Note B - Acquisition of Katsa Oy

12 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Business Combination Disclosure [Text Block]

B. ACQUISITION OF KATSA OY

On May 31, 2024, the Company completed the acquisition of 100% of the outstanding common stock of Katsa Oy (“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 $25.5 million in cash at closing, which included a base payment plus adjustments for net cash and working capital, and transactions costs of $0.4 million. 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 $0.7 million 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	$	25.1
Final working capital adjustment		0.8
Total consideration	$	25.9
Assets acquired (in millions):
Cash	$	2.7
Trade accounts receivable, net		7.4
Inventories, net		10.6
Prepaid expenses		0.3
Other		0.8
Property, plant and equipment, net		13.9
Right-of-use operating lease assets		0.5
Intangible assets, net		3.4
Total assets acquired	$	39.6
Liabilities assumed (in millions):
Accounts payable		1.8
Accrued liabilities		5.3
Lease obligations		0.4
Deferred income taxes		2.5
Total liabilities assumed	$	10.0
Total identified net assets acquired (in millions):	$	29.6
Gain on bargain purchase		3.7
Purchase price consideration	$	25.9

The fair value of the identifiable assets acquired and liabilities assumed of $29.6 million exceeded the purchase price of the business, and additional expected working capital adjustment, of $25.9 million. 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 $3.7 million, net of income tax of $2.5 million 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	$	2.7
Trade accounts receivable, net		7.4	(a)
Inventories, net		10.6	(b)
Prepaid expenses		0.3
Other		0.8
Property, plant and equipment, net		13.9	(c)
Right-of-use operating lease assets		0.5
Intangible assets, net		3.4	(d)
Accounts payable		1.8
Accrued liabilities		5.3	(e)
Lease obligations		0.4
Deferred income taxes		2.5
Total identified net assets acquired (in millions):	$	29.6
Gain on bargain purchase		3.7	(f)
Purchase price consideration	$	25.9

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	$	4.5
Work in progress at fair value		2.8
Finished goods at fair value		3.3
Inventories at fair value	$	10.6
Inventories at book value		9.8
Step-up	$	0.8

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

Buildings	$	7.6
Land		0.9
Equipment		5.4
Property, plant and equipment at fair value		13.9
Property, plant and equipment at book value		5.3
Step-up	$	8.6

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

	Estimated fair		Estimated average
	value		useful lives
Customer relationships	$	1.5		12
Tradename		0.9		10
Technology know-how		1.0		7
Total	$	3.4

(e) The amounts approximate fair value.

(f) The Company recognized a bargain purchase gain of $3.7 million, net of income tax expense of $2.5 million 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.