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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION         

WASHINGTON, D.C. 20549

Form 10-Q

 

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

 

For the quarter ended December 29, 2023

 

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

 

Commission File Number 1-7635

 

 

TWIN DISC, INCORPORATED

(Exact name of registrant as specified in its charter)

 

Wisconsin

39-0667110

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification No.)

  

222 East Erie Street, Suite 400, Milwaukee, Wisconsin 53202

(Address of principal executive offices)

 

(262) 638-4000

(Registrant's telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock (No Par Value)

TWIN

The NASDAQ Stock Market LLC

 

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

Yes ☑                  No ☐         

 

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

 

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

Large Accelerated Filer ☐

Accelerated Filer

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

 

 

 

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

 

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

Yes                   No ☑         

 

At February 2, 2024, the registrant had 13,995,627 shares of its common stock outstanding.

 

 

   

Part I.               FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

  

December 29, 2023

  

June 30, 2023

 

ASSETS

        

Current assets:

        

Cash

 $21,021  $13,263 

Trade accounts receivable, net

  41,428   54,760 

Inventories

  131,768   131,930 

Assets held for sale

  2,968   2,968 

Prepaid expenses

  10,157   8,459 

Other

  9,235   8,326 

Total current assets

  216,577   219,706 
         

Property, plant and equipment, net

  40,334   38,650 

Right-of-use assets operating leases

  12,017   13,133 

Intangible assets, net

  11,146   12,637 

Deferred income taxes

  2,371   2,244 

Other assets

  2,745   2,811 
         

Total assets

 $285,190  $289,181 
         

LIABILITIES AND EQUITY

        

Current liabilities:

        

Current maturities of long-term debt

 $2,000  $2,010 

Accounts payable

  32,611   36,499 

Accrued liabilities

  62,929   61,586 

Total current liabilities

  97,540   100,095 
         

Long-term debt

  15,698   16,617 

Lease obligations

  9,988   10,811 

Accrued retirement benefits

  6,975   7,608 

Deferred income taxes

  3,162   3,280 

Other long-term liabilities

  5,917   5,253 

Total liabilities

  139,280   143,664 
         

Twin Disc shareholders' equity:

        

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

  -   - 

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

  39,661   42,855 

Retained earnings

  119,496   120,299 

Accumulated other comprehensive loss

  (4,059)  (5,570)
   155,098   157,584 

Less treasury stock, at cost (639,006 and 814,734 shares, respectively)

  9,802   12,491 
         

Total Twin Disc shareholders' equity

  145,296   145,093 
         

Noncontrolling interest

  614   424 

Total equity

  145,910   145,517 
         

Total liabilities and equity

 $285,190  $289,181 

 

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

 

 

2

 

 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE 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

 $72,994  $63,351  $136,547  $119,264 

Cost of goods sold (COGS)

  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   17,023   37,292   30,320 
                 

Marketing, engineering and administrative expenses

  17,149   15,983   34,068   31,063 

Restructuring expenses

  69   164   68   174 

Other operating income

  -   (4,150)  -   (4,150)

Income from operations

  3,438   5,026   3,156   3,233 
                 

Interest expense

  392   594   786   1,160 

Other expense (income), net

  449   182   310   (164)
   841   776   1,096   996 
                 

Income before income taxes and noncontrolling interest

  2,597   4,250   2,060   2,237 

Income tax expense

  1,662   2,489   2,208   1,801 
                 

Net income (loss)

  935   1,761   (148)  436 

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

  (5)  (15)  (95)  (112)
                 

Net income (loss) attributable to Twin Disc

 $930  $1,746  $(243) $324 
                 

Dividends per share

 $0.04  $-  $0.04  $- 
                 

Income (loss) per share data:

                

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

 $0.07  $0.13  $(0.02) $0.02 

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

 $0.07  $0.13  $(0.02) $0.02 
                 

Weighted average shares outstanding data:

                

Basic shares outstanding

  13,718   13,460   13,629   13,434 

Diluted shares outstanding

  13,923   13,699   13,629   13,649 
                 

Comprehensive income (loss)

                

Net income (loss)

 $935  $1,761  $(148) $436 

Benefit plan adjustments, net of income taxes of $13, $13, $8 and $4, respectively

  (108)  (1,122)  (279)  (1,211)

Foreign currency translation adjustment

  5,190   8,392   2,154   2,102 

Unrealized (loss) gain on hedges, net of income taxes of $0, $0, $0 and $0, respectively

  (485)  (595)  (269)  198 

Comprehensive income

  5,532   8,436   1,458   1,525 

Less: Comprehensive income attributable to noncontrolling interest

  40   74   190   210 
                 

Comprehensive income attributable to Twin Disc

 $5,492  $8,362  $1,268  $1,315 

 

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

 

3

 

 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

  

For the Two Quarters Ended

 
      

As Adjusted

 
  

December 29,

2023

  

December 30,

2022

 
         

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net (loss) income

 $(148) $436 

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

        

Depreciation and amortization

  5,023   4,266 

Gain on sale of assets

  (42)  (4,203)

Loss on sale of boat management product line and related inventory

  3,099   - 

Provision for deferred income taxes

  280   (1,105)

Stock compensation expense and other non-cash changes, net

  1,413   1,565 

Net change in operating assets and liabilities

  6,422   (927)
         

Net cash provided by operating activities

  16,047   32 
         

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Acquisition of property, plant, and equipment

  (5,419)  (4,734)

Proceeds from sale of fixed assets

  -   7,152 

Other, net

  (252)  385 
         

Net cash (used) provided by investing activities

  (5,671)  2,803 
         

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Borrowings under revolving loan arrangements

  50,632   42,898 

Repayments of revolving loan arrangements

  (50,632)  (46,628)

Repayments of other long-term debt

  (1,010)  (707)

Dividends paid to shareholders

  (560)  - 

Payments of finance lease obligations

  (471)  (132)

Payments of withholding taxes on stock compensation

  (1,772)  (463)
         

Net cash used by financing activities

  (3,813)  (5,032)
         

Effect of exchange rate changes on cash

  1,195   3,204 
         

Net change in cash

  7,758   1,007 
         

Cash:

        

Beginning of period

  13,263   12,521 
         

End of period

 $21,021  $13,528 

 

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

 

4

 

 

 

TWIN DISC, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

A.

Basis of Presentation

 

The unaudited condensed consolidated financial statements have been prepared by Twin Disc, Incorporated (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include adjustments, consisting primarily of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report filed on Form 10-K for  June 30, 2023. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States.

 

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

 

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.

 

5

 

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

 $65,089  $66,956 

Work in process

  22,239   23,374 

Raw materials

  44,440   41,600 
  $131,768  $131,930 

 

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 $2.1 million. The Company also evaluated its other boat management system inventory, not associated with the sale. This evaluation resulted in the Company recognizing an additional inventory write-down of $1.6 million for inventory located in the U.S. These write-downs were partially offset by certain liabilities transferred to the buyer at the time of the sale. The sale was completed in the second quarter of fiscal year 2024.

   

 

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

 $4,160  $3,804  $3,476  $3,329 

Current period expense and adjustments

  1,208   770   2,724   1,678 

Payments or credits to customers

  (898)  (503)  (1,718)  (869)

Translation

  18   74   6   7 

Reserve balance, end of period

 $4,488  $4,145  $4,488  $4,145 

 

 

The current portion of the warranty accrual ($3,549 and $3,552 as of December 29, 2023 and December 30, 2022, respectively) is reflected in accrued liabilities, while the long-term portion ($939 and $593 as of December 29, 2023 and December 30, 2022, respectively) is included in other long-term liabilities on the consolidated balance sheets.

 

6

   
 

D.

Contingencies

 

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

   

 

E.

Business Segments

 

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

 

The Company has two reportable segments: manufacturing and distribution.  These segment structures reflect the way management makes operating decisions and manages the growth and profitability of the business. It also corresponds with management’s approach of allocating resources and assessing the performance of its segments. The accounting practices of the segments are the same as those described in the summary of significant accounting policies. Transfers 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

 $58,368  $56,678  $112,906  $105,675 

Distribution segment sales

  37,242   25,584   70,095   49,892 

Inter/Intra segment elimination – manufacturing

  (18,795)  (14,198)  (38,979)  (27,842)

Inter/Intra segment elimination – distribution

  (3,821)  (4,713)  (7,475)  (8,461)
  $72,994  $63,351  $136,547  $119,264 

Net income (loss) attributable to Twin Disc

                

Manufacturing segment net income

 $2,078  $4,439  $3,636  $6,841 

Distribution segment net income

  3,173   1,403   4,179   2,359 

Corporate and eliminations

  (4,321)  (4,096)  (8,058)  (8,876)
  $930  $1,746  $(243) $324 

 

Assets

 

December 29, 2023

  

June 30, 2023

 

Manufacturing segment assets

 $380,283  $381,668 

Distribution segment assets

  70,391   69,213 

Corporate assets and elimination of intercompany assets

  (165,484)  (161,700)
  $285,190  $289,181 

 

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.

 

7

 
 

Net sales by product group for the quarter ended December 29, 2023 is summarized as follows:

 

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $5,704  $1,557  $(730) $6,531 

Land-based transmissions

  15,003   7,953   (7,093) $15,863 

Marine and propulsion systems

  37,661   24,058   (14,773) $46,946 

Other

  -   3,674   (20) $3,654 

Total

 $58,368  $37,242  $(22,616) $72,994 

 

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

 

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $6,963  $1,726  $(1,177) $7,512 

Land-based transmissions

  15,256   3,445   (4,030) $14,671 

Marine and propulsion systems

  34,262   15,427   (13,223) $36,466 

Other

  197   4,986   (481) $4,702 

Total

 $56,678  $25,584  $(18,911) $63,351 

 

Net Sales by product group for the two quarters ended December 29, 2023 is summarized as follows:

 

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $10,994  $2,586  $(1,364) $12,216 

Land-based transmissions

  29,684   20,623   (15,867) $34,440 

Marine and propulsion systems

  72,228   40,378   (29,197) $83,409 

Other

  (0)  6,508   (26) $6,482 

Total

 $112,906  $70,095  $(46,454) $136,547 

 

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

 

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $13,656  $2,774  $(1,886) $14,544 

Land-based transmissions

  31,543   8,051   (8,985) $30,609 

Marine and propulsion systems

  60,077   29,971   (24,246) $65,802 

Other

  399   9,096   (1,186) $8,309 

Total

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

    

 

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 119.3 and 118.1 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2024 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2026. 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 238.7.

 

The fiscal 2023 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2025. These PSAs are subject to adjustment if the Company’s return on invested capital and cumulative EBITDA falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 236.2.

 

8

 

There were 335.2 and 438.9 unvested PSAs outstanding at December 29, 2023 and December 30, 2022, respectively. The fair value of the PSAs (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. Compensation expense of $261 and $366 was recognized for the quarters ended December 29, 2023 and December 30, 2022, respectively, related to PSAs. Compensation expense of $314 and $596 was recognized for the two quarters ended December 29, 2023 and December 30, 2022, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at December 29, 2023 was $11.48. At December 29, 2023, the Company had $1,977 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2024 and 2023 awards. The total fair value of PSAs vested as of December 29, 2023 and December 30, 2022 was $0.

 

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 10.5 and 0 PSUAs, respectively, to various individuals in the Company. The fiscal 2024 PSUAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSUA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2026. These PSUAs 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 20.9.

 

There were 10.5 and 0 unvested PSUAs outstanding at December 29, 2023 and December 30, 2022, respectively. The fair value of the PSUAs (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. Compensation expense of $11 and $0 was recognized for the quarters ended December 29, 2023 and December 30, 2022, respectively, related to PSUAs. Compensation expense of $18 and $0 was recognized for the two quarters ended December 29, 2023 and December 30, 2022, respectively, related to PSUAs. The weighted average grant date fair value of the unvested awards at December 29, 2023 was $12.15. At December 29, 2023, the Company had $109 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2024 awards. The total fair value of PSUAs vested as of December 29, 2023 and December 30, 2022 was $0.

 

Restricted Stock Awards (RS)

 

The Company has unvested RS awards outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded as compensation expense over the vesting period, which is generally 1 to 3 years. During the first two quarters of fiscal 2024 and 2023, the Company granted 115.7 and 177.7 service based restricted shares, respectively, to employees and non-employee directors. There were 251.3 and 309.2 unvested shares outstanding at December 29, 2023 and December 30, 2022, respectively. A total of 2.4 and 0 shares of restricted stock were forfeited during the two quarters ended December 29, 2023 and December 30, 2022, respectively. Compensation expense of $210 and $334 was recognized for the quarters ended December 29, 2023 and December 30, 2022, respectively. Compensation expense of $523 and $694 was recognized for the two quarters ended December 29, 2023 and December 30, 2022, respectively. The total fair value of restricted stock grants vested as of December 29, 2023 and December 30, 2022 was $2,206 and $1,669, respectively. As of December 29, 2023, the Company had $1,804 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

 

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 three 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 7.1 and 72.4 of employment based RSUs, respectively. There were 135.0 and 130.9 unvested RSUs outstanding at December 29, 2023 and December 30, 2022, respectively. Compensation expense of $126 and $132 was recognized for the quarters ended December 29, 2023 and December 30, 2022, respectively. Compensation expense of $247 and $224 was recognized for the two quarters ended December 29, 2023 and December 30, 2022, respectively. The total fair value of restricted stock units vested as of December 29, 2023 and December 30, 2022 was $25 and $40, respectively. The weighted average grant date fair value of the unvested awards at December 29, 2023 was $10.97. As of December 29, 2023, the Company had $537 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

 

9

  
 

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

 $94  $102  $188  $203 

Prior service cost

  -   8   -   17 

Interest cost

  896   868   1,792   1,736 

Expected return on plan assets

  (1,048)  (1,060)  (2,096)  (2,120)

Amortization of transition obligation

  10   9   19   18 

Amortization of prior service cost

  9   9   17   18 

Amortization of actuarial net loss

  16   617   31   1,235 

Net periodic benefit (gain) cost

 $(23) $553  $(49) $1,107 
                 

Postretirement Benefits:

                

Service cost

 $2  $2  $4  $5 

Interest cost

  48   53   95   106 

Amortization of prior service cost

  (22)  (69)  (44)  (137)

Amortization of actuarial net loss

  (155)  (10)  (310)  (19)

Net periodic benefit gain

 $(127) $(24) $(255) $(45)

 

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 $675 to its pension plans in fiscal 2024. As of December 29, 2023, $403 in contributions to the pension plans have been made.

 

The Company has reclassified ($108) (net of $13 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended December 29, 2023, and ($1,122) (net of $13 in taxes) during the quarter ended December 30, 2022. These reclassifications are included in the computation of net periodic benefit (gain) cost. The Company has reclassified ($279) (net of $8 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the two quarters ended December 29, 2023, and ($1,211) (net of $4 in taxes) during the two quarters ended December 30, 2022. These reclassifications are included in the computation of net periodic benefit (gain) cost.

   

 

H.

Income Taxes

 

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated Annual Effective Tax Rate (AETR). Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. To calculate its AETR, an entity must estimate its ordinary income or loss and the related tax expense or benefit for its full fiscal year. In situations in which an entity is in a loss position and recognizes a full valuation allowance, the guidance in ASC 740-270-25-9 applies. Due to continued historical domestic losses and uncertain future domestic earnings, the Company 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.

 

10

 

For the six months ended December 29, 2023 and December 30, 2022 the Company’s effective income tax rate was 107.2% and 80.5% respectively. Foreign earnings were $9,282 and $5,094 respectively, with a related tax expense of $2,199 and $1,773, respectively. Domestic losses were ($7,222) and ($2,857), respectively, with a related tax expense of $9 and $28, respectively. Due to the full US valuation allowance currently in place, no tax benefit can be recognized on the domestic losses. This inability to recognize a tax benefit for domestic purposes resulted in a consolidated tax expense of $2,208 and $1,801, respectively, on year-to-date income of $2,061 and $2,237, respectively.

 

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 $834 of unrecognized tax benefits, including interest and penalties, as of December 29, 2023, which, if recognized, would favorably impact the effective tax rate. There were no significant changes in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the two quarters ended December 29, 2023. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going activity.

 

Annually, the Company files income tax returns in various taxing jurisdictions inside and outside the United States. In general, the tax years that remain subject to examination in foreign jurisdictions are 2018 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

 $31,925    $(19,288) $12,637  $6,553  $2,422  $668  $2,994 

Addition

  73     -   73   -   -   -   73 

Reduction

  (631)    631   -   -   -   -   - 

Amortization

  -     (1,636)  (1,636)  (622)  (601)  (39)  (374)

Translation adjustment

  72     -   72   62   (173)  195   (12)

Balance at December 29, 2023

 $31,439    $(20,293) $11,146  $5,993  $1,648  $824  $2,681 

 

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 $817 and $704 for the quarters ended December 29, 2023, and December 30, 2022, respectively. Intangible amortization expense was $1,636 and $1,402 for the two quarters ended December 29, 2023, and December 30, 2022, respectively. Estimated intangible amortization expense for the remainder of fiscal 2024 and each of the next five fiscal years and thereafter is as follows:

 

Fiscal Year

    

2024

 $1,827 

2025

  3,316 

2026

  2,310 

2027

  1,553 

2028

  1,405 

2029

  735 

Thereafter

  0 

 

11

   
 

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)

 $7,175  $7,094 

Term loan (due March 2026)

  10,500   11,500 

Other

  23   33 

Subtotal

  17,698   18,627 

Less: current maturities

  (2,000)  (2,010)

Total long-term debt

 $15,698  $16,617 

 

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 $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 0.10% and 0.15% 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.

 

12

 

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, BMO may take the three actions listed above without notice to the Company.

 

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

 

As of December 29, 2023, current maturities include $2,000 of term loan payments due within the coming year.

 

Other: Other long-term debt pertains mainly to a financing arrangement in Europe. These liabilities carry terms of three to five years and implied interest rates ranging from 7% to 25%. A total amount of $10 in principal was paid on these liabilities during the current fiscal year.

 

During the quarter ended December 29, 2023, the average interest rate was 6.82% on the Term Loan, and 5.63% on the Revolving Loans.

 

As of December 29, 2023, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $37,157, and the Company had approximately $29,982 of available borrowings. In addition to the Credit Agreement, the Company has established unsecured lines of credit that are used from time to time to secure certain performance obligations by the Company.

 

The Company’s borrowings described above approximate fair value at December 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 $20,000 and a maturity date of March 4, 2026 to hedge the Term Loan. As of December 29, 2023, the notional amount was $10,500. This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging. This swap is included in the disclosures in Note O, Derivative Financial Instruments.

 

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

     

 

K.

Shareholders Equity

 

The Company, from time to time, makes open market purchases of its common stock under authorizations given to it by the Board of Directors, of which 315.0 shares as of December 29, 2023 remain authorized for purchase.  The Company did not make any open market purchases of its shares during the quarters ended December 29, 2023 and December 30, 2022.

 

As of July 1, 2022, the cumulative effect of the Accounting change resulted in $25.1 million decrease to retained earnings and a corresponding $25.1 million increase to Accumulated other comprehensive income (loss), both net of tax of $0 ($7.9 million in deferred tax asset offset by $7.9 million valuation allowance).

 

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.

 

13

 

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

 $42,855  $120,299  $(5,570) $(12,491) $424  $145,517 

Net (loss) income

      (1,173)          90   (1,083)

Translation adjustments

          (3,096)      60   (3,036)

Benefit plan adjustments, net of tax

          (171)          (171)

Unrealized gain on hedges, net of tax

          216           216 

Compensation expense

  495                   495 

Shares (acquired) issued, net

  (3,911)          2,148       (1,763)

Balance, September 29, 2023

  39,439   119,126   (8,621)  (10,343)  574   140,175 

Net income

      930           5   935 

Dividends paid to shareholders

      (560)              (560)

Translation adjustments

          5,155       35   5,190 

Benefit plan adjustments, net of tax

          (108)          (108)

Unrealized loss on hedges, net of tax

          (485)          (485)

Compensation expense

  772                   772 

Shares (acquired) issued, net

  (550)          541       (9)

Balance, December 29, 2023

 $39,661  $119,496  $(4,059) $(9,802) $614  $145,910 

 

 

  

Twin Disc, Inc. Shareholders’ Equity

 
          

Accumulated

             
          

Other

      

Non-

     
  

Common

  

Retained

  

Comprehensive

  

Treasury

  

Controlling

  

Total

 
  

Stock

  

Earnings

  

Loss

  

Stock

  

Interest

  

Equity

 

Balance, June 30, 2022

 $42,551  $109,919  $(6,974) $(14,720) $412  $131,188 

Net (loss) income

      (1,422)          98   (1,324)

Translation adjustments

          (6,328)      38   (6,290)

Benefit plan adjustments, net of tax

          (89)          (89)

Unrealized gain on hedges, net of tax

          793           793 

Compensation expense

  658                   658 

Shares (acquired) issued, net

  (1,924)          1,756       (168)

Balance, September 30, 2022

  41,285   108,497   (12,598)  (12,964)  548   124,768 

Net income

      1,746           15   1,761 

Translation adjustments

          8,333       59   8,392 

Benefit plan adjustments, net of tax

          (1,122)          (1,122)

Unrealized loss on hedges, net of tax

          (595)          (595)

Compensation expense

  856                   856 

Shares (acquired) issued, net

  (697)          402       (295)

Balance, December 30, 2022

 $41,444  $110,243  $(5,982) $(12,562) $622  $133,765 

 

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

 $(1,582) $(5,948) $688  $1,272 

Translation adjustment during the quarter

  (3,096)  -   -   - 

Amounts reclassified from accumulated other comprehensive loss

  -   (171)  (6)  222 

Net current period other comprehensive (loss) income

  (3,096)  (171)  (6)  222 

Balance, September 29, 2023

  (4,678)  (6,119)  682   1,494 

Translation adjustment during the quarter

  5,155          

Amounts reclassified from accumulated other comprehensive loss

  -   (108)  (183)  (302)

Net current period other comprehensive income (loss)

  5,155   (108)  (183)  (302)

Balance at December 29, 2023

 $477  $(6,227) $499