The notes to condensed consolidated financial statements are an integral part of these statements.
The notes to condensed consolidated financial statements are an integral part of these statements.
The notes to condensed consolidated financial statements are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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. 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.
New Accounting Releases
In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-10 (collectively ASC 326). ASC 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, and for smaller reporting companies for fiscal years beginning after December 15, 2022 (the Company’s fiscal 2024), with early adoption permitted for certain amendments. ASC 326 must be adopted by applying a cumulative effect adjustment to retained earnings. The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.
In March 2020 and January 2021, the FASB issued guidance (ASU 2020-04 and ASU 2021-01, respectively), intended to provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments in this guidance are effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The adoption of this guidance did not have a material impact on the Company’s financial statements.
Special Note Regarding Smaller Reporting Company Status
Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller reporting company and accordingly, it has scaled some of its disclosures of financial and non-financial information in this quarterly report. The Company will continue to determine whether to provide additional scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.
The major classes of inventories were as follows:
|
|
March 31, 2023 |
|
|
June 30, 2022 |
|
Inventories: |
|
|
|
|
|
|
|
|
Finished parts |
|
$ |
68,602 |
|
|
$ |
65,789 |
|
Work in process |
|
|
26,320 |
|
|
|
19,801 |
|
Raw materials |
|
|
41,231 |
|
|
|
41,519 |
|
|
|
$ |
136,153 |
|
|
$ |
127,109 |
|
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, 2023 and March 25, 2022:
|
|
For the Quarter Ended |
|
|
For the Three Quarters Ended |
|
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
Reserve balance, beginning of period |
|
$ |
4,145 |
|
|
$ |
3,483 |
|
|
$ |
3,329 |
|
|
$ |
4,369 |
|
Current period expense and adjustments |
|
|
371 |
|
|
|
339 |
|
|
|
2,052 |
|
|
|
658 |
|
Payments or credits to customers |
|
|
(510 |
) |
|
|
(518 |
) |
|
|
(1,381 |
) |
|
|
(1,688 |
) |
Translation |
|
|
12 |
|
|
|
(27 |
) |
|
|
18 |
|
|
|
(62 |
) |
Reserve balance, end of period |
|
$ |
4,018 |
|
|
$ |
3,277 |
|
|
$ |
4,018 |
|
|
$ |
3,277 |
|
The current portion of the warranty accrual ($3,503 and $2,757 as of March 31, 2023 and March 25, 2022, respectively) is reflected in accrued liabilities, while the long-term portion ($515 and $520 as of March 31, 2023 and March 25, 2022, respectively) is included in other long-term liabilities on the consolidated balance sheets.
The Company is involved in litigation of which the ultimate outcome and liability to the Company, if any, is not presently determinable. Management believes that final disposition of such litigation will not have a material impact on the Company’s results of operations, financial position or cash flows.
The Company and its subsidiaries are engaged in the manufacture and sale of marine and heavy-duty off-highway power transmission equipment. Principal products include marine transmissions, azimuth drives, surface drives, propellers and boat management systems, as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls systems. The Company sells to both domestic and foreign customers in a variety of market areas, principally pleasure craft, commercial and military marine markets, as well as in the energy and natural resources, government and industrial markets. The Company'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 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 between segments are at established inter-company selling prices. Management evaluates the performance of its segments based on their net income.
Information about the Company’s segments is summarized as follows:
|
|
For the Quarter Ended |
|
|
For the Three Quarters Ended |
|
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment sales |
|
$ |
63,932 |
|
|
$ |
56,403 |
|
|
$ |
169,607 |
|
|
$ |
147,296 |
|
Distribution segment sales |
|
|
33,839 |
|
|
|
23,660 |
|
|
|
83,732 |
|
|
|
72,485 |
|
Inter/Intra segment elimination – manufacturing |
|
|
(18,531 |
) |
|
|
(16,672 |
) |
|
|
(46,373 |
) |
|
|
(40,815 |
) |
Inter/Intra segment elimination – distribution |
|
|
(5,468 |
) |
|
|
(4,102 |
) |
|
|
(13,930 |
) |
|
|
(12,027 |
) |
|
|
$ |
73,772 |
|
|
$ |
59,289 |
|
|
$ |
193,036 |
|
|
$ |
166,939 |
|
Net income attributable to Twin Disc |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment net income |
|
$ |
5,873 |
|
|
$ |
6,000 |
|
|
$ |
11,500 |
|
|
$ |
9,230 |
|
Distribution segment net income |
|
|
2,053 |
|
|
|
1,415 |
|
|
|
4,412 |
|
|
|
3,396 |
|
Corporate and eliminations |
|
|
(5,252 |
) |
|
|
(5,184 |
) |
|
|
(14,127 |
) |
|
|
(12,310 |
) |
|
|
$ |
2,674 |
|
|
$ |
2,231 |
|
|
$ |
1,785 |
|
|
$ |
316 |
|
Assets |
|
March 31, 2023 |
|
|
June 30, 2022 |
|
Manufacturing segment assets |
|
$ |
376,722 |
|
|
$ |
364,174 |
|
Distribution segment assets |
|
|
60,394 |
|
|
|
50,958 |
|
Corporate assets and elimination of intercompany assets |
|
|
(151,603 |
) |
|
|
(138,609 |
) |
|
|
$ |
285,513 |
|
|
$ |
276,523 |
|
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, 2023 and March 25, 2022.
Net sales by product group for the quarter ended March 31, 2023 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Elimination of |
|
|
|
|
|
|
|
Manufacturing |
|
|
Distribution |
|
|
Intercompany Sales |
|
|
Total |
|
Industrial |
|
$ |
7,076 |
|
|
$ |
1,548 |
|
|
$ |
(1,321 |
) |
|
$ |
7,303 |
|
Land-based transmissions |
|
|
16,785 |
|
|
|
8,692 |
|
|
|
(5,902 |
) |
|
|
19,575 |
|
Marine and propulsion systems |
|
|
40,492 |
|
|
|
19,867 |
|
|
|
(16,505 |
) |
|
|
43,854 |
|
Other |
|
|
(421 |
) |
|
|
3,732 |
|
|
|
(271 |
) |
|
|
3,040 |
|
Total |
|
$ |
63,932 |
|
|
$ |
33,839 |
|
|
$ |
(23,999 |
) |
|
$ |
73,772 |
|
Net sales by product group for the quarter ended March 25, 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 |
|
Net sales by product group for the three quarters ended March 25, 2022 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Elimination of |
|
|
|
|
|
|
|
Manufacturing |
|
|
Distribution |
|
|
Intercompany Sales |
|
|
Total |
|
Industrial |
|
$ |
20,939 |
|
|
$ |
4,377 |
|
|
$ |
(3,016 |
) |
|
$ |
22,300 |
|
Land-based transmissions |
|
|
41,158 |
|
|
|
18,775 |
|
|
|
(18,287 |
) |
|
|
41,646 |
|
Marine and propulsion systems |
|
|
84,968 |
|
|
|
41,330 |
|
|
|
(30,983 |
) |
|
|
95,315 |
|
Other |
|
|
231 |
|
|
|
8,003 |
|
|
|
(556 |
) |
|
|
7,678 |
|
Total |
|
$ |
147,296 |
|
|
$ |
72,485 |
|
|
$ |
(52,842 |
) |
|
$ |
166,939 |
|
F. |
Stock-Based Compensation |
Performance Stock Awards (“PSA”)
During the first three quarters of fiscal 2023 and 2022, the Company granted a target number of 118.1 and 103.6 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2023 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2025. These PSAs are subject to adjustment if the Company’s return on invested capital and cumulative EBITDA falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 236.3. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.
The PSAs granted in fiscal 2022 will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual earnings per share (“EPS”) or average free cashflow (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2024. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS or average free cashflow for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 145.0. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.
There were 437.9 and 440.9 unvested PSAs outstanding at March 31, 2023 and March 25, 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 and $237 was recognized for the quarters ended March 31, 2023 and March 25, 2022, respectively, related to PSAs. Compensation expense of $903 and $672 was recognized for the three quarters ended March 31, 2023 and March 25, 2022, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at March 31, 2023 was $8.37. At March 31, 2023, the Company had $1,396 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2023, 2022 and 2021 awards. The total fair value of PSAs vested as of March 31, 2023 and March 25, 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 three quarters of fiscal 2023 and 2022, the Company granted 180.0 and 51.7 service based restricted shares, respectively, to employees and non-employee directors. There were 308.6 and 268.5 unvested shares outstanding at March 31, 2023 and March 25, 2022, respectively. A total of 0 and 29.8 shares of restricted stock were forfeited during the three quarters ended March 31, 2023 and March 25, 2022, respectively. Compensation expense of $313 and $294 was recognized for the quarters ended March 31, 2023 and March 25, 2022, respectively. Compensation expense of $1,007 and $913 was recognized for the three quarters ended March 31, 2023 and March 25, 2022, respectively. The total fair value of restricted stock grants vested as of March 31, 2023 and March 25, 2022 was $1,699 and $1,695, respectively. As of March 31, 2023, the Company had $1,359 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.
Restricted Stock Unit Awards (“RSU”)
Under the 2021 Long Term Incentive Plan, the Company has been authorized to issue RSUs. The RSUs entitle the employee to shares of common stock of the Company if the employee remains employed by the Company through a specified date, generally three years from the date of grant. The fair value of the RSUs (on the date of grant) is recorded as compensation expense over the vesting period. During the first three quarters of fiscal 2023 and 2022, the Company granted 72.4 and 67.4 of employment based RSUs, respectively. There were 130.2 and 67.4 unvested RSUs outstanding at March 31, 2023 and March 25, 2022, respectively. Compensation expense of $116 and $89 was recognized for the quarters ended March 31, 2023 and March 25, 2022, respectively. Compensation expense of $340 and $255 was recognized for the three quarters ended March 31, 2023 and March 25, 2022, respectively. The total fair value of restricted stock units vested as of March 31, 2023 and March 25, 2022 was $40 and $475, respectively. The weighted average grant date fair value of the unvested awards at March 31, 2023 was $10.92. As of March 31, 2023, the Company had $825 of unrecognized compensation expense related to restricted stock which will be recognized over the next two years.
G. |
Pension and Other Postretirement Benefit Plans |
The Company has non-contributory, qualified defined benefit plans covering substantially all domestic employees hired prior to October 1, 2003 and certain foreign employees. Additionally, the Company provides healthcare and life insurance benefits for certain domestic retirees. 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 |
|
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
Pension Benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
106 |
|
|
$ |
137 |
|
|
$ |
309 |
|
|
$ |
406 |
|
Prior service cost |
|
|
8 |
|
|
|
10 |
|
|
|
25 |
|
|
|
30 |
|
Interest cost |
|
|
912 |
|
|
|
709 |
|
|
|
2,648 |
|
|
|
2,055 |
|
Expected return on plan assets |
|
|
(1,053 |
) |
|
|
(1,258 |
) |
|
|
(3,173 |
) |
|
|
(3,773 |
) |
Amortization of transition obligation |
|
|
9 |
|
|
|
9 |
|
|
|
27 |
|
|
|
28 |
|
Amortization of prior service cost |
|
|
9 |
|
|
|
(4 |
) |
|
|
27 |
|
|
|
(12 |
) |
Amortization of actuarial net loss |
|
|
639 |
|
|
|
562 |
|
|
|
1,873 |
|
|
|
1,687 |
|
Net periodic benefit cost |
|
$ |
630 |
|
|
$ |
165 |
|
|
$ |
1,736 |
|
|
$ |
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
2 |
|
|
$ |
4 |
|
|
$ |
7 |
|
|
$ |
11 |
|
Interest cost |
|
|
53 |
|
|
|
35 |
|
|
|
159 |
|
|
|
105 |
|
Amortization of prior service cost |
|
|
(69 |
) |
|
|
(69 |
) |
|
|
(206 |
) |
|
|
(206 |
) |
Amortization of acturial net loss |
|
|
(10 |
) |
|
|
- |
|
|
|
(29 |
) |
|
|
- |
|
Net periodic benefit gain |
|
$ |
(24 |
) |
|
$ |
(30 |
) |
|
$ |
(69 |
) |
|
$ |
(90 |
) |
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 to its pension plans in fiscal 2023. For the three quarters ended March 31, 2023, the amount of $666 in contributions to the pension plans were made.
The Company had changes in benefit plan adjustments totaling $578 (net of $1 in taxes) from accumulated other comprehensive loss during the quarter ended March 31, 2023, and $505 (net of $4 in taxes) during the quarter ended March 25, 2022. These changes are included in the computation of net periodic benefit cost. The Company had changes in benefit plan adjustments totaling $581 (net of $5 in taxes) from accumulated other comprehensive loss during the three quarters ended March 31, 2023, and $1,512 (net of $4 in taxes) during the three quarters ended March 25, 2022. These changes are included in the computation of net periodic benefit cost. Included in changes in benefit plan adjustments, the Company had a plan merger remeasurement adjustment of ($1,115) during the quarter ended December 30, 2022.
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 historical losses and uncertain future domestic earnings, the Company recognizes a full US valuation allowance. Permanent differences continue to fluctuate and are significant compared to projected ordinary income. Therefore, per ASC guidance, the fully valued domestic entity was removed from the annualized effective rate calculation. Because of the full US valuation allowance, the US entity may only recognize tax expense / benefit recorded for ASC-740-10 adjustments.
For the nine months ended March 31, 2023 and March 25, 2022 the Company’s effective income tax rate was 54.3% and 76.5% respectively. Foreign income and expense was recognized, although there continues to be negative domestic earnings. The mix of foreign earnings by jurisdiction resulted in a decrease in the effective tax rate of 22.2%.
In the post pandemic era, the Company continues to monitor for any revisions enacted under the Tax Cuts and Job Act (TCJA), Coronavirus Aid, Relief and Economic Security (CARES) Act and the American Rescue Plan (ARPA). On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA). This landmark United States law aims to reduce inflation by reducing the deficit, lowering prescription drug prices and investing into domestic energy production while promoting clean energy. At this time it is not certain what, if any, impact this will have on the Company.
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 of unrecognized tax benefits, which include $53 of related interest and penalties, as of March 31, 2023, which, if recognized, would favorably impact the effective tax rate. There were no significant changes in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quarter ended March 31, 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 2014 through 2021. The tax year open to exam in the Netherlands is 2018. 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.
10
As of March 31, 2023, the following acquired intangible assets have definite useful lives and are subject to amortization:
|
|
Net Book Value Rollforward |
|
|
Net Book Value By Asset Type |
|
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization / Impairment |
|
|
Net Book Value |
|
|
Customer Relationships |
|
|
Technology Know-how |
|
|
Trade Name |
|
|
Other |
|
Balance at June 30, 2022 |
|
$ |
39,845 |
|
|
$ |
(26,835 |
) |
|
$ |
13,010 |
|
|
$ |
7,636 |
|
|
$ |
3,238 |
|
|
$ |
972 |
|
|
$ |
1,164 |
|
Addition |
|
|
53 |
|
|
|
- |
|
|
|
53 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
Reduction |
|
|
(10,506 |
) |
|
|
10,506 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
- |
|
|
|
(2,140 |
) |
|
|
(2,140 |
) |
|
|
(993 |
) |
|
|
(880 |
) |
|
|
(39 |
) |
|
|
(228 |
) |
Translation adjustment |
|
|
316 |
|
|
|
- |
|
|
|
316 |
|
|
|
214 |
|
|
|
365 |
|
|
|
(265 |
) |
|
|
2 |
|
Balance at March 31, 2023 |
|
$ |
29,708 |
|
|
$ |
(18,469 |
) |
|
$ |
11,239 |
|
|
$ |
6,857 |
|
|
$ |
2,723 |
|
|
$ |
668 |
|
|
$ |
991 |
|
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 7 years.
Intangible amortization expense was $738 and $785 for the quarters ended March 31, 2023, and March 25, 2022, respectively. Intangible amortization expense was $2,140 and $2,415 for the three quarters ended March 31, 2023, and March 25, 2022, respectively. Estimated intangible amortization expense for the remainder of fiscal 2023 and each of the next five fiscal years and thereafter is as follows:
Fiscal Year |
|
|
|
|
2023 |
|
$ |
742 |
|
2024 |
|
|
2,838 |
|
2025 |
|
|
2,681 |
|
2026 |
|
|
1,757 |
|
2027 |
|
|
1,096 |
|
2028 |
|
|
1,066 |
|
Thereafter |
|
|
1,059 |
|
Long-term debt at March 31, 2023 and June 30, 2022 consisted of the following:
| | March 31, 2023 | | | June 30, 2022 | |
Credit Agreement Debt | | | | | | | | |
Revolving loans (expire June 2025) | | $ | 19,240 | | | $ | 22,968 | |
Term loan (due March 2026) | | | 12,000 | | | | 13,500 | |
Other | | | 36 | | | | 75 | |
Subtotal | | | 31,276 | | | | 36,543 | |
Less: current maturities | | | (2,000 | ) | | | (2,000 | ) |
Total long-term debt | | $ | 29,276 | | | $ | 34,543 | |
Credit Agreement Debt: The Company’s credit agreement debt represents borrowings made under the credit agreement, as amended, which it entered into with BMO Harris Bank N.A, (“BMO”) on June 29, 2018 (“Credit Agreement”). Under the agreement, 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”) between the Company and BMO.
Pursuant to the Credit Agreement, as in effect prior to the Ninth Amendment, the Bank made a Term Loan to the Company in the principal amount of $20 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 subject to a Borrowing Base, $40 million (the “Revolving Credit Commitment”). The Credit Agreement also allows the Company to obtain Letters of Credit from the Bank, which if drawn upon by the beneficiary thereof and paid by the Bank, would become Revolving Loans.
The Ninth Amendment extended the Credit Agreement through June 30, 2025. Prior to the Ninth Amendment, 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-based interest rates with different benchmark rates based on 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, the Applicable Margins are between 1.25% and 2.75% for Revolving Loans and Letters of Credit; 1.375% and 2.875% for Term Loans; and .10% and .15% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).
The Ninth Amendment also revised the Company’s financial covenants under 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.
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, 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 in principal was paid on these liabilities during the three quarters ended March 31, 2023.
During the quarter ended March 31, 2023, the average interest rate was 6.22% on the Term Loan, and 5.15% on the Revolving Loans.
As of March 31, 2023, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $40,000, and the Company had approximately $20,760 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, 2023 and June 30, 2022. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
The Company is party to an interest rate swap arrangement with Bank of Montreal, with an initial notional amount of $20,000 and a maturity date of March 4, 2026 to hedge the Term Loan. As of March 31, 2023, the notional amount was $12,000. This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging. This swap is included in the disclosures in Note O, Derivative Financial Instruments.
During the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan as a net investment hedge to mitigate the risk of variability in its euro denominated net investments in wholly-owned foreign companies. Effective upon the designation, all changes in the fair value of the euro revolver are reported in accumulated other comprehensive loss along with the foreign currency translation adjustments on those foreign investments. This net investment hedge is included in the disclosures in Note O, Derivative Financial Instruments.
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, 2023 remain authorized for purchase. The Company did not make any open market purchases of its shares during the quarters ended March 31, 2023 and March 25, 2022.
The following is a reconciliation of the Company’s equity balances for the first three fiscal quarters of 2023 and 2022:
| | Twin Disc, Inc. Shareholders’ Equity | |
| | | | | | | | | | Accumulated | | | | | | | | | | | | | |
| | | | | | | | | | Other | | | | | | | Non- | | | | | |
| | Common | | | Retained | | | Comprehensive | | | Treasury | | | Controlling | | | Total | |
| | Stock | | | Earnings | | | Income (Loss) | | | Stock | | | Interest | | | Equity | |
Balance, June 30, 2022 | | $ | 42,551 | | | $ | 135,031 | | | $ | (32,086 | ) | | $ | (14,720 | ) | | $ | 412 | | | $ | 131,188 | |
Net (loss) income | | | | | | | (2,029 | ) | | | | | | | | | | | 98 | | | | (1,931 | ) |
Translation adjustments | | | | | | | | | | | (6,328 | ) | | | | | | | 38 | | | | (6,290 | ) |
Benefit plan adjustments, net of tax | | | | | | | | | | | 518 | | | | | | | | | | | | 518 | |
Unrealized gain on cash flow hedge, net of tax | | | | | | | | | | | 793 | | | | | | | | | | | | 793 | |
Compensation expense | | | 658 | | | | | | | | | | | | | | | | | | | | 658 | |
Shares (acquired) issued, net | | | (1,924 | ) | | | | | | | | | | | 1,756 | | | | | | | | (168 | ) |
Balance, September 30, 2022 | | | 41,285 | | | | 133,002 | | | | (37,103 | ) | | | (12,964 | ) | | | 548 | | | | 124,768 | |
Net income | | | | | | | 1,139 | | | | | | | | | | | | 15 | | | | 1,154 | |
Translation adjustments | | | | | | | | | | | 8,333 | | | | | | | | 59 | | | | 8,392 | |
Benefit plan adjustments, net of tax | | | | | | | | | | | (515 | ) | | | | | | | | | | | (515 | ) |
Unrealized loss on cash flow hedge, net of tax | | | | | | | | | | | (595 | ) | | | | | | | | | | | (595 | ) |
Compensation expense | | | 856 | | | | | | | | | | | | | | | | | | | | 856 | |
Shares (acquired) issued, net | | | (697 | ) | | | | | | | | | | | 402 | | | | | | | | (295 | ) |
Balance, December 30, 2022 | | | 41,444 | | | | 134,141 | | | | (29,880 | ) | | | (12,562 | ) | | | 622 | | | | 133,765 | |
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 | |
| | 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 | |
Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended March 31, 2023 and March 25, 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 | |
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 | | |
Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended March 25, 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 | | |
| (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 Operations |
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.
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. 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.
In the second quarter of fiscal 2023, the Company completed the sale of the real estate property located in Belgium and received $7,150 in proceeds, net of fees and recorded a gain of $4,161 in other operating income.
The 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.
The components of basic and diluted earnings per share were as follows:
|
|
For the Quarter Ended |
|
|
For the Three Quarters Ended |
|
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,750 |
|
|
$ |
2,310 |
|
|
$ |
1,973 |
|
|
$ |
539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net earnings attributable to noncontrolling interest |
|
|
(76 |
) |
|
|
(79 |
) |
|
|
(188 |
) |
|
|
(223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Undistributed earnings attributable to unvested shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Twin Disc |
|
|
2,674 |
|
|
|
2,231 |
|
|
|
1,785 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic |
|
|
13,504 |
|
|
|
13,397 |
|
|
|
13,455 |
|
|
|
13,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share - basic |
|
$ |
0.20 |
|
|
$ |
0.17 |
|
|
$ |
0.13 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,750 |
|
|
$ |
2,310 |
|
|
$ |
1,973 |
|
|
$ |
539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net earnings attributable to noncontrolling interest |
|
|
(76 |
) |
|
|
(79 |
) |
|
|
(188 |
) |
|
|
(223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Undistributed earnings attributable to unvested shares |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Twin Disc |
|
|
2,674 |
|
|
|
2,231 |
|
|
|
1,785 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic |
|
|
13,504 |
|
|
|
13,397 |
|
|
|
13,455 |
|
|
|
13,339 |
|
Effect of dilutive stock awards |
|
|
158 |
|
|
|
60 |
|
|
|
153 |
|
|
|
34 |
|
Weighted average shares outstanding - diluted |
|
|
13,662 |
|
|
|
13,457 |
|
|
|
13,608 |
|
|
|
13,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share - diluted |
|
$ |
0.20 |
|
|
$ |
0.17 |
|
|
$ |
0.13 |
|
|
$ |
0.02 |
|
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.
The components of lease expense were as follows:
|
|
For the Quarter Ended |
|
|
For the Three Quarters Ended |
|
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
$ |
187 |
|
|
$ |
162 |
|
|
$ |
498 |
|
|
$ |
492 |
|
Interest on lease liabilities |
|
|
87 |
|
|
|
68 |
|
|
|
219 |
|
|
|
211 |
|
Operating lease cost |
|
|
852 |
|
|
|
800 |
|
|
|
2,250 |
|
|
|
2,190 |
|
Short-term lease cost |
|
|
2 |
|
|
|
13 |
|
|
|
5 |
|
|
|
53 |
|
Variable lease cost |
|
|
94 |
|
|
|
46 |
|
|
|
202 |
|
|
|
127 |
|
Total lease cost |
|
|
1,222 |
|
|
|
1,089 |
|
|
|
3,174 |
|
|
|
3,073 |
|
Less: Sublease income |
|
|
(18 |
) |
|
|
(19 |
) |
|
|
(53 |
) |
|
|
(57 |
) |
Net lease cost |
|
$ |
1,204 |
|
|
$ |
1,070 |
|
|
$ |
3,121 |
|
|
$ |
3,016 |
|
Other information related to leases was as follows:
|
|
For the Quarter Ended |
|
|
For the Three Quarters Ended |
|
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
873 |
|
|
$ |
808 |
|
|
$ |
2,268 |
|
|
$ |
2,281 |
|
Operating cash flows from finance leases |
|
|
138 |
|
|
|
207 |
|
|
|
270 |
|
|
|
623 |
|
Financing cash flows from finance leases |
|
|
73 |
|
|
|
68 |
|
|
|
231 |
|
|
|
726 |
|
Right-of-use-assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
218 |
|
|
|
695 |
|
|
|
1,736 |
|
|
|
1,091 |
|
Finance leases |
|
|
47 |
|
|
|
- |
|
|
|
367 |
|
|
|
307 |
|
Weighted average remaining lease term (years): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
|
|
|
|
8.8 |
|
|
|
8.8 |
|
Finance lease |
|
|
|
|
|
|
|
|
|
|
11.3 |
|
|
|
11.4 |
|
Weighted average discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
|
|
|
|
7.2 |
% |
|
|
7.1 |
% |
Finance leases |
|
|
|
|
|
|
|
|
|
|
5.2 |
% |
|
|
5.1 |
% |
Approximate future minimum rental commitments under non-cancellable leases as of March 31, 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 |
|
O. |
Derivative Financial Instruments |
From time to time, the Company enters into derivative instruments to manage risks relating to interest rate and foreign exchange rate volatility. 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 consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes.
Interest Rate Swap Contracts
The Company has one outstanding interest rate swap contract as of March 31, 2023, with a notional amount of $12,000. It has been designated as a cash flow hedge in accordance with ASC 815, Derivatives and Hedging.
The primary purpose of the Company’s cash flow hedging activities is to manage the potential changes in value associated with interest payments on the Company’s SOFR-based indebtedness. The Company records gains and losses on interest rate swap contracts qualifying as cash flow hedges in accumulated other comprehensive loss to the extent that these hedges are effective and until the Company recognizes the underlying transactions in net earnings, at which time these gains and losses are recognized in interest expense on its 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 and $355 as of March 31, 2023, and June 30, 2022, respectively. The unrealized amounts in accumulated other comprehensive income (loss) will fluctuate based on changes in the fair value of open contracts during each reporting period.
The Company estimates that $239 of net unrealized losses related to cash flow hedging activities included in accumulated other comprehensive income (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 risk related to its investment in net assets in foreign countries. As discussed in Note J, Long-term Debt, during the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan, with a notional amount of €6,500, 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 gains related to net investment hedging activities that were included in accumulated other comprehensive loss were $1,319 and $1,551 as of March 31, 2023 and June 30, 2022, 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 |
|
Derivative designated as hedge: |
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Other current assets |
|
$ |
239 |
|
|
$ |
68 |
|
Interest rate swap |
|
Other noncurrent assets |
|
|
112 |
|
|
|
77 |
|
The impact of the Company’s derivative instruments on the condensed consolidated statements of operations and comprehensive (loss) income for the quarters and three quarters ended March 31, 2023 and March 25, 2022, respectively, was as follows:
|
|
Statement of Comprehensive |
|
For the Quarter Ended |
|
|
For the Three Quarters Ended |
|
|
|
Income Location |
|
March 31, 2023 |
|
|
March 25, 2022 |
|
|
March 31, 2023 |
|
|
March 25, 2022 |
|
Derivative designated as hedge: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Interest expense |
|
$ |
76 |
|
|
$ |
81 |
|
|
$ |
238 |
|
|
$ |
268 |
|
Interest rate swap |
|
Unrealized (loss) gain on cash flow hedge |
|
|
(133 |
) |
|
|
556 |
|
|
|
206 |
|
|
|
855 |
|
Net investment hedge |
|
Unrealized (loss) gain on hedges |
|
|
(91 |
) |
|
|
254 |
|
|
|
(232 |
) |
|
|
893 |
|