UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
For the quarter ended
Commission File Number
TWIN DISC, INCORPORATED
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of | (I.R.S. Employer |
| Incorporation or organization) | Identification No.) |
(Address of principal executive offices)
(
(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 |
| | | The |
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.
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).
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 ☐ | |
| 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
At February 2, 2024, the registrant had
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
| December 29, 2023 | June 30, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Trade accounts receivable, net | ||||||||
| Inventories | ||||||||
| Assets held for sale | ||||||||
| Prepaid expenses | ||||||||
| Other | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Right-of-use assets operating leases | ||||||||
| Intangible assets, net | ||||||||
| Deferred income taxes | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt | ||||||||
| Lease obligations | ||||||||
| Accrued retirement benefits | ||||||||
| Deferred income taxes | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Twin Disc shareholders' equity: | ||||||||
| Preferred shares authorized: ; issued: ; par value | ||||||||
| Common shares authorized: ; issued: ; par value | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Less treasury stock, at cost ( and shares, respectively) | ||||||||
| Total Twin Disc shareholders' equity | ||||||||
| Noncontrolling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The notes to condensed consolidated financial statements are an integral part of these statements.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
| For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
| As Adjusted | As Adjusted | |||||||||||||||
| December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold (COGS) | ||||||||||||||||
| COGS - Sale of boat management system product line and related inventory | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Marketing, engineering and administrative expenses | ||||||||||||||||
| Restructuring expenses | ||||||||||||||||
| Other operating income | ( | ) | ( | ) | ||||||||||||
| Income from operations | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other expense (income), net | ( | ) | ||||||||||||||
| Income before income taxes and noncontrolling interest | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net income (loss) | ( | ) | ||||||||||||||
| Less: Net earnings attributable to noncontrolling interest, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to Twin Disc | $ | $ | $ | ( | ) | $ | ||||||||||
| Dividends per share | $ | $ | $ | $ | ||||||||||||
| Income (loss) per share data: | ||||||||||||||||
| Basic income (loss) per share attributable to Twin Disc common shareholders | $ | $ | $ | ( | ) | $ | ||||||||||
| Diluted income (loss) per share attributable to Twin Disc common shareholders | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted average shares outstanding data: | ||||||||||||||||
| Basic shares outstanding | ||||||||||||||||
| Diluted shares outstanding | ||||||||||||||||
| Comprehensive income (loss) | ||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Benefit plan adjustments, net of income taxes of $, $, $ and $, respectively | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency translation adjustment | ||||||||||||||||
| Unrealized (loss) gain on hedges, net of income taxes of $, $, $ and $, respectively | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income | ||||||||||||||||
| Less: Comprehensive income attributable to noncontrolling interest | ||||||||||||||||
| Comprehensive income attributable to Twin Disc | $ | $ | $ | $ | ||||||||||||
The notes to condensed consolidated financial statements are an integral part of these statements.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
| For the Two Quarters Ended | ||||||||
| As Adjusted | ||||||||
| December 29, 2023 | December 30, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Gain on sale of assets | ( | ) | ( | ) | ||||
| Loss on sale of boat management product line and related inventory | ||||||||
| Provision for deferred income taxes | ( | ) | ||||||
| Stock compensation expense and other non-cash changes, net | ||||||||
| Net change in operating assets and liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Acquisition of property, plant, and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of fixed assets | ||||||||
| Other, net | ( | ) | ||||||
| Net cash (used) provided by investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Borrowings under revolving loan arrangements | ||||||||
| Repayments of revolving loan arrangements | ( | ) | ( | ) | ||||
| Repayments of other long-term debt | ( | ) | ( | ) | ||||
| Dividends paid to shareholders | ( | ) | ||||||
| Payments of finance lease obligations | ( | ) | ( | ) | ||||
| Payments of withholding taxes on stock compensation | ( | ) | ( | ) | ||||
| Net cash used by financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash | ||||||||
| Net change in cash | ||||||||
| Cash: | ||||||||
| Beginning of period | ||||||||
| End of period | $ | $ | ||||||
The notes to condensed consolidated financial statements are an integral part of these statements.
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
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.
Change in Accounting Method
During the fourth quarter of fiscal year 2023, the Company changed its accounting method related to the recognition of actuarial gains and losses for the Company’s pension and postretirement benefit plans (the “Accounting change”). Prior to the Accounting change, actuarial gains and losses were recognized as a component of Accumulated other comprehensive income (loss) upon annual remeasurement and were amortized into earnings in future periods when they exceeded the accounting corridor, a defined range within which amortization of net gains and losses is not required. Under the Accounting change, the accounting corridor of 10% of the greater of the projected benefit obligation and plan assets was modified to add full, immediate recognition above a second 20% threshold. Although the decision to make the Accounting change occurred in the fourth quarter of fiscal year 2023, the actual accounting method change was applied to all calculations for fiscal year end 2023, and retroactively applied to all other amounts presented in this Form 10-Q.
Under the new accounting method, actuarial gains and losses are recognized in net periodic benefit cost through a modified mark-to-market (expense) benefit upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement. The method for recognizing prior service credits (charges) as a component of Accumulated other comprehensive income (loss) and amortized into earnings in future periods did not change. With respect to the recognition of actuarial gains and losses, while the historical principle was acceptable, the Company believes the Accounting change is preferable as it better aligns with fair value principles by recognizing the effects of economic and interest rate changes in plan assets and liabilities in the year in which the gains and losses are incurred to the degree such accumulated gains and losses exceed the new 20% threshold in addition to amortizing the amounts between the 10% and 20% thresholds over time. The Accounting change has been applied retrospectively to prior years and amounts presented.
See Notes G, K, M and P for further information regarding the impact of the Accounting change on the Company’s current and prior consolidated financial statements.
Recently Adopted Accounting Standards
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.
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 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.
| B. | Inventories |
The major classes of inventories were as follows:
| December 29, 2023 | June 30, 2023 | |||||||
| Inventories: | ||||||||
| Finished parts | $ | $ | ||||||
| Work in process | ||||||||
| Raw materials | ||||||||
| $ | $ | |||||||
In the first quarter of fiscal year 2024, the Company entered into an agreement to sell most of its boat management system product line located at one of its subsidiaries in Italy. The sale amount was below cost and resulted in the Company recognizing an inventory write-down of $
| 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 29, 2023 and December 30, 2022:
| For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
| December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||
| Reserve balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Current period expense and adjustments | ||||||||||||||||
| Payments or credits to customers | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Translation | ||||||||||||||||
| Reserve balance, end of period | $ | $ | $ | $ | ||||||||||||
The current portion of the warranty accrual ($
| 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 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 among segments are at established inter-company selling prices. Management evaluates the performance of its segments based on net income.
Information about the Company’s segments is summarized as follows:
| For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
| December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||
| Net sales | ||||||||||||||||
| Manufacturing segment sales | $ | $ | $ | $ | ||||||||||||
| Distribution segment sales | ||||||||||||||||
| Inter/Intra segment elimination – manufacturing | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Inter/Intra segment elimination – distribution | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | $ | $ | $ | |||||||||||||
| Net income (loss) attributable to Twin Disc | ||||||||||||||||
| Manufacturing segment net income | $ | $ | $ | $ | ||||||||||||
| Distribution segment net income | ||||||||||||||||
| Corporate and eliminations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
| Assets | December 29, 2023 | June 30, 2023 | ||||||
| Manufacturing segment assets | $ | $ | ||||||
| Distribution segment assets | ||||||||
| Corporate assets and elimination of intercompany assets | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Disaggregated revenue:
The following table presents details deemed most relevant to the users of the financial statements for the quarters ended December 29, 2023 and December 30, 2022.
Net sales by product group for the quarter ended December 29, 2023 is summarized as follows:
| Elimination of | ||||||||||||||||
| Manufacturing | Distribution | Intercompany Sales | Total | |||||||||||||
| Industrial | $ | $ | $ | ( | ) | $ | ||||||||||
| Land-based transmissions | ( | ) | $ | |||||||||||||
| Marine and propulsion systems | ( | ) | $ | |||||||||||||
| Other | ( | ) | $ | |||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
Net sales by product group for the quarter ended December 30, 2022 is summarized as follows:
| Elimination of | ||||||||||||||||
| Manufacturing | Distribution | Intercompany Sales | Total | |||||||||||||
| Industrial | $ | $ | $ | ( | ) | $ | ||||||||||
| Land-based transmissions | ( | ) | $ | |||||||||||||
| Marine and propulsion systems | ( | ) | $ | |||||||||||||
| Other | ( | ) | $ | |||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
Net Sales by product group for the two quarters ended December 29, 2023 is summarized as follows:
| Elimination of | ||||||||||||||||
| Manufacturing | Distribution | Intercompany Sales | Total | |||||||||||||
| Industrial | $ | $ | $ | ( | ) | $ | ||||||||||
| Land-based transmissions | ( | ) | $ | |||||||||||||
| Marine and propulsion systems | ( | ) | $ | |||||||||||||
| Other | ( | ) | ( | ) | $ | |||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
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 | $ | $ | $ | ( | ) | $ | ||||||||||
| Land-based transmissions | ( | ) | $ | |||||||||||||
| Marine and propulsion systems | ( | ) | $ | |||||||||||||
| Other | ( | ) | $ | |||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| F. | Stock-Based Compensation |
Performance Stock Awards (“PSA”)
During the first two quarters of fiscal 2024 and 2023, the Company granted a target number of
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 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
There were
Performance Stock Unit Awards (“PSUA”)
The PSUAs entitle an individual to shares of common stock of the Company or cash in lieu of shares of Company common stock if specific terms and conditions or restrictions are met through a specified date. During the first two quarters of fiscal 2024 and 2023, the Company granted a target number of
There were
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 to years. During the first two quarters of fiscal 2024 and 2023, the Company granted
Restricted Stock Unit Awards (“RSU”)
The RSUs entitle an individual to shares of common stock of the Company or cash in lieu of shares of Company common stock if specific terms and conditions or restrictions are met through a specified date, generally years from the date of grant or when performance conditions have been met. 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 2024 and 2023, the Company granted
| 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.
As discussed in Note A, during the fourth quarter of fiscal year 2023, the Company changed its accounting method related to the recognition of actuarial gains and losses for its pension and postretirement benefit plans. Under the new method, actuarial gains and losses are recognized in net periodic benefit costs upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement. These changes have been applied retrospectively to prior years presented below. See Notes A, K, M, and P for further information regarding the impact of the change in accounting principle on the Company’s consolidated financial statements.
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 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||
| Pension Benefits: | ||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||
| Prior service cost | ||||||||||||||||
| Interest cost | ||||||||||||||||
| Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of transition obligation | ||||||||||||||||
| Amortization of prior service cost | ||||||||||||||||
| Amortization of actuarial net loss | ||||||||||||||||
| Net periodic benefit (gain) cost | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Postretirement Benefits: | ||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||
| Interest cost | ||||||||||||||||
| Amortization of prior service cost | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of actuarial net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net periodic benefit gain | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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 $
The Company has reclassified ($
| H. | Income Taxes |
Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated Annual Effective Tax Rate (AETR). Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. To calculate its AETR, an entity must estimate its ordinary income or loss and the related tax expense or benefit for its full fiscal year. In situations in which an entity is in a loss position and recognizes a full valuation allowance, the guidance in ASC 740-270-25-9 applies. Due to continued historical domestic losses and uncertain future domestic earnings, the Company continues to recognize a full domestic 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 29, 2023 and December 30, 2022 the Company’s effective income tax rate was
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.
The Company has approximately $
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 through 2023 for our major operations in Belgium, Japan, Netherlands, Singapore and Australia. The tax years open to examination in the U.S. are for years subsequent to fiscal 2018. It is reasonably possible that other audit cycles will be completed during fiscal 2024.
| I. | Intangible Assets |
As of December 29, 2023, 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, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Addition | - | |||||||||||||||||||||||||||||
| Reduction | ( | ) | - | - | - | - | - | |||||||||||||||||||||||
| Amortization | - | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at December 29, 2023 | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||
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 5 years.
Intangible amortization expense was $
| Fiscal Year | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter |
| J. | Long-term Debt |
Long-term debt at December 29, 2023 and June 30, 2023 consisted of the following:
| December 29, 2023 | June 30, 2023 | |||||||
| Credit Agreement Debt | ||||||||
| Revolving loans (expire June 2025) | $ | $ | ||||||
| Term loan (due March 2026) | ||||||||
| Other | ||||||||
| Subtotal | ||||||||
| Less: current maturities | ( | ) | ( | ) | ||||
| Total long-term debt | $ | $ | ||||||
Credit Agreement Debt: On June 29, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A. (“BMO”) that provided for the assignment and assumption of the previously existing loans between the Company and Bank of Montreal (the “2016 Credit Agreement”) and subsequent amendments into a term loan (the “Term Loan”) and revolving credit loans (each a “Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan, the “Loans”). Pursuant to the Credit Agreement, BMO agreed to make the Term Loan to the Company in a principal amount not to exceed $
Under the Credit Agreement as amended, interest rates are based on either the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”). Loans 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. Currently, the Applicable Margins are between
The Credit Agreement, as amended, requires the Company to meet certain financial covenants. Specifically, the Company’s Total Funded Debt to EBITDA ratio may not exceed
Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property, including accounts receivable, inventory, machinery and equipment, and intellectual property. The Company has also pledged
The Company has also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security interest in deposit accounts the Company maintains with the Bank. The Bank may not provide a notice of exclusive control of a deposit account (thereby obtaining exclusive control of the account) prior to the occurrence or existence of a Default or an Event of Default under the Credit Agreement or otherwise upon the occurrence or existence of an event or condition that would, but for the passage of time or the giving of notice, constitute a Default or an Event of Default under the Credit Agreement.
Upon the occurrence of an Event of Default, BMO may take the following actions upon written notice to the Company: (1) terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately Cash Collateralize L/C Obligations in an amount equal to
The Company remains in compliance with its liquidity and other covenants.
As of December 29, 2023, current maturities include $
Other: Other long-term debt pertains mainly to a financing arrangement in Europe. These liabilities carry terms of to years and implied interest rates ranging from
During the quarter ended December 29, 2023, the average interest rate was
As of December 29, 2023, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $
The Company’s borrowings described above approximate fair value at December 29, 2023 and June 30, 2023. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
The Company is party to an interest rate swap arrangement with Bank of Montreal, with an initial notional amount of $
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
As of July 1, 2022, the cumulative effect of the Accounting change resulted in $
See Notes A, G, M, and P for further information regarding the impact of the Accounting change on the Company’s prior year consolidated financial statements.
The following is a reconciliation of the Company’s equity balances for the first two fiscal quarters of 2024 and 2023:
| Twin Disc, Inc. Shareholders’ Equity | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Other | Non- | |||||||||||||||||||||||
| Common | Retained | Comprehensive | Treasury | Controlling | Total | |||||||||||||||||||
| Stock | Earnings | Loss | Stock | Interest | Equity | |||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||
| Net (loss) income | ( | ) | ( | ) | ||||||||||||||||||||
| Translation adjustments | ( | ) | ( | ) | ||||||||||||||||||||
| Benefit plan adjustments, net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| Unrealized gain on hedges, net of tax | ||||||||||||||||||||||||
| Compensation expense | ||||||||||||||||||||||||
| Shares (acquired) issued, net | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 29, 2023 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Dividends paid to shareholders | ( | ) | ( | ) | ||||||||||||||||||||
| Translation adjustments | ||||||||||||||||||||||||
| Benefit plan adjustments, net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| Unrealized loss on hedges, net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| Compensation expense | ||||||||||||||||||||||||
| Shares (acquired) issued, net | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, December 29, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||
| Twin Disc, Inc. Shareholders’ Equity | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Other | Non- | |||||||||||||||||||||||
| Common | Retained | Comprehensive | Treasury | Controlling | Total | |||||||||||||||||||
| Stock | Earnings | Loss | Stock | Interest | Equity | |||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||
| Net (loss) income | ( | ) | ( | ) | ||||||||||||||||||||
| Translation adjustments | ( | ) | ( | ) | ||||||||||||||||||||
| Benefit plan adjustments, net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| Unrealized gain on hedges, net of tax | ||||||||||||||||||||||||
| Compensation expense | ||||||||||||||||||||||||
| Shares (acquired) issued, net | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Translation adjustments | ||||||||||||||||||||||||
| Benefit plan adjustments, net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| Unrealized loss on hedges, net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| Compensation expense | ||||||||||||||||||||||||
| Shares (acquired) issued, net | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, December 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||
Reconciliations for the changes in accumulated other comprehensive loss, net of tax, by component for the quarters ended December 29, 2023 and December 30, 2022 are as follows:
| Translation | Benefit Plan | Cash Flow | Net Investment | |||||||||||||
| Adjustment | Adjustment | Hedges | Hedges | |||||||||||||
| Balance, June 30, 2023 | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Translation adjustment during the quarter | ( | ) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ( | ) | ( | ) | ||||||||||||
| Net current period other comprehensive (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance, September 29, 2023 | ( | ) | ( | ) | ||||||||||||
| Translation adjustment during the quarter | ||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Net current period other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance at December 29, 2023 | $ | $ | ( | ) | $ | $ | ||||||||||
| Translation | Benefit Plan | Cash Flow | Net Investment | |||||||||||||
| Adjustment | Adjustment | Hedges | Hedges | |||||||||||||
| Balance, June 30, 2022 | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Translation adjustment during the quarter | ( | ) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ( | ) | ||||||||||||||
| Net current period other comprehensive (loss) income | ( | ) | ( | ) | ||||||||||||
| Balance, September 30, 2022 | ( | ) | ( | ) | ||||||||||||
| Translation adjustment during the quarter | ||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Plan merger adjustment | ( | ) | ||||||||||||||
| Net current period other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance at December 30, 2022 | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 29, 2023 are as follows:
| Amount Reclassified | Amount Reclassified | |||||||||
| Quarter Ended | Two Quarters Ended | |||||||||
| December 29, 2023 | December 29, 2023 | |||||||||
| Changes in benefit plan items | ||||||||||
| Actuarial losses | $ | ( | ) | (a) | $ | ( | ) | (a) | ||
| Transition asset and prior service benefit | ( | ) | (a) | ( | ) | (a) | ||||
| Total amortization | ( | ) | ( | ) | ||||||
| Income tax expense | ( | ) | ( | ) | ||||||
| Total reclassification net of tax | $ | ( | ) | $ | ( | ) | ||||
Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 30, 2022 is as follows:
| Amount Reclassified | Amount Reclassified | |||||||||
| Quarter Ended | Two Quarters Ended | |||||||||
| December 30, 2022 | December 30, 2022 | |||||||||
| Changes in benefit plan items | ||||||||||
| Actuarial losses | $ | (a) | $ | (a) | ||||||
| Transition asset and prior service benefit | ( | ) | (a) | ( | ) | (a) | ||||
| Mark-to-market adjustment | ( | ) | ( | ) | ||||||
| Plan merger remeasurement adjustment | ( | ) | ( | ) | ||||||
| Total amortization | ( | ) | ( | ) | ||||||
| Income taxes | ( | ) | ( | ) | ||||||
| Total reclassification net of tax | $ | ( | ) | $ | ( | ) | ||||
| (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. | 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. 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 $
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 $
In the second quarter of fiscal 2023, the Company completed the sale of the real estate property located in Belgium and received $
In the first quarter of fiscal 2024, the Company entered into an agreement to sell certain machinery assets, inventory, and legal relationships of its boat management systems product line. This action required the Company to reclassify these assets from Property, Plant and Equipment and Inventory to Assets Held for Sale, at fair value less costs to sell, or net book value, whichever is lower. The fair value of the machinery assets was determined using local internal specialists. The machinery assets’ fair value less costs to sell exceeded its net book value. The boat management systems inventory was valued at the lower of cost or net realizable value. Net realizable value was determined using the offer amount from the buyer less costs to sell. This assessment resulted in the Company recognizing a write-down of the carrying value of its boat management systems inventory of million. The write-down was classified in the income statement as a component of cost of goods sold. The agreement closed October 30, 2023.
| 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.
As discussed in Note A, during the fourth quarter of 2023, the Company changed its accounting method related to the recognition of actuarial gains and losses for its pension plans. Under the new method, actuarial gains and losses are recognized in net periodic benefit costs upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement. These changes have been applied retrospectively to prior years. See Notes A, G, K, and P for further information regarding the impact of the change in accounting principle on the Company’s consolidated financial statements.
The components of basic and diluted earnings per share were as follows:
| For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
| As Adjusted | As Adjusted | |||||||||||||||
| December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||
| Basic: | ||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Less: Net earnings attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Undistributed earnings attributable to unvested shares | ||||||||||||||||
| Net income (loss) attributable to Twin Disc | ( | ) | ||||||||||||||
| Weighted average shares outstanding - basic | ||||||||||||||||
| Basic Loss Per Share: | ||||||||||||||||
| Net earnings (loss) per share - basic | $ | $ | $ | ( | ) | $ | ||||||||||
| Diluted: | ||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Less: Net earnings attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Undistributed earnings attributable to unvested shares | ||||||||||||||||
| Net income (loss) attributable to Twin Disc | ( | ) | ||||||||||||||
| Weighted average shares outstanding - basic | ||||||||||||||||
| Effect of dilutive stock awards | ||||||||||||||||
| Weighted average shares outstanding - diluted | ||||||||||||||||
| Diluted Income (Loss) Per Share: | ||||||||||||||||
| Net earnings (loss) per share - diluted | $ | $ | $ | ( | ) | $ | ||||||||||
The following potential common shares were excluded from diluted EPS for the
| 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. Some of the Company’s leases contain non-lease components (e.g., common area, other maintenance costs, etc.) that relate to the lease components of the agreement. Non-lease components and the lease components to which they relate are accounted for as a single lease component.
The following table provides a summary of leases recorded on the condensed consolidated balance sheet.
| Balance Sheet Location | December 29, 2023 | June 30, 2023 | |||||||
| Lease Assets | |||||||||
| Operating lease right-of-use assets | Right-of-use assets operating leases | $ | $ | ||||||
| Finance lease right-of-use assets | Property, plant and equipment, net | ||||||||
| Lease Liabilities | |||||||||
| Operating lease liabilities | Accrued liabilities | $ | $ | ||||||
| Operating lease liabilities | Lease obligations | ||||||||
| Finance lease liabilities | Accrued liabilities | ||||||||
| Finance lease liabilities | Other long-term liabilities | ||||||||
The components of lease expense were as follows:
| For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
| December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Operating lease cost | ||||||||||||||||
| Short-term lease cost | ( | ) | ||||||||||||||
| Variable lease cost | ||||||||||||||||
| Total lease cost | ||||||||||||||||
| Less: Sublease income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net lease cost | $ | $ | $ | $ | ||||||||||||
Other information related to leases was as follows:
| For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
| December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||||||
| Operating cash flows from finance leases | ||||||||||||||||
| Financing cash flows from finance leases | ||||||||||||||||
| Right-of-use-assets obtained in exchange for lease obligations: | ||||||||||||||||
| Operating leases | ||||||||||||||||
| Finance leases | ||||||||||||||||
| Weighted average remaining lease term (years): | ||||||||||||||||
| Operating leases | ||||||||||||||||
| Finance lease | ||||||||||||||||
| Weighted average discount rate: | ||||||||||||||||
| Operating leases | % | % | ||||||||||||||
| Finance leases | % | % | ||||||||||||||
Approximate future minimum rental commitments under non-cancellable leases as of December 29, 2023 were as follows:
| Operating Leases | Finance Leases | |||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| Thereafter | ||||||||
| Total future lease payments | ||||||||
| Less: Amount representing interest | ( | ) | ( | ) | ||||
| Present value of future payments | $ | $ | ||||||
| O. | Derivative Financial Instruments |
From time to time, the Company enters into derivative instruments to manage volatility arising from risks relating to interest rates and foreign currency exchange rates. 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 condensed 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
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 condensed 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 gains related to cash flow hedging activities that were included in accumulated other comprehensive loss were ($
The Company estimates that $
Derivatives Designated as Net Investment Hedges
The Company is exposed to foreign currency exchange rate risk related to its investment in net assets in foreign countries. During the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan, with a notional amount of 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 ($
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 29, 2023 | June 30, 2023 | |||||||
| Derivative designated as hedge: | |||||||||
| Interest rate swap | Other current assets | $ | $ | ||||||
| Interest rate swap | Other noncurrent assets | ||||||||
The impact of the Company’s derivative instruments on the condensed consolidated statements of operations and comprehensive income (loss) for the quarters ended December 29, 2023 and December 30, 2022, respectively, was as follows:
| Statement of Comprehensive | For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
| Income (Loss) Location | December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||
| Derivative designated as hedge: | |||||||||||||||||
| Interest rate swap | Interest expense | $ | $ | $ | $ | ||||||||||||
| Interest rate swap | Unrealized gain (loss) on hedges | ( | ) | ||||||||||||||
| Net investment hedge | Unrealized (loss) gain on hedges | ( | ) | ( | ) | ||||||||||||
| P. | IMPACT OF ACCOUNTING METHOD CHANGE |
The following tables summarize the effects of the Accounting change described in Note A on the Company’s condensed consolidated statement of operations and comprehensive loss, statement of cash flows and statement of changes in equity for the quarter ended and the two quarters ended December 30, 2022 and condensed consolidated balance sheet as of December 30, 2022.
CONDENSED CONSOLIDATED STATEMENT OF OPERATION AND COMPREHENSIVE INCOME (LOSS)
| For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||||||||||
| December 30, 2022 | December 30, 2022 | |||||||||||||||||||||||
| As Computed Under Previous Method | Effect of Accounting Change | As Reported Under New Method | As Computed Under Previous Method | Effect of Accounting Change | As Reported Under New Method | |||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of goods sold | ||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||
| Marketing, engineering and administrative expenses | ||||||||||||||||||||||||
| Restructuring expenses | ||||||||||||||||||||||||
| Other operating income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Income from operations | ||||||||||||||||||||||||
| Other expense (income): | ||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||
| Other expense (income), net | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| ( | ) | ( | ) | |||||||||||||||||||||
| Income before income taxes and noncontrolling interest | ||||||||||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||
| Net income (loss) | ( | ) | ||||||||||||||||||||||
| Less: Net earnings attributable to noncontrolling interest, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net income (loss) attributable to Twin Disc | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Income (loss) per share data: | ||||||||||||||||||||||||
| Basic income (los)s per share attributable to Twin Disc common shareholders | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Diluted income (loss) per share attributable to Twin Disc common shareholders | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Weighted average shares outstanding data: | ||||||||||||||||||||||||
| Basic shares outstanding | ||||||||||||||||||||||||
| Diluted shares outstanding | ||||||||||||||||||||||||
| Comprehensive income (loss) | ||||||||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Benefit plan adjustments, net of income taxes of $ and $ computed under previous method; and $ and $ as reported under new method | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||||||
| Unrealized (loss) gain on hedges, net of income taxes of $ and $, respectively | ( | ) | ( | ) | ||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||
| Less: Comprehensive income attributable to noncontrolling interest | ||||||||||||||||||||||||
| Comprehensive income attributable to Twin | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
CONDENSED ONSOLIDATED CONDENSED BALANCE SHEET
| December 30, 2022 | ||||||||||||
| As Computed Under Previous Method | Effect of Accounting Change | As Reported Under New Method | ||||||||||
| ASSETS | ||||||||||||
| Current assets: | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Trade accounts receivable, net | ||||||||||||
| Inventories | ||||||||||||
| Assets held for sale | ||||||||||||
| Prepaid expenses | ||||||||||||
| Other | ||||||||||||
| Total current assets | ||||||||||||
| Property, plant and equipment, net | ||||||||||||
| Right-of-use assets operating leases | ||||||||||||
| Intangible assets, net | ||||||||||||
| Deferred income taxes | ||||||||||||
| Other assets | ||||||||||||
| Total assets | $ | $ | $ | |||||||||
| LIABILITIES AND EQUITY | ||||||||||||
| Current liabilities: | ||||||||||||
| Current maturities of long-term debt | $ | $ | $ | |||||||||
| Accounts payable | ||||||||||||
| Accrued liabilities | ||||||||||||
| Total current liabilities | ||||||||||||
| Long-term debt | ||||||||||||
| Lease obligations | ||||||||||||
| Accrued retirement benefits | ||||||||||||
| Deferred income taxes | ||||||||||||
| Other long-term liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Twin Disc shareholders' equity: | ||||||||||||
| Preferred shares authorized: ; issued: ; par value | ||||||||||||
| Common shares authorized: ; issued: ; par value | ||||||||||||
| Retained earnings | ( | ) | ||||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||||||
| Less treasury stock, at cost ( shares, respectively) | ||||||||||||
| Total Twin Disc shareholders' equity | ||||||||||||
| Noncontrolling interest | ||||||||||||
| Total equity | ||||||||||||
| Total liabilities and equity | $ | $ | $ | |||||||||
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
| December 30, 2022 | ||||||||||||
| As Computed Under Previous Method | Effect of Accounting Change | As Reported Under New Method | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | |||||||
| Adjustments to reconcile net (loss) income to net cash provided by activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Gain on sale of assets | ( | ) | ( | ) | ||||||||
| Provision for deferred income taxes | ( | ) | ( | ) | ||||||||
| Stock compensation expense | ||||||||||||
| Net change in operating assets and liabilities | ( | ) | ( | ) | ||||||||
| Net cash provided by operating activities | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Acquisition of property, plant, and equipment | ( | ) | ( | ) | ||||||||
| Proceeds from sale of fixed assets | ||||||||||||
| Proceeds on note receivable | ||||||||||||
| Other, net | ||||||||||||
| Net cash provided by investing activities | ||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Borrowings under revolving loan arrangements | ||||||||||||
| Repayments of revolving loan arrangements | ( | ) | ( | ) | ||||||||
| Repayments of other long-term debt | ( | ) | ( | ) | ||||||||
| Payments of finance lease obligations | ( | ) | ( | ) | ||||||||
| Payments of withholding taxes on stock compensation | ( | ) | ( | ) | ||||||||
| Net cash used by financing activities | ( | ) | ( | ) | ||||||||
| Effect of exchange rate changes on cash | ||||||||||||
| Net change in cash | ||||||||||||
| Cash: | ||||||||||||
| Beginning of period | ||||||||||||
| End of period | $ | $ | $ | |||||||||
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
| December 30, 2022 | ||||||||||||
| As Computed Under Previous Method | Effect of Accounting Change | As Reported Under New Method | ||||||||||
| Retained earnings | ||||||||||||
| Balance at June 30, 2022 | ( | ) | ||||||||||
| Net (loss) income attributable to Twin Disc | ( | ) | ||||||||||
| Balance at December 30, 2022 | $ | $ | ( | ) | $ | |||||||
| Accumulated other comprehensive income (loss) | ||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ||||||||
| Translation adjustments | ||||||||||||
| Benefit plan adjustments, net of tax | ( | ) | ( | ) | ||||||||
| Unrealized gain on hedges, net of tax | ||||||||||||
| Balance at December 30, 2022 | $ | ( | ) | $ | $ | ( | ) | |||||
| Item 2. |
Management Discussion and Analysis |
In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated financial statements as of December 29, 2023, 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, 2023, as supplemented in this Quarterly Report, could cause actual results to be materially different from what is expressed or implied in any forward-looking statement.
Results of Operations
| Quarter Ended |
Two Quarters Ended |
|||||||||||||||||||||||||||||||
| December 29, 2023 |
% of Net Sales |
December 30, 2022 |
% of Net Sales |
December 29, 2023 |
% of Net Sales |
December 30, 2022 |
% of Net Sales |
|||||||||||||||||||||||||
| Net sales |
$ | 72,994 | $ | 63,351 | $ | 136,547 | $ | 119,264 | ||||||||||||||||||||||||
| Cost of goods sold |
52,338 | 46,328 | 96,156 | 88,944 | ||||||||||||||||||||||||||||
| COGS - Sale of boat management system product line and related inventory |
- | - | 3,099 | - | ||||||||||||||||||||||||||||
| Gross profit |
20,656 | 28.3 | % | 17,023 | 26.9 | % | 37,292 | 27.3 | % | 30,320 | 25.4 | % | ||||||||||||||||||||
| Marketing, engineering and administrative expenses |
17,149 | 23.5 | % | 15,983 | 25.2 | % | 34,068 | 24.9 | % | 31,063 | 26.0 | % | ||||||||||||||||||||
| Restructuring expense |
69 | 0.1 | % | 164 | 0.3 | % | 68 | 0.0 | % | 174 | 0.1 | % | ||||||||||||||||||||
| Other operating income |
- | 0.0 | % | (4,150 | ) | -6.6 | % | - | 0.0 | % | (4,150 | ) | -3.5 | % | ||||||||||||||||||
| Loss from operations |
$ | 3,438 | 4.7 | % | $ | 5,026 | 7.9 | % | $ | 3,156 | 2.3 | % | $ | 3,233 | 2.7 | % | ||||||||||||||||
Comparison of the Second Quarter of Fiscal 2024 with the Second Quarter of Fiscal 2023
Net sales for the second quarter increased 15.2%, or $9.6 million, to $73.0 million from $63.4 million in the same quarter a year ago. The Company has benefited from favorable market conditions across most geographies and product groups through fiscal 2023 and into fiscal 2024. With the easing of global supply chain disruptions, along with improving operational performance, the Company has been able to improve delivery results. Global sales of marine and propulsion products improved 28.7% from the prior year, while shipments of off-highway transmission products improved by 8.1%. Shipments of industrial products declined by 13.1%, with a slow-down in the domestic housing and construction markets. The Asia Pacific region enjoyed the most significant sales improvement ($7.1 million or 56.1%) due to improved shipments of oil and gas transmissions into China, an improved demand for commercial marine products and continued strength in pleasure craft demand in Australia. The European region also saw a significant increase ($5.3 million or 26.5%), with improved operational performance at our facilities in Belgium and the Netherlands, coupled with continued strong demand. Sales into North America decreased 20.5%, or $5.3 million, primarily due to some softening in aftermarket demand in the oil and gas market. Currency translation had a favorable impact on second quarter fiscal 2024 sales compared to the second quarter of the prior year totaling $2.1 million primarily due to the strengthening of the euro against the U.S. dollar.
Sales at our manufacturing segment increased 3.2%, or $1.8 million, versus the same quarter last year. The U.S. manufacturing operations experienced a 5.6%, or $1.7 million, decrease in sales versus the second fiscal quarter of 2023, with some softening aftermarket demand in the North American energy market and weaker industrial demand related to the North American housing and construction markets. The Company’s operation in the Netherlands saw increased revenue of $3.6 million (27.3%) compared to the second fiscal quarter of 2023, primarily due to improving operation performance in support of a record level of incoming orders over the past few quarters, along with a favorable currency impact and improved supply chain performance. Similarly, the Company’s Belgian operation saw an increase compared to the prior year second quarter (35.1% or $1.8 million), with a favorable translation effect and improved delivery performance driven by operational and supply chain execution. The Company’s Italian manufacturing operations were down $2.0 million (29.2%) compared to the second quarter of fiscal 2023, primarily due to the sale of the BCS business during the quarter. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.1 million (6.2%) compared to the prior year second quarter.
Our distribution segment experienced an increase in sales of $11.5 million (44.8%) in the second quarter of fiscal 2024 compared to the second quarter of fiscal 2023. The Company’s Asian distribution operations in Singapore, China and Japan were up 60.4% or $4.4 million from the prior year on improving deliveries for energy related products in China. The Company’s North America distribution operation saw a 26.3% ($1.7 million) increase on strong demand for marine products from the European operations. The Company’s European distribution operation saw a significant increase ($2.1 million or 41.9%) on strong demand, a favorable currency impact and improved supply of product. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in revenue (29.4% or $2.1 million) from the prior year second fiscal quarter, primarily due to continued strong demand for pleasure craft products in the region.
Gross profit as a percentage of sales for the second quarter of fiscal 2024 improved to 28.3%, compared to 26.9% for the same period last year. The improvement in the current year second quarter compared to the prior year result was primarily volume related, with margin conversion of 37.7% on the additional revenue. The mix impact for the quarter was essentially neutral.
For the fiscal 2024 second quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 23.5%, compared to 25.2% for the fiscal 2023 second quarter. ME&A expenses increased $1.2 million (7.3%) versus the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of higher wages and benefits ($0.7 million), travel costs ($0.2 million), software maintenance ($0.1 million), product development ($0.1 million) and a positive currency translation impact ($0.3 million). These increases were partially offset by lower professional fees ($0.4 million). The increases were driven by inflationary impacts and investment in resources to support our hybrid electric strategy.
The Company incurred minor restructuring charges during the second quarter of fiscal 2024 and fiscal 2023, 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 in light of the ongoing market challenges.
Interest expense was down slightly to $0.4 million in the second quarter of fiscal 2024, with a lower average outstanding revolver balance partially offset by a higher interest rate.
Other expense, net of $0.4 million for the second fiscal quarter was primarily attributable to a currency loss, partially offset by a pension benefit.
The fiscal 2024 second quarter effective tax rate was 64.0% compared to 26.3% 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 2024 with the First Half of Fiscal 2023
Net sales for the first half increased 14.5%, or $17.3 million, to $136.5 million from $119.3 million in the same period a year ago. The Company has continued to benefit from favorable market conditions across most geographies and product groups through fiscal 2023 and into fiscal 2024. With the easing of global supply chain disruptions, along with improving operational performance, the Company has been able to improve delivery results compared to the prior year. Global sales of marine and propulsion products improved 26.8% from the prior year, while shipments of off-highway transmission products improved by 12.5%. Shipments of industrial products declined by 16.0%, with a slow-down in the domestic housing and construction markets. The Asia Pacific region enjoyed the most significant sales improvement ($14.5 million or 57.5%) due to improved shipments of oil and gas transmissions into China, an improved demand for commercial marine products and continued strength in pleasure craft demand in Australia. The European region also saw a significant increase ($11.4 million or 32.2%), with improved operational performance at our facilities in Belgium and the Netherlands, coupled with continued strong demand. Sales into North America decreased 18.9%, or $9.2 million, primarily due to some softening in aftermarket demand in the oil and gas market. Currency translation had a favorable impact on first half fiscal 2024 sales compared to the first half of the prior year totaling $4.4 million primarily due to the strengthening of the euro against the U.S. dollar.
Sales at our manufacturing segment increased 6.8%, or $7.2 million, versus the same period last year. The U.S. manufacturing operations experienced a 6.9%, or $4.1 million, decrease in sales versus the first half of fiscal 2023, with some softening aftermarket demand in the North American energy market and weaker industrial demand related to the North American housing and construction markets. The Company’s operation in the Netherlands saw increased revenue of $11.2 million (54.1%) compared to the first half of fiscal 2023, primarily due to improving operation performance in support of a record level of incoming orders over the past several quarters, along with a favorable currency impact and improved supply chain performance. Similarly, the Company’s Belgian operation saw an increase compared to the prior fiscal year first half (28.8% or $2.7 million), with a favorable translation effect and improved delivery performance driven by operational and supply chain execution. The Company’s Italian manufacturing operations were down $2.7 million (21.4%) compared to the first half of fiscal 2023, primarily due to the sale of the BCS business during the current fiscal year. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.1 million (4.2%) compared to the prior fiscal year first half.
Our distribution segment experienced an increase in sales of $20.2 million (40.5%) in the first half of fiscal 2024 compared to the first half of fiscal 2023. The Company’s Asian distribution operations in Singapore, China and Japan were up 88.9% or $14.0 million from the prior year on improving deliveries for energy related products in China and strong commercial marine demand in the region. The Company’s North America distribution operation saw a 10.4% ($1.2 million) increase on strong domestic demand for marine products from the European operations. The Company’s European distribution operation saw a significant increase ($2.2 million or 26.1%) on strong demand, a favorable currency impact and improved supply of product. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in revenue (6.8% or $0.9 million) from the prior year first half, primarily due to continued strong demand for pleasure craft products in the region.
Gross profit as a percentage of sales for the first half of fiscal 2024 improved to 27.3%, compared to 25.4% for the same period last year. The improvement in the first half of the current year compared to the prior year result was primarily volume related, along with a positive mix impact due to additional oil and gas units shipped in the current year. These favorable movements were partially offset by the negative impact of the sale of the BCS business that was recorded in the first quarter of fiscal 2024.
For the fiscal 2024 first half, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 24.9%, compared to 26.0% for the fiscal 2023 first half. ME&A expenses increased $3.0 million (9.7%) versus the same period last fiscal year. The increase in ME&A spending for the first half was comprised of higher wages and benefits ($1.4 million), travel costs ($0.5 million), software maintenance ($0.3 million), product development ($0.3 million) and a positive currency translation impact ($0.5 million). These increases were partially offset by lower bad debt expense ($0.2 million). The increases were driven by inflationary impacts and investment in resources to support our hybrid electric strategy.
The Company incurred minor restructuring charges during the first half of fiscal 2024 and fiscal 2023, 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 in light of the ongoing market challenges.
Interest expense was down slightly to $0.8 million in the first half of fiscal 2024, with a lower average outstanding revolver balance partially offset by a higher interest rate.
Other expense of $0.3 million for the first half of fiscal 2024 was primarily attributable to a currency loss, partially offset by a pension benefit.
The fiscal 2024 first half effective tax rate was 107.1% compared to 80.5% in the prior fiscal year comparable period. 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 29, 2023 and June 30, 2023
As of December 29, 2023, the Company had net working capital of $119.0 million, which represents a decrease of $0.6 million, or 0.5%, from the net working capital of $119.6 million as of June 30, 2023.
Cash increased by $7.8 million to $21.0 million as of December 29, 2023, versus $13.3 million as of June 30, 2023. As of December 29, 2023, the majority of the cash is at the Company’s overseas operations in Europe ($5.5 million) and Asia-Pacific ($10.8 million).
Trade receivables of $41.4 million were down $13.3 million, or 24.3%, when compared to last fiscal year-end. The impact of foreign currency translation was to increase accounts receivable by $1.2 million versus June 30, 2023. As a percent of sales, trade receivables finished at 56.8% in the second quarter of fiscal 2024 compared to 62.2% for the comparable period in fiscal 2023 and 65.2% for the fourth quarter of fiscal 2023.
Inventories were essentially unchanged versus June 30, 2023. The impact of foreign currency translation was to increase inventories by $3.9 million versus June 30, 2023. This increase was essentially offset by the sale of the BCS business, reducing inventory by $3.8 million. Other entity movements were offsetting, with increases at our operations in the Netherlands (driven by anticipated growth in the second half) and Australia (timing of purchases and a new product introduction) being offset by reductions at our distribution operations in Singapore, China and the US. On a consolidated basis, as of December 29, 2023, the Company’s backlog of orders to be shipped over the next six months approximates $125.2 million, compared to $119.2 million at June 30, 2023 and $124.0 million at December 30, 2022. As a percentage of six-month backlog, inventory has decreased from 111% at June 30, 2023 to 105% at December 29, 2023.
Net property, plant and equipment increased $1.6 million (4.4%) to $40.3 million versus $38.7 million at June 30, 2023. The Company had capital spending of $5.4 million in the first half and a favorable exchange impact of $0.5 million. These increases were offset by depreciation ($3.4 million) and the impact of the sale of the BCS business. 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 2024. 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 29, 2023 of $32.6 million was down $3.9 million, or 10.7%, from June 30, 2023. The impact of foreign currency translation was to increase accounts payable by $1.1 million versus June 30, 2023. The remaining decrease is primarily related to the reduced purchasing activities in light of stable demand and inventory reduction efforts.
Total borrowings and long-term debt as of December 29, 2023 decreased $0.9 million to $17.7 million versus $18.6 million at June 30, 2023. During the first half, the Company reported positive free cash flow of $10.6 million (defined as operating cash flow less acquisitions of fixed assets), driven by positive operating results and working capital performance, partially offset by the payment of a bonus accrual and capital spending. The Company ended the quarter with total debt, net of cash, of ($3.3) million, compared to $5.4 million at June 30, 2023, for a net improvement of $8.7 million.
Total equity increased $0.2 million, or 0.1%, to $145.3 million as of December 29, 2023. The net loss during the first half decreased equity by $0.1 million, offset by a favorable foreign currency translation of $2.2 million and the payment of a dividend ($0.6 million). The net change in common stock and treasury stock resulting from the accounting for stock-based compensation decreased equity by $0.5 million. The net remaining decrease in equity 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.
On June 29, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A. (“BMO”) that provided for the assignment and assumption of the previously existing loans between the Company and Bank of Montreal (the “2016 Credit Agreement”) and subsequent amendments into a term loan (the “Term Loan”) and revolving credit loans (each a “Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan, the “Loans”). Pursuant to the Credit Agreement, BMO agreed to make the Term Loan to the Company in a principal amount not to exceed $35.0 million and the Company may, from time to time prior to the maturity date, enter into Revolving Loans in amounts not to exceed, in the aggregate, $50.0 million (the “Revolving Credit Commitment”), subject to a Borrowing Base based on Eligible Inventory and Eligible Receivables. Subsequent amendments to the Credit Agreement reduced the Term Loan to $20.0 million, extended the maturity date of the Term Loan to March 4, 2026, and require the Company to make principal installment payments on the Term Loan of $0.5 million per quarter. In addition, under subsequent amendments to the Credit Agreement, BMO’s Revolving Credit Commitment is currently $40.0 million. The Credit Agreement also allows the Company to obtain Letters of Credit from BMO, which if drawn upon by the beneficiary thereof and paid by BMO, would become Revolving Loans. Under the Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $3.0 million in any fiscal year. The term of the Revolving Loans under the Credit Agreement currently runs through June 30, 2025.
Under the Credit Agreement as amended, interest rates are based on either the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”). Loans 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. Currently, 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 Credit Agreement, as amended, requires the Company to meet certain financial covenants. Specifically, the Company’s Total Funded Debt to EBITDA ratio 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.
Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property, including accounts receivable, inventory, machinery and equipment, and intellectual property. The Company has also pledged 100% of its equity interests in certain domestic subsidiaries and 65% of its equity interests in certain foreign subsidiaries. The Company also entered into a Collateral Assignment of Rights under Purchase Agreement for its acquisition of Veth Propulsion. To effect these security interests, the Company entered into various amendment and assignment agreements that consent to the assignment of certain agreements previously entered into between the Company and the Bank of Montreal in connection with the 2016 Credit Agreement. The Company also amended and assigned to BMO a Negative Pledge Agreement that it has previously entered into with Bank of Montreal, pursuant to which it agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Credit Agreement and the Negative Pledge Agreement.
The Company has also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security interest in deposit accounts the Company maintains with the Bank. The Bank may not provide a notice of exclusive control of a deposit account (thereby obtaining exclusive control of the account) prior to the occurrence or existence of a Default or an Event of Default under the Credit Agreement or otherwise upon the occurrence or existence of an event or condition that would, but for the passage of time or the giving of notice, constitute a Default or an Event of Default under the Credit Agreement.
Upon the occurrence of an Event of Default, BMO may take the following actions upon written notice to the Company: (1) terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately Cash Collateralize L/C Obligations in an amount equal to 105% of the aggregate L/C Obligations or a greater amount if BMO determines a greater amount is necessary. If such Event of Default is due to the Company’s bankruptcy, the Bank may take the three actions listed above without notice to the Company.
Other significant contractual obligations as of December 29, 2023 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 29, 2023, 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 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 2024, the Company expects to contribute $0.7 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 2024, the Company expects to contribute $0.7 million to its defined benefit pension plans. The Company does not have any material off-balance sheet arrangements.
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, 2023. There have been no significant changes to those accounting policies subsequent to June 30, 2023.
| 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.
| 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 2023 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 29, 2023, which were not registered under the Securities Act of 1933, in reliance upon an exemption from registration provided by Section 4 (2) of the Act.
| (b) |
Use of Proceeds |
Not applicable.
| (c) |
Issuer Purchases of Equity Securities |
Issuer Purchases of Equity Securities
| Period |
(a) Total Number of Shares Purchased |
(b) Average Price Paid per Share |
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| September 30, – October 27, 2023 |
0 |
NA |
0 |
315,000 |
| October 28 – November 24, 2023 |
0 |
NA |
0 |
315,000 |
| November 25 – December 29, 2023 |
620 |
NA |
0 |
315,000 |
| Total |
0 |
NA |
0 |
315,000 |
The amounts shown in Column (a) above represent shares of common stock delivered to the Company as payment of withholding taxes due on the vesting of restricted stock and performance stock issued under the Twin Disc, Incorporated 2021 and 2018 Long-Term Incentive Compensation Plans.
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 29, 2023, 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 29, 2023.
The discussion of limitations upon the payment of dividends as a result of the Credit Agreement between the Company and BMO Harris Bank, N.A., as discussed in Part I, Item 2, "Management's Discussion and Analysis " under the heading "Financial Condition, Liquidity and Capital Resources," is incorporated herein by reference.
| Item 3. |
Defaults Upon Senior Securities |
None.
| Item 5. |
Other Information |
None.
| 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).
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 7, 2024 |
/s/ JEFFREY S. KNUTSON |
| Jeffrey S. Knutson |
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| Vice President – Finance, Chief Financial Officer, |
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| Treasurer and Secretary | |
| Chief Accounting Officer |
Exhibit 31a
CERTIFICATION
I, John H. Batten, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Twin Disc, Incorporated; |
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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; |
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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; |
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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: |
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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; |
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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; |
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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 |
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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 |
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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): |
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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 |
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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. |
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Date: February 7, 2024 |
/s/ JOHN H. BATTEN |
|
John H. Batten |
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|
President and Chief Executive Officer |
Exhibit 31b
CERTIFICATION
I, Jeffrey S. Knutson, certify that:
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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; |
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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 |
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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 |
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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 |
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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. |
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Date: February 7, 2024 |
/s/ JEFFREY S. KNUTSON |
|
Jeffrey S. Knutson |
|
|
Vice President – Finance, Chief Financial Officer, |
|
| Treasurer and Secretary |
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 29, 2023, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, John H. Batten, 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:
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(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 |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: February 7, 2024 |
/s/ JOHN H. BATTEN |
|
John H. Batten |
|
|
President and Chief Executive Officer |
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 29, 2023, 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 |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: February 7, 2024 |
/s/ JEFFREY S. KNUTSON |
|
Jeffrey S. Knutson |
|
|
Vice President – Finance, Chief Financial Officer, Treasurer and Secretary |