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Item 7. Management’s Discussion and Analysis

2024-10-15 compared with 2023-09-26 · 175 added, 51 removed, 173 unchanged (57% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement of the Company’s previously issued consolidated financial statements as of and for the years ended July 1, 2023 and July 2, 2022.

The restatement was due to errors in recording cost recovery related to material price variances in certain of the Company’s facilities.

These errors led to an understatement of both revenue and cost of goods sold during the impacted periods.

For additional information, see Note 14 - "Restatement of Previously Issued Financial Statements" in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

The Company’s previously issued unaudited interim consolidated statements of operations for the quarters ended March 30, 2024, December 30, 2023, September 30, 2023, April 1, 2023, December 31, 2022, October 1, 2022, April 2, 2022, January 1, 2022, and October 2, 2021 have also been restated due to these errors, and the Company's previously issued unaudited interim balance sheets as of March 30, 2024, December 30, 2023, September 30, 2023 have been revised due to errors related to the adoption of ASU 326.

For additional information regarding these interim periods, see Note 15 – “Restatement and Revision of Interim Financial Information” of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Key Tronic is a leading contract manufacturer offering value-added design and manufacturing services from its facilities in the United States, Mexico, China, and Vietnam.

We provide full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, worldwide distribution and unparalleled customer service.

Our customers include some of the world’s leading original equipment manufacturers, and our combined capabilities and vertical integration are proving to be a desirable offering to our expanded customer base.

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

Our domestic and international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time.

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Executive Summary

During the fourth quarter of fiscal year 2023, we won new programs involving inventory control, clean energy, and distribution monitoring equipment.

We reported net sales of $588.1 million for fiscal year 2023, the highest annual revenue in the Company’s history, and up 11% from $531.8 million for fiscal year 2022.

Record annual revenue and strong earnings in fiscal year 2023 was driven by successful new program ramps and increased demand from a number of longstanding customer programs.

Moving into fiscal 2024, we expect a strong Mexican Peso valuation to the US Dollar and relatively high interest expense to constrain our bottom line.

At the same time, global logistics problems and heightened assurance of supply concerns continue to drive the favorable trend of contract manufacturing returning to North America.

For the first quarter of fiscal year 2024, the Company expects to report revenue in the range of $140 million to $150 million.

We continue to see a trend of contract manufacturing returning to North America and a growing number of potential customers evaluating a migration of their China-based manufacturing to our facility in Vietnam.

We move into fiscal year 2024 with a strong backlog and pipeline of potential new business, our inventory more in line with our revenue levels, and continuing improvement in the global supply issues and lower labor turnover.

However, we are also seeing some softening in demand from several large customers and one large customer is pausing production during the next quarter to resolve certain of their design issues.

Over the longer term, we are well positioned for continued growth and profitability.

We have continued to diversify our customer base by adding additional programs and customers.

Our current customer relationships involve a variety of products including consumer electronics, electronic storage devices, plastics, household products, gaming devices, specialty printers, telecommunications, industrial equipment, military supplies, computer accessories, medical, educational, irrigation, automotive, transportation management, robotics, RFID, power supply, off-road vehicle equipment, fitness equipment, HVAC controls, consumer products, home building products, material handling systems, lighting equipment, consumer security products, smart security, architectural LED lighting, power meters and smart grid, wireless power solutions, sanitizer dispensing, automotive controllers, oil and gas drilling, power equipment, and wireless security.

Gross profit as a percentage of net sales was 8.1 percent in both fiscal year 2023 and 2022, respectively.

During fiscal year 2023, the gross margins benefited by increased revenue levels along with some stabilization in the labor market.

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

During the fourth quarter of fiscal year 2024, we won new programs involving medical devices, sheet metal fabrication, and consumer products.

We reported net sales of $566.9 million for fiscal year 2024, down 6.3 percent from $605.3 million for fiscal year 2023.

The decrease in fiscal year 2024 was driven by softer demand from Mexico-based programs, and production stoppages due to a cybersecurity incident that occurred in the fourth quarter, as previously reported.

Moving into fiscal year 2025, we expect revenue and earnings to rebound as production has resumed across our facilities.

Additionally, the Company is beginning to realize operational efficiencies as a result of headcount reductions announced in the third quarter of fiscal year 2024, coupled with a favorable weakening of the Mexican Peso to the US dollar of approximately 10% beginning in June.

We continue to win new programs and reduce inventories to be more aligned with current revenue levels.

For the first quarter of fiscal year 2025, we believe global logistics problems, China-US political tensions and continued supply-chain concerns will continue to drive the favorable trend of contract manufacturing returning to North America, as well as to our expanding Vietnam facilities.

We continue to see improvement across the metrics associated with business development, including a significant increase in the number of active quotes with prospective customers.

We aim to diversify our customer base by adding additional programs and customers.

Our current customer relationships involve a variety of products including sheet metal fabrication, medical devices and components, water purification products, consumer security products, aerospace and defense products, recreational and outdoor equipment, and plastics.

Gross profit as a percentage of net sales was 7.0 percent in fiscal year 2024, down from 7.8 percent in 2023.

During fiscal year 2024, our gross margin was also adversely impacted by a cybersecurity incident late in the year, and continued increases in

Mexican wages as well as the strengthening of the Mexican Peso relative to the US Dollar.

Additionally, as previously disclosed, a restructuring of our Mexico-based facility to focus on higher volume manufacturing resulted in severance expenses incurred late in the year which we expect to provide benefits to the gross profit margin in future periods.

The level of gross margin is impacted by product mix, timing of the startup of new programs, facility utilization, and pricing within the electronics industry and material costs, which can fluctuate significantly from quarter-to-quarter and year-to-year.

Operating income as a percentage of net sales for fiscal year 2024 was 1.2 percent compared to 2.7 percent for fiscal year 2023.

The increase in operating income as a percentage of net sales was primarily driven by the gains on insurance proceeds from the claim on a lightning strike at our Arkansas production facility.

Net income for fiscal year 2023 was $5.2 million or $0.47 per share, as compared to $3.4 million or $0.31 per share for fiscal year 2022.

Earnings for fiscal 2023 continued to be adversely impacted by supply chain, transportation and logistics issues, and increased interest expense.

In addition to the factors discussed above, we incurred expenses related to the cybersecurity incident late in the year, and our 2023 results included a significant gain on insurance related to losses incurred from storm damage to the Company's Arkansas facility in 2022.

Net loss for fiscal year 2024 was $2.8 million or $0.26 per share, as compared to net income of $5.2 million or $0.47 per share for fiscal year 2023.

Earnings for fiscal 2024 continued to be adversely impacted by increased interest expense and were also impacted by the cybersecurity incident, and severance expenses.

We maintained a strong balance sheet with a current ratio of 2.8 and a debt-to-equity ratio of 0.96.

Total cash used in operating activities as defined on our cash flow statement was $11.3 million during fiscal year 2023, as working capital has increased to support increased revenue.

Total cash provided by operating activities as defined on our cash flow statement was $13.8 million during fiscal year 2024, as we have continued to focus on decreasing accounts receivable and inventory balances.

We believe we maintain sufficient liquidity for our expected future operations, dependent upon executing projected cash flows from operations and potentially adding additional credit capacities through refinancing current credit agreements or pursuing additional debt structures.

RESULTS OF OPERATIONS

Comparison of the Fiscal Year Ended June 29, 2024 with the Fiscal Year Ended July 1, 2023

The following table sets forth for the periods indicated certain items of the consolidated statements of income expressed as a percentage of net sales.

The financial information and discussion below should be read in conjunction with the consolidated financial statements and Footnotes contained in this Annual Report on Form 10-K.

Fiscal Year Ended

(in thousands) June 29, 2024 % of

net sales July 1, 2023 % of

net sales $ change % point

Net sales $ 566,942 100.0% $ 605,315 100.0% $ (38,373) —

Cost of sales 527,063 93.0 557,843 92.2 (30,780) 0.8

Gross profit 39,879 7.0 47,472 7.8 (7,593) (0.8)

Operating expenses:

Research, development and engineering 8,333 1.5 9,735 1.6 (1,402) (0.1)

Selling, general and administrative 25,219 4.4 25,715 4.2 (496) 0.2

Gain on insurance proceeds, net of losses (431) (0.1) (4,301) (0.7) 3,870 0.6

Total operating expenses 33,121 5.8 31,149 5.1 1,972 0.7

Operating income 6,758 1.2 16,323 2.7 (9,565) (1.5)

Interest expense, net 11,945 2.1 10,023 1.7 1,922 0.4

Income (loss) before income taxes (5,187) (0.9) 6,300 1.0 (11,487) (1.9)

Income tax provision (benefit) (2,400) (0.4) 1,143 0.2 (3,543) (0.6)

Net income (loss) $ (2,787) (0.5)% $ 5,157 0.9% $ (7,944) (1.4)

Effective income tax rate 46.3 % 18.1 %

The decrease in net sales of $38.4 million from the prior fiscal year was primarily due to production stoppages due to the cybersecurity incident which caused the company to be unable to fulfill approximately $15 million of revenue during the fourth quarter of fiscal year 2024, as well as softer demand from Mexico-based programs.

The following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2024 and 2023:

Fiscal Year Ended

June 29, 2024 July 1, 2023

Industrial 46 42

Consumer 45 44

Communication 4 9

Transportation 1 3

Total 100% 100%

We provide services to customers in a number of industries and produce a variety of products for our customers in each industry.

Key Tronic does not target any particular industry, but rather seeks to find programs that strategically fit our vertical manufacturing capabilities.

As a result, we expect to continue to see a change in the industry concentrations of our revenue over time.

Sales to foreign locations represented 22.5 percent and 14.3 percent of our total net sales in fiscal years 2024 and 2023, respectively.

Cost of Sales

Total cost of sales as a percentage of net sales was 93.0 percent in fiscal year 2024 and 92.2 percent in fiscal year 2023.

We record our inventories at net realizable value based on specific identification of inventory against current demand and recent usage.

We also consider our customers' ability to pay for inventory whether or not there is a lead-time assurance agreement for a specific program.

The amounts charged to expense for these inventories were approximately $0.3 million and $0.4 million in fiscal years 2024 and 2023, respectively.

We provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns.

Warranty expense is related to workmanship claims.

The amounts charged to expense are determined based on an estimate of warranty exposure.

The net warranty expense was approximately $0.3 million and $0.3 million in fiscal years 2024 and 2023, respectively.

Gross profit as a percentage of net sales was 7.0 percent in fiscal year 2024 and 7.8 percent in fiscal year 2023.

During fiscal year 2024, we incurred expenses related to a cybersecurity incident late in the year of approximately $2.3 million.

Additionally, we incurred severance expenses related to a headcount reduction in our Mexico based facilities, and starting in the fourth quarter of fiscal year 2024, we are beginning to realize the operational efficiencies as a result of these headcount reductions.

Changes in gross profit margins reflect the impact of a number of factors that can vary from period to period, including product mix, start-up costs and efficiencies associated with new programs, product life cycles, sales volumes, capacity utilization of our resources, management of inventories, component pricing and shortages, end market demand for customers’ products, fluctuations in and timing of customer orders, and competition within the contract manufacturing industry.

These and other factors can cause variations in operating results.

There can be no assurance that gross margins will not decrease in future periods.

Research, Development and Engineering

Research, development and engineering expenses (RD&E) consist principally of employee related costs, third-party development costs, program materials, depreciation, and allocated information technology and facilities costs.

Total RD&E expenses were $8.3 million and $9.7 million in fiscal years 2024 and 2023, respectively.

Total RD&E expenses as a percent of net sales was 1.5 percent in fiscal year 2024 and 1.6 percent in fiscal year 2023.

Selling, General and Administrative

Selling, general, and administrative expenses (SG&A) consist principally of salaries and benefits, advertising and marketing programs, sales commissions, travel expenses, provision for credit losses, facilities costs, and professional services.

Total SG&A expenses were $25.2 million and $25.7 million in fiscal years 2024 and 2023, respectively.

Total SG&A expenses as a percent of net sales were 4.4 percent and 4.2 percent in fiscal years 2024 and 2023, respectively.

Interest Expense

We had net interest expense of $11.9 million and $10.0 million in fiscal years 2024 and 2023, respectively.

The increase in interest expense is primarily related to increased interest rates due to the amended line of credit agreement, and an increase in the average balance outstanding throughout the year.

Income Tax Provision

We had an income tax benefit of approximately $2.4 million during fiscal year 2024 and an income tax expense of approximately $1.1 million during fiscal year 2023.

The income tax benefit/expense recognized during both fiscal years 2024 and 2023 was primarily a function of U.S.

and foreign taxes recognized at statutory rates, the net benefit associated with federal research and development tax credits, and the impact of foreign exchange gains in fiscal year 2023.

We continually review our requirements for liquidity domestically to fund current operations, revenue growth, and potential future acquisitions.

We anticipate repatriating a portion of our unremitted foreign earnings.

The estimated taxes associated with these expected repatriations are included in the income tax calculation.

For further information on taxes, please review Footnote " Income Taxes” of the “Notes to Consolidated Financial Statements”.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared in accordance with generally accepted accounting principles in the United States (GAAP), we use certain non-GAAP financial measures, adjusted net income and adjusted net income per share, diluted.

Beginning with the full year of fiscal year 2024, we provide these non-GAAP financial measures because we believe they provide greater transparency related to our core operations and represent supplemental information used by management in its financial and operational decision making.

We exclude (or include) certain items in our non-GAAP financial measures as we believe the net result is a measure of our core business.

We believe this facilitates operating performance comparisons from period to period by eliminating potential differences caused by the existence and timing of certain income and expense items that would not otherwise be apparent on a GAAP basis.

Non-GAAP performance measures should be considered in addition to, and not as a substitute for, results prepared in accordance with GAAP.

The non-GAAP financial measures disclosed below should be read in conjunction with the remainder of this Annual Report on Form 10-K, including the consolidated financial statements and footnotes thereto.

Our non-GAAP financial measures may be different from those reported by other companies.

See the table below for reconciliations of adjusted net income to the most directly comparable GAAP measure, which are GAAP net income and the computation of adjusted net income per share, diluted.

Twelve Months Ended

(in thousands, except per share amounts) June 29, 2024 July 1, 2023

GAAP net income (loss) $ (2,787) $ 5,157

Cybersecurity expenses 2,340 —

Severance expenses (benefit) 945 354

Gain on insurance proceeds (net of losses) (431) (4,301)

Stock-based compensation expense (444) 254

Income tax effect of non-GAAP adjustments (1) (482) 739

Adjusted net income (loss):

$ (859) $ 2,203

Adjusted net income (loss) per share — non-GAAP Diluted $ (0.08) $ 0.20

Weighted average shares outstanding — Diluted 10,762 10,938

(1) Income tax effects are calculated using an effective tax rate of 20%, which approximates the statutory tax rates for the presented periods.

International Subsidiaries

We offer customers a complete global manufacturing solution.

Our facilities provide our customers the opportunity to have their products manufactured in the facility that best serves specific cost, product manufacturing, and distribution needs.

The locations of our active foreign subsidiaries are as follows:

• Key Tronic Juarez, SA de CV owns five facilities and leases three facilities in Juarez, Mexico.

These facilities include an SMT facility, an assembly and molding facility, a sheet metal fabrication facility, and assembly and warehouse facilities.

This subsidiary primarily supports our U.S.

• Key Tronic Computer Peripherals (Shanghai) Co., Ltd.

leases one facility with SMT, assembly, global purchasing, and warehouse capabilities in Shanghai, China, which began operations in 1999.

Its primary function is to provide contract manufacturing services.

• Key Tronic Vietnam leases one facility in Da Nang, Vietnam.

This facility includes SMT, assembly, and warehouse capabilities.

Its primary function is to provide contract manufacturing services for export.

Foreign sales (based on shipping instructions) from our worldwide operations, including domestic exports, were $127.6 million and $86.5 million in fiscal years 2024 and 2023, respectively.

Products and manufacturing services provided by our subsidiary operations are often shipped to customers directly by the parent company.

RESULTS OF OPERATIONS

Comparison of the Fiscal Year Ended July 1, 2023 with the Fiscal Year Ended July 2, 2022

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Fiscal Year Ended

July 1, 2023 % of

(in thousands) July 1, 2023 % of

net sales July 2, 2022 % of

net sales $ change % point

(Restated) (Restated)

Net sales $ 605,315 100.0% $ 544,177 100.0% $ 61,138 —

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The net warranty expense was approximately $313,000 and $446,000 in fiscal years 2023 and 2022, respectively.

Gross profit as a percentage of net sales was 8.1 percent in fiscal years 2023 and 2022.

Gross profit as a percentage of net sales was 7.8 percent in fiscal year 2023 and 7.9 percent in fiscal year 2022.

During fiscal year 2023, the gross margins benefited by increased revenue levels along with some stabilization in the labor market.

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The locations of our active foreign subsidiaries are as follows:

• Key Tronic Juarez, SA de CV owns five facilities and leases four facilities in Juarez, Mexico.

• Key Tronic Juarez, SA de CV owns five facilities and leases three facilities in Juarez, Mexico.

These facilities include an SMT facility, an assembly and molding facility, a sheet metal fabrication facility, and assembly and warehouse facilities.

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Products and manufacturing services provided by our subsidiary operations are often shipped to customers directly by the parent company.

RESULTS OF OPERATIONS

Comparison of the Fiscal Year Ended July 2, 2022 with the Fiscal Year Ended July 3, 2021

To review the results of operations comparison of the fiscal year ended July 2, 2022 with the fiscal year ended July 3, 2021, please refer to our Annual Report on Form 10-K filed September 14, 2022 with the Securities and Exchange Commission or follow the link below.

https://www.sec.gov/ix?doc=/Archives/edgar/data/719733/000071973322000063/ktcc-20220702.htm

Capital Resources and Liquidity

Operating Cash Flow

Net cash used in operating activities for fiscal year 2023 was $11.3 million compared to $4.9 million in fiscal year 2022.

The additional cash used in fiscal year 2023 was predominately used for revenue growth that required additional working capital in increased receivables and paying down supplier payables during the year.

The $11.3 million of net cash used in operating activities during fiscal year 2023 is primarily related to $5.2 million of net income adjusted for $9.5 million of depreciation and amortization, $14.8 million increase in accounts receivable, a $17.4 million decrease in inventory, a $16.0 million increase in other liabilities, partially offset by a $5.5 million decrease in accounts payable, $8.0 million increase in contract assets, and a $1.5 million increase in accrued compensation and vacation.

The $4.9 million of net cash used in operating activities during fiscal year 2022 was primarily related to $3.4 million of net income adjusted for $7.6 million of depreciation and amortization, $25.6 million increase in accounts receivable, a $19.4 million increase in inventory, a $3.6 million increase in other liabilities, partially offset by a $28.6 million increase in accounts payable, and a $2.8 million decrease in contract assets.

Net cash provided by operating activities for fiscal year 2024 was $13.8 million compared to net cash used in operating activities of $11.3 million in fiscal year 2023.

The additional cash provided in fiscal year 2024 was due to a focus on collecting accounts receivable and working down inventory balances to be in line with current revenue levels.

The $13.8 million of net cash provided by operating activities during fiscal year 2024 is primarily related to $2.8 million of net loss adjusted for $11.0 million of depreciation and amortization, $15.8 million decrease in accounts receivable, a $32.5 million decrease in inventory, an $8.7 million decrease in contract assets partially offset by a $36.5 million decrease in accounts payable, a $2.9 million decrease in accrued compensation and vacation, $0.6 million increase in other assets and a $8.1 million decrease in other liabilities.

The $11.3 million of net cash used in operating activities during fiscal year 2023 was primarily related to $5.2 million of net income adjusted for $9.5 million of depreciation and amortization, $14.8 million increase in accounts receivable, a $16.0

million decrease in other liabilities, a $5.5 million decrease in accounts payable, a $8.0 million increase in contract assets partially offset by a $17.4 million decrease in inventory, and a $1.5 million increase in accrued compensation and vacation.

Accounts receivable fluctuates based on the timing of shipments, terms offered, and collections.

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Our primary use of cash in investing activities during fiscal years 2024 and 2023 was purchasing equipment to support increased production levels for new programs.

During fiscal year 2023, cash flows used in investing activities also included prepayments on finance lease obligations.

During fiscal year 2024, the source of cash provided by investing activities came from insurance claims paid for replacing equipment and facility repairs in our Arkansas facility related to a lightning strike and water damage.

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Financing Cash Flow

Cash flows provided by financing activities were $17.7 million and $11.2 million in fiscal years 2023 and 2022, respectively.

Our primary financing activities during fiscal year 2023 were proceeds from capital equipment finance leases and borrowings and repayments under our revolving line of credit facility;

partially offset by repayments on our term loans and principal payments on finance leases.

Our primary financing activities during fiscal year 2022 were repayments on our term loans as well as borrowings and repayments under our revolving line of credit facility.

As of July 1, 2023, approximately $4.6 million was available under the asset-based revolving credit facility and we were in compliance with our loan covenants.

Cash flows used in financing activities were $10.5 million in fiscal year 2024 and cash flows provided by financing activities were $17.7 million in fiscal year 2023.

Our primary financing activities during both fiscal year 2024 and fiscal year 2023 were borrowings and repayments under our revolving line of credit facility as well as repayments on our term loans and principal payments on finance leases.

In fiscal year 2024, there was a significantly higher percentage of repayments against the borrowings on the revolving line of credit.

As of June 29, 2024, approximately $12.9 million was available under the asset-based revolving credit facility.

Due to corrections made to our financial statements as part of the restatement process described in this Annual Report, we determined that as of June 29, 2024 and July 27, 2024, we were not in compliance with the minimum fixed charge coverage ratio of 1.00:1.00 and 1.05:1:00, respectively, required under our Loan Agreement for the revolving credit facility.

As a result, we obtained a waiver from the lender for these events of default, which was effective as of October 9, 2024, and amended our Loan Agreement.

As previously disclosed, we also had to obtain a waiver for breaches of the fixed charge coverage ratio for fiscal quarter ended March 30, 2024 and amend the Loan Agreement to covenant relief for the fixed charge coverage ratio, reducing the minimum requirement from 1.25:1.00 to 1.00:1.00 as of March 30, 2024, with increases as follows:

1.05:1.00 on July 27, 2024, 1.15:1.00 on October 26, 2024, 1.20:1.00 on January 25, 2025 and 1.25:1.00 on and after March 29, 2025.

These breaches and subsequent amendments have resulted in an increase in interest rates, an increase in the availability block, which limits available borrowing under the Loan Agreement, and a shortened maturity date to September 3, 2025 (extended to December 3, 2025).

We believe we are in compliance with the minimum fixed charge coverage ratio of 1.05:1.00 as of the end of August 2024 and have not yet finalized our calculation for September of 2024 to determine if we are in compliance with the minimum fixed charge coverage ratio of 1.05:1.00.

In addition, we may not be able to comply with the increased minimum fixed charge coverage ratio of 1.15:1:00 as of October 26, 2024 or in future periods.

If we are unable to comply with restrictive covenants on the Loan Agreement, including the fixed charge coverage ratio, we will need to negotiate additional waivers and amendments, which may further increase interest rates, limit our borrowing availability, shorten the maturity date or impose other adverse consequences.

As a result, and due to the upcoming maturity of the Loan Agreement on December 3, 2025, we are in discussions with financial institutions to refinance our revolving line of credit.

The terms available to us may be less favorable than the terms of our existing Loan Agreement.

For additional information, see Note 1 - “Significant Accounting Policies-Liquidity” of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K and Part I, Item 1A.

Risk Factors “Risks Related to Capital and Financing “⸻Our failure to comply with the covenants in our credit arrangements could materially and adversely affect our financial condition” and “⸻Our ability to secure and maintain sufficient credit arrangements is key to our continued operations.”

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

We believe that projected cash from operations, funds available under the revolving credit facility and potential additional debt capacity will be sufficient to meet our working and fixed capital requirements for at least twelve months beyond issuance of our financial statements, and our current asset-based senior secured revolving credit facility does not mature until December 3, 2025.

The Company further notes projected cash from operations is projected to improve in the coming quarters as supply chain availability will boost additional inventory turns and existing inventory is consumed by fulfilling customer backlog.

As of July 1, 2023, we had approximately $3.6 million of cash held by foreign subsidiaries.

As of June 29, 2024, we had approximately $4.7 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 July 1, 2023 would approximate $64,000.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of June 29, 2024 would approximate $15,893.

The Company also has approximately $38.5 million of foreign earnings that have not been repatriated to the U.S.

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If these amounts were required to be repatriated, we estimate it would create an additional $0.8 million in foreign withholding taxes payable.

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

We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 5 “Income Taxes” of the “Notes to Consolidated Financial Statements”.

Off-Balance Sheet Arrangements and Contractual Obligations

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We have certain contractual obligations that extend beyond fiscal year 2024 under lease obligations and debt arrangements.

As of July 1, 2023, we had open purchase order commitments for materials and other supplies.

As of June 29, 2024, we had open purchase order commitments for materials and other supplies.

Actual needs under these blanket purchase orders fluctuate with our manufacturing levels and as such cannot be broken out between fiscal years.

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We do not use off-balance sheet financing techniques other than traditional operating leases, and we have not guaranteed the obligations of any entity that is not one of our wholly owned subsidiaries.

For a summary of our lease obligations as of July 1, 2023, please refer to Note 15 “Leases” of the “Notes to Consolidated Financial Statements.”

For a summary of our long-term debt obligations as of July 1, 2023, please refer to Note 4 “Long-Term Debt” of the “Notes to Consolidated Financial Statements.”

For a summary of our lease obligations as of June 29, 2024, please refer to Note 13 “Leases” of the “Notes to Consolidated Financial Statements”.

For a summary of our long-term debt obligations as of June 29, 2024, please refer to Note 4 “Long-Term Debt” of the “Notes to Consolidated Financial Statements”.

Critical Accounting Policies and Estimates

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For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer.

Revenue from engineering services is recognized over time as the services are performed.

Revenue from engineering

services is recognized over time as costs related to the services are incurred, which approximates proportional performance of the service.

This method is used because management considers it to be the best available measure of progress on the contracts.

Revenue from scrap and excess inventory sales is recognized at the point-in-time of scrap at the customers direction, or, if applicable, shipment of the material to the customer.

Inactive, Obsolete, and Surplus Inventory Valuation

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We also write down inventory values related to specific customers covered by lead-time assurance agreements when those customers are experiencing financial difficulties or reimbursement is not reasonably assured.

Allowance for Doubtful Accounts

We value our accounts receivable net of an allowance for doubtful accounts.

As of July 1, 2023, the allowance for doubtful accounts was approximately $23,000.

As of July 2, 2022, the allowance for doubtful accounts was approximately $12,000.

Allowance for Credit Losses

We value our accounts receivable net of an allowance for credit losses.

As of June 29, 2024, the allowance for credit losses was approximately $2.9 million.

As of July 1, 2023, the allowance for credit losses was approximately $23,000.

The increase during fiscal year 2024 relates to the adoption of ASC 326, which was adopted on a modified retrospective basis.

This allowance is based on estimates of the portion of accounts receivable that may not be collected in the future.

The estimates used are based primarily on specific identification of potentially uncollectible accounts.

The estimates used are based on specific identification of potentially uncollectible accounts as well as a general calculation based on the company's collection history.

Such accounts are identified using publicly available information in conjunction with evaluations of current payment activity.

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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-K

Item 7. Management’s Discussion and Analysis