What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-05-10 · 82 added, 119 removed, 309 unchanged (39% of the section changed)

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The Company provides its customers full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, and worldwide distribution.

Its customers include some of the world’s leading original equipment manufacturers.

Our customers include some of the world’s leading original equipment manufacturers.

Our combined capabilities and vertical integration are proving to be a desirable offering to our expanded customer base.

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Executive Summary

For the third quarter of fiscal year 2023, the Company reported total revenue of $164.6 million, up 18.9 percent from $138.4 million in the same period of fiscal year 2022.

While year-over-year sales have increased and customer demand has been even higher, production continues to be limited by global supply chain and transportation issues.

Although constraints in the global supply chain continue to limit production, the Company continues to see gradual improvements with respect to lead times of certain key components.

As new customer programs ramp, the concentration of our top three customers’ net sales decreased to 34.0 percent of total sales in the third quarter of fiscal year 2023 from 34.4 percent in the same period of the prior fiscal year.

We expect that concentration to our top three customers will likely decrease during the fiscal year.

For the first quarter of fiscal year 2024, the Company reported total revenue of $147.8 million, up 8% from $137.3 million in the same period of fiscal year 2023.

During the first quarter of fiscal year 2024, the Company ramped up new programs produced in the Company’s U.S.

facilities and remained profitable, despite a softening of customer demand in the Company’s Mexico-based facilities.

As previously announced, the large program with a leading power equipment company is now expected to resume materially in fiscal 2025 rather than 2024, with a redesigned product.

As new customer programs ramp, the concentration of our top three customers’ net sales increased to 29.9 percent of total sales in the first quarter of fiscal year 2024 from 25.4 percent in the same period of the prior fiscal year.

We expect that concentration to our top three customers will decrease during the fiscal year.

Net sales to our largest customers may vary significantly from quarter to quarter depending on the size and timing of customer program commencement, forecasts, delays, and design modifications.

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In addition, our capacity and core competencies for printed circuit board assemblies, precision molding, sheet metal fabrication, tool making, assembly, and engineering can be applied to a wide variety of products.

Gross profit as a percent of net sales was 8.7 percent for the third quarter of fiscal year 2023 as compared to 8.3 percent for the same quarter of the prior fiscal year.

During the third quarter of fiscal year 2023, the increase was driven by increased revenue levels along with some stabilization in the labor market.

However, our gross margin was adversely impacted by the strengthening of the Mexican Peso relative to the US Dollar.

Operating income as a percentage of net sales was 3.1 percent for the third quarter of fiscal year 2023 compared to 2.0 percent of operating income as a percentage of net sales for the third quarter of fiscal year 2022.

The increase in operating income as a percentage of net sales was primarily driven by the increase in gross profit as discussed above.

Net income for the third quarter of fiscal year 2023 was $2.0 million or $0.18 per diluted share, as compared to net income of $1.0 million or $0.09 per diluted share for the third quarter of fiscal year 2022.

Net income for the third quarter of fiscal year 2023 improved mainly based on the increase in revenue for the quarter.

Net income for the third quarter of fiscal 2023 also included a gain on insurance proceeds of $0.4 million or approximately $0.03 per share related to equipment damaged in the storm at our Arkansas facility earlier in the year.

During the third quarter of fiscal year 2023, we won new programs involving security equipment, video and pinball machines, mining safety and productivity products, and telecommunications devices.

Moving into the fourth quarter of fiscal 2023, global logistics problems, the war in Europe, and China-US geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies.

Gross profit as a percent of net sales was 7.4 percent for the first quarter of fiscal year 2024 as compared to 7.6 percent for the same quarter of the prior fiscal year.

During the first quarter of fiscal year 2024, the results were impacted by unanticipated severance costs of $0.6 million, as the Company reduced its workforce by over 100 employees in Mexico and the U.S.

which adversely impacted gross profit.

Gross margin was also adversely impacted by the strength of the Mexican Peso, although the Mexican Peso has weakened during the second quarter.

Operating income as a percentage of net sales was 2.2 percent for the first quarter of fiscal year 2024 compared to 2.4 percent of operating income as a percentage of net sales for the first quarter of fiscal year 2023.

The decrease in operating income as a percentage of net sales was primarily driven by unanticipated severance costs and the strength of the Mexican Peso.

Net income for the first quarter of fiscal year 2024 was $0.3 million or $0.03 per diluted share, as compared to net income of $1.2 million or $0.11 per diluted share for the first quarter of fiscal year 2023.

The year-over-year decline in earnings was primarily a result of a $1.1 million increase in interest expense on higher interest rates.

Earnings were also adversely impacted by an unanticipated severance costs of $0.6 million, or approximately $0.04 to $0.05 per diluted share.

The workforce reduction reflects softening demand for a number of different programs and is expected to reduce operating expenses by more than $5 million annually.

During the first quarter of fiscal year 2024, we won new programs involving security equipment, sporting and outdoor products, environmental solutions, and industrial control systems.

Moving into the second quarter of fiscal year 2024, global logistics problems, the war in Europe, and China-US geopolitical tensions continue to drive OEM’s to examine their traditional outsourcing strategies.

We believe these customers increasingly realize they have become overly dependent on their China-based contract manufacturers not only for products, but also for design and logistics services.

The decision to onshore or near shore production is becoming more widely accepted as a smart long-term strategy.

The decision to onshore or near shore production appears to be becoming more widely accepted as a smart long-term strategy.

As a result, we see opportunities for continued growth.

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At the same time, these price reductions are offset by increasing wages at our North American facilities.

We maintain a strong balance sheet with a current ratio of 2.2 and a debt to equity ratio of 1.0 as of April 1, 2023.

Total cash used in operating activities as defined on our cash flow statement was $17.1 million for the nine months ended April 1, 2023, as working capital has increased to support increase revenue.

We believe we maintain sufficient liquidity for our expected future operations and had $116.8 million in borrowings on our revolving credit facility and $3.2 million remained available at April 1, 2023.

In our second quarter of fiscal 2024, the Company is beginning to see the Peso weaken to the US dollar which may translate into improving conditions moving forward.

We maintain a strong balance sheet with a current ratio of 2.5 and a debt-to-equity ratio of 0.9 as of September 30, 2023.

Total cash provided by operating activities as defined on our cash flow statement was $5.6 million for the three months ended September 30, 2023, the Company focuses on inventory reductions and other working capital improvements.

We believe we maintain sufficient liquidity for our expected future operations and had $110.5 million in borrowings on our revolving credit facility and $9.5 million remained available at September 30, 2023.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended April 1, 2023 with the Three Months Ended April 2, 2022

Comparison of the Three Months Ended September 30, 2023 with the Three Months Ended October 1, 2022

The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the three months ended April 1, 2023 as compared to the three months ended April 2, 2022.

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the three months ended September 30, 2023 as compared to the three months ended October 1, 2022.

It is provided to assist in assessing differences in our overall performance (in thousands):

Three Months Ended

April 1, 2023 % of

net sales April 2, 2022 % of

September 30, 2023 % of

net sales October 1, 2022 % of

net sales $ change % point

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Selling, general and administrative 5,784 3.9 % 5,656 4.1 % 128 (0.2) %

Gain on insurance proceeds (396) (0.2) % — — % (396) (0.2) %

Gain on insurance proceeds, net of losses (431) (0.3) % (934) (0.7) % 503 0.4 %

Total operating expenses 7,594 5.1 % 7,018 5.1 % 576 — %

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Net income $ 335 0.2 % $ 1,152 0.8 % $ (817) (0.6) %

Net sales of $164.6 million for the third quarter of fiscal year 2023 increased by 18.9 percent as compared to net sales of $138.4 million for the third quarter of fiscal year 2022.

The $26.2 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs and increased demand from existing customers.

However, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues, which delayed the arrival of certain key components, causing factory downtime and overtime expenses.

Gross profit as a percentage of net sales for the three months ended April 1, 2023 was 8.7 percent compared to 8.3 percent for the three months ended April 2, 2022.

This 0.4 percentage point increase was primarily a result of increased revenue levels along with some stabilization in the labor market, offset by the strengthening of the Mexican Peso relative to the US Dollar.

Net sales of $147.8 million for the first quarter of fiscal year 2024 increased by 7.6 percent as compared to net sales of $137.3 million for the first quarter of fiscal year 2024.

The $10.5 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs and increased component sales for a large customer.

However, the Company’s revenue was constrained by tightening worldwide supply chain and transportation and logistics issues.

Gross profit as a percentage of net sales for the three months ended September 30, 2023 was 7.4 percent compared to 7.6 percent for the three months ended October 1, 2022.

This 0.2 percentage point decrease was primarily a result of unanticipated severance costs related to a reduction of the Company’s workforce in Mexico and the United States.

The level of gross margin is impacted by facility utilization, product mix, timing, severity and steepness of new program ramps, pricing within the electronics industry and material costs, which can fluctuate significantly from quarter to quarter.

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence.

We recorded an impairment of approximately $100,000 and $155,000 for obsolete inventory during the three months ended April 1, 2023 and April 2, 2022, respectively.

We recorded an impairment of approximately $265,000 and $175,000 for obsolete inventory during the three months ended September 30, 2023 and October 1, 2022, respectively.

We adjust the carrying value for estimated obsolescence as necessary in an amount equal to the difference between the cost of inventory and its net realizable value based on assumptions as to future demand and market conditions.

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Operating Expenses

There were no significant changes to operating expenses during the presented quarters, other than the gain on insurance proceeds of $0.4 million recorded in the third quarter of fiscal 2023.

Total research, development, and engineering (RD&E) expenses were $2.6 million during the three months ended April 1, 2023 and $2.5 million during the three months ended April 2, 2022.

Total RD&E expenses as a percent of net sales were 1.6 percent during the three months ended April 1, 2023 and 1.8 percent during the three months ended April 2, 2022.

Total selling, general and administrative (SG&A) expenses were $7.0 million during the three months ended April 1, 2023 compared to $6.2 million for the three months ended April 2, 2022.

The increase in SG&A expenses relate to an increase in factory bonus accrual and incentive compensation plan accruals.

Total SG&A expenses as a percentage of net sales were 4.2 percent for the three months ended April 1, 2023 and 4.5 percent for the three months ended April 2, 2022.

Interest expense was $2.7 million during the three months ended April 1, 2023 and $1.6 million during the three months ended April 2, 2022.

There were no significant changes to operating expenses during the presented quarters, other than the gain on insurance proceeds of $0.4 million recorded in the first quarter of fiscal year 2024.

Total research, development, and engineering (RD&E) expenses were $2.2 million during the three months ended September 30, 2023 and $2.3 million during the three months ended October 1, 2022, respectively.

Total RD&E expenses as a percent of net sales were 1.5 percent during the three months ended September 30, 2023 and 1.7 percent during the three months ended October 1, 2022.

Total selling, general, and administrative (SG&A) expenses were $5.8 million during the three months ended September 30, 2023 compared to $5.7 million for the three months ended October 1, 2022.

Total SG&A expenses as a percentage of net sales were 3.9 percent for the three months ended September 30, 2023 and 4.1 percent for the three months ended October 1, 2022.

Interest expense was $3.0 million during the three months ended September 30, 2023 and $1.9 million during the three months ended October 1, 2022.

The increase in interest expense is primarily related to increased interest rates and an increase in the average balance outstanding on our line of credit.

The effective tax rate for the three months ended April 1, 2023 was 19.1 percent compared to 18.7 percent for the three months ended April 2, 2022.

The effective tax rate for the three months ended September 30, 2023 was (30.4) percent compared to 21.8 percent for the three months ended October 1, 2022.

The decrease is primarily due to the impact of discrete foreign exchange benefits and the relatively low amount of income before income taxes for the three months ended September 30, 2023.

Our judgments regarding deferred tax assets and liabilities may change due to changes in market conditions, changes in estimates, changes in tax laws or other factors.

If assumptions and estimates change in the future the deferred tax assets and liability will be adjusted accordingly and any increase or decrease will result in an additional deferred income tax expense or benefit in subsequent periods.

RESULTS OF OPERATIONS

Comparison of the Nine Months Ended April 1, 2023 with the Nine Months Ended April 2, 2022

The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the nine months ended April 1, 2023 as compared to the nine months ended April 2, 2022.

It is provided to assist in assessing differences in our overall performance (in thousands):

Nine Months Ended

April 1, 2023 % of

net sales April 2, 2022 % of

net sales $ change % point

Net sales $ 425,524 100.0 % $ 405,609 100.0 % $ 19,915 — %

Cost of sales 391,950 92.1 % 374,155 92.2 % 17,795 (0.1) %

Gross profit 33,574 7.9 % 31,454 7.8 % 2,120 0.1 %

Research, development and engineering 7,162 1.7 % 7,473 1.8 % (311) (0.1) %

Selling, general and administrative 18,353 4.3 % 17,447 4.3 % 906 — %

Gain on insurance proceeds (4,040) (0.9) % — — % (4,040) (0.9) %

Total operating expenses 21,475 5.0 % 24,920 6.1 % (3,445) (1.1) %

Operating income 12,099 2.8 % 6,534 1.6 % 5,565 1.2 %

Interest expense, net 7,081 1.7 % 3,638 0.9 % 3,443 0.8 %

Income before income taxes 5,018 1.2 % 2,896 0.7 % 2,122 0.5 %

Income tax provision 924 0.2 % 487 0.1 % 437 0.1 %

Net income $ 4,094 1.0 % $ 2,409 0.6 % $ 1,685 0.4 %

Effective income tax rate 18.4 % 16.8 %

Net sales of $425.5 million for the nine months ended April 1, 2023 increased by 4.9 percent as compared to net sales of $405.6 million for the nine months ended April 2, 2022.

The $19.9 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs and increased demand from existing customers.

Gross profit as a percentage of net sales for the nine months ended April 1, 2023 was 7.9 percent compared to 7.8 percent for the nine months ended April 2, 2022.

The increase was primarily a result of increased revenue levels along with some stabilization in the labor market, offset by the strengthening of the Mexican Peso relative to the US Dollar.

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence.

We recorded an impairment of approximately $455,000 and $520,000 for obsolete inventory during the nine months ended April 1, 2023 and nine months ended April 2, 2022, respectively.

The provisions are established for inventory that we have determined customers are not contractually responsible for and for inventory that we believe customers will be unable to purchase.

Operating Expenses

Total RD&E expenses were $7.2 million and $7.5 million during the nine months ended April 1, 2023 and nine months ended April 2, 2022.

The decrease in RD&E expenses relate to an increase in engineering payroll expenses in the prior year.

Total RD&E expenses as a percent of net sales were 1.7 percent during the nine months ended April 1, 2023 and 1.8 percent during the nine months ended April 2, 2022.

Total SG&A expenses were $18.4 million during the nine months ended April 1, 2023 compared to $17.4 million for the nine months ended April 2, 2022.

The increase in SG&A expenses relate to an increase in factory bonus accrual and incentive compensation plan accruals.

Total SG&A expenses as a percentage of net sales were 4.3 percent during the nine months ended April 1, 2023 compared to 4.3 percent during the nine months ended April 2, 2022.

Interest expense was $7.1 million during the nine months ended April 1, 2023 compared to $3.6 million during the nine months ended April 2, 2022.

The increase in interest expense is primarily related to increased interest rates and an increase in the average balance outstanding on our line of credit.

The effective tax rate for the nine months ended April 1, 2023 was 18.4 percent compared to 16.8 percent for the same period in fiscal year 2022.

The increase was primarily due to the impact of fluctuations in foreign exchange rates.

For further information on taxes, see Note 5 of the “Notes to Consolidated Financial Statements.”

On April 1, 2023, we had an order backlog of approximately $380.6 million.

This compares with a backlog of approximately $384.1 million on April 2, 2022.

On September 30, 2023, we had an order backlog of approximately $319.8 million.

This compares with a backlog of approximately $380.0 million on October 1, 2022.

The decrease in order backlog is related to some softening on demand for a number of our Mexico-based programs, partially offset by an increase in demand for our U.S.

based facilities.

Order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements.

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Operating Cash Flow

Net cash used in operating activities for the nine months ended April 1, 2023 was $17.1 million, compared to $11.6 million during the same period of the prior fiscal year.

The $17.1 million of net cash used in operating activities for the nine months ended April 1, 2023 is primarily related to $4.1 million in net income for the period adjusted for $6.9 million of depreciation and amortization, a $1.4 million decrease in inventory, a $1.2 million decrease in accrued compensation and vacation, a $10.7 million increase in accounts payable, partially offset by a $17.0 million decrease in other liabilities, a $16.1 million increase in accounts receivable and a $7.9 million increase in contract assets.

The $11.6 million of net cash used in operating activities for the nine months ended April 2, 2022 is primarily related to $2.4 million in net income for the period adjusted for $3.9 million of depreciation and amortization, a $27.6 million increase in accounts receivable, a $18.3 million increase in inventory, a $2.8 million decrease in accrued compensation and vacation partially offset by a $32.4 million increase in accounts payable, and a $1.3 million decrease in contract assets.

Net cash provided by operating activities for the three months ended September 30, 2023 was $5.6 million, compared to net cash used in operating activities of $5.8 million during the same period of the prior fiscal year.

The $5.6 million of net cash provided by operating activities for the three months ended September 30, 2023 is primarily related to $0.3 million in net income adjust for 2.8 million of depreciation and amortization, a $9.2 million decrease in accounts receivable, a $10.9 million decrease in inventory, partially off set by a $1.5 million decrease in accrued compensation and vacation, a $14.3 million decrease in accounts payable, a $1.0 million decrease in other liabilities and a $3.0 million increase in contract assets.

The $5.8 million of net cash used in operating activities for the three months ended October 1, 2022 is primarily related to $1.2 million in net income for the period adjusted for $2.4 million of depreciation and amortization, a $4.4 million increase in contract assets, a $1.8 million increase in accounts receivable, a $13.7 million increase in inventory, a $2.8 million decrease in accrued compensation and vacation partially offset by a $12.7 million increase in accounts payable.

Accounts receivable fluctuates based on the timing of shipments, terms offered and collections that occurred during the quarter.

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Investing Cash Flow

Cash used in investing activities was $1.4 million during the nine months ended April 1, 2023 as compared to $4.1 million during the nine months ended April 2, 2022.

Our primary investing activity during the nine months ended April 1, 2023 and April 2, 2022, was purchasing equipment to support increased production levels for new programs.

Cash provided by investing activities was $1.7 million during the three months ended September 30, 2023 as compared to cash used in investing activities of $2.5 million during the three months ended October 1, 2022.

Our primary investing activity during the three months ended September 30, 2023 and October 1, 2022, was purchasing equipment to support increased production levels for new programs.

The Company also received $2.2 million related to insurance proceeds as a result of previously disclosed storm damage to the Company’s Arkansas facility.

Leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership.

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Financing Cash Flow

Cash provided by financing activities was $16.8 million during the nine months ended April 1, 2023 as compared to $14.0 million in the same period of the previous fiscal year.

Our primary financing activities during the nine months ended April 1, 2023 and nine months ended April 2, 2022, were borrowings and repayments under our revolving line of credit facility and term loans.

As of April 1, 2023, approximately $3.2 million was available under the asset-based revolving credit facility.

Cash used in financing activities was $7.4 million during the three months ended September 30, 2023 as compared to cash provided by financing activities of $8.8 million in the same period of the previous fiscal year.

Our primary financing activities during the three months ended September 30, 2023 and October 1, 2022, were borrowings and repayments under our revolving line of credit facility and term loans.

As of September 30, 2023, approximately $9.5 million was available under the asset-based revolving credit facility.

Our cash requirements are affected by the level of current operations and new programs.

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The Company further notes projected cash from operations from increased demand from certain customers will be partially offset by an anticipated slowdown in collections from other customers and increasing inventory levels in efforts to mitigate supply chain constraint risks.

As of April 1, 2023, we had approximately $1.4 million of cash held by foreign subsidiaries.

As of September 30, 2023, we had approximately $3.6 million of cash held by foreign subsidiaries.

If cash is to be repatriated in the future from these foreign subsidiaries, the Company would be subject to certain withholding taxes in the foreign jurisdictions.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of April 1, 2023 would approximate $33,000.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of September 30, 2023 would approximate $56,000.

We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 6 of the “Notes to Consolidated Financial Statements.”

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• political and economic instability (including acts of terrorism, pandemics, civil unrest, forms of violence and outbreaks of war), which could impact our ability to ship, manufacture, and/or receive product;

• unexpected changes in regulatory requirements and laws;

• unexpected changes in regulatory requirements and laws, including those related to climate change;

• longer customer payment cycles and difficulty collecting accounts receivable;

• cash liquidity, the ability to acquire new debt capacity, and capital constraints;

• export duties, import controls and trade barriers (including quotas);

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subject to trade wars and tariffs;

• our locations are subject to physical and operational risks from natural disasters, severe weather events, climate change;

• our locations may also be impacted by future temporary closures and labor constraints as a result of COVID-19.

• our locations are subject to physical and operational risks from natural disasters, severe weather events, and climate change;

• our locations may also be impacted by future temporary closures and labor constraints as a result of local mandates for medical, climate, and unforeseen emergencies.

Our operations in certain foreign locations receive favorable income tax treatment in the form of tax credits or other incentives.

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Operating results can also fluctuate if changes are made to significant estimates and assumptions.

Significant estimates and assumptions include the allowance for doubtful receivables, provision for obsolete and non-saleable inventory, stock-based compensation, the valuation allowance on deferred tax assets, impairment of long-lived assets, long-term incentive compensation accrual, the provision for warranty costs, and the impact of hedging activities.

Significant estimates and assumptions include the allowance for doubtful receivables, net realizable inventory, the valuation allowance on deferred tax assets.

Due to the COVID-19 pandemic, we have seen extreme shifts in demand from our customer base.

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Additionally, the financial strength of our customers and suppliers and their ability to obtain and rely on credit financing may affect their ability to fulfill their obligations to us and have an adverse effect on our financial results.

Adverse macroeconomic conditions, such as those resulting from COVID-19, have and may continue to affect our business.

Adverse macroeconomic conditions, such as those that were a result of COVID-19 have and may continue to affect our business.

The conditions affect the Company’s ability to predict and plan for future supply chain disruptions, fluctuations in customer demand and costs, and the ability to operate as there is uncertainty over future temporary closures.

Inflation has also risen globally to historically high levels.

If the inflation rate continues to increase, the costs of labor and other expenses have and may continue to increase.

If the inflation rate continues to increase, the costs of labor and other expenses could also increase.

We may not be able to increase our product prices enough to offset these increased costs.

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In addition, our suppliers' facilities may also experience earthquakes, tsunamis, and other natural disasters which may cause a shortage of components.

This can result in longer lead times and the inability to meet our customers request for flexible production and extended shipment dates.

This can result in longer lead times and the inability to meet our customers request for flexible production and extended

shipment dates.

If demand for components outpaces supply, capacity delays could affect future operations.

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In addition, competitors can copy our non-proprietary designs and processes after we have invested in development of products for customers, thereby enabling such competitors to offer lower prices on such products due to savings in development costs.

Fluctuations in foreign currency exchange rates have increased, and could continue to increase, our operating costs.

Fluctuations in foreign currency exchange rates could increase our operating costs.

We have manufacturing operations located in Mexico and China.

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The primary impact of currency exchange fluctuations is on the cash, receivables, payables and expenses of our operating entities.

As part of our hedging strategy, we have used Mexican Peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican Peso denominated expenses, but do not currently hedge our Mexican Peso denominated expenses.

We also currently do not hedge expenses denominated in RMB.

Unexpected losses have occurred from increases in the value of these currencies relative to the United States dollar and further unexpected losses could occur, which could be material to our business, financial results, or operations.

As a result of COVID-19, significant currency exchange fluctuations can occur causing unexpected losses.

Future temporary closures of production facilities in Mexico could also cause significant changes in our ability to qualify for hedge accounting treatment of any forward contracts to hedge foreign currency fluctuations.

As part of our hedging strategy, we may use Mexican peso forward contracts to hedge future foreign currency fluctuations for a portion of our Mexican peso denominated expenses.

We currently do not hedge expenses denominated in RMB.

Unexpected losses could occur from increases in the value of these currencies relative to the United States dollar.

Global economic and political events, including as a result of COVID-19, can lead to significant currency exchange fluctuations can occur causing unexpected losses.

Future temporary closures of production facilities in Mexico could also cause significant changes in our ability to qualify for hedge accounting treatment of our forward contracts to hedge foreign currency fluctuations.

However, given the unprecedented nature of the pandemic the FASB staff believes that an entity may apply the exception in paragraph 815-30-40-4 for rare cases caused by extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of an entity to delays in the timing of the forecasted transactions if those delays are related to the effects of the COVID-19 pandemic and are considered probable to still occur.

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In addition, we, along with our suppliers and customers, rely on various energy sources in our transportation activities.

While significant uncertainty currently exists about the future levels of energy prices, a significant increase, such as continued increases in fuel prices, is possible.

While significant uncertainty currently exists about the future levels of energy prices, a significant increase, such as the increased fuel prices experienced in fiscal year 2023, is possible.

Increased energy prices could cause an increase to our raw material costs and transportation costs.

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Digital technologies and services are subject to the risk of cybersecurity incidents and some incidents can remain undetected for a period of time.

We routinely monitor our systems for cyber threats and believe we have sufficient processes in place to detect and remediate vulnerabilities.

We routinely monitor our systems for cyber threats and have processes in place to detect and remediate vulnerabilities.

Nevertheless, we have experienced attempted security breaches, such as phishing emails and other targeted attacks.

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If we cannot meet our financial covenants, our borrowings could become immediately payable which could have a material adverse impact on our financial statements.

For a summary of our banking arrangements, see “Long-Term Debt” in Note 4 of the “Notes to Consolidated Financial Statements.”

For a summary of our banking arrangements, see Note 4 Long-Term Debt of the “Notes to Consolidated Financial Statements.”

An adverse change in the interest rates for our borrowings could adversely affect our financial condition.

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We have not historically hedged the interest rate on our credit facility;

therefore, unless we do so, significant changes in interest rates could adversely affect our results of operations.

For a summary of our debt obligations, see “Long-Term Debt” in Note 4 of the “Notes to Consolidated Financial Statements.”

therefore, unless we do so, significant changes in interest rates could adversely affect our

results of operations.

For a summary of our debt obligations, see Footnote “Long-Term Debt” of the “Notes to Consolidated Financial Statements.”

In addition, the U.K.’s Financial Conduct Authority, which regulates LIBOR, has confirmed that LIBOR-indexed rates will cease after June 30, 2023, with the remaining IBOR-indexed rates ceasing on December 31, 2021.

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In addition, holders of our common stock will suffer immediate dilution to the extent outstanding equity awards are exercised to purchase common stock.

RISKS RELATED TO OUR CONTROLS AND PROCEDURES AND THE INTERNAL INVESTIGATION

We identified a material weakness in our internal control over financial reporting and concluded that our disclosure controls and procedures were not effective as of December 26, 2020 and April 3, 2021.

RISKS RELATED TO OUR CONTROLS AND PROCEDURES

If we fail to properly remediate any future deficiencies or material weaknesses or to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted.

As previously disclosed, we concluded that our disclosure controls and procedures were not effective as of December 26, 2020 and April 3, 2021, due to the existence of a material weakness in our internal control over financial reporting.

While we undertook remediation efforts to address the identified deficiencies and have concluded that the material weakness was remediated as of July 3, 2021, we cannot provide assurance that we will be able to conclude that our controls will be effective in the future.

We also cannot guarantee that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not arise or be identified in the future.

If additional deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results and incur the additional costs and expenses associated therewith.

If deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results and incur the additional costs and expenses associated therewith.

Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all.

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Our consolidated financial statements are prepared in conformity with accounting standards generally accepted in the United States, or U.S.

These principles are subject to amendments made primarily by the Financial Accounting Standards Board (FASB) and the SEC.

These principles are subject to amendments made primarily by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).

A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions which are completed before a change is announced.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis