Twin Disc: Generated $8.7 Million in Operating Cash Flow in Fourth Quarter

OREANDA-NEWS. Twin Disc, Inc. (NASDAQ:TWIN), today reported financial results for the fiscal 2016 fourth quarter ended June 30, 2016. 

Sales for the fiscal 2016 fourth quarter were $42,646,000, compared to $67,334,000 for the same period last year.  For fiscal 2016, sales were $166,282,000, compared to $265,790,000 for fiscal 2015.  The sales decline for both the fiscal 2016 fourth quarter and full year is the result of reduced demand for the Company’s oil and gas related products in both North America and Asia driven by the global decline in oil and natural gas production, along with softening demand in Asia for the Company’s commercial marine products.  Demand from customers in Europe remained weak, while overall demand in North America was relatively stable for the Company’s commercial marine and non-oil and gas industrial products.  Currency had an unfavorable impact on fiscal 2016 sales compared to 2015 totaling $7,877,000 for the full fiscal year, due to the strengthening of the U.S. dollar against the Euro and Asian currencies.   

Commenting on the results, John H. Batten, President and Chief Executive Officer, said: “Fiscal 2016 was a very challenging year.  The decline in oil prices and subsequent collapse of North American oil production severely impacted demand for our oil and gas transmissions used in pressure-pumping applications.  The impacts of lower oil prices spread to other markets as we experienced weaker demand from international customers, as well as lower demand from commercial marine customers that manufacture offshore crew boats.  We responded to this difficult cycle by restructuring our operations, implementing cost reduction initiatives, and lowering fixed costs.  As a result of these actions, we have eliminated more than $7,500,000 of costs from our operations.  We continue to watch our markets closely, and evaluate our manufacturing costs and global footprint to align our cost structure with future volumes, while maintaining our ability to execute and to succeed when our markets eventually come back.”

Gross margin for the fiscal 2016 fourth quarter was 26.2 percent, the highest level of the fiscal year, compared to 29.0 percent for the same period last year.  Gross profit for fiscal 2016’s fourth quarter was unfavorably impacted by reduced volumes and a less profitable product mix driven by lower sales of the Company’s oil and gas transmission products.  These unfavorable items were partially offset by improved efficiencies and a global reduction in fixed manufacturing costs.  For fiscal 2016, gross margin was 24.4 percent, compared to 31.2 percent for fiscal 2015. 

For the fiscal 2016 fourth quarter marketing, engineering and administrative (ME&A) expenses declined $2,970,000 to $13,208,000, compared to $16,178,000 for the fiscal 2015 fourth quarter.  The 18.4 percent decline in ME&A expenses in the quarter was primarily due to headcount reductions, the elimination of the bonus for fiscal 2016, currency movements and general cost containment measures, partially offset by increases related to pension expense.  For fiscal 2016, ME&A expenses decreased $7,151,000, or 11.1 percent, to $57,113,000, compared to $64,264,000 for fiscal 2015.

During fiscal 2016, the Company recorded restructuring charges of $921,000, compared to $3,282,000 recorded last fiscal year.  The actions taken in fiscal 2016 are expected to generate over $4,500,000 in annualized savings through reductions in the base salaries of the Company’s corporate officers, the elimination of salaried positions, reductions in base salaries and wages of salaried and hourly employees at the Company’s headquarters and domestic manufacturing facilities, temporary layoffs at its Racine operation and headcount reductions at certain foreign subsidiaries.

As previously disclosed, the Company sold the assets and distribution rights of its distribution entity covering the southeast U.S. territory during the fiscal 2016 first quarter for approximately $4,100,000, resulting in a net operating gain of $445,000. 

Due to the sustained decline in the Company’s operating results throughout fiscal 2016 and the uncertain recovery of the markets served, the Company recorded a $7,602,000 non-cash goodwill impairment charge in the fiscal 2016 fourth quarter related to the domestic industrial business and the European propulsion business.

The effective tax rate for the twelve months of fiscal 2016 was 48.6%, which is significantly higher than the prior year rate of 28.4%. During fiscal 2016, the Company recorded the favorable impact of $2,400,000 of foreign tax credits associated with the repatriation of cash from certain foreign entities.  Adjusting for this non-recurring tax benefit, the fiscal 2016 effective tax rate would have been 39.1%.  The fiscal 2015 rate was favorably impacted by a change in the jurisdictional mix of earnings, along with favorable discrete items related to foreign earnings, and the reinstatement of the research and development credit for calendar 2015.

Net loss attributable to Twin Disc for the fiscal 2016 fourth quarter was ($5,517,000), or ($0.49) per share, compared with earnings attributable to Twin Disc of $437,000, or $0.04 per diluted share, for the fiscal 2015 fourth quarter.  For fiscal 2016, the net loss attributable to Twin Disc was ($13,104,000), or ($1.17) per share, compared to earnings of $11,173,000, or $0.99 per diluted share for fiscal 2015. 

Adjusted net loss for the fiscal 2016 fourth quarter and twelve-month period was ($183,000), or ($0.01) per share, and ($7,554,000), or ($0.68) per share, respectively.  Adjusted net income for the fiscal 2015 fourth quarter and twelve-month period was $2,511,000, or $0.22 per share, and $13,247,000, or $1.17 per share, respectively. 

Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA)* were ($7,564,000) for the fiscal 2016 fourth quarter, compared to $2,556,000 for the fiscal 2015 fourth quarter.  For fiscal 2016, EBITDA was ($16,113,000), compared to $26,455,000 for fiscal 2015.  Fiscal 2016 EBITDA includes charges for goodwill impairment ($7,602,000) and restructuring ($921,000), while the fiscal 2015 EBITDA includes a restructuring charge ($3,282,000). 

Jeffrey S. Knutson, Vice President – Finance, Chief Financial Officer, Treasurer and Secretary, stated: “Throughout the recent downturn we have strengthened our balance sheet by reducing working capital levels, which has resulted in strong operating cash flows and lower debt.  As a result, we have the highest fiscal year ending net cash position in the history of the Company.  We generated $8,726,000 million of operating cash flow during the fourth quarter, which helped increase our cash position to $18,273,000 at June 30, 2016.  In addition, during the quarter we made the last payment under our Senior Notes leaving the Company with its revolving Credit Agreement, which had a balance of $8,501,000 and $12,058,000 of availability at June 30, 2016.  Our balance sheet and access to capital is strong and provides us with significant flexibility to withstand the downturn in our markets, while making targeted investments in our business to strengthen our organization.” 

Mr. Batten concluded: “Our six-month backlog at June 30, 2016 was $35,709,000 compared to $39,952,000 at March 25, 2016 and $34,397,000 at June 30, 2015.  As a result of weaker global economic growth and lower oil production, the conditions of many of our markets remained challenging and impacted our six-month backlog.  We remain optimistic in our long-term market opportunities but expect difficult conditions will remain over the next several quarters.  We continue to focus on optimizing our cost structure to respond to the prolonged downturn in our markets, while investing in our business and products to expand our offerings and to grow our market share.  In addition, we are aggressively pursuing new markets, customers and applications for existing products, and have successfully released several new products, with additional releases scheduled in the coming months.”

Twin Disc will be hosting a conference call to discuss these results and to answer questions at 11:00 a.m. Eastern Time on Thursday, August 18, 2016. To participate in the conference call, please dial 888-359-3627 five to ten minutes before the call is scheduled to begin. A replay will be available from 2:00 p.m. August 18, 2016 until midnight August 25, 2016. The number to hear the teleconference replay is 877-870-5176. The access code for the replay is 4454159. 

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 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 INCOME (LOSS)
(In thousands, except per-share data; unaudited)
		Three Months Ended								Twelve Months Ended
			June 30,				June 30,				June 30,				June 30,
			2016				2015				2016				2015
Net sales		$	42,646			$	67,334			$	166,282			$	265,790
Cost of goods sold			31,465				47,800				125,687				182,758
Gross profit			11,181				19,534				40,595				83,032
Marketing, engineering and
administrative expenses			13,208				16,178				57,113				64,264
Restructuring of operations			134				3,282				921				3,282
Goodwill impairment charge			7,602				-				7,602				-
Other operating (income)			-				-				(445	)			-
(Loss) earnings from operations			(9,763	)			74				(24,596	)			15,486
Interest expense			70				170				426				606
Other (income) expense, net			13				1				273				(1,020	)
(Loss) earnings before income
taxes and non-controlling interest			(9,846	)			(97	)			(25,295	)			15,900
Income tax (benefit) expense			(4,328	)			(573	)			(12,282	)			4,515
Net (loss) earnings			(5,518	)			476				(13,013	)			11,385
Less: Net loss (earnings) attributable to
non-controlling interest, net of tax			1				(39	)			(91	)			(212	)
Net (loss) earnings attributable to Twin Disc		$	(5,517	)		$	437			$	(13,104	)		$	11,173
(Loss) earnings per share data:
Basic (loss) earnings per share attributable
to Twin Disc common shareholders		$	(0.49	)		$	0.04			$	(1.17	)		$	0.99
Diluted (loss) earnings per share attributable
to Twin Disc common shareholders		$	(0.49	)		$	0.04			$	(1.17	)		$	0.99
Weighted average shares outstanding data:
Basic shares outstanding			11,207				11,268				11,203				11,273
Diluted shares outstanding			11,207				11,270				11,203				11,277
Dividends per share		$	-			$	0.09			$	0.18			$	0.36
Comprehensive income (loss):
Net (loss) earnings		$	(5,518	)		$	476			$	(13,013	)		$	11,385
Other comprehensive (loss) income:
Benefit plan adjustments, net			(9,295	)			(7,044	)			(7,080	)			(5,499	)
Foreign currency translation adjustment			623				643				(1,557	)			(14,119	)
Comprehensive loss			(14,190	)			(5,925	)			(21,650	)			(8,233	)
Less: Comprehensive income attributable to
noncontrolling interest			(33	)			(45	)			(114	)			(132	)
Comprehensive loss attributable to
Twin Disc		$	(14,223	)		$	(5,970	)		$	(21,764	)		$	(8,365	)

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands; unaudited)
		June 30,				June 30,
		2016				2015
ASSETS
Current assets:
Cash		$	18,273			$	22,936
Trade accounts receivable, net			25,363				43,883
Inventories			66,569				80,241
Deferred income taxes			-				4,863
Other			14,830				17,907
Total current assets			125,035				169,830
Property, plant and equipment, net			51,665				56,427
Goodwill, net			5,120				12,789
Deferred income taxes			25,870				4,878
Intangible assets, net			2,164				2,186
Other assets			4,068				3,752
TOTAL ASSETS		$	213,922			$	249,862
LIABILITIES AND EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt		$	-			$	3,571
Accounts payable			14,716				20,729
Accrued liabilities			21,415				32,754
Total current liabilities			36,131				57,054
Long-term debt			8,501				10,231
Accrued retirement benefits			48,705				38,362
Deferred income taxes			827				1,093
Other long-term liabilities			2,705				2,955
Total liabilities			96,869				109,695
Twin Disc shareholders’ equity:
Preferred shares authorized: 200,000; issued: none; no par value			-				-
Common shares authorized: 30,000,000;
Issued: 13,099,468; no par value			11,761				12,259
Retained earnings			175,662				190,807
Accumulated other comprehensive loss			(44,143	)			(35,481	)
			143,280				167,585
Less treasury stock, at cost
(1,749,294 and 1,832,121 shares, respectively)			26,790				28,057
Total Twin Disc shareholders' equity			116,490				139,528
Noncontrolling interest			563				639
Total equity			117,053				140,167
TOTAL LIABILITIES AND EQUITY		$	213,922			$	249,862

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
		Twelve Months Ended
		June 30,				June 30,
		2016				2015
Cash flows from operating activities:
Net (loss) earnings		$	(13,013	)		$	11,385
Adjustments to reconcile net (loss) earnings to cash
provided by operating activities:
Depreciation and amortization			8,847				10,161
Impairment charge			7,602				-
Stock compensation expense			1,295				696
Restructuring of operations			354				3,282
Provision for deferred income taxes			(12,203	)			(442	)
Other, net			74				215
Net change in operating assets and liabilities			10,435				(8,237	)
Net cash provided by operating activities			3,391				17,060
Cash flows from investing activities:
Proceeds from sale of business			3,500				-
Proceeds from life insurance policy			2,002				-
Proceeds from sale of plant assets			124				279
Capital expenditures			(4,214	)			(9,049	)
Other, net			(270	)			1,934
Net cash provided (used) by investing activities			1,142				(6,836	)
Cash flows from financing activities:
Payments of senior notes			(3,571	)			(3,600	)
Borrowings under revolving loan agreement			89,473				83,681
Repayments under revolving loan agreement			(91,203	)			(84,674	)
Proceeds from exercise of stock options			12				15
Dividends paid to shareholders			(2,041	)			(4,061	)
Dividends paid to non-controlling interest			(192	)			(220	)
Excess tax benefits (shortfall) from stock compensation			(349	)			(26	)
Payments of withholding taxes on compensation			(190	)			(313	)
Net cash used by financing activities			(8,061	)			(9,198	)
Effect of exchange rate changes on cash			(1,135	)			(2,847	)
Net change in cash			(4,663	)			(1,821	)
Cash:
Beginning of period			22,936				24,757
End of period		$	18,273			$	22,936

RECONCILIATION OF CONSOLIDATED NET (LOSS) EARNINGS TO EBITDA
(In thousands; unaudited)
		Three Months Ended								Twelve Months Ended
		June 30,				June 30,				June 30,				June 30,
		2016				2015				2016				2015
Net (loss) earnings attributable to Twin Disc		$	(5,517	)		$	437			$	(13,104	)		$	11,173
Interest expense			70				170				426				606
Income taxes			(4,328	)			(573	)			(12,282	)			4,515
Depreciation and amortization			2,211				2,522				8,847				10,161
Earnings (loss) before interest, taxes,
depreciation and amortization		$	(7,564	)		$	2,556			$	(16,113	)		$	26,455