Twin Disc, Incorporated — FY2022 Form 10-K
Period: Fiscal year ended June 30, 2022; comparison is with fiscal 2021. Although the request metadata says “2021 Q4,” this filing reports FY2022 annual results, including fourth-quarter commentary. Twin Disc designs and manufactures marine and heavy-duty off-highway power-transmission equipment.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $242.9 million | $218.6 million |
| Gross profit / margin | $68.8 million / 28.3% | $50.9 million / 23.3% |
| Operating income (loss) | $11.0 million | $(12.3) million |
| Net income (loss) attributable to Twin Disc | $8.1 million | $(29.7) million |
| Basic / diluted earnings per share | $0.61 / $0.60 | $(2.24) / $(2.24) |
| Cash from (used in) operations | $(8.3) million | $6.5 million |
| Cash / total debt at year-end | $12.5 million / $36.5 million | $12.3 million / $32.1 million |
| Current ratio | 2.5 | 2.4 |
Net sales grew 11.1%. Gross margin rose 500 basis points, which management attributed chiefly to higher volume and more favorable product mix, including stronger sales of higher-margin oil-and-gas transmissions and aftermarket products. Management estimated volume contributed about $5.7 million and mix about $9.6 million to gross profit; COVID-related relief programs provided a further net benefit of $1.4 million. ME&A expense rose 7.8% to $60.1 million, but declined as a share of sales to 24.7% from 25.5%.
Operating cash flow turned negative as inventory and receivables increased amid higher demand and supply-chain disruption. Investing cash flow was positive $5.9 million, including $9.5 million of property-sale proceeds, partly offset by $4.7 million of capital spending. Financing cash flow was positive $4.1 million. Available borrowings under the credit agreement were approximately $17.0 million at year-end. Cash was largely held overseas, with some restrictions and tax implications on repatriation.
Changes and notable items
- Business recovery lifted demand across most markets, but supply constraints limited deliveries during the first three fiscal quarters. Fourth-quarter sales were $76.0 million, up 14.8% year over year.
- Manufacturing-segment sales rose 13.4%; distribution sales rose 6.7%. By product group, industrial sales increased 36.9%, land-based transmissions 11.1%, while marine and propulsion systems declined 1.4%.
- Currency translation reduced FY2022 sales by an estimated $8.5 million. Foreign currency movements also contributed to the improvement in other income, from expense of $3.4 million to income of $1.3 million.
- Restructuring expense fell to $1.0 million from $7.4 million. A $4.3 million impairment of the corporate office building had been recorded in FY2021. FY2022 included a $2.9 million gain on the sale of a Swiss property; other plant-sale proceeds included the sale of an Italian warehouse.
- FY2021 included $8.2 million of income from forgiveness of the PPP loan. The loan had been forgiven, but remained subject to SBA audit for six years after forgiveness.
- Income taxes were $1.8 million in FY2022 versus $19.7 million in FY2021. The FY2021 result included a $24.4 million domestic deferred-tax valuation allowance; the audited FY2022 tax note reports a $23.1 million allowance. The effective tax rates were 17.8% and -200.0%, respectively.
Liquidity, outlook, and risks
The six-month order backlog rose about 44% to $101.2 million from $70.3 million. Management said the outlook reflected broad demand recovery, but noted that backlog is subject to cancellation and rescheduling and is not necessarily a reliable indicator of shipments. The filing does not provide a clear quantified sales or earnings forecast for FY2023. Management expected sufficient cash from operations and credit facilities to meet near-term needs and planned a minimum $0.6 million pension contribution in FY2023.
The June 30, 2022 credit amendment extended the facility to June 30, 2025, ended the prior forbearance arrangements and waived defaults associated with earlier minimum-EBITDA noncompliance. The agreement set a maximum funded-debt-to-EBITDA ratio of 3.50 to 1.00, a minimum fixed-charge-coverage ratio of 1.10 to 1.00, and a minimum tangible net worth requirement. Borrowings are secured by substantially all personal property and certain subsidiary equity. The company reported approximately $17.0 million of available borrowings and said it expected to meet future covenants, while cautioning that planned results were not assured.
Risks highlighted: persistent supply-chain and delivery constraints; COVID-related disruption; cyclical marine, industrial, and oil-and-gas markets; commodity and energy costs and trade restrictions; foreign-currency movements; international operations; customer and supplier concentration; product-quality or warranty claims; and debt-service, borrowing-base, and covenant requirements. One distributor accounted for 10% of FY2022 sales, and the top ten customers accounted for approximately 50%. Product-liability litigation was disclosed, but management did not expect it to materially affect results, financial position, or cash flows. The filing reports effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
The MD&A states that planned capital expenditures were expected to be approximately $12–$15 million in fiscal 2022, although the year had ended and reported FY2022 capital expenditures were $4.7 million. This timing inconsistency is not clarified in the filing text and should be checked against subsequent disclosures.
Important facts for investors to verify
- Whether operating cash flow recovers as elevated inventory and receivables convert to shipments and collections.
- Whether supply constraints ease, backlog converts to revenue, and gross-margin gains persist as product mix changes.
- Actual FY2023 covenant compliance, borrowing availability, debt balances, interest costs, and any subsequent lender amendments.
- The timing and amount of planned capital expenditures; the stated FY2022 plan conflicts with reported year-end actual spending.
- The realizability of deferred tax assets and any consequences of tax examinations or the remaining SBA audit exposure on the forgiven PPP loan.