Twin Disc, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Quarter ended September 30, 2016; comparable quarter ended September 25, 2015. Amounts below are in millions unless noted. Twin Disc manufactures and distributes marine and heavy-duty off-highway power transmission equipment.
Financial results and position
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $35.8 | $37.4 |
| Gross profit / margin | $9.2 / 25.6% | $8.2 / 21.9% |
| Operating loss | $(3.6) | $(6.6) |
| Net loss attributable to Twin Disc | $(2.7) | $(4.3) |
| Basic and diluted loss per share | $(0.24) | $(0.39) |
| Operating cash flow | $(2.7) | $(2.4) |
| Capital expenditures | $0.5 | $1.4 |
- Sales declined 4.1% year over year. Gross margin improved 3.7 percentage points, while the company remained loss-making at the operating and net levels.
- Management attributed the margin improvement to cost reductions: fixed manufacturing costs were lower by about $1.1 million and manufacturing efficiencies improved by nearly $0.8 million, partly offsetting an estimated $0.9 million adverse volume effect. ME&A expense fell $2.8 million, including about $2.3 million of savings from prior restructuring actions.
- At September 30, cash was $16.1 million, down $2.2 million from June 30. Current assets were $123.7 million and current liabilities $35.8 million; working capital was $87.9 million and the current ratio 3.5. Inventory was $67.1 million.
- Long-term debt was $9.7 million, up $1.2 million from June 30. The BMO revolving facility had approximately $22.3 million borrowing capacity under its borrowing-base calculation and $11.6 million available borrowings; the disclosed rate was 2.27%. Debt net of cash was $(6.4) million, indicating net cash.
- Operating cash flow less capital expenditures was negative $3.2 million. The filing reports no shareholder dividends in the quarter; the prior-year quarter paid $0.09 per share.
- Accrued retirement benefits were $48.5 million. The company expected fiscal 2017 pension contributions of about $1.5 million; the filing reports $155,000 contributed in the financial statements and approximately $0.2 million in MD&A.
Changes, outlook, and risks
- Manufacturing-segment sales increased 5.0%, led by a 27.6% increase at the U.S. operation, partly reflecting 21 more shipping days than in the prior-year quarter. The Belgian manufacturing operation declined $3.1 million. Distribution-segment sales fell 25.7%; about $2.6 million of the decrease reflected the prior-year sale of the southeastern U.S. distribution business. Asian distribution sales were also weak.
- Management cited soft demand in Asian commercial marine markets and global industrial markets, continued weakness in oil and gas, and weak European demand. North American commercial marine demand was described as stable. Currency translation added about $0.4 million to sales.
- Six-month order backlog was $33.1 million, versus $35.7 million at June 30 and $37.5 million a year earlier. Inventory equaled 203% of backlog, up from 186% at June 30.
- There was no specific sales or earnings forecast. Management expected fiscal 2017 capital expenditures of $4–$6 million and said available cash, the credit facility, and potential debt-market access should meet foreseeable capital needs. It expected $1.5 million of pension contributions.
- Restructuring charges were $0.3 million in the quarter, with estimated annualized savings of about $0.4 million. Further U.S. and Italian workforce reductions were expected to generate about $1.0 million of annualized savings and approximately $0.6 million of second-quarter charges. The filing separately notes $0.442 million of Italian termination costs incurred September 30 but excluded from this quarter because of the subsidiary’s reporting date; those costs were to be included in Q2.
- Management reviewed goodwill impairment indicators, including market softness and operating losses, and concluded no interim impairment was indicated. No impairment charge was recorded.
- Management described liquidity as sufficient for near-term needs. Key exposures include continued market weakness, foreign exchange, steel and aluminum prices, floating-rate debt, warranty estimates, pension obligations, and the realization of deferred tax assets. Litigation outcomes were not determinable, but management did not expect a material effect; product claims were described as insured or immaterial. Risk factors were unchanged from the FY2016 Form 10-K.
Important facts for investors to verify
- Whether sales and backlog stabilize, particularly in Asian marine, oil and gas, industrial, and European markets, and whether inventory is reduced relative to demand.
- Whether cost savings and improved gross margin persist despite lower volumes, and whether planned workforce actions deliver stated savings at the expected restructuring cost.
- Available borrowing capacity and covenant/headroom details under the asset-secured BMO facility, alongside cash needs and negative free cash flow.
- Progress on pension funding and the sensitivity of the $48.5 million accrued retirement-benefit balance to actuarial assumptions.
- The $0.442 million Italian termination charge expected in Q2, the status of tax audits and approximately $0.9 million of unrecognized tax benefits, and any changes in goodwill impairment indicators.