UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

 

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

 

For the quarter ended March 31,December 29, 2023

 

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

 

Commission File Number 1-7635

 

TWIN DISC, INCORPORATED

(Exact name of registrant as specified in its charter)

 

Wisconsin

39-0667110

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification No.)

  

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)

 

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 ☑

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 May 1, 2023,February 2, 2024, the registrant had 13,815,70713,995,627 shares of its common stock outstanding.

 

 
 

   

Part I.               FINANCIAL INFORMATION

Item 1.  Financial Statements

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

 

March 31, 2023

  

June 30, 2022

 
  

December 29, 2023

  

June 30, 2023

 

ASSETS

     

Current assets:

     

Cash

 $14,024  $12,521  $21,021  $13,263 

Trade accounts receivable, net

  44,438   45,452  41,428  54,760 

Inventories

  136,153   127,109  131,768  131,930 

Assets held for sale

  2,968   2,968  2,968  2,968 

Prepaid expenses

  10,025   7,756  10,157  8,459 

Other

  8,341   8,646   9,235   8,326 

Total current assets

  215,949   204,452  216,577  219,706 
  

Property, plant and equipment, net

  40,700   41,615  40,334  38,650 

Right-of-use assets operating leases

  12,415   12,685  12,017  13,133 

Intangible assets, net

  11,239   13,010  11,146  12,637 

Deferred income taxes

  2,542   2,178  2,371  2,244 

Other assets

  2,668   2,583   2,745   2,811 
  

Total assets

 $285,513  $276,523  $285,190  $289,181 
  

LIABILITIES AND EQUITY

     

Current liabilities:

     

Current maturities of long-term debt

 $2,000  $2,000  $2,000  $2,010 

Accounts payable

  29,726   28,536  32,611  36,499 

Accrued liabilities

  56,886   50,542   62,929   61,586 

Total current liabilities

  88,612   81,078  97,540  100,095 
  

Long-term debt, less current maturities

  29,276   34,543 

Long-term debt

 15,698  16,617 

Lease obligations

  9,897   10,575  9,988  10,811 

Accrued retirement benefits

  10,315   9,974  6,975  7,608 

Deferred income taxes

  3,391   3,802  3,162  3,280 

Other long-term liabilities

  5,403   5,363   5,917   5,253 
 

Total liabilities

  146,894   145,335  139,280  143,664 
  

Commitments and contingencies (Note D)

          
 

Equity:

    

Twin Disc shareholders' equity:

     

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

 -  -  -  - 

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

  42,145   42,551  39,661  42,855 

Retained earnings

  136,815   135,031  119,496  120,299 

Accumulated other comprehensive loss

  (28,503)  (32,086)  (4,059)  (5,570)
  150,457   145,496  155,098  157,584 

Less treasury stock, at cost (817,095 and 960,459 shares, respectively)

  12,527   14,720 

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

  9,802   12,491 
  

Total Twin Disc shareholders' equity

  137,930   130,776  145,296  145,093 
  

Noncontrolling interest

  689   412   614   424 
 

Total equity

  138,619   131,188  145,910  145,517 
  

Total liabilities and equity

 $285,513  $276,523  $285,190  $289,181 

 

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

 


 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

 

For the Quarter Ended

 

For the Two Quarters Ended

 
 

For the Quarter Ended

 

For the Three Quarters Ended

      

As Adjusted

     

As Adjusted

 
 

March 31, 2023

  

March 25, 2022

  

March 31, 2023

  

March 25, 2022

  

December 29, 2023

  

December 30, 2022

  

December 29, 2023

  

December 30, 2022

 
          

Net sales

 $73,772  $59,289  $193,036  $166,939  $72,994  $63,351  $136,547  $119,264 

Cost of goods sold

  54,507   41,598   143,451   122,319 

Cost of goods sold (COGS)

 52,338  46,328  96,156  88,944 

COGS - Sale of boat management system product line and related inventory

  -   -   3,099   - 

Gross profit

  19,265   17,691   49,585   44,620  20,656  17,023  37,292  30,320 
          

Marketing, engineering and administrative expenses

  14,626   14,396   45,688   42,753  17,149  15,983  34,068  31,063 

Restructuring expenses

  33   303   208   1,542  69  164  68  174 

Other operating income

  1   (63)  (4,149)  (2,957)  -   (4,150)  -   (4,150)

Income from operations

  4,605   3,055   7,838   3,282  3,438  5,026  3,156  3,233 
          

Interest expense

  522   490   1,682   1,594  392  594  786  1,160 

Other expense (income), net

  785   (498)  1,834   (608)  449   182   310   (164)
  1,307   (8)  3,516   986  841  776  1,096  996 
          

Income before income taxes and noncontrolling interest

  3,298   3,063   4,322   2,296  2,597  4,250  2,060  2,237 

Income tax expense

  548   753   2,349   1,757   1,662   2,489   2,208   1,801 
          

Net income

  2,750   2,310   1,973   539 

Net income (loss)

 935  1,761  (148) 436 

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

  (76)  (79)  (188)  (223)  (5)  (15)  (95)  (112)
          

Net income attributable to Twin Disc

 $2,674  $2,231  $1,785  $316 

Net income (loss) attributable to Twin Disc

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

Income per share data:

        

Basic income per share attributable to Twin Disc common shareholders

 $0.20  $0.17  $0.13  $0.02 

Diluted income per share attributable to Twin Disc common shareholders

 $0.20  $0.17  $0.13  $0.02 

Dividends per share

 $0.04  $-  $0.04  $- 
         

Income (loss) per share data:

         

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

 $0.07  $0.13  $(0.02) $0.02 

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

 $0.07  $0.13  $(0.02) $0.02 
          

Weighted average shares outstanding data:

                 

Basic shares outstanding

  13,504   13,397   13,455   13,339  13,718  13,460  13,629  13,434 

Diluted shares outstanding

  13,662   13,457   13,608   13,373  13,923  13,699  13,629  13,649 
          

Comprehensive income (loss)

                 

Net income

 $2,750  $2,310  $1,973  $539 

Benefit plan adjustments, net of income taxes of $1, $4, $5 and $4, respectively

  578   505   581   1,512 

Net income (loss)

 $935  $1,761  $(148) $436 

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

 (108) (1,122) (279) (1,211)

Foreign currency translation adjustment

  1,014   (2,721)  3,117   (6,359) 5,190  8,392  2,154  2,102 

Unrealized (loss) gain on cash flow hedge, net of income taxes of $0, $0, $0 and $0, respectively

  (224)  810   (26)  1,748 

Comprehensive income (loss)

  4,118   904   5,645   (2,560)

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

  (485)  (595)  (269)  198 

Comprehensive income

 5,532  8,436  1,458  1,525 

Less: Comprehensive income attributable to noncontrolling interest

  67   38   277   235   40   74   190   210 
          

Comprehensive income (loss) attributable to Twin Disc

 $4,185  $942  $5,922  $(2,325)

Comprehensive income attributable to Twin Disc

 $5,492  $8,362  $1,268  $1,315 

 

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

 


 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 

For the Three Quarters Ended

  

For the Two Quarters Ended

 
 

March 31, 2023

  

March 25, 2022

      

As Adjusted

 
  

December 29,

2023

  

December 30,

2022

 

Cash flows from operating activities:

    

Net income

 $1,973  $539 

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

    
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net (loss) income

 $(148) $436 

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

 

Depreciation and amortization

  6,936   7,317  5,023  4,266 

Gain on sale of assets

  (4,237)  (2,939) (42) (4,203)

Restructuring expenses

  (54)  (487)

Loss on sale of boat management product line and related inventory

 3,099  - 

Provision for deferred income taxes

  (1,462)  (1,383) 280  (1,105)

Stock compensation expense and other non-cash changes, net

  2,355   2,642  1,413  1,565 

Net change in operating assets and liabilities

  1,348   (12,912)  6,422   (927)
  

Net cash provided (used) by operating activities

  6,859   (7,223)

Net cash provided by operating activities

  16,047   32 
  

Cash flows from investing activities:

    

Acquisitions of property, plant and equipment

  (6,783)  (2,371)

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Acquisition of property, plant, and equipment

 (5,419) (4,734)

Proceeds from sale of fixed assets

  7,177   9,152  -  7,152 

Proceeds on note receivable

  -   500 

Other, net

  199   465   (252)  385 
  

Net cash provided by investing activities

  593   7,746 

Net cash (used) provided by investing activities

  (5,671)  2,803 
  

Cash flows from financing activities:

    

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings under revolving loan arrangements

  65,862   78,142  50,632  42,898 

Repayments of revolving loan arrangements

  (69,823)  (73,192) (50,632) (46,628)

Repayments of other long term debt

  (1,534)  (2,063)

Repayments of other long-term debt

 (1,010) (707)

Dividends paid to shareholders

 (560) - 

Payments of finance lease obligations

  (231)  (726) (471) (132)

Payments of withholding taxes on stock compensation

  (463)  (487)  (1,772)  (463)
  

Net cash (used) provided by financing activities

  (6,189)  1,674 

Net cash used by financing activities

  (3,813)  (5,032)
  

Effect of exchange rate changes on cash

  240   (1,712)  1,195   3,204 
  

Net change in cash

  1,503   485  7,758  1,007 
  

Cash:

     

Beginning of period

  12,521   12,340   13,263   12,521 
  

End of period

 $14,024  $12,825  $21,021  $13,528 

 

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 did not change. With respect to the recognition of actuarial gains and losses, while the historical principle was acceptable, the Company believes the Accounting change is preferable as it better aligns with fair value principles by recognizing the effects of economic and interest rate changes in plan assets and liabilities in the year in which the gains and losses are incurred to the degree such accumulated gains and losses exceed the new 20% threshold in addition to amortizing the amounts between the 10% and 20% thresholds over time. The Accounting change has been applied retrospectively to prior years and amounts presented.

See Notes G, K, M and P for further information regarding the impact of the Accounting change on the Company’s current and prior consolidated financial statements.

Recently Adopted Accounting Standards

In March 2020 and January 2021, the FASB issued guidance (ASU 2020-04 and ASU 2021-01, respectively), intended to provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments in this guidance are effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-10 (collectively ASC 326). ASC 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, and for smaller reporting companies for fiscal years beginning after December 15, 2022 (the Company’s fiscal 2024), with early adoption permitted for certain amendments. ASC 326 must be adopted by applying a cumulative effect adjustment to retained earnings. The 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.

5

Special Note Regarding Smaller Reporting Company Status

 

Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller reporting company and accordingly, it has scaled some of its disclosures of financial and non-financial information in this quarterly report. The Company will continue to determine whether to provide additional scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.

   


 

B.

Inventories

 

The major classes of inventories were as follows:

 

 

March 31, 2023

  

June 30, 2022

  

December 29, 2023

  

June 30, 2023

 

Inventories:

  

Finished parts

 $68,602  $65,789  $65,089  $66,956 

Work in process

 26,320  19,801  22,239  23,374 

Raw materials

  41,231   41,519   44,440   41,600 
 $136,153  $127,109  $131,768  $131,930 

In the first quarter of fiscal year 2024, the Company entered into an agreement to sell most of its boat management system product line located at one of its subsidiaries in Italy. The sale amount was below cost and resulted in the Company recognizing an inventory write-down of $2.1 million. The Company also evaluated its other boat management system inventory, not associated with the sale. This evaluation resulted in the Company recognizing an additional inventory write-down of $1.6 million for inventory located in the U.S. These write-downs were partially offset by certain liabilities transferred to the buyer at the time of the sale. The sale was completed in the second quarter of fiscal year 2024.

   

 

C.

Warranty

 

The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers. However, its warranty obligation is affected by product failure rates, the number of units affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. When evaluating the adequacy of the reserve for warranty costs, management takes into consideration the term of the warranty coverage, historical claim rates and costs of repair, knowledge of the type and volume of new products and economic trends. While we believe the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable in the future could differ materially from what actually transpires. The following is a listing of the activity in the warranty reserve for the quarters ended March 31,December 29, 2023 and March 25,December 30, 2022:

 

 

For the Quarter Ended

 

For the Three Quarters Ended

  

For the Quarter Ended

 

For the Two Quarters Ended

 
 

March 31, 2023

  

March 25, 2022

  

March 31, 2023

  

March 25, 2022

  

December 29, 2023

  

December 30, 2022

  

December 29, 2023

  

December 30, 2022

 

Reserve balance, beginning of period

 $4,145  $3,483  $3,329  $4,369  $4,160  $3,804  $3,476  $3,329 

Current period expense and adjustments

 371  339  2,052  658  1,208  770  2,724  1,678 

Payments or credits to customers

 (510) (518) (1,381) (1,688) (898) (503) (1,718) (869)

Translation

  12   (27)  18   (62)  18   74   6   7 

Reserve balance, end of period

 $4,018  $3,277  $4,018  $3,277  $4,488  $4,145  $4,488  $4,145 

 

The current portion of the warranty accrual ($3,5033,549 and $2,757$3,552 as of March 31,December 29, 2023 and March 25,December 30, 2022, respectively) is reflected in accrued liabilities, while the long-term portion ($515939 and $520$593 as of March 31,December 29, 2023 and March 25,December 30, 2022, respectively) is included in other long-term liabilities on the consolidated balance sheets.

 

6
 

D.

Contingencies

 

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

   

 

E.

Business Segments

 

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

 

The Company has two reportable segments: manufacturing and distribution.  These segment structures reflect the way management makes operating decisions and manages the growth and profitability of the business, and itbusiness. 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.

 

6

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

 

 

For the Quarter Ended

 

For the Three Quarters Ended

  

For the Quarter Ended

 

For the Two Quarters Ended

 
 

March 31, 2023

 

March 25, 2022

 

March 31, 2023

 

March 25, 2022

  

December 29, 2023

  

December 30, 2022

  

December 29, 2023

  

December 30, 2022

 

Net sales

          

Manufacturing segment sales

 $63,932  $56,403  $169,607  $147,296  $58,368  $56,678  $112,906  $105,675 

Distribution segment sales

 33,839  23,660  83,732  72,485  37,242  25,584  70,095  49,892 

Inter/Intra segment elimination – manufacturing

 (18,531) (16,672) (46,373) (40,815) (18,795) (14,198) (38,979) (27,842)

Inter/Intra segment elimination – distribution

  (5,468) (4,102) (13,930) (12,027)  (3,821)  (4,713)  (7,475)  (8,461)
 $73,772  $59,289  $193,036  $166,939  $72,994  $63,351  $136,547  $119,264 

Net income attributable to Twin Disc

 

Net income (loss) attributable to Twin Disc

         

Manufacturing segment net income

 $5,873  $6,000  $11,500  $9,230  $2,078  $4,439  $3,636  $6,841 

Distribution segment net income

 2,053  1,415  4,412  3,396  3,173  1,403  4,179  2,359 

Corporate and eliminations

  (5,252) (5,184) (14,127) (12,310)  (4,321)  (4,096)  (8,058)  (8,876)
 $2,674  $2,231  $1,785  $316  $930  $1,746  $(243) $324 

 

Assets

 

March 31, 2023

 

June 30, 2022

  

December 29, 2023

  

June 30, 2023

 

Manufacturing segment assets

 $376,722  $364,174  $380,283  $381,668 

Distribution segment assets

 60,394  50,958  70,391  69,213 

Corporate assets and elimination of intercompany assets

  (151,603) (138,609)  (165,484)  (161,700)
 $285,513  $276,523  $285,190  $289,181 

 

Disaggregated revenue:

 

The following table presents details deemed most relevant to the users of the financial statements for the quarters and three quarters ended March 31,December 29, 2023 and March 25,December 30, 2022.

7

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

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $5,704  $1,557  $(730) $6,531 

Land-based transmissions

  15,003   7,953   (7,093) $15,863 

Marine and propulsion systems

  37,661   24,058   (14,773) $46,946 

Other

  -   3,674   (20) $3,654 

Total

 $58,368  $37,242  $(22,616) $72,994 

 

Net sales by product group for the quarter ended March 31,December 30, 2022 is summarized as follows:

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $6,963  $1,726  $(1,177) $7,512 

Land-based transmissions

  15,256   3,445   (4,030) $14,671 

Marine and propulsion systems

  34,262   15,427   (13,223) $36,466 

Other

  197   4,986   (481) $4,702 

Total

 $56,678  $25,584  $(18,911) $63,351 

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

 

     

Elimination of

        

Elimination of

   
 

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $7,076  $1,548  $(1,321) $7,303  $10,994  $2,586  $(1,364) $12,216 

Land-based transmissions

 16,785  8,692  (5,902) 19,575  29,684  20,623  (15,867) $34,440 

Marine and propulsion systems

 40,492  19,867  (16,505) 43,854  72,228  40,378  (29,197) $83,409 

Other

  (421)  3,732   (271)  3,040   (0)  6,508   (26) $6,482 

Total

 $63,932  $33,839  $(23,999) $73,772  $112,906  $70,095  $(46,454) $136,547 

 

Net salesSales by product group for the quartertwo quarters ended March 25,December 30, 2022 is summarized as follows:

 

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $7,947  $1,449  $(935) $8,461 

Land-based transmissions

  17,448   7,173   (8,535)  16,086 

Marine and propulsion systems

  30,820   13,108   (10,766)  33,162 

Other

  188   1,930   (538)  1,580 

Total

 $56,403  $23,660  $(20,774) $59,289 

Net sales by product group for the three quarters ended March 31, 2023 is summarized as follows:

          

Elimination of

     
  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $20,732  $4,322  $(3,208) $21,846 

Land-based transmissions

  48,329   16,743   (14,888)  50,184 

Marine and propulsion systems

  100,546   49,838   (40,751)  109,633 

Other

  -   12,829   (1,456)  11,373 

Total

 $169,607  $83,732  $(60,303) $193,036 

7

Net sales by product group for the three quarters ended March 25, 2022 is summarized as follows:

     

Elimination of

        

Elimination of

   
 

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

  

Manufacturing

  

Distribution

  

Intercompany Sales

  

Total

 

Industrial

 $20,939  $4,377  $(3,016) $22,300  $13,656  $2,774  $(1,886) $14,544 

Land-based transmissions

 41,158  18,775  (18,287) 41,646  31,543  8,051  (8,985) $30,609 

Marine and propulsion systems

 84,968  41,330  (30,983) 95,315  60,077  29,971  (24,246) $65,802 

Other

  231   8,003   (556)  7,678   399   9,096   (1,186) $8,309 

Total

 $147,296  $72,485  $(52,842) $166,939  $105,675  $49,892  $(36,303) $119,264 

    

 

F.

Stock-Based Compensation

 

Performance Stock Awards (“PSA”)

 

During the first threetwo quarters of fiscal 20232024 and 2022,2023, the Company granted a target number of 118.1119.3 and 103.6118.1 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2024 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2026. These PSAs are subject to adjustment if the Company’s return on invested capital and cumulative EBITDA falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 238.7.

The fiscal 2023 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2025. These PSAs are subject to adjustment if the Company’s return on invested capital and cumulative EBITDA falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 236.3. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.236.2.

 

The PSAs granted in fiscal

20228 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 145.0. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

There were 437.9335.2 and 440.9438.9 unvested PSAs outstanding at March 31,December 29, 2023 and March 25,December 30, 2022, respectively. The fair value of the PSAs (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. Compensation expense of $307$261 and $237$366 was recognized for the quarters ended March 31,December 29, 2023 and March 25,December 30, 2022, respectively, related to PSAs. Compensation expense of $903$314 and $672$596 was recognized for the threetwo quarters ended March 31,December 29, 2023 and March 25,December 30, 2022, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at March 31,December 29, 2023 was $8.37.$11.48. At March 31,December 29, 2023, the Company had $1,396$1,977 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 March 31,December 29, 2023 and March 25,December 30, 2022 was $0.

Performance Stock Unit Awards (“PSUA”)

The PSUAs entitle an individual to shares of common stock of the Company or cash in lieu of shares of Company common stock if specific terms and conditions or restrictions are met through a specified date. During the firsttwo quarters of fiscal 2024 and 2023, the Company granted a target number of 10.5 and 0 PSUAs, respectively, to various individuals in the Company. The fiscal 2024 PSUAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSUA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2026. These PSUAs are subject to adjustment if the Company’s return on invested capital and cumulative EBITDA falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 20.9.

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

 

Restricted Stock Awards (“RS”)

 

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 threetwo quarters of fiscal 20232024 and 2022,2023, the Company granted 180.0115.7 and 51.7177.7 service based restricted shares, respectively, to employees and non-employee directors. There were 308.6251.3 and 268.5309.2 unvested shares outstanding at March 31,December 29, 2023 and March 25,December 30, 2022, respectively. A total of 02.4 and 29.80 shares of restricted stock were forfeited during the threetwo quarters ended March 31,December 29, 2023 and March 25,December 30, 2022, respectively. Compensation expense of $313$210 and $294$334 was recognized for the quarters ended March 31,December 29, 2023 and March 25,December 30, 2022, respectively. Compensation expense of $1,007$523 and $913$694 was recognized for the threetwo quarters ended March 31,December 29, 2023 and March 25,December 30, 2022, respectively. The total fair value of restricted stock grants vested as of March 31,December 29, 2023 and March 25,December 30, 2022 was $1,699$2,206 and $1,695,$1,669, respectively. As of March 31,December 29, 2023, the Company had $1,359$1,804 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

 

8

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 threetwo quarters of fiscal 20232024 and 2022,2023, the Company granted 72.47.1 and 67.472.4 of employment based RSUs, respectively. There were 130.2135.0 and 67.4130.9 unvested RSUs outstanding at March 31,December 29, 2023 and March 25,December 30, 2022, respectively. Compensation expense of $116$126 and $89$132 was recognized for the quarters ended March 31,December 29, 2023 and March 25,December 30, 2022, respectively. Compensation expense of $340$247 and $255$224 was recognized for the threetwo quarters ended March 31,December 29, 2023 and March 25,December 30, 2022, respectively. The total fair value of restricted stock units vested as of March 31,December 29, 2023 and March 25,December 30, 2022 was $40$25 and $475,$40, respectively. The weighted average grant date fair value of the unvested awards at March 31,December 29, 2023 was $10.92.$10.97. As of March 31,December 29, 2023, the Company had $825$537 of unrecognized compensation expense related to restricted stock which will be recognized over the next twothree years.

 

9
 

G.

Pension and Other Postretirement Benefit Plans

 

The Company has non-contributory, qualified defined benefit plans covering substantially all domestic employees hired prior to October 1, 2003 and certain foreign employees. Additionally, the Company provides healthcare and life insurance benefits for certain domestic retirees.

As discussed in Note A, during the fourth quarter of fiscal year 2023, the Company changed its accounting method related to the recognition of actuarial gains and losses for its pension and postretirement benefit plans. Under the new method, actuarial gains and losses are recognized in net periodic benefit costs upon annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement. These changes have been applied retrospectively to prior years presented below. See Notes A, K, M, and P for further information regarding the impact of the change in accounting principle on the Company’s consolidated financial statements.

The components of the net periodic benefit cost for the defined benefit pension plans and the other postretirement benefit plan are as follows:

 

 

For the Quarter Ended

 

For the Three Quarters Ended

  

For the Quarter Ended

 

For the Two Quarters Ended

 
 

March 31, 2023

 

March 25, 2022

 

March 31, 2023

 

March 25, 2022

  

December 29, 2023

  

December 30, 2022

  

December 29, 2023

  

December 30, 2022

 

Pension Benefits:

          

Service cost

 $106  $137  $309  $406  $94  $102  $188  $203 

Prior service cost

 8  10  25  30  -  8  -  17 

Interest cost

 912  709  2,648  2,055  896  868  1,792  1,736 

Expected return on plan assets

 (1,053) (1,258) (3,173) (3,773) (1,048) (1,060) (2,096) (2,120)

Amortization of transition obligation

 9  9  27  28  10  9  19  18 

Amortization of prior service cost

 9  (4) 27  (12) 9  9  17  18 

Amortization of actuarial net loss

  639  562  1,873  1,687   16  617   31  1,235 

Net periodic benefit cost

 $630  $165  $1,736  $421 

Net periodic benefit (gain) cost

 $(23) $553  $(49) $1,107 
          

Postretirement Benefits:

          

Service cost

 $2  $4  $7  $11  $2  $2  $4  $5 

Interest cost

 53  35  159  105  48  53  95  106 

Amortization of prior service cost

 (69) (69) (206) (206) (22) (69) (44) (137)

Amortization of acturial net loss

  (10) -  (29) - 

Amortization of actuarial net loss

  (155) (10)  (310) (19)

Net periodic benefit gain

 $(24) $(30) $(69) $(90) $(127) $(24) $(255) $(45)

 

The service cost component is included in cost of goods sold and marketing, engineering, and administrative expenses. All other components of net periodic benefit cost are included in other expense (income), net.

 

The Company expects to contribute approximately $700$675 to its pension plans in fiscal 2023.2024. For theAs of three quarters ended March 31,December 29, 2023, the amount of $666$403 in contributions to the pension plans werehave been made.

 

The Company had changeshas reclassified ($108) (net of $13 in taxes) of benefit plan adjustments totaling $578 (net of $1 in taxes) from accumulated other comprehensive loss during the quarter ended March 31,December 29, 2023, and $505($1,122) (net of $4$13 in taxes) during the quarter ended March 25,December 30, 2022. These changesreclassifications are included in the computation of net periodic benefit (gain) cost. The Company had changeshas reclassified ($279) (net of $8 in taxes) of benefit plan adjustments totaling $581 (net of $5 in taxes) from accumulated other comprehensive loss during the threetwo quarters ended March 31,December 29, 2023, and $1,512($1,211) (net of $4 in taxes) during the threetwo quarters ended March 25,December 30, 2022. These changesreclassifications are included in the computation of net periodic benefit (gain) 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.

 

910
 
 

For the ninesix months ended March 31,December 29, 2023 and March 25,December 30, 2022 the Company’s effective income tax rate was 54.3%107.2% and 76.5%80.5% respectively. Foreign incomeearnings were $9,282 and $5,094 respectively, with a related tax expense wasof $2,199 and $1,773, respectively. Domestic losses were ($7,222) and ($2,857), respectively, with a related tax expense of $9 and $28, respectively. Due to the full US valuation allowance currently in place, no tax benefit can be recognized although there continueson the domestic losses. This inability to be negativerecognize a tax benefit for domestic earnings. The mix of foreign earnings by jurisdictionpurposes resulted in a decrease in the effectiveconsolidated tax rateexpense of 22.2%.

In the post pandemic era, the Company continues to monitor for any revisions enacted under the Tax Cuts$2,208 and Job Act (TCJA), Coronavirus Aid, Relief$1,801, respectively, on year-to-date income of $2,061 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.$2,237, respectively.

 

The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. In addition, all other available positive and negative evidence is taken into consideration, including all new impacts of tax reform. The Company has evaluated the realizability of the net deferred tax assets related to its foreign operations and based on this evaluation management has concluded that no valuation allowances are required. 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 $810$834 of unrecognized tax benefits, which include $53 of relatedincluding interest and penalties, as of March 31,December 29, 2023, which, if recognized, would favorably impact the effective tax rate. There were no significant changes in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quartertwo quarters ended March 31,December 29, 2023. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going activity.

 

Annually, the Company files income tax returns in various taxing jurisdictions inside and outside the United States. In general, the tax years that remain subject to examination in foreign jurisdictions are 20142018 through 2021.2023 The tax year open to examfor our major operations in theBelgium, Japan, Netherlands, is 2018.Singapore and Australia. The tax years open to examination in the U.S. are for years subsequent to fiscal 2018. It is reasonably possible that other audit cycles will be completed during fiscal 2023.2024.

    

10
 

I.

Intangible Assets

 

As of March 31,December 29, 2023, the following acquired intangible assets have definite useful lives and are subject to amortization:

 

 

Net Book Value Rollforward

 

Net Book Value By Asset Type

  

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

 53  -  53  -  -  -  53  73    -  73  -  -  -  73 

Reduction

 (10,506) 10,506  -           (631)   631  -  -  -  -  - 

Amortization

 -  (2,140) (2,140) (993) (880) (39) (228) -    (1,636) (1,636) (622) (601) (39) (374)

Translation adjustment

  316  -  316   214  365  (265) 2   72    -  72   62  (173) 195  (12)

Balance at March 31, 2023

 $29,708  $(18,469) $11,239  $6,857  $2,723  $668  $991 

Balance at December 29, 2023

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

 

Other intangibles consist mainly of computer software. Amortization is recorded on the basis of straight-line or accelerated, as appropriate, over the estimated useful lives of the assets.

 

The weighted average remaining useful life of the intangible assets included in the table above is approximately 75 years.

 

Intangible amortization expense was $738$817 and $785$704 for the quarters ended March 31,December 29, 2023, and March 25,December 30, 2022, respectively. Intangible amortization expense was $2,140$1,636 and $2,415$1,402 for the threetwo quarters ended March 31,December 29, 2023, and March 25,December 30, 2022, 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

 $742 

2024

 2,838  $1,827 

2025

 2,681  3,316 

2026

 1,757  2,310 

2027

 1,096  1,553 

2028

 1,066  1,405 

2029

 735 

Thereafter

 1,059  0 

 

11
 

J.

Long-term Debt

 

Long-term debt at March 31,December 29, 2023 and June 30, 20222023 consisted of the following:

 

 

March 31, 2023

  

June 30, 2022

  

December 29, 2023

  

June 30, 2023

 

Credit Agreement Debt

  

Revolving loans (expire June 2025)

 $19,240  $22,968  $7,175  $7,094 

Term loan (due March 2026)

 12,000  13,500  10,500  11,500 

Other

  36   75   23   33 

Subtotal

 31,276  36,543  17,698  18,627 

Less: current maturities

  (2,000)  (2,000)  (2,000)  (2,010)

Total long-term debt

 $29,276  $34,543  $15,698  $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.

Bank of Montreal (the 11“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, 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.

12

The Company has also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security interest in deposit accounts the Company maintains with the Bank. The Bank may not provide a notice of exclusive control of a deposit account (thereby obtaining exclusive control of the account) prior to the occurrence or existence of a Default or an Event of Default under the Credit Agreement or otherwise upon the occurrence or existence of an event or condition that would, but for the passage of time or the giving of notice, constitute a Default or an Event of Default under the Credit Agreement.

Upon the occurrence of an Event of Default, BMO may take the following actions upon written notice to the Company: (1) terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately Cash Collateralize L/C Obligations in an amount equal to 105% of the aggregate L/C Obligations or a greater amount if BMO determines a greater amount is necessary. If such Event of Default is due to the Company’s bankruptcy, BMO may take the three actions listed above without notice to the Company.

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

 

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 March 31,December 29, 2023, current maturities include $2,000 of term loan payments due within the coming year.

 

Other: Other long-term debt pertains mainly to a financing arrangement in Europe. These liabilities carry terms of three to five years and implied interest rates ranging from 7% to 25%. A total amount of $34$10 in principal was paid on these liabilities during the three quarters ended March 31, 2023.current fiscal year.

 

During the quarter ended March 31,December 29, 2023, the average interest rate was 6.22%6.82% on the Term Loan, and 5.15%5.63% on the Revolving Loans.

 

As of March 31,December 29, 2023, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $40,000,$37,157, and the Company had approximately $20,760$29,982 of available borrowings. In addition to the Credit Agreement, the Company has established unsecured lines of credit that are used from time to time to secure certain performance obligations by the Company.

 

The Company’s borrowings described above approximate fair value at March 31,December 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.

 

12

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 March 31,December 29, 2023, the notional amount was $12,000.$10,500. This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging. This swap is included in the disclosures in Note O, Derivative Financial Instruments.

 

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

     

 

K.

Shareholders’ Equity

 

The Company, from time to time, makes open market purchases of its common stock under authorizations given to it by the Board of Directors, of which 315.0 shares as of March 31,December 29, 2023 remain authorized for purchase.  The Company did not make any open market purchases of its shares during the quarters ended March 31,December 29, 2023 and March 25,December 30, 2022.

 

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

See Notes A, G, M, and P for further information regarding the impact of the Accounting change on the Company’s prior year consolidated financial statements.

13

The following is a reconciliation of the Company’s equity balances for the first threetwo fiscal quarters of 20232024 and 2022:2023:

 

 

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 (Loss)

 

Stock

 

Interest

 

Equity

  

Stock

  

Earnings

  

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 gain on hedges, net of tax

      216       216 

Compensation expense

 658           658  495           495 

Shares (acquired) issued, net

  (1,924)      1,756     (168)  (3,911)      2,148     (1,763)

Balance, September 30, 2022

 41,285  133,002  (37,103) (12,964) 548  124,768 

Balance, September 29, 2023

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

Net income

    1,139       15  1,154     930       5  935 

Dividends paid to shareholders

    (560)        (560)

Translation adjustments

      8,333     59  8,392       5,155     35  5,190 

Benefit plan adjustments, net of tax

      (515)      (515)      (108)      (108)

Unrealized loss on cash flow hedge, net of tax

      (595)      (595)

Unrealized loss on hedges, net of tax

      (485)      (485)

Compensation expense

 856           856  772           772 

Shares (acquired) issued, net

  (697)      402     (295)  (550)      541     (9)

Balance, December 30, 2022

 41,444  134,141  (29,880) (12,562) 622  133,765 

Net income

    2,674       76  2,750 

Translation adjustments

      1,023     (9) 1,014 

Benefit plan adjustments, net of tax

      578       578 

Unrealized loss on cash flow hedge, net of tax

      (224)      (224)

Compensation expense

 736          736 

Shares issued (acquired), net

  (35)      35     - 

Balance, March 31, 2023

 $42,145  $136,815  $(28,503) $(12,527) $689  $138,619 

Balance, December 29, 2023

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

 

13
 
  

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 

Net income

      2,231           79   2,310 

Translation adjustments

          (2,680)      (41)  (2,721)

Benefit plan adjustments, net of tax

          505           505 

Unrealized loss on cash flow hedge, net of tax

          810           810 

Compensation expense

  620                   620 

Shares issued (acquired), net

  (163)          163       0 

Balance, March 25, 2022

 $42,048  $127,251  $(25,724) $(14,805) $685  $129,455 

  

Twin Disc, Inc. Shareholders’ Equity

 
          

Accumulated

             
          

Other

      

Non-

     
  

Common

  

Retained

  

Comprehensive

  

Treasury

  

Controlling

  

Total

 
  

Stock

  

Earnings

  

Loss

  

Stock

  

Interest

  

Equity

 

Balance, June 30, 2022

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

Net (loss) income

      (1,422)          98   (1,324)

Translation adjustments

          (6,328)      38   (6,290)

Benefit plan adjustments, net of tax

          (89)          (89)

Unrealized gain on hedges, net of tax

          793           793 

Compensation expense

  658                   658 

Shares (acquired) issued, net

  (1,924)          1,756       (168)

Balance, September 30, 2022

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

Net income

      1,746           15   1,761 

Translation adjustments

          8,333       59   8,392 

Benefit plan adjustments, net of tax

          (1,122)          (1,122)

Unrealized loss on hedges, net of tax

          (595)          (595)

Compensation expense

  856                   856 

Shares (acquired) issued, net

  (697)          402       (295)

Balance, December 30, 2022

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

 

Reconciliations for the changes in accumulated other comprehensive income (loss),loss, net of tax, by component for the quarters ended March 31,December 29, 2023 and March 25,December 30, 2022 are as follows:

 

  

Translation

  

Benefit Plan

  

Cash Flow

  

Net Investment

 
  

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 

Translation adjustment during the quarter

  8,333   -   -   - 

Plan merger remeasurement adjustment

  -   (1,115)  -   - 

Amounts reclassified from accumulated other comprehensive income (loss)

  -   600   (10)  (585)

Net current period other comprehensive (loss) income

  8,333   (515)  (10)  (585)

Balance at December 30, 2022

  (261)  (31,723)  694   1,410 

Translation adjustment during the quarter

  1,023          

Amounts reclassified from accumulated other comprehensive income (loss)

  -   578   (133)  (91)

Net current period other comprehensive (loss) income

  1,023   578   (133)  (91)

Balance at March 31, 2023

 $762  $(31,145) $561  $1,319 

  

Translation

  

Benefit Plan

  

Cash Flow

  

Net Investment

 
  

Adjustment

  

Adjustment

  

Hedges

  

Hedges

 

Balance at June 30, 2021

 $9,192  $(31,463) $(678) $334 

Translation adjustment during the quarter

  (2,014)  -   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   384   68   136 

Net current period other comprehensive (loss) income

  (2,014)  384   68   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 

Translation adjustment during the quarter

  (2,680)  -   -   - 

Amounts reclassified from accumulated other comprehensive income

  -   505   556   254 

Net current period other comprehensive (loss) income

  (2,680)  505   556   254 

Balance at March 25, 2022

 $2,822  $(29,951) $178  $1,227 
  

Translation

  

Benefit Plan

  

Cash Flow

  

Net Investment

 
  

Adjustment

  

Adjustment

  

Hedges

  

Hedges

 

Balance, June 30, 2023

 $(1,582) $(5,948) $688  $1,272 

Translation adjustment during the quarter

  (3,096)  -   -   - 

Amounts reclassified from accumulated other comprehensive loss

  -   (171)  (6)  222 

Net current period other comprehensive (loss) income

  (3,096)  (171)  (6)  222 

Balance, September 29, 2023

  (4,678)  (6,119)  682   1,494 

Translation adjustment during the quarter

  5,155          

Amounts reclassified from accumulated other comprehensive loss

  -   (108)  (183)  (302)

Net current period other comprehensive income (loss)

  5,155   (108)  (183)  (302)

Balance at December 29, 2023

 $477  $(6,227) $499  $1,192 

 

14
 
 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended March 31, 2023 are as follows:

  

Quarter Ended

   

Three Quarters Ended

  
  

March 31, 2023

   

March 31, 2023

  

Changes in benefit plan items

          

Actuarial losses

 $629 

(a)

 $1,844 (a)

Transition asset and prior service benefit

  (51)

(a)

  (152)(a)

Plan merger remaeasurement adjustment

  -    (1,115) 

Translation

  1    9  

Total amortization

  579    586  

Income taxes

  1    5  

Total changes, net of tax

 $578   $581  
  

Translation

  

Benefit Plan

  

Cash Flow

  

Net Investment

 
  

Adjustment

  

Adjustment

  

Hedges

  

Hedges

 

Balance, June 30, 2022

 $(2,266) $(6,614) $356  $1,550 

Translation adjustment during the quarter

  (6,328)  -   -   - 

Amounts reclassified from accumulated other comprehensive loss

  -   (89)  657   136 

Net current period other comprehensive (loss) income

  (6,328)  (89)  657   136 

Balance, September 30, 2022

  (8,594)  (6,703)  1,013   1,686 

Translation adjustment during the quarter

  8,333   -   -   - 

Amounts reclassified from accumulated other comprehensive loss

     (7)  (10)  (585)

Plan merger adjustment

  -   (1,115)  -   - 

Net current period other comprehensive income (loss)

  8,333   (1,122)  (10)  (585)

Balance at December 30, 2022

 $(261) $(7,825) $1,003  $1,101 

 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended March 25,December 29, 2023 are as follows:

  

Amount Reclassified

   

Amount Reclassified

  
  

Quarter Ended

   

Two Quarters Ended

  
  

December 29, 2023

   

December 29, 2023

  

Changes in benefit plan items

          

Actuarial losses

 $(91)

(a)

 $(263)

(a)

Transition asset and prior service benefit

  (4)

(a)

  (8)

(a)

Total amortization

  (95)   (271) 

Income tax expense

  (13)   (8) 

Total reclassification net of tax

 $(108)  $(279) 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 30, 2022 is as follows:

 

  

Quarter Ended

   

Three Quarters Ended

  
  

March 25, 2022

   

March 25, 2022

  

Changes in benefit plan items

          

Actuarial losses

 $562 

(a)

 $1,687 

(a)

Transition asset and prior service benefit

  (64)

(a)

  (190)

(a)

Translation

  11    19  

Total amortization

  509    1,516  

Income taxes

  4    4  

Total changes, net of tax

 $505   $1,512  

  

Amount Reclassified

   

Amount Reclassified

  
  

Quarter Ended

   

Two Quarters Ended

  
  

December 30, 2022

   

December 30, 2022

  

Changes in benefit plan items

         ��

Actuarial losses

 $664 

(a)

 $1,223 

(a)

Transition asset and prior service benefit

  (51)

(a)

  (101)

(a)

Mark-to-market adjustment

  (607)   (1,214) 

Plan merger remeasurement adjustment

  (1,115)   (1,115) 

Total amortization

  (1,109)   (1,207) 

Income taxes

  (13)   (4) 

Total reclassification net of tax

 $(1,122)  $(1,211) 

 

 

(a)

These accumulated other comprehensive income (loss) 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 of OperationsAssets Held for Sale

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 $33 and $303 in the quarters ending March 31, 2023 and March 25, 2022, respectively. Total restructuring charges relating to streamlining operations totaled to $208 and $1,542 in the three quarters ending March 31, 2023 and March 25, 2022, 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 March 31, 2023 were $16,406.

15

The following is a roll-forward of restructuring activity:

Accrued restructuring liability, June 30, 2022

 $1,024 

Additions

  208 

Payments, adjustments and write-offs during the year

  (262)

Accrued restructuring liability, March 31, 2023

 $970 

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 corporate headquarters by $4,267 in the fourth quarter of fiscal 2021.

In the first quarter of fiscal 2022, the Company completed 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. In the fourth quarter of fiscal 2022, 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.

 

15

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.

In the first quarter of fiscal 2024, the Company entered into an agreement to sell certain machinery assets, inventory, and legal relationships of its boat management systems product line. This action required the Company to reclassify these assets from Property, Plant and Equipment and Inventory to Assets Held for Sale, at fair value less costs to sell, or net book value, whichever is lower. The fair value of the machinery assets was determined using local internal specialists. The machinery assets’ fair value less costs to sell exceeded its net book value. The boat management systems inventory was valued at the lower of cost or net realizable value. Net realizable value was determined using the offer amount from the buyer less costs to sell. This assessment resulted in the Company recognizing a write-down of the carrying value of its boat management systems inventory of $2.1 million. The write-down was classified in the income statement as a component of cost of goods sold. The agreement closed October 30, 2023.

   

 

M.

Earnings Per Share

 

The Company calculates basic earnings per share based upon the weighted average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period.  The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect.  Certain restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company and are therefore included in computing earnings per share pursuant to the two-class method. 

 

As discussed in Note A, during the 16fourth

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

 
 

For the Quarter Ended

 

For the Three Quarters Ended

    

As Adjusted

   

As Adjusted

 
 

March 31, 2023

  

March 25, 2022

  

March 31, 2023

  

March 25, 2022

  

December 29, 2023

  

December 30, 2022

  

December 29, 2023

  

December 30, 2022

 

Basic:

                        

Net income

 $2,750  $2,310  $1,973  $539 
            

Net income (loss)

 $935  $1,761  $(148) $436 

Less: Net earnings attributable to noncontrolling interest

 (76) (79) (188) (223) (5) (15) (95) (112)
            

Less: Undistributed earnings attributable to unvested shares

  -   -   -   -   -   -   -   - 
            

Net income attributable to Twin Disc

 2,674  2,231  1,785  316 

Net income (loss) attributable to Twin Disc

 930  1,746  (243) 324 
          

Weighted average shares outstanding - basic

  13,504   13,397   13,455   13,339   13,718   13,460   13,629   13,434 
          

Basic Income Per Share:

        

Net earnings per share - basic

 $0.20  $0.17  $0.13  $0.02 

Basic Loss Per Share:

                

Net earnings (loss) per share - basic

 $0.07  $0.13  $(0.02) $0.02 
          

Diluted:

                        

Net income

 $2,750  $2,310  $1,973  $539 
            

Net income (loss)

 $935  $1,761  $(148) $436 

Less: Net earnings attributable to noncontrolling interest

 (76) (79) (188) (223) (5) (15) (95) (112)
            

Less: Undistributed earnings attributable to unvested shares

  -   -   -   -   -   -   -   - 
            

Net income attributable to Twin Disc

 2,674  2,231  1,785  316 

Net income (loss) attributable to Twin Disc

 930  1,746  (243) 324 
          

Weighted average shares outstanding - basic

 13,504  13,397  13,455  13,339  13,718  13,460  13,629  13,434 

Effect of dilutive stock awards

  158   60   153   34   205   239   -   215 

Weighted average shares outstanding - diluted

  13,662  13,457  13,608  13,373   13,923   13,699   13,629   13,649 
          

Diluted Income Per Share:

        

Net earnings per share - diluted

 $0.20  $0.17  $0.13  $0.02 

Diluted Income (Loss) Per Share:

                

Net earnings (loss) per share - diluted

 $0.07  $0.13  $(0.02) $0.02 

16

The following potential common shares were excluded from diluted EPS for the two quarters ended December 29, 2023 because they were anti-dilutive: 135.1 related to the Company’s unvested PSAs, 2.6 related to the Company’s unvested PSAUs, 80.2 related to the Company’s unvested RS awards, and 87.4 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 following table provides a summary of leases recorded on the condensed consolidated balance sheet.

 

Balance Sheet Location

 

December 29, 2023

  

June 30, 2023

 

Lease Assets

         

Operating lease right-of-use assets

Right-of-use assets operating leases

 $12,017  $13,133 

Finance lease right-of-use assets

Property, plant and equipment, net

  4,860   4,427 
          

Lease Liabilities

         

Operating lease liabilities

Accrued liabilities

 $2,064  $2,343 

Operating lease liabilities

Lease obligations

  9,988   10,811 

Finance lease liabilities

Accrued liabilities

  642   643 

Finance lease liabilities

Other long-term liabilities

  4,532   4,314 

 

The components of lease expense were as follows:

 

 

For the Quarter Ended

 

For the Three Quarters Ended

  

For the Quarter Ended

 

For the Two Quarters Ended

 
 

March 31, 2023

  

March 25, 2022

  

March 31, 2023

  

March 25, 2022

  

December 29, 2023

  

December 30, 2022

  

December 29, 2023

  

December 30, 2022

 

Finance lease cost:

          

Amortization of right-of-use assets

 $187  $162  $498  $492  $175  $156  $397  $311 

Interest on lease liabilities

 87  68  219  211  77  67  151  132 

Operating lease cost

 852  800  2,250  2,190  882  686  1,775  1,397 

Short-term lease cost

 2  13  5  53  6  (10) 9  3 

Variable lease cost

  94   46   202   127   99   67   199   108 

Total lease cost

 1,222  1,089  3,174  3,073  1,239  966  2,531  1,951 

Less: Sublease income

  (18)  (19)  (53)  (57)  (20)  (18)  (41)  (35)

Net lease cost

 $1,204  $1,070  $3,121  $3,016  $1,219  $948  $2,490  $1,916 

 

17
 
 

Other information related to leases was as follows:

 

 

For the Quarter Ended

 

For the Three Quarters Ended

  

For the Quarter Ended

 

For the Two Quarters Ended

 
 

March 31, 2023

  

March 25, 2022

  

March 31, 2023

  

March 25, 2022

  

December 29, 2023

  

December 30, 2022

  

December 29, 2023

  

December 30, 2022

 

Cash paid for amounts included in the measurement of lease liabilities:

          

Operating cash flows from operating leases

 $873  $808  $2,268  $2,281  $934  $777  $1,871  $1,473 

Operating cash flows from finance leases

 138  207  270  623  76  215  149  420 

Financing cash flows from finance leases

 73  68  231  726  207  67  471  132 

Right-of-use-assets obtained in exchange for lease obligations:

          

Operating leases

 218  695  1,736  1,091  188  990  188  1,518 

Finance leases

 47  -  367  307  123  269  657  320 

Weighted average remaining lease term (years):

          

Operating leases

      8.8  8.8       8.1  8.3 

Finance lease

      11.3  11.4       9.5  10.8 

Weighted average discount rate:

          

Operating leases

      7.2% 7.1%      7.6% 7.2%

Finance leases

      5.2% 5.1%      5.8% 5.2%

 

Approximate future minimum rental commitments under non-cancellable leases as of March 31,December 29, 2023 were as follows:         

 

  

Operating Leases

  

Finance Leases

 

2023

 $764  $233 

2024

  2,607   900 

2025

  1,708   661 

2026

  1,484   593 

2027

  1,438   527 

Thereafter

  7,701   3,598 

Total future lease payments

  15,702   6,512 

Less: Amount representing interest

  (3,269)  (1,338)

Present value of future payments

 $12,434  $5,175 

The following table provides a summary of leases recorded on the condensed consolidated balance sheet.

  

Balance Sheet Location

 

March 31, 2023

  

June 30, 2022

 

Lease Assets

          

Operating lease right-of-use assets

 

Right-of-use assets operating leases

 $12,415  $12,685 

Finance lease right-of-use assets

 

Property, plant and equipment, net

  4,675   4,805 
           

Lease Liabilities

          

Operating lease liabilities

 

Accrued liabilities

 $2,537  $2,127 

Operating lease liabilities

 

Lease obligations

  9,897   10,575 

Finance lease liabilities

 

Accrued liabilities

  627   576 

Finance lease liabilities

 

Other long-term liabilities

  4,548   4,440 
  

Operating Leases

  

Finance Leases

 

2024

 $1,575  $492 

2025

  2,300   836 

2026

  1,810   788 

2027

  1,697   735 

2028

  1,652   657 

2029

  1,637   482 

Thereafter

  5,752   2,646 

Total future lease payments

  16,423   6,636 

Less: Amount representing interest

  (4,371)  (1,462)

Present value of future payments

 $12,052  $5,174 

   

 

O.

Derivative Financial Instruments

 

From time to time, the Company enters into derivative instruments to manage volatility arising from risks relating to interest 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.

 

18

Interest Rate Swap Contracts

 

The Company has one outstanding interest rate swap contract as of March 31,December 29, 2023, with a notional amount of $12,000.$10,500. It has been designated as a cash flow hedge in accordance with ASC 815, Derivatives and Hedging.

 

The primary purpose of the Company’s cash flow hedging activities is to manage the potential changes in value associated with interest payments on the Company’s SOFR-based indebtedness. The Company records gains and losses on interest rate swap contracts qualifying as cash flow hedges in accumulated other comprehensive loss to the extent that these hedges are effective and until the Company recognizes the underlying transactions in net earnings, at which time these gains and losses are recognized in interest expense on its condensed consolidated statements of operations and comprehensive income (loss). Cash flows from derivative financial instruments are classified as cash flows from financing activities on the consolidated statements of cash flows. These contracts generally have original maturities of greater than twelve months.

 

Net unrealized after-tax gains related to cash flow hedging activities that were included in accumulated other comprehensive loss were $561($499) and $355($688) as of March 31,December 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.

 

18

The Company estimates that $239$218 of net unrealized losses related to cash flow hedging activities included in accumulated other comprehensive income (loss)loss will be reclassified into earnings within the next twelve months.

 

Derivatives Designated as Net Investment Hedges

 

The Company is exposed to foreign currency exchange rate risk related to its investment in net assets in foreign countries. 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 loss along with the foreign currency translation adjustments on those foreign investments. Net unrealized after-tax gainsincome related to net investment hedging activities that were included in accumulated other comprehensive lossAccumulated Other Comprehensive Loss were $1,319($1,192) and $1,551($1,272) as of March 31,December 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

 

March 31, 2023

  

June 30, 2022

 

Balance Sheet Location

 

December 29, 2023

  

June 30, 2023

 

Derivative designated as hedge:

              

Interest rate swap

 

Other current assets

 $239  $68 

Other current assets

 $209  $292 

Interest rate swap

 

Other noncurrent assets

 112  77 

Other noncurrent assets

 80  187 

 

The impact of the Company’s derivative instruments on the condensed consolidated statements of operations and comprehensive income (loss) income for the quarters and three quarters ended March 31,December 29, 2023 and March 25,December 30, 2022, respectively, was as follows:

 

 

Statement of Comprehensive

 

For the Quarter Ended

 

For the Three Quarters Ended

 

Statement of Comprehensive

 

For the Quarter Ended

 

For the Two Quarters Ended

 
 

Income Location

 

March 31, 2023

  

March 25, 2022

  

March 31, 2023

  

March 25, 2022

 

Income (Loss) Location

 

December 29, 2023

  

December 30, 2022

  

December 29, 2023

  

December 30, 2022

 

Derivative designated as hedge:

                                   

Interest rate swap

 

Interest expense

 $76  $81  $238  $268 

Interest expense

 $67  $79  $138  $162 

Interest rate swap

 

Unrealized (loss) gain on cash flow hedge

 (133) 556  206  855 

Unrealized gain (loss) on hedges

 183  10  189  (339)

Net investment hedge

 

Unrealized (loss) gain on hedges

 (91) 254  (232) 893 

Unrealized (loss) gain on hedges

 (302) 585  (81) 141 

 

19
 

P.

IMPACT OF ACCOUNTING METHOD CHANGE

The following tables summarize the effects of the Accounting change described in Note A on the Company’s condensed consolidated statement of operations and comprehensive loss, statement of cash flows and statement of changes in equity for the quarter ended and the two quarters ended December 30, 2022 and condensed consolidated balance sheet as of December 30, 2022.

CONDENSED CONSOLIDATED STATEMENT OF OPERATION AND COMPREHENSIVE INCOME (LOSS)

  

For the Quarter Ended

  

For the Two Quarters Ended

 
  

December 30, 2022

  

December 30, 2022

 
  

As Computed Under Previous Method

  

Effect of Accounting Change

  

As Reported Under New Method

  

As Computed Under Previous Method

  

Effect of Accounting Change

  

As Reported Under New Method

 
                         

Net sales

 $63,351  $-  $63,351  $119,264  $-  $119,264 

Cost of goods sold

  46,328   -   46,328   88,944   -   88,944 

Gross profit

  17,023   -   17,023   30,320   -   30,320 
                         

Marketing, engineering and administrative expenses

  15,983   -   15,983   31,063   -   31,063 

Restructuring expenses

  164   -   164   174   -   174 

Other operating income

  (4,150)  -   (4,150)  (4,150)  -   (4,150)

Income from operations

  5,026   -   5,026   3,233   -   3,233 
                         

Other expense (income):

                        

Interest expense

  594   -   594   1,160   -   1,160 

Other expense (income), net

  789   (607)  182   1,050   (1,214)  (164)
   1,383   (607)  776   2,210   (1,214)  996 

Income before income taxes and noncontrolling interest

  3,643   607   4,250   1,023   1,214   2,237 
                         

Income tax expense

  2,489   -   2,489   1,801   -   1,801 

Net income (loss)

  1,154   607   1,761   (778)  1,214   436 

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

  (15)  -   (15)  (112)  -   (112)

Net income (loss) attributable to Twin Disc

 $1,139  $607  $1,746  $(890) $1,214  $324 
                         

Income (loss) per share data:

                        

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

 $0.08  $0.05  $0.13  $(0.07) $0.09  $0.02 

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

 $0.08  $0.05  $0.13  $(0.07) $0.09  $0.02 
                         

Weighted average shares outstanding data:

                        

Basic shares outstanding

  13,460   -   13,460   13,434   -   13,434 

Diluted shares outstanding

  13,699   -   13,699   13,434   -   13,434 
                         

Comprehensive income (loss)

                        

Net income (loss)

 $1,154  $607  $1,761  $(778) $1,214  $436 

Benefit plan adjustments, net of income taxes of $ 1 and $3 computed under previous method; and $13 and $4 as reported under new method

  (515)  (607)  (1,122)  3   (1,214)  (1,211)

Foreign currency translation adjustment

  8,392   -   8,392   2,005   -   2,005 

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

  (595)  -   (595)  198   -   198 

Comprehensive income

  8,436   -   8,436   1,428   -   1,428 

Less: Comprehensive income attributable to noncontrolling interest

  74   -   74   210   -   210 
                         

Comprehensive income attributable to Twin
Disc

 $8,362  $-  $8,362  $1,218  $-  $1,218 

20

CONDENSED ONSOLIDATED CONDENSED BALANCE SHEET

  

December 30, 2022

 
  

As Computed

Under Previous Method

  

Effect of

Accounting

Change

  

As Reported

Under New

Method

 

ASSETS

            

Current assets:

            

Cash

 $13,528  $-  $13,528 

Trade accounts receivable, net

  39,392   -   39,392 

Inventories

  136,810   -   136,810 

Assets held for sale

  2,968   -   2,968 

Prepaid expenses

  10,871   -   10,871 

Other

  7,228   -   7,228 

Total current assets

  210,797   -   210,797 
             

Property, plant and equipment, net

  39,683   -   39,683 

Right-of-use assets operating leases

  12,807   -   12,807 

Intangible assets, net

  11,798   -   11,798 

Deferred income taxes

  2,403   -   2,403 

Other assets

  2,766   -   2,766 
             

Total assets

 $280,254  $-  $280,254 
             

LIABILITIES AND EQUITY

            

Current liabilities:

            

Current maturities of long-term debt

 $2,000  $-  $2,000 

Accounts payable

  28,906   -   28,906 

Accrued liabilities

  55,939   -   55,939 

Total current liabilities

  86,845   -   86,845 
             

Long-term debt

  29,927   -   29,927 

Lease obligations

  10,278   -   10,278 

Accrued retirement benefits

  10,587   -   10,587 

Deferred income taxes

  3,506   -   3,506 

Other long-term liabilities

  5,346   -   5,346 

Total liabilities

  146,489   -   146,489 
             

Twin Disc shareholders' equity:

            

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

  -   -   - 

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

  41,444   -   41,444 

Retained earnings

  134,141   (23,898)  110,243 

Accumulated other comprehensive loss

  (29,880)  23,898   (5,982)
   145,705   -   145,705 

Less treasury stock, at cost (819,398 shares, respectively)

  12,562   -   12,562 
             

Total Twin Disc shareholders' equity

  133,143   -   133,143 
             

Noncontrolling interest

  622   -   622 

Total equity

  133,765   -   133,765 
             

Total liabilities and equity

 $280,254  $-  $280,254 

21

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

  

December 30, 2022

 
  

As Computed Under Previous Method

  

Effect of Accounting Change

  

As Reported Under New Method

 
             

CASH FLOWS FROM OPERATING ACTIVITIES:

            

Net (loss) income

 $(778) $1,214  $436 

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

            

Depreciation and amortization

  4,266   -   4,266 

Gain on sale of assets

  (4,203)  -   (4,203)

Provision for deferred income taxes

  (1,105)  -   (1,105)

Stock compensation expense

  1,565   -   1,565 

Net change in operating assets and liabilities

  287   (1,214)  (927)
             

Net cash provided by operating activities

  32   -   32 
             

CASH FLOWS FROM INVESTING ACTIVITIES:

            

Acquisition of property, plant, and equipment

  (4,734)  -   (4,734)

Proceeds from sale of fixed assets

  7,152   -   7,152 

Proceeds on note receivable

  -   -   - 

Other, net

  385   -   385 
             

Net cash provided by investing activities

  2,803   -   2,803 
             

CASH FLOWS FROM FINANCING ACTIVITIES:

            

Borrowings under revolving loan arrangements

  42,898   -   42,898 

Repayments of revolving loan arrangements

  (46,628)  -   (46,628)

Repayments of other long-term debt

  (839)  132   (707)

Payments of finance lease obligations

     (132)  (132)

Payments of withholding taxes on stock compensation

  (463)  -   (463)
             

Net cash used by financing activities

  (5,032)  -   (5,032)
             

Effect of exchange rate changes on cash

  3,204   -   3,204 
             

Net change in cash

  1,007   -   1,007 
             

Cash:

            

Beginning of period

  12,521   -   12,521 
             

End of period

 $13,528  $-  $13,528 

22

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

  

December 30, 2022

 
  

As Computed

Under

Previous

Method

  

Effect of

Accounting

Change

  

As Reported

Under New

Method

 

Retained earnings

            

Balance at June 30, 2022

  135,031   (25,112)  109,919 

Net (loss) income attributable to Twin Disc

  (890)  1,214   324 

Balance at December 30, 2022

 $134,141  $(23,898) $110,243 
             

Accumulated other comprehensive income (loss)

            

Balance at June 30, 2022

  (32,086)  25,112   (6,974)

Translation adjustments

  2,005   -   2,005 

Benefit plan adjustments, net of tax

  3   (1,214)  (1,211)

Unrealized gain on hedges, net of tax

  198   -   198 

Balance at December 30, 2022

 $(29,880) $23,898  $(5,982)

 

 

Item 2.Management Discussion and Analysis

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 March 31,December 29, 2023, and related notes, as reported in Item 1 of this Quarterly Report.

 

Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the Company’s description of plans and objectives for future operations and assumptions behind those plans. The words “anticipates,” “believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by the Company should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.

 

In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company’s Annual Report filed on Form 10-K for June 30, 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

 

(In thousands)

 
 

Quarter Ended

  

Three Quarters Ended

  

Quarter Ended

  

Two Quarters Ended

 
 

March 31, 2023

  

% of Net Sales

  

March 25, 2022

  

% of Net Sales

  

March 31, 2023

  

% of Net Sales

  

March 25, 2022

  

% of Net Sales

  

December 29, 2023

  

% of Net Sales

  

December 30, 2022

  

% of Net Sales

  

December 29, 2023

  

% of Net Sales

  

December 30, 2022

  

% of Net Sales

 

Net sales

 $73,772     $59,289     $193,036     $166,939     $72,994     $63,351     $136,547     $119,264    

Cost of goods sold

  54,507      41,598      143,451      122,319     52,338     46,328     96,156     88,944    

COGS - Sale of boat management system product line and related inventory

  -      -      3,099      -    

Gross profit

 19,265  26.1% 17,691  29.8% 49,585  25.7% 44,620  26.7% 20,656  28.3% 17,023  26.9% 37,292  27.3% 30,320  25.4%

Marketing, engineering and administrative expenses

 14,626  19.8% 14,396  24.3% 45,688  23.7% 42,753  25.6% 17,149  23.5% 15,983  25.2% 34,068  24.9% 31,063  26.0%

Restructuring of operations

 33  0.0% 303  0.5% 208  0.1% 1,542  0.9%

Restructuring expense

 69  0.1% 164  0.3% 68  0.0% 174  0.1%

Other operating income

  1  0.0%  (63) -0.1%  (4,149) -2.1%  (2,957) -1.8%  -  0.0%  (4,150) -6.6%  -  0.0%  (4,150) -3.5%

Income from operations

 $4,605  6.2% $3,055  5.2% $7,838  4.1% $3,282  2.0%

Loss from operations

 $3,438  4.7% $5,026  7.9% $3,156  2.3% $3,233  2.7%

 

Comparison of the ThirdSecond Quarter of Fiscal 20232024 with the ThirdSecond Quarter of Fiscal 20222023

 

Net sales for the thirdsecond quarter increased 24.4%15.2%, or $14.5$9.6 million, to $73.8$73.0 million from $59.3$63.4 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 initial demand for new transmissions in the North American oil and gas market,global supply chain disruptions, along with improving operational performance, the ongoing demand for aftermarket support. The Company’s abilityCompany has been able 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.improve delivery results. Global sales of industrial products declined 13.7%, primarily due to supply chain challenges, while shipments of marine and propulsion products improved by 32.2% and off-highway transmission shipments grew by 21.7% compared with28.7% from the prior year, third quarter.while shipments of off-highway transmission products improved by 8.1%. Shipments of industrial products declined by 13.1%, with a slow-down in the domestic housing and construction markets. The North AmericanAsia Pacific region enjoyed the most significant sales improvement ($6.87.1 million or 33.9%56.1%) due to generally improving market conditions, stabilizing supply chainimproved shipments of oil and increased new unitgas transmissions into China, an improved demand for commercial marine products and aftermarketcontinued strength in pleasure craft demand in the North American energy market.Australia. The European region also saw a more modestsignificant increase ($1.65.3 million or 7.3%26.5%), with a more challenging economyimproved operational performance at our facilities in Belgium and the negative impact of currency exchange.Netherlands, coupled with continued strong demand. Sales into the Asia Pacific region increased 43.1%North America decreased 20.5%, or $5.3 million, primarily due to a catch-upsome softening in shipments of certainaftermarket demand in the oil and gas related products into China after a pause in the second quarter.market. Currency translation had an unfavorablea favorable impact on thirdsecond quarter fiscal 20232024 sales compared to the thirdsecond quarter of the prior year totaling $2.0$2.1 million primarily due to the weakeningstrengthening of the euro and Australian dollar against the U.S. dollar.

23

 

Sales at our manufacturing segment increased 13.5%3.2%, or $7.6$1.8 million, versus the same quarter last year. The U.S. manufacturing operations experienced a 10.8%5.6%, or $3.2$1.7 million, increasedecrease in sales versus the thirdsecond 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 $0.6saw increased revenue of $3.6 million (4.5%(27.3%) compared to the thirdsecond fiscal quarter of 2022,2023, primarily due to improving market demand and strong operational execution, partially offset by an unfavorableoperation performance in support of a record level of incoming orders over the past few quarters, along with a favorable currency impact and improved supply chain limitations.performance. Similarly, the Company’s Belgian operation saw an increase compared to the prior year thirdsecond quarter (35.5%(35.1% or $1.9$1.8 million), with improving demanda favorable translation effect and stabilizingimproved delivery performance driven by operational and supply chain partially offset by an unfavorable translation effect.execution. The Company’s Italian manufacturing operations were up $1.6down $2.0 million (24.4%(29.2%) compared to the thirdsecond quarter of fiscal 2022, with improving execution and easing supply chain interruptions.2023, primarily due to the sale of the BCS business during the quarter. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.3$0.1 million (33.1%(6.2%) compared to the prior year thirdsecond quarter.

20

 

Our distribution segment experienced an increase in sales of $10.1$11.5 million (42.6%(44.8%) in the thirdsecond quarter of fiscal 20232024 compared to the thirdsecond quarter of fiscal 2022.2023. The Company’s Asian distribution operations in Singapore, China and Japan were up 33.5%,60.4% or $3.3$4.4 million from the prior year primarily due to a recovery in shipments of certain oil and gason improving deliveries for energy related products into China after a pause during the second fiscal quarter.in China. The Company’s North America distribution operation saw ana 26.3% ($1.7 million) increase ($3.4 million or 68.5%) on stronger supply of productstrong demand for marine products from the manufacturing operations, as all markets have seen improving demand.European operations. The Company’s European distribution operation saw ana significant increase ($0.72.1 million or 15.5%41.9%) resulting fromon strong demand, a favorable currency impact and improved factory shipments and market demand, partially offset by the unfavorable impactsupply 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 (62.1%an increase in revenue (29.4% or $2.7$2.1 million), from the prior year thirdsecond fiscal quarter, on theprimarily due to continued strengthening ofstrong demand for pleasure craft marine market demandproducts in the region.

 

Total gross profit for the third quarter of fiscal 2023 improved by $1.6 million, or 8.9%, from the third quarter of fiscal 2022 primarily due to the additional sales in the quarter. Gross profit as a percentage of sales for the thirdsecond quarter of fiscal 2023 declined2024 improved to 26.1%28.3%, compared to 29.8%26.9% for the same period last year. The decline fromimprovement in the current year second quarter compared to the prior year isresult was primarily volume related, with margin conversion of 37.7% on the result of inflationary pressures on cost ($2.5 million) and a less favorableadditional revenue. The mix of product shipments ($0.2 million).impact for the quarter was essentially neutral.

 

For the fiscal 2023 third2024 second quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 19.8%23.5%, compared to 24.3%25.2% for the fiscal 2022 third2023 second quarter. ME&A expenses increased just $0.2$1.2 million (1.6%(7.3%) 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 subsidies ($0.7 million), increasedhigher wages and benefits ($0.7 million), travel costs ($0.2 million), software maintenance ($0.1 million), product development ($0.1 million) and a return to more normalized travel spendingpositive currency translation impact ($0.3 million). These increases were partially offset by a reductionlower professional fees ($0.4 million). The increases were driven by inflationary impacts and investment in global bonus expense ($1.2 million) and a foreign currency translation impact of $0.3 million.resources to support our hybrid electric strategy.

 

The Company incurred minor restructuring charges during the thirdsecond 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.costs in light of the ongoing market challenges.

 

Interest expense was relatively flat at $0.5down slightly to $0.4 million in the thirdsecond quarter 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 expense, net of $0.8$0.4 million for the thirdsecond fiscal quarter was primarily attributable to translation losses related to the Company’s euro denominated liabilities.a currency loss, partially offset by a pension benefit.

 

The fiscal 2023 third2024 second quarter effective tax rate was 16.6%64.0% compared to 24.6%26.3% in the prior fiscal year thirdsecond quarter. The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the decreaseincrease to the effective tax rate.

 

24

Comparison of the First Nine MonthsHalf of Fiscal 20232024 with the First Nine MonthsHalf of Fiscal 20222023

 

Net sales for the first nine monthshalf increased 15.6%14.5%, or $26.1$17.3 million, to $193.0$136.5 million from $166.9$119.3 million in the same period a year ago. The Company experienced stronghas continued to benefit from favorable market conditions across most geographies and improving demandproduct groups through fiscal 2023 and into fiscal 2024. With the first nine months as all markets have demonstrated recovery following the severe impacteasing of the COVID-19 pandemic in fiscal 2021, including demand for new transmissions in the North American oil and gas market demand,global supply chain disruptions, along with improving operational performance, the ongoing demand for aftermarket support. The Company’s abilityCompany has been able to ship product continuesimprove delivery results compared to be hampered by a variety of supply chain challenges, with these challenges easing somewhat during the third quarter. These include supplier capacity constraints, extended supplier lead times and a global shortage of electronic components.prior year. Global sales of industrialmarine and propulsion products were essentially even with the comparable period inimproved 26.8% from the prior year, while shipments of marine and propulsionoff-highway transmission products improved by 15.0%12.5%. Shipments of industrial products declined by 16.0%, with a slow-down in the domestic housing and off-highway transmission shipments grew by 20.5% compared with the prior year nine months.construction markets. The North AmericanAsia Pacific region enjoyed the most significant sales improvement ($18.714.5 million or 33.0%57.5%) 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 ($11.4 million or 32.2%), with improved operational performance at our facilities in Belgium and the Netherlands, coupled with continued strong demand. Sales into North America decreased 18.9%, or $9.2 million, primarily due to some softening in aftermarket demand in the North American energy market. The European region saw a more modest increase ($2.5 million or 4.5%), with a more challenging economy and the negative impact of currency exchange. Sales into the Asia Pacific region increased 13.5%, or $5.1 million, primarily due to continued demand for oil and gas related products into China, along with continued strong demand in Australia.market. Currency translation had an unfavorablea favorable impact on the first nine months ofhalf fiscal 20232024 sales compared to the comparable periodfirst half of the prior year totaling $11.9$4.4 million primarily due to the weakeningstrengthening of the euro against the U.S. dollar.

 

21

Sales at our manufacturing segment increased 15.1%6.8%, or $22.3$7.2 million, versus the same period last year. The U.S. manufacturing operations experienced a 21.4%6.9%, or $16.3$4.1 million, increasedecrease in sales versus the first nine monthshalf of fiscal 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 $1.4saw increased revenue of $11.2 million (4.1%(54.1%) compared to the first nine monthshalf of fiscal 2022,2023, primarily due to improving market demand and strong operational execution, partially offset by an unfavorableoperation performance in support of a record level of incoming orders over the past several quarters, along with a favorable currency impact and improved supply chain limitations. Theperformance. Similarly, the Company’s Belgian operation saw a solidan increase compared to the prior fiscal year comparable period (9.6%first half (28.8% or $1.5$2.7 million), with improving demanda favorable translation effect and improved delivery performance driven by operational execution partially offset by an unfavorable currency translation effect.and supply chain execution. The Company’s Italian manufacturing operations were up $2.6down $2.7 million (14.6%(21.4%) compared to the first nine monthshalf of fiscal 2022, with improving execution and easing supply chain interruptions.2023, primarily due to the sale of the BCS business during the current fiscal year. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.5$0.1 million (14.5%(4.2%) compared to the prior fiscal year nine months.first half.

 

Our distribution segment experienced an increase in sales of $11.2$20.2 million (15.5%(40.5%) in the first nine monthshalf of fiscal 20232024 compared to the comparable periodfirst half of fiscal 2022.2023. The Company’s Asian distribution operations in Singapore, China and Japan were up 2.0%88.9% or $14.0 million from the prior year primarily due to continued strength in demandon improving deliveries for oil and gasenergy related products into China.in China and strong commercial marine demand in the region. The Company’s North America distribution operation saw a 10.4% ($1.2 million) increase on strong increase ($5.7 million or 39.9%) on stronger supply of productdomestic demand for marine products from the manufacturing operations, as all markets have seen improving demand.European operations. The Company’s European distribution operation saw ana significant increase (2.4%($2.2 million or 26.1%) resulting from improving factory shipments partially offset by the unfavorableon strong demand, a favorable currency impact and improved 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 (28.0% increase)an increase in revenue (6.8% or $0.9 million) from the prior year comparable period, on thefirst half, primarily due to continued strengthening ofstrong demand for pleasure craft marine market demandproducts in the region.

 

Total grossGross profit as a percentage of sales for the first nine months improved by $5.0 million or 11.1% primarily on the improved sales volume and a more profitable mix of products sold. The gross profit percentage for the first nine monthshalf of fiscal 2023 declined2024 improved to 25.7%27.3%, compared to 26.7%25.4% for the same period last year. The improvement in the first half of the current year compared to the prior year result reflectswas primarily volume related, along with a positive mix impact due to additional oil and gas units shipped in the benefit of an Employee Retention Credit (“ERC”, part of various COVID-19 relief programs providedcurrent year. These favorable movements were partially offset by the U.S. government)negative impact of $1.3 millionthe sale of the BCS business that was recorded at the Company’s domestic operation, along with the benefit of a NOW subsidy (COVID-19 relief program in the Netherlands)first quarter of $0.7 million. Adjusting for these non-recurring items, the gross profit percent for the first nine months of the prior year would have been 25.5%.fiscal 2024.

 

For the fiscal 20232024 first nine months,half, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 23.7%24.9%, compared to 25.6%26.0% for the fiscal 20222023 first nine months.half. ME&A expenses increased $2.9$3.0 million (6.9%(9.7%) versus the same period last fiscal year. The increase in ME&A spending for the periodfirst half was comprised of the incremental impact of prior year COVID subsidies ($2.1 million), increased professional fees ($0.6 million), salarieshigher wages and benefits ($1.4 million) marketing activities, travel costs ($0.40.5 million), spending on travel and entertainmentsoftware maintenance ($0.80.3 million), product development ($0.3 million) and other inflationary impactsa positive currency translation impact ($0.5 million). These increases were partially offset by a reductionlower bad debt expense ($0.2 million). The increases were driven by inflationary impacts and investment in the global bonus expense ($0.9 million) and a foreign currency translation impact of $2.0 million.resources to support our hybrid electric strategy.

 

The Company incurred minor restructuring charges during the first nine monthshalf 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 $4.1 millioncosts in the first nine months 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.ongoing market challenges.

 

Interest expense was relatively flat at $1.7down slightly to $0.8 million in the first nine monthshalf 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.

25

 

Other expense of $1.8$0.3 million for the first nine monthshalf of fiscal 20232024 was primarily attributable to translation losses related to the Company’s euro denominated liabilities.a currency loss, partially offset by a pension benefit.

 

The fiscal 2023 nine-month2024 first half effective tax rate was 54.4%107.1% compared to 76.5%80.5% in the prior fiscal year comparable period. The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the changeincrease to the effective tax rate.

22

 

Financial Condition, Liquidity and Capital Resources

 

Comparison between March 31,December 29, 2023 and June 30, 20222023

 

As of March 31,December 29, 2023, the Company had net working capital of $127.3$119.0 million, which represents an increasea decrease of $3.9$0.6 million, or 3.2%0.5%, from the net working capital of $123.4$119.6 million as of June 30, 2022.2023.

 

Cash increased by $1.5$7.8 million to $14.0$21.0 million as of March 31,December 29, 2023, versus $12.5$13.3 million as of June 30, 2022.2023. As of March 31,December 29, 2023, the majority of the cash is at the Company’s overseas operations in Europe ($2.95.5 million) and Asia-Pacific ($10.010.8 million).

 

Trade receivables of $44.4$41.4 million were down $1.0$13.3 million, or approximately 2.2%24.3%, when compared to last fiscal year-end. The impact of foreign currency translation was to increase accounts receivable by $0.9$1.2 million versus June 30, 2022.2023. As a percent of sales, trade receivables finished at 60.2%56.8% in the thirdsecond quarter of fiscal 20232024 compared to 65.7%62.2% for the comparable period in fiscal 20222023 and 59.8%65.2% for the fourth quarter of fiscal 2022.2023.

 

Inventories increased by $9.0 million, or 7.1%,were essentially unchanged versus June 30, 2022 to $136.2 million.2023. The impact of foreign currency translation was to increase inventories by $2.0$3.9 million versus June 30, 2022. The remaining2023. This increase was seen primarilyessentially offset by the sale of the BCS business, reducing inventory by $3.8 million. Other entity movements were offsetting, with increases at the Company’sour operations in the Netherlands ($6.7 million) and Singapore ($2.3 million). The Singapore increase was the result of a temporary delay(driven by anticipated growth in the shipmentsecond half) and Australia (timing of certain oilpurchases and gas transmission products into China. The Netherlands increase was primarily drivena new product introduction) being offset 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. Other increases were seenreductions at our Italian manufacturingdistribution operations ($2.7 million)in Singapore, China and our Australian ($1.1 million) and European ($0.6 million) distribution operations. There was an offsetting decrease at the North American operations ($6.4 million) resulting from increased focus on purchase quantities and timing of deliveries.US. On a consolidated basis, as of March 31,December 29, 2023, the Company’s backlog of orders to be shipped over the next six months approximates $127.7$125.2 million, compared to $101.2$119.2 million at June 30, 20222023 and $98.9$124.0 million at December 31, 2021.30, 2022. As a percentage of six-month backlog, inventory has decreased from 126%111% at June 30, 20222023 to 107%105% at March 31,December 29, 2023.

 

Net property, plant and equipment decreased $0.9increased $1.6 million (2.2%(4.4%) to $40.7$40.3 million versus $41.6$38.7 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.2023. The Company had capital spending of $6.8$5.4 million in the first three quarters, as well ashalf and a favorable exchange impact ($0.3 million).of $0.5 million. These increases were partially offset by depreciation ($3.4 million) and the impact of $4.8 million.the sale of the BCS business. Capital spending occurring in the first nine monthshalf 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 March 31,December 29, 2023 of $29.7$32.6 million was up $1.2down $3.9 million, or 4.2%10.7%, from June 30, 2022.2023. The impact of foreign currency translation was to increase accounts payable by $0.6$1.1 million versus June 30, 2022.2023. The remaining increasedecrease 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 March 31,December 29, 2023 decreased $5.3$0.9 million to $31.3$17.7 million versus $36.5$18.6 million at June 30, 2022.2023. During the first nine months,half, the Company reported slightly positive free cash flow of $10.6 million (defined as operating cash flow less acquisitions of fixed assets), driven by positive operating results and working capital performance, partially offset by the payment of a bonus accrual and the first half increase to inventory, offset by improved operating results and inventory reduction in the third fiscal quarter. The Company also generated $7.2 million in cash through the sale of the Belgian facility.capital spending. The Company ended the third quarter with total debt, net of cash, of $17.3($3.3) million, compared to $24.0$5.4 million at June 30, 2022,2023, for a net improvement of $6.8$8.7 million.

 

Total equity increased $7.4$0.2 million, or 5.7%0.1%, to $138.6$145.3 million as of March 31,December 29, 2023. The net profitloss during the first nine months increasedhalf decreased equity by $1.8$0.1 million, whileoffset by a favorable foreign currency translation increased equity by $3.1 million.of $2.2 million and the payment of a dividend ($0.6 million). The net change in common stock and treasury stock resulting from the accounting for stock-based compensation increaseddecreased equity by $1.8$0.5 million. The net remaining increasedecrease in equity of $0.7 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's June 29, 2018 credit agreement (the "Credit Agreement") with BMO Harris Bank, N.A. ("BMO"), as amended through the Ninth Amendment dated June 30, 2022, remains in effect, and there have been no material changes in the terms of the Credit Agreement since the end of the Company's most recent fiscal year.  As of March 31, 2023, the Company's borrowing capacity on the Revolving Loans under the Credit agreement was $40,000,000 and the Company had approximately $20,760,000 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.  As of March 31, 2023, the Company also had cash of $14.0 million, primarily at its overseas operations.  These funds, with some restrictions and tax implications, are available for repatriation as deemed necessary by the Company.

2326
 

 

On June 29, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A. (“BMO”) that provided for the assignment and assumption of the previously existing loans between the Company and Bank of Montreal (the “2016 Credit Agreement”) and subsequent amendments into a term loan (the “Term Loan”) and revolving credit loans (each a “Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan, the “Loans”). Pursuant to the Credit Agreement, BMO agreed to make the Term Loan to the Company in a principal amount not to exceed $35.0 million and the Company may, from time to time prior to the maturity date, enter into Revolving Loans in amounts not to exceed, in the aggregate, $50.0 million (the “Revolving Credit Commitment”), subject to a Borrowing Base based on Eligible Inventory and Eligible Receivables. Subsequent amendments to the Credit Agreement reduced the Term Loan to $20.0 million, extended the maturity date of the Term Loan to March 4, 2026, and require the Company to make principal installment payments on the Term Loan of $0.5 million per quarter. In addition, under subsequent amendments to the Credit Agreement, BMO’s Revolving Credit Commitment is currently $40.0 million. The Credit Agreement also allows the Company to obtain Letters of Credit from BMO, which if drawn upon by the beneficiary thereof and paid by BMO, would become Revolving Loans. Under the Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $3.0 million in any fiscal year. The term of the Revolving Loans under the Credit Agreement currently runs through June 30, 2025.

Under the Credit Agreement as amended, interest rates are based on either the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”). Loans are designated either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,” which accrue interest at the EURIBO Rate plus an Applicable Margin. Amounts drawn on a Letter of Credit that are not timely reimbursed to the Bank bear interest at a Base Rate plus an Applicable Margin. The Company expects capital expendituresalso pays a commitment fee on the average daily Unused Revolving Credit Commitment equal to be approximately $9 - $11 million in fiscal 2023.  These anticipated expenditures reflectan Applicable Margin. Currently, the Company's plansApplicable 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 invest in modern equipment to drive efficiencies, quality improvements, and cost reductions.EBITDA ratio).

 

The Company'sCredit Agreement, as amended, requires the Company to meet certain financial covenants. Specifically, the Company’s Total Funded Debt to EBITDA ratio may not exceed 3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00. The Company’s Tangible Net Worth may not be less than $100 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.

Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property, including accounts receivable, inventory, machinery and equipment, and intellectual property. The Company has also pledged 100% of its equity interests in certain domestic subsidiaries and 65% of its equity interests in certain foreign subsidiaries. The Company also entered into a Collateral Assignment of Rights under Purchase Agreement for its acquisition of Veth Propulsion. To effect these security interests, the Company entered into various amendment and assignment agreements that consent to the assignment of certain agreements previously entered into between the Company and the Bank of Montreal in connection with the 2016 Credit Agreement. The Company also amended and assigned to BMO a Negative Pledge Agreement that it has previously entered into with Bank of Montreal, pursuant to which it agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Credit Agreement and the Negative Pledge Agreement.

The Company has also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security interest in deposit accounts the Company maintains with the Bank. The Bank may not provide a notice of exclusive control of a deposit account (thereby obtaining exclusive control of the account) prior to the occurrence or existence of a Default or an Event of Default under the Credit Agreement or otherwise upon the occurrence or existence of an event or condition that would, but for the passage of time or the giving of notice, constitute a Default or an Event of Default under the Credit Agreement.

Upon the occurrence of an Event of Default, BMO may take the following actions upon written notice to the Company: (1) terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately Cash Collateralize L/C Obligations in an amount equal to 105% of the aggregate L/C Obligations or a greater amount if BMO determines a greater amount is necessary. If such Event of Default is due to the Company’s bankruptcy, the Bank may take the three actions listed above without notice to the Company.

Other significant contractual obligations as of March 31,December 29, 2023 are disclosed in Note N "Lease Liabilities" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.  There are no material undisclosed guarantees.  As of March 31,December 29, 2023, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant, and equipment, which generally have terms of less than 90 days.  The Company also has long-term obligations related to its postretirement plans which are discussed in detail in Note G "Pension and Other Postretirement Benefit Plans” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q.  Postretirement medical claims are paid by the Company as they are submitted.  In fiscal 2023,2024, the Company expects to contribute $0.8$0.7 million to postretirement benefits based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured.  In fiscal 2023,2024, the Company expects to contribute $0.7 million to its defined benefit pension plans, the minimum contribution required.plans.  The Company does not have any material off-balance sheet arrangements.

27

 

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

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)

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)

(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.

 

24

 

Part II.                OTHER INFORMATION

Item 1.Legal Proceedings

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

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

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 March 31,December 29, 2023, which were not registered under the Securities Act of 1933, in reliance upon an exemption from registration provided by Section 4 (2) of the Act.

 

(b)

Use of Proceeds

 

Not applicable.

 

29

(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

     

December 31, 2022 – January 27, 2023

0

NA

0

315,000

     

January 28 – February 24, 2023

0

NA

0

315,000

     

February 25 – March 31, 2023

0

NA

0

315,000

     

Total

0

NA

0

315,000

Period

(a) Total

Number of

Shares

Purchased

(b)

Average

Price Paid

per Share

(c) Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

(d) Maximum Number of

Shares that May Yet Be

Purchased Under the Plans or

Programs

     

September 30, –  October 27, 2023

0

NA

0

315,000

     

October 28 – November 24, 2023

0

NA

0

315,000

     

November 25 – December 29, 2023

620

NA

0

315,000

     

Total

0

NA

0

315,000

The amounts shown in Column (a) above represent shares of common stock delivered to the Company as payment of withholding taxes due on the vesting of restricted stock and performance stock issued under the Twin Disc, Incorporated 2021 and 2018 Long-Term Incentive Compensation Plans.

 

Under authorizations granted by the Board of Directors on February 1, 2008 and July 27, 2012, the Company was authorized to purchase 500,000 shares of its common stock.  This authorization has no expiration, and as of March 31,December 29, 2023, 315,000 may yet be purchased under these authorizations. The Company did not purchase any shares of its common stock pursuant to these authorizations during the quarter ended March 31,December 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

Defaults Upon Senior Securities

 

None.

Item 5.Other Information

Other Information

 

None.

 


Item 6.Exhibits

31aItem 6.

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibits

 

31b

Certification of Chief Financial

31a               Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32a

Certification of Chief Executive Officer pursuant to Section 906

31b               Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32b

Certification of Chief Financial

32a               Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS 

32b               Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Inline XBRL Instance Document

 

101.SCH

101.INS       Inline XBRL Instance Document

Inline XBRL Schema

 

101.CAL

101.SCH      Inline XBRL Schema

Inline XBRL Calculation Linkbase

 

101.DEF

Inline XBRL Definition

101.CAL      Inline XBRL Calculation Linkbase

 

101.LAB

Inline XBRL Label

101.DEF      Inline XBRL Definition Linkbase

 

101.PRE

Inline XBRL Presentation

101.LAB      Inline XBRL Label Linkbase

 

104

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: May 10, 2023February 7, 2024

/s/ JEFFREY S. KNUTSON

 

Jeffrey S. Knutson

 

Vice President – Finance, Chief Financial Officer,

Treasurer and Secretary

 

Chief Accounting Officer

 

2732