Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 25, 2022, with comparisons to March 26, 2021; year-to-date figures cover the first three fiscal quarters. Although the request metadata says “2021 Q3,” the filing is for fiscal 2022 Q3. Unless otherwise noted, amounts are in millions of dollars.
Business context and results
Twin Disc manufactures and distributes marine and heavy-duty off-highway power transmission equipment. The company reported improving demand across most markets, but supplier constraints, long lead times and electronic-component shortages limited shipments.
| Metric | Q3 FY22 | Q3 FY21 | First 3 quarters FY22 | First 3 quarters FY21 |
|---|---|---|---|---|
| Net sales | $59.3 | $57.6 | $166.9 | $152.4 |
| Gross profit | $17.7 | $14.0 | $44.6 | $32.5 |
| Gross margin | 29.8% | 24.2% | 26.7% | 21.4% |
| Operating income (loss) | $3.1 | $0.5 | $3.3 | ($7.2) |
| Net income attributable to Twin Disc | $2.2 | $0.1 | $0.3 | ($8.2) |
| Diluted EPS | $0.17 | $0.01 | $0.02 | ($0.62) |
Financial position and cash flow
- Cash: $12.8 at March 25, 2022, versus $12.3 at June 30, 2021. Much of the cash was held overseas.
- Operating cash flow: Cash used was $7.2 for the first three quarters, compared with $5.0 provided in the prior-year period. The company attributed the change mainly to a $12.9 net use from changes in operating assets and liabilities.
- Capital spending and free cash flow: Capital expenditures were $2.4 year to date. Management reported negative free cash flow of $9.6, excluding proceeds from the Swiss facility sale.
- Debt and liquidity: Total debt, including current maturities, was $34.1; net debt was $21.2. Revolving-credit availability was approximately $15.9. Net working capital was $116.4 and the current ratio was 2.4.
- Inventory and backlog: Inventory increased $16.1, or 14%, from fiscal year-end to $131.1, largely because goods awaited missing components. Six-month backlog was $108.9, versus $70.3 at June 30, 2021.
Changes versus comparable periods
- Q3 sales rose 2.9%; year-to-date sales rose 9.6%. Management estimated supply constraints reduced Q3 sales by approximately $7–$10.
- Q3 gross margin increased 5.6 percentage points. Management cited favorable product mix, pricing actions and higher volume. Year-to-date improvement also reflected cost reductions and government subsidies.
- Year-to-date operating results improved from a $7.2 operating loss to $3.3 of operating income; the current period included a $2.9 gain on the Swiss facility sale.
- Year-to-date sales grew in industrial products, land-based transmissions, and marine and propulsion systems. In Q3, industrial sales increased 45.0%, while marine and propulsion sales declined 1.7% year over year.
Outlook, risks and unusual items
- Credit agreement: Twin Disc remained under a lender forbearance arrangement through June 30, 2022 because it was not required to meet its minimum EBITDA covenant during the period. The company said it remained compliant with liquidity and other covenants and expected to comply with the credit agreement after forbearance. If defaults occur after the forbearance, the lender may accelerate amounts due and exercise remedies.
- Operating outlook and risks: Management cited supply-chain disruption, component shortages, supplier capacity constraints, inflation, project delays, currency movements and continuing uncertainty related to COVID-19. North American oil and gas demand had not shown meaningful improvement in new units, though aftermarket demand was strong.
- Spending plans: Fiscal 2022 capital expenditures were expected to be $4–$6 million. The company expected approximately $0.7 million in pension contributions for the year.
- Restructuring: The Belgian workforce reduction settlement was estimated at $3.2 million, with anticipated annual pre-tax savings of approximately $1.6 million when completed.
- Asset transactions: The Swiss facility sale generated net proceeds of $9.1 million and a $2.9 million gain. The company accepted an offer to sell its Racine headquarters for $3.25 million, with closing expected by fiscal Q1 2023 and a leaseback of up to 18 months. The Italian warehouse sale closed April 20, 2022; management expected an approximately $0.2 million gain in Q4.
- Tax: Year-to-date effective tax rate was 76.5%, affected by the full U.S. valuation allowance and the absence of tax benefits on current domestic losses. Management said the rate comparison was not directly reconcilable because of differing interim tax methodologies.
- Other matters: Litigation outcomes were not presently determinable, but management did not expect the cases to materially affect results, financial position or cash flows. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the company meets credit-agreement requirements after the June 30, 2022 forbearance deadline, and the status of any subsequent lender amendments.
- Whether supply constraints ease, backlog converts to shipments, and inventory levels normalize without impairments or further working-capital strain.
- Whether reported margin improvement and profitability persist after the Swiss sale gain, government subsidies and favorable mix effects.
- Actual capital expenditures, cash generation and debt levels relative to management’s forecasts and available revolving capacity.
- Final proceeds, leaseback terms and accounting gains or costs from the Racine headquarters and Italian warehouse transactions.