Twin Disc, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2023, the third quarter of fiscal 2023; nine-month results cover the first three fiscal quarters. The filing describes a manufacturer and distributor of marine and heavy-duty off-highway power transmission equipment, with manufacturing and distribution reportable segments. Unless otherwise noted, amounts below are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended March 31, 2023 | First nine months of FY2023 |
|---|---|---|
| Net sales | $73.8 million, up 24.4% year over year | $193.0 million, up 15.6% |
| Gross profit / margin | $19.3 million / 26.1%; prior year 29.8% | $49.6 million / 25.7%; prior year 26.7% |
| Operating income / margin | $4.6 million / 6.2%; prior year $3.1 million / 5.2% | $7.8 million / 4.1%; prior year $3.3 million / 2.0% |
| Net income attributable to Twin Disc | $2.7 million; diluted EPS $0.20 | $1.8 million; diluted EPS $0.13 |
| Operating cash flow | Quarterly figure not provided in the supplied filing text | $6.9 million, versus cash used of $7.2 million |
- Cash was $14.0 million at March 31, 2023, versus $12.5 million at June 30, 2022. Net working capital was $127.3 million, up $3.9 million.
- Inventories were $136.2 million, up $9.0 million from fiscal year-end. Six-month backlog was approximately $127.7 million, versus $101.2 million at June 30, 2022.
- Total debt was $31.3 million, down $5.3 million from June 30, 2022; debt net of cash was $17.3 million. Revolver availability was approximately $20.8 million under a $40 million commitment.
- Nine-month capital expenditures were $6.8 million. Operating cash flow less capital expenditures was approximately $0.1 million, which management characterized as slightly positive free cash flow.
Material changes versus comparable periods
- Quarterly sales growth reflected stronger marine and propulsion shipments (+32.2%) and off-highway transmission shipments (+21.7%); industrial product sales declined 13.7%. North America and Asia Pacific contributed substantially to growth.
- Quarterly gross profit rose 8.9%, slower than sales, and gross margin fell 3.7 percentage points. Management attributed the decline primarily to $2.5 million of inflationary cost pressure and a less favorable product mix.
- Nine-month operating income increased year over year, but results included a $4.2 million gain on the sale of a Belgian facility. The comparable prior-year period included a $2.9 million gain on a Swiss property sale. These items affect comparisons of underlying operating performance.
- Quarterly income attributable to Twin Disc increased to $2.7 million from $2.2 million. Nine-month attributable income was $1.8 million, versus $0.3 million in the prior-year period.
- Foreign currency translation reduced sales by approximately $2.0 million in the quarter and $11.9 million in the first nine months, principally due to a weaker euro; translation effects also contributed to expense and equity fluctuations.
Outlook, commentary, risks and unusual items
- Management reported improving demand across most markets and some easing of supply-chain challenges in the third quarter, but continued to cite supplier capacity constraints, long lead times and electronic-component shortages as impediments to shipments.
- Management expects fiscal 2023 capital expenditures of $9 million to $11 million, focused on manufacturing modernization, efficiency, quality and cost reduction. The filing provides no specific revenue or earnings guidance.
- Inventory growth included goods awaiting missing components or customer shipment acceptance, as well as a temporary delay in certain China-bound shipments. The company said inventory relative to six-month backlog declined to 107% from 126% at June 30, 2022.
- The credit agreement includes a maximum total funded debt-to-EBITDA ratio of 3.50:1.00, a minimum fixed-charge coverage ratio of 1.10:1.00 and a tangible-net-worth requirement. The company reported compliance with its liquidity and other covenants. The agreement restricts cash dividends to no more than $3 million in a fiscal year.
- The company reported a full valuation allowance against U.S. deferred tax assets because of historical domestic losses and uncertain future domestic earnings. Its nine-month effective tax rate was reported as 54.4% in MD&A; foreign earnings mix contributed to the rate.
- Warranty reserves totaled $4.0 million at March 31, 2023. Management considers the reserve adequate but notes actual product failure rates and repair costs could differ from estimates. Litigation outcomes were described as not presently determinable; management does not expect material effects. No material changes to previously disclosed risk factors were reported.
- Cash was concentrated in overseas operations, and management noted that repatriation may involve restrictions and tax implications. The company stated that cash, credit availability and expected operating cash flows should be adequate for foreseeable requirements.
Most important facts for investors to verify
- Whether the substantial backlog converts to shipments and cash, particularly given component constraints, elevated inventory and customer acceptance delays.
- Whether gross margins recover as inflationary costs and product mix change; compare operating results excluding property-sale gains and other unusual items.
- Revolver availability, covenant headroom, debt reduction and the accessibility of overseas cash, including any repatriation costs or restrictions.
- Progress against the $9 million to $11 million capital-spending plan and the effect of investment on capacity, efficiency and cash generation.
- Developments in U.S. tax valuation allowances, warranty claims and pension obligations, and any material changes in the risks or contingencies disclosed.