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Item 2. Management’s Discussion and Analysis

2024-12-10 compared with 2024-09-06 · 52 added, 56 removed, 141 unchanged (43% of the section changed)

51 unchanged sentences

On July 1, 2024, the Company acquired the fire and rescue business of LHD Group Deutschland GmbH and its subsidiaries in Hong Kong and Australia (collectively, "LHD") in an all-cash transaction subject to post-closing adjustments and customary holdback provisions.

Total consideration was $15.9 million, net of $1.5 million cash acquired, of which $15.5 million was paid to retire LHD’s debt, $0.8 million was paid to the seller at closing, and $1.1 million remained unpaid subject to post-closing adjustments and customary holdback provisions.

Total consideration was $16.3 million, of which $15.5 million was paid to retire LHD’s debt, $0.8 million was paid to the seller at closing, and $1.1 million remained unpaid subject to post-closing adjustments and customary holdback provisions.

LHD is a leading provider of firefighter turnout gear, accessories, and personal protective equipment cleaning, repair, and maintenance.

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Headquartered in Whanganui, New Zealand, Pacific is a leading designer and provider of structural firefighting, wildland firefighting, and technical rescue helmets.

Our net sales attributable to customers outside the United States were $26.2 million and $17.9 million for the three months ended July 31, 2024 and 2023, respectively, and $48.2 million and $34.3 million for the six months ended July 31, 2024 and 2023, respectively.

Our net sales attributable to customers outside the United States were $30.4 million and $16.6 million for the three months ended October 31, 2024 and 2023, respectively, and $78.5 million and $50.8 million for the nine months ended October 31, 2024 and 2023, respectively.

We are continually monitoring the potential financial impact of the Russian invasion of Ukraine on our operations.

For the first half of FY25, sales in Russia were approximately 2.8% of our consolidated sales and sales into Ukraine were not significant.

For the nine months ended October 31, 2024, sales in Russia were approximately 2.6% of our consolidated sales and sales into Ukraine were not significant.

We do not have any capital assets in Russia.

Results of Operations

Three Months ended July 31, 2024, Compared to the Three Months Ended July 31, 2023

Net sales were $38.5 million for the three months ended July 31, 2024, an increase of $5.4 million or 16.3% compared to $33.1 million for the three months ended July 31, 2023.

Sales of our Fire Services product line increased $3.0 million due to $5.8 million in sales from LHD, acquired in July 2024, Jolly, acquired in February 2024 and Pacific, acquired in November 2023, and growth in the product line offset by a $2.6 million reduction in sales from Eagle due to a large order delivery in the prior year.

We also saw strength in the Woven product line with an increase of $3.1 million, primarily in the Latin America market.

These improvements were offset by a slight decline in industrial sales.

Three Months ended October 31, 2024, Compared to the Three Months Ended October 31, 2023

Net sales were $45.8 million for the three months ended October 31, 2024, an increase of $14.1 million or 44.5% compared to $31.7 million for the three months ended October 31, 2023.

Sales of our Fire Services product line increased $13.7 million due to $11.4 million in sales from LHD, acquired in July 2024, Jolly, acquired in February 2024 and Pacific, acquired in November 2023, and growth in the product line.

The significant increase in Fire Services was complemented by an increase in industrial sales of $0.4 million.

Gross Profit.

Gross profit for the three months ended July 31, 2024 was $15.2 million, an increase of $1.0 million, or 7.0%, compared to $14.2 million for the three months ended July 31, 2023.

Gross profit as a percentage of net sales decreased to 39.6% for the three-month period ended July 31, 2024, from 42.9% for the three months ended July 31, 2023.

Gross profit performance declined in the three months ended July 31, 2024 due to increased manufacturing costs, in-bound freight expense, increase in deferred profit in ending inventory and amortization of the step up in basis of acquired inventory, partially offset by a favorable sales mix.

Gross profit for the three months ended October 31, 2024 was $18.6 million, an increase of $5.2 million, or 38.8%, compared to $13.4 million for the three months ended October 31, 2023.

Gross profit as a percentage of net sales decreased to 40.6% for the three-month period ended October 31, 2024, from 42.2% for the three months ended October 31, 2023.

Gross profit performance declined in the three months ended October 31, 2024 due to lower margins from LHD and Jolly and increased in-bound freight expense.

Operating Expense .

Operating expenses increased by $6.4 million, or 61.5%, from $10.4 million for the three months ended July 31, 2023 to $16.8 million for the three months ended July 31, 2024.

Operating expenses increased by $8.1 million, or 83.5%, from $9.7 million for the three months ended October 31, 2023 to $17.8 million for the three months ended October 31, 2024.

This increase is attributable to the acquisition of LHD, Jolly and Pacific which increased operating expenses by $2.9 million.

In addition, the Company incurred transaction expenses of $0.7 million, restructuring costs of $0.7 million, $0.5 million of foreign currency losses from the continued devaluation of the Argentine peso, equity compensation of $0.4 million, ongoing PFAS litigation costs of $0.2 million and $0.2 million of costs associated with the Monterrey facility.

The remaining increase was related to additional selling expenses including travel and trade shows, professional fees and administrative expenses of $0.8 million.

During the quarter ended July 31, 2023, the Company evaluated the earnout consideration accrual related to the Eagle acquisition and reduced the accrual by $0.7 million, which was recorded as a reduction in operating expense.

Operating expenses as a percentage of net sales was 43.6% for the three months ended July 31, 2024, up from 31.6% for the three months ended July 31, 2023, primarily due to the factors noted above.

In addition, the Company incurred transaction expenses of $0.5 million, restructuring costs of $0.7 million, ongoing PFAS litigation costs of $0.2 million, intangible amortization of $0.3 million and $0.4 million of costs associated with the Monterrey facility.

The remaining increase was related to additional selling expenses including travel and trade shows of $1.5 million, professional fees and administrative expenses of $0.6 million offset by a reduction in foreign currency translation expense of $0.6 million.

During the quarter ended October 31, 2023, the Company evaluated the earnout consideration accrual related to the Eagle acquisition and reduced the accrual by $1.5 million, which was recorded as a reduction in operating expense.

Operating expenses as a percentage of net sales was 38.8% for the three months ended October 31, 2024, up from 30.7% for the three months ended October 31, 2023, primarily due to the factors noted above.

Operating Profit .

Operating loss was $(1.6) million for the three months ended July 31, 2024 compared to operating profit of $3.7 million for the three months ended July 31, 2023, due to the impacts detailed above.

Operating margins were (4.2%) for the three months ended July 31, 2024, as compared to 11.2% for the three months ended July 31, 2023.

Operating profit was $0.8 million for the three months ended October 31, 2024 compared to operating profit of $3.6 million for the three months ended October 31, 2023, due to the impacts detailed above.

Operating margins were 1.8% for the three months ended October 31, 2024, as compared to 11.4% for the three months ended October 31, 2023.

Income Tax Expense .

Income tax expense consists of federal, state and foreign income taxes.

Income tax benefit was $0.4 million for the three months ended July 31, 2024, compared to an expense of $1.2 million for the three months ended July 31, 2023.

Income tax expense was $0.1 million for the three months ended October 31, 2024, compared to an expense of $0.9 million for the three months ended October 31, 2023.

The reduction in tax expense between the two periods is primarily a result of the decrease in pre-tax income.

The Company's effective tax rate for the second quarter of FY25 was 23.4% which differs from the U.S.

federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions, GILTI, and the impacts from stock compensation vestings during the quarter, partially offset by foreign withholding taxes accrued during the quarter in anticipation of additional repatriations of cash from China.

The Company's effective tax rate for the second quarter of FY24 was 32.7%, which differs from the U.S.

The Company's effective tax rate for the third quarter of FY25 was 63.5% which differs from the U.S.

federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions, GILTI, and the impacts from stock compensation vestings during the quarter.

The Company's effective tax rate for the third quarter of FY24 was 26.4%, which differs from the U.S.

federal statutory rate of 21% primarily due to rate differentials in foreign tax jurisdictions and GILTI.

Net Income (Loss).

Net loss was $(1.4) million for the three months ended July 31, 2024, compared to net income of $2.5 million for the three months ended July 31, 2023.

Six Months ended July 31, 2024, Compared to the Six Months Ended July 31, 2023

Net sales were $74.8 million for the six months ended July 31, 2024 as compared to $61.8 million for the six months ended July 31, 2023, an increase of 21.0%.

Our fire service product line increased by $8.0 million in the period due to the impact of the acquisitions of LHD, Jolly and Pacific which contributed $9.6 million in sales coupled with organic growth of $1.1 million, offset by a $2.6 million reduction in sales from Eagle due to a large order delivery in the prior year.

Net income was $0.1 million for the three months ended October 31, 2024, compared to net income of $2.6 million for the three months ended October 31, 2023.

Nine Months ended October 31, 2024, Compared to the Nine Months Ended October 31, 2023

Net sales were $120.6 million for the nine months ended October 31, 2024 as compared to $93.4 million for the nine months ended October 31, 2023, an increase of 29.1%.

Our fire service product line increased by $21.8 million in the period due to the impact of the acquisitions of LHD, Jolly and Pacific which contributed $21.0 million in sales coupled organic growth of $0.8 million.

Sales of our woven product line increased $4.4 million due to strength in the Latin America market, primarily from Argentina.

Our remaining product lines delivered modest growth of $0.8 million.

Our remaining product lines delivered growth of $1.0 million.

Gross Profit.

Gross profit was $31.4 million for the six months ended July 31, 2024, an increase of $4.8 million, or 18.0%, from $26.6 million for the six months ended July 31, 2023.

Gross profit as a percentage of net sales decreased to 42.0% for the six months ended July 31, 2024, from 43.1% for the six months ended July 31, 2023 due to increased manufacturing costs, in-bound freight expense, increase in deferred profit in ending inventory and amortization of the step up in basis of acquired inventory partially offset by a favorable sales mix.

Gross profit was $50.0 million for the nine months ended October 31, 2024, an increase of $10.0 million, or 25.0%, from $40.0 million for the nine months ended October 31, 2023.

Gross profit as a percentage of net sales decreased to 41.5% for the nine months ended October 31, 2024, from 42.8% for the nine months ended October 31, 2023 due to lower margins from LHD and Jolly, increased in-bound freight expense, increase in deferred profit in ending inventory and amortization of the step up in basis of acquired inventory.

Operating Expense.

Operating expenses increased $9.8 million, or 46.7%, to $30.8 million for the six months ended July 31, 2024 from $21.0 million for the six months ended July 31, 2023.

Operating expenses increased $17.9 million, or 58.3%, to $48.6 million for the nine months ended October 31, 2024 from $30.7 million for the nine months ended October 31, 2023.

The acquisitions of LHD, Jolly and Pacific accounted for $6.6 million of the increase in operating expenses.

The Company incurred $1.9 million in acquisition costs associated with these acquisitions.

In addition, the Company incurred ongoing PFAS litigation costs of $0.4 million and $0.5 million of costs associated with the Monterrey facility.

The impact of the adjustment to the earnout consideration accrual related to the Eagle acquisition was a reduction to operating expenses of $0.7 million for the 6 months ended July 31, 2024 compared to a reduction of $1.2 million for the six months ended July 31, 2023, which was recorded as a reduction in operating expense.

The remaining increase was related to additional selling expenses including travel and trade shows, professional fees and administrative expenses of $3.1 million.

Operating expenses as a percentage of net sales was 41.1% for the six months ended July 31, 2024, up from 33.9% for the six months ended July 31, 2023.

In addition, the Company incurred ongoing PFAS litigation costs of $0.6 million, additional expenses related to the Monterrey facility of $0.4 million and restructuring costs of $0.6 million .

The impact of the adjustment to the earnout consideration accrual related to the Eagle acquisition was a reduction to operating expenses of $0.7 million for the nine months ended October 31, 2024 compared to a reduction of $2.7 million for the nine months ended October 31, 2023, which was recorded as a reduction in operating expense.

The remaining increase was related to additional selling expenses including, outbound freight, travel and trade shows of $3.2 million.

Administrative expenses including administrative salaries and expenses, professional fees, rent and bad debt increased $3.4 million offset by reduced foreign currency translation expenses of $0.8 million.

Operating expenses as a percentage of net sales was 40.3% for the nine months ended October 31, 2024, up from 32.9% for the nine months ended October 31, 2023.

Operating Profit .

Operating profit decreased to $0.6 million for the six months ended July 31, 2024 from $5.7 million for the six months ended July 31, 2023, due to the impacts detailed above.

Operating margins were 0.8% for the six months ended July 31, 2024, as compared to 9.2% for the six months ended July 31, 2023.

Operating profit decreased to $1.4 million for the nine months ended October 31, 2024 from $9.3 million for the nine months ended October 31, 2023, due to the impacts detailed above.

Operating margins were 1.2% for the nine months ended October 31, 2024, as compared to 9.9% for the nine months ended October 31, 2023.

Income Tax Expense .

Income tax expense consists of federal, state and foreign income taxes.

Income tax benefit was less than $0.1 million for the six months ended July 31, 2024, compared to an expense of $1.7 million for the six months ended July 31, 2023.

In Q2 FY23, the Company changed its permanent reinvestment assertions for its Chinese operations due to increased volatility of the Chinese yuan and geopolitical uncertainties.

The Company recorded $2 million in withholding taxes for a planned repatriation during FY23.

In Q1 FY23, the Company recorded deferred tax benefits of $0.2 million related to accruals for China social taxes.

Excluding these discrete items the Company’s effective rate was (13.1%) and 31.5% for the six months ended July 31, 2024 and 2023, respectively.

Income tax expense was $0.1 million for the nine months ended October 31, 2024, compared to an expense of $2.7 million for the nine months ended October 31, 2023.

The Company’s effective rate was 24.3% and 29.5% for the nine months ended October 31, 2024 and 2023, respectively.

Net Income (Loss).

Net income decreased by $3.5 million to $0.3 million for the six months ended July 31, 2024 from $3.8 million for the six months ended July 31, 2023.

Net income decreased by 6.0 million to $0.4 million for the nine months ended October 31, 2024 from $6.4 million for the nine months ended October 31, 2023.

Liquidity and Capital Resources

At July 31, 2024, cash and cash equivalents were approximately $24.9 million, and working capital was approximately $98.2 million.

Cash and cash equivalents decreased $0.3 million, and working capital increased $15.0 million from January 31, 2024 due to the balance sheet fluctuations described above and the acquisition of LHD, Pacific and Jolly.

Of the Company’s total cash and cash equivalents of $24.9 million as of July 31, 2024, cash held in Latin America of $2.4 million, cash held in the UK of $1.7 million, cash held in Russia and Kazakhstan of $1.5 million, cash held in the EEC of $6.3 million, cash held in India of $0.5 million, cash held in Vietnam of $0.2 million, and cash held in Hong Kong of $0.3 million would not be subject to additional US tax in the event such cash was repatriated due to the change in the US tax law as a result of the December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act (the “Tax Act”).

When the Company repatriates cash from China, of the $7.4 million balance at July 31, 2024, there could be an additional 10% withholding tax incurred in that country.

The Company expects to repatriate cash from China during the third quarter of FY 25 and in anticipation of doing so, has accrued withholding tax expense of $0.5 million as of July 31, 2024.

Cash used in operations was $4.1 million due to net income of $0.5 million, non-cash charges of $1.4 million, increases in working capital of $6.0 million, primarily due to a build in inventory in preparation for forecasted increase in sales in the second half of the year.

At October 31, 2024, cash and cash equivalents were approximately $15.8 million, and working capital was approximately $95.7 million.

Cash and cash equivalents decreased $9.4 million, and working capital increased $12.5 million from January 31, 2024 due to the balance sheet fluctuations described below and the acquisition of LHD, Pacific and Jolly.

Of the Company’s total cash and cash equivalents of $15.8 million as of October 31, 2024, cash held in Latin America of $2.1 million, cash held in the UK of $1.5 million, cash held in Russia and Kazakhstan of $2.0 million, cash held in the EEC of $4.4 million, cash held in India of $0.9 million, cash held in Vietnam of $0.3 million, and cash held in Hong Kong of $0.2 million would not be subject to additional US tax in the event such cash was repatriated due to the change in the US tax law as a result of the December 22, 2017 enactment of the 2017 Tax Cuts and Jobs Act (the “Tax Act”).

When the Company repatriates cash from China, of the $1.3 million balance at October 31, 2024, there could be an additional 10% withholding tax incurred in that country.

Cash used in operations was $12.5 million due to net income of $0.4 million, non-cash charges of $3.4 million, offset by increases in working capital of $16.3 million, primarily due to a build in inventory in preparation for forecasted increase in sales in the fourth quarter of the year and the first quarter of fiscal 2026.

Net cash used in investing activities was $25.4 million which included the acquisition of LHD and Jolly which required net cash of $22.9 million and a further investment in Bodytrak’s convertible debt instruments of $1.0 million.

Capital expenditures were $0.8 million for the six months ended July 31, 2024, primarily for manufacturing equipment.

Net cash provided by financing activities was $27.0 million for the six months ended July 31, 2024, due to $28.3 million borrowed to fund the LHD and Jolly acquisitions offset by dividends of $0.4 million, term loan borrowings of $2.9 million to support Jolly operations, repayment of term loan borrowings of $0.4 million and repayments of our revolving credit facility of $3.0 million and $0.3 million in shares returned to pay income taxes on shares vested under our equity compensation program.

Capital expenditures were $1.5 million for the nine months ended October 31, 2024, primarily for manufacturing equipment.

Net cash provided by financing activities was $28.3 million for the nine months ended October 31, 2024, due to $29.9 million borrowed to fund the LHD and Jolly acquisitions offset by dividends of $0.7 million, term loan borrowings of $2.9 million to support Jolly operations, repayment of term loan borrowings of $0.4 million and repayments of our revolving credit facility of $3.0 million and $0.4 million in shares returned to pay income taxes on shares vested under our equity compensation program.

On July 1, 2024, the Company acquired the fire and rescue business of LHD Group Deutschland GmbH and its subsidiaries in Hong Kong and Australia (collectively, "LHD") in an all-cash transaction valued at approximately $16.3 million subject to post-closing adjustments and customary holdback provisions.

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The Fourth Amendment provides for additional indebtedness or the assumption of existing indebtedness for acquisitions of foreign subsidiaries (not to exceed $10.0 million in USD) and increased the size of Permitted Acquisitions, without prior approval from the Lender, to $17.5 million per occurrence and $35.0 million in the aggregate.

We were in compliance with all financial covenants of the Loan Agreement as of July 31, 2024.

We were in compliance with all financial covenants of the Loan Agreement as of October 31, 2024.

Stock Repurchase Program.

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On December 1, 2022, the Board of Directors authorized an increase in the Company’s stock repurchase program, under which the Company may repurchase up to an additional $5 million of its outstanding common stock.

No shares were repurchased in the six months ended July 31, 2024 leaving $5.0 million remaining under the share repurchase program at July 31, 2024.

No shares were repurchased in the nine months ended October 31, 2024 leaving $5.0 million remaining under the share repurchase program at October 31, 2024.

The share repurchase program has no expiration date but may be terminated by the Board of Directors at any time.

Quarterly Cash Dividend .

On May 1, 2024, the Board of Directors declared a quarterly cash dividend.

The quarterly dividend of $0.03 per share was paid on May 22, 2024, to stockholders of record as of May 15, 2024.

On August 1, 2024, the Board of Directors declared a quarterly cash dividend.

The quarterly dividend of $0.03 per share was paid on August 22, 2024, to stockholders of record as of August 15, 2024.

Capital Expenditures.

Our capital expenditures for the six months ended July 31, 2024 of $0.8 million principally relate to capital purchases for replacement of manufacturing equipment.

Our capital expenditures of $1.5 million for the nine months ended October 31, 2024 principally relate to capital purchases for replacement of manufacturing equipment.

We anticipate FY25 capital expenditures to be approximately $2.0 million as we invest in strategic capacity expansion and replace existing equipment in the normal course of operations.

7 unchanged sentences

Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our 2024 Form 10-K.

There have been no significant changes in the application of our critical accounting policies during the six months ended July 31, 2024.

There have been no significant changes in the application of our critical accounting policies during the nine months ended October 31, 2024.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis