Twin Disc, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter ended December 30, 2022; the filing also reports the first six months of fiscal 2023. Unless otherwise noted, amounts below are in millions of dollars. Comparisons are with the corresponding prior-year period or June 30, 2022 year-end.
Business context and results
Twin Disc manufactures and sells marine and heavy-duty off-highway power transmission equipment. Its reportable segments are manufacturing and distribution. Management cited recovering demand, particularly in North American energy markets, alongside continuing supply-chain constraints.
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Net sales | $63.4 | $59.9 | $119.3 | $107.7 |
| Gross profit | $17.0 | $13.5 | $30.3 | $26.9 |
| Gross margin | 26.9% | 22.5% | 25.4% | 25.0% |
| Operating income (loss) | $5.0 | $(3.0) | $3.2 | $0.2 |
| Net income (loss) attributable to Twin Disc | $1.1 | $(3.8) | $(0.9) | $(1.9) |
| Basic and diluted EPS | $0.08 | $(0.29) | $(0.07) | $(0.14) |
- Q2 sales rose 5.8%; first-half sales rose 10.8%. First-half manufacturing segment sales increased 16.3%, while distribution sales increased 2.2%. In Q2, manufacturing sales grew 15.0%, but distribution sales declined 9.6%.
- First-half product-group sales increased for marine and propulsion systems to $65.8 million and land-based transmissions to $30.6 million; industrial sales were $14.5 million.
- Q2 gross-margin improvement reflected volume, product mix, pricing and cost efficiencies. The first-half prior-year comparison included $2.5 million of identified benefits (employee-retention and Dutch subsidies, plus a warranty-reserve correction); excluding these, management said prior-year first-half gross margin would have been 22.7%.
- Q2 operating income included a $4.2 million gain on the sale of the Belgian facility. The property sold for approximately $7.2 million and was leased back for two years; the gain is an unusual item and should not be treated as recurring operating performance.
- First-half interest expense was $1.2 million. Other expense was $1.0 million, primarily from translation losses on euro-denominated liabilities. The effective tax rate was 68.3% for Q2 and 175.9% for the first half; management attributed the elevated rates to the full domestic valuation allowance and the mix of foreign earnings by jurisdiction.
Cash flow, liquidity and debt
- First-half operating cash flow was approximately breakeven at $0.03 million, versus cash used of $1.0 million a year earlier. Capital spending was $4.7 million, and management reported negative free cash flow of $4.7 million, defined as operating cash flow less fixed-asset purchases.
- Cash was $13.5 million at December 30, up from $12.5 million at June 30. Cash increased by $1.0 million during the half, including a $3.2 million favorable exchange-rate effect. Most cash was held overseas: $4.2 million in Europe and $8.2 million in Asia-Pacific.
- Net working capital was $124.0 million, up $0.6 million from year-end. Inventories rose $9.7 million to $136.8 million, including inventory awaiting components or customer acceptance and stock associated with delayed China shipments. Receivables were $39.4 million, down $6.1 million from year-end.
- Six-month shipment backlog was approximately $124.0 million, compared with $101.2 million at June 30, 2022 and $98.9 million a year earlier. Backlog is not a guarantee of shipment or revenue.
- Total debt was $31.9 million, down from $36.5 million at June 30; debt net of cash was $18.4 million versus $24.0 million. Revolver borrowing capacity was approximately $39.5 million, with about $20.1 million available. The company reported compliance with its liquidity and other credit covenants.
Outlook, risks and other notable matters
- Management described demand as strong or improving across most markets, including North American energy and aftermarket demand. It also said shipments remained constrained by supplier capacity, extended lead times and electronic-component shortages. China-related oil-and-gas shipments were temporarily delayed.
- No specific revenue or earnings forecast was provided. Management expected fiscal 2023 capital expenditures of $9–$11 million, primarily for equipment and improvements to manufacturing, assembly and testing processes.
- The credit agreement runs through June 2025 and includes leverage, fixed-charge-coverage and tangible-net-worth covenants. A prior forbearance was terminated in June 2022; the lender waived specified earlier minimum-EBITDA noncompliance. The filing states the company remained in covenant compliance at quarter-end.
- Risks and uncertainties include supply-chain disruption, foreign-currency movements, execution of backlog, inventory build-up, tax uncertainty and warranty-estimate variability. Management said there were no material changes to previously disclosed risk factors. Litigation outcomes were not determinable, but management did not expect a material impact; product-liability claims were described as insured or immaterial.
- The company maintained a full valuation allowance on domestic deferred tax assets because of historical losses and uncertainty about future domestic earnings. Approximately $0.8 million of unrecognized tax benefits, including related interest and penalties, remained at quarter-end and could change over the next 12 months.
- Management said available cash, credit facilities and expected operating cash flows should be adequate for foreseeable cash and capital needs. This is forward-looking and subject to the risks described in the filing.
Important facts for investors to verify
- How much of the Q2 operating improvement remains after excluding the $4.2 million Belgian property-sale gain, and whether core margins continue to improve.
- Whether the $124.0 million backlog converts to shipments and cash on schedule, given supplier constraints and delayed China orders.
- Whether inventory levels, especially in the Netherlands and Singapore, normalize without additional obsolescence, discounting or working-capital pressure.
- Future cash generation and revolver availability, alongside covenant headroom, planned $9–$11 million of capital spending and debt repayments.
- The effect of the domestic tax valuation allowance, foreign earnings mix, amended foreign return and any changes in unrecognized tax benefits.