Twin Disc, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the third quarter and first nine months of fiscal 2014, ended March 28, 2014; comparisons are with the corresponding fiscal 2013 periods. Twin Disc manufactures and distributes marine and heavy-duty off-highway power-transmission equipment. The report was signed June 20, 2014, after a late filing.
Financial performance and condition
| Metric | Quarter ended Mar. 28, 2014 | Quarter ended Mar. 29, 2013 | Nine months ended Mar. 28, 2014 | Nine months ended Mar. 29, 2013 |
|---|---|---|---|---|
| Net sales | $60.7m | $68.2m | $190.3m | $209.4m |
| Gross profit / margin | $16.5m / 27.2% | $17.7m / 25.9% | $55.7m / 29.3% | $59.4m / 28.4% |
| Operating income (loss) | $(0.3)m | $0.3m | $5.1m | $8.6m |
| Net income (loss) attributable to Twin Disc | $(0.5)m | $(0.8)m | $1.3m | $3.8m |
| Basic and diluted EPS | $(0.04) | $(0.07) | $0.12 | $0.34 |
Quarterly sales fell 11.0%; nine-month sales declined 9.1%. Gross margin improved on product mix, but lower volume weighed on gross profit and operating results. ME&A expense fell year over year in dollars but rose as a percentage of sales. Nine-month results included a $1.1m Belgian workforce-restructuring charge.
For the first nine months, operating cash flow was $17.8m versus $10.8m a year earlier; capital expenditures were $5.2m and reported free cash flow was $12.6m. Cash was $26.4m, total debt $25.0m, and net cash $1.3m at March 28. Net working capital was $127.4m. Total equity was $146.4m. Six-month order backlog was $57.6m, down from $66.8m at June 30, 2013.
Changes, outlook, and risks
- Management attributed weaker sales mainly to softer North American and European demand, especially in pressure pumping, commercial marine, and mega-yacht markets; severe winter weather also delayed some shipments. Asian demand remained comparatively strong, and North American pressure-pumping demand began improving late in the quarter.
- The nine-month effective tax rate was 66.6%, compared with 46.6% a year earlier, primarily reflecting a valuation allowance and earnings mix. Management cited a 33.3% adjusted rate excluding losses in a foreign jurisdiction for which tax benefits were not recognized.
- Management expected to invest up to $10m in fiscal 2014 capital assets, contribute approximately $2.6m to pension plans (of which $1.9m had been contributed), and generate sufficient operating cash for operating and investing needs. It expected to remain within debt covenants in fiscal 2014, while noting market uncertainty.
- Debt covenants were met at quarter-end: four-quarter EBITDA was $17.7m and funded debt/EBITDA was 1.42. The late filing delayed required lender reporting; lenders consented to an extension, and the company delivered financial statements and compliance certificates on June 20, 2014.
- The company disclosed an $82,000 accounting irregularity at its Belgian subsidiary involving artificially inflated labor hours included in inventory; the amount was recorded in cost of goods sold. The Audit Committee investigation found no other adjustments needed, and the company said it was considering further training and control improvements. Separate out-of-period corrections of prior-year errors increased fiscal 2014 nine-month pretax earnings by $437,000 and Twin Disc net earnings by $69,000; management said these were not material.
- Other notable risks include foreign-exchange exposure, depressed Canadian oil and gas activity, uncertain warranty estimates, pension obligations, and tax audits and unrecognized tax benefits of approximately $1.9m. Management considered pending litigation not likely to have a material impact.
Important facts for investors to verify
- Whether the reported recovery in North American pressure-pumping demand continued and whether the $57.6m backlog converted to shipments.
- Progress in restoring sales and operating profitability amid lower North American and European demand, and the effect of product mix and restructuring actions.
- Whether the Belgian accounting issue prompted additional control changes or further findings beyond the disclosed $82,000 adjustment.
- Ongoing covenant compliance, liquidity and debt repayment, particularly given the late filing and upcoming debt obligations.
- Tax valuation allowances, foreign tax positions, and the potential effect of tax audits or recognition of unrecognized tax benefits.