Twin Disc, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended June 30, 2013 (not calendar 2012 Q4). Twin Disc designs and manufactures marine and heavy-duty off-highway power transmission equipment. Its markets include commercial, pleasure-craft and military marine, oil and gas, industrial and government applications.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $285.3 million | $355.9 million |
| Gross profit / margin | $80.0 million / 28.1% | $121.6 million / 34.2% |
| Operating earnings | $10.0 million | $44.9 million |
| Net earnings attributable to Twin Disc | $3.9 million | $26.7 million |
| Diluted earnings per share | $0.34 | $2.31 |
| Cash provided by operating activities | $24.5 million | $14.4 million |
| Capital expenditures | $6.6 million | $13.7 million |
Sales declined 19.8% year over year, principally because North American oil-and-gas pressure-pumping demand weakened. Off-highway transmission sales fell by more than 50%; marine and propulsion sales increased 11.4%, supported by commercial marine demand. China sales rose approximately 46% to $29.1 million. Lower volume, mix, pension and warranty costs, and manufacturing absorption pressured gross margin. The effective tax rate was 54.0%, versus 39.8% in FY2012; non-deductible items contributed to the elevated rate.
Liquidity, debt and balance sheet
- Cash was $20.7 million at year-end, with management noting that much of it was held overseas and repatriation could involve restrictions and tax implications.
- Total funded debt was $27.2 million, down from $32.1 million; balance-sheet long-term debt was $23.5 million, with $3.7 million classified as current maturities.
- Available borrowing capacity was reported as $23.7 million under the $40 million BMO revolver and $15 million under a Wells Fargo facility, which had no borrowings at year-end.
- The current ratio was 3.0. Net working capital decreased $5.6 million. Operating cash flow improved mainly from lower working capital, including reduced receivables, despite lower earnings.
- Debt covenants were met at year-end: four-quarter EBITDA was $21.1 million against an $11 million minimum, and funded debt to EBITDA was 1.28 against a maximum of 3.0.
Material changes, outlook and risks
- Six-month scheduled backlog fell approximately 32% to $66.8 million from $98.7 million, reflecting weaker orders for 8500-series transmissions as North American rig operators responded to natural-gas supply and price conditions.
- Management expected to remain in covenant compliance in FY2014 and believed operating cash and available credit would fund near-term needs, while cautioning that results depended on uncertain markets. Planned FY2014 capital expenditures were approximately $15 million; expected defined-benefit pension contributions were $2.6 million.
- FY2013 included a $0.7 million restructuring charge for workforce reductions in Belgium and elimination of a corporate officer position. Subsequent July 2013 negotiations added approximately $1.1 million, expected to be recorded in FY2014.
- A $1.4 million impairment was recorded after the company decided to exit an Italian distribution agreement. FY2012 included a separate $3.7 million goodwill impairment related to an Italian manufacturing reporting unit.
- The company revised prior-period financial statements for errors in reserves for uncertain tax positions and other immaterial tax adjustments. It said the errors were not material individually or in aggregate to prior periods; FY2012 net earnings attributable to Twin Disc were revised to $26.7 million.
- Key risks include cyclical marine and energy markets, customer concentration (one distributor accounted for approximately 11% of FY2013 sales; the top ten customers represented about 45%), foreign exchange exposure, supplier and commodity costs, product quality and warranty claims, and dependence on Racine manufacturing facilities. Product-liability litigation was pending, but management did not expect a material impact.
- CEO Michael E. Batten was scheduled to step down November 1, 2013, with President John H. Batten becoming CEO on that date.
Important facts for investors to verify
- Whether backlog and demand in North American oil and gas recovered, and whether marine growth offset continued weakness in other markets.
- Whether gross margins stabilized after the sharp decline, including trends in warranty expense and manufacturing utilization.
- Whether the additional Belgian restructuring charge and Italian distribution exit produced the expected costs and benefits.
- Cash availability and debt-covenant headroom, including the location and potential tax cost of overseas cash.
- The assumptions supporting deferred tax asset recoverability, the $1.556 million of unrecognized tax benefits, and the company’s disclosed tax-position revisions.