KEY TRONIC CORP

Previous wording

The concentration of our top three customers’ net sales increased to 41.8 percent of total sales in the second quarter of fiscal year 2025 from 31.1 percent in the same period of the prior fiscal year. As new customer programs ramp, we expect that concentration to our top three customers will decrease.

Current wording

The concentration of our top three customers’ net sales increased to 33.5 percent of total sales in the third quarter of fiscal year 2025 from 25.4 percent in the same period of the prior fiscal year. As new customer programs ramp, we expect that concentration to our top three customers will decrease.

Previous wording

Net loss for the second quarter of fiscal year 2025 was $4.9 million or $0.46 per diluted share, as compared to net income of $1.1 million or $0.10 per diluted share for the second quarter of fiscal year 2024. The year-over-year decrease in earnings was a result of the factors discussed above, primarily softening demand combined with the write-off of unamortized deferred loan fees in connection with refinancing debt with a new lender.

Current wording

Net loss for the third quarter of fiscal year 2025 was $0.6 million or $0.06 per diluted share, as compared to net loss of $2.2 million or $0.21 per diluted share for the third quarter of fiscal year 2024. The year-over-year increase in earnings was a result of the factors discussed above, primarily increases in margins attributed to benefits realized from reducing costs and strategic reductions in headcount over the past three quarters.

Previous wording

Moving into the third quarter of fiscal year 2025, while we continue to see a favorable trend of contract manufacturing returning to North America, continued increases in Mexican wages, particularly along the US-Mexico border, and potential tariffs, have reduced the competitive advantage of Mexico-based manufacturing compared to U.S.-based manufacturing. In response to this sustained and ongoing trend, the Company is restructuring its Juarez facility to focus on higher volume manufacturing, while lower volume products with higher service level requirements will migrate to our other sites. This restructuring resulted in a significant headcount reduction starting in the third quarter of fiscal year 2024, and will continue with further headcount reductions in the third quarter of fiscal year 2025. Additionally, global logistics problems, the wars in Europe, China-U.S. geopolitical tensions and related tariff increases may continue to drive OEMs to examine their traditional outsourcing strategies. We believe these customers increasingly realize they have become overly dependent on their China-based contract manufacturers not only for products, but also for design and logistics services. The decision to onshore or near shore production appears to be becoming more widely accepted as a smart long-term strategy. As a result, we see opportunities for continued growth. In the third quarter of fiscal year 2025, the Company expects a continued weakening of the Mexican Peso relative to the U.S. dollar, which may translate into improving conditions moving forward.

Current wording

Moving into the fourth quarter of fiscal year 2025, while we continue to see a favorable trend of contract manufacturing returning to North America, continued increases in Mexican wages, particularly along the US-Mexico border, and potential tariffs, have reduced the competitive advantage of Mexico-based manufacturing compared to U.S.-based manufacturing. In response to this sustained and ongoing trend, the Company is restructuring its Juarez facility to focus on higher volume manufacturing, while lower volume products with higher service level requirements will migrate to our other sites. This restructuring resulted in a significant headcount reduction starting in the third quarter of fiscal year 2024 with a follow on reduction in the third quarter of fiscal year 2025, and further reductions expected through the first quarter of fiscal year 2026. Additionally, global logistics problems, the wars in Europe, China-U.S. geopolitical tensions and related tariff increases may continue to drive Original Equipment Manufacturers (“OEMs”) to examine their traditional outsourcing strategies. We believe these customers increasingly realize they have become overly dependent on their China-based contract manufacturers not only for products, but also for design and logistics services. The decision to onshore or near shore production appears to be becoming more widely accepted as a smart long-term strategy. The Company's international and domestic manufacturing footprint provides flexibility to respond to market conditions. This is expected to help mitigate tariff implications and optimize pricing for customers. As previously announced, the Company is also planning to significantly increase its production capacity in its Arkansas and Vietnam facilities in order to continue to benefit from the growing customer demand for rebalancing their contract manufacturing. This expansion is also expected to help mitigate the adverse impact and uncertainties surrounding any current and potential tariffs on goods manufactured in China and Mexico. As a result, we see opportunities for growth moving forward.

Previous wording

We maintain a strong balance sheet with a current ratio of 2.8 and a debt-to-equity ratio of 0.9 as of December 28, 2024. Total cash provided by operating activities as defined on our cash flow statement was $11.5 million for the six months ended December 28, 2024. We believe we maintain sufficient liquidity for our expected future operations and had $75.6 million in borrowings under our asset-based revolving credit facility with $18.1 million remaining available and $4.2 million of cash on hand.

Current wording

We maintain a strong balance sheet with a current ratio of 2.7 and a debt-to-equity ratio of 0.9 as of March 29, 2025. Total cash provided by operating activities as defined on our cash flow statement was $10.1 million for the nine months ended March 29, 2025. We believe we maintain sufficient liquidity for our expected future operations and as of March 29, 2025, had $79.5 million in borrowings under our asset-based revolving credit facility with $20.4 million remaining available and $2.5 million of cash on hand.

Previous wording

Net sales of $113.9 million for the second quarter of fiscal year 2025 decreased by 23.0 percent as compared to net sales of $147.8 million for the second quarter of fiscal year 2024.

Current wording

Net sales of $112.0 million for the third quarter of fiscal year 2025 decreased by 21.4 percent as compared to net sales of $142.4 million for the third quarter of fiscal year 2024.

Previous wording

Gross profit as a percentage of net sales for the three months ended December 28, 2024 was 6.8 percent compared to 8.0 percent for the three months ended December 30, 2023. The decrease in gross margin is primarily due to decreases in net sales as discussed above without corresponding decreases in the fixed charges incurred in our operations.

Current wording

Gross profit as a percentage of net sales for the three months ended March 29, 2025 was 7.7 percent compared to 5.7 percent for the three months ended March 30, 2024. The increase in gross margin is primarily attributed to benefits realized from reducing costs and strategic reductions in headcount that have occurred over the past three quarters.

Previous wording

There were no significant changes to operating expenses during the second quarter of fiscal year 2025. Total research, development, and engineering (“RD&E”) expenses were $2.3 million during the three months ended December 28, 2024 and $1.8 million during the three months ended December 30, 2023, respectively. Total RD&E expenses as a percent of net sales were 2.0 percent during the three months ended December 28, 2024 and 1.2 percent during the three months ended December 30, 2023. The increase largely relates to reversals of accrued compensation balances in the prior period.

Current wording

There were no significant changes to operating expenses during the third quarter of fiscal year 2025. Total research, development, and engineering (“RD&E”) expenses were $2.3 million during the three months ended March 29, 2025 and $2.2 million during the three months ended March 30, 2024, respectively. Total RD&E expenses as a percent of net sales were 2.1 percent during the three months ended March 29, 2025 and 1.6 percent during the three months ended March 30, 2024.

Previous wording

Total selling, general and administrative (“SG&A”) expenses were $6.5 million during the three months ended December 28, 2024 compared to $6.1 million for the three months ended December 30, 2023. Total SG&A expenses as a percentage of net sales were 5.7 percent for the three months ended December 28, 2024 and 4.1 percent for the three months ended December 30, 2023. These increases are attributable to increases in third party professional services, provision for credit losses, and indirect labor.

Current wording

Total selling, general and administrative (“SG&A”) expenses were $6.8 million during the three months ended March 29, 2025 compared to $6.4 million for the three months ended March 30, 2024. Total SG&A expenses as a percentage of net sales were 6.0 percent for the three months ended March 29, 2025 and 4.5 percent for the three months ended March 30, 2024. These increases are attributable to increases in the estimated provision for credit losses.

Previous wording

Interest expense was $3.9 million during the three months ended December 28, 2024 and $3.0 million during the three months ended December 30, 2023. This increase is largely attributable to the write-off of approximately $1.0 million of unamortized loan fees related to refinancing our debt with a new lender, as described in Note 4 of the “Notes to Consolidated Financial Statements.” In connection with this refinancing, we expect our interest charges to decrease in future periods as a result of refinancing our line of credit with a new lender.

Current wording

Interest expense was $2.6 million during the three months ended March 29, 2025 and $2.8 million during the three months ended March 30, 2024. This decrease is largely attributable to lower interest costs as a result of refinancing our debt with a new lender, as described in Note 4 of the “Notes to Consolidated Financial Statements.”

Previous wording

The effective tax rate for the three months ended December 28, 2024 was 2.2 percent compared to (9.8) percent for the three months ended December 30, 2023. The increase was primarily due to federal research and development tax credits andpermanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period.

Current wording

The effective tax rate for the three months ended March 29, 2025 was 80.1 percent compared to 34.2 percent for the three months ended March 30, 2024. The increase was primarily due to federal research and development tax credits andpermanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period.

Previous wording

Comparison of the Six Months Ended December 28, 2024 with the Six Months Ended December 30, 2023

Current wording

Comparison of the Nine Months Ended March 29, 2025 with the Nine Months Ended March 30, 2024

Previous wording

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the six months ended December 28, 2024 as compared to the six months ended December 30, 2023. It is provided to assist in assessing differences in our overall performance (in thousands):

Current wording

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the nine months ended March 29, 2025 as compared to the nine months ended March 30, 2024. It is provided to assist in assessing differences in our overall performance (in thousands):

Previous wording

Net sales of $245.4 million for the six months ended December 28, 2024 decreased by 17.6 percent as compared to net sales of $298.0 million for the six months ended December 30, 2023.

Current wording

Net sales of $357.4 million for the nine months ended March 29, 2025 decreased by 18.8 percent as compared to net sales of $440.4 million for the nine months ended March 30, 2024.

Previous wording

The $52.5 million decrease is due tounexpected component shortages, lower-than-expected production during the holiday season, and reduced demand from certain customers which together lowered revenue by approximately $15 million for the second quarter. Additionally, the results are due to the softening of demand from certain long-standing programs, which caused decreases in backlog throughout fiscal year 2024 and the early part of fiscal year 2025. Additionally, excess inventory and scrap sales decreased significantly during the first two quarters of 2025 as certain large programs went end of life in 2024 and their final shipments of product, inventory, and any scrap were recorded at that time.

Current wording

The $83.0 million decrease is due toa number of factors including adverse impacts from the worldwide economic disruptions and uncertainty caused by the recent escalation and fluctuations in global tariffs. This resulted in delays, increased costs, and reduced demand from many customers. In addition there have been other unexpected component shortages along with softening of demand from certain long-standing programs experienced throughout fiscal year 2025. Finally, excess inventory and scrap sales decreased by approximately $44 million during the first three quarters of 2025 as certain large programs went end of life in 2024 and their final shipments of product, inventory, and any scrap were recorded at that time.

Previous wording

Gross profit as a percentage of net sales for the six months ended December 28, 2024 was 8.6 percent compared to 7.6 percent for the six months ended December 30, 2023. These results were largely due to benefits realized from restructuring in the third quarter of fiscal year 2024 and a weakening of the Mexican Peso.

Current wording

Gross profit as a percentage of net sales for the nine months ended March 29, 2025 was 8.3 percent compared to 7.0 percent for the nine months ended March 30, 2024. These results were largely due to benefits realized from restructuring in the third quarter of fiscal year 2024 and a weakening of the Mexican Peso.

Previous wording

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence. We did not record any significant impairment for obsolete inventory during the six months ended December 28, 2024 or December 30, 2023. 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 also inventory that we believe customers will be unable to purchase.

Current wording

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence. We did not record any significant impairment for obsolete inventory during the nine months ended March 29, 2025 or March 30, 2024. 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 also inventory that we believe customers will be unable to purchase.

Previous wording

There were no significant changes to operating expenses during thefirst six months of fiscal year 2025. Total research, development, and engineering (“RD&E”) expenses were $4.6 million during the six months ended December 28, 2024 and $4.0 million during the six months ended December 30, 2023, respectively. Total RD&E expenses as a percent of net sales were 1.9 percent during the six months ended December 28, 2024 and 1.3 percent during the six months ended December 30, 2023. The increase largely relates to reversals of accrued compensation balances in the prior period.

Current wording

There were no significant changes to operating expenses during thefirst nine months of fiscal year 2025. Total research, development, and engineering (“RD&E”) expenses were $6.9 million during the nine months ended March 29, 2025 and $6.2 million during the nine months ended March 30, 2024, respectively. Total RD&E expenses as a percent of net sales were 1.9 percent during the nine months ended March 29, 2025 and 1.4 percent during the nine months ended March 30, 2024.

Previous wording

Total selling, general and administrative (“SG&A”) expenses were $13.1 million during the six months ended December 28, 2024 compared to $11.8 million for the six months ended December 30, 2023. Total SG&A expenses as a percentage of net sales were 5.3 percent for the six months ended December 28, 2024 and 4.0 percent for the six months ended December 30, 2023. These increases are attributable to increases in third party professional services, provision for credit losses, and indirect labor.

Current wording

Total selling, general and administrative (“SG&A”) expenses were $19.8 million during the nine months ended March 29, 2025 compared to $18.3 million for the nine months ended March 30, 2024. Total SG&A expenses as a percentage of net sales were 5.6 percent for the nine months ended March 29, 2025 and 4.1 percent for the nine months ended March 30, 2024. These increases are attributable to estimated provisions for credit losses, and indirect labor.

Previous wording

Interest expense was $7.17 million during the six months ended December 28, 2024 and $5.97 million during the six months ended December 30, 2023. This increase is largely attributable to the write-off of approximately $1.0 million of unamortized loan fees related to refinancing our debt with a new lender in the second quarter of fiscal year 2025. In connection with this refinancing, we expect our interest charges to decrease in future periods.

Current wording

Interest expense was $9.75 million during the nine months ended March 29, 2025 and $8.8 million during the nine months ended March 30, 2024. This increase is largely attributable to the write-off of approximately $1.0 million of unamortized loan fees related to refinancing our debt with a new lender in the second quarter of fiscal year 2025. In connection with this refinancing, we expect our interest charges to decrease in future periods.

Previous wording

The effective tax rate for thesix months ended December 28, 2024 was 1.4 percent compared to(14.1) percent for thesix months ended December 30, 2023. The increase was primarily due to federal research and development tax credits and permanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period.

Current wording

The effective tax rate for thenine months ended March 29, 2025 was 36.2 percent compared to 62.4 percent for thenine months ended March 30, 2024. The decrease was primarily due to federal research and development tax credits and permanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period.

Previous wording

To supplement our consolidated financial statements, which are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), we use certain non-GAAP financial measures, adjusted net income and adjusted net income per share, diluted. We provide these non-GAAP financial measures because we believe they provide greater transparency related to our core operations and represent supplemental information used by management in its financial and operational decision making. We exclude (or include) certain items in our non-GAAP financial measures as we believe the net result is a measure of our core business. We believe this facilitates operating performance comparisons from period to period by eliminating potential differences caused by the existence and timing of certain income and expense items that would not otherwise be apparent on a GAAP basis. Non-GAAP performance measures should be considered in addition to, and not as a substitute for, results prepared in accordance with GAAP. The non-GAAP financial measures disclosed below should be read in conjunction with the remainder of this Quarterly Report on Form 10-Q, including the consolidated financial statements and footnotes thereto. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Our non-GAAP financial measures may be different from those reported by other companies. See the table below for reconciliations of adjusted net income to the most directly comparable GAAP measure, which is GAAP net income, and the computation of adjusted net income per share, diluted.

Current wording

To supplement our consolidated financial statements, which are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), we use certain non-GAAP financial measures, adjusted net loss and adjusted net loss per share, diluted. We provide these non-GAAP financial measures because we believe they provide greater transparency related to our core operations and represent supplemental information used by management in its financial and operational decision making. We exclude (or include) certain items in our non-GAAP financial measures as we believe the net result is a measure of our core business. We believe this facilitates operating performance comparisons from period to period by eliminating potential differences caused by the existence and timing of certain income and expense items that would not otherwise be apparent on a GAAP basis. Non-GAAP performance measures should be considered in addition to, and not as a substitute for, results prepared in accordance with GAAP. The non-GAAP financial measures disclosed below should be read in conjunction with the remainder of this Quarterly Report on Form 10-Q, including the consolidated financial statements and footnotes thereto. We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. Our non-GAAP financial measures may be different from those reported by other companies. See the table below for reconciliations of adjusted net loss to the most directly comparable GAAP measure, which is GAAP net loss, and the computation of adjusted net loss per share, diluted.

Previous wording

On December 28, 2024, we had an order backlog of approximately $162.5 million. This compares with a backlog of approximately $264.1 million on December 30, 2023. The decrease in order backlog is related to softening of demand for a number of our Mexico-based programs, partially offset by an increase in demand for our U.S. based facilities. We expect backlog to increase in the coming periods due to recent sizeable program wins. 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.

Current wording

On March 29, 2025, we had an order backlog of approximately $138.1 million. This compares with a backlog of approximately $275.8 million on March 30, 2024. The decrease in order backlog is related to softening of demand for a number of our Mexico-based programs, partially offset by an increase in demand for our U.S. based facilities. We expect backlog to increase in the coming periods due to recent sizeable program wins. 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.

Previous wording

Net cash provided by operating activities for the six months ended December 28, 2024 was $11.5 million. Net cash provided by operating activities was $9.1 million for the six months ended December 30, 2023.

Current wording

Net cash provided by operating activities for the nine months ended March 29, 2025 was $10.1 million. Net cash provided by operating activities was $6.1 million for the nine months ended March 30, 2024.

Previous wording

The $9.1 million of net cash provided by operating activities for the six months ended December 30, 2023 was primarily related to $1.4 million in net income for the period adjusted for $5.5 million of depreciation and amortization, a $13.8 million decrease in inventory, a $15.7 million decrease in accounts receivable, a $2.2 million decrease in contract assets, a $0.5 million increase in other liabilities, and a $0.4 million decrease in other assets, partially offset by a $24.5 million decrease in accounts payable, and a $3.8 million decrease in accrued compensation and vacation.

Current wording

The $10.1 million of net cash provided by operating activities for the nine months ended March 29, 2025 was primarily related to $4.4 million in net loss for the period adjusted for $7.9 million of depreciation and amortization, a $5.8 million decrease in inventory, a $19.6 million decrease in accounts receivable, a $2.2 million decrease in contract assets partially offset by a $14.1 million decrease in accounts payable, a $7.3 million increase in other assets, a $0.4 million decrease in other liabilities, and a $0.7 million decrease in accrued compensation and vacation.

Previous wording

The $11.5 million of net cash provided by operating activities for the six months ended December 28, 2024 was primarily related to $3.8 million in net loss for the period adjusted for $5.5 million of depreciation and amortization, a $4.4 million decrease in inventory, a $19.4 million decrease in accounts receivable, a $2.4 million decrease in contract assets and a $1.7 million increase in other liabilities partially offset by a $15.8 million decrease in accounts payable a $3.9 million increase in other assets, and a $0.3 million decrease in accrued compensation and vacation.

Current wording

The $6.1 million of net cash provided by operating activities for the nine months ended March 30, 2024 was primarily related to $0.8 million in net loss for the period adjusted for $8.2 million of depreciation and amortization, a $22.8 million decrease in inventory, a $1.3 million decrease in contract assets, a $14.9 million decrease in accounts receivable partially offset by a $0.8 million decrease in other liabilities, a $1.5 million increase in other assets, a $33.7 million decrease in accounts payable, and a $2.4 million decrease in accrued compensation and vacation.

Previous wording

Cash used in investing activities was $0.8 million during the six months ended December 28, 2024 as compared to cash used in investing activities of $0.4 million during the six months ended December 30, 2023. Our primary investing activities during the six months ended December 28, 2024 and December 30, 2023, related to purchasing equipment to support increased production levels for new programs.

Current wording

Cash used in investing activities was $3.0 million during the nine months ended March 29, 2025 as compared to cash used in investing activities of $1.0 million during the nine months ended March 30, 2024. Our primary investing activities during the nine months ended March 29, 2025 and March 30, 2024, related to purchasing equipment to support increased production levels for new programs.

Previous wording

Cash used in financing activities was $11.2 million during the six months ended December 28, 2024 as compared to $9.4 million used in financing activities in the same period of the previous fiscal year. Our primary financing activities during the six months ended December 28, 2024, and December 30, 2023, were borrowings and repayments under our asset-based revolving line of credit facility with Bank of Montreal, our Prior Credit Facility with Bank of America, and term loans.

Current wording

Cash used in financing activities was $9.4 million during the nine months ended March 29, 2025 as compared to $3.4 million used in financing activities in the same period of the previous fiscal year. Our primary financing activities during the nine months ended March 29, 2025, and March 30, 2024, were borrowings and repayments under our asset-based revolving line of credit facility with Bank of Montreal, our Prior Credit Facility with Bank of America, and term loans.

Previous wording

As of December 28, 2024, we had approximately $3.4 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 December 28, 2024 would approximate $26,000. We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 5 of the “Notes to Consolidated Financial Statements.”

Current wording

As of March 29, 2025, we had approximately $2.8 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 March 29, 2025 would approximate $29,000. We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 5 of the “Notes to Consolidated Financial Statements.”

Previous wording

During the COVID-19 pandemic, we saw 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 pandemics can materially impact operating results.

Current wording

During the COVID-19 pandemic, we saw 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 pandemics or otherwise can materially impact operating results.

Previous wording

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.

Current wording

Adverse economic conditions and uncertainty in the global economy such as unstable global financial and credit markets, changing trade policies, 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.

Previous wording

Adverse macroeconomic conditions, such as those that were 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. As the inflation rate continues to increase, the costs of labor and other expenses have and may continue to 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.

Current wording

Adverse macroeconomic conditions 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 inflation rate continues to increase, the costs of labor and other expenses may continue to 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.

Previous wording

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 closures or limited production due to natural disasters or other reasons, which may cause a shortage of components. This can result in longer lead times and the inability to meet our customers' requests 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.

Current wording

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 closures or limited production due to macroeconomic conditions, natural disasters or other reasons, which may cause a shortage of components. This can result in longer lead times and the inability to meet our customers' requests 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.

Previous wording

In addition, we must successfully manage transition issues that may result from the departure or retirement of members of our leadership team. For example, our Chief Executive Officer retired at the end of fiscal year 2024 and is succeeded by our former Chief Financial Officer. Any significant leadership change or senior management transition involves inherent risks and failure to ensure a smooth transition could hinder our strategic planning, business execution, and future performance. We cannot provide assurances that any changes of management personnel will not cause disruption to operations or customer relationships or a decline in our operating results.

Current wording

In addition, we must successfully manage transition issues that may result from the departure or retirement of members of our leadership team. For example, our former Chief Executive Officer retired at the end of fiscal year 2024 and was succeeded by our former Chief Financial Officer. Any significant leadership change or senior management transition involves inherent risks and failure to ensure a smooth transition could hinder our strategic planning, business execution, and future performance. We cannot provide assurances that any changes of management personnel will not cause disruption to operations or customer relationships or a decline in our operating results.

Previous wording

Current and future U.S. trade policy could increase the cost of manufacturing services for our customers, leading them to reduce their orders to us.

Current wording

Current and future U.S. trade policy could adversely affect our business and results of operations.

Previous wording

Although we maintain significant manufacturing capacity in the U.S., the majority of our manufacturing operations are located outside the U.S (in countries such as China and Mexico). In the past, the U.S. has imposed tariffs impacting certain components and products imported from these countries by us into the U.S. These tariffs apply to both components imported into the U.S. from these countries for use in the manufacture of products at our U.S. plants and to certain of our customers’ products that we manufacture for them in these countries and that are then imported into the U.S.

Current wording

Although we maintain significant manufacturing capacity in the U.S., the majority of our manufacturing operations are currently located outside the U.S (in countries such as China and Mexico). We also source certain components and materials for our products from various countries. In the past, the U.S. has imposed tariffs impacting certain components and products imported from these countries by us into the U.S. These tariffs apply to both components imported into the U.S. from these countries for use in the manufacture of products at our U.S. plants and to certain of our customers’ products that we manufacture for them in these countries and that are then imported into the U.S.

Previous wording

The current U.S. presidential administration has indicated that a broad increase in tariffs on imported components is possible, and in some cases has been put into effect, which could drive up our prices to customers. Any decision by a large number of our customers to cease using our manufacturing services due to the application of tariffs could materially reduce our revenue and net income.

Current wording

Changes in tariffs and other trade policies can be announced with little or no advance notice. The current U.S. presidential administration recently announced a broad increase in tariffs on imported products and components from certain countries, including higher tariff levels on those imported from China and Mexico. These actions have resulted, and are expected to further result, in retaliatory measures on U.S. goods by those countries and others. If maintained, these recently announced tariffs, and the potential escalation of trade disputes could pose a risk to our business that could affect our revenue and cost of sourcing materials. Actions we take to adapt to new tariffs or trade restrictions may increase our costs or may cause us to modify our operations, and could drive up our prices to customers. Any decision by a large number of our customers to cease using our manufacturing services due to the application of tariffs could materially reduce our revenue and net income. In addition, tariffs or other trade restrictions have caused, and may continue to cause, adverse changes and uncertainty in U.S. and global financial and economic conditions, which adversely impacts the demand for our products.