twin20210630_10k.htm
0000100378 TWIN DISC INC false --06-30 FY 2021 200,000 200,000 0 0 0 0 30,000,000 30,000,000 14,632,802 14,632,802 0 0 984,139 1,226,809 3,791 530 235 185 0 0 3 5 0 0 315,000 0 211 341 103 0 9,537 13,316 2 3 3 3 3 13,000 Annuity contracts represent contractual agreements in which payments are made to an insurance company, which agrees to pay out an income or lump sum amount at a later date. Annuity contracts are valued at fair value using the net present value of future cash flows. In accordance with ASC 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at the end of the year. Activity primarily represents amounts written-off during the year, along with other adjustments (primarily foreign currency translation adjustments). Common stock is valued at the closing price reported on the active market on which the individual securities are traded. These securities include U.S. equity securities invested in companies that are traded on exchanges inside the U.S. and international equity securities invested in companies that are traded on exchanges outside the U.S. Mutual funds are valued at the daily closing price as reported by the fund. Mutual funds held by the Company’s funded benefit plans are open-end mutual funds that are registered with the Securities Exchange Commission. These funds are required to publish their daily net asset value (“NAV”) and to transact at that price. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

 

 ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECRURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended June 30, 2021

 

or

 

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

 

For the transition period from ____________ to ____________

 

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 Incorporation or Organization)

(I.R.S. Employer Identification Number)

  

1328 Racine Street, Racine, Wisconsin

53403

(Address of Principal Executive Office)

(Zip Code)

  

Registrant's Telephone Number, including area code:

(262) 638‑4000

 

Securities registered pursuant to Section 12(b) of the 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

 

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

 

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☑

 

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

 

1

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report ☑.

 

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

Yes  No ☑

 

At December 25, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non‑affiliates of the registrant was $77,500,872. Determination of stock ownership by affiliates was made solely for the purpose of responding to this requirement and registrant is not bound by this determination for any other purpose.

 

At August 20, 2021, the registrant had 13,654,965 shares of its common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III.

 

2

 

 

 

TABLE OF CONTENTS

 

TWIN DISC, INC. - FORM 10-K

FOR THE YEAR ENDED JUNE 30, 2021

 

PART I.

   
       
 

Item 1.

Business.

4

 

Item 1A.

Risk Factors.

5

 

Item 1B.

Unresolved Staff Comments.

10

 

Item 2.

Properties.

10

 

Item 3.

Legal Proceedings.

10

 

Item 4.

Mine Safety Disclosure.

10

   

Information About Our Executive Officers.

11

     

PART II.

   
     
 

Item 5.

Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.

12

 

Item 6.

Selected Financial Data.

13

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

13

 

Item 7A.

Quantitative and Qualitative Disclosure About Market Risk.

22

 

Item 8.

Financial Statements and Supplementary Data.

23

 

Item 9.

Change In and Disagreements With Accountants on Accounting and Financial Disclosure.

23

 

Item 9A.

Controls and Procedures.

23

 

Item 9B.

Other Information.

24

     

PART III.

   
     
 

Item 10.

Directors, Executive Officers and Corporate Governance.

25

 

Item 11.

Executive Compensation.

25

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

25

 

Item 13.

Certain Relationships and Related Transactions, Director Independence.

26

 

Item 14.

Principal Accounting Fees and Services.

26

     

PART IV.

   
     
 

Item 15.

Exhibits, Financial Statement Schedules.

27

   

Exhibit Index.

67

   

Signatures.

71

 

3

 

 

 

PART I

 

Item 1. Business

 

Twin Disc, Incorporated (“Twin Disc”, or the “Company”) was incorporated under the laws of the state of Wisconsin in 1918. Twin Disc designs, manufactures and sells marine and heavy duty off‑highway power transmission equipment. The Company has manufacturing locations in the United States, Belgium, Italy, Switzerland and the Netherlands. In addition to these countries, it has distribution locations in Singapore, China, Australia and Japan. Products offered 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 its products to customers primarily in the 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. The products described above have accounted for more than 90% of revenues in each of the last three fiscal years.

 

Most of the Company's products are machined from cast iron, forgings, cast aluminum and bar steel which generally are available from multiple sources and which are believed to be in adequate supply.

 

The Company has applied for patents in both the United States and certain foreign countries on inventions made in the course of its development work for which commercial applications are considered probable. The Company regards its patents collectively as important but does not consider its business dependent upon any one of such patents.

 

The business is not considered to be seasonal except to the extent that employee vacations and plant shutdowns, particularly in Europe, occur mainly in the months of July and August, curtailing production during that period.

 

The Company's products receive direct widespread competition, including from divisions of other larger independent manufacturers. The Company also competes for business with parts manufacturing divisions of some of its major customers. The primary competitive factors for the Company’s products are design, technology, performance, price, service and availability. The Company’s top ten customers accounted for approximately 48% and 51% of the Company's consolidated net sales during the years ended June 30, 2021 and June 30, 2020, respectively. There were no customers that accounted for 10% of consolidated net sales in fiscal 2021.

 

Unfilled open orders for the next six months of $70.3 million at June 30, 2021 compares to $66.6 million at June 30, 2020. Since orders are subject to cancellation and rescheduling by the customer, the six‑month order backlog is considered more representative of operating conditions than total backlog. However, as procurement and manufacturing "lead times" change, the backlog will increase or decrease, and thus it does not necessarily provide a valid indicator of the shipping rate. Cancellations are generally the result of rescheduling activity and do not represent a material change in backlog.

 

Management recognizes that there are attendant risks that foreign governments may place restrictions on dividend payments and other movements of money, but these risks are considered low due to the relatively low investment within individual countries that have currency movement restrictions. No material portion of the Company’s business is subject to renegotiation of profits or termination of contracts at the election of the U.S. government.

 

Engineering and development costs include research and development expenses for new product development and major improvements to existing products, and other costs for ongoing efforts to refine existing products. Research and development costs charged to operations totaled $1.9 million and $1.8 million in fiscal 2021 and 2020, respectively. Total engineering and development costs were $8.5 million and $11.0 million in fiscal 2021 and 2020, respectively.

 

Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not anticipated to have a material effect on capital expenditures, earnings or the competitive position of the Company.

 

The number of persons employed by the Company at June 30, 2021 and June 30, 2020 was 743 and 806, respectively. The Company believes that its continued success is a direct result of its talent. As such, the Company strives to be an employer of choice in every community in which it operates. It does this by fostering a fair, respectful, inclusive and safe work environment and culture shaped with its core values of Customer Focus, Integrity, Accountability, Teamwork, and Innovation.

 

4

 

A summary of financial data by segment, geographic area, and classes of products that accounted for more than 10% of consolidated sales revenues for the years ended June 30, 2021 and 2020 appears in Note J, Business Segments and Foreign Operations, to the consolidated financial statements.

 

The Company’s internet website address is www.twindisc.com. The Company makes available free of charge (other than an investors own internet access charges) through its website the Companys Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the United States Securities and Exchange Commission. The SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC. In addition, the Company makes available, through its website, important corporate governance materials. This information is also available from the Company upon request. The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.

 

 

Item 1A. Risk Factors

 

The Company’s business involves risk. The following information about these risks should be considered carefully together with other information contained in this report. The risks described below are not the only risks the Company faces. Additional risks not currently known, deemed immaterial or that could apply to any issuer may also result in adverse results for the Company’s business.

 

As a global company, the Company is subject to currency fluctuations and any significant movement between the U.S. dollar and the euro, in particular, could have an adverse effect on its profitability. Although the Company’s financial results are reported in U.S. dollars, a significant portion of its sales and operating costs are realized in euros and other foreign currencies. The Company’s profitability is affected by movements of the U.S. dollar against the euro and the other currencies in which it generates revenues and incurs expenses. Significant long-term fluctuations in relative currency values, in particular a significant change in the relative values of the U.S. dollar or euro, could have an adverse effect on the Company’s profitability and financial condition. While the long-term impacts of the United Kingdom’s exit from the European Union (commonly known as “Brexit”) remain uncertain, any resulting unfavorable currency impact to the euro could have an adverse effect on the Company’s profitability and financial condition.

 

The Company continues to be adversely affected by the economic disruptions caused by the global coronavirus pandemic.  In March 2020, the World Health Organization (“WHO”) declared that a new strain of coronavirus that originated in Wuhan, China, and has rapidly spread around the world (“COVID-19”) is a pandemic that poses significant risk to the international community.  This outbreak contributed to shelter-in-place policies, unexpected factory closures, supply chain disruptions, and market volatility causing substantial declines in market capitalization, and occurring in the midst of an already challenging economic environment in some of our markets, most notably the oil and gas market.  As a result of the outbreak, starting in March 2020 and intermittently through June 30, 2021, the Company suspended or reduced its operations, in whole or in part, in many of its locations. The Company’s businesses operate in market segments impacted by COVID-19.  Operating during a global pandemic has exposed 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, have had an adverse effect on the Company’s business, financial condition, results of operations and cash flows. The depth and duration of the pandemic remains unknown.  Management continues to actively monitor the global situation and its effect on financial condition, liquidity, operations, suppliers, industry and workforce.  The Company remains unable to estimate the full extent or nature of the impact of COVID-19 at this time.

 

Certain of the Companys 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. In recent years, the Company has seen significant variations in the sales of its products that are used in oil and energy related markets. The variability in these markets has been defined by the change in oil prices and the global demand for oil. Significant decreases in oil prices and reduced demand for oil and capital investment in the oil and energy markets adversely affect the sales of these products and the Company’s profitability. The cyclical nature of the global oil and gas market presents the ongoing possibility of a severe cutback in demand, which would create a significant adverse effect on the sales of these products and ultimately on the Company’s profitability.

 

5

 

Many of the Companys product markets are cyclical in nature or are otherwise sensitive to volatile or variable factors. A downturn or weakness in overall economic activity or fluctuations in those other factors could have a material adverse effect on the Companys overall financial performance. Historically, sales of many of the products that the Company manufactures and sells have been subject to cyclical variations caused by changes in general economic conditions and other factors. In particular, the Company sells its products to customers primarily in the pleasure craft, commercial and military marine markets, as well as in the energy and natural resources, government and industrial markets. The demand for the products may be impacted by the strength of the economy generally, governmental spending and appropriations, including security and defense outlays, fuel prices, interest rates, as well as many other factors. Adverse economic and other conditions may cause the Company's customers to forego or otherwise postpone purchases in favor of repairing existing equipment.

 

In the event of an increase in the global demand for steel, the Company could be adversely affected if it experiences shortages of raw castings and forgings used in the manufacturing of its products. With the continued development of certain developing economies, in particular China and India, the global demand for steel has risen significantly in recent years. The Company selects its suppliers based on a number of criteria, and the Company expects that they will be able to support its needs. However, there can be no assurance that a significant increase in demand, capacity constraints or other issues experienced by the Company’s suppliers will not result in shortages or delays in their supply of raw materials to the Company. If the Company were to experience a significant or prolonged shortage of critical components from any of its suppliers, particularly those who are sole sources, and could not procure the components from other sources, the Company would be unable to meet its production schedules for some of its key products and would miss product delivery dates which would adversely affect its sales, profitability and relationships with its customers.

 

The Company continues to face the prospect of increasing commodity costs, including steel, other raw materials and energy that could have an adverse effect on future profitability. In addition, developments in tariff regulations in the U.S. and foreign jurisdictions have resulted in uncertainty regarding international trade policies and future commodity prices, contributing to an increased risk of higher commodity costs that could have an adverse impact on the Companys profitability, financial condition and results of operations. The Company’s profitability is dependent, in part, on commodity costs. To date, the Company has been successful with offsetting the effects of increased commodity costs through cost reduction programs and pricing actions. However, if material prices were to continue to increase at a rate that could not be recouped through product pricing, 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 will be able to pass any of the increases in raw material costs directly resulting from the tariff 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 United States, 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 United States. 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.

 

If the Company were to lose business with any key customers, the Companys business would be adversely affected. Although there were no customers that accounted for 10% or more of consolidated net sales in fiscal 2021, deterioration of a business relationship with one or more of the Company’s significant customers would cause its sales and profitability to be adversely affected. Although the Company’s accounts receivable are dispersed among a large customer base, a significant change in the liquidity or financial position of any one of its largest customers could have a material adverse impact on the collectability of its accounts receivable and future operating results.

 

The termination of relationships with the Companys suppliers, or the inability of such suppliers to perform, could disrupt its business and have an adverse effect on its ability to manufacture and deliver products. The Company relies on raw materials, component parts, and services supplied by outside third parties. If a supplier of significant raw materials, component parts or services were to terminate its relationship with the Company, or otherwise cease supplying raw materials, component parts, or services consistent with past practice, the Company’s ability to meet its obligations to its customers may be affected. Such a disruption with respect to numerous products, or with respect to a few significant products, could have an adverse effect on the Company’s profitability and financial condition.

 

6

 

A significant design, manufacturing or supplier quality issue could result in recalls or other actions by the Company that could adversely affect profitability. As a manufacturer of highly engineered products, the performance, reliability and productivity of the Company’s products are some of its competitive advantages. While the Company prides itself on putting in place procedures to ensure the quality and performance of its products and suppliers, a significant quality or product issue, whether due to design, performance, manufacturing or supplier quality issue, could lead to warranty actions, scrapping of raw materials, finished goods or returned products, the deterioration in a customer relationship, or other action that could adversely affect warranty and quality costs, future sales and profitability.

 

The Company faces risks associated with its international sales and operations that could adversely affect its business, results of operations or financial condition. Sales to customers outside the United States approximated 71% of the Company’s consolidated net sales for fiscal 2021. The Company has international manufacturing operations in Belgium, Italy, the Netherlands and Switzerland. In addition, the Company has international distribution operations in Singapore, China, Australia, Japan, Italy, Belgium, and India. The Company’s international sales and operations are subject to a number of risks, including:

 

 
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currency exchange rate fluctuations

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export and import duties, changes to import and export regulations, and restrictions on the transfer of funds, including dividends

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problems with the transportation or delivery of its products

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issues arising from cultural or language differences

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potential social and labor unrest as well as public health and political crises

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longer payment cycles and greater difficulty in collecting accounts receivables

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compliance with trade and other laws in a variety of jurisdictions

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changes in tax law

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compliance with the Foreign Corrupt Practices Act

 

These factors could adversely affect the Company’s business, results of operations or financial condition.

 

A material disruption at the Companys manufacturing facility in Racine, Wisconsin could adversely affect its ability to generate sales and meet customer demand. The majority of the Company’s manufacturing, based on fiscal 2021 sales, came from its facility in Racine, Wisconsin. If operations at this facility were to be disrupted as a result of significant equipment failures, natural disasters, power outages, fires, explosions, adverse weather conditions, labor force disruptions or other reasons, the Company’s business and results of operations could be adversely affected. Interruptions in production would increase costs and reduce sales. Any interruption in production capability could require the Company to make substantial capital expenditures to remedy the situation, which could negatively affect its profitability and financial condition. The Company maintains property damage insurance which it believes to be adequate to provide for reconstruction of its facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under this insurance policy may not offset the lost sales or increased costs that may be experienced during the disruption of operations. Lost sales may not be recoverable under the policy and long-term business disruptions could result in a loss of customers. If this were to occur, future sales levels and costs of doing business, and therefore profitability, could be adversely affected.

 

7

 

The Company entered into a new credit agreement in June 2018 and significantly increased its indebtedness. The ability to service the requirements of the new 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 Companys control. The Company entered into a new credit agreement on June 29, 2018. The Company’s ability to make payments on its indebtedness, including those under the new 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. Many of these factors are beyond its control. The Company cannot assure that its business will generate sufficient cash flow from operations, or operating improvements will be realized or that future borrowings will be available to it in an amount sufficient to enable it to repay its indebtedness or to fund its other operating requirements. Significant delays in its planned capital expenditures may materially and adversely affect the Company’s future revenue prospects.

 

Any failure to meet debt obligations and financial covenants, and maintain adequate asset-based borrowing capacity could adversely affect the Companys business and financial condition.  The Company’s five-year revolving credit facility entered into on June 29, 2018 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 borrowing base at all times to secure its outstanding borrowings.  The Company is also required to comply with a minimum Debt to EBITDA ratio and/or a minimum EBITDA.  Based on results through the quarter ended December 25, 2020, the Company was not in compliance with its minimum EBITDA financial covenant, and as a result has entered into a forbearance agreement with its senior lender. The forbearance period ends on the earlier of September 30, 2021, or the date on which an event of default occurs. While the Company has been able to collaborate closely with its senior lender and has successfully negotiated reasonable terms with its bank during cyclical market periods, there can be no assurance that the Company will be able to continue doing so, or achieve the planned results in future periods especially due to the significant uncertainties flowing from the current economic environment. If the Company is not able to achieve these objectives and to meet the required financial covenants under the agreements, the Company may require further forbearance 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, 2021, the Company had a borrowing capacity that exceeded its outstanding loan balance (see Note G, 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 2022 in order to maintain compliance with this borrowing base and meet the minimum Debt to EBITDA ratio by December, 31, 2021, the first measurement date after the forbearance period.   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 programs 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 current employees, maintain payroll and make lease and utility payments.  The Company has accounted for the full proceeds as a loan.  It obtained formal forgiveness of the full amount of the loan on June 16, 2021, and has 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 loan and the appropriateness of the loan obtained. 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.

 

8

 

The Company carries a significant amount of intangible assets, but it may never fully realize the full value of these assets. The Company recorded significant non-cash goodwill impairment charges in fiscal 2020, as well as in prior fiscal years. As part of the acquisition of Veth Propulsion in July 2018, the Company acquired goodwill and intangible assets in the form of customer relationships, technology and knowhow and tradenames. In fiscal 2020, due to its assessment of the adverse economic consequences of the COVID-19 outbreak and the negative trends in its markets as explained in Note D, Intangible Assets, the Company recorded significant impairment charges in the amount of $27.6 million, writing off all the goodwill in its books, as well as writing down some intangibles and other assets. In fiscal 2017 and 2016, when the Company’s markets were significantly adversely affected by the global oil and gas decline, it recorded significant impairment charges related to two of its prior acquisitions. Any deterioration in the industries or businesses of the Company may trigger future impairment charges, which may have a material adverse effect to the Company’s financial results.

 

The Company may experience negative or unforeseen tax consequences. The Company reviews the probability of the realization of its net deferred tax assets each period based on forecasts of taxable income in both the U.S. and foreign jurisdictions. This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward periods, tax planning opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. or foreign jurisdictions may require the creation of a valuation allowance to reduce the Company’s net deferred tax assets. 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. In fiscal 2021, the Company recorded a 100% allowance on its domestic deferred tax assets, amounting to $24.4 million.

 

Taxing authority challenges and changes to tax laws may lead to tax payments exceeding current reserves. The Company is subject to ongoing tax examinations in various jurisdictions. As a result, the Company may record incremental tax expense based on expected outcomes of such matters. In addition, the Company may adjust previously reported tax reserves based on expected results of these examinations. Such adjustments could result in an increase or decrease to the Company’s effective tax rate.

 

The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in December 2017. The new law made numerous changes to U.S. federal corporate tax law that the Company expects will impact its effective tax rate in future periods. The changes included in the Tax Act are broad and complex. The final impact of the Tax Act may differ from the Company’s current estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for U.S. federal income taxes or related interpretations in response to the Tax Act or any updates or changes to estimates the Company has utilized to calculate the impact. 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.

 

Security breaches and other disruptions could compromise the Companys 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. The secure processing, maintenance and transmission of this information is critical to the Company’s operations and business strategy. Despite the Company’s security measures, its information technology and infrastructure, and that of its partners, may be vulnerable to malicious attacks or breaches due to employee error, malfeasance or other disruptions, including as a result of rollouts of new systems. 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 newly enacted 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.

 

9

 

Item 1B. Unresolved Staff Comments

 

None.

 

 

Item 2. Properties

 

Manufacturing Segment

 

The Company owns two manufacturing, assembly and office facilities in Racine, Wisconsin, U.S.A., one in Nivelles, Belgium, two in Decima, Italy and one in Novazzano, Switzerland. The aggregate floor space of these six plants approximates 763,000 square feet. One of the Racine facilities also serves as the Company's corporate headquarters. The Company leases additional manufacturing, assembly and office facilities in, Sturtevant, Wisconsin, Lufkin, Texas, Limite sull’Arno, Italy and Papendrecht, Netherlands.

 

Distribution Segment

 

The Company also has operations in the following locations, all of which are leased and are used for sales offices, warehousing and light assembly or product service:

 

Brisbane, Queensland, Australia

Guangzhou, China

Perth, Western Australia, Australia

Chennai, India

Gold Coast, Queensland, Australia

Coimbatore, India

Singapore

Saitama City, Japan

Shanghai, China

 

 

The Company believes its properties are well maintained and adequate for its present and anticipated needs.

 

 

Item 3. Legal Proceedings

 

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

 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

10

 

 

Information About Our Executive Officers

 

Pursuant to General Instruction G(3) of Form 10‑K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 28, 2021.

 

Name

Age

Position

John H. Batten

56

Chief Executive Officer

James E. Feiertag

64

President, Chief Operating Officer

Jeffrey S. Knutson

56

Vice President – Finance, Chief Financial Officer, Treasurer and Secretary

Debbie A. Lange

63

Corporate Controller

 

Officers are elected annually by the Board of Directors at the Board meeting held in conjunction with each Annual Meeting of the Shareholders. Each officer holds office until a successor is duly elected, or until he/she resigns or is removed from office.

 

John H. Batten, Chief Executive Officer. Effective May 2019, Mr. Batten was named Chief Executive Officer. Prior to that, Mr. Batten served as President and Chief Executive Officer since July 2013, President and Chief Operations Officer since July 2008, Executive Vice President since October 2004, Vice President and General Manager – Marine Products since October 2001 and Commercial Manager – Marine since 1998. Mr. Batten joined Twin Disc in 1996 as an Application Engineer.

 

James E. Feiertag, President, Chief Operating Officer. Mr. Feiertag joined the company as President and Chief Operating Officer effective May 1, 2019. Prior to his joining the company, Mr. Feiertag served as President and CEO of Bemis Manufacturing Company beginning in 2014. Before his role at Bemis, Mr. Feiertag was employed at Twin Disc from 2000 to 2014 in various roles, including Executive Vice President and Vice President, Manufacturing. Prior to these roles at Twin Disc, Mr. Feiertag was the Vice President of Manufacturing for the Drives and System Group of Rockwell Automation.

 

Jeffrey S. Knutson, Vice President – Finance, Chief Financial Officer, Treasurer and Secretary. Mr. Knutson was named Chief Financial Officer and Treasurer in June 2015. Mr. Knutson was named Vice President – Finance, Interim Chief Financial Officer and Interim Treasurer in February 2015. Mr. Knutson was appointed Corporate Secretary in June 2013, and was Corporate Controller from his appointment in October 2005 until August 2015. Mr. Knutson joined the Company in February 2005 as Controller of North American Operations. Prior to joining Twin Disc, Mr. Knutson held Operational Controller positions with Tower Automotive (since August 2002) and Rexnord Corporation (since November 1998).

 

Debbie A. Lange, Corporate Controller. Ms. Lange was hired as Corporate Controller effective August 4, 2015. Prior to joining the Company, Ms. Lange was the Director of Accounting Research & Special Projects at Sealed Air Corporation (since 2011), a global manufacturer and provider of food packaging solutions, product packaging and cleaning and hygiene solutions. Prior to her role at Sealed Air, Ms. Lange held the position of Director of Global Accounting and Reporting at Diversey, Inc.

 

11

 

PART II

 

Item 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The Company's common stock is traded on the NASDAQ Global Select Market under the symbol TWIN.

 

   

Fiscal Year Ended

June 30, 2021

   

Fiscal Year Ended

June 30, 2020

 

Quarter

 

High

   

Low

   

High

   

Low

 

First Quarter

  $ 7.76     $ 4.66     $ 15.18     $ 9.60  

Second Quarter

    7.97       4.87       12.59       9.50  

Third Quarter

    10.35       7.35       11.61       6.06  

Fourth Quarter

    15.02       8.79       8.35       4.84  

 

There were no dividend payments made in the fiscal years ended June 30, 2021 and 2020.

 

For information regarding the Company’s equity-based compensation plans, see the discussion under Item 12 of this report. As of August 20, 2021, shareholders of record numbered 403.

 

Recent Sales of Unregistered Securities

 

On May 13, 2019, the Company issued 139,347 shares of its common stock, valued at $1,991 ($14.29 per share), to settle its earn-out obligation under the June 13, 2018 Share Purchase Agreement entered into by Twin Disc NL Holding B.V., a wholly-owned subsidiary of the Company, with Het Komt Vast Goed B.V., the prior parent of Veth Propulsion Holding B.V. The shares were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as the Share Purchase Agreement was a privately negotiated transaction that involved substantial due diligence on the part of all parties, and the shares were issued to three entities related to Het Komt Vast Goed B.V.

 

Issuer Purchases of Equity Securities

 

Period

(a) Total

Number of

Shares

Purchased

(b) Average

Price Paid

per Share

(c) Total Number

of Shares

Purchased as Part

of Publicly

Announced Plans

or Programs

(d) Maximum Number of

Shares that May Yet Be

Purchased Under the Plans

or Programs

March 27, 2021 – April 30, 2021

0

NA

0

315,000

May 1, 2021 – May 28, 2021

0

NA

0

315,000

May 29, 2021 - June 30, 2021

0

NA

0

315,000

Total

0

NA

0

315,000

 

On February 1, 2008, the Board of Directors authorized the purchase of up to 500,000 shares of Common Stock at market values, of which 250,000 shares were purchased during fiscal 2009 and 125,000 shares were purchased during fiscal 2012. On July 27, 2012, the Board of Directors authorized the purchase of an additional 375,000 shares of Common Stock at market values. This authorization has no expiration. During the second quarter of fiscal 2013, the Company purchased 185,000 shares under this authorization. The Company did not make any purchases during fiscal 2020 and 2021. As of June 30, 2021, 315,000 shares remain authorized for purchase.

 

12

 

Item 6. Selected Financial Data

 

Financial Highlights

(in thousands, except per share amounts)

 

Fiscal Years Ended June 30,

 

Statement of Operations Data:

 

2021

   

2020

   

2019

   

2018

   

2017

 

Net sales

  $ 218,581     $ 246,838     $ 302,663     $ 240,733     $ 168,182  

Net (loss) income

    (29,519 )     (39,571 )     10,796       9,647       (6,115 )

Net (loss) income attributable to Twin Disc

    (29,719 )     (39,817 )     10,673       9,528       (6,294 )

Basic (loss) income per share attributable to Twin Disc common shareholders

    (2.24 )     (3.03 )     0.84       0.82       (0.56 )

Diluted (loss) income per share attributable to Twin Disc common shareholders

    (2.24 )     (3.03 )     0.83       0.82       (0.56 )

Dividends per share

    -       -       -       -       -  

 

June 30,

 

Balance Sheet Data

 

2021

   

2020

   

2019

   

2018

   

2017

 

Total assets

  $ 275,413     $ 294,127     $ 346,870     $ 241,240     $ 210,898  

Total long-term debt

    32,085       42,587       42,491       4,824       6,323  

 

 

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

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 based on its public float as of the last business day of the second quarter of fiscal 2021. Accordingly, it has scaled some of its disclosures of financial and non-financial information in this annual 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.

 

Note on Forward-Looking Statements

 

Statements in this report (including but not limited to certain statements in Items 1, 3 and 7) and in other Company communications that are not historical facts are forward-looking statements, which are based on management’s current expectations. These statements involve risks and uncertainties that could cause actual results to differ materially from what appears here.

 

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, could cause actual results to be materially different from what is presented in any forward-looking statements.

 

13

 

Results of Operations

                               

(In thousands)

         

% of

           

% of

 
   

2021

   

Sales

   

2020

   

Sales

 

Net sales

  $ 218,581             $ 246,838          

Cost of goods sold

    167,724               191,130          
                                 

Gross profit

    50,857       23.3       55,708       22.6  
                                 

Marketing, engineering and administrative expenses

    55,750       25.5       63,218       25.6  

Restructuring expenses

    7,377       3.4       5,138       2.1  

Goodwill and other asset impairment charge

    -       -       27,603       11.2  

Loss from operations

  $ (12,270 )     (5.6 )   $ (40,251 )     (16.3 )

 

 

Fiscal 2021 Compared to Fiscal 2020

 

Net Sales

 

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

 

Sales at our manufacturing segment decreased 15.8%, or $36.1 million, versus the same period last year. The largest decline was seen at the Company’s North American manufacturing operation, the largest, which experienced a 28.0% decline in sales compared to fiscal 2020. The primary driver for this decrease was a broad reduction in demand created by the global economic impact of the COVID-19 pandemic. The Company’s Veth Propulsion operation in the Netherlands experienced an 18.5% decrease in sales in fiscal 2021, also due to the global market impacts of the COVID-19 pandemic. The Company’s Italian manufacturing operations reported a 16.6% increase in sales from fiscal 2020, with foreign currency contributing half of that increase and a recovering European industrial market in the second half of the fiscal year driving the remaining volume growth. Similarly, the Company’s Belgian manufacturing operation saw a 12.2% increase in sales in fiscal 2021 on a favorable foreign exchange impact and an economic recovery in the fourth fiscal quarter. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 7.2% increase in sales, primarily due to a favorable currency impact.

 

Sales at our distribution segment were up 4.6%, or $4.4 million, compared to fiscal 2020, with the entire increase coming in the fourth fiscal quarter. The Company’s Asian distribution operation in Singapore, China and Japan experienced an 8.3% decrease in sales due to the weakened global demand resulting from COVID-19, partially offset by stable demand for the Company’s oil and gas transmissions. The Company’s European distribution operation saw an increase of $0.4 million thanks to a positive currency impact of $1.3 million. The operational decline is the result of the impact of the COVID-19 pandemic. The Company’s North American distribution operation saw an increase of 3.0% thanks to improving market conditions in the fourth fiscal quarter driving additional demand. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems primarily for the pleasure craft market, saw sales increase sharply (52.8%), driven by a significant favorable currency impact (15.9%) and strong demand for the Company’s product in the pleasure craft market.

 

14

 

Net sales for the Company’s marine transmission, propulsion and boat management systems were down 16.6% compared to the prior fiscal year. This decrease reflects a general weakening of the global economy primarily as a result of the COVID-19 pandemic. While most marine markets were significantly impacted, the pleasure craft market in Australia was an area of strength. In the off-highway transmission market, the year-over-year decrease of 6.8% can also be attributed primarily to the global impact of the COVID-19 pandemic through the first three quarters, while the year-over-year comparisons turned positive in the fourth quarter. Sale of the Company’s pressure pumping transmission systems into China remained steady and consistent with the prior year. The decrease experienced in the Company’s industrial products of 11.0% was also seen primarily in the first three quarters of the fiscal year, brought on by a weakening global economy and the impacts of the COVID-19 pandemic. This comparison also turned positive in the fourth fiscal quarter, as the global recovery started to gain traction.

 

Geographically, sales to the U.S. and Canada declined 23% in fiscal 2021 compared to fiscal 2020, representing 32% of consolidated sales for fiscal 2021 compared to 36% in fiscal 2020. The reduction is primarily due to the impact of the COVID-19 pandemic. Sales into the Asia Pacific market actually increased 2% compared to fiscal 2020 and represented approximately 24% of sales in fiscal 2021, compared to 21% in fiscal 2020. The increase in fiscal 2021 reflects a strong Australian pleasure craft market and consistent Chinese demand for the Company’s oil and gas transmission. Sales into the European market declined approximately 11% from fiscal 2020 levels while accounting for 37% of consolidated net sales in both fiscal 2021 and fiscal 2020. The decrease, similar to North America, is primarily the result of the global economic impact of the COVID-19 pandemic. 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.

 

Gross Profit

 

In fiscal 2021, gross profit decreased $4.9 million, or 8.7%, to $50.9 million on a sales decrease of $28.3 million. Gross profit as a percentage of sales increased 70 basis points in fiscal 2021 to 23.3%, compared to 22.6% in fiscal 2020. The table below summarizes the gross profit trend by quarter for fiscal years 2021 and 2020:

 

   

1st Qtr

   

2nd Qtr

   

3rd Qtr

   

4th Qtr

   

Year

 

Gross Profit:

                                       

($ millions)

                                       

2021

  $ 9.7     $ 8.9     $ 14.0     $ 18.3     $ 50.9  

2020

  $ 9.6     $ 15.7     $ 16.5     $ 13.9     $ 55.7  
                                         

% of Sales:

                                       

2021

    21.0 %     18.3 %     24.2 %     27.7 %     23.3 %

2020

    16.3 %     26.4 %     24.1 %     23.3 %     22.6 %

 

There were a number of factors that impacted the Company’s overall gross profit rate in fiscal 2021. Gross profit for the year was primarily impacted by reduced volumes and a continued unfavorable product mix. This was driven by the global economic impact of the COVID-19 pandemic and very limited sales of high-margin oil and gas transmissions and parts. Margin was favorably impacted by the recording of a benefit related to the Employee Retention Credit (“ERC”), a COVID-19 relief program of the U.S. government, totaling $2.4 million, split evenly between the third and fourth quarters. The Company estimates the net unfavorable impact of reduced volumes on gross margin in fiscal 2021 was approximately $6.5 million. The unfavorable shift in product mix, primarily related to the reduced shipments of the Company’s high margin oil and gas transmission units and aftermarket products, had an estimated unfavorable impact of $3.7 million.

 

Marketing, Engineering and Administrative (ME&A) Expenses

 

Marketing, engineering, and administrative (ME&A) expenses of $55.8 million were down $7.5 million, or 11.8%, compared to the prior fiscal year. As a percentage of sales, ME&A expenses decreased slightly to 25.5% of sales versus 25.6% of sales in fiscal 2020. The decrease in spending in fiscal 2021 compared to the prior year was driven by reduced domestic salaries and benefits ($3.4 million), a reclassification of certain costs from ME&A to COGS ($2.4 million), lower amortization expense ($1.0 million), reduced marketing activities ($1.5 million) and a benefit related to the domestic ERC ($1.2 million), reduced corporate travel ($0.9 million) and the impact of global expense containment measures ($1.5 million). These decreases were partially offset by an increase in global bonus expense ($2.4 million) and an exchange driven increase ($2.0 million).

 

15

 

Restructuring of Operations

 

During the course of fiscal 2021, the Company incurred $7.4 million in restructuring charges. Included in this amount is $2.3 million related to the provision for an announced restructuring program at the Company’s Belgian operation resulting in the elimination of 23 positions. The action was taken to allow the Belgian operation to focus resources on core manufacturing processes, while allowing for savings on the outsourcing of non-core processes. The Company anticipates annual pre-tax savings upon completion of the restructuring of approximately $1.6 million. The Company also recorded a $4.3 million charge for the impairment of its corporate office building, which is currently held for sale. The remaining $0.8 million of restructuring charges relates to productivity and cost reduction actions at the Company’s domestic and European operations. The Company continues to focus on actively managing its cost structure and reducing fixed costs in light of the ongoing market challenges.

 

Income from Extinguishment of Loan

 

During the fourth fiscal quarter, the Company received formal forgiveness of its PPP Loan in the amount of $8.2 million. The Company recorded $8.2 million in income from extinguishment of loan in its consolidated statement of operations in fiscal 2021. See Note G, Debt, of the notes to the consolidated financial statements for additional information on the PPP loan.

 

Interest Expense

 

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

 

Other income (expense), net

 

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

 

Income Taxes

 

The effective tax rate for fiscal 2021 is -200.0% compared to 9.5% for fiscal 2020. During the current fiscal year, the Company received full forgiveness of its PPP loan which resulted in an increase to the effective tax rate of 17.5%. In the prior year, the Company’s management determined that the carrying value of certain goodwill and intangibles exceeded the fair value and a $27.6 million impairment loss was calculated, which resulted in a decrease to the prior year effective tax rate of 13.8%. During the current fiscal year, the Company was able to take advantage of the newly enacted high tax exception regulations. The Company filed its federal tax return utilizing this exception and had no global intangible low taxed income (“GILTI”) inclusion increasing the current rate by 12.4%. Due to continued historical domestic losses and uncertain future domestic earnings, the Company recognized a full domestic valuation allowance reducing the effective tax rate by 248.2%.

 

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

 

Order Rates

 

As of June 30, 2021, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was $70.3 million or approximately 6% higher than the six-month backlog of $66.6 million as of June 30, 2020. The increased backlog is primarily attributable to the improvement in order rates through the second half of the fiscal year, as the global economy began to recover from the COVID-19 pandemic.

 

16

 

Liquidity and Capital Resources

 

Fiscal Years 2021 and 2020

 

The net cash provided by operating activities in fiscal 2021 totaled $6.5 million, a decrease of $2.6 million from the prior fiscal year. The positive operating cash flow was generated by continued progress in working capital reduction efforts, which contributed $3.4 million during the year before considering the $3.2 million reclassification, net of the $4.8 million impairment recorded to restructuring expenses, of the corporate office building as a current asset held for sale as of June 30, 2021. The largest contributions came from inventory reduction ($5.6 million) and increased trade payables ($5.3 million). These improvements were partially offset by an increase in trade receivables ($8.8 million) resulting from the increased sales volume in the fourth quarter of the current fiscal year.

 

The net cash used by investing activities for fiscal 2021 primarily represents capital spending activity totaling $4.5 million, partially offset by the receipt of $1.5 million on the note receivable related to the sale of the assets of a previously owned subsidiary of the Company in fiscal 2019. The capital spending amount reflects a $6.2 million (58.3%) decrease in spending on capital projects compared to fiscal 2020. Given the extreme economic uncertainty brought on by the COVID-19 pandemic, the Company limited fiscal 2021 capital spending to critical replacement items and spending needed to bring the new Lufkin facility online.

 

The net cash used by financing activities relates primarily to payments of long-term debt ($3.9 million), along with payments for withholding taxes on stock compensation ($0.2 million) and dividends paid to a non-controlling interest ($0.2 million). During fiscal 2021, the Company did not purchase any shares as part of its Board-authorized stock repurchase program. The Company has 315,000 shares remaining under its authorized stock repurchase plan.

 

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”). 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. Under the Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $3.0 million in any fiscal year.

 

On March 4, 2019, the Company entered into a second amendment (the “Second Amendment”) to the Credit Agreement. The Second Amendment reduced the principal amount of the term loan commitment under the Credit Agreement from $35.0 million to $20.0 million. In connection with the Second Amendment, the Company issued an amended and restated term note in the amount of $20.0 million to the Bank, which amended the original $35.0 million note provided under the Credit Agreement.

 

Prior to entering into the Second Amendment, the outstanding principal amount of the term loan (the “Term Loan”) under the Credit Agreement was $10.8 million. On the date of the Second Amendment, the Bank made an additional advance on the Term Loan to the Company in the amount of $9.2 million. The Second Amendment also extended the maturity date of the Term Loan from January 2, 2020 to March 4, 2026, and added a requirement that the Company make principal installments of $0.5 million per quarter starting with the quarter ending June 30, 2019.

 

The Second Amendment also reduced the applicable margin for purposes of determining the interest rate applicable to the Term Loan. Previously, the applicable margin was 3.00%, which was added to the Monthly Reset LIBOR Rate or the Adjusted LIBOR, as applicable. Under the Second Amendment, the applicable margin was between 1.375% and 2.375%, depending on the Company’s total funded debt to EBITDA ratio.

 

17

 

The Second Amendment also adjusted certain financial covenants made by the Company under the Credit Agreement. Specifically, the Company covenanted (i) not to allow its total funded debt to EBITDA ratio to be greater than 3.00 to 1.00 (the cap had previously been 3.50 to 1.00 for quarters ending on or before September 30, 2019 and 3.25 to 1.00 for quarters ending on or about December 31, 2019 through September 30, 2020), and (ii) that its tangible net worth will not be less than $100.0 million plus 50% of net income for each fiscal year ending on and after June 30, 2019 for which net income is a positive number (the $100.0 million figure had previously been $70.0 million). 

 

On January 28, 2020, the Company entered into a third amendment (the “Third Amendment”) to the Credit Agreement. The Third Amendment restated the financial covenant provisions related to the maximum allowable ratio of total funded debt to EBITDA from 3.00 to 1.00 to 4.00 to 1.00 for the quarter ended December 27, 2019, 5.00 to 1.00 for the quarter ending March 27, 2020, 4.00 to 1.00 for the quarter ending June 30, 2020, 3.50 to 1.00 for the quarter ending September 25, 2020 and 3.00 to 1.00 for quarters ending on or after December 25, 2020. For purposes of determining EBITDA, the Third Amendment added back extraordinary expenses (not to exceed $3.9 million) related to the previously reported isolated product performance issue on one of the Company’s oil and gas transmission models at certain installations. Under the Third Amendment, the applicable margin for revolving loans, letters of credit, and term loans was between 1.25% and 3.375%, depending on the Company’s total funded debt to EBITDA ratio.

 

On April 17, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $8.2 million (the “PPP Loan”) made to the Company under the PPP. The PPP was established under the CARES Act and is a program under the U.S. SBA. The PPP Loan to the Company is administered by BMO. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal payments are deferred until April 2022.

 

In connection with the PPP Loan, the Company entered into a fourth amendment to the Credit Agreement (the “Fourth Amendment”) on April 17, 2020. The Fourth Amendment: (1) permits the Company to incur indebtedness in the form of the PPP Loan notwithstanding the Credit Agreement’s restrictions limiting the Company’s ability to incur indebtedness, and (2) provides that the PPP Loan (to the extent that the PPP Loan is forgiven) shall be disregarded for purposes of calculating financial covenants in the Credit Agreement. Any unforgiven portion of the PPP Loan and the interest thereon will not be disregarded for purposes of calculating the financial covenants.

 

On July 22, 2020, the Company entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement that amends the Credit Agreement dated as of June 29, 2018, as amended between the Company and BMO. The Fifth Amendment reduced BMO’s Revolving Credit Commitment from $50.0 million to $45.0 million. The Fifth Amendment also gives the Company the option to make interest-only payments on the Term Loan for quarterly payments occurring on September 30, 2020 and December 31, 2020, and limits the Company’s Capital Expenditures for the fiscal year ending June 30, 2021 to $10.0 million.

 

The Fifth Amendment provides the Company with relief from its Total Funded Debt to EBITDA ratio financial covenant under the Credit Agreement through (and including) the earlier of June 30, 2021 or a date selected by the Company. During the financial covenant relief period:

 

 

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

 

 

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

 

 

The Company must maintain liquidity (as defined in the Fifth Amendment) of at least $15.0 million.

 

 

The Company must maintain minimum EBITDA of at least (1) $1.0 million for the fiscal quarter ending June 30, 2020 and the two fiscal quarters ending on or about September 30, 2020; (2) $2.5 million for the three fiscal quarters ending on or about December 31, 2020; (3) $6.0 million for the four fiscal quarters ending on or about March 31, 2021; and (4) $10.0 million for the four fiscal quarters ending June 30, 2021.

 

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

 

The Fifth Amendment also changed the definition of “LIBOR” (used in calculating interest on Eurodollar Loans), “Monthly Reset LIBOR Rate” (used in calculating interest on LIBOR Loans), and “LIBOR Quoted Rate” (used in the definition of “Base Rate,” which is used in calculating interest on Letters of Credit that are drawn upon and not timely reimbursed).

 

The Company 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. Under the Fifth Amendment, 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.

 

18

 

On January 27, 2021, the Company entered into a Forbearance Agreement and Amendment No. 6 to the Credit Agreement (the “Forbearance Agreement”) that further amended the Credit Agreement.

 

The Company entered into the Forbearance Agreement because the Company was not in compliance with its financial covenant to maintain a minimum EBITDA of at least $2.5 million for the three fiscal quarters ended as of December 25, 2020. In the Forbearance Agreement, the Bank has agreed to forbear from exercising its rights and remedies against the Company under the Credit Agreement with respect to the Company’s noncompliance with the minimum EBITDA financial covenant during the period (the “Forbearance Period”) commencing January 27, 2021 and ending on the earlier of (i) September 30, 2021, and (ii) the date on which a default under the Forbearance Agreement or Credit Agreement occurs. During the Forbearance Period, the Bank may continue to honor requests of the Company for draws on the revolving note provided by the Bank under the Credit Agreement, except that the revolving credit commitment is reduced from $45.0 million to $42.5 million during the Forbearance Period.

 

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

 

When the Forbearance Period ends on September 30, 2021, the Bank’s forbearance under the Forbearance Agreement will cease, and, therefore, on December 31, 2021, the Company is subject to the Total Funded Debt to EBITDA ratio financial covenant of 3.00 to 1.00. Further, upon an event of default and upon notice from the Bank, the Company’s obligations under the Loan Documents would be accelerated and become due at the default rate, and the Bank may exercise its rights and remedies under the Credit Agreement for any occurrence and continuation of default under the Credit Agreement.

 

For the quarter ended June 30, 2021, as a result of the Forbearance Agreement, the Company was not required to meet the minimum EBITDA financial covenant. The Company expects to be in compliance with the terms of the Credit Agreement following the forbearance period, and therefore continues to classify its debt as long term.

 

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

 

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.

 

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

 

19

 

The Company’s balance sheet remains strong, there are no material off-balance-sheet arrangements, and it continues to have sufficient liquidity for near-term needs. The Company had approximately $27.1 million of available borrowings under the Credit Agreement as of June 30, 2021. The Company expects to continue to generate enough cash from operations, as well as its credit facilities, to meet its operating and investing needs. As of June 30, 2021, the Company also had cash of $12.3 million, primarily at its overseas operations. These funds, with some restrictions and tax implications, are available for repatriation as deemed necessary by the Company. In fiscal 2022, the Company expects to contribute $0.7 million to its defined benefit pension plans, the minimum contribution required.

 

Net working capital increased $6.2 million, or 5.7%, during fiscal 2021 and the current ratio (calculated as total current assets divided by total current liabilities) decreased from 2.6 at June 30, 2020 to 2.4 at June 30, 2021. The increase in net working capital was primarily the result of the reclassification of the assets currently held for sale ($9.5 million) from long term assets to current assets. Excluding this one-off movement, working capital decreased by $3.4 million. This reduction was the result of a focused inventory reduction effort ($5.6 million), increased trade payables ($5.3 million) and accrued expenses ($9.2 million), partially offset by a volume driven increase to trade receivables ($8.8 million) and a reclassification of a component of short term debt back to long term ($2.7 million).

 

The Company expects capital expenditures to be approximately $10 million - $12 million in fiscal 2022. These anticipated expenditures reflect the Company’s plans to invest in modern equipment to drive efficiencies, quality improvements and cost reductions.

 

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

 

Off Balance Sheet Arrangements and Contractual Obligations

 

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

 

Other Matters

 

Critical Accounting Policies and Estimates

 

The preparation of this Annual 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 significant accounting policies are described in Note A, Significant Accounting Policies, of the notes to the consolidated financial statements. Not all of these significant accounting policies require management to make difficult, subjective, or complex judgments or estimates. However, the policies management considers most critical to understanding and evaluating its reported financial results are the following:

 

Accounts Receivable

 

The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on payment history and the customer’s credit-worthiness as determined by review of current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer-collection issues. In addition, senior management reviews the accounts receivable aging on a monthly basis to determine if any receivable balances may be uncollectible. Although the Company’s accounts receivable are dispersed among a large customer base, a significant change in the liquidity or financial position of any one of its largest customers could have a material adverse impact on the collectability of its accounts receivable and future operating results.

 

20

 

Inventory

 

Inventories are valued at the lower of cost or net realizable value. Cost has been determined by the last-in, first-out (LIFO) method for the majority of the inventories located in the United States, and by the first-in, first-out (FIFO) method for all other inventories. Management specifically identifies obsolete products and analyzes historical usage, forecasted production based on future orders, demand forecasts, and economic trends when evaluating the adequacy of the reserve for excess and obsolete inventory. The adjustments to the reserve are estimates that could vary significantly, either favorably or unfavorably, from the actual requirements if future economic conditions, customer demand or competitive conditions differ from expectations.

 

Assets Held for Sale

 

Assets that will be recovered principally through sale rather than in its continuing use in operations are reclassified out of property, plant and equipment and into assets held for sale if all of the following criteria are met: (a) management, having the authority to approve the action, commits to a plan to sell the asset(s); (b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer, and other actions required to complete the plan to sell the asset have been initiated; (d) the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within a year; (e) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that plan will be withdrawn.

 

Assets Held for Sale are carried at fair value less costs to sell, or net book value, whichever is lower. The Company ceases to record depreciation expense at the time of designation as held for sale.

 

Long-lived Assets

 

The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. For property, plant and equipment and other long-lived assets, including intangible assets, the Company performs undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Fair value is primarily determined using discounted cash flow analyses; however, other methods may be used to substantiate the discounted cash flow analyses, including third party valuations when necessary.

 

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 extent of the market affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on the Company’s 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 the Company believes that 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.

 

21

 

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, 2021 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-2020 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 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.

 

Income Taxes and Valuation Allowances

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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 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. Based on the above criteria the Company has determined that a full valuation allowance is appropriate as relates to its domestic operations. A full domestic valuation allowance of $24.4 million has been recognized in fiscal 2021. The recognition of a valuation allowance does not affect the availability of the tax credits as the Company realizes earnings.

 

Recently Issued Accounting Standards

 

See Note A, Significant Accounting Policies, of the notes to the consolidated financial statements for a discussion of recently issued accounting standards.

 

 

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

 

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

 

22

 

Item 8. Financial Statements and Supplementary Data

 

See Consolidated Financial Statements and Financial Statement Schedule.

 

Sales and Earnings by Quarter - Unaudited (in thousands, except per share amounts)

 

2021

 

1st Qtr.

   

2nd Qtr.

   

3rd Qtr.

   

4th Qtr.

   

Year

 
                                         

Net sales

  $ 46,179     $ 48,557     $ 57,640     $ 66,205     $ 218,581  

Gross profit

    9,703       8,877       13,962       18,315       50,857  

Restructuring expenses

    405       120       251       6,601       7,377  

Net (loss) income

    (3,937 )     (4,280 )     166       (21,468 )     (29,519 )

Net (loss) income attributable to Twin Disc

    (3,979 )     (4,313 )     94       (21,521 )     (29,719 )

Basic (loss) income per share attributable to Twin Disc common shareholders

    (0.30 )     (0.33 )     0.01       (1.62 )     (2.24 )

Diluted (loss) income per share attributable to Twin Disc common shareholders

    (0.30 )     (0.33 )     0.01       (1.62 )     (2.24 )

Dividends per share

    -       -       -       -       -  
                                         

2020

                                       
                                         

Net sales

  $ 59,290     $ 59,536     $ 68,636     $ 59,376     $ 246,838  

Gross profit

    9,636       15,711       16,549       13,812       55,708  

Restructuring expenses

    121       4,248       532       237       5,138  

Goodwill and other asset impairment charge

    -       -       27,603       -       27,603  

Net loss

    (6,293 )     (6,466 )     (25,176 )     (1,636 )     (39,571 )

Net loss attributable to Twin Disc

    (6,311 )     (6,516 )     (25,230 )     (1,760 )     (39,817 )

Basic loss per share attributable to Twin Disc common shareholders

    (0.48 )     (0.49 )     (1.92 )     (0.13 )     (3.03 )

Diluted loss per share attributable to Twin Disc common shareholders

    (0.48 )     (0.49 )     (1.92 )     (0.13 )     (3.03 )

Dividends per share

    -       -       -       -       -  

 

Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

 

Item 9A. Controls and Procedures

 

Conclusion Regarding Disclosure Controls and Procedures

 

As required by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report and under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures.  Based on such evaluation, which includes the circumstances around a misstatement as described below, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were not effective as of June 30, 2021 to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

 

23

 

Managements Report on Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The Company’s internal control over financial reporting includes those policies and procedures that:

 

 

1.

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company,

 

2.

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and

 

3.

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on financial statements.

 

Management has identified a material weakness in internal controls over financial reporting due to a misstatement in income taxes.  The misstatement related to a deficiency in the company’s review controls over significant, infrequent transactions that did not detect an error in the recording of a valuation allowance on deferred income tax assets.  Specifically, the misstatement was attributed to the presentation of the tax effects of a pension plan and the adjusting journal entry to income tax expense.  Due to the isolated, non-recurring nature of this transaction, management had not anticipated the complexity of this process.  This misstatement resulted in the Company filing a Form 8-K/A on August 23, 2021, amending its previously released financial results for the quarter and year ended June 30, 2021.  The amendment was filed to disclose that final income tax expense adjustments related to the domestic deferred tax asset valuation allowance have been recorded by the Company, which resulted in increasing the amount of net loss for the year ended June 30, 2021 by $8.8 million.  This had the effect of increasing the net loss of -$20.9 million to -$29.7 million for the year ended June 30, 2021.  While this late adjustment is a non-cash adjustment, the Company has concluded that it constitutes a material weakness in its internal controls over financial reporting due to the deficiency in certain review controls described above.

 

To remediate the material weakness, the Company has taken steps to enhance the controls within the tax reporting process, including improving the review precision of adjusting journal entries and to proactively reach out to outside consultants on technical and complex one-off issues such as these, should the need arise.  To allow for adequate time to manage the recording and reviewing of infrequent and complex transactions, the Company also intends to postpone the earnings release date to a date closer to the filing of the Company’s Form 10-K or Form 10-Q. The Company believes that these steps will mitigate the occurrence of similar events in the future.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate.

 

The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the framework (2013 edition) in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon such evaluation, due to the circumstance around a misstatement as described above, the Company’s management concluded that its internal control over financial reporting was not effective as of June 30, 2021.

 

RSM US LLP, an independent registered public accounting firm, has audited the Company’s internal control over financial reporting as of June 30, 2021, as stated in their report which appears herein.

 

Changes in Internal Control Over Financial Reporting

 

During the fourth quarter of fiscal 2021, there have not been any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company intends to complete the remediation of the material weakness described within fiscal 2022.

 

 

Item 9B. Other Information

 

Not applicable.

 

24

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

For information with respect to the executive officers of the Registrant, see "Information About Our Executive Officers" at the end of Part I of this report.

 

For information with respect to the Directors of the Registrant, see "Election of Directors" in the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021, which is incorporated into this report by reference.

 

For information with respect to the Company’s Code of Ethics, see "Guidelines for Business Conduct and Ethics” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021, which is incorporated into this report by reference. The Company’s Code of Ethics, entitled, “Guidelines for Business Conduct and Ethics,” is included on the Company’s website, www.twindisc.com. If the Company makes any substantive amendment to the Code of Ethics, or grants a waiver from a provision of the Code of Ethics for its Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer (or any person performing similar functions), it intends to disclose the nature of such amendment on its website within four business days of the amendment or waiver in lieu of filing a Form 8-K with the SEC.

 

For information with respect to procedures by which shareholders may recommend nominees to the Company’s Board of Directors, see “Director Committee Functions: Nominating and Governance Committee” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021, which is incorporated into this report by reference. There were no changes to these procedures since the Company’s last disclosure relating to these procedures.

 

For information with respect to the Audit Committee Financial Expert, see “Director Committee Functions: Audit Committee” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021, which is incorporated into this report by reference.

 

For information with respect to the Audit Committee Disclosure, see “Director Committee Functions: Audit Committee” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021, which is incorporated into this report by reference.

 

For information with respect to the Audit Committee Membership, see “Director Committee Functions: Committee Membership” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021, which is incorporated into this report by reference.

 

 

Item 11. Executive Compensation

 

The information set forth under the captions "Executive Compensation" and "Director Compensation” in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 28, 2021, is incorporated into this report by reference.

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

For information regarding security ownership of certain beneficial owners and management, see the Proxy Statement for the Annual Meeting of Shareholders to be held on October 28, 2021 under the captions "Principal Shareholders” and “Directors and Executive Officers" and incorporated into this report by reference.

 

For information regarding securities authorized for issuance under equity compensation plans of the Company, see “Equity Compensation Plan Information” in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 28, 2021, which is incorporated into this report by reference.

 

There are no arrangements known to the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant.

 

25

 

Item 13. Certain Relationships and Related Transactions, Director Independence

 

For information with respect to transactions with related persons and policies for the review, approval or ratification of such transactions, see “Corporate Governance – Review, Approval or Ratification of Transactions with Related Persons” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021, which is incorporated into this report by reference.

 

For information with respect to director independence, see “Corporate Governance – Board Independence” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021, which is incorporated into this report by reference.

 

 

Item 14. Principal Accounting Fees and Services

 

The Company incorporates by reference the information contained in the Proxy Statement for the Annual Meeting of Shareholders to be held October 28, 2021 under the headings “Fees to Independent Registered Public Accounting Firm” and “Pre-approval Policies and Procedures.”

 

26

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(a)(1) Consolidated Financial Statements

 

See Index to Consolidated Financial Statements and Financial Statement Schedule, the Report of Independent Registered Public Accounting Firm and the Consolidated Financial Statements, all of which are incorporated by reference.

 

(a)(2) Consolidated Financial Statement Schedule

 

See Index to Consolidated Financial Statements and Financial Statement Schedule, and the Consolidated Financial Statement Schedule, all of which are incorporated by reference.

 

(a)(3) Exhibits. See Exhibit Index included as the last page of this form, which is incorporated by reference.

 

27

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULE

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

   

Report of Independent Registered Public Accounting Firm

29-30

   

Consolidated Balance Sheets as of June 30, 2021 and 2020

31

   

Consolidated Statements of Operations and Comprehensive Loss for the years ended June 30, 2021 and 2020

32

   

Consolidated Statements of Cash Flows for the years ended June 30, 2021 and 2020

33

   

Consolidated Statements of Changes in Equity for the years ended June 30, 2021 and 2020

34

   

Notes to Consolidated Financial Statements

35-65

   
   

INDEX TO FINANCIAL STATEMENT SCHEDULE

 
   

Schedule II - Valuation and Qualifying Accounts

66

 

Schedules, other than those listed, are omitted for the reason that they are inapplicable, are not required, or the information required is shown in the financial statements or the related notes.

 

28

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Shareholders and the Board of Directors of Twin Disc, Incorporated:

 

 

Opinion on the Internal Control Over Financial Reporting

We have audited Twin Disc, Incorporated's (the Company) internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and our report dated September 2, 2021 expressed an unqualified opinion.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment. The misstatement related to a deficiency in the company’s review controls over significant, infrequent transactions that did not detect an error in the recording of a valuation allowance on deferred income tax assets. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2021 financial statements, and this report does not affect our report dated September 2, 2021 on those financial statements.

 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Managements Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ RSM US LLP

 

Milwaukee, Wisconsin

September 2, 2021 

 

29

 

Report of Independent Registered Public Accounting Firm

 

 

To the Shareholders and the Board of Directors of Twin Disc, Incorporated:

 

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Twin Disc, Incorporated (the Company) as of June 30, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, changes in equity and cash flows for each of the two years in the period ended June 30, 2021, and the related notes to the consolidated financial statements and schedule (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated September 2, 2021 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Deferred Tax Asset Valuation Allowance

As described in Note N to the consolidated financial statements the Company’s gross deferred tax asset and valuation allowance was approximately $31,004,000 and $24,420,000, respectively, as of June 30, 2021. The Company recognizes deferred tax assets and liabilities for the expected future income tax consequences of events that have been recognized in the Company’s financial statements.  Valuation allowances are provided for deferred tax assets where it is considered more likely than not that the Company will not realize the benefit of such assets. In evaluating the realizability of deferred tax assets in future periods, the available positive and negative evidence, including projected future taxable income exclusive of reversing temporary differences, history of book losses, tax planning strategies, and results of recent operations, are considered.

 

We identified management’s determination of the value of deferred tax assets as a critical audit matter as there is significant judgment required by management to conclude that it is more likely than not that these deferred tax assets will be realized in future periods. In addition, the auditing of these elements involved complex and subjective auditor judgment, including the need to involve personnel with specialized skill and knowledge.

 

Our audit procedures to evaluate management’s determination that sufficient taxable income will not be generated to realize deferred tax assets included the following, among others:

 

We evaluated the design and operating effectiveness of internal controls over income taxes, specifically, those controls over the evaluation of the realizability of deferred tax assets.

 

We evaluated the reasonableness of management’s estimates in regards to the ability to generate future taxable income and utilize the deferred tax assets by evaluating: (i) the forecast of future taxable income, including testing of management’s forecasts against the Company’s historical performance, and (ii) testing management’s assessment of the timing of future reversals of temporary differences.

  We utilized personnel with specialized knowledge and skill in income taxes and accounting for income taxes under ASC 740 to assist in the evaluation of management’s assessment of positive and negative evidence and their conclusion that it is more likely than not that the Company will not realize the benefit of its deferred tax assets.

 

/s/ RSM US LLP

 

We have served as the Company's auditor since 2017.

 

Milwaukee, Wisconsin

September 2, 2021

 

30

 

 

TWIN DISC, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2021 and 2020

(In thousands, except share amounts)

 

  

2021

  

2020

 
         

ASSETS

        

Current assets:

        

Cash

 $12,340  $10,688 

Trade accounts receivable, net

  39,491   30,682 

Inventories

  114,967   120,607 

Assets held for sale

  9,539   - 

Prepaid expenses

  5,704   5,269 

Other

  9,926   6,739 

Total current assets

  191,967   173,985 
         

Property, plant and equipment, net

  45,463   58,284 

Right-of-use assets operating leases

  14,736   14,448 

Intangible assets, net

  17,480   18,973 

Deferred income taxes

  2,511   24,445 

Other assets

  3,256   3,992 
         

Total assets

 $275,413  $294,127 
         

LIABILITIES AND EQUITY

        

Current liabilities:

        

Current maturities of long-term debt

 $2,000  $4,691 

Accounts payable

  31,011   25,663 

Accrued liabilities

  45,549   36,380 

Total current liabilities

  78,560   66,734 
         

Long-term debt

  30,085   37,896 

Lease obligations

  12,887   12,738 

Accrued retirement benefits

  11,176   27,938 

Deferred income taxes

  5,045   5,501 

Other long-term liabilities

  7,000   3,362 
         

Total liabilities

  144,753   154,169 
         

Commitments and contingencies (Note O)

        
         

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

  40,972   42,756 

Retained earnings

  126,936   156,655 

Accumulated other comprehensive loss

  (22,615)  (41,226)
   145,293   158,185 

Less treasury stock, at cost (984,139 and 1,226,809 shares, respectively)

  15,083   18,796 
         

Total Twin Disc shareholders' equity

  130,210   139,389 
         

Noncontrolling interest

  450   569 
         

Total equity

  130,660   139,958 
         

Total liabilities and equity

 $275,413  $294,127 

 

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

 

31

 

 

TWIN DISC, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

For the years ended June 30, 2021 and 2020

(In thousands, except per share amounts)

 

  

2021

  

2020

 
         

Net sales

 $218,581  $246,838 

Cost of goods sold

  167,724   191,130 

Gross profit

  50,857   55,708 
         

Marketing, engineering and administrative expenses

  55,750   63,218 

Restructuring expenses

  7,377   5,138 

Goodwill and other asset impairment charge

  -   27,603 

Loss from operations

  (12,270)  (40,251)
         

Other income (expense):

        

Interest expense

  (2,358)  (1,860)

Income from extinguishment of loan

  8,200   - 

Other (expense) income, net

  (3,411)  (1,629)
   2,431   (3,489)
         

Loss before income taxes and noncontrolling interest

  (9,839)  (43,740)
         

Income tax expense (benefit)

  19,680   (4,169)
         

Net loss

  (29,519)  (39,571)
         

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

  (200)  (246)
         

Net loss attributable to Twin Disc

 $(29,719) $(39,817)
         

Loss per share data:

        

Basic loss per share attributable to Twin Disc common shareholders

 $(2.24) $(3.03)

Diluted loss per share attributable to Twin Disc common shareholders

 $(2.24) $(3.03)
         

Weighted average shares outstanding data:

        

Basic shares outstanding

  13,247   13,153 

Dilutive stock awards

  -   - 
         

Diluted shares outstanding

  13,247   13,153 
         

Comprehensive loss

        

Net loss

 $(29,519) $(39,571)

Foreign currency translation adjustment

  5,639   (966)

Benefit plan adjustments, net of income taxes of $3,791 and ($530), respectively

  12,113   (1,675)

Unrealized gain (loss) on hedges, net of income taxes of $235 and ($185), respectively

  760   (595)

Comprehensive loss

  (11,007)  (42,807)

Less: Comprehensive income attributable to noncontrolling interest

  (101)  (266)
         

Comprehensive loss attributable to Twin Disc

 $(11,108) $(43,073)

 

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

 

32

 

 

 

TWIN DISC, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended June 30, 2021 and 2020

(In thousands)

 

   

2021

   

2020

 

Cash flows from operating activities:

               

Net loss

  $ (29,519 )   $ (39,571 )

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    11,243       11,925  

Income from extinguishment of loan

    (8,200 )     -  

Restructuring of operations

    6,619       2,269  

Stock compensation expense

    2,154       1,158  

Provision for deferred income taxes

    17,655       (8,072 )

Goodwill and other asset impairment charge

    -       27,603  

Other, net

    798       258  

Changes in operating assets and liabilities

               

Trade accounts receivable

    (7,810 )     13,132  

Inventories

    9,063       6,775  

Other assets

    (5,007 )     2,246  

Accounts payable

    4,606       (3,342 )

Accrued liabilities

    7,058       (5,807 )

Accrued/prepaid retirement benefits

    (2,132 )     544  
                 

Net cash provided by operating activities

    6,528       9,118  
                 

Cash flows from investing activities:

               

Capital expenditures

    (4,464 )     (10,699 )

Proceeds on note receivable

    1,500       500  

Proceeds from sale of plant assets

    102       137  

Proceeds from life insurance policy

    253       102  

Other, net

    (133 )     (159 )
                 

Net cash used by investing activities

    (2,742 )     (10,119 )
                 

Cash flows from financing activities:

               

Borrowings under long-term debt agreement

    -       8,200  

Borrowings under revolving loan agreement

    76,335       99,262  

Repayments under revolving loan agreement

    (78,370 )     (105,065 )

Repayments of long-term borrowings

    (1,838 )     (2,241 )

Payments of withholding taxes on stock compensation

    (224 )     (913 )

Dividends paid to noncontrolling interest

    (220 )     (298 )
                 

Net cash used by financing activities

    (4,317 )     (1,055 )
                 

Effect of exchange rate changes on cash

    2,183       382  
                 

Net change in cash

    1,652       (1,674 )
                 

Cash:

               

Beginning of year

    10,688       12,362  
                 

End of year

  $ 12,340     $ 10,688  
                 

Supplemental cash flow information:

               

Cash paid during the year for:

               

Interest

  $ 2,366     $ 1,861  

Income taxes

    3,257       3,481  

 

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

 

33

 

 

 

TWIN DISC, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended June 30, 2021 and 2020

(In thousands)

 

   

Twin Disc, Inc. Shareholders Equity

 
                   

Accumulated

                         
                   

Other

           

Non-

         
   

Common

   

Retained

   

Comprehensive

   

Treasury

   

Controlling

   

Total

 
   

Stock

   

Earnings

   

Income (Loss)

   

Stock

   

Interest

   

Equity

 

Balance at June 30, 2019

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

Net (loss) income

          (39,817 )                 246       (39,571 )

Translation adjustments

                (985 )           19       (966 )

Benefit plan adjustments, net of tax

                (1,675 )                 (1,675 )

Unrealized loss on hedges, net of tax

                (595 )                 (595 )

Cash dividends

                            (298 )     (298 )

Compensation expense

    1,158                               1,158  

Shares (acquired) issued, net

    (3,449 )                 2,536             (913 )
                                                 

Balance at June 30, 2020

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

Net (loss) income

          (29,719 )                 200       (29,519 )

Translation adjustments

                5,738             (99 )     5,639  

Benefit plan adjustments, net of tax

                12,113                   12,113  

Unrealized gain on hedges, net of tax

                760                   760  

Cash dividends

                            (220 )     (220 )

Compensation expense

    2,154                               2,154  

Shares (acquired) issued, net

    (3,938 )                 3,713             (225 )
                                                 

Balance at June 30, 2021

  $ 40,972     $ 126,936     $ (22,615 )   $ (15,083 )   $ 450     $ 130,660  

 

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

 

34

 

 

TWIN DISC, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE DATA)

 

 

 

A.   SIGNIFICANT ACCOUNTING POLICIES

 

COVID-19

 

Throughout this report, references made to “COVID-19” pertain to the global pandemic declared by the World Health Organization (“WHO”) in March 2020. This pandemic caused shelter-in-place policies, unexpected factory closures, supply chain disruptions, and market volatilities across the globe. These drastic actions resulted in an unprecedented global recession, causing substantial declines in countries’ gross domestic output around the world.

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. The depth and duration of the pandemic remains unknown. Despite the availability of vaccines, recent surges in the infection rate and the detection of new variants of the virus have reinforced the general consensus that the containment of COVID-19 remains a challenge. Management is actively monitoring the global situation and its effect on its financial condition, liquidity, operations, suppliers, industry, and workforce.

 

Significant Accounting Policies

 

The following is a summary of the significant accounting policies followed in the preparation of these financial statements:

 

Consolidation Principles‑‑The consolidated financial statements include the accounts of Twin Disc, Incorporated and its wholly-owned domestic and foreign subsidiaries. In fiscal 2021 and 2020, certain subsidiaries changed their reporting periods to conform to the Company’s fiscal year end. The impact of aligning to the corporate reporting period is not material to the consolidated results. All significant intercompany transactions have been eliminated.

 

Management Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates.

 

Translation of Foreign Currencies‑‑The financial statements of the Company’s non-U.S. subsidiaries are translated using the current exchange rate for assets and liabilities and the weighted-average exchange rate for the year for revenues and expenses. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss, which is included in equity. Gains and losses from foreign currency transactions are included in earnings. Included in other (expense) income are foreign currency transaction losses of ($2,108) and ($570) in fiscal 2021 and 2020, respectively.

 

Cash--The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalent. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent that checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the amount of those un-presented checks is included in accounts payable.

 

Accounts Receivable--These represent trade accounts receivable and are stated net of an allowance for doubtful accounts of $1,870 and $1,740 at June 30, 2021 and 2020, respectively. The Company records an allowance for doubtful accounts for certain customers where a risk of default has been specifically identified as well as provisions determined on a general basis when it is believed that some default is probable and estimable. The assessment of likelihood of customer default is based on a variety of factors, including the length of time the receivables are past due, the historical collection experience and existing economic conditions. Various factors may adversely impact its customer’s ability to access sufficient liquidity and capital to fund their operations and render the Company’s estimation of customer defaults inherently uncertain. While the Company believes current allowances for doubtful accounts are adequate, it is possible that these factors may cause higher levels of customer defaults and bad debt expense in future periods.

 

35

 

Fair Value of Financial Instruments--The carrying amount reported in the consolidated balance sheets for cash, trade accounts receivable and accounts payable approximate fair value because of the immediate short-term maturity of these financial instruments. If measured at fair value, cash would be classified as Level 1 and all other items listed above would be classified as Level 2 in the fair value hierarchy, as defined in Note M, Pension and Other Postretirement Benefit Plans. The Company’s borrowings under the revolving loan agreement, which is classified as long-term debt and consists of loans that are routinely borrowed and repaid throughout the year, approximate fair value at June 30, 2021. The Company’s term loan borrowing, which is LIBOR-based, approximates fair value at June 30, 2021. If measured at fair value in the financial statements, long-term debt (including any current portion) would be classified as Level 2 in the fair value hierarchy.

 

Derivative Financial Instruments--The Company has written policies and procedures that place all financial instruments under the direction of the Company’s corporate treasury department and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for trading purposes is prohibited. The Company uses derivative financial instruments to manage certain financial risks. The Company enters into forward contracts to reduce the earnings and cash flow impact of non-functional currency denominated receivables and payables. The Company uses interest rate swap contracts to reduce the exposure to variability in interest rates on floating debt borrowings. The Company designates certain financial instruments as cash flow hedges for accounting purposes. The Company designates certain financial instruments as net investment hedges to reduce the exposure in its foreign currency denominated net investments in wholly-owned subsidiaries. See Note R, Derivative Financial Instruments, for additional information.

 

Inventories‑‑Inventories are valued at the lower of cost or net realizable value. Cost has been determined by the last‑in, first‑out (LIFO) method for the majority of inventories located in the United States, and by the first‑in, first‑out (FIFO) method for all other inventories. Management specifically identifies obsolete products and analyzes historical usage, forecasted production based on future orders, demand forecasts, and economic trends, among others, when evaluating the adequacy of the reserve for excess and obsolete inventory.

 

Assets Held for Sale--Assets that will be recovered principally through sale rather than in its continuing use in operations are reclassified out of property, plant and equipment and into assets held for sale if all of the following criteria are met: (a) management, having the authority to approve the action, commits to a plan to sell the asset(s); (b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer, and other actions required to complete the plan to sell the asset have been initiated; (d) the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within a year; (e) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that plan will be withdrawn.

 

Assets Held for Sale are carried at fair value less costs to sell, or net book value, whichever is lower. The Company ceases to record depreciation expense at the time of designation as held for sale. During fiscal 2021, the Company classified certain properties as held for sale and recorded impairment charges of $4,267. See Note P, Restructuring of Operations and Income from Extinguishment of Loan, for additional information.

 

Property, Plant and Equipment and Depreciation‑‑Assets are stated at cost. Expenditures for maintenance, repairs and minor renewals are charged against earnings as incurred. Expenditures for major renewals and betterments are capitalized and depreciated. Depreciation is provided on the straight‑line method over the estimated useful lives of the assets. The lives assigned to buildings and related improvements range from 10 to 40 years, and the lives assigned to machinery and equipment range from 5 to 15 years. Upon disposal of property, plant and equipment, the cost of the asset and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in earnings. Fully depreciated assets are not removed from the accounts until physically disposed.

 

Right of Use Lease Assets--In accordance with ASC 842, the Company’s leases, with lease periods longer than twelve months, are recorded on the consolidated balance sheets. These leases primarily consist of office and warehouse facilities, as well as production and office equipment.

 

36

 

The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. As its lease agreements typically do not provide an implicit rate, the Company primarily uses an incremental borrowing rate based upon the information available at lease commencement. In determining the incremental borrowing rate, the Company considers its current borrowing rate, the lease period, and the economic environments where the lease activity is concentrated.                                             

 

During fiscal 2021, the Company elected to more closely align with ASC 842 by presenting operating lease right-of-use assets and finance lease right-of-use assets on separate lines on the consolidated balance sheets, as well as to present operating lease liabilities and finance lease liabilities on separate lines on the consolidated balance sheets. For comparative purposes, the Company restated certain amounts previously reported on the consolidated balance sheet as of June 30, 2020. The following table presents the effect of those changes:         

 

  

June 30, 2020

      

June 30, 2020

 
  

As Reported

  

Impact

  

Restated

 
             

Property, plant and equipment, net

 $72,732  $(14,448) $58,284 

Right-of-use assets operating leases

  -   14,448   14,448 
             

Lease obligations

 $13,495  $(757) $12,738 

Other long-term liabilities

  2,605   757   3,362 

 

Impairment of Long-lived Assets--The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. For property, plant and equipment and other long-lived assets, including intangible assets, the Company performs undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Fair value is primarily determined using discounted cash flow analyses; however, other methods may be used to determine the fair value, including third party valuations when necessary.

 

Intangible Assets--Intangible assets primarily consist of customer relationships, technology and know-how, and tradenames, all of which are definite-lived. They were initially valued at fair value at acquisition, and are amortized over their respective useful lives on the basis of straight line or accelerated, as appropriate.

 

Income Taxes--The Company recognizes deferred tax assets and liabilities for the expected future income tax consequences of events that have been recognized in the Company’s financial statements. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which temporary differences are expected to reverse. Valuation allowances are provided for deferred tax assets where it is considered more likely than not that the Company will not realize the benefit of such assets. The Company evaluates its uncertain tax positions as new information becomes available. Tax benefits are recognized to the extent a position is more likely than not to be sustained upon examination by the taxing authority.

 

Revenue Recognition--Revenue from contracts with customers is recognized using a five-step model consisting of the following:

 

1.

identify the contract with a customer; The Company’s customers consist of distributors and direct end-users. With regard to distributors, the Company generally has written distribution agreements which describe the terms of the distribution arrangement, such as the product range, the sales territory, product pricing, sales support, payment and returns policy, etc. Customer contracts are generally in the form of acknowledged purchase orders. Services to be rendered, as part of the delivery of those products, are also generally specified. Such services include installation reviews and technical commissioning.

 

2.

identify the performance obligations in the contract; The Company’s performance obligations primarily consist of product delivery and certain service obligations such as technical commissioning, repair services, installation reviews, and shift development.

 

3.

determine the transaction price; The Company considers the invoice as the transaction price.

 

4.

allocate the transaction price to the performance obligations in the contract; The Company determined that the most relevant allocation method for its service obligations is to apply the expected cost plus appropriate margin. This is the Company’s practice of billing for repairs, overhaul, and other product service related time incurred by its technicians.

 

37

 
 

5.

recognize revenue; Revenue is recognized as each performance obligation is satisfied which is typically when the Company transfers control of a good or service to a customer, which can occur over time or at a point in time. For technical commissioning, repairs, installation review, and shift development services, revenue is recognized upon completion of the service. The amount of revenue recognized is based on the consideration to which the Company expects to be entitled in exchange for those goods or services, including the expected value of variable consideration. The customer’s ability and intent to pay the transaction price is assessed in determining whether a contract exists with the customer. If collectability of substantially all of the consideration in a contract is not probable, consideration received is not recognized as revenue unless the consideration is nonrefundable and the Company no longer has an obligation to transfer additional goods or services to the customer or collectability becomes probable.

 

Goods sold to third party distributors are subject to an annual return policy, for which a provision is made at the time of shipment based upon historical experience. Goods sold under bill and hold arrangements are recorded as revenue when control has been transferred to the customer and when the reason for the arrangement is substantive, when the product is identified as the customer’s asset, when the product is ready for delivery to the customer, and when the Company cannot use the product or redirect the product to another customer.

 

Shipping and Handling Fees and Costs--The Company records revenue from shipping and handling costs in net sales. The cost associated with shipping and handling of products is reflected in cost of goods sold.

 

Recently Adopted Accounting Standards

 

 

a.

In August 2018, the Financial Accounting Standards Board (“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 ASC 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.

 

 

b.

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

 

 

a.

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 ASC 326). ASC 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. ASC 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.

 

 

b.

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.

 

 

c.

In March 2020 and January 2021, the FASB issued guidance (ASU 2020-04 and ASU 2021-01, respectively), 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 working with its lender and currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

 

38

 

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 based on its public float as of the last business day of the second quarter of fiscal 2021. Accordingly, it has scaled some of its disclosures of financial and non-financial information in this annual 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.

 

 

 

B.   INVENTORIES

 

The major classes of inventories at June 30 were as follows:

 

  

2021

  

2020

 

Finished parts

 $59,761  $62,394 

Work in process

  17,908   17,844 

Raw materials

  37,298   40,369 
  $114,967  $120,607 

 

Inventories stated on a LIFO basis represent approximately 45% and 50% of total inventories at June 30, 2021 and 2020, respectively.  The approximate current cost of the LIFO inventories exceeded the LIFO cost by $25,969 and $27,225 at June 30, 2021 and 2020, respectively.  Inventories were reduced during 2021, resulting in a liquidation of a LIFO inventory layer that was carried at a lower cost prevailing from a prior year, as compared with current costs in the current year (“LIFO decrement”). A LIFO decrement results in the erosion of layers created in earlier years, and, therefore, a LIFO layer is not created for years that have decrements. For the year ended June 30, 2021, the effect of this LIFO decrement decreased cost of goods sold by $1,105. There was no LIFO decrement for the year ended June 20, 2020.

 

The Company had reserves for inventory obsolescence of $10,279 and $9,863 at June 30, 2021 and 2020, respectively.

 

 

 

C.   PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment at June 30 were as follows:

 

  

2021

  

2020

 

Land

 $3,858  $6,589 

Buildings

  30,317   48,168 

Machinery and equipment

  150,872   146,841 
   185,047   201,598 

Less: accumulated depreciation

  (139,584)  (143,314)
  $45,463  $58,284 

 

Included in the above amounts are finance lease right-of-use assets of $5,244 and $959 for the years ended June 30, 2021 and 2020, respectively.

 

Depreciation expense for the years ended June 30, 2021 and 2020 was $7,853 and $7,394, respectively.

 

39

 
 

D.   INTANGIBLE ASSETS

 

At June 30, 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, 2019

 $39,587  $