Note B - Acquisitions

12 Months Ended

Jun. 30, 2025

Notes to Financial Statements

Business Combination [Text Block]

B. ACQUISITIONS

Kobelt Manufacturing Co., Ltd., Inc.

On February 14, 2025, the Company completed the acquisition of 100% of the outstanding common stock of Kobelt. Based in Surrey, British Columbia, Kobelt is a Canadian manufacturer of controls, propulsion, steering, and braking systems to the marine, oil and gas, and industrial markets. This acquisition was pursuant to a Sale and Purchase Agreement (“Purchase Agreement”) entered into by Twin Disc Canada Holdings Ltd, a wholly-owned subsidiary of the Company, with the prior owners, on February 14, 2025. Immediately following the acquisition, Kobelt and Twin Disc Canada Holdings Ltd amalgamated to continue a wholly-owned subsidiary of the Company, retaining the Kobelt name.

Under the terms of the Purchase Agreement, the Company paid an aggregate of approximately $17,236 in cash at closing, which included a base payment plus adjustments for net cash, working capital, and earnout. The Company paid an additional $516 for the net working capital adjustment. The amount is still subject to a final determination of the earnout calculation. The transaction is considered a taxable stock acquisition.

The Company, in part, financed the payment of the cash consideration through borrowings of $6,500 under a new credit agreement entered into on February 14, 2025 with Bank of Montreal (the “Credit Agreement”). The Credit Agreement is further discussed in Note K, Debt.

Kobelt brings a complementary range of products that enhance and diversify the Company's portfolio, reinforcing Twin Disc’s position as a global leader in power transmission solutions. Kobelt's in-house foundry and expertise in bronze die casting, precision machining, assembly and testing ensure complete quality control, which aligns perfectly with the Company's commitment to engineering excellence.

With over 60 years of experience designing and manufacturing high-quality products, Kobelt is a well-suited addition to the Twin Disc family. This acquisition opens new opportunities for growth and partnerships, leveraging the Company's global sales and service teams to drive even greater success.

Since the acquisition date, the Company included in its consolidated statement of operations and comprehensive income net sales and earnings (loss) for Kobelt of $4,870 and ($164), respectively.

Purchase Price Allocation

The acquisition of Kobelt met the criteria for a business combination to be accounted for using the acquisition method under ASC 805, Business Combinations (“ASC 805”), with the Company identified as the legal and the accounting acquirer. The Company recognized approximately $0.7 million of acquisition-related costs which were expensed in the consolidated statement of operations for the quarter ended March 28, 2025.

The following table details the allocation of the purchase price of the assets acquired and liabilities assumed in connection with the acquisition of Kobelt.

Cash purchase price	$	17,102
Earnout		374
Total consideration	$	17,476
Assets acquired:
Cash	$	240
Trade accounts receivable		1,881
Inventories		5,984
Other current assets		290
Property, plant and equipment		5,031
Intangible assets		2,847
Total assets acquired	$	16,273
Liabilities assumed :
Accounts payable	$	924
Accrued liabilities		520
Deferred tax liability		159
Total liabilities assumed	$	1,603
Total identified net assets acquired:	$	14,670
Goodwill		2,806
Purchase price consideration	$	17,476

Fair Value Estimate of Assets Acquired and Liabilities Assumed

The Company is continuing its review of the fair value estimate of assets acquired and liabilities assumed during the measurement period, which will conclude as soon as the necessary information regarding the facts and circumstances that existed as of the acquisition date is obtained, or otherwise not available. This measurement period will not exceed one year from the acquisition date. At the effective date of the acquisition, the assets acquired and liabilities assumed are required to be measured at fair value. The fair value estimates are pending completion of some elements, including the finalization of an independent appraisal and final review by the Company. Accordingly, until the fair values are final, there could be material adjustments to the Company’s consolidated financial statements, including changes to depreciation and amortization expense related to the valuation of property and equipment and intangible assets acquired and their respective useful lives, among other adjustments.

Upon the final determination of the fair value of assets acquired and liabilities assumed, the excess of the purchase price over such fair values is allocated to goodwill.

The final determination of the purchase price, fair values and resulting goodwill may differ significantly from what is reflected in these consolidated financial statements.

The following summarizes the preliminary estimate of fair value of the assets acquired and liabilities assumed at the acquisition date:

Assets acquired and liabilities assumed:
Cash	$	240
Trade accounts receivable		1,881	(a)
Inventories, net		5,984	(b)
Other current assets		290
Property, plant and equipment		5,031	(c)
Intangible assets, net		2,847	(d)
Accounts payable		(924	)
Accrued liabilities		(520	)(e)
Deferred tax liability		(159	)
Total identified net assets acquired:		14,670
Goodwill		2,806	(f)
Purchase price consideration	$	17,476

The following information provides further details about the preliminary estimated net step-up in fair value and/or the estimated fair value at the acquisition date for some key balance sheet items.

(a)  Accounts receivable represent contractual amounts receivable from customers. The amounts approximate fair value.

(b)  Inventory consists of:

Raw materials	$	4,622
Work in progress at fair value		520
Finished goods at fair value		842
Inventories at fair value	$	5,984
Inventories at book value		5,558
Step-up	$	426

(c)  The value of property, plant and equipment is estimated at:

Dies, tools and fixtures	$	2,976
Machinery and equipment		1,718
Other		337
Property, plant and equipment at fair value	$	5,031
Property, plant and equipment at book value		2,156
Step-up	$	2,875

(d) Intangible assets consist of :

	Estimated fair value		Estimated average useful lives
Tradename		636		20
Backlog		21	<1
Customer relationship		1,201		15
Computer Software - External		71		5
Developed technology		918		20
	$	2,847

(e) The amounts approximate fair value.

(f) The Company recorded goodwill of $2,806 associated with the acquisition. The fair value of the purchase price of the business exceeded the fair value of the identifiable assets acquired and liabilities assumed.

Katsa OY

On May 31, 2024, the Company completed the acquisition of 100% of the outstanding common stock of Katsa. Based in Finland, Katsa is a European manufacturer of custom-designed, high-quality power transmission components and gearboxes for industrial and marine end-markets for a broad range of end market applications. Katsa also provides a wide range of after-sales services, including spare part deliveries, reverse engineering, modeling, and gearbox refurbishment. As a well-established business with a solid reputation for quality in addition to its strong in-house manufacturing and engineering capabilities, this acquisition is an excellent opportunity to expand Twin Disc’s global presence, leveraging Kata’s longstanding relationships with leading European OEMs to introduce the Company’s portfolio into new, growing markets. This acquisition was pursuant to a Sale and Purchase Agreement (“Purchase Agreement”) entered into by TD Finland Holding Oy, a wholly-owned subsidiary of the Company, with Timo Salli and Jouko Salli, the prior owners, on March 5, 2024.

Under the terms of the Purchase Agreement, the Company paid an aggregate of approximately $25,522 in cash at closing, which included a base payment plus adjustments for net cash and working capital, and transactions costs of $377. This amount was subject to a final determination of working capital adjustments.

The Company, in part, financed the payment of the cash consideration through borrowings of $16.9 million under a new credit agreement entered into on April 1, 2024 with BMO Harris Bank N.A. (the “Credit Agreement”). The Credit Agreement is further discussed in Note H, Debt.

Purchase Price Allocation

The acquisition of Katsa met the criteria for a business combination to be accounted for using the acquisition method under ASC 805, Business Combinations (“ASC 805”), with the Company identified as the legal and the accounting acquirer. The Company recognized approximately $745 of acquisition-related costs which were expensed in the consolidated statement of operations for the year ended June 30, 2024.

The following table details the allocation of the purchase price of the assets acquired and liabilities assumed in connection with the acquisition of Katsa.

Cash purchase price	$	25,145
Final working capital adjustment		739
Total consideration	$	25,884
Assets acquired (in millions):
Cash	$	2,706
Trade accounts receivable, net		7,400
Inventories, net		10,694
Prepaid expenses		312
Other		786
Property, plant and equipment, net		13,853
Right-of-use operating lease assets		507
Intangible assets, net		3,377
Total assets acquired	$	39,635
Liabilities assumed (in millions):
Accounts payable	$	1,822
Accrued liabilities		5,360
Lease obligations		410
Deferred income taxes		2,435
Total liabilities assumed	$	10,027
Total identified net assets acquired (in millions):	$	29,608
Gain on bargain purchase		3,724
Purchase price consideration	$	25,884

The fair value of the identifiable assets acquired and liabilities assumed of $29,608 exceeded the purchase price of the business, and additional expected working capital adjustment, of $25,884. As a result, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measurements were appropriate. Accordingly, the acquisition has been accounted for as a bargain purchase and as a result, the Company recognized a gain of $3,724, net of income tax of $2,435. associated with the acquisition. The amount is recorded in other income in the consolidated statements of operations and comprehensive income.

Pro forma results of operation for this acquisition have not been presented because the effects of the acquisition were not material to the Company’s consolidated financial results.

Fair Value Estimate of Assets Acquired and Liabilities Assumed

The Company is continuing its review of the fair value estimate of certain assets acquired and liabilities assumed during the measurement period, which will conclude as soon as the necessary information regarding the facts and circumstances that existed as of the acquisition date is obtained, or otherwise not available. This measurement period will not exceed one year from the acquisition date. At the effective date of the acquisition, the assets acquired and liabilities assumed are required to be measured at fair value. The provisional fair value estimates of the property, plant and equipment, net, the intangible assets, net, and deferred income taxes are pending final review by the Company. Accordingly, until the fair values are final, there could be material adjustments to the Company’s consolidated financial statements, including changes to depreciation and amortization expense related to the valuation of property and equipment and intangible assets acquired and their respective useful lives, among other adjustments.

Upon the final determination of the fair value of assets acquired and liabilities assumed, the excess of the purchase price over such fair values is allocated to goodwill or the excess of such fair values over the purchase price is allocated to bargain purchase gain. The final determination of the purchase price, fair values and resulting bargain purchase gain may differ significantly from what is reflected in these consolidated financial statements.

The following summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date, including the preliminary estimates of the property, plant and equipment, net, the intangible assets, net, and deferred income taxes:

Assets acquired (in millions):
Cash	$	2,706
Trade accounts receivable, net		7,400	(a)
Inventories, net		10,694	(b)
Prepaid expenses		312
Other		786
Property, plant and equipment, net		13,853	(c)
Right-of-use operating lease assets		507
Intangible assets, net		3,377	(d)
Accounts payable		1,822
Accrued liabilities		5,360	(e)
Lease obligations		410
Deferred income taxes		2,435
Total identified net assets acquired (in millions):	$	29,608
Gain on bargain purchase		3,724	(f)
Purchase price consideration	$	25,884

The following information provides further details about the preliminary estimated net step-up in fair value and/or the estimated fair value at the acquisition date for some key balance sheet items.

(a) Accounts receivable represent contractual amounts receivable from customers. The amounts approximate fair value.

(b) Inventory consists of (in millions):

Raw materials	$	4,524
Work in progress at fair value		2,802
Finished goods at fair value		3,368
Inventories at fair value	$	10,694
Inventories at book value		9,858
Step-up	$	836

(c) The value of property, plant and equipment is estimated at (in millions):

Buildings	$	7,560
Land		894
Equipment		5,399
Property, plant and equipment at fair value	$	13,853
Property, plant and equipment at book value		5,333
Step-up	$	8,520

(d) Intangible assets consist of (in millions):

	Estimated fair value		Estimated average useful lives
Customer relationships	$	1,525		12
Tradename		872		10
Technology know-how		980		7
Total	$	3,377

(e) The amounts approximate fair value.

(f) The Company recognized a bargain purchase gain of $3,724, net of income tax expense of $2,435 associated with the acquisition. As a result, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measurements were appropriate. The fair value of the identifiable assets acquired and liabilities assumed exceeded the fair value of the purchase price of the business.

The fair values of property, plant and equipment, net, intangible assets, net, and deferred taxes presented above are preliminary until the final purchase price consideration is determined and the Company completes its work with the use of a third-party valuation firm. These values are subject to change. Any changes to the initial estimates of the fair value of assets and liabilities will impact the bargain purchase gain and may affect future earnings.