Plexus Corp: Form 10-Q for the period ended Jul 1, 2023

"SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:

The statements contained in this Form 10-Q that are guidance or which are not historical facts (such as statements in the future tense and statements including believe, expect, intend, plan, anticipate, goal, target and similar terms and concepts), including all discussions of periods which are not yet completed, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties include the effect of inflationary pressures on our costs of production, profitability, and on the economic outlook of our markets; the effects of shortages and delays in obtaining components as a result of economic cycles, natural disasters or otherwise; the risk of customer delays, changes, cancellations or forecast inaccuracies in both ongoing and new programs; the ability to realize anticipated savings from restructuring or similar actions, as well as the adequacy of related charges as compared to actual expenses; the lack of visibility of future orders, particularly in view of changing economic conditions; the economic performance of the industries, sectors and customers we serve; the outcome of litigation and regulatory investigations and proceedings, including the results of any challenges with regard to such outcomes; the effects of tariffs, trade disputes, trade agreements and other trade protection measures; the effects of the volume of revenue from certain sectors or programs on our margins in particular periods; our ability to secure new customers, maintain our current customer base and deliver product on a timely basis; the risks of concentration of work for certain customers; the particular risks relative to new or recent customers, programs or services, which risks include customer and other delays, start-up costs, potential inability to execute, the establishment of appropriate terms of agreements, and the lack of a track record of order volume and timing; the effects of start-up costs of new programs and facilities or the costs associated with the closure or consolidation of facilities; possible unexpected costs and operating disruption in transitioning programs, including transitions between Company facilities; the risk that new program wins and/or customer demand may not result in the expected revenue or profitability; the fact that customer orders may not lead to long-term relationships; our ability to manage successfully and execute a complex business model characterized by high product mix and demanding quality, regulatory, and other requirements; the risks associated with excess and obsolete inventory, including the risk that inventory purchased on behalf of our customers may not be consumed or otherwise paid for by the customer, resulting in an inventory write-off; risks related to information technology systems and data security; increasing regulatory and compliance requirements; any tax law changes and related foreign jurisdiction tax developments; current or potential future barriers to the repatriation of funds that are currently held outside of the United States as a result of actions taken by other countries or otherwise; the potential effects of jurisdictional results on our taxes, tax rates, and our ability to use deferred tax assets and net operating losses; the weakness of areas of the global economy; the effect of changes in the pricing and margins of products; raw materials and component cost fluctuations; the potential effect of fluctuations in the value of the currencies in which we transact business; the effects of changes in economic conditions, political conditions and tax matters in the United States and in the other countries in which we do business; the potential effect of other world or local events or other events outside our control (such as the conflict between Russia and Ukraine, escalating tensions between China and Taiwan or China and the United States, changes in energy prices, terrorism, global health epidemics and weather events); the impact of increased competition; an inability to successfully manage human capital; changes in financial accounting standards; and other risks detailed herein and in our other Securities and Exchange Commission filings, particularly in Risk Factors contained in our fiscal 2022 Form 10-K.

OVERVIEW

Plexus Corp. and its subsidiaries (together "Plexus," the "Company", "our", or "we") participate in the Electronic Manufacturing Services ("EMS") industry. Since 1979, we have been partnering with companies to create the products that build a better world. We are a global leader with a team of nearly 25,000 individuals who are dedicated to providing Design and Development, Supply Chain Solutions, New Product Introduction, Manufacturing and Sustaining Services. We specialize in serving customers in industries with highly complex products and demanding regulatory environments. We deliver customer service excellence to leading global companies in the Industrial, Healthcare/Life Sciences and Aerospace/Defense market sectors by providing innovative, comprehensive solutions throughout the product's lifecycle. We provide these innovative solutions to customers in the Americas ("AMER"), Asia-Pacific ("APAC") and Europe, Middle East and Africa ("EMEA") regions.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide an analysis of both short-term results and future prospects from management’s perspective, including an assessment of the financial condition and results of operations, events and uncertainties that are not indicative of future operations and any other financial or statistical data that we believe will enhance the understanding of our company’s financial condition, cash flows and other changes in financial condition and results of operations.

The following information should be read in conjunction with our condensed consolidated financial statements included herein and "Risk Factors" included in Part II, Item 1A included herein as well as Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 1, 2022, and our "Safe Harbor" Cautionary Statement included above.

Market Pressures Update

We have experienced an inability to procure certain components on a timely basis due to global supply chain constraints. These constraints have impacted our ability to meet customer demand and may inhibit our ability to capture the demand from our customers. The extended lead-times have required us to make additional investments in inventory to satisfy customer demand, which we expect to persist.

Over the past year, the global supply chain constraints have led to inflation in some of the components we acquire, as well as labor and operating costs. We have also been, and expect to continue to be, subject to such inflationary and general labor cost increases. While we have been largely able to mitigate the impacts of inflation through our contractual rights with customers on pricing, the pricing recoveries received may be dilutive to our operating margin. The inability to offset these costs in future periods or the impacts of continued inflation on end markets and our customers may affect our operating results, cash flows and inventory levels, which could increase as a result of higher component prices or the negative effects of inflation on customer end-market demand.

The Department of Commerce’s export controls restricting the People’s Republic of China’s access to advanced semiconductors, supercomputers, and semiconductor manufacturing equipment has created demand volatility for some of our customers as they adjust their forecasts as a result of these restrictions, which can create operating inefficiencies that may place additional burden on our operating results.

Changes in tax laws or tax rates in the jurisdictions where we operate, including the potential passage of tax regulation changes such as the establishment of a global minimum tax could result in adverse tax consequences. During the first nine months of fiscal 2023, certain jurisdictions consented to implement a global minimum tax. We will continue to monitor these developments as each jurisdiction incorporates such changes into tax laws.

In June 2023, we paid a one-time, non-recurring payment of $15.8 million related to an arbitration decision in Norway regarding a contractual matter concluded upon in May 2023. Refer to Note 15, "Restructuring and Non-recurring Charges," for information regarding total charges. We no longer provide services for this customer and do not expect further charges relating to this matter, but are pursuing further insurance recoveries. We do not believe that any other such proceedings, individually or in the aggregate, will have a material positive or adverse effect on the Company's consolidated financial position, results of operations or cash flows. However, legal proceedings and regulatory and governmental matters are subject to inherent uncertainties, and unfavorable rulings or other events could occur. Unfavorable resolutions could involve substantial fines, civil or criminal penalties, and other expenditures.

We believe our balance sheet is positioned to support the potential future challenges presented by the macro-economic pressures we are facing. As of the third quarter of fiscal 2023, cash and cash equivalents and restricted cash were $254 million, while debt, finance lease and other financing obligations were $492 million. Borrowings under our credit facility as of July 1, 2023 were $297 million, leaving $203 million of our revolving commitment of $500 million available for use as well as the ability to expand our revolving commitment to $750 million upon mutual agreement with our banks. Interest expense could increase above current levels due to increased borrowing under our credit facility associated with working capital investments along with the impact of rising interest rates. Refer to Note 3, "Debt, Finance Lease and Other Financing Obligations," in Notes to Condensed Consolidated Financial Statements and "Management’s Discussion and Analysis Liquidity and Capital Resources" in Part I, Item 2 for further information.

RESULTS OF OPERATIONS

Consolidated Performance Summary. The following table presents selected consolidated financial data (dollars in millions, except per share data):

Net sales. For the three months ended July 1, 2023, net sales increased $40.3 million, or 4.1%, as compared to the three months ended July 2, 2022. For the nine months ended July 1, 2023, net sales increased $498.9 million, or 18.6%, as compared to the nine months ended July 2, 2022.

Net sales are analyzed by management by geographic segment, which reflects our reportable segments, and by market sector. Management measures operational performance and allocates resources on a geographic segment basis. Our global business development strategy is based on our targeted market sectors.

A discussion of net sales by reportable segment is presented below (in millions):

AMER. Net sales for the three months ended July 1, 2023 in the AMER segment increased $28.8 million, or 8.4%, as compared to the three months ended July 2, 2022. The increase in net sales was driven by a $42.7 million increase in production ramps of new products for existing customers. The increase was partially offset by overall net decreased customer end-market demand and a $5.6 million decrease for end-of-life products.

During the nine months ended July 1, 2023, net sales in the AMER segment increased $237.7 million, or 25.5%, as compared to the nine months ended July 2, 2022. The increase in net sales was driven by a $176.8 million increase in production ramps of new products for existing customers and overall net increased customer end-market demand, inclusive of a partial easing of supply chain constraints. The increase was also driven by higher pricing associated with inflated component prices and a $17.3 million increase in production ramps for new customers. The increase was partially offset by an $11.0 million decrease for end-of-life products and a $6.3 million decrease due to the discontinuation of a program with an existing customer.

APAC. Net sales for the three months ended July 1, 2023 in the APAC segment decreased $14.2 million, or 2.4%, as compared to the three months ended July 2, 2022. The decrease in net sales was driven by overall net decreased customer end-market demand, primarily as a result of the Department of Commerce's export control restrictions on the People's Republic of China. The decrease was partially offset by a $15.0 million increase in production ramps of new products for existing customers and a partial easing of supply chain constraints.

During the nine months ended July 1, 2023, net sales in the APAC segment increased $189.4 million, or 11.8%, as compared to the nine months ended July 2, 2022. The increase in net sales was driven by a partial easing of supply chain constraints, a $63.9 million increase in production ramps of new products for existing customers, higher pricing associated with inflated component prices and a $5.9 million increase in production ramps for a new customer. The increase was partially offset by overall net decreased customer end-market demand, primarily as a result of the Department of Commerce's export control restrictions on the People's Republic of China.

EMEA. Net sales for the three months ended July 1, 2023 in the EMEA segment increased $20.2 million, or 24.0%, as compared to the three months ended July 2, 2022. The increase in net sales was driven by overall net increased customer end-market demand.

During the nine months ended July 1, 2023, net sales in the EMEA segment increased $64.9 million, or 28.1%, as compared to the nine months ended July 2, 2022. The increase in net sales was driven by overall net increased customer end-market demand inclusive of a partial easing of supply chain constraints, an $8.7 million increase in production ramps of new products for existing customers and a $5.0 million increase in production ramps for a new customer.

Our net sales by market sector were as follows (in millions):

Industrial. Net sales for the three months ended July 1, 2023 in the Industrial sector decreased $26.7 million, or 5.9%, as compared to the three months ended July 2, 2022. The decrease in net sales was driven by overall net decreased customer end-market demand, primarily as a result of the Department of Commerce's export control restrictions on the People's Republic of China. The decrease was also driven by a $5.6 million decrease for end-of-life products. The overall decrease was partially offset by a $6.5 million increase in production ramps of new products for an existing customer.

During the nine months ended July 1, 2023, net sales in the Industrial sector increased $106.2 million, or 8.6%, as compared to the nine months ended July 2, 2022. The increase in net sales was driven by a partial easing of supply chain constraints, a $67.2 million increase due to production ramps of new products for existing customers and an $18.7 million increase in production ramps for new customers. The increase was also driven by higher pricing associated with inflated component prices. The increase was partially offset by overall net decreased customer end-market demand, primarily as a result of the Department of Commerce's export control restrictions on the People's Republic of China, as well as a $7.8 million decrease for end-of-life products.

Healthcare/Life Sciences. Net sales for the three months ended July 1, 2023 in the Healthcare/Life Sciences sector increased $50.2 million, or 12.5%, as compared to the three months ended July 2, 2022. The increase in net sales was driven by a $48.1 million increase due to production ramps of new products for existing customers and a partial easing of supply chain constraints. The increase was partially offset by overall net decreased customer end-market demand.

During the nine months ended July 1, 2023, net sales in the Healthcare/Life Sciences sector increased $327.7 million, or 29.8%, as compared to the nine months ended July 2, 2022. The increase in net sales was driven by a $178.5 million increase due to production ramps of new products for existing customers and overall net increased customer end-market demand, inclusive of a partial easing of supply chain constraints. The increase was also driven by higher pricing associated with inflated component prices.

Aerospace/Defense. Net sales for the three months ended July 1, 2023 in the Aerospace/Defense sector increased $16.8 million, or 13.3%, as compared to the three months ended July 2, 2022. The increase was driven by overall net increased customer end-market demand.

During the nine months ended July 1, 2023, net sales in the Aerospace/Defense sector increased $65.0 million, or 18.3%, as compared to the nine months ended July 2, 2022. The increase was driven by overall net increased customer end-market demand, increased pricing associated with inflated component prices and a $9.6 million increase in production ramps for a new customer. The increase was partially offset by a $6.0 million decrease due to the discontinuation of a program with an existing customer.

Cost of sales. Cost of sales for the three months ended July 1, 2023 increased $40.3 million, or 4.5%, as compared to the three months ended July 2, 2022, while cost of sales for the nine months ended July 1, 2023 increased $441.1 million, or 18.0%, as compared to the nine months ended July 2, 2022. Cost of sales is comprised primarily of material and component costs, labor costs and overhead. For the three and nine months ended July 1, 2023 and July 2, 2022, approximately 89% to 90% of the total cost of sales was variable in nature and fluctuated with sales volumes. Of these amounts, approximately 87% to 88% of the variable costs for the three and nine months ended July 1, 2023 and July 2, 2022, were related to material and component costs.

As compared to the three months ended July 2, 2022, the increase in cost of sales for the three months ended July 1, 2023 was primarily driven by the increase in net sales, an increase in fixed costs and increased labor costs, partially offset by a positive shift in customer mix. As compared to the nine months ended July 2, 2022, the increase in cost of sales for the nine months ended July 1, 2023 was primarily driven by the increase in net sales, inflated component costs, an increase in fixed costs, increased labor costs and a negative shift in customer mix, partially offset by improvements in operational efficiencies.

Gross profit. Gross profit for the three months ended July 1, 2023 remained flat, as compared to the three months ended July 2, 2022. Gross margin of 9.2% for the three months ended July 1, 2023 decreased 30 basis points compared to the three months ended July 2, 2022. The primary drivers of the decrease in gross margin for the three months ended July 1, 2023 were the increase in fixed costs and increased labor costs, partially offset by a positive shift in customer mix.

Gross profit for the nine months ended July 1, 2023 increased $57.7 million, or 24.0%, as compared to the nine months ended July 2, 2022. Gross margin of 9.3% for the nine months ended July 1, 2023 increased 40 basis points compared to the nine months ended July 2, 2022. The primary drivers of the increase in gross profit and gross margin for the nine months ended July 1, 2023 were the increase in net sales and improvements in operational efficiencies, partially offset by inflated component costs, an increase in fixed costs, increased labor costs and a negative shift in customer mix.

Operating income. Operating income for the three months ended July 1, 2023 decreased $21.4 million, or 43.1%, as compared to the three months ended July 2, 2022. Operating margin of 2.8% for the three months ended July 1, 2023 decreased 230 basis points compared to the three months ended July 2, 2022. The primary driver of the decrease in operating income and operating margin for the three months ended July 1, 2023 was the result of a $23.1 million increase in restructuring and other charges along with the decrease in gross margin, partially offset by a $1.7 million decrease in selling and administrative expenses ("S&A"). The decrease in S&A was primarily due to a decrease in incentive compensation costs.

Operating income for the nine months ended July 1, 2023 increased $26.6 million, or 23.0%, as compared to the nine months ended July 2, 2022. Operating margin of 4.5% for the nine months ended July 1, 2023 increased 20 basis points compared to the nine months ended July 2, 2022. The primary driver of the increase in operating income and operating margin for the nine months ended July 1, 2023 was the result of the increase in gross profit and gross margin, partially offset by a $21.1 million increase in restructuring and other charges and a $10.0 million increase in S&A. The increase in S&A was primarily due to a net increase in compensation costs.

A discussion of operating income by reportable segment presented below (in millions):

AMER. Operating income decreased $1.1 million for the three months ended July 1, 2023 as compared to the three months ended July 2, 2022, primarily as a result of increased fixed costs and increased labor costs, partially offset by an increase in net sales.

During the nine months ended July 1, 2023, operating income in the AMER segment increased $32.6 million as compared to the nine months ended July 2, 2022, primarily as a result of an increase in net sales and improvements in operational efficiencies, partially offset by a negative shift in customer mix, increased fixed costs, increased labor costs, inflated component costs and an increase in S&A.

APAC. Operating income increased $2.6 million for the three months ended July 1, 2023 as compared to the three months ended July 2, 2022, primarily as a result of a positive shift in customer mix, partially offset by a decrease in net sales, increased fixed costs and increased labor costs.

During the nine months ended July 1, 2023, operating income in the APAC segment increased $29.2 million as compared to the nine months ended July 2, 2022, primarily as a result of an increase in net sales and a positive shift in customer mix, partially offset by increased fixed costs, reduced operational efficiencies, increased labor costs, inflated component costs and an increase in S&A.

EMEA. Operating income decreased $1.8 million for the three months ended July 1, 2023 as compared to the three months ended July 2, 2022, primarily as a result of increased fixed costs and increased labor costs, partially offset by an increase in net sales.

During the nine months ended July 1, 2023, operating income in the EMEA segment decreased $2.0 million as compared to the nine months ended July 2, 2022, primarily as a result of a negative shift in customer mix, increased fixed costs and increased labor costs, partially offset by an increase in net sales.

Other expense. Other expense for the three months ended July 1, 2023 increased $4.5 million as compared to the three months ended July 2, 2022. The increase in other expense for the three months ended July 1, 2023 was primarily due to the increase in interest expense of $4.3 million due to a higher average interest rate and the higher average daily borrowing levels.

Other expense for the nine months ended July 1, 2023 increased $13.4 million as compared to the nine months ended July 2, 2022. The increase in other expense was primarily driven by an increase in interest expense of $13.1 million due to a higher average interest rate and the higher average daily borrowing levels. The increase was also due to an increase in factoring fees of $4.7 million, partially offset by increases in other miscellaneous income of $3.3 million and interest income of $1.4 million.

Income taxes. Income tax expense for the three and nine months ended July 1, 2023 was $1.6 million and $15.8 million, respectively, compared to $5.8 million and $13.6 million for the three and nine months ended July 2, 2022, respectively. The decrease for the three months ended July 1, 2023 as compared to July 2, 2022 was primarily due to an increase in discrete tax benefits of $3.0 million and a decrease in pre-tax book income. The increase for the nine months ended July 1, 2023 as compared to July 2, 2022 was primarily due to a change in the geographic distribution of pre-tax book income and an increase in pre-tax book income, partially offset by an increase in discrete tax benefits of $3.2 million.

Our annual effective tax rate varies from the U.S. statutory rate of 21.0% primarily due to the geographic distribution of worldwide earnings as well as a tax holiday granted to a subsidiary located in the APAC segment where we derive a significant portion of our earnings. Our effective tax rate may also be impacted by disputes with taxing authorities, tax planning activities, adjustments to uncertain tax positions and changes in valuation allowances.

The annual effective tax rate for fiscal 2023 is expected to be approximately 13.0% to 15.0% assuming no changes to tax laws.

Net income. Net income for the three months ended July 1, 2023 decreased $21.7 million, or 57.9%, from the three months ended July 2, 2022 to $15.8 million. Net income decreased primarily as a result of the decrease in operating income and an increase in other expense, partially offset by a decrease in tax expense, as previously discussed.

Net income for the nine months ended July 1, 2023 increased $11.0 million, or 12.5%, from the nine months ended July 2, 2022 to $98.8 million. Net income increased primarily as a result of the increase in operating income, partially offset by an increase in tax expense and other expense, as previously discussed.

Diluted earnings per share. Diluted earnings per share decreased to $0.56 for the three months ended July 1, 2023 from $1.33 for the three months ended July 2, 2022, primarily as a result of decreased net income due to the factors previously discussed, partially offset by a reduction in diluted shares outstanding due to repurchase activity under our share repurchase plans.

Diluted earnings per share increased to $3.51 for the nine months ended July 1, 2023 from $3.09 for the nine months ended July 2, 2022 primarily as a result of increased net income due to the factors previously discussed as well as a reduction in diluted shares outstanding due to repurchase activity under our share repurchase plans.

Return on Invested Capital ("ROIC") and economic return. We use a financial model that is aligned with our business strategy and includes an ROIC goal of 15% which would exceed our weighted average cost of capital ("WACC") by more than 500 basis points and represent positive economic return. Economic return is the amount our ROIC exceeds our WACC.

Non-GAAP financial measures, including ROIC and economic return, are used for internal management goals and decision making because such measures provide management and investors additional insight into financial performance. In particular, we provide ROIC and economic return because we believe they offer insight into the metrics that are driving management decisions. We view ROIC and economic return as important measures in evaluating the efficiency and effectiveness of our long-term capital investments. We also use ROIC as a performance criteria in determining certain elements of compensation as well as economic return performance.

We define ROIC as tax-effected operating income before restructuring and other special items divided by average invested capital over a rolling four-quarter period for the third quarter. Invested capital is defined as equity plus debt and operating lease liabilities, less cash and cash equivalents. Other companies may not define or calculate ROIC in the same way. ROIC and other non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").

We review our internal calculation of WACC annually. Our WACC is 9.0% for fiscal 2023 as compared to 9.3% for fiscal 2022. By exercising discipline to generate ROIC in excess of our WACC, our goal is to create value for our shareholders. For the nine months ended July 1, 2023, ROIC of 13.5% reflects an economic return of 4.5%, based on our weighted average cost of capital of 9.0%. For the nine months ended July 2, 2022, ROIC of 11.5% reflects an economic return of 2.2%, based on our weighted average cost of capital of 9.3% for that fiscal year.

For a reconciliation of ROIC, economic return and adjusted operating income (tax-effected) to our financial statements that were prepared using U.S. GAAP, see Exhibit 99.1 to this quarterly report on Form 10-Q, which exhibit is incorporated herein by reference.

Refer to the table below, which includes the calculation of ROIC and economic return for the indicated fiscal period (dollars in millions):

27

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and restricted cash were $253.6 million as of July 1, 2023, as compared to $275.5 million as of October 1, 2022.

As of July 1, 2023, 92% of our cash and cash equivalents balance was held outside of the U.S. by our foreign subsidiaries. Currently, we believe that our cash balance, together with cash available under our Credit Facility, will be sufficient to meet our liquidity needs and be sufficient to cover potential share repurchases, if any, for the next twelve months and for the foreseeable future.

Our future cash flows from operating activities will be reduced by $42.0 million due to cash payments for U.S. federal taxes on the deemed repatriation of undistributed foreign earnings that are payable over an eight-year period that began in fiscal 2019 with the first payment. The table below provides the expected timing of these future cash outflows, in accordance with the following installment schedule for the remaining three years (in millions):

Cash Flows. The following table provides a summary of cash flows (in millions):

Operating Activities. Cash flows provided by operating activities were $76.0 million for the nine months ended July 1, 2023, as compared to cash flows used in operating activities of $25.8 million for the nine months ended July 2, 2022. The change was primarily due to cash flow improvements (reductions) of:

• $11.0 million increase in net income.
• $576.2 million in inventory cash flows driven by inventory levels increasing at a slower rate in the nine months ended July 1, 2023 as compared to the nine months ended July 2, 2022. In the nine months ended July 1, 2023, inventory levels have primarily increased to support the ramp of customer programs, as well as supply chain constraints have led to inflation in some of the components we acquire, increasing inventory.
• $139.8 million in accounts receivable cash flows driven by timing of shipments and mix of customer payment terms.
• $18.9 million in contract assets cash flows driven by increases in advance payments received from customers who recognize revenue over time.
• $12.3 million in other current and non-current assets driven by a lesser increase in prepayments to suppliers as compared to the nine months ended July 2, 2022.
• $(344.1) million in accounts payables cash outflows primarily driven by the timing of materials procurement and payments to suppliers.
• $(214.4) million in other current and non-current liabilities cash outflows driven by releases of advance payments to customers as we sold products that contained inflated component prices in the nine months ended July 1, 2023 compared to an increase in advanced payments from customers in the nine months ended July 2, 2022.
• $(91.8) million in customer deposit cash outflows driven by deposits increasing at a slower rate in the nine months ended July 1, 2023 as compared to the nine months ended July 2, 2022, consistent with inventory cash flows. Deposit increases in both periods were primarily to cover certain inventory balances.

The following table provides a summary of cash cycle days for the periods indicated (in days):

We calculate days in accounts receivable and contract assets as each balance sheet item for the respective quarter divided by annualized sales for the respective quarter by day. We calculate days in inventory, accounts payable and cash deposits as each balance sheet line item for the respective quarter divided by annualized cost of sales for the respective quarter by day. We calculate annualized cash cycle as the sum of days in accounts receivable, days in contract assets and days in inventory, less days in accounts payable and days in cash deposits.

As of July 1, 2023, annualized cash cycle days increased nine days compared to July 2, 2022 due to the following:

Days in accounts receivable for the three months ended July 1, 2023 increased six days compared to the three months ended July 2, 2022. The increase is primarily attributable to mix of customer payment terms and the timing of customer shipments and payments.

Days in contract assets for the three months ended July 1, 2023 remained flat compared to the three months ended July 2, 2022.

Days in inventory for the three months ended July 1, 2023 increased one day compared to the three months ended July 2, 2022. The increase is primarily attributable to increased inventory levels to support the ramp of customer programs.

Days in accounts payable for the three months ended July 1, 2023 decreased nineteen days compared to the three months ended July 2, 2022. The decrease is primarily attributable to timing of materials procurement and payments to suppliers.

Days in cash deposits for the three months ended July 1, 2023 increased seventeen days compared to the three months ended July 2, 2022. The increase was primarily attributable to significant deposits received from customers to cover certain increasing inventory balances.

Free Cash Flow. We define free cash flow ("FCF"), a non-GAAP financial measure, as cash flow provided by (used in) operations less capital expenditures. FCF was $(3.8) million for the nine months ended July 1, 2023 compared to $(110.8) million for the nine months ended July 2, 2022, an improvement of $107.0 million. The improvement in FCF was primarily due to lower working capital investments in inventory to support our customers in the nine months ended July 1, 2023 as compared to the nine months ended July 2, 2022.

Non-GAAP financial measures, including FCF, are used for internal management assessments because such measures provide additional insight to investors into ongoing financial performance. In particular, we provide FCF because we believe it offers insight into the metrics that are driving management decisions. We view FCF as an important financial metric as it demonstrates our ability to generate cash and can allow us to pursue opportunities that enhance shareholder value. FCF is a non-GAAP financial measure that should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance with U.S. GAAP.

A reconciliation of FCF to our financial statements that were prepared using U.S. GAAP as follows (in millions):

Investing Activities. Cash flows used in investing activities were $77.7 million for the nine months ended July 1, 2023 compared to $85.1 million for the nine months ended July 2, 2022. The decrease in cash used in investing activities was due to a $5.2 million decrease in capital expenditures, as the manufacturing footprint expansion in Bangkok, Thailand has been substantially completed.

We estimate capital expenditures for fiscal 2023 will be approximately $115.0 million to $125.0 million to support new program ramps and replace older equipment.

Financing Activities. Cash flows used in financing activities were $22.4 million for the nine months ended July 1, 2023 compared to cash flows provided by financing activities of $122.1 million for the nine months ended July 2, 2022. The decrease was primarily attributable to a lesser increase in borrowings on the credit facility in the nine months ended July 1, 2023 of $34.0 million as compared to the nine months ended July 2, 2022 of $185.0 million and a decrease of $9.5 million in cash used to repurchase our common stock.

On August 11, 2021, the Board of Directors approved a share repurchase program under which we were authorized to repurchase up to $50.0 million of our common stock (the "2022 Program"). The 2022 Program commenced upon completion of the 2021 Program and was completed in fiscal 2022. During the three months ended July 2, 2022, we repurchased 148,571 shares under this program for $11.7 million at an average price of $79.27 per share. During the nine months ended July 2, 2022, we repurchased 564,718 shares under this program for $46.9 million at an average price of $83.07 per share.

On August 18, 2022, the Board of Directors approved a share repurchase program under which we are authorized to repurchase up to $50.0 million of our common stock (the "2023 Program"). The 2023 Program became effective immediately and has no expiration. During the three months ended July 1, 2023, we repurchased 149,783 shares under this program for $13.5 million at an average price of $90.49 per share. During the nine months ended July 1, 2023, we repurchased 391,145 shares under this program for $37.4 million at an average price of $95.70 per share. As of July 1, 2023, $9.1 million of the 2023 Program remained available to repurchase shares.

All shares repurchased under the aforementioned programs were recorded as treasury stock.

We have Master Accounts Receivable Purchase Agreements with MUFG Bank, New York Branch (formerly known as The Bank of Tokyo-Mitsubishi UFJ, Ltd.) (the "MUFG RPA"), HSBC Bank (China) Company Limited, Xiamen branch (the "HSBC RPA") and other unaffiliated financial institutions, under which we may elect to sell receivables, at a discount. These facilities are uncommitted facilities. The maximum facility amount under the MUFG RPA as of July 1, 2023 was $340.0 million. The maximum facility amount under the HSBC RPA as of July 1, 2023 was $60.0 million. The MUFG RPA will be automatically extended each year unless any party gives no less than 10 days prior notice that the agreement should not be extended. The terms of the HSBC RPA are generally consistent with the terms of the MUFG RPA previously discussed.

We sold $205.3 million and $213.6 million of trade accounts receivable under these programs, or their predecessors, during the three months ended July 1, 2023 and July 2, 2022, respectively, in exchange for cash proceeds of $202.9 million and $212.3 million, respectively. We sold $616.6 million and $563.8 million of trade accounts receivable under these programs, or their predecessors, during the nine months ended July 1, 2023 and July 2, 2022, respectively, in exchange for cash proceeds of $609.4 million and $561.3 million, respectively. As of July 1, 2023 and October 1, 2022, $216.8 million and $222.5 million, respectively, of accounts receivables sold under trade accounts receivable programs and subject to servicing by us remained outstanding and had not yet been collected.

In all cases, the sale discount was recorded within "Miscellaneous, net" in the Condensed Consolidated Statements of Comprehensive Income in the period of the sale. For further information regarding the receivable sale programs, see Note 13, "Trade Accounts Receivable Sale Programs," in Notes to Condensed Consolidated Financial Statements.

Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents, our leasing capabilities and potential borrowings under our 5-year senior unsecured revolving credit facility

(referred to as the "Credit Facility"), including our ability to expand our revolving commitment, should be sufficient to meet our working capital and fixed capital requirements, as well as execution upon our share repurchase authorizations as management deems appropriate, for the next twelve months and for the forseeable future. We believe our balance sheet is positioned to support the potential future challenges presented by macro-economic factors including increased working capital requirements associated with our sales growth. As of the end of the third quarter of fiscal 2023, cash and cash equivalents and restricted cash were $253.6 million, while debt, finance lease and other financing obligations were $492.2 million. If our future financing needs increase, including to support additional capital expenditures or investments in the growth of our business, then we may need to arrange additional debt or equity financing. Accordingly, we evaluate and consider from time to time various financing alternatives to supplement our existing financial resources. However, we cannot be assured that we will be able to make any such arrangements on acceptable terms or at all.

DISCLOSURE ABOUT CRITICAL ACCOUNTING ESTIMATES

Our critical accounting policies are disclosed in our 2022 Annual Report on Form 10-K. During the third quarter of fiscal 2023, there were no material changes.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 1, "Basis of Presentation," in Notes to Condensed Consolidated Financial Statements regarding recent accounting pronouncements.

There were no material changes in our exposure to market risk from changes in foreign exchange and interest rates from those disclosed in our 2022 Annual Report on Form 10-K.

Foreign Currency Risk

Our international operations create potential foreign exchange risk. Our policy is to selectively hedge our foreign currency denominated transactions in a manner that partially offsets the effects of changes in foreign currency exchange rates. We typically use foreign currency contracts to hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. Corresponding gains and losses on the underlying transaction generally offset the gains and losses on these foreign currency hedges. We cannot predict changes in currency rates, nor the degree to which we will be able to manage the impacts of currency exchange rate changes. Such changes could have a material effect on our business, results of operations and financial condition.

Our percentages of transactions denominated in currencies other than the U.S. dollar for the indicated periods were as follows:

We have evaluated the potential foreign currency exchange rate risk on transactions denominated in currencies other than the U.S. dollar for the periods presented above. Based on our overall currency exposure, as of July 1, 2023, a 10.0% change in the value of the U.S. dollar relative to our other transactional currencies would not have a material effect on our financial position, results of operations, or cash flows.

Interest Rate Risk

We have financial instruments, including cash equivalents and debt, which are sensitive to changes in interest rates. The primary objective of our investment activities is to preserve principal, while maximizing yields without significantly increasing market risk. To achieve this, we limit the amount of principal exposure to any one issuer.

As of July 1, 2023, our only material interest rate risk was associated with our Credit Facility. Borrowings under the Credit Facility bear interest, at the Company's option, at (a)(1) for borrowings denominated in U.S. dollars, the Term Secured Overnight Financing Rate ("SOFR"), (2) for borrowings denominated in pounds sterling, the Daily Simple Risk-Free Rate, plus, in each case of (a)(1) and (2), 10 basis points, (b) for borrowings denominated in euros, the EURIBOR Rate plus a statutory reserve rate, or (c) an Alternate Base Rate equal to the highest of (i) 100 basis points per annum, (ii) the prime rate last quoted by The Wall Street Journal (or, if not quoted, as otherwise provided in the Credit Facility), (iii) the greater of the federal funds effective rate and the overnight bank funding rate in effect on such day plus, in each case, 50 basis points per annum (or, if neither are available, as otherwise provided in the Credit Facility), and (iv) Term SOFR for a one month interest period on such day plus 110 basis points, plus, in each case of (a), (b), and (c), an applicable interest rate margin based on the Company's then current consolidated total indebtedness (minus certain unrestricted cash and cash equivalents in an amount not to exceed $100 million) to consolidated EBITDA. As of July 1, 2023, the borrowing rate under the Credit Facility was SOFR plus 1.10%. Borrowings under the 2018 Note Purchase Agreement are based on a fixed interest rate, thus mitigating much of our interest rate risk. Based on our overall interest rate exposure, as of July 1, 2023, a 10.0% change in interest rates would not have a material effect on our financial position, results of operations, or cash flows.

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission ("SEC") is recorded, processed, summarized and reported on a timely basis. The Company’s Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have reviewed and evaluated, with the participation of the Company’s management, the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report. Based on such evaluation, the CEO and CFO have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective, at the reasonable assurance level, (a) in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act, and (b) in assuring that information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the third quarter of fiscal 2023, there have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the risks and uncertainties discussed herein, particularly those discussed in the “Safe Harbor” Cautionary Statement and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, see the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 1, 2022 that have had no material changes.