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 28, 2025 and June 29, 2024, the related consolidated statements of operations, comprehensive 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 28, 2025 and June 29, 2024, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our 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 $468 million for the year ended June 28, 2025, of which $443 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 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. 30 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 manufacturing services revenue recognized to an independent expectation of manufacturing services revenue. • Performing cutoff procedures to test that revenue transactions were recorded in the appropriate period. /s/ Baker Tilly US, LLP Seattle, Washington September 16, 2025 We have served as the Company’s auditor since 2021. 31 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) June 28, 2025 June 29, 2024 ASSETS Current assets: Cash and cash equivalents $ 1,384 $ 4,752 Trade receivables, net of credit losses of $ 3,479 and $ 2,918 96,142 132,559 Contract assets 17,409 21,250 Inventories 97,321 105,099 Other, net of credit losses of $ 1,463 and $ 1,679 21,917 24,739 Total current assets 234,173 288,399 Property, plant and equipment, net 27,727 28,806 Operating lease right-of-use assets, net 11,347 15,416 Other assets: Deferred income tax asset 23,397 17,376 Other, net of credit losses of $ 500 and $ 0 19,230 5,346 Total other assets 42,627 22,722 Total assets $ 315,874 $ 355,343 LIABILITIES AND SHAREHOLDERS ’ EQUITY Current liabilities: Accounts payable $ 63,725 $ 79,394 Accrued compensation and vacation 8,157 6,510 Current portion of long-term debt 6,215 3,123 Other 13,894 15,149 Total current liabilities 91,991 104,176 Long-term liabilities: Long-term debt, net 98,936 116,383 Operating lease liabilities 6,859 10,312 Deferred income tax liability — 263 Other long-term obligations 954 219 Total long-term liabilities 106,749 127,177 Total liabilities 198,740 231,353 Commitments and contingencies (Note 8) Shareholders’ equity: Common stock, no par value—shares authorized 25,000 ; issued and outstanding 10,762 and 10,762 shares, respectively 47,502 47,284 Retained earnings 68,603 76,921 Accumulated other comprehensive income (loss) 1,029 ( 215 ) Total shareholders’ equity 117,134 123,990 Total liabilities and shareholders’ equity $ 315,874 $ 355,343 See accompanying notes to consolidated financial statements. 32 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Fiscal Year Ended June 28, 2025 June 29, 2024 Net sales $ 467,871 $ 566,942 Cost of sales 431,444 527,063 Gross profit 36,427 39,879 Research, development and engineering expenses 9,163 8,333 Selling, general and administrative expenses 26,702 25,219 Gain on insurance proceeds, net of losses — ( 431 ) Total operating expenses 35,865 33,121 Operating income 562 6,758 Interest expense, net 12,523 11,945 Loss before income taxes ( 11,961 ) ( 5,187 ) Income tax benefit ( 3,643 ) ( 2,400 ) Net loss $ ( 8,318 ) $ ( 2,787 ) Net loss per share — Basic $ ( 0.77 ) $ ( 0.26 ) Weighted average shares outstanding — Basic 10,762 10,762 Net loss per share — Diluted $ ( 0.77 ) $ ( 0.26 ) Weighted average shares outstanding — Diluted 10,762 10,762 See accompanying notes to consolidated financial statements. 33 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Fiscal Year Ended June 28, 2025 June 29, 2024 Comprehensive loss: Net loss $ ( 8,318 ) $ ( 2,787 ) Other comprehensive income (loss): Unrealized gain (loss) on hedging instruments, net of tax 1,244 ( 118 ) Comprehensive loss $ ( 7,074 ) $ ( 2,905 ) Other comprehensive loss for fiscal years 2025 and 2024 is reflected net of tax provision (benefit) of approximately $ 0.4 million and $( 0.1 ) million, respectively. See accompanying notes to consolidated financial statements. 34 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal Year Ended June 28, 2025 June 29, 2024 Operating activities: Net loss $ ( 8,318 ) $ ( 2,787 ) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 9,599 11,038 Amortization of interest rate swap — 97 Amortization of deferred loan costs 1,553 339 Noncash lease expense 4,853 5,663 Inventory write-down to net realizable value 98 322 Provision for warranty 17 320 Provision for credit losses 1,805 ( 84 ) Gain on disposal of assets ( 42 ) ( 32 ) Gain on insurance proceeds, net of losses — ( 431 ) Share-based compensation expense 218 ( 444 ) Deferred income taxes ( 6,647 ) ( 5,132 ) Noncash accrued compensation benefit — ( 3,925 ) Changes in operating assets and liabilities Trade receivables 32,408 15,818 Contract assets 3,836 8,656 Inventories 7,680 32,490 Other assets ( 10,461 ) ( 587 ) Accounts payable ( 15,669 ) ( 36,505 ) Accrued compensation and vacation 1,647 ( 2,917 ) Other liabilities ( 3,648 ) ( 8,123 ) Cash provided by operating activities 18,929 13,776 Investing activities: Purchases of property and equipment ( 4,095 ) ( 3,958 ) Proceeds from sale of fixed assets 40 — Prepayments on finance lease obligations ( 144 ) — Proceeds from insurance — 1,850 Cash used in investing activities ( 4,199 ) ( 2,108 ) Financing activities: Payment of financing costs ( 2,973 ) ( 807 ) Proceeds from issuance of long term debt 33,273 1,178 Repayments of long-term debt ( 4,776 ) ( 2,977 ) Borrowings under revolving credit agreement 382,968 521,088 Repayments of revolving credit agreement ( 424,367 ) ( 523,931 ) Principal payments on finance leases ( 2,223 ) ( 5,070 ) Cash used in financing activities ( 18,098 ) ( 10,519 ) Net increase (decrease) in cash and cash equivalents ( 3,368 ) 1,149 Cash and cash equivalents, beginning of period 4,752 3,603 Cash and cash equivalents, end of period $ 1,384 $ 4,752 Supplemental cash flow information: Interest payments $ 11,067 $ 10,269 Income tax payments, net of refunds $ 989 $ 2,402 ASC 326 opening balance sheet adjustment $ — $ 3,278 Recognition of operating lease liabilities and right-of-use assets $ 784 $ 4,877 Recognition of financing lease liabilities and right-of-use assets $ 1,374 $ — See accompanying notes to consolidated financial statements. 35 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 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 Net loss — ( 8,318 ) — ( 8,318 ) Unrealized gain on hedging instruments, net of tax — — — 1,244 1,244 Share-based compensation — 218 — — 218 Balances, June 28, 2025 10,762 $ 47,502 $ 68,603 $ 1,029 $ 117,134 See accompanying notes to consolidated financial statements. 36 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 income and net loss of $ 0.6 million and $( 8.3 ) million respectively, during the 12-month period ended June 28, 2025 and have positive working capital of $ 142.2 million as of June 28, 2025. 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 2025. Based on current projections, we anticipate generating cash from operations as revenue increases in the first half of fiscal year 2026. As of June 28, 2025, we have $ 25.0 million of additional borrowing capacity on our credit facility, which matures on December 3, 2029. 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 loss, 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, contract assets, and other recoverable costs and records an allowance for credit losses, which reduces these assets 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 assets 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. 37 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. 38 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 28, 2025, the Company had outstanding foreign currency forward contracts with a notional amount of $ 12.9 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 39 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 28, 2025 and June 29, 2024, reasonably approximate their fair value. The Company had an outstanding balance on its lines of credit of $ 71.2 million as of June 28, 2025, and $ 112.6 million as of June 29, 2024, with a carrying value that reasonably approximates the fair value. The Company had an outstanding balance on its foreign term loan of MXN18.9 million ($ 1.0 million USD) as of June 28, 2025, and MXN 40.5 million ($ 2.2 million USD) as of June 29, 2024, with a carrying value that reasonably approximates the fair value. The domestic equipment term loans were $ 9.0 million as of June 28, 2025, and $ 5.8 million as of June 29, 2024, 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 November 4, 2024 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures. The ASU requires entities to disclose in the notes to the financial statements specified information about certain costs and expenses. Subsequently, the FASB issued ASU 2025-01 which clarifies the effective date of ASU 2024-03 for public business entities. The ASU applies to the Company’s annual reporting period beginning in fiscal year 2028 and interim reporting periods beginning in fiscal year 2029.The Company does not anticipate early adoption of the new disclosure standard. 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 adopted the standard during the year ended June 28, 2025. See Note 11 to the consolidated financial statements included within this report for more information on the increased disclosure for the Company's single reportable segment. 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 2025 and 2024 ended on June 28, 2025 and June 29, 2024, respectively. Fiscal years 2024 and 2025 were 52 week years. 40 2. INVENTORIES Inventory as of June 28, 2025 is $ 97.3 million compared to $ 105.1 million as of June 29, 2024. The components of inventories consist of the following (in thousands): June 28, 2025 June 29, 2024 (in thousands) Raw materials and supplies $ 75,429 $ 80,570 Work-in-process 21,892 24,529 Inventories $ 97,321 $ 105,099 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: Life June 28, 2025 June 29, 2024 (in years) (in thousands) Land — $ 4,034 $ 4,034 Buildings and improvements 3 to 30 29,276 27,821 Equipment 1 to 10 94,140 80,049 Furniture and fixtures 3 to 5 7,238 6,660 Total property, plant and equipment 134,688 118,564 Accumulated depreciation ( 106,961 ) ( 89,758 ) Property, plant and equipment, net $ 27,727 $ 28,806 Fiscal Year Ended June 28, 2025 June 29, 2024 (in thousands) Depreciation expense $ 5,200 $ 5,270 41 4. LONG-TERM DEBT Debt consists of the following: Maturity Date Interest Rate June 28, 2025 June 29, 2024 (in thousands) Asset-based senior secured revolving credit facility (1) December 3, 2029 7.4 % $ 67,900 $ 107,149 Domestic term loan - Callodine (2) December 3, 2029 11.5 % 26,500 — Foreign line of credit (3) December 11, 2026 11.8 % 3,253 5,403 Domestic term loan - Balboa (4) September 19, 2030 6 % to 8 % 3,702 4,535 Foreign term loan - Banorte (5) April 24, 2026 5.5 % 1,000 2,200 Domestic term loan - Bank of America (6) August 14, 2025 4.9 % — 1,277 Domestic term loan - Avtech 8 (7) October 31, 2028 13.6 % 278 — Domestic term loan - Avtech 9 (8) June 30, 2028 11.7 % 4,996 — Total debt 107,629 120,564 Less: current portion of debt ( 6,215 ) ( 3,123 ) Less: unamortized financing costs ( 2,478 ) ( 1,059 ) Long-term debt, net $ 98,936 $ 116,382 (1) On December 3, 2024, Key Tronic Corporation (the "Company") entered into an asset-based credit agreement (the "Credit Agreement") among the Company, certain domestic subsidiaries (as co-borrowers or guarantors), BMO Bank, N.A (the "Bank"), as administrative agent and swing line lender, BMO Capital Markets as arranger and book runner, and certain financial institutions, as lenders. The Credit Agreement provides for an asset-based senior secured revolving credit facility (the "Credit Facility") of up to $ 115 million, maturing on December 3, 2029. Generally, under the Credit Agreement and at the Company’s option: (i) each SOFR Loan shall bear interest at a rate per annum equal to Adjusted Term SOFR (Term SOFR plus 0.10 %, subject to a floor of 0.00 %) plus an applicable margin of 2.50 % to 3.00 %, depending on the availability of borrowing amounts under the Credit Agreement; and (ii) each Base Rate Loan, Swing Line Loan or other Obligation shall bear interest at a rate per annum equal to the Base Rate (subject to a floor of 1.00 %) plus an applicable margin of 1.50 % to 2.00 %, depending on the availability of borrowing amounts under the Credit Agreement. As of June 28, 2025, the applicable margin was 2.75 % for SOFR Loans and 1.75 % for Base Rate Loans. If there is an event of default under the Credit Agreement, all loans and other obligations may bear interest at a rate of an additional 2.00 % on the otherwise applicable interest rates. In addition to the applicable interest rates, the Company is required to pay a fee of 0.2 % per annum on the unused portion of the Credit Facility, monthly in arrears. Availability on the line of credit is generally determined based on eligible inventory and accounts receivable balances. On May 13, 2025, the Company entered into a first amendment and limited waiver to the Credit Agreement. The amendment waived an existing event of cross-default created by an event of default under the Term Loan as defined and discussed in footnote (2) below. The amendment also adds an additional reporting requirement. Proceeds from the Credit Facility and the Term Loan discussed below were used to pay-off the Company's prior loan and security agreement, as amended, with Bank of America, N.A. (with the related credit facility, the "Prior Credit Facility") in the amount of $ 99.7 million, as well as its outstanding equipment term loan, and financing costs related to the Credit Agreement. The Term Loan, may also be used to pay-off certain other existing debt, to issue letters of credit, and for other business purposes, including working capital needs. As of June 28, 2025, the Company had an outstanding balance under the asset-based revolving credit facility of $ 67.9 million, $ 0.4 million in outstanding letters of credit and $ 25.0 million available for future borrowings. On August 14, 2020, the Company entered into a loan agreement with Bank of America (“Loan Agreement”). The Loan Agreement, as amended, provided for an asset-based senior secured revolving credit facility with an availability of up to $ 120 million, subject to the Company’s borrowing base, and was set to mature on December 3, 2025. The interest rate as of December 2, 2024 at the time of pay-off was approximately 9.2 %. As of June 29, 2024, the Company had an outstanding balance under the Prior Credit Facility of $ 107.1 million, $ 0.3 million in outstanding letters of credit and $ 12.9 million available for future borrowings. (2) On December 3, 2024, the Company entered into a $ 28 million term loan (the "Term Loan") credit agreement among the Company, certain domestic subsidiaries (as co-borrowers or guarantors), Callodine Commercial Finance, LLC (“Callodine”), as administrative agent, and certain financial institutions, as term loan lenders. The Term Loan requires quarterly repayments of 42 principal in the amount of $ 0.75 million. The remainder will be payable at maturity which is the earlier of December 3, 2029 or the maturity of the Credit Agreement described above. The Term Loan bears interest at Adjusted Term SOFR (Term SOFR plus 0.15 %, subject to a floor of 3.50 %) plus an applicable margin of 7.00 %. If there is an event of default under the Term Loan, all loans and other obligations may bear interest at a rate of an additional 2.00 % on the otherwise applicable interest rate. On May 13, 2025, the Company entered into a first amendment and limited waiver to the Term Loan. The amendment waived an existing event of default relating to non-compliance with minimum required earnings before interest, depreciation, amortization, and other adjustments for the period ending March 29, 2025. The amendment permanently adds an additional reporting requirement, and requires minimum earnings before interest, taxes, depreciation, amortization, and other adjustments only if average daily availability for the applicable fiscal quarter is less than 12.5 % of the combined borrowing base. (3) 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 28, 2025, was 11.8 %. As of June 28, 2025, the Company had an outstanding balance under the revolving credit facility of MXN 61 million ($ 3.25 million USD) and MXN 39 million ($ 1.67 million USD) available for future borrowings. (4) 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. (5) 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. (6) 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 accrued interest at 4.85 % and was set to mature on August 14, 2025. Under this loan agreement, equal monthly payments of approximately $ 94,000 commenced on September 14, 2020 and continued through the pay-off of the Prior Credit Facility on December 4, 2024. (7) On May 1, 2025, the Company entered into a $ 4.0 million equipment financing facility related to new manufacturing equipment that bears interest at 13.56 % and matures on October 31, 2028. Under this loan agreement, equal quarterly payments of $ 383,679 will commence when the full amount of the facility is drawn and will continue through the maturity of the equipment financing facility on October 31, 2028. (8) On March 6, 2025, the Company entered into a $ 5.0 million equipment financing facility related to the Company’s existing manufacturing equipment that bears interest at 11.71 % and matures on June 30, 2028. Under this loan agreement, equal quarterly payments of $ 464,361 commenced on July 15, 2025 and will continue through the maturity of the equipment financing facility on June 30, 2028. 43 Debt maturities as of June 28, 2025 for the next four years are as follows (in thousands): Fiscal Years Ending Amount 2026 $ 6,215 2027 8,828 2028 6,337 2029 3,792 2030 - Thereafter $ 82,457 Total debt $ 107,629 Unamortized financing costs ( 2,478 ) Long-term debt, net of unamortized financing costs $ 105,151 The Company must comply with certain financial covenants, including average and daily availability and, if triggered, earnings before interest, taxes, depreciation, amortization and other adjustments and a fixed charge coverage ratio covenant will apply. The credit agreement requires the Company to grant certain inspection rights to Bank of Montreal, 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 28, 2025, the Company was in compliance with all applicable financial covenants. On May 13, 2025, the Company executed a first amendment and limited waiver to the Term Loan which waived an existing event of default as of that date. Also on May 13, 2025, the Company executed a first amendment and limited waiver to the Credit Agreement which waived an existing event of cross-default as of that date. 5. INCOME TAXES Income tax benefit consists of the following: Fiscal Year Ended June 28, 2025 June 29, 2024 (in thousands) Current income tax provision (benefit): United States $ 112 $ 263 Foreign 2,841 1,451 2,953 1,714 Deferred income tax provision (benefit): United States ( 5,546 ) ( 4,322 ) Foreign ( 1,050 ) 208 ( 6,596 ) ( 4,114 ) Total income tax benefit $ ( 3,643 ) $ ( 2,400 ) The Company has gross tax credit carryforwards of approximately $ 11.1 million at June 28, 2025 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. In spite of the Company’s current cumulative loss position before nonrecurring items such as cyber losses and restructuring costs, based upon the Company’s historical profitability and forecasted income, management determined that it is more likely than not that the deferred tax assets will be realized. The Company’s largest deferred tax assets are federal research and development tax credits, deferred research and development expenses, and interest expense deduction carryforwards. Company forecasts show that the credits will be utilized within the expiration period. Deferred research and development expenses will be deductible in fiscal year 2026 under the One Big Beautiful Bill Act. Interest expense deduction carryforwards, which never expire and carry forward indefinitely, are projected to be utilized in future periods as profitability increases and interest expense decreases. Profitability is forecasted in the coming years due to the nonrecurrence of significant expense items in recent years such as cyber losses and restructuring costs, the future cost benefits associated with the restructuring costs, and significant income and increased margins from multiple new customers. The Company has closely monitored the realizability of deferred tax assets, tracking book income, permanent differences, and nonrecurring items while projecting future utilization of deferred tax assets, and will continue to do so as future actual results are compared to forecasted results. 44 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. After the end of fiscal year 2025, on July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, which includes several tax related provisions that may impact the Company beginning in fiscal year 2026. The Company is still evaluating the implications, and it is expected that these tax law changes will mitigate federal income taxes payable, but it is not expected to materially impact the Company’s overall tax position and effective tax rate. 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. However, one aspect of the OBBBA is to eliminate the capitalization requirement and the Company expects to expense any unamortized capitalized R&D costs in fiscal year 2026. 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. In the fourth quarter of fiscal year 2025, Management changed its indefinite investment assertions relating to the portion of accumulated earnings and profits in China that may be repatriated in the future and updated its deferred tax liability based on the withholding tax expected in connection with future repatriation. Accordingly, management estimates that future repatriations of cash from China may result in approximately $ 0.3 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 approximately $ 2.9 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. 45 The Company’s effective tax rate differs from the federal tax rate as follows: Fiscal Year Ended June 28, 2025 June 29, 2024 (in thousands) Federal income tax provision at statutory rates $ ( 2,512 ) $ ( 1,089 ) State income taxes, net of federal tax effect ( 264 ) ( 145 ) Foreign tax rate differences 284 ( 71 ) Effect of income tax credits ( 569 ) ( 929 ) Previously unrecognized tax benefits — ( 232 ) Inflation adjustments 115 132 Deferred income tax on unremitted foreign earnings ( 474 ) 39 Global Intangible Low-Taxed Income (GILTI) tax — 53 Provision to return reconciliation ( 44 ) ( 68 ) Equity compensation shortfall 33 51 Foreign exchange gains/losses unrealized for tax purposes ( 204 ) ( 126 ) Other ( 8 ) ( 15 ) Income tax benefit $ ( 3,643 ) $ ( 2,400 ) The domestic and foreign components of loss before income taxes were: Fiscal Year Ended June 28, 2025 June 29, 2024 (in thousands) Domestic $ ( 19,691 ) $ ( 13,539 ) Foreign 7,730 8,352 Loss before income taxes $ ( 11,961 ) $ ( 5,187 ) 46 Deferred income tax assets and liabilities consist of the following at: June 28, 2025 June 29, 2024 (in thousands) Deferred tax assets: Tax credit carryforwards, net $ 8,121 $ 7,544 Inventory 240 252 Identifiable intangibles 185 247 Accruals 2,764 2,340 Property, plant, and equipment 13 — ASC 606 deferred costs 2,803 3,852 Lease liabilities 2,721 3,542 Interest expense deduction carryforward 5,362 2,765 Research and development expenses 7,818 6,042 Other 389 505 Deferred income tax assets $ 30,416 $ 27,089 Deferred tax liabilities: Accrued withholding tax - unremitted earnings $ ( 287 ) $ ( 796 ) Property, plant, and equipment — ( 127 ) Right-of-use assets ( 2,737 ) ( 3,609 ) Tax capital lease liabilities ( 504 ) ( 764 ) ASC 606 accelerated revenue ( 2,826 ) ( 3,882 ) Other ( 665 ) ( 798 ) Deferred income tax liabilities $ ( 7,019 ) $ ( 9,976 ) Net deferred income tax assets $ 23,397 $ 17,113 Balance sheet caption reported in: Long-term deferred income tax asset $ 23,397 $ 17,376 Long-term deferred income tax liability — ( 263 ) Net deferred income tax asset $ 23,397 $ 17,113 Uncertain Tax Positions: The Company has R&D tax credits that approximate $ 11.1 million that have 20 -year carryforwards before expiring. The Company’s R&D tax credits expire in various fiscal years from 2033 to 2045. As of June 28, 2025, the Company had unrecognized tax benefits of $ 3.0 million related to its gross R&D tax credits. The unrecognized tax benefits relate to certain R&D tax credits generated from 2005 to 2025. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Fiscal Year Ended June 28, 2025 June 29, 2024 (in thousands) Beginning balance $ 2,899 $ 3,028 Additions based on tax positions related to the current year 80 110 Adjustment to prior year tax positions & amended tax returns ( 16 ) ( 7 ) Lapse of statute of limitations — ( 232 ) Ending balance $ 2,963 $ 2,899 The $ 3.0 million of unrecognized tax benefits at the end of fiscal year 2025, if recognized, would reduce the effective tax rate. Management does not anticipate any material changes to this amount during the next 12 months. 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 47 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 loss (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 28, 2025 June 29, 2024 Net loss $ ( 8,318 ) $ ( 2,787 ) Weighted average shares outstanding—basic 10,762 10,762 Effect of dilutive common stock awards — — Weighted average shares outstanding—diluted 10,762 10,762 Net loss per share—basic $ ( 0.77 ) $ ( 0.26 ) Net loss per share—diluted $ ( 0.77 ) $ ( 0.26 ) Antidilutive stock-based awards not included in diluted earnings per share 11 515 7. STOCK-BASED COMPENSATION AND BENEFIT PLANS The Company’s 2024 Incentive Plan provides for equity and liability awards to employees and non-employee directors with service and performance vesting conditions 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. The 2024 Incentive Plan replaced the previous 2010 Incentive Plan, which provided for similar awards, and expired on October 24, 2024. At June 28, 2025, 1,596,135 shares were available for grant from the 2024 Incentive Plan. New shares of common stock are issued upon the exercise of SARs or when vesting conditions on restricted stock units are fully satisfied. 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. For SARs awards forfeitures are estimated at the date of grant based on historical experience and future expectations. Due to a lack of historical experience and a different grant pool than SARs, forfeitures for restricted stock units are accounted for prospectively as they occur. Stock Appreciation Rights In addition to service conditions, 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 evaluated quarterly to determine the likelihood that performance metrics will be achieved during the performance period. These awards are charged to compensation expense over the requisite service period based on the number of shares expected to vest. If the performance and service conditions are attained, then the SARs cliff vest after the completion of the three-year period from date of grant and expire five years from date of grant. 48 SARs Aggregate Intrinsic Value (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Balance, July 1, 2023 626,250 $ — $ 6.41 2.2 SARs forfeited ( 137,500 ) 6.9 SARs expired ( 101,250 ) 8.17 Balance, June 30, 2024 387,500 $ — 5.78 1.8 SARs forfeited ( 136,250 ) 7.17 SARs expired ( 115,000 ) 4.93 Balance, June 28, 2025 136,250 $ — $ 5.10 2.1 Exercisable at June 28, 2025 — — — — 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. There were no SARs granted during fiscal years ended June 28, 2025 and June 29, 2024. 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. Total SARs expense recognized during fiscal years ended June 28, 2025 and June 29, 2024 was approximately $( 141,000 ) and $( 400,000 ), respectively There were no SARs exercised during fiscal years ended June 28, 2025 or June 29, 2024. As of June 28, 2025, there is no unrecognized compensation expense for SARs awards due to unachieved performance. Restricted Stock Units The Company grants restricted stock units that have a performance condition and/or a service condition. Restricted stock units with only a service condition generally vest in equal annual installments over a maximum of three years . Certain restricted stock units are granted with a performance condition. The final number of shares issued will be determined annually based on the achievement of annual financial targets. Forfeitures for restricted stock units are accounted for prospectively as they occur. The fair value of restricted stock units is the market close price on the date of grant. The Company granted 329,457 restricted stock units at a weighted average grant date fair value of $ 4.52 per share during the fiscal year ended June 28, 2025. During the same period, 47,880 restricted stock units with a weighted average grant date fair value of $ 4.52 per share were forfeited due to not meeting the minimum performance threshold as of June 28, 2025 . Total restricted stock unit expense recognized during the fiscal year ended June 28, 2025 was approximately $ 359,000 . As of June 28, 2025, total unrecognized compensation expense on restricted stock units was $ 0.9 million, which is expected to be recognized over a weighted average period of approximately 2.09 years. The company has defined contribution plans available to U.S. employees who have attained age 21. Company contributions to the plans were approximately $ 1.4 million during fiscal years ended June 28, 2025 and $ 1.3 million during June 29, 2024, 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 differ significantly from management's estimates, adjustments to recognize additional cost of sales may be required in future 49 periods. As of June 28, 2025 and June 29, 2024, the reserve for warranty costs was approximately $ 26,000 and $ 164,000 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 A significant portion of our operations are in foreign locations, which results in transactions occurring in currencies other than the U.S. Dollar. As a part of our risk management strategy, we use Mexican Peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican Peso denominated expenses. As of June 28, 2025, the Company had outstanding foreign currency forward contracts with a total notional amount of $ 12.9 million. The maturity dates for these contracts extend through December 2025. For the three months ended June 28, 2025, the Company did not enter into any foreign currency forward contracts and settled $ 8.0 million of such contracts. During the same period of the previous year, the Company entered $ 12.5 million of foreign currency forward contracts and did not settle any of such contracts. For the twelve months ended June 28, 2025, the Company entered into $ 29.0 million of foreign currency forward contracts and settled $ 28.6 million of such contracts. During the same period of the previous year, the Company entered into $ 19.0 million of foreign currency forward contracts and settled $ 6.5 million of such contracts. Changes in the fair value of the forward contracts are recognized as a component of OCI and will be recognized in cost of sales when the hedged item affects earnings. The amount of net gains expected to be reclassified into earnings in the next 6 months is $ 1.1 million. 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 the Loan Agreement with Bank of America. On the date of termination this interest rate swap was in a liability position of $ 776,500 , which has been 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 28, 2025 and June 29, 2024 (in thousands): Fair Value Derivatives designated as hedging instruments under Subtopic 815-20 Balance Sheet Location June 28, 2025 June 29, 2024 Foreign currency forward contracts Other current assets $ 1,330 $ — Foreign currency forward contracts Other current liabilities $ — $ ( 277 ) 50 The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Operations for the fiscal year 2025 and 2024, respectively (in thousands): Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of June 29, 2024 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of June 28, 2025 Forward contracts Cost of sales 215 ( 2,803 ) 1,559 ( 1,029 ) Total $ 215 ( 2,803 ) 1,559 ( 1,029 ) 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 As of June 28, 2025, 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 and Vietnam 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 28, 2025 and June 29, 2024. The carrying values of cash and cash equivalents, accounts receivable, contract assets, and current liabilities are reflected on the balance sheets at June 28, 2025 and June 29, 2024 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, term loans, and equipment loans. The asset-based revolving credit facility and Callodine term loan borrowings bear interest at Adjusted SOFR per the loan agreements. Each of these rates is a variable floating rate dependent upon current market conditions and the Company’s current average availability as discussed along with the interest rates for all long-term debt agreements 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 28, 2025 and June 29, 2024. 51 . 11. SEGMENT INFORMATION AND 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 28, 2025, 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. The chief operating decision maker assesses performance and determines resource allocation for the Company’s single reportable segment based on consolidated net income/loss and total assets/liabilities. The accounting policies of the single reportable segment are the same as those described in the summary of significant accounting policies. Significant segment measures include gross profit which is primarily composed of materials spend and labor costs, which are further presented below. Products and Services Of the revenues for the years ended June 28, 2025, and June 29, 2024 contract manufacturing sales and services were $ 467.9 million and $ 566.9 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 28, 2025 and June 29, 2024 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) 2025 2024 Geographic net sales: Domestic (U.S.) $ 368,558 $ 439,334 Foreign 99,313 127,608 Total $ 467,871 $ 566,942 Long-lived assets: United States $ 20,519 $ 24,497 Mexico 13,368 15,531 Vietnam 4,845 3,780 China 342 414 Total $ 39,074 $ 44,222 Percentage of net sales made to customers located in the following countries: Fiscal Year Ended 2025 2024 United States 79 % 77 % China 20 % 22 % Other foreign countries (a) 1 % 1 % Total 100 % 100 % (a) No other individual foreign country accounted for 10% or more of the foreign sales in fiscal years 2025 and 2024 52 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 2025 2024 2025 2024 Customer A 25 % 20 % 16 % 21 % Significant Segment Measures In accordance with the adoption of ASU 2023-07 in 2025, the Company determined that significant segment measures included gross profit which is primarily composed of materials and labor costs as follows (in thousands): Twelve Months Ended June 28, 2025 June 29, 2024 Materials $ 276,366 $ 354,080 Labor costs 111,682 125,856 Other 43,396 47,127 Total Cost of sales $ 431,444 $ 527,063 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. 53 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 2025 and 2024, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods. 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 28, 2025 (in thousands): Contract Assets Beginning balance, June 29, 2024 $ 21,250 Revenue recognized $ 443,294 Amounts collected or invoiced ( 447,135 ) Ending balance, June 28, 2025 $ 17,409 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 54 Disaggregation of Revenue The following table presents the Company’s revenue disaggregated for the twelve months ended June 28, 2025, the twelve months ended June 29, 2024, (in thousands): Revenue Recognition June 28, 2025 June 29, 2024 Over-Time $ 443,294 $ 497,348 Point-in-Time 24,577 69,594 Total $ 467,871 $ 566,942 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 6 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 4.07 %. The weighted average discount rate is disclosed in the tables below. The components of lease cost were as follows as of June 28, 2025 and June 29, 2024 (in thousands): Year Ended Year Ended Lease cost Classification June 28, 2025 June 29, 2024 Operating lease cost Cost of sales $ 5,135 $ 4,814 Operating lease cost Selling, general and administrative expenses $ 732 $ 734 Financing lease cost Cost of sales $ 3,369 $ 4,865 Financing lease cost Selling, general and administrative expenses $ 171 $ 206 Total lease cost $ 9,407 $ 10,619 Fixed lease cost $ 6,335 $ 6,169 Short-term lease cost 3,072 4,450 Total lease cost $ 9,407 $ 10,619 55 Amounts reported in the Consolidated Balance Sheet as of June 28, 2025 and June 29, 2024 were (in thousands, except weighted average lease term and discount rate): June 28, 2025 June 29, 2024 Operating Leases: Operating lease right of use assets $ 11,347 $ 15,416 Operating lease liabilities (1) $ 11,347 $ 15,416 Weighted-average remaining lease term (in years) Operating leases 3.29 3.97 Weighted-average discount rate Operating leases 4.07 % 4.00 % Financing Leases (2): Financing lease right of use assets $ 2,244 $ 3,569 Financing lease liabilities $ 1,912 $ 2,128 Weighted-average remaining lease term (in years) Financing leases 2.35 1.06 Weighted-average discount rate Financing leases 10.11 % 11.18 % (1) The current portion of the total operating lease liabilities of $ 4.5 million is classified under Other Current Liabilities , resulting in $ 6.9 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 $ 2.2 million is classified under Other Long-term Assets . The current portion of the total finance lease liabilities of $ 1.0 million is classified under Other Current Liabilities , resulting in $ 1.0 million classified in Other Long-term Liabilities section of the condensed consolidated balance sheet. Future lease payments under non-cancellable leases as of June 28, 2025 are as follows (in thousands): Fiscal Years Ending Operating Leases Finance Leases 2026 $ 4,488 $ 983 2027 3,404 519 2028 2,324 606 2029 1,051 — 2030 470 — Thereafter 352 — Total undiscounted lease payments 12,089 2,108 Less: present value discount ( 742 ) ( 196 ) Total lease liabilities $ 11,347 $ 1,912 As of June 28, 2025, we have additional operating and finance leases for commercial properties and equipment that have not yet commenced with future lease payments of approximately $ 28.6 million and $ 5.1 million, respectively. Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 56