twin20210930

twin20210930_10q.htm

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 September 24, 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)	Identification No.)

1328 Racine Street, Racine, Wisconsin 53403

(Address of principal executive offices)

(262) 638-4000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock (No Par Value)	TWIN	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐	Accelerated Filer ☑
Non-accelerated filer ☐	Smaller reporting company ☑
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

At October 28, 2021, the registrant had 13,599,013 shares of its common stock outstanding.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

	September 24, 2021			June 30, 2021

ASSETS
Current assets:
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
Prepaid expenses		6,165			5,704
Other		7,334			9,926
Total current assets		194,841			191,967

Property, plant and equipment, net		44,339			45,463
Right-of-use assets operating leases		14,216			14,736
Intangible assets, net		16,468			17,480
Deferred income taxes		2,615			2,511
Other assets		3,768			3,256

Total assets	$	276,247		$	275,413

LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	2,000		$	2,000
Accounts payable		29,363			31,011
Accrued liabilities		49,138			45,549
Total current liabilities		80,501			78,560

Long-term debt		29,883			30,085
Lease obligations		12,373			12,887
Accrued retirement benefits		10,853			11,176
Deferred income taxes		4,543			5,045
Other long-term liabilities		6,470			7,000

Total liabilities		144,623			144,753

Commitments and contingencies (Note D)

Equity:
Twin Disc shareholders' equity:
Preferred shares authorized: 200,000; issued: none; no par value		-			-
Common shares authorized: 30,000,000; issued: 14,632,802; no par value		41,165			40,972
Retained earnings		128,856			126,936
Accumulated other comprehensive loss		(24,041	)		(22,615	)
		145,980			145,293
Less treasury stock, at cost (974,978 and 985,686 shares, respectively)		14,942			15,083

Total Twin Disc shareholders' equity		131,038			130,210

Noncontrolling interest		586			450

Total equity		131,624			130,660

Total liabilities and equity	$	276,247		$	275,413

The notes to condensed consolidated financial statements are an integral part of these statements.

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

	For the Quarter Ended
	September 24, 2021			September 25, 2020

Net sales	$	47,761		$	46,179
Cost of goods sold		34,314			36,476
Gross profit		13,447			9,703

Marketing, engineering and administrative expenses		13,091			12,445
Restructuring expenses		48			405
Other operating income		(2,939	)		-
Income (loss) from operations		3,247			(3,147	)

Interest expense		530			573
Other expense (income), net		355			1,148
		885			1,721

Income (loss) before income taxes and noncontrolling interest		2,362			(4,868	)
Income tax expense (benefit)		382			(931	)

Net income (loss)		1,980			(3,937	)
Less: Net earnings attributable to noncontrolling interest, net of tax		(60	)		(42	)

Net income (loss) attributable to Twin Disc	$	1,920		$	(3,979	)

Income (loss) per share data:
Basic income (loss) per share attributable to Twin Disc common shareholders	$	0.14		$	(0.30	)
Diluted income (loss) per share attributable to Twin Disc common shareholders	$	0.14		$	(0.30	)

Weighted average shares outstanding data:
Basic shares outstanding		13,283			13,197
Diluted shares outstanding		13,350			13,197

Comprehensive income
Net income (loss)	$	1,980		$	(3,937	)
Benefit plan adjustments, net of income taxes of $117 and $177, respectively		384			553
Foreign currency translation adjustment		(1,938	)		3,612
Unrealized gain on hedges, net of income taxes of $63 and $22, respectively		204			75
Comprehensive income		630			303
Less: Comprehensive income attributable to noncontrolling interest		(136	)		(55	)

Comprehensive income attributable to Twin Disc	$	494		$	248

The notes to condensed consolidated financial statements are an integral part of these statements.

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

	For the Quarters Ended
	September 24, 2021			September 25, 2020

Cash flows from operating activities:
Net income (loss)	$	1,980		$	(3,937	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization		2,550			2,758
Gain on sale of assets		(2,939	)		-
Restructuring expenses		(125	)		-
Provision for deferred income taxes		(814	)		(4,908	)
Stock compensation expense and other non-cash changes, net		937			709
Net change in operating assets and liabilities		785			4,662

Net cash provided (used) by operating activities		2,374			(716	)

Cash flows from investing activities:
Acquisitions of fixed assets		(846	)		(1,419	)
Proceeds from sale of fixed assets		9,139			19
Proceeds on note receivable		500			300
Other, net		(81	)		(129	)

Net cash used by investing activities		8,712			(1,229	)

Cash flows from financing activities:
Borrowings under revolving loan arrangement		20,591			18,301
Repayments of revolver loans		(20,591	)		(18,674	)
Repayments of other long term debt		(278	)		(155	)
Payments of withholding taxes on stock compensation		(292	)		(224	)

Net cash used by financing activities		(570	)		(752	)

Effect of exchange rate changes on cash		(764	)		1,322

Net change in cash		9,752			(1,375	)

Cash:
Beginning of period		12,340			10,688

End of period	$	22,092		$	9,313

The notes to condensed consolidated financial statements are an integral part of these statements.

TWIN DISC, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

A.	Basis of Presentation

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, 2021. 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.

Reclassification

Certain prior year amounts primarily in cost of goods sold and marketing, engineering, and administrative expenses have been reclassified for consistency with current year presentation.

Recently Adopted Accounting Standards

In December 2019, the FASB issued guidance (ASU 2019-12) intended to simplify the accounting for income taxes. The Company adopted this guidance effective July 1, 2021. The adoption of this guidance did not have a material impact on the Company’s 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 ASC 326). ASC 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective for filers, excluding smaller reporting companies, for fiscal years beginning after December 15, 2019, and for smaller reporting companies for fiscal years beginning after December 15, 2022 (the Company’s fiscal 2024), with early adoption permitted for certain amendments. ASC 326 must be adopted by applying a cumulative effect adjustment to retained earnings. The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.

In March 2020 and January 2021, the FASB issued guidance (ASU 2020-04 and ASU 2021-01, respectively), intended to provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments in this guidance are effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is working with its lender and 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.

B.	Inventories

The major classes of inventories were as follows:

	September 24, 2021		June 30, 2021
Inventories:
Finished parts	$	62,735	$	59,761
Work in process		19,785		17,908
Raw materials		38,572		37,298
	$	121,092	$	114,967

C.	Warranty

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 24, 2021 and September 25, 2020:

	For the Quarter Ended
	September 24, 2021			September 25, 2020
Reserve balance, beginning of period	$	4,369		$	4,460
Current period (benefit) expense		(265	)		1,034
Payments or credits to customers		(532	)		(848	)
Translation		(12	)		36
Reserve balance, end of period	$	3,560		$	4,682

The current portion of the warranty accrual ($2,947 and $3,863 as of September 24, 2021 and September 25, 2020, respectively) is reflected in accrued liabilities, while the long-term portion ($613 and $819 as of September 24, 2021 and September 25, 2020, respectively) is included in other long-term liabilities on the consolidated balance sheets.

D.	Contingencies

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.

E.	Business Segments

The Company and its subsidiaries are engaged in the manufacture and sale of marine and heavy-duty off-highway power transmission equipment. Principal products include marine transmissions, azimuth drives, surface drives, propellers and boat management systems, as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls systems. The Company sells to both domestic and foreign customers in a variety of market areas, principally pleasure craft, commercial and military marine markets, as well as in the energy and natural resources, government and industrial markets. The Company's worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network.

The Company has two reportable segments: manufacturing and distribution. These segment structures reflect the way management makes operating decisions and manages the growth and profitability of the business. 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 24, 2021			September 25, 2020
Net sales
Manufacturing segment sales	$	41,594		$	38,495
Distribution segment sales		20,534			22,506
Inter/Intra segment elimination – manufacturing		(10,942	)		(10,738	)
Inter/Intra segment elimination – distribution		(3,425	)		(4,084	)
	$	47,761		$	46,179
Net income (loss) attributable to Twin Disc
Manufacturing segment net income (loss)	$	4,832		$	(2,662	)
Distribution segment net income		483			1,155
Corporate and eliminations		(3,395	)		(2,472	)
	$	1,920		$	(3,979	)

Assets	September 24, 2021			June 30, 2021
Manufacturing segment assets	$	366,338		$	364,379
Distribution segment assets		49,914			46,956
Corporate assets and elimination of intercompany assets		(140,005	)		(135,922	)
	$	276,247		$	275,413

Disaggregated revenue:

The following table presents details deemed most relevant to the users of the financial statements for the quarters ended September 24, 2021 and September 25, 2020.

Net sales by product group for the quarter ended September 24, 2021 is summarized as follows:

					Elimination of
	Manufacturing		Distribution		Intercompany Sales			Total
Industrial	$	5,907	$	1,118	$	(893	)	$	6,132
Land-based transmissions		11,384		5,105		(4,247	)		12,242
Marine and propulsion systems		24,285		11,562		(9,214	)		26,633
Other		18		2,749		(13	)		2,754
Total	$	41,594	$	20,534	$	(14,367	)	$	47,761

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	$	(753	)	$	5,423
Land-based transmissions		10,494		6,067		(4,302	)		12,259
Marine and propulsion systems		23,179		12,759		(9,762	)		26,176
Other		16		2,310		(5	)		2,321
Total	$	38,495	$	22,506	$	(14,822	)	$	46,179

F.	Stock-Based Compensation

Performance Stock Awards (“PSA”)

During the first quarter of fiscal 2022 and 2021, the Company granted a target number of 103.6 and 265.3 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2022 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual earnings per share (“EPS”) (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2024. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS 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 155.4. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

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 382.3. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

There were 477.4 and 433.1 unvested PSAs outstanding at September 24, 2021 and September 25, 2020, 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 $216 and $87 was recognized for the quarters ended September 24, 2021 and September 25, 2020, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at September 24, 2021 was $8.98. At September 24, 2021, the Company had $3,589 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2022, 2021 and 2020 awards. The total fair value of PSAs vested as of September 24, 2021 and September 25, 2020 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 2022 and 2021, the Company granted 2.4 and 151.6 service based restricted shares, respectively, to employees and non-employee directors. There were 362.0 and 332.8 unvested shares outstanding at September 24, 2021 and September 25, 2020, respectively. A total of 6.9 and 0.0 shares of restricted stock were forfeited during the quarters ended September 24, 2021 and September 25, 2020, respectively. Compensation expense of $335 and $339 was recognized for the quarters ended September 24, 2021 and September 25, 2020, respectively. The total fair value of restricted stock grants vested as of September 24, 2021 and September 25, 2020 was $181 and $293, respectively. As of September 24, 2021, the Company had $993 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 and 2021 Long Term Incentive Plans, the Company has been authorized to issue RSUs. The RSUs entitle the employee to shares of common stock of the Company if the employee remains employed by the Company through a specified date, generally three years from the date of grant. The fair value of the RSUs (on the date of grant) is recorded as compensation expense over the vesting period. During the first quarter of fiscal 2022 and 2021, the Company granted 65.6 and 0.0 of employment based RSUs, respectively. There were 65.6 and 38.0 unvested RSUs outstanding at September 24, 2021 and September 25, 2020, respectively. Compensation expense of $74 and $82 was recognized for the quarters ended September 24, 2021 and September 25, 2020, respectively. The total fair value of restricted stock units vested as of September 24, 2021 and September 25, 2020 was $475 and $0, respectively. The weighted average grant date fair value of the unvested awards at September 24, 2021 was $14.29. As of September 24, 2021, the Company had $888 of unrecognized compensation expense related to restricted stock which will be recognized over the next two years.

G.	Pension and Other Postretirement Benefit Plans

The Company has non-contributory, qualified defined benefit plans covering substantially all domestic employees hired prior to October 1, 2003 and certain foreign employees. Additionally, the Company provides healthcare and life insurance benefits for certain domestic retirees. The components of the net periodic benefit cost for the defined benefit pension plans and the other postretirement benefit plan are as follows:

	For the Quarter Ended
	September 24, 2021			September 25, 2020
Pension Benefits:
Service cost	$	139		$	142
Prior service cost		10			16
Interest cost		666			668
Expected return on plan assets		(1,259	)		(1,132	)
Amortization of transition obligation		9			9
Amortization of prior service cost		(4	)		(4	)
Amortization of actuarial net loss		562			811
Net periodic benefit cost	$	123		$	510

Postretirement Benefits:
Service cost	$	4		$	4
Interest cost		35			39
Amortization of prior service cost		(69	)		(69	)
Net periodic benefit gain	$	(30	)	$	(26	)

The service cost component is included in cost of goods sold and marketing, engineering and administrative expenses. All other components of net periodic benefit cost are included in other expense (income), net.

The Company expects to contribute approximately $733 to its pension plans in fiscal 2022. As of September 24, 2021, $196 in contributions to the pension plans have been made.

The Company has reclassified $384 (net of $117 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended September 24, 2021, and $553 (net of $177 in taxes) during the quarter ended September 25, 2020. These reclassifications are included in the computation of net periodic benefit cost.

H.	Income Taxes

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated Annual Effective Tax Rate (“AETR”). Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. To calculate its AETR, an entity must estimate its ordinary income or loss and the related tax expense or benefit for its full fiscal year. As of September 24, 2021, 91% of the forecasted consolidated income has been earned which under this methodology would have resulted in 91% of the forecasted tax expense being recorded as of the Company’s first fiscal quarter. In situations in which an entity is in a loss position and recognizes a full valuation allowance, the guidance in ASC 740 applies. The tax effect of losses that arise in the early portion of the fiscal year shall be recognized only when the tax benefits are expected to be realized during the year or recognizable as a deferred tax asset at the end of the year. Due to continued losses and uncertain future domestic earnings, the Company recognizes a full US valuation allowance. Permanent differences continue to fluctuate and are significant compared to projected ordinary income. Therefore, according to ASC 740 guidance, the fully valued domestic entity was removed from the annualized effective rate calculation. Because of the full US valuation allowance, the US entity may only recognize tax expense / benefit recorded for FIN 48 adjustments and the valuation allowance entries recorded for pension and hedging adjustments.

For the quarters ended September 24, 2021 and September 25, 2020 the Company’s effective income tax rate was 16.2% and 19.1% respectively. For the quarter ended September 24, 2021, the net income tax expense reflected is the estimated AETR for the foreign entities with no valuation allowance plus the limited tax expense / benefits allowed under ASC 740 for the fully valued US entity. For the quarter ended September 25, 2020 the company did not recognize a full US valuation allowance so the tax expense realized was based on the estimated AETR. Due to the different methodologies utilized to calculate the interim tax provisions, it is not reasonable to numerically reconcile the change in the estimated tax rate.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of a novel coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally. In March 2020, the World Health Organization classified the COVID-19 outbreak a pandemic, based on the rapid increase in exposure globally. The spread of the COVID-19 outbreak has caused significant volatility and uncertainty in U.S. and international markets. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. 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 (“TCJA”) in 2017. In addition, governments around the world continue to initiate various forms of assistance. The Consolidated Appropriations Act of 2021 was signed into law on December 27, 2020. Changes in the tax treatment of certain items have been reflected during this quarter. These changes did not have a material impact to the Company’s effective tax rate. On March 11, 2021, President Biden signed into law The American Rescue Plan Act of 2021 (“ARPA”), which among other things, further changed the executive compensation rules. Under the ARPA, which is effective for tax years beginning after December 31, 2026, the definition of covered employee has been expanded to include employees who are among the five highest compensated employees for the year, not limited to only officers. This is in addition to the existing pool of officers who are defined as “covered employees” under the current IRC 162(m) rules. Management will continue to monitor these new rules and apply them as required. Currently, there is minimal impact anticipated. 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 foreign operations and based on this evaluation management has concluded that no valuation allowances are required. However, due to continued historical domestic losses and uncertain future domestic earnings, the Company continues to recognize a full domestic valuation allowance.

The Company has approximately $814 of unrecognized tax benefits, including related interest and penalties, as of September 24, 2021, which, if recognized, would favorably impact the effective tax rate. There were no significant changes in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quarter ended September 24, 2021. 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 2014 through 2021. The tax year open to exam in the Netherlands is 2019. The tax years open to examination in the U.S. are for years subsequent to fiscal 2016. It is reasonably possible that other audit cycles will be completed during fiscal 2022.

I.	Intangible Assets

As of September 24, 2021, 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, 2021	$	41,142		$	(23,662	)	$	17,480		$	10,321		$	4,883		$	1,282		$	994
Amortization		-			(826	)		(826	)		(419	)		(304	)		(46	)		(57	)
Translation adjustment		(186	)		-			(186	)		(116	)		(54	)		(14	)		(2	)
Balance at September 24, 2021	$	40,956		$	(24,488	)	$	16,468		$	9,786		$	4,525		$	1,222		$	935

Other intangibles consist mainly of computer software. Amortization is recorded on the basis of straight-line or accelerated, as appropriate, over the estimated useful lives of the assets.

The weighted average remaining useful life of the intangible assets included in the table above is approximately 7 years.

Intangible amortization expense was $826 and $835 for the quarters ended September 24, 2021, and September 25, 2020, respectively. Estimated intangible amortization expense for the remainder of fiscal 2022 and each of the next five fiscal years is as follows:

Fiscal Year
2022	$	2,494
2023		3,110
2024		2,955
2025		2,789
2026		1,413
Thereafter		3,707

J.	Long-term Debt

Long-term debt at September 24, 2021 and June 30, 2021 consisted of the following:

	September 24, 2021			June 30, 2021
Credit Agreement Debt
Revolving loans (expire June 2023)	$	15,237		$	15,415
Term loan (due March 2026)		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

Credit Agreement Debt: The Company’s credit agreement debt represents borrowings made under the credit agreement, as amended, which it entered into with BMO Harris Bank N.A, (“BMO”) on June 29, 2018 (“Credit Agreement”). Under the agreement, the Company, among other obligations, is subject to a minimum EBITDA financial covenant.

On January 27, 2021, the Company and BMO entered into a forbearance agreement and amendment to the Credit Agreement (the “Forbearance Agreement”). Under this agreement, BMO agreed to forbear from exercising its rights and remedies against the Company with respect to its noncompliance with the minimum EBITDA covenant, for the period beginning with the date of the amendment through September 30, 2021.

On September 30, 2021, the Company and BMO entered into an amended and restated forbearance agreement and amendment to the Credit Agreement (the "Amended and Restated Forbearance Agreement"). The Amended and Restated Forbearance Agreement extends the forbearance period through February 28, 2022, or if earlier, through the date on which a default under the Amended and Restated Forbearance Agreement or Credit Agreement occurs. During the extended forbearance period, BMO will continue to forbear from exercising its rights and remedies against the Company under the Credit Agreement with respect to the Company’s noncompliance with its minimum EBITDA covenants. The Amended and Restated Forbearance Agreement also makes certain adjustments to the Credit Agreement. When the forbearance period ends, the Company is subject to a maximum total funded debt to EBITDA ratio of 3.00 to 1.00.

For the quarter ended September 24, 2021, as a result of the Amended and Restated Forbearance Agreement, the Company was not required to meet the minimum EBITDA financial covenant. The Company expects to be in compliance with the terms of the Credit Agreement following the forbearance period, and therefore continues to classify its debt as long term.

The Company remains in compliance with its liquidity and other covenants, and has agreed to provide additional financial reports to BMO.

The Credit Agreement, including its amendments, is more fully described in the Company’s Annual Report filed on Form 10-K for June 30, 2021, as well as in Item 2 of this quarterly report.

As of September 24, 2021, current maturities include $2,000 of term loan payments due within the coming year.

Other: Other long-term debt pertains mainly to a financing arrangement in Europe. These liabilities carry terms of three to five years and implied interest rates ranging from 7% to 25%. A total amount of $23 in principal was paid on these liabilities during the current fiscal year.

During the quarters ended September 24, 2021, the average interest rate was 3.96% on the Term Loan, and 4.25% on the Revolving Loans.

As of September 24, 2021, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $40,622, and the Company had approximately $25,384 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 24, 2021 and June 30, 2021. 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 24, 2021, the notional amount was $15,500. 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.

During the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan as a net investment hedge to mitigate the risk of variability in its euro denominated net investments in wholly-owned foreign companies. Effective upon the designation, all changes in the fair value of the euro revolver are reported in accumulated other comprehensive loss along with the foreign currency translation adjustments on those foreign investments. This net investment hedge is included in the disclosures in Note O, Derivative Financial Instruments.

K.	Shareholders’ Equity

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 24, 2021 remain authorized for purchase. The Company did not make any open market purchases of its shares during the quarters ended September 24, 2021 and September 25, 2020.

The following is a reconciliation of the Company’s equity balances for the first fiscal quarter of 2022 and 2021:

	Twin Disc, Inc. Shareholders’ Equity
						Accumulated
						Other						Non-
	Common			Retained		Comprehensive			Treasury			Controlling		Total
	Stock			Earnings		Income (Loss)			Stock			Interest		Equity
Balance, June 30, 2021	$	40,972		$	126,936	$	(22,615	)	$	(15,083	)	$	450	$	130,660
Net income					1,920								60		1,980
Translation adjustments							(2,014	)					76		(1,938	)
Benefit plan adjustments, net of tax							384								384
Unrealized gain on hedges, net of tax							204								204
Compensation expense		625													625
Shares (acquired) issued, net		(432	)							141					(291	)
Balance, September 24, 2021	$	41,165		$	128,856	$	(24,041	)	$	(14,942	)	$	586	$	131,624

	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 24, 2021 and September 25, 2020 are as follows:

	Translation			Benefit Plan			Cash Flow			Net Investment
	Adjustment			Adjustment			Hedges			Hedges
Balance at June 30, 2021	$	9,192		$	(31,463	)	$	(678	)	$	334
Translation adjustment during the quarter		(2,014	)		-			-			-
Amounts reclassified from accumulated other comprehensive income		-			384			68			136
Net current period other comprehensive (loss) income		(2,014	)		384			68			136
Balance at September 24, 2021	$	7,178		$	(31,079	)	$	(610	)	$	470

	Translation		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

SEC Form 10-Q filed by Twin Disc, Incorporated