What changed in this filing

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Item 1. Financial Statements

2024-05-08 compared with 2024-02-07 · 356 added, 406 removed, 843 unchanged (47% of the section changed)

3 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

December 29, 2023

March 29, 2024

June 30, 2023

29 unchanged sentences

Lease obligations

12,638 10,811

Accrued retirement benefits

22 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

For the Quarter Ended

For the Two Quarters Ended

December 29, 2023

December 30, 2022

December 29, 2023

December 30, 2022

For the Three Quarters Ended

March 29, 2024

March 31, 2023

March 29, 2024

March 31, 2023

$ 74,161 $ 73,772 $ 210,709 $ 193,036

7 unchanged sentences

139 33 207 208

Other operating income

Other operating expense (income)

- 1 - ( 4,149 )

3 unchanged sentences

263 522 1,049 1,682

Other expense (income), net

Other (income) expense, net

( 959 ) 178 ( 649 ) 13

4 unchanged sentences

398 548 2,606 2,350

Net income (loss)

3,900 3,357 3,752 3,793

1 unchanged sentence

( 78 ) ( 76 ) ( 173 ) ( 188 )

Net income (loss) attributable to Twin Disc

Net income attributable to Twin Disc

$ 3,822 $ 3,281 $ 3,579 $ 3,605

1 unchanged sentence

$ 0.04 $ - $ 0.08 $ -

Income (loss) per share data:

Basic income (loss) per share attributable to Twin Disc common shareholders

Income per share data:

Basic income per share attributable to Twin Disc common shareholders

$ 0.28 $ 0.24 $ 0.26 $ 0.27

Diluted income (loss) per share attributable to Twin Disc common shareholders

Diluted income per share attributable to Twin Disc common shareholders

$ 0.27 $ 0.24 $ 0.26 $ 0.26

4 unchanged sentences

13,904 13,662 13,852 13,608

Comprehensive income (loss)

Net income (loss)

Comprehensive income

$ 3,900 $ 3,357 $ 3,752 $ 3,793

3 unchanged sentences

( 3,084 ) 1,014 ( 930 ) 3,116

Unrealized (loss) gain on hedges, net of income taxes of $ 0 , $ 0 , $ 0 and $ 0 , respectively

Unrealized gain (loss) on hedges, net of income taxes of $ 0 , $ 0 , $ 0 and $ 0 , respectively

196 ( 224 ) ( 73 ) ( 26 )

9 unchanged sentences

(IN THOUSANDS)

For the Two Quarters Ended

For the Three Quarters Ended

March 29, 2024

March 31, 2023

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income

$ ( 148 ) $ 436

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Gain on sale of assets

( 42 ) ( 4,203 )

Loss on sale of boat management product line and related inventory

Provision for deferred income taxes

280 ( 1,105 )

Stock compensation expense and other non-cash changes, net

Net change in operating assets and liabilities

6,422 ( 927 )

Net cash provided by operating activities

1 unchanged sentence

Acquisition of property, plant, and equipment

( 5,419 ) ( 4,734 )

Proceeds from sale of fixed assets

Net cash (used) provided by investing activities

( 5,671 ) 2,803

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under revolving loan arrangements

50,632 42,898

Repayments of revolving loan arrangements

( 50,632 ) ( 46,628 )

Repayments of other long-term debt

( 1,010 ) ( 707 )

Dividends paid to shareholders

Payments of finance lease obligations

( 471 ) ( 132 )

Payments of withholding taxes on stock compensation

( 1,772 ) ( 463 )

Net cash used by financing activities

( 3,813 ) ( 5,032 )

Effect of exchange rate changes on cash

1 unchanged sentence

Beginning of period

13,263 12,521

End of period

$ 21,021 $ 13,528

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

20 unchanged sentences

See Notes G, K, M and P for further information regarding the impact of the Accounting change on the Company’s current and prior consolidated financial statements.

Recently Issued Not Yet Adopted Accounting Standards

In December 2023, the FASB issued guidance ASU 2023 - 09, Improvements to Income Tax Disclosures (“ASU 2023 - 09” ), which includes requirements that an entity disclose specific categories in the rate reconciliation and provide additional information for reconciling items that are greater than five percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income rate.

The standard also requires that entities disclose income (or loss) from continuing operations before income tax expense (or benefit) and income tax expense (or benefit) each disaggregated between domestic and foreign.

ASU 2023 - 09 is effective for annual periods beginning after December 15, 2024.

The Company is currently evaluating the impact of adopting this standard on its financial statement disclosures.

Recently Adopted Accounting Standards

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 adoption of this guidance did not have a material impact on the Company’s financial statements.

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 ).

9 unchanged sentences

The major classes of inventories were as follows:

December 29, 2023

March 29, 2024

June 30, 2023

Finished parts

$ 65,089 $ 66,956

Work in process

22,239 23,374

Raw materials

44,440 41,600

$ 131,768 $ 131,930

In the first quarter of fiscal year 2024, the Company entered into an agreement to sell most of its boat management system product line located at one of its subsidiaries in Italy.

2 unchanged sentences

This evaluation resulted in the Company recognizing an additional inventory write-down of $ 1.6 million for inventory located in the U.S.

These write-downs were partially offset by certain liabilities transferred to the buyer at the time of the sale.

These write-downs were partially offset by certain liabilities transferred to the buyer at the time of sale.

The sale was completed in the second quarter of fiscal year 2024.

4 unchanged sentences

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 December 29, 2023 and December 30, 2022:

The following is a listing of the activity in the warranty reserve for the quarters ended March 29, 2024 and March 31, 2023:

For the Quarter Ended

For the Two Quarters Ended

December 29, 2023

December 30, 2022

December 29, 2023

December 30, 2022

For the Three Quarters Ended

March 29, 2024

March 31, 2023

March 29, 2024

March 31, 2023

Reserve balance, beginning of period

$ 4,160 $ 3,804 $ 3,476 $ 3,329

Current period expense and adjustments

1,208 770 2,724 1,678

Payments or credits to customers

( 898 ) ( 503 ) ( 1,718 ) ( 869 )

Reserve balance, end of period

$ 4,488 $ 4,145 $ 4,488 $ 4,145

The current portion of the warranty accrual ($ 3,549 and $ 3,552 as of December 29, 2023 and December 30, 2022, respectively) is reflected in accrued liabilities, while the long-term portion ($ 939 and $ 593 as of December 29, 2023 and December 30, 2022, respectively) is included in other long-term liabilities on the consolidated balance sheets.

The current portion of the warranty accrual ($ 4,052 and $ 3,503 as of March 29, 2024 and March 31, 2023, respectively) is reflected in accrued liabilities, while the long-term portion ($ 843 and $ 515 as of March 29, 2024 and March 31, 2023, respectively) is included in other long-term liabilities on the consolidated balance sheets.

Contingencies

15 unchanged sentences

For the Quarter Ended

For the Two Quarters Ended

December 29, 2023

December 30, 2022

December 29, 2023

December 30, 2022

For the Three Quarters Ended

March 29, 2024

March 31, 2023

March 29, 2024

March 31, 2023

Manufacturing segment sales

$ 58,368 $ 56,678 $ 112,906 $ 105,675

Distribution segment sales

37,242 25,584 70,095 49,892

Inter/Intra segment elimination – manufacturing

( 18,795 ) ( 14,198 ) ( 38,979 ) ( 27,842 )

Inter/Intra segment elimination – distribution

( 3,821 ) ( 4,713 ) ( 7,475 ) ( 8,461 )

$ 72,994 $ 63,351 $ 136,547 $ 119,264

Net income (loss) attributable to Twin Disc

Net income attributable to Twin Disc

Manufacturing segment net income

$ 2,078 $ 4,439 $ 3,636 $ 6,841

Distribution segment net income

3,173 1,403 4,179 2,359

Corporate and eliminations

( 4,321 ) ( 4,096 ) ( 8,058 ) ( 8,876 )

$ 930 $ 1,746 $ ( 243 ) $ 324

December 29, 2023

March 29, 2024

June 30, 2023

Manufacturing segment assets

$ 380,283 $ 381,668

Distribution segment assets

70,391 69,213

Corporate assets and elimination of intercompany assets

( 165,484 ) ( 161,700 )

$ 285,190 $ 289,181

Disaggregated revenue:

The following table presents details deemed most relevant to the users of the financial statements for the quarters ended December 29, 2023 and December 30, 2022.

Net sales by product group for the quarter ended December 29, 2023 is summarized as follows:

The following tables presents details deemed most relevant to the users of the financial statements for the quarters ended March 29, 2024 and March 31, 2023.

Net sales by product group for the quarter ended March 29, 2024 is summarized as follows:

Elimination of

1 unchanged sentence

Intercompany Sales

$ 5,704 $ 1,557 $ ( 730 ) $ 6,531

Land-based transmissions

15,003 7,953 ( 7,093 ) $ 15,863

Marine and propulsion systems

37,661 24,058 ( 14,773 ) $ 46,946

- 3,674 ( 20 ) $ 3,654

$ 58,368 $ 37,242 $ ( 22,616 ) $ 72,994

Net sales by product group for the quarter ended December 30, 2022 is summarized as follows:

Net sales by product group for the quarter ended March 31, 2023 is summarized as follows:

Elimination of

1 unchanged sentence

Intercompany Sales

$ 6,963 $ 1,726 $ ( 1,177 ) $ 7,512

Land-based transmissions

15,256 3,445 ( 4,030 ) $ 14,671

Marine and propulsion systems

34,262 15,427 ( 13,223 ) $ 36,466

197 4,986 ( 481 ) $ 4,702

$ 56,678 $ 25,584 $ ( 18,911 ) $ 63,351

Net Sales by product group for the two quarters ended December 29, 2023 is summarized as follows:

Net Sales by product group for the three quarters ended March 29, 2024 is summarized as follows:

Elimination of

1 unchanged sentence

Intercompany Sales

$ 10,994 $ 2,586 $ ( 1,364 ) $ 12,216

Land-based transmissions

29,684 20,623 ( 15,867 ) $ 34,440

Marine and propulsion systems

72,228 40,378 ( 29,197 ) $ 83,409

( 0 ) 6,508 ( 26 ) $ 6,482

$ 112,906 $ 70,095 $ ( 46,454 ) $ 136,547

Net Sales by product group for the two quarters ended December 30, 2022 is summarized as follows:

Net Sales by product group for the three quarters ended March 31, 2023 is summarized as follows:

Elimination of

1 unchanged sentence

Intercompany Sales

$ 13,656 $ 2,774 $ ( 1,886 ) $ 14,544

Land-based transmissions

31,543 8,051 ( 8,985 ) $ 30,609

Marine and propulsion systems

60,077 29,971 ( 24,246 ) $ 65,802

399 9,096 ( 1,186 ) $ 8,309

$ 105,675 $ 49,892 $ ( 36,303 ) $ 119,264

Stock-Based Compensation

Performance Stock Awards ( “ PSA ” )

During the first two quarters of fiscal 2024 and 2023, the Company granted a target number of 119.3 and 118.1 PSAs, respectively, to various employees of the Company, including executive officers.

The fiscal 2024 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, 2026.

During the first three quarters of fiscal 2024 and 2023, the Company granted a target number of 119.3 and 118.1 PSAs, respectively, to various employees of the Company, including executive officers.

The fiscal 2024 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative earnings before interest, taxes, depreciation, and amortization ("EBITDA", as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2026.

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 238.7 .

1 unchanged sentence

There were 335.2 and 438.9 unvested PSAs outstanding at December 29, 2023 and December 30, 2022, respectively.

There were 329.9 and 437.9 unvested PSAs outstanding at March 29, 2024 and March 31, 2023, 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 $ 261 and $ 366 was recognized for the quarters ended December 29, 2023 and December 30, 2022, respectively, related to PSAs.

Compensation expense of $ 314 and $ 596 was recognized for the two quarters ended December 29, 2023 and December 30, 2022, respectively, related to PSAs.

The weighted average grant date fair value of the unvested awards at December 29, 2023 was $ 11.48 .

At December 29, 2023, the Company had $ 1,977 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2024 and 2023 awards.

The total fair value of PSAs vested as of December 29, 2023 and December 30, 2022 was $ 0 .

Compensation expense of $ 326 and $ 307 was recognized for the quarters ended March 29, 2024 and March 31, 2023, respectively, related to PSAs.

Compensation expense of $ 704 and $ 903 was recognized for the three quarters ended March 29, 2024 and March 31, 2023, respectively, related to PSAs.

The weighted average grant date fair value of the unvested awards at March 29, 2024 was $ 11.48 .

At March 29, 2024, the Company had $ 1,652 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2024 and 2023 awards.

The total fair value of PSAs vested as of March 29, 2024 and March 31, 2023 was $ 0 .

Performance Stock Unit Awards ( “ PSUA ” )

The PSUAs entitle an individual to shares of common stock of the Company or cash in lieu of shares of Company common stock if specific terms and conditions or restrictions are met through a specified date.

During the first two quarters of fiscal 2024 and 2023, the Company granted a target number of 10.5 and 0 PSUAs, respectively, to various individuals in the Company.

During the first three quarters of fiscal 2024 and 2023 , the Company granted a target number of 10.5 and 0 PSUAs, respectively, to various individuals in the Company.

The fiscal 2024 PSUAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital and cumulative EBITDA (as defined in the PSUA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2026.

These PSUAs 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 20.9 .

There were 10.5 and 0 unvested PSUAs outstanding at December 29, 2023 and December 30, 2022, respectively.

There were 10.5 and 0 unvested PSUAs outstanding at March 29, 2024 and March 31, 2023, respectively.

The fair value of the PSUAs (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest.

Compensation expense of $ 11 and $ 0 was recognized for the quarters ended December 29, 2023 and December 30, 2022, respectively, related to PSUAs.

Compensation expense of $ 18 and $ 0 was recognized for the two quarters ended December 29, 2023 and December 30, 2022, respectively, related to PSUAs.

The weighted average grant date fair value of the unvested awards at December 29, 2023 was $ 12.15 .

At December 29, 2023, the Company had $ 109 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2024 awards.

The total fair value of PSUAs vested as of December 29, 2023 and December 30, 2022 was $ 0 .

Compensation expense of $ 11 and $ 0 was recognized for the quarters ended March 29, 2024 and March 31, 2023, respectively, related to PSUAs.

Compensation expense of $ 29 and $ 0 was recognized for the three quarters ended March 29, 2024 and March 31, 2023, respectively, related to PSUAs.

The weighted average grant date fair value of the unvested awards at March 29, 2024 was $ 12.15 .

At March 29, 2024, the Company had $ 98 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective were achieved for the fiscal 2024 awards.

The total fair value of PSUAs vested as of March 29, 2024 and March 31, 2023 was $ 0 .

Restricted Stock Awards ( “ RS ” )

1 unchanged sentence

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 two quarters of fiscal 2024 and 2023, the Company granted 115.7 and 177.7 service based restricted shares, respectively, to employees and non-employee directors.

There were 251.3 and 309.2 unvested shares outstanding at December 29, 2023 and December 30, 2022, respectively.

A total of 2.4 and 0 shares of restricted stock were forfeited during the two quarters ended December 29, 2023 and December 30, 2022, respectively.

Compensation expense of $ 210 and $ 334 was recognized for the quarters ended December 29, 2023 and December 30, 2022, respectively.

Compensation expense of $ 523 and $ 694 was recognized for the two quarters ended December 29, 2023 and December 30, 2022, respectively.

The total fair value of restricted stock grants vested as of December 29, 2023 and December 30, 2022 was $ 2,206 and $ 1,669 , respectively.

As of December 29, 2023, the Company had $ 1,804 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

During the first three quarters of fiscal 2024 and 2023, the Company granted 117.2 and 180.0 service based restricted shares, respectively, to employees and non-employee directors.

There were 246.6 and 308.6 unvested shares outstanding at March 29, 2024 and March 31, 2023, respectively.

A total of 2.4 and 0 shares of restricted stock were forfeited during the three quarters ended March 29, 2024 and March 31, 2023, respectively.

Compensation expense of $ 330 and $ 313 was recognized for the quarters ended March 29, 2024 and March 31, 2023, respectively.

Compensation expense of $ 953 and $ 1,007 was recognized for the three quarters ended March 29, 2024 and March 31, 2023, respectively.

The total fair value of restricted stock grants vested as of March 29, 2024 and March 31, 2023 was $ 2,196 and $ 1,699 , respectively.

As of March 29, 2024, the Company had $ 1,568 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

Restricted Stock Unit Awards ( “ RSU ” )

The RSUs entitle an individual to shares of common stock of the Company or cash in lieu of shares of Company common stock if specific terms and conditions or restrictions are met through a specified date, generally three years from the date of grant or when performance conditions have been met.

The RSUs entitles an individual to shares of common stock of the Company or cash in lieu of shares of Company common stock if specific terms and conditions or restrictions are met 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 two quarters of fiscal 2024 and 2023, the Company granted 7.1 and 72.4 of employment based RSUs, respectively.

There were 135.0 and 130.9 unvested RSUs outstanding at December 29, 2023 and December 30, 2022, respectively.

Compensation expense of $ 126 and $ 132 was recognized for the quarters ended December 29, 2023 and December 30, 2022, respectively.

Compensation expense of $ 247 and $ 224 was recognized for the two quarters ended December 29, 2023 and December 30, 2022, respectively.

The total fair value of restricted stock units vested as of December 29, 2023 and December 30, 2022 was $ 25 and $ 40 , respectively.

The weighted average grant date fair value of the unvested awards at December 29, 2023 was $ 10.97 .

As of December 29, 2023, the Company had $ 537 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

During the first three quarters of fiscal 2024 and 2023, the Company granted 7.1 and 72.4 of employment based RSUs, respectively.

There were 135.0 and 130.2 unvested RSUs outstanding at March 29, 2024 and March 31, 2023, respectively.

Compensation expense of $ 124 and $ 116 was recognized for the quarters ended March 29, 2024 and March 31, 2023, respectively.

Compensation expense of $ 372 and $ 340 was recognized for the three quarters ended March 29, 2024 and March 31, 2023, respectively.

The total fair value of RSUs vested as of March 29, 2024 and March 31, 2023 was $ 25 and $ 40 , respectively.

The weighted average grant date fair value of the unvested awards at March 29, 2024 was $ 10.97 .

As of March 29, 2024, the Company had $ 412 of unrecognized compensation expense related to RSUs which will be recognized over the next three years.

Pension and Other Postretirement Benefit Plans

7 unchanged sentences

For the Quarter Ended

For the Two Quarters Ended

December 29, 2023

December 30, 2022

December 29, 2023

December 30, 2022

For the Three Quarters Ended

March 29, 2024

March 31, 2023

March 29, 2024

March 31, 2023

Pension Benefits:

$ 94 $ 102 $ 188 $ 203

Prior service cost

Interest cost

896 868 1,792 1,736

Expected return on plan assets

( 1,048 ) ( 1,060 ) ( 2,096 ) ( 2,120 )

Amortization of transition obligation

1 unchanged sentence

Amortization of actuarial net loss

16 617 31 1,235

Net periodic benefit (gain) cost

$ ( 23 ) $ 553 $ ( 49 ) $ 1,107

Postretirement Benefits:

$ 2 $ 2 $ 4 $ 5

Interest cost

Amortization of prior service cost

( 22 ) ( 69 ) ( 44 ) ( 137 )

Amortization of actuarial net loss

( 155 ) ( 10 ) ( 310 ) ( 19 )

Net periodic benefit gain

$ ( 127 ) $ ( 24 ) $ ( 255 ) $ ( 45 )

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.

All other components of net periodic benefit cost are included in other (income) expense, net.

The Company expects to contribute approximately $ 662 to its pension plans in fiscal 2024.

As of December 29, 2023, $ 403 in contributions to the pension plans have been made.

The Company has reclassified ($ 108 ) (net of $ 13 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended December 29, 2023, and ($ 1,122 ) (net of $ 13 in taxes) during the quarter ended December 30, 2022.

These reclassifications are included in the computation of net periodic benefit (gain) cost.

The Company has reclassified ($ 279 ) (net of $ 8 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the two quarters ended December 29, 2023, and ($ 1,211 ) (net of $ 4 in taxes) during the two quarters ended December 30, 2022.

These reclassifications are included in the computation of net periodic benefit (gain) cost.

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 historical domestic losses and uncertain future domestic earnings, the Company continues to recognize a full domestic 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 six months ended December 29, 2023 and December 30, 2022 the Company’s effective income tax rate was 107.2 % and 80.5 % respectively.

Foreign earnings were $ 9,282 and $ 5,094 respectively, with a related tax expense of $ 2,199 and $ 1,773 , respectively.

Domestic losses were ($ 7,222 ) and ($ 2,857 ), respectively, with a related tax expense of $ 9 and $ 28 , respectively.

Due to the full US valuation allowance currently in place, no tax benefit can be recognized on the domestic losses.

This inability to recognize a tax benefit for domestic purposes resulted in a consolidated tax expense of $ 2,208 and $ 1,801 , respectively, on year-to-date income of $ 2,061 and $ 2,237 , respectively.

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.

The Company has approximately $ 834 of unrecognized tax benefits, including interest and penalties, as of December 29, 2023, 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 two quarters ended December 29, 2023.

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 2018 through 2023 for our major operations in Belgium, Japan, Netherlands, Singapore and Australia.

The tax years open to examination in the U.S.

are for years subsequent to fiscal 2018.

It is reasonably possible that other audit cycles will be completed during fiscal 2024.

As of March 29, 2024, $ 634 in contributions to the pension plans have been made.

The Company has reclassified ($ 191 ) (net of $ 10 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended March 29, 2024, and ($ 29 ) (net of $ 1 in taxes) during the quarter ended March 31, 2023.

The Company has reclassified ($ 470 ) (net of $ 2 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the three quarters ended March 29, 2024, and $( 1,240 ) (net of $ 5 in taxes) during the three quarters ended March 31, 2023.

These reclassifications are included in the computation of net periodic benefit cost.

The Company computes its effective tax rate each quarter consistent with the requirements of ASC 740 - 270 - 25.

However, due to historic domestic losses and the full domestic valuation allowance, the Company has removed the loss jurisdiction for which no tax benefit may be recorded from the Annual Effective Tax Rate ("AETR") calculations consistent with ASC 740 - 270 - 30 - 30.

The Company recorded an overall effective tax rate of 9.3 % and 14.0 % for the quarters ended March 29, 2024 and March 31, 2023, respectively and an overall effective tax rate of 41.0 % and 38.2 % for the three quarters ended March 29, 2024 and March 31, 2023.

Year-to-date foreign earnings were $ 14,916 and $ 8,207 , with corresponding income tax expense of $ 2,599 and $ 2,303 for the period ended March 29, 2024 and March 31, 2023.

The foreign effective tax rate for the period ended March 29, 2024 incudes a total discrete benefit of ( $834 ), of which ($ 786 ) related to a favorable tax ruling related to operations in the Netherlands.

Year-to-date domestic earnings were ($ 8,557 ) and ($ 2,063 ), with corresponding income tax expense of $ 7 and $ 47 for the three quarters ended March 29, 2024 and March 31, 2023.

Intangible Assets

As of December 29, 2023, the following acquired intangible assets have definite useful lives and are subject to amortization:

As of March 29, 2024, the following acquired intangible assets have definite useful lives and are subject to amortization:

Net Book Value Rollforward

6 unchanged sentences

Balance at June 30, 2023

$ 31,925 $ ( 19,288 ) $ 12,637 $ 6,553 $ 2,422 $ 668 $ 2,994

73 - 73 - - - 73

( 631 ) 631 - - - - -

- ( 1,636 ) ( 1,636 ) ( 622 ) ( 601 ) ( 39 ) ( 374 )

Translation adjustment

72 - 72 62 ( 173 ) 195 ( 12 )

Balance at December 29, 2023

$ 31,439 $ ( 20,293 ) $ 11,146 $ 5,993 $ 1,648 $ 824 $ 2,681

Balance at March 29, 2024

Other intangibles consist mainly of computer software.

1 unchanged sentence

The weighted average remaining useful life of the intangible assets included in the table above is approximately 5 years.

Intangible amortization expense was $ 817 and $ 704 for the quarters ended December 29, 2023, and December 30, 2022, respectively.

Intangible amortization expense was $ 1,636 and $ 1,402 for the two quarters ended December 29, 2023, and December 30, 2022, respectively.

Estimated intangible amortization expense for the remainder of fiscal 2024 and each of the next five fiscal years and thereafter is as follows:

Long-term Debt

Long-term debt at December 29, 2023 and June 30, 2023 consisted of the following:

December 29, 2023

Intangible amortization expense was $ 822 and $ 738 for the quarters ended March 29, 2024, and March 31, 2023, respectively.

Intangible amortization expense was $ 2,458 and $ 2,140 for the three quarters ended March 29, 2024, and March 31, 2023, respectively.

Estimated intangible amortization expense for the remainder of fiscal 2024 and each of the next five fiscal years is as follows:

Total $ 10,157

Long-Term Debt and Subsequent Event

Long-term debt at March 29, 2024 and June 30, 2023 consisted of the following:

March 29, 2024

June 30, 2023

Credit Agreement Debt

Revolving loans (expire June 2025)

$ 7,175 $ 7,094

Term loan (due March 2026)

10,500 11,500

17,698 18,627

Revolving loans (expire April 2027)

Term loan (due April 2027)

current maturities

( 2,000 ) ( 2,010 )

Total long-term debt

$ 15,698 $ 16,617

Credit Agreement Debt:

2 unchanged sentences

Pursuant to the Credit Agreement, BMO agreed to make the Term Loan to the Company in a principal amount not to exceed $ 35.0 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, $ 50.0 million (the “Revolving Credit Commitment”), subject to a Borrowing Base based on Eligible Inventory and Eligible Receivables.

Subsequent amendments to the Credit Agreement reduced the Term Loan to $ 20.0 million, extended the maturity date of the Term Loan to March 4, 2026, and require the Company to make principal installment payments on the Term Loan of $ 0.5 million per quarter.

Subsequent amendments to the Credit Agreement reduced the Term Loan to $ 20.0 million, extended the maturity date of the Term Loan to April 1, 2027, and require the Company to make principal installment payments on the Term Loan of $ 0.5 million per quarter.

In addition, under subsequent amendments to the Credit Agreement, BMO’s Revolving Credit Commitment is currently $ 45.0 million.

1 unchanged sentence

Under the Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $ 5.0 million in any fiscal year.

The term of the Revolving Loans under the Credit Agreement currently runs through June 30, 2025.

The term of the Revolving Loans under the Credit Agreement currently runs through April 1, 2027.

Under the Credit Agreement as amended, interest rates are based on either the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”).

7 unchanged sentences

Specifically, the Company’s Total Funded Debt to EBITDA ratio 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.

In determining whether the Company is in compliance with its Total Funded Debt/EBITDA Ratio, the Company’s EBITDA will include transaction expenses of up to $ 0.6 million for the Katsa Oy acquisition, as well as pro-forma EBITDA of Katsa Oy as permitted by the Bank.

The Company’s Tangible Net Worth may not be less than $ 100.0 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.

11 unchanged sentences

If such Event of Default is due to the Company’s bankruptcy, BMO may take the three actions listed above without notice to the Company.

On April 1, 2024, the Company entered into Amendment No.

10 to Credit Agreement (the “Tenth Amendment”) that amended and extended the Credit Agreement.

The Tenth Amendment increased the Revolving Credit Commitment from $ 40.0 million to $ 45.0 million, and also increased the Borrowing Base for Revolving Loans from the sum of (a) 85 % of outstanding unpaid Eligible Receivable and (b) the lesser of $ 30.0 million and 50 % of Eligible Inventory to the sum of (a) 85 % of outstanding unpaid Eligible Receivables and (b) the lesser of $ 35.0 million (reduced to $ 32.5 million beginning with the first quarter of the 2026 fiscal year) and 60 % of Eligible Inventory (reduced to 55 % of Eligible Inventory beginning with the third quarter of the 2025 fiscal year, and 50 % of Eligible Inventory beginning with the first quarter of the 2026 fiscal year).

The Company intends to use the increased borrowing capacity under the Credit Agreement to help finance its previously announced proposed acquisition of Katsa Oy by TD Finland Holding Oy, a wholly-owned subsidiary of the Company.

The Tenth Amendment specifically permits the Company to use Revolving Loans for the Katsa Oy acquisition.

In addition, in determining whether the Company is in compliance with its Total Funded Debt/EBITDA Ratio, the Company’s EBITDA will include transaction expenses of up to $ 0.6 million for the Katsa Oy acquisition, as well as pro-forma EBITDA of Katsa Oy as permitted by the Bank.

The Tenth Amendment also extended the Credit Agreement through April 1, 2027 and extended the maturity date of the Term Loan and the Term Loan Commitment Date to April 1, 2027.

Prior to the Tenth Amendment, the Credit Agreement was scheduled to terminate as of June 30, 2025, and the Term Loan and Term Loan Commitment Date were scheduled to mature/terminate on March 4, 2026.

The Tenth Amendment also increased the Applicable Margins under the Credit Agreement for purposes of determining interest rates on Revolving Loans, Letters of Credit, Term Loans, and the Unused Revolving Credit Commitment.

Prior to the Tenth Amendment, the Applicable Margins were 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).

Under the Tenth Amendment, the Applicable Margins are between 2 % and 3.5 % for Revolving Loans and Letters of Credit;

2.125 % and 3.625 % for Term Loans;

and .15% and .3% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).

The Tenth Amendment also increased the amount of Restricted Payments that the Company may make in the form of cash dividends, distributions, purchases, redemptions, or other acquisitions of its common stock from $ 3.0 million to $ 5.0 million in any fiscal year.

The Company remains in compliance with its liquidity and other covenants.

As of December 29, 2023, current maturities include $ 2,000 of term loan payments due within the coming year.

As of March 29, 2024, current maturities include $ 2.0 million of term loan payments due within the coming year.

Other long-term debt pertains mainly to a financing arrangement in Europe.

1 unchanged sentence

A total amount of $ 10 in principal was paid on these liabilities during the current fiscal year.

During the quarter ended December 29, 2023, the average interest rate was 6.82 % on the Term Loan, and 5.63 % on the Revolving Loans.

As of December 29, 2023, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $ 37,157 , and the Company had approximately $ 29,982 of available borrowings.

During the quarters ended March 29, 2024, the average interest rate was 6.83 % on the Term Loan, and 5.12 % on the Revolving Loans.

As of March 29, 2024, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $ 37,016 , and the Company had approximately $ 29,694 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 December 29, 2023 and June 30, 2023.

The Company’s borrowings described above approximate fair value at March 29, 2024 and June 30, 2023.

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 December 29, 2023, the notional amount was $ 10,500 .

As of March 29, 2024, the notional amount was $ 10,000 .

This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging.

4 unchanged sentences

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 December 29, 2023 remain authorized for purchase.

The Company did not make any open market purchases of its shares during the quarters ended December 29, 2023 and December 30, 2022.

As of July 1, 2022, the cumulative effect of the Accounting change resulted in $ 25.1 million decrease to retained earnings and a corresponding $ 25.1 million increase to Accumulated other comprehensive income (loss), both net of tax of $ 0 ($ 7.9 million in deferred tax asset offset by $ 7.9 million valuation allowance).

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 March 29, 2024 remain authorized for purchase.

The Company did not make any open market purchases of its shares during the quarters ended March 29, 2024 and March 31, 2023.

As of July 1, 2022, the cumulative effect of the Accounting change resulted in $ 25.1 million decrease to retained earnings and a corresponding $ 25.1 million increase to accumulated other comprehensive loss, both net of tax of $ 0 ($ 7.9 million in deferred tax asset offset by $ 7.9 million valuation allowance).

See Notes A, G, M, and P for further information regarding the impact of the Accounting change on the Company’s prior year consolidated financial statements.

The following is a reconciliation of the Company’s equity balances for the first two fiscal quarters of 2024 and 2023:

The following is a reconciliation of the Company’s equity balances for the three fiscal quarters of 2024 and 2023:

Twin Disc, Inc.

28 unchanged sentences

39,661 119,496 ( 4,059 ) ( 9,802 ) 614 145,910

3,822 78 3,900

Dividends paid to shareholders

( 559 ) ( 559 )

Translation adjustments

( 3,040 ) ( 44 ) ( 3,084 )

Benefit plan adjustments, net of tax

( 191 ) ( 191 )

Unrealized gain on cash flow hedge, net of tax

Compensation expense

Shares (acquired) issued, net

( 24 ) 5 ( 19 )

Balance, March 29, 2024

$ 40,428 $ 122,759 $ ( 7,094 ) $ ( 9,797 ) $ 648 $ 146,944

Twin Disc, Inc.

27 unchanged sentences

41,444 110,243 ( 5,982 ) ( 12,562 ) 622 133,765

Reconciliations for the changes in accumulated other comprehensive loss, net of tax, by component for the quarters ended December 29, 2023 and December 30, 2022 are as follows:

3,281 76 3,357

Translation adjustments

1,023 ( 9 ) 1,014

Benefit plan adjustments, net of tax

( 29 ) ( 29 )

Unrealized loss on cash flow hedge, net of tax

( 224 ) ( 224 )

Compensation expense

Shares (acquired) issued, net

Balance, March 31, 2023

$ 42,145 $ 113,524 $ ( 5,212 ) $ ( 12,527 ) $ 689 $ 138,619

Reconciliations for the changes in accumulated other comprehensive loss, net of tax, by component for the quarters ended March 29, 2024 and March 31, 2023 are as follows:

Net Investment

16 unchanged sentences

477 ( 6,227 ) 499 1,192

Translation adjustment during the quarter

( 3,040 ) - - -

Amounts reclassified from accumulated other comprehensive loss

- ( 191 ) 40 156

Net current period other comprehensive (loss) income

( 3,040 ) ( 191 ) 40 156

Balance at March 29, 2024

$ ( 2,563 ) $ ( 6,418 ) $ 539 $ 1,348

Net Investment

18 unchanged sentences

( 261 ) ( 7,825 ) 1,003 1,101

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 29, 2023 are as follows:

Translation adjustment during the quarter

Amounts reclassified from accumulated other comprehensive loss

- ( 29 ) ( 133 ) ( 91 )

Net current period other comprehensive income (loss)

1,023 ( 29 ) ( 133 ) ( 91 )

Balance at March 31, 2023

$ 762 $ ( 7,854 ) $ 870 $ 1,010

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended March 29, 2024 are as follows:

Amount Reclassified

1 unchanged sentence

Quarter Ended

Two Quarters Ended

December 29, 2023

Three Quarters Ended

March 29, 2024

Changes in benefit plan items

1 unchanged sentence

$ ( 198 ) (a)

$ ( 461 ) (a)

Transition asset and prior service benefit

4 unchanged sentences

$ ( 191 ) $ ( 470 )

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended December 30, 2022 is as follows:

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended March 31, 2023 is as follows:

Amount Reclassified

1 unchanged sentence

Quarter Ended

Two Quarters Ended

December 30, 2022

Three Quarters Ended

March 31, 2023

Changes in benefit plan items

Actuarial losses

Actuarial gains

Transition asset and prior service benefit

2 unchanged sentences

Plan merger remeasurement adjustment

( 1,115 ) ( 1,115 )

Total amortization

2 unchanged sentences

$ ( 29 ) $ ( 1,240 )

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).

These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note G, "Pension and Other Postretirement Benefit Plans" for further details).

Assets Held for Sale

2 unchanged sentences

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.

This assessment of fair value resulted in the Company recognizing a write-down of the carrying value of its former corporate headquarters by $ 4,267 in the fourth quarter of fiscal 2021.

In the first quarter of fiscal 2023, the Company commenced the active marketing of an additional real estate property located in Nivelles, Belgium.

23 unchanged sentences

For the Quarter Ended

For the Two Quarters Ended

December 29, 2023

December 30, 2022

December 29, 2023

December 30, 2022

Net income (loss)

For the Three Quarters Ended

March 29, 2024

March 31, 2023

March 29, 2024

March 31, 2023

$ 3,900 $ 3,357 $ 3,752 $ 3,793

2 unchanged sentences

Undistributed earnings attributable to unvested shares

Net income (loss) attributable to Twin Disc

Net income attributable to Twin Disc

3,822 3,281 3,579 3,605

1 unchanged sentence

13,742 13,504 13,663 13,455

Basic Loss Per Share:

Net earnings (loss) per share - basic

Basic Income Per Share:

Net earnings per share - basic

$ 0.28 $ 0.24 $ 0.26 $ 0.27

Net income (loss)

$ 3,900 $ 3,357 $ 3,752 $ 3,793

2 unchanged sentences

Undistributed earnings attributable to unvested shares

Net income (loss) attributable to Twin Disc

Net income attributable to Twin Disc

3,822 3,281 3,579 3,605

5 unchanged sentences

13,904 13,662 13,852 13,608

Diluted Income (Loss) Per Share:

Net earnings (loss) per share - diluted

Diluted Income Per Share:

Net earnings per share - diluted

$ 0.27 $ 0.24 $ 0.26 $ 0.26

The following potential common shares were excluded from diluted EPS for the two quarters ended December 29, 2023 because they were anti-dilutive:

The following potential common shares were excluded from diluted EPS for the three quarters ended March 29, 2024 because they were anti-dilutive:

224.6 related to the Company’s unvested PSAs, 10.5 related to the Company’s unvested PSAUs, 153.9 related to the Company’s unvested RS awards, and 51.0 related to the Company’s unvested RSUs.

The following potential common shares were excluded from diluted EPS for the three quarters ended March 31, 2023 because they were anti-dilutive:

355.5 related to the Company’s unvested PSAs, 191.6 related to the Company’s unvested RS awards, and 59.5 related to the Company’s unvested RSUs.

Lease Liabilities

8 unchanged sentences

Balance Sheet Location

December 29, 2023

March 29, 2024

June 30, 2023

1 unchanged sentence

Right-of-use assets operating leases

$ 12,017 $ 13,133

Finance lease right-of-use assets

3 unchanged sentences

Accrued liabilities

$ 2,064 $ 2,343

Operating lease liabilities

6 unchanged sentences

For the Quarter Ended

For the Two Quarters Ended

December 29, 2023

December 30, 2022

December 29, 2023

December 30, 2022

For the Three Quarters Ended

March 29, 2024

March 31, 2023

March 29, 2024

March 31, 2023

Finance lease cost:

Amortization of right-of-use assets

$ 175 $ 156 $ 397 $ 311

Interest on lease liabilities

77 67 151 132

Operating lease cost

882 686 1,775 1,397

Short-term lease cost

Variable lease cost

99 67 199 108

Total lease cost

1,239 966 2,531 1,951

Sublease income

( 20 ) ( 18 ) ( 41 ) ( 35 )

Net lease cost

$ 1,219 $ 948 $ 2,490 $ 1,916

Other information related to leases was as follows:

For the Quarter Ended

For the Two Quarters Ended

December 29, 2023

December 30, 2022

December 29, 2023

December 30, 2022

For the Three Quarters Ended

March 29, 2024

March 31, 2023

March 29, 2024

March 31, 2023

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$ 934 $ 777 $ 1,871 $ 1,473

Operating cash flows from finance leases

76 215 149 420

Financing cash flows from finance leases

207 67 471 132

Right-of-use-assets obtained in exchange for lease obligations:

Operating leases

188 990 188 1,518

Finance leases

123 269 657 320

Weighted average remaining lease term (years):

4 unchanged sentences

Finance leases

Approximate future minimum rental commitments under non-cancellable leases as of December 29, 2023 were as follows:

Approximate future minimum rental commitments under non-cancellable leases as of March 29, 2024 were as follows:

Operating Leases

Finance Leases

$ 1,575 $ 492

Total future lease payments

Amount representing interest

( 4,371 ) ( 1,462 )

Present value of future payments

$ 12,052 $ 5,174

Derivative Financial Instruments

4 unchanged sentences

Interest Rate Swap Contracts

The Company has one outstanding interest rate swap contract as of December 29, 2023, with a notional amount of $ 10,500 .

The Company has one outstanding interest rate swap contract as of March 29, 2024, with a notional amount of $ 10,000 .

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 condensed consolidated statements of operations and comprehensive income (loss).

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 gains related to cash flow hedging activities that were included in accumulated other comprehensive loss were ($ 499 ) and ($ 688 ) as of December 29, 2023, and June 30, 2023, respectively.

Net unrealized after-tax gains related to cash flow hedging activities that were included in accumulated other comprehensive loss were $ 539 and $ 688 as of March 29, 2024, and June 30, 2023, 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.

4 unchanged sentences

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 related to net investment hedging activities that were included in Accumulated Other Comprehensive Loss were ($ 1,192 ) and ($ 1,272 ) as of December 29, 2023 and June 30, 2023, respectively.

Net unrealized after-tax income related to net investment hedging activities that were included in accumulated other comprehensive loss were ($ 1,348 ) and ($ 1,272 ) as of March 29, 2024 and June 30, 2023, respectively.

Fair Value of Derivative Instruments

1 unchanged sentence

Balance Sheet Location

December 29, 2023

March 29, 2024

June 30, 2023

4 unchanged sentences

Other noncurrent assets

The impact of the Company’s derivative instruments on the condensed consolidated statements of operations and comprehensive income (loss) for the quarters ended December 29, 2023 and December 30, 2022, respectively, was as follows:

The impact of the Company’s derivative instruments on the condensed consolidated statements of operations and comprehensive income for the quarters ended March 29, 2024 and March 31, 2023, respectively, was as follows:

Statement of Comprehensive

For the Quarter Ended

For the Two Quarters Ended

Income (Loss) Location

December 29, 2023

December 30, 2022

December 29, 2023

December 30, 2022

For the Three Quarters Ended

Income Location

March 29, 2024

March 31, 2023

March 29, 2024

March 31, 2023

Derivative designated as hedge:

1 unchanged sentence

Interest expense

$ 67 $ 79 $ 138 $ 162

Interest rate swap

Unrealized gain (loss) on hedges

183 10 189 ( 339 )

Net investment hedge

Unrealized (loss) gain on hedges

( 302 ) 585 ( 81 ) 141

Unrealized gain (loss) on hedges

IMPACT OF ACCOUNTING METHOD CHANGE

The following tables summarize the effects of the Accounting change described in Note A on the Company’s condensed consolidated statement of operations and comprehensive loss, statement of cash flows and statement of changes in equity for the quarter ended and the two quarters ended December 30, 2022 and condensed consolidated balance sheet as of December 30, 2022.

CONDENSED CONSOLIDATED STATEMENT OF OPERATION AND COMPREHENSIVE INCOME (LOSS)

The following tables summarize the effects of the Accounting change described in Note A on the Company’s condensed consolidated statement of operations and comprehensive income, statement of cash flows and statement of changes in equity for the quarter ended and the three quarters ended March 31, 2023 and condensed consolidated balance sheet as of March 31, 2023.

CONDENSED CONSOLIDATED STATEMENT OF OPERATION AND COMPREHENSIVE INCOME

For the Quarter Ended

For the Two Quarters Ended

December 30, 2022

For the Three Quarters Ended

March 31, 2023

As Computed Under Previous Method

12 unchanged sentences

33 - 33 208 - 208

Other operating income

Other operating expense (income)

1 - 1 ( 4,149 ) - ( 4,149 )

11 unchanged sentences

548 - 548 2,350 - 2,350

Net income (loss)

2,750 607 3,357 1,972 1,821 3,793

1 unchanged sentence

( 76 ) - ( 76 ) ( 188 ) - ( 188 )

Net income (loss) attributable to Twin Disc

Net income attributable to Twin Disc

$ 2,674 $ 607 $ 3,281 $ 1,784 $ 1,821 $ 3,605

Income (loss) per share data:

Basic income (los)s per share attributable to Twin Disc common shareholders

Income per share data:

Basic income per share attributable to Twin Disc common shareholders

$ 0.20 $ 0.04 $ 0.24 $ 0.13 $ 0.14 $ 0.27

Diluted income (loss) per share attributable to Twin Disc common shareholders

Diluted income per share attributable to Twin Disc common shareholders

$ 0.20 $ 0.04 $ 0.24 $ 0.13 $ 0.13 $ 0.26

4 unchanged sentences

13,662 - 13,662 13,608 - 13,608

Comprehensive income (loss)

Net income (loss)

Comprehensive income

$ 2,750 $ 607 $ 3,357 $ 1,972 $ 1,821 $ 3,793

4 unchanged sentences

1,014 - 1,014 3,116 - 3,116

Unrealized (loss) gain on hedges, net of income taxes of $ 0 and $ 0 , respectively

Unrealized loss on hedges, net of income taxes of $ 0 and $ 0 , respectively

( 224 ) - ( 224 ) ( 26 ) - ( 26 )

3 unchanged sentences

67 - 67 277 - 277

Comprehensive income attributable to Twin

Comprehensive income attributable to Twin Disc

$ 4,051 $ - $ 4,051 $ 5,366 $ - $ 5,366

CONDENSED ONSOLIDATED CONDENSED BALANCE SHEET

December 30, 2022

Under Previous Method

CONDENSED CONSOLIDATED CONDENSED BALANCE SHEET

March 31, 2023

As Computed Under Previous Method

Effect of Accounting Change

As Reported Under New Method

Current assets:

48 unchanged sentences

136,815 ( 23,291 ) 113,524

Accumulated other comprehensive loss

Accumulated other comprehensive (loss) income

( 28,503 ) 23,291 ( 5,212 )

9 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

December 30, 2022

For the Three Quarters Ended March 31, 2023

As Computed Under Previous Method

Effect of Accounting Change

As Reported Under New Method

Accounting Change

As Reported Under

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income

$ 1,972 $ 1,821 $ 3,793

Adjustments to reconcile net (loss) income to net cash provided by activities:

Adjustments to reconcile net income to net cash provided by activities:

Depreciation and amortization

9 unchanged sentences

Net cash provided by operating activities

6,859 - 6,859

CASH FLOWS FROM INVESTING ACTIVITIES:

5 unchanged sentences

Net cash provided by investing activities

2,803 - 2,803

CASH FLOWS FROM FINANCING ACTIVITIES:

12 unchanged sentences

Effect of exchange rate changes on cash

3,204 - 3,204

Net change in cash

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

December 30, 2022

For the Three Quarters Ended March 31, 2023

Retained earnings

Balance at June 30, 2022

135,031 ( 25,112 ) 109,919

Net (loss) income attributable to Twin Disc

( 890 ) 1,214 324

Balance at December 30, 2022

$ 134,141 $ ( 23,898 ) $ 110,243

Accumulated other comprehensive income (loss)

Net income attributable to Twin Disc

Balance at March 31, 2023

Accumulated other comprehensive (loss) income

Balance at June 30, 2022

( 32,086 ) 25,112 ( 6,974 )

Translation adjustments

2,005 - 2,005

Benefit plan adjustments, net of tax

3 ( 1,214 ) ( 1,211 )

Unrealized gain on hedges, net of tax

Balance at December 30, 2022

$ ( 29,880 ) $ 23,898 $ ( 5,982 )

Unrealized loss on hedges, net of tax

Balance at March 31, 2023

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 December 29, 2023, and related notes, as reported in Item 1 of this Quarterly Report.

This discussion should be read in conjunction with our consolidated financial statements as of March 29, 2024, 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.

5 unchanged sentences

Results of Operations

(In thousands)

Quarter Ended

Two Quarters Ended

December 29, 2023

% of Net Sales

December 30, 2022

% of Net Sales

December 29, 2023

% of Net Sales

December 30, 2022

% of Net Sales

Three Quarters Ended

March 29, 2024

March 31, 2023

March 29, 2024

March 31, 2023

Cost of goods sold

2 unchanged sentences

Restructuring expense

Other operating income

Loss from operations

Comparison of the Second Quarter of Fiscal 2024 with the Second Quarter of Fiscal 2023

Net sales for the second quarter increased 15.2%, or $9.6 million, to $73.0 million from $63.4 million in the same quarter a year ago.

Other operating expense (income)

Income from operations

Comparison of the Third Quarter of Fiscal 2024 with the Third Quarter of Fiscal 2023

Net sales for the third quarter increased 0.5%, or $0.4 million, to $74.2 million from $73.8 million in the same quarter a year ago.

The Company has benefited from favorable market conditions across most geographies and product groups through fiscal 2023 and into fiscal 2024.

With the easing of global supply chain disruptions, along with improving operational performance, the Company has been able to improve delivery results.

Global sales of marine and propulsion products improved 28.7% from the prior year, while shipments of off-highway transmission products improved by 8.1%.

Shipments of industrial products declined by 13.1%, with a slow-down in the domestic housing and construction markets.

The Asia Pacific region enjoyed the most significant sales improvement ($7.1 million or 56.1%) due to improved shipments of oil and gas transmissions into China, an improved demand for commercial marine products and continued strength in pleasure craft demand in Australia.

The European region also saw a significant increase ($5.3 million or 26.5%), with improved operational performance at our facilities in Belgium and the Netherlands, coupled with continued strong demand.

Sales into North America decreased 20.5%, or $5.3 million, primarily due to some softening in aftermarket demand in the oil and gas market.

Currency translation had a favorable impact on second quarter fiscal 2024 sales compared to the second quarter of the prior year totaling $2.1 million primarily due to the strengthening of the euro against the U.S.

Sales at our manufacturing segment increased 3.2%, or $1.8 million, versus the same quarter last year.

manufacturing operations experienced a 5.6%, or $1.7 million, decrease in sales versus the second fiscal quarter of 2023, with some softening aftermarket demand in the North American energy market and weaker industrial demand related to the North American housing and construction markets.

The Company’s operation in the Netherlands saw increased revenue of $3.6 million (27.3%) compared to the second fiscal quarter of 2023, primarily due to improving operation performance in support of a record level of incoming orders over the past few quarters, along with a favorable currency impact and improved supply chain performance.

Similarly, the Company’s Belgian operation saw an increase compared to the prior year second quarter (35.1% or $1.8 million), with a favorable translation effect and improved delivery performance driven by operational and supply chain execution.

The Company’s Italian manufacturing operations were down $2.0 million (29.2%) compared to the second quarter of fiscal 2023, primarily due to the sale of the BCS business during the quarter.

The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.1 million (6.2%) compared to the prior year second quarter.

Our distribution segment experienced an increase in sales of $11.5 million (44.8%) in the second quarter of fiscal 2024 compared to the second quarter of fiscal 2023.

The Company’s Asian distribution operations in Singapore, China and Japan were up 60.4% or $4.4 million from the prior year on improving deliveries for energy related products in China.

The Company’s North America distribution operation saw a 26.3% ($1.7 million) increase on strong demand for marine products from the European operations.

The Company’s European distribution operation saw a significant increase ($2.1 million or 41.9%) on strong demand, a favorable currency impact and improved supply of product.

The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in revenue (29.4% or $2.1 million) from the prior year second fiscal quarter, primarily due to continued strong demand for pleasure craft products in the region.

Gross profit as a percentage of sales for the second quarter of fiscal 2024 improved to 28.3%, compared to 26.9% for the same period last year.

The improvement in the current year second quarter compared to the prior year result was primarily volume related, with margin conversion of 37.7% on the additional revenue.

With the some stabilization in the global supply chain, along with improving operational performance, the Company has been able to improve overall delivery results.

Global sales of marine and propulsion products improved 3.2% from the prior year, while shipments of off-highway transmission products declined slightly (2.5%).

Shipments of industrial products declined by 14.7%, with a slow-down in the domestic housing and construction markets, as well as weakness in European market demand.

The European region enjoyed the most significant sales improvement ($2.1 million or 8.9%) due to improved shipments Veth propulsion products for European applications.

The Asia Pacific region also saw a slight increase ($0.1 million or 0.4%), with improved demand in the commercial marine market, partially offset by timing of oil and gas shipments into China.

Sales into North America decreased 19.3%, or $5.2 million, primarily due to some softening in aftermarket demand in the oil and gas market and weaker demand for industrial products.

Currency translation had a slightly favorable impact on third quarter fiscal 2024 sales compared to the third quarter of the prior year totaling $0.1 million.

Sales at our manufacturing segment decreased 1.9%, or $1.2 million, versus the same quarter last year.

manufacturing operations experienced a 9.4%, or $3.1 million, decrease in sales versus the third fiscal quarter of 2023, with some softening aftermarket demand in the North American energy market and weaker industrial demand related to the North American housing and construction markets.

The Company’s operation in the Netherlands saw dramatically increased revenue of $4.9 million (32.8%) compared to the third fiscal quarter of 2023, primarily due to improving operation performance in support of a record level of incoming orders over the past few quarters, along with improved supply chain performance.

Similarly, the Company’s Belgian operation saw an increase compared to the prior year third quarter (12.9% or $0.9 million), with improved delivery performance driven by operational and supply chain execution.

The Company’s Italian manufacturing operations were down $4.1 million (51.9%) compared to the third quarter of fiscal 2023, primarily due to the sale of the BCS business during the current fiscal year.

The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.2 million (13.9%) compared to the prior year third quarter.

Our distribution segment experienced an increase in sales of $3.1 million (9.2%) in the third quarter of fiscal 2024 compared to the third quarter of fiscal 2023.

The Company’s Asian distribution operations in Singapore, China and Japan were up 1.2% or $0.2 million from the prior year on improved commercial marine demand, partially offset by reduced deliveries for energy related products in China.

The Company’s North America distribution operation saw a 7.9% ($0.7 million) increase on strong demand for marine products manufactured by the European operations.

The Company’s European distribution operation saw a significant increase ($1.5 million or 29.1%) on strong demand and improved supply of product.

The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw a decrease in revenue (9.7% or $0.7 million) from the prior year third fiscal quarter, primarily due to softer demand for pleasure craft products in the region following record levels in the prior year.

Gross profit as a percentage of sales for the third quarter of fiscal 2024 improved to 28.2%, compared to 26.1% for the same period last year.

The improvement in the current year third quarter compared to the prior year result was primarily driven by price realization and cost reductions, with a slightly positive mix impact.

The mix impact for the quarter was essentially neutral.

For the fiscal 2024 second quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 23.5%, compared to 25.2% for the fiscal 2023 second quarter.

For the fiscal 2024 third quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 23.2%, compared to 19.8% for the fiscal 2023 third quarter.

ME&A expenses increased $2.6 million (17.6%) versus the same period last fiscal year.

The increase in ME&A spending for the quarter was comprised of higher wages and benefits ($0.7 million), travel costs ($0.2 million), software maintenance ($0.1 million), product development ($0.1 million) and a positive currency translation impact ($0.3 million).

These increases were partially offset by lower professional fees ($0.4 million).

The increases were driven by inflationary impacts and investment in resources to support our hybrid electric strategy.

The Company incurred minor restructuring charges during the second quarter of fiscal 2024 and fiscal 2023, 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 increase in ME&A spending for the quarter was comprised of higher wages and benefits ($0.5 million), increased global bonus expense ($0.4 million), travel costs ($0.3 million), lease expense ($0.2 million), higher professional fees ($0.5 million, driven by acquisition activities), along with other inflationary increases.

The increases were driven by investments to drive growth (resources to support our hybrid electric strategy), corporate development and other inflationary impacts.

The Company incurred minor restructuring charges during the third quarter of fiscal 2024 and fiscal 2023, 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.

Interest expense was down slightly to $0.4 million in the second quarter of fiscal 2024, with a lower average outstanding revolver balance partially offset by a higher interest rate.

Other expense, net of $0.4 million for the second fiscal quarter was primarily attributable to a currency loss, partially offset by a pension benefit.

The fiscal 2024 second quarter effective tax rate was 64.0% compared to 26.3% in the prior fiscal year second quarter.

The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the increase to the effective tax rate.

Comparison of the First Half of Fiscal 2024 with the First Half of Fiscal 2023

Net sales for the first half increased 14.5%, or $17.3 million, to $136.5 million from $119.3 million in the same period a year ago.

Interest expense was down slightly to $0.3 million in the third quarter of fiscal 2024, with a lower average outstanding revolver balance partially offset by a higher interest rate.

Other income, net of $1.0 million for the third fiscal quarter was primarily attributable to a currency gains and a pension benefit.

The fiscal 2024 third quarter effective tax rate was 10.6% compared to 14.0% in the prior fiscal year third quarter.

The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the reduced effective tax rate for both periods.

Comparison of the First Three Quarters of Fiscal 2024 with the First Three Quarters of Fiscal 2023

Net sales for the first three quarters increased 9.2%, or $17.7 million, to $210.7 million from $193.0 million in the same period a year ago.

The Company has continued to benefit from favorable market conditions across most geographies and product groups through fiscal 2023 and into fiscal 2024.

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Sales into North America decreased 19.1%, or $14.4 million, primarily due to some softening in aftermarket demand in the oil and gas market.

Currency translation had a favorable impact on first half fiscal 2024 sales compared to the first half of the prior year totaling $4.4 million primarily due to the strengthening of the euro against the U.S.

Currency translation had a favorable impact on first three quarters of fiscal 2024 sales compared to the same period in the prior year totaling $4.5 million primarily due to the strengthening of the euro against the U.S.

Sales at our manufacturing segment increased 3.5%, or $5.9 million, versus the same period last year.

manufacturing operations experienced a 6.9%, or $4.1 million, decrease in sales versus the first half of fiscal 2023, with some softening aftermarket demand in the North American energy market and weaker industrial demand related to the North American housing and construction markets.

The Company’s operation in the Netherlands saw increased revenue of $11.2 million (54.1%) compared to the first half of fiscal 2023, primarily due to improving operation performance in support of a record level of incoming orders over the past several quarters, along with a favorable currency impact and improved supply chain performance.

Similarly, the Company’s Belgian operation saw an increase compared to the prior fiscal year first half (28.8% or $2.7 million), with a favorable translation effect and improved delivery performance driven by operational and supply chain execution.

The Company’s Italian manufacturing operations were down $2.7 million (21.4%) compared to the first half of fiscal 2023, primarily due to the sale of the BCS business during the current fiscal year.

The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.1 million (4.2%) compared to the prior fiscal year first half.

Our distribution segment experienced an increase in sales of $20.2 million (40.5%) in the first half of fiscal 2024 compared to the first half of fiscal 2023.

manufacturing operations experienced a 7.8%, or $7.2 million, decrease in sales versus the first three quarters of fiscal 2023, with some softening aftermarket demand in the North American energy market and weaker industrial demand related to the North American housing and construction markets.

The Company’s operation in the Netherlands saw increased revenue of $16.1 million (45.2%) compared to the first three quarters of fiscal 2023, primarily due to improving operation performance in support of a record level of incoming orders over the past several quarters, along with a favorable currency impact and improved supply chain performance.

Similarly, the Company’s Belgian operation saw an increase compared to the prior fiscal year first three quarters (21.5% or $3.6 million), with a favorable translation effect and improved delivery performance driven by operational and supply chain execution.

The Company’s Italian manufacturing operations were down $6.9 million (33.2%) compared to the first three quarters of fiscal 2023, primarily due to the sale of the BCS business during the current fiscal year.

The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.3 million (7.3%) compared to the prior fiscal year first three quarters.

Our distribution segment experienced an increase in sales of $23.4 million (27.95%) in the first three quarters of fiscal 2024 compared to the first three quarters of fiscal 2023.

The Company’s Asian distribution operations in Singapore, China and Japan were up 48.6% or $14.1 million from the prior year on improving deliveries for energy related products in China and strong commercial marine demand in the region.

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The Company’s European distribution operation saw a significant increase ($3.8 million or 27.9%) on strong demand, a favorable currency impact and improved supply of product.

The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in revenue (6.8% or $0.9 million) from the prior year first half, primarily due to continued strong demand for pleasure craft products in the region.

Gross profit as a percentage of sales for the first half of fiscal 2024 improved to 27.3%, compared to 25.4% for the same period last year.

The improvement in the first half of the current year compared to the prior year result was primarily volume related, along with a positive mix impact due to additional oil and gas units shipped in the current year.

The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in revenue (1.2% or $0.3 million) from the prior year first three quarters, primarily due to continued strong demand for pleasure craft products in the region.

Gross profit as a percentage of sales for the first three quarters of fiscal 2024 improved to 27.6%, compared to 25.7% for the same period last year.

The improvement in the first three quarters of the current year compared to the prior year result was primarily volume related, along with a positive mix impact due to additional oil and gas units shipped in the current year.

These favorable movements were partially offset by the negative impact of the sale of the BCS business that was recorded in the first quarter of fiscal 2024.

For the fiscal 2024 first half, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 24.9%, compared to 26.0% for the fiscal 2023 first half.

For the fiscal 2024 first three quarters, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 24.3%, compared to 23.7% for the fiscal 2023 first three quarters.

ME&A expenses increased $5.6 million (12.2%) versus the same period last fiscal year.

The increase in ME&A spending for the first half was comprised of higher wages and benefits ($1.4 million), travel costs ($0.5 million), software maintenance ($0.3 million), product development ($0.3 million) and a positive currency translation impact ($0.5 million).

These increases were partially offset by lower bad debt expense ($0.2 million).

The increase in ME&A spending for the first three quarters was comprised of higher wages and benefits ($1.4 million), travel costs ($0.7 million), software maintenance ($0.3 million), product development ($0.3 million), global bonus expense ($0.9 million), professional fees ($0.4 million), lease expense ($0.3 million), depreciation and amortization ($0.6 million) and a positive currency translation impact ($0.5 million).

The increases were driven by inflationary impacts and investment in resources to support our hybrid electric strategy.

The Company incurred minor restructuring charges during the first half of fiscal 2024 and fiscal 2023, 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 incurred minor restructuring charges during the first three quarters of fiscal 2024 and fiscal 2023, 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.

Interest expense was down slightly to $0.8 million in the first half of fiscal 2024, with a lower average outstanding revolver balance partially offset by a higher interest rate.

Other expense of $0.3 million for the first half of fiscal 2024 was primarily attributable to a currency loss, partially offset by a pension benefit.

The fiscal 2024 first half effective tax rate was 107.1% compared to 80.5% in the prior fiscal year comparable period.

Interest expense was down 37.6% to $1.0 million in the first three quarters of fiscal 2024, with a lower average outstanding revolver balance partially offset by a higher interest rate.

Other income of $0.6 million for the first three quarters of fiscal 2024 was primarily attributable to a pension benefit, partially offset by a currency loss.

The fiscal 2024 first three quarters effective tax rate was 41.9% compared to 38.2% in the prior fiscal year comparable period.

The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the increase to the effective tax rate.

Financial Condition, Liquidity and Capital Resources

Comparison between December 29, 2023 and June 30, 2023

As of December 29, 2023, the Company had net working capital of $119.0 million, which represents a decrease of $0.6 million, or 0.5%, from the net working capital of $119.6 million as of June 30, 2023.

Cash increased by $7.8 million to $21.0 million as of December 29, 2023, versus $13.3 million as of June 30, 2023.

As of December 29, 2023, the majority of the cash is at the Company’s overseas operations in Europe ($5.5 million) and Asia-Pacific ($10.8 million).

Comparison between March 29, 2024 and June 30, 2023

As of March 29, 2024, the Company had net working capital of $119.9 million, which represents an increase of $0.3 million, or 0.2%, from the net working capital of $119.6 million as of June 30, 2023.

Cash increased by $10.6 million to $23.8 million as of March 29, 2024, versus $13.3 million as of June 30, 2023.

As of March 29, 2024, the majority of the cash is at the Company’s overseas operations in Europe ($5.6 million) and Asia-Pacific ($10.4 million).

The Company had $7.9 million of domestic cash available at March 29, 2024 in anticipation of the closing of the Katsa Oy acquisition announced in March.

Trade receivables of $41.0 million were down $13.8 million, or 25.2%, when compared to last fiscal year-end.

The impact of foreign currency translation was to increase accounts receivable by $1.2 million versus June 30, 2023.

As a percent of sales, trade receivables finished at 56.8% in the second quarter of fiscal 2024 compared to 62.2% for the comparable period in fiscal 2023 and 65.2% for the fourth quarter of fiscal 2023.

Inventories were essentially unchanged versus June 30, 2023.

The impact of foreign currency translation was to increase inventories by $3.9 million versus June 30, 2023.

This increase was essentially offset by the sale of the BCS business, reducing inventory by $3.8 million.

Other entity movements were offsetting, with increases at our operations in the Netherlands (driven by anticipated growth in the second half) and Australia (timing of purchases and a new product introduction) being offset by reductions at our distribution operations in Singapore, China and the US.

On a consolidated basis, as of December 29, 2023, the Company’s backlog of orders to be shipped over the next six months approximates $125.2 million, compared to $119.2 million at June 30, 2023 and $124.0 million at December 30, 2022.

As a percentage of six-month backlog, inventory has decreased from 111% at June 30, 2023 to 105% at December 29, 2023.

The impact of foreign currency translation was to decrease accounts receivable by $0.2 million versus June 30, 2023.

As a percent of sales, trade receivables finished at 55.2% in the third quarter of fiscal 2024 compared to 60.2% for the comparable period in fiscal 2023 and 65.2% for the fourth quarter of fiscal 2023.

Inventories were reduced by $2.1 million (1.6%) versus June 30, 2023.

The impact of foreign currency translation was to decrease inventories by $0.9 million versus June 30, 2023.

The remaining decrease was essentially the result of the sale of the BCS business, reducing inventory by $3.8 million.

The operation in the Netherlands reported an offsetting increase driven by continued growth in backlog and the need for inventory to support growth.

Much of this inventory, however, is funded through customer advance payments upon receipt of the order.

On a consolidated basis, as of March 29, 2024, the Company’s backlog of orders to be shipped over the next six months approximates $130.5 million, compared to $119.2 million at June 30, 2023 and $127.7 million at March 31, 2023.

As a percentage of six-month backlog, inventory has decreased from 111% at June 30, 2023 to 100% at March 29, 2024.

Net property, plant and equipment increased $2.0 million (5.1%) to $40.6 million versus $38.7 million at June 30, 2023.

The Company had capital spending of $5.4 million in the first half and a favorable exchange impact of $0.5 million.

These increases were offset by depreciation ($3.4 million) and the impact of the sale of the BCS business.

Capital spending occurring in the first half was primarily related to replacement capital.

The Company had capital spending of $7.6 million in the first three quarters.

This increase was partially offset by depreciation ($5.0 million) and the impact of the sale of the BCS business.

Capital spending occurring in the first three quarters was primarily related to replacement capital.

In total, the Company expects to invest between $9 and $11 million in capital assets in fiscal 2024.

1 unchanged sentence

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 December 29, 2023 of $32.6 million was down $3.9 million, or 10.7%, from June 30, 2023.

The impact of foreign currency translation was to increase accounts payable by $1.1 million versus June 30, 2023.

Accounts payable as of March 29, 2024 of $33.2 million was down $3.3 million, or 9.0%, from June 30, 2023.

The impact of foreign currency translation was to decrease accounts payable by $0.3 million versus June 30, 2023.

The remaining decrease is primarily related to the reduced purchasing activities in light of stable demand and inventory reduction efforts.

Total borrowings and long-term debt as of December 29, 2023 decreased $0.9 million to $17.7 million versus $18.6 million at June 30, 2023.

During the first half, the Company reported positive free cash flow of $10.6 million (defined as operating cash flow less acquisitions of fixed assets), driven by positive operating results and working capital performance, partially offset by the payment of a bonus accrual and capital spending.

Total borrowings and long-term debt as of March 29, 2024 decreased $1.6 million to $17.0 million versus $18.6 million at June 30, 2023.

During the first three quarters, the Company reported positive free cash flow of $14.7 million (defined as operating cash flow less acquisitions of fixed assets), driven by positive operating results and working capital performance, partially offset by the payment of a bonus accrual and capital spending.

The Company ended the quarter with total debt, net of cash, of ($6.8) million, compared to $5.4 million at June 30, 2023, for a net improvement of $12.2 million.

Total equity increased $0.2 million, or 0.1%, to $145.3 million as of December 29, 2023.

The net loss during the first half decreased equity by $0.1 million, offset by a favorable foreign currency translation of $2.2 million and the payment of a dividend ($0.6 million).

Total equity increased $1.4 million, or 0.1%, to $146.9 million as of March 29, 2024.

The net income during the first three quarters increased equity by $3.6 million, offset by an unfavorable foreign currency translation of $0.9 million and the payment of a dividend ($1.2 million).

The net change in common stock and treasury stock resulting from the accounting for stock-based compensation decreased equity by $0.5 million.

3 unchanged sentences

Pursuant to the Credit Agreement, BMO agreed to make the Term Loan to the Company in a principal amount not to exceed $35.0 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, $50.0 million (the “Revolving Credit Commitment”), subject to a Borrowing Base based on Eligible Inventory and Eligible Receivables.

Subsequent amendments to the Credit Agreement reduced the Term Loan to $20.0 million, extended the maturity date of the Term Loan to March 4, 2026, and require the Company to make principal installment payments on the Term Loan of $0.5 million per quarter.

Subsequent amendments to the Credit Agreement reduced the Term Loan to $20.0 million, extended the maturity date of the Term Loan to April 1, 2027, and require the Company to make principal installment payments on the Term Loan of $0.5 million per quarter.

In addition, under subsequent amendments to the Credit Agreement, BMO’s Revolving Credit Commitment is currently $45.0 million.

1 unchanged sentence

Under the Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $5.0 million in any fiscal year.

The term of the Revolving Loans under the Credit Agreement currently runs through June 30, 2025.

The term of the Revolving Loans under the Credit Agreement currently runs through April 1, 2027.

Under the Credit Agreement as amended, interest rates are based on either the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”).

7 unchanged sentences

Specifically, the Company’s Total Funded Debt to EBITDA ratio 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.

In determining whether the Company is in compliance with its Total Funded Debt/EBITDA Ratio, the Company’s EBITDA will include transaction expenses of up to $0.6 million for the Katsa Oy acquisition, as well as pro-forma EBITDA of Katsa Oy as permitted by the Bank.

The Company’s Tangible Net Worth may not be less than $100.0 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.

10 unchanged sentences

and (3) demand the Company to immediately Cash Collateralize L/C Obligations in an amount equal to 105% of the aggregate L/C Obligations or a greater amount if BMO determines a greater amount is necessary.

If such Event of Default is due to the Company’s bankruptcy, the Bank may take the three actions listed above without notice to the Company.

Other significant contractual obligations as of December 29, 2023 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.

If such Event of Default is due to the Company’s bankruptcy, BMO may take the three actions listed above without notice to the Company.

On April 1, 2024, the Company entered into Amendment No.

10 to Credit Agreement (the “Tenth Amendment”) that amended and extended the Credit Agreement.

The Tenth Amendment increased the Revolving Credit Commitment from $40.0 million to $45.0 million, and also increased the Borrowing Base for Revolving Loans from the sum of (a) 85% of outstanding unpaid Eligible Receivable and (b) the lesser of $30.0 million and 50% of Eligible Inventory to the sum of (a) 85% of outstanding unpaid Eligible Receivables and (b) the lesser of $35.0 million (reduced to $32.5 million beginning with the first quarter of the 2026 fiscal year) and 60% of Eligible Inventory (reduced to 55% of Eligible Inventory beginning with the third quarter of the 2025 fiscal year, and 50% of Eligible Inventory beginning with the first quarter of the 2026 fiscal year).

The Tenth Amendment specifically permits the Company to use Revolving Loans for the Katsa Oy acquisition.

In addition, in determining whether the Company is in compliance with its Total Funded Debt/EBITDA Ratio, the Company’s EBITDA will include transaction expenses of up to $0.6 million for the Katsa Oy acquisition, as well as pro-forma EBITDA of Katsa Oy as permitted by the Bank.

The Tenth Amendment also extended the Credit Agreement through April 1, 2027 and extended the maturity date of the Term Loan and the Term Loan Commitment Date to April 1, 2027.

Prior to the Tenth Amendment, the Credit Agreement was scheduled to terminate as of June 30, 2025, and the Term Loan and Term Loan Commitment Date were scheduled to mature/terminate on March 4, 2026.

Prior to the Tenth Amendment, the Applicable Margins were 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).

Under the Tenth Amendment, the Applicable Margins are between 2% and 3.5% for Revolving Loans and Letters of Credit;

2.125% and 3.625% for Term Loans;

and .15% and .3% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).

The Company remains in compliance with its liquidity and other covenants.

As of March 29, 2024, current maturities include $2.0 million of term loan payments due within the coming year.

Other significant contractual obligations as of March 29, 2024 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 December 29, 2023, 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.

As of March 29, 2024, 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 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.

15 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements