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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

 

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

 

For the quarter ended December 31, 2021

 

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

 

Commission File Number 1-7635

 

TWIN DISC, INCORPORATED

(Exact name of registrant as specified in its charter)

 

Wisconsin

39-0667110

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification No.)

  

1328 Racine Street, Racine, Wisconsin 53403

(Address of principal executive offices)

 

(262) 638-4000

(Registrant's telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock (No Par Value)

TWIN

The NASDAQ Stock Market LLC

 

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

Yes  ☑                  No  ☐

 

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

 

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

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

 

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

 

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

Yes                    No  ☑

 

At February 2, 2022, the registrant had 13,662,173 shares of its common stock outstanding.

 

 

 

 

Part I.         FINANCIAL INFORMATION

 

Item 1.         Financial Statements

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

  

December 31, 2021

  

June 30, 2021

 
         

ASSETS

        

Current assets:

        

Cash

 $11,123  $12,340 

Trade accounts receivable, net

  34,022   39,491 

Inventories

  123,928   114,967 

Assets held for sale

  3,318   9,539 

Prepaid expenses

  5,879   5,704 

Other

  8,200   9,926 

Total current assets

  186,470   191,967 
         

Property, plant and equipment, net

  43,155   45,463 

Right-of-use assets operating leases

  13,795   14,736 

Intangible assets, net

  15,209   17,480 

Deferred income taxes

  2,629   2,511 

Other assets

  3,300   3,256 
         

Total assets

 $264,558  $275,413 
         

LIABILITIES AND EQUITY

        

Current liabilities:

        

Current maturities of long-term debt

 $2,000  $2,000 

Accounts payable

  31,234   31,011 

Accrued liabilities

  47,302   45,549 

Total current liabilities

  80,536   78,560 
         

Long-term debt

  23,255   30,085 

Lease obligations

  11,905   12,887 

Accrued retirement benefits

  10,501   11,176 

Deferred income taxes

  4,254   5,045 

Other long-term liabilities

  6,176   7,000 
         

Total liabilities

  136,627   144,753 
         

Commitments and contingencies (Note D)

          
         

Equity:

        

Twin Disc shareholders' equity:

        

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

  -   - 

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

  41,591   40,972 

Retained earnings

  125,020   126,936 

Accumulated other comprehensive loss

  (24,359)  (22,615)
   142,252   145,293 

Less treasury stock, at cost (974,557 and 985,686 shares, respectively)

  14,968   15,083 
         

Total Twin Disc shareholders' equity

  127,284   130,210 
         

Noncontrolling interest

  647   450 
         

Total equity

  127,931   130,660 
         

Total liabilities and equity

 $264,558  $275,413 

 

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

 

2

 

 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 31, 2021

  

December 25, 2020

  

December 31, 2021

  

December 25, 2020

 
                 

Net sales

 $59,889  $48,557  $107,650  $94,737 

Cost of goods sold

  46,407   39,679   80,721   76,156 

Gross profit

  13,482   8,878   26,929   18,581 
                 

Marketing, engineering and administrative expenses

  15,267   13,361   28,357   25,805 

Restructuring expenses

  1,190   120   1,238   525 

Other operating income

  45   -   (2,894)  - 

(Loss) income from operations

  (3,020)  (4,603)  228   (7,749)
                 

Interest expense

  574   590   1,104   1,163 

Other expense (income), net

  (466)  1,724   (110)  2,872 
   108   2,314   994   4,035 
                 

Loss before income taxes and noncontrolling interest

  (3,128)  (6,917)  (766)  (11,784)

Income tax expense (benefit)

  622   (2,637)  1,004   (3,567)
                 

Net loss

  (3,750)  (4,280)  (1,770)  (8,217)

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

  (86)  (33)  (144)  (75)
                 

Net (loss) income attributable to Twin Disc

 $(3,836) $(4,313) $(1,914) $(8,292)
                 

Income (loss) per share data:

                

Basic loss per share attributable to Twin Disc common shareholders

 $(0.29) $(0.33) $(0.14) $(0.63)

Diluted loss per share attributable to Twin Disc common shareholders

 $(0.29) $(0.33) $(0.14) $(0.63)
                 

Weighted average shares outstanding data:

                

Basic shares outstanding

  13,296   13,255   13,288   13,227 

Diluted shares outstanding

  13,296   13,255   13,288   13,227 
                 

Comprehensive (loss) income

                

Net loss

 $(3,750) $(4,280) $(1,770) $(8,217)

Benefit plan adjustments, net of income taxes of $(115), $177, $2 and $353, respectively

  623   555   1,007   1,108 

Foreign currency translation adjustment

  (1,701)  4,899   (3,639)  8,511 

Unrealized gain on cash flow hedge, net of income taxes of $(63), $32, $0 and $55, respectively

  735   104   939   179 

Comprehensive (loss) income

  (4,093)  1,278   (3,463)  1,581 

Less: Comprehensive income attributable to noncontrolling interest

  (61)  (45)  (197)  (99)
                 

Comprehensive (loss) income attributable to Twin Disc

 $(4,154) $1,233  $(3,660) $1,482 

 

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

 

3

 

 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

   

For the Two Quarters Ended

 
   

December 31, 2021

   

December 25, 2020

 
                 

Cash flows from operating activities:

               

Net loss

  $ (1,770 )   $ (8,217 )

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

               

Depreciation and amortization

    5,011       5,523  

Gain on sale of assets

    (2,939 )     -  

Restructuring expenses

    (111 )     22  

Provision for deferred income taxes

    (1,156 )     (7,122 )

Stock compensation expense and other non-cash changes, net

    1,848       1,317  

Net change in operating assets and liabilities

    (1,932 )     11,254  
                 

Net cash (used) provided by operating activities

    (1,049 )     2,777  
                 

Cash flows from investing activities:

               

Acquisitions of fixed assets

    (1,750 )     (2,788 )

Proceeds from sale of fixed assets

    9,152       48  

Proceeds on note receivable

    500       600  

Other, net

    140       (17 )
                 

Net cash provided (used) by investing activities

    8,042       (2,157 )
                 

Cash flows from financing activities:

               

Borrowings under revolving loan arrangement

    51,410       34,241  

Repayments of revolver loans

    (55,552 )     (36,276 )

Repayments of other long term debt

    (2,541 )     (261 )

Payments of withholding taxes on stock compensation

    (487 )     (224 )
                 

Net cash used by financing activities

    (7,170 )     (2,520 )
                 

Effect of exchange rate changes on cash

    (1,040 )     3,050  
                 

Net change in cash

    (1,217 )     1,150  
                 

Cash:

               

Beginning of period

    12,340       10,688  
                 

End of period

  $ 11,123     $ 11,838  

 

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

 

4

 

 

TWIN DISC, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

 

A.

Basis of Presentation

 

The unaudited condensed consolidated financial statements have been prepared by Twin Disc, Incorporated (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include adjustments, consisting primarily of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report filed on Form 10-K for June 30, 2021. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

 

Reclassification

 

Certain prior year amounts primarily in cost of goods sold and marketing, engineering, and administrative expenses have been reclassified for consistency with current year presentation.

 

Recently Adopted Accounting Standards

 

In December 2019, the FASB issued guidance (ASU 2019-12) intended to simplify the accounting for income taxes. The Company adopted this guidance effective July 1, 2021. The adoption of this guidance did not have a material impact on the Company’s disclosures.

 

New Accounting Releases

 

In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-10 (collectively 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.

 

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.

 

Special Note Regarding Smaller Reporting Company Status

 

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

 

5

 
 
 

B.

Inventories

 

The major classes of inventories were as follows:

 

  

December 31, 2021

  

June 30, 2021

 

Inventories:

        

Finished parts

 $61,551  $59,761 

Work in process

  19,924   17,908 

Raw materials

  42,453   37,298 
  $123,928  $114,967 

 

 

C.

Warranty

 

The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers. However, its warranty obligation is affected by product failure rates, the number of units affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. When evaluating the adequacy of the reserve for warranty costs, management takes into consideration the term of the warranty coverage, historical claim rates and costs of repair, knowledge of the type and volume of new products and economic trends. While we believe the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable in the future could differ materially from what actually transpires. The following is a listing of the activity in the warranty reserve for the quarters ended December 31, 2021 and December 25, 2020:

 

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 31, 2021

  

December 25, 2020

  

December 31, 2021

  

December 25, 2020

 

Reserve balance, beginning of period

 $3,560  $4,682  $4,369  $4,460 

Current period expense and adjustments

  585   711   319   1,745 

Payments or credits to customers

  (638)  (971)  (1,169)  (1,819)

Translation

  (24)  52   (36)  88 

Reserve balance, end of period

 $3,483  $4,474  $3,483  $4,474 

 

Included in expense in the two quarters ended December 31, 2021 and December 25, 2020 is a non-recurring warranty charge in the amount of $0 and $321, respectively, to accrue for estimated costs to resolve a unique product performance issue at certain installations.

 

The current portion of the warranty accrual ($2,930 and $3,676 as of December 31, 2021 and December 25, 2020, respectively) is reflected in accrued liabilities, while the long-term portion ($553 and $798 as of December 31, 2021 and December 25, 2020, respectively) is included in other long-term liabilities on the consolidated balance sheets.

 

 

D.

Contingencies

 

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

 

 

E.

Business Segments

 

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

 

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

 

6

 

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

 

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 31, 2021

  

December 25, 2020

  

December 31, 2021

  

December 25, 2020

 

Net sales

                

Manufacturing segment sales

 $49,298  $41,705  $90,893  $80,200 

Distribution segment sales

  28,291   23,223   48,825   45,729 

Inter/Intra segment elimination – manufacturing

  (13,200)  (12,170)  (24,143)  (22,908)

Inter/Intra segment elimination – distribution

  (4,500)  (4,201)  (7,925)  (8,284)
  $59,889  $48,557  $107,650  $94,737 

Net (loss) income attributable to Twin Disc

                

Manufacturing segment net (loss) income

 $(1,601) $(3,112) $3,231  $(5,774)

Distribution segment net income

  1,496   500   1,979   1,655 

Corporate and eliminations

  (3,731)  (1,701)  (7,124)  (4,173)
  $(3,836) $(4,313) $(1,914) $(8,292)

 

Assets

 

December 31, 2021

  

June 30, 2021

 

Manufacturing segment assets

 $344,947  $364,379 

Distribution segment assets

  50,899   46,956 

Corporate assets and elimination of intercompany assets

  (131,288)  (135,922)
  $264,558  $275,413 

 

Disaggregated revenue:

 

The following table presents details deemed most relevant to the users of the financial statements for the quarters and two quarters ended December 31, 2021 and December 25, 2020.

 

Net sales by product group for the quarter ended December 31, 2021 is summarized as follows:

 

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $7,085  $1,809  $(1,188) $7,706 

Land-based transmissions

  12,326   6,497   (5,505)  13,318 

Marine and propulsion systems

  29,861   16,659   (11,000)  35,520 

Other

  26   3,326   (7)  3,345 

Total

 $49,298  $28,291  $(17,700) $59,889 

 

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

 

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $5,287  $1,308  $(1,309) $5,286 

Land-based transmissions

  10,101   6,308   (4,669)  11,740 

Marine and propulsion systems

  26,300   14,216   (10,381)  30,135 

Other

  17   1,391   (12)  1,396 

Total

 $41,705  $23,223  $(16,371) $48,557 

 

Net sales by product group for the two quarters ended December 31, 2021 is summarized as follows:

 

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $12,992  $2,927  $(2,081) $13,838 

Land-based transmissions

  23,710   11,602   (9,752)  25,560 

Marine and propulsion systems

  54,148   28,222   (20,216)  62,154 

Other

  43   6,074   (19)  6,098 

Total

 $90,893  $48,825  $(32,068) $107,650 

 

7

 

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

 

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $10,093  $2,679  $(2,062) $10,710 

Land-based transmissions

  20,595   12,374   (8,969)  24,000 

Marine and propulsion systems

  49,479   26,975   (20,144)  56,310 

Other

  33   3,701   (17)  3,717 

Total

 $80,200  $45,729  $(31,192) $94,737 

 

 

F.

Stock-Based Compensation

 

Performance Stock Awards (PSA)

 

During the first two quarters of fiscal 2022 and 2021, the Company granted a target number of 103.6 and 265.3 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2022 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, cumulative sales revenue, and adjusted annual earnings per share (“EPS”) (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2024. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 155.4. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

 

The fiscal 2021 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, cumulative sales revenue, and cumulative free cashflow (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2023. These PSAs are subject to adjustment if the Company’s return on invested capital, sales revenue, or free cashflow for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 334.6. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

 

There were 440.9 and 433.1 unvested PSAs outstanding at December 31, 2021 and December 25, 2020, respectively. The fair value of the PSAs (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. Compensation expense of $219 and $131 was recognized for the quarters ended December 31, 2021 and December 25, 2020, respectively, related to PSAs. Compensation expense of $435 and $228 was recognized for the two quarters ended December 31, 2021 and December 25, 2020, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at December 31, 2021 was $9.18. At December 31, 2021, the Company had $3,211 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2022, 2021 and 2020 awards. The total fair value of PSAs vested as of December 31, 2021 and December 25, 2020 was $0.

 

Restricted Stock Awards (RS)

 

The Company has unvested RS awards outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded as compensation expense over the vesting period, which is generally 1 to 3 years. During the first two quarters of fiscal 2022 and 2021, the Company granted 44.1 and 246.8 service based restricted shares, respectively, to employees and non-employee directors. There were 262.7 and 380.9 unvested shares outstanding at December 31, 2021 and December 25, 2020, respectively. A total of 29.8 and 0.0 shares of RS were forfeited during the two quarters ended December 31, 2021 and December 25, 2020, respectively. Compensation expense of $285 and $350 associated with the RS was recognized for the quarters ended December 31, 2021 and December 25, 2020, respectively. Compensation expense of $619 and $689 associated with the RS was recognized for the two quarters ended December 31, 2021 and December 25, 2020, respectively. The total fair value of RS grants vested as of December 31, 2021 and December 25, 2020 was $1,679 and $533, respectively. As of December 31, 2021, the Company had $1,046 of unrecognized compensation expense related to RS which will be recognized over the next three years.

 

8

 

Restricted Stock Unit Awards (RSU)

 

Under the 2018 and 2021 Long Term Incentive Plans, the Company has been authorized to issue RSUs. The RSUs entitle the employee to shares of common stock of the Company if the employee remains employed by the Company through a specified date, generally three years from the date of grant. The fair value of the RSUs (on the date of grant) is recorded as compensation expense over the vesting period. During the first two quarters of fiscal 2022 and 2021, the Company granted 67.4 and 0.0 of employment based RSUs, respectively. There were 67.4 and 38.0 unvested RSUs outstanding at December 31, 2021 and December 25, 2020, respectively. Compensation expense of $92 and $163 associated with RSU's was recognized for the two quarters ended December 31, 2021 and December 25, 2020, respectively. The total fair value of restricted stock units vested as of December 31, 2021 and December 25, 2020 was $475 and $0, respectively. The weighted average grant date fair value of the unvested awards at December 31, 2021 was $14.19. As of December 31, 2021, the Company had $816 of unrecognized compensation expense related to restricted stock which will be recognized over the next two years.

 

 

G.

Pension and Other Postretirement Benefit Plans

 

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

 

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 31, 2021

  

December 25, 2020

  

December 31, 2021

  

December 25, 2020

 

Pension Benefits:

                

Service cost

 $130  $146  $269  $289 

Prior service cost

  10   16   20   32 

Interest cost

  681   690   1,347   1,357 

Expected return on plan assets

  (1,255)  (1,133)  (2,514)  (2,266)

Amortization of transition obligation

  9   9   18   18 

Amortization of prior service cost

  (4)  (4)  (8)  (8)

Amortization of actuarial net loss

  562   811   1,124   1,623 

Net periodic benefit cost

 $133  $535  $256  $1,045 
                 

Postretirement Benefits:

                

Service cost

 $4  $4  $8  $8 

Interest cost

  35   39   70   77 

Amortization of prior service cost

  (69)  (69)  (138)  (137)

Net periodic benefit gain

 $(30) $(26) $(60) $(52)

 

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

 

The Company expects to contribute approximately $733 to its pension plans in fiscal 2022. For the two quarters ended December 31, 2021, the amount of $419 in contributions to the pension plans were made.

 

The Company has reclassified $623 (net of ($115) in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended December 31, 2021, and $555 (net of $177 in taxes) during the quarter ended December 25, 2020. These reclassifications are included in the computation of net periodic benefit cost. The Company has reclassified $1,007 (net of $2 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the two quarters ended December 31, 2021, and $1,108 (net of $353 in taxes) during the two quarters ended December 25, 2020. These reclassifications are included in the computation of net periodic benefit cost.

 

 

H.

Income Taxes

 

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated Annual Effective Tax Rate (AETR). Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. To calculate its AETR, an entity must estimate its ordinary income or loss and the related tax expense or benefit for its full fiscal year. In situations in which an entity is in a loss position and recognizes a full valuation allowance, the guidance in ASC 740-270-25-9 applies. Due to continued losses and uncertain future domestic earnings, the Company recognizes a full US valuation allowance. Permanent differences continue to fluctuate and are significant compared to projected ordinary income. Therefore per ASC guidance, the fully valued domestic entity was removed from the annualized effective rate calculation. Because of the full US valuation allowance, the US entity may only recognize tax expense / benefit recorded for ASU 740-10 adjustments.

 

9

 

For the two quarters ended December 31, 2021 and December 25, 2020 the Company’s effective income tax rate was -130.9% and 30.3% respectively. For the quarter ended December 25, 2020 the company did not recognize a full US valuation allowance so the tax expense realized was based on the estimated AETR. Due to the different methodologies utilized to calculate the interim tax provisions, it is not reasonable to numerically reconcile the change in estimated tax rate.

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of a novel coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally. In March 2020, the World Health Organization classified the COVID-19 outbreak a pandemic, based on the rapid increase in exposure globally. The spread of the COVID-19 outbreak has caused significant volatility and uncertainty in U.S. and international markets. On March 27, 2020 the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income-based tax laws, some of which were enacted under the Tax Cuts and Jobs Act (“TCJA”) in 2017. In addition, governments around the world continue to initiate various forms of assistance. The Consolidated Appropriations Act of 2021 was signed into law on December 27, 2020. Changes in the tax treatment of certain items have been reflected during this quarter. These changes did not have a material impact to the Company’s effective tax rate. On March 11, 2021, President Biden signed into law The American Rescue Plan Act of 2021 (“ARPA”), which among other things, further changed executive compensation rules. Under the ARPA, which is effective for tax years beginning after December 31, 2026, the definition of covered employee has been expanded to include employees who are among the five highest compensated employees for the year, not limited to only officers. This is in addition to the existing pool of officers who are defined as “covered employees” under the current IRC 162(m) rules. Management will continue to monitor these new rules and apply them as required. Currently, the anticipated impact is minimal.  The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such it is uncertain as to the full magnitude that the COVID-19 outbreak will have on the Company’s financial condition, liquidity, and future results of operations.

 

The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. In addition, all other available positive and negative evidence is taken into consideration, including all new impacts of tax reform. The Company has evaluated the realizability of the net deferred tax assets related to its foreign operations and based on this evaluation management has concluded that no valuation allowances are required. However, due to continued historical domestic losses and uncertain future domestic earnings, the company continues to recognize a full domestic valuation allowance.

 

The Company has approximately $762 of unrecognized tax benefits, including related interest and penalties, as of December 31, 2021, which, if recognized, would favorably impact the effective tax rate. There were no significant changes in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quarter ended December 31, 2021. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going activity.

 

Annually, the Company files income tax returns in various taxing jurisdictions inside and outside the United States. In general, the tax years that remain subject to examination in foreign jurisdictions are 2014 through 2021. The tax year open to exam in the Netherlands is 2019. The tax years open to examination in the U.S. are for years subsequent to fiscal 2017. It is reasonably possible that other audit cycles will be completed during fiscal 2022.

 

10

 
 

I.

Intangible Assets

 

As of December 31, 2021, 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, 2021

 $41,142  $(23,662) $17,480  $10,321  $4,883  $1,282  $994 

Addition

  4   -  $4   -   -   -   4 

Amortization

  -   (1,630) $(1,630)  (826)  (600)  (90)  (114)

Translation adjustment

  (645)  -  $(645)  (403)  (186)  (50)  (6)

Balance at December 31, 2021

 $40,501  $(25,292) $15,209  $9,092  $4,097  $1,142  $878 

 

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

 

The weighted average remaining useful life of the intangible assets included in the table above is approximately 7 years.

 

Intangible amortization expense was $804 and $843 for the quarters ended December 31, 2021, and December 25, 2020, respectively. Intangible amortization expense was $1,630 and $1,678 for the two quarters ended December 31, 2021, and December 25, 2020, respectively. Estimated intangible amortization expense for the remainder of fiscal 2022 and each of the next five fiscal years and thereafter is as follows:

 

Fiscal Year

    

2022

  1,639 

2023

  3,022 

2024

  2,872 

2025

  2,722 

2026

  1,376 

Thereafter

  3,578 

 

 

J.

Long-term Debt

 

Long-term debt at December 31, 2021 and June 30, 2021 consisted of the following:

 

  

December 31, 2021

  

June 30, 2021

 

Credit Agreement Debt

        

Revolving loans (expire June 2023)

 $10,634  $15,415 

Term loan (due March 2026)

  14,500   16,500 

Other

  121   170 

Subtotal

  25,255   32,085 

Less: current maturities

  (2,000)  (2,000)

Total long-term debt

 $23,255  $30,085 

 

Credit Agreement Debt: The Company’s credit agreement debt represents borrowings made under the credit agreement, as amended, which it entered into with BMO Harris Bank N.A, (“BMO”) on June 29, 2018 (“Credit Agreement”). Under the agreement, the Company, among other obligations, is subject to a minimum EBITDA financial covenant.

 

On January 27, 2021, the Company and BMO entered into a forbearance agreement and amendment to the Credit Agreement (the “Forbearance Agreement”). Under this agreement, BMO agreed to forbear from exercising its rights and remedies against the Company with respect to its noncompliance with the minimum EBITDA covenant, for the period beginning with the date of the amendment through September 30, 2021.

 

11

 

On September 30, 2021, the Company and BMO entered into an amended and restated forbearance agreement and amendment to the Credit Agreement (the "Amended and Restated Forbearance Agreement"). The Amended and Restated Forbearance Agreement extends the forbearance period through February 28, 2022, or if earlier, through the date on which a default under the Amended and Restated Forbearance Agreement or Credit Agreement occurs. During the extended forbearance period, BMO will continue to forbear from exercising its rights and remedies against the Company under the Credit Agreement with respect to the Company’s noncompliance with its minimum EBITDA covenants. The Amended and Restated Forbearance Agreement also makes certain adjustments to the Credit Agreement. When the forbearance period ends, the Company is subject to a maximum total funded debt to EBITDA ratio of 3.00 to 1.00.

 

For the quarter ended December 31, 2021, as a result of the Amended and Restated 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 covenants, and has agreed to provide additional financial reports to BMO.

 

The Credit Agreement, including its amendments, is more fully described in the Company’s Annual Report filed on Form 10-K for June 30, 2021, as well as in Item 2 of this quarterly report.

 

As of December 31, 2021, current maturities include $2,000 of term loan payments due within the coming year.

 

Other: Other long-term debt pertains mainly to a financing arrangement in Europe. These liabilities carry terms of three to five years and implied interest rates ranging from 7% to 25%. A total amount of $43 in principal was paid on these liabilities during the current fiscal year.

 

During the quarters ended December 31, 2021, the average interest rate was 3.96% on the Term Loan, and 4.25% on the Revolving Loans.

 

As of December 31, 2021, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $34,669, and the Company had approximately $24,035 of available borrowings. In addition to the Credit Agreement, the Company has established unsecured lines of credit that are used from time to time to secure certain performance obligations by the Company.

 

The Company’s borrowings described above approximate fair value at December 31, 2021 and June 30, 2021. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

 

The Company is party to an interest rate swap arrangement with Bank of Montreal, with an initial notional amount of $20,000 and a maturity date of March 4, 2026 to hedge the Term Loan. As of December 31, 2021, the notional amount was $14,500. This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging. This swap is included in the disclosures in Note O, Derivative Financial Instruments.

 

During the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan as a net investment hedge to mitigate the risk of variability in its euro denominated net investments in wholly-owned foreign companies. Effective upon the designation, all changes in the fair value of the euro revolver are reported in accumulated other comprehensive loss along with the foreign currency translation adjustments on those foreign investments. This net investment hedge is included in the disclosures in Note O, Derivative Financial Instruments.

 

 

K.

Shareholders Equity

 

The Company, from time to time, makes open market purchases of its common stock under authorizations given to it by the Board of Directors, of which 315.0 shares as of December 31, 2021 remain authorized for purchase.  The Company did not make any open market purchases of its shares during the quarters ended December 31, 2021 and December 25, 2020.

 

12

 

The following is a reconciliation of the Company’s equity balances for the first two fiscal quarters of 2022 and 2021:

 

  

Twin Disc, Inc. Shareholders’ Equity

 
          

Accumulated

             
          

Other

      

Non-

     
  

Common

  

Retained

  

Comprehensive

  

Treasury

  

Controlling

  

Total

 
  

Stock

  

Earnings

  

Income (Loss)

  

Stock

  

Interest

  

Equity

 

Balance, June 30, 2021

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

Net (loss) income

     1,920         60   1,980 

Translation adjustments

        (2,014)     76   (1,938)

Benefit plan adjustments, net of tax

        384         384 

Unrealized gain on cash flow hedge, net of tax

        204         204 

Compensation expense

  625               625 

Shares (acquired) issued, net

  (432)        141      (291)

Balance, September 24, 2021

  41,165   128,856   (24,041)  (14,942)  586   131,624 

Net (loss) income

     (3,836)        86   (3,750)

Translation adjustments

        (1,676)     (25)  (1,701)

Benefit plan adjustments, net of tax

        623         623 

Unrealized gain on cash flow hedge, net of tax

        735         735 

Compensation expense

  595               595 

Shares (acquired) issued, net

  (169)        (26)     (195)

Balance, December 31, 2021

 $41,591  $125,020  $(24,359) $(14,968) $647  $127,931 

 

  

Twin Disc, Inc. Shareholders’ Equity

 
          

Accumulated

             
          

Other

      

Non-

     
  

Common

  

Retained

  

Comprehensive

  

Treasury

  

Controlling

  

Total

 
  

Stock

  

Earnings

  

Income (Loss)

  

Stock

  

Interest

  

Equity

 

Balance, June 30, 2020

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

Net (loss) income

     (3,979)        42   (3,937)

Translation adjustments

        3,600      12   3,612 

Benefit plan adjustments, net of tax

        553         553 

Unrealized gain on cash flow hedge, net of tax

        75         75 

Compensation expense

  518               518 

Shares (acquired) issued, net

  (2,460)        2,236      (224)

Balance, September 25, 2020

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

Net (loss) income

     (4,313)        33   (4,280)

Translation adjustments

        4,887      12   4,899 

Benefit plan adjustments, net of tax

        555         555 

Unrealized gain on cash flow hedge, net of tax

        104         104 

Compensation expense

  562               562 

Shares (acquired) issued, net

  (1,458)        1,458      - 

Balance, December 25, 2020

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

 

13

 
 

Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended December 31, 2021 and December 25, 2020 are as follows:

 

  

Translation

  

Benefit Plan

  

Cash Flow

  

Net Investment

 
  

Adjustment

  

Adjustment

  

Hedges

  

Hedges

 

Balance at June 30, 2021

 $9,192  $(31,463) $(678) $334 

Translation adjustment during the quarter

  (2,014)  -   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   384   68   136 

Net current period other comprehensive (loss) income

  (2,014)  384   68   136 

Balance at September 24, 2021

 $7,178  $(31,079) $(610) $470 

Translation adjustment during the quarter

  (1,676)  -   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   623   232   503 

Net current period other comprehensive (loss) income

  (1,676)  623   232   503 

Balance at December 31, 2021

  5,502   (30,456)  (378)  973 

 

  

Translation

  

Benefit Plan

  

Cash Flow

 
  

Adjustment

  

Adjustment

  

Hedges

 

Balance at June 30, 2020

 $3,454  $(43,576) $(1,104)

Translation adjustment during the quarter

  3,600   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   553   75 

Net current period other comprehensive income

  3,600   553   75 

Balance at September 25, 2020

  7,054   (43,023)  (1,029)

Translation adjustment during the quarter

  4,887   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   555   104 

Net current period other comprehensive income

  4,887   555   104 

Balance at December 25, 2020

 $11,941  $(42,468) $(925)

 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 31, 2021 are as follows:

 

  

Amount Reclassified

   

Amount Reclassified

  
  

Quarter Ended

   

Two Quarters Ended

  
  

December 31, 2021

   

December 31, 2021

  

Changes in benefit plan items

          

Actuarial losses

 $572 

(a)

 $1,137 

(a)

Transition asset and prior service benefit

  (64)

(a)

  (128)

(a)

Total amortization

  508    1,009  

Income tax (benefit) expense

  (115)   2  

Total reclassification net of tax

 $623   $1,007  

 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 25, 2020 is as follows:

 

  

Amount Reclassified

   

Amount Reclassified

  
  

Quarter Ended

   

Two Quarters Ended

  
  

December 25, 2020

   

December 25, 2020

  

Changes in benefit plan items

          

Actuarial losses

 $796 

(a)

 $1,588 

(a)

Transition asset and prior service benefit

  (64)

(a)

  (127)

(a)

Total amortization

  732    1,461  

Income tax expense

  177    353  

Total reclassification net of tax

 $555   $1,108  

 

 

(a)

These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note G, "Pension and Other Postretirement Benefit Plans" for further details).

 

14

 
 
 

L.

Restructuring of Operations

 

Restructuring expenses

 

The Company has implemented various restructuring programs in response to unfavorable macroeconomic trends in certain of the Company’s markets since the fourth quarter of fiscal 2015. These programs primarily involved the reduction of workforce in several of the Company’s manufacturing locations, under a combination of voluntary and involuntary programs. During the fourth quarter of fiscal 2021, the Company undertook a series of steps to accelerate its focus on its core competencies, improve its fixed cost structure, and monetize some of its under-utilized assets.

 

With regard to its Belgian operations, on June 30, 2021, the Company announced a new phase in its restructuring plans. Under this plan, the Belgian operation’s workforce will be reduced by 23 employees. This reduction in force resulted in an initial accrual of $2,200, pertaining to the Company’s current estimate for the payment of severance benefits, which is expected to be completed by December 2022. The action was taken to allow the Belgian operation to focus its 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 $1,600.

 

In the second quarter, the Company and the union representing certain of the employees affected by the restructuring of the Belgian operations came to an agreement on a final settlement amount of $3,200. The Company booked the additional $1,000 in restructuring charges during the second quarter of fiscal 2022.

 

Total restructuring charges relating to streamlining operations totaled to $1,190 and $120 in the quarters ending December 31, 2021 and December 25, 2020, respectively. Total restructuring charges relating to streamlining operations totaled to $1,238 and $525 in the two quarters ending December 31, 2021 and December 25, 2020, respectively. Restructuring activities since June 2015 have resulted in the elimination of 259 full-time employees in the manufacturing segment. Accumulated costs to date under these programs within the manufacturing segment through December 31, 2021 were $16,754.

 

The following is a roll-forward of restructuring activity: 

 

Accrued restructuring liability, June 30, 2021

 $2,352 

Additions

  1,238 

Payments, adjustments and write-offs during the year

  (1,350)

Accrued restructuring liability, December 31, 2021

 $2,240 

 

Assets held for sale

 

To improve its fixed cost structure and monetize some of its under-utilized assets, the Company commenced the active marketing of three of its real estate properties, namely, its corporate headquarters in Racine, its propeller machining plant and office in Switzerland, and a spare warehouse in Italy during the fourth quarter of fiscal 2021. During the first quarter of fiscal 2022, the Company completed the sale of its propeller machining plant and office in Switzerland and received $9,138 in proceeds, net of fees and local taxes and recorded a gain of $2,939 in other operating income in the condensed consolidated statements of operations and comprehensive income.

 

 

M.

Earnings Per Share

 

The Company calculates basic earnings per share based upon the weighted average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period.  The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect.  Certain restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company, and are therefore included in computing earnings per share pursuant to the two-class method. 

 

15

 

The components of basic and diluted earnings per share were as follows:

 

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 31, 2021

  

December 25, 2020

  

December 31, 2021

  

December 25, 2020

 

Basic:

                

Net loss

 $(3,750) $(4,280) $(1,770) $(8,217)

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

  (86)  (33)  (144)  (75)

Less: Undistributed earnings attributable to unvested shares

  -   -   -   - 

Net (loss) income attributable to Twin Disc

  (3,836)  (4,313)  (1,914)  (8,292)
                 

Weighted average shares outstanding - basic

  13,296   13,255   13,288   13,227 
                 

Basic Loss Per Share:

                

Net loss per share - basic

 $(0.29) $(0.33) $(0.14) $(0.63)
                 

Diluted:

                

Net loss

 $(3,750) $(4,280) $(1,770) $(8,217)

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

  (86)  (33)  (144)  (75)

Less: Undistributed earnings attributable to unvested shares

  -   -   -   - 

Net (loss) income attributable to Twin Disc

  (3,836)  (4,313)  (1,914)  (8,292)
                 

Weighted average shares outstanding - basic

  13,296   13,255   13,288   13,227 

Effect of dilutive stock awards

  -   -   -   - 

Weighted average shares outstanding - diluted

  13,296   13,255   13,288   13,227 
                 

Diluted Loss Per Share:

                

Net loss per share - diluted

 $(0.29) $(0.33) $(0.14) $(0.63)

 

The following potential common shares were excluded from diluted EPS for the quarter and two quarters ended December 31, 2021 as the Company reported a net loss: 440.9 related to the Company’s unvested PSAs, 262.7 related to the Company’s unvested RS awards, and 67.4 related to the Company’s unvested RSUs.

 

The following potential common shares were excluded from diluted EPS for the quarter and two quarters ended December 25, 2020 as the Company reported a net loss: 433.1 related to the Company’s unvested PSAs, 380.9 related to the Company’s unvested RS awards, and 38.0 related to the Company’s unvested RSUs.

 

 

N.

Lease Liabilities

 

The Company leases certain office and warehouse space, as well as production and office equipment.

 

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 term of the lease, and the economic environments where the lease activity is concentrated.

 

16

 

The components of lease expense were as follows:

 

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 31, 2021

  

December 25, 2020

  

December 31, 2021

  

December 25, 2020

 

Finance lease cost:

                

Amortization of right-of-use assets

 $168  $148  $331  $267 

Interest on lease liabilities

  71   17   142   35 

Operating lease cost

  698   795   1,391   1,557 

Short-term lease cost

  37   3   40   12 

Variable lease cost

  42   15   81   31 

Total lease cost

  1,016   978   1,985   1,902 

Less: Sublease income

  (19)  (56)  (39)  (112)

Net lease cost

 $997  $922  $1,946  $1,790 

 

Other information related to leases was as follows:

 

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 31, 2021

  

December 25, 2020

  

December 31, 2021

  

December 25, 2020

 

Cash paid for amounts included in the measurement of lease liabilities:

                

Operating cash flows from operating leases

 $737  $758  $1,479  $1,528 

Operating cash flows from finance leases

  211   176   416   310 

Financing cash flows from finance leases

  71   17   142   35 

Right-of-use-assets obtained in exchange for lease obligations:

                

Operating leases

  232   105   396   105 

Finance leases

  133   55   307   4,671 

Weighted average remaining lease term (years):

                

Operating leases

          9.3   10.6 

Finance lease

          11.5   12.2 

Weighted average discount rate:

                

Operating leases

          7.2%  7.4%

Finance leases

          5.2%  5.2%

 

Approximate future minimum rental commitments under non-cancellable leases as of December 31, 2021 were as follows:         

 

  

Operating Leases

  

Finance Leases

 

2022

 $1,597  $438 

2023

  2,783   866 

2024

  2,510   866 

2025

  1,664   619 

2026

  1,532   530 

Thereafter

  9,972   4,550 

Total future lease payments

  20,058   7,869 

Less: Amount representing interest

  (6,243)  (2,580)

Present value of future payments

 $13,815  $5,289 

 

17

 

The following table provides a summary of leases recorded on the condensed consolidated balance sheet.

 

 

Balance Sheet Location

 

December 31, 2021

  

June 30, 2021

 

Lease Assets

         

Operating lease right-of-use assets

Right-of-use assets operating leases

 $13,795  $14,736 

Finance lease right-of-use assets

Property, plant and equipment, net

  5,113   5,244 
          

Lease Liabilities

         

Operating lease liabilities

Accrued liabilities

 $1,910  $1,870 

Operating lease liabilities

Lease obligations

  11,905   12,887 

Finance lease liabilities

Accrued liabilities

  579   541 

Finance lease liabilities

Other long-term liabilities

  4,711   4,836 

 

 

O.

Derivative Financial Instruments

 

From time to time, the Company enters into derivative instruments to manage risks relating to interest rate and foreign exchange rate volatility. The Company does not purchase, hold or sell derivative financial instruments for trading purposes. The Company’s practice is to terminate derivative transactions if the underlying asset or liability matures or is sold or terminated, or if it determines the underlying forecasted transaction is no longer probable of occurring.

 

The Company reports all derivative instruments on its consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes.

 

Interest Rate Swap Contracts

 

The Company has one outstanding interest rate swap contract as of December 31, 2021, with a notional amount of $14,500. It has been designated as a cash flow hedge in accordance with ASC 815, Derivatives and Hedging.

 

The primary purpose of the Company’s cash flow hedging activities is to manage the potential changes in value associated with interest payments on the Company’s LIBOR-based indebtedness. The Company records gains and losses on interest rate swap contracts qualifying as cash flow hedges in accumulated other comprehensive loss to the extent that these hedges are effective and until the Company recognizes the underlying transactions in net earnings, at which time these gains and losses are recognized in interest expense on its consolidated statements of operations and comprehensive income. Cash flows from derivative financial instruments are classified as cash flows from financing activities on the consolidated statements of cash flows. These contracts generally have original maturities of greater than twelve months.

 

Net unrealized after-tax losses related to cash flow hedging activities that were included in accumulated other comprehensive loss were $378 and $678 as of December 31, 2021, and June 30, 2021, respectively. The unrealized amounts in accumulated other comprehensive loss will fluctuate based on changes in the fair value of open contracts during each reporting period.

 

The Company estimates that $278 of net unrealized losses related to cash flow hedging activities included in accumulated other comprehensive loss will be reclassified into earnings within the next twelve months.

 

Derivatives Designated as Net Investment Hedges

 

The Company is exposed to foreign currency exchange risk related to its investment in net assets in foreign countries. As discussed in Note J, Long-term Debt, during the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan, with a notional amount of €6,500, as a net investment hedge to mitigate the risk of variability in its euro denominated net investments in wholly-owned foreign subsidiaries. All changes in the fair value of the euro revolver were then recorded in Accumulated Other Comprehensive Loss along with the foreign currency translation adjustments on those foreign investments. Net unrealized after-tax income related to net investment hedging activities that were included in Accumulated Other Comprehensive Loss were $973 and $334 as of December 31, 2021 and June 30, 2021, respectively.

 

18

 

Fair Value of Derivative Instruments

 

The fair value of derivative instruments included in the condensed consolidated balance sheets were as follows:

 

 

Balance Sheet Location

 

December 31, 2021

  

June 30, 2021

 

Derivative designated as hedge:

         

Interest rate swap

Accrued liabilities

 $277  $346 

Interest rate swap

Other long-term liabilities

 $311  $542 

 

The impact of the Company’s derivative instruments on the condensed consolidated statements of operations and comprehensive (loss) income for the quarters and two quarters ended December 31, 2021 and December 25, 2020, respectively, was as follows:

 

 

 

 

For the Quarter Ended

  

For the Two Quarters Ended

 
 

Statement of Comprehensive

Income Location

 

December 31, 2021

  

December 25, 2020

  

December 31, 2021

  

December 25, 2020

 

Derivative designated as hedge:

                 

Interest rate swap

Interest expense

 $98  $101  $187  $199 

Interest rate swap

Unrealized gain (loss) on cash flow hedge

  232   104   300   179 

Net investment hedge

Unrealized gain on hedges

  503   -   639   - 
                  

Derivatives not designated as hedges:

                 

Foreign currency forward contracts

Other income (expense), net

 $-  $-  $-  $(13)

 

 

 

Item 2.         Management Discussion and Analysis

 

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated financial statements as of December 31, 2021, and related notes, as reported in Item 1 of this Quarterly Report.

 

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

 

In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company’s Annual Report filed on Form 10-K for June 30, 2021, as supplemented in this Quarterly Report, could cause actual results to be materially different from what is expressed or implied in any forward-looking statement.

 

Results of Operations

 

(In thousands)

                                                               
   

Quarter Ended

   

Two Quarters Ended

 
   

December 31, 2021

   

% of Net Sales

   

December 25, 2020

   

% of Net Sales

   

December 31, 2021

   

% of Net Sales

   

December 25, 2020

   

% of Net Sales

 

Net sales

  $ 59,889             $ 48,557             $ 107,650             $ 94,737          

Cost of goods sold

    46,407               39,679               80,721               76,156          

Gross profit

    13,482       22.5 %     8,878       18.3 %     26,929       25.0 %     18,581       19.6 %

Marketing, engineering and administrative expenses

    15,267       25.5 %     13,361       27.5 %     28,357       26.3 %     25,805       27.2 %

Restructuring of operations

    1,190       2.0 %     120       0.2 %     1,238       1.2 %     525       0.6 %

Other operating income

    45       0.1 %             0.0 %     (2,894 )     -2.7 %             0.0 %

Income (loss) from operations

  $ (3,020 )     -5.0 %   $ (4,603 )     -9.5 %   $ 228       0.2 %   $ (7,749 )     -8.2 %

 

19

 

Comparison of the Second Quarter of Fiscal 2022 with the Second Quarter of Fiscal 2021

 

Net sales for the second quarter increased 23.3%, or $11.3 million, to $59.9 million from $48.6 million in the same quarter a year ago. The Company continues to experience improving market conditions across most markets served, although the North American oil and gas market demand for new units remains depressed. The Company’s ability to ship product continues to be hampered by a variety of supply chain challenges. These include supplier capacity constraints, extended supplier lead times and a global shortage of shipping containers. Global sales of industrial products improved 45.8% from the prior year, while sales of marine and propulsion products improved by 14.5% and off-highway transmission demand increased 13.4% compared with the prior year second quarter. The North American region enjoyed the most significant sales improvement ($4.5 million or 29.9%) due to generally improving market conditions and increased aftermarket demand in the North American energy market. The European region saw a modest increase ($0.8 million or 4.6%), with project delays and supply chain challenges hampering volume. Sales into the Asia Pacific region increased significantly ($2.0 million or 17.2%) due to the generally improving market conditions and continued strength in the Australian pleasure craft market. Currency translation had an unfavorable impact on second quarter fiscal 2022 sales compared to the second quarter of the prior year totaling $1.0 million primarily due to the weakening of the euro against the U.S. dollar.

 

Sales at our manufacturing segment increased 18.2%, or $7.6 million, versus the same quarter last year. The U.S. manufacturing operations experienced a 28.6%, or $5.4 million, increase in sales versus the second fiscal quarter of 2021, with recovering markets following the significant impact of the COVID-19 pandemic, partially offset by the supply chain challenges noted above. The Company’s operation in the Netherlands was up $0.4 million (3.2%) compared to the second fiscal quarter of 2021, with many boat construction projects being delayed due to the COVID-19 crisis. The Company’s Belgian operation saw a decrease compared to the prior year second quarter (5.4% or $0.3 million), with supply chain challenges combined with a negative translation impact. The Company’s Italian manufacturing operations, benefiting from a resurgent pleasure craft market and generally improving market conditions, were up $1.6 million (31.7%) compared to the second quarter of fiscal 2021. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.5 million (56.9%) compared to the prior year second quarter.

 

Our distribution segment experienced an increase in sales of $5.1 million (21.8%) compared to the second quarter of fiscal 2021. The Company’s Asian distribution operations in Singapore, China and Japan were up 11.6% from the prior year on improving demand for commercial marine and patrol craft products in the region, along with improved delivery of product from the Company’s manufacturing operations. The Company’s North America distribution operation saw an increase of 10.1%, while the Company’s European distribution operation saw an increase of $1.1 million (27.0%) primarily due to improving market conditions. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw continued strong growth (63.7% increase from the prior year second fiscal quarter), on improving pleasure craft market trends in the region.

 

Gross profit as a percentage of sales for the second quarter of fiscal 2022 improved to 22.5%, compared to 18.3% for the same period last year. The current quarter result reflects the benefit of improved volume for the quarter ($2.1 million) and a favorable mix impact ($3.6 million – primarily due to strong aftermarket demand). These improvements were partially offset by the negative impact of inflationary pressures on cost, as we have seen significant price increases across our supply base. We have implemented price increases to offset these inflationary pressures going forward.

 

For the fiscal 2022 second quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 25.5%, compared to 27.5% for the fiscal 2021 second quarter. ME&A expenses increased $1.9 million (14.3%) versus the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of increases to domestic salaries and benefits ($0.7 million), the accrual for the global bonus program ($0.7 million), professional fees ($0.4 million), marketing activities ($0.2 million) and other net spending increases of $0.6 million. These increases were partially offset by a Dutch COVID-19 subsidy recorded in the quarter, which reduced ME&A expense by $0.7 million.

 

The Company incurred restructuring charges of approximately $1.2 million during the second quarter of fiscal 2022, primarily associated with the final negotiated settlement related to the Belgian restructuring program announced in June 2021. The total cost of this program is now estimated at $3.2 million, and the Company anticipated annual pre-tax savings of approximately $1.6 million upon completion of this program.

 

Interest expense remained flat at $0.6 million on stable borrowings and average interest rates.

 

Other income of $0.5 million for the second fiscal quarter was primarily attributable to translation gains related to the Company’s euro-denominated liabilities.

 

The fiscal 2022 second quarter effective tax rate was negative 19.9% compared to 38.1% in the prior fiscal year second quarter. The current year rate was impacted by the fact that the domestic entity recognized a full valuation allowance in the fourth quarter of fiscal 2021, resulting in no tax benefits being recognized for current domestic losses.

 

20

 

Comparison of the First Two Quarters of Fiscal 2022 with the First Two Quarters of Fiscal 2021

 

Net sales for the first two quarters increased 13.6%, or $12.9 million, to $107.7 million from $94.7 million in the same period a year ago. The Company experienced a broad-based recovery in demand across most of the markets served, as the impact of the COVID-19 crisis on the Company’s global markets begins to subside. Global sales of industrial products improved by 29.2% from the prior year, while off-highway transmission sales increased by 6.5% and marine and propulsion grew by 7.9%. The North American region experienced the most significant sales improvement ($7.1 million or 24.2%) due to a broad-based market recovery and extremely strong aftermarket demand in the North American oil and gas segment. The North American region improved from 31% of total sales in the prior year first two quarters to 34% in the fiscal 2022 comparable period. The European region saw a moderate improvement ($1.1 million and 23.0%), with strengthening market conditions offset by supply chain challenges. Sales into the Asia Pacific region increased ($0.9 million or 3.5%), due to stable demand for oil and gas units in China and an improving marine market in Australia. Currency translation had an unfavorable impact on first half fiscal 2022 sales compared to the same period of the prior year totaling $0.5 million primarily due to the weakening of the euro against the U.S. dollar.

 

Sales at our manufacturing segment increased 13.1%, or $10.6 million, versus the first two quarters of last year. The U.S. manufacturing operation experienced a 22.8%, or $8.6 million, increase in sales versus the first two quarters of fiscal 2021, with market recovery seen across all product lines, hampered somewhat by supply chain challenges during the recent six month period. The Company’s operation in the Netherlands was essentially flat (down 1.7% or $0.3 million) compared to the first two quarters of fiscal 2021, with many boat construction projects delayed due to the COVID-19 crisis. The Company’s Belgian operation also saw a slight decrease compared to the prior year (2.2% or $0.2 million), with supply chain difficulties offsetting improving market conditions. The Company’s Italian manufacturing operations were up $1.7 million (16.7%) compared to the first two quarters of fiscal 2021, with most of the improvement coming in the second quarter thanks to a resurgent pleasure craft market. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.8 million (43.0%) compared to the prior year comparable period.

 

Our distribution segment experienced an increase in sales of $3.2 million (7.1%) compared to the first two quarters of fiscal 2021. The Company’s Asian distribution operations in Singapore, China and Japan were down 4.9% from the prior year as supply chain challenges during the recent six month peiod delayed delivery from the manufacturing operations. The Company’s North America distribution operation saw an increase of 6.2% on an improving overall market demand. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw incredibly strong growth (40.5% increase from the prior year first two quarters), on improving pleasure craft marine market trends in the region. The Company’s European distribution operation saw a slight increase of $0.2 million (2.0%) on improving market conditions.

 

Gross profit as a percentage of sales for the first two quarters of fiscal 2022 improved to 25.0%, compared to 19.6% for the same period last year. The improvement is attributable to increased volume ($2.6 million), a more favorable mix ($4.9 million – primarily due to increased aftermarket volume) and the net positive impact of government subsidies ($1.4 million). The Company was able to offset significant inflationary cost increases in the first half with targeted cost reduction efforts.

 

For the fiscal 2022 first two quarters, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 26.3%, compared to 27.2% for the fiscal 2021 comparable period. ME&A expenses increased $2.6 million (9.9%) versus the same period last fiscal year. The increase in ME&A spending for the first half was comprised of increases to salaries and benefits ($1.1 million), global bonus expense ($1.3 million), professional fees ($0.5 million), marketing expenses ($0.2 million) and corporate travel ($0.2 million). These increases were partially offset by a by a Dutch COVID-19 subsidy recorded in the second quarter, which reduced ME&A expense by $0.7 million.

 

The Company incurred restructuring charges of approximately $1.2 million during the first half of fiscal 2022, primarily associated with final negotiated settlement related to the Belgian restructuring program announced in June 2021. The total cost of this program is now estimated at $3.2 million, and the Company anticipated annual pre-tax savings of approximately $1.6 million upon completion of this program. The Company continues to focus on actively managing its cost structure and reducing fixed costs in light of the ongoing market challenges.

 

21

 

Interest expense was essentially flat with the prior year, reflecting consistent borrowing levels and average interest rates.

 

Other income of $0.1 million for the first two fiscal quarters was primarily attributable to translation gains related to the Company’s euro denominated liabilities.

 

For the six months ended December 31, 2021 and December 25, 2020, the Company’s effective income tax rate was -131.0% and 30.3%, respectively. The current year rate was impacted by the fact that the domestic entity recognized a full valuation allowance in the fourth quarter of fiscal 2021, resulting in no tax benefits being recognized for current domestic losses.

 

Financial Condition, Liquidity and Capital Resources

 

Comparison between December 31, 2021 and June 30, 2021

 

As of December 31, 2021, the Company had net working capital of $105.9 million, which represents a decrease of $7.5 million, or 6.6%, from the net working capital of $113.4 million as of June 30, 2021.

 

Cash decreased $1.2 million to $11.1 million as of December 31, 2021, versus $12.3 million as of June 30, 2021. The majority of the cash as of December 31, 2021, is at the Company’s overseas operations in Europe ($4.4 million) and Asia-Pacific ($6.5 million).

 

Trade receivables of $34.0 million were down $5.5 million, or approximately 13.8%, when compared to last fiscal year-end. The impact of foreign currency translation was to decrease accounts receivable by $0.7 million versus June 30, 2021. As a percent of sales, trade receivables finished at 56.8% in the second quarter of fiscal 2022 compared to 65.7% for the comparable period in fiscal 2021 and 59.6% for the fourth quarter of fiscal 2021.

 

Inventories increased by $9.0 million, or 7.8%, versus June 30, 2021 to $123.9 million. The impact of foreign currency translation was to decrease inventories by $2.1 million versus June 30, 2021. The remaining increase was seen primarily at the Company’s operations in North American ($7.5 million), the Netherlands ($2.9 million) and Australia ($2.0 million). These increases were primarily driven by an imbalance in the supply chain, resulting in excess inventory waiting for missing components to finish assembly, or waiting for customers to accept shipment. On a consolidated basis, as of December 31, 2021, the Company’s backlog of orders to be shipped over the next six months approximates $98.9 million, compared to $70.3 million at June 30, 2021 and $76.6 million at December 25, 2020. As a percentage of six-month backlog, inventory has decreased from 163% at June 30, 2021 to 125% at December 31, 2021.

 

Net property, plant and equipment decreased $2.3 million (5.1%) to $43.2 million versus $45.5 million at June 30, 2021. The Company spent $1.8 million on capital equipment in the first half, offset by an unfavorable exchange impact ($0.5 million) and depreciation ($3.6 million). The capital spending in the first quarter reflects primarily maintenance capital. In total, the Company expects to invest between $7 and $10 million in capital assets in fiscal 2022. The Company continues to review its capital plans based on overall market conditions and availability of capital, and may make changes to its capital plans accordingly. The Company’s capital program is focused on modernizing key core manufacturing, assembly and testing processes and improving efficiencies at its facilities around the world.

 

Accounts payable as of December 31, 2021, of $31.2 million was up $0.2 million, or 0.7%, from June 30, 2021. The impact of foreign currency translation was to reduce accounts payable by $0.7 million versus June 30, 2021. The remaining increase is primarily related to the increased purchasing activities in light of increased volume in the quarter.

 

Total borrowings and long-term debt as of December 31, 2021, decreased $6.8 million to $25.3 million versus $32.1 million at June 30, 2021. This reduction is primarily attributable to the repatriation of cash from Switzerland following the sale of our Swiss facility in the first fiscal quarter. During the first half, the Company reported negative free cash flow of $2.8 million (defined as operating cash flow less acquisitions of fixed assets), which excludes the sale of the Swiss facility for $9.1 million. The Company ended the quarter with total debt, net of cash, of $14.1 million, compared to $19.7 million at June 30, 2021, for a net improvement of $5.6 million.

 

Total equity decreased $2.7 million, or 2.1%, to $127.9 million as of December 31, 2021. The net loss during the first half decreased equity by $1.9 million, partially offset by an unfavorable foreign currency translation of $2.0 million. The net change in common stock and treasury stock resulting from the accounting for stock-based compensation increased equity by $0.7 million. The net remaining decrease in equity of $1.5 million primarily represents the amortization of net actuarial loss and prior service cost on the Company’s defined benefit pension plans, along with the unrealized gain on cash flow hedges.

 

22

 

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.

 

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 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.

 

23

 

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 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 Paycheck Protection Program 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.

 

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 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.

 

On September 30, 2021, the Company entered into a First Amended and Restated Forbearance Agreement and Amendment No. 7 to Credit Agreement (the “Amended and Restated Forbearance Agreement”) that amends the Credit Agreement dated as of June 29, 2018, as amended between the Company and the Bank.

 

24

 

The Amended and Restated Forbearance Agreement extends the Forbearance Period through February 28, 2022, or if earlier, through the date on which a default under the Amended and Restated Forbearance Agreement or Credit Agreement occurs. During the extended Forbearance Period, the Bank will continue to forbear from exercising its rights and remedies against the Company under the Credit Agreement with respect to the Company’s noncompliance with its minimum EBITDA covenants. The Amended and Restated Forbearance Agreement also makes certain adjustments to the Credit Agreement, including:

 

 

Permitting the Company to sell its manufacturing facility in Novazzano, Switzerland for a gross sales price of approximately $10 million, resulting in Net Cash Proceeds of approximately $8.7 million (the “Rolla Disposition”).

 

Requiring the Company to promptly repatriate approximately $7 million of the Net Cash Proceeds from the Rolla Disposition (the “Rolla Repatriation”), and to apply $1 million of such Net Cash Proceeds to the Term Loan and the remainder to the revolving Loans under the Credit Agreement.

 

Upon completion of the Rolla Repatriation: (1) reducing the portion of the Borrowing Base that is based on Eligible Inventory from the lesser of $35 million or 50% of the value of Eligible Inventory to the lesser of $30 million or 50% of the value of Eligible Inventory; and (2) reducing the Revolving Credit Commitment from a maximum of $42.5 million to a maximum of $40 million.

 

When the Forbearance Period ends, the Bank’s forbearance under the Forbearance Agreement will cease, and 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 December 31, 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 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.

 

There are no material off-balance-sheet arrangements, and the Company continues to have sufficient liquidity for near-term needs. The Company had approximately $24.0 million of available borrowings under the Credit Agreement as of December 31, 2021. The Company expects to continue to generate enough cash from operations, as well as have sufficient capacity under its credit facilities, to meet its operating and investing needs. As of December 31, 2021, the Company also had cash of $11.1 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 decreased $7.5 million, or 6.6%, during the first half of fiscal 2022, and the current ratio declined slightly to 2.3 for December 31, 2021, compared to 2.4 for June 30, 2021. The decrease in net working capital was primarily driven by a decrease to assets held for sale and trade receivables, partially offset by an increase to inventory.

 

The Company expects capital expenditures to be approximately $7 million - $10 million in fiscal 2022. These anticipated expenditures reflect the Company’s plans to modernize its equipment and facilities, and enhance its global sourcing program and new products.

 

25

 

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

 

The Company has approximately $0.8 million of unrecognized tax benefits, including related interest and penalties, as of December 31, 2021, which, if recognized, would favorably impact the effective tax rate. See Note H, Income Taxes, of the Condensed Consolidated Financial Statements for disclosures surrounding uncertain income tax positions.

 

The Company maintains defined benefit pension plans for some of its operations in the United States and Europe. The Company has established the Benefits Committee (a non-Board management committee) to oversee the operations and administration of the defined benefit plans. The Company estimates that fiscal 2022 contributions to all defined benefit plans will total $0.7 million. As of December 31, 2021, $0.4 million in contributions have been made.

 

New Accounting Releases

 

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

 

Critical Accounting Policies

 

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

 

The Company’s critical accounting policies are described in Item 7 of the Company’s Annual Report filed on Form 10-K for June 30, 2021. There have been no significant changes to those accounting policies subsequent to June 30, 2021.

 

 

Item 3.         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.

 

 

Item 4.         Controls and Procedures

 

(a)         Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) as of the end of the period covered by this report.  Based on such evaluation,  the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

 

In the fourth quarter of fiscal 2021, management identified a material weakness in internal control 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.  

 

26

 

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 was a non-cash adjustment, the Company concluded that it constituted a material weakness in its internal control 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 its 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.

 

27

 

 

(b)         Changes in Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  During the most recent fiscal quarter, other than the remediation of the material weakness reported at the fiscal year-end 2021, no changes were made which have materially affected, or which are reasonably likely to materially affect, our internal control over financial reporting. 

 

 

Part II.         OTHER INFORMATION

 

Item 1.         Legal Proceedings

 

The Company is a defendant in several product liability or related claims which are considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition of the Company.

 

Item 1A.         Risk Factors

 

There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 2021 Annual Report on Form 10-K.

 

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)         Unregistered Sales of Equity Securities

 

There were no securities of the Company sold by the Company during the quarter ended December 31, 2021, which were not registered under the Securities Act of 1933, in reliance upon an exemption from registration provided by Section 4 (2) of the Act.

 

(b)         Use of Proceeds

 

Not applicable.

 

(c)         Issuer Purchases of Equity Securities

 

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

         

September 25 –  October 29, 2021

40,335

NA

0

315,000

         

October 30 – November 26, 2021

0

NA

0

315,000

         

November 27 – December 31, 2021

0

NA

0

315,000

         

Total

0

NA

0

315,000

 

The amounts shown in Column (a) above represent shares of common stock delivered to the Company as payment of withholding taxes due on the vesting of restricted stock and restricted stock units issued under the Twin Disc, Incorporated 2018 Long-Term Incentive Compensation Plans.

 

28

 

Under authorizations granted by the Board of Directors on February 1, 2008 and July 27, 2012, the Company was authorized to purchase 500,000 shares of its common stock.  This authorization has no expiration, and as of December 31, 2021, 315,000 may yet be purchased under these authorizations. The Company did not purchase any shares of its common stock pursuant to these authorizations during the quarter ended December 31, 2021.

 

The discussion of limitations upon the payment of dividends as a result of the Credit Agreement between the Company and BMO Harris Bank, N.A., as discussed in Part I, Item 2, "Management's Discussion and Analysis " under the heading "Financial Condition, Liquidity and Capital Resources," is incorporated herein by reference.

 

Item 3.         Defaults Upon Senior Securities

 

None.

 

Item 5.         Other Information

 

None.

 

29

 

 

Item 6.         Exhibits

 

31a    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31b   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32a   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32b   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   Inline XBRL Instance Document
     
101.SCH   Inline XBRL Schema
     
101.CAL   Inline XBRL Calculation Linkbase
     
101.DEF   Inline XBRL Definition Linkbase
     
101.LAB   Inline XBRL Label Linkbase
     
101.PRE   Inline XBRL Presentation Linkbase
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

30

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

TWIN DISC, INCORPORATED

 

(Registrant)

   
   

Date: February 9, 2022

/s/ JEFFREY S. KNUTSON

 

Jeffrey S. Knutson

 

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

 

Chief Accounting Officer

 

 

 

31
ex_331154.htm

Exhibit 31a

CERTIFICATION

 

I, John H. Batten, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Twin Disc, Incorporated;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

 

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

 

Date: February 9, 2022

/s/ JOHN H. BATTEN

 

John H. Batten

 

President and Chief Executive Officer

 

 

 

 
ex_331155.htm

Exhibit 31b

CERTIFICATION

 

I, Jeffrey S. Knutson, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Twin Disc, Incorporated;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

 

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

 

Date: February 9, 2022

/s/ JEFFREY S. KNUTSON

 

Jeffrey S. Knutson

 

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

 

 

 

 
ex_331156.htm

EXHIBIT 32a

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Twin Disc, Incorporated (the “Company”) on Form 10-Q for the fiscal quarter ending December 31, 2021, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, John H. Batten, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 

(1)         The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

 

(2)         The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

Date: February 9, 2022

/s/ JOHN H. BATTEN

 

John H. Batten

 

President and Chief Executive Officer

 

 

 

 
ex_331157.htm

EXHIBIT 32b

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Twin Disc, Incorporated (the “Company”) on Form 10-Q for the fiscal quarter ending December 31, 2021, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, Jeffrey S. Knutson, Vice President – Finance, Chief Financial Officer, Treasurer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 

(1)         The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

 

(2)         The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

Date: February 9, 2022

/s/ JEFFREY S. KNUTSON

 

Jeffrey S. Knutson

 

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