Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2017, the third quarter of fiscal 2017, with year-to-date results for the first three fiscal quarters. The request metadata says “2016 Q3,” but the filing itself reports fiscal 2017 Q3. Financial statement amounts below are in millions of dollars unless noted.
Business context and results
Twin Disc manufactures and sells marine and heavy-duty off-highway power transmission equipment. Its reportable segments are manufacturing and distribution.
| Metric | Q3 FY2017 | Q3 FY2016 | First 3 quarters FY2017 | First 3 quarters FY2016 |
|---|---|---|---|---|
| Net sales | $45.1 | $41.4 | $114.6 | $123.6 |
| Gross profit | $13.3 | $9.6 | $31.4 | $29.4 |
| Gross margin | 29.5% | 23.2% | 27.4% | 23.8% |
| Operating loss | $(3.4) | $(4.7) | $(11.4) | $(14.8) |
| Net loss attributable to Twin Disc | $(1.8) | $(1.0) | $(7.5) | $(7.6) |
| Loss per share, diluted | $(0.16) | $(0.09) | $(0.66) | $(0.68) |
Financial position, cash flow and liquidity
- At March 31, 2017, cash was $14.9, total debt was $9.0, and net cash was approximately $6.0. Cash was down $3.3 from June 30, 2016; most was held overseas.
- Year-to-date operating cash flow was a use of $0.8, compared with a use of $5.3 in the prior-year period. The company generated $1.6 of operating cash flow in Q3. Year-to-date capital expenditures were $1.9.
- Working capital was $84.3, down $4.6 from fiscal year-end; the current ratio declined to 3.1 from 3.5. The company reported $15.7 of available borrowing capacity under its revolving facility and stated it had sufficient liquidity for near-term needs.
- Inventory was $66.9. Six-month shipment backlog was $49.8, up from $35.7 at June 30, 2016 and $40.0 a year earlier.
- Total liabilities were $99.6 and total equity was $110.2. Accrued retirement benefits were $47.4.
Changes versus comparable periods
- Q3 sales rose 8.8%, led by stronger North American oil-and-gas demand and initial shipments under a previously announced 100-unit transmission order. Year-to-date sales fell 7.3%, amid weakness in Asian commercial marine, global industrial, and European markets.
- Q3 gross margin expanded 6.3 percentage points. Management attributed the improvement to volume, product mix, a $0.4 warranty accrual reversal, and cost and productivity initiatives. Year-to-date gross margin rose 3.6 percentage points despite lower sales.
- Q3 net loss increased from the prior year despite a smaller operating loss, in part because the quarter included a $2.6 goodwill and other impairment charge and a smaller income tax benefit. Year-to-date net loss attributable to Twin Disc improved modestly.
- Distribution sales declined 5.3% in Q3 and 16.8% year to date; Asian distribution demand remained particularly weak. Year-to-date manufacturing sales declined 3.5%.
Outlook, commentary and material items
- Management cited continued weakness in global industrial and commercial marine markets and no evidence of a broad, sustained recovery. Oil-and-gas demand provided a relative bright spot. The filing gives no numerical earnings or sales guidance.
- The company fully impaired the remaining U.S. Industrial reporting unit goodwill, recording a $2.6 non-cash charge after weaker industry outlook and performance versus forecast. Remaining goodwill was $2.4, allocated to European Industrial; an annual impairment test was planned for June 30, 2017.
- Restructuring charges were $1.4 year to date, with $0.5 accrued at quarter-end. Actions included commencing the closure of the India factory and workforce reductions in U.S. and European manufacturing. Management expected further charges through December 2017; year-to-date actions were expected to generate approximately $2.4 in annualized savings.
- Fiscal 2017 capital expenditures were expected to be $3–$4. The company expected pension contributions of approximately $1.5 for the year; $1.2 had been contributed by March 31.
- Management said it expected available cash, the BMO credit facility, and potential debt-market access to fund foreseeable requirements. The revolving facility had a stated $40 borrowing limit, subject to borrowing-base terms, and was secured by substantially all personal property and certain subsidiary interests.
- Risks and uncertainties include ongoing market weakness, foreign-exchange and floating-rate debt exposure, commodity-price changes, warranty-estimate variability, pension obligations, and the potential realization of deferred tax assets. The company reported litigation whose outcome was not determinable but which management did not expect to materially affect results, financial position, or cash flows.
Important facts for investors to verify
- Whether the oil-and-gas transmission orders convert into sustained sales and cash generation, and how much of the $49.8 backlog ships as scheduled.
- Whether restructuring savings are realized, and the amount and timing of additional charges, including costs associated with the India closure.
- Whether weak industrial and marine markets or further underperformance trigger additional goodwill impairment, particularly in the remaining European Industrial unit.
- Cash availability and borrowing-base capacity under the secured BMO facility, given overseas cash holdings and working-capital needs.
- Warranty reserve adequacy, pension funding requirements, tax-audit outcomes, and the continued need for valuation allowances on deferred tax assets.