Twin Disc, Inc. — Form 10-Q Summary
Business context and reporting period. Twin Disc manufactures and distributes marine and heavy-duty off-highway power transmission equipment, serving marine, oil and gas, industrial, government and related markets. This report covers the first quarter of fiscal 2018, the quarter ended September 29, 2017, compared with the quarter ended September 30, 2016. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $45.1 million | $35.8 million |
| Gross profit / margin | $13.9 million / 30.8% | $9.2 million / 25.6% |
| Operating loss | $1.0 million | $3.6 million |
| Net income (loss) attributable to Twin Disc | $3.4 million | $(2.7) million |
| Basic and diluted EPS | $0.29 | $(0.24) |
| Operating cash flow | $(1.4) million | $(2.7) million |
- Sales increased 25.8%. Manufacturing segment sales rose 30.7%; distribution sales rose 14.7%. North American oil and gas demand was the principal growth driver.
- Gross margin expanded 520 basis points. Management attributed the improvement to higher volume, favorable oil and gas product mix, cost reductions and manufacturing efficiencies, partly offset by higher warranty expense.
- ME&A expense increased $1.2 million to $13.7 million, but declined to 30.3% of sales from 34.8%. Restructuring expense was $1.2 million, versus $0.3 million.
- Net income included a $4.7 million income tax benefit, principally reflecting release of a $3.8 million valuation allowance in a foreign jurisdiction. The reported profit therefore includes a significant tax-related benefit; excluding the valuation-allowance release, management reported an effective tax rate of 68.2%.
- Cash used in investing was $1.6 million, including $1.5 million of capital expenditures. Management-defined free cash flow, operating cash flow less fixed-asset purchases, was negative $2.9 million.
Liquidity, debt and balance sheet
- At September 29, 2017, cash was $15.5 million, current assets were $128.6 million, current liabilities were $41.2 million, and working capital was $87.3 million. The current ratio was 3.1.
- Total debt was $8.2 million, up from $6.3 million at June 30, 2017. The company reported net cash of approximately $7.2 million. The revolving facility had approximately $18.0 million of available borrowings, at a 2.99% interest rate.
- Inventory increased $3.8 million from fiscal year-end to $70.0 million. Six-month order backlog was $62.7 million, compared with $46.4 million at June 30, 2017 and $33.1 million a year earlier.
- Total equity was $130.1 million, up from $123.6 million at June 30, 2017. Cash declined $0.9 million during the quarter.
Material changes, outlook and risks
- Management said the North American oil and gas recovery, which began in the third quarter of fiscal 2017, continued and broadened across customers. Industrial demand remained relatively flat; European mega-yacht and industrial markets remained soft, and Asian commercial marine demand had not recovered.
- The company expects fiscal 2018 capital expenditures of $7–9 million and pension contributions of approximately $2.3 million, of which $0.8 million had been contributed by quarter-end. Management stated that cash, the credit facility and potential debt-market access should fund foreseeable requirements.
- Restructuring actions in Belgium and Europe, together with costs related to exiting Indian manufacturing operations, contributed to the quarter’s $1.2 million charge. Since June 2015, restructuring programs eliminated 162 manufacturing positions and incurred $7.1 million of cumulative costs.
- The company gave no specific sales or earnings forecast. It cautioned that forward-looking statements are not guarantees and referred investors to the risk factors in its fiscal 2017 Form 10-K. It identified exposure to interest rates, commodity prices and foreign exchange; it does not hedge translation exposure and does not hedge commodity-price exposure.
- Management reported no material change in previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls. Litigation outcomes were not presently determinable; management did not expect the disclosed litigation to materially affect results, financial position or cash flows. Product-liability claims were described as insured or not material.
- Revenue-recognition guidance was expected to be adopted in fiscal 2019. The company’s preliminary assessment identified contracts where post-delivery services could defer revenue and customer-specific products could potentially accelerate recognition; the impact was still under evaluation.
- Warranty estimates depend on failure rates, affected units and repair costs. Goodwill related to the European Industrial reporting unit; the company found no impairment-triggering event during the quarter, but future operating deterioration could require testing.
Most important facts for investors to verify
- How much of reported net income and the effective tax rate reflects the $3.8 million valuation-allowance release, and whether the underlying foreign operations can sustain profitability.
- Whether the oil and gas recovery and $62.7 million backlog convert into shipments, cash collections and sustained margins.
- Whether inventory growth and negative operating/free cash flow improve as production and working-capital needs change.
- Whether restructuring delivers recurring savings sufficient to offset continued costs and weakness in certain marine and industrial markets.
- The eventual financial and timing effects of adopting the new revenue-recognition and lease-accounting standards, and the adequacy of warranty, pension and tax estimates.