TWIN DISC INC 10-Q

twin20220930_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 30, 2022   ☐ 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 24, 2022, the registrant had 13,787,132 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 30, 2022     June 30, 2022                     ASSETS                 Current assets:                 Cash   $ 13,214     $ 12,521   Trade accounts receivable, net     40,007       45,452   Inventories     128,100       127,109   Assets held for sale     5,769       2,968   Prepaid expenses     8,207       7,756   Other     6,521       8,646   Total current assets     201,818       204,452                     Property, plant and equipment, net     38,989       41,615   Right-of-use assets operating leases     11,492       12,685   Intangible assets, net     11,560       13,010   Deferred income taxes     2,846       2,178   Other assets     2,846       2,583                     Total assets   $ 269,551     $ 276,523                     LIABILITIES AND EQUITY                 Current liabilities:                 Current maturities of long-term debt   $ 2,000     $ 2,000   Accounts payable     30,706       28,536   Accrued liabilities     49,158       50,542   Total current liabilities     81,864       81,078                     Long-term debt, less current maturities     35,112       34,543   Lease obligations     9,483       10,575   Accrued retirement benefits     9,860       9,974   Deferred income taxes     3,422       3,802   Other long-term liabilities     5,042       5,363                     Total liabilities     144,783       145,335                     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     41,285       42,551   Retained earnings     133,002       135,031   Accumulated other comprehensive loss     ( 37,103 )     ( 32,086 )       137,184       145,496   Less treasury stock, at cost ( 845,670 and 960,459  shares, respectively)     12,964       14,720                     Total Twin Disc shareholders' equity     124,220       130,776                     Noncontrolling interest     548       412                     Total equity     124,768       131,188                     Total liabilities and equity   $ 269,551     $ 276,523     The notes to condensed consolidated financial statements are an integral part of these statements.   2       TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)       For the Quarter Ended       September 30, 2022     September 24, 2021                     Net sales   $ 55,913     $ 47,761   Cost of goods sold     42,616       34,314   Gross profit     13,297       13,447                     Marketing, engineering and administrative expenses     15,079       13,091   Restructuring expenses     11       48   Other operating income     -       ( 2,939 ) (Loss) income from operations     ( 1,793 )     3,247                     Interest expense     566       530   Other (income) expense, net     260       355         826       885                     (Loss) income before income taxes and noncontrolling interest     ( 2,619 )     2,362   Income tax (benefit) expense     ( 688 )     382                     Net (loss) income     ( 1,931 )     1,980   Less: Net earnings attributable to noncontrolling interest, net of tax     ( 98 )     ( 60 )                   Net (loss) income attributable to Twin Disc   $ ( 2,029 )   $ 1,920                     (Loss) income per share data:                 Basic (loss) income per share attributable to Twin Disc common shareholders   $ ( 0.15 )   $ 0.14   Diluted (loss) income per share attributable to Twin Disc common shareholders   $ ( 0.15 )   $ 0.14                     Weighted average shares outstanding data:                 Basic shares outstanding     13,407       13,283   Diluted shares outstanding     13,407       13,350                     Comprehensive income (loss)                 Net (loss) income   $ ( 1,931 )   $ 1,980   Benefit plan adjustments, net of income taxes of $ 1 and $ 117 , respectively     518       384   Foreign currency translation adjustment     ( 6,290 )     ( 1,938 ) Unrealized gain on cash flow hedge, net of income taxes of $ 0 and $ 63 , respectively     793       204   Comprehensive (loss) income     ( 6,910 )     630   Less: Comprehensive income (loss) attributable to noncontrolling interest     136       ( 136 )                   Comprehensive (loss) income attributable to Twin Disc   $ ( 6,774 )   $ 494       The notes to condensed consolidated financial statements are an integral part of these statements.   3       TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)       For the Quarters Ended       September 30, 2022     September 24, 2021                     Cash flows from operating activities:                 Net (loss) income   $ ( 1,931 )   $ 1,980   Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:                 Depreciation and amortization     2,140       2,550   Gain on sale of assets     ( 42 )     ( 2,939 ) Restructuring expenses     ( 68 )     ( 125 ) Provision for deferred income taxes     ( 1,623 )     ( 814 ) Stock compensation expense and other non-cash changes, net     864       937   Net change in operating assets and liabilities     ( 36 )     785                     Net cash (used) provided by operating activities     ( 696 )     2,374                     Cash flows from investing activities:                 Acquisitions of property, plant and equipment     ( 2,237 )     ( 846 ) Proceeds from sale of fixed assets     2       9,139   Proceeds on note receivable     -       500   Other, net     534       ( 81 )                   Net cash (used) provided by investing activities     ( 1,701 )     8,712                     Cash flows from financing activities:                 Borrowings under revolving loan arrangements     20,221       20,591   Repayments of revolving loan arrangements     ( 18,685 )     ( 20,591 ) Repayments of other long term debt     ( 651 )     ( 278 ) Payments of withholding taxes on stock compensation     ( 168 )     ( 292 )                   Net cash provided (used) by financing activities     717       ( 570 )                   Effect of exchange rate changes on cash     2,373       ( 764 )                   Net change in cash     693       9,752                     Cash:                 Beginning of period     12,521       12,340                     End of period   $ 13,214     $ 22,092     The notes to condensed consolidated financial statements are an integral part of these statements.   4     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. These financial statements should 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, 2022. The year-end condensed consolidated 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.   The Company's reporting period ends on the last Friday of the quarterly calendar period.  The Company's fiscal year ends on June 30, regardless of the day of the week on which June 30 falls.   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 financial statements and 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.   5       B. Inventories   The major classes of inventories were as follows:         September 30, 2022     June 30, 2022   Inventories:                 Finished parts   $ 64,707     $ 65,789   Work in process     22,216       19,801   Raw materials     41,177       41,519       $ 128,100     $ 127,109       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 30, 2022 and September 24, 2021:       For the Quarter Ended       September 30, 2022     September 24, 2021   Reserve balance, beginning of period   $ 3,329     $ 4,369   Current period expense and adjustments     908       ( 265 ) Payments or credits to customers     ( 366 )     ( 532 ) Translation     ( 67 )     ( 12 ) Reserve balance, end of period   $ 3,804     $ 3,560       The current portion of the warranty accrual ($ 3,331 and $ 2,947 as of September 30, 2022 and September 24, 2021, respectively) is reflected in accrued liabilities, while the long-term portion ($ 473 and $ 613 as of September 30, 2022 and September 24, 2021, respectively) is included in other long-term liabilities on the condensed 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.   6     Information about the Company’s segments is summarized as follows:       For the Quarter Ended       September 30, 2022     September 24, 2021   Net sales                 Manufacturing segment sales   $ 48,997     $ 41,594   Distribution segment sales     24,307       20,534   Inter/Intra segment elimination – manufacturing     ( 13,643 )     ( 10,942 ) Inter/Intra segment elimination – distribution     ( 3,748 )     ( 3,425 )     $ 55,913     $ 47,761   Net (loss) income attributable to Twin Disc                 Manufacturing segment net income   $ 1,795     $ 4,832   Distribution segment net income     956       483   Corporate and eliminations     ( 4,780 )     ( 3,395 )     $ ( 2,029 )   $ 1,920         September 30, 2022     June 30, 2022   Assets             Manufacturing segment assets   $ 361,904     $ 364,174   Distribution segment assets     50,594       50,958   Corporate assets and elimination of intercompany assets     ( 142,947 )     ( 138,609 )     $ 269,551     $ 276,523       Disaggregated revenue:   The following table presents details deemed most relevant to the users of the financial statements for the quarters ended September 30, 2022 and September 24, 2021.   Net sales by product group for the quarter ended September 30, 2022 is summarized as follows:                       Elimination of               Manufacturing     Distribution     Intercompany Sales     Total   Industrial   $ 6,692     $ 1,048     $ ( 709 )   $ 7,031   Land-based transmissions     16,287       4,606       ( 4,956 )   $ 15,937   Marine and propulsion systems     25,816       14,544       ( 11,022 )   $ 29,338   Other     202       4,109       ( 704 )   $ 3,607   Total   $ 48,997     $ 24,307     $ ( 17,391 )   $ 55,913     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     7       F. Stock-Based Compensation   Performance Stock Awards ( “ PSA ” )   During the first quarter of fiscal 2023 and 2022, the Company granted a target number of 112.4 and 103.6 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2023 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2025. These PSAs are subject to adjustment if the Company’s return on invested capital and cumulative EBITDA 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 224.8 . Based upon actual results to date, the Company is currently not accruing compensation expense for these PSAs.   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”) or average free cashflow (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 or average free cashflow 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 146.6 . Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.   There were 433.2 and 477.4 unvested PSAs outstanding at September 30, 2022 and September 24, 2021, 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 $ 230 and $ 216 was recognized for the quarters ended September 30, 2022 and September 24, 2021, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at September 30, 2022 was $ 8.35 . At September 30, 2022, the Company had $ 2,024 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2023 and 2022 awards. The total fair value of PSAs vested as of September 30, 2022 and September 24, 2021 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 2023 and 2022, the Company granted 129.4 and 2.4 service based restricted shares, respectively, to employees and non-employee directors. There were 356.3 and 362.0 unvested shares outstanding at September 30, 2022 and September 24, 2021, respectively. A total of 0 and 6.9 shares of restricted stock were forfeited during the quarters ended September 30, 2022 and September 24, 2021, respectively. Compensation expense of $ 360 and $ 334 was recognized for the quarters ended September 30, 2022 and September 24, 2021, respectively. The total fair value of restricted stock grants vested as of September 30, 2022  and September 24, 2021  was $ 417 and $ 181 , respectively. As of September 30, 2022, the Company had $ 1,446 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.   Restricted Stock Unit Awards ( “ RSU ” )   Under the 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 or when performance conditions have been met.. 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 2023 and 2022, the Company granted 72.4 and 65.6 of employment based RSUs, respectively. There were 130.9 and 65.5 unvested RSUs outstanding at September 30, 2022 and September 24, 2021, respectively. Compensation expense of $ 69 and $ 74 was recognized for the quarters ended September 30, 2022 and September 24, 2021, respectively. The total fair value of restricted stock units vested as of September 30, 2022 and September 24, 2021 was $ 40 and $ 475 , respectively. The weighted average grant date fair value of the unvested awards at September 30, 2022 was $ 10.94 . As of September 30, 2022, the Company had $ 1,106 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.   8       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 30, 2022     September 24, 2021   Pension Benefits:                 Service cost   $ 101     $ 139   Prior service cost     8       10   Interest cost     868       666   Expected return on plan assets     ( 1,060 )     ( 1,259 ) Amortization of transition obligation     9       9   Amortization of prior service cost     9       ( 4 ) Amortization of actuarial net loss     617       562   Net periodic benefit cost   $ 553     $ 123                     Postretirement Benefits:                 Service cost   $ 2     $ 4   Interest cost     53       35   Amortization of prior service cost     ( 69 )     ( 69 )     Amortization of actuarial net loss     ( 10 )     -   Net periodic benefit gain   $ ( 23 )   $ ( 30 )   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 $ 576 to its pension plans in fiscal 2023. As of September 30, 2022, $ 143 in contributions to the pension plans have been made.   The Company has reclassified $ 518 (net of $ 1 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended September 30, 2022, and $ 384 (net of $ 117 in taxes) during the quarter ended September 24, 2021. 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. In situations in which an entity is in a loss position and recognizes a full valuation allowance, the guidance in ASC 740 - 270 - 25 - 9 applies. 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, per ASC 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 ASC 740 - 10 adjustments.   For the three months ended September 30, 2022 and September 24, 2021 the Company’s effective income tax rate was 26.3 % and 16.2 % respectively. The mix of foreign earnings by jurisdiction resulted in an increase in the effective tax rate of 9.6 %.   In the post pandemic era, the Company continues to monitor for any revisions enacted under the Tax Cuts and Job Act (TCJA), Coronavirus Aid, Relief and Economic Security (CARES) Act and the American Rescue Plan (ARPA). On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA). This landmark United States law aims to reduce inflation by reducing the deficit, lowering prescription drug prices and investing into domestic energy production while promoting clean energy. At this time, it is not certain what, if any, impact this will have on the Company.   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.   9     The Company has approximately $ 772 of unrecognized tax benefits, which include $ 53 of related interest and penalties, as of September 30, 2022, 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 30, 2022. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going 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 2017. It is reasonably possible that other audit cycles will be completed during fiscal 2023.       I. Intangible Assets   As of September 30, 2022, 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, 2022   $ 39,845     $ ( 26,835 )   $ 13,010     $ 7,636     $ 3,238     $ 972     $ 1,164   Addition     9       -       9       -       -       -       9   Reduction     ( 10,506 )     10,506       -                                   Amortization     -       ( 698 )     ( 698 )     ( 323 )     ( 260 )     ( 39 )     ( 76 ) Translation adjustment     ( 761 )     -       ( 761 )     ( 487 )     0       ( 265 )     ( 9 ) Balance at September 30, 2022   $ 28,587     $ ( 17,027 )   $ 11,560     $ 6,826     $ 2,978     $ 668     $ 1,088       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 $ 698 and $ 826 for the quarters ended September 30, 2022, and September 24, 2021, respectively. Estimated intangible amortization expense for the remainder of fiscal 2023 and each of the next five fiscal years is as follows:   Fiscal Year     2023 $ 2,013 2024   2,582 2025   2,440 2026   1,611 2027   989 2028   958 Thereafter   967   10       J. Long-term Debt   Long-term debt at September 30, 2022 and June 30, 2022  consisted of the following:       September 30, 2022     June 30, 2022   Credit Agreement Debt                 Revolving loans (expire June 2025)   $ 24,061     $ 22,968   Term loan (due March 2026)     13,000       13,500   Other     51       75   Subtotal     37,112       36,543   Less: current maturities     ( 2,000 )     ( 2,000 ) Total long-term debt   $ 35,112     $ 34,543     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 June 30, 2022, the Company entered into Amendment No. 9 to Credit Agreement (the “Ninth Amendment”) that amends and extends the Credit Agreement dated as of June 29, 2018, as amended (the “Credit Agreement”) between the Company and BMO.   Pursuant to the Credit Agreement, as in effect prior to the Ninth Amendment, the Bank made a Term Loan to the Company in the principal amount of $ 20 million, and the Company may, from time to time prior to the maturity date, enter into Revolving Loans in amounts not to exceed, in the aggregate and subject to a Borrowing Base, $ 40 million (the “Revolving Credit Commitment”). The Credit Agreement also allows the Company to obtain Letters of Credit from the Bank, which if drawn upon by the beneficiary thereof and paid by the Bank, would become Revolving Loans.   The Ninth Amendment extended the Credit Agreement through June 30, 2025. Prior to the Ninth Amendment, the Credit Agreement was scheduled to terminate as of June 30, 2023.   The Ninth Amendment also formally terminated the January 27, 2021 Forbearance Agreement, which had been entered into because the Company had not been in compliance with a requirement to maintain a minimum EBITDA of $ 2.5 million for the three fiscal quarters ended as of December 25, 2020. The Bank also waived the Company’s compliance with the minimum EBITDA requirements under the Credit Agreement and any Event of Default associated with the Company’s noncompliance with the minimum EBITDA requirements.   The Ninth Amendment also replaced LIBOR-based interest rates with different benchmark rates based on the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”). Loans under the Credit Agreement are designated either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,” which accrue interest at the EURIBO Rate plus an Applicable Margin. Amounts drawn on a Letter of Credit that are not timely reimbursed to the Bank bear interest at a Base Rate plus an Applicable Margin. The Company also pays a commitment fee on the average daily Unused Revolving Credit Commitment equal to an Applicable Margin.   The Ninth Amendment also reduced the Applicable Margins from the rates that had been in effect during the period of the Forbearance Agreement. During the period covered by the Forbearance Agreement, the Applicable Margins for Revolving Loans, Term Loans, and the Unused Revolving Credit Commitment were 3.25 %, 3.875 %, and . 20 %, respectively. Under the Ninth Amendment, the Applicable Margins are between 1.25 % and 2.75 % for Revolving Loans and Letters of Credit; 1.375 % and 2.875 % for Term Loans; and . 10 % and . 15 % for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).   The Ninth Amendment also revised the Company’s financial covenants under the Credit Agreement. The Company’s Total Funded Debt to EBITDA ratio (for which the Bank provided relief during period covered by the Forbearance Agreement) may not exceed 3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00. The Company’s Tangible Net Worth may not be less than $ 100 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.   The Company remains in compliance with its liquidity and other covenants.   11     The Credit Agreement, including its amendments, is more fully described in the Company’s Annual Report filed on Form 10 -K for June 30, 2022, as well as in Item 2 of this quarterly report.   As of September 30, 2022, 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 $ 19 in principal was paid on these liabilities during the current fiscal year.   During the quarter ended September 30, 2022, the average interest rate was 4.61 % on the Term Loan, and 3.73 % on the Revolving Loans.   As of September 30, 2022, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $ 40,000 , and the Company had approximately $ 15,939 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 30, 2022 and June 30, 2022. 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 30, 2022, the notional amount was $ 13,000 . 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 30, 2022 remain authorized for purchase.  The Company did not make any open market purchases of its shares during the quarters ended September 30, 2022 and September 24, 2021.   The following is a reconciliation of the Company’s equity balances for the first fiscal quarter of 2023 and 2022:       Twin Disc, Inc. Shareholders’ Equity                       Accumulated                                               Other             Non-               Common     Retained     Comprehensive     Treasury     Controlling     Total       Stock     Earnings     Income     Stock     Interest     Equity   Balance, June 30, 2022   $ 42,551     $ 135,031     $ ( 32,086 )   $ ( 14,720 )   $ 412     $ 131,188   Net (loss) income             ( 2,029 )                     98     $ ( 1,931 ) Translation adjustments                     ( 6,328 )             38     $ ( 6,290 ) Benefit plan adjustments, net of tax                     518                     $ 518   Unrealized gain on cash flow hedge, net of tax                     793                     $ 793   Compensation expense     658                                     $ 658   Shares (acquired) issued, net     ( 1,924 )                     1,756             $ ( 168 ) Balance, September 30, 2022   $ 41,285     $ 133,002     $ ( 37,103 )   $ ( 12,964 )   $ 548     $ 124,768     12         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 cash flow hedge, 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       Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended September 30, 2022 and September 24, 2021 are as follows:       Translation     Benefit Plan     Cash Flow     Net Investment       Adjustment     Adjustment     Hedges     Hedges   Balance at June 30, 2022   $ ( 2,266 )   $ ( 31,726 )   $ 356     $ 1,550   Translation adjustment during the quarter     ( 6,328 )     -       -       -   Amounts reclassified from accumulated other comprehensive income (loss)     -       518       657       136   Net current period other comprehensive (loss) income     ( 6,328 )     518       657       136   Balance at September 30, 2022   $ ( 8,594 )   $ ( 31,208 )   $ 1,013     $ 1,686         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     Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended September 30, 2022 are as follows:       Amount Reclassified         Quarter Ended         September 30, 2022     Changes in benefit plan items           Actuarial losses   $ 570   (a) Transition asset and prior service benefit     ( 51 ) (a) Total amortization     519     Income tax expense     1                 Total reclassification net of tax   $ 518       Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended September 24, 2021 is as follows:       Amount Reclassified         Quarter Ended         September 24, 2021     Changes in benefit plan items           Actuarial losses   $ 565   (a) Transition asset and prior service benefit     ( 64 ) (a) Total amortization     501     Income tax expense     117     Total reclassification net of tax   $ 384         (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).   13       L. Restructuring of Operations   Restructuring expenses   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. During the fourth quarter of fiscal 2021, the Company undertook a series of steps to accelerate its focus on its core competencies, improve its fixed cost structure, and monetize some of its under-utilized assets.   With regard to its Belgian operations, on June 30, 2021, the Company announced a new phase in its restructuring plans. Under this plan, the Belgian operation’s workforce was reduced by 18 employees. This reduction in force resulted in an accrual of $ 2,200 , pertaining to the Company’s current estimate for the payment of severance benefits, which is expected to be completed by December 2022. The action was taken to allow the Belgian operation to focus resources on core manufacturing processes, while allowing for savings on the outsourcing of non-core processes.   Restructuring charges to streamline operations totaled $ 11 and $ 448 in the quarters ending September 30, 2022 and September 24, 2021, respectively. Restructuring activities since June 2015 have resulted in the elimination of 254 full-time employees in the manufacturing segment. Accumulated costs to date under these programs within the manufacturing segment through September 30, 2022 were $ 16,229 .   The following is a roll-forward of restructuring activity:            Accrued restructuring liability, June 30, 2022   $ 1,024   Additions     11   Payments, adjustments and write-offs during the year     ( 79 ) Accrued restructuring liability, September 30, 2022   $ 956     Assets held for sale   To improve its fixed cost structure and monetize some of its under-utilized assets, the Company commenced the active marketing of several of its real estate properties, namely, its corporate headquarters in Racine, its propeller machining plant and office in Switzerland, and a spare warehouse in Italy during the fourth quarter of fiscal 2021. Such actions required the Company to reclassify these assets from Property, Plant and Equipment to Assets Held for Sale, at fair value less costs to sell, or net book value, whichever is lower. Fair value was determined using real estate broker estimates and would be classified as Level 3 in the fair value hierarchy. This assessment of fair value resulted in the Company recognizing a write-down of the carrying value of its corporate headquarters by $ 4,267 in the fourth quarter of fiscal 2021.   In the first quarter of fiscal 2022, the Company completed the sale of its propeller machining plant and office in Switzerland and received $ 9,138 in proceeds, net of fees and local taxes and recorded a gain of $ 2,939 in other operating income. In the fourth quarter of fiscal 2022, the Company completed the sale of its spare warehouse in Italy and received net proceeds of about $ 305 .   In the first quarter of fiscal 2023, the Company commenced the active marketing of an additional real estate property located in Nivelles, Belgium.  This action requires the Company to reclassify these assets from Property, Plant, and Equipment to Assets Held for Sale, at fair value less costs to sell or net book value, whichever is lower.  Fair value was determined using real estate broker estimates and would be classified as Level 3 in the fair value hierarchy.  The real estate property's fair value less costs to sell exceeds its net book value.  The Company reclassified the property's net book value of $ 2,801 from Property, Plant, and Equipment to Assets Held for Sale.       M. Earnings Per Share   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.    14     The components of basic and diluted earnings per share were as follows:       For the Quarter Ended       September 30, 2022     September 24, 2021   Basic:                 Net (loss) income   $ ( 1,931 )   $ 1,980                     Less: Net earnings attributable to noncontrolling interest     ( 98 )     ( 60 )                   Less: Undistributed earnings attributable to unvested shares     -       -                     Net (loss) income attributable to Twin Disc     ( 2,029 )     1,920                     Weighted average shares outstanding - basic     13,407       13,283                     Basic Loss Per Share:                 Net (loss) earnings per share - basic   $ ( 0.15 )   $ 0.14                     Diluted:                 Net (loss) income   $ ( 1,931 )   $ 1,980                     Less: Net earnings attributable to noncontrolling interest     ( 98 )     ( 60 )                   Less: Undistributed earnings attributable to unvested shares     -       -                     Net (loss) income attributable to Twin Disc     ( 2,029 )     1,920                     Weighted average shares outstanding - basic     13,407       13,283   Effect of dilutive stock awards     -       67   Weighted average shares outstanding - diluted     13,407       13,350                     Diluted Income (Loss) Per Share:                 Net (loss) earnings per share - diluted   $ ( 0.15 )   $ 0.14       The following potential common shares were excluded from diluted EPS for the quarter ended September 24, 2021 because they were anti-dilutive: 439.1 related to the Company’s unvested PSAs, 362.0 related to the Company’s unvested RS awards, and 37.0 related to the Company’s unvested RSUs.   There were no potential common shares excluded from diluted EPS for the quarter ended September 30, 2022 due to the current period net loss.       N. Lease Liabilities   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.   15     The following table provides a summary of leases recorded on the condensed consolidated balance sheet.     Balance Sheet Location   September 30, 2022     June 30, 2022   Lease Assets                   Operating lease right-of-use assets Right-of-use assets operating leases   $ 11,492     $ 12,685   Finance lease right-of-use assets Property, plant and equipment, net     4,626       4,805                       Lease Liabilities                   Operating lease liabilities Accrued liabilities   $ 2,039     $ 2,127   Operating lease liabilities Lease obligations     9,483       10,575   Finance lease liabilities Accrued liabilities     607       576   Finance lease liabilities Other long-term liabilities     4,236       4,440       The components of lease expense were as follows:       For the Quarter Ended       September 30, 2022     September 24, 2021   Finance lease cost:                 Amortization of right-of-use assets   $ 155     $ 163   Interest on lease liabilities     64       72   Operating lease cost     711       693   Short-term lease cost     13       2   Variable lease cost     40       39   Total lease cost     983       969   Less: Sublease income     ( 17 )     ( 20 ) Net lease cost   $ 966     $ 949       Other information related to leases was as follows:       For the Quarter Ended       September 30, 2022     September 24, 2021   Cash paid for amounts included in the measurement of lease liabilities:                 Operating cash flows from operating leases   $ 748     $ 742   Operating cash flows from finance leases     201       136   Financing cash flows from finance leases     64       72   Right-of-use-assets obtained in exchange for lease obligations:                 Operating leases     528       165   Finance leases     51       174   Weighted average remaining lease term (years):                 Operating leases     8.8       9.6   Finance lease     11.4       11.7   Weighted average discount rate:                 Operating leases     7.2 %     7.2 % Finance leases     5.2 %     5.2 %   16     Approximate future minimum rental commitments under non-cancellable leases as of September 30, 2022 were as follows:       Operating Leases     Finance Leases   2023   $ 2,297     $ 864   2024     2,411       834   2025     1,460       591   2026     1,317       525   2027     1,312       466   Thereafter     7,005       3,465   Total future lease payments     15,802       6,744   Less: Amount representing interest     ( 4,280 )     ( 1,901 ) Present value of future payments   $ 11,522     $ 4,843         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 30, 2022, with a notional amount of $ 13,000 . 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 SOFR-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 twelve months.   Net unrealized after-tax income related to cash flow hedging activities that were included in accumulated other comprehensive loss were ($ 705 ) and ($ 355 ) as of September 30, 2022 and June 30, 2022, 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 $ 214 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.   Derivatives Designated as Net Investment Hedges   The Company is exposed to foreign currency exchange risk related to its investment in net assets in foreign countries. As discussed in Note J, Long-term Debt, during the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan, with a notional amount of €13,000, as a net investment hedge to mitigate the risk of variability in its euro denominated net investments in wholly-owned foreign subsidiaries. All changes in the fair value of the euro revolver were then recorded in accumulated other comprehensive loss along with the foreign currency translation adjustments on those foreign investments. Net unrealized after-tax income (loss) related to net investment hedging activities that were included in accumulated other comprehensive loss were ($ 1,995 ) and ($ 1,551 ) as of September 30, 2022 and June 30, 2022, respectively.   17     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 30, 2022     June 30, 2022   Derivative designated as hedge:                   Interest rate swap Other current assets   $ 214     $ 68   Interest rate swap Other noncurrent assets     279       77     The impact of the Company’s derivative instruments on the condensed consolidated statements of operations and comprehensive (loss) income for the quarters ended September 30, 2022 and September 24, 2021, respectively, was as follows:     Statement of Comprehensive   For the Quarter Ended     (Loss) Income Location   September 30, 2022     September 24, 2021   Derivative designated as hedge:                   Interest rate swap Interest expense   $ 84     $ 90   Interest rate swap Unrealized gain (loss) on cash flow hedge     349       68   Net investment hedge Unrealized gain on hedges     444       136           Item 2. Management Discussion and Analysis   In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated financial statements as of September 30, 2022, and related notes, as reported in Item 1 of this Quarterly Report.   Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the Company’s description of plans and objectives for future operations and assumptions behind those plans. The words “anticipates,” “believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by the Company should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.   In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company’s Annual Report filed on Form 10-K for June 30, 2022, as supplemented in this Quarterly Report, could cause actual results to be materially different from what is expressed or implied in any forward-looking statement.   Results of Operations     (In thousands)                                     Quarter Ended       September 30, 2022     % of Net     September 24, 2021     % of Net               Sales             Sales   Net sales   $ 55,913             $ 47,761           Cost of goods sold     42,616               34,314           Gross profit     13,297       23.8 %     13,447       28.2 % Marketing, engineering and administrative expenses     15,079       27.0 %     13,091       27.4 % Restructuring expense     11       0.0 %     48       0.1 % Other operating income     -       0.0 %     (2,939)       6.2 % (Loss) Income from operations   $ (1,793 )     -3.2 %   $ 3,247       6.8 %   18     Comparison of the First Quarter of Fiscal 2023 with the First Quarter of Fiscal 2022   Net sales for the first quarter increased 17.1%, or $8.2 million, to $55.9 million from $47.8 million in the same quarter a year ago. The Company has experienced improving conditions across most of its markets following the severe impact of the COVID-19 pandemic in fiscal 2021, including initial demand for new transmission in the North American oil and gas market demand, along with the ongoing demand for aftermarket support. The Company’s ability to ship product continues to be hampered by a variety of supply chain challenges. These include supplier capacity constraints, extended supplier lead times and a global shortage of electronic components. Global sales of industrial products improved 14.6% from the prior year, while shipments of marine and propulsion products improved by 10.1% and off-highway transmission shipments grew by 30.2% compared with the prior year first quarter. The North American region enjoyed the most significant sales improvement ($5.6 million or 33.2%) due to generally improving market conditions and increased new unit and aftermarket demand in the North American energy market. The European region saw a more modest increase ($0.2 million or 1.6%), with a more challenging economy and the negative impact of currency exchange. Sales into the Asia Pacific region increased 8.2%, or $0.9 million, primarily due to improving shipments of oil and gas related products into China. Currency translation had an unfavorable impact on first quarter fiscal 2023 sales compared to the first quarter of the prior year totaling $4.8 million primarily due to the weakening of the euro against the U.S. dollar.   Sales at our manufacturing segment increased 17.8%, or $7.4 million, versus the same quarter last year. The U.S. manufacturing operations experienced a 35.4%, or $7.9 million, increase in sales versus the first fiscal quarter of 2022, with recovering markets and growing North American demand in the energy market, partially offset by the continued supply chain challenges noted above. The Company’s operation in the Netherlands was down $0.8 million (9.6%) compared to the first fiscal quarter of 2022, primarily due to an unfavorable currency impact ($1.3 million), with shipments also hampered by supply chain shortages and customer requested delivery delays. Similarly, the Company’s Belgian operation saw a decrease compared to the prior year first quarter (11.6% or $0.6 million), with an unfavorable translation effect of $0.7 million driving the shortfall. The Company’s Italian manufacturing operations were up $0.8 million (15.7%) compared to the first quarter of fiscal 2022, with improving execution and limited supply chain interruptions. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.1 million (4.1%) compared to the prior year first quarter.   Our distribution segment experienced an increase in sales of $3.8 million (18.4%) in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. The Company’s Asian distribution operations in Singapore, China and Japan were up 6.0% from the prior year on improving demand for energy related products in China. The Company’s North America distribution operation saw a significant increase ($2.2 million or 68.1%) on stronger supply of product from the manufacturing operations, as all markets have seen improving demand. The Company’s European distribution operation saw a slight increase (2.8%), limited by the unfavorable impact of currency translation. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw continued growth (17.5% increase from the prior year first fiscal quarter), on the continued strengthening of pleasure craft marine market demand in the region.   Gross profit as a percentage of sales for the first quarter of fiscal 2023 declined to 23.8%, compared to 28.2% for the same period last year. The prior year first quarter result reflects the benefit of an Employee Retention Credit (“ERC”, part of various COVID-19 relief programs provided by the U.S. government) of $1.3 million recorded at the Company’s domestic operation, along with the benefit of a NOW subsidy (COVID-19 relief program in the Netherlands) of $0.7 million and the favorable impact of a correction to the Company’s warranty reserve ($0.5 million). Adjusting for these non-recurring items, the prior year gross profit percent would have been 22.9%. The slight improvement in the current year first quarter compared to the adjusted prior year result reflects the impact of additional volume and strong North American oil and gas demand, partially offset by the negative impact of inflation, primarily at our European operations.   For the fiscal 2023 first quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 27.0%, compared to 27.4% for the fiscal 2022 first quarter. ME&A expenses increased $2.0 million (15.2%) versus the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of the incremental impact of prior year COVID subsidies ($0.8 million), increased marketing activities ($0.4 million), higher salary expense ($0.5 million), the accrual for the global bonus program ($0.3 million), travel costs ($0.2 million), professional fees ($0.3 million) and other inflationary impacts ($0.4 million). These increases were partially offset by a foreign currency translation impact of $0.9 million.   The Company incurred minor restructuring charges during the first quarter of fiscal 2023 and fiscal 2022, primarily associated with ongoing cost reduction actions at its European operations and actions to adjust the cost structure at the Company’s domestic operation. The Company continues to focus on actively managing its cost structure and reducing fixed costs in light of the ongoing market challenges.   19     The Company recorded other operating income of $2.9 million in fiscal 2022 associated with the gain on the sale of the Company’s facility in Switzerland. The building was sold for approximately $9.1 million.   Interest expense was relatively flat at $0.6 million in the first quarter of fiscal 2023, with a slightly higher rate partially offset by a lower average outstanding revolver balance.   Other expense of $0.3 million for the first fiscal quarter was primarily attributable to translation losses related to the Company’s euro denominated liabilities.   The fiscal 2023 first quarter effective tax rate was 26.3% compared to 16.2% in the prior fiscal year first quarter. The mix of foreign earnings by jurisdiction resulted in the increase to the effective tax rate.   Financial Condition, Liquidity and Capital Resources   Comparison between September 30, 2022 and June 30, 2022   As of September 30, 2022, the Company had net working capital of $120.0 million, which represents a decrease of $3.4 million, or 2.8%, from the net working capital of $123.4 million as of June 30, 2022.   Cash increased by $0.7 million to $13.2 million as of September 30, 2022, versus $12.5 million as of June 30, 2022. As of September 30, 2022, the majority of the cash is at the Company’s overseas operations in Europe ($3.1 million) and Asia-Pacific ($9.5 million).   Trade receivables of $40.0 million were down $5.4 million, or approximately 12.0%, when compared to last fiscal year-end. The impact of foreign currency translation was to decrease accounts receivable by $1.4 million versus June 30, 2022. As a percent of sales, trade receivables finished at 71.6% in the first quarter of fiscal 2023 compared to 72.9% for the comparable period in fiscal 2022 and 59.8% for the fourth quarter of fiscal 2022.   Inventories increased by $1.0 million, or 0.8%, versus June 30, 2022 to $128.1 million. The impact of foreign currency translation was to decrease inventories by $4.6 million versus June 30, 2022. The remaining increase was seen primarily at the Company’s operations in the Netherlands ($2.8 million), Singapore ($3.7 million), Italy ($1.8 million) and Belgium ($1.6 million). These increases were primarily driven by an imbalance in the supply chain, resulting in excess inventory waiting for missing components to finish assembly, or waiting for customers to accept shipment. The remaining decrease is due to a reduction inventory in transit as of quarter end ($4.5 million). On a consolidated basis, as of September 30, 2022, the Company’s backlog of orders to be shipped over the next six months approximates $108.9 million, compared to $101.2 million at June 30, 2022 and $86.1 million at September 24, 2021. As a percentage of six-month backlog, inventory has decreased from 126% at June 30, 2022 to 118% at September 30, 2022.   Net property, plant and equipment decreased $2.6 million (6.3%) to $39.0 million versus $41.6 million at June 30, 2022. The Company reclassified approximately $2.8 million of assets to Other Current Assets related to a building in Belgium that meets the criteria for an asset held for sale. The Company had capital spending of $2.4 million in the quarter, offset by an unfavorable exchange impact ($0.7 million) and depreciation ($1.4 million). Capital spending occurring in the first quarter was primarily related to replacement capital. In total, the Company expects to invest between $9 and $11 million in capital assets in fiscal 2023. The Company continues to review its capital plans based on overall market conditions and availability of capital, and may make changes to its capital plans accordingly. The Company’s capital program is focused on modernizing key core manufacturing, assembly and testing processes and improving efficiencies at its facilities around the world.   Accounts payable as of September 30, 2022 of $30.7 million was up $2.2 million, or 7.6%, from June 30, 2022. The impact of foreign currency translation was to reduce accounts payable by $1.3 million versus June 30, 2022. The remaining increase is primarily related to the increased purchasing activities in light of growing backlog and strong market demand.   Total borrowings and long-term debt as of September 30, 2022 decreased $0.6 million to $37.1 million versus $36.5 million at June 30, 2022. During the first quarter, the Company reported negative free cash flow of $2.9 million (defined as operating cash flow less acquisitions of fixed assets), driven by the payment of a bonus accrual and the first quarter increase to inventory. The Company ended the quarter with total debt, net of cash, of $23.9 million, compared to $24.0 million at June 30, 2022, for a net improvement of $0.1 million.   20     Total equity decreased $6.4 million, or 4.9%, to $124.8 million as of September 30, 2022. The net loss during the first quarter decreased equity by $1.9 million, along with an unfavorable foreign currency translation of $6.3 million. The net change in common stock and treasury stock resulting from the accounting for stock-based compensation increased equity by $0.5 million. The net remaining increase in equity of $1.2 million primarily represents the amortization of net actuarial loss and prior service cost on the Company’s defined benefit pension plans, along with the unrealized gain on cash flow hedges.   The Company's June 29, 2018 credit agreement (the "Credit Agreement") with BMO Harris Bank, N.A. ("BMO"), as amended through the Ninth Amendment dated June 30, 2022, remains in effect, and there have been no material changes in the terms of the Credit Agreement since the end of the Company's most recent fiscal year.  As of September 30, 2022, the Company's borrowing capacity on the Revolving Loans under the Credit agreement was $40,000,000 and the Company had approximately $15,939,000 of available borrowings.  In addition to the Credit Agreement, the Company has established unsecured lines of credit that used from time to time to secure certain performance obligations by the Company.  As of September 30, 2022, the Company also had cash of $13.2 million, primarily at its overseas operations.  These funds, with some restrictions and tax implications, are available for repatriation as deemed necessary by the Company.   The Company expects capital expenditures to be approximately $9 - $11 million in fiscal 2023.  These anticipated expenditures reflect the Company's plans to invest in modern equipment to drive efficiencies, quality improvements, and cost reductions.   The Company's significant contractual obligations as of September 30, 2022 are disclosed in Note N "Lease Liabilities" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.  There are no material undisclosed guarantees.  As of September 30, 2022, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90 days.  The Company also has long-term obligations related to its postretirement plans which are discussed in detail in Note G "Pension and Other Postretirement Benefit Plans in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q.  Postretirement medical claims are paid by the Company as they are submitted.  In fiscal 2023, the Company expects to contribute $0.8 million to postretirement benefits based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured.  In fiscal 2023, the Company expects to contribute $0.6 million to its defined benefit pension plans, the minimum contribution required.  the Company does not have any material off-balance sheet arrangements.   Management believes that available cash, the Credit Agreement, the unsecured lines of credit, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company's cash and capital requirements for the foreseeable future.        21     New Accounting Releases   See Note A, Basis of Presentation, to the condensed consolidated financial statements for a discussion of recently issued accounting standards.   Critical Accounting Policies   The preparation of this Quarterly Report requires management’s judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.   The Company’s critical accounting policies are described in Item 7 of the Company’s Annual Report filed on Form 10-K for June 30, 2022. There have been no significant changes to those accounting policies subsequent to June 30, 2022.     Item 3. Quantitative and Qualitative Disclosure About Market Risk   The Company is electing not to provide this disclosure due to its status as a Smaller Reporting Company.     Item 4. Controls and Procedures   (a) Evaluation of Disclosure Controls and Procedures   The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) as of the end of the period covered by this report.  Based on such evaluation,  the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.   (b) Changes in Internal Control Over Financial Reporting   Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). During the most recent fiscal quarter, no changes were made which have materially affected, or which are reasonably likely to materially affect, our internal control over financial reporting.     Part II. OTHER INFORMATION   Item 1. Legal Proceedings   The Company is a defendant in several product liability or related claims which are considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition of the Company.   Item 1A. Risk Factors   There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 2022 Annual Report on Form 10-K.   22     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   (a) Unregistered Sales of Equity Securities   There were no securities of the Company sold by the Company during the quarter ended September 30, 2022, which were not registered under the Securities Act of 1933, in reliance upon an exemption from registration provided by Section 4 (2) of the Act.   (b) Use of Proceeds   Not applicable.   (c) Issuer Purchases of Equity Securities   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 29, 2022   0 NA 0 315,000             July 30 – August 26, 2022   17,437 NA 0 315,000             August 27 – September 30, 2022   767 NA 0 315,000             Total   18,204 NA 0 315,000   The amounts shown in Column (a) above represent shares of common stock delivered to the Company as payment of withholding taxes due on the vesting of restricted stock and restricted stock units issued under the Twin Disc, Incorporated 2010 and 2018 Long-Term Incentive Compensation Plans.   Under authorizations granted by the Board of Directors on February 1, 2008 and July 27, 2012, the Company was authorized to purchase 500,000 shares of its common stock.  This authorization has no expiration, and as of September 30, 2022, 315,000 may yet be purchased under these authorizations. The Company did not purchase any shares of its common stock pursuant to these authorizations during the quarter ended September 30, 2022.   The discussion of limitations upon the payment of dividends as a result of the Credit Agreement between the Company and BMO Harris Bank, N.A., as discussed in Part I, Item 2, "Management's Discussion and Analysis " under the heading "Financial Condition, Liquidity and Capital Resources," is incorporated herein by reference.     Item 3. Defaults Upon Senior Securities   None.   Item 5. Other Information   None.   23     Item 6. Exhibits   31a Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   31b Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   32a Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   32b Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   101.INS Inline XBRL Instance Document   101.SCH Inline XBRL Schema   101.CAL Inline XBRL Calculation Linkbase   101.DEF Inline XBRL Definition Linkbase   101.LAB Inline XBRL Label Linkbase   101.PRE Inline XBRL Presentation Linkbase   104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).   24     SIGNATURE   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.         TWIN DISC, INCORPORATED   (Registrant)         Date: November 9, 2022 /s/ JEFFREY S. KNUTSON   Jeffrey S. Knutson   Vice President – Finance, Chief Financial Officer, Treasurer and Secretary   Chief Accounting Officer   25