Twin Disc, Incorporated — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. Twin Disc designs, manufactures and sells marine and heavy-duty off-highway power transmission equipment.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $168.2 million | $166.3 million |
| Gross profit / margin | $48.2 million / 28.7% | $40.6 million / 24.4% |
| Operating loss | $9.0 million | $24.6 million |
| Net loss attributable to Twin Disc | $6.3 million; $0.56 per share | $13.1 million; $1.17 per share |
| Cash from operating activities | $3.2 million | $3.4 million |
| Capital expenditures | $3.1 million | $4.2 million |
FY2017 fourth-quarter net sales were $53.6 million, gross profit was $16.8 million, and net earnings attributable to Twin Disc were $1.2 million ($0.10 per share). The full-year income tax benefit was $3.4 million; the reported effective tax rate was 35.8%.
Balance sheet and liquidity
- At June 30, 2017, cash was $16.4 million, total assets $210.9 million, and total equity $123.6 million.
- Debt was $6.3 million, down from $8.5 million. The BMO revolving facility had about $28.6 million of borrowing capacity and $21.4 million available; the reported rate was 2.80%.
- Current ratio fell to 2.9 from 3.5; management said near-term liquidity remained sufficient. Cash was primarily held overseas and may involve restrictions and tax consequences on repatriation.
- Net working capital declined $4.0 million. The company paid no common dividend in FY2017, compared with $0.18 per share in FY2016.
Changes versus prior year
- Sales rose 1.1%, reversing only slightly after FY2016 sales fell 37.4% from FY2015. North American oil-and-gas demand strengthened in the second half; marine sales remained weak in Asia and Europe.
- Gross margin improved 430 basis points, reflecting volume and product mix benefits and cost reductions. Marketing, engineering and administrative expenses fell 7.6% to $52.8 million.
- Impairment charges declined to $2.6 million from $7.6 million. The FY2017 charge fully impaired the remaining U.S. Industrial goodwill; $2.6 million of goodwill remained in European Industrial.
- The company recorded $1.8 million in restructuring charges and continued workforce reductions. It formally began exiting its India manufacturing operations.
Outlook, risks and contingencies
- No specific FY2018 sales or earnings guidance is provided. Management expected FY2018 capital expenditures of $7–9 million and pension contributions of approximately $2.3 million, and said cash, operating cash generation and credit facilities should fund foreseeable needs.
- Six-month order backlog was $46.4 million, about 30% above the prior-year $35.7 million, largely reflecting North American oil-and-gas demand. The filing cautions that orders may be canceled or rescheduled and backlog is not necessarily a reliable indicator of shipments.
- Key exposures include cyclical marine, oil-and-gas and industrial markets; foreign currency movements; commodity costs and supplier availability; customer concentration; international operations; and disruption at the Racine manufacturing facilities. Customers outside the U.S. represented about 51% of sales; the top ten customers represented about 48%, and one distributor accounted for 11%.
- Goodwill impairment, deferred-tax-asset realization, pension assumptions, product quality and warranty costs are significant judgment areas. Further industry or business deterioration could prompt additional impairment charges.
- The company disclosed product-liability and related litigation with outcomes not presently determinable; management did not expect a material impact. Unrecognized tax benefits were approximately $0.8 million, with an IRS audit of FY2015 expected to close within the next year.
- Management and PwC reported effective internal control over financial reporting as of June 30, 2017. The financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether oil-and-gas demand and the higher backlog convert into sustained sales, cash generation and improved operating profitability.
- Whether margin gains and cost reductions persist while marine and European markets remain weak.
- Available borrowing capacity, facility terms and covenant compliance, including the effect of working-capital needs and overseas cash access.
- Potential future goodwill impairments, deferred-tax valuation allowances, pension funding needs and outcomes of tax examinations or litigation.
- Effects of the India plant exit, restructuring costs, and planned FY2018 capital spending on operating performance and liquidity.