KEY TRONIC CORP

(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 June 27, 2026.

The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The three month period ended September 26, 2026 and September 27, 2025, were both 13 week periods. Fiscal year 2027 will end on July 3, 2027, which is a 53 week year. Fiscal year 2026, which ended on June 27, 2026, was a 52 week year.

Management’s Assessment of Liquidity

Historically, due to the timing between the procurement of raw materials, production cycle and payment from our customers, we have financed operations and met our capital expenditure requirements primarily through cash flows provided by operations and borrowings under our credit facilities. We used cash in operations of $(2.1) million during the three month period ended September 26, 2026 and generated cash from operations of $7.6 million during the three month period ended September 27, 2025. We have positive working capital of $109.0 million as of September 26, 2026. Based on current projections, we anticipate generating cash from operations on revenue increases throughout fiscal year 2027 along with gross margin improvements as a result of cost reduction efforts.

On December 3, 2024, we entered into an asset-based credit agreement with BMO Bank, N.A that provides for an asset-based senior secured revolving credit facility of up to $115 million, maturing on December 3, 2029. On December 3, 2024, we also entered into a $28 million term loan credit agreement with Callodine Commercial Finance, LLC. As of September 26, 2026, approximately $14.4 million of gross borrowing capacity was available under the asset-based senior secured revolving credit facility, which is further limited by certain covenant blocks in the loan agreement. Additionally we have $1.6 million of cash on hand. If we are unable to meet projected operating results or extend our borrowing capacity, we may need to delay the purchase of raw materials or require our customers to fund inventory raw material costs ahead of production. Other options to increase our liquidity include leveraging foreign owned assets for additional borrowing capacity or factoring receivables. We believe that projected cash from operations and funds available under our asset-based revolving credit facility will be sufficient to meet our working and fixed capital requirements for at least the next 12 months.

2. Significant Accounting Policies

Allowance for Credit Losses

The Company evaluates the collectability of accounts receivable, contract assets, and other recoverable costs and records an allowance for credit losses, which reduces these assets to an amount that management reasonably estimates will be collected. A specific allowance is recorded against receivables considered to be impaired based on the Company’s knowledge of the financial condition of the customer, and a general allowance is calculated and applied to remaining assets based on the Company's historical collection experience. In determining the amount of the allowance, the Company considers several factors including the aging of the receivables, the current business environment and historical experience. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Leases

Lease assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using the Company’s incremental borrowing rate, unless the implicit rate is readily determinable. Our incremental borrowing rate represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. Lease assets also include any lease prepayments. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of operations. For further information, please refer to Note 11. “Leases.”

Revenue Recognition

The first step in its process for revenue recognition is to identify the contract with a customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outlines the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, and payment terms. 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 services are performed. Progress toward completion is measured using progress billings issued to customers, which approximate costs incurred and are considered to faithfully depict the Company's performance in transferring services to customers. This method is used because management considers it to be the best available measure of progress on the contracts. Revenue from scrap and excess inventory sales is recognized at the point-in-time of scrap at the customers’ direction, or, if applicable, shipment of the material to the customer.

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 which are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging. The effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and is reclassified into earnings in the same period in which the underlying hedged transaction affects earnings. The derivative’s effectiveness represents the change in fair value of the hedge that offsets the change in fair value of the hedged item.

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 generally compute our interim income tax provision through the use of an estimated 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. In the current quarter, we have departed from the ETR approach with respect to the United States and China, as we have a full valuation allowance against our net deferred tax assets in the United States and China, resulting in projected zero ETR in the United States and China for fiscal year 2027. 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 2005 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

On November 4, 2024 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures. The ASU requires entities to disclose in the notes to the financial statements specified information about certain costs and expenses. The ASU applies to the Company’s annual reporting period beginning in fiscal year 2028 and interim reporting periods beginning in fiscal year 2029. The Company does not anticipate early adoption of the new disclosure standard.

On September 18, 2025, the FASB issued ASU 2025-06, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software. This update was made to modernize the accounting for software costs. The ASU is effective for all entities for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company is currently evaluating the guidance and its impact to the financial statements.

On November 25, 2025, the FASB issued ASU 2025-09, Derivatives and Hedging (Topic 815), Hedge Accounting Improvements. This update was made to clarify certain aspects of the guidance on hedge accounting and to address several incremental hedge accounting issues arising from the global reference rate reform initiative. The ASU is effective for public business entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company is currently assessing the impact of the requirements on its consolidated financial statements.

On December 4, 2025, the FASB issued ASU 2025-10, Government Grants (Topic 832), Accounting for Government Grants Received by Business Entities. The FASB is issuing this Update to improve generally accepted accounting principles (GAAP) by establishing authoritative guidance on the accounting for government grants received by business entities. The ASU is effective for public business entities for annual reporting periods beginning after December 15, 2029, and interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company does not expect any material changes to its consolidated financial statements as a result of this update.

On December 8, 2025, the FASB issued ASU 2025-11, Interim Reporting (Topic 270), Narrow-Scope Improvements. This update is intended to improving the navigability of the required interim disclosures and clarifying when that guidance is applicable. The amendments also provide additional guidance on what disclosures should be provided in interim reporting periods. The ASU is effective for interim reporting periods within annual reporting periods beginning after December 15, 2027 for public business entities. Early adoption is permitted. The Company is currently assessing the impact of the requirements on its consolidated financial statements.

On December 17, 2025 the FASB issued ASU 2025-12, Codification Improvements. This evergreen project facilitates Codification updates for a broad range of Topics arising from technical corrections, unintended application of the Codification, clarifications, and other minor improvements. The resulting amendments are collectively referred to as Codification improvements. The amendments in this Update are effective for all entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods. The types of issues considered through this project are improvements that are not expected to have a significant effect on current accounting practice or result in significant costs to most entities, and the Company is currently assessing the impact of the requirements on its consolidated financial statements.

3. Inventories

Inventories as of September 26, 2026 are $104.0 million compared to $95.8 million as of June 27, 2026. The components of inventories consist of the following (in thousands):

4. Long-Term Debt

(1) On December 3, 2024, the Company entered into an asset-based credit agreement (the "Credit Agreement") among the Company, certain domestic subsidiaries (as co-borrowers or guarantors), BMO Bank, N.A (the "Bank"), as administrative agent and swing line lender, BMO Capital Markets as arranger and book runner, and certain financial institutions, as lenders. The Credit Agreement provides for an asset-based senior secured revolving credit facility (the "Credit Facility") of up to $115 million, maturing on December 3, 2029.

Generally, under the Credit Agreement and at the Company’s option: (i) each SOFR Loan shall bear interest at a rate per annum equal to Adjusted Term SOFR (Term SOFR plus 0.10%, subject to a floor of 0.00%) plus an applicable margin of 2.50% to 3.00%, depending on the availability of borrowing amounts under the Credit Agreement; and (ii) each Base Rate Loan, Swing Line Loan or other Obligation shall bear interest at a rate per annum equal to the Base Rate (subject to a floor of 1.00%) plus an applicable margin of 1.50% to 2.00%, depending on the availability of borrowing amounts under the Credit Agreement. As of September 26, 2026, the applicable margin was 2.75% for SOFR Loans and 1.75% for Base Rate Loans. If there is an event of default under the Credit Agreement, all loans and other obligations may bear interest at a rate of an additional 2.00% on the otherwise applicable interest rates. In addition to the applicable interest rates, the Company is required to pay a fee of 0.2% per annum on the unused portion of the Credit Facility, monthly in arrears. Availability on the line of credit is generally determined based on eligible inventory and accounts receivable balances, certain machinery and equipment located in the US, and other covenant restrictions, including a $13 million availability block, which functions to reduce the Company's total availability.

On May 13, 2025, the Company entered into a first amendment and limited waiver to the Credit Agreement. The amendment waived an existing event of cross-default created by an event of default under the Term Loan as defined and discussed in footnote (2) below. The amendment also adds an additional reporting requirement.

As of September 26, 2026, the Company had an outstanding balance under the asset-based revolving credit facility of $79.2 million, $0.7 million in outstanding letters of credit and $14.4 million of potential borrowing capacity, further limited by the availability block in the credit agreement.

As of June 27, 2026, the Company had an outstanding balance under the Credit Facility of $74.7 million, $0.7 million in outstanding letters of credit and $16.5 million of potential borrowing capacity, further limited by the availability block in the credit agreement.

(2) On December 3, 2024, the Company entered into a $28 million term loan (the "Term Loan") credit agreement among the Company, certain domestic subsidiaries (as co-borrowers or guarantors), Callodine Commercial Finance, LLC (“Callodine”), as administrative agent, and certain financial institutions, as term loan lenders. The Term Loan requires quarterly repayments of principal in the amount of $0.75 million. The remainder will be payable at maturity which is the earlier of December 3, 2029 or the maturity of the Credit Agreement described above. The Term Loan bears interest at Adjusted Term SOFR (Term SOFR plus 0.15%, subject to a floor of 3.50%) plus an applicable margin of 7.00%. If there is an event of default under the Term Loan, all loans and other obligations may bear interest at a rate of an additional 2.00% on the otherwise applicable interest rate.

On May 13, 2025, the Company entered into a first amendment and limited waiver to the Term Loan. The amendment waived an existing event of default relating to non-compliance with minimum required earnings before interest, depreciation, amortization, and other adjustments for the period ending March 29, 2025. The amendment adds an additional reporting requirement, and requires minimum earnings before interest, taxes, depreciation, amortization, and other adjustments only if average daily availability for the applicable fiscal quarter is less than 12.5% of the combined borrowing base.

(3) On December 11, 2023, the Company entered into a loan agreement in Mexican peso with Banorte Financial Group. The agreement provides for athree-year secured line of credit up to MXN 100 million, subject to the Company’s borrowing base, maturing on December 11, 2026. On October 2, 2025, the company refinanced its loan agreement with Banorte Financial Group. The refinanced agreement separated the existing MXN 100 million line of credit intotwo separate debt instruments. The first instrument allows for a line of credit of up to MXN 20 million, subject to the Company’s borrowing base, maturing on December 11, 2026. The second component is a MXN 40 million term loan, requiring monthly payments of MXN 678 thousand through maturity on September 7, 2030. No proceeds were received as a result of the refinanced agreement. The agreement is subject to certain financial covenants which are reviewed on an annual basis. During fiscal year 2026 it was determined that the Company was not in compliance with the debt coverage and leverage covenants for the local Mexico entity. The non-compliance was primarily due to a change in the methodology for calculating and remitting Income Tax (ISR). The Company was notified by the Banorte Financial Group that they have chosen to not exercise their right to accelerate the maturity of outstanding loans.

The credit facility bears interest at Iterbancario de Equilibrio Interest Rate plus 2.75%, and as of September 26, 2026, was 10.0%. As of September 26, 2026, the Company had an outstanding balance under the revolving credit facility of MXN 12 million ($0.7 million USD) and MXN 8 million ($0.4 million USD) was available for future borrowings.

(4) On September 19, 2023, the Company entered into a $1.1 million equipment financing agreement with Ameris Bank dba Balboa Capital ("Balboa Capital"). Combining with other equipment financing agreements entered in the third quarter of fiscal year 2023, a total of $5.5 million relates to the Company’s existing manufacturing equipment that bears an interest rate range of 6% -8% and matures in the first quarter of fiscal 2030. Under these loan agreements, equal monthly payments of $94,000 commenced in the fourth quarter of fiscal year 2024 and will continue through the maturity of the equipment financing facility in the first quarter of fiscal 2030.

(5) On May 1, 2025, the Company entered into a $4.0 million equipment financing facility related to new manufacturing equipment that bears interest at 13.6% and matures on October 31, 2028. On December 16, 2025, the equipment financing facility was amended and restated to reduce the financing proceeds to $0.7 million and equal quarterly payments of $69,022. The equipment financing facility will mature on December 16, 2028.

(6) On March 6, 2025, the Company entered into a $5.0 million equipment financing facility related to the Company’s existing manufacturing equipment that bears interest at 11.71% and matures on June 30, 2028. Under this loan agreement, equal quarterly payments of $464,361 commenced on July 15, 2025 and will continue through the maturity of the equipment financing facility on June 30, 2028.

Debt maturities as of September 26, 2026 for the next five years are as follows (in thousands):

(1) Represents scheduled payments for the remaining nine-month period ending July 3, 2027.

The Company must comply with certain financial covenants, including average and daily availability and, if triggered, earnings before interest, taxes, depreciation, amortization and other adjustments and a fixed charge coverage ratio covenant will apply. The Credit Agreement requires the Company to grant certain inspection rights to BMO Bank, N.A., limit or restrict the Company’s cash management; limit or restrict the ability of the Company to incur additional liens, make acquisitions or investments, incur additional indebtedness, engage in mergers, consolidations, liquidations, dissolutions, or dispositions, pay dividends or other restricted payments, prepay certain indebtedness, engage in transactions with affiliates, and use proceeds. As of September 26, 2026, the Company was in compliance with all applicable financial covenants under the Credit Agreement. As noted above in (3), the Company was not in compliance with certain financial covenants for the local Mexico entity. The Company was notified by the Banorte Financial Group that they have chosen to not exercise their right to accelerate the maturity of outstanding loans.

5. Income Taxes

The Company expects to repatriate approximately $1.8 million from China in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations.

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. Currently, management estimates future repatriations of cash from China may result in approximately $0.1 million of withholding tax. Withholding taxes would not apply to future repatriations from Mexico or Vietnam.

The Company has available approximately $12.5 million of gross federal research and development tax credits as of September 26, 2026 expiring in various fiscal years from 2033 to 2047. 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 September 26, 2026, 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 $9.4 million.

Management has reviewed all deferred tax assets for purposes of determining whether a valuation allowance may be required. A valuation allowance against deferred tax assets is required if it is more likely than not that some of the deferred tax assets will not be realized. At June 27, 2026, the Company evaluated the realizability of its U.S. federal and state deferred tax assets by considering all available positive and negative evidence, and determined the significance of negative evidence caused a change in judgment about realizability of its U.S. net deferred tax asset, and a full valuation allowance was recognized against the U.S. net deferred tax asset. The principal negative evidence included a significant cumulative loss in recent years in the U.S. tax-paying group, continued annual U.S. losses, and fiscal 2026 revenue and operating results below the levels reflected in prior forecasts. At earlier fiscal 2026 reporting dates, management concluded that this negative evidence was outweighed by the positive evidence then available, including scheduled reversals of existing taxable temporary differences, the absence of a history of tax credit or operating loss carryforwards expiring unused, and forecasted future U.S. taxable income associated with anticipated program ramps and operating improvements. At March 28, 2026, the forecast continued to reflect a return to operating profitability during the fourth quarter of fiscal year 2026 and was supported by strong customer demand.

During the fourth quarter of fiscal year 2026, actual U.S. operating results did not achieve the timing or magnitude contemplated in the March 28, 2026, realizability assessment. This additional actual-result evidence, considered together with previous forecast shortfalls and the significant cumulative U.S. loss position, reduced the weight that could be placed on projected future taxable income as positive evidence. Because future reversals of existing taxable temporary differences were insufficient to realize the net U.S. deferred tax assets and no carryback or qualifying tax-planning strategies were available, management concluded at June 27, 2026, that it was no longer more likely than not that the affected deferred tax assets would be realized. Accordingly, the Company recorded a full valuation allowance against its net U.S. deferred tax assets at June 27, 2026, and continues to maintain a full valuation allowance against its net U.S. deferred tax assets as of September 26, 2026. The Company’s decision to end manufacturing operations in China has resulted in loss carryforwards that more likely than not will not be realized in the carryforward period. Therefore, the Company has placed a full valuation allowance against the net deferred tax asset in China at December 27, 2025, and continues to maintain a full valuation allowance against its net China deferred tax assets as of September 26, 2026.

The Company evaluated tax law changes and regulatory guidance issued through the fiscal quarter. After the end of fiscal year 2025, on July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, which includes several tax related provisions that impact the Company beginning in fiscal year 2026. These tax law changes mitigate federal income taxes payable, but did not materially impact the Company’s overall tax position and effective tax rate in fiscal year 2026, nor are they expected to materially impact the Company’s overall tax position and effective tax rate in fiscal year 2027, or beyond.

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).

The Company’s Advance Pricing Agreement for intercompany transfer pricing has expired, and our Mexico subsidiary is now subject to the Mexico safe harbor transfer pricing regulations. As a result, we generally expect our current tax liability in Mexico to increase. Overall, we do not expect the application of the safe harbor transfer pricing regulations to have a material impact on our consolidated tax position.

6. Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net loss (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is computed by including both the weighted-average number of shares outstanding and any dilutive common share equivalents in the denominator. The following table presents a reconciliation of the denominator and the number of antidilutive common share awards that were not included in the diluted earnings per share calculation. These antidilutive securities occur when equity awards outstanding have an option price greater than the average market price for the period:

7. Stock-Based Compensation and Benefit Plans

The Company’s 2024 Incentive Plan provides for equity and liability awards to employees and non-employee directors with service and performance vesting conditions in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based or cash-based awards. At September 26, 2026,720,045 shares were available for grant. 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 sales, research, development and engineering, and selling, general and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest and forfeitures for restricted stock units are accounted for prospectively as they occur.

Restricted Stock Units

The Company grants restricted stock units that have a performance condition and/or a service condition. Restricted stock units with only a service condition generally vest in equal annual installments over a maximum ofthree years. Certain restricted stock units are granted with a performance condition. The final number of shares issued will be determined annually based on the achievement of annual financial targets. Forfeitures for restricted stock units are accounted for prospectively as they occur. The fair value of restricted stock units is the market close price on the date of grant.

The following table is a summary of restricted stock unit activity:

Total restricted stock unit expense recognized during the three months ended September 26, 2026 and September 27, 2025 was approximately $315,000 and $221,000, respectively.

As of September 26, 2026 total unrecognized compensation expense on restricted stock units was $2.6 million, which is expected to be recognized over a weighted average period of approximately 2.1 years.

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 $15,700 as of September 26, 2026 and $25,300 as of June 27, 2026.

9. Derivative Financial Instruments

A significant portion of our operations are in foreign locations, which results in transactions occurring in currencies other than the U.S. Dollar. As a part of our risk management strategy, we use Mexican Peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican Peso denominated expenses. As of September 26, 2026, the Company had outstanding foreign currency forward contracts with a total notional amount of $4.9 million that mature through the third quarter of fiscal year 2027. During the three months ended September 26, 2026, the Company did not enter into foreign currency forward contracts and settled $5.9 million of such contracts. During the same period of the previous year, the Company didnot enter into foreign currency forward contracts and settled $6.5 million of such contracts.

Changes in the fair value of the forward contracts are recognized as a component of OCI and will be recognized in cost of sales when the hedged item affects earnings. The amount of net gain expected to be reclassified into earnings in the next 12 months is approximately $26,000.

The following table summarizes the fair value of the derivative instruments in the Consolidated Balance Sheets as of September 26, 2026 and June 27, 2026 (in thousands):

The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Operations for the three months ended September 26, 2026 and September 27, 2025, respectively (in thousands):

As of September 26, 2026, 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 lines of credit and foreign currency risk resulting from our China and Vietnam operations. The Company does not currently manage these risk exposures by using derivative instruments.

10. 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 services are performed. Progress toward completion is measured using progress billings issued to customers, which approximate costs incurred and are considered to faithfully depict the Company's performance in transferring services to customers. This method is used because management considers it to be the best available measure of progress on the contracts. Revenue from scrap and excess inventory sales is recognized at the point-in-time of scrap at the customers’ direction, or, if applicable, shipment of the material to the customer.

The Company’s typical payment terms are 30 to 45 days and its sales arrangements do not contain any significant financing component for its customers.

The Company generally provides a warranty for workmanship on its manufacturing contracts. Although we offer warranties on our products, our warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations; therefore, the primary performance obligation in the majority of our contracts is the delivery of a specific good through the purchase order submitted by our customer.

The Company elected not to disclose information about remaining performance obligations for current contract assets as they are part of contracts 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 quarter of fiscal year 2027, 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. Current 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 September 26, 2026 (in thousands):

The Company also has long term contract assets of approximately $4.3 million at September 26, 2026, and $4.7 million at June 27, 2026, classified under Other long-term assets in the condensed consolidated balance sheet. No revenue was recognized, and $0.1 million was collected or invoiced related to these balances during the period. The remaining performance obligations related to these amounts are tied to the manufacturing of electronic products.

Disaggregation of Revenue

The following table presents the Company’s revenue disaggregated for the three and three months ended September 26, 2026 and September 27, 2025 (in thousands):

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, discount rates assumed range from 4.0% to 9.5% . The weighted average discount rate is disclosed in the tables below.

The components of lease cost for the three months ended September 26, 2026 and September 27, 2025 were (in thousands):

Amounts reported in the Consolidated Balance Sheet as of September 26, 2026 and June 27, 2026 were (in thousands, except weighted average lease term and discount rate):

(1) The current portion of the total operating lease liabilities of $6.3 million is classified under Other Current Liabilities resulting in $19.1 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 $9.8 million is classified under Other Long-term Assets. The current portion of the total finance lease liabilities of $3.5 million is classified under Other Current Liabilities, and $3.3 million is classified in the Other Long-term Liabilities section of the condensed consolidated balance sheet.

Future lease payments under non-cancellable leases as of September 26, 2026 are as follows (in thousands):

(1) Represents estimated lease payments for the remaining nine-month period ending July 3, 2027.

12. Segment Information

Operating segments are defined in ASC Topic 280, Segment Reporting as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. As of September 26, 2026, the Company operates and internally manages a single operating segment, Electronics Manufacturing Services, as this is the only discrete financial information that is regularly reviewed by the chief operating decision maker. This segment provides integrated electronic and mechanical engineering, assembly, sourcing and procurement, logistics, and new product testing for our customers. The chief operating decision maker assesses performance and determines resource allocation for the Company’s single reportable segment based on consolidated net income/loss and total assets/liabilities. The accounting policies of the single reportable segment are the same as those described in the summary of significant accounting policies. Significant segment measures include gross profit which is primarily composed of materials spend and labor costs, which are further presented below.

Significant Segment Measures

In accordance with the adoption of ASU 2023-07 in 2025, the Company determined that significant segment measures included gross profit, which is primarily composed of materials and labor costs as follows (in thousands). The other category includes various expenses such as depreciation, lease expense, utilities, supplies, maintenance, and other operating costs.