10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 ____________________________________________________________ 

FORM 10-Q

 ____________________________________________________________ 

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

FOR THE PERIOD ENDED OCTOBER 1, 2016

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

(509) 928-8000

  ____________________________________________________________ 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

As of October 28, 2016, 10,758,238 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
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Cash Flows	6
	Consolidated Statements of Shareholders’ Equity	7
	Notes to Consolidated Financial Statements	8-15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION:
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
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	29
Signatures		30

 * Items are not applicable

“We,” “us,” “our,” “Company,” “KeyTronicEMS” and “KeyTronic,” 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)

	October 1, 2016			July 2, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	275		$	1,018
Trade receivables, net of allowance for doubtful accounts of $127 and $135	64,793			61,678
Inventories	100,205			107,006
Other	12,438			11,757
Total current assets	177,711			181,459
Property, plant and equipment, net	29,456			27,925
Other assets:
Deferred income tax asset	9,975			8,982
Goodwill	9,957			9,957
Other intangible assets, net	5,646			5,928
Other	1,541			1,673
Total other assets	27,119			26,540
Total assets	$	234,286		$	235,924
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	53,068		$	58,967
Accrued compensation and vacation	7,369			9,571
Current portion of debt	5,000			5,000
Other	12,134			10,572
Total current liabilities	77,571			84,110
Long-term liabilities:
Term loan	20,000			21,250
Revolving loan	22,996			18,073
Other long-term obligations	7,256			6,909
Total long-term liabilities	50,252			46,232
Total liabilities	127,823			130,342
Commitments and contingencies (Note 9)
Shareholders’ equity:
Common stock, no par value—shares authorized 25,000; issued and outstanding 10,756 and 10,725 shares, respectively	45,316			45,227
Retained earnings	69,720			67,928
Accumulated other comprehensive loss	(8,573		)	(7,573		)
Total shareholders’ equity	106,463			105,582
Total liabilities and shareholders’ equity	$	234,286		$	235,924

See accompanying notes to consolidated financial statements.

3

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

	Three Months Ended
	October 1, 2016		September 26, 2015
Net sales	$	117,135	$	126,209
Cost of sales	107,426		117,290
Gross profit	9,709		8,919
Research, development and engineering expenses	1,584		1,556
Selling, general and administrative expenses	5,335		5,583
Total operating expenses	6,919		7,139
Operating income	2,790		1,780
Interest expense, net	589		533
Income before income taxes	2,201		1,247
Income tax provision	409		430
Net income	$	1,792	$	817
Net income per share — Basic	$	0.17	$	0.08
Weighted average shares outstanding — Basic	10,748		10,706
Net income per share — Diluted	$	0.16	$	0.07
Weighted average shares outstanding — Diluted	10,922		11,391

See accompanying notes to consolidated financial statements.

4

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

	Three Months Ended
	October 1, 2016			September 26, 2015
Comprehensive income (loss):
Net income	$	1,792		$	817
Other comprehensive income (loss):
Unrealized loss on hedging instruments, net of tax	(1,000		)	(2,980		)
Comprehensive income (loss)	$	792		$	(2,163	)

Other comprehensive income (loss) for the three months ended October 1, 2016 and September 26, 2015 is reflected net of tax benefit of approximately $(0.5) million and $(1.5) million, respectively.

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, 2016			September 26, 2015
Operating activities:
Net income	$	1,792		$	817
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	1,619			1,516
Excess tax benefit from share-based compensation	—			(325		)
Provision for obsolete inventory	55			405
Provision for (recovery of) warranty	2			(22		)
Recovery of doubtful accounts	(8		)	(4		)
Loss on disposal of assets	71			—
Share-based compensation expense	197			189
Deferred income taxes	(477		)	(1,127		)
Changes in operating assets and liabilities:
Trade receivables	(3,107		)	(905		)
Inventories	6,746			(9,611		)
Other assets	(733		)	(1,904		)
Accounts payable	(5,899		)	13,429
Accrued compensation and vacation	(2,202		)	(2,011		)
Other liabilities	527			847
Cash (used in) provided by operating activities	(1,417		)	1,294
Investing activities:
Purchase of property and equipment	(2,956		)	(3,512		)
Proceeds from sale of fixed assets	93			2,439
Cash used in investing activities	(2,863		)	(1,073		)
Financing activities:
Payment of financing costs	(28		)	(28		)
Repayments of long term debt	(1,250		)	(1,250		)
Borrowings under revolving credit agreement	40,832			50,721
Repayments of revolving credit agreement	(35,909		)	(50,221		)
Excess tax benefit from share-based compensation	—			325
Tax withholding from exercise of share-based compensation	(108		)	—
Cash provided by (used in) financing activities	3,537			(453		)
Net decrease in cash and cash equivalents	(743		)	(232		)
Cash and cash equivalents, beginning of period	1,018			372
Cash and cash equivalents, end of period	$	275		$	140
Supplemental cash flow information:
Interest payments	$	569		$	491
Income tax payments, net of refunds	$	330		$	552

See accompanying notes to consolidated financial statements.

6

KEY TRONIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited, in thousands)

	Shares		Common Stock			Retained Earnings		Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balances, July 2, 2016	10,725		$	45,227		$	67,928	$	(7,573	)	$	105,582
Net income	—		—			1,792		—			1,792
Unrealized loss on hedging instruments, net	—		—			—		(1,000		)	(1,000		)
Exercise of stock appreciation rights	43		—			—		—			—
Shares withheld for taxes	(12	)	(108		)	—		—			(108		)
Share-based compensation	—		197			—		—			197
Balances, October 1, 2016	10,756		$	45,316		$	69,720	$	(8,573	)	$	106,463

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, 2016.

The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The three months endedOctober 1, 2016 and September 26, 2015 were 13 week periods, respectively. Fiscal year 2017 will end on July 1,2017, which is a 52 week year. Fiscal year 2016 which ended on July 2, 2016, was a 53 week year.

2. Significant Accounting Policies

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

The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities and interest rate risk associated with certain borrowings under the Company’s debt arrangement. The foreign currency forward contracts and interest rate swaps 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 and interest rate swap potentially expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the agreement. The Company minimizes such risk by seeking high quality counterparties. The Company’s counterparties to the foreign currency forward contracts and interest rate swap are major banking institutions. These institutions do not require collateral for the contracts, and the Company believes that the risk of the counterparties 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 net operating loss carryforwards, 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. Refer to Note 6 for further discussions.

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 basis, as well as operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.

We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments based on new assessments and changes in estimates and which may not accurately forecast actual outcomes. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. The tax years 1998 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject.

Impairment of Goodwill and Other Intangible Assets

The Company records intangible assets that are acquired individually or with a group of other assets in the financial statements at acquisition. In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. The Company’s annual goodwill impairment analysis is performed as of the first day of the fourth quarter. The Company’s acquired intangible assets are subject to amortization over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued an amendment to defer the effective date of ASU 2014-09 for all entities by one year. This Update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. Companies have the option of using either a full or modified retrospective approach in applying this standard. The Company is in the process of assessing the impact of ASU 2014-09 on its consolidated financial statements.

In July 2015, the FASB issued final guidance that simplifies the subsequent measurement of inventory for which cost is determined by methods other than last-in first-out (“LIFO”) and the retail inventory method. For inventory within the scope of the new guidance, entities will be required to compare the cost of inventory to only one measure, its net realizable value, and not the three measures required by the existing guidance. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance should not change how entities initially measure the cost of inventory. The guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this update on its consolidated financial statements.

9

In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases which supersedes ASC 840 Leases and creates a new topic, ASC 842 Leases. This update requires lessees to recognize a lease asset and a lease liability for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-09 (ASU 2016-09), Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier adoption permitted. The Company prospectively adopted this ASU during the first quarter of fiscal year 2017. As a result, excess tax benefits are recorded in income tax expense instead of a component of shareholders’ equity and excess tax benefits are no longer broken out on the consolidated statement of cash flows beginning in fiscal year 2017.

In August 2016, the FASB issued Accounting Standards Update 2016-15 (ASU 2016-15), Classification of Certain Cash Receipts and Cash Payments. This update provides guidance on how to record eight specific cash flow issues. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted and a retrospective transition method to each period should be presented. The Company is currently evaluating the effect of this update on its consolidated financial statements.

3. Inventories

The components of inventories consist of the following (in thousands):

	October 1, 2016		July 2, 2016
Finished goods	$	13,811	$	13,384
Work-in-process	16,760		18,988
Raw materials and supplies	69,634		74,634
	$	100,205	$	107,006

4. Long-Term Debt

On September 3, 2014, the Company added a five-year term loan in the amount of $35.0 million used to acquire all of the outstanding shares of CDR Manufacturing, Inc. (dba Ayrshire Electronics). On August 6, 2015, the Company entered into a First Amendment to the amended and restated credit agreement extending the limit on our line of credit facility to $45.0 million as evidenced by the Second Replacement Revolving Note.

The agreement specifies that the proceeds of the revolving line of credit be used primarily for working capital and general corporate purposes of the Company and its subsidiaries. Borrowings under the revolving line of credit bear interest at either a “Base Rate” or a “Fixed Rate,” as elected by the Company. The base rate is the higher of the Wells Fargo Bank prime rate, daily one month London Interbank Offered Rate (LIBOR) plus 1.5%, or the Federal Funds rate plus 1.5%. The fixed rate is LIBOR plus 1.75%, LIBOR plus 2.00%, or LIBOR plus 2.25% depending on the level of the Company’s trailing four quarters Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The revolving line of credit is secured by substantially all of the assets of the Company.

As of October 1, 2016, the Company had an outstanding balance under the credit facility of $23.0 million, $0.4 million in outstanding letters of credit and $21.6 million available for future borrowings. The interest rate on the outstanding line of credit balance was in the range of 2.53% - 3.50%. As of July 2, 2016, the Company had an outstanding balance under the credit facility of $18.1 million, $0.4 million in outstanding letters of credit and $26.5 million available for future borrowings. The interest rate on the outstanding line of credit balance was in the range of 2.45% - 3.50%.

10

The outstanding principal balance of the term loan bears interest at a fixed rate per annum of the daily one month LIBOR plus 1.75%, 2.00% or 2.25% depending on the ratio of the Company’s funded debt to EBITDA, except that the term loan bore interest at LIBOR plus 2.00% from September 3, 2014 through December 14, 2014 regardless of the Company’s cash flow leverage ratio. Principal on the term loan is payable in equal quarterly installments of $1.25 million which commenced on December 15, 2014 and will continue through June 15, 2019, with a final installment of all remaining unpaid principal due on August 31, 2019. The Company had an outstanding balance of $25.0 million under the term loan as of October 1, 2016. As of July 2, 2016, the Company had an outstanding balance of $26.3 million under the term loan.

Debt maturities as of October 1, 2016 for the next five years and thereafter are as follows (in thousands):

Fiscal Years Ending	Amount
2017 (1)	$	3,750
2018	5,000
2019	5,000
2020	34,246
Total	$	47,996

(1) Represents scheduled payments for the remaining nine-month period ending July 1, 2017.

The Company must comply with certain financial covenants, including a cash flow leverage ratio, an asset coverage ratio, and a fixed charge coverage ratio. The credit agreement requires the Company to maintain a minimum profit threshold, limits the maximum capital lease expenditures and restricts the Company from declaring or paying dividends in cash or stock without prior bank approval. The Company is in compliance with all financial covenants for all periods presented.

5. Trade Accounts Receivable Purchase Programs

Sale Programs

The Company utilizes an Account Purchase Agreement with Wells Fargo Bank, N.A. (“WFB”) which allows the Company to sell and assign to WFB and WFB may purchase from the Company the accounts receivable of certain Company customers in a maximum aggregate amount outstanding of $20.0 million. The initial term of the agreement is set to mature in June 2017 and there are successive 12 month renewal periods available. The Company also has an Account Purchase Agreement with Orbian Financial Services (“Orbian”). This agreement may be cancelled at any time by either party.

Total accounts receivables sold during the three months ended October 1, 2016 and September 26, 2015 was approximately $17.4 million and $13.6 million, respectively. Accounts receivables sold and not yet collected were $1.4 million and $1.7 million as of October 1, 2016 and July 2, 2016, respectively. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received is reflected as cash provided by operating activities in the condensed consolidated statements of cash flows.

6. 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 $12.0 million of foreign earnings in the future. As such, these earnings would be recognized in the United States, and the Company would be subject to U.S. federal income taxes and potential withholding taxes in foreign jurisdictions. Both the domestic tax and estimated withholding tax of expected repatriation of foreign earnings have been recorded as part of deferred taxes as of October 1, 2016. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations.

The Company has available approximately $7.1 million of gross federal research and development tax credits as of October 1, 2016. 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, 2016, the Company has recorded $3.8 million of unrecognized tax benefits associated with these federal tax credits, resulting in a net deferred tax benefit of approximately $3.3 million.

11

7. Earnings Per Share

The following tables present 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 per share information)
	October 1, 2016		September 26, 2015
Net income	$	1,792	$	817
Weighted average shares outstanding—basic	10,748		10,706
Effect of dilutive common stock awards	174		685
Weighted average shares outstanding—diluted	10,922		11,391
Net income per share—basic	$	0.17	$	0.08
Net income per share—diluted	$	0.16	$	0.07
Antidilutive SARs not included in diluted earnings per share	890		208

8. 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, these 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 26, 2016		July 29, 2015
SARs Granted	242,500		248,166
Strike Price	$	8.18	$	10.26
Fair Value	$	2.42	$	3.65

Total share-based compensation expense recognized during the three months ended October 1, 2016 and September 26, 2015 was approximately $197,000 and $189,000, respectively. As of October 1, 2016, total unrecognized compensation expense related to unvested share-based compensation arrangements was approximately $1.3 million. This expense is expected to be recognized over a weighted average period of 2.11 years.

SARs exercised during the three months ended October 1, 2016 and September 26, 2015 were 102,000 and 3,333, respectively. There was approximately $342,000 of intrinsic value for SARs exercised during the three months ended October 1, 2016 compared to an immaterial amount during the three months ended September 26, 2015.

9. 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.

12

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 $38,000 and $30,000 as of October 1, 2016 and July 2, 2016, respectively.

10. Fair Value Measurements

The Company has adopted ASC 820, Fair Value Measurements, which defines fair value, establishes a framework for assets and liabilities being measured and reported at fair value and expands disclosures about fair value measurements. There are three levels of fair value hierarchy inputs used to value assets and liabilities which include: Level 1 – inputs are quoted market prices for identical assets or liabilities; Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 – inputs are unobservable inputs for the asset or liability.

The following table summarizes the fair value of assets (liabilities) of the Company’s derivatives that are required to be measured on a recurring basis as of October 1, 2016 and July 2, 2016 (in thousands):

	October 1, 2016
	Level 1		Level 2			Level 3		Total Fair Value
Financial Liabilities:
Interest rate swap	$	—	$	(376	)	$	—	$	(376	)
Foreign currency forward contracts	$	—	$	(12,614	)	$	—	$	(12,614	)

	July 2, 2016
	Level 1		Level 2			Level 3		Total Fair Value
Financial Assets:
Foreign currency forward contracts	$	—	$	136		$	—	$	136
Financial Liabilities:
Interest rate swap	$	—	$	(498	)	$	—	$	(498	)
Foreign currency forward contracts	$	—	$	(11,112	)	$	—	$	(11,112	)

The Company currently has forward contracts to hedge known future cash outflows for expenses denominated in the Mexican peso and an interest rate swap to mitigate risk associated with certain borrowings under the Company’s debt arrangement. These contracts are measured on a recurring basis based on the foreign currency spot rates and forward rates quoted by banks or foreign currency dealers. These contracts are marked to market using level 2 input criteria every period with the unrealized gain or loss, net of tax, reported as a component of shareholders’ equity in accumulated other comprehensive loss, as they qualify for hedge accounting.

The carrying values of cash and cash equivalents, accounts receivable and current liabilities reflected on the balance sheets at October 1, 2016 and July 2, 2016, reasonably approximate their fair value. The Company’s long-term debt primarily consists of a revolving line of credit and a term loan. Borrowings under the revolving line of credit bear interest at either a “Base Rate” or a “Fixed Rate,” as elected by the Company. Each of these rates is a variable floating rate dependent upon current market conditions and the Company’s current credit risk as discussed in footnote 4.

As a result of the determinable market rate for our revolving credit and term loan debt, they are classified within Level 2 of the fair value hierarchy. The discounted cash flow of the revolving line of credit is estimated to be $23.0 million and $18.1 million as of October 1, 2016 and July 2, 2016, respectively, with a carrying value that reasonably approximates the fair value. The discounted cash flow of the term loan is estimated to be $25.0 million as of October 1, 2016 and $26.3 million as of July 2, 2016, respectively, with a carrying value that reasonably approximates the fair value.

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11. Derivative Financial Instruments

As of October 1, 2016, the Company had outstanding foreign currency forward contracts with a total notional amount of $64.2 million. The maturity dates for these contracts extend through June 2019. For the three months ended October 1, 2016, the Company did not enter into any foreign currency forward contracts and settled $5.2 million of such contracts. During the same period of the previous year, the Company entered into $12.0 million of foreign currency forward contracts and settled $5.4 million of such contracts.

On October 1, 2014, the Company entered into an interest rate swap contract with an effective date of September 1, 2015 and a termination date of September 3, 2019, with a notional amount of $25.0 million related to the borrowings outstanding under the term loan. This interest rate swap pays the Company variable interest at the one month LIBOR rate, and the Company pays the counter party a fixed interest rate. The fixed interest rate for the contract is 1.97% that replaces the one month LIBOR rate component of our contractual interest to be paid to WFB as part of our term loan. Based on the terms of the interest rate swap contract and the underlying borrowings outstanding under the term loan, the interest rate contract was determined to be effective, and thus qualifies as a cash flow hedge.

The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheet as of October 1, 2016 and July 2, 2016 (in thousands):

		October 1, 2016			July 2, 2016
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value			Fair Value
Foreign currency forward contracts	Other long-term assets	$	—		$	136
Foreign currency forward contracts	Other current liabilities	$	(5,707	)	$	(4,670	)
Foreign currency forward contracts	Other long-term liabilities	$	(6,907	)	$	(6,442	)
Interest rate swap	Other current liabilities	$	(215	)	$	(264	)
Interest rate swap	Other long-term liabilities	$	(161	)	$	(234	)

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, 2016 and September 26, 2015, 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, 2016			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of October 1, 2016
Forward contracts	Cost of sales	$	(7,245	)	$	(2,189	)	$	1,109		$	(8,325	)
Interest rate swap	Interest expense	(328		)	(1		)	81			(248		)
Total		$	(7,573	)	$	(2,190	)	$	1,190		$	(8,573	)
Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of June 27, 2015			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of September 26, 2015
Forward contracts	Cost of sales	$	(4,487	)	$	(2,165	)	$	(684	)	$	(7,336	)
Interest rate swap	Interest expense	(276		)	(131		)	—			(407		)
Total		$	(4,763	)	$	(2,296	)	$	(684	)	$	(7,743	)

As of October 1, 2016, the net amount of unrealized loss expected to be reclassified into earnings within the next 12 months is approximately $3.9 million. As of October 1, 2016, the Company does not have any foreign exchange contracts with credit-risk-related contingent features.

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12. Goodwill and Other Intangible Assets

The Company recorded goodwill in connection with the Ayrshire and Sabre acquisitions resulting primarily from the synergies that resulted from the Company’s acquisitions and the assembled workforce. The goodwill from the acquisitions is not deductible for tax purposes.

During the three months ended October 1, 2016 and September 26, 2015, no impairment was recognized. Goodwill was recorded at $10.0 million as of October 1, 2016 and July 2, 2016.

The components of acquired intangible assets are as follows (in thousands):

	October 1, 2016
	Amortization Period in Years	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets:
Non-Compete Agreements	3 - 5	$	568	$	(378	)	$	190
Customer Relationships	10	4,803		(1,230		)	3,573
Favorable Lease Agreements	4 - 7	2,941		(1,058		)	1,883
Total		$	8,312	$	(2,666	)	$	5,646

	July 2, 2016
	Amortization Period in Years	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets:
Non-Compete Agreements	3 - 5	$	568	$	(343	)	$	225
Customer Relationships	10	4,803		(1,110		)	3,693
Favorable Lease Agreements	4 - 7	2,941		(931		)	2,010
Total		$	8,312	$	(2,384	)	$	5,928

Amortization expense was approximately $282,000 for both the three months ended October 1, 2016 and September 26, 2015.

Aggregate amortization expense relative to existing intangible assets by fiscal year is currently estimated to be as follows (in thousands):

Fiscal Years Ending	Amount
2017 (1)	$	846
2018	1,073
2019	818
2020	783
2021	784
Thereafter	1,342
Total amortization expense	$	5,646

(1) Represents estimated amortization for the remaining nine-month period ending July 1, 2017.

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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,” “KeyTronicEMS,” “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 periodic reports the Company files from time to time with the Securities and Exchange Commission, including Year-end Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Overview

KeyTronicEMS is a leader in electronic manufacturing services (EMS) and solutions to original equipment manufacturers of a broad range of products including consumer products, communications, medical, defense, automotive, electronics, educational, gaming, industrial and computer markets. We provide engineering services, worldwide procurement and distribution, materials management, world-class manufacturing and assembly services, in-house testing, and unparalleled customer service. 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.

Acquisitions

On September 3, 2014, we completed the acquisition of all the outstanding shares of CDR Manufacturing, Inc. (dba Ayrshire Electronics), which added five locations (four in North America and one in Mexico). This acquisition expanded our printed circuit board assembly capacity, total revenue, and added to and diversified our customer base with the addition of many new multi-national companies. Subsequent to the acquisition, the Reynosa, Mexico operations were transferred to the Company’s existing Juarez, Mexico facilities. During the fourth quarter of fiscal year 2016, we approved a plan to close the Harrodsburg, Kentucky facility in order to improve operating efficiencies. The closure of the facility occurred shortly after the end of the first quarter of 2017 and the remaining programs from the Kentucky facility have been transferred to other facilities.

Executive Summary

During the first quarter of fiscal year 2017, we saw a slight slowdown in demand from a few customers. However, new programs continue to ramp and we are excited about our customer diversification and future prospects. We saw year-over-year improvements in margins as we continue to replace the high risk revenue that was associated with the longstanding customer discussed in previous quarters. The longstanding customer is no longer included in any sales forecasts. We continue to see a robust pipeline of potential new business and won three new significant programs during the first quarter involving transportation logistics equipment, medical and personal safety products. We are also encouraged by the strong prospects for new business involving our USA plants that we acquired in the Ayrshire acquisition. In coming periods we expect to see revenue growth in our USA plants as we complete their integration in the latter half of fiscal 2017. We plan to continue to invest in expanding our SMT, sheet metal and plastic molding capabilities while continuing to decrease our inventory levels to be more in line with revenues.

The concentration of our top three customers’ net sales decreased to 35.1 percent of total sales in the first quarter of fiscal year 2017 from 36.5 percent in the same period of the prior fiscal year.

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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 8.3 percent for the first quarter of fiscal year 2017 as compared to 7.1 percent for the same quarter of the prior fiscal year. The increase in gross profit as a percentage of net sales was due to a decrease in certain material related costs in the current period which were partially offset by an increase in overhead costs as a percentage of net sales due to lower net sales. The prior year period was also negatively impacted by a single longstanding customer that requested a significant and immediate increase in production volumes for a new program at the start of the quarter and then later abruptly cancelled those orders.

Operating income as a percentage of net sales was 2.4 percent for the first quarter of fiscal year 2017 as compared to 1.4 percent for the first quarter of the prior fiscal year. The increase in operating income as a percentage of net sales was primarily due to an increase in gross margin as discussed above.

Net income for the first quarter of fiscal year 2017 was $1.8 million or $0.16 per share, as compared to net income of $0.8 million or $0.07 per share for the first quarter of fiscal year 2016. The increase in net income for the first quarter of fiscal year 2017 as compared to the same period in fiscal year 2016 was primarily due to the increase in gross margin as discussed above.

Our pipeline of potential new business is also increasingly robust, involving programs with greater long-term revenue potential and higher quantity requirements. Our increased competitiveness in the EMS marketplace is being driven by the growing recognition of the advantages of Mexico-based production for North America consumption, opportunities presented by the acquisition of Ayrshire, as well as by the growing number of opportunities where we can capitalize on the continued expansion of our sheet metal fabrication capabilities in concert with our plastic molding, printed circuit, and product assembly capabilities. We believe that we are well positioned in the EMS industry to continue expansion of our customer base and achieve long-term growth.

For the second quarter of fiscal year 2017, the Company expects to report revenue in the range of $115 million to $120 million, and earnings in the range of $0.13 to $0.18 per diluted share. These expected results assume an effective tax rate of 25%. Future results will depend on actual levels of customers’ orders and the timing of the startup of production of new product programs.

We maintain a strong balance sheet with a current ratio of 2.3 and a debt to equity ratio of 0.5 as of October 1, 2016. Total cash used in operating activities as defined on our cash flow statement was $1.4 million for the three months ended October 1, 2016 as we did not utilize our Accounts Purchase Agreements to the same extent we did during the three months ended July 2, 2016. We maintain sufficient liquidity for our expected future operations and had $23.0 million in borrowings on our $45.0 million revolving line of credit with Wells Fargo Bank, N.A. of which $21.6 million remained available at October 1, 2016. We believe cash flows generated from operations, our borrowing capacity, and leasing opportunities should provide adequate capital for planned growth.

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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.

• Inactive, Obsolete, and Surplus Inventory Reserve

• Revenue Recognition

• Allowance for Doubtful Accounts

• Accrued Warranty

• Income Taxes

• Share-Based Compensation

• Impairment of Long-Lived Assets

• Derivatives and Hedging Activity

• Long-Term Incentive Compensation Accrual

• Impairment of Goodwill

• Business Combinations

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, 2016, for further details.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended October 1, 2016 with the Three Months Ended September 26, 2015

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, 2016 as compared to the three months ended September 26, 2015. It is provided to assist in assessing differences in our overall performance (in thousands):

	Three Months Ended
	October 1, 2016			% of net sales		September 26, 2015			% of net sales		$ change			% point change
Net sales	$	117,135		100.0	%	$	126,209		100.0	%	$	(9,074	)	—	%
Cost of sales	107,426			91.7	%	117,290			92.9	%	(9,864		)	(1.2	)%
Gross profit	9,709			8.3	%	8,919			7.1	%	790			1.2	%
Research, development and engineering	1,584			1.4	%	1,556			1.2	%	28			0.2	%
Selling, general and administrative	5,335			4.6	%	5,583			4.4	%	(248		)	0.2	%
Total operating expenses	6,919			6.0	%	7,139			5.6	%	(220		)	0.4	%
Operating income	2,790			2.4	%	1,780			1.4	%	1,010			1.0	%
Interest expense, net	589			0.5	%	533			0.4	%	56			0.1	%
Income before income taxes	2,201			1.9	%	1,247			1.0	%	954			0.9	%
Income tax provision	409			0.4	%	430			0.4	%	(21		)	—	%
Net income	$	1,792		1.5	%	$	817		0.6	%	$	975		0.9	%
Effective income tax rate	18.6		%			34.5		%

Net Sales

Net sales of $117.1 million for the first quarter of fiscal year 2017 decreased by 7.2 percent as compared to net sales of $126.2 million for the first quarter of fiscal year 2016.

The $9.1 million decrease in net sales from the prior year period was driven by a decrease in net sales from the previously mentioned longstanding customer which was partially offset by an increase in demand from current customer programs as well as an increase in net sales from new programs.

Gross Profit

Gross profit as a percentage of net sales for the three months ended October 1, 2016 was 8.3 percent compared to 7.1 percent for the three months ended September 26, 2015. This 1.2 percentage point increase was due to a decrease in material related costs partially offset by an increase in certain overhead costs as a percentage of net sales due to lower net sales. The prior year period was also negatively impacted by a single longstanding customer that requested a significant and immediate increase in production volumes for a new program at the start of the quarter and then later abruptly cancelled those orders. 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 changes in the allowance for obsolete inventory. We recorded a provision of approximately $55,000 and $405,000 for obsolete inventory during the three months ended October 1, 2016 and September 26, 2015, respectively. We adjust the allowance for estimated obsolescence as necessary in an amount equal to the difference between the cost of inventory and estimated net realizable value based on assumptions as to future demand and market conditions. The reserves 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

Total research, development, and engineering (RD&E) expenses were $1.6 million during both the three months ended October 1, 2016 and the three months ended September 26, 2015, respectively. Total RD&E expenses as a percent of net sales were 1.4 percent and 1.2 percent during the three months ended October 1, 2016 and September 26, 2015, respectively. This 0.2 percent increase in RD&E as a percentage of net sales is due to a decrease in net sales for the three months ended October 1, 2016.

Total selling, general and administrative (SG&A) expenses were $5.3 million during the three months ended October 1, 2016 compared to $5.6 million during the three months ended September 26, 2015. Total SG&A expenses as a percentage of net sales were 4.6 percent during the three months ended October 1, 2016 compared to 4.4 percent during the three months ended September 26, 2015. This 0.2 percent increase as a percentage of net sales is primarily attributable to a decrease in net sales during three months ended October 1, 2016.

Interest

Interest expense increased to $589,000 during the three months ended October 1, 2016 from $533,000 during the three months ended September 26, 2015. The increase in interest expense is primarily related to an increase in the average balance outstanding on our line of credit that was primarily used to fund capital expenditures in our facilities.

Income Taxes

The effective tax rate for the three months ended October 1, 2016 was 18.6 percent compared to 34.5 percent for the same period in fiscal year 2016. The decrease is primarily attributable to federal research and development tax credits which were not available during the first quarter of fiscal year 2016 as well as the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting during the first quarter of fiscal year 2017.

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, 2016, we had an order backlog of approximately $130.0 million. This compares with a backlog of approximately $108.2 million on September 26, 2015. The increase in backlog at October 1, 2016, when compared to September 26, 2015, reflects an increase in demand as well as new programs. 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.

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CAPITAL RESOURCES AND LIQUIDITY

Operating Cash Flow

Net cash used in operating activities for the three months ended October 1, 2016 was $1.4 million, compared to net cash provided by operating activities of $1.3 million during the same period of the prior fiscal year.

The $1.4 million of net cash used in operating activities for the three months ended October 1, 2016 is primarily related to a $3.1 million increase in accounts receivable, a $5.9 million decrease in accounts payable and a $2.2 million decrease in accrued compensation partially offset by $1.8 million of net income for the period adjusted for $1.6 million of depreciation and amortization and a $6.7 million decrease in inventory. This compares to $1.3 million of cash flows provided by operating activities during the three months ended September 26, 2015, which resulted primarily from net income of $0.8 million adjusted for $1.5 million of depreciation and amortization and a $13.4 million increase in accounts payable, partially offset by a $9.6 million increase in inventory and a $2.0 million decrease in accrued compensation and vacation.

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. In addition, accounts receivable will fluctuate based upon the amount of accounts receivable sold under our trade accounts receivable purchase programs. During the three months ended October 1, 2016 and September 26, 2015, we factored accounts receivable of $17.4 million and $13.6 million, respectively, which were removed from our Consolidated Balance Sheets. 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 and negotiated supplier terms.

Investing Cash Flow

Cash used in investing activities was $2.9 million during the three months ended October 1, 2016 as compared to $1.1 million during the three months ended September 26, 2015. Our primary investing activity during the three months ended October 1, 2016 was purchasing equipment to support increased production levels for new programs. Our primary investing activity during the three months ended September 26, 2015 was the purchase of equipment to support increased production levels for new programs as well as the sale and leaseback of equipment.

Operating and capital leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership. Capital expenditures and periodic lease payments are expected to be financed with internally generated funds as well as our revolving line of credit facility. During the three months ended October 1, 2016, we did not enter into any sales and leaseback transactions. During the same period of the prior year we received $2.4 million of cash from a sale and leaseback transaction.

Financing Cash Flow

Cash provided by financing activities was $3.5 million during the three months ended October 1, 2016 as compared to cash used in financing activities of $0.5 million in the same period of the previous fiscal year. Our primary financing activities during the three months ended October 1, 2016 and the three months ended September 26, 2015 was repayment on our term loan of $1.3 million as well as borrowings and repayments under our revolving line of credit facility. Our credit agreement with Wells Fargo Bank N.A. provides a revolving line of credit facility of up to $45.0 million, subject to availability.

As of October 1, 2016, we were in compliance with our loan covenants and approximately $21.6 million was available under the revolving line of credit facility. As of September 26, 2015, approximately $18.1 million was available under the revolving line of credit facility.

Our cash requirements are affected by the level of current operations and new EMS 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. As of October 1, 2016, we had approximately $0.3 million of cash held by foreign subsidiaries. If cash is to be repatriated in the future from these foreign subsidiaries, the Company could be subject to additional income taxes payable in the U.S. The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of October 1, 2016 would approximate $30,000. We have accrued for expected future repatriation of foreign earnings as discussed in footnote 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, 2016. There have been no material changes in contractual obligations outside the ordinary course of business since July 2, 2016.

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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.

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 could affect future quarterly results. Additionally, our customers could be impacted by the illiquidity of 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 our 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, valuation of goodwill, impairment of long-lived assets, long-term incentive compensation accrual, the provision for warranty costs, the impact of hedging activities and purchase price allocation.

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 net 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.

The majority of our net sales come from a small number of customers and a decline in net 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.

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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.

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 could cause delays or reductions in shipment of products to our customers which could adversely affect our operating results and damage customer relationships.

We operate in a highly competitive industry; if we are not able to compete effectively in the EMS 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 net 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.

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 the uncertain macroeconomic climate continues, 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. For a summary of our banking arrangements, see Note 4 Long-Term Debt of the “Notes to Consolidated Financial Statements.”

Our operations may be subject to certain risks.

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

• difficulties in staffing 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;

• 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;

• our locations may be impacted by hurricanes, tornadoes, earthquakes, water shortages, tsunamis, floods, typhoons, fires, extreme weather conditions and other natural or man-made disasters.

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.

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.

23

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 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.

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 employees. There can be no assurance that we will be successful in attracting and retaining such personnel. The loss of key employees could have a material adverse effect on our business, operating results and financial condition.

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

The markets for our customers’ products is 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.

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.

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.

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.

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 currently hedge a portion of our term loan with an interest rate swap. 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. Refer to the discussion in note 4, “Long-Term Debt” to the consolidated financial statements for further details of our debt obligations. We are also exposed to interest rate risk on our factoring activities.

24

Compliance or the failure to comply with current and future environmental 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. 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.

Our stock price is volatile.

Holders of the common stock will suffer immediate dilution to the extent outstanding equity awards are exercised to purchase common stock. Our stock price may 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 variations in quarterly operating results or changes in earnings estimates, or to factors relating to the EMS 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.

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 internal controls and procedures 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.

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

Our business is experiencing rapid 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.

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.

25

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 is possible. Increased energy prices could cause an increase to our raw material costs and transportation costs. In addition, increased transportation costs of certain of our 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.

Disruptions to our information systems, including security breaches, 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. Despite the implementation of network security measures, our systems and those of third parties on which we rely may also be vulnerable to computer viruses, break-ins and similar disruptions. If we or our vendors are unable to prevent such outages and breaches, our operations could be disrupted.

We are involved in various legal proceedings.

We have been party to 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, 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 adverse effect on our business, consolidated financial conditions and results of operations.

Increases in our own market capitalization and changes in securities laws and regulations will increase our costs and risk of noncompliance.

As a result of our increased market capitalization as of the end of our second quarter of fiscal year 2013, we are required to file as an accelerated filer. As such, we are subject to additional requirements contained in the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) and more recently 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.

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.

26

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.

Our goodwill and identifiable intangible assets could become impaired, which could reduce the value of our assets and reduce net income in the year in which the write-off occurs.

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company also ascribes value to certain identifiable intangible assets, which consists of customer relationships, non-compete agreements, and favorable leases, as a result of the acquisitions of Sabre and Ayrshire. The Company may incur impairment charges on goodwill or identifiable intangible assets if it determines that the fair values of goodwill or identifiable intangible assets are less than their current carrying values. The Company evaluates, on a regular basis, whether events or circumstances have occurred that indicate all, or a portion, of the carrying amount of goodwill may no longer be recoverable, in which case an impairment charge to earnings would become necessary.

Refer to Notes 2 and 13 to the consolidated financial statements and ‘critical accounting policies and estimates’ in management’s discussion and analysis of financial condition and results of operations for further discussion regarding the impairment testing of goodwill and identifiable intangible assets.

A decline in general economic conditions or global equity valuations could impact the judgments and assumptions about the fair value of the Company’s businesses and the Company could be required to record impairment charges on its goodwill or other identifiable intangible assets in the future, which could impact the Company’s consolidated balance sheet, as well as the Company’s consolidated statement of operations. If the Company was required to recognize an impairment charge in the future, the charge would not impact the Company’s consolidated cash flows, current liquidity, capital resources, and covenants under its existing credit facilities.

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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 revolving credit facility and term loan are secured by substantially all of our assets. The interest rates applicable to our revolving credit facility and term loan fluctuate with the Wells Fargo Bank, N.A. prime rate and LIBOR rates. There was outstanding $23.0 million in borrowings under our revolving credit facility and $25.0 million outstanding on our term loan as of October 1, 2016. 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 loan.

During the second quarter of fiscal year 2015, we entered into an interest rate swap contract with a notional amount of $25.0 million related to the borrowings outstanding under the term loan. As of October 1, 2016, the remaining notional amount of the interest rate swap contract was $19.0 million. Our only material interest rate risk is associated with our revolving credit facility and term loan. Through the use of the interest rate swap, as described above, we fixed the basis on which we pay interest, thus eliminating much of our interest rate risk. See Note 11 – “Derivative Financial Instruments” to the Consolidated Financial Statements for additional information regarding our derivative instruments.

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. We currently use Mexican peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican peso denominated expenses. There was outstanding $64.2 million of foreign currency forward contracts as of October 1, 2016. The fair value of these contracts was $(12.6) million. See Note 11 – “Derivative Financial Instruments” to the Consolidated Financial Statements for additional information regarding our derivative instruments.

Item 4. 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 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(f). Based on our assessment, we believe that as of October 1, 2016, the Company’s disclosure controls and procedures are effective based on that criteria.

Due to inherent limitations of any internal control system, management acknowledges that there are limitations as to the effectiveness of internal controls over financial reporting and therefore recognize that only reasonable assurance can be gained from any internal control system. Accordingly, our internal control system may not detect or prevent material misstatements in our financial statements and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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, 2016 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)).

28

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, 2016.

Item 6.	Exhibits
	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	XBRL Instance Document *
	101.SCH	XBRL Taxonomy Extension Schema Document *
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document *
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document *
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document *
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document *

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections.

29

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 10, 2016
President and Chief Executive Officer
(Principal Executive Officer)
/s/    Brett R. Larsen
Brett R. Larsen	Date:	November 10, 2016
Executive Vice President of Administration, Chief Financial Officer and Treasurer
(Principal Financial Officer)

30

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 officers 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 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 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 registrant’s board of directors (or persons fulfilling 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 10, 2016
		/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 officers 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 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 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 registrant’s board of directors (or persons fulfilling 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 10, 2016
		/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, 2016 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 10, 2016
		/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, 2016 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 10, 2016
		/s/ Brett R. Larsen
		Brett R. Larsen
		Executive Vice President of Administration, Chief Financial Officer and Treasurer

XML

Document and Entity Information - shares	3 Months Ended
	Oct. 01, 2016	Oct. 28, 2016
Document Documentand Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Oct. 01, 2016
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Trading Symbol	ktcc
Entity Registrant Name	KEY TRONIC CORP
Entity Central Index Key	0000719733
Current Fiscal Year End Date	--07-01
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		10,758,238

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Oct. 01, 2016	Jul. 02, 2016
ASSETS
Cash and cash equivalents	$ 275	$ 1,018
Trade receivables, net of allowance for doubtful accounts of $127 and $135	64,793	61,678
Inventories	100,205	107,006
Other	12,438	11,757
Total current assets	177,711	181,459
Property, plant and equipment, net	29,456	27,925
Other assets:
Deferred income tax asset	9,975	8,982
Goodwill	9,957	9,957
Other intangible assets, net	5,646	5,928
Other	1,541	1,673
Total other assets	27,119	26,540
Total assets	234,286	235,924
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	53,068	58,967
Accrued compensation and vacation	7,369	9,571
Current portion of debt	5,000	5,000
Other	12,134	10,572
Total current liabilities	77,571	84,110
Long-term liabilities:
Term loan	20,000	21,250
Revolving loan	22,996	18,073
Other long-term obligations	7,256	6,909
Total long-term liabilities	50,252	46,232
Total liabilities	127,823	130,342
Commitments and contingencies (Note 9)
Shareholders’ equity:
Common stock, no par value—shares authorized 25,000; issued and outstanding 10,756 and 10,725 shares, respectively	45,316	45,227
Retained earnings	69,720	67,928
Accumulated other comprehensive loss	(8,573)	(7,573)
Total shareholders’ equity	106,463	105,582
Total liabilities and shareholders’ equity	$ 234,286	$ 235,924

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Oct. 01, 2016	Jul. 02, 2016
Statement of Financial Position [Abstract]
Trade receivables, allowance for doubtful accounts	$ 127	$ 135
Common stock - par value	$ 0	$ 0
Common stock - shares authorized	25,000	25,000
Common stock - shares issued	10,756	10,725
Common stock - shares outstanding	10,756	10,725

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CONSOLIDATED STATEMENTS OF INCOME - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Oct. 01, 2016	Sep. 26, 2015
Income Statement [Abstract]
Net sales	$ 117,135	$ 126,209
Cost of sales	107,426	117,290
Gross profit	9,709	8,919
Operating expenses
Research, development and engineering expenses	1,584	1,556
Selling, general and administrative expenses	5,335	5,583
Total operating expenses	6,919	7,139
Operating income	2,790	1,780
Interest expense, net	589	533
Income before income taxes	2,201	1,247
Income tax provision	409	430
Net income	$ 1,792	$ 817
Earnings per share:
Net income per share — Basic	$ 0.17	$ 0.08
Weighted average shares outstanding — Basic	10,748	10,706
Net income per share — Diluted	$ 0.16	$ 0.07
Weighted average shares outstanding — Diluted	10,922	11,391

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2016	Sep. 26, 2015
Comprehensive income (loss):
Net income	$ 1,792	$ 817
Other comprehensive income (loss):
Unrealized loss on hedging instruments, net of tax	(1,000)	(2,980)
Comprehensive income (loss)	$ 792	$ (2,163)

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) - USD ($) $ in Millions	3 Months Ended
	Oct. 01, 2016	Sep. 26, 2015
Statement of Comprehensive Income [Abstract]
Unrealized gain (loss) on foreign exchange contracts, tax	$ (0.5)	$ (1.5)

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2016	Sep. 26, 2015
Operating activities:
Net income	$ 1,792	$ 817
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	1,619	1,516
Excess tax benefit from share-based compensation	0	325
Provision for obsolete inventory	55	405
Provision for (recovery of) warranty	2	(22)
Recovery of doubtful accounts	(8)	(4)
Loss on disposal of assets	71	0
Share-based compensation expense	197	189
Deferred income taxes	(477)	(1,127)
Changes in operating assets and liabilities:
Trade receivables	(3,107)	(905)
Inventories	6,746	(9,611)
Other assets	(733)	(1,904)
Accounts payable	(5,899)	13,429
Accrued compensation and vacation	(2,202)	(2,011)
Other liabilities	527	847
Cash (used in) provided by operating activities	(1,417)	1,294
Investing activities:
Purchase of property and equipment	(2,956)	(3,512)
Proceeds from sale of fixed assets	93	2,439
Cash used in investing activities	(2,863)	(1,073)
Financing activities:
Payment of financing costs	(28)	(28)
Repayments of long term debt	(1,250)	(1,250)
Borrowings under revolving credit agreement	40,832	50,721
Repayments of revolving credit agreement	(35,909)	(50,221)
Excess tax benefit from share-based compensation	0	325
Shares withheld for taxes	(108)	0
Cash provided by (used in) financing activities	3,537	(453)
Net decrease in cash and cash equivalents	(743)	(232)
Cash and cash equivalents, beginning of period	1,018	372
Cash and cash equivalents, end of period	275	140
Supplemental cash flow information:
Interest payments	569	491
Income tax payments, net of refunds	$ 330	$ 552

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CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY - 3 months ended Oct. 01, 2016 - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock	Retained Earnings	Accumulated Other Comprehensive (Loss) Income
Balances (Shares) at Jul. 02, 2016		10,725
Balances, Period Start at Jul. 02, 2016	$ 105,582	$ 45,227	$ 67,928	$ (7,573)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	1,792		1,792
Unrealized loss on hedging instruments, net	(1,000)			(1,000)
Exercise of stock appreciation rights (Shares)		43
Shares withheld for taxes, (Shares)		(12)
Shares withheld for taxes	(108)	$ (108)
Share-based compensation expense	197	$ 197
Balances (Shares) at Oct. 01, 2016		10,756
Balances, Period End at Oct. 01, 2016	$ 106,463	$ 45,316	$ 69,720	$ (8,573)

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BASIS OF PRESENTATION

3 Months Ended

Oct. 01, 2016

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, 2016.

FISCAL YEAR

The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The three months endedOctober 1, 2016 and September 26, 2015 were 13 week periods, respectively. Fiscal year 2017 will end on July 1,2017, which is a 52 week year. Fiscal year 2016 which ended on July 2, 2016, was a 53 week year.

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SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Oct. 01, 2016

Accounting Policies [Abstract]

SIGNIFICANT ACCOUNTING POLICIES

Significant Accounting Policies

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

The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities and interest rate risk associated with certain borrowings under the Company’s debt arrangement. The foreign currency forward contracts and interest rate swaps 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 and interest rate swap potentially expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the agreement. The Company minimizes such risk by seeking high quality counterparties. The Company’s counterparties to the foreign currency forward contracts and interest rate swap are major banking institutions. These institutions do not require collateral for the contracts, and the Company believes that the risk of the counterparties 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 net operating loss carryforwards, 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. Refer to Note 6 for further discussions.

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 basis, as well as operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.

We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments based on new assessments and changes in estimates and which may not accurately forecast actual outcomes. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. The tax years 1998 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject.

Impairment of Goodwill and Other Intangible Assets

The Company records intangible assets that are acquired individually or with a group of other assets in the financial statements at acquisition. In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. The Company’s annual goodwill impairment analysis is performed as of the first day of the fourth quarter. The Company’s acquired intangible assets are subject to amortization over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued an amendment to defer the effective date of ASU 2014-09 for all entities by one year. This Update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. Companies have the option of using either a full or modified retrospective approach in applying this standard. The Company is in the process of assessing the impact of ASU 2014-09 on its consolidated financial statements.

In July 2015, the FASB issued final guidance that simplifies the subsequent measurement of inventory for which cost is determined by methods other than last-in first-out (“LIFO”) and the retail inventory method. For inventory within the scope of the new guidance, entities will be required to compare the cost of inventory to only one measure, its net realizable value, and not the three measures required by the existing guidance. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance should not change how entities initially measure the cost of inventory. The guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this update on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases which supersedes ASC 840 Leases and creates a new topic, ASC 842 Leases. This update requires lessees to recognize a lease asset and a lease liability for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-09 (ASU 2016-09), Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier adoption permitted. The Company prospectively adopted this ASU during the first quarter of fiscal year 2017. As a result, excess tax benefits are recorded in income tax expense instead of a component of shareholders’ equity and excess tax benefits are no longer broken out on the consolidated statement of cash flows beginning in fiscal year 2017.

In August 2016, the FASB issued Accounting Standards Update 2016-15 (ASU 2016-15), Classification of Certain Cash Receipts and Cash Payments. This update provides guidance on how to record eight specific cash flow issues. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted and a retrospective transition method to each period should be presented. The Company is currently evaluating the effect of this update on its consolidated financial statements.

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INVENTORIES

3 Months Ended

Oct. 01, 2016

Inventory Disclosure [Abstract]

INVENTORIES

Inventories

The components of inventories consist of the following (in thousands):

	October 1, 2016		July 2, 2016
Finished goods	$	13,811	$	13,384
Work-in-process	16,760		18,988
Raw materials and supplies	69,634		74,634
	$	100,205	$	107,006

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LONG-TERM DEBT

3 Months Ended

Oct. 01, 2016

Debt Disclosure [Abstract]

LONG-TERM DEBT

Long-Term Debt

On September 3, 2014, the Company added a five-year term loan in the amount of $35.0 million used to acquire all of the outstanding shares of CDR Manufacturing, Inc. (dba Ayrshire Electronics). On August 6, 2015, the Company entered into a First Amendment to the amended and restated credit agreement extending the limit on our line of credit facility to $45.0 million as evidenced by the Second Replacement Revolving Note.

The agreement specifies that the proceeds of the revolving line of credit be used primarily for working capital and general corporate purposes of the Company and its subsidiaries. Borrowings under the revolving line of credit bear interest at either a “Base Rate” or a “Fixed Rate,” as elected by the Company. The base rate is the higher of the Wells Fargo Bank prime rate, daily one month London Interbank Offered Rate (LIBOR) plus 1.5%, or the Federal Funds rate plus 1.5%. The fixed rate is LIBOR plus 1.75%, LIBOR plus 2.00%, or LIBOR plus 2.25% depending on the level of the Company’s trailing four quarters Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The revolving line of credit is secured by substantially all of the assets of the Company.

As of October 1, 2016, the Company had an outstanding balance under the credit facility of $23.0 million, $0.4 million in outstanding letters of credit and $21.6 million available for future borrowings. The interest rate on the outstanding line of credit balance was in the range of 2.53% - 3.50%. As of July 2, 2016, the Company had an outstanding balance under the credit facility of $18.1 million, $0.4 million in outstanding letters of credit and $26.5 million available for future borrowings. The interest rate on the outstanding line of credit balance was in the range of 2.45% - 3.50%.

The outstanding principal balance of the term loan bears interest at a fixed rate per annum of the daily one month LIBOR plus 1.75%, 2.00% or 2.25% depending on the ratio of the Company’s funded debt to EBITDA, except that the term loan bore interest at LIBOR plus 2.00% from September 3, 2014 through December 14, 2014 regardless of the Company’s cash flow leverage ratio. Principal on the term loan is payable in equal quarterly installments of $1.25 million which commenced on December 15, 2014 and will continue through June 15, 2019, with a final installment of all remaining unpaid principal due on August 31, 2019. The Company had an outstanding balance of $25.0 million under the term loan as of October 1, 2016. As of July 2, 2016, the Company had an outstanding balance of $26.3 million under the term loan.

Debt maturities as of October 1, 2016 for the next five years and thereafter are as follows (in thousands):

Fiscal Years Ending	Amount
2017 (1)	$	3,750
2018	5,000
2019	5,000
2020	34,246
Total	$	47,996

(1) Represents scheduled payments for the remaining nine-month period ending July 1, 2017.

The Company must comply with certain financial covenants, including a cash flow leverage ratio, an asset coverage ratio, and a fixed charge coverage ratio. The credit agreement requires the Company to maintain a minimum profit threshold, limits the maximum capital lease expenditures and restricts the Company from declaring or paying dividends in cash or stock without prior bank approval. The Company is in compliance with all financial covenants for all periods presented.

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TRADE ACCOUNTS RECEIVABLE PURCHASE PROGRAMS

3 Months Ended

Oct. 01, 2016

Receivables [Abstract]

TRADE ACCOUNTS RECEIVABLE PURCHASE PROGRAMS

Trade Accounts Receivable Purchase Programs

Sale Programs

The Company utilizes an Account Purchase Agreement with Wells Fargo Bank, N.A. (“WFB”) which allows the Company to sell and assign to WFB and WFB may purchase from the Company the accounts receivable of certain Company customers in a maximum aggregate amount outstanding of $20.0 million. The initial term of the agreement is set to mature in June 2017 and there are successive 12 month renewal periods available. The Company also has an Account Purchase Agreement with Orbian Financial Services (“Orbian”). This agreement may be cancelled at any time by either party.

Total accounts receivables sold during the three months ended October 1, 2016 and September 26, 2015 was approximately $17.4 million and $13.6 million, respectively. Accounts receivables sold and not yet collected were $1.4 million and $1.7 million as of October 1, 2016 and July 2, 2016, respectively. The receivables that were sold were removed from the condensed consolidated balance sheets and the cash received is reflected as cash provided by operating activities in the condensed consolidated statements of cash flows.

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INCOME TAXES

3 Months Ended

Oct. 01, 2016

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 $12.0 million of foreign earnings in the future. As such, these earnings would be recognized in the United States, and the Company would be subject to U.S. federal income taxes and potential withholding taxes in foreign jurisdictions. Both the domestic tax and estimated withholding tax of expected repatriation of foreign earnings have been recorded as part of deferred taxes as of October 1, 2016. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations.

The Company has available approximately $7.1 million of gross federal research and development tax credits as of October 1, 2016. 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, 2016, the Company has recorded $3.8 million of unrecognized tax benefits associated with these federal tax credits, resulting in a net deferred tax benefit of approximately $3.3 million.

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EARNINGS PER SHARE

3 Months Ended

Oct. 01, 2016

Earnings Per Share [Abstract]

EARNINGS PER SHARE

Earnings Per Share

The following tables present 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 per share information)
	October 1, 2016		September 26, 2015
Net income	$	1,792	$	817
Weighted average shares outstanding—basic	10,748		10,706
Effect of dilutive common stock awards	174		685
Weighted average shares outstanding—diluted	10,922		11,391
Net income per share—basic	$	0.17	$	0.08
Net income per share—diluted	$	0.16	$	0.07
Antidilutive SARs not included in diluted earnings per share	890		208

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SHARE-BASED COMPENSATION

3 Months Ended

Oct. 01, 2016

Disclosure of Compensation Related Costs, Share-based Payments [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, these 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 26, 2016		July 29, 2015
SARs Granted	242,500		248,166
Strike Price	$	8.18	$	10.26
Fair Value	$	2.42	$	3.65

Total share-based compensation expense recognized during the three months ended October 1, 2016 and September 26, 2015 was approximately $197,000 and $189,000, respectively. As of October 1, 2016, total unrecognized compensation expense related to unvested share-based compensation arrangements was approximately $1.3 million. This expense is expected to be recognized over a weighted average period of 2.11 years.

SARs exercised during the three months ended October 1, 2016 and September 26, 2015 were 102,000 and 3,333, respectively. There was approximately $342,000 of intrinsic value for SARs exercised during the three months ended October 1, 2016 compared to an immaterial amount during the three months ended September 26, 2015.

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COMMITMENTS AND CONTINGENCIES

3 Months Ended

Oct. 01, 2016

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 $38,000 and $30,000 as of October 1, 2016 and July 2, 2016, respectively.

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FAIR VALUE MEASUREMENTS

3 Months Ended

Oct. 01, 2016

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

Fair Value Measurements

The Company has adopted ASC 820, Fair Value Measurements, which defines fair value, establishes a framework for assets and liabilities being measured and reported at fair value and expands disclosures about fair value measurements. There are three levels of fair value hierarchy inputs used to value assets and liabilities which include: Level 1 – inputs are quoted market prices for identical assets or liabilities; Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 – inputs are unobservable inputs for the asset or liability.

The following table summarizes the fair value of assets (liabilities) of the Company’s derivatives that are required to be measured on a recurring basis as of October 1, 2016 and July 2, 2016 (in thousands):

	October 1, 2016
	Level 1		Level 2			Level 3		Total Fair Value
Financial Liabilities:
Interest rate swap	$	—	$	(376	)	$	—	$	(376	)
Foreign currency forward contracts	$	—	$	(12,614	)	$	—	$	(12,614	)

	July 2, 2016
	Level 1		Level 2			Level 3		Total Fair Value
Financial Assets:
Foreign currency forward contracts	$	—	$	136		$	—	$	136
Financial Liabilities:
Interest rate swap	$	—	$	(498	)	$	—	$	(498	)
Foreign currency forward contracts	$	—	$	(11,112	)	$	—	$	(11,112	)

The Company currently has forward contracts to hedge known future cash outflows for expenses denominated in the Mexican peso and an interest rate swap to mitigate risk associated with certain borrowings under the Company’s debt arrangement. These contracts are measured on a recurring basis based on the foreign currency spot rates and forward rates quoted by banks or foreign currency dealers. These contracts are marked to market using level 2 input criteria every period with the unrealized gain or loss, net of tax, reported as a component of shareholders’ equity in accumulated other comprehensive loss, as they qualify for hedge accounting.

The carrying values of cash and cash equivalents, accounts receivable and current liabilities reflected on the balance sheets at October 1, 2016 and July 2, 2016, reasonably approximate their fair value. The Company’s long-term debt primarily consists of a revolving line of credit and a term loan. Borrowings under the revolving line of credit bear interest at either a “Base Rate” or a “Fixed Rate,” as elected by the Company. Each of these rates is a variable floating rate dependent upon current market conditions and the Company’s current credit risk as discussed in footnote 4.

As a result of the determinable market rate for our revolving credit and term loan debt, they are classified within Level 2 of the fair value hierarchy. The discounted cash flow of the revolving line of credit is estimated to be $23.0 million and $18.1 million as of October 1, 2016 and July 2, 2016, respectively, with a carrying value that reasonably approximates the fair value. The discounted cash flow of the term loan is estimated to be $25.0 million as of October 1, 2016 and $26.3 million as of July 2, 2016, respectively, with a carrying value that reasonably approximates the fair value.

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DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Oct. 01, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

Derivative Financial Instruments

As of October 1, 2016, the Company had outstanding foreign currency forward contracts with a total notional amount of $64.2 million. The maturity dates for these contracts extend through June 2019. For the three months ended October 1, 2016, the Company did not enter into any foreign currency forward contracts and settled $5.2 million of such contracts. During the same period of the previous year, the Company entered into $12.0 million of foreign currency forward contracts and settled $5.4 million of such contracts.

On October 1, 2014, the Company entered into an interest rate swap contract with an effective date of September 1, 2015 and a termination date of September 3, 2019, with a notional amount of $25.0 million related to the borrowings outstanding under the term loan. This interest rate swap pays the Company variable interest at the one month LIBOR rate, and the Company pays the counter party a fixed interest rate. The fixed interest rate for the contract is 1.97% that replaces the one month LIBOR rate component of our contractual interest to be paid to WFB as part of our term loan. Based on the terms of the interest rate swap contract and the underlying borrowings outstanding under the term loan, the interest rate contract was determined to be effective, and thus qualifies as a cash flow hedge.

The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheet as of October 1, 2016 and July 2, 2016 (in thousands):

		October 1, 2016			July 2, 2016
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value			Fair Value
Foreign currency forward contracts	Other long-term assets	$	—		$	136
Foreign currency forward contracts	Other current liabilities	$	(5,707	)	$	(4,670	)
Foreign currency forward contracts	Other long-term liabilities	$	(6,907	)	$	(6,442	)
Interest rate swap	Other current liabilities	$	(215	)	$	(264	)
Interest rate swap	Other long-term liabilities	$	(161	)	$	(234	)

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, 2016 and September 26, 2015, 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, 2016			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of October 1, 2016
Forward contracts	Cost of sales	$	(7,245	)	$	(2,189	)	$	1,109		$	(8,325	)
Interest rate swap	Interest expense	(328		)	(1		)	81			(248		)
Total		$	(7,573	)	$	(2,190	)	$	1,190		$	(8,573	)
Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of June 27, 2015			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of September 26, 2015
Forward contracts	Cost of sales	$	(4,487	)	$	(2,165	)	$	(684	)	$	(7,336	)
Interest rate swap	Interest expense	(276		)	(131		)	—			(407		)
Total		$	(4,763	)	$	(2,296	)	$	(684	)	$	(7,743	)

As of October 1, 2016, the net amount of unrealized loss expected to be reclassified into earnings within the next 12 months is approximately $3.9 million. As of October 1, 2016, the Company does not have any foreign exchange contracts with credit-risk-related contingent features.

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GOODWILL AND OTHER INTANGIBLE ASSETS

3 Months Ended

Oct. 01, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and Other Intangible Assets

The Company recorded goodwill in connection with the Ayrshire and Sabre acquisitions resulting primarily from the synergies that resulted from the Company’s acquisitions and the assembled workforce. The goodwill from the acquisitions is not deductible for tax purposes.

During the three months ended October 1, 2016 and September 26, 2015, no impairment was recognized. Goodwill was recorded at $10.0 million as of October 1, 2016 and July 2, 2016.

The components of acquired intangible assets are as follows (in thousands):

	October 1, 2016
	Amortization Period in Years	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets:
Non-Compete Agreements	3 - 5	$	568	$	(378	)	$	190
Customer Relationships	10	4,803		(1,230		)	3,573
Favorable Lease Agreements	4 - 7	2,941		(1,058		)	1,883
Total		$	8,312	$	(2,666	)	$	5,646

	July 2, 2016
	Amortization Period in Years	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets:
Non-Compete Agreements	3 - 5	$	568	$	(343	)	$	225
Customer Relationships	10	4,803		(1,110		)	3,693
Favorable Lease Agreements	4 - 7	2,941		(931		)	2,010
Total		$	8,312	$	(2,384	)	$	5,928

Amortization expense was approximately $282,000 for both the three months ended October 1, 2016 and September 26, 2015.

Aggregate amortization expense relative to existing intangible assets by fiscal year is currently estimated to be as follows (in thousands):

Fiscal Years Ending	Amount
2017 (1)	$	846
2018	1,073
2019	818
2020	783
2021	784
Thereafter	1,342
Total amortization expense	$	5,646

(1) Represents estimated amortization for the remaining nine-month period ending July 1, 2017.

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Oct. 01, 2016

Accounting Policies [Abstract]

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

The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities and interest rate risk associated with certain borrowings under the Company’s debt arrangement. The foreign currency forward contracts and interest rate swaps 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 and interest rate swap potentially expose the Company to credit risk to the extent the counterparties may be unable to meet the terms of the agreement. The Company minimizes such risk by seeking high quality counterparties. The Company’s counterparties to the foreign currency forward contracts and interest rate swap are major banking institutions. These institutions do not require collateral for the contracts, and the Company believes that the risk of the counterparties 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 net operating loss carryforwards, 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. Refer to Note 6 for further discussions.

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 basis, as well as operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.

We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments based on new assessments and changes in estimates and which may not accurately forecast actual outcomes. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. The tax years 1998 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject.

Impairment of Goodwill

Impairment of Goodwill and Other Intangible Assets

The Company records intangible assets that are acquired individually or with a group of other assets in the financial statements at acquisition. In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. The Company’s annual goodwill impairment analysis is performed as of the first day of the fourth quarter. The Company’s acquired intangible assets are subject to amortization over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.

Recently Issued Accounting Standards

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued an amendment to defer the effective date of ASU 2014-09 for all entities by one year. This Update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. Companies have the option of using either a full or modified retrospective approach in applying this standard. The Company is in the process of assessing the impact of ASU 2014-09 on its consolidated financial statements.

In July 2015, the FASB issued final guidance that simplifies the subsequent measurement of inventory for which cost is determined by methods other than last-in first-out (“LIFO”) and the retail inventory method. For inventory within the scope of the new guidance, entities will be required to compare the cost of inventory to only one measure, its net realizable value, and not the three measures required by the existing guidance. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance should not change how entities initially measure the cost of inventory. The guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this update on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases which supersedes ASC 840 Leases and creates a new topic, ASC 842 Leases. This update requires lessees to recognize a lease asset and a lease liability for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-09 (ASU 2016-09), Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier adoption permitted. The Company prospectively adopted this ASU during the first quarter of fiscal year 2017. As a result, excess tax benefits are recorded in income tax expense instead of a component of shareholders’ equity and excess tax benefits are no longer broken out on the consolidated statement of cash flows beginning in fiscal year 2017.

In August 2016, the FASB issued Accounting Standards Update 2016-15 (ASU 2016-15), Classification of Certain Cash Receipts and Cash Payments. This update provides guidance on how to record eight specific cash flow issues. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted and a retrospective transition method to each period should be presented. The Company is currently evaluating the effect of this update on its consolidated financial statements.

Maximum Amount Of Income Tax Benefits Percentage Realized Upon Ultimate Settlement

50.00%

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INVENTORIES (Tables)

3 Months Ended

Oct. 01, 2016

Inventory Disclosure [Abstract]

Components of Inventories

The components of inventories consist of the following (in thousands):

	October 1, 2016		July 2, 2016
Finished goods	$	13,811	$	13,384
Work-in-process	16,760		18,988
Raw materials and supplies	69,634		74,634
	$	100,205	$	107,006

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LONG-TERM DEBT LONG-TERM DEBT (Tables)

3 Months Ended

Oct. 01, 2016

Debt Disclosure [Abstract]

Schedule of Maturities of Long-term Debt [Table Text Block]

Debt maturities as of October 1, 2016 for the next five years and thereafter are as follows (in thousands):

Fiscal Years Ending	Amount
2017 (1)	$	3,750
2018	5,000
2019	5,000
2020	34,246
Total	$	47,996

(1) Represents scheduled payments for the remaining nine-month period ending July 1, 2017.

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EARNINGS PER SHARE (Tables)

3 Months Ended

Oct. 01, 2016

Earnings Per Share [Abstract]

Reconciliation of Denominator and Number of Antidilutive Common Share Awards not Included in 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 per share information)
	October 1, 2016		September 26, 2015
Net income	$	1,792	$	817
Weighted average shares outstanding—basic	10,748		10,706
Effect of dilutive common stock awards	174		685
Weighted average shares outstanding—diluted	10,922		11,391
Net income per share—basic	$	0.17	$	0.08
Net income per share—diluted	$	0.16	$	0.07
Antidilutive SARs not included in diluted earnings per share	890		208

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SHARE-BASED COMPENSATION (Tables)

3 Months Ended

Oct. 01, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Share-based Compensation Arrangements by Share-based Payment Award

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

	July 26, 2016		July 29, 2015
SARs Granted	242,500		248,166
Strike Price	$	8.18	$	10.26
Fair Value	$	2.42	$	3.65

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FAIR VALUE MEASUREMENTS (Tables)

3 Months Ended

Oct. 01, 2016

Fair Value Disclosures [Abstract]

Assets and Liabilities Measured at Fair Value on Recurring Basis

The following table summarizes the fair value of assets (liabilities) of the Company’s derivatives that are required to be measured on a recurring basis as of October 1, 2016 and July 2, 2016 (in thousands):

	October 1, 2016
	Level 1		Level 2			Level 3		Total Fair Value
Financial Liabilities:
Interest rate swap	$	—	$	(376	)	$	—	$	(376	)
Foreign currency forward contracts	$	—	$	(12,614	)	$	—	$	(12,614	)

	July 2, 2016
	Level 1		Level 2			Level 3		Total Fair Value
Financial Assets:
Foreign currency forward contracts	$	—	$	136		$	—	$	136
Financial Liabilities:
Interest rate swap	$	—	$	(498	)	$	—	$	(498	)
Foreign currency forward contracts	$	—	$	(11,112	)	$	—	$	(11,112	)

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DERIVATIVE FINANCIAL INSTRUMENTS (Tables)

3 Months Ended

Oct. 01, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Summerized Fair Value of Derivative Instruments in Consolidated Balance Sheets

The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheet as of October 1, 2016 and July 2, 2016 (in thousands):

		October 1, 2016			July 2, 2016
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value			Fair Value
Foreign currency forward contracts	Other long-term assets	$	—		$	136
Foreign currency forward contracts	Other current liabilities	$	(5,707	)	$	(4,670	)
Foreign currency forward contracts	Other long-term liabilities	$	(6,907	)	$	(6,442	)
Interest rate swap	Other current liabilities	$	(215	)	$	(264	)
Interest rate swap	Other long-term liabilities	$	(161	)	$	(234	)

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, 2016 and September 26, 2015, 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, 2016			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of October 1, 2016
Forward contracts	Cost of sales	$	(7,245	)	$	(2,189	)	$	1,109		$	(8,325	)
Interest rate swap	Interest expense	(328		)	(1		)	81			(248		)
Total		$	(7,573	)	$	(2,190	)	$	1,190		$	(8,573	)
Derivatives Designated as Hedging Instruments	Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	AOCI Balance as of June 27, 2015			Effective Portion Recorded In AOCI			Effective Portion Reclassified From AOCI Into Income			AOCI Balance as of September 26, 2015
Forward contracts	Cost of sales	$	(4,487	)	$	(2,165	)	$	(684	)	$	(7,336	)
Interest rate swap	Interest expense	(276		)	(131		)	—			(407		)
Total		$	(4,763	)	$	(2,296	)	$	(684	)	$	(7,743	)

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GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

3 Months Ended

Oct. 01, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Finite-Lived Intangible Assets

The components of acquired intangible assets are as follows (in thousands):

	October 1, 2016
	Amortization Period in Years	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets:
Non-Compete Agreements	3 - 5	$	568	$	(378	)	$	190
Customer Relationships	10	4,803		(1,230		)	3,573
Favorable Lease Agreements	4 - 7	2,941		(1,058		)	1,883
Total		$	8,312	$	(2,666	)	$	5,646

	July 2, 2016
	Amortization Period in Years	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets:
Non-Compete Agreements	3 - 5	$	568	$	(343	)	$	225
Customer Relationships	10	4,803		(1,110		)	3,693
Favorable Lease Agreements	4 - 7	2,941		(931		)	2,010
Total		$	8,312	$	(2,384	)	$	5,928

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

Aggregate amortization expense relative to existing intangible assets by fiscal year is currently estimated to be as follows (in thousands):

Fiscal Years Ending	Amount
2017 (1)	$	846
2018	1,073
2019	818
2020	783
2021	784
Thereafter	1,342
Total amortization expense	$	5,646

(1) Represents estimated amortization for the remaining nine-month period ending July 1, 2017.

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Inventories (Components Of Inventories) (Detail) - USD ($) $ in Thousands	Oct. 01, 2016	Jul. 02, 2016
Inventory Disclosure [Abstract]
Finished goods	$ 13,811	$ 13,384
Work-in-process	16,760	18,988
Raw materials and supplies	69,634	74,634
Inventories	$ 100,205	$ 107,006

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Long-Term Debt (Detail) - USD ($)	3 Months Ended
	Oct. 01, 2016	Jul. 02, 2016	Aug. 06, 2015	Sep. 03, 2014
Debt Disclosure [Line Items]
Long-term Debt	$ 25,000,000	$ 26,300,000		$ 35,000,000
Line of Credit Facility, Amount Outstanding	23,000,000	18,100,000
Letters of Credit Outstanding, Amount	400,000	400,000
Additional availability of line of credit	21,600,000	$ 26,500,000
Debt Instrument, Periodic Payment, Principal	1,250,000
2017 (1)	5,000,000
2018	5,000,000
2019	34,246,000
Total	47,996,000
Long-term Debt, Maturities, Repayment of Principal, Remainder of Fiscal Year	$ 3,750,000
Line of Credit | One-Month London Interbank Offered Rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)	1.50%
Line of Credit | Federal Funds Rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)	1.50%
Wells Fargo Bank
Debt Disclosure [Line Items]
Increase in revolving line of credit			$ 45,000,000.0
Debt Instrument, Basis Spread on Variable Rate, 1.75% | Term Loan | Fixed Rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)	1.75%
Debt Instrument, Basis Spread on Variable Rate, 1.75% | Line of Credit | Fixed Rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)	1.75%
Debt Instrument, Basis Spread on Variable Rate, 2.00% | Term Loan | Fixed Rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)	2.00%
Debt Instrument, Basis Spread on Variable Rate, 2.00% | Line of Credit | Fixed Rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)	2.00%
Debt Instrument, Basis Spread on Variable Rate, 2.25% | Term Loan | Fixed Rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)	2.25%
Debt Instrument, Basis Spread on Variable Rate, 2.25% | Line of Credit | Fixed Rate
Debt Disclosure [Line Items]
Variable rate on line of credit facility (percent)	2.25%
Minimum
Debt Disclosure [Line Items]
Long-term Debt, Percentage Bearing Variable Interest, Percentage Rate	2.52689%	2.45%
Maximum
Debt Disclosure [Line Items]
Long-term Debt, Percentage Bearing Variable Interest, Percentage Rate	3.50%	3.50%

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Trade Accounts Receivable Purchase Programs (Detail) - USD ($) $ in Millions	3 Months Ended
	Oct. 01, 2016	Sep. 26, 2015	Jul. 02, 2016	Jul. 16, 2015
Receivables [Abstract]
Account Purchase Agreement Maximum Aggregate Amount				$ 20.0
Trade Accounts Receivable Sold To Third Party	$ 17.4	$ 13.6
Accounts Receivable Factored To Banking Institutions	$ 1.4		$ 1.7

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Income Taxes (Detail) $ in Millions	3 Months Ended
	Oct. 01, 2016 USD ($)
Income Tax Disclosure [Abstract]
Foreign tax credits related to future repatriations of earnings	$ 12.0
Gross potential research and development (R&D) tax credit	7.1
Unrecognized tax benefits associated with federal tax credits	3.8
Deferred Income Tax Expense (Benefit)	$ 3.3

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Earnings Per Share (Reconciliation Of Denominator And Number Of Antidilutive Common Share Awards Not Included In Diluted Earnings Per Share Calculation) (Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Oct. 01, 2016	Sep. 26, 2015
Earnings Per Share [Abstract]
Net income	$ 1,792	$ 817
Weighted average shares outstanding - basic	10,748	10,706
Effect of dilutive common stock options (Shares)	174	685
Weighted average shares outstanding - Diluted	10,922	11,391
Net income per share—diluted	$ 0.17	$ 0.08
Net income per share—diluted	$ 0.16	$ 0.07
Antidilutive options not included in diluted earnings per share (Shares)	890	208

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Share-Based Compensation (Detail) - USD ($)			3 Months Ended
	Jul. 27, 2016	Jul. 29, 2015	Oct. 01, 2016	Sep. 26, 2015	Jul. 26, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized Share-based Compensation Expense			$ 1,300,000
Unrecognized Share-based Compensation, Period for Recognition			2 years 1 month 10 days
Stock Appreciation Rights (SARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
SARs Granted	242,500	248,166
Strike Price		$ 10.26			$ 8.18
Fair Value	$ 2.42	$ 3.65
Share-based Compensation Expense			$ 197,000	$ 189,000
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Exercised			102,000	3,333

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SHARE-BASED COMPENSATION Intrinsic Value (Details)	3 Months Ended
	Oct. 01, 2016 USD ($)
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period, Intrinsic Value	$ 342,000

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Commitments And Contingencies (Detail) - USD ($)	Oct. 01, 2016	Jul. 02, 2016
Purchase Commitment, Excluding Long-term Commitment [Line Items]
Warranty reserve	$ 38,000	$ 30,000

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Fair Value Measurements (Assets And Liabilities Measured At Fair Value On Recurring Basis) (Detail) - USD ($) $ in Thousands	Oct. 01, 2016	Jul. 02, 2016	Sep. 03, 2014
Fair Value Disclosures [Line Items]
Line of Credit Facility, Amount Outstanding	$ 23,000	$ 18,100
Long-term Debt	25,000	26,300	$ 35,000
Forward Contracts
Fair Value Disclosures [Line Items]
Foreign currency forward contracts, Financial Assets		136
Foreign currency forward contracts, Financial Liabilities	(12,614)	(11,112)
Interest Rate Swap
Fair Value Disclosures [Line Items]
Foreign currency forward contracts, Financial Liabilities	(376)	(498)
Level 1 | Forward Contracts
Fair Value Disclosures [Line Items]
Foreign currency forward contracts, Financial Assets		0
Foreign currency forward contracts, Financial Liabilities	0	0
Level 1 | Interest Rate Swap
Fair Value Disclosures [Line Items]
Foreign currency forward contracts, Financial Liabilities	0	0
Level 2 | Forward Contracts
Fair Value Disclosures [Line Items]
Foreign currency forward contracts, Financial Assets		136
Foreign currency forward contracts, Financial Liabilities	(12,614)	(11,112)
Level 2 | Interest Rate Swap
Fair Value Disclosures [Line Items]
Foreign currency forward contracts, Financial Liabilities	(376)	(498)
Level 3 | Forward Contracts
Fair Value Disclosures [Line Items]
Foreign currency forward contracts, Financial Assets		0
Foreign currency forward contracts, Financial Liabilities	0	0
Level 3 | Interest Rate Swap
Fair Value Disclosures [Line Items]
Foreign currency forward contracts, Financial Liabilities	$ 0	$ 0

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Derivative Financial Instruments (Detail) - USD ($) $ in Millions	3 Months Ended
	Oct. 01, 2016	Sep. 26, 2015	Sep. 01, 2015
Derivative [Line Items]
Outstanding foreign currency forward contracts	$ 64.2
Contract maturity date	Jun. 26, 2019
Foreign currency forward contracts entered		$ 12.0
Foreign currency forward contracts settled	$ 5.2	$ 5.4
Derivative, Fixed Interest Rate	1.97%
Net amount of existing losses expected to be reclassified into earnings within the next 12 months	$ 3.9
Interest Rate Swap
Derivative [Line Items]
Outstanding foreign currency forward contracts			$ 25.0

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Derivative Financial Instruments (Summarized Fair Value Of Derivative Instruments In Consolidated Balance Sheets) (Detail) - USD ($) $ in Thousands	Oct. 01, 2016	Jul. 02, 2016
Forward Contracts | Other Long Term Assets
Derivative Instruments [Line Items]
Foreign currency forward contracts, Asset Fair Value	$ 0	$ 136
Forward Contracts | Other Current Liabilities
Derivative Instruments [Line Items]
Foreign currency forward contracts, Liability Fair Value	(5,707)	(4,670)
Forward Contracts | Other Long Term Liabilities
Derivative Instruments [Line Items]
Foreign currency forward contracts, Liability Fair Value	(6,907)	(6,442)
Interest Rate Swap | Other Current Liabilities
Derivative Instruments [Line Items]
Foreign currency forward contracts, Liability Fair Value	(215)	(264)
Interest Rate Swap | Other Long Term Liabilities
Derivative Instruments [Line Items]
Foreign currency forward contracts, Liability Fair Value	$ (161)	$ (234)

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Derivative Financial Instruments (Gain (Loss) Of Derivative Instruments In Statement Of Operations) (Detail) - Designated As Hedging Instrument - USD ($) $ in Thousands	3 Months Ended
	Oct. 01, 2016	Sep. 26, 2015
Derivatives used in Net Investment Hedge, Net of Tax [Roll Forward]
AOCI Balance, Period Start	$ (7,573)	$ (4,763)
Effective Portion Recorded In AOCI	(2,190)	(2,296)
Derivative Instruments, Gain (Loss) Reclassified from Accumulated OCI into Income, Effective Portion, Net	1,190	(684)
AOCI Balance, Period End	(8,573)	(7,743)
Forward Contracts
Derivatives used in Net Investment Hedge, Net of Tax [Roll Forward]
AOCI Balance, Period Start	(7,245)	(4,487)
Effective Portion Recorded In AOCI	(2,189)	(2,165)
Derivative Instruments, Gain (Loss) Reclassified from Accumulated OCI into Income, Effective Portion, Net	1,109	(684)
AOCI Balance, Period End	(8,325)	(7,336)
Interest Rate Swap
Derivatives used in Net Investment Hedge, Net of Tax [Roll Forward]
AOCI Balance, Period Start	(328)	(276)
Effective Portion Recorded In AOCI	(1)	(131)
Derivative Instruments, Gain (Loss) Reclassified from Accumulated OCI into Income, Effective Portion, Net	81	0
AOCI Balance, Period End	$ (248)	$ (407)

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Goodwill and Other Intangible Assets (Detail) - USD ($)	3 Months Ended		12 Months Ended
	Oct. 01, 2016	Sep. 26, 2015	Jul. 02, 2016
Goodwill and Intangible Assets Disclosure [Abstract]
Goodwill	$ 9,957,000		$ 9,957,000
Amortization of Intangible Assets	282,000	$ 282,000
Finite-lived Intangible Assets [Roll Forward]
Gross Carrying Amount	8,312,000		8,312,000
Accumulated Amortization	(2,666,000)		(2,384,000)
Net Carrying Amount	5,646,000		5,928,000
Non-Compete Agreements
Finite-lived Intangible Assets [Roll Forward]
Gross Carrying Amount	568,000		568,000
Accumulated Amortization	(378,000)		(343,000)
Net Carrying Amount	$ 190,000		$ 225,000
Customer Relationships
Finite-lived Intangible Assets [Roll Forward]
Amortization Period in Years	10 years		10 years
Gross Carrying Amount	$ 4,803,000		$ 4,803,000
Accumulated Amortization	(1,230,000)		(1,110,000)
Net Carrying Amount	3,573,000		3,693,000
Favorable Lease Agreements
Finite-lived Intangible Assets [Roll Forward]
Gross Carrying Amount	2,941,000		2,941,000
Accumulated Amortization	(1,058,000)		(931,000)
Net Carrying Amount	$ 1,883,000		$ 2,010,000
Minimum | Non-Compete Agreements
Finite-lived Intangible Assets [Roll Forward]
Amortization Period in Years	3 years
Minimum | Favorable Lease Agreements
Finite-lived Intangible Assets [Roll Forward]
Amortization Period in Years	4 years
Maximum | Non-Compete Agreements
Finite-lived Intangible Assets [Roll Forward]
Amortization Period in Years	5 years
Maximum | Favorable Lease Agreements
Finite-lived Intangible Assets [Roll Forward]
Amortization Period in Years	7 years

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Goodwill and Intangible Assets (Aggregate Amortization Expense by Fiscal Year) (Detail) - USD ($) $ in Thousands	Oct. 01, 2016	Jul. 02, 2016
Goodwill and Intangible Assets Disclosure [Abstract]
2016	$ 846
2017	1,073
2018	818
2019	783
2020	784
Thereafter	1,342
Net Carrying Amount	$ 5,646	$ 5,928