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. It is suggested that these financial statements 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, 2020. The year-end condensed 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.
Recently Adopted Accounting Standards
In August 2018, the FASB issued updated guidance (ASU 2018-13) as part of the disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to the financial statements. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The Company adopted this guidance effective July 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial statements and disclosures.
In August 2018, the FASB issued updated guidance (ASU 2018-14) intended to modify the disclosure requirements for employers that sponsor defined benefit pension or postretirement plans. The Company adopted this guidance effective July 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial statements and disclosures.
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 Topic 326). Topic 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. Topic 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 December 2019, the FASB issued guidance (ASU 2019-12) intended to simplify the accounting for income taxes. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 (the Company’s fiscal 2022), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.
In March 2020, the FASB issued guidance (ASU 2020-04), 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 Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.
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:
|
|
September 25, 2020
|
|
|
June 30, 2020
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished parts
|
|
$
|
61,762
|
|
|
$
|
62,394
|
|
Work in process
|
|
|
18,510
|
|
|
|
17,844
|
|
Raw materials
|
|
|
39,944
|
|
|
|
40,369
|
|
|
|
$
|
120,216
|
|
|
$
|
120,607
|
|
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 September 25, 2020 and September 27, 2019:
|
|
For the Quarter Ended
|
|
|
|
September 25, 2020
|
|
|
September 27, 2019
|
|
Reserve balance, beginning of period
|
|
$
|
4,460
|
|
|
$
|
3,736
|
|
Current period expense and adjustments
|
|
|
1,034
|
|
|
|
5,448
|
|
Payments or credits to customers
|
|
|
(848
|
)
|
|
|
(2,031
|
)
|
Translation
|
|
|
36
|
|
|
|
(46
|
)
|
Reserve balance, end of period
|
|
$
|
4,682
|
|
|
$
|
7,107
|
|
Included in expense in the quarters ended September 25, 2020 and September 27, 2019 is a non-recurring warranty charge in the amount of $188 and $3,889, respectively, to accrue for estimated costs to resolve a unique product performance issue at certain installations.
The current portion of the warranty accrual ($3,863 and $6,253 as of September 25, 2020 and September 27, 2019, respectively) is reflected in accrued liabilities, while the long-term portion ($819 and $854 as of September 25, 2020 and September 27, 2019, 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. Its segment structure reflects the way management makes operating decisions and manages the growth and profitability of the business. 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 among segments are at established inter-company selling prices. Management evaluates the performance of its segments based on net income.
Information about the Company’s segments is summarized as follows:
|
|
For the Quarter Ended
|
|
|
|
September 25, 2020
|
|
|
September 27, 2019
|
|
Net sales
|
|
|
|
|
|
|
|
|
Manufacturing segment sales
|
|
$
|
38,495
|
|
|
$
|
54,561
|
|
Distribution segment sales
|
|
|
22,506
|
|
|
|
22,428
|
|
Inter/Intra segment elimination – manufacturing
|
|
|
(10,738
|
)
|
|
|
(13,830
|
)
|
Inter/Intra segment elimination – distribution
|
|
|
(4,120
|
)
|
|
|
(3,869
|
)
|
|
|
$
|
46,143
|
|
|
$
|
59,290
|
|
Net (loss) income attributable to Twin Disc
|
|
|
|
|
|
|
|
|
Manufacturing segment net loss
|
|
$
|
(2,662
|
)
|
|
$
|
(4,855
|
)
|
Distribution segment net income
|
|
|
1,155
|
|
|
|
1,092
|
|
Corporate and eliminations
|
|
|
(2,472
|
)
|
|
|
(2,548
|
)
|
|
|
$
|
(3,979
|
)
|
|
$
|
(6,311
|
)
|
|
|
September 25, 2020
|
|
|
June 30, 2020
|
|
Assets
|
|
|
|
|
|
|
Manufacturing segment assets
|
|
$
|
369,621
|
|
|
$
|
365,417
|
|
Distribution segment assets
|
|
|
43,844
|
|
|
|
43,118
|
|
Corporate assets and elimination of intercompany assets
|
|
|
(111,122
|
)
|
|
|
(114,408
|
)
|
|
|
$
|
302,343
|
|
|
$
|
294,127
|
|
Disaggregated revenue:
The following table presents details deemed most relevant to the users of the financial statements for the quarters ended September 25, 2020 and September 27, 2019.
Net sales by product group for the quarter ended September 25, 2020 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Elimination of
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
Distribution
|
|
|
Intercompany Sales
|
|
|
Total
|
|
Industrial
|
|
$
|
4,806
|
|
|
$
|
1,370
|
|
|
$
|
(393
|
)
|
|
$
|
5,783
|
|
Land-based transmissions
|
|
|
10,494
|
|
|
|
6,067
|
|
|
|
(4,728
|
)
|
|
|
11,833
|
|
Marine and propulsion systems
|
|
|
23,179
|
|
|
|
12,759
|
|
|
|
(9,732
|
)
|
|
|
26,206
|
|
Other
|
|
|
16
|
|
|
|
2,310
|
|
|
|
(5
|
)
|
|
|
2,321
|
|
Total
|
|
$
|
38,495
|
|
|
$
|
22,506
|
|
|
$
|
(14,858
|
)
|
|
$
|
46,143
|
|
Net sales by product group for the quarter ended September 27, 2019 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Elimination of
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
Distribution
|
|
|
Intercompany Sales
|
|
|
Total
|
|
Industrial
|
|
$
|
6,808
|
|
|
$
|
1,468
|
|
|
$
|
(812
|
)
|
|
$
|
7,464
|
|
Land-based transmissions
|
|
|
17,414
|
|
|
|
5,480
|
|
|
|
(7,376
|
)
|
|
|
15,518
|
|
Marine and propulsion systems
|
|
|
30,320
|
|
|
|
14,211
|
|
|
|
(9,510
|
)
|
|
|
35,021
|
|
Other
|
|
|
19
|
|
|
|
1,269
|
|
|
|
(1
|
)
|
|
|
1,287
|
|
Total
|
|
$
|
54,561
|
|
|
$
|
22,428
|
|
|
$
|
(17,699
|
)
|
|
$
|
59,290
|
|
F.
|
Stock-Based Compensation
|
Performance Stock Awards (“PSA”)
During the first quarter of fiscal 2021 and 2020, the Company granted a target number of 265.3 and 71.7 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2021 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average free cash flow (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2023. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and free cash flow 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 397.9. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.
The fiscal 2020 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual EPS (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2022. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS 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 94.8. Based upon actual results to date, the Company is not currently accruing compensation expense for these PSAs.
There were 433.1 and 167.8 unvested PSAs outstanding at September 25, 2020 and September 27, 2019, 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 $87 and $72 was recognized for the quarters ended September 25, 2020 and September 27, 2019, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at September 25, 2020 was $9.26. At September 25, 2020, the Company had $3,923 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2021, 2020 and 2019 awards. The total fair value of PSAs vested as of September 25, 2020 and September 27, 2019 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 quarter of fiscal 2021 and 2020, the Company granted 151.6 and 86.4 service based restricted shares, respectively, to employees and non-employee directors. There were 332.8 and 178.8 unvested shares outstanding at September 25, 2020 and September 27, 2019, respectively. Compensation expense of $339 and $306 was recognized for the quarters ended September 25, 2020 and September 27, 2019, respectively. The total fair value of restricted stock grants vested as of September 25, 2020 and September 27, 2019 was $293 and $1,017, respectively. As of September 25, 2020, the Company had $1,842 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.
Restricted Stock Unit Awards (“RSU”)
Under the 2018 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. There were 38.0 unvested RSUs outstanding at September 25, 2020 and at September 27, 2019. Compensation expense of $82 and $81 was recognized for the quarters ended September 25, 2020 and September 27, 2019, respectively. The weighted average grant date fair value of the unvested awards at September 25, 2020 was $25.77. As of September 25, 2020, the Company had $272 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 health care 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
|
|
|
|
September 25, 2020
|
|
|
September 27, 2019
|
|
Pension Benefits:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
142
|
|
|
$
|
212
|
|
Prior service cost
|
|
|
16
|
|
|
|
-
|
|
Interest cost
|
|
|
668
|
|
|
|
906
|
|
Expected return on plan assets
|
|
|
(1,132
|
)
|
|
|
(1,248
|
)
|
Amortization of transition obligation
|
|
|
9
|
|
|
|
9
|
|
Amortization of prior service cost
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Amortization of actuarial net loss
|
|
|
811
|
|
|
|
784
|
|
Net periodic benefit cost
|
|
$
|
510
|
|
|
$
|
659
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
4
|
|
|
$
|
4
|
|
Interest cost
|
|
|
39
|
|
|
|
55
|
|
Amortization of prior service cost
|
|
|
(69
|
)
|
|
|
(69
|
)
|
Net periodic benefit (gain) cost
|
|
$
|
(26
|
)
|
|
$
|
(10
|
)
|
The Company expects to contribute approximately $2,346 to its pension plans in fiscal 2021. As of September 25, 2020, the amount of $151 in contributions has been made.
The Company has reclassified $553 (net of $177 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended September 25, 2020, and $557 (net of $169 in taxes) during the quarter ended September 27, 2019. These reclassifications are included in the computation of net periodic benefit cost.
For the quarters ended September 25, 2020 and September 27, 2019, the Company’s effective income tax rate was 19.1% and 20.5% respectively. The mix of income earned by jurisdiction net of the changes in the tax preference items recognized resulted in a minimal change in rate of 1.4%.
The spread of the COVID-19 outbreak (the global pandemic declared by the World Health Organization in March 2020) has caused significant volatility and uncertainty in U.S. and international markets. On March 27, 2020 the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act includes many measures to assist companies, including temporary changes to income and non-income-based tax laws, some of which were enacted under the Tax Cuts and Jobs Act in 2017. In addition, governments around the world continue to initiate various forms of assistance. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such it is uncertain as to the full magnitude that the COVID-19 outbreak will have on the Company’s financial condition, liquidity, and future results of operations.
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 operations and based on this evaluation management has concluded that no valuation allowances are required.
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. 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.
The Company has approximately $1,138 of unrecognized tax benefits, including related interest and penalties, as of September 25, 2020, which, if recognized, would favorably impact the effective tax rate. There was no significant change 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 September 25, 2020. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going audit 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 2013 through 2019. The tax year open to exam in the Netherlands is fiscal 2019. The tax years open to examination in the U.S. are for years subsequent to fiscal 2016. The state of Wisconsin income tax audit remains ongoing for the fiscal years 2011 through 2013. It is reasonably possible that other audit cycles will be completed during fiscal 2021.
I. Intangible Assets
As of September 25, 2020, 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, 2020
|
|
$
|
39,245
|
|
|
$
|
(20,272
|
)
|
|
$
|
18,973
|
|
|
$
|
11,554
|
|
|
$
|
5,784
|
|
|
$
|
1,388
|
|
|
$
|
247
|
|
Amortization
|
|
|
-
|
|
|
|
(835
|
)
|
|
|
(835
|
)
|
|
|
(465
|
)
|
|
|
(303
|
)
|
|
|
(45
|
)
|
|
|
(22
|
)
|
Translation adjustment
|
|
|
679
|
|
|
|
-
|
|
|
|
679
|
|
|
|
413
|
|
|
|
208
|
|
|
|
49
|
|
|
|
9
|
|
Balance at September 25, 2020
|
|
$
|
39,924
|
|
|
$
|
(21,107
|
)
|
|
$
|
18,817
|
|
|
$
|
11,502
|
|
|
$
|
5,689
|
|
|
$
|
1,392
|
|
|
$
|
234
|
|
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 8 years.
Intangible amortization expense was $835 and $1,129 for the quarters ended September 25, 2020, and September 27, 2019, respectively. Estimated intangible amortization expense for the remainder of fiscal 2021 and each of the next five fiscal years is as follows:
Fiscal Year
|
|
|
|
|
2021
|
|
$
|
2,450
|
|
2022
|
|
|
3,094
|
|
2023
|
|
|
2,926
|
|
2024
|
|
|
2,774
|
|
2025
|
|
|
2,587
|
|
2026
|
|
|
1,264
|
|
Long-term debt at September 25, 2020 and June 30, 2020 consisted of the following:
|
|
September 25, 2020
|
|
|
June 30, 2020
|
|
Credit Agreement Debt
|
|
|
|
|
|
|
|
|
Revolving loans (expire June 2023)
|
|
$
|
16,783
|
|
|
$
|
16,641
|
|
Term loan (due March 2026)
|
|
|
17,500
|
|
|
|
17,500
|
|
PPP loan
|
|
|
8,200
|
|
|
|
8,200
|
|
Other
|
|
|
233
|
|
|
|
246
|
|
Subtotal
|
|
|
42,716
|
|
|
|
42,587
|
|
Less: current maturities
|
|
|
(3,700
|
)
|
|
|
(4,691
|
)
|
Total long-term debt
|
|
$
|
39,016
|
|
|
$
|
37,896
|
|
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, on June 29, 2018 (“Credit Agreement”). As a result of the most recent amendment of July 22, 2020, the revolving loan facility has been amended from $50,000 to $45,000, and the term loan principal quarterly payments of $500 payable on September 30, 2020 and December 31, 2020 were deferred to fiscal 2026. Interest rate margins on the term loan also changed, from 3.375% to 3.875%.
As of September 25, 2020, current maturities include $1,500 of term loan payments due within a year.
Also as a result of the most recent amendment, the Company was given financial covenant relief for the quarters ended June 30, 2020 through June 30, 2021. During this period, in lieu of the Total Funded Debt to EBITDA ratio financial covenant, the Company is required to maintain a minimum cumulative EBITDA, as follows: (1) $1,000 for the fiscal quarter ended June 30, 2020 and the two fiscal quarters ending September 25, 2020; (2) $2,500 for the three fiscal quarters ending December 25, 2020; (3) $6,000 for the four fiscal quarters ending March 26, 2021; and (4) $10,000 for the four fiscal quarters ending June 30, 2021. As of September 25, 2020, the Company was in compliance with financial 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, 2020, as well as in Item 2 of this quarterly report.
The PPP Loan: On April 17, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $8,200 made to the Company under the Paycheck Protection Program ("PPP"). The PPP is a liquidity facility program established by the U.S. government as part of the CARES Act in response to the negative economic impact of the COVID-19 outbreak. The PPP Loan to the Company is being administered by BMO. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are due starting on May 2021. PPP Loan recipients can be granted forgiveness for all or a portion of loans granted subject to certain conditions, based on the use of the loan proceeds for payment of payroll costs and any payments of mortgage interest, rent and utilities. The Company has started the process of applying for loan forgiveness.
In accounting for the terms of the PPP Loan, the Company is guided by ASC 470 Debt, and ASC 450-30 Gain Contingency. Accordingly, it recorded the proceeds of the PPP Loan of $8,200 as debt and it will derecognize the liability when the loan is paid off or it believes forgiveness is reasonably certain. The Company believes that the possibility of loan forgiveness is to be regarded as a contingent gain and therefore will not recognize the gain (and derecognize the loan) until all uncertainty is removed (i.e. all conditions for forgiveness are met).
As of September 25, 2020, current maturities include $2,200 of PPP principal payments due within a year.
The PPP Loan is more fully described in the Company’s Annual Report filed on Form 10-K for June 30, 2020, as well as in Item 2 of this quarterly report.
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 $21 in principal was paid on these liabilities during the current fiscal year.
During the quarter ended September 25, 2020, the average interest rate was 4.03% on the Term Loan, and 4.25% on the Revolving Loans.
As of September 25, 2020, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $40,894, and the Company had approximately $24,111 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 September 25, 2020 and June 30, 2020. 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 September 25, 2020, the notional amount was $17,500. This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging. This swap is included in the disclosures in Note O, Derivative Financial Instruments.
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 September 25, 2020 remain authorized for purchase. The Company did not make any open market purchases of its shares during the quarters ended September 25, 2020 and September 27, 2019.
The following is a reconciliation of the Company’s equity balances for the first fiscal quarters of 2021 and 2020:
|
|
Twin Disc, Inc. Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Controlling
|
|
|
Total
|
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Interest
|
|
|
Equity
|
|
Balance, June 30, 2019
|
|
$
|
45,047
|
|
|
$
|
196,472
|
|
|
$
|
(37,971
|
)
|
|
$
|
(21,332
|
)
|
|
$
|
602
|
|
|
$
|
182,818
|
|
Net (loss) income
|
|
|
|
|
|
|
(6,311
|
)
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
(6,293
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
(3,014
|
)
|
|
|
|
|
|
|
18
|
|
|
|
(2,996
|
)
|
Benefit plan adjustments, net of tax
|
|
|
|
|
|
|
|
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
|
557
|
|
Unrealized loss on cash flow hedge, net of tax
|
|
|
|
|
|
|
|
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
(143
|
)
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
(127
|
)
|
Compensation expense
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
459
|
|
Shares (acquired) issued, net
|
|
|
(2,324
|
)
|
|
|
|
|
|
|
|
|
|
|
1,412
|
|
|
|
|
|
|
|
(912
|
)
|
Balance, September 27, 2019
|
|
$
|
43,182
|
|
|
$
|
190,161
|
|
|
$
|
(40,571
|
)
|
|
$
|
(19,920
|
)
|
|
$
|
511
|
|
|
$
|
173,363
|
|
|
|
Twin Disc, Inc. Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Controlling
|
|
|
Total
|
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Interest
|
|
|
Equity
|
|
Balance, June 30, 2020
|
|
$
|
42,756
|
|
|
$
|
156,655
|
|
|
$
|
(41,226
|
)
|
|
$
|
(18,796
|
)
|
|
$
|
569
|
|
|
$
|
139,958
|
|
Net (loss) income
|
|
|
|
|
|
|
(3,979
|
)
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
(3,937
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
3,600
|
|
|
|
|
|
|
|
12
|
|
|
|
3,612
|
|
Benefit plan adjustments, net of tax
|
|
|
|
|
|
|
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
553
|
|
Unrealized gain on cash flow hedge, net of tax
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
Compensation expense
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
518
|
|
Shares (acquired) issued, net
|
|
|
(2,460
|
)
|
|
|
|
|
|
|
|
|
|
|
2,236
|
|
|
|
|
|
|
|
(224
|
)
|
Balance, September 25, 2020
|
|
$
|
40,814
|
|
|
$
|
152,676
|
|
|
$
|
(36,998
|
)
|
|
$
|
(16,560
|
)
|
|
$
|
623
|
|
|
$
|
140,555
|
|
Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended September 25, 2020, and September 27, 2019 are as follows:
|
|
Translation
|
|
|
Benefit Plan
|
|
|
Cash Flow
|
|
|
|
Adjustment
|
|
|
Adjustment
|
|
|
Hedges
|
|
Balance at June 30, 2019
|
|
$
|
4,439
|
|
|
$
|
(41,901
|
)
|
|
$
|
(509
|
)
|
Translation adjustment during the quarter
|
|
|
(3,014
|
)
|
|
|
-
|
|
|
|
-
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
557
|
|
|
|
(143
|
)
|
Net current period other comprehensive (loss) income
|
|
|
(3,014
|
)
|
|
|
557
|
|
|
|
(143
|
)
|
Balance at September 27, 2019
|
|
$
|
1,425
|
|
|
$
|
(41,344
|
)
|
|
$
|
(652
|
)
|
|
|
Translation
|
|
|
Benefit Plan
|
|
|
Cash Flow
|
|
|
|
Adjustment
|
|
|
Adjustment
|
|
|
Hedges
|
|
Balance at June 30, 2020
|
|
$
|
3,454
|
|
|
$
|
(43,576
|
)
|
|
$
|
(1,104
|
)
|
Translation adjustment during the quarter
|
|
|
3,600
|
|
|
|
-
|
|
|
|
-
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
553
|
|
|
|
75
|
|
Net current period other comprehensive income
|
|
|
3,600
|
|
|
|
553
|
|
|
|
75
|
|
Balance at September 25, 2020
|
|
$
|
7,054
|
|
|
$
|
(43,023
|
)
|
|
$
|
(1,029
|
)
|
Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended September 25, 2020 are as follows:
|
|
Amount Reclassified
|
|
|
|
Quarter Ended
|
|
|
|
September 25, 2020
|
|
Changes in benefit plan items
|
|
|
|
|
Actuarial losses
|
|
$
|
794
|
(a)
|
Transition asset and prior service benefit
|
|
|
(64
|
)(a)
|
Total amortization
|
|
|
730
|
|
Income taxes
|
|
|
177
|
|
Total reclassification net of tax
|
|
$
|
553
|
|
Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended September 27, 2019 is as follows:
|
|
Amount Reclassified
|
|
|
|
Quarter Ended
|
|
|
|
September 27, 2019
|
|
Changes in benefit plan items
|
|
|
|
|
Actuarial losses
|
|
$
|
790
|
(a)
|
Transition asset and prior service benefit
|
|
|
(64
|
)(a)
|
Total amortization
|
|
|
726
|
|
Income taxes
|
|
|
169
|
|
Total reclassification net of tax
|
|
$
|
557
|
|
|
(a)
|
These accumulated other comprehensive income 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
|
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. In its European operations, the Company also implemented actions to reorganize for productivity.
These actions resulted in restructuring charges of $405 in the quarter ended September 25, 2020, and restructuring charges of $121 for the quarter ended September 27, 2019.
Restructuring activities since June 2015 have resulted in the elimination of 249 full-time employees in the manufacturing segment. Accumulated costs to date under these programs within the manufacturing segment through September 25, 2020 were $12,810.
The following is a roll-forward of restructuring activity:
Accrued restructuring liability, June 30, 2020
|
|
$
|
84
|
|
Additions
|
|
|
405
|
|
Payments, adjustments and write-offs during the year
|
|
|
(355
|
)
|
Accrued restructuring liability, September 25, 2020
|
|
$
|
134
|
|
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
|
|
|
|
September 25, 2020
|
|
|
September 27, 2019
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,937
|
)
|
|
$
|
(6,293
|
)
|
Less: Net earnings attributable to noncontrolling interest
|
|
|
(42
|
)
|
|
|
(18
|
)
|
Less: Undistributed earnings attributable to unvested shares
|
|
|
-
|
|
|
|
-
|
|
Net loss available to Twin Disc shareholders
|
|
|
(3,979
|
)
|
|
|
(6,311
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
13,197
|
|
|
|
13,111
|
|
|
|
|
|
|
|
|
|
|
Basic Loss Per Share:
|
|
|
|
|
|
|
|
|
Net loss per share - basic
|
|
$
|
(0.30
|
)
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,937
|
)
|
|
$
|
(6,293
|
)
|
Less: Net earnings attributable to noncontrolling interest
|
|
|
(42
|
)
|
|
|
(18
|
)
|
Less: Undistributed earnings attributable to unvested shares
|
|
|
-
|
|
|
|
-
|
|
Net loss available to Twin Disc shareholders
|
|
|
(3,979
|
)
|
|
|
(6,311
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
13,197
|
|
|
|
13,111
|
|
Effect of dilutive stock awards
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares outstanding - diluted
|
|
|
13,197
|
|
|
|
13,111
|
|
|
|
|
|
|
|
|
|
|
Diluted Loss Per Share:
|
|
|
|
|
|
|
|
|
Net loss per share - diluted
|
|
$
|
(0.30
|
)
|
|
$
|
(0.48
|
)
|
The following potential common shares were excluded from diluted EPS for the quarter ended September 25, 2020 as the Company reported a net loss: 433.1 related to the Company’s unvested PSAs, 332.8 related to the Company’s unvested RS awards, and 38.0 related to the Company’s unvested RSUs.
The following potential common shares were excluded from diluted EPS for the quarter ended September 27, 2019 as the Company reported a net loss: 167.8 related to the Company’s unvested PSAs, 178.8 related to the Company’s unvested RS awards, 38.0 related to the Company’s unvested RSUs, and 3.6 related to outstanding stock options.
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
|
|
|
|
September 25, 2020
|
|
|
September 27, 2019
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
119
|
|
|
$
|
36
|
|
Interest on lease liabilities
|
|
|
17
|
|
|
|
12
|
|
Operating lease cost
|
|
|
762
|
|
|
|
781
|
|
Short-term lease cost
|
|
|
9
|
|
|
|
17
|
|
Variable lease cost
|
|
|
16
|
|
|
|
16
|
|
Total lease cost
|
|
|
923
|
|
|
|
862
|
|
Less: Sublease income
|
|
|
(56
|
)
|
|
|
(53
|
)
|
Net lease cost
|
|
$
|
867
|
|
|
$
|
809
|
|
Other information related to leases was as follows:
|
|
For the Quarter Ended
|
|
|
|
September 25, 2020
|
|
|
September 27, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
762
|
|
|
$
|
778
|
|
Operating cash flows from finance leases
|
|
|
135
|
|
|
|
30
|
|
Financing cash flows from finance leases
|
|
|
17
|
|
|
|
12
|
|
Right-of-use-assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
-
|
|
|
|
351
|
|
Finance leases
|
|
|
4,616
|
|
|
|
224
|
|
Weighted average remaining lease term (years):
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
10.7
|
|
|
|
11.1
|
|
Finance lease
|
|
|
12.8
|
|
|
|
4.6
|
|
Weighted average discount rate:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
7.4
|
%
|
|
|
7.7
|
%
|
Finance leases
|
|
|
5.2
|
%
|
|
|
7.0
|
%
|
Approximate future minimum rental commitments under non-cancellable leases as of September 25, 2020 were as follows:
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2021
|
|
$
|
2,039
|
|
|
$
|
562
|
|
2022
|
|
|
2,293
|
|
|
|
749
|
|
2023
|
|
|
2,042
|
|
|
|
740
|
|
2024
|
|
|
1,842
|
|
|
|
697
|
|
2025
|
|
|
1,616
|
|
|
|
475
|
|
Thereafter
|
|
|
11,290
|
|
|
|
4,305
|
|
Total future lease payments
|
|
|
21,122
|
|
|
|
7,528
|
|
Less: Amount representing interest
|
|
|
(6,723
|
)
|
|
|
(1,989
|
)
|
Present value of future payments
|
|
$
|
14,399
|
|
|
$
|
5,539
|
|
The following table provides a summary of leases recorded on the condensed consolidated balance sheet.
|
Balance Sheet Location
|
|
September 25, 2020
|
|
|
June 30, 2020
|
|
Lease Assets
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
Property, plant and equipment, net
|
|
$
|
14,383
|
|
|
$
|
14,448
|
|
Finance lease right-of-use assets
|
Property, plant and equipment, net
|
|
|
5,484
|
|
|
|
959
|
|
|
|
|
|
|
|
|
|
|
|
Lease Liabilities
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
Accrued liabilities
|
|
$
|
1,629
|
|
|
$
|
1,724
|
|
Operating lease liabilities
|
Lease obligations
|
|
|
12,770
|
|
|
|
12,738
|
|
Finance lease liabilities
|
Accrued liabilities
|
|
|
473
|
|
|
|
233
|
|
Finance lease liabilities
|
Lease obligations
|
|
|
5,066
|
|
|
|
757
|
|
O.
|
Derivative Financial Instruments
|
From time to time, the Company enters into derivative instruments to manage volatility arising from risks relating to interest rates and foreign exchange. 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 September 25, 2020, with a notional amount of $17,500. It has been designated as a cash flow hedge in accordance with ASC 815, Derivatives and Hedging.
The primary purpose of the Company’s cash flow hedging activities is to manage the potential changes in value associated with interest payments on the Company’s LIBOR-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 (loss) income. 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 12 months.
Net unrealized after-tax losses related to cash flow hedging activities that were included in accumulated other comprehensive loss were $1,029 and $1,104 as of September 25, 2020 and June 30, 2020, respectively. The unrealized amounts in accumulated other comprehensive loss will fluctuate based on changes in the fair value of open contracts during each reporting period.
The Company estimates that $378 of net unrealized losses related to cash flow hedging activities included in accumulated other comprehensive loss will be reclassified into earnings within the next twelve months.
Foreign Currency Forward Contracts
The Company primarily enters into forward exchange contracts to reduce the earnings and cash flow impact of non-functional currency denominated receivables and payables. At September 25, 2020, one of the Company’s foreign subsidiaries had one outstanding forward exchange contract to purchase U.S. dollars in the notional value of $711 with a weighted average maturity of 6 days. The fair value of the Company’s contract was a loss of $13 at September 25, 2020. At June 30, 2020, the same foreign subsidiary had one outstanding forward exchange contract to purchase U.S. dollars in the notional value of $1,247 with a weighted average maturity of 7 days. The fair value of the Company’s contract was a loss of $9 at June 30, 2020.
Fair Value of Derivative Instruments
The fair value of derivative instruments included in the condensed consolidated balance sheets were as follows:
|
Balance Sheet Location
|
|
September 25, 2020
|
|
|
June 30, 2020
|
|
Derivative designated as hedge:
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
Accrued liabilities
|
|
$
|
353
|
|
|
$
|
392
|
|
Interest rate swap
|
Other long-term liabilities
|
|
|
993
|
|
|
|
1,052
|
|
The impact of the Company’s derivative instruments on the consolidated statement of operations and comprehensive income (loss) for the quarters ended September 25, 2020 and September 27, 2019, respectively, was as follows:
|
Statement of Comprehensive
|
|
For the Quarter Ended
|
|
|
Income Location
|
|
September 25, 2020
|
|
|
September 27, 2019
|
|
Derivative designated as hedge:
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
Interest expense
|
|
$
|
98
|
|
|
$
|
11
|
|
Interest rate swap
|
Unrealized loss on cash flow hedge
|
|
|
75
|
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Other income (expense), net
|
|
$
|
(13
|
)
|
|
$
|
-
|
|