Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first two quarters of fiscal 2018, ended December 29, 2017. Comparative periods ended December 30, 2016. Unless otherwise stated, financial amounts are in millions of U.S. dollars; the filing presents statements in thousands.
Business context
Twin Disc manufactures and distributes marine and heavy-duty off-highway power transmission equipment. Its reportable segments are manufacturing and distribution. Management attributed the period’s growth chiefly to recovering North American oil and gas demand, alongside improved global industrial and marine markets.
Financial performance
| Metric | Quarter ended Dec. 29, 2017 | Comparable quarter | First two quarters FY2018 | Comparable first half |
|---|---|---|---|---|
| Net sales | $56.5 | $33.7 | $101.6 | $69.5 |
| Gross profit / margin | $18.1 / 32.1% | $8.9 / 26.6% | $32.0 / 31.5% | $18.1 / 26.1% |
| Operating income (loss) | $2.0 | ($4.4) | $1.0 | ($8.0) |
| Net loss attributable to Twin Disc | ($4.1) | ($2.9) | ($0.7) | ($5.6) |
| Basic and diluted loss per share | ($0.36) | ($0.26) | ($0.06) | ($0.50) |
| Cash from operating activities | Not separately presented for quarter | $3.8 | ($2.4) | |
| Capital expenditures | Not separately presented for quarter | $3.0 | $1.1 |
Quarterly sales rose 67.9%; first-half sales rose 46.2%. Management said higher volume, improved manufacturing efficiencies, cost reductions, and product mix lifted gross margins. Marketing, engineering and administrative expenses increased in dollars, but declined as a share of sales to 27.0% for the quarter and 28.5% for the first half.
Financial position and liquidity
- At December 29, cash was $15.8, total debt was $4.7, and total debt net of cash was negative $11.1. Cash declined $0.6 from June 30, 2017.
- Current assets were $134.7 and current liabilities $46.7; net working capital was $87.9, up $3.0 from June 30. The current ratio was 2.9.
- The company reported $23.1 of available borrowings under its revolving facility, with borrowing capacity of approximately $28.6. The reported interest rate was 3.11%.
- First-half free cash flow, defined by the company as operating cash flow less capital expenditures, was $0.8.
- Inventory increased $7.8 from June 30 to $74.0, mainly due to higher activity and foreign currency translation. Six-month shipment backlog was $85.1, versus $46.4 at June 30 and $38.0 a year earlier.
- Total equity was $128.6, compared with $123.6 at June 30.
Material changes and unusual items
- Tax Act: The quarter included a $4.6 non-cash tax expense, primarily from remeasuring U.S. deferred tax assets and liabilities following U.S. tax reform; a Belgian tax-rate change also caused a non-cash tax expense. The first-half effective tax rate was 204.0%, versus 28.8% in the prior-year first half. A $3.8 valuation-allowance release in the first quarter partly offset the tax expense. Some Tax Act calculations remained provisional; the company recorded no provisional transition-tax liability.
- Restructuring: Charges were $0.8 for the quarter and $2.0 for the first half, mainly for actions in European operations and the exit of India manufacturing operations. The company reported $14,000 of accrued restructuring liability at period end.
- Warranty: First-half warranty expense was $1.4, compared with $0.2 in the prior-year first half; the warranty reserve ended at $2.5. Management considers its estimate adequate but notes actual claims may differ materially.
- Foreign exchange: Currency translation increased first-half sales by approximately $1.5. The company reported no outstanding forward exchange contracts at December 29 and does not hedge translation exposure on foreign subsidiaries.
- Retirement plans: The company expected fiscal 2018 pension contributions of approximately $2.3; $1.0 had been contributed by December 29.
- Management reported no material off-balance-sheet arrangements and believed liquidity was sufficient for near-term operating and investing needs. It also said litigation was not expected to materially affect results, financial position, or cash flows.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management described improving demand across several markets and expected available cash and credit capacity to fund foreseeable requirements. It planned fiscal 2018 capital expenditures of $7–$9 million, subject to market conditions and capital availability, focused on equipment, facilities, manufacturing efficiency, sourcing, and new products.
Key risks include uncertainty in the eventual tax effects of the Tax Act and future tax guidance; demand and economic conditions in oil and gas, marine, industrial, and other end markets; currency movements; exposure to steel and aluminum prices; and estimates for warranty and pension obligations. The company is also involved in litigation whose ultimate outcome was not determinable, although management did not expect a material impact. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the strong sales and backlog growth convert into sustained revenue, cash generation, and improved operating profitability.
- How the higher inventory balance changes as orders are shipped and demand evolves.
- Final tax accounting under the Tax Act, including deferred-tax remeasurement adjustments and the effect on future effective tax rates.
- Whether restructuring actions deliver savings and whether warranty costs remain elevated.
- Liquidity, borrowing availability, capital spending, and pension contributions as the company funds its recovery.