UNITED STATES

SECURITIES AND EXCHANGE COMMISSION     

WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 30,December 28, 2018

Commission File Number 1-7635

TWIN DISC, INCORPORATED

(Exact name of registrant as specified in its charter)

1328 Racine Street, Racine, Wisconsin 53403

(Address of principal executive offices)

(262) 638-4000

(Registrant's telephone number, including area code)

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__

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 definition of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer               Accelerated Filer√

Non-accelerated filer(Do not check if a smaller reporting company)

Smaller reporting company__               Emerging growth company

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

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

Yes               No √ 

At May 4, 2018,January 31, 2019, the registrant had 11,551,28513,099,512 shares of its common stock outstanding.

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 only of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report filed on Form 10-K10-K for June 30, 2017. 2018. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

New Accounting ReleasesThe unaudited condensed consolidated financial statements and information included in this Quarterly Report on Form 10-Q (“Form 10-Q”) includes the financial results of Veth Propulsion Holding BV (“Veth Propulsion”) for the period beginning July 2, 2018 through December 28, 2018. The financial results included in this Form 10-Q related to the acquisition method of accounting for the Veth Propulsion acquisition are subject to change as the acquisition method accounting is not yet finalized and dependent upon the finalization of management’s review of certain independent valuations and studies that are still in process. See Note B, “Acquisition of Veth Propulsion Holding BV” for further information about the acquisition and related transactions and the acquisition accounting.

In February 2018, the FinancialRecently Adopted Accounting Standards

The Company determined that deferral of revenue is appropriate for certain agreements where the performance of services after product delivery is required. Such services primarily pertain to technical commissioning services by its distribution entities in its marine business, whereby the Company’s technicians calibrate the controls and transmission to ensure proper performance for the customer’s specific application. This service helps identify issues with the ship's design or performance that need to be remediated by the ship builder or other component suppliers prior to the ship being officially accepted into service by the ship buyer. The cumulative effect adjustment of adopting the new standard is not significant to the Company’s results of operations and financial condition.

For operating leases in which the Company is a lessee, the Company concluded that all existing operating leases under the old guidance (ASU 2018-02)continue to be classified as operating leases under the new guidance, and all existing capital leases under the old guidance are classified as finance leases under the new guidance. The Company excluded any lease contracts with terms of twelve months or less as of the adoption date. The Company has lease agreements with lease and non-lease components, which are generally accounted for as separate lease components. The Company accounts for short-term leases on a straight-line basis over the lease term.

The following table presents the effect of the adoption of ASU 2016-02 on the Company’s condensed consolidated balance sheet as of June 30, 2018:

The adoption of ASU 2014-09 and ASU 2016-02 did not have an impact on the Company’s condensed consolidated statement of operations and comprehensive income for the quarter and two quarters ended December 29, 2017, or condensed consolidated statement of cash flows for the two quarters ended December 29, 2017.

The following table presents the effect of the adoption of ASU 2017-07 on the Company’s condensed consolidated statements of operations and comprehensive income for the quarter and two quarters ended December 29, 2017:

New Accounting Releases

In August 2018, the FASB issued updated guidance (ASU 2018-13) as part of the disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, (the2019 (the Company’s fiscal 2020), with early adoption permitted. The Company has not decided when it will adopt this guidance; its adoption will have no impact to total shareholders’ equity.

In March 2017, the FASB issued guidance (ASU 2017-07) intended to improve the presentation of net periodic pension cost and net periodic postretirement cost. This guidance 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 components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations. The amendments in this guidance are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, (the Company’s fiscal 2019)2021), 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, August 2018, the FASB issued updated guidance (ASU 2016-16)2018-14) intended to modify the disclosure requirements for employers that changes the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory.sponsor defined pension or postretirement plans. The amendments in this guidance are effective for fiscal years and interim periods within those fiscal years, beginningending after December 15, 2017 (the2020 (the Company’s fiscal 2019)2021), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

Special Note Regarding Smaller Reporting Company Status

In August 2016, June 2018, the FASBSEC issued updated guidance (ASU 2016-15) that addresses eight specific cash flow issues withRelease 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, which changes the objectivedefinition of reducinga smaller reporting company in Rule 12b-2 of the existing diversity in practice.Securities Exchange Act of 1934, as amended.  Under this release, the new thresholds for qualifying are (1) public float of less than $250 million or (2) annual revenue of less than $100 million and public float of less than $700 million (including no public float).  The amendments in this guidance arerule change is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (on September 10, 2018, the Company’s first fiscal2019), 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) intended 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. As2019.  Under this release, the Company continues to qualify as a resultsmaller reporting company based on its public float as of the adoption, excess tax benefitslast business day of its second fiscal quarter of fiscal year 2019. A smaller reporting company may choose to comply with scaled or deficiencies associated with stock-based compensation award activity are recognizednon-scaled financial and non-financial disclosure requirements on an item-by-item basis. The Company has not scaled its disclosures of financial and non-financial information in income tax expensethis Quarterly Report. The Company may determine to provide scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.

On July 2, 2018, the Company completed the acquisition of 100% of the outstanding common stock of Veth Propulsion. Veth Propulsion is a global manufacturer of highly-engineered primary and auxiliary propulsions and propulsion machinery for maritime vessels, including rudder propellers, bow thrusters, generator sets and engine service and repair, based in the consolidated statementsNetherlands. These products are complementary to and expand the Company’s current product offerings in the marine and propulsion markets. Prior to the acquisition, the Company was a distributor of operations. In addition, excess tax benefits associatedVeth products in North America and Asia. This acquisition was pursuant to a Share Purchase Agreement (“Purchase Agreement”) entered into by Twin Disc NL Holding B.V., a wholly-owned subsidiary of the Company, with award activityHet Komt Vast Goed B.V., the prior parent of Veth Propulsion, on June 13, 2018.  Veth Propulsion 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. The adoptionpart of this guidance did not have a material impact on the Company's financial statements.manufacturing segment.

In February 2016, Under the FASB issued guidance (ASU 2016-02)terms of the Purchase Agreement, the Company paid an aggregate of approximately $60,729 in cash at closing, which replaces the existing guidanceincluded a base payment plus adjustments for leases.net cash and working capital. This amount is subject to a final determination of working capital adjustments and an earn-out. 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. Leasesmaximum earn-out is approximately $3,800. The earn-out will be classified as either finance or operating, with classification affectingpaid if the patternearnings before interest, tax, depreciation and amortization of expense recognitionVeth Propulsion in the income statement.period January 1, 2018 through December 31, 2018 exceeds the agreed upon threshold amount. The guidanceearn-out is effective for fiscal years beginning after December 15,payable in the form of Company stock or cash, and will be determined by April 2019.

The Company financed the payment of the cash consideration through borrowings of $60,729 under a new credit agreement entered into on June 29, 2018 with BMO Harris Bank N.A. (the Company’s fiscal 2020“Credit Agreement”), including interim periods within those fiscal years. The Credit Agreement is further discussed in Note L, Debt.

Consideration Transferred

The following table summarizes the consideration transferred at the acquisition date. This amount is subject to a final determination of a working capital adjustment and requires retrospective application.earn-out, which will be settled prior to the end of the measurement period ending July 1, 2019.

In preparation for the adoptionFair Value Estimate of this guidance, the 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,Assets Acquired 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.Liabilities Assumed

The Company is continuing its assessment, including the potential operational process changes as a resultreview of the new guidance. It plans to early-adoptfair value estimate of assets acquired and liabilities assumed during the guidance, usingmeasurement period, which will conclude as soon as the modified retrospective approach, to coincide with its adoptionnecessary information regarding the facts and circumstances that existed as of the new revenue recognition guidance, whichacquisition date is obtained, or otherwise not available. This measurement period will not exceed one year from the first quarteracquisition date. At the effective date of fiscal 2019.

In July 2015, the FASB issued guidance (ASU 2015-11) intended to simplifyacquisition, the measurement of inventoryassets acquired and to closely align with International Financial Reporting Standards. Current guidance requires inventoriesliabilities assumed are required to be measured at fair value. The fair value estimates are pending completion of several elements, including the lowerfinalization of cost an independent appraisal and final review by the Company. Accordingly, until the fair values are final, there could be material adjustments to the Company’s consolidated financial statements, including changes to depreciation and amortization expense related to the valuation of property and equipment and intangible assets acquired and their respective useful lives, among other adjustments.

Upon the final determination of the fair value of assets acquired and liabilities assumed, the excess of the purchase price over such fair values is allocated to goodwill. The final determination of the purchase price, fair values and resulting goodwill may differ significantly from what is reflected in these consolidated financial statements.

The following summarizes the preliminary estimate of fair value of the assets acquired and liabilities assumed at the acquisition date.  Some of these amounts reflect updated values from those previously reported as of September 28, 2018, the Company's prior fiscal quarter, due to management's ongoing fair value assessment during the measurement period.

The following information provides further details about the estimated net step-up in fair value and/or market. Under this new guidance, inventories other than those measuredthe estimated fair value at the acquisition date for some key balance sheet items. 

(a) Included in cash is restricted cash in the amount of $685. This amount is restricted and not available for general business use in order to guarantee performance obligations by Veth Propulsion under last in first out (“LIFO”)certain customer contracts. A significant majority of these arrangements have expired as of December 28, 2018 and they are not expected to be renewed.

(b) Accounts receivable represents contractual amounts receivable from customers less an allowance for doubtful accounts. This amount approximates fair value.

(c) Inventories consist of:

As of the effective date of the acquisition, inventory is required to be measured at fair value. Raw materials are typically utilized in operations within one year of purchase and therefore book values approximate fair value. Projects work in progress are estimated to be approximately 70% complete, and the lowerstep-up to fair value less estimated costs to complete and sell resulted in a step-up value of costapproximately $4,402.

(d) The fair value of property, plant and net realizable value. Net realizable valueequipment is estimated at $2,641. These assets primarily consist of manufacturing equipment, test equipment, vehicles, and office and plant fixtures. Their estimated useful lives range from 2 to 13 years.

(e) Intangible assets consist of:

The preliminary fair values were determined primarily using an income method, which utilizes financial forecasts of expected future cash flows. Some of the estimated selling pricesmore significant assumptions used in the ordinary coursedevelopment of business, less reasonably predictable costsintangible asset values include: the amount and timing of completion, disposal,projected future cash flows, the discount rate selected to measure the risks inherent in future cash flows, and transportation.the assessment of the asset’s life cycle and competitive trends impacting the asset, as well as other factors.

(f) This represents the net deferred tax liability associated with the fair value of assets acquired and liabilities assumed.

(g) The Company adoptedis not able to deduct any of the goodwill for tax purposes.

The fair values presented above are preliminary until the final purchase price consideration is determined and the Company completes its work with the use of a third party valuation firm. These values are subject to change. Any changes to the initial estimates of the fair value of assets and liabilities will impact residual goodwill and may affect future earnings.

As part of the acquisition, the Company entered into a fifteen-year lease with Het Komt Vast Goed B.V., the owner of the real property where Veth Propulsion’s operations are located. Under this guidance, prospectively,lease, the Company pays an annual market-based rent of $1,249, with provisions for increasing rent based on the prevailing consumer price index.

Summary Financial Information

The following table presents financial information for Veth Propulsion that is included in the first fiscalCompany’s consolidated statement of operations for the quarter and two quarters ended December 28, 2018:

(b)   In addition to (a), operating income (loss) includes the depreciation of 2018.property, plant and equipment and amortization of intangible assets acquired of $647 and $1,268 for the quarter and two quarters ended December 28, 2018, respectively. Operating income (loss) also includes one-time transaction charges related to the acquisition of $256 and $460 for the quarter and two quarters ended December 28, 2018, respectively.

The adoptionfollowing table presents unaudited supplemental pro forma information as if the acquisition of this guidance did not have an impactVeth Propulsion had occurred on the Company's financial statements.July 1, 2017.

C.Revenue Recognition

In May 2014, the FASB issued updated guidance (ASU 2014-09) on revenueRevenue from contracts with customers. This revenue recognition guidance supersedes existing guidance, including industry-specific guidance. The core principlecustomers is that an entity shouldrecognized using a five-step model consisting of the following: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a performance obligation. Performance obligations are satisfied when the Company transfers control of a good or service to depict the transfera customer, which can occur over time or at a point in time. The amount of control over promised goods or services to customers in an amount that reflectsrevenue recognized is based on the consideration to which the entityCompany expects to be entitled in exchange for those goods or services.services, including the expected value of variable consideration. The guidance identifies stepscustomer’s ability and intent to applypay the transaction price is assessed in achieving this principle. This updated guidancedetermining whether a contract exists with the customer. If collectibility of substantially all of the consideration in a contract is effective for fiscal years,not probable, consideration received is not recognized as revenue unless the consideration is nonrefundable and interim periods within those fiscal years, beginning after December 15, 2017 (the Company’s first quarter of fiscal 2019).Company no longer has an obligation to transfer additional goods or services to the customer or collectibility becomes probable.

In preparation forThe Company designs, manufactures and sells marine and heavy duty off highway power transmission equipment. Products offered 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 its products to customers primarily in the adoption of this guidance,commercial, pleasure craft, 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.

Identify contract with customer:

The Company gathered customer contracts and representative customer purchase orders of its various locationslocations. The Company’s customers consist of distributors and direct end-users. With regard to assess whether theredistributors, the Company generally has written distribution agreements which describe the terms of the distribution arrangement, such as the product range, the sales territory, product pricing, sales support, payment and returns policy, etc. Customer contracts are generally in the form of acknowledged purchase orders. Services to be rendered, as part of the delivery of those products, are also generally specified. Such services include installation reviews and technical commissioning.

Performance obligations:

The Company’s performance obligation as it relates to the delivery of goods is straightforward; the recognition of revenue is generally driven by shipment date and the terms of sale. As it relates to the Company’s service obligations, the Company determined that installation reviews, shift development and technical commissioning are separate and distinct performance obligations.

Transaction price:

The Company considers the invoice price as the transaction price.

Allocation of transaction price:

The Company determined that the most relevant allocation method for its service obligations as definedis to apply the expected cost plus appropriate margin. This is the Company’s current practice of billing for repairs, overhaul, and other product service related time incurred by ASU 2014-09, within these agreements. The assessment has included interviews with various functions, including sales, engineering, customer service,its technicians.

Recognize revenue:

Revenue is recognized upon transfer of control of the products to the customer. For installation review, shift development, and finance, to further analyze those performance obligations, both explicit and implicit (particularly as they relate to services). Under this ASU,technical commissioning services, revenue is recognized when or as each performance obligation is satisfied. Based upon completion of the findings to date, 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. service.

Disaggregated revenue:

The Company is continuing its assessment, including whether or not these obligations are perfunctory or materialfollowing table presents details deemed most relevant to the users of the financial statements. It plans to adoptstatements for the guidance, usingquarter and two quarters ended December 28, 2018.

Net sales by product group for the modified retrospective approach, onquarter ended December 28, 2018 is summarized as follows:

Net sales by product group for the effective date applicable to the Company, whichtwo quarters ended December 28, 2018 is the first quartersummarized as follows:

Contract assets/liabiliies:

There are no significant balances of fiscal 2019.contract assets or liabilities as of December 28, 2018.

The major classes of inventories were as follows:

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 threetwo quarters ended March 30,December 28, 2018 and March 31,December 29, 2017:

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

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

The Company has two reportable segments: manufacturing and distribution.  Its segment structure reflects the way management makes operating decisions and manages the growth and profitability of the business. It also corresponds with management’s approach of allocating resources and assessing the performance of its segments. The accounting practices of the segments are the same as those described in the summary of significant accounting policies. Transfers among segments are at established inter-company selling prices.  Management evaluates the performance of its segments based on net income.

Information about the Company’s segments is summarized as follows:

Performance Stock Awards (“PSA”)

During the firstthree quarters half of fiscal 20182019 and 2017,2018, the Company granted a target number of 54.942.3 and 109.654.9 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 20182019 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”) (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2020. 2021. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 69.2.63.4. Based upon favorable actual results to date, the Company is currently accruing compensation expense for these PSAs.

The fiscal 20172018 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual EPS (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2019. 2020. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 149.4.69.2. Based upon favorable actual results to date, and the low probability of achieving certain threshold performance levels, the Company is currently not accruing compensation expense for the portion of the PSAs relating to the average return on invested capital and average annual EPS measures. The Company is currently accruing compensation expense for the average annual sales measure.these PSAs.

There were 206.2188.0 and 181.8224.9 unvested PSAs outstanding at March 30,December 28, 2018 and March 31,December 29, 2017, 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 $138$242 and $15$121 was recognized for the quarters ended March 30,December 28, 2018 and March 31,December 29, 2017, respectively, related to PSAs. Compensation expense of $274$788 and $45$136 was recognized for the threetwo quarters ended March 30,December 28, 2018 and March 31,December 29, 2017, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at March 30,December 28, 2018 was $11.75.$15.02. At March 30,December 28, 2018, the Company had $2,036$1,522 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2019, 20182017 and 20162017 awards. The total fair value of PSAs vested as of March 30,December 28, 2018 and March 31,September 29, 2017 was $0.$0.

Restricted Stock Awards (“RS”)

The Company has unvested RS awards outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded as compensation expense over the vesting period, which is generally 1 to 3 years. During the firstthree quarters half of fiscal 20182019 and 2017,2018, the Company granted 85.335.6 and 181.885.3 service based restricted shares, respectively, to employees and non-employee directors. There were 237.7185.3 and 269.6272.4 unvested shares outstanding at March 30,December 28, 2018 and March 31,December 29, 2017, respectively. A total of 32.72.8 shares of restricted stock were forfeited during the threetwo quarters ended March 30,December 28, 2018. There were no shares of restricted stock forfeited during the threetwo quarters ended March 31,December 29, 2017. Compensation expense of $186$266 and $430$464 was recognized for the quarters ended March 30,December 28, 2018 and March 31,December 29, 2017, respectively. Compensation expense of $1,113$516 and $1,126$927 was recognized for the threetwo quarters ended March 30,December 28, 2018 and March 31,December 29, 2017, respectively. The total fair value of restricted stock grants vested as of March 30,December 28, 2018 and March 31,December 29, 2017 was $1,809$2,102 and $587,$1,758, respectively. As of March 30,December 28, 2018, the Company had $1,512$1,217 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

Restricted Stock Unit Awards (“RSU”)

Under the 2018 Long Term Incentive Plan, the Company has been authorized to issue RSUs. The RSUs entitle the employee to shares of common stock of the Company if the employee remains employed by the Company through a specified date, generally three years from the date of grant. During the first half of fiscal 2019, the Company granted 38.0 RSUs to various employees of the Company, including executive officers. The fair value of the RSUs (on the date of grant) is recorded as compensation expense over the vesting period. There were 38.0 unvested RSUs outstanding at December 28, 2018. Compensation expense of $82 was recognized for the quarter ended December 28, 2018. Compensation expense of $136 was recognized for the two quarters ended December 28, 2018. The weighted average grant date fair value of the unvested awards at December 28, 2018 was $25.77. As of December 28, 2018, the Company had $842 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

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 care and life insurance benefits for certain domestic retirees. The components of the net periodic benefit cost for the defined benefit pension plans and the other postretirement benefit plan are as follows:

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, introducesintroduced 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 arewere effective beginning on January 1, 2018; however, as the Company has a fiscal year end of June 30, the effective dates for the Company are various and different.

For the threetwo quarters ended March 30,December 28, 2018 and March 31,December 29, 2017, the Company’s effective income tax rate was 39.4%25.1% and 34.8%204.0% respectively. DuringIn the current fiscalprior year, increased and sustained profitability in compliance witha foreign jurisdiction resulted in the newrelease of a $3,803 valuation allowance, which decreased the effective tax rate by 611.5%. In the prior year, the impact of the Tax Act the Company recorded a provisionalwas reflected resulting in an increase to tax expense of $4,293 primarily due to a re-measurement of deferred tax assets and liabilities; this$4,526, which increased the effective tax rate by 70.5%727.9%. The Company has determined that Foreign tax reform also reflected in the impact of the U.S. federal corporate incomeprior year increased tax rate change on the U.S. deferred tax assetsexpense 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 allowanceby $431 and resulted in a certain foreign jurisdiction of $3,803 reducedan increase in the effective tax rate by 62.4%. Increased domestic income was offset by the utilization of the Domestic Production Activities Deduction under IRC§199, decreasing the effective tax rate by 3.1%69.3%. The mix of earnings by jurisdiction and continued operational improvement coupled with increased tax preference items 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,Further, 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 the tax expense and the effective tax rate for the Company’s earnings before income taxes:

The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is was effective January 1, 2018 (the “Effective Date”).  When a U.S. federal2018. The effective tax rate change occurs during ain the current quarter of fiscal year, taxpayers are required to compute a weighted daily average rate for2019 reflects the fiscal year of enactment.  As a result ofreduction in the Tax Act, the Company has calculated a U.S.statutory federal statutory corporate income tax rate of 27.6% for the fiscal year ending June 30, 2018 and applied this rate in computing the income tax provision for the firstthree quarters. 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..