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Item 7. Management’s Discussion and Analysis

2025-09-17 compared with 2024-10-15 · 60 added, 162 removed, 186 unchanged (54% of the section changed)

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

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

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

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

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

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

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

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

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Executive Summary

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

During the fourth quarter of fiscal year 2025, we continued to win new programs in pest control, personal protection, air purification, automotive, medical technology and utilities inspection equipment.

We also announced a new manufacturing services contract with a large data processing OEM that will consign its material and components for new production in our Corinth, Mississippi manufacturing facility.

We have never had a consigned program at this scale, which has the potential to ramp significantly during fiscal year 2026 and is estimated to eventually exceed $20 million in annual revenue.

We reported net sales of $467.9 million for fiscal year 2025, down 17.5 percent from $566.9 million for fiscal year 2024.

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

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

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

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

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

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

The revenue in fiscal year 2025 was adversely impacted by the continued worldwide economic disruptions caused by the recent escalation and fluctuations in global tariffs, which caused business paralysis throughout much of the year and ultimately led to delays in new programs originally scheduled to ramp in the year.

In addition, approximately $48 million of this decrease related to a reduction in scrap and component sales in fiscal year 2025, as certain large programs went end of life in 2024 and their final shipments of product, inventory, and any scrap were recorded at that time.

Key Tronic expects long-term growth and profitability despite revenue trends in fiscal year 2025.

In order to better align costs with current customer demand and boost automation, the Company cut approximately 300 more jobs during the fourth quarter of fiscal year 2025, for a total net headcount reduction during fiscal year 2025 of approximately 600.

These measures have improved competitiveness for new program bids, which have increased recently.

To support its near-shoring and tariff mitigation strategies, Key Tronic is also expanding its manufacturing footprint, with a new US facility and added capacity in Vietnam.

For the first quarter of fiscal year 2026, we believe ongoing tariff-related concerns, global logistics problems, China-US political tensions and continued supply-chain concerns will continue to drive the favorable trend of contract manufacturing returning to North America, as well as to our expanding Vietnam facilities.

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

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

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

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

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

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

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

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

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

Gross profit as a percentage of net sales was 7.8 percent in fiscal year 2025, up from 7.0 percent in 2024.

During fiscal year 2025, the increase in gross margin is largely related to operational efficiencies gained from the reductions in workforce offset by the expenses incurred for the related severance.

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

Operating income as a percentage of net sales for fiscal year 2025 was 0.1 percent compared to 1.2 percent for fiscal year 2024.

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

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

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

In addition to the factors discussed above, this decrease is primarily related to approximately $1.8 million in adjustments for estimated collections from customers during 2025.

The net loss for fiscal year 2025 was $(8.3) million or $(0.77) per share, compared to a net loss of $(2.8) million or $(0.26) per share for fiscal year 2024.

The net loss in 2025 is primarily related to reductions in demand, severance expenses incurred, and adjustments for estimated collections from customers.

We maintained a strong balance sheet with a current ratio of 2.5 and a debt-to-equity ratio of 0.90.

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

Total cash provided by operating activities as defined on our cash flow statement was $18.9 million during fiscal year 2025, as we have continued to focus on optimizing inventory balances and reducing the days to collect accounts receivable.

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

RESULTS OF OPERATIONS

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

Comparison of the Fiscal Year Ended June 28, 2025 with the Fiscal Year Ended June 29, 2024

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

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(in thousands) June 28, 2025 % of

net sales July 1, 2023 % of

net sales June 29, 2024 % of

net sales $ change % point

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Interest expense, net 12,523 2.7 11,945 2.1 578 0.6

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

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

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

Loss before income taxes (11,961) (2.6) (5,187) (0.9) (6,774) (1.7)

Income tax benefit (3,643) (0.8) (2,400) (0.4) (1,243) (0.4)

Net Loss $ (8,318) (1.8)% $ (2,787) (0.5)% $ (5,531) (1.3)

Effective income tax rate 30.5 % 46.3 %

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

Net sales decreased $99.1 million from the prior fiscal year.

Approximately $48 million of this decrease related to a reduction in scrap and component sales in fiscal year 2025, as certain large programs went end of life in 2024 and their final shipments of product, inventory, and any scrap were recorded at that time.

Additionally, worldwide economic disruptions caused by the recent escalation and fluctuations in global tariffs led to disruptions throughout the year and ultimately led to delays in new programs originally scheduled to ramp in the year.

The following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2025 and 2024:

Fiscal Year Ended

June 29, 2024 July 1, 2023

June 28, 2025 June 29, 2024

Industrial 52 46

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

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

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

The amounts charged to expense for these inventories were approximately $0.1 million and $0.3 million in fiscal years 2025 and 2024, respectively.

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Gross profit as a percentage of net sales was 7.8 percent in fiscal year 2025 and 7.0 percent in fiscal year 2024.

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

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

During fiscal year 2025, the increase in gross margin was primarily driven by cost reductions and strategic headcount reductions implemented in prior quarters, partially offset by the related severance expenses.

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

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Total SG&A expenses as a percent of net sales were 5.7 percent and 4.4 percent in fiscal years 2025 and 2024, respectively.

This increase is largely attributable to approximately $1.8 million in adjustments for estimated collections from customers.

Interest Expense

We had net interest expense of $12.5 million and $11.9 million in fiscal years 2025 and 2024, respectively.

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

This increase is largely attributable to the write-off in the second quarter of fiscal year 2025 of approximately $1.0 million of unamortized loan fees related to refinancing our debt, partially offset by a reduction in maturing equipment leases and a lower average revolving credit loan balance.

Income Tax Provision

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

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

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

We had income tax benefits of approximately $3.6 million during fiscal year 2025 and $2.4 million during fiscal year 2024.

The income tax benefit recognized during both fiscal years 2025 and 2024 was primarily a function of U.S.

and foreign taxes recognized at statutory rates, the net benefit associated with federal research and development tax credits, and the change in deferred tax liability related to future distributions from China in fiscal year 2025.

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

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Non-GAAP Financial Measures

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

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

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

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

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

Twelve Months Ended

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

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

(in thousands, except per share amounts) June 28, 2025 June 29, 2024

GAAP net loss $ (8,318) $ (2,787)

Cybersecurity expenses — 2,340

Severance expenses (benefit) 945 354

Severance expenses 2,908 1,743

Gain on insurance proceeds (net of losses) — (431)

Stock-based compensation expense 218 (444)

Write-off of unamortized loan fees 1,012 —

Income tax effect of non-GAAP adjustments (1)

Adjusted net income (loss):

Adjusted net loss:

$ (5,008) $ (221)

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

Adjusted net loss per share — non-GAAP Diluted $ (0.47) $ (0.02)

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

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RESULTS OF OPERATIONS

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

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

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

Fiscal Year Ended

(in thousands) July 1, 2023 % of

net sales July 2, 2022 % of

net sales $ change % point

(Restated) (Restated)

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

Cost of sales 557,843 92.2 500,963 92.1 56,880 0.1

Gross profit 47,472 7.8 43,214 7.9 4,258 (0.1)

Operating expenses:

Research, development and engineering 9,735 1.6 9,821 1.8 (86) (0.2)

Selling, general and administrative 25,715 4.2 24,598 4.5 1,117 (0.3)

Gain on insurance proceeds, net of losses (4,301) (0.7) — — (4,301) (0.7)

Total operating expenses 31,149 5.1 34,419 6.3 (3,270) (1.2)

Operating income 16,323 2.7 8,795 1.6 7,528 1.1

Interest expense, net 10,023 1.7 5,104 0.9 4,919 0.8

Income before income taxes 6,300 1.0 3,691 0.7 2,609 0.3

Income tax provision 1,143 0.2 314 0.1 829 0.1

Net income $ 5,157 0.8% $ 3,377 0.6% $ 1,780 0.2

Effective income tax rate 18.1 % 8.5 %

The increase in net sales of $61.1 million from the prior fiscal year was primarily due to the successful ramp of new customer programs and increased demand from existing customers.

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

The following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2023 and 2022:

Fiscal Year Ended

July 1, 2023 July 2, 2022

Consumer 44 50

Industrial 42 42

Communication 9 8

Transportation 1 —

Computer and Peripheral — 1

Total 56% 53%

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

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

As we continue to diversify our customer base and win new customers, we expect to continue to see a change in the industry concentrations of our revenue.

Sales to foreign locations represented 14.3 percent and 17.2 percent of our total net sales in fiscal years 2023 and 2022, respectively.

Cost of Sales

Total cost of sales as a percentage of net sales was 92.2 percent in fiscal year 2023 and 92.1 percent in fiscal year 2022.

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

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

The amounts charged to expense for these inventories were approximately $427,000 and $950,000 in fiscal years 2023 and 2022, respectively.

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

Warranty expense is related to workmanship claims.

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

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

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

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

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

These and other factors can cause variations in operating results.

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

Research, Development and Engineering

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

Total RD&E expenses were $9.7 million and $9.8 million in fiscal years 2023 and 2022, respectively.

Total RD&E expenses as a percent of net sales was 1.6 percent in fiscal year 2023 and 1.8 percent in fiscal year 2022.

Selling, General and Administrative

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

Total SG&A expenses were $25.7 million and $24.6 million in fiscal years 2023 and 2022, respectively.

Total SG&A expenses as a percent of net sales were 4.2 percent and 4.5 percent in fiscal years 2023 and 2022, respectively.

This 0.3 percentage point decrease in SG&A as a percentage of net sales is primarily related to an increase in legal expenses related specifically to the SEC’s review of the whistleblower complaint in fiscal year 2021.

Interest Expense

We had net interest expense of $10.0 million and $5.1 million in fiscal years 2023 and 2022, respectively.

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

Income Tax Provision

We had an income tax expense of approximately $1.1 million during fiscal year 2023 and an income tax expense of approximately $0.3 million during fiscal year 2022.

The income tax expense recognized during both fiscal years 2023 and 2022 was primarily a function of U.S.

and foreign taxes recognized at statutory rates, the net benefit associated with federal research and development tax credits, the impact of foreign exchange gains in fiscal year 2023, and the net benefit of carrying back the fiscal year 2021 net operating tax losses to years with higher federal tax rates in fiscal year 2022.

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

We anticipate repatriating a portion of our unremitted foreign earnings.

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

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

International Subsidiaries

We offer customers a complete global manufacturing solution.

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

The locations of our active foreign subsidiaries are as follows:

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

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

This subsidiary primarily supports our U.S.

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

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

Its primary function is to provide contract manufacturing services.

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

This facility includes SMT, assembly, and warehouse capabilities.

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

Foreign sales (based on shipping instructions) from our worldwide operations, including domestic exports, were $86.5 million and $93.8 million in fiscal years 2023 and 2022, respectively.

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

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

To review the results of operations comparison of the fiscal year ended June 29, 2024 with the fiscal year ended July 1, 2023 please refer to our Annual Report on Form 10-K filed October 15, 2024 with the Securities and Exchange Commission or follow the link below.

https://www.sec.gov/ix?doc=/Archives/edgar/data/719733/000071973324000113/ktcc-20240629.htm

Capital Resources and Liquidity

Operating Cash Flow

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

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

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

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

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

Net cash provided by operating activities for fiscal year 2025 was $18.9 million compared to net cash provided by operating activities of $13.8 million in fiscal year 2024.

The additional cash provided in fiscal year 2025 was due to a focus on collecting accounts receivable faster and working down inventory balances to be in line with current revenue levels.

The $18.9 million of net cash provided by operating activities during fiscal year 2025 is primarily related to $8.3 million of net loss adjusted for $9.6 million of depreciation and amortization, $32.4 million decrease in accounts receivable, a $7.7 million decrease in inventory, a $3.8 million decrease in contract assets, and a $1.6 million increase in accrued compensation and vacation partially offset by a $15.7 million decrease in accounts payable, a $10.5 million increase in other assets and a $3.6 million decrease in other liabilities.

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

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

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Investing Cash Flow

Cash flows used in investing activities were $2.1 million for fiscal year 2024.

Cash flows used in investing activities were $4.5 million in fiscal year 2023.

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

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

Cash flows used in investing activities were $4.2 million for fiscal year 2025 and $2.1 million in fiscal year 2024.

Our primary use of cash in investing activities during fiscal years 2025 and 2024 was purchasing equipment to support production for new programs.

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

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

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Financing Cash Flow

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

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

Cash flows used in financing activities were $18.1 million in fiscal year 2025 and $10.5 million in fiscal year 2024.

Our primary financing activities during both fiscal year 2025 and fiscal year 2024 were borrowings and repayments under our asset-based revolving line of credit facility with Bank of Montreal, our Prior Credit Facility with Bank of America, and term loans.

In fiscal year 2025, there was a significantly higher percentage of repayments against the borrowings on the revolving line of credit.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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of that amount, the Company estimates that $2.9 million is to be repatriated in the future, requiring foreign withholding taxes of $0.3 million that is currently accrued in our deferred tax liabilities.

The remaining $30.5 million is considered to be permanently reinvested in Mexico, China and Vietnam.

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

The remaining $23.5 million is considered to be permanently reinvested in Mexico and Vietnam.

If these amounts were required to be repatriated, it would result in no foreign withholding taxes payable.

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

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

Revenue from engineering

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

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.

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As of June 28, 2025, the allowance for credit losses was approximately $3.5 million.

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

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

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

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

This allowance is based on estimates of the portion of accounts receivable that may not be collected in the future, and the increase during fiscal year 2025 relates to ongoing revisions to this estimated amount.

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

13 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis