TWIN DISC, INCORPORATED In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated financial statements as ofMarch 25, 2022 , and related notes, as reported in Item 1 of this Quarterly Report. Some of the statements in this Quarterly Report on Form 10-Q are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. 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. In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company's Annual Report filed on Form 10-K forJune 30, 2021 , as supplemented in this Quarterly Report, could cause actual results to be materially different from what is expressed or implied in any forward-looking statement. Results of Operations (In thousands) Quarter Ended Three Quarters Ended March 25, % of Net March 26, % of Net March 25, % of Net March 26, % of Net 2022 Sales 2021 Sales 2022 Sales 2021 Sales Net sales$ 59,289 $ 57,640 $ 166,939 $ 152,377 Cost of goods sold 41,598 43,678 122,319 119,835
Gross profit 17,691 29.8 % 13,962 24.2 %
44,620 26.7 % 32,542 21.4 %
Marketing,
engineering and
administrative
expenses 14,396 24.3 % 13,196 22.9 % 42,753 25.6 % 39,000 25.6 % Restructuring of operations
303 0.5 % 251 0.4 % 1,542 0.9 % 777 0.5 %
Other operating
income (63 ) -0.1 % 0.0 % (2,957 ) -1.8 % 0.0 %
Income (loss)
from operations $ 3,055 5.2 % $ 515 0.9 % $ 3,282 2.0 % $ (7,235 ) -4.7 %
Comparison of the Third Quarter of Fiscal 2022 with the Third Quarter of Fiscal 2021
Net sales for the third quarter increased 2.9%, or$1.6 million , to$59.3 million from$57.6 million in the same quarter a year ago. The Company continues to experience improving market conditions across most markets served, although demand for new units in the North American oil and gas market has not shown meaningful improvement. The Company's ability to ship product was significantly hampered by a variety of supply chain challenges. These include supplier capacity constraints, extended supplier lead times and a global shortage of electronic components. The supply chain disruptions had a negative impact on fiscal 2022 third quarter net sales of approximately$7 million -$10 million . Global sales of industrial products improved 45.0% from the prior year and off-highway transmission sales increased 5.4%, while sales of marine and propulsion products decreased by 1.7% compared with the prior year third quarter. The North American region enjoyed the most significant sales improvement ($4.2 million or 26.4%) due to generally improving market conditions and increased aftermarket demand in the North American energy market. The European region saw sales decrease ($2.4 million or 9.9%), with project delays and supply chain challenges hampering volume. Similarly, sales into theAsia Pacific region decreased ($2.0 million or 13.8%) due to the supply chain challenges noted above. Currency translation had an unfavorable impact on third quarter fiscal 2022 sales compared to the third quarter of the prior year totaling$3.0 million primarily due to the weakening of the euro against theU.S. dollar. 19
-------------------------------------------------------------------------------- Sales at our manufacturing segment increased 8.2%, or$4.3 million , versus the same quarter last year. TheU.S. manufacturing operations experienced a 25.9%, or$6.0 million , increase in sales versus the third fiscal quarter of 2021, with recovering markets following the significant impact of the COVID-19 pandemic, partially offset by the supply chain challenges noted above. The Company's operation inthe Netherlands was up$0.5 million (3.8%) compared to the third fiscal quarter of 2021, with many boat construction projects being delayed due to the COVID-19 crisis. The Company's Belgian operation saw a decrease compared to the prior year third quarter (24.2% or$1.7 million ), with supply chain challenges combined with a negative translation impact. The Company's Italian manufacturing operations, also impacted by supply chain disruptions across their product offering, were down$0.4 million (5.9%) compared to the third quarter of fiscal 2021. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was down$0.2 million (15.5%) compared to the prior year third quarter. Our distribution segment experienced a decrease in sales of$2.6 million (9.8%) compared to the third quarter of fiscal 2021. Despite continued strong demand, the Company's Asian distribution operations inSingapore ,China andJapan were down 6.4% from the prior year due to lack of product deliveries from the manufacturing entities noted above. The Company'sNorth America distribution operation saw a decrease of 5.0%, while the Company's European distribution operation saw flat revenue in the quarter. The Company's distribution operation inAustralia , which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw continued strong demand, but reported a revenue decline (25.6% decrease from the prior year third fiscal quarter), due to supply chain challenges, primarily electronic components. Gross profit as a percentage of sales for the third quarter of fiscal 2022 improved to 29.8%, compared to 24.2% for the same period last year. The current quarter result reflects the benefit of improved volume for the quarter ($0.4 million ) and a favorable mix impact ($2.2 million - primarily due to strong aftermarket and global energy demand), along with the positive impact of pricing actions taken early in the quarter. We remain sensitive to the inflationary environment we are currently operating in, and are prepared to react with additional pricing actions as required. For the fiscal 2022 third quarter, marketing, engineering and administrative ("ME&A") expenses, as a percentage of sales, were 24.3%, compared to 22.9% for the fiscal 2021 third quarter. ME&A expenses increased$1.2 million (9.1%) versus the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of the accrual for the global bonus program ($0.8 million ), professional fees ($0.3 million ), marketing activities ($0.1 million ), increased travel costs ($0.2 million ) and other net spending increases of$0.9 million (largely inflation). These increases were partially offset by a Dutch COVID-19 subsidy recorded in the quarter, which reduced ME&A expense by$0.7 million , and a currency driven reduction of$0.4 million . The Company incurred restructuring charges of approximately$0.3 million during the third quarter of fiscal 2022, primarily associated with an adjustment to the carrying value of an asset held for sale. The Company has accepted an offer to sell the corporate headquarters building for a price slightly below previous estimates.
Interest expense was down slightly to
Other income of
The fiscal 2022 third quarter effective tax rate was negative 24.6% compared to 64.3% in the prior fiscal year third quarter. The current year rate was impacted by the fact that the domestic entity recognized a full valuation allowance in the fourth quarter of fiscal 2021, resulting in no tax benefits being recognized for current domestic losses.
Comparison of the First Three Quarters of Fiscal 2022 with the First Three Quarters of Fiscal 2021
Net sales for the first three quarters increased 9.6%, or$14.6 million , to$166.9 million from$152.4 million in the same period a year ago. 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 begins to subside. Global sales of industrial products improved by 34.8% from the prior year, while off-highway transmission sales increased by 6.1% and marine and propulsion grew by 5.8%. The North American region experienced the most significant sales improvement ($11.3 million or 25.0%) due to a broad-based market recovery and extremely strong aftermarket demand in the North American oil and gas segment. The North American region improved from 30% of total sales in the prior year first three quarters to 34% in the fiscal 2022 comparable period. The European region saw a moderate decline ($1.3 million and 2.2%), with strengthening market conditions more than offset by supply chain challenges. Sales into theAsia Pacific region decreased ($1.1 million or 2.8%), due to the noted supply chain challenges despite stable demand for oil and gas units inChina and an improving marine market inAustralia . Currency translation had an unfavorable impact on the first three quarters of fiscal 2022 sales compared to the same period of the prior year totaling$3.5 million primarily due to the weakening of the euro against theU.S. dollar. 20 -------------------------------------------------------------------------------- Sales at our manufacturing segment increased 11.1%, or$14.8 million , versus the first three quarters of last fiscal year. TheU.S. manufacturing operation experienced a 24.0%, or$14.7 million , increase in sales versus the first three quarters of fiscal 2021, with market recovery seen across all product lines, hampered somewhat by supply chain challenges, during the recent nine-month period. The Company's operation inthe Netherlands was essentially flat (up 0.5% or$0.2 million ) compared to the first three quarters of fiscal 2021, with many boat construction projects delayed due to the COVID-19 crisis. The Company's Belgian operation also saw a decrease compared to the prior year (11.6% or$2.0 million ), with supply chain difficulties offsetting improving market conditions. The Company's Italian manufacturing operations were up$1.3 million (7.5%) compared to the first three quarters of fiscal 2021, with most of the improvement coming in the second quarter thanks to a resurgent pleasure craft market. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up$0.6 million (20.0%) compared to the prior year comparable period. Our distribution segment experienced an increase in sales of$0.7 million (1.0%) compared to the first three quarters of fiscal 2021. The Company's Asian distribution operations inSingapore ,China andJapan were down 5.4% from the prior year as supply chain challenges during the recent nine month period delayed delivery from the manufacturing operations. The Company'sNorth America distribution operation saw an increase of 2.0% on an improving overall market demand. The Company's distribution operation inAustralia , which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw strong growth (13.6% increase from the prior year first three quarters), on improving pleasure craft marine market trends in the region. The Company's European distribution operation saw a slight increase of$0.2 million (1.4%) on improving market conditions. Gross profit as a percentage of sales for the first three quarters of fiscal 2022 improved to 26.7%, compared to 21.4% for the same period last year. The improvement is attributable to increased volume ($3.1 million ), a more favorable mix ($6.5 million - primarily due to increased aftermarket volume), the net positive impact of government subsidies ($1.4 million ) and favorable pricing and cost reduction actions ($1.1 million ). The Company was able to offset significant inflationary cost increases in the first three quarters with pricing actions and targeted cost reduction efforts. For the fiscal 2022 first three quarters, marketing, engineering and administrative ("ME&A") expenses, as a percentage of sales, were 25.6%, compared to 25.6% for the fiscal 2021 comparable period. ME&A expenses increased$3.8 million (9.6%) versus the same period last fiscal year. The increase in ME&A spending for the first three quarters was comprised of increases to salaries and benefits ($0.7 million ), global bonus expense ($2.0 million ), professional fees ($0.7 million ), marketing expenses ($0.3 million ), business insurance ($0.2 million ), corporate travel ($0.4 million ) and other net spending increases ($1.7 million , largely inflation). These increases were partially offset by COVID-19 subsidies, which reduced ME&A expense by$1.8 million and a currency driven reduction of$0.4 million . The Company incurred restructuring charges of approximately$1.5 million during the first three quarters of fiscal 2022, primarily associated with final negotiated settlement related to the Belgian restructuring program announced inJune 2021 ($1.2 million ). The total cost of this program is now estimated at$3.2 million , and the Company anticipated annual pre-tax savings of approximately$1.6 million upon completion of this program. The Company continues to focus on actively managing its cost structure and reducing fixed costs in light of the ongoing market challenges.
Interest expense was down slightly from the prior year comparable period, reflecting slightly lower borrowing levels and consistent average interest rates.
Other income of
The effective income tax rate for the first three quarters of fiscal 2022 was
76.5% compared to 28.9% for the comparable period in fiscal 2021. The current
year rate was impacted by the fact that the domestic entity recognized a full
valuation allowance in the fourth quarter of fiscal 2021, resulting in no tax
benefits being recognized for current domestic losses.
21
--------------------------------------------------------------------------------Financial Condition, Liquidity and Capital Resources
Comparison between
As of
Cash increased$0.5 million to$12.8 million as ofMarch 25, 2022 , versus$12.3 million as ofJune 30, 2021 . The majority of the cash as ofMarch 25, 2022 , is at the Company's overseas operations inEurope ($4.9 million ) andAsia-Pacific ($6.2 million ). Trade receivables of$39.0 million were down just$0.5 million , or approximately 1.3%, when compared to last fiscal year-end. The impact of foreign currency translation was to decrease accounts receivable by$1.2 million versusJune 30, 2021 . As a percent of sales, trade receivables finished at 65.7% in the third quarter of fiscal 2022 compared to 54.3% for the comparable period in fiscal 2021 and 59.6% for the fourth quarter of fiscal 2021. Inventories increased by$16.1 million , or 14.0%, versusJune 30, 2021 to$131.1 million . The impact of foreign currency translation was to decrease inventories by$3.4 million versusJune 30, 2021 . The remaining increase was seen primarily at the Company's operations inNorth America ($10.5 million ),the Netherlands ($2.7 million ) andAustralia ($5.2 million ). These increases were primarily driven by an imbalance in the supply chain, resulting in a growth in past due backlog and excess inventory waiting for missing components to finish assembly. On a consolidated basis, as ofMarch 25, 2022 , the Company's backlog of orders to be shipped over the next six months approximates$108.9 million , compared to$70.3 million atJune 30, 2021 and$71.4 million atMarch 26, 2021 . As a percentage of six-month backlog, inventory has decreased from 163% atJune 30, 2021 to 120% atMarch 25, 2022 . Net property, plant and equipment decreased$2.7 million (6.0%) to$42.8 million versus$45.5 million atJune 30, 2021 . The Company spent$2.4 million on capital equipment in the first three quarters, offset by an unfavorable exchange impact ($0.8 million ) and depreciation ($4.9 million ). The capital spending in the first three quarters reflects primarily maintenance capital. In total, the Company expects to invest between$4 and$6 million in capital assets in fiscal 2022. The Company continues to review its capital plans based on overall market conditions and availability of capital, and may make changes to its capital plans accordingly. The Company's capital program is focused on modernizing key core manufacturing, assembly and testing processes and improving efficiencies at its facilities around the world. Accounts payable as ofMarch 25, 2022 , of$34.2 million was up$3.2 million , or 10.3%, fromJune 30, 2021 . The impact of foreign currency translation was to reduce accounts payable by$1.1 million versusJune 30, 2021 . The remaining increase is primarily related to the increased purchasing activities in light of increased demand in the quarter. Total borrowings and long-term debt as ofMarch 25, 2022 , increased$2.0 million to$34.1 million versus$32.1 million atJune 30, 2021 . This increase is primarily attributable to the increase in inventory driven by supply chain imbalances, partially offset by the repatriation of cash fromSwitzerland following the sale of our Swiss facility in the first fiscal quarter. During the first nine months, the Company reported negative free cash flow of$9.6 million (defined as operating cash flow less acquisitions of fixed assets), which excludes the sale of the Swiss facility for$9.1 million . The Company ended the quarter with total debt, net of cash, of$21.2 million , compared to$19.7 million atJune 30, 2021 , for a net increase of$1.5 million . Total equity decreased$1.2 million , or 0.9%, to$129.5 million as ofMarch 25, 2022 . The net profit during the first three quarters increased equity by$0.5 million , offset by an unfavorable foreign currency translation of$6.4 million . The net change in common stock and treasury stock resulting from the accounting for stock-based compensation increased equity by$1.4 million . The net remaining increase in equity of$3.3 million primarily represents the amortization of net actuarial loss and prior service cost on the Company's defined benefit pension plans, along with the unrealized gain on cash flow hedges. 22 -------------------------------------------------------------------------------- OnJune 29, 2018 , the Company entered into a Credit Agreement (the "Credit Agreement") withBMO 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. OnMarch 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 fromJanuary 2, 2020 toMarch 4, 2026 , and added a requirement that the Company make principal installments of$0.5 million per quarter starting with the quarter endingJune 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 beforeSeptember 30, 2019 and 3.25 to 1.00 for quarters ending on or aboutDecember 31, 2019 throughSeptember 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 afterJune 30, 2019 for which net income is a positive number (the$100.0 million figure had previously been$70.0 million ). OnJanuary 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 endedDecember 27, 2019 , 5.00 to 1.00 for the quarter endingMarch 27, 2020 , 4.00 to 1.00 for the quarter endingJune 30, 2020 , 3.50 to 1.00 for the quarter endingSeptember 25, 2020 , and 3.00 to 1.00 for quarters ending on or afterDecember 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. OnJuly 22, 2020 , the Company entered into a fifth amendment (the "Fifth Amendment") to the Credit Agreement that amends the Credit Agreement dated as ofJune 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 onSeptember 30, 2020 andDecember 31, 2020 , and limits the Company's Capital Expenditures for the fiscal year endingJune 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
? 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).
23
--------------------------------------------------------------------------------? 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)
fiscal quarter ending
about
ending on or about
quarters ending on or about
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
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 ofDecember 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") commencingJanuary 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. OnSeptember 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 ofJune 29, 2018 , as amended between the Company and the Bank. The Amended and Restated Forbearance Agreement extended the Forbearance Period throughFebruary 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,
Net Cash Proceeds of approximately
? Requiring the Company to promptly repatriate approximately
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.
24--------------------------------------------------------------------------------
? Upon completion of the Rolla Repatriation: (1) reducing the portion of the
Borrowing Base that is based on Eligible Inventory from the lesser of
million or 50% of the value of Eligible Inventory to the lesser of
or 50% of the value of Eligible Inventory; and (2) reducing the Revolving
Credit Commitment from a maximum of
OnFebruary 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 amends the Credit Agreement dated as ofJune 29, 2018 , as amended between the Company and the Bank. The Second Amended and Restated Forbearance Agreement extends the Forbearance Period throughJune 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 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 Second Amended and Restated Forbearance Agreement also makes certain adjustments to the Credit Agreement, including:
? Reducing the portion of the Borrowing Base that is based on Eligible Inventory
from the lesser of
the lesser of
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,
approximately
Amended and Restated Forbearance Agreement) of approximately
"Rolla Disposition") and repatriation of approximately
Cash Proceeds (the "Rolla Repatriation").
? Reducing the Revolving Credit Commitment from a maximum of
maximum of
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
When the Forbearance Period ends, the Bank's forbearance under the Forbearance Agreement will cease, and the Company is subject to the Total Funded Debt to EBITDA ratio financial covenant of 3.00 to 1.00. Further, upon an event of default and upon notice from the Bank, the Company's obligations under the Loan Documents would be accelerated and become due at the default rate, and the Bank may exercise its rights and remedies under the Credit Agreement for any occurrence and continuation of default under the Credit Agreement. For the quarter endedMarch 25, 2022 , as a result of the Forbearance Agreement, the Company was not required to meet the minimum EBITDA financial covenant. The Company expects to be in compliance with the terms of the Credit Agreement following the forbearance period, and therefore continues to classify its debt as long term.
The Company remains in compliance with its liquidity and other covenants, and has agreed to provide additional financial reports to BMO.
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.
25
--------------------------------------------------------------------------------
There are no material off-balance-sheet arrangements, and the Company continues
to have sufficient liquidity for near-term needs. The Company had approximately
$15.9 million of available borrowings under the Credit Agreement as of March 25,
2022 . The Company expects to continue to generate enough cash from operations,
as well as have sufficient capacity under its credit facilities, to meet its
operating and investing needs. As of March 25, 2022 , the Company also had cash
of $12.8 million , primarily at its overseas operations. These funds, with some
restrictions and tax implications, are available for repatriation as deemed
necessary by the Company. In fiscal 2022, the Company expects to contribute $0.7
million to its defined benefit pension plans, the minimum contribution required.
Net working capital increased $3.0 million , or 2.7%, during the first three
quarters of fiscal 2022, and the current ratio declined remained level at 2.4
for March 25, 2022 and June 30, 2021 . The increase in net working capital was
primarily driven by an increase to inventory driven by substantial supply chain
imbalances across the Company's operations.
The Company expects capital expenditures to be approximately $4 million - $6
million in fiscal 2022. These anticipated expenditures reflect the Company's
plans to modernize its equipment and facilities, enhance its global sourcing
program and drive new product development.
Management believes that available cash, the BMO credit facility, and potential access to debt markets will be adequate to fund the Company's capital requirements for the foreseeable future.
The Company has approximately
The Company maintains defined benefit pension plans for some of its operations inthe United States andEurope . The Company has established the Benefits Committee (a non-Board management committee) to oversee the operations and administration of the defined benefit plans. The Company estimates that fiscal 2022 contributions to all defined benefit plans will total$0.7 million . As ofMarch 25, 2022 ,$0.7 million in contributions have been made. New Accounting Releases
See Note A, Basis of Presentation, to the condensed consolidated financial statements for a discussion of recently issued accounting standards.
Critical Accounting Policies The preparation of this Quarterly Report requires management's judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
The Company's critical accounting policies are described in Item 7 of the
Company's Annual Report filed on Form 10-K for
© Edgar Online, source
