Twin Disc, Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018. Although the request metadata references 2017 Q4, this filing reports FY2018 and includes quarterly results for FY2018. Financial amounts are in U.S. dollars.
Business context
Twin Disc designs, manufactures and sells marine and heavy-duty off-highway power transmission equipment, serving marine, energy and natural resources, government, and industrial markets. The year’s recovery was led by North American oil-and-gas demand, alongside improving commercial marine and industrial markets.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $240.7 million | $168.2 million |
| Gross profit / margin | $80.2 million / 33.3% | $48.2 million / 28.7% |
| Operating income (loss) / margin | $14.9 million / 6.2% | $(9.0) million / (5.3)% |
| Net income (loss) | $9.6 million; $9.5 million attributable to Twin Disc | $(6.1) million; $(6.3) million attributable to Twin Disc |
| Diluted earnings (loss) per share | $0.82 | $(0.56) |
| Cash from operating activities | $6.5 million | $3.2 million |
| Capital expenditures | $6.3 million | $3.1 million |
| Cash at year-end | $15.2 million | $16.4 million |
| Long-term debt | $4.8 million | $6.3 million |
| Current ratio | 2.6 | 2.9 |
FY2018 sales rose 43.1% year over year. North American manufacturing sales increased 65.8%; off-highway transmission product sales increased 152.8%. Gross-margin improvement reflected higher volumes and favorable product mix; management estimated volume contributed approximately $26.1 million and mix approximately $5.8 million to gross profit. Operating cash flow increased, but rising activity required substantial working capital: inventory grew $17.8 million and trade receivables $14.0 million. The six-month order backlog increased to $115.0 million from $46.4 million.
Fiscal Q4 net sales were $73.8 million, gross profit $27.5 million, and net income $6.0 million. The filing provides quarterly results but does not give a standalone Q4 cash-flow figure.
Material changes and unusual items
- FY2018 restructuring charges were $3.4 million, mainly associated with headcount reductions and structural changes in Belgium.
- ME&A expenses increased 17.3% to $61.9 million, including $1.8 million of Veth acquisition transaction costs, $4.0 million higher bonus expense, and other growth-related costs. As a share of sales, these expenses declined to 25.7% from 31.4%.
- The effective tax rate was 33.1%. Significant discrete items included a $3.8 million tax benefit from reversing a foreign valuation allowance and a $3.8 million non-cash Tax Act-related expense, primarily from deferred-tax remeasurement.
- The company recorded no goodwill impairment in FY2018; $2.7 million of goodwill remained at year-end. Prior impairment charges were $2.6 million in FY2017 and $7.6 million in FY2016.
- No shareholder dividends were paid in FY2018 or FY2017. The company made no share repurchases during those years.
Acquisition, outlook and risks
On July 2, 2018, immediately after year-end, Twin Disc completed its acquisition of Veth Propulsion for approximately $60.7 million in cash, subject to working-capital adjustment and a possible earn-out of up to approximately $4 million. The cash consideration was funded with new credit-facility borrowings. The company said Veth had approximately $50 million in annual sales and expected it to contribute 18–20% of consolidated revenue in FY2019. The acquisition accounting was still in progress when the 10-K was filed.
A new BMO credit agreement provided for a term loan of up to $35 million and revolving loans up to $50 million. At June 30, 2018, the company had $4.8 million drawn and approximately $45.2 million of available borrowings under the asset-based facility. On July 2, it drew an additional $60.7 million to fund the acquisition. Management expected FY2019 capital expenditures of $14–16 million and pension contributions of approximately $2.4 million, and stated that available liquidity and expected cash generation should cover foreseeable requirements. The filing does not provide a numerical earnings or revenue forecast beyond the Veth revenue contribution estimate.
Key risks include cyclical end markets and dependence on oil-and-gas activity; customer concentration (the top ten customers represented about 57% of FY2018 sales, with one distributor at 10%); foreign currency exposure; steel and other input-cost increases and tariffs; supplier, product-quality and manufacturing disruption; and acquisition integration, debt-service and goodwill-impairment risks. Product-liability claims were pending, but management did not expect their disposition to materially affect results, financial position or cash flows.
Important facts for investors to verify
- Whether the sharp sales, backlog and margin recovery is sustained, particularly in North American oil-and-gas markets.
- Veth’s post-acquisition contribution, integration costs, final purchase-price allocation, working-capital settlement and any earn-out payment.
- Post-acquisition debt balances, borrowing-base availability, covenant headroom, interest expense and cash generation.
- Whether working-capital needs, especially inventory and receivables, continue to absorb operating cash flow.
- The sustainability of the reported tax benefits and deferred-tax-asset realization assumptions, and exposure to tariffs, currency movements and commodity costs.