UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
☒☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 30, 2022September 29, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7635
TWIN DISC, INCORPORATED
(Exact name of registrant as specified in its charter)
Wisconsin | 39-0667110 |
(State or other jurisdiction of | (I.R.S. Employer |
Incorporation or organization) | Identification No.) |
1328 Racine222 East Erie Street, Racine,Suite 400, Milwaukee, Wisconsin 5340353202
(Address of principal executive offices)
(262) 638-4000
(Registrant's telephone number, including area code)
1328 Racine Street, Racine, Wisconsin 53403
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock (No Par Value) | TWIN | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ | Accelerated Filer |
Non-accelerated filer ☐ | Smaller reporting company |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒☑
At February 3,October 25, 2023, the registrant had 13,815,70713,960,861 shares of its common stock outstanding.
Part I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
December 30, 2022 | June 30, 2022 | |||||||||||||||
September 29, 2023 | June 30, 2023 | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 13,528 | $ | 12,521 | $ | 20,428 | $ | 13,263 | ||||||||
Trade accounts receivable, net | 39,392 | 45,452 | 39,756 | 54,760 | ||||||||||||
Inventories | 136,810 | 127,109 | 126,236 | 131,930 | ||||||||||||
Assets held for sale | 2,968 | 2,968 | 4,559 | 2,968 | ||||||||||||
Prepaid expenses | 10,871 | 7,756 | 9,466 | 8,459 | ||||||||||||
Other | 7,228 | 8,646 | 8,763 | 8,326 | ||||||||||||
Total current assets | 210,797 | 204,452 | 209,208 | 219,706 | ||||||||||||
Property, plant and equipment, net | 39,683 | 41,615 | 40,065 | 38,650 | ||||||||||||
Right-of-use assets operating leases | 12,807 | 12,685 | 12,093 | 13,133 | ||||||||||||
Intangible assets, net | 11,798 | 13,010 | 11,517 | 12,637 | ||||||||||||
Deferred income taxes | 2,403 | 2,178 | 2,204 | 2,244 | ||||||||||||
Other assets | 2,766 | 2,583 | 2,894 | 2,811 | ||||||||||||
Total assets | $ | 280,254 | $ | 276,523 | $ | 277,981 | $ | 289,181 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current maturities of long-term debt | $ | 2,000 | $ | 2,000 | $ | 2,002 | $ | 2,010 | ||||||||
Accounts payable | 28,906 | 28,536 | 29,584 | 36,499 | ||||||||||||
Accrued liabilities | 55,939 | 50,542 | 60,632 | 61,586 | ||||||||||||
Total current liabilities | 86,845 | 81,078 | 92,218 | 100,095 | ||||||||||||
Long-term debt, less current maturities | 29,927 | 34,543 | ||||||||||||||
Long-term debt | 19,655 | 16,617 | ||||||||||||||
Lease obligations | 10,278 | 10,575 | 9,896 | 10,811 | ||||||||||||
Accrued retirement benefits | 10,587 | 9,974 | 7,138 | 7,608 | ||||||||||||
Deferred income taxes | 3,506 | 3,802 | 3,150 | 3,280 | ||||||||||||
Other long-term liabilities | 5,346 | 5,363 | 5,749 | 5,253 | ||||||||||||
Total liabilities | 146,489 | 145,335 | 137,806 | 143,664 | ||||||||||||
Commitments and contingencies (Note D) | ||||||||||||||||
Equity: | ||||||||||||||||
Twin Disc shareholders' equity: | ||||||||||||||||
Preferred shares authorized: 200,000; issued: none; no par value | - | - | ||||||||||||||
Preferred shares authorized: 200,000; issued: none; no par value | - | - | ||||||||||||||
Common shares authorized: 30,000,000; issued: 14,632,802; no par value | 41,444 | 42,551 | 39,439 | 42,855 | ||||||||||||
Retained earnings | 134,141 | 135,031 | 119,126 | 120,299 | ||||||||||||
Accumulated other comprehensive loss | (29,880 | ) | (32,086 | ) | (8,621 | ) | (5,570 | ) | ||||||||
145,705 | 145,496 | 149,944 | 157,584 | |||||||||||||
Less treasury stock, at cost (819,398 and 960,459 shares, respectively) | 12,562 | 14,720 | ||||||||||||||
Less treasury stock, at cost (674,354 and 814,734 shares, respectively) | 10,343 | 12,491 | ||||||||||||||
Total Twin Disc shareholders' equity | 133,143 | 130,776 | 139,601 | 145,093 | ||||||||||||
Noncontrolling interest | 622 | 412 | 574 | 424 | ||||||||||||
Total equity | 133,765 | 131,188 | 140,175 | 145,517 | ||||||||||||
Total liabilities and equity | $ | 280,254 | $ | 276,523 | $ | 277,981 | $ | 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 (LOSS)
INCOMELOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | |||||||||||||
Net sales | $ | 63,351 | $ | 59,889 | $ | 119,264 | $ | 107,650 | ||||||||
Cost of goods sold | 46,328 | 46,407 | 88,944 | 80,721 | ||||||||||||
Gross profit | 17,023 | 13,482 | 30,320 | 26,929 | ||||||||||||
Marketing, engineering and administrative expenses | 15,983 | 15,267 | 31,063 | 28,357 | ||||||||||||
Restructuring expenses | 164 | 1,190 | 174 | 1,238 | ||||||||||||
Other operating (income) expense | (4,150 | ) | 45 | (4,150 | ) | (2,894 | ) | |||||||||
Income (loss) from operations | 5,026 | (3,020 | ) | 3,233 | 228 | |||||||||||
Interest expense | 594 | 574 | 1,160 | 1,104 | ||||||||||||
Other expense (income), net | 789 | (466 | ) | 1,049 | (110 | ) | ||||||||||
1,383 | 108 | 2,209 | 994 | |||||||||||||
Income (loss) before income taxes and noncontrolling interest | 3,643 | (3,128 | ) | 1,024 | (766 | ) | ||||||||||
Income tax expense | 2,489 | 622 | 1,801 | 1,004 | ||||||||||||
Net income (loss) | 1,154 | (3,750 | ) | (777 | ) | (1,770 | ) | |||||||||
Less: Net earnings attributable to noncontrolling interest, net of tax | (15 | ) | (86 | ) | (112 | ) | (144 | ) | ||||||||
Net income (loss) attributable to Twin Disc | $ | 1,139 | $ | (3,836 | ) | $ | (889 | ) | $ | (1,914 | ) | |||||
Income (loss) per share data: | ||||||||||||||||
Basic income (loss) per share attributable to Twin Disc common shareholders | $ | 0.08 | $ | (0.29 | ) | $ | (0.07 | ) | $ | (0.14 | ) | |||||
Diluted income (loss) per share attributable to Twin Disc common shareholders | $ | 0.08 | $ | (0.29 | ) | $ | (0.07 | ) | $ | (0.14 | ) | |||||
Weighted average shares outstanding data: | ||||||||||||||||
Basic shares outstanding | 13,460 | 13,296 | 13,434 | 13,288 | ||||||||||||
Diluted shares outstanding | 13,699 | 13,296 | 13,434 | 13,288 | ||||||||||||
Comprehensive income (loss) | ||||||||||||||||
Net income (loss) | $ | 1,154 | $ | (3,750 | ) | $ | (777 | ) | $ | (1,770 | ) | |||||
Benefit plan adjustments, net of income taxes of $1, $(115), $3 and $2, respectively | (515 | ) | 623 | 3 | 1,007 | |||||||||||
Foreign currency translation adjustment | 8,392 | (1,701 | ) | 2,064 | (3,639 | ) | ||||||||||
Unrealized gain on cash flow hedge, net of income taxes of $0, $(63), $0 and $0, respectively | (595 | ) | 735 | 197 | 939 | |||||||||||
Comprehensive income (loss) | 8,436 | (4,093 | ) | 1,487 | (3,463 | ) | ||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interest | 74 | (61 | ) | 210 | (197 | ) | ||||||||||
Comprehensive income (loss) attributable to Twin Disc | $ | 8,510 | $ | (4,154 | ) | $ | 1,697 | $ | (3,660 | ) |
For the Quarter-Ended | ||||||||
As Adjusted | ||||||||
September 29, 2023 | September 30, 2022 | |||||||
Net sales | $ | 63,554 | $ | 55,913 | ||||
Cost of goods sold | 43,818 | 42,616 | ||||||
Cost of goods sold - Sale of boat management system product line and related inventory | 3,099 | - | ||||||
Gross profit | 16,637 | 13,297 | ||||||
Marketing, engineering and administrative expenses | 16,917 | 15,090 | ||||||
Loss from operations | (280 | ) | (1,793 | ) | ||||
Other Income (expense): | ||||||||
Interest expense | (394 | ) | (566 | ) | ||||
Other income, net | 137 | 347 | ||||||
(257 | ) | (219 | ) | |||||
Loss before income taxes and noncontrolling interest | (537 | ) | (2,012 | ) | ||||
Income tax expense | 546 | (688 | ) | |||||
Net loss | (1,083 | ) | (1,324 | ) | ||||
Less: Net earnings attributable to noncontrolling interest, net of tax | (90 | ) | (98 | ) | ||||
Net loss attributable to Twin Disc | $ | (1,173 | ) | $ | (1,422 | ) | ||
Loss per share data: | ||||||||
Basic loss per share attributable to Twin Disc common shareholders | $ | (0.09 | ) | $ | (0.11 | ) | ||
Diluted loss per share attributable to Twin Disc common shareholders | $ | (0.09 | ) | $ | (0.11 | ) | ||
Weighted average shares outstanding data: | ||||||||
Basic shares outstanding | 13,527 | 13,407 | ||||||
Diluted shares outstanding | 13,527 | 13,407 | ||||||
Comprehensive income (loss) | ||||||||
Net loss | $ | (1,083 | ) | $ | (1,324 | ) | ||
Benefit plan adjustments, net of income taxes of $5 and $9, respectively | (171 | ) | (89 | ) | ||||
Foreign currency translation adjustment | (3,036 | ) | (6,290 | ) | ||||
Unrealized loss on hedges, net of income taxes of $0 and 0, respectively | 216 | 793 | ||||||
Comprehensive loss | (4,074 | ) | (6,910 | ) | ||||
Less: Comprehensive income attributable to noncontrolling interest | 151 | 136 | ||||||
- | ||||||||
Comprehensive loss attributable to Twin Disc | $ | (4,225 | ) | $ | (7,046 | ) |
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 | For the Quarters Ended | |||||||||||||||
December 30, 2022 | December 31, 2021 | As Adjusted | ||||||||||||||
September 29, 2023 | September 30, 2022 | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (777 | ) | $ | (1,770 | ) | $ | (1,083 | ) | $ | (1,324 | ) | ||||
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities: | ||||||||||||||||
Adjustments to reconcile net loss to net cash provided (used) by operating activities: | ||||||||||||||||
Depreciation and amortization | 4,266 | 5,011 | 2,488 | 2,140 | ||||||||||||
Gain on sale of assets | (4,203 | ) | (2,939 | ) | (16 | ) | (42 | ) | ||||||||
Loss on sale of boat management product line and related inventory | 3,099 | - | ||||||||||||||
Restructuring expenses | (1 | ) | (111 | ) | (57 | ) | (68 | ) | ||||||||
Provision for deferred income taxes | (1,105 | ) | (1,156 | ) | 97 | (1,623 | ) | |||||||||
Stock compensation expense and other non-cash changes, net | 1,564 | 1,848 | 1,140 | 864 | ||||||||||||
Net change in operating assets and liabilities | 288 | (1,932 | ) | 4,134 | (643 | ) | ||||||||||
Net cash provided (used) by operating activities | 32 | (1,049 | ) | 9,802 | (696 | ) | ||||||||||
Cash flows from investing activities: | ||||||||||||||||
Acquisitions of property, plant and equipment | (4,734 | ) | (1,750 | ) | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Acquisition of property, plant, and equipment | (3,690 | ) | (2,237 | ) | ||||||||||||
Proceeds from sale of fixed assets | 7,152 | 9,152 | - | 2 | ||||||||||||
Proceeds on note receivable | - | 500 | ||||||||||||||
Other, net | 385 | 140 | 45 | 534 | ||||||||||||
Net cash provided by investing activities | 2,803 | 8,042 | ||||||||||||||
Net cash used by investing activities | (3,645 | ) | (1,701 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Borrowings under revolving loan arrangements | 42,898 | 51,410 | 27,184 | 20,221 | ||||||||||||
Repayments of revolving loan arrangements | (46,628 | ) | (55,552 | ) | (23,423 | ) | (18,685 | ) | ||||||||
Repayments of other long term debt | (839 | ) | (2,541 | ) | ||||||||||||
Repayments of other long-term debt | (508 | ) | (519 | ) | ||||||||||||
Payments of finance lease obligations | (847 | ) | (132 | ) | ||||||||||||
Payments of withholding taxes on stock compensation | (463 | ) | (487 | ) | (1,763 | ) | (168 | ) | ||||||||
Net cash used by financing activities | (5,032 | ) | (7,170 | ) | ||||||||||||
Net cash provided by financing activities | 643 | 717 | ||||||||||||||
Effect of exchange rate changes on cash | 3,204 | (1,040 | ) | 365 | 2,373 | |||||||||||
Net change in cash | 1,007 | (1,217 | ) | 7,165 | 693 | |||||||||||
Cash: | ||||||||||||||||
Beginning of period | 12,521 | 12,340 | 13,263 | 12,521 | ||||||||||||
End of period | $ | 13,528 | $ | 11,123 | $ | 20,428 | $ | 13,214 |
The notes to condensed consolidated financial statements are an integral part of these statements.
TWIN DISC, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
A. | Basis of Presentation |
The unaudited condensed consolidated financial statements have been prepared by Twin Disc, Incorporated (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include adjustments, consisting primarily of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report filed on Form 10-K for June 30, 2022.2023. 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 is not changing. 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. As of July 1, 2022, the cumulative effect of the 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 G, K, M and P for further information regarding the impact of the Accounting change on the Company’s current and prior consolidated financial statements.
Recently Adopted Accounting Standards
In March 2020 and January 2021, the FASB issued guidance (ASU 2020-04 and ASU 2021-01, respectively), intended to provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments in this guidance are effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The adoption of this guidance did not have a material impact on the Company’s financial statements.
In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-10 (collectively ASC 326). ASC 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, and for smaller reporting companies for fiscal years beginning after December 15, 2022 (the Company’s fiscal 2024), with early adoption permitted for certain amendments. ASC 326 must be adopted by applying a cumulative effect adjustment to retained earnings. The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.
In March 2020 and January 2021, the FASB issued guidance (ASU 2020-04 and ASU 2021-01, respectively), intended to provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments in this guidance are effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The adoption of this guidance did not have a material impact on the Company’s financial statements.
Special Note Regarding Smaller Reporting Company Status
Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller reporting company and accordingly, it has scaled some of its disclosures of financial and non-financial information in this quarterly report. The Company will continue to determine whether to provide additional scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.
B. | Inventories |
The major classes of inventories were as follows:
December 30, 2022 | June 30, 2022 | September 29, 2023 | June 30, 2023 | |||||||||||||
Inventories: | ||||||||||||||||
Finished parts | $ | 70,515 | $ | 65,789 | $ | 63,087 | $ | 66,956 | ||||||||
Work in process | 25,674 | 19,801 | 22,008 | 23,374 | ||||||||||||
Raw materials | 40,621 | 41,519 | 41,141 | 41,600 | ||||||||||||
$ | 136,810 | $ | 127,109 | $ | 126,236 | $ | 131,930 |
In the first quarter of fiscal year 2024, the Company entered into an agreement to sell most of its inventory for 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 boat management system inventory located in the U.S.
C. | Warranty |
The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers. However, its warranty obligation is affected by product failure rates, the number of units affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. When evaluating the adequacy of the reserve for warranty costs, management takes into consideration the term of the warranty coverage, historical claim rates and costs of repair, knowledge of the type and volume of new products and economic trends. While we believe the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable in the future could differ materially from what actually transpires. The following is a listing of the activity in the warranty reserve for the quarters ended December 30, 2022September 29, 2023 and December 31, 2021:September 30, 2022:
For the Quarter Ended | For the Two Quarters Ended | For the Quarter Ended | ||||||||||||||||||||||
December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | September 29, 2023 | September 30, 2022 | |||||||||||||||||||
Reserve balance, beginning of period | $ | 3,804 | $ | 3,560 | $ | 3,329 | $ | 4,369 | $ | 3,476 | $ | 3,329 | ||||||||||||
Current period expense and adjustments | 770 | 585 | 1,678 | 319 | 1,516 | 908 | ||||||||||||||||||
Payments or credits to customers | (503 | ) | (638 | ) | (869 | ) | (1,169 | ) | (821 | ) | (366 | ) | ||||||||||||
Translation | 74 | (24 | ) | 7 | (36 | ) | (11 | ) | (67 | ) | ||||||||||||||
Reserve balance, end of period | $ | 4,145 | $ | 3,483 | $ | 4,145 | $ | 3,483 | $ | 4,160 | $ | 3,804 |
Included in expense in the
The current portion of the warranty accrual ($3,5523,409 and $2,930$3,331 as of DecemberSeptember 29, 2023 and September 30, 2022,and December 31, 2021, respectively) is reflected in accrued liabilities, while the long-term portion ($594751 and $553$473 as of DecemberSeptember 29, 2023 and September 30, 2022,and December 31, 2021, respectively) is included in other long-term liabilities on the consolidated balance sheets.
D. | Contingencies |
The Company is involved in litigation of which the ultimate outcome and liability to the Company, if any, is not presently determinable. Management believes that final disposition of such litigation will not have a material impact on the Company’s results of operations, financial position or cash flows.
E. | Business Segments |
The Company and its subsidiaries are engaged in the manufacture and sale of marine and heavy-duty off-highway power transmission equipment. Principal products include marine transmissions, azimuth drives, surface drives, propellers and boat management systems, as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls systems. The Company sells to both domestic and foreign customers in a variety of market areas, principally pleasure craft, commercial and military marine markets, as well as in the energy and natural resources, government and industrial markets. The Company's worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network.
The Company has two reportable segments: manufacturing and distribution. These segment structures reflect the way management makes operating decisions and manages the growth and profitability of the businessbusiness. 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 betweenamong segments are at established inter-company selling prices. Management evaluates the performance of its segments based on their net income.
Information about the Company’s segments is summarized as follows:
For the Quarter Ended | For the Two Quarters Ended | For the Quarter Ended | ||||||||||||||||||||||
December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | September 29, 2023 | September 30, 2022 | |||||||||||||||||||
Net sales | ||||||||||||||||||||||||
Manufacturing segment sales | $ | 56,678 | $ | 49,298 | $ | 105,675 | $ | 90,893 | $ | 54,537 | $ | 48,997 | ||||||||||||
Distribution segment sales | 25,584 | 28,291 | 49,892 | 48,825 | 32,853 | 24,307 | ||||||||||||||||||
Inter/Intra segment elimination – manufacturing | (14,198 | ) | (13,200 | ) | (27,842 | ) | (24,143 | ) | (20,184 | ) | (13,643 | ) | ||||||||||||
Inter/Intra segment elimination – distribution | (4,713 | ) | (4,500 | ) | (8,461 | ) | (7,925 | ) | (3,652 | ) | (3,748 | ) | ||||||||||||
$ | 63,351 | $ | 59,889 | $ | 119,264 | $ | 107,650 | $ | 63,554 | $ | 55,913 | |||||||||||||
Net income (loss) attributable to Twin Disc | ||||||||||||||||||||||||
Manufacturing segment net income (loss) | $ | 3,832 | $ | (1,601 | ) | $ | 5,627 | $ | 3,231 | |||||||||||||||
Net (loss) income attributable to Twin Disc | ||||||||||||||||||||||||
Manufacturing segment net income | $ | 1,558 | $ | 2,402 | ||||||||||||||||||||
Distribution segment net income | 1,403 | 1,496 | 2,359 | 1,979 | 1,006 | 956 | ||||||||||||||||||
Corporate and eliminations | (4,096 | ) | (3,731 | ) | (8,875 | ) | (7,124 | ) | (3,737 | ) | (4,780 | ) | ||||||||||||
$ | 1,139 | $ | (3,836 | ) | $ | (889 | ) | $ | (1,914 | ) | $ | (1,173 | ) | $ | (1,422 | ) |
| December 30, 2022 | June 30, 2022 | September 29, 2023 | June 30, 2023 | ||||||||||||
Assets | ||||||||||||||||
Manufacturing segment assets | $ | 371,442 | $ | 364,174 | $ | 374,546 | $ | 381,668 | ||||||||
Distribution segment assets | 56,834 | 50,958 | 64,812 | 69,213 | ||||||||||||
Corporate assets and elimination of intercompany assets | (148,022 | ) | (138,609 | ) | (161,377 | ) | (161,700 | ) | ||||||||
$ | 280,254 | $ | 276,523 | $ | 277,981 | $ | 289,181 |
Disaggregated revenue:
The following table presents details deemed most relevant to the users of the financial statements for the quarters and two quarters ended December 30, 2022September 29, 2023 and December 31, 2021.September 30, 2022.
Net sales by product group for the quarter ended December 30, 2022 is summarized as follows:
Elimination of | ||||||||||||||||
Manufacturing | Distribution | Intercompany Sales | Total | |||||||||||||
Industrial | $ | 6,963 | $ | 1,726 | $ | (1,177 | ) | $ | 7,512 | |||||||
Land-based transmissions | 15,256 | 3,445 | (4,030 | ) | 14,671 | |||||||||||
Marine and propulsion systems | 34,262 | 15,427 | (13,223 | ) | 36,466 | |||||||||||
Other | 197 | 4,986 | (481 | ) | 4,702 | |||||||||||
Total | $ | 56,678 | $ | 25,584 | $ | (18,911 | ) | $ | 63,351 |
Net sales by product group for the quarter ended December 31, 2021 is summarized as follows:
Elimination of | ||||||||||||||||
Manufacturing | Distribution | Intercompany Sales | Total | |||||||||||||
Industrial | $ | 7,085 | $ | 1,809 | $ | (1,188 | ) | $ | 7,706 | |||||||
Land-based transmissions | 12,326 | 6,497 | (5,505 | ) | 13,318 | |||||||||||
Marine and propulsion systems | 29,861 | 16,659 | (11,000 | ) | 35,520 | |||||||||||
Other | 26 | 3,326 | (7 | ) | 3,345 | |||||||||||
Total | $ | 49,298 | $ | 28,291 | $ | (17,700 | ) | $ | 59,889 |
Net sales by product group for the two quartersquarter ended December 30, 2022September 29, 2023 is summarized as follows:
Elimination of | Elimination of | |||||||||||||||||||||||||||||||
Manufacturing | Distribution | Intercompany Sales | Total | Manufacturing | Distribution | Intercompany Sales | Total | |||||||||||||||||||||||||
Industrial | $ | 13,656 | $ | 2,774 | $ | (1,886 | ) | $ | 14,544 | $ | 5,290 | $ | 1,028 | $ | (634 | ) | $ | 5,684 | ||||||||||||||
Land-based transmissions | 31,543 | 8,051 | (8,985 | ) | 30,609 | 14,681 | 12,671 | (8,774 | ) | $ | 18,578 | |||||||||||||||||||||
Marine and propulsion systems | 60,077 | 29,971 | (24,246 | ) | 65,802 | 34,566 | 16,320 | (14,422 | ) | $ | 36,464 | |||||||||||||||||||||
Other | 399 | 9,096 | (1,186 | ) | 8,309 | - | 2,834 | (6 | ) | $ | 2,828 | |||||||||||||||||||||
Total | $ | 105,675 | $ | 49,892 | $ | (36,303 | ) | $ | 119,264 | $ | 54,537 | $ | 32,853 | $ | (23,836 | ) | $ | 63,554 |
Net sales by product group for the two quartersquarter ended December 31, 2021September 30, 2022 is summarized as follows:
Elimination of | Elimination of | |||||||||||||||||||||||||||||||
Manufacturing | Distribution | Intercompany Sales | Total | Manufacturing | Distribution | Intercompany Sales | Total | |||||||||||||||||||||||||
Industrial | $ | 12,992 | $ | 2,927 | $ | (2,081 | ) | $ | 13,838 | $ | 6,692 | $ | 1,048 | $ | (709 | ) | $ | 7,031 | ||||||||||||||
Land-based transmissions | 23,710 | 11,602 | (9,752 | ) | 25,560 | 16,287 | 4,606 | (4,956 | ) | $ | 15,937 | |||||||||||||||||||||
Marine and propulsion systems | 54,148 | 28,222 | (20,216 | ) | 62,154 | 25,816 | 14,544 | (11,022 | ) | $ | 29,338 | |||||||||||||||||||||
Other | 43 | 6,074 | (19 | ) | 6,098 | 202 | 4,109 | (704 | ) | $ | 3,607 | |||||||||||||||||||||
Total | $ | 90,893 | $ | 48,825 | $ | (32,068 | ) | $ | 107,650 | $ | 48,997 | $ | 24,307 | $ | (17,391 | ) | $ | 55,913 |
F. | Stock-Based Compensation |
Performance Stock Awards (“PSA”)
During the first two quartersquarter of fiscal 20232024 and 2022,2023, the Company granted a target number of 118.1119.3 and 103.6112.4 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2024 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2026. These PSAs are subject to adjustment if the Company’s return on invested capital and cumulative EBITDA falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 238.7.
The fiscal 2023 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2025. These PSAs are subject to adjustment if the Company’s return on invested capital and cumulative EBITDA falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 236.3. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.
The PSAs granted in fiscal 2022 will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual earnings per share (“EPS”) or average free cashflow (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2024. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS or average free cashflow for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 146.6. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.224.8.
There were 438.9334.1 and 440.9433.2 unvested PSAs outstanding at DecemberSeptember 29, 2023 and September 30, 2022,and December 31, 2021, respectively. The fair value of the PSAs (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. Compensation expense of $366$53 and $219$230 was recognized for the quarters ended DecemberSeptember 29, 2023 and September 30, 2022,and December 31, 2021, respectively, related to PSAs. Compensation expense of $596 and $435 was recognized for the two quarters ended December 30, 2022 and December 31, 2021, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at December 30, 2022September 29, 2023 was $8.38.$11.48. At December 30, 2022,September 29, 2023, the Company had $1,718$2,303 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2023,20222024 and 20212023 awards. The total fair value of PSAs vested as of DecemberSeptember 29, 2023 and September 30, 2022 was $0.
Performance Stock Unit Awards (“PSUA”)
The PSUAs entitle an individual to shares of common stock of the Company or cash in lieu of shares of Company common stock if specific terms and conditions or restrictions are met through a specified date. During the first quarter of fiscal 2024and December 31, 20212023, 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 September 29, 2023 and September 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 $7 and $0 was recognized for the quarters ended September 29, 2023 and September 30, 2022, respectively, related to PSUAs. The weighted average grant date fair value of the unvested awards at September 29, 2023 was $12.15. At September 29, 2023, the Company had $120 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 September 29, 2023 and September 30, 2022 was $0.
Restricted Stock Awards (“RS”)
The Company has unvested RS awards outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded as compensation expense over the vesting period, which is generally 1 to 3 years. During the first two quartersquarter of fiscal 20232024 and 2022,2023, the Company granted 177.781.5 and 44.1129.4 service based restricted shares, respectively, to employees and non-employee directors. There were 309.2260.2 and 262.7356.3 unvested shares outstanding at DecemberSeptember 29, 2023 and September 30, 2022,and December 31, 2021, respectively. A total of 02.4 and 29.80 shares of restricted stock were forfeited during the twothree quarters ended DecemberSeptember 29, 2023 and September 30, 2022,and December 31, 2021, respectively. Compensation expense of $334$313 and $285$360 was recognized for the quarters ended DecemberSeptember 29, 2023 and September 30, 2022,and December 31, 2021, respectively. Compensation expense of $694 and $619 was recognized for the two quarters ended December 30, 2022 and December 31, 2021, respectively. The total fair value of restricted stock grants vested as of DecemberSeptember 29, 2023 and September 30, 2022 was $1,623 and December 31, 2021 was $1,669 and $1,679,$417, respectively. As of December 30, 2022,September 29, 2023, the Company had $1,648$1,727 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.
Restricted Stock Unit Awards (“RSU”)
Under the 2021 Long Term Incentive Plan, the Company has been authorized to issue RSUs. The RSUs entitle the employeean individual to shares of common stock of the Company or cash in lieu of shares of Company common stock if the employee remains employed by the Companyspecific terms and conditions or restrictions are met through a specified date, generally three years from the date of grant.grant or when performance conditions have been met. The fair value of the RSUs (on the date of grant) is recorded as compensation expense over the vesting period. During the first two quartersquarter of fiscal 20232024 and 2022,2023, the Company granted 72.47.1 and 67.472.4 of employment based RSUs, respectively. There were 130.9136.8 and 67.4130.9 unvested RSUs outstanding at DecemberSeptember 29, 2023 and September 30, 2022,and December 31, 2021, respectively. Compensation expense of $132$121 and $92$69 was recognized for the quarters ended DecemberSeptember 29, 2023 and September 30, 2022,and December 31, 2021, respectively. Compensation expense of $224 and $92 was recognized for the two quarters ended December 30, 2022 and December 31, 2021, respectively. The total fair value of restricted stock units vested as of DecemberSeptember 29, 2023 and September 30, 2022 was $0 and December 31, 2021 was $40, and $475, respectively. The weighted average grant date fair value of the unvested awards at December 30, 2022September 29, 2023 was $10.94.$10.97. As of December 30, 2022,September 29, 2023, the Company had $951$663 of unrecognized compensation expense related to restricted stock which will be recognized over the next twothree years.
G. | Pension and Other Postretirement Benefit Plans |
The Company has non-contributory, qualified defined benefit plans covering substantially all domestic employees hired prior to October 1, 2003 and certain foreign employees. Additionally, the Company provides healthcare and life insurance benefits for certain domestic retirees.
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 | ||||||||||||||||||||||
December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | September 29, 2023 | September 30, 2022 | |||||||||||||||||||
Pension Benefits: | ||||||||||||||||||||||||
Service cost | $ | 102 | $ | 130 | $ | 203 | $ | 269 | $ | 94 | $ | 101 | ||||||||||||
Prior service cost | 8 | 10 | 17 | 20 | - | 8 | ||||||||||||||||||
Interest cost | 868 | 681 | 1,736 | 1,347 | 896 | 868 | ||||||||||||||||||
Expected return on plan assets | (1,060 | ) | (1,255 | ) | (2,120 | ) | (2,514 | ) | (1,048 | ) | (1,060 | ) | ||||||||||||
Amortization of transition obligation | 9 | 9 | 18 | 18 | 10 | 9 | ||||||||||||||||||
Amortization of prior service cost | 9 | (4 | ) | 18 | (8 | ) | 9 | 9 | ||||||||||||||||
Amortization of actuarial net loss | 617 | 562 | 1,235 | 1,124 | 16 | 10 | ||||||||||||||||||
Net periodic benefit cost | $ | 553 | $ | 133 | $ | 1,107 | $ | 256 | $ | (24 | ) | $ | (55 | ) | ||||||||||
Postretirement Benefits: | ||||||||||||||||||||||||
Service cost | $ | 2 | $ | 4 | $ | 5 | $ | 8 | $ | 2 | $ | 2 | ||||||||||||
Interest cost | 53 | 35 | 106 | 70 | 48 | 53 | ||||||||||||||||||
Amortization of prior service cost | (69 | ) | (69 | ) | (137 | ) | (138 | ) | (22 | ) | (69 | ) | ||||||||||||
Amortization of actuarial net loss | (10 | ) | - | (19 | ) | - | (155 | ) | (10 | ) | ||||||||||||||
Net periodic benefit gain | $ | (24 | ) | $ | (30 | ) | $ | (45 | ) | $ | (60 | ) | $ | (127 | ) | $ | (24 | ) |
The service cost component is included in cost of goods sold and marketing, engineering and administrative expenses. All other components of net periodic benefit cost are included in other expense (income), net.
The Company expects to contribute approximately $576$645 to its pension plans in fiscal 2023.2024. For theAs of twoSeptember 29 2023, quarters ended December 30, 2022, the amount of $387$182 in contributions to the pension plans werehave been made.
The Company had changeshas reclassified ($171) (net of $5 in taxes) of benefit plan adjustments totaling ($515) (net of $1 in taxes) from accumulated other comprehensive loss during the quarter ended December 30, 2022,September 29, 2023, and $623($89) (net of ($115)$9 in taxes) during the quarter ended December 31, 2021.September 30, 2022. These changesreclassifications are included in the computation of net periodic benefit cost. The Company had changes in benefit plan adjustments totaling $3 (net of $3 in taxes) from accumulated other comprehensive loss during the two quarters ended December 30, 2022, and $1,007 (net of $2 in taxes) during the two quarters ended December 31, 2021. These changes are included in the computation of net periodic benefit cost. Included in changes in benefit plan adjustments, the Company had a plan merger remeasurement adjustment of ($1,115) during the quarter ended December 30, 2022.
H. | Income Taxes |
Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated Annual Effective Tax Rate (AETR). Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. To calculate its AETR, an entity must estimate its ordinary income or loss and the related tax expense or benefit for its full fiscal year. In situations in which an entity is in a loss position and recognizes a full valuation allowance, the guidance in ASC 740-270-25-9 applies. Due to continued historical domestic losses and uncertain future domestic earnings, the Company recognizescontinues to recognize a full USdomestic valuation allowance. Permanent differences continue to fluctuate and are significant compared to projected ordinary income. Therefore, per ASC guidance, the fully valued domestic entity was removed from the annualized effective rate calculation. Because of the full US valuation allowance, the US entity may only recognize tax expense / benefit recorded for ASC-ASC 740-10 adjustments.
For the sixthree months ended DecemberSeptember 29, 2023 and September 30, 2022and December 31, 2021 the Company’s effective income tax rate was 175.9%(101.7)% and -131.1%26.3% respectively. InForeign earnings were $3,200 and ($2,080), respectively, with a related tax expense of $516 and ($702), respectively. Domestic losses were ($3,700) and ($542), respectively, with a related tax expense of $30 and $14, respectively. Due to the prior year, foreign income and expense were recognized. However, there wasfull US valuation allowance currently in place, no tax benefit can be recognized on the domestic losses. This inability to recognize a significanttax benefit for domestic loss, resultingpurposes resulted in a net global loss, creating a negative effective tax rate. Current year overall financial improvement resulted in positive net global earnings, yielding a positive effective tax rate. Foreign income and expense was recognized, although there continues to be negative domestic earnings. In addition, an amended foreign return anticipated to be filed further increasedconsolidated tax expense recognized in this quarter.
In the post pandemic era, the Company continues to monitor for any revisions enacted under the Tax Cutsof $546 and Job Act (TCJA)($688) respectively, on a year-to-date loss of ($537) and ($2,012), Coronavirus Aid, Relief and Economic Security (CARES) Act and the American Rescue Plan (ARPA). On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA). This landmark United States law aims to reduce inflation by reducing the deficit, lowering prescription drug prices and investing into domestic energy production while promoting clean energy. At this time it is not certain what, if any, impact this will have on the Company.respectively.
The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. In addition, all other available positive and negative evidence is taken into consideration, including all new impacts of tax reform. The Company has evaluated the realizability of the net deferred tax assets related to its foreign operations and based on this evaluation management has concluded that no valuation allowances are required. However, due to historical domestic losses and uncertain future domestic earnings, the Company continues to recognize a full domestic valuation allowance.
The Company has approximately $783$867 of unrecognized tax benefits, which include $53 of relatedincluding interest and penalties, as of December 30, 2022,September 29, 2023, which, if recognized, would favorably impact the effective tax rate. There were no significant changes in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quarter ended December 30, 2022.September 29, 2023. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going activity.
Annually, the Company files income tax returns in various taxing jurisdictions inside and outside the United States. In general, the tax years that remain subject to examination in foreign jurisdictions are 20142018 through 2021.2023. The tax year open to exam in the Netherlands is 2019. The tax years open to examination in the U.S. are for years subsequent to fiscal 2017.2018. It is reasonably possible that other audit cycles will be completed during fiscal 2023.2024.
I. | Intangible Assets |
As of December 30, 2022,September 29, 2023, the following acquired intangible assets have definite useful lives and are subject to amortization:
Net Book Value Rollforward | Net Book Value By Asset Type | Net Book Value Rollforward | Net Book Value By Asset Type | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization / Impairment | Net Book Value | Customer Relationships | Technology Know-how | Trade Name | Other | Gross Carrying Amount | Accumulated Amortization / Impairment | Net Book Value | Customer Relationships | Technology Know-how | Trade Name | Other | |||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | $ | 39,845 | $ | (26,835 | ) | $ | 13,010 | $ | 7,636 | $ | 3,238 | $ | 972 | $ | 1,164 | |||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2023 | $ | 31,925 | $ | (19,288 | ) | $ | 12,637 | $ | 6,553 | $ | 2,422 | $ | 668 | $ | 2,994 | |||||||||||||||||||||||||||||||||||||||||
Addition | 9 | - | 9 | - | - | - | 9 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Reduction | (10,506 | ) | 10,506 | - | - | - | - | - | (89 | ) | - | (89 | ) | - | - | - | (89 | ) | ||||||||||||||||||||||||||||||||||||||
Amortization | - | (1,402 | ) | (1,402 | ) | (650 | ) | (562 | ) | (39 | ) | (151 | ) | - | (819 | ) | (819 | ) | (312 | ) | (282 | ) | (39 | ) | (186 | ) | ||||||||||||||||||||||||||||||
Translation adjustment | 181 | - | 181 | 125 | 320 | (265 | ) | 1 | (211 | ) | - | (212 | ) | (197 | ) | (110 | ) | 22 | 73 | |||||||||||||||||||||||||||||||||||||
Balance at December 30, 2022 | $ | 29,529 | $ | (17,731 | ) | $ | 11,798 | $ | 7,111 | $ | 2,996 | $ | 668 | $ | 1,023 | |||||||||||||||||||||||||||||||||||||||||
Balance at September 29, 2023 | $ | 31,625 | $ | (20,107 | ) | $ | 11,517 | $ | 6,044 | $ | 2,030 | $ | 651 | $ | 2,792 |
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 75 years.
Intangible amortization expense was $704$819 and $804$698 for the quarters ended DecemberSeptember 29, 2023, and September 30, 2022,and December 31, 2021, respectively. Intangible amortization expense was $1,402 and $1,630 for the two quarters ended December 30, 2022, and December 31, 2021, respectively. Estimated intangible amortization expense for the remainder of fiscal 20232024 and each of the next five fiscal years and thereafter is as follows:
Fiscal Year | ||||||||
2023 | $ | 1,448 | ||||||
2024 | 2,796 | $ | 2,517 | |||||
2025 | 2,641 | 3,191 | ||||||
2026 | 1,738 | 2,247 | ||||||
2027 | 1,073 | 1,495 | ||||||
2028 | 1,046 | 1,346 | ||||||
2029 | 721 | |||||||
Thereafter | 1,056 | 0 |
J. | Long-term Debt |
Long-term debt at December 30, 2022September 29, 2023 and June 30, 20222023 consisted of the following:
December 30, 2022 | June 30, 2022 | September 29, 2023 | June 30, 2023 | |||||||||||||
Credit Agreement Debt | ||||||||||||||||
Revolving loans (expire June 2025) | $ | 19,381 | $ | 22,968 | $ | 10,633 | $ | 7,094 | ||||||||
Term loan (due March 2026) | 12,500 | 13,500 | 11,000 | 11,500 | ||||||||||||
Other | 46 | 75 | 24 | 33 | ||||||||||||
Subtotal | 31,927 | 36,543 | 21,657 | 18,627 | ||||||||||||
Less: current maturities | (2,000 | ) | (2,000 | ) | (2,002 | ) | (2,010 | ) | ||||||||
Total long-term debt | $ | 29,927 | $ | 34,543 | $ | 19,655 | $ | 16,617 |
Credit Agreement Debt: The Company’s credit agreement debt represents borrowings made under On June 29, 2018, the credit agreement, as amended, which itCompany entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A,N.A. (“BMO”) on June 29, 2018 (“Credit Agreement”). Underthat provided for the agreement,assignment and assumption of the Company, among other obligations, is subject to a minimum EBITDA financial covenant.
On June 30, 2022, the Company entered into Amendment No.9 to Credit Agreement (the “Ninth Amendment”) that amends and extends the Credit Agreement dated as of June 29, 2018, as amended (the “Credit Agreement”)previously existing loans between the Company and BMO.
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, as in effect priorBMO agreed to make the Ninth Amendment, the Bank made a Term Loan to the Company in thea principal amount of $20not 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, and$50.0 million (the “Revolving Credit Commitment”), subject to a Borrowing Base $40based on Eligible Inventory and Eligible Receivables. Subsequent amendments to the Credit Agreement reduced the Term Loan to $20.0 million, (the “Revolvingextended 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 Commitment”).Agreement, BMO’s Revolving Credit Commitment is currently $40.0 million. The Credit Agreement also allows the Company to obtain Letters of Credit from the Bank,BMO, which if drawn upon by the beneficiary thereof and paid by the Bank,BMO, would become Revolving Loans.
The Ninth Amendment extended Under the Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $3.0 million in any fiscal year. The term of the Revolving Loans under the Credit Agreement currently runs through June 30, 2025.Prior to the Ninth Amendment,
Under the Credit Agreement was scheduled to terminate as of June 30, 2023.
The Ninth Amendment also formally terminated the January 27, 2021 Forbearance Agreement, which had been entered into because the Company had not been in compliance with a requirement to maintain a minimum EBITDA of $2.5 million for the three fiscal quarters ended as of December 25, 2020. The Bank also waived the Company’s compliance with the minimum EBITDA requirements under the Credit Agreement and any Event of Default associated with the Company’s noncompliance with the minimum EBITDA requirements.
The Ninth Amendment also replaced LIBOR-basedamended, interest rates with different benchmark ratesare based on either the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”). Loans under the Credit Agreement are designated either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,” which accrue interest at the EURIBO Rate plus an Applicable Margin. Amounts drawn on a Letter of Credit that are not timely reimbursed to the Bank bear interest at a Base Rate plus an Applicable Margin. The Company also pays a commitment fee on the average daily Unused Revolving Credit Commitment equal to an Applicable Margin.
The Ninth Amendment also reduced the Applicable Margins from the rates that had been in effect during the period of the Forbearance Agreement. During the period covered by the Forbearance Agreement, the Applicable Margins for Revolving Loans, Term Loans, and the Unused Revolving Credit Commitment were 3.25%, 3.875%, and .20%, respectively. Under the Ninth Amendment, 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%0.10% and .15%0.15% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).
The Ninth Amendment also revisedCredit Agreement, as amended, requires the Company’sCompany to meet certain financial covenants undercovenants. Specifically, the Credit Agreement. The Company’s Total Funded Debt to EBITDA ratio (for which the Bank provided relief during period covered by the Forbearance Agreement) may not exceed 3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00. The Company’s Tangible Net Worth may not be less than $100 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.
Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property, including accounts receivable, inventory, machinery and equipment, and intellectual property. The Company has also pledged 100% of its equity interests in certain domestic subsidiaries and 65% of its equity interests in certain foreign subsidiaries. The Company also entered into a Collateral Assignment of Rights under Purchase Agreement for its acquisition of Veth Propulsion. To effect these security interests, the Company entered into various amendment and assignment agreements that consent to the assignment of certain agreements previously entered into between the Company and the Bank of Montreal in connection with the 2016 Credit Agreement. The Company also amended and assigned to BMO a Negative Pledge Agreement that it has previously entered into with Bank of Montreal, pursuant to which it agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Credit Agreement and the Negative Pledge Agreement.
The Company has also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security interest in deposit accounts the Company maintains with the Bank. The Bank may not provide a notice of exclusive control of a deposit account (thereby obtaining exclusive control of the account) prior to the occurrence or existence of a Default or an Event of Default under the Credit Agreement or otherwise upon the occurrence or existence of an event or condition that would, but for the passage of time or the giving of notice, constitute a Default or an Event of Default under the Credit Agreement.
Upon the occurrence of an Event of Default, BMO may take the following actions upon written notice to the Company: (1) terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately Cash Collateralize L/C Obligations in an amount equal to 105% of the aggregate L/C Obligations or a greater amount if BMO determines a greater amount is necessary. If such Event of Default is due to the Company’s bankruptcy, BMO may take the three actions listed above without notice to the Company.
The Company remains in compliance with its liquidity and other covenants.
The Credit Agreement, including its amendments, is more fully described in the Company’s Annual Report filed on Form 10-K for June 30, 2022, as well as in Item 2 of this quarterly report.
As of December 30, 2022,September 29, 2023, current maturities include $2,000 of term loan payments due within the coming year.
Other: Other long-term debt pertains mainly to a financing arrangement in Europe. These liabilities carry terms of three to five years and implied interest rates ranging from 7% to 25%. A total amount of $28$7 in principal was paid on these liabilities during the current fiscal year.
During the quarter ended December 30, 2022,September 29, 2023, the average interest rate was 5.68%6.73% on the Term Loan, and 4.73%5.47% on the Revolving Loans.
As of December 30, 2022,September 29, 2023, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $39,477,$37,665, and the Company had approximately $20,096$27,032 of available borrowings. In addition to the Credit Agreement, the Company has established unsecured lines of credit that are used from time to time to secure certain performance obligations by the Company.
The Company’s borrowings described above approximate fair value at December 30, 2022September 29, 2023 and June 30, 2022.2023. 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 30, 2022,September 29, 2023, the notional amount was $12,500.$11,000. This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging. This swap is included in the disclosures in Note O, Derivative Financial Instruments.
During the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan as a net investment hedge to mitigate the risk of variability in its euro denominated net investments in wholly-owned foreign companies. Effective upon the designation, all changes in the fair value of the euro revolver are reported in accumulated other comprehensive loss along with the foreign currency translation adjustments on those foreign investments. This net investment hedge is included in the disclosures in Note O, Derivative Financial Instruments.
K. | Shareholders’ Equity |
The Company, from time to time, makes open market purchases of its common stock under authorizations given to it by the Board of Directors, of which 315.0 shares as of December 30, 2022September 29, 2023 remain authorized for purchase. The Company did not make any open market purchases of its shares during the quarters ended December 30, 2022September 29, 2023 and December 31, 2021.September 30, 2022.
As of July 1, 2022, the cumulative effect of the Accounting change resulted in $25.1 million decrease to retained earnings and a corresponding $25.1 million increase to Accumulated other comprehensive income (loss), both net of tax of $0 ($7.9 million in deferred tax asset offset by $7.9 million valuation allowance).
See Notes A, G, M, and P for further information regarding the impact of the Accounting change on the Company’s prior year consolidated financial statements.
The following is a reconciliation of the Company’s equity balances for the first twofiscal quartersquarter of 2023 and 2022:
Twin Disc, Inc. Shareholders’ Equity | Twin Disc, Inc. Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Other | Non- | Other | Non- | |||||||||||||||||||||||||||||||||||||||||||||
Common | Retained | Comprehensive | Treasury | Controlling | Total | Common | Retained | Comprehensive | Treasury | Controlling | Total | |||||||||||||||||||||||||||||||||||||
Stock | Earnings | Income | Stock | Interest | Equity | Stock | Earnings | Income (Loss) | Stock | Interest | Equity | |||||||||||||||||||||||||||||||||||||
Balance, June 30, 2022 | $ | 42,551 | $ | 135,031 | $ | (32,086 | ) | $ | (14,720 | ) | $ | 412 | $ | 131,188 | ||||||||||||||||||||||||||||||||||
Balance, June 30, 2023 | $ | 42,855 | $ | 120,299 | $ | (5,570 | ) | $ | (12,491 | ) | $ | 424 | $ | 145,517 | ||||||||||||||||||||||||||||||||||
Net (loss) income | (2,029 | ) | 98 | $ | (1,931 | ) | (1,173 | ) | 90 | (1,083 | ) | |||||||||||||||||||||||||||||||||||||
Translation adjustments | (6,328 | ) | 38 | $ | (6,290 | ) | (3,096 | ) | 60 | (3,036 | ) | |||||||||||||||||||||||||||||||||||||
Benefit plan adjustments, net of tax | 518 | $ | 518 | (171 | ) | (171 | ) | |||||||||||||||||||||||||||||||||||||||||
Unrealized gain on cash flow hedge, net of tax | 793 | $ | 793 | |||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on cash flow hedge, net of tax | 216 | 216 | ||||||||||||||||||||||||||||||||||||||||||||||
Compensation expense | 658 | $ | 658 | 494 | 494 | |||||||||||||||||||||||||||||||||||||||||||
Shares (acquired) issued, net | (1,924 | ) | 1,756 | $ | (168 | ) | ||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2022 | 41,285 | 133,002 | (37,103 | ) | (12,964 | ) | 548 | 124,768 | ||||||||||||||||||||||||||||||||||||||||
Net (loss) income | 1,139 | 15 | 1,154 | |||||||||||||||||||||||||||||||||||||||||||||
Translation adjustments | 8,333 | 59 | 8,392 | |||||||||||||||||||||||||||||||||||||||||||||
Benefit plan adjustments, net of tax | (515 | ) | (515 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on cash flow hedge, net of tax | (595 | ) | (595 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Compensation expense | 856 | 856 | ||||||||||||||||||||||||||||||||||||||||||||||
Shares (acquired) issued, net | (697 | ) | 402 | (295 | ) | |||||||||||||||||||||||||||||||||||||||||||
Balance, December 30, 2022 | $ | 41,444 | $ | 134,141 | $ | (29,880 | ) | $ | (12,562 | ) | $ | 622 | $ | 133,765 | ||||||||||||||||||||||||||||||||||
Stock awards, net of tax | (3,911 | ) | 2,148 | (1,995 | ) | |||||||||||||||||||||||||||||||||||||||||||
Balance, September 29, 2023 | $ | 39,439 | $ | 119,126 | $ | (8,621 | ) | $ | (10,343 | ) | $ | 574 | $ | 140,175 |
Twin Disc, Inc. Shareholders’ Equity | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Non- | |||||||||||||||||||||||
Common | Retained | Comprehensive | Treasury | Controlling | Total | |||||||||||||||||||
Stock | Earnings | Income (Loss) | Stock | Interest | Equity | |||||||||||||||||||
Balance, June 30, 2021 | $ | 40,972 | $ | 126,936 | $ | (22,615 | ) | $ | (15,083 | ) | $ | 450 | $ | 130,660 | ||||||||||
Net income | 1,920 | 60 | 1,980 | |||||||||||||||||||||
Translation adjustments | (2,014 | ) | 76 | (1,938 | ) | |||||||||||||||||||
Benefit plan adjustments, net of tax | 384 | 384 | ||||||||||||||||||||||
Unrealized gain on cash flow hedge, net of tax | 204 | 204 | ||||||||||||||||||||||
Compensation expense | 625 | 625 | ||||||||||||||||||||||
Shares (acquired) issued, net | (432 | ) | 141 | (291 | ) | |||||||||||||||||||
Balance, September 24, 2021 | 41,165 | 128,856 | (24,041 | ) | (14,942 | ) | 586 | 131,624 | ||||||||||||||||
Net (loss) income | (3,836 | ) | 86 | (3,750 | ) | |||||||||||||||||||
Translation adjustments | (1,676 | ) | (25 | ) | (1,701 | ) | ||||||||||||||||||
Benefit plan adjustments, net of tax | 623 | 623 | ||||||||||||||||||||||
Unrealized gain on cash flow hedge, net of tax | 735 | 735 | ||||||||||||||||||||||
Compensation expense | 595 | 595 | ||||||||||||||||||||||
Shares (acquired) issued, net | (169 | ) | (26 | ) | (195 | ) | ||||||||||||||||||
Balance, December 31, 2021 | $ | 41,591 | $ | 125,020 | $ | (24,359 | ) | $ | (14,968 | ) | $ | 647 | $ | 127,931 |
Twin Disc, Inc. Shareholders’ Equity | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Non- | |||||||||||||||||||||||
Common | Retained | Comprehensive | Treasury | Controlling | Total | |||||||||||||||||||
Stock | Earnings | Income (Loss) | Stock | Interest | Equity | |||||||||||||||||||
Balance, June 30, 2022 | $ | 42,551 | $ | 109,919 | $ | (6,974 | ) | $ | (14,720 | ) | $ | 412 | $ | 131,188 | ||||||||||
Net income | (1,422 | ) | 98 | (1,324 | ) | |||||||||||||||||||
Translation adjustments | (6,328 | ) | 38 | (6,290 | ) | |||||||||||||||||||
Benefit plan adjustments, net of tax | (89 | ) | (89 | ) | ||||||||||||||||||||
Unrealized loss on cash flow hedge, net of tax | 793 | 793 | ||||||||||||||||||||||
Compensation expense | 658 | 658 | ||||||||||||||||||||||
Stock awards, net of tax | (1,924 | ) | 1,756 | (168 | ) | |||||||||||||||||||
Balance, September 30, 2022 | $ | 41,285 | $ | 108,497 | $ | (12,598 | ) | $ | (12,964 | ) | $ | 548 | $ | 124,768 |
Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended DecemberSeptember 29, 2023 and September 30, 2022and December 31, 2021 are as follows:
Translation | Benefit Plan | Cash Flow | Net Investment | Translation | Benefit Plan | Cash Flow | Net Investment | |||||||||||||||||||||||||
Adjustment | Adjustment | Hedges | Hedges | Adjustment | Adjustment | Hedges | Hedges | |||||||||||||||||||||||||
Balance at June 30, 2022 | $ | (2,266 | ) | $ | (31,726 | ) | $ | 355 | $ | 1,551 | ||||||||||||||||||||||
Translation adjustment during the quarter | (6,328 | ) | - | - | - | |||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | - | 518 | 349 | 444 | ||||||||||||||||||||||||||||
Net current period other comprehensive (loss) income | (6,328 | ) | 518 | 349 | 444 | |||||||||||||||||||||||||||
Balance at September 30, 2022 | $ | (8,594 | ) | $ | (31,208 | ) | $ | 704 | $ | 1,995 | ||||||||||||||||||||||
Balance, June 30, 2023 | $ | (1,582 | ) | $ | (5,948 | ) | $ | 688 | $ | 1,272 | ||||||||||||||||||||||
Translation adjustment during the quarter | 8,333 | - | - | - | (3,096 | ) | - | - | - | |||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income | - | 600 | (10 | ) | (585 | ) | - | (171 | ) | (6 | ) | 222 | ||||||||||||||||||||
Plan merger remeasurement adjustment | - | (1,115 | ) | - | - | |||||||||||||||||||||||||||
Net current period other comprehensive (loss) income | 8,333 | (515 | ) | (10 | ) | (585 | ) | (3,096 | ) | (171 | ) | (6 | ) | 222 | ||||||||||||||||||
Balance at December 30, 2022 | (261 | ) | (31,723 | ) | 694 | 1,410 | ||||||||||||||||||||||||||
Balance, September 29, 2023 | $ | (4,678 | ) | $ | (6,119 | ) | $ | 682 | $ | 1,494 |
Translation | Benefit Plan | Cash Flow | Net Investment | Translation | Benefit Plan | Cash Flow | Net Investment | |||||||||||||||||||||||||
Adjustment | Adjustment | Hedges | Hedges | Adjustment | Adjustment | Hedges | Hedges | |||||||||||||||||||||||||
Balance at June 30, 2021 | $ | 9,192 | $ | (31,463 | ) | $ | (678 | ) | $ | 334 | ||||||||||||||||||||||
Balance, June 30, 2022 | $ | (2,266 | ) | $ | (6,614 | ) | $ | 356 | $ | 1,550 | ||||||||||||||||||||||
Translation adjustment during the quarter | (2,014 | ) | - | - | - | (6,328 | ) | - | - | - | ||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income | - | 384 | 68 | 136 | - | (89 | ) | 657 | 136 | |||||||||||||||||||||||
Net current period other comprehensive (loss) income | (2,014 | ) | 384 | 68 | 136 | (6,328 | ) | (89 | ) | 657 | 136 | |||||||||||||||||||||
Balance at September 24, 2021 | $ | 7,178 | $ | (31,079 | ) | $ | (610 | ) | $ | 470 | ||||||||||||||||||||||
Translation adjustment during the quarter | (1,676 | ) | - | - | - | |||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income | - | 623 | 232 | 503 | ||||||||||||||||||||||||||||
Net current period other comprehensive (loss) income | (1,676 | ) | 623 | 232 | 503 | |||||||||||||||||||||||||||
Balance at December 31, 2021 | 5,502 | (30,456 | ) | (378 | ) | 973 | ||||||||||||||||||||||||||
Balance, September 30, 2022 | $ | (8,594 | ) | $ | (6,703 | ) | $ | 1,013 | $ | 1,686 |
Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 30, 2022September 29, 2023 are as follows:
|
| Amount Reclassified | ||||||||||||
Quarter Ended | Two Quarters Ended | Quarter Ended | ||||||||||||
December 30, 2022 | December 30, 2022 | September 29, 2023 | ||||||||||||
Changes in benefit plan items | ||||||||||||||
Actuarial losses | $ | 608 | (a) | $ | 1,215 | (a) | $ | (172 | )(a) | |||||
Transition asset and prior service benefit | (51 | ) | (a) | (102 | ) | (a) | (4 | )(a) | ||||||
Translation | 42 | 2 | ||||||||||||
Total amortization | 599 | 1,115 | (176 | ) | ||||||||||
Plan merger remeasurement adjustment | (1,115 | ) | (1,115 | ) | ||||||||||
Income tax expense | 1 | 3 | 5 | |||||||||||
Total changes, net of tax | $ | (515 | ) | $ | 3 | |||||||||
Total reclassification net of tax | $ | (171 | ) |
Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 31, 2021September 30, 2022 is as follows:
|
| Amount Reclassified | ||||||||||||
Quarter Ended | Two Quarters Ended | Quarter Ended | ||||||||||||
December 31, 2021 | December 31, 2021 | September 30, 2022 | ||||||||||||
Changes in benefit plan items | ||||||||||||||
Actuarial losses | $ | 562 | (a) | $ | 1,124 | (a) | $ | 560 | (a) | |||||
Transition asset and prior service benefit | (64 | ) | (a) | (128 | ) | (a) | (51 | )(a) | ||||||
Translation | 10 | 13 | ||||||||||||
Mark-to-market adjustment | (607 | ) | ||||||||||||
Total amortization | 508 | 1,009 | (98 | ) | ||||||||||
Income tax expense | (115 | ) | 2 | 9 | ||||||||||
Total changes, net of tax | $ | 623 | $ | 1,007 | ||||||||||
Total reclassification net of tax | $ | (89 | ) |
(a) | These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note G, "Pension and Other Postretirement Benefit Plans" for further details). |
L. |
|
Restructuring expenses
The Company has implemented various restructuring programs in response to unfavorable macroeconomic trends in certain of the Company’s markets since the fourth quarter of fiscal 2015. These programs primarily involved the reduction of workforce in several of the Company’s manufacturing locations, under a combination of voluntary and involuntary programs. During the fourth quarter of fiscal 2021, the Company undertook a series of steps to accelerate its focus on its core competencies, improve its fixed cost structure, and monetize some of its under-utilized assets.
With regard to its Belgian operations, on June 30, 2021, the Company announced a new phase in its restructuring plans. Under this plan, the Belgian operation’s workforce was reduced by 18 employees. This reduction in workforce resulted in an accrual of $2,200, pertaining to the Company’s estimate for the payment of severance benefits, which is expected to be completed by June 2023. The action was taken to allow the Belgian operation to focus resources on core manufacturing processes, while allowing for savings on the outsourcing of non-core processes.
In the second quarter of fiscal 2022, the Company and the union representing certain of the employees affected by the restructuring of the Belgian operation came to an agreement on a final settlement amount of $3,200. The Company recorded the additional $1,000 in restructuring charges during the second quarter of fiscal 2022.
Total restructuring charges relating to streamlining operations totaled $164 and $1,190 in the quarters ending December 30, 2022 and December 31, 2021, respectively. Total restructuring charges relating to streamlining operations totaled to $174 and $1,238 in the two quarters ending December 30, 2022 and December 31, 2021, respectively. Restructuring activities since June 2015 have resulted in the elimination of 254 full-time employees in the manufacturing segment. Accumulated costs to date under these programs within the manufacturing segment through December 30, 2022 were $16,383.
The following is a roll-forward of restructuring activity:
Accrued restructuring liability, June 30, 2022 | $ | 1,024 | ||
Additions | 174 | |||
Payments, adjustments and write-offs during the year | (175 | ) | ||
Accrued restructuring liability, December 30, 2022 | $ | 1,023 |
Assets held for sale
To improve its fixed cost structure and monetize some of its under-utilized assets, the Company commenced the active marketing of several of its real estate properties, namely, its corporate headquarters in Racine, its propeller machining plant and office in Switzerland, and a spare warehouse in Italy during the fourth quarter of fiscal 2021.properties. Such actions required the Company to reclassify these assets from Property, Plant and Equipment to Assets Held for Sale, at fair value less costs to sell, or net book value, whichever is lower. Fair value was determined using real estate broker estimates and would be classified as Level 3 in the fair value hierarchy. This assessment of fair value resulted in the Company recognizing a write-down of the carrying value of its former corporate headquarters by $4,267 in the fourth quarter of fiscal 2021.
In the first quarter of fiscal 2022, the The Company completedexpects to complete the sale of its propeller machining plant and office in Switzerland and received $9,138 in proceeds, net of fees and local taxes and recorded a gain of $2,939 in other operating income. Informer corporate headquarters before the fourth quarterend of fiscal year 20222024., the Company completed the sale of its spare warehouse in Italy and received net proceeds of approximately $305.
In the first quarter of fiscal 2023, the Company commenced the active marketing of an additional real estate property located in Nivelles, Belgium. This action required the Company to reclassify these assets from Property, Plant, and Equipment to Assets Held for Sale, at fair value less costs to sell or net book value, whichever is lower. Fair value was determined using real estate broker estimates and would be classified as Level 3 in the fair value hierarchy. The real estate property's fair value less costs to sell exceeded its net book value. The Company reclassified the property's net book value of $2,801 from Property, Plant, and Equipment to Assets Held for Sale.
In the second quarter of fiscal 2023, the Company completed the sale of the real estate property located in Belgium and received $7,150 in proceeds, net of fees and recorded a gain of $4,161 in other operating income. The
In the first quarter of fiscal 2024, the Company entered into a leasean agreement to leasebacksell certain machinery assets, inventory, and legal relationships of its boat management systems product line. This action required the propertyCompany to reclassify these assets from Property, Plant and Equipment and Inventory to Assets Held for Sale, at fair value less costs to sell, or net book value, whichever is lower. The fair value of the machinery assets was determined using local internal specialists. The machinery assets’ fair value less costs to sell exceeded its net book value. The boat management systems inventory was valued at the lower of cost or net realizable value. Net realizable value was determined using the offer amount from the buyer less costs to sell. This assessment resulted in the Company recognizing a write-down of the carrying value of its boat management systems inventory of two$2.1-year term. million. The write-down was classified in the Condensed Consolidated Statement of Operations and Comprehensive loss as a component of cost of goods sold. The agreement closed October 30, 2023.
M. | Earnings Per Share |
The Company calculates basic earnings per share based upon the weighted average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. Certain restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company and are therefore included in computing earnings per share pursuant to the two-class method.
As discussed in Note A, during the fourth quarter of 2023, the Company changed its accounting method related to the recognition of actuarial gains and losses for its pension plans. Under the new method, actuarial gains and losses are recognized in net periodic benefit costs upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement. These changes have been applied retrospectively to prior years. See Notes A, G, K, and P for further information regarding the impact of the change in accounting principle on the Company’s consolidated financial statements.
The components of basic and diluted earnings per share were as follows:
For the Quarter Ended | For the Two Quarters Ended | As Adjusted | ||||||||||||||||||||||
December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | September 29, 2023 | September 30, 2022 | |||||||||||||||||||
Basic: | ||||||||||||||||||||||||
Net income (loss) | $ | 1,154 | $ | (3,750 | ) | $ | (777 | ) | $ | (1,770 | ) | |||||||||||||
Net loss | $ | (1,083 | ) | $ | (1,324 | ) | ||||||||||||||||||
Less: Net earnings attributable to noncontrolling interest | (15 | ) | (86 | ) | (112 | ) | (144 | ) | (90 | ) | (98 | ) | ||||||||||||
Less: Undistributed earnings attributable to unvested shares | - | - | - | - | - | - | ||||||||||||||||||
Net income (loss) attributable to Twin Disc | 1,139 | (3,836 | ) | (889 | ) | (1,914 | ) | |||||||||||||||||
Net loss attributable to Twin Disc | (1,173 | ) | (1,422 | ) | ||||||||||||||||||||
Weighted average shares outstanding - basic | 13,460 | 13,296 | 13,434 | 13,288 | 13,527 | 13,407 | ||||||||||||||||||
Basic Loss Per Share: | ||||||||||||||||||||||||
Net earnings (loss) per share - basic | $ | 0.08 | $ | (0.29 | ) | $ | (0.07 | ) | $ | (0.14 | ) | |||||||||||||
Net loss per share - basic | $ | (0.09 | ) | $ | (0.11 | ) | ||||||||||||||||||
Diluted: | ||||||||||||||||||||||||
Net income (loss) | $ | 1,154 | $ | (3,750 | ) | $ | (777 | ) | $ | (1,770 | ) | |||||||||||||
Net loss | $ | (1,083 | ) | $ | (1,324 | ) | ||||||||||||||||||
Less: Net earnings attributable to noncontrolling interest | (15 | ) | (86 | ) | (112 | ) | (144 | ) | (90 | ) | (98 | ) | ||||||||||||
Less: Undistributed earnings attributable to unvested shares | - | - | - | - | - | - | ||||||||||||||||||
Net income (loss) attributable to Twin Disc | 1,139 | (3,836 | ) | (889 | ) | (1,914 | ) | |||||||||||||||||
Net loss attributable to Twin Disc | (1,173 | ) | (1,422 | ) | ||||||||||||||||||||
Weighted average shares outstanding - basic | 13,460 | 13,296 | 13,434 | 13,288 | 13,527 | 13,407 | ||||||||||||||||||
Effect of dilutive stock awards | 239 | - | - | - | - | - | ||||||||||||||||||
Weighted average shares outstanding - diluted | 13,699 | 13,296 | 13,434 | 13,288 | 13,527 | 13,407 | ||||||||||||||||||
Diluted Income (Loss) Per Share: | ||||||||||||||||||||||||
Net earnings (loss) per share - diluted | $ | 0.08 | $ | (0.29 | ) | $ | (0.07 | ) | $ | (0.14 | ) | |||||||||||||
Diluted Loss Per Share: | ||||||||||||||||||||||||
Net loss per share - diluted | $ | (0.09 | ) | $ | (0.11 | ) |
The following potential common shares were excluded from diluted EPS for the two quartersquarter ended December 31, 2022September 29, 2023 as the Company reported a net loss: 438.9because they were anti-dilutive: 265.0 related to the Company’s unvested PSAs, 309.25.2 related to the Company’s unvested PSUA awards, 108.5 related to the Company’s unvested RS awards, and 130.972.6 related to the Company’s unvested RSUs.
The following potential common shares were excluded from diluted EPS for the quarter and two quarters ended December 31, 2021September 30, 2022 as the Company reported a net loss: 440.9because they were anti-dilutive: 320.8 related to the Company’s unvested PSAs, 262.7181.2 related to the Company’s unvested RS awards, and 67.451.2 related to the Company’s unvested RSUs.
N. | Lease Liabilities |
The Company leases certain office and warehouse space, as well as production and office equipment.
The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. As its lease agreements typically do not provide an implicit rate, the Company primarily uses an incremental borrowing rate based upon the information available at lease commencement. In determining the incremental borrowing rate, the Company considers its current borrowing rate, the term of the lease, and the economic environments where the lease activity is concentrated. 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 components of lease expense were as follows:
For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | |||||||||||||
Finance lease cost: | ||||||||||||||||
Amortization of right-of-use assets | $ | 156 | $ | 168 | $ | 311 | $ | 331 | ||||||||
Interest on lease liabilities | 67 | 71 | 132 | 142 | ||||||||||||
Operating lease cost | 686 | 698 | 1,397 | 1,391 | ||||||||||||
Short-term lease cost | (10 | ) | 37 | 3 | 40 | |||||||||||
Variable lease cost | 67 | 42 | 108 | 81 | ||||||||||||
Total lease cost | 966 | 1,016 | 1,952 | 1,985 | ||||||||||||
Less: Sublease income | (18 | ) | (19 | ) | (35 | ) | (39 | ) | ||||||||
Net lease cost | $ | 948 | $ | 997 | $ | 1,917 | $ | 1,946 |
Other information related to leases was as follows:
For the Quarter Ended | For the Two Quarters Ended | |||||||||||||||
December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
Operating cash flows from operating leases | $ | 777 | $ | 737 | $ | 1,473 | $ | 1,479 | ||||||||
Operating cash flows from finance leases | 215 | 211 | 420 | 416 | ||||||||||||
Financing cash flows from finance leases | 67 | 71 | 132 | 142 | ||||||||||||
Right-of-use-assets obtained in exchange for lease obligations: | ||||||||||||||||
Operating leases | 990 | 232 | 1,518 | 396 | ||||||||||||
Finance leases | 269 | 133 | 320 | 307 | ||||||||||||
Weighted average remaining lease term (years): | ||||||||||||||||
Operating leases | 8.3 | 9.3 | ||||||||||||||
Finance lease | 10.8 | 11.5 | ||||||||||||||
Weighted average discount rate: | ||||||||||||||||
Operating leases | 7.2 | % | 7.2 | % | ||||||||||||
Finance leases | 5.2 | % | 5.2 | % |
Approximate future minimum rental commitments under non-cancellable leases as of December 30, 2022 were as follows:
Operating Leases | Finance Leases | |||||||
2023 | $ | 1,507 | $ | 877 | ||||
2024 | 2,517 | 875 | ||||||
2025 | 1,619 | 644 | ||||||
2026 | 1,434 | 578 | ||||||
2027 | 1,428 | 519 | ||||||
Thereafter | 7,636 | 4,448 | ||||||
Total future lease payments | 16,142 | 7,940 | ||||||
Less: Amount representing interest | (3,321 | ) | (2,899 | ) | ||||
Present value of future payments | $ | 12,821 | $ | 5,041 |
The following table provides a summary of leases recorded on the condensed consolidated balance sheet.
Balance Sheet Location | December 30, 2022 | June 30, 2022 | Balance Sheet Location | September 29, 2023 | June 30, 2023 | |||||||||||||
Lease Assets | ||||||||||||||||||
Operating lease right-of-use assets | Right-of-use assets operating leases | $ | 12,807 | $ | 12,685 | Right-of-use assets operating leases | $ | 12,093 | $ | 13,133 | ||||||||
Finance lease right-of-use assets | Property, plant and equipment, net | 4,563 | 4,805 | Property, plant and equipment, net | 4,952 | $ | 4,427 | |||||||||||
Lease Liabilities | ||||||||||||||||||
Operating lease liabilities | Accrued liabilities | $ | 2,543 | $ | 2,127 | Accrued liabilities | $ | 2,218 | $ | 2,343 | ||||||||
Operating lease liabilities | Lease obligations | 10,278 | 10,575 | Lease obligations | 9,896 | $ | 10,811 | |||||||||||
Finance lease liabilities | Accrued liabilities | 615 | 576 | Accrued liabilities | 670 | $ | 643 | |||||||||||
Finance lease liabilities | Other long-term liabilities | 4,426 | 4,440 | Other long-term liabilities | 4,556 | $ | 4,314 |
The components of lease expense were as follows:
For the Quarter Ended | ||||||||
September 29, 2023 | September 30, 2022 | |||||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | $ | 222 | $ | 155 | ||||
Interest on lease liabilities | 73 | 64 | ||||||
Operating lease cost | 893 | 711 | ||||||
Short-term lease cost | 3 | 13 | ||||||
Variable lease cost | 100 | 40 | ||||||
Total lease cost | 1,291 | 983 | ||||||
Less: Sublease income | (20 | ) | (17 | ) | ||||
Net lease cost | $ | 1,271 | $ | 966 |
Other information related to leases was as follows:
For the Quarter Ended | ||||||||
September 29, 2023 | September 30, 2022 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 924 | $ | 748 | ||||
Operating cash flows from finance leases | 73 | 201 | ||||||
Financing cash flows from finance leases | 847 | 132 | ||||||
Right-of-use-assets obtained in exchange for lease obligations: | ||||||||
Operating leases | 15 | 528 | ||||||
Finance leases | 484 | 51 | ||||||
Weighted average remaining lease term (years): | ||||||||
Operating leases | 8.2 | 8.8 | ||||||
Finance lease | 9.7 | 11.4 | ||||||
Weighted average discount rate: | ||||||||
Operating leases | 7.6 | % | 7.2 | % | ||||
Finance leases | 5.7 | % | 5.2 | % |
Approximate future minimum rental commitments under non-cancellable leases as of September 29, 2023 were as follows:
Operating Leases | Finance Leases | |||||||
2024 | $ | 2,396 | $ | 740 | ||||
2025 | 2,143 | 806 | ||||||
2026 | 1,672 | 744 | ||||||
2027 | 1,608 | 679 | ||||||
2028 | 1,587 | 619 | ||||||
2029 | 1,572 | 476 | ||||||
Thereafter | 5,602 | 2,655 | ||||||
Total future lease payments | 16,580 | 6,719 | ||||||
Less: Amount representing interest | (4,466 | ) | (1,493 | ) | ||||
Present value of future payments | $ | 12,114 | $ | 5,226 |
O. | Derivative Financial Instruments |
From time to time, the Company enters into derivative instruments to manage volatility arising from risks relating to interest raterates and foreign currency exchange rate volatility.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 interest rate swap contract as of December 30, 2022,September 29, 2023, with a notional amount of $12,500.$11,000. 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). income. 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 lossesgains related to cash flow hedging activities that were included in accumulated other comprehensive loss were ($694)682) and ($355)688) as of December 30, 2022,September 29, 2023, and June 30, 2022,2023, respectively. The unrealized amounts in accumulated other comprehensive income (loss)loss will fluctuate based on changes in the fair value of open contracts during each reporting period.
The Company estimates that $273$284 of net unrealized losses related to cash flow hedging activities included in accumulated other comprehensive income (loss) loss as of September 29, 2023 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. As discussed in Note J, Long-term Debt, duringDuring the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan, with a notional amount of €6,500,13,000, 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 Lossaccumulated other comprehensive loss along with the foreign currency translation adjustments on those foreign investments. Net unrealized after-tax income (loss) related to net investment hedging activities that were included in Accumulated Other Comprehensive Lossaccumulated other comprehensive loss were ($1,410)1,494) and ($1,551)1,272) as of December 30, 2022September 29, 2023 and June 30, 2022,2023, 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 30, 2022 | June 30, 2022 | Balance Sheet Location | September 29, 2023 | June 30, 2023 | |||||||||||||
Derivative designated as hedge: | ||||||||||||||||||
Interest rate swap | Other current assets | $ | 273 | $ | 68 | Other current assets | $ | 268 | $ | 292 | ||||||||
Interest rate swap | Other noncurrent assets | 211 | 77 | Other noncurrent assets | 205 | 187 |
The impact of the Company’s derivative instruments on the condensed consolidated statements of operations and comprehensive (loss) income for the quarters and two quarters ended December 30, 2022September 29, 2023 and December 31, 2021,September 30, 2022, respectively, was as follows:
Statement of Comprehensive | For the Quarter Ended | For the Two Quarters Ended | Statement of Operations and Comprehensive | For the Quarter Ended | ||||||||||||||||||||||
(Loss) Income Location | December 30, 2022 | December 31, 2021 | December 30, 2022 | December 31, 2021 | (Loss) Income Location | September 29, 2023 | September 30, 2022 | |||||||||||||||||||
Derivative designated as hedge: | ||||||||||||||||||||||||||
Interest rate swap | Interest expense | $ | 79 | $ | 98 | $ | 162 | $ | 187 | Interest expense | $ | 71 | $ | 84 | ||||||||||||
Interest rate swap | Unrealized (loss) gain on cash flow hedge | (338 | ) | 232 | (1 | ) | 300 | Unrealized loss on hedges | (6 | ) | 349 | |||||||||||||||
Net investment hedge | Unrealized (loss) gain on hedges | (585 | ) | 503 | (141 | ) | 639 | Unrealized loss on hedges | 222 | 444 |
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 September 30, 2022 and condensed consolidated balance sheet as of September 30, 2022. Certain prior year amounts pertaining to finance lease obligations have been reclassified for consistency with current year presentation.
CONDENSED CONSOLIDATED STATEMENT OF OPERATION AND COMPREHENSIVE LOSS
September 30, 2022 | ||||||||||||
As Computed Under Previous Method | Effect of Accounting Change | As Reported Under New Method | ||||||||||
Net sales | $ | 55,913 | $ | - | $ | 55,913 | ||||||
Cost of goods sold | 42,616 | - | 42,616 | |||||||||
Gross profit | 13,297 | - | 13,297 | |||||||||
Marketing, engineering and administrative expenses | 15,090 | - | 15,090 | |||||||||
Loss from operations | (1,793 | ) | - | (1,793 | ) | |||||||
Other Income (expense): | ||||||||||||
Interest expense | (566 | ) | - | (566 | ) | |||||||
Other income, net | (260 | ) | 607 | 347 | ||||||||
(826 | ) | 607 | (219 | ) | ||||||||
Income before income taxes and noncontrolling interest | (2,619 | ) | 607 | (2,012 | ) | |||||||
Income tax expense | (688 | ) | - | (688 | ) | |||||||
Net loss | (1,931 | ) | 607 | (1,324 | ) | |||||||
Less: Net loss attributable to noncontrolling interest, net of tax | (98 | ) | - | (98 | ) | |||||||
Net loss attributable to Twin Disc | $ | (2,029 | ) | $ | 607 | $ | (1,422 | ) | ||||
Loss per share data: | ||||||||||||
Basic loss per share attributable to Twin Disc common shareholders | $ | (0.15 | ) | $ | 0.04 | $ | (0.11 | ) | ||||
Diluted loss per share attributable to Twin Disc common shareholders | $ | (0.15 | ) | $ | 0.04 | $ | (0.11 | ) | ||||
Weighted average shares outstanding data: | ||||||||||||
Basic shares outstanding | 13,407 | - | 13,407 | |||||||||
Diluted shares outstanding | 13,407 | - | 13,407 | |||||||||
Comprehensive income (loss) | ||||||||||||
Net loss | $ | (1,931 | ) | $ | 607 | $ | (1,324 | ) | ||||
Benefit plan adjustments, net of income taxes of $9 | 518 | (607 | ) | (89 | ) | |||||||
Foreign currency translation adjustment | (6,290 | ) | - | (6,290 | ) | |||||||
Unrealized loss on hedges, net of income taxes of $0, respectively | 793 | - | 793 | |||||||||
Comprehensive loss | (6,910 | ) | - | (6,910 | ) | |||||||
Less: Comprehensive income attributable to noncontrolling interest | 136 | - | 136 | |||||||||
Comprehensive loss attributable to Twin Disc | $ | (7,046 | ) | $ | - | $ | (7,046 | ) |
CONDENSED ONSOLIDATED CONDENSED BALANCE SHEET
September 30, 2022 | ||||||||||||
As Computed Under Previous Method | Effect of Accounting Change | As Reported Under New Method | ||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash | $ | 13,214 | $ | - | $ | 13,214 | ||||||
Trade accounts receivable, net | 40,007 | - | 40,007 | |||||||||
Inventories | 128,100 | - | 128,100 | |||||||||
Assets held for sale | 5,769 | - | 5,769 | |||||||||
Prepaid expenses | 8,207 | - | 8,207 | |||||||||
Other | 6,521 | - | 6,521 | |||||||||
Total current assets | 201,818 | - | 201,818 | |||||||||
Property, plant and equipment, net | 38,989 | - | 38,989 | |||||||||
Right-of-use assets operating leases | 11,492 | - | 11,492 | |||||||||
Intangible assets, net | 11,560 | - | 11,560 | |||||||||
Deferred income taxes | 2,846 | - | 2,846 | |||||||||
Other assets | 2,846 | - | 2,846 | |||||||||
Total assets | $ | 269,551 | $ | - | $ | 269,551 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Current maturities of long-term debt | $ | 2,000 | $ | - | $ | 2,000 | ||||||
Accounts payable | 30,706 | - | 30,706 | |||||||||
Accrued liabilities | 49,158 | - | 49,158 | |||||||||
Total current liabilities | 81,864 | - | 81,864 | |||||||||
Long-term debt | 35,112 | - | 35,112 | |||||||||
Lease obligations | 9,483 | - | 9,483 | |||||||||
Accrued retirement benefits | 9,860 | - | 9,860 | |||||||||
Deferred income taxes | 3,422 | - | 3,422 | |||||||||
Other long-term liabilities | 5,042 | - | 5,042 | |||||||||
Total liabilities | 144,783 | - | 144,783 | |||||||||
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 | 41,285 | - | 41,285 | |||||||||
Retained earnings | 133,002 | (24,505 | ) | 108,497 | ||||||||
Accumulated other comprehensive loss | (37,103 | ) | 24,505 | (12,598 | ) | |||||||
137,184 | - | 137,184 | ||||||||||
Less treasury stock, at cost (845,670 shares, respectively) | 12,964 | - | 12,964 | |||||||||
Total Twin Disc shareholders' equity | 124,220 | - | 124,220 | |||||||||
Noncontrolling interest | 548 | - | 548 | |||||||||
Total equity | 124,768 | - | 124,768 | |||||||||
Total liabilities and equity | $ | 269,551 | $ | - | $ | 269,551 |
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
September 30, 2022 | ||||||||||||
As Computed Under Previous Method | Effect of Accounting Change | As Reported Under New Method | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net loss | $ | (1,931 | ) | $ | 607 | $ | (1,324 | ) | ||||
Adjustments to reconcile net loss to net cash provided by used activities: | ||||||||||||
Depreciation and amortization | 2,140 | - | 2,140 | |||||||||
Gain on sale of assets | (42 | ) | - | (42 | ) | |||||||
Restructuring expenses | (68 | ) | - | (68 | ) | |||||||
Provision for deferred income taxes | (1,623 | ) | - | (1,623 | ) | |||||||
Stock compensation expense | 864 | - | 864 | |||||||||
Net change in operating assets and liabilities | (36 | ) | (607 | ) | (643 | ) | ||||||
Net cash used by operating activities | (696 | ) | - | (696 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Acquisition of property, plant, and equipment | (2,237 | ) | - | (2,237 | ) | |||||||
Proceeds from sale of fixed assets | 2 | - | 2 | |||||||||
Proceeds on note receivable | - | - | - | |||||||||
Other, net | 534 | - | 534 | |||||||||
Net cash used by investing activities | (1,701 | ) | - | (1,701 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Borrowings under revolving loan arrangements | 20,221 | - | 20,221 | |||||||||
Repayments of revolving loan arrangements | (18,685 | ) | - | (18,685 | ) | |||||||
Repayments of other long-term debt | (651 | ) | 132 | (519 | ) | |||||||
Payments of finance lease obligations | - | (132 | ) | (132 | ) | |||||||
Payments of withholding taxes on stock compensation | (168 | ) | - | (168 | ) | |||||||
Net cash provided by financing activities | 717 | - | 717 | |||||||||
Effect of exchange rate changes on cash | 2,373 | - | 2,373 | |||||||||
Net change in cash | 693 | - | 693 | |||||||||
Cash: | ||||||||||||
Beginning of period | 12,521 | - | 12,521 | |||||||||
End of period | $ | 13,214 | $ | - | $ | 13,214 |
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
September 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 attributable to Twin Disc | (2,029 | ) | 607 | (1,422 | ) | |||||||
Balance at September 30, 2022 | $ | 133,002 | $ | (24,505 | ) | $ | 108,497 | |||||
Accumulated other comprehensive loss | ||||||||||||
Balance at June 30, 2022 | (32,086 | ) | 25,112 | (6,974 | ) | |||||||
Translation adjustments | (6,328 | ) | - | (6,328 | ) | |||||||
Benefit plan adjustments, net of tax | 518 | (607 | ) | (89 | ) | |||||||
Unrealized gain on hedges, net of tax | 793 | - | 793 | |||||||||
Balance at September 30, 2022 | $ | (37,103 | ) | $ | 24,505 | $ | (12,598 | ) |
Item 2. | Management Discussion and Analysis |
In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our condensed consolidated financial statements as of December 30, 2022,September 29, 2023, and related notes, as reported in Item 1 of this Quarterly Report.
Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the Company’s description of plans and objectives for future operations and assumptions behind those plans. The words “anticipates,” “believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by the Company should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.
In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company’s Annual Report filed on Form 10-K for June 30, 2022,2023, as supplemented in this Quarterly Report, could cause actual results to be materially different from what is expressed or implied in any forward-looking statement.
Results of Operations
Quarter Ended | Two Quarters Ended | |||||||||||||||||||||||||||||||
December 30, 2022 | % of Net Sales | December 31, 2021 | % of Net Sales | December 30, 2022 | % of Net Sales | December 31, 2021 | % of Net Sales | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Net sales | $ | 63,351 | $ | 59,889 | $ | 119,264 | $ | 107,650 | ||||||||||||||||||||||||
Cost of goods sold | 46,328 | 46,407 | 88,944 | 80,721 | ||||||||||||||||||||||||||||
Gross profit | 17,023 | 26.9 | % | 13,482 | 22.5 | % | 30,320 | 25.4 | % | 26,929 | 25.0 | % | ||||||||||||||||||||
Marketing, engineering and administrative expenses | 15,983 | 25.2 | % | 15,267 | 25.5 | % | 31,063 | 26.0 | % | 28,357 | 26.3 | % | ||||||||||||||||||||
Restructuring of operations | 164 | 0.3 | % | 1,190 | 2.0 | % | 174 | 0.1 | % | 1,238 | 1.2 | % | ||||||||||||||||||||
Other operating income | (4,150 | ) | -6.6 | % | 45 | 0.1 | % | (4,150 | ) | -3.5 | % | (2,894 | ) | -2.7 | % | |||||||||||||||||
Income (loss) from operations | $ | 5,026 | 7.9 | % | $ | (3,020 | ) | -5.0 | % | $ | 3,233 | 2.7 | % | $ | 228 | 0.2 | % |
(In thousands)
Quarter Ended | ||||||||||||||||
September 29, 2023 | % of Net Sales | September 30, 2022 | % of Net Sales | |||||||||||||
Net sales | $ | 63,554 | $ | 55,913 | ||||||||||||
Cost of goods sold | 43,818 | 42,616 | ||||||||||||||
Cost of goods sold - Sale of boat management system product line and related inventory | 3,099 | - | ||||||||||||||
Gross profit | 16,637 | 26.2 | % | 13,297 | 23.8 | % | ||||||||||
Marketing, engineering and administrative expenses | 16,917 | 26.6 | % | 15,090 | 27.0 | % | ||||||||||
Loss from operations | $ | (280 | ) | -0.4 | % | $ | (1,793 | ) | -3.2 | % |
Comparison of the SecondFirst Quarter of Fiscal 20232024 with the SecondFirst Quarter of Fiscal 20222023
Net sales for the secondfirst quarter increased 5.8%13.7%, or $3.5$7.7 million, to $63.4$63.6 million from $59.9$55.9 million in the same quarter a year ago. The Company continues to experience strong demandhas benefited from favorable market conditions across most geographies and product groups through fiscal 2023 and into fiscal 2024. With the easing of its markets following the severe impact of the COVID-19 pandemic in fiscal 2021, including demand for new transmissions in the North American oil and gas market, along with the ongoing demand for aftermarket support. The Company’s ability to ship product continues to be hampered by a variety ofglobal supply chain challenges. These include supplier capacity constraints, extended supplier lead times and a global shortage of electronic components.disruptions, the Company has been able to improve delivery performance. Global sales of industrial products declined slightly (2.5%), primarily due to an unfavorable currency impact, while shipments of marine and propulsion products improved by 2.7% and off-highway transmission shipments grew by 10.2% compared with24.3% from the prior year, second quarter.while shipments of off-highway transmission products improved by 16.6%. Shipments of industrial products declined by 19.1%, with a slow-down in the domestic housing and construction markets. The North AmericanAsia Pacific region enjoyed the most significant sales improvement ($6.27.3 million or 32.0%58.9%) due to generally improving market conditionsimproved shipments of oil and increased new unitgas 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 ($6.0 million or 38.5%), with improved operational performance at our facilities in Belgium and the Netherlands. Sales into North America decreased 17.1%, or $3.9 million, primarily due to some softening in aftermarket demand in the North American energy market. The European region saw a more modest increase ($0.7 million or 3.7%), with a more challenging economy and the negative impact of currency exchange. Sales into the Asia Pacific region decreased 8.3%, or $1.1 million, primarily due to a temporary pause in shipments of certain oil and gas related products into China.market. Currency translation had an unfavorablea favorable impact on secondfirst quarter fiscal 20232024 sales compared to the secondfirst quarter of the prior year totaling $5.0$2.2 million primarily due to the weakeningstrengthening of the euro against the U.S. dollar.
Sales at our manufacturing segment increased 15.0%11.3%, or $7.4$5.5 million, versus the same quarter last year. The U.S. manufacturing operations experienced a 17.5%an 8.2%, or $5.2$2.5 million, increasedecrease in sales versus the secondfirst fiscal quarter of 2022,2023, with recovering markets and growing North Americansome softening aftermarket demand in the North American energy market partially offset byand weaker industrial demand related to the continued supply chain challenges noted above.North American housing and construction markets. The Company’s operation in the Netherlands was up $1.6saw increased revenue of $7.6 million (13.3%(102.1%) compared to the secondfirst fiscal quarter of 2022,2023, primarily due to improving market demand and strong operational execution, partially offset by an unfavorablea record level of incoming orders over the past few quarters, along with a favorable currency impact and improved operational and supply chain limitations.performance. Similarly, the Company’s Belgian operation saw an increase compared to the prior year secondfirst quarter (6.7%(25.2% or $0.3$1.1 million), with improving demand partially offseta favorable translation effect and improved delivery performance driven by an unfavorable translation effect.operational and supply chain execution. The Company’s Italian manufacturing operations were up $0.3down $0.7 million (4.4%(11.8%) compared to the secondfirst quarter of fiscal 2022,2023, with improving execution and easing supply chain interruptions.some softening in demand for industrial products in Europe. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.1 million (10.5%(1.9%) compared to the prior year secondfirst quarter.
Our distribution segment experienced a decreasean increase in sales of $2.7$8.5 million (9.6%(35.1%) in the secondfirst quarter of fiscal 20232024 compared to the secondfirst quarter of fiscal 2022.2023. The Company’s Asian distribution operations in Singapore, China and Japan were down 30.8%,up 113.2% or $3.2$9.7 million from the prior year primarily due to a temporary delay in shipments of certain oil and gason improving deliveries for energy related products intoin China. The Company’s North America distribution operation saw a slight increasesmall decrease ($0.20.5 million or 2.5%8.61%) on strongertiming of supply of product from the manufacturing operations, as all markets have seen improving demand.operations. The Company’s European distribution operation saw a decreaseslight increase ($0.70.5 million or 12.0%13.3%) resulting from lower factory shipmentson a favorable currency impact and the unfavorable impactimproved supply of currency translation.product. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw continued growth (14.0% increase, or $0.9 million,a decline in revenue (16.6% decrease from the prior year secondfirst fiscal quarter), on the continued strengtheningprimarily due to timing of pleasure craft marine market demand in the region.shipments and an unfavorable currency impact.
Gross profit as a percentage of sales for the secondfirst quarter of fiscal 20232024 improved to 26.9%26.2%, compared to 22.5%23.8% for the same period last year. The current year first quarter result reflects the unfavorable impact of the write down of inventory associated with the sale of the assets related to the Company’s boat management systems product line, which resulted in a non-cash charge to cost of goods sold totaling $3.1 million. Adjusting for these non-recurring items, the current year gross profit percent would have been 31.1%. The improvement overin the current year first quarter compared to the prior year is primarilyresult reflects the resultimpact of additional volume ($0.8 million), a more favorable mixand strong North American oil and gas demand, partially offset by the negative impact of product shipments ($0.7 million) and progress on margin improvement actions related to pricing and cost efficiencies ($2.0 million).inflation, primarily at our European operations.
For the fiscal 2023 second2024 first quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 25.2%26.6%, compared to 25.5%27.0% for the fiscal 2022 second2023 first quarter. ME&A expenses increased $0.7$1.8 million (4.7%(12.2%) versus the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of the incremental impact of prior year COVID subsidieshigher wages and benefits ($0.80.7 million), increased professional fees ($0.50.3 million), travel costs ($0.3 million), software maintenance ($0.2 million) product development ($0.1 million) and other inflationary impactsa positive currency translation impact ($0.2 million). These increases were partially offsetdriven by a foreign currency translation impact of $0.8 million.inflationary impacts and investment in resources to support our hybrid electric strategy.
The Company incurred minor restructuring charges during the secondfirst quarter of fiscal 20232024 and fiscal 2022,2023, primarily associated with ongoing cost reduction actions at its European operations and actions to adjust the cost structure at the Company’s domestic operation. The Company continues to focus on actively managing its cost structure and reducing fixed costs.
The Company recorded other operating income of $4.2 millioncosts in the second quarter of fiscal 2023 associated with the gain on the salelight of the Company’s facility in Belgium. The building was sold for approximately $7.2 million. The Company entered into a lease agreement to leaseback the property for a two-year term.
Interest expense was relatively flat at $0.6 million in the second quarter of fiscal 2023, with a slightly higher rate partially offset by a lower average outstanding revolver balance.
Other expense of $0.8 million for the second fiscal quarter was primarily attributable to translation losses related to the Company’s euro denominated liabilities.
The fiscal 2023 second quarter effective tax rate was 68.3% compared to -19.9% in the prior fiscal year second quarter. The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the increase to the effective tax rate.
Comparison of the First Half of Fiscal 2023 with the First Half of Fiscal 2022
Net sales for the first half increased 10.8%, or $11.6 million, to $119.3 million from $107.7 million in the same period a year ago. The Company experienced strong and improving demand through the first half as all markets have demonstrated recovery following the severe impact of the COVID-19 pandemic in fiscal 2021, including demand for new transmissions in the North American oil and gasongoing market demand, along with the ongoing demand for aftermarket support. The Company’s ability to ship product continues to be hampered by a variety of supply chain challenges. These include supplier capacity constraints, extended supplier lead times and a global shortage of electronic components. Global sales of industrial products improved (5.1%) primarily due to a strong first quarter in North America, while shipments of marine and propulsion products improved by 5.9% and off-highway transmission shipments grew by 19.8% compared with the prior year first half. The North American region enjoyed the most significant sales improvement ($11.9 million or 32.5%) due to generally improving market conditions and increased new unit and aftermarket demand in the North American energy market. The European region saw a more modest increase ($0.9 million or 2.7%), with a more challenging economy and the negative impact of currency exchange. Sales into the Asia Pacific region decreased 0.8%, or $0.2 million, primarily due to a temporary pause in shipments of certain oil and gas related products into China offset by continued strong demand in Australia. Currency translation had an unfavorable impact on first half fiscal 2023 sales compared to the first half of the prior year totaling $9.9 million primarily due to the weakening of the euro against the U.S. dollar.
Sales at our manufacturing segment increased 16.3%, or $14.8 million, versus the same period last year. The U.S. manufacturing operations experienced a 28.0%, or $13.1 million, increase in sales versus the first half of fiscal 2022, with recovering markets and growing North American demand in the energy market, partially offset by the continued supply chain challenges noted above. The Company’s operation in the Netherlands was up $0.8 million (3.9%) compared to the first half of fiscal 2022, primarily due to improving market demand and strong operational execution, partially offset by an unfavorable currency impact and supply chain limitations. The Company’s Belgian operation saw a slight decrease compared to the prior year first half (3.6% or $0.4 million), with improving demand offset by an unfavorable currency translation effect. The Company’s Italian manufacturing operations were up $1.1 million (9.2%) compared to the first half of fiscal 2022, with improving execution and easing supply chain interruptions. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.2 million (7.3%) compared to the prior year first half.
Our distribution segment experienced an increase in sales of $1.1 million (2.2%) in the first half of fiscal 2023 compared to the first half of fiscal 2022. The Company’s Asian distribution operations in Singapore, China and Japan were down 14.8% from the prior year primarily due to a temporary delay in shipments of certain oil and gas related products into China during the second fiscal quarter. The Company’s North America distribution operation saw a strong increase ($2.3 million or 24.7%) on stronger supply of product from the manufacturing operations, as all markets have seen improving demand. The Company’s European distribution operation saw a decrease (4.9%) resulting from lower factory shipments and the unfavorable impact of currency translation. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw continued growth (15.7% increase from the prior year first half), on the continued strengthening of pleasure craft marine market demand in the region.
The gross profit percentage for the first half of fiscal 2023 improved to 25.4%, compared to 25.0% for the same period last year. The prior year first half result reflects the benefit of an Employee Retention Credit (“ERC”, part of various COVID-19 relief programs provided by the U.S. government) of $1.3 million recorded at the Company’s domestic operation, along with the benefit of a NOW subsidy (COVID-19 relief program in the Netherlands) of $0.7 million and the favorable impact of a correction to the Company’s warranty reserve ($0.5 million). Adjusting for these non-recurring items, the gross profit percent for the first half would have been 22.7%. The improvement over the prior year after adjusting for these items is primarily the result of additional volume ($2.9 million), a more favorable mix of product shipments ($2.0 million) and progress on margin improvement actions related to pricing and cost efficiencies ($1.0 million).
For the fiscal 2023 first half, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 26.0%, compared to 26.3% for the fiscal 2022 first half. ME&A expenses increased $2.7 million (9.5%) versus the same period last fiscal year. The increase in ME&A spending for the period was comprised of the incremental impact of prior year COVID subsidies ($1.5 million), increased professional fees ($0.8 million), salaries and benefits ($0.9 million) marketing activities ($0.3 million), spending on travel and entertainment ($0.4 million) and other inflationary impacts ($0.5 million). These increases were partially offset by a foreign currency translation impact of $1.7 million.
The Company incurred restructuring charges during the first half of fiscal 2023 and fiscal 2022, primarily associated with ongoing cost reduction actions at its European operations and actions to adjust the cost structure at the Company’s domestic operation. The Company continues to focus on actively managing its cost structure and reducing fixed costs.
The Company recorded other operating income of $4.2 million in fiscal 2023 associated with the gain on the sale of the Company’s facility in Belgium. The building was sold for approximately $7.2 million.
Interest expense was relatively flat at $1.2down slightly to $0.4 million in the first halfquarter of fiscal 2023,2024, with a slightly higher rate partially offset by a lower average outstanding revolver balance.balance partially offset by a higher interest rate.
Other expenseincome of $1.0$0.1 million for the first half of fiscal 2023quarter was primarily attributable to translation losses related to the Company’s euro denominated liabilities.a pension benefit partially offset by a small currency loss.
The fiscal 20232024 first halfquarter effective tax rate was 175.9%(101.7)% compared to -131.1%26.3% in the prior fiscal year first half.quarter. The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the increase to the effective tax rate.
Financial Condition, Liquidity and Capital Resources
Comparison between December 30, 2022September 29, 2023 and June 30, 20222023
As of December 30, 2022,September 29, 2023, the Company had net working capital of $124.0$117.0 million, which represents an increasea decrease of $0.6$2.6 million, or 0.5%2.2%, from the net working capital of $123.4$119.6 million as of June 30, 2022.2023.
Cash increased by $1.0$7.2 million to $13.5$20.4 million as of December 30, 2022,September 29, 2023, versus $12.5$13.3 million as of June 30, 2022.2023. As of December 30, 2022,September 29, 2023, the majority of the cash is at the Company’s overseas operations in Europe ($4.2 million) and Asia-Pacific ($8.216.0 million).
Trade receivables of $39.4$39.8 million were down $6.0$15.0 million, or approximately 13.3%27.4%, when compared to last fiscal year-end. The impact of foreign currency translation was to increasedecrease accounts receivable by $0.5$0.7 million versus June 30, 2022.2023. As a percent of sales, trade receivables finished at 62.2%62.6% in the secondfirst quarter of fiscal 20232024 compared to 55.1%71.6% for the comparable period in fiscal 2022 and 59.8%65.2% for the fourth quarter of fiscal 2022.2023.
Inventories increaseddecreased by $9.1$5.7 million, or 7.6%4.3%, versus June 30, 20222023 to $136.8$126.2 million. The impact of foreign currency translation was to increasedecrease inventories by $1.5$2.4 million versus June 30, 2022.2023. The remaining increasedecrease was seen primarilya function of the sale of the assets related to the Company’s boat management systems product line ($3.7 million) and a significant reduction at the Company’s Singapore distribution operation ($2.0 million) due to increased shipments of oil and gas transmissions into China. These decreases were partially offset by temporary increases at the Company’s operations in the Netherlands ($4.4 million) and Singapore ($5.6 million). The Singapore increase was the result of a temporary delay in the shipment of certain oil and gas transmission products into China. The Netherlands increase was primarily driven by an imbalance in the supply chain, resulting in excess inventory waiting for missing components to finish assembly, or waiting for customers to accept shipment. There was an offsetting decrease at the North American operations ($3.0 million) resulting from increased focus on purchase quantities and timing of deliveries.Australia. On a consolidated basis, as of December 30, 2022,September 29, 2023, the Company’s backlog of orders to be shipped over the next six months approximates $124.0$122.5 million, compared to $101.2$119.2 million at June 30, 20222023 and $98.9$108.9 million at December 31, 2021.September 30, 2022. As a percentage of six-month backlog, inventory has decreased from 126%111% at June 30, 20222023 to 110%103% at December 30, 2022.September 29, 2023.
Net property, plant and equipment decreased $1.9increased $0.4 million (4.6%(0.7%) to $39.7$52.2 million versus $41.6$51.8 million at June 30, 2022. In the first fiscal quarter of 2023, the Company reclassified approximately $2.8 million of assets to Assets Held for Sale related to a building in Belgium that was then sold during the second fiscal quarter of 2023. The Company had capital spending of $4.7$3.7 million in the first half, as well as a favorable exchange impact ($0.2 million).quarter and new lease obligations of $0.6 million. These increases were partially offset by depreciation of $2.9 million.($1.7 million) and an unfavorable exchange impact. Capital spending occurring in the first halfquarter was primarily related to replacement capital. In total, the Company expects to invest between $9 and $11 million in capital assets in fiscal 2023.2024. The Company continues to review its capital plans based on overall market conditions and availability of capital, and may make changes to its capital plans accordingly. The Company’s capital program is focused on modernizing key core manufacturing, assembly and testing processes and improving efficiencies at its facilities around the world.
Accounts payable as of December 30, 2022September 29, 2023 of $28.9$29.6 million was up $0.4down $6.9 million, or 1.3%18.9%, from June 30, 2022.2023. The impact of foreign currency translation was to increasereduce accounts payable by $0.5$0.7 million versus June 30, 2022.2023. The remaining decrease is primarily related to the timingreduced purchasing activities in light of purchasing activities.stable demand and inventory reduction efforts.
Total borrowings and long-term debt as of December 30, 2022 decreased $4.6September 29, 2023 increased $3.0 million to $31.9$21.7 million versus $36.5$18.6 million at June 30, 2022.2023. During the first half,quarter, the Company reported negativepositive free cash flow of $4.7$6.1 million (defined as operating cash flow less acquisitions of fixed assets), driven by positive operating results and working capital performance, partially offset by the payment of a bonus accrual and the first half increase to inventory. However, the Company generated $7.2 million in cash through the sale of the Belgian facility.capital spending. The Company ended the second quarter with total debt, net of cash, of $18.4$1.2 million, compared to $24.0$5.4 million at June 30, 2022,2023, for a net improvement of $5.6$4.2 million.
Total equity increased $2.6decreased $5.5 million, or 2.0%3.8%, to $133.8$139.6 million as of December 30, 2022.September 29, 2023. The net loss during the first halfquarter decreased equity by $0.9$1.1 million, while a favorablealong with an unfavorable foreign currency translation increased equity by $2.1of $3.0 million. The net change in common stock and treasury stock resulting from the accounting for stock-based compensation increaseddecreased equity by $1.1$1.3 million. The net remaining increasedecrease in equity of $0.3$0.1 million primarily represents the amortization of net actuarial loss and prior service cost on the Company’s defined benefit pension plans, along with the unrealized gain on cash flow hedges.
The Company'sOn June 29, 2018, credit agreementthe Company entered into a Credit Agreement (the "Credit Agreement"“Credit Agreement”) with BMO Harris Bank N.A. ("BMO"(“BMO”), as amended through that provided for the Ninth Amendment dated June 30, 2022, remains in effect,assignment and there have been no material changes inassumption of the termspreviously existing loans between the Company and Bank of Montreal (the “2016 Credit Agreement”) and subsequent amendments into a term loan (the “Term Loan”) and revolving credit loans (each a “Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan, the “Loans”). Pursuant to the Credit Agreement, sinceBMO agreed to make the endTerm 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 Company's most recentTerm Loan to March 4, 2026, and require the Company to make principal installment payments on the Term Loan of $0.5 million per quarter. In addition, under subsequent amendments to the Credit Agreement, BMO’s Revolving Credit Commitment is currently $40.0 million. The Credit Agreement also allows the Company to obtain Letters of Credit from BMO, which if drawn upon by the beneficiary thereof and paid by BMO, would become Revolving Loans. Under the Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $3.0 million in any fiscal year. AsThe term of December 30, 2022, the Company's borrowing capacity on the Revolving Loans under the Credit agreement was $39,476,000 and the Company had approximately $20,096,000 of available borrowings. In addition toAgreement currently runs through June 30, 2025.
Under the Credit Agreement as amended, interest rates are based on either the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”). Loans are designated either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,” which accrue interest at the EURIBO Rate plus an Applicable Margin. Amounts drawn on a Letter of Credit that are not timely reimbursed to the Bank bear interest at a Base Rate plus an Applicable Margin. The Company also pays a commitment fee on the average daily Unused Revolving Credit Commitment equal to an Applicable Margin. Currently, the Applicable Margins are between 1.25% and 2.75% for Revolving Loans and Letters of Credit; 1.375% and 2.875% for Term Loans; and .10% and .15% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).
The Credit Agreement, as amended, requires the Company to meet certain financial covenants. Specifically, the Company’s Total Funded Debt to EBITDA ratio may not exceed 3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00. The Company’s Tangible Net Worth may not be less than $100 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.
Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property, including accounts receivable, inventory, machinery and equipment, and intellectual property. The Company has established unsecured linesalso pledged 100% of creditits equity interests in certain domestic subsidiaries and 65% of its equity interests in certain foreign subsidiaries. The Company also entered into a Collateral Assignment of Rights under Purchase Agreement for its acquisition of Veth Propulsion. To effect these security interests, the Company entered into various amendment and assignment agreements that used from timeconsent to timethe 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 secure certain performance obligationsBMO a Negative Pledge Agreement that it has previously entered into with Bank of Montreal, pursuant to which it agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Company. As of December 30, 2022,Credit Agreement and the Company also had cash of $13.5 million, primarily at its overseas operations. These funds, with some restrictions and tax implications, are available for repatriation as deemed necessary by the Company.Negative Pledge Agreement.
The Company expects capital expenditureshas 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 approximately $9 - $11 million in fiscal 2023. These anticipated expenditures reflect the Company's plans to invest in modern equipment to drive efficiencies, quality improvements,immediately due and cost reductions.
The Company's significant contractual obligations as of December 30, 2022 are disclosed in Note N "Lease Liabilities" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There are no material undisclosed guarantees. As of December 30, 2022,payable; and (3) demand the Company had no additional material purchase obligations other than those createdto immediately Cash Collateralize L/C Obligations in an amount equal to 105% of the ordinary courseaggregate L/C Obligations or a greater amount if BMO determines a greater amount is necessary. If such Event of business relatedDefault is due to inventory and property, plant and equipment, which generally have terms of less than 90 days. The Company also has long-term obligations relatedthe Company’s bankruptcy, the Bank may take the three actions listed above without notice to its postretirement plans which are discussed in detail in Note G "Pension and Other Postretirement Benefit Plans in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q. Postretirement medical claims are paid by the Company as they are submitted. In fiscal 2023, the Company expects to contribute $0.8 million to postretirement benefits based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured. In fiscal 2023, the Company expects to contribute $0.6 million to its defined benefit pension plans, the minimum contribution required. the Company does not have any material off-balance sheet arrangements.Company.
Management believes that available cash, the Credit Agreement, the unsecured lines of credit, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company's cash and capital requirements for the foreseeable future.
New Accounting Releases
See Note A, Basis of Presentation, to the condensed consolidated financial statements for a discussion of recently issued accounting standards.
Critical Accounting Policies
The preparation of this Quarterly Report requires management’s judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
The Company’s critical accounting policies are described in Item 7 of the Company’s Annual Report filed on Form 10-K for June 30, 2022.2023. There have been no significant changes to those accounting policies subsequent to June 30, 2022.2023.
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
The Company is electing not to provide this disclosure due to its status as a Smaller Reporting Company.
Item 4. | Controls and Procedures |
| (a) Evaluation of Disclosure Controls and Procedures |
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.
| (b) Changes in Internal Control Over Financial Reporting |
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). During the most recent fiscal quarter, no changes were made which have materially affected, or which are reasonably likely to materially affect, our internal control over financial reporting.
Part II. | OTHER INFORMATION |
Item 1. | Legal Proceedings |
The Company is a defendant in several product liability or related claims which are considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition of the Company.
Item 1A. | Risk Factors |
There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 20222023 Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | Unregistered Sales of Equity Securities |
There were no securities of the Company sold by the Company during the quarter ended December 30, 2022,September 29, 2023, which were not registered under the Securities Act of 1933, in reliance upon an exemption from registration provided by Section 4 (2) of the Act.
(b) | Use of Proceeds |
Not applicable.
(c) | Issuer Purchases of Equity Securities |
Issuer Purchases of Equity Securities
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
October 1 – October 28, 2022
| 0 | NA | 0 | 315,000 |
October 29 – November 25, 2022
| 22,024 | NA | 0 | 315,000 |
November 26 – December 30, 2022
| 0 | NA | 0 | 315,000 |
Total
| 22,024 | NA | 0 | 315,000 |
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 |
July 1, – July 28, 2023 | 0 | NA | 0 | 315,000 |
July 29 – August 25, 2023 | 138,141 | NA | 0 | 315,000 |
August 26 – September 29, 2023 | 0 | NA | 0 | 315,000 |
Total | 138,141 | 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 restrictedperformance stock units issued under the Twin Disc, Incorporated 2021 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 30, 2022,September 29, 2023, 315,000 may yet be purchased under these authorizations. The Company did not purchase any shares of its common stock pursuant to these authorizations during the quarter ended December 30, 2022.September 29, 2023.
Under itsThe discussion of limitations upon the payment of dividends as a result of the Credit Agreement withbetween the Company and BMO Harris Bank, N.A., as discussed in Part I, Item 2, "Management's Discussion and Analysis " under the Company may not pay cash dividends on its common stock in excess of $3 million in any fiscal year.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: | /s/ JEFFREY S. KNUTSON |
Jeffrey S. Knutson | |
Vice President – Finance, Chief Financial Officer, | |
Treasurer and Secretary | |
Chief Accounting Officer |