UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q10-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
For the quarter ended December 29, 2017
Commission File Number 1-7635
TWIN DISC, INCORPORATED
(Exact name of registrant as specified in its charter)
Wisconsin |
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(State or other jurisdiction of | (I.R.S. Employer |
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1328 Racine222 East Erie Street,, Racine, Suite 400, Milwaukee, Wisconsin 5340353202
(Address of principal executive offices)
(262) 638-4000
(Registrant'sRegistrant'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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes √ No__ ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitiondefinitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☐ | Accelerated Filer | |
Non-accelerated filer | Smaller reporting | |
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, 2018,2024, the registrant had 11,584,89213,995,627 shares of its common stock outstanding.
Part I.FINANCIAL INFORMATION |
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Item 1.Financial Statements
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(ININ THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)(UNAUDITED)
December 29, 2017 | June 30, 2017 | |||||||||||||||
December 29, 2023 | June 30, 2023 | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 15,766 | $ | 16,367 | $ | 21,021 | $ | 13,263 | ||||||||
Trade accounts receivable, net | 29,214 | 31,392 | 41,428 | 54,760 | ||||||||||||
Inventories | 74,037 | 66,193 | 131,768 | 131,930 | ||||||||||||
Assets held for sale | 2,968 | 2,968 | ||||||||||||||
Prepaid expenses | 7,683 | 8,295 | 10,157 | 8,459 | ||||||||||||
Other | 7,979 | 7,187 | 9,235 | 8,326 | ||||||||||||
Total current assets | 134,679 | 129,434 | 216,577 | 219,706 | ||||||||||||
Property, plant and equipment, net | 47,820 | 48,212 | 40,334 | 38,650 | ||||||||||||
Right-of-use assets operating leases | 12,017 | 13,133 | ||||||||||||||
Intangible assets, net | 11,146 | 12,637 | ||||||||||||||
Deferred income taxes | 21,462 | 24,198 | 2,371 | 2,244 | ||||||||||||
Goodwill, net | 2,759 | 2,585 | ||||||||||||||
Intangible assets, net | 2,032 | 2,009 | ||||||||||||||
Other assets | 4,434 | 4,460 | 2,745 | 2,811 | ||||||||||||
Total assets | $ | 213,186 | $ | 210,898 | $ | 285,190 | $ | 289,181 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current maturities of long-term debt | $ | 2,000 | $ | 2,010 | ||||||||||||
Accounts payable | $ | 23,404 | $ | 21,301 | 32,611 | 36,499 | ||||||||||
Accrued liabilities | 23,335 | 23,222 | 62,929 | 61,586 | ||||||||||||
Total current liabilities | 46,739 | 44,523 | 97,540 | 100,095 | ||||||||||||
Long-term debt | 4,684 | 6,323 | 15,698 | 16,617 | ||||||||||||
Lease obligations | 9,988 | 10,811 | ||||||||||||||
Accrued retirement benefits | 30,463 | 33,706 | 6,975 | 7,608 | ||||||||||||
Deferred income taxes | 976 | 1,011 | 3,162 | 3,280 | ||||||||||||
Other long-term liabilities | 1,675 | 1,768 | 5,917 | 5,253 | ||||||||||||
Total liabilities | 84,537 | 87,331 | 139,280 | 143,664 | ||||||||||||
Commitments and contingencies (Note D) | ||||||||||||||||
Equity: | ||||||||||||||||
Twin Disc shareholders' equity: | ||||||||||||||||
Preferred shares authorized: 200,000; issued: none; no par value | - | - | ||||||||||||||
Common shares authorized: 30,000,000; issued: 13,099,468; no par value | 10,086 | 10,429 | ||||||||||||||
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 | 168,646 | 169,368 | 119,496 | 120,299 | ||||||||||||
Accumulated other comprehensive loss | (27,427 | ) | (32,671 | ) | (4,059 | ) | (5,570 | ) | ||||||||
151,305 | 147,126 | 155,098 | 157,584 | |||||||||||||
Less treasury stock, at cost (1,514,576 and 1,580,335 shares, respectively) | 23,199 | 24,205 | ||||||||||||||
Less treasury stock, at cost (639,006 and 814,734 shares, respectively) | 9,802 | 12,491 | ||||||||||||||
Total Twin Disc shareholders' equity | 128,106 | 122,921 | 145,296 | 145,093 | ||||||||||||
Noncontrolling interest | 543 | 646 | 614 | 424 | ||||||||||||
Total equity | 128,649 | 123,567 | 145,910 | 145,517 | ||||||||||||
Total liabilities and equity | $ | 213,186 | $ | 210,898 | $ | 285,190 | $ | 289,181 |
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 | $ | 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.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE(LOSS) INCOMECASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)IN THOUSANDS)
(UNAUDITED)(UNAUDITED)
For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
December 29, 2017 | December 30, 2016 | December 29, 2017 | December 30, 2016 | |||||||||||||
Net sales | $ | 56,546 | $ | 33,672 | $ | 101,611 | $ | 69,507 | ||||||||
Cost of goods sold | 38,420 | 24,723 | 69,590 | 51,385 | ||||||||||||
Gross profit | 18,126 | 8,949 | 32,021 | 18,122 | ||||||||||||
Marketing, engineering and administrative expenses | 15,268 | 12,560 | 28,936 | 25,035 | ||||||||||||
Restructuring expenses | 831 | 816 | 2,049 | 1,074 | ||||||||||||
Income (loss) from operations | 2,027 | (4,427 | ) | 1,036 | (7,987 | ) | ||||||||||
Interest expense | 83 | 122 | 147 | 175 | ||||||||||||
Other expense (income), net | 69 | (456 | ) | 268 | (346 | ) | ||||||||||
152 | (334 | ) | 415 | (171 | ) | |||||||||||
Income (loss) before income taxes and noncontrolling interest | 1,875 | (4,093 | ) | 621 | (7,816 | ) | ||||||||||
Income tax expense (benefit) | 5,925 | (1,201 | ) | 1,267 | (2,253 | ) | ||||||||||
Net loss | (4,050 | ) | (2,892 | ) | (646 | ) | (5,563 | ) | ||||||||
Less: Net earnings attributable to noncontrolling interest, net of tax | (63 | ) | (20 | ) | (76 | ) | (45 | ) | ||||||||
Net loss attributable to Twin Disc | $ | (4,113 | ) | $ | (2,912 | ) | $ | (722 | ) | $ | (5,608 | ) | ||||
Loss per share data: | ||||||||||||||||
Basic loss per share attributable to Twin Disc common shareholders | $ | (0.36 | ) | $ | (0.26 | ) | $ | (0.06 | ) | $ | (0.50 | ) | ||||
Diluted loss per share attributable to Twin Disc common shareholders | $ | (0.36 | ) | $ | (0.26 | ) | $ | (0.06 | ) | $ | (0.50 | ) | ||||
Weighted average shares outstanding data: | ||||||||||||||||
Basic shares outstanding | 11,297 | 11,242 | 11,278 | 11,231 | ||||||||||||
Diluted shares outstanding | 11,297 | 11,242 | 11,278 | 11,231 | ||||||||||||
Comprehensive (loss) income: | ||||||||||||||||
Net loss | $ | (4,050 | ) | $ | (2,892 | ) | $ | (646 | ) | $ | (5,563 | ) | ||||
Benefit plan adjustments, net of income taxes of $674, $399, $952 and $798, respectively | 1,734 | 750 | 2,208 | 1,422 | ||||||||||||
Foreign currency translation adjustment | 488 | (4,198 | ) | 3,029 | (3,515 | ) | ||||||||||
Comprehensive (loss) income | (1,828 | ) | (6,340 | ) | 4,591 | (7,656 | ) | |||||||||
Less: Comprehensive income attributable to noncontrolling interest | (62 | ) | (31 | ) | (69 | ) | (112 | ) | ||||||||
Comprehensive (loss) income attributable to Twin Disc | $ | (1,890 | ) | $ | (6,371 | ) | $ | 4,522 | $ | (7,768 | ) |
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.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the Two Quarters Ended | ||||||||
December 29, 2017 | December 30, 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (646 | ) | $ | (5,563 | ) | ||
Adjustments to reconcile net loss to net cash provided (used) by operating activities: | ||||||||
Depreciation and amortization | 3,263 | 3,680 | ||||||
Restructuring expenses | 162 | 174 | ||||||
Provision for deferred income taxes | 1,613 | (2,580 | ) | |||||
Stock compensation expense and other non-cash changes, net | 1,064 | 720 | ||||||
Net change in operating assets and liabilities | (1,644 | ) | 1,130 | |||||
Net cash provided (used) by operating activities | 3,812 | (2,439 | ) | |||||
Cash flows from investing activities: | ||||||||
Acquisitions of fixed assets | (3,013 | ) | (1,094 | ) | ||||
Proceeds from sale of fixed assets | 79 | 9 | ||||||
Other, net | (129 | ) | (129 | ) | ||||
Net cash used by investing activities | (3,063 | ) | (1,214 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings under revolving loan agreement | 35,315 | 26,948 | ||||||
Repayments under revolving loan agreement | (36,957 | ) | (27,666 | ) | ||||
Dividends paid to noncontrolling interest | (172 | ) | (109 | ) | ||||
Tax shortfall from stock compensation | - | (153 | ) | |||||
Payments of withholding taxes on stock compensation | (400 | ) | (140 | ) | ||||
Net cash used by financing activities | (2,214 | ) | (1,120 | ) | ||||
Effect of exchange rate changes on cash | 864 | (509 | ) | |||||
Net change in cash | (601 | ) | (5,282 | ) | ||||
Cash: | ||||||||
Beginning of period | 16,367 | 18,273 | ||||||
End of period | $ | 15,766 | $ | 12,991 |
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 all adjustments, consisting onlyprimarily of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that theseThese 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-K10-K for June 30, 2017. 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.
NewChange in Accounting ReleasesMethod
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 second20% 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 2017, 2020 and January 2021, the Financial Accounting Standards Board (“FASB”)FASB issued guidance (ASU 2017-07)2020-04 and ASU 2021-01, respectively), intended to improveprovide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the presentationdiscontinuation of net periodic pension cost 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 net periodic postretirementthe 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 guidancereplaces the existing incurred loss model with an expected loss model and requires that an employer report the service costs component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other componentsuse of net benefit cost are requiredforward-looking information to be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations.calculate credit loss estimates. The amendments in this guidance are effective for annual periods, and interim periods within those annual periods,filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2017, (the Company’s2019, and for smaller reporting companies for fiscal 2019)years beginning after December 15, 2022 (the Company’s fiscal 2024), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.
In October 2016, the FASB issued updated guidance (ASU 2016-16) that changes the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory. The amendments in this guidance are effectivepermitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (the Company’s fiscal 2019), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.
In August 2016, the FASB issued updated guidance (ASU 2016-15) that addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (the Company’s fiscal 2019), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.
In March 2016, the FASB issued updated guidance (ASU 2016-09) intendedcertain amendments. ASC 326 must be adopted by applying a cumulative effect adjustment to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this standard in the first quarter of fiscal year 2018. As a result of the adoption, excess tax benefits or deficiencies associated with stock-based compensation award activity are recognized in income tax expense in the consolidated statements of operations. In addition, excess tax benefits associated with award activity is reported as cash flows from operating activities along with all other income tax cash flows. The Company has elected to apply this classification change on a prospective basis.retained earnings. The adoption of this guidance did not have a material impact on the Company'sCompany’s financial statements.
In February 2016, the FASB issued guidance (ASU 2016-02) which replaces the existing guidance for leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The guidance is effective for fiscal years beginning after December 15, 2018 (the Company’s fiscal 2020), including interim periods within those fiscal years and requires retrospective application.
In preparation for the adoption of this guidance, theSpecial Note Regarding Smaller Reporting Company gathered all active lease contracts from all its locations to assess whether or not they meet the definition of a lease under the new guidance, specifically, whether there is an identified asset in the contract, and whether or not control thereof lies with the Company. The Company assessed the practical expedients that are allowed under the guidance, including the exclusion of lease contracts with terms of twelve months or less. It assessed each contract for the appropriate lease payment components, discount rate, lease terms (dependent on renewal options) and compiled a preliminary calculation of the right-of-use assets and operating lease liability amounts that would be recognized on the Company’s balance sheet upon adoption of the guidance.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 is continuing its assessment, including the potential operational process changes aswill 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 result of the new guidance. It plans to early-adopt the guidance, using the modified retrospective approach, to coincide with its adoption of the new revenue recognition guidance, which is the first quarter of fiscal 2019.smaller reporting company under SEC rules.
In July 2015, the FASB issued guidance (ASU 2015-11) intended to simplify the measurement of inventory and to closely align with International Financial Reporting Standards. Current guidance requires inventories to be measured at the lower of cost or market. Under this new guidance, inventories other than those measured under last in first out (“LIFO”) are to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this guidance, prospectively, in the first fiscal quarter of 2018. The adoption of this guidance did not have an impact on the Company's financial statements.
In May 2014, the FASB issued updated guidance (ASU 2014-09) on revenue from contracts with customers. This revenue recognition guidance supersedes existing guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of control over promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies steps to apply in achieving this principle. This updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (the Company’s first quarter of fiscal 2019).
In preparation for the adoption of this guidance, the Company gathered customer contracts and customer purchase orders of its various locations to assess whether there are separate and distinct performance obligations, as defined by ASU 2014-09, within these agreements. The assessment has included interviews with various functions, including sales, engineering, customer service, and finance, to further analyze those performance obligations, both explicit and implicit (particularly as they relate to services). Under this ASU, revenue is recognized when or as each performance obligation is satisfied. Based upon the preliminary findings, the Company has identified indicators that suggest a deferral of revenue may be required for certain agreements where the performance of services after product delivery may be required. In certain agreements where the products are built to customer specifications, revenue may need to be accelerated. The Company is continuing its assessment, including whether or not these obligations are perfunctory or material to the financial statements. It plans to adopt the guidance, using the modified retrospective approach, on the effective date applicable to the Company, which is the first quarter of fiscal 2019.
B. |
|
The major classesclasses of inventories were as follows:
December 29, 2017 | June 30, 2017 | December 29, 2023 | June 30, 2023 | |||||||||||||
Inventories: | ||||||||||||||||
Finished parts | $ | 49,052 | $ | 45,829 | $ | 65,089 | $ | 66,956 | ||||||||
Work in process | 10,141 | 8,358 | 22,239 | 23,374 | ||||||||||||
Raw materials | 14,844 | 12,006 | 44,440 | 41,600 | ||||||||||||
$ | 74,037 | $ | 66,193 | $ | 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 quarter and two quarters ended December 29, 2017 2023 and December 30, 2016:2022:
For the Quarter Ended | For the Two Quarters Ended | For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||||||||||||||||
December 29, 2017 | December 30, 2016 | December 29, 2017 | December 30, 2016 | December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||||||||||||||
Reserve balance, beginning of period | $ | 2,326 | $ | 3,036 | $ | 2,062 | $ | 3,607 | $ | 4,160 | $ | 3,804 | $ | 3,476 | $ | 3,329 | ||||||||||||||||
Current period expense | 723 | 61 | 1,381 | 243 | ||||||||||||||||||||||||||||
Current period expense and adjustments | 1,208 | 770 | 2,724 | 1,678 | ||||||||||||||||||||||||||||
Payments or credits to customers | (589 | ) | (506 | ) | (1,022 | ) | (1,268 | ) | (898 | ) | (503 | ) | (1,718 | ) | (869 | ) | ||||||||||||||||
Translation | 7 | (49 | ) | 46 | (40 | ) | 18 | 74 | 6 | 7 | ||||||||||||||||||||||
Reserve balance, end of period | $ | 2,467 | $ | 2,542 | $ | 2,467 | $ | 2,542 | $ | 4,488 | $ | 4,145 | $ | 4,488 | $ | 4,145 |
The current portion of the warranty accrual ($2,0323,549 and $2,063$3,552 as of December 29, 2017 2023 and December 30, 2016, 2022, respectively) is reflected in accrued liabilities, while the long-term portion ($435939 and $479$593 as of December 29, 2017 2023 and December 30, 2016, 2022, respectively) is included in other long-term liabilities on the consolidated balance sheets.
D. | Contingencies |
The Company is involved in litigation of which the ultimate outcome and liability to the Company, if any, is not presently determinable. Management believes that final disposition of such litigation will not have a material impact on the Company’sCompany’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-dutyheavy-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. Its These segment structure reflectsstructures 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 earnings.income.
Information about the Company’sCompany’s segments is summarized as follows:
For the Quarter Ended | For the Two Quarters Ended | For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||||||||||||||||
December 29, 2017 | December 30, 2016 | December 29, 2017 | December 30, 2016 | December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||||||||||||||
Net sales | ||||||||||||||||||||||||||||||||
Manufacturing segment sales | $ | 48,580 | $ | 29,472 | $ | 88,453 | $ | 59,971 | $ | 58,368 | $ | 56,678 | $ | 112,906 | $ | 105,675 | ||||||||||||||||
Distribution segment sales | 21,336 | 14,291 | 38,998 | 29,686 | 37,242 | 25,584 | 70,095 | 49,892 | ||||||||||||||||||||||||
Inter/Intra segment elimination – manufacturing | (9,489 | ) | (8,229 | ) | (19,821 | ) | (16,355 | ) | (18,795 | ) | (14,198 | ) | (38,979 | ) | (27,842 | ) | ||||||||||||||||
Inter/Intra segment elimination – distribution | (3,881 | ) | (1,862 | ) | (6,019 | ) | (3,795 | ) | (3,821 | ) | (4,713 | ) | (7,475 | ) | (8,461 | ) | ||||||||||||||||
$ | 56,546 | $ | 33,672 | $ | 101,611 | $ | 69,507 | $ | 72,994 | $ | 63,351 | $ | 136,547 | $ | 119,264 | |||||||||||||||||
Net income (loss) attributable to Twin Disc | ||||||||||||||||||||||||||||||||
Manufacturing segment net income (loss) | $ | 123 | $ | (1,459 | ) | $ | 5,190 | $ | (2,879 | ) | ||||||||||||||||||||||
Manufacturing segment net income | $ | 2,078 | $ | 4,439 | $ | 3,636 | $ | 6,841 | ||||||||||||||||||||||||
Distribution segment net income | 387 | 496 | 1,056 | 767 | 3,173 | 1,403 | 4,179 | 2,359 | ||||||||||||||||||||||||
Corporate and eliminations | (4,623 | ) | (1,949 | ) | (6,968 | ) | (3,496 | ) | (4,321 | ) | (4,096 | ) | (8,058 | ) | (8,876 | ) | ||||||||||||||||
$ | (4,113 | ) | $ | (2,912 | ) | $ | (722 | ) | $ | (5,608 | ) | $ | 930 | $ | 1,746 | $ | (243 | ) | $ | 324 |
Assets | December 29, 2017 | June 30, 2017 | December 29, 2023 | June 30, 2023 | ||||||||||||||||||||
Manufacturing segment assets | $ | 229,835 | $ | 222,136 | $ | 380,283 | $ | 381,668 | ||||||||||||||||
Distribution segment assets | 51,557 | 50,418 | 70,391 | 69,213 | ||||||||||||||||||||
Corporate assets and elimination of intercompany assets | (68,206 | ) | (61,656 | ) | (165,484 | ) | (161,700 | ) | ||||||||||||||||
$ | 213,186 | $ | 210,898 | $ | 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.
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”(“PSA”)
During the the first halftwo quarters of fiscal 20182024 and 2017,2023, the Company granted a target number of 54.9119.3 and 109.6118.1 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 20182024 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital average annual sales and average annual Earnings Per Share (“EPS”)cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2020. 2026. These PSAs are subject to adjustment if the Company’s return on invested capital net sales, and EPS for the periodcumulative 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 82.3. Based upon favorable actual results to date, the Company is currently accruing compensation expense for these PSAs.238.7.
The fiscal 20172023 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital average annual sales and average annual EPScumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2019. 2025. These PSAs are subject to adjustment if the Company’sCompany’s return on invested capital net sales, and EPS for the periodcumulative 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 164.4. Based upon actual results to date and the low probability of achieving the threshold performance levels, the Company is currently not accruing compensation expense for these PSAs.236.2.
There were 224.9335.2 and 181.8438.9 unvested PSAs outstanding at December 29, 2017 2023 and December 30, 2016, 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 $121$261 and $15$366 was recognized for the quarters ended December 29, 2017 2023 and December 30, 2016, 2022, respectively, related to PSAs. Compensation expense of $136$314 and $30$596 was recognized for the two quarters ended December 29, 2017 2023 and December 30, 2016, 2022, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at December 29, 2017 2023 was $13.45.$11.48. At December 29, 2017, 2023, the Company had $2,775$1,977 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2018, 20172024 and 20162023 awards. The total fair value of PSAs vested as of December 29, 2017 2023 and December 30, 2016 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 firsttwo 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”(“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 halftwo quarters of fiscal 20182024 and 2017,2023, the Company granted 85.3115.7 and 181.8177.7 service based restricted shares, respectively, to employees and non-employee directors. There were 272.4251.3 and 269.6309.2 unvested shares outstanding at December 29, 2017 2023 and December 30, 2016, 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 $464$210 and $370$334 was recognized for the quarters ended December 29, 2017 2023 and December 30, 2016, 2022, respectively. Compensation expense of $927$523 and $696$694 was recognized for the two quarters ended December 29, 2017 2023 and December 30, 2016, 2022, respectively. The total fair value of restricted stock grants vested as of December 29, 2017 2023 and December 30, 2016 2022 was $1,758$2,206 and $587,$1,669, respectively. As of December 29, 2017, 2023, the Company had $2,195$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 firsttwo 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.
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 health carehealthcare 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 | For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||||||||||||||||
December 29, 2017 | December 30, 2016 | December 29, 2017 | December 30, 2016 | December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||||||||||||||
Pension Benefits: | ||||||||||||||||||||||||||||||||
Service cost | $ | 241 | $ | 259 | $ | 503 | $ | 480 | $ | 94 | $ | 102 | $ | 188 | $ | 203 | ||||||||||||||||
Prior service cost | - | 8 | - | 17 | ||||||||||||||||||||||||||||
Interest cost | 1,062 | 1,118 | 2,136 | 2,243 | 896 | 868 | 1,792 | 1,736 | ||||||||||||||||||||||||
Expected return on plan assets | (1,516 | ) | (1,457 | ) | (3,041 | ) | (2,899 | ) | (1,048 | ) | (1,060 | ) | (2,096 | ) | (2,120 | ) | ||||||||||||||||
Amortization of transition obligation | 9 | 9 | 18 | 18 | 10 | 9 | 19 | 18 | ||||||||||||||||||||||||
Amortization of prior service cost | 1 | 1 | 2 | 2 | 9 | 9 | 17 | 18 | ||||||||||||||||||||||||
Amortization of actuarial net loss | 759 | 899 | 1,518 | 1,798 | 16 | 617 | 31 | 1,235 | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 556 | $ | 829 | $ | 1,136 | $ | 1,642 | ||||||||||||||||||||||||
Net periodic benefit (gain) cost | $ | (23 | ) | $ | 553 | $ | (49 | ) | $ | 1,107 | ||||||||||||||||||||||
Postretirement Benefits: | ||||||||||||||||||||||||||||||||
Service cost | $ | 5 | $ | 6 | $ | 10 | $ | 12 | $ | 2 | $ | 2 | $ | 4 | $ | 5 | ||||||||||||||||
Interest cost | 77 | 122 | 169 | 244 | 48 | 53 | 95 | 106 | ||||||||||||||||||||||||
Amortization of prior service cost | (22 | ) | (69 | ) | (44 | ) | (137 | ) | ||||||||||||||||||||||||
Amortization of actuarial net loss | (59 | ) | 182 | (56 | ) | 364 | (155 | ) | (10 | ) | (310 | ) | (19 | ) | ||||||||||||||||||
Net periodic benefit cost | $ | 23 | $ | 310 | $ | 123 | $ | 620 | ||||||||||||||||||||||||
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 expectsexpects to contribute approximately $2,265$675 to its pension plans in fiscal 2018.2024. As of December 29, 2017, the amount of $1,0432023, $403 in contributions hasto the pension plans have been made.
The Company has reclassified $1,734($108) (net of $674$13 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended December 29, 2017, 2023, and $750($1,122) (net of $399$13 in taxes) during the quarter ended December 30, 2016.2022. These reclassifications are included in the computation of net periodic benefit (gain) cost. The Company has reclassified $2,208($279) (net of $952$8 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the two quarters ended December 29, 2017, 2023, and $1,422($1,211) (net of $798$4 in taxes) during the two quarters ended December 30, 2016. 2022. These reclassifications are included in the computation of net periodic benefit (gain) cost.
H. | Income Taxes |
On December 22, 2017,Accounting policies for interim reporting require the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in the United States. The Tax Act, among other provisions, introduces changes in the U.S. corporateCompany to adjust its effective tax rate businesseach 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 exclusionstax expense or benefit for its full fiscal year. In situations in which an entity is in a loss position and deductionsrecognizes a full valuation allowance, the guidance in ASC 740-270-25-9 applies. Due to continued historical domestic losses and credits,uncertain future domestic earnings, the Company continues to recognize a full domestic valuation allowance. Permanent differences continue to fluctuate and has tax consequences for companies that operate internationally. Mostare 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 changes introduced infull US valuation allowance, the Tax Act are effective beginning on January 1, 2018; however, as the Company has a fiscal year end of June 30, the effective datesUS entity may only recognize tax expense / benefit recorded for the Company are various and different.ASC 740-10 adjustments.
For the two quarterssix months ended December 29, 2017 2023 and December 30, 2016, 2022 the Company’s effective income tax rate was 204.0%107.2% and 28.8%,80.5% respectively. During the current fiscal quarter, in complianceForeign earnings were $9,282 and $5,094 respectively, with the new Tax Act, the Company recorded a related tax expense of $4,565, primarily due$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 a remeasurement of deferredthe full US valuation allowance currently in place, no tax assets and liabilities; this increased the effective tax rate by 735.1%. The Company has determined that the impact of the U.S. federal corporate income tax rate changebenefit can be recognized on the U.S. deferreddomestic losses. This inability to recognize a tax assets and liabilities is provisional because the number cannot be calculated until the actual timing differences are known at year end rather than estimated this quarter. The first quarter release of a valuation allowance in a certain foreign jurisdiction of $3,803 reduced the effective tax rate by 612.4%. The mix of earnings by jurisdiction and continued operational improvement coupled with increased tax preference itemsbenefit for domestic purposes resulted in a minimal impact to the overall effective tax rate.
Within the calculation of the Company’s annual effective tax rate the Company has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions. For example, the Company anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.
The following table sets forth theconsolidated tax expense of $2,208 and the effective tax rate for the Company’s earnings before$1,801, respectively, on year-to-date income taxes:
For the Two Quarters Ended | ||||||||
December 29, 2017 | December 30, 2016 | |||||||
Income (loss) before income taxes | $ | 621 | $ | (7,816 | ) | |||
Income tax expense (benefit) | 1,267 | (2,253 | ) | |||||
Effective tax rate | 204.0 | % | 28.8 | % |
The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018 (the “Effective Date”). When a U.S. federal tax rate change occurs during a fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment. As a result of the Tax Act, the Company has calculated a U.S. federal statutory corporate income tax rate of 27.6% for the fiscal year ending June 30, 2018$2,061 and applied this rate in computing the first half of fiscal year 2018 income tax provision. The U.S. federal statutory corporate income tax rate of 27.6% is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 34% applicable to the Company’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S. federal statutory tax rate of 21% applicable to the 2018 fiscal year thereafter. The Company expects the U.S. federal statutory rate to be 21% for fiscal years beginning after June 30, 2018.$2,237, respectively.
The Company completed a provisional calculation to determine the impact of a one-time repatriation tax on deferred foreign income (“Transition Tax”), as required by the Tax Act. The Company determined that the calculation is provisional because various components of the computation are unknown as of December 29, 2017, including the following significant items: exchange rates for fiscal year 2018, the actual aggregate foreign cash position and the earnings and profits of the foreign entities as of the two measurement dates. This provisional calculation resulted in a zero tax liability, therefore no tax accrual was necessary. The Company has not provided for additional U.S. income taxes on cumulative earnings of consolidated foreign subsidiaries. With the enactment of the Transition Tax, any future dividends repatriated would benefit from the 100% Dividends Received Deduction. The company reaffirms its position that the earnings of certain foreign subsidiaries remain permanently reinvested. An analysis was also completed to verify the future utilization of tax attributes and it was determined that full utilization would be realized and no valuation allowance was required.
The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”), a deduction for foreign-derived intangible income ("FDII") and base erosion anti-abuse tax (“BEAT”) on the Company, which are not effective until fiscal 2019. The Company has not recorded any impact associated with GILTI, FDII or BEAT in the tax rate for the first half of fiscal 2018. A provisional analysis of the new BEAT rules has been completed and it is not anticipated that the Company will meet the minimum thresholds, nor is it anticipated that it will for the foreseeable future and is therefore not subject to this tax. Initial provisional estimates of the impact of GILTI and FDII have also been completed and minimal impact is anticipated. These estimates may be impacted by actual future data, additional guidance or other unforeseen circumstances.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”). SAB 118 expresses views of the SEC regarding ASC Topic 740, Income Taxes (“ASC 740”) in the reporting period that includes the enactment date of the Tax Act. The SEC staff issuing SAB 118 (the “Staff”) recognized that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. The Staff’s view of the enactment of the Tax Act has been developed considering the principles of ASC Topic 805,Business Combinations, which addresses the accounting for certain items in a business combination for which the accounting is incomplete upon issuance of the financial statements that include the reporting period in which the business combination occurs. Specifically, the Staff provides that the accounting guidance in ASC Topic 805 may be analogized to the accounting for impacts of the Tax Act. If a company does not have the necessary information available, prepared or analyzed for certain income tax effects of the Tax Act, SAB 118 allows a company to report provisional numbers and adjust those amounts during the measurement period not to extend beyond one year. For the two quarters ended December 29, 2017, the Company has recorded all known and estimable impacts of the Tax Act that are effective for fiscal year 2018. Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.
Accordingly, the Company’s income tax provision as of December 29, 2017 reflects (i) the current year impacts of the Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail.
For the Two Quarters Ended | ||||
December 29, 2017 | ||||
Transition Tax (provisional) | $ | - | ||
Net impact on U.S. deferred tax assets and liabilities (provisional) | (4,565 | ) | ||
Net discrete impacts of the enactment of the Tax Act | $ | (4,565 | ) |
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. Due to operational changes, theIn 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 a certainits foreign jurisdiction. Basedoperations and based on this evaluation along with expected future earnings, management has concluded that theno valuation allowance is no longer appropriate and it was released during the first quarter of fiscal 2018.
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. 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.allowances are required.
The Company has approximately $856$834 of unrecognized tax benefits, including related interest and penalties, as of December 29, 2017 2023, which, if recognized, would favorably impact the effective tax rate. There was were no significant changechanges in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quartertwo quarters ended December 29, 2017. 2023. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going audit 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 20112018 through 20172023 for theour major operations in Italy, Canada, Belgium, Japan, Netherlands, Singapore and Japan.Australia. The tax years open to examination in the U.S. are for years subsequent to fiscal 2015. The state of Wisconsin income tax audit remains ongoing for the fiscal years 2010 through 2013. During the quarter the company finalized a US Federal Income tax audit for the fiscal year 2015 with no adjustment.2018. It is reasonably possible that other audit cycles will be completed during fiscal 2018.2024.
I. |
|
The Company reviews goodwill for impairment on a reporting unit basis annually as of the end of the fiscal year, and whenever events or circumstances (“triggering events”) indicate that the carrying value of goodwill may not be recoverable. The Company monitors for interim triggering events on an ongoing basis. Such triggering events include unfavorable operating results and macroeconomic trends.
The fair value of reporting units is primarily driven by projected growth rates and operating results under the income approach using a discounted cash flow model, which applies an appropriate market-participant discount rate, and consideration of other market approach data from guideline public companies. If declining actual operating results or future operating results become indicative that the fair value of the Company’s reporting units has declined below their carrying values, an interim goodwill impairment test may need to be performed and may result in a non-cash goodwill impairment charge.
As of December 29, 2017 and June 30, 2017, goodwill pertains solely to the European Industrial reporting unit.
For the quarter ended December 29, 2017, the Company performed a review of potential triggering events, and concluded there were no triggering events that indicated that the fair value of its European Industrial reporting unit had not more likely than not declined to below its carrying value at December 29, 2017. The Company will perform its annual impairment test for this reporting unit as of June 30, 2018.
The changes in the carrying amount of goodwill are summarized as follows:
Net Book Value Rollforward | ||||||||||||
Gross Carrying Amount | Accumulated Impairment | Net Book Value | ||||||||||
Balance at June 30, 2017 | $ | 16,407 | $ | (13,822 | ) | $ | 2,585 | |||||
Translation adjustment | 174 | - | 174 | |||||||||
Balance at December 29, 2017 | $ | 16,581 | $ | (13,822 | ) | $ | 2,759 |
At December 29, 2017, 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 | Net Book Value Rollforward | Net Book Value By Asset Type | |||||||||||||||||||||||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization / Impairment | Net Book Value | Licensing agreements | Trade Name | Other | Gross Carrying Amount | Accumulated Amortization / Impairment | Net Book Value | Customer Relationships | Technology Know-how | Trade Name | Other | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2017 | $ | 13,436 | $ | (11,632 | ) | $ | 1,804 | $ | 390 | $ | 1,319 | $ | 95 | |||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2023 | $ | 31,925 | $ | (19,288 | ) | $ | 12,637 | $ | 6,553 | $ | 2,422 | $ | 668 | $ | 2,994 | |||||||||||||||||||||||||||||||||||||||
Addition | 19 | - | 19 | - | - | 19 | 73 | - | 73 | - | - | - | 73 | |||||||||||||||||||||||||||||||||||||||||
Reduction | (631 | ) | 631 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Amortization | - | (89 | ) | (89 | ) | (30 | ) | (43 | ) | (16 | ) | - | (1,636 | ) | (1,636 | ) | (622 | ) | (601 | ) | (39 | ) | (374 | ) | ||||||||||||||||||||||||||||||
Translation adjustment | 94 | - | 94 | - | 87 | 7 | 72 | - | 72 | 62 | (173 | ) | 195 | (12 | ) | |||||||||||||||||||||||||||||||||||||||
Balance at December 29, 2017 | $ | 13,549 | $ | (11,721 | ) | $ | 1,828 | $ | 360 | $ | 1,363 | $ | 105 | |||||||||||||||||||||||||||||||||||||||||
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 135 years.
Intangible amortization expense was $45$817 and $42$704 for the quarters ended December 29, 2017, 2023, and December 30, 2016, 2022, respectively. Intangible amortization expense was $89$1,636 and $85$1,402 for the two quarters ended December 29, 2017, 2023, and December 30, 2016, 2022, respectively. Estimated intangible amortization expense for the remainder of fiscal 20182024 and each of the next five fiscal years and thereafter is as follows:
Fiscal Year | ||||
2018 | $ | 101 | ||
2019 | 187 | |||
2020 | 173 | |||
2021 | 158 | |||
2022 | 151 | |||
2023 | 150 |
Fiscal Year | ||||
2024 | $ | 1,827 | ||
2025 | 3,316 | |||
2026 | 2,310 | |||
2027 | 1,553 | |||
2028 | 1,405 | |||
2029 | 735 | |||
Thereafter | 0 |
The gross carrying amount of the Company’s intangible assets that have indefinite lives and are not subject to amortization as of December 29, 2017 and June 30, 2017 was $204 and $205, respectively. These assets are comprised of acquired trade names.
J. | Long-term Debt |
Long-term debt at December 29, 2017 2023 and June 30, 2017 2023 consisted of the following:
December 29, 2017 | June 30, 2017 | December 29, 2023 | June 30, 2023 | |||||||||||||
Revolving loan | $ | 4,645 | $ | 6,285 | ||||||||||||
Credit Agreement Debt | ||||||||||||||||
Revolving loans (expire June 2025) | $ | 7,175 | $ | 7,094 | ||||||||||||
Term loan (due March 2026) | 10,500 | 11,500 | ||||||||||||||
Other | 39 | 38 | 23 | 33 | ||||||||||||
Subtotal | 4,684 | 6,323 | 17,698 | 18,627 | ||||||||||||
Less: current maturities and short-term borrowings | - | - | ||||||||||||||
Less: current maturities | (2,000 | ) | (2,010 | ) | ||||||||||||
Total long-term debt | $ | 4,684 | $ | 6,323 | $ | 15,698 | $ | 16,617 |
The revolving loan agreement pertains to the revolving loan facility which Credit Agreement Debt: On June 29, 2018, the Company entered into on April 22, 2016a 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 “BMO“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, isthe 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, and certain machinery and equipment, and intellectual property. The Company has also pledged 100% of its primary manufacturing facilityequity interests in Racine, Wisconsin,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 personal propertyBank of Mill-Log Equipment Co., Inc.,Montreal in connection with the 2016 Credit Agreement. The Company also amended and assigned to BMO a wholly-owned domestic subsidiaryNegative 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, BMO may take the three actions listed above without notice to the Company.
The BMO Agreement provides for a borrowing base calculation to determine borrowing capacity. This capacity will be based upon eligible domestic inventory, eligible accounts receivableCompany remains in compliance with its liquidity and machinery and equipment, subject to certain adjustments. other covenants.
As of December 29, 2017, 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 BMOCredit Agreement was approximately $28,588,$37,157, and the Company had approximately $23,128$29,982 of available borrowings. AsIn addition to the Credit Agreement, the Company has established unsecured lines of December 29, 2017,credit that are used from time to time to secure certain performance obligations by the interest rate under this agreement was 3.11%. Company.
The Company’s revolving loan agreement approximatesCompany’s borrowings described above approximate fair value at December 29, 2017 2023 and June 30, 2017. 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 315315.0 shares as of December 29, 2017 2023 remain authorized for purchase. The Company did not make any open market purchases of its shares during the quarter and two quarters ended December 29, 2017 2023 and December 30, 2016.2022.
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.
The following is a reconciliation of the Company’sCompany’s equity balances for the firsttwo fiscal quarters of 20182024 and 2017:2023:
Twin Disc, Inc. Shareholders’ Equity | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Non- | |||||||||||||||||||||||
Common | Retained | Comprehensive | Treasury | Controlling | Total | |||||||||||||||||||
Stock | Earnings | Income (Loss) | Stock | Interest | Equity | |||||||||||||||||||
Balance, June 30, 2017 | $ | 10,429 | $ | 169,368 | $ | (32,671 | ) | $ | (24,205 | ) | $ | 646 | $ | 123,567 | ||||||||||
Net (loss) income | (722 | ) | 76 | (646 | ) | |||||||||||||||||||
Translation adjustments | 3,036 | (7 | ) | 3,029 | ||||||||||||||||||||
Benefit plan adjustments, net of tax | 2,208 | 2,208 | ||||||||||||||||||||||
Cash dividends | (172 | ) | (172 | ) | ||||||||||||||||||||
Compensation expense | 1,063 | 1,063 | ||||||||||||||||||||||
Shares (acquired) issued, net | (1,406 | ) | 1,006 | (400 | ) | |||||||||||||||||||
Balance, December 29, 2017 | $ | 10,086 | $ | 168,646 | $ | (27,427 | ) | $ | (23,199 | ) | $ | 543 | $ | 128,649 |
Twin Disc, Inc. Shareholders’ Equity | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Non- | |||||||||||||||||||||||
Common | Retained | Comprehensive | Treasury | Controlling | Total | |||||||||||||||||||
Stock | Earnings | Income (Loss) | Stock | Interest | Equity | |||||||||||||||||||
Balance, June 30, 2016 | $ | 11,761 | $ | 175,662 | $ | (44,143 | ) | $ | (26,790 | ) | $ | 563 | $ | 117,053 | ||||||||||
Net (loss) income | (5,608 | ) | 45 | (5,563 | ) | |||||||||||||||||||
Translation adjustments | (3,581 | ) | 66 | (3,515 | ) | |||||||||||||||||||
Benefit plan adjustments, net of tax | 1,422 | 1,422 | ||||||||||||||||||||||
Cash dividends | (109 | ) | (109 | ) | ||||||||||||||||||||
Compensation expense and | ||||||||||||||||||||||||
tax shortfall | 573 | 573 | ||||||||||||||||||||||
Shares (acquired) issued, net | (2,725 | ) | 2,585 | (140 | ) | |||||||||||||||||||
Balance, December 30, 2016 | $ | 9,609 | $ | 170,054 | $ | (46,302 | ) | $ | (24,205 | ) | $ | 565 | $ | 109,721 |
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 |
Reconciliations
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 income (loss),loss, net of tax, by component for the quarters ended September 29, and December 29, 2017, 2023 and September 30, and December 30, 2016 2022 are as follows:
Translation | Benefit Plan | |||||||
Adjustment | Adjustment | |||||||
Balance at June 30, 2017 | $ | 6,130 | $ | (38,801 | ) | |||
Translation adjustment during the quarter | 2,547 | - | ||||||
Amounts reclassified from accumulated other comprehensive income | - | 474 | ||||||
Net current period other comprehensive income | 2,547 | 474 | ||||||
Balance at September 29, 2017 | $ | 8,677 | $ | (38,327 | ) | |||
Translation adjustment during the quarter | 489 | - | ||||||
Other comprehensive income before reclassifications | - | 1,695 | ||||||
Amounts reclassified from accumulated other comprehensive income | - | 39 | ||||||
Net current period other comprehensive income | 489 | 1,734 | ||||||
Balance at December 29, 2017 | $ | 9,166 | $ | (36,593 | ) |
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 | $ | 1,192 |
Translation | Benefit Plan | |||||||
Adjustment | Adjustment | |||||||
Balance at June 30, 2016 | $ | 5,158 | $ | (49,301 | ) | |||
Translation adjustment during the quarter | 627 | - | ||||||
Amounts reclassified from accumulated other comprehensive income | - | 672 | ||||||
Net current period other comprehensive income | 627 | 672 | ||||||
Balance at September 30, 2016 | $ | 5,785 | $ | (48,629 | ) | |||
Translation adjustment during the quarter | (4,208 | ) | - | |||||
Amounts reclassified from accumulated other comprehensive income | - | 750 | ||||||
Net current period other comprehensive (loss) income | (4,208 | ) | 750 | |||||
Balance at December 30, 2016 | $ | 1,577 | $ | (47,879 | ) |
Translation | Benefit Plan | Cash Flow | Net Investment | |||||||||||||
Adjustment | Adjustment | Hedges | Hedges | |||||||||||||
Balance, June 30, 2022 | $ | (2,266 | ) | $ | (6,614 | ) | $ | 356 | $ | 1,550 | ||||||
Translation adjustment during the quarter | (6,328 | ) | - | - | - | |||||||||||
Amounts reclassified from accumulated other comprehensive loss | - | (89 | ) | 657 | 136 | |||||||||||
Net current period other comprehensive (loss) income | (6,328 | ) | (89 | ) | 657 | 136 | ||||||||||
Balance, September 30, 2022 | (8,594 | ) | (6,703 | ) | 1,013 | 1,686 | ||||||||||
Translation adjustment during the quarter | 8,333 | - | - | - | ||||||||||||
Amounts reclassified from accumulated other comprehensive loss | (7 | ) | (10 | ) | (585 | ) | ||||||||||
Plan merger adjustment | - | (1,115 | ) | - | - | |||||||||||
Net current period other comprehensive income (loss) | 8,333 | (1,122 | ) | (10 | ) | (585 | ) | |||||||||
Balance at December 30, 2022 | $ | (261 | ) | $ | (7,825 | ) | $ | 1,003 | $ | 1,101 |
Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter and two quarters ended December 29, 2017 2023 are as follows:
Amount Reclassified | Amount Reclassified | Amount Reclassified | Amount Reclassified | |||||||||||||||
Quarter Ended | Two Quarters Ended | Quarter Ended | Two Quarters Ended | |||||||||||||||
December 29, 2017 | December 29, 2017 | December 29, 2023 | December 29, 2023 | |||||||||||||||
Changes in benefit plan items | ||||||||||||||||||
Actuarial losses | $ | 703 | (a) | $ | 1,445 | (a) | $ | (91 | ) | (a) | $ | (263 | ) | (a) | ||||
Transition asset and prior service benefit | 10 | (a) | 20 | (a) | (4 | ) | (a) | (8 | ) | (a) | ||||||||
Total amortization | 713 | 1,465 | (95 | ) | (271 | ) | ||||||||||||
Other benefit plan adjustments | (1,695 | ) | (1,695 | ) | ||||||||||||||
Income taxes | 674 | 952 | ||||||||||||||||
Income tax expense | (13 | ) | (8 | ) | ||||||||||||||
Total reclassification net of tax | $ | 1,734 | $ | 2,208 | $ | (108 | ) | $ | (279 | ) |
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 | $ | 664 | (a) | $ | 1,223 | (a) | ||||
Transition asset and prior service benefit | (51 | ) | (a) | (101 | ) | (a) | ||||
Mark-to-market adjustment | (607 | ) | (1,214 | ) | ||||||
Plan merger remeasurement adjustment | (1,115 | ) | (1,115 | ) | ||||||
Total amortization | (1,109 | ) | (1,207 | ) | ||||||
Income taxes | (13 | ) | (4 | ) | ||||||
Total reclassification net of tax | $ | (1,122 | ) | $ | (1,211 | ) |
(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). |
Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter and two quarters ended December 30, 2016 is as follows:
Amount Reclassified | Amount Reclassified | |||||||
Quarter Ended | Two Quarters Ended | |||||||
December 30, 2016 | December 30, 2016 | |||||||
Changes in benefit plan items | ||||||||
Actuarial losses | $ | 1,139 | (a) | $ | 2,200 | (a) | ||
Transition asset and prior service benefit | 10 | (a) | 20 | (a) | ||||
Total amortization | 1,149 | 2,220 | ||||||
Income taxes | 399 | 798 | ||||||
Total reclassification net of tax | $ | 750 | $ | 1,422 |
|
|
L. |
|
TheTo improve its fixed cost structure and monetize some of its under-utilized assets, the Company has implemented various restructuring programscommenced 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 response to unfavorable macroeconomic trendsthe fair value hierarchy. This assessment of fair value resulted in certainthe Company recognizing a write-down of the Company’s markets sincecarrying value of its corporate headquarters by $4,267 in the fourth quarter of fiscal 2015. These programs primarily involved2021.
In the reductionfirst quarter of workforcefiscal 2023, the Company commenced the active marketing of an additional real estate property located in severalNivelles, Belgium. This action required the Company to reclassify these assets from Property, Plant, and Equipment to Assets Held for Sale, at fair value less costs to sell or net book value, whichever is lower. Fair value was determined using real estate broker estimates and would be classified as Level 3 in the fair value hierarchy. The real estate property's fair value less costs to sell exceeded its net book value. The Company reclassified the property's net book value of $2,801 from Property, Plant, and Equipment to Assets Held for Sale.
In the second quarter of fiscal 2023, the Company completed the sale of the Company’s manufacturing locations, underreal estate property located in Belgium and received $7,150 in proceeds, net of fees and recorded a combinationgain of voluntary and involuntary programs.$4,161 in other operating income.
DuringIn the current year,first quarter of fiscal 2024, the Company implemented additional actionsentered into an agreement to reduce personnelsell 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 into 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 Belgian operations and reorganize for productivity in its European operations. These actions, together withnet 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 associated with the India manufacturing operations exit, resulted in a restructuring charge of $831 and $2,049 in the quarter and two quarters ended December 29, 2017, respectively. For the quarter and two quarters ended December 30, 2016, restructuring charges of $816 and $1,074, respectively, pertained to the elimination of full-time positions in the Company’s U.S., Belgian and Italian manufacturing operations.
Restructuring activities since June 2015 havesell. This assessment resulted in the eliminationCompany recognizing a write-down of 163 full-time employeesthe carrying value of its boat management systems inventory of $2.1 million. The write-down was classified in the manufacturing segment. Accumulated costs to date under these programs within the manufacturing segment through December 29, 2017 were $7,924.income statement as a component of cost of goods sold. The agreement closed October 30, 2023.
The following is a rollforward of restructuring activity:
Accrued restructuring liability, June 30, 2017 | $ | 92 | ||
Additions during the year | 2,049 | |||
Payments and adjustments | (2,127 | ) | ||
Accrued restructuring liability, December 29, 2017 | $ | 14 |
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. RestrictedCertain 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-classtwo-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 lossearnings per share were as follows:
For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||||||||||||||||||
For the Quarter Ended | For the Two Quarters Ended | As Adjusted | As Adjusted | |||||||||||||||||||||||||||||
December 29, 2017 | December 30, 2016 | December 29, 2017 | December 30, 2016 | December 29, 2023 | December 30, 2022 | December 29, 2023 | December 30, 2022 | |||||||||||||||||||||||||
Basic: | ||||||||||||||||||||||||||||||||
Net loss | $ | (4,050 | ) | $ | (2,892 | ) | $ | (646 | ) | $ | (5,563 | ) | ||||||||||||||||||||
Net income (loss) | $ | 935 | $ | 1,761 | $ | (148 | ) | $ | 436 | |||||||||||||||||||||||
Less: Net earnings attributable to noncontrolling interest | (63 | ) | (20 | ) | (76 | ) | (45 | ) | (5 | ) | (15 | ) | (95 | ) | (112 | ) | ||||||||||||||||
Less: Undistributed earnings attributable to unvested shares | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net loss available to Twin Disc shareholders | (4,113 | ) | (2,912 | ) | (722 | ) | (5,608 | ) | ||||||||||||||||||||||||
Net income (loss) attributable to Twin Disc | 930 | 1,746 | (243 | ) | 324 | |||||||||||||||||||||||||||
Weighted average shares outstanding - basic | 11,297 | 11,242 | 11,278 | 11,231 | 13,718 | 13,460 | 13,629 | 13,434 | ||||||||||||||||||||||||
Basic Loss Per Share: | ||||||||||||||||||||||||||||||||
Net loss per share - basic | $ | (0.36 | ) | $ | (0.26 | ) | $ | (0.06 | ) | $ | (0.50 | ) | ||||||||||||||||||||
Net earnings (loss) per share - basic | $ | 0.07 | $ | 0.13 | $ | (0.02 | ) | $ | 0.02 | |||||||||||||||||||||||
Diluted: | ||||||||||||||||||||||||||||||||
Net loss | $ | (4,050 | ) | $ | (2,892 | ) | $ | (646 | ) | $ | (5,563 | ) | ||||||||||||||||||||
Net income (loss) | $ | 935 | $ | 1,761 | $ | (148 | ) | $ | 436 | |||||||||||||||||||||||
Less: Net earnings attributable to noncontrolling interest | (63 | ) | (20 | ) | (76 | ) | (45 | ) | (5 | ) | (15 | ) | (95 | ) | (112 | ) | ||||||||||||||||
Less: Undistributed earnings attributable to unvested shares | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net loss available to Twin Disc shareholders | (4,113 | ) | (2,912 | ) | (722 | ) | (5,608 | ) | ||||||||||||||||||||||||
Net income (loss) attributable to Twin Disc | 930 | 1,746 | (243 | ) | 324 | |||||||||||||||||||||||||||
Weighted average shares outstanding - basic | 11,297 | 11,242 | 11,278 | 11,231 | 13,718 | 13,460 | 13,629 | 13,434 | ||||||||||||||||||||||||
Effect of dilutive stock awards | - | - | - | - | 205 | 239 | - | 215 | ||||||||||||||||||||||||
Weighted average shares outstanding - diluted | 11,297 | 11,242 | 11,278 | 11,231 | 13,923 | 13,699 | 13,629 | 13,649 | ||||||||||||||||||||||||
Diluted Loss Per Share: | ||||||||||||||||||||||||||||||||
Net loss per share - diluted | $ | (0.36 | ) | $ | (0.26 | ) | $ | (0.06 | ) | $ | (0.50 | ) | ||||||||||||||||||||
Diluted Income (Loss) Per Share: | ||||||||||||||||||||||||||||||||
Net earnings (loss) per share - diluted | $ | 0.07 | $ | 0.13 | $ | (0.02 | ) | $ | 0.02 |
The following potential common shares were excluded from diluted EPS for the quarter and two quarters ended December 29, 2017 as the Company reported a net loss: 224.92023 because they were anti-dilutive: 135.1 related to the Company’sCompany’s unvested PSAs, 272.42.6 related to the Company’s unvested PSAUs, 80.2 related to the Company’s unvested RS awards, and 9.6 related to outstanding stock options.
The following potential common shares were excluded from diluted EPS for the quarter and two quarters ended December 30, 2016 as the Company reported a net loss: 181.8 related to the Company’s unvested PSAs, 269.687.4 related to the Company’s unvested RS awards,RSUs.
N. | Lease Liabilities |
The Company leases certain office and 13.2warehouse 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 | $ | 12,017 | $ | 13,133 | ||||
Finance lease right-of-use assets | Property, plant and equipment, net | 4,860 | 4,427 | ||||||
Lease Liabilities | |||||||||
Operating lease liabilities | Accrued liabilities | $ | 2,064 | $ | 2,343 | ||||
Operating lease liabilities | Lease obligations | 9,988 | 10,811 | ||||||
Finance lease liabilities | Accrued liabilities | 642 | 643 | ||||||
Finance lease liabilities | Other long-term liabilities | 4,532 | 4,314 |
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 | $ | 175 | $ | 156 | $ | 397 | $ | 311 | ||||||||
Interest on lease liabilities | 77 | 67 | 151 | 132 | ||||||||||||
Operating lease cost | 882 | 686 | 1,775 | 1,397 | ||||||||||||
Short-term lease cost | 6 | (10 | ) | 9 | 3 | |||||||||||
Variable lease cost | 99 | 67 | 199 | 108 | ||||||||||||
Total lease cost | 1,239 | 966 | 2,531 | 1,951 | ||||||||||||
Less: Sublease income | (20 | ) | (18 | ) | (41 | ) | (35 | ) | ||||||||
Net lease cost | $ | 1,219 | $ | 948 | $ | 2,490 | $ | 1,916 |
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 | $ | 934 | $ | 777 | $ | 1,871 | $ | 1,473 | ||||||||
Operating cash flows from finance leases | 76 | 215 | 149 | 420 | ||||||||||||
Financing cash flows from finance leases | 207 | 67 | 471 | 132 | ||||||||||||
Right-of-use-assets obtained in exchange for lease obligations: | ||||||||||||||||
Operating leases | 188 | 990 | 188 | 1,518 | ||||||||||||
Finance leases | 123 | 269 | 657 | 320 | ||||||||||||
Weighted average remaining lease term (years): | ||||||||||||||||
Operating leases | 8.1 | 8.3 | ||||||||||||||
Finance lease | 9.5 | 10.8 | ||||||||||||||
Weighted average discount rate: | ||||||||||||||||
Operating leases | 7.6 | % | 7.2 | % | ||||||||||||
Finance leases | 5.8 | % | 5.2 | % |
Approximate future minimum rental commitments under non-cancellable leases as of December 29, 2023 were as follows:
Operating Leases | Finance Leases | |||||||
2024 | $ | 1,575 | $ | 492 | ||||
2025 | 2,300 | 836 | ||||||
2026 | 1,810 | 788 | ||||||
2027 | 1,697 | 735 | ||||||
2028 | 1,652 | 657 | ||||||
2029 | 1,637 | 482 | ||||||
Thereafter | 5,752 | 2,646 | ||||||
Total future lease payments | 16,423 | 6,636 | ||||||
Less: Amount representing interest | (4,371 | ) | (1,462 | ) | ||||
Present value of future payments | $ | 12,052 | $ | 5,174 |
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 one outstanding stock options.interest rate swap contract as of December 29, 2023, with a notional amount of $10,500. It has been designated as a cash flow hedge in accordance with ASC 815, Derivatives and Hedging.
The primary purpose of the Company’s cash flow hedging activities is to manage the potential changes in value associated with interest payments on the Company’s SOFR-based indebtedness. The Company records gains and losses on interest rate swap contracts qualifying as cash flow hedges in accumulated other comprehensive loss to the extent that these hedges are effective and until the Company recognizes the underlying transactions in net earnings, at which time these gains and losses are recognized in interest expense on its 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 ($499) and ($688) as of December 29, 2023, and June 30, 2023, respectively. The unrealized amounts in accumulated other comprehensive loss will fluctuate based on changes in the fair value of open contracts during each reporting period.
The Company estimates that $218 of net unrealized losses related to cash flow hedging activities included in accumulated other comprehensive loss will be reclassified into earnings within the next twelve months.
Derivatives Designated as Net Investment Hedges
The Company is exposed to foreign currency exchange 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 €13,000, as a net investment hedge to mitigate the risk of variability in its euro denominated net investments in wholly-owned foreign subsidiaries. All changes in the fair value of the euro revolver were then recorded in accumulated other comprehensive loss along with the foreign currency translation adjustments on those foreign investments. Net unrealized after-tax income related to net investment hedging activities that were included in Accumulated Other Comprehensive Loss were ($1,192) and ($1,272) as of December 29, 2023 and June 30, 2023, respectively.
Fair Value of Derivative Instruments
The fair value of derivative instruments included in the condensed consolidated balance sheets were as follows:
Balance Sheet Location | December 29, 2023 | June 30, 2023 | |||||||
Derivative designated as hedge: | |||||||||
Interest rate swap | Other current assets | $ | 209 | $ | 292 | ||||
Interest rate swap | Other noncurrent assets | 80 | 187 |
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 | $ | 67 | $ | 79 | $ | 138 | $ | 162 | ||||||||
Interest rate swap | Unrealized gain (loss) on hedges | 183 | 10 | 189 | (339 | ) | |||||||||||
Net investment hedge | Unrealized (loss) gain on hedges | (302 | ) | 585 | (81 | ) | 141 |
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 | $ | 63,351 | $ | - | $ | 63,351 | $ | 119,264 | $ | - | $ | 119,264 | ||||||||||||
Cost of goods sold | 46,328 | - | 46,328 | 88,944 | - | 88,944 | ||||||||||||||||||
Gross profit | 17,023 | - | 17,023 | 30,320 | - | 30,320 | ||||||||||||||||||
Marketing, engineering and administrative expenses | 15,983 | - | 15,983 | 31,063 | - | 31,063 | ||||||||||||||||||
Restructuring expenses | 164 | - | 164 | 174 | - | 174 | ||||||||||||||||||
Other operating income | (4,150 | ) | - | (4,150 | ) | (4,150 | ) | - | (4,150 | ) | ||||||||||||||
Income from operations | 5,026 | - | 5,026 | 3,233 | - | 3,233 | ||||||||||||||||||
Other expense (income): | ||||||||||||||||||||||||
Interest expense | 594 | - | 594 | 1,160 | - | 1,160 | ||||||||||||||||||
Other expense (income), net | 789 | (607 | ) | 182 | 1,050 | (1,214 | ) | (164 | ) | |||||||||||||||
1,383 | (607 | ) | 776 | 2,210 | (1,214 | ) | 996 | |||||||||||||||||
Income before income taxes and noncontrolling interest | 3,643 | 607 | 4,250 | 1,023 | 1,214 | 2,237 | ||||||||||||||||||
Income tax expense | 2,489 | - | 2,489 | 1,801 | - | 1,801 | ||||||||||||||||||
Net income (loss) | 1,154 | 607 | 1,761 | (778 | ) | 1,214 | 436 | |||||||||||||||||
Less: Net earnings attributable to noncontrolling interest, net of tax | (15 | ) | - | (15 | ) | (112 | ) | - | (112 | ) | ||||||||||||||
Net income (loss) attributable to Twin Disc | $ | 1,139 | $ | 607 | $ | 1,746 | $ | (890 | ) | $ | 1,214 | $ | 324 | |||||||||||
Income (loss) per share data: | ||||||||||||||||||||||||
Basic income (los)s per share attributable to Twin Disc common shareholders | $ | 0.08 | $ | 0.05 | $ | 0.13 | $ | (0.07 | ) | $ | 0.09 | $ | 0.02 | |||||||||||
Diluted income (loss) per share attributable to Twin Disc common shareholders | $ | 0.08 | $ | 0.05 | $ | 0.13 | $ | (0.07 | ) | $ | 0.09 | $ | 0.02 | |||||||||||
Weighted average shares outstanding data: | ||||||||||||||||||||||||
Basic shares outstanding | 13,460 | - | 13,460 | 13,434 | - | 13,434 | ||||||||||||||||||
Diluted shares outstanding | 13,699 | - | 13,699 | 13,434 | - | 13,434 | ||||||||||||||||||
Comprehensive income (loss) | ||||||||||||||||||||||||
Net income (loss) | $ | 1,154 | $ | 607 | $ | 1,761 | $ | (778 | ) | $ | 1,214 | $ | 436 | |||||||||||
Benefit plan adjustments, net of income taxes of $ 1 and $3 computed under previous method; and $13 and $4 as reported under new method | (515 | ) | (607 | ) | (1,122 | ) | 3 | (1,214 | ) | (1,211 | ) | |||||||||||||
Foreign currency translation adjustment | 8,392 | - | 8,392 | 2,005 | - | 2,005 | ||||||||||||||||||
Unrealized (loss) gain on hedges, net of income taxes of $0 and $0, respectively | (595 | ) | - | (595 | ) | 198 | - | 198 | ||||||||||||||||
Comprehensive income | 8,436 | - | 8,436 | 1,428 | - | 1,428 | ||||||||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | 74 | - | 74 | 210 | - | 210 | ||||||||||||||||||
Comprehensive income attributable to Twin | $ | 8,362 | $ | - | $ | 8,362 | $ | 1,218 | $ | - | $ | 1,218 |
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 | $ | 13,528 | $ | - | $ | 13,528 | ||||||
Trade accounts receivable, net | 39,392 | - | 39,392 | |||||||||
Inventories | 136,810 | - | 136,810 | |||||||||
Assets held for sale | 2,968 | - | 2,968 | |||||||||
Prepaid expenses | 10,871 | - | 10,871 | |||||||||
Other | 7,228 | - | 7,228 | |||||||||
Total current assets | 210,797 | - | 210,797 | |||||||||
Property, plant and equipment, net | 39,683 | - | 39,683 | |||||||||
Right-of-use assets operating leases | 12,807 | - | 12,807 | |||||||||
Intangible assets, net | 11,798 | - | 11,798 | |||||||||
Deferred income taxes | 2,403 | - | 2,403 | |||||||||
Other assets | 2,766 | - | 2,766 | |||||||||
Total assets | $ | 280,254 | $ | - | $ | 280,254 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Current maturities of long-term debt | $ | 2,000 | $ | - | $ | 2,000 | ||||||
Accounts payable | 28,906 | - | 28,906 | |||||||||
Accrued liabilities | 55,939 | - | 55,939 | |||||||||
Total current liabilities | 86,845 | - | 86,845 | |||||||||
Long-term debt | 29,927 | - | 29,927 | |||||||||
Lease obligations | 10,278 | - | 10,278 | |||||||||
Accrued retirement benefits | 10,587 | - | 10,587 | |||||||||
Deferred income taxes | 3,506 | - | 3,506 | |||||||||
Other long-term liabilities | 5,346 | - | 5,346 | |||||||||
Total liabilities | 146,489 | - | 146,489 | |||||||||
Twin Disc shareholders' equity: | ||||||||||||
Preferred shares authorized: 200,000; issued: none; no par value | - | - | - | |||||||||
Common shares authorized: 30,000,000; issued: 14,632,802; no par value | 41,444 | - | 41,444 | |||||||||
Retained earnings | 134,141 | (23,898 | ) | 110,243 | ||||||||
Accumulated other comprehensive loss | (29,880 | ) | 23,898 | (5,982 | ) | |||||||
145,705 | - | 145,705 | ||||||||||
Less treasury stock, at cost (819,398 shares, respectively) | 12,562 | - | 12,562 | |||||||||
Total Twin Disc shareholders' equity | 133,143 | - | 133,143 | |||||||||
Noncontrolling interest | 622 | - | 622 | |||||||||
Total equity | 133,765 | - | 133,765 | |||||||||
Total liabilities and equity | $ | 280,254 | $ | - | $ | 280,254 |
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 | $ | (778 | ) | $ | 1,214 | $ | 436 | |||||
Adjustments to reconcile net (loss) income to net cash provided by activities: | ||||||||||||
Depreciation and amortization | 4,266 | - | 4,266 | |||||||||
Gain on sale of assets | (4,203 | ) | - | (4,203 | ) | |||||||
Provision for deferred income taxes | (1,105 | ) | - | (1,105 | ) | |||||||
Stock compensation expense | 1,565 | - | 1,565 | |||||||||
Net change in operating assets and liabilities | 287 | (1,214 | ) | (927 | ) | |||||||
Net cash provided by operating activities | 32 | - | 32 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Acquisition of property, plant, and equipment | (4,734 | ) | - | (4,734 | ) | |||||||
Proceeds from sale of fixed assets | 7,152 | - | 7,152 | |||||||||
Proceeds on note receivable | - | - | - | |||||||||
Other, net | 385 | - | 385 | |||||||||
Net cash provided by investing activities | 2,803 | - | 2,803 | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Borrowings under revolving loan arrangements | 42,898 | - | 42,898 | |||||||||
Repayments of revolving loan arrangements | (46,628 | ) | - | (46,628 | ) | |||||||
Repayments of other long-term debt | (839 | ) | 132 | (707 | ) | |||||||
Payments of finance lease obligations | (132 | ) | (132 | ) | ||||||||
Payments of withholding taxes on stock compensation | (463 | ) | - | (463 | ) | |||||||
Net cash used by financing activities | (5,032 | ) | - | (5,032 | ) | |||||||
Effect of exchange rate changes on cash | 3,204 | - | 3,204 | |||||||||
Net change in cash | 1,007 | - | 1,007 | |||||||||
Cash: | ||||||||||||
Beginning of period | 12,521 | - | 12,521 | |||||||||
End of period | $ | 13,528 | $ | - | $ | 13,528 |
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 | 135,031 | (25,112 | ) | 109,919 | ||||||||
Net (loss) income attributable to Twin Disc | (890 | ) | 1,214 | 324 | ||||||||
Balance at December 30, 2022 | $ | 134,141 | $ | (23,898 | ) | $ | 110,243 | |||||
Accumulated other comprehensive income (loss) | ||||||||||||
Balance at June 30, 2022 | (32,086 | ) | 25,112 | (6,974 | ) | |||||||
Translation adjustments | 2,005 | - | 2,005 | |||||||||
Benefit plan adjustments, net of tax | 3 | (1,214 | ) | (1,211 | ) | |||||||
Unrealized gain on hedges, net of tax | 198 | - | 198 | |||||||||
Balance at December 30, 2022 | $ | (29,880 | ) | $ | 23,898 | $ | (5,982 | ) |
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, 2017,2023, 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“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 Twin Disc, Incorporatedthe 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’sCompany’s Annual Report filed on Form 10-K for June 30, 20172023, as supplemented in this Quarterly Report, could cause actual results to be materially different from what is expressed or implied in any forward-looking statement.
Results of Operations
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Quarter Ended | Two Quarters Ended | Quarter Ended | Two Quarters Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 29, 2017 | % | December 30, 2016 | % | December 29, 2017 | % | December 30, 2016 | % | 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 | $ | 56,546 | $ | 33,672 | $ | 101,611 | $ | 69,507 | $ | 72,994 | $ | 63,351 | $ | 136,547 | $ | 119,264 | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost of goods sold | 38,420 | 24,723 | 69,590 | 51,385 | 52,338 | 46,328 | 96,156 | 88,944 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
COGS - Sale of boat management system product line and related inventory | - | - | 3,099 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross profit | 18,126 | 32.1 | % | 8,949 | 26.6 | % | 32,021 | 31.5 | % | 18,122 | 26.1 | % | 20,656 | 28.3 | % | 17,023 | 26.9 | % | 37,292 | 27.3 | % | 30,320 | 25.4 | % | ||||||||||||||||||||||||||||||||||||||||
Marketing, engineering and administrative expenses | 15,268 | 27.0 | % | 12,560 | 37.3 | % | 28,936 | 28.5 | % | 25,035 | 36.0 | % | 17,149 | 23.5 | % | 15,983 | 25.2 | % | 34,068 | 24.9 | % | 31,063 | 26.0 | % | ||||||||||||||||||||||||||||||||||||||||
Restructuring of operations | 831 | 1.5 | % | 816 | 2.4 | % | 2,049 | 2.0 | % | 1,074 | 1.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations | $ | 2,027 | 3.6 | % | $ | (4,427 | ) | -13.1 | % | $ | 1,036 | 1.0 | % | $ | (7,987 | ) | -11.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||
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 2018Fiscal 2024 with the Second Quarter of Fiscal 2017Fiscal 2023
NetNet sales for the second quarter increased 67.9%15.2%, or $22.9$9.6 million, to $56.5$73.0 million from $33.7$63.4 million in the same periodquarter a year ago. The increase is primarilyCompany has benefited from favorable market conditions across most geographies and product groups through fiscal 2023 and into fiscal 2024. With the resulteasing of increasing demandglobal 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 North America for the Company’sdomestic 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 related transmission products. This market recovery began in the Company’s third fiscal quarter of fiscal 2017 and has continued through the current quarter. The increased demand reflects positive movements in both forward market and after market activity, and represents a broadening customer base compared to the early stages of market recovery seen in fiscal 2017. Globaltransmissions into China, an improved demand for industrialcommercial 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 significantlyoperational 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 second quarter, with contributions from the North American oil and gas market, an improved global economy and new product introductions. Demand for the Company’s marine and propulsion systems also saw strong growth compared to the prior year second fiscal quarter thanks to improved activity in the global commercial marine, patrol craft and pleasure craft markets, following a very difficult market environment in fiscal 2017. The sales increases noted were seen most heavily in North America, as the percentage of sales to this region increased to 66% of total consolidated net sales in the second quarter of fiscal 2018 compared to 52% for the second quarter of fiscal 2017.market. Currency translation had a favorable impact on second quarter fiscal 20182024 sales compared to the second quarter of the prior year totaling $1.0$2.1 million primarily due to the strengthening of the euro and Asian currencies against the U.S. dollar.
Sales at our manufacturing segment increased 64.8%3.2%, or $19.1$1.8 million, versus the same periodquarter last year. In the current fiscal quarter, ourThe U.S. manufacturing operation, the largest,operations experienced a 98.3%5.6%, or $17.0$1.7 million, increasedecrease in sales versus the second fiscal quarter of 2017.2023, 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 primary driver for this increase was continued accelerationCompany’s operation in the Netherlands saw increased revenue of demand for$3.6 million (27.3%) compared to the Company’s oilsecond 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 gas related products. Theimproved supply chain performance. Similarly, the Company’s Belgian operation also saw a moderatean increase over the prior year (11.5% or $0.7 million), largely due to improving North American demand for its marine transmissions. The Company’s Italian manufacturing operations enjoyed a significant recovery in their markets, primarily the European mega yacht and industrial markets, compared to the prior year second quarter reporting(35.1% or $1.8 million), with a 40.3% ($1.7 million) increasefavorable 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 comparable period.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, also experienced a solid increase (88.0% or $0.8 million), primarily duewas up $0.1 million (6.2%) compared to the timing of projects for the global pleasure craft and patrol boat markets.prior year second quarter.
Our distribution segment experienced a 49.3%, or $7.0 million,an increase in sales of $11.5 million (44.8%) in the second quarter of fiscal 2024 compared to the second quarter of fiscal 2017.2023. The Company’sCompany’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 combined 49.7%26.3% ($1.7 million) increase in sales compared toon strong demand for marine products from the prior fiscal year’s second quarter. This increase reflects improving commercial and patrol craft activity in the region following many quarters of declining volume.European operations. The Company’s European distribution operation in the Northwestsaw a significant increase ($2.1 million or 41.9%) on strong demand, a favorable currency impact and improved supply of the United States and Southwest of Canada experienced an increase in sales of 88.5% ($3.1 million). The year over year increase was driven by improved sales of aftermarket service and components for the Canadian oil and gas markets.product. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, experienced flat demand compared tosaw an increase in revenue (29.4% or $2.1 million) from the prior year second fiscal quarter.quarter, primarily due to continued strong demand for pleasure craft products in the region.
Gross profit as a percentage of sales increased 550 basis pointsfor the second quarter of fiscal 2024 improved to 32.1% of sales,28.3%, compared to 26.6% of sales26.9% for the same period last year. This favorable movement isThe improvement in the current year second quarter compared to the prior year result was primarily due to a positive volume related, with margin conversion of 37.7% on the additional revenue. The mix impact ($10.1 million). The favorable trend in gross profit performance reflects a combination of successful cost reduction actions overfor the past several quarters, improving manufacturing efficiencies and a positive product mix profile.quarter was essentially neutral.
For the fiscal 20182024 second quarter, marketing, engineering and administrative (ME&A)(“ME&A”) expenses, as a percentage of sales, were 27.0%23.5%, compared to 37.3%25.2% for the fiscal 20172023 second quarter. ME&A expenses increased $2.7$1.2 million (7.3%) versus the same period last fiscal year. The increase in ME&A expensesspending for the quarter is the resultwas comprised of increases to bonus expensehigher wages and benefits ($1.60.7 million), stock based compensationtravel costs ($0.2 million), salary expensesoftware maintenance ($0.30.1 million), product development ($0.1 million) and a positive currency exchangetranslation impact ($0.3 million) and other volume related spending ($0.5 million). These increases were partially offset by a reductionlower professional fees ($0.4 million). The increases were driven by inflationary impacts and investment in resources to global audit fees ($0.1 million) and lower pension expense ($0.1 million).support our hybrid electric strategy.
The Company incurred $0.8 million inminor restructuring charges during the second quarter of fiscal 2018,2024 and fiscal 2023, primarily associated with ongoing cost reduction actions at its European operations.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 recentongoing market challenges.
Interest expense remains relatively immaterial at approximately $0.1was 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 of both the current and prior fiscal year. The Company has focused on controlling debt and managing cash flow through the recent down cycle and ongoing recovery in many of its markets.
The unfavorable movement in other expense (income) comparedwas primarily attributable to the prior year is primarily due to the impact ofa currency movements related to the euro.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in the United States. The Tax Act, among other provisions, introduces changes in the U.S. corporate tax rate, business related exclusions and deductions and credits, and has tax consequences for companies that operate internationally. Most of the changes introduced in the Tax Act are effective beginning on January 1, 2018; however, as the Company hasloss, partially offset by a fiscal year end of June 30, the effective dates for the Company are various and different.pension benefit.
The fiscal 2018 second quarter tax expense primarily reflects the impact of the new Tax Act. As a result, the Company recorded a non-cash tax expense of $4.6 million in the second fiscal quarter, primarily due to a remeasurement of deferred tax assets and liabilities driven by the revised rate structure. Similarly, a rate change in Belgium resulted in a $0.4 million non-cash tax expense due to remeasurement of deferred tax assets and liabilities. Excluding the impact of the U.S. and Belgian deferred tax remeasurements, the Company’s effective tax rate was 49.3%. This is higher than the prior year2024 second quarter effective tax rate of 29.3%. The increase fromwas 64.0% compared to 26.3% in the prior fiscal year is primarily due tosecond quarter. The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, andresulted in the impact of improved operating results on full year projections.
Withinincrease to the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, the Financial Accounting Standards Board (“FASB”) and/or various other taxing jurisdictions. The Tax Act contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined. Changes in corporate tax rates, the net deferred tax assets and/or liabilities relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Act or other future tax reform legislation could have a material impact on our future U.S. tax expense. rate.
Comparison of the First Two QuartersHalf of Fiscal 20182024 with the First Two QuartersHalf of Fiscal 20172023
Net sales for the first two quartershalf increased 46.2%14.5%, or $32.1$17.3 million, to $101.6$136.5 million from $69.5$119.3 million in the same period a year ago. The increase is primarilyCompany has continued to benefit from favorable market conditions across most geographies and product groups through fiscal 2023 and into fiscal 2024. With the resulteasing of increasing demand in North America forglobal supply chain disruptions, along with improving operational performance, the Company’s oil and gas related transmission products, driven by the ongoing market recovery which began in the Company’s third fiscal quarter of fiscal 2017. The increased demand reflects positive movements in both forward market and after market activity, and represents a broadening customer base comparedCompany has been able to the early stages of market recovery seen in fiscal 2017. Global demand for industrial products also improved significantly, primarily in the second quarter, with contributions from the North American oil and gas market, an improved global economy and new product introductions. Demand for the Company’s marine and propulsion systems also saw strong growthimprove delivery results compared to the prior year. Global sales of marine and propulsion products improved 26.8% from the prior year, first halfwhile 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 activityshipments 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 global commercial marine, patrol craftoil and pleasure craft markets, following a very difficult market environment in fiscal 2017. These market improvements accelerated in the second quarter, showing a positive trend through the first half. The sales increases noted were seen most heavily in North America, as the percentage of sales to this region increased to 63% of total consolidated net sales in the first half of fiscal 2018 compared to 53% for the first half of fiscal 2017.gas market. Currency translation had a favorable impact on fiscal 2018 first half fiscal 2024 sales compared to the first half of the prior year totaling $1.5$4.4 million primarily due to the strengthening of the euro and the Australian and Canadian dollar against the U.S. dollar.
Sales at our manufacturing segment increased 47.5%6.8%, or $28.5$7.2 million, versus the same period last year. InThe U.S. manufacturing operations experienced a 6.9%, or $4.1 million, decrease in sales versus the first half of fiscal 2018, our U.S. manufacturing2023, 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 largest operationNetherlands saw increased revenue of the Company, experienced a 70.6%, or $25.8$11.2 million increase in sales versus(54.1%) compared to the first fiscal half of 2017. The primary driver for this increase was continuing strengthfiscal 2023, primarily due to improving operation performance in demand forsupport of a record level of incoming orders over the Company’s oilpast several quarters, along with a favorable currency impact and gas related products. Theimproved supply chain performance. Similarly, the Company’s Belgian operation also saw a significantan increase overcompared to the prior fiscal year first half (30.8%(28.8% or $3.0$2.7 million), largely due to improving North American demand for its marine transmissions.with a favorable translation effect and improved delivery performance driven by operational and supply chain execution. The Company’s Italian manufacturing operations which continuedwere down $2.7 million (21.4%) compared to be hampered by the softness in the European mega yacht and industrial markets, saw marginal improvement over the prior year first half with a 16.2% ($1.4 million) increase comparedof fiscal 2023, primarily due to the sale of the BCS business during the current fiscal 2017.year. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a solid 28.9% improvement ($0.8 million), primarily duewas up $0.1 million (4.2%) compared to the timing of projects for the global pleasure craft and patrol boat markets.prior fiscal year first half.
Our distribution segment experienced a 31.4%, or $9.3 million,an increase in sales of $20.2 million (40.5%) in the first half of fiscal 2024 compared to the first half of fiscal 2017.2023. 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 combined 32.3%10.4% ($1.2 million) increase in sales compared toon strong domestic demand for marine products from the prior fiscal year’s first half. This increase reflects improving commercial and patrol craft activity in the region, after several quarters of declining demand as a result of the struggling Asian economy.European operations. The Company’s European distribution operation in the Northwest United Statessaw a significant increase ($2.2 million or 26.1%) on strong demand, a favorable currency impact and Southwest Canada experienced an increase in salesimproved supply of 65.0% ($4.3 million). The year over year increase was driven by improved sales of aftermarket service and components for the Canadian oil and gas markets.product. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, also saw a solidan increase in sales (12.5%)revenue (6.8% or $0.9 million) from the prior year first half, primarily due to a favorable trendcontinued strong demand for pleasure craft products in the Australian pleasure craft market.region.
Gross profit as a percentage of sales increased 540 basis pointsfor the first half of fiscal 2024 improved to 31.5% of sales,27.3%, compared to 26.1% of sales25.4% for the same period last year. This The improvement is due to a positive volume impact ($14.2 million) associated with the strong revenue growth throughin the first half of fiscal 2018. The strong gross profit performance reflects a combination of successful cost reduction actions over the past several quarters, improving manufacturing efficiencies andcurrent year compared to the prior year result was primarily volume related, along with a positive product mix profile.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 20182024 first two quarters,half, marketing, engineering and administrative (ME&A)(“ME&A”) expenses, as a percentage of sales, were 28.5%24.9%, compared to 36.0%26.0% for the fiscal 20172023 first two quarters.half. ME&A expenses increased $3.9$3.0 million (9.7%) versus the same period last fiscal year. The increase in ME&A expensesspending for the period is primarily the resultfirst half was comprised of increases to bonus expensehigher wages and benefits ($2.41.4 million), stock based compensationtravel costs ($0.5 million), salary expensesoftware maintenance ($0.70.3 million), product development ($0.3 million) and a positive currency exchangetranslation impact ($0.4 million) and volume based spending ($0.30.5 million). These increases were partially offset by a reduction to global audit fees ($0.3 million) and lower pensionbad 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 $2.0 million inminor restructuring charges during the first half of fiscal 2018,2024 and fiscal 2023, primarily associated with ongoing cost reduction actions at its European operations.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 recentongoing market challenges.
Interest expense remains relatively immaterial at less than $0.2was 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 two quartershalf of both the current and prior fiscal year. The Company has focused on controlling debt and managing cash flow through the down cycle and ongoing recovery in many of its markets.
The unfavorable movement in other expense (income) compared2024 was primarily attributable to the prior year is primarily due to the impact ofa currency movements related to the euro and Singapore dollar.loss, partially offset by a pension benefit.
The fiscal 20182024 first half effective tax rate was 204.0%,107.1% compared to 80.5% in the prior fiscal 2017 first half rate of 28.8%.year comparable period. The fiscal 2018 rate was impacted by two significant discrete adjustments. During the first quarter of fiscal 2018, the Company recorded a tax benefit of $3.8 million related to the reversal of afull domestic valuation allowance, in a certain foreign jurisdiction that had been subject to a full valuation allowance. Improvement in operating results, along with a business reorganization which provided favorable tax planning opportunities, allowed for the reversal of this valuation allowance. During the second quarter of the current fiscal year, in compliance with the new Tax Act, the Company recorded a non-cash tax expense of $4.6 million, primarily due to a remeasurement of deferred tax assets and liabilities. In addition, a rate change in Belgium resulted in a $0.4 million non-cash tax expense due to remeasurement of deferred tax assets and liabilities. The mix of foreign earnings by jurisdiction, smaller discrete adjustments and continued operational improvement explain the remaining movementresulted in the Company’sincrease to the effective tax rate.
Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, the Financial Accounting Standards Board (“FASB”) and/or various other taxing jurisdictions. The Tax Act contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined. Changes in corporate tax rates, the net deferred tax assets and/or liabilities relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Act or other future tax reform legislation could have a material impact on our future U.S. tax expense.
Financial Condition, Liquidity and Capital Resources
Comparison between December29,, 2017 2023 and June 30, 20172023
As of December 29, 2017,2023, the Company had net working capital of $87.9$119.0 million, which represents an increasea decrease of $3.0$0.6 million, or 3.6%0.5%, from the net working capital of $84.9$119.6 million as of June 30, 2017.2023.
Cash decreased $0.6increased by $7.8 million to $15.8$21.0 million as of December 29, 2017,2023, versus $16.4$13.3 million as of June 30, 2017. The2023. As of December 29, 2023, the majority of the cash as of December 29, 2017 is at the Company’s overseas operations in Europe ($7.55.5 million) and Asia-Pacific ($7.110.8 million).
Trade receivables of $29.2$41.4 million were down $2.2$13.3 million, or approximately 6.9%24.3%, when compared to last fiscal year-end. ForeignThe impact of foreign currency translation increasedwas to increase accounts receivable by $0.6$1.2 million versus June 30, 2017. The net remaining decrease is driven by strong collection results and the timing of sales within the quarter, as sales for the second fiscal quarter slow through the year-end holiday season.2023. As a percent of sales, trade receivables finished at 51.7%56.8% in the second quarter of fiscal 20182024 compared to 67.5%62.2% for the comparable period in fiscal 20172023 and 58.6%65.2% for the fourth quarter of fiscal 2017.2023.
Inventories increased by $7.8 million, or 11.9%,were essentially unchanged versus June 30, 2017 to $74.0 million. Foreign2023. The impact of foreign currency translation increasedwas to increase inventories by $1.9$3.9 million versus June 30, 2017. The remaining2023. This increase is volume driven, aswas essentially offset by the Company experiences recovery primarilysale of the BCS business, reducing inventory by $3.8 million. Other entity movements were offsetting, with increases at our operations in its products serving the North American oilNetherlands (driven by anticipated growth in the second half) and gas market.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, 2017,2023, the Company’s backlog of orders to be shipped over the next six months approximates $85.1$125.2 million, compared to $46.4$119.2 million at June 30, 20172023 and $38.0$124.0 million at December 30, 2016. The increase versus the end of the prior fiscal year is primarily being experienced at the Company’s domestic manufacturing location.2022. As a percentage of six-month backlog, inventory has reduceddecreased from 143%111% at June 30, 20172023 to 87%105% at December 29, 2017.2023.
Net property, plant and equipment (PP&Eincreased $1.6 million (4.4%) increased $0.4to $40.3 million versus $38.7 million at June 30, 2017. This includes the addition2023. The Company had capital spending of $3.0$5.4 million in capital expenditures, primarily at the Company’s U.S.first half and Belgian-based manufacturing operations, which was essentiallya favorable exchange impact of $0.5 million. These increases were offset by depreciation ($3.4 million) and the impact of $3.2 million. The net remaining increase is duethe sale of the BCS business. Capital spending occurring in the first half was primarily related to foreign currency translation effects.replacement capital. In total, the Company expects to invest between $7$9 and $9$11 million in capital assets in fiscal 2018.2024. 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.
AccountsAccounts payable as of December 29, 20172023 of $23.4$32.6 million were up $2.1was down $3.9 million, or 9.9%10.7%, from June 30, 2017.2023. The impact of foreign currency translation was to increase accounts payable by $0.5$1.1 million versus June 30, 2017.2023. The remaining increasedecrease is consistent with increased sales volumesprimarily related to the reduced purchasing activities in light of stable demand and inventory levels in comparison to the fiscal 2017 fourth quarter, along with the Company’s focus on effective working capital management.reduction efforts.
Total borrowingsborrowings and long-term debt as of December 29, 20172023 decreased by $1.6$0.9 million or 25.9%, to $4.7$17.7 million versus $18.6 million at June 30, 2017. Cash needs were driven primarily by volume related working capital requirements and were offset by favorable collection results and a $1.0 million tax refund.2023. During the first half, of fiscal 2018, the Company generatedreported 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 $0.8 milliona bonus accrual and capital spending. The Company ended the second fiscal quarter with total debt, net of cash, of ($11.1)3.3) million, compared to ($10.0)$5.4 million at June 30, 2017,2023, for a net favorable changeimprovement of $1.1$8.7 million.
Total equity increased $5.1$0.2 million, or 4.1%0.1%, to $128.6$145.3 million as of December 29, 2017. Retained earnings decreased by $0.7 million, reflecting the2023. The net loss forduring the first fiscal half. Nethalf decreased equity by $0.1 million, offset by a favorable foreign currency translation of $3.0$2.2 million was reported.and the payment of a dividend ($0.6 million). The reductionnet change in common stock and treasury stock resulting from the accounting for stock basedstock-based compensation increaseddecreased equity by $0.7$0.5 million. The net remaining increasedecrease in equity of $2.1 million primarily represents the impact of a plan change to the Company’s U.S. postretirement benefit plan and amortization of net actuarial loss and prior service cost on the Company’s defined benefit pension plans.plans, along with the unrealized gain on cash flow hedges.
On April 22, 2016,June 29, 2018, the Company entered into a revolving Credit Agreement (the “BMO“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 (“BMO”(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”). This agreement permitsPursuant 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 enter into loans upmake principal installment payments on the Term Loan of $0.5 million per quarter. In addition, under subsequent amendments to $40the Credit Agreement, BMO’s Revolving Credit Commitment is currently $40.0 million. This maximumThe 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 be increasednot 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 BMOCredit Agreement by an additional $10 million so long as there exists no default and certain other conditions specified in the BMO Agreement are satisfied.currently runs through June 30, 2025.
In general, each revolving loan underUnder the BMOCredit Agreement willas 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 EurodollarBase Rate as defined. This rate as of December 29, 2017 was 3.11%. In addition to monthly interest payments, theplus an Applicable Margin. The Company will be responsible for payingalso pays a quarterly unusedcommitment fee equal to 0.15% ofon the average daily unused portionUnused 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 revolving credit commitment. 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 prepay loans subjectnot exceed 3.50 to certain limitations. 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 BMOCredit Agreement are secured by substantially all of the Company’s personal property, including accounts receivable, inventory, certain machinery and equipment, and intellectual property, and the personal property of Mill-Log Equipment Co., Inc. (“Mill-Log”), a wholly-owned domestic subsidiary of the Company.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 has entered into a security agreement, IP security agreement and pledge agreement with BMO, and Mill-Log has entered into a guaranty agreement, guarantor security agreement and pledge agreement with BMO, which collectively grant BMO a security interest in these assets and holdings as administrative agent for itself and other lenders that may enter into the BMO Agreement. The Company has also entered into a negative pledge agreementCollateral 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 has agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the BMOCredit Agreement and the negative pledge agreement. Within thirty daysNegative 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 eventEvent of default (as defined) that is not cured withinDefault, BMO may take the prescribed cure period, or if availabilityfollowing actions upon written notice to the Company: (1) terminate its remaining obligations under the BMOCredit Agreement; (2) declare all amounts outstanding under the Credit Agreement is less thanto be immediately due and payable; and (3) demand the greater of 15%Company to immediately Cash Collateralize L/C Obligations in an amount equal to 105% of the aggregate revolving credit commitments and $6.0 million,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 and Mill-Log will execute and deliver mortgagesCompany’s bankruptcy, the Bank may take the three actions listed above without notice to BMO on all real estate owned by them at such time to further secure borrowings under the BMO Agreement.Company.
The Company’s balance sheet remains very strong, there are no material off-balance-sheet arrangements, and the Company continues to have sufficient liquidity for near-term needs. The Company had approximately $23.1 million of available borrowings under the BMO AgreementOther significant contractual obligations as of December 29, 2017. The Company expects2023 are disclosed in Note N "Lease Liabilities" in the Notes to continue to generate enough cash from operations, as well as borrowing capacity from credit facilities, to meet its operating and investing needs.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, 2017,2023, the Company also had cashno additional material purchase obligations other than those created in the ordinary course of $15.8 million, primarily atbusiness 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 overseas operations. These funds, with some restrictionspostretirement plans which are discussed in detail in Note G "Pension and tax implications,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 available for repatriation as deemed necessarypaid by the Company.Company as they are submitted. In fiscal 2018,2024, the Company expects to contribute $2.3$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 minimum contribution required.plans. The Company does not have any material off-balance sheet arrangements.
Net working capital increased $3.0 million, or 3.6%, during the first half of fiscal 2018, and the current ratio remained level at 2.9 for both December 29, 2017 and June 30, 2017. The increase in net working capital was primarily driven by a volume related increase to inventory during the first half of fiscal 2018.
The Company expects capital expenditures to be approximately $7 million to $9 million in fiscal 2018. These anticipated expenditures reflect the Company’s plans to invest in modern equipment and facilities, its global sourcing program and new products.
Management believes that available cash, the BMOCredit Agreement, the unsecured lines of credit, facility,cash generated from future operations, and potential access to debt markets will be adequate to fund the Company’sCompany's cash and capital requirements for the foreseeable future.
As of December 29, 2017, the Company has obligations under non-cancelable operating lease contracts and loan agreements for certain future payments.
The Company has approximately $0.9 million of unrecognized tax benefits, including related interest and penalties, as of December 29, 2017, which, if recognized, would favorably impact the effective tax rate. See Note H of the Condensed Consolidated Financial Statements for disclosures surrounding uncertain income tax positions.
The Company maintains defined benefit pension plans for some of its operations in the United States and Europe. The Company has established the Benefits Committee (a non-Board management committee) to oversee the operations and administration of the defined benefit plans. The Company estimates that fiscal 2018 contributions to all defined benefit plans will total $2.3 million. As of December 29, 2017, $1.0 million in contributions have been made.
New Accounting Releases
See Note A,, Basis of Presentation, to the condensed consolidated financial statements for a discussion of recently issued accounting standards.
Critical Accounting Policies
The preparation of this Quarterly Report requires management’smanagement’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’sCompany’s critical accounting policies are described in Item 7 of the Company’s Annual Report filed on Form 10-K for June 30, 2017.2023. There have been no significant changes to those accounting policies subsequent to June 30, 2017.2023.
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
The Company is exposedelecting not to market risks from changes in interest rates, commodities and foreign exchange. To reduce such risks, the Company selectively uses financial instruments and other pro-active management techniques. All hedging transactions are authorized and executed pursuantprovide this disclosure due to clearly defined policies and procedures, which prohibit the use of financial instruments for trading or speculative purposes.
Interest rate risk - The Company’s earnings exposure related to adverse movements of interest rates is primarily derived from outstanding floating rate debt instruments that are indexed to a Eurodollar Rate. In accordance with BMO Agreement expiring April 22, 2021, the Company has the option of borrowing at a Eurodollar Rate plus an additional “Add-On” of 1.75%. Due to the relative stability of interest rates, the Company did not utilize any financial instruments at December 29, 2017 to manage interest rate risk exposure. A 10 percent increase or decrease in the applicable interest rate would result in a change in annual pretax interest expense of approximately $14,000.
Commodity price risk - The Company is exposed to fluctuation in market prices for such commodities as steel and aluminum. The Company does not utilize commodity price hedges to manage commodity price risk exposure.
Currency risk - The Company has exposure to foreign currency exchange fluctuations. Approximately 26% of the Company’s revenues in the two quarters ended December 29, 2017 were denominated in currencies other than the U.S. dollar. Of that total, approximately 56% was denominated in euros with the balance composed of Japanese yen, the Swiss franc, Indian rupee and the Australian and Singapore dollars. The Company does not hedge the translation exposure represented by the net assets of its foreign subsidiaries. Foreign currency translation adjustments are recordedstatus as a component of shareholders’ equity. Forward foreign exchange contracts are occasionally used to hedge the currency fluctuations on significant transactions denominated in foreign currencies.
Derivative financial instruments - The Company has written policies and procedures that place all financial instruments under the direction of the Company’s corporate treasury group and restrict derivative transactions to those intended for hedging purposes. The use of financial instruments for trading or speculative purposes is prohibited. The Company occasionally uses financial instruments to manage the market risk from changes in foreign exchange rates.
The Company primarily enters into forward exchange contracts to reduce the earnings and cash flow impact of non-functional currency denominated receivables and payables. These contracts are highly effective in hedging the cash flows attributable to changes in currency exchange rates. Gains and losses resulting from these contracts offset the foreign exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of the forward exchange contracts generally coincide with the settlement dates of the related transactions. Gains and losses on these contracts are recorded in Other expense, net in the Condensed Consolidated Statement of Operations as the changes in the fair value of the contracts are recognized and generally offset the gains and losses on the hedged items in the same period. The primary currency to which the Company was exposed in fiscal 2018 and 2017 was the euro. At December 29, 2017, the Company had no outstanding forward exchange contracts. At June 30, 2017, one of the Company’s foreign subsidiaries had three outstanding forward exchange contracts to purchase U.S. dollars in the notional value of $1,050,000 with a weighted average maturity of 53 days. The fair value of the Company’s contract was a loss of $29,000 at June 30, 2017.Smaller Reporting Company.
Item 4. | Controls and Procedures |
(a) | Evaluation of Disclosure Controls and Procedures |
The Company’sCompany’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 Rule 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 other material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 20172023 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, 2017,2023, 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 | ||||||||||
Sept. 30, 2017 – Oct. 27, 2017 | 0 | NA | 0 | 315,000 | ||||||||||
Oct. 28, 2017 – Nov. 24, 2017 | 0 | NA | 0 | 315,000 | ||||||||||
Nov. 25, 2017 – Dec. 29, 2017 | 7,119 | NA | 0 | 315,000 | ||||||||||
Total | 7,119 | NA | 0 | 315,000 |
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 20102021 and 2018 Long-Term Incentive Compensation Plan.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, 2017,2023, 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, 2017.2023.
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 | /s/ |
| |
| |
Treasurer and Secretary | |
Chief Accounting Officer |
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