Twin Disc, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020, including fourth-quarter results. The filing was signed August 26, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Business context
Twin Disc designs, manufactures and sells marine and heavy-duty off-highway power transmission equipment, including marine propulsion systems, transmissions, industrial clutches and controls. Its markets include pleasure-craft, commercial and military marine, energy and natural resources, government, and industrial. The Veth Propulsion acquisition, completed in July 2018, expanded its marine propulsion offerings.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $246.8 | $302.7 |
| Gross profit / margin | $55.7 / 22.6% | $89.6 / 29.6% |
| Operating income (loss) | $(40.3) | $18.5 |
| Net income (loss) | $(39.6) | $10.8 |
| Net income (loss) attributable to Twin Disc | $(39.8) | $10.7 |
| Basic and diluted EPS | $(3.03) | $0.84 basic; $0.83 diluted |
| Cash from operations | $9.1 | $(5.5) |
| Capital expenditures | $10.7 | $12.0 |
- Sales fell 18.4%, or $55.8 million. North American oil-and-gas-related sales declined approximately $49.7 million; currency translation reduced sales by $4.8 million.
- Gross margin contracted 700 basis points, principally due to lower volume and unfavorable mix, including fewer high-margin oil-and-gas transmissions and aftermarket products. Management estimated volume and mix reduced gross profit by $16.5 million and $15.3 million, respectively.
- A $6.2 million charge for a product performance issue affected gross profit. Separately, the warranty reserve included a non-recurring $6.233 million charge for estimated costs to resolve this issue.
- Fiscal 2020 operating expenses included $5.1 million of restructuring charges and $27.6 million of non-cash impairment charges. The impairment included a $25.4 million write-off of all goodwill and $2.2 million for certain intangibles and other assets.
- Cash from operations improved by $14.6 million year over year, with working-capital actions contributing to cash generation. Cash at year-end was $10.7 million. The current ratio was 2.6, versus 2.7 a year earlier; net working capital decreased $20.0 million.
- Total debt was $42.6 million, including an $8.2 million Paycheck Protection Program (PPP) loan. The company reported approximately $27.0 million of available borrowings under its credit agreement. Long-term debt excluding current maturities was $37.9 million; lease obligations were reported separately.
- There were no cash dividends in fiscal 2020 or 2019. The filing reports no material off-balance-sheet arrangements.
Material changes and operating trends
- Land-based transmission sales fell 44.4% to $62.7 million, while industrial sales fell 22.3% to $26.3 million. Marine and propulsion systems sales increased 1.5% to $152.5 million, supported in part by Veth Propulsion.
- U.S. and Canadian sales declined 38% and represented 36% of consolidated sales, compared with 47% in fiscal 2019. European sales increased approximately 8% and represented 37% of sales.
- Six-month order backlog was $66.6 million at June 30, 2020, about one-third lower than the prior year. The filing gives the prior-year amount inconsistently as $99.6 million and $99.8 million.
- Fiscal fourth-quarter net sales were $59.4 million and net loss was $1.6 million. North American incoming orders in the quarter were approximately 50% below the fiscal year-to-date run rate through the third quarter.
- Top ten customers generated approximately 51% of fiscal 2020 sales; one distributor customer accounted for at least 10%.
Outlook, management commentary and key risks
- Management said the depth and duration of COVID-19’s economic effects were unknown and did not provide specific revenue or earnings guidance. It reported intermittent shutdowns, supply-chain and shipment disruptions, reduced demand, and cost and cash-preservation actions.
- Management expected fiscal 2021 capital expenditures of approximately $7–$9 million; the subsequent credit amendment capped fiscal 2021 capital expenditures at $10 million. The company expected to contribute approximately $2.3 million to defined-benefit pension plans.
- On July 22, 2020, the company amended its credit agreement: revolving commitment declined from $50 million to $45 million; covenant relief through the earlier of June 30, 2021 or an elected date replaced the funded-debt-to-EBITDA test with minimum EBITDA requirements; and the company must maintain at least $15 million of defined liquidity during the relief period. The amendment also restricted certain shareholder payments and increased applicable borrowing margins.
- The $8.2 million PPP loan bears 1% interest and matures in 2022 if not forgiven. Twin Disc recorded it as debt and had not recognized forgiveness at year-end. Management estimated approximately $7.0–$7.6 million could qualify for forgiveness, but no assurance was given.
- Other key risks include oil-and-gas market weakness, cyclical marine and industrial demand, foreign exchange and international exposure, customer concentration, supplier and commodity disruptions, product quality and warranty costs, and the ability to meet liquidity and lender requirements. A planned transfer of certain industrial manufacturing operations from Racine, Wisconsin, to Lufkin, Texas, also carries execution and cost risks.
- Management stated that it complied with financial covenants after amendments and believed liquidity sources would meet foreseeable needs, while cautioning that results and covenant compliance remained uncertain. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether demand, orders and backlog recover from the sharp declines, particularly in North American oil and gas, and how COVID-19 affects fiscal 2021 operations.
- The ultimate cost and resolution of the transmission product performance issue, including warranty claims beyond the recorded reserve.
- Compliance with the amended credit agreement’s liquidity and minimum-EBITDA requirements, borrowing availability, and the company’s ability to service debt.
- Whether and how much of the PPP loan is forgiven, and the financial and tax treatment of any unforgiven balance.
- Execution costs, timing and expected benefits of the Lufkin facility relocation, alongside the company’s capital spending and cash-flow plans.
- Whether the remaining intangible-asset carrying values and deferred tax assets remain supportable if market conditions deteriorate further.