What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-14 compared with 2024-11-07 · 182 added, 152 removed, 79 unchanged (81% 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 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.

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

are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical Device, Medical Imaging, Aerospace

and 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.

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.

As of December 31, 2024, we have facilities

in Minnesota:

Bemidji, Mankato, Milaca and Maple Grove.

We closed our facility in Blue Earth, Minnesota in December 2024 and are currently

seeking to sell this facility.

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

net sales are derived from complex designed products built to the customers’ specifications.

The products we manufacture are engineered

and designed products that require sophisticated manufacturing support.

Quality, on-time delivery, and reliability are of upmost importance.

Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early

engagement design, and development strategy.

We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements

to increase asset utilization, reduce lead times and provide competitive pricing.

strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness

by expanding our global footprint.

Our industrial and defense markets are focused on improving our asset utilization and profitability

while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid

dollar amounts are stated in thousands of U.S.

Restructuring Activities

In fiscal year 2024, the Company

initiated a restructuring plan related to the closure of its Blue Earth, MN facility.

During the quarter ended March 31, 2025, the

Company had restructuring charges related to staff reductions and activities related to the Blue Earth facility closure.

estimated cost of these restructuring programs is approximately $850, of which $571 was recorded in the prior fiscal year.

charges relate to employee severance and facility closure costs.

We do not expect significant additional expenses related

to this plan.

of Operations

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

September 30,

Increase (Decrease)

Aerospace and defense

Total net sales

Nine Months Ended

September 30,

Net sales for the three months ended March 31, 2025 and 2024 were $26,895 and $34,215, respectively, a decrease of $7,320

Net sales in the first quarter of 2025 were negatively impacted by delays in Aerospace and Defense customer approvals of products

transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related

to the movement of various production between plants.

We expect these matters to be positively resolved over the next two quarters.

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

Three Months Ended March 31,

Increase (Decrease)

Medical Device

Medical Imaging

Aerospace and Defense

Total net sales

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

Net sales to our medical customers decreased $2,668, or 24.8%, in the three months ended March 31, 2025 as compared with

the same period in 2024.

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

launches and lower productivity as we managed our facility consolidation.

Net sales to our Medical Imaging customers decreased $956, or 10.0%, in the three months ended March 31, 2025 as compared with

the same period in 2024.

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

launches and lower manufacturing productivity arising from the transfer of production between facilities.

Net sales to our industrial customers decreased $1,128, or 14.0%, in the three months ended March 31, 2025, as compared with the

same period in 2024.

The decrease in net sales was primarily due to customer order delays and part shortages.

Net sales to our aerospace and defense customers were down $2,568, or 43.8%, in the three months ended March 31, 2025, as compared

with the same period in 2024.

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.

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

The decrease in net sales relates to delays in customer approvals as we have consolidated this business

into our Bemidji facility.

Our 90-day shipment backlog as of March 31, 2025 was $26,742, an increase of 1.1% from $26,451 at the beginning of the quarter, and

a 24.1% decrease from March 31, 2024.

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 March 31, 2025, was $68,332, a 3.8% increase from $65,852 at the beginning of the quarter and a 20.5% decrease

from the prior-year comparable quarter end as some customers are requesting much shorter order lead times, which has resulted in a decrease in our backlog.

As we develop deep strategic partnerships with these customers, we have agreed to these shorter lead times.

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.

addition, several of our Aerospace and Defense customers are delaying orders until they approve the move of production at our Bemidji

We expect the majority of those approvals to be completed by the end of the second quarter of 2025.

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

March 31, 2025

December 31, 2024

March 31, 2024

Medical Device

Medical Imaging

Aerospace and Defense

Total backlog

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.

90-day and total backlog as of March 31, 2025 includes orders already recognized in net sales and included in the contract asset value

Costs and Expenses.

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

Three Months Ended September 30,

Three Months Ended March 31,

Increase/(Decrease)

1 unchanged sentence

Gross margin percentage (1)

(450) bpc (2)

% of Net sales

1 unchanged sentence

% of Net sales

Restructuring charges

% of Net sales

Research and development

% of Net sales

Operating income

% of Net sales

margin percentage is defined as gross profit as a percentage of net sales.

points change in gross margin percentage.

Nine Months Ended September 30,

Increase/(Decrease)

Cost of goods sold

Gross margin percentage (1)

% of Net sales

General and administrative

% of Net sales

Restructuring charges

% of Net sales

Research and development

% of Net sales

Operating income

Operating (loss) income

% of Net sales

1 unchanged sentence

points change in gross margin percentage.

During the three months ended March 31, 2025, the Company modified the responsibilities and reporting relationships of certain customer-facing

As a result of these organizational changes, the related costs, which were previously classified as cost of sales, are now reported

as selling expenses to better reflect the nature of the activities performed.

profit and gross margins.

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 14.0% and 15.8% for the nine months ended September 30, 2024 and 2023,

Gross profit as a percent of net sales was 11.4% and 15.9% for the three months ended March 31, 2025, and

2024, respectively.

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.

The decrease in gross profit as a percentage of net sales in the 2025 period as compared with the same prior-year

period was the result of lower net sales, as discussed above, reduced facility utilization and decreased manufacturing productivity.

Selling expenses .

Selling expenses,

as measured as a percent of net sales , was 4.4% and 2.3% for the three months ended March 31, 2025, and 2024, respectively.

increase is a result of realignment of our customer facing managers that were previously included in cost of sales to selling expense

as well as the impact of fixed costs on a lower revenue base.

and administrative expenses.

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.

General and administrative expenses decreased in the 2025 period as compared with the 2024 period as

the result of lower incentive compensation accruals in the current year.

Restructuring

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.

Restructuring charges were $266 in the three months ended March 31, 2025 for severance charges for a February 2025

reduction in force to align staffing to our forecasted net sales of $235 and expenses related to our closed Blue Earth

facility of $31.

(loss) income.

Operating loss for the three months ended March 31, 2025 was ($1,613) or (6.0)% of net sales.

Operating income

for the three months ended March 31, 2024 was $1,155 or 3.4% of net sales.

Decrease in the period was driven by the decrease in net

sales and resulting gross margin.

Interest expense was $214 and $167 for the three months ended March 31, 2025 and 2024, 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 ended March 31, 2025 was 28.0%.

Our effective tax rate for the three months ended March

31, 2024 was 22.6%.

The primary drivers of the increase in effective tax rate were changes in pretax (loss) income and an increase in

the GILTI inclusion.

Flow Operating Results

following is a summary of cash flow results:

Nine Months Ended September 30,

Three Months Ended March 31,

Cash provided by (used in):

4 unchanged sentences

Net change in cash and cash equivalents

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

Cash used in operating activities was $2,930 in the first three months of 2025, compared with cash provided of $2,828

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 $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 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

used by accounts receivable was $814 in the three months ended March 31, 2025 as compared with cash provided of $3,215 in the same

prior-year period.

The use of cash in the three months ended March 31, 2025 is largely due to timing of customer shipments and cash

The cash provided in the prior year was due an expected increase in cash collections due to higher sales and the timing

of customer payments.

Cash provided by inventory was $487 in the three months ended March

31, 2025 as compared with cash used of $1,400 in the prior-year period.

The decrease in the current-year period cash usage was the

result of normal timing variances of inventory purchases and timing of product shipments.

We plan to actively reduce inventory

balances over the next several quarters.

used by changes in accounts payable was $1,441 in the current-year period as compared with cash used of $8 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

Cash used in investing activities was $268 in the first three months of 2025, compared with cash used of $735 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.

Cash provided by financing activities was $3,446 in the first three months of 2025, compared with cash provided of $274

in the same prior-year period.

The increase in cash provided by financing activities resulted from the line of credit advances for working

capital and operations in the three months ended March 31, 2025.

and Capital Resources

believe that our existing financing arrangements, anticipated cash flows from operations and cash on hand will be sufficient to satisfy

our working capital needs for the next twelve months, capital expenditures and debt repayments.

We had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provided for a line of credit

arrangement of $16,000, that was to expire on June 15, 2026.

February 29, 2024, we replaced the asset backed line of credit agreement with a $15,000 Senior Secured Revolving Line of Credit with

Bank of America (the “Revolver”).

The Revolver allows for borrowings at a defined base rate, or at the one, three or six

month Secured Overnight Finance Rate, also known as “SOFR,” plus a defined margin.

If the Company prepays SOFR borrowings

before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement.

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

our working capital needs, capital expenditures and debt repayments for the next twelve months.

February 29, 2024, we entered into a $15,000 Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”).

The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known

as “SOFR,” plus a defined margin.

If the Company prepays SOFR borrowings before their contractual maturity, the Company has

agreed to compensate the bank for lost margin, as defined in the Revolver agreement.

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 September 30, 2024.

These ratios are calculated based on trailing twelve-month results.

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

3 unchanged sentences

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

Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset

borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate.

Our line of credit bears

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 $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.

We were not in compliance with financial covenants

related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024.

We have received

a waiver of this event of default from the bank.

On March 27, 2025, we amended (the “First Amendment”) the Revolver to waive

our non-compliance with the leverage ratio and minimum fixed charge ratio as of December 31, 2024, and March 31, 2025.

Provisions of the First Amendment relating to the Company’s compliance

with these ratios were replaced with provisions of the Second Amendment (described below).

Provisions of the First Amendment relating

to minimum EBITDA requirements of the Company were replaced with provisions of the Second Amendment (described below).

Provisions of the

First Amendment requiring the Company to maintain unrestricted cash and Revolver availability (collectively, “Liquidity”)

at specified levels were replaced with provisions of the Second Amendment (described below).

The First Amendment also requires the Company to provide incremental monthly reporting and increased

the Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver.

May 14, 2025, we further amended (the “Second Amendment”) the Revolver, which amended the First Amendment in part, to defer the Company’s compliance with

the leverage ratio and minimum fixed charge ratio until the fourth quarter of 2025 at which time the Company must maintain (a) a leverage

ratio of 2.5 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter;

and (b) a minimum

fixed charge coverage ratio to 1.25 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter.

The Company must also maintain adjusted EBITDA (earnings before interest, taxes depreciation and amortization), as defined in the Revolver,

as of the end of the second quarter of 2025 of at least $1,000, the third quarter of 2025 of at least $1,300 and the fourth quarter of

2025 and each quarter thereafter of at least $1,600.

In addition, the Second Amendment requires the Company to always maintain

Liquidity of at least $2,500.

The Second Amendment accelerated the expiration of the Revolver to June 30, 2026 and increases the borrowing rate by 25 basis points.

Revolver, as amended, bears interest at a weighted-average interest rate of 7.2% and 7.7% as of March 31, 2025 and December 31, 2024,

respectively.

We had borrowings on our line of credit of $11,955 and $8,695 outstanding as of March 31, 2025 and December 31, 2024, respectively.

As of March 31, 2025, we had unused availability on the line of credit of $3,045, which is subject to a month end cap based on the previously

noted minimum Liquidity.

Company has an interim funding agreement as of March 31, 2025 with a bank related to deposits made on equipment purchases that will be

funded through a finance lease when the equipment is received and operational.

As of March 31, 2025 we have $563 outstanding on the interim

funding agreement for equipment.

Net sales in the first quarter of 2025 and fourth quarter of 2024 were

negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our

Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants.

We expect these matters to be resolved over the next two quarters.

The Company has implemented plant optimization activities and our cost

cutting initiatives in the first quarter of 2025 to address losses.

These actions plus the planned reduction in inventory levels are intended

to drive reduced borrowings during the remainder of 2025.

The Company believes it has sufficient capital and liquidity to operate its

business for at least twelve months from the filing of this Form 10-Q.

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