Twin Disc(TWIN) - 2023 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Twin Disc, Incorporated for the quarter ended March 31, 2023, including Balance Sheets, Statements of Operations and Comprehensive Income, and Statements of Cash Flows, with detailed notes Condensed Consolidated Balance Sheets Total assets increased to $285.5 million as of March 31, 2023, from $276.5 million at June 30, 2022, primarily driven by a $9.0 million increase in inventories, while total liabilities saw a slight increase to $146.9 million, and total equity grew by $7.4 million to $138.6 million over the same period Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Total Current Assets | $215,949 | $204,452 | | Inventories | $136,153 | $127,109 | | Total Assets | $285,513 | $276,523 | | Total Current Liabilities | $88,612 | $81,078 | | Long-term debt, less current maturities | $29,276 | $34,543 | | Total Liabilities | $146,894 | $145,335 | | Total Equity | $138,619 | $131,188 | Condensed Consolidated Statements of Operations and Comprehensive Income For the third quarter of fiscal 2023, net sales grew 24.4% year-over-year to $73.8 million, and net income attributable to Twin Disc increased to $2.7 million from $2.2 million, while for the nine-month period, net sales rose 15.6% to $193.0 million, with net income attributable to Twin Disc significantly improving to $1.8 million from $0.3 million in the prior year period Q3 Performance Comparison (in thousands, except per share data) | Metric | Q3 FY2023 | Q3 FY2022 | YoY Change | | :--- | :--- | :--- | :--- | | Net Sales | $73,772 | $59,289 | +24.4% | | Gross Profit | $19,265 | $17,691 | +8.9% | | Income from Operations | $4,605 | $3,055 | +50.7% | | Net Income Attributable to Twin Disc | $2,674 | $2,231 | +19.9% | | Diluted EPS | $0.20 | $0.17 | +17.6% | Nine-Month Performance Comparison (in thousands, except per share data) | Metric | Nine Months FY2023 | Nine Months FY2022 | YoY Change | | :--- | :--- | :--- | :--- | | Net Sales | $193,036 | $166,939 | +15.6% | | Gross Profit | $49,585 | $44,620 | +11.1% | | Income from Operations | $7,838 | $3,282 | +138.8% | | Net Income Attributable to Twin Disc | $1,785 | $316 | +464.9% | | Diluted EPS | $0.13 | $0.02 | +550.0% | Condensed Consolidated Statements of Cash Flows For the nine months ended March 31, 2023, net cash provided by operating activities was $6.9 million, a significant improvement from the $7.2 million used in the prior year period, with net cash from investing activities at $0.6 million, primarily from asset sales, and financing activities using $6.2 million, leading to a net increase in cash of $1.5 million Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Mar 31, 2023 | Nine Months Ended Mar 25, 2022 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $6,859 | $(7,223) | | Net cash provided by investing activities | $593 | $7,746 | | Net cash (used) provided by financing activities | $(6,189) | $1,674 | | Net change in cash | $1,503 | $485 | Notes to Condensed Consolidated Financial Statements The notes provide detailed disclosures on the basis of presentation, segment performance, debt structure, restructuring activities, and other key accounting policies, highlighting strong sales growth in both Manufacturing and Distribution segments, gains from asset sales as part of restructuring, and stable debt management under the amended credit facility - The company operates under two reportable segments: Manufacturing and Distribution. Both segments saw year-over-year sales growth for the quarter and nine-month periods[24][26] - As part of its restructuring, the company sold a real estate property in Belgium during the second quarter of fiscal 2023, receiving $7.15 million in proceeds and recording a gain of $4.16 million[78] - The company's credit agreement was amended in June 2022, extending the maturity to June 2025 and replacing LIBOR-based rates with SOFR and EURIBO benchmarks[52][54][56] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant increase in net sales for both the third quarter and first nine months of fiscal 2023, driven by strong demand across most markets, particularly in North American oil and gas, which, despite supply chain challenges and inflationary pressures affecting gross margins, led to higher operating and net income, strengthening the company's financial condition with increased working capital, reduced net debt, and sufficient liquidity to fund future operations and capital expenditures Results of Operations Q3 FY2023 net sales rose 24.4% YoY to $73.8 million, driven by strong demand in marine, propulsion, and off-highway transmissions, especially in North America, though gross margin declined to 26.1% from 29.8% due to inflation; for the first nine months, sales grew 15.6% to $193.0 million, with gross margin at 25.7%, slightly down from 26.7%, but an improvement from 25.5% after adjusting for prior-year government subsidies - Q3 FY2023 net sales increased 24.4% ($14.5 million) YoY, driven by strong demand in the North American oil and gas market and recovery across most sectors, despite ongoing supply chain challenges[100] Q3 FY2023 Sales Growth by Product/Region | Category | YoY Growth | | :--- | :--- | | Marine and propulsion products | +32.2% | | Off-highway transmission shipments | +21.7% | | Industrial products | -13.7% | | North American region | +33.9% | | Asia Pacific region | +43.1% | - Gross profit percentage for Q3 FY2023 declined to 26.1% from 29.8% in the prior year, primarily due to inflationary cost pressures of $2.5 million[103] - For the first nine months of FY2023, net sales increased 15.6% ($26.1 million) YoY. Adjusting for prior-year COVID-19 relief subsidies, the gross profit margin improved from 25.5% to 25.7%[108][111] Financial Condition, Liquidity and Capital Resources As of March 31, 2023, the company's financial condition improved, with net working capital increasing by $3.9 million to $127.3 million since June 30, 2022, total debt decreasing by $5.3 million to $31.3 million, and net debt (total debt less cash) improving by $6.8 million to $17.3 million, while maintaining adequate liquidity with $20.8 million available under its revolving credit facility and expecting capital expenditures of $9 to $11 million in fiscal 2023 - Inventories increased by $9.0 million (7.1%) to $136.2 million compared to June 30, 2022, mainly due to supply chain imbalances, though the inventory-to-backlog ratio improved[119] - The six-month order backlog grew to $127.7 million as of March 31, 2023, up from $101.2 million at June 30, 2022[119] - Total debt decreased by $5.3 million since June 30, 2022, with net debt improving by $6.8 million to $17.3 million, aided by positive free cash flow and proceeds from an asset sale[122] - The company has approximately $20.8 million of available borrowings under its credit facility and plans for $9 to $11 million in capital expenditures for fiscal 2023[124][125] Part II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in several product liability claims, which are considered either adequately covered by insurance or not material to its financial condition - The Company is a defendant in several product liability or related claims which are considered either adequately covered by appropriate liability insurance or involving amounts not deemed material[134] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes to risk factors have occurred since the 2022 Annual Report on Form 10-K[135] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not sell any unregistered equity securities during the quarter, and no shares were repurchased during the quarter ended March 31, 2023, with 315,000 shares remaining authorized for purchase under existing plans - The company did not purchase any of its common stock during the quarter ended March 31, 2023[138] - As of March 31, 2023, 315,000 shares remain authorized for repurchase under the company's existing programs[138] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of the end of the period, with no material changes made to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures are effective as of the end of the reporting period[132] - No changes were made during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[133]