What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-09-14 compared with 2021-09-16 · 61 added, 114 removed, 191 unchanged (48% of the section changed)

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Executive Summary

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

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

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

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

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

During the fourth quarter of fiscal year 2022, we won new programs involving audio products, GPS devices, utility meters, personal safety devices, and innovative internet solutions.

We reported net sales of $531.8 million for fiscal year 2022, the highest annual revenue in the Company’s history, and up 3% from $518.7 million for fiscal year 2021.

While demand has remained strong from both new and existing customers, revenue for the fourth quarter and for the full year of fiscal year 2022 continued to be constrained by issues related to the supply chain, transportation and logistics and the worldwide pandemic.

During the fourth quarter of fiscal year 2022, the results were impacted by intermittent parts supply and factory downtime.

The Company’s facilities in Shanghai, China were closed for most of the fourth quarter due to a government mandated COVID-19 shutdown.

While the reopening of the Company’s China facility took longer than anticipated, operations have since resumed.

Moving into fiscal 2023, the global supply chain and COVID-19 crises continue to present uncertainty and multiple business challenges.

At the same time, global logistics problems and heightened assurance of supply concerns continue to drive the favorable trend of contract manufacturing returning to North America.

For the first quarter of fiscal year 2023, the Company expects to report revenue in the range of $125 million to $135 million.

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

Despite growing customer demand and backlog, we expect that the ongoing disruptions from the global supply chain and COVID-19 issues will continue to significantly limit production and adversely impact operating efficiencies, particularly for our China-based facilities.

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

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

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

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

Gross profit as a percent of net sales was 8.1 percent in both fiscal year 2022 and 2021.

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

Operating income as a percentage of net sales for fiscal year 2022 was 1.7 percent compared to 1.8 percent for fiscal year 2021.

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

The decrease in operating income as a percentage of net sales was primarily driven by the increase in legal expenses related specifically to the SEC’s review of last year’s whistleblower complaint.

Net income for fiscal year 2022 was $3.4 million or $0.31 per share, as compared to $4.3 million or $0.39 per share for fiscal year 2021.

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

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

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

Earnings for fiscal 2022 continued to be adversely impacted by supply chain and transportation and logistics issues, legal and other professional service expenses related specifically to the SEC’s review of last year’s whistleblower complaint, and increased interest expense.

We maintained a strong balance sheet with a current ratio of 2.1 and a debt to equity ratio of 0.86.

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RESULTS OF OPERATIONS

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

Comparison of the Fiscal Year Ended July 2, 2022 with the Fiscal Year Ended July 3, 2021

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

The financial information and discussion below should be read in conjunction with the consolidated financial statements and notes contained in this Annual Report.

The financial information and discussion below should be read in conjunction with the consolidated financial statements and Footnotes contained in this Annual Report on Form 10-K.

Fiscal Year Ended

July 2, 2022 % of

net sales June 27, 2020 % of

net sales July 3, 2021 % of

net sales $ change % point

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Income before income taxes 3,691 0.7 5,913 1.1 (2,222) (0.4)

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

Income tax provision 314 0.1 1,572 0.3 (1,258) (0.2)

Net income $ 3,377 0.6% $ 4,341 0.8% $ (964) (0.2)

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The increase in net sales of $13.1 million from prior year period was primarily driven by an increase in new program wins and demand for current programs.

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

However, partially offsetting the increase in revenue during fiscal year 2022, the Company’s revenue was constrained by the global supply chain and transportation issues that continued to limit production throughout the year and to a lesser extent the Chinese government mandated COVID-19 shutdown of our Shanghai, China facilities for most of the fourth quarter.

The following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2022 and 2021:

Fiscal Year Ended

July 3, 2021 June 27, 2020

July 2, 2022 July 3, 2021

Consumer 48 51

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Cost of Sales

Total cost of sales as a percentage of net sales was 91.9 percent and 92.2 percent in fiscal years 2021 and 2020, respectively.

We provide a reserve for obsolete and non-saleable inventories based on specific identification of inventory against current demand and recent usage.

Total cost of sales as a percentage of net sales was 91.9 percent in both fiscal years 2022 and 2021.

We record our inventories at net realizable value based on specific identification of inventory against current demand and recent usage.

We also consider our customers' ability to pay for inventory whether or not there is a lead-time assurance agreement for a specific program.

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The net warranty expense was approximately $446,000 and $145,000 in fiscal years 2022 and 2021, respectively.

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

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

Gross profit as a percentage of net sales was 8.1 percent in both fiscal years 2022, and 2021.

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

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

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

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

Research, Development and Engineering

Research, development and engineering expenses (RD&E) consists principally of employee related costs, third party development costs, program materials, depreciation and allocated information technology and facilities costs.

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

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

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

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

Total RD&E expenses were $9.8 million in both fiscal years 2022 and 2021.

Total RD&E expenses as a percent of net sales was 1.8 percent in fiscal year 2022 and 1.9 percent in fiscal year 2021.

Selling, General and Administrative

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Total SG&A expenses as a percent of net sales were 4.6 percent and 4.4 percent in fiscal years 2022 and 2021, respectively.

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

This 0.2 percentage point increase in SG&A as a percentage of net sales is primarily related to an increase in legal expenses related specifically to the SEC’s review of last year’s whistleblower complaint.

Interest Expense

We had net interest expense of $5.1 million and $3.6 million in fiscal years 2022 and 2021, respectively.

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

Income Tax Benefit

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

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

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

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

Income Tax Provision

We had an income tax expense of approximately $0.3 million during fiscal year 2022 and an income tax expense of approximately $1.6 million during fiscal year 2021.

The income tax expense recognized during both fiscal years 2022 and 2021 was primarily a function of U.S.

and foreign taxes recognized at statutory rates, the net benefit associated with federal research and development tax credits, the benefit of carrying back the fiscal year 2021 net operating tax losses to years with higher federal tax rates in fiscal year 2022, the non-cash tax impact of expired stock appreciation rights in fiscal year 2021, and the recognition of previously unrecognized tax benefits for federal research and development tax credits in fiscal year 2020.

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

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The estimated taxes associated with these expected repatriations are included in the income tax calculation.

For further information on taxes please review footnote 6 of the “Notes to Consolidated Financial Statements.”

For further information on taxes please review Footnote “Income Taxes” of the “Notes to Consolidated Financial Statements.”

International Subsidiaries

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The locations of active foreign subsidiaries are as follows:

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

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

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

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• Key Tronic Computer Peripherals (Shanghai) Co., Ltd.

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

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

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

Its primary function is to provide contract manufacturing services.

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

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RESULTS OF OPERATIONS

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

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

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

To review the results of operations comparison of the fiscal year ended July 3, 2021 with the fiscal year ended June 27, 2020, please refer to our Annual Report on Form 10-K filed September 16, 2021 with the Securities and Exchange Commission or follow the link below.

https://www.sec.gov/ix?doc=/Archives/edgar/data/719733/000071973321000106/ktcc-20210703.htm

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Operating Cash Flow

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

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

Net cash used in operating activities for fiscal year 2022 was $4.9 million compared to $15.1 million and $31.0 million in fiscal years 2021 and 2020, respectively.

The $4.9 million of net cash used in operating activities during fiscal year 2022 is primarily related to $3.4 million of net income adjusted for $7.6 million of depreciation and amortization, $25.6 million increase in accounts receivable, a $19.4 million increase in inventory, a $3.6 million increase in other liabilities, partially offset by a $28.6 million increase in accounts payable, and a $2.8 million decrease in contract assets.

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

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

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

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

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

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

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

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

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

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Our primary use of cash in investing activities during fiscal years 2022, 2021 and 2020, was purchasing equipment to support increased production levels for new programs.

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

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

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

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

During fiscal year 2022, cash flows used in investing activities also included prepayments on finance lease obligations.

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

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

Capital expenditures and periodic lease payments are expected to be financed with internally generated funds as well as our revolving line of credit facility and equipment term loan .

Financing Cash Flow

Cash flows provided by financing activities were $11.2 million, $28.6 million, and $34.5 million in fiscal years 2022, 2021, and 2020.

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

Our primary financing activities during fiscal year 2022, were proceeds from capital equipment finance leases and borrowings and repayments under our revolving line of credit facility;

partially offset by repayments on our term loans and principal payments on finance leases.

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

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income taxes, but may be subject to foreign withholding taxes.

See additional discussion in Footnote 6, Income Taxes.

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

See additional discussion in Footnote “Income Taxes” of the “Notes to Consolidated Financial Statements.” The total amount of foreign withholding taxes required to be paid for the amount of foreign subsidiary cash on hand as of July 2, 2022, would approximate $8,000.

The Company also has approximately $28.9 million of foreign earnings that have not been repatriated to the U.S.

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If these amounts were required to be repatriated, we estimate it would create an additional $0.7 million in foreign withholding taxes payable.

Contractual Obligations and Commitments

Contractual Obligations

In the normal course of business, we enter into contracts which obligate us to make payments in the future.

The table below sets forth our significant future obligations by fiscal year:

Payments Due by Fiscal Year (in thousands)

Total 2022 2023 2024 2025 2026 Thereafter

Term loans (1)

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

Bank of America revolving loan (2)

$ 90,886 $ — $ — $ — $ — $ 90,886 $ —

Operating leases (3)

$ 18,308 $ 4,225 $ 3,140 $ 2,526 $ 2,427 $ 1,865 $ 4,125

Purchase orders (4)

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

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

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

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

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

We lease some of our administrative and manufacturing facilities and equipment.

A complete discussion of properties can be found in Part 1, Item 2 at “Properties.” Leases have proven to be an acceptable method for us to acquire new or replacement equipment and to maintain facilities with a minimum impact on our short term cash flows for operations.

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

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

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

We have certain contractual obligations that extend beyond fiscal year 2023 under lease obligations and debt arrangements.

As of July 2, 2022, we had open purchase order commitments for materials and other supplies.

Actual needs under these blanket purchase orders fluctuate with our manufacturing levels and as such cannot be broken out between fiscal years.

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These agreements depend in part on the type of materials purchased as well as the circumstances surrounding any requested cancellations.

In addition to the cash requirements presented above, we have various other accruals which are not included in the table above.

For example, we owe our suppliers approximately $92.8 million for accounts payable and shipments in transit at the end of the fiscal year.

We generally pay our suppliers in a range from 30 to 120 days depending on terms offered.

These payments are financed by operating cash flows and our revolving line of credit.

We believe that cash flows generated from operations, factoring, leasing facilities, and funds available under the revolving credit facility will satisfy cash requirements for a period in excess of 12 months and into the foreseeable future.

We do not use off-balance sheet financing techniques other than traditional operating leases, and we have not guaranteed the obligations of any entity that is not one of our wholly owned subsidiaries.

For a summary of our lease obligations as of July 2, 2022, please refer to Footnote “Leases” of the “Notes to Consolidated Financial Statements.”

For a summary of our long-term debt obligations as of July 2, 2022, please refer to Footnote “Long-Term Debt” of the “Notes to Consolidated Financial Statements.”

Critical Accounting Policies and Estimates

Preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses.

Note 1 to our consolidated financial statements describes the significant accounting policies used in the preparation of our consolidated financial statements.

Footnote “Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” describes the significant accounting policies used in the preparation of our consolidated financial statements.

Management believes the most complex and sensitive judgments, because of their significance to our consolidated financial statements, result primarily from the need to make estimates about effects of matters that are inherently uncertain.

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

Inactive, Obsolete, and Surplus Inventory Reserve

Inactive, Obsolete, and Surplus Inventory Valuation

Inventories are stated at the lower of cost or net realizable value.

Inventory valuation is determined using the first-in, first-out (FIFO) method.

We reserve for inventories that we deem inactive, obsolete or surplus.

This reserve is calculated based upon the demand for the products that we produce.

We write down inventories that we deem inactive, obsolete or surplus to net realizable value.

The write down is calculated based upon the demand for the products that we produce to value this related inventory at net realizable value.

Demand is determined by expected sales, customer purchase orders, or customer forecasts.

If expected sales do not materialize, then we would have inventory in excess of our reserves and would have to charge the excess against future earnings.

If expected sales do not materialize, excess inventory would be the result and a write down of that inventory against earnings would occur.

In the case where we have purchased material based upon a customer’s forecast or purchase orders, we are usually covered by lead-time assurance agreements or purchase orders with each customer.

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If we purchase material outside the lead-time assurance agreement and the customer’s forecasts do not materialize or if we have no lead-time assurance agreement for a specific program, we would have the financial liability and may have to charge inactive, obsolete or surplus inventory against earnings.

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.

We also write down inventory values related to specific customers covered by lead-time assurance agreements when those customers are experiencing financial difficulties or reimbursement is not reasonably assured.

Allowance for Doubtful Accounts

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As of July 2, 2022, the allowance for doubtful accounts was approximately $12,000.

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

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

This allowance is based on estimates of the portion of accounts receivable that may not be collected in the future.

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Stock-Based Compensation

Stock-based compensation is accounted for according to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation .

Stock-based compensation is accounted for according to FASB Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation .

ASC 718 requires us to expense the fair value of employee stock options, stock appreciation rights and other forms of stock-based compensation.

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If actual forfeitures are higher than our estimates it would result in lower compensation expense and to the extent the actual forfeitures are lower than our estimate we would record higher compensation expense.

Impairment of Long-Lived Assets

Long-lived assets, such as property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset.

If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge would be recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Derivatives and Hedging Activity

Derivatives are recognized on the balance sheet at their estimated fair value.

On the date a derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (a “cash flow” hedge).

The Company does not enter into derivatives for speculative purposes.

Changes in the fair value of a derivative that qualifies as a cash flow hedge are recorded in “Accumulated Other Comprehensive Income,” until earnings are affected by the variability of cash flows.

See Note 10 of the Company’s consolidated financial statements for additional information.

Long-Term Incentive Compensation Accrual

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Actual results could vary from our estimates and assumptions.

Impairment of Goodwill

In accordance with ASC 350, Goodwill and Other Intangible Assets , goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value.

The Company is permitted the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the fair value of any reporting unit is less than its corresponding carrying value.

If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of any reporting unit is less than its corresponding carrying value then the Company is not required to take further action.

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

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

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

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

In addition, we applied a market discount rate calculated based upon an analysis of companies similar in size.

If our future cash flows do not meet our projections or there is an event that impacts our market capitalization, the assumptions used in our goodwill analysis could be negatively impacted.

Goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

The Company also has the option to bypass the qualitative assessment for goodwill in any period and proceed directly to performing the quantitative impairment test.

Refer to footnote 14 for discussion of the write-off of goodwill and other intangibles that occurred during fiscal year 2019, as a result of certain triggering events being present.

New and Future Accounting Pronouncements

See Note 1 to our consolidated financial statements.

See Footnote “Significant Accounting Policies” of the “Notes to Consolidated Financial Statements.”

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

What changed 10-K

Item 7. Management’s Discussion and Analysis