Twin Disc, Inc. — Form 10-Q Summary
Business context and reporting period. Twin Disc manufactures and distributes marine and heavy-duty off-highway power-transmission equipment, serving marine, industrial, energy and other markets. This filing covers the quarter and six months ended December 31, 2021 (fiscal 2022 Q2); comparable periods ended December 25, 2020. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Fiscal Q2 2022 | Fiscal Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $59.9 | $48.6 | $107.7 | $94.7 |
| Gross profit / margin | $13.5 / 22.5% | $8.9 / 18.3% | $26.9 / 25.0% | $18.6 / 19.6% |
| Operating income (loss) | $(3.0) | $(4.6) | $0.2 | $(7.7) |
| Net income (loss) attributable to Twin Disc | $(3.8) | $(4.3) | $(1.9) | $(8.3) |
| Basic and diluted loss per share | $(0.29) | $(0.33) | $(0.14) | $(0.63) |
- Quarterly sales rose 23.3%; first-half sales rose 13.6%. Management cited recovery across most served markets, with North American oil and gas demand for new units still depressed.
- Quarterly gross margin improved on higher volume and favorable mix, especially aftermarket demand; inflationary supplier costs partly offset those benefits. First-half margin also benefited from government subsidies.
- Quarterly operating loss narrowed, while first-half operating results turned positive. The first-half comparison includes a $2.939 gain on the sale of the Swiss facility, recorded in other operating income.
- Six-month cash from operations was $(1.0), versus $2.8 generated in the prior-year period. Capital spending was $1.8, producing negative free cash flow of approximately $2.8, as defined by the company, excluding Swiss facility sale proceeds. Investing cash flow included $9.152 of fixed-asset sale proceeds.
- At December 31, cash was $11.1, total debt was $25.3 and net debt was approximately $14.1. Current assets were $186.5 and current liabilities $80.5; management reported a 2.3 current ratio and $105.9 of net working capital.
- Available borrowings under the credit agreement were approximately $24.0. Inventory was $123.9, up $9.0 from June 30, 2021, partly reflecting components awaiting completion or customer shipment. Six-month order backlog was $98.9, compared with $70.3 at June 30, 2021.
Material changes, outlook and risks
- Demand and supply chain: Sales grew in industrial, marine and propulsion, and off-highway products. Management said supplier capacity constraints, extended lead times and shipping-container shortages continued to limit shipments and delay projects. Currency translation also reduced sales compared with the prior-year periods.
- Credit agreement: The company remained under lender forbearance for noncompliance with minimum EBITDA covenants; the extended period runs through February 28, 2022, unless an earlier default occurs. The minimum EBITDA covenant was waived during the quarter. After forbearance, the agreement requires a maximum total funded debt-to-EBITDA ratio of 3.00 to 1.00. Management expects to comply after forbearance and said the company remained in compliance with liquidity and other covenants. The lender retains remedies, including acceleration, in the event of default.
- Restructuring and asset sale: The Belgian workforce-reduction settlement brought the estimated program cost to $3.2, including $1.2 of fiscal 2022 first-half charges. Management anticipates annual pre-tax savings of approximately $1.6 upon completion. The Swiss facility sale generated $9.138 in net proceeds and a $2.939 gain; proceeds were applied to debt under the lender agreement.
- Spending plans: Management expects fiscal 2022 capital expenditures of $7–$10 and pension contributions of approximately $0.7. It said available cash and credit capacity should meet foreseeable operating and investing needs, while noting that overseas cash may have repatriation restrictions and tax implications.
- Taxes and controls: Continued domestic losses and uncertain future domestic earnings resulted in a full U.S. valuation allowance, limiting recognition of tax benefits on domestic losses. The company disclosed a fiscal 2021 material weakness in tax-related internal controls following an $8.8 non-cash adjustment that increased fiscal 2021 net loss. Remediation steps were underway; management reported disclosure controls effective for this quarter.
- Other uncertainties: Management said the full financial and operating effects of COVID-19 remained uncertain. Warranty estimates depend on claims and repair costs; litigation outcomes were not determinable, though management did not expect material effects. Unrecognized tax benefits, including interest and penalties, were approximately $0.8.
Most important facts for investors to verify
- Whether Twin Disc meets the 3.00-to-1.00 funded-debt-to-EBITDA covenant after the February 28, 2022 forbearance deadline, and whether lender terms or availability change.
- Whether backlog converts to shipments and cash as supply constraints ease, and whether inventory awaiting components or customer acceptance declines.
- Whether operating cash flow improves after the first-half cash use and the company can fund capital spending without relying on asset sales or additional borrowing.
- Whether Belgian restructuring savings are achieved and whether costs remain within the revised estimate.
- Progress in remediating the tax-control material weakness, and any changes to domestic valuation allowances, tax estimates or audit exposures.