Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 26, 2021 (fiscal 2021 third quarter), with year-to-date results for the three quarters ended that date. The request metadata says “2020 Q3,” but the filing covers fiscal 2021 Q3. Unless noted otherwise, dollar amounts below are in millions.
Business context
Twin Disc manufactures and sells marine and heavy-duty off-highway power transmission equipment, including marine transmissions, propulsion systems, industrial clutches and controls. It reports manufacturing and distribution segments and serves marine, oil and gas, industrial, government and other markets.
Financial performance
| Metric | Fiscal 2021 Q3 | Prior-year Q3 | First three quarters FY2021 | Prior-year comparable |
|---|---|---|---|---|
| Net sales | $57.6 | $68.6 | $152.4 | $187.5 |
| Gross profit / margin | $14.0 / 24.2% | $16.5 / 24.1% | $32.5 / 21.4% | $41.9 / 22.3% |
| Operating income (loss) | $0.5 | $(26.9) | $(7.2) | $(38.7) |
| Net income (loss) attributable to Twin Disc | $0.1 | $(25.2) | $(8.2) | $(38.1) |
| EPS, basic and diluted | $0.01 | $(1.92) | $(0.62) | $(2.89) |
- Quarterly sales fell 16.0%; year-to-date sales fell 18.7%. Management cited weaker demand across oil and gas, industrial and marine markets, with COVID-19-related disruption. Quarter sales increased $9.2 million sequentially, or 19.0%.
- Quarter gross margin edged up year over year, aided by a $1.2 million domestic Employee Retention Credit (ERC), but offset by lower volume and unfavorable product mix. Year-to-date gross margin declined, reflecting lower volume and mix, partly offset by COVID-related relief benefits and a prior-year product warranty charge.
- Prior-year quarterly and year-to-date results included a $27.6 million goodwill and intangible impairment charge. The prior-year nine-month period also included a $6.1 million charge for a specific product performance issue.
- Manufacturing segment sales were $52.1 million in Q3, down 11.4%; distribution sales were $26.2 million before intersegment eliminations, down 7.6%. Year-to-date distribution sales rose 1.2%, while manufacturing sales declined 22.4%.
Cash flow, balance sheet and liquidity
- For the first three quarters, operating cash flow was $5.0 million and capital expenditures were $3.9 million, resulting in reported free cash flow of $1.2 million. Cash rose to $11.6 million from $10.7 million at June 30, 2020.
- Total debt was $41.2 million, down from $42.6 million at fiscal year-end; debt net of cash was $29.6 million versus $31.9 million. Debt included an $8.2 million PPP loan. The company reported $26.9 million of available revolver borrowings.
- Net working capital was $104.0 million, down $3.3 million from June 30, 2020; the current ratio was 2.5 versus 2.6. Inventories were $116.7 million, down 3.2% from fiscal year-end.
- Six-month order backlog was approximately $71.4 million, versus $66.6 million at June 30, 2020 and $87.4 million a year earlier. Receivables were $31.3 million; receivables as a percentage of sales increased to 54.3% from 45.9% in the prior-year quarter.
Outlook, risks and unusual items
- Management expects fiscal 2021 capital expenditures of $5 million to $7 million and pension contributions of approximately $2.3 million. It expects available cash and credit capacity to fund foreseeable requirements, while noting plans may change with market conditions.
- The company breached its minimum EBITDA covenant for the three quarters ended December 25, 2020. Under a January 2021 forbearance agreement, the lender agreed not to exercise remedies for that breach through the earlier of September 30, 2021 or a new default. During forbearance, the revolving commitment was reduced to $42.5 million. The company said it remained compliant with liquidity and other covenants and expected to comply after forbearance; a 3.00-to-1.00 total funded debt-to-EBITDA covenant applies thereafter.
- The $8.2 million PPP loan remained recorded as debt. The company applied for full forgiveness; its bank approved and forwarded the application to the SBA, but forgiveness was not assured at the filing date.
- Management cited continuing uncertainty from COVID-19 and volatility in its global markets. Currency movements affected results, including favorable translation effects on sales and quarter-specific translation gains on euro-denominated liabilities. Year-to-date other expense included translation losses on those liabilities.
- Warranty reserves involve estimates that could differ from actual claims. The company recorded a nonrecurring warranty charge of $0.5 million year to date, compared with $6.1 million in the prior-year period. Management said pending litigation was not expected to materially affect results, financial position or cash flows.
Important facts for investors to verify
- Whether the SBA ultimately forgives the PPP loan and when the company can derecognize the debt.
- Performance against lender requirements during and after forbearance, including the company’s ability to meet the 3.00-to-1.00 leverage covenant.
- Whether sequential sales growth and backlog translate into sustained revenue and cash flow improvement, given backlog remained below the prior-year level.
- Receivables collection trends, inventory levels and the sustainability of reported free cash flow.
- The extent to which reported margins depend on temporary relief benefits, product mix and recovery in marine, industrial and oil and gas markets.