The preceding Notice of Annual Meeting of Shareholders, this Proxy Statement and the enclosed proxy card are being furnished by Key Tronic Corporation, a Washington corporation (the "Company"), to the holders of outstanding shares of Common Stock, no par value, of the Company ("Common Stock") in connection with the solicitation of proxies by the Board of Directors of the Company from holders of such shares. The proxies are to be used at the Annual Meeting of Shareholders of the Company to be held on Friday, October 25, 201923, 2020 at 10:00 a.m. Pacific Time at the principal executive offices of the Company, 4424 N. Sullivan Road - Upper Level, Spokane Valley, Washington 99216, and any adjournments or postponements thereof (the "Annual Meeting"). The proxies appoint Craig D. Gates and Brett R. Larsen, each of them and their substitutes, as proxy to vote all shares represented at the Annual Meeting pursuant to this proxy solicitation. This proxy statement and the enclosed form of proxy were first mailed to shareholders on or about September 19, 2019.17, 2020.
Each share of Common Stock outstanding is entitled to one vote on each matter presented for a vote of the shareholders at the Annual Meeting. Under applicable law and the Company's Restated Articles of Incorporation and Amended and Restated By-Laws, if a quorum exists at a meeting: (i) the six nominees for election as directors who receive the greatest number of votes cast for the election of directors by the shares present in person or represented by proxy and entitled to vote shall be elected directors, (ii) matters 2 and 4 listed in the accompanying Notice of Annual Meeting of Shareholders will be approved if the number of votes cast in favor of the proposal exceeds the number of votes cast against it, and (iii) on proposal 3 the frequency receiving the greatest number of votes cast will be approved. In the election of directors, any action other than a vote for a nominee will have the practical effect of voting against the nominee. An abstention from voting or a broker nonvote will have no effect on matters 2, 3 or 4 since none represents a vote cast.
If you are a stockholder of record and do not submit your vote by proxy or vote in person at the annual meeting, your shares will not be voted. However, if you hold shares beneficially in street name, the result may be different. If you do not return the voting instruction form, your broker, trustee or nominee may vote your shares in certain circumstances and on certain proposals. Under current regulations, brokers can not vote "uninstructed" shares in director elections or on executive compensation matters. Thus, if you hold your shares in street name and you do not instruct your record holder how to vote in the election of directors (matter 1), the advisory vote to approve the compensation of the Company’s named executive officers (matter 2) or the advisory vote on the frequency of an advisory vote on executive compensation (proposal 3), no votes will be cast on your behalf. Discretionary voting by brokers is permitted in the ratification of the appointment of the independent registered public accounting firm (matter 4).When a broker votes a client’s shares on some but not all of the proposals at a meeting, the missing votes are referred to as “broker non-votes.” Those shares will be included in determining the presence of a quorum at the meeting, but are not considered “present” for purposes of voting on non-discretionary matters.
Six directors are to be elected at the Annual Meeting to serve until the next Annual Meeting of Shareholders and until their respective successors have been elected and have qualified. The six nominees receiving the highest number of affirmative votes will be elected as directors. In the event any nominee is unable or unwilling to serve as a nominee or director, the proxies may be voted for the balance of those nominees named and for any substitute nominee designated by the present Board of Directors or the proxy holders to fill such vacancy, or for the balance of those nominees named without nomination of a substitute, or the size of the Board of Directors may be reduced in accordance with the By-Laws of the Company. The Board of Directors has no reason to believe that any of the persons named will be unable or unwilling to serve as a nominee or as a director if elected. It is the Company’s policy that nominees for election at the Annual Meeting attend the Annual Meeting. All nominees for election at the 20182019 Annual Meeting attended the 20182019 Annual meeting.
The following information has been provided to the Company with respect to the nominees for election to the Board of Directors:
The Board of Directors has determined that all members of the Company’s Board of Directors are “independent directors” within the meaning of the applicable Nasdaq Global Select Market (“NASDAQ”) listing standards, except for Mr. Gates, the Company’s President and Chief Executive Officer.
The Board of Directors has determined that the relationship between the Company and CyberOptics Corporation (“CyberOptics”), for which Dr. Kulkarni serves as President and Chief Executive Officer and a director, does not impair Dr. Kulkarni’s independence because the transactions (described in this Proxy Statement under “Related Person Transactions”) between the Company and CyberOptics are immaterial to the gross revenues of CyberOptics and the relationship between the Company and CyberOptics has no unique characteristics that interfere with Dr. Kulkarni’s exercise of independent judgement in carrying out his responsibilities as a director of the Company.
The Board of Directors also has determined that all members of the Audit Committee (1) meet the definition of independence contained in the NASDAQ listing standards; (2) meet the requirements of the Securities and Exchange Commission (“SEC”) Rule 10A-3(b)(1); (3) have not participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years; and (4) are able to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement, as required by the NASDAQ Marketplace Rules.
The Board of Directors has determined that James R. Bean, Ronald F. Klawitter, Subodh K. Kulkarni, Yacov A. Shamash and Patrick Sweeney, members of the Audit Committee, each has the requisite attributes of an “audit committee financial expert” as defined by SEC regulations and that such attributes were acquired through relevant education and/or experience.
The Board of Directors determines whether the roles of Chief Executive Officer and Chairman of the Board should be separated based upon its judgment of the structure which best meets the current needs of the Company and promotes the most effective communication between the Board and management. The Board currently separates the role of Chief Executive Officer and Chairman of the Board.
The Board oversees the Company’s risk directly and through its committees. The Board is assisted by its Audit Committee in performing its risk management oversight responsibilities with respect to financial reporting, internal controls cyber security risk, and legal and regulatory requirements. The Board is assisted by its Compensation and Administration Committee in performing its risk management oversight responsibilities with respect to risk relating to compensation programs and policies. The Board, with the assistance of its Governance and Nominating Committee, oversees risk management with respect to Board membership, structure and organization.
The Chairmen of the three Board Committees report to the Board on committee meetings at regular meetings of the Board of Directors. Management has the day to day responsibility for risk management and members of management make regular reports to the Board and its committees on identification, monitoring and mitigation of material risks.
At each of the four regular meetings of the Board of Directors held during fiscal year 2019,2020, the independent directors met separately in executive session without management present.
5
Code of Conduct
The Board of Directors has adopted a written Code of Conduct which applies to all directors, officers and employees of the Company. The Code of Conduct is available on the Company’s website at www.keytronic.com. The Company intends to disclose on its website any amendments to or waivers of the Code of Conduct.
Insider Trading Policy/Prohibition of Speculative Transactions
The Board of Directors has adopted a written policy on Insider Trading which applies to all directors, officers and employees of the Company. The policy prohibits directors, officers and employees from engaging in short-term speculative transactions involving the Company’s securities, including short sales and buying or selling put or call options.
Recoupment Policy
The Board of Directors has adopted a written Recoupment Policy which provides that in the event of a restatement of the Company’s consolidated financial statements, the Company shall have the right to recoup from any executive officer any portion of any bonus or other equity or non-equity incentive compensation received by the executive officer the grant of which was tied to the achievement of one or more specific performance targets, with respect to the period for which such financial statements are restated, regardless of whether the executive officer engaged in any misconduct or was at fault or responsible in any way for causing the restatement, if, as a result of such restatement, the executive officer would not have received such bonus or other compensation or portion thereof.
Shareholder Communications
Shareholders of Key Tronic Corporation may send written communications to the Board of Directors or any of its members by certified mail only, addressed to the Board of Directors or any member, c/o General Counsel & Secretary, Key Tronic Corporation, 4424 N. Sullivan Road, Spokane Valley, WA 99216. All such shareholder communications will be compiled by the General Counsel & Secretary and submitted to the Board of Directors or a Board member.
Nominations to the Board
The Governance and Nominating Committee will consider written proposals from shareholders for directors to be elected at the annual meeting which are submitted to the Secretary of the Company, together with biographical information and references, at least six months prior to the annual meeting.
Board Committees
The Board of Directors has three standing committees: the Audit Committee, the Compensation and Administration Committee, and the Governance and Nominating Committee. The committees each have written charters approved by the Board. The charters of the Audit Committee, the Compensation and Administration Committee and the Governance and Nominating Committee are available on the Company’s website at www.keytronic.com.
The Audit Committee, which currently consists of Messrs. Bean (Chairman), Klawitter, Kulkarni, Shamash and Sweeney met nine times during fiscal 2019.2020. The Audit Committee monitors the integrity of the Company’s financial statements, financial reporting processes and systems of internal controls regarding finance, accounting, cyber security and legal compliance; selects and appoints the Company’s independent registered public accounting firm, pre-approves all audit and non-audit services to be provided to the Company by the Company’s independent registered public accounting firm, and establishes the fees and other compensation to be paid to the independent registered public accounting firm; monitors the qualifications, independence and performance of the Company’s independent registered public accounting firm; and establishes procedures for the receipt, retention, response to and treatment of complaints, including confidential, anonymous submissions by the Company’s employees, regarding accounting, internal controls or auditing matters, and provides an avenue of communication among the Board, the independent registered public accounting firm and management.
The Compensation and Administration Committee (“Compensation Committee”) which currently consists of Messrs. Shamash (Chairman), Bean and Sweeney, met five times during fiscal 2019.2020. The Committee establishes and reviews annually the Company’s general compensation policies applicable to the Company’s executive officers and other key employees, reviews and approves the level of compensation awarded to the Company’s Chief Executive Officer and
other officers and key management employees, prepares and delivers annually to the Board a report disclosing compensation policies applicable to the Company’s executive officers and the basis for the Chief Executive Officer’s compensation during the last fiscal year and makes recommendations to the Board regarding changes to existing compensation plans. The Committee administers the Company’s incentive compensation plans including determining the individuals to receive awards and the terms of such awards.
The Governance and Nominating Committee, which currently consists of Messrs. Bean (Chairman), Klawitter, Kulkarni, Shamash and Sweeney met one time during fiscal 2019.2020. The Committee makes recommendations to the Board regarding corporate governance, recommends for selection by the Board nominees for election as Directors and makes recommendations to the Board with respect to the structure and composition of the Board. The Committee evaluates potential director nominees based upon a number of criteria, including the potential nominee’s skills, relevant experience and independence. The Committee has no specific minimum qualifications which must be met by a potential director nominee. Each potential nominee is considered on a case by case basis. Potential nominees may be identified to the Committee by members of the Board, officers of the Company, shareholders or other persons. The Committee evaluates each potential nominee in the same manner regardless of the source of the potential nominee’s recommendation. Although the Company does not have a policy regarding diversity, the Governance and Nominating Committee does take into consideration the value of diversity among Board members in background, experience, education and perspective in considering potential nominees for recommendation to the Board for selection. The Company has not paid any third party a fee to assist in identifying and evaluating potential director nominees. The Committee has not rejected any potential nominee recommended within the preceding year by a beneficial owner of more than 5% of the Company’s Common Stock.
Related Person Transactions
In April 2007, the Board of Directors adopted a written policy and procedures for the approval or ratification of Interested Transactions with Related Parties. The policy and procedures supplement the Company’s Code of Conduct. The policy defines an “Interested Transaction” as any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including any indebtedness or guarantee of indebtedness) in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year, (2) the Company is a participant, and (3) any Related Party has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of another entity).
The policy defines a “Related Party” as any (a) person who is or was (since the beginning of the last fiscal year for which the Company has filed a Form 10-K and proxy statement, even if they do not presently serve in that role) an executive officer, director or nominee for election as a director, (b) greater than 5 percent beneficial owner of the Company’s common stock, or (c) immediate family member of any of the foregoing. Immediate family member includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law and anyone residing in such person’s home (other than a tenant or employee).
The Audit Committee is responsible for review, approval, ratification or disapproval of Interested Transactions. In determining whether to approve or ratify an Interested Transaction, the Committee will take into account, among other factors it deems appropriate, whether the Interested Transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the Related Party’s interest in the Transaction.
During the fiscal yearyears 2020 and 2019, the Company had no transactions with CyberOptics. During fiscal year 2018, the Company purchased surface mount technology inspection equipment from CyberOptics. The purchases by the Company during fiscal year 2018 totaled $159,600. These transactions were conducted at arm’s length in the ordinary course of business of the Company and CyberOptics, and the terms of purchase were no more favorable to the Company than purchases by unaffiliated parties from CyberOptics.
PRINCIPAL SHAREHOLDERS AND SECURITY
OWNERSHIP OF MANAGEMENT
The following table provides certain information which has been furnished to the Company regarding beneficial ownership of the Common Stock as of the Record Date, with respect to (i) each person known by the Company to own beneficially more than 5% of the Company’s Common Stock; (ii) each director and nominee for director of the Company; (iii) each of the executive officers of the Company named in the Summary Compensation table; and (iv) all officers and directors of the Company as a group.
| | Name of Beneficial Owner* | | Number of Shares Beneficially Owned (1) | | Percent of Class (1) | Name of
Beneficial Owner* | | Number of Shares Beneficially Owned (1) | | Percent of Class (1) |
| MORE THAN 5% SHAREHOLDERS | | | | | MORE THAN 5% SHAREHOLDERS | | | | |
Morgan Stanley Wealth Management 999 3rd Avenue, Suite 4500 Seattle, WA 98104 | | 1,076,497 |
| (2),(3) | 10.00 | % | Morgan Stanley Wealth Management
999 3rd Avenue, Suite 4500
Seattle, WA 98104 | | 1,228,046 | (2),(3) | 11.4 | % |
Tieton Capital Management LLC
4700 Tieton Drive, Suite C
Yakima, WA 98908 | | Tieton Capital Management LLC
4700 Tieton Drive, Suite C
Yakima, WA 98908 | | 861,161 | (4),(5) | 8.0 | % |
Dimensional Fund Advisors, L.P. 1299 Ocean Avenue, Suite 650 Santa Monica, CA 90401 | | 889,014 |
| (4),(5) | 8.3 | % | Dimensional Fund Advisors, L.P.
1299 Ocean Avenue, Suite 650
Santa Monica, CA 90401 | | 860414 | (6),(7) | 8.0 | % |
Tieton Capital Management LLC 4700 Tieton Drive, Suite C Yakima, WA 98908 | | 867,241 |
| (6),(7) | 8.1 | % | |
| DIRECTORS AND EXECUTIVE OFFICERS | | | | | DIRECTORS AND EXECUTIVE OFFICERS | |
| James R. Bean | | 6,786 |
| | ** |
| James R. Bean | | 6,786 | | | ** |
| Ronald F. Klawitter | | 195,368 |
| (8) | 1.82 | % | Ronald F. Klawitter | | 194,760 | | (8) | 1.8 | % |
| Subodh K. Kulkarni | | 1,000 |
| | ** |
| Subodh K. Kulkarni | | 1,000 | | | ** |
| Yacov A. Shamash | | 42,326 |
| (9) | ** |
| Yacov A. Shamash | | 42,326 | | (9) | ** |
| Patrick Sweeney | | 77,410 |
| | ** |
| Patrick Sweeney | | 77,410 | | | ** |
| Craig D. Gates | | 221,758 |
| (10) | 2.1 | % | Craig D. Gates | | 221,758 | | (10) | 2.1 | % |
| Brett R. Larsen | | 15,099 |
| (11) | ** |
| Brett R. Larsen | | 34,118 | | (11) | ** |
| Douglas G. Burkhardt | | 92,418 |
| (12) | ** |
| |
| Mark R. Courtney | | Mark R. Courtney | | 2,342 | | (12) | ** |
| Philip S. Hochberg | | 33,265 |
| (13) | ** |
| Philip S. Hochberg | | 69,368 | | (13) | ** |
| Chad T. Orebaugh | | Chad T. Orebaugh | | 4,345 | | | ** |
| Duane D. Mackleit | | 20,409 |
| (14) | ** |
| Duane D. Mackleit | | 47,004 | | (14) | ** |
All officers and directors as a group (15 persons) | | 754,526 |
| | 7.01 | % | |
| David H. Knaggs | | David H. Knaggs | | 4,469 | | | ** |
All officers and directors as a group
(14 persons) | | All officers and directors as a group
(14 persons) | | 750,693 | | | 7 | % |
_____________
* Unless otherwise noted, the address for each named shareholder is in care of the Company at its principal executive offices.
** Less than 1%.
| |
1. | Percentage beneficially owned is based on 10,759,680 shares of Common Stock outstanding on the Record Date. A person or group of persons is deemed to beneficially own as of the record date any shares which such person or group of persons has the right to acquire within 60 days after the record date. In computing the percentage of outstanding shares held by each person or group of persons, any shares which such person or persons have the right to acquire within 60 days after the record date are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. |
| |
2. | Based on Form 13F filed with the Securities and Exchange Commission, dated June 30, 2019. |
| |
3. | Morgan Stanley Wealth Management is a registered investment advisor. |
| |
4. | Based on Form 13F filed with the Securities and Exchange Commission, dated June 30, 2019. |
1. Percentage beneficially owned is based on 10,759,680 shares of Common Stock outstanding on the Record Date. A person or group of persons is deemed to beneficially own as of the record date any shares which such person or group of persons has the right to acquire within 60 days after the record date. In computing the percentage of outstanding shares held by each person or group of persons, any shares which such person or persons have the right to acquire within 60 days after the record date are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
2. Based on Form 13F filed with the Securities and Exchange Commission, dated June 30, 2020.
3. Morgan Stanley Wealth Management is a registered investment advisor.
4. Based on Form 13F filed with the Securities and Exchange Commission, dated June 30, 2020.
| |
5. | 5. Dimensional Fund Advisors, Inc. (“DFA”), a registered investor advisor, is deemed to have beneficial ownership of these shares all of which are held in portfolios of DFA Investment Dimensions Group, Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, for all of which DFA serves as investment manager. DFA disclaims beneficial ownership of all shares. |
| |
6. | Based on Form 13F filed with the Securities and Exchange Commission, dated June 30, 2019. |
| |
7. | Tieton Capital Management LLC is a registered investment advisor. |
| |
8. | Includes Common Stock allocated to Mr. Klawitter as a participant in the Company's 401(k) Retirement Savings Plan (17,091 shares) as of June 30, 2019, 1,600 shares owned directly by Mr. Klawitter’s daughter and 4,200 shares owned directly by Mr. Klawitter’s son. |
| |
9. | Includes 1,100 shares owned directly by Dr. Shamash’s daughter. |
| |
10. | Includes Common Stock allocated to Mr. Gates as a participant in the Company's 401(k) Retirement Savings Plan (7,429 shares) as of June 30, 2019. |
| |
11. | Includes Common Stock allocated to Mr. Larsen as a participant in the Company’s 401(k) Retirement Savings Plan (1,332 shares) as of June 30, 2019. |
| |
12. | Includes Common Stock allocated to Mr. Burkhardt as a participant in the Company’s 401(k) Retirement Savings Plan (176 shares) as of June 30, 2019. |
| |
13. | Includes Common Stock allocated to Mr. Hochberg as a participant in the Company’s 401(k) Retirement Savings Plan (4,717 shares) as of June 30, 2019 and 100 shares owned directly by Mr. Hochberg’s son. |
| |
14. | Includes Common Stock allocated to Mr. Mackleit as a participant in the Company’s 401(k) Retirement Savings Plan (11,295 shares) as of June 30, 2019. |
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Executive Summary
This Compensation Discussion and Analysis explains our compensation philosophy, summarizes our compensation programs and reviews compensation decisions for the executives identified as named executive officers in the Summary Compensation Table. The named executive officers for fiscal year 2019 were:
Craig D. Gates, President & Chief Executive Officer
Brett R. Larsen, Executive Vice President of Administration, CFO & Treasurer
Douglas G. Burkhardt, Executive Vice President of Worldwide Operations
Philip S. Hochberg, Executive Vice President of Business Development
Duane D. Mackleit, Vice President of Program Management
The compensation for the named executive officers currently consists of four elements - base salaries, performance-based annual cash incentives, performance-based long-term cash incentive and performance-based long-term equity incentives in the form of SARS - that are designed to reward performance in a simple and straightforward manner. Our executive compensation program is aligned with our business strategy and culture to attract and retain top talent, reward business results and individual performance, and most importantly, maximize shareholder returns. Our total compensation program for the named executive officers is highly incentive-based and competitive in the marketplace, with Company performance determining a significant portion of total compensation.
Base Salaries. Base salaries were modified to maintain a competitive position as compared to the organization’s targeted labor market. These increases were predicated on individual performance, tenure with the organization, and relative position to the market.
Performance-Based Annual Cash Incentive Plan. Target award opportunities for fiscal 2019 for all named executive officers remained the same as the prior year.
Performance-Based Long-Term Cash Incentive Plan. Target award opportunities for fiscal 2019 for named executive officers remained the same as the prior year.
Performance Based Long-Term Equity Incentive Plan. Equity based long-term performance based awards (SARS) for fiscal 2019 for named executive officers remained the same as the prior year.
The Compensation Committee of the Board of Directors (the “Committee”) is comprised of three members, Yacov A. Shamash (Chairman), James R. Bean, and Patrick Sweeney, each of whom is an independent director under applicable NASDAQ listing standards.
The Committee oversees the Board’s responsibilities relating to the compensation of the Company’s Chief Executive Officer and other named executive officers. In discharging this responsibility, the Compensation Committee evaluates and approves the Company’s compensation plans, policies and programs as they affect the named executive officers.
The named executive officers have substantial portions of their compensation at risk for annual and long-term performance, with the largest portion at risk for the most senior executives. Target “at risk” compensation for the CEO is 63%. “At risk” compensation is targeted slightly lower for the other named executive officers.
|
| | |
Executive | | Target
“At Risk” Compensation
|
Craig D. Gates, President & Chief Executive Officer | | 63% |
Brett R. Larsen, Executive Vice President, Chief Financial Officer | | 54% |
Douglas G. Burkhardt, Executive Vice President, Worldwide Operations | | 48% |
Philip S. Hochberg, Executive Vice President Business Development | | 51% |
Duane D. Mackleit, Vice President of Program Management | | 39% |
This discussion describes and analyzes the compensation program for the named executive officers. First, it covers the Company’s compensation objectives and philosophy, the cornerstone of which is pay for performance. Next, it reviews the process the Compensation Committee follows in deciding how to compensate the named executive officers and provides a brief overview of the principal components of the Company’s compensation program, including a detailed discussion and analysis of the Compensation Committee’s specific decisions about the compensation of the Company’s named executive officers for fiscal year 2019.
Compensation Objectives and Philosophy
The Company believes that compensation of its executive officers should encourage creation of shareholder value and achievement of strategic corporate objectives. The Company attempts to align the interests of its shareholders and management by integrating compensation with the Company’s short-term and long-term corporate strategic and financial objectives. In order to attract and retain the most qualified personnel, the Company intends to offer a total compensation package competitive with companies in our industry sector, taking into account relative company size, performance and geographic location as well as individual responsibilities and performance.
The elements of compensation for the named executive officers include base salaries, annual cash incentives, long-term cash incentives and long-term equity incentives as well as severance benefits in connection with certain terminations of employment and additional benefits which are available to all other U.S. employees, including a 401(k) plan, health and welfare programs, and life insurance. In general, base salaries and other benefit programs, and severance and other termination benefits are primarily intended to attract and retain highly qualified executives as they provide predictable compensation levels that reward executives for their continued service. Annual cash incentives are primarily intended to motivate executives to achieve specific tactical and operating objectives, while long-term cash and equity incentives are primarily intended to align executives’ long-term interests with those of the Company’s shareholders. These elements of total compensation are targeted to pay at market median when performance meets expectations.
Compensation Process
As part of its process for determining the compensation for the named executive officers, the Compensation Committee considers competitive market data. As authorized by its charter, the Compensation Committee, from time to time, engages an independent compensation consultant, to periodically review the Company’s compensation plans, policies and programs that affect executive officers and to provide advice and recommendations on competitive market practices and specific compensation decisions. The independent compensation consultant has worked directly with the Compensation Committee to assist the Compensation Committee in satisfying its responsibilities and will undertake no projects for management except at the request of the Compensation Committee chair and in the capacity of the Compensation Committee’s agent. During fiscal 2019, the independent compensation consultant provided no assistance to management in evaluating the competitiveness of compensation for non-executive officer personnel.
The Committee takes into consideration multiple factors for purposes of developing competitive market data for analyzing executive compensation. These factors include a combination of both published executive salary surveys as well as an evaluation of peer organizations and their publicly disclosed compensation information. The Compensation Committee has identified a group of peer organizations with which the Company competes for executive talent (which may or may not be the same organizations that the company competes with directly on a business level). The peer companies were identified based on the following criteria: industry type, organization size/complexity, with the best indicators of organization size in the Company’s industry being revenue and number of employees, as well as, enterprise value and net income.
Following this process, the Compensation Committee selected the following peer group for compensation decisions, all of which are electronics manufacturing organizations comparableheld in portfolios of DFA Investment Dimensions Group, Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, for all of which DFA serves as investment manager. DFA disclaims beneficial ownership of all shares.
6. Based on Form 13F filed with the Securities and Exchange Commission, dated June 30, 2020.
7. Tieton Capital Management LLC is a registered investment advisor.
8. Includes Common Stock allocated to the Company in business space and profitability. This peer group is the sameMr. Klawitter as the 2018 peer group.
|
| |
Cabot Microelectronics Corp. | KEMET Corporation |
Coherent, Inc. | Kimball Electronics, Inc. |
CTS Corporation | Materion Corp. |
Ducommun Inc. | Mercury Computer Systems Inc. |
Entegris, Inc. | Methode Electronics Inc. |
Extreme Networks, Inc. | Oclaro, Inc. |
Fabrinet | Radysis Corp. |
IPG Photonics Corp. | Richardson Electronics Ltd. |
To ensure we have the information necessary to set appropriate compensation levels, we collect data comparing each executive officer to their counterparts in similar positions within the peer group companies. The Compensation Committee does not base its decisions on targeting compensation levels to specific benchmarks against the peer group, instead, the Compensation Committee refers to the peer group compensation data as background information regarding competitive pay levels and also considers the other factors identified below in making its decisions. The elements of total compensation are targeted to pay at the market median when performance meets expectations.
The Compensation Committee supplements the peer group analysis with published compensation data on all executive officers. Published compensation data is focused on similar labor talent for the Company’s executives, including organizationsa participant in the electronics manufacturing industry with annual revenues closeCompany's 401(k) Retirement Savings Plan (16,483 shares) as of June 30, 2012, 1,600 shares owned directly by Mr. Klawitter’s daughter and 4,200 shares owned directly by Mr. Klawitter’s son.
9. Includes 1,100 shares owned directly by Dr. Shamash’s daughter.
10. Includes Common Stock allocated to that of the Company. In addition, the Compensation Committee considers the value of each item of compensation, both separately andMr. Gates as a participant in the aggregate, in lightCompany's 401(k) Retirement Savings Plan (7,418 shares) as of Company performance, each executive officer’s position within the Company, the executive officer’s performance history and potential for future advancement, and, with respectJune 30, 2020.
11. Includes Common Stock allocated to long-term cash and equity incentive compensation, the value of existing vested and unvested outstanding cash and equity awards.
The Compensation Committee also considers the recommendations of the Company’s chief executive officer with respect to the compensation for each executive officer other than himself. In setting compensation, the Compensation Committee also considers, among other factors, the possible tax consequences to the Company and its executive officers, the accounting consequences and the impact on shareholder dilution. The Compensation Committee does not assignMr. Larsen as a specific weight to these factors and none of these factors by itself will compel a particular compensation decision. Instead, this information is used generally by the Compensation Committee to help inform its decision-making process. Except as noted below, such decisions by the Compensation Committee are subjective, made in the exercise of the Compensation Committee’s independent business judgment.
Principal Elements of Compensation
The principal elements of compensation for the Company’s executive officers are described below:
Base Salaries. Base salaries, including merit-based salary increases, for the named executive officers are established based on the scope of their respective responsibilities, competitive market salaries and general levels of market increases in salaries, individual performance, achievement of the Company’s corporate and strategic goals and changes in job duties and responsibilities.
In July 2018 the Compensation Committee reviewed the base salaries of the named executive officers and determined that they are generally competitive with the market (50th percentile) when compared to the Company’s peer group and other market data. Given the competitive position of some salaries, the Compensation Committee determined that base salaries should increase somewhat in fiscal year 2019 As a result, the named executive officers’ base salaries for fiscal 2019 were as follows:
|
| | | | | | | | |
| Name and Position | | | 2018 Base Salary | | | 2019 Base Salary |
| Craig D. Gates, President & Chief Executive Officer | | $ | 620,000 |
| | $ | 620,000 |
|
| Brett R. Larsen, Executive Vice President, Chief Financial Officer | | $ | 349,000 |
| | $ | 361,215 |
|
| Douglas G. Burkhardt, Executive Vice President, Operations | | $ | 305,815 |
| | $ | 348,629 |
|
| Philip S. Hochberg, Executive Vice President Business Development | | $ | 301,291 |
| | $ | 310,330 |
|
| Duane D. Mackleit, Vice President of Program Management | | $ | 269,696 |
| | $ | 269,696 |
|
Annual Cash Incentive Compensation. Annual cash incentives for the Company’s executive officers are designed to reward performance for achieving key corporate goals, which the Company believes should increase shareholder value. In general, the annual incentive awards for executive officers are determined based on achievement of performance objectives for profit before taxes established by the Compensation Committee for the fiscal year. Profit Before Tax is an appropriate goal for calculating short-term incentive because it is the best measure of operating performance and should yield the best result for shareholders. Having the entire management team with the same goal will prevent having conflicting goals between different functions of the Company.
The Compensation Committee has established a cash incentive program for the Company’s named executive officers, including minimum, target and maximum bonus opportunities for each executive as well as performance goals that need to be achieved in order for the executives to receive such bonuses. Minimum, target and maximum bonus opportunities under the program are determined by reference to a percentage of the executive officer’s base salary. These minimum, target and maximum bonus levels are consistent with the levels established in previous years by the Compensation Committee and are appropriate based on a subjective assessment of the executive’s position and ability to directly impact Company performance, and responsibility for the Company’s performance, and its subjective assessment of general compensation practices in place at companiesparticipant in the Company’s peer group identified above. Bonuses under the fiscal year 2019 cash annual incentive program were paid out in August 2019 only if the executive officer was employed by the Company on the payment date.
The annual cash incentive program focuses on key metrics for a given year. Most often the Company uses a single company-wide financial element: profit before taxes (PBT). Performance for fiscal year 2019 was measured based on the Company’s PBT.
For fiscal year 2019 performance, the target bonus opportunities (as a %401(k) Retirement Savings Plan (20,441 shares) as of base salary) were:
|
| | | | | | | | | | | | |
| Name and Position | | Minimum | | Target | | Maximum | | Actual |
| Craig D. Gates, President & Chief Executive Officer | | 10 | % | | 100 | % | | 150 | % | | — | % |
| Brett R. Larsen, Executive Vice President, Chief Financial Officer | | 6 | % | | 60 | % | | 90 | % | | — | % |
| Douglas G. Burkhardt, Executive Vice President, Worldwide Operations | | 5 | % | | 50 | % | | 75 | % | | — | % |
| Philip S. Hochberg, Executive Vice President Business Development | | 5 | % | | 50 | % | | 75 | % | | — | % |
| Duane D. Mackleit, Vice President of Program Management | | 3.5 | % | | 35 | % | | 52.5 | % | | — | % |
Long-Term Cash Incentive Compensation
. The Compensation Committee awards long-term cash incentive compensation
12. Represents 2,342 shares of Common Stock allocated to the Company’s executive officers to align their interests with those of the Company’s shareholders, to provide additional incentives to the Company’s executive officers to improve the long-term performance of the Company’s common stock and achieve the Company’s corporate goals and strategic objectives and to retain the Company’s executive officers.
The Company’s current practice is primarily to grant long-term cash incentive awards to the named executive officers in the form of performance units at the start of each fiscal year. These units will haveMr. Courtney as a future value tied directly to the achievement of Board determined and approved goals for a three-year period. At the end of each three-year period, the cash value of these units will be paid to the executive officer at a value set by the Board, upon the recommendation of the Compensation Committee, at the beginning of the three-year period based on goal achievement as measured at the end of the three-year period. The goals consist of sales growth compared to industry peer group companies and return on invested capital. Revenue growth compared to the industry and Return on Invested Capital (“ROIC”) combine to
provide the most appropriate measures of long-term financial performance. Having a goal of revenue growth compared to the industry incents management to gain market share. Having a goal of ROIC above the Company’s weighted average cost of capital builds shareholder value and incents management to make sure that revenue growth is profitable.
The table below contains the target award levels for each named executive officer for the three-year period ending at the end of fiscal year 2019.
|
| | | | | | |
| Name and Position | | Minimum Award | | Target Award | | Maximum Award |
| Craig D. Gates, President & Chief Executive Officer | | $150,000 | | $300,000 | | $450,000 |
| Brett R. Larsen, Executive Vice President, Chief Financial Officer | | $55,000 | | $110,000 | | $165,000 |
| Douglas G. Burkhardt, Executive Vice President, Worldwide Operations | | $55,000 | | $110,000 | | $165,000 |
| Philip S. Hochberg, Executive Vice President Business Development | | $55,000 | | $110,000 | | $165,000 |
| Duane D. Mackleit, Vice President of Program Management | | $25,000 | | $50,000 | | $75,000 |
Long-Term Equity Incentive Compensation. In fiscal years 2017, 2018 and 2019 the named executive officers received grants of stock appreciation rights (“SARS”) under the 2010 Incentive Plan, as amended and restated October 23, 2014 (“2010 Incentive Plan”). These stock appreciation rights vest on the third anniversary of the grant date to the extent the Company’s return on invested capital (ROIC) over the vesting period compared to the weighted average ROIC of a selected group of industry peer companies over the same period has reached 90% or more of the ROIC of the peer group average. These rights have a five year term. Payment upon exercise of a stock appreciation right may be in cash, in shares, in some combination thereof or in any other manner approved by the Compensation Committee.
The SARS are designed to link executives’ interests with those of the Company’s shareholders as the shares’ value is based on the increase in key financial metrics, to provide a long-term retention incentive for the vesting period and, awards are subject to performance-based vesting requirements, to provide further incentives for executives to achieve goals considered critical to the Company’s success. The Committee has determined that ROIC is the key measure for aligning executive’s performance with the long-term shareholder interests.
In determining the size of the Company’s long-term equity incentive awards, the Compensation Committee reviews competitive market data for similar positionsparticipant in the Company’s peer companies, the executive officer’s performance history and/or potential for future responsibility and promotion, the chief executive officer’s recommendations (with respect401(k) Retirement Savings Plan as of June 30, 2020.
13. Includes Common Stock allocated to executives other than himself) and the value of existing vested and unvested outstanding cash and equity awards. The relative weight given to each of these factors will vary from individual to individual at the Compensation Committee’s discretion and adjustments may be madeMr. Hochberg as the Compensation Committee deems reasonable to attract candidates in the competitive environment for highly qualified employees in which the Company operates.
SARS awards are outlined in the table below for the past three fiscal years.
|
| | | | | | |
| Executive | | 2017(1) | | 2018(2) | | 2019(3) |
| Craig D. Gates, President & Chief Executive Officer | | 50,000 | | 50,000 | | 25,000 |
| Brett R. Larsen, Executive Vice President, Chief Financial Officer | | 22,500 | | 22,500 | | 11,250 |
| Douglas G. Burkhardt, Executive Vice President, Operations | | 20,000 | | 20,000 | | 10,000 |
| Philip S. Hochberg, Executive Vice President Business Development | | 20,000 | | 20,000 | | 10,000 |
| Duane D. Mackleit, Vice President of Program Management | | 10,000 | | 10,000 | | 5,000 |
| |
(1) | The grant date fair values of the 2017 SARS awards were, $121,000, $54,450, $48,400, $48,400 and $24,200, respectively. |
| |
(2) | The grant date fair values of the 2018 SARS awards were, $94,500, $42,525, $37,800, $37,800, and $18,900, respectively. |
| |
(3) | The grant date fair values of the 2019 SARS awards were, $31,000, $13,950, $12,400, $12,400, and $6,200, respectively. |
Other Benefits. The named executive officers are also entitled to participatea participant in the Company’s benefit programs which are available401(k) Retirement Savings Plan (40,820 shares) as of June 30, 2020 and 100 shares owned directly by Mr. Hochberg’s son.
14. Includes Common Stock allocated to all ofMr. Mackleit as a participant in the Company’s U.S. employees, including company-sponsored health, welfare, 401(k), and disability and life insurance. Retirement Savings Plan (37,890 shares) as of June 30, 2020.
Post-Termination Protection and Payments
The Company has entered into employment agreements with each of the named executive officers. The Compensation Committee believes these agreements are important in attracting and retaining key executive officers. Under these agreements, the executive would be entitled to severance benefits in the event of a termination of the executive’s employment by the Company without cause or by the executive for good reason. The Company has determined that it is appropriate to provide each named executive officer with severance benefits under these circumstances in light of his position with the Company and as part of his overall compensation package. The severance benefits for each named executive officer are generally determined as if he continued to remain employed by the Company for 12 months following his actual termination date or 24 months following termination upon a change of control. Because the Company believes that a termination by an executive for good reason (or constructive termination) is conceptually the same as an actual termination by the Company without cause, the Company believes it is appropriate to provide severance benefits following such a constructive termination of the executive’s employment. Monthly base salary payments will terminate immediately upon the executive’s employment by a third party at a base salary equal to or greater than the monthly base salary then being paid the executive by the Company. If the executive is paid a monthly base salary by a third party lower than that being paid by the Company, the Company will continue to pay the difference for the remainder of the severance period.
If a change in control of the Company occurs, outstanding long-term cash incentive awards and SARS awards, including awards held by the Company’s named executive officers, will generally become fully vested if they are not assumed by the successor entity.
Tax Deductibility of Pay
For taxable years beginning prior to January 1, 2018, Section 162(m) of the Internal Revenue Code places a limit of $1,000,000 on the amount of compensation that the Company may deduct in any one year with respect to the Company’s chief executive officer and certain other executive officers. There is an exception to the $1,000,000 limitation for performance-based compensation meeting certain requirements. In general, awards granted under the Company’s annual cash incentive plan, long-term cash incentive plan and SARS granted under the 2010 Incentive Plan are intended to comply with the applicable requirements for this exemption. Effective for tax years beginning after December 31, 2017, the $1 million annual deduction limit will apply to all our named executive officers, including our chief financial officer, and the exemption for qualified performance-based compensation will no longer be available. As a result, compensation paid to each of our named executive officers in any taxable year in excess of $1 million will not be deductible unless it qualifies for the transition relief applicable to certain compensation arrangements in place as of November 2, 2017, including certain stock appreciation rights and incentive awards granted prior to such date. Because of the absence of formal guidance under the transition relief provisions, though, we cannot guarantee that any compensation arrangements intended to qualify for the exemption under Section 162(m) will actually receive such treatment. The Compensation Committee generally considers the limitations imposed by Section 162(m) among other factors in making its compensation decisions. However, the Compensation Committee reserves the right to design programs that recognize a full range of performance criteria important to the Company’s success, even where the compensation paid under such programs may not be deductible. The Compensation Committee will continue to monitor the tax and other consequences of the Company’s executive compensation program as part of its primary objective of ensuring that compensation paid to the Company’s executive officers is reasonable, performance-based and consistent with the Company’s goals and the goals of the Company’s shareholders.
Risk Considerations
The Compensation Committee has reviewed the Company’s compensation programs to determine whether they encourage unnecessary or excessive risk taking and has concluded that they do not. The Compensation Committee believes that the design of the Company’s annual cash, long-term cash and long-term equity incentives provides an effective and appropriate mix of incentives to help ensure the Company’s performance is focused on long-term shareholder value creation and does not encourage the taking of short-term risks at the expense of long-term results.
The Compensation Committee takes risk into account in establishing and reviewing the Company’s executive compensation arrangements and believes that they do not encourage unnecessary or excessive risk-taking behaviors. Base salaries are fixed in amount and thus do not encourage risk-taking. While the Company’s performance-based annual cash bonuses are generally based on annual results, the amounts of such bonuses represent only a portion of each individual’s overall total compensation opportunities. The Compensation Committee believes that the annual incentive program appropriately balances risk and the desire to focus executives on specific annual goals important to the
Company’s success, and that it does not encourage unnecessary or excessive risk-taking. Finally, a significant portion of the compensation provided to the Company’s executive officers is in the form of long term cash and equity based awards that further align executives’ interests with those of shareholders. The Compensation Committee believes that these awards do not encourage unnecessary or excessive risk-taking since the ultimate value of the equity based awards is tied to the Company’s stock price, and grants are generally subject to long-term vesting schedules and a two year retention requirement after exercise to help ensure that executives always have significant value tied to long-term stock price performance. Also, annual cash incentive compensation and long term cash and equity incentive compensation payments are subject to the Company’s Recoupment Policy, described under the caption “Recoupment Policy”.
Summary
The Compensation Committee believes that the Company’s compensation philosophy and programs are designed to foster a performance-oriented culture that aligns executives’ interests with those of the Company’s shareholders. The Compensation Committee believes that the compensation of the Company’s executives is both appropriate and responsive to the goal of improving shareholder value.
Compensation Committee Report
The Compensation Committee reviewed this Compensation Discussion and Analysis and discussed its contents with Company management. Based on this review and discussions, the Compensation Committee has recommended to the Board that this Compensation Discussion and Analysis be included in the Annual Report on Form 10-K and the 2019 Proxy Statement.
Respectfully submitted by the Compensation Committee:
Yacov A. Shamash, Chair
James R. Bean
Patrick Sweeney
EXECUTIVE COMPENSATION
Summary Compensation Table-Fiscal Years 2017-20192018-2020
The following table sets forth information concerning compensation for services rendered to the Company by the President and Chief Executive Officer, the Executive Vice President and Chief Financial Officer and the Company’s next three most highly compensated executive officers. Collectively, these officers are the “named executive officers.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Option/SAR Awards ($)(1) | | Non-Equity Incentive Plan Compensation ($)(2) | | All Other Compensation ($)(3) | | Total ($) |
| Craig D. Gates, | | 2020 | | 650,842 | | | — | | | 30,750 | | | 791,461 | | | 11,217 | | | 1,484,270 | |
| President & Chief | | 2019 | | 620,000 | | | — | | | 31,000 | | | — | | | 34,846 | | | 685,846 | |
| Executive Officer | | 2018 | | 620,000 | | | — | | | 94,500 | | | 225,000 | | | 58,492 | | | 997,992 | |
| Brett R. Larsen, | | 2020 | | 369,968 | | | — | | | 13,838 | | | 294,981 | | | 11,000 | | | 689,787 | |
| Executive Vice President, | | 2019 | | 359,806 | | | — | | | 13,950 | | | — | | | 24,423 | | | 398,179 | |
| Chief Financial Officer | | 2018 | | 346,692 | | | — | | | 42,525 | | | 82,500 | | | 37,646 | | | 509,363 | |
| Philip S. Hochberg, | | 2020 | | 310,688 | | | — | | | 12,300 | | | 211,929 | | | 11,000 | | | 545,917 | |
| Executive Vice President, | | 2019 | | 301,291 | | | — | | | 12,400 | | | — | | | 22,307 | | | 335,998 | |
| Business Development | | 2018 | | 293,203 | | | — | | | 37,800 | | | 82,500 | | | 34,623 | | | 448,126 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
1)The amounts reported in the “Option/SAR Awards” column reflect the fair value on the grant date of the stock appreciation rights, or SARS, granted to the named executive officers during the fiscal year. These values have been determined under generally accepted accounting principles used to calculate the value of equity awards for purposes of the Company’s financial statements. For a discussion of the assumptions and methodologies used to calculate the amounts reported above, please see the discussion of equity awards contained in Note 8 - “Stock Option and Benefit Plans” to the Consolidated Financial Statements in the Company’s 2020 Annual Report.
2)Amounts reflect (a) annual cash incentive compensation, which is based on performance during the relevant fiscal year, pursuant to the annual incentive program and (b) any payout of long term performance unit awards for the three year performance period that ended in the relevant fiscal year, pursuant to the long term cash incentive program. No annual cash incentive compensation or long term cash incentive compensation was paid for fiscal year 2019.
3)Includes for fiscal year 2019 payment for accrued vacation in the amount of $23,846 for Mr. Gates, $13,423 for Mr. Larsen and $11,588 for Mr. Hochberg. Includes for fiscal year 2018 payment for accrued vacation in the amount of $47,692 for Mr. Gates, $26,846 for Mr. Larsen, $23,839 for Mr. Hochberg. Also includes matching payments in fiscal years 2020, 2019 and 2018 under the Company’s 401(k) Retirement Savings Plan. Also includes for Mr. Gates a service award in the amount of $215.15 in fiscal year 2020.
10
|
| | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Option/SAR Awards ($)(1) | | Non-Equity Incentive Plan Compensation ($)(2) | | All Other Compensation ($)(3) | | Total ($) |
| Craig D. Gates, | | 2019 | | 620,000 |
| | — |
| | 31,000 |
| | — |
| | 34,846 |
| | 685,846 |
|
| President & Chief | | 2018 | | 620,000 |
| | — |
| | 94,500 |
| | 225,000 |
| | 58,492 |
| | 997,992 |
|
| Executive Officer | | 2017 | | 646,064 |
| | — |
| | 121,000 |
| | 736,076 |
| | 10,600 |
| | 1,513,740 |
|
| Brett R. Larsen, | | 2019 | | 359,806 |
| | — |
| | 13,950 |
| | — |
| | 24,423 |
| | 398,179 |
|
| Executive Vice President, | | 2018 | | 346,692 |
| | — |
| | 42,525 |
| | 82,500 |
| | 37,646 |
| | 509,363 |
|
| Chief Financial Officer | | 2017 | | 316,000 |
| | — |
| | 54,450 |
| | 137,363 |
| | 7,487 |
| | 515,300 |
|
| Douglas G. Burkhardt, | | 2019 | | 340,395 |
| | — |
| | 12,400 |
| | — |
| | 22,762 |
| | 375,557 |
|
| Executive Vice | | 2018 | | 300,676 |
| | — |
| | 37,800 |
| | 82,500 |
| | 33,982 |
| | 454,958 |
|
| President, Operations | | 2017 | | 291,919 |
| | — |
| | 48,400 |
| | 194,910 |
| | 10,600 |
| | 545,829 |
|
| Philip S. Hochberg, | | 2019 | | 301,291 |
| | — |
| | 12,400 |
| | — |
| | 22,307 |
| | 335,998 |
|
| Executive Vice President, | | 2018 | | 293,203 |
| | — |
| | 37,800 |
| | 82,500 |
| | 34,623 |
| | 448,126 |
|
| Business Development | | 2017 | | 285,634 |
| | — |
| | 48,400 |
| | 193,238 |
| | 10,600 |
| | 537,872 |
|
| Duane D. Mackleit, | | 2019 | | 273,555 |
| | — |
| | 6,200 |
| | — |
| | 21,373 |
| | 301,128 |
|
| Vice President of | | 2018 | | 260,576 |
| | — |
| | 18,900 |
| | 37,500 |
| | 30,844 |
| | 347,820 |
|
Program Management (4) | | 2017 | | 255,493 |
| | — |
| | 24,200 |
| | 112,769 |
| | 10,600 |
| | 403,062 |
|
| |
1) | The amounts reported in the “Option/SAR Awards” column reflect the fair value on the grant date of the stock appreciation rights, or SARS, granted to the named executive officers during the fiscal year. These values have been determined under generally accepted accounting principles used to calculate the value of equity awards for purposes of the Company’s financial statements. For a discussion of the assumptions and methodologies used to calculate the amounts reported above, please see the discussion of equity awards contained in Note 8 - “Stock Option and Benefit Plans” to the Consolidated Financial Statements in the Company’s 2019 Annual Report. |
| |
2) | Amounts reflect (a) annual cash incentive compensation, which is based on performance during the relevant fiscal year, pursuant to the annual incentive program and (b) any payout of long term performance unit awards for the three year performance period that ended in the relevant fiscal year, pursuant to the long term cash incentive program. No annual cash incentive compensation or long term cash incentive compensation was paid for fiscal year 2019. |
| |
3) | Includes for fiscal year 2019 payment for accrued vacation in the amount of $23,846 for Mr. Gates, $13,423 for Mr. Larsen, $11,762 for Mr. Burkhardt, $11,588 for Mr. Hochberg and $10,373 for Mr. Mackleit. Includes for fiscal year 2018 payment for accrued vacation in the amount of 47,692 for Mr. Gates, $26,846 for Mr. Larsen, $23,182 for Mr. Burkhardt, $23,839 for Mr. Hochberg and $20,044 for Mr. Mackleit. Also includes matching payments in fiscal years 2019, 2018 and 2017 under the Company’s 401(k) Retirement Savings Plan. Also includes for Mr. Mackleit a service award in the amount of $232 in fiscal year 2017. |
Compensation of Named Executive Officers
The Summary Compensation Table above quantifies the value of the different forms of compensation earned by or awarded to the Company’s named executive officers for the fiscal years indicated above. The primary elements of each named executive officer’s total compensation reported in the table are base salary, long term equity incentives consisting of awards of stock appreciation rights and the payout of annual and long term cash incentives. Named executive officers also received the other benefits listed in the “All Other Compensation” column of the Summary Compensation Table, as further described in the footnotes to the table.
The Summary Compensation Table should be read in conjunction with the tables and narrative descriptions that follow. The Grants of Plan-Based Awards in fiscal year 20192020 table and the accompanying description of the material terms of the equity awards granted in fiscal year 2019,2020, provides information regarding the long-term equity incentives awarded to the named executive officers in fiscal year 2019.2020. The Outstanding Equity Awards at 20192020 Fiscal Year-End and Option/SAR Exercises and Stock Vested tables provide further information on the named executive officers’ potential realizable value and actual value realized with respect to their equity awards. The “Potential Payments Upon Termination or Change in Control” section provides information on the benefits the named executive officers may be entitled to receive in connection with certain terminations of their employment and/or a change in control of the Company.
Description of Employment Agreements-Cash Compensation
The Company entered into employment contracts with Messrs. Gates, Larsen Burkhardt,and Hochberg and Mackleit at the time each employee was first elected an officer of the Company. Each of the employment contracts imposes upon the employee standard nondisclosure, confidentiality and no competition provisions. Each of the employment contracts provides that the Company may terminate employment at any time. The employment contracts provide that upon termination of employment by the Company, other than for cause, the Company shall continue to pay employee’s base salary in effect prior to termination for a period of one year after termination. The employment contracts also provide that upon termination by the employee in the event the Company changes the substantive responsibilities and duties of the employee in such a way as to constitute a demotion, the Company shall continue to pay employee's base salary in effect prior to termination for a period of one year after termination. The contracts provide that upon termination of employment by the Company after a change of control, other than for cause, the Company shall continue to pay employee's base salary in effect prior to termination for a period of two years after termination. The contracts condition the payment of severance upon execution of a release of claims and include provisions to comply with Internal Revenue Code Section 409A.
GRANTS OF PLAN BASED AWARDS IN FISCAL YEAR 20192020
The following table sets forth information concerning individual grants of non-equity incentive plan awards and grants of equity incentive plan awards made during fiscal year 20192020 to each of the named executive officers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Grant Date | | Estimated Future Payouts
Under Non-Equity Incentive Plan Awards | | | | | | Estimated Future Payouts Under
Equity Incentive Plan Awards (#) | | Exercise or Base Price of
Option/SAR Awards ($/Sh) | | Grant Date Fair Value of Stock
And Option/SAR Awards ($) |
| | | | Threshold
($) | | Target
($) | | Maximum
($) | | | | | | |
| Craig D. Gates | | 07/26/19(1) 07/26/19(2) 07/26/19(3) | |
52,000
200,000 | |
520,000
400,000 | |
780,000
600,000 | | 50,000
-
- | | 4.93
-
- | | 246,500
-
- |
| Brett R. Larsen | | 07/26/19(1) 07/26/19(2) 07/26/19(3) | |
21,673
95,000 | | 216,279
190,000 | |
325,014
285,000 | | 22,500
-
- | | 4.93
-
- | | 110,925
-
- |
| Philip S. Hochberg | | 07/26/19(1) 07/26/19(2) 07/26/19(3) | | 15,516
75,000 | |
155,516
150,000 | |
232,747
112,500 | | 10,000
-
- | | 4.93
-
- | | 49,300
-
- |
(1)Represents stock appreciation rights awards during fiscal year 2020 under the 2010 Incentive Plan.
(2)Represents threshold, target and maximum payouts under the annual Incentive Compensation Plan for fiscal year 2020. For actual payouts, if any, earned for fiscal year 2020 see the Summary Compensation Table.
(3)Represents threshold, target and maximum payouts under the Long-Term Incentive Plan for the 2020-2022 performance cycle. Payouts under the Long-Term Incentive Plan for the 2020-2022 performance cycle are dependent upon the achievement of goals for three years sales growth compared to peer group companies and return on invested capital.
12
|
| | | | | | | | | | | | | | |
| Name | | Grant Date | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards | | Estimated Future Payouts Under Equity Incentive Plan Awards (#) | | Exercise or Base Price of Option/SAR Awards ($/Sh) | | Grant Date Fair Value of Stock And Option/SAR Awards ($) |
| | Threshold ($) | | Target ($) | | Maximum ($) | | | | | | |
| Craig D. Gates | | 07/27/18(1) 07/27/18(2) 07/27/18(3) | |
62,000 150,000 | |
620,000 300,000 | |
930,000 450,000 | | 50,000 - - | | 7.26 - - | | 94,500 - - |
| Brett R. Larsen | | 07/27/18(1) 07/27/18(2) 07/27/18(3) | |
19,140
72,500 | | 191,400 145,000 | |
287,100
217,500 | | 22,500
-
- | | 7.26
-
- | | 42,525
-
- |
| Douglas G. Burkhardt | | 07/27/18(1) 07/27/18(2) 07/27/18(3) | |
14,845 55,000 | |
148,454 110,000 | |
222,681 165,000 | | 20,000 - - | | 7.26 - - | | 37,800 - - |
| Philip S. Hochberg | | 07/27/18(1) 07/27/18(2) 07/27/18(3) | | 14,626 55,000 | |
146,258 110,000 | |
219,386 165,000 | | 20,000 - - | | 7.26
-
- | | 37,800 - - |
| Duane D. Mackleit | | 07/27/18(1) 07/27/18(2) 07/27/18(3) | | 9,120 25,000 | | 91,202 50,000 | | 136,802 75,000 | | 10,000 - - | | 7.26 - - | | 18,900 - - |
| |
(1) | Represents stock appreciation rights awards during fiscal year 2019 under the 2010 Incentive Plan. The 2010 Incentive Plan is discussed under the caption “Long-Term Equity Incentive Compensation” beginning on page 14. |
| |
(2) | Represents threshold, target and maximum payouts under the annual Incentive Compensation Plan for fiscal year 2019. For actual payouts, if any, earned for fiscal year 2019 see the Summary Compensation Table. The Incentive Compensation Plan is discussed under the caption “Annual Cash Incentive Compensation” beginning on page 12. |
| |
(3) | Represents threshold, target and maximum payouts under the Long-Term Incentive Plan for the 2019-2021 performance cycle. The Long-Term Incentive Plan is discussed under the caption “Long-Term Cash Incentive Compensation” beginning on page 13. Payouts under the Long-Term Incentive Plan for the 2019-2021 performance cycle are dependent upon the achievement of goals for three years sales growth compared to peer group companies and return on invested capital. |
Outstanding Equity Awards at Fiscal 20192020 Year-End
The following table presents information regarding the outstanding equity awards held by each of the Company’s named executive officers as of June 29, 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Option/SAR Awards | | | | | | | | | | |
| Name | | Grant Date | | Equity Incentive Plan Awards Number of Securities Underlying Unexercised Exercisable Options/SARS (#)(1) | | Equity Incentive Plan Awards Number of Securities Underlying Unexercised Unearned Options/SARS (#)(1) | | Option/SAR
Exercise/Base Price ($)
| | Option/SAR
Expiration Date
|
| Craig D. Gates | | 07/26/19
07/27/18
07/28/17
07/26/16
07/29/15 | |
50,000
50,000 | | 07/27/1825,000
07/28/17
07/26/16
07/29/15
10/31/14
| |
50,00025,000
50,000 | | 25,000
50,000
50,000
4.93
8.17
7.26
8.18
10.26 | | 8.17
7.26
8.18
10.26
8.22
| | 07/26/24
07/27/23
07/28/22
07/26/21
07/29/20
10/30/19
|
| Brett R. Larsen | | 07/26/19
07/27/18
07/28/17
07/26/16
07/29/15 | | 07/27/18
07/28/17
07/26/16
07/29/15
10/31/14
| |
22,500
20,000 10,000
| | 11,250 22,50011,250
22,500 | | 4.93
8.17
7.26
8.18
10.26
8.22
| | 07/26/24
07/27/23
07/28/22
07/26/21
07/29/20
10/30/19
|
Douglas G. Burkhardt | | 07/27/18
07/28/17
07/26/16
07/29/15
10/31/14
| | 20,000
20,000
| | 10,000
20,000
20,000
| | 8.17
7.26
8.18
10.26
8.22
| | 07/28/23
07/28/22
07/26/21
07/29/20
10/30/19
|
| Philip S. Hochberg | | 07/26/19
07/27/18
07/28/17
07/26/16
07/29/15 | | 07/27/18
07/28/17
07/26/16
07/29/15
10/31/14
| |
20,000 20,000 | | 10,000
20,000
20,000
| | 8.17
7.26
8.18
10.26
8.22
| | 07/27/23
07/28/22
07/26/21
07/29/20
10/30/19
|
Duane D. Mackleit | | 07/27/18
07/28/17
07/26/16
07/29/15
10/31/14
| | 10,000 10,000 | | 5,000
10,000
10,00020,000
| | 4.93
8.17
7.26
8.18
10.26
8.22
| | 07/28/26/24
07/27/23
07/28/22
07/26/21
07/29/20
10/30/19
|
| |
(1) | Stock appreciation rights vest on the third anniversary of the grant date and have a five year term. Payouts under the stock appreciation rights are dependent upon the achievement of goals for three year’s return on invested capital compared to peer group companies. |
(1)Stock appreciation rights vest on the third anniversary of the grant date and have a five year term. Payouts under the stock appreciation rights are dependent upon the achievement of goals for three year’s return on invested capital compared to peer group companies.
Option/SAR Exercises and Stock Vested-Fiscal Year 20192020
The following table presents information regarding the exercise during fiscal year 20192020 of stock appreciation rights awards previously granted by the Company to the named executive officers.
|
| | | | | | | | | | | | | |
| | | Option/SAR Awards | | |
| Name | | Number of Shares
Acquired on Exercise (#)
| | Value Realized
on Exercise ($)
|
| Craig D. Gates | | — |
| | — |
|
| Brett R. Larsen | | — |
| | — |
|
Doug G. Burkhardt | | — |
| | — |
|
| Philip S. Hochberg | | — |
| | — |
|
Duane D. Mackleit | | — |
| | — |
|
Pension Benefits
None of the named executive officers is covered by a pension plan.
Non-qualified Deferred Compensation
None of the named executive officers is covered by a defined benefit plan or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.
Other Benefits
The Company offers the named executive officers and all other U.S. employees a 401(k) plan and life insurance, disability, medical and dental plans for which the named executive officers are charged the same rate as all other employees.
Potential Payments upon Termination or Change in Control
The following section describes the benefits that may become payable to the named executive officers in connection with a termination of their employment and/or a change in control of the Company.
Quantification of Severance and Change in Control Benefits. The tables below quantify the benefits that would have been payable to each of the named executive officers if the executive’s employment had terminated under the circumstances described above and/or a change in control of the Company had occurred on June 29, 2019.27, 2020. The first table presents the benefits the executive would have received if such a termination had occurred outside of the context of a change in control. The second table presents the benefits the executive would have received if such a termination occurred in connection with a change in control.
Severance Benefits (Outside of Change of Control)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Cash Severance ($)(1) | | Continuation of Health/Life Benefits ($)(2) | | Cash-Out of
Accrued and
Earned Vacation ($) | | Total ($) |
| Craig D. Gates | | 630,000 | | | — | | | — | | | 630,000 | |
| Brett R. Larsen | | 369,968 | | | — | | | — | | | 369,968 | |
| Philip S. Hochberg | | 310,668 | | | — | | | — | | | 310,668 | |
|
| | | | | | | | | | | | |
| Name | | Cash Severance ($)(1) | | Continuation of Health/Life Benefits ($)(2) | | Cash-Out of Accrued and Earned Vacation ($) | | Total ($) |
| Craig D. Gates | | 620,000 |
| | — |
| | — |
| | 620,000 |
|
| Brett R. Larsen | | 361,215 |
| | — |
| | — |
| | 361,215 |
|
| Douglas G. Burkhardt | | 348,629 |
| | — |
| | — |
| | 348,629 |
|
| Philip S. Hochberg | | 310,330 |
| | — |
| | — |
| | 310,330 |
|
| Duane D. Mackleit | | 269,696 |
| | — |
| | — |
| | 269,696 |
|
| |
1. | This amount represents 12 months of the executive’s base salary. Monthly base salary payments will terminate immediately upon the executive’s employment by a third party at a monthly base salary equal to or greater than the monthly base salary then being paid the executive by the Company. If the executive is paid a base salary by a third party lower than that being paid by the Company, the Company will continue to pay the difference for the remainder of the 12 month severance period. |
2.The premiums that would be charged to continue health coverage for the applicable period pursuant to COBRA for the executive and his eligible dependents (to the extent that such dependents were receiving health benefits as of June 27, 2020) would be paid by the executive and the Company will not reimburse the executive for these premiums.
| |
2. | The premiums that would be charged to continue health coverage for the applicable period pursuant to COBRA for the executive and his eligible dependents (to the extent that such dependents were receiving health benefits as of June 29, 2019) would be paid by the executive and the Company will not reimburse the executive for these premiums. |
Change of Control Severance Benefits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Cash Severance ($)(1) | | Continuation of Health/Life Benefits ($) (2) | | Cash-Out of
Accrued and Unpaid
Paid Time Off ($) | | Equity Acceleration ($)(3) | | Non-Equity Acceleration ($)(4) | | Total ($) |
| Craig D. Gates | | 1,260,000 | | | — | | | — | | | — | | | 400,000 | | | 1,660,000 | |
| Brett R. Larsen | | 739,936 | | | — | | | — | | | — | | | 190,000 | | | 929,936 | |
| Philip S. Hochberg | | 621,376 | | | — | | | — | | | — | | | 150,000 | | | 771,376 | |
|
| | | | | | | | | | | | | | | | | | |
| Name | | Cash Severance ($)(1) | | Continuation of Health/Life Benefits ($) (2) | | Cash-Out of Accrued and Unpaid Paid Time Off ($) | | Equity Acceleration ($)(3) | | Non-Equity Acceleration ($)(4) | | Total ($) |
| Craig D. Gates | | 1,240,000 |
| | — |
| | — |
| | — |
| | 400,000 |
| | 1,640,000 |
|
| Brett R. Larsen | | 722,430 |
| | — |
| | — |
| | — |
| | 190,000 |
| | 912,430 |
|
| Douglas G. Burkhardt | | 697,258 |
| | — |
| | — |
| | — |
| | 150,000 |
| | 847,258 |
|
| Philip S. Hochberg | | 620,660 |
| | — |
| | — |
| | — |
| | 150,000 |
| | 770,660 |
|
| Duane D. Mackleit | | 539,393 |
| | — |
| | — |
| | — |
| | 70,000 |
| | 609,393 |
|
| |
1. | For each of the named executive officers, this amount represents the sum of 24 months of the executive’s base salary. Monthly base salary payments will terminate immediately upon the executive’s employment by a third party at a monthly base salary equal to or greater than the monthly base salary then being paid the executive by the Company. If the executive is paid a base salary by a third party lower than that being paid by the Company, the Company will continue to pay the difference for the remainder of the 24 month severance period. |
| |
2. | See footnote (2) to the previous table. |
| |
3. | This amount represents the intrinsic value of the unvested portions of the executive’s stock appreciation rights (SARS) awards that would have accelerated on a termination of the executive’s employment as described above. This value is calculated by multiplying the amount by which $4.982.See footnote (2) to the previous table.
3.This amount represents the intrinsic value of the unvested portions of the executive’s stock appreciation rights (SARS) awards that would have accelerated on a termination of the executive’s employment as described above. This value is calculated by multiplying the amount by which $5.26 (the closing price of the Company’s common stock on the last trading day of fiscal 2019) exceeds the base price of the SARS by the number of SARS subject to the accelerated portion of the SARS. Each executive would have been entitled to full acceleration of his then-outstanding equity awards on such a termination. |
| |
4. | This amount represents the target value of the unvested portion of the executive’s long term cash incentive plan awards (described beginning on page 13) that would have accelerated if the executive’s employment terminated upon a change in control of the Company on June 29, 2019. |
Pay Ratio Disclosure
As required by Item 402(u) of Regulation S-K, the following information is provided with respect to the relationship of the annual total compensation of the median employee and the annual total compensation of the CEO. The pay ration was calculated in a manner consistent with Item 402(u) of Regulation S-K and based upon reasonable judgement and assumptions.
For fiscal year 2019, the annual total compensation of the Company’s median employee was $9,174 andcommon stock on the annual total compensationlast trading day of fiscal 2020) exceeds the base price of the Company’s CEO was $685,846. The ratioSARS by the number of SARS subject to the accelerated portion of the total annual compensationSARS. Each executive would have been entitled to full acceleration of his then-outstanding equity awards on such a termination.
4.This amount represents the target value of the Company’s CEO to the medianunvested portion of the annual total compensation of employees was 75 to 1. “The median employee” was identified andexecutive’s long term cash incentive plan awards that would have accelerated if the median employee’s total annual compensation was calculatedexecutive’s employment terminated upon a change in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K. The total annual compensationcontrol of the Company’s CEO is the amount reported in the “Total” column of the fiscal year 2019 Summary Compensation Table included in this Proxy StatementCompany on page 17.June 27, 2020.
The SEC rules for identifying the “median employee” and calculating the pay ratio based on the median employee’s total annual compensation allow companies to adopt a variety of methodologies, to apply certain exclusions and make reasonable estimates and assumptions that reflect a company’s compensation practices. Therefore pay ratios reported by other companies may not be comparable to the Company’s pay ration reported above, since other companies may have different employment and compensation practices and may utilize different methodologies, estimates and assumptions.
DIRECTOR COMPENSATION
Non-Employee Director Compensation Table
The following table presents information regarding the compensation paid for fiscal year 20192020 to members of the Board of Directors who are not also employees of the Company (referred to herein as “non-employee directors”).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or
Paid in Cash ($) | | Option/SAR Awards ($)(1) | | Non-Equity Incentive Plan Compensation ($)(2)(3) | | All Other
Compensation ($) | | Total ($) |
| James R. Bean | | 57,970 | | | 4,613 | | | 10,000 | | | — | | | 72,583 | |
| Ronald F. Klawitter | | 51,800 | | | 4,613 | | | 10,000 | | | — | | | 66,413 | |
| Subodh K. Kulkarni | | 51,300 | | | 4,613 | | | 10,000 | | | — | | | 65,913 | |
| Yacov A. Shamash | | 56,135 | | | 4,613 | | | 10,000 | | | — | | | 70,748 | |
| Patrick Sweeney | | 72,076 | | | 4,613 | | | 10,000 | | | — | | | 86,689 | |
|
| | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash ($) | | Option/SAR Awards ($)(1) | | Non-Equity Incentive Plan Compensation ($)(2)(3) | | All Other Compensation ($) | | Total ($) |
| James R. Bean | | 58,837 |
| | 8,513 |
| | — |
| | — |
| | 67,350 |
|
| Ronald F. Klawitter | | 49,300 |
| | 8,513 |
| | — |
| | — |
| | 57,813 |
|
| Subodh K. Kulkarni | | 29,800 |
| | 7,567 |
| | — |
| | — |
| | 37,367 |
|
| Yacov A. Shamash | | 56,635 |
| | 8,513 |
| | — |
| | — |
| | 65,148 |
|
| Patrick Sweeney | | 71,576 |
| | 8,513 |
| | — |
| | — |
| | 80,089 |
|
| |
(1) | The amounts reported in the “Option/SAR Awards” column reflect the fair value on the grant date of the stock appreciation rights granted to the Company’s non-employee directors during fiscal year 2019 as determined under generally accepted accounting principles used to calculate the value of equity awards for purposes of the Company’s financial statements. For a discussion of the assumptions and methodologies used to calculate the amounts reported above, please see the discussion of equity awards contained in Note 8 - “Stock Option and Benefit Plans” to the Consolidated Financial Statements in the Company’s 2019 Annual Report.
|
| |
(2) | Reflects payout, if any, of long term incentive plan awards for the three year performance period that ended in fiscal year 2019. |
(2)Reflects payout, if any, of long term incentive plan awards for the three year performance period that ended in fiscal year 2020.
The table below presents the number of outstanding and unexercised options/SAR awards held by each of the Company’s non-employee directors as of June 29, 2019.
|
| | | | | | | | | | | | | |
| Director | | Number of Shares Subject to Outstanding Options/SAR Awards as of 06/29/201927/2020 | | Number of Unvested Restricted
Shares/Units as of 06/29/2019
27/2020 |
| James. R. Bean | | 33,75030,000 |
| | — |
|
| Ronald F. Klawitter | | 51,25030,000 |
| | — |
|
| Patrick Sweeney | | 33,75030,000 |
| | — |
|
| Subodh K. Kulkarni | | 3,750 | | | — | |
| Yacov A. Shamash | | 33,75030,000 |
| | — |
|
Non-Employee Director Compensation
Equity Grants. Under the Company’s 2010 Incentive Plan, as approved by the shareholders in October 2010, as amended and restated October 23, 2014, the Company’s non-employee directors receive awards, subject to the non-employee director’s continued service to the Company through the vesting date.
Long-Term Incentive Plan Awards. Under the Company’s Long-Term Incentive Plan, non-employee directors receive long term non-equity incentive compensation awards.
Retainers and Meeting Fees. In addition, non-employee directors receive annual retainers and fees for attending Board and committee meetings as set forth in the following table:
| | | | | | | | |
| Annual Cash Retainer | | |
| Board Member, other than Chairman | $ | 40,000 |
| Chairman of the Board | | 54,375 |
| | |
| Board Meeting Fees | | |
| Board Member, other than Chairman | $ | 1,700 |
| Chairman of the Board | | 2,550 |
| | |
| Committee Meeting Fees | | |
| Committee Member, other than Chairman | $ | 1,000 |
| Committee Chairman | | 1,733 |
All non-employee directors are also reimbursed for their expenses incurred in attending Board meetings and committee meetings, as well as other Board-related travel expenses.
PROPOSAL 2
ADVISORY VOTE TO APPROVE THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS
The Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 14A to the Securities Exchange Act of 1934, which requires that we provide our shareholders with the opportunity to vote to approve, on a nonbinding, advisory basis, the compensation of our named executive officers as disclosed in this proxy statement in accordance with the compensation disclosure rules of the Securities and Exchange Commission.
As described in greater detail in the “Compensation Discussion and Analysis” section of this proxy statement the Company believes that compensation of its executive officers should encourage creation of shareholder value and achievement of strategic corporate objectives. The Company attempts to align the interest of its shareholders and management by integrating compensation with the Company’s short-term and long-term corporate strategic and financial objectives. In order to attract and retain the most qualified personnel, the Company intends to offer a total compensation package competitive with companies in our industry sector, taking into account relative company size, performance and geographic location as well as individual responsibilities and performance, while at the same time avoiding the encouragement of unnecessary or excessive risk taking.
This vote is advisory, which means that the vote on executive compensation is not binding on the Company, our Board of Directors or the Compensation Committee of the Board of Directors. The vote on this resolution is not intended to address any specific element of compensation, but rather relates to the overall compensation of our named executive officers, as described in this proxy statement in accordance with the compensation disclosure rules of the Securities and Exchange Commission. To the extent there is a significant vote against our named executive officers compensation as disclosed in this proxy statement, the Compensation Committee will evaluate whether any actions are necessary to address our shareholders concerns.
Therefore, we ask our shareholders to vote on the following resolution at the Annual Meeting:
RESOLVED, that the Company’s shareholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in the Company’s Proxy Statement for the 20192020 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and disclosure.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT.
PROPOSAL 3
ADVISORY VOTE ON THE FUTURE FREQUENCY OF ADVISORY VOTES ON EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 14A to the Securities Exchange Act of 1934, which requires we provide shareholders with the opportunity to vote on a non-binding, advisory basis, for their preference as to how frequently to vote on future advisory votes on the compensation of our named executive officers as disclosed in accordance with the compensation disclosure rules of the Securities and Exchange Commission.
Shareholders may indicate whether they would prefer that we conduct future advisory votes on executive compensation once every one, two, or three years. If no preference is indicated, shares will be voted in accordance with the Board of Directors recommendation. The Board of Directors has determined that an advisory vote on executive compensation that occurs once every three years is the most appropriate alternative for the Company and therefore the Board recommends that you vote for a three year interval for the advisory vote on executive compensation. In determining to recommend that shareholders vote for a frequency of once every three years, the Board considered how an advisory vote at this frequency will provide our shareholders with sufficient time to evaluate the effectiveness of our overall compensation objectives and philosophy and compensation process in the context of our long term business results for the corresponding period, while avoiding over-emphasis on short-term variations in compensation and business results. An advisory vote occurring once every three years will also permit our shareholders to observe and evaluate the impact of any changes to our compensation objectives and philosophy and compensation process which have occurred since the last advisory vote on executive compensation.
This vote is advisory, which means that the vote on executive compensation is not binding on the Company, our Board of Directors or the Compensation Committee of the Board of Directors. The Board of Directors and the Compensation Committee will take into account the outcome of the vote; however, when considering the frequency of future advisory votes on executive compensation, the Board of Directors may decide that it is in the best interests of our shareholders and the Company to hold an advisory vote on executive compensation more or less frequently than the frequency receiving the most votes cast by our shareholders.
The proxy card provides shareholders with the opportunity to choose among three options (holding the vote once every one, two or three years) and therefore, shareholders will not be voting to approve or disapprove the recommendation of the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE OPTION OF ONCE EVERY THREE YEARS AS THE PREFERRED FREQUENCY FOR ADVISORY VOTES ON EXECUTIVE COMPENSATION.
AUDIT COMMITTEE REPORT
The Audit Committee of the Company’s Board of Directors consists of five members. The Board of Directors has determined that all Audit Committee members meet the definition of independence within the meaning of the applicable NASDAQ listing standards and that James R. Bean, Ronald F. Klawitter, Subodh K. Kulkarni, Yacov A. Shamash and Patrick Sweeney each have the requisite attributes of an “audit committee financial expert” as defined by SEC regulations.The Audit Committee operates under a written charter adopted by the Board of Directors which is reviewed and reassessed for adequacy annually by the Audit Committee. The Audit Committee has met and discussed with the Company’s management and BDO USA, LLP ("BDO"), the Company’s independent registered public accounting firm, the Company’s financial statements contained in the Annual Report on Form 10-K for the fiscal year ended June 29, 2019.27, 2020.
The Audit Committee has reviewed and discussed with BDO the matters required to be discussed pursuant to PCAOB Auditing Standard No. 16, Communications with Audit Committees.BDO has submitted to the Audit Committee and the Committee has reviewed the written disclosures and letter from BDO as required under applicable independence standards for auditors of public companies.The Audit Committee discussed with BDO that firm’s independence. The Audit Committee has considered whether the provision of non-audit services is compatible with maintaining the principal auditor's independence.All services to be provided by BDO are pre-approved by the Audit Committee or are pre-approved by a member of the Audit Committee and later ratified by the Committee.
Based upon the reviews and discussions described above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10K for the fiscal year ended June 30, 2019,27, 2020, for filing with the Securities and Exchange Commission.
The Audit Committee: James R. Bean (Chairman), Ronald F. Klawitter, Subodh K. Kulkarni, Yacov A. Shamash, and Patrick Sweeney
Principal Accountant Fees and Services. The following chart shows the aggregate audit and non-audit fees billed or expected to be billed to the Company by BDO for professional services in the named categories for the fiscal years ended June 29, 201927, 2020 and June 30, 2018:29, 2019:
| | | | | | | | | | | |
| FY 2020 | | FY 2019 |
Audit Fees(1) | $ | 363,000 | | | $ | 363,000 | |
Audit Related Fees(2) | 19,000 | | | 19,000 | |
Tax Fees(3) | 130,500 | | | 97,500 | |
| All Other Fees | — | | | — | |
| Total | $ | 512,500 | | | $ | 479,500 | |
a.Audit fees consisted of professional services provided in connection with the audit of the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K, review of the interim consolidated financial statements included in the Company’s quarterly reports on Form 10-Q, review of documents filed with the SEC and statutory audits.
a.Audit related fees consisted of professional services provided in connection with the audit of the Company’s 401(k) Retirement Savings Plan and other consultation matters.
a.Tax fees for fiscal years 2020 and 2019 consisted of professional services provided for domestic income tax planning and compliance and the review of foreign tax returns and consultation on foreign tax matters.Tax fees for fiscal years 2020 and 2019 also included fees for BDO performing a study relating to research and development tax credits.
|
| | | | | | | |
| | FY 2019 | | FY 2018 |
Audit Fees(1) | $ | 363,000 |
| | $ | 409,500 |
|
Audit Related Fees(2) | 19,000 |
| | 13,500 |
|
Tax Fees(3) | 97,500 |
| | 97,500 |
|
| All Other Fees | — |
| | — |
|
| Total | $ | 479,500 |
| | $ | 520,500 |
|
| |
(1) | Audit fees consisted of professional services provided in connection with the audit of the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K, review of the interim consolidated financial statements included in the Company’s quarterly reports on Form 10-Q, review of documents filed with the SEC and statutory audits. |
| |
(2) | Audit related fees consisted of professional services provided in connection with the audit of the Company’s 401(k) Retirement Savings Plan and other consultation matters. |
| |
(3) | Tax fees for fiscal years 2019 and 2018 consisted of professional services provided for domestic income tax planning and compliance and the review of foreign tax returns and consultation on foreign tax matters. Tax fees for fiscal years 2019 and 2018 also included fees for BDO performing a study relating to research and development tax credits. |
PROPOSAL 43
RATIFICATION OF APPOINTMENT OF AUDITORS
The Audit Committee has retained BDO USA, LLP ("BDO") as the Company's independent registered public accounting firm for the fiscal year ending June 27, 2020.July 3, 2021. Representatives of BDO are expected to be present at the Annual Meeting with the opportunity to make a statement, if they desire to do so, and they are expected to be available to respond to appropriate questions. In the event that ratification of this appointment of BDO as the Company’s registered public accounting firm is not approved by a majority of the shares of Common Stock voting at the Annual Meeting in person or by proxy, the Audit Committee will review its future selection of its registered public accounting firm.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF BDO USA, LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SHAREHOLDER PROPOSALS
Eligible shareholders who wish to present proposals for action at the Annual Meeting of Shareholders to be held in 20202021 must submit their proposals in writing to Kathleen L. Nemeth, Secretary, Key Tronic Corporation, 4424 N. Sullivan Road - Upper Level, Spokane Valley, Washington 99216. Under Rule 14a-8(e) of the Securities Exchange Act of 1934, proposals submitted for inclusion in our proxy statement for the 20202021 Annual Meeting must be received by the Secretary at the address above no later than May 28, 2020.27, 2021. In addition, any shareholder who intends to present a proposal at the 20202021 Annual Meeting without inclusion of such proposal in our proxy materials must provide us notice of such proposal in the manner set forth above by July 26, 202025, 2021 or such proposal will be considered untimely. For such proposals that are untimely, the Company retains discretion to vote proxies it receives. For such proposals that are timely, the Company retains discretion to vote proxies it receives provided that (1) the Company includes in its Proxy Statement advice on the nature of the proposal and how it intends to exercise its voting discretion and (2) the proponent does not issue a proxy statement. We reserve the right to reject, rule out of order, or take other appropriate action with respect to any proposal that does not comply with these and other applicable requirements.
OTHER MATTERS
Annual Report on Form 10-K
The 20192020 Annual Report on Form 10-K (including exhibits), as amended, which we refer to as our “Form 10-K,” is available by accessing the Company’s website at www.keytronicems.com or the SEC’s website at www.sec.gov. Stockholders may request a free copy of our Form 10-K by contacting Investor Relations at StreetConnect, (206) 729-3625, ktcc@stct.com.(509) 927-5500, investorrelations@keytronic.com. We will furnish any exhibit to our Form 10-K if specifically requested to do so.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors and persons who own more than 10% of the Company's Common Stock (collectively, "Reporting Persons") to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC") and NASDAQ.
Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms which they file. Based solely on its review of the copies of such forms received or written representations from certain Reporting Persons that no Forms 5’s were required, the Company believes that with respect to the fiscal year ended June 29, 201927, 2020 all the Reporting Persons complied with all applicable filing requirements.
20
Solicitation Expenses. The expense of printing and mailing proxy material will be borne by the Company. In addition to the solicitation of proxies by mail, solicitation may be made by certain directors, executive officers and other employees of the Company by personal interview, telephone or facsimile. No additional compensation will be paid for such solicitation. The Company will request brokers and nominees who hold stock in their names to furnish proxy material to beneficial owners of the shares and will reimburse such brokers and nominees for their reasonable expenses incurred in forwarding solicitation material to such beneficial owners. In addition, we have retained Georgeson LLP to aid in the solicitation of proxies. We currently estimate the fees payable to Georgeson LLP in connection with such services to be approximately $16,500,$8,500, plus reimbursement of out of pocket expenses.
Other Business. The Board of Directors knows of no other business that will be presented to the Annual Meeting. If any other business is properly brought before the Annual Meeting, it is intended that proxies in the enclosed form will be voted in respect thereof in accordance with the judgment of the persons voting the proxies.
|
| | | | | | | |
| Spokane Valley, Washington | | By Order of the Board of Directors, |
September 19, 201917, 2020 | | Kathleen L. Nemeth |
| | Secretary |
