What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-09-26 compared with 2022-09-14 · 118 added, 213 removed, 705 unchanged (32% of the section changed)

4 unchanged sentences

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Key Tronic Corporation (the “Company”) as of July 2, 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of July 2, 2022, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of July 2, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 13, 2022 expressed an unqualified opinion on the Company’s internal control over financial reporting.

We have audited the accompanying consolidated balance sheets of Key Tronic Corporation (the “Company”) as of July 1, 2023 and July 2, 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of July 1, 2023 and July 2, 2022, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

8 unchanged sentences

Management’s calculation includes reports with varying elements, to estimate costs incurred to date for various performance obligations.

Auditing management’s estimates used in the calculation of revenue recognized over time involved especially challenging and subjective auditor judgment.

Auditing management’s estimates used in the calculation of revenue recognized over time involved especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures.

The primary procedures we performed to address this critical audit matter included:

• Testing the design, implementation, and operating effectiveness of controls relating to revenue recognized over time, including controls over the quarterly calculation of in-process contracts, and the related contract assets.

• Testing the design, implementation, and operating effectiveness of internal controls relating to revenue recognized over time, including controls over the quarterly calculation of in-process contracts, and the related contract assets.

• Evaluating the methodology of estimating costs incurred to date on in-process contracts and testing the completeness and accuracy of the system generated reports used to estimate costs incurred by recalculating the expected costs on in-process contracts, vouching to source documents, tracing in-process orders to subsequent sales and shipping documentation within a reasonable period after year-end, identifying and testing significant assumptions used in the revenue calculation, and performing data validation procedures.

5 unchanged sentences

We have served as the Company’s auditor since 2021 .

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Key Tronic Corporation

Spokane Valley, Washington

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Key Tronic Corporation (the “Company”) as of July 3, 2021, the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended July 3, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at July 3, 2021, and the results of its operations and its cash flows for each of the two years in the period ended July 3, 2021 , in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principles

As discussed in Note 1 to the consolidated financial statements, the Company changed its accounting method for accounting for leases in fiscal year 2020 due to the adoption of Topic 842:

Leases, using a modified retrospective approach.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company's auditor from 2003 through 2021.

Spokane, Washington

September 16, 2021

KEY TRONIC CORPORATION AND SUBSIDIARIES

5 unchanged sentences

Trade receivables, net of allowance for doubtful accounts of $ 23 and $ 12

150,600 135,876

Contract assets 29,925 21,974

24 unchanged sentences

Total liabilities 287,655 282,045

Commitments and contingencies (Note 4 and 8)

Commitments and contingencies (Note 9)

Shareholders’ equity:

1 unchanged sentence

issued and outstanding 10,762 and 10,762 shares, respectively

47,728 47,474

Retained earnings 82,986 77,829

7 unchanged sentences

Fiscal Year Ended

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

Net sales $ 588,135 $ 531,815

3 unchanged sentences

Selling, general and administrative expenses 25,715 24,598

Gain on insurance proceeds, net of losses ( 4,301 ) —

Total operating expenses 31,149 34,419

2 unchanged sentences

Income before income taxes 6,300 3,691

Income tax provision (benefit) 314 1,572 ( 439 )

Income tax provision 1,143 314

Net income $ 5,157 $ 3,377

8 unchanged sentences

Fiscal Year Ended

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

Comprehensive income:

3 unchanged sentences

Comprehensive income $ 5,485 $ 880

Other comprehensive income for fiscal years 2022, 2021, and 2020 is reflected net of tax provision (benefit) of approximately $( 0.8 ) million, $ 1.2 million and $( 1.1 ) million, respectively.

Other comprehensive income for fiscal years 2023 and 2022 is reflected net of tax provision (benefit) of approximately $ 0 and $( 0.8 ) million, respectively.

See accompanying notes to consolidated financial statements.

3 unchanged sentences

Fiscal Year Ended

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

Operating activities:

4 unchanged sentences

Amortization of deferred loan costs 154 143

Excess tax benefit from exercise of stock options — ( 43 ) —

Noncash lease expense 5,712 4,261

Inventory write-down to net realizable value 427 950

1 unchanged sentence

Provision for doubtful accounts 37 67

(Gain) loss on disposal of assets ( 12 ) — 207

Gain on disposal of assets ( 21 ) ( 12 )

Gain on insurance proceeds, net of losses ( 4,301 ) —

Share-based compensation expense 254 293

13 unchanged sentences

Prepayments on finance lease obligations ( 188 ) ( 1,252 )

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

Proceeds from insurance 3,500 —

Cash used in investing activities ( 4,534 ) ( 8,051 )

2 unchanged sentences

Proceeds from issuance of long term debt 4,375 11,594

Interest rate swap termination fee — ( 925 ) —

Repayments of long-term debt ( 2,417 ) ( 2,143 )

2 unchanged sentences

Principal payments on finance leases ( 4,291 ) ( 2,331 )

Excess tax benefit from exercise of stock options — 43 —

Cash provided by financing activities 17,741 11,192

17 unchanged sentences

Shareholders’

Balances, June 29, 2019 10,760 $ 46,680 $ 65,353 $ 2,426 $ 114,459

Net income — — 4,758 — 4,758

Unrealized loss on hedging instruments, net of tax — — — ( 3,926 ) ( 3,926 )

Share-based compensation — 266 — — 266

Balances, June 27, 2020 10,760 $ 46,946 $ 70,111 $ ( 1,500 ) $ 115,557

Balances, July 3, 2021 10,762 47,181 74,452 2,072 $ 123,705

Net income — — 3,377 — 3,377

Unrealized gain on hedging instruments, net of tax — — — ( 2,497 ) ( 2,497 )

Exercise of stock appreciation rights 2 — — — —

Excess tax benefit from exercise of stock options 43 43

Share-based compensation — 293 — — 293

17 unchanged sentences

Additionally, continued adverse macroeconomic conditions and significant currency exchange fluctuations can also materially impact operating results.

Correction of an Immaterial Error

The Company made an out-of-period tax adjustment in fiscal year 2021 in the amount of $0.4 million decreasing the deferred tax asset related to unexercised stock appreciation rights (SARs), to reflect the fact that certain of the unexercised SARs had expired over several different periods prior to fiscal year 2021.

Historically, we have financed operations and met our capital expenditure requirements primarily through cash flows provided by operations and borrowings under our credit facilities.

We generated operating and net income of $ 16.3 million and $ 5.2 million, respectively, during the 12-month period ended July 1, 2023 and have positive working capital of $ 197.6 million as of July 1, 2023.

Due to the timing between the procurement of raw materials, production cycle and payment from our customers, we have relied on borrowings on our credit facilities to fund operations as the Company increased its revenues and backlog during fiscal year 2023.

Based on current projections, we anticipate generating cash from operations as revenue slightly decreases in the first quarter of fiscal year 2024 and decreasing working capital requirements as existing backlog is manufactured and shipped.

As of July 1, 2023, we have limited additional borrowing capacity on our credit facility.

We are in discussions with multiple financial institutions to extend the borrowing capacity on our credit facility.

If we are unable to meet projected operating results or extend our borrowing capacity, we may need to delay the purchase of raw materials or require our customers to fund inventory raw material costs ahead of production.

Other options to increase our liquidity include factoring receivables or leveraging foreign owned assets for additional borrowing capacity.

We believe that projected cash from operations, funds available under our asset-based revolving credit facility and additional financing options will be sufficient to meet our working and fixed capital requirements for at least the next 12 months.

Reclassifications

Certain prior period reclassifications were made to conform with the current period presentation.

These reclassifications had no effect on reported income, comprehensive income, cash flows, total assets, or shareholders' equity as previously reported.

Principles of Consolidation

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The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outlines the terms of the business relationship between the customer and the Company.

This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc.

This includes matters such as warranty,

indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc.

The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place.

35 unchanged sentences

As of July 1, 2023, the Company did not have any outstanding foreign currency forward contracts.

The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities.

The foreign currency forward contracts and interest rate swaps have terms that are matched to the underlying transactions being hedged.

As a result, these transactions fully offset the hedged risk and no ineffectiveness has been recorded.

The Company’s foreign currency forward contracts and interest rate swaps potentially expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the agreement.

The Company minimizes such risk by seeking high quality counterparties.

The Company’s counterparties to the foreign currency forward contracts and interest rate swaps are major banking institutions.

These institutions do not require collateral for the contracts, and the Company believes that the risk of the counterparties failing to meet their contractual obligations is remote.

The Company does not enter into derivative instruments for trading or speculative purposes.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.

Diluted earnings per common share is computed by dividing net income by the combination of other potentially dilutive weighted average common shares and the weighted average number of common shares outstanding during the period using the treasury stock method.

during the period using the treasury stock method.

The computation assumes the proceeds from the exercise of stock options were used to repurchase common shares at the average market price during the period.

7 unchanged sentences

The Company had an outstanding balance on the term loan of $ 3.4 million as of July 1, 2023 and $ 4.6 million as of July 2, 2022, with a carrying value that reasonably approximates the fair value.

The equipment term loan was $ 4.6 million as of July 2, 2022 and $ 5.8 million as of July 3, 2021, with a carrying value that reasonably approximates the fair value.

The equipment term loans were $ 6.5 million as of July 1, 2023 and $ 3.3 million as of July 2, 2022, with a carrying value that reasonably approximates the fair value.

Share-based Compensation

4 unchanged sentences

In January 2021, FASB issued Accounting Standard Update (ASU) 2021-01, Reference Rate Reform (Topic 848) to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation.

The Company is currently assessing the effects on its consolidated financial statements, and if it will elect this optional standard.

The Company is currently assessing the effects on its consolidated financial statements, and it intends to adopt the guidance as it becomes effective.

In March of 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which clarifies specific issues raised by stakeholders.

11 unchanged sentences

The Company is currently assessing the impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2024.

As a result of adopting ASC 842, Leases , using a modified retrospective approach as of June 30, 2019, the Company recognized a right of use asset of $21.4 million, a corresponding lease liability of $20.4 million, a reduction in prepaid rent of $0.4 million, a reduction of favorable lease agreement intangible of $0.7 million, and no adjustment to retained earnings or future P&L impact.

The Company operates on a 52/53 week fiscal year.

Fiscal years end on the Saturday nearest June 30.

As such, fiscal years 2022, 2021, and 2020, ended on July 2, 2022, July 3, 2021, and June 27, 2020, respectively.

Fiscal year 2021 was a 53 week year.

As such, fiscal years 2023 and 2022 ended on July 1, 2023 and July 2, 2022, respectively.

Fiscal years 2022 and 2023 were 52 week years.

7 unchanged sentences

Buildings and improvements 3 to 30

26,459 25,841

Equipment 1 to 10

77,823 71,180

Furniture and fixtures 3 to 5

3 unchanged sentences

Fiscal Year Ended

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

(in thousands)

4 unchanged sentences

The Loan Agreement provides for a five-year asset-based senior secured revolving credit facility of up to $ 93 million, maturing on August 14, 2025.

Subsequent to July 2, 2022, the company entered into a third amendment to the loan agreement with Bank of America.

On September 3, 2021, the Company entered into an amendment to the Company's current loan agreement with Bank of America.

The amendment increases the Company's current credit facility of $ 93 million to $ 120 million, subject to the Company's borrowing base, maturing on September 3, 2026.

On August 26, 2022, the Company entered into a third amendment to the loan agreement with Bank of America.

The amendment removed the cash flow leverage ratio covenant and increased the interest rate by 25 basis points.

In the third quarter of fiscal year 2023, the Company entered into equipment financing agreements with Ameris Bank dba Balboa Capital ("Balboa Capital") totaling $ 4.4 million related to the Company’s existing manufacturing equipment that bears an interest rate range of 6 % - 8 % and matures in the third quarter of fiscal 2029.

Under these agreements, equal monthly payments of $ 75,000 commenced in the third quarter of fiscal year 2023 and will continue through the maturity of the equipment financing facility in the third quarter of fiscal 2029.

The Company had an outstanding balance $ 4.1 million as of July 1, 2023.

As of July 1, 2023, the Company had an outstanding balance under the asset-based revolving credit facility of $ 115.4 million, $ 0.3 million in outstanding letters of credit and $ 4.6 million available for future borrowings.

5 unchanged sentences

As of July 2, 2022, the Company had an outstanding balance of $ 3.3 million.

Generally, the interest rate applicable to loans under the Bank of America loan agreement are, at the Company’s option:

(i)(A) the base rate which is the highest of (1) the prime rate for the applicable day (as such rate is determined from time to time by the Bank), (2) the federal funds rate for the applicable day plus 0.50%, and (3) LIBOR for a 30-day interest period as of the applicable day plus 1.00% (provided that in no event shall the base rate be less than zero), plus the applicable interest margin for base rate loans;

and (B) LIBOR rate for an applicable interest period (provided that in no event shall the LIBOR rate be less than 0.50%), plus the applicable interest margin for LIBOR rate loans.

Generally, the interest rate applicable to loans under the Bank of America loan agreement will be, at the Company’s option:

(i)(A) the base rate which is the highest of (a) the Prime Rate for such day, (b) the Federal Funds Rate for such day plus 0.50 %, or (c) Term SOFR for a one month interest period as of such day, plus 1.00 % (provided that in no event shall the base rate be less than zero), plus the applicable interest margin for base rate loans;

and (B) SOFR rate for an applicable interest period, plus

the applicable interest margin for SOFR rate loans.

Depending on average daily excess borrowing availability over applicable periods under the Credit Facility, applicable interest margins on:

(x) base rate loans are 1.25-1.75%;

and (y) LIBOR rate loans are 2.25-2.75%, resetting on a quarterly basis.

If there is an event of default under the loan agreement, all loans and other obligations will bear interest at a rate of an additional 2.00% on the otherwise applicable interest rates.

(x) base rate loans will be 1.50 - 2.00 %;

and (y) SOFR rate loans will be 2.50 - 3.00 %, resetting on a quarterly basis beginning in early 2021.

If there is an event of default under the loan agreement, all loans and other obligations will bear interest at a rate of an additional 2.00 % on the last change rates above otherwise applicable interest rates.

In addition to interest charges, the Company is required to pay a fee of 0.25 % per annum on the unused portion of the Credit Facility, monthly in arrears.

Under the loan agreement with Bank of America, the asset-based revolving credit facility bears interest at LIBOR plus 2.5 %, as elected by the Company.

On November 24, 2020, the Company entered into a $ 6.0 million equipment financing facility related to the Company’s existing manufacturing equipment that bears interest at 5.52% and matures on April 24, 2026.

Under this loan agreement, equal monthly payments of $ 100,000 commenced on May 24, 2021 and will continue through the maturity of the equipment financing facility on April 24, 2026.

On November 24, 2020, the Company entered into a $ 6.0 million financing facility related to the Company’s existing real estate located in Mexico that bears interest at 5.52 % and matures on April 24, 2026.

Under this loan agreement, equal monthly payments of $ 100,000 commenced on May 24, 2021 and will continue through the maturity of the financing facility on April 24, 2026.

The Company had an outstanding balance of $ 3.4 million and $ 4.6 million as of July 1, 2023 and July 2, 2022, respectively.

On September 3, 2021, the Company entered into an amendment to the Company's current loan agreement with Bank of America.

The amendment increases the Company's current credit facility of $ 93 million to $120 million, subject to the Company's borrowing base, maturing on September 3, 2026.

The interest rates on outstanding debt as of July 1, 2023 range from 4.85 % - 8.22 % compared to 4.50 % - 5.52 % as of July 2, 2022.

1 unchanged sentence

Fiscal Years Ending Amount

2028 - Thereafter $ 1,367

Total debt $ 125,259

5 unchanged sentences

Management believes the Company was in compliance with all financial covenants as of July 1, 2023.

TRADE ACCOUNTS RECEIVABLE PURCHASE PROGRAMS

Sale Programs

The Company has utilized an Account Purchase Agreement with Wells Fargo Bank, N.A.

("WFB") which allowed the Company to sell and assign to WFB and WFB to purchase from Company the accounts receivable of certain Company customers in a maximum aggregate amount outstanding of $ 25.0 million.

As of July 2, 2022, the Company had no factored receivables with WFB.

The Company did not sell any accounts receivables during the twelve months ended July 2, 2022 or July 3, 2021.

There were no accounts receivables sold and not yet collected as of July 2, 2022 or July 3, 2021.

The receivables that were sold were removed from the consolidated balance sheets and the cash received is reflected as cash provided by operating activities in the consolidated statements of cash flows.

Cash receipts related to the deferred purchase price from receivables factored by the Company is reflected as cash provided by investing activities.

Income tax benefit consists of the following:

Fiscal Year Ended

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

(in thousands)

Current income tax benefit:

Current income tax provision (benefit):

United States $ 998 $ ( 2,179 )

1 unchanged sentence

3,132 ( 167 )

Deferred income tax benefit:

Deferred income tax provision (benefit):

United States ( 2,130 ) 443

1 unchanged sentence

( 1,989 ) 481

Total income tax provision (benefit) $ 314 $ 1,572 $ ( 439 )

The Company has gross tax credit carryforwards of approximately $ 11.0 million at July 2, 2022 consisting of federal research and development (R&D) tax credits, and approximately $ 1.9 million of net operating loss carryovers in China which expire in fiscal years 2025 through 2027.

Management has reviewed all deferred tax assets for purposes of determining whether or not a valuation allowance may be required.

Total income tax provision $ 1,143 $ 314

The Company has gross tax credit carryforwards of approximately $ 9.8 million at July 1, 2023 consisting of federal research and development (R&D) tax credits.

Management has reviewed all deferred tax assets for purposes of determining whether a valuation allowance may be required.

A valuation allowance against deferred tax assets is required if it is more likely than not that some of the deferred tax assets will not be realized.

1 unchanged sentence

In the fourth quarter of fiscal year 2022, the Company, with its fiscal year 2021 federal income tax return, made automatic changes in tax accounting methods that created a fiscal year 2021 tax net operating loss.

This loss is permitted to be carried back to the tax years ending in 2016, 2017, and 2019, resulting in a tax benefit of $0.6 million due to the higher federal income tax rate in effect in the years ending in 2016 and 2017.

This loss was carried back to the tax years ending in 2016, 2017, and 2019, resulting in a tax benefit of $ 0.6 million due to the higher federal income tax rate in effect in the years ending in 2016 and 2017.

On January 27, 2021, the Company received official notice from the Vietnamese tax authorities, confirming tax benefits awarded related to the Company’s principal product line in Vietnam (the “Tax Holiday”).

Under the Tax Holiday, the tax rate applied to income derived from this product line will be zero percent for four years beginning with fiscal year 2021, then five percent for nine years, then ten percent for one year (as opposed to the normal twenty percent Vietnamese statutory rate).

Consequently, Management has revalued its net operating loss in Vietnam at the zero percent Tax Holiday rate, as the net operating loss carryovers are projected to expire before the end of the Tax Holiday.

The Company eliminated the deferred tax assets attributable to the Vietnam net operating loss carryover ($0.2 million) in the third quarter of fiscal year 2021.

The Company evaluated tax law changes and regulatory guidance issued through the quarter.

Such changes and regulations include guidance under Sec.

951A, foreign tax credits, and rules relating to consolidated NOL carryback claims.

951A, foreign tax credits, and rules relating to consolidated NOL carryback claims, a new book minimum tax on certain large corporations, and an excise tax on corporate stock buybacks among other provisions.

The Company evaluated the ongoing impact of these law and regulatory changes, which did not have a material impact on its provision for income taxes.

Subsequent to the end of the fiscal year ending July 2, 2022, on August 16, 2022, the Inflation Reduction Act of 2022 was signed into law.

This act includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks among other provisions.

The Company is evaluating the impacts of this act, and at this time the Company does not believe they will have a material impact on our consolidated financial position, results of operations, or cash flows.

Subsequent to the end of the fiscal year ending June 27, 2020, the Treasury Department issued final regulations applicable to the Company’s position with respect to the U.S.

1 unchanged sentence

These regulations did not have a material impact to the Company's income tax positions.

The 2017 Tax Cuts and Jobs Act (TCJA) mandated that, for tax years after fiscal year 2022, certain costs incurred for research and development (R&D) activities would no longer be allowed for immediate deduction but would be capitalized and amortized over 5 years (for R&D activities performed domestically) or 15 years (for R&D activities performed abroad).

The Company began capitalizing and amortizing such costs in fiscal year 2023, resulting in an increase to income taxes payable that was largely offset by the utilization of R&D credit carryovers.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic.

21 unchanged sentences

Fiscal Year Ended

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

(in thousands)

2 unchanged sentences

Foreign tax rate differences 137 336

Tax rate change — 184 —

Federal rate differences applied to net operating loss carryback

1 unchanged sentence

Previously unrecognized tax benefits ( 75 ) 146

Effect of repatriation of foreign earnings, net — ( 61 ) —

Inflation adjustments 118 178

Tax penalties & interest — 179

2 unchanged sentences

Equity compensation shortfall 73 104

Other 174 220 124

Foreign Exchange Gains/Losses Unrealized for Tax Purposes 277 23

Income tax provision (benefit) $ 1,143 $ 314

Prior year presentation of certain items in the above table has been adjusted to reflect current year classification.

The domestic and foreign components of income before income taxes were:

Fiscal Year Ended

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

(in thousands)

11 unchanged sentences

Accruals 2,421 2,406

Fixed assets 1,200 —

PPE 1,328 1,200

ASC 606 deferred costs 4,802 4,216

1 unchanged sentence

Interest expense deduction carryforward 977 580

Research and development expenses 3,860 —

Other 271 465

2 unchanged sentences

Accrued withholding tax - unremitted earnings ( 754 ) ( 754 )

Fixed assets — ( 794 )

Right-of-use assets ( 3,857 ) ( 3,663 )

Tax capital lease liabilities ( 2,832 ) ( 2,385 )

Mark-to-market adjustments — ( 816 )

ASC 606 accelerated revenue ( 4,599 ) ( 3,736 )

13 unchanged sentences

Fiscal Year Ended

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

(in thousands)

7 unchanged sentences

The Company recognizes interest accrued related to unrecognized tax benefits and penalties in its income tax provision.

The Company has not recognized any interest or penalties in the fiscal years presented in these financial statements, except for $0.2 million in fiscal year 2022.

The Company has not recognized any interest or penalties in the fiscal years presented in these financial statements, except for

$ 0.2 million in fiscal year 2022.

The Company is subject to income tax in the U.S.

8 unchanged sentences

(in thousands, except per share information)

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

Net income $ 5,157 $ 3,377

13 unchanged sentences

The SARs cliff vest after a three-year period from date of grant and expire five years from date of grant.

On August 9, 2021, the Compa ny granted 165,000 SARs under the 2010 Incentive Plan to certain key employees and outside directors at a strike price of $ 7.17 and a grant date fair value of $ 2.73 .

On July 29, 2022, the Compa ny granted 145,000 SARs under the 2010 Incentive Plan to certain key employees and outside directors at a strike price of $ 5.10 and a grant date fair value of $ 2.09 .

As of July 1, 2023, 140,000 remain outstanding.

The grant date fair value for the awards granted during fiscal year 2022, were estimated using the Black Scho les option valuation method with the following weighted average assumptions as of August 9, 2021:

The grant date fair value for the awards granted during fiscal year 2023, were estimated using the Black Scho les option valuation method with the following weighted average assumptions as of July 29, 2022:

Fiscal Year 2023

August 9, 2021

July 29, 2022

Expected dividend yield — %

2 unchanged sentences

Expected life 4.00

On July 23, 2020, the Company granted 155,000 SARs under the 2010 Incentive Plan to certain key employees and outside directors at a strike price of $ 6.94 and a grant date fair value of $ 2.32 .

On August 9, 2021, the Compa ny granted 165,000 SARs under the 2010 Incentive Plan to certain key employees and outside directors at a strike price of $ 7.17 and a grant date fair value of $ 2.73 .

As of July 1, 2023, 140,000 remain outstanding.

The grant date fair value for the awards granted during fiscal year 2021, were estimated using the Black Scholes option valuation method with the following weighted average assumptions as of July 23, 2020:

Fiscal Year 2022

July 23, 2020

August 9, 2021

Expected dividend yield — %

11 unchanged sentences

Expected life 4.00

Subsequent to July 2, 2022, the Company granted 145,000 SARs with a strike price of $ 5.10 and a grant date fair value of $ 2.09 .

Share-based compensation expense is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations.

This forfeiture rate will be revised, if necessary, in subsequent periods if actual forfeitures differ from the amount estimated.

Share-based compensation expense for fiscal years ended July 2, 2022, July 3, 2021 and June 27, 2020 was $ 0.3 million, $ 0.2 million and $ 0.3 million, respectively.

Share-based compensation expense for fiscal years ended July 1, 2023 and July 2, 2022 was $ 0.3 million and $ 0.3 million, respectively.

The Black-Scholes option valuation model is used by the Company for estimating the fair value of SARs.

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Changes in these assumptions can materially affect the fair value estimates.

There were no SARs exercised during fiscal year 2022.

There were 20,000 SARs exercised with an immaterial amount of intrinsic value in fiscal year 2021.

There were no SARs exercised during fiscal year 2020.

There were no SARs exercised during fiscal year 2023 and fiscal year 2022.

As of July 1, 2023, total unrecognized compensation expense related to nonvested share-based compensation arrangements was approximately $ 0.3 million.

This expense is expected to be recognized over a weighted-average period of 1.90 years.

The following table summarizes the Company’s Options and SARs activity for all plans from June 30, 2019 through July 2, 2022:

The following table summarizes the Company’s Options and SARs activity for all plans from July 3, 2022 through July 1, 2023:

For Grant SARs

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Price Weighted

Balances, June 30, 2019 493,918 985,416 $ — $ 8.35 1.7

Shares authorized — —

SARs granted ( 175,000 ) 175,000 4.93

SARs forfeited 290,833 ( 290,833 ) 7.71

SARs exercised — — — —

Balances June 27, 2020 609,751 869,583 $ — $ 7.87 1.9

Balances, July 3, 2021 688,084 791,250 $ — $ 7.15 1.9

Shares authorized — $ —

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525,000 2.1 $ 6.06 120,000 $ 4.93

$ 7.44 – $ 9.44

101,250 14.6 8.17 106,250 8.17

$ 4.93 to $ 9.44

626,250 2.2 $ 6.41 226,250 $ 6.45

The Company has defined contribution plans available to U.S.

employees who have attained age 21.

Company contributions to the plans were approximately $ 0.9 million, $ 0.9 million, and $ 0.8 million during fiscal years 2022, 2021 and 2020, respectively.

Company contributions to the plans were approximately $ 1.1 million and $ 0.9 million during fiscal years 2023 and 2022, respectively.

COMMITMENTS AND CONTINGENCIES

As of July 3, 2021 and June 27, 2020, the Company did not have any property and equipment financed under finance leases.

Please refer to Footnote “Leases” of the “Notes to Consolidated Financial Statements” for information regarding lease commitments.

Warranty Costs :

The Company provides warranties on certain product sales, and allowances for estimated warranty costs are recorded during the period of sale.

The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty.

The Company establishes warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior twelve months’ sales activities.

As of July 2, 2022 and July 3, 2021, the reserve for warranty costs was approximately $ 31,000 and $ 25,000 , respectively.

If actual return rates and/or repair and replacement costs differ significantly from estimates, adjustments to recognize additional cost of sales may be required in future periods.

Warranty expense for fiscal years 2022, 2021 and 2020 was related to workmanship claims on certain contract manufacturing products.

Litigation and Other Matters

The Company is party to certain lawsuits or claims in the ordinary course of business.

The Company does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the financial position, results of operations or cash flow of the Company.

The Company provides warranties on certain product sales.

Allowances for estimated warranty costs are recorded during the period of sale.

The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty.

If actual return rates and/or repair and replacement costs differ significantly from management's estimates, adjustments to recognize additional cost of sales may be required in future periods.

As of July 1, 2023 and July 2, 2022, the reserve for warranty costs was approximately $ 29,000 and $ 31,000 , respectively.

Please refer to Footnote “Leases” of the “Notes to Consolidated Financial Statements” for information regarding lease commitments.

Internal Investigation

During fiscal 2021, the Company’s Audit Committee completed an internal investigation arising from a notification from an employee regarding certain alleged accounting irregularities.

During fiscal year 2021, the Company’s Audit Committee completed an internal investigation arising from a notification from an employee regarding certain alleged accounting irregularities.

In January 2021, the Company determined that improper accounting resulted in an understatement of cost of goods sold and an overstatement of inventories.

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During the fiscal year ended July 2, 2022, the Company entered into $ 13.9 million of foreign currency forward contracts and settled $ 24.6 million of such contracts.

During the fiscal year ended July 3, 2021, the Company did not enter into any foreign currency forward contracts and settled $ 26.1 million of such contracts.

During the fiscal year ended June 27, 2020, the Company entered into $ 23.8 million of foreign currency forward contracts and settled $ 26.7 million of such contracts.

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of September 30, 2022, related to the borrowings outstanding under the term loan with Wells Fargo Bank.

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At date of termination this interest rate swap was in a liability position of $ 776,500 , which will be amortized to interest expense over the original term of the swap.

The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheets as of July 2, 2022 and July 3, 2021 (in thousands):

July 2, 2022 July 3, 2021

Derivatives Designated as Hedging Instruments Balance Sheet Location Fair Value Fair Value

Foreign currency forward contracts & swaps Other current assets $ — $ 3,614

The following table summarizes the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the fiscal year 2023 (in thousands):

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Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance

June 27, 2020 Effective

July 3, 2021 Effective

AOCI Effective Portion

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Total $ 2,072 $ 950 $ ( 3,447 ) $ ( 425 )

The following table summarizes the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the fiscal year 2020 (in thousands):

Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance

June 29, 2019 Effective

AOCI Effective Portion

Reclassified From

AOCI Into Income AOCI Balance

June 27, 2020

Forward contracts & swaps Cost of sales $ 2,424 $ ( 865 ) $ ( 2,318 ) $ ( 759 )

Interest rate swap Interest expense 2 ( 782 ) 39 ( 741 )

Total $ 2,426 $ ( 1,647 ) $ ( 2,279 ) $ ( 1,500 )

As of July 1, 2023, the Company does not have any foreign exchange contracts with credit-risk-related contingent features.

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There have been no changes in the fair value methodologies used at July 1, 2023 and July 2, 2022.

The following table summarizes the fair value of assets (liabilities) of the Company’s derivatives that are required to be measured on a recurring basis as of July 3, 2021 (in thousands):

Level 1 Level 2 Level 3 Total

Financial Assets:

Foreign currency forward contracts — 3,614 — $ 3,614

The Company had forward contracts to hedge known future cash outflows for expenses denominated in the Mexican peso and had an interest rate swap to mitigate risk associated with certain borrowings under the Company’s debt arrangement.

These contracts were measured on a recurring basis based on the foreign currency spot rates and forward rates quoted by banks or foreign currency dealers.

These contracts were marked to market using level 2 input criteria every quarter with the unrealized gain or loss, net of tax, reported as a component of shareholders’ equity in accumulated other comprehensive income (loss), as they qualified for hedge accounting.

The carrying values of cash and cash equivalents, accounts receivable, contract assets, and current liabilities are reflected on the balance sheets at July 1, 2023 and July 2, 2022, reasonably approximate their fair value.

The Company’s long-term debt, which is measured at amortized cost, primarily consists of an asset-based revolving credit facility, lease liability, and equipment loans.

These borrowings bear interest at LIBOR plus 2.5% per the loan agreement.

These borrowings bear interest at SOFR plus 2.5 % per the loan agreement.

Each of these rates is a variable floating rate dependent upon current market conditions and the Company’s current credit risk as discussed in Footnote “Long-Term Debt” of the “Notes to Consolidated Financial Statements.”

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Products and Services

Of the revenues for the years ended July 2, 2022, July 3, 2021, and June 27, 2020, contract manufacturing sales and services were $ 531.8 million, $ 518.7 million and $ 449.5 million, respectively.

Of the revenues for the years ended July 1, 2023 and July 2, 2022, contract manufacturing sales and services were $ 588.1 million and $ 531.8 million, respectively.

Geographic Areas

Net sales and long-lived assets (property, plant, and equipment) by geographic area for the years ended and as of July 2, 2022, July 3, 2021 and June 27, 2020 are summarized in the following table.

Net sales and long-lived assets (property, plant, and equipment) by geographic area for the years ended and as of July 1, 2023 and July 2, 2022 are summarized in the following table.

Net sales set forth below are based on the shipping destination.

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(in thousands)

2022 2021 2020

Geographic net sales:

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Fiscal Year Ended

2022 2021 2020

United States 85 % 82 %

China 16 25 19

Other foreign countries (a)

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Customer A 12 % 12 % 16 % 13 %

Customer B 12 % 24 % 18 % 13 % 15 %

QUARTERLY FINANCIAL DATA (Unaudited)

Fiscal Year Ended July 2, 2022

Quarter Second

Quarter Third

Quarter Fourth

(in thousands, except per share amounts)

Net sales $ 132,762 $ 134,456 $ 138,391 $ 126,206

Gross profit 10,138 9,808 11,508 11,760

Income before income taxes 1,102 556 1,238 795

Net income 815 587 1,007 968

Net income per share - basic $ 0.08 $ 0.05 $ 0.09 $ 0.09

Net income per share - diluted $ 0.07 $ 0.05 $ 0.09 $ 0.09

Weighted average shares outstanding

Basic 10,762 10,762 10,762 10,762

Diluted 11,052 11,057 11,062 11,071

Fiscal Year Ended July 3, 2021

Quarter Second

Quarter Third

Quarter Fourth

(in thousands, except per share amounts)

Net sales $ 123,207 $ 128,262 $ 134,600 $ 132,629

Gross profit 10,015 10,622 11,096 10,306

Income before income taxes 2,115 1,872 1,556 370

Net income 1,719 1,580 867 175

Net income per share - basic $ 0.16 $ 0.15 $ 0.08 $ 0.02

Net income per share - diluted $ 0.16 $ 0.14 $ 0.08 $ 0.02

Weighted average shares outstanding

Basic 10,760 10,760 10,760 10,762

Diluted 11,040 11,385 11,429 11,169

Revenue Recognition

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Contract Assets

Beginning balance, June 27, 2020

Beginning balance, July 3, 2021

Revenue recognized 515,831

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The following table presents the Company’s revenue disaggregated for the twelve months ended July 1, 2023 and the twelve months ended July 2, 2022 (in thousands):

Recognition July 2, 2022 July 3, 2021 June 27, 2020

Recognition July 1, 2023 July 2, 2022

Over-Time $ 573,444 $ 515,831

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The weighted average discount rate is disclosed in the tables below.

The components of lease cost were as follows as of July 2, 2022, July 3, 2021 and June 27, 2020 (in thousands):

Year Ended Year Ended Year Ended

Lease cost Classification July 2, 2022 July 3, 2021 June 27, 2020

The components of lease cost were as follows as of July 1, 2023 and July 2, 2022 (in thousands):

Year Ended Year Ended

Lease cost Classification July 1, 2023 July 2, 2022

Operating lease cost Cost of sales $ 4,519 $ 6,442

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Other information related to leases was as follows (in thousands):

July 2, 2022 July 3, 2021 June 27, 2020

July 1, 2023 July 2, 2022

Cash paid for amounts included in the measurement of lease liabilities:

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2027 2,464 71

2027 1,450 71

Thereafter 1,689 —

4 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data