What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-09-08 compared with 2021-09-02 · 138 added, 98 removed, 164 unchanged (59% of the section changed)

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In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including, but not limited to those factors discussed under Item 1A, Risk Factors, could cause actual results to be materially different from what is presented in any forward-looking statements.

Results of Operations

(In thousands)

Cost of goods sold

Marketing, engineering and administrative expenses

Restructuring expenses

Goodwill and other asset impairment charge

Loss from operations

Fiscal 2022 Compared to Fiscal 2021

Net sales for fiscal 2021 decreased 11.4%, or $28.3 million, to $218.6 million from $246.8 million in fiscal 2020. The Company experienced a broad-based softening in demand through the first three fiscal quarters across the industrial and marine markets, due in large part to the continued impacts of the COVID-19 crisis on the Company’s global markets. The weakness in the North American oil and gas market experienced throughout fiscal 2020 persisted through fiscal 2021, with some improvement in aftermarket activity in the fourth quarter of fiscal 2021. The Company began to see a general market recovery trend starting at the end of the fiscal second quarter, which continued through the fiscal fourth quarter. With a recovering global economy following a relaxation of COVID-19 restrictions, the Company has seen renewed demand for its products across all segments. With improving volume levels through the year, the Company reported a fourth quarter favorable variance to the prior year of 11.5%, its first favorable year-over-year variance since the third quarter of fiscal 2019. Currency translation had a favorable impact on fiscal 2021 sales compared to the prior year totaling $11.6 million primarily due to the strengthening of the euro and Australian dollar against the U.S.

Sales at our manufacturing segment decreased 15.8%, or $36.1 million, versus the same period last year.

The largest decline was seen at the Company’s North American manufacturing operation, the largest, which experienced a 28.0% decline in sales compared to fiscal 2020.

The primary driver for this decrease was a broad reduction in demand created by the global economic impact of the COVID-19 pandemic.

The Company’s Veth Propulsion operation in the Netherlands experienced an 18.5% decrease in sales in fiscal 2021, also due to the global market impacts of the COVID-19 pandemic.

The Company’s Italian manufacturing operations reported a 16.6% increase in sales from fiscal 2020, with foreign currency contributing half of that increase and a recovering European industrial market in the second half of the fiscal year driving the remaining volume growth.

Similarly, the Company’s Belgian manufacturing operation saw a 12.2% increase in sales in fiscal 2021 on a favorable foreign exchange impact and an economic recovery in the fourth fiscal quarter.

The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 7.2% increase in sales, primarily due to a favorable currency impact.

Sales at our distribution segment were up 4.6%, or $4.4 million, compared to fiscal 2020, with the entire increase coming in the fourth fiscal quarter.

The Company’s Asian distribution operation in Singapore, China and Japan experienced an 8.3% decrease in sales due to the weakened global demand resulting from COVID-19, partially offset by stable demand for the Company’s oil and gas transmissions.

The Company’s European distribution operation saw an increase of $0.4 million thanks to a positive currency impact of $1.3 million.

The operational decline is the result of the impact of the COVID-19 pandemic.

The Company’s North American distribution operation saw an increase of 3.0% thanks to improving market conditions in the fourth fiscal quarter driving additional demand.

The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems primarily for the pleasure craft market, saw sales increase sharply (52.8%), driven by a significant favorable currency impact (15.9%) and strong demand for the Company’s product in the pleasure craft market.

Net sales for the Company’s marine transmission, propulsion and boat management systems were down 16.6% compared to the prior fiscal year.

This decrease reflects a general weakening of the global economy primarily as a result of the COVID-19 pandemic.

While most marine markets were significantly impacted, the pleasure craft market in Australia was an area of strength.

In the off-highway transmission market, the year-over-year decrease of 6.8% can also be attributed primarily to the global impact of the COVID-19 pandemic through the first three quarters, while the year-over-year comparisons turned positive in the fourth quarter.

Sale of the Company’s pressure pumping transmission systems into China remained steady and consistent with the prior year.

The decrease experienced in the Company’s industrial products of 11.0% was also seen primarily in the first three quarters of the fiscal year, brought on by a weakening global economy and the impacts of the COVID-19 pandemic.

This comparison also turned positive in the fourth fiscal quarter, as the global recovery started to gain traction.

Net sales for fiscal 2022 increased 11.1%, or $24.3 million, to $242.9 million from $218.6 million in fiscal 2021.

The Company experienced a broad-based recovery in demand across most of the markets served, as the impact of the COVID-19 crisis on the Company’s global markets subsided.

While market demand was strong through the year, supply chain disruption limited the Company’s ability to deliver product through the first three quarters of fiscal 2022.

The Company was able to overcome many supply chain challenges in the fourth fiscal quarter of 2022, resulting in revenue of $76.0 million, an increase of $9.8 million or 14.8% compared to the prior year fourth fiscal quarter.

Currency translation had an unfavorable impact on fiscal 2022 sales compared to the prior year totaling $8.5 million primarily due to the weakening of the euro and Australian dollar against the U.S.

Sales at our manufacturing segment increased 13.4%, or $25.8 million, versus the same period last year.

The largest improvement was seen at the Company’s North American manufacturing operations, which experienced a 30.7% increase in sales compared to fiscal 2021.

The primary driver for this increase was a broad recovery in demand following the negative global economic impact of the COVID-19 pandemic.

In particular, this operation saw a marked improvement in demand for its oil and gas related products, both new units and aftermarket volume.

The Company’s Veth Propulsion operation in the Netherlands experienced a 4.6% decrease in sales in fiscal 2022, primarily the result of an unfavorable currency translation impact.

In constant currency, this entity experienced a slight increase in sales (1.3%) as recovering market demand was hampered somewhat by supply chain challenges.

The Company’s Italian manufacturing operations reported an 8.2% increase in sales from fiscal 2021, despite an unfavorable currency translation impact, thanks to a recovering European industrial market following the negative impact of the COVID-19 pandemic.

The Company’s Belgian manufacturing operation saw an 11.3% decrease in sales in fiscal 2022 on an unfavorable foreign exchange impact and supply chain challenges limiting production.

The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 6.5% increase in sales, primarily due to a recovering European marine market.

Sales at our distribution segment were up 6.7%, or $6.7 million, compared to fiscal 2021, with improving global demand and product delivery from the manufacturing operations.

The Company’s Asian distribution operation in Singapore, China and Japan experienced a 7.8% increase in sales due to the recovering global demand following the impacts of COVID-19, partially offset by an unfavorable currency translation impact.

The Company’s European distribution operation saw essentially flat sales, as improving demand was offset by an unfavorable currency translation impact and supply chain challenges limiting shipment of goods from the production operations.

The Company’s North American distribution operation was also relatively unchanged from fiscal 2021, as supply chain challenges offset an improving demand picture.

The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems primarily for the pleasure craft market, saw an 18.2% sales increase, driven by strong demand for the Company’s product in the pleasure craft market.

Net sales for the Company’s marine transmission, propulsion and boat management systems were up 6.1% in fiscal 2022 compared to the prior fiscal year.

This increase reflects a general strengthening of the global economy following the negative impact of the COVID-19 pandemic in fiscal 2021.

Strength was seen across the commercial, pleasure and defense components of the market.

In the off-highway transmission market, the year-over-year increase of 11.1% can also be attributed primarily to the global recovery following the impact of the COVID-19 pandemic, with particular strength in North American aftermarket product sales for the oil and gas industry.

Sale of the Company’s pressure pumping transmission systems into China also improved over the prior year.

The increase experienced in the Company’s industrial products of 36.9% was also a function of the recovering global economy, along with the improving performance of the Company’s new Lufkin, Texas operation, which is focused on growing sales of industrial products.

Geographically, sales to the U.S.

and Canada declined 23% in fiscal 2021 compared to fiscal 2020, representing 32% of consolidated sales for fiscal 2021 compared to 36% in fiscal 2020.

The reduction is primarily due to the impact of the COVID-19 pandemic.

Sales into the Asia Pacific market actually increased 2% compared to fiscal 2020 and represented approximately 24% of sales in fiscal 2021, compared to 21% in fiscal 2020.

The increase in fiscal 2021 reflects a strong Australian pleasure craft market and consistent Chinese demand for the Company’s oil and gas transmission.

Sales into the European market declined approximately 11% from fiscal 2020 levels while accounting for 37% of consolidated net sales in both fiscal 2021 and fiscal 2020.

The decrease, similar to North America, is primarily the result of the global economic impact of the COVID-19 pandemic.

and Canada improved 26% in fiscal 2022 compared to fiscal 2021, representing 36% of consolidated sales for fiscal 2022 compared to 32% in fiscal 2021.

The increase is primarily due to the impact of the economic recovery following the COVID-19 pandemic.

Sales into the Asia Pacific market improved 8% compared to fiscal 2021 and represented approximately 23% of sales in fiscal 2022, compared to 24% in fiscal 2021.

The increase in fiscal 2022 reflects a continued strong Australian pleasure craft market, continued demand for the Company’s oil and gas transmissions by the Chinese market and a general economic recovery following the COVID-19 pandemic.

Sales into the European market declined approximately 6% from fiscal 2021 levels while accounting for 31% of consolidated net sales in fiscal 2021 compared to 37% of net sales in fiscal 2021.

Despite strengthening demand, the region experienced significant supply chain challenges and an unfavorable currency exchange impact.

See Note J, Business Segments and Foreign Operations, of the notes to the consolidated financial statements for more information on the Company’s business segments and foreign operations.

In fiscal 2021, gross profit decreased $4.9 million, or 8.7%, to $50.9 million on a sales decrease of $28.3 million.

In fiscal 2022, gross profit improved $18.0 million, or 35.3%, to $68.8 million on a sales increase of $24.3 million.

Gross profit as a percentage of sales increased 500 basis points in fiscal 2022 to 28.3%, compared to 23.3% in fiscal 2021.

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There were a number of factors that impacted the Company’s overall gross profit rate in fiscal 2022.

Gross profit for the year was primarily impacted by reduced volumes and a continued unfavorable product mix.

This was driven by the global economic impact of the COVID-19 pandemic and very limited sales of high-margin oil and gas transmissions and parts.

Margin was favorably impacted by the recording of a benefit related to the Employee Retention Credit (“ERC”), a COVID-19 relief program of the U.S.

government, totaling $2.4 million, split evenly between the third and fourth quarters.

The Company estimates the net unfavorable impact of reduced volumes on gross margin in fiscal 2021 was approximately $6.5 million.

The unfavorable shift in product mix, primarily related to the reduced shipments of the Company’s high margin oil and gas transmission units and aftermarket products, had an estimated unfavorable impact of $3.7 million.

Gross profit for the year was primarily impacted by improved volumes and a significantly more favorable product mix.

This was driven by the global economic recovery following the impact of the COVID-19 pandemic and a significant increase in the sales of high-margin oil and gas transmissions and parts.

The Company also experienced a net favorable improvement in margins from the recording of benefits related to COVID-19 relief programs of the U.S.

and the Netherlands, totaling $1.4 million.

The Company estimates the net favorable impact of increased volumes on gross margin in fiscal 2022 was approximately $5.7 million.

The favorable shift in product mix, primarily related to the increased shipments of the Company’s high margin oil and gas transmission units and aftermarket products, had an estimated favorable impact of $9.6 million.

Marketing, Engineering and Administrative (ME&A) Expenses

Marketing, engineering, and administrative (ME&A) expenses of $55.8 million were down $7.5 million, or 11.8%, compared to the prior fiscal year.

As a percentage of sales, ME&A expenses decreased slightly to 25.5% of sales versus 25.6% of sales in fiscal 2020.

The decrease in spending in fiscal 2021 compared to the prior year was driven by reduced domestic salaries and benefits ($3.4 million), a reclassification of certain costs from ME&A to COGS ($2.4 million), lower amortization expense ($1.0 million), reduced marketing activities ($1.5 million) and a benefit related to the domestic ERC ($1.2 million), reduced corporate travel ($0.9 million) and the impact of global expense containment measures ($1.5 million).

These decreases were partially offset by an increase in global bonus expense ($2.4 million) and an exchange driven increase ($2.0 million).

Marketing, engineering, and administrative (ME&A) expenses of $60.1 million were up $4.3 million, or 7.8%, in fiscal 2022 compared to the prior fiscal year.

As a percentage of sales, ME&A expenses decreased to 24.7% of sales versus 25.5% of sales in fiscal 2021.

The increase in ME&A spending in fiscal 2022 compared to the prior year was driven by increased domestic salaries and benefits ($2.4 million), increased marketing activities ($0.4 million), additional engineering project spending ($0.5 million), increased travel expense ($0.4 million) and bad debt expense ($0.3 million), higher professional fees ($0.8 million), reduced benefit from the U.S.

employee retention credit program ($0.7 million) and an inflationary impact estimated at $2.0 million.

These increases were partially offset by an increase in the receipt of Dutch COVID-19 subsidy payments ($1.2 million), the absence of a prior year one-off product issue ($0.8 million) and an exchange driven decrease ($1.2 million).

Restructuring of Operations

During the course of fiscal 2022, the Company incurred $1.0 million in restructuring charges.

Included in this amount is $2.3 million related to the provision for an announced restructuring program at the Company’s Belgian operation resulting in the elimination of 23 positions.

The action was taken to allow the Belgian operation to focus resources on core manufacturing processes, while allowing for savings on the outsourcing of non-core processes.

The Company anticipates annual pre-tax savings upon completion of the restructuring of approximately $1.6 million.

The Company also recorded a $4.3 million charge for the impairment of its corporate office building, which is currently held for sale.

The remaining $0.8 million of restructuring charges relates to productivity and cost reduction actions at the Company’s domestic and European operations.

The Company continues to focus on actively managing its cost structure and reducing fixed costs in light of the ongoing market challenges.

These charges relate to a continued restructuring program at the Company’s Belgian operation to focus resources on core manufacturing process, while allowing for savings on the outsourcing of non-core processes.

In fiscal 2021, the Company incurred $7.4 million in restructuring charges.

These charges relate to the Belgian restructuring program just mentioned ($2.3 million), an impairment charge of the Company’s corporate office building ($4.3 million), and other restructuring activities at the company’s domestic and European operations ($0.8 million).

Restructuring activities since June 2015 have resulted in the elimination of 254 full-time employees in the manufacturing segment.

Accumulated costs to date under these programs within the manufacturing segment through June 30, 2022 were $16,226.

Income from Extinguishment of Loan

During the fourth fiscal quarter, the Company received formal forgiveness of its PPP Loan in the amount of $8.2 million.

During the fourth fiscal quarter of fiscal 2021, the Company received formal forgiveness of its PPP Loan in the amount of $8.2 million.

The Company recorded $8.2 million in income from extinguishment of loan in its consolidated statement of operations in fiscal 2021.

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Interest Expense

Interest expense of $2.4 million for fiscal 2021 was $0.5 million higher than fiscal 2020 on a higher average interest rate, partially offset by a lower average balance on the domestic revolver.

Interest expense of $2.1 million for fiscal 2022 was $0.3 million lower than fiscal 2021 on a relatively stable average interest rate and a lower average balance on the domestic revolver.

Other income (expense), net

In fiscal 2021, other expense, net, increased $1.8 million primarily due to the impact of currency movements related to the euro and Asian currencies.

In fiscal 2022, other income, net, of $1.3 million improved by $4.7 million from a prior fiscal year other expense, net, of ($3.4 million).

This change is primarily due to the impact of currency movements related to the euro and Asian currencies.

The effective tax rate for fiscal 2022 is 17.8% compared to -200.0% for fiscal 2021.

During the current fiscal year, the Company received full forgiveness of its PPP loan which resulted in an increase to the effective tax rate of 17.5%.

In the prior year, the Company’s management determined that the carrying value of certain goodwill and intangibles exceeded the fair value and a $27.6 million impairment loss was calculated, which resulted in a decrease to the prior year effective tax rate of 13.8%.

During the current fiscal year, the Company was able to take advantage of the newly enacted high tax exception regulations.

The Company filed its federal tax return utilizing this exception and had no global intangible low taxed income (“GILTI”) inclusion increasing the current rate by 12.4%.

Due to continued historical domestic losses and uncertain future domestic earnings, the Company recognized a full domestic valuation allowance reducing the effective tax rate by 248.2%.

During the prior fiscal year, the Company received full forgiveness of its PPP loan which resulted in an increase to the effective tax rate of 17.5%.

The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

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In determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

The Company has evaluated the likelihood of whether the net domestic deferred tax assets would be realized and concluded that it is more likely than not that all of deferred tax assets would not be realized.

Management believes that it is more likely than not that the results of future operations will not generate sufficient taxable income and foreign source income to realize all the domestic deferred tax assets, therefore, a valuation allowance in the amount of $24.4 million, included in income tax expense (benefit) on the consolidated statement of operations, has been recorded for fiscal year 2021.

In fiscal 2021, the Company evaluated the likelihood of whether the net domestic deferred tax assets would be realized and concluded that it is more likely than not that all of deferred tax assets would not be realized.

Management believes that it is more likely than not that the results of future operations will not generate sufficient taxable income and foreign source income to realize all the domestic deferred tax assets, therefore, a valuation allowance in the amount of $24.4 million, was included in income tax expense (benefit) on the consolidated statement of operations, for fiscal year 2021.

In fiscal year 2022, the valuation allowance was $23.1 million,

As of June 30, 2022, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was $101.2 million or approximately 44% higher than the six-month backlog of $70.3 million as of June 30, 2021.

The increased backlog is primarily attributable to the improvement in order rates through the second half of the fiscal year, as the global economy began to recover from the COVID-19 pandemic.

The increased backlog is primarily attributable to the improvement in order rates throughout the fiscal year resulting from the global economic recovery following the negative impact of the COVID-19 pandemic.

Liquidity and Capital Resources

Fiscal Years 2022 and 2021

The net cash provided by operating activities in fiscal 2021 totaled $6.5 million, a decrease of $2.6 million from the prior fiscal year.

The positive operating cash flow was generated by continued progress in working capital reduction efforts, which contributed $3.4 million during the year before considering the $3.2 million reclassification, net of the $4.8 million impairment recorded to restructuring expenses, of the corporate office building as a current asset held for sale as of June 30, 2021.

The largest contributions came from inventory reduction ($5.6 million) and increased trade payables ($5.3 million).

These improvements were partially offset by an increase in trade receivables ($8.8 million) resulting from the increased sales volume in the fourth quarter of the current fiscal year.

The net cash used by investing activities for fiscal 2021 primarily represents capital spending activity totaling $4.5 million, partially offset by the receipt of $1.5 million on the note receivable related to the sale of the assets of a previously owned subsidiary of the Company in fiscal 2019.

The capital spending amount reflects a $6.2 million (58.3%) decrease in spending on capital projects compared to fiscal 2020.

Given the extreme economic uncertainty brought on by the COVID-19 pandemic, the Company limited fiscal 2021 capital spending to critical replacement items and spending needed to bring the new Lufkin facility online.

The net cash used by financing activities relates primarily to payments of long-term debt ($3.9 million), along with payments for withholding taxes on stock compensation ($0.2 million) and dividends paid to a non-controlling interest ($0.2 million).

The net cash used by operating activities in fiscal 2022 totaled $8.3 million, a change of ($14.8 million) from the prior fiscal year cash provided by operating activities of $6.5 million.

The negative operating cash flow was created primarily by an increase to inventory ($12.2 million) and trade accounts receivable ($5.9 million) compared to the prior year end.

The increased inventory is the result of the global volume increase, along with rampant supply chain disruptions creating imbalanced inventory at our operations.

These disruptions were mitigated somewhat during the fourth quarter, but remain a significant challenge.

The increase in trade accounts receivable reflects a very strong shipping month in June, with collection to follow in fiscal 2023.

These increases were partially offset by an increase in accrued liabilities compared to the prior year end.

The net cash provided by investing activities for fiscal 2022 primarily represents the proceeds from the sale of real property in Switzerland and Italy ($9.5 million), partially offset by capital spending activity totaling $4.7 million.

The capital spending amount reflects a continued focus on cash conservation as we navigated through the extreme economic uncertainty brought on by the COVID-19 pandemic, along with extended lead times on equipment resulting from global supply chain challenges.

The net cash provided by financing activities relates primarily to borrowings of long-term debt ($3.9 million), partially offset by payments for withholding taxes on stock compensation ($0.5 million), payments on finance lease obligations ($0.9 million) and dividends paid to a non-controlling interest ($0.2 million).

During fiscal 2022, the Company did not purchase any shares as part of its Board-authorized stock repurchase program.

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Under the Third Amendment, the applicable margin for revolving loans, letters of credit, and term loans was between 1.25% and 3.375%, depending on the Company’s total funded debt to EBITDA ratio.

On April 17, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $8.2 million (the “PPP Loan”) made to the Company under the PPP. The PPP was established under the CARES Act and is a program under the U.S.

SBA. The PPP Loan to the Company is administered by BMO. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum.

Monthly principal payments are deferred until April 2022.

In connection with the PPP Loan, the Company entered into a fourth amendment to the Credit Agreement (the “Fourth Amendment”) on April 17, 2020.

The Fourth Amendment:

(1) permits the Company to incur indebtedness in the form of the PPP Loan notwithstanding the Credit Agreement’s restrictions limiting the Company’s ability to incur indebtedness, and (2) provides that the PPP Loan (to the extent that the PPP Loan is forgiven) shall be disregarded for purposes of calculating financial covenants in the Credit Agreement. Any unforgiven portion of the PPP Loan and the interest thereon will not be disregarded for purposes of calculating the financial covenants.

On July 22, 2020, the Company entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement that amends the Credit Agreement dated as of June 29, 2018, as amended, between the Company and BMO.

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During the financial covenant relief period:

The “Applicable Margin” to be applied to Revolving Loans, the Term Loan, and the Commitment/Facility Fee will be increased to 3.25%, 3.875%, and 0.20%, respectively.

The “Applicable Margin” to be applied to Revolving Loans, the Term Loan, and the Commitment/Facility Fee increased to 3.25%, 3.875%, and 0.20%, respectively.

The Company may not make certain restricted payments (specifically, cash dividends, distributions, purchases, redemptions or other acquisitions of or with respect to shares of its common stock or other common equity interests).

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and (4) $10.0 million for the four fiscal quarters ending June 30, 2021.

For purposes of the minimum EBITDA financial covenant and the Total Funded Debt to EBITDA ratio, the Fifth Amendment clarified that EBITDA shall exclude any gain that is realized on the forgiveness of the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan that the Company previously received.

For purposes of the minimum EBITDA covenant and the Total Funded Debt to EBITDA ratio, the Fifth Amendment clarified that EBITDA shall exclude any gain that is realized on the forgiveness of the Small Business Administration Paycheck Protection Program loan that the Company previously received.

The Fifth Amendment also changed the definition of “LIBOR”

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The Company entered into the Forbearance Agreement because the Company was not in compliance with its financial covenant to maintain a minimum EBITDA of at least $2.5 million for the three fiscal quarters ended as of December 25, 2020.

In the Forbearance Agreement, the Bank has agreed to forbear from exercising its rights and remedies against the Company under the Credit Agreement with respect to the Company’s noncompliance with the minimum EBITDA financial covenant during the period (the “Forbearance Period”) commencing January 27, 2021 and ending on the earlier of (i) September 30, 2021, and (ii) the date on which a default under the Forbearance Agreement or Credit Agreement occurs.

During the Forbearance Period, the Bank may continue to honor requests of the Company for draws on the revolving note provided by the Bank under the Credit Agreement, except that the revolving credit commitment is reduced from $45.0 million to $42.5 million during the Forbearance Period.

In the Forbearance Agreement, the Bank agreed to forbear from exercising its rights and remedies against the Company under the Credit Agreement with respect to the Company’s noncompliance with the minimum EBITDA covenant during the period (the “Forbearance Period”) commencing January 27, 2021 and ending on the earlier of (i) September 30, 2021, and (ii) the date on which a default under the Forbearance Agreement or Credit Agreement occurs.

During the Forbearance Period, the Bank agreed to continue to honor requests of the Company for draws on the revolving note provided by the Bank under the Credit Agreement, except that the revolving credit commitment was reduced from $45.0 million to $42.5 million during the Forbearance Period.

The Forbearance Agreement also added to the Company’s financial reporting requirements under the Credit Agreement by requiring the Company to provide the Bank with monthly forecasts of the Company’s financial statements, and monthly reports on the Company’s six-month backlog.

When the Forbearance Period ends on September 30, 2021, the Bank’s forbearance under the Forbearance Agreement will cease, and, therefore, on December 31, 2021, the Company is subject to the Total Funded Debt to EBITDA ratio financial covenant of 3.00 to 1.00.

Further, upon an event of default and upon notice from the Bank, the Company’s obligations under the Loan Documents would be accelerated and become due at the default rate, and the Bank may exercise its rights and remedies under the Credit Agreement for any occurrence and continuation of default under the Credit Agreement.

For the quarter ended June 30, 2021, as a result of the Forbearance Agreement, the Company was not required to meet the minimum EBITDA financial covenant.

The Company expects to be in compliance with the terms of the Credit Agreement following the forbearance period, and therefore continues to classify its debt as long term.

The Company remains in compliance with its liquidity and other financial covenants, and has agreed to provide additional financial reports to BMO.

On September 30, 2021, the Company entered into a First Amended and Restated Forbearance Agreement and Amendment No.

7 to Credit Agreement (the “Amended and Restated Forbearance Agreement”) that amends the Credit Agreement dated as of June 29, 2018, as amended between the Company and the Bank.

The Amended and Restated Forbearance Agreement extended the Forbearance Period through February 28, 2022, or if earlier, through the date on which a default under the Amended and Restated Forbearance Agreement or Credit Agreement occurs.

During the extended Forbearance Period, the Bank agreed to continue to forbear from exercising its rights and remedies against the Company under the Credit Agreement with respect to the Company’s noncompliance with its minimum EBITDA covenants.

The Amended and Restated Forbearance Agreement also made certain adjustments to the Credit Agreement, including:

Permitting the Company to sell its manufacturing facility in Novazzano, Switzerland for a gross sales price of approximately $10 million, resulting in Net Cash Proceeds of approximately $8.7 million (the “Rolla Disposition”).

Requiring the Company to promptly repatriate approximately $7 million of the Net Cash Proceeds from the Rolla Disposition (the “Rolla Repatriation”), and to apply $1 million of such Net Cash Proceeds to the Term Loan and the remainder to the revolving Loans under the Credit Agreement.

Upon completion of the Rolla Repatriation:

(1) reducing the portion of the Borrowing Base that is based on Eligible Inventory from the lesser of $35 million or 50% of the value of Eligible Inventory to the lesser of $30 million or 50% of the value of Eligible Inventory;

and (2) reducing the Revolving Credit Commitment from a maximum of $42.5 million to a maximum of $40 million.

On February 28, 2022, the Company entered into a Second Amended and Restated Forbearance Agreement and Amendment No.

8 to Credit Agreement (the “Second Amended and Restated Forbearance Agreement”) that amended the Credit Agreement dated as of June 29, 2018, as amended between the Company and the Bank.

The Second Amended and Restated Forbearance Agreement extended the Forbearance Period through June 30, 2022, or if earlier, through the date on which a default under the Amended and Restated Forbearance Agreement or Credit Agreement occurs.

During the extended Forbearance Period, the Bank continued to forbear from exercising its rights and remedies against the Company under the Credit Agreement with respect to the Company’s noncompliance with its minimum EBITDA covenants.

The Second Amended and Restated Forbearance Agreement also made certain adjustments to the Credit Agreement, including:

Reduced the portion of the Borrowing Base that is based on Eligible Inventory from the lesser of $35,000,000 or 50% of the value of Eligible Inventory to the lesser of $30,000,000 or 50% of the value of Eligible Inventory.

This change was already in effect under the terms of the Amended and Restated Forbearance Agreement, due to the Company’s previously reported sale of its manufacturing facility in Novazzano, Switzerland for a gross sales price of approximately $10,000,000, resulting in Net Cash Proceeds (as defined in the Amended and Restated Forbearance Agreement) of approximately $8,700,000 (the “Rolla Disposition”) and repatriation of approximately $7,000,000 of those Net Cash Proceeds (the “Rolla Repatriation”).

Reduced the Revolving Credit Commitment from a maximum of $42,500,000 to a maximum of $40,000,000.

This change was also already in effect under the terms of the Amended and Restated Forbearance Agreement due to the Rolla Disposition and Rolla Repatriation.

The Company also executed a Third Amended and Restated Revolving Note with the Bank, reflecting the maximum Revolving Credit Commitment of $40,000,000.

On June 30, 2022, the Company entered into Amendment No.

9 to Credit Agreement (the “Ninth Amendment”) that amends and extends the Credit Agreement dated as of June 29, 2018, as amended (the “Credit Agreement”) between the Company and the Bank.

Pursuant to the Credit Agreement, as in effect prior to the Ninth Amendment, the Bank made a Term Loan to the Company in the principal amount of $20,000,000, and the Company may, from time to time prior to the maturity date, enter into Revolving Loans in amounts not to exceed, in the aggregate and subject to a Borrowing Base, $40,000,000 (the “Revolving Credit Commitment”).

The Credit Agreement also allows the Company to obtain Letters of Credit from the Bank, which if drawn upon by the beneficiary thereof and paid by the Bank, would become Revolving Loans.

The Ninth Amendment extended the Credit Agreement through June 30, 2025.

Prior to the Ninth Amendment, the Credit Agreement was scheduled to terminate as of June 30, 2023.

The Ninth Amendment also formally terminated the January 27, 2021 Forbearance Agreement, which had been entered into because the Company had not been in compliance with a requirement to maintain a minimum EBITDA of $2,500,000 for the three fiscal quarters ended as of December 25, 2020.

The Bank also waived the Company’s compliance with the minimum EBITDA requirements under the Credit Agreement and any Event of Default associated with the Company’s noncompliance with the minimum EBITDA requirements.

The Ninth Amendment also replaced LIBOR-based interest rates with different benchmark rates based on the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”).

Loans under the Credit Agreement are designated either as “SOFR Loans,”

which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,”

which accrue interest at the EURIBO Rate plus an Applicable Margin.

Amounts drawn on a Letter of Credit that are not timely reimbursed to the Bank bear interest at a Base Rate plus an Applicable Margin.

The Company also pays a commitment fee on the average daily Unused Revolving Credit Commitment equal to an Applicable Margin.

The Ninth Amendment also reduced the Applicable Margins from the rates that had been in effect during the period of the Forbearance Agreement.

During the period covered by the Forbearance Agreement, the Applicable Margins for Revolving Loans, Term Loans, and the Unused Revolving Credit Commitment were 3.25%, 3.875%, and .20%, respectively.

Under the Ninth Amendment, the Applicable Margins are between 1.25% and 2.75% for Revolving Loans and Letters of Credit;

1.375% and 2.875% for Term Loans;

and .10% and .15% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).

The Ninth Amendment also revised the Company’s financial covenants under the Credit Agreement.

The Company’s Total Funded Debt to EBITDA ratio (for which the Bank provided relief during period covered by the Forbearance Agreement) may not exceed 3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00.

The Company’s Tangible Net Worth may not be less than $100,000,000 plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.

Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property, including accounts receivable, inventory, machinery and equipment, and intellectual property.

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and (3) demand the Company to immediately Cash Collateralize L/C Obligations in an amount equal to 105% of the aggregate L/C Obligations or a greater amount if BMO determines a greater amount is necessary.

If such Event of Default is due to the Company’s bankruptcy, BMO may take the three actions listed above without notice to the Company.

On March 3, 2021 the Company submitted its application for forgiveness of the PPP Loan. The application was supported by documentation of qualified expenses and compliance of eligibility with the program. On June 16, 2021 the Company was notified by the SBA that the PPP loan was fully forgiven. The Company recorded the forgiveness as income from extinguishment of loan. This is described further in Note G, Debt, of the notes to the consolidated financial statements.

The Company’s balance sheet remains strong, there are no material off-balance-sheet arrangements, and it continues to have sufficient liquidity for near-term needs.

If such Event of Default is due to the Company’s bankruptcy, the Bank may take the three actions listed above without notice to the Company.

On March 3, 2021 the Company submitted its application for forgiveness of the PPP Loan.

The application was supported by documentation of qualified expenses and compliance of eligibility with the program.

On June 16, 2021 the Company was notified by the SBA that the PPP loan was fully forgiven.

The Company recorded the forgiveness as income from extinguishment of loan.

This is described further in Note G, Debt, of the notes to the consolidated financial statements.

The Company’s balance sheet remains strong, there are no material off-balance-sheet arrangements, and it continues to have sufficient liquidity for its near-term needs.

The Company had approximately $17.0 million of available borrowings under the Credit Agreement as of June 30, 2022.

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In fiscal 2023, the Company expects to contribute $0.6 million to its defined benefit pension plans, the minimum contribution required.

Net working capital increased $6.2 million, or 5.7%, during fiscal 2021 and the current ratio (calculated as total current assets divided by total current liabilities) decreased from 2.6 at June 30, 2020 to 2.4 at June 30, 2021.

The increase in net working capital was primarily the result of the reclassification of the assets currently held for sale ($9.5 million) from long term assets to current assets.

Excluding this one-off movement, working capital decreased by $3.4 million.

This reduction was the result of a focused inventory reduction effort ($5.6 million), increased trade payables ($5.3 million) and accrued expenses ($9.2 million), partially offset by a volume driven increase to trade receivables ($8.8 million) and a reclassification of a component of short term debt back to long term ($2.7 million).

Net working capital increased $10.0 million, or 8.8%, during fiscal 2022 and the current ratio (calculated as total current assets divided by total current liabilities) increased from 2.4 at June 30, 2021 to 2.5 at June 30, 2022.

The increase in net working capital was primarily the result of an increase to inventory ($9.1 million) resulting from growing demand and supply chain imbalances.

Other increases included trade receivables ($6.0 million - due to increased sales volume in the fourth quarter), lower trade payables ($2.5 million) and slightly higher other current assets ($0.8 million).

These increases were partially offset by a reduction in the current portion of assets held for sale ($6.6 million –

due primarily to the sale of a Swiss property) and increased accrued expenses ($5.0 million).

The Company expects capital expenditures to be approximately $12 million - $15 million in fiscal 2022.

These anticipated expenditures reflect the Company’s plans to invest in modern equipment to drive efficiencies, quality improvements and cost reductions.

Management believes that available cash, the BMO credit facility, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company’s capital requirements for the foreseeable future.

Off Balance Sheet Arrangements and Contractual Obligations

The Company had no material off-balance sheet arrangements as of June 30, 2021 and 2020.

Management believes that available cash, the credit facility, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company’s capital requirements for the foreseeable future.

Contractual Obligations

The Company's significant contractual obligations as of June 30, 2022 are discussed in Note H “Lease Obligations”

in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2022 Annual Report on Form 10-K.  There are no material undisclosed guarantees.  As of June 30, 2022, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90 days.  The Company also has long-term obligations related to its postretirement plans which are discussed in detail in Note M “Pension and Other Postretirement Benefit Plans” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2022 Annual Report on Form 10-K.

 Postretirement medical claims are paid by the Company as they are submitted, and they are anticipated to be $0.3 million in 2022 based on actuarial estimates;

however, these amounts can vary significantly from year to year because the Company is self-insured.

In fiscal 2023, the Company expects to contribute $0.6 million to its defined benefit pension plans, the minimum contribution required.

Other Matters

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There can be no assurance that actual results will not differ from those estimates.

The Company’s significant accounting policies are described in Note A, Significant Accounting Policies, of the notes to the consolidated financial statements.

The Company’s significant accounting policies are described in Note A, Significant Accounting Policies, of the notes to the consolidated financial statements.

Not all of these significant accounting policies require management to make difficult, subjective, or complex judgments or estimates.

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The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

In determining whether a valuation allowance is required, the Company considers such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

Based on the above criteria the Company has determined that a full valuation allowance is appropriate as relates to its domestic operations.

A full domestic valuation allowance of $24.4 million has been recognized in fiscal 2021. The recognition of a valuation allowance does not affect the availability of the tax credits as the Company realizes earnings.

A full domestic valuation allowance of $24.4 million has been recognized in fiscal 2022.

The recognition of a valuation allowance does not affect the availability of the tax credits as the Company realizes earnings.

Recently Issued Accounting Standards

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The Company is electing not to provide this disclosure due to its status as a Smaller Reporting Company.

Financial Statements and Supplementary

See Consolidated Financial Statements and Financial Statement Schedule.

Change in and Disagreements with Accountants on Accounting and Financial Disclosure

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-K

Item 7. Management’s Discussion and Analysis