KEY TRONIC CORP 10-K

Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Key Tronic Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Key Tronic Corporation (the “Company”) as of June 29, 2024, July 1, 2023, and July 2, 2022, the related consolidated statements of operations, comprehensive income (loss), cash flows, and shareholders’ equity 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 June 29, 2024, 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. Restatement of Previously Issued Financial Statements As discussed in Note 14 to the consolidated financial statements, the consolidated financial statements for the years ended July 1, 2023 and July 2, 2022, have been restated to correct misstatements. 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. 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 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. 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 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 The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. As described in Notes 1 and 12 to the consolidated financial statements, the Company reported revenue of $567 million for the year ended June 29, 2024, of which $497 million related to revenue recognized over time. The Company has determined that for the majority of its contracts, the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, intellectual property, and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts over-time based on the input cost-to-cost method as it better depicts the transfer of 32 control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. We identified the auditing of revenue recognized over time on contracts for manufacturing products, including the total estimated costs at completion of the performance obligation as a critical audit matter. Auditing management’s estimates used in the calculation of revenue recognized over time involved significant audit effort, as well as especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. Our audit procedures related to auditing revenue recognized over time on contracts for manufacturing products, including the total estimated costs at completion of the performance obligation, included the following, among others: • Evaluating the methodology of estimating costs incurred to date on in-process contracts, testing the completeness and accuracy of the system generated reports used to estimate costs incurred, and performing data validation procedures. • Recalculating the expected costs on in-process contracts, testing a selection of contracts to source documents, and 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, including the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligations. • Comparing margins realized to trending historic margins, and comparing total revenue recognized to independent expectations of total revenues disaggregated by revenue stream. • Performing cutoff procedures to test that revenue transactions were recorded in the appropriate period. /s/ Moss Adams LLP Seattle, Washington October 15, 2024 We have served as the Company’s auditor since 2021. 33 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) June 29, 2024 July 1, 2023 July 2, 2022 ASSETS Current assets: Cash and cash equivalents $ 4,752 $ 3,603 $ 1,707 Trade receivables, net of credit losses of $ 2,918 , $ 23 and $ 12 132,559 150,600 135,876 Contract assets 21,250 29,925 21,974 Inventories 105,099 137,911 155,741 Other, net of credit losses of $ 1,679 , $ 0 , and $ 0 24,739 27,510 24,710 Total current assets 288,399 349,549 340,008 Property, plant and equipment, net 28,806 28,870 26,012 Operating lease right-of-use assets, net 15,416 16,202 16,731 Other assets: Deferred income tax asset 17,376 12,254 10,055 Other 5,346 11,397 14,117 Total other assets 22,722 23,651 24,172 Total assets $ 355,343 $ 418,272 $ 406,923 LIABILITIES AND SHAREHOLDERS ’ EQUITY Current liabilities: Accounts payable $ 79,394 $ 115,899 121,393 Accrued compensation and vacation 6,510 13,351 11,836 Current portion of long-term debt 3,123 3,138 2,190 Other 15,149 19,578 28,248 Total current liabilities 104,176 151,966 163,667 Long-term liabilities: Long-term debt, net 116,383 121,531 100,293 Operating lease liabilities 10,312 10,317 12,023 Deferred income tax liability 263 274 64 Other long-term obligations 219 3,567 5,998 Total long-term liabilities 127,177 135,689 118,378 Total liabilities 231,353 287,655 282,045 Commitments and contingencies (Note 9) Shareholders’ equity: Common stock, no par value—shares authorized 25,000 ; issued and outstanding 10,762 , 10,762 , and 10,762 shares, respectively 47,284 47,728 47,474 Retained earnings 76,921 82,986 77,829 Accumulated other comprehensive (loss) income ( 215 ) ( 97 ) ( 425 ) Total shareholders’ equity 123,990 130,617 124,878 Total liabilities and shareholders’ equity $ 355,343 $ 418,272 $ 406,923 See accompanying notes to consolidated financial statements. 34 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Fiscal Year Ended Restated Restated June 29, 2024 July 1, 2023 July 2, 2022 Net sales $ 566,942 $ 605,315 $ 544,177 Cost of sales 527,063 557,843 500,963 Gross profit 39,879 47,472 43,214 Research, development and engineering expenses 8,333 9,735 9,821 Selling, general and administrative expenses 25,219 25,715 24,598 Gain on insurance proceeds, net of losses ( 431 ) ( 4,301 ) — Total operating expenses 33,121 31,149 34,419 Operating income 6,758 16,323 8,795 Interest expense, net 11,945 10,023 5,104 Income (loss) before income taxes ( 5,187 ) 6,300 3,691 Income tax provision (benefit) ( 2,400 ) 1,143 314 Net income (loss) $ ( 2,787 ) $ 5,157 $ 3,377 Net income (loss) per share — Basic $ ( 0.26 ) $ 0.48 $ 0.31 Weighted average shares outstanding — Basic 10,762 10,762 10,762 Net income (loss) per share — Diluted $ ( 0.26 ) $ 0.47 $ 0.31 Weighted average shares outstanding — Diluted 10,762 10,938 11,063 See accompanying notes to consolidated financial statements. 35 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) Fiscal Year Ended June 29, 2024 July 1, 2023 July 2, 2022 Comprehensive income: Net income (loss) $ ( 2,787 ) $ 5,157 $ 3,377 Other comprehensive income: Unrealized gain (loss) on hedging instruments, net of tax ( 118 ) 328 ( 2,497 ) Comprehensive income (loss) $ ( 2,905 ) $ 5,485 $ 880 Other comprehensive income for fiscal years 2024, 2023, and 2022 is reflected net of tax provision (benefit) of approximately $( 0.1 ) million, $ 0.0 million , and $( 0.8 ) million, respectively. See accompanying notes to consolidated financial statements. 36 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal Year Ended June 29, 2024 July 1, 2023 July 2, 2022 Operating activities: Net income (loss) $ ( 2,787 ) $ 5,157 $ 3,377 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 11,038 9,542 7,562 Amortization of interest rate swap 97 328 301 Amortization of deferred loan costs 339 154 143 Noncash lease expense 5,663 5,712 4,261 Inventory write-down to net realizable value 322 427 950 Provision for warranty 320 313 446 Provision for credit losses ( 84 ) 37 67 Gain on disposal of assets ( 32 ) ( 21 ) ( 12 ) Gain on insurance proceeds, net of losses ( 431 ) ( 4,301 ) — Share-based compensation expense ( 444 ) 254 293 Deferred income taxes ( 5,132 ) ( 1,989 ) 481 Noncash accrued compensation benefit ( 3,925 ) — — Changes in operating assets and liabilities Trade receivables 15,818 ( 14,760 ) ( 25,619 ) Contract assets 8,656 ( 7,951 ) 2,807 Inventories 32,490 17,403 ( 19,362 ) Other assets ( 587 ) ( 1,684 ) ( 5,912 ) Accounts payable ( 36,505 ) ( 5,494 ) 28,569 Accrued compensation and vacation ( 2,917 ) 1,515 365 Other liabilities ( 8,123 ) ( 15,953 ) ( 3,624 ) Cash provided by (used in) operating activities 13,776 ( 11,311 ) ( 4,907 ) Investing activities: Purchases of property and equipment ( 3,958 ) ( 9,771 ) ( 6,813 ) Proceeds from sale of fixed assets — 1,925 14 Prepayments on finance lease obligations — ( 188 ) ( 1,252 ) Proceeds from insurance 1,850 3,500 — Cash used in investing activities ( 2,108 ) ( 4,534 ) ( 8,051 ) Financing activities: Payment of financing costs ( 807 ) ( 245 ) ( 118 ) Proceeds from issuance of long term debt 1,178 4,375 11,594 Repayments of long-term debt ( 2,977 ) ( 2,417 ) ( 2,143 ) Borrowings under revolving credit agreement 521,088 596,121 581,893 Repayments of revolving credit agreement ( 523,931 ) ( 575,802 ) ( 577,703 ) Principal payments on finance leases ( 5,070 ) ( 4,291 ) ( 2,331 ) Cash provided by (used in) financing activities ( 10,519 ) 17,741 11,192 Net increase (decrease) in cash and cash equivalents 1,149 1,896 ( 1,766 ) Cash and cash equivalents, beginning of period 3,603 1,707 3,473 Cash and cash equivalents, end of period $ 4,752 $ 3,603 $ 1,707 Supplemental cash flow information: Interest payments $ 10,269 $ 9,256 $ 5,110 Income tax payments, net of refunds $ 2,402 $ 1,414 $ 1,315 ASC 326 Opening Balance Sheet Adjustment $ 3,278 $ — $ — Recognition of operating lease liabilities and right-of-use assets $ 4,877 $ 5,184 $ 5,247 Recognition of financing lease liabilities and right-of-use assets $ — $ 1,940 $ 13,096 See accompanying notes to consolidated financial statements. 37 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (In thousands) Shares Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balances, July 3, 2021 10,762 47,181 74,452 2,072 $ 123,705 Net income 3,377 — 3,377 Unrealized loss on hedging instruments, net of tax — — — ( 2,497 ) ( 2,497 ) Share-based compensation — 293 — — 293 Balances, July 2, 2022 10,762 47,474 77,829 ( 425 ) $ 124,878 Net income — — 5,157 — 5,157 Unrealized gain on hedging instruments, net of tax — — — 328 328 Share-based compensation — 254 — — 254 Balances, July 1, 2023 10,762 $ 47,728 $ 82,986 $ ( 97 ) $ 130,617 Net loss — ( 2,787 ) — ( 2,787 ) CECL opening balance sheet adjustment, net of tax — — ( 3,278 ) — ( 3,278 ) Unrealized loss on hedging instruments, net of tax — — — ( 118 ) ( 118 ) Share-based compensation — ( 444 ) — — ( 444 ) Balances, June 29, 2024 10,762 $ 47,284 $ 76,921 $ ( 215 ) $ 123,990 See accompanying notes to consolidated financial statements. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Business Key Tronic Corporation and subsidiaries (the Company) is engaged in contract manufacturing for original equipment manufacturers (OEMs). The Company’s headquarters are located in Spokane Valley, Washington with manufacturing operations in Oakdale, Minnesota; Fayetteville, Arkansas; Corinth, Mississippi; and foreign manufacturing operations in Juarez, Mexico; Shanghai, China; and Da Nang, Vietnam. Liquidity Historically, due to the timing between the procurement of raw materials, production cycle and payment from our customers, 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 $ 6.8 million and $( 2.8 ) million respectively, during the 12-month period ended June 29, 2024 and have positive working capital of $ 184.2 million as of June 29, 2024. 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 during fiscal year 2024. Based on current projections, we anticipate generating cash from operations as revenue increases in the first quarter of fiscal year 2025. As of June 29, 2024, we have limited additional borrowing capacity on our credit facility, which matures on December 3, 2025. 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 The consolidated financial statements include the Company and its wholly owned subsidiaries in the United States, Mexico, China and Vietnam. Intercompany balances and transactions have been eliminated during consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates include the allowance for credit losses, calculating inventory impairments related to obsolete and non-saleable inventories to value at net realizable value, deferred tax assets and liabilities, uncertain tax positions, impairment of long-lived assets, medical self-funded insurance liability, long-term incentive compensation accrual, the provision for warranty costs, and the fair value of stock appreciation rights granted under the Company’s share-based compensation plan. Due to uncertainties with respect to the assumptions and estimates, actual results could differ from those estimates. Cash and Cash Equivalents The Company considers investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. The Company may have cash and cash equivalents at financial institutions that are in excess of federally insured limits from time to time. Allowance for Credit Losses The Company evaluates the collectability of accounts receivable and records an allowance for credit losses, which reduces the receivables to an amount that management reasonably estimates will be collected. A specific allowance is recorded against receivables considered to be impaired based on the Company’s knowledge of the financial condition of the customer, and a general allowance is calculated and applied to remaining receivables based on the Company's historical collection experience. In determining the amount of the allowance, the Company considers several factors including the aging of the receivables, the current business environment and historical experience. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. 39 Inventories Inventories are stated at the lower of cost or net realizable value. Inventory valuation is determined using the first-in, first-out (FIFO) method. Customer orders are based upon forecasted quantities of product manufactured for shipment over defined periods. Raw material inventories are purchased to fulfill these customer requirements. Within these arrangements, customer demands for products frequently change, sometimes creating excess and obsolete inventories. The Company regularly reviews raw material inventories by customer for both excess and obsolete quantities. Wherever possible, the Company attempts to recover its full cost of excess and obsolete inventories from customers or, in some cases, through other markets. When it is determined that the Company’s carrying cost of such excess and obsolete inventories cannot be recovered in full, a charge is taken against income for the difference between the carrying cost and the estimated realizable amount. We also reserve for inventory related to specific customers covered by lead-time assurance agreements when those customers are experiencing financial difficulties or reimbursement is not reasonably assured. Property, Plant and Equipment Property, plant and equipment are carried at cost and depreciated using straight-line methods over the expected useful lives of the assets. Repairs and maintenance costs are expensed as incurred. Leases Lease assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using the Company’s incremental borrowing rate, unless the implicit rate is readily determinable. Our incremental borrowing rate represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. Lease assets also include any lease prepayments. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of income. For further information, please refer to Footnote “Leases” of the “Notes to Consolidated Financial Statements.” Impairment of Long-lived Assets The Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews assets for impairment whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable. Impaired assets are reported at the lower of cost or fair value. Accrued Warranty An accrual is made for expected warranty costs, with the related expense recognized in cost of goods sold. Management reviews the adequacy of this accrual quarterly based on historical analyses and anticipated product returns. Self-funded Insurance The Company self-funds its domestic employee health plans. The Company contracts with a separate administrative service company to supervise and administer the programs and act as its representative. The Company reduces its risk under this self-funded platform by purchasing stop-loss insurance coverage for high dollar individual claims. In addition, if the aggregate annual claims amount to more than 125 percent of expected claims for the plan year this insurance will also pay those claims amounts exceeding that level. The Company estimates its exposure for claims incurred but not paid at the end of each reporting period and uses historical claims data supplied by the Company’s broker to estimate its self-funded insurance liability. This liability is subject to a total limitation that varies based on employee enrollment and factors that are established at each annual contract renewal. Actual claims experience may differ from the Company’s estimates. Costs related to the administration of the plan and related claims are expensed as incurred. Revenue Recognition The first step in its process for revenue recognition is to identify the contract with a customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outlines the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates. 40 The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as 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. Shipping and Handling Fees The Company classifies costs associated with shipping and handling fees as a component of cost of goods sold. Customer billings related to shipping and handling fees are reported as revenue. Research, Development and Engineering Research, development and engineering expenses include unreimbursed contract manufacturing costs as well as design and engineering costs associated with the production of contract manufacturing programs. Research, development and engineering costs are expensed as incurred. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments based on new assessments and changes in estimates and which may not accurately forecast actual outcomes. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax provision. The tax years 2005 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject. For further discussions, please refer to Footnote “Income Taxes” of the “Notes to Consolidated Financial Statements.” Derivative Instruments and Hedging Activities The Company has previously entered into foreign currency forward contracts and an interest rate swap which are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging . The effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (AOCI) and is reclassified into earnings in the same period in which the underlying hedged transaction affects earnings. The derivative’s effectiveness represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. As of June 29, 2024, the Company had outstanding foreign currency forward contracts with a notional amount of $ 12.5 million. 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. 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. The computation of diluted earnings per 41 common share does not assume conversion, exercise, or contingent issuance of common stock equivalent shares that would have an anti-dilutive effect on earnings per share. Foreign Currency Transactions The functional currency of the Company’s subsidiaries in Mexico, China and Vietnam is the U.S. dollar. Realized foreign currency transaction gains and losses for local currency denominated assets and liabilities are included in cost of goods sold. Fair Value of Financial Instruments The carrying values of cash and cash equivalents, accounts receivable, current liabilities, and non-current operating lease liability are reflected on the balance sheets at June 29, 2024, July 1, 2023, and July 2, 2022 , reasonably approximate their fair value. The Company had an outstanding balance on its lines of credit of $ 112.6 million as of June 29, 2024, $ 115.4 million as of July 1, 2023, and $ 95.1 million as of July 2, 2022 with a carrying value that reasonably approximates the fair value. The Company had an outstanding balance on its foreign term loan of MXN 40.5 million ($ 2.2 million USD) as of June 29, 2024, MXN 58.2 million ($ 3.4 million USD) as of July 1, 2023, and MXN 93.3 million ($ 4.6 million USD) as of July 2, 2022 with a carrying value that reasonably approximates the fair value. The domestic equipment term loans were $ 5.8 million as of June 29, 2024, $ 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 The Company’s incentive plan may provide for equity awards to employees in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based awards. Compensation cost is recognized on a straight-line basis over the requisite employee service period, which is generally the vesting period, and is included in cost of goods sold, research, development and engineering, and selling, general, and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations. Newly Adopted and Recent Accounting Pronouncements On December 14, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires entities to disclose more detailed information relating to their reconciliation of statutory tax rate to effective tax rate, income taxes paid by jurisdiction, pretax income (or loss) from continuing operations, and income tax expense (or benefit). The ASU applies to the Company’s annual reporting period beginning in fiscal year 2026. The Company does not anticipate early adoption of the new disclosure standards. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires public entities to disclose information about their reportable segments' oversight and significant expenses on an interim and annual basis. The ASU is effective for the annual reporting period beginning in fiscal year 2025 and for interim periods beginning in fiscal year 2026. Early adoption is permitted. The Company is currently evaluating the guidance and its impact to the financial statements. In September 2022, the FASB issued ASU No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50). This standard requires disclosure of the key terms of outstanding supplier finance programs and a roll forward of the related obligations. The new standard does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The ASU became effective for the Company July 2, 2023, except for the roll forward requirement, which becomes effective June 30, 2024. This ASU, except for the roll forward requirement, was adopted retrospectively as of July 2, 2023 and did not have a material impact on our consolidated financial statements. In October 2021, the FASB issued ASU 2021-08 amending Business Combination: (Topic 805), which was necessary due to 2014-09, Revenue from Contracts with Customers (Topic 606). The FASB issued this ASU to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to (1) recognition of an acquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. The Company adopted these amendments as of the effective date of July 2, 2023. These amendments are to be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company plans to apply the practical expedients as needed for any future acquisitions. The practical expedients cover contracts that were modified prior to acquisition date as well as determining which date an acquirer would have to determine the standalone selling price of each performance obligation in an acquired contract. This ASU did not have a material impact on our consolidated financial statements. In March of 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which clarifies specific issues raised by stakeholders. Specifically, the ASU clarifies the following: 1) that all entities are required to provide the fair value option disclosures in ASC 825, Financial Instruments 2) clarifies that the portfolio exception in ASC 820, Fair 42 Value Measurement, applies to nonfinancial items accounted for as derivatives under ASC 815, Derivatives and Hedging; 3) clarifies that for purposes of measuring expected credit losses on a net investment in a lease in accordance with ASC 326, Financial Instruments - Credit Losses, the lease term determined in accordance with ASC 842, Leases, should be used as the contractual term; 4) clarifies that when an entity regains control of financial assets sold, it should recognize an allowance for credit losses in accordance with ASC 326; and 5) aligns the disclosure requirements for debt securities in ASC 320, Investments - Debt Securities, with the corresponding requirements for depository and lending institutions in ASC 942, Financial Services - Depository and Lending. The amendments in the ASU have various effective dates and transition requirements which are dependent on timing of adoption of ASU 2016-13. The Company adopted this amendment as of the effective date of July 2, 2023 on a modified retrospective basis. This ASU did not have a material impact on our consolidated financial statements. In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance was effective for the Company beginning in the first quarter of fiscal year 2024. The Company adopted this amendment as of the effective date of July 2, 2023, and the impacts are disclosed in opening retained earnings on the Consolidated Statement of Shareholders' Equity. Refer to further discussion in Note 15 - "Restatement of Interim Financial Information" Fiscal Year The Company operates on a 52/53 week fiscal year. Fiscal years end on the Saturday nearest June 30. As such, fiscal years 2024 and 2023 ended on June 29, 2024 and July 1, 2023, respectively. Fiscal years 2022, 2023 and 2024 were 52 week years. 2. INVENTORIES Inventory as of June 29, 2024 is $ 105.1 million compared to $ 137.9 million as of July 1, 2023 and $ 155.7 million as of July 2, 2022. The components of inventories consist of the following (in thousands): June 29, 2024 July 1, 2023 July 2, 2022 (in thousands) Raw materials and supplies $ 80,570 $ 109,078 $ 131,980 Work-in-process 24,529 28,833 23,761 Inventories $ 105,099 $ 137,911 $ 155,741 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: Life June 29, 2024 July 1, 2023 July 2, 2022 (in years) (in thousands) Land — $ 4,034 $ 4,034 $ 4,034 Buildings and improvements 3 to 30 27,821 26,459 25,841 Equipment 1 to 10 80,049 77,823 71,180 Furniture and fixtures 3 to 5 6,660 5,418 5,286 Total property, plant and equipment 118,564 113,734 106,341 Accumulated depreciation ( 89,758 ) ( 84,864 ) ( 80,329 ) Property, plant and equipment, net $ 28,806 $ 28,870 $ 26,012 Fiscal Year Ended June 29, 2024 July 1, 2023 July 2, 2022 (in thousands) Depreciation expense $ 5,270 $ 4,700 $ 4,940 43 4. LONG-TERM DEBT Debt consists of the following: Maturity Date Interest Rate June 29, 2024 July 1, 2023 July 2, 2022 (in thousands) Asset-based senior secured revolving credit facility (1) December 3, 2025 9.5 % $ 107,149 $ 115,395 $ 95,077 Foreign line of credit (2) December 11, 2026 14.0 % 5,403 — — Domestic term loan - Balboa (3) September 19, 2030 6 % to 8 % 4,535 4,148 — Foreign term loan - Banorte (4) April 24, 2026 5.5 % $ 2,200 $ 3,400 $ 4,600 Domestic term loan - Bank of America (5) August 14, 2025 4.9 % $ 1,277 $ 2,316 $ 3,305 Total debt 120,564 125,259 102,982 Less: current portion of debt ( 3,123 ) ( 3,138 ) ( 2,190 ) Less: unamortized financing costs ( 1,059 ) ( 590 ) ( 499 ) Long-term debt, net $ 116,382 $ 121,531 $ 100,293 (1) On August 14, 2020, the Company entered into a loan agreement with Bank of America (“Loan Agreement”). The Loan Agreement replaced the Company’s prior amended and restated credit agreement, as amended, with Wells Fargo Bank. The Loan Agreement provides for an asset-based senior secured revolving credit facility with an original availability of up to $ 93 million. On September 3, 2021, the Company entered into an amendment to the Loan Agreement, which increased the availability under the credit facility to $ 120 million, subject to the Company’s borrowing base, and set the maturity date to September 3, 2026. On August 26, 2022, the Company entered into a third amendment to the Loan Agreement, which removed the cash flow leverage ratio covenant and increased the interest rate by 25 basis points. On May 7, 2024, the Company entered into a fourth amendment to the Loan Agreement, effective as of March 29, 2024, which amendment modified debt covenant provisions to reduce the minimum requirement for the fixed charge coverage ratio from 1.25 :1.00 to 1.00 :1.00 as of March 30, 2024 and allow for the add back of severance expenses incurred during the quarter ended March 30, 2024. The minimum requirement for the fixed charge coverage ratio will increase 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. In addition, the amendment increased the interest rate by 100 basis points beginning on March 29, 2024 and moved forward the maturity date by one year to September 3, 2025. On September 27, 2024, the Company entered into a fifth amendment to the Loan Agreement, which extended the maturity date by three months to December 3, 2025. On October 9, 2024, the Company entered into a sixth amendment to the Loan Agreement, The Amendment waived existing events of default relating to non-compliance with (a) prescribed fixed charge coverage ratios for the periods ending June 29, 2024 and July 27, 2024 and (b) delivering audited financial statements within 90 days of the Company's fiscal year-end. The Amendment increased the interest rate by 50 basis points beginning on October 9, 2024 so that the applicable margin on base rate loans is 3.50 % and term SOFR loans is 4.50 %. In addition, the Amendment increased the availability block, which reduces the calculated borrowing base under the Loan Agreement, from $ 8 million to $ 10 million, with further increases to $ 11 million and $ 12 million to be effective on December 31, 2024 and March 31, 2025, respectively. As of June 29, 2024, the Company had an outstanding balance under the asset-based revolving credit facility of $ 107.1 million, $ 0.3 million in outstanding letters of credit and $ 12.9 million available for future borrowings. 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. As of July 2, 2022, the Company had an outstanding balance under the asset-based revolving credit facility of $ 95.1 million, $ 0.3 million in outstanding letters of credit and $ 10.8 million available for future borrowings. Generally, the interest rate applicable to loans under the Bank of America loan agreement will be, at the Company’s option: (i) 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 %, and (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; or (ii) SOFR rate for an applicable interest period, plus the applicable interest margin for SOFR rate loans. As modified by the sixth amendment to the Loan Agreement, the applicable interest margin on: (x) base rate loans is 3.50 % and (y) SOFR rate loans is 4.50 %, resetting on a quarterly basis. If there is an event of default that is not waived under the Loan Agreement, all loans and other obligations will bear interest at a rate of an 44 additional 2.00 % on the 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. As of June 29, 2024, the interest rate on the asset-based revolving credit facility with Bank of America was 9.46 %. (2) On December 11, 2023, the Company entered into a loan agreement in Mexican peso with Banorte Financial Group. The agreement provides for a three-year secured line of credit up to MXN 100 million, subject to the Company’s borrowing base, maturing on December 11, 2026. The credit facility bears interest at Iterbancario de Equilibrio Interest Rate plus 2.75 %, and as of June 29, 2024, was 13.99 %. As of June 29, 2024, the Company had an outstanding balance under the revolving credit facility of MXN 99 million ($ 5.4 USD) and MXN 1 million ($ 0.1 million USD) available for future borrowings. (3) On September 19, 2023, the Company entered into a $ 1.1 million equipment financing agreement with Ameris Bank dba Balboa Capital ("Balboa Capital"). Combining with other equipment financing agreements entered in the third quarter of fiscal year 2023, a total of $ 5.5 million relates to the Company’s existing manufacturing equipment that bears an interest rate range of 6 % - 8 % and matures in the first quarter of fiscal 2030. Under these loan agreements, equal monthly payments of $ 94,000 commenced in the fourth quarter of fiscal year 2024 and will continue through the maturity of the equipment financing facility in the first quarter of fiscal 2030. The Company had an outstanding balance $ 4.5 million as of June 29, 2024. (4) 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. As of June 29, 2024, the Company had an outstanding balance of $ 2.2 million. As of July 1, 2023, the Company had an outstanding balance of $ 3.4 million. As of July 2, 2022, the Company had an outstanding balance of $ 4.6 million. (5) On August 14, 2020, the Company entered into a $ 5.0 million equipment financing facility with Bank of America relating to the Company’s existing U.S. manufacturing equipment that bears interest at 4.85 % and matures on August 14, 2025. Under this loan agreement, equal monthly payments of approximately $ 94,000 commenced on September 14, 2020 and will continue through the maturity of the equipment financing facility on August 14, 2025. As of June 29, 2024, the Company had an outstanding balance of $ 1.3 million. As of July 1, 2023, the Company had an outstanding balance of $ 2.3 million. As of July 2, 2022, the Company had an outstanding balance of $ 3.3 million. Debt maturities as of June 29, 2024 for the next five years are as follows (in thousands): Fiscal Years Ending Amount 2025 $ 3,123 2026 109,230 2027 6,363 2028 1,032 2029 816 2030 - Thereafter — Total debt 120,564 Unamortized financing costs ( 1,059 ) Long-term debt, net of unamortized financing costs $ 119,505 The Company must comply with certain financial covenants, including a fixed charge coverage ratio. The credit agreement requires the Company to grant certain inspection rights to Bank of America, limit or restrict the Company’s cash management; limit or restrict the ability of the Company to incur additional liens, make acquisitions or investments, incur additional indebtedness, engage in mergers, consolidations, liquidations, dissolutions, or dispositions, pay dividends or other restricted payments, prepay certain indebtedness, engage in transactions with affiliates, and use proceeds. As of June 29, 2024, The Company was not in compliance with the fixed coverage charge ratio. On October 9, 2024, the Company executed a sixth amendment to the Loan Agreement which waived existing events of default as of that date . 45 5. INCOME TAXES Income tax benefit consists of the following: Fiscal Year Ended June 29, 2024 July 1, 2023 July 2, 2022 (in thousands) Current income tax provision (benefit): United States $ 263 $ 998 $ ( 2,179 ) Foreign 1,451 2,134 2,012 1,714 3,132 ( 167 ) Deferred income tax provision (benefit): United States ( 4,322 ) ( 2,130 ) 443 Foreign 208 141 38 ( 4,114 ) ( 1,989 ) 481 Total income tax provision $ ( 2,400 ) $ 1,143 $ 314 The Company has gross tax credit carryforwards of approximately $ 10.4 million at June 29, 2024 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. Based upon the Company’s profitability, forecasted income, and evaluation of all other positive and negative evidence, management determined that it is more likely than not that the deferred tax assets will be realized. 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). The Company continuously evaluates impact of tax law and regulatory changes. The Company noted no changes during the current quarter or fiscal year that would have a material impact on its provision for income taxes or overall income tax position. 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. In future years, repatriations of cash will generally be tax-free in the U.S. However, withholding taxes in China may still apply to any such future repatriations. Management has not changed its indefinite investment assertions regarding to the portion of accumulated earnings and profits in China that may be repatriated in the future. Accordingly, management estimates that future repatriations of cash from China may result in approximately $ 0.8 million of withholding tax. There would be no offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations. Withholding taxes will not apply to future repatriations from Mexico or Vietnam. The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company expects to repatriate approximately $ 8.0 million from China, in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations. 46 The Company’s effective tax rate differs from the federal tax rate as follows: Fiscal Year Ended June 29, 2024 July 1, 2023 July 2, 2022 (in thousands) Federal income tax provision at statutory rates $ ( 1,089 ) $ 1,322 $ 775 State income taxes, net of federal tax effect ( 145 ) ( 25 ) 86 Foreign tax rate differences ( 71 ) 137 336 Net operating loss carryback — — ( 593 ) Effect of income tax credits ( 929 ) ( 1,020 ) ( 920 ) Previously unrecognized tax benefits ( 232 ) ( 75 ) 146 Inflation adjustments 132 118 178 Tax penalties & interest included in tax provision — — 179 Global Intangible Low-Taxed Income (GILTI) tax 53 33 59 Provision to return reconciliation ( 68 ) 52 ( 91 ) Equity compensation shortfall 51 73 104 Foreign Exchange Gains/Losses Unrealized for Tax Purposes ( 126 ) 277 23 Other 24 251 32 Income tax provision (benefit) $ ( 2,400 ) $ 1,143 $ 314 The domestic and foreign components of income before income taxes were: Fiscal Year Ended June 29, 2024 July 1, 2023 July 2, 2022 (in thousands) Domestic $ ( 13,539 ) $ ( 1,086 ) $ ( 2,890 ) Foreign 8,352 7,386 6,581 Income before income taxes $ ( 5,187 ) $ 6,300 $ 3,691 47 Deferred income tax assets and liabilities consist of the following at: June 29, 2024 July 1, 2023 July 2, 2022 (in thousands) Deferred tax assets: Tax credit carryforwards, net $ 7,544 $ 6,812 $ 7,990 Net operating loss — — 486 Inventory 252 267 247 Identifiable intangibles 247 308 370 Accruals 2,340 2,421 2,406 Property, plant, and equipment — 1,328 1,200 ASC 606 deferred costs 3,852 4,802 4,216 Lease liabilities 3,542 3,775 3,671 Interest expense deduction carryforward 2,765 977 580 Research and development expenses 6,042 3,860 — Other 505 271 465 Deferred income tax assets $ 27,089 $ 24,821 $ 21,631 Deferred tax liabilities: Accrued withholding tax - unremitted earnings ( 796 ) ( 754 ) ( 754 ) Property, plant, and equipment ( 127 ) — — Right-of-use assets ( 3,609 ) ( 3,857 ) ( 3,663 ) Tax capital lease liabilities ( 764 ) ( 2,832 ) ( 2,385 ) ASC 606 accelerated revenue ( 3,882 ) ( 4,599 ) ( 3,736 ) Other ( 798 ) ( 799 ) ( 1,102 ) Deferred income tax liabilities $ ( 9,976 ) $ ( 12,841 ) $ ( 11,640 ) Net deferred income tax assets $ 17,113 $ 11,980 $ 9,991 Balance sheet caption reported in: Long-term deferred income tax asset $ 17,376 $ 12,254 $ 10,055 Long-term deferred income tax liability ( 263 ) ( 274 ) ( 64 ) Net deferred income tax asset $ 17,113 $ 11,980 $ 9,991 Uncertain Tax Positions: The Company has R&D tax credits that approximate $ 10.4 million that have 20 -year carryforwards before expiring. The Company’s R&D tax credits expire in various fiscal years from 2033 to 2044. As of June 29, 2024, the Company had unrecognized tax benefits of $ 2.9 million related to its gross R&D tax credits. The unrecognized tax benefits relate to certain R&D tax credits generated from 2005 to 2024. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Fiscal Year Ended June 29, 2024 July 1, 2023 July 2, 2022 (in thousands) Beginning Balance $ 3,028 $ 2,998 $ 4,863 Additions based on tax positions related to the current year 110 120 286 Adjustment to prior year tax positions & amended tax returns ( 7 ) ( 15 ) ( 2,296 ) Lapse of statute of limitations ( 232 ) ( 75 ) 145 Ending Balance $ 2,899 $ 3,028 $ 2,998 The $ 2.9 million of unrecognized tax benefits at the end of fiscal year 2024, if recognized, would reduce the effective tax rate. Management does not anticipate any material changes to this amount during the next 12 months. 48 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. The Company is subject to income tax in the U.S. federal jurisdiction, various state jurisdictions, Mexico, China and Vietnam. Certain years remain subject to examination but there are currently no ongoing exams in any taxing jurisdiction. 6. EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is computed by including both the weighted-average number of shares outstanding and any dilutive common share equivalents in the denominator. The following table presents a reconciliation of the denominator and the number of antidilutive common share awards that were not included in the diluted earnings per share calculation. These antidilutive securities occur when equity awards outstanding have an option price greater than the average market price for the period: Fiscal Year Ended (in thousands, except per share information) June 29, 2024 July 1, 2023 July 2, 2022 Net income (loss) $ ( 2,787 ) $ 5,157 $ 3,377 Weighted average shares outstanding—basic 10,762 10,762 10,762 Effect of dilutive common stock awards — 176 301 Weighted average shares outstanding—diluted 10,762 10,938 11,063 Net income (loss) per share—basic $ ( 0.26 ) $ 0.48 $ 0.31 Net income (loss) per share—diluted $ ( 0.26 ) $ 0.47 $ 0.31 Antidilutive SARs not included in diluted earnings per share 515 376 619 7. STOCK-BASED COMPENSATION AND BENEFIT PLANS The Company’s incentive plan provides for equity and liability awards to employees and non-employee directors in the form of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based or cash-based awards. Compensation cost is recognized on a straight-line basis over the requisite employee service period, which is generally the vesting period, and is recorded as employee compensation expense in cost of goods sold, research, development and engineering, and selling, general and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations. In addition to service conditions, these SARs contain a performance condition. The additional performance condition is based upon the achievement of Return on Invested Capital (ROIC) goals relative to a peer group. All awards with performance conditions are measured over the vesting period and are charged to compensation expense over the requisite service period based on the number of shares expected to vest. The SARs cliff vest after a three-year period from date of grant based on the performance metric and expire five years from date of grant. 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 June 29, 2024, 136,250 remain outstanding. 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 July 29, 2022 Expected dividend yield — % Risk-free interest rate 3.01 % Expected volatility 48.56 % Expected life 4.00 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 June 29, 2024, 136,250 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: 49 Fiscal Year 2022 August 9, 2021 Expected dividend yield — % Risk-free interest rate 0.62 % Expected volatility 48.58 % Expected life 4.00 The Black-Scholes option valuation model is used by the Company for estimating the fair value of SARs. Option valuation models require the input of highly subjective assumptions, particularly for the expected term and expected stock price volatility. Changes in these assumptions can materially affect the fair value estimates. 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 June 29, 2024, July 1, 2023 and July 2, 2022 was $( 0.4 ) million, $ 0.3 million and $ 0.3 million, respectively. The fiscal year 2024 amount relates to reversal of prior expense for which performance metrics were not ultimately attained. There were no SARs exercised during fiscal year 2024, fiscal year 2023 and fiscal year 2022. As of June 29, 2024, total unrecognized compensation expense related to nonvested share-based compensation arrangements was approximately $ 0.1 million. This expense is expected to be recognized over a weighted-average period of 1.0 years. The following table summarizes the Company’s SARs activity from July 3, 2021 through June 29, 2024: SARs Available For Grant SARs Outstanding Aggregate Intrinsic Value (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Balances, July 3, 2021 688,084 791,250 $ 7.15 1.9 SARs granted ( 165,000 ) 165,000 $ 7.17 SARs expired 197,500 ( 197,500 ) $ 8.17 Balances, July 2, 2022 720,584 758,750 $ — $ 6.89 2.1 SARs granted ( 145,000 ) 145,000 $ 5.10 SARs forfeited 90,000 ( 90,000 ) $ 6.55 SARs expired 187,500 ( 187,500 ) $ 7.26 Balances, July 1, 2023 853,084 626,250 $ — $ 6.41 2.2 SARs forfeited 137,500 ( 137,500 ) $ 6.90 SARs expired 101,250 ( 101,250 ) $ 8.17 Balances, June 29, 2024 1,091,834 387,500 $ — $ 5.78 1.8 Exercisable at June 29, 2024 115,000 $ — $ 4.93 0.1 The Company has defined contribution plans available to U.S. employees who have attained age 21. Company contributions to the plans were approximately $ 1.3 million, $ 1.1 million and $ 0.9 million during fiscal years 2024, 2023 and 2022, respectively. 8. COMMITMENTS AND CONTINGENCIES Litigation and Other Matters The Company is party to certain lawsuits or claims in the ordinary course of business. The Company does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the financial position, results of operations or cash flow of the Company. Warranties The Company provides warranties on certain product sales. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty. If actual return rates and/or repair and replacement costs 50 differ significantly from management's estimates, adjustments to recognize additional cost of sales may be required in future periods. As of June 29, 2024, July 1, 2023, and July 2, 2022 the reserve for warranty costs was approximately $ 164,000 , $ 29,000 , and $ 31,000 respectively. Leases Please refer to Footnote “Leases” of the “Notes to Consolidated Financial Statements” for information regarding lease commitments. Internal Investigation 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. Subsequent to the matter identified in January 2021, additional inventory accounting errors unrelated to the investigation were also identified by management. The investigation did not result in a restatement of our previously filed financial statements. The Company is cooperating with the Securities and Exchange Commission’s (the “SEC”) inquiries related to the internal investigation. The Company cannot currently form an estimate of any possible loss or range of loss, including any potential monetary penalties; or other remedies potentially imposed by the SEC. Indemnification Rights Under the Company’s bylaws, the Company’s directors and officers have certain rights to indemnification by the Company against certain liabilities that may arise by reason of their status or service as directors or officers. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers and former directors in certain circumstances. 9. DERIVATIVE FINANCIAL INSTRUMENTS As of June 29, 2024, the Company had outstanding foreign currency forward contracts with a total notional amount of $ 12.5 million. The maturity dates for these contracts extend through December 2024. For the three months ended June 29, 2024, the Company entered into $ 12.5 million of foreign currency forward contracts and did not settle any of contracts. During the same period of the previous year, the Company did not enter or settle any foreign currency forward contracts. For the twelve months ended June 29, 2024, the Company entered into $ 19.0 million of foreign currency forward contracts and settled $ 6.5 million of contracts. During the same period of the previous year, the Company did not enter into or settle any foreign currency forward 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. This interest rate swap contract was terminated on August 14, 2020 when the Company entered into a loan and security agreement with Bank of America. At date of termination this interest rate swap was in a liability position of $ 148,400 , which was amortized to interest expense over the original term of the swap. On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of November 1, 2023, related to the borrowings outstanding under the line of credit with Wells Fargo Bank. This interest rate swap contract was terminated on August 14, 2020 when the Company entered into a loan and security agreement with Bank of America. At date of termination this interest rate swap was in a liability position of $ 776,500 , which was amortized to interest expense over the original term of the swap. The following table summarizes the fair value of the derivative instruments in the Consolidated Balance Sheets as of June 29, 2024, July 1, 2023 and July 2, 2022 (in thousands): Fair Value Derivatives designated as hedging instruments under Subtopic 815-20 Balance Sheet Location June 29, 2024 July 1, 2023 July 2, 2022 Foreign currency forward contracts Other current liabilities $ 277 $ — $ — 51 The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Operations for the fiscal year 2024, 2023 and 2022, respectively (in thousands): Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of July 1, 2023 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of June 29, 2024 Forward contracts Cost of sales — 287 ( 72 ) 215 Interest rate swap Interest expense ( 97 ) — 97 — Total $ ( 97 ) 287 25 215 Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of July 2, 2022 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of July 1, 2023 Forward contracts Cost of sales $ ( 79 ) $ — $ 79 $ — Interest rate swap Interest expense ( 346 ) — 249 ( 97 ) Total $ ( 425 ) $ — $ 328 $ ( 97 ) Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of June 28, 2021 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of July 2, 2022 Forward contracts Cost of sales $ 2,721 $ 950 ( 3,750 ) $ ( 79 ) Interest rate swap Interest expense ( 649 ) — 303 ( 346 ) Total $ 2,072 $ 950 $ ( 3,447 ) $ ( 425 ) As of June 29, 2024, the Company does not have any foreign exchange contracts with credit-risk-related contingent features. The Company is subject to the risk of fluctuating interest rates from our line of credit and foreign currency risk resulting from our China operations. The Company does not currently manage these risk exposures by using derivative instruments. 10. FAIR VALUE MEASUREMENTS The Company has adopted ASC 820, Fair Value Measurements, which defines fair value, establishes a framework for assets and liabilities being measured and reported at fair value and expands disclosures about fair value measurements. There are three levels of fair value hierarchy inputs used to value assets and liabilities which include: Level 1 – inputs are quoted market prices for identical assets or liabilities; Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 – inputs are unobservable inputs for the asset or liability. There have been no changes in the fair value methodologies used at June 29, 2024, July 1, 2023, and July 2, 2022 . The carrying values of cash and cash equivalents, accounts receivable, contract assets, and current liabilities are reflected on the balance sheets at June 29, 2024, July 1, 2023, and July 2, 2022 and 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, and equipment loans. These borrowings bear interest at SOFR plus 4.5 % 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.” As a result of the determinable market rates for our asset-based revolving credit facility and equipment loans, they are classified within Level 2 of the fair value hierarchy. Further, the carrying value of each of these instruments reasonably approximates their fair value as of June 29, 2024, July 1, 2023, and July 2, 2022. 52 11. ENTERPRISE-WIDE DISCLOSURES Operating segments are defined in ASC Topic 280, Segment Reporting as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. As of June 29, 2024, the Company operates and internally manages a single operating segment, Electronics Manufacturing Services as this is the only discrete financial information that is regularly reviewed by the chief operating decision maker. This segment provides integrated electronic and mechanical engineering, assembly, sourcing and procurement, logistics, and new product testing for our customers. Products and Services Of the revenues for the years ended June 29, 2024, July 1, 2023, and July 2, 2022 contract manufacturing sales and services were $ 566.9 million, $ 605.3 million, and $ 544.2 million respectively. Geographic Areas Net sales and long-lived assets (property, plant, and equipment) by geographic area for the years ended and as of June 29, 2024, July 1, 2023, and July 2, 2022 are summarized in the following table. Net sales set forth below are based on the shipping destination. Long-lived assets information is based on the physical location of the asset and includes property, plant and equipment, net, and operating lease right-of-use assets, net. Fiscal Year Ended (in thousands) Restated Restated 2024 2023 2022 Geographic net sales: Domestic (U.S.) $ 439,334 $ 518,819 $ 450,380 Foreign 127,608 86,496 93,797 Total $ 566,942 $ 605,315 $ 544,177 Long-lived assets: United States $ 24,497 $ 21,799 $ 14,440 Mexico 15,531 18,203 22,473 Vietnam 3,780 4,547 5,228 China 414 523 601 Total $ 44,222 $ 45,072 $ 42,742 Percentage of net sales made to customers located in the following countries: Fiscal Year Ended 2024 2023 2022 United States 77 % 86 % 83 % China 22 % 13 % 15 % Other foreign countries (a) 1 % 1 % 2 % Total 100 % 100 % 100 % (a) No other individual foreign country accounted for 10% or more of the foreign sales in fiscal years 2024 or 2023. 53 Significant Customers The percentage of net sales to and trade accounts receivables from significant customers were as follows: Percentage of Net Sales Fiscal Year Percentage of Trade Receivables Fiscal Year 2024 2023 2022 2024 2023 2022 Customer A 20 % 12 % 12 % 21 % 16 % 13 % Customer B * * 13 % * * * 12. REVENUE Revenue Recognition The Company specializes in services ranging from product manufacturing to engineering and tooling services. The first step in its process for revenue recognition is to identify the contract with a customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outlines the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates. The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as 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. The Company’s typical payment terms are 30 to 45 days and its sales arrangements do not contain any significant financing component for its customers. The Company generally provides a warranty for workmanship on its manufacturing contracts. Although we offer warranties on our products, our warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations; therefore, the primary performance obligation in the majority of our contracts is the delivery of a specific good through the purchase order submitted by our customer. The Company elected to not disclose information about remaining performance obligations as they are part of contracts that that have expected durations of one year or less. The Company has elected to expense costs to obtain contracts as incurred as these costs are immaterial to the financial statements. During fiscal 2024, 2023 and 2022, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods. 54 Contract Balances A contract asset is recognized when the Company has recognized revenue, but has not issued an invoice for payment. Contract assets are classified separately on the condensed consolidated balance sheet and transferred to receivables when the right to payment becomes unconditional. The following table summarizes the activity in the Company’s contract assets during the twelve months ended June 29, 2024 (in thousands): Contract Assets Beginning balance, July 1, 2023 $ 29,925 Revenue recognized 497,348 Amounts collected or invoiced ( 506,023 ) Ending balance, June 29, 2024 $ 21,250 The following table summarizes the activity in the Company’s contract assets during the twelve months ended July 1, 2023 (in thousands): Contract Assets Beginning balance, July 2, 2022 $ 21,974 Revenue recognized 590,624 Amounts collected or invoiced ( 582,673 ) Ending balance, July 1, 2023 $ 29,925 The following table summarizes the activity in the Company’s contract assets during the twelve months ended July 2, 2022 (in thousands): Contract Assets Beginning balance, July 3, 2021 $ 24,781 Revenue recognized 528,204 Amounts collected or invoiced ( 531,011 ) Ending balance, July 2, 2022 $ 21,974 Disaggregation of Revenue The following table presents the Company’s revenue disaggregated for the twelve months ended June 29, 2024, the twelve months ended July 1, 2023, and the twelve months ended July 2, 2022 (in thousands): Revenue Recognition June 29, 2024 July 1, 2023 (Restated) July 2, 2022 (Restated) Over-Time $ 497,348 $ 590,624 $ 528,193 Point-in-Time 69,594 14,691 15,984 Total $ 566,942 $ 605,315 $ 544,177 Revenues and associated costs from engineering design, development services and tooling, which are performed under contract of short term durations, are recognized over time as the services are performed. 55 13. LEASES The Company has several commitments under operating and financing leases for warehouses, manufacturing facilities, office buildings, and equipment with initial terms that expire at various dates during the next 1 year to 10 years. The Company has some leases that include an extension clause. Management has considered the likelihood of exercising each extension option included and estimated the duration of the extension option, for those leases management determined to be reasonably certain, in calculating the lease term for measurement of the right of use asset and liability. For operating leases, management assumed a discount rate of 4.0 %. The weighted average discount rate is disclosed in the tables below. The components of lease cost were as follows as of June 29, 2024, July 1, 2023 and July 2, 2022 (in thousands): Year Ended Year Ended Year Ended Lease cost Classification June 29, 2024 July 1, 2023 July 2, 2022 Operating lease cost Cost of sales $ 4,814 $ 4,519 $ 6,442 Operating lease cost Selling, general and administrative expenses $ 734 $ 737 $ 929 Financing lease cost Cost of sales $ 4,865 $ 3,891 $ 2,054 Financing lease cost Selling, general and administrative expenses $ 206 $ 161 $ 64 Total lease cost $ 10,619 $ 9,308 $ 9,489 Fixed lease cost $ 6,169 $ 8,171 $ 7,941 Short-term lease cost 4,450 1,137 1,548 Total lease cost $ 10,619 $ 9,308 $ 9,489 56 Amounts reported in the Consolidated Balance Sheet as of June 29, 2024, July 1, 2023 and July 2, 2022 were (in thousands, except weighted average lease term and discount rate): June 29, 2024 July 1, 2023 July 2, 2022 Operating Leases: Operating lease right of use assets $ 15,416 $ 16,202 $ 16,731 Operating lease liabilities (1) $ 15,416 $ 16,202 $ 16,731 Weighted-average remaining lease term (in years) Operating leases 3.97 4.55 5.28 Weighted-average discount rate Operating leases 4.00 % 4.00 % 4.00 % Financing Leases (2): Financing lease right of use assets $ 3,569 $ 9,718 $ 12,464 Financing lease liabilities $ 2,128 $ 8,278 $ 11,211 Weighted-average remaining lease term (in years) Financing leases 1.06 1.89 2.56 Weighted-average discount rate Financing leases 11.18 % 9.96 % 8.82 % (1) The current portion of the total operating lease liabilities of $ 5.1 million is classified under Other Current Liabilities , resulting in $ 10.3 million classified under Operating Lease Liabilities in the Long-term Liabilities section of the condensed consolidated balance sheet. (2) The total finance lease right of use assets of $ 3.6 million is classified under Other Long-term Assets . The current portion of the total finance lease liabilities of $ 1.9 million is classified under Other Current Liabilities , resulting in $ 0.2 million classified in Other Long-term Liabilities section of the condensed consolidated balance sheet. Future lease payments under non-cancellable leases as of June 29, 2024 are as follows (in thousands): Fiscal Years Ending Operating Leases Finance Leases 2025 $ 5,104 $ 1,909 2026 4,147 501 2027 3,238 — 2028 2,281 — 2029 1,051 — Thereafter 822 — Total undiscounted lease payments 16,643 2,410 Less: present value discount ( 1,227 ) ( 282 ) Total lease liabilities $ 15,416 $ 2,128 14. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS In connection with the preparation of the Company's consolidated financial statements as of and for the year ended June 29, 2024, the Company concluded that cost recovery of material price variances was not being consistently recorded across its facilities. Material price variance occurs when the price the Company pays for materials exceeds the price quoted to customers, and the Company typically recovers the excess cost from customers through a sales price adjustment. Per Company policy, this 57 cost recovery should be recorded as net sales when inventory enters the production process, however, certain of the Company’s facilities were recording the cost recovery as a reduction to cost of sales. These errors resulted in an understatement of both net sales and cost of sales for the years ended July 1, 2023 and July 2, 2022 (the "impacted annual periods"). As a result, the Company has restated its consolidated statements of operations for the impacted annual periods presented herein. The nature of the restatement adjustments shown below and their impact on the previously issued consolidated statements of operations is to increase net sales and increase cost of sales to appropriately reflect these transactions as sales price adjustments. Fiscal Year Ended 7/1/2023 CORRECTED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share information) As previously reported Adjustments As restated Net sales $ 588,135 $ 17,180 $ 605,315 Cost of sales 540,663 17,180 557,843 Gross profit 47,472 — 47,472 Research, development and engineering expenses 9,735 — 9,735 Selling, general and administrative expenses 25,715 — 25,715 Gain on insurance proceeds, net of losses ( 4,301 ) — ( 4,301 ) Total operating expenses 31,149 — 31,149 Operating income 16,323 — 16,323 Interest expense, net 10,023 — 10,023 Income before income taxes 6,300 — 6,300 Income tax provision 1,143 — 1,143 Net income $ 5,157 $ — $ 5,157 Net income per share — Basic $ 0.48 $ — $ 0.48 Weighted average shares outstanding — Basic 10,762 — 10,762 Net income per share — Diluted $ 0.47 $ — $ 0.47 Weighted average shares outstanding — Diluted 10,938 — 10,938 Fiscal Year Ended 7/2/2022 CORRECTED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share information) As previously reported Adjustments As restated Net sales $ 531,815 $ 12,362 $ 544,177 Cost of sales 488,601 12,362 500,963 Gross profit 43,214 — 43,214 Research, development and engineering expenses 9,821 — 9,821 Selling, general and administrative expenses 24,598 — 24,598 Gain on insurance proceeds, net of losses — — — Total operating expenses 34,419 — 34,419 Operating income 8,795 — 8,795 Interest expense, net 5,104 — 5,104 Income before income taxes 3,691 — 3,691 Income tax provision 314 — 314 Net income $ 3,377 $ — $ 3,377 Net income per share — Basic $ 0.31 $ — $ 0.31 Weighted average shares outstanding — Basic 10,762 — 10,762 Net income per share — Diluted $ 0.31 $ — $ 0.31 Weighted average shares outstanding — Diluted 11,063 — 11,063 All referenced amounts for prior periods in these financial statements and the notes herein reflect the balances and amounts on a restated basis. 58 15. RESTATEMENT AND REVISION OF INTERIM FINANCIAL INFORMATION Restatement of Unaudited Consolidated Statements of Operations In connection with the preparation of the Company’s consolidated financial statements as of and for the year ended June 29, 2024, the Company concluded that cost recovery of material price variances was not being consistently recorded across its facilities. Material price variance occurs when the price the Company pays for materials exceeds the price quoted to customers, and the Company typically recovers the excess cost from customers through a sales price adjustment. Per Company policy, this cost recovery should be recorded as net sales when inventory enters the production process, however, certain of the Company’s facilities were recording the cost recovery as a reduction to cost of sales. These errors resulted in an understatement of both net revenues and cost of sales 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, 2022 (the “impacted quarterly periods”). As a result of these errors, the Company has restated its unaudited consolidated statements of operations for the impacted quarterly periods in the following tables. The unaudited consolidated balance sheets, statements of comprehensive income, shareholders’ equity and cash flows for the impacted quarters were not impacted by the errors noted above and have not been restated; provided, that the unaudited consolidated balance sheets as of March 30, 2024, December 30, 2023, September 30, 2023 have been revised as a result of error related to the adoption of ASU 326 as discussed below under "Revision of Unaudited Consolidated Balance Sheets." 59 Interim periods - fiscal year 2024 (in thousands, except per share information) CORRECTED CONSOLIDATED STATEMENT OF OPERATIONS As restated - three months ended 9/30/23 As restated - three months ended 12/30/23 As restated - three months ended 3/30/24 Three months ended 6/29/24 Twelve months ended 6/29/24 Net sales $ 150,112 [1] $ 147,847 [2] $ 142,427 [3] $ 126,556 $ 566,942 Cost of sales 139,250 [1] 136,084 [2] 134,346 [3] 117,383 527,063 Gross profit 10,862 11,763 8,081 9,173 39,879 Research, development and engineering expenses 2,241 1,758 2,234 2,100 8,333 Selling, general and administrative expenses 5,784 6,057 6,422 6,956 25,219 Gain on insurance proceeds, net of losses ( 431 ) — — — ( 431 ) Total operating expenses 7,594 7,815 8,656 9,056 33,121 Operating income 3,268 3,948 ( 575 ) 117 6,758 Interest expense, net 3,011 2,961 2,800 3,173 11,945 Income (loss) before income taxes 257 987 ( 3,375 ) ( 3,056 ) ( 5,187 ) Income tax provision (benefit) ( 78 ) ( 97 ) ( 1,154 ) ( 1,071 ) ( 2,400 ) Net income (loss) $ 335 $ 1,084 $ ( 2,221 ) $ ( 1,985 ) $ ( 2,787 ) Net income (loss) per share — Basic $ 0.03 $ 0.10 $ ( 0.21 ) $ ( 0.18 ) $ ( 0.26 ) Weighted average shares outstanding — Basic 10,762 10,762 10,762 10,762 10,762 Net income (loss) per share — Diluted $ 0.03 $ 0.10 $ ( 0.21 ) $ ( 0.18 ) $ ( 0.26 ) Weighted average shares outstanding — Diluted 11,003 10,889 10,762 10,762 10,762 [1] - Includes an increase of $ 2,349 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. [2] - Includes an increase of $ 2,430 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. [3] - Includes an increase of $ 1,900 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. 60 Interim periods - fiscal year 2023 (in thousands, except per share information) CORRECTED CONSOLIDATED STATEMENT OF OPERATIONS As restated - three months ended 10/1/22 As restated - three months ended 12/31/22 As restated - three months ended 4/1/23 As restated - three months ended 7/1/23 As restated - twelve months ended 7/1/23 Net sales $ 140,971 [1] $ 127,592 [2] $ 167,758 [3] $ 168,994 [4] $ 605,315 Cost of sales 130,592 [1] 118,672 [2] 153,482 [3] 155,096 [4] 557,843 Gross profit 10,379 8,920 14,276 13,898 47,472 Research, development and engineering expenses 2,296 2,287 2,580 2,573 9,735 Selling, general and administrative expenses 5,656 5,735 6,961 7,363 25,715 Gain on insurance proceeds, net of losses ( 934 ) ( 2,710 ) ( 396 ) ( 261 ) ( 4,301 ) Total operating expenses 7,018 5,312 9,145 9,675 31,149 Operating income 3,361 3,608 5,131 4,223 16,323 Interest expense, net 1,887 2,507 2,688 2,941 10,023 Income before income taxes 1,474 1,101 2,443 1,282 6,300 Income tax provision 322 134 467 220 1,143 Net income $ 1,152 $ 967 $ 1,976 $ 1,062 $ 5,157 Net income per share — Basic $ 0.11 $ 0.09 $ 0.18 $ 0.10 $ 0.48 Weighted average shares outstanding — Basic 10,762 10,762 10,762 10,762 10,762 Net income per share — Diluted $ 0.11 $ 0.09 $ 0.18 $ 0.10 $ 0.47 Weighted average shares outstanding — Diluted 10,832 10,832 10,865 10,996 10,938 [1] - Includes an increase of $ 3,708 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. [2] - Includes an increase of $ 3,884 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. [3] - Includes an increase of $ 3,205 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. [4] - Includes an increase of $ 6,384 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. 61 Interim periods - fiscal year 2022 (in thousands, except per share information) CORRECTED CONSOLIDATED STATEMENT OF OPERATIONS As restated - three months ended 10/2/21 As restated - three months ended 1/1/22 As restated - three months ended 4/2/22 As restated - three months ended 7/2/22 As restated - twelve months ended 7/2/22 Net sales $ 133,130 [1] $ 136,407 [2] $ 140,714 [3] $ 133,926 [4] $ 544,177 Cost of sales 122,992 [1] 126,599 [2] 129,206 [3] 122,166 [4] 500,963 Gross profit 10,138 9,808 11,508 11,760 43,214 Research, development and engineering expenses 2,449 2,498 2,526 2,348 9,821 Selling, general and administrative expenses 5,595 5,659 6,193 7,151 24,598 Gain on insurance proceeds, net of losses — — — — — Total operating expenses 8,044 8,157 8,719 9,499 34,419 Operating income 2,094 1,651 2,789 2,261 8,795 Interest expense, net 992 1,095 1,551 1,466 5,104 Income before income taxes 1,102 556 1,238 795 3,691 Income tax provision (benefit) 287 ( 31 ) 231 ( 173 ) 314 Net income $ 815 $ 587 $ 1,007 $ 968 $ 3,377 Net income per share — Basic $ 0.08 $ 0.05 $ 0.09 $ 0.09 $ 0.31 Weighted average shares outstanding — Basic 10,762 10,762 10,762 10,762 10,762 Net income per share — Diluted $ 0.07 $ 0.05 $ 0.09 $ 0.09 $ 0.31 Weighted average shares outstanding — Diluted 11,052 11,057 11,062 11,071 11,063 [1] - Includes an increase of $ 368 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. [2] - Includes an increase of $ 1,951 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. [3] - Includes an increase of $ 2,323 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. [4] - Includes an increase of $ 7,720 over amounts previously reported in the Net Sales and Cost of Sales lines, respectively. Revision of Unaudited Consolidated Balance Sheets In addition, in connection with the preparation of the Company’s consolidated financial statements as of and for the year ended June 29, 2024, the Company concluded that it had not recorded an immaterial adjustment related to its adoption on July 2, 2023 of ASU 2016-13 Financial Instruments - Credit Losses (ASU 326): Measurement of Credit Losses on Financial Instruments . As of July 2, 2023, the Company should have performed an assessment and recorded any adjustment as a modified retrospective adjustment through its opening retained earnings balance. The error resulted in an immaterial overstatement of accounts receivable, contract assets, other assets and retained earnings as of March 30, 2024, December 30, 2023 and September 30, 2023. Given the restatement described above, the Company elected to revise its unaudited consolidated balance sheets as of March 30, 2024, December 30, 2023 and September 30, 2023 in the following tables. The related unaudited consolidated statements of operations, statements of comprehensive income, shareholders’ equity and cash flows were not materially impacted by this error and have not been revised for this matter. 62 CORRECTED CONSOLIDATED BALANCE SHEETS (in thousands) As revised - as of 9/30/23 As revised - as of 12/30/23 As revised - as of 3/30/24 ASSETS Current assets: Cash and cash equivalents $ 3,574 $ 2,953 $ 5,255 Trade receivables, net of credit losses [1] 138,463 $ 131,913 $ 132,663 Contract assets [1] 32,878 $ 27,745 $ 28,594 Inventories 126,778 $ 124,054 $ 115,115 Other [1] 21,700 $ 21,382 $ 20,994 Total current assets 323,393 $ 308,047 $ 302,621 Property, plant and equipment, net 28,085 $ 28,935 $ 29,046 Operating lease right-of-use assets, net 15,928 $ 18,104 $ 16,790 Other assets: Deferred income tax asset [1] 14,161 $ 14,117 $ 15,533 Other 7,500 $ 6,243 $ 6,109 Total other assets 21,661 $ 20,360 $ 21,642 Total assets $ 389,067 $ 375,446 $ 370,099 LIABILITIES AND SHAREHOLDERS ’ EQUITY Current liabilities: Accounts payable $ 101,638 $ 91,358 $ 82,198 Accrued compensation and vacation 11,860 $ 5,677 $ 7,071 Current portion of long-term debt 2,886 $ 3,068 $ 3,094 Other 16,640 $ 18,263 $ 17,040 Total current liabilities 133,024 $ 118,366 $ 109,403 Long-term liabilities: Long-term debt, net 115,789 $ 114,894 $ 122,193 Operating lease liabilities 10,939 $ 12,380 $ 11,351 Deferred income tax liability 324 22 $ 19 Other long-term obligations 1,201 627 $ 336 Total long-term liabilities 128,253 127,923 $ 133,899 Total liabilities 261,277 246,289 $ 243,302 Commitments and contingencies (Note 9) Shareholders’ equity: Common stock, no par value—shares authorized 25,000 ; issued and outstanding 10,762 , 10,762 , and 10,762 shares, respectively 47,786 47,839 47,891 Retained earnings [1] 80,043 81,127 78,906 Accumulated other comprehensive (loss) income ( 39 ) 191 — Total shareholders’ equity 127,790 129,157 126,797 Total liabilities and shareholders’ equity $ 389,067 $ 375,446 370,099 [1] - Each presented period includes a reduction for expected credit losses of $( 2,979 ) related to receivables, $( 1,230 ) related to Other, $( 25 ) related to Contract Assets, $ 956 related to deferred income tax asset, and $( 3,278 ) related to Retained Earnings. These adjustments serve to reflect a modified retrospective adoption of ASC 326 - Financial Instruments, Credit Losses. The related tax-effects and subsequent inter-period adjustments are considered immaterial for presentation on an interim basis. 63 Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None