Twin Disc, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter ended September 25, 2020, Twin Disc’s first quarter of fiscal 2021. The company manufactures and distributes marine and heavy-duty off-highway power transmission equipment, serving marine, industrial, energy and other markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Quarter ended September 25, 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $46.1 million | $59.3 million |
| Gross profit / margin | $10.3 million / 22.3% | $9.6 million / 16.3% |
| Operating loss | $3.2 million | $6.8 million |
| Net loss attributable to Twin Disc | $4.0 million; $0.30 per diluted share | $6.3 million; $0.48 per diluted share |
| Operating cash flow | Cash used: $0.7 million | Cash provided: $1.5 million |
| Capital expenditures | $1.4 million | $4.0 million |
- Sales declined 22.2% year over year. Manufacturing segment sales fell 29.4% to $38.5 million; distribution segment sales were nearly flat at $22.5 million. Manufacturing reported a $2.7 million net loss attributable to Twin Disc, while distribution reported $1.2 million of net income.
- Gross margin improved despite lower sales. Management attributed most of the year-over-year increase to a $3.9 million unusual warranty charge in the prior-year quarter for an isolated product performance issue. Current-quarter gross profit was also pressured by unfavorable product mix ($1.6 million) and lower volume ($3.0 million), partly offset by cost reductions and foreign COVID-19 relief programs.
- Quarterly free cash flow, defined by the company as operating cash flow less fixed-asset purchases, was negative $2.1 million. Cash declined $1.4 million to $9.3 million. Total debt was $42.7 million and debt net of cash was $33.4 million.
- At September 25, current assets were $172.6 million and current liabilities were $69.4 million; working capital was $103.2 million and the current ratio was 2.5. Inventory was $120.2 million. Six-month order backlog was $69.4 million, versus $66.6 million at June 30, 2020 and $96.7 million a year earlier.
- Available borrowing capacity under the revolving credit facility was approximately $24.1 million. The facility commitment had been reduced from $50 million to $45 million. The filing reports covenant compliance at quarter-end.
Changes, outlook and risks
- Management cited COVID-19-related demand weakness across oil and gas, industrial and marine markets. North American sales fell 34.2% and European sales fell 29.3%; Asia-Pacific sales increased 1.6%. Currency translation added approximately $1.5 million to sales.
- Marketing, engineering and administrative expense decreased $3.3 million year over year, reflecting lower bonus, salary and benefit, marketing and travel costs, along with other cost controls. Restructuring expense was $0.4 million, primarily for European and domestic cost adjustments.
- The July 2020 credit amendment provided temporary relief from the funded-debt-to-EBITDA covenant through no later than June 30, 2021, subject to minimum EBITDA tests and minimum liquidity of $15 million. It also restricts certain equity payments and raises borrowing margins. The company reported compliance as of September 25, 2020.
- The company carries an $8.2 million Paycheck Protection Program loan as debt while pursuing forgiveness. Management estimated qualifying expenses of approximately $8.2 million and expected it could support forgiveness of $7.0 million to $7.6 million, but stated that forgiveness was not assured. Any gain would be recorded only when forgiveness is sufficiently certain.
- Management expects fiscal 2021 capital expenditures of $5 million to $7 million, within the amended credit agreement’s $10 million cap, and pension contributions of approximately $2.3 million. No specific sales or earnings forecast is provided. Management stated available cash and credit capacity should meet foreseeable operating and investing needs.
- Other matters to monitor include uncertainty from the pandemic, warranty reserve estimates, litigation whose outcome is not presently determinable, and approximately $1.1 million of unrecognized tax benefits. Management said litigation was not expected to have a material impact. The filing reports effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether market demand, backlog and sales recover, particularly in North America and Europe, and whether inventory levels adjust accordingly.
- Whether Twin Disc meets the amended minimum EBITDA and $15 million liquidity requirements as the temporary covenant-relief period progresses.
- The amount and timing of PPP loan forgiveness, and the effect if some or all of the loan remains repayable.
- Whether the improved gross margin is sustainable after accounting for the prior-year unusual warranty charge and current low-volume and product-mix pressures.
- Whether operating cash flow improves enough to fund capital spending, pension contributions and debt service without increasing net debt.