Twin Disc has reported financial results for the fiscal 2019 fourth quarter ended June 30, 2019.
Sales for the fiscal 2019 fourth quarter were $72,447,000, compared to $73,774,000 for the same period last year. The 1.8% decrease in 2019 fourth quarter sales was primarily due to reduced demand for the Company’s 8500 series transmission systems from North American fracking customers, partially offset by stable activity in the global industrial and commercial marine markets, and the contribution of Veth Propulsion. For the fiscal 2019 full year, sales were $302,663,000, compared to $240,733,000 for fiscal 2018, an increase of 25.7%.
Commenting on the results, John H. Batten, Chief Executive Officer, said: “Continued operational challenges associated with manufacturing and supply chain issues, compounded by a weak oil and gas environment, significantly impacted profitability during the fiscal 2019 fourth quarter. I am pleased with the meaningful progress we made executing our long-term strategic plan, which is focused on diversifying our product, geographic, and end market exposure, investing in our manufacturing and supply chain capabilities, and creating an agile and profit focused platform.”
“The Veth Propulsion acquisition was an important milestone and its fiscal 2019 financial performance was in line with our initial expectations. During fiscal 2019, we have completed most of the integration of Veth Propulsion, expanded Veth’s presence in the U.S. and improved our mix of marine sales. In fact, Veth’s backlog has increased approximately 30% since we acquired the business in July 2018. Overall, marine markets represented 48% of fiscal 2019’s total sales, compared to 38% last fiscal year. Our focus on diversification significantly helped us absorb the fourth quarter’s weak oil and gas market environment and confirms the benefits of our diversification strategy. I am pleased with Veth’s performance as it contributed to both sales and cash earnings for fiscal 2019. Based on current trends, we continue to believe the Veth Propulsion acquisition will generate diluted GAAP earnings accretion of $0.30 per share once fully integrated.”
Gross profit percent for the fiscal 2019 fourth quarter was 22.7%, compared to 37.4% in the fiscal 2018 fourth quarter. The decrease in gross profit percent for the fiscal 2019 fourth quarter compared to the fiscal 2018 fourth quarter was primarily due to a less profitable mix of revenues associated with reduced new rig construction and aftermarket demand in the North American fracking market and volume shifting to lower margin products. Margin was also impacted by a move to higher cost suppliers in order to meet production demands. The Company is actively pursuing cost reduction and pricing initiatives to improve gross margin and overall profitability. For the fiscal 2019 full year, gross profit was 29.6%, compared to 33.5% for the fiscal 2018 full year.
For the fiscal 2019 fourth quarter, marketing, engineering and administrative (ME&A) expenses decreased $1,811,000 to $16,272,000, compared to $18,083,000 for the fiscal 2018 fourth quarter. The fourth quarter decrease was due to lower professional fees ($1,078,000), bonus expense ($2,055,000) and the impact of the Mill Log divestiture ($1,138,000). These decreases were partially offset by the incremental Veth expense ($2,654,000). For the fiscal 2019 full year, ME&A expenses increased $10,446,000, or 17.1%, to $71,541,000, compared to $61,095,000 for the fiscal 2018 full year. As a percent of revenues, for the fiscal 2019 full year, ME&A expenses improved to 23.6%, compared to 25.4% for the fiscal 2018 full year.
Twin Disc recorded restructuring charges of $441,000 in the fiscal 2019 fourth quarter, compared to restructuring charges of $897,000 in the same period last fiscal year. Restructuring activities during the fiscal 2019 fourth quarter related primarily to cost reduction and productivity actions at the Company’s European operations. For the fiscal 2019 full year, the Company recorded restructuring charges of $1,179,000, compared to $3,398,000 for the fiscal 2018 full year.
The fiscal 2019 full year effective tax rate was 25.6% compared to the fiscal 2018 rate of 33.1%. The lower fiscal 2019 rate was primarily the result of the full year impact of the Tax Cuts and Jobs Act, which was enacted in the middle of the Company’s prior fiscal year. The prior year was also impacted by two significant discrete adjustments. During the first quarter of fiscal 2018, the Company recorded a tax benefit of $3,800,000 related to the reversal of a valuation allowance in a certain foreign jurisdiction that had been subject to a full valuation allowance. During the second quarter of the prior fiscal year, in compliance with the new Tax Cuts and Jobs Act, the Company recorded a non-cash tax expense of $3,800,000, primarily due to a remeasurement of deferred tax assets and liabilities. In addition, a rate change in Belgium resulted in a $400,000 non-cash tax expense due to remeasurement of deferred tax assets and liabilities. The mix of earnings by jurisdiction, smaller discrete adjustments and continued operational improvement explain the remaining movement in the Company’s effective tax rate.
The net loss attributable to Twin Disc for the fiscal 2019 fourth quarter was $(822,000), or $(0.06) per diluted share, compared to net income of $5,941,000 or $0.51 per diluted share, for the fiscal 2018 fourth quarter. For the fiscal 2019 full year, net income attributable to Twin Disc was $10,673,000, or $0.83 per diluted share, compared to net income of $9,528,000 or $0.82 per share for the fiscal 2018 full year.
Earnings before interest, taxes, depreciation and amortization (EBITDA)* was $2,868,000 for the fiscal 2019 fourth quarter, compared to $9,925,000 for the fiscal 2018 fourth quarter. For the fiscal 2019 full year, EBITDA was $29,923,000 compared to $21,047,000 for the fiscal 2018 full year.
Jeffrey S. Knutson, Vice President – Finance, Chief Financial Officer, Treasurer and Secretary, stated: “During fiscal 2019 we completed several corporate actions to improve and invest in our long-term business platform and I am pleased with the successful follow-on offering completed in September 2018, as well as the strategic divestiture of Mill Log, which we completed during this year’s third quarter. We invested nearly $12,000,000 of capital expenditures this past fiscal year, nearly double that of the prior year, and expect to invest $12,000,000 to $14,000,000 in fiscal 2020. The investments we are making are focused on improving our operations, upgrading our manufacturing capabilities, and increasing our overall productivity. In addition, throughout fiscal 2020 we will continue to focus on operating cash flow, reducing leverage, and efficient balance sheet management.”
Mr. Batten concluded: “Our six-month backlog at June 30, 2019 was $99,593,000, compared to $113,703,000 at March 29, 2019 and $114,979,000 at June 30, 2018. As we enter the new fiscal year, we are focused on improving our performance, investing in our operations, and creating an infrastructure to support Twin Disc for the future. Components of this plan include our new operations facility in Texas, which is scheduled to open in the first calendar quarter of 2020, and our expanded Wisconsin distribution center, which opened in May 2019 and is now running at peak performance. We expect the investments we are making will start contributing to financial results during the second half of fiscal 2020. In addition, based on our current backlog of orders, we expect oil and gas market demand will remain soft throughout the fiscal 2020 first half. Despite the near-term market and operational challenges, we believe we are headed in the right direction to support our business and create shareholder value for the long-term.”
Twin Disc will be hosting a conference call to discuss these results and to answer questions at 11:00 a.m. Eastern Time on Friday, August 9, 2019. To participate in the conference call, please dial 888-394-8218 five to ten minutes before the call is scheduled to begin. A replay will be available from 2:00 p.m. August 9, 2019, until midnight August 16, 2019. The number to hear the teleconference replay is 844-512-2921. The access code for the replay is 2203957.