Twin Disc, Incorporated — Form 10-Q Summary
Reporting period: The filing covers the quarter ended March 25, 2016 and the first three quarters of fiscal 2016. The request metadata says “2015 Q3,” but the filing itself reports fiscal 2016 Q3. Unless otherwise noted, amounts below are in millions of dollars.
Business context and results
Twin Disc manufactures and sells marine and heavy-duty off-highway power transmission equipment through manufacturing and distribution segments. Management attributed the downturn primarily to lower oil and gas-related demand in North America and Asia, weaker Asian commercial marine demand, and continuing softness in European markets.
| Metric | Q3 FY2016 | Q3 FY2015 | First 9 months FY2016 | First 9 months FY2015 |
|---|---|---|---|---|
| Net sales | $41.4 | $60.9 | $123.6 | $198.5 |
| Gross profit | $9.6 | $19.0 | $29.4 | $63.5 |
| Gross margin | 23.2% | 31.2% | 23.8% | 32.0% |
| Operating income (loss) | $(4.7) | $3.3 | $(14.8) | $15.4 |
| Net income (loss) attributable to Twin Disc | $(1.0) | $2.9 | $(7.6) | $10.7 |
| Diluted EPS | $(0.09) | $0.26 | $(0.68) | $0.95 |
Financial position, liquidity and cash flow
- At March 25, cash was $13.4, total debt was $11.8, and total equity was $131.0. Cash was down $9.5 from June 30, 2015; management said the $9.7 repatriation of European cash was used to pay down debt.
- Net working capital was $92.3, down $20.5 from June 30, 2015; the current ratio increased from 3.0 to 3.3. Receivables were $32.6 and inventory was $69.5.
- For the first nine months, operating cash flow was negative $5.3, versus positive $15.5 in the prior-year period. Capital expenditures were $3.6, and management-defined free cash flow, including shareholder dividends, was negative $10.9.
- Debt declined $2.0 from fiscal year-end. The company reported net cash (cash less debt) of $1.6 at quarter-end, versus $9.1 at June 30, 2015.
- Management expected fiscal 2016 capital expenditures of $5–$7 and pension contributions of approximately $2.2; $2.2 had been contributed by March 25. No specific sales or earnings forecast was provided.
Material changes and management commentary
- Q3 sales fell 32.0% year over year; nine-month sales fell 37.7%. Currency translation reduced sales by approximately $1.0 in the quarter and $7.9 year to date.
- Lower volume, less favorable product mix, and currency reduced gross profit; cost savings and improved efficiencies partly offset those pressures. Nine-month gross profit was adversely affected by reduced volume ($32.1), mix (approximately $3.4), and currency ($1.0), partly offset by savings and efficiencies of $2.5.
- The company announced restructuring actions expected to produce $4.3 of annualized savings. It recorded $0.8 of restructuring expense in the first nine months, including $0.3 in Q3.
- In September 2015, the company sold southeastern U.S. distribution rights and related assets for approximately $4.1, including inventory. It recognized a $0.445 gain; $0.6 of proceeds for distribution rights was deferred and is to be recognized through June 2016.
- Six-month shipment backlog was $40.0, up from $34.4 at June 30, 2015 but down from $47.8 a year earlier.
- The nine-month effective tax rate was 51.5%. A tax strategy related to repatriating $9.7 from European entities generated a $2.4 benefit; management estimated the rate excluding that nonrecurring benefit at 36.0%.
Debt, risks and contingencies
- At March 25, the company was not in compliance with the Wells Fargo revolving facility’s EBITDA covenant. On April 22, it entered into a secured revolving facility with Bank of Montreal (BMO), used it to repay Wells Fargo, and reported approximately $15.5 of available borrowing capacity at closing. The facility is subject to a borrowing base and has a stated commitment of up to $40, with a conditional option to increase it by $10.
- The $3.6 final installment of the 10-year senior notes was paid April 11, 2016; the related shelf-note arrangement was terminated April 21. The filing classified the Wells Fargo balance as long-term at March 25 based on the subsequent refinancing.
- Management said the quarter’s market capitalization decline and operating trends did not indicate that goodwill impairment was more likely than not; the annual impairment test was planned for Q4. A future impairment remains possible if operating results, forecasts, or market conditions deteriorate.
- Risks include continued weakness in oil and gas and marine markets, foreign exchange movements, pension costs, warranty estimates, and exposure to steel and aluminum prices. The company does not hedge translation exposure and did not use commodity hedges. Management described litigation outcomes as not presently determinable but not expected to have a material effect; product-liability claims were described as insured or immaterial.
- Management stated that liquidity was sufficient for near-term needs and that available cash, the BMO facility, and expected operating cash flow should fund requirements. This is a forward-looking assessment, not a guarantee.
Important facts for investors to verify
- Whether the BMO borrowing base and covenant terms provide adequate liquidity if sales and operating cash flow remain weak.
- Subsequent operating performance, backlog conversion, and whether restructuring savings offset lower volume and mix.
- Whether pension, warranty, or other estimates change materially, and the outcome of the Q4 goodwill impairment test.
- The sustainability of the reported tax benefit and the company’s ability to generate cash after capital spending, dividends, and debt service.