What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 125 added, 116 removed, 106 unchanged (69% of the section changed)

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & Defense and

Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including

project management, design, testing, prototyping, manufacturing, supply chain management and post-market services.

Our products are

complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board

assemblies, complex higher-level assemblies and other box builds for a wide range of industries.

We serve three major markets within

the EMS industry:

Medical, Aerospace and Defense, and the Industrial market which includes industrial capital equipment,

transportation, vision, agriculture, oil and gas.

As of June 30, 2024, we have facilities in Minnesota:

Bemidji, Blue Earth,

Mankato, Milaca and Maple Grove (corporate office).

We also have facilities in Monterrey, Mexico and Suzhou, China.

In May, 2024, we announced the

closure of our Blue Earth facility by the end of 2024 and moving its operations to our Bemidji facility.

All dollar amounts are stated in thousands of U.S.

are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & Defense and Industrial

markets offering a full range of value-added engineering, technical and manufacturing services and support including project management,

design, testing, prototyping, manufacturing, supply chain management and post-market services.

Our products are complex electromedical

and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level

assemblies and other box builds for a wide range of industries.

We serve three major markets within the EMS industry:

Medical, Aerospace

and Defense, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas.

As of September 30, 2024, we have facilities in Minnesota:

Bemidji, Blue Earth, Mankato, Milaca and Maple Grove (corporate office).

also have facilities in Monterrey, Mexico and Suzhou, China.

In May, 2024, we announced the closure of our Blue Earth facility by the

end of 2024 and moving its operations to our Bemidji facility.

dollar amounts are stated in thousands of U.S.

of Operations

Net sales for the three months ended June 30, 2024 and 2023 were $33,891 and $35,021, respectively, a decrease

of $1,130 or 3.2%.

Net sales for the six months ended June 30, 2024 and 2023 were $68,106 and $69,909, respectively,

a decrease of $1,803 or 2.6%.

Net sales for the three months ended September 30, 2024 and 2023 were $31,407 and $33,369, respectively, a decrease of $1,962

Net sales for the nine months ended September 30, 2024 and 2023 were $99,513 and $103,278, respectively, a decrease of $3,765

The following is a summary of net sales by our major industry markets:

Three Months Ended June 30,

Three Months Ended

September 30,

Increase (Decrease)

1 unchanged sentence

Total net sales

Six Months Ended June 30,

Nine Months Ended

September 30,

Increase (Decrease)

1 unchanged sentence

Total net sales

Net sales to our medical customers decreased $2,736, or 13.3%, in the three months ended June 30, 2024 as compared with

the same period in 2023, and $5,002, or 11.9%, in the six months ended June 30, 2024 as compared with the same period in

The decrease was primarily due to inventory re-balancing with existing customers, timing of customer product launches and lower

average sales prices in anticipation of moving several programs for one customer to our Monterrey, Mexico facility.

Net sales to our industrial customers increased $326, or 3.6%, in the three months ended June 30, 2024 as compared with

the same period in 2023, and $446, or 2.4%, in the six months ended June 30, 2024 as compared with the same period in 2023.

The increase in net sales was primarily due to stronger demand with existing customers.

Net sales to our aerospace and defense customers were up $1,280, or 23.9%, in the three months ended June 30, 2024 as compared

with the same period in 2023, and $2,754, or 29.3% in the six months ended June 30, 2024 as compared with the same period

The increase in net sales relates to increasing demand in the aerospace and defense market, and improved supply chain availability

of component materials.

Our 90-day shipment backlog as of June 30, 2024 was $30,095, down 14.5% from March 31, 2024, and 12.2% from the prior-year

Net sales to our medical customers increased $212, or 1.2%, in the three months ended September 30, 2024 as compared with the same

period in 2023, and decreased $5,823, or 9.7%, in the nine months ended September 30, 2024 as compared with the same period in 2023.

The decrease in the nine-month comparison was primarily due to inventory re-balancing with existing customers, timing of customer

product launches and lower average sales prices in anticipation of moving several programs for one customer to our Monterrey, Mexico

facility which will be completed in the fourth quarter of 2024.

Net sales to our industrial customers decreased $2,001, or 19.2%, in the three months ended September 30, 2024 as compared with the

same period in 2023, and $1,323, or 4.6%, in the nine months ended September 30, 2024 as compared with the same period in 2023.

decrease in net sales was primarily due to industrial customer’s efforts to reduce their inventory investments, delayed program launches with several customers as well as sales

headwinds in several markets for which we provide products for these customers.

Net sales to our aerospace and defense customers decreased $173, or 3.4%, in the three months ended September 30, 2024,

as compared with the same period in 2023, and increased $3,381, or 23.3% in the nine months ended September 30, 2024, as compared

with the same period in 2023.

The increase in net sales in the nine-month comparison relates to increasing demand in the aerospace

and defense market, and improved supply chain availability of component materials.

Our 90-day shipment backlog as of September 30, 2024 was $29,631, down 1.5% from June 30, 2024, and 12.3% from the prior-year comparable

Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to

be shipped within 180 days.

total order backlog as of September 30, 2024 was $69,770, a 4.8% decrease from the prior quarter end and a 31.8% decrease from the prior-year

comparable quarter end.

Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining

amounts to be shipped within 180 days.

total order backlog as of June 30, 2024 was $73,296, a 14.8% decrease from the prior quarter end and a 27.4% decrease from the

prior-year comparable quarter end.

As the supply chain lead times have normalized, customers are returning to their pre-pandemic

ordering practices, which has resulted in a decrease in our backlog.

More recently we are also noting reduced visibility to revenues

in the next several quarters as customers are rebalancing their inventories

and, therefore, deferring the placement of some orders.

shipment and total backlog by our major industry markets are as follows:

June 30, 2024

March 31, 2024

As the supply chain lead times have normalized, customers are returning to their pre-pandemic ordering practices,

which has resulted in a decrease in our backlog.

We continue to experience reduced visibility to revenues in the next several quarters

as customers are rebalancing their inventories and, therefore, deferring the placement of some orders.

and total shipment backlog by our major industry markets are as follows:

September 30, 2024

June 30, 2024

September 30, 2023

Aerospace and defense

Total backlog

90-day and total backlog as of June 30, 2024 includes orders already recognized in net sales and included in the contract asset value

90-day and total backlog as of September 30, 2024 includes orders already recognized in net sales and included in the contract asset

value of $15,058.

Costs and Expenses.

sales, cost of goods sold, gross profit, and operating costs were as follows:

Three Months Ended June 30,

Three Months Ended September 30,

Increase/(Decrease)

1 unchanged sentence

Gross margin percentage (1)

(200 ) bpc (2)

% of Net sales

9 unchanged sentences

points change in gross margin percentage.

Six Months Ended June 30,

Nine Months Ended September 30,

Increase/(Decrease)

1 unchanged sentence

Gross margin percentage (1)

(90 ) bpc (2)

% of Net sales

10 unchanged sentences

profit and gross margins.

Gross profit as a percent of net sales was 13.6% and 15.6% for the three months ended June 30, 2024

Gross profit as a percent of net sales was 12.2% and 15.9% for the three months ended September 30, 2024

and 2023, respectively.

Gross profit as a percent of net sales was 14.8% and 15.7% for the six months ended June 30, 2024 and 2023,

Gross profit as a percent of net sales was 14.0% and 15.8% for the nine months ended September 30, 2024 and 2023,

respectively.

The decrease in gross profit as a percentage of net sales in the 2024 periods as compared with the same prior-year

periods was the result of lower net sales, as discussed above, and reduced facility utilization.

Selling expenses as measured as a percent of net sales, were relatively flat in the three and six months ended June 30,

2024 and 2023.

The decrease in gross profit as a percentage of net sales in 2024 as compared with the same prior-year periods was the

result of lower net sales, as discussed above, and corresponding lower operating leverage from reduced production at a number of our manufacturing facilities.

Selling expenses were decreased slightly in the three and nine months ended September 30, 2024 and 2023 as the result of

lower incentive compensation accruals in the current-year periods.

and administrative expenses.

General and administrative expenses decreased in the 2024 periods as compared with the 2023 periods

as the result of lower incentive compensation accruals in the current-year periods, and ,as a percent of net sales, remained relatively

General and administrative expenses decreased slightly in the 2024 periods as compared with the 2023

periods as the result of lower incentive compensation accruals in the current-year periods.

Restructuring

Restructuring charges were $91 in the three and six months ended June 30, 2024 for accrued employee retention bonuses

for our facility consolidation and closure of our Blue Earth facility.

We expect to incur approximately $800 of cash restructuring

costs, including employee retention and facility moving cost in 2024, of which substantially all are expected to be incurred and paid

by December 2024.

Operating income for the three months ended June 30, 2024 and 2023 were $344 or 1.0% of net sales, and $1,099 or 3.1% of net sales, respectively.

Operating income for the six months ended June 30, 2024 and 2023 were $1,499 or 2.3% of

net sales and $2,152 or 3.1% of net sales, respectively.

Decreases in both periods were driven by the decrease in net sales and

resulting gross margin.

Interest expense was $165 and $125 for the three months ended June 30, 2024 and 2023, respectively.

expense was $332 and $235 for the six months ended June 30, 2024 and 2023, respectively.

This increase was driven by

higher borrowings under our line of credit arrangement.

Refer to “Liquidity and Capital Resources” for further discussion

of financing arrangements.

Our effective tax rate for the three and six months ended June 30, 2024 was 12% and 21%.

Our effective tax rate for the three

and six months ended June 30, 2023 was 35% and 31%.

The decrease in the effective tax rate is attributable to the application of a valuation

allowance during the three and six month periods ended June 30, 2023 and inclusion of estimated research and development tax credits

in the three and six months ended June 30, 2024, partially offset by increased taxes on foreign entities.

Restructuring charges were $176 and $267 in the three and nine months ended September 30, 2024, respectively, for accrued

employee retention bonuses for our facility consolidation and closure of our Blue Earth facility.

We expect to incur approximately $800

of cash restructuring costs, including employee retention and facility moving cost in 2024, of which substantially all are expected to

be incurred and paid by December 2024.

Operating (loss) income for the three months ended September 30, 2024 and 2023 were $(467) or (1.5)% of net sales, and $1,124

or 3.4% of net sales, respectively.

Operating income for the nine months ended September 30, 2024 and 2023 were $1,032 or 1.0% of net

sales and $3,276 or 3.2% of net sales, respectively.

Decreases in both periods were driven by the decrease in net sales and resulting

gross margin.

Interest expense was $216 and $130 for the three months ended September 30, 2024 and 2023, respectively.

Interest expense

was $548 and $365 for the nine months ended September 30, 2024 and 2023, respectively.

This increase was driven by higher borrowings

under our line of credit arrangement.

Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.

Our effective tax rate for the three and nine months ended September 30, 2024 was 8% and 62%, respectively.

Our effective

tax rate for the three and nine months ended September 30, 2023 was (21%) and 13%, respectively.

The primary drivers of the change in

rate relate to changes in pretax book income and the 2023 U.S.

federal provision to return adjustments recorded in the third quarter

of 2024, partially offset by realization of deferred tax assets in the 2024 periods as the Company removed its valuation allowance in

the fourth quarter of 2023.

Flow Operating Results

following is a summary of cash flow results:

Six Months Ended June 30,

Nine Months Ended September 30,

Cash provided by (used in):

4 unchanged sentences

Net change in cash and cash equivalents

Cash used in operating activities was $1,458 in the first six months of 2024, compared with cash provided of

Cash used in operating activities was $3,043 in the first nine months of 2024, compared with cash provided of $2,181

in the same prior-year period.

Significant changes in operating assets and liabilities affecting cash flows during these

periods included:

provided by accounts receivable and contract assets was $1,214 in the six months ended June 30, 2024 as compared with cash

Significant changes in operating assets and liabilities affecting cash flows during these periods included:

provided by accounts receivable and contract assets was $2,150 in the nine months ended September 30, 2024 as compared with cash

usage of $1,942 in the same prior-year period.

The improved cash flow in the current year was due an expected increase in

cash collections due to higher sales and the timing of customer payments in the fourth quarter of 2023 as compared with the fourth

quarter of 2022.

used in inventory was $1,288 in the six months ended June 30, 2024 as compared with cash provided of $1,350 in

the prior-year period.

The increase in the current-year period cash usage was the result of normal timing variances of inventory

purchases and timing of product shipments and increased inventory levels to support the transition of manufacturing from our Blue

Earth facility to our Bemidji plant.

used by changes in accounts payable was $2,546 in the current-year period as compared with cash provided of $586 in the same prior-year period, primarily related to the timing of cash payments.

provided by customer deposits was $1,385 in the six months ended June 30, 2024 as compared with cash used of $195 in the same

prior-year period which is driven by timing of customer deposits received before the quarter end.

Cash used in investing activities was $408 in the first six months of 2024, compared with cash used of $956 in the same prior-year period, both primarily for capital expenditures.

Cash provided by financing activities was $2,343 in the first six months of 2024, compared with cash provided

of $144 in the same prior-year period.

The increase in cash provided by financing activities resulted from the cash used for

working capital in the six months ended June 30, 2024.

The improved cash flow in the current year was due to the timing of customer payments

in the fourth quarter of 2023 as compared with the fourth quarter of 2022, both of which impacted cash collections in the subsequent

used in inventory was $922 in the nine months ended September 30, 2024 as compared with cash provided of $899 in the prior-year period.

The increase in the current-year period cash usage was the result of normal timing variances of inventory purchases and timing of

product shipments and increased inventory levels to support the transition of manufacturing from our Blue Earth facility to our Bemidji

used by changes in accounts payable was $3,609 in the current-year period as compared with cash use of $1,636 in the same prior-year

period, primarily related to the timing of cash payments.

provided by customer deposits was $1,195 in the nine months ended September 30, 2024 as compared with cash provided of $345 in the

same prior-year period which is driven by timing of customer deposits received before the quarter end.

Cash used in investing activities was $971 in the first nine months of 2024, compared with cash used of $1,121 in the

same prior-year period, both primarily for capital expenditures.

Cash provided by financing activities was $3,561in the first nine months of 2024, compared with cash used of $2,388 in

the same prior-year period.

The increase in cash provided by financing activities resulted from the cash used for working capital in

the nine months ended September 30, 2024.

and Capital Resources

10 unchanged sentences

The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges

coverage ratio, both of which are defined in the Revolver agreement.

The Company met the covenants for the period ended June 30,

There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings.

The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements,

abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital

expenditures.

The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027.

compliance with all the financial covenants related to this agreement as of and for the period ended June 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in excess of the amounts allowed under the

We have received a waiver of this event of default from the bank.

Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage

ratio, both of which are defined in the Revolver agreement.

The Company met the covenants for the period ended September 30, 2024.

are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings.

contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder

dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.

The Revolver is secured

by substantially all the Company’s assets and expires on February 28, 2027.

We were in compliance with all the financial covenants

related to this agreement as of and for the period ended September 30, 2024, except for the covenant related to operating expense contributions

to our Mexican operations in the first and second quarters of 2024 in excess of the amounts allowed under the Revolver.

a waiver of this event of default from the bank in August 2024.

the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index

2 unchanged sentences

Our line of credit bears

interest at a weighted-average interest rate of 8.0% and 8.3% as of June 30, 2024 and December 31, 2023, respectively.

interest at a weighted-average interest rate of 7.9% and 8.3% as of September 30, 2024 and December 31, 2023, respectively.

We had borrowings

on our line of credit of $8,360 and $5,846 outstanding as of June 30, 2024 and December 31, 2023, respectively.

of June 30, 2024 we had unused availability on the line of credit of $6,440.

on our line of credit of $9,550 and $5,846 outstanding as of September 30, 2024 and December 31, 2023, respectively.

As of September

30, 2024 we had unused availability on the line of credit of $5,450.

The Company has an interim funding agreement as of

September 30, 2024 with a bank related to $317 of deposits made on equipment purchases that will be funded through a finance lease when

the equipment is received and operational.

As of September 30, we have $317 outstanding on the interim funding agreement for equipment

we expect to receive in the fourth quarter of 2024.

The line of credit is shown net of debt issuance costs of $42 and $31 on the condensed consolidated balance sheet

as of September 30, 2024 and December 31, 2023, respectively.

Sheet Arrangements

30 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis