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What changed in TWIN DISC INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of TWIN DISC INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+118 added−162 removedSource: 10-K (2023-09-08) vs 10-K (2022-09-08)

Top changes in TWIN DISC INC's 2023 10-K

118 paragraphs added · 162 removed · 102 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeThe number of persons employed by the Company at June 30, 2022 and June 30, 2021 was 761 and 743, respectively. The Company believes that its continued success is a direct result of its talent. As such, the Company strives to be an employer of choice in every community in which it operates.
Biggest changeThe Company believes that its continued success is a direct result of its talent. As such, the Company strives to be an employer of choice in every community in which it operates. It does this by fostering a fair, respectful, inclusive and safe work environment and culture shaped with its core values of customer focus, integrity, accountability, teamwork, and innovation.
However, as procurement and manufacturing "lead times" change, the backlog will increase or decrease, and thus it does not necessarily provide a valid indicator of the shipping rate. Cancellations are generally the result of rescheduling activity and do not represent a material change in backlog.
However, as procurement and manufacturing "lead times" change, the backlog will increase or decrease, and thus it does not necessarily provide a valid indicator of the shipping rate. Cancellations are generally the result of rescheduling activity and do not represent a material change in total backlog.
The Company’s top ten customers accounted for approximately 50% and 48% of the Company's consolidated net sales during the years ended June 30, 2022 and June 30, 2021, respectively. Included in the Company’s top ten customers, there was one customer, an authorized distributor of the Company, that accounted for 10% of consolidated net sales in fiscal year 2022.
The Company’s top ten customers accounted for approximately 47% and 50% of the Company's consolidated net sales during the years ended June 30, 2023 and June 30, 2022, respectively. Included in the Company’s top ten customers, there was one customer, an authorized distributor of the Company, that accounted for 10% of consolidated net sales in fiscal year 2023.
Unfilled open orders for the next six months of $101.2 million at June 30, 2022 compares to $70.3 million at June 30, 2021. Since orders are subject to cancellation and rescheduling by the customer, the six‑month order backlog is considered more representative of operating conditions than total backlog.
Unfilled open orders for the next six months of $119.2 million at June 30, 2023 compares to $101.2 million at June 30, 2022. Since orders are subject to cancellation and rescheduling by the customer, the six‑month order backlog is considered more representative of operating conditions than total backlog.
Research and development costs charged to operations totaled $1.6 million and $1.9 million in fiscal 2022 and 2021, respectively. Total engineering and development costs were $8.8 million and $8.5 million in fiscal 2022 and 2021, respectively.
Research and development costs charged to operations totaled $2.5 million and $1.6 million in fiscal 2023 and 2022, respectively. Total engineering and development costs were $8.7 million and $8.8 million in fiscal 2023 and 2022, respectively.
Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not anticipated to have a material effect on capital expenditures, earnings or the competitive position of the Company.
Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not anticipated to have a material effect on capital expenditures, earnings or the competitive position of the Company. 4 The number of persons employed by the Company at June 30, 2023 and June 30, 2022 was 739 and 761, respectively.
It does this by fostering a fair, respectful, inclusive and safe work environment and culture shaped with its core values of customer focus, integrity, accountability, teamwork, and innovation. 4 A summary of financial data by segment, geographic area, and classes of products that accounted for more than 10% of consolidated sales revenues for the years ended June 30, 2022 and 2021 appears in Note J, Business Segments and Foreign Operations, to the consolidated financial statements.
A summary of financial data by segment, geographic area, and classes of products that accounted for more than 10% of consolidated sales revenues for the years ended June 30, 2023 and 2022 appears in Note J, Business Segments and Foreign Operations, to the consolidated financial statements. The Company’s website address is www.twindisc.com.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeCertain of the Company ’ s products are directly or indirectly used in oil exploration and oil drilling and are thus dependent upon the strength of those markets and oil prices. In recent years, the Company has seen significant variations in the sales of its products that are used in oil and energy related markets.
Biggest changeThe Company remains unable to estimate the full extent or nature of the impact of COVID-19. 5 Certain of the Company ’ s products are directly or indirectly used in oil exploration and oil drilling and are thus dependent upon the strength of those markets and oil prices.
If this were to occur, future sales levels and costs of doing business, and therefore profitability, could be adversely affected. The ability to service the requirements of debt depends on the ability to generate cash and/or refinance its indebtedness as it becomes due, and depends on many factors, some of which are beyond the Company ’ s control.
If this were to occur, future sales levels and costs of doing business, and therefore profitability, could be adversely affected. 7 The ability to service the requirements of debt depends on the ability to generate cash and/or refinance its indebtedness as it becomes due, and depends on many factors, some of which are beyond the Company ’ s control.
The cyclical nature of the global oil and gas market presents the ongoing possibility of a severe cutback in demand, which would create a significant adverse effect on the sales of these products and ultimately on the Company’s profitability. 5 Many of the Company ’ s product markets are cyclical in nature or are otherwise sensitive to volatile or unpredictable factors.
The cyclical nature of the global oil and gas market presents the ongoing possibility of a severe cutback in demand, which would create a significant adverse effect on the sales of these products and ultimately on the Company’s profitability. Many of the Company ’ s product markets are cyclical in nature or are otherwise sensitive to volatile or unpredictable factors.
Such a disruption with respect to numerous products, or with respect to a few significant products, could have an adverse effect on the Company’s profitability and financial condition. 6 A significant design, manufacturing or supplier quality issue could result in recalls or other actions by the Company that could adversely affect profitability.
Such a disruption with respect to numerous products, or with respect to a few significant products, could have an adverse effect on the Company’s profitability and financial condition. A significant design, manufacturing or supplier quality issue could result in recalls or other actions by the Company that could adversely affect profitability.
Significant delays in its planned capital expenditures may materially and adversely affect the Company’s future revenue prospects. 7 Any failure to meet debt obligations and financial covenants, and maintain adequate asset-based borrowing capacity could adversely affect the Company ’ s business and financial condition.
Significant delays in its planned capital expenditures may materially and adversely affect the Company’s future revenue prospects. Any failure to meet debt obligations and financial covenants, and maintain adequate asset-based borrowing capacity could adversely affect the Company ’ s business and financial condition.
If these events were to transpire, they could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company carries a significant amount of intangible assets, but it may never fully realize the full value of these assets.
If these events were to transpire, they could have a material adverse effect on the Company’s business, results of operations and financial condition. 8 The Company carries a significant amount of intangible assets, but it may never fully realize the full value of these assets.
Based on its annual financial plan, the Company believes that it will generate sufficient cash flow levels throughout fiscal 2023 to meet the required financial covenants under the agreements. However, as with all forward-looking information, there can be no assurance that the Company will achieve the planned results in future periods.
Based on its annual financial plan, the Company believes that it will generate sufficient cash flow levels throughout fiscal 2024 to meet the required financial covenants under the agreements. However, as with all forward-looking information, there can be no assurance that the Company will achieve the planned results in future periods.
Failure to obtain relief from financial covenant violations or to obtain alternative financing, if necessary, would have a material adverse impact on the Company. As of June 30, 2022, the Company had a borrowing capacity that exceeded its outstanding loan balance (see Note G, Debt, of the notes to the consolidated financial statements).
Failure to obtain relief from financial covenant violations or to obtain alternative financing, if necessary, would have a material adverse impact on the Company. As of June 30, 2023, the Company had a borrowing capacity that exceeded its outstanding loan balance (see Note G, Debt, of the notes to the consolidated financial statements).
In the event of an increase in the global demand for steel, the Company could be adversely affected if it experiences shortages of raw castings and forgings used in the manufacturing of its products. With the continued development of certain developing economies, in particular China and India, the global demand for steel has risen significantly in recent years.
In the event of an increase in the global demand for steel, the Company could be adversely affected if it experiences shortages of raw castings and forgings used in the manufacturing of its products. With the continued advancement of certain developing economies, in particular China and India, the global demand for steel has risen significantly in recent years.
Although there was only one customer that accounted for 10% or more of consolidated net sales in fiscal 2022, deterioration of a business relationship with one or more of the Company’s significant customers would cause its sales and profitability to be adversely affected.
Although there was only one customer that accounted for 10% or more of consolidated net sales in fiscal 2023, deterioration of a business relationship with one or more of the Company’s significant customers would cause its sales and profitability to be adversely affected.
As a result of the outbreak, starting in March 2020 and intermittently through June 30, 2022, the Company suspended or reduced its operations, in whole or in part, in several of its locations. The Company’s businesses operate in market segments impacted by COVID-19.
As a result of the outbreak, starting in March 2020 and intermittently through June 30, 2023, the Company suspended or reduced its operations, in whole or in part, in several of its locations. The Company’s businesses operate in market segments impacted by COVID-19.
A material disruption at the Company ’ s manufacturing facility in Racine, Wisconsin could adversely affect its ability to generate sales and meet customer demand. The majority of the Company’s manufacturing, based on fiscal 2022 sales, came from its facility in Racine, Wisconsin.
A material disruption at the Company ’ s manufacturing facility in Racine, Wisconsin could adversely affect its ability to generate sales and meet customer demand. The majority of the Company’s manufacturing, based on fiscal 2023 sales, came from its facility in Racine, Wisconsin.
The Company faces risks associated with its international sales and operations that could adversely affect its business, results of operations or financial condition. Sales to customers outside the United States approximated 67% of the Company’s consolidated net sales for fiscal 2022. The Company has international manufacturing operations in Belgium, Italy, the Netherlands and Switzerland.
The Company faces risks associated with its international sales and operations that could adversely affect its business, results of operations or financial condition. Sales to customers outside the United States approximated 65% of the Company’s consolidated net sales for fiscal 2023. The Company has international manufacturing operations in Belgium, Italy, the Netherlands and Switzerland.
Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on the Company’s results of operations and financial condition. In fiscal 2021, the Company recorded a 100% allowance on its domestic deferred tax assets, totaling $24.4 million.
Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on the Company’s results of operations and financial condition. In fiscal 2021, the Company recorded a 100% allowance on its domestic deferred tax assets, totaling $15.9 million.
In fiscal 2022, the allowance totaled $23.1 million. 8 Taxing authority challenges and changes to tax laws may lead to tax payments exceeding current reserves. The Company is subject to ongoing tax examinations in various jurisdictions. As a result, the Company may record incremental tax expense based on expected outcomes of such matters.
At June 30, 2023 and 2022, the allowance totaled $22.3 million and $23.1 million, respectively. Taxing authority challenges and changes to tax laws may lead to tax payments exceeding current reserves. The Company is subject to ongoing tax examinations in various jurisdictions. As a result, the Company may record incremental tax expense based on expected outcomes of such matters.
The variability in these markets has been defined by the change in oil prices and the global demand for oil. Significant decreases in oil prices and reduced demand for oil and capital investment in the oil and energy markets adversely affect the sales of these products and the Company’s profitability.
Significant decreases in oil prices and reduced demand for oil and capital investment in the oil and energy markets adversely affect the sales of these products and the Company’s profitability.
In addition, the Company may adjust previously reported tax reserves based on expected results of these examinations. Such adjustments could result in an increase or decrease to the Company’s effective tax rate. The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in December 2017.
In addition, the Company may adjust previously reported tax reserves based on expected results of these examinations. Such adjustments could result in an increase or decrease to the Company’s effective tax rate.
Retaliatory actions by other countries could result in increases in the price of its products, which could limit demand for such products, hurt its global competitive position and have a material adverse effect on the Company’s business, financial condition and results of operations.
Retaliatory actions by other countries could result in increases in the price of its products, which could limit demand for such products, hurt its global competitive position and have a material adverse effect on the Company’s business, financial condition and results of operations. 6 If the Company were to lose business with any key customers, the Company ’ s business would be adversely affected.
The severity and duration of the pandemic remains unknown. Management continues to actively monitor the global situation and its effect on financial condition, liquidity, operations, suppliers, industry and workforce. The Company remains unable to estimate the full extent or nature of the impact of COVID-19, at this time.
Management continues to monitor the global situation and its effect on financial condition, liquidity, operations, suppliers, industry and workforce.
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If the Company were to lose business with any key customers, the Company ’ s business would be adversely affected.
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In recent years, the Company has seen significant variations in the sales of its products that are used in oil and energy related markets. The variability in these markets has been defined by the change in oil prices and the global demand for oil.
Removed
The Tax Act made numerous changes to U.S. federal corporate tax law that the Company expects will impact its effective tax rate in future periods. The changes included in the Tax Act are broad and complex.
Removed
The final impact of the Tax Act may differ from the Company’s current estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for U.S. federal income taxes or related interpretations in response to the Tax Act or any updates or changes to estimates the Company utilized to calculate the impact.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties Manufacturing Segment The Company owns two manufacturing, assembly and office facilities in Racine, Wisconsin, U.S.A., one in Nivelles, Belgium, and one in Decima, Italy. The aggregate floor space of these four plants approximates 625,000 square feet. One of the Racine facilities also serves as the Company's corporate headquarters.
Biggest changeItem 2. Properties The Company leases a facility in Milwaukee, Wisconsin, U.S.A., which serves as its corporate headquarters. 9 Manufacturing Segment The Company owns two manufacturing, assembly and office facilities in Racine, Wisconsin, U.S.A., and one in Decima, Italy. The aggregate floor space of these three plants approximates 580,000 square feet.
Distribution Segment The Company also has operations in the following locations, all of which are leased and are used for sales offices, warehousing and light assembly or product service: Brisbane, Queensland, Australia Guangzhou, China Perth, Western Australia, Australia Chennai, India Gold Coast, Queensland, Australia Coimbatore, India Singapore Saitama City, Japan Shanghai, China The Company believes its properties are well maintained and adequate for its present and anticipated needs. 9
Distribution Segment The Company also has operations in the following locations, all of which are leased and are used for sales offices, warehousing and light assembly or product service: Brisbane, Queensland, Australia Guangzhou, China Perth, Western Australia, Australia Chennai, India Gold Coast, Queensland, Australia Coimbatore, India Singapore Saitama City, Japan Shanghai, China The Company believes its properties are well maintained and adequate for its present and anticipated needs.
The Company leases additional manufacturing, assembly and office facilities in, Sturtevant, Wisconsin, Lufkin, Texas, Limite sull’Arno, Italy, Papendrecht, Netherlands, Novazzano, Switzerland, and Decima, Italy.
One of the Racine facilities is classified as an asset held for sale. The Company leases additional manufacturing, assembly and office facilities in, Sturtevant, Wisconsin; Lufkin, Texas; Limite sull’Arno, Italy; Papendrecht, Netherlands; Nivelles, Belgium; Novazzano, Switzerland; and Decima, Italy.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures Not applicable. 10 Information About Our Executive Officers Pursuant to General Instruction G(3) of Form 10‑K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 27, 2022.
Biggest changeItem 4. Mine Safety Disclosures Not applicable. Information About Our Executive Officers Pursuant to General Instruction G(3) of Form 10‑K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 26, 2023.
Name Age Position John H. Batten 57 President and Chief Executive Officer Jeffrey S. Knutson 57 Vice President – Finance, Chief Financial Officer, Treasurer and Secretary Officers are elected annually by the Board of Directors at the Board meeting held in conjunction with each Annual Meeting of the Shareholders.
Name Age Position John H. Batten 58 President and Chief Executive Officer Jeffrey S. Knutson 58 Vice President – Finance, Chief Financial Officer, Treasurer and Secretary Officers are elected annually by the Board of Directors at the Board meeting held in conjunction with each Annual Meeting of the Shareholders.
Each officer holds office until a successor is duly elected, or until he/she resigns or is removed from office. John H. Batten, President and Chief Executive Officer. Effective October 2021, Mr. Batten was renamed President and Chief Executive Officer. Prior to that, Mr.
Each officer holds office until a successor is duly elected, or until he/she resigns or is removed from office. John H. Batten, President and Chief Executive Officer. Effective October 2022, Mr. Batten was renamed President and Chief Executive Officer. Prior to that, Mr.
Knutson held Operational Controller positions with Tower Automotive (since August 2002) and Rexnord Corporation (since November 1998). 11 PART II
Knutson held Operational Controller positions with Tower Automotive (since August 2002) and Rexnord Corporation (since November 1998). 10 PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeItem 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock is traded on the NASDAQ Global Select Market under the symbol TWIN.
Biggest changeItem 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock is traded on the NASDAQ Global Select Market under the symbol TWIN. There were no dividend payments made in the fiscal years ended June 30, 2023 and 2022.
On July 27, 2012, the Board of Directors authorized the purchase of an additional 375,000 shares of Common Stock at market values. This authorization has no expiration. During the second quarter of fiscal 2013, the Company purchased 185,000 shares under this authorization. The Company did not make any purchases during fiscal 2021 and 2022.
On July 27, 2012, the Board of Directors authorized the purchase of an additional 375,000 shares of Common Stock at market values. This authorization has no expiration. During the second quarter of fiscal 2013, the Company purchased 185,000 shares under this authorization. The Company did not make any purchases during fiscal 2022 and 2023.
Issuer Purchases of Equity Securities Period (a) Total Number of Shares Purchased (b) Average Price Paid per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs March 25, 2022 – April 29, 2022 0 NA 0 315,000 April 30, 2022 – May 27, 2022 0 NA 0 315,000 May 28, 2022 - June 30, 2022 0 NA 0 315,000 Total 0 NA 0 315,000 On February 1, 2008, the Board of Directors authorized the purchase of up to 500,000 shares of Common Stock at market values, of which 250,000 shares were purchased during fiscal 2009 and 125,000 shares were purchased during fiscal 2012.
Issuer Purchases of Equity Securities Period (a) Total Number of Shares Purchased (b) Average Price Paid per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs April 1, 2023 – April 28, 2023 0 NA 0 315,000 April 29, 2023 – May 26, 2023 0 NA 0 315,000 May 2, 2023 - June 30, 2023 0 NA 0 315,000 Total 0 NA 0 315,000 On February 1, 2008, the Board of Directors authorized the purchase of up to 500,000 shares of Common Stock at market values, of which 250,000 shares were purchased during fiscal 2009 and 125,000 shares were purchased during fiscal 2012.
As of June 30, 2022, 315,000 shares remain authorized for purchase. Item 6. Reserved
As of June 30, 2023, 315,000 shares remain authorized for purchase. Item 6. Reserved
For information regarding the Company’s equity-based compensation plans, see the discussion under Item 12 of this report. As of August 8, 2022, shareholders of record numbered 339.
For information regarding the Company’s equity-based compensation plans, see the discussion under Item 12 of this report. As of August 4, 2023, shareholders of record numbered 331.
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Fiscal Year Ended June 30, 2022 Fiscal Year Ended June 30, 2021 Quarter High Low High Low First Quarter $ 16.20 $ 9.40 $ 7.76 $ 4.66 Second Quarter 14.01 9.56 7.97 4.87 Third Quarter 18.20 10.45 10.35 7.35 Fourth Quarter 17.77 8.35 15.02 8.79 There were no dividend payments made in the fiscal years ended June 30, 2022 and 2021.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeUpon 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.
Biggest changeThe 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. 15 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.
This yield curve is made up of Corporate Bonds rated AA or better. ● Expected Return on Plan Assets – based on the expected long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers historical returns earned on the funds. 21 ● Compensation Increase – reflect the long-term actual experience, the near-term outlook and assumed inflation. ● Retirement and Mortality Rates – based upon the Society of Actuaries PRI-2012 base tables for annuitants and non-annuitants, adjusted for generational mortality improvement based on the Society of Actuaries modified MP-2021 projection scale. ● Health Care Cost Trend Rates – developed based upon historical cost data, near-term outlook and an assessment of likely long-term trends.
This yield curve is made up of Corporate Bonds rated AA or better. ● Expected Return on Plan Assets – based on the expected long-term average rate of return on assets in the pension funds, which is reflective of the current and projected asset mix of the funds and considers historical returns earned on the funds. ● Compensation Increase – reflect the long-term actual experience, the near-term outlook and assumed inflation. ● Retirement and Mortality Rates – based upon the Society of Actuaries PRI-2012 base tables for annuitants and non-annuitants, adjusted for generational mortality improvement based on the Society of Actuaries modified MP-2021 projection scale. ● Health Care Cost Trend Rates – developed based upon historical cost data, near-term outlook and an assessment of likely long-term trends.
There can be no assurance that actual results will not differ from those estimates. The Company’s significant accounting policies are described in Note A, Significant Accounting Policies, of the notes to the consolidated financial statements. Not all of these significant accounting policies require management to make difficult, subjective, or complex judgments or estimates.
There can be no assurance that actual results will not differ from those estimates. 16 The Company’s significant accounting policies are described in Note A, Significant Accounting Policies, of the notes to the consolidated financial statements. Not all of these significant accounting policies require management to make difficult, subjective, or complex judgments or estimates.
During fiscal 2022, the Company did not purchase any shares as part of its Board-authorized stock repurchase program. The Company has 315,000 shares remaining under its authorized stock repurchase plan. Future Liquidity and Capital Resources On June 29, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A.
During fiscal 2023, the Company did not purchase any shares as part of its Board-authorized stock repurchase program. The Company has 315,000 shares remaining under its authorized stock repurchase plan. Future Liquidity and Capital Resources On June 29, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Smaller Reporting Company Status Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller reporting company based on its public float as of the last business day of the second quarter of fiscal 2022.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Smaller Reporting Company Status Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller reporting company based on its public float as of the last business day of the second quarter of fiscal 2023.
The Company also has long-term obligations related to its postretirement plans which are discussed in detail in Note M “Pension and Other Postretirement Benefit Plans” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2022 Annual Report on Form 10-K.
The Company also has long-term obligations related to its postretirement plans which are discussed in detail in Note M “Pension and Other Postretirement Benefit Plans” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2023 Annual Report on Form 10-K.
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.
The Company has 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.
Contractual Obligations The Company's significant contractual obligations as of June 30, 2022 are discussed in Note H “Lease Obligations” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2022 Annual Report on Form 10-K. There are no material undisclosed guarantees.
Contractual Obligations The Company's significant contractual obligations as of June 30, 2023 are discussed in Note H “Lease Obligations” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2023 Annual Report on Form 10-K. There are no material undisclosed guarantees.
As of June 30, 2022, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90 days.
As of June 30, 2023, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90 days.
The approach used to determine the annual assumptions are as follows: ● Discount Rate – based on the Willis Towers Watson BOND:Link model at June 30, 2022 as applied to the expected payouts from the pension plans.
The approach used to determine the annual assumptions are as follows: ● Discount Rate – based on the Willis Towers Watson BOND:Link model at June 30, 2023 as applied to the expected payouts from the pension plans.
The increase in fiscal 2022 reflects a continued strong Australian pleasure craft market, continued demand for the Company’s oil and gas transmissions by the Chinese market and a general economic recovery following the COVID-19 pandemic.
The increase in fiscal 2023 reflects a continued strong Australian pleasure craft market, continued demand for the Company’s oil and gas transmissions by the Chinese market and a general economic recovery following the COVID-19 pandemic.
Management believes that it is more likely than not that the results of future operations will not generate sufficient taxable income and foreign source income to realize all the domestic deferred tax assets, therefore, a valuation allowance in the amount of $24.4 million, was included in income tax expense (benefit) on the consolidated statement of operations, for fiscal year 2021.
Management believes that it is more likely than not that the results of future operations will not generate sufficient taxable income and foreign source income to realize all the domestic deferred tax assets, therefore, a valuation allowance in the amount of $15.9 million, was included in income tax expense (benefit) on the consolidated statement of operations, for fiscal year 2021.
Long-lived Assets The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. For property, plant and equipment and other long-lived assets, including intangible assets, the Company performs undiscounted operating cash flow analyses to determine if an impairment exists.
Long-lived Assets The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. When triggering events are identified, the Company performs undiscounted operating cash flow analyses to determine if an impairment exists for property, plant and equipment and other long-lived assets, including intangible assets.
In fiscal 2023, the Company expects to contribute $0.6 million to its defined benefit pension plans, the minimum contribution required.
In fiscal 2024, the Company expects to contribute $0.6 million to its defined benefit pension plans, the minimum contribution required.
Postretirement medical claims are paid by the Company as they are submitted, and they are anticipated to be $0.3 million in 2022 based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured.
Postretirement medical claims are paid by the Company as they are submitted, and they are anticipated to be $0.7 million in fiscal 2024 based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured.
In the off-highway transmission market, the year-over-year increase of 11.1% can also be attributed primarily to the global recovery following the impact of the COVID-19 pandemic, with particular strength in North American aftermarket product sales for the oil and gas industry. Sale of the Company’s pressure pumping transmission systems into China also improved over the prior year.
In the off-highway transmission market, the year-over-year increase of 12.5% can also be attributed primarily to the global recovery following the impact of the COVID-19 pandemic, with particular strength in North American aftermarket product sales for the oil and gas industry. Sale of the Company’s pressure pumping transmission systems into China also remains strong.
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”).
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”), subject to a Borrowing Base based on Eligible Inventory and Eligible Receivables.
In fiscal year 2022, the valuation allowance was $23.1 million, Order Rates As of June 30, 2022, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was $101.2 million or approximately 44% higher than the six-month backlog of $70.3 million as of June 30, 2021.
In fiscal year 2023 and 2022, the valuation allowance was $22.3 million and $23.1 million, respectively. Order Rates As of June 30, 2023, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was $119.2 million or approximately 18% higher than the six-month backlog of $101.2 million as of June 30, 2022.
See Note J, Business Segments and Foreign Operations, of the notes to the consolidated financial statements for more information on the Company’s business segments and foreign operations. Gross Profit In fiscal 2022, gross profit improved $18.0 million, or 35.3%, to $68.8 million on a sales increase of $24.3 million.
See Note J, Business Segments and Foreign Operations, of the notes to the consolidated financial statements for more information on the Company’s business segments and foreign operations. Gross Profit In fiscal 2023, gross profit improved $5.5 million, or 8.0%, to $74.3 million on a sales increase of $34.0 million.
Although the Company’s accounts receivable are dispersed among a large customer base, a significant change in the liquidity or financial position of any one of its largest customers could have a material adverse impact on the collectability of its accounts receivable and future operating results. 20 Inventory Inventories are valued at the lower of cost or net realizable value.
Although the Company’s accounts receivable are dispersed among a large customer base, a significant change in the liquidity or financial position of any one of its largest customers could have a material adverse impact on the collectability of its accounts receivable and future operating results.
Sales into the Asia Pacific market improved 8% compared to fiscal 2021 and represented approximately 23% of sales in fiscal 2022, compared to 24% in fiscal 2021.
Sales into the Asia Pacific market improved 13% compared to fiscal 2022 and represented approximately 23% of sales in fiscal 2023, compared to 23% in fiscal 2022.
These charges relate to a continued restructuring program at the Company’s Belgian operation to focus resources on core manufacturing process, while allowing for savings on the outsourcing of non-core processes. In fiscal 2021, the Company incurred $7.4 million in restructuring charges.
These charges relate to a continued restructuring program at the Company’s Belgian operation to focus resources on core manufacturing process, while allowing for savings on the outsourcing of non-core processes.
Under the Ninth Amendment, the Applicable Margins are between 1.25% and 2.75% for Revolving Loans and Letters of Credit; 1.375% and 2.875% for Term Loans; and .10% and .15% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio). The Ninth Amendment also revised the Company’s financial covenants under the Credit Agreement.
Currently, the Applicable Margins are between 1.25% and 2.75% for Revolving Loans and Letters of Credit; 1.375% and 2.875% for Term Loans; and .10% and .15% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio). The Credit Agreement, as amended, requires the Company to meet certain financial covenants.
Currency translation had an unfavorable impact on fiscal 2022 sales compared to the prior year totaling $8.5 million primarily due to the weakening of the euro and Australian dollar against the U.S. dollar. Sales at our manufacturing segment increased 13.4%, or $25.8 million, versus the same period last year.
Currency translation had an unfavorable impact on fiscal 2023 sales compared to the prior year totaling $11.5 million, primarily due to the weakening of the euro and Australian dollar against the U.S. dollar. Sales for our manufacturing segment increased 12.2%, or $26.6 million, versus the same period last year.
Gross profit for the year was primarily impacted by improved volumes and a significantly more favorable product mix. This was driven by the global economic recovery following the impact of the COVID-19 pandemic and a significant increase in the sales of high-margin oil and gas transmissions and parts.
Gross profit for the year was primarily impacted by improved volumes (approximately $9.6 million) and a more favorable product mix (approximately $1.5 million). This was driven by the global economic recovery that started in fiscal 2021 following the impact of the COVID-19 pandemic and an increase in the sales of high-margin oil and gas transmissions and parts.
Marketing, Engineering and Administrative (ME&A) Expenses Marketing, engineering, and administrative (ME&A) expenses of $60.1 million were up $4.3 million, or 7.8%, in fiscal 2022 compared to the prior fiscal year. As a percentage of sales, ME&A expenses decreased to 24.7% of sales versus 25.5% of sales in fiscal 2021.
Marketing, Engineering and Administrative (ME&A) Expenses Marketing, engineering, and administrative (ME&A) expenses of $62.2 million were up $2.2 million, or 3.6%, in fiscal 2023 compared to the prior fiscal year. As a percentage of sales, ME&A expenses decreased to 22.5% of sales versus 24.7% of sales in fiscal 2022.
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.
Actual results may vary because of variations between these assumptions and actual performance. 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.
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 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 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. 12 Note on Forward-Looking Statements Statements in this report (including but not limited to certain statements in Items 1, 3 and 7) and in other Company communications that are not historical facts are forward-looking statements, which are based on management’s current expectations.
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. 11 Note on Forward-Looking Statements This report contains statements (including but not limited to certain statements in Items 1, 3, and 7) that are forward-looking as defined by the Securities and Exchange Commission in its rules, regulations and releases.
Cost has been determined by the last-in, first-out (LIFO) method for the majority of the inventories located in the United States, and by the first-in, first-out (FIFO) method for all other inventories.
Inventory Inventories are valued at the lower of cost or net realizable value (or lower of cost or market where appropriate). Cost has been determined by the last-in, first-out (LIFO) method for the majority of the inventories located in the United States, and by the first-in, first-out (FIFO) method for all other inventories.
Liquidity and Capital Resources Fiscal Years 2022 and 2021 The net cash used by operating activities in fiscal 2022 totaled $8.3 million, a change of ($14.8 million) from the prior fiscal year cash provided by operating activities of $6.5 million.
Liquidity and Capital Resources Fiscal Years 2023 and 2022 The net cash provided by operating activities in fiscal 2023 totaled $22.9 million, an improvement of $31.2 million from the prior fiscal year cash used by operating activities of $8.3 million.
The Company’s European distribution operation saw essentially flat sales, as improving demand was offset by an unfavorable currency translation impact and supply chain challenges limiting shipment of goods from the production operations. The Company’s North American distribution operation was also relatively unchanged from fiscal 2021, as supply chain challenges offset an improving demand picture.
The Company’s European distribution operation saw a slight increase in sales of 2.1%, as improving demand was offset by an unfavorable currency translation impact and supply chain challenges limiting shipment of goods from the production operations.
These anticipated expenditures reflect the Company’s plans to invest in modern equipment to drive efficiencies, quality improvements and cost reductions. Management believes that available cash, the credit facility, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company’s capital requirements for the foreseeable future.
Management believes that available cash, the credit facility, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company’s capital requirements for the foreseeable future.
These statements involve risks and uncertainties that could cause actual results to differ materially from what appears here. Forward-looking statements include the Company’s description of plans and objectives for future operations and assumptions behind those plans. The words “anticipates,” “believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions, usually identify forward-looking statements.
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. These statements are based on management’s current expectations that are based on assumptions that are subject to risks and uncertainties.
The increase in net working capital was primarily the result of an increase to inventory ($9.1 million) resulting from growing demand and supply chain imbalances. Other increases included trade receivables ($6.0 million - due to increased sales volume in the fourth quarter), lower trade payables ($2.5 million) and slightly higher other current assets ($0.8 million).
The decrease in net working capital was primarily the result of an increase to trade payables ($8.0 million) and accrued liabilities ($11.0 million) resulting from growing demand and supply chain imbalances. Offsetting these movement were increases to trade receivables ($9.3 million - due to increased sales volume in the fourth quarter) and inventory ($4.8 million).
Geographically, sales to the U.S. and Canada improved 26% in fiscal 2022 compared to fiscal 2021, representing 36% of consolidated sales for fiscal 2022 compared to 32% in fiscal 2021. The increase is primarily due to the impact of the economic recovery following the COVID-19 pandemic.
Geographically, sales to the U.S. and Canada improved 22% in fiscal 2023 compared to fiscal 2022, representing 38% of consolidated sales for fiscal 2023 compared to 36% in fiscal 2022. The increase is primarily due to the continuing economic recovery following the COVID-19 pandemic, with strong demand experienced across the markets served by the Company.
The warranty reserve is established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.
However, its warranty obligation is affected by product failure rates, the extent of the market affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.
Interest Expense Interest expense of $2.1 million for fiscal 2022 was $0.3 million lower than fiscal 2021 on a relatively stable average interest rate and a lower average balance on the domestic revolver.
Interest Expense Interest expense of $2.3 million for fiscal 2023 was $0.2 million higher than fiscal 2022 due to an increased average interest rate, partially offset by a lower average balance on the domestic revolver.
Loans under the Credit Agreement are designated either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,” which accrue interest at the EURIBO Rate plus an Applicable Margin.
Loans are designated either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin, or “Eurodollar Loans,” which accrue interest at the EURIBO Rate plus an Applicable Margin. Amounts drawn on a Letter of Credit that are not timely reimbursed to the Bank bear interest at a Base Rate plus an Applicable Margin.
The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems primarily for the pleasure craft market, saw an 18.2% sales increase, driven by strong demand for the Company’s product in the pleasure craft market. 13 Net sales for the Company’s marine transmission, propulsion and boat management systems were up 6.1% in fiscal 2022 compared to the prior fiscal year.
The Company’s distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems primarily for the pleasure craft market, saw a 14.4% sales increase, driven by strong demand for the Company’s product in the pleasure craft market.
In fiscal 2023, the Company expects to contribute $0.6 million to its defined benefit pension plans, the minimum contribution required. 19 Net working capital increased $10.0 million, or 8.8%, during fiscal 2022 and the current ratio (calculated as total current assets divided by total current liabilities) increased from 2.4 at June 30, 2021 to 2.5 at June 30, 2022.
Net working capital decreased $3.8 million, or 3.0%, during fiscal 2023 and the current ratio (calculated as total current assets divided by total current liabilities) decreased from 2.5 at June 30, 2022 to 2.2 at June 30, 2023.
The Company’s Asian distribution operation in Singapore, China and Japan experienced a 7.8% increase in sales due to the recovering global demand following the impacts of COVID-19, partially offset by an unfavorable currency translation impact.
The Company’s Asian distribution operation in Singapore, China and Japan experienced a 7.4% increase in sales due to the recovering global demand following the impacts of COVID-19 and continued strength in Chinese demand for oil and gas related products.
Fiscal 2022 Compared to Fiscal 2021 Net Sales Net sales for fiscal 2022 increased 11.1%, or $24.3 million, to $242.9 million from $218.6 million in fiscal 2021. The Company experienced a broad-based recovery in demand across most of the markets served, as the impact of the COVID-19 crisis on the Company’s global markets subsided.
Fiscal 2023 Compared to Fiscal 2022 Net Sales Net sales for fiscal 2023 increased 14.0%, or $34.1 million, to $277.0 million from $242.9 million in fiscal 2022. The Company continued to experience growing demand across most of the markets served, following the unfavorable impact of the COVID-19 crisis on the Company’s global markets in fiscal 2020 and 2021.
Recently Issued Accounting Standards See Note A, Significant Accounting Policies, of the notes to the consolidated financial statements for a discussion of recently issued accounting standards.
The recognition of a valuation allowance does not affect the availability of the tax credits as the Company realizes earnings. 18 Recently Issued Accounting Standards See Note A, Significant Accounting Policies, of the notes to the consolidated financial statements for a discussion of recently issued accounting standards.
Based on the above criteria the Company has determined that a full valuation allowance is appropriate as relates to its domestic operations. A full domestic valuation allowance of $24.4 million has been recognized in fiscal 2022. The recognition of a valuation allowance does not affect the availability of the tax credits as the Company realizes earnings.
Based on the above criteria the Company has determined that a full valuation allowance is appropriate as relates to its domestic operations. A full domestic valuation allowance of $22.3 million has been recognized at June 30, 2023.
Other income (expense), net In fiscal 2022, other income, net, of $1.3 million improved by $4.7 million from a prior fiscal year other expense, net, of ($3.4 million). This change is primarily due to the impact of currency movements related to the euro and Asian currencies.
Other Income, Net In fiscal 2023, other income, net, of $0.7 million declined by $3.0 million from the prior fiscal year other income, net, of $3.7 million. This change is primarily due to the impact of currency movements related to the euro. Income Taxes The effective tax rate for fiscal 2023 is 26.2% compared to 14.5% for fiscal 2022.
The Company expects to continue to generate enough cash from operations, as well as its credit facilities, to meet its operating and investing needs. As of June 30, 2022, the Company also had cash of $12.5 million, primarily at its overseas operations. These funds, with some restrictions and tax implications, are available for repatriation as deemed necessary by the Company.
The Company had approximately $33.0 million of available borrowings under the Credit Agreement as of June 30, 2023. The Company expects to continue to generate enough cash from operations, as well as its credit facilities, to meet its operating and investing needs. As of June 30, 2023, the Company also had cash of $13.3 million, primarily at its overseas operations.
Sales into the European market declined approximately 6% from fiscal 2021 levels while accounting for 31% of consolidated net sales in fiscal 2021 compared to 37% of net sales in fiscal 2021. Despite strengthening demand, the region experienced significant supply chain challenges and an unfavorable currency exchange impact.
Sales into the European market improved approximately 11% from fiscal 2022 levels while accounting for 30% of consolidated net sales in fiscal 2023 compared to 31% of net sales in fiscal 2022. The region enjoyed strong demand across the end markets served, limited somewhat by supply chain challenges, but overcoming an unfavorable currency exchange impact.
Amounts drawn on a Letter of Credit that are not timely reimbursed to the Bank bear interest at a Base Rate plus an Applicable Margin. The Company also pays a commitment fee on the average daily Unused Revolving Credit Commitment equal to an Applicable Margin.
The Company also pays a commitment fee on the average daily Unused Revolving Credit Commitment equal to an Applicable Margin.
In constant currency, this entity experienced a slight increase in sales (1.3%) as recovering market demand was hampered somewhat by supply chain challenges. The Company’s Italian manufacturing operations reported an 8.2% increase in sales from fiscal 2021, despite an unfavorable currency translation impact, thanks to a recovering European industrial market following the negative impact of the COVID-19 pandemic.
The Company’s Italian manufacturing operations reported a 14.4% increase in sales from fiscal 2022, despite an unfavorable currency translation impact, thanks to recovering European markets following the negative impact of the COVID-19 pandemic.
While market demand was strong through the year, supply chain disruption limited the Company’s ability to deliver product through the first three quarters of fiscal 2022.
While market demand was strong through the year, supply chain challenges again limited the Company’s ability to deliver product during the fiscal year. The Company noted improving supply chain performance through the year, delivering sequential revenue improvements through the four quarters of fiscal 2023.
The net cash provided by financing activities relates primarily to borrowings of long-term debt ($3.9 million), partially offset by payments for withholding taxes on stock compensation ($0.5 million), payments on finance lease obligations ($0.9 million) and dividends paid to a non-controlling interest ($0.2 million).
The capital spending amount reflects a return to somewhat normalized capital spending levels, somewhat hampered by extended lead times on equipment resulting from global supply chain challenges. 14 The net cash used by financing activities relates primarily to repayments of long-term debt ($18.2 million), along with payments for withholding taxes on stock compensation ($0.5 million), payments on finance lease obligations ($0.6 million) and dividends paid to a non-controlling interest ($0.2 million).
These increases were partially offset by an increase in the receipt of Dutch COVID-19 subsidy payments ($1.2 million), the absence of a prior year one-off product issue ($0.8 million) and an exchange driven decrease ($1.2 million). 14 Restructuring of Operations During the course of fiscal 2022, the Company incurred $1.0 million in restructuring charges.
These increases were partially offset by a reduction in the global bonus expense ($2.0 million) and a currency exchange driven decrease ($1.6 million). 13 Restructuring of Operations During the course of fiscal 2023 and fiscal 2022 the Company incurred $0.2 million and $1.0 million in restructuring charges, respectively.
Specifically, the Company covenanted (i) not to allow its total funded debt to EBITDA ratio to be greater than 3.00 to 1.00 (the cap had previously been 3.50 to 1.00 for quarters ending on or before September 30, 2019 and 3.25 to 1.00 for quarters ending on or about December 31, 2019 through September 30, 2020), and (ii) that its tangible net worth will not be less than $100.0 million plus 50% of net income for each fiscal year ending on and after June 30, 2019 for which net income is a positive number (the $100.0 million figure had previously been $70.0 million).
Specifically, the Company’s Total Funded Debt to EBITDA ratio may not exceed 3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00. The Company’s Tangible Net Worth may not be less than $100 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2023.
The Company also experienced a net favorable improvement in margins from the recording of benefits related to COVID-19 relief programs of the U.S. and the Netherlands, totaling $1.4 million. The Company estimates the net favorable impact of increased volumes on gross margin in fiscal 2022 was approximately $5.7 million.
The Company experienced a negative impact to margins from inflationary cost pressures, primarily through the first three quarters of the fiscal year ($3.7 million). In addition, the prior year result included the net favorable impact on margins from the recording of benefits related to COVID-19 relief programs of the U.S. and the Netherlands, totaling $2.0 million.
If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Fair value is primarily determined using discounted cash flow analyses; however, other methods may be used to substantiate the discounted cash flow analyses, including third party valuations when necessary.
Fair value is primarily determined using discounted cash flow analyses; however, other methods may be used to substantiate the discounted cash flow analyses, including third party valuations when necessary. 17 Warranty The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers.
The increase in ME&A spending in fiscal 2022 compared to the prior year was driven by increased domestic salaries and benefits ($2.4 million), increased marketing activities ($0.4 million), additional engineering project spending ($0.5 million), increased travel expense ($0.4 million) and bad debt expense ($0.3 million), higher professional fees ($0.8 million), reduced benefit from the U.S. employee retention credit program ($0.7 million) and an inflationary impact estimated at $2.0 million.
The increase in ME&A spending in fiscal 2023 compared to the prior year was driven by the incremental impact of prior year COVID subsidies ($2.1 million), increased professional fees ($0.7 million), increased salaries and benefits ($0.8 million), increased marketing activities ($0.9 million), higher travel expense ($0.7 million) and increased stock-based compensation ($0.6 million).
The Company’s balance sheet remains strong, there are no material off-balance-sheet arrangements, and it continues to have sufficient liquidity for its near-term needs. The Company had approximately $17.0 million of available borrowings under the Credit Agreement as of June 30, 2022.
If such Event of Default is due to the Company’s bankruptcy, the Bank may take the three actions listed above without notice to the Company. The Company’s balance sheet remains strong, there are no material off-balance-sheet arrangements, and it continues to have sufficient liquidity for its near-term needs.
The Company’s Belgian manufacturing operation saw an 11.3% decrease in sales in fiscal 2022 on an unfavorable foreign exchange impact and supply chain challenges limiting production. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 6.5% increase in sales, primarily due to a recovering European marine market.
The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 16.4% increase in sales compared to fiscal 2022, primarily due to a recovering European marine market. 12 Sales for our distribution segment were up 14.3%, or $15.2 million, compared to fiscal 2022, with improving global demand and product delivery from the manufacturing operations.
Gross profit as a percentage of sales increased 500 basis points in fiscal 2022 to 28.3%, compared to 23.3% in fiscal 2021.
Gross profit as a percentage of sales decreased 150 basis points in fiscal 2023 to 26.8%, compared to 28.3% in fiscal 2022. There were a number of factors that impacted the Company’s overall gross profit rate in fiscal 2023.
This increase reflects a general strengthening of the global economy following the negative impact of the COVID-19 pandemic in fiscal 2021. Strength was seen across the commercial, pleasure and defense components of the market.
This increase reflects a general strengthening of the global economy following the negative impact of the COVID-19 pandemic in fiscal 2022, continued global growth of the Veth product and a general easing of supply chain constraints during the second half of the fiscal year.
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.
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 Bank also waived the Company’s compliance with the minimum EBITDA requirements under the Credit Agreement and any Event of Default associated with the Company’s noncompliance with the minimum EBITDA requirements. The Ninth Amendment also replaced LIBOR-based interest rates with different benchmark rates based on the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”).
The term of the Revolving Loans under the Credit Agreement currently runs through June 30, 2025. Under the Credit Agreement as amended, interest rates are based on either the secured overnight financing rate (“SOFR”) or the euro interbank offered rate (the “EURIBO Rate”).
On March 4, 2019, the Company entered into a second amendment (the “Second Amendment”) to the Credit Agreement. The Second Amendment reduced the principal amount of the term loan commitment under the Credit Agreement from $35.0 million to $20.0 million.
Subsequent amendments to the Credit Agreement reduced the Term Loan to $20.0 million, extended the maturity date of the Term Loan to March 4, 2026, and require the Company to make principal installment payments on the Term Loan of $0.5 million per quarter. In addition, under subsequent amendments to the Credit Agreement, BMO’s Revolving Credit Commitment is currently $40.0 million.
Removed
The Company was able to overcome many supply chain challenges in the fourth fiscal quarter of 2022, resulting in revenue of $76.0 million, an increase of $9.8 million or 14.8% compared to the prior year fourth fiscal quarter.
Added
The Company intends that such forward-looking statements qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995.
Removed
The largest improvement was seen at the Company’s North American manufacturing operations, which experienced a 30.7% increase in sales compared to fiscal 2021. The primary driver for this increase was a broad recovery in demand following the negative global economic impact of the COVID-19 pandemic.
Added
Accordingly, the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed therein will be achieved. The Company assumes no obligation, and disclaims any obligation, to publicly update or revise any forward-looking statements to reflect subsequent events, new information, or otherwise.
Removed
In particular, this operation saw a marked improvement in demand for its oil and gas related products, both new units and aftermarket volume. The Company’s Veth Propulsion operation in the Netherlands experienced a 4.6% decrease in sales in fiscal 2022, primarily the result of an unfavorable currency translation impact.
Added
The largest improvement was seen at the Company’s Veth propulsion operation in the Netherlands, which experienced a 17.1% increase in sales compared to fiscal 2022 despite a $3.2 million unfavorable currency translation impact. The primary driver for this increase was growing demand for the Company’s innovative propulsion solutions around the globe, partially offset by supply chain challenges limiting shipments.
Removed
Sales at our distribution segment were up 6.7%, or $6.7 million, compared to fiscal 2021, with improving global demand and product delivery from the manufacturing operations.
Added
The Company’s domestic manufacturing operation experienced a 9.6% increase in sales in fiscal 2023, driven by continued strong demand across the product portfolio, with particular strength in demand for oil and gas related products for both new construction and rebuilds.
Removed
The increase experienced in the Company’s industrial products of 36.9% was also a function of the recovering global economy, along with the improving performance of the Company’s new Lufkin, Texas operation, which is focused on growing sales of industrial products.
Added
The Company’s Belgian manufacturing operation saw a 12.3% increase in sales from fiscal 2022 despite an unfavorable foreign exchange impact, with strength in the global marine markets it serves.
Removed
The table below summarizes the gross profit trend by quarter for fiscal years 2022 and 2021: 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Gross Profit: ($ millions) 2022 $ 13.4 $ 13.5 $ 17.7 $ 24.2 $ 68.8 2021 $ 9.7 $ 8.9 $ 14.0 $ 18.3 $ 50.9 % of Sales: 2022 28.2 % 22.5 % 29.8 % 31.8 % 28.3 % 2021 21.0 % 18.3 % 24.2 % 27.7 % 23.3 % There were a number of factors that impacted the Company’s overall gross profit rate in fiscal 2022.
Added
The Company’s North American distribution operation experienced significant revenue growth of 35.7% as supply chain challenges eased somewhat, allowing for a catch-up in deliveries against a strong demand backdrop.
Removed
The favorable shift in product mix, primarily related to the increased shipments of the Company’s high margin oil and gas transmission units and aftermarket products, had an estimated favorable impact of $9.6 million.
Added
Net sales for the Company’s marine transmission, propulsion and boat management systems were up 17.2% in fiscal 2023 compared to the prior fiscal year.
Removed
These charges relate to the Belgian restructuring program just mentioned ($2.3 million), an impairment charge of the Company’s corporate office building ($4.3 million), and other restructuring activities at the company’s domestic and European operations ($0.8 million). Restructuring activities since June 2015 have resulted in the elimination of 254 full-time employees in the manufacturing segment.
Added
The decrease experienced in the Company’s industrial products of 7.2% was a function of a stronger fiscal 2022 driven by the catch-up in demand after a pause during the COVID-19 pandemic, along with a softening in order rates during the second half of the fiscal year.

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