Quarterly Report for Quarter Ending March 27, 2026 (Form 10-Q)

Management Discussion and Analysis

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our condensed consolidated financial statements as of March 27, 2026, and related notes, as reported in Item 1 of this Quarterly Report.

Some of the statements in this Quarterly Report on Form 10-Q are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the Company's description of plans and objectives for future operations and assumptions behind those plans. The words "anticipates," "believes," "intends," "estimates," and "expects," or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by the Company should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.

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, of the Company's Annual Report filed on Form 10-K for June 30, 2025, as supplemented in this Quarterly Report, could cause actual results to be materially different from what is expressed or implied in any forward-looking statement.

Results of Operations

(In thousands)
		Quarter Ended														Three Quarters Ended
		March 27, 2026			% of Net Sales				March 28,2025			% of Net Sales				March 27, 2026			% of Net Sales				March 28,2025			% of Net Sales
Net sales		$	96,694						$	81,242						$	266,870						$	244,060
Cost of goods sold			69,563							59,536							194,438							179,773
Cost of goods sold - other			-							-							-							1,579
Gross profit			27,131			28.1	%			21,706			26.7	%			72,432			27.1	%			62,708			25.7	%
Marketing, engineering and administrative expenses			21,255			22.0	%			19,759			24.3	%			62,607			23.5	%			58,166			23.8	%
Other operating income			54			0.1	%			-			0.0	%			(320	)		-0.1	%			-			0.0	%
Income (loss) from operations		$	5,822			6.0	%		$	1,947			2.4	%		$	10,145			3.8	%		$	4,542			1.9	%

Comparison of the Third Quarter of Fiscal 2026 with the Third Quarter of Fiscal 2025

Net sales for the third quarter increased 19.0%, or $15.5 million, to $96.7 million from $81.2 million in the same quarter a year ago. Currency translation had a favorable impact on third quarter fiscal 2026 sales compared to the third quarter of the prior year totaling $7.5 million primarily due to the strengthening of the euro against the U.S. dollar. The remaining organic increase of $8.0 million (9.8%) reflects strength across most of the Company's markets including commercial marine, global defense and land-based transmission. Global sales of marine and propulsion products were up 20.0% compared with the prior year, as improved commercial marine demand in Asia combined with continued strength in global demand for Veth propulsion products. Shipments of off-highway transmission products increased by 22.2%, with improved ARFF shipments in the quarter following some delays in the second fiscal quarter. Shipments of industrial products improved by 15.2% as demand for the Katsa product continues to grow, along with the favorable impact from the Kobelt acquisition. The European region saw a significant increase in revenue ($7.4 million or 21.3%) thanks primarily to strong regional demand for the Veth and Katsa products. Sales into North America increased 33.7%, or $7.3 million, driven by improved commercial marine and transmission shipments, along with the addition of Kobelt. The Asia Pacific region increased 9.0%, or $1.6 million, on improved demand for commercial marine transmissions in the region.

Sales at our manufacturing segment increased 15.5%, or $11.0 million, versus the same quarter last year. The Company's new acquisition, Kobelt, in Canada contributed $2.2 million of incremental revenue. The U.S. manufacturing operations experienced an 8.0%, or $2.3 million, increase in sales versus the third fiscal quarter of 2025, with a recovery in shipments of ARFF products impacted by tariff driven delays in the second quarter. The Company's operation in the Netherlands saw a slight decrease in revenue of $1.1 million (4.7%) compared to the third fiscal quarter of 2025, primarily due to timing of shipments of projects. The Company's Belgian operation saw a decrease compared to the prior year third quarter (10.7% or $0.6 million), with weaker demand for its marine transmission products due in part to the domestic tariff structure. The Company's Italian manufacturing operation was up $0.7 million (16.0%) compared to the third quarter of fiscal 2025, due primarily to stronger European demand for industrial and commercial marine products. The Company's operation in Finland saw revenue increase 86.2% ($6.1 million), with strong demand for defense related products in the region. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $1.3 million (94.0%) compared to the prior year third quarter.

Our distribution segment experienced an increase in sales of $2.5 million (8.3%) in the third quarter of fiscal 2026 compared to the third quarter of fiscal 2025. The Company's Asian distribution operations in Singapore, China and Japan were up 22.2% or $2.7 million from the prior year on improved demand for commercial marine transmissions and oil and gas transmissions for China. The Company's North America distribution operation saw a decrease ($0.3 million or 6.0%), negatively impacted by the existing tariff structure and related impact on goods coming from European manufacturing operations. The Company's European distribution operation saw a decline ($1.0 million or 16.4%) on weaker shipments of commercial marine projects. The Company's distribution operation in Australia and New Zealand, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in revenue of 16.7% from the prior year third fiscal quarter, primarily due to improved pleasure craft demand.

Gross profit as a percentage of sales for the third quarter of fiscal 2026 improved to 28.1%, compared to 26.7% for the same period last year. The current quarter was impacted by a positive volume impact and the positive impact of cost initiatives, offsetting a less favorable product mix and the impact of margin dilution resulting from the invoicing of tariffs..

For the fiscal 2026 third quarter, marketing, engineering and administrative ("ME&A") expenses, as a percentage of sales, were 21.7%, compared to 24.0% for the fiscal 2025 third quarter. ME&A expenses increased $1.5 million (7.6%) over the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of the addition of Kobelt ($0.3 million) and a foreign currency impact ($1.0 million), along with a general inflationary impact offset by cost savings initiatives.

Interest expense was up $0.1 million to $0.8 million in the third quarter of fiscal 2026, with a higher average outstanding revolver balance following the Katsa and Kobelt acquisitions.

Other expense (benefit) of $(0.3) million for the third fiscal quarter was primarily attributable to a currency gain ($1.0 million), partially offset by pension amortization expense ($0.7 million).

The fiscal 2026 third quarter effective tax rate was 34.1% compared to (407.9%) in the prior fiscal year third quarter. The full domestic valuation allowance in place during fiscal 2025 is the primary cause of the prior year rate. The current year rate was primarily impacted by the mix of foreign earnings by jurisdiction.

Comparison of the First Nine Months of Fiscal 2026 with the First Nine Months of Fiscal 2025

Net sales for the first nine months increased 9.3%, or $22.8 million, to $266.9 million from $244.1 million in the same period a year ago. The acquisition of Kobelt, completed in the third quarter of fiscal 2025, contributed $8.7 million of additional revenue in the first nine months. Currency translation had a favorable impact of $14.9 million on revenue for the first nine months of fiscal 2026 sales compared to the same period of the prior year due to the strengthening of the euro against the U.S. dollar. The remaining decrease of $0.8 million reflects continued growth in demand for the company's Veth propulsion systems, offset by weakness in global demand for commercial marine products through the first half of the fiscal year. Global sales of marine and propulsion products improved 10.8% from the prior year, driven by strong demand for the Veth product and a third quarter recovery in commercial marine demand. Shipments of industrial products improved by 16.8%, driven by the addition of Katsa and Kobelt. Shipments of off-highway transmission products improved by 4.9%, with recovery in ARFF shipments that were delayed in the previous quarter. The European region saw a significant increase in revenue ($12.5 million or 12.4%) thanks primarily to growing demand for the Veth and Katsa products in the region. Sales into North America increased 29.1%, or $18.2 million, on improved industrial and commercial marine shipments in the second and third quarters. The Asia Pacific region decreased 10.70%, or $5.8 million, on weaker demand for commercial marine and oil and gas transmissions in the region during the first half of the fiscal year.

Sales at our manufacturing segment increased 12.9%, versus the same period last year. The Company's new acquisition, Kobelt, in Canada contributed $8.5 million of incremental revenue. The U.S. manufacturing operations experienced a 1.5%, or $1.3 million, decline in sales versus the first nine months of fiscal 2025, with tariff concerns creating a drag on shipments. The Company's operation in the Netherlands saw increased revenue of $7.4 million (11.5%) compared to the first nine months of fiscal 2025, which includes a favorable currency impact, as this operation continues to experience record demand for its propulsion systems and has begun to increase capacity to satisfy the growing demand. The Company's Belgian operation saw a decrease compared to the prior year first nine months (14.4% or $2.3 million), with weaker US demand for its marine transmission products, impacted by tariffs. The Company's Italian manufacturing operation was up $3.9 million (33.6%) compared to the first nine months of fiscal 2025, due primarily to stronger European demand for industrial and commercial marine products. The Company's operation in Finland saw revenue increase 34.1% ($9.0 million), with improving demand for defense related products in the region. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $2.3 million (51.9%) compared to the prior year first nine months.

Our distribution segment experienced a decrease in sales of $15.7 million (16.4%) in the first nine months of fiscal 2026 compared to the first nine months of fiscal 2025. The Company's Asian distribution operations in Singapore, China and Japan were down 15.6% or $6.3 million from the prior year on weaker commercial marine activity in the region, along with reduced demand for oilfield transmissions into China. The Company's North America distribution operation saw a decrease ($4.4 million or 27.1%) on softening in North American demand for European manufactured product, impacted by the current tariff structure. The Company's European distribution operation saw a decrease ($5.4 million or 30.4%) on soft demand for commercial marine projects in the region. The Company's distribution operation in Australia and New Zealand, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in revenue of 1.9% from the prior year first nine months, primarily due to improving pleasure craft demand along with a favorable currency impact.

Gross profit as a percentage of sales for the first nine months of fiscal 2026 improved to 27.1%, compared to 25.7% for the same period last year. The prior year includes the impact of a non-cash inventory write-down of $1.6 million. This write-down reflected the results of a product rationalization exercise of the Company's industrial product line following the acquisition of Katsa. Excluding this adjustment, the fiscal 2025 gross profit percentage was 26.3%. The improvement in gross profit percentage versus the prior year first nine months is attributed to the increased volume, operational execution at our Veth operation and successful margin improvement initiatives, partially offset by margin dilution resulting from the invoicing of tariff charges.

For the fiscal 2026 first nine months, marketing, engineering and administrative ("ME&A") expenses, as a percentage of sales, were 23.3%, compared to 23.7% for the same period of fiscal 2025. ME&A expenses increased $4.5 million (7.8%) over the same period last fiscal year. The increase in ME&A spending for the first nine months was comprised of the addition of Kobelt ($1.4 million), a foreign currency translation impact ($2.0 million), and general inflationary increases partially offset by the favorable impact of savings initiatives.

Interest expense was up $0.6 million to $2.4 million in the first nine months of fiscal 2026, with a higher average outstanding revolver balance following the Katsa and Kobelt acquisitions.

Other expense of $1.2 million for the first nine months was primarily attributable to pension amortization expense ($2.1 million), partially offset by a currency gain ($0.9 million).

The fiscal 2026 first nine-month effective tax rate was (284.5%) compared to 1,469.0% in the prior fiscal year first nine months. The reversal of the full domestic valuation allowance in the current year explains the significant fluctuation in the effective tax rate.

Financial Condition, Liquidity and Capital Resources

Comparison between March 27, 2026 and June 30, 2025

As of March 27, 2026, the Company had net working capital of $136.1 million, which represents an increase of $14.3 million, or 11.7%, from the net working capital of $121.8 million as of June 30, 2025.

Cash of $16.1 million as of March 27, 2026 was unchanged from June 30, 2025. As of March 27, 2026, the majority of the cash was at the Company's overseas operations in Europe ($4.6 million) and Asia-Pacific ($10.6 million).

Trade receivables of $64.1 million were up $5.1 million, or 8.7%, when compared to last fiscal year-end. The impact of foreign currency translation was a reduction of $1.0 million versus June 30, 2025. As a percent of sales, trade receivables finished at 66.3% in the third quarter of fiscal 2026 compared to 70.5% for the comparable period in fiscal 2025 and 61.0% for the fourth quarter of fiscal 2025.

Inventories increased by $8.4 million, or 5.5%, versus June 30, 2025 to $160.3 million. The impact of foreign currency translation was to reduce inventory by $1.9 million versus June 30, 2025. The largest increase came at our operations in the Netherlands ($5.4 million) in support of growing backlog for the Veth product. The Singapore distribution entity experienced a $1.4 million increase primarily related to customer delays of deliveries on oilfield transmissions into China. Our operation in Finland also experienced an increase ($1.8 million or 12.8%) on strong demand for industrial products including defense applications. The global operations team is focused on driving inventory improvements as we close out the fiscal year. On a consolidated basis, as of March 27, 2026, the Company's backlog of orders to be shipped over the next six months grew to $179.5 million, compared to $150.5 million at June 30, 2025 and $133.7 million at March 28, 2025. The increase in backlog since June 30, 2025 ($29.0 million) is largely reflective of strong market conditions for the Veth product and increasing global defense spending. As a percentage of six-month backlog, inventory has decreased from 99% at June 30, 2025 to 89% at March 28, 2025.

Net property, plant and equipment increased $0.4 million (1.4%) to $70.0 million versus $69.6 million at June 30, 2025. The Company had capital spending of $10.2 million in the first nine months. This increase was partially offset by depreciation of $8.5 million and a currency driven decrease of $0.7 million. Capital spending occurring in the first nine months was primarily related to replacement capital, along with capital to drive growth and operating efficiencies. In total, the Company expects to invest between $13 and $16 million in capital assets in fiscal 2026. The Company continues to review its capital plans based on overall market conditions and availability of capital and may make changes to its capital plans accordingly. The Company's capital program is focused on modernizing key core manufacturing, assembly and testing processes and improving efficiencies at its facilities around the world.

Accounts payable as of March 27, 2026 of $36.5 million was down $2.2 million, or 5.7%, from June 30, 2025. The impact of foreign currency translation was to decrease accounts payable by $0.7 million versus June 30, 2025. The remaining decrease is related to the normal timing of purchasing activity and related payments.

Total borrowings and long-term debt as of March 27, 2026 increased $13.6 million to $45.0 million versus $31.4 million at June 30, 2025. During the first nine months, the Company reported negative free cash flow of $8.0 million (defined as operating cash flow less acquisitions of fixed assets), driven by an increase to inventory and capital spending. The Company ended the quarter with total debt, net of cash, of $29.0 million, compared to $15.3 million at June 30, 2025, for a net degradation of $13.7 million.

Total equity increased $22.1 million, or 13.5%, to $186.5 million as of March 27, 2026. The net earnings during the first nine months increased equity by $25.2 million, while other decreases related to a favorable foreign currency translation of $4.6 million and dividends paid to shareholders of $1.7 million. The net change in common stock and treasury stock resulting from the accounting for stock-based compensation increased equity by $0.8 million. The net remaining increase in equity of $2.4 million primarily represents the amortization of benefit plan adjustments on the Company's defined benefit pension plans, an unrealized loss on cash flow hedges and an increase to a noncontrolling interest.

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.

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 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 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 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 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 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.

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.

Other significant contractual obligations as of March 27, 2026 are disclosed in Note N "Lease Liabilities" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There are no material undisclosed guarantees. As of March 27, 2026, 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 has long-term obligations related to its postretirement plans which are discussed in detail in Note H "Pension and Other Postretirement Benefit Plans" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q. Postretirement medical claims are paid by the Company as they are submitted. In fiscal 2026, the Company expects to contribute $0.5 million to postretirement benefits based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured. In fiscal 2026, the Company expects to contribute $0.7 million to its defined benefit pension plans. The Company does not have any material off-balance sheet arrangements.

New Accounting Releases

See Note A, Basis of Presentation, to the condensed consolidated financial statements for a discussion of recently issued accounting standards.

Critical Accounting Policies

The preparation of this Quarterly Report requires management's judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

The Company's critical accounting policies are described in Item 7 of the Company's Annual Report filed on Form 10-K for June 30, 2025. There have been no significant changes to those accounting policies subsequent to June 30, 2025.