Twin Disc(TWIN) - 2021 Q2 - Quarterly Report

Item 1. Financial Statements This section presents the company's condensed consolidated financial statements and related notes Condensed Consolidated Balance Sheets 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) 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][102] - 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][105] - 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] Condensed Consolidated Statements of Cash Flows 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] - Cash used in investing activities decreased by $4.777 million, mainly due to lower acquisitions of fixed assets[13] - 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] Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures on accounting policies, financial components, and significant events for the unaudited financial statements A. Basis of Presentation 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][17] - 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][19][20] - The Company qualifies as a smaller reporting company and has scaled some disclosures in this report[21] B. Inventories 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] C. Warranty 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