Twin Disc, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019. Although the request identifies 2018 Q4, this filing covers fiscal 2019; fourth-quarter figures are included below where available. Amounts are in U.S. dollars.
Business context
Twin Disc designs, manufactures and sells marine and heavy-duty off-highway power transmission equipment. Its markets include commercial, pleasure-craft and military marine, energy and natural resources, government, and industrial. On July 2, 2018, the company acquired Veth Propulsion, a Netherlands-based marine propulsion manufacturer. Veth’s results are included from the acquisition date.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $302.7 million | $240.7 million |
| Gross profit / margin | $89.6 million / 29.6% | $80.6 million / 33.5% |
| Income from operations | $18.5 million / 6.1% of sales | $16.1 million / 6.7% of sales |
| Net income attributable to Twin Disc | $10.7 million | $9.5 million |
| Diluted earnings per share | $0.83 | $0.82 |
| Cash from operating activities | $(5.5) million | $6.5 million |
| Capital expenditures | $12.0 million | $6.3 million |
| Cash at year-end | $12.4 million | $15.2 million |
| Long-term debt, including current maturities | $42.5 million | $4.8 million |
Sales rose 25.7%, with $54.9 million of the increase attributable to Veth. Higher oil-and-gas product sales also contributed, while currency translation reduced sales by $5.1 million. Gross margin fell 390 basis points, reflecting less favorable product mix, higher-cost suppliers and a $4.3 million Veth inventory fair-value step-up charge. Increased volume provided an estimated $16.6 million benefit to gross margin.
Operating cash flow weakened to a use of $5.5 million, principally as working capital increased; management cited a $22.2 million inventory increase, excluding the acquisition effect. Investing cash use was $66.9 million, including $60.2 million for Veth. Financing cash provided $69.2 million, including $32.2 million of net equity-offering proceeds and net debt borrowing. Net working capital increased 33.4%; the current ratio rose from 2.6 to 2.8.
At June 30, 2019, the company reported approximately $24.7 million of available borrowing capacity under its credit agreement. Its $20.0 million term loan matures in March 2026, with quarterly principal installments. The revolver commitment is $50.0 million. Debt is secured by substantially all personal property and is subject to financial covenants, including a maximum funded-debt-to-EBITDA ratio of 3.00 to 1.00.
Material changes and fourth-quarter performance
- Veth expanded marine and propulsion sales; marine and propulsion systems revenue increased 55.2% for the year.
- The six-month order backlog declined approximately 13%, to $99.6 million from $115.0 million, mainly due to fewer North American oil-and-gas transmission orders, partly offset by Veth.
- Fiscal 2019 fourth-quarter sales were $72.4 million versus $73.8 million a year earlier. Gross profit was $16.5 million versus $27.6 million, and gross margin was 22.7% versus 37.4%. The quarter recorded a net loss attributable to Twin Disc of $0.8 million, or $0.06 per diluted share, compared with net income of $5.9 million, or $0.51 per diluted share.
- Interest expense increased to $1.9 million from $0.3 million, principally due to acquisition-related borrowing. The effective tax rate decreased to 25.6% from 33.1%, largely reflecting the full-year impact of the U.S. Tax Cuts and Jobs Act.
Outlook, risks and unusual items
- Management expects fiscal 2020 capital expenditures of approximately $12–$14 million and a minimum defined-benefit pension contribution of approximately $1.9 million. It expects cash, operating cash generation and credit facilities to cover foreseeable needs, while noting that forecasts are subject to uncertainty.
- Management reported improving commercial-marine and industrial demand, steady pleasure-craft demand, and weakening oil-and-gas demand in the fourth quarter. It did not provide numerical revenue or earnings guidance.
- Fiscal 2019 included $1.2 million of restructuring charges, a $0.8 million gain on the Mill Log business divestiture, and a $0.8 million gain from remeasurement of Veth contingent consideration. Veth’s acquisition accounting also included the $4.3 million inventory step-up charge.
- Key risks include cyclical end markets and oil-and-gas exposure; foreign exchange, tariffs and commodity costs; supplier and customer concentration; international operations; manufacturing disruptions; debt covenant and refinancing risk; and realizing Veth synergies or avoiding impairment of acquired goodwill and intangibles. Product-liability claims are pending, but management said their ultimate outcomes are not determinable and does not expect a material impact.
- The company reported effective disclosure controls and internal control over financial reporting. However, management and the auditor excluded Veth from their internal-control assessments because it was acquired during the year; Veth represented 28% of year-end assets.
Important facts for investors to verify
- Whether operating cash flow recovers as inventory and other working-capital requirements normalize.
- Whether the lower backlog and weaker fourth-quarter margins indicate sustained demand or mix pressure, especially in North American oil and gas.
- Veth’s ongoing profitability, integration costs, expected synergies and contribution to margins.
- Debt covenant headroom, borrowing availability and the effect of debt service on planned investment.
- Whether management’s acquisition-related goodwill and intangible-asset assumptions remain supportable, and how Veth’s controls are integrated.