What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-09-16 compared with 2020-09-11 · 78 added, 94 removed, 227 unchanged (43% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

KeyTronicEMS is a leader in electronic manufacturing services and solutions to original equipment manufacturers of a broad range of products.

We provide engineering services, worldwide procurement and distribution, materials management, world-class manufacturing and assembly services, in-house testing, and unparalleled customer service.

Key Tronic is a leading contract manufacturer offering value-added design and manufacturing services from its facilities in the United States, Mexico, China and Vietnam.

We provide full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, worldwide distribution and unparalleled customer service.

It’s customers include some of the world’s leading original equipment manufacturers.

Our combined capabilities and vertical integration are proving to be a desirable offering to our expanded customer base.

Our international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time.

We continue to make investments in all of our operating facilities to give us the production capacity, capabilities and logistical advantages to continue to win new business.

The following information should be read in conjunction with the consolidated financial statements included herein and with Item 1A, Risk Factors included as part of this filing.

The following information should be read in conjunction with the consolidated financial statements included herein and with Part II Item 1A, Risk Factors included as part of this filing.

Our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products, and create long-term mutually beneficial business relationships by employing our “Trust, Commitment, Results” philosophy.

Executive Summary

During the fourth quarter of fiscal year 2020, we won new programs involving sanitizer dispensing, automotive controllers, oil and gas drilling, wireless security and personal healthcare protective equipment.

A large program that we announced in the third quarter, which when fully ramped is anticipated to contribute $100 million in annual revenue, got underway in the fourth quarter and is expected to contribute to revenue in fiscal 2021.

We reported net sales of $449.5 million for fiscal year 2020 compared to net sales of $464.0 million in fiscal year 2019.

During the fourth quarter of fiscal year 2020, the Company’s revenue was constrained by the temporary shutdown of its facilities in Juarez by the Mexican government due to the COVID-19 pandemic and associated delays in production.

During the past fiscal year, we overcame a number of powerful global headwinds, including component shortages, trade disputes and the COVID-19 crisis, but we see the favorable trend of contract manufacturing returning to North America accelerating.

On balance, the effect of the pandemic on our customer’s demand was a net positive during the second half of fiscal 2020.

While some of our customers, particularly in the gaming industry, have seen large decreases in their demand, others have significantly increased their demand, including programs for healthcare and home-oriented consumer products and exercise equipment.

As we enter fiscal 2021, uncertainty remains around the continuing impact of COVID-19 and potential future disruptions to our production facilities and we continue to focus on protecting the health of all of our employees by adhering to current health guidelines.

Nevertheless, thanks to the dedication and sacrifices of our employees, we enter the year with increasingly positive momentum.

We continue to invest in new capacity and remain optimistic about our long-term opportunities for growth.

During the fourth quarter of fiscal year 2021, we won new programs involving consumer products, exercise equipment, and residential building products.

We reported net sales of $518.7 million for fiscal year 2021, the highest annual revenue in the Company’s fifty-two year history, and up 15% from $449.5 million for fiscal year 2020.

While demand has remained strong from both new and existing customers, revenue for the fourth quarter and for the full year of fiscal year 2021 continued to be significantly constrained by issues related to the worldwide pandemic, the supply chain, and transportation and logistics.

Moving into fiscal 2022, the COVID-19 crisis, component shortages and logistic delays continue to present multiple business challenges, but we continue to see the favorable trend of contract manufacturing returning to North America.

With our recent investments in new capacity, we’re increasingly well-prepared for long term growth.

For the first quarter of fiscal year 2022, the Company expects to report revenue in the range of $125 million to $135 million.

While the Company’s facilities in the US, Mexico, China and Vietnam are currently operating and rigorously following current health guidelines, uncertainty as to the possibility of future temporary closures, customer demand and costs, and future supply chain disruptions during the rapidly changing COVID-19 environment could significantly impact operations in coming periods.

Due to the heightened risks associated with the above, we may issue updated guidance during the first quarter of fiscal year 2021.

We continue to diversify our customer base by adding additional programs and customers.

Despite growing customer demand and backlog, we expect that delays in the supply of key components for the Company’s business will continue to significantly limit production and adversely impact operating efficiencies.

We have continued to diversify our customer base by adding additional programs and customers.

Our current customer relationships involve a variety of products, including consumer electronics, electronic storage devices, plastics, household products, gaming devices, specialty printers, telecommunications, industrial equipment, military supplies, computer accessories, medical, educational, irrigation, automotive, transportation management, robotics, RFID, power supply, off-road vehicle equipment, fitness equipment, HVAC controls, consumer products, home building products, material handling systems, lighting equipment, consumer security products, smart security, architectural LED lighting, power meters and smart grid, wireless power solutions, sanitizer dispensing, automotive controllers, oil and gas drilling, wireless security and personal healthcare protective equipment.

Gross profit as a percent of net sales was 8.1 percent in fiscal year 2021 compared to 7.8 percent for the prior fiscal year.

The increase in gross profit as a percentage of net sales was primarily related to streamlining efforts in the Company’s Juarez facilities and reductions in materials, offset by COVID related expenses.

The increase in gross profit as a percentage of net sales was primarily related to streamlining efforts in the Company’s Juarez facilities partially offset by supply chain constraints, a temporary four-day closure of our Mexico facilities during a late winter storm that caused power disruptions in the region, and continued but lessening expenses related to COVID-19.

The level of gross margin is impacted by product mix, timing of the startup of new programs, facility utilization, and pricing within the electronics industry and material costs, which can fluctuate significantly from quarter to quarter and year to year.

Operating income as a percentage of net sales for fiscal year 2020 was 1.5 percent compared to operating loss of (1.3) percent for fiscal year 2019.

The increase in operating income as a percentage of net sales was primarily driven by the one-time impairment of goodwill and intangible assets during fiscal year 2019.

Net income for fiscal year 2020 was $4.8 million or $0.44 per share, as compared to net loss of $(8.0) million or $(0.74) per share for fiscal year 2019.

The increase in net income for fiscal year 2020 as compared to fiscal year 2019 was primarily driven by the one-time impairment of approximately $12.4 million related to the impairment of goodwill and intangible assets and $1.1 million in severance expense due to improvements in operating efficiencies during fiscal year 2019.

We maintain a strong balance sheet with a current ratio of 2.2 and a debt to equity ratio of 0.61.

Operating income as a percentage of net sales for fiscal year 2021 was 1.8 percent compared to 1.5 percent for fiscal year 2020.

The increase in operating income as a percentage of net sales was primarily driven by the increase in gross profit.

Net income for fiscal year 2021 was $4.3 million or $0.39 per share, as compared to $4.8 million or $0.44 per share for fiscal year 2020.

Earnings for the fourth quarter of fiscal 2021 continued to be adversely impacted by supply chain and transportation and logistics issues causing both factory downtime and overtime expenses.

Earnings for the fourth quarter of fiscal 2021 were also constrained by legal and other professional service expenses related to the previously disclosed internal investigation of approximately $1.0 million during quarter, and we expect some additional expenses to occur prospectively.

Additionally, the Company recorded approximately $0.5 million in non-cash tax expense related to expired stock appreciation rights during the fourth quarter of fiscal year 2021.

We maintained a strong balance sheet with a current ratio of 2.4 and a debt to equity ratio of 0.81.

Total cash used in operating activities as defined on our cash flow statement was $15.1 million during fiscal year 2021.

We maintain sufficient liquidity for our expected future operations.

We believe cash flow from operations, our borrowing capacity, our accounts receivable sale program, and equipment financing should provide adequate capital for planned growth over the long term.

We maintained sufficient liquidity for our expected future operations.

We believe cash flow from operations, our borrowing capacity, and equipment financing should provide adequate capital for planned growth over the long term.

RESULTS OF OPERATIONS

Comparison of the Fiscal Year Ended June 27, 2020 with the Fiscal Year Ended June 29, 2019

Comparison of the Fiscal Year Ended July 3, 2021 with the Fiscal Year Ended June 27, 2020

The following table sets forth for the periods indicated certain items of the consolidated statements of income expressed as a percentage of net sales.

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Fiscal Year Ended

June 27, 2020 % of

July 3, 2021 % of

net sales June 27, 2020 % of

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Selling, general and administrative 22,723 4.4 21,030 4.7 1,693 (0.3)

Impairment of goodwill and intangibles — — 12,448 2.7 (12,448) (2.7)

Total operating expenses 32,513 6.3 28,421 6.3 4,092 —

Operating income (loss) 6,828 1.5 (5,958) (1.3) 12,786 2.8

Operating income 9,526 1.8 6,828 1.5 2,698 0.3

Interest expense, net 3,613 0.7 2,509 0.6 1,104 0.1

Income (loss) before income taxes 4,319 1.0 (8,740) (1.9) 13,059 2.9

Income tax benefit (439) (0.1) (758) (0.2) 319 0.1

Net income (loss) $ 4,758 1.1% $ (7,982) (1.7)% $ 12,740 2.8

Income before income taxes 5,913 1.1 4,319 1.0 1,594 0.1

Income tax provision (benefit) 1,572 0.3 (439) (0.1) 2,011 0.4

Net income $ 4,341 0.8% $ 4,758 1.1% $ (417) (0.3)

Effective income tax rate 26.6 % (10.2) %

The decrease in net sales of $14.6 million from prior year period was primarily driven by the temporary shutdown of its facilities in Juarez by the Mexican government due to the COVID-19 pandemic and associated delays in production.

The increase in net sales of $69.2 million from prior year period was primarily driven by an increase in new program wins and demand for current programs.

However, partially offsetting the increase in revenue during fiscal year 2021, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues which delayed the arrival of key components, causing factory downtime.

The following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2021 and 2020:

Fiscal Year Ended

June 27, 2020 June 29, 2019

Industrial 42% 44%

July 3, 2021 June 27, 2020

Consumer 51% 44%

Industrial 38% 42%

Communication 5 4

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Key Tronic does not target any particular industry, but rather seeks to find programs that strategically fit our vertical manufacturing capabilities.

As we continue to diversify our customer base and win new customers, we will continue to see a change in the industry concentrations of our revenue.

As we continue to diversify our customer base and win new customers, we expect to continue to see a change in the industry concentrations of our revenue.

Sales to foreign locations represented 28.2 percent and 24.6 percent of our total net sales in fiscal years 2021 and 2020, respectively.

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We provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns.

Warranty expense is related to workmanship claims on keyboards and EMS products.

Warranty expense is related to workmanship claims on keyboards and other products.

The amounts charged to expense are determined based on an estimate of warranty exposure.

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Gross profit as a percentage of net sales was 8.1 percent and 7.8 percent in fiscal years 2021, and 2020, respectively.

The 0.3 percentage point increase in gross profit as a percentage of net sales during fiscal year 2020 as compared to fiscal year 2019 is primarily related to streamlining efforts in the Company’s Juarez facilities and material cost reductions, partially offset by the dampening of fiscal year 2020 margins from the COVID-19 pandemic.

Changes in gross profit margins reflect the impact of a number of factors that can vary from period to period, including product mix, start-up costs and efficiencies associated with new programs, product life cycles, sales volumes, capacity utilization of our resources, management of inventories, component pricing and shortages, end market demand for customers’ products, fluctuations in and timing of customer orders, and competition within the EMS industry.

The 0.3 percentage point increase in gross profit as a percentage of net sales during fiscal year 2021 as compared to fiscal year 2020 is primarily related to streamlining efforts in the Company’s Juarez facilities and material cost reductions, partially offset by supply chain constraints, a temporary four-day closure of our Mexico facilities during a late winter storm that caused power disruptions in the region, and continued but lessening expenses related to COVID-19.

These and other factors can cause variations in operating results.

There can be no assurance that gross margins will not decrease in future periods.

We took early pay discounts to suppliers that totaled approximately $0.1 million and $0.8 million in fiscal years 2020 and 2019, respectively.

We took early pay discounts to suppliers that totaled approximately $32,000 and $0.1 million in fiscal years 2021 and 2020, respectively.

Early pay discounts will fluctuate based on our liquidity and changes in the discounts and terms offered by our suppliers.

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Total RD&E expenses were $9.8 million in fiscal year 2021 and $7.4 million in fiscal year 2020, respectively.

The Company invested more in its RD&E in fiscal year 2021 for development and design of customer programs.

The Company anticipates higher RD&E costs in the future as the Company continues to offer these services.

Total RD&E expenses as a percent of net sales was 1.9 percent in fiscal year 2021 and 1.6 in fiscal year 2020.

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Total SG&A expenses as a percent of net sales were 4.4 percent and 4.7 percent in fiscal years 2021 and 2020, respectively.

This 0.1 percentage point increase in SG&A as a percentage of net sales is primarily related to a decrease in sales year over year, partially offset by a decrease in travel expenses and a decrease in amortization expense related to intangibles assets that were impaired during fiscal year 2019.

Impairment of goodwill and intangibles

During fiscal year 2019, the Company assessed other finite-lived intangible assets including the Company’s customer relationships and favorable lease agreements due to an indicator of possible impairment being present, as discussed in footnote 14 of the “Notes to Consolidated Financial Statements.” As a result of the analysis performed, the Company determined that the carrying value of the customer relationships intangible asset was not recoverable and recorded an impairment for the entire carrying amount during the third quarter of fiscal year 2019.

During fiscal year 2019, a goodwill impairment of $10.0 million and other intangible assets impairment of $2.5 million was recognized.

The Company’s analysis did not indicate that any of its other long-lived assets were impaired.

This 0.3 percentage point decrease in SG&A as a percentage of net sales is primarily related to an increase in sales year over year and a decrease in travel related expenses due to the COVID-19 pandemic.

Interest Expense

We had net interest expense of $3.6 million and $2.5 million in fiscal years 2021 and 2020, respectively.

The decrease in interest expense is primarily related to a decrease in the interest rate on our line of credit.

The increase in interest expense is primarily related to an increase in the average balance outstanding on our line of credit and increased interest rates.

Income Tax Benefit

We had an income tax benefit of approximately $(0.4) million during fiscal year 2020 and $(0.8) million during fiscal year 2019.

The income tax benefit recognized during fiscal years 2020 and 2019 was primarily a function of U.S., and foreign taxes recognized at statutory rates and the net benefit associated with federal research and development tax credits, including the recognition of previously unrecognized tax benefits for federal research and development tax credits in fiscal year 2020 and offset by the tax impact of the nondeductible goodwill write-off in fiscal year 2019.

We had an income tax expense of approximately $1.6 million during fiscal year 2021 and an income tax benefit of approximately $(0.4) million during fiscal year 2020.

The income tax expense (benefit) recognized during both fiscal years 2021 and 2020 was primarily a function of U.S.

and foreign taxes recognized at statutory rates, the net benefit associated with federal research and development tax credits, the non-cash tax impact of expired stock appreciation rights in fiscal year 2021, and the recognition of previously unrecognized tax benefits for federal research and development tax credits in fiscal year 2020.

We continually review our requirements for liquidity domestically to fund current operations, revenue growth and to look for potential future acquisitions.

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The locations of active foreign subsidiaries are as follows:

• Key Tronic Juarez, SA de CV owns five facilities and leases two facilities in Juarez, Mexico.

• Key Tronic Juarez, SA de CV owns five facilities and leases three facilities in Juarez, Mexico.

These facilities include an SMT facility, an assembly and molding facility, a sheet metal fabrication facility, and assembly and warehouse facilities.

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leases two facilities with SMT, assembly, global purchasing and warehouse capabilities in Shanghai, China, which began operations in 1999.

Its primary function is to provide EMS services for export.

Its primary function is to provide contract manufacturing services for export.

• Key Tronic Vietnam leases one facility in Da Nang, Vietnam.

This facility includes SMT, assembly, and warehouse capabilities.

Its primary function is to provide EMS services for export.

Its primary function is to provide contract manufacturing services for export.

Foreign sales (based on shipping instructions) from our worldwide operations, including domestic exports, were $146.5 million and $110.7 million in fiscal years 2021 and 2020, respectively.

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To review the results of operations comparison of the fiscal year ended June 27, 2020 with the fiscal year ended June 29, 2019, please refer to our Form 10-K filed September 11, 2020 with the Securities and Exchange Commission or follow the link below.

https://www.sec.gov/ix?doc=/Archives/edgar/data/719733/000071973319000063/ktcc-06292019x10k.htm

https://www.sec.gov/ix?doc=/Archives/edgar/data/719733/000071973320000061/ktcc-20200627.htm

Capital Resources and Liquidity

Operating Cash Flow

Net cash used in operating activities for fiscal year 2020 was $31.0 million compared to net cash provided by operating activities of $0.9 million and $3.1 million in fiscal years 2019 and 2018, respectively.

The decrease in cash provided by operating activities from prior year was primarily attributable to the Company no longer factoring receivables at year end fiscal 2020, and an increase in inventory levels.

The $31.0 million of net cash used in operating activities during fiscal year 2020 is primarily related to $4.8 million of net income adjusted for $5.6 million of depreciation and amortization, $28.3 million increase in accounts receivable, a $14.7 million increase in inventory, a $7.7 million increase in other assets, a $1.6 million increase in contract assets, partially offset by a $6.6 million increase in accounts payable and a $3.7 million increase in accrued compensation and vacation.

Net cash used in operating activities for fiscal year 2021 was $15.1 million compared to net cash used in operating activities of $31.0 million and net cash provided by operating activities of $0.9 million in fiscal years 2020 and 2019, respectively.

The $15.1 million of net cash used in operating activities during fiscal year 2021 is primarily related to $4.3 million of net income adjusted for $6.9 million of depreciation and amortization, $24.3 million increase in accounts receivable, a $23.1 million increase in inventory, a $1.0 million increase in contract assets, a $2.3 million decrease in other assets, partially offset by a $12.6 million increase in accounts payable, an $5.6 million increase in other liabilities, and a $1.0 million increase in accrued compensation and vacation.

The $31.0 million of net cash used in operating activities during fiscal year 2020 was primarily related to $4.8 million of net income adjusted for $5.6 million of depreciation and amortization, $28.3 million increase in accounts receivable, a $14.7 million increase in inventory, a $7.7 million increase in other assets, a $1.6 million increase in contract assets, partially offset by a $6.6 million increase in accounts payable and a $3.7 million increase in accrued compensation and vacation.

The $0.9 million of net cash provided by operating activities during fiscal year 2019 was primarily related to $8.0 million of net loss, $12.4 million impairment of goodwill and intangibles, $7.3 million of depreciation and amortization, $6.7 million of cash received from arbitration settlement, a $3.3 million decrease in accounts receivable, partially offset by a $10.3 million increase in contract assets, a $4.5 million increase in other assets, a $2.6 million increase in accounts payable and a $1.4 million decrease in inventory.

The $3.1 million of net cash provided by operating activities during fiscal year 2018 was primarily due to $1.3 million of net loss adjusted for $7.8 million of depreciation and amortization and $4.5 million loss on arbitration, a $22.9 million increase in accounts payable, a $1.3 million decrease in accounts receivable, partially offset by an $18.1 million increase in inventory.

Accounts receivable fluctuates based on the timing of shipments, terms offered and collections.

In addition, accounts receivable will fluctuate based upon the amount of accounts receivable sold under our Trade Accounts Receivable Purchase Program.

During fiscal years 2020, 2019 and 2018, we factored receivables of $41.4 million, $81.0 million and $104.7 million, respectively, from accounts receivable sold to financial institutions, which are not included on our Consolidated Balance Sheets.

The Company no longer had factored receivables at year end fiscal 2020.

The Company did not sell any accounts receivables during the twelve months ended July 3, 2021.

During fiscal years 2020 and 2019, we factored receivables of $41.4 million and $81.0 million, respectively, from accounts receivable sold to financial institutions, which are not included on our Consolidated Balance Sheets.

The Company no longer had factored receivables at year end fiscal 2021 or 2020.

We purchase inventory based on customer forecasts and orders, and when those forecasts and orders change, the amount of inventory may also fluctuate.

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Cash flows used in investing activities were $10.6 million for fiscal year 2021.

Cash flows used in investing activities were $1.9 million for fiscal year 2019 and cash flows provided by investing activities were $4.9 million in fiscal year 2018.

Our primary use of cash in investing activities during fiscal years 2020, 2019 and 2018, was purchasing equipment to support increased production levels for new programs, and our primary source of cash provided by investing activities came from receipts of the deferred purchase price on factored receivables.

Operating and capital leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership.

Cash flows used in investing activities were $3.6 million and $1.9 million in fiscal year 2020 and 2019, respectively.

Our primary use of cash in investing activities during fiscal years 2021, 2020 and 2019, was purchasing equipment to support increased production levels for new programs.

During fiscal years 2020 and 2019, our primary source of cash provided by investing activities came from receipts of the deferred purchase price on factored receivables.

Operating and finance leases under accounting guidance that became effective in fiscal year 2020, and capital leases prior to that date are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership.

Capital expenditures and periodic lease payments are expected to be financed with internally generated funds and available borrowing capacities.

During fiscal years 2021, 2020 and 2019, we did not receive any cash resulting from the sale and leaseback of equipment under operating leases.

During fiscal year 2018, we received $1.0 million of cash resulting from the sale and leaseback of equipment under operating leases.

Financing Cash Flow

Cash flows provided by financing activities were $34.5 million in fiscal year 2020, cash flows provided by financing activities were $1.2 million in fiscal year 2019 and cash flows used in financing activities were $8.0 million in fiscal year 2018.

Cash flows provided by financing activities were $28.6 million, $34.5 million, and $1.2 million in fiscal years 2021, 2020, and 2019.

Our primary financing activities during fiscal year 2021, were repayments on our term loans of $11.7 million as well as borrowings and repayments under our revolving line of credit facility.

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Our primary financing activities during fiscal year 2019 was repayments on our term loans of $5.9 million as well as borrowings and repayments under our revolving line of credit facility.

As of June 27, 2020, the Company had an outstanding balance on the line of credit of $60.1 million.

We had availability to borrow an additional $4.5 million under the Wells Fargo line of credit and we were in compliance with our loan covenants.

Our cash requirements are affected by the level of current operations and new EMS programs.

We believe that projected cash from operations, funds available under the revolving credit facility and fixed asset financing will be sufficient to meet our working and fixed capital requirements for the foreseeable future.

As of June 27, 2020, we had approximately $0.6 million of cash held by foreign subsidiaries.

As of July 3, 2021, the Company had an outstanding balance on the line of credit of $90.9 million.

We had availability to borrow an additional $2.1 million under the asset-based revolving credit facility and we were in compliance with our loan covenants.

Our cash requirements are affected by the level of current operations and new programs.

We believe that projected cash from operations, funds available under the asset-based revolving credit facility and fixed asset financing will be sufficient to meet our working and fixed capital requirements for the foreseeable future.

As of July 3, 2021, we had approximately $2.0 million of cash held by foreign subsidiaries.

Under the Tax Cuts and Jobs Act, future cash repatriations from these foreign subsidiaries are no longer subject to U.S.

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See additional discussion in Footnote 6, Income Taxes.

The total amount of foreign withholding taxes required to be paid for the amount of foreign subsidiary cash on hand as of June 27, 2020, would approximate $21,000.

The total amount of foreign withholding taxes required to be paid for the amount of foreign subsidiary cash on hand as of July 3, 2021, would approximate $47,000.

The Company also has approximately $23.6 million of foreign earnings that have not been repatriated to the U.S.

Of that amount, the Company estimates that $7.5 million is to be repatriated in the future, requiring foreign withholding taxes of $0.8 million that is currently accrued in our deferred tax liabilities.

The remaining $13.5 million is considered to be permanently reinvested in Mexico and China.

The remaining $16.1 million is considered to be permanently reinvested in Mexico, China and Vietnam.

If these amounts were required to be repatriated, we estimate it would create an additional $0.8 million in foreign withholding taxes payable.

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$ 10,049 $ 2,143 $ 2,190 $ 2,239 $ 2,290 $ 1,187 $ —

Wells Fargo Bank N.A.

revolving loan (2)

Bank of America revolving loan (2)

$ 90,886 $ — $ — $ — $ — $ 90,886 $ —

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Purchase orders (4)

(1) The terms of the Wells Fargo Bank N.A.

term loans are discussed in the consolidated financial statements at Note 4, “Long-Term Debt.” Principal on the term loan is payable in quarterly installments of $1.67 million commencing December 31, 2019 through September 30, 2021, and quarterly payments of $0.4 million commencing December 31, 2021 through September 30, 2022, with a final installment of all remaining unpaid principal due on September 30, 2022.

The equipment term loan is payable in equal quarterly payments of approximately $0.2 million which commenced on March 31, 2017 and will continue through the maturity of the equipment term loan on June 30, 2021.

The Company’s debt was paid in full in conjunction with the closing of a new credit facility subsequent to June 27, 2020.

Refer to footnote 17 - Subsequent Events for additional details.

(2) The terms of the Wells Fargo Bank N.A.

revolving loan are discussed in the consolidated financial statements at Note 4, “Long-Term Debt.” As of June 27, 2020, we were in compliance with our loan covenants.

The Company’s debt was paid in full in conjunction with the closing of a new credit facility subsequent to June 27, 2020.

Refer to footnote 17 - Subsequent Events for additional details.

(1) The terms of the Bank of America term loans are discussed in the consolidated financial statements at Note 4, “Long-Term Debt.” The equipment financing facility relating to the Company’s existing U.S.

manufacturing equipment is payable in equal monthly payments of approximately $94,000 which commenced on September 14, 2020 and will continue through the maturity of the equipment financing facility on August 14, 2025.

The equipment financing facility relating to the Company’s existing Mexico manufacturing equipment is payable in equal monthly payments of approximately $100,000 which commenced on May 24, 2021 and will continue through the maturity of the equipment term loan on April 24, 2026.

(2) The terms of the Bank of America asset-based revolving credit facility are discussed in the consolidated financial statements at Note 4, “Long-Term Debt.” As of July 3, 2021, we were in compliance with our loan covenants.

(3) We maintain vertically integrated manufacturing operations in the United States, Mexico, China and Vietnam.

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In addition, such operations are heavily dependent upon technically superior manufacturing equipment including molding machines in various tonnages, Surface Mount Technology (SMT) lines, sheet metal fabrication and stamping machines, clean rooms, and automated insertion, and test equipment for the various products we are capable of producing.

(4) As of June 27, 2020, we had open purchase order commitments for materials and other supplies of approximately $46.4 million.

(4) As of July 3, 2021, we had open purchase order commitments for materials and other supplies of approximately $116.1 million.

Included in the open purchase orders are various blanket orders for annual requirements.

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The Company specializes in services ranging from product manufacturing to engineering and tooling services.

Subsequent to the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) during the year ended June 29, 2019, the first step in its process for revenue recognition is to identify the contract with a customer.

The first step in its process for revenue recognition is to identify the contract with a customer.

A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations.

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Revenue from engineering services is recognized over time as the services are performed.

Prior to the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), sales revenue from manufacturing is recognized upon shipment of the manufactured product per contractual terms.

Upon shipment, title transfers and the customer assumes risks and rewards of ownership of the product.

The price to the buyer is fixed or determinable and recoverability is reasonably assured.

Unless specifically stated in contractual terms, there are no formal customer acceptance requirements or further obligations related to the manufacturing services;

if any such requirements exist, then sales revenue is recognized at the time when such requirements are completed and such obligations are fulfilled.

Revenue is recorded net of estimated returns of manufactured product based on management’s analysis of historical returns.

Revenues and associated costs from engineering design, development services and tooling, which are performed under contract of short term durations, are recognized only after the completed performance of the service.

Inactive, Obsolete, and Surplus Inventory Reserve

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We value our accounts receivable net of an allowance for doubtful accounts.

As of June 27, 2020, the allowance for doubtful accounts was approximately $609,000.

As of July 3, 2021, the allowance for doubtful accounts was approximately $275,000.

As of June 27, 2020, the allowance for doubtful accounts was approximately $609,000.

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We review the adequacy of this accrual quarterly based on historical analysis and anticipated product returns and rework costs.

Our warranty period for keyboards is generally longer than that for EMS products.

We only warrant materials and workmanship on EMS products, and we do not warrant design defects for EMS customers.

Our warranty period for keyboards is generally longer than that for other products.

We only warrant materials and workmanship on products, and we do not warrant design defects for customers.

Income tax expense includes U.S.

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However, if the Company concludes otherwise, then it is required to perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value.

The Company utilizes a weighting of the income approach and a market approach in the impairment test.

We also consider valuation factors including the Company's market capitalization, future discounted cash flows and an estimated control premium based upon a review of comparable market transactions.

The Company utilized a weighting of the income approach and a market approach in the impairment test.

We also considered valuation factors including the Company's market capitalization, future discounted cash flows and an estimated control premium based upon a review of comparable market transactions.

Our consideration of discounted future cash flows included assumptions regarding growth rates and margins based on our historical trends.

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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