Twin Disc, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, ended September 30, 2022; comparable quarter ended September 24, 2021. Twin Disc manufactures and sells marine and heavy-duty off-highway power transmission equipment through manufacturing and distribution segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Quarter / period ended September 30, 2022 | Comparable / prior period |
|---|---|---|
| Net sales | $55.9 million | $47.8 million; up 17.1% |
| Gross profit / margin | $13.3 million / 23.8% | $13.4 million / 28.2% |
| Operating income (loss) | $(1.8) million / (3.2)% | $3.2 million / 6.8% |
| Net income (loss) attributable to Twin Disc | $(2.0) million; $(0.15) per share | $1.9 million; $0.14 per share |
| Cash from operating activities | $(0.7) million | $2.4 million provided |
| Capital expenditures | $2.2 million | $0.8 million |
| Cash and total debt | $13.2 million cash; $37.1 million debt | At June 30, 2022: $12.5 million cash; $36.5 million debt |
| Net working capital | $120.0 million | $123.4 million at June 30, 2022 |
Gross margin fell year over year, though management said it was modestly above the prior-year margin after excluding approximately $2.5 million of prior-year benefits: a $1.3 million U.S. Employee Retention Credit, a $0.7 million Netherlands subsidy, and a $0.5 million warranty-reserve correction. The prior-year quarter also included $2.9 million of operating income from the sale of a Swiss facility.
Cash increased by $0.7 million during the quarter, including a favorable $2.4 million foreign-exchange effect. The company reported negative free cash flow of $2.9 million, defined as operating cash flow less purchases of fixed assets. Net debt was approximately $23.9 million, versus $24.0 million at June 30, 2022.
Material changes and operating trends
- Sales growth reflected improving demand across markets, including stronger North American energy demand and aftermarket support. Industrial product sales rose 14.6%; marine and propulsion shipments rose 10.1%; and off-highway transmission shipments rose 30.2%.
- North America recorded the largest regional increase, up $5.6 million, or 33.2%. Europe’s increase was limited by economic conditions and currency effects. Asia-Pacific sales rose 8.2%.
- Foreign-currency translation reduced year-over-year sales by $4.8 million, primarily because of euro weakness against the U.S. dollar.
- Cost of goods sold rose faster than sales, and gross margin was pressured by inflation, particularly in Europe. Management cited higher ME&A spending on salaries, bonuses, marketing, travel, professional fees and inflation, partly offset by favorable currency translation.
- Manufacturing segment net income was $1.8 million, down from $4.8 million; distribution segment net income was $1.0 million, up from $0.5 million. Corporate and eliminations were a $4.8 million loss, compared with a $3.4 million loss.
- Backlog scheduled for shipment over the next six months was $108.9 million, versus $101.2 million at June 30, 2022 and $86.1 million a year earlier. Inventory was $128.1 million, up $1.0 million from June 30; management attributed accumulated inventory in part to missing components and customer shipment delays.
Liquidity, debt and outlook
Under the amended BMO credit agreement, revolving-loan capacity was $40.0 million, with approximately $15.9 million available at quarter-end. The agreement runs through June 30, 2025 and includes maximum total funded debt-to-EBITDA and minimum fixed-charge-coverage covenants, as well as a tangible-net-worth requirement. The company stated that it was in compliance with its liquidity and other covenants. Management said cash, credit facilities, expected operating cash generation and potential debt-market access should be adequate for foreseeable cash and capital needs.
Management expects fiscal 2023 capital expenditures of $9 million to $11 million, principally for manufacturing, assembly and testing equipment and efficiency improvements. No specific revenue or earnings guidance was provided. The company expects to contribute approximately $0.6 million to pension plans and $0.8 million to postretirement benefits in fiscal 2023.
Risks, contingencies and notable items
- Supplier capacity constraints, extended lead times and shortages of electronic components continued to limit the company’s ability to ship products. Inflation, customer delivery delays, weaker economic conditions in Europe and foreign-exchange movements are additional pressures.
- The company maintained a full valuation allowance on U.S. deferred tax assets because of continued domestic losses and uncertainty about future domestic earnings. It reported approximately $0.8 million of unrecognized tax benefits, including interest and penalties; the amount could change in the next twelve months.
- The company reported $37.1 million of debt, including $24.1 million of revolving loans and a $13.0 million term loan. A $13.0 million interest-rate swap hedges the term loan. Borrowing costs and covenant compliance warrant monitoring.
- Management said the outcome of ongoing litigation was not determinable but was not expected to materially affect results, financial position or cash flows. Product-liability claims were described as insured or not material.
- The company classified a Belgian property with a $2.8 million net book value as held for sale. It also continued restructuring activities; the quarter’s restructuring expense was minimal.
- Accumulated other comprehensive loss increased, with a $6.3 million unfavorable foreign-currency translation adjustment in the quarter. The company also reported warranty-estimation risk and defined-benefit pension obligations.
Most important facts for investors to verify
- Whether backlog converts into shipments and cash despite component shortages, excess inventory and customer delivery delays.
- Whether sales growth improves operating profitability after lower gross margin, higher operating expenses and the absence of prior-year one-time benefits.
- Future operating cash flow, inventory levels, capital spending and the availability of revolving credit.
- Compliance with credit-agreement covenants and the effect of interest rates, currency movements and hedge accounting on earnings and equity.
- Developments in domestic profitability and deferred-tax-asset valuation allowances, as well as the expected proceeds and timing of property sales.