TWIN DISC INC

Previous wording

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our condensed consolidated financial statements as of September 27, 2024, and related notes, as reported in Item 1 of this Quarterly Report.

Current wording

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated financial statements as of December 27, 2024, and related notes, as reported in Item 1 of this Quarterly Report.

Previous wording

Comparison of the First Quarter of Fiscal 2025 with the First Quarter of Fiscal 2024

Current wording

Comparison of the Second Quarter of Fiscal 2025 with the Second Quarter of Fiscal 2024

Previous wording

Net sales for the first quarter increased 14.7%, or $9.3 million, to $72.9 million from $63.6 million in the same quarter a year ago. The acquisition of Katsa Oy (“Katsa”), completed in the fourth quarter of fiscal 2024, contributed $9.2 million of additional revenue in the quarter. This was partially offset by the sale of the boat management system product line in the prior year, reducing revenue by $1.8 million in the quarter. The remaining increase of $1.9 million reflects continued growth in demand for the company’s Veth propulsion systems, along with improved revenue from the European and Australian distribution entities. The Company experienced a decline in demand for oilfield transmissions in China, negatively impacting revenue for the quarter. Global sales of marine and propulsion products improved 17.0% from the prior year, while shipments of industrial products improved by 61.3%. Shipments of off-highway transmission products declined by 7.0%, with a slow-down in the Chinese oil market. The European region saw a significant increase in revenue ($7.7 million or 35.6%) thanks primarily to the acquisition of Katsa. Sales into North America decreased 5.6%, or $1.0 million, on softer commercial marine shipments in the quarter. The Asia Pacific region declined 15.3%, or $3.0 million, on weaker demand for oilfield transmissions into China. Currency translation had a favorable impact on first quarter fiscal 2025 sales compared to the first quarter of the prior year totaling $0.7 million primarily due to the strengthening of the euro against the U.S. dollar.

Current wording

Net sales for the second quarter increased 23.2%, or $16.9 million, to $89.9 million from $73.0 million in the same quarter a year ago. The acquisition of Katsa Oy, completed in the fourth quarter of fiscal 2024, contributed $10.0 million of additional revenue in the quarter. This was partially offset by the sale of the boat management system product line in the prior year, reducing revenue by $0.8 million in the quarter. The remaining increase of $7.1 million primarily reflects continued growth in demand for the company’s Veth propulsion systems, along with improved shipments of the Company’s products for the airport rescue and firefighting (“ARFF”) market. The Company experienced a decline in demand for oilfield transmissions, negatively impacting revenue for the quarter. Global sales of marine and propulsion products improved 20.8% from the prior year, while shipments of industrial products improved by 44.8%. Shipments of off-highway transmission products improved by 19.8%, with improving ARFF shipments. The European region saw a significant increase in revenue ($5.4 million or 21.5%) thanks primarily to the acquisition of Katsa. Sales into North America increased 13.3%, or $2.7 million, on improved industrial and commercial marine shipments in the quarter. The Asia Pacific region increased 2.1%, or $0.4 million, on flat demand for oilfield transmissions into China. Currency translation had a favorable impact on second quarter fiscal 2025 sales compared to the second quarter of the prior year totaling $0.4 million primarily due to the strengthening of the euro, Singapore dollar and Australian dollar against the U.S. dollar.

Previous wording

Sales at our manufacturing segment increased 14.8%, or $8.1 million, versus the same quarter last year. The Company’s new acquisition in Finland, Katsa, contributed $9.2 million of incremental revenue. The U.S. manufacturing operations experienced a 1.8%, or $0.5 million, increase in sales versus the first fiscal quarter of 2024, with some improvement in demand for industrial products. The Company’s operation in the Netherlands saw increased revenue of $0.7 million (4.5%) compared to the first fiscal quarter of 2024, as this operation continues to experience record demand for its propulsion systems. The Company’s Belgian operation saw a decrease compared to the prior year first quarter (7.3% or $0.4 million), with weaker demand for its marine transmission products. The Company’s Italian manufacturing operation was down $2.1 million, 41.0%, compared to the first quarter of fiscal 2024, due primarily to the sale of the boat management product line in the prior year. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.2 million, 12.1%, compared to the prior year first quarter.

Current wording

Sales at our manufacturing segment increased 31.0%, or $18.1 million, versus the same quarter last year. The Company’s new acquisition, Katsa Oy, in Finland contributed $10.0 million of incremental revenue. The U.S. manufacturing operations experienced a 10.3%, or $2.9 million, increase in sales versus the second fiscal quarter of 2024, with improvement in demand for ARFF and industrial products. The Company’s operation in the Netherlands saw increased revenue of $8.2 million (48.6%) compared to the second fiscal quarter of 2024, as this operation continues to experience record demand for its propulsion systems. The Company’s Belgian operation saw a decrease compared to the prior year first quarter (20.3% or $1.4 million), with weaker demand for its marine transmission products. The Company’s Italian manufacturing operations were down $2.4 million (47.8%) compared to the second quarter of fiscal 2024, due primarily to the sale of the boat management product line in the prior year, along with weaker European demand for industrial and commercial marine products. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.1 million (6.1%) compared to the prior year second quarter.

Previous wording

For the fiscal 2025 first quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 26.7%, compared to 26.6% for the fiscal 2024 first quarter. ME&A expenses increased $2.6 million, 15.2%, over the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of the addition of Katsa ($1.4 million), a stock-based compensation adjustment ($0.5 million), a legal settlement ($0.4 million) and a general inflationary impact ($0.3 million).

Current wording

For the fiscal 2025 second quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 21.0%, compared to 23.6% for the fiscal 2024 second quarter. ME&A expenses increased $1.7 million (9.9%) over the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of the addition of Katsa ($1.6 million) and an increase in professional fees ($0.8 million). These increases were offset by a decrease in global bonus expense ($0.8 million).

Previous wording

Interest expense was up $0.2 million to $0.6 million in the first quarter of fiscal 2025, with a higher average outstanding revolver balance following the Katsa acquisition.

Current wording

Interest expense was up $0.1 million to $0.5 million in the second quarter of fiscal 2025, with a higher average outstanding revolver balance following the Katsa acquisition.

Previous wording

The fiscal 2025 first quarter effective tax rate was (29.2%) compared to (101.9%) in the prior fiscal year first quarter. The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the change to the effective tax rate.

Current wording

The fiscal 2025 second quarter effective tax rate was 58.5% compared to 64.0% in the prior fiscal year second quarter. The full domestic valuation allowance, along with the mix of foreign earnings by jurisdiction, resulted in the change to the effective tax rate.

Previous wording

Our distribution segment experienced a decrease in sales of $2.6 million, 7.8%, in the first quarter of fiscal 2025 compared to the first quarter of fiscal 2024. The Company’s Asian distribution operations in Singapore, China and Japan were down 34.6% or $6.3 million from the prior year on delayed deliveries for energy related products into China. The Company’s North America distribution operation saw a slight decrease ($0.3 million or 6.2%) on timing of supply of product from the manufacturing operations. The Company’s European distribution operation saw a significant increase ($2.1 million or 58.8%) on a strong backlog of commercial marine projects. The Company’s distribution operation in Australia and New Zealand, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in revenue (22.6% increase from the prior year first fiscal quarter), primarily due to strong pleasure craft demand and a favorable currency impact.

Current wording

Our distribution segment experienced a decrease in sales of $4.8 million (6.8%) in the first half of fiscal 2025 compared to the first half of fiscal 2024. The Company’s Asian distribution operations in Singapore, China and Japan were down 5.7% or $1.7 million from the prior year on weaker demand for oilfield transmissions into China. The Company’s North America distribution operation saw a decrease ($1.9 million or 14.5%) on timing of shipments from European manufacturing operations and some softening in North American demand. The Company’s European distribution operation saw an increase ($1.2 million or 11.3%) on stronger shipments of commercial marine projects. The Company’s distribution operation in Australia and New Zealand, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw a decrease in revenue of 2.4% from the prior year first fiscal half, primarily due to weaker pleasure craft demand partially offset by a favorable currency impact.

Previous wording

Other expense of $1.3 million for the first fiscal quarter was primarily attributable to a currency loss ($1.1 million) and pension amortization expense ($0.2 million).

Current wording

Other expense of $1.0 million for the first half was primarily attributable to a currency loss ($0.6 million), along with pension amortization expense ($0.5 million).

Previous wording

As of September 27, 2024, the Company had net working capital of $126.6 million, which represents an increase of $6.5 million, or 5.4%, from the net working capital of $120.1 million as of June 30, 2024.

Current wording

As of December 27, 2024, the Company had net working capital of $113.9 million, which represents a decrease of $6.2 million, or 5.2%, from the net working capital of $120.1 million as of June 30, 2024.

Previous wording

Cash decreased by $3.4 million to $16.7 million as of September 27, 2024, versus $20.1 million as of June 30, 2024. As of September 27, 2024, the majority of the cash is at the Company’s overseas operations in Europe ($7.0 million) and Asia-Pacific ($9.5 million).

Current wording

Cash decreased by $4.2 million to $15.9 million as of December 27, 2024, versus $20.1 million as of June 30, 2024. As of December 27, 2024, the majority of the cash is at the Company’s overseas operations in Europe ($4.6 million) and Asia-Pacific ($9.0 million).

Previous wording

Trade receivables of $51.5 million were down $0.7 million, or 1.3%, when compared to last fiscal year-end. The impact of foreign currency translation was to increase accounts receivable by $1.4 million versus June 30, 2024. As a percent of sales, trade receivables finished at 70.7% in the first quarter of fiscal 2025 compared to 62.6% for the comparable period in fiscal 2024 and 61.8% for the fourth quarter of fiscal 2024.

Current wording

Trade receivables of $53.7 million were down $1.5 million, or 2.8%, when compared to last fiscal year-end. The impact of foreign currency translation was to decrease accounts receivable by $0.9 million versus June 30, 2024. As a percent of sales, trade receivables finished at 59.7% in the second quarter of fiscal 2025 compared to 56.8% for the comparable period in fiscal 2024 and 61.8% for the fourth quarter of fiscal 2024.

Previous wording

Inventories increased by $13.4 million, or 10.3%, versus June 30, 2024 to $143.9 million. The impact of foreign currency translation was to increase inventories by $4.2 million versus June 30, 2024. The largest increase came at our operation in the Netherlands ($4.6 million) in support of growing backlog for the Veth product, also impacted by timing of shipment of several large projects. The Singapore distribution entity experienced a $2.3 million increase related to customer delays of deliveries on oilfield transmissions into China. Additional increases were seen at our facilities in Lufkin ($1.5 million) Belgium ($1.0 million) and Australia ($0.9 million). The global operations team is focused on driving inventory improvements in the second fiscal quarter and beyond, with several large orders expected to ship within the quarter. On a consolidated basis, as of September 27, 2024, the Company’s backlog of orders to be shipped over the next six months approximates $144.3 million, compared to $133.7 million at June 30, 2024 and $122.5 million at September 29, 2023. As a percentage of six-month backlog, inventory has increased from 98% at June 30, 2024 to 100% at September 27, 2024.

Current wording

Inventories decreased by $2.2 million, or 1.7%, versus June 30, 2024 to $128.3 million. The impact of foreign currency translation was to decrease inventories by $2.6 million versus June 30, 2024. The largest decrease came at our operations in the United States ($2.4 million), favorably impacted by the non-cash write down of industrial inventory in the quarter ($1.6 million). Our operation in the Netherlands saw an increase ($1.4 million) in support of growing backlog for the Veth product. The Singapore distribution entity experienced a $4.1 million increase primarily related to customer delays of deliveries on oilfield transmissions into China. Additional increases were seen at our facilities in Belgium ($1.1 million) and Australia ($0.8 million). The global operations team is focused on driving inventory improvements in the second half and beyond. On a consolidated basis, as of December 27, 2024, the Company’s backlog of orders to be shipped over the next six months approximates $124.0 million, compared to $133.7 million at June 30, 2024 and $125.2 million at December 29, 2023. The reduction in backlog since June 30, 2024 ($9.7 million) is largely due to a currency translation impact ($5.5 million). As a percentage of six-month backlog, inventory has increased from 98% at June 30, 2024 to 103% at December 27, 2024.

Previous wording

Net property, plant and equipment increased $0.9 million (0.1%) to $59.0 million versus $58.1 million at June 30, 2024. The Company had capital spending of $2.2 million in the quarter, and a favorable exchange impact of $0.8 million. These increases were offset by depreciation of $1.9 million. Capital spending occurring in the first quarter was primarily related to replacement capital, along with capital to drive growth and operating efficiencies. In total, the Company expects to invest between $13 and $15 million in capital assets in fiscal 2025. 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. The Company’s capital program is focused on modernizing key core manufacturing, assembly and testing processes and improving efficiencies at its facilities around the world.

Current wording

Net property, plant and equipment increased $0.4 million (0.7%) to $58.5 million versus $58.1 million at June 30, 2024. The Company had capital spending of $5.1 million in the first half, and an unfavorable exchange impact of $0.8 million. These increases were offset by depreciation of $4.0 million. Capital spending occurring in the first half was primarily related to replacement capital, along with capital to drive growth and operating efficiencies. In total, the Company expects to invest between $12 and $15 million in capital assets in fiscal 2025. 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. The Company’s capital program is focused on modernizing key core manufacturing, assembly and testing processes and improving efficiencies at its facilities around the world.

Previous wording

Accounts payable as of September 27, 2024 of $31.1 million was down $1.5 million, or 4.5%, from June 30, 2024. The impact of foreign currency translation was to increase accounts payable by $1.0 million versus June 30, 2024. The remaining decrease is primarily related to the timing of inventory receipts within the quarter.

Current wording

Accounts payable as of December 27, 2024 of $28.6 million was down $4.0 million, or 12.3%, from June 30, 2024. The impact of foreign currency translation was to decrease accounts payable by $0.4 million versus June 30, 2024. The remaining decrease is primarily related to the inventory reduction during the second quarter.

Previous wording

Total borrowings and long-term debt as of September 27, 2024 increased $4.0 million to $29.8 million versus $25.8 million at June 30, 2024. During the first quarter, the Company reported negative free cash flow of $6.7 million (defined as operating cash flow less acquisitions of fixed assets), driven by unfavorable working capital movement related primarily to inventory, the payment of the annual bonus for fiscal 2024 and capital spending. The Company ended the quarter with total debt, net of cash, of $13.1 million, compared to $5.7 million at June 30, 2024, for a net degradation of $7.4 million.

Current wording

Total borrowings and long-term debt as of December 27, 2024 decreased $0.9 million to $24.9 million versus $25.8 million at June 30, 2024. During the first half, the Company reported negative free cash flow of $0.5 million (defined as operating cash flow less acquisitions of fixed assets), driven by favorable working capital movement offset by capital spending. The Company ended the quarter with total debt, net of cash, of $9.0 million, compared to $5.7 million at June 30, 2024, for a net degradation of $3.3 million.

Previous wording

Total equity increased $2.7 million, or 1.8%, to $157.4 million as of September 27, 2024. The net loss during the first quarter decreased equity by $2.9 million, offset by a favorable foreign currency translation of $7.0 million. The net change in common stock and treasury stock resulting from the accounting for stock-based compensation decreased equity by $1.9 million. The net remaining decrease in equity of $0.7 million primarily represents the amortization of net actuarial loss and prior service cost on the Company’s defined benefit pension plans, along with the unrealized loss on cash flow hedges.

Current wording

Total equity decreased $7.4 million, or 4.8%, to $147.6 million as of December 27, 2024. The net loss during the first half decreased equity by $1.7 million, while other decreases related to a favorable foreign currency translation of $4.1 million and dividends paid to shareholders of $1.1 million. The net change in common stock and treasury stock resulting from the accounting for stock-based compensation increased equity by $0.6 million. The net remaining decrease in equity of $1.1 million primarily represents the amortization of net actuarial loss and prior service cost on the Company’s defined benefit pension plans, along with the unrealized loss on cash flow hedges.

Previous wording

Other significant contractual obligations as of September 27, 2024 are disclosed in Note N "Lease Liabilities" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There are no material undisclosed guarantees. As of September 27, 2024, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant, and equipment, which generally have terms of less than 90 days. The Company has long-term obligations related to its postretirement plans which are discussed in detail in Note G "Pension and Other Postretirement Benefit Plans” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q. Postretirement medical claims are paid by the Company as they are submitted. In fiscal 2025, the Company expects to contribute $0.5 million to postretirement benefits based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured. In fiscal 2025, the Company expects to contribute $0.6 million to its defined benefit pension plans. The Company does not have any material off-balance sheet arrangements.

Current wording

Other significant contractual obligations as of December 27, 2024 are disclosed in Note M "Lease Liabilities" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There are no material undisclosed guarantees. As of December 27, 2024, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant, and equipment, which generally have terms of less than 90 days. The Company has long-term obligations related to its postretirement plans which are discussed in detail in Note G "Pension and Other Postretirement Benefit Plans” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q. Postretirement medical claims are paid by the Company as they are submitted. In fiscal 2025, the Company expects to contribute $0.5 million to postretirement benefits based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured. In fiscal 2025, the Company expects to contribute $0.5 million to its defined benefit pension plans. The Company does not have any material off-balance sheet arrangements.