Twin Disc, Inc. — Q1 FY2012 Form 10-Q
Business context and reporting period. The unaudited quarter ended September 30, 2011, compared with the quarter ended September 24, 2010. Twin Disc manufactures and distributes marine and heavy-duty off-highway power transmission equipment. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2012 | Prior-year quarter |
|---|---|---|
| Net sales | $81.3 million | $61.4 million |
| Gross profit / margin | $30.8 million / 37.8% | $20.0 million / 32.6% |
| Operating earnings / margin | $14.9 million / 18.3% | $5.2 million / 8.5% |
| Net earnings attributable to Twin Disc | $9.6 million | $2.7 million |
| Basic / diluted EPS | $0.84 / $0.83 | $0.24 / $0.24 |
| Operating cash flow | $(1.2) million | $4.1 million |
| Capital expenditures | $3.6 million | $1.2 million |
- Sales increased 32.5%. The filing attributes growth mainly to oil and gas demand and stronger aftermarket, industrial, and airport rescue and fire-fighting markets. Favorable currency translation added approximately $2.8 million to revenue before eliminations.
- Gross margin expanded 520 basis points, supported by higher volume, favorable oil-and-gas product mix, improved manufacturing efficiency and absorption, and lower warranty expense. Marketing, engineering and administrative expense rose $1.1 million, but declined as a share of sales to 19.6% from 24.1%.
- Cash from operations was negative despite higher earnings, primarily reflecting a $16.4 million working-capital use. Investing used $3.9 million; financing provided $10.1 million. Cash increased $4.5 million to $24.7 million.
- At September 30, cash was $24.7 million, net working capital was $126.4 million, and total debt was $40.8 million, up $11.1 million from June 30. The company reported $17.5 million of available borrowing capacity on its $40 million revolver. It was in compliance with debt covenants; funded debt to four-quarter EBITDA was 0.75.
- Inventory was $105.0 million, up $5.8 million from June 30. Six-month backlog rose to $164.5 million from $146.9 million at June 30 and $100.0 million a year earlier.
Changes, outlook and risks
- Manufacturing-segment sales rose 39.7% and distribution sales rose 19%; segment figures include inter/intra-segment activity. Management cited strong domestic oil-and-gas transmission demand, while some marine markets remained weak or experienced shipment timing delays.
- Management expects fiscal 2012 capital spending of $15–$20 million and pension contributions of approximately $3.7 million; $1.4 million had been contributed by September 30. It expects the tax rate for the rest of the year to remain near the quarter’s 35.3%. The filing provides no specific sales or earnings guidance.
- Management said it expects sufficient operating cash flow to meet operating and investing needs and does not expect to breach financial covenants in fiscal 2012. Capital plans may change with market conditions, capital availability, and equipment lead times.
- Risks include foreign-exchange exposure, floating-rate debt, steel and aluminum price fluctuations, and uncertainty in warranty claims. No forward foreign-exchange contracts were outstanding at quarter-end. Management said litigation was not expected to materially affect results, financial position, or cash flows; product-liability claims were insured or considered immaterial.
- The company recorded a full valuation allowance on deferred tax assets in certain foreign jurisdictions due to recent losses and missed improvement targets. It also disclosed approximately $874,000 of unrecognized tax benefits and a proposed U.S. settlement expected to reduce that balance by about $350,000 within twelve months.
- A new ERP system at the Belgian manufacturing operation prompted changes to financial-reporting controls; management was reviewing and redesigning affected controls, with completion planned for the second fiscal quarter. Management said disclosure controls were effective and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether backlog converts to shipments and cash on schedule, particularly given the quarter’s working-capital outflow and inventory growth.
- Whether oil-and-gas demand, product mix, and improved manufacturing absorption sustain the unusually large margin improvement.
- Progress on cash generation, planned capital spending and pension contributions, and revolver utilization and covenant headroom.
- Developments in foreign-market demand, currency effects, foreign tax-asset valuation allowances, and the proposed tax settlement.
- Completion of the Belgian ERP control review and any subsequent changes in financial-reporting controls.