ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The following Management's Discussion and Analysis should be read in conjunction with the accompanying condensed consolidated financial statements and notes.

Business Overview

Our strategic priority is to execute a business transformation to strengthen the Company's profitability and deliver sustainable sales growth. We expect to improve our business with upgraded systems and processes, modernization of our support functions and a focus on productivity and efficiencies in our manufacturing operations. We believe this will result in an optimized cost structure and consistent cash generation through improved working capital velocity and efficient asset utilization. In the short term, cash generated from our operations will be reinvested in our business to fund our transformational efforts and growth initiatives. To drive organic growth, we will leverage our technical engineering expertise, market-leading positions and strong customer relationships to generate innovative solutions and capture more content on current platforms, win new platforms with current customers, gain new customers both domestically and abroad and build opportunities in the broader transportation industry.

Volatility in the North American automotive industry is driven by supply chain disruptions, global inflation, thinning labor availability, rising global commodity costs and a changing global trade and geopolitical climate. These macro conditions, coupled with changes in production volumes by OEMs in response to new vehicle consumer demand impact our sales and profitability levels. Lower near term North American light vehicle production estimates, which are subject to change, are a result of recent industry-wide supply chain disruptions, tariff uncertainties, and availability of raw materials including rare earth minerals. As we look forward and navigate these macroeconomic challenges and fluctuating OEM production volumes, we are focused on executing new initiatives to improve our cost structure, continuing to mitigate the impact of incremental tariff costs, driving cash flow through improved working capital utilization and securing new platforms to solidify future sales growth.

Analysis of Results of Operations

Three months ended December 28, 2025 (second quarter fiscal 2026) compared with the three months ended December 29, 2024 (second quarter fiscal 2025)

The Company's consolidated results of operations were as follows (in thousands):

Second quarter fiscal 2026 net sales totaled $137.5 million, representing an increase of $7.6 million, or 6%, compared with the prior year second quarter. The year-over-year increase in net sales was primarily driven by $4.4 million of pricing (including $1.4 million of customer recoveries for tariffs), $3.0 million of favorable mix and content per vehicle and $2.4 million in net new program launches, partially offset by $2.3 million lower market demand.

Gross profit was $22.7 million in the second quarter of fiscal 2026, compared with $17.2 million in the comparable prior year period. Gross profit margin improved year-over-year from 13.2% to 16.5%, a 330 basis point improvement, as a result of enhanced leverage of our fixed cost structure from increased production volumes combined with a $3.0 million benefit from pricing. Improved year-over-year conversion costs reflect $2.3 million in labor cost savings (including benefits from previously completed restructuring actions) and $0.5 million lower royalty expense on reduced aftermarket demand. Offsetting headwinds included unfavorable changes in foreign currency exchange rates of $1.6 million, $1.2 million of higher Mexico labor costs and incremental tariff costs of $0.9 million.

Selling, administrative, and engineering expenses were 13.0% of sales for the three months ended December 28, 2025, compared with 11.6% in the prior year period. Fiscal 2026 second quarter expenses were $17.9 million, a $2.8 million increase year-over-year. The current year quarter included a $1.7 million charge related to a voluntary retirement program while the prior year included a $0.2 million restructuring charge. Additional costs in the current quarter were the result of investments in the business including incremental employee costs of $0.7 million, timing of outside service spend and $0.7 million of business transformation costs. The second quarter last year also included $1.1 million of executive transition costs, compared to $0.1 million in the current year.

Interest income increased $0.5 million due to increased levels of cash and cash equivalents, which are invested in overnight money market funds. Interest expense decreased $0.2 million, the result of the continued paydown of amounts outstanding under revolving credit agreements.

Other income (expense) was $1.7 million of income in the current period compared to $0.5 million of expense in the prior year. Changes in other income (expense), reflect foreign currency transaction gains and losses, changes in the fair value of peso forward contracts and non-service post-employment costs.

The effective income tax rate was 23.1% and 22.4% for the second quarter of fiscal 2026 and 2025, respectively. The effective tax rate for each period presented differs from the U.S. federal statutory rate of 21% primarily due to the accrual of foreign income taxes, which are generally higher than the U.S. federal statutory rate, partially offset by the recognition of U.S. research and development tax credits and discrete income tax benefits associated with share-based payments.

Six months ended December 28, 2025 compared with the six months ended December 29, 2024

The Company's consolidated results of operations were as follows (in thousands):

Year-to-date net sales totaled $289.9 million, representing an increase of $21.0 million, or 8%, in the comparable prior year period. The year-over-year increase in net sales was primarily driven by $8.3 million of pricing (including $1.9 million of customer recoveries for tariffs), $5.6 million of higher demand, $4.4 million in net new program launches and $2.6 million of favorable mix and content per vehicle.

Year-to-date gross profit was $49.1 million, compared with $36.1 million in the comparable prior year period. Despite unfavorable changes in foreign currency exchange rates of $2.1 million and incremental tariff costs of $1.9 million, gross profit margin improved year-over-year from 13.4% to 16.9%, a 350 basis point improvement. Material costs increased $9.7 million on higher production levels while labor and overhead costs decreased $1.8 million. Lower year-over-year conversion costs on higher sales reflect our focused efforts to manage our cost structure, which includes a $3.0 million labor cost benefit from completed restructuring actions. Annual merit increases of $2.3 million and incremental freight & logistics costs of $0.4 million (due to supply chain disruptions) were offset by reduced aftermarket royalty costs on reduced demand and a $0.5 million lower provision for annual bonuses.

Selling, administrative, and engineering expenses were 11.6% of sales for the six months ended December 28, 2025, compared with 10.7% in the prior year period. Year-to-date expenses were $33.7 million, a $4.9 million increase year-over-year. The increase in costs reflects efforts to improve our cost structure including one-time restructuring and voluntary retirement costs of $1.3 million ($0.3 million in the prior year period) and $1.0 million of business transformation costs ($0.2 million in the prior year period). Higher incentive compensation cost of $0.7 million and $1.6 million associated with headcount additions were partially offset by reduced executive transition costs of $1.6 million.

Interest income increased $1.0 million due to increased levels of cash and cash equivalents, which are invested in overnight money market funds. Interest expense decreased $0.3 million, the result of the repayment of amounts outstanding under revolving credit agreements.

Other income (expense) was $1.4 million of income in the current period compared to $0.4 million of expense in the prior year. Changes in other income (expense), reflect foreign currency transaction gains and losses, changes in the fair value of peso forward contracts and non-service post-employment costs.

The effective income tax rate was 22.2% and 27.0% for the year-to-date period of fiscal 2026 and 2025, respectively. The higher effective tax rate in the prior year period was impacted by the foreign tax rate differential and a limitation on the utilization of our foreign tax credits on non-deductible items.

Liquidity and Capital Resources

At December 28, 2025, we had $99.0 million of cash and cash equivalents, of which $3.6 million was held by our foreign subsidiaries. Excess cash is held in money market funds. The following table summarizes our cash flows provided by (used in) operating, investing and financing activities (in millions):

Cash flow from operations was $25.2 million, and increase of $4.4 million compared with the prior year. Cash provided by operating activities for the year-to-date period of fiscal 2026 reflects cash earnings against flat operating assets and liabilities. Year-to-date cash flow from operations in both periods reflects the payment of annual short-term incentive compensation earned in the prior year and a replenishment of our inventory balance partially offset by the collection of receivables. Cash used in investing activities, which includes capital expenditures to support customer programs and modernization of equipment was $3.9 million year-to-date compared with $3.0 million in the prior year period. Current year net cash used in financing activities resulted from the repayment of $5.5 million under the joint venture revolving credit agreement during fiscal 2026 and the payment of $1.3 million for taxes withheld related to the vesting of share-based awards.

At December 28, 2025, no borrowings were outstanding under the $40.0 million Amended & Restated Credit Agreement and $2.5 million was outstanding under the $18.0 million joint venture revolving credit agreement. The Company was in compliance with all covenants under its credit facilities at December 28, 2025.

We believe that the revolving credit lines, combined with our existing cash and anticipated operating cash flows will be adequate to meet operating, debt service and capital expenditure funding requirements in both the short term and beyond.

Primary Working Capital Management

We use primary working capital as a percentage of sales (PWC %) as a key metric of working capital management. We define this metric as the sum of net accounts receivable and net inventory less accounts payable, divided by the past three months sales annualized. The following table shows a comparison of primary working capital (dollars in millions):

Primary working capital levels at December 28, 2025 were consistent with the beginning of the fiscal year, as we increased inventory levels $7.2 million to improve customer deliveries, which was offset by reduced accounts receivable of $12.9 million on sequentially lower sales and a $6.3 million reduction in accounts payable due to timing of inventory purchases and payments.