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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 30, 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 February 3, 2023, the registrant had 13,815,707 shares of its common stock outstanding.

 

1

 

 

Part I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

  

December 30, 2022

  

June 30, 2022

 
         

ASSETS

        

Current assets:

        

Cash

 $13,528  $12,521 

Trade accounts receivable, net

  39,392   45,452 

Inventories

  136,810   127,109 

Assets held for sale

  2,968   2,968 

Prepaid expenses

  10,871   7,756 

Other

  7,228   8,646 

Total current assets

  210,797   204,452 
         

Property, plant and equipment, net

  39,683   41,615 

Right-of-use assets operating leases

  12,807   12,685 

Intangible assets, net

  11,798   13,010 

Deferred income taxes

  2,403   2,178 

Other assets

  2,766   2,583 
         

Total assets

 $280,254  $276,523 
         

LIABILITIES AND EQUITY

        

Current liabilities:

        

Current maturities of long-term debt

 $2,000  $2,000 

Accounts payable

  28,906   28,536 

Accrued liabilities

  55,939   50,542 

Total current liabilities

  86,845   81,078 
         

Long-term debt, less current maturities

  29,927   34,543 

Lease obligations

  10,278   10,575 

Accrued retirement benefits

  10,587   9,974 

Deferred income taxes

  3,506   3,802 

Other long-term liabilities

  5,346   5,363 
         

Total liabilities

  146,489   145,335 
         

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

  41,444   42,551 

Retained earnings

  134,141   135,031 

Accumulated other comprehensive loss

  (29,880)  (32,086)
   145,705   145,496 

Less treasury stock, at cost (819,398 and 960,459 shares, respectively)

  12,562   14,720 
         

Total Twin Disc shareholders' equity

  133,143   130,776 
         

Noncontrolling interest

  622   412 
         

Total equity

  133,765   131,188 
         

Total liabilities and equity

 $280,254  $276,523 

 

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 30, 2022

  

December 31, 2021

  

December 30, 2022

  

December 31, 2021

 
                 

Net sales

 $63,351  $59,889  $119,264  $107,650 

Cost of goods sold

  46,328   46,407   88,944   80,721 

Gross profit

  17,023   13,482   30,320   26,929 
                 

Marketing, engineering and administrative expenses

  15,983   15,267   31,063   28,357 

Restructuring expenses

  164   1,190   174   1,238 

Other operating (income) expense

  (4,150)  45   (4,150)  (2,894)

Income (loss) from operations

  5,026   (3,020)  3,233   228 
                 

Interest expense

  594   574   1,160   1,104 

Other expense (income), net

  789   (466)  1,049   (110)
   1,383   108   2,209   994 
                 

Income (loss) before income taxes and noncontrolling interest

  3,643   (3,128)  1,024   (766)

Income tax expense

  2,489   622   1,801   1,004 
                 

Net income (loss)

  1,154   (3,750)  (777)  (1,770)

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

  (15)  (86)  (112)  (144)
                 

Net income (loss) attributable to Twin Disc

 $1,139  $(3,836) $(889) $(1,914)
                 

Income (loss) per share data:

                

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

 $0.08  $(0.29) $(0.07) $(0.14)

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

 $0.08  $(0.29) $(0.07) $(0.14)
                 

Weighted average shares outstanding data:

                

Basic shares outstanding

  13,460   13,296   13,434   13,288 

Diluted shares outstanding

  13,699   13,296   13,434   13,288 
                 

Comprehensive income (loss)

                

Net income (loss)

 $1,154  $(3,750) $(777) $(1,770)

Benefit plan adjustments, net of income taxes of $1, $(115), $3 and $2, respectively

  (515)  623   3   1,007 

Foreign currency translation adjustment

  8,392   (1,701)  2,064   (3,639)

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

  (595)  735   197   939 

Comprehensive income (loss)

  8,436   (4,093)  1,487   (3,463)

Less: Comprehensive income (loss) attributable to noncontrolling interest

  74   (61)  210   (197)
                 

Comprehensive income (loss) attributable to Twin Disc

 $8,510  $(4,154) $1,697  $(3,660)

 

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 30, 2022

   

December 31, 2021

 
                 

Cash flows from operating activities:

               

Net loss

  $ (777 )   $ (1,770 )

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

               

Depreciation and amortization

    4,266       5,011  

Gain on sale of assets

    (4,203 )     (2,939 )

Restructuring expenses

    (1 )     (111 )

Provision for deferred income taxes

    (1,105 )     (1,156 )

Stock compensation expense and other non-cash changes, net

    1,564       1,848  

Net change in operating assets and liabilities

    288       (1,932 )
                 

Net cash provided (used) by operating activities

    32       (1,049 )
                 

Cash flows from investing activities:

               

Acquisitions of property, plant and equipment

    (4,734 )     (1,750 )

Proceeds from sale of fixed assets

    7,152       9,152  

Proceeds on note receivable

    -       500  

Other, net

    385       140  
                 

Net cash provided by investing activities

    2,803       8,042  
                 

Cash flows from financing activities:

               

Borrowings under revolving loan arrangements

    42,898       51,410  

Repayments of revolving loan arrangements

    (46,628 )     (55,552 )

Repayments of other long term debt

    (839 )     (2,541 )

Payments of withholding taxes on stock compensation

    (463 )     (487 )
                 

Net cash used by financing activities

    (5,032 )     (7,170 )
                 

Effect of exchange rate changes on cash

    3,204       (1,040 )
                 

Net change in cash

    1,007       (1,217 )
                 

Cash:

               

Beginning of period

    12,521       12,340  
                 

End of period

  $ 13,528     $ 11,123  

 

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. These financial statements should 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, 2022. The year-end condensed consolidated 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.

 

The Company's reporting period ends on the last Friday of the quarterly calendar period.  The Company's fiscal year ends on  June 30, regardless of the day of the week on which  June 30 falls.

 

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 adoption of this guidance did not have a material impact on the Company’s financial statements.

 

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 30, 2022

   

June 30, 2022

 

Inventories:

               

Finished parts

  $ 70,515     $ 65,789  

Work in process

    25,674       19,801  

Raw materials

    40,621       41,519  
    $ 136,810     $ 127,109  

 

 

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 30, 2022 and December 31, 2021:

 

   

For the Quarter Ended

   

For the Two Quarters Ended

 
   

December 30, 2022

   

December 31, 2021

   

December 30, 2022

   

December 31, 2021

 

Reserve balance, beginning of period

  $ 3,804     $ 3,560     $ 3,329     $ 4,369  

Current period expense and adjustments

    770       585       1,678       319  

Payments or credits to customers

    (503 )     (638 )     (869 )     (1,169 )

Translation

    74       (24 )     7       (36 )

Reserve balance, end of period

  $ 4,145     $ 3,483     $ 4,145     $ 3,483  

 

Included in expense in the two quarters ended December 30, 2022 and December 31, 2021 is a non-recurring warranty charge in the amount of $0 and $0, respectively, to accrue for estimated costs to resolve a unique product performance issue at certain installations.

 

The current portion of the warranty accrual ($3,552 and $2,930 as of December 30, 2022 and December 31, 2021, respectively) is reflected in accrued liabilities, while the long-term portion ($594 and $553 as of December 30, 2022 and December 31, 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 Two Quarters Ended

 
   

December 30, 2022

   

December 31, 2021

   

December 30, 2022

   

December 31, 2021

 

Net sales

                               

Manufacturing segment sales

  $ 56,678     $ 49,298     $ 105,675     $ 90,893  

Distribution segment sales

    25,584       28,291       49,892       48,825  

Inter/Intra segment elimination – manufacturing

    (14,198 )     (13,200 )     (27,842 )     (24,143 )

Inter/Intra segment elimination – distribution

    (4,713 )     (4,500 )     (8,461 )     (7,925 )
    $ 63,351     $ 59,889     $ 119,264     $ 107,650  

Net income (loss) attributable to Twin Disc

                               

Manufacturing segment net income (loss)

  $ 3,832     $ (1,601 )   $ 5,627     $ 3,231  

Distribution segment net income

    1,403       1,496       2,359       1,979  

Corporate and eliminations

    (4,096 )     (3,731 )     (8,875 )     (7,124 )
    $ 1,139     $ (3,836 )   $ (889 )   $ (1,914 )

 

 

 

December 30, 2022

   

June 30, 2022

 
Assets            

Manufacturing segment assets

  $ 371,442     $ 364,174  

Distribution segment assets

    56,834       50,958  

Corporate assets and elimination of intercompany assets

    (148,022 )     (138,609 )
    $ 280,254     $ 276,523  

 

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 30, 2022 and December 31, 2021.

 

Net sales by product group for the quarter ended December 30, 2022 is summarized as follows:

 

                   

Elimination of

         
   

Manufacturing

   

Distribution

   

Intercompany Sales

   

Total

 

Industrial

  $ 6,963     $ 1,726     $ (1,177 )   $ 7,512  

Land-based transmissions

    15,256       3,445       (4,030 )     14,671  

Marine and propulsion systems

    34,262       15,427       (13,223 )     36,466  

Other

    197       4,986       (481 )     4,702  

Total

  $ 56,678     $ 25,584     $ (18,911 )   $ 63,351  

 

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  

 

7

 

Net sales by product group for the two quarters ended December 30, 2022 is summarized as follows:

 

                   

Elimination of

         
   

Manufacturing

   

Distribution

   

Intercompany Sales

   

Total

 

Industrial

  $ 13,656     $ 2,774     $ (1,886 )   $ 14,544  

Land-based transmissions

    31,543       8,051       (8,985 )     30,609  

Marine and propulsion systems

    60,077       29,971       (24,246 )     65,802  

Other

    399       9,096       (1,186 )     8,309  

Total

  $ 105,675     $ 49,892     $ (36,303 )   $ 119,264  

 

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  

 

 

F.

Stock-Based Compensation

 

Performance Stock Awards (PSA)

 

During the first two quarters of fiscal 2023 and 2022, the Company granted a target number of 118.1 and 103.6 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2023 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2025. These PSAs are subject to adjustment if the Company’s return on invested capital and cumulative EBITDA 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 236.3. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

 

The PSAs granted in fiscal 2022 will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual earnings per share (“EPS”) or average free cashflow (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 or average 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 146.6. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

 

There were 438.9 and 440.9 unvested PSAs outstanding at December 30, 2022 and December 31, 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 $366 and $219 was recognized for the quarters ended December 30, 2022 and December 31, 2021, respectively, related to PSAs. Compensation expense of $596 and $435 was recognized for the two quarters ended December 30, 2022 and December 31, 2021, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at December 30, 2022 was $8.38. At December 30, 2022, the Company had $1,718 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2023, 2022 and 2021 awards. The total fair value of PSAs vested as of December 30, 2022 and December 31, 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 first two quarters of fiscal 2023 and 2022, the Company granted 177.7 and 44.1 service based restricted shares, respectively, to employees and non-employee directors. There were 309.2 and 262.7 unvested shares outstanding at December 30, 2022 and December 31, 2021, respectively. A total of 0 and 29.8 shares of restricted stock were forfeited during the two quarters ended December 30, 2022 and December 31, 2021, respectively. Compensation expense of $334 and $285 was recognized for the quarters ended December 30, 2022 and December 31, 2021, respectively. Compensation expense of $694 and $619 was recognized for the two quarters ended December 30, 2022 and December 31, 2021, respectively. The total fair value of restricted stock grants vested as of December 30, 2022 and December 31, 2021 was $1,669 and $1,679, respectively. As of December 30, 2022, the Company had $1,648 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

 

8

 

Restricted Stock Unit Awards (RSU)

 

Under the 2021 Long Term Incentive Plan, the Company has been authorized to issue RSUs. The RSUs entitle the employee to shares of common stock of the Company if the employee remains employed by the Company through a specified date, generally three years from the date of grant. The fair value of the RSUs (on the date of grant) is recorded as compensation expense over the vesting period. During the first two quarters of fiscal 2023 and 2022, the Company granted 72.4 and 67.4 of employment based RSUs, respectively. There were 130.9 and 67.4 unvested RSUs outstanding at December 30, 2022 and December 31, 2021, respectively. Compensation expense of $132 and $92 was recognized for the quarters ended December 30, 2022 and December 31, 2021, respectively. Compensation expense of $224 and $92 was recognized for the two quarters ended December 30, 2022 and December 31, 2021, respectively. The total fair value of restricted stock units vested as of December 30, 2022 and December 31, 2021 was $40 and $475, respectively. The weighted average grant date fair value of the unvested awards at December 30, 2022 was $10.94. As of December 30, 2022, the Company had $951 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 30, 2022

  

December 31, 2021

  

December 30, 2022

  

December 31, 2021

 

Pension Benefits:

                

Service cost

 $102  $130  $203  $269 

Prior service cost

  8   10   17   20 

Interest cost

  868   681   1,736   1,347 

Expected return on plan assets

  (1,060)  (1,255)  (2,120)  (2,514)

Amortization of transition obligation

  9   9   18   18 

Amortization of prior service cost

  9   (4)  18   (8)

Amortization of actuarial net loss

  617   562   1,235   1,124 

Net periodic benefit cost

 $553  $133  $1,107  $256 
                 

Postretirement Benefits:

                

Service cost

 $2  $4  $5  $8 

Interest cost

  53   35   106   70 

Amortization of prior service cost

  (69)  (69)  (137)  (138)

Amortization of actuarial net loss

  (10)  -   (19)  - 

Net periodic benefit gain

 $(24) $(30) $(45) $(60)

 

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 $576 to its pension plans in fiscal 2023. For the two quarters ended December 30, 2022, the amount of $387 in contributions to the pension plans were made.

 

The Company had changes in benefit plan adjustments totaling ($515) (net of $1 in taxes) from accumulated other comprehensive loss during the quarter ended December 30, 2022, and $623 (net of ($115) in taxes) during the quarter ended December 31, 2021. These changes are included in the computation of net periodic benefit cost. The Company had changes in benefit plan adjustments totaling $3 (net of $3 in taxes) from accumulated other comprehensive loss during the two quarters ended December 30, 2022, and $1,007 (net of $2 in taxes) during the two quarters ended December 31, 2021. These changes are included in the computation of net periodic benefit cost. Included in changes in benefit plan adjustments, the Company had a plan merger remeasurement adjustment of ($1,115) during the quarter ended December 30, 2022.

 

9

 
 

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 historical 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 ASC-740-10 adjustments.

 

For the six months ended December 30, 2022 and December 31, 2021 the Company’s effective income tax rate was 175.9% and -131.1% respectively. In the prior year, foreign income and expense were recognized. However, there was a significant domestic loss, resulting in a net global loss, creating a negative effective tax rate. Current year overall financial improvement resulted in positive net global earnings, yielding a positive effective tax rate. Foreign income and expense was recognized, although there continues to be negative domestic earnings. In addition, an amended foreign return anticipated to be filed further increased tax expense recognized in this quarter.

 

In the post pandemic era, the Company continues to monitor for any revisions enacted under the Tax Cuts and Job Act (TCJA), Coronavirus Aid, Relief and Economic Security (CARES) Act and the American Rescue Plan (ARPA). On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA). This landmark United States law aims to reduce inflation by reducing the deficit, lowering prescription drug prices and investing into domestic energy production while promoting clean energy. At this time it is not certain what, if any, impact this will have on the Company.

 

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 historical domestic losses and uncertain future domestic earnings, the Company continues to recognize a full domestic valuation allowance.

 

The Company has approximately $783 of unrecognized tax benefits, which include $53 of related interest and penalties, as of December 30, 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 December 30, 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 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 2023.

 

10

 
 
 

I.

Intangible Assets

 

As of December 30, 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, 2022

  $ 39,845     $ (26,835 )   $ 13,010     $ 7,636     $ 3,238     $ 972     $ 1,164  

Addition

    9       -       9       -       -       -       9  

Reduction

    (10,506 )     10,506       -       -       -       -       -  

Amortization

    -       (1,402 )     (1,402 )     (650 )     (562 )     (39 )     (151 )

Translation adjustment

    181       -       181       125       320       (265 )     1  

Balance at December 30, 2022

  $ 29,529     $ (17,731 )   $ 11,798     $ 7,111     $ 2,996     $ 668     $ 1,023  

 

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 $704 and $804 for the quarters ended December 30, 2022, and December 31, 2021, respectively. Intangible amortization expense was $1,402 and $1,630 for the two quarters ended December 30, 2022, and December 31, 2021, respectively. Estimated intangible amortization expense for the remainder of fiscal 2023 and each of the next five fiscal years and thereafter is as follows:

 

Fiscal Year

       

2023

  $ 1,448  

2024

    2,796  

2025

    2,641  

2026

    1,738  

2027

    1,073  

2028

    1,046  

Thereafter

    1,056  

 

 

J.

Long-term Debt

 

Long-term debt at December 30, 2022 and June 30, 2022 consisted of the following:

 

   

December 30, 2022

   

June 30, 2022

 

Credit Agreement Debt

               

Revolving loans (expire June 2025)

  $ 19,381     $ 22,968  

Term loan (due March 2026)

    12,500       13,500  

Other

    46       75  

Subtotal

    31,927       36,543  

Less: current maturities

    (2,000 )     (2,000 )

Total long-term debt

  $ 29,927     $ 34,543  

 

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 June 30, 2022, the Company entered into Amendment No. 9 to Credit Agreement (the “Ninth Amendment”) that amends and extends the Credit Agreement dated as of June 29, 2018, as amended (the “Credit Agreement”) between the Company and BMO.

 

11

 

Pursuant to the Credit Agreement, as in effect prior to the Ninth Amendment, the Bank made a Term Loan to the Company in the principal amount of $20 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 and subject to a Borrowing Base, $40 million (the “Revolving Credit Commitment”). The Credit Agreement also allows the Company to obtain Letters of Credit from the Bank, which if drawn upon by the beneficiary thereof and paid by the Bank, would become Revolving Loans.

 

The Ninth Amendment extended the Credit Agreement through June 30, 2025. Prior to the Ninth Amendment, the Credit Agreement was scheduled to terminate as of June 30, 2023.

 

The Ninth Amendment also formally terminated the January 27, 2021 Forbearance Agreement, which had been entered into because the Company had not been in compliance with a requirement to maintain a minimum EBITDA of $2.5 million for the three fiscal quarters ended as of December 25, 2020. The Bank also waived the Company’s compliance with the minimum EBITDA requirements under the Credit Agreement and any Event of Default associated with the Company’s noncompliance with the minimum EBITDA requirements.

 

The Ninth Amendment also replaced LIBOR-based interest rates with different benchmark rates based on the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”). Loans under the Credit Agreement are designated either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,” which accrue interest at the EURIBO Rate plus an Applicable Margin. Amounts drawn on a Letter of Credit that are not timely reimbursed to the Bank bear interest at a Base Rate plus an Applicable Margin. The Company also pays a commitment fee on the average daily Unused Revolving Credit Commitment equal to an Applicable Margin.

 

The Ninth Amendment also reduced the Applicable Margins from the rates that had been in effect during the period of the Forbearance Agreement. During the period covered by the Forbearance Agreement, the Applicable Margins for Revolving Loans, Term Loans, and the Unused Revolving Credit Commitment were 3.25%, 3.875%, and .20%, respectively. Under the Ninth Amendment, the Applicable Margins are between 1.25% and 2.75% for Revolving Loans and Letters of Credit; 1.375% and 2.875% for Term Loans; and .10% and .15% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).

 

The Ninth Amendment also revised the Company’s financial covenants under the Credit Agreement. The Company’s Total Funded Debt to EBITDA ratio (for which the Bank provided relief during period covered by the Forbearance Agreement) may not exceed 3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00. The Company’s Tangible Net Worth may not be less than $100 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.

 

The Company remains in compliance with its liquidity and other covenants.

 

The Credit Agreement, including its amendments, is more fully described in the Company’s Annual Report filed on Form 10-K for June 30, 2022, as well as in Item 2 of this quarterly report.

 

As of December 30, 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 $28 in principal was paid on these liabilities during the current fiscal year.

 

During the quarter ended December 30, 2022, the average interest rate was 5.68% on the Term Loan, and 4.73% on the Revolving Loans.

 

As of December 30, 2022, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $39,477, and the Company had approximately $20,096 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 30, 2022 and June 30, 2022. 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.

 

12

 

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 30, 2022, the notional amount was $12,500. 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 30, 2022 remain authorized for purchase.  The Company did not make any open market purchases of its shares during the quarters ended December 30, 2022 and December 31, 2021.

 

The following is a reconciliation of the Company’s equity balances for the first two fiscal quarters of 2023 and 2022:

 

  

Twin Disc, Inc. Shareholders’ Equity

 
          

Accumulated

             
          

Other

      

Non-

     
  

Common

  

Retained

  

Comprehensive

  

Treasury

  

Controlling

  

Total

 
  

Stock

  

Earnings

  

Income

  

Stock

  

Interest

  

Equity

 

Balance, June 30, 2022

 $42,551  $135,031  $(32,086) $(14,720) $412  $131,188 

Net (loss) income

      (2,029)          98  $(1,931)

Translation adjustments

          (6,328)      38  $(6,290)

Benefit plan adjustments, net of tax

          518          $518 
                         

Unrealized gain on cash flow hedge, net of tax

          793          $793 

Compensation expense

  658                  $658 

Shares (acquired) issued, net

  (1,924)          1,756      $(168)

Balance, September 30, 2022

  41,285   133,002   (37,103)  (12,964)  548   124,768 

Net (loss) income

      1,139           15   1,154 

Translation adjustments

          8,333       59   8,392 

Benefit plan adjustments, net of tax

          (515)          (515)

Unrealized gain on cash flow hedge, net of tax

          (595)          (595)

Compensation expense

  856                   856 

Shares (acquired) issued, net

  (697)          402       (295)

Balance, December 30, 2022

 $41,444  $134,141  $(29,880) $(12,562) $622  $133,765 

 

13

 
  

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 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 

 

Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended December 30, 2022 and December 31, 2021 are as follows:

 

  

Translation

  

Benefit Plan

  

Cash Flow

  

Net Investment

 
  

Adjustment

  

Adjustment

  

Hedges

  

Hedges

 

Balance at June 30, 2022

 $(2,266) $(31,726) $355  $1,551 

Translation adjustment during the quarter

  (6,328)  -   -   - 

Amounts reclassified from accumulated other comprehensive income (loss)

  -   518   349   444 

Net current period other comprehensive (loss) income

  (6,328)  518   349   444 

Balance at September 30, 2022

 $(8,594) $(31,208) $704  $1,995 

Translation adjustment during the quarter

  8,333   -   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   600   (10)  (585)
Plan merger remeasurement adjustment  -   (1,115)  -   - 

Net current period other comprehensive (loss) income

  8,333   (515)  (10)  (585)

Balance at December 30, 2022

  (261)  (31,723)  694   1,410 

 

  

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 

 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 30, 2022 are as follows:

 

  

 

   

 

  
  

Quarter Ended

   

Two Quarters Ended

  
  

December 30, 2022

   

December 30, 2022

  

Changes in benefit plan items

          

Actuarial losses

 $608 

(a)

 $1,215 

(a)

Transition asset and prior service benefit

  (51)

(a)

  (102)

(a)

Translation  42    2  

Total amortization

  599    1,115  
Plan merger remeasurement adjustment  (1,115)   (1,115) 

Income tax expense

  1    3  

Total changes, net of tax

 $(515)  $3  

 

14

 

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

 

  

 

   

 

  
  

Quarter Ended

   

Two Quarters Ended

  
  

December 31, 2021

   

December 31, 2021

  

Changes in benefit plan items

          

Actuarial losses

 $562 

(a)

 $1,124 

(a)

Transition asset and prior service benefit

  (64)

(a)

  (128)

(a)

Translation  10    13  

Total amortization

  508    1,009  

Income tax expense

  (115)   2  

Total changes, net of tax

 $623   $1,007  

 

 

(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).

 

 

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 was reduced by 18 employees. This reduction in workforce resulted in an accrual of $2,200, pertaining to the Company’s estimate for the payment of severance benefits, which is expected to be completed by June 2023. The action was taken to allow the Belgian operation to focus resources on core manufacturing processes, while allowing for savings on the outsourcing of non-core processes.

 

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

 

Total restructuring charges relating to streamlining operations totaled $164 and $1,190 in the quarters ending December 30, 2022 and December 31, 2021, respectively. Total restructuring charges relating to streamlining operations totaled to $174 and $1,238 in the two quarters ending December 30, 2022 and December 31, 2021, respectively. Restructuring activities since June 2015 have resulted in the elimination of 254 full-time employees in the manufacturing segment. Accumulated costs to date under these programs within the manufacturing segment through December 30, 2022 were $16,383.

 

The following is a roll-forward of restructuring activity:         

 

Accrued restructuring liability, June 30, 2022

 $1,024 

Additions

  174 

Payments, adjustments and write-offs during the year

  (175)

Accrued restructuring liability, December 30, 2022

 $1,023 

 

15

 

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 several 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. Such actions required the Company to reclassify these assets from Property, Plant and Equipment to Assets Held for Sale, at fair value less costs to sell, or net book value, whichever is lower. Fair value was determined using real estate broker estimates and would be classified as Level 3 in the fair value hierarchy. This assessment of fair value resulted in the Company recognizing a write-down of the carrying value of its corporate headquarters by $4,267 in the fourth quarter of fiscal 2021.

 

In 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 fourth quarter of fiscal 2022, the Company completed the sale of its spare warehouse in Italy and received net proceeds of approximately $305.

 

In the first quarter of fiscal 2023, the Company commenced the active marketing of an additional real estate property located in Nivelles, Belgium.  This action required the Company to reclassify these assets from Property, Plant, and Equipment to Assets Held for Sale, at fair value less costs to sell or net book value, whichever is lower.  Fair value was determined using real estate broker estimates and would be classified as Level 3 in the fair value hierarchy.  The real estate property's fair value less costs to sell exceeded its net book value.  The Company reclassified the property's net book value of $2,801 from Property, Plant, and Equipment to Assets Held for Sale.

 

In the second quarter of fiscal 2023, the Company completed the sale of the real estate property located in Belgium and received $7,150 in proceeds, net of fees and recorded a gain of $4,161 in other operating income.  The Company entered into a lease agreement to leaseback the property for a two-year term.

 

 

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. 

 

16

 

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

 

   

For the Quarter Ended

   

For the Two Quarters Ended

 
   

December 30, 2022

   

December 31, 2021

   

December 30, 2022

   

December 31, 2021

 

Basic:

                               

Net income (loss)

  $ 1,154     $ (3,750 )   $ (777 )   $ (1,770 )
                                 

Less: Net earnings attributable to noncontrolling interest

    (15 )     (86 )     (112 )     (144 )
                                 

Less: Undistributed earnings attributable to unvested shares

    -       -       -       -  
                                 

Net income (loss) attributable to Twin Disc

    1,139       (3,836 )     (889 )     (1,914 )
                                 

Weighted average shares outstanding - basic

    13,460       13,296       13,434       13,288  
                                 

Basic Loss Per Share:

                               

Net earnings (loss) per share - basic

  $ 0.08     $ (0.29 )   $ (0.07 )   $ (0.14 )
                                 

Diluted:

                               

Net income (loss)

  $ 1,154     $ (3,750 )   $ (777 )   $ (1,770 )
                                 

Less: Net earnings attributable to noncontrolling interest

    (15 )     (86 )     (112 )     (144 )
                                 

Less: Undistributed earnings attributable to unvested shares

    -       -       -       -  
                                 

Net income (loss) attributable to Twin Disc

    1,139       (3,836 )     (889 )     (1,914 )
                                 

Weighted average shares outstanding - basic

    13,460       13,296       13,434       13,288  

Effect of dilutive stock awards

    239       -       -       -  

Weighted average shares outstanding - diluted

    13,699       13,296       13,434       13,288  
                                 

Diluted Income (Loss) Per Share:

                               

Net earnings (loss) per share - diluted

  $ 0.08     $ (0.29 )   $ (0.07 )   $ (0.14 )

 

The following potential common shares were excluded from diluted EPS for the two quarters ended December 31, 2022 as the Company reported a net loss: 438.9 related to the Company’s unvested PSAs, 309.2 related to the Company’s unvested RS awards, and 130.9 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 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.

 

 

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.

 

17

 

The components of lease expense were as follows:

 

   

For the Quarter Ended

   

For the Two Quarters Ended

 
   

December 30, 2022

   

December 31, 2021

   

December 30, 2022

   

December 31, 2021

 

Finance lease cost:

                               

Amortization of right-of-use assets

  $ 156     $ 168     $ 311     $ 331  

Interest on lease liabilities

    67       71       132       142  

Operating lease cost

    686       698       1,397       1,391  

Short-term lease cost

    (10 )     37       3       40  

Variable lease cost

    67       42       108       81  

Total lease cost

    966       1,016       1,952       1,985  

Less: Sublease income

    (18 )     (19 )     (35 )     (39 )

Net lease cost

  $ 948     $ 997     $ 1,917     $ 1,946  

 

Other information related to leases was as follows:

 

   

For the Quarter Ended

   

For the Two Quarters Ended

 
   

December 30, 2022

   

December 31, 2021

   

December 30, 2022

   

December 31, 2021

 

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

                               

Operating cash flows from operating leases

  $ 777     $ 737     $ 1,473     $ 1,479  

Operating cash flows from finance leases

    215       211       420       416  

Financing cash flows from finance leases

    67       71       132       142  

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

                               

Operating leases

    990       232       1,518       396  

Finance leases

    269       133       320       307  

Weighted average remaining lease term (years):

                               

Operating leases

                    8.3       9.3  

Finance lease

                    10.8       11.5  

Weighted average discount rate:

                               

Operating leases

                    7.2 %     7.2 %

Finance leases

                    5.2 %     5.2 %

 

18

 
 

Approximate future minimum rental commitments under non-cancellable leases as of December 30, 2022 were as follows:         

 

   

Operating Leases

   

Finance Leases

 

2023

  $ 1,507     $ 877  

2024

    2,517       875  

2025

    1,619       644  

2026

    1,434       578  

2027

    1,428       519  

Thereafter

    7,636       4,448  

Total future lease payments

    16,142       7,940  

Less: Amount representing interest

    (3,321 )     (2,899 )

Present value of future payments

  $ 12,821     $ 5,041  

 

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

 

 

Balance Sheet Location

 

December 30, 2022

   

June 30, 2022

 

Lease Assets

                 

Operating lease right-of-use assets

Right-of-use assets operating leases

  $ 12,807     $ 12,685  

Finance lease right-of-use assets

Property, plant and equipment, net

    4,563       4,805  
                   

Lease Liabilities

                 

Operating lease liabilities

Accrued liabilities

  $ 2,543     $ 2,127  

Operating lease liabilities

Lease obligations

    10,278       10,575  

Finance lease liabilities

Accrued liabilities

    615       576  

Finance lease liabilities

Other long-term liabilities

    4,426       4,440  

 

 

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 30, 2022, with a notional amount of $12,500. 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 SOFR-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 (loss). 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 ($694) and ($355) as of December 30, 2022, and June 30, 2022, respectively. The unrealized amounts in accumulated other comprehensive income (loss) will fluctuate based on changes in the fair value of open contracts during each reporting period.

 

The Company estimates that $273 of net unrealized losses related to cash flow hedging activities included in accumulated other comprehensive income (loss) will be reclassified into earnings within the next twelve months.

 

19

 

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 ($1,410) and ($1,551) as of December 30, 2022 and June 30, 2022, respectively.

 

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 30, 2022

   

June 30, 2022

 

Derivative designated as hedge:

                 

Interest rate swap

Other current assets

  $ 273     $ 68  

Interest rate swap

Other noncurrent assets

    211       77  

 

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 30, 2022 and December 31, 2021, respectively, was as follows:

 

 

Statement of Comprehensive

 

For the Quarter Ended

   

For the Two Quarters Ended

 
 

(Loss) Income Location

 

December 30, 2022

   

December 31, 2021

   

December 30, 2022

   

December 31, 2021

 

Derivative designated as hedge:

                                 

Interest rate swap

Interest expense

  $ 79     $ 98     $ 162     $ 187  

Interest rate swap

Unrealized (loss) gain on cash flow hedge

    (338 )     232       (1 )     300  

Net investment hedge

Unrealized (loss) gain on hedges

    (585 )     503       (141 )     639  

 

 

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 condensed consolidated financial statements as of December 30, 2022, 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, 2022, 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.

 

20

 

 

Results of Operations

 

   

Quarter Ended

   

Two Quarters Ended

 
   

December 30, 2022

   

% of Net Sales

   

December 31, 2021

   

% of Net Sales

   

December 30, 2022

   

% of Net Sales

   

December 31, 2021

   

% of Net Sales

 
(In thousands)                                                

Net sales

  $ 63,351             $ 59,889             $ 119,264             $ 107,650          

Cost of goods sold

    46,328               46,407               88,944               80,721          

Gross profit

    17,023       26.9 %     13,482       22.5 %     30,320       25.4 %     26,929       25.0 %

Marketing, engineering and administrative expenses

    15,983       25.2 %     15,267       25.5 %     31,063       26.0 %     28,357       26.3 %

Restructuring of operations

    164       0.3 %     1,190       2.0 %     174       0.1 %     1,238       1.2 %

Other operating income

    (4,150 )     -6.6 %     45       0.1 %     (4,150 )     -3.5 %     (2,894 )     -2.7 %

Income (loss) from operations

  $ 5,026       7.9 %   $ (3,020 )     -5.0 %   $ 3,233       2.7 %   $ 228       0.2 %

 

Comparison of the Second Quarter of Fiscal 2023 with the Second Quarter of Fiscal 2022

 

Net sales for the second quarter increased 5.8%, or $3.5 million, to $63.4 million from $59.9 million in the same quarter a year ago. The Company continues to experience strong demand across most of its markets following the severe impact of the COVID-19 pandemic in fiscal 2021, including demand for new transmissions in the North American oil and gas market, along with the ongoing demand for aftermarket support. 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 electronic components. Global sales of industrial products declined slightly (2.5%), primarily due to an unfavorable currency impact, while shipments of marine and propulsion products improved by 2.7% and off-highway transmission shipments grew by 10.2% compared with the prior year second quarter. The North American region enjoyed the most significant sales improvement ($6.2 million or 32.0%) due to generally improving market conditions and increased new unit and aftermarket demand in the North American energy market. The European region saw a more modest increase ($0.7 million or 3.7%), with a more challenging economy and the negative impact of currency exchange. Sales into the Asia Pacific region decreased 8.3%, or $1.1 million, primarily due to a temporary pause in shipments of certain oil and gas related products into China. Currency translation had an unfavorable impact on second quarter fiscal 2023 sales compared to the second quarter of the prior year totaling $5.0 million primarily due to the weakening of the euro against the U.S. dollar.

 

Sales at our manufacturing segment increased 15.0%, or $7.4 million, versus the same quarter last year. The U.S. manufacturing operations experienced a 17.5%, or $5.2 million, increase in sales versus the second fiscal quarter of 2022, with recovering markets and growing North American demand in the energy market, partially offset by the continued supply chain challenges noted above. The Company’s operation in the Netherlands was up $1.6 million (13.3%) compared to the second fiscal quarter of 2022, primarily due to improving market demand and strong operational execution, partially offset by an unfavorable currency impact and supply chain limitations. Similarly, the Company’s Belgian operation saw an increase compared to the prior year second quarter (6.7% or $0.3 million), with improving demand partially offset by an unfavorable translation effect. The Company’s Italian manufacturing operations were up $0.3 million (4.4%) compared to the second quarter of fiscal 2022, with improving execution and easing supply chain interruptions. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.1 million (10.5%) compared to the prior year second quarter.

 

Our distribution segment experienced a decrease in sales of $2.7 million (9.6%) in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022. The Company’s Asian distribution operations in Singapore, China and Japan were down 30.8%, or $3.2 million, from the prior year primarily due to a temporary delay in shipments of certain oil and gas related products into China. The Company’s North America distribution operation saw a slight increase ($0.2 million or 2.5%) on stronger supply of product from the manufacturing operations, as all markets have seen improving demand. The Company’s European distribution operation saw a decrease ($0.7 million or 12.0%) resulting from lower factory shipments and the unfavorable impact of currency translation. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw continued growth (14.0% increase, or $0.9 million, from the prior year second fiscal quarter), on the continued strengthening of pleasure craft marine market demand in the region.

 

Gross profit as a percentage of sales for the second quarter of fiscal 2023 improved to 26.9%, compared to 22.5% for the same period last year. The improvement over the prior year is primarily the result of additional volume ($0.8 million), a more favorable mix of product shipments ($0.7 million) and progress on margin improvement actions related to pricing and cost efficiencies ($2.0 million).

 

21

 

For the fiscal 2023 second quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 25.2%, compared to 25.5% for the fiscal 2022 second quarter. ME&A expenses increased $0.7 million (4.7%) versus the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of the incremental impact of prior year COVID subsidies ($0.8 million), increased professional fees ($0.5 million) and other inflationary impacts ($0.2 million). These increases were partially offset by a foreign currency translation impact of $0.8 million.

 

The Company incurred restructuring charges during the second quarter of fiscal 2023 and fiscal 2022, primarily associated with ongoing cost reduction actions at its European operations and actions to adjust the cost structure at the Company’s domestic operation. The Company continues to focus on actively managing its cost structure and reducing fixed costs.

 

The Company recorded other operating income of $4.2 million in the second quarter of fiscal 2023 associated with the gain on the sale of the Company’s facility in Belgium. The building was sold for approximately $7.2 million.  The Company entered into a lease agreement to leaseback the property for a two-year term.

 

Interest expense was relatively flat at $0.6 million in the second quarter of fiscal 2023, with a slightly higher rate partially offset by a lower average outstanding revolver balance.

 

Other expense of $0.8 million for the second fiscal quarter was primarily attributable to translation losses related to the Company’s euro denominated liabilities.

 

The fiscal 2023 second quarter effective tax rate was 68.3% compared to -19.9% in the prior fiscal year second quarter. The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the increase to the effective tax rate.

 

Comparison of the First Half of Fiscal 2023 with the First Half of Fiscal 2022

 

Net sales for the first half increased 10.8%, or $11.6 million, to $119.3 million from $107.7 million in the same period a year ago. The Company experienced strong and improving demand through the first half as all markets have demonstrated recovery following the severe impact of the COVID-19 pandemic in fiscal 2021, including demand for new transmissions in the North American oil and gas market demand, along with the ongoing demand for aftermarket support. 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 electronic components. Global sales of industrial products improved (5.1%) primarily due to a strong first quarter in North America, while shipments of marine and propulsion products improved by 5.9% and off-highway transmission shipments grew by 19.8% compared with the prior year first half. The North American region enjoyed the most significant sales improvement ($11.9 million or 32.5%) due to generally improving market conditions and increased new unit and aftermarket demand in the North American energy market. The European region saw a more modest increase ($0.9 million or 2.7%), with a more challenging economy and the negative impact of currency exchange. Sales into the Asia Pacific region decreased 0.8%, or $0.2 million, primarily due to a temporary pause in shipments of certain oil and gas related products into China offset by continued strong demand in Australia. Currency translation had an unfavorable impact on first half fiscal 2023 sales compared to the first half of the prior year totaling $9.9 million primarily due to the weakening of the euro against the U.S. dollar.

 

Sales at our manufacturing segment increased 16.3%, or $14.8 million, versus the same period last year. The U.S. manufacturing operations experienced a 28.0%, or $13.1 million, increase in sales versus the first half of fiscal 2022, with recovering markets and growing North American demand in the energy market, partially offset by the continued supply chain challenges noted above. The Company’s operation in the Netherlands was up $0.8 million (3.9%) compared to the first half of fiscal 2022, primarily due to improving market demand and strong operational execution, partially offset by an unfavorable currency impact and supply chain limitations. The Company’s Belgian operation saw a slight decrease compared to the prior year first half (3.6% or $0.4 million), with improving demand offset by an unfavorable currency translation effect. The Company’s Italian manufacturing operations were up $1.1 million (9.2%) compared to the first half of fiscal 2022, with improving execution and easing supply chain interruptions. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.2 million (7.3%) compared to the prior year first half.

 

22

 

Our distribution segment experienced an increase in sales of $1.1 million (2.2%) in the first half of fiscal 2023 compared to the first half of fiscal 2022. The Company’s Asian distribution operations in Singapore, China and Japan were down 14.8% from the prior year primarily due to a temporary delay in shipments of certain oil and gas related products into China during the second fiscal quarter. The Company’s North America distribution operation saw a strong increase ($2.3 million or 24.7%) on stronger supply of product from the manufacturing operations, as all markets have seen improving demand. The Company’s European distribution operation saw a decrease (4.9%) resulting from lower factory shipments and the unfavorable impact of currency translation. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw continued growth (15.7% increase from the prior year first half), on the continued strengthening of pleasure craft marine market demand in the region.

 

The gross profit percentage for the first half of fiscal 2023 improved to 25.4%, compared to 25.0% for the same period last year. The prior year first half result reflects the benefit of an Employee Retention Credit (“ERC”, part of various COVID-19 relief programs provided by the U.S. government) of $1.3 million recorded at the Company’s domestic operation, along with the benefit of a NOW subsidy (COVID-19 relief program in the Netherlands) of $0.7 million and the favorable impact of a correction to the Company’s warranty reserve ($0.5 million). Adjusting for these non-recurring items, the gross profit percent for the first half would have been 22.7%. The improvement over the prior year after adjusting for these items is primarily the result of additional volume ($2.9 million), a more favorable mix of product shipments ($2.0 million) and progress on margin improvement actions related to pricing and cost efficiencies ($1.0 million).

 

For the fiscal 2023 first half, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 26.0%, compared to 26.3% for the fiscal 2022 first half. ME&A expenses increased $2.7 million (9.5%) versus the same period last fiscal year. The increase in ME&A spending for the period was comprised of the incremental impact of prior year COVID subsidies ($1.5 million), increased professional fees ($0.8 million), salaries and benefits ($0.9 million) marketing activities ($0.3 million), spending on travel and entertainment ($0.4 million) and other inflationary impacts ($0.5 million). These increases were partially offset by a foreign currency translation impact of $1.7 million.

 

The Company incurred restructuring charges during the first half of fiscal 2023 and fiscal 2022, primarily associated with ongoing cost reduction actions at its European operations and actions to adjust the cost structure at the Company’s domestic operation. The Company continues to focus on actively managing its cost structure and reducing fixed costs.

 

The Company recorded other operating income of $4.2 million in fiscal 2023 associated with the gain on the sale of the Company’s facility in Belgium. The building was sold for approximately $7.2 million.

 

Interest expense was relatively flat at $1.2 million in the first half of fiscal 2023, with a slightly higher rate partially offset by a lower average outstanding revolver balance.

 

Other expense of $1.0 million for the first half of fiscal 2023 was primarily attributable to translation losses related to the Company’s euro denominated liabilities.

 

The fiscal 2023 first half effective tax rate was 175.9% compared to -131.1% in the prior fiscal year first half. The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the increase to the effective tax rate.

 

Financial Condition, Liquidity and Capital Resources

 

Comparison between December 30, 2022 and June 30, 2022

 

As of December 30, 2022, the Company had net working capital of $124.0 million, which represents an increase of $0.6 million, or 0.5%, from the net working capital of $123.4 million as of June 30, 2022.

 

Cash increased by $1.0 million to $13.5 million as of December 30, 2022, versus $12.5 million as of June 30, 2022. As of December 30, 2022, the majority of the cash is at the Company’s overseas operations in Europe ($4.2 million) and Asia-Pacific ($8.2 million).

 

Trade receivables of $39.4 million were down $6.0 million, or approximately 13.3%, when compared to last fiscal year-end. The impact of foreign currency translation was to increase accounts receivable by $0.5 million versus June 30, 2022. As a percent of sales, trade receivables finished at 62.2% in the second quarter of fiscal 2023 compared to 55.1% for the comparable period in fiscal 2022 and 59.8% for the fourth quarter of fiscal 2022.

 

23

 

Inventories increased by $9.1 million, or 7.6%, versus June 30, 2022 to $136.8 million. The impact of foreign currency translation was to increase inventories by $1.5 million versus June 30, 2022. The remaining increase was seen primarily at the Company’s operations in the Netherlands ($4.4 million) and Singapore ($5.6 million). The Singapore increase was the result of a temporary delay in the shipment of certain oil and gas transmission products into China. The Netherlands increase was 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. There was an offsetting decrease at the North American operations ($3.0 million) resulting from increased focus on purchase quantities and timing of deliveries. On a consolidated basis, as of December 30, 2022, the Company’s backlog of orders to be shipped over the next six months approximates $124.0 million, compared to $101.2 million at June 30, 2022 and $98.9 million at December 31, 2021. As a percentage of six-month backlog, inventory has decreased from 126% at June 30, 2022 to 110% at December 30, 2022.

 

Net property, plant and equipment decreased $1.9 million (4.6%) to $39.7 million versus $41.6 million at June 30, 2022. In the first fiscal quarter of 2023, the Company reclassified approximately $2.8 million of assets to Assets Held for Sale related to a building in Belgium that was then sold during the second fiscal quarter of 2023. The Company had capital spending of $4.7 million in the first half, as well as a favorable exchange impact ($0.2 million). These increases were partially offset by depreciation of $2.9 million. Capital spending occurring in the first half was primarily related to replacement capital. In total, the Company expects to invest between $9 and $11 million in capital assets in fiscal 2023. 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 30, 2022 of $28.9 million was up $0.4 million, or 1.3%, from June 30, 2022. The impact of foreign currency translation was to increase accounts payable by $0.5 million versus June 30, 2022. The remaining decrease is primarily related to the timing of purchasing activities.

 

Total borrowings and long-term debt as of December 30, 2022 decreased $4.6 million to $31.9 million versus $36.5 million at June 30, 2022. During the first half, the Company reported negative free cash flow of $4.7 million (defined as operating cash flow less acquisitions of fixed assets), driven by the payment of a bonus accrual and the first half increase to inventory. However, the Company generated $7.2 million in cash through the sale of the Belgian facility. The Company ended the second quarter with total debt, net of cash, of $18.4 million, compared to $24.0 million at June 30, 2022, for a net improvement of $5.6 million.

 

Total equity increased $2.6 million, or 2.0%, to $133.8 million as of December 30, 2022. The net loss during the first half decreased equity by $0.9 million, while a favorable foreign currency translation increased equity by $2.1 million. The net change in common stock and treasury stock resulting from the accounting for stock-based compensation increased equity by $1.1 million. The net remaining increase in equity of $0.3 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.

 

The Company's June 29, 2018 credit agreement (the "Credit Agreement") with BMO Harris Bank, N.A. ("BMO"), as amended through the Ninth Amendment dated June 30, 2022, remains in effect, and there have been no material changes in the terms of the Credit Agreement since the end of the Company's most recent fiscal year.  As of December 30, 2022, the Company's borrowing capacity on the Revolving Loans under the Credit agreement was $39,476,000 and the Company had approximately $20,096,000 of available borrowings.  In addition to the Credit Agreement, the Company has established unsecured lines of credit that used from time to time to secure certain performance obligations by the Company.  As of December 30, 2022, the Company also had cash of $13.5 million, primarily at its overseas operations.  These funds, with some restrictions and tax implications, are available for repatriation as deemed necessary by the Company.

 

The Company expects capital expenditures to be approximately $9 - $11 million in fiscal 2023.  These anticipated expenditures reflect the Company's plans to invest in modern equipment to drive efficiencies, quality improvements, and cost reductions.

 

The Company's significant contractual obligations as of December 30, 2022 are disclosed in Note N "Lease Liabilities" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.  There are no material undisclosed guarantees.  As of December 30, 2022, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90 days.  The Company also has long-term obligations related to its postretirement plans which are discussed in detail in Note G "Pension and Other Postretirement Benefit Plans in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q.  Postretirement medical claims are paid by the Company as they are submitted.  In fiscal 2023, the Company expects to contribute $0.8 million to postretirement benefits based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured.  In fiscal 2023, the Company expects to contribute $0.6 million to its defined benefit pension plans, the minimum contribution required.  the Company does not have any material off-balance sheet arrangements.

 

24

 

Management believes that available cash, the Credit Agreement, the unsecured lines of credit, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company's cash and capital requirements for the foreseeable future.

 

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, 2022. There have been no significant changes to those accounting policies subsequent to June 30, 2022.

 

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.

 

(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, 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.

 

25

 

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 2022 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 30, 2022, 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

         

 

October 1 –  October 28, 2022

 

0

NA

0

315,000

         

 

October 29 – November 25, 2022

 

22,024

NA

0

315,000

         

 

November 26 – December 30, 2022

 

0

NA

0

315,000

         

 

Total

 

22,024

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 Plan.

 

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 30, 2022, 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 30, 2022.

 

Under its Credit Agreement with BMO Harris Bank, N.A., the Company may not pay cash dividends on its common stock in excess of $3 million in any fiscal year.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 5.

Other Information

 

None.

 

26

 

 

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).

 

27

 

 

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 8, 2023

/s/ JEFFREY S. KNUTSON

 

Jeffrey S. Knutson

 

Vice President – Finance, Chief Financial Officer,

  Treasurer and Secretary
 

Chief Accounting Officer

 

28
ex_469375.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 8, 2023

/s/ JOHN H. BATTEN

 

John H. Batten

 

President and Chief Executive Officer

 

 
ex_469376.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 8, 2023

/s/ JEFFREY S. KNUTSON

 

Jeffrey S. Knutson

 

Vice President – Finance, Chief Financial Officer,

  Treasurer and Secretary

 

 
ex_469377.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 30, 2022, 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 8, 2023

/s/ JOHN H. BATTEN

 

John H. Batten

 

President and Chief Executive Officer

 

 
ex_469378.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 30, 2022, 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 8, 2023

/s/ JEFFREY S. KNUTSON

 

Jeffrey S. Knutson

 

Vice President – Finance, Chief Financial Officer,

  Treasurer and Secretary