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Twin Disc, Inc. Announces Fiscal 2020 First Quarter Financial Results

  • Significant decline in North American oil and gas market demand
  • Generated $1,481,000 in operating cash flow for the fiscal 2020 first quarter
  • Continued focus on executing strategic growth plan and improving profitability
  • Six-month backlog remains stable at $96.7 million

RACINE, Wis., Nov. 01, 2019 (GLOBE NEWSWIRE) -- Twin Disc, Inc. (NASDAQ: TWIN), today reported financial results for the fiscal 2020 first quarter ended September 27, 2019. 

Net sales for the fiscal 2020 first quarter were $59.3 million, compared to $74.7 million for the same period last year.  The 20.6% decrease in 2020 first quarter sales was primarily due to reduced demand for the Company’s 8500 series transmission systems from North American fracking customers. Demand remained stable across the Company’s global industrial and commercial marine markets.  Foreign currency exchange had a $1.5 million unfavorable impact on fiscal 2020 first quarter sales. 

Commenting on the results, John H. Batten, Chief Executive Officer, said: “Unfortunately, during the fiscal 2020 first quarter a weak oil and gas environment continued to impact sales, while gross margin was impacted by a $3.9 million expense for an isolated product performance issue related to one of our pressure pumping transmission models.  This issue appears to be limited to the application characteristics associated with one customer and we are working to address their installed base of Twin Disc oil and gas transmission systems."

“We continue to work through the market and operational challenges that have recently impacted our business.  Strategic enhancements are underway which include aggressive cost reduction initiatives, adding machinery, and expanding our manufacturing and logistic capabilities.  The investments we are making will increase efficiencies and product quality while improving margins, and we expect to begin seeing the benefits flow through our income statement this fiscal year. I am confident we will navigate the near-term challenges we are facing, and emerge a leaner, more focused, and more profitable organization, while creating value for our shareholders.”

Gross profit percent for the fiscal 2020 first quarter was 16.3%, compared to 32.1% in the fiscal 2019 first quarter.  The decrease in the gross profit percent for the fiscal 2020 first quarter compared to the fiscal 2019 first quarter was primarily due to the $3.9 million expense noted above and a less profitable mix of revenues associated with reduced new rig construction and aftermarket demand in the North American fracking market and volume shifting to lower margin products.  Gross profit, as a percent of fiscal 2020 first quarter sales, adjusted for the product performance accrual was 22.8%, which improved slightly from 22.7% reported for the fourth quarter of fiscal 2019. 

For the fiscal 2020 first quarter, marketing, engineering and administrative (ME&A) expenses decreased $2.6 million to $16.3 million, compared to $19.0 million for the fiscal 2019 first quarter.  The 13.9% decrease in ME&A expenses in the quarter was primarily due to lower professional fees ($0.4 million), bonus expense ($0.6 million), marketing spending ($0.6 million), stock-based compensation ($0.4 million) and the impact of the Mill Log divestiture ($0.7 million). As a percent of revenues, ME&A expenses increased to 27.6% for the fiscal 2020 first quarter, compared to 25.4% for the same period last year. 

Twin Disc recorded restructuring charges of $0.1 million in the fiscal 2020 first quarter, compared to restructuring charges of $0.2 million in the same period last fiscal year. Restructuring activities during the fiscal 2020 first quarter related primarily to ongoing cost reduction and productivity actions at the Company’s European operations. 

The fiscal 2020 first quarter tax rate was 20.5%, compared to 23.4% for the same period last fiscal year.  The variance to the prior year rate is a function of the jurisdictional mix of earnings.

The net loss attributable to Twin Disc for the fiscal 2020 first quarter was $(6.3 million), or $(0.48) per share, compared to a net income attributable to Twin Disc of $2.9 million, or $0.24 per diluted share for the prior fiscal year first quarter. 

Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA)* were a loss of $(4.6 million) for the fiscal 2020 first quarter, compared to a positive $8.0 million for the fiscal 2019 first quarter. 

Jeffrey S. Knutson, Vice President – Finance, Chief Financial Officer, Treasurer and Secretary, stated: “We generated $1.5 million of cash from operating activities, despite the $6.3 million loss in the first quarter and high levels of inventory.  The increase in inventory is primarily due to an elevated amount of oil and gas transmission components.  We are confident that we’ve reached peak inventory levels and expect to see inventory reductions during fiscal 2020, which should result in improved operating cash flow.  We continue to make strategic investments in our operations and for the fiscal 2020 first quarter we invested $4.0 million in capital expenditures and expect to invest approximately $12.0 million to $14.0 million in capital expenditures in total during fiscal 2020.” 

Mr. Batten concluded: “Our six-month backlog at September 28, 2019 was $96.7 million, compared to $99.6 million at June 30, 2019 and $146.3 million at September 29, 2018.  Despite recent weakness in the North American oil and gas market, we continue to actively quote projects and anticipate improved market conditions in the second half of fiscal 2020.  In addition, demand remains stable throughout our other global end-markets, including our Veth marine market.  I am confident the strategies underway to grow sales and improve our operations, including the new Texas facility, a new domestic aftermarket location, additional Veth synergies and recent product releases, will create significant long-term value in the future.” 

Twin Disc will be hosting a conference call to discuss these results and to answer questions at 11:00 a.m. Eastern Time on November 1, 2019. To participate in the conference call, please dial 800-239-9838 five to ten minutes before the call is scheduled to begin. A replay will be available from 2:00 p.m. November 1, 2019 until midnight November 8, 2019. The number to hear the teleconference replay is 844-512-2921. The access code for the replay is 8210267. 

The conference call will also be broadcast live over the Internet. To listen to the call via the Internet, access Twin Disc's website at http://ir.twindisc.com and follow the instructions at the web cast link. The archived webcast will be available shortly after the call on the Company's website.

About Twin Disc, Inc.
Twin Disc, Inc. designs, manufactures and sells marine and heavy-duty off-highway power transmission equipment.  Products offered include marine transmissions, azimuth drives, surface drives, propellers and boat management systems, as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and control systems.  The Company sells its products to customers primarily in the pleasure craft, commercial and military marine markets, as well as in the energy and natural resources, government and industrial markets.  The Company’s worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network. 

Forward-Looking Statements
This press release may contain statements that are forward looking as defined by the Securities and Exchange Commission in its rules, regulations and releases. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. All forward-looking statements are based on current expectations regarding important risk factors including those identified in the Company’s most recent periodic report and other filings with the Securities and Exchange Commission. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed therein will be achieved.

*Non-GAAP Financial Disclosures
Financial information excluding the impact of asset impairments, restructuring charges, foreign currency exchange rate changes and the impact of acquisitions, if any, in this press release are not measures that are defined in U.S. Generally Accepted Accounting Principles (“GAAP”). These items are measures that management believes are important to adjust for in order to have a meaningful comparison to prior and future periods and to provide a basis for future projections and for estimating our earnings growth prospects. Non-GAAP measures are used by management as a performance measure to judge profitability of our business absent the impact of foreign currency exchange rate changes and acquisitions. Management analyzes the company’s business performance and trends excluding these amounts.  These measures, as well as EBITDA, provide a more consistent view of performance than the closest GAAP equivalent for management and investors. Management compensates for this by using these measures in combination with the GAAP measures. The presentation of the non-GAAP measures in this press release are made alongside the most directly comparable GAAP measures.

Definition – Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

The sum of, net earnings and adding back provision for income taxes, interest expense, depreciation and amortization expenses: this is a financial measure of the profit generated excluding the above-mentioned items.

--Financial Results Follow--

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME
(In thousands, except per-share data; unaudited)
 
For the Quarter Ended
  September 27,
2019
  September 28,
2018
Net sales $   59,290     $   74,689  
Cost of goods sold     49,654         50,704  
  Gross profit   9,636       23,985  
Marketing, engineering and administrative expenses   16,346       18,986  
Restructuring expenses     121         173  
(Loss) income from operations   (6,831 )     4,826  
     
Interest expense   389       717  
Other expense, net     691         319  
(Loss) income before income taxes and noncontrolling interest   (7,911 )     3,790  
Income tax (benefit) expense     (1,618 )       887  
     
Net (loss) income   (6,293 )     2,903  
Less: Net earnings attributable to noncontrolling interest, net of tax                (18 )                  (41 )
Net (loss) income attributable to Twin Disc $   (6,311 )   $   2,862  
(Loss) income per share data:    
  Basic (loss) income per share $   (0.48 )   $   0.24  
  Diluted (loss) income per share $   (0.48 )   $   0.24  
Weighted average shares outstanding data:    
  Basic shares outstanding   13,111       11,722  
  Diluted shares outstanding   13,111       11,799  
     
Comprehensive (loss) income:    
  Net (loss) income $   (6,293 )   $   2,903  
  Benefit plan adjustments, net of income taxes of $169 and $146, respectively   557       471  
  Foreign currency translation adjustment   (2,996 )     (561 )
  Unrealized loss on cash flow hedge, net of income taxes of $146 and $0, respectively              (143 )                       -  
  Comprehensive (loss) income   (8,875 )     2,813  
  Less: Comprehensive income attributable to noncontrolling interest                (36 )                  (16 )
Comprehensive (loss) income attributable to Twin Disc $       (8,911 )   $          2,797  


RECONCILIATION OF CONSOLIDATED NET (LOSS) INCOME TO EBITDA
(In thousands; unaudited)

   

For the Quarter Ended
  September 27,
2019
  September 28,
2018
Net (loss) income attributable to Twin Disc $   (6,311 )   $   2,862
  Interest expense   389       717
  Income taxes   (1,618 )     887
  Depreciation and amortization     2,926         3,520
Earnings (loss) before interest, taxes,
depreciation and amortization
$   (4,614 )   $   7,986


CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands; unaudited)
     
  September 27,   June 30,
    2019       2019  
ASSETS    
Current assets:    
  Cash $   16,505     $   12,362  
  Trade accounts receivable, net   36,893       44,013  
  Inventories   127,305       125,893  
  Prepaid expenses   9,821       11,681  
  Other     8,001         8,420  
  Total current assets   198,525       202,369  
     
Property, plant and equipment, net   71,249       71,258  
Goodwill, net   25,072       25,954  
Intangible assets, net   23,267       25,353  
Deferred income taxes   19,508       18,178  
Other assets     3,840         3,758  
     
Total assets $   341,461     $   346,870  
     
LIABILITIES AND EQUITY    
Current liabilities:    
  Current maturities of long-term debt $   2,000     $   2,000  
  Accounts payable   25,278       31,468  
  Accrued liabilities     44,954         39,609  
  Total current liabilities   72,232       73,077  
     
Long-term debt   47,554       40,491  
Lease obligations   14,054       14,683  
Accrued retirement benefits   25,141       25,878  
Deferred income taxes   6,894       7,429  
Other long-term liabilities     2,223         2,494  
     
Total liabilities   168,098       164,052  
     
Twin Disc shareholders’ equity:    
Preferred shares authorized: 200,000; issued: none; no par value   -       -  
Common shares authorized: 30,000,000;
  Issued: 14,632,802; no par value
   
43,182
     
45,047
 
Retained earnings   190,161       196,472  
Accumulated other comprehensive loss     (40,571 )       (37,971 )
    192,772       203,548  
  Less treasury stock, at cost
  (1,300,317 and 1,392,524 shares, respectively)
   
        19,920
     
  21,332
 
     
  Total Twin Disc shareholders' equity     172,852         182,216  
     
Noncontrolling interest     511         602  
Total equity     173,363         182,818  
     
TOTAL LIABILITIES AND EQUITY $   341,461     $   346,870  


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
     
     
  For the Quarter Ended
  September 27,
2019
  September 28,
2018
     
CASH FLOWS FROM OPERATING ACTIVITIES:    
  Net (loss) income $   (6,293 )   $   2,903  
  Adjustments to reconcile net (loss) income to net cash provided    
  by operating activities:    
  Depreciation and amortization   2,926       2,349  
  Provision for deferred income taxes   (1,663 )     3,460  
  Stock compensation expense and other non-cash changes, net   457       892  
  Net change in operating assets and liabilities     6,054         (9,953 )
  Amortization of inventory fair value step-up     -         1,171  
Net cash provided by operating activities     1,481         822  
     
CASH FLOWS FROM INVESTING ACTIVITIES:    
  Acquisitions of fixed assets   (4,037 )     (3,556 )
  Proceeds from sale of fixed assets   29       30  
  Other, net     (129 )       (129 )
  Acquisition of Veth Propulsion, less cash acquired     -         (59,649 )
Net cash used by investing activities     (4,137 )       (63,304 )
     
CASH FLOWS FROM FINANCING ACTIVITIES:    
  Borrowings under revolving loan arrangement   33,095       67,103  
  Repayments under revolver loans   (25,397 )     (45,231 )
  Dividends paid to noncontrolling interest   (127 )     (115 )
  Payments of withholding taxes on stock compensation     (913 )       (926 )
  Proceeds from issuance of common stock, net   -       32,210  
  Proceeds from exercise of stock option   -       12  
  Borrowings under long-term debt arrangement   -       35,000  
  Repayments of long-term borrowings     -         (24,234 )
Net cash provided by financing activities     6,658         63,819  
     
Effect of exchange rate changes on cash     141         49  
     
  Net change in cash   4,143       1,386  
     
Cash:    
  Beginning of period     12,362         15,171  
     
  End of period $   16,505     $   16,557  

Contact: Jeffrey S. Knutson
(262) 638-4242

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