Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Quarter and first three quarters of fiscal 2020 ended March 27, 2020. Although the request metadata says “2019 Q3,” the filing covers fiscal 2020 Q3. Amounts below are in millions unless otherwise stated.
Business context and results
Twin Disc manufactures and sells marine and heavy-duty off-highway power transmission equipment. Its products serve marine, energy, industrial, government, and related markets. Results include Veth Propulsion, acquired in July 2018.
- Q3 revenue: $68.6, down 11.3% from $77.4 a year earlier. North American sales were particularly weak, led by oil-and-gas products; European and Asia-Pacific sales increased.
- First nine months revenue: $187.5, down 18.6% from $230.2. North American sales fell $47.6, or 41.4%; marine and propulsion sales were approximately flat overall.
- Q3 profitability: Gross profit was $16.5 and gross margin 24.1%, versus $23.1 and 29.9%. Operating loss was $26.9, including a $27.6 impairment charge; net loss attributable to Twin Disc was $25.2, or $1.92 per diluted share.
- First nine months profitability: Gross margin was 22.3%, versus 31.8%; operating loss was $38.7 and net loss attributable to Twin Disc was $38.1, or $2.89 per diluted share.
- Cash flow: Nine-month operating cash flow was positive $5.3, compared with cash use of $12.2 in the prior-year period. Capital spending was $9.2, producing negative free cash flow of $3.8 as defined by the company.
Financial position and liquidity
- At March 27, cash was $8.4; current assets were $182.4 and current liabilities $72.1. Net working capital was $110.3, down $17.0 from June 30, 2019; the current ratio was 2.5 versus 2.7.
- Total debt was $42.9, including $24.1 drawn on the revolver and $18.5 on the term loan. Debt net of cash was $34.4. The company reported approximately $18.3 of available revolver borrowings.
- Total assets were $301.2, down from $346.9 at fiscal year-end, principally reflecting the goodwill impairment. Equity was $144.0, down from $182.8.
- Cash declined $3.9 during the first nine months. Receivables fell 28.4% from year-end to $31.5, while inventory increased 1.4% to $127.6. Six-month backlog was $87.4, down from $99.6 at June 30, 2019.
Changes, unusual items, and outlook
- Impairment: COVID-19-driven uncertainty and market deterioration triggered a $27.6 non-cash charge: $25.4 for full impairment of European Propulsion and European Industrial goodwill, plus $2.2 for certain intangibles and other assets. Goodwill was reduced to zero.
- Warranty issue: The company recorded $6.1 of non-recurring charges over nine months for estimated costs to address a product performance issue at certain installations; $2.2 was recorded in Q3. The warranty reserve ended at $5.9.
- Restructuring: Nine-month charges were $4.9, including $3.2 to exit a marine propulsion program ($2.2 non-cash write-off and $1.0 cash settlement) and other cost-reduction actions.
- COVID-19 and markets: Operations were reduced or intermittently shut down from mid-March, with supply and shipment disruptions. Management said the pandemic’s depth and duration were unknown and did not provide a specific forecast. North American April incoming orders were more than 60% below the fiscal-year-to-date run rate. The depressed oil market and pandemic-related demand weakness were identified as significant risks.
- Management cited cost reductions, wage actions, deferred non-critical capital spending, and cash-preservation measures. Before the outbreak, fiscal 2020 capital spending was expected to be $11–$13; no revised spending target was provided. Management stated liquidity was sufficient for near-term needs but could be pressured by market conditions.
- Debt covenants: The January 2020 credit amendment temporarily raised the maximum funded-debt-to-EBITDA covenant to 5.0x for the March 2020 quarter, then steps down to 3.0x for quarters beginning December 25, 2020. The company reported compliance; covenant headroom is not clearly stated in the filing text.
- Subsequent event: On April 17, 2020, the company obtained an $8.2 PPP loan at 1% interest, with a two-year term and payments deferred for six months. Forgiveness was not assured; any unforgiven balance counts in credit covenant calculations.
- The company disclosed litigation and product-liability claims, which management said were insured or not expected to be material. It also reported approximately $1.1 of unrecognized tax benefits and an ongoing Wisconsin tax audit.
Important facts for investors to verify
- Whether order trends, sales, and collections deteriorated further after the filing’s March 27 reporting date, particularly in North American energy markets.
- Whether the $5.9 warranty reserve adequately covers the product performance issue and whether additional costs or claims arise.
- Whether PPP proceeds qualify for forgiveness, and the effect of any unforgiven amount on liquidity and debt covenants.
- Available revolver capacity and covenant compliance as results weaken and covenant thresholds tighten.
- Whether inventory levels and the $87.4 backlog convert into timely shipments and cash amid shutdown and supply-chain risks.
- Potential additional impairments or restructuring costs as the pandemic and oil-market outlook evolve.