Item 7. Management’s Discussion and Analysis
Item 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Key Tronic is a leading contract manufacturer offering value-added design and manufacturing services from its facilities in the United States, Mexico, China and Vietnam. We provide full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, worldwide distribution and unparalleled customer service. It’s customers include some of the world’s leading original equipment manufacturers. Our combined capabilities and vertical integration are proving to be a desirable offering to our expanded customer base.
Our international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time. We continue to make investments in all of our operating facilities to give us the production capacity, capabilities and logistical advantages to continue to win new business. The following information should be read in conjunction with the consolidated financial statements included herein and with Part II Item 1A, Risk Factors included as part of this filing.
Our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products, and create long-term mutually beneficial business relationships by employing our “Trust, Commitment, Results” philosophy.
Executive Summary
During the fourth quarter of fiscal year 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 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, power equipment and wireless security.
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 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 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.
19
We maintained a strong balance sheet with a current ratio of 2.1 and a debt to equity ratio of 0.86. Total cash used in operating activities as defined on our cash flow statement was $4.9 million during fiscal year 2022. We maintained sufficient liquidity for our expected future operations. We believe cash flow from operations, our borrowing capacity, and equipment financing should provide adequate capital for planned growth over the long term.
RESULTS OF OPERATIONS
Comparison of the Fiscal Year Ended 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 Footnotes contained in this Annual Report on Form 10-K.
Fiscal Year Ended
July 2, 2022 % of
net sales July 3, 2021 % of
net sales $ change % point
change
Net sales $ 531,815 100.0% $ 518,698 100.0% $ 13,117 —
Cost of sales 488,601 91.9 476,659 91.9 11,942 —
Gross profit 43,214 8.1 42,039 8.1 1,175 —
Operating expenses:
Research, development and engineering 9,821 1.8 9,790 1.9 31 (0.1)
Selling, general and administrative 24,598 4.6 22,723 4.4 1,875 0.2
Total operating expenses 34,419 6.4 32,513 6.3 1,906 0.1
Operating income 8,795 1.7 9,526 1.8 (731) (0.1)
Interest expense, net 5,104 1.0 3,613 0.7 1,491 0.3
Income before income taxes 3,691 0.7 5,913 1.1 (2,222) (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)
Effective income tax rate 8.5 % 26.6 %
Net Sales
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 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 2, 2022 July 3, 2021
Consumer 48 51
Industrial 41 38
Communication 7 5
Gaming 1 3
Transportation 1 1
Printers 1 1
Computer and Peripheral 1 1
Total 100% 100%
We provide services to customers in a number of industries and produce a variety of products for our customers in each industry. Key Tronic does not target any particular industry, but rather seeks to find programs that strategically fit our vertical manufacturing capabilities. As we continue to diversify our customer base and win new customers, we expect to continue to see a change in the industry concentrations of our revenue.
20
Sales to foreign locations represented 17.6 percent and 28.2 percent of our total net sales in fiscal years 2022 and 2021, respectively.
Cost of Sales
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. The amounts charged to expense for these inventories were approximately $950,000 and $753,000 in fiscal years 2022 and 2021, respectively.
We provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns. Warranty expense is related to workmanship claims on keyboards and other products. The amounts charged to expense are determined based on an estimate of warranty exposure. The net warranty expense was approximately $446,000 and $145,000 in fiscal years 2022 and 2021, respectively.
Gross Profit
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. These and other factors can cause variations in operating results. There can be no assurance that gross margins will not decrease in future periods.
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 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
Selling, general and administrative expenses (SG&A) consist principally of salaries and benefits, advertising and marketing programs, sales commissions, travel expenses, provision for doubtful accounts, facilities costs, and professional services. Total SG&A expenses were $24.6 million and $22.7 million in fiscal years 2022 and 2021, respectively. 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 0.2 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, 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. We anticipate repatriating a portion of our unremitted foreign earnings. The estimated taxes associated with these expected repatriations are included in the income tax calculation. For further information on taxes please review Footnote “Income Taxes” of the “Notes to Consolidated Financial Statements.”
21
International Subsidiaries
We offer customers a complete global manufacturing solution. Our facilities provide our customers the opportunity to have their products manufactured in the facility that best serves specific cost, product manufacturing and distribution needs. The locations of active foreign subsidiaries are as follows:
• 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. This subsidiary is primarily used to support our U.S. operations.
• Key Tronic Computer Peripherals (Shanghai) Co., Ltd. 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. This facility includes SMT, assembly, and warehouse capabilities. Its primary function is to provide contract manufacturing services for export.
Foreign sales (based on shipping instructions) from our worldwide operations, including domestic exports, were $93.8 million and $146.5 million in fiscal years 2022 and 2021, respectively. Products and manufacturing services provided by our subsidiary operations are often shipped to customers directly by the parent company.
RESULTS OF OPERATIONS
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
Capital Resources and Liquidity
Operating Cash Flow
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.
Accounts receivable fluctuates based on the timing of shipments, terms offered and collections. We purchase inventory based on customer forecasts and orders, and when those forecasts and orders change, the amount of inventory may also fluctuate. Accounts payable fluctuates with changes in inventory levels, volume of inventory purchases, negotiated supplier terms, and taking advantage of early pay discounts.
Investing Cash Flow
Cash flows used in investing activities were $8.1 million for fiscal year 2022. Cash flows used in investing activities were $10.6 million and $3.6 million in fiscal year 2021 and 2020, respectively. 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 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.
22
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 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. Our primary financing activities during fiscal year 2020 was repayments on our term loans of $7.1 million as well as borrowings and repayments under our revolving line of credit facility.
As of July 2, 2022, the Company had an outstanding balance on the line of credit of $95.1 million. We had availability to borrow an additional $10.8 million under the asset-based revolving credit facility and we were in compliance with our loan covenants. Our cash requirements are affected by the level of current operations and new programs. We believe that projected cash from operations, funds available under the asset-based revolving credit facility and fixed asset financing will be sufficient to meet our working and fixed capital requirements for the foreseeable future.
As of July 2, 2022, we had approximately $1.7 million of cash held by foreign subsidiaries. Under the Tax Cuts and Jobs Act, future cash repatriations from these foreign subsidiaries are no longer subject to U.S. income taxes, but may be subject to foreign withholding taxes. 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. Of that amount, the Company estimates that $7.1 million is to be repatriated in the future, requiring foreign withholding taxes of $0.7 million that is currently accrued in our deferred tax liabilities. The remaining $21.8 million is considered to be permanently reinvested in Mexico, China and Vietnam. If these amounts were required to be repatriated, we estimate it would create an additional $0.7 million in foreign withholding taxes payable.
Contractual Obligations
In the normal course of business, we enter into contracts which obligate us to make payments in the future. 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. In addition, we have contracts with many of our customers that minimize our exposure to losses for material purchased within lead-times necessary to meet customer forecasts. Purchase orders generally can be cancelled without penalty within specified ranges that are determined in negotiations with our suppliers. These agreements depend in part on the type of materials purchased as well as the circumstances surrounding any requested cancellations. 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.”
23
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. 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. The most significant areas involving management judgments are described below. Actual results in these areas could differ from management’s estimates.
Revenue
The Company specializes in services ranging from product manufacturing to engineering and tooling services. The first step in its process for revenue recognition is to identify the contract with a customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outlines the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates.
The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. Further, the Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as the services are performed.
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 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, 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. These contracts state that the financial liability for material purchased within agreed upon lead-time and based upon the customer’s forecasts, lies with the customer. 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 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
We value our accounts receivable net of an allowance for doubtful accounts. As of July 2, 2022, the allowance for doubtful accounts was approximately $12,000. 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. The estimates used are based primarily on specific identification of potentially uncollectible accounts. Such accounts are identified using publicly available information in conjunction with evaluations of current payment activity. However, if any of our customers were to develop unexpected and immediate financial problems that would prevent payment of open invoices, we could incur additional and possibly material expenses that would negatively impact earnings.
24
Accrued Warranty
An accrual is made for expected warranty costs, with the related expense recognized in cost of goods sold. We review the adequacy of this accrual quarterly based on historical analysis and anticipated product returns and rework costs. Our warranty period for keyboards is generally longer than that for other products. We only warrant materials and workmanship on products, and we do not warrant design defects for customers.
Income Taxes
Income tax expense includes U.S. and international income taxes and a provisional estimate for U.S. taxes on undistributed earnings of foreign subsidiaries. We do not record foreign withholding taxes on undistributed earnings of international subsidiaries that are deemed to be permanently reinvested. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. The deferred income taxes are classified as long-term assets or liabilities. The most significant areas involving management judgments include deferred income tax assets and liabilities, uncertain tax positions, and research and development tax credits. Our estimates of the realization of the deferred tax assets related to our tax credits are based upon our estimates of future taxable income which may change.
Stock-Based 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. Under the fair value recognition provisions of ASC 718, share-based compensation cost is estimated at the grant date based upon the fair value of the award and is recognized as expense ratably over the requisite service period of the award (generally the vesting period). Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating the expected life of the share-based award, the expected stock price volatility over the expected life of the share-based award and forfeitures.
To determine the fair value of stock based awards on the date of grant we use the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock price volatility, option life, risk-free interest rate and dividend yield. The risk-free interest rate is a less-subjective assumption as it is based on factual data derived from public sources. We use a dividend yield of zero as we have never paid cash dividends and have no intention to pay cash dividends in the foreseeable future. The expected stock price volatility and option life assumptions require a greater level of judgment. Our expected stock-price volatility assumption is based upon the historical volatility of our stock which is obtained from public data sources. The expected life represents the weighted average period of time that share-based awards are expected to be outstanding, giving consideration to vesting schedules and historical exercise patterns. We determine the expected life assumption based upon the exercise and post-vesting behavior that has been exhibited historically, adjusted for specific factors that may influence future exercise patterns. If expected volatility or expected life were to increase, that would result in an increase in the fair value of our stock options which would result in higher compensation charges, while a decrease in volatility or the expected life would result in a lower fair value of our stock option awards resulting in lower compensation charges.
We estimate forfeitures for all of our awards based upon historical experience of stock-based pre-vesting forfeitures. We believe that our estimates are based upon outcomes that are reasonably likely to occur. 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.
Long-Term Incentive Compensation Accrual
Long-term incentive compensation is recognized as expense ratably over the requisite service period of the award which is generally three years. The Board of Directors approve target performance measures for the three year period for each of the Company’s officers and non-employee Directors. Performance measures are based on a combination of sales growth targets and return on invested capital targets. No cash awards will be made to participants if actual Company performance does not exceed the minimum target performance measures. The calculation used to determine the necessary accrual uses a combination of actual results and projected results. We believe that our estimates are based upon outcomes that are reasonably likely to occur. These estimates and assumptions are based on historical results as well as future expectations. Actual results could vary from our estimates and assumptions.
New and Future Accounting Pronouncements
See Footnote “Significant Accounting Policies” of the “Notes to Consolidated Financial Statements.”
25