KEY TRONIC CORP 10-K

Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Key Tronic Corporation Spokane Valley, Washington Opinion on the Consolidated Financial Statements 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 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 These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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 31 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 We have served as the Company's auditor since 2003 Spokane, Washington September 16, 2021 32 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) July 3, 2021 June 27, 2020 ASSETS Current assets: Cash and cash equivalents $ 3,473 $ 553 Trade receivables, net of allowance for doubtful accounts of $275 and $609 110,324 86,123 Contract assets 24,781 23,753 Inventories, net 137,329 115,020 Other 23,345 17,315 Total current assets 299,252 242,764 Property, plant and equipment, net 35,735 31,764 Operating lease right-of-use assets, net 15,745 17,568 Other assets: Deferred income tax asset 9,656 10,178 Other 1,458 2,587 Total other assets 11,114 12,765 Total assets $ 361,846 $ 304,861 LIABILITIES AND SHAREHOLDERS ’ EQUITY Current liabilities: Accounts payable $ 92,823 $ 80,204 Accrued compensation and vacation 11,471 10,428 Current portion of debt, net 2,143 7,508 Other 20,268 14,079 Total current liabilities 126,705 112,219 Long-term liabilities: Term loans 7,906 3,258 Revolving loan 90,362 60,094 Operating lease liabilities 11,428 12,624 Deferred income tax liability — 234 Other long-term obligations 1,740 875 Total long-term liabilities 111,436 77,085 Total liabilities 238,141 189,304 Commitments and contingencies (Note 4 and 9) Shareholders’ equity: Common stock, no par value—shares authorized 25,000; issued and outstanding 10,762 and 10,760 shares, respectively 47,181 46,946 Retained earnings 74,452 70,111 Accumulated other comprehensive (loss) income 2,072 ( 1,500 ) Total shareholders’ equity 123,705 115,557 Total liabilities and shareholders’ equity $ 361,846 $ 304,861 See accompanying notes to consolidated financial statements. 33 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) (In thousands, except per share amounts) Fiscal Year Ended July 3, 2021 June 27, 2020 June 29, 2019 Net sales $ 518,698 $ 449,480 $ 464,044 Cost of sales 476,659 414,231 429,443 Gross profit 42,039 35,249 34,601 Research, development and engineering expenses 9,790 7,391 6,555 Selling, general and administrative expenses 22,723 21,030 21,556 Impairment of goodwill and intangibles — — 12,448 Total operating expenses 32,513 28,421 40,559 Operating income (loss) 9,526 6,828 ( 5,958 ) Interest expense, net 3,613 2,509 2,782 Income (loss) before income taxes 5,913 4,319 ( 8,740 ) Income tax provision (benefit) 1,572 ( 439 ) ( 758 ) Net income (loss) $ 4,341 $ 4,758 $ ( 7,982 ) Net income (loss) per share — Basic $ 0.40 $ 0.44 $ ( 0.74 ) Weighted average shares outstanding — Basic 10,760 10,760 10,760 Net income (loss) per share — Diluted $ 0.39 $ 0.44 $ ( 0.74 ) Weighted average shares outstanding — Diluted 11,046 10,816 10,760 See accompanying notes to consolidated financial statements. 34 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) Fiscal Year Ended July 3, 2021 June 27, 2020 June 29, 2019 Comprehensive income (loss): Net income (loss) $ 4,341 $ 4,758 $ ( 7,982 ) Other comprehensive income (loss): Unrealized gain (loss) on hedging instruments, net of tax 3,572 ( 3,926 ) 3,395 Comprehensive income (loss) $ 7,913 $ 832 $ ( 4,587 ) Other comprehensive income (loss) for fiscal years 2021, 2020, and 2019 is reflected net of tax provision (benefit) of approximately $ 1.2 million, $( 1.1 ) million and $ 1.0 million, respectively. See accompanying notes to consolidated financial statements. 35 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal Year Ended July 3, 2021 June 27, 2020 June 29, 2019 Operating activities: Net income (loss) $ 4,341 $ 4,758 $ ( 7,982 ) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Goodwill and intangible assets impairment — — 12,448 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 doubtful accounts 117 551 58 Loss on disposal of assets — 207 3 Share-based compensation expense 192 266 436 Deferred income taxes ( 942 ) ( 958 ) ( 1,116 ) Changes in operating assets and liabilities Trade receivables ( 24,318 ) ( 28,254 ) 3,344 Contract assets ( 1,028 ) ( 1,592 ) ( 10,255 ) Cash received from arbitration settlement — — 6,684 Inventories ( 23,062 ) ( 14,725 ) ( 1,417 ) Other assets 2,317 ( 7,728 ) ( 4,490 ) Accounts payable 12,618 6,632 ( 2,627 ) Accrued compensation and vacation 1,043 3,669 ( 1,346 ) Other liabilities 5,588 292 ( 323 ) Cash provided by (used in) operating activities ( 15,052 ) ( 31,004 ) 919 Investing activities: Purchases of property and equipment ( 10,602 ) ( 8,623 ) ( 8,386 ) Proceeds from sale of fixed assets — 696 22 Cash receipts from deferred purchase price of factored receivables — 4,350 6,455 Cash used in investing activities ( 10,602 ) ( 3,577 ) ( 1,909 ) Financing activities: Payment of financing costs ( 617 ) ( 84 ) ( 15 ) 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 ) Borrowings under revolving credit agreement 414,943 177,343 181,688 Repayments of revolving credit agreement ( 384,150 ) ( 140,605 ) ( 174,554 ) 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 Cash and cash equivalents, beginning of period 553 601 343 Cash and cash equivalents, end of period $ 3,473 $ 553 $ 601 Supplemental cash flow information: Interest payments $ 3,777 $ 2,483 $ 2,773 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. 36 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (In thousands) Shares Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balances, June 30, 2018 10,760 $ 46,244 $ 72,806 $ ( 969 ) $ 118,081 Net loss — — ( 7,982 ) — ( 7,982 ) ASC 606 opening balance sheet adjustment — — 529 — 529 Unrealized gain on hedging instruments, net — — — 3,395 3,395 Share-based compensation — 436 — — 436 Balances, June 29, 2019 10,760 $ 46,680 $ 65,353 $ 2,426 $ 114,459 Net income — — 4,758 — 4,758 Unrealized loss on hedging instruments, net — — — ( 3,926 ) ( 3,926 ) Share-based compensation — 266 — — 266 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. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Business 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; Fayetteville, Arkansas; Corinth, Mississippi; and foreign manufacturing operations in Juarez, Mexico; Shanghai, China; and Da Nang, Vietnam. 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. 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 The consolidated financial statements include the Company and its wholly owned subsidiaries in the United States, Mexico, China and Vietnam. Intercompany balances and transactions have been eliminated during consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates include the allowance for doubtful receivables, the provision for obsolete and non-saleable inventories, deferred tax assets and liabilities, uncertain tax positions, valuation of goodwill, impairment of long-lived assets, medical self-funded insurance liability, long-term incentive compensation accrual, the provision for warranty costs, the fair value of stock appreciation rights granted under the Company’s share-based compensation plan and purchase price allocation of acquired businesses. Due to uncertainties with respect to the assumptions and estimates, actual results could differ from those estimates. Cash and Cash Equivalents The Company considers investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. The Company may have cash and cash equivalents at financial institutions that are in excess of federally insured limits from time to time. Allowance for Doubtful Accounts The Company evaluates the collectability of accounts receivable and records an allowance for doubtful accounts, which reduces the receivables to an amount that management reasonably estimates will be collected. A specific allowance is recorded against receivables considered to be impaired based on the Company’s knowledge of the financial condition of the customer. In determining the amount of the allowance, the Company considers several factors including the aging of the receivables, the current business environment and historical experience. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. 38 Inventories Inventories are stated at the lower of cost or net realizable value. Inventory valuation is determined using the first-in, first-out (FIFO) method. Customer orders are based upon forecasted quantities of product manufactured for shipment over defined periods. Raw material inventories are purchased to fulfill these customer requirements. Within these arrangements, customer demands for products frequently change, sometimes creating excess and obsolete inventories. The Company regularly reviews raw material inventories by customer for both excess and obsolete quantities. Wherever possible, the Company attempts to recover its full cost of excess and obsolete inventories from customers or, in some cases, through other markets. When it is determined that the Company’s carrying cost of such excess and obsolete inventories cannot be recovered in full, a charge is taken against income for the difference between the carrying cost and the estimated realizable amount. We also reserve for inventory related to specific customers covered by lead-time assurance agreements when those customers are experiencing financial difficulties or reimbursement is not reasonably assured. Property, Plant and Equipment Property, plant and equipment are carried at cost and depreciated using straight-line methods over the expected useful lives of the assets. Repairs and maintenance costs are expensed as incurred. Impairment of Goodwill In accordance with accounting guidance on goodwill and other intangible assets, the Company evaluates goodwill for impairment at the reporting unit level annually, and whenever circumstances occur indicating that goodwill might be impaired. Upon adoption of ASU 2017-04, the Company now recognizes an impairment charge (not to exceed the total amount of goodwill allocated to the reporting unit) for the amount by which the carrying amount of a reporting unit exceeds the reporting unit’s fair value. During the third quarter of fiscal year 2019, a few large programs declined in revenue and two new programs were delayed. This decrease in the Company’s total revenue combined with book value continuing to exceed market capitalization caused a “triggering event” in which to perform a quantitative impairment analysis as of March 30, 2019. To estimate the fair value of the Company’s equity, the Company used both a market approach and an income approach, based on a discounted cash flows analysis. As of March 30, 2019, market related factors increased expected required rates of return, which also increased the Company’s discount rate used to project future cash flows. Further, push outs of the Company’s forecasted future cash flows relating to delays in customer orders adversely impacted the Company’s discounted cash flows model. As a result, a lower estimate in the Company’s fair value using these two valuation methods indicated an impairment charge. During the third quarter of fiscal year 2019, the Company also 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 above. 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. The Company’s analysis did not indicate that any of its other long-lived assets were impaired. Refer to footnote 14 for impairment analysis for goodwill and other intangibles that occurred during fiscal year 2019, as a result of certain triggering events being present. Impairment of Long-lived Assets The Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews assets for impairment whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable. Impaired assets are reported at the lower of cost or fair value. Accrued Warranty An accrual is made for expected warranty costs, with the related expense recognized in cost of goods sold. Management reviews the adequacy of this accrual quarterly based on historical analyses and anticipated product returns. 39 Self-funded Insurance The Company self-funds its domestic employee health plans. The Company contracts with a separate administrative service company to supervise and administer the programs and act as its representative. The Company reduces its risk under this self-funded platform by purchasing stop-loss insurance coverage for high dollar individual claims. In addition, if the aggregate annual claims amount to more than 125 percent of expected claims for the plan year this insurance will also pay those claims amounts exceeding that level. The Company estimates its exposure for claims incurred but not paid at the end of each reporting period and uses historical claims data supplied by the Company’s broker to estimate its self-funded insurance liability. This liability is subject to a total limitation that varies based on employee enrollment and factors that are established at each annual contract renewal. Actual claims experience may differ from the Company’s estimates. Costs related to the administration of the plan and related claims are expensed as incurred. Revenue Recognition 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. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outlines the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates. The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as the services are performed. Shipping and Handling Fees The Company classifies costs associated with shipping and handling fees as a component of cost of goods sold. Customer billings related to shipping and handling fees are reported as revenue. Research, Development and Engineering 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. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. 40 We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 % likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments based on new assessments and changes in estimates and which may not accurately forecast actual outcomes. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax provision. To date, we have not incurred charges for interest or penalties in relation to the underpayment of income taxes. The tax years 2004 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject. Refer to Note 6 for further discussions. Derivative Instruments and Hedging Activities The Company has entered into foreign currency forward contracts and an interest rate swap which are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging . The effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (AOCI) and is reclassified into earnings in the same period in which the underlying hedged transaction affects earnings. The derivative’s effectiveness represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities. The foreign currency forward contracts and interest rate swaps have terms that are matched to the underlying transactions being hedged. As a result, these transactions fully offset the hedged risk and no ineffectiveness has been recorded. The Company’s foreign currency forward contracts and interest rate swaps potentially expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the agreement. The Company minimizes such risk by seeking high quality counterparties. The Company’s counterparties to the foreign currency forward contracts and interest rate swaps are major banking institutions. These institutions do not require collateral for the contracts, and the Company believes that the risk of the counterparties failing to meet their contractual obligations is remote. The Company does not enter into derivative instruments for trading or speculative purposes. Earnings Per Common Share Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the combination of other potentially dilutive weighted average common shares and the weighted average number of common shares outstanding during the period using the treasury stock method. The computation assumes the proceeds from the exercise of stock options were used to repurchase common shares at the average market price during the period. The computation of diluted earnings per common share does not assume conversion, exercise, or contingent issuance of common stock equivalent shares that would have an anti-dilutive effect on earnings per share. Foreign Currency Transactions The functional currency of the Company’s subsidiaries in Mexico and China is the U.S. dollar. Realized foreign currency transaction gains and losses for local currency denominated assets and liabilities are included in cost of goods sold. 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 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 The Company’s incentive plan may provide for equity and liability awards to employees in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based or cash-based awards. Compensation cost is recognized on a straight-line basis over the requisite employee service period, which is generally the vesting period, and is included in cost of goods sold, research, development and engineering, and selling, general, and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations. 41 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. ASU 2019-12 is effective for us the first quarter of fiscal year 2022. 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 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance is effective for the Company beginning in the first quarter of fiscal year 2024 with early adoption permitted. 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. Fiscal Year The Company operates on a 52/53 week fiscal year. Fiscal years end on the Saturday nearest June 30. 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. 2. INVENTORIES 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. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: Life July 3, 2021 June 27, 2020 (in years) (in thousands) Land — $ 4,034 $ 4,034 Buildings and improvements 3 to 30 25,513 23,444 Equipment 1 to 10 77,509 72,151 Furniture and fixtures 3 to 5 5,271 4,883 Total Property, Plant and Equipment 112,327 104,512 Accumulated depreciation ( 76,592 ) ( 72,748 ) Property, Plant and Equipment, net $ 35,735 $ 31,764 42 4. LONG-TERM DEBT 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 2022 $ 2,143 2023 2,190 2024 2,239 2025 2,290 2026 92,074 Total debt $ 100,936 Unamortized debt issuance costs ( 525 ) Long-term debt, net of debt issuance costs $ 100,411 43 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. 5. TRADE ACCOUNTS RECEIVABLE PURCHASE PROGRAMS Sale Programs The Company has utilized an Account Purchase Agreement with Wells Fargo Bank, N.A. ("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. Cash receipts related to the deferred purchase price from receivables factored by the Company is reflected as cash provided by investing activities. 6. INCOME TAXES Income tax benefit consists of the following: Fiscal Year Ended July 3, 2021 June 27, 2020 June 29, 2019 (in thousands) Current income tax benefit: United States $ 1,416 $ 365 $ ( 537 ) Foreign 1,098 154 895 2,514 519 358 Deferred income tax benefit: United States ( 858 ) ( 1,850 ) ( 910 ) Foreign ( 84 ) 892 ( 206 ) ( 942 ) ( 958 ) ( 1,116 ) 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. A valuation allowance against deferred tax assets is required if it is more likely than not that some of the deferred tax assets will not be realized. 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. 162(m), Sec. 245A, 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 44 (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. The CARES Act, among other things, permits net operating loss (NOL) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company does not expect that the NOL carryback provision of the CARES Act will result in a material cash benefit. In addition, the CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. 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 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 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 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. There would be no offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations. Withholding taxes will not apply to future repatriations from Mexico or Vietnam. The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company expects to repatriate approximately $ 7.5 million from China, in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations. 45 The Company’s effective tax rate differs from the federal tax rate as follows: Fiscal Year Ended July 3, 2021 June 27, 2020 June 29, 2019 (in thousands) Federal income tax provision (benefit) at statutory rates $ 1,242 $ 907 $ ( 1,836 ) State income taxes, net of federal tax effect 76 90 ( 158 ) Foreign tax rate differences ( 36 ) 336 251 Tax rate change 184 — — Provisional transition tax on accumulated foreign earnings — — ( 384 ) Effect of income tax credits ( 413 ) ( 310 ) ( 861 ) Previously unrecognized tax benefits ( 296 ) ( 1,345 ) — Effect of repatriation of foreign earnings, net ( 61 ) — ( 42 ) Goodwill write-off — — 1,726 Global Intangible Low-Taxed Income (GILTI) tax 34 — 150 Provision to return reconciliation 50 ( 241 ) 630 Equity compensation shortfall 572 — — Other 220 124 ( 234 ) Income tax provision (benefit) $ 1,572 $ ( 439 ) $ ( 758 ) The domestic and foreign components of income (loss) before income taxes were: Fiscal Year Ended July 3, 2021 June 27, 2020 June 29, 2019 (in thousands) Domestic $ 2,839 $ 1,142 $ ( 12,220 ) Foreign 3,074 3,177 3,480 Income (loss) before income taxes $ 5,913 $ 4,319 $ ( 8,740 ) 46 Deferred income tax assets and liabilities consist of the following at: July 3, 2021 June 27, 2020 (in thousands) Deferred tax assets: Net operating loss $ 465 $ 184 Tax credit carryforwards, net 3,581 5,961 Inventory 1,190 1,426 Identifiable intangibles 432 493 Accruals 3,132 2,847 Mart-to-market adjustments — 415 ASC 606 deferred costs 4,670 1,943 Lease liabilities 2,909 3,201 Other 385 212 Deferred income tax assets $ 16,764 $ 16,682 Deferred tax liabilities: Accrued withholding tax - unremitted earnings ( 754 ) ( 820 ) Fixed assets ( 794 ) ( 566 ) Right-of-use assets ( 2,930 ) ( 3,290 ) Mart-to-market adjustments ( 816 ) — ASC 606 accelerated revenue ( 672 ) ( 1,344 ) Other ( 1,142 ) ( 718 ) Deferred income tax liabilities $ ( 7,108 ) $ ( 6,738 ) Net deferred income tax assets $ 9,656 $ 9,944 Balance sheet caption reported in: Long-term deferred income tax asset $ 9,656 $ 10,178 Long-term deferred income tax liability — ( 234 ) Net deferred income tax asset $ 9,656 $ 9,944 Uncertain Tax Positions: The Company has R&D tax credits that approximate $ 6.1 million that have 20 -year carryforwards before expiring. The Company’s R&D tax credits expire in various fiscal years from 2034 to 2041. 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. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Fiscal Year Ended July 3, 2021 June 27, 2020 June 29, 2019 (in thousands) Beginning Balance $ 2,863 $ 4,099 $ 4,011 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 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. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in its income tax provision. The Company has not recognized any interest or penalties in the fiscal years presented in these financial statements. The Company is subject to income tax in the U.S. federal jurisdiction, various state jurisdictions, Mexico, China and Vietnam. Certain years remain subject to examination but there are currently no ongoing exams in any taxing jurisdictions. 47 7. EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is computed by including both the weighted-average number of shares outstanding and any dilutive common share equivalents in the denominator. The following table presents a reconciliation of the denominator and the number of antidilutive common share awards that were not included in the diluted earnings per share calculation. These antidilutive securities occur when equity awards outstanding have an option price greater than the average market price for the period: Fiscal Year Ended (in thousands, except per share information) July 3, 2021 June 27, 2020 June 29, 2019 Net income (loss) $ 4,341 $ 4,758 $ ( 7,982 ) Weighted average shares outstanding– basic 10,760 10,760 10,760 Effect of dilutive common stock awards 286 56 — Weighted average shares outstanding – diluted 11,046 10,816 10,760 Net income (loss) per share – basic $ 0.40 $ 0.44 $ ( 0.74 ) Net income (loss) per share – diluted $ 0.39 $ 0.44 $ ( 0.74 ) Antidilutive SARs not included in diluted earnings per share 314 720 985 8. STOCK OPTION AND BENEFIT PLANS The Company’s incentive plan provides for equity and liability awards to employees and non-employee directors in the form of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based or cash-based awards. Compensation cost is recognized on a straight-line basis over the requisite employee service period, which is generally the vesting period, and is recorded as employee compensation expense in cost of goods sold, research, development and engineering, and selling, general and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations. In addition to service conditions, these SARs contain a performance condition. The additional performance condition is based upon the achievement of Return on Invested Capital (ROIC) goals relative to a peer group. All awards with performance conditions are measured over the vesting period and are charged to compensation expense over the requisite service period based on the number of shares expected to vest. The SARs cliff vest after a three-year period from date of grant and expire five years from date of grant. 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 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: Fiscal Year 2021 July 23, 2020 Expected dividend yield — % Risk – free interest rate 0.17 % Expected volatility 42.85 % Expected life 4.00 48 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 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: Fiscal Year 2020 July 26, 2019 Expected dividend yield — % Risk – free interest rate 1.54 % Expected volatility 28.50 % Expected life 4.00 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 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: Fiscal Year 2019 July 27, 2018 Expected dividend yield — % Risk – free interest rate 2.80 % Expected volatility 29.75 % Expected life 4.00 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 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. Option valuation models require the input of highly subjective assumptions, particularly for the expected term and expected stock price volatility. 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 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. 49 The following table summarizes the Company’s Options and SARs activity for all plans from July 1, 2018 through July 3, 2021: SARs Available For Grant SARs Outstanding Aggregate Intrinsic Value (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Balances, July 1, 2018 404,335 1,074,999 $ 79 $ 8.90 2.3 Shares authorized — — SARs granted ( 161,250 ) 161,250 8.17 SARs forfeited 250,833 ( 250,833 ) 10.59 SARs exercised — — — — Balances June 30, 2019 493,918 985,416 $ — $ 8.35 1.7 Shares authorized — — SARs granted ( 175,000 ) 175,000 4.93 SARs forfeited 290,833 ( 290,833 ) 7.71 SARs exercised — — — — Balances, June 27, 2020 609,751 869,583 $ — $ 7.87 1.9 Shares authorized — — SARs granted ( 155,000 ) 155,000 6.94 SARs forfeited 213,333 ( 213,333 ) 9.88 SARs exercised 20,000 ( 20,000 ) — 7.72 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: Range of Exercise Prices Number Outstanding Weighted Avg. Remaining Contractual Life (yrs.) Weighted Avg. Exercise Price Number Exercisable Weighted Avg. Exercise Price $4.40 – $7.90 477,500 2.6 $ 6.48 187,500 $ 7.26 7.91 – 9.91 313,750 0.3 8.17 197,500 8.17 $4.40 to $11.34 791,250 1.9 $ 7.15 385,000 $ 7.73 The Company has defined contribution plans available to U.S. employees who have attained age 21. Company contributions to the plans were approximately $ 0.9 million, $ 0.8 million, and $ 0.9 million during fiscal years 2021, 2020 and 2019, respectively. 9. COMMITMENTS AND CONTINGENCIES 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. Rental expense under operating leases was approximately $ 4.5 million, $ 4.2 million, and $ 5.0 million during fiscal years 2021, 2020 and 2019, respectively. Warranty Costs : The Company provides warranties on certain product sales, and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty. 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 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 2021, 2020 and 2019 was related to workmanship claims on certain contract manufacturing products. 50 Litigation : 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 : Under the Company’s bylaws, the Company’s directors and officers have certain rights to indemnification by the Company against certain liabilities that may arise by reason of their status or service as directors or officers. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers and former directors in certain circumstances. 10. DERIVATIVE FINANCIAL INSTRUMENTS 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 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. 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 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, 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. 51 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 Foreign currency forward contracts & swaps Other current assets $ 3,614 $ — Foreign currency forward contracts & swaps Other long-term assets $ — $ 1,097 Foreign currency forward contracts & swaps Other current liabilities $ — $ ( 1,960 ) Foreign currency forward contracts & swaps Other long-term liabilities $ — $ ( 17 ) Interest rate swaps Other current liabilities $ — $ ( 347 ) Interest rate swaps Other long-term liabilities $ — $ ( 610 ) The following table summarizes the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the fiscal year 2021 (in thousands): Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of June 27, 2020 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of July 3, 2021 Forward contracts Cost of sales $ ( 759 ) $ 4,621 $ ( 1,141 ) $ 2,721 Interest rate swap Interest expense ( 741 ) ( 223 ) 315 ( 649 ) Total $ ( 1,500 ) $ 4,398 $ ( 826 ) $ 2,072 The following table summarizes the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the fiscal year 2020 (in thousands): Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of June 29, 2019 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of June 27, 2020 Forward contracts Cost of sales $ 2,424 $ ( 865 ) $ ( 2,318 ) $ ( 759 ) Interest rate swap Interest expense 2 ( 782 ) 39 ( 741 ) Total $ 2,426 $ ( 1,647 ) $ ( 2,279 ) $ ( 1,500 ) The following table summarizes the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the fiscal year 2019 (in thousands): Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of June 30, 2018 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of June 29, 2019 Forward contracts & swaps Cost of sales $ ( 988 ) $ 3,332 $ 80 $ 2,424 Interest rate swap Interest expense 19 2 ( 19 ) 2 Total $ ( 969 ) $ 3,334 $ 61 $ 2,426 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. The Company does not currently manage these risk exposures by using derivative instruments. 11. FAIR VALUE MEASUREMENTS The Company has adopted ASC 820, Fair Value Measurements, which defines fair value, establishes a framework for assets and liabilities being measured and reported at fair value and expands disclosures about fair value measurements. There are three levels of fair value hierarchy inputs used to value assets and liabilities which include: Level 1 – inputs are quoted market prices for identical assets or liabilities; Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 – inputs are unobservable inputs for the asset or liability. There have been no changes in the fair value methodologies used at July 3, 2021 and June 27, 2020. 52 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): July 3, 2021 Level 1 Level 2 Level 3 Total Fair Value Financial Assets: Foreign currency forward contracts $ — $ 3,614 $ — $ 3,614 June 27, 2020 Level 1 Level 2 Level 3 Total Fair Value 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 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, 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. 53 12. ENTERPRISE-WIDE DISCLOSURES Operating segments are defined in ASC Topic 280, Segment Reporting as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. 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 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 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 and includes property, plant and equipment, net, and operating lease right-of-use assets, net. Fiscal Year Ended (in thousands) 2021 2020 2019 Geographic net sales: Domestic (U.S.) $ 372,217 $ 338,766 $ 357,341 Foreign 146,481 110,714 106,703 Total $ 518,698 $ 449,480 $ 464,044 Long-lived assets: United States $ 20,949 $ 21,078 $ 9,658 Mexico 24,089 20,828 17,781 Vietnam 5,919 6,567 1,220 China 523 859 754 Total $ 51,480 $ 49,332 $ 29,413 Percentage of net sales made to customers located in the following countries: Fiscal Year Ended 2021 2020 2019 United States 72 % 75 % 77 % China 25 19 19 Other foreign countries (a) 3 5 3 Canada — 1 1 Total 100 % 100 % 100 % (a) No other individual foreign country accounted for 10% or more of the foreign sales in fiscal years 2021, 2020 or 2019. 54 Significant Customers The percentage of net sales to and trade accounts receivables from significant customers were as follows: Percentage of Net Sales Fiscal Year Percentage of Trade Accounts Receivable Fiscal Year 2021 2020 2019 2021 2020 Customer A 24 % 18 % 17 % 15 % 14 % 13. QUARTERLY FINANCIAL DATA (Unaudited) Fiscal Year Ended July 3, 2021 First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except per share amounts) Net sales $ 123,207 $ 128,262 $ 134,600 $ 132,629 Gross profit 10,015 10,622 11,096 10,306 Income before income taxes 2,115 1,872 1,556 370 Net income 1,719 1,580 867 175 Net income per share - basic $ 0.16 $ 0.15 $ 0.08 $ 0.02 Net income per share - diluted $ 0.16 $ 0.14 $ 0.08 $ 0.02 Weighted average shares outstanding Basic 10,760 10,760 10,760 10,762 Diluted 11,040 11,385 11,429 11,169 Fiscal Year Ended June 27, 2020 First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except per share amounts) Net sales $ 105,285 $ 116,722 $ 111,455 $ 116,018 Gross profit 9,273 8,122 9,248 8,606 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 Basic 10,760 10,760 10,760 10,760 Diluted 10,805 10,877 10,885 10,832 55 14. GOODWILL AND OTHER INTANGIBLE ASSETS The Company recorded goodwill in connection with the Ayrshire and Sabre acquisitions resulting primarily from the synergies that resulted from the Company's acquisitions and the assembled workforce. The goodwill is not amortized for financial accounting purposes. In accordance with accounting guidance on goodwill and other intangible assets, the Company evaluates goodwill for impairment at the reporting unit level annually, and whenever circumstances occur indicating that goodwill might be impaired. Upon adoption of ASU 2017-04, the Company now recognizes an impairment charge (not to exceed the total amount of goodwill allocated to the reporting unit) for the amount by which the carrying amount of a reporting unit exceeds the reporting unit’s fair value. During the third quarter of fiscal year 2019, a goodwill impairment of $ 10.0 million was recognized. During the third quarter for 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 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. This resulted in an impairment charge related to other intangible assets of $ 2.5 million recognized in the third quarter of fiscal year 2019. The Company’s analysis did not indicate that any of its other long-lived assets were impaired. During the first quarter of fiscal year 2020, the Company adopted the Accounting Standards Update 2016-02, Leases which supersedes ASC 840 Leases and creates a new topic, ASC 842 Leases. Under ASC 842, any assets or liabilities recognized in accordance with ASC 805 that are related to favorable or unfavorable terms of an operating lease for which an entity is a lessee, the entity should derecognize the asset or liability and commensurately adjust the ROU asset. Refer to footnote 16 for additional disclosure. As such, the Company derecognized the intangible asset and added the offsetting amount to the ROU asset. Resulting in a reduction of favorable lease agreement intangible of $ 0.7 million, and no adjustment to retained earnings or future P&L impact. The components of acquired intangible assets are as follows (in thousands): June 27, 2020 Amortization Period in Years Gross Carrying Amount Accumulated Amortization Derecognition Favorable Lease per ASC 842 Net Carrying Amount Other intangible assets: Favorable Lease Agreements 4 - 7 2,941 ( 2,284 ) ( 657 ) — Total $ 2,941 $ ( 2,284 ) $ ( 657 ) $ — Amortization expense related to intangible assets was approximately $ 0.6 million for the year ended June 29, 2019. 15. REVENUE Revenue Recognition The Company specializes in services ranging from product manufacturing to engineering and tooling services. 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. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outlines the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates. 56 The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as the services are performed. The Company’s typical payment terms are 30 to 45 days and its sales arrangements do not contain any significant financing component for its customers. The Company generally provides a warranty for workmanship on its manufacturing contracts. Historically, the amount of returns for workmanship issues has been de minimis under the Company’s warranties. The Company elected to not disclose information about remaining performance obligations as they are part of contracts that that have expected durations of one year or less. The Company has elected to expense costs to obtain contracts as incurred as these costs are immaterial to the financial statements. During fiscal 2021, 2020 and 2019, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods. Contract Balances A contract asset is recognized when the Company has recognized revenue, but has not issued an invoice for payment. 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 July 3, 2021 (in thousands): Contract Assets Beginning balance, June 27, 2020 $ 23,753 Revenue recognized 509,621 Amounts collected or invoiced ( 508,593 ) Ending balance, July 3, 2021 $ 24,781 The following table summarizes the activity in the Company’s contract assets during the twelve months ended June 27, 2020 (in thousands): Contract Assets Beginning balance, June 29, 2019 22,161 Revenue recognized 441,405 Amounts collected or invoiced ( 439,813 ) Ending balance, June 27, 2020 $ 23,753 57 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 July 3, 2021 and the twelve months ended June 27, 2020 (in thousands): Revenue Recognition July 3, 2021 June 27, 2020 June 29, 2019 Over-Time $ 509,621 $ 441,405 $ 458,256 Point-in-Time 9,077 8,075 5,788 Total $ 518,698 $ 449,480 $ 464,044 Revenues and associated costs from engineering design, development services and tooling, which are performed under contract of short term durations, are recognized over time as the services are performed. Revenue from engineering design, development services and tooling represented approximately 5.6 %, 3.3 % and 2.9 % of total revenue in fiscal year 2021, 2020 and 2019, respectively. 16. LEASES 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. The Company has some operating leases that include an extension clause. Management has considered the likelihood of exercising each extension option included and estimated the duration of the extension option, for those leases management determined to be reasonably certain, in calculating the lease term for measurement of the right of use asset and liability. For operating leases, management assumed a discount rate of 4% - 5.9%. The weighted average discount rate is disclosed in the tables below. 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 Operating lease cost Selling, general and administrative expenses 1,270 1,266 Total lease cost $ 6,088 $ 5,777 Fixed lease cost $ 4,943 $ 5,335 Short-term lease cost $ 1,145 $ 442 Total lease cost $ 6,088 $ 5,777 58 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: Operating lease right of use assets $ 15,745 $ 17,568 Operating lease liabilities (1) 15,653 17,173 Weighted-average remaining lease term (in years) Operating leases 5.95 6.46 Weighted-average discount rate Operating leases 4.05 % 4.07 % (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): 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 Future lease payments under non-cancellable leases as of July 3, 2021 are as follows (in thousands): Fiscal Years Ending Operating Leases 2022 $ 4,225 2023 3,140 2024 2,526 2025 2,427 2026 1,865 Thereafter 4,125 Total undiscounted lease payments 18,308 Less: present value discount 2,655 Total lease liabilities $ 15,653 Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 59