TWIN DISC INC - Quarter Report: 2018 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION     

WASHINGTON, D.C. 20549

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended March 30, 2018

 

Commission File Number 1-7635

 

 

TWIN DISC, INCORPORATED

(Exact name of registrant as specified in its charter)

 

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

1328 Racine Street, Racine, Wisconsin 53403

(Address of principal executive offices)

 

(262) 638-4000

(Registrant's telephone number, including area code)

 

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

Yes √           No          

 

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

 

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

Large Accelerated Filer                         Accelerated Filer √      

Non-accelerated filer      (Do not check if a smaller reporting company)

Smaller reporting company__               Emerging growth company          

 

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

 

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

Yes               No √      

 

At May 4, 2018, the registrant had 11,551,285 shares of its common stock outstanding.

 

 

 

		March 30, 2018				June 30, 2017
ASSETS
Current assets:
Cash		$	15,115			$	16,367
Trade accounts receivable, net			39,752				31,392
Inventories			80,041				66,193
Prepaid expenses			7,738				8,295
Other			9,461				7,187
Total current assets			152,107				129,434
Property, plant and equipment, net			48,031				48,212
Deferred income taxes			18,997				24,198
Goodwill, net			2,843				2,585
Intangible assets, net			2,041				2,009
Other assets			4,580				4,460
Total assets		$	228,599			$	210,898
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	26,244			$	21,301
Accrued liabilities			26,624				23,222
Total current liabilities			52,868				44,523
Long-term debt			7,604				6,323
Accrued retirement benefits			29,944				33,706
Deferred income taxes			988				1,011
Other long-term liabilities			1,585				1,768
Total liabilities			92,989				87,331
Commitments and contingencies (Note D)
Equity:
Twin Disc shareholders' equity:
Preferred shares authorized: 200,000; issued: none; no par value			-				-
Common shares authorized: 30,000,000; issued: 13,099,468; no par value			10,902				10,429
Retained earnings			172,954				169,368
Accumulated other comprehensive loss			(25,102	)			(32,671	)
			158,754				147,126
Less treasury stock, at cost (1,548,183 and 1,580,335 shares, respectively)			23,713				24,205
Total Twin Disc shareholders' equity			135,041				122,921
Noncontrolling interest			569				646
Total equity			135,610				123,567
Total liabilities and equity		$	228,599			$	210,898

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		For the Quarter Ended								For the Three Quarters Ended
		March 30, 2018				March 31, 2017				March 30, 2018				March 31, 2017
Net sales		$	65,349			$	45,084			$	166,960			$	114,591
Cost of goods sold			44,624				31,790				114,214				83,175
Gross profit			20,725				13,294				52,746				31,416
Marketing, engineering and administrative expenses			14,747				13,737				43,683				38,772
Restructuring expenses			452				293				2,501				1,367
Goodwill and other impairment charge			-				2,637				-				2,637
Income (loss) from operations			5,526				(3,373	)			6,562				(11,360	)
Interest expense			80				61				227				236
Other expense (income), net			(23	)			(67	)			244				(414	)
			57				(6	)			471				(178	)
Income (loss) before income taxes and noncontrolling interest			5,469				(3,367	)			6,091				(11,182	)
Income tax expense (benefit)			1,133				(1,639	)			2,401				(3,892	)
Net income (loss)			4,336				(1,728	)			3,690				(7,290	)
Less: Net earnings attributable to noncontrolling interest, net of tax			(28	)			(121	)			(104	)			(166	)
Net income (loss) attributable to Twin Disc		$	4,308			$	(1,849	)		$	3,586			$	(7,456	)
Income (loss) per share data:
Basic income (loss) per share attributable to Twin Disc common shareholders		$	0.37			$	(0.16	)		$	0.31			$	(0.66	)
Diluted income (loss) per share attributable to Twin Disc common shareholders		$	0.37			$	(0.16	)		$	0.31			$	(0.66	)
Weighted average shares outstanding data:
Basic shares outstanding			11,313				11,250				11,289				11,236
Diluted shares outstanding			11,344				11,250				11,320				11,236
Comprehensive income (loss):
Net income (loss)		$	4,336			$	(1,728	)		$	3,690			$	(7,290	)
Benefit plan adjustments, net of income taxes of $212, $398, $1,164 and $1,196, respectively			474				682				2,682				2,104
Foreign currency translation adjustment			1,849				1,059				4,878				(2,456	)
Comprehensive income (loss)			6,659				13				11,250				(7,642	)
Less: Comprehensive income attributable to noncontrolling interest			(26	)			(38	)			(95	)			(149	)
Comprehensive income (loss) attributable to Twin Disc		$	6,633			$	(25	)		$	11,155			$	(7,791	)

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		For the Three Quarters Ended
		March 30, 2018				March 31, 2017
Cash flows from operating activities:
Net income (loss)		$	3,690			$	(7,290	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization			4,908				5,368
Restructuring expenses			162				129
Impairment charge			-				2,637
Provision for deferred income taxes			3,455				(3,640	)
Stock compensation expense and other non-cash changes, net			1,330				1,163
Net change in operating assets and liabilities			(12,544	)			791
Net cash provided (used) by operating activities			1,001				(842	)
Cash flows from investing activities:
Acquisitions of fixed assets			(4,354	)			(1,869	)
Proceeds from sale of fixed assets			141				11
Other, net			(129	)			(129	)
Net cash used by investing activities			(4,342	)			(1,987	)
Cash flows from financing activities:
Borrowings under revolving loan agreement			54,415				38,793
Repayments under revolving loan agreement			(53,138	)			(38,316	)
Dividends paid to noncontrolling interest			(172	)			(109	)
Payments of withholding taxes on stock compensation			(422	)			(140	)
Net cash provided by financing activities			683				228
Effect of exchange rate changes on cash			1,406				(732	)
Net change in cash			(1,252	)			(3,333	)
Cash:
Beginning of period			16,367				18,273
End of period		$	15,115			$	14,940

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A.	Basis of Presentation

 

The unaudited condensed consolidated financial statements have been prepared by Twin Disc, Incorporated (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments, consisting only of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report filed on Form 10-K for June 30, 2017. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

 

New Accounting Releases

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued guidance (ASU 2018-02) intended to eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act by allowing a reclassification from accumulated other comprehensive income to retained earnings. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, (the Company’s fiscal 2020), with early adoption permitted. The Company has not decided when it will adopt this guidance; its adoption will have no impact to total shareholders’ equity.

 

In March 2017, the FASB issued guidance (ASU 2017-07) intended to improve the presentation of net periodic pension cost and net periodic postretirement cost. This guidance requires that an employer report the service costs component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations. The amendments in this guidance are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, (the Company’s fiscal 2019), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

 

In October 2016, the FASB issued updated guidance (ASU 2016-16) that changes the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (the Company’s fiscal 2019), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

 

In August 2016, the FASB issued updated guidance (ASU 2016-15) that addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (the Company’s fiscal 2019), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

 

In March 2016, the FASB issued updated guidance (ASU 2016-09) intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this standard in the first quarter of fiscal year 2018. As a result of the adoption, excess tax benefits or deficiencies associated with stock-based compensation award activity are recognized in income tax expense in the consolidated statements of operations. In addition, excess tax benefits associated with award activity is reported as cash flows from operating activities along with all other income tax cash flows. The Company has elected to apply this classification change on a prospective basis. The adoption of this guidance did not have a material impact on the Company's financial statements.

 

In February 2016, the FASB issued guidance (ASU 2016-02) which replaces the existing guidance for leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The guidance is effective for fiscal years beginning after December 15, 2018 (the Company’s fiscal 2020), including interim periods within those fiscal years and requires retrospective application.

 

 

In preparation for the adoption of this guidance, the Company gathered all active lease contracts from all its locations to assess whether or not they meet the definition of a lease under the new guidance, specifically, whether there is an identified asset in the contract, and whether or not control thereof lies with the Company. The Company assessed the practical expedients that are allowed under the guidance, including the exclusion of lease contracts with terms of twelve months or less. It assessed each contract for the appropriate lease payment components, discount rate, lease terms (dependent on renewal options) and compiled a preliminary calculation of the right-of-use assets and operating lease liability amounts that would be recognized on the Company’s balance sheet upon adoption of the guidance.

 

The Company is continuing its assessment, including the potential operational process changes as a result of the new guidance. It plans to early-adopt the guidance, using the modified retrospective approach, to coincide with its adoption of the new revenue recognition guidance, which is the first quarter of fiscal 2019.

 

In July 2015, the FASB issued guidance (ASU 2015-11) intended to simplify the measurement of inventory and to closely align with International Financial Reporting Standards. Current guidance requires inventories to be measured at the lower of cost or market. Under this new guidance, inventories other than those measured under last in first out (“LIFO”) are to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this guidance, prospectively, in the first fiscal quarter of 2018. The adoption of this guidance did not have an impact on the Company's financial statements.

 

In May 2014, the FASB issued updated guidance (ASU 2014-09) on revenue from contracts with customers. This revenue recognition guidance supersedes existing guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of control over promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies steps to apply in achieving this principle. This updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (the Company’s first quarter of fiscal 2019).

 

In preparation for the adoption of this guidance, the Company gathered customer contracts and customer purchase orders of its various locations to assess whether there are separate and distinct performance obligations, as defined by ASU 2014-09, within these agreements. The assessment has included interviews with various functions, including sales, engineering, customer service, and finance, to further analyze those performance obligations, both explicit and implicit (particularly as they relate to services). Under this ASU, revenue is recognized when or as each performance obligation is satisfied. Based upon the findings to date, the Company has identified indicators that suggest a deferral of revenue may be required for certain agreements where the performance of services after product delivery may be required. The Company is continuing its assessment, including whether or not these obligations are perfunctory or material to the financial statements. It plans to adopt the guidance, using the modified retrospective approach, on the effective date applicable to the Company, which is the first quarter of fiscal 2019.

 

 

B.	Inventories

 

The major classes of inventories were as follows:

 

 

 

 

C.

Warranty

 

The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers. However, its warranty obligation is affected by product failure rates, the number of units affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. When evaluating the adequacy of the reserve for warranty costs, management takes into consideration the term of the warranty coverage, historical claim rates and costs of repair, knowledge of the type and volume of new products and economic trends. While we believe the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable in the future could differ materially from what actually transpires. The following is a listing of the activity in the warranty reserve for the quarter and three quarters ended March 30, 2018 and March 31, 2017:

 

 

The current portion of the warranty accrual ($2,705 and $1,507 as of March 30, 2018 and March 31, 2017, respectively) is reflected in accrued liabilities, while the long-term portion ($444 and $395 as of March 30, 2018 and March 31, 2017, respectively) is included in other long-term liabilities on the consolidated balance sheets.

 

 

D.	Contingencies

 

The Company is involved in litigation of which the ultimate outcome and liability to the Company, if any, is not presently determinable. Management believes that final disposition of such litigation will not have a material impact on the Company’s results of operations, financial position or cash flows.

 

 

E.	Business Segments

 

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

 

The Company 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 income.

 

 

Information about the Company’s segments is summarized as follows:

 

 

 

 

 

F.	Stock-Based Compensation

 

Performance Stock Awards (“PSA”)

 

During the first three quarters of fiscal 2018 and 2017, the Company granted a target number of 54.9 and 109.6 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2018 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual Earnings Per Share (“EPS”) (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2020. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 69.2. Based upon favorable actual results to date, the Company is currently accruing compensation expense for these PSAs.

 

The fiscal 2017 PSAs will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual EPS (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2019. These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 149.4. Based upon actual results to date and the low probability of achieving certain threshold performance levels, the Company is currently not accruing compensation expense for the portion of the PSAs relating to the average return on invested capital and average annual EPS measures. The Company is currently accruing compensation expense for the average annual sales measure.

 

There were 206.2 and 181.8 unvested PSAs outstanding at March 30, 2018 and March 31, 2017, respectively. The fair value of the PSAs (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. Compensation expense of $138 and $15 was recognized for the quarters ended March 30, 2018 and March 31, 2017, respectively, related to PSAs. Compensation expense of $274 and $45 was recognized for the three quarters ended March 30, 2018 and March 31, 2017, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at March 30, 2018 was $11.75. At March 30, 2018, the Company had $2,036 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2018, 2017 and 2016 awards. The total fair value of PSAs vested as of March 30, 2018 and March 31, 2017 was $0.

 

Restricted Stock Awards (“RS”)

 

The Company has unvested RS awards outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded as compensation expense over the vesting period, which is generally 1 to 3 years. During the first three quarters of fiscal 2018 and 2017, the Company granted 85.3 and 181.8 service based restricted shares, respectively, to employees and non-employee directors. There were 237.7 and 269.6 unvested shares outstanding at March 30, 2018 and March 31, 2017, respectively. A total of 32.7 shares of restricted stock were forfeited during the three quarters ended March 30, 2018. There were no shares of restricted stock forfeited during the three quarters ended March 31, 2017. Compensation expense of $186 and $430 was recognized for the quarters ended March 30, 2018 and March 31, 2017, respectively. Compensation expense of $1,113 and $1,126 was recognized for the three quarters ended March 30, 2018 and March 31, 2017, respectively. The total fair value of restricted stock grants vested as of March 30, 2018 and March 31, 2017 was $1,809 and $587, respectively. As of March 30, 2018, the Company had $1,512 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

 

 

 

G.	Pension and Other Postretirement Benefit Plans

 

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

 

 

The Company expects to contribute approximately $2,265 to its pension plans in fiscal 2018. As of March 30, 2018, the amount of $1,949 in contributions has been made.

 

The Company has reclassified $474 (net of $212 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended March 30, 2018, and $682 (net of $398 in taxes) during the quarter ended March 31, 2017. The Company has reclassified $2,682 (net of $1,164 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the three quarters ended March 30, 2018, and $2,104 (net of $1,196 in taxes) during the three quarters ended March 31, 2017. These reclassifications are included in the computation of net periodic benefit cost.

 

 

H.	Income Taxes

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in the United States. The Tax Act, among other provisions, introduces changes in the U.S corporate tax rate, business related exclusions and deductions and credits, and has tax consequences for companies that operate internationally. Most of the changes introduced in the Tax Act are effective beginning on January 1, 2018; however, as the Company has a fiscal year end of June 30, the effective dates for the Company are various and different.

 

For the three quarters ended March 30, 2018 and March 31, 2017, the Company’s effective income tax rate was 39.4% and 34.8% respectively. During the current fiscal year, in compliance with the new Tax Act, the Company recorded a provisional tax expense of $4,293 primarily due to a re-measurement of deferred tax assets and liabilities; this increased the effective tax rate by 70.5%. The Company has determined that the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because the number cannot be calculated until the actual timing differences are known at year end rather than estimated this quarter. The first quarter release of a valuation allowance in a certain foreign jurisdiction of $3,803 reduced the effective tax rate by 62.4%. Increased domestic income was offset by the utilization of the Domestic Production Activities Deduction under IRC§199, decreasing the effective tax rate by 3.1%. The mix of earnings by jurisdiction and continued operational improvement coupled with increased tax preference items resulted in a minimal impact to the overall effective tax rate.

 

 

Within the calculation of the Company’s annual effective tax rate the Company has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions.  For example, the Company anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.

 

The following table sets forth the tax expense and the effective tax rate for the Company’s earnings before income taxes:

 

 

The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018 (the “Effective Date”).  When a U.S. federal tax rate change occurs during a fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment.  As a result of the Tax Act, the Company has calculated a U.S. federal statutory corporate income tax rate of 27.6% for the fiscal year ending June 30, 2018 and applied this rate in computing the income tax provision for the first three quarters. The U.S. federal statutory corporate income tax rate of 27.6% is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 34% applicable to the Company’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S. federal statutory tax rate of 21% applicable to the 2018 fiscal year thereafter.  The Company expects the U.S. federal statutory rate to be 21% for fiscal years beginning after June 30, 2018.

 

The Company completed a provisional calculation to determine the impact of a one-time repatriation tax on deferred foreign income (“Transition Tax”), as required by the Tax Act. The Company determined that the calculation is provisional because various components of the computation are unknown as of March 30, 2018, including the following significant items: exchange rates for fiscal year 2018, the actual aggregate foreign cash position and the earnings and profits of the foreign entities as of the two measurement dates. This provisional calculation resulted in a zero tax liability, therefore no tax accrual was necessary. With the enactment of the Transition Tax, any future dividends repatriated would benefit from the 100% Dividends Received Deduction. The Company reaffirms its positon that the earnings of certain foreign subsidiaries remain permanently reinvested. An analysis was also completed to verify the future utilization of tax attributes and it was determined that full utilization would be realized and no valuation allowance was required.

 

The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”), a deduction for foreign-derived intangible income (FDII) and base erosion anti-abuse tax (“BEAT”) on the Company, which are not effective until fiscal 2019. The Company has not recorded any impact associated with GILTI, FDII or BEAT in the tax rate for the first three quarters of fiscal 2018. A provisional analysis of the new BEAT rules has been completed and it is not anticipated that the Company will meet the minimum thresholds, nor is it anticipated that it will for the foreseeable future and is therefore not subject to this tax. Initial provisional estimates of the impact of GILTI and FDII have also been completed and minimal impact is anticipated. These estimates may be impacted by actual future data, additional guidance or other unforeseen circumstances.

 

Under ASC Topic 740, Income Taxes ("ASC 740"), a company is generally required to recognize the effect of changes in tax laws in its financial statements in the period in which the legislation is enacted. U.S. income tax laws are deemed to be effective on the date the president signs tax legislation. The president signed the U.S. Tax Reform legislation on December 22, 2017. As such, the Company was required to recognize the related impacts to the financial statements in the quarter ended December 29, 2017. In acknowledgment of the substantial changes incorporated in the U.S. Tax Reform, in conjunction with the timing of the enactment being just weeks before the majority of the provisions became effective, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) to provide certain guidance in determining the accounting for income tax effects of the legislation in the accounting period of enactment as well as provide a measurement period (similar to that used when accounting for business combinations) within which to finalize and reflect such final effects associated with U.S. Tax Reform. Further, SAB 118 summarizes a three-step approach to be applied each reporting period within the overall measurement period: (1) amounts should be reflected in the period including the date of enactment for those items which are deemed to be complete (i.e. all information is available and appropriately analyzed to determine the applicable financial statement impact), (2) to the extent the effects of certain changes due to U.S. Tax Reform for which the accounting is not deemed complete but for which a reasonable estimate can be determined, such provisional amount(s) should be reflected in the period so determined and adjusted in subsequent periods as such effects are finalized and (3) to the extent a reasonable estimate cannot be determined for a specific effect of the tax law change associated with U.S. Tax Reform, no provisional amount should be recorded but rather, continue to apply ASC 740 based upon the tax law in effect prior to the enactment of U.S. Tax Reform. Such measurement period is deemed to end when all necessary information has been obtained, prepared and analyzed such that a final accounting determination can be concluded, but in no event should the period extend beyond one year. If a company does not have the necessary information available, prepared or analyzed for certain income tax effects of the Tax Act, SAB 118 allows a company to report provisional numbers and adjust those amounts during the measurement period not to extend beyond one year.  For the three quarters ended March 30, 2018, the Company has recorded all known and estimable impacts of the Tax Act that are effective for fiscal year 2018.  Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.

 

 

Accordingly, the Company’s income tax provision as of March 30, 2018 reflects (i) the current year impacts of the Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail.

 

 

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. Due to operational changes, the Company has evaluated the realizability of the net deferred tax assets related to a certain foreign jurisdiction. Based on this evaluation, along with expected future earnings, management has concluded that the valuation allowance is no longer appropriate and it was released during the first quarter of fiscal 2018.

 

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter.

 

The Company has approximately $798 of unrecognized tax benefits, including related interest and penalties, as of March 30, 2018 which, if recognized, would favorably impact the effective tax rate. There was no significant change in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quarter ended March 30, 2018. It appears possible that the amount of unrecognized tax benefits could change in the next twelve months due to on-going audit activity.

 

Annually, the Company files income tax returns in various taxing jurisdictions inside and outside the United States.  In general, the tax years that remain subject to examination are 2011 through 2017 for the major operations in Italy, Canada, Belgium, and Japan.  The tax years open to examination in the U.S. are for years subsequent to fiscal 2015. The state of Wisconsin income tax audit remains ongoing for the fiscal years 2010 through 2013. It is reasonably possible that other audit cycles will be completed during fiscal 2018.

 

 

I.     Goodwill and Other Intangibles

 

The Company reviews goodwill for impairment on a reporting unit basis annually as of the end of the fiscal year, and whenever events or circumstances (“triggering events”) indicate that the carrying value of goodwill may not be recoverable. The Company monitors for interim triggering events on an ongoing basis. Such triggering events include unfavorable operating results and macroeconomic trends.

 

The fair value of reporting units is primarily driven by projected growth rates and operating results under the income approach using a discounted cash flow model, which applies an appropriate market-participant discount rate, and consideration of other market approach data from guideline public companies. If declining actual operating results or future operating results become indicative that the fair value of the Company’s reporting units has declined below their carrying values, an interim goodwill impairment test may need to be performed and may result in a non-cash goodwill impairment charge.

 

 

As of March 30, 2018 and June 30, 2017, goodwill pertains solely to the European Industrial reporting unit.

 

For the quarter ended March 30, 2018, the Company performed a review of potential triggering events, and concluded there were no triggering events that indicated that the fair value of its European Industrial reporting unit had not more likely than not declined to below its carrying value at March 30, 2018. The Company will perform its annual impairment test for this reporting unit as of June 30, 2018.

 

The changes in the carrying amount of goodwill are summarized as follows:

 

 

At March 30, 2018, the following acquired intangible assets have definite useful lives and are subject to amortization:                

 

 

The weighted average remaining useful life of the intangible assets included in the table above is approximately 13 years.

 

Intangible amortization expense was $46 and $41 for the quarters ended March 30, 2018, and March 31, 2017, respectively. Intangible amortization expense was $135 and $126 for the three quarters ended March 30, 2018, and March 31, 2017, respectively. Estimated intangible amortization expense for the remainder of fiscal 2018 and each of the next five fiscal years is as follows:

 

 

The gross carrying amount of the Company’s intangible assets that have indefinite lives and are not subject to amortization as of March 30, 2018 and June 30, 2017 was $214 and $205, respectively. These assets are comprised of acquired trade names.

 

 

 

J.	Long-term Debt

 

Long-term debt at March 30, 2018 and June 30, 2017 consisted of the following:

 

 

The revolving loan agreement pertains to the revolving loan facility which the Company entered into on April 22, 2016 with Bank of Montreal (the “BMO Agreement”). The BMO Agreement is secured by substantially all of the Company’s personal property, including accounts receivable, inventory, and certain machinery and equipment of its primary manufacturing facility in Racine, Wisconsin, and the personal property of Mill-Log Equipment Co., Inc., a wholly-owned domestic subsidiary of the Company. The BMO Agreement provides for a borrowing base calculation to determine borrowing capacity. This capacity will be based upon eligible domestic inventory, eligible accounts receivable and machinery and equipment, subject to certain adjustments. As of March 30, 2018, the Company’s borrowing capacity under the terms of the BMO Agreement was approximately $34,581, and the Company had approximately $26,146 of available borrowings. As of March 30, 2018, the interest rate under this agreement was 3.41%. 

 

The Company’s revolving loan agreement approximates fair value at March 30, 2018 and June 30, 2017. 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.

 

 

 

K.	Shareholders’ Equity

 

The Company from time to time makes open market purchases of its common stock under authorizations given to it by the Board of Directors, of which 315 shares as of March 30, 2018 remain authorized for purchase.  The Company did not make any open market purchases of its shares during the quarter and three quarters ended March 30, 2018 and March 31, 2017.

 

The following is a reconciliation of the Company’s equity balances for the first three fiscal quarters of 2018 and 2017:

 

 

 

 

 

Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended September 29, December 29, 2017, and March 30, 2018, and September 30, December 30, 2016, and March 31, 2017 are as follows:

 

 

 

 

 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter and three quarters ended March 30, 2018 are as follows:

 

 

(a)

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

 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter and three quarters ended March 31, 2017 is as follows:

 

 

(a)

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

 

 

L.	Restructuring of Operations

 

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 current year, the Company implemented additional actions to reduce personnel costs in its Belgian operations and reorganize for productivity in its European operations. These actions, together with the costs associated with the India manufacturing operations exit, resulted in a restructuring charge of $452 and $2,501 in the quarter and three quarters ended March 30, 2018, respectively. For the quarter and three quarters ended March 31, 2017, restructuring charges of $293 and $1,367, respectively, pertained to the elimination of full-time positions in the Company’s U.S., Belgian and Italian manufacturing operations.

 

Restructuring activities since June 2015 have resulted in the elimination of 164 full-time employees in the manufacturing segment. Accumulated costs to date under these programs within the manufacturing segment through March 30, 2018 were $8,376.

 

The following is a rollforward of restructuring activity:

 

 

 

M.	Earnings Per Share

 

The Company calculates basic earnings per share based upon the weighted average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period.  The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect.  Restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company, and are therefore included in computing earnings per share pursuant to the two-class method. 

 

 

The components of basic and diluted earnings per share were as follows:

 

 

The following potential common shares were excluded from diluted EPS for the quarter and three quarters ended March 30, 2018 because they were anti-dilutive: 179.1 related to the Company’s unvested PSAs, 237.7 related to the Company’s unvested RS awards, and 5.4 related to outstanding stock options.

 

The following potential common shares were excluded from diluted EPS for the quarter and three quarters ended March 31, 2017 as the Company reported a net loss: 181.8 related to the Company’s unvested PSAs, 269.6 related to the Company’s unvested RS awards, and 13.2 related to outstanding stock options.

 

 

 

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