Twin Disc(TWIN) - 2022 Q1 - Quarterly Report

Cover Page and Filing Information Filing Details 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][4] - As of October 28, 2021, 13,599,013 shares of common stock were outstanding[4] - All required reports and interactive data files have been submitted[3] Part I. FINANCIAL INFORMATION Item 1. Financial Statements 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 | 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] - Inventories increased to $121,092 thousand, while net trade accounts receivable decreased to $34,837 thousand[6] CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME | (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] - 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] - Basic and diluted earnings per share both improved from $(0.30) in the prior-year period to $0.14[8] CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (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] - Investing activities generated $8,712 thousand in cash inflow, primarily due to $9,139 thousand from the sale of property, plant, and equipment[11] - Period-end cash balance significantly increased to $22,092 thousand, up from $9,313 thousand in the prior-year period[11] NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 - Unaudited condensed consolidated financial statements prepared in accordance with SEC rules and regulations are deemed adequate for disclosure[12] - ASU 2019-12 (simplifying income tax accounting) adopted on July 1, 2021, with no material impact on disclosures[14] - 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][16] - As a smaller reporting company, the company has adjusted certain financial and non-financial information disclosures per SEC rules[17] B. Inventories | 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][101] C. Warranty | 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] D. Contingencies - The company is involved in litigation, but management believes the ultimate outcome will not materially affect operations, financial condition, or cash flows[20] E. Business Segments - 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] - The company has two reporting segments: Manufacturing and Distribution, with performance assessed by management based on net income[22][23] | 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 - The company grants Performance Share Awards (PSAs), Restricted Stock Awards (RS), and Restricted Stock Unit Awards (RSUs) as equity incentives[27][31][32] - Unvested PSAs, RS, and RSUs were 477.4, 362.0, and 65.6 units, respectively, as of September 24, 2021[30][31][32] | 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][31][32] G. Pension and Other Postretirement Benefit Plans | 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] - The company expects to contribute approximately $733 thousand to pension plans in fiscal year 2022[35] H. Income Taxes - 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] - 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] - 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] - 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] I. Intangible Assets | 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][43] | 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 | 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] - 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] - The company expects to comply with credit agreement terms after the waiver period, thus continuing to classify debt as long-term[48] - 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] K. Shareholders' Equity | 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][105] | 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 - The company implemented several restructuring plans to address unfavorable market trends, primarily involving workforce reductions and optimizing fixed cost structures[61] - 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] - As of September 24, 2021, restructuring activities resulted in 257 full-time manufacturing employees being terminated, with cumulative costs of $15,563 thousand[65] | 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][96] M. Earnings Per Share | 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] - Certain unvested PSAs, RS, and RSUs were excluded from diluted EPS calculation due to their anti-dilutive effect[69][70] N. Lease Liabilities | 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] | 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 - The company uses derivative instruments to manage interest rate and foreign currency risks, not for trading purposes[77] - 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] - 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][82] - 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] | 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 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 | (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] - 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] - 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][96] - 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] Financial Condition, Liquidity and Capital Resources - Net working capital increased to $114.3 million as of September 24, 2021, a $0.9 million increase from June 30, 2021[98] - Cash balance increased by $9.8 million to $22.1 million, primarily concentrated in overseas operations in Europe and Asia Pacific[99] - Inventories increased by $6.1 million to $121.1 million, mainly due to component shortages from supply chain imbalances and customer delivery delays[101] - The company reported positive free cash flow of $10.7 million, including $9.1 million from the sale of the Swiss facility[104] - 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][119] - 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] - 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][122][124] New Accounting Releases - Discussion regarding newly issued accounting pronouncements can be found in Note A "Basis of Presentation" to the Condensed Consolidated Financial Statements[129] Critical Accounting Policies - Preparation of this quarterly report requires management estimates and assumptions, but no significant changes to critical accounting policies since June 30, 2021[130][131] Part II. OTHER INFORMATION Item 3. Quantitative and Qualitative Disclosure About Market Risk 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] Item 4. Controls and Procedures 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 - 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] - 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][138] - 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] - 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] (b) Changes in Internal Control Over Financial Reporting - 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] Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 - The company did not sell any securities not registered under the Securities Act of 1933 during the quarter ended September 24, 2021[145] (b) Use of Proceeds - Not applicable[146] (c) Issuer Purchases of Equity Securities | Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :----------------------- | :----------------------------------- | :------------------------------- | :----------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | 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][148] - As of September 24, 2021, 315,000 shares of common stock remained available for repurchase under board authorization[148] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred this quarter - No defaults upon senior securities occurred this quarter[150] Item 5. Other Information No other information required to be disclosed this quarter - No other information required to be disclosed this quarter[151] Item 6. Exhibits 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][153] SIGNATURE Signature Details 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][155]