74.7(2.94)237.5(9.35)455.4(17.93) 238.0TOWER 1TOWER 28.508.5017.118.508.504.8712.8125.6251/2-13 UNC THRU6 HOLES EQUALLY SPACED901.7(35.50)965.7(38.02)388.1(15.28)3.443.44.91OUTLETINLET( )( )( ) HPTOIT’S OURCOMMITMENT2022 ANNUAL REPORT COMMITTED TO
Success
Twin Disc puts horsepower to work with our innovative products, controls and
systems. We are transforming the global off-highway and marine markets with
our sustainable hybrid and electric powertrains, empowering customers to meet
business goals as well as regulatory requirements. As recovery continued in fiscal
2022, we focused on delivering customers the right solution at the right time while
further diversifying our geographic and end markets, maintaining compelling levels
of profitability and investing in R&D to drive long-term growth.
Operating Results by Quarter
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Year
2022
Net Sales
Gross Profit
$ 47,761
$ 59,889
$ 59,289
$ 75,974 $ 242,913
13,447
13,482
17,691
24,192
68,812
Net (Loss) Income
1,920
(3,836)
2,231
7,779
8,095
Basic (Loss) Income Per Share
Diluted (Loss) Income Per Share
Dividends Per Share
0.14
0.14
–
(0.29)
(0.29)
–
0.17
0.17
–
0.58
0.58
–
0.61
0.60
–
Stock Price Range (High-Low)
16.20 - 9.40
14.01 - 9.56 18.20 - 10.45
17.77 - 8.35 18.20 - 8.35
2021
Net Sales
Gross Profit
$ 46,179
$ 48,557
$ 57,640
$ 66,205 $ 218,581
9,703
8,877
13,962
18,315
50,857
Net (Loss) Income
(3,979)
(4,313)
94
(21,521)
(29,719)
Basic (Loss) Income Per Share
Diluted (Loss) Income Per Share
Dividends Per Share
(0.30)
(0.30)
–
(0.33)
(0.33)
–
0.01
0.01
–
(1.62)
(2.24)
(1.62)
(2.24)
–
–
Stock Price Range (High-Low)
7.76 - 4.66
7.97 - 4.87
10.35 - 7.35
15.02 - 8.79 15.02 - 4.66
Financial Highlights (in thousands)
2022
2021
2020
Net Sales
Net Income (Loss)
Basic Income (Loss) Per Share
Diluted Income (Loss) Per Share
Dividends Per Share
$ 242,913
$ 218,581
$ 246,838
8,095
(29,719)
(39,817)
0.61
0.60
–
(2.24)
(2.24)
–
(3.03)
(3.03)
–
Average Basic Shares Outstanding
13,352,509
13,246,501
13,153,330
Average Diluted Shares Outstanding
13,381,771
13,246,501
13,153,330
2 | TWIN DISC, INC. 2022 ANNUAL REPORT
2 | TWIN DISC, INC. 2022 ANNUAL REPORT
9,118
6,528
2022
2021
2020
2019
(5,461)
(8,312)
11,979
10,699
10,000
8,000
6,000
4,000
2,000
0
-2,000
-4,000
-6,000
-8,000
-10,000
12,000
10,000
8,000
6,000
4,000
4,729
4,464
2,000
0
1.0
0.5
-0.5
-1.0
0
-1.5
-2.0
-2.5
-3.0
-3.5
2022
2021
2020
2019
0.83
0.60
2022
2021
2020
2019
(2.24)
(3.03)
SUCCESSNet Cash Provided (Used) by Operating Activities (in thousands)Diluted (Loss) Income Per ShareCapital Expenditures (in thousands) COMMITTED TO OUR
Shareholders
“This is what sets Twin Disc apart:
our commitment…to our customers,
our investors, our employees and
our community. We will continue
to deliver on that commitment,
strengthening performance,
leading in innovation and
supporting customer success.”
John Batten
President and Chief Executive Officer
This fiscal year Twin Disc enjoyed
sustained sales growth as our markets
continued their recovery. With oil and
gas strong all year in Asia, and activity
increasing in the fourth quarter in North
America, demand rose for pressure
pumping equipment. Our global marine
market also saw higher demand. And with
strong industrial markets, our Lufkin, Texas,
manufacturing facility saw production
accelerate with volume there forecast to
increase another 40% next year.
At the same time, our teams faced
the challenges of global supply chain
disruption and exploding costs. Although
supply chain uncertainties eased as the
year progressed, we continue to evaluate
potential new sources and suppliers,
always looking for the quality Twin Disc
demands. Costs, however, continued to
rise for raw materials, freight and energy.
We proactively managed expenses
and prudently increased selling prices,
protecting our margins and doing the
right thing for our shareholders.
Sales for the fiscal 2022 fourth quarter
were $76.0 million, compared to $66.2
million for the same period last year.
The 14.8% year-over-year increase
was primarily due to improving market
demand, as well as the success of our
growth strategies and initiatives to
improve profitability.
For the fiscal 2022 full year, sales
increased 11.1% to $242.9 million
from $218.6 million in fiscal 2021. As
noted, global supply chain challenges
continued to limit sales growth. Our
six-month backlog at June 30, 2022,
was $101.2 million, compared to $70.3
million at June 30, 2021. We believe
the 44% increase indicates a significant
improvement in trends across our
global markets.
We expect to generate higher levels of
positive operating cash flow during fiscal
2023, which over the near term we’ll use
to pay down debt, strengthen our balance
sheet, and invest in our operations and
growth initiatives. We continue to focus
TWIN DISC, INC. 2022 ANNUAL REPORT | 3
TWIN DISC, INC. 2022 ANNUAL REPORT | 3
CEO LETTER“ COMMITTED TO OUR
Shareholders
on further diversifying our geographic
and end markets, maintaining compelling
levels of profitability and investing in R&D
to drive long-term growth.
Innovation leadership. New products
that we’ve launched in the last three to
five years are getting attention. And our
electric and hybrid propulsion strategy
remains on track. These systems give
our global off-highway markets better
ways to meet emissions standards,
save on fuel and maintenance costs,
and increase efficiency. This is where the
market is going. The opportunities keep
growing for both land-based and marine
applications. We’re careful to choose
projects that fit where we want to go.
A more efficient footprint. In fiscal 2022
we advanced a more asset-light business
model. In our first quarter, we completed
a sale leaseback of the Rolla production
facility for $9.1 million, which we used to
pay down long-term debt. During fiscal
2022 we announced our plan to sell
our corporate headquarters. We expect
this move to save nearly $1 million
a year in expenses. Our aggressive
approach to right-sizing makes Twin
Disc more efficient, cost-effective and
sustainable. We also continue to invest
in modernizing our global facilities,
including our manufacturing plants
in Racine and Lufkin.
Personally, I am filled with mixed
emotions about the headquarters
sale. My office was my father’s and
4 | TWIN DISC, INC. 2022 ANNUAL REPORT
CEO LETTER grandfather’s, and I still use my great-
grandfather’s desk. I hope that plans
for redeveloping the building can help
reinvigorate Uptown Racine. But ultimately,
it’s just a building. Twin Disc is its employees,
customers, shareholders, products, and the
trust that binds us together. Which brings me
to our people.
Outstanding people. Our teams fought
hard this year, battling supply chain issues
and the impact of COVID-19 to serve our
customers. Everyone understood we
couldn’t miss a day of production, even
when much of the staff was out sick or in
quarantine. Our facilities teams took full
precautions to keep employees safe, and
we did everything we could to show our
appreciation for the people who kept high-
quality product flowing out the door.
This is what sets Twin Disc apart:
our commitment…to our customers,
our investors, our employees and our
community. We will continue to deliver
on that commitment, strengthening
performance, leading in innovation and
supporting customer success. Thank
you for your support, and for joining Twin
Disc in finding ever-better ways to put
horsepower to work.
John H. Batten
President and Chief Executive Officer
TWIN DISC, INC. 2022 ANNUAL REPORT | 5
COMMITTED TO OUR
Customers
All over the world, Twin Disc employees live
our values every day—and our Number 1
value is customer focus. Here’s a look at
the commitment demonstrated by our
North American manufacturing facilities,
in Racine, Wisconsin and Lufkin, Texas.
Our Racine plant saw orders and output
increase this fiscal year as markets
rebounded. Says Darryl Babu, Vice
President, Industrial & Transmission Sales,
“Everybody needed new equipment.” Twin
Disc also helped customers protect their
investment, meeting pent-up demand for
aftermarket repairs and overhauls.
Babu says employees showed
perseverance in on-time production and
resourcefulness in managing supply
chain disruption. “They did a fantastic job
weaving their way through a constantly
changing landscape, sourcing essential
components and re-prioritizing production
schedules,” he says.
Electrical components and electronic
controller harnesses with specialized
connectors were in especially short supply.
6 | TWIN DISC, INC. 2022 ANNUAL REPORT
When the team learned that a harness
supplier faced a critical staff shortage due
to COVID-19, Twin Disc employees even
offered to travel to the supplier to help
complete harness assembly.
“That willingness to pitch in, plus the
knowledge, experience and expertise;
is key to our high quality,” Babu says.
“Design, manufacture, assembly,
testing—it all adds up to technology
that differentiates Twin Disc.”
Our Lufkin facility is closer to
customers’ locations, enabling increased
responsiveness and more competitive lead
times. And our make-to-order business
model helps ensure customers get exactly
the product they want and need.
Tim Stacy, business unit manager for
industrial products, says the Lufkin team
jumped into action when supply chain
challenges threatened that service in
Fiscal 2022. “We needed to get parts from
overseas faster,” he says. The team found
alternate shipping options and routes to
cut more than three weeks of lead time.
“That improved on-time-to-pack date
to 90%, even with continuing material
shortages,” Stacy says.
Employees regularly go above and beyond
for customers, Stacy says. “A customer
called us when they had an emergency
equipment need and couldn’t reach a
distributor,” he says. “From their area code,
we realized they were nearby. We had a
new unit ready for pickup in two hours.”
This year Lufkin employees also
demonstrated their commitment to each
other, achieving 365 days with no injuries.
“We cover each other’s backs,” Stacy says.
The Racine and Lufkin plants work closely
to ensure their priorities are aligned.
“The team has been incredibly supportive
as we finish shifting HPTO production to
Lufkin,” Stacy says. “And it’s exciting to
unify our approaches and goals.”
Adds Babu, “This is teamwork as usual at
Twin Disc—and that makes a difference for
our customers.”
VALUES COMMITTED TO
Racine
For more than a century, Twin Disc has
been a vital contributor to our hometown,
Racine, Wisconsin. Generations of
employees have given back to enhance
our community. And we expect that
commitment to continue for generations
to come.
She adds that United Way counts on all
our employees. “Twin Disc volunteers are
great!” she says. “They make up one of
the largest groups for our Day of Caring.
They serve on our committees and
board of directors. They’re a staple of our
volunteer base.”
Our involvement with United Way of
Racine County is a prime example. We’ve
taken part in the organization since its
founding in 1922. Now, as United Way
celebrates its centennial, Twin Disc
President and CEO John Batten is co-
chair of the annual fundraising campaign.
His task: help raise more than $5 million
to improve lives in Racine County.
“John represents multiple generations of
support for United Way of Racine County,”
says Ali Haigh, United Way president and
CEO. “His father, Michael Batten, was a
huge supporter. After Michael’s death in
2015, we named an annual award in his
honor—the Michael Batten Advancing the
Common Good Award.”
Twin Disc’s community support also
includes work with the SME Education
Foundation, the philanthropic arm of
SME, a manufacturing nonprofit. Through
its SME PRIME program, the Foundation
helps inspire, prepare and support the
next generation of manufacturing and
engineering talent. Within the Racine
Unified School District, three schools
were identified to participate in the SME
PRIME program. Twin Disc helps support
the PRIME program at Case High School.
“We’re proud to work with Racine Unified
School District in Case, Horlick and Park
high schools,” says Ronald Scozzari,
educational programs manager for the
foundation. “And local industry support
has been impressive.”
Through PRIME, Twin Disc helps fund
equipment, professional development,
curriculum and marketing for the
Manufacturing Pathway program,
which focuses on industrial
maintenance. Students study topics
including AC/DC electrical power and
pneumatics and hydraulics, as part
of an orientation to mechatronics.
“The curriculum is based on regional
manufacturers’ needs,” Scozzari says.
“Students explore their interests and
strengthen their skills, preparing for
community-relevant employment.”
Like our support for United Way, and
for countless other community groups,
our support of the PRIME program with
Racine’s Case High School looks toward
the future—a future where Twin Disc as
well as our neighbors throughout Greater
Racine can prosper.
TWIN DISC, INC. 2022 ANNUAL REPORT | 7
COMMUNITY COMMITTED TO
Innovation
Twin Disc continues to advance hybrid electric propulsion, uniting mechanical and electrical components to reduce fuel use, cut emissions
and increase reliability—and now the market is knocking at our door. We choose projects that make sense for our customers, economically
and ecologically, and that present us with solid business opportunities. Here’s a look at innovative land-based and marine applications.
Driving next-generation hybrid log
stackers. Log stackers must run all day,
every day to maintain pulp mill production—
but continuous diesel engine use drives up
carbon dioxide emissions and fuel costs.
EdiLog switched to a Twin Disc hybrid drive
system. Energy is stored in ultracapacitors
that deliver better performance than
batteries and equal a diesel engine’s service
life. Reduced noise and vibration increases
operator comfort. And the electric motor
is simpler than a conventional gearbox,
minimizing maintenance while maximizing
reliability. The result is a log stacker
that’s better for people in and around the
machine, and better for the planet.
Powering a pleasure boat paradigm shift.
A new hybrid upgrade enables Hinckley’s
iconic Picnic Boat to run in near silence.
The yacht maker partnered with Twin
Disc to create its SilentJet™ technology,
with a groundbreaking automatic mode
that seamlessly manages diesel/electric
operation. Users glide silently away from
the dock and can travel farther than with an
electric-only platform. When faster speeds
are desired or the battery needs charging,
the diesel engine comes on automatically,
replenishing the battery in just 30-45
minutes. Electrical loads are supported by
the battery at anchor, so there’s no need
for a noisy generator. Hinckley calls it “the
quietest ride on the water.”
Updating the world’s first hybrid container
barge. Veth Propulsion by Twin Disc
partnered with Carpe Diem Inland Shipping
a decade ago on the Semper Fi to save
fuel and reduce emissions. Now it was
time to replace the vessel’s Scania CCNR-2
engines. We refit the Semper Fi with Veth’s
first installation of the new Scania DC16 EU
Stage V engines and a new after-treatment
system. The low-nitrogen oxides (Nox)
EU Stage V engine meets strict emission
standards and reduces fuel consumption.
The engine range also offers impressive
torque and response, for more agile
performance. And the Semper Fi maintains
its Green Award gold-level certification.
8 | TWIN DISC, INC. 2022 ANNUAL REPORT
GROWTH LAND-BASED - PARALLEL HYBRID: DIESEL + SINGLE
ELECTRIC MOTOR WITH ENERGY STORAGE
MARINE - PARALLEL HYBRID: DIESEL + SINGLE
ELECTRIC MOTOR WITH ENERGY STORAGE
Profitable. Sustainable. Powerful. We design
electric and hybrid propulsion systems for marine
and land-based applications in both serial and
parallel configurations. Here are two schematics
showing parallel hybrid propulsion. For a full list of
options, visit https://twindisc.com/goelectric.
Land-Based / Off-Highway / Mobile Equipment
• Parallel hybrid using diesel and electric power
• In high-demand phases, electric power can
boost diesel power
• During low-power operation, the e-motor can
use excess diesel power to generate electricity
• Power regeneration through braking (inertia
or vehicle) or lowering loads is possible with a
clutch between diesel engine and RePTO drive
• Hybrid controller manages power distribution,
interfacing with the vehicle/machine controller
and high voltage equipment
• RePTO drive permits power generation through
PTO/PTI in various operating states
Marine
• Parallel hybrid using diesel and electric power
• During low-power operation, the e-motor can
use excess diesel power to generate electricity
• In high-demand phases, electric power can
boost diesel power
• Marine transmission has standard footprint
and selection criteria, for worldwide support
• MasterClutch™ permits power generation
through PTO/PTI in forward, neutral
and reverse
TWIN DISC, INC. 2022 ANNUAL REPORT | 9
TWIN DISC
Corporate Data
Annual Meeting
Twin Disc Corporate Offices
2:00 P.M., October 27, 2022
Shares Traded
NASDAQ: Symbol TWIN
Annual Report on Securities and Exchange
Commission Form 10-K Single copies of the
Company’s 2022 Annual Report on Securities
and Exchange Commission Form 10-K,
including exhibits, will be provided without
charge to shareholders after September
Partially Owned Subsidiaries
Twin Disc Nico Co. Ltd.
Manufacturing Facilities
Racine, Wisconsin
Sturtevant, Wisconsin
Lufkin, Texas
Nivelles, Belgium
Decima, Italy
Novazzano, Switzerland
Limite sull’Arno, Italy
Papendrecht, Netherlands
9, 2022, upon written request directed to
Sales Offices
Secretary, Twin Disc, Incorporated, 1328
Racine Street, Racine, Wisconsin 53403.
Transfer Agent and Registrar
Computershare
462 S. 4th Street, Suite 100
Louisville, KY 40202
Toll-free: 877-498-8861
www.computershare.com/investor
Independent Accountants
RSM US LLP, Milwaukee, WI
Corporate Offices
Twin Disc, Incorporated
Racine, WI 53403
Telephone: (262) 638-4000
Wholly Owned Subsidiaries
Twin Disc International S.P.R.L.,
Nivelles, Belgium
Twin Disc Srl, Decima, Italy
Rolla Sp Propellers SARL,
Novazzano, Switzerland
Twin Disc (Pacific) Pty. Ltd.,
Brisbane, Queensland, Australia
Twin Disc (Far East) Pte. Ltd., Singapore
Twin Disc Power Transmission Private, Ltd.,
Chennai, India
Twin Disc Power Transmission (Shanghai)
Co. Ltd., Shanghai, China
Veth Propulsion B.V.,
Papendrecht, Netherlands
Twin Disc European Distribution S.P.R.L.,
Nivelles, Belgium
10 | TWIN DISC, INC. 2022 ANNUAL REPORT
Domestic
Racine, Wisconsin
Lufkin, Texas
Foreign
Nivelles, Belgium
Brisbane, Australia
Perth, Australia
Gold Coast, Australia
Singapore
Decima, Italy
Limite sull’Arno, Italy
Novazzano, Switzerland
Chennai, India
Coimbatore, India
Saitama, Japan
Shanghai, China
Guangzhou, China
Papendrecht, Netherlands
Manufacturing Licenses
Hitachi-Nico Transmission Co., Ltd.
Tokyo, Japan
Twin Disc Board of Directors
David B. Rayburn† Chairman
Retired President & Chief Executive Officer,
Modine Manufacturing Company
Racine, WI
A manufacturer of heat exchange equipment
John H. Batten
President and Chief Executive Officer,
Twin Disc, Inc.
Racine, WI
Michael Doar
Executive Chairman of the Board and
retired Chief Executive Officer
Hurco Companies, Inc., Indianapolis, IN
A global manufacturer of machine tools
Janet P. Giesselman
Retired President and General Manager
Dow Oil & Gas Company, Midland, MI
A business unit of Dow Chemical Company
David W. Johnson
Chief Financial Officer, Johnson Outdoors,
Inc., Racine, WI
A global provider of outdoor recreation products
Juliann Larimer
Chair of the Board and retired President and
Chief Executive Officer, Peak Technologies,
Milwaukee, WI
A provider of end-to-end mobility and
digital supply chain solutions for
performance-driven organizations
Kevin M. Olsen
President and Chief Executive Officer Dorman
Products, Colmar, PA
A supplier of replacement parts for global
automotive aftermarket industry
Michael C. Smiley‡
Former Chief Financial Officer, Zebra
Technologies Corporation, Lincolnshire, IL
A global provider of asset management solutions
Harold M. Stratton II†
Chairman of the Board and retired Chief
Executive Officer, Strattec Security
Corporation, Milwaukee, WI
A manufacturer of security and access control
products for the global automotive industry
Twin Disc Officers
John H. Batten
President and Chief Executive Officer
Jeffrey S. Knutson
Vice President – Finance, Chief Financial
Officer, Treasurer and Secretary
† Retiring from the Board of Directors effective October 27, 2022
‡ Chairman effective October 27, 2022
TWIN DISC UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
☑☑ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2022
Or
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-7635
TWIN DISC, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Wisconsin
(State or Other Jurisdiction of Incorporation or Organization)
39-0667110
(I.R.S. Employer Identification Number)
1328 Racine Street, Racine, Wisconsin
(Address of Principal Executive Office)
53403
(Zip Code)
Registrant's Telephone Number, including area code:
(262) 638-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock (No Par Value)
Trading Symbol(s)
TWIN
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files)
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Accelerated Filer ☑
Non-accelerated Filer ☐ Smaller reporting company ☑ Emerging growth company ☐
TWIN DISC, INC. 2022 ANNUAL REPORT | 11
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report ☑.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☑
At December 31, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market
value of the common stock held by non-affiliates of the registrant was $116,665,389. Determination of stock ownership by affiliates
was made solely for the purpose of responding to this requirement and registrant is not bound by this determination for any other
purpose.
At August 24, 2022, the registrant had 13,784,266 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held October 27, 2022, which will be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III.
12 | TWIN DISC, INC. 2022 ANNUAL REPORT
TABLE OF CONTENTS
TWIN DISC, INC. - FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2022
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosure.
Information About Our Executive Officers.
Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Reserved.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosure About Market Risk.
Financial Statements and Supplementary Data.
Change In and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
14
15
19
19
19
19
19
20
20
20
29
29
29
29
30
30
30
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
31
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 31
31
Certain Relationships and Related Transactions, Director Independence.
31
Principal Accounting Fees and Services.
Exhibits, Financial Statement Schedules.
Exhibit Index.
Signatures.
31
72
76
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
TWIN DISC, INC. 2022 ANNUAL REPORT | 13
PART I
Item 1. Business
Twin Disc, Incorporated (“Twin Disc”, or the “Company”) was incorporated under the laws of the state of Wisconsin in 1918.
Twin Disc designs, manufactures and sells marine and heavy duty off-highway power transmission equipment. The Company has
manufacturing locations in the United States, Belgium, Italy, Switzerland and the Netherlands. In addition to these countries, it
has distribution locations in Singapore, China, Australia and Japan. Products offered include: marine transmissions, azimuth drives,
surface drives, propellers and boat management systems as well as power-shift transmissions, hydraulic torque converters, power
take-offs, industrial clutches and controls systems. The Company sells its products to customers primarily in the pleasure craft,
commercial and military marine markets, as well as in the energy and natural resources, government and industrial markets. The
Company's worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor
network. The products described above have accounted for more than 90% of revenues in each of the last three fiscal years.
Most of the Company's products are machined from cast iron, forgings, cast aluminum and bar steel which generally are available
from multiple sources and which are believed to be in adequate supply.
The Company has applied for patents in both the United States and certain foreign countries on inventions made in the course of
its development work for which commercial applications are considered probable. The Company regards its patents collectively
as important but does not consider its business dependent upon any one of such patents.
The business is not considered to be seasonal except to the extent that employee vacations and plant shutdowns, particularly in
Europe, occur mainly in the months of July and August, curtailing production during that period.
The Company's products receive direct widespread competition, including from divisions of other larger independent manufacturers.
The Company also competes for business with parts manufacturing divisions of some of its major customers. The primary competitive
factors for the Company’s products are design, technology, performance, price, service and availability. The Company’s top ten
customers accounted for approximately 50% and 48% of the Company's consolidated net sales during the years ended June 30, 2022
and June 30, 2021, respectively. Included in the Company’s top ten customers, there was one customer, an authorized distributor of
the Company, that accounted for 10% of consolidated net sales in fiscal year 2022.
Unfilled open orders for the next six months of $101.2 million at June 30, 2022 compares to $70.3 million at June 30, 2021. Since
orders are subject to cancellation and rescheduling by the customer, the six-month order backlog is considered more representative of
operating conditions than total backlog. However, as procurement and manufacturing "lead times" change, the backlog will increase
or decrease, and thus it does not necessarily provide a valid indicator of the shipping rate. Cancellations are generally the result of
rescheduling activity and do not represent a material change in backlog.
Management recognizes that there are attendant risks that foreign governments may place restrictions on dividend payments and
other movements of money, but these risks are considered low due to the relatively low investment within individual countries that
have currency movement restrictions. No material portion of the Company’s business is subject to renegotiation of profits or
termination of contracts at the election of the U.S. government.
Engineering and development costs include research and development expenses for new product development and major improvements
to existing products, and other costs for ongoing efforts to refine existing products. Research and development costs charged to operations
totaled $1.6 million and $1.9 million in fiscal 2022 and 2021, respectively. Total engineering and development costs were $8.8 million and
$8.5 million in fiscal 2022 and 2021, respectively.
Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating
to the protection of the environment, is not anticipated to have a material effect on capital expenditures, earnings or the competitive
position of the Company.
The number of persons employed by the Company at June 30, 2022 and June 30, 2021 was 761 and 743, respectively. The Company
believes that its continued success is a direct result of its talent. As such, the Company strives to be an employer of choice in every
community in which it operates. It does this by fostering a fair, respectful, inclusive and safe work environment and culture shaped
with its core values of customer focus, integrity, accountability, teamwork, and innovation.
A summary of financial data by segment, geographic area, and classes of products that accounted for more than 10% of consolidated
sales revenues for the years ended June 30, 2022 and 2021 appears in Note J, Business Segments and Foreign Operations, to the
consolidated financial statements.
14 | TWIN DISC, INC. 2022 ANNUAL REPORT
The Company’s internet website address is www.twindisc.com. The Company makes available free of charge (other than an
investor’s own internet access charges) through its website the Company’s Annual Report on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the United States Securities and Exchange Commission.
The SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information
regarding issuers, such as the Company, that file electronically with the SEC. In addition, the Company makes available, through its
website, important corporate governance materials. This information is also available from the Company upon request. The Company
is not including the information contained on or available through its website as a part of, or incorporating such information by
reference to, this Annual Report on Form 10-K.
Item 1A. Risk Factors
The Company’s business involves various risk factors. The following information about these risks should be considered carefully
together with other information contained in this report. The risks described below are not the only risks the Company faces.
Additional risks not currently known, deemed immaterial or that could apply to any issuer may also result in adverse results for
the Company’s business.
As a global company, the Company is subject to currency fluctuations and a significant movement between the U.S. dollar and
the euro exchange rate, in particular, could have an adverse effect on its profitability. Although the Company’s financial results
are reported in U.S. dollars, a significant portion of its sales and operating costs are realized in euros and other foreign currencies.
The Company’s profitability is affected by movements of the U.S. dollar against the euro and the other currencies in which it
generates revenues and incurs expenses. Significant long-term fluctuations in relative currency values, in particular a significant
change in the exchange rate between the U.S. dollar and the euro, could have an adverse effect on the Company’s profitability and
financial condition.
The Company continues to be adversely affected by the economic disruptions caused by the global coronavirus pandemic. In
March 2020, the World Health Organization (“WHO”) declared that a new strain of coronavirus that originated in Wuhan, China,
and has rapidly spread around the world (“COVID-19”) is a pandemic that poses significant risk to the international community. This
outbreak contributed to shelter-in-place policies, unexpected factory closures, supply chain disruptions, and market volatility causing
substantial declines in market capitalization, and occurring in the midst of an already challenging economic environment in some of
our markets, most notably the oil and gas market. As a result of the outbreak, starting in March 2020 and intermittently through June
30, 2022, the Company suspended or reduced its operations, in whole or in part, in several of its locations. The Company’s businesses
operate in market segments impacted by COVID-19. Operating during a global pandemic has exposed the Company to a number of
material risks, including diminished demand for our products and our customers’ products, suspensions in the operations of our and
our suppliers’ manufacturing facilities, maintenance of appropriate labor levels, our ability to ship products to our customers,
interruptions in our supply chains and distribution systems, access to capital and potential increases to the cost of capital, collection
of trade receivables in accordance with their terms and potential further impairment of long-lived assets; all of which, in the aggregate,
have had an adverse effect on the Company’s business, financial condition, results of operations and cash flows. The severity and
duration of the pandemic remains unknown. Management continues to actively monitor the global situation and its effect on financial
condition, liquidity, operations, suppliers, industry and workforce. The Company remains unable to estimate the full extent or nature
of the impact of COVID-19, at this time.
Certain of the Company’s products are directly or indirectly used in oil exploration and oil drilling and are thus dependent upon
the strength of those markets and oil prices. In recent years, the Company has seen significant variations in the sales of its products
that are used in oil and energy related markets. The variability in these markets has been defined by the change in oil prices and the
global demand for oil. Significant decreases in oil prices and reduced demand for oil and capital investment in the oil and energy
markets adversely affect the sales of these products and the Company’s profitability. The cyclical nature of the global oil and gas
market presents the ongoing possibility of a severe cutback in demand, which would create a significant adverse effect on the sales
of these products and ultimately on the Company’s profitability.
Many of the Company’s product markets are cyclical in nature or are otherwise sensitive to volatile or unpredictable factors.
A downturn or weakness in overall economic activity or fluctuations in those other factors could have a material adverse effect
on the Company’s overall financial performance. Historically, sales of many of the products that the Company manufactures and
sells have been subject to cyclical variations caused by changes in general economic conditions and other factors. In particular, the
Company sells its products to customers primarily in the pleasure craft, commercial and military marine markets, as well as in the
energy and natural resources, government and industrial markets. The demand for the products may be impacted by the strength
of the economy generally, governmental spending and appropriations, including security and defense outlays, fuel prices, interest
rates, as well as many other factors. Adverse economic and other conditions may cause the Company's customers to forego or
otherwise postpone purchases in favor of repairing existing equipment.
TWIN DISC, INC. 2022 ANNUAL REPORT | 15
In the event of an increase in the global demand for steel, the Company could be adversely affected if it experiences shortages
of raw castings and forgings used in the manufacturing of its products. With the continued development of certain developing
economies, in particular China and India, the global demand for steel has risen significantly in recent years. The Company selects
its suppliers based on a number of criteria, and the Company expects that they will be able to support its needs. However, there can
be no assurance that a significant increase in demand, capacity constraints or other issues experienced by the Company’s suppliers
will not result in shortages or delays in their supply of raw materials to the Company. If the Company were to experience a significant
or prolonged shortage of critical components from any of its suppliers, particularly those who are sole sources, and could not procure
the components from other sources, the Company would be unable to meet its production schedules for some of its key products and
would miss product delivery dates which would adversely affect its sales, profitability and relationships with its customers.
The Company continues to face the prospect of increasing commodity costs, including steel, other raw materials and energy
that could have an adverse effect on future profitability. In addition, developments in tariff regulations in the U.S. and foreign
jurisdictions have resulted in uncertainty regarding international trade policies and future commodity prices, contributing to an
increased risk of higher commodity costs that could have an adverse impact on the Company’s profitability, financial condition
and results of operations. The Company’s profitability is dependent, in part, on commodity costs. To date, the Company has been
successful with offsetting the effects of increased commodity costs through cost reduction programs and pricing actions. However,
if material prices were to continue to increase at a rate that could not be recouped through product pricing or cost reductions, it could
potentially have an adverse effect on the Company’s future profitability.
The Company anticipates that additional tariffs or trade restrictions resulting from “trade wars” could result in an increase in its
cost of sales and there can be no assurance that the Company would be able to pass any of the increases in raw material costs directly
resulting from additional tariffs to its customers. Given that it procures many of the raw materials that it uses to create its products
directly or indirectly from outside of the United States, the imposition of tariffs and other potential changes in U.S. trade policy
could increase the cost or limit the availability of such raw materials, which could hurt its competitive position and adversely impact
its business, financial condition and results of operations. In addition, the Company sells a significant proportion of its products to
customers outside of the United States. Retaliatory actions by other countries could result in increases in the price of its products,
which could limit demand for such products, hurt its global competitive position and have a material adverse effect on the Company’s
business, financial condition and results of operations.
If the Company were to lose business with any key customers, the Company’s business would be adversely affected. Although there
was only one customer that accounted for 10% or more of consolidated net sales in fiscal 2022, deterioration of a business relationship
with one or more of the Company’s significant customers would cause its sales and profitability to be adversely affected. Although the
Company’s accounts receivable are dispersed among a large customer base, a significant change in the liquidity or financial position
of any one of its largest customers could have a material adverse impact on the collectability of its accounts receivable and future
operating results.
The termination of relationships with the Company’s suppliers, or the inability of such suppliers to perform, could disrupt its
business and have an adverse effect on its ability to manufacture and deliver products. The Company relies on raw materials,
component parts, and services supplied by outside third parties. If a supplier of significant raw materials, component parts or services
were to terminate its relationship with the Company, or otherwise cease supplying raw materials, component parts, or services
consistent with past practice, the Company’s ability to meet its obligations to its customers may be affected. Such a disruption with
respect to numerous products, or with respect to a few significant products, could have an adverse effect on the Company’s
profitability and financial condition.
A significant design, manufacturing or supplier quality issue could result in recalls or other actions by the Company that could
adversely affect profitability. As a manufacturer of highly engineered products, the performance, reliability and productivity of the
Company’s products are some of its competitive advantages. While the Company prides itself on implementing procedures to ensure
the quality and performance of its products and suppliers, a significant quality or product issue, whether due to design, performance,
manufacturing or supplier quality issue, could lead to warranty actions, scrapping of raw materials, finished goods or returned
products, the deterioration in a customer relationship, or other action that could adversely affect warranty and quality costs, future
sales and profitability.
The Company faces risks associated with its international sales and operations that could adversely affect its business, results of
operations or financial condition. Sales to customers outside the United States approximated 67% of the Company’s consolidated net
sales for fiscal 2022. The Company has international manufacturing operations in Belgium, Italy, the Netherlands and Switzerland. In
addition, the Company has international distribution operations in Singapore, China, Australia, Japan, Italy, Belgium, and India.
16 | TWIN DISC, INC. 2022 ANNUAL REPORT
The Company’s international sales and operations are subject to a number of risks, including:
currency exchange rate fluctuations
export and import duties, changes to import and export regulations, and restrictions on the transfer of funds, including dividends
problems with the transportation or delivery of its products
issues arising from cultural or language differences
potential social and labor unrest as well as public health and political crises
longer payment cycles and greater difficulty in collecting accounts receivables
compliance with trade and other laws in a variety of jurisdictions
changes in tax law
compliance with the Foreign Corrupt Practices Act
⇒
⇒
⇒
⇒
⇒
⇒
⇒
⇒
⇒
These factors could adversely affect the Company’s business, results of operations or financial condition.
A material disruption at the Company’s manufacturing facility in Racine, Wisconsin could adversely affect its ability to generate
sales and meet customer demand. The majority of the Company’s manufacturing, based on fiscal 2022 sales, came from its facility in
Racine, Wisconsin. If operations at this facility were to be disrupted as a result of significant equipment failures, natural disasters,
power outages, fires, explosions, adverse weather conditions, labor force disruptions or other reasons, the Company’s business and
results of operations could be adversely affected. Interruptions in production would increase costs and reduce sales. Any interruption
in production capability could require the Company to make substantial capital expenditures to remedy the situation, which could
negatively affect its profitability and financial condition. The Company maintains property damage insurance which it believes is
adequate to reconstruct its facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any
production interruption or shutdown caused by an insured loss. However, any recovery under this insurance policy may not offset the
lost sales or increased costs that may be experienced during the disruption of operations. Lost sales may not be recoverable under the
policy and long-term business disruptions could result in a loss of customers. If this were to occur, future sales levels and costs of
doing business, and therefore profitability, could be adversely affected.
The ability to service the requirements of debt depends on the ability to generate cash and/or refinance its indebtedness as it
becomes due, and depends on many factors, some of which are beyond the Company’s control. The Company entered into a credit
agreement on June 29, 2018. The Company’s ability to make payments on its indebtedness, including those under the credit
agreement, and to fund planned capital expenditures, research and development efforts and other corporate expenses depends on the
Company’s future operating performance and on economic, financial, competitive, legislative, regulatory and other factors. Many of
these factors are beyond its control. The Company cannot be certain that its business will generate sufficient cash flow from
operations, or operating improvements will be realized or that future borrowings will be available to it in an amount sufficient to
enable it to repay its indebtedness or to fund its other operating requirements. Significant delays in its planned capital expenditures
may materially and adversely affect the Company’s future revenue prospects.
Any failure to meet debt obligations and financial covenants, and maintain adequate asset-based borrowing capacity could
adversely affect the Company’s business and financial condition. The Company’s three-year revolving credit facility expiring June
2025 is secured by certain personal property assets such as accounts receivable, inventory, and machinery and equipment. Under this
agreement, the Company’s borrowing capacity is based on the eligible balances of these assets and it is required to maintain sufficient
asset levels at all times to secure its outstanding borrowings. The Company is also required to comply with a total funded debt to
EBITDA ratio, a minimum fixed charge coverage ratio, and a minimum tangible net worth. If the Company does not meet these
financial covenants as specified under the agreement, the Company may require forbearance or relief from its financial covenant
violations from its senior lender or be required to arrange alternative financing. Failure to obtain relief from financial covenant
violations or to obtain alternative financing, if necessary, would have a material adverse impact on the Company.
As of June 30, 2022, the Company had a borrowing capacity that exceeded its outstanding loan balance (see Note G, Debt, of the
notes to the consolidated financial statements). Based on its annual financial plan, the Company believes that it will generate sufficient
cash flow levels throughout fiscal 2023 to meet the required financial covenants under the agreements. However, as with all forward-
looking information, there can be no assurance that the Company will achieve the planned results in future periods.
While the Company has obtained forgiveness of its Paycheck Protection Program Loan (“PPP loan”), it remains subject to audit
under the program’s rules and any resulting adverse audit findings of non-compliance can result in the repayment of a portion or
all of the PPP loan. On April 17, 2020 the Company received proceeds of $8.2 million from a loan under the PPP of the Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”), which it has used to retain employees, maintain payroll and make lease and
utility payments. The Company accounted for the full proceeds as a loan. It obtained formal forgiveness of the full amount of the
loan on June 16, 2021, and accounted for the forgiveness as income from extinguishment of loan in its statement of operations for
the year ended June 30, 2021.
TWIN DISC, INC. 2022 ANNUAL REPORT | 17
While the loan has been formally forgiven, under the terms of the PPP Loan, the Company remains subject to an audit by the Small
Business Administration (“SBA”) for a period of six years after forgiveness. The audit is intended to confirm the Company’s
eligibility for the PPP loan and the appropriateness of the PPP loan forgiveness. The Company is aware of the requirements of the
PPP Loan and believes it is within the eligibility threshold and has used the loan proceeds in accordance with PPP loan forgiveness
requirements. It has retained all necessary documentation in support of its eligibility, including gross receipts calculations, supporting
payroll expenses and related information. However, no assurance is provided that the Company will satisfy fully all the requirements
of an audit. If despite the Company’s actions and certification that it satisfied all eligibility requirements for the PPP loan, it is later
determined that it violated applicable laws or was otherwise ineligible to receive the PPP loan, it may be required to repay the PPP
loan in its entirety in a lump sum or be subject to additional penalties, which could result in adverse publicity and damage to the
Company’s reputation. If these events were to transpire, they could have a material adverse effect on the Company’s business, results
of operations and financial condition.
The Company carries a significant amount of intangible assets, but it may never fully realize the full value of these assets.The Company
recorded significant non-cash goodwill impairment charges in fiscal 2020, as well as in prior fiscal years. As part of the acquisition of
Veth Propulsion in July 2018, the Company acquired goodwill and intangible assets in the form of customer relationships, technology and
knowhow and tradenames. In fiscal 2020, due to its assessment of the adverse economic consequences of the COVID-19 outbreak and the
negative trends in its markets as explained in Note D, Intangible Assets, the Company recorded significant impairment charges, writing off
all the goodwill in its books, as well as writing down some intangibles and other assets. In fiscal 2017 and 2016, when the Company’s
markets were significantly adversely affected by the global oil and gas decline, it recorded significant impairment charges related to two
of its prior acquisitions. Any deterioration in the industries or businesses of the Company may trigger future non-cash impairment charges,
which may have a material adverse effect to the Company’s financial results.
The Company may experience negative or unforeseen tax consequences. The Company reviews the probability of the realization of
its net deferred tax assets each period based on forecasts of taxable income in both the U.S. and foreign jurisdictions. This review uses
historical results, projected future operating results based upon approved business plans, eligible carryforward periods, tax planning
opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. or foreign
jurisdictions may require the creation of a valuation allowance to reduce the Company’s net deferred tax assets. Such changes could
result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on the
Company’s results of operations and financial condition. In fiscal 2021, the Company recorded a 100% allowance on its domestic
deferred tax assets, totaling $24.4 million. In fiscal 2022, the allowance totaled $23.1 million.
Taxing authority challenges and changes to tax laws may lead to tax payments exceeding current reserves. The Company is subject
to ongoing tax examinations in various jurisdictions. As a result, the Company may record incremental tax expense based on expected
outcomes of such matters. In addition, the Company may adjust previously reported tax reserves based on expected results of these
examinations. Such adjustments could result in an increase or decrease to the Company’s effective tax rate.
The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in December 2017. The Tax Act made numerous changes to U.S.
federal corporate tax law that the Company expects will impact its effective tax rate in future periods. The changes included in the Tax
Act are broad and complex. The final impact of the Tax Act may differ from the Company’s current estimates, possibly materially,
due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of
the Tax Act, any changes in accounting standards for U.S. federal income taxes or related interpretations in response to the Tax Act or
any updates or changes to estimates the Company utilized to calculate the impact. Future changes in tax law in the United States or the
various jurisdictions in which the Company operates and income tax holidays could have a material impact on the Company’s
effective tax rate, foreign rate differential, future income tax expense and cash flows.
Security breaches and other disruptions could compromise the Company’s information system and expose the Company to
liabilities, which would cause its business and reputation to suffer. In the ordinary course of its business, the Company collects and
stores sensitive data, including its proprietary business information and that of its customers, suppliers and business partners, as well
as personally identifiable information of its customers and employees, in its internal and external data centers, cloud services and on
its networks. The secure processing, maintenance and transmission of this information is critical to the Company’s operations and
business strategy. Despite the Company’s security measures, its information technology and infrastructure, and that of its partners,
may be vulnerable to malicious attacks or breaches due to employee error, malfeasance or other disruptions, including as a result of
rollouts of new systems. Any such breach or operational failure would compromise the Company’s networks and/or that of its partners
and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information
could result in legal claims or proceedings and/or regulatory fines or penalties, including, among others, under the European Union’s General
Data Privacy Regulation, disrupt the Company’s operations, damage its reputation and/or cause a loss of confidence in the Company’s
products and services, which could adversely affect its business, financial condition and results of operations.
18 | TWIN DISC, INC. 2022 ANNUAL REPORT
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Manufacturing Segment
The Company owns two manufacturing, assembly and office facilities in Racine, Wisconsin, U.S.A., one in Nivelles, Belgium, and
one in Decima, Italy. The aggregate floor space of these four plants approximates 625,000 square feet. One of the Racine facilities
also serves as the Company's corporate headquarters. The Company leases additional manufacturing, assembly and office facilities in,
Sturtevant, Wisconsin, Lufkin, Texas, Limite sull’Arno, Italy, Papendrecht, Netherlands, Novazzano, Switzerland, and Decima, Italy.
Distribution Segment
The Company also has operations in the following locations, all of which are leased and are used for sales offices, warehousing and
light assembly or product service:
Brisbane, Queensland, Australia
Perth, Western Australia, Australia
Gold Coast, Queensland, Australia
Singapore
Shanghai, China
Guangzhou, China
Chennai, India
Coimbatore, India
Saitama City, Japan
The Company believes its properties are well maintained and adequate for its present and anticipated needs.
Item 3. Legal Proceedings
Twin Disc is a defendant in certain product liability or related claims of which the ultimate outcome and liability to the Company, if
any, are not presently determinable. Management believes that the final disposition of such litigation will not have a material impact
on the Company’s results of operations, financial position or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
Information About Our Executive Officers
Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this Report in
lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 27, 2022.
Name
John H. Batten
Jeffrey S. Knutson
Age
57
57
Position
President and Chief Executive Officer
Vice President – Finance, Chief Financial Officer, Treasurer and Secretary
Officers are elected annually by the Board of Directors at the Board meeting held in conjunction with each Annual Meeting of the
Shareholders. Each officer holds office until a successor is duly elected, or until he/she resigns or is removed from office.
John H. Batten, President and Chief Executive Officer. Effective October 2021, Mr. Batten was renamed President and Chief
Executive Officer. Prior to that, Mr. Batten served as Chief Executive Officer since May 2019, President and Chief Executive Officer
since July 2013, President and Chief Operations Officer since July 2008, Executive Vice President since October 2004, Vice President
and General Manager – Marine Products since October 2001 and Commercial Manager – Marine since 1998. Mr. Batten joined Twin
Disc in 1996 as an Application Engineer.
Jeffrey S. Knutson, Vice President – Finance, Chief Financial Officer, Treasurer and Secretary. Mr. Knutson was named Chief
Financial Officer and Treasurer in June 2015. Mr. Knutson was named Vice President – Finance, Interim Chief Financial Officer and
Interim Treasurer in February 2015. Mr. Knutson was appointed Corporate Secretary in June 2013, and was Corporate Controller from
his appointment in October 2005 until August 2015. Mr. Knutson joined the Company in February 2005 as Controller of North
American Operations. Prior to joining Twin Disc, Mr. Knutson held Operational Controller positions with Tower Automotive (since
August 2002) and Rexnord Corporation (since November 1998).
TWIN DISC, INC. 2022 ANNUAL REPORT | 19
PART II
Item 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock is traded on the NASDAQ Global Select Market under the symbol TWIN.
Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended
June 30, 2022
Fiscal Year Ended
June 30, 2021
High
Low
High
Low
$
16.20 $
14.01
18.20
17.77
9.40 $
9.56
10.45
8.35
7.76 $
7.97
10.35
15.02
4.66
4.87
7.35
8.79
There were no dividend payments made in the fiscal years ended June 30, 2022 and 2021.
For information regarding the Company’s equity-based compensation plans, see the discussion under Item 12 of this report. As of
August 8, 2022, shareholders of record numbered 339.
Issuer Purchases of Equity Securities
Period
March 25, 2022 – April 29, 2022
April 30, 2022 – May 27, 2022
May 28, 2022 - June 30, 2022
Total
(a) Total
Number
of Shares
Purchased
(b) Average
Price Paid
per Share
0
0
0
0
NA
NA
NA
NA
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
0
0
0
0
(d) Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs
315,000
315,000
315,000
315,000
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. The Company did not make any
purchases during fiscal 2021 and 2022. As of June 30, 2022, 315,000 shares remain authorized for purchase.
Item 6. Reserved
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Smaller Reporting Company Status
Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller
reporting company based on its public float as of the last business day of the second quarter of fiscal 2022. Accordingly, it has scaled
some of its disclosures of financial and non-financial information in this annual report. The Company will continue to determine
whether to provide additional scaled disclosures of financial or non-financial information in future quarterly reports, annual reports
and/or proxy statements if it remains a smaller reporting company under SEC rules.
Note on Forward-Looking Statements
Statements in this report (including but not limited to certain statements in Items 1, 3 and 7) and in other Company communications
that are not historical facts are forward-looking statements, which are based on management’s current expectations. These statements
involve risks and uncertainties that could cause actual results to differ materially from what appears here.
Forward-looking statements include the Company’s description of plans and objectives for future operations and assumptions behind
those plans. The words “anticipates,” “believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions, usually
identify forward-looking statements. In addition, goals established by the Company should not be viewed as guarantees or promises
of future performance. There can be no assurance the Company will be successful in achieving its goals.
20 | TWIN DISC, INC. 2022 ANNUAL REPORT
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, could cause actual results to be materially different from what
is presented in any forward-looking statements.
Fiscal 2022 Compared to Fiscal 2021
Net Sales
Net sales for fiscal 2022 increased 11.1%, or $24.3 million, to $242.9 million from $218.6 million in fiscal 2021. The Company
experienced a broad-based recovery in demand across most of the markets served, as the impact of the COVID-19 crisis on the
Company’s global markets subsided. While market demand was strong through the year, supply chain disruption limited the
Company’s ability to deliver product through the first three quarters of fiscal 2022. The Company was able to overcome many
supply chain challenges in the fourth fiscal quarter of 2022, resulting in revenue of $76.0 million, an increase of $9.8 million or
14.8% compared to the prior year fourth fiscal quarter. Currency translation had an unfavorable impact on fiscal 2022 sales compared
to the prior year totaling $8.5 million primarily due to the weakening of the euro and Australian dollar against the U.S. dollar.
Sales at our manufacturing segment increased 13.4%, or $25.8 million, versus the same period last year. The largest improvement was
seen at the Company’s North American manufacturing operations, which experienced a 30.7% increase in sales compared to fiscal
2021. The primary driver for this increase was a broad recovery in demand following the negative global economic impact of the
COVID-19 pandemic. In particular, this operation saw a marked improvement in demand for its oil and gas related products, both new
units and aftermarket volume. The Company’s Veth Propulsion operation in the Netherlands experienced a 4.6% decrease in sales in
fiscal 2022, primarily the result of an unfavorable currency translation impact. In constant currency, this entity experienced a slight
increase in sales (1.3%) as recovering market demand was hampered somewhat by supply chain challenges. The Company’s Italian
manufacturing operations reported an 8.2% increase in sales from fiscal 2021, despite an unfavorable currency translation impact,
thanks to a recovering European industrial market following the negative impact of the COVID-19 pandemic. The Company’s Belgian
manufacturing operation saw an 11.3% decrease in sales in fiscal 2022 on an unfavorable foreign exchange impact and supply chain
challenges limiting production. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global
mega yacht and patrol boat markets, experienced a 6.5% increase in sales, primarily due to a recovering European marine market.
Sales at our distribution segment were up 6.7%, or $6.7 million, compared to fiscal 2021, with improving global demand and product
delivery from the manufacturing operations. The Company’s Asian distribution operation in Singapore, China and Japan experienced
a 7.8% increase in sales due to the recovering global demand following the impacts of COVID-19, partially offset by an unfavorable
currency translation impact. The Company’s European distribution operation saw essentially flat sales, as improving demand was
offset by an unfavorable currency translation impact and supply chain challenges limiting shipment of goods from the production
operations. The Company’s North American distribution operation was also relatively unchanged from fiscal 2021, as supply chain
challenges offset an improving demand picture. The Company’s distribution operation in Australia, which provides boat accessories,
propulsion and marine transmission systems primarily for the pleasure craft market, saw an 18.2% sales increase, driven by strong
demand for the Company’s product in the pleasure craft market.
Net sales for the Company’s marine transmission, propulsion and boat management systems were up 6.1% in fiscal 2022 compared
to the prior fiscal year. This increase reflects a general strengthening of the global economy following the negative impact of the
COVID-19 pandemic in fiscal 2021. Strength was seen across the commercial, pleasure and defense components of the market. In
the off-highway transmission market, the year-over-year increase of 11.1% can also be attributed primarily to the global recovery
following the impact of the COVID-19 pandemic, with particular strength in North American aftermarket product sales for the oil
and gas industry. Sale of the Company’s pressure pumping transmission systems into China also improved over the prior year. The
increase experienced in the Company’s industrial products of 36.9% was also a function of the recovering global economy, along with
the improving performance of the Company’s new Lufkin, Texas operation, which is focused on growing sales of industrial products.
Geographically, sales to the U.S. and Canada improved 26% in fiscal 2022 compared to fiscal 2021, representing 36% of consolidated
sales for fiscal 2022 compared to 32% in fiscal 2021. The increase is primarily due to the impact of the economic recovery following
the COVID-19 pandemic. Sales into the Asia Pacific market improved 8% compared to fiscal 2021 and represented approximately
23% of sales in fiscal 2022, compared to 24% in fiscal 2021. The increase in fiscal 2022 reflects a continued strong Australian
pleasure craft market, continued demand for the Company’s oil and gas transmissions by the Chinese market and a general economic
recovery following the COVID-19 pandemic. Sales into the European market declined approximately 6% from fiscal 2021 levels
while accounting for 31% of consolidated net sales in fiscal 2021 compared to 37% of net sales in fiscal 2021. Despite strengthening
demand, the region experienced significant supply chain challenges and an unfavorable currency exchange impact. See Note J,
Business Segments and Foreign Operations, of the notes to the consolidated financial statements for more information on the
Company’s business segments and foreign operations.
TWIN DISC, INC. 2022 ANNUAL REPORT | 21
Gross Profit
In fiscal 2022, gross profit improved $18.0 million, or 35.3%, to $68.8 million on a sales increase of $24.3 million. Gross profit as a
percentage of sales increased 500 basis points in fiscal 2022 to 28.3%, compared to 23.3% in fiscal 2021. The table below summarizes
the gross profit trend by quarter for fiscal years 2022 and 2021:
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Year
Gross Profit:
($ millions)
2022
2021
% of Sales:
2022
2021
$
$
13.4 $
9.7 $
13.5 $
8.9 $
17.7 $
14.0 $
24.2 $
18.3 $
68.8
50.9
28.2 %
21.0 %
22.5 %
18.3 %
29.8 %
24.2 %
31.8 %
27.7 %
28.3 %
23.3 %
There were a number of factors that impacted the Company’s overall gross profit rate in fiscal 2022. Gross profit for the year was
primarily impacted by improved volumes and a significantly more favorable product mix. This was driven by the global economic
recovery following the impact of the COVID-19 pandemic and a significant increase in the sales of high-margin oil and gas
transmissions and parts. The Company also experienced a net favorable improvement in margins from the recording of benefits related
to COVID-19 relief programs of the U.S. and the Netherlands, totaling $1.4 million. The Company estimates the net favorable impact
of increased volumes on gross margin in fiscal 2022 was approximately $5.7 million. The favorable shift in product mix, primarily
related to the increased shipments of the Company’s high margin oil and gas transmission units and aftermarket products, had an
estimated favorable impact of $9.6 million.
Marketing, Engineering and Administrative (ME&A) Expenses
Marketing, engineering, and administrative (ME&A) expenses of $60.1 million were up $4.3 million, or 7.8%, in fiscal 2022
compared to the prior fiscal year. As a percentage of sales, ME&A expenses decreased to 24.7% of sales versus 25.5% of sales in
fiscal 2021. The increase in ME&A spending in fiscal 2022 compared to the prior year was driven by increased domestic salaries and
benefits ($2.4 million), increased marketing activities ($0.4 million), additional engineering project spending ($0.5 million), increased
travel expense ($0.4 million) and bad debt expense ($0.3 million), higher professional fees ($0.8 million), reduced benefit from the
U.S. employee retention credit program ($0.7 million) and an inflationary impact estimated at $2.0 million. These increases were
partially offset by an increase in the receipt of Dutch COVID-19 subsidy payments ($1.2 million), the absence of a prior year one-off
product issue ($0.8 million) and an exchange driven decrease ($1.2 million).
Restructuring of Operations
During the course of fiscal 2022, the Company incurred $1.0 million in restructuring charges. These charges relate to a continued
restructuring program at the Company’s Belgian operation to focus resources on core manufacturing process, while allowing for
savings on the outsourcing of non-core processes. In fiscal 2021, the Company incurred $7.4 million in restructuring charges. These
charges relate to the Belgian restructuring program just mentioned ($2.3 million), an impairment charge of the Company’s corporate
office building ($4.3 million), and other restructuring activities at the company’s domestic and European operations ($0.8 million).
Restructuring activities since June 2015 have resulted in the elimination of 254 full-time employees in the manufacturing segment.
Accumulated costs to date under these programs within the manufacturing segment through June 30, 2022 were $16,226.
Income from Extinguishment of Loan
During the fourth fiscal quarter of fiscal 2021, the Company received formal forgiveness of its PPP Loan in the amount of $8.2
million. The Company recorded $8.2 million in income from extinguishment of loan in its consolidated statement of operations in
fiscal 2021. See Note G, Debt, of the notes to the consolidated financial statements for additional information on the PPP loan.
Interest Expense
Interest expense of $2.1 million for fiscal 2022 was $0.3 million lower than fiscal 2021 on a relatively stable average interest rate
and a lower average balance on the domestic revolver.
Other income (expense), net
In fiscal 2022, other income, net, of $1.3 million improved by $4.7 million from a prior fiscal year other expense, net, of ($3.4
million). This change is primarily due to the impact of currency movements related to the euro and Asian currencies.
22 | TWIN DISC, INC. 2022 ANNUAL REPORT
Income Taxes
The effective tax rate for fiscal 2022 is 17.8% compared to -200.0% for fiscal 2021. During the prior fiscal year, the Company
received full forgiveness of its PPP loan which resulted in an increase to the effective tax rate of 17.5%.
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 fiscal 2021, the Company evaluated the likelihood of whether the net domestic deferred tax
assets would be realized and concluded that it is more likely than not that all of deferred tax assets would not be realized. Management
believes that it is more likely than not that the results of future operations will not generate sufficient taxable income and foreign
source income to realize all the domestic deferred tax assets, therefore, a valuation allowance in the amount of $24.4 million, was
included in income tax expense (benefit) on the consolidated statement of operations, for fiscal year 2021. In fiscal year 2022, the
valuation allowance was $23.1 million,
Order Rates
As of June 30, 2022, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was
$101.2 million or approximately 44% higher than the six-month backlog of $70.3 million as of June 30, 2021. The increased backlog
is primarily attributable to the improvement in order rates throughout the fiscal year resulting from the global economic recovery
following the negative impact of the COVID-19 pandemic.
Liquidity and Capital Resources
Fiscal Years 2022 and 2021
The net cash used by operating activities in fiscal 2022 totaled $8.3 million, a change of ($14.8 million) from the prior fiscal year cash
provided by operating activities of $6.5 million. The negative operating cash flow was created primarily by an increase to inventory
($12.2 million) and trade accounts receivable ($5.9 million) compared to the prior year end. The increased inventory is the result of
the global volume increase, along with rampant supply chain disruptions creating imbalanced inventory at our operations. These
disruptions were mitigated somewhat during the fourth quarter, but remain a significant challenge. The increase in trade accounts
receivable reflects a very strong shipping month in June, with collection to follow in fiscal 2023. These increases were partially offset
by an increase in accrued liabilities compared to the prior year end.
The net cash provided by investing activities for fiscal 2022 primarily represents the proceeds from the sale of real property in
Switzerland and Italy ($9.5 million), partially offset by capital spending activity totaling $4.7 million. The capital spending amount
reflects a continued focus on cash conservation as we navigated through the extreme economic uncertainty brought on by the COVID-
19 pandemic, along with extended lead times on equipment resulting from global supply chain challenges.
The net cash provided by financing activities relates primarily to borrowings of long-term debt ($3.9 million), partially offset by
payments for withholding taxes on stock compensation ($0.5 million), payments on finance lease obligations ($0.9 million) and
dividends paid to a non-controlling interest ($0.2 million). During fiscal 2022, the Company did not purchase any shares as part of its
Board-authorized stock repurchase program. The Company has 315,000 shares remaining under its authorized stock repurchase plan.
Future Liquidity and Capital Resources
On June 29, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A. (“BMO”)
that provided for the assignment and assumption of the previously existing loans between the Company and Bank of Montreal (the
“2016 Credit Agreement”) and subsequent amendments into a term loan (the “Term Loan”) and revolving credit loans (each a
“Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan, the “Loans”). 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”). The Credit Agreement also allows the Company to obtain Letters of Credit from BMO, which
if drawn upon by the beneficiary thereof and paid by BMO, would become Revolving Loans. Under the Credit Agreement, the
Company may not pay cash dividends on its common stock in excess of $3.0 million in any fiscal year.
On March 4, 2019, the Company entered into a second amendment (the “Second Amendment”) to the Credit Agreement. The Second
Amendment reduced the principal amount of the term loan commitment under the Credit Agreement from $35.0 million to $20.0
million. In connection with the Second Amendment, the Company issued an amended and restated term note in the amount of $20.0
million to the Bank, which amended the original $35.0 million note provided under the Credit Agreement.
TWIN DISC, INC. 2022 ANNUAL REPORT | 23
Prior to entering into the Second Amendment, the outstanding principal amount of the term loan (the “Term Loan”) under the Credit
Agreement was $10.8 million. On the date of the Second Amendment, the Bank made an additional advance on the Term Loan to the
Company in the amount of $9.2 million. The Second Amendment also extended the maturity date of the Term Loan from January 2,
2020 to March 4, 2026, and added a requirement that the Company make principal installments of $0.5 million per quarter starting
with the quarter ending June 30, 2019.
The Second Amendment also reduced the applicable margin for purposes of determining the interest rate applicable to the Term
Loan. Previously, the applicable margin was 3.00%, which was added to the Monthly Reset LIBOR Rate or the Adjusted LIBOR,
as applicable. Under the Second Amendment, the applicable margin was between 1.375% and 2.375%, depending on the Company’s
total funded debt to EBITDA ratio.
The Second Amendment also adjusted certain financial covenants made by the Company under the Credit Agreement. Specifically,
the Company covenanted (i) not to allow its total funded debt to EBITDA ratio to be greater than 3.00 to 1.00 (the cap had previously
been 3.50 to 1.00 for quarters ending on or before September 30, 2019 and 3.25 to 1.00 for quarters ending on or about December 31,
2019 through September 30, 2020), and (ii) that its tangible net worth will not be less than $100.0 million plus 50% of net income for
each fiscal year ending on and after June 30, 2019 for which net income is a positive number (the $100.0 million figure had previously
been $70.0 million).
On January 28, 2020, the Company entered into a third amendment (the “Third Amendment”) to the Credit Agreement. The Third
Amendment restated the financial covenant provisions related to the maximum allowable ratio of total funded debt to EBITDA from
3.00 to 1.00 to 4.00 to 1.00 for the quarter ended December 27, 2019, 5.00 to 1.00 for the quarter ending March 27, 2020, 4.00 to 1.00
for the quarter ending June 30, 2020, 3.50 to 1.00 for the quarter ending September 25, 2020, and 3.00 to 1.00 for quarters ending on
or after December 25, 2020. For purposes of determining EBITDA, the Third Amendment added back extraordinary expenses (not to
exceed $3.9 million) related to the previously reported isolated product performance issue on one of the Company’s oil and gas
transmission models at certain installations. Under the Third Amendment, the applicable margin for revolving loans, letters of credit,
and term loans was between 1.25% and 3.375%, depending on the Company’s total funded debt to EBITDA ratio.
On July 22, 2020, the Company entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement that amends the
Credit Agreement dated as of June 29, 2018, as amended, between the Company and BMO. The Fifth Amendment reduced BMO’s
Revolving Credit Commitment from $50.0 million to $45.0 million. The Fifth Amendment also gives the Company the option to make
interest-only payments on the Term Loan for quarterly payments occurring on September 30, 2020 and December 31, 2020, and limits
the Company’s Capital Expenditures for the fiscal year ending June 30, 2021 to $10.0 million.
The Fifth Amendment provides the Company with relief from its Total Funded Debt to EBITDA ratio financial covenant under the
Credit Agreement through (and including) the earlier of June 30, 2021 or a date selected by the Company. During the financial
covenant relief period:
● The “Applicable Margin” to be applied to Revolving Loans, the Term Loan, and the Commitment/Facility Fee increased to
3.25%, 3.875%, and 0.20%, respectively.
● The Company may not make certain restricted payments (specifically, cash dividends, distributions, purchases, redemptions
or other acquisitions of or with respect to shares of its common stock or other common equity interests).
● The Company must maintain liquidity (as defined in the Fifth Amendment) of at least $15.0 million.
● The Company must maintain minimum EBITDA of at least (1) $1.0 million for the fiscal quarter ending June 30, 2020 and
the two fiscal quarters ending on or about September 30, 2020; (2) $2.5 million for the three fiscal quarters ending on or
about December 31, 2020; (3) $6.0 million for the four fiscal quarters ending on or about March 31, 2021; and (4) $10.0
million for the four fiscal quarters ending June 30, 2021.
For purposes of the minimum EBITDA covenant and the Total Funded Debt to EBITDA ratio, the Fifth Amendment clarified that
EBITDA shall exclude any gain that is realized on the forgiveness of the Small Business Administration Paycheck Protection Program
loan that the Company previously received.
The Fifth Amendment also changed the definition of “LIBOR” (used in calculating interest on Eurodollar Loans), “Monthly Reset
LIBOR Rate” (used in calculating interest on LIBOR Loans), and “LIBOR Quoted Rate” (used in the definition of “Base Rate,” which
is used in calculating interest on Letters of Credit that are drawn upon and not timely reimbursed).
The Company also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security interest in deposit
accounts the Company maintains with the Bank. Under the Fifth Amendment, the Bank may not provide a notice of exclusive control
of a deposit account (thereby obtaining exclusive control of the account) prior to the occurrence or existence of a Default or an Event
of Default under the Credit Agreement or otherwise upon the occurrence or existence of an event or condition that would, but for the
passage of time or the giving of notice, constitute a Default or an Event of Default under the Credit Agreement.
24 | TWIN DISC, INC. 2022 ANNUAL REPORT
On January 27, 2021, the Company entered into a Forbearance Agreement and Amendment No. 6 to the Credit Agreement (the
“Forbearance Agreement”) that further amended the Credit Agreement.
The Company entered into the Forbearance Agreement because the Company was not in compliance with its financial covenant to
maintain a minimum EBITDA of at least $2.5 million for the three fiscal quarters ended as of December 25, 2020. In the Forbearance
Agreement, the Bank agreed to forbear from exercising its rights and remedies against the Company under the Credit Agreement with
respect to the Company’s noncompliance with the minimum EBITDA covenant during the period (the “Forbearance Period”)
commencing January 27, 2021 and ending on the earlier of (i) September 30, 2021, and (ii) the date on which a default under the
Forbearance Agreement or Credit Agreement occurs. During the Forbearance Period, the Bank agreed to continue to honor requests
of the Company for draws on the revolving note provided by the Bank under the Credit Agreement, except that the revolving credit
commitment was reduced from $45.0 million to $42.5 million during the Forbearance Period.
The Forbearance Agreement also added to the Company’s financial reporting requirements under the Credit Agreement by requiring
the Company to provide the Bank with monthly forecasts of the Company’s financial statements, and monthly reports on the
Company’s six-month backlog.
On September 30, 2021, the Company entered into a First Amended and Restated Forbearance Agreement and Amendment No. 7
to Credit Agreement (the “Amended and Restated Forbearance Agreement”) that amends the Credit Agreement dated as of June 29,
2018, as amended between the Company and the Bank.
The Amended and Restated Forbearance Agreement extended the Forbearance Period through February 28, 2022, or if earlier, through
the date on which a default under the Amended and Restated Forbearance Agreement or Credit Agreement occurs. During the
extended Forbearance Period, the Bank agreed to continue to forbear from exercising its rights and remedies against the Company
under the Credit Agreement with respect to the Company’s noncompliance with its minimum EBITDA covenants. The Amended and
Restated Forbearance Agreement also made certain adjustments to the Credit Agreement, including:
● Permitting the Company to sell its manufacturing facility in Novazzano, Switzerland for a gross sales price of approximately
$10 million, resulting in Net Cash Proceeds of approximately $8.7 million (the “Rolla Disposition”).
● Requiring the Company to promptly repatriate approximately $7 million of the Net Cash Proceeds from the Rolla Disposition
(the “Rolla Repatriation”), and to apply $1 million of such Net Cash Proceeds to the Term Loan and the remainder to the
revolving Loans under the Credit Agreement.
● Upon completion of the Rolla Repatriation: (1) reducing the portion of the Borrowing Base that is based on Eligible Inventory
from the lesser of $35 million or 50% of the value of Eligible Inventory to the lesser of $30 million or 50% of the value of
Eligible Inventory; and (2) reducing the Revolving Credit Commitment from a maximum of $42.5 million to a maximum of
$40 million.
On February 28, 2022, the Company entered into a Second Amended and Restated Forbearance Agreement and Amendment No. 8
to Credit Agreement (the “Second Amended and Restated Forbearance Agreement”) that amended the Credit Agreement dated as of
June 29, 2018, as amended between the Company and the Bank.
The Second Amended and Restated Forbearance Agreement extended the Forbearance Period through June 30, 2022, or if earlier,
through the date on which a default under the Amended and Restated Forbearance Agreement or Credit Agreement occurs. During the
extended Forbearance Period, the Bank continued to forbear from exercising its rights and remedies against the Company under the
Credit Agreement with respect to the Company’s noncompliance with its minimum EBITDA covenants. The Second Amended and
Restated Forbearance Agreement also made certain adjustments to the Credit Agreement, including:
● Reduced the portion of the Borrowing Base that is based on Eligible Inventory from the lesser of $35,000,000 or 50% of the
value of Eligible Inventory to the lesser of $30,000,000 or 50% of the value of Eligible Inventory. This change was already
in effect under the terms of the Amended and Restated Forbearance Agreement, due to the Company’s previously reported
sale of its manufacturing facility in Novazzano, Switzerland for a gross sales price of approximately $10,000,000, resulting
in Net Cash Proceeds (as defined in the Amended and Restated Forbearance Agreement) of approximately $8,700,000 (the
“Rolla Disposition”) and repatriation of approximately $7,000,000 of those Net Cash Proceeds (the “Rolla Repatriation”).
● Reduced the Revolving Credit Commitment from a maximum of $42,500,000 to a maximum of $40,000,000. This change
was also already in effect under the terms of the Amended and Restated Forbearance Agreement due to the Rolla Disposition
and Rolla Repatriation.
The Company also executed a Third Amended and Restated Revolving Note with the Bank, reflecting the maximum Revolving Credit
Commitment of $40,000,000.
TWIN DISC, INC. 2022 ANNUAL REPORT | 25
On June 30, 2022, the Company entered into Amendment No. 9 to Credit Agreement (the “Ninth Amendment”) that amends and
extends the Credit Agreement dated as of June 29, 2018, as amended (the “Credit Agreement”) between the Company and the Bank.
Pursuant to the Credit Agreement, as in effect prior to the Ninth Amendment, the Bank made a Term Loan to the Company in the
principal amount of $20,000,000, and the Company may, from time to time prior to the maturity date, enter into Revolving Loans in
amounts not to exceed, in the aggregate and subject to a Borrowing Base, $40,000,000 (the “Revolving Credit Commitment”). The
Credit Agreement also allows the Company to obtain Letters of Credit from the Bank, which if drawn upon by the beneficiary thereof
and paid by the Bank, would become Revolving Loans.
The Ninth Amendment extended the Credit Agreement through June 30, 2025. Prior to the Ninth Amendment, the Credit Agreement
was scheduled to terminate as of June 30, 2023.
The Ninth Amendment also formally terminated the January 27, 2021 Forbearance Agreement, which had been entered into because
the Company had not been in compliance with a requirement to maintain a minimum EBITDA of $2,500,000 for the three fiscal
quarters ended as of December 25, 2020. The Bank also waived the Company’s compliance with the minimum EBITDA requirements
under the Credit Agreement and any Event of Default associated with the Company’s noncompliance with the minimum EBITDA
requirements.
The Ninth Amendment also replaced LIBOR-based interest rates with different benchmark rates based on the secured overnight
financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”). Loans under the Credit Agreement are designated
either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,” which
accrue interest at the EURIBO Rate plus an Applicable Margin. Amounts drawn on a Letter of Credit that are not timely reimbursed
to the Bank bear interest at a Base Rate plus an Applicable Margin. The Company also pays a commitment fee on the average daily
Unused Revolving Credit Commitment equal to an Applicable Margin.
The Ninth Amendment also reduced the Applicable Margins from the rates that had been in effect during the period of the
Forbearance Agreement. During the period covered by the Forbearance Agreement, the Applicable Margins for Revolving Loans,
Term Loans, and the Unused Revolving Credit Commitment were 3.25%, 3.875%, and .20%, respectively. Under the Ninth
Amendment, the Applicable Margins are between 1.25% and 2.75% for Revolving Loans and Letters of Credit; 1.375% and 2.875%
for Term Loans; and .10% and .15% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded
Debt to EBITDA ratio).
The Ninth Amendment also revised the Company’s financial covenants under the Credit Agreement. The Company’s Total Funded
Debt to EBITDA ratio (for which the Bank provided relief during period covered by the Forbearance Agreement) may not exceed
3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00. The Company’s Tangible Net
Worth may not be less than $100,000,000 plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.
Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property, including accounts
receivable, inventory, machinery and equipment, and intellectual property. The Company has also pledged 100% of its equity interests
in certain domestic subsidiaries and 65% of its equity interests in certain foreign subsidiaries. The Company also entered into a
Collateral Assignment of Rights under Purchase Agreement for its acquisition of Veth Propulsion. To effect these security interests,
the Company entered into various amendment and assignment agreements that consent to the assignment of certain agreements
previously entered into between the Company and the Bank of Montreal in connection with the 2016 Credit Agreement. The Company
also amended and assigned to BMO a Negative Pledge Agreement that it has previously entered into with Bank of Montreal, pursuant
to which it agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Credit Agreement and the
Negative Pledge Agreement.
Upon the occurrence of an Event of Default, BMO may take the following actions upon written notice to the Company: (1)
terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding under the Credit Agreement
to be immediately due and payable; 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.
On March 3, 2021 the Company submitted its application for forgiveness of the PPP Loan. The application was supported by
documentation of qualified expenses and compliance of eligibility with the program. On June 16, 2021 the Company was notified
by the SBA that the PPP loan was fully forgiven. The Company recorded the forgiveness as income from extinguishment of loan.
This is described further in Note G, Debt, of the notes to the consolidated financial statements.
The Company’s balance sheet remains strong, there are no material off-balance-sheet arrangements, and it continues to have sufficient
liquidity for its near-term needs. The Company had approximately $17.0 million of available borrowings under the Credit Agreement
as of June 30, 2022. The Company expects to continue to generate enough cash from operations, as well as its credit facilities, to meet
its operating and investing needs. As of June 30, 2022, the Company also had cash of $12.5 million, primarily at its overseas
26 | TWIN DISC, INC. 2022 ANNUAL REPORT
operations. These funds, with some restrictions and tax implications, are available for repatriation as deemed necessary by the
Company. In fiscal 2023, the Company expects to contribute $0.6 million to its defined benefit pension plans, the minimum
contribution required.
Net working capital increased $10.0 million, or 8.8%, during fiscal 2022 and the current ratio (calculated as total current assets
divided by total current liabilities) increased from 2.4 at June 30, 2021 to 2.5 at June 30, 2022. The increase in net working capital
was primarily the result of an increase to inventory ($9.1 million) resulting from growing demand and supply chain imbalances. Other
increases included trade receivables ($6.0 million - due to increased sales volume in the fourth quarter), lower trade payables ($2.5 million)
and slightly higher other current assets ($0.8 million). These increases were partially offset by a reduction in the current portion of assets held
for sale ($6.6 million – due primarily to the sale of a Swiss property) and increased accrued expenses ($5.0 million).
The Company expects capital expenditures to be approximately $12 million - $15 million in fiscal 2022. These anticipated expenditures
reflect the Company’s plans to invest in modern equipment to drive efficiencies, quality improvements and cost reductions.
Management believes that available cash, the credit facility, cash generated from future operations, and potential access to debt
markets will be adequate to fund the Company’s capital requirements for the foreseeable future.
Contractual Obligations
The Company's significant contractual obligations as of June 30, 2022 are discussed in Note H “Lease Obligations” in the Notes to
Consolidated Financial Statements in Part II, Item 8 of this 2022 Annual Report on Form 10-K. There are no material undisclosed
guarantees. As of June 30, 2022, the Company had no additional material purchase obligations other than those created in the
ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90
days. The Company also has long-term obligations related to its postretirement plans which are discussed in detail in Note
M “Pension and Other Postretirement Benefit Plans” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this
2022 Annual Report on Form 10-K. Postretirement medical claims are paid by the Company as they are submitted, and they are
anticipated to be $0.3 million in 2022 based on actuarial estimates; however, these amounts can vary significantly from year to year
because the Company is self-insured. In fiscal 2023, the Company expects to contribute $0.6 million to its defined benefit pension
plans, the minimum contribution required.
Other Matters
Critical Accounting Policies and Estimates
The preparation of this Annual Report requires management’s judgment to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those
estimates.
The Company’s significant accounting policies are described in Note A, Significant Accounting Policies, of the notes to the
consolidated financial statements. Not all of these significant accounting policies require management to make difficult, subjective,
or complex judgments or estimates. However, the policies management considers most critical to understanding and evaluating its
reported financial results are the following:
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on payment history and the
customer’s credit-worthiness as determined by review of current credit information. The Company continuously monitors collections
and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any
specific customer-collection issues. In addition, senior management reviews the accounts receivable aging on a monthly basis to
determine if any receivable balances may be uncollectible. Although the Company’s accounts receivable are dispersed among a large
customer base, a significant change in the liquidity or financial position of any one of its largest customers could have a material
adverse impact on the collectability of its accounts receivable and future operating results.
Inventory
Inventories are valued at the lower of cost or net realizable value. Cost has been determined by the last-in, first-out (LIFO) method
for the majority of the inventories located in the United States, and by the first-in, first-out (FIFO) method for all other inventories.
Management specifically identifies obsolete products and analyzes historical usage, forecasted production based on future orders,
demand forecasts, and economic trends when evaluating the adequacy of the reserve for excess and obsolete inventory. The
adjustments to the reserve are estimates that could vary significantly, either favorably or unfavorably, from the actual requirements
if future economic conditions, customer demand or competitive conditions differ from expectations.
TWIN DISC, INC. 2022 ANNUAL REPORT | 27
Assets Held for Sale
Assets that will be recovered principally through sale rather than in its continuing use in operations are reclassified out of property,
plant and equipment and into assets held for sale if all of the following criteria are met: (a) management, having the authority to
approve the action, commits to a plan to sell the asset(s); (b) the asset is available for immediate sale in its present condition subject
only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer, and other actions required
to complete the plan to sell the asset have been initiated; (d) the sale of the asset is probable and the transfer of the asset is expected to
qualify for recognition as a completed sale within a year; (e) the asset is being actively marketed for sale at a price that is reasonable in
relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the
plan will be made or that plan will be withdrawn.
Assets Held for Sale are carried at fair value less costs to sell, or net book value, whichever is lower. The Company ceases to record
depreciation expense at the time of designation as held for sale.
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable. For property, plant and equipment and other long-lived assets, including
intangible assets, the Company performs undiscounted operating cash flow analyses to determine if an impairment exists. If an
impairment is determined to exist, any related impairment loss is calculated based on fair value. Fair value is primarily determined
using discounted cash flow analyses; however, other methods may be used to substantiate the discounted cash flow analyses, including
third party valuations when necessary.
Warranty
The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality
of its suppliers. However, its warranty obligation is affected by product failure rates, the extent of the market affected by the failure
and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on the Company’s best
estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. When evaluating
the adequacy of the reserve for warranty costs, management takes into consideration the term of the warranty coverage, historical
claim rates and costs of repair, knowledge of the type and volume of new products and economic trends. While the Company believes
that 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.
Pension and Other Postretirement Benefit Plans
The Company provides a wide range of benefits to employees and retired employees, including pensions and postretirement health
care coverage. Plan assets and obligations are recorded annually based on the Company’s measurement date utilizing various actuarial
assumptions such as discount rates, expected return on plan assets, compensation increases, retirement and mortality tables, and health
care cost trend rates as of that date. The approach used to determine the annual assumptions are as follows:
● Discount Rate – based on the Willis Towers Watson BOND:Link model at June 30, 2022 as applied to the expected payouts
from the pension plans. This yield curve is made up of Corporate Bonds rated AA or better.
● Expected Return on Plan Assets – based on the expected long-term average rate of return on assets in the pension funds, which
is reflective of the current and projected asset mix of the funds and considers historical returns earned on the funds.
● Compensation Increase – reflect the long-term actual experience, the near-term outlook and assumed inflation.
● Retirement and Mortality Rates – based upon the Society of Actuaries PRI-2012 base tables for annuitants and non-annuitants,
adjusted for generational mortality improvement based on the Society of Actuaries modified MP-2021 projection scale.
● Health Care Cost Trend Rates – developed based upon historical cost data, near-term outlook and an assessment of likely long-
term trends.
Measurements of net periodic benefit cost are based on the assumptions used for the previous year-end measurements of assets and
obligations. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions when
appropriate. The effects of the modifications are recorded currently or amortized over future periods. Based on information provided
by its independent actuaries and other relevant sources, the Company believes that the assumptions used are reasonable; however,
changes in these assumptions could impact the Company’s financial position, results of operations or cash flows.
28 | TWIN DISC, INC. 2022 ANNUAL REPORT
Income Taxes and Valuation Allowances
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. 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. In determining whether a valuation allowance
is required, the Company considers 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. Based on the above
criteria the Company has determined that a full valuation allowance is appropriate as relates to its domestic operations. A full
domestic valuation allowance of $24.4 million has been recognized in fiscal 2022. The recognition of a valuation allowance does
not affect the availability of the tax credits as the Company realizes earnings.
Recently Issued Accounting Standards
See Note A, Significant Accounting Policies, of the notes to the consolidated financial statements for a discussion of recently issued
accounting standards.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company is electing not to provide this disclosure due to its status as a Smaller Reporting Company.
Item 8. Financial Statements and Supplementary
See Consolidated Financial Statements and Financial Statement Schedule.
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding Disclosure Controls and Procedures
As required by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report and
under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on such evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms,
and to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial
officers, as appropriate, to allow timely decisions regarding disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The
Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. The Company’s internal control over financial reporting includes those policies and procedures that:
1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the Company,
2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company, and
3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on financial statements.
TWIN DISC, INC. 2022 ANNUAL REPORT | 29
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate.
The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the framework
(2013 edition) in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based upon such evaluation, the Company’s management concluded that its internal control over financial
reporting was effective as of June 30, 2022.
RSM US LLP, an independent registered public accounting firm, has audited the Company’s internal control over financial reporting
as of June 30, 2022, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of fiscal 2022, there have not been any changes in the Company’s internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
For information with respect to the executive officers of the Registrant, see "Information About Our Executive Officers" at the end of
Part I of this report.
For information with respect to the Directors of the Registrant, see "Election of Directors" in the Proxy Statement for the Annual
Meeting of Shareholders to be held October 27, 2022, which is incorporated into this report by reference.
For information with respect to the Company’s Code of Ethics, see "Guidelines for Business Conduct and Ethics” in the Proxy
Statement for the Annual Meeting of Shareholders to be held October 27, 2022, which is incorporated into this report by reference.
The Company’s Code of Ethics, entitled, “Guidelines for Business Conduct and Ethics,” is included on the Company’s website,
www.twindisc.com. If the Company makes any substantive amendment to the Code of Ethics, or grants a waiver from a provision
of the Code of Ethics for its Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer (or any person performing
similar functions), it intends to disclose the nature of such amendment on its website within four business days of the amendment or
waiver in lieu of filing a Form 8-K with the SEC.
For information with respect to procedures by which shareholders may recommend nominees to the Company’s Board of Directors,
see “Director Committee Functions: Nominating and Governance Committee” in the Proxy Statement for the Annual Meeting of
Shareholders to be held October 27, 2022, which is incorporated into this report by reference. There were no changes to these
procedures since the Company’s last disclosure relating to these procedures.
For information with respect to the Audit Committee Financial Expert, see “Director Committee Functions: Audit Committee” in
the Proxy Statement for the Annual Meeting of Shareholders to be held October 27, 2022, which is incorporated into this report by reference.
For information with respect to the Audit Committee Disclosure, see “Director Committee Functions: Audit Committee” in the Proxy
Statement for the Annual Meeting of Shareholders to be held October 27, 2022, which is incorporated into this report by reference.
For information with respect to the Audit Committee Membership, see “Director Committee Functions: Committee Membership” in the
Proxy Statement for the Annual Meeting of Shareholders to be held October 27, 2022, which is incorporated into this report by reference.
For information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, see “Delinquent Section 16(a)
Reports” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 27, 2022, which is incorporated into
this report by reference.
30 | TWIN DISC, INC. 2022 ANNUAL REPORT
Item 11. Executive Compensation
The information set forth under the captions "Executive Compensation" and "Director Compensation” in the Proxy Statement for
the Annual Meeting of Shareholders to be held on October 27, 2022, is incorporated into this report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
For information regarding security ownership of certain beneficial owners and management, see the Proxy Statement for the Annual
Meeting of Shareholders to be held on October 27, 2022 under the captions "Principal Shareholders” and “Directors and Executive
Officers" and incorporated into this report by reference.
For information regarding securities authorized for issuance under equity compensation plans of the Company, see “Equity
Compensation Plan Information” in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 27, 2022,
which is incorporated into this report by reference.
There are no arrangements known to the Registrant, the operation of which may at a subsequent date result in a change in control
of the Registrant.
Item 13. Certain Relationships and Related Transactions, Director Independence
For information with respect to transactions with related persons and policies for the review, approval or ratification of such
transactions, see “Corporate Governance – Review, Approval or Ratification of Transactions with Related Persons” in the Proxy
Statement for the Annual Meeting of Shareholders to be held October 27, 2022, which is incorporated into this report by reference.
For information with respect to director independence, see “Corporate Governance – Board Independence” in the Proxy Statement
for the Annual Meeting of Shareholders to be held October 27, 2022, which is incorporated into this report by reference.
Item 14. Principal Accounting Fees and Services
The Company incorporates by reference the information contained in the Proxy Statement for the Annual Meeting of Shareholders to
be held October 27, 2022 under the headings “Fees to Independent Registered Public Accounting Firm” and “Pre-approval Policies
and Procedures.”
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Consolidated Financial Statements
See Index to Consolidated Financial Statements and Financial Statement Schedule, the Report of Independent Registered Public
Accounting Firm and the Consolidated Financial Statements, all of which are incorporated by reference.
(a)(2) Consolidated Financial Statement Schedule
See Index to Consolidated Financial Statements and Financial Statement Schedule, and the Consolidated Financial Statement
Schedule, all of which are incorporated by reference.
(a)(3) Exhibits. See Exhibit Index included as the last page of this form, which is incorporated by reference.
TWIN DISC, INC. 2022 ANNUAL REPORT | 31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm, RSM US LLP, Milwaukee, Wisconsin, PCAOB ID #49
33-35
Consolidated Balance Sheets as of June 30, 2022 and 2021
Consolidated Statements of Operations and Comprehensive Loss for the years ended June 30, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended June 30, 2022 and 2021
Consolidated Statements of Changes in Equity for the years ended June 30, 2022 and 2021
Notes to Consolidated Financial Statements
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts
36
37
38
39
40-70
71
Schedules, other than those listed, are omitted for the reason that they are inapplicable, are not required, or the information required
is shown in the financial statements or the related notes.
32 | TWIN DISC, INC. 2022 ANNUAL REPORT
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Twin Disc, Incorporated:
Opinion on the Internal Control Over Financial Reporting
We have audited Twin Disc, Incorporated's (the Company) internal control over financial reporting as of June 30, 2022, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2022, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated financial statements of the Company and our report dated September 8, 2022 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over
Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Milwaukee, Wisconsin
September 8, 2022
TWIN DISC, INC. 2022 ANNUAL REPORT | 33
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Twin Disc, Incorporated:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Twin Disc, Incorporated (the Company) as of June 30, 2022 and
2021, the related consolidated statements of operations and comprehensive loss, changes in equity and cash flows for each of the two
years in the period ended June 30, 2022, and the related notes to the consolidated financial statements and schedule (collectively, the
financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period
ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States (PCAOB),
the Company's internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated September 8,
2022 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Deferred Tax Asset Valuation Allowance
As described in Note N to the consolidated financial statements the Company’s gross deferred tax asset and valuation allowance was
approximately $28,526,000 and $23,097,000, respectively, as of June 30, 2022. The Company recognizes deferred tax assets and
liabilities for the expected future income tax consequences of events that have been recognized in the Company’s financial statements.
Valuation allowances are provided for deferred tax assets where it is considered more likely than not that the Company will not realize
the benefit of such assets. In evaluating the realizability of deferred tax assets in future periods, the available positive and negative
evidence, including projected future taxable income exclusive of reversing temporary differences, history of book losses, tax planning
strategies, and results of recent operations, are considered.
We identified management’s determination of the value of deferred tax assets as a critical audit matter as there is significant judgment
required by management to conclude that it is more likely than not that these deferred tax assets will be realized in future periods. In
addition, the auditing of these elements involved complex and subjective auditor judgment, including the need to involve personnel
with specialized skill and knowledge.
34 | TWIN DISC, INC. 2022 ANNUAL REPORT
Our audit procedures to evaluate management’s determination that sufficient taxable income will not be generated to realize deferred
tax assets included the following, among others:
● We evaluated the design and operating effectiveness of internal controls over income taxes, specifically, those controls over
the evaluation of the realizability of deferred tax assets.
● We evaluated the reasonableness of management’s estimates in regards to the ability to generate future taxable income and
utilize the deferred tax assets by evaluating: (i) the forecast of future taxable income, including testing of management’s
forecasts against the Company’s historical performance, and (ii) testing management’s assessment of the timing of future
reversals of temporary differences.
● We utilized personnel with specialized knowledge and skill in income taxes and accounting for income taxes under ASC 740
to assist in the evaluation of management’s assessment of positive and negative evidence and their conclusion that it is more
likely than not that the Company will not realize the benefit of its deferred tax assets.
/s/ RSM US LLP
We have served as the Company's auditor since 2017.
Milwaukee, Wisconsin
September 8, 2022
TWIN DISC, INC. 2022 ANNUAL REPORT | 35
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2022 and 2021
(In thousands, except share amounts)
ASSETS
Current assets:
Cash
Trade accounts receivable, net
Inventories
Assets held for sale
Prepaid expenses
Other
Total current assets
Property, plant and equipment, net
Right-of-use assets operating leases
Intangible assets, net
Deferred income taxes
Other assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt
Accounts payable
Accrued liabilities
Total current liabilities
Long-term debt
Lease obligations
Accrued retirement benefits
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note O)
Equity:
Twin Disc shareholders' equity:
Preferred shares authorized: 200,000; issued: none; no par value
Common shares authorized: 30,000,000; issued: 14,632,802; no par value
Retained earnings
Accumulated other comprehensive loss
Less treasury stock, at cost (960,459 and 984,139 shares, respectively)
Total Twin Disc shareholders' equity
Noncontrolling interest
Total equity
Total liabilities and equity
2022
2021
$
12,521 $
45,452
127,109
2,968
7,756
8,646
204,452
41,615
12,685
13,010
2,178
2,583
12,340
39,491
114,967
9,539
5,704
9,926
191,967
45,463
14,736
17,480
2,511
3,256
$
276,523 $
275,413
$
2,000 $
28,536
50,542
81,078
34,543
10,575
9,974
3,802
5,363
2,000
31,011
45,549
78,560
30,085
12,887
11,176
5,045
7,000
145,335
144,753
-
42,551
135,031
(32,086 )
145,496
14,720
-
40,972
126,936
(22,615 )
145,293
15,083
130,776
130,210
412
450
131,188
130,660
$
276,523 $
275,413
The notes to consolidated financial statements are an integral part of these statements.
36 | TWIN DISC, INC. 2022 ANNUAL REPORT
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the years ended June 30, 2022 and 2021
(In thousands, except per share amounts)
Net sales
Cost of goods sold
Gross profit
Marketing, engineering and administrative expenses
Restructuring expenses
Other operating income
Income (loss) from operations
Other income (expense):
Interest expense
Income from extinguishment of loan
Other income (expense), net
Income (loss) before income taxes and noncontrolling interest
Income tax expense
Net income (loss)
Less: Net earnings attributable to noncontrolling interest, net of tax
Net income (loss) attributable to Twin Disc
Income (loss) per share data:
Basic loss per share attributable to Twin Disc common shareholders
Diluted loss per share attributable to Twin Disc common shareholders
Weighted average shares outstanding data:
Basic shares outstanding
Dilutive stock awards
Diluted shares outstanding
Comprehensive loss
Net income (loss)
Foreign currency translation adjustment
Benefit plan adjustments, net of income taxes of $7 and $3,791, respectively
Unrealized gain on hedges, net of income taxes of $0 and 235, respectively
Comprehensive loss
Less: Comprehensive income (loss) attributable to noncontrolling interest
$
$
$
$
$
2022
2021
242,913 $
174,101
68,812
60,085
973
(3,282 )
11,036
(2,128 )
-
1,321
(807 )
10,229
218,581
167,724
50,857
55,750
7,377
-
(12,270 )
(2,358 )
8,200
(3,411 )
2,431
(9,839 )
1,823
19,680
8,406
(29,519 )
(311 )
(200 )
8,095 $
(29,719 )
0.61 $
0.60 $
(2.24 )
(2.24 )
13,353
29
13,247
-
13,382
13,247
8,406 $
(11,593 )
(263 )
2,250
(1,200 )
176
(29,519 )
5,639
12,113
760
(11,007 )
(101 )
Comprehensive loss attributable to Twin Disc
$
(1,024 ) $
(11,108 )
The notes to consolidated financial statements are an integral part of these statements.
TWIN DISC, INC. 2022 ANNUAL REPORT | 37
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2022 and 2021
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities:
$
8,406
$
(29,519 )
2022
2021
Depreciation and amortization
Gain on sale of assets
Income from extinguishment of loan
Restructuring of operations
Stock compensation expense
Provision for deferred income taxes
Other, net
Changes in operating assets and liabilities
Trade accounts receivable
Inventories
Other assets
Accounts payable
Accrued liabilities
Accrued retirement benefits
Net cash (used) provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds on note receivable
Proceeds from sale of plant assets
Proceeds from life insurance policy
Other, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Borrowings under revolving loan agreement
Repayments under revolving loan agreement
Repayments of long-term borrowings
Payments of finance lease obligations
Payments of withholding taxes on stock compensation
Dividends paid to noncontrolling interest
Net cash provided (used) by financing activities
Effect of exchange rate changes on cash
Net change in cash
Cash:
Beginning of year
End of year
Supplemental cash flow information:
Cash paid during the year for:
Interest
Income taxes
9,547
(3,126 )
-
(1,328 )
2,428
(849)
201
(8,405 )
(18,552 )
(3,081)
(638 )
8,581
(1,497 )
(8,312 )
(4,729 )
500
9,455
-
675
5,901
104,473
(95,704 )
(3,081 )
(933 )
(487 )
(214 )
4,054
(1,462 )
181
11,243
-
(8,200 )
6,619
2,154
17,655
798
(7,810 )
9,063
(5,007 )
4,606
7,058
(2,132 )
6,528
(4,464 )
1,500
102
253
(133 )
(2,742 )
76,335
(78,370 )
(1,091 )
(747 )
(224 )
(220 )
(4,317 )
2,183
1,652
12,340
10,688
$
12,521 $
12,340
$
2,254 $
3,190
2,366
3,257
The notes to consolidated financial statements are an integral part of these statements.
38 | TWIN DISC, INC. 2022 ANNUAL REPORT
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended June 30, 2022 and 2021
(In thousands)
Twin Disc, Inc. Shareholders’ Equity
Accumulated
Other
Common
Stock
Retained
Earnings
Comprehensive Treasury
Income (Loss)
Stock
Non-
Controlling
Interest
Total
Equity
Balance at June 30, 2020
$
42,756 $
156,655 $
(41,226 ) $
(18,796 ) $
569 $
139,958
Net (loss) income
Translation adjustments
Benefit plan adjustments, net of tax
Unrealized loss on hedges, net of tax
Cash dividends
Compensation expense
Shares (acquired) issued, net
(29,719 )
5,738
12,113
760
2,154
(3,938 )
3,713
200
(99 )
(220 )
(29,519 )
5,639
12,113
760
(220 )
2,154
(225 )
Balance at June 30, 2021
40,972
126,936
(22,615 )
(15,083 )
450
130,660
Net income
Translation adjustments
Benefit plan adjustments, net of tax
Unrealized loss on hedges, net of tax
Cash dividends
Compensation expense
Shares (acquired) issued, net
8,095
(11,458 )
(263 )
2,250
2,428
(849 )
363
311
(135 )
(214 )
8,406
(11,593 )
(263 )
2,250
(214 )
2,428
(486 )
Balance at June 30, 2022
$
42,551 $
135,031 $
(32,086 ) $
(14,720 ) $
412 $
131,188
The notes to consolidated financial statements are an integral part of these statements.
TWIN DISC, INC. 2022 ANNUAL REPORT | 39
TWIN DISC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE DATA)
A. SIGNIFICANT ACCOUNTING POLICIES
COVID-19
Throughout this report, references made to “COVID-19” pertain to the global pandemic declared by the World Health Organization
(“WHO”) in March 2020. This pandemic caused shelter-in-place policies, unexpected factory closures, supply chain disruptions, and
market volatilities across the globe. These drastic actions resulted in an unprecedented global recession, causing substantial declines in
countries’ gross domestic output around the world.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. The depth and duration of the pandemic
remains unknown. Despite the availability of vaccines, recent surges in the infection rate and the detection of new variants of the virus
have reinforced the general consensus that the containment of COVID-19 remains a challenge. Management is actively monitoring the
global situation and its effect on its financial condition, liquidity, operations, suppliers, industry, and workforce.
Significant Accounting Policies
The following is a summary of the significant accounting policies followed in the preparation of these financial statements:
Consolidation Principles--The consolidated financial statements include the accounts of Twin Disc, Incorporated and its wholly-
owned domestic and foreign subsidiaries. In fiscal 2021, certain subsidiaries changed their reporting periods to conform to the
Company’s fiscal year end. The impact of aligning to the corporate reporting period is not material to the consolidated results. All
significant intercompany transactions have been eliminated.
Management Estimates--The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual amounts could differ from those estimates.
Translation of Foreign Currencies--The financial statements of the Company’s non-U.S. subsidiaries are translated using the current
exchange rate for assets and liabilities and the weighted-average exchange rate for the year for revenues and expenses. The resulting
translation adjustments are recorded as a component of accumulated other comprehensive loss, which is included in equity. Gains and
losses from foreign currency transactions are included in earnings. Included in other (expense) income are foreign currency transaction
gain (losses) of $714 and ($2,108) in fiscal 2022 and 2021, respectively.
Cash--The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalent.
Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment.
To the extent that checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they
were written, the amount of those un-presented checks is included in accounts payable.
Accounts Receivable--These represent trade accounts receivable and are stated net of an allowance for doubtful accounts of $1,741
and $1,870 at June 30, 2022 and 2021, respectively. The Company records an allowance for doubtful accounts for certain customers
where a risk of default has been specifically identified as well as provisions determined on a general basis when it is believed that
some default is probable and estimable. The assessment of likelihood of customer default is based on a variety of factors, including the
length of time the receivables are past due, the historical collection experience and existing economic conditions. Various factors may
adversely impact its customer’s ability to access sufficient liquidity and capital to fund their operations and render the Company’s
estimation of customer defaults inherently uncertain. While the Company believes current allowances for doubtful accounts are
adequate, it is possible that these factors may cause higher levels of customer defaults and bad debt expense in future periods.
Fair Value of Financial Instruments--The carrying amount reported in the consolidated balance sheets for cash, trade accounts
receivable and accounts payable approximate fair value because of the immediate short-term maturity of these financial instruments.
If measured at fair value, cash would be classified as Level 1 and all other items listed above would be classified as Level 2 in the
fair value hierarchy, as defined in Note M, Pension and Other Postretirement Benefit Plans. The Company’s borrowings under the
revolving loan agreement, which is classified as long-term debt and consists of loans that are routinely borrowed and repaid
throughout the year, approximate fair value at June 30, 2022. The Company’s term loan borrowing, which is SOFR-based,
approximates fair value at June 30, 2022. If measured at fair value in the financial statements, long-term debt (including any current
portion) would be classified as Level 2 in the fair value hierarchy.
40 | TWIN DISC, INC. 2022 ANNUAL REPORT
Derivative Financial Instruments--The Company has written policies and procedures that place all financial instruments under
the direction of the Company’s corporate treasury department and restrict all derivative transactions to those intended for hedging
purposes. The use of financial instruments for trading purposes is prohibited. The Company uses derivative financial instruments
to manage certain financial risks. The Company enters into forward contracts to reduce the earnings and cash flow impact of non-
functional currency denominated receivables and payables. The Company uses interest rate swap contracts to reduce the exposure to
variability in interest rates on floating debt borrowings. The Company designates certain financial instruments as cash flow hedges
for accounting purposes. The Company designates certain financial instruments as net investment hedges to reduce the exposure in
its foreign currency denominated net investments in wholly-owned subsidiaries. See Note R, Derivative Financial Instruments, for
additional information.
Inventories--Inventories are valued at the lower of cost or net realizable value. Cost has been determined by the last-in, first-out
(LIFO) method for the majority of inventories located in the United States, and by the first-in, first-out (FIFO) method for all other
inventories. Management specifically identifies obsolete products and analyzes historical usage, forecasted production based on future
orders, demand forecasts, and economic trends, among others, when evaluating the adequacy of the reserve for excess and obsolete
inventory.
Assets Held for Sale--Assets that will be recovered principally through sale rather than in its continuing use in operations are
reclassified out of property, plant and equipment and into assets held for sale if all of the following criteria are met: (a) management,
having the authority to approve the action, commits to a plan to sell the asset(s); (b) the asset is available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets; (c) an active program to locate a buyer,
and other actions required to complete the plan to sell the asset have been initiated; (d) the sale of the asset is probable and the transfer
of the asset is expected to qualify for recognition as a completed sale within a year; (e) the asset is being actively marketed for sale at a
price that is reasonable in relation to its current fair value; and (f) actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that plan will be withdrawn.
Assets Held for Sale are carried at fair value less costs to sell, or net book value, whichever is lower. The Company ceases to record
depreciation expense at the time of designation as held for sale. During fiscal 2021, the Company classified certain properties as held
for sale and recorded impairment charges of $4,267. During fiscal 2022, the Company sold certain assets held for sale and record a net
gain of $2,939. See Note P, Restructuring of Operations and Income from Extinguishment of Loan, for additional information.
Property, Plant and Equipment and Depreciation--Assets are stated at cost. Expenditures for maintenance, repairs and minor
renewals are charged against earnings as incurred. Expenditures for major renewals and betterments are capitalized and depreciated.
Depreciation is provided on the straight-line method over the estimated useful lives of the assets. The lives assigned to buildings and
related improvements range from 10 to 40 years, and the lives assigned to machinery and equipment range from 5 to 15 years. Upon
disposal of property, plant and equipment, the cost of the asset and the related accumulated depreciation are removed from the
accounts and the resulting gain or loss is reflected in earnings. Fully depreciated assets are not removed from the accounts until
physically disposed.
Right of Use Lease Assets--In accordance with ASC 842, the Company’s leases, with lease periods longer than twelve months, are
recorded on the consolidated balance sheets. These leases primarily consist of office and warehouse facilities, as well as production
and office equipment.
The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which
is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably
certain that such options will be exercised. As its lease agreements typically do not provide an implicit rate, the Company primarily
uses an incremental borrowing rate based upon the information available at lease commencement. In determining the incremental
borrowing rate, the Company considers its current borrowing rate, the lease period, and the economic environments where the lease
activity is concentrated.
Impairment of Long-lived Assets--The Company reviews long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. For property, plant and equipment and
other long-lived assets, including intangible assets, the Company performs undiscounted operating cash flow analyses to determine
if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Fair
value is primarily determined using discounted cash flow analyses; however, other methods may be used to determine the fair value,
including third party valuations when necessary.
Intangible Assets-- Intangible assets primarily consist of customer relationships, technology and know-how, and tradenames, all of
which are definite-lived. They were initially valued at fair value at acquisition, and are amortized over their respective useful lives on
the basis of straight line or accelerated, as appropriate.
TWIN DISC, INC. 2022 ANNUAL REPORT | 41
Income Taxes--The Company recognizes deferred tax assets and liabilities for the expected future income tax consequences of events
that have been recognized in the Company’s financial statements. Under this method, deferred tax assets and liabilities are determined
based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using
enacted tax rates in effect in the years in which temporary differences are expected to reverse. Valuation allowances are provided for
deferred tax assets where it is considered more likely than not that the Company will not realize the benefit of such assets. The
Company evaluates its uncertain tax positions as new information becomes available. Tax benefits are recognized to the extent a
position is more likely than not to be sustained upon examination by the taxing authority.
Revenue Recognition--Revenue from contracts with customers is recognized using a five-step model consisting of the following:
1.
identify the contract with a customer; The Company’s customers consist of distributors and direct end-users. With regard
to distributors, the Company generally has written distribution agreements which describe the terms of the distribution
arrangement, such as the product range, the sales territory, product pricing, sales support, payment and returns policy, etc.
Customer contracts are generally in the form of acknowledged purchase orders. Services to be rendered, as part of the
delivery of those products, are also generally specified. Such services include installation reviews and technical
commissioning.
2.
identify the performance obligations in the contract; The Company’s performance obligations primarily consist of product
delivery and certain service obligations such as technical commissioning, repair services, installation reviews, and shift
development.
3. determine the transaction price; The Company considers the invoice as the transaction price.
4.
5.
allocate the transaction price to the performance obligations in the contract; The Company determined that the most
relevant allocation method for its service obligations is to apply the expected cost plus appropriate margin. This is the
Company’s practice of billing for repairs, overhaul, and other product service related time incurred by its technicians.
recognize revenue; Revenue is recognized as each performance obligation is satisfied which is typically when the Company
transfers control of a good or service to a customer, which can occur over time or at a point in time. For technical
commissioning, repairs, installation review, and shift development services, revenue is recognized upon completion of the
service. The amount of revenue recognized is based on the consideration to which the Company expects to be entitled in
exchange for those goods or services, including the expected value of variable consideration. The customer’s ability and
intent to pay the transaction price is assessed in determining whether a contract exists with the customer. If collectability of
substantially all of the consideration in a contract is not probable, consideration received is not recognized as revenue unless
the consideration is nonrefundable and the Company no longer has an obligation to transfer additional goods or services to
the customer or collectability becomes probable.
Goods sold to third party distributors are subject to an annual return policy, for which a provision is made at the time of shipment
based upon historical experience. Goods sold under bill and hold arrangements are recorded as revenue when control has been
transferred to the customer and when the reason for the arrangement is substantive, when the product is identified as the customer’s
asset, when the product is ready for delivery to the customer, and when the Company cannot use the product or redirect the product to
another customer.
Shipping and Handling Fees and Costs--The Company records revenue from shipping and handling costs in net sales. The cost
associated with shipping and handling of products is reflected in cost of goods sold.
Recently Adopted Accounting Standards
a.
b.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance (ASU 2018-13) as part of
the disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to the financial
statements. The amendments in this update modify the disclosure requirements on fair value measurements in ASC 820,
Fair Value Measurement. The Company adopted this guidance effective July 1, 2021. The adoption of this guidance did
not have a material impact on the Company’s financial statements and disclosures.
In August 2018, the FASB issued updated guidance (ASU 2018-14) intended to modify the disclosure requirements for
employers that sponsor defined benefit pension or postretirement plans. The Company adopted this guidance effective July 1,
2021. The adoption of this guidance did not have a material impact on the Company’s financial statements and disclosures.
42 | TWIN DISC, INC. 2022 ANNUAL REPORT
New Accounting Releases
a.
In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial
guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-10 (collectively ASC 326). ASC 326 requires the
measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing
incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss
estimates. The amendments in this guidance are effective for filers, excluding smaller reporting companies, for fiscal years
beginning after December 15, 2019, and for smaller reporting companies for fiscal years beginning after December 15, 2022
(the Company’s fiscal 2024), with early adoption permitted for certain amendments. ASC 326 must be adopted by applying a
cumulative effect adjustment to retained earnings. The Company is currently evaluating the potential impact of this guidance
on the Company’s disclosures.
b.
c.
In December 2019, the FASB issued guidance (ASU 2019-12) intended to simplify the accounting for income taxes. The
amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2021 (the Company’s fiscal 2022), with early adoption permitted. The Company is currently evaluating the
potential impact of this guidance on the Company’s disclosures.
In March 2021 and January 2022, the FASB issued guidance (ASU 2021-04 and ASU 2022-01, 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,
2021, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is
working with its lender and currently evaluating the potential impact of this guidance on the Company’s financial statements
and disclosures.
Special Note Regarding Smaller Reporting Company Status
Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller
reporting company based on its public float as of the last business day of the second quarter of fiscal 2022. Accordingly, it has scaled
some of its disclosures of financial and non-financial information in this annual report. The Company will continue to determine
whether to provide additional scaled disclosures of financial or non-financial information in future quarterly reports, annual reports
and/or proxy statements if it remains a smaller reporting company under SEC rules.
TWIN DISC, INC. 2022 ANNUAL REPORT | 43
B. INVENTORIES
The major classes of inventories at June 30 were as follows:
Finished parts
Work in process
Raw materials
2022
2021
$
$
65,789 $
19,801
41,519
127,109 $
59,761
17,908
37,298
114,967
Inventories stated on a LIFO basis represent approximately 44% and 45% of total inventories at June 30, 2022 and 2021, respectively.
The approximate current cost of the LIFO inventories exceeded the LIFO cost by $27,797 and $25,969 at June 30, 2022 and 2021,
respectively. Inventories were reduced during 2021, resulting in a liquidation of a LIFO inventory layer that was carried at a lower
cost prevailing from a prior year, as compared with current costs in the current year (“LIFO decrement”). A LIFO decrement results in
the erosion of layers created in earlier years, and, therefore, a LIFO layer is not created for years that have decrements. There was no
LIFO decrement for the year ended June 30, 2022. For the year ended June 30, 2021, the effect of this LIFO decrement decreased cost
of goods sold by $1,105.
The Company had reserves for inventory obsolescence of $11,557 and $10,279 at June 30, 2022 and 2021, respectively.
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 were as follows:
Land
Buildings
Machinery and equipment
Less: accumulated depreciation
2022
2021
$
$
2,163 $
31,935
146,054
180,152
(138,537 )
41,615 $
3,858
30,317
150,872
185,047
(139,584 )
45,463
Included in the above amounts are finance lease right-of-use assets of $4,805 and $5,244 for the years ended June 30, 2022 and 2021,
respectively.
Depreciation expense for the years ended June 30, 2022 and 2021 was $6,374 and $7,853, respectively.
44 | TWIN DISC, INC. 2022 ANNUAL REPORT
D. INTANGIBLE ASSETS
At June 30, the following acquired intangible assets have definite useful lives and are subject to amortization:
Balance at June 30, 2020
Addition
Amortization
Translation adjustment
Balance at June 30, 2021
Addition
Amortization
Translation adjustment
Balance at June 30, 2022
Gross
Carrying
Amount
$ 39,245 $
833
-
1,064
41,142
421
-
(1,718 )
$ 39,845 $
Accumulated
Amortization
/ Impairment
Net Book
Value
Customer
Relationships
Technology
Know-how
Trade
Name
Other
-
(3,390 )
-
(23,662 )
-
(3,173 )
-
(20,272 ) $ 18,973 $
833
(3,390 )
1,064
17,480
421
(3,173 )
(1,718 )
(26,835 ) $ 13,010 $
11,554 $
-
(1,880 )
647
10,321
-
(1,605 )
(1,080 )
7,636 $
5,784 $
-
(1,226 )
325
4,883
-
(1,163 )
(482 )
3,238 $
1,388 $
-
(184 )
78
1,282
-
(174 )
(136 )
972 $
247
833
(100 )
14
994
421
(231 )
(20 )
1,164
Other intangibles consist mainly of computer software. Amortization is recorded on the basis of straight-line or accelerated, as
appropriate, over the estimated useful lives of the assets.
The weighted average remaining useful life of the intangible assets included in the table above is approximately 7 years.
Intangible amortization expense for the years ended June 30, 2022 and 2021 was $3,173 and $3,390, respectively. Estimated
intangible amortization expense for each of the next five fiscal years is as follows:
Fiscal Year
2023
2024
2025
2026
2027
Thereafter
2,880
2,741
2,590
1,354
1,235
2,210
The changes in the carrying amount of goodwill (impairment charges) are summarized as follows:
Net Book Value Rollforward
Net Book Value By Reporting
Unit
Gross
Carrying
Amount
Accumulated
Impairment
Net Book
Value
European
Propulsion
European
Industrial
Balance at June 30,
2020
Translation
adjustment
Balance at June 30,
2021
Translation
adjustment
Balance at June 30,
2022
$
39,202 $
(39,202 ) $
-
-
39,202
(39,202 )
-
-
$
39,202 $
(39,202 ) $
- $
-
-
-
- $
- $
-
-
-
- $
-
-
-
-
-
TWIN DISC, INC. 2022 ANNUAL REPORT | 45
E. ACCRUED LIABILITIES
Accrued liabilities at June 30 were as follows:
Customer deposits
Salaries and wages
Warranty
Distributor rebates
Retirement benefits
Other
F. WARRANTY
2022
2021
$
$
17,151 $
11,272
2,724
2,627
1,738
15,030
50,542 $
13,124
10,022
3,448
3,190
1,769
13,996
45,549
The Company warrants all assembled products, parts (except component products or parts on which written warranties are issued by
the respective manufacturers thereof and are furnished to the original customer, as to which the Company makes no warranty and
assumes no liability) and service against defective materials or workmanship. Such warranty generally extends from periods ranging
from 12 months to 24 months. The Company engages in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of its suppliers. However, its warranty obligation is affected by product failure rates, the number
of units affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established
based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance
sheet date. When evaluating the adequacy of the reserve for warranty costs, management takes into consideration the term of the
warranty coverage, historical claim rates and costs of repair, knowledge of the type and volume of new products and economic trends.
While the Company believes that 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 during the years ended June 30:
Reserve balance, July 1
Current period expense and adjustments
Payments or credits to customers
Translation adjustment
Reserve balance, June 30
2022
2021
$
$
4,369 $
1,570
(2,501 )
(109 )
3,329 $
4,460
3,590
(3,742 )
61
4,369
The current portion of the warranty accrual ($2,724 and $3,448 for fiscal 2022 and 2021, respectively) is reflected in accrued
liabilities, while the long-term portion ($605 and $921 for fiscal 2022 and 2021, respectively) is included in other long-term liabilities
on the consolidated balance sheets.
46 | TWIN DISC, INC. 2022 ANNUAL REPORT
G. DEBT
Long-term debt consisted of the following at June 30:
Credit Agreement Debt
Revolving loans (expire June 2025)
Term loan (due March 2026)
Other
Subtotal
Less: current maturities
Total long-term debt
Credit Agreement Debt:
2022
2021
$
$
22,968 $
13,500
75
36,543
(2,000 )
34,543 $
15,415
16,500
170
32,085
(2,000 )
30,085
On June 29, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A. (“BMO”)
that provided for the assignment and assumption of the previously existing loans between the Company and Bank of Montreal (the
“2016 Credit Agreement”) and subsequent amendments into a term loan (the “Term Loan”) and revolving credit loans (each a
“Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan, the “Loans”). 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”). The Credit Agreement also allows the Company to obtain Letters of Credit from BMO, which
if drawn upon by the beneficiary thereof and paid by BMO, would become Revolving Loans. Under the Credit Agreement, the
Company may not pay cash dividends on its common stock in excess of $3.0 million in any fiscal year.
On March 4, 2019, the Company entered into a second amendment (the “Second Amendment”) to the Credit Agreement. The Second
Amendment reduced the principal amount of the term loan commitment under the Credit Agreement from $35.0 million to $20.0
million. In connection with the Second Amendment, the Company issued an amended and restated term note in the amount of $20.0
million to the Bank, which amended the original $35.0 million note provided under the Credit Agreement.
Prior to entering into the Second Amendment, the outstanding principal amount of the term loan (the “Term Loan”) under the Credit
Agreement was $10.8 million. On the date of the Second Amendment, the Bank made an additional advance on the Term Loan to the
Company in the amount of $9.2 million. The Second Amendment also extended the maturity date of the Term Loan from January 2,
2020 to March 4, 2026, and added a requirement that the Company make principal installments of $0.5 million per quarter starting
with the quarter ending June 30, 2019.
The Second Amendment also reduced the applicable margin for purposes of determining the interest rate applicable to the Term Loan.
Previously, the applicable margin was 3.00%, which was added to the Monthly Reset LIBOR Rate or the Adjusted LIBOR, as
applicable. Under the Second Amendment, the applicable margin was between 1.375% and 2.375%, depending on the Company’s
total funded debt to EBITDA ratio.
The Second Amendment also adjusted certain financial covenants made by the Company under the Credit Agreement. Specifically,
the Company covenanted (i) not to allow its total funded debt to EBITDA ratio to be greater than 3.00 to 1.00 (the cap had previously
been 3.50 to 1.00 for quarters ending on or before September 30, 2019 and 3.25 to 1.00 for quarters ending on or about December 31,
2019 through September 30, 2020), and (ii) that its tangible net worth will not be less than $100.0 million plus 50% of net income for
each fiscal year ending on and after June 30, 2019 for which net income is a positive number (the $100.0 million figure had previously
been $70.0 million).
On January 28, 2020, the Company entered into a third amendment (the “Third Amendment”) to the Credit Agreement. The Third
Amendment restated the financial covenant provisions related to the maximum allowable ratio of total funded debt to EBITDA from
3.00 to 1.00 to 4.00 to 1.00 for the quarter ended December 27, 2019, 5.00 to 1.00 for the quarter ending March 27, 2020, 4.00 to 1.00
for the quarter ending June 30, 2020, 3.50 to 1.00 for the quarter ending September 25, 2020, and 3.00 to 1.00 for quarters ending on
or after December 25, 2020. For purposes of determining EBITDA, the Third Amendment added back extraordinary expenses (not to
exceed $3.9 million) related to the previously reported isolated product performance issue on one of the Company’s oil and gas
transmission models at certain installations. Under the Third Amendment, the applicable margin for revolving loans, letters of credit,
and term loans was between 1.25% and 3.375%, depending on the Company’s total funded debt to EBITDA ratio.
TWIN DISC, INC. 2022 ANNUAL REPORT | 47
On July 22, 2020, the Company entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement that amends the
Credit Agreement dated as of June 29, 2018, as amended, between the Company and BMO. The Fifth Amendment reduced BMO’s
Revolving Credit Commitment from $50.0 million to $45.0 million. The Fifth Amendment also gives the Company the option to make
interest-only payments on the Term Loan for quarterly payments occurring on September 30, 2020 and December 31, 2020, and limits
the Company’s Capital Expenditures for the fiscal year ending June 30, 2021 to $10.0 million.
The Fifth Amendment provides the Company with relief from its Total Funded Debt to EBITDA ratio financial covenant under the
Credit Agreement through (and including) the earlier of June 30, 2021 or a date selected by the Company. During the financial
covenant relief period:
● The “Applicable Margin” to be applied to Revolving Loans, the Term Loan, and the Commitment/Facility Fee will be
increased to 3.25%, 3.875%, and 0.20%, respectively.
● The Company may not make certain restricted payments (specifically, cash dividends, distributions, purchases, redemptions
or other acquisitions of or with respect to shares of its common stock or other common equity interests).
● The Company must maintain liquidity (as defined in the Fifth Amendment) of at least $15.0 million.
● The Company must maintain minimum EBITDA of at least (1) $1.0 million for the fiscal quarter ending June 30, 2020 and
the two fiscal quarters ending on or about September 30, 2020; (2) $2.5 million for the three fiscal quarters ending on or
about December 31, 2020; (3) $6.0 million for the four fiscal quarters ending on or about March 31, 2021; and (4) $10.0
million for the four fiscal quarters ending June 30, 2021.
For purposes of the minimum EBITDA covenant and the Total Funded Debt to EBITDA ratio, the Fifth Amendment clarified that
EBITDA shall exclude any gain that is realized on the forgiveness of the Small Business Administration Paycheck Protection Program
loan that the Company previously received.
The Fifth Amendment also changed the definition of “LIBOR” (used in calculating interest on Eurodollar Loans), “Monthly Reset
LIBOR Rate” (used in calculating interest on LIBOR Loans), and “LIBOR Quoted Rate” (used in the definition of “Base Rate,” which
is used in calculating interest on Letters of Credit that are drawn upon and not timely reimbursed).
The Company also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security interest in deposit
accounts the Company maintains with the Bank. Under the Fifth Amendment, the Bank may not provide a notice of exclusive control
of a deposit account (thereby obtaining exclusive control of the account) prior to the occurrence or existence of a Default or an Event
of Default under the Credit Agreement or otherwise upon the occurrence or existence of an event or condition that would, but for the
passage of time or the giving of notice, constitute a Default or an Event of Default under the Credit Agreement.
On January 27, 2021, the Company entered into a Forbearance Agreement and Amendment No. 6 to the Credit Agreement (the
“Forbearance Agreement”) that further amended the Credit Agreement.
The Company entered into the Forbearance Agreement because the Company was not in compliance with its financial covenant to
maintain a minimum EBITDA of at least $2.5 million for the three fiscal quarters ended as of December 25, 2020. In the Forbearance
Agreement, the Bank has agreed to forbear from exercising its rights and remedies against the Company under the Credit Agreement
with respect to the Company’s noncompliance with the minimum EBITDA covenant during the period (the “Forbearance Period”)
commencing January 27, 2021 and ending on the earlier of (i) September 30, 2021, and (ii) the date on which a default under the
Forbearance Agreement or Credit Agreement occurs. During the Forbearance Period, the Bank may continue to honor requests of the
Company for draws on the revolving note provided by the Bank under the Credit Agreement, except that the revolving credit
commitment is reduced from $45.0 million to $42.5 million during the Forbearance Period.
The Forbearance Agreement also added to the Company’s financial reporting requirements under the Credit Agreement by requiring
the Company to provide the Bank with monthly forecasts of the Company’s financial statements, and monthly reports on the
Company’s six-month backlog.
On September 30, 2021, the Company entered into a First Amended and Restated Forbearance Agreement and Amendment No. 7
to Credit Agreement (the “Amended and Restated Forbearance Agreement”) that amends the Credit Agreement dated as of June 29,
2018, as amended between the Company and the Bank.
48 | TWIN DISC, INC. 2022 ANNUAL REPORT
The Amended and Restated Forbearance Agreement extended the Forbearance Period through February 28, 2022, or if earlier, through
the date on which a default under the Amended and Restated Forbearance Agreement or Credit Agreement occurs. During the
extended Forbearance Period, the Bank will continue to forbear from exercising its rights and remedies against the Company under the
Credit Agreement with respect to the Company’s noncompliance with its minimum EBITDA covenants. The Amended and Restated
Forbearance Agreement also made certain adjustments to the Credit Agreement, including:
● Permitting the Company to sell its manufacturing facility in Novazzano, Switzerland for a gross sales price of approximately
$10 million, resulting in Net Cash Proceeds of approximately $8.7 million (the “Rolla Disposition”).
● Requiring the Company to promptly repatriate approximately $7 million of the Net Cash Proceeds from the Rolla Disposition
(the “Rolla Repatriation”), and to apply $1 million of such Net Cash Proceeds to the Term Loan and the remainder to the
revolving Loans under the Credit Agreement.
● Upon completion of the Rolla Repatriation: (1) reducing the portion of the Borrowing Base that is based on Eligible Inventory
from the lesser of $35 million or 50% of the value of Eligible Inventory to the lesser of $30 million or 50% of the value of
Eligible Inventory; and (2) reducing the Revolving Credit Commitment from a maximum of $42.5 million to a maximum of
$40 million.
On February 28, 2022, the Company entered into a Second Amended and Restated Forbearance Agreement and Amendment No. 8
to Credit Agreement (the “Second Amended and Restated Forbearance Agreement”) that amended the Credit Agreement dated as of
June 29, 2018, as amended between the Company and the Bank.
The Second Amended and Restated Forbearance Agreement extended the Forbearance Period through June 30, 2022, or if earlier,
through the date on which a default under the Amended and Restated Forbearance Agreement or Credit Agreement occurs. During
the extended Forbearance Period, the Bank continued to forbear from exercising its rights and remedies against the Company under
the Credit Agreement with respect to the Company’s noncompliance with its minimum EBITDA covenants. The Second Amended
and Restated Forbearance Agreement also made certain adjustments to the Credit Agreement, including:
● Reduced the portion of the Borrowing Base that is based on Eligible Inventory from the lesser of $35,000,000 or 50% of the
value of Eligible Inventory to the lesser of $30,000,000 or 50% of the value of Eligible Inventory. This change was already in
effect under the terms of the Amended and Restated Forbearance Agreement, due to the Company’s previously reported sale
of its manufacturing facility in Novazzano, Switzerland for a gross sales price of approximately $10,000,000, resulting in Net
Cash Proceeds (as defined in the Amended and Restated Forbearance Agreement) of approximately $8,700,000 (the “Rolla
Disposition”) and repatriation of approximately $7,000,000 of those Net Cash Proceeds (the “Rolla Repatriation”).
● Reduced the Revolving Credit Commitment from a maximum of $42,500,000 to a maximum of $40,000,000. This change
was also already in effect under the terms of the Amended and Restated Forbearance Agreement due to the Rolla Disposition
and Rolla Repatriation.
The Company also executed a Third Amended and Restated Revolving Note with the Bank, reflecting the maximum Revolving Credit
Commitment of $40,000,000.
On June 30, 2022, the Company entered into Amendment No. 9 to Credit Agreement (the “Ninth Amendment”) that amends and
extends the Credit Agreement dated as of June 29, 2018, as amended (the “Credit Agreement”) between the Company and BMO.
Pursuant to the Credit Agreement, as in effect prior to the Ninth Amendment, the Bank made a Term Loan to the Company in the
principal amount of $20,000,000, and the Company may, from time to time prior to the maturity date, enter into Revolving Loans in
amounts not to exceed, in the aggregate and subject to a Borrowing Base, $40,000,000 (the “Revolving Credit Commitment”). The
Credit Agreement also allows the Company to obtain Letters of Credit from the Bank, which if drawn upon by the beneficiary thereof
and paid by the Bank, would become Revolving Loans.
The Ninth Amendment extended the Credit Agreement through June 30, 2025. Prior to the Ninth Amendment, the Credit Agreement
was scheduled to terminate as of June 30, 2023.
The Ninth Amendment also formally terminated the January 27, 2021 Forbearance Agreement, which had been entered into because the
Company had not been in compliance with a requirement to maintain a minimum EBITDA of $2,500,000 for the three fiscal quarters ended
as of December 25, 2020. The Bank also waived the Company’s compliance with the minimum EBITDA requirements under the Credit
Agreement and any Event of Default associated with the Company’s noncompliance with the minimum EBITDA requirements.
TWIN DISC, INC. 2022 ANNUAL REPORT | 49
The Ninth Amendment also replaced LIBOR-based interest rates with different benchmark rates based on the secured overnight
financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”). Loans under the Credit Agreement are designated
either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,” which
accrue interest at the EURIBO Rate plus an Applicable Margin. Amounts drawn on a Letter of Credit that are not timely reimbursed
to the Bank bear interest at a Base Rate plus an Applicable Margin. The Company also pays a commitment fee on the average daily
Unused Revolving Credit Commitment equal to an Applicable Margin.
The Ninth Amendment also reduced the Applicable Margins from the rates that had been in effect during the period of the Forbearance
Agreement. During the period covered by the Forbearance Agreement, the Applicable Margins for Revolving Loans, Term Loans, and the
Unused Revolving Credit Commitment were 3.25%, 3.875%, and .20%, respectively. Under the Ninth Amendment, the Applicable Margins
are between 1.25% and 2.75% for Revolving Loans and Letters of Credit; 1.375% and 2.875% for Term Loans; and .10% and .15% for the
Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).
The Ninth Amendment also revised the Company’s financial covenants under the Credit Agreement. The Company’s Total Funded
Debt to EBITDA ratio (for which the Bank provided relief during period covered by the Forbearance Agreement) may not exceed
3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00. The Company’s Tangible Net
Worth may not be less than $100,000,000 plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.
Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property, including accounts
receivable, inventory, machinery and equipment, and intellectual property. The Company has also pledged 100% of its equity interests
in certain domestic subsidiaries and 65% of its equity interests in certain foreign subsidiaries. The Company also entered into a
Collateral Assignment of Rights under Purchase Agreement for its acquisition of Veth Propulsion. To effect these security interests,
the Company entered into various amendment and assignment agreements that consent to the assignment of certain agreements
previously entered into between the Company and the Bank of Montreal in connection with the 2016 Credit Agreement. The Company
also amended and assigned to BMO a Negative Pledge Agreement that it has previously entered into with Bank of Montreal, pursuant
to which it agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Credit Agreement and the
Negative Pledge Agreement.
Upon the occurrence of an Event of Default, BMO may take the following actions upon written notice to the Company: (1) terminate
its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding under the Credit Agreement to be
immediately due and payable; 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, BMO may take the three actions listed above without notice to the Company.
The PPP Loan:
On April 17, 2020, the Company entered into a promissory note (the “PPP Loan”) evidencing an unsecured loan in the amount of
$8,200 made to the Company under the Payment Protection Plan ("PPP"). The PPP is a liquidity facility program established by the
U.S. government as part of the CARES Act in response to the negative economic impact of the COVID-19 outbreak. The PPP Loan
is funded by the Small Business Administration (“SBA”) and administered by BMO. The PPP Loan has a two-year term and bears
interest at a rate of 1.0% per annum. Monthly principal and interest payments were deferred until April 2022.
The PPP Loan is a forgivable loan to the extent proceeds are used to cover qualified documented payroll, mortgage interest, rent,
and utility costs over a 24-week measurement period (as amended) following loan funding. For the loan to be forgiven, the Company
was required to formally apply for forgiveness, and potentially, could be required to pass an audit that it met the eligibility
qualifications of the loan.
In accounting for the terms of the PPP Loan, the Company is guided by ASC 470 Debt, and ASC 450-30 Gain contingency.
Accordingly, it recorded the proceeds of the PPP Loan of $8,200 as debt and it will derecognize the liability when the loan is paid off
or it has obtained forgiveness. The Company believes that the possibility of loan forgiveness is to be regarded as a contingent gain and
therefore did not recognize the gain (and derecognize the loan) until all uncertainty was removed (i.e., all conditions for forgiveness
are met). The Company applied for forgiveness, and on June 16, 2021, it was notified by BMO that the SBA remitted funds to BMO
to repay the PPP Loan in full, evidencing that the PPP Loan was fully forgiven. The Company removed the balance of the PPP Loan
from its consolidated balance sheet and recorded $8,200 in income from extinguishment of loan in its consolidated statement of
operations in fiscal 2021.
50 | TWIN DISC, INC. 2022 ANNUAL REPORT
While the loan has been formally forgiven, under the terms of the PPP Loan, the Company remains subject to an audit by the SBA
for a period of six years after forgiveness. The audit is intended to confirm the Company’s eligibility for the PPP loan and the
appropriateness of the PPP loan forgiveness. In accordance with ASC 450 Contingencies, the Company assessed the probability of
failing the audit and being required to repay all or any portion of the PPP Loan. The Company is aware of the requirements and has
retained all necessary documentation in support of its eligibility, including gross receipts calculations, supporting payroll expenses and
related information. The Company believes that it has materially complied with all the requirements of the PPP and reasonably
assured it would satisfy the requirements of an audit.
Other:
Other long-term debt pertains mainly to a financing arrangement in Europe. During fiscal 2019, the Company entered into sale
leaseback agreements with a leasing company covering various company vehicles. Under the terms of the agreements, the Company
received $329 in cash proceeds and agreed to lease back those same vehicles under various terms, ranging from 3 to 5 years. Under
ASC 842, Leases, these agreements are required to be accounted for as financing transactions. Consequently, the Company recorded
long-term liabilities for the proceeds received, and they are reduced as lease payments are made. These liabilities carry implied
interest rates ranging from 7% to 25%. A total amount of $91 in principal was paid on these liabilities during the current fiscal year.
During fiscal year 2022, the average interest rate was 4.10% on the Term Loan, and 4.23% on the Revolving Loans.
As of June 30, 2022, the Company’s borrowing capacity under the terms of the Credit Agreement was approximately $40,662 and the
Company had approximately $17,032 of available borrowings.
The Company’s borrowings described above approximates fair value at June 30, 2022 and June 30, 2021. If measured at fair value in
the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy. The
Company is party to an interest rate swap arrangement with Bank of Montreal, with an outstanding notional amount of $13,500 as of
June 30, 2022, and maturing on March 2026. This swap has been designated as a cash flow hedge under ASC 815, Derivatives and
Hedging. This swap is included in the disclosures in Note R, Derivative Financial Instruments.
During the fourth quarter of fiscal 2021, the Company designated its euro denominated Revolving Loan as a net investment hedge to
mitigate the risk of variability in its euro denominated net investments in wholly-owned foreign companies. Effective upon the
designation, all changes in fair value of the euro Revolving Loan are reported in accumulated other comprehensive loss along with the
foreign currency translation adjustments on those foreign investments. This net investment hedge is included in the disclosures in Note
R, Derivative Financial Instruments.
The aggregate scheduled maturities of outstanding long-term debt obligations in subsequent years are as follows:
Fiscal Year
2023
2024
2025
2026
2027
Thereafter
Other lines of credit:
$
$
2,038
2,014
24,968
5,500
-
22
34,543
The Company has established unsecured lines of credit, which may be withdrawn at the option of the banks. Under these
arrangements, the Company has unused and available credit lines of $1,049 with a weighted average interest rate of 5.7% as of June
30, 2022, and $1,535 with a weighted average interest rate of 5.6% as of June 30, 2021.
TWIN DISC, INC. 2022 ANNUAL REPORT | 51
H. LEASE OBLIGATIONS
The following table provides a summary of leases recorded on the consolidated balance sheet at June 30.
Balance Sheet Location
2022
2021
Lease Assets
Operating lease right-of-use assets Right-of-use assets operating leases
Property, plant and equipment, net
Finance lease right-of-use assets
Lease Liabilities
Operating lease liabilities
Operating lease liabilities
Finance lease liabilities
Finance lease liabilities
Accrued liabilities
Lease obligations
Accrued liabilities
Other long-term liabilities
$
$
12,685 $
4,805
14,736
5,244
2,127 $
10,575
576
4,440
1,870
12,887
541
4,836
The components of lease expense for the years ended June 30 were as follows:
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
Less: Sublease income
Net lease cost
Other information related to leases was as follows:
2022
2021
$
$
650 $
277
2,908
98
173
4,106
(75 )
4,031 $
580
273
2,795
24
159
3,831
(154 )
3,677
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use-assets obtained in exchange for lease obligations:
$
Operating leases
Finance leases
Weighted average remaining lease term (years):
Operating leases
Finance lease
Weighted average discount rate:
Operating leases
Finance leases
2022
2021
3,050 $
277
933
1,192
406
8.7
11.3
7.1 %
5.1 %
3,022
273
747
1,481
4,814
9.8
12.0
7.2 %
5.2 %
Approximate future minimum rental commitments under non-cancellable leases as of June 30, 2022 were as follows:
2023
2024
2025
2026
2027
Thereafter
Total future lease payments
Less: Amount representing interest
Present value of future payments
52 | TWIN DISC, INC. 2022 ANNUAL REPORT
Operating Leases Finance Leases
855
$
821
578
512
457
3,376
6,598
(1,582 )
5,016
2,941 $
2,378
1,539
1,404
1,130
7,742
17,134
(4,432 )
12,702 $
$
I. SHAREHOLDERS' EQUITY
The total number of shares of common stock outstanding at June 30, 2022 and 2021 was 13,672,343 and 13,648,663, respectively.
At June 30, 2022 and 2021, treasury stock consisted of 960,459 and 984,139 shares of common stock, respectively. The Company
issued 57,204 and 249,480 shares of treasury stock in fiscal 2022 and 2021, respectively, to fulfill its obligations under its incentive
compensation plans. The Company also recorded forfeitures of 29,810 and 6,809 shares of previously issued restricted stock in fiscal
2022 and 2021, respectively. The difference between the cost of treasury shares and the option price is recorded in common stock.
Under an authorization given by the Board of Directors on July 27, 2012, the Company is permitted to make open market purchases
of its common stock. The Company did not make any open market purchases during the two most recent fiscal years. As of June 30,
2022 and 2021, 315,000 shares remain authorized for purchase.
Cash dividends per share were $0.00 in both fiscal 2022 and 2021.
The Company is authorized to issue 200,000 shares of preferred stock, none of which have been issued. The Company has designated
150,000 shares of the preferred stock as Series A Junior Preferred Stock.
The components of accumulated other comprehensive loss included in equity as of June 30, 2022 and 2021 are as follows:
Translation adjustments
Benefit plan adjustments, net of income taxes of $9,452 and $9,537 respectively
Net loss on cash flow hedge derivatives, net of income taxes of $34 and $211,
respectively
Net gain on net investment hedge derivatives, net of income taxes of $388 and
$103, respectively
Accumulated other comprehensive loss
$
$
(2,266 ) $
(31,726 )
356
1,550
(32,086 ) $
9,192
(678 )
334
(31,463 )
(22,615 )
2022
2021
A reconciliation for the changes in accumulated other comprehensive loss, net of tax, by component for the years ended June 30, 2022
and June 30, 2021 is as follows:
Balance at June 30, 2021
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other
comprehensive loss
Net current period other comprehensive income
Balance at June 30, 2022
Balance at June 30, 2020
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other
comprehensive loss
Net current period other comprehensive loss
Balance at June 30, 2021
Translation
Adjustment
Benefit Plan
Adjustment
Cash Flow
Hedges
Net Investment
Hedges
9,192
(11,458 )
$
(31,463 ) $
(1,835 )
-
(11,458 )
(2,266 ) $
1,572
(263 )
(31,726 ) $
(678 ) $
-
1,034
1,034
356 $
334
-
1,216
1,216
1,550
Translation
Adjustment
Benefit Plan
Adjustment
Cash Flow
Hedges
Net Investment
Hedges
$
3,454
5,738
-
5,738
9,192
$
(43,576 ) $
9,783
2,330
12,113
(31,463 ) $
(1,104 ) $
426
-
426
(678 ) $
-
334
-
334
$
$
$
$
TWIN DISC, INC. 2022 ANNUAL REPORT | 53
A reconciliation for the reclassifications out of accumulated other comprehensive loss, net of tax, for the year ended June 30, 2022
is as follows:
Amortization of benefit plan items
Actuarial losses
Transition asset and prior service benefit
Total before tax benefit
Tax benefit
Total reclassification net of tax
Amount
Reclassified
$
$
(2,376 )
321
(2,055 )
483
(1,572 )
A reconciliation for the reclassifications out of accumulated other comprehensive loss, net of tax, for the year ended June 30, 2021 is
as follows:
Amortization of benefit plan items
Actuarial losses
Transition asset and prior service benefit
Total before tax benefit
Tax benefit
Total reclassification net of tax
Amount
Reclassified
$
$
(3,246 )
187
(3,059 )
729
(2,330 )
J. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company and its subsidiaries are engaged in the manufacture and sale of marine and heavy duty off-highway power transmission
equipment. Principal products include marine transmissions, azimuth drives, surface drives, propellers and boat management systems,
as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls systems. The
Company sells to both domestic and foreign customers in a variety of market areas, principally pleasure craft, commercial and military
marine markets, energy and natural resources, government, and industrial markets.
Net sales by product group is summarized as follows:
Industrial
Land-based transmissions
Marine and propulsion systems
Other
Total
2022
2021
$
$
32,100 $
64,904
125,446
20,463
242,913 $
23,454
58,421
127,243
9,463
218,581
Industrial products include clutches, power take-offs and pump drives sold to the agriculture, recycling, construction and oil and
gas markets. The land-based transmission products include applications for oil field and natural gas, military and airport rescue and
firefighting. The marine and propulsion systems include marine transmission, azimuth drives, controls, surface drives, propellers and
boat management systems for the global commercial marine, pleasure craft and patrol boat markets. Other includes non-Twin Disc
manufactured product sold through Company-owned distribution entities.
The Company has two reportable segments: manufacturing and distribution. Its segment structure reflects the way management
makes operating decisions and manages the growth and profitability of the business. It also corresponds with management’s approach
of allocating resources and assessing the performance of its segments. The accounting practices of the segments are the same as those
described in the summary of significant accounting policies. Transfers among segments are at established inter-company selling
prices. Management evaluates the performance of its segments based on net earnings.
54 | TWIN DISC, INC. 2022 ANNUAL REPORT
Information about the Company's segments, before intercompany eliminations, is summarized as follows:
2022
Net Sales
Intra-segment sales
Inter-segment sales
Interest income
Interest expense
Income taxes
Depreciation and amortization
Net income attributable to Twin Disc
Assets
Expenditures for segment assets
2021
Net Sales
Intra-segment sales
Inter-segment sales
Interest income
Interest expense
Income taxes
Depreciation and amortization
Net (loss) income attributable to Twin Disc
Assets
Expenditures for segment assets
Manufacturing
$
217,488 $
4,218
60,220
423
2,734
795
8,912
22,455
364,174
(8,112 )
Manufacturing
$
191,510 $
9,436
44,575
172
2,449
(980 )
10,455
11,016
364,379
3,500
Distribution
Total
106,731 $
12,987
3,880
269
1
1,177
294
3,238
50,958
386
324,219
17,206
64,100
692
2,735
1,972
9,205
25,692
415,132
(7,726 )
Distribution
Total
100,221 $
14,746
4,393
17
1
189
412
105
46,956
188
291,731
24,182
48,968
189
2,450
(791 )
10,867
11,121
411,335
3,688
The following is a reconciliation of reportable segment net sales and net income (loss) to the Company’s consolidated totals:
Net sales:
Total net sales from reportable segments
Elimination of inter-company sales
Total consolidated net sales
Net income (loss) attributable to Twin Disc:
Total net income (loss) from reportable segments
Other adjustments and corporate expenses
Total consolidated net loss attributable to Twin Disc
2022
2021
$
$
$
$
324,219 $
(81,305 )
242,913 $
25,692 $
(17,598 )
8,095 $
291,731
(73,150 )
218,581
11,121
(40,840 )
(29,719 )
Corporate expenses pertain to certain costs that are not allocated to the reportable segments, primarily consisting of corporate
overhead costs, including administrative functions and global functional expenses.
Other significant items:
2022
Interest income
Interest expense
Income taxes
Depreciation and amortization
Assets
Expenditures for segment assets
2021
Interest income
Interest expense
Income taxes
Depreciation and amortization
Assets
Expenditures for segment assets
Segment
Totals
Adjustments
Totals
Consolidated
$
$
692 $
2,735
1,972
9,205
415,132
(7,726 )
189 $
2,450
(791 )
10,867
411,335
3,688
(664 ) $
(607 )
(148 )
342
(136,743 )
12,455
(170 ) $
(92 )
20,471
376
(135,922 )
776
28
2,128
1,823
9,547
276,523
4,729
19
2,358
19,680
11,243
275,413
4,464
All adjustments represent inter-company eliminations and corporate amounts.
TWIN DISC, INC. 2022 ANNUAL REPORT | 55
Geographic information about the Company is summarized as follows:
Net sales
United States
Netherlands
China
Australia
Italy
Other countries
Total
2022
2021
$
$
81,454 $
28,099
26,870
18,404
16,577
71,510
242,913 $
64,344
25,790
33,026
17,963
16,041
61,417
218,581
Net sales by geographic region are based on product shipment destination.
Long-lived assets primarily pertain to property, plant and equipment and exclude goodwill, other intangibles, and deferred income
taxes. They are summarized as follows:
Long-lived assets
United States
Netherlands
Belgium
Italy
Switzerland
Other countries
Total
2022
2021
$
$
32,293 $
10,471
6,760
1,244
923
5,191
56,883 $
34,629
12,447
8,575
1,525
503
5,776
63,455
There was one customer, an authorized distributor of the Company, that accounted for 10% of consolidated net sales in fiscal year
2022. There were no customers that accounted for 10% of consolidated net sales in fiscal 2021.
Disaggregated revenue:
The following tables present details deemed most relevant to the users of the financial statements for the years ended June 30, 2022
and June 30, 2021.
Net sales by product group for the year ended June 30, 2022 is summarized as follows:
Industrial
Land-based transmissions
Marine and propulsion systems
Other
Total
$
Manufacturing
30,769
65,332
112,149
9,238
217,488
$
Elimination of
Intercompany
Sales
Distribution
$
$
5,506 $
30,177
56,909
14,139
106,731 $
(4,175 ) $
(30,605 )
(43,612 )
(2,914 )
(81,305 ) $
Total
32,100
64,904
125,446
20,463
242,913
Net sales by product group for the year ended June 30, 2021 is summarized as follows:
$
Manufacturing
22,621
52,441
116,371
77
191,510
$
Distribution
Elimination of
Intercompany
Sales
$
$
5,494 $
26,003
59,276
9,448
100,221 $
(4,661 ) $
(20,023 )
(48,404 )
(62 )
(73,150 ) $
Total
23,454
58,421
127,243
9,463
218,581
Industrial
Land-based transmissions
Marine and propulsion systems
Other
Total
56 | TWIN DISC, INC. 2022 ANNUAL REPORT
K. STOCK-BASED COMPENSATION
In fiscal 2022, the Company adopted the Twin Disc, Incorporated 2021 Long-Term Incentive Plan (the “2021 LTI Plan”). Benefits
under the 2021 LTI Plan may be granted, awarded or paid in any one or a combination of stock options, stock appreciation rights,
restricted stock awards, restricted stock units, cash-settled restricted stock units, performance stock awards, performance stock unit
awards, performance unit awards, and dividend equivalent awards. There is reserved for issuance under the Plan an aggregate of
715,000 shares of the Company’s common stock, which may be authorized and unissued shares or shares reacquired by the Company
in the open market or a combination of both. The aggregate amount is subject to proportionate adjustments for stock dividends, stock
splits and similar changes.
In fiscal 2021, the Company adopted the Twin Disc, Incorporated 2020 Stock Incentive Plan for Non-Employee Directors (the “2020
Directors' Plan”) a plan to grant non-employee directors equity-based awards. Benefits under the 2020 Directors’ Plan may be granted,
awarded or paid in any one or a combination of stock options, restricted stock awards, or cash-settled restricted stock units. Under the
2020 Directors’ Plan, non-employee directors may elect to receive all or a portion of their base cash retainer in the form of restricted
stock. There is reserved for issuance under the 2020 Directors’ Plan an aggregate of 750,000 shares of the Company's common stock,
which may be authorized and unissued shares or shares reacquired by the Company in the open market or a combination of both. The
aggregate amount is subject to proportionate adjustments for stock dividends, stock splits and similar changes.
In fiscal 2019, the Company adopted the Twin Disc, Incorporated 2018 Long-Term Incentive Plan (the “2018 LTI Plan”). Benefits
under the 2018 LTI Plan may be granted, awarded or paid in any one or a combination of stock options, stock appreciation rights,
restricted stock awards, restricted stock units, cash-settled restricted stock units, performance stock awards, performance stock unit
awards, performance unit awards, and dividend equivalent awards. There is reserved for issuance under the Plan an aggregate of
850,000 shares of the Company’s common stock, which may be authorized and unissued shares or shares reacquired by the Company
in the open market or a combination of both. The aggregate amount is subject to proportionate adjustments for stock dividends, stock
splits and similar changes.
Shares available for future awards as of June 30 were as follows (assuming that outstanding performance awards are issued at the
target level of performance):
2020 Directors' Plan
2021 LTI Plan
Performance Stock Awards (“PSA”)
2022
2021
612,981
551,901
666,913
-
In fiscal 2022 and 2021, the Company granted a target number of 103,575 and 265,256 PSAs, respectively, to various employees of
the Company, including executive officers.
The PSAs granted in fiscal 2022 will vest if the Company achieves performance-based target objectives relating to average return on
invested capital, average annual sales and average annual earnings per share (“EPS”) or average free cashflow (as defined in the PSA
Grant Agreement), in the cumulative three fiscal year period ending June 30, 2024. These PSAs are subject to adjustment if the
Company’s return on invested capital, net sales, and EPS or average free cashflow for the period falls below or exceeds the specified
target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 146,562.
Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.
The PSAs granted in fiscal 2021 will vest if the Company achieves performance-based target objectives relating to average return on
invested capital, average annual sales and average free cash flow (as defined in the PSA Grant Agreement), in the cumulative three
fiscal year period ending June 30, 2023. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales,
and free cash flow for the period falls below or exceeds the specified target objective, and the maximum number of performance
shares that can be awarded if the target objective is exceeded is 397,884. Based upon actual results to date, the Company is currently
accruing compensation expense for these PSAs.
There were 320,779 and 388,433 unvested PSAs outstanding at June 30, 2022 and 2021, respectively. The fair value of the PSAs
(on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. The compensation
expense for the year ended June 30, 2022 and 2021, related PSAs, was $883 and $491, respectively. The tax expense from
compensation expense for the year ended June 30, 2022 and 2021, related PSAs, was $207 and $116, respectively. The weighted
average grant date fair value of the unvested awards at June 30, 2022 was $8.37. At June 30, 2022, the Company had $1,322 of
unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved
for the fiscal 2022 and 2021 awards. The total fair value of performance stock awards vested in fiscal 2022 and fiscal 2021 was $0.
TWIN DISC, INC. 2022 ANNUAL REPORT | 57
Restricted Stock Awards (“RS”)
The Company has unvested RS outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded
as compensation over the vesting period, which is generally 1 to 3 years. During fiscal 2022 and 2021, the Company granted 57,204 and
251,804 service based restricted shares, respectively, to employees and non-employee directors in each year. A total of 29,810 and 6,809
shares of restricted stock were forfeited during fiscal 2022 and 2021, respectively. There were 272,438 and 379,095 unvested shares
outstanding at June 30, 2022 and 2021, respectively. Compensation expense of $1,223 and $1,335 was recognized during the year ended
June 30, 2022 and 2021, respectively, related to these service-based awards. The tax benefit from compensation expense for the year ended
June 30, 2022 and 2021, related to these service-based awards, was $287 and $315, respectively. The total fair value of restricted stock grants
vested in fiscal 2022 and 2021 was $1,711 and $533, respectively. As of June 30, 2022, the Company had $618 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 the employee to shares of common stock of the Company if the employee remains employed by the Company
through a specified date, generally three years from the date of grant. The fair value of the RSUs (on the date of grant) is recorded as
compensation expense over the vesting period. There were 62,119 and 34,822 unvested RSUs outstanding at June 30, 2022 and June
30, 2021, respectively. Compensation expense of $321 and $328 was recognized during the year ended June 30, 2022 and 2021,
respectively. The tax benefit from compensation expense for the year ended June 30, 2022 and 2021, related to these service-based
awards, was $75 and $78, respectively. The weighted average grant date fair value of the unvested awards at June 30, 2022 was
$14.18. As of June 30, 2022, the Company had $585 of unrecognized compensation expense related to RSUs which will be recognized
over the next year.
L. ENGINEERING AND DEVELOPMENT COSTS
Engineering and development costs include research and development expenses for new products, development and major
improvements to existing products, and other costs for ongoing efforts to refine existing products. Research and development costs
charged to operations totaled $1,576 and $1,867 in fiscal 2022 and 2021, respectively. Total engineering and development costs were
$8,808 and $8,535 in fiscal 2022 and 2021, respectively.
M. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has non-contributory, qualified defined benefit pension plans covering substantially all domestic employees hired prior
to October 1, 2003, and certain foreign employees. Domestic plan benefits are based on years of service, and, for salaried employees,
on average compensation for benefits earned prior to January 1, 1997, and on a cash balance plan for benefits earned from January 1,
1997 through July 31, 2009, at which time the Company froze future accruals under domestic defined benefit pension plans. The
Company's funding policy for the plans covering domestic employees is to contribute an actuarially determined amount which falls
between the minimum required contribution and maximum amount that can be deducted for federal income tax purposes.
In addition, the Company has unfunded, non-qualified retirement plans for certain management employees and Directors. In the case
of management employees, benefits are based on an annual credit to a bookkeeping account, intended to restore the benefits that
would have been earned under the qualified plans, but for the earnings limitations under the Internal Revenue Code. In the case of
Directors, benefits are based on years of service on the Board. All benefits vest upon retirement from the Company.
In addition to providing pension benefits, the Company provides other postretirement benefits, including healthcare and life insurance
benefits for certain domestic retirees. All employees retiring after December 31, 1992, and electing to continue healthcare coverage
through the Company's group plan, are required to pay 100% of the premium cost.
The measurement date for the Company’s pension and postretirement benefit plans in fiscal 2022 and 2021 was June 30.
58 | TWIN DISC, INC. 2022 ANNUAL REPORT
Obligations and Funded Status
The following table sets forth the Company's defined benefit pension plans’ and other postretirement benefit plans’ funded status and
the amounts recognized in the Company's balance sheets and statement of operations and comprehensive loss as of June 30:
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Prior service cost
Actuarial (gain) loss
Contributions by plan participants
Benefits paid
Benefit obligation, end of year
Change in plan assets:
Fair value of assets, beginning of year
Actual return on plan assets
Employer contribution
Contributions by plan participants
Benefits paid
Fair value of assets, end of year
Funded status
Amounts recognized in the balance sheet consist of:
Other assets - noncurrent
Accrued liabilities - current
Accrued retirement benefits - noncurrent
Net amount recognized
Amounts recognized in accumulated other comprehensive loss
consist of (net of tax):
Net transition obligation
Prior service cost
Actuarial net loss
Net amount recognized
Pension
Benefits
Other
Postretirement
Benefits
2022
2021
2022
2021
98,700 $
507
2,472
40
(14,253 )
105
(8,022 )
79,549 $
92,430 $
(11,884 )
709
105
(8,022 )
73,338 $
105,520 $
608
2,516
65
(1,577 )
114
(8,546 )
98,700 $
83,284 $
15,325
2,253
114
(8,546 )
92,430 $
6,102 $
14
140
-
(786 )
203
(888 )
4,785 $
- $
-
686
203
(889 )
- $
7,059
16
154
-
(395 )
269
(1,001 )
6,102
-
-
732
269
(1,001 )
-
(6,211 ) $
(6,270 ) $
(4,785 ) $
(6,102 )
- $
(271 )
(5,940 )
(6,211 ) $
60 $
(423 )
(5,907 )
(6,270 ) $
- $
(751 )
(4,034 )
(4,785 ) $
-
(833 )
(5,269 )
(6,102 )
102 $
9
32,453
32,564 $
133 $
94
31,563
31,790 $
- $
(278 )
(560 )
(838 ) $
-
(487 )
160
(327 )
$
$
$
$
$
$
$
$
$
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost
during the next fiscal year for the qualified defined benefit and other postretirement benefit plans are as follows:
Net transition obligation
Prior service cost
Actuarial net loss
Net amount to be recognized
Other
Pension
Benefits
Postretirement
Benefits
$
$
36 $
37
2,482
2,555 $
-
(275 )
(39 )
(314 )
The accumulated benefit obligation for all defined benefit pension plans was approximately $98,700 and $105,520 at June 30, 2022
and 2021, respectively.
TWIN DISC, INC. 2022 ANNUAL REPORT | 59
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
Projected and accumulated benefit obligation
Fair value of plan assets
Components of Net Periodic Benefit Cost:
Service cost
Interest cost
Prior service cost
Expected return on plan assets
Amortization of transition obligation
Amortization of prior service cost
Amortization of actuarial net loss
Net periodic benefit cost
Service cost
Interest cost
Amortization of prior service cost
Net periodic benefit cost
June 30
2022
2021
79,549 $
73,338
53,780
47,450
Pension Benefits
2022
2021
511 $
2,473
40
(5,055 )
40
(85 )
2,375
299 $
615
2,516
65
(4,552 )
40
47
3,246
1,977
Other Postretirement Benefits
2022
2021
14 $
140
(274 )
(120 ) $
16
154
(274 )
(104 )
$
$
$
$
$
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss for Fiscal 2022 (Pre-tax):
Other
Postretirement
Pension
Benefits
Net income (loss)
Amortization of transition asset
Amortization of prior service (cost) benefit
Amortization of net loss
Total recognized in other comprehensive income
Net periodic benefit cost (benefit)
Total recognized in net periodic benefit cost and other comprehensive
$
2,860 $
(40 )
85
(2,375 )
530
299
income
$
829 $
(785 )
-
275
-
(510 )
(120 )
(630 )
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss for Fiscal 2021 (Pre-tax):
Other
Postretirement
Pension
Benefits
Net loss
Amortization of transition asset
Amortization of prior service (cost) benefit
Amortization of net loss
Total recognized in other comprehensive income
Net periodic benefit cost (benefit)
Total recognized in net periodic benefit cost and other comprehensive
$
(12,460 ) $
(40 )
(47 )
(3,246 )
(15,793 )
1,977
income
$
(13,816 ) $
(397 )
-
275
-
(122 )
(104 )
(226 )
60 | TWIN DISC, INC. 2022 ANNUAL REPORT
Additional Information
Assumptions
Weighted average assumptions used to
determine benefit obligations at June 30
Pension Benefits
Other
Postretirement Benefits
Discount rate
Expected return on plan assets
4.61 %
6.13 %
2.63 %
5.69 %
4.83 %
2.47 %
2022
2021
2022
2021
Pension Benefits
Other
Postretirement Benefits
Weighted average assumptions used to
determine net periodic benefit costs for
years ended June 30
Discount rate
Expected return on plan assets
2.59 %
5.50 %
2.49 %
5.89 %
2.47 %
2.37 %
2022
2021
2022
2021
The assumed weighted-average healthcare cost trend rate was 5.75% in 2022, grading down to 5.00% in 2025.
Plan Assets
The Company’s Benefits Committee (“Committee”), a non-board management committee, oversees investment matters related to the
Company’s funded benefit plans. The Committee works with external actuaries and investment consultants on an ongoing basis to
establish and monitor investment strategies and target asset allocations. The overall objective of the Committee’s investment strategy
is to earn a rate of return over time to satisfy the benefit obligations of the pension plans and to maintain sufficient liquidity to pay
benefits and address other cash requirements of the pension plans. The Committee has established an Investment Policy Statement
which provides written documentation of the Company’s expectations regarding its investment programs for the pension plans,
establishes objectives and guidelines for the investment of the plan assets consistent with the Company’s financial and benefit-related
goals, and outlines criteria and procedures for the ongoing evaluation of the investment program. The Company employs a total return
on investment approach whereby a mix of investments among several asset classes are used to maximize long-term return of plan
assets while avoiding excessive risk. Investment risk is measured and monitored on an ongoing basis through quarterly investment
portfolio reviews, and annual liability measurements.
The Company’s pension plan weighted-average asset allocations at June 30, 2022 and 2021 by asset category were as follows:
Asset Category
Equity securities
Debt securities
Real estate
Target
Allocation
June 30
2022
2021
43 %
50 %
7 %
100 %
40 %
49 %
11 %
100 %
53 %
38 %
9 %
100 %
Due to market conditions and other factors, actual asset allocation may vary from the target allocation outlined above. The U.S.
pension plans held 98,211 shares of Company stock with a fair market value of $890 (1.3% of total plan assets) at June 30, 2022 and
98,211 shares with a fair market value of $1,398 (1.5% of total plan assets) at June 30, 2021.
The U.S. plans have a long-term return assumption of 6.40%. This rate was derived based upon historical experience and forward-
looking return expectations for major asset class categories. The weighted average long-term return across all plans is 6.13%.
Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The inputs used to measure fair value are classified into the following hierarchy:
Level I
Level II Unadjusted quoted prices in active markets for similar instruments, or
Unadjusted quoted prices in active markets for identical instruments
Unadjusted quoted prices for identical or similar instruments in markets that are not active, or
Other inputs that are observable in the market or can be corroborated by observable market data
Level III Use of one or more significant unobservable inputs
TWIN DISC, INC. 2022 ANNUAL REPORT | 61
The following table presents plan assets using the fair value hierarchy as of June 30, 2022:
Total
Level I
Level II
Level III
Cash and cash equivalents
Equity securities:
Company common stock (a)
Common stock (a)
Mutual funds (b)
Annuity contracts (c)
Total
Investments Measured at Net Asset Value (d)
Total
$
865 $
865 $
890
10,612
4,720
6,302
23,389 $
49,949
73,338
$
$
890
10,612
4,720
-
17,087 $
- $
-
-
-
-
- $
-
-
-
-
6,302
6,302
The following table presents plan assets using the fair value hierarchy as of June 30, 2021:
Total
Level I
Level II
Level III
Cash and cash equivalents
Equity securities:
Company common stock (a)
Common stock (a)
Mutual funds (b)
Annuity contracts (c)
Total
Investments Measured at Net Asset Value (d)
Total
$
1,043 $
1,043 $
1,398
18,201
9,366
6,646
36,654 $
55,776
92,430
$
$
1,398
18,201
9,366
-
30,008 $
- $
-
-
-
-
- $
-
-
-
-
6,646
6,646
(a) Common stock is valued at the closing price reported on the active market on which the individual securities are traded. These
securities include U.S. equity securities invested in companies that are traded on exchanges inside the U.S. and international equity
securities invested in companies that are traded on exchanges outside the U.S.
(b) Mutual funds are valued at the daily closing price as reported by the fund. Mutual funds held by the Company’s funded benefit
plans are open-end mutual funds that are registered with the Securities Exchange Commission. These funds are required to publish
their daily net asset value (“NAV”) and to transact at that price. The mutual funds held by the Company’s funded benefit plans are
deemed to be actively traded.
(c) Annuity contracts represent contractual agreements in which payments are made to an insurance company, which agrees to pay
out an income or lump sum amount at a later date. Annuity contracts are valued at fair value using the net present value of future
cash flows.
(d) In accordance with ASC 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not
been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the
fair value hierarchy to the fair value of plan assets at the end of the year.
62 | TWIN DISC, INC. 2022 ANNUAL REPORT
The following table sets forth additional disclosures for the fair value measurement of the fair value of pension plan assets that
calculate fair value based on NAV per share practical expedient as of June 30, 2022 and June 30, 2021:
Fixed income funds
International equity securities
Real estate
Hedged equity mutual funds
Total
2022
2021
31,763 $
2,198
7,074
8,914
49,949 $
31,627
4,282
7,747
12,120
55,776
$
$
The following tables present a reconciliation of the fair value measurements using significant unobservable inputs (Level III) as of
June 30, 2022 and 2021:
Beginning balance
Actual return on plan assets:
Relating to assets still held at reporting date
Purchases, sales and settlements, net
Ending balance
Cash Flows
2022
2021
6,646 $
(452 )
108
6,302 $
6,095
600
(49 )
6,646
$
$
Contributions
The Company expects to contribute $612 to its defined benefit pension plans in fiscal 2023.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
2022
2023
2024
2025
2026
Years 2027-2031
Other
Pension
Benefits
Postretirement
Benefits
$
7,946 $
7,380
7,068
6,833
6,738
34,812
769
693
608
544
501
1,806
The Company does not expect to make any Part D reimbursements for the periods presented.
The Company sponsors defined contribution plans covering substantially all domestic employees and certain foreign employees.
These plans provide for employer contributions based primarily on employee participation. The total expense under the plans was
$2,245 and $2,162 in fiscal 2022 and 2021, respectively.
TWIN DISC, INC. 2022 ANNUAL REPORT | 63
N. INCOME TAXES
United States and foreign (loss) income before income taxes and minority interest were as follows:
United States
Foreign
2022
2021
(1,165 ) $
11,394
10,229 $
(15,925 )
6,086
(9,839 )
$
$
The provision (benefit) for income taxes is comprised of the following:
Currently payable:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
2022
2021
(164 ) $
(2 )
2,838
2,672
-
62
(911 )
(849 )
1,823 $
28
49
1,948
2,025
15,554
2,341
(240 )
17,655
19,680
$
$
$
The components of the net deferred tax asset as of June 30 are summarized in the table below.
2022
2021
Deferred tax assets:
Retirement plans and employee benefits
Foreign tax credit carryforwards
Federal tax credits, net of ASU 2013-11
State net operating loss and other state credit carryforwards, net of
$
4,787 $
7,822
1,597
ASU 2013-11
Federal net operating loss
Inventory
Reserves
Foreign NOL carryforwards
Accruals
Right of use assets - operating leases
Disallowed interest
Capital loss carryforward
Other assets
Valuation allowance
Deferred tax liabilities:
Inventory
Property, plant and equipment
Intangibles
Long term operating lease obligations
Other liabilities
2,179
5,492
-
1,119
-
703
3,381
980
108
358
28,526
(23,097 )
5,429
285
1,155
2,012
3,352
249
7,053
4,584
7,609
1,801
2,208
6,506
-
1,670
66
871
3,674
982
-
1,033
31,004
(24,420 )
6,584
480
1,852
2,982
3,622
182
9,118
Total net deferred tax (liabilities) assets
$
(1,624 ) $
(2,534 )
At June 30, 2022 the Company has net operating loss carryforwards (“NOLs”) of approximately $26,154 and $30,901 for federal and
state income tax purposes which will expire at various dates from fiscal year 2023 – 2042. Federal NOLs were generated subsequent
to fiscal 2019 and have an indefinite carryover period. The Company has federal and state tax credit carryforwards of approximately
$9,738 and $935, respectively, which will expire at various dates from fiscal 2026 – 2042.
64 | TWIN DISC, INC. 2022 ANNUAL REPORT
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. The Company has evaluated the likelihood of whether the net deferred tax assets would be realized
and concluded that it is more likely than not that all of deferred tax assets would not be realized. Management believes that it is more
likely than not that the results of future operations will not generate sufficient taxable income and foreign source income to realize all
the domestic deferred tax assets, therefore, a valuation allowance in the amount of $23,097 and $24,420 have been recorded for fiscal
year 2022 and 2021, respectively.
Following is a reconciliation of the applicable U.S. federal income taxes to the actual income taxes reflected in the statements of
operations:
U.S. federal income tax at 21%
Increases (reductions) in tax resulting from:
Foreign tax items
State taxes
Change in prior year estimate
Nondeductible PPP loan expenses
Research and development tax credits
Unrecognized tax benefits
Stock compensation
Rate changes
Deferred tax basis adjustments
Executive compensation
GILTI inclusion
Valuation allowance
Other, net
2022
2021
$
2,148 $
(2,066 )
(575 )
(12 )
372
-
(10 )
(152 )
(46 )
121
(54 )
42
920
(981 )
50
1,823 $
552
(440 )
(1,138 )
(1,722 )
(336 )
59
252
18
42
-
-
24,420
39
19,680
$
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs
Act (the “Tax Act”). The Tax Act makes broad and complex changes to the Internal Revenue Code. The Tax Act is generally
applicable for tax years beginning after December 31, 2017, which is the Company’s fiscal year 2018. However, several provisions of
the Tax Act have differing effective dates, meaning these provisions did not impact the Company’s financial statements until fiscal
year 2019. The provisions impacting the Company’s fiscal year 2019 financial statements include the global intangible low taxed
income (“GILTI”) income and foreign-derived intangible income (“FDII”) deduction and limitations on the deductibility of executive
compensation.
Executive Compensation Limitations: The Tax Act substantially modifies the limitation on corporate deductibility of executive
compensation under Section 162(m) of the Code. Section 162(m) limits the deduction for compensation paid by a publicly held
corporation to certain of its executive employees to $1,000 per year. The Tax Act has amended the definition of “covered employee”
to correspond to the general SEC reporting requirements for named executive officers. These are the corporation’s principal executive
officer, principal financial officer, and the next three highest-paid executive officers. Most significantly, the Tax Act has eliminated
the exemptions for commissions and performance-based compensation. This had an impact on the company’s effective tax rate in
fiscal years 2022 and 2021 of $42 and $0 respectively.
Global Intangible Low Taxed Income (“GILTI”): The Tax Act changed the foreign source income calculations and related foreign
tax credit amounts. The GILTI require 10% domestic shareholders (“U.S. Shareholders”) of controlled foreign corporations (“CFC’s”)
to include in gross income annually the U.S. Shareholders’ pro rata share of GILTI for the year. The High Tax Exception (“HTE")
rules were finalized and applicable for the Company during fiscal year 2022. Accordingly, the Company may exclude from the GILTI
inclusion tested income from tested units with an effective tax rate greater than 18.9%. The Company was able to take advantage of
this high tax exception, which resulted in zero GILTI inclusion in the Company’s effective tax rate for fiscal year 2021. In fiscal year
2022, the GILTI inclusion was $920. During Q4 FY2022, neither Rolla nor TD China qualified for the HTE because their effective tax
rates are lower than 18.9%. This resulted in a GILTI income inclusion of approximately $4.9 million. The Rolla inclusion is largely
due to the gain on the sale of their building, while TD China’s inclusion is due to a temporary tax rate decrease in China.
Foreign Derived Intangible Income (“FDII”): The Tax Act provides companies with a new permanent deduction. An incentive
for C corporations to generate revenue from serving foreign markets, the provision applies a preferential tax rate to eligible income.
The new tax law assumes a fixed rate of return on a corporation’s tangible assets. Any remaining income is deemed to be generated
by intangible assets. This did not have an impact on the Company’s effective tax rate in fiscal year 2022 and 2021.
TWIN DISC, INC. 2022 ANNUAL REPORT | 65
The Company has not provided additional U.S. income taxes on cumulative earnings of its consolidated foreign subsidiaries that
are considered to be reinvested indefinitely. The Company reaffirms its position that the earnings of those subsidiaries remain
permanently invested and has no plans to repatriate funds from any permanently reinvested subsidiaries to the U.S. for the foreseeable
future. These earnings relate to ongoing operations and were approximately $14,175 and $10,871 at June 30, 2022 and June 30, 2021,
respectively. Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend
repatriation. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would
be tax effective through the utilization of foreign tax credits.
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 are 2017 through 2022 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 2017.
The Company has approximately $716 and $778 of unrecognized tax benefits as of June 30, 2022 and June 30, 2021, respectively,
which, if recognized, would impact the effective tax rate. During the fiscal year the amount of unrecognized tax benefits decreased
primarily due to settlements with tax authorities. No material changes are expected to the reserve during the next 12 months. The
Company’s policy is to accrue interest and penalties related to unrecognized tax benefits in income tax expense.
Below is a reconciliation of beginning and ending amount of unrecognized tax benefits as of June 30:
Unrecognized tax benefits, beginning of year
Additions based on tax positions related to the prior year
Additions based on tax positions related to the current year
Reductions based on tax positions related to the prior year
Subtractions due to statutes closing
Settlements with taxing authorities
Unrecognized tax benefits, end of year
2022
2021
778 $
-
3
(65 )
-
-
716 $
918
-
66
(21 )
-
(185 )
778
$
$
Substantially all of the Company’s unrecognized tax benefits as of June 30, 3022, if recognized, would affect the effective tax rate.
As of June 30, 2022 and 2021, the amounts accrued for interest and penalties totaled $38 and $141, respectively, and are not included
in the reconciliation above.
O. CONTINGENCIES
The Company is involved in litigation of which the ultimate outcome and liability to the Company, if any, are not presently
determinable. Management believes that final disposition of such litigation will not have a material impact on the Company’s results
of operations, financial position or cash flows, either individually or in the aggregate.
66 | TWIN DISC, INC. 2022 ANNUAL REPORT
P. RESTRUCTURING OF OPERATIONS AND INCOME FROM EXTINGUISHMENT OF LOAN
Restructuring expenses
The Company has implemented various restructuring programs in response to unfavorable macroeconomic trends in certain of the
Company’s markets since the fourth quarter of fiscal 2015. These programs primarily involved the reduction of workforce in several
of the Company’s manufacturing locations, under a combination of voluntary and involuntary programs. During the fourth quarter of
fiscal 2021, the Company undertook a series of steps to accelerate its focus on its core competencies, improve its fixed cost structure,
and monetize some of its under-utilized assets.
With regard to its Belgian operations, on June 30, 2021, the Company announced a new phase in its restructuring plans. Under this
plan, the Belgian operation’s workforce was reduced by 18 employees. This reduction in force resulted in an accrual of $2,200,
pertaining to the Company’s current estimate for the payment of severance benefits, which is expected to be completed by December
2022. The action was taken to allow the Belgian operation to focus resources on core manufacturing processes, while allowing for
savings on the outsourcing of non-core processes.
Total restructuring charges relating to streamlining operations amounted to $973 and $3,110 in fiscal 2022 and 2021, respectively.
Restructuring activities since June 2015 have resulted in the elimination of 254 full-time employees in the manufacturing segment.
Accumulated costs to date under these programs within the manufacturing segment through June 30, 2022 were $16,226.
The following is a roll-forward of restructuring activity:
Accrued restructuring liability, June 30, 2020
Additions
Payments and adjustments
Accrued restructuring liability, June 30, 2021
Additions
Payments and adjustments
Accrued restructuring liability, June 30, 2022
Assets held for sale
$
$
84
7,377
(5,109 )
2,352
973
(2,301 )
1,024
To improve its fixed cost structure and monetize some of its under-utilized assets, the Company commenced the active marketing of
three of its real estate properties, namely, its corporate headquarters in Racine, its propeller machining plant and office in Switzerland,
and a spare warehouse in Italy during the fourth quarter of fiscal 2021. Such actions required the Company to reclassify these assets
from Property, Plant and Equipment to Assets Held for Sale, at fair value less costs to sell, or net book value, whichever is lower. Fair
value was determined using real estate broker estimates and would be classified as Level 3 in the fair value hierarchy. This assessment
of fair value resulted in the Company recognizing a write-down of the carrying value of its corporate headquarters by $4,267.
In the first quarter of fiscal 2022, the Company completed the sale of its propeller machining plant and office in Switzerland and
received $9,138 in proceeds, net of fees and local taxes and recorded a gain of $2,939 in other operating income. In the fourth quarter
of fiscal 2022, the Company completed the sale of its spare warehouse in Italy and received net proceeds of about $305.
Income from extinguishment of loan
As discussed in Note G, Debt, on June 16, 2021, the Company received formal forgiveness of its PPP Loan in the amount of $8,200.
In accordance with ASC 470 Debt and ASC 450-30 Gain contingency, the Company recorded $8,200 in income from extinguishment
of loan in its condensed consolidated statement of operations in fiscal 2021.
TWIN DISC, INC. 2022 ANNUAL REPORT | 67
Q. EARNINGS PER SHARE
The Company calculates basic earnings per share based upon the weighted average number of common shares outstanding during the
period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during
the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-
dilutive effect. Restricted stock award recipients under the 2010 LTI Plan have a non-forfeitable right to receive dividends declared
by the Company, and are therefore included in computing earnings per share pursuant to the two-class method.
The components of basic and diluted earnings per share were as follows:
Basic:
Net income (loss)
Less: Net earnings attributable to noncontrolling interest
Less: Undistributed earnings attributable to unvested shares
Net income (loss) attributable to Twin Disc
Weighted average shares outstanding - basic
Basic Loss Per Share:
Net income (loss) per share - basic
Diluted:
Net income (loss)
Less: Net earnings attributable to noncontrolling interest
Less: Undistributed earnings attributable to unvested shares
Net income (loss) attributable to Twin Disc
Weighted average shares outstanding - basic
Effect of dilutive stock awards
Weighted average shares outstanding - diluted
Diluted Loss Per Share:
Net income (loss) per share - diluted
$
$
$
2022
2021
8,406 $
(311 )
-
8,095
(29,519 )
(200 )
-
(29,719 )
13,353
13,247
0.61 $
(2.24 )
8,406 $
(311 )
-
8,095
13,353
29
13,382
(29,519 )
(200 )
-
(29,719 )
13,247
-
13,247
$
0.60 $
(2.24 )
The following potential common shares were excluded from diluted EPS for the year ended June 30, 2021 as the Company reported a
net loss: 388,433 related to the Company’s unvested PSAs, 379,095 related to the Company’s unvested RS awards, and 34,822 related
to the Company’s unvested RSUs.
68 | TWIN DISC, INC. 2022 ANNUAL REPORT
R. DERIVATIVE FINANCIAL INSTRUMENTS
The Company reports all derivative instruments on its consolidated balance sheets at fair value and establishes criteria for designation
and effectiveness of transactions entered into for hedging purposes.
As a global organization, the Company faces exposure to market risks, such as fluctuations in foreign currency exchange rates, interest rates
and commodity prices. To manage the volatility relating to these exposures, the Company enters into various derivative instruments from
time to time under its risk management policies. The Company designates derivative instruments as hedges on a transaction basis to support
hedge accounting. The changes in fair value of these hedging instruments offset in part or in whole corresponding changes in the fair value
or cash flows of the underlying exposures being hedged. The Company assesses the initial and ongoing effectiveness of its hedging
relationships in accordance with its policy. The Company does not purchase, hold or sell derivative financial instruments for trading
purposes. The Company’s practice is to terminate derivative transactions if the underlying asset or liability matures or is sold or terminated,
or if it determines the underlying forecasted transaction is no longer probable of occurring.
Interest Rate Swaps Designated as Cash Flow Hedges
The primary purpose of the Company’s cash flow hedging activities is to manage the potential changes in value associated with
interest payments on the Company’s SOFR-based indebtedness. The Company records gains and losses on interest rate swap contracts
qualifying as cash flow hedges in accumulated other comprehensive loss to the extent that these hedges are effective and until the
Company recognizes the underlying transactions in net earnings, at which time these gains and losses are recognized in interest
expense on its consolidated statements of operations and comprehensive loss. 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 losses related to cash flow hedging activities that were included in accumulated other comprehensive loss
were ($356) and $678 for the years ended June 30, 2022 and 2021, respectively. The unrealized amounts in accumulated other
comprehensive loss will fluctuate based on changes in the fair value of open contracts during each reporting period.
The Company estimates that ($68) of net unrealized losses related to cash flow hedging activities included in accumulated other
comprehensive loss will be reclassified into earnings within the next twelve months.
Derivatives Designated as Net Investment Hedges
The Company is exposed to foreign currency exchange risk related to its investment in net assets in foreign countries. As discussed in
Note G, Debt, during the fourth quarter of fiscal 2022, the Company designated its euro denominated Revolving Loan, with a notional
amount of €13,500, as a net investment hedge to mitigate the risk of variability in its euro denominated net investments in wholly-
owned foreign subsidiaries. All changes in fair value of the euro revolver were then reported 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 ($1,551) and $334 for the years ended
June 30, 2022 and 2021, respectively.
Foreign Currency Forward Contracts Not Designated as Hedges
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 consolidated statement of
operations and comprehensive loss 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 2022 and 2021 was
the euro. At June 30, 2022 and 2021, there were no significant forward exchange contracts outstanding.
Other Derivative Instruments
The Company does not utilize commodity price hedges to manage commodity price risk exposure. Likewise, the Company does not
hedge the translation exposure represented by the net assets of its foreign subsidiaries.
TWIN DISC, INC. 2022 ANNUAL REPORT | 69
Fair Value of Derivative Instruments
The Company’s interest rate swaps and foreign currency forward contracts are recorded at fair value on the consolidated balance
sheets using a discounted cash flow analysis that incorporates observable market inputs. These market inputs include foreign currency
spot and forward rates, and various interest rate curves, and are obtained from pricing data quoted by various banks, third-party
sources and foreign currency dealers involving identical or comparable instruments (Level 2).
Counterparties to these foreign currency forward contracts have at least an investment grade rating. Credit ratings on some of the
Company’s counterparties may change during the term of the financial instruments. The Company closely monitors its counterparties’
credit ratings and, if necessary, will make any appropriate changes to its financial instruments. The fair value generally reflects the
estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date.
As discussed in Note G, Debt, the Company's euro denominated Revolving Loan approximates fair value at June 30, 2022 and June
30, 2021. If measured at fair value in the financial statements, it would be classified as Level 2 in the fair value hierarchy.
The fair value of derivative instruments included in the consolidated balance sheets at June 30 were as follows:
Derivatives designated as hedges:
Interest rate swaps
Interest rate swaps
Interest rate swaps
Interest rate swaps
Balance Sheet Location
2022
2021
Other current assets
Other noncurrent assets
Accrued liabilities
Other long-term liabilities
$
68 $
77
-
-
-
-
(346 )
(542 )
The impact of the Company’s derivative instruments on the consolidated statement of operations and comprehensive loss for the
years ended June 30 was as follows:
Statement of Comprehensive
Loss Location
2022
2021
Derivatives designated as hedges:
Interest rate swap
Interest rate swap
Net investment hedge
Interest expense
Unrealized gain (loss) on hedges
Unrealized gain (loss) on hedges
Derivatives not designated as hedges:
Foreign currency forward contracts
Other income (expense), net
$
$
362 $
1,034
1,216
399
425
335
- $
(15 )
70 | TWIN DISC, INC. 2022 ANNUAL REPORT
TWIN DISC, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 2022 and 2021 (in thousands)
Description
2022
Allowance for losses on accounts receivable
Reserve for inventory obsolescence
Deferred tax valuation allowance
2021
Allowance for losses on accounts receivable
Reserve for inventory obsolescence
Deferred tax valuation allowance
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Balance at
Adjustments(1)
End of
Period
$
$
$
$
$
$
1,870 $
255 $
384 $
1,741
10,279 $
2,246 $
968 $
11,557
24,420 $
- $
1,323 $
23,097
1,740 $
346 $
216 $
1,870
9,863 $
1,178 $
762 $
10,279
- $
24,420 $
- $
24,420
(1) Activity primarily represents amounts written-off during the year, along with other adjustments (primarily foreign currency
translation adjustments).
TWIN DISC, INC. 2022 ANNUAL REPORT | 71
EXHIBIT INDEX
TWIN DISC, INCORPORATED
10-K for Year Ended June 30, 2022
Exhibit
Description
3a)
3b)
3c)
Restated Articles of Incorporation of Twin Disc, Incorporated (Incorporated by reference
to Exhibit 3.1 of the Company's Form 8-K dated December 6, 2007). File No. 001-
07635.
Articles of Amendment to the Restated Articles of Incorporation of Twin Disc,
Incorporated (Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K dated
October 29, 2020). File No. 001-07635.
Restated Bylaws of Twin Disc, Incorporated, as amended through October 29, 2021
(Incorporated by reference to Exhibit 3.2 of the Company's Form 8-K dated October 29,
2020). File No. 001-07635.
Exhibit 10
Material Contracts
Included
Herewith
Included
Herewith
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
m)
n)
Director Tenure and Retirement Policy (Incorporated by reference to Exhibit 10.A of the
Company’s Form 10-K dated September 2, 2021). File No. 001-07635.
The Twin Disc, Incorporated 2021 Long-Term Incentive Compensation Plan
(Incorporated by reference to Appendix A of the Proxy Statement for the Annual
Meeting of Shareholders held on October 28, 2021). File No. 001-07635.
The 2020 Stock Incentive Plan for Non-Employee Directors (Incorporated by reference
to Appendix A of the Proxy Statement for the Annual Meeting of Shareholders held on
October 29, 2020). File No. 001-07635.
The Twin Disc, Incorporated 2018 Long-Term Incentive Compensation Plan
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 6,
2018). File No. 001-07635.
Form of Restricted Stock Award Grant Agreement for restricted stock grants on May 1,
2019 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated May
3, 2019). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares
on May 1, 2019 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K
dated May 3, 2019). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares
on August 1, 2019 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-
K dated August 7, 2019). File No. 001-07635.
Form of Restricted Stock Award Grant Agreement for restricted stock grants on August
1, 2019 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated
August 7, 2019). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares
on October 31, 2019 (Incorporated by reference to Exhibit 10.1 of the Company’s Form
8-K dated November 5, 2019). File No. 001-07635.
Form of Restricted Stock Award Grant Agreement for restricted stock grants on October
31, 2019 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated
November 5, 2019). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares
on August 6, 2020 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-
K dated August 12, 2020). File No. 001-07635.
Form of Restricted Stock Award Grant Agreement for restricted stock grants on August
6, 2020 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated
August 12, 2020). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares
on August 4, 2021 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-
K dated August 10, 2021). File No. 001-07635.
Form of Restricted Stock Unit Grant Agreement for restricted stock units granted on
August 4, 2021 (Incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K
dated August 10, 2021). File No. 001-07635.
72 | TWIN DISC, INC. 2022 ANNUAL REPORT
o)
p)
q)
r)
s)
t)
u)
v)
w)
x)
y)
z)
aa)
bb)
cc)
dd)
ee)
ff)
Form of Restricted Stock Grant Agreement for restricted stock grants on August 3, 2022
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 8,
2022). File No. 001-07635.
Form of Restricted Stock Unit Grant Agreement for restricted stock units granted on
August 3, 2022 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K
dated August 8, 2022). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares
on August 3, 2022 (Incorporated by reference to Exhibit 10.3 of the Company’s Form
8-K dated August 8, 2022). File No. 001-07635.
Twin Disc, Incorporated Supplemental Executive Retirement Plan, amended and restated
as of July 29, 2010 (Incorporated by reference to Exhibit 10.4 of the Company’s Form
8-K dated August 4, 2010). File No. 001-07635.
Forms of Change in Control Severance Agreements (Incorporated by reference to
Exhibits 10.4, 10.5 and 10.6 of the Company’s Form 8-K dated August 6, 2018). File
No. 001-07635.
Form of Change in Control Severance Agreements (Incorporated by reference to Exhibit
10.4 of the Company’s Form 8-K dated August 3, 2022). File No. 001-07635.
Form of Indemnity Agreement (Incorporated by reference to Exhibit 10.5 of the
Company’s Form 8-K dated August 2, 2005). File No. 001-07635.
Credit Agreement Between Twin Disc, Incorporated and BMO Harris Bank, dated June
29, 2018 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
July 3, 2018). File No. 001-07635.
Amendment and Assignment of Revolving Loan Note between Bank of Montreal and
BMO Harris Bank, N.A., dated June 29, 2018. (Incorporated by reference to Exhibit
10.2 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635.
Assignment of and Amendment to Security Agreement By and Among Bank of
Montreal, BMO Harris Bank, N.A., and Twin Disc, Incorporated, dated June 29, 2018.
(Incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K dated July 3,
2018). File No. 001-07635.
Assignment of and Amendment to IP Security Agreement By and Among Bank of
Montreal, BMO Harris Bank, N.A., and Twin Disc, Incorporated, dated June 29, 2018.
(Incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K dated July 3,
2018). File No. 001-07635.
Assignment of and Amendment to Pledge Agreement By and Among Bank of Montreal,
BMO Harris Bank, N.A., Twin Disc, Incorporated, and Mill-Log Equipment Co., Inc.,
dated June 29, 2018. (Incorporated by reference to Exhibit 10.5 of the Company’s Form
8-K dated July 3, 2018). File No. 001-07635.
Assignment of and Amendment to the Guaranty Agreement By and Among Bank of
Montreal, BMO Harris Bank, N.A., and Mill-Log Equipment Co., Inc., dated June 29,
2018. (Incorporated by reference to Exhibit 10.6 of the Company’s Form 8-K dated July
3, 2018). File No. 001-07635.
Assignment of and Amendment to Guarantor Security Agreement By and Among Bank
of Montreal, BMO Harris Bank, N.A., and Mill-Log Equipment Co., Inc., dated June 29,
2018. (Incorporated by reference to Exhibit 10.7 of the Company’s Form 8-K dated July
3, 2018). File No. 001-07635.
Assignment of and Amendment to Negative Pledge Agreement By and Among Twin
Disc, Incorporated, Bank of Montreal, and BMO Harris Bank N.A., dated June 29, 2018.
(Incorporated by reference to Exhibit 10.8 of the Company’s Form 8-K dated July 3,
2018). File No. 001-07635.
Collateral Assignment of Rights under Purchase Agreement from Twin Disc,
Incorporated and Twin Disc NL Holding B.V. in favor of BMO Harris Bank N.A., dated
July 2, 2018. (Incorporated by reference to Exhibit 10.9 of the Company’s Form 8-K
dated July 3, 2018). File No. 001-07635.
First Amendment to June 29, 2018 Credit Agreement between Twin Disc, Incorporated
and BMO Harris Bank, N.A. (Incorporated by reference to Exhibit 1.2 of the Company’s
Form 8-K dated September 21, 2018). File No. 001-07635.
Amendment No. 2 to June 29, 2018 Credit Agreement between Twin Disc, Incorporated
and BMO Harris Bank, N.A. (Incorporated by reference to Exhibit 1.1 of the Company’s
Form 8-K dated March 6, 2019). File No. 001-07635.
TWIN DISC, INC. 2022 ANNUAL REPORT | 73
gg)
hh)
ii)
jj)
kk)
ll)
mm)
nn)
oo)
pp)
qq)
rr)
kk)
tt)
uu)
Amended and Restated Term Note between Twin Disc, Incorporated and BMO Harris
Bank, N.A. (Incorporated by reference to Exhibit 1.2 of the Company’s Form 8-K dated
March 6, 2019). File No. 001-07635.
Amendment No. 3 to June 29, 2018 Credit Agreement between Twin Disc, Incorporated
and BMO Harris Bank, N.A. (Incorporated by reference to Exhibit 1.1 of the Company’s
Form 8-K dated January 30, 2020). File No. 001-07635.
Promissory Note dated April 17, 2021, entered into by Twin Disc, Incorporated, as
borrower, for the benefit of BMO Harris Bank, N.A., as lender (Incorporated by
reference to Exhibit 10.1 of the Company’s Form 8-K dated April 21, 2020). File No.
001-07635.
Amendment No. 4 to June 29, 2018 Credit Agreement between Twin Disc, Incorporated
and BMO Harris Bank, N.A. (Incorporated by reference to Exhibit 10.2 of the
Company’s Form 8-K dated April 21, 2020). File No. 001-07635.
Amendment No. 5 to June 29, 2018 Credit Agreement between Twin Disc, Incorporated
and BMO Harris Bank, N.A. (Incorporated by reference to Exhibit 1.1 of the Company’s
Form 8-K dated July 28, 2020). File No. 001-07635.
Second Amended and Restated Revolving Note between Twin Disc, Incorporated and
BMO Harris Bank, N.A. (Incorporated by reference to Exhibit 1.2 of the Company’s
Form 8-K dated July 28, 2020). File No. 001-07635.
Form of Deposit Account Control Agreement between Twin Disc, Incorporated and
BMO Harris Bank, N.A. (Incorporated by reference to Exhibit 1.3 of the Company’s
Form 8-K dated July 28, 2020). File No. 001-07635.
Forbearance Agreement and Amendment No. 6 to June 29, 2018 Credit Agreement
between Twin Disc, Incorporated and BMO Harris Bank, N.A. (Incorporated by
reference to Exhibit 1.1 of the Company’s Form 8-K dated January 29, 2021). File No.
001-07635.
First Amended and Restated Forbearance Agreement and Amendment No. 7 to Credit
Agreement between Twin Disc, Incorporated and BMO Harris Bank, N.A. (Incorporated
by reference to Exhibit 1.1 of the Company’s Form 8-K dated October 5, 2021). File No.
001-07635.
Second Amended and Restated Forbearance Agreement and Amendment No. 8 to Credit
Agreement between Twin Disc, Incorporated and BMO Harris Bank, N.A. (Incorporated
by reference to Exhibit 1.1 of the Company’s Form 8-K dated March 4, 2022). File No.
001-07635.
Third Amended and Restated Revolving Note between Twin Disc, Incorporated and
BMO Harris Bank, N.A. (Incorporated by reference to Exhibit 1.2 of the Company’s
Form 8-K dated March 4, 2022). File No. 001-07635.
Amendment No. 9 to Credit Agreement between Twin Disc, Incorporated and BMO
Harris Bank, N.A. (Incorporated by reference to Exhibit 1.1 of the Company’s Form 8-K
dated July 6, 2022). File No. 001-07635.
ISDA Master Agreement and Schedule, dated April 11, 2019, between Twin Disc,
Incorporated and Bank of Montreal (Incorporated by reference to Exhibit 10.1 of the
Company’s Form 8-K dated April 26, 2019). File No. 001-07635.
Confirmation of swap transaction, dated April 22, 2019, from Bank of Montreal to Twin
Disc, Incorporated (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-
K dated April 26, 2019). File No. 001-07635.
Commercial Offer to Purchase, dated March 10, 2022, between Twin Disc, Incorporated
and J. Jeffers & Co., LLC (Incorporated by reference to Exhibit 1.1 of the Company’s
Form 8-K dated March 15, 2022). File No. 001-07635.
74 | TWIN DISC, INC. 2022 ANNUAL REPORT
Exhibit
21
23a
24
31a
31b
32a
32b
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Description
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification
Certification
Certification pursuant to 18 U.S.C. Section 1350
Certification pursuant to 18 U.S.C. Section 1350
Herewith
X
X
X
X
X
X
X
Inline XBRL Instance Document, filed herewith
Inline XBRL Schema Document, filed herewith
Inline XBRL Calculation Linkbase Document, filed herewith
Inline XBRL Definition Linkbase Document, filed herewith
Inline XBRL Label Linkbase Document, filed herewith
Inline XBRL Presentation Linkbase, filed herewith
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in
Exhibit 101)
TWIN DISC, INC. 2022 ANNUAL REPORT | 75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
September 8, 2022
TWIN DISC, INCORPORATED
By: /s/ JOHN H. BATTEN
John H. Batten
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ DAVID B. RAYBURN
David B. Rayburn
Chairman of the Board
By: /s/ JOHN H. BATTEN
John H. Batten
President and Chief Executive Officer
By: /s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial Officer,
Treasurer and Secretary
Michael Doar, Director
Janet P. Giesselman, Director
David W. Johnson, Director
Juliann Larimer, Director
Kevin M. Olsen, Director
Michael C. Smiley, Director
Harold M. Stratton II, Director
By: /s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial Officer,
Treasurer and Secretary (Attorney in Fact)
September 8, 2022
September 8, 2022
September 8, 2022
September 8, 2022
76 | TWIN DISC, INC. 2022 ANNUAL REPORT
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Twin Disc, Incorporated, the registrant (a Wisconsin Corporation) owns directly or indirectly 100% of the following subsidiaries:
1. Twin Disc International, S.P.R.L. (a Belgian corporation)
2. Twin Disc Srl (an Italian corporation)
3. Rolla Sp Propellers SARL (a Swiss corporation)
4. Twin Disc (Pacific) Pty. Ltd. (an Australian corporation)
5. Twin Disc (Far East) Ltd. (a Delaware corporation operating in Singapore and Hong Kong)
6. Twin Disc (Far East) Pte. Ltd. (a Singapore corporation)
7. Twin Disc Japan (a Japanese corporation)
8. Twin Disc Power Transmission Private, Ltd. (an Indian limited liability corporation)
9. Twin Disc Power Transmission (Shanghai) Co. Ltd. (a Chinese corporation)
10. Twin Disc Netherlands Holdings B.V. (a Netherlands corporation)
11. Twin Disc NL Holding B.V. (a Netherlands corporation)
12. Veth Propulsion Holding B.V. (a Netherlands corporation)
13. Veth Propulsion B.V. (a Netherlands corporation)
14. Twin Disc European Distribution S.P.R.L (a Belgian corporation)
Twin Disc, Incorporated also owns 66% of Twin Disc Nico Co. LTD. (a Japanese corporation).
The registrant has neither a parent nor any other subsidiaries. All of the above subsidiaries are included in the consolidated financial
statements.
TWIN DISC, INC. 2022 ANNUAL REPORT | 77
EXHIBIT 23a
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Nos. 333-260800, 333-228245 and 333-249730 on Form
S-8 and No. 333-227130 on Form S-3) of Twin Disc, Incorporated of our reports dated September 8, 2022, relating to the consolidated
financial statements, the financial statement schedule and the effectiveness of internal control over financial reporting of Twin Disc,
Incorporated, appearing in this Annual Report on Form 10-K of Twin Disc, Incorporated for the year ended June 30, 2022.
/s/ RSM US LLP
Milwaukee, Wisconsin
September 8, 2022
78 | TWIN DISC, INC. 2022 ANNUAL REPORT
EXHIBIT 24
POWER OF ATTORNEY
The undersigned directors of Twin Disc, Incorporated hereby severally constitute John H. Batten and Jeffrey S. Knutson, and each of
them singly, true and lawful attorneys with full power to them, and each of them, singly, to sign for us and in our names as directors
the Form 10-K Annual Report for the fiscal year ended June 30, 2022 pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934, and generally do all such things in our names and behalf as directors to enable Twin Disc, Incorporated to comply with the
provisions of the Securities and Exchange Act of 1934 and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures so they may be signed by our attorneys, or either of them, as set forth below.
/s/ MICHAEL DOAR
Michael Doar, Director
/s/ JANET P. GIESSELMAN
Janet P. Giesselman, Director
/s/ DAVID W. JOHNSON
David W. Johnson, Director
/s/ JULIANN LARIMER
Juliann Larimer, Director
/s/ DAVID B. RAYBURN
David B. Rayburn, Director
/s/ MICHAEL C. SMILEY
Michael C. Smiley, Director
/s/ HAROLD M. STRATTON II
Harold M. Stratton II, Director
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
August 4, 2022
TWIN DISC, INC. 2022 ANNUAL REPORT | 79
EXHIBIT 31a
CERTIFICATIONS
I, John H. Batten, certify that:
1.
I have reviewed this annual report on Form 10-K of Twin Disc, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: September 8, 2022
By: /s/ JOHN H. BATTEN
John H. Batten
President and Chief Executive Officer
80 | TWIN DISC, INC. 2022 ANNUAL REPORT
EXHIBIT 31b
CERTIFICATIONS
I, Jeffrey S. Knutson, certify that:
1.
I have reviewed this annual report on Form 10-K of Twin Disc, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: September 8, 2022
/s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial Officer,
Treasurer and Secretary
TWIN DISC, INC. 2022 ANNUAL REPORT | 81
EXHIBIT 32a
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Twin Disc, Incorporated (the “Company”) on Form 10-K for the fiscal year ending June
30, 2022, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, John H. Batten, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to the best of my knowledge:
(1)
the Report fully complies with Section 13(a) of the Securities Exchange Act of 1934, and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: September 8, 2022
By: /s/ JOHN H. BATTEN
John H. Batten
President and Chief Executive Officer
EXHIBIT 32b
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Twin Disc, Incorporated (the “Company”) on Form 10-K for the fiscal year ending June
30, 2022, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, Jeffrey S. Knutson, Vice
President - Finance, Chief Financial Officer, Treasurer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)
the Report fully complies with Section 13(a) of the Securities Exchange Act of 1934, and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: September 8, 2022
By: /s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial Officer,
Treasurer and Secretary
82 | TWIN DISC, INC. 2022 ANNUAL REPORT
5-YEAR FINANCIAL
Summary
(Dollar amounts in thousands, except per share statistics)
Statements of Operations and Comprehensive Income (Loss)
2022
2021
2020
2019
2018
Net sales
$ 242,913
$ 218,581
$ 246,838
$ 302,663
$ 240,733
Cost and expenses, including marketing, engineering and administrative
231,877
Income (loss) from operations
Other income (expense)
Income (loss) before income taxes and noncontrolling interest
Income taxes
Noncontrolling interest
Net income (loss) attributable to Twin Disc
11,036
(807)
10,229
1,823
(311)
8,095
230,851
(12,270)
2,431
(9,839)
19,680
(200)
(29,719)
287,089
(40,251)
(3,489)
(43,740)
(4,169)
(246)
(39,817)
284,165
224,585
18,498
(3,991)
14,507
3,711
(123)
10,673
16,148
(1,728)
14,420
4,773
(119)
9,528
Balance Sheet
Assets
Cash
Accounts receivable, net
Inventories
Other current assets
Total current assets
Intangibles, goodwill and other assets
Property, plant and equipment, net
Total assets
Liabilities and Equity
Current liabilities
Long-term debt
Deferred liabilities
Total equity
Noncontrolling interest
Total liabilities and equity
Comparative Financial Information
Per share statistics
Basic (loss) income
Diluted (loss) income
Dividends
Total equity
Return on equity
Return on assets
Return on sales
Average basic shares outstanding
Average diluted shares outstanding
Number of shareholder accounts
Number of employees
$ 12,521
$ 12,340
$ 10,688
$ 12,362
$ 15,171
45,452
127,109
19,370
204,452
17,771
54,300
39,491
114,967
25,169
191,967
23,247
60,199
30,682
120,607
12,008
173,985
47,410
72,732
44,013
125,893
20,101
202,369
73,243
71,258
45,422
84,001
14,675
159,269
26,504
55,467
276,523
275,413
294,127
346,870
241,240
$ 81,078
$ 78,560
$ 66,734
$ 73,077
$ 62,344
34,543
29,714
30,085
36,108
37,896
49,539
40,491
50,484
4,824
30,456
130,776
130,210
139,389
182,216
142,997
412
450
569
602
619
276,523
275,413
294,127
346,870
241,240
$ 0.61
$ (2.24)
$ (3.03)
$ 0.84
$ 0.82
0.60
$ (2.24)
–
9.79
6.2%
2.9%
3.3%
–
9.83
-22.8%
-10.8%
-13.6%
(3.03)
–
10.60
-28.6%
-13.5%
-16.1%
0.83
–
14.49
5.9%
3.1%
3.5%
0.82
–
12.66
6.7%
3.9%
4.0%
13,352,509
13,246,501
13,153,330
12,571,013
11,294,914
13,381,771
13,246,501
13,153,330
12,681,574
11,395,072
340
761
403
743
405
806
415
873
435
696
Additions to property, plant and equipment
$ 4,729
$ 4,464
$ 10,699
$ 11,979
$ 6,328
Depreciation
Net working capital
(Dollar amounts in thousands, except per share statistics)
6,374
123,374
7,853
113,407
7,394
107,251
6,682
129,292
6,315
96,925
TWIN DISC, INC. 2022 ANNUAL REPORT | 83
5-YR WE PUT HORSEPOWER
TO WORK ®
T H E T W I N D I S C F A M I L Y O F P R O D U C T S
Twin Disc, Incorporated • Racine, Wisconsin 53403, U.S.A. • 262-638-4000 • www.twindisc.com
UNITED STATES OF AMERICA • AUSTRALIA • BELGIUM • CHINA • INDIA • ITALY • JAPAN • NETHERLANDS • SINGAPORE • SWITZERLAND
©2022 TWIN DISC, INC
12 | TWIN DISC, INC. 2022 ANNUAL REPORT