Twin Disc, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended December 30, 2011 (fiscal 2012 second quarter); comparisons are with the quarter ended December 31, 2010. The filing also reports the six months ended December 30, 2011. Twin Disc manufactures and distributes marine and heavy-duty off-highway power transmission equipment.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $82.9 million, up 10.4% | $164.3 million, up 20.3% |
| Gross profit / margin | $29.6 million / 35.6% (31.6% prior year) | $60.3 million / 36.7% (32.1% prior year) |
| Operating earnings / margin | $9.5 million / 11.4% (6.8% prior year) | $24.3 million / 14.8% (7.6% prior year) |
| Net earnings attributable to Twin Disc | $5.9 million, versus $4.0 million | $15.4 million, versus $6.7 million |
| Diluted earnings per share | $0.51, versus $0.35 | $1.34, versus $0.59 |
For the six months, operating cash flow was negative $3.1 million, versus positive $8.5 million a year earlier, primarily reflecting a $28.2 million working-capital use. Investing cash flow was negative $7.1 million, including $6.9 million of capital expenditures; financing provided $10.1 million. Cash declined $1.5 million to $18.6 million.
At December 30, 2011, working capital was $127.6 million. Inventory was $115.0 million, up $15.8 million from June 30, 2011; receivables were $56.9 million. Total debt was $41.7 million, up about $12.0 million since fiscal year-end, and cash was $18.6 million. The $40 million revolving facility had $23.5 million outstanding and $16.5 million available. The company reported compliance with debt covenants, including a 0.70 funded-debt-to-four-quarter-EBITDA ratio.
Material changes and management commentary
- Growth was led by manufacturing, whose segment sales rose 22.9% in the quarter and 30.3% in the first half. Demand for oil-and-gas transmissions, aftermarket products, industrial products, and airport rescue and fire-fighting markets strengthened. Distribution sales fell 18.6% in the quarter, notably due to a sharp decline at the Japanese joint venture following tsunami-related disruption and weakness in pleasure-craft markets.
- Management attributed improved gross margins to higher production volumes, favorable oil-and-gas product mix, manufacturing efficiency and absorption, and lower warranty expense. First-half warranty expense declined 40% to $1.8 million despite sales growth.
- The effective tax rate rose to 36.5% for the quarter and 35.8% for the first half, compared with 11.5% and 23.6%, respectively, in the prior-year periods. Prior-year rates benefited from pension-related deferred-tax adjustments and reinstatement of the R&D credit. A full valuation allowance remains against certain foreign deferred tax assets due to recent operating losses.
- Foreign currency translation increased first-half sales by approximately $3.1 million before eliminations, but generated an $8.5 million unfavorable translation adjustment in equity for the period.
Outlook, risks and contingencies
- Management reported a six-month shipping backlog of $148.6 million, versus $146.9 million at June 30, 2011 and $118.8 million a year earlier. It expects to ramp production of oil-and-gas transmissions in the second half. The filing does not provide specific revenue or earnings guidance.
- Fiscal 2012 capital spending is expected to be $15–$20 million; pension contributions are expected to total $3.728 million, of which $2.043 million had been made by December 30.
- Management said it expects sufficient liquidity and operating cash generation for near-term needs and does not expect covenant violations over the next year. It noted that overseas cash may be subject to restrictions on repatriation.
- Risks include cyclical and uneven demand across marine and industrial markets, foreign-exchange exposure, steel and aluminum price volatility, working-capital needs, warranty-estimate uncertainty, and the possibility that litigation outcomes or tax audits differ from expectations. Management considers pending litigation not material; product-liability claims are insured or considered immaterial.
- The Belgian operation implemented a new ERP system. Control review and redesign were substantially completed, but testing and validation were to continue through the third quarter. Management stated disclosure controls remained adequate.
Important facts for investors to verify
- Whether the backlog converts to shipments and cash, particularly as inventory rose and represented 77% of six-month backlog.
- Whether the strong oil-and-gas transmission demand and improved gross margins persist, and whether distribution-market weakness eases.
- Working-capital requirements, operating cash flow, capital spending, and the resulting need for revolver borrowing.
- The sustainability of warranty-cost improvements and the impact of the higher effective tax rate and foreign tax valuation allowance.
- Completion of ERP control testing, covenant compliance, and developments in tax audits and other contingencies.