TWIN DISC, INC. ANNOUNCES FISCAL 2020 THIRD QUARTER FINANCIAL RESULTS

  • Third quarter sales up sequentially driven primarily by stable marine demand
  • Generated $5.3 million of cash from operating activities during the third quarter
  • Recorded a non-cash goodwill impairment of $27.6 million
  • Recently implemented annualized expense reductions of $4.1 million in response to the COVID-19 crisis

RACINE, Wis. , May 01, 2020 (GLOBE NEWSWIRE) -- Twin Disc, Inc. (NASDAQ: TWIN), today reported financial results for the fiscal 2020 third quarter ended March 27, 2020.

“We are focused on successfully navigating the near-term challenges created by the unprecedented COVID-19 crisis and the significant decline in global oil and gas prices, while protecting the health and safety of our customers, employees, and communities,” commented John H. Batten, Chief Executive Officer. “Over five years ago we started pursuing strategies to limit the capital requirements of our business, improve manufacturing efficiency, reduce costs, and diversify our geographic footprint and end market concentration. These initiatives have created a more agile, efficient, and modern platform helping us withstand current global market trends.”

“Unfortunately, gross profit was impacted by an additional $2.2 million expense for the continuation of a product performance issue related to one of our pressure pumping transmission models that was initially recorded in the fiscal 2020 first quarter. Due to high rig utilization, it was difficult for us to get rigs out of service for repair in the first calendar quarter, resulting in higher cost repairs than anticipated. With the recent decline in utilization, we expect the incident rate to improve significantly, allowing for less expensive repair costs. We continue to work with this customer and address their installed base of Twin Disc oil and gas transmission systems. Gross margin, adjusted for the product performance accrual, represents the third consecutive quarter of higher sequential gross margin reflecting our success improving efficiencies and overall profitability.” 

Mr. Batten continued: “Our six-month backlog at March 27, 2020, was $87.4 million, compared to $99.6 million at June 30, 2019 and $113.7 million at March 29, 2019. Stable marine and propulsion demand primarily associated with the 2018 Veth Propulsion acquisition is helping support our six-month backlog. Many of our global markets are expected to remain challenging over the next several quarters as a result of the COVID-19 crisis and the historic decline in oil and gas prices. While the adverse economic effects of the outbreak are not fully known, management has already seen significant order cancellations and a decline in North American incoming orders, with April orders down more than 60% from the year to date run rate.  Throughout this period, we will continue making the necessary adjustments to our operations and cost structure, while remaining focused on pursuing our long-term diversification and operational strategies. We remain confident that the acquisition of Veth Propulsion will continue to provide profitable growth and remain committed to this strategy of profitable diversification. As noted in our April 8, 2020 press release, we have already taken significant actions that will drive $4.1 million in annualized savings. For over 100 years, Twin Disc has successfully navigated various economic and market cycles and we are confident we will withstand the impacts of the COVID-19 crisis and related downturn in the global energy markets.” 

Sales for the fiscal 2020 third quarter decreased to $68.6 million, from $77.4 million for the same period last year. The 11.3% decrease in 2020 third quarter sales was primarily due to continued softness in the Company’s oil and gas markets along with weaker demand for industrial products compared to the same period the prior fiscal year. Year-to-date, sales were $187.5 million, compared to $230.2 million for the fiscal 2019 nine months. Foreign currency exchange had a $1.3 million unfavorable impact on fiscal 2020 third quarter sales and a $3.9 million unfavorable impact on fiscal 2020 year-to-date sales.

Gross profit for the fiscal 2020 third quarter was 24.1%, compared to 29.9% in the fiscal 2019 third quarter. The 580-basis point decrease in gross profit percent for the fiscal 2020 third quarter compared to the fiscal 2019 third quarter was primarily due to the $2.2 million expense related to the product performance issue noted above, as well as lower sales and volume shifting to lower margin products. Gross profit, as a percent of fiscal 2020 third quarter sales, adjusted for the product performance accrual was 27.4%, which represents the third consecutive quarter of sequential gross margin improvement.

For the fiscal 2020 third quarter, marketing, engineering and administrative (ME&A) expenses decreased $2.0 million to $15.3 million. The 11.7% decrease in ME&A expenses in the quarter was primarily due to reduced bonus expense ($0.5 million), stock based compensation ($0.6 million), professional fees ($0.3 million), the impact of the Mill Log divestiture ($0.6 million) and general cost containment actions ($0.4 million). These decreases were partially offset by an increase to amortization expense due to a change in assumptions ($0.4 million). As a percent of revenues, ME&A expenses were 22.4% for the fiscal 2020 third quarter, compared to 22.4% for the same period last fiscal year.  Year-to-date, ME&A expenses were $48.1 million, compared to $55.3 million for the fiscal 2019 nine-month period. As a percent of revenues, year-to-date ME&A expenses were 25.7%, compared to 24.0% for the same period last fiscal year.

Twin Disc recorded restructuring charges of $0.5 million in the fiscal 2020 third quarter, compared to restructuring charges of $0.1 million in the same period last fiscal year. Restructuring activities during the fiscal 2020 third quarter related primarily to ongoing cost reduction and productivity actions at the Company’s European operations. Year-to-date, the Company recorded restructuring charges of $4.9 million, compared to $0.7 million for the same period last fiscal year.

The Company recorded a $27.6 million non-cash goodwill and long-lived asset impairment charge in the fiscal 2020 third quarter related to the unprecedented uncertainty in the Company’s markets due to the global COVID-19 pandemic, along with an historic decline in oil prices impacting the global energy market.

The fiscal 2020 nine-month tax rate of 8.9% was significantly lower than the prior year nine month rate of 24.6%.  The current year rate was significantly impacted by the $27.6 million non-cash goodwill impairment charge booked in the third quarter, which resulted in a 13.8% decrease to the effective rate.  The current year rate was also impacted by the GILTI (Global Intangible Low-Taxed Income) provisions of the Tax Cuts and Jobs Act, which require the inclusion of foreign income but prohibit certain foreign deductions and credits when in a domestic loss position.  The impact of the GILTI provision was to reduce the current year effective rate by 2.7%.  Income generated in foreign jurisdictions and other tax preference items also impacted the rate.  

Net loss attributable to Twin Disc for the fiscal 2020 third quarter was $(25.2 million), or ($1.92) per share, compared to net income attributable to Twin Disc of $4.6 million, or $0.34 per diluted share, for the fiscal 2019 third quarter. Year-to-date, net loss attributable to Twin Disc was $(38.1 million), or ($2.89) per share, compared to net income attributable to Twin Disc of $11.5 million, or $0.90 per diluted share, for the fiscal 2019 nine months.

Jeffrey S. Knutson, Vice President – Finance, Chief Financial Officer, Treasurer and Secretary stated, “We are focused on strengthening our balance sheet by proactively reducing working capital levels, generating positive operating cash flow, and lowering debt. During the third quarter, we generated $5.3 million of cash from operating activities, and proactively paid down $9.6 million of debt from second quarter levels. Working capital at March 27, 2020 was $110.3 million, compared to $127.3 million at June 30, 2019. In addition, we have deferred all non-essential spending and capital expenditures for the remainder of this year to conserve cash until the economic environment becomes clearer.”

Twin Disc will be hosting a conference call to discuss these results and to answer questions at 11:00 a.m. Eastern Time on May 1, 2020. To participate in the conference call, please dial
866-548-4713 five to ten minutes before the call is scheduled to begin. A replay will be available from 2:00 p.m. May 1, 2020 until midnight May 8, 2020. The number to hear the teleconference replay is 844-512-2921. The access code for the replay is 1556831.

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. For more information, please visit www.twindisc.com.

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.  Risk factors also include the effects of the COVID-19 pandemic, and any impact the COVID-19 pandemic may have on the Company’s business operations, as well as its impact on general economic and financial market conditions. 

*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
 For the Three
Quarters Ended
 March 27,
 March 29,
  March 27,
 March 29,
 
 2020 2019  2020 2019 
Net sales$  68,636 $  77,420  $  187,462 $  230,216 
Cost of goods sold   52,087    54,303     145,566    157,026 
  Gross profit 16,549  23,117   41,896  73,190 
      
      
Marketing, engineering and
  administrative expenses
 15,349   17,375   48,106  55,269 
Restructuring expenses   532    131     4,902    738 
Goodwill and other impairment charge 27,603  -   27,603  - 
Other operating income   -    (1,357)    -    (1,357)
(Loss) income from operations (26,935
)
 6,968
   (38,715
) 18,540 
Interest expense 488  449   1,324  1,583 
Other expense, net   898    490     1,618    1,608 
 
(Loss) income before income taxes
and noncontrolling interest
 (28,321) 6,029   (41,657)  15,349 
Income tax (benefit) expense   (3,145)   1,442     (3,722)   3,780 
      
Net (loss) income (25,176) 4,587   (37,935) 11,569 
Less: Net earnings attributable to     
  noncontrolling interest, net of tax   (54)   (27)    (122)   (75)
Net (loss) income attributable to Twin Disc$  (25,230)$  4,560  $  (38,057)$  11,494 
              
(Loss) income per share data:     
  Basic (loss) income per share attributable
    to Twin Disc common shareholders
$(1.92

)
$0.35  $(2.89

)
$0.91 
  Diluted (loss) income per share attributable
    to Twin Disc common shareholders
$ (1.92

)
$ 0.34  $ (2.89

)
$ 0.90 
      
Weighted average shares outstanding data:     
  Basic shares outstanding 13,175  12,914   13,147  12,437 
  Diluted shares outstanding 13,175  13,146   13,147  12,652 
      
Comprehensive (loss) income     
  Net (loss) income$  (25,176)$  4,587  $  (37,935)$  11,569 
Benefit plan adjustments, net of
taxes of $490, $146, $828, and $437, respectively
  

  1,593
   

  478
    

  2,698
   

  1,427
 
  Foreign currency translation adjustment   (1,266)   (869)    (2,615)   (3,217)
Unrealized loss on cash flow hedge,
net of income taxes of $178, $0,
$177 and $0, respectively
 (582)  -     (579) - 
  Comprehensive (loss) income (25,431) 4,196   (38,431) 9,779 
  Less: Comprehensive income
  attributable to noncontrolling interest
   (46)  (44) 

 
 (132) (52)
  Comprehensive (loss) income attributable to
    Twin Disc
$ (25,477)$  4,152  $ (38,563)$9,727 


CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands; except share amounts, unaudited)
   
 March 27,June 30,
  2020  2019 
ASSETS  
Current assets:  
  Cash$  8,434 $  12,362 
  Trade accounts receivable, net   31,514    44,013 
  Inventories   127,615    125,893 
  Prepaid expenses   6,681    11,681 
  Other   8,128    8,420 
   
  Total current assets 182,372  202,369 
   
Property, plant and equipment, net 72,863  71,258 
Goodwill, net -  25,954 
Intangible assets, net 19,925  25,353 
Deferred income taxes 22,848  18,178 
Other assets   3,152    3,758 
   
TOTAL ASSETS$  301,160 $  346,870 
       
LIABILITIES AND EQUITY  
Current liabilities:  
  Current maturities of long-term debt$  2,000 $  2,000 
  Accounts payable   27,909    31,468 
  Accrued liabilities   42,160    41,646 
       
  Total current liabilities 72,069  75,114 
   
Long-term debt 40,874  40,491 
Lease obligations 13,340  12,646 
Accrued retirement benefits 22,502  25,878 
Deferred income taxes 5,780  7,429 
Other long-term liabilities   2,560    2,494 
       
Total liabilities 157,125  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
  

42,286
   

45,047
 
Retained earnings 158,415  196,472 
Accumulated other comprehensive loss   (38,476)   (37,971)
  162,225  203,548 
Less treasury stock, at cost
  (1,226,809 and 1,392,524 shares, respectively)
  18,796  21,332 
       
Total Twin Disc shareholders' equity   143,429    182,216 
       
Noncontrolling interest   606    602 
Total equity   144,035    182,818 
       
TOTAL LIABILITIES AND EQUITY$  301,160 $  346,870 



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
 For the Three Quarters Ended
 March 27,
2020
March 29,
2019
   
CASH FLOWS FROM OPERATING ACTIVITIES:  
  Net (loss) income$  (37,935)$  11,569 
  Adjustments to reconcile net (loss) income to net cash
  provided (used) by operating activities, net of acquired assets:
  
  Depreciation and amortization 8,917  6,974 
  Restructuring expenses 2,556  28 
  Goodwill and other impairment charge 27,603  - 
  Provision for deferred income taxes (6,225) 1,158 
  Stock compensation expense and other non-cash changes, net 859  2,123 
  Amortization of inventory fair value step-up -  3,223 
  Gain on sale of Mill Log -  (865)
  Gain on contingent consideration of Veth Propulsion acquisition -  (492)
  Net change in operating assets and liabilities   9,556    (35,876)
Net cash provided (used) by operating activities   5,331    (12,158)
       
CASH FLOWS FROM INVESTING ACTIVITIES:  
  Acquisitions of fixed assets (9,155) (8,911)
  Proceeds from sale of fixed assets 109  145 
  Other, net   (27)   (229)
  Proceeds from sale of Mill Log, net of costs to sell -    5,158 
  Acquisition of Veth Propulsion, less cash acquired   -    (60,195)
Net cash used by investing activities   (9,073)   (64,032)
       
CASH FLOWS FROM FINANCING ACTIVITIES:  
  Borrowings under revolving loan arrangement 78,597  123,904 
  Repayments of revolver loans (76,805) (99,156)
  Repayments of long-term debt (1,164) (23,872)
  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 options -  36 
  Borrowings under term debt arrangement   -    44,151 
Net cash (used) provided by financing activities   (412)   76,232 
   
Effect of exchange rate changes on cash   226    544 
       
  Net change in cash (3,928) 586 
   
Cash:  
   
  Beginning of period   12,362    15,171 
       
  End of period$  8,434 $  15,757 



RECONCILIATION OF CONSOLIDATED NET (LOSS) INCOME TO EBITDA
(In thousands; unaudited)
 For the
Quarter Ended
For the
Three Quarters Ended
 March 27,
2020
March 29,
2019
March 27,
2020
March 29,
2019
Net (loss) income attributable to Twin Disc$  (25,230)$  4,560 $(38,057)$  11,494
  Interest expense 488  449  1,324  1,583
  Income taxes (3,145) 1,442  (3,722) 3,780
  Depreciation and amortization     2,991    3,514    8,917    10,197
Earnings before interest, taxes,
depreciation and amortization
$(24,896)$  9,965 $(31,538)$  27,054

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

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