Twin Disc, Inc. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2021; fourth-quarter results are also noted. Unless otherwise stated, amounts are in U.S. dollars.
Business context and reporting period
Twin Disc designs, manufactures and sells marine and heavy-duty off-highway power transmission equipment, including marine transmissions and propulsion systems, land-based transmissions, clutches and power take-offs. Its customers serve marine, energy and natural resources, government and industrial markets. The business was affected by COVID-19 disruptions and weakness in oil and gas markets, although management reported improving demand as the global economy recovered during the second half of fiscal 2021.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $218.6 million | $246.8 million |
| Gross profit | $50.9 million; 23.3% margin | $55.7 million; 22.6% margin |
| Operating loss | $12.3 million | $40.3 million |
| Net loss | $29.5 million | $39.6 million |
| Net loss attributable to Twin Disc | $29.7 million; $2.24 per share | $39.8 million; $3.03 per share |
| Cash provided by operating activities | $6.5 million | $9.1 million |
| Capital expenditures | $4.5 million | $10.7 million |
| Long-term debt, including current maturities | $32.1 million | $42.6 million |
- Sales fell 11.4% year over year. Fourth-quarter sales were $66.2 million, up 11.5% from the prior-year quarter.
- Gross margin improved 70 basis points despite lower sales. Management cited a $2.4 million Employee Retention Credit benefit; lower volume and unfavorable product mix were estimated to reduce gross profit by $6.5 million and $3.7 million, respectively.
- FY2021 included $7.4 million of restructuring expenses and $8.2 million of income from forgiveness of the Paycheck Protection Program loan. FY2020 included $27.6 million of goodwill and other asset impairment charges.
- Income tax expense was $19.7 million despite a pretax loss of $9.8 million; the effective tax rate was negative 200%. A $24.4 million valuation allowance was recorded against domestic deferred tax assets.
- Cash at year-end was $12.3 million. The current ratio was 2.4, down from 2.6. Net working capital increased $6.2 million, including the reclassification of $9.5 million of assets held for sale; excluding that reclassification, working capital decreased $3.4 million.
- Available borrowings under the credit agreement were approximately $27.1 million at June 30, 2021. The filing also reports credit-agreement borrowing capacity of approximately $43.8 million; the revolving commitment was reduced to $42.5 million during the forbearance period.
- No common dividends were paid in FY2021 or FY2020.
Material changes versus the prior comparable period
- Management reported broad demand weakness through the first three quarters, followed by improving orders and a year-over-year sales increase in the fourth quarter. Six-month order backlog rose to $70.3 million from $66.6 million.
- Manufacturing-segment sales declined 15.8%; distribution-segment sales increased 4.6%. Marine and propulsion systems sales fell 16.6%, land-based transmissions fell 6.8%, and industrial products fell 11.0%.
- Foreign currency translation contributed a favorable $11.6 million to FY2021 sales compared with FY2020.
- Debt declined from $42.6 million to $32.1 million, including the removal of the forgiven $8.2 million PPP loan and debt repayments.
- Employees numbered 743 at year-end, compared with 806 a year earlier. The company announced a Belgian restructuring affecting 23 positions, with expected annual pretax savings of approximately $1.6 million.
Outlook, risks, contingencies and unusual items
- Management expected fiscal 2022 capital expenditures of approximately $10 million to $12 million and a minimum $0.7 million pension contribution. It expected improving demand and believed cash, credit facilities and operating cash flow would meet foreseeable needs; these expectations are forward-looking and not assured.
- The company breached a minimum EBITDA covenant for the three fiscal quarters ended December 25, 2020. Its lender agreed to forbear through the earlier of September 30, 2021 or a default. The company expected to comply after the forbearance period, with the 3.00-to-1.00 debt-to-EBITDA covenant applying at the December 31, 2021 measurement date. Failure to meet covenants or obtain further relief or alternative financing could materially affect the company.
- COVID-19 effects remained uncertain, including demand, production interruptions, supply-chain and shipping constraints, customer collections and potential asset impairment. Other principal risks include cyclical marine and energy markets, foreign exchange, commodity and tariff costs, supplier concentration, customer relationships and international operations.
- The SBA may audit the forgiven PPP loan for six years; adverse findings could require repayment. The company said it believed it had complied with program requirements.
- The company recorded a $4.3 million impairment on its corporate headquarters, classified three properties as held for sale and later signed an agreement to sell its Swiss propeller facility. Product-liability litigation was disclosed; management did not expect a material impact.
- Management and the auditor concluded that internal control over financial reporting was ineffective at June 30, 2021 because of a material weakness in review controls for complex, infrequent income-tax transactions. A tax valuation-allowance error led to an amended Form 8-K/A and increased the reported FY2021 net loss by $8.8 million, from $20.9 million to $29.7 million. Management described remediation steps and expected to complete remediation during FY2022.
Important facts for investors to verify
- Progress in remediating the material weakness and whether subsequent filings report further tax adjustments.
- Actual covenant compliance after the lender forbearance ends, including the December 31, 2021 test, and the availability and terms of credit.
- Whether recovering orders convert into sustained sales, margins and operating cash flow, particularly in North American manufacturing and oil-and-gas markets.
- Completion, proceeds and accounting effects of the planned property sales and Belgian restructuring savings.
- Any SBA audit outcome concerning PPP-loan forgiveness and any changes to the company’s deferred-tax-asset valuation allowance.