TWIN DISC INC - Quarter Report: 2019 September (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 September 27, 2019

 

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 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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	Accelerated Filer  √
Non-accelerated filer	Smaller reporting company √
Emerging growth company

 

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

 

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

Yes               No  √

 

At October 31, 2019, the registrant had 13,359,133 shares of its common stock outstanding.

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock (No Par Value)	TWIN	The NASDAQ Stock Market LLC

 

 

 

		September 27, 2019				June 30, 2019
ASSETS
Current assets:
Cash		$	16,505			$	12,362
Trade accounts receivable, net			36,893				44,013
Inventories			127,305				125,893
Prepaid expenses			9,821				11,681
Other			8,001				8,420
Total current assets			198,525				202,369
Property, plant and equipment, net			71,249				71,258
Goodwill, net			25,072				25,954
Intangible assets, net			23,267				25,353
Deferred income taxes			19,508				18,178
Other assets			3,840				3,758
Total assets		$	341,461			$	346,870
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt		$	2,000			$	2,000
Accounts payable			25,278				31,468
Accrued liabilities			44,954				39,609
Total current liabilities			72,232				73,077
Long-term debt			47,554				40,491
Lease obligations			14,054				14,683
Accrued retirement benefits			25,141				25,878
Deferred income taxes			6,894				7,429
Other long-term liabilities			2,223				2,494
Total liabilities			168,098				164,052
Commitments and contingencies (Note D)
Equity:
Twin Disc shareholders' equity:
Preferred shares authorized: 200,000; issued: none; no par value			-				-
Common shares authorized: 30,000,000; issued: 14,632,802; no par value			43,182				45,047
Retained earnings			190,161				196,472
Accumulated other comprehensive loss			(40,571	)			(37,971	)
			192,772				203,548
Less treasury stock, at cost (1,300,317 and 1,392,524 shares, respectively)			19,920				21,332
Total Twin Disc shareholders' equity			172,852				182,216
Noncontrolling interest			511				602
Total equity			173,363				182,818
Total liabilities and equity		$	341,461			$	346,870

 

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		For the Quarter Ended
		September 27, 2019				September 28, 2018
Net sales		$	59,290			$	74,689
Cost of goods sold			49,654				50,704
Gross profit			9,636				23,985
Marketing, engineering and administrative expenses			16,346				18,986
Restructuring expenses			121				173
(Loss) income from operations			(6,831	)			4,826
Interest expense			389				717
Other expense (income), net			691				319
			1,080				1,036
(Loss) income before income taxes and noncontrolling interest			(7,911	)			3,790
Income tax (benefit) expense			(1,618	)			887
Net (loss) income			(6,293	)			2,903
Less: Net earnings attributable to noncontrolling interest, net of tax			(18	)			(41	)
Net (loss) income attributable to Twin Disc		$	(6,311	)		$	2,862
(Loss) income per share data:
Basic (loss) income per share attributable to Twin Disc common shareholders		$	(0.48	)		$	0.24
Diluted (loss) income per share attributable to Twin Disc common shareholders		$	(0.48	)		$	0.24
Weighted average shares outstanding data:
Basic shares outstanding			13,111				11,722
Diluted shares outstanding			13,111				11,799
Comprehensive (loss) income
Net (loss) income		$	(6,293	)		$	2,903
Benefit plan adjustments, net of income taxes of $169 and $146, respectively			557				471
Foreign currency translation adjustment			(2,996	)			(561	)
Unrealized loss on cash flow hedge, net of income taxes of $44 and $0, respectively			(143	)			-
Comprehensive (loss) income			(8,875	)			2,813
Less: Comprehensive income attributable to noncontrolling interest			(36	)			(16	)
Comprehensive (loss) income attributable to Twin Disc		$	(8,911	)		$	2,797

 

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		For the Quarter Ended
		September 27, 2019				September 28, 2018
Cash flows from operating activities:
Net (loss) income		$	(6,293	)		$	2,903
Adjustments to reconcile net (loss) income to net cash provided by operating activities, net of acquired assets:
Depreciation and amortization			2,926				2,349
Provision for deferred income taxes			(1,663	)			3,460
Stock compensation expense and other non-cash changes, net			457				892
Net change in operating assets and liabilities			6,054				(9,953	)
Amortization of inventory fair value step-up			-				1,171
Net cash provided by operating activities			1,481				822
Cash flows from investing activities:
Acquisitions of fixed assets			(4,037	)			(3,556	)
Proceeds from sale of fixed assets			29				30
Other, net			(129	)			(129	)
Acquisition of Veth Propulsion, less cash acquired			-				(59,649	)
Net cash used by investing activities			(4,137	)			(63,304	)
Cash flows from financing activities:
Borrowings under revolving loan arrangement			33,095				67,103
Repayments of revolver loans			(25,397	)			(45,231	)
Dividends paid to noncontrolling interest			(127	)			(115	)
Payments of withholding taxes on stock compensation			(913	)			(926	)
Proceeds from issuance of common stock, net			-				32,210
Proceeds from exercise of stock options			-				12
Borrowings under term debt arrangement			-				35,000
Repayments of term debt loan			-				(24,234	)
Net cash provided by financing activities			6,658				63,819
Effect of exchange rate changes on cash			141				49
Net change in cash			4,143				1,386
Cash:
Beginning of period			12,362				15,171
End of period		$	16,505			$	16,557

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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 adjustments, consisting primarily of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. 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, 2019. 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.

 

The consolidated financial statements and information presented herein include the financial results of Veth Propulsion Holding BV (“Veth Propulsion”), the acquisition of which was completed on July 2, 2018. The financial results included in this Form 10-Q related to the acquisition method of accounting for the Veth Propulsion acquisition have been finalized and completed.

 

Recently Adopted Accounting Standards

 

In June 2018, the FASB issued guidance (ASU 2018-07) intended to simplify the accounting for share based payments granted to nonemployees. Under the amendments in this guidance, payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The Company adopted this guidance effective July 1, 2019. The adoption of this guidance did not have a material impact on the Company’s financial statements and disclosures.

 

New Accounting Releases

 

In August 2018, the 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 Topic 820, Fair Value Measurement. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.

 

In August 2018, the FASB issued updated guidance (ASU 2018-14) intended to modify the disclosure requirements for employers that sponsor defined pension or postretirement plans. The amendments in this guidance are effective for fiscal years ending after December 15, 2020 (the Company’s fiscal 2021), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s 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 and accordingly, it has scaled some of its disclosures of financial and non-financial information in this quarterly report. The Company will continue to determine whether to provide additional scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.

 

 

 

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 quarters ended September 27, 2019 and September 28, 2018:

 

 

Included in the current fiscal quarter expense is a non-recurring warranty charge in the amount of $3,889, to accrue for estimated costs to resolve a unique product performance issue at certain installations.

 

The current portion of the warranty accrual ($6,253 and $4,139 as of September 27, 2019 and September 28, 2018, respectively) is reflected in accrued liabilities, while the long-term portion ($854 and $528 as of September 27, 2019 and September 28, 2018, 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, azimuth drives, surface drives, propellers and boat management systems, as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls systems. The Company sells to both domestic and foreign customers in a variety of market areas, principally pleasure craft, commercial and military marine markets, as well as in the energy and natural resources, government and industrial markets. The Company's worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network.

 

The Company has two reportable segments: manufacturing and distribution. 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:

 

 

 

Disaggregated revenue:

 

The following table presents details deemed most relevant to the users of the financial statements for the quarters ended September 27, 2019 and September 28, 2018.

 

Net sales by product group for the quarter ended September 27, 2019 is summarized as follows:.

 

 

Net sales by product group for the quarter ended September 28, 2018 is summarized as follows:

 

 

 

F.	Stock-Based Compensation

 

Performance Stock Awards (“PSA”)

 

During the first quarter of fiscal 2020 and 2019, the Company granted a target number of 71.7 and 37.0 PSAs, respectively, to various employees of the Company, including executive officers. The fiscal 2020 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, 2022. 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 107.6. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

 

 

The fiscal 2019 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, 2021. 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 75.0. Based upon actual results to date, the Company is currently accruing compensation expense for these PSAs.

 

There were 167.8 and 182.7 unvested PSAs outstanding at September 27, 2019 and September 28, 2018, 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 $72 and $546 was recognized for the quarters ended September 27, 2019 and September 28, 2018, respectively, related to PSAs. The weighted average grant date fair value of the unvested awards at September 27, 2019 was $16.70. At September 27, 2019, the Company had $1,844 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2020, 2019 and 2018 awards. The total fair value of PSAs vested as of September 27, 2019 and September 28, 2018 was $0.

 

Restricted Stock Awards (“RS”)

 

The Company has unvested RS awards outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded as compensation expense over the vesting period, which is generally 1 to 3 years. During the first quarter of fiscal 2020 and 2019, the Company granted 86.4 and 4.0 service based restricted shares, respectively, to employees and non-employee directors. There were 178.8 and 170.4 unvested shares outstanding at September 27, 2019 and September 28, 2018, respectively. There were no shares of restricted stock forfeited during the quarter ended September 27, 2019. A total of 2.8 shares of restricted stock were forfeited during the quarter ended September 28, 2018. Compensation expense of $306 and $250 was recognized for the quarters ended September 27, 2019 and September 28, 2018, respectively. The total fair value of restricted stock grants vested as of September 27, 2019 and September 28, 2018 was $1,017 and $1,785, respectively. As of September 27, 2019, the Company had $1,474 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.

 

Restricted Stock Unit Awards (“RSU”)

 

Under the 2018 Long Term Incentive Plan, the Company has been authorized to issue RSUs. The RSUs entitle the employee to shares of common stock of the Company if the employee remains employed by the Company through a specified date, generally three years from the date of grant. During the first quarter of fiscal 2019, the Company granted 38.0 RSUs to various employees of the Company, including executive officers. The fair value of the RSUs (on the date of grant) is recorded as compensation expense over the vesting period. There were 38.0 unvested RSUs outstanding at September 27, 2019 and at September 28, 2018. Compensation expense of $81 and $54 was recognized for the quarters ended September 27, 2019 and September 28, 2018, respectively. The weighted average grant date fair value of the unvested awards at September 27, 2019 was $25.77. As of September 27, 2019, the Company had $598 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 $1,936 to its pension plans in fiscal 2020. As of September 27, 2019, the amount of $429 in contributions has been made.

 

The Company has reclassified $557 (net of $169 in taxes) of benefit plan adjustments from accumulated other comprehensive loss during the quarter ended September 27, 2019, and $471 (net of $146 in taxes) during the quarter ended September 28, 2018. These reclassifications are included in the computation of net periodic benefit cost.

 

H.	Income Taxes

 

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated Annual Effective Tax Rate (“AETR”). Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. To calculate its AETR, an entity must estimate its ordinary income or loss and the related tax expense or benefit for its full fiscal year. Generally, an entity can reliably estimate ordinary income (or loss); however, there may be instances in which the entity is unable to estimate part of its ordinary income (or loss). In situations in which an entity is unable to estimate a portion of its ordinary income (or loss), the guidance in ASC 740-270-25-3 applies. If a company’s AETR is highly sensitive to changes in estimates of total ordinary income (or loss), the AETR may not be considered reliable. If a reliable estimate of the AETR cannot be made, the best estimate of the AETR may be the actual year-to-date effective tax rate. The determination of what constitutes a “reliable estimate” is a matter of professional judgement. As of the first fiscal quarter of 2020, Twin Disc is unable to reliably forecast its annual ordinary income (or loss). As of September 27, 2019 the Company has recognized a greater loss than that which is forecasted for the full year. Permanent differences continue to remain consistent and significant compared to projected ordinary income. The Company asserts that the best estimate of its AETR is in fact the actual year-to-date effective rate.

 

For the quarter ended September 27, 2019 and September 28, 2018 the Company’s effective income tax rate was 20.5% and 23.4%, respectively. For the quarter ended September 27, 2019, the net income tax benefit reflected is the statutory rate applied to year-to-date income (loss) plus the discrete items. For the quarter ended September 28, 2018, the Company was able to reliably forecast annual ordinary income and the tax expense realized was based on the estimated AETR. Due to the different methodologies utilized to calculate the interim tax provisions, it is not reasonable to numerically reconcile the change in estimated tax rate.

 

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 be realized. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income and foreign source income to realize all the deferred tax assets.

 

 

The Company has not provided for additional U.S. income taxes on cumulative earnings of consolidated foreign subsidiaries that are considered to be reinvested indefinitely. The Company reaffirms its position that these earnings remain permanently invested. Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation.

 

The Company has approximately $1,116 of unrecognized tax benefits, including related interest and penalties, as of September 27, 2019, 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 September 27, 2019. It is 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 in foreign jurisdictions are 2013 through 2019. The tax year open to examination in the Netherlands is 2019. The tax years open for 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 2011 through 2015. It is reasonably possible that other audit cycles will be completed during fiscal 2020.

 

I.     Goodwill and Other Intangibles

 

Goodwill represents the amount of the consideration transferred in excess of the net of the acquisition-date fair values of the identifiable assets acquired and the liabilities assumed.

 

The Company reviews goodwill for impairment on a reporting unit basis annually as of the first day of the Company’s fourth fiscal quarter, and whenever events or changes in circumstances (“triggering events”) indicate that the carrying value of goodwill may not be recoverable.

 

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.

 

During the first quarter of fiscal 2020, the Company determined that there were no triggering events to warrant an interim goodwill impairment test. As of September 27, 2019, goodwill in the amounts of $22,531 and $2,541 is carried in the European Propulsion and European Industrial reporting units, respectively.

 

As of September 27, 2019, changes in the carrying amount of goodwill is summarized as follows:

 

 

As of September 27, 2019, the following acquired intangible assets have definite useful lives and are subject to amortization:

 

 

 

Other intangibles consist of certain proprietary technology, computer software, patents and licensing agreements. 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 9 years.

 

Intangible amortization expense was $1,129 and $665 for the quarters ended September 27, 2019, and September 28, 2018, respectively. Estimated intangible amortization expense for the remainder of fiscal 2020 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 September 27, 2019 and June 30, 2019 was $202 and $200, respectively. These assets are comprised of acquired trade names.

 

J.	Long-term Debt

 

The Company’s long-term debt represents borrowings made under the credit agreement, as amended, which it entered into with BMO Harris Bank N.A, on June 29, 2018. The borrowings consist of a term loan component (“Term Loan”) with an interest rate based on LIBOR plus an applicable margin, requiring quarterly principal payments of $500 and maturing on March 4, 2026, and a revolving loan component (“Revolving Loans”) with a maximum facility of $50,000. The borrowings are subject to financial covenants and are secured by substantially all of the Company’s personal property, including accounts receivable, inventory, machinery and equipment and intellectual property. The credit arrangement is more fully described in the Company’s Annual Report filed on Form 10-K for June 30, 2019, as well as in Item 2 of this quarterly report.

 

Long-term debt at September 27, 2019 and June 30, 2019 consisted of the following:

 

 

 

During the quarter ended September 27, 2019, the average interest rate was 3.62% on the Term Loan, and 2.36% on the Revolving Loans.

 

Other long-term debt pertains mainly to a financing arrangement in Europe. These liabilities carry terms of three to five years and implied interest rates ranging from 7% to 25%. A total amount of $17 in principal was paid on these liabilities during the current fiscal year.

 

As of September 27, 2019, the Company’s borrowing capacity on the Revolving Loans under the terms of the Credit Agreement was $44,535, and the Company had approximately $14,776 of available borrowings. In addition to the Credit Agreement, the Company has established unsecured lines of credit that are used from time to time to secure certain performance obligations by the Company.

 

The Company’s borrowings described above approximate fair value at September 27, 2019 and June 30, 2019. 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.

 

 

On April 22, 2019, the Company entered into an interest rate swap arrangement with Bank of Montreal, with an original notional amount of $20,000 and a maturity date of March 4, 2026 to hedge the Term Loan. This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging. This swap is included in the disclosures in Note O, Derivative Financial Instruments.

 

 

K.	Shareholders’ Equity

 

The Company, from time to time, makes open market purchases of its common stock under authorizations given to it by the Board of Directors, of which 315.0 shares as of September 27, 2019 remain authorized for purchase. The Company did not make any open market purchases of its shares during the quarters ended September 27, 2019 and September 28, 2018.

 

The following is a reconciliation of the Company’s equity balances for the first fiscal quarter of 2020 and 2019:

 

 

 

 

Reconciliations for the changes in accumulated other comprehensive income (loss), net of tax, by component for the quarters ended September 27, 2019, and September 28, 2018 are as follows:

 

 

 

 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended September 27, 2019 are as follows:

 

 

 

Reconciliation for the changes in benefit plan adjustments, net of tax for the quarter ended September 28, 2018 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 last two fiscal years, the Company implemented additional actions to reduce personnel costs in its Belgian operations and reorganize for productivity in its European operations. These actions resulted in pre-tax restructuring charges of $121 and $173 in the quarters ended September 27, 2019 and September 28, 2018, respectively.

 

 

Restructuring activities since June 2015 have resulted in the elimination of 177 full-time employees in the manufacturing segment. Accumulated costs to date under these programs within the manufacturing segment through September 27, 2019 were $10,573.

 

The following is a roll-forward 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. Certain restricted stock award recipients have a non-forfeitable right to receive dividends declared by the Company, and are therefore included in computing earnings per share pursuant to the two-class method. 

 

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 ended September 27, 2019 because they were anti-dilutive: 167.8 related to the Company’s unvested PSAs, 178.8 related to the Company’s unvested RS awards, 38.0 related to the Company’s unvested RSUs, and 3.6 related to outstanding stock options.

 

 

The following potential common shares were excluded from diluted EPS for the quarter ended September 28, 2018 because they were anti-dilutive: 180.6 related to the Company’s unvested PSAs, 170.4 related to the Company’s unvested RS awards, 28.2 related to the Company’s unvested RSUs, and 3.3 related to outstanding stock options.

 

N.	Lease Liabilities

 

The Company leases certain office and warehouse space, as well as production and office equipment.

 

The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised. As its lease agreements typically do not provide an implicit rate, the Company primarily uses an incremental borrowing rate based upon the information available at lease commencement. In determining the incremental borrowing rate, the Company considers its current borrowing rate, the term of the lease, and the economic environments where the lease activity is concentrated.

 

The components of lease expense were as follows:

 

 

 

Other information related to leases was as follows:

 

 

 

Approximate future minimum rental commitments under non-cancellable leases as of September 27, 2019 were as follows:

 

 

 

The Company had $13,329 and $14,138 of operating lease right-of-use assets recorded in property, plant and equipment, net as of September 27, 2019 and June 30, 2019, respectively. The Company had $13,319 and $14,130 of operating lease liabilities recorded in lease obligations as of September 27, 2019 and June 30, 2019, respectively.

 

The Company had $720 and $545 of finance lease right-of-use assets recorded in property, plant and equipment, net as of September 27, 2019 and June 30, 2019, respectively. The Company had $735 and $553 of finance lease liabilities recorded in lease obligations as of September 27, 2019 and June 30, 2019, respectively.

 

O.	Derivative Financial Instruments

 

From time to time, the Company enters into derivative instruments to manage volatility arising from risks relating to interest rates and foreign exchange. The Company does not purchase, hold or sell derivative financial instruments for trading purposes. The Company’s practice is to terminate derivative transactions if the underlying asset or liability matures or is sold or terminated, or if it determines the underlying forecasted transaction is no longer probable of occurring.

 

The Company reports all derivative instruments on its consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes.

 

Interest Rate Swap Contracts

 

The Company has one outstanding interest rate swap contract as of September 27, 2019, which it entered into on April 22, 2019. It has been designated as a cash flow hedge in accordance with ASC 815, Derivatives and Hedging.

 

The primary purpose of the Company’s cash flow hedging activities is to manage the potential changes in value associated with interest payments on the Company’s LIBOR-based indebtedness. The Company records gains and losses on interest rate swap contracts qualifying as cash flow hedges in accumulated other comprehensive loss to the extent that these hedges are effective and until the Company recognizes the underlying transactions in net earnings, at which time these gains and losses are recognized in interest expense on its consolidated statements of operations and comprehensive (loss) income. Cash flows from derivative financial instruments are classified as cash flows from financing activities on the consolidated statements of cash flows. These contracts generally have original maturities of greater than 12 months.

 

Net unrealized after-tax losses related to cash flow hedging activities that were included in accumulated other comprehensive loss were $652 and $509 as of September 27, 2019 and June 30, 2019, 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 $136 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.

 

Foreign Currency Forward Contracts

 

The Company has no outstanding foreign currency forward exchange contracts at September 27, 2019 or at June 30, 2019.

 

 

Fair Value of Derivative Instruments

 

The fair value of derivative instruments included in the condensed consolidated balance sheets were as follows:

 

 

The impact of the Company’s derivative instruments on the consolidated statement of operations and comprehensive income for the years ended June 30 was as follows:

 

 

 

 

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