Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 29, 2013, the company’s fiscal third quarter, with nine-month results compared with the periods ended March 30, 2012. The request metadata labels the period “2012 Q3,” but the filing covers fiscal 2013 Q3.
Business context and financial performance
Twin Disc manufactures and sells marine and heavy-duty off-highway power-transmission equipment. Its reportable segments are manufacturing and distribution.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $68.2 million | $95.5 million | $209.4 million | $259.8 million |
| Gross profit / margin | $17.7 million / 25.9% | $33.1 million / 34.6% | $59.4 million / 28.4% | $93.4 million / 36.0% |
| Operating income / margin | $0.3 million / 0.4% | $15.3 million / 16.0% | $8.6 million / 4.1% | $39.6 million / 15.3% |
| Net earnings attributable to Twin Disc | $(0.8) million | $10.0 million | $3.8 million | $25.5 million |
| EPS, diluted | $(0.07) | $0.86 | $0.34 | $2.20 |
Third-quarter sales declined 28.5% year over year; nine-month sales fell 19.4%. Lower North American oil-and-gas pressure-pumping demand was the primary driver. Commercial marine demand partly offset that weakness; mega-yacht markets remained depressed. Lower volumes, unfavorable product mix in oil-and-gas transmissions, and weaker manufacturing efficiency and overhead absorption weighed on gross margins. Nine-month operating cash flow was $10.8 million, compared with cash used of $3.8 million in the prior-year period; capital expenditures were $5.1 million.
Liquidity, debt, and balance sheet
At March 29, 2013, cash was $17.2 million, total debt was $34.7 million, and net working capital was $132.8 million. Cash increased $1.5 million from June 30, 2012. Inventory rose $9.8 million to $113.0 million, while receivables declined $19.2 million to $44.2 million. Six-month order backlog was $64.9 million, down from $98.7 million at June 30, 2012 and $131.4 million a year earlier; inventory equaled 174% of six-month backlog.
The company reported $19.8 million available under its $40 million revolver and an additional $15 million under a Wells Fargo facility, which had no borrowings at quarter-end. It was in compliance with debt covenants, including a 1.38 funded-debt-to-four-quarter-EBITDA ratio against a maximum of 3.0. Management expected covenant compliance in fiscal 2013 and 2014, but said covenant headroom was expected to continue decreasing. Total equity was $139.8 million.
Outlook, risks, and unusual items
- Management cited continued softness in North American oil-and-gas markets and global mega-yacht markets, with order backlog substantially lower. It expected to generate sufficient operating cash for operating and investing needs.
- Fiscal 2013 capital spending was expected to be up to $10 million, subject to market conditions and possible timing shifts. Expected pension contributions were approximately $4.2 million for the year; $3.6 million had been contributed by quarter-end.
- Q3 tax expense included an approximately $0.7 million provision-to-return adjustment reversing a previously booked foreign-tax-credit carryforward benefit after completion of a federal tax audit. The nine-month effective tax rate was 46.6%, versus 34.4% a year earlier.
- The company revised prior-period financial information for tax-related errors and other immaterial out-of-period tax adjustments. It said the errors were not material to the affected prior periods individually or in aggregate, but the cumulative correction would have been material if recorded entirely in fiscal 2013 Q2.
- Performance-based stock awards were not being accrued, and previously recognized expense was reversed, due to the low probability of achieving threshold performance. Stock-price-linked compensation nevertheless increased Q3 expense.
- Management believed pending litigation would not materially affect results, financial position, or cash flows. Product-liability claims were described as insured or not material. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether pressure-pumping demand and the sharp backlog decline lead to further sales, margin, or covenant pressure.
- How elevated inventory, especially oil-and-gas transmission inventory, converts to sales and cash; monitor the inventory-to-backlog relationship.
- Actual covenant headroom and borrowing availability as EBITDA and debt change.
- Potential tax effects from ongoing federal, state, and foreign audits, uncertain tax positions, and the prior-period revisions.
- Capital spending, pension contributions, and the realization of management’s operating-cash-flow expectations.