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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 March 25, 2022

 

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 April 29, 2022, the registrant had 13,651,611 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)

 

  

March 25, 2022

  

June 30, 2021

 
         

ASSETS

        

Current assets:

        

Cash

 $12,825  $12,340 

Trade accounts receivable, net

  38,977   39,491 

Inventories

  131,080   114,967 

Assets held for sale

  3,082   9,539 

Prepaid expenses

  6,984   5,704 

Other

  8,447   9,926 

Total current assets

  201,395   191,967 
         

Property, plant and equipment, net

  42,753   45,463 

Right-of-use assets operating leases

  13,692   14,736 

Intangible assets, net

  13,944   17,480 

Deferred income taxes

  2,258   2,511 

Other assets

  3,682   3,256 
         

Total assets

 $277,724  $275,413 
         

LIABILITIES AND EQUITY

        

Current liabilities:

        

Current maturities of long-term debt

 $2,000  $2,000 

Accounts payable

  34,195   31,011 

Accrued liabilities

  48,779   45,549 

Total current liabilities

  84,974   78,560 
         

Long-term debt

  32,069   30,085 

Lease obligations

  11,543   12,887 

Accrued retirement benefits

  10,065   11,176 

Deferred income taxes

  3,959   5,045 

Other long-term liabilities

  5,659   7,000 
         

Total liabilities

  148,269   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

  42,048   40,972 

Retained earnings

  127,251   126,936 

Accumulated other comprehensive loss

  (25,724)  (22,615)
   143,575   145,293 

Less treasury stock, at cost (965,987 and 984,139 shares, respectively)

  14,805   15,083 
         

Total Twin Disc shareholders' equity

  128,770   130,210 
         

Noncontrolling interest

  685   450 
         

Total equity

  129,455   130,660 
         

Total liabilities and equity

 $277,724  $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 Three Quarters Ended

 
  

March 25, 2022

  

March 26, 2021

  

March 25, 2022

  

March 26, 2021

 
                 

Net sales

 $59,289  $57,640  $166,939  $152,377 

Cost of goods sold

  41,598   43,678   122,319   119,835 

Gross profit

  17,691   13,962   44,620   32,542 
                 

Marketing, engineering and administrative expenses

  14,396   13,196   42,753   39,000 

Restructuring expenses

  303   251   1,542   777 

Other operating income

  (63)  -   (2,957)  - 

Income (loss) from operations

  3,055   515   3,282   (7,235)
                 

Interest expense

  490   606   1,594   1,769 

Other (income) expense, net

  (498)  (557)  (608)  2,314 
   (8)  49   986   4,083 
                 

Income (loss) before income taxes and noncontrolling interest

  3,063   466   2,296   (11,318)

Income tax expense (benefit)

  753   300   1,757   (3,267)
                 

Net income (loss)

  2,310   166   539   (8,051)

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

  (79)  (72)  (223)  (147)
                 

Net income (loss) attributable to Twin Disc

 $2,231  $94  $316  $(8,198)
                 

Income (loss) per share data:

                

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

 $0.17  $0.01  $0.02  $(0.62)

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

 $0.17  $0.01  $0.02  $(0.62)
                 

Weighted average shares outstanding data:

                

Basic shares outstanding

  13,397   13,269   13,339   13,240 

Diluted shares outstanding

  13,457   13,295   13,373   13,240 
                 

Comprehensive income (loss)

                

Net income (loss)

 $2,310  $166  $539  $(8,051)

Benefit plan adjustments, net of income taxes of $4, $177, $4 and $529, respectively

  505   583   1,512   1,691 

Foreign currency translation adjustment

  (2,721)  (3,008)  (6,359)  5,503 

Unrealized gain on cash flow hedge, net of income taxes of $0, $60, $0 and $115, respectively

  810   193   1,748   372 

Comprehensive income (loss)

  904   (2,066)  (2,560)  (485)

Less: Comprehensive income (loss) attributable to noncontrolling interest

  38   (34)  235   (133)
                 

Comprehensive income (loss) attributable to Twin Disc

 $942  $(2,100) $(2,325) $(618)

 

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 Three Quarters Ended

 
   

March 25, 2022

   

March 26, 2021

 
                 

Cash flows from operating activities:

               

Net income (loss)

  $ 539     $ (8,051 )

Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities:

               

Depreciation and amortization

    7,317       8,366  

Gain on sale of assets

    (2,939 )     -  

Restructuring expenses

    (487 )     215  

Provision for deferred income taxes

    (1,383 )     (6,052 )

Stock compensation expense and other non-cash changes, net

    2,642       1,934  

Net change in operating assets and liabilities

    (12,912 )     8,603  
                 

Net cash (used) provided by operating activities

    (7,223 )     5,015  
                 

Cash flows from investing activities:

               

Acquisitions of property, plant and equipment

    (2,371 )     (3,851 )

Proceeds from sale of fixed assets

    9,152       76  

Proceeds on note receivable

    500       700  

Other, net

    465       (18 )
                 

Net cash provided (used) by investing activities

    7,746       (3,093 )
                 

Cash flows from financing activities:

               

Borrowings under revolving loan arrangement

    78,142       56,463  

Repayments of revolver loans

    (73,192 )     (58,497 )

Repayments of other long term debt

    (2,789 )     (411 )

Payments of withholding taxes on stock compensation

    (487 )     (224 )
                 

Net cash provided (used) by financing activities

    1,674       (2,669 )
                 

Effect of exchange rate changes on cash

    (1,712 )     1,653  
                 

Net change in cash

    485       906  
                 

Cash:

               

Beginning of period

    12,340       10,688  
                 

End of period

  $ 12,825     $ 11,594  

 

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:

 

   

March 25, 2022

   

June 30, 2021

 

Inventories:

               

Finished parts

  $ 68,166     $ 59,761  

Work in process

    19,580       17,908  

Raw materials

    43,334       37,298  
    $ 131,080     $ 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 March 25, 2022 and March 26, 2021:

 

   

For the Quarter Ended

   

For the Three Quarters Ended

 
   

March 25, 2022

   

March 26, 2021

   

March 25, 2022

   

March 26, 2021

 

Reserve balance, beginning of period

  $ 3,483     $ 4,474     $ 4,369     $ 4,460  

Current period expense and adjustments

    339       805       658       2,550  

Payments or credits to customers

    (518 )     (995 )     (1,688 )     (2,814 )

Translation

    (27 )     (28 )     (62 )     60  

Reserve balance, end of period

  $ 3,277     $ 4,256     $ 3,277     $ 4,256  

 

The current portion of the warranty accrual ($2,757 and $3,314 as of March 25, 2022 and March 26, 2021, respectively) is reflected in accrued liabilities, while the long-term portion ($520 and $942 as of March 25, 2022 and March 26, 2021, 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 Three Quarters Ended

 
   

March 25, 2022

   

March 26, 2021

   

March 25, 2022

   

March 26, 2021

 

Net sales

                               

Manufacturing segment sales

  $ 56,403     $ 52,138     $ 147,296     $ 132,338  

Distribution segment sales

    23,660       26,221       72,485       71,950  

Inter/Intra segment elimination – manufacturing

    (16,672 )     (15,074 )     (40,815 )     (37,892 )

Inter/Intra segment elimination – distribution

    (4,102 )     (5,645 )     (12,027 )     (14,019 )
    $ 59,289     $ 57,640     $ 166,939     $ 152,377  

Net (loss) income attributable to Twin Disc

                               

Manufacturing segment net (loss) income

  $ 6,000     $ 2,422     $ 9,230     $ (3,352 )

Distribution segment net income

    1,415       697       3,396       2,352  

Corporate and eliminations

    (5,184 )     (3,025 )     (12,310 )     (7,198 )
    $ 2,231     $ 94     $ 316     $ (8,198 )

 

Assets

 

March 25, 2022

   

June 30, 2021

 

Manufacturing segment assets

  $ 356,154     $ 364,379  

Distribution segment assets

    54,629       46,956  

Corporate assets and elimination of intercompany assets

    (133,059 )     (135,922 )
    $ 277,724     $ 275,413  

 

Disaggregated revenue:

 

The following table presents details deemed most relevant to the users of the financial statements for the quarters and three quarters ended March 25, 2022 and March 26, 2021.

 

Net sales by product group for the quarter ended March 25, 2022 is summarized as follows:

 

   

Manufacturing

   

Distribution

   

Elimination of

Intercompany Sales

   

Total

 

Industrial

  $ 7,947     $ 1,449     $ (935 )   $ 8,461  

Land-based transmissions

    17,448       7,173       (8,535 )     16,086  

Marine and propulsion systems

    30,820       13,108       (10,766 )     33,162  

Other

    188       1,930       (538 )     1,580  

Total

  $ 56,403     $ 23,660     $ (20,774 )   $ 59,289  

 

Net sales by product group for the quarter ended March 26, 2021 is summarized as follows:

 

   

Manufacturing

   

Distribution

   

Elimination of

Intercompany Sales

   

Total

 

Industrial

  $ 5,652     $ 1,491     $ (1,307 )   $ 5,836  

Land-based transmissions

    13,793       6,892       (5,419 )     15,266  

Marine and propulsion systems

    32,671       15,016       (13,951 )     33,736  

Other

    22       2,822       (42 )     2,802  

Total

  $ 52,138     $ 26,221     $ (20,719 )   $ 57,640  

 

Net sales by product group for the three quarters ended March 25, 2022 is summarized as follows:

 

   

Manufacturing

   

Distribution

   

Elimination of

Intercompany Sales

   

Total

 

Industrial

  $ 20,939     $ 4,377     $ (3,016 )   $ 22,300  

Land-based transmissions

    41,158       18,775       (18,287 )     41,646  

Marine and propulsion systems

    84,968       41,330       (30,983 )     95,315  

Other

    231       8,003       (556 )     7,678  

Total

  $ 147,296     $ 72,485     $ (52,842 )   $ 166,939  

 

7

 

Net sales by product group for the three quarters ended March 26, 2021 is summarized as follows:

 

   

Manufacturing

   

Distribution

   

Elimination of

Intercompany Sales

   

Total

 

Industrial

  $ 15,744     $ 4,168     $ (3,369 )   $ 16,543  

Land-based transmissions

    34,388       19,267       (14,388 )     39,267  

Marine and propulsion systems

    82,152       41,996       (34,095 )     90,053  

Other

    54       6,519       (59 )     6,514  

Total

  $ 132,338     $ 71,950     $ (51,911 )   $ 152,377  

 

 

F.

Stock-Based Compensation

 

Performance Stock Awards (PSA)

 

During the three 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 March 25, 2022 and March 26, 2021, 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 $237 and $132 was recognized for the quarters ended March 25, 2022 and March 26, 2021, respectively, related to PSAs. Compensation expense of $672 and $360 was recognized for the three quarters ended March 25, 2022 and March 26, 2021, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at March 25, 2022 was $9.18. At March 25, 2022, the Company had $2,895 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 March 25, 2022 and March 26, 2021 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 three quarters of fiscal 2022 and 2021, the Company granted 51.7 and 250.3 service based restricted shares, respectively, to employees and non-employee directors. There were 268.5 and 377.5 unvested shares outstanding at March 25, 2022 and March 26, 2021, respectively. A total of 29.8 and 6.8 shares of RS were forfeited during the three quarters ended March 25, 2022 and March 26, 2021, respectively. Compensation expense of $294 and $302 associated with RS was recognized for the quarters ended March 25, 2022 and March 26, 2021, respectively. Compensation expense of $913 and $991 associated with RS was recognized for the three quarters ended March 25, 2022 and March 26, 2021, respectively. The total fair value of RS grants vested as of March 25, 2022 and March 26, 2021 was $1,695 and $533, respectively. As of March 25, 2022, the Company had $840 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 three quarters of fiscal 2022 and 2021, the Company granted 67.4 and 0.0 of employment based RSUs, respectively. There were 67.4 and 34.8 unvested RSUs outstanding at March 25, 2022 and March 26, 2021, respectively. Compensation expense of $89 and $90 was recognized for the quarters ended March 25, 2022 and March 26, 2021, respectively. Compensation expense of $255 and $253 associated with RSU’s was recognized for the three quarters ended March 25, 2022 and March 26, 2021, respectively. The total fair value of restricted stock units vested as of March 25, 2022 and March 26, 2021 was $475 and $25, respectively. The weighted average grant date fair value of the unvested awards at March 25, 2022 was $14.19. As of March 25, 2022, the Company had $727 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 Three Quarters Ended

 
   

March 25, 2022

   

March 26, 2021

   

March 25, 2022

   

March 26, 2021

 

Pension Benefits:

                               

Service cost

  $ 137     $ 144     $ 406     $ 432  

Prior service cost

    10       16       30       48  

Interest cost

    709       715       2,055       2,072  

Expected return on plan assets

    (1,258 )     (1,133 )     (3,773 )     (3,400 )

Amortization of transition obligation

    9       9       28       28  

Amortization of prior service cost

    (4 )     (4 )     (12 )     (12 )

Amortization of actuarial net loss

    562       811       1,687       2,434  

Net periodic benefit cost

  $ 165     $ 558     $ 421     $ 1,602  
                                 

Postretirement Benefits:

                               

Service cost

  $ 4     $ 4     $ 11     $ 12  

Interest cost

    35       39       105       116  

Amortization of prior service cost

    (69 )     (69 )     (206 )     (206 )

Net periodic benefit gain

  $ (30 )   $ (26 )   $ (90 )   $ (78 )

 

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 three quarters ended March 25, 2022, the amount of $701 in contributions to the pension plans were made.

 

The Company has reclassified $505 (net of $4 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended March 25, 2022, and $583 (net of $177 in taxes) during the quarter ended March 26, 2021. These reclassifications are included in the computation of net periodic benefit cost. The Company has reclassified $1,513 (net of $4 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the three quarters ended March 25, 2022, and $1,691 (net of $529 in taxes) during the three quarters ended March 26, 2021. 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 historical domestic 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 three quarters ended March 25, 2022 and March 26, 2021 the Company’s effective income tax rate was 76.5% and 28.9% respectively. For the quarter ended March 26, 2021 the company did not recognize a full U.S. 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 $752 of unrecognized tax benefits, including related interest and penalties, as of March 25, 2022, 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 March 25, 2022. 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 years open to examination in the Netherlands are for years subsequent to 2018. 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 March 25, 2022, 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

    9       -     $ 9       -       -       -       9  

Amortization

    -       (2,415 )   $ (2,415 )     (1,225 )     (888 )     (133 )     (169 )

Translation adjustment

    (1,130 )     -     $ (1,130 )     (707 )     (321 )     (89 )     (13 )

Balance at March 25, 2022

  $ 40,021     $ (26,077 )   $ 13,944     $ 8,389     $ 3,674     $ 1,060     $ 821  

 

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 $785 and $838 for the quarters ended March 25, 2022, and March 26, 2021, respectively. Intangible amortization expense was $2,415 and $2,516 for the three quarters ended March 25, 2022, and March 26, 2021, 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

    791  

2023

    2,924  

2024

    2,779  

2025

    2,661  

2026

    1,343  

Thereafter

    3,446  

 

 

J.

Long-term Debt

 

Long-term debt at March 25, 2022 and June 30, 2021 consisted of the following:

 

   

March 25, 2022

   

June 30, 2021

 

Credit Agreement Debt

               

Revolving loans (expire June 2023)

  $ 19,472     $ 15,415  

Term loan (due March 2026)

    14,500       16,500  

Other

    97       170  

Subtotal

    34,069       32,085  

Less: current maturities

    (2,000 )     (2,000 )

Total long-term debt

  $ 32,069     $ 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 earnings before interest, taxes, depreciation, and amortization (“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.

 

On February 28, 2022, the Company entered into a second amended and restated forbearance agreement and amendment No. 8 to Credit Agreement (the “Second Amended and Restated Forbearance Agreement”) that amends the Credit Agreement dated as of June 29, 2018, as amended between the Company and BMO.  The Second Amended and Restated Forbearance Agreement extends the Forbearance Period through June 30, 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 Company also executed a Third Amended and Restated Revolving Note with BMO, reflecting the maximum Revolving Credit Commitment of $40,000,000.

 

For the quarter ended March 25, 2022, as a result of the Second 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 March 25, 2022, 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 $63 in principal was paid on these liabilities during the current fiscal year.

 

During the quarters ended March 25, 2022, the average interest rate was 3.98% on the Term Loan, and 4.25% on the Revolving Loans.

 

As of March 25, 2022, the Company’s borrowing capacity on the revolving loans under the terms of the Credit Agreement was $35,339, and the Company had approximately $15,866 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 March 25, 2022 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 March 25, 2022, 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.

 

12

 
 
 

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 March 25, 2022 remain authorized for purchase.  The Company did not make any open market purchases of its shares during the quarters ended March 25, 2022 and March 26, 2021.

 

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

 

  

Twin Disc, Inc. Shareholders’ Equity

 
  

Common

Stock

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income

  

Treasury

Stock

  

Non-

Controlling

Interest

  

Total

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 

Net income

     2,231         79   2,310 

Translation adjustments

        (2,680)     (41)  (2,721)

Benefit plan adjustments, net of tax

        505         505 

Unrealized loss on cash flow hedge, net of tax

        810         810 

Compensation expense

  620               620 

Shares issued (acquired), net

  (163)        163      0 

Balance, March 25, 2022

 $42,048  $127,251  $(25,724) $(14,805) $685  $129,455 

 

  

Twin Disc, Inc. Shareholders’ Equity

 
  

Common

Stock

  

Retained

Earnings

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Treasury

Stock

  

Non-

Controlling

Interest

  

Total

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 

Net (loss) income

     94         72   166 

Translation adjustments

        (2,970)     (38)  (3,008)

Benefit plan adjustments, net of tax

        583         583 

Unrealized loss on cash flow hedge, net of tax

        193         193 

Compensation expense

  524               524 

Shares issued (acquired), net

  4         (4)     - 

Balance, March 26, 2021

 $40,446  $148,457  $(33,646) $(15,106) $702  $140,853 

 

13

 

Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended March 25, 2022 and March 26, 2021 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)  -