Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2020, ended December 27, 2019. Comparisons are with the quarter and six months ended December 28, 2018. Amounts are in millions, except per-share data.
Business context and results
Twin Disc manufactures and distributes marine and heavy-duty off-highway power-transmission equipment, serving marine, energy, industrial, government and other markets. Its reportable segments are manufacturing and distribution.
| Metric | Q2 FY2020 | Q2 FY2019 | First half FY2020 | First half FY2019 |
|---|---|---|---|---|
| Net sales | $59.5 | $78.1 | $118.8 | $152.8 |
| Gross profit | $15.7 | $26.1 | $25.3 | $50.1 |
| Gross margin | 26.4% | 33.4% | 21.3% | 32.8% |
| Operating income (loss) | $(5.0) | $6.7 | $(11.8) | $11.6 |
| Net income (loss) attributable to Twin Disc | $(6.5) | $4.1 | $(12.8) | $6.9 |
| Diluted EPS | $(0.49) | $0.31 | $(0.98) | $0.56 |
| Operating cash flow | Not presented separately for the quarter | $0.1 | $(3.8) |
Financial position and liquidity
- At December 27, cash was $14.8, current assets $195.9 and current liabilities $76.0; working capital was $119.9 and the current ratio was 2.6. Cash increased $2.5 from June 30, 2019, and was principally held in overseas operations.
- Total debt was $52.5, up $10.0 from June 30; cash less total debt resulted in net debt of $37.7, versus $30.1 at fiscal year-end. Long-term debt included $33.2 of revolver borrowings and a $19.0 term loan. The company reported about $8.5 of available borrowings under its credit agreement.
- First-half capital expenditures were $6.9. Operating cash flow less fixed-asset purchases was negative $6.7. Cash ended the period at $14.8, versus $18.5 a year earlier.
- Inventory rose $8.8 to $134.7 from June 30, while receivables fell $10.7 to $33.3. Six-month shipment backlog was $94.7, down from $99.6 at June 30 and $137.8 a year earlier; inventory equaled 142% of backlog, compared with 126% at June 30.
- Total equity declined $13.3 to $169.5, primarily reflecting the first-half loss and foreign-currency translation.
Material changes and management commentary
- Quarterly sales fell 23.8%; first-half sales fell 22.2%. Management attributed the largest decline to weak North American oil-and-gas demand: approximately $16.5 lower in the quarter and $31.3 lower in the first half. North American sales fell 42.3% in Q2 and 43.5% in the first half.
- For the first half, industrial sales declined 12.8% and marine and propulsion sales declined 3.3%. European sales grew, but Asia-Pacific sales declined; weaker demand, shipment timing and currency translation also affected results.
- Management cited unfavorable product mix and lower production volume as the main drivers of Q2 margin compression. First-half gross margin also included a $3.9 warranty charge for an isolated oil-and-gas transmission performance issue; excluding it, management stated first-half gross margin would have been 24.6%. The filing reports targeted cost reductions and improved gross-profit trends over recent quarters.
- ME&A expense fell year over year in dollars, but rose as a share of sales to 27.6% for both Q2 and the first half, as sales contracted. Restructuring expense was $4.2 in Q2 and $4.4 in the first half, including $3.2 to terminate a marine propulsion program: $2.2 of noncash write-offs and $1.0 of supplier-commitment cash payments.
- The first-half effective tax rate was 4.3%, versus 25.1% a year earlier. Management said the rate reflected domestic losses, foreign GILTI inclusions and other tax items. The quarter’s tax expense was $1.0 despite a pretax loss.
Outlook, risks and unusual items
- No specific sales or earnings guidance is provided. Management expects fiscal 2020 capital spending of approximately $11–$13 and pension contributions of approximately $1.9; $0.8 of pension contributions had been made by December 27.
- Management said cash, the BMO credit facility and potential debt-market access should meet foreseeable capital needs, and stated near-term liquidity was sufficient. This assessment should be considered alongside negative first-half free cash flow, reduced backlog and limited reported available revolver borrowings.
- The company exceeded the prior 3.00-to-1.00 maximum funded-debt-to-EBITDA covenant at December 27. A January 28, 2020 amendment revised permitted leverage thresholds: 4.00-to-1.00 for the December quarter, 5.00 for the March quarter, 4.00 for June, 3.50 for September, and 3.00 for quarters ending on or after December 25, 2020. The amendment also permits up to $3.9 of specified product-issue costs to be added back in EBITDA and increases certain interest margins.
- Warranty reserve was $5.8 at period-end; the first-half warranty expense included the nonrecurring $3.9 performance-issue charge. Management cautions that actual warranty costs may differ materially from estimates.
- The company disclosed ongoing litigation, product-liability or related claims, and tax audits; management did not expect litigation outcomes to materially affect results, financial position or cash flows. Unrecognized tax benefits were approximately $1.2, and the company noted they could change with ongoing audits. No material off-balance-sheet arrangements or material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether sales and order backlog stabilize, particularly in North American energy markets, and whether inventory can be reduced relative to backlog.
- Whether margin improvement persists after the warranty charge, unfavorable product mix, lower volumes and restructuring costs.
- Compliance with amended leverage covenants, actual borrowing availability, borrowing costs and progress in reducing net debt.
- Final costs and cash impact of the terminated propulsion program and the isolated product-performance issue, including warranty claims.
- Delivery of stated fiscal 2020 capital-spending and pension-contribution plans, and actual operating cash flow and liquidity.