Twin Disc, Inc.

Apr 19, 2011

Twin Disc, Inc. Announces Fiscal 2011 Third-Quarter Financial Results

RACINE, Wis.--(BUSINESS WIRE)-- Twin Disc, Inc. (NASDAQ: TWIN), today reported financial results for the fiscal 2011 third quarter ended March 25, 2011.

Sales for the fiscal 2011 third quarter were $76,471,000, compared to $60,977,000 for the fiscal 2010 third quarter. Year-to-date, sales were $213,026,000, compared to $163,220,000 for the fiscal 2010 nine months. The improvement in sales was primarily the result of growing demand from customers in the oil and gas market. In addition, the Company experienced modest growth from both the aftermarket and industrial products markets. Stable demand continued from land- and marine-based military, airport rescue and fire fighting (ARFF), pleasure craft and commercial marine markets.

Gross margin for the fiscal 2011 third quarter was 36.3 percent, compared to 27.1 percent in last year's comparable period and 31.6 percent in the fiscal 2011 second quarter. The fiscal 2011 third-quarter gross margin percentage was the highest for any quarter in the Company's history. The significant improvement in the fiscal 2011 third quarter gross margin compared to the same period last fiscal year was the result of increased sales volumes, improved manufacturing efficiency and absorption, and a more profitable mix of business. Year-to-date, gross margin was 33.6 percent, compared to 25.1 percent for the fiscal 2010 first nine months.

For the fiscal 2011 third quarter, marketing, engineering and administrative (ME&A) expenses, as a percentage of sales, were 22.3 percent, compared to 23.9 percent for the fiscal 2010 third quarter. ME&A expenses increased $2,499,000 versus the fiscal 2010 third quarter. Stock based compensation expense in the 2011 fiscal third quarter of $982,000 increased $860,000 versus the same period a year ago, primarily driven by the increase in the Company's stock price in the third fiscal quarter. In addition, there was $974,000 of domestic bonus expense in the third fiscal quarter, compared to $0 in the prior fiscal year. Year-to-date, ME&A expenses, as a percentage of sales, were 23.7 percent, compared to 25.9 percent for the fiscal 2010 first nine months. For the fiscal 2011 nine months, ME&A expenses increased $8,242,000 versus the same period last fiscal year. Stock based compensation expense in the 2011 fiscal nine months of $3,288,000 increased $2,904,000 versus the same period a year ago, primarily driven by the increase in the Company's stock price in the nine months of fiscal 2011. In addition, there was $2,874,000 of domestic bonus expense in the nine months of fiscal 2011, compared to $0 in the prior fiscal year. The net remaining increase in ME&A, both for the quarter and on a year-to-date basis, was primarily driven by higher salary and benefit costs, increased travel, higher project related expenses and a continued emphasis on the Company's product development program.

The effective tax rate for the first nine months of fiscal year 2011 of 40.4 percent is significantly lower than the prior year of 52.4 percent. The current year rate includes a $794,000 benefit due to a favorable adjustment to the deferred tax asset related to the pension liability as the Company increased their estimated tax rate from 34.0 percent to 35.0 percent in the second fiscal quarter, and a favorable impact of approximately $147,000 related to the reinstatement of the R&D credit, which was passed into law during the second fiscal quarter. These benefits were unfavorably impacted during the third fiscal quarter as the Company recorded a valuation allowance of approximately $2,400,000, or $0.21 per diluted share, at one of the Company's foreign jurisdictions. In each reporting period, the Company assesses the recoverability of its deferred tax assets, based primarily on documented evidence, and a valuation allowance is established when the Company determines that it is more likely than not that some portion or all of its deferred tax assets will not be realized. The Company concluded during the third fiscal quarter that based primarily upon recent losses in this jurisdiction and failure to achieve targeted levels of improvement in the current year, a full valuation allowance was necessary. The annualized effective rate before these discrete items is 32.8 percent. The prior year rate was relatively high due to the impact of permanent items, which remained relatively constant but had a greater impact on the rate due to the low base of earnings in fiscal 2010.

Net earnings attributable to Twin Disc for the fiscal 2011 third quarter were $4,548,000, or $0.40 per diluted share, compared to $1,451,000, or $0.13 per diluted share, for the fiscal 2010 third quarter. Net earnings for the fiscal 2011 third quarter were negatively impacted by the $2,400,000 valuation allowance described above. Year-to-date, net earnings attributable to Twin Disc were $11,238,000, or $0.98 per diluted share, compared to a net loss of $1,443,000, or $0.13 per diluted share for the fiscal 2010 first nine months.

Earnings before interest, taxes, depreciation and amortization (EBITDA)* was $12,906,000 for the fiscal 2011 third quarter, compared to $4,800,000 for the fiscal 2010 third quarter. For the fiscal 2011 nine months, EBITDA was $27,178,000, compared to $6,262,000 for the fiscal 2010 comparable period.

Commenting on the results, Michael E. Batten, Chairman and Chief Executive Officer, said: "We experienced revenue growth from a higher number of end markets, particularly from our pressure pumping transmission systems to customers in the oil and gas industry. The strength of the capital goods cycle in the oil and gas market continues, reflecting the worldwide economic recovery and geopolitical concerns in the Middle East, which are impacting the price of oil and gas. Our optimism is increasing because certain of our other markets have started to show favorable trends; most notably orders for our industrial products have begun to increase. These business improvements are encouraging given our mega yacht business remains at depressed levels."

Christopher J. Eperjesy, Vice President - Finance, Chief Financial Officer and Treasurer, stated: "The positive financial results we are achieving are having a favorable impact on our balance sheet. We are continuing to build inventories, which have increased $20,512,000, or 28.2 percent, primarily a result of anticipated higher oil and gas product sales. Of this increase, $6,737,000 is attributable to foreign currency translation increases since June 30, 2010. Working capital at the end of the fiscal 2011 third quarter increased 32.1 percent to $111,166,000, compared to $84,143,000 at the end of fiscal 2010. We expect working capital to remain at these levels as our receivables and inventory remain high due to our robust sales growth. Total debt, net of cash, at March 25, 2011 was $12,305,000 versus $12,109,000 at June 30, 2010 and $6,384,000 at December 31, 2010. Total Twin Disc shareholders' equity at the end of the fiscal 2011 third quarter improved 30.2 percent to $115,215,000, from $88,460,000 at the end of fiscal 2010."

Mr. Batten concluded: "Our six-month backlog at March 25, 2011 was a record $140,239,000 compared to $118,827,000 at December 31, 2010, $84,419,000 at June 30, 2010 and $72,786,000 at March 26, 2010. We are continuing to benefit from very positive demand from oil and gas exploration and development, as well as modest growth in orders from several of our other end markets. Looking forward, we are optimistic the favorable oil and gas market fundamentals will continue as backlog and shipments of the 8500 series remain at record levels. The 7500 transmission is in field testing and results to date are encouraging. We continue to believe we will be shipping initial units in the fiscal 2011 fourth quarter. We remain optimistic that the Company is positioned to achieve very good fiscal 2011 financial results and that the outlook for fiscal 2012 is encouraging."

Twin Disc will be hosting a conference call to discuss these results and to answer questions at 2:00 p.m. Eastern Time on Tuesday, April 19, 2011. To participate in the conference call, please dial 877-941-2069 five to ten minutes before the call is scheduled to begin. A replay will be available from 5:00 p.m. April 19, 2011 until midnight April 26, 2011. The number to hear the teleconference replay is 877-870-5176. The access code for the replay is 4432000.

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://www.twindisc.com/companyinvestor.aspx and follow the instructions at the web cast link. The archived web cast 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, 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 foreign currency exchange rate changes and the impact of acquisitions 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 INCOME (LOSS)

(In thousands, except per-share data, unaudited)

 
        Three Months Ended     Nine Months Ended

March 25,
2011

 

March 26,
2010

March 25,
2011

 

March 26,
2010

Net sales $ 76,471 $ 60,977 $ 213,026 $ 163,220
Cost of goods sold   48,689   44,472     141,464     122,182  
Gross profit 27,782 16,505 71,562 41,038
 

Marketing, engineering and administrative expenses

  17,054   14,555     50,470     42,228  
Earnings (loss) from operations 10,728 1,950 21,092 (1,190 )
Interest expense 430 639 1,309 1,821

Other expense (income), net

  193   (433 )   836     (236 )

Earnings (loss) before income taxes and noncontrolling interest

 

10,105

 

1,744

 

18,947

 

(2,775

 

)

Income taxes   5,563   244     7,648     (1,454 )
 
Net earnings (loss) 4,542 1,500 11,299 (1,321 )

Less: Net loss (earnings) attributable to noncontrolling interest, net of tax

6 (49 ) (61 ) (122 )
Net earnings (loss) attributable to Twin Disc $ 4,548 $ 1,451   $ 11,238   $ (1,443 )
 
Earnings (loss) per share data:

Basic earnings (loss) per share attributable to Twin Disc common shareholders

$

0.40

$

0.13

$

0.99

$

(0.13

)

Diluted earnings (loss) per share attributable to Twin Disc common shareholders

$

0.40

$

0.13

$

0.98

$

(0.13

)

 
Weighted average shares outstanding data:
Basic shares outstanding 11,344 11,065 11,308 11,062
Diluted shares outstanding 11,474 11,150 11,419 11,062
 
Dividends per share $ 0.08 $ 0.07 $ 0.22 $ 0.21
 
Comprehensive income (loss):
Net earnings (loss) $ 4,542 $ 1,500 $ 11,299 $ (1,321 )
Benefit plan adjustments, net 545 488 1,665 1,405
Other comprehensive income:
Foreign currency translation adjustment   4,551   (7,124 )   14,776     (1,209 )
Comprehensive income (loss) 9,638 (5,136 ) 27,740 (1,125 )

Comprehensive loss (income) attributable to noncontrolling interest

 

6

 

(49

)

 

 

(61

)

 

(122

)

Comprehensive income (loss) attributable to Twin Disc

 

$

 

9,644

 

$

 

(5,185

 

)

 

$

 

27,679

 

 

$

 

(1,247

 

)

 
 
 

RECONCILIATION OF CONSOLIDATED NET EARNINGS (LOSS) TO EBITDA

(In thousands, unaudited)

 
       

Three Months Ended

   

Nine Months Ended

March 25,
2011

 

March 26,
2010

March 25,
2011

 

March 26,
2010

Net earnings (loss) attributable to Twin Disc $ 4,548 $ 1,451 $ 11,238 $ (1,443 )
Interest expense 430 639 1,309 1,821
Income taxes 5,563 244 7,648 (1,454 )
Depreciation and amortization   2,365   2,466   6,983   7,338  

Earnings before interest, taxes, depreciation and amortization

$ 12,906 $ 4,800 $ 27,178 $ 6,262  
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
           
March 25, June 30,

2011

2010

ASSETS
Current assets:
Cash $ 18,499 $ 19,022
Trade accounts receivable, net 55,416 43,014
Inventories, net 93,311 72,799
Deferred income taxes 6,212 5,224
Other   9,275     7,391  
 
Total current assets 182,713 147,450
 
Property, plant and equipment, net 59,396 58,243
Goodwill, net 17,476 16,440
Deferred income taxes 21,868 24,029
Intangible assets, net 6,400 6,268
Other assets   6,774     6,626  
 
TOTAL ASSETS $ 294,627   $ 259,056  
 
LIABILITIES AND EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt $ 3,973 $ 3,920
Accounts payable 32,238 23,842
Accrued liabilities   35,336     35,545  
 
Total current liabilities 71,547 63,307
 
Long-term debt 26,831 27,211
Accrued retirement benefits 70,857 72,833
Deferred income taxes 4,225 3,914
Other long-term liabilities   5,054     2,472  
 
Total liabilities 178,514 169,737
 
Equity:
Twin Disc shareholders' equity:
Common stock authorized: 30,000,000;
Issued: 13,099,468; no par value 10,170 10,667
Retained earnings 156,182 147,438
Accumulated other comprehensive loss   (25,722 )   (42,048 )
 
140,630 116,057

Less treasury stock, at cost (1,760,774 and 2,070,124 shares, respectively)

 

25,415

   

27,597

 
 

Total Twin Disc shareholders' equity

  115,215     88,460  
 
Noncontrolling interest   898     859  
Total equity   116,113     89,319  
 
TOTAL LIABILITIES AND EQUITY $ 294,627   $ 259,056  
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 
        Nine Months Ended

March 25,
2011

   

March 26,
2010

 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 11,299 $ (1,321 )

Adjustments to reconcile to net earnings (loss) to cash provided by operating activities:

Depreciation and amortization 6,983 7,338
Other non-cash changes, net 5,537 270
Net change in working capital, excluding cash   (19,753 )   16,827  
Net cash provided by operating activities   4,066     23,114  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of fixed assets

(4,099

)

(2,791

)

Proceeds from sale of fixed assets

58

 

30

 

Other, net  

(293

)

 

(293

)

Net cash used by investing activities   (4,334 )   (3,054 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 19 89
Payments of notes payable (82 ) (531 )
Payments of long-term debt (352 ) (15,244 )
Proceeds from exercise of stock options 203 80

Dividends paid to shareholders

 

(2,494

)

(2,352

)

Dividends paid to noncontrolling interest

(137

)

(160

)

Other   223    

(466

)
Net cash used by financing activities   (2,620 )   (18,584 )
 
Effect of exchange rate changes on cash   2,365     (209 )
 
Net change in cash (523 ) 1,267
 
Cash:
Beginning of period   19,022     13,266  
 
End of period $ 18,499   $ 14,533  
 

Twin Disc, Inc.
Christopher J. Eperjesy, 262-638-4343

Source: Twin Disc, Inc.

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