Twin Disc, Inc. (NASDAQ:TWIN) Q3 2022 Earnings Conference Call April 29, 2022 11:00 AM ET Company Participants Stanley Berger - SM Berger & Company John Batten - CEO Jeff Knutson - VP, Finance and CFO Conference Call Participants Josh Chan - Baird Noah Kaye - Oppenheimer Rand Gesing - Neuberger Operator Greetings. Welcome to the Twin Disc, Inc. Fiscal Third Quarter 2022 Earnings Conference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal present ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended December 31, 2021 ☐ 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) (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) ...

Financial Data and Key Metrics Changes - Sales for the quarter were just under $60 million, an increase of $11.3 million or 23.3% from the prior year and up $12.1 million or 25.4% from the previous quarter [15][16] - The second quarter margin percentage improved to 22.5% compared to 18.3% in the prior year, driven by increased revenue and a more profitable product mix [16] - The net loss for the second quarter was $3.8 million or $0.29 per diluted share, compared to a net loss of $4.3 million or $0.33 per diluted share in the prior year [20] Business Line Data and Key Metrics Changes - Industrial product shipments increased by 46%, marine and propulsion shipments rose by 14.5%, and off-highway transmission sales grew by 13.4% for the second quarter [15] - Marketing, engineering, and administrative costs increased by $1.9 million or 14% compared to the prior year, primarily due to increased salaries and benefits [17] Market Data and Key Metrics Changes - Sales into North America were up 30%, Asia Pacific sales increased by 17%, and European sales rose by 5% [16] - The Australian marine market, particularly for pleasure craft, continued to show elevated demand, with significant unit orders for marine transmissions [8] Company Strategy and Development Direction - The company anticipates improving conditions in North American oil and gas and aims to match internal and supply chain capacity to meet increasing demand [23] - There is a focus on hybrid and electrification applications, with ongoing R&D and engineering activity [24] Management's Comments on Operating Environment and Future Outlook - Management noted that supply chain challenges remain, but there is optimism about demand recovery in various markets, including oil and gas and marine [11][23] - The company is hopeful that inflationary pressures may stabilize, allowing for better pricing strategies moving forward [42] Other Important Information - The company recorded restructuring charges of $1.2 million related to a Belgian restructuring program, expected to drive annualized savings of approximately $1.6 million once complete [19] - Inventory increased by $9 million in the first half, primarily due to supply chain imbalances [21] Q&A Session Summary Question: Oil and gas market outlook and order trajectory - Management indicated that conversations with OEMs are ongoing, and they expect new unit orders to improve within the next three to six months based on historical cycles [29] Question: Price increase and surcharge impact - Management explained that the recent price increases and surcharges are aimed at maintaining gross margins amid rising costs, with expectations to return to gross margins above 25% in the second half [35][36] Question: Backlog pricing and margin impact - The backlog will be shipped at higher prices due to recent price increases, which should positively impact current margins [40] Question: Labor constraints and growth - Management acknowledged challenges in growing the workforce, particularly in North America, but noted improvements in the situation [63] Question: Cash flow expectations - The company expects to be free cash flow positive in the second half of the fiscal year, despite some challenges in the first half [56]

[Cover Page and Filing Information](index=1&type=section&id=Cover%20Page%20and%20Filing%20Information) [Filing Details](index=1&type=section&id=Filing%20Details) This report is TWIN DISC, INCORPORATED's quarterly report (Form 10-Q) as of September 24, 2021, identifying the company as an accelerated filer and smaller reporting company, confirming all required reports and interactive data files have been submitted - The company is an **Accelerated Filer** and a **Smaller Reporting Company**[3](index=3&type=chunk)[4](index=4&type=chunk) - As of October 28, 2021, **13,599,013 shares of common stock** were outstanding[4](index=4&type=chunk) - All required reports and interactive data files have been submitted[3](index=3&type=chunk) [Part I. FINANCIAL INFORMATION](index=2&type=section&id=Part%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) This section provides the unaudited condensed consolidated balance sheets, statements of operations and comprehensive income, and cash flows for the specified periods [CONDENSED CONSOLIDATED BALANCE SHEETS](index=2&type=section&id=CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) | ASSETS | September 24, 2021 (in thousands) | June 30, 2021 (in thousands) | | :--------------------------------- | :-------------------------------- | :----------------------------- | | Cash | $22,092 | $12,340 | | Trade accounts receivable, net | $34,837 | $39,491 | | Inventories | $121,092 | $114,967 | | Assets held for sale | $3,321 | $9,539 | | Total current assets | $194,841 | $191,967 | | Total assets | $276,247 | $275,413 | | LIABILITIES AND EQUITY | | | | Total current liabilities | $80,501 | $78,560 | | Long-term debt | $29,883 | $30,085 | | Total liabilities | $144,623 | $144,753 | | Total equity | $131,624 | $130,660 | | Total liabilities and equity | $276,247 | $275,413 | - Cash balance increased to **$22,092 thousand** as of September 24, 2021, a significant increase from **$12,340 thousand** on June 30, 2021[6](index=6&type=chunk) - Inventories increased to **$121,092 thousand**, while net trade accounts receivable decreased to **$34,837 thousand**[6](index=6&type=chunk) [CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME](index=4&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS%20AND%20COMPREHENSIVE%20INCOME) | (IN THOUSANDS, EXCEPT PER SHARE DATA) | For the Quarter Ended September 24, 2021 | For the Quarter Ended September 25, 2020 | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | | Net sales | $47,761 | $46,179 | | Cost of goods sold | $34,314 | $36,476 | | Gross profit | $13,447 | $9,703 | | Income (loss) from operations | $3,247 | $(3,147) | | Net income (loss) attributable to Twin Disc | $1,920 | $(3,979) | | Basic income (loss) per share | $0.14 | $(0.30) | | Diluted income (loss) per share | $0.14 | $(0.30) | | Comprehensive income attributable to Twin Disc | $494 | $248 | - Net sales for the quarter ended September 24, 2021, increased to **$47,761 thousand**, compared to **$46,179 thousand** in the prior-year period[8](index=8&type=chunk) - The company transitioned from an operating loss of **$3,147 thousand** to operating income of **$3,247 thousand**, and net income from a loss of **$3,979 thousand** to a profit of **$1,920 thousand**[8](index=8&type=chunk) - Basic and diluted earnings per share both improved from **$(0.30)** in the prior-year period to **$0.14**[8](index=8&type=chunk) [CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS](index=5&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) | (IN THOUSANDS) | For the Quarter Ended September 24, 2021 | For the Quarter Ended September 25, 2020 | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash provided (used) by operating activities | $2,374 | $(716) | | Net cash used by investing activities | $8,712 | $(1,229) | | Net cash used by financing activities | $(570) | $(752) | | Net change in cash | $9,752 | $(1,375) | | Cash: End of period | $22,092 | $9,313 | - Operating activities provided **$2,374 thousand** in cash for the quarter ended September 24, 2021, compared to a use of **$716 thousand** in the prior-year period[11](index=11&type=chunk) - Investing activities generated **$8,712 thousand** in cash inflow, primarily due to **$9,139 thousand** from the sale of property, plant, and equipment[11](index=11&type=chunk) - Period-end cash balance significantly increased to **$22,092 thousand**, up from **$9,313 thousand** in the prior-year period[11](index=11&type=chunk) [NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS](index=6&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section provides detailed notes to the condensed consolidated financial statements, covering key information such as accounting policies, inventories, warranties, and business segments [A. Basis of Presentation](index=6&type=section&id=A.%20Basis%20of%20Presentation) - Unaudited condensed consolidated financial statements prepared in accordance with SEC rules and regulations are deemed adequate for disclosure[12](index=12&type=chunk) - ASU 2019-12 (simplifying income tax accounting) adopted on July 1, 2021, with no material impact on disclosures[14](index=14&type=chunk) - The company is evaluating the potential impact of ASU 2016-13 (expected credit losses) and ASU 2020-04/2021-01 (LIBOR transition) on financial statements and disclosures[15](index=15&type=chunk)[16](index=16&type=chunk) - As a smaller reporting company, the company has adjusted certain financial and non-financial information disclosures per SEC rules[17](index=17&type=chunk) [B. Inventories](index=7&type=section&id=B.%20Inventories) | Inventories (in thousands) | September 24, 2021 | June 30, 2021 | | :------------------------- | :----------------- | :------------ | | Finished parts | $62,735 | $59,761 | | Work in process | $19,785 | $17,908 | | Raw materials | $38,572 | $37,298 | | Total | $121,092 | $114,967 | - Total inventories amounted to **$121,092 thousand** as of September 24, 2021, an increase of **5.3%** from June 30, 2021, driven by growth in finished parts, work in process, and raw materials[18](index=18&type=chunk)[101](index=101&type=chunk) [C. Warranty](index=7&type=section&id=C.%20Warranty) | Warranty Reserve Activity (in thousands) | For the Quarter Ended September 24, 2021 | For the Quarter Ended September 25, 2020 | | :------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Reserve balance, beginning of period | $4,369 | $4,460 | | Current period (benefit) expense | $(848) | $1,034 | | Payments or credits to customers | $(532) | $(265) | | Translation | $(12) | $36 | | Reserve balance, end of period | $3,560 | $4,682 | - Warranty reserve balance was **$3,560 thousand** as of September 24, 2021, a decrease from the prior-year period, with a warranty benefit of **$848 thousand** recognized in the current period[19](index=19&type=chunk) [D. Contingencies](index=7&type=section&id=D.%20Contingencies) - The company is involved in litigation, but management believes the ultimate outcome will not materially affect operations, financial condition, or cash flows[20](index=20&type=chunk) [E. Business Segments](index=7&type=section&id=E.%20Business%20Segments) - The company manufactures and sells marine and heavy-duty off-highway power transmission equipment, including marine transmissions, bow thrusters, surface drives, propellers, and marine control systems[21](index=21&type=chunk) - The company has two reporting segments: Manufacturing and Distribution, with performance assessed by management based on net income[22](index=22&type=chunk)[23](index=23&type=chunk) | Segment Performance (in thousands) | For the Quarter Ended September 24, 2021 | For the Quarter Ended September 25, 2020 | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | | Manufacturing segment sales | $41,594 | $38,495 | | Distribution segment sales | $20,534 | $22,506 | | Total Net sales | $47,761 | $46,179 | | Manufacturing segment net income (loss) | $4,832 | $(2,662) | | Distribution segment net income | $483 | $1,155 | | Total Net income (loss) attributable to Twin Disc | $1,920 | $(3,979) | | Net Sales by Product Group (in thousands) | September 24, 2021 | September 25, 2020 | | :---------------------------------------- | :----------------- | :----------------- | | Industrial | $6,132 | $5,423 | | Land-based transmissions | $12,242 | $12,259 | | Marine and propulsion systems | $26,633 | $26,176 | | Other | $2,754 | $2,321 | | Total | $47,761 | $46,179 | [F. Stock-Based Compensation](index=9&type=section&id=F.%20Stock-Based%20Compensation) - The company grants Performance Share Awards (PSAs), Restricted Stock Awards (RS), and Restricted Stock Unit Awards (RSUs) as equity incentives[27](index=27&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) - Unvested PSAs, RS, and RSUs were **477.4**, **362.0**, and **65.6 units**, respectively, as of September 24, 2021[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) | Stock-Based Compensation Expense (in thousands) | For the Quarter Ended September 24, 2021 | For the Quarter Ended September 25, 2020 | | :---------------------------------------------- | :--------------------------------------- | :--------------------------------------- | | PSA compensation expense | $216 | $87 | | RS compensation expense | $335 | $339 | | RSU compensation expense | $74 | $82 | - Total unrecognized compensation expense related to unvested shares was **$3,589 thousand** (PSAs), **$993 thousand** (RS), and **$888 thousand** (RSUs) as of September 24, 2021[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) [G. Pension and Other Postretirement Benefit Plans](index=12&type=section&id=G.%20Pension%20and%20Other%20Postretirement%20Benefit%20Plans) | Net Periodic Benefit Cost (in thousands) | For the Quarter Ended September 24, 2021 | For the Quarter Ended September 25, 2020 | | :------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Pension Benefits: Net periodic benefit cost | $123 | $510 | | Postretirement Benefits: Net periodic benefit gain | $(30) | $(26) | - Net periodic benefit cost for pension benefits was **$123 thousand** for the quarter ended September 24, 2021, a significant decrease from **$510 thousand** in the prior-year period[34](index=34&type=chunk) - The company expects to contribute approximately **$733 thousand** to pension plans in fiscal year 2022[35](index=35&type=chunk) [H. Income Taxes](index=12&type=section&id=H.%20Income%20Taxes) - The effective income tax rate for the quarter ended September 24, 2021, was **16.2%**, lower than **19.1%** in the prior-year period[37](index=37&type=chunk) - The company continues to maintain a full valuation allowance against domestic deferred tax assets due to ongoing domestic losses and uncertainty of future domestic earnings[39](index=39&type=chunk) - As of September 24, 2021, the company had approximately **$814 thousand** in unrecognized tax benefits, which if recognized, would favorably impact the effective tax rate[40](index=40&type=chunk) - The full impact of the COVID-19 pandemic, CARES Act, and ARPA on the company's financial condition, liquidity, and future operating results remains uncertain[38](index=38&type=chunk) [I. Intangible Assets](index=13&type=section&id=I.%20Intangible%20Assets) | Intangible Assets (in thousands) | September 24, 2021 | June 30, 2021 | | :------------------------------- | :----------------- | :------------ | | Net Book Value | $16,468 | $17,480 | | Customer Relationships | $9,786 | $10,321 | | Technology Know-how | $4,525 | $4,883 | | Trade Name | $1,222 | $1,282 | | Other | $935 | $994 | - Net book value of intangible assets was **$16,468 thousand** as of September 24, 2021, with a weighted-average remaining useful life of approximately **7 years**[42](index=42&type=chunk)[43](index=43&type=chunk) | Estimated Intangible Amortization Expense (in thousands) | | :--------------------------------------- | | Fiscal Year 2022 | $2,494 | | Fiscal Year 2023 | $3,110 | | Fiscal Year 2024 | $2,955 | | Fiscal Year 2025 | $2,789 | | Fiscal Year 2026 | $1,413 | | Thereafter | $3,707 | [J. Long-term Debt](index=14&type=section&id=J.%20Long-term%20Debt) | Long-term Debt (in thousands) | September 24, 2021 | June 30, 2021 | | :---------------------------- | :----------------- | :------------ | | Revolving loans | $15,237 | $15,415 | | Term loan | $16,500 | $16,500 | | Other | $146 | $170 | | Subtotal | $31,883 | $32,085 | | Less: current maturities | $(2,000) | $(2,000) | | Total long-term debt | $29,883 | $30,085 | - Total long-term debt was **$29,883 thousand** as of September 24, 2021, slightly lower than June 30, 2021[45](index=45&type=chunk) - The company entered into an amended and restated waiver agreement with BMO Harris Bank N.A., extending the waiver period to February 28, 2022, during which BMO will continue to waive non-compliance with the minimum EBITDA covenant[47](index=47&type=chunk) - The company expects to comply with credit agreement terms after the waiver period, thus continuing to classify debt as long-term[48](index=48&type=chunk) - As of September 24, 2021, the company had borrowing capacity of **$40,622 thousand** on its revolving loan, with approximately **$25,384 thousand** available for borrowing[53](index=53&type=chunk) [K. Shareholders' Equity](index=16&type=section&id=K.%20Shareholders'%20Equity) | Twin Disc, Inc. Shareholders' Equity (in thousands) | September 24, 2021 | June 30, 2021 | | :------------------------------------------------ | :----------------- | :------------ | | Common Stock | $41,165 | $40,972 | | Retained Earnings | $128,856 | $126,936 | | Accumulated Other Comprehensive Income (Loss) | $(24,041) | $(22,615) | | Treasury Stock | $(14,942) | $(15,083) | | Total Twin Disc shareholders' equity | $131,038 | $130,210 | | Noncontrolling interest | $586 | $450 | | Total equity | $131,624 | $130,660 | - Total equity increased to **$131,624 thousand** as of September 24, 2021, a **$1,000 thousand** increase from June 30, 2021, primarily driven by a **$1,900 thousand** increase in net income, offset by unfavorable foreign currency translation impacts[58](index=58&type=chunk)[105](index=105&type=chunk) | Changes in Accumulated Other Comprehensive Income (Loss) (in thousands) | September 24, 2021 | June 30, 2021 | | :-------------------------------------------------------------------- | :----------------- | :------------ | | Balance at June 30, 2021 | $(22,615) | $(41,226) | | Net current period other comprehensive (loss) income | $(1,426) | $4,228 | | Balance at September 24, 2021 | $(24,041) | $(36,998) | [L. Restructuring of Operations](index=17&type=section&id=L.%20Restructuring%20of%20Operations) - The company implemented several restructuring plans to address unfavorable market trends, primarily involving workforce reductions and optimizing fixed cost structures[61](index=61&type=chunk) - The restructuring plan for Belgian operations will reduce the workforce by **23 employees**, expected to be completed by December 2022, yielding approximately **$1,600 thousand** in annual pre-tax savings[62](index=62&type=chunk) - As of September 24, 2021, restructuring activities resulted in **257 full-time manufacturing employees** being terminated, with cumulative costs of **$15,563 thousand**[65](index=65&type=chunk) | Restructuring Activity (in thousands) | Amount | | :------------------------------------ | :----- | | Accrued restructuring liability, June 30, 2021 | $2,352 | | Additions | $48 | | Payments, adjustments and write-offs during the year | $(172) | | Accrued restructuring liability, September 24, 2021 | $2,228 | - The company sold its propeller machining facility and offices in Switzerland, generating net proceeds of **$9,138 thousand** and recognizing a gain of **$2,939 thousand** in other operating income[67](index=67&type=chunk)[96](index=96&type=chunk) [M. Earnings Per Share](index=19&type=section&id=M.%20Earnings%20Per%20Share) | Earnings Per Share Data | For the Quarter Ended September 24, 2021 | For the Quarter Ended September 25, 2020 | | :---------------------- | :--------------------------------------- | :--------------------------------------- | | Net income (loss) available to Twin Disc shareholders | $1,920 | $(3,979) | | Weighted average shares outstanding - basic | 13,283 | 13,197 | | Basic Income (Loss) Per Share | $0.14 | $(0.30) | | Weighted average shares outstanding - diluted | 13,350 | 13,197 | | Diluted Income (Loss) Per Share | $0.14 | $(0.30) | - Basic and diluted earnings per share were both **$0.14** for the quarter ended September 24, 2021, compared to **$(0.30)** in the prior-year period, reflecting improved profitability[69](index=69&type=chunk) - Certain unvested PSAs, RS, and RSUs were excluded from diluted EPS calculation due to their anti-dilutive effect[69](index=69&type=chunk)[70](index=70&type=chunk) [N. Lease Liabilities](index=20&type=section&id=N.%20Lease%20Liabilities) | Lease Assets and Liabilities (in thousands) | September 24, 2021 | June 30, 2021 | | :---------------------------------------- | :----------------- | :------------ | | Operating lease right-of-use assets | $14,216 | $14,736 | | Finance lease right-of-use assets | $5,201 | $5,244 | | Operating lease liabilities | $14,237 | $14,757 | | Finance lease liabilities | $5,356 | $5,377 | | Lease Expense (in thousands) | For the Quarter Ended September 24, 2021 | For the Quarter Ended September 25, 2020 | | :--------------------------- | :--------------------------------------- | :--------------------------------------- | | Finance lease cost | $235 | $136 | | Operating lease cost | $693 | $762 | | Short-term lease cost | $2 | $9 | | Variable lease cost | $39 | $16 | | Total lease cost | $969 | $923 | | Net lease cost | $949 | $867 | - As of September 24, 2021, the weighted-average remaining lease term for operating leases was **9.6 years**, with a weighted-average discount rate of **7.2%**[76](index=76&type=chunk) | Approximate Future Minimum Rental Commitments (in thousands) | Operating Leases | Finance Leases | | :--------------------------------------------------------- | :--------------- | :------------- | | 2022 | $2,169 | $621 | | 2023 | $2,625 | $819 | | 2024 | $2,283 | $776 | | 2025 | $1,643 | $534 | | 2026 | $1,551 | $465 | | Thereafter | $9,855 | $3,895 | | Total future lease payments | $20,126 | $7,110 | | Present value of future payments | $14,237 | $5,356 | [O. Derivative Financial Instruments](index=22&type=section&id=O.%20Derivative%20Financial%20Instruments) - The company uses derivative instruments to manage interest rate and foreign currency risks, not for trading purposes[77](index=77&type=chunk) - As of September 24, 2021, the company had one outstanding interest rate swap contract with a notional amount of **$15,500 thousand**, designated as a cash flow hedge[79](index=79&type=chunk) - As of September 24, 2021, net unrealized after-tax losses related to cash flow hedging activities were **$611 thousand**, with **$334 thousand** expected to be reclassified to earnings within the next 12 months[81](index=81&type=chunk)[82](index=82&type=chunk) - The company designated its Euro-denominated revolving loan as a net investment hedge to mitigate volatility risk of its Euro-denominated foreign subsidiary net investment[83](index=83&type=chunk) | Impact of Derivative Instruments on Statements of Operations (in thousands) | For the Quarter Ended September 24, 2021 | For the Quarter Ended September 25, 2020 | | :------------------------------------------------------------------------ | :--------------------------------------- | :--------------------------------------- | | Interest rate swap (Interest expense) | $90 | $98 | | Interest rate swap (Unrealized gain on hedges) | $68 | $75 | | Net investment hedge (Unrealized gain on hedges) | $136 | $- | | Foreign currency forward contracts (Other income (expense), net) | $- | $(13) | [Item 2. Management Discussion and Analysis](index=23&type=section&id=Item%202.%20Management%20Discussion%20and%20Analysis) This section discusses the company's operating results, financial condition, liquidity, and capital resources for the quarter ended September 24, 2021, with comparative analysis and new accounting pronouncements [Results of Operations](index=25&type=section&id=Results%20of%20Operations) | (In thousands) | Quarter Ended September 24, 2021 | % of Net Sales | Quarter Ended September 25, 2020 | % of Net Sales | | :------------------------------------ | :------------------------------- | :------------- | :------------------------------- | :------------- | | Net sales | $47,761 | | $46,179 | | | Cost of goods sold | $34,314 | | $36,476 | | | Gross profit | $13,447 | 28.2% | $9,703 | 21.0% | | Marketing, engineering and administrative expenses | $13,091 | 27.4% | $12,445 | 26.9% | | Restructuring of operations | $48 | 0.1% | $405 | 0.9% | | Other operating income | $(2,939) | -6.2% | $- | 0.0% | | Income (loss) from operations | $3,247 | 6.8% | $(3,147) | -6.8% | - Net sales increased by **3.4%** year-over-year to **$47.6 million** in Q1 FY2022, driven by improved market conditions but hindered by supply chain challenges[90](index=90&type=chunk) - Gross margin improved to **28.2%** from **21.0%** in the prior-year period, benefiting from Employee Retention Credits (ERC), NOW subsidies, and warranty reserve adjustments[93](index=93&type=chunk) - Operating income shifted from a loss of **$3,147 thousand** to a profit of **$3,247 thousand**, primarily due to sales growth, improved gross margin, and **$2,939 thousand** in other operating income from the sale of the Swiss facility[89](index=89&type=chunk)[96](index=96&type=chunk) - Marketing, Engineering, and Administrative (ME&A) expenses as a percentage of sales slightly increased from **26.9%** to **27.4%**, mainly due to increased domestic salaries, benefits, and global bonus programs[94](index=94&type=chunk) [Financial Condition, Liquidity and Capital Resources](index=26&type=section&id=Financial%20Condition,%20Liquidity%20and%20Capital%20Resources) - Net working capital increased to **$114.3 million** as of September 24, 2021, a **$0.9 million** increase from June 30, 2021[98](index=98&type=chunk) - Cash balance increased by **$9.8 million** to **$22.1 million**, primarily concentrated in overseas operations in Europe and Asia Pacific[99](index=99&type=chunk) - Inventories increased by **$6.1 million** to **$121.1 million**, mainly due to component shortages from supply chain imbalances and customer delivery delays[101](index=101&type=chunk) - The company reported positive free cash flow of **$10.7 million**, including **$9.1 million** from the sale of the Swiss facility[104](index=104&type=chunk) - The company's credit agreement with BMO Harris Bank N.A. has been amended multiple times, including waivers for minimum EBITDA covenants and adjustments to borrowing capacity[106](index=106&type=chunk)[119](index=119&type=chunk) - The company anticipates capital expenditures of approximately **$9 million to $11 million** in fiscal year 2022, primarily for equipment modernization and new product development[126](index=126&type=chunk) - The company expects to repatriate approximately **$7.0 million** in cash from Europe, which will be used to repay term loans and revolving loans[99](index=99&type=chunk)[122](index=122&type=chunk)[124](index=124&type=chunk) [New Accounting Releases](index=30&type=section&id=New%20Accounting%20Releases) - Discussion regarding newly issued accounting pronouncements can be found in Note A "Basis of Presentation" to the Condensed Consolidated Financial Statements[129](index=129&type=chunk) [Critical Accounting Policies](index=30&type=section&id=Critical%20Accounting%20Policies) - Preparation of this quarterly report requires management estimates and assumptions, but no significant changes to critical accounting policies since June 30, 2021[130](index=130&type=chunk)[131](index=131&type=chunk) [Part II. OTHER INFORMATION](index=31&type=section&id=Part%20II.%20OTHER%20INFORMATION) [Item 3. Quantitative and Qualitative Disclosure About Market Risk](index=31&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) As a smaller reporting company, the company has elected not to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the company has elected not to provide quantitative and qualitative disclosures about market risk[133](index=133&type=chunk) [Item 4. Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) This section assesses the company's disclosure controls and procedures and discusses material weaknesses in internal control and their remediation [(a) Evaluation of Disclosure Controls and Procedures](index=31&type=section&id=(a)%20Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - Management assessed that the company's disclosure controls and procedures were ineffective as of the end of the reporting period due to a material weakness in internal control over financial reporting[136](index=136&type=chunk) - The material weakness stemmed from insufficient review controls over significant, infrequent transactions, failing to detect an error in recording the valuation allowance for deferred income tax assets, which increased the FY2021 net loss by **$8.8 million**[137](index=137&type=chunk)[138](index=138&type=chunk) - The company is taking steps to remediate the material weakness, including enhancing review accuracy for adjusting entries, proactively seeking external advisors when needed, and planning to delay earnings release[139](index=139&type=chunk) - Despite the material weakness, management believes the condensed consolidated financial statements in this quarterly report fairly present the company's consolidated financial position, results of operations, and cash flows in all material respects[140](index=140&type=chunk) [(b) Changes in Internal Control Over Financial Reporting](index=31&type=section&id=(b)%20Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) - The company is designing and implementing measures to remediate the identified material weakness in internal control over financial reporting, with no other significant changes to internal control over financial reporting this quarter[141](index=141&type=chunk) [Item 1. Legal Proceedings](index=32&type=section&id=Item%201.%20Legal%20Proceedings) The company is a defendant in several product liability or related claims, but management believes these claims are adequately covered by liability insurance or involve amounts not material to the company's business or financial condition - The company is a defendant in several product liability or related claims, but management believes these claims are adequately covered by liability insurance or involve amounts not material to the company's business or financial condition[142](index=142&type=chunk) [Item 1A. Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors have occurred since the annual report on Form 10-K as of June 30, 2021 - No material changes to risk factors have occurred since the 2021 annual report on Form 10-K[144](index=144&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=33&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not conduct unregistered equity security sales this quarter and provided information on issuer purchases of equity securities [(a) Unregistered Sales of Equity Securities](index=33&type=section&id=(a)%20Unregistered%20Sales%20of%20Equity%20Securities) - The company did not sell any securities not registered under the Securities Act of 1933 during the quarter ended September 24, 2021[145](index=145&type=chunk) [(b) Use of Proceeds](index=33&type=section&id=(b)%20Use%20of%20Proceeds) - Not applicable[146](index=146&type=chunk) [(c) Issuer Purchases of Equity Securities](index=33&type=section&id=(c)%20Issuer%20Purchases%20of%20Equity%20Securities) | Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :----------------------- | :----------------------------------- | :------------------------------- | :----------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | July 1, – July 30, 2021 | 815 | NA | 0 | 315,000 | | July 31 – August 27, 2021 | 20,263 | NA | 0 | 315,000 | | August 28 – September 24, 2021 | 0 | NA | 0 | 315,000 | | Total | 0 | NA | 0 | 315,000 | - The company did not conduct open market stock repurchases under board authorization in Q1 2021, but shares were delivered to the company for tax withholding payments upon vesting of restricted stock and restricted stock units[147](index=147&type=chunk)[148](index=148&type=chunk) - As of September 24, 2021, **315,000 shares** of common stock remained available for repurchase under board authorization[148](index=148&type=chunk) [Item 3. Defaults Upon Senior Securities](index=33&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities occurred this quarter - No defaults upon senior securities occurred this quarter[150](index=150&type=chunk) [Item 5. Other Information](index=33&type=section&id=Item%205.%20Other%20Information) No other information required to be disclosed this quarter - No other information required to be disclosed this quarter[151](index=151&type=chunk) [Item 6. Exhibits](index=34&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the report, including amendments to articles of incorporation, credit agreements, CEO and CFO Sarbanes-Oxley certifications, and XBRL data files - Exhibits include amendments to articles of incorporation, credit agreements, CEO and CFO Sarbanes-Oxley certifications, and XBRL data files[152](index=152&type=chunk)[153](index=153&type=chunk) [SIGNATURE](index=35&type=section&id=SIGNATURE) [Signature Details](index=35&type=section&id=Signature%20Details) This report was formally signed by Twin Disc, Incorporated on November 3, 2021, by Jeffrey S. Knutson, Vice President of Finance, Chief Financial Officer, Treasurer, and Secretary - The report was signed on November 3, 2021, by Jeffrey S. Knutson (Vice President of Finance, Chief Financial Officer, Treasurer, and Secretary) on behalf of the company[154](index=154&type=chunk)[155](index=155&type=chunk)

Financial Data and Key Metrics Changes - The first quarter revenue was $47.8 million, a significant increase from the prior year [14] - The gross profit margin improved to 28.2% from 21.0% in the previous year, benefiting from employee retention credits and a favorable sales mix [22] - Net profit for the first quarter was $1.9 million or $0.14 per diluted share, compared to a loss of $4 million or $0.30 per diluted share in the prior year [26] - EBITDA improved to $5.4 million from a loss of $1.6 million in the previous year [26] - Operating income was $3.2 million compared to an operating loss of $3.1 million in the prior year [25] Business Line Data and Key Metrics Changes - Industrial sales increased by 13.1%, while marine and propulsion sales rose by 1.8%, with transmission sales remaining flat [20] - The backlog has increased across all markets, particularly in oil and gas and aftermarket spare parts for North America [64] Market Data and Key Metrics Changes - Sales into North America were up 18%, while sales into Europe increased by 2%, and sales into Asia Pacific decreased by 9% [21] - The company experienced a net positive impact of $0.5 million from foreign currency exchange in the first quarter [21] Company Strategy and Development Direction - The company is focusing on restructuring operations to improve efficiency, including outsourcing machining operations not related to gear manufacturing [11] - Investments will be made in hybrid and electrification areas, as well as in testing and safety equipment [59] - The company aims to preserve liquidity and has deferred nonessential capital spending, expecting to invest $9 million to $11 million in fiscal 2022 [28] Management's Comments on Operating Environment and Future Outlook - Management noted that supply chain issues are stabilizing, with improvements expected in the second half of the year [40] - The company anticipates continued demand improvement across markets for several quarters [29] - Concerns remain regarding labor shortages and supply chain constraints, but management is optimistic about future performance [30] Other Important Information - The company completed a sale leaseback of its Swiss production facility for net proceeds of $9.1 million, resulting in a gain of $2.9 million [25] - Restructuring charges of approximately $1 million are expected in the second fiscal quarter, bringing the total charge to $3.3 million [24] Q&A Session Summary Question: How is the company managing through supply chain pressures? - Management indicated that supply chain issues are labor-related and have stabilized, with dual sourcing strategies being employed [36][38] Question: What is the current inventory balance and its implications? - A significant portion of the inventory increase is work-in-process, with improvements expected as supply chain issues ease [41][42] Question: What is the outlook for the marine business? - Management expressed confidence in growth due to repowering activity and improving demand in the marine sector [53][56] Question: How is the company addressing labor shortages? - The company is facing challenges in attracting labor, particularly in the U.S., and is considering increasing wages and investing in technology to improve efficiency [67][80] Question: What is the competitive position in the oil and gas sector? - Management believes the company is better positioned than in previous years due to maintained inventory levels and readiness to respond to market demands [92][93]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ☑ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECRURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 2021 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 1-7635 TWIN DISC, INCORPORATED (Exact Name of Registrant as Specified in its Charter) Wisconsin 39-0667110 (State or Other J ...

Twin Disc, Incorporated (NASDAQ:TWIN) Q4 2021 Earnings Conference Call August 13, 2021 11:00 AM ET Company Participants Stanley Berger - President of SM Berger & Company, Inc. John Batten - Chief Executive Officer James Feiertag - President and Chief Operating Officer Conference Call Participants Noah Kaye - Oppenheimer & Co. Inc. Josh Chan - Robert W. Baird & Co. Inc. Operator Good day, and welcome to the Twin Disc's Fiscal 2021 Fourth Quarter Conference Call. Today's call is being recorded. At this time, ...

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 26, 2021 ☐ 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) Id ...

Financial Data and Key Metrics Changes - Sales for Q3 2021 were $57.6 million, down $11 million or 16% from the prior year [15] - Gross profit margin for Q3 was 24.2%, slightly up from 24.1% in the prior year [17] - Net profit for Q3 was $100,000 or $0.01 per diluted share, compared to a net loss of $25.2 million or $1.92 per diluted share in the prior year [22] - EBITDA for Q3 was $3.8 million, improved from negative $24.9 million in the prior year [23] Business Line Data and Key Metrics Changes - Transmission sales were down 13.4%, industrial sales down 14.8%, and marine and propulsion sales down 23.2% compared to the prior year [15] - The decline in aftermarket volume and shipments into the North American oil and gas markets contributed to the less profitable mix of revenues [17] Market Data and Key Metrics Changes - Sales in North America were down 29%, Europe down 10%, and Asia Pacific down 6% [16] - Foreign currency exchange had a net positive impact of $3.9 million on sales in Q3 [16] Company Strategy and Development Direction - The company is focusing on cost reduction opportunities to compensate for revenue declines [19] - There is a strong emphasis on R&D and project activity in hybrid and electrification, with plans to roll out new products in global and off-highway markets [12][30] - The company plans to modernize its facilities and implement cost reduction activities as travel restrictions ease [28] Management's Comments on Operating Environment and Future Outlook - Management noted that April orders rebounded, indicating an improvement in market share throughout the calendar year [27] - The company is optimistic about the recovery of North American oil and gas rebuild activities and expects to see new unit orders by late summer or early fall [34][27] - Management acknowledged ongoing supply chain issues but indicated that the impact on margins was being mitigated [39][40] Other Important Information - The company recorded restructuring charges of $251,000 in Q3, primarily related to cost structure adjustments [20] - Inventory was down $5.5 million in the quarter, reflecting a focus on liquidity and cash flow [24] Q&A Session Summary Question: When will there be a more pronounced uptake in new equipment for oil and gas? - Management anticipates rebuild activity to continue for the next quarter, with new units expected by late summer or early fall [34] Question: Will the company have products to serve the demand for hybrid or electric tracking equipment? - Management confirmed that they are working on products to meet this demand and hope to provide updates in future calls [35] Question: What incremental gross margins can be expected as the market recovers? - Management expects incremental gross margins to be in the mid-30s as markets recover, with potential for higher margins if weighted towards North American oil and gas [36] Question: Can you quantify the impact of supply chain issues on margins? - Management indicated that the impact was not significant in the current quarter but acknowledged that costs would be felt in the coming months [39] Question: Will the company be able to produce to end market demand this quarter? - Management stated that they are currently able to meet demand and have scheduled container ships arriving in late May [46] Question: How does the proposed California fracking ban affect the company? - Management expressed that the company’s exposure to California is minimal and does not concern them significantly [50]

[Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) This section presents the company's condensed consolidated financial statements and related notes [Condensed Consolidated Balance Sheets](index=2&type=section&id=CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) The balance sheets show a **4.23% increase in total assets** and a **6.50% increase in total liabilities** as of December 25, 2020 Balance Sheet Summary | Metric | Dec 25, 2020 (in thousands) | Jun 30, 2020 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total assets | $306,583 | $294,127 | $12,456 | 4.23% | | Total liabilities | $164,188 | $154,169 | $10,019 | 6.50% | | Total equity | $142,395 | $139,958 | $2,437 | 1.74% | | Cash | $11,838 | $10,688 | $1,150 | 10.76% | | Inventories | $122,161 | $120,607 | $1,554 | 1.29% | | Property, plant and equipment, net| $78,187 | $72,732 | $5,455 | 7.50% | | Deferred income taxes (assets) | $30,924 | $24,445 | $6,479 | 26.50% | | Accrued liabilities | $42,924 | $36,380 | $6,544 | 17.99% | | Lease obligations | $18,099 | $13,495 | $4,604 | 34.12% | [Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)](index=3&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS%20AND%20COMPREHENSIVE%20INCOME%20(LOSS)) The company reported a net loss for the quarter and two quarters, with decreased net sales and gross profit, but comprehensive income improved due to foreign currency adjustments Statements of Operations Summary | Metric (in thousands) | Q2 FY21 (Dec 25, 2020) | Q2 FY20 (Dec 27, 2019) | 2Q FY21 (Dec 25, 2020) | 2Q FY20 (Dec 27, 2019) | | :-------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net sales | $48,438 | $59,536 | $94,581 | $118,826 | | Gross profit | $9,485 | $15,711 | $19,762 | $25,347 | | Loss from operations | $(4,608) | $(4,950) | $(7,759) | $(11,781) | | Net Loss | $(4,280) | $(6,466) | $(8,217) | $(12,759) | | Net loss attributable to Twin Disc | $(4,313) | $(6,516) | $(8,292) | $(12,827) | | Basic loss per share | $(0.33) | $(0.49) | $(0.63) | $(0.98) | | Comprehensive income (loss) | $1,278 | $(4,125) | $1,581 | $(13,000) | - Net sales decreased by **18.6%** for the quarter and **20.4%** for the two quarters ended December 25, 2020, compared to the prior year, primarily due to broad-based softening in demand across oil and gas, industrial, and marine markets, exacerbated by the COVID-19 crisis[93](index=93&type=chunk)[102](index=102&type=chunk) - Gross profit margin declined to **19.6%** for the quarter (from 26.4%) and **20.9%** for the two quarters (from 21.3%), attributed to unfavorable product mix and reduced volume[96](index=96&type=chunk)[105](index=105&type=chunk) - Comprehensive income shifted from a loss to a gain, largely driven by a significant positive foreign currency translation adjustment of **$4.899 million** for the quarter and **$8.511 million** for the two quarters[10](index=10&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=3&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) Operating cash flow significantly improved, while investing cash use decreased, and financing activities shifted to net cash usage due to loan repayments Cash Flow Summary | Metric (in thousands) | 2Q FY21 (Dec 25, 2020) | 2Q FY20 (Dec 27, 2019) | Change (in thousands) | | :-------------------- | :--------------------- | :--------------------- | :-------------------- | | Net cash provided by operating activities | $2,777 | $116 | $2,661 | | Net cash used by investing activities | $(2,157) | $(6,934) | $4,777 | | Net cash (used) provided by financing activities | $(2,520) | $9,220 | $(11,740) | | Net change in cash | $1,150 | $2,474 | $(1,324) | | Cash, end of period | $11,838 | $14,836 | $(2,998) | - Operating cash flow significantly improved, providing **$2.777 million** in the first two quarters of fiscal 2021, compared to **$0.116 million** in the prior year, despite a net loss[13](index=13&type=chunk) - Cash used in investing activities decreased by **$4.777 million**, mainly due to lower acquisitions of fixed assets[13](index=13&type=chunk) - Financing activities shifted from a net cash provider of **$9.220 million** to a net cash user of **$2.520 million**, primarily driven by net repayments of revolving loans[13](index=13&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=4&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) These notes provide detailed disclosures on accounting policies, financial components, and significant events for the unaudited financial statements [A. Basis of Presentation](index=4&type=section&id=A.%20Basis%20of%20Presentation) The unaudited financial statements adhere to SEC rules, with no material impact from new FASB guidance, while other new guidance is under evaluation - The Company adopted ASU 2018-13 (fair value measurements) and ASU 2018-14 (defined benefit plans) effective July 1, 2020, with **no material impact** on financial statements or disclosures[16](index=16&type=chunk)[17](index=17&type=chunk) - The Company is currently evaluating the potential impact of new accounting guidance, including Topic 326 (expected credit losses), ASU 2019-12 (income taxes), and ASU 2020-04 (LIBOR discontinuation)[18](index=18&type=chunk)[19](index=19&type=chunk)[20](index=20&type=chunk) - The Company qualifies as a smaller reporting company and has scaled some disclosures in this report[21](index=21&type=chunk) [B. Inventories](index=5&type=section&id=B.%20Inventories) Total inventories increased slightly, primarily in finished parts and raw materials, from June 30, 2020, to December 25, 2020 Inventory Breakdown | Inventory Class | Dec 25, 2020 (in thousands) | Jun 30, 2020 (in thousands) | | :-------------- | :-------------------------- | :-------------------------- | | Finished parts | $63,563 | $62,394 | | Work in process | $17,771 | $17,844 | | Raw materials | $40,827 | $40,369 | | Total Inventories | $122,161 | $120,607 | - Total inventories increased by **$1.554 million** (**1.29%**) from June 30, 2020, to December 25, 2020[23](index=23&type=chunk) [C. Warranty](index=6&type=section&id=C.%20Warranty) The warranty reserve decreased due to lower current period expenses and reduced payments, despite a prior-year non-recurring charge Warranty Activity | Warranty Activity (in thousands) | Q2 FY21 (Dec 25, 2020) | Q2 FY20 (Dec 27, 2019) | 2Q FY21 (Dec 25, 2020) | 2Q FY20 (Dec 27, 2019) | | :------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Reserve balance, beginning of period | $4,682 | $7,107 | $4,460 | $3,736 | | Current period