10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 ____________________________________________________________ 

FORM 10-Q

 ____________________________________________________________ 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2022

OR

 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE PERIOD FROM             TO             .

Commission File Number 0-11559

 ____________________________________________________________ 

KEY TRONIC CORPORATION

(Exact name of registrant as specified in its charter)

 ____________________________________________________________ 

Washington	91-0849125
(State of Incorporation)	(I.R.S. Employer Identification No.)

N. 4424 Sullivan Road

Spokane Valley, Washington 99216

(Address of principal executive offices)

(509) 928-8000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report)

  ____________________________________________________________ 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, no par value	KTCC	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements during the past 90 days.    Yes  ☒    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer	☐	Accelerated Filer	☒
Non-accelerated Filer	☐	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of November 7, 2022, 10,761,871 shares of common stock, no par value (the only class of common stock), were outstanding.

KEY TRONIC CORPORATION

Index

		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements (Unaudited):	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Statements of Shareholders’ Equity	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	29
PART II.	OTHER INFORMATION:
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds*
Item 3.	Defaults upon Senior Securities*
Item 4.	Mine Safety Disclosures*
Item 5.	Other Information*
Item 6.	Exhibits	30
Signatures		31

 * Items are not applicable

“We,” “us,” “our,” “Company,” and “Key Tronic,” unless the context otherwise requires, means Key Tronic Corporation and its subsidiaries.

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands; except share data)

	October 1, 2022		July 2, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	2,133	$	1,707
Trade receivables, net of allowance for doubtful accounts of $29 and $12	139,010		135,876
Contract assets	26,358		21,974
Inventories	169,285		155,741
Other	22,803		24,710
Total current assets	359,589		340,008
Property, plant and equipment, net	26,977		26,012
Operating lease right-of-use assets, net	19,497		16,731
Other assets:
Deferred income tax asset	10,770		10,055
Other	13,131		14,117
Total other assets	23,901		24,172
Total assets	$	429,964	$	406,923
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	134,126	$	121,393
Accrued compensation and vacation	9,065		11,836
Current portion of debt, net	6,642		7,402
Other	23,950		23,036
Total current liabilities	173,783		163,667
Long-term liabilities:
Term loans	5,173		5,716
Revolving loan	104,968		94,577
Operating lease liabilities	14,128		12,023
Deferred income tax liability	21		64
Other long-term obligations	5,668		5,998
Total long-term liabilities	129,958		118,378
Total liabilities	303,741		282,045
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	47,514		47,474
Retained earnings	78,981		77,829
Accumulated other comprehensive (loss)	(272)		(425)
Total shareholders’ equity	126,223		124,878
Total liabilities and shareholders’ equity	$	429,964	$	406,923

See accompanying notes to consolidated financial statements.

3

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except share and per share amounts)

	Three Months Ended
	October 1, 2022		October 2, 2021
Net sales	$	137,263	$	132,762
Cost of sales	126,884		122,624
Gross profit	10,379		10,138
Research, development and engineering expenses	2,296		2,449
Selling, general and administrative expenses	5,656		5,595
Gain on insurance proceeds, net of losses	(934)		—
Total operating expenses	7,018		8,044
Operating income	3,361		2,094
Interest expense, net	1,887		992
Income before income taxes	1,474		1,102
Income tax provision	322		287
Net income	$	1,152	$	815
Net income per share — Basic	$	0.11	$	0.08
Weighted average shares outstanding — Basic	10,762		10,762
Net income per share — Diluted	$	0.11	$	0.07
Weighted average shares outstanding — Diluted	10,832		11,052

See accompanying notes to consolidated financial statements.

4

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

	Three Months Ended
	October 1, 2022		October 2, 2021
Comprehensive income:
Net income	$	1,152	$	815
Other comprehensive income (loss):
Unrealized gain (loss) on hedging instruments, net of tax	153		(1,531)
Comprehensive income	$	1,305	$	(716)

Other comprehensive income for the three months ended October 2, 2021, is reflected net of tax expense (benefit) of approximately $(0.3) million.

See accompanying notes to consolidated financial statements.

5

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited, in thousands)

	Three Months Ended
	October 1, 2022		October 2, 2021
Operating activities:
Net income	$	1,152	$	815
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization	2,385		1,335
Amortization of interest rate swap	153		75
Amortization of deferred loan costs	37		32
Provision for warranty	152		75
Provision for doubtful accounts	14		26
Gain on disposal of assets	(123)		—
Gain on insurance proceeds, net of losses	(934)		—
Share-based compensation expense	40		68
Deferred income taxes	(344)		(220)
Changes in operating assets and liabilities:
Trade receivables	(1,776)		(16,155)
Contract assets	(4,384)		1,130
Inventories	(13,544)		(5,802)
Other assets	3,601		(7,092)
Accounts payable	12,732		18,835
Accrued compensation and vacation	(2,771)		(2,995)
Other liabilities	(2,227)		(4,753)
Cash used in operating activities	(5,837)		(14,626)
Investing activities:
Purchase of property and equipment	(2,526)		(1,791)
Cash used in investing activities	(2,526)		(1,791)
Financing activities:
Payment of financing costs	—		(80)
Proceeds from issuance of long term debt	—		5,055
Repayments of long term debt	(543)		(532)
Borrowings on revolver, net	10,354		10,446
Principal payments on finance leases	(1,022)		(401)
Cash provided by financing activities	8,789		14,488
Net increase (decrease) in cash and cash equivalents	426		(1,929)
Cash and cash equivalents, beginning of period	1,707		3,473
Cash and cash equivalents, end of period	$	2,133	$	1,544
Supplemental cash flow information:
Interest payments	$	1,894	$	999
Income tax payments, net of refunds	$	414	$	210
Recognition of operating lease liabilities and right-of-use assets	$	4,613	$	4,695
Recognition of financing lease liabilities and right-of-use assets	$	—	$	4,456

See accompanying notes to consolidated financial statements.

6

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited, in thousands; except share data)

	Three Months Ended
	October 1, 2022		October 2, 2021
Total shareholders’ equity, beginning balances	$	124,878	$	123,705
Common stock (shares):
Beginning balances	10,762		10,762
Exercise of stock appreciation rights	—		—
Ending balances	10,762		10,762
Common stock:
Beginning balances	$	47,474	$	47,181
Share-based compensation	40		68
Exercise of stock options	—		—
Ending balances	47,514		47,249
Retained Earnings:
Beginning balances	$	77,829	$	74,452
Net income	1,152		815
Ending balances	78,981		75,267
Accumulated other comprehensive income (loss):
Beginning balances	$	(425)	$	2,072
Unrealized gain (loss) on hedging instruments, net	153		(1,531)
Ending balances	(272)		541
Total shareholders’ equity, ending balances	$	126,223	$	123,057

See accompanying notes to consolidated financial statements.

7

KEY TRONIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Basis of Presentation

The consolidated financial statements included herein have been prepared by Key Tronic Corporation and subsidiaries (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The year-end condensed consolidated balance sheet information was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The financial statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2022.

The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The three month periods ended October 1, 2022 and October 2, 2021, were both 13 week periods. Fiscal year 2023 will end on July 1, 2023, which is a 52 week year. Fiscal year 2022 which ended on July 2, 2022, was also a 52 week year.

Certain Significant Risks and Uncertainties Related to Outbreak of Coronavirus Disease 2019 (“COVID-19”)

Due to the COVID-19 pandemic, the Company has seen extreme shifts in demand from its customer base, and shifts in supply chain and logistics risks. The possibility of future temporary closures, as well as adverse fluctuations in customer demand, freight and expedite costs, precautionary safety expenses and labor shortages, collectability of accounts, and future supply chain disruptions during the rapidly changing COVID-19 environment can materially impact operating results. Additionally, continued adverse macroeconomic conditions and significant currency exchange fluctuations can also materially impact operating results.

2.Significant Accounting Policies

Reclassifications

Certain prior period reclassifications were made to conform with the current period presentation. These reclassifications had no effect on reported income, comprehensive income, cash flows, total assets, or shareholders' equity as previously reported.

Earnings Per Common Share

Basic earnings per common share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) 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 equity awards were used to repurchase common shares at the average market price during the period. The computation of diluted EPS does not assume conversion, exercise, or contingent issuance of common stock equivalent shares that would have an anti-dilutive effect on EPS.

Derivative Instruments and Hedging Activities

The Company has entered into foreign currency forward contracts that are accounted for as cash flow hedges. 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.

The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities. The foreign currency forward contracts have terms that are matched to the underlying transactions being hedged. As a result, these transactions fully offset the hedged risk and no ineffectiveness has been recorded.

The Company’s foreign currency forward contracts potentially expose the Company to credit risk to the extent the counterparty may be unable to meet the terms of the agreement. The Company minimizes such risk by utilizing a counterparty with a strong credit rating. The Company’s counterparty to the foreign currency forward contracts is a major banking institution. This institution does not require collateral for the contracts, and the Company believes that the risk of the counterparty failing to meet their contractual obligations is remote. The Company does not enter into derivative instruments for trading or speculative purposes.

8

Income Taxes

We compute our interim income tax provision through the use of an estimated annual effective tax rate (ETR) applied to year-to-date operating results and specific events that are discretely recognized as they occur. In determining the estimated annual ETR, we analyze various factors, including projections of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual ETR.

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 and net operating loss 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 expense. The tax years 2001 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject. Refer to Note 5 for further discussions.

Recently Issued Accounting Standards

In January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2021-01, Reference Rate Reform (Topic 848) to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The Company is currently assessing the effects on its consolidated financial statements, and if it will elect this optional standard.

In March of 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which clarifies specific issues raised by stakeholders. Specifically, the ASU clarifies the following: 1) that all entities are required to provide the fair value option disclosures in ASC 825, Financial Instruments 2) clarifies that the portfolio exception in ASC 820, Fair Value Measurement, applies to nonfinancial items accounted for as derivatives under ASC 815, Derivatives and Hedging; 3) clarifies that for purposes of measuring expected credit losses on a net investment in a lease in accordance with ASC 326, Financial Instruments - Credit Losses, the lease term determined in accordance with ASC 842, Leases, should be used as the contractual term; 4) clarifies that when an entity regains control of financial assets sold, it should recognize an allowance for credit losses in accordance with ASC 326; and 5) aligns the disclosure requirements for debt securities in ASC 320, Investments - Debt Securities, with the corresponding requirements for depository and lending institutions in ASC 942, Financial Services - Depository and Lending. The amendments in the ASU have various effective dates and transition requirements which are dependent on timing of adoption of ASU 2016-13. The Company is currently assessing the effects on its consolidated financial statements, and it intends to adopt the guidance as they become effective.

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance is effective for the Company beginning in the first quarter of fiscal year 2024 with early adoption permitted. The Company is currently assessing the impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2024.

3.Inventories

Inventories as of October 1, 2022 are $169.3 million compared to $155.7 million as of July 2, 2022. Substantially all of the Company’s inventory balances are raw materials.

9

4.Long-Term Debt

On September 3, 2021, the Company entered into an amendment to the Company’s current loan agreement with Bank of America. The amendment increases the Company’s current credit facility of $93 million to $120 million, subject to the Company’s borrowing base, maturing on September 3, 2026. As of October 1, 2022, the Company had an outstanding balance under the asset-based revolving credit facility of $105.4 million, $0.3 million in outstanding letters of credit and $10.6 million available for future borrowings.

On August 26, 2022, the company entered into a third amendment to the loan agreement with Bank of America. The amendment removed the cash flow leverage ratio covenant and increased the interest rate by 25 basis points.

As of July 2, 2022, the Company had an outstanding balance under the credit facility with Bank of America of $95.1 million, $0.3 million in outstanding letters of credit and $10.8 million available for future borrowings.

Generally, the interest rate applicable to loans under the Bank of America loan agreement will be, at the Company’s option: (i)(A) the base rate which is the highest of (1) the prime rate for the applicable day (as such rate is determined from time to time by the Bank), (2) the federal funds rate for the applicable day plus 0.50%, and (3) LIBOR for a 30-day interest period as of the applicable day plus 1.00% (provided that in no event shall the base rate be less than zero), plus the applicable interest margin for base rate loans; and (B) LIBOR rate for an applicable interest period (provided that in no event shall the LIBOR rate be less than 0.50%), plus the applicable interest margin for LIBOR rate loans. Depending on average daily excess borrowing availability over applicable periods under the Credit Facility, applicable interest margins on: (x) base rate loans will be 1.25-1.75%; and (y) LIBOR rate loans will be 2.25-2.75%, resetting on a quarterly basis beginning in early 2021. If there is an event of default under the loan agreement, all loans and other obligations will bear interest at a rate of an additional 2.00% on the otherwise applicable interest rates. In addition to interest charges, the Company is required to pay a fee of 0.25% per annum on the unused portion of the Credit Facility, monthly in arrears.

Under the new loan agreement with Bank of America, the asset-based revolving credit facility bears interest at LIBOR plus 2.5%, as elected by the Company.

On August 14, 2020, the Company also entered into a $5.0 million equipment financing facility relating to the Company’s existing U.S. manufacturing equipment that bears interest at 4.85% and matures on August 14, 2025. Under this loan agreement, equal monthly payments of approximately $94,000 commenced on September 14, 2020 and will continue through the maturity of the equipment financing facility on August 14, 2025. As of October 1, 2022, the Company had an outstanding balance of $3.1 million. As of July 2, 2022, the Company had an outstanding balance of $3.3 million under the Bank of America equipment term loan agreement.

On November 24, 2020, the Company entered into a $6.0 million equipment financing facility related to the Company’s existing manufacturing equipment that bears interest at 5.52% and matures on April 24, 2026. Under this loan agreement, equal monthly payments of $100,000 commenced on May 24, 2021 and will continue through the maturity of the equipment financing facility on April 24, 2026. As of October 1, 2022, the Company had an outstanding balance of $4.3 million. As of July 2, 2022, the Company had an outstanding balance of $4.6 million.

The interest rates on outstanding debt as of October 1, 2022 range from 4.85% - 6.15% compared to 3.25% - 5.52% as of July 2, 2022.

Debt maturities as of October 1, 2022 for the next five years and thereafter are as follows (in thousands):

Fiscal Years Ending	Amount
2023 (1)	$	1,647
2024	2,239
2025	2,290
2026	1,187
2027	105,430
Thereafter	—
Total debt	$	112,793
Unamortized debt issuance costs	(462)
Long-term debt, net of debt issuance costs	$	112,331

    (1) Represents scheduled payments for the remaining nine-month period ending July 1, 2023.

The Company must comply with certain financial covenants, including a fixed charge coverage ratio. The Company was in compliance with all financial covenants as of October 1, 2022.

10

5.Income Taxes

The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company currently expects to repatriate approximately $8.6 million of foreign earnings in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations.

Repatriations of cash will generally be tax-free in the U.S. However, withholding taxes in China may still apply to any such future repatriations. Management has not changed its indefinite investment assertions with regard to the portion of accumulated earnings and profits in China that may be repatriated in the future. Accordingly, management estimates that future repatriations of cash from China may result in approximately $0.8 million of withholding tax. We do not anticipate there would be any offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations. Withholding taxes would not apply to future repatriations from Mexico or Vietnam.

The Company has available approximately $10.6 million of gross federal research and development tax credits as of October 1, 2022. ASC 740 requires the Company to recognize in its financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. Accordingly, as of October 1, 2022, the Company has recorded $3.1 million of unrecognized tax benefits associated with these federal tax credits, resulting in a net deferred tax benefit of approximately $7.5 million.

The Company evaluated tax law changes and regulatory guidance issued through the prior fiscal year. Such changes and regulations include guidance under Sec. 162(m), Sec. 245A, Sec. 951A, foreign tax credits, and rules relating to consolidated NOL carryback claims. The Company evaluated the ongoing impact of these law and regulatory changes, which did not have a material impact on its provision for income taxes. On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. The Inflation Reduction Act of 2022 includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks, among other provisions. The Company is evaluating the impacts of this act, and at this time the Company does not believe they will have a material impact on our consolidated financial position, results of operations, or cash flows.

On January 27, 2021, the Company received official notice from the Vietnamese tax authorities, confirming tax benefits awarded (the “Tax Holiday”) related to the Company’s principal product line in Vietnam. The tax rate related to 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 each year). Consequently, Management determined that the net operating loss in Vietnam more likely than not would result in minimal, if any, tax benefit, and the Company recorded a valuation allowance against the entire Vietnam net operating loss deferred tax asset ($0.2 million) in the third quarter of fiscal year 2021.

6.Earnings Per Share

The following table presents a reconciliation of the denominator in the basic and diluted EPS calculation 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.

	Three Months Ended
	(in thousands, except share and per share information)
	October 1, 2022		October 2, 2021
Net income	$	1,152	$	815
Weighted average shares outstanding—basic	10,762		10,762
Effect of dilutive common stock awards	70		290
Weighted average shares outstanding—diluted	10,832		11,052
Net income per share—basic	$	0.11	$	0.08
Net income per share—diluted	$	0.11	$	0.07
Antidilutive SARs not included in diluted earnings per share	904		629

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7. Share-based Compensation

The Company’s incentive plan provides for equity and liability awards to employees and non-employee directors in the form of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based or cash-based awards. Compensation cost is recognized on a straight-line basis over the requisite employee service period, which is generally the vesting period, and is recorded as employee compensation expense in cost of goods sold, research, development and engineering, and selling, general and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations.

In addition to service conditions, 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. The SARs cliff vest after a three-year period from date of grant and expire five years from date of grant.

The grant date fair value for the awards granted below were estimated using the Black Scholes option valuation method:

	July 29, 2022		August 9, 2021
SARs Granted	145,000		165,000
Strike Price	$	5.10	$	7.17
Fair Value	$	2.09	$	2.73

Total share-based compensation expense recognized during the three months ended October 1, 2022 and October 2, 2021 was approximately $40,000 and $68,000, respectively.

As of October 1, 2022, total unrecognized compensation expense related to unvested share-based compensation arrangements was approximately $0.6 million. This expense is expected to be recognized over a weighted average period of 2.16 years. No SARs were exercised during the three months ended October 1, 2022 or October 2, 2021.

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 periods. The Company’s warranty reserve was approximately $30,000 as of October 1, 2022 and $31,000 as of July 2, 2022, respectively.

Gain from Insurance Recoveries, Net of Losses

Gain from insurance recoveries, net of losses, relate to losses incurred from storm damage to the Company’s Arkansas facility on July 29, 2022, as the result of a lightning strike. During the three months ended October 1, 2022, the Company recorded a gain from insurance recoveries, net of losses, of $0.9 million due to the storm event. The gain is net of a $0.4 million loss on the disposal of fixed assets, which were damaged in the event.

Subsequent to the end of the first quarter of fiscal year 2023, the Company received initial insurance proceeds of $1 million to repair the plant and replace equipment, which should be completed by the second half of fiscal year 2023. These initial coverage amounts, net of equipment book value loss, are included in reported gain on insurance claims during the quarter.

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9.Derivative Financial Instruments

As of October 1, 2022, the Company did not have any outstanding foreign currency forward contracts. For the three months ended October 1, 2022, the Company did not enter into or settle any foreign currency forward contracts. During the same period of the previous year, the Company entered into $13.9 million foreign currency forward contracts and settled $5.5 million of contracts.

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of September 30, 2022, related to the borrowings outstanding under the term loan with Wells Fargo Bank. This interest rate swap contract was terminated on August 14, 2020 when the Company entered into a loan and security agreement with Bank of America. On the date of termination this interest rate swap was in a liability position of $148,400, which will be amortized to interest expense over the original term of the swap.

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of November 1, 2023, related to the borrowings outstanding under the line of credit with Wells Fargo Bank. This interest rate swap contract was terminated on August 14, 2020 when the Company entered into a loan and security agreement with Bank of America. On the date of termination this interest rate swap was in a liability position of $776,500, which will be amortized to interest expense over the original term of the swap.

The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the three months ended October 1, 2022 and October 2, 2021, respectively (in thousands):

Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of July 2, 2022		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of October 1, 2022
Forward contracts	Cost of sales	$	(79)	$	—	$	79	$	—
Interest rate swap	Interest expense	(346)		—		74		(272)
Total		$	(425)	$	—	$	153	$	(272)
Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of July 3, 2021		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of October 2, 2021
Forward contracts	Cost of sales	$	2,721	$	224	$	(1,830)	$	1,115
Interest rate swap	Interest expense	(649)		—		75		(574)
Total		$	2,072	$	224	$	(1,755)	$	541

As of October 1, 2022, the Company does not have any foreign exchange contracts with credit-risk-related contingent features. The Company is subject to the risk of fluctuating interest rates from our line of credit and foreign currency risk resulting from our China operations. The Company does not currently manage these risk exposures by using derivative instruments.

10.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 outline 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

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Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates.

The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as the services are performed.

The Company’s 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 the first three months of fiscal year 2023, 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 three months ended October 1, 2022 (in thousands):

	Contract Assets
Beginning balance, July 2, 2022	$	21,974
Revenue recognized	134,557
Amounts collected or invoiced	(130,173)
Ending balance, October 1, 2022	$	26,358

Disaggregation of Revenue

The following table presents the Company’s revenue disaggregated for the three months ended October 1, 2022 and October 2, 2021 (in thousands):

	Revenue
Recognition	Three Months Ended
	October 1, 2022		October 2, 2021
Over-Time	$	134,558	$	129,481
Point-in-Time	2,705		3,281
Total	$	137,263	$	132,762

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11.Leases

The Company has several commitments under operating and financing leases for warehouses, manufacturing facilities, office buildings, and equipment with initial terms that expire at various dates during the next 1 year to 10 years.

The Company has some leases that include an extension clause. Management has considered the likelihood of exercising each extension option included and estimated the duration of the extension option, for those leases management determined to be reasonably certain, in calculating the lease term for measurement of the right of use asset and liability.

For operating leases, management assumed a discount rate of 4%. The weighted average discount rate is disclosed in the tables below.

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The components of lease cost for the three months ended October 1, 2022 and October 2, 2021 were (in thousands): 

Lease cost	Classification	October 1, 2022		October 2, 2021
Operating lease cost	Cost of sales	$	1,334	$	1,433
Operating lease cost	Selling, general and administrative expenses	$	184	$	308
Financing lease cost	Cost of sales	$	900	$	434
Financing lease cost	Selling, general and administrative expenses	$	38	$	10
Total lease cost		$	2,456	$	2,185
Fixed lease cost		$	2,221	$	1,777
Short-term lease cost		$	235	$	408
Total lease cost		$	2,456	$	2,185

Amounts reported in the Consolidated Balance Sheet as of October 1, 2022 were (in thousands, except weighted average lease term and discount rate):

	October 1, 2022
Operating Leases:
Operating lease right of use assets	$	19,497
Operating lease liabilities (1)	$	19,497
Weighted-average remaining lease term (in years)
Operating leases	5.08
Weighted-average discount rate
Operating leases	4.0		%
Financing Leases (2):
Financing lease right of use assets	$	11,373
Financing lease liabilities	$	10,120
Weighted-average remaining lease term (in years)
Financing leases	2.31
Weighted-average discount rate
Financing leases	8.8		%

(1) The current portion of the total operating lease liabilities of $5.4 million is classified under Other Current Liabilities, resulting in $14.1 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 $11.4 million is classified under Other Long-term Assets. The current portion of the total finance lease liabilities of $4.4 million is classified under Current portion of debt, net, resulting in $5.7 million classified in Other Long-term Liabilities section of the condensed consolidated balance sheet.

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Other information related to leases was as follows (in thousands):

	Three Months Ended
	October 1, 2022		October 2, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,847	$	1,446
Financing cash flows used in financing leases	$	1,022	$	401

Future lease payments under non-cancellable leases as of October 1, 2022 are as follows (in thousands):

Fiscal Years Ending	Operating Leases		Finance Leases
2023 (1)	$	4,125	$	3,910
2024	4,826		3,960
2025	3,987		2,539
2026	3,365		107
2027	2,464		71
Thereafter	3,240		—
Total undiscounted lease payments	22,007		10,587
Less: present value discount	(2,510)		(467)
Total lease liabilities	$	19,497	$	10,120

(1) Represents estimated lease payments for the remaining nine-month period ending July 1, 2023.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

References in this report to “the Company,” “Key Tronic,” “we,” “our,” or “us” mean Key Tronic Corporation together with its subsidiaries, except where the context otherwise requires.

This Quarterly Report contains forward-looking statements in addition to historical information. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Risks and uncertainties that might cause such differences include, but are not limited to those outlined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risks and Uncertainties that May Affect Future Results.” Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s opinions only as of the date hereof. The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaims any obligation to do so. Readers should carefully review the risk factors described in this report and other periodic reports the Company files from time to time with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.

Overview

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. The Company provides its customers full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, and worldwide distribution. Its customers include some of the world’s leading original equipment manufacturers. Our combined capabilities and vertical integration are proving to be a desirable offering to our expanded customer base.

Our international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time. We continue to make investments in all of our operating facilities to give us the production capacity, capabilities, and logistical advantages to continue to win new business. The following information should be read in conjunction with the consolidated financial statements included herein and with Part II Item 1A, Risk Factors included as part of this filing.

Our mission is to provide our customers with superior manufacturing and engineering services at the lowest total cost for the highest quality products, and create long-term mutually beneficial business relationships by employing our “Trust, Commitment, Results” philosophy.

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Executive Summary

For the first quarter of fiscal year 2023, the Company reported total revenue of $137.3 million, up 3.4% from $132.8 million in the same period of fiscal year 2022. During the first quarter of fiscal year 2023, the Company ramped up new programs from both longstanding and new customers. While constraints in the global supply chain continued to limit production, the Company saw some gradual improvements with respect to lead times of certain key components.

As new customer programs ramp the concentration of our top three customers’ net sales decreased to 25.4 percent of total sales in the first quarter of fiscal year 2023 from 33.0 percent in the same period of the prior fiscal year. We expect that concentration to our top three customers will continue to decrease during the fiscal year.

Net sales to our largest customers may vary significantly from quarter to quarter depending on the size and timing of customer program commencement, forecasts, delays, and design modifications. We remain dependent on continued net sales to our significant customers and most contracts with customers are not firm long-term purchase commitments. We seek to maintain flexibility in production capacity by employing skilled temporary and short-term labor and by utilizing short-term leases on equipment and manufacturing facilities. In addition, our capacity and core competencies for printed circuit board assemblies, precision molding, sheet metal fabrication, tool making, assembly, and engineering can be applied to a wide variety of products.

Gross profit as a percent of net sales was 7.6 percent for the first quarter of fiscal year 2023 as compared to 7.6 percent for the same quarter of the prior fiscal year. During the first quarter of fiscal year 2023, the results were impacted by storm damage to the Company’s facilities in Arkansas, which reduced revenue and gross profit. Key Tronic has received initial insurance proceeds to repair the plant and replace equipment, which should be completed by the second half of fiscal year 2023, and these initial coverage amounts, net of equipment book value loss, are included in reported gain on insurance claims during the quarter. In addition, the global supply chain and transportation issues continued to disrupt production, along with increased costs associated to ramping new programs.

Operating income as a percentage of net sales was 2.4 percent for the first quarter of fiscal year 2023 compared to 1.6 percent of operating income as a percentage of net sales for the first quarter of fiscal year 2022. The increase in operating income as a percentage of net sales was primarily driven by the reported gain on insurance claim during the quarter.

Net income for the first quarter of fiscal year 2023 was $1.2 million or $0.11 per diluted share, as compared to net income of $0.8 million or $0.07 per diluted share for the first quarter of fiscal year 2022. Net income for the first quarter of fiscal year 2023 improved based on the increase in operating income generated by the gains on insurance claim of $0.9 million and increased revenue during the quarter when compared to the results to first quarter of fiscal 2022.

During the first quarter of fiscal year 2023, we won new programs involving audio, automation, electric vehicle, and power distribution equipment.

Moving into the second quarter of fiscal 2023, global logistics problems, the war in Europe, and China-US geopolitical tensions continue to drive OEM’s to examine their traditional outsourcing strategies. We believe we are well positioned to benefit from this growing demand.

We have experienced shortages in electronic components used in our products. These shortages can result from strong demand for those components or from problems experienced by suppliers, such as shortages of raw materials. We have also experienced, and expect to continue to experience, such shortages and shutdowns due to the effects of the recent pandemic. These unanticipated component shortages have resulted and could continue to result in curtailed production or delays in production, which may prevent us from timely satisfying our performance obligations with our customers. Our inability to satisfy these performance obligations could cause us to experience a reduction in sales, increase in inventory levels and costs, and could adversely affect our operating results. We are carefully monitoring potential supply chain disruptions due to ongoing tightness in the overall component environment and are working to mitigate supply chain constraint risks.

We maintain a strong balance sheet with a current ratio of 2.1 and a debt to equity ratio of 0.9 as of October 1, 2022. Total cash used in operating activities as defined on our cash flow statement was $5.8 million for the three months ended October 1, 2022. We maintain sufficient liquidity for our expected future operations and had $105.4 million in borrowings on our revolving credit facility and $10.6 million remained available at October 1, 2022.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. These estimates and assumptions are based on historical results as well as future expectations. Actual results could vary from our estimates and assumptions.

The accounting policies and estimates listed below are those that we believe are the most critical to our consolidated financial condition and results of operations. They are also the accounting policies that typically require our most difficult, subjective and complex judgments and estimates, often for matters that are inherently uncertain.

•Revenue Recognition

•Inactive, Obsolete, and Surplus Inventory Valuation

•Allowance for Doubtful Accounts

•Accrued Warranty

•Income Taxes

•Share-Based Compensation

•Long-Term Incentive Compensation Accrual

Please refer to the discussion of critical accounting policies in our most recent Annual Report on Form 10-K for the fiscal year ended July 2, 2022, for further details.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended October 1, 2022 with the Three Months Ended October 2, 2021

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

The following table sets forth certain information regarding the components of our condensed consolidated statements of income for the three months ended October 1, 2022 as compared to the three months ended October 2, 2021. It is provided to assist in assessing differences in our overall performance (in thousands):

	Three Months Ended
	October 1, 2022		% of net sales		October 2, 2021		% of net sales		$ change		% point change
Net sales	$	137,263	100.0	%	$	132,762	100.0	%	$	4,501	—	%
Cost of sales	126,884		92.4	%	122,624		92.4	%	4,260		—	%
Gross profit	10,379		7.6	%	10,138		7.6	%	241		—	%
Research, development and engineering	2,296		1.7	%	2,449		1.8	%	(153)		(0.1)	%
Selling, general and administrative	5,656		4.1	%	5,595		4.2	%	61		(0.1)	%
Gain on insurance proceeds, net of losses	(934)		(0.7)	%	—		—	%	(934)		(0.7)	%
Total operating expenses	7,018		5.1	%	8,044		6.0	%	(1,026)		(0.9)	%
Operating income	3,361		2.4	%	2,094		1.6	%	1,267		0.8	%
Interest expense, net	1,887		1.4	%	992		0.7	%	895		0.7	%
Income before income taxes	1,474		1.1	%	1,102		0.8	%	372		0.3	%
Income tax provision	322		0.2	%	287		0.2	%	35		—	%
Net income	$	1,152	0.8	%	$	815	0.6	%	$	337	0.2	%

Net Sales

Net sales of $137.3 million for the first quarter of fiscal year 2023 increased by 3.4 percent as compared to net sales of $132.8 million for the first quarter of fiscal year 2022.

The $4.5 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs for new and legacy customers. The Company’s revenue continued to be constrained by tightening worldwide supply chain and transportation and logistics issues, but these problems do show signs of gradually abating.

Gross Profit

Gross profit as a percentage of net sales for the three months ended October 1, 2022 was 7.6 percent compared to 7.6 percent for the three months ended October 2, 2021. Gross profits percentages were flat as a result of the loss of production related to storm damage in Arkansas and increasing costs associated to new program ramps offset by the efficiencies gained in additional revenue.

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

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence. We recorded a provision of approximately $175,000 and $138,000 for obsolete inventory during the three months ended October 1, 2022 and October 2, 2021, respectively. We adjust the carrying value for estimated obsolescence as necessary in an amount equal to the difference between the cost of inventory and its net realizable value based on assumptions as to future demand and market conditions. The provisions are established for inventory that we have determined customers are not contractually responsible for and for inventory that we believe customers will be unable to purchase.

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Operating Expenses

There were no significant changes to operating expenses during the presented quarters, other than the gain on insurance proceeds of $934,000 recorded in the first quarter of fiscal 2023. Total research, development, and engineering (RD&E) expenses were $2.3 million during the three months ended October 1, 2022 and $2.4 million during the three months ended October 2, 2021, respectively. Total RD&E expenses as a percent of net sales were 1.7 percent during the three months ended October 1, 2022 and 1.8 percent during the three months ended October 2, 2021.

Total selling, general and administrative (SG&A) expenses were $5.7 million during the three months ended October 1, 2022 compared to $5.6 million for the three months ended October 2, 2021. Total SG&A expenses as a percentage of net sales were 4.1 percent for the three months ended October 1, 2022 and 4.2 percent for the three months ended October 2, 2021.

Interest

Interest expense was $1.9 million during the three months ended October 1, 2022 and $1.0 million during the three months ended October 2, 2021. The increase in interest expense is primarily related to increased interest rates and an increase in the average balance outstanding on our line of credit.

Income Taxes

The effective tax rate for the three months ended October 1, 2022 was 21.8 percent compared to 26.0 percent for the three months ended October 2, 2021. The decrease was primarily due to increased federal research and development tax credits expected during the fiscal year 2023. For further information on taxes see Note 5 of the “Notes to Consolidated Financial Statements.”

Our judgments regarding deferred tax assets and liabilities may change due to changes in market conditions, changes in estimates, changes in tax laws or other factors. If assumptions and estimates change in the future the deferred tax assets and liability will be adjusted accordingly and any increase or decrease will result in an additional deferred income tax expense or benefit in subsequent periods.

BACKLOG

On October 1, 2022, we had an order backlog of approximately $380.0 million. This compares with a backlog of approximately $320.9 million on October 2, 2021. The increase in order backlog is related to increases in demand and continuing supply chain issues that have delayed production. Order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements. Order backlog should not be considered an accurate measure of future net sales.

CAPITAL RESOURCES AND LIQUIDITY

Operating Cash Flow

Net cash used in operating activities for the three months ended October 1, 2022 was $5.8 million, compared to $14.6 million during the same period of the prior fiscal year.

The $5.8 million of net cash used in operating activities for the three months ended October 1, 2022 is primarily related to $0.2 million in net income for the period adjusted for $2.4 million of depreciation and amortization, a $1.8 million increase in accounts receivable, a $13.5 million increase in inventory, a $2.8 million decrease in accrued compensation and vacation, a $3.6 million increase in other assets, partially offset by a $12.7 million increase in accounts payable, a $2.2 million increase in other liabilities and a $4.4 million decrease in contract assets.

The $14.6 million of net cash used in operating activities for the three months ended October 2, 2021 is primarily related to $0.8 million in net income for the period adjusted for $1.3 million of depreciation and amortization, a $16.2 million increase in accounts receivable, a $5.8 million increase in inventory, a $3.0 million decrease in accrued compensation and vacation partially offset by a $18.8 million increase in accounts payable, and a $1.1 million decrease in contract assets.

Accounts receivable fluctuates based on the timing of shipments, terms offered and collections that occurred during the quarter. While overall net sales are not typically seasonal in nature, we ship the majority of our product during the latter half of the quarter. We purchase inventory based on customer forecasts and orders, and when those forecasts and orders change, the amount of inventory may also fluctuate. Accounts payable fluctuates with changes in inventory levels, volume of inventory purchases, negotiated supplier terms and taking advantage of early pay discounts.

Investing Cash Flow

Cash used in investing activities was $2.5 million during the three months ended October 1, 2022 as compared to $1.8 million during the three months ended October 2, 2021. Our primary investing activity during the three months ended October 1, 2022 and October 2, 2021, was purchasing equipment to support increased production levels for new programs.

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Leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership. Total capital expenditures are expected to be $9.0 million during the fiscal year, a significant portion of which may be funded through finance leases. Capital expenditures and periodic lease payments are expected to be financed with internally generated funds as well as our revolving line of credit facility and equipment term loan.

Financing Cash Flow

Cash provided by financing activities was $8.8 million during the three months ended October 1, 2022 as compared to $14.5 million in the same period of the previous fiscal year. Our primary financing activities during the three months ended October 1, 2022 and three months ended October 2, 2021, were borrowings and repayments under our revolving line of credit facility and term loans.

As of October 1, 2022, approximately $10.6 million was available under the asset-based revolving credit facility.

Our cash requirements are affected by the level of current operations and new programs. We believe that projected cash from operations, funds available under the revolving credit facility and leasing capabilities will be sufficient to meet our working and fixed capital requirements for the foreseeable future. The Company further notes projected cash from operations from increased demand from certain customers will be partially offset by an anticipated slowdown in collections from other customers and increasing inventory levels in efforts to mitigate supply chain constraint risks. As of October 1, 2022, we had approximately $2.1 million of cash held by foreign subsidiaries. If cash is to be repatriated in the future from these foreign subsidiaries, the Company would be subject to certain withholding taxes in the foreign jurisdictions. The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of October 1, 2022 would approximate $12,000. We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 6 of the “Notes to Consolidated Financial Statements.”

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We have included a summary of our Contractual Obligations in our annual report on Form 10-K for the fiscal year ended July 2, 2022. There have been no material changes in contractual obligations outside the ordinary course of business since July 2, 2022.

RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

The following risks and uncertainties could affect our actual results and could cause results to differ materially from past results or those contemplated by our forward-looking statements. When used herein, the words “expects,” “believes,” “anticipates” and other similar expressions are intended to identify forward-looking statements.

RISKS RELATED TO OUR BUSINESS AND STRATEGY

Our operations may be subject to certain risks.

We manufacture product in facilities located in Mexico, China, Vietnam and the United States. These operations may be subject to a number of risks, including:

•difficulties in staffing, turnover and managing onshore and offshore operations;

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

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

•longer customer payment cycles and difficulty collecting accounts receivable;

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

•governmental restrictions on the transfer of funds;

•burdens of complying with a wide variety of foreign laws and labor practices; subject to trade wars and tariffs;

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

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

Our operations in certain foreign locations receive favorable income tax treatment in the form of tax credits or other incentives. In the event that such tax incentives are not extended, are repealed, or we no longer qualify for such programs, our taxes may increase, which would reduce our net income.

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Additionally, certain foreign jurisdictions restrict the amount of cash that can be transferred to the U.S or impose taxes and penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed by, our operations in the United States, we may incur significant penalties and/or taxes to repatriate these funds.

We may experience fluctuations in quarterly results of operations.

Our quarterly operating results have varied in the past and may vary in the future due to a variety of factors, including adverse changes in the U.S. and global macroeconomic environment, volatility in overall demand for our customers’ products, success of customers’ programs, timing of new programs, new product introductions or technological advances by us, our customers and our competitors, and changes in pricing policies by us, our customers, our suppliers, and our competitors. Our customer base is diverse in the markets they serve, however, decreases in demand, particularly from customers in certain industries could affect future quarterly results. Additionally, our customers could be adversely impacted by illiquidity in the credit markets which could directly impact our operating results.

Component procurement, production schedules, personnel and other resource requirements are based on estimates of customer requirements. Occasionally, our customers may request accelerated production that can stress resources and reduce operating margins. Conversely, our customers may abruptly lower or cancel production which may lead to a sudden, unexpected increase in inventory or accounts receivable for which we may not be reimbursed even when under contract with customers. In addition, because many of our operating expenses are relatively fixed, a reduction in customer demand can harm our gross profit and operating results. The products which we manufacture for our customers have relatively short product lifecycles. Therefore, our business, operating results and financial condition are dependent in a significant way on our ability to obtain orders from new customers and new product programs from existing customers.

Operating results can also fluctuate if changes are made to significant estimates and assumptions. Significant estimates and assumptions include the allowance for doubtful receivables, provision for obsolete and non-saleable inventory, stock-based compensation, the valuation allowance on deferred tax assets, impairment of long-lived assets, long-term incentive compensation accrual, the provision for warranty costs, and the impact of hedging activities.

Due to the COVID-19 pandemic, we have seen extreme shifts in demand from our customer base. The possibility of future temporary closures and labor constraints, as well as the inability to predict customer demand, costs, and future supply chain disruptions during the rapidly changing COVID-19 environment can materially impact operating results.

We are exposed to general economic conditions, which could have a material adverse impact on our business, operating results and financial condition.

Adverse economic conditions and uncertainty in the global economy such as unstable global financial and credit markets, inflation, and recession can negatively impact our business. Unfavorable economic conditions could affect the demand for our customers’ products by triggering a reduction in orders as well as a decline in forecasts which could adversely affect our sales in future periods. Additionally, the financial strength of our customers and suppliers and their ability to obtain and rely on credit financing may affect their ability to fulfill their obligations to us and have an adverse effect on our financial results.

Adverse macroeconomic conditions as a result of COVID-19 have and may continue to affect our business. The conditions affect the Company’s ability to predict and plan for future supply chain disruptions, fluctuations in customer demand and costs, and the ability to operate as there is uncertainty over future temporary closures. Inflation has also risen globally to historically high levels. If the inflation rate continues to increase, the costs of labor and other expenses could also increase. We may not be able to increase our product prices enough to offset these increased costs. In addition, any increase in our product prices may reduce our future customer orders and profitability. Inflation may further exacerbate other risk factors discussed in this Quarterly Report on Form 10-Q, including disruptions to international operations.

The majority of our sales come from a small number of customers and a decline in sales to any of these customers could adversely affect our business.

At present, our customer base is concentrated and could become more or less concentrated. There can be no assurance that our principal customers will continue to purchase products from us at current levels. Moreover, we typically do not enter into long-term volume purchase contracts with our customers, and our customers have certain rights to extend or delay the shipment of their orders. We, however, typically require that our customers contractually agree to buy back inventory purchased within specified lead times to build their products if not used.

The loss of one or more of our major customers, or the reduction, delay or cancellation of orders from such customers, due to economic conditions or other forces, could materially and adversely affect our business, operating results and financial condition. The contraction in demand from certain industries could impact our customer orders and have a negative impact on our operations over the foreseeable future. Additionally, if one or more of our customers were to become insolvent or otherwise unable to pay for the manufacturing services provided by us, our operating results and financial condition would be adversely affected.

We depend on a limited number of suppliers for certain components that are critical to our manufacturing processes. A shortage of these components or an increase in their price could interrupt our operations and result in a significant change in our results of operations.

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We are dependent on many suppliers, including sole source suppliers, to provide key components and raw materials used in manufacturing customers’ products. We have seen supply shortages in certain electronic components. In addition, our suppliers' facilities may also experience earthquakes, tsunamis and other natural disasters which may cause a shortage of components. This can result in longer lead times and the inability to meet our customers request for flexible production and extended shipment dates. If demand for components outpaces supply, capacity delays could affect future operations. Delays in deliveries from suppliers or the inability to obtain sufficient quantities of components and raw materials have and may continue to cause delays or reductions in shipment of products to our customers which could adversely affect our operating results and damage customer relationships.

Key Tronic continues to work closely with its employees and key suppliers to ascertain delays attributable to the COVID-19 pandemic. Delays in production and extended transit times of critical parts have and may continue to cause a shortage of components.

We operate in a highly competitive industry; if we are not able to compete effectively in the contract manufacturing industry, our business could be adversely affected.

Competitors may offer customers lower prices on certain high volume programs. This could result in price reductions, reduced margins and loss of market share, all of which would materially and adversely affect our business, operating results, and financial condition. If we were unable to provide comparable or better manufacturing services at a lower cost than our competitors, it could cause sales to decline. In addition, competitors can copy our non-proprietary designs and processes after we have invested in development of products for customers, thereby enabling such competitors to offer lower prices on such products due to savings in development costs.

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

We have manufacturing operations located in Mexico and China. A significant portion of our operations are denominated in the Mexican peso and the Chinese currency, the renminbi ("RMB"). Currency exchange rates fluctuate daily as a result of a number of factors, including changes in a country's political and economic policies. Volatility in the currencies of our entities and the United States dollar, as well as inflationary costs, could seriously harm our business, operating results and financial condition. The primary impact of currency exchange fluctuations is on the cash, receivables, payables and expenses of our operating entities. As part of our hedging strategy, we currently use Mexican peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican peso denominated expenses. We currently do not hedge expenses denominated in RMB. Unexpected losses could occur from increases in the value of these currencies relative to the United States dollar.

As a result of COVID-19, significant currency exchange fluctuations can occur causing unexpected losses. Future temporary closures of production facilities in Mexico could also cause significant changes in our ability to qualify for hedge accounting treatment of our forward contracts to hedge foreign currency fluctuations. However, given the unprecedented nature of the pandemic the FASB staff believes that an entity may apply the exception in paragraph 815-30-40-4 for rare cases caused by extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of an entity to delays in the timing of the forecasted transactions if those delays are related to the effects of the COVID-19 pandemic and are considered probable to still occur. In addition, the FASB staff believes that it would be acceptable for an entity to determine that missed forecasts related to the effects of the COVID-19 pandemic need not be considered when determining whether it has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions. 

Our success will continue to depend to a significant extent on our key personnel.

Our future success depends in large part on the continued service of our key technical, marketing and management personnel and on our ability to continue to attract and retain qualified production employees. There can be no assurance that we will be successful in attracting and retaining such personnel, particularly in our manufacturing locales that may be experiencing high demand for similar key personnel. The loss of key employees could have a material adverse effect on our business, operating results and financial condition.

Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and such costs may not be recoverable if such new programs or transferred programs are canceled or don’t meet expected sales volumes.

Start-up costs, the management of labor and equipment resources in connection with the establishment of new programs and new customer relationships, and the need to obtain required resources in advance can adversely affect our gross margins and operating results. These factors are particularly evident in the ramping stages of new programs. These factors also affect our ability to efficiently use labor and equipment. We are currently managing a number of new programs. Consequently, our exposure to these factors has increased. In addition, if any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short term. We may not be able to recoup these start-up costs or replace anticipated new program revenues.

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Customers may change production timing and demand schedules which makes it difficult for us to schedule production and capital expenditures and to maximize the efficiency of our manufacturing capacity.

Changes in demand for customer products reduce our ability to accurately estimate the future requirements of our customers. This makes it difficult to schedule production and maximize utilization of our manufacturing capacity. We must determine the levels of business that we will seek and accept from customers, set production schedules, commit to procuring inventory, and allocate personnel and resources, based on our estimates of our customers' requirements. Customers can require sudden increases and decreases in production which can put added stress on resources and reduce margins. Sudden decreases in production can lead to excess inventory on hand which may or may not be reimbursed by our customers even when under contract.

Continued growth could further lead to capacity constraints. We may need to transfer production to other facilities, acquire new facilities, or outsource production which could negatively impact gross margin. The Company has been able to manage the arrival of components in an effort to control inventory levels of customers that have seen sharp decreases in demand, as a result of COVID-19.

Compliance or the failure to comply with current and future environmental and health laws or regulations could cause us significant expense.

We are subject to a variety of domestic and foreign environmental regulations relating to the use, storage, and disposal of materials used in our manufacturing processes. In addition, increasing governmental focus on climate change may result in new environmental regulations that may negatively affect us, our vendors or our customers. As a result, we may incur additional costs or obligations in complying with any new environmental and reporting requirements, as well as increased indirect costs resulting from our vendors or customers that get passed on to us.

If we fail to comply with any present or future regulations, we could be subject to future liabilities or the suspension of current manufacturing operations. In addition, such regulations could restrict our ability to expand our operations or could require us to acquire costly equipment, substitute materials, or incur other significant expenses to comply with government regulations.

If our manufacturing processes and services do not comply with applicable statutory and regulatory requirements, or if we manufacture products containing design or manufacturing defects, demand for our services may decline and we may be subject to liability claims.

We manufacture and design products to our customers’ specifications, and, in some cases, our manufacturing processes and facilities may need to comply with applicable statutory and regulatory requirements. For example, medical devices that we manufacture or design, as well as the facilities and manufacturing processes that we use to produce them, are regulated by the Food and Drug Administration and non-U.S. counterparts of this agency. In addition, our customers’ products and the manufacturing processes that we use to produce them often are highly complex. As a result, products that we manufacture may at times contain manufacturing or design defects, and our manufacturing processes may be subject to errors or not be in compliance with applicable statutory and regulatory requirements. Defects in the products we manufacture or design, whether caused by a design, manufacturing or component failure or error, or deficiencies in our manufacturing processes, may result in delayed shipments to customers or reduced or canceled customer orders. If these defects or deficiencies are significant, our business reputation may also be damaged. The failure of the products that we manufacture or our manufacturing processes and facilities to comply with applicable statutory and regulatory requirements may subject us to legal fines or penalties and, in some cases, require us to shut down or incur considerable expense to correct a manufacturing process or facility. Our customers are required to indemnify us against liability associated with designing products to meet their specifications. However, if our customers are responsible for the defects, they may not, or may not have resources to, assume responsibility for any costs or liabilities arising from these defects, which could expose us to additional liability claims.

If we do not manage our growth effectively, our profitability could decline.

Our business is experiencing growth which can place considerable additional demands upon our management team and our operational, financial and management information systems. Our ability to manage growth effectively requires us to continue to implement and improve these systems; avoid cost overruns; maintain customer, supplier and other favorable business relationships during possible transition periods; continue to develop the management skills of our managers and supervisors; and continue to train, motivate and manage our employees. Our failure to effectively manage growth could have a material adverse effect on our results of operations.

Energy price increases may negatively impact our results of operations.

Certain components that we use in our manufacturing process are petroleum-based. In addition, we, along with our suppliers and customers, rely on various energy sources in our transportation activities. While significant uncertainty currently exists about the future levels of energy prices, a significant increase, such as the increased fuel prices experienced in fiscal year 2022, is possible. Increased energy prices could cause an increase to our raw material costs and transportation costs. In addition,

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increased transportation costs related to certain suppliers and customers could be passed along to us. We may not be able to increase our product prices enough to offset these increased costs. In addition, any increase in our product prices may reduce our future customer orders and profitability.

TECHNOLOGY RISKS

Our operations are subject to cyberattacks that could have a material adverse effect on our business.

We are increasingly dependent on digital technologies and services to conduct our operations. We use these technologies for internal purposes, including data storage, processing and transmissions, as well as in our interactions with vendors and customers. Digital technologies and services are subject to the risk of cybersecurity incidents and some incidents can remain undetected for a period of time.

We routinely monitor our systems for cyber threats and have processes in place to detect and remediate vulnerabilities. Nevertheless, we have experienced attempted security breaches, such as phishing emails and other targeted attacks. We expect that our operations will continue to be subject to cyber threats, and any future cybersecurity incident could significantly disrupt our operations.

Cybersecurity incidents could also result in the misappropriation of proprietary or confidential information of the Company or that of its customers, employees, vendors or customers. We expect to incur costs in the future to mitigate against cybersecurity incidents as threats are expected to continue to become more persistent and sophisticated. If our systems for protecting against cybersecurity incidents prove not to be sufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or employee, vendor or customer data; interruption of our business operations; and increased costs to prevent, respond to or mitigate cybersecurity incidents. These risks could harm our reputation and our relationships with employees, vendors and customers and may result in claims or enforcement actions and investigations against us.

Disruptions to our information systems, including losses of data or outages, could adversely affect our operations.

We rely on information technology networks and systems to process, transmit and store electronic information. In particular, we depend on our information technology infrastructure for a variety of functions, including worldwide financial reporting, inventory management, procurement, invoicing and email communications. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks and similar events. If we or our vendors are unable to prevent such outages, our operations could be disrupted.

If we are unable to maintain our technological and manufacturing process expertise, our business could be adversely affected.

The markets for our customers’ products are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and short product life cycles. The introduction of products embodying new technologies or the emergence of new industry standards can render existing products obsolete or unmarketable. Our success will depend upon our customers’ ability to enhance existing products and to develop and introduce, on a timely and cost-effective basis, new products that keep pace with technological developments and emerging industry standards and address evolving and increasingly sophisticated customer requirements. Failure of our customers to do so could substantially harm our customers’ competitive positions. There can be no assurance that our customers will be successful in identifying, developing and marketing products that respond to technological change, emerging industry standards or evolving customer requirements.

RISKS RELATED TO CAPITAL AND FINANCING

Cash and cash equivalents are exposed to concentrations of credit risk.

We place our cash with high credit quality institutions. At times, such balances may be in excess of the federal depository insurance limit or may be on deposit at institutions which are not covered by insurance. If such institutions were to become insolvent during which time it held our cash and cash equivalents in excess of the insurance limit, it could be necessary to obtain other credit financing to operate our facilities.

Our ability to secure and maintain sufficient credit arrangements is key to our continued operations.

There is no assurance that we will be able to retain or renew our credit agreements in the future. In the event the business grows rapidly or there is uncertainty in the macroeconomic climate, additional financing resources could be necessary in the current or future fiscal years. There is no assurance that we will be able to obtain equity or debt financing at acceptable terms, or at all in the future. In addition, we have restrictive covenants with our financial institution which could impact how we manage our business. If we cannot meet our financial covenants, our borrowings could become immediately payable which could have a material adverse impact on our financial statements. For a summary of our banking arrangements, see Note 4 Long-Term Debt of the “Notes to Consolidated Financial Statements.”

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

We are exposed to interest rate risk under our revolving line of credit and term loan. We have not historically hedged the interest rate on our credit facility; therefore, unless we do so, significant changes in interest rates could adversely affect our results of operations. For a summary of our debt obligations, see Footnote “Long-Term Debt” of the “Notes to Consolidated Financial Statements.”

In addition, the U.K.’s Financial Conduct Authority, which regulates LIBOR, has confirmed that LIBOR-indexed rates will cease after June 30, 2023, with the remaining IBOR-indexed rates ceasing on December 31, 2021. The Federal Reserve Board and the Federal Reserve Bank of New York identified Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR for debt and derivative financial instruments.

Our stock price is volatile.

Our stock price has and may continue to be subject to wide fluctuations and possible rapid increases or declines over a short time period. These fluctuations may be due to factors specific to us such as our stock's thinly traded nature, variations in quarterly operating results, changes in earnings estimates, or the Audit Committee's internal investigation, or to factors relating to the contract manufacturing industry or to the securities markets in general, which, in recent years, have experienced significant price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stocks are traded. In addition, holders of our common stock will suffer immediate dilution to the extent outstanding equity awards are exercised to purchase common stock.

RISKS RELATED TO OUR CONTROLS AND PROCEDURES AND THE INTERNAL INVESTIGATION

We identified a material weakness in our internal control over financial reporting and concluded that our disclosure controls and procedures were not effective as of December 26, 2020 and April 3, 2021. If we fail to properly remediate any future deficiencies or material weaknesses or to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted.

As previously disclosed, we concluded that our disclosure controls and procedures were not effective as of December 26, 2020 and April 3, 2021, due to the existence of a material weakness in our internal control over financial reporting. While we undertook remediation efforts to address the identified deficiencies and have concluded that the material weakness was remediated as of July 3, 2021, we cannot provide assurance that we will be able to conclude that our controls will be effective in the future. We also cannot guarantee that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not arise or be identified in the future.

If additional deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results and incur the additional costs and expenses associated therewith. Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all. If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed. Restated financial statements and failures in internal controls may also cause us to fail to meet additional reporting obligations, negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect on the price of our common stock, subject us to regulatory investigations and penalties or stockholder litigation, and materially adversely impact our business, financial condition, results of operations and cash flows.

Matters relating to or arising from the subject of the Audit Committee’s internal investigation, including expenses and diversion of personnel and resources, regulatory investigations, and proceedings and litigation matters, could have an adverse effect on our business, results of operations and financial condition.

We have incurred, and may continue to incur, significant expenses related to legal, accounting and other professional services in connection with matters relating to or arising from the subject of the Audit Committee’s internal investigation. As a result of the internal investigation, we have taken and continue to take a number of steps in order to remediate identified deficiencies in our internal control over financial reporting and attempt to reduce the risk of future recurrence. The validation of the efficacy of these remedial steps have resulted in us incurring additional near term expenses, and to the extent these steps are not successful, we may incur significant additional time and expense.

In addition, we are cooperating with the SEC regarding matters related to the internal investigation. The completion of the internal investigation will not automatically resolve the SEC’s inquiries. If the SEC or any other regulator were to commence legal action against us, we could be required to pay significant additional legal fees, as well as penalties and become subject to injunctions, cease and desist orders or other remedies. We can provide no assurances as to the outcome of any governmental inquiry or investigation. Further, we, our officers and members of our board of directors could be named as defendants in lawsuits asserting claims arising out of the subject matter of the Audit Committee’s internal investigation. As a result of any legal proceedings and any related indemnification requirements to our officers and directors, we could be required to pay additional legal fees and/or monetary damages that may be in excess of our insurance coverage or may have additional penalties or other remedies imposed against us or our officers and directors.

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All of these expenses, the delay in timely filing our periodic reports and the diversion of the attention of management and other personnel that has occurred and is expected to continue, could adversely affect our business, financial condition, results of operations and cash flows.

Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors, theft and fraud, or in informing management of all material information in a timely manner.

Management does not expect that our disclosure controls and procedures and internal controls over financial reporting will prevent all errors or fraud. A control system is designed to give reasonable, but not absolute, assurance that the objectives of the control system are met. In addition, any control system reflects resource constraints and the benefits of controls must be considered relative to their costs. Inherent limitations of a control system may include: judgments in decision making may be faulty, breakdowns can occur simply because of error or mistake and controls can be circumvented by collusion or management override. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

LEGAL AND ACCOUNTING RISKS

We are involved in various legal proceedings.

In the past, we have been notified of claims relating to various matters including contractual matters, intellectual property rights or other issues arising in the ordinary course of business. In the event of such a claim, we may be required to spend a significant amount of money to defend or otherwise address the claim. Any litigation or dispute resolution, even where a claim is without merit, could result in substantial costs and diversion of resources. Accordingly, the resolution or adjudication of such disputes, even those encountered in the ordinary course of business, could have a material effect on our business, consolidated financial conditions and results of operations.

Changes in securities laws and regulations will increase our costs and risk of noncompliance.

We are subject to additional requirements contained in the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) and more recently the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Sarbanes-Oxley and Dodd-Frank Acts required or will require changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of the Sarbanes-Oxley and Dodd-Frank Acts, the SEC and NASDAQ promulgated new rules and additional rulemaking is expected in the future. Compliance with these new rules and future rules has increased and may increase further our legal, financial and accounting costs as well as a potential risk of noncompliance. Absent significant changes in related rules, which we cannot assure, we anticipate some level of increased costs related to these new regulations to continue indefinitely. We also expect these developments to make it more difficult and more expensive to obtain director and officer liability insurance, and we may be forced to accept reduced coverage or incur substantially higher costs to obtain coverage. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our Board of Directors or qualified management personnel. Further, the costs associated with the compliance with and implementation of procedures under these and future laws and related rules could have a material impact on our results of operations. In addition, the costs associated with noncompliance with additional securities laws and regulations could also impact our business.

Changes in financial accounting standards may affect our reported financial condition or results of operations as well increase costs related to implementation of new standards and modifications to internal controls.

Our consolidated financial statements are prepared in conformity with accounting standards generally accepted in the United States, or U.S. GAAP. These principles are subject to amendments made primarily by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions which are completed before a change is announced. Changes to accounting rules or challenges to our interpretation or application of the rules by regulators may have a material adverse effect on our reported financial results or on the way we conduct business.

GENERAL RISKS

Our levels of insurance coverage may not be sufficient for potential damages, claims or losses.

We have various forms of business and liability insurance which we believe are appropriate based on the needs of companies in our industry. As a result, not all of our potential business risks or potential losses would be covered by our insurance policies. If we sustain a significant claim or loss which is not covered by insurance, our net income could be negatively impacted.

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We may encounter complications with acquisitions, which could potentially harm our business.

Any current or future acquisitions may require additional equity financing, which could be dilutive to our existing shareholders, or additional debt financing, which could potentially affect our credit ratings. Any downgrades in our credit ratings associated with an acquisition could adversely affect our ability to borrow by resulting in more restrictive borrowing terms. To integrate acquired businesses, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The integration of acquired businesses may be further complicated by difficulties managing operations in geographically dispersed locations. The integration of acquired businesses may not be successful and could result in disruption by diverting management’s attention from the core business. In addition, the integration of acquired businesses may require that we incur significant restructuring charges or other increases in our expenses and working capital requirements, which reduce our return on invested capital.

Acquisitions may involve numerous other risks and challenges including but not limited to: potential loss of key employees and customers of the acquired companies; the potential for deficiencies in internal controls at acquired companies; lack of experience operating in the geographic market or industry sector of the acquired business; constraints on available liquidity, and exposure to unanticipated liabilities of acquired companies. These and other factors could harm our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our consolidated business and operating results.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are subject to the risk of fluctuating interest rates in the normal course of business. Our major market risk relates to our secured debt. Our asset-based senior secured revolving credit facility and equipment financing facility are secured by substantially all of our assets. The interest rates applicable to our asset-based senior secured revolving credit facility fluctuate with LIBOR rates. There was outstanding $105.4 million in borrowings under our asset-based senior secured revolving credit facility and $7.8 million outstanding on our equipment financing facilities as of October 1, 2022. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity” and Note 4 – “Long-Term Debt” to the Consolidated Financial Statements for additional information regarding our revolving credit facility and term loans.

Foreign Currency Exchange Risk

A significant portion of our operations are in foreign locations. As a result, transactions occur in currencies other than the U.S. dollar. Exchange rate fluctuations among other currencies used by us would directly or indirectly affect our financial results. From time to time, we use Mexican peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican peso denominated expenses. As of October 1, 2022, the Company did not have any outstanding foreign currency forward contracts. For the three months ended October 1, 2022, the Company did not enter into or settle any foreign currency forward contracts.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

It is the responsibility of our management to establish, maintain, and monitor disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Additionally, these disclosure controls include controls and procedures that are designed to accumulate and communicate the information required to be disclosed to our company’s Chief Executive Officer and Chief Financial Officer, allowing for timely decisions regarding required disclosures.

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b).

Based on our assessment, we believe that as of October 1, 2022, the Company’s disclosure controls and procedures are effective based on that criteria.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal controls over financial reporting during the three months ended October 1, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)).

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PART II. OTHER INFORMATION:

Item 1.Legal Proceedings

We are involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A.Risk Factors

Information regarding risk factors appear in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 3, “Quantitative and Qualitative Disclosures about Market Risk” of this Form 10-Q.

There are no material changes to the risk factors set forth in Part I Item 1A in the Company’s Annual Report on Form 10-K for the year ended July 2, 2022.

Item 6.	Exhibits
	3.1	Articles of Incorporation, incorporated by reference to the Company’s Form 10-K for the fiscal year ended July 3, 2021
	3.2	Bylaws, as amended, incorporated by reference to the Company’s Form 10-K for the fiscal year ended July 3, 2021
	10.1	Third Amendment to Loan and Security Agreement, dated August 26,2022, among the Company, Bank of America, N.A., and certain other parties, incorporated by reference to Exhibit 10.2 to the Company’s Form 10-K filed September 14,2022.
	31.1	Certification of Chief Executive Officer (Exchange Act Rules 13(a)-14 and 15(d)-14)
	31.2	Certification of Chief Financial Officer (Exchange Act Rules 13(a)-14 and 15(d)-14)
	32.1	Certification of Chief Executive Officer (18 U.S.C. 1350)
	32.2	Certification of Chief Financial Officer (18 U.S.C. 1350)
	101.INS	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
	101.SCH	Inline XBRL Taxonomy Extension Schema Document
	101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
	101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
	104	Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extention information contained in Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB and 101.PRE)

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

KEY TRONIC CORPORATION
/s/    CRAIG D. GATES
Craig D. Gates	Date:	November 9, 2022
President and Chief Executive Officer
(Principal Executive Officer)
/s/    BRETT R. LARSEN
Brett R. Larsen	Date:	November 9, 2022
Executive Vice President of Administration, Chief Financial Officer and Treasurer
(Principal Financial Officer)

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EX-10.1

Execution Version 1 162363368_5 THIRD AMENDMENT AND LIMITED WAIVER TO LOAN, GUARANTY AND SECURITYAGREEMENT THIS THIRD AMENDMENT AND LIMITED WAIVER TO LOAN, GUARANTY AND SECURITY AGREEMENT (this “Amendment”), dated as of August 26, 2022 is by and among KEY TRONIC CORPORATION, a Washington corporation (“Key Tronic”), CDR MANUFACTURING, LLC, a Kentucky limited liability company (“CDR”), AYRSHIRE ELECTRONICS OF ARKANSAS LLC, a Kentucky limited liability company (“Ayrshire Arkansas”), and AYRSHIRE ELECTRONICS OF MISSISSIPPI, LLC, a Kentucky limited liability company (“Ayrshire Mississippi”; and together with Key Tronic, CDR, Ayrshire Arkansas, each, a “Borrower” and collectively, the “Borrowers”), K T SERVICES, INC., a Washington corporation (“KT”), and KEY TRONIC CHINA LTD., a Washington corporation (“KTC” together with KT, each, a “Guarantor” and collectively, the “Guarantors”; and together with the Borrowers, each, an “Obligor” and collectively, the “Obligors”), the financial institutions party to the Loan Agreement (as defined below) from time to time as lenders (collectively, the “Lenders”), and BANK OF AMERICA, N.A., a national banking association, as agent for the Lenders (in such capacity, the “Agent”). RECITALS WHEREAS, the Borrowers, Guarantors, Agent and the Lenders are parties to that certain Loan, Guaranty and Security Agreement, dated as of August 14, 2020 (as amended, restated, amended and restated, modified, or supplemented from time to time, including pursuant to this Amendment, the “Loan Agreement”), pursuant to which the Agent and the Lenders provide Borrowers with certain financial accommodations. WHEREAS, the Obligors have requested that Agent and Lenders agree to waive the Existing Defaults (as defined below) and amend the Loan Agreement as set forth herein, which Agent and Lenders are willing to do, but solely on the terms and conditions hereafter set forth. AGREEMENT NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore or hereafter made to or for the account of Borrowers by Agent and Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS; RECITALS Section 1.01 Defined Terms. Capitalized terms used but not defined herein shall have the respective meanings ascribed to such terms in the Loan Agreement. Section 1.02 Recitals. The Recitals above are incorporated herein as though set forth in full and Borrower stipulates to the accuracy of each of the Recitals. ARTICLE II AMENDMENTS TO LOAN AND SECURITY AGREEMENT Section 2.01 New Definition. The following definition is added to Section 1.1 of the Loan Agreement in alphabetical order as follows:

2 162363368_5 Third Amendment Effective Date: August 26, 2022. Section 2.02 Amended Definitions. The following definitions in Section 1.1 of the Loan Agreement are hereby amended and restated in their entirety to read as follows: Applicable Margin: the margin set forth below, as determined by the average daily Availability for the last Fiscal Quarter: Level Average Daily Availability Base Rate Loans LIBOR Loans I < $17,500,000 2.00% 3.00% II > $17,500,000 < $35,000,000 1.75% 2.75% III > $35,000,000 1.50% 2.50% Margins shall be subject to increase or decrease by Agent on the first day of the calendar month following each Fiscal Quarter end. If Agent is unable to calculate average daily Availability for a Fiscal Quarter due to Borrowers’ failure to deliver any Borrowing Base Report when required hereunder, then, at the option of Agent or Required Lenders, margins shall be determined as if Level I were applicable until the first day of the calendar month following its receipt. Notwithstanding the above, all margins with respect to Loans which are FILO Loans shall be determined based on the margins set forth in the appropriate level above plus 1.00%. EBITDA: determined on a consolidated basis for Borrowers and Subsidiaries, net income calculated before (i) interest expense, (ii) provision for income taxes, (iii) depreciation and amortization expense, (iv) gains or losses arising from the sale of capital assets, (v) gains arising from the write-up of assets, (vi) non-cash gains or losses arising from the write-down of assets, (vii) any extraordinary gains, and (viii) any other items expressly approved by Agent in writing (in each case, to the extent included in determining net income). For the avoidance of doubt, Agent has not approved any addbacks which require the approval of Agent prior to the Third Amendment Effective Date. Investment Grade Accounts Formula Amount: 90% of the Value of Investment Grade Eligible Accounts. Long-Dated Account Debtors: each of the following Account Debtors, so long as such Account Debtor maintains a credit rating of at least BBB- or higher by S&P or Baa3 or higher by Moody’s: (i) Honeywell International Inc. and its wholly owned subsidiaries, (ii) Amphenol Corporation, (iii) Baker Hughes Company, (iv) Trane Technologies PLC, (v) Nidec Corporation, and (vi) other Persons approved by Agent in its Permitted Discretion. Section 2.03 Amended Definition of “Eligible Accounts”. Clause (a) of the definition of “Eligible Accounts” in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: (a) (i) with respect to Eligible Long-Dated Accounts, it is unpaid for more than 60 days after the original due date, or more than 120 days after the original invoice

3 162363368_5 date, and (ii) with respect to all other Accounts, it is unpaid for more than 60 days after the original due date, or more than 90 days after the original invoice date; Section 2.04 Amendment to Section 10.3.2 of the Loan Agreement. Section 10.3.2 of the Loan Agreement is hereby amended and restated in its entirety to read as follows: 10.3.2 [Reserved] Section 2.05 Agreement Regarding Interest Rate. Notwithstanding any provision of any Loan Document to the contrary, the parties agree that the terms set forth on Appendix A shall apply to the credit facility contemplated by the Credit Agreement. For the avoidance of doubt, to the extent provisions in the Loan Agreement apply to Loans and other extensions of credit under the credit facility, and such provisions are not specifically addressed by Appendix A, the Loan Agreement provisions shall continue to apply. ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties. To induce Agent and the Lenders to execute this Amendment, each Obligor hereby represents and warrants to Agent and the Lenders as follows: (a) the execution, delivery and performance of this Amendment by the Obligors has been duly authorized, and this Amendment constitutes the legal, valid and binding obligation of each Obligor enforceable against such Obligor in accordance with its terms, except as the enforceability may be limited by bankruptcy, insolvency and similar laws affecting the enforceability of creditors’ rights generally and to general principles of equity; (b) the execution, delivery and performance of this Amendment by each Obligor does not require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect); (c) after giving effect to this Amendment, each of the representations and warranties of each Obligor in the Loan Agreement and the other Loan Documents, are true and correct in all respects (or, in the case of any representation and warranty qualified by materiality, Material Adverse Effect or any similar concept, are true and correct in all respects) with the same effect as though made on and as of the date hereof (except to the extent such representations and warranties expressly relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all respects (or, in the case of any representation and warranty qualified by materiality, Material Adverse Effect or any similar concept, are true and correct in all respects) as of such earlier date); and (d) after giving effect to this Amendment, no Event of Default or Default exists. ARTICLE IV EXISTING EVENTS OF DEFAULT/LIMITED WAIVER As of the Third Amendment Effective Date, certain Events of Default have occurred and are continuing as a result of Borrowers’ failure to maintain a Cash Flow Leverage Ratio of no greater than 6.00:1.00 as required under Section 10.3.2 of the Loan Agreement, resulting in Events of Default under Section 11.1(c) of the Loan Agreement (the “Existing Defaults”). Subject to the satisfaction of the conditions to effectiveness set forth in Article V below, the Agent and Lenders hereby waive the Existing Defaults. The foregoing waiver is a one-time waiver and applies only to the specified circumstance and

4 162363368_5 does not modify or otherwise affect the Borrowers’ obligations to comply with such provision of the Loan Agreement or any other provision of the Loan Documents in any other instance. For the avoidance of doubt, Agent and Lenders waive only the Existing Defaults that have occurred as of the Third Amendment Effective Date. The foregoing limited waiver shall not be deemed or otherwise construed to constitute a waiver of any other provision or to prejudice any right, power or remedy which the Agent may now have or may have in the future under or in connection with the Loan Agreement or any other Loan Document, all of which rights, powers and remedies are hereby expressly reserved by the Agent. By virtue of the waiver in the immediately preceding sentence, the Borrowers hereby affirm and agree that no other Event of Default has occurred as a result of the Existing Defaults. The agreements and consents set forth in this Article IV are limited to the extent specifically set forth above and no other terms, covenants or provisions of the Loan Documents are intended to be affected hereby. For the avoidance of doubt, the effectiveness of Article IV of this Amendment is subject to Article V of this Amendment. ARTICLE V CONDITIONS TO EFFECTIVENESS Section 5.01 Conditions Precedent to Effectiveness of Amendment. The obligation of the Agent and Lenders to enter into this Amendment is subject to the following conditions precedents: (a) This Amendment shall have been duly executed and delivered to Agent by each of the signatories thereto, and each Obligor shall be in compliance with all terms thereof. (b) Agent shall have received, all in form and substance satisfactory to Agent in its discretion, such other agreements, instruments, documents, certificates and opinions as Agent may reasonably request. ARTICLE VI ADDITIONAL COVENANTS AND MISCELLANEOUS Section 6.01 Acknowledgment by Obligors. Each Obligor hereby represents and warrants that the execution and delivery of this Amendment and compliance by each Obligor with all of the provisions of this Amendment: (a) are within the powers and purposes of each Obligor; (b) have been duly authorized or approved by the board of directors or managers of each Obligor; and (c) when executed and delivered by or on behalf of each Obligor, will constitute valid and binding obligations of each Obligor, enforceable in accordance with their terms. Each Obligor reaffirms its obligation to pay all amounts due to Agent and Lenders under the Loan Documents in accordance with the terms thereof, as modified hereby. Section 6.02 Release. (a) In consideration of the agreements of Agent and the Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Obligor, on behalf of itself and its successors, assigns, and other legal representatives (collectively, the “Releasors” and each, a “Releasee”), hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and each Lender, and their successors and assigns, and their respective present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (collectively, Agent, each Lender, and all such other Persons, the “Releasees”, and each, a “Releasee”), of and from all demands, actions, causes of action, suits, damages and any and all other claims, counterclaims, and rights of set off whatsoever (individually, a “Claim” and collectively, “Claims”) of every name and nature, known or that reasonably should be known, suspected or that reasonably should be suspected, both at law and in equity (and all defenses that may arise out of the foregoing), which such Obligor or any of its successors, assigns, or other legal representatives may now or

5 162363368_5 hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which has arisen at any time on or prior to the date of this Amendment for or on account of, or relating to the Loan Agreement or any of the other Loan Documents or transactions thereunder. (b) Each Obligor understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense in respect of the matter covered thereby and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release. (c) Each Obligor agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above. (d) Each Obligor, on behalf of itself and each Releasor, hereby absolutely, unconditionally, and irrevocably, covenants and agrees with and in favor of each Releasee that it will not sue (at law, in equity, in any regulatory proceeding, or otherwise) any Releasee on the basis of any Claim released, remised, and discharged by such Obligor pursuant to this Section 5.02. Each Borrower, for itself and each other Releasor, agrees and acknowledges that all applicable attorneys’ fees and costs incurred by any Releasee as a result of any violation of the foregoing covenant shall constitute Extraordinary Expenses under the Loan Agreement. Section 6.03 Effect of Amendment. The parties hereto agree and acknowledge that: (i) nothing contained in this Amendment in any manner or respect limits or terminates any of the provisions of the Loan Agreement or any of the other Loan Documents other than as expressly set forth herein and further agree and acknowledge that the Loan Agreement (as modified hereby) and each of the other Loan Documents remain and continue in full force and effect and are hereby ratified and confirmed; (ii) nothing contained in this Amendment in any manner or respect requires Agent or any Lender to refund, disgorge or otherwise return any cash payments of principal, interest, fees or other amounts made by any Obligor prior to the date hereof and (iii) other than as expressly set forth herein, the obligations under the Loan Agreement and the guarantees, pledges and grants of security interests created under or pursuant to the Loan Agreement and the other Loan Documents continue in full force and effect in accordance with their respective terms and the Collateral secures and shall continue to secure the Obligors’ obligations under the Loan Agreement as amended by this Amendment and any other obligations and liabilities provided for under the Loan Documents. Except to the extent expressly set forth herein, the execution, delivery and effectiveness of this Amendment shall not operate as a consent or waiver of any rights, power or remedy of the Lenders or Agent under the Loan Agreement or any other Loan Document, nor constitute a consent or waiver of any provision of the Loan Agreement or any other Loan Document. No delay on the part of any Lender or Agent in exercising any of their respective rights, remedies, powers and privileges under the Loan Agreement or any of the Loan Documents or partial or single exercise thereof, shall constitute a consent to or waiver thereof. None of the terms and conditions of this Amendment may be changed, consented to, waived, modified or varied in any manner, whatsoever, except in accordance with Section 14.1 of the Loan Agreement. Upon the effectiveness hereof, each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of like import shall mean and be a reference to the Loan Agreement as amended hereby. Section 6.04 Counterparts. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Delivery of the executed counterpart of this Amendment by telecopy or electronic mail (including electronically in “.pdf” format) shall be as effective as delivery of a manually executed counterpart to this Amendment.

6 162363368_5 Section 6.05 Severability. The illegality or unenforceability of any provision of this Amendment or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Amendment or any instrument or agreement required hereunder. Section 6.06 Captions. Section captions used in this Amendment are for convenience only, and shall not affect the construction of this Amendment. Section 6.07 Entire Agreement. This Amendment embodies the entire agreement and understanding among the parties hereto and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof. Section 6.08 References. Any reference to the Loan Agreement contained in any notice, request, certificate, or other document executed concurrently with or after the execution and delivery of this Amendment shall be deemed to include this Amendment unless the context shall otherwise require. Reference in any of this Amendment, the Loan Agreement or any other Loan Document to the Loan Agreement shall be a reference to the Loan Agreement as amended hereby and as may be further amended, modified, restated, supplemented or extended from time to time. Section 6.09 Governing Law. THIS AMENDMENT AND ALL CLAIMS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAW PRINCIPLES THAT WOULD REQUIRE THE APPLICATION OF LAWS OF ANOTHER JURISDICTION. Section 6.10 Electronic Signatures. This Amendment may be in the form of an Electronic Record and may be executed using Electronic Signatures (including, without limitation, facsimile and .pdf) and shall be considered an original, and shall have the same legal effect, validity and enforceability as a paper record. This Amendment may be executed in as many counterparts as necessary or convenient, including both paper and electronic counterparts, but all such counterparts are one and the same Amendment. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance by the Agent of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format), or an electronically signed Communication converted into another format, for transmission, delivery and/or retention. “Electronic Record” and “Electronic Signature” shall have the meanings assigned to them, respectively, by 15 USC §7006, as it may be amended from time to time. [Signature Pages Follow]

162363368_5 APPENDIX A Terms Applicable to Term SOFR Loans 1. Defined Terms. The following definitions are added to the Credit Agreement and, to the extent the terms are already defined in the Credit Agreement, the following supersede such existing terms: Base Rate: for any day, a per annum rate equal to the greater of (a) the Prime Rate for such day; (b) the Federal Funds Rate for such day, plus 0.50%; or (c) Term SOFR for a one month interest period as of such day, plus 1.00%; provided, that in no event shall the Base Rate be less than 0%. CME: CME Group Benchmark Administration Limited. Conforming Changes: with respect to use, administration of or conventions associated with SOFR, Term SOFR or any proposed Successor Rate, as applicable, any conforming changes to the definitions of Base Rate, SOFR, Term SOFR and Interest Period, timing and frequency of determining rates and making payments of interest and other technical, administrative or operational matters (including, for the avoidance of doubt, the definitions of Business Day or U.S. Government Securities Business Day, timing of borrowing requests or prepayment, conversion or continuation notices, and length of lookback periods) as may be appropriate, in Agent's discretion, to reflect the adoption and implementation of such applicable rate(s), and to permit the administration thereof by Agent in a manner substantially consistent with market practice (or, if Agent determines that adoption of any portion of such market practice is not administratively feasible or that no market practice for the administration of such rate exists, in such other manner of administration as Agent determines is reasonably necessary in connection with the administration of any Loan Document). Daily Simple SOFR: with respect to any applicable determination date, the secured overnight financing rate published on the FRBNY website (or any successor source satisfactory to Agent). FRBNY: the Federal Reserve Bank of New York. Notice of Borrowing: notice by Borrower Agent of a Borrowing, in form satisfactory to Agent. Notice of Conversion/Continuation: notice by Borrower Agent for conversion or continuation of a Loan as a Term SOFR Loan, in form satisfactory to Agent. Relevant Governmental Body: the Federal Reserve Board and/or FRBNY, or a committee officially endorsed or convened by the Federal Reserve Board and/or FRBNY. Scheduled Unavailability Date: as defined in Section (g) below. SOFR: the secured overnight financing rate as administered by FRBNY (or a successor administrator). SOFR Adjustment: (a) with respect to Daily Simple SOFR, 0.11448%; and (b) with respect to Term SOFR, 0.11448% for a one month Interest Period, 0.26161% for a three month Interest Period and 0.42826% for a six month Interest Period.

162363368_5 Successor Rate: as defined in Section (g) below. Term SOFR: (a) for any Interest Period relating to a Loan (other than a Base Rate Loan), a per annum rate equal to the Term SOFR Screen Rate two U.S. Government Securities Business Days prior to such Interest Period, with a term equivalent to such Interest Period (or if such rate is not published prior to 11:00 a.m. on the determination date, the applicable Term SOFR Screen Rate on the U.S. Government Securities Business Day immediately prior thereto), plus the SOFR Adjustment for such Interest Period; and (b) for any interest calculation relating to a Base Rate Loan on any day, a fluctuating rate of interest equal to the Term SOFR Screen Rate with a term of one month commencing that day; provided, that in no event shall Term SOFR be less than 0%. Term SOFR Loan: a Loan that bears interest based on clause (a) of the definition of Term SOFR. Term SOFR Screen Rate: the forward-looking SOFR term rate administered by CME (or any successor administrator satisfactory to Agent) and published on the applicable Reuters screen page (or such other commercially available source providing such quotations as may be designated by Agent from time to time). U.S. Government Securities Business Day: any Business Day, except any day on which the Securities Industry and Financial Markets Association, New York Stock Exchange or FRBNY is not open for business because the day is a legal holiday under New York law or U.S. federal law. 2. Terms Applicable to Term SOFR Loans. Commencing on the Third Amendment Effective Date, the following provisions shall apply to the Credit Agreement and other Loan Documents: (a) Unavailability of LIBOR Loans. Any request for a new LIBOR Loan shall be deemed to be a request for a new Loan bearing interest at Term SOFR; provided, that any LIBOR Loan outstanding on the Third Amendment Effective Date shall continue to bear interest at LIBOR until the end of its current Interest Period. (b) References to LIBOR Loans, Etc. in the Loan Documents. (i) References to LIBOR Loans, LIBOR, any eurocurrency loans or rate, or the administration or terms thereof, or other matters relating thereto in the Loan Documents that are not specifically addressed herein shall be deemed to be references to Term SOFR Loans and Term SOFR, as applicable. In addition, general references to Loans and interest rates, their administration or terms, and related matters shall be deemed to include Term SOFR Loans and Term SOFR, as applicable. (ii) Any requirement for Borrowers to compensate Lenders for losses in the Credit Agreement resulting from any continuation, conversion, payment or prepayment of any Loan on a day other than the last day of any Interest Period shall be deemed to include Term SOFR Loans. (c) Interest Rates. Agent does not warrant or accept responsibility, nor shall it have any liability with respect to, administration, submission or any other matter related to any reference rate referred to herein or in the Credit Agreement, nor with respect to any rate (including, for the avoidance of doubt, the selection of such rate and any related spread or other adjustment) that is an alternative, replacement or successor to such rate (including any Successor Rate), or any component thereof, or the effect of any of the foregoing, or of any Conforming Changes. The Agent and its

162363368_5 affiliates or other related entities may engage in transactions or other activities that affect any reference rate referred to herein, or any alternative, successor or replacement rate (including, without limitation, any Successor Rate) (or any component of any of the foregoing) or any related spread or other adjustments thereto, in each case, in a manner adverse to the Obligors. Agent may select information source(s) in its discretion to ascertain any reference rate referred to herein or any alternative, successor or replacement rate (including any Successor Rate), or any component thereof, in each case pursuant to the terms hereof, and shall have no liability to any Lender, Obligor or other Person for damages of any kind, including direct or indirect, special, punitive, incidental or consequential damages, costs, losses or expenses (whether in tort, contract or otherwise, and whether at law or in equity) for any error or other act or omission related to or affecting the selection, determination or calculation of any rate (or component thereof) provided by such information source or service. (d) Borrowings, Conversions, Continuations and Prepayments of Term SOFR Loans. In addition to any other borrowing or prepayment requirements set forth in the Credit Agreement: (i) Notice of Borrowing of Term SOFR Loans. For any Borrowing, conversion or continuation of a Term SOFR Loan, Borrower Agent shall deliver a Notice of Borrowing or Notice of Conversion/Continuation, as applicable, to Agent by 11:00 a.m. at least two Business Days prior to the requested funding date. Notices received by Agent after such time shall be deemed received on the next Business Day. Each such notice shall be irrevocable and must specify (A) the amount, (B) the requested funding date (which must be a Business Day), (C) whether such Borrowing, conversion or continuation is to be made as a Term SOFR Loan, and (D) the applicable Interest Period (which shall be deemed to be one month if not specified). (ii) Interest Periods. Borrowers shall select an interest period ("Interest Period") of one, three or six months (in each case, subject to availability) to apply to each Term SOFR Loan; provided, that (a) the Interest Period shall begin on the date the Loan is made or continued as, or converted into, a Term SOFR Loan and shall expire one, three or six months thereafter, as applicable; (b) if any Interest Period begins on the last day of a calendar month or on a day for which there is no numerically corresponding day in the calendar month at its end, or if such corresponding day falls after the last Business Day of the end month, then the Interest Period shall expire on the end month's last Business Day; and if any Interest Period would otherwise expire on a day that is not a Business Day, the period shall expire on the next Business Day; and (c) no Interest Period shall extend beyond the maturity date of the credit facility. (iii) Voluntary Prepayment of Term SOFR Loans. Term SOFR Loans may be prepaid from time to time, without penalty or premium, pursuant to a notice of prepayment to Agent, delivered at least three Business Days prior to prepayment of the Loan; provided, that no such notice shall be required for payments effected through sweeps from the Dominion Account. (iv) Conforming Changes. Agent may make Conforming Changes from time to time with respect to SOFR, Term SOFR or any Successor Rate. Notwithstanding anything to the contrary in any Loan Document, any amendment implementing such changes shall be effective without further action or consent of any other party to any Loan Document. Agent shall post each amendment to Borrower Agent and Lenders promptly after it becomes effective.

162363368_5 (v) Deemed Term SOFR Loans. Notwithstanding the above, unless otherwise requested in a Notice of Borrowing or Notice of Conversion/Continuation, any request for a Borrowing shall be a request to fund a Term SOFR Loan with an Interest Period of one month and the termination of any Interest Period shall be deemed a request by Borrower of the continuation of such Borrowing as a Term SOFR Loan with an Interest period of one month. (e) Interest. Subject to the provisions of the Credit Agreement with respect to default interest, each Term SOFR Loan shall bear interest at Term SOFR for the applicable Interest Period, plus the Applicable Margin. Interest on each Term SOFR Loan shall be due and payable in arrears on each Interest Payment Date and at such other times and in such manner as specified in the Credit Agreement. (f) Computations. Computations of interest for Base Rate Loans (including Base Rate Loans determined by reference to Term SOFR) shall be computed for actual days elapsed, based on a year of 365 or 366 days, as applicable. All other interest, as well as fees and other charges calculated on a per annum basis, shall be computed for actual days elapsed, based on a year of 360 days. Each determination by Agent of an interest rate or fee shall be conclusive and binding for all purposes, absent manifest error. (g) Inability to Determine Rates; Successor Rates. (i) Inability to Determine Rate. If in connection with any request for a Term SOFR Loan or a conversion to or continuation thereof, as applicable, (A) Agent determines (which determination shall be conclusive absent manifest error) that (I) no Successor Rate has been determined in accordance with Section 2(g)(ii), and the circumstances under Section 2(g)(ii)(A) or the Scheduled Unavailability Date has occurred (as applicable), or (II) adequate and reasonable means do not otherwise exist for determining Term SOFR for any requested Interest Period with respect to a proposed Term SOFR Loan or in connection with an existing or proposed Base Rate Loan, or (B) Agent or Required Lenders determine that for any reason Term SOFR for any requested Interest Period with respect to a proposed Term SOFR Loan does not adequately and fairly reflect the cost to such Lenders of funding such Loan, Agent will promptly so notify Borrowers and Lenders. Thereafter, (1) the obligation of Lenders to make, maintain or convert Base Rate Loans to Term SOFR Loans shall be suspended (to the extent of the affected Term SOFR Loans or Interest Periods), and (2) in the event of a determination described in the preceding sentence with respect to the Term SOFR component of Base Rate, the utilization of such component in determining Base Rate shall be suspended, in each case until Agent (or, in the case of a determination by Required Lenders described above, until Agent upon instruction of Required Lenders) revokes such notice. Upon receipt of such notice, (x) Borrowers may revoke any pending request for a Borrowing, conversion or continuation of Term SOFR Loans (to the extent of the affected Term SOFR Loans or Interest Periods) or, failing that, will be deemed to have converted such request into a request for Base Rate Loans, and (y) any outstanding Term SOFR Loans shall convert to Base Rate Loans at the end of their respective Interest Periods. (ii) Successor Rates. Notwithstanding anything to the contrary in any Loan Document, if Agent determines (which determination shall be conclusive absent manifest error), or Borrower Agent or Required Lenders notify Agent (with, in the case of the Required Lenders, a copy to Borrower Agent) that Borrowers or Required Lenders (as applicable) have determined, that:

162363368_5 (A) adequate and reasonable means do not exist for ascertaining one, three and six month interest periods of Term SOFR, including because the Term SOFR Screen Rate is not available or published on a current basis, and such circumstances are unlikely to be temporary; or (B) CME or any successor administrator of the Term SOFR Screen Rate or a Governmental Authority having jurisdiction over Agent, CME or such administrator with respect to its publication of Term SOFR, in each case acting in such capacity, has made a public statement identifying a specific date after which one, three and six month interest periods of Term SOFR or the Term SOFR Screen Rate shall or will no longer be made available, or permitted to be used for determining the interest rate of U.S. dollar denominated syndicated loans, or shall or will otherwise cease, provided, that at the time of such statement, there is no successor administrator satisfactory to Agent that will continue to provide such interest periods of Term SOFR after such specific date (the latest date on which one, three and six month interest periods of Term SOFR or the Term SOFR Screen Rate are no longer available permanently or indefinitely, "Scheduled Unavailability Date"); then, on a date and time determined by Agent (any such date, "Term SOFR Replacement Date"), which date shall be at the end of an Interest Period or on the relevant interest payment date, as applicable, for interest calculated and, solely with respect to clause (b) above, no later than the Scheduled Unavailability Date, Term SOFR will be replaced hereunder and under any other applicable Loan Document with Daily Simple SOFR plus the SOFR Adjustment for any payment period for interest calculated that can be determined by Agent, in each case, without any amendment to, or further action or consent of any other party to any Loan Document ("Successor Rate"). If the Successor Rate is Daily Simple SOFR plus the SOFR Adjustment, all interest will be payable on a monthly basis. Notwithstanding anything to the contrary herein, (1) if Agent determines that neither of the alternatives in clauses (I) and (II) above is available on or prior to the Term SOFR Replacement Date or (2) if the events or circumstances of the type described in Section (g)(ii)(A) or (B) above have occurred with respect to the Successor Rate then in effect, then in each case, Agent and Borrower Agent may amend the Credit Agreement solely for the purpose of replacing Term SOFR or any then current Successor Rate in accordance with this Section at the end of any Interest Period, relevant interest payment date or payment period for interest calculated, as applicable, with an alternative benchmark rate giving due consideration to any evolving or then existing convention for similar U.S. dollar denominated syndicated credit facilities for such alternative benchmarks and, in each case, including any mathematical or other adjustments to such benchmark giving due consideration to any evolving or then existing convention for similar U.S. dollar denominated syndicated credit facilities for such benchmarks, which adjustment or method for calculating such adjustment shall be published on an information service selected by Agent from time to time in its discretion and may be periodically updated. For the avoidance of doubt, any such proposed rate and adjustments shall constitute a Successor Rate. Any such amendment shall become effective at 5:00 p.m. on the fifth Business Day after Agent posts such proposed amendment to all Lenders and Borrowers unless, prior to such time, Required Lenders deliver to Agent written notice that Required Lenders object to the amendment.

162363368_5 Agent will promptly (in one or more notices) notify Borrowers and Lenders of implementation of any Successor Rate. A Successor Rate shall be applied in a manner consistent with market practice; provided, that to the extent market practice is not administratively feasible for Agent, the Successor Rate shall be applied in a manner as otherwise reasonably determined by Agent. Notwithstanding anything else herein, if at any time any Successor Rate as so determined would otherwise be less than 0%, the Successor Rate will be deemed to be 0% for all purposes of the Loan Documents.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Craig D. Gates, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Key Tronic Corporation;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting

Dated:	November 9, 2022
		/s/ Craig D. Gates
		Craig D. Gates
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Brett R. Larsen, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Key Tronic Corporation;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting

Dated:	November 9, 2022
		/s/ Brett R. Larsen
		Brett R. Larsen
		Executive Vice President of Administration, Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Key Tronic Corporation (the “Company”) on Form 10-Q for the period ended October 1, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Craig D. Gates, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

1.The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2.The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	November 9, 2022
		/s/ Craig D. Gates
		Craig D. Gates
		President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Key Tronic Corporation (the “Company”) on Form 10-Q for the period ended October 1, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Brett R. Larsen, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

1.The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2.The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	November 9, 2022
		/s/ Brett R. Larsen
		Brett R. Larsen
		Executive Vice President of Administration, Chief Financial Officer and Treasurer

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COVER PAGE - shares	3 Months Ended
	Oct. 01, 2022	Nov. 07, 2022
Cover [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Oct. 01, 2022
Document Transition Report	false
Entity File Number	0-11559
Entity Registrant Name	KEY TRONIC CORPORATION
Entity Incorporation, State or Country Code	WA
Entity Tax Identification Number	91-0849125
Entity Address, Address Line One	N. 4424 Sullivan Road
Entity Address, City or Town	Spokane Valley
Entity Address, State or Province	WA
Entity Address, Postal Zip Code	99216
City Area Code	509
Local Phone Number	928-8000
Title of 12(b) Security	Common Stock, no par value
Trading Symbol	KTCC
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		10,761,871
Amendment Flag	false
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q1
Entity Central Index Key	0000719733
Current Fiscal Year End Date	--06-29

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Oct. 01, 2022	Jul. 02, 2022
Current assets:
Cash and cash equivalents	$ 2,133	$ 1,707
Trade receivables, net of allowance for doubtful accounts of $29 and $12	139,010	135,876
Contract assets	26,358	21,974
Inventories	169,285	155,741
Other	22,803	24,710
Total current assets	359,589	340,008
Property, plant and equipment, net	26,977	26,012
Operating lease right-of-use assets, net	19,497	16,731
Other assets:
Deferred income tax asset	10,770	10,055
Other	13,131	14,117
Total other assets	23,901	24,172
Total assets	429,964	406,923
Current liabilities:
Accounts payable	134,126	121,393
Accrued compensation and vacation	9,065	11,836
Current portion of debt, net	6,642	7,402
Other	23,950	23,036
Total current liabilities	173,783	163,667
Long-term liabilities:
Term loans	5,173	5,716
Revolving loan	104,968	94,577
Operating lease liabilities	14,128	12,023
Deferred income tax liability	21	64
Other long-term obligations	5,668	5,998
Total long-term liabilities	129,958	118,378
Total liabilities	303,741	282,045
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	47,514	47,474
Retained earnings	78,981	77,829
Accumulated other comprehensive (loss)	(272)	(425)
Total shareholders’ equity	126,223	124,878
Total liabilities and shareholders’ equity	$ 429,964	$ 406,923

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Oct. 01, 2022	Jul. 02, 2022
Statement of Financial Position [Abstract]
Trade receivables, allowance for doubtful accounts	$ 29	$ 12
Common stock, shares authorized (in shares)	25,000	25,000
Common stock, shares issued (in shares)	10,762	10,762
Common stock, shares outstanding (in shares)	10,762	10,762

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CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2022	Oct. 02, 2021
Income Statement [Abstract]
Net sales	$ 137,263	$ 132,762
Cost of sales	126,884	122,624
Gross profit	10,379	10,138
Research, development and engineering expenses	2,296	2,449
Selling, general and administrative expenses	5,656	5,595
Gain on insurance proceeds, net of losses	(934)	0
Total operating expenses	7,018	8,044
Operating income	3,361	2,094
Interest expense, net	1,887	992
Income before income taxes	1,474	1,102
Income tax provision	322	287
Net income	$ 1,152	$ 815
Net income per share - Basic (in USD per share)	$ 0.11	$ 0.08
Weighted average shares outstanding — Basic (in shares)	10,762,000	10,762,000
Net income per share - Diluted (in USD per share)	$ 0.11	$ 0.07
Weighted average shares outstanding — Diluted (in shares)	10,832,000	11,052,000

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2022	Oct. 02, 2021
Comprehensive income:
Net income	$ 1,152	$ 815
Other comprehensive income (loss):
Unrealized gain (loss) on hedging instruments, net of tax	153	(1,531)
Comprehensive income	$ 1,305	$ (716)

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) $ in Millions	3 Months Ended
	Oct. 02, 2021 USD ($)
Statement of Comprehensive Income [Abstract]
Net of tax expense (benefit)	$ (0.3)

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2022	Oct. 02, 2021
Operating activities:
Net income	$ 1,152	$ 815
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization	2,385	1,335
Amortization of interest rate swap	153	75
Amortization of deferred loan costs	37	32
Provision for warranty	152	75
Provision for doubtful accounts	14	26
Gain on disposal of assets	(123)	0
Gain on insurance proceeds, net of losses	(934)	0
Share-based compensation expense	40	68
Deferred income taxes	(344)	(220)
Changes in operating assets and liabilities:
Trade receivables	(1,776)	(16,155)
Contract assets	(4,384)	1,130
Inventories	(13,544)	(5,802)
Other assets	3,601	(7,092)
Accounts payable	12,732	18,835
Accrued compensation and vacation	(2,771)	(2,995)
Other liabilities	(2,227)	(4,753)
Cash used in operating activities	(5,837)	(14,626)
Investing activities:
Purchase of property and equipment	(2,526)	(1,791)
Cash used in investing activities	(2,526)	(1,791)
Financing activities:
Payment of financing costs	0	(80)
Proceeds from issuance of long term debt	0	5,055
Repayments of long term debt	(543)	(532)
Borrowings on revolver, net	10,354	10,446
Principal payments on finance leases	(1,022)	(401)
Cash provided by financing activities	8,789	14,488
Net increase (decrease) in cash and cash equivalents	426	(1,929)
Cash and cash equivalents, beginning of period	1,707	3,473
Cash and cash equivalents, end of period	2,133	1,544
Supplemental cash flow information:
Interest payments	1,894	999
Income tax payments, net of refunds	414	210
Recognition of operating lease liabilities and right-of-use assets	4,613	4,695
Recognition of financing lease liabilities and right-of-use assets	$ 0	$ 4,456

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CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income (Loss)
Beginning balances at Jul. 03, 2021	$ 123,705	$ 47,181	$ 74,452	$ 2,072
Beginning balances (in shares) at Jul. 03, 2021		10,762
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Exercise of stock appreciation rights (in shares)		0
Share-based compensation expense	(68)	$ 68
Exercise of stock options		0
Net income	815		815
Unrealized gain (loss) on hedging instruments, net of tax	(1,531)			(1,531)
Ending balances at Oct. 02, 2021	123,057	$ 47,249	75,267	541
Ending balances (in shares) at Oct. 02, 2021		10,762
Beginning balances at Jul. 02, 2022	124,878	$ 47,474	77,829	(425)
Beginning balances (in shares) at Jul. 02, 2022		10,762
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Exercise of stock appreciation rights (in shares)		0
Share-based compensation expense	(40)	$ 40
Exercise of stock options		0
Net income	1,152		1,152
Unrealized gain (loss) on hedging instruments, net of tax	153			153
Ending balances at Oct. 01, 2022	$ 126,223	$ 47,514	$ 78,981	$ (272)
Ending balances (in shares) at Oct. 01, 2022		10,762

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Basis of Presentation

3 Months Ended

Oct. 01, 2022

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

Basis of Presentation

The consolidated financial statements included herein have been prepared by Key Tronic Corporation and subsidiaries (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The year-end condensed consolidated balance sheet information was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The financial statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2022.

The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The three month periods ended October 1, 2022 and October 2, 2021, were both 13 week periods. Fiscal year 2023 will end on July 1, 2023, which is a 52 week year. Fiscal year 2022 which ended on July 2, 2022, was also a 52 week year.

Certain Significant Risks and Uncertainties Related to Outbreak of Coronavirus Disease 2019 (“COVID-19”)

Due to the COVID-19 pandemic, the Company has seen extreme shifts in demand from its customer base, and shifts in supply chain and logistics risks. The possibility of future temporary closures, as well as adverse fluctuations in customer demand, freight and expedite costs, precautionary safety expenses and labor shortages, collectability of accounts, and future supply chain disruptions during the rapidly changing COVID-19 environment can materially impact operating results. Additionally, continued adverse macroeconomic conditions and significant currency exchange fluctuations can also materially impact operating results.

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Significant Accounting Policies

3 Months Ended

Oct. 01, 2022

Accounting Policies [Abstract]

Significant Accounting Policies

Significant Accounting Policies

Reclassifications

Certain prior period reclassifications were made to conform with the current period presentation. These reclassifications had no effect on reported income, comprehensive income, cash flows, total assets, or shareholders' equity as previously reported.

Earnings Per Common Share

Basic earnings per common share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) 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 equity awards were used to repurchase common shares at the average market price during the period. The computation of diluted EPS does not assume conversion, exercise, or contingent issuance of common stock equivalent shares that would have an anti-dilutive effect on EPS.

Derivative Instruments and Hedging Activities

The Company has entered into foreign currency forward contracts that are accounted for as cash flow hedges. 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.

The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities. The foreign currency forward contracts have terms that are matched to the underlying transactions being hedged. As a result, these transactions fully offset the hedged risk and no ineffectiveness has been recorded.

The Company’s foreign currency forward contracts potentially expose the Company to credit risk to the extent the counterparty may be unable to meet the terms of the agreement. The Company minimizes such risk by utilizing a counterparty with a strong credit rating. The Company’s counterparty to the foreign currency forward contracts is a major banking institution. This institution does not require collateral for the contracts, and the Company believes that the risk of the counterparty failing to meet their contractual obligations is remote. The Company does not enter into derivative instruments for trading or speculative purposes.

Income Taxes

We compute our interim income tax provision through the use of an estimated annual effective tax rate (ETR) applied to year-to-date operating results and specific events that are discretely recognized as they occur. In determining the estimated annual ETR, we analyze various factors, including projections of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual ETR.

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 and net operating loss 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 expense. The tax years 2001 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject. Refer to Note 5 for further discussions.

Recently Issued Accounting Standards

In January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2021-01, Reference Rate Reform (Topic 848) to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The Company is currently assessing the effects on its consolidated financial statements, and if it will elect this optional standard.

In March of 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which clarifies specific issues raised by stakeholders. Specifically, the ASU clarifies the following: 1) that all entities are required to provide the fair value option disclosures in ASC 825, Financial Instruments 2) clarifies that the portfolio exception in ASC 820, Fair Value Measurement, applies to nonfinancial items accounted for as derivatives under ASC 815, Derivatives and Hedging; 3) clarifies that for purposes of measuring expected credit losses on a net investment in a lease in accordance with ASC 326, Financial Instruments - Credit Losses, the lease term determined in accordance with ASC 842, Leases, should be used as the contractual term; 4) clarifies that when an entity regains control of financial assets sold, it should recognize an allowance for credit losses in accordance with ASC 326; and 5) aligns the disclosure requirements for debt securities in ASC 320, Investments - Debt Securities, with the corresponding requirements for depository and lending institutions in ASC 942, Financial Services - Depository and Lending. The amendments in the ASU have various effective dates and transition requirements which are dependent on timing of adoption of ASU 2016-13. The Company is currently assessing the effects on its consolidated financial statements, and it intends to adopt the guidance as they become effective.

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance is effective for the Company beginning in the first quarter of fiscal year 2024 with early adoption permitted. The Company is currently assessing the impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2024.

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Inventories	3 Months Ended
	Oct. 01, 2022
Inventory Disclosure [Abstract]
Inventories	InventoriesInventories as of October 1, 2022 are $169.3 million compared to $155.7 million as of July 2, 2022. Substantially all of the Company’s inventory balances are raw materials.

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Long-Term Debt

3 Months Ended

Oct. 01, 2022

Debt Disclosure [Abstract]

Long-Term Debt

Long-Term Debt

On September 3, 2021, the Company entered into an amendment to the Company’s current loan agreement with Bank of America. The amendment increases the Company’s current credit facility of $93 million to $120 million, subject to the Company’s borrowing base, maturing on September 3, 2026. As of October 1, 2022, the Company had an outstanding balance under the asset-based revolving credit facility of $105.4 million, $0.3 million in outstanding letters of credit and $10.6 million available for future borrowings.

On August 26, 2022, the company entered into a third amendment to the loan agreement with Bank of America. The amendment removed the cash flow leverage ratio covenant and increased the interest rate by 25 basis points.

As of July 2, 2022, the Company had an outstanding balance under the credit facility with Bank of America of $95.1 million, $0.3 million in outstanding letters of credit and $10.8 million available for future borrowings.

Generally, the interest rate applicable to loans under the Bank of America loan agreement will be, at the Company’s option: (i)(A) the base rate which is the highest of (1) the prime rate for the applicable day (as such rate is determined from time to time by the Bank), (2) the federal funds rate for the applicable day plus 0.50%, and (3) LIBOR for a 30-day interest period as of the applicable day plus 1.00% (provided that in no event shall the base rate be less than zero), plus the applicable interest margin for base rate loans; and (B) LIBOR rate for an applicable interest period (provided that in no event shall the LIBOR rate be less than 0.50%), plus the applicable interest margin for LIBOR rate loans. Depending on average daily excess borrowing availability over applicable periods under the Credit Facility, applicable interest margins on: (x) base rate loans will be 1.25-1.75%; and (y) LIBOR rate loans will be 2.25-2.75%, resetting on a quarterly basis beginning in early 2021. If there is an event of default under the loan agreement, all loans and other obligations will bear interest at a rate of an additional 2.00% on the otherwise applicable interest rates. In addition to interest charges, the Company is required to pay a fee of 0.25% per annum on the unused portion of the Credit Facility, monthly in arrears.

Under the new loan agreement with Bank of America, the asset-based revolving credit facility bears interest at LIBOR plus 2.5%, as elected by the Company.

On August 14, 2020, the Company also entered into a $5.0 million equipment financing facility relating to the Company’s existing U.S. manufacturing equipment that bears interest at 4.85% and matures on August 14, 2025. Under this loan agreement, equal monthly payments of approximately $94,000 commenced on September 14, 2020 and will continue through the maturity of the equipment financing facility on August 14, 2025. As of October 1, 2022, the Company had an outstanding balance of $3.1 million. As of July 2, 2022, the Company had an outstanding balance of $3.3 million under the Bank of America equipment term loan agreement.

On November 24, 2020, the Company entered into a $6.0 million equipment financing facility related to the Company’s existing manufacturing equipment that bears interest at 5.52% and matures on April 24, 2026. Under this loan agreement, equal monthly payments of $100,000 commenced on May 24, 2021 and will continue through the maturity of the equipment financing facility on April 24, 2026. As of October 1, 2022, the Company had an outstanding balance of $4.3 million. As of July 2, 2022, the Company had an outstanding balance of $4.6 million.

The interest rates on outstanding debt as of October 1, 2022 range from 4.85% - 6.15% compared to 3.25% - 5.52% as of July 2, 2022.

Debt maturities as of October 1, 2022 for the next five years and thereafter are as follows (in thousands):

Fiscal Years Ending	Amount
2023 (1)	$	1,647
2024	2,239
2025	2,290
2026	1,187
2027	105,430
Thereafter	—
Total debt	$	112,793
Unamortized debt issuance costs	(462)
Long-term debt, net of debt issuance costs	$	112,331

    (1) Represents scheduled payments for the remaining nine-month period ending July 1, 2023.

The Company must comply with certain financial covenants, including a fixed charge coverage ratio. The Company was in compliance with all financial covenants as of October 1, 2022.

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Income Taxes

3 Months Ended

Oct. 01, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company currently expects to repatriate approximately $8.6 million of foreign earnings in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations.

Repatriations of cash will generally be tax-free in the U.S. However, withholding taxes in China may still apply to any such future repatriations. Management has not changed its indefinite investment assertions with regard to the portion of accumulated earnings and profits in China that may be repatriated in the future. Accordingly, management estimates that future repatriations of cash from China may result in approximately $0.8 million of withholding tax. We do not anticipate there would be any offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations. Withholding taxes would not apply to future repatriations from Mexico or Vietnam.

The Company has available approximately $10.6 million of gross federal research and development tax credits as of October 1, 2022. ASC 740 requires the Company to recognize in its financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. Accordingly, as of October 1, 2022, the Company has recorded $3.1 million of unrecognized tax benefits associated with these federal tax credits, resulting in a net deferred tax benefit of approximately $7.5 million.

The Company evaluated tax law changes and regulatory guidance issued through the prior fiscal year. Such changes and regulations include guidance under Sec. 162(m), Sec. 245A, Sec. 951A, foreign tax credits, and rules relating to consolidated NOL carryback claims. The Company evaluated the ongoing impact of these law and regulatory changes, which did not have a material impact on its provision for income taxes. On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. The Inflation Reduction Act of 2022 includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks, among other provisions. The Company is evaluating the impacts of this act, and at this time the Company does not believe they will have a material impact on our consolidated financial position, results of operations, or cash flows.

On January 27, 2021, the Company received official notice from the Vietnamese tax authorities, confirming tax benefits awarded (the “Tax Holiday”) related to the Company’s principal product line in Vietnam. The tax rate related to 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 each year). Consequently, Management determined that the net operating loss in Vietnam more likely than not would result in minimal, if any, tax benefit, and the Company recorded a valuation allowance against the entire Vietnam net operating loss deferred tax asset ($0.2 million) in the third quarter of fiscal year 2021.

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Earnings Per Share

3 Months Ended

Oct. 01, 2022

Earnings Per Share [Abstract]

Earnings Per Share

Earnings Per Share

The following table presents a reconciliation of the denominator in the basic and diluted EPS calculation 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.

	Three Months Ended
	(in thousands, except share and per share information)
	October 1, 2022		October 2, 2021
Net income	$	1,152	$	815
Weighted average shares outstanding—basic	10,762		10,762
Effect of dilutive common stock awards	70		290
Weighted average shares outstanding—diluted	10,832		11,052
Net income per share—basic	$	0.11	$	0.08
Net income per share—diluted	$	0.11	$	0.07
Antidilutive SARs not included in diluted earnings per share	904		629

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Share-based Compensation

3 Months Ended

Oct. 01, 2022

Share-Based Payment Arrangement [Abstract]

Share-based Compensation

Share-based Compensation

The Company’s incentive plan provides for equity and liability awards to employees and non-employee directors in the form of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based or cash-based awards. Compensation cost is recognized on a straight-line basis over the requisite employee service period, which is generally the vesting period, and is recorded as employee compensation expense in cost of goods sold, research, development and engineering, and selling, general and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on historical experience and future expectations.

In addition to service conditions, 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. The SARs cliff vest after a three-year period from date of grant and expire five years from date of grant.

The grant date fair value for the awards granted below were estimated using the Black Scholes option valuation method:

	July 29, 2022		August 9, 2021
SARs Granted	145,000		165,000
Strike Price	$	5.10	$	7.17
Fair Value	$	2.09	$	2.73

Total share-based compensation expense recognized during the three months ended October 1, 2022 and October 2, 2021 was approximately $40,000 and $68,000, respectively.

As of October 1, 2022, total unrecognized compensation expense related to unvested share-based compensation arrangements was approximately $0.6 million. This expense is expected to be recognized over a weighted average period of 2.16 years. No SARs were exercised during the three months ended October 1, 2022 or October 2, 2021.

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Commitments and Contingencies

3 Months Ended

Oct. 01, 2022

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

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 periods. The Company’s warranty reserve was approximately $30,000 as of October 1, 2022 and $31,000 as of July 2, 2022, respectively.

Gain from Insurance Recoveries, Net of Losses

Gain from insurance recoveries, net of losses, relate to losses incurred from storm damage to the Company’s Arkansas facility on July 29, 2022, as the result of a lightning strike. During the three months ended October 1, 2022, the Company recorded a gain from insurance recoveries, net of losses, of $0.9 million due to the storm event. The gain is net of a $0.4 million loss on the disposal of fixed assets, which were damaged in the event.

Subsequent to the end of the first quarter of fiscal year 2023, the Company received initial insurance proceeds of $1 million to repair the plant and replace equipment, which should be completed by the second half of fiscal year 2023. These initial coverage amounts, net of equipment book value loss, are included in reported gain on insurance claims during the quarter.

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Derivative Financial Instruments

3 Months Ended

Oct. 01, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

As of October 1, 2022, the Company did not have any outstanding foreign currency forward contracts. For the three months ended October 1, 2022, the Company did not enter into or settle any foreign currency forward contracts. During the same period of the previous year, the Company entered into $13.9 million foreign currency forward contracts and settled $5.5 million of contracts.

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of September 30, 2022, related to the borrowings outstanding under the term loan with Wells Fargo Bank. This interest rate swap contract was terminated on August 14, 2020 when the Company entered into a loan and security agreement with Bank of America. On the date of termination this interest rate swap was in a liability position of $148,400, which will be amortized to interest expense over the original term of the swap.

On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of November 1, 2023, related to the borrowings outstanding under the line of credit with Wells Fargo Bank. This interest rate swap contract was terminated on August 14, 2020 when the Company entered into a loan and security agreement with Bank of America. On the date of termination this interest rate swap was in a liability position of $776,500, which will be amortized to interest expense over the original term of the swap.

The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the three months ended October 1, 2022 and October 2, 2021, respectively (in thousands):

Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of July 2, 2022		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of October 1, 2022
Forward contracts	Cost of sales	$	(79)	$	—	$	79	$	—
Interest rate swap	Interest expense	(346)		—		74		(272)
Total		$	(425)	$	—	$	153	$	(272)
Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of July 3, 2021		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of October 2, 2021
Forward contracts	Cost of sales	$	2,721	$	224	$	(1,830)	$	1,115
Interest rate swap	Interest expense	(649)		—		75		(574)
Total		$	2,072	$	224	$	(1,755)	$	541

As of October 1, 2022, the Company does not have any foreign exchange contracts with credit-risk-related contingent features. The Company is subject to the risk of fluctuating interest rates from our line of credit and foreign currency risk resulting from our China operations. The Company does not currently manage these risk exposures by using derivative instruments.

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Revenue

3 Months Ended

Oct. 01, 2022

Revenue from Contract with Customer [Abstract]

Revenue

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 outline the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the

Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates.

The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as the services are performed.

The Company’s 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 the first three months of fiscal year 2023, 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 three months ended October 1, 2022 (in thousands):

	Contract Assets
Beginning balance, July 2, 2022	$	21,974
Revenue recognized	134,557
Amounts collected or invoiced	(130,173)
Ending balance, October 1, 2022	$	26,358

Disaggregation of Revenue

The following table presents the Company’s revenue disaggregated for the three months ended October 1, 2022 and October 2, 2021 (in thousands):

	Revenue
Recognition	Three Months Ended
	October 1, 2022		October 2, 2021
Over-Time	$	134,558	$	129,481
Point-in-Time	2,705		3,281
Total	$	137,263	$	132,762

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Leases

3 Months Ended

Oct. 01, 2022

Leases [Abstract]

Leases

Leases

The Company has several commitments under operating and financing leases for warehouses, manufacturing facilities, office buildings, and equipment with initial terms that expire at various dates during the next 1 year to 10 years.

The Company has some leases that include an extension clause. Management has considered the likelihood of exercising each extension option included and estimated the duration of the extension option, for those leases management determined to be reasonably certain, in calculating the lease term for measurement of the right of use asset and liability.

For operating leases, management assumed a discount rate of 4%. The weighted average discount rate is disclosed in the tables below.

The components of lease cost for the three months ended October 1, 2022 and October 2, 2021 were (in thousands): 

Lease cost	Classification	October 1, 2022		October 2, 2021
Operating lease cost	Cost of sales	$	1,334	$	1,433
Operating lease cost	Selling, general and administrative expenses	$	184	$	308
Financing lease cost	Cost of sales	$	900	$	434
Financing lease cost	Selling, general and administrative expenses	$	38	$	10
Total lease cost		$	2,456	$	2,185
Fixed lease cost		$	2,221	$	1,777
Short-term lease cost		$	235	$	408
Total lease cost		$	2,456	$	2,185

Amounts reported in the Consolidated Balance Sheet as of October 1, 2022 were (in thousands, except weighted average lease term and discount rate):

	October 1, 2022
Operating Leases:
Operating lease right of use assets	$	19,497
Operating lease liabilities (1)	$	19,497
Weighted-average remaining lease term (in years)
Operating leases	5.08
Weighted-average discount rate
Operating leases	4.0		%
Financing Leases (2):
Financing lease right of use assets	$	11,373
Financing lease liabilities	$	10,120
Weighted-average remaining lease term (in years)
Financing leases	2.31
Weighted-average discount rate
Financing leases	8.8		%

(1) The current portion of the total operating lease liabilities of $5.4 million is classified under Other Current Liabilities, resulting in $14.1 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 $11.4 million is classified under Other Long-term Assets. The current portion of the total finance lease liabilities of $4.4 million is classified under Current portion of debt, net, resulting in $5.7 million classified in Other Long-term Liabilities section of the condensed consolidated balance sheet.

Other information related to leases was as follows (in thousands):

	Three Months Ended
	October 1, 2022		October 2, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,847	$	1,446
Financing cash flows used in financing leases	$	1,022	$	401

Future lease payments under non-cancellable leases as of October 1, 2022 are as follows (in thousands):

Fiscal Years Ending	Operating Leases		Finance Leases
2023 (1)	$	4,125	$	3,910
2024	4,826		3,960
2025	3,987		2,539
2026	3,365		107
2027	2,464		71
Thereafter	3,240		—
Total undiscounted lease payments	22,007		10,587
Less: present value discount	(2,510)		(467)
Total lease liabilities	$	19,497	$	10,120

(1) Represents estimated lease payments for the remaining nine-month period ending July 1, 2023.

Leases

Leases

The Company has several commitments under operating and financing leases for warehouses, manufacturing facilities, office buildings, and equipment with initial terms that expire at various dates during the next 1 year to 10 years.

The Company has some leases that include an extension clause. Management has considered the likelihood of exercising each extension option included and estimated the duration of the extension option, for those leases management determined to be reasonably certain, in calculating the lease term for measurement of the right of use asset and liability.

For operating leases, management assumed a discount rate of 4%. The weighted average discount rate is disclosed in the tables below.

The components of lease cost for the three months ended October 1, 2022 and October 2, 2021 were (in thousands): 

Lease cost	Classification	October 1, 2022		October 2, 2021
Operating lease cost	Cost of sales	$	1,334	$	1,433
Operating lease cost	Selling, general and administrative expenses	$	184	$	308
Financing lease cost	Cost of sales	$	900	$	434
Financing lease cost	Selling, general and administrative expenses	$	38	$	10
Total lease cost		$	2,456	$	2,185
Fixed lease cost		$	2,221	$	1,777
Short-term lease cost		$	235	$	408
Total lease cost		$	2,456	$	2,185

Amounts reported in the Consolidated Balance Sheet as of October 1, 2022 were (in thousands, except weighted average lease term and discount rate):

	October 1, 2022
Operating Leases:
Operating lease right of use assets	$	19,497
Operating lease liabilities (1)	$	19,497
Weighted-average remaining lease term (in years)
Operating leases	5.08
Weighted-average discount rate
Operating leases	4.0		%
Financing Leases (2):
Financing lease right of use assets	$	11,373
Financing lease liabilities	$	10,120
Weighted-average remaining lease term (in years)
Financing leases	2.31
Weighted-average discount rate
Financing leases	8.8		%

(1) The current portion of the total operating lease liabilities of $5.4 million is classified under Other Current Liabilities, resulting in $14.1 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 $11.4 million is classified under Other Long-term Assets. The current portion of the total finance lease liabilities of $4.4 million is classified under Current portion of debt, net, resulting in $5.7 million classified in Other Long-term Liabilities section of the condensed consolidated balance sheet.

Other information related to leases was as follows (in thousands):

	Three Months Ended
	October 1, 2022		October 2, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,847	$	1,446
Financing cash flows used in financing leases	$	1,022	$	401

Future lease payments under non-cancellable leases as of October 1, 2022 are as follows (in thousands):

Fiscal Years Ending	Operating Leases		Finance Leases
2023 (1)	$	4,125	$	3,910
2024	4,826		3,960
2025	3,987		2,539
2026	3,365		107
2027	2,464		71
Thereafter	3,240		—
Total undiscounted lease payments	22,007		10,587
Less: present value discount	(2,510)		(467)
Total lease liabilities	$	19,497	$	10,120

(1) Represents estimated lease payments for the remaining nine-month period ending July 1, 2023.

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Significant Accounting Policies (Policies)

3 Months Ended

Oct. 01, 2022

Accounting Policies [Abstract]

Fiscal Year

The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The three month periods ended October 1, 2022 and October 2, 2021, were both 13 week periods. Fiscal year 2023 will end on July 1, 2023, which is a 52 week year. Fiscal year 2022 which ended on July 2, 2022, was also a 52 week year.

Reclassifications

Reclassifications

Certain prior period reclassifications were made to conform with the current period presentation. These reclassifications had no effect on reported income, comprehensive income, cash flows, total assets, or shareholders' equity as previously reported.

Earnings Per Common Share

Earnings Per Common Share

Basic earnings per common share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) 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 equity awards were used to repurchase common shares at the average market price during the period. The computation of diluted EPS does not assume conversion, exercise, or contingent issuance of common stock equivalent shares that would have an anti-dilutive effect on EPS.

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

The Company has entered into foreign currency forward contracts that are accounted for as cash flow hedges. 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.

The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities. The foreign currency forward contracts have terms that are matched to the underlying transactions being hedged. As a result, these transactions fully offset the hedged risk and no ineffectiveness has been recorded.

The Company’s foreign currency forward contracts potentially expose the Company to credit risk to the extent the counterparty may be unable to meet the terms of the agreement. The Company minimizes such risk by utilizing a counterparty with a strong credit rating. The Company’s counterparty to the foreign currency forward contracts is a major banking institution. This institution does not require collateral for the contracts, and the Company believes that the risk of the counterparty failing to meet their contractual obligations is remote. The Company does not enter into derivative instruments for trading or speculative purposes.

Income Taxes

Income Taxes

We compute our interim income tax provision through the use of an estimated annual effective tax rate (ETR) applied to year-to-date operating results and specific events that are discretely recognized as they occur. In determining the estimated annual ETR, we analyze various factors, including projections of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual ETR.

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 and net operating loss 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 expense. The tax years 2001 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject. Refer to Note 5 for further discussions.

Recently Issued Accounting Standards

Recently Issued Accounting Standards

In January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2021-01, Reference Rate Reform (Topic 848) to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The Company is currently assessing the effects on its consolidated financial statements, and if it will elect this optional standard.

In March of 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which clarifies specific issues raised by stakeholders. Specifically, the ASU clarifies the following: 1) that all entities are required to provide the fair value option disclosures in ASC 825, Financial Instruments 2) clarifies that the portfolio exception in ASC 820, Fair Value Measurement, applies to nonfinancial items accounted for as derivatives under ASC 815, Derivatives and Hedging; 3) clarifies that for purposes of measuring expected credit losses on a net investment in a lease in accordance with ASC 326, Financial Instruments - Credit Losses, the lease term determined in accordance with ASC 842, Leases, should be used as the contractual term; 4) clarifies that when an entity regains control of financial assets sold, it should recognize an allowance for credit losses in accordance with ASC 326; and 5) aligns the disclosure requirements for debt securities in ASC 320, Investments - Debt Securities, with the corresponding requirements for depository and lending institutions in ASC 942, Financial Services - Depository and Lending. The amendments in the ASU have various effective dates and transition requirements which are dependent on timing of adoption of ASU 2016-13. The Company is currently assessing the effects on its consolidated financial statements, and it intends to adopt the guidance as they become effective.

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance is effective for the Company beginning in the first quarter of fiscal year 2024 with early adoption permitted. The Company is currently assessing the impact on its consolidated financial statements, and it intends to adopt the guidance when it becomes effective in the first quarter of fiscal year 2024.

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Long-Term Debt (Tables)

3 Months Ended

Oct. 01, 2022

Debt Disclosure [Abstract]

Schedule of Maturities of Long-term Debt

Debt maturities as of October 1, 2022 for the next five years and thereafter are as follows (in thousands):

Fiscal Years Ending	Amount
2023 (1)	$	1,647
2024	2,239
2025	2,290
2026	1,187
2027	105,430
Thereafter	—
Total debt	$	112,793
Unamortized debt issuance costs	(462)
Long-term debt, net of debt issuance costs	$	112,331

    (1) Represents scheduled payments for the remaining nine-month period ending July 1, 2023.

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Earnings Per Share (Tables)

3 Months Ended

Oct. 01, 2022

Earnings Per Share [Abstract]

Schedule of Antidilutive Securities and Outstanding Equity Awards

These antidilutive securities occur when equity awards outstanding have an option price greater than the average market price for the period.

	Three Months Ended
	(in thousands, except share and per share information)
	October 1, 2022		October 2, 2021
Net income	$	1,152	$	815
Weighted average shares outstanding—basic	10,762		10,762
Effect of dilutive common stock awards	70		290
Weighted average shares outstanding—diluted	10,832		11,052
Net income per share—basic	$	0.11	$	0.08
Net income per share—diluted	$	0.11	$	0.07
Antidilutive SARs not included in diluted earnings per share	904		629

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Share-based Compensation (Tables)

3 Months Ended

Oct. 01, 2022

Share-Based Payment Arrangement [Abstract]

Schedule of Share-based Compensation for the Awards Granted

The grant date fair value for the awards granted below were estimated using the Black Scholes option valuation method:

	July 29, 2022		August 9, 2021
SARs Granted	145,000		165,000
Strike Price	$	5.10	$	7.17
Fair Value	$	2.09	$	2.73

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Derivative Financial Instruments (Tables)

3 Months Ended

Oct. 01, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of Gain (Loss) of Derivative Instruments in Statement of Operations

The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Income for the three months ended October 1, 2022 and October 2, 2021, respectively (in thousands):

Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of July 2, 2022		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of October 1, 2022
Forward contracts	Cost of sales	$	(79)	$	—	$	79	$	—
Interest rate swap	Interest expense	(346)		—		74		(272)
Total		$	(425)	$	—	$	153	$	(272)
Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of July 3, 2021		Effective Portion Recorded In AOCI		Effective Portion Reclassified From AOCI Into Income		AOCI Balance as of October 2, 2021
Forward contracts	Cost of sales	$	2,721	$	224	$	(1,830)	$	1,115
Interest rate swap	Interest expense	(649)		—		75		(574)
Total		$	2,072	$	224	$	(1,755)	$	541

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Revenue (Tables)

3 Months Ended

Oct. 01, 2022

Revenue from Contract with Customer [Abstract]

Schedule of Contract Assets

The following table summarizes the activity in the Company’s contract assets during the three months ended October 1, 2022 (in thousands):

	Contract Assets
Beginning balance, July 2, 2022	$	21,974
Revenue recognized	134,557
Amounts collected or invoiced	(130,173)
Ending balance, October 1, 2022	$	26,358

Schedule of Disaggregation of Revenue

The following table presents the Company’s revenue disaggregated for the three months ended October 1, 2022 and October 2, 2021 (in thousands):

	Revenue
Recognition	Three Months Ended
	October 1, 2022		October 2, 2021
Over-Time	$	134,558	$	129,481
Point-in-Time	2,705		3,281
Total	$	137,263	$	132,762

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Leases (Tables)

3 Months Ended

Oct. 01, 2022

Leases [Abstract]

Schedule of Lease Cost

The components of lease cost for the three months ended October 1, 2022 and October 2, 2021 were (in thousands): 

Lease cost	Classification	October 1, 2022		October 2, 2021
Operating lease cost	Cost of sales	$	1,334	$	1,433
Operating lease cost	Selling, general and administrative expenses	$	184	$	308
Financing lease cost	Cost of sales	$	900	$	434
Financing lease cost	Selling, general and administrative expenses	$	38	$	10
Total lease cost		$	2,456	$	2,185
Fixed lease cost		$	2,221	$	1,777
Short-term lease cost		$	235	$	408
Total lease cost		$	2,456	$	2,185

Schedule of Lease Assets and Liabilities

Amounts reported in the Consolidated Balance Sheet as of October 1, 2022 were (in thousands, except weighted average lease term and discount rate):

	October 1, 2022
Operating Leases:
Operating lease right of use assets	$	19,497
Operating lease liabilities (1)	$	19,497
Weighted-average remaining lease term (in years)
Operating leases	5.08
Weighted-average discount rate
Operating leases	4.0		%
Financing Leases (2):
Financing lease right of use assets	$	11,373
Financing lease liabilities	$	10,120
Weighted-average remaining lease term (in years)
Financing leases	2.31
Weighted-average discount rate
Financing leases	8.8		%

(1) The current portion of the total operating lease liabilities of $5.4 million is classified under Other Current Liabilities, resulting in $14.1 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 $11.4 million is classified under Other Long-term Assets. The current portion of the total finance lease liabilities of $4.4 million is classified under Current portion of debt, net, resulting in $5.7 million classified in Other Long-term Liabilities section of the condensed consolidated balance sheet.

Other information related to leases was as follows (in thousands):

	Three Months Ended
	October 1, 2022		October 2, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,847	$	1,446
Financing cash flows used in financing leases	$	1,022	$	401

Schedule of Maturities of Operating Leases Liability

Future lease payments under non-cancellable leases as of October 1, 2022 are as follows (in thousands):

Fiscal Years Ending	Operating Leases		Finance Leases
2023 (1)	$	4,125	$	3,910
2024	4,826		3,960
2025	3,987		2,539
2026	3,365		107
2027	2,464		71
Thereafter	3,240		—
Total undiscounted lease payments	22,007		10,587
Less: present value discount	(2,510)		(467)
Total lease liabilities	$	19,497	$	10,120

(1) Represents estimated lease payments for the remaining nine-month period ending July 1, 2023.

Schedule of Maturities of Finance Leases Liability

Future lease payments under non-cancellable leases as of October 1, 2022 are as follows (in thousands):

Fiscal Years Ending	Operating Leases		Finance Leases
2023 (1)	$	4,125	$	3,910
2024	4,826		3,960
2025	3,987		2,539
2026	3,365		107
2027	2,464		71
Thereafter	3,240		—
Total undiscounted lease payments	22,007		10,587
Less: present value discount	(2,510)		(467)
Total lease liabilities	$	19,497	$	10,120

(1) Represents estimated lease payments for the remaining nine-month period ending July 1, 2023.

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Inventories - Narrative (Details) - USD ($) $ in Thousands	Oct. 01, 2022	Jul. 02, 2022
Inventory Disclosure [Abstract]
Inventories	$ 169,285	$ 155,741

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Long-Term Debt - Narrative (Details) - USD ($)			3 Months Ended
	Aug. 26, 2022	Nov. 24, 2020	Oct. 01, 2022	Jul. 02, 2022	Sep. 03, 2021	Sep. 02, 2021	Aug. 14, 2020
Debt Disclosure [Line Items]
Increase in revolving line of credit					$ 120,000,000	$ 93,000,000
Revolving credit facility outstanding amount			$ 105,400,000	$ 95,100,000
Letters of credit outstanding amount			300,000	300,000
Additional availability of line of credit			10,600,000	10,800,000
Long-term Debt			$ 112,331,000
Interest rate on outstanding debt		5.52%					4.85%
Line of Credit | Fixed Rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)			2.50%
Line of Credit | London interbank offered rate (LIBOR)
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)			1.00%
Percentage on variable floor rate (as percent)			0.50%
Equipment Term Loan
Debt Disclosure [Line Items]
Long-term Debt			$ 3,100,000	3,300,000			$ 5,000,000
Periodic payment of principal amount			94,000
JZ Equipment Term Loan
Debt Disclosure [Line Items]
Long-term Debt		$ 6,000,000	$ 4,300,000	$ 4,600,000
Periodic payment of principal amount		$ 100,000
Bank of America
Debt Disclosure [Line Items]
Increase in interest rate	0.25%
Bank of America | Line of Credit
Debt Disclosure [Line Items]
Percentage of additional interest rate On default			2.00%
Percentage of unused portion of credit			0.25%
Revolving credit facility | Line of Credit | Federal funds rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)			0.50%
Minimum
Debt Disclosure [Line Items]
Interest rate on outstanding debt			4.85%	3.25%
Minimum | Bank of America | Line of Credit | London interbank offered rate (LIBOR)
Debt Disclosure [Line Items]
LIBOR rate (as percent)			2.25%
Minimum | Bank of America | Line of Credit | Base rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)			1.25%
Maximum
Debt Disclosure [Line Items]
Interest rate on outstanding debt			6.15%	5.52%
Maximum | Bank of America | Line of Credit | London interbank offered rate (LIBOR)
Debt Disclosure [Line Items]
LIBOR rate (as percent)			2.75%
Maximum | Bank of America | Line of Credit | Base rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)			1.75%

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Long-Term Debt - Schedule of Maturities of Long-term Debt (Details) $ in Thousands	Oct. 01, 2022 USD ($)
Debt Disclosure [Abstract]
2023	$ 1,647
2024	2,239
2025	2,290
2026	1,187
2027	105,430
Thereafter	0
Total debt	112,793
Unamortized debt issuance costs	(462)
Long-term debt, net of debt issuance costs	$ 112,331

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Income Taxes - Narrative (Details) - USD ($) $ in Millions	3 Months Ended
	Oct. 01, 2022	Apr. 03, 2021
Operating Loss Carryforwards [Line Items]
Foreign tax credits related to future repatriations of earnings	$ 8.6
Estimated federal and state income taxes and potential withholding taxes	0.8
Gross potential research and development (R&D) tax credit	10.6
Unrecognized tax benefits associated with federal tax credits	3.1
Deferred tax benefit	$ 7.5
Foreign Tax Authority
Operating Loss Carryforwards [Line Items]
Deferred tax asset, valuation allowance		$ 0.2

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Earnings Per Share - Schedule of Antidilutive Securities and Outstanding Equity Awards (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Oct. 01, 2022	Oct. 02, 2021
Earnings Per Share [Abstract]
Net income	$ 1,152	$ 815
Weighted average shares outstanding — basic (in shares)	10,762,000	10,762,000
Effect of dilutive common stock options (in shares)	70,000	290,000
Weighted average shares outstanding - Diluted (in shares)	10,832,000	11,052,000
Net income per share—basic (in USD per share)	$ 0.11	$ 0.08
Net income per share—diluted (in USD per share)	$ 0.11	$ 0.07
Antidilutive SARs not included in diluted earnings per share (in shares)	904,000	629,000

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Share-based Compensation - Schedule of Share-based Compensation for the Awards Granted (Details) - USD ($) $ / shares in Units, $ in Thousands			3 Months Ended
	Jul. 29, 2022	Aug. 09, 2021	Oct. 01, 2022	Oct. 02, 2021
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation arrangement vesting period (in year)			3 years
Share-based compensation arrangement expiration period (in year)			5 years
Unrecognized unvested share-based compensation arrangements			$ 600
Weighted average period (in years)			2 years 1 month 28 days
Stock Appreciation Rights (SARs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
SARs Granted (in dollars per share)	145,000	165,000
Strike Price (in dollars per share)	$ 5.10	$ 7.17
Fair Value	$ 2.09	$ 2.73
Share-based Compensation Expense			$ 40	$ 68

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Commitments and Contingencies - Narrative (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended
	Nov. 09, 2022	Oct. 01, 2022	Oct. 02, 2021	Jul. 02, 2022
Gain Contingencies [Line Items]
Amount of warranty reserve		$ 30		$ 31
Gain on insurance proceeds, net of losses		934	$ 0
Arkansas Facility
Gain Contingencies [Line Items]
Gain on disposal of fixed assets		$ 400
Subsequent Event | Arkansas Facility
Gain Contingencies [Line Items]
Proceeds from initial insurance	$ 1,000

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Derivative Financial Instruments - Narrative (Details) - USD ($)	3 Months Ended
	Oct. 02, 2021	Aug. 14, 2020
Derivative [Line Items]
Foreign currency forward contracts entered	$ 13,900,000
Foreign currency forward contracts settled	$ 5,500,000
Derivative, notional amount		$ 776,500
Equipment Term Loan
Derivative [Line Items]
Derivative, notional amount		$ 148,400

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Derivative Financial Instruments - Schedule of Gain (Loss) of Derivative Instruments in Statement of Operations (Details) - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2022	Oct. 02, 2021
Derivatives used in Net Investment Hedge, Net of Tax [Roll Forward]
Accumulated Other Comprehensive Income, Beginning balance	$ (425)
Accumulated Other Comprehensive Income, Ending balance	(272)
Designated As Hedging Instrument
Derivatives used in Net Investment Hedge, Net of Tax [Roll Forward]
Accumulated Other Comprehensive Income, Beginning balance	(425)	$ 2,072
Effective Portion Recorded In AOCI	0	224
Effective Portion Reclassified From AOCI Into Income	153	(1,755)
Accumulated Other Comprehensive Income, Ending balance	(272)	541
Forward contracts | Designated As Hedging Instrument
Derivatives used in Net Investment Hedge, Net of Tax [Roll Forward]
Accumulated Other Comprehensive Income, Beginning balance	(79)	2,721
Effective Portion Recorded In AOCI	0	224
Effective Portion Reclassified From AOCI Into Income	79	(1,830)
Accumulated Other Comprehensive Income, Ending balance	0	1,115
Interest rate swap | Designated As Hedging Instrument
Derivatives used in Net Investment Hedge, Net of Tax [Roll Forward]
Accumulated Other Comprehensive Income, Beginning balance	(346)	(649)
Effective Portion Recorded In AOCI	0	0
Effective Portion Reclassified From AOCI Into Income	74	75
Accumulated Other Comprehensive Income, Ending balance	$ (272)	$ (574)

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Revenue - Schedule of Contract Assets (Details) $ in Thousands	3 Months Ended
	Oct. 01, 2022 USD ($)
Contract with Customer, Asset, Allowance for Credit Loss [Roll Forward]
Beginning balance	$ 21,974
Revenue recognized	134,557
Amounts collected or invoiced	(130,173)
Ending balance	$ 26,358

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Revenue - Schedule of Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2022	Oct. 02, 2021
Disaggregation of Revenue [Line Items]
Net sales	$ 137,263	$ 132,762
Over-Time
Disaggregation of Revenue [Line Items]
Net sales	134,558	129,481
Point-in-Time
Disaggregation of Revenue [Line Items]
Net sales	$ 2,705	$ 3,281

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Leases - Narrative (Details)	Oct. 01, 2022
Lessee, Lease, Description [Line Items]
Operating lease, discount rate (as percent)	4.00%
Minimum
Lessee, Lease, Description [Line Items]
Operating lease, term (in years)	1 year
Maximum
Lessee, Lease, Description [Line Items]
Operating lease, term (in years)	10 years

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Leases - Schedule of Lease Cost (Details) - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2022	Oct. 02, 2021
Lessee, Lease, Description [Line Items]
Total lease cost	$ 2,456	$ 2,185
Fixed lease cost	2,221	1,777
Short-term lease cost	235	408
Cost of Sales
Lessee, Lease, Description [Line Items]
Operating lease cost	1,334	1,433
Financing lease cost	900	434
Selling, General and Administrative Expenses
Lessee, Lease, Description [Line Items]
Operating lease cost	184	308
Financing lease cost	$ 38	$ 10

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Leases - Schedule of Lease Assets and Liabilities (Details) - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2022	Oct. 02, 2021	Jul. 02, 2022
Operating Leases:
Operating lease right-of-use assets, net	$ 19,497		$ 16,731
Operating lease liabilities	$ 19,497
Weighted-average remaining lease term (in years)
Operating leases	5 years 29 days
Weighted-average discount rate
Operating leases (as percent)	4.00%
Financing Leases:
Financing lease right of use assets	$ 11,373
Financing lease liabilities	$ 10,120
Weighted-average remaining lease term (in years)
Financing leases	2 years 3 months 21 days
Weighted-average discount rate
Financing leases (as percent)	8.80%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$ 1,847	$ 1,446
Financing cash flows used in financing leases	1,022	$ 401
Operating lease liability, current	$ 5,400
Operating Lease, Liability, Statement of Financial Position [Extensible Enumeration]	Other Liabilities
Operating lease liabilities	$ 14,128		$ 12,023
Operating Lease, Liability, Noncurrent, Statement of Financial Position [Extensible Enumeration]	Operating lease liabilities
Finance Lease, Right-of-Use Asset, Statement of Financial Position [Extensible Enumeration]	Other
Finance Lease, Liability, Current, Statement of Financial Position [Extensible Enumeration]	Current portion of debt, net
Finance Lease, Liability, Noncurrent	$ 5,700
Finance Lease, Liability, Noncurrent, Statement of Financial Position [Extensible Enumeration]	Other long-term obligations
Current portion of Debt
Cash paid for amounts included in the measurement of lease liabilities:
Finance Lease, Liability, Current	$ 4,400

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Leases - Schedule of Maturities of Future Lease Payment (Details) $ in Thousands	Oct. 01, 2022 USD ($)
Operating Leases
2023	$ 4,125
2024	4,826
2025	3,987
2026	3,365
2027	2,464
Thereafter	3,240
Total undiscounted lease payments	22,007
Less: present value discount	(2,510)
Total operating lease liabilities	19,497
Finance Leases
2023	3,910
2024	3,960
2025	2,539
2026	107
2027	71
Thereafter	0
Total undiscounted lease payments	10,587
Less: present value discount	(467)
Financing lease liabilities	$ 10,120