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Item 7. Management’s Discussion and Analysis

2025-09-05 compared with 2024-09-06 · 88 added, 116 removed, 94 unchanged (68% of the section changed)

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Fiscal 2025 Compared to Fiscal 2024

The Katsa acquisition closed on May 31, 2024, and the Company reports its operations on a one-month lag.

Therefore, only the opening balance sheet and a bargain purchase gain impact the fiscal year 2024 results.

Net sales for fiscal 2025 increased 15.5%, or $45.6 million, to $340.7 million from $295.1 million in fiscal 2024.

The Company continued to experience stable or growing demand across most of the markets served, following the unfavorable impact of the COVID-19 crisis on the Company’s global markets in fiscal 2020 and 2021.

With improving operation execution through the year, including a focus on finding solutions to solve supply chain disruptions, the Company was able to deliver sequential revenue improvements through the four quarters of fiscal 2024.

The Company’s acquisition of Katsa at the beginning of fiscal 2025 contributed $39.1 million of incremental revenue, while the acquisition of Kobelt in the Company’s third fiscal quarter contributed $4.9 million of incremental revenue.

Excluding the impact of these acquisitions, the Company’s revenue was relatively flat with the prior year, as strong growth in the Veth product was offset by weaker oil and gas transmission shipments into China and some weakness in the European industrial and commercial marine markets.

Currency translation had a favorable impact on fiscal 2025 sales compared to the prior year totaling $1.5 million, primarily due to the strengthening of the euro against the U.S.

Sales for our manufacturing segment increased 2.8%, or $6.8 million, versus the same period last year.

The largest improvement was seen at the Company’s Veth propulsion operation in the Netherlands, which experienced a 39.1% increase in sales compared to fiscal 2023, including a $2.0 million favorable currency translation impact.

The primary driver for this increase was growing demand for the Company’s innovative propulsion solutions around the globe, along with improving supply chain and operational performance.

The Company’s domestic manufacturing operation experienced a 4.7% decrease in sales in fiscal 2024, driven by some softening aftermarket demand in the North American energy market and weaker industrial demand related to the North American housing and construction markets.

The Company’s Italian manufacturing operations reported a 40.5% decrease in sales from fiscal 2023, primarily due to the sale of the BCS business during the current fiscal year.

The Company’s Belgian manufacturing operation saw a 17.9% increase in sales from fiscal 2023 with a favorable translation effect and improved delivery performance driven by operational and supply chain execution.

The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 4.8% increase in sales compared to fiscal 2023, primarily due to a recovering European marine market.

Sales for our distribution segment were up 22.1%, or $27.0 million, compared to fiscal 2023, with improving global demand and product delivery from the manufacturing operations.

The Company’s Asian distribution operations in Singapore, China and Japan experienced a 31.4% increase in sales on improving deliveries for energy related products in China and strong commercial marine demand in the region.

The Company’s North America distribution operation saw a 6.9% increase on strong domestic demand for marine products from the European operations.

The Company’s European distribution operation saw a significant increase (25.2%) on strong demand, a favorable currency impact and improved supply of product.

The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in revenue of 4.8%, primarily due to continued strong demand for pleasure craft products in the region.

Excluding the impact of the Katsa and Kobelt acquisitions, sales for our manufacturing segment decreased 2.5%, or $7.5 million, versus the same period last year.

The largest improvement was seen at the Company’s Veth propulsion operation in the Netherlands, which experienced a 12.3% increase in sales compared to fiscal 2024.

The primary driver for this increase was growing demand through market and geographic penetration for the Company’s innovative propulsion solutions around the globe, along with improving supply chain and operational performance.

The Company’s domestic manufacturing operation experienced a 1.8% decrease in sales in fiscal 2025, driven by some softening demand for oil and gas transmissions in China.

The Company’s Italian manufacturing operations reported a 29.7% decrease in sales from fiscal 2024, primarily due to the sale of the BCS business during fiscal 2024.

The Company’s Belgian manufacturing operation saw an 18.4% decrease in sales from fiscal 2024 with softer demand in the European marine markets.

The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 3.9% increase in sales compared to fiscal 2024, primarily due to a strengthening European propulsion market.

Sales for our distribution segment were down 8.6%, or $12.4 million, compared to fiscal 2024.

The Company’s Asian distribution operations in Singapore, China and Japan experienced a 6.7% decrease in sales on softening demand for energy related products in China.

The Company’s North American distribution operation saw a 26.9% decrease on weaker domestic demand for marine products from the European operations.

The Company’s European distribution operation was essentially flat with the prior year.

The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw a slight decrease in revenue (0.7%) on consistent demand for pleasure craft products in the region.

Net sales for the Company’s marine transmission and propulsion systems were up 17.1% in fiscal 2025 compared to the prior fiscal year.

This increase reflects generally strong market conditions, continued global growth of the Veth product and a general easing of supply chain constraints during the fiscal year.

In the off-highway transmission market, the year-over-year increase of 7.5% can be attributed primarily to strength in North American aftermarket product sales for the oil and gas industry, historically high demand for the Company’s ARFF (airport rescue and firefighting) transmission and sales of the Company’s pressure pumping transmission systems into China.

The decrease experienced in the Company’s industrial products of 13.8% was a function of weaker demand in the North American construction and recycling markets.

This increase reflects generally strong market conditions, continued global growth of the Veth product, the addition of the Katsa and Kobelt product lines and a general easing of supply chain constraints during the fiscal year.

In the off-highway transmission market, the year-over-year increase of 2.1% can be attributed primarily to the historically high demand for the Company’s ARFF (airport rescue and firefighting) transmissions.

The increase experienced in the Company’s industrial products of 61.8% was a function of stronger demand in the North American construction and recycling markets, along with the addition of the Katsa and Kobelt product lines.

Geographically, sales to the U.S.

and Canada declined 21% in fiscal 2024 compared to fiscal 2023, representing 28% of consolidated sales for fiscal 2024 compared to 36% in fiscal 2023.

The decrease is primarily due to the weaker domestic demand for oil and gas related units, along with a decline in industrial product demand.

Sales into the Asia Pacific market improved 27% compared to fiscal 2023 and represented approximately 28% of sales in fiscal 2024, compared to 25% in fiscal 2023.

The increase in fiscal 2024 reflects increased demand for commercial marine and patrol craft related products, a continued strong Australian pleasure craft market and stable demand for the Company’s oil and gas transmissions by the Chinese market.

and Canada improved 10% in fiscal 2025 compared to fiscal 2024, representing 27% of consolidated sales for fiscal 2025 compared to 28% in fiscal 2024.

The increase is primarily due to the addition of Kobelt, improving Veth demand in the region and recovering industrial sales.

Sales into the Asia Pacific market decreased 20% compared to fiscal 2024 and represented approximately 22% of sales in fiscal 2025, compared to 32% in fiscal 2024.

The decrease in fiscal 2025 reflects softening demand for the Company’s oil and gas transmissions in the Chinese market.

Sales into the European market improved approximately 40% from fiscal 2024 levels while accounting for 41% of consolidated net sales in fiscal 2025 compared to 33% of net sales in fiscal 2024.

The region enjoyed strong demand for the Company’s Veth propulsion products, driving much of the fiscal 2024 growth.

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.

The addition of Katsa revenue in fiscal 2025, along with strong demand for the Company’s Veth propulsion products, drove much of the fiscal 2025 growth.

See Note K, 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 2025, gross profit improved $9.4 million, or 11.3%, to $92.7 million on a sales increase of $45.6 million.

Gross profit as a percentage of sales increased 140 basis points in fiscal 2024 to 28.2%, compared to 26.8% in fiscal 2023.

Gross profit as a percentage of sales decreased 100 basis points in fiscal 2025 to 27.2%, compared to 28.2% in fiscal 2024.

There were a number of factors that impacted the Company’s overall gross profit rate in fiscal 2025.

Gross profit for the year was primarily impacted by improved volumes (approximately $4.9 million) and a more favorable product mix (approximately $2.1 million).

This was driven by the global economic recovery that started in fiscal 2021 following the impact of the COVID-19 pandemic and an increase in the sales of high-margin oil and gas transmissions.

Gross profit for the year was primarily impacted by improved volumes (approximately $12.9 million).

This was offset by a less favorable product mix (approximately $3.1 million), primarily related to weaker demand for oil and gas related products.

The company also recorded purchase accounting amortization in cost of goods sold totaling $0.9 million in fiscal 2025.

The remaining increase ($0.5 million) is the result of price realization, cost reduction efforts and improved productivity at our operating facilities.

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Marketing, engineering, and administrative (ME&A) expenses of $82.4 million were up $10.8 million, or 15.1%, in fiscal 2025 compared to the prior fiscal year.

As a percentage of sales, ME&A expenses increased to 24.3% of sales versus 22.5% of sales in fiscal 2023.

The increase in ME&A spending in fiscal 2024 compared to the prior year was driven increased salaries and benefits ($1.9 million), global bonus expense ($1.8 million), travel and entertainment ($0.9 million), stock compensation expense ($0.6 million), professional fees ($0.6 million), lease expense ($0.5 million), a transfer tax payment related to the Katsa acquisition ($0.4 million), commission and marketing expense ($0.4 million), depreciation and amortization ($0.7 million), a currency exchange driven increase ($0.4 million) and other inflationary and volume related increases ($1.2 million).

As a percentage of sales, ME&A expenses decreased to 24.2% of sales versus 24.3% of sales in fiscal 2024.

The increase in ME&A spending in fiscal 2025 compared to the prior year was primarily driven by the addition of the Katsa and Kobelt operations ($8.6 million).

The remaining increase was driven by an inflationary increase to salaries and benefits ($1.5 million), stock compensation expense ($0.7 million), professional fees ($1.3 million), and a legal settlement ($0.4 million).

These increases were partially offset by reductions to the global bonus expense ($1.0 million), bad debt expense ($0.3 million) and other cost savings ($0.4 million).

Restructuring of Operations

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Interest Expense

Interest expense of $1.4 million for fiscal 2024 was $0.8 million lower than fiscal 2023 due to a decreased average balance, partially offset by an increased average interest rate on the domestic revolver.

Interest expense of $2.6 million for fiscal 2025 was $1.2 million higher than fiscal 2024 due to an increased average balance following the two completed acquisitions.

Other Income, Net

In fiscal 2024, other income, net, of $5.3 million increased by $4.7 million from the prior fiscal year other income, net, of $0.7 million.

This change is primarily due to the impact of a bargain purchase gain related to the acquisition of Katsa ($3.7 million).

See Note B, Acquisition of Katsa Oy, of the notes to the consolidated financial statements for a full description of this acquisition.

In fiscal 2025, other expense, net, of $5.5 million increased by $10.8 million from the prior fiscal year other income, net, of $5.3 million.

This change is primarily due to an increase in currency translation losses ($5.2 million), an increase in defined benefit pension amortization ($2.0 million) and the prior year impact of a bargain purchase gain related to the acquisition of Katsa ($3.7 million).

The effective tax rate for fiscal 2025 is 190.4% compared to 26.8% for fiscal 2024.

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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, the company recorded in fiscal year 2025 and 2024, the valuation allowance of $24.0 million and $24.0 million, respectively.

As of June 30, 2024, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog), which includes the impact of the Katsa acquisition, was $133.7 million or approximately 12% higher than the six-month backlog of $119.2 million as of June 30, 2023.

The increased backlog is primarily attributable to continued strength in order rates throughout the fiscal year, along with the addition of Katsa backlog ($12.6 million).

These increases were partially offset by a reduction in past due orders resulting from improved operational performance and the elimination of the BCS backlog ($5.3 million) due to the sale of that business during the fiscal year.

As of June 30, 2025, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was $150.5 million or approximately 13% higher than the six-month backlog of $133.7 million as of June 30, 2024.

The increased backlog is primarily attributable to continued strength in order rates throughout the fiscal year, led by continued growth in demand for the Veth product, along with the addition of Kobelt backlog ($2.8 million).

Liquidity and Capital Resources

Fiscal Years 2025 and 2024

The Katsa acquisition closed on May 31, 2024, and the Company reports its operations on a one-month lag.

Therefore, only the opening balance sheet and a bargain purchase gain impact the fiscal year 2024 results.

The net cash provided by operating activities in fiscal 2024 totaled $33.8 million, an improvement of $10.9 million from the prior fiscal year cash provided by operating activities of $22.9 million.

The positive movement in operating cash flow was created primarily by a strong earnings result and favorable working capital movements.

The Company has begun to make significant progress on its inventory reduction initiatives, driving a $12.0 million decrease (excluding the Katsa acquisition) during the second half of fiscal 2024.

The net cash used by investing activities for fiscal 2024 primarily represents the acquisition of Katsa ($23.2 million) and the acquisition of property, plant and equipment ($8.7 million).

The capital spending amount reflects a return to somewhat normalized capital spending levels, still somewhat hampered by 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 ($7.4 million) impacted by the Katsa acquisition, along with payments for dividends ($1.7 million), withholding taxes on stock compensation ($1.8 million), payments on finance lease obligations ($0.9 million) and dividends paid to a non-controlling interest ($0.3 million).

The net cash provided by operating activities in fiscal 2025 totaled $24.0 million, a decrease of $9.7 million from the prior fiscal year cash provided by operating activities of $33.7 million.

The reduction in operating cash flow from the prior year was primarily due to an increase in inventory in fiscal 2025.

This increase was driven by some shipping delays at the end of fiscal 2025, along with operational increases to support a growing backlog.

The Company expects to drive inventory reductions through fiscal 2026.

The unfavorable movement in inventory was partially offset by favorable movements in trade payables and accrued liabilities.

The net cash used by investing activities for fiscal 2025 primarily represents the acquisition of Kobelt ($17.2 million) and the acquisition of property, plant and equipment ($15.2 million).

The capital spending amount reflects a significant increase from the prior year, driven by the additional capital needs of Katsa and the timing of machine tool deliveries.

The net cash used by financing activities relates primarily to payments for dividends ($2.6 million), payments on finance lease obligations ($1.1 million) and payments on stock compensation withholding taxes ($1.3 million).

These uses were partially offset by incremental borrowings of $4.0 million.

During fiscal 2025, the Company did not purchase any shares as part of its Board-authorized stock repurchase program.

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Future Liquidity and Capital Resources

On June 29, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A.

(“BMO”) that provided for the assignment and assumption of the previously existing loans between the Company and Bank of Montreal (the “2016 Credit Agreement”) and subsequent amendments into a term loan (the “Term Loan”) and revolving credit loans (each a “Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan, the “Loans”).

Pursuant to the Credit Agreement, BMO agreed to make the Term Loan to the Company in a principal amount not to exceed $35.0 million 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, $50.0 million (the “Revolving Credit Commitment”), subject to a Borrowing Base based on Eligible Inventory and Eligible Receivables.

Subsequent amendments to the Credit Agreement reduced the Term Loan to $20.0 million, extended the maturity date of the Term Loan to April 1, 2027, and require the Company to make principal installment payments on the Term Loan of $0.5 million per quarter.

In addition, under subsequent amendments to the Credit Agreement, BMO’s Revolving Credit Commitment is currently $45.0 million.

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

On February 14, 2025, the Company entered into an amended and restated Credit Agreement (the “Credit Agreement”) with Bank of Montreal (the “Bank”) that refinances and replaces the credit agreement dated as of June 29, 2018, as amended, between the Company and BMO Harris Bank, N.A.

(the “Prior Credit Agreement”).

Pursuant to the Credit Agreement, the Bank made a Term Loan to the Company in the principal amount of $15.0 million, consisting of an assignment of a term loan under the Prior Credit Agreement from BMO to the Bank with a remaining principal of $8.5 million and an additional advance of $6.5 million.

The maturity date of the Term Loan is April 1, 2027, and the Company is required to make principal installments on the Term Loan of at least $0.75 million per quarter.

Under the Credit Agreement, the Company is restricted in making dividend payments beyond $5 million in any fiscal year.

In addition, 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, $50.0 million (the “Revolving Credit Commitment”).

The Borrowing Base is the sum of (a) 85% of outstanding unpaid Eligible Receivables and (b) the lesser of $40.0 million for each fiscal month ending on or prior to August 31, 2025 (reduced to $35.0 million for each fiscal month ending on or prior to August 31, 2026, and further reduced to $32.5 million for each fiscal month ending thereafter) and 60% of Eligible Inventory for each fiscal month ending on or prior to August 31, 2025 (reduced to 55% of Eligible Inventory for each fiscal month ending on or prior to February 28, 2026, and 50% of Eligible Inventory for each fiscal month ending thereafter).

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.

Under the Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $5.0 million in any fiscal year.

The term of the Revolving Loans under the Credit Agreement currently runs through April 1, 2027.

Under the Credit Agreement as amended, interest rates are based on either the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”).

Loans 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.

Currently, the Applicable Margins are between 2.00% and 3.50% for Revolving Loans and Letters of Credit;

The term of the Revolving Loans under the Credit Agreement runs through April 1, 2027.

The Company used the increased borrowing capacity under the Credit Agreement to help finance its acquisition of Kobelt.

Kobelt is included as a Borrower under the Credit Agreement, and may borrow directly under the Credit Agreement up to the lesser of the Revolving Credit Commitment or $25.0 million.

For purposes of determining the Borrowing Base under the Credit Agreement, Eligible Receivables and Eligible Inventory of Kobelt are included.

Interest rates under the Credit Agreement are based on the secured overnight financing rate (“SOFR”), the euro interbank offered rate (the “EURIBO Rate”), or the Canadian Overnight Repo Rate Average (the “CORRA”).

Loans under the Credit Agreement are designated as either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin;

“Eurodollar Loans,” which accrue interest at the EURIBO Rate plus an Applicable Margin;

“Term CORRA Loans,” which accrue interest at an Adjusted Term CORRA plus an Applicable Margin;

“Daily Compounded CORRA Loans,” which accrue interest at a Daily Compounded CORRA plus an Applicable Margin;

or Canadian Prime Rate Loans,” which accrue interest at the Canadian Prime Rate plus an Applicable Margin.

The Applicable Margins are between 2% and 3.5% for Revolving Loans and Letters of Credit;

2.125% and 3.625% for Term Loans;

and .15% and .3% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).

The Credit Agreement, as amended, requires the Company to meet certain financial covenants.

The Credit Agreement requires the Company to meet certain financial covenants.

Specifically, the Company’s Total Funded Debt to EBITDA ratio 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.

In determining whether the Company is in compliance with its Total Funded Debt/EBITDA Ratio, the Company’s EBITDA will include transaction expenses of up to $0.6 million for the Katsa acquisition, as well as pro-forma EBITDA of Katsa as permitted by the Bank.

In determining whether the Company is in compliance with its Total Funded Debt/EBITDA Ratio, the Company’s EBITDA will include transaction expenses of up to $0.6 million for each of the Company’s Kobelt Acquisition and the Company’s prior Katsa acquisition, as well as pro-forma EBITDA of Katsa and Kobelt as permitted by the Bank.

The Company’s Tangible Net Worth may not be less than $100.0 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2024.

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.

The Company has also pledged 100% of its equity interests in certain domestic subsidiaries and 65% of its equity interests in certain foreign subsidiaries.

The Company also entered into a Collateral Assignment of Rights under Purchase Agreement for its acquisition of Veth Propulsion.

To effect these security interests, the Company entered into various amendment and assignment agreements that consent to the assignment of certain agreements previously entered into between the Company and the Bank of Montreal in connection with the 2016 Credit Agreement.

The Company also amended and assigned to BMO a Negative Pledge Agreement that it has previously entered into with Bank of Montreal, pursuant to which it agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Credit Agreement and the Negative Pledge Agreement.

The Company has also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security interest in deposit accounts the Company maintains with the Bank.

The Bank may not provide a notice of exclusive control of a deposit account (thereby obtaining exclusive control of the account) prior to the occurrence or existence of a Default or an Event of Default under the Credit Agreement or otherwise upon the occurrence or existence of an event or condition that would, but for the passage of time or the giving of notice, constitute a Default or an Event of Default under the Credit Agreement.

Upon the occurrence of an Event of Default, BMO may take the following actions upon written notice to the Company:

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

The Company has also pledged 65% of its equity interests in certain foreign subsidiaries.

To effect these security interests, the Company entered into various amendment and assignment agreements that consent to the assignment to the Bank of certain agreements previously entered into between the Company and the Bank in connection with an April 22, 2016 credit agreement between the Company and the Bank, and further amended such agreements pursuant to the terms of the Credit Agreement.

Specifically, the Company amended and agreed to the assignment to the Bank of a Security Agreement, IP Security Agreement, Pledge Agreement, Perfection Certificate, and Assignment as to Liens and Encumbrances.

The Company also amended and assigned to the Bank a Negative Pledge Agreement, pursuant to which it agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Credit Agreement and the Negative Pledge Agreement.

The Company also entered into a Collateral Assignment of Rights under Purchase Agreement for its acquisition of Kobelt.

Borrowings under the Credit Agreement are also required to be guaranteed by each U.S.

subsidiary of the Company.

Upon the occurrence of an Event of Default, the Bank may take the following actions upon written notice to the Company:

(1) terminate its remaining obligations under the Credit Agreement;

(2) declare all amounts outstanding under the Credit Agreement to be immediately due and payable;

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 April 1, 2024, the Company entered into Amendment No.

10 to Credit Agreement (the “Tenth Amendment”) that amended and extended the Credit Agreement.

The Tenth Amendment increased the Revolving Credit Commitment from $40.0 million to $45.0 million, and also increased the Borrowing Base for Revolving Loans from the sum of (a) 85% of outstanding unpaid Eligible Receivable and (b) the lesser of $30.0 million and 50% of Eligible Inventory to the sum of (a) 85% of outstanding unpaid Eligible Receivables and (b) the lesser of $35.0 million (reduced to $32.5 million beginning with the first quarter of the 2026 fiscal year) and 60% of Eligible Inventory (reduced to 55% of Eligible Inventory beginning with the third quarter of the 2025 fiscal year, and 50% of Eligible Inventory beginning with the first quarter of the 2026 fiscal year).

The Company used the increased borrowing capacity under the Credit Agreement to help finance its acquisition of Katsa by TD Finland Holding Oy, a wholly-owned subsidiary of the Company.

The Tenth Amendment specifically permitted the Company to use Revolving Loans for the Katsa acquisition.

In addition, in determining whether the Company is in compliance with its Total Funded Debt/EBITDA Ratio, the Company’s EBITDA will include transaction expenses of up to $0.6 million for the Katsa acquisition, as well as pro-forma EBITDA of Katsa as permitted by the Bank.

The Tenth Amendment also extended the Credit Agreement through April 1, 2027 and extended the maturity date of the Term Loan and the Term Loan Commitment Date to April 1, 2027.

The Tenth Amendment also increased the Applicable Margins under the Credit Agreement for purposes of determining interest rates on Revolving Loans, Letters of Credit, Term Loans, and the Unused Revolving Credit Commitment.

Prior to the Tenth Amendment, the Applicable Margins were 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).

Under the Tenth Amendment, the Applicable Margins are between 2% and 3.5% for Revolving Loans and Letters of Credit;

2.125% and 3.625% for Term Loans;

and .15% and .3% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).

The Tenth Amendment also increased the amount of Restricted Payments that the Company may make in the form of cash dividends, distributions, purchases, redemptions, or other acquisitions of its common stock from $3.0 million to $5.0 million in any fiscal year.

The Company remains in compliance with its liquidity and other covenants.

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 the Bank determines a greater amount is necessary.

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.

The Company remains in compliance with its liquidity and other covenants under the Credit Agreement.

Management believes that available cash, the Credit Agreement, the unsecured lines of credit, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company's cash and capital requirements for the foreseeable future.

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In fiscal 2026, the Company expects to contribute $0.7 million to its defined benefit pension plans, the minimum contribution required.

Net working capital decreased $0.5 million, or 0.4%, during fiscal 2024 and the current ratio (calculated as total current assets divided by total current liabilities) remained flat at 2.2 for both June 30, 2024 and June 30, 2023.

The decrease in net working capital was primarily the result of an increase to trade payables ($3.9 million), accrued salaries ($2.9 million) and accrued liabilities ($10.9 million), along with a decrease to other current assets ($2.9 million – related to reclassification of assets held for sale of $3.0 million).

These reductions were partially offset by increases to cash ($6.8 million) and trade receivables ($2.5 million).

The working capital movements are largely a result of the Katsa acquisition and growing demand and supply chain imbalances, along with successful efforts to drive inventory reduction.

Excluding the Katsa acquisition, inventory decreased by $11.5 million from the end of fiscal 2023.

Net working capital increased $1.0 million, or 0.8%, during fiscal 2025 and the current ratio (calculated as total current assets divided by total current liabilities) decreased to 2.0 at June 30, 2025 compared to 2.2 for June 30, 2024.

The increase in net working capital was primarily the result of an increase to inventory ($21.5 million) and trade receivables ($6.7 million).

These increases were partially offset by increases in trade payables ($6.2 million) and accrued liabilities ($18.2 million).

The Company expects capital expenditures to be approximately $17 million - $19 million in fiscal 2026.

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

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

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.

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However, the policies management considers most critical to understanding and evaluating its reported financial results are the following:

Business Combinations

The Company utilizes the acquisition method of accounting for business combinations and allocates the purchase price of an acquisition to the various tangible and intangible assets acquired and liabilities assumed based on their estimated fair values.

The Company primarily establishes fair value using the income approach based upon a discounted cash flow model.

The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates.

Other estimates include:

estimated step-ups for the fixed assets, leasehold interests and inventory;

estimated fair values of intangible assets;

estimated income tax assets and liabilities assumed from the acquiree.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, its estimates and assumptions are inherently uncertain and subject to refinement.

As a result, during the purchase price allocation period, which is generally one year from the business acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill or bargain purchase gain.

For changes in the valuation of intangible assets between preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs.

Subsequent to the purchase price allocation period any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is determined.

Pension and Other Postretirement Benefit Plans

The Company provides a wide range of benefits to employees and retired employees, including pensions and postretirement health care coverage.

Plan assets and obligations are recorded annually based on the Company’s measurement date utilizing various actuarial assumptions such as discount rates, expected return on plan assets, compensation increases, retirement and mortality tables, and health care cost trend rates as of that date.

The approach used to determine the annual assumptions are as follows:

Discount Rate – based on the Willis Towers Watson BOND:Link model at June 30, 2024 as applied to the expected payouts from the pension plans.

Plan assets and obligations are recorded annually based on the Company’s measurement date utilizing discount rates as the significant assumption in determining the obligation as of that date.

The approach used to determine the discount rates is based on the Willis Towers Watson BOND:Link model at June 30, 2025 as applied to the expected payouts from the pension plans.

This yield curve is made up of Corporate Bonds rated AA or better.

Expected Return on Plan Assets – based on the expected long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers historical returns earned on the funds.

Compensation Increase – reflect the long-term actual experience, the near-term outlook and assumed inflation.

Retirement and Mortality Rates – based upon the Society of Actuaries PRI-2012 base tables for annuitants and non-annuitants, adjusted for generational mortality improvement based on the Society of Actuaries modified MP-2021 projection scale.

Health Care Cost Trend Rates – developed based upon historical cost data, near-term outlook and an assessment of likely long-term trends.

Measurements of net periodic benefit cost are based on the assumptions used for the previous year-end measurements of assets and obligations.

The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions when appropriate.

The Company reviews its discount rates on an annual basis and makes modifications when appropriate.

The effects of the modifications are recorded currently or amortized over future periods.

Based on information provided by its independent actuaries and other relevant sources, the Company believes that the assumptions used are reasonable;

however, changes in these assumptions could impact the Company’s financial position, results of operations or cash flows.

In the fourth quarter of fiscal year 2023, the Company voluntarily changed its method of accounting for recognizing actuarial gains and losses for its defined benefit pension and postretirement benefit plans.

Under the accounting method change, accumulated actuarial gains and losses as determined upon the annual remeasurement of projected benefit obligation and plan assets are recognized sooner in earnings through net periodic benefit cost within Other Income (Expense) on the Consolidated Statement of Operations and Comprehensive Income.

Based on information provided by its independent actuaries and other relevant sources, the Company believes that the discount rates used are reasonable;

however, changes in the discount rates could impact the Company’s financial position, results of operations or cash flows.

Income Taxes and Valuation Allowances

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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.

In determining whether a valuation allowance is required, several factors are considered (e.g., prior earnings history, carry-back and carry-forward periods, etc.) but the most significant factors are expected future earnings that could potentially enhance the likelihood of realization of a deferred tax asset and tax strategies.

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

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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