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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION     

WASHINGTON, D.C. 20549

Form 10-Q

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended December 25, 2020

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-7635

 

 

TWIN DISC, INCORPORATED

(Exact name of registrant as specified in its charter)

 

Wisconsin

39-0667110

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification No.)

 

1328 Racine Street, Racine, Wisconsin 53403

(Address of principal executive offices)

 

(262) 638-4000

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock (No Par Value)

TWIN

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑          No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes ☑          No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐Accelerated Filer ☑
Non-accelerated filer ☐Smaller reporting company 
Emerging growth company  

                  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes           No ☑

 

At January 28, 2021, the registrant had 13,643,695 shares of its common stock outstanding.

 

 

 
 

 

Part I.     FINANCIAL INFORMATION

 

Item 1.     Financial Statements

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

  

December 25, 2020

  

June 30, 2020

 
         

ASSETS

        

Current assets:

        

Cash

 $11,838  $10,688 

Trade accounts receivable, net

  31,893   30,682 

Inventories

  122,161   120,607 

Prepaid expenses

  4,206   5,269 

Other

  5,096   6,739 

Total current assets

  175,194   173,985 
         

Property, plant and equipment, net

  78,187   72,732 

Intangible assets, net

  18,856   18,973 

Deferred income taxes

  30,924   24,445 

Other assets

  3,422   3,992 
         

Total assets

 $306,583  $294,127 
         

LIABILITIES AND EQUITY

        

Current liabilities:

        

Current maturities of long-term debt

 $5,569  $4,691 

Accounts payable

  26,615   25,663 

Accrued liabilities

  42,924   36,380 

Total current liabilities

  75,108   66,734 
         

Long-term debt (Note J)

  36,195   37,896 

Lease obligations

  18,099   13,495 

Accrued retirement benefits

  27,156   27,938 

Deferred income taxes

  5,564   5,501 

Other long-term liabilities

  2,066   2,605 
         

Total liabilities

  164,188   154,169 
         

Commitments and contingencies (Note D)

          
         

Equity:

        

Twin Disc shareholders' equity:

        

Preferred shares authorized: 200,000; issued: none; no par value

  -   - 

Common shares authorized: 30,000,000; issued: 14,632,802; no par value

  39,918   42,756 

Retained earnings

  148,363   156,655 

Accumulated other comprehensive loss

  (31,452)  (41,226)
   156,829   158,185 

Less treasury stock, at cost (985,426 and 1,226,809 shares, respectively)

  15,102   18,796 
         

Total Twin Disc shareholders' equity

  141,727   139,389 
         

Noncontrolling interest

  668   569 
         

Total equity

  142,395   139,958 
         

Total liabilities and equity

 $306,583  $294,127 

 

The notes to condensed consolidated financial statements are an integral part of these statements.

 

2

 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 25, 2020

  

December 27, 2019

  

December 25, 2020

  

December 27, 2019

 
                 

Net sales

 $48,438  $59,536  $94,581  $118,826 

Cost of goods sold

  38,953   43,825   74,819   93,479 

Gross profit

  9,485   15,711   19,762   25,347 
                 

Marketing, engineering and administrative expenses

  13,973   16,413   26,996   32,759 

Restructuring expenses

  120   4,248   525   4,369 

Loss from operations

  (4,608)  (4,950)  (7,759)  (11,781)
                 

Interest expense

  590   447   1,163   836 

Other expense (income), net

  1,719   29   2,862   720 
   2,309   476   4,025   1,556 
                 

Loss before income taxes and noncontrolling interest

  (6,917)  (5,426)  (11,784)  (13,337)

Income tax (benefit) expense

  (2,637)  1,040   (3,567)  (578)
                 
Net Loss  (4,280)  (6,466)  (8,217)  (12,759)

Less: Net earnings attributable to noncontrolling interest, net of tax

  (33)  (50)  (75)  (68)
                 
Net loss attributable to Twin Disc $(4,313)  $(6,516) $(8,292)  $(12,827)
                 
Loss per share data:                
Basic loss per share attributable to Twin Disc common shareholders $(0.33) $(0.49) $(0.63) $(0.98)
Diluted loss per share attributable to Twin Disc common shareholders $(0.33) $(0.49) $(0.63) $(0.98)
                 
Weighted average shares outstanding data:                
Basic shares outstanding  13,255   13,164   13,227   13,135 
Diluted shares outstanding  13,255    13,164   13,227   13,135 
                 
Comprehensive income (loss)                
Net loss $(4,280) $(6,466) $(8,217) $(12,759)
Benefit plan adjustments, net of income taxes of $177, $169, $353 and $338, respectively  555   548   1,108   1,105 
Foreign currency translation adjustment  4,899   1,647   8,511   (1,349)
Unrealized gain on cash flow hedge, net of income taxes of $32, ($45), $55 and ($1), respectively  104   146   179   3 
Comprehensive income (loss)  1,278   (4,125)  1,581   (13,000)

Less: Comprehensive income attributable to noncontrolling interest

  (45)  (50)  (99)  (86)
                 
Comprehensive income (loss) attributable to Twin Disc $1,233   $(4,175) $1,482   $(13,086)


The notes to condensed consolidated financial statements are an integral part of these statements.

 

3

 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

   

For the Two Quarters Ended

 
   

December 25, 2020

   

December 27, 2019

 
                 

Cash flows from operating activities:

               
                 

Net loss

  $ (8,217 )   $ (12,759 )

Adjustments to reconcile net loss to net cash provided by operating activities, net of acquired assets:

               

Depreciation and amortization

    5,523       5,926  

Restructuring expenses

    22       3,844  

Provision for deferred income taxes

    (7,122 )     (3,901 )

Stock compensation expense and other non-cash charges, net

    1,317       774  

Net change in operating assets and liabilities

    11,254       6,232  
                 

Net cash provided by operating activities

    2,777       116  
                 

Cash flows from investing activities:

               
                 

Acquisitions of fixed assets

    (2,788 )     (6,860 )

Proceeds on note receivable

    600       -  

Proceeds from sale of fixed assets

    48       55  

Other, net

    (17 )     (129 )
                 

Net cash used by investing activities

    (2,157 )     (6,934 )
                 

Cash flows from financing activities:

               
                 

Borrowings under revolving loan arrangement

    34,241       58,993  

Repayments of revolver loans

    (36,276 )     (48,130 )

Repayments of other long term debt

    (261 )     (603 )

Payments of withholding taxes on stock compensation

    (224 )     (913 )

Dividends paid to noncontrolling interest

    -       (127 )
                 

Net cash (used) provided by financing activities

    (2,520 )     9,220  
                 

Effect of exchange rate changes on cash

    3,050       72  
                 

Net change in cash

    1,150       2,474  
                 

Cash:

               

Beginning of period

    10,688       12,362  
                 

End of period

  $ 11,838      $ 14,836  

 

The notes to condensed consolidated financial statements are an integral part of these statements.

 

4

 

TWIN DISC, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

 

A.

Basis of Presentation

 

The unaudited condensed consolidated financial statements have been prepared by Twin Disc, Incorporated (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include adjustments, consisting primarily of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report filed on Form 10-K for June 30, 2020. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

 

Recently Adopted Accounting Standards

 

In August 2018, the FASB issued updated guidance (ASU 2018-13) as part of the disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The Company adopted this guidance effective July 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial statements and disclosures.

 

In August 2018, the FASB issued updated guidance (ASU 2018-14) intended to modify the disclosure requirements for employers that sponsor defined benefit pension or postretirement plans. The Company adopted this guidance effective July 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial statements and disclosures.

 

New Accounting Releases

 

In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-10 (collectively Topic 326). Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, and for smaller reporting companies for fiscal years beginning after December 15, 2022 (the Company’s fiscal 2024), with early adoption permitted for certain amendments. Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings. The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.

 

In December 2019, the FASB issued guidance (ASU 2019-12) intended to simplify the accounting for income taxes. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 (the Company’s fiscal 2022), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.

 

In March 2020, the FASB issued guidance (ASU 2020-04), intended to provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments in this guidance are effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

 

Special Note Regarding Smaller Reporting Company Status

 

Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller reporting company and accordingly, it has scaled some of its disclosures of financial and non-financial information in this quarterly report. The Company will continue to determine whether to provide additional scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.

 

5

 

 

B.

Inventories

 

The major classes of inventories were as follows:

 

   

December 25, 2020

   

June 30, 2020

 

Inventories:

               

Finished parts

  $ 63,563     $ 62,394  

Work in process

    17,771       17,844  

Raw materials

    40,827       40,369  
    $ 122,161     $ 120,607  

 

 

 

C.

Warranty

 

The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers. However, its warranty obligation is affected by product failure rates, the number of units affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. When evaluating the adequacy of the reserve for warranty costs, management takes into consideration the term of the warranty coverage, historical claim rates and costs of repair, knowledge of the type and volume of new products and economic trends. While we believe the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable in the future could differ materially from what actually transpires. The following is a listing of the activity in the warranty reserve for the quarters and two quarters ended December 25, 2020 and December 27, 2019:

 

   

For the Quarter Ended

   

For the Two Quarters Ended

 
   

December 25, 2020

   

December 27, 2019

   

December 25, 2020

   

December 27, 2019

 

Reserve balance, beginning of period

  $ 4,682     $ 7,107     $ 4,460     $ 3,736  

Current period expense and adjustments

    711       681       1,745       6,129  

Payments or credits to customers

    (971 )     (2,035 )     (1,819 )     (4,067 )

Translation

    52       22       88       (23 )

Reserve balance, end of period

  $ 4,474     $ 5,775     $ 4,474     $ 5,775  

 

Included in expense in the two quarters ended December 25, 2020 and December 27, 2019 is a non-recurring warranty charge in the amount of $321 and $3,889, respectively, to accrue for estimated costs to resolve a unique product performance issue at certain installations.

 

The current portion of the warranty accrual ($3,676 and $4,856 as of December 25, 2020 and December 27, 2019, respectively) is reflected in accrued liabilities, while the long-term portion ($798 and $919 as of December 25, 2020 and December 27, 2019, respectively) is included in other long-term liabilities on the consolidated balance sheets.

 

 

D.

Contingencies

 

The Company is involved in litigation of which the ultimate outcome and liability to the Company, if any, is not presently determinable. Management believes that final disposition of such litigation will not have a material impact on the Company’s results of operations, financial position or cash flows.

 

 

E.

Business Segments

 

The Company and its subsidiaries are engaged in the manufacture and sale of marine and heavy-duty off-highway power transmission equipment. Principal products include marine transmissions, azimuth drives, surface drives, propellers and boat management systems, as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls systems. The Company sells to both domestic and foreign customers in a variety of market areas, principally pleasure craft, commercial and military marine markets, as well as in the energy and natural resources, government and industrial markets. The Company's worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network.

 

6

 

The Company has two reportable segments: manufacturing and distribution.  Its segment structure reflects the way management makes operating decisions and manages the growth and profitability of the business. It also corresponds with management’s approach of allocating resources and assessing the performance of its segments. The accounting practices of the segments are the same as those described in the summary of significant accounting policies. Transfers among segments are at established inter-company selling prices.  Management evaluates the performance of its segments based on net income.

 

Information about the Company’s segments is summarized as follows:

 

   

For the Quarter Ended

   

For the Two Quarters Ended

 
   

December 25, 2020

    December 27, 2019    

December 25, 2020

   

December 27, 2019

 

Net sales

                               

Manufacturing segment sales

  $ 41,705     $ 57,173     $ 80,200     $ 111,734  

Distribution segment sales

    23,223       22,025       45,729       44,452  

Inter/Intra segment elimination – manufacturing

    (12,170 )     (15,105 )     (22,908 )     (28,935 )

Inter/Intra segment elimination – distribution

    (4,320 )     (4,557 )     (8,440 )     (8,425 )
    $ 48,438     $ 59,536     $ 94,581     $ 118,826  

Net (loss) income attributable to Twin Disc

                               

Manufacturing segment net loss

  $ (3,112 )   $ (2,936 )   $ (5,774 )   $ (7,791 )

Distribution segment net income

    500       842       1,655       1,934  

Corporate and eliminations

    (1,701 )     (4,422 )     (4,173 )     (6,970 )
    $ (4,313 )   $ (6,516 )   $ (8,292 )   $ (12,827 )

 

    December 25, 2020     June 30, 2020  

Assets

               
Manufacturing segment assets   $ 373,405     $ 365,417  
Distribution segment assets     45,534       43,118  
Corporate assets and elimination of intercompany assets     (112,356 )     (114,408 )
    $ 306,583     $ 294,127  

 

Disaggregated revenue:

 

The following table presents details deemed most relevant to the users of the financial statements for the quarters and two quarters ended December 25, 2020 and December 27, 2019.

 

Net sales by product group for the quarter ended December 25, 2020 is summarized as follows:

 

                   

Elimination of

         
   

Manufacturing

   

Distribution

   

Intercompany Sales

   

Total

 

Industrial

  $ 5,287     $ 1,308     $ (512 )   $ 6,083  

Land-based transmissions

    10,101       6,308       (5,503 )     10,906  

Marine and propulsion systems

    26,300       14,216       (10,464 )     30,052  

Other

    17       1,391       (11 )     1,397  

Total

  $ 41,705     $ 23,223     $ (16,490 )   $ 48,438  

 

Net sales by product group for the quarter ended December 27, 2019 is summarized as follows:

 

                   

Elimination of

         
   

Manufacturing

   

Distribution

   

Intercompany Sales

   

Total

 

Industrial

  $ 5,892     $ 1,484     $ (751 )   $ 6,625  

Land-based transmissions

    16,559       6,238       (7,492 )     15,305  

Marine and propulsion systems

    34,700       13,418       (11,419 )     36,699  

Other

    22       885       -       907  

Total

  $ 57,173     $ 22,025     $ (19,662 )   $ 59,536  

 

7

 

Net sales by product group for the two quarters ended December 25, 2020 is summarized as follows:

 

                   

Elimination of

         
   

Manufacturing

   

Distribution

   

Intercompany Sales

   

Total

 

Industrial

  $ 10,093     $ 2,679     $ (905 )   $ 11,867  

Land-based transmissions

    20,595       12,374       (10,231 )     22,738  

Marine and propulsion systems

    49,479       26,975       (20,195 )     56,259  

Other

    33       3,701       (17 )     3,717  

Total

  $ 80,200     $ 45,729     $ (31,348 )   $ 94,581  

 

Net sales by product group for the two quarters ended December 27, 2019 is summarized as follows:

 

                   

Elimination of

         
   

Manufacturing

   

Distribution

   

Intercompany Sales

   

Total

 

Industrial

  $ 12,700     $ 2,952     $ (1,564 )   $ 14,088  

Land-based transmissions

    33,973       11,718       (14,867 )     30,824  

Marine and propulsion systems

    65,020       27,628       (20,928 )     71,720  

Other

    41       2,154       (1 )     2,194  

Total

  $ 111,734     $ 44,452     $ (37,360 )   $ 118,826  

 

 

F.

Stock-Based Compensation

 

Performance Stock Awards (“PSA”)

 

During the first two quarters of fiscal 2021 and 2020, the Company granted a target number of 265.3 and 131.7 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2021 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average free cash flow (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2023. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and free cash flow for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 397.9. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

 

The fiscal 2020 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual EPS (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2022. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 184.8. Based upon actual results to date, the Company is not currently accruing compensation expense for these PSAs.

 

There were 433.1 and 214.0 unvested PSAs outstanding at December 25, 2020 and December 27, 2019, respectively. The fair value of the PSAs (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. Compensation expense (income) of $131 and ($52) was recognized for the quarters ended December 25, 2020 and December 27, 2019, respectively, related to PSAs. Compensation expense of $228 and $20 was recognized for the two quarters ended December 25, 2020 and December 27, 2019, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at December 25, 2020 was $9.26. At December 25, 2020, the Company had $3,792 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2021, 2020 and 2019 awards. The total fair value of PSAs vested as of December 25, 2020 and December 27, 2019 was $0.

 

Restricted Stock Awards (“RS”)

 

The Company has unvested RS awards outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded as compensation expense over the vesting period, which is generally 1 to 3 years. During the first two quarters of fiscal 2021 and 2020, the Company granted 246.8 and 180.4 service based restricted shares, respectively, to employees and non-employee directors. There were 380.9 and 231.4 unvested shares outstanding at December 25, 2020 and December 27, 2019, respectively. A total of 20.5 shares of restricted stock were forfeited during the two quarters ended December 27, 2019. Compensation expense of $350 and $218 was recognized for the quarters ended December 25, 2020 and December 27, 2019, respectively. Compensation expense of $689 and $524 was recognized for the two quarters ended December 25, 2020 and December 27, 2019, respectively. The total fair value of restricted stock grants vested as of December 25, 2020 and December 27, 2019 was $533 and $1,241, respectively. As of December 25, 2020, the Company had $2,014 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

 

8

 

Restricted Stock Unit Awards (“RSU”)

 

Under the 2018 Long Term Incentive Plan, the Company has been authorized to issue RSUs. The RSUs entitle the employee to shares of common stock of the Company if the employee remains employed by the Company through a specified date, generally three years from the date of grant. The fair value of the RSUs (on the date of grant) is recorded as compensation expense over the vesting period. There were 38.0 unvested RSUs outstanding at December 25, 2020 and at December 27, 2019. Compensation expense of $81 and $81 was recognized for the quarters ended December 25, 2020 and December 27, 2019, respectively. Compensation expense of $163 and $163 was recognized for the two quarters ended December 25, 2020 and December 27, 2019, respectively. The weighted average grant date fair value of the unvested awards at December 25, 2020 was $25.77. As of December 25, 2020, the Company had $190 of unrecognized compensation expense related to restricted stock which will be recognized over the next two years.

 

 

G.

Pension and Other Postretirement Benefit Plans

 

The Company has non-contributory, qualified defined benefit plans covering substantially all domestic employees hired prior to October 1, 2003 and certain foreign employees. Additionally, the Company provides health care and life insurance benefits for certain domestic retirees. The components of the net periodic benefit cost for the defined benefit pension plans and the other postretirement benefit plan are as follows:

 

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 25, 2020

  

December 27, 2019

  

December 25, 2020

  December 27, 2019 

Pension Benefits:

                

Service cost

 $146  $194  $289  $406 

Prior service cost

  16   -   32   - 

Interest cost

  690   889   1,357   1,794 

Expected return on plan assets

  (1,133)  (1,240)  (2,266)  (2,488)

Amortization of transition obligation

  9   9   18   17 

Amortization of prior service cost

  (4)  (4)  (8)  (7)

Amortization of actuarial net loss

  811   784   1,623   1,568 

Net periodic benefit cost

 $535  $632  $1,045  $1,290 
                 

Postretirement Benefits:

                

Service cost

 $4  $4  $8  $9 

Interest cost

  39   55   77   110 

Amortization of prior service cost

  (69)  (69)  (137)  (138)

Net periodic benefit gain

 $(26) $(10) $(52) $(19)

 

The service cost component is included in cost of goods sold and marketing, engineering and administrative expenses. All other components of net periodic benefit cost are included in other expense (income), net.

 

The Company expects to contribute approximately $2,346 to its pension plans in fiscal 2021. As of December 25, 2020, the amount of $391 in contributions has been made.

 

The Company has reclassified $555 (net of $177 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended December 25, 2020, and $548 (net of $169 in taxes) during the quarter ended December 27, 2019. The Company has reclassified $1,108 (net of $353 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the two quarters ended December 25, 2020, and $1,105 (net of $338 in taxes) during the two quarters ended December 27, 2019. These reclassifications are included in the computation of net periodic benefit cost.

 

 

H.

Income Taxes

 

For the two quarters ended December 25, 2020 and December 27, 2019, the Company’s effective income tax rate was 30.3% and 4.3% respectively. As the Global Intangible Low-Taxed Income (“GILTI”) regulations were not final in the prior year, the Company had a GILTI inclusion and no offsetting GILTI credits decreasing the rate by 18.6%. During the current quarter the Company was able to take advantage of the newly enacted high tax exception regulations which were passed on July 23, 2020. The company filed its federal tax return during the quarter utilizing the high tax exception and had no GILTI inclusion decreasing the rate by 9%.

 

9

 

The spread of the COVID-19 outbreak has caused significant volatility and uncertainty in U.S. and international markets. On March 27, 2020 the U.S. government enacted the Coronavirus Aid, Relief and Economic Security (the “CARES Act”). The CARES Act includes many measures to assist companies, including temporary changes to income and non-income-based tax laws, some of which were enacted under the Tax Cuts and Jobs Act in 2017. In addition, governments around the world continue to initiate various forms of assistance. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such it is uncertain as to the full magnitude that the COVID-19 outbreak will have on the Company’s financial condition, liquidity, and future results of operations.

 

The Consolidated Appropriations Act (“CAA”) of 2021 was signed into law on December 27, 2020. Since the Company closes the quarter on the last Friday of the period, which was December 25, 2020, the changes from the CAA will be reflected during the third fiscal quarter of 2021, the period in which the CAA was enacted. The Company does not anticipate a material impact to its effective tax rate.

 

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. Changes in valuation allowances from period to period are included in the tax provision in the period of change. 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. In addition, all other available positive and negative evidence is taken into consideration, including all new impacts of tax reform. The Company has evaluated the realizability of the net deferred tax assets related to its operations and based on this evaluation management has concluded that no valuation allowances are required.

 

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter.

 

The Company has approximately $926 of unrecognized tax benefits, including related interest and penalties, as of December 25, 2020, which, if recognized, would favorably impact the effective tax rate. During the quarter, the Company settled its Wisconsin income tax audit, which resulted in a minimal decrease to the unrecognized tax benefits. There were no other significant changes in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quarter ended December 25, 2020. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going audit activity.

 

Annually, the Company files income tax returns in various taxing jurisdictions inside and outside the United States. In general, the tax years that remain subject to examination in foreign jurisdictions are 2013 through 2019. The tax year open to exam in the Netherlands is 2019. The tax years open to examination in the U.S. are for years subsequent to fiscal 2016. It is reasonably possible that other audit cycles will be completed during fiscal 2020.

 

 

I.

Intangible Assets

 

As of December 25, 2020, the following acquired intangible assets have definite useful lives and are subject to amortization:

 

   

Net Book Value Rollforward

   

Net Book Value By Asset Type

 
   

Gross Carrying
Amount

   

Accumulated
Amortization /
Impairment

   

Net Book
Value

   

Customer
Relationships

   

Technology
Know-how

   

Trade Name

   

Other

 

Balance at June 30, 2020

  $ 39,245     $ (20,272 )   $ 18,973     $ 11,554     $ 5,784     $ 1,388     $ 247  

Addition

    2       -       2       -       -       -       2  

Amortization

    -       (1,678 )     (1,678 )     (936 )     (610 )     (91 )     (41 )

Translation adjustment

    1,559       -       1,559       951       473       115       20  

Balance at December 25, 2020

  $ 40,806     $ (21,950 )   $ 18,856     $ 11,569     $ 5,647     $ 1,412     $ 228  

 

Other intangibles consist mainly of computer software. Amortization is recorded on the basis of straight-line or accelerated, as appropriate, over the estimated useful lives of the assets.

 

The weighted average remaining useful life of the intangible assets included in the table above is approximately 8 years.

 

10

 

Intangible amortization expense was $843 and $1,143 for the quarters ended December 25, 2020, and December 27, 2019, respectively. Intangible amortization expense was $1,678 and $2,272 for the two quarters ended December 25, 2020, and December 27, 2019, respectively. Estimated intangible amortization expense for the remainder of fiscal 2021 and each of the next five fiscal years is as follows:

 

Fiscal Year

       
2021   $ 1,768  

2022

    3,240  

2023

    3,062  

2024

    2,906  

2025

    2,691  

2026

    1,325  

 

 

J.

Long-term Debt

 

Long-term debt at December 25, 2020 and June 30, 2020 consisted of the following:

 

   

December 25, 2020

   

June 30, 2020

 

Credit Agreement Debt

               

Revolving loans (expire June 2023)

  $ 15,843     $ 16,641  

Term loan (due March 2026)

    17,500       17,500  
PPP loan     8,200       8,200  
Other     221       246  
Subtotal     41,764       42,587  
Less: current maturities     (5,569 )     (4,691 )
Total long-term debt   $ 36,195     $ 37,896  

 

Credit Agreement Debt: The Company’s credit agreement debt represents borrowings made under the credit agreement, as amended, which it entered into with BMO Harris Bank N.A, (“BMO”) on June 29, 2018 (“Credit Agreement”). Under the agreement, the Company, among other obligations, is subject to a minimum EBITDA financial covenant. For the quarter ended December 25, 2020, the Company was subject to a minimum EBITDA of $2,500 for the most recent cumulative three quarters. The Company did not meet this minimum EBITDA requirement as of December 25, 2020.

 

On January 27, 2021, the Company and BMO entered into a forbearance agreement and amendment to the Credit Agreement (the “Forbearance Agreement”). Under this agreement, BMO agreed to forbear from exercising its rights and remedies against the Company with respect to its noncompliance with the minimum EBITDA covenant, for the period beginning with the date of the amendment through September 30, 2021. After this date, the forbearance period ends and, therefore, on December 31, 2021, the Company is subject to a total funded debt to EBITDA ratio of 3.00 to 1.00. 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 covenants, and has agreed to provide additional financial reports to BMO.

 

The Credit Agreement, including its amendments, is more fully described in the Company’s Annual Report filed on Form 10-K for June 30, 2020, as well as in Item 2 of this quarterly report.

 

As of December 25, 2020, current maturities include $2,000 of term loan payments due within a year.

 

The PPP Loan: On April 17, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $8,200 made to the Company under the Paycheck Protection Program ("PPP"). The PPP is a liquidity facility program established by the U.S. government as part of the CARES Act in response to the negative economic impact of the COVID-19 outbreak. The PPP Loan to the Company is being administered by BMO. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are due starting on May 2021. PPP Loan recipients can be granted forgiveness for all or a portion of loans granted subject to certain conditions, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent and utilities. The Company has started the process of applying for loan forgiveness.

 

11

 

In accounting for the terms of the PPP Loan, the Company is guided by ASC 470 Debt, and ASC 450-30 Gain Contingency. Accordingly, it recorded the proceeds of the PPP Loan of $8,200 as debt and it will derecognize the liability when the loan is paid off or it believes forgiveness is reasonably certain. The Company believes that the possibility of loan forgiveness is to be regarded as a contingent gain and therefore will not recognize the gain (and derecognize the loan) until all uncertainty is removed (i.e. all conditions for forgiveness are met).

 

As of December 25, 2020, current maturities include $3,569 of PPP principal payments due within a year.

 

The PPP Loan is more fully described in the Company’s Annual Report filed on Form 10-K for June 30, 2020, as well as in Item 2 of this quarterly report.

 

Other: Other long-term debt pertains mainly to a financing arrangement in Europe. These liabilities carry terms of three to five years and implied interest rates ranging from 7% to 25%. A total amount of $45 in principal was paid on these liabilities during the current fiscal year.

 

During the two quarters ended December 25, 2020, the average interest rate was 4.03% on the Term Loan, and 4.25% on the Revolving Loans.

 

As of December 25, 2020, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $39,487, and the Company had approximately $23,644 of available borrowings. In addition to the Credit Agreement, the Company has established unsecured lines of credit that are used from time to time to secure certain performance obligations by the Company.

 

The Company’s borrowings described above approximate fair value at December 25, 2020 and June 30, 2020. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

 

The Company is party to an interest rate swap arrangement with Bank of Montreal, with an initial notional amount of $20,000 and a maturity date of March 4, 2026 to hedge the Term Loan. As of December 25, 2020, the notional amount was $17,000. This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging. This swap is included in the disclosures in Note O, Derivative Financial Instruments.

 

 

K.

Shareholders’ Equity

 

The Company, from time to time, makes open market purchases of its common stock under authorizations given to it by the Board of Directors, of which 315.0 shares as of December 25, 2020 remain authorized for purchase.  The Company did not make any open market purchases of its shares during the quarters ended December 25, 2020 and December 27, 2019.

 

12

 

The following is a reconciliation of the Company’s equity balances for the first two fiscal quarters of 2021 and 2020:

 

  

Twin Disc, Inc. Shareholders’ Equity

 
          

Accumulated

             
          

Other

      

Non-

     
  

Common

  

Retained

  

Comprehensive

  

Treasury

  

Controlling

  

Total

 
  

Stock

  

Earnings

  

Income (Loss)

  

Stock

  

Interest

  

Equity

 

Balance, June 30, 2020

 $42,756  $156,655  $(41,226) $(18,796) $569  $139,958 

Net (loss) income

     (3,979)        42   (3,937)

Translation adjustments

        3,600      12   3,612 

Benefit plan adjustments, net of tax

        553         553 

Unrealized gain on cash flow hedge, net of tax

        75         75 

Compensation expense

  518               518 

Shares (acquired) issued, net

  (2,460)        2,236      (224)

Balance, September 25, 2020

  40,814   152,676   (36,998)  (16,560)  623   140,555 

Net (loss) income

     (4,313)        33   (4,280)

Translation adjustments

        4,887      12   4,899 

Benefit plan adjustments, net of tax

        555         555 

Unrealized gain on cash flow hedge, net of tax

        104         104 

Compensation expense

  562               562 

Shares (acquired) issued, net

  (1,458)        1,458      - 

Balance, December 25, 2020

 $39,918  $148,363  $(31,452) $(15,102) $668  $142,395 

 

 

  

Twin Disc, Inc. Shareholders’ Equity

 
          

Accumulated

             
          

Other

      

Non-

     
  

Common

  

Retained

  

Comprehensive

  

Treasury

  

Controlling

  

Total

 
  

Stock

  

Earnings

  

Income (Loss)

  

Stock

  

Interest

  

Equity

 

Balance, June 30, 2019

 $45,047  $196,472  $(37,971) $(21,332) $602  $182,818 

Net (loss) income

     (6,311)        18   (6,293)

Translation adjustments

        (3,014)     18   (2,996)

Benefit plan adjustments, net of tax

        557         557 

Unrealized loss on cash flow hedge, net of tax

        (143)        (143)

Cash dividends

                  (127)  (127)

Compensation expense

  459               459 

Shares (acquired) issued, net

  (2,324)        1,412      (912)

Balance, September 27, 2019

  43,182   190,161   (40,571)  (19,920)  511   173,363 

Net (loss) income

     (6,516)        50   (6,466)

Translation adjustments

        1,647      -   1,647 

Benefit plan adjustments, net of tax

        548         548 

Unrealized gain on cash flow hedge, net of tax

        146         146 

Compensation expense

  248               248 

Shares (acquired) issued, net

  (1,125)        1,124      (1)

Balance, December 27, 2019

 $42,305  $183,645  $(38,230) $(18,796) $561  $169,485 

 

13

 

Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended September 25, 2020 and December 25, 2020, and September 27, 2019 and December 27, 2019 are as follows:

 

  

Translation

  

Benefit Plan

  

Cash Flow

 
  

Adjustment

  

Adjustment

  

Hedges

 

Balance at June 30, 2020

 $3,454  $(43,576) $(1,104)

Translation adjustment during the quarter

  3,600   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   553   75 

Net current period other comprehensive income

  3,600   553   75 

Balance at September 25, 2020

  7,054   (43,023)  (1,029)

Translation adjustment during the quarter

  4,887   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   555   104 

Net current period other comprehensive income

  4,887   555   104 

Balance at December 25, 2020

 $11,941  $(42,468) $(925)

 

  

Translation

  

Benefit Plan

  

Cash Flow

 
  

Adjustment

  

Adjustment

  

Hedges

 

Balance at June 30, 2019

 $4,439  $(41,901) $(509)

Translation adjustment during the quarter

  (3,014)  -   - 

Amounts reclassified from accumulated other comprehensive income

  -   557   (143)

Net current period other comprehensive (loss) income

  (3,014)  557   (143)

Balance at September 27, 2019

  1,425   (41,344)  (652)

Translation adjustment during the quarter

  1,647   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   548