Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TWIN > SEC Filings for TWIN > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for TWIN DISC INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for TWIN DISC INC


8-May-2013

Quarterly Report


Item 2. Management Discussion and Analysis

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. The figures discussed in this review reflect the revisions described in Note A. This discussion should be read in conjunction with our consolidated fiscal 2012 financial statements and related notes.

Some of the statements in this Quarterly Report on Form 10-Q are "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the Company's description of plans and objectives for future operations and assumptions behind those plans. The words "anticipates," "believes," "intends," "estimates," and "expects," or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by Twin Disc, Incorporated should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.

In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company's Annual Report filed on Form 10-K for June 30, 2012 could cause actual results to be materially different from what is presented here.

Results of Operations

(In thousands)
                               Three Months Ended            Nine Months Ended
                             March 29,     March 30,     March 29,      March 30,
                            2013     %    2012     %     2013     %     2012     %

Net sales                  $68,232       $95,490       $209,351       $259,761
Cost of goods sold          50,558        62,434        149,949        166,375

Gross profit                17,674 25.9%  33,056 34.6%   59,402 28.4%   93,386 36.0%

Marketing, engineering and
administrative expenses     17,405  25.5  17,746  18.6   50,795  24.3   53,752  20.7

Earnings from operations    $  269   0.4 $15,310  16.0  $ 8,607   4.1  $39,634  15.3

Comparison of the Third Quarter of FY 2013 with the Third Quarter of FY 2012

Net sales for the third quarter decreased 28.5%, or $27.3 million, to $68.2 million from the record $95.5 million in the same period a year ago. Compared to the third quarter of fiscal 2012, on average, the euro and Asian currencies weakened against the U.S. dollar. The net translation effect of this on foreign operations was to decrease revenues by approximately $0.4 million versus the prior year, before eliminations. The decrease in sales was primarily the result of lower demand from customers in the pressure pumping sector of the North American oil and gas market. Offsetting weakness in this market was higher demand from customers in the North American and Asian commercial marine markets. Sales to customers serving the global mega yacht market remained at historical lows in the quarter, while demand remained steady for equipment used in the airport rescue and fire fighting (ARFF), and military markets.

Sales at our manufacturing segment were down 34.6% versus the same period last year. Compared to the third quarter of fiscal 2012, on average, the euro weakened against the U.S. dollar. The net translation effect of this on foreign manufacturing operations was to decrease revenues for the manufacturing segment by approximately $0.1 million versus the prior year, before eliminations. In the current fiscal year's third quarter, our domestic manufacturing operation saw a decrease in sales of 43.8% versus the third fiscal quarter of 2012. The primary driver for this decrease was the decrease in shipments of transmissions and related products for the North American oil and gas markets. This was only partially offset by an increase in commercial marine transmission shipments. The Company's Italian manufacturing operations, which have been adversely impacted by the softness in the European mega yacht and industrial markets, experienced flat sales compared to the prior fiscal year's third quarter. The Company's Belgian manufacturing operation, which also continues to be adversely impacted by the softness in the global mega yacht market as well as the European commercial marine markets, saw a 15.8% decrease in sales versus the prior fiscal year's third quarter. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced flat sales.

Our distribution segment experienced a slight increase of 1.0% in sales compared to the third quarter of fiscal 2012. Compared to the third quarter of fiscal 2012, on average, the Asian currencies weakened against the U.S. dollar. The net translation effect of this on foreign distribution operations was to decrease revenues for the distribution segment by approximately $0.2 million versus the prior year, before eliminations. The Company's distribution operation in Singapore continues to experience record demand for marine transmission products for use in various commercial applications as well as for pressure pumping transmission for the Chinese oil and gas market. This operation saw a nearly 17% increase in shipments versus the prior fiscal year's record third quarter. The Company's distribution operation in the Northwest of the United States and Southwest of Canada experienced a decrease in sales of just over 33% versus the prior fiscal year's record third quarter. This operation continued to be impacted by the softness in the Canadian oil and gas market. The Company's distribution operation in Italy, which provides boat accessories and propulsion systems for the pleasure craft market, remained at historic lows due to continued weakness in the global mega yacht market as well as customer requests to delay shipments. The Company's distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw a decrease in sales of 30%.

The elimination for net inter/intra segment sales decreased $2.5 million, including an unfavorable exchange movement of $0.1 million, accounting for the remainder of the net change in sales versus the same period last year.

Gross profit as a percentage of sales decreased 870 basis points to 25.9% of sales, compared to 34.6% of sales for the same period last year. Gross profit for fiscal 2013's third quarter was significantly impacted by lower sales volumes, primarily due to lower shipments to the Company's North American pressure pumping transmission customers (approximately $13.1 million), a less profitable mix related to the Company's oil and gas transmission business (approximately $2.7 million), and unfavorable manufacturing efficiency and absorption due to lower volumes.

For the fiscal 2013 third quarter, marketing, engineering and administrative (ME&A) expenses, as a percentage of sales, were 25.5 percent, compared to 18.6 percent for the fiscal 2012 third quarter. ME&A expenses decreased $0.3 million versus the fiscal 2012 third quarter. The impact of the increase in the Company's stock price from $17.06 at the end of the fiscal second quarter to $24.62 at the end of the fiscal third quarter was to increase sequential stock based compensation expense by $0.8 million which contributed to the $1.5 million expense in the quarter. The table below summarizes significant changes in certain ME&A expenses for the quarter:

Three Months Ended Increase/ $ thousands -Expense/(Income) March 29, 2013 March 30, 2012 (Decrease)

Stock-Based Compensation          $   1,488     $    (385)      $   1,873
Incentive/Bonus Expense                 74          1,129          (1,055)
                                                                     818
                               Foreign Currency Translation          (36)
                                                                     782
                                             All Other, Net        (1,123)
                                                                $    (341)

The year-over-year net remaining decrease in ME&A expenses of $1.1 million for the quarter primarily relates to efforts to control global ME&A expenses in light of the current softness in demand experienced in certain of the Company's markets.

Interest expense of $0.4 million for the quarter was down 5.9% versus last year's second fiscal quarter. Total interest on the Company's $40 million revolving credit facility ("revolver") decreased 13% to $0.1 million in fiscal 2013's third quarter. This decrease can be attributed to an overall decrease in the average borrowings year-over-year and a lower interest rate on the revolver. The average borrowing on the revolver, computed monthly, decreased to $20.5 million in fiscal 2013's third quarter, compared to $24.6 million in the same period a year ago. The interest rate on the revolver decreased from a range of 1.74% to 1.8% in the prior fiscal year's third quarter to a range of 1.70% to 1.71% in the current year. The interest expense on the Company's $25 million Senior Note decreased 20%, at a fixed rate of 6.05%, to $0.2 million, due to a lower remaining principal balance.

Other income of $0.1 million for the quarter ended March 29, 2013 improved slightly from other expense of $0.1 million for the comparable period a year ago. The current year's improvement was due primarily to favorable foreign currency movements.

The third fiscal quarter tax expense on near break-even, pre-tax results primarily relates to a provision to return adjustment related to foreign tax credits of approximately $0.7 million during the third quarter of fiscal 2013. During the third quarter of fiscal 2013, the Company completed and filed its 2012 Federal income tax return which reflected all adjustments from the recently finalized federal income tax audit. As a result of this filing, the Company recorded a provision to return adjustment which reversed the carryforward benefit previously booked for foreign tax credits utilized under the audit period.

Comparison of the First Nine Months of FY 2013 with the First Nine Months of FY 2012

Net sales for the first nine months of fiscal 2013 decreased 19.4%, or $50.4 million, to $209.4 million from a record $259.8 million in the same period a year ago. Compared to the first nine months of fiscal 2012, on average, the euro and Swiss franc weakened against the U.S. dollar. The net translation effect of this on foreign operations was to decrease revenues by approximately $3.3 million versus the prior year, before eliminations. The decrease in sales continued to primarily be driven by lower demand from customers in the pressure pumping sector of the North American oil and gas market. Offsetting weakness in this market was higher demand from customers in the North American and Asian commercial marine markets. Sales to customers serving the global mega yacht market remained at historical lows in the first nine months, while demand remained steady for equipment used in the airport rescue and fire fighting (ARFF), and military markets.

Sales at our manufacturing segment were down 22.8% versus the same period last year. Compared to the first nine months of fiscal 2012, on average, the euro and Swiss franc weakened against the U.S. dollar. The net translation effect of this on foreign manufacturing operations was to decrease revenues for the manufacturing segment by approximately $2.8 million versus the prior year, before eliminations. In the current fiscal year's first nine months, our domestic manufacturing operation saw a decrease of roughly 28% in sales versus the first nine months of fiscal 2012. The primary driver for this decrease was the decrease in shipments of transmissions and related products for the North American oil and gas markets. This was only partially offset by an increase in commercial marine transmission shipments. The Company's Italian manufacturing operations, which have been adversely impacted by the softness in the European mega yacht and industrial markets, experienced a 15.1% decrease compared to the prior fiscal year's first nine months. Approximately one-third of this decrease can be attributed to unfavorable foreign currency translation, with the majority of the remaining decrease due to continued softness and timing of shipments to the Italian mega yacht market. The Company's Belgian manufacturing operation, which also continued to be adversely impacted by the softness in the global mega yacht market, saw an approximately 5% decrease in sales versus the prior fiscal year's first nine months. Approximately two-thirds of this decrease can be attributed to unfavorable foreign currency translation. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 10.9% decrease in sales.

Our distribution segment experienced a slight increase of roughly 2% in sales compared to the first nine months of fiscal 2012. Compared to the first nine months of fiscal 2012, on average, the Asian currencies strengthened against the U.S. dollar. The net translation effect of this on foreign distribution operations was to increase revenues for the distribution segment by approximately $0.3 million versus the prior year, before eliminations. The Company's distribution operations in Singapore continued to experience record shipments for marine transmission products for use in various commercial applications. This operation saw a 44.6% increase in sales versus the prior fiscal year's record first nine months. The Company's distribution operation in the Northwest of the United States and Southwest of Canada experienced a nearly 50% decrease in sales due to continued softness in the Canadian oil and gas market. The Company's distribution operation in Italy, which provides boat accessories and propulsion systems for the pleasure craft market, continued to experience historic lows due to continued weakness in the global pleasure craft and mega yacht markets. The Company's distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw a decrease in sales of just over 18%.

The elimination for net inter/intra segment sales decreased $1.6 million, including an unfavorable exchange movement of $0.7 million, accounting for the remainder of the net change in sales versus the same period last year.

Gross profit as a percentage of sales decreased 760 basis points to 28.4% of sales, compared to 36.0% of sales for the same period last year. Gross profit for fiscal 2013's first nine months was significantly impacted by lower sales volumes, primarily due to lower shipments to the Company's North American pressure pumping transmission customers (approximately $24.7 million), a less profitable mix related to the Company's oil and gas transmission business (approximately $5.6 million), and unfavorable manufacturing efficiency and absorption due to lower volumes.

Year-to-date, ME&A expenses, as a percentage of sales, were 24.3 percent, compared to 20.7 percent for the fiscal 2012 first nine months. For the fiscal 2013 nine-month period, ME&A expenses decreased $3.0 million versus the same period last fiscal year. The table below summarizes significant changes in certain ME&A expenses for the fiscal year:

Nine Months Ended Increase/ $ thousands -Expense/(Income) March 29, 2013 March 30, 2012 (Decrease)

Stock-Based Compensation          $   2,412     $   2,022       $    390
Incentive/Bonus Expense                203          3,128          (2,925)
                                                                   (2,535)
                               Foreign Currency Translation         (805)
                                                                   (3,340)
                                             All Other, Net          383
                                                                $  (2,957)

The net remaining year-to-date increase in ME&A expenses for the year primarily relates to increased research and development activities, wage inflation and additional headcount in the first half of the fiscal year, offset by global reductions in ME&A expenses in the third fiscal quarter.

Interest expense of $1.0 million for the first nine months was down 11.3% versus last fiscal year's first nine months. Total interest on the Company's $40 million revolving credit facility ("revolver") decreased 2% to $0.3 million in fiscal 2013's first nine months versus the same period a year ago. This decrease can be attributed to a decrease in the interest rate on the revolver. The average borrowing on the revolver, computed monthly, was flat at $20.0 million in fiscal 2013's first nine months, compared to the same period a year ago. The interest rate on the revolver decreased from a range of 1.74% to 2.12% in the prior fiscal year's first nine months to a range of 1.70% to 1.75% in the current year. The interest expense on the Company's $25 million Senior Note decreased 20%, at a fixed rate of 6.05%, to $0.7 million, due to a lower remaining principal balance.

The effective tax rate for the first nine months of fiscal 2013 is 46.6%, which is higher than the prior year's 34.4%. The fiscal 2013 rate reflects the provision to return adjustment related to foreign tax credits noted above, along with impact of the valuation allowance on a continued reduced earnings base and increased net foreign earnings. Other offsetting items impacting the year to date tax expense include a favorable benefit from the reinstated research and development tax credit, a reduced domestic manufacturing deduction (i.e. Section 199) benefit and an additional reserve for uncertain tax positions for additional state income taxes.

Financial Condition, Liquidity and Capital Resources

Comparison between March 29, 2013 and June 30, 2012

As of March 29, 2013, the Company had net working capital of $132.8 million, which represents an increase of $2.3 million, or 1.7%, from the net working capital of $130.5 million as of June 30, 2012. The primary drivers of the net increase in net working capital were a $9.8 million, or 9.5%, increase in inventories, a $2.4 million, or a 10.1%, decrease in accounts payable and a $6.9 million, or 17.5%, decrease in accrued liabilities, substantially offset by a $19.2 million, or 30.3%, decrease in accounts receivable.

Cash increased $1.5 million to $17.2 million as of March 29, 2013, versus $15.7 million as of June 30, 2012. The majority of the cash as of March 29, 2013 is at our overseas operations in Europe and Asia-Pacific.

Trade receivables of $44.2 million were down $19.2 million, or over 30%, when compared to last fiscal year-end. The impact of foreign currency translation was to increase accounts receivable by $0.7 million versus June 30, 2012. The net remaining decrease is consistent with the sales volume decrease versus the fourth quarter of fiscal 2012. Historically, the fourth fiscal quarter generally is the strongest sales quarter of the fiscal year.

Net inventory increased by $9.8 million versus June 30, 2012 to $113.0 million. Sequentially, when compared to the second fiscal quarter of 2013, net inventory decreased by $5.3 million, or 4.5%. The impact of foreign currency translation was to increase net inventory by $1.4 million versus June 30, 2012. After adjusting for the impact of foreign currency translation, the net increase of $8.4 million primarily came at the Company's domestic manufacturing and Asian distribution locations. The increase was driven primarily by an elevated level of oil and gas transmissions inventory that has yet to work its way through sales as well as increased inventory to meet increased demand from North American and Asian commercial marine markets. On a consolidated basis, as of March 29, 2013, the Company's backlog of orders to be shipped over the next six months approximates $64.9 million, compared to $98.7 million at June 30, 2012 and $131.4 million at March 30, 2012. The majority of the decrease is being experienced at the Company's domestic manufacturing location due to continued softness in the North American pressure pumping transmission market. As a percentage of six month backlog, inventory has increased from 104% at June 30, 2012 to 174% at March 29, 2013.

Net property, plant and equipment (PP&E) decreased $2.1 million versus June 30, 2012 as depreciation outpaced capital expenditures for the year. This includes the addition of $5.1 million in capital expenditures, primarily at the Company's Racine-based manufacturing operation, which was more than offset by depreciation of $7.5 million. The net remaining decrease is due to foreign currency translation effects. In total, the Company expects to invest up to $10 million in capital assets in fiscal 2013. The Company continues to review its capital plans based on overall market conditions and availability of capital, and may make changes to its capital plans accordingly. In addition, the quoted lead times on certain manufacturing equipment purchases may push some of the capital expenditures into the next fiscal year. In fiscal 2012, the Company spent $13.7 million for capital expenditures, up from $12.0 million and $4.5 million in fiscal years 2011 and 2010, respectively. The Company's capital program is focused on modernizing key core manufacturing, assembly and testing processes and expanding capacity at its facilities around the world.

Accounts payable as of March 29, 2013 of $21.2 million were down $2.4 million, or 10.1%, from June 30, 2012. The impact of foreign currency translation was to increase accounts payable by $0.2 million versus June 30, 2012. The decrease in accounts payable is consistent with the overall decrease in inventory experienced in the third fiscal quarter.

Total borrowings and long-term debt as of March 29, 2013 increased by $2.6 million, or roughly 8%, to $34.7 million versus June 30, 2012. This increase was driven by the overall increase in working capital levels, primarily driven by an increase in inventory and a net decrease in accrued liabilities, and the repurchase of $3.1 million (185,000 shares) of the Company's stock. These were substantially offset by a nearly $20 million reduction in accounts receivable. In addition, the Company made payments for its annual incentive program in the first fiscal quarter of 2013 based on the achievement of fiscal 2012 targets.

Total equity increased $3.3 million, or 2.4%, to $139.8 million as of March 29, 2013. Retained earnings increased by $0.8 million. The net increase in retained earnings included $3.8 million in net earnings attributable to Twin Disc for the first nine months offset by $3.1 million in dividend payments. Net favorable foreign currency translation of $2.5 million was reported. In addition, the adjustment for the amortization of net actuarial loss and prior service cost on the Company's defined benefit pension plans was $2.0 million. The net remaining movement of $2.0 million primarily relates to changes in Treasury Stock, including the repurchase of 185,000 shares of the Company's stock for $3.1 million in the second fiscal quarter.

In December 2002, the Company entered into a $20,000,000 revolving loan agreement with M&I Marshall & Ilsley Bank ("M&I"), which had an original expiration date of October 31, 2005. Through a series of amendments, the last of which was agreed to during the fourth quarter of fiscal 2011, the total commitment was increased to $40,000,000 and the term was extended to May 31, 2015. This agreement contains certain covenants, including restrictions on investments, acquisitions and indebtedness. Financial covenants include a minimum consolidated net worth, minimum EBITDA for the most recent four fiscal quarters of $11,000,000 at March 29, 2013, and a maximum total funded debt to EBITDA ratio of 3.0 at March 29, 2013. As of March 29, 2013, the Company was in compliance with these covenants with a four quarter EBITDA total of $25,192,000 and a funded debt to EBITDA ratio of 1.38. The minimum net worth covenant fluctuates based upon actual earnings and is subject to adjustment for certain pension accounting adjustments to equity. As of March 29, 2013 the minimum equity requirement was $119,173,000 compared to an actual result of $172,808,000 after all required adjustments. The outstanding balance of $20,250,000 and $17,550,000 at March 29, 2013 and June 30, 2012, respectively, is classified as long-term debt. In accordance with the loan agreement as amended, the Company can borrow at LIBOR plus an additional "Add-On," between 1.5% and 2.5%, depending on the Company's Total Funded Debt to EBITDA ratio. The rate was 1.70% and 1.74% at March 29, 2013 and June 30, 2012, respectively.

On April 10, 2006, the Company entered into a Note Agreement (the "Note Agreement") with The Prudential Insurance Company of America and certain other entities (collectively, "Purchasers"). Pursuant to the Note Agreement, Purchasers acquired, in the aggregate, $25,000,000 in 6.05% Senior Notes due April 10, 2016 (the "Notes"). The Notes mature and become due and payable in full on April 10, 2016 (the "Payment Date"). Prior to the Payment Date, the Company is obligated to make quarterly payments of interest during the term of the Notes, plus prepayments of principal of $3,571,429 on April 10 of each year from 2010 to 2015, inclusive. The outstanding balance was $14,285,714 at March 29, 2013 and June 30, 2012, respectively. Of the outstanding balance, $3,571,429 was classified as a current maturity of long-term debt at March 29, 2013 and June 30, 2012, respectively. The remaining $10,714,286 is classified as long-term debt. The Company also has the option of making additional prepayments subject to certain limitations, including the payment of a Yield-Maintenance Amount as defined in the Note Agreement. In addition, the Company will be required to make an offer to purchase the Notes upon a Change of Control, and any such offer must include the payment of a Yield-Maintenance Amount. The Note Agreement includes certain financial covenants which are identical to those associated with the revolving loan agreement discussed above. The Note Agreement also includes certain restrictive covenants that limit, among other things, the incurrence of additional indebtedness and the disposition of assets outside the ordinary course of business. The Note Agreement provides that it shall automatically include any covenants or events of default not previously included in the Note Agreement to the extent such covenants or events of default are granted to any other lender of an amount in excess of $1,000,000. Following an Event of Default, each Purchaser may accelerate all amounts outstanding under the Notes held by such party.

On November 19, 2012, the Company and its wholly-owned subsidiary Twin Disc International, S.A. entered into a multi-currency revolving Credit Agreement with Wells Fargo Bank, National Association. Pursuant to the Credit Agreement, the Company may, from time to time, enter into revolving credit loans in amounts not to exceed, in the aggregate, Wells Fargo's revolving credit commitment of $15,000,000. In general, outstanding revolving credit loans (other than foreign currency loans) will bear interest at one of the following rates, as selected by the Company: (1) a "Base Rate," which is equal to the highest of (i) the prime rate; (ii) the federal funds rate plus 0.50%; or (iii) LIBOR plus 1.00%; or (2) a "LIBOR Rate" (which is equal to LIBOR divided by the difference between 1.00 and the Eurodollar Reserve Percentage (as defined in the Credit Agreement)) plus 1.50%. Outstanding revolving credit loans that are foreign currency loans will bear interest at the LIBOR Rate plus 1.50%, plus an additional "Mandatory Cost," which is designed to compensate Wells Fargo for the cost of compliance with the requirements of the Bank of England and/or the Financial Services Authority, or the requirements of the European Central Bank. In addition to principal and interest payments, the Borrowers will be responsible for paying monthly commitment fees equal to .25% of the unused revolving credit commitment. The Company has the option of making additional prepayments subject to certain limitations. The Credit Agreement includes financial covenants regarding minimum net worth, minimum EBITDA for the most recent four fiscal quarters of $11,000,000, and a maximum total funded debt to EBITDA ratio of 3.0:1. The . . .

  Add TWIN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TWIN - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.