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Item 7. Management’s Discussion and Analysis

2024-11-26 compared with 2023-11-21 · 53 added, 96 removed, 277 unchanged (35% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (all tabular amounts in thousands except per share amounts)

The following discussion includes results of operations and financial condition for the fiscal year ended October 28, 2023 (fiscal 2023) and the fiscal year ended October 29, 2022 (fiscal 2022) and year-over-year comparisons between fiscal 2023 and fiscal 2022.

The following discussion includes results of operations and financial condition for the fiscal year ended November 2, 2024 (fiscal 2024) and the fiscal year ended October 28, 2023 (fiscal 2023) and year-over-year comparisons between fiscal 2024 and fiscal 2023.

For discussion on results of operations and financial condition for fiscal 2023 and the fiscal year ended October 29, 2022 (fiscal 2022) and year-over-year comparisons between fiscal 2023 and fiscal 2022, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for fiscal 2023 filed with the Securities and Exchange Commission on November 21, 2023.

Our fiscal year is the 52-week or 53-week period ending on the Saturday closest to the last day in October.

Fiscal 2023 and fiscal 2022 were 52-week fiscal periods.

Fiscal 2024 was a 53-week fiscal period, while fiscal 2023 was a 52-week fiscal period.

The additional week in fiscal 2024 is included in the first quarter ended February 3, 2024.

Therefore, fiscal 2024 includes an additional week of operations as compared to fiscal 2023.

Results of Operations

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(1) The su m of the individual percentages may not equal the total due to rounding.

Revenue increased 2% in fiscal 2023 as compared to fiscal 2022 primarily as a result of broad-based demand for our products sold into the Industrial end market, namely aerospace and defense and instrumentation, as well as the Automotive end market, namely cabin electronics and battery management systems.

These increases were partially offset by a decrease in revenue in the Consumer end market primarily due to weakening market trends and a decrease in revenue in the Communications end market due to the timing of infrastructure deployment cycles.

Revenue decreased 23% in fiscal 2024 as compared to fiscal 2023 primarily as a result of weaker macroeconomic trends.

This was pronounced in our Industrial end market as customers decreased their inventory balances and in the Communications end market primarily due to the timing of infrastructure deployment cycles.

The Automotive and Consumer end markets declined to a lesser extent as demand weakened driven by reduced consumer spending.

Revenue by Sales Channel

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(1) The sum of the individual percentages may not equal the total due to rounding.

As indicated in the table above, the percentage of total revenue sold via each channel has remained relatively consistent in the periods presented, but can fluctuate from time to time based on end customer demand.

As a percentage of total revenue, the decrease in the distributor channel is primarily due to the decrease in revenue in our Industrial end market.

Revenue Trends by Geographic Region

Revenue by geographic region, based upon the geographic location of the distributors or OEMs who purchased the Company's products, for fiscal 2023 and fiscal 2022 was as follows:

Geographic revenue information for fiscal 2024 and fiscal 2023 reflects the geographic location of the distributors or OEMs who purchased the Company’s products.

This may differ from the geographic location of the end customers particularly in cases where a third-party contract manufacturer purchases the Company’s products through distributors.

Fiscal Year 2024 over 2023

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In all periods presented, the predominant regions comprising “Rest of North and South America” are Canada and Mexico;

the predominant regions comprising “Europe” are Germany, Sweden and the Netherlands;

the predominant regions comprising “Europe” are Germany, Sweden, Israel and the Netherlands;

and the predominant regions comprising “Rest of Asia” are Taiwan, Malaysia, South Korea and Singapore.

Total revenue increased in fiscal 2023 as compared to fiscal 2022 due to the revenue trends discussed above, partially offset by weaker customer demand in China and Rest of Asia primarily due to deteriorating macroeconomic conditions in those regions.

Total revenue decreased in fiscal 2024 as compared to fiscal 2023 in all regions due to weaker macroeconomic conditions as discussed above under the heading Revenue Trends by End Market.

Fiscal Year 2024 over 2023

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Gross margin % 57.1 % 64.0 %

Gross margin percentage in fiscal 2023 increased by 130 basis points compared to fiscal 2022.

Fiscal 2022 included $271.4 million of additional cost of goods sold that did not repeat in fiscal 2023 related to a nonrecurring fair value adjustment recorded to inventory.

This increase in gross margin percentage was partially offset by lower utilization of our factories due to decreasing customer demand during fiscal 2023.

Gross margin percentage in fiscal 2024 decreased by 690 basis points compared to fiscal 2023, primarily due to lower utilization of our factories due to decreased customer demand and unfavorable product mix.

Research and Development (R&D)

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R&D expenses as a % of revenue 16 % 13 %

R&D expenses decreased in fiscal 2023 as compared to fiscal 2022 primarily as a result of lower employee related variable compensation expenses, partially offset by higher salary and benefit expenses.

R&D expenses decreased in fiscal 2024 as compared to fiscal 2023 primarily as a result of lower R&D employee related variable compensation expenses, partially offset by the impact of an additional week of operations in fiscal 2024 as compared to fiscal 2023.

R&D expenses as a percentage of revenue will fluctuate from year-to-year depending on the amount of revenue and the success of new product development efforts, which we view as critical to our future growth.

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SMG&A expenses as a % of revenue 11 % 10 %

SMG&A expenses increased in fiscal 2023 as compared to fiscal 2022, primarily as a result of higher employee related salary and benefit expenses and discretionary spending, partially offset by lower variable compensation expenses and acquisition-related transaction costs.

SMG&A expenses decreased in fiscal 2024 as compared to fiscal 2023, primarily as a result of lower variable compensation expenses, SMG&A employee related salary and benefit expenses and discretionary spending.

The decrease was partially offset by an additional week of operations in fiscal 2024 as compared to fiscal 2023.

Amortization of Intangibles

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Special charges, net as a % of revenue — % 1 %

Special charges, net decreased in fiscal 2023 as compared to fiscal 2022, primarily due to increased charges recorded in fiscal 2022 related to our Global Repositioning Actions offset by $160.7 million of charges recorded in fiscal 2023 primarily related to $114.0 million recorded for our plan committed to during the three months ended October 28, 2023, to reorganize our business (the Q4 2023 Plan).

The Q4 2023 Plan, consisting of voluntary and involuntary reductions-in-force, and other cost-savings initiatives, was commenced to adjust our cost structure and business activities to better align with weaker market demand and continued economic uncertainty in our end markets, as well as make certain strategic shifts in our workforce necessary to achieve our long-term vision.

Special charges, net decreased in fiscal 2024 as compared to fiscal 2023, primarily due to decreased charges related to our Q4 2023 Plan.

See Note 5, Special Charges, Net , of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information.

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Operating income as a % of revenue 21.6 % 31.1 %

The increase in operating income in fiscal 2023 as compared to fiscal 2022 was primarily the result of a $344.7 million increase in gross margin, a $113.8 million decrease in special charges, net, a $53.0 million decrease in amortization expenses and a $40.3 million decrease in R&D expenses, partially offset by a $7.4 million increase in SMG&A expenses, as more fully described above under the headings Gross Margin, Special Charges, Net, Amortization of Intangibles, Research and Development (R&D) and Selling, Marketing, General and Administrative (SMG&A).

The decrease in operating income in fiscal 2024 as compared to fiscal 2023 was primarily the result of a decrease in revenue which contributed to a decrease in gross margin of $2,495.9 million, partially offset by a $204.9 million decrease in SMG&A expenses, a $204.8 million decrease in amortization expenses, a $172.3 million decrease in R&D expenses and a $123.5 million decrease in special charges, net, as more fully described above.

Nonoperating Expense (Income)

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$ 255,458 $ 215,109 $ 40,349 19 %

The year-over-year increase in nonoperating expense in fiscal 2023 as compared to fiscal 2022 was primarily the result of

higher interest expense related to our debt obligations and lower net gains from other investments, partially offset by higher interest income.

Provision for (Benefit From) Income Taxes

The year-over-year increase in nonoperating expense in fiscal 2024 as compared to fiscal 2023 was primarily the result of higher interest expense related to our debt obligations and lower net gains from other investments, partially offset by higher interest income.

Provision for Income Taxes

Fiscal Year 2024 over 2023

2024 2023 $ Change % Change

Provision for (benefit from) income taxes $ 293,424 $ 350,188 $ (56,764) (16) %

Provision for income taxes $ 142,067 $ 293,424 $ (151,357) (52) %

Effective income tax rate 8.0 % 8.1 %

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For fiscal 2024 and fiscal 2023 our pretax income was primarily generated in Ireland at a tax rate of 12.5%.

Our effective tax rate for fiscal 2023 also included the effects of the mandatory capitalization and amortization of research and development expenses which began in fiscal 2023 under the Tax Cuts and Jobs Act of 2017.

The mandatory capitalization requirement decreased our effective tax rate primarily by increasing the foreign-derived intangible income deduction.

Our effective tax rate for fiscal 2023 was also impacted by a discrete income tax benefit recorded of $81.7 million resulting from the approval granted by the Joint Committee on Taxation of our federal corporate income tax relief claim which reduced the amount of transition tax owed under the Tax Cuts and Jobs Act of 2017.

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Diluted EPS $ 3.28 $ 6.55 $ (3.27) (50) %

The increase in net income in fiscal 2023 as compared to fiscal 2022 was a result of a $544.4 million increase in operating income and a $56.8 million decrease in provision for income taxes, partially offset by a $35.2 million increase in nonoperating expense, as more fully described above under the headings Operating Income, Provision for (Benefit From) Income Taxes and Nonoperating (Income) Expense.

The decrease in net income in fiscal 2024 as compared to fiscal 2023 was a result of a $1,790.3 million decrease in operating income and a $40.3 million increase in nonoperating expense, partially offset by a $151.4 million decrease in provision for income taxes.

Liquidity and Capital Resources

At October 28, 2023, our principal source of liquidity was $958.1 million of cash and cash equivalents, of which approximately $201.1 million was held in the United States and the balance of our cash and cash equivalents was held outside the United States in various foreign subsidiaries.

At November 2, 2024, our principal source of liquidity was $2.4 billion of cash, cash equivalents and short-term investments, of which approximately $1.3 billion was held in the United States, with the balance held outside the United States in various foreign subsidiaries.

We manage our worldwide cash requirements by, among other things, reviewing available funds held by our foreign subsidiaries and the cost effectiveness by which those funds can be accessed in the United States.

We do not expect current regulatory restrictions or taxes on repatriation to have a material adverse effect on our overall liquidity, financial condition or results of operations.

Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less, including money market funds.

Our cash, cash equivalents and short-term investments consist of highly liquid investments, including money market funds and corporate and bank obligations.

We maintain these balances with counterparties with high credit ratings, and continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk.

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Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.

The increase in cash provided by operating activities during fiscal 2023 as compared to fiscal 2022 was primarily a result of higher net income adjusted for noncash items offset by changes in working capital.

The decrease in cash provided by operating activities during fiscal 2024 as compared to fiscal 2023 was primarily a result of lower net income adjusted for noncash items partially offset by changes in working capital.

Investing Activities

Investing cash flows generally consist of capital expenditures and cash used for acquisitions.

The increase in cash used for investing activities during fiscal 2023 as compared to fiscal 2022 was primarily the result of an increase in cash used for capital expenditures.

The decrease in cash used for investing activities during fiscal 2024 as compared to fiscal 2023 was primarily the result of a decrease in cash used for capital expenditures, partially offset by the net impact of purchases and maturities of short-term investments during fiscal 2024.

Financing Activities

Financing cash flows generally consist of payments of dividends to shareholders, repurchases of common stock, issuance and repayment of debt and proceeds from the sale of shares of common stock pursuant to employee equity incentive plans.

The decrease in cash used for financing activities during fiscal 2023 as compared to fiscal 2022 was primarily the result of the net proceeds from the issuance of commercial paper notes during fiscal 2023 and lower debt repayments, partially offset by higher common stock repurchases.

The decrease in cash used for financing activities during fiscal 2024 as compared to fiscal 2023 was primarily the result of lower common stock repurchases.

Working Capital

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The decrease in accounts receivable for fiscal 2024 compared to fiscal 2023 was primarily the result of variations in the timing of collections and billings and decreased revenue levels in the fourth quarter of fiscal 2024 as compared to the fourth quarter of fiscal 2023.

Inventory increased in fiscal 2023 as compared to fiscal 2022, primarily as a result of our efforts to balance manufacturing production, demand and inventory levels.

Inventory decreased in fiscal 2024 as compared to fiscal 2023, primarily as a result of our efforts to balance manufacturing production, demand and inventory levels.

Our inventory levels are impacted by our need to support forecasted sales demand and variations between those forecasts and actual demand.

Current liabilities increased to $3.2 billion at October 28, 2023 from $2.4 billion recorded at the end of fiscal 2022, primarily due to increases in commercial paper notes and current debt, partially offset by lower accrued liabilities.

Current liabilities decreased to $3.0 billion at November 2, 2024 from $3.2 billion recorded at the end of fiscal 2023, primarily due to decreases in accrued liabilities and current debt, partially offset by increases in income taxes payable.

Revolving Credit Facility

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In addition, the Revolving Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.5 to 1.0.

As of October 28, 2023, we were in compliance with these covenants.

As of November 2, 2024, we were in compliance with these covenants.

See Note 13, Revolving Credit Facility , of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our revolving credit facility.

As of October 28, 2023, we had approximately $6.4 billion of carrying value outstanding on our senior notes.

As of November 2, 2024, we had approximately $7.0 billion of carrying value outstanding on our senior notes.

The difference in the carrying value of the debt and the principal is due to the unamortized discount and issuance fees and other adjustments on these instruments.

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and consolidate with or merge into, or transfer or lease all or substantially all of our assets to, any other party.

As of October 28, 2023, we were compliant with these covenants.

As of November 2, 2024, we were compliant with these covenants.

See Note 14, Debt of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our outstanding debt.

Commercial Paper Program

During fiscal 2023, we established a commercial paper program under which we may issue short-term, unsecured commercial paper notes in amounts up to a maximum aggregate face amount of $2.5 billion outstanding at any time, with maturities of up to 397 days from the date of issuance.

As of October 28, 2023, we had $547.2 million of outstanding borrowings under the commercial paper program recorded in the Consolidated Balance Sheet.

Under our commercial paper program, we may issue short-term, unsecured commercial paper notes in amounts up to a maximum aggregate face amount of $2.5 billion outstanding at any time, with maturities of up to 397 days from the date of issuance.

As of November 2, 2024, we had $547.7 million of outstanding borrowings under the commercial paper program recorded in the Consolidated Balance Sheet.

We intend to use the net proceeds of the commercial paper program for general corporate purposes, including without limitation, repayment of indebtedness, stock repurchases, acquisitions, capital expenditures and working capital.

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Under the program, we may repurchase outstanding shares of our common stock from time to time in the open market and through privately negotiated transactions.

Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized under the program.

As of October 28, 2023, $2.1 billion remained available for repurchase under the current authorized program.

Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when the full dollar amount of the authorization has been used to repurchase shares under the program.

As of November 2, 2024, $1.7 billion remained available for repurchase under the current authorized program.

The repurchased shares are held as authorized but unissued shares of common stock.

We also repurchase shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units/awards or the exercise of stock options.

Future repurchases of common stock will be dependent upon our financial position, results of operations, outlook, liquidity and other factors we deem relevant.

Capital Expenditures

Net additions to property, plant and equipment were $1.3 billion in fiscal 2023 as we invested to enhance our global resiliency.

We expect capital expenditures for fiscal 2024 to be between approximately $600.0 million and $800.0 million.

Net additions to property, plant and equipment were $730.5 million in fiscal 2024 as we invested to enhance our global resiliency and continue to diversify our global manufacturing footprint.

We expect capital expenditures for fiscal 2025 to be between approximately 4% and 6% of fiscal 2025 revenue.

These capital expenditures will be funded with a combination of cash on hand and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing.

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Contractual Obligations

The table below summarizes our material contractual obligations in specified periods as of October 28, 2023:

The table below summarizes our material contractual obligations in specified periods as of November 2, 2024:

Payment due by period

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Interest payments associated with debt obligations 3,169,308 232,301 433,714 343,339 2,159,954

Investment-related commitments (2)

198,000 33,000 66,000 66,000 33,000

Transition tax (3)

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(1) Debt obligations are assumed to be held to maturity.

(2) Tax obligation relates to the one-time tax on deemed repatriated earnings under the Tax Cuts and Jobs Act and includes a reduction resulting from the approval granted by the Joint Committee on Taxation of our federal corporate income tax relief claim which reduced the amount of transition tax owed.

(2) Commitments related to certain investments in venture funds directed to our strategic areas of targeted growth in digital biology, life sciences and sustainability, among others.

(3) Tax obligation relates to the one-time tax on deemed repatriated earnings under the Tax Cuts and Jobs Act.

(4) Certain of our operating lease obligations include escalation clauses.

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(5) We have supplier commitments for the purchase of materials and supplies in advance or with minimum purchase quantities.

As of October 28, 2023, our total liabilities associated with uncertain tax positions was $186.2 million, which are included in non-current income taxes payable in our Consolidated Balance Sheets contained in Item 8 of this Annual Report on Form 10-K.

As of November 2, 2024, our total liabilities associated with uncertain tax positions was $185.8 million, which are included in non-current income taxes payable in our Consolidated Balance Sheets contained in Item 8 of this Annual Report on Form 10-K.

Due to the complexity associated with our tax uncertainties, we cannot make a reasonably reliable estimate of the period in which we expect to settle the non-current liabilities associated with these uncertain tax positions.

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Unless otherwise discussed, management believes that the impact of recently issued standards will not have a material impact on our future financial condition and results of operations.

See Note 2s, New Accounting Pronouncements, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for a description of recently issued and adopted accounting pronouncements, including the dates of adoption and impact on our historical financial condition and results of operations.

Critical Accounting Policies and Estimates

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Certain shipping terms require the goods to be through customs or be received by the customer before title passes.

In those instances, we defer the revenue recognized until title and control of the promised goods have passed to the customer.

In those instances, we defer the revenue recognized until title and control of the promised goods

have passed to the customer.

Shipping costs are charged to selling, marketing, general and administrative expense as incurred.

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To date, our actual results have not been materially different than our estimates.

Long-Lived Assets

We review property, plant, and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable.

Recoverability of these assets is determined by comparison of their carrying value to the estimated future undiscounted cash flows that the assets are expected to generate over their remaining estimated lives.

If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.

Material impairment adjustments related to our property, plant, and equipment are reflected in our financial statements for the periods presented.

Any deterioration in our business in the future could lead to such impairment adjustments in future periods.

Evaluation of impairment of long-lived assets requires estimates of future operating results that are used in the preparation of the expected future undiscounted cash flows.

Actual future operating results and the remaining economic lives of our long-lived assets could differ from the estimates used in assessing the recoverability of these assets.

These differences could

result in impairment charges, which could have a material adverse impact on our results of operations.

In addition, in certain instances, assets may not be impaired but their estimated useful lives may have decreased.

In these situations, we amortize the remaining net book values over the revised useful lives.

Goodwill is subject to impairment tests annually or more frequently if events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable, utilizing either the qualitative or quantitative method.

We test goodwill for impairment at the reporting unit level, which we determined is consistent with our identified operating segments, on an annual basis on the first day of the fourth quarter (on or about July 30) or more frequently if we believe indicators of impairment exist or we reorganize our operating segments or reporting units.

We test goodwill for impairment at the reporting unit level, which we determined is consistent with our identified operating segments, on an annual basis on the first day of the fourth quarter (on or about August 4 th ) or more frequently if we believe indicators of impairment exist or we reorganize our operating segments or reporting units.

We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value.

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In order to assess the reasonableness of the calculated reporting unit fair values, we reconcile the aggregate fair values of our reporting units determined, as described above, to our total company market capitalization, allowing for a reasonable control premium.

In fiscal 2023, we used the qualitative method of assessing goodwill for our reporting units.

In fiscal 2022, we used a combination of the qualitative and quantitative methods of assessing goodwill for all reporting units.

During fiscal 2024 and fiscal 2023, we elected to use the qualitative method of assessing goodwill for all of our reporting units.

In all periods presented, we concluded the reporting units’ fair values exceeded their carrying amounts as of the assessment dates and no risk of impairment existed.

Business Combinations

Under the acquisition method of accounting, we recognize tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values.

We record the excess of the fair value of the purchase consideration over the value of the net assets acquired as goodwill.

The accounting for business combinations requires us to make significant estimates and assumptions, especially with respect to intangible assets and the fair value of contingent payment obligations.

Critical estimates in valuing purchased technology, customer lists and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets.

If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges which could be material.

In addition, we have estimated the economic lives of certain acquired

assets and these lives are used to calculate depreciation and amortization expense.

If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.

We record contingent consideration resulting from a business combination at its fair value on the acquisition date.

We generally determine the fair value of the contingent consideration using the income approach methodology of valuation.

Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as an adjustment to operating expenses within the Consolidated Statements of Income.

Changes in the fair value of the contingent consideration can result from changes in assumed discount periods and rates, and from changes pertaining to the achievement of the defined milestones.

Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.

Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense we record in any given period.

Accounting for Income Taxes

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For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

We classify interest and penalties related to uncertain tax positions within the provision for (benefit from) income taxes line of the Consolidated Statements of Income.

We classify interest and penalties related to uncertain tax positions within the provision for income taxes line of the Consolidated Statements of Income.

We reevaluate these uncertain tax positions on a quarterly basis.

This evaluation is based on factors including, but not limited to, changes in known facts or circumstances, changes in tax law, effectively settled issues under audit, and new guidance on legislative interpretations.

A change in these factors could result in the recognition of an increase or decrease to our income tax provision, which could materially impact our consolidated financial position and results of operations.

A change in these factors could

result in the recognition of an increase or decrease to our income tax provision, which could materially impact our consolidated financial position and results of operations.

In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain.

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See Note 12, Income Taxes , of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion.

Stock-Based Compensation

Stock-based compensation expense associated with stock related awards is recognized in the Consolidated Statements of Income.

Determining the amount of stock-based compensation to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of restricted stock units and market-based and performance-based awards.

The grant-date fair value of restricted stock units with a service condition and restricted stock units with both service and performance conditions is calculated using the value of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting.

For restricted stock units with both service and performance conditions, this grant-date fair value is also impacted by the number of units that are expected to vest during the performance period and is adjusted through the related stock-based compensation expense at each reporting period based on the probability

of achievement of that performance condition.

If we determine that an award is unlikely to vest, any previously recorded stock-based compensation expense is reversed in the period of that determination.

The grant date fair value of restricted stock units and performance-based stock options with both service and market conditions are calculated using the Monte Carlo simulation model to estimate the probability of satisfying the performance condition stipulated in the award grant, including the possibility that the market condition may not be satisfied.

The use of valuation models requires us to make estimates of key assumptions which are based on historical information and judgment regarding market factors and trends.

We recognize the expense related to equity awards on a straight-line basis over the vesting period.

See Note 2r, Stock-Based Compensation, and Note 3, Stock-Based Compensation and Shareholders' Equity , of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for more information related to stock-based compensation.

Contingencies

From time to time, in the ordinary course of business, various claims, charges and litigation are asserted or commenced against us arising from, or related to, among other things, contractual matters, patents, trademarks, personal injury, environmental matters, product liability, insurance coverage, employment or employment benefits.

We periodically assess each matter to determine if a contingent liability should be recorded.

In making this determination, we may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts.

Based on the information we obtain, combined with our judgment regarding all the facts and circumstances of each matter, we determine whether it is probable that a contingent loss may be incurred and whether the amount of such loss can be reasonably estimated.

If a loss is probable and reasonably estimable, we record a contingent loss.

In determining the amount of a contingent loss, we consider advice received from experts in the specific matter, current status of legal proceedings, settlement negotiations that may be ongoing, prior case history and other factors.

If the judgments and estimates made by us are incorrect, we may need to record additional contingent losses that could materially adversely impact our results of operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis