What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-30 compared with 2021-08-27 · 126 added, 110 removed, 202 unchanged (54% of the section changed)

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We are well recognized by our customers and the industry for our excellent quality, reliability, and innovative service.

For the third time in four years, we were recognized in 2021 for achieving the Highest Overall Customer Rating in CIRCUITS ASSEMBLY’s 2021 Service Excellence Awards.

CIRCUITS ASSEMBLY is a leading brand and technical publication for electronics manufacturers worldwide.

CIRCUITS ASSEMBLY, a leading brand and technical publication for electronics manufacturers worldwide, has recognized us three times in the past four years for achieving the Highest Overall Customer Rating in their Service Excellence Awards.

The contract manufacturing services industry is very competitive.

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This characteristic of the contract electronics marketplace is expected to continue.

The Worldwide Manufacturing Services Market - 2021 Edition , a comprehensive study on the worldwide EMS market published by New Market Research (“NVR”), provided worldwide forecast trends through 2025.

The Worldwide Manufacturing Services Market - 2022 Edition , a comprehensive study on the worldwide EMS market published by New Venture Research (“NVR”), provided worldwide forecast trends through 2026.

NVR projects the worldwide assembly market for electronics products to grow at a compound annual growth rate (“CAGR”) of 4.3% over the next five years, with the EMS industry projected to grow at a CAGR of 5.5%.

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The COVID-19 pandemic continues to impact the global economy, and we are actively monitoring its impact on all our operations.

The well-being and safety of our employees remains our number one priority, and we are following guidelines suggested by applicable authorities, including utilizing protective shields, face masks, body temperature scanning, social distancing, and proper hygiene as appropriate for our operations.

The well-being and safety of our employees remains our number one priority, and we are following guidelines suggested by applicable authorities as appropriate for our operations.

Our response to each positive case in our facilities follows our procedures for communication to our employees, contact tracing, self-quarantining, testing, and sanitization of the affected work areas.

Because of the variety of critical medical device assemblies we manufacture around the world, our facilities were classified as “essential businesses” or otherwise permitted to operate under shelter in place orders or other similar orders during government-mandated COVID-19 shutdowns, but all have been affected to varying degrees by COVID-19.

Nonetheless, all of our facilities have been affected to varying degrees by COVID-19.

Most recently, due to the continued spread of COVID-19 cases, in various cities in China where our customers and suppliers operate, Chinese authorities have reinstated certain measures to keep COVID-19 in check, including travel restrictions, stay-at-home orders, compulsory quarantines, and the temporary closure of many corporate offices, manufacturing facilities, and factories.

We continue to maintain close contact and communication with our customers and our supply chain to ensure safety measures follow appropriate guidelines for the health and safety of all parties and to minimize disruption of operations.

While the availability of vaccines is encouraging, significant uncertainties and risks still exist related to the effectiveness and uptake of the various vaccines and the severity and duration of the impact of COVID-19 on our end markets, the supply chain, the health and availability of our workforce, and global macroeconomic conditions;

While the availability of vaccines and other treatments is encouraging, significant uncertainties and risks still exist related to the severity and duration of the impact of COVID-19 on our end markets, the supply chain, the health and availability of our workforce, and global macroeconomic conditions;

therefore, its financial impact on our future results cannot be reasonably estimated but could be material.

The EMS industry is currently experiencing component shortages and component allocations, particularly with semiconductors driven by the strong demand in consumer electronics and the beginning of a global recovery.

Component shortages or allocations could increase component costs and potentially interrupt our operations and negatively impact our ability to meet commitments to customers.

The semiconductor shortage has adversely impacted global manufacturing, including the automotive industry, leading to automakers temporarily suspending production in recent months.

We have taken various actions to mitigate the risk and minimize the impact to our customers as well as the adverse effect component shortages or allocations could have on our results;

however, the duration or severity of the semiconductor shortage is unknown, and its financial impact on our results cannot be reasonably estimated but could be material.

Demand from customers in the automotive market is gaining momentum, after recently being adversely impacted by COVID-19, as we experienced a record sales quarter in our automotive vertical in the second quarter of fiscal year 2021 and growth in the second half of fiscal year 2021 over the second half of fiscal year 2020.

We are monitoring, however, the current shortage of semiconductors and the continuing impact on global automobile production.

We anticipate demand from customers in the automotive market to remain strong during fiscal year 2022, but we expect a stronger second half of fiscal year 2022 than

the first half as we expect the supply to catch up with the demand.

In the medical market, sales returned to the pre-COVID-19 pandemic levels starting with the second quarter of fiscal year 2021 after we experienced a record sales quarter in the first quarter of fiscal year 2021 due to the significant increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products, as a direct result of COVID-19.

Sales were adversely impacted in the medical market due to lower demand for non-critical medical products, but we believe this demand will increase as elective procedures resume to pre-COVID-19 levels.

In the industrial market, we had record sales in the current fiscal year in large part due to improved sales of automation, test, and inspection equipment and higher end market demand for climate control products.

Sales to customers in the public safety market were lower in fiscal year 2021 compared to fiscal year 2020 primarily due to the phase out of certain programs.

We have a strong focus on cost control and closely monitor market changes and our liquidity in order to proactively adjust our operating costs and discretionary capital spending as needed.

We expect to make investments that will strengthen or add new capabilities to our package of value as a multifaceted manufacturing solutions company, including through acquisitions and capacity expansions.

The EMS industry continues to experience component shortages, component allocations, and shipping delays, particularly with semiconductors, which have been especially challenging throughout this fiscal year.

Component shortages or allocations could continue to increase component costs and potentially interrupt our operations and negatively impact our ability to meet commitments to customers.

We have taken various actions to mitigate the risk and minimize the impact to our customers as well as the adverse effect component shortages, component allocations, or shipping delays could have on our results;

however, the duration or severity of the components shortages is unknown.

COVID-19 interruptions and supply chain restraints have also resulted in an industry-wide inflation of components, labor, freight, and other operating costs.

Through contractual pricing arrangements and negotiations with our customers, we have been able to mitigate a majority of these cost increases;

however, our profitability has been impacted, and the financial impact on our future results cannot be reasonably estimated but could be material.

In February 2022, Russia launched an invasion of Ukraine.

The ongoing war there has impacted the global economy as the United States, the UK, the EU, and other countries have imposed broad export controls and financial and economic sanctions against Russia (a large exporter of commodities), Belarus, and specific areas of Ukraine, and may continue to impose additional sanctions or other measures.

Russia may impose its own counteractive measures.

Companies worldwide are interrupting or

stopping production in Ukraine, Russia, and neighboring countries.

We do not procure materials directly from Ukraine or Russia, but these impacts can further exacerbate the ongoing supply chain disruptions that are occurring across the globe, particularly in the automotive industry.

While the precise effects on global economies of the ongoing war and sanctions remain uncertain, they have already resulted in significant volatility in financial markets, fluctuations in currency exchange rates, and an increase in energy and commodity prices globally.

Should the war continue or escalate, there may be various economic and security consequences including, but not limited to, additional supply shortages of different kinds;

further increases in prices of commodities;

significant disruptions in logistics infrastructure and telecommunications services;

and risks relating to the unavailability of information technology systems and infrastructure.

The resulting impacts to the global economy, financial markets, inflation, interest rates, and unemployment, among others, could adversely impact economic and financial conditions, and may disrupt the global economy’s ongoing recovery from the COVID-19 pandemic.

Other potential consequences include, but are not limited to, growth in the number of popular uprisings in the region, increased political discontent, especially in the regions most affected by war or economic sanctions, increase in cyberterrorism activities and attacks, displacement of persons to regions close to the areas of conflict, and an increase in the number of refugees fleeing across Europe, among other unforeseen social and humanitarian effects.

Any future negative impact to our operations cannot be reasonably estimated but could be material.

As expected, the second half of fiscal year 2022 finished stronger than the first half as we had record quarterly net sales in the fourth quarter and record annual net sales.

Sales to customers in the automotive market and the industrial market experienced record annual net sales.

We anticipate demand from customers in the automotive market to remain strong in fiscal year 2023 as the supply chain catches up with the demand and the continued ramp-up of certain programs and the launch of new programs.

In the medical market, sales increased slightly by 2% as the prior fiscal year benefited from the COVID-19-related demand increase for medical assemblies.

In the industrial market, sales increased in the current fiscal year in large part due to higher end market demand for climate control products.

Sales to customers in the public safety market were slightly higher in the current fiscal year compared to fiscal year 2021.

We have a strong focus on cost control balanced with managing the future growth prospects of our business and growing backlog of orders due to the global component shortage and logistical challenges.

We expect to make investments that will strengthen or add new capabilities to our package of value as a multifaceted manufacturing solutions company, including through our recently announced and completed capacity expansions.

Managing working capital in conjunction with fluctuating demand levels is likewise key.

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• The nature of the EMS industry is such that the start-up of new customers and new programs to replace expiring programs occurs frequently.

As such, our ability to continue contractual relationships with our customers, including our principal customers, is not certain.

While our agreements with customers generally do not have a definitive term and thus could be canceled at any time with little or no notice, we generally realize relatively few cancellations prior to the end of the product’s life cycle.

We attribute this to our focus on long-term customer relationships, meeting customer expectations, required capital investment, and product qualification cycle times.

As such, our ability to continue contractual relationships with our customers, including our principal customers, is not certain.

New customers and program start-ups generally cause margin dilution early in the life of a program, which are generally recovered as the program becomes established and matures.

• Risk factors within our business include, but are not limited to, general economic and market conditions, component availability, customer order delays, globalization, global health emergencies including the COVID-19 pandemic, impact related to tariffs and other trade barriers, foreign currency exchange rate fluctuations, rapid technological changes, supplier and customer financial stability, the contract nature of this industry, the concentration of sales to large customers, and the potential for customers to choose a dual sourcing strategy or to in-source a greater portion of their manufacturing.

• Risk factors within our business include, but are not limited to, general economic and market conditions, component availability, logistical challenges, customer order delays, globalization, global health emergencies including the COVID-19 pandemic, geopolitical conflicts such as the war in Ukraine, impact related to tariffs and other trade barriers, foreign currency exchange rate fluctuations, rapid technological changes, supplier and customer financial stability, the contract nature of this industry, the concentration of sales to significant customers, and the potential for

customers to choose a dual sourcing strategy or to in-source a greater portion of their manufacturing.

The continuing success of our business is dependent upon our ability to replace expiring customers/programs with new customers/programs.

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Other General Income 1.4 0.4

Goodwill Impairment $ — — % $ 7.9 0.6 %

Operating Income 52.5 3.9 % 65.7 5.1 % (20) %

Other Income (Expense) (8.7) 4.4

Provision for Income Taxes 12.5 13.3 (6) %

Net Income $ 31.3 $ 56.8 (45) %

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Total Net Sales $ 1,349.5 $ 1,291.8 4 %

Net sales in fiscal year 2021 increased by 8% compared to net sales in fiscal year 2020 including a favorable impact of 3% from foreign exchange fluctuations.

Net sales in fiscal year 2022 increased by 4% compared to net sales in fiscal year 2021, which included an unfavorable impact of 1% from foreign exchange fluctuations.

By end market vertical, our market verticals fluctuated as follows:

• We experienced record sales to customers in the automotive market during the current fiscal year as the automotive industry was returning to more normalized levels from the prior fiscal year, during which many automakers suspended production in our fourth fiscal quarter due to the COVID-19 pandemic.

Sales to customers in the automotive market also improved from the ramp-up of certain programs, including programs for fully electric vehicles.

• Sales to customers in the medical market were down slightly in the current fiscal year when compared to the prior fiscal year due to the lower demand for non-critical medical products due to the COVID-19 pandemic.

Fiscal years 2021 and 2020 benefited from the temporary increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products as a direct result of the COVID-19 pandemic and related global shortage of respiratory equipment.

• We also experienced record sales to customers in the industrial market during the current fiscal year, as a result of improved sales of automation, test, and inspection equipment and higher end market demand for climate control products, which were partially offset by decreased demand for smart metering products.

• Sales to customers in the public safety market were lower in fiscal year 2021 compared to fiscal year 2020 primarily due to the phase out of certain programs.

• We experienced record sales to customers in the automotive market largely due to the ramp-up of certain programs and new product introductions, including programs for fully electric vehicles, partially offset by the unfavorable impact of component shortages.

• Sales to customers in the medical market improved slightly in the current fiscal year when compared to the prior fiscal year due to launch and ramp-up of new programs.

Partially offsetting this increase was the benefit in the prior fiscal year sales of the temporary increase in demand for medical assemblies, specifically those related to respiratory care and patient monitoring products as a direct result of the COVID-19 pandemic and related global shortage of respiratory equipment.

• We also experienced record sales to customers in the industrial market during the current fiscal year, as a result of higher end market demand for climate control products.

• Sales to customers in the public safety market were slightly higher in fiscal year 2022 compared to fiscal year 2021.

A significant amount of sales to Nexteer Automotive and Philips accounted for the following portions of our net sales:

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Philips 15% 15%

Open orders were up 78% as of June 30, 2021 compared to June 30, 2020, primarily from an increase in the automotive vertical.

The increase in open orders in the automotive market is driven by the overall increase in demand coupled with the global semiconductor and other component shortages, which has limited our ability to fulfill customer orders.

Open orders in the automotive market were down at June 30, 2020 due to the severe impact of the COVID-19 pandemic on the automotive industry in the prior year.

Open orders were up 59% as of June 30, 2022 compared to June 30, 2021, primarily from an increase in the medical and automotive verticals.

The increase in open orders in both the medical and automotive market is driven by the overall increase in demand coupled with the component shortages, which has limited our ability to fulfill customer orders.

Open orders are the aggregate sales price of production pursuant to unfulfilled customer orders, which may be delayed or canceled by the customer subject to contractual termination provisions.

Substantially all of the open orders as of June 30, 2021 are expected to be filled within the next twelve months.

Open orders at a point in time may not be indicative of future sales trends due to the contract nature of our business.

Additionally, COVID-19 could impact the timing of fulfillment of open orders.

Gross profit as a percent of net sales improved to 9.1% in fiscal year 2021 from 7.0% in fiscal year 2020 primarily due to improved operating execution, favorable product mix within our automotive vertical driven by a shift to more mature and larger programs, and favorable foreign currency fluctuations, which were partially offset by higher profit-sharing incentive bonus expense.

For fiscal year 2021, selling and administrative expenses increased both as a percent of net sales and in absolute dollars compared to fiscal year 2020.

The current fiscal year selling and administrative expenses increased in absolute dollars from the prior fiscal year primarily due to an increase in profit-sharing incentive bonus expense, higher salary and related payroll costs, and the increase in the fair value of the liability for the supplemental employee retirement plan (“SERP”).

Other General Income in fiscal year 2021 of $0.4 million resulted from payments received related to class action lawsuits in which Kimball Electronics was a class member, partially offset by lawsuit settlement accruals and payments.

No Other General Income was recorded during fiscal year 2020.

We recorded a non-cash pre-tax goodwill impairment charge of $7.9 million during fiscal year 2020 related to our GES reporting unit.

See Note 6 - Goodwill and Other Intangible Assets of Notes to Consolidated Financial Statements for more information on goodwill impairment.

No goodwill impairment charge was recorded during fiscal year 2021.

The majority of open orders as of June 30, 2022 are expected to be filled within the next twelve months.

Open orders at a point in time may not be indicative of future sales trends due to the contract nature of our business and the variability of order lead times among our customers.

Additionally, COVID-19 and the component shortages could impact the timing of fulfillment of open orders.

Gross profit as a percent of net sales declined in fiscal year 2022 when compared to fiscal year 2021.

We incurred higher material costs, increased freight costs, unfavorable foreign currency fluctuations, and wage inflation in the current fiscal year compared to the prior fiscal year.

We also experienced lost absorption in the first half of the current fiscal year as we retained our workforce to be well-positioned for the anticipated growth in the second half of the current fiscal year.

Partially offsetting these unfavorable factors in fiscal year 2022 were lower profit-sharing incentive bonus expense and lower depreciation from the change in estimates of useful lives on Surface Mount Technology production equipment.

See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for more information on the change in estimates of useful lives.

For fiscal year 2022, selling and administrative expenses increased slightly by 1% in absolute dollars but remained flat as a percent of net sales when compared to fiscal year 2021.

Other General Income in fiscal years 2022 and 2021 consisted of $1.4 million and $0.4 million, respectively, resulting from payments received related to class action lawsuits in which Kimball Electronics was a class member.

The fiscal year 2021 amount was partially offset by lawsuit settlement accruals and payments.

Other Income (Expense) consisted of the following:

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Interest Expense (2,655) (2,165)

Foreign Currency/Derivative Gain 4,806 420

Gain on SERP Investments 2,073 848

Adjustments after Measurement Period of GES Acquisition 53 (3,785)

Foreign Currency/Derivative Gain (Loss) (4,182) 4,806

Gain (Loss) on SERP Investments (1,563) 2,073

Other (499) (465)

Other Income (Expense), net $ (8,818) $ 4,351

The Foreign Currency/Derivative Gain resulted from net foreign currency exchange rate movements during the period.

The Foreign Currency/Derivative Gain/(Loss) resulted from net foreign currency exchange rate movements during the periods.

The loss in fiscal year 2022 and the gain in fiscal year 2021 were driven by the respective strengthening and weakening of the U.S.

dollar versus foreign currencies that we have exposure to in our business.

The revaluation of the fair value of the supplemental employee retirement plan (“SERP”) investments recorded in Other Income (Expense) is offset by the revaluation of the SERP liability recorded in Selling and Administrative Expenses, and thus there is no effect on net income.

The Adjustments after Measurement Period of GES Acquisition are amounts recorded after the twelve-month measurement period which ended on September 30, 2019, with the fiscal year 2020 amount reflecting the final net working capital adjustment on the GES acquisition as determined by the dispute resolution procedure provided for under the terms of the asset purchase agreement.

See Note 2 - Acquisition of Notes to Consolidated Financial Statements for more information on this acquisition.

The decrease in interest expense was driven by lower borrowings on credit facilities and lower interest rates.

Other includes fees associated with our credit facilities, amortization of actuarial gains (losses), and other miscellaneous items that are not directly related to operations.

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Year Ended June 30, 2022 Year Ended June 30, 2021

(Amounts in Thousands) Income Before Taxes Effective Tax Rate Income (Loss) Before Taxes Effective Tax Rate

(Amounts in Thousands) Income Before Taxes Effective Tax Rate Income Before Taxes Effective Tax Rate

United States $ 1,542 29.8 % $ 10,439 11.4 %

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Total $ 43,731 28.5 % $ 70,054 18.9 %

When compared to the statutory rate, the domestic effective tax rate for fiscal year 2021 was favorably impacted by research and development credits.

The consolidated effective tax rate for fiscal year 2022 was unfavorably impacted by the mix of taxable earnings within our various tax jurisdictions and foreign exchange rate movements.

The domestic effective tax rate and the consolidated effective tax rate for fiscal year 2021 were favorably impacted by a reversal of state valuation allowances.

The consolidated effective tax rate was also favorably impacted by the mix of taxable earnings within our various tax jurisdictions and foreign exchange rate movements.

The domestic effective tax rate and the consolidated effective tax rate for fiscal year 2020 were unfavorably impacted by tax expense due to the global intangible low-taxed income tax provisions of the Tax Cuts and Jobs Act (“Tax Reform”) and the valuation allowance recorded related to state tax credits, partially offset by favorable tax credits.

Our overall effective tax rate will fluctuate depending on the geographic distribution of our worldwide earnings.

See Note 10 - Income Taxes of Notes to Consolidated Financial Statements for more information.

We recorded net income of $56.8 million in fiscal year 2021, or $2.24 per diluted share, an increase of 212% from fiscal year 2020 net income of $18.2 million, or $0.71 per diluted share.

Fiscal year 2020 results include the following non-recurring charges previously discussed:

a $6.9 million after-tax non-cash goodwill impairment charge, or $0.28 per diluted share, and the $2.9 million after-tax net working capital adjustment on the GES acquisition, or $0.11 per diluted share.

Comparing the balance sheet as of June 30, 2021 to June 30, 2020, Receivables increased $23.2 million largely due to increased sales volumes and customer sales mix.

Contract assets decreased $24.5 million as a result of the impact of timing of shipments and related billings to our customers.

Our inventory balance decreased $18.7 million due to the consumption of the inventory build at the end of the prior fiscal year to support the increased demand for medical assemblies and changes in customers’ forecasts as a result of COVID-19 in addition to the current component shortages reducing our inventory levels.

Also contributing to the inventory balance decrease was the reimbursement from certain customers for the excess raw material inventory we purchased based on their forecasts during the ramp-up due to COVID-19.

Borrowings under credit facilities decreased $51.9 million largely due to payments on the U.S.

primary credit facility.

We recorded net income of $31.3 million in fiscal year 2022, or $1.24 per diluted share, a decrease of 45.0% from fiscal year 2021 net income of $56.8 million, or $2.24 per diluted share.

Comparing the balance sheet as of June 30, 2022 to June 30, 2021, Receivables increased $19.5 million largely due to increased sales volumes.

Our inventory balance increased $195.2 million primarily due to the component shortages as we continued to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, as well as increased demand.

Property and equipment, net increased $43.6 million primarily from the Mexico and Thailand facility expansions.

Accounts payable increased $92.1 million primarily due to the increased inventory purchases.

Borrowings under credit facilities increased $114.4 million primarily due to borrowings on the U.S.

primary credit facility for working capital purposes, including the strategic inventory builds to mitigate part shortages.

Liquidity and Capital Resources

Working capital at June 30, 2022 was $352.3 million compared to working capital of $282.6 million at June 30, 2021.

The current ratio was 1.9 and 2.0 at June 30, 2021 and June 30, 2020, respectively.

The current ratio was 1.9 at both June 30, 2022 and June 30, 2021.

The debt-to-equity ratio was 0.4 and 0.1 at June 30, 2022 and June 30, 2021, respectively.

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We define DSO as the average of monthly trade accounts and notes receivable divided by an average day’s net sales, CAD as the average monthly contract assets divided by an average day’s net sales, PDSOH as the average of monthly gross inventory divided by an average day’s cost of sales, and APD as the average of monthly accounts payable divided by an average day’s cost of sales.

Over the past several quarters, we have supported our customers through strategic inventory builds to mitigate parts shortages, which adversely impacted our PDSOH and CCD metrics.

The following table reflects the major categories of cash flows for the fiscal years ended June 30, 2022 and 2021.

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(Amounts in Millions) 2022 2021

Net cash provided by operating activities $ 130.1 $ 72.8

Net cash (used for) provided by operating activities $ (83.2) $ 130.1

Net cash used for investing activities $ (74.8) $ (38.8)

Net cash used for financing activities $ (53.1) $ (17.9)

Net cash provided by (used for) financing activities $ 103.7 $ (53.1)

Cash Flows from Operating Activities

Net cash provided by operating activities for the fiscal year ended June 30, 2021 was driven both by net income adjusted for non-cash items and changes in operating assets and liabilities.

Net cash provided by operating activities for the fiscal year ended June 30, 2020 was primarily driven by net income adjusted for non-cash items.

Changes in operating assets and liabilities provided $40.4 million and $7.9 million of cash for the fiscal years ended June 30, 2021 and 2020, respectively.

Net cash used for operating activities for the fiscal year ended June 30, 2022 was driven by changes in operating assets and liabilities.

Net cash provided by operating activities for the fiscal year ended June 30, 2021 was driven by net income adjusted for non-cash items and changes in operating assets and liabilities.

Changes in operating assets and liabilities used $152.8 million of cash in the fiscal year ended June 30, 2022 compared to $40.4 million of cash provided in the fiscal year ended June 30, 2021.

The cash used of $152.8 million from changes in operating assets and liabilities in fiscal year 2022 was largely due to an increase in inventory, which used cash of $203.2 million primarily due to the component shortages as we continued to purchase material not impacted by the shortages so we can fulfill our customer orders once the impacted components are received, and an increase in accounts receivable, which used cash of $26.5 million primarily resulting from increased sales volumes.

Partially offsetting cash used by inventory was an increase in accounts payable, which provided cash of $96.8 million largely resulting from increased inventory purchases.

The cash provided of $40.4 million from changes in operating assets and liabilities in fiscal year 2021 was primarily due to a decrease in contract assets, which provided cash of $24.5 million as a result of the impact of timing of shipments and related billings to our customers, the decrease in inventory, which provided cash of $18.6 million primarily due to the consumption of the inventory build at the end of the prior fiscal year in addition to the reimbursement from certain customers for the excess raw material inventory we purchased based on their forecasts during the ramp-up due to COVID-19, and the increase in accounts payable, which provided cash of $14.6 million.

Partially offsetting cash provided by contract assets and inventory was an increase in accounts receivable, which used cash of $28.4 million primarily resulting from increased sales volumes and customer sales mix.

The cash provided of $7.9 million from changes in operating assets and liabilities in fiscal year 2020 was primarily due to a decrease in accounts receivable, which provided cash of $41.9 million largely due to the increased utilization of accounts receivable factoring arrangements.

Partially offsetting cash provided by the decrease in accounts receivable was an increase in contract assets, which used cash of $18.4 million to support the increased demand for medical assemblies in addition to certain contracts with customers beginning to meet the criteria to recognize revenue over time during the fiscal year, and an increase in inventory, which used cash of $15.1 million primarily to support the increased demand for medical assemblies.

Cash Flows from Investing Activities

Net cash used for investing activities during fiscal year 2022 includes $74.7 million cash used for capital investments.

The capital investments were primarily for machinery and equipment for capacity purposes and to support new business awards in addition to capital investments for the beginning of expansions at our Thailand and Mexico facilities.

The capital investments were primarily for expansions at our Thailand and Mexico facilities and to support new business awards.

Net cash used for investing activities during fiscal year 2021 includes $39.4 million cash used for capital investments.

The capital investments were primarily for machinery and equipment for capacity purposes and to support new business awards.

Cash Flows from Financing Activities

Net cash used by financing activities for the fiscal year ended June 30, 2021 resulted largely from net payments on our credit facilities of $52.3 million.

Net cash used by financing activities for the fiscal year ended June 30, 2020 resulted largely from net payments on our primary credit facility of $11.4 million, repurchases of our common stock under an authorized stock repurchase plan, and the remittance of tax withholdings on share-based payments, which were partially offset by borrowings of $3.3 million on our Netherlands facility.

Net cash provided by financing activities for the fiscal year ended June 30, 2022 resulted largely from net borrowings on our credit facilities of $114.9 million primarily for working capital purposes.

Net cash used for financing activities for the fiscal year ended June 30, 2021 resulted largely from net payments on our credit facilities of $52.3 million.

Credit Facilities

The Company maintains a U.S.

primary credit facility (the “primary credit facility”) among the Company, the lenders party thereto, and JPMorgan Chase Bank, National Association, as Administrative Agent, and Bank of America, N.A., as Documentation Agent, scheduled to mature July 27, 2023.

The Company maintained a U.S.

primary credit facility which was scheduled to mature on July 23, 2023.

On May 4, 2022, the Company entered into an amended and restated credit agreement (the “primary credit facility”) among the Company, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, and Bank of America, N.A., as Documentation Agent, and the primary credit facility is now scheduled to mature on May 4, 2027.

The primary credit facility provides for $300 million in borrowings, with an option to increase the amount available for borrowing to $450 million at the Company’s request, subject to the consent of each lender participating in such increase.

The proceeds of the loans on the primary credit facility are to be used for working capital and general corporate purposes of the Company including capital expenditures and acquisitions.

The proceeds of the loans on the primary credit facility are to be used for working capital and general corporate purposes of the Company.

A portion of the credit facility, not to exceed $15 million of the principal amount, was available for the issuance of letters of credit.

A commitment fee on the unused portion of the principal amount of the credit facility was payable at a rate that ranged from 20.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.

The interest rate on borrowings is dependent on the type of borrowings and will be one of the following two options:

• the London Interbank Offered Rate (“LIBOR”) in effect two business days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined under the primary credit facility, plus the Eurocurrency Loans spread which can range from 125.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;

• the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuating rate per annum equal to the higher of

JPMorgan’s prime rate;

1% per annum above the Adjusted LIBO Rate (as defined under the primary credit facility);

A commitment fee on the unused portion of the principal amount of the credit facility was payable at a rate that ranged from 10.0 to 25.0 basis points per annum as determined by the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA, as defined under the primary credit facility.

The interest rate on borrowings is dependent on the type and currencies of borrowings and will be one of the following options:

• any Term Benchmark borrowing denominated in U.S.

Dollars will utilize the Secured Overnight Financing Rate (“SOFR”), which is a rate per annum equal to the secured overnight financing rate for such business day published by the SOFR Administrator, the Federal Reserve Bank of New York, on the immediately succeeding business day, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;

• any Term Benchmark borrowing denominated in Euros will utilize the Euro Interbank Offered Rate (“EURIBOR”) in effect two target days prior to the advance (adjusted upwards to reflect bank reserve costs) for such interest period as defined in the agreement, plus the Revolving Commitment Term Benchmark spread which can range from 100.0 to 175.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA;

• the Alternate Base Rate (“ABR”), which is defined as the highest of the fluctuation rate per annum equal to the higher of:

Prime Rate in the U.S.

last quoted by the Wall Street Journal, and if this is ceased to be quoted, the highest bank prime loan rate or similar loan rate quoted by the Federal Reserve Board;

1/2 of 1% per annum above the Federal Funds Effective Rate (as defined under the primary credit facility);

plus the ABR Loans spread which can range from 25.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.

At June 30, 2021, we had $62.7 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility.

At June 30, 2021, $40.0 million of the borrowings were classified as long term as the Company intends, and has the ability, to refinance for a period longer than twelve months.

1% per annum above the Adjusted Term SOFR Rate (as defined under the primary credit facility);

plus the Revolving Commitment ABR spread which can range from 0.0 to 75.0 basis points based on the Company’s ratio of consolidated total indebtedness to adjusted consolidated EBITDA.

At June 30, 2022, we had $171.4 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $145.0 million of the borrowings were classified as long term.

Our debt classified as long term at June 30, 2021 declined $51.5 million from June 30, 2020 as we remitted payment of $46.5 million for borrowings under the primary credit facility and reclassified $5.0 million of the borrowings under the primary credit facility to short term as we have the intent and the ability to repay within twelve months.

At June 30, 2021, we had $62.7 million in borrowings under the primary credit facility and $0.4 million in letters of credit against the primary credit facility, and $40.0 million of the borrowings were classified as long term.

Our debt classified as long term reflects the borrowings the Company intends, and has the ability, to refinance for a period longer than twelve months.

As noted above in the Cash Flows for Financing Activities section, our borrowings on the primary credit facility increased due to working capital purposes.

The Company’s financial covenants under the primary credit facility require:

• a ratio of consolidated total indebtedness minus unencumbered U.S.

• a fixed charge coverage ratio, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be less than 1.10 to 1.00.

cash on hand in the United States in excess of $15 million to adjusted consolidated EBITDA, determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters, to not be greater than 3.0 to 1.0 provided, however, that for each fiscal quarter end during the four quarter period following a material permitted acquisition, as defined in the Credit Agreement, the Company will not permit this financial covenant to be greater than 3.5 to 1.0 for each such fiscal quarter end, and

• an interest coverage ratio, defined as that ratio of consolidated EBITDA for such period to cash interest expense for such period, for any period of four consecutive fiscal quarters, to be less than 3.5 to 1.0.

We were in compliance with the financial covenants during the fiscal year ended June 30, 2022.

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At June 30, 2022 and 2021, we had $9.2 million and $3.5 million, respectively, in borrowings outstanding under this credit facility.

The facility matures on June 22, 2022.

• An uncommitted revolving credit facility for our Poland operation, which allows for borrowings up to 5 million Euro (approximately $5.9 million at June 30, 2021 exchange rates) that can be drawn in Euro, U.S.

dollars, or Polish Zloty.

We had no borrowings outstanding under this credit facility as of June 30, 2021 or June 30, 2020.

The facility matures on December 20, 2021.

During the current fiscal year, the 364-day multi-currency revolving credit facility (the “secondary credit facility”) matured on May 18, 2021, which allowed for borrowings up to $30.0 million.

We did not extend the secondary credit facility as it was intended to provide additional domestic liquidity at the enterprise level to help support the increased demand in medical assemblies that is attributable to the COVID-19 pandemic, and we had no borrowings on the secondary credit facility during its term.

The facility matures in July 2023.

During the current fiscal year, the Poland revolving credit facility, which allowed borrowings up to 5 million Euro, matured and was not extended.

There were no borrowings on the Poland revolving credit facility during the current or prior fiscal year.

Subsequent to June 30, 2022, the Company expanded the borrowing capacity of the Thailand credit facility to $10 million and entered into a foreign credit facility for its EMS operation in China which allows for borrowings up to $7.5 million.

These facilities will be used for general corporate needs and working capital purposes, including the strategic inventory builds to mitigate part shortages.

Factoring Arrangements

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The unused borrowings in USD equivalent under all of our credit facilities totaled $128.7 million at June 30, 2022.

We expect to continue to prudently invest in capital expenditures, including for capacity expansions and potential acquisitions, that would help us continue our growth and development as a multifaceted manufacturing solutions company.

In fiscal year 2021, we have approved capacity expansions at our Thailand and Mexico facilities.

We expect to continue to prudently invest in capital expenditures, including for capacity expansions and potential acquisitions, that would help us continue our growth as a multifaceted manufacturing solutions company.

In fiscal year 2021, we approved capacity expansions at our Thailand and Mexico facilities.

Our Thailand facility expansion was completed in the third quarter of fiscal year 2022, and we anticipate the Mexico facility expansion will be complete in the first quarter of fiscal year 2023.

We have also approved a plan to expand the facility in Poznan, Poland, and the expansion is expected to be completed in early fiscal year 2024.

We are in a solid financial position to be able to weather the continuing impact of COVID-19;

however, significant uncertainties and risks exist related to the severity and duration of its impact to certain markets, the supply chain, and global macroeconomic conditions.

At June 30, 2021, our capital expenditure commitments were approximately $28 million, consisting primarily of commitments for the expansions of our Mexico and Thailand facilities, capital related to new program wins, and productivity improvements including automation.

At June 30, 2022, our capital expenditure commitments were approximately $22 million, consisting primarily of commitments for the expansion of our Poland facility, equipment for the Mexico and Thailand facility expansions, and capital related to new program wins.

We anticipate our available liquidity will be sufficient to fund these capital expenditures.

We have purchase obligations that arise in the normal course of business for items such as raw materials, services, and software acquisitions/license commitments.

In certain instances, such as when lead times dictate, we enter into contractual agreements for material in excess of the levels required to fulfill customer orders to help mitigate the potential impact related to component shortages, which require longer lead times.

In certain instances, such as when lead times dictate, we enter into contractual agreements

for material in excess of the levels required to fulfill customer orders to help mitigate the potential impact related to component shortages, which require longer lead times.

In turn, our material authorization agreements with customers cover a portion of the exposure for material which is purchased prior to having a firm order.

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Most of these accumulated unremitted foreign earnings have been invested in active non-U.S.

business operations, and we expect we may only repatriate a minor amount of these earnings to the United States in a tax-efficient manner.

business operations, and it is not anticipated such earnings will be remitted to the United States.

Our intent is to permanently reinvest the remaining funds outside of the United States, and our current plans do not demonstrate a need to repatriate these funds to our U.S.

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income and withholding taxes.

On October 21, 2015, the Company’s Board of Directors approved a resolution to authorize an 18-month stock repurchase plan (the “Plan”) to allow the repurchase of up to $20 million of common stock.

Then, separately on each of September 29, 2016, August 23, 2017, November 8, 2018 and November 10, 2020, the Board extended and increased the Plan to allow the repurchase of up to an additional $20 million worth of common stock with no expiration date, which brought the total authorized stock repurchases under the Plan to $100 million.

The Plan may be suspended or discontinued at any time.

The Company has a Board-authorized stock repurchase plan (the “Plan”) to allow the repurchase of up to $100 million of common stock.

Purchases may be made under various programs, including in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions, all in accordance with applicable securities laws and regulations.

The Plan has no expiration date but may be suspended or discontinued at any time.

The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the Company’s management team.

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The majority of our revenue is recognized over time as manufacturing services are performed where we manufacture a product with no alternative use and have an enforceable right to payment for performance completed to date.

The remaining revenue is recognized when the customer obtains control of the manufactured product.

The remaining revenue is

recognized when the customer obtains control of the manufactured product.

We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products.

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If the estimated fair value of the reporting unit is less than the carrying value, goodwill is written down to its estimated fair value.

No impairment charges were recorded in fiscal year 2021 resulting from our annual impairment tests for all reporting units.

In fiscal year 2020, we reported a $7.9 million goodwill impairment charge for our GES reporting unit, partially offset by a $1.0 million reduction in income tax expense associated with the deferred tax asset established for the deductible portion of the impaired goodwill.

No impairment charges were recorded in fiscal year 2022 or 2021 resulting from our annual impairment tests for all reporting units.

Other Intangible Assets, $14.7 million and $17.0 million as of June 30, 2022 and 2021, respectively, are reported on the Consolidated Balance Sheets and consist of capitalized software, customer relationships, technology, and trade name.

Intangible assets are reviewed for impairment, and their remaining useful lives evaluated for revision, when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets.

See Note 1 - Business Description and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for further discussion of the Company’s goodwill and intangible asset accounting policies, along with Note 6 - Goodwill and Other Intangible Assets for further discussion of the calculated fiscal year 2020 goodwill impairment charge.

Taxes - Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

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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