What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-09-14 compared with 2021-09-16 · 209 added, 239 removed, 709 unchanged (39% of the section changed)

1 unchanged sentence

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Key Tronic Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Key Tronic Corporation (the “Company”) as of July 2, 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of July 2, 2022, and the consolidated results of its operations and its cash flows for the year then ended, 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 2, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 13, 2022 expressed an unqualified opinion on the Company’s internal control over financial reporting.

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 audit.

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 audit 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 audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit 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 audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

As described in Notes 1 and 13 to the consolidated financial statements, the Company reported revenue of $531.8 million for the year ended July 2, 2022, of which $515.8 million related to revenue recognized over time.

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, intellectual property, 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.

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

Management’s calculation includes reports with varying elements, to estimate costs incurred to date for various performance obligations.

Auditing management’s estimates used in the calculation of revenue recognized over time involved especially challenging and subjective auditor judgment.

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

• Testing the design, implementation, and operating effectiveness of controls relating to revenue recognized over time, including controls over the quarterly calculation of in-process contracts, and the related contract assets.

• Evaluating the methodology of estimating costs incurred to date on in-process contracts and testing the completeness and accuracy of the system generated reports used to estimate costs incurred by recalculating the expected costs on in-process contracts, vouching to source documents, tracing in-process orders to subsequent sales and shipping documentation within a reasonable period after year-end, identifying and testing significant assumptions used in the revenue calculation, and performing data validation procedures.

• Comparing margins realized to trending historic margins, and comparing total revenue recognized to independent expectations of total revenues disaggregated by revenue stream.

• Performing cutoff procedures to test that revenue transactions were recorded in the appropriate period.

/s/ Moss Adams LLP

Seattle, Washington

September 14, 2022

We have served as the Company’s auditor since 2021.

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Key Tronic Corporation (the “Company”) as of 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.

We have audited the accompanying consolidated balance sheets of Key Tronic Corporation (the “Company”) as of July 3, 2021, the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended July 3, 2021, and the related notes (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 the results of its operations and its cash flows for each of the two years in the period ended July 3, 2021 , in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principles

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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.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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.

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

Critical Audit Matters

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

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

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

Accounting for Revenue from Contracts with Customers

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

Revenues for contracts for manufacturing products and contracts for engineering

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

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

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

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

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

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

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

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

Accounting for Inventories

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

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

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

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

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

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

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

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

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

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

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

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

/s/ BDO USA, LLP

We have served as the Company's auditor since 2003

We have served as the Company's auditor from 2003 through 2021.

Spokane, Washington

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(In thousands)

July 3, 2021 June 27, 2020

July 2, 2022 July 3, 2021

Current assets:

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KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

Fiscal Year Ended

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

July 2, 2022 July 3, 2021 June 27, 2020

Net sales $ 531,815 $ 518,698 $ 449,480

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Selling, general and administrative expenses 24,598 22,723 21,030

Impairment of goodwill and intangibles — — 12,448

Total operating expenses 34,419 32,513 28,421

Operating income (loss) 9,526 6,828 ( 5,958 )

Operating income 8,795 9,526 6,828

Interest expense, net 5,104 3,613 2,509

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

Income before income taxes 3,691 5,913 4,319

Income tax provision (benefit) 314 1,572 ( 439 )

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

Net income (loss) per share — Basic $ 0.40 $ 0.44 $ ( 0.74 )

Net income $ 3,377 $ 4,341 $ 4,758

Net income per share — Basic $ 0.31 $ 0.40 $ 0.44

Weighted average shares outstanding — Basic 10,762 10,760 10,760

Net income (loss) per share — Diluted $ 0.39 $ 0.44 $ ( 0.74 )

Net income per share — Diluted $ 0.31 $ 0.39 $ 0.44

Weighted average shares outstanding — Diluted 11,063 11,046 10,816

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KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(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):

July 2, 2022 July 3, 2021 June 27, 2020

Comprehensive income:

Net income $ 3,377 $ 4,341 $ 4,758

Other comprehensive income:

Unrealized gain (loss) on hedging instruments, net of tax ( 2,497 ) 3,572 ( 3,926 )

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.

Comprehensive income $ 880 $ 7,913 $ 832

Other comprehensive income for fiscal years 2022, 2021, and 2020 is reflected net of tax provision (benefit) of approximately $( 0.8 ) million, $ 1.2 million and $( 1.1 ) million, respectively.

See accompanying notes to consolidated financial statements.

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Fiscal Year Ended

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

July 2, 2022 July 3, 2021 June 27, 2020

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

Net income $ 3,377 $ 4,341 $ 4,758

Adjustments to reconcile net income to cash used in operating activities:

Depreciation and amortization 7,562 6,856 5,591

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

Provision for obsolete inventory 753 136 91

Inventory write-down to net realizable value 950 753 136

Provision for warranty 446 145 121

Provision for doubtful accounts 67 117 551

Loss on disposal of assets — 207 3

(Gain) loss on disposal of assets ( 12 ) — 207

Share-based compensation expense 293 192 266

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Contract assets 2,807 ( 1,028 ) ( 1,592 )

Cash received from arbitration settlement — — 6,684

Inventories ( 19,362 ) ( 23,062 ) ( 14,725 )

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Other liabilities ( 3,624 ) 5,588 292

Cash provided by (used in) operating activities ( 15,052 ) ( 31,004 ) 919

Cash used in operating activities ( 4,907 ) ( 15,052 ) ( 31,004 )

Investing activities:

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Proceeds from sale of fixed assets 14 — 696

Prepayments on finance lease obligations ( 1,252 ) — —

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

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Repayments of revolving credit agreement ( 577,703 ) ( 384,150 ) ( 140,605 )

Principal payments on finance leases ( 2,331 ) — —

Excess tax benefit from exercise of stock options — 43 —

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Recognition of operating lease liabilities and right-of-use assets $ 5,247 $ 3,103 $ —

Recognition of financing lease liabilities and right-of-use assets $ 13,096 $ — $ —

See accompanying notes to consolidated financial statements.

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Balances, June 29, 2019 10,760 $ 46,680 $ 65,353 $ 2,426 $ 114,459

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 )

Unrealized loss on hedging instruments, net of tax — — — ( 3,926 ) ( 3,926 )

Share-based compensation — 266 — — 266

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Net income — — 4,341 — 4,341

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

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

Exercise of stock appreciation rights 2 — — — —

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

Net income — — 3,377 — 3,377

Unrealized loss on hedging instruments, net of tax — — — ( 2,497 ) ( 2,497 )

Share-based compensation — 293 — — 293

Balances, July 2, 2022 10,762 $ 47,474 $ 77,829 $ ( 425 ) $ 124,878

See accompanying notes to consolidated financial statements.

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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.

Correction of an Immaterial Error

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

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

Refer to corrected disclosures in Note 12.

Principles of Consolidation

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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.

Estimates include the allowance for doubtful receivables, calculating inventory impairments related to obsolete and non-saleable inventories to value at net realizable value, deferred tax assets and liabilities, uncertain tax positions, impairment of long-lived assets, medical self-funded insurance liability, long-term incentive compensation accrual, the provision for warranty costs, and the fair value of stock appreciation rights granted under the Company’s share-based compensation plan.

Due to uncertainties with respect to the assumptions and estimates, actual results could differ from those estimates.

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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.

Lease assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using the Company’s incremental borrowing rate, unless the implicit rate is readily determinable.

Our incremental borrowing rate represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment.

Lease assets also include any lease prepayments.

Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of income.

For further information, please refer to Footnote “Leases” of the “Notes to Consolidated Financial Statements.”

Impairment of Long-lived Assets

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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.

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

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

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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 2001 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.

For further discussions, please refer to Footnote “Income Taxes” of the “Notes to Consolidated Financial Statements.”

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 Company has previously 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.

As of July 2, 2022, the Company did not have any outstanding foreign currency forward contracts.

The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities.

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Foreign Currency Transactions

The functional currency of the Company’s subsidiaries in Mexico and China is the U.S.

The functional currency of the Company’s subsidiaries in Mexico, China and Vietnam is the U.S.

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.

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 2, 2022 and July 3, 2021, reasonably approximate their fair value.

The Company had an outstanding balance on the line of credit of $ 95.1 million as of July 2, 2022 and $ 90.9 million as of July 3, 2021, with a carrying value that reasonably approximates the fair value.

The Company had an outstanding balance on the term loan of $ 3.3 million as of July 2, 2022 and $ 4.2 million as of July 3, 2021, with a carrying value that reasonably approximates the fair value.

The equipment term loan was $ 4.6 million as of July 2, 2022 and $ 5.8 million as of July 3, 2021, 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.

The Company’s incentive plan may provide for equity 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 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.

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Newly Adopted and Recent Accounting Pronouncements

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

In January 2021, 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.

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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):

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

As a result of adopting ASC 842, Leases , using a modified retrospective approach as of June 30, 2019, the Company recognized a 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 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.

As such, fiscal years 2022, 2021, and 2020, ended on July 2, 2022, July 3, 2021, and June 27, 2020, respectively.

Fiscal year 2021 was a 53 week year.

Fiscal years 2022 and 2020 were 52 week years.

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

Net inventory as of July 2, 2022 is $ 155.7 million compared to $ 137.3 million as of July 3, 2021.

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

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Property, plant and equipment consists of the following:

Life July 3, 2021 June 27, 2020

Life July 2, 2022 July 3, 2021

(in years) (in thousands)

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Property, Plant and Equipment, net $ 26,012 $ 35,735

Fiscal Year Ended

July 2, 2022 July 3, 2021 June 27, 2020

(in thousands)

Depreciation expense $ 4,940 $ 6,631 $ 5,369

LONG-TERM DEBT

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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.

Subsequent to July 2, 2022, the company entered into a third amendment to the loan agreement with Bank of America.

The amendment removed the cash flow leverage ratio covenant and increased the interest rate by 25 basis points.

As of July 2, 2022, the Company had an outstanding balance under the asset-based revolving credit facility of $ 95.1 million, $ 0.3 million in outstanding letters of credit and $ 10.8 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.

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.

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.

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As of July 2, 2022, the Company had an outstanding balance of $ 3.3 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.

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

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

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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.

The Company had an outstanding balance of $ 4.6 million and $ 5.8 million as of July 2, 2022 and July 3, 2021, respectively.

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.

The interest rates on outstanding debt as of July 2, 2022 range from 4.50 % - 5.52 % compared to 3.25 % - 5.52 % as of July 3, 2021.

Debt maturities as of July 2, 2022 for the next five years are as follows (in thousands):

6 unchanged sentences

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.

Management believes the Company was in compliance with all financial covenants as of July 2, 2022.

TRADE ACCOUNTS RECEIVABLE PURCHASE PROGRAMS

3 unchanged sentences

As of July 2, 2022, 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 Company did not sell any accounts receivables during the twelve months ended July 2, 2022 or July 3, 2021.

There were no accounts receivables sold and not yet collected as of July 2, 2022 or July 3, 2021.

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.

2 unchanged sentences

Fiscal Year Ended

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

July 2, 2022 July 3, 2021 June 27, 2020

(in thousands)

8 unchanged sentences

Total income tax provision (benefit) $ 314 $ 1,572 $ ( 439 )

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.

The Company has gross tax credit carryforwards of approximately $ 11.0 million at July 2, 2022 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 through 2027.

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

1 unchanged sentence

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.

In the fourth quarter of fiscal year 2022, the Company, with its fiscal year 2021 federal income tax return, made automatic changes in tax accounting methods that created a fiscal year 2021 tax net operating loss.

This loss is permitted to be carried back to the tax years ending in 2016, 2017, and 2019, resulting in a tax benefit of $0.6 million due to the higher federal income tax rate in effect in the years ending in 2016 and 2017.

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”).

2 unchanged sentences

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.

The Company evaluated tax law changes and regulatory guidance issued through the quarter.

Such changes and regulations include guidance under Sec.

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

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

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

Subsequent to the end of the fiscal year ending July 2, 2022, on August 16, 2022, the Inflation Reduction Act of 2022 was signed into law.

This act includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks among other provisions.

The Company is evaluating the impacts of this act, and at this time the Company does not believe they will have a material impact on our consolidated financial position, results of operations, or cash flows.

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

taxability of foreign earnings under the global intangible low taxed income

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

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

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

1 unchanged sentence

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 allows NOLs incurred in years beginning 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 is taking advantage of this NOL carryback provision by carrying back the fiscal year 2021 NOL to the fiscal 2016 and 2017 years, as described above.

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.

This modification did not have a material impact on the fiscal year 2020 or fiscal year 2021 provisions for income taxes.

Also, under the CARES Act, AMT credits not previously refunded for the tax year beginning in 2018 are refundable in the tax year beginning in 2019 rather than in years beginning in 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.

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.

10 unchanged sentences

Fiscal Year Ended

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

July 2, 2022 July 3, 2021 June 27, 2020

(in thousands)

Federal income tax provision (benefit) at statutory rates $ 1,242 $ 907 $ ( 1,836 )

Federal income tax provision at statutory rates $ 775 $ 1,242 $ 907

State income taxes, net of federal tax effect 86 76 90

1 unchanged sentence

Tax rate change — 184 —

Provisional transition tax on accumulated foreign earnings — — ( 384 )

Federal rate differences applied to net operating loss carryback

Effect of income tax credits ( 920 ) ( 413 ) ( 310 )

1 unchanged sentence

Effect of repatriation of foreign earnings, net — ( 61 ) —

Goodwill write-off — — 1,726

Tax penalties & interest 179 — —

Global Intangible Low-Taxed Income (GILTI) tax 59 34 —

3 unchanged sentences

Income tax provision (benefit) $ 314 $ 1,572 $ ( 439 )

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

The domestic and foreign components of income before income taxes were:

Fiscal Year Ended

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

July 2, 2022 July 3, 2021 June 27, 2020

(in thousands)

1 unchanged sentence

Foreign 6,581 3,074 3,177

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

Income before income taxes $ 3,691 $ 5,913 $ 4,319

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

July 3, 2021 June 27, 2020

July 2, 2022 July 3, 2021

(in thousands)

5 unchanged sentences

Accruals 2,406 3,132

Mart-to-market adjustments — 415

Fixed assets 1,200 —

ASC 606 deferred costs 4,216 4,670

Lease liabilities 3,671 2,909

Interest expense deduction carryforward 580 —

Other 465 385

4 unchanged sentences

Right-of-use assets ( 3,663 ) ( 2,930 )

Mart-to-market adjustments ( 816 ) —

Tax capital lease liabilities ( 2,385 ) —

Mark-to-market adjustments — ( 816 )

ASC 606 accelerated revenue ( 3,736 ) ( 672 )

13 unchanged sentences

Fiscal Year Ended

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

July 2, 2022 July 3, 2021 June 27, 2020

(in thousands)

1 unchanged sentence

Additions based on tax positions related to the current year 286 193 109

Adjustment to prior year tax positions 2,102 — —

Adjustment to prior year tax positions & amended tax returns ( 2,296 ) 2,102 —

Lapse of statute of limitations 145 ( 295 ) ( 1,345 )

Ending Balance $ 2,998 $ 4,863 $ 2,863

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.

The $ 2.998 million of unrecognized tax benefits at the end of fiscal year 2022, 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 has not recognized any interest or penalties in the fiscal years presented in these financial statements, except for $0.2 million in fiscal year 2022.

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.

Certain years remain subject to examination but there are currently no ongoing exams in any taxing jurisdiction.

EARNINGS PER SHARE

5 unchanged sentences

(in thousands, except per share information)

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

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

July 2, 2022 July 3, 2021 June 27, 2020

Net income $ 3,377 $ 4,341 $ 4,758

Weighted average shares outstanding– basic 10,762 10,760 10,760

1 unchanged sentence

Weighted average shares outstanding – diluted 11,063 11,046 10,816

Net income (loss) per share – basic $ 0.40 $ 0.44 $ ( 0.74 )

Net income (loss) per share – diluted $ 0.39 $ 0.44 $ ( 0.74 )

Net income per share – basic $ 0.31 $ 0.40 $ 0.44

Net income per share – diluted $ 0.31 $ 0.39 $ 0.44

Antidilutive SARs not included in diluted earnings per share 619 314 720

7 unchanged sentences

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 .

On August 9, 2021, the Compa ny granted 165,000 SARs under the 2010 Incentive Plan to certain key employees and outside directors at a strike price of $ 7.17 and a grant date fair value of $ 2.73 .

As of July 2, 2022, 165,000 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:

The grant date fair value for the awards granted during fiscal year 2022, were estimated using the Black Scho les option valuation method with the following weighted average assumptions as of August 9, 2021:

Fiscal Year 2022

July 23, 2020

August 9, 2021

Expected dividend yield — %

23 unchanged sentences

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.

Share-based compensation expense for fiscal years ended July 2, 2022, July 3, 2021 and June 27, 2020 was $ 0.3 million, $ 0.2 million and $ 0.3 million, respectively.

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

1 unchanged sentence

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

There were no SARs exercised during fiscal year 2022.

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.

There were no SARs exercised during fiscal year 2020.

As of July 2, 2022, total unrecognized compensation expense related to nonvested share-based compensation arrangements was approximately $ 0.4 million.

This expense is expected to be recognized over a weighted-average period of 1.79 years.

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

The following table summarizes the Company’s Options and SARs activity for all plans from June 30, 2019 through July 2, 2022:

For Grant SARs

2 unchanged sentences

Price Weighted

Balances, July 1, 2018 404,335 1,074,999 $ 79 $ 8.90 2.3

Balances, June 30, 2019 493,918 985,416 $ — $ 8.35 1.7

Shares authorized — —

7 unchanged sentences

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

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

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

Shares authorized — —

16 unchanged sentences

COMMITMENTS AND CONTINGENCIES

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.

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

Please refer to Footnote “Leases” of the “Notes to Consolidated Financial Statements” for information regarding lease commitments.

Warranty Costs :

2 unchanged sentences

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.

As of July 2, 2022 and July 3, 2021, the reserve for warranty costs was approximately $ 31,000 and $ 25,000 , 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.

14 unchanged sentences

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.

As of July 2, 2022, the Company did not have any outstanding foreign currency forward contracts.

During the fiscal year ended July 2, 2022, the Company entered into $ 13.9 million of foreign currency forward contracts and settled $ 24.6 million of such contracts.

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.

4 unchanged sentences

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

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

July 3, 2021 June 27, 2020

The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheets as of July 2, 2022 and July 3, 2021 (in thousands):

July 2, 2022 July 3, 2021

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 2022 (in thousands):

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

June 27, 2020 Effective

July 3, 2021 Effective

AOCI Effective Portion

10 unchanged sentences

AOCI Into Income AOCI Balance

June 27, 2020

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

20 unchanged sentences

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.

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

Level 1 Level 2 Level 3 Total

Financial Assets:

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

June 27, 2020

There have been no changes in the fair value methodologies used at July 2, 2022 and July 3, 2021.

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 (in thousands):

Level 1 Level 2 Level 3 Total

1 unchanged sentence

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

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 had 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 were measured on a recurring basis based on the foreign currency spot rates and forward rates quoted by banks or foreign currency dealers.

These contracts were 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 qualified for hedge accounting.

The carrying values of cash and cash equivalents, accounts receivable, contract assets, and current liabilities are reflected on the balance sheets at July 2, 2022 and July 3, 2021, 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.

Each of these rates is a variable floating rate dependent upon current market conditions and the Company’s current credit risk as discussed in Footnote “Long-Term Debt” of the “Notes to Consolidated Financial Statements.”

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.

Further, the carrying value of each of these instruments reasonably approximates their fair value as of July 2, 2022 and July 3, 2021.

ENTERPRISE-WIDE DISCLOSURES

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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.

Of the revenues for the years ended July 2, 2022, July 3, 2021, and June 27, 2020, contract manufacturing sales and services were $ 531.8 million, $ 518.7 million and $ 449.5 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 and long-lived assets (property, plant, and equipment) by geographic area for the years ended and as of July 2, 2022, July 3, 2021 and June 27, 2020 are summarized in the following table.

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

23 unchanged sentences

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

Percentage of Net Sales

Fiscal Year Percentage of Trade Accounts Receivable

2022 2021 2020 2022 2021

Customer A 13 % * * 5 % *

Customer B 12 % 24 % 18 % 13 % 15 %

QUARTERLY FINANCIAL DATA (Unaudited)

13 unchanged sentences

Diluted 11,052 11,057 11,062 11,071

Fiscal Year Ended June 27, 2020

Fiscal Year Ended July 3, 2021

Quarter Second

11 unchanged sentences

Diluted 11,040 11,385 11,429 11,169

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.

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.

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

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.

Revenue Recognition

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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.

Although we offer warranties on our products, our warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended.

Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations;

therefore, the primary performance obligation in the majority of our contracts is the delivery of a specific good through the purchase order submitted by our customer.

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.

6 unchanged sentences

Contract Assets

Beginning balance, June 27, 2020

Beginning balance, July 3, 2021

Revenue recognized 515,831

1 unchanged sentence

Ending balance, July 2, 2022

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

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

Contract Assets

2 unchanged sentences

Amounts collected or invoiced ( 508,593 )

Ending balance, June 27, 2020

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.

Ending balance, July 3, 2021

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):

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

The following table presents the Company’s revenue disaggregated for the twelve months ended July 2, 2022 and the twelve months ended July 3, 2021 (in thousands):

Recognition July 2, 2022 July 3, 2021 June 27, 2020

Over-Time $ 515,831 $ 509,621 $ 441,405

4 unchanged sentences

services and tooling represented approximately 9.6 %, 5.6 % and 3.3 % of total revenue in fiscal year 2022, 2021 and 2020, respectively.

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

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

The Company has some operating leases that include an extension clause.

The Company has several commitments under operating and financing 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 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.

1 unchanged sentence

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

The components of lease cost were as follows as of July 2, 2022, July 3, 2021 and June 27, 2020 (in thousands):

Year Ended Year Ended Year Ended

Lease cost Classification July 2, 2022 July 3, 2021 June 27, 2020

Operating lease cost Cost of sales $ 6,442 $ 4,818 $ 4,511

Operating lease cost Selling, general and administrative expenses 929 1,270 1,266

Financing lease cost Cost of sales $ 2,054 $ — $ —

Financing lease cost Selling, general and administrative expenses $ 64 $ — $ —

Total lease cost $ 9,489 $ 6,088 $ 5,777

2 unchanged sentences

Total lease cost $ 9,489 $ 6,088 $ 5,777

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

July 3, 2021 June 27, 2020

Amounts reported in the Consolidated Balance Sheet as of July 2, 2022 and July 3, 2021 were (in thousands, except weighted average lease term and discount rate):

July 2, 2022 July 3, 2021

Operating Leases:

6 unchanged sentences

Operating leases 4.00 % 4.05 %

Financing Leases (2) :

Financing lease right of use assets $ 12,464 $ —

Financing lease liabilities 11,211 —

Weighted-average remaining lease term (in years)

Financing leases 2.56 0.00

Weighted-average discount rate

Financing leases 8.82 % — %

(1) For fiscal year 2022 and 2021, the current portion of the total operating lease liabilities is classified under Other Current Liabilities.

(2) The total finance lease right of use assets of $12.5 million is classified under Other Long-term Assets.

The current portion of the total finance lease liabilities of $5.2 million is classified under Current portion of debt, net, resulting in $6.0 million classified in Other Long-term Liabilities section of the condensed consolidated balance sheet.

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

July 3, 2021 June 27, 2020

July 2, 2022 July 3, 2021 June 27, 2020

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

Operating cash flows from operating leases 4,261 4,976 4,237

Financing cash flows used in financing leases 2,331 — —

Future lease payments under non-cancellable leases as of July 2, 2022 are as follows (in thousands):

Fiscal Years Ending Operating Leases

Fiscal Years Ending Operating Leases Finance Leases

2023 $ 4,709 $ 5,213

2024 3,811 3,960

2025 2,972 2,539

2026 2,351 107

2027 1,450 71

Thereafter 3,071 —

4 unchanged sentences

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What changed 10-K

Item 8. Financial Statements and Supplementary Data