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Item 1A. Risk Factors

2026-09-04 compared with 2025-09-05 · 36 added, 42 removed, 101 unchanged (44% of the section changed)

11 unchanged sentences

dollar and the euro, could have an adverse effect on the Company’s profitability and financial condition.

The Company could be materially adversely affected by the effects of health pandemics or epidemics in regions where we or third parties on which we rely have business operations.

Operating during a global pandemic could expose the Company to a number of material risks, including diminished demand for our products and our customers’ products, suspensions in the operations of our and our suppliers’ manufacturing facilities, maintenance of appropriate labor levels, our ability to ship products to our customers, interruptions in our supply chains and distribution systems, access to capital and potential increases to the cost of capital, collection of trade receivables in accordance with their terms and potential further impairment of long-lived assets;

all of which, in the aggregate, could have an adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Certain of the Company ’ s products are directly or indirectly used in oil exploration and oil drilling and are thus dependent upon the strength of those markets and oil prices.

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however, if material prices were to continue to increase at a rate that could not be recouped through product pricing or cost reductions, it could potentially have an adverse effect on the Company’s future profitability.

The Company anticipates that additional tariffs or trade restrictions resulting from “trade wars” could result in an increase in its cost of sales and there can be no assurance that the Company would be able to pass any of the increases in raw material costs directly resulting from additional tariffs to its customers.

Given that it procures many of the raw materials that it uses to create its products directly or indirectly from outside of the U.S., the imposition of tariffs and other potential changes in U.S.

trade policy could increase the cost or limit the availability of such raw materials, which could hurt its competitive position and adversely impact its business, financial condition and results of operations.

In addition, the Company sells a significant proportion of its products to customers outside of the U.S.

Retaliatory actions by other countries could result in increases in the price of its products, which could limit demand for such products, hurt its global competitive position and have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company could be affected by tariffs, trade restrictions, changes in trade policy, or retaliatory actions by foreign governments could increase its cost of sales, reduce the availability of raw materials or components, disrupt supply chains, and adversely affect demand for its products.

The Company procures many raw materials and components directly or indirectly from outside the United States, including materials and products that may be affected by tariffs or other import restrictions.

There can be no assurance that the Company would be able to offset increased costs through pricing actions, supplier changes, sourcing adjustments, or cost reductions.

In addition, because the Company sells a significant proportion of its products to customers outside the United States, retaliatory tariffs, trade barriers, or changes in foreign trade policy could increase the price of its products in foreign markets, reduce demand, impair its competitive position, or otherwise adversely affect its business, financial condition and results of operations.

If the Company were to lose business with any key customers, the Company ’ s business would be adversely affected.

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The Company’s international sales and operations are subject to a number of risks, including:

political and social attitudes, laws, rules, regulations, and policies within countries that favor local companies over US companies, including government-supported efforts to promote local competitors;

political and social attitudes, laws, rules, regulations, and policies within countries that favor local companies over U.S.

companies, including government-supported efforts to promote local competitors;

currency exchange rate fluctuations;

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different customs and ways of doing business.

To date, our operations have not been materially adversely affected by global conflicts including Russia’s invasion of Ukraine.

However, further escalation of this or other conflicts could result in, among other negative consequences, a disruption to the global economy and supply chain leading to a shortage of parts, materials and services needed to manufacture and timely deliver our products.

To date, our operations have not been materially adversely affected by global conflicts including Russia’s invasion of Ukraine and the ongoing conflict involving Iran, Israel, and other reginal actors.

However, further escalation of these or other conflicts could result in, among other negative consequences, a disruption to the global economy and supply chain leading to a shortage of parts, materials and services needed to manufacture and timely deliver our products.

Any such shortages could negatively impact our suppliers’ ability to meet our demand requirements and, in turn, our ability to satisfy our customer demand.

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The ability to service the requirements of debt depends on the ability to generate cash and/or refinance its indebtedness as it becomes due, and depends on many factors, some of which are beyond the Company ’ s control.

The Company entered into an amended and restated credit agreement on February 14, 2025.

On June 30, 2026, the Company refinanced and replaced its credit agreement dated February 14, 2025.

The Company’s ability to make payments on its indebtedness, including those under the credit agreement, and to fund planned capital expenditures, research and development efforts and other corporate expenses depends on the Company’s future operating performance and on economic, financial, competitive, legislative, regulatory and other factors.

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Any failure to meet debt obligations and financial covenants, and maintain adequate asset-based borrowing capacity could adversely affect the Company ’ s business and financial condition.

The Company’s revolving credit facility expiring April 2027 is secured by certain personal property assets such as accounts receivable, inventory, and machinery and equipment.

Under this agreement, the Company’s borrowing capacity is based on the eligible balances of these assets and it is required to maintain sufficient asset levels at all times to secure its outstanding borrowings.

The Company is also required to comply with a total funded debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) ratio, a minimum fixed charge coverage ratio, and a minimum tangible net worth.

The Company’s revolving credit facility expiring June 2031 is secured by substantially all of the Company’s and Kobelt’s personal property (i.e., none of the other subsidiaries of the Company have pledged their personal property as collateral for the bank debt), including accounts receivable, inventory, machinery and equipment, and intellectual property.

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

The Company is required to comply with a total funded debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) ratio and a minimum fixed charge coverage ratio.

If the Company does not meet these financial covenants as specified under the agreement, the Company may require forbearance or relief from its financial covenant violations from its senior lender or be required to arrange alternative financing.

Failure to obtain relief from financial covenant violations or to obtain alternative financing, if necessary, would have a material adverse impact on the Company.

As of June 30, 2025, the Company had a borrowing capacity that exceeded its outstanding loan balance (see Note H, Debt, of the notes to the consolidated financial statements).

Based on its annual financial plan, the Company believes that it will generate sufficient cash flow levels throughout fiscal 2026 to meet the required financial covenants under the agreements.

However, as with all forward-looking information, there can be no assurance that the Company will achieve the planned results in future periods.

While the Company has obtained forgiveness of its Paycheck Protection Program Loan ( “ PPP loan ” ), it remains subject to audit under the program ’ s rules and any resulting adverse audit findings of non-compliance can result in the repayment of a portion or all of the PPP loan.

On April 17, 2020, the Company received proceeds of $8.2 million from a loan under the PPP of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which it has used to retain employees, maintain payroll and make lease and utility payments.

The Company accounted for the full proceeds as a loan.

It obtained formal forgiveness of the full amount of the loan on June 16, 2021, and accounted for the forgiveness as income from extinguishment of loan in its statement of operations for the year ended June 30, 2021.

While the loan has been formally forgiven, under the terms of the PPP loan, the Company remains subject to an audit by the Small Business Administration (“SBA”) for a period of six years after forgiveness.

The audit is intended to confirm the Company’s eligibility for the PPP loan and the appropriateness of the PPP loan forgiveness.

The Company is aware of the requirements of the PPP loan and believes it is within the eligibility threshold and has used the loan proceeds in accordance with PPP loan forgiveness requirements.

It has retained all necessary documentation in support of its eligibility, including gross receipts calculations, supporting payroll expenses and related information.

However, no assurance is provided that the Company will satisfy fully all the requirements of an audit.

If despite the Company’s actions and certification that it satisfied all eligibility requirements for the PPP loan, it is later determined that it violated applicable laws or was otherwise ineligible to receive the PPP loan, it may be required to repay the PPP loan in its entirety in a lump sum or be subject to additional penalties, which could result in adverse publicity and damage to the Company’s reputation.

If these events were to transpire, they could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company has made certain assumptions relating to the acquisition of Katsa and Kobelt in its forecasts that may prove to be materially inaccurate.

The integration of Katsa and Kobelt into the Company’s business processes is ongoing.

While the integration is currently proceeding as planned, the Company has made certain longer term assumptions relating to the forecast level of synergies and associated costs of the acquisition of Katsa and Kobelt that may be inaccurate based on the information that was available to the Company or as a result of the failure to realize the expected benefits of the acquisition, higher than expected integration costs, unknown liabilities and global economic and business conditions that may adversely affect the combined Company following the completion of the acquisition.

The combination of the businesses will require significant management attention, and the Company may incur significant additional integration costs because of integration difficulties and other challenges.

As a result of the acquisition of Katsa and Kobelt, the Company carries a significant amount of intangible assets, but it may never fully realize the full value of these assets.

The full accounting for the Kobelt acquisition, including the purchase price allocation, is pending final review by the Company.

The Company recorded intangible assets, including customer relationships, technology know-how, trade name, and computer software for both Katsa and Kobelt.

As a result of the acquisition of Kobelt, the Company carries a significant amount of intangible assets, but it may never fully realize the total value of these assets.

The Company recorded intangible assets, including customer relationships, technology know-how, trade name, and computer software for Kobelt.

Amortizable intangible assets are periodically reviewed for possible impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable.

Impairment may result from, among other things, (i) a decrease in its expected net earnings;

Impairment may result from, among other things, (i) a decrease in the Company’s expected net earnings;

(ii) adverse equity market conditions;

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or (ix) a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of.

In the event that it determines that events or circumstances exist that indicate that the carrying value of identifiable intangible assets may no longer be recoverable, it might have to recognize a non-cash impairment of identifiable intangible assets, which could have a material adverse effect on the Company’s consolidated financial condition or results of operations.

In the event that the Company determines that events or circumstances exist that indicate that the carrying value of identifiable intangible assets may no longer be recoverable, the Company might have to recognize a non-cash impairment of identifiable intangible assets, which could have a material adverse effect on the Company’s consolidated financial condition or results of operations.

The Company may experience negative or unforeseen tax consequences.

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Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on the Company’s results of operations and financial condition.

At June 30, 2025 and 2024, the allowance totaled $24.0 million and $24.0 million, respectively.

The Company has evaluated the realizability of deferred tax assets and concluded that the U.S.

and state valuation allowance is no longer required and was released December 26, 2025.

The Company's valuation allowance was $0.1 million and $16.5 million (as adjusted) as of June 30, 2026 and 2025, respectively, with prior-year amounts adjusted to reflect the change in inventory valuation method.

Taxing authority challenges and changes to tax laws may lead to tax payments exceeding current reserves.

3 unchanged sentences

Such adjustments could result in an increase or decrease to the Company’s effective tax rate.

Future changes in tax law in the United States or the various jurisdictions in which the Company operates and income tax holidays could have a material impact on the Company’s effective tax rate, foreign rate differential, future income tax expense and cash flows.

Future changes in tax law in the United States or the various jurisdictions in which the Company operates could have a material impact on the Company’s effective tax rate, foreign rate differential, future income tax expense and cash flows.

Security breaches and other disruptions could compromise the Company ’ s information system and expose the Company to liabilities, which would cause its business and reputation to suffer.

In the ordinary course of its business, the Company collects and stores sensitive data, including its proprietary business information and that of its customers, suppliers and business partners, as well as personally identifiable information of its customers and employees, in its internal and external data centers, cloud services and on its networks.

In the ordinary course of business, the Company collects and stores sensitive data, including its proprietary business information and that of its customers, suppliers and business partners, as well as personally identifiable information of its customers and employees, in its internal and external data centers, cloud services and on its networks.

The secure processing, maintenance and transmission of this information is critical to the Company’s operations and business strategy.

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Any such breach or operational failure would compromise the Company’s networks and/or that of its partners and the information stored there could be accessed, publicly disclosed, lost or stolen.

Any such access, disclosure or other loss of information could result in legal claims or proceedings and/or regulatory fines or penalties, including, among others, under the European Union’s General Data Privacy Regulation, disrupt the Company’s operations, damage its reputation and/or cause a loss of confidence in the Company’s products and services, which could adversely affect its business, financial condition and results of operations.

Any such access, disclosure or other loss of information could result in legal claims or proceedings and/or regulatory fines or penalties, including, among others, under the European Union’s General Data Protection Regulation, disruption of the Company’s operations, damage to the Company’s reputation and/or cause a loss of confidence in the Company’s products and services, which could adversely affect business, financial condition and results of operations of the Company.