Twin Disc, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, ended September 25, 2015; comparisons are to the quarter ended September 26, 2014 unless noted. Twin Disc manufactures and distributes marine and heavy-duty off-highway power-transmission equipment.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $37.4 million | $64.8 million |
| Gross profit / margin | $8.2 million / 21.9% | $22.4 million / 34.5% |
| Operating income (loss) | ($6.6 million) | $6.5 million |
| Net income (loss) attributable to Twin Disc | ($4.3 million) | $4.0 million |
| Diluted EPS | ($0.39) | $0.36 |
| Operating cash flow | ($2.4 million) | $0.4 million |
- Sales fell 42.3%; management said the decline was 35.4% excluding a $4.5 million unfavorable currency-translation impact. Gross margin contracted 12.6 percentage points.
- Management attributed lower gross profit primarily to reduced volume, less profitable product mix, foreign exchange, and lower factory absorption.
- Manufacturing segment sales declined 50.9%; distribution sales declined 15.9%. Weak oil-and-gas demand and softer Asian commercial-marine demand were key factors.
- Cash from investing activities was $3.9 million, including $3.5 million from a business sale and $1.9 million from a life-insurance receipt; capital expenditures were $1.4 million. Free cash flow, defined by the company as operating cash flow less fixed-asset purchases, was negative $3.8 million.
Balance sheet and liquidity
- At September 25, cash was $23.0 million; total debt was $14.3 million, implying net cash of approximately $8.8 million. Cash increased $0.1 million from June 30.
- Working capital was $97.5 million, down from $112.8 million at June 30; the current ratio was 2.9, versus 3.0. Inventory was $77.0 million, and six-month backlog was $37.5 million, down 41% from the prior-year quarter.
- The company reported $49.3 million of available borrowing capacity under its $60 million revolving facility and said near-term liquidity was sufficient.
- The company was in compliance with debt covenants at quarter-end. Reported funded debt to four-quarter EBITDA was 0.88; adjusted net worth was $167.3 million versus a $124.7 million minimum.
Material changes, outlook, and risks
- Management said sales weakness reflected the global decline in oil and natural-gas prices, reduced pressure-pumping demand in North America and Asia, soft commercial-marine demand in Asia, and continued weakness in Europe. North American commercial-marine and industrial demand was described as stable.
- The company sold southeastern U.S. distribution rights and related assets for approximately $4.1 million. It recognized a $0.5 million gain; $0.6 million of the proceeds was deferred and will be amortized into revenue through June 2016. The gain is subject to purchase-price adjustment.
- A North American restructuring announced in fiscal 2015 reduced headcount by 79. The company paid $2.1 million and recorded $0.1 million of additional expense in the quarter; $1.3 million remained accrued at September 25. A separate Belgian restructuring obligation was $0.5 million.
- Management said maintaining covenant compliance could be a significant challenge during fiscal 2016 as EBITDA and debt-ratio margins were expected to decline. It had begun preliminary discussions with lenders about potential covenant violations. The company cited market uncertainty and referred investors to its fiscal 2015 Form 10-K risk factors.
- Planned fiscal 2016 capital expenditures were $5–$10 million. Expected pension contributions were approximately $2.2 million, of which $0.9 million had been made by quarter-end. No specific revenue or earnings forecast was provided.
- Other disclosed exposures include foreign exchange, steel and aluminum prices, pension obligations, warranty-estimate uncertainty, and litigation whose ultimate outcome was not determinable; management did not expect litigation to have a material effect. The company maintained a full valuation allowance on deferred tax assets in a foreign jurisdiction with recent losses.
Important facts for investors to verify
- Whether demand in oil-and-gas markets and Asia’s commercial-marine market stabilizes, and whether backlog converts to shipments and cash.
- Whether the company can maintain lender covenant compliance through fiscal 2016; the filing cites four-quarter EBITDA of $16.172 million in one discussion but $16.197 million in its reconciliation, a discrepancy to clarify.
- The timing and potential purchase-price adjustments associated with the southeastern distribution-asset sale, including recognition of the deferred $0.6 million.
- Cash generation, inventory relative to backlog, and the planned capital-spending and pension-contribution requirements.