Twin Disc, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended December 28, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Twin Disc manufactures and distributes marine and heavy-duty off-highway power transmission equipment. Its markets include commercial, military and pleasure-craft marine, oil and gas, industrial, and government applications.
- Quarterly sales: $72.3 million, down 12.8% from $82.9 million. Management attributed the decline mainly to lower North American pressure-pumping demand; commercial marine demand partly offset weakness. Foreign currency translation reduced revenue by about $0.7 million.
- Quarterly profitability: Gross profit was $22.3 million, or 30.8% of sales, versus $29.6 million, or 35.6%. Operating earnings were $5.5 million versus $9.5 million; operating margin fell to 7.7% from 11.4%. Net earnings attributable to Twin Disc were $3.36 million versus $5.84 million; diluted EPS was $0.29 versus $0.50.
- First-half results: Sales were $141.1 million, down 14.1%; gross margin was 29.6% versus 36.7%; operating earnings were $8.3 million versus $24.3 million. Net earnings attributable to Twin Disc were $4.59 million versus $15.50 million; diluted EPS was $0.40 versus $1.34.
- Segment trends: Manufacturing sales declined 14.3% in the quarter; distribution sales rose 16.0%. Manufacturing segment earnings were $5.1 million versus $8.3 million, while distribution earnings increased to $1.6 million from $1.1 million.
Cash flow, financial position and liquidity
- Cash flow: First-half operating cash flow was $12.1 million, compared with $3.6 million used in the prior-year period. Capital expenditures were $3.5 million; cash increased $4.9 million to $20.6 million.
- Working capital: Net working capital was $132.3 million, up from $130.5 million at June 30, 2012. Receivables declined about $25.0 million to $38.5 million, while inventory rose $15.1 million to $118.3 million.
- Debt: Total borrowings were $34.0 million, up from $32.1 million at fiscal year-end. Cash exceeded current borrowings and debt by approximately $13.4 million. The company reported $20.5 million available under its $40 million revolver and an additional $15 million under a Wells Fargo facility, which had no borrowings.
- Covenants: The company was in compliance at quarter-end. Four-quarter EBITDA was $40.2 million and funded debt to EBITDA was 0.85, against a maximum of 3.0. Management expected covenant compliance for fiscal 2013 but said covenant headroom was expected to decline.
- Capital and retirement obligations: Fiscal 2013 capital spending was estimated at approximately $10 million. Pension contributions were estimated at $4.4 million, of which $3.6 million had been made by quarter-end.
Material changes, outlook and risks
- Six-month order backlog was $68.2 million, down from $98.7 million at June 30, 2012 and $148.5 million a year earlier. Management linked much of the decline to weaker North American pressure-pumping demand. Inventory equaled 173% of six-month backlog, versus 104% at fiscal year-end.
- Lower volume, less favorable oil-and-gas product mix, and reduced manufacturing efficiency and overhead absorption pressured gross margins. The company cited persistently weak global mega-yacht markets and softness in the Canadian oil-and-gas market; Singapore commercial marine demand was notably strong.
- Management said it expected to generate sufficient operating cash for operating and investing needs and reported adequate near-term liquidity. No specific revenue or earnings guidance was provided. The filing estimated a favorable approximately $0.5 million impact from the recently extended research-and-development tax credit, to be recorded in Q3.
- The six-month effective tax rate rose to 38.3% from 35.5%, reflecting, among other items, losses in certain foreign jurisdictions for which no tax benefit was recognized and additional uncertain-tax-position reserves. Unrecognized tax benefits were approximately $1.5 million; tax examinations were ongoing.
- The company revised prior-period financial information for errors in uncertain-tax-position reserves and other tax adjustments, which it concluded were not material to prior periods individually or in aggregate. The filing also describes correction of a prior cash-flow classification error for excess stock-compensation tax benefits.
- Product-liability claims and other litigation were disclosed; management did not expect the matters to have a material effect, and certain product claims were described as insured or immaterial. Warranty estimates could differ from actual claims. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the weaker pressure-pumping market and sharply lower backlog translate into further sales, utilization, or margin declines.
- Whether elevated inventory is converted to sales without discounting, impairment, or additional working-capital pressure.
- Ongoing covenant headroom, borrowing availability, and the effect of lower EBITDA on compliance.
- Resolution and potential financial impact of tax audits, uncertain tax positions, and the disclosed prior-period revisions.
- Actual capital spending, pension contributions, and the realized benefit of the R&D tax credit compared with management’s estimates.