Company Quick10K Filing
Key Tronic
Price5.79 EPS-1
Shares11 P/E-8
MCap63 P/FCF-15
Net Debt47 EBIT-5
TEV110 TEV/EBIT-22
TTM 2019-09-28, in MM, except price, ratios
10-Q 2020-03-28 Filed 2020-05-06
10-Q 2019-12-28 Filed 2020-02-05
10-Q 2019-09-28 Filed 2019-11-07
10-K 2019-06-29 Filed 2019-09-12
10-Q 2019-03-30 Filed 2019-05-08
10-Q 2018-12-29 Filed 2019-02-07
10-Q 2018-09-29 Filed 2018-11-08
10-K 2018-06-30 Filed 2018-09-10
10-Q 2018-03-31 Filed 2018-05-09
10-Q 2017-12-30 Filed 2018-02-08
10-Q 2017-09-30 Filed 2017-11-09
10-K 2017-07-01 Filed 2017-09-11
10-Q 2017-04-01 Filed 2017-05-04
10-Q 2016-12-31 Filed 2017-02-09
10-Q 2016-10-01 Filed 2016-11-10
10-K 2016-07-02 Filed 2016-09-09
10-Q 2016-04-02 Filed 2016-05-10
10-Q 2015-12-26 Filed 2016-02-04
10-Q 2015-09-26 Filed 2015-11-05
10-K 2015-06-27 Filed 2015-09-04
10-Q 2015-03-28 Filed 2015-05-06
10-Q 2014-12-27 Filed 2015-02-05
10-Q 2014-09-27 Filed 2014-11-06
10-K 2014-06-28 Filed 2014-09-05
10-Q 2014-03-29 Filed 2014-05-08
10-Q 2013-12-28 Filed 2014-02-05
10-Q 2013-09-28 Filed 2013-11-06
10-K 2013-06-29 Filed 2013-09-06
10-Q 2013-03-30 Filed 2013-05-08
10-Q 2012-12-29 Filed 2013-02-06
10-Q 2012-09-29 Filed 2012-11-09
10-K 2012-06-30 Filed 2012-09-10
10-Q 2012-03-31 Filed 2012-05-14
10-Q 2011-12-31 Filed 2012-02-13
10-Q 2011-10-01 Filed 2011-11-14
10-K 2011-07-02 Filed 2011-09-12
10-Q 2011-04-02 Filed 2011-05-13
10-Q 2011-01-01 Filed 2011-02-11
10-Q 2010-10-02 Filed 2010-11-12
10-K 2010-07-03 Filed 2010-09-13
10-Q 2010-04-03 Filed 2010-05-11
10-Q 2009-12-26 Filed 2010-02-09
8-K 2020-08-17 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2020-07-31 Earnings, Exhibits
8-K 2020-07-23 Officers
8-K 2020-04-28
8-K 2020-04-27
8-K 2020-04-23
8-K 2020-04-09
8-K 2020-02-04
8-K 2020-01-21
8-K 2019-10-29
8-K 2019-10-25
8-K 2019-08-06
8-K 2019-07-26
8-K 2019-07-24
8-K 2019-04-30
8-K 2019-04-10
8-K 2019-01-29
8-K 2018-12-27
8-K 2018-10-30
8-K 2018-10-26
8-K 2018-10-01
8-K 2018-09-05
8-K 2018-08-07
8-K 2018-07-27
8-K 2018-05-01
8-K 2018-05-01
8-K 2018-01-30

KTCC 10Q Quarterly Report

Part I: Financial Information
Item 1: Financial Statements
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information:
Item 1. Legal Proceedings
Item 1A. Risk Factors
EX-31.1 q32020exhibit311.htm
EX-31.2 q32020exhibit312.htm
EX-32.1 q32020exhibit321.htm
EX-32.2 q32020exhibit322.htm

Key Tronic Earnings 2020-03-28

Balance SheetIncome StatementCash Flow
2852281711145702012201420172020
Assets, Equity
130101724314-152012201420172020
Rev, G Profit, Net Income
503010-10-30-502012201420172020
Ops, Inv, Fin

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________________ 
FORM 10-Q
 ____________________________________________________________ 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2020
OR
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD FROM             TO             .
Commission File Number 0-11559
 ____________________________________________________________ 
KEY TRONIC CORPORATION
(Exact name of registrant as specified in its charter)
 ____________________________________________________________ 
Washington
91-0849125
(State of Incorporation)
(I.R.S. Employer Identification No.)
N. 4424 Sullivan Road
Spokane Valley, Washington 99216
(509) 928-8000
  ____________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements during the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, no par value
KTCC
NASDAQ Global Market
As of May 4, 2020, 10,759,680 shares of common stock, no par value (the only class of common stock), were outstanding.




KEY TRONIC CORPORATION
Index
 
 
 
Page No.
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8-21
 
 
 
Item 2.
21-34
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds*
 
 
 
 
Item 3.
Defaults upon Senior Securities*
 
 
 
 
Item 4.
Mine Safety Disclosures*
 
 
 
 
Item 5.
Other Information*
 
 
 
 
Item 6.
 
 
 * Items are not applicable
“We,” “us,” “our,” “Company,” “KeyTronicEMS” and “KeyTronic,” unless the context otherwise requires, means Key Tronic Corporation and its subsidiaries.




PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands; except share data)
 
 
March 28, 2020
 
June 29, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,302

 
$
601

Trade receivables, net of allowance for doubtful accounts of $609 and $58
77,329

 
58,429

Contract assets
17,681

 
22,161

Inventories, net
114,052

 
100,431

Other
19,597

 
16,477

Total current assets
229,961

 
198,099

Property, plant and equipment, net
30,594

 
29,413

Operating lease right-of-use assets, net
15,347

 

Other assets:
 
 
 
Deferred income tax asset
9,825

 
7,840

Other intangible assets, net

 
657

Other
2,676

 
2,301

Total other assets
12,501

 
10,798

Total assets
$
288,403

 
$
238,310

LIABILITIES AND SHAREHOLDERS EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
71,893

 
$
73,571

Accrued compensation and vacation
6,702

 
6,759

Current portion of debt, net
7,508

 
5,841

Other
15,470

 
7,233

Total current liabilities
101,573

 
93,404

Long-term liabilities:
 
 
 
Term loans
5,210

 
7,091

Revolving loan
57,236

 
23,356

Operating lease liabilities
10,327

 

Other long-term obligations
1,117

 

Total long-term liabilities
73,890

 
30,447

Total liabilities
175,463

 
123,851

Commitments and contingencies (Note 9)

 

Shareholders’ equity:
 
 
 
Common stock, no par value—shares authorized 25,000; issued and outstanding 10,760 and 10,760 shares, respectively
46,880

 
46,680

Retained earnings
68,639

 
65,353

Accumulated other comprehensive gain (loss)
(2,579
)
 
2,426

Total shareholders’ equity
112,940

 
114,459

Total liabilities and shareholders’ equity
$
288,403

 
$
238,310

See accompanying notes to consolidated financial statements.

3



KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited, in thousands, except share and per share amounts)
 
 
Three Months Ended
 
Nine Months Ended
 
March 28, 2020
 
March 30, 2019
 
March 28, 2020
 
March 30, 2019
Net sales
$
111,455

 
$
107,954

 
$
333,462

 
$
358,463

Cost of sales
102,207

 
101,147

 
306,819

 
332,243

Gross profit
9,248

 
6,807

 
26,643

 
26,220

Research, development and engineering expenses
1,749

 
1,398

 
5,129

 
4,955

Selling, general and administrative expenses
5,735

 
5,497

 
15,713

 
16,184

Impairment of goodwill and intangibles

 
12,448

 

 
12,448

Total operating expenses
7,484

 
19,343

 
20,842

 
33,587

Operating income (loss)
1,764

 
(12,536
)
 
5,801

 
(7,367
)
Interest expense, net
754

 
720

 
1,988

 
2,105

Income (loss) before income taxes
1,010

 
(13,256
)
 
3,813

 
(9,472
)
Income tax provision (benefit)
100

 
(1,275
)
 
527

 
(673
)
Net income (loss)
$
910

 
$
(11,981
)
 
$
3,286

 
$
(8,799
)
Net income (loss) per share — Basic
$
0.08

 
$
(1.11
)
 
$
0.31

 
$
(0.82
)
Weighted average shares outstanding — Basic
10,760

 
10,760

 
10,760

 
10,760

Net income (loss) per share — Diluted
$
0.08

 
$
(1.11
)
 
$
0.30

 
$
(0.82
)
Weighted average shares outstanding — Diluted
10,885

 
10,760

 
10,813

 
10,760

See accompanying notes to consolidated financial statements.

4



KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
 
 
Three Months Ended
 
Nine Months Ended
  
March 28, 2020
 
March 30, 2019
 
March 28, 2020
 
March 30, 2019
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
910

 
$
(11,981
)
 
$
3,286

 
$
(8,799
)
     Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on hedging instruments, net of tax
(4,836
)
 
859

 
(5,005
)
 
3,019

Comprehensive income (loss)
$
(3,926
)
 
$
(11,122
)
 
$
(1,719
)
 
$
(5,780
)
Other comprehensive income (loss) for the three months ended March 28, 2020 and March 30, 2019, is reflected net of tax expense (benefit) of approximately $(1.4) million and $0.2 million, respectively. Other comprehensive income (loss) for the nine months ended March 28, 2020 and March 30, 2019, is reflected net of tax expense (benefit) of approximately $(1.5) million and $0.8 million, respectively.
See accompanying notes to consolidated financial statements.

5


KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited, in thousands)
 
Nine Months Ended
 
March 28, 2020
 
March 30, 2019
Operating activities:
 
 
 
Net income (loss)
$
3,286

 
$
(8,799
)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
 
 
 
Goodwill and intangible assets impairment

 
12,448

Depreciation and amortization
3,996

 
5,520

Amortization of deferred loan costs
22

 
22

Provision for obsolete inventory
76

 
70

Provision for warranty
125

 
67

Provision for doubtful accounts
551

 
58

Loss on disposal of assets
207

 

Share-based compensation expense
200

 
354

Deferred income taxes
(525
)
 
(936
)
Changes in operating assets and liabilities:
 
 
 
Trade receivables
(19,456
)
 
5,534

Contract assets
4,480

 
(8,232
)
Cash received from arbitration settlement

 
6,684

Inventories
(13,697
)
 
3,639

Other assets
(9,068
)
 
(3,648
)
Accounts payable
(1,679
)
 
(7,439
)
Accrued compensation and vacation
(57
)
 
(1,769
)
Other liabilities
(522
)
 
(185
)
Cash (used in) provided by operating activities
(32,061
)
 
3,388

Investing activities:
 
 
 
Purchase of property and equipment
(5,921
)
 
(5,841
)
Proceeds from sale of fixed assets
696

 
17

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

 
4,768

Cash used in investing activities
(875
)
 
(1,056
)
Financing activities:
 
 
 
Payment of financing costs
(7
)
 
(11
)
Proceeds from issuance of long term debt
5,000

 

Repayments of long term debt
(5,236
)
 
(4,403
)
Borrowings under revolving credit agreement
148,303

 
140,047

Repayments of revolving credit agreement
(114,423
)
 
(138,143
)
Cash provided by (used in) financing activities
33,637

 
(2,510
)
Net increase (decrease) in cash and cash equivalents
701

 
(178
)
Cash and cash equivalents, beginning of period
601

 
343

Cash and cash equivalents, end of period
$
1,302

 
$
165

Non-cash investing activities:
 
 
 
Beneficial interest in transferred receivables
(5
)
 
(2,083
)
Supplemental cash flow information:
 
 
 
Interest payments
$
1,990

 
$
2,108

Income tax payments (refunds), net of refunds
$
426

 
$
(384
)
See accompanying notes to consolidated financial statements.

6



KEY TRONIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited, in thousands; except share data)

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 28, 2020
 
March 30, 2019
 
March 28, 2020
 
March 30, 2019
Total shareholders’ equity, beginning balances
 
$
116,808

 
$
124,226

 
$
114,459

 
$
118,081

 
 
 
 
 
 
 
 
 
Common stock (shares):
 
 
 
 
 
 
 
 
Beginning balances
 
$
10,760

 
$
10,760

 
$
10,760

 
$
10,760

Exercise of stock appreciation rights
 

 

 

 

Ending balances
 
10,760

 
10,760

 
10,760

 
10,760

 
 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
 
Beginning balances
 
$
46,821

 
$
46,518

 
$
46,680

 
$
46,244

Share-based compensation
 
59

 
80

 
200

 
354

Ending balances
 
46,880

 
46,598

 
46,880

 
46,598

 
 
 
 
 
 
 
 
 
Retained Earnings:
 
 
 
 
 
 
 
 
Beginning balances
 
$
67,729

 
$
76,517

 
$
65,353

 
$
72,806

Net income
 
910

 
(11,981
)
 
3,286

 
(8,799
)
ASC 606 opening balance sheet adjustment
 

 

 

 
529

Ending balances
 
68,639

 
64,536

 
68,639

 
64,536

 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income:
 
 
 
 
 
 
 
 
Beginning balances
 
$
2,257

 
$
1,191

 
$
2,426

 
$
(969
)
Unrealized gain (loss) on hedging instruments, net
 
(4,836
)
 
859

 
(5,005
)
 
3,019

Ending balances
 
(2,579
)
 
2,050

 
(2,579
)
 
2,050

Total shareholder’s equity, ending balances
 
$
112,940

 
$
113,184

 
$
112,940

 
$
113,184

See accompanying notes to consolidated financial statements.

7



KEY TRONIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The consolidated financial statements included herein have been prepared by Key Tronic Corporation and subsidiaries (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The year-end condensed consolidated balance sheet information was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The financial statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2019.
The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The three and nine month periods ended March 28, 2020 and March 30, 2019, were 13 and 39 week periods, respectively. Fiscal year 2020 will end on June 27, 2020, which is a 52 week year. Fiscal year 2019 which ended on June 29, 2019, was also a 52 week year.
The 2019 novel strain of coronavirus ("COVID-19") has resulted in business slowdowns or shutdowns in affected areas. In January 2020, the Company’s China facilities faced temporary shutdowns as a result of government mandates. In March 2020, these facilities began returning to full operation and the supply chain disruptions have been abating. In April 2020, the Company announced the temporary closure of its Juarez facilities, however, operations successfully resumed six days later.
Due to the COVID-19 pandemic, the Company has seen extreme shifts in demand from its customer base. The possibility of future temporary closures, as well as adverse fluctuations in customer demand, freight and expedite costs, precautionary safety expenses, collectibility of accounts, and future supply chain disruptions during the rapidly changing COVID-19 environment can materially impact operating results. Additionally, continued adverse macroeconomic conditions and significant currency exchange fluctuations can also materially impact operating results.
2.
Significant Accounting Policies
Earnings Per Common Share
Basic earnings per common share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the combination of other potentially dilutive weighted average common shares and the weighted average number of common shares outstanding during the period using the treasury stock method. The computation assumes the proceeds from the exercise of equity awards were used to repurchase common shares at the average market price during the period. The computation of diluted EPS does not assume conversion, exercise, or contingent issuance of common stock equivalent shares that would have an anti-dilutive effect on EPS.
Derivative Instruments and Hedging Activities
The Company has entered into foreign currency forward contracts, foreign currency swaps 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.
The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities and interest rate risk associated with certain borrowings under the Company’s term loan arrangement. The foreign currency forward contracts, foreign currency swaps and interest rate swap have terms that are matched to the underlying transactions being hedged. As a result, these transactions fully offset the hedged risk and no ineffectiveness has been recorded.

8



The Company’s foreign currency forward contracts, and interest rate swap potentially expose the Company to credit risk to the extent the counterparty may be unable to meet the terms of the agreement. The Company minimizes such risk by utilizing a counterparty with a strong credit rating. The Company’s counterparty to the foreign currency forward contracts, foreign currency swaps and interest rate swap is a major banking institution. This institution does not require collateral for the contracts, and the Company believes that the risk of the counterparty failing to meet their contractual obligations is remote. The Company does not enter into derivative instruments for trading or speculative purposes.
Income Taxes
We compute our interim income tax provision through the use of an estimated annual effective tax rate (ETR) applied to year-to-date operating results and specific events that are discretely recognized as they occur. In determining the estimated annual ETR, we analyze various factors, including projections of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual ETR.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.
We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments based on new assessments and changes in estimates and which may not accurately forecast actual outcomes. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. The tax years 1998 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.
Impairment of Goodwill and Other Intangible Assets
The Company records intangible assets that are acquired individually or with a group of other assets in the financial statements at acquisition. In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. The Company’s acquired intangible assets are subject to amortization over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. Refer to footnote 12 for recognition of intangible asset in accordance with ASC 842.
Recently Issued Accounting Standards
In March of 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which clarifies specific issues raised by stakeholders. Specifically, the ASU clarifies the following: 1) that all entities are required to provide the fair value option disclosures in ASC 825, Financial Instruments 2) clarifies that the portfolio exception in ASC 820, Fair Value Measurement, applies to nonfinancial items accounted for as derivatives under ASC 815, Derivatives and Hedging; 3) clarifies that for purposes of measuring expected credit losses on a net investment in a lease in accordance with ASC 326, Financial Instruments - Credit Losses, the lease term determined in accordance with ASC 842, Leases, should be used as the contractual term; 4) clarifies that when an entity regains control of financial assets sold, it should recognize an allowance for credit losses in accordance with ASC 326; and 5) aligns the disclosure requirements for debt securities in ASC 320, Investments - Debt Securities, with the corresponding requirements for depository and lending institutions in ASC 942, Financial Services - Depository and Lending. The amendments in the ASU have various effective dates and transition requirements which are dependent on timing of adoption of ASU 2016-13. The Company is currently assessing the effects on its consolidated financial statements, and it intends to adopt the guidance as they become effective.

9



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 February 2016, the FASB issued Accounting Standards Update ASC 2016-02, Leases which supersedes ASC 840 Leases and creates a new topic, ASC 842 Leases. This update requires lessees to recognize a lease asset and a lease liability for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. In July 2018, the FASB issued Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases. The update is intended to clarify certain aspects of the new lease standard, Topic 842. The amendments affect narrow aspects of the guidance issued in update 2016-02 discussed above. The amendments address residual value guarantees, the rate implicit in the lease, certain lessee and lessor reassessments, variable lease payments that depend on an index or rate, investment tax credits, lease term and purchase option, transition guidance and certain adjustments, impairment of the net investment in the lease, residual assets that are not guaranteed, as well as other areas of improvement and clarification. The amendments have the same effective date and transition requirements as the new lease standard.
The Company adopted ASC 842 on June 30, 2019 using the modified retrospective method for leases existing at, or entered into after, June 30, 2019. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before our adoption date. Management elected the package of practical expedients which, among other things, allows the Company to carry forward historical lease classification in place prior to June 30, 2019. ASC 842 also provides practical expedients for an entity’s accounting after transition. Management has elected the short-term lease recognition exemption for all leases that qualify, as well as the practical expedient to not separate lease and non-lease components. Both of these expedients were elected for all classes of underlying leased assets. As the Company cannot determine the interest rate implicit in the lease for its leases, the Company uses its estimate of the incremental borrowing rate as of the commencement date in determining the present value of lease payments. The Company’s estimated incremental borrowing rate is the rate of interest it would have to pay on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by either an option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise.
The adoption of ASC 842 had a material impact to the Company’s consolidated balance sheet, but did not materially impact the consolidated statement of income or consolidated statement of cash flows. The most significant changes to the consolidated balance sheet relate to the recognition of new right-of-use (ROU) assets and lease liabilities for operating leases.
As a result of adopting ASC 842 as of June 30, 2019, the Company recognized an ROU asset of $17.2 million, a corresponding lease liability of $16.2 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.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance is effective for the Company beginning in the first quarter of fiscal year 2024 with early adoption permitted. 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.
3.
Inventories
The components of inventories consist of the following (in thousands):
 
 
March 28, 2020
 
June 29, 2019
Finished goods
$
15,390

 
$
11,969

Work-in-process
19,346

 
11,705

Raw materials and supplies
79,316

 
76,757

 
$
114,052

 
$
100,431



Total inventory as of March 28, 2020 is net of $13.5 million of reserves, customer payments, and customer deposits compared to $10.0 million in reserves, customer payments, and customer deposits as of June 29, 2019.

10



4.
Long-Term Debt
On March 5, 2020, the Company entered into a Seventh amendment to the amended and restated credit agreement extending the limit on our line of credit facility to $65.0 million. Outside of the limit increase of the credit facility, the agreement reflects the same specifications and terms as the sixth amendment to the amended and restated credit agreement entered into by the Company on November 20, 2019; discussed below. As of March 28, 2020, the Company had an outstanding balance under the credit facility of $57.2 million, $0.4 million in outstanding letters of credit and $7.4 million available for future borrowings. As of June 29, 2019, the Company had an outstanding balance under the credit facility of $23.4 million, $0.4 million in outstanding letters of credit and $21.3 million available for future borrowings.
On November 20, 2019, the Company entered into a Sixth amendment to the amended and restated credit agreement extending the limit on our line of credit facility to $55.0 million as evidenced by the Second Replacement Revolving Note. The agreement specifies that the proceeds of the revolving line of credit be used primarily for working capital and general corporate purposes. The line of credit is secured by substantially all of the assets of the Company. On September 30, 2018, the Company entered into a Fourth amendment to the amended and restated credit agreement to extend the maturity date to November 1, 2023, at which time all outstanding balances are payable.
On September 10, 2019, the Company entered into a Fifth amendment to the amended and restated credit agreement to increase the outstanding balance on the term loan in the amount of $5.0 million and to extend the maturity date to September 30, 2022 on the original term loan in the amount of $35.0 million that was used to acquire all of the outstanding shares of CDR Manufacturing, Inc. (dba Ayrshire Electronics). The term loan requires quarterly payments of $1.67 million commencing December 31, 2019 through September 30, 2021, and quarterly payments of $0.4 million commencing December 31, 2021 through September 30, 2022, with a final payment of the remaining outstanding balance on September 30, 2022. The Company had an outstanding balance of $11.7 million and $11.3 million under the term loan as of March 28, 2020 and June 29, 2019, respectively.
On December 28, 2016, the Company entered into an equipment term loan agreement in the amount of $3.9 million in order to further invest in production equipment. The equipment term loan is collateralized by production equipment. Under this loan agreement, equal quarterly payments of approximately $0.2 million commenced on March 31, 2017 and will continue through the maturity of the equipment term loan on June 30, 2021. Amortization of the debt issuance costs is reported as interest expense on the consolidated income statement. As of March 28, 2020, the Company had an outstanding balance of $1.1 million. As of June 29, 2019, the Company had an outstanding balance of $1.7 million.
The Fifth amendment to the amended and restated credit agreement noted above to increase the outstanding balance on the term loan in the amount of $5.0 million fixes borrowings under the revolving line of credit, term loan and equipment term loan to bear interest at LIBOR plus 2.0%, as opposed to previous borrowings at either a “Base Rate” or a “Fixed Rate,” as elected by the Company. The base rate is the higher of the Wells Fargo Bank prime rate, daily one month London Interbank Offered Rate (LIBOR) plus 1.5%, or the Federal Funds rate plus 1.5%. The fixed rate is LIBOR plus 1.75%, LIBOR plus 2.00%, or LIBOR plus 2.25% depending on the level of the Company’s trailing four quarters Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The interest rates on outstanding debt as of March 28, 2020 range from 2.99% - 3.58% compared to 4.40% - 5.50% as of June 29, 2019.
Debt maturities as of March 28, 2020 for the next five years and thereafter are as follows (in thousands):
Fiscal Years Ending
Amount
2020 (1)
$
1,884

2021
7,537

2022
2,917

2023
417

2024
57,236

Total debt
$
69,991

Unamortized debt issuance costs
(37
)
Long-term debt, net of debt issuance costs
$
69,954

(1) Represents scheduled payments for the remaining three-month period ending June 27, 2020.
The Company must comply with certain financial covenants, including a fixed charge coverage ratio. The credit agreement requires the Company to maintain a minimum profit threshold, limits the maximum capital lease expenditures and restricts the Company from declaring or paying dividends in cash or stock without prior bank approval. The Company was in compliance with all financial covenants as of March 28, 2020.

11



5.
Trade Accounts Receivable Purchase Programs
Sale Programs
The Company has utilized an Account Purchase Agreement with Wells Fargo Bank, N.A. (“WFB”) which allows the Company to sell and assign to WFB and WFB may purchase from the Company the accounts receivable of certain Company customers in a maximum aggregate amount outstanding of $25.0 million. As of March 28, 2020, the Company has no factored receivables with WFB. The Company also has an Account Purchase Agreement with Orbian Financial Services (“Orbian”). This agreement allows the Company to sell accounts receivable of certain customers to Orbian and the agreement may be cancelled at any time by either party.
Total accounts receivables sold during the nine months ended March 28, 2020 and March 30, 2019 was approximately $38.6 million and $62.0 million, respectively. Accounts receivables sold and not yet collected were $5,000 and $1.7 million as of March 28, 2020 and June 29, 2019, respectively. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received is reflected as cash provided by operating activities in the condensed consolidated statements of cash flows. Cash receipts related to the deferred purchase price from receivables factored by the Company is reflected as cash provided by investing activities.
6.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act reduced Federal corporate tax rates effective January 1, 2018 and changed certain other provisions, many of which were not effective until fiscal year 2019.
As a result of the change of the U.S. tax system under the Tax Act from a global to a territorial model, a deemed one-time repatriation of all accumulated earnings and profits (AE&P) in Mexico and China occurred on December 31, 2017 (the “Transition Tax”).
On December 22, 2017, the staff of the SEC issued Staff Accounting Bulletin No. 118 (“SAB No. 118”). SAB No. 118 provides guidance on accounting for the tax effects of the 2017 Tax Act and allows registrants to record provisional amounts for a period of up to one year from the date of enactment of the 2017 Tax Act. In fiscal year 2019 we finalized the effects of the Tax Act, resulting in a net Transition Tax amount of $0.8 million, a decrease of $0.4 million compared to the amount provisioned in fiscal year 2018.
In future years, because of the Transition Tax on AE&P described above, repatriations of cash will generally be tax-free in the U.S. However, withholding taxes in China may still apply to any such future repatriations. Management has not changed its indefinite investment assertions with regard to the portion of AE&P in China that may be repatriated in the future. Accordingly, management estimates that future repatriations of cash from China may result in approximately $0.8 million of withholding tax. There would be no offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations. Withholding taxes will not apply to future repatriations from Mexico or Vietnam.
The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company currently expects to repatriate approximately $7.7 million of foreign earnings in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations.
The Company has available approximately $9.7 million of gross federal research and development tax credits as of March 28, 2020. ASC 740 requires the Company to recognize in its financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. Accordingly, as of March 28, 2020, the Company has recorded $4.2 million of unrecognized tax benefits associated with these federal tax credits, resulting in a net deferred tax benefit of approximately $5.5 million.

12



On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. 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 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 would increase the allowable interest expense deduction of the Company and result in less taxable income for fiscal year 2020, but is not expected to have a material impact on the 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. The Company has made this election by applying for a tentative refund claim. The Company is continuing to evaluate the impacts of other aspects of the CARES 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.

7.
Earnings Per Share
The following tables present a reconciliation of the denominator in the basic and diluted EPS calculation and the number of antidilutive common share awards that were not included in the diluted earnings per share calculation. These antidilutive securities occur when equity awards outstanding have an option price greater than the average market price for the period.
 
Three Months Ended
 
(in thousands, except share and per share information)
 
March 28, 2020
 
March 30, 2019
Net income (loss)
$
910

 
$
(11,981
)
Weighted average shares outstanding—basic
10,760

 
10,760

Effect of dilutive common stock awards
125

 

Weighted average shares outstanding—diluted
10,885

 
10,760

Net income (loss) per share—basic
$
0.08

 
$
(1.11
)
Net income (loss) per share—diluted
$
0.08

 
$
(1.11
)
Antidilutive SARs not included in diluted earnings per share
720

 
1,005



 
Nine Months Ended
 
(in thousands, except share and per share information)
 
March 28, 2020
 
March 30, 2019
Net income (loss)
$
3,286

 
$
(8,799
)
Weighted average shares outstanding—basic
10,760

 
10,760

Effect of dilutive common stock awards
53

 

Weighted average shares outstanding—diluted
10,813

 
10,760

Net income (loss) per share—basic
$
0.31

 
$
(0.82
)
Net income (loss) per share—diluted
$
0.30

 
$
(0.82
)
Antidilutive SARs not included in diluted earnings per share
720

 
1,005


8. Share-based Compensation
The Company’s incentive plan provides for equity and liability awards to employees and non-employee directors in the form of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based or cash-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 recorded as employee compensation expense in cost of goods sold, research, development and engineering, and selling, general and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations.

13



In addition to service conditions, SARs contain a performance condition. The additional performance condition is based upon the achievement of Return on Invested Capital (ROIC) goals relative to a peer group. All awards with performance conditions are evaluated quarterly to determine the likelihood that performance metrics will be achieved during the performance period. These awards are charged to compensation expense over the requisite service period based on the number of shares expected to vest. The SARs cliff vest after a three-year period from date of grant and expire five years from date of grant.
The grant date fair value for the awards granted below were estimated using the Black Scholes option valuation method:
 
July 26, 2019
 
July 27, 2018
SARs Granted
170,000

 
161,250

Strike Price
$
4.93

 
$
8.17

Fair Value
$
1.23

 
$
2.27


Total share-based compensation expense recognized during the three months ended March 28, 2020 and March 30, 2019 was approximately $59,000 and $80,000, respectively. Total share-based compensation expense recognized during the nine months ended March 28, 2020 and March 30, 2019 was approximately $200,000 and $354,000, respectively.
As of March 28, 2020, total unrecognized compensation expense related to unvested share-based compensation arrangements was approximately $0.3 million. This expense is expected to be recognized over a weighted average period of 1.65 years. No SARs were exercised during the three or nine months ended March 28, 2020 or March 30, 2019.
9.
Commitments and Contingencies
Litigation and Other Matters
The Company is party to certain lawsuits or claims in the ordinary course of business. The Company does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the financial position, results of operations or cash flow of the Company.
Warranties
The Company provides warranties on certain product sales. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty. If actual return rates and/or repair and replacement costs differ significantly from management’s estimates, adjustments to recognize additional cost of sales may be required in future periods. The Company’s warranty reserve was approximately $33,000 as of March 28, 2020 and $22,000 as of June 29, 2019, respectively.
10.
Derivative Financial Instruments
As of March 28, 2020, the Company had outstanding foreign currency forward contracts with a total notional amount of $43.0 million. The maturity dates for these contracts extend through December 2021. For the three months ended March 28, 2020, the Company entered into $23.8 million of foreign currency forward contracts and settled $6.6 million of such contracts. During the same period of the previous year, the Company did not enter into any foreign currency forward contracts and settled $7.0 million of such contracts.
For the nine months ended March 28, 2020, the Company entered into $23.8 million of foreign currency forward contracts and settled $20.5 million of such contracts. During the same period of the previous year, the Company entered into foreign currency forward contracts of $6.3 million and settled $19.0 million of such contracts.
As of March 28, 2020, 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 in MXN
 
Notional Contracts in USD
 
Estimated Fair Value
June 27, 2020
 
$
138,213

 
$
6,257

 
$
(365
)
September 26, 2020
 
$
141,173

 
$
6,729

 
$
(790
)
December 26, 2020
 
$
132,773

 
$
6,241

 
$
(725
)
April 3, 2021
 
$
148,253

 
$
6,682

 
$
(598
)
July 3, 2021
 
$
144,725

 
$
6,446

 
$
(576
)
October 2, 2021
 
$
146,373

 
$
5,502

 
$
360

January 1, 2022
 
$
137,973

 
$
5,129

 
$
328



14



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. This interest rate swap pays the Company variable interest at the one month LIBOR rate, and the Company pays the counter party a fixed interest rate. The fixed interest rate for the contract is 1.70% that replaces the one month LIBOR rate component of our contractual interest to be paid to WFB as part of our term loan. Based on the terms of the interest rate swap contract and the underlying borrowings outstanding under the term loan, the interest rate contract was determined to be effective, and thus qualified as a cash flow hedge.
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 November 1, 2023, related to the borrowings outstanding under the line of credit. This interest rate swap pays the Company variable interest at the one month LIBOR rate, and the Company pays the counter party a fixed interest rate. The fixed interest rate for the contract is 1.67% that replaces the one month LIBOR rate component of our contractual interest to be paid to WFB as part of our line of credit. Based on the terms of the interest rate swap contract and the underlying borrowings outstanding under the line of credit, the interest rate contract was determined to be effective, and thus qualified as a cash flow hedge.
The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheet as of March 28, 2020 and June 29, 2019 (in thousands):
 
 
 
March 28, 2020
 
June 29, 2019
Derivatives Designated as Hedging Instruments
Balance Sheet Location
 
Fair Value
 
Fair Value
Foreign currency forward contracts & swaps
Other current assets
 
$

 
$
2,912

Foreign currency forward contracts & swaps
Other long-term assets
 
$
687

 
$
320

Foreign currency forward contracts & swaps
Other current liabilities
 
$
(2,478
)
 
$

Foreign currency forward contracts & swaps
Other long-term liabilities
 
$
(576
)
 
$

Interest rate swap
Other current assets
 
$
3

 
$
2

Interest rate swap
Other current liabilities
 
$
(326
)
 
$

Interest rate swap
Other long-term liabilities
 
$
(541
)
 
$



The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the three months ended March 28, 2020 and March 30, 2019, respectively (in thousands):
Derivatives Designated as Hedging Instruments
Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
AOCI Balance
as of
December 28, 2019
 
Effective
Portion
Recorded In
AOCI
 
Effective Portion
Reclassified From
AOCI Into
Income
 
AOCI Balance
as of
March 28, 2020
Forward contracts & swaps
Cost of sales
 
$
2,329

 
$
(3,163
)
 
$
(1,077
)
 
$
(1,911
)
Interest rate swap
Interest expense
 
(72
)
 
(591
)
 
(5
)
 
(668
)
Total
 
 
$
2,257

 
$
(3,754
)
 
$
(1,082
)
 
$
(2,579
)
 
 
 
 
 
 
 
 
 
 
Derivatives Designated as Hedging Instruments
Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
AOCI Balance
as of
December 29, 2018
 
Effective
Portion
Recorded In
AOCI
 
Effective Portion
Reclassified From
AOCI Into
Income
 
AOCI Balance
as of
March 30, 2019
Forward contracts & swaps
Cost of sales
 
$
1,178

 
$
1,059

 
$
(194
)
 
$
2,043

Interest rate swap
Interest expense
 
13

 
1

 
(7
)
 
7

Total
 
 
$
1,191

 
$
1,060

 
$
(201
)
 
$
2,050




15



The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the nine months ended March 28, 2020 and March 30, 2019, respectively (in thousands):
Derivatives Designated as Hedging Instruments
Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
AOCI Balance
as of
June 29, 2019
 
Effective
Portion
Recorded In
AOCI
 
Effective Portion
Reclassified From
AOCI Into
Income
 
AOCI Balance
as of
March 28, 2020
Forward contracts & swaps
Cost of sales
 
$
2,424

 
$
(1,671
)
 
$
(2,664
)
 
$
(1,911
)
Interest rate swap
Interest expense
 
2

 
(662
)
 
(8
)
 
(668
)
Total
 
 
$
2,426

 
$
(2,333
)
 
$
(2,672
)
 
$
(2,579
)
 
 
 
 
 
 
 
 
 
 
Derivatives Designated as Hedging Instruments
Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
AOCI Balance
as of
June 30, 2018
 
Effective
Portion
Recorded In
AOCI
 
Effective Portion
Reclassified From
AOCI Into
Income
 
AOCI Balance
as of
March 30, 2019
Forward contracts & swaps
Cost of sales
 
$
(988
)
 
$
2,308

 
$
723

 
$
2,043

Interest rate swap
Interest expense
 
19

 
2

 
(14
)
 
7

Total
 
 
$
(969
)
 
$
2,310

 
$
709

 
$
2,050



As of March 28, 2020, the net amount of unrealized loss expected to be reclassified into earnings within the next 12 months is approximately $2.2 million. As of March 28, 2020, the Company does not have any foreign exchange contracts with credit-risk-related contingent features.
11.
Fair Value Measurements
The Company has adopted ASC 820, Fair Value Measurements, which defines fair value, establishes a framework for assets and liabilities being measured and reported at fair value and expands disclosures about fair value measurements. There are three levels of fair value hierarchy inputs used to value assets and liabilities which include: Level 1 – inputs are quoted market prices for identical assets or liabilities; Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 – inputs are unobservable inputs for the asset or liability.
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 March 28, 2020 and June 29, 2019 (in thousands):
 
March 28, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Financial Assets:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
3

 
$

 
$
3

Foreign currency forward contracts
$

 
$
687

 
$

 
$
687

Financial Liabilities:
 
 
 
 
 
 
 
Interest rate swap
$

 
$
(867
)
 
$

 
$
(867
)
Foreign currency forward contracts & swaps
$

 
$
(3,054
)
 
$

 
$
(3,054
)

 
June 29, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Financial Assets:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
2

 
$

 
$
2

Foreign currency forward contracts & swaps
$

 
$
3,232

 
$

 
$
3,232




16



The Company currently has forward contracts to hedge known future cash outflows for expenses denominated in the Mexican peso and 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 period with the unrealized gain or loss, net of tax, reported as a component of shareholders’ equity in accumulated other comprehensive loss, as they qualify for hedge accounting.
The carrying values of cash and cash equivalents, accounts receivable and current liabilities reflected on the balance sheets at March 28, 2020 and June 29, 2019, reasonably approximate their fair value. The Company’s long-term debt, which is measured at amortized cost, primarily consists of a revolving line of credit, a term loan and an equipment term loan. These borrowings bear interest at LIBOR plus 2.0% per the Fifth amendment to the amended and restated credit agreement, as opposed to the previous interest at either a “Base Rate” or a “Fixed Rate,” as elected by the Company. 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 4.
As a result of the determinable market rates for our revolving line of credit, term loan and equipment term loan, 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 March 28, 2020 and June 29, 2019.
12.
Goodwill and Other Intangible Assets
The Company recorded goodwill and intangible assets in connection with the Ayrshire and Sabre acquisitions resulting primarily in synergies that resulted from the Company's acquisitions and the assembled workforce and favorable lease agreements; respectively.
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 goodwill impairment of $10.0 million and other intangible assets impairment of $2.5 million was recognized.
In accordance with accounting guidance on goodwill and other intangible assets, the Company evaluates intangible assets for impairment at the reporting unit level annually, and whenever circumstances occur indicating that intangibles might be impaired.
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. 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. 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.
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.

17



The components of acquired intangible assets are as follows (in thousands):
 
March 28, 2020
 
Amortization Period
in Years
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Impairment
Recognized
 
Derecognition Favorable Lease per ASC 842
 
Net Carrying
Amount
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Favorable Lease Agreements
4 - 7
 
2,941

 
(2,284
)
 

 
(657
)
 

Total
 
 
$
2,941

 
$
(2,284
)
 
$

 
$
(657
)
 
$

 
June 29, 2019
 
Amortization Period
in Years
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Impairment
Recognized
 
Net Carrying
Amount
Intangible assets:
 
 
 
 
 
 
 
 
 
Non-Compete Agreements
3 - 5
 
$
568

 
$
(568
)
 
$

 
$

Customer Relationships
10
 
4,803

 
(2,311
)
 
(2,492
)
 

Favorable Lease Agreements
4 - 7
 
2,941

 
(2,284
)
 

 
657

Total
 
 
$
8,312

 
$
(5,163
)
 
$
(2,492
)
 
$
657


Amortization expense was approximately $0 and $76,000 for the three months ended March 28, 2020 and March 30, 2019, respectively. Amortization expense was approximately $0 and $502,000 for the nine months ended March 28, 2020 and March 30, 2019, respectively.
13.
Revenue
Revenue Recognition
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. 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.
The Company’s typical payment terms are 30 to 90 days and its sales arrangements do not contain any significant financing component for its customers.
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.
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.

18



During fiscal 2020, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods.
Contract Balances
A contract asset is recognized when the Company has recognized revenue, but has not issued an invoice for payment. Contract assets are classified separately on the condensed consolidated balance sheet and transferred to receivables when the right to payment becomes unconditional. The following table summarizes the activity in the Company’s contract assets during the nine months ended March 28, 2020 (in thousands):
 
Contract Assets
Beginning balance, June 29, 2019
$
22,16