Twin Disc, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 30, 2018, and first three quarters of fiscal 2018. The filing period differs from the request metadata’s “2017 Q3”; this is fiscal 2018 Q3.
Business and financial performance
Twin Disc manufactures and distributes marine and heavy-duty off-highway power transmission equipment, serving marine, oil and gas, industrial, government and related markets. Amounts below are in millions of dollars except per-share data.
| Metric | Q3 FY2018 | Q3 FY2017 | First 3 quarters FY2018 | First 3 quarters FY2017 |
|---|---|---|---|---|
| Net sales | $65.3 | $45.1 | $167.0 | $114.6 |
| Gross profit / margin | $20.7 / 31.7% | $13.3 / 29.5% | $52.7 / 31.6% | $31.4 / 27.4% |
| Operating income (loss) | $5.5 | $(3.4) | $6.6 | $(11.4) |
| Net income (loss) attributable to Twin Disc | $4.3 | $(1.8) | $3.6 | $(7.5) |
| Diluted EPS | $0.37 | $(0.16) | $0.31 | $(0.66) |
- Q3 sales rose 44.9%; nine-month sales rose 45.7%. Management attributed growth chiefly to recovering North American oil and gas transmission demand, stronger marine and propulsion markets, and improving distribution activity. Currency translation added $2.1 million to quarterly sales and $3.6 million to nine-month sales.
- Gross margin improved 220 basis points in Q3 and 420 basis points year to date, reflecting higher volume, cost reductions, improved manufacturing efficiencies and product mix. A discrete $0.8 million marine-transmission warranty issue reduced Q3 margin; excluding it, management said quarterly gross margin would have been 33.0%.
- Q3 restructuring expense was $0.5 million; nine-month expense was $2.5 million, primarily related to European cost reductions and the India manufacturing exit. No impairment charge was recorded in FY2018 periods shown, compared with $2.6 million in the prior-year periods.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1.0 million, versus an outflow of $0.8 million a year earlier. Capital expenditures were $4.4 million, resulting in company-defined free cash flow of negative $3.4 million, compared with negative $2.7 million.
- Cash was $15.1 million at March 30, 2018, versus $16.4 million at June 30, 2017. Total debt was $7.6 million, up from $6.3 million; the company reported net cash of approximately $7.5 million. Revolver availability was approximately $26.1 million, with a 3.41% interest rate.
- Net working capital increased to $99.2 million from $84.9 million; the current ratio remained 2.9. Receivables rose to $39.8 million and inventory to $80.0 million, primarily reflecting higher sales volumes and currency effects.
- Six-month order backlog was approximately $116.3 million, versus $46.4 million at June 30, 2017 and $49.8 million a year earlier. Total assets were $228.6 million and total equity was $135.6 million at quarter-end.
Outlook, commentary and material items
- Management reported a fifth consecutive quarter of year-over-year sales growth and cited a broadening customer base and a backlog extending through the first half of fiscal 2019. The filing does not provide specific revenue or earnings guidance.
- Fiscal 2018 capital expenditures were expected to be $6–8 million. Management expected cash from operations and available credit to meet foreseeable operating and investment needs; pension contributions were estimated at $2.3 million for the year, of which $1.9 million had been made.
- The Tax Act produced a provisional $4.3 million non-cash tax expense, largely from remeasuring deferred tax balances, while release of a foreign-jurisdiction valuation allowance generated a $3.8 million tax benefit. The nine-month effective tax rate was 39.4%. Management noted estimates remain subject to further guidance and finalization.
- The warranty reserve was $3.1 million at quarter-end, up from $1.9 million a year earlier. Management cautioned that actual warranty claims may differ materially from estimates. Litigation outcomes were described as not presently determinable, but management did not expect a material effect; certain product claims were considered insured or immaterial.
- Market risks include floating-rate debt, steel and aluminum prices, and foreign exchange. The company had no outstanding forward currency contracts at March 30, 2018. Management disclosed no material off-balance-sheet arrangements and said disclosure controls were effective.
Important facts for investors to verify
- Whether elevated backlog converts to shipments and cash on schedule, and whether inventory and receivables remain aligned with demand.
- Whether gross-margin improvement persists after the discrete warranty issue and as market demand and product mix change.
- Final tax effects of the Tax Act, including deferred-tax estimates and any future discrete adjustments.
- Actual restructuring costs, warranty claims, capital spending and pension contributions compared with management’s estimates.
- Available borrowing capacity and liquidity under the secured revolving credit agreement as working-capital needs evolve.