Twin Disc's CEO Discusses F4Q12 Results - Earnings Call Transcript

Twin Disc, Inc (TWIN)

F4Q12 Earnings Call

July 31, 2012 11:00 am ET

Executives

Stan Berger – Investor Relations, SM Berger

Michael Batten – Chairman and Chief Executive Officer

John Batten – President and Chief Operating Officer

Christopher Eperjesy – Vice President-Finance, Chief Financial Officer and Treasurer

Analysts

Josh Chan – Robert W. Baird

Jon Braatz – Kansas City Capital

Andrea Sharkey – Gabelli & Company

Joe Giamichael – Global Hunter Securities, LLC

Gregory Garner – Singular Research

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Twin Disc, Inc Fourth-Quarter Fiscal 2012 Financial Results Conference Call. At this time all participants are in listen-only mode. Following the presentation, we’ll conduct a question-and-answer session, and instructions will be provided at that time. (Operator Instructions) I would now like to turn the conference over to Mr. Stan Berger of SM Berger. Please go ahead sir.

Stan Berger

Thank you, Ron. On behalf of the management at Twin Disc, we are extremely pleased that you have taken the time to participate in our call, and thank you for joining us to discuss the Company’s fiscal 2012 fourth quarter and full year financial results and business outlook.

Before I introduce management, I would like to remind everyone that certain statements made during the course of this conference call, especially those that states management’s “intentions,” “hopes,” “beliefs,” “expectations” or “predictions” for the future, are forward-looking statements. It is important to remember that the Company’s actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company’s annual report on Form 10-K, copies of which maybe obtained by contacting either the Company or the SEC.

By now, you should have received a copy of the news release which was issued this morning before the market opened. If you have not received a copy, please call [Annette Mianecki] at 262-638-4000 and she will send a copy to you.

Hosting the call today are Mike Batten, Twin Disc Chairman and Chief Executive Officer; John Batten, President and Chief Operating Officer; and Christopher Eperjesy, the Company’s Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I will turn the call over to Mike Batten. Mike?

Michael Batten

Thank you, Stan, and good day, everyone. Welcome to our fiscal 2012 fourth quarter and year-end conference call. I will begin with a brief summary statement and then John, Chris and I will be ready to take your questions. As we noted in our press release, issued earlier today fiscal year 2012, was a record year in terms of sales and earnings that was driven by an exceptionally strong first nine months of the year, reflecting high oil and gas demand. However, softening demand from that sector produce moderating sales in the fourth quarter is still ranked as our second best in history.

Turning to our results, for the fiscal year 2012 when this reported recorded sales of $356 million compared to $310 million for fiscal year 2011, gross margin for fiscal ‘12 was 34.2% compared to 34.7% for the previous year. Marketing, engineering and administrative expenses held steady at $73 million for both fiscal ‘12 and ’11. Net earnings attributed to Twin Disc for the fiscal year were $25.8 million, or $2.24 per diluted share, compared to $18.8 million, or $1.64 per diluted share for fiscal 2011.

Sales for the fiscal fourth quarter of 2012 declined modestly to $96.1 million from $97.4 million for the same period a year ago. The anticipated decline in fiscal ’12 fourth quarter sales was from softening demand in oil and gas products. Shipment to the aftermarket and industrial products market, land and marine-based military, airport rescue and fire fighting and commercial marine markets were good while the yacht market continued to be challenging.

Gross margin for the fiscal 2012 fourth quarter declined to 29.4%, compared to 37.1% for the fiscal ‘11 fourth quarter, and 34.6% for the fiscal ‘12 third quarter. The year-over-year and sequential decline in gross margin reflected a change in the mix of sales, primarily due to the impact of lower oil and gas transmission sales, as well as the unfavorable absorption impact due to the significant inventory reduction realized in the fourth fiscal quarter.

Spending on marketing, engineering and administrative expense declined $3.2 million to $19.3 million in fiscal ‘12 fourth quarter, compared to $22.5 million for the same three months of fiscal ‘11, primarily due to a reduction in stock-based compensation, the details of which are set out in the press release.

In preparing our financial statements for fiscal ‘12, we concluded that we were required to take an impairment charge amounting to $3.7 million, or $0.32 per diluted share in the fourth quarter of fiscal ‘12 for the write-down of goodwill for our Italian operations, due to softness in Italian mega yacht market.

The net effective tax rate for the fourth quarter was 81.1%, significantly higher than the prior year fourth quarter rate of 41.4%. The primary factor increasing the current year rate was the impact of a non-deductible impairment charge of $3.7 million that increased the effective rate by approximately 32 percentage points. The remaining rate increase was due to a combination of reduced foreign credits, elimination of the R&D tax credit, and additional impact of the valuation allowance related to the Company’s Belgian facility.

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