Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first half of fiscal 2017, ended December 30, 2016; comparisons are with the quarter and first half ended December 25, 2015. The company manufactures and distributes marine and heavy-duty off-highway power-transmission equipment. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | First half FY2017 | First half FY2016 |
|---|---|---|---|---|
| Net sales | $33.7 | $44.8 | $69.5 | $82.2 |
| Gross profit | $8.9 | $11.6 | $18.1 | $19.8 |
| Gross margin | 26.6% | 25.9% | 26.1% | 24.1% |
| Operating loss | $(4.4) | $(3.6) | $(8.0) | $(10.1) |
| Net loss attributable to Twin Disc | $(2.9) | $(2.3) | $(5.6) | $(6.6) |
| Loss per share, diluted | $(0.26) | $(0.21) | $(0.50) | $(0.59) |
- Q2 sales fell 24.9%; first-half sales fell 15.4%. Management cited weaker commercial marine, industrial and oil-and-gas demand, especially in Asia, along with delayed shipments tied to a domestic supplier transition.
- Gross margin improved year over year despite lower sales. Cost reductions and manufacturing efficiencies partly offset lower volume; Q2 results also benefited from an approximately $0.8 million Belgian property-tax refund.
- Q2 operating loss increased year over year. First-half operating loss narrowed, while first-half net loss improved; the prior-year comparison included a $0.445 million net gain on the sale of a distribution business.
- First-half operating cash flow was negative $2.4 million, versus negative $4.4 million a year earlier. Capital expenditures were $1.1 million; cash declined $5.3 million to $13.0 million.
Financial position and liquidity
- At December 30, 2016, cash was $13.0 million, current assets $114.7 million, and current liabilities $34.2 million. Working capital was $80.5 million, down $8.4 million from June 30, 2016; the current ratio was 3.4.
- Long-term debt was $7.8 million, down from $8.5 million at fiscal year-end. Cash exceeded debt by $5.2 million. The BMO revolving facility had approximately $24.8 million of borrowing capacity and $16.1 million available; its rate was 2.37%.
- Total assets were $202.4 million and total equity was $109.7 million. Cash was concentrated in overseas operations, principally Europe ($6.0 million) and Asia-Pacific ($5.9 million); repatriation may involve restrictions and tax implications.
- No dividends were declared in the quarter or first half, compared with $0.09 per share in Q2 FY2016 and $0.18 per share in the prior-year first half.
Business changes, outlook and risks
- Manufacturing-segment sales declined 23.5% in Q2 and 11.3% in the first half. Distribution sales declined 18.5% and 22.4%, respectively. Asian distribution was particularly weak; Australian distribution benefited from improving pleasure-craft demand.
- Six-month order backlog was approximately $38.0 million, up from $35.7 million at June 30, 2016 and $34.6 million a year earlier. Management said part of the increase at the U.S. manufacturing location reflected initial oil-and-gas transmission orders.
- Restructuring charges were $1.1 million in the first half; actions since June 2015 eliminated 141 manufacturing positions. Management expects further charges through December 2017 and cited expected annualized savings of approximately $2.1 million from first-half actions.
- Management expects fiscal 2017 capital expenditures of $3–$5 million and pension contributions of approximately $1.5 million. It said available cash and credit facilities should meet foreseeable capital requirements; no formal sales or earnings guidance is provided in the filing.
- Key operating risks include continued market softness, the supplier-transition issue (management expected resolution in the second half), foreign-exchange movements, and exposure to steel and aluminum prices. About 29% of first-half revenue was denominated in currencies other than the U.S. dollar.
- The company reported ongoing litigation with outcomes not presently determinable, but management did not expect the matters to materially affect results, financial position or cash flows. Product-liability claims were described as insured or immaterial. Management found no goodwill impairment trigger at quarter-end, while noting that continued weak results or market-capitalization declines could prompt testing.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its prior Form 10-K.
Important facts for investors to verify
- Whether the supplier transition is resolved as expected and delayed orders convert to shipments.
- Whether backlog converts into revenue, particularly the initial oil-and-gas orders, and how demand develops across Asia, Europe and North America.
- Whether cost savings and restructuring can offset continued low production volumes, and whether further restructuring charges arise through December 2017.
- Operating cash flow, inventory levels, available borrowing capacity and the effect of cash held overseas on liquidity.
- Progress on the approximately $1.5 million pension contribution plan, warranty obligations, tax audits and valuation allowances.