Rising ME&A Costs Hurt Twin Disc's Q1 Earnings Despite Revenue Growth

Zacks Equity Research

Thu, Nov 7, 2024, 10:10 AM 4 min read

Despite a broader increase in sales, the overall financial performance was hindered by external pressures, including an unfavorable product mix and increased operational costs. The company reported EBITDA of $1.7 million, down 23% compared to the first quarter of fiscal 2024, indicating pressures on operating efficiency despite increased top-line performance.

Twin Disc, Inc. Price, Consensus and EPS Surprise

Twin Disc, Incorporated Price, Consensus and EPS Surprise

Twin Disc, Inc. price-consensus-eps-surprise-chart | Twin Disc, Inc. Quote

Key Business Metrics

Segment Performance

Marine and Propulsion Systems

Sales in this segment surged by 22.9%, reaching $42.1 million from $34.3 million in the prior year. This increase was largely due to sustained demand and the integration of Katsa Oy, which bolstered the marine segment's capabilities.

Land-Based Transmissions

This segment recorded a 7% decline in revenue, totaling $17.3 million compared to $18.6 million in the first quarter of fiscal 2024. A significant factor here was a slowdown in the Asian oil and gas markets, which impacted demand for land-based transmission products.

Industrial Products

Sales in this segment increased by an impressive 61.3%, reaching $9.2 million from $5.7 million the previous year. The growth was attributed to stabilized industrial demand and strong order flow, particularly in European and Latin American markets.

Other Products

Revenues in this segment decreased 13.8% year over year, falling to $4.3 million from $5 million in the first quarter of fiscal 2024, indicating weaker performance in non-core areas.

Geographical Performance

Twin Disc experienced strong year-over-year growth in Europe and Latin America, which contributed significantly to the revenue increase. The distribution of sales indicated a shift, with North America’s contribution shrinking while Europe and other regions, such as the Middle East and South America, gained prominence.

Gross Profit and Margin

Gross profit increased to $19.3 million, up 16.1% from $16.6 million in the first quarter of fiscal 2024. The gross margin rose to 26.5%, a modest increase from 26.2% in the previous year, largely due to higher sales volumes. However, the margin improvement was limited by an unfavorable product mix, which dampened the impact of volume gains.

Operating Expenses

Marketing, engineering, and administrative (ME&A) expenses climbed 15.1% to $19.5 million, up from $16.9 million in the same period last year. The increase was driven by the addition of Katsa Oy’s operational costs, adjustments in stock compensation, and inflationary pressures on wages and benefits.

Net Income

Twin Disc incurred a net loss of $2.8 million for the first quarter of fiscal 2025, wider than the $1.2 million net loss recorded in the same period last year. The company’s increased expenses, including a $1.1 million currency loss and higher ME&A costs, impacted its profitability. Additionally, increased amortization expenses tied to the company’s pension plan and interest expenses related to a higher debt load contributed to the loss. Interest expenses grew by $0.2 million compared to the previous year.

Balance Sheet Update (as of Sept. 27, 2024)

Twin Disc had cash of $16.7 million, reflecting a decline from $20.1 million at the end of the fiscal year ended June 30, 2024.

Total assets reached $323.5 million, an increase from $312.1 million at the end of the previous fiscal year-end.

The company’s long-term debt rose, amounting to $27.8 million compared to $23.8 million, while the current portion of long-term debt remained steady at $2 million.

Shareholders' equity stood at $157.5 million, slightly up from $154.7 million at the prior fiscal-year end.

Cash Flows

Net cash used in operations totaled $4.3 million in the quarter under review, while it generated net cash from operations of $9.8 million in the prior-year quarter.

Management Guidance

CEO Batten indicated that Twin Disc’s outlook for fiscal 2025 remains favorable, particularly as the company continues to leverage its recent acquisition and capture demand in the marine and industrial sectors.

Other Developments

The most significant development during the quarter was the acquisition of Katsa Oy, which has already contributed to revenue growth in the Marine and Propulsion Systems segment. The integration process for Katsa has reportedly advanced smoothly, with the acquisition expected to further strengthen Twin Disc's market position in marine and industrial applications. Additionally, the company reported an uptick in inventory levels, a strategic move to align with anticipated demand over the next six months.

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