Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 28, 2018 (fiscal 2019 Q1), compared with the quarter ended September 29, 2017. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise stated.
Business context and reporting period
Twin Disc designs, manufactures and sells marine and heavy-duty off-highway power transmission equipment. Results include Veth Propulsion, acquired on July 2, 2018, from that date through quarter-end. Veth manufactures maritime propulsion equipment and expands Twin Disc’s marine offerings.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $74.7 | $45.1 |
| Gross profit / margin | $24.0 / 32.1% | $14.0 / 31.0% |
| Operating income (loss) / margin | $4.8 / 6.5% | ($0.6) / (1.4%) |
| Net income attributable to Twin Disc | $2.9 | $3.4 |
| Diluted EPS | $0.24 | $0.29 |
| Cash from operating activities | $0.8 | ($1.4) |
- Sales rose 65.7% year over year; Veth contributed $13.4 million. Excluding Veth, marine and propulsion sales increased nearly 11%, and management cited stronger North American oil-and-gas demand and improving global commercial marine demand. Global industrial demand was relatively flat.
- Gross margin improved 110 basis points, reflecting higher volume and Veth contribution, partly offset by a $1.2 million acquired-inventory fair-value step-up charge, which reduced margin by about 157 basis points.
- Net income attributable to Twin Disc declined despite the operating turnaround. The prior-year quarter included a $3.8 million release of a foreign tax valuation allowance; the prior-year effective tax rate was 371.7% versus 23.4% this quarter. Q1 FY2019 interest expense rose to $0.7 million from $0.1 million, principally due to acquisition-related borrowing.
- Operating cash flow was $0.8 million; capital expenditures were $3.6 million, resulting in negative free cash flow of $2.7 million, as defined by the company.
- At September 28, cash was $16.6 million, total debt $37.4 million, and net debt $20.9 million. The company reported $23.4 million of available borrowing capacity, net working capital of $124.0 million, and a current ratio of 2.6.
- Six-month order backlog was approximately $146.3 million, versus $115.0 million at June 30, 2018 and $62.7 million a year earlier.
Material changes versus the prior comparable period
- Veth’s acquisition materially increased sales and added preliminary goodwill of $24.7 million and intangible assets of $23.7 million. Acquisition accounting and valuations remain incomplete and could be adjusted.
- The company completed a registered stock offering, issuing 1.533 million shares and receiving net proceeds of $32.2 million, used to partially repay acquisition-related debt. This increased the share count and equity.
- Debt increased by $32.6 million from June 30, 2018, to $37.4 million, after acquisition borrowing and partial repayment from offering proceeds. Inventories rose to $123.4 million from $84.0 million, partly from Veth and partly to support demand.
- Early adoption of lease accounting added right-of-use assets and lease liabilities; lease obligations were $17.1 million at quarter-end. Revenue-recognition guidance was also adopted, with no significant cumulative-effect impact reported.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects sufficient cash, operating cash generation and credit availability to fund near-term operating and investment needs.
- Fiscal 2019 capital expenditures are expected to be $14–$16 million. The company expects approximately $2.4 million of pension contributions for the fiscal year; $1.1 million had been contributed by quarter-end.
- Management cited continued cost-management and European restructuring actions. Restructuring expense was $0.2 million, compared with $1.2 million a year earlier.
- Veth consideration included $2.9 million of estimated contingent consideration; the earn-out can reach approximately $4.0 million, subject to an EBITDA threshold and determination by April 2019. Veth also entered a 15-year facility lease with annual rent of approximately $1.2 million, subject to increases tied to the consumer price index.
- Key exposures include floating-rate debt, steel and aluminum prices, and foreign exchange; about 33% of quarterly revenue was denominated in currencies other than the U.S. dollar. No forward currency contracts were outstanding at quarter-end. Management estimated that a 10% interest-rate change would alter annual pretax interest expense by approximately $79,000.
- The company reported ongoing litigation but said its outcome was not presently determinable and expected final disposition not to have a material impact. Product-liability claims were described as insured or not material. Warranty estimates and acquisition valuations are subject to uncertainty. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Final Veth purchase-price allocation, including acquired inventory, intangible-asset valuations, goodwill and any resulting changes to future depreciation or amortization.
- Veth’s operating contribution after the quarter and whether performance meets the earn-out threshold.
- Conversion of the $146.3 million backlog into sales and cash, particularly given higher inventory and negative free cash flow.
- Debt levels, borrowing availability, interest costs and the company’s ability to fund planned capital expenditures and pension contributions.
- Underlying earnings comparability after considering the prior-year tax benefit, this quarter’s acquisition-related charges and the share issuance.