Twin Disc, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, ended September 24, 2021; comparisons are to the quarter ended September 25, 2020 unless otherwise noted. Amounts are U.S. dollars. The company makes marine and heavy-duty off-highway power transmission equipment and reports manufacturing and distribution segments.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change / context |
|---|---|---|---|
| Net sales | $47.8 million | $46.2 million | Up 3.4% |
| Gross profit / margin | $13.4 million / 28.2% | $9.7 million / 21.0% | Margin improved 7.2 percentage points |
| Operating income (loss) | $3.2 million | $(3.1) million | Current quarter included a $2.9 million gain on property sale |
| Net income (loss) attributable to Twin Disc | $1.9 million; $0.14 per diluted share | $(4.0) million; $(0.30) per diluted share | Returned to profitability |
| Operating cash flow | $2.4 million | $(0.7) million | Improved year over year |
Gross margin benefited from a $1.3 million U.S. Employee Retention Credit, a $0.3 million Netherlands subsidy, a $0.5 million warranty reserve correction, favorable product mix of $0.8 million and higher volume of $0.4 million. These items mean reported margin and earnings should be considered in context.
Financial position and liquidity
- Cash was $22.1 million at September 24, up from $12.3 million at June 30, 2021. Most cash was held overseas. The company planned to repatriate approximately $7.0 million from Europe during fiscal 2022.
- Net working capital was $114.3 million, up $0.9 million from fiscal year-end; the current ratio was 2.4.
- Borrowings and long-term debt totaled $31.9 million, compared with $32.1 million at June 30. Cash-adjusted net debt was $9.8 million, versus $19.7 million at fiscal year-end. Revolving loan availability is stated as approximately $25.4 million in the debt note and $26.9 million in MD&A; the filing does not provide a clear reconciled value.
- Inventory increased $6.1 million to $121.1 million, largely because of supply-chain bottlenecks, components awaiting assembly and shipments awaiting customer acceptance. Six-month backlog rose to $86.1 million from $70.3 million at June 30 and $69.4 million a year earlier.
- Reported free cash flow was $10.7 million, defined by the company as operating cash flow less fixed-asset purchases; it included $9.1 million of proceeds from the Swiss facility sale. Excluding those sale proceeds, cash generation was substantially lower.
Business trends and changes versus prior year
- Manufacturing segment sales increased 8.1%; distribution sales decreased 8.8%. Industrial product shipments rose 13.1%, marine and propulsion shipments rose 1.8%, and off-highway transmission demand was essentially flat.
- North America sales improved 18.2%, supported by recovering markets and aftermarket energy demand. Asia-Pacific sales declined 9.1%, while Europe recorded a modest increase amid project delays and supply constraints.
- Management cited supplier capacity constraints, extended lead times and a global shipping-container shortage as limitations on its ability to ship products. North American oil and gas demand for new units remained depressed.
- Interest expense fell to $0.5 million from $0.6 million. Other expense was $0.4 million, primarily from foreign currency translation losses on euro- and Australian-dollar-denominated liabilities.
Outlook, risks and unusual items
- Management expected fiscal 2022 capital expenditures of approximately $9 million to $11 million and pension contributions of approximately $0.7 million. The company anticipated annual pretax savings of approximately $1.6 million after completing its Belgian restructuring.
- The Belgian workforce reduction was initially accrued at $2.2 million. In October 2021, the company and union agreed on a $3.2 million final settlement; the company said it planned to record an additional $1.0 million restructuring charge in fiscal Q2 2022.
- The company sold its Swiss propeller facility for approximately $9.1 million net of fees and local taxes, recording a $2.9 million gain. The lender agreement required application of sale proceeds to debt and repatriation of approximately $7.0 million.
- The company was not required to meet its minimum EBITDA covenant during the quarter under a lender forbearance agreement extended through February 28, 2022, unless an earlier default occurs. After the forbearance period, the agreement requires a maximum total funded debt-to-EBITDA ratio of 3.00 to 1.00. Management expected compliance after forbearance; the filing does not establish that outcome.
- Management identified COVID-19 uncertainty, supply-chain disruption, market weakness and foreign-exchange movements as risks. The company also reported a material weakness in tax-related internal controls; disclosure controls were deemed ineffective. The weakness followed a tax adjustment that increased fiscal 2021 net loss by $8.8 million, and remediation efforts were ongoing.
- Management said pending litigation was not expected to have a material effect, although ultimate outcomes and liabilities were not determinable. Domestic deferred tax assets remained subject to a full valuation allowance because of historical losses and uncertain future domestic earnings.
Investor verification priorities
- Track covenant compliance, liquidity, the February 2022 forbearance expiration and any further lender amendments.
- Reconcile the differing disclosed amounts of available revolving borrowings and confirm the required debt repayments and cash repatriation.
- Assess whether improved gross margin and profitability persist without the sale gain, government subsidies, warranty reserve correction and other favorable items.
- Monitor conversion of the $86.1 million backlog into shipments and cash, and whether inventory levels and supply constraints improve.
- Review progress in remediating the tax-control material weakness and any effects on future filings or financial statements.
- Confirm the timing and amount of the additional Belgian restructuring charge and the realization of expected savings.