Twin Disc, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and first two fiscal quarters ended December 25, 2020. Amounts below are in millions of dollars except per-share data. The company manufactures and distributes marine and heavy-duty off-highway power transmission equipment.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | First half FY2021 | First half FY2020 |
|---|---|---|---|---|
| Net sales | $48.4 | $59.5 | $94.6 | $118.8 |
| Gross profit / margin | $9.5 / 19.6% | $15.7 / 26.4% | $19.8 / 20.9% | $25.3 / 21.3% |
| Operating loss | $(4.6) | $(5.0) | $(7.8) | $(11.8) |
| Net loss attributable to Twin Disc | $(4.3) | $(6.5) | $(8.3) | $(12.8) |
| Basic and diluted loss per share | $(0.33) | $(0.49) | $(0.63) | $(0.98) |
| Operating cash flow | Not separately presented for the quarter | $2.8 | $0.1 |
- Q2 sales fell 18.6% year over year; first-half sales fell 20.4%. Demand weakened broadly across oil and gas, industrial, off-highway transmission, and marine markets, with COVID-19 impacts and delayed boat projects cited. Asia-Pacific sales increased, while North America and Europe declined. Currency translation added $2.1 million to Q2 sales and $3.6 million to first-half sales.
- Q2 manufacturing segment sales decreased 27.1%; distribution sales increased 5.4%. For the first half, manufacturing sales decreased 28.2% while distribution sales increased 2.9%. The manufacturing segment reported losses in both periods.
- Q2 gross margin contracted to 19.6%, primarily due to unfavorable product mix, reduced volume, and intercompany inventory profit adjustments. First-half margin was slightly below the prior year, which included a $3.9 million product-performance charge.
- ME&A expense declined year over year in dollars, but rose as a share of sales: 28.8% versus 27.6% in Q2 and 28.5% versus 27.6% for the first half. Operating losses were narrower than in the prior-year periods, which included higher restructuring charges.
- First-half investing cash use was $2.2 million, including $2.8 million of fixed-asset purchases; operating cash flow less fixed-asset purchases was approximately neutral. Cash was $11.8 million at period-end, up from $10.7 million at June 30, 2020.
Liquidity, debt, and balance sheet
- Working capital was $100.1 million, down $7.2 million from June 30, 2020; the current ratio declined to 2.3 from 2.6. Inventory was $122.2 million, up $1.6 million from fiscal year-end. Six-month backlog was $74.9 million, versus $66.6 million at June 30, 2020 and $94.7 million a year earlier.
- Total borrowings were $41.8 million, compared with $42.6 million at June 30, 2020; debt net of cash was $29.9 million. The company reported $23.6 million of available revolver borrowings at December 25, 2020. Lease obligations were $18.1 million.
- The company failed its minimum EBITDA covenant for the three fiscal quarters ended December 25, 2020. On January 27, 2021, BMO agreed to forbear from exercising remedies for the breach through the earlier of September 30, 2021 or a default under the agreement. During forbearance, the revolver commitment is reduced from $45.0 million to $42.5 million, and additional monthly forecasts and backlog reports are required. The company remains subject to a 3.00:1.00 funded-debt-to-EBITDA covenant after the forbearance period, and management expects compliance.
- The balance sheet includes an $8.2 million Paycheck Protection Program loan. The company had begun applying for forgiveness and said it believed $7.0–$8.0 million could qualify; forgiveness was not assured, and no gain had been recognized.
Outlook, risks, and unusual items
- Management expects fiscal 2021 capital expenditures of approximately $5–$7 million, focused on equipment, facilities, manufacturing efficiency, and the Lufkin, Texas facility. It expects pension contributions of approximately $2.3 million for the fiscal year, of which $0.4 million had been contributed by quarter-end.
- Management said available cash, the BMO facility, and potential debt-market access should meet foreseeable capital needs. It also noted that COVID-19’s full effects on financial condition, liquidity, and future results remained uncertain.
- Other expense was $1.7 million in Q2 and $2.9 million for the first half, primarily from translation losses on euro-denominated liabilities. The first-half effective tax rate was 30.3%, compared with 4.3% a year earlier; the filing attributes the change largely to GILTI tax treatment and use of the high-tax exception.
- First-half restructuring charges were $0.5 million, versus $4.4 million a year earlier. The prior-year Q2 included a $3.2 million exit cost for a terminated marine propulsion development program. First-half warranty expense included a $0.3 million nonrecurring accrual for a product performance issue, compared with $3.9 million in the prior-year period.
- The company is involved in litigation whose outcome is not determinable; management does not expect final disposition to materially affect results, financial position, or cash flows. It also disclosed product-liability claims it considers insured or immaterial.
Investor verification priorities
- Monitor covenant compliance, the forbearance conditions and end date, reduced borrowing capacity, and whether the company can meet the restored leverage covenant.
- Confirm the outcome and timing of PPP loan forgiveness and the amount, if any, ultimately recognized as a gain.
- Track sales, backlog conversion, inventory levels, receivables, and demand trends across the company’s major markets, particularly North American oil and gas and marine.
- Review cash generation, working capital, capital spending, and available liquidity alongside the company’s debt and lease obligations.
- Assess whether product-quality and warranty costs, foreign-exchange losses, and COVID-related disruption differ materially from management’s estimates.