UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended September 25, 2015

 

Commission File Number 1-7635

 

 

TWIN DISC, INCORPORATED

(Exact name of registrant as specified in its charter)

 

Wisconsin	39-0667110
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

1328 Racine Street, Racine, Wisconsin 53403

(Address of principal executive offices)

 

(262) 638-4000

(Registrant's telephone number, including area code)

 

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

Yes √           No          

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).          Yes √           No__

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer                         Accelerated Filer √      

Non-accelerated filer                         Smaller reporting company__

 

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

Yes               No √      

 

At October 26, 2015, the registrant had 11,351,924 shares of its common stock outstanding.

 

 

Part I.     FINANCIAL INFORMATION

 

Item 1.     Financial Statements

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)

 

 

 

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

 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

 

 

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

 

 

 

 

 

 

 

TWIN DISC, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 

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

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Item 2.     Management Discussion and Analysis

 

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated fiscal 2015 financial statements and related notes.

 

Some of the statements in this Quarterly Report on Form 10-Q are “forward looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the Company’s description of plans and objectives for future operations and assumptions behind those plans. The words “anticipates,” “believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by Twin Disc, Incorporated should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.

 

In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company’s Annual Report filed on Form 10-K for June 30, 2015 could cause actual results to be materially different from what is presented here.

 

Results of Operations

 

(In thousands)
		Quarter Ended
		September 25,								September 26,
		2015				%				2014				%
Net sales		$	37,373							$	64,824
Cost of goods sold			29,183								42,435
Gross profit			8,190				21.9%				22,389				34.5%
Marketing, engineering and administrative expenses			15,240				40.8%				15,910				24.5%
Other operating income			(500	)							-
(Loss) earnings from operations		$	(6,550	)			(17.5%)			$	6,479				10.0%

 

Comparison of the First Quarter of FY 2016 with the First Quarter of FY 2015

 

Net sales for the first quarter decreased 42.3%, or $27.5 million, to $37.4 million from $64.8 million in the same period a year ago. Currency translation had an unfavorable impact on fiscal 2016 sales compared to the prior year totaling $4.5 million due to the strengthening of the U.S. dollar against the euro and Asian currencies. Adjusting for constant currency, sales declined 35.4% compared to the fiscal 2015 first quarter. The significant decline is the result of reduced demand for the Company’s oil and gas related products in both North America and Asia driven by the global decline in oil and natural gas prices, along with softening demand in Asia for the Company’s commercial marine products. Demand from customers in Europe remains weak, while overall demand in North America remains stable for the Company’s commercial marine and industrial products. The sales decline was seen most heavily in North America, as the percentage of sales to this region fell to 49% of total consolidated net sales in the first quarter of fiscal 2016 compared to 55% for the full year fiscal 2015. By comparison, the European region increased as a percent of total to 20% (from 17%) and Asia Pacific remained relatively flat at 22% (compared to 21% for fiscal 2015).   

 

Sales at our manufacturing segment were down 50.9%, or $30.7 million, versus the same period last year. In the current fiscal year’s first quarter, our U.S. manufacturing operation, the largest, experienced a 65.1% decrease in sales versus the first fiscal quarter of 2015. The primary driver for this decrease was reduced shipments of pressure pumping transmissions and aftermarket components for the North American and Asian oil and gas markets, along with reduced demand for commercial marine product. The Company’s Italian manufacturing operations, which continue to be hampered by the softness in the European mega yacht and industrial markets, experienced a 20.8% decrease in sales compared to the prior fiscal year’s first quarter, primarily due to an unfavorable currency impact (17.6%). After adjusting for a 15.0% unfavorable currency impact, the Company’s Belgian manufacturing operation experienced relatively flat demand compared to the fiscal 2015 first quarter, reporting a 0.3% decline. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 15.9% decrease in sales, primarily due to currency impact and the timing of shipments for the global patrol boat and Italian mega yacht markets.

 

 

Our distribution segment experienced a 15.9%, or $3.8 million, decrease in sales compared to the first quarter of fiscal 2015. The Company’s distribution operation in Singapore, its largest Company-owned distribution operation, saw a 52.0% decrease in sales compared to the prior fiscal year’s first quarter. This operation acts as the Company’s master distributor for Asia and has experienced record results in recent years as the Company’s products gain greater acceptance in the market. In the first fiscal quarter, this operation saw a significant decrease in shipments of pressure pumping and commercial marine transmissions for the Chinese market, along with an unfavorable currency impact. The Company’s distribution operation in the Northwest of the United States and Southwest of Canada experienced a decrease in sales of 46.3%. The year over year decrease was driven by reduced shipments of pressure pumping transmissions and aftermarket service and components for the Canadian oil and gas markets. 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 sales of just over 12% from the prior fiscal year’s first quarter, after adjusting for an unfavorable currency impact (24.0%). This constant-currency increase was driven by improved shipments in the Australian mega yacht market compared to the prior year.

 

The elimination for net inter/intra segment sales decreased $7.1 million, accounting for the remainder of the net change in sales versus the same period last year.

 

Gross profit as a percentage of sales decreased 1260 basis points to 21.9% of sales, compared to 34.5% of sales for the same period last year. Gross profit for fiscal 2016’s first quarter was unfavorably impacted by the reduced volume ($9.9 million), a less profitable product mix (approximately $1.4 million) driven by lower sales of the Company’s oil and gas transmission products, an unfavorable currency impact ($1.0 million) and reduced absorption primarily at the Company’s U.S. manufacturing operations ($1.4 million).

 

For the fiscal 2016 first quarter, marketing, engineering and administrative (ME&A) expenses, as a percentage of sales, were 40.8%, compared to 24.5% for the fiscal 2015 first quarter. ME&A expenses decreased $0.7 million versus the same period last fiscal year. The decrease in ME&A expenses for the quarter relates to a currency movement ($0.8 million), reduced bonus expense ($0.7 million) and general cost containment measures. These decreases were partially offset by increases related to stock compensation expense following a prior year forfeiture ($0.2 million), increased pension expense ($0.5 million) and corporate development activities ($0.5 million).

 

During the first quarter of fiscal 2016, the Company sold the distribution rights and assets of its distribution entity covering the southeast U.S. territory for approximately $4.1 million, resulting in a net operating gain of $0.5 million.

 

Interest expense of $0.1 million for the quarter was down 44.5% versus last year’s first fiscal quarter. Total interest on the Company’s $60 million revolving credit facility (“revolver”) decreased 20.5% to $32,348 in fiscal 2016’s first quarter. The average borrowing on the revolver, computed monthly, decreased to $9.9 million in fiscal 2016’s first quarter, compared to $13.2 million in the same period a year ago. The interest rate on the revolver increased from a range of 1.16% to 1.17% in the prior fiscal year’s first quarter to a range of 1.20% to 1.21% in the current year. The interest expense on the Company’s $25 million Senior Note decreased 50%, at a fixed rate of 6.05%, due to a lower remaining principal balance.

 

The unfavorable movement in other expense (income) compared to the prior year is primarily due to the impact of currency movements related to the euro and Australian dollar.

 

The fiscal 2016 first quarter tax rate was 34.1%, compared to the fiscal 2015 first quarter rate of 39.0%. Both periods were impacted by non-deductible operating losses in a foreign jurisdiction that is subject to a full valuation allowance. Adjusting both periods for the non-deductible losses, the fiscal 2016 first quarter rate would have been 35.2%, compared to 36.3% for the fiscal 2015 first quarter. The reduction in the fiscal 2016 effective tax rate was primarily a function of jurisdictional mix.

 

Financial Condition, Liquidity and Capital Resources

 

Comparison between September 25, 2015 and June 30, 2015

 

As of September 25, 2015, the Company had net working capital of $97.5 million, which represents a decrease of $15.3 million, or 13.6%, from the net working capital of $112.8 million as of June 30, 2015.

 

Cash increased $0.1 million to $23.0 million as of September 25, 2015, versus $22.9 million as of June 30, 2015. The majority of the cash as of September 25, 2015 is at our overseas operations in Europe ($14.5 million) and Asia-Pacific ($7.0 million).

 

 

Trade receivables of $31.3 million were down $12.6 million, or approximately 29%, when compared to last fiscal year-end. The impact of foreign currency translation was to decrease accounts receivable by $0.4 million versus June 30, 2015. The net remaining decrease is driven by the sales volume decrease of just over 40% from the fourth quarter of fiscal 2015 compared to the first fiscal quarter of fiscal 2016.

 

Net inventory decreased by $3.2 million, or 4.0%, versus June 30, 2015 to $77.0 million. The impact of foreign currency translation was to decrease net inventory by $1.3 million versus June 30, 2015. After adjusting for the impact of foreign currency translation, the net decrease of $1.9 million is primarily the result of the sale of the inventories of Twin Disc Southeast, a Company-owned distributor in the southeast U.S., to a third party distributor ($3.3 million). On a consolidated basis, as of September 25, 2015, the Company’s backlog of orders to be shipped over the next six months approximates $37.5 million, compared to $34.4 million at June 30, 2015 and $64.0 million at September 26, 2014. The slight increase versus the end of the prior fiscal year is being experienced at the Company’s domestic manufacturing location. As a percentage of six month backlog, inventory has improved from 233% at June 30, 2015 to 205% at September 25, 2015.

 

Net property, plant and equipment (PP&E) decreased $1.1 million versus June 30, 2015. This includes the addition of $1.4 million in capital expenditures, primarily at the Company’s Racine-based manufacturing operation, which was more than offset by depreciation of $2.2 million. The net remaining decrease is due to foreign currency translation effects and asset disposals. In total, the Company expects to invest between $5 and $10 million in capital assets in fiscal 2016. These anticipated expenditures reflect the Company’s plans to continue investing in modern equipment and facilities, its global sourcing program and new products. The Company continues to review its capital plans based on overall market conditions and availability of capital, and may make changes to its capital plans accordingly. The Company’s capital program is focused on modernizing key core manufacturing, assembly and testing processes and expanding capacity at its facilities around the world.

 

Accounts payable as of September 25, 2015 of $18.4 million were down $2.3 million, or 11.1%, from June 30, 2015. The impact of foreign currency translation was to decrease accounts payable by $0.1 million versus June 30, 2015. This decrease is consistent with the timing of certain payments, the Company’s lower six month backlog levels and the reduction in purchasing activity during the first quarter resulting from reduced sales levels compared to the fourth quarter of fiscal 2015.

 

Total borrowings and long-term debt as of September 25, 2015 increased by $0.5 million, or roughly 3%, to $14.3 million versus June 30, 2015. Cash needs were driven primarily by bonus and severance payments, partially offset by proceeds from the sale of the assets of Twin Disc Southeast and the receipt of a life insurance benefit. During the first quarter, the Company generated negative free cash flow (defined as operating cash flow less acquisitions of fixed assets) of ($3.8) million and ended the quarter with total debt, net of cash, of ($8.8) million, compared to ($9.1) million at June 30, 2015, for a net change of $0.3 million.

 

Total equity decreased $6.4 million, or 4.6%, to $133.7 million as of September 25, 2015. Retained earnings decreased by $5.3 million. The net decrease in retained earnings included $4.3 million in net loss for the first fiscal quarter, along with $1.0 million in dividend payments. Net unfavorable foreign currency translation of $1.8 million was reported. The net remaining increase in equity of $0.7 million primarily represents the amortization of net actuarial loss and prior service cost on the Company’s defined benefit pension plans.

 

On June 30, 2014, the Company entered into a revolving loan agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association. Pursuant to the Credit Agreement, the Company may, from time to time, enter into revolving credit loans in amounts not to exceed, in the aggregate, Wells Fargo’s revolving credit commitment of $60,000,000. The revolving credit commitment may be increased under the agreement by an additional $10,000,000 in the event that the conditions for “Incremental Loans” (as defined in the agreement) are satisfied. In general, outstanding revolving credit loans will bear interest at LIBOR plus 1.00%. The rate was 1.20% at September 25, 2015. In addition to principal and interest payments, the Company will be responsible for paying monthly commitment fees equal to 0.15% of the unused revolving credit commitment. The Company has the option of making additional prepayments subject to certain limitations. The Credit Agreement is scheduled to expire on May 31, 2018. The outstanding balance of $10,671,884 at September 25, 2015 is classified as long-term debt. This agreement contains certain covenants, including restrictions on investments, acquisitions and indebtedness. Financial covenants include a minimum consolidated adjusted net worth, a minimum EBITDA for the most recent four fiscal quarters of $11,000,000 at September 25, 2015, and a maximum total funded debt to EBITDA ratio of 3.0 at September 25, 2015. On August 3, 2015, the Credit Agreement was amended to revise the definition of EBITDA for the four consecutive fiscal quarters ending on and including June 30, 2015 to and including March 25, 2016 to add $3,300,000, reflective of the restructuring charge taken by the Company in the fourth quarter of the fiscal year ending June 30, 2015. As of September 25, 2015, the Company was in compliance with these financial covenants with a four quarter EBITDA total of $16,172,000 and a funded debt to EBITDA ratio of 0.88 (compared to $29,755,000 and 0.46 as of June 30, 2015, respectively). The minimum adjusted net worth covenant fluctuates based upon actual earnings and the Company’s compliance with that covenant is based on the Company’s shareholders’ equity as adjusted by certain pension accounting items. As of September 25, 2015, the minimum adjusted equity requirement was $124,741,000 compared to an actual result of $167,253,000 after all required adjustments.

 

 

On June 30, 2014, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement (the “Prudential Agreement”). Among other things, the Prudential Agreement: (a) amends and restates the “Note Agreement” between the Company and Purchasers dated as of April 10, 2006, as it has been amended from time to time (the “2006 Note Agreement”); and (b) sets forth the terms of the potential sale and purchase of up to $50,000,000 in “Shelf Notes” as defined in the Prudential Agreement (the “Shelf Notes”) by the Company to Prudential. The notes sold by the Company to the Existing Holders under the 2006 Agreement (the “2006 Notes”) are deemed outstanding under, and are governed by, the terms of the Prudential Agreement. The 2006 Notes bear interest on the outstanding principal balance at a fixed rate of 6.05% per annum and mature and become due and payable in full on April 10, 2016 (the “Payment Date”). Prior to the Payment Date, the Company is obligated to make quarterly payments of interest during the term of the 2006 Notes, plus prepayments of principal of $3,571,429 on April 10 of each year from 2010 to 2015, inclusive. The outstanding balance was $3,571,429 at September 25, 2015 and June 30, 2015, respectively. The entire outstanding balance was classified as a current maturity of long-term debt at September 25, 2015 and June 30, 2015, respectively. In addition to the interest payments and any mandatory principal payments required under the terms of the Shelf Note, the Company will pay an issuance fee of 0.10% of the aggregate principal balance of each of the Shelf Notes sold to, and purchased by, Prudential. The Company may prepay the Shelf Notes or the 2006 Notes, subject to certain limitations. At no time during the term of the Prudential Agreement may the aggregate outstanding principal amount of the 2006 Notes and the Shelf Notes exceed $35,000,000. The Prudential Agreement includes financial covenants regarding minimum net worth, minimum EBITDA for the most recent four fiscal quarters of $11,000,000 and a maximum total funded debt to EBITDA ratio of 3.0. On August 3, 2015, the Credit Agreement was amended to revise the definition of EBITDA for the four consecutive fiscal quarters ending on and including June 30, 2015 to and including March 25, 2016 to add $3,300,000, reflective of the restructuring charge taken by the Company in the fourth quarter of the fiscal year ending June 30, 2015. As of September 25, 2015, the Company was in compliance with these financial covenants. As part of the agreement, the Company will be required to make an offer to purchase the 2006 Notes and Shelf Notes upon a change of control, and any such offer must include the payment of a Yield-Maintenance Amount. The Prudential Agreement also includes certain covenants that limit, among other things, certain indebtedness, acquisitions and investments. The Prudential Agreement also has a most favored lender provision whereby the Prudential Agreement shall be automatically modified to include any additional covenant or event of default that is included in any agreement evidencing, securing, guarantying or otherwise related to other indebtedness in excess of $1,000,000.

 

Four quarter EBITDA, total funded debt, and adjusted net worth are non-GAAP measures, and are included herein for the purpose of disclosing the status of the Company’s compliance with the four quarter EBITDA, total funded debt to four quarter EBITDA ratio, and adjusted net worth covenants described above. In accordance with the Company’s revolving loan agreements and the Prudential Agreement:

 

●

“Four quarter EBITDA” is defined as “the sum of (i) Net Income plus, to the extent deducted in the calculation of Net Income, (ii) interest expense, (iii) depreciation and amortization expense, (iv) income tax expense and (v) $3,300,000 adjustment;” and

 

●

“Total funded debt” is defined as “(i) all Indebtedness for borrowed money (including without limitation, Indebtedness evidenced by promissory notes, bonds, debentures and similar interest-bearing instruments), plus (ii) all purchase money Indebtedness, plus (iii) the principal portion of capital lease obligations, plus (iv) the maximum amount which is available to be drawn under letters of credit then outstanding, all as determined for the Company and its consolidated Subsidiaries as of the date of determination, without duplication, and in accordance with generally accepted accounting principles applied on a consistent basis.”

 

●

“Total funded debt to four quarter EBITDA” is defined as the ratio of total funded debt to four quarter EBITDA calculated in accordance with the above definitions.

 

●

“Adjusted net worth” means the Company’s reported shareholder equity, excluding adjustments that result from (i) changes to the assumptions used by the Company in determining its pension liabilities or (ii) changes in the market value of plan assets up to an aggregate amount of adjustments equal to $34,000,000 (“Permitted Benefit Plan Adjustments”) for purposes of computing net worth at any time.

 

 

The Company’s total funded debt as of September 25, 2015 and June 30, 2015 was equal to the total debt reported on the Company’s September 25, 2015 and June 30, 2015 Consolidated Balance Sheet, and therefore no reconciliation is included herein. The following table sets forth the reconciliation of the Company’s reported Net Earnings to the calculation of four quarter EBITDA for the four quarters ended September 25, 2015:

 

Four Quarter EBITDA Reconciliation
Net Earnings Attributable to Twin Disc		$	2,807,000
Depreciation & Amortization			9,843,000
Interest Expense			533,000
Income Taxes			(286,000	)
Adjustment			3,300,000
Four Quarter EBITDA		$	16,197,000
Total Funded Debt to Four Quarter EBITDA
Total Funded Debt		$	14,267,000
Divided by: Four Quarter EBITDA			16,197,000
Total Funded Debt to Four Quarter EBITDA			0.88

 

The following table sets forth the reconciliation of the Company’s reported shareholders’ equity to the calculation of adjusted net worth for the quarter ended September 25, 2015:

 

Total Twin Disc Shareholders’ Equity		$	133,253,000
Permitted Benefit Plan Adjustments			34,000,000
Adjusted Net Worth		$	167,253,000

 

As of September 25, 2015, the Company was in compliance with all of the covenants described above. As of September 25, 2015, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was $37.5 million, or approximately 9% higher than the six-month backlog of $34.4 million as of June 30, 2015, but down 41% from the end of the first fiscal quarter of 2015. The current margins surrounding ongoing compliance with the above covenants, in particular, minimum EBITDA for the most recent four fiscal quarters and total funded debt to EBITDA, are expected to decrease in fiscal 2016. Based on its latest projections, the Company believes it will be a significant challenge to generate sufficient EBITDA levels throughout fiscal 2016 in order to maintain compliance with the above covenants. The Company has engaged its lenders in preliminary discussions regarding potential covenant violations. However, as with all forward-looking information, there can be no assurance that the Company will achieve or fail to achieve the projected results in future periods due to the uncertainties in certain of its markets. Please see the factors discussed under Item 1A, Risk Factors, of the Company’s Annual Report filed on Form 10-K for June 30, 2015 which could cause actual results to be materially different from what is presented here.

 

The Company’s balance sheet remains very strong, there are no off-balance-sheet arrangements other than the operating leases listed below, and we continue to have sufficient liquidity for near-term needs. The Company had $49.3 million of available borrowings on our $60 million revolving loan agreement as of September 25, 2015. The Company expects to continue to generate enough cash from operations to meet our operating and investing needs. As of September 25, 2015, the Company also had cash of $23.0 million, primarily at its overseas operations. These funds, with some restrictions and tax implications, are available for repatriation as deemed necessary by the Company. In fiscal 2016, the Company expects to contribute $2.2 million to its defined benefit pension plans, the minimum contributions required. However, if the Company elects to make voluntary contributions in fiscal 2016, it intends to do so using cash from operations and, if necessary, from available borrowings under existing credit facilities.

 

Net working capital decreased $15.3 million, or 13.6%, in fiscal 2016’s first quarter, and the current ratio decreased from 3.0 at June 30, 2015 to 2.9 at September 25, 2015. The decrease in net working capital was primarily driven by a decrease in accounts receivable and inventory, partially offset by a decrease in accounts payable and accrued liabilities due to the impact of reduced volume and the payment of severance and bonus obligations.

 

 

The Company expects capital expenditures to be approximately $5 million - $10 million in fiscal 2016. These anticipated expenditures reflect the Company’s plans to continue investing in modern equipment and facilities, its global sourcing program and new products.

 

Management believes that available cash, the credit facility, cash generated from future operations, existing lines of credit and potential access to debt markets will be adequate to fund the Company’s capital requirements for the foreseeable future.

 

As of September 25, 2015, the Company has obligations under non-cancelable operating lease contracts and loan and senior note agreements for certain future payments.

 

The Company has approximately $895,000 of unrecognized tax benefits, including related interest and penalties, as of September 25, 2015, which, if recognized, would favorably impact the effective tax rate. See Note H of the Condensed Consolidated Financial Statements for disclosures surrounding uncertain income tax positions.

 

The Company maintains defined benefit pension plans for some of its operations in the United States and Europe. The Company has established the Pension Committee to manage the operations and administration of the defined benefit plans. The Company estimates that fiscal 2016 contributions to all defined benefit plans will total $2,240,000. As of September 25, 2015, $869,000 in contributions have been made.

 

New Accounting Releases

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued guidance intended to amend current presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (the Company’s fiscal 2017). The adoption of this guidance is not expected to have a material impact on the Company’s financial statements and disclosures.

 

In August 2014, the FASB issued updated guidance intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern. The amendments in this guidance are effective for fiscal years ending after December 15, 2016 (the Company’s fiscal 2017), and interim periods within fiscal years beginning after December 15, 2016. The adoption of this guidance is not expected to have a material impact on the Company’s financial disclosures.

 

In June 2014, the FASB issued stock compensation guidance requiring that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (the Company’s fiscal 2017). The adoption of this guidance is not expected to have a material impact on the Company’s financial statements and disclosures.

 

In May 2014, the FASB issued updated guidance on revenue from contracts with customers. This revenue recognition guidance supersedes existing U.S. GAAP guidance, including most industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies steps to apply in achieving this principle. This updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (the Company’s fiscal 2020). The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

 

In July 2015, the FASB issued guidance intended to simplify the measurement of inventory and to closely align with International Financial Reporting Standards. Current guidance requires inventories to be measured at the lower of cost or market. Under this new guidance, inventories other than those measured under LIFO are to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is to be applied prospectively, and is effective for fiscal years beginning after December 15, 2016 (the Company’s fiscal 2018). The adoption of this guidance is not expected to have a material impact on the Company’s financial statements and disclosures.

 

 

In July 2015, the FASB issued guidance to reduce complexity in employee benefit plan accounting, which is consistent with its Simplification Initiative of improving areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. This guidance update consists of several parts that affect the reporting of defined benefit pension plans, defined contribution pension plans, and their fair value measurements, among others. This guidance is effective for fiscal years beginning after December 15, 2015 (the Company’s fiscal 2017). The adoption of this guidance is not expected to have a material impact on the Company’s financial disclosures.

 

Critical Accounting Policies

 

The preparation of this Quarterly Report requires management’s judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

 

Twin Disc’s critical accounting policies are described in Item 7 of the Company’s Annual Report filed on Form 10-K for June 30, 2015. There have been no significant changes to those accounting policies subsequent to June 30, 2015.

 

Item 3.     Quantitative and Qualitative Disclosure About Market Risk

 

The Company is exposed to market risks from changes in interest rates, commodities and foreign exchange. To reduce such risks, the Company selectively uses financial instruments and other pro-active management techniques. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which prohibit the use of financial instruments for trading or speculative purposes.

 

Interest rate risk - The Company’s earnings exposure related to adverse movements of interest rates is primarily derived from outstanding floating rate debt instruments that are indexed to the LIBOR interest rate. In accordance with the $60,000,000 revolving loan agreement expiring May 31, 2018, the Company has the option of borrowing at LIBOR plus an additional “Add-On” of 1.0%. Due to the relative stability of interest rates, the Company did not utilize any financial instruments at September 25, 2015 to manage interest rate risk exposure. A 10 percent increase or decrease in the applicable interest rate would result in a change in pretax interest expense of approximately $13,000.

 

Commodity price risk - The Company is exposed to fluctuation in market prices for such commodities as steel and aluminum. The Company does not utilize commodity price hedges to manage commodity price risk exposure.

 

Currency risk - The Company has exposure to foreign currency exchange fluctuations. Approximately 28% of the Company’s revenues in the quarter ended September 25, 2015 were denominated in currencies other than the U.S. dollar. Of that total, approximately 58% was denominated in euros with the balance composed of Japanese yen, the Swiss franc, Indian rupee and the Australian and Singapore dollars. The Company does not hedge the translation exposure represented by the net assets of its foreign subsidiaries. Foreign currency translation adjustments are recorded as a component of shareholders’ equity. Forward foreign exchange contracts are occasionally used to hedge the currency fluctuations on significant transactions denominated in foreign currencies.

 

Derivative financial instruments - The Company has written policies and procedures that place all financial instruments under the direction of the Company’s corporate treasury group and restrict derivative transactions to those intended for hedging purposes. The use of financial instruments for trading purposes is prohibited. The Company occasionally uses financial instruments to manage the market risk from changes in foreign exchange rates.

 

The Company primarily enters into forward exchange contracts to reduce the earnings and cash flow impact of non-functional currency denominated receivables and payables. These contracts are highly effective in hedging the cash flows attributable to changes in currency exchange rates. Gains and losses resulting from these contracts offset the foreign exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of the forward exchange contracts generally coincide with the settlement dates of the related transactions. Gains and losses on these contracts are recorded in Other expense, net in the Condensed Consolidated Statement of Operations as the changes in the fair value of the contracts are recognized and generally offset the gains and losses on the hedged items in the same period. The primary currency to which the Company was exposed in fiscal 2016 and 2015 was the euro. At September 25, 2015, the Company had two outstanding forward exchange contracts to purchase U.S. dollars and euros in the notional value of $450,000 with a weighted average maturity of 20 days. The fair value of the Company’s contracts was a loss of $6,000 at September 25, 2015. The Company had no outstanding forward exchange contracts at June 30, 2015.

 

 

Item 4.     Controls and Procedures

 

(a)     Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

 

(b)     Changes in Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). During the period covered by this report, no changes were made which have materially affected, or which are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II.     OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

Twin Disc is a defendant in several product liability or related claims which are considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition of the Company.

 

Item 1A.     Risk Factors

 

There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 2015 Annual Report on Form 10-K.

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)	Unregistered Sales of Equity Securities

 

There were no securities of the Company sold by the Company during the quarter ended September 25, 2015, which were not registered under the Securities Act of 1933, in reliance upon an exemption from registration provided by Section 4 (2) of the Act.

 

(b)	Use of Proceeds

 

Not applicable.

 

(c)	Issuer Purchases of Equity Securities

 

 

Issuer Purchases of Equity Securities

 

Period				(a) Total Number of Shares Purchased				(b) Average Price Paid per Share				(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2015   –   July 31, 2015					12,361				NA				0				315,000
August 1, 2015   –   August 28, 2015					0				NA				0				315,000
Aug. 29, 2015   –   Sep. 25, 2015					0				NA				0				315,000
Total					12,361				NA				0				315,000

 

The Company did not purchase any shares of Common Stock during the quarter ended September 25, 2015, pursuant to our publicly announced program (described below). The amounts shown in Column (a) above represent shares of Common Stock delivered to the Company as payment of withholding taxes due on the vesting of restricted stock issued under the Twin Disc, Incorporated 2010 Long-Term Incentive Compensation Plan.

 

On February 1, 2008, the Board of Directors authorized the purchase of up to 500,000 shares of Common Stock at market values, of which 250,000 shares were purchased during fiscal 2009 and 125,000 shares were purchased during fiscal 2012. On July 27, 2012, the Board of Directors authorized the purchase of an additional 375,000 shares of Common Stock at market values. This authorization has no expiration. During the second quarter of fiscal 2013, the Company purchased 185,000 shares under this authorization.

 

Item 3.     Defaults Upon Senior Securities

 

None.

 

Item 5.     Other Information

 

None.

 

Item 6.     Exhibits

 

31a	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31b	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32a	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32b	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS

XBRL Instance Document

 

101.SCH

XBRL Schema

 

101.CAL

XBRL Calculation Linkbase

 

101.DEF

XBRL Definition Linkbase

 

101.LAB

XBRL Label Linkbase

 

101.PRE

XBRL Presentation Linkbase

 

 

SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

	TWIN DISC, INCORPORATED
	(Registrant)
Date: November 4, 2015	/s/ DEBBIE A. LANGE
	Debbie A. Lange
	Corporate Controller
	Chief Accounting Officer

 

 

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