When Racine-based Twin Disc Inc. planned an early July conference call with investors and analysts, chief executive officer John Batten assumed he would be announcing new cost cutting actions.
Depending on industry and the state of the economy, it is an action many of the thousands of companies that got loans under the U.S. Small Business Administration Paycheck Protection Program may have to consider in the coming months as their funds run out.
Twin Disc, which makes marine propulsion and heavy-duty off-highway power transmission equipment, received a nearly
$8.2 million PPP loan in April from BMO Harris Bank. Under the original terms of the program, companies had eight weeks to use the loan funds and still qualify for loan forgiveness. However, the SBA extended that period to 24 weeks in June.
Some public companies receiving PPP loans have been criticized for taking money from a program intended to help small businesses struggling during the COVID-19 pandemic keep their staff and pay for utilities and rent. Batten defended Twin Disc, which has more than 800 employees globally and generated $302.7 million in net sales in fiscal 2019, taking a loan because it has around 400 employees in the U.S. and the money would go to support those jobs.
Batten told analysts in May that the company’s loan
allowed it to bring back laid off workers at its Racine plant. On Tuesday, he said everyone at the company is currently able to work full-time and at full wages.
But with the loan only originally intended to cover eight weeks and a dramatic uptick in business not likely in the short-term, the current environment of full-time and full wages likely won’t last.
Batten and chief financial officer Jeffrey Knutson acknowledged the company will likely need to announce cost cutting actions when it announces fourth quarter results in August.
The cuts will likely be similar to actions Twin Disc took before getting a PPP loan, Batten said. Those actions included layoffs for 10 salaried employees, a 25% cut in paid hours for other salaried positions and a 15% salary reduction for all remaining full-time employees. Batten and chief operating officer James Feiertag took 20% salary reductions.
Batten said conversations with customers and distributors suggest Twin Disc could still be two or three months from orders returning in a meaningful way.
“Our first quarter is going to be tough, I think we’re going to bounce along the bottom here and it will start to improve this fall. That’s my gut,” he said.
Batten and Knutson said they are encouraged that there have not been significant issues with collections and distributors seem to be primarily working through inventory to generate their own cash flow.
“It’s not panic yet, but we are definitely pushing for every order than we can here in North America,” Batten said.
He said the cost reductions the company does put in place will likely address a mix of variable and fixed costs.
“We want to be very mindful of any permanent cost reductions that we do, because coming up on the other side we want to be able to deliver,” Batten said, adding Twin Disc is committed to keeping product development efforts on schedule. “We want to keep the talent we have for the upside.”
In addition to the potential cost cutting, Twin Disc also has to navigate uncertainty surrounding accounting for the PPP program. Knutson said while the loan boosts the company’s cash position now, it is unclear how loan forgiveness should be treated if it is granted.
Even getting loan forgiveness could take time. Kntuson said Twin Disc will seek loan forgiveness during its current quarter, but then the bank has 60 days to make a determination and the SBA has another 90 days to review it.
“There’s potentially five months before we get a final answer,” Knutson said.
