Twin Disc, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, ended September 27, 2019. Financial amounts below are in millions of dollars unless noted. The comparable quarter ended September 28, 2018.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $59.3 | $74.7 |
| Gross profit / margin | $9.6 / 16.3% | $24.0 / 32.1% |
| Operating income (loss) | ($6.8) | $4.8 |
| Net income (loss) attributable to Twin Disc | ($6.3) | $2.9 |
| Diluted EPS | ($0.48) | $0.24 |
| Operating cash flow | $1.5 | $0.8 |
Sales fell 20.6% year over year. The filing attributes the decline principally to weaker North American oil-and-gas demand, which reduced sales by approximately $14.8 million; currency translation reduced sales by a further $1.5 million. North America’s share of sales fell to 37% from 53%, while Europe grew 23.2% to approximately $21.2 million. Industrial-product sales rose 5.9%; marine and propulsion sales declined 3.4%.
Gross margin fell sharply amid a $3.9 million non-recurring warranty accrual, unfavorable product mix (approximately $5.5 million) and lower volume (approximately $4.9 million). Management said gross margin excluding the warranty accrual would have been 22.8%. Manufacturing-segment sales declined 20.8%; distribution-segment sales declined 2.1%.
Cash, liquidity and debt
- Cash was $16.5 million at quarter-end, up from $12.4 million at June 30, 2019. Net working capital was $126.3 million, down $3.0 million; the current ratio was 2.8.
- Capital expenditures were $4.0 million. Free cash flow, defined by the company as operating cash flow less fixed-asset purchases, was negative $2.6 million.
- Total debt was $49.6 million, up $7.1 million from fiscal year-end; cash-netted debt was $33.0 million. Revolver availability was approximately $14.8 million.
- The company reported $96.7 million of orders expected to ship over the next six months, down from $99.6 million at June 30, 2019 and $146.3 million a year earlier. Inventory was $127.3 million.
Outlook, risks and notable items
- No specific sales or earnings guidance was provided. Management expects fiscal 2020 capital expenditures of $12–$14 million and pension contributions of approximately $1.9 million. It said available cash and credit capacity should fund foreseeable operating and investing needs.
- The $3.9 million warranty charge covered estimated costs to address a product-performance issue involving an oil-and-gas transmission model at certain installations. Management described the issue as isolated to one customer and said it had been addressed. The warranty reserve was $7.1 million at quarter-end, versus $4.7 million a year earlier.
- The credit agreement caps total funded debt to EBITDA at 3.00 to 1.00; the reported ratio was 2.38 to 1.00. Management warned forecasts indicate some risk of temporarily exceeding the covenant in coming quarters and said it expects to reach a suitable resolution with the lender. A default could allow the lender to accelerate debt.
- The company said it continues to manage costs amid market challenges. It recorded $0.1 million of restructuring charges in the quarter.
- Management could not reliably forecast full-year ordinary income for interim tax-rate purposes. Litigation outcomes were not determinable, but management did not expect the litigation to materially affect results, financial position or cash flows. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether North American oil-and-gas demand, lower backlog and elevated inventory lead to further revenue or cash-flow pressure.
- Whether the warranty accrual adequately covers the product issue and whether additional claims arise.
- Actual covenant performance in coming quarters and any lender amendments or waivers.
- Progress against the $12–$14 million capital-spending plan and management’s liquidity assumptions.
- The quarter’s share-purchase table reports 72,697 shares delivered for tax withholding in one period, while total issuer purchases are shown as zero; the filing says no open-market repurchases were made.