Financial Performance Overview

Our company’s financial performance for the three months ended December 28, 2024 showed mixed results. While we saw a 7.0% increase in net sales compared to the same period in the prior year, our gross margin declined slightly from 8.6% to 8.4%.

The increase in net sales was primarily driven by new program wins in our telecommunications and automotive end markets. However, our gross margin was impacted by a number of factors, including supply chain constraints, changes in product mix, and operational inefficiencies.

Segment Performance

Our business is divided into two main segments - IMS (which represents about 80% of total revenue) and CPS. The IMS segment saw its gross margin improve from 7.6% to 7.9%, due to better operating efficiencies and a more favorable customer mix. In contrast, the CPS segment experienced a decline in gross margin from 13.0% to 12.5%, mainly because of an unfavorable product mix.

Challenges and Uncertainties

Our business faces several challenges and uncertainties. We compete with both larger and smaller companies in our key end markets, and competition remains intense. Additionally, we are impacted by macroeconomic factors such as inflation, supply chain constraints, foreign currency fluctuations, high interest rates, and market volatility. These headwinds are expected to persist in 2025, as customers continue to work through their finished goods inventory.

Despite these challenges, we remain focused on improving our operations, building flexibility and efficiencies in our processes, and adjusting our business models to changing circumstances. We intend to continue diversifying into mission-critical markets and creating a portfolio of more complex, higher-technology products with longer product life cycles.

Financial Position and Liquidity

As of December 28, 2024, we had $642 million in cash and cash equivalents, and $791 million in available borrowing capacity under our credit agreement. Our working capital was $2.0 billion, up from $1.9 billion at the end of the prior fiscal year.

During the three months ended December 28, 2024, we generated $64 million in cash from operating activities, compared to $126 million in the same period of the prior year. The decrease was primarily due to changes in working capital, including a decrease in accounts payable and an increase in deferred revenue and customer advances.

We continue to utilize various accounts receivable sales programs to manage our liquidity, selling approximately $34 million of receivables during the quarter. We also repurchased $16 million of our common stock during the period.

Looking ahead, we believe our existing cash resources and other sources of liquidity, together with cash generated from operations, will be sufficient to meet our working capital requirements through at least the next twelve months. However, a significant decrease in demand or an inability to recover on customer obligations could impact our cash flow from operations and require us to seek additional sources of liquidity.

Critical Accounting Policies and Estimates

Our financial reporting relies on several critical accounting policies and estimates, including those related to accounts receivable, inventories, income taxes, environmental matters, litigation, and long-term contract costs and revenue recognition. We regularly review these policies and estimates, and make adjustments as necessary based on historical experience and changing business conditions.

One area of focus has been the material weaknesses identified in our internal control over financial reporting at one of our divisions. These weaknesses, which led to the restatement of prior financial statements, were primarily due to an inappropriate tone at the top, insufficient finance personnel, and ineffective controls over the quarterly contract estimate review process. We have implemented remedial actions, including changes in personnel and additional training, to address these issues.

Outlook and Conclusion

While our business faces ongoing challenges, we remain focused on improving our operations, diversifying into higher-value markets, and creating a more flexible and efficient organization. Our financial position remains strong, with ample liquidity to support our growth plans. However, we will need to continue navigating the macroeconomic headwinds and addressing the material weaknesses in our internal controls to deliver consistent financial performance in the quarters ahead.