What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-09-16 compared with 2020-09-11 · 238 added, 314 removed, 710 unchanged (44% of the section changed)

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Key Tronic Corporation (the “Company”) as of June 27, 2020 and June 29, 2019, the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended June 27, 2020, and the related notes and schedule (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 27, 2020 and June 29, 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 27, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of June 27, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated September 11, 2020 expressed an unqualified opinion thereon.

We have audited the accompanying consolidated balance sheets of Key Tronic Corporation (the “Company”) as of July 3, 2021 and June 27, 2020, the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended July 3, 2021, and the related notes and schedule (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at July 3, 2021 and June 27, 2020, and the results of its operations and its cash flows for each of the three years in the period ended July 3, 2021, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of July 3, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated September 16, 2021 expressed an unqualified opinion thereon.

Change in Accounting Principles

As discussed in Note 1 to the consolidated financial statements, the Company has changed its accounting method for accounting for leases in fiscal year 2020 due to the adoption of Topic 842:

Leases , using a modified retrospective approach, and as discussed in Note 1 to the consolidated financial statements, the Company changed its method for recognizing revenue in fiscal year 2019 due to the adoption of Topic 606:

Revenue from Contracts with Customers .

As discussed in Note 1 to the consolidated financial statements, the Company changed its accounting method for accounting for leases in fiscal year 2020 due to the adoption of Topic 842:

Leases , using a modified retrospective approach.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Accounting for Revenue from Contracts with Customers

As described in Notes 1 and 15 to the consolidated financial statements, the Company’s consolidated revenue balance was $519 million for the year ended July 3, 2021, of which $510 million related to revenues recognized over time and $9 million related to revenues recognized at a point in time.

Revenues for contracts for manufacturing products and contracts for engineering

services are recognized over-time using the input method based on the ratio of costs incurred to date as compared to the total estimated costs at the completion of the performance obligation or as the services are performed.

We identified revenues recognized over time on contracts for manufacturing products as a critical audit matter.

Management’s calculation includes reports with varying elements, for determining the estimated costs incurred to date.

Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters.

The primary procedures we performed to address this critical audit matter included:

• Testing the design and operating effectiveness of controls relating to the inputs of the quarterly calculation of the contract asset for in process contracts for each manufacturing location;

• Evaluating the methodology of estimating costs incurred to date on contracts for manufacturing products and testing the completeness and accuracy of the system reports by recalculating the expected costs on contracts in process;

• Analyzing the margins realized and ratio of costs incurred by comparing the trending historic margins by customer and ratios of completion to prior periods.

Accounting for Inventories

As described in Note 1 and Note 2 to the consolidated financial statements, the Company’s consolidated inventory balance was $137.3 million at July 3, 2021.

In January 2021, the Company determined that improper accounting resulted in an understatement of cost of goods sold and an overstatement of inventories.

Subsequent to the matter identified in January 2021, additional inventory accounting errors unrelated to the investigation were also identified by management.

As discussed in Item 9A, Controls and Procedures, the errors were a result of material weaknesses in internal controls over financial reporting related to the design and operating effectiveness of certain controls over the accounting for inventory as well as the Company’s monitoring activities as it pertains to accounting for inventory at its domestic facilities.

As disclosed by the Company, the material weakness was remediated fully at July 3, 2021.

We identified management’s estimates for costs capitalized to inventories, including the Company’s internal investigation of improper inventory accounting, as a critical audit matter.

Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skills and knowledge.

In addition, as described in Item 9A, a material weakness in internal controls was disclosed as of December 26, 2020 and April 3, 2021, that relates to this matter.

The primary procedures we performed to address this critical audit matter included:

• Utilizing personnel with specialized knowledge and skills in legal and forensic matters to assist in assessing the reasonableness of the scope, investigative procedures, and findings of the internal investigation supervised by the Audit Committee of the Company’s Board of Directors.

• Testing the design and operating effectiveness of controls relating to inventories and management’s remedial measures of existing controls and implementation of additional controls, including oversight of the East Locations and review by the Corporate office of material account reconciliations and journal entries.

• Analyzing the correction of the errors identified by assessing the estimates used in calculating the corrections of the errors related to costs capitalized to inventories and by evaluating corroborative evidence.

/s/ BDO USA, LLP

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(In thousands)

June 27, 2020 June 29, 2019

July 3, 2021 June 27, 2020

Current assets:

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Deferred income tax asset 9,656 10,178

Other intangible assets, net — 657

Other 1,458 2,587

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Fiscal Year Ended

June 27, 2020 June 29, 2019 June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

Net sales $ 518,698 $ 449,480 $ 464,044

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Impairment of goodwill and intangibles — — 12,448

Loss on settlement of arbitration — — 4,535

Total operating expenses 32,513 28,421 40,559

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Income (loss) before income taxes 5,913 4,319 ( 8,740 )

Income tax benefit ( 439 ) ( 758 ) ( 117 )

Income tax provision (benefit) 1,572 ( 439 ) ( 758 )

Net income (loss) $ 4,341 $ 4,758 $ ( 7,982 )

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Fiscal Year Ended

June 27, 2020 June 29, 2019 June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

Comprehensive income (loss):

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Fiscal Year Ended

June 27, 2020 June 29, 2019 June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

Operating activities:

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Depreciation and amortization 6,856 5,591 7,298

Amortization of interest rate swap 276 — —

Amortization of deferred loan costs 95 30 30

Excess tax benefit from exercise of stock options ( 43 ) — —

Provision for obsolete inventory 753 136 91

Provision for warranty 145 121 83

Provision for (recovery of) doubtful accounts 551 58 ( 84 )

Provision for doubtful accounts 117 551 58

Loss on disposal of assets — 207 3

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Deferred income taxes ( 942 ) ( 958 ) ( 1,116 )

Loss on settlement of arbitration — — 4,535

Changes in operating assets and liabilities

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Cash receipts from deferred purchase price of factored receivables — 4,350 6,455

Cash provided by (used in) investing activities ( 3,577 ) ( 1,909 ) 4,853

Cash used in investing activities ( 10,602 ) ( 3,577 ) ( 1,909 )

Financing activities:

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Proceeds from issuance of long term debt 11,000 5,000 —

Interest rate swap termination fee ( 925 ) — —

Repayments of long term debt ( 11,720 ) ( 7,121 ) ( 5,871 )

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Repayments of revolving credit agreement ( 384,150 ) ( 140,605 ) ( 174,554 )

Cash provided by (used in) financing activities 34,533 1,248 ( 8,005 )

Excess tax benefit from exercise of stock options 43 — —

Cash provided by financing activities 28,574 34,533 1,248

Net increase (decrease) in cash and cash equivalents 2,920 ( 48 ) 258

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Income tax payments, net of refunds $ 2,014 $ 683 $ ( 511 )

Recognition of operating lease liabilities and right-of-use assets $ 3,103 $ — $ —

See accompanying notes to consolidated financial statements.

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Shareholders’

Balances, July 1, 2017 10,760 $ 45,797 $ 73,545 $ ( 2,775 ) $ 116,567

Net loss — — ( 1,325 ) — ( 1,325 )

Tax rate effect reclassification — — 586 ( 586 ) —

Unrealized gain on hedging instruments, net — — — 2,392 2,392

Share-based compensation — 447 — — 447

Balances, June 30, 2018 10,760 $ 46,244 $ 72,806 $ ( 969 ) $ 118,081

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Balances, June 27, 2020 10,760 $ 46,946 $ 70,111 $ ( 1,500 ) $ 115,557

Net income — — 4,341 — 4,341

Unrealized gain on hedging instruments, net — — — 3,572 3,572

Exercise of stock appreciation rights 2 — — — —

Excess tax benefit from exercise of stock options — 43 — — 43

Share-based compensation — 192 — — 192

Balances, July 3, 2021 10,762 $ 47,181 $ 74,452 $ 2,072 $ 123,705

See accompanying notes to consolidated financial statements.

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SIGNIFICANT ACCOUNTING POLICIES

Key Tronic Corporation and subsidiaries (the Company) is engaged in electronic manufacturing services (EMS) for original equipment manufacturers (OEMs) and also manufactures keyboards and other input devices.

Key Tronic Corporation and subsidiaries (the Company) is engaged in contract manufacturing for original equipment manufacturers (OEMs) and also manufactures keyboards and other input devices.

The Company’s headquarters are located in Spokane Valley, Washington with manufacturing operations in Oakdale, Minnesota;

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and Da Nang, Vietnam.

The 2019 novel strain of coronavirus ("COVID-19") has resulted in business slowdowns or shutdowns in affected areas.

In January 2020, the Company’s China facilities faced temporary shutdowns as a result of government mandates.

In March 2020, these facilities began returning to full operation and the supply chain disruptions have been abating.

In April 2020, the Company announced the temporary closure of its Juarez facilities, however, operations successfully resumed six days later.

Due to the COVID-19 pandemic, the Company has seen extreme shifts in demand from its customer base.

The possibility of future temporary closures, as well as adverse fluctuations in customer demand, freight and expedite costs, precautionary safety expenses, collectibility of accounts, and future supply chain disruptions during the rapidly changing COVID-19 environment can materially impact operating results.

Due to the COVID-19 pandemic, the Company has seen extreme shifts in demand from its customer base, supply chain and logistics risks.

The possibility of future temporary closures, as well as adverse fluctuations in customer demand, freight and expedite costs, precautionary safety expenses and labor shortages, collectability of accounts, and future supply chain disruptions during the rapidly changing COVID-19 environment can materially impact operating results.

Additionally, continued adverse macroeconomic conditions and significant currency exchange fluctuations can also materially impact operating results.

Reclassifications

Certain prior period reclassifications were made to conform with the current period presentation.

These reclassifications had no effect on reported income, comprehensive income, cash flows, total assets, or shareholders’ equity as previously reported.

Correction of an Immaterial Errors

The Company previously reported as of June 27, 2020 that its inventory balances included finished goods of $15.3 million and work in process of $17.4 million.

Such amounts actually related to raw materials.

The Company has revised its disclosure of inventory to reflect these costs as raw material costs.

There was no change to the total inventory balance.

Refer to corrected disclosure in Note 2.

The Company made an out-of-period tax adjustment in fiscal year 2021 in the amount of $0.4 million decreasing the deferred tax asset related to unexercised stock appreciation rights (SARs), to reflect the fact that certain of the unexercised SARs had expired over several different periods prior to fiscal year 2021.

The Company previously excluded the right of use asset amounts as reported as of June 27, 2020 in Note 12.

Refer to corrected disclosures in Note 12.

Principles of Consolidation

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Revenue Recognition

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.

ASU 2014-09, Revenue from Contracts with Customers (Topic 606) was adopted effective fiscal year 2019.

The primary impact was switching to over-time recognition which accelerated the Company's revenue recognition for in-process inventory and the cumulative impact from adoption is reflected in the Statement of Shareholders' Equity.

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.

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Research, Development and Engineering

Research, development and engineering expenses include unreimbursed EMS costs as well as design and engineering costs associated with the production of EMS programs.

Research, development and engineering expenses include unreimbursed contract manufacturing costs as well as design and engineering costs associated with the production of contract manufacturing programs.

Research, development and engineering costs are expensed as incurred.

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Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable, current liabilities, and non current operating lease liability are reflected on the balance sheets at June 27, 2020 and June 29, 2019, reasonably approximate their fair value.

The Company had an outstanding balance on the line of credit of $ 60.1 million as of June 27, 2020 and $ 23.4 million as of June 29, 2019, with a carrying value that reasonably approximates the fair value.

The Company had an outstanding balance on the term loan of $ 10.0 million as of June 27, 2020 and $ 11.3 million as of June 29, 2019, with a carrying value that reasonably approximates the fair value.

The equipment term loan is estimated to be $ 0.9 million as of June 27, 2020 and $ 1.7 million as of June 29, 2019, with a carrying value that reasonably approximates the fair value.

The carrying values of cash and cash equivalents, accounts receivable, current liabilities, and non current operating lease liability are reflected on the balance sheets at July 3, 2021 and June 27, 2020, reasonably approximate their fair value.

The Company had an outstanding balance on the line of credit of $ 90.9 million as of July 3, 2021 and $ 60.1 million as of June 27, 2020, with a carrying value that reasonably approximates the fair value.

The Company had an outstanding balance on the term loan of $ 4.2 million as of July 3, 2021 and $ 10.0 million as of June 27, 2020, with a carrying value that reasonably approximates the fair value.

The equipment term loan was $ 5.8 million as of July 3, 2021 and $ 0.9 million as of June 27, 2020, with a carrying value that reasonably approximates the fair value.

Share-based Compensation

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Newly Adopted and Recent Accounting Pronouncements

In January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2021-01, Reference Rate Reform (Topic 848) to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation.

The Company is currently assessing the effects on its consolidated financial statements, and if it will elect this optional standard.

In March of 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which clarifies specific issues raised by stakeholders.

Specifically, the ASU clarifies the following:

1) that all entities are required to provide the fair value option disclosures in ASC 825, Financial Instruments 2) clarifies that the portfolio exception in ASC 820, Fair Value Measurement, applies to nonfinancial items accounted for as derivatives under ASC 815, Derivatives and Hedging;

3) clarifies that for purposes of measuring expected credit losses on a net investment in a lease in accordance with ASC 326, Financial Instruments - Credit Losses, the lease term determined in accordance with ASC 842, Leases, should be used as the contractual term;

4) clarifies that when an entity regains control of financial assets sold, it should recognize an allowance for credit losses in accordance with ASC 326;

and 5) aligns the disclosure requirements for debt securities in ASC 320, Investments - Debt Securities, with the corresponding requirements for depository and lending institutions in ASC 942, Financial Services - Depository and Lending.

The amendments in the ASU have various effective dates and transition requirements which are dependent on timing of adoption of ASU 2016-13.

The Company is currently assessing the effects on its consolidated financial statements, and it intends to adopt the guidance as they become effective.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which modifies certain provisions of ASC 740, Income Taxes, in an effort to reduce the complexity of accounting for income taxes.

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We are currently evaluating the effects and do not believe this standard will have a material impact on our consolidated financial position, results of operations, or cash flows.

In June 2018, the FASB issued ASU 2018-07 "Compensation - Stock Compensation (Topic 718):

Improvement to Nonemployee Share-Based Payment Accounting" with the objective of simplifying several aspects of the accounting for nonemployee share-based payment transactions in current GAAP.

The Company adopted this guidance during the first quarter of fiscal year 2020 with an immaterial impact on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities" with the objective of improving the financial reporting of hedging relationships and simplifying the application of the hedge accounting guidance in current GAAP.

The Company adopted this guidance during the first quarter of fiscal year 2020 with no impact on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update ASU 2016-02, Leases which supersedes ASC 840 Leases and creates a new topic, ASC 842 Leases.

This update requires lessees to recognize a lease asset and a lease liability for all leases, including operating leases, with a term greater than 12 months on its balance sheet.

The update also expands the required quantitative and qualitative disclosures surrounding leases.

The Company adopted ASC 842 on June 30, 2019 using the modified retrospective method for leases existing at June 30, 2019.

As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before our adoption date.

Management elected the package of practical expedients which, among other things, allows the Company to carry forward historical lease classification in place prior to June 30, 2019.

ASC 842 also provides practical expedients for an entity’s accounting after transition.

Management has elected the short-term lease recognition exemption for all leases that qualify, as well as the practical expedient to not separate lease and non-lease components.

Both of these expedients were elected for all classes of underlying leased assets.

As the Company cannot determine the interest rate implicit in the lease for its leases, the Company uses its estimate of the incremental borrowing rate as of the commencement date in determining the present value of lease payments.

The Company’s estimated incremental borrowing rate is the rate of interest it would have to pay on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.

The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by either an option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise.

The adoption of ASC 842 had a material impact to the Company’s consolidated balance sheet, but did not materially impact the consolidated statement of income or consolidated statement of cash flows.

The most significant changes to the consolidated balance sheet relate to the recognition of new right-of-use (ROU) assets and lease liabilities for operating leases.

As a result of adopting ASC 842 as of June 30, 2019, the Company recognized an ROU asset of $21.4 million, a corresponding lease liability of $20.4 million, a reduction in prepaid rent of $0.4 million, a reduction of favorable lease agreement intangible of $0.7 million, and no adjustment to retained earnings or future P&L impact.

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326):

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The Company is currently assessing the impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2024.

The Company adopted Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606) (also referred to as Accounting Standard Codification 606 (“ASC 606”) on July 1, 2018 using the modified retrospective approach by applying the guidance to all open contracts at the adoption date and has implemented revised accounting policies, new operational and financial reporting processes, enhanced systems capabilities and relevant internal controls.

As part of adopting ASC 606, revenue for certain customer contracts where the Company is manufacturing products for which there is no alternative use and the Company has an enforceable right to payment including a reasonable profit for work-in-progress inventory will be recognized over time instead of upon shipment of products.

The cumulative effect of change made to our July 1, 2018 consolidated balance sheet for the adoption of ASC 606 was as follows:

Consolidated Balance Sheet Impact of Adopting ASC 606

(Unaudited, in thousands) Balance at June 30, 2018 Adjustments Balance at July 1, 2018

Contract assets — 11,906 11,906

Inventories 110,315 ( 11,210 ) 99,105

Deferred income tax asset 7,882 ( 167 ) 7,715

LIABILITIES AND SHAREHOLDERS’ EQUITY

Retained earnings 72,806 529 73,335

The following tables summarize the impacts of ASC 606 adoption on the Company’s consolidated balance sheets and consolidated statements of income (loss):

Consolidated Balance Sheet

As of June 29, 2019 Impact of Adopting ASC 606

(Unaudited, in thousands) As Reported 606 Adjustment Balance without 606 Adoption

Contract assets 22,161 ( 22,161 ) —

Inventories 100,431 19,563 119,994

Deferred income tax asset 7,840 167 8,007

LIABILITIES AND SHAREHOLDERS’ EQUITY

Retained earnings 65,353 2,431 62,922

Consolidated Statement of Income (Loss)

Impact of Adopting ASC 606

(Unaudited, in thousands) Twelve Months Ended June 29, 2019

As Reported 606 Adjustment Balance without 606 Adoption

Net sales $ 464,044 $ 10,254 $ 453,790

Cost of sales $ 429,443 $ 8,353 $ 421,090

Gross profit $ 34,601 $ 1,901 $ 32,700

Net income $ ( 7,982 ) $ 1,901 $ ( 9,883 )

For the fiscal year ended June 29, 2019, the reported revenue and gross profit was approximately $ 464.0 million, and $ 34.6 million;

respectively.

This reflects the adoption of ASC 606 as revenue and gross profit would have been $ 10.3 million and $ 1.9 million less without ASC 606 adoption;

respectively.

This is primarily due to the change from 'point-in-time' to 'over-time' recognition as the standard requires.

There was not a material tax impact for the twelve months ended June 29, 2019 from adopting ASC 606.

The Company operates on a 52/53 week fiscal year.

Fiscal years end on the Saturday nearest June 30.

As such, fiscal years 2020, 2019, and 2018, ended on June 27, 2020, June 29, 2019, and June 30, 2018, respectively.

Fiscal year 2020, 2019 and 2018 were all 52 week years.

The components of inventories consist of the following (in thousands):

June 27, 2020 June 29, 2019

Finished goods $ 15,269 $ 11,969

Work-in-process 17,390 11,705

Raw materials and supplies 82,361 76,757

$ 115,020 $ 100,431

Total inventory as of June 27, 2020 is net of $ 17.3 million of reserves, customer payments, and customer deposits compared to $ 10.8 million in reserves, customer payments, and customer deposits as of June 29, 2019.

As such, fiscal years 2021, 2020, and 2019, ended on July 3, 2021, June 27, 2020, and June 29, 2019, respectively.

Fiscal year 2021 was a 53 week year.

Fiscal years 2020 and 2019 were 52 week years.

Total inventory as of July 3, 2021 is $ 137.3 million which is net of $ 14.9 million of reserves, customer payments, and customer deposits compared to $ 115.0 million which is net of $ 17.3 million in reserves, customer payments, and customer deposits as of June 27, 2020.

Substantially all of the Company’s inventory balances are raw materials.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

Life June 27, 2020 June 29, 2019

Life July 3, 2021 June 27, 2020

(in years) (in thousands)

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LONG-TERM DEBT

On March 5, 2020, the Company entered into a Seventh amendment to the amended and restated credit agreement extending the limit on our line of credit facility to $ 65.0 million.

Outside of the limit increase of the credit facility, the agreement reflects the same specifications and terms as the sixth amendment to the amended and restated credit agreement entered into by the Company on November 20, 2019;

discussed below.

As of June 27, 2020, the Company had an outstanding balance under the credit facility of $ 60.1 million, $ 0.4 million in outstanding letters of credit and $ 4.5 million available for future borrowings.

As of June 29, 2019, the Company had an outstanding balance under the credit facility of $ 23.4 million, $ 0.4 million in outstanding letters of credit and $ 21.3 million available for future borrowings.

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.

On November 20, 2019, the Company entered into a Sixth amendment to the amended and restated credit agreement extending the limit on our line of credit facility to $ 55.0 million as evidenced by the Second Replacement Revolving Note.

The agreement specifies that the proceeds of the revolving line of credit be used primarily for working capital and general corporate purposes.

The line of credit is secured by substantially all of the assets of the Company.

On September 30, 2018, the Company entered into a Fourth amendment to the amended and restated credit agreement to extend the maturity date to November 1, 2023, at which time all outstanding balances are payable.

On September 10, 2019, the Company entered into a Fifth amendment to the amended and restated credit agreement to increase the outstanding balance on the term loan in the amount of $ 5.0 million and to extend the maturity date to September 30, 2022 on the original term loan in the amount of $ 35.0 million that was used to acquire all of the outstanding shares of CDR Manufacturing, Inc.

(dba Ayrshire Electronics).

The term loan requires quarterly payments 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 payment of the remaining outstanding balance on September 30, 2022.

The Company had an outstanding balance of $ 10.0 million and $ 11.3 million under the term loan as of June 27, 2020 and June 29, 2019, respectively.

On December 28, 2016, the Company entered into an equipment term loan agreement in the amount of $ 3.9 million in order to further invest in production equipment.

The equipment term loan is collateralized by production equipment.

Under this loan agreement, equal quarterly payments of approximately $ 0.2 million commenced on March 31, 2017 and will continue through the maturity of the equipment term loan on June 30, 2021.

Amortization of the debt issuance costs is reported as interest expense on the consolidated income statement.

As of June 27, 2020, the Company had an outstanding balance of $ 0.9 million.

As of June 29, 2019, the Company had an outstanding balance of $ 1.7 million.

The Fifth amendment to the amended and restated credit agreement noted above to increase the outstanding balance on the term loan in the amount of $ 5.0 million fixes borrowings under the revolving line of credit, term loan and equipment term loan to bear interest at LIBOR plus 2.0 %, as opposed to previous borrowings at either a “Base Rate” or a “Fixed Rate,” as elected by the Company.

The base rate is the higher of the Wells Fargo Bank prime rate, daily one month London Interbank Offered Rate (LIBOR) plus 1.5 %, or the Federal Funds rate plus 1.5 %.

The fixed rate is LIBOR plus 1.75 %, LIBOR plus 2.0 % or LIBOR plus 2.25 % depending on the level of the Company’s trailing four quarters Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).

The interest rates on the outstanding debt as of June 27, 2020 range from 2.17 % - 2.18 % compared to 4.40 % - 5.50 % as of June 29, 2019.

Debt maturities as of June 27, 2020 for the next four years are as follows (in thousands):

On August 14, 2020, the Company entered into a loan agreement with Bank of America.

The Loan Agreement replaces the Company’s prior amended and restated credit agreement, as amended, with Wells Fargo Bank.

The Loan Agreement provides for a five-year asset-based senior secured revolving credit facility of up to $ 93 million, maturing on August 14, 2025.

As of July 3, 2021, the Company had an outstanding balance under the asset-based revolving credit facility of $ 90.9 million, $ 0.3 million in outstanding letters of credit and $ 2.1 million available for future borrowings.

As of June 27, 2020, the Company had an outstanding balance under the credit facility with Wells Fargo Bank of $ 60.1 million, $ 0.4 million in outstanding letters of credit and $ 4.5 million available for future borrowings.

The Company had an outstanding balance of $ 10.0 million under the term loan with Wells Fargo Bank as of June 27, 2020.

On August 14, 2020, the Company also entered into a $ 5.0 million equipment financing facility with Bank of America relating to the Company’s existing U.S.

manufacturing equipment that bears interest at 4.85% and matures on August 14, 2025.

Under this loan agreement, equal monthly payments of approximately $ 94,000 commenced on September 14, 2020 and will continue through the maturity of the equipment financing facility on August 14, 2025.

As of July 3, 2021, the Company had an outstanding balance of $ 4.2 million.

As of June 27, 2020, the Company had an outstanding balance of $ 0.9 million under the Wells Fargo Bank equipment term loan agreement.

Generally, the interest rate applicable to loans under the Bank of America loan agreement are, at the Company’s option:

(i)(A) the base rate which is the highest of (1) the prime rate for the applicable day (as such rate is determined from time to time by the Bank), (2) the federal funds rate for the applicable day plus 0.50%, and (3) LIBOR for a 30-day interest period as of the applicable day plus 1.00% (provided that in no event shall the base rate be less than zero), plus the applicable interest margin for base rate loans;

and (B) LIBOR rate for an applicable interest period (provided that in no event shall the LIBOR rate be less than 0.50%), plus the applicable interest margin for LIBOR rate loans.

Depending on average daily excess borrowing availability over applicable periods under the Credit Facility, applicable interest margins on:

(x) base rate loans are 1.25-1.75%;

and (y) LIBOR rate loans are 2.25-2.75%, resetting on a quarterly basis.

If there is an event of default under the loan agreement, all loans and other obligations will bear interest at a rate of an additional 2.00% on the otherwise applicable interest rates.

In addition to interest charges, the Company is required to pay a fee of 0.25% per annum on the unused portion of the Credit Facility, monthly in arrears.

Under the loan agreement with Bank of America, the asset-based revolving credit facility bears interest at LIBOR plus 2.5 %, as elected by the Company.

On November 24, 2020, the Company entered into a $ 6.0 million equipment financing facility related to the Company’s existing manufacturing equipment that bears interest at 5.52% and matures on April 24, 2026.

Under this loan agreement, equal monthly payments of $ 100,000 commenced on May 24, 2021 and will continue through the maturity of the equipment financing facility on April 24, 2026.

As of July 3, 2021, the Company had an outstanding balance of $ 5.8 million.

On September 3, 2021, the Company entered into an amendment to the Company's current loan agreement with Bank of America.

The amendment increases the Company's current credit facility of $ 93 million to $120 million, subject to the Company's borrowing base, maturing on September 3, 2026.

The interest rates on outstanding debt as of July 3, 2021 range from 3.25 % - 5.52 % compared to 2.17 % - 2.18 % as of June 27, 2020.

Debt maturities as of July 3, 2021 for the next five years are as follows (in thousands):

Fiscal Years Ending Amount

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Long-term debt, net of debt issuance costs $ 100,411

The Company must comply with certain financial covenants, including a cash flow leverage ratio, an asset coverage ratio and a fixed charge coverage ratio.

The credit agreement requires the Company to maintain a minimum profit threshold, limits the maximum capital lease expenditures and restricts the Company from declaring or paying dividends in cash or stock without prior bank approval.

The Company was in compliance with all financial covenants as of June 27, 2020.

The Company must comply with certain financial covenants, including a fixed charge coverage ratio and a cash flow leverage ratio.

The credit agreement requires the Company to grant certain inspection rights to Bank of America, limit or restrict the Company’s cash management;

limit or restrict the ability of the Company to incur additional liens, make acquisitions or investments, incur additional indebtedness, engage in mergers, consolidations, liquidations, dissolutions, or dispositions, pay dividends or other restricted payments, prepay certain indebtedness, engage in transactions with affiliates, and use proceeds.

The Company was in compliance with all financial covenants as of July 3, 2021.

TRADE ACCOUNTS RECEIVABLE PURCHASE PROGRAMS

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The Company has utilized an Account Purchase Agreement with Wells Fargo Bank, N.A.

("WFB") which allows the Company to sell and assign to WFB and WFB may purchase from Company the accounts receivable of certain Company customers in a maximum aggregate amount outstanding of $ 25.0 million.

This agreement may be cancelled at any time by either party.

The Company also has an Account Purchase Agreement with Orbian Financial Services (“Orbian”).

This agreement allows the Company to sell accounts receivable of certain customers to Orbian and the agreement may be cancelled at any time by either party.

Total accounts receivables sold during the twelve months ended June 27, 2020 and June 29, 2019 was approximately $ 41.4 million and $ 81.0 million, respectively.

Accounts receivables sold and not yet collected was approximately $ 9,000 and $ 1.7 million as of June 27, 2020 and June 29, 2019, respectively.

("WFB") which allowed the Company to sell and assign to WFB and WFB to purchase from Company the accounts receivable of certain Company customers in a maximum aggregate amount outstanding of $ 25.0 million.

As of July 3, 2021, the Company had no factored receivables with WFB.

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

Total accounts receivables sold during the twelve months ended June 27, 2020 was approximately $ 41.4 million.

There were no accounts receivables sold and not yet collected as of July 3, 2021 or June 27, 2020.

The receivables that were sold were removed from the consolidated balance sheets and the cash received is reflected as cash provided by operating activities in the consolidated statements of cash flows.

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

Cash receipts related to the deferred purchase price from receivables factored by the Company is reflected as cash provided by investing activities.

Income tax benefit consists of the following:

Fiscal Year Ended

June 27, 2020 June 29, 2019 June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

(in thousands)

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( 942 ) ( 958 ) ( 1,116 )

Total income tax benefit $ ( 439 ) $ ( 758 ) $ ( 117 )

The Company has gross tax credit carryforwards of approximately $ 8.8 million at June 27, 2020 consisting of federal research and development (R&D) tax credits.

Total income tax provision (benefit) $ 1,572 $ ( 439 ) $ ( 758 )

The Company has gross tax credit carryforwards of approximately $ 6.1 million at July 3, 2021 consisting of federal research and development (R&D) tax credits, and approximately $ 1.9 million of net operating loss carryovers in China which expire in fiscal years 2025 and 2026.

Management has reviewed all deferred tax assets for purposes of determining whether or not a valuation allowance may be required.

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Based upon the Company’s profitability, forecasted income, and evaluation of all other positive and negative evidence, management determined that it is more likely than not that the deferred tax assets will be realized.

On January 27, 2021, the Company received official notice from the Vietnamese tax authorities, confirming tax benefits awarded related to the Company’s principal product line in Vietnam (the “Tax Holiday”).

Under the Tax Holiday, the tax rate applied to income derived from this product line will be zero percent for four years beginning with fiscal year 2021, then five percent for nine years, then ten percent for one year (as opposed to the normal twenty percent Vietnamese statutory rate).

Consequently, Management has revalued its net operating loss in Vietnam at the zero percent Tax Holiday rate, as the net operating loss carryovers are projected to expire before the end of the Tax Holiday.

The Company eliminated the deferred tax assets attributable to the Vietnam net operating loss carryover ($0.2 million) in the third quarter of fiscal year 2021.

The Company evaluated tax law changes and regulatory guidance issued in fiscal year 2021.

Such changes and regulations include guidance under Sec.

951A, foreign tax credits, and rules relating to consolidated NOL carryback claims.

The Company evaluated the ongoing impact of these law and regulatory changes, and which did not have a material impact on its provision for income taxes.

Subsequent to the end of the fiscal year ending June 27, 2020, the Treasury Department issued final regulations applicable to the Company’s position with respect to the U.S.

taxability of foreign earnings under the global intangible low taxed income (also known as “GILTI”) regime and the deductibility of interest expense under IRC Section 163(j).

The Company is still evaluating the impact of these regulations, and, at this time, it does not anticipate any material impact to its current or future income tax positions.

taxability of foreign earnings under the global intangible low taxed income

(also known as “GILTI”) regime and the deductibility of interest expense under IRC Section 163(j).

These regulations did not have a material impact to the Company's income tax positions.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic.

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The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income.

This modification would increase the allowable interest expense deduction of the Company and result in less taxable income for fiscal year 2020, but is not expected to have a material impact on the provision for income taxes.

This modification increased the allowable interest expense deduction of the Company, resulting in less taxable income for fiscal year 2020, but did not have a material impact on the fiscal year 2021 provision for income taxes.

Also, under the CARES Act, AMT credits not previously refunded for the 2018 tax year are refundable in the 2019 taxable year rather than in years 2019-2021, and taxpayers can elect to claim 100% of the AMT credits in the first taxable year beginning in 2018 by applying for a tentative refund claim on or before December 31, 2020.

The Company has made this election by applying for a tentative refund claim.

The Company is taking advantage of the deferred payment payroll taxes provision, the impacts of which are not expected to be material.

The Company is continuing to evaluate the impacts of other aspects of the CARES Act, and at this time the Company does not believe they will have a material impact on our consolidated financial position, results of operations, or cash flows.

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law.

The Tax Act reduced Federal corporate tax rates effective January 1, 2018, and changed certain other provisions, many of which were not effective until fiscal year 2019.

Effective tax rates for fiscal year 2018, were blended rates reflecting the benefit of two quarters of Federal tax rate reductions.

These benefits were offset by discrete expenses relating to the revaluation of our U.S.

net deferred tax assets, an adjustment relating to foreign exchange, and required adjustments associated with the transition from a global to a territorial tax system (discussed further below).

As a result of the U.S.

tax system under the Tax Act from a global to a territorial model, a deemed one-time repatriation of all accumulated earnings and profits (AE&P) in Mexico and China occurred on December 31, 2017 (the “Transition Tax”).

On December 22, 2017, the staff of the SEC issued Staff Accounting Bulletin No.

118 (“SAB No.

118 provided guidance on accounting for the tax effects of the 2017 Tax Act and allowed registrants to record provisional amounts for a period of up to one year from the date of enactment of the 2017 Tax Act.

In fiscal year 2019, we finalized the Transition Tax calculation, resulting in a net Transition Tax amount of $ 0.8 million, a decrease of $ 0.4 million for the fiscal year.

In addition to the $ 0.8 million Transition Tax described above, the Company recognized a $ 1.3 million discrete expense in fiscal year 2018 due to the revaluation of our U.S.

net deferred tax assets.

Offsetting these amounts, because of the shift to a territorial system of taxation in the U.S., the Company recognized a discrete benefit of approximately $ 1.3 million related to reversing its previously recognized estimated liability associated with estimated future repatriations from Mexico and China.

In future years, because of the Transition Tax on AE&P described above, repatriations of cash will generally be tax-free in the U.S.

The Company took advantage of the deferred payment payroll taxes provision, resulting in decreased deductible payroll tax payments, and increased taxable income, in fiscal years 2020 and 2021.

Similarly, other aspects of the CARES Act did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In future years, repatriations of cash will generally be tax-free in the U.S.

However, withholding taxes in China may still apply to any such future repatriations.

Management has not changed its indefinite investment assertions with regards to the portion of AE&P in China that may be repatriated in the future.

Management has not changed its indefinite investment assertions regarding to the portion of accumulated earnings and profits in China that may be repatriated in the future.

Accordingly, management estimates that future repatriations of cash from China may result in approximately $ 0.8 million of withholding tax.

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Fiscal Year Ended

June 27, 2020 June 29, 2019 June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

(in thousands)

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Provision to return reconciliation 50 ( 241 ) 630

Equity compensation shortfall 572 — —

Other 220 124 ( 234 )

Income tax benefit $ ( 439 ) $ ( 758 ) $ ( 117 )

Income tax provision (benefit) $ 1,572 $ ( 439 ) $ ( 758 )

The domestic and foreign components of income (loss) before income taxes were:

Fiscal Year Ended

June 27, 2020 June 29, 2019 June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

(in thousands)

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Deferred income tax assets and liabilities consist of the following at:

June 27, 2020 June 29, 2019

July 3, 2021 June 27, 2020

(in thousands)

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Identifiable intangibles 432 493

Interest expense carryforward — 474

Accruals 3,132 2,847

Research and development expenses — 232

Mart-to-market adjustments — 415

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Lease liabilities 2,909 3,201

Other 385 212

Deferred income tax assets $ 16,764 $ 16,682

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Net deferred income tax asset $ 9,656 $ 9,944

Certain reclassifications have been made in the 2019 information in the above table to conform with 2020 presentation.

Uncertain Tax Positions:

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The Company’s R&D tax credits expire in various fiscal years from 2034 to 2041.

The Company also has alternative minimum tax credits, which do not expire, approximating $ 347,000 , which are now classified as a receivable due to the repeal of the alternative minimum tax.

As of June 27, 2020, the Company had unrecognized tax benefits of $ 2.9 million related to its gross R&D tax credits.

As of July 3, 2021, the Company had unrecognized tax benefits of $ 2.6 million related to its gross R&D tax credits.

The unrecognized tax benefits relate to certain R&D tax credits generated from 2004 to 2021.

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Fiscal Year Ended

June 27, 2020 June 29, 2019 June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

(in thousands)

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Additions based on tax positions related to the current year 193 109 88

Adjustment to prior year tax positions 2,102 — —

Lapse of statute of limitations ( 295 ) ( 1,345 ) —

Ending Balance $ 4,863 $ 2,863 $ 4,099

The increase from the prior year is due to additional R&D credits that were recorded in 2020 as discussed above.

Of the $ 4.863 million of unrecognized tax benefits at the end of fiscal year 2021, $ 2.6 million, if recognized, would reduce the effective tax rate.

Management does not anticipate any material changes to this amount during the next 12 months.

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(in thousands, except per share information)

June 27, 2020 June 29, 2019 June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

Net income (loss) $ 4,341 $ 4,758 $ ( 7,982 )

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On July 23, 2020, the Company granted 155,000 SARs under the 2010 Incentive Plan to certain key employees and outside directors at a strike price of $ 6.94 and a grant date fair value of $ 2.32 .

As of June 27, 2020, 150,000 remain outstanding.

As of July 3, 2021, 150,000 remain outstanding.

The grant date fair value for the awards granted during fiscal year 2021, were estimated using the Black Scholes option valuation method with the following weighted average assumptions as of July 23, 2020:

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On July 26, 2019, the Company granted 175,000 SARs under the 2010 Incentive Plan to certain key employees and outside directors at a strike price of $ 4.93 and a grant date fair value of $ 1.23 .

As of June 27, 2020, 121,250 remain outstanding.

As of July 3, 2021, 140,000 remain outstanding.

The grant date fair value for the awards granted during fiscal year 2020, were estimated using the Black Scholes option valuation method with the following weighted average assumptions as of July 26, 2019:

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On July 27, 2018, the Company granted 161,250 SARs under the 2010 Incentive Plan to certain key employees and outside directors at a strike price of $ 8.17 and a grant date fair value of $ 2.27 .

As of June 27, 2020, 197,500 remain outstanding.

As of July 3, 2021, 116,250 remain outstanding.

The grant date fair value for the awards granted during fiscal year 2019, were estimated using the Black Scholes option valuation method with the following weighted average assumptions as of July 27, 2018:

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Expected life 4.00

Subsequent to June 27, 2020, the Company granted 155,000 SARs with a strike price of $6.94 and a grant date fair value of $2.32.

Subsequent to July 3, 2021, the Company granted 165,000 SARs with a strike price of $ 7.17 and a grant date fair value of $ 2.73 .

Share-based compensation expense is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations.

This forfeiture rate will be revised, if necessary, in subsequent periods if actual forfeitures differ from the amount estimated.

Share-based compensation expense for fiscal years ended June 27, 2020, June 29, 2019 and June 30, 2018 was $ 0.3 million, $ 0.4 million and $ 0.4 million, respectively.

Share-based compensation expense for fiscal years ended July 3, 2021, June 27, 2020 and June 29, 2019 was $ 0.2 million, $ 0.3 million and $ 0.4 million, respectively.

The Black-Scholes option valuation model is used by the Company for estimating the fair value of SARs.

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Changes in these assumptions can materially affect the fair value estimates.

There were 20,000 SARs exercised with an immaterial amount of intrinsic value in fiscal year 2021.

There were no SARs exercised during fiscal year 2020 or 2019.

As of June 27, 2020, total unrecognized compensation expense related to nonvested share-based compensation arrangements was approximately $ 0.2 million.

As of July 3, 2021, total unrecognized compensation expense related to nonvested share-based compensation arrangements was approximately $ 0.3 million.

This expense is expected to be recognized over a weighted-average period of 1.81 years.

The following table summarizes the Company’s Options and SARs activity for all plans from July 2, 2016 through June 27, 2020:

The following table summarizes the Company’s Options and SARs activity for all plans from July 1, 2018 through July 3, 2021:

For Grant SARs

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SARs exercised 20,000 ( 20,000 ) — 7.72

Balances, June 27, 2020 609,751 869,583 $ — $ 7.87 1.9

Exercisable at June 27, 2020 400,833 $ — $ 9.18 0.6

Additional information regarding SARs outstanding and exercisable as of June 27, 2020, is as follows:

Balances, July 3, 2021 688,084 791,250 $ — $ 7.15 1.9

Exercisable at July 3, 2021 385,000 $ — $ 7.73 0.6

Additional information regarding SARs outstanding and exercisable as of July 3, 2021, is as follows:

Exercise Prices Number Outstanding Weighted Avg.

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7.91 – 9.91 313,750 0.3 8.17 197,500 8.17

9.92 – 11.34 193,333 0.1 10.26 193,333 10.26

$4.40 to $11.34 791,250 1.9 $ 7.15 385,000 $ 7.73

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COMMITMENTS AND CONTINGENCIES

As of June 27, 2020, June 29, 2019 and June 30, 2018, the Company did not have any property and equipment financed under capital leases.

As of July 3, 2021, June 27, 2020 and June 29, 2019, the Company did not have any property and equipment financed under finance leases.

Please refer to Note 16 for information regarding operating lease commitments.

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The Company establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior twelve months’ sales activities.

As of June 27, 2020 and June 29, 2019, the reserve for warranty costs was approximately $ 15,000 and $ 22,000 , respectively.

As of July 3, 2021 and June 27, 2020, the reserve for warranty costs was approximately $ 25,000 and $ 15,000 , respectively.

If actual return rates and/or repair and replacement costs differ significantly from estimates, adjustments to recognize additional cost of sales may be required in future periods.

Warranty expense for fiscal years 2020, 2019 and 2018 was related to workmanship claims on certain EMS products.

Warranty expense for fiscal years 2021, 2020 and 2019 was related to workmanship claims on certain contract manufacturing products.

The Company is party to certain lawsuits or claims in the ordinary course of business.

The Company does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the financial position, results of operations or cash flow of the Company.

Internal Investigation :

During fiscal 2021, the Company’s Audit Committee completed an internal investigation arising from a notification from an employee regarding certain alleged accounting irregularities.

In January 2021, the Company determined that improper accounting resulted in an understatement of cost of goods sold and an overstatement of inventories.

Subsequent to the matter identified in January 2021, additional inventory accounting errors unrelated to the investigation were also identified by management.

The investigation did not result in a restatement of our previously filed financial statements.

The Company is cooperating with the Securities and Exchange Commission’s (the “SEC”) inquiries related to the internal investigation.

The Company cannot currently form an estimate of any possible loss or range of loss, including any potential monetary penalties;

or other remedies potentially imposed by the SEC.

Indemnification Rights :

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DERIVATIVE FINANCIAL INSTRUMENTS

As of June 27, 2020, the Company had outstanding foreign currency forward contracts and swaps with a total notional amount of $ 36.7 million.

As of July 3, 2021, the Company had outstanding foreign currency forward contracts with a total notional amount of $ 10.6 million.

The maturity dates for these contracts and swaps extend through December 2021.

As of June 27, 2020, the net amount of unrealized loss expected to be reclassified into earnings within the next 12 months is approximately $ 1.8 million.

During the fiscal year ended June 27, 2020, the Company entered into $ 23.8 million of foreign currency forward contracts and settled $ 26.7 million of such contracts.

As of July 3, 2021, the net amount of unrealized gain expected to be reclassified into earnings within the next 12 months is approximately $ 2.8 million.

During the fiscal year ended July 3, 2021, the Company did not enter into any foreign currency forward contracts and settled $ 26.1 million of such contracts.

During the fiscal year ended June 27, 2020, the Company entered into $ 23.8 million of foreign currency forward contracts and settled $ 26.7 million of such contracts.

During the fiscal year ended June 29, 2019, the Company entered into $ 19.2 million of foreign currency forward contracts and settled $ 25.9 million of such contracts.

As of June 27, 2020, the aggregate notional amount of the Company’s outstanding foreign currency contracts and swaps along with their unrealized gains (losses) are expected to mature as summarized below (in thousands):

Subsequent to July 3, 2021, the Company entered into $ 13.9 million of additional foreign currency forward contracts that extended our hedge position through June 2022.

As of July 3, 2021, the aggregate notional amount of the Company’s outstanding foreign currency contracts along with their unrealized gains (losses) are expected to mature as summarized below (in thousands):

Quarter Ending Notional Contracts and Swaps in MXN Notional Contracts and Swaps in USD Estimated Fair Value

September 26, 2020 $ 141,173 $ 6,729 $ ( 623 )

December 26, 2020 $ 132,773 $ 6,241 $ ( 561 )

April 3, 2021 $ 148,253 $ 6,682 $ ( 425 )

July 3, 2021 $ 144,725 $ 6,446 $ ( 367 )

October 2, 2021 $ 146,373 $ 5,502 $ 1,874

January 1, 2022 $ 137,973 $ 5,129 $ 1,740

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of September 30, 2022, with a notional amount of $ 15.0 million related to the borrowings outstanding under the term loan.

This interest rate swap pays the Company variable interest at the one month LIBOR rate, and the Company pays the counter party a fixed interest rate.

The fixed interest rate for the contract is 1.70 % that replaces the one month LIBOR rate component of our contractual interest to be paid to WFB as part of our term loan.

Based on the terms of the interest rate swap contract and the underlying borrowings outstanding under the term loan, the interest rate contract was determined to be effective, and thus qualified as a cash flow hedge.

As of June 27, 2020, the remaining notional balance of this swap was $ 11.7 million.

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of November 1, 2023, with a notional amount of $ 15.0 million related to the borrowings outstanding under the line of credit.

This interest rate swap pays the Company variable interest at the one month LIBOR rate, and the Company pays the counter party a fixed interest rate.

The fixed interest rate for the contract is 1.67 % that replaces the one month LIBOR rate component of our contractual interest to be paid to WFB as part of our line of credit.

Based on the terms of the interest rate swap contract and the underlying borrowings outstanding under the line of credit, the interest rate contract was determined to be effective, and thus qualified as a cash flow hedge.

In conjunction with the new credit facility, the interest rate swap contracts have been terminated.

Please refer to footnote 17 Subsequent Event for more information.

The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheets as of June 27, 2020 and June 29, 2019 (in thousands):

June 27, 2020 June 29, 2019

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of September 30, 2022, related to the borrowings outstanding under the term loan with Wells Fargo Bank.

This interest rate swap contract was terminated on August 14, 2020 when the Company entered into a loan and security agreement with Bank of America.

At date of termination this interest rate swap was in a liability position of $ 148,400 , which will be amortized to interest expense over the original term of the swap.

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of November 1, 2023, related to the borrowings outstanding under the line of credit with Wells Fargo Bank.

This interest rate swap contract was terminated on August 14, 2020 when the Company entered into a loan and security agreement with Bank of America.

At date of termination this interest rate swap was in a liability position of $ 776,500 , which will be amortized to interest expense over the original term of the swap.

The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheets as of July 3, 2021 and June 27, 2020 (in thousands):

July 3, 2021 June 27, 2020

Derivatives Designated as Hedging Instruments Balance Sheet Location Fair Value Fair Value

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Foreign currency forward contracts & swaps Other long-term liabilities $ — $ ( 17 )

Interest rate swaps Other current assets $ — $ 2

Interest rate swaps Other current liabilities $ — $ ( 347 )

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AOCI Into Income AOCI Balance

June 27, 2020

Forward contracts & swaps Cost of sales $ 2,424 $ ( 865 ) $ ( 2,318 ) $ ( 759 )

Forward contracts Cost of sales $ ( 759 ) $ 4,621 $ ( 1,141 ) $ 2,721

Interest rate swap Interest expense ( 741 ) ( 223 ) 315 ( 649 )

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June 27, 2020

Forward contracts & swaps Cost of sales $ ( 988 ) $ 3,332 $ 80 $ 2,424

Forward contracts Cost of sales $ 2,424 $ ( 865 ) $ ( 2,318 ) $ ( 759 )

Interest rate swap Interest expense 2 ( 782 ) 39 ( 741 )

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Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance

July 1, 2017 Effective

AOCI Tax Rate Effect Reclassification Effective Portion

June 30, 2018 Effective

AOCI Effective Portion

Reclassified From

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Total $ ( 969 ) $ 3,334 $ 61 $ 2,426

As of June 27, 2020, the Company does not have any foreign exchange contracts with credit-risk-related contingent features.

As of July 3, 2021, the Company does not have any foreign exchange contracts with credit-risk-related contingent features.

The Company is subject to the risk of fluctuating interest rates from our line of credit and foreign currency risk resulting from our China operations.

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and Level 3 – inputs are unobservable inputs for the asset or liability.

There have been no changes in the fair value methodologies used at June 27, 2020 and June 29, 2019.

The following table summarizes the fair value of assets (liabilities) of the Company’s derivatives that are required to be measured on a recurring basis as of June 27, 2020 and June 29, 2019 (in thousands):

June 27, 2020

There have been no changes in the fair value methodologies used at July 3, 2021 and June 27, 2020.

The following table summarizes the fair value of assets (liabilities) of the Company’s derivatives that are required to be measured on a recurring basis as of July 3, 2021 and June 27, 2020 (in thousands):

Level 1 Level 2 Level 3 Total

Financial Assets:

Foreign currency forward contracts & swaps $ — $ 1,097 $ — $ 1,097

Financial Liabilities:

Interest rate swaps $ — $ ( 957 ) $ — $ ( 957 )

Foreign currency forward contracts & swaps $ — $ ( 1,977 ) $ — $ ( 1,977 )

Foreign currency forward contracts $ — $ 3,614 $ — $ 3,614

June 27, 2020

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Financial Assets:

Foreign currency forward contracts — 1,097 — $ 1,097

Financial Liabilities:

Interest rate swaps $ — $ ( 957 ) $ — $ ( 957 )

Foreign currency forward contracts & swaps $ — $ ( 1,977 ) $ — $ ( 1,977 )

The Company currently has forward contracts to hedge known future cash outflows for expenses denominated in the Mexican peso and an interest rate swap to mitigate risk associated with certain borrowings under the Company’s debt arrangement.

The Company currently has forward contracts to hedge known future cash outflows for expenses denominated in the Mexican peso and had an interest rate swap to mitigate risk associated with certain borrowings under the Company’s debt arrangement.

These contracts are measured on a recurring basis based on the foreign currency spot rates and forward rates quoted by banks or foreign currency dealers.

These contracts are marked to market using level 2 input criteria every quarter with the unrealized gain or loss, net of tax, reported as a component of shareholders’ equity in accumulated other comprehensive income (loss), as they qualify for hedge accounting.

The carrying values of cash and cash equivalents, accounts receivable, current liabilities, and non current lease liability are reflected on the balance sheets at June 27, 2020 and June 29, 2019, reasonably approximate their fair value.

The Company’s long-term debt, which is measured at amortized cost, primarily consists of a revolving line of credit, a term loan and an equipment term loan.

These borrowings bear interest at either a “Base Rate” or a “Fixed Rate,” as elected by the Company.

Each of these rates is a variable floating rate dependent upon current market conditions and the Company’s current credit risk as discussed in footnote 4.

As a result of the determinable market rate for our revolving line of credit, term loan and equipment term, they are classified within Level 2 of the fair value hierarchy.

Further, the carrying value of each of these instruments reasonably approximates their fair value as of June 27, 2020 and June 29, 2019.

Other assets and liabilities held by the Company may be required to be measured at fair value on a non recurring basis.

As of June 29, 2019, the customer relationship intangibles were written down to their fair value of $0.

This measurement was the result of certain triggering events that occurred during the third quarter of fiscal year 2019.

Refer to Note 14 for further discussion of the impairment.

The carrying values of cash and cash equivalents, accounts receivable, and current liabilities are reflected on the balance sheets at July 3, 2021 and June 27, 2020, reasonably approximate their fair value.

The Company’s long-term debt, which is measured at amortized cost, primarily consists of an asset-based revolving credit facility, lease liability, and equipment loans.

These borrowings bear interest at LIBOR plus 2.5% per the loan agreement.

Each of these rates is a variable floating rate dependent upon current market conditions and the Company’s current credit risk as discussed in Note 4.

As a result of the determinable market rates for our asset-based revolving credit facility and equipment loans, they are classified within Level 2 of the fair value hierarchy.

Further, the carrying value of each of these instruments reasonably approximates their fair value as of July 3, 2021 and June 27, 2020.

ENTERPRISE-WIDE DISCLOSURES

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The Company’s chief operating decision maker is its Chief Executive Officer.

As of June 27, 2020, the Company operates and internally manages a single operating segment, Electronics Manufacturing Services as this is the only discrete financial information that is regularly reviewed by the chief operating decision maker.

As of July 3, 2021, the Company operates and internally manages a single operating segment, Electronics Manufacturing Services as this is the only discrete financial information that is regularly reviewed by the chief operating decision maker.

This segment provides integrated electronic and mechanical engineering, assembly, sourcing and procurement, logistics, and new product testing for our customers.

Products and Services

Of the revenues for the years ended June 27, 2020, June 29, 2019, and June 30, 2018, EMS sales and services were $ 449.5 million, $ 463.9 million and $ 445.8 million, respectively.

Keyboard sales for the years ended June 27, 2020, June 29, 2019, and June 30, 2018 were $ 4,000 , $ 0.1 million and $ 0.5 million, respectively.

Of the revenues for the years ended July 3, 2021, June 27, 2020, and June 29, 2019, contract manufacturing sales and services were $ 518.7 million, $ 449.5 million and $ 463.9 million, respectively.

Keyboard sales for the years ended July 3, 2021, June 27, 2020, and June 29, 2019 were $ 550 , $ 4,000 and $ 0.1 million, respectively.

Geographic Areas

Net sales and long-lived assets (property, plant, and equipment) by geographic area for the years ended and as of June 27, 2020, June 29, 2019 and June 30, 2018 are summarized in the following table.

Net sales and long-lived assets (property, plant, and equipment) by geographic area for the years ended and as of July 3, 2021, June 27, 2020 and June 29, 2019 are summarized in the following table.

Net sales set forth below are based on the shipping destination.

Long-lived assets information is based on the physical location of the asset.

Long-lived assets information is based on the physical location of the asset and includes property, plant and equipment, net, and operating lease right-of-use assets, net.

Fiscal Year Ended

26 unchanged sentences

Customer A 24 % 18 % 17 % 15 % 14 %

Customer B * * * 12 % *

* Current customer amount represents less than 10%.

QUARTERLY FINANCIAL DATA (Unaudited)

Fiscal Year Ended June 27, 2020

Fiscal Year Ended July 3, 2021

Quarter Second

18 unchanged sentences

Gross profit 9,273 8,122 9,248 8,606

Income (loss) before income taxes 1,868 1,916 ( 13,256 ) 732

Net income (loss) 1,593 1,589 ( 11,981 ) 817

Net income (loss) per share - basic $ 0.15 $ 0.15 $ ( 1.11 ) $ 0.08

Net income (loss) per share - diluted $ 0.15 $ 0.15 $ ( 1.11 ) $ 0.08

Income before income taxes 1,829 974 1,010 506

Net income 1,552 824 910 1,472

Net income per share - basic $ 0.14 $ 0.08 $ 0.08 $ 0.14

Net income per share - diluted $ 0.14 $ 0.08 $ 0.08 $ 0.14

Weighted average shares outstanding

25 unchanged sentences

Total $ 2,941 $ ( 2,284 ) $ ( 657 ) $ —

June 29, 2019

Amortization Period

in Years Gross Carrying

Amount Accumulated

Amortization Impairment

Recognized Net Carrying

Other intangible assets:

Non-Compete Agreements 3 - 5 $ 568 $ ( 568 ) $ — $ —

Customer Relationships 10 4,803 ( 2,311 ) ( 2,492 ) —

Favorable Lease Agreements 4 - 7 2,941 ( 2,284 ) — 657

Total $ 8,312 $ ( 5,163 ) $ ( 2,492 ) $ 657

Amortization expense related to intangible assets was approximately $ 0.6 million and $ 1.1 million for the year ended June 29, 2019, and June 30, 2018;

respectively.

Amortization expense related to intangible assets was approximately $ 0.6 million for the year ended June 29, 2019.

Revenue Recognition

23 unchanged sentences

The Company has elected to expense costs to obtain contracts as incurred as these costs are immaterial to the financial statements.

During fiscal 2020, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods.

During fiscal 2021, 2020 and 2019, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods.

Contract Balances

1 unchanged sentence

Contract assets are classified separately on the condensed consolidated balance sheet and transferred to receivables when the right to payment becomes unconditional.

The following table summarizes the activity in the Company’s contract assets during the twelve months ended June 27, 2020 (in thousands):

The following table summarizes the activity in the Company’s contract assets during the twelve months ended July 3, 2021 (in thousands):

Contract Assets

2 unchanged sentences

Amounts collected or invoiced ( 508,593 )

Ending balance, June 27, 2020 $ 23,753

Ending balance, July 3, 2021

The following table summarizes the activity in the Company’s contract assets during the twelve months ended June 27, 2020 (in thousands):

1 unchanged sentence

Beginning balance, June 29, 2019

Cumulative effect adjustment at July 1, 2018 11,906

Revenue recognized 441,405

1 unchanged sentence

Ending balance, June 27, 2020

The Company’s cumulative effect adjustment at July 1, 2018 was $ 11.9 million.

Revenue recognized in FY2019 was $ 448.0 million with $ 437.7 million collected or invoiced, resulting in an ending balance of $22.2 million as of June 29, 2019.

Disaggregation of Revenue

The following table presents the Company’s revenue disaggregated for the twelve months ended June 27, 2020 and the twelve months ended June 29, 21019 (in thousands):

Recognition June 27, 2020 June 29, 2019

The following table presents the Company’s revenue disaggregated for the twelve months ended July 3, 2021 and the twelve months ended June 27, 2020 (in thousands):

Recognition July 3, 2021 June 27, 2020 June 29, 2019

Over-Time $ 509,621 $ 441,405 $ 458,256

3 unchanged sentences

Revenue from engineering design, development

services and tooling represented approximately 3.3% of total revenue in fiscal year 2020.

services and tooling represented approximately 5.6 %, 3.3 % and 2.9 % of total revenue in fiscal year 2021, 2020 and 2019, respectively.

As a result of adopting ASC 842 as of June 30, 2019, the Company recognized an right of use asset of $ 21.4 million, a corresponding lease liability of $ 20.4 million, a reduction in prepaid rent of $0.4 million, a reduction of favorable lease agreement intangible of $0.7 million, and no adjustment to retained earnings or future P&L impact.

The Company has several commitments under operating leases for warehouses, manufacturing facilities, office buildings, and equipment with initial terms that expire at various dates during the next 1 year to 10 years.

3 unchanged sentences

The weighted average discount rate is disclosed in the tables below.

The components of lease cost as of June 27, 2020 were (in thousands):

Lease cost Classification June 27, 2020

The components of lease expense were as follows as of July 3, 2021 and June 27, 2020 (in thousands):

Year Ended Year Ended

Lease cost Classification July 3, 2021 June 27, 2020

Operating lease cost Cost of sales $ 4,818 $ 4,511

1 unchanged sentence

Total lease cost $ 6,088 $ 5,777

Amounts reported in the Consolidated Balance Sheet as of June 27, 2020 were (in thousands, except weighted average lease term and discount rate):

June 27, 2020

Fixed lease cost $ 4,943 $ 5,335

Short-term lease cost $ 1,145 $ 442

Total lease cost $ 6,088 $ 5,777

Amounts reported in the Consolidated Balance Sheet as of July 3, 2021 and June 27, 2020 were (in thousands, except weighted average lease term and discount rate):

July 3, 2021 June 27, 2020

Operating Leases:

1 unchanged sentence

Operating lease liabilities (1)

15,653 17,173

Weighted-average remaining lease term (in years)

2 unchanged sentences

Operating leases 4.05 % 4.07 %

(1) The current portion of the total operating lease liabilities of $ 4.5 million is classified under Other Current Liabilities, resulting in $ 12.6 million classified under Operating Lease Liabilities in the Long-term Liabilities section of the consolidated balance sheet.

(1) For fiscal year 2021 and 2020, the current portion of the total operating lease liabilities is classified under Other Current Liabilities.

Other information related to leases was as follows (in thousands):

June 27, 2020

July 3, 2021 June 27, 2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases 4,976 4,237

The Company entered into one new lease during the fiscal year, resulting in a non-cash impact of $0.4 million.

Future lease payments under non-cancellable leases as of June 27, 2020 are as follows (in thousands):

Future lease payments under non-cancellable leases as of July 3, 2021 are as follows (in thousands):

Fiscal Years Ending Operating Leases

3 unchanged sentences

Total lease liabilities $ 15,653

As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 29, 2019 and under the previous lease accounting standard ASC 840, the aggregate future minimum payments under non-cancellable operating leases, as of June 29, 2019, are as follows (in thousands):

Fiscal Years Ending Operating Leases

Thereafter 4,121

Total minimum lease payments $ 18,239

The Company identified certain immaterial errors in relation to its computation of its operating lease right-of-use assets and operating lease liabilities upon adoption of ASC 842, which primarily related to the improper exclusion of fixed rent escalation clauses.

The errors were considered to be immaterial to previously issued quarterly reports on Form 10-Q as of September 28, 2019, December 28, 2019 and March 28, 2020.

The impact of the correction on the respective balance sheets was as follows (in thousands):

September 28, 2019

Amounts as reported Adjustments Amounts as corrected

Operating lease right-of-use assets, net $ 16,056 $ 4,223 $ 20,279

Total assets $ 281,127 $ 4,223 $ 285,350

Operating lease liabilities - Long-term $ 10,885 $ 4,223 $ 15,108

Total Liabilities $ 165,989 $ 4,223 $ 170,212

December 28, 2019

Amounts as reported Adjustments Amounts as corrected

Operating lease right-of-use assets, net $ 14,876 $ 4,223 $ 19,099

Total assets $ 273,970 $ 4,223 $ 278,193

Operating lease liabilities - Long-term $ 9,870 $ 4,223 $ 14,093

Total Liabilities $ 157,163 $ 4,223 $ 161,386

March 28, 2020

Amounts as reported Adjustments Amounts as corrected

Operating lease right-of-use assets, net $ 15,347 $ 3,127 $ 18,474

Total assets $ 288,403 $ 3,127 $ 291,530

Operating lease liabilities - Long-term $ 10,327 $ 3,127 $ 13,454

Total Liabilities $ 175,463 $ 3,127 $ 178,590

SUBSEQUENT EVENT

On August 14, 2020, the Company entered into a loan and security agreement (the “Loan Agreement”) with Bank of America.

The Loan Agreement replaces the Company’s prior amended and restated credit agreement, as amended, with Wells Fargo Bank, N.A.

The Loan Agreement provides for a five-year asset-based senior secured revolving credit facility of up to $93 million, maturing on August 14, 2025.

In addition, during the term of the Loan Agreement, the Company may increase the aggregate amount of the Credit Facility by up to an additional $25 million, subject to customary conditions, including obtaining a commitment from the Bank (or another lender, if applicable) to such increase.

The Credit Facility has been used to pay-off the Prior Credit Facility and costs related to the Loan Agreement, and may be used to pay-off certain other existing debt, to issue letters of credit, and for other business purposes, including working capital needs.

Based on the Company’s borrowing base and reserve requirements and after paying off the Prior Credit Facility and related fees and expenses relating to the Credit Facility, immediately following the closing of the Loan Agreement, there was approximately $16 million available under the Credit Facility.

The Loan Agreement contains financial covenants as long as commitments or obligations are outstanding under the Loan Agreement, requiring the Company to maintain:

(i) a fixed charge coverage ratio of at least 1.25 to 1.0, measured monthly on a trailing 12-month basis;

and (ii) a cash flow leverage ratio of no greater than 6.00 to 1.00, which may be subject to adjustments for COVID-19 related cash expenses as approved by the Bank, measured monthly on a trailing 12-month basis.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

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 8. Financial Statements and Supplementary Data