1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1999 Commission File Number 1-7635
TWIN DISC, INCORPORATED
(Exact name of registrant as specified in its charter)
Wisconsin 39-0667110
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1328 Racine Street, Racine, Wisconsin 53403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (262) 638-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
At December 31, 1999, the registrant had 2,814,790 shares of its common stock
outstanding.
2
FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31 June 30
1999 1999
---- ----
Assets
Current assets:
Cash and cash equivalents $ 3,455 $ 4,136
Trade accounts receivable, net 27,447 27,201
Inventories 55,273 54,500
Deferred income taxes 6,004 6,004
Other 6,599 5,906
-------- --------
Total current assets 98,778 97,747
Property, plant and equipment, net 36,982 38,935
Investments in affiliates 6,818 6,663
Deferred income taxes 4,439 4,349
Intangible pension asset 3,385 3,385
Other assets 25,176 25,821
-------- --------
$175,578 $176,900
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 8,862 $ 23,015
Accounts payable 9,247 10,724
Accrued liabilities 21,643 21,022
-------- --------
Total current liabilities 39,752 54,761
Long-term debt 35,115 17,112
Accrued retirement benefits 35,596 37,567
-------- --------
110,463 109,440
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 80,233 81,430
Accumulated other comprehensive loss (9,386) (8,516)
-------- --------
82,500 84,567
Less treasury stock, at cost 17,385 17,107
-------- --------
Total shareholders' equity 65,115 67,460
-------- --------
$175,578 $176,900
-------- --------
-------- --------
The notes to consolidated financial statements are an integral part of
this statement. Amounts in thousands.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
1999 1998 1999 1998
---- ---- ---- ----
Net sales $44,342 $40,108 $79,619 $80,733
Cost of goods sold 34,390 30,833 62,811 62,239
------- ------- ------- -------
9,952 9,275 16,808 18,494
Marketing, engineering and
administrative expenses 8,139 8,964 15,884 16,815
Interest expense 828 375 1,484 752
Other income, net (252) 148 (353) 30
------- ------- ------- -------
8,715 9,487 17,015 17,597
------- ------- ------- -------
Earnings before income tax 1,237 (212) (207) 897
Income taxes 544 79 (3) 600
------- ------- ------- -------
Net earnings (loss) $ 693 ($ 291) ($ 204) $ 297
------- ------- ------- -------
------- ------- ------- -------
Dividends per share $ 0.175 $ 0.21 $ 0.35 $ 0.42
Earnings per share data:
Basic earnings (loss) per share $ 0.25 ($ 0.10) ($ 0.07) $ 0.10
Diluted earnings (loss)per share $ 0.25 ($ 0.10) ($ 0.07) $ 0.10
Shares outstanding data:
Average shares outstanding 2,826 2,835 2,831 2,835
Dilutive stock options 0 10 0 18
------- ------- ------- -------
Diluted shares outstanding 2,826 2,845 2,831 2,853
------- ------- ------- -------
------- ------- ------- -------
Comprehensive income:
Net earnings $ 693 ($ 291) ($ 204) $ 297
Foreign currency translation
adjustment (858) 1,362 (870) 1,555
------- ------- ------- -------
Comprehensive income ($ 165) $ 1,071 ($ 1,074) $ 1,852
------- ------- ------- -------
------- ------- ------- -------
In thousands of dollars except per share statistics and shares outstanding
data. Per share figures are based on shares outstanding data.
The notes to consolidated financial statements are an integral part of
this statement.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31
1999 1998
---- ----
Cash flows from operating activities:
Net earnings (loss) ($ 204) $ 297
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 3,201 2,835
Loss on sale of fixed assets 0 45
Equity in earnings of affiliates (405) (82)
Dividends received from affiliate 250 375
Net change in working capital,
excluding cash and debt, and other (3,589) 4,226
------ ------
(747) 7,696
------ ------
Cash flows from investing activities:
Acquisitions of fixed assets (1,145) (3,240)
Proceeds from sale of fixed assets 51 0
Business acquisition 0 (437)
------ ------
(1,094) (3,677)
------ ------
Cash flows from financing activities:
Increase in notes payable, net 2,489 2
Treasury stock activity (278) 38
Dividends paid (993) (1,191)
------ ------
1,218 (1,151)
------ ------
Effect of exchange rate changes on cash (58) 172
------ ------
Net change in cash and cash equivalents (681) 3,040
Cash and cash equivalents:
Beginning of period 4,136 5,087
------ ------
End of period $3,455 $8,127
------ ------
------ ------
The notes to consolidated financial statements are an integral part of
this statement. Amounts in thousands.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Basis of Presentation
The unaudited financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC)
and, in the opinion of the Company, include all adjustments, consisting only
of normal recurring items, necessary for a fair statement of results for each
period. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. The Company believes that the disclosures made are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with financial statements and the
notes thereto included in the Company's latest Annual Report. The year end
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles.
B. Inventory
The major classes of inventories were as follows (in thousands):
December 31 June 30
1999 1999
----------- ---------
Inventories:
Finished parts $44,046 $42,405
Work in process 6,640 6,385
Raw materials 4,587 5,710
------- -------
$55,273 $54,500
------- -------
------- -------
C. Contingencies
The Company is involved in various stages of investigation relative to
hazardous waste sites, two of which are on the United States EPA National
Priorities List (Superfund sites). The Company's assigned responsibility at
each of the Superfund sites is less than 2%. The Company has also been
requested to provide administrative information related to two other potential
Superfund sites but has not yet been identified as a potentially responsible
party. Additionally, the Company is subject to certain product liability
matters in the normal course of business.
At December 31, 1999 the Company has accrued approximately $1,050,000, which
represents management's best estimate available for possible losses related to
these contingencies. This amount has been provided over the past several
years. Based on the information available, the Company does not expect that
any unrecorded liability related to these matters would materially affect the
consolidated financial position, results of operations or cash flows.
D. BUSINESS SEGMENTS
Information about the Company's segments is summarized as follows (in
thousands):
Three Months Ended Six Months Ended
December 31 December 31
1999 1998 1999 1998
---- ---- ---- ----
Manufacturing segment sales $40,994 $38,049 $72,213 $76,251
Distribution segment sales 11,729 10,225 22,248 20,366
Inter/Intra segment sales (8,381) (8,166) (14,842) (15,884)
------- ------- ------- -------
Net sales $44,342 $40,108 $79,619 $80,733
------- ------- ------- -------
------- ------- ------- -------
Manufacturing segment earnings(loss)$ 773 $ 340 ($ 1,015) $ 1,423
Distribution segment earnings 848 475 1,393 1,143
Inter/Intra segment earnings (loss) (384) (1,027) (585) (1,669)
------ ------- ------- -------
Pretax earnings (loss) $ 1,237 ($ 212) ($ 207) $ 897
------- ------- ------- -------
------- ------- ------- -------
Assets December 31, June 30,
1999 1999
------------- -------------
Manufacturing segment assets $149,309 $152,251
Distribution segment assets 25,576 25,448
Corporate assets and elimination
of inter-company assets 693 (799)
-------- --------
$175,578 $176,900
-------- --------
-------- --------
6
MANAGEMENT DISCUSSION AND ANALYSIS
Net sales for the second quarter were 11 percent greater than the same period
a year ago primarily due to acquisitions made during the last half of fiscal
year 1999. Net earnings of $693,000 represented a welcome turnaround from the
$291,000 loss reported in last year's second quarter. Generally, market
conditions were stable with evidence of improving trends in specific market
segments.
The increase in shipments from our domestic manufacturing facilities consisted
mainly of industrial products. Most of the increase was attributable to the
power take-off product line purchased a year ago. There also was some
improvement in sales of Arneson marine surface drives and power-shift
transmissions for construction equipment. Renewal part sales to the
aftermarket were comparable to a year ago and have begun to recover somewhat
from the low-point at the end of last fiscal year. Shipments of marine
transmissions were down slightly from last year, but demand has been
relatively stable in both pleasure craft and commercial markets. Higher sales
volume in Europe was attributable to our Italian manufacturing subsidiary
acquired last February with shipments from our Belgium operation about even
with last year's second quarter. Most of our distribution subsidiaries
reported higher sales compared with a year ago, including a significant
increase in Singapore reflecting the beginning of economic recovery in Asia.
During the past year, the dollar has appreciated by approximately 10 percent
versus the currencies in which we operate mitigating the dollar impact of the
increased shipping levels overseas.
The consolidated gross margin was higher than in the previous three quarters
but was down modestly from the same period last year. As a result of higher
volume and better productivity, domestic manufacturing margins were up from a
year ago. At our Belgian subsidiary, the gross margin was down about four
percentage points due to less favorable product mix and to the lower
production levels associated with inventory reduction activity.
Marketing, engineering and administrative expenses were below the second
quarter last year as a result of personnel and other cost reductions
implemented in fiscal 1999. Offsetting some of those savings were the
additional expenses incurred at the newly acquired Italian subsidiary.
Statutory income tax rates are comparable with a year ago; but domestic
losses, which were taxed at a relatively low rate, resulted in a higher than
normal effective tax rate.
Working capital, at $59 million, was comparable to the previous quarter but
much greater than at the prior fiscal year-end. The increase was caused by
restructuring much of the current borrowings at year-end to long-term debt in
the first fiscal quarter. Accounts receivable was up from the previous
quarter as a result of increased sales, and inventory declined slightly as
turnover improved. Both receivables and inventory were comparable to balances
at the prior fiscal year-end. While debt levels are high by our historical
standards, our balance sheet is strong and we continue to have sufficient
liquidity for near-term needs.
As a final report on Year 2000 Readiness, we have started the new millennium
with all systems operational and business being conducted without
interruption.
7
OTHER INFORMATION
Item 1. Legal Proceedings.
There were no reports on Form 8-K during the six months ended December 31,
1999. The financial statements included herein have been subjected to a
limited review by PricewaterhouseCoopers LLP, the registrant's independent
public accountants, in accordance with professional standards and procedures
for such review.
Item 2. Changes in Securities and Use of Proceeds.
There were no securities of the Company sold by the Company during the six
months ended December 31, 1999 which were not registered under the Securities
Act of 1933, in reliance upon an exemption from registration provided by
Section 4 (2) of the Act.
Item 5. Other Information.
At the Annual Meeting of Shareholders held October 15, 1999, the number of
votes cast for, against or abstentions with respect to each matter were as
follows:
1. Election of Directors:
a) To serve until Annual Meeting in 2002:
Michael E. Batten For: 2,422,053 Authority withheld: 24,052
David L. Swift For: 2,415,391 Authority withheld: 30,714
David R. Zimmer For: 2,414,612 Authority withheld: 31,493
The discussions in this report on Form 10-Q and in the documents incorporated
herein by reference, and oral presentations made by or on behalf of the
Company contain or may contain various forward-looking statements
(particularly those referring to the expectations as to possible strategic
alternatives, future business and/or operations, in the future tense, or using
terms such as "believe", "anticipate", "expect" or "intend") that involve
risks and uncertainties. The Company's actual future results could differ
materially from those discussed, due to the factors which are noted in
connection with the statements and other factors. The factors that could
cause or contribute to such differences include, but are not limited to, those
further described in the "Management's Discussion and Analysis".
8
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TWIN DISC, INCORPORATED
(Registrant)
/S/ FRED H. TIMM
----------------------- ---------------------------
(Date) Fred H. Timm
Corporate Controller and
Secretary
9
Report of Independent Accountants
To the Board of Directors
Twin Disc, Incorporated
Racine, Wisconsin
We have reviewed the accompanying condensed consolidated balance sheet of Twin
Disc, Incorporated and subsidiaries as of December 31, 1999, and the related
condensed consolidated statements of operations for the three and six-month
periods ended December 31, 1999 and 1998 and the related condensed
consolidated statements of cash flows for the six-month periods ended December
31, 1999 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data, and making inquiries of persons
responsible for financial accounting matters. It is substantially less
in scope than an audit in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of June 30, 1999,
and the related consolidated statements of operations, changes in
shareholders' equity and comprehensive income, and cash flows for the year
then ended (not presented herein); and in our report dated July 23, 1999, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of June 30, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/
- ------------------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
January 7, 2000
10
[TYPE] EX-15
EXHIBIT 15
Awareness Letter of Independent Accountants
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Twin Disc, Incorporated
We are aware that our report dated January 7, 2000 on our review of
interim financial information of Twin Disc, Incorporated for the
three and six month periods ended December 31, 1999 and 1998 and included in
the Company's quarterly report on Form 10-Q for the quarter then ended,
is incorporated by reference in the registration statements of Twin
Disc, Incorporated on Form S-8 (Twin Disc, Incorporated 1988 Incentive
Stock Option Plan; Twin Disc, Incorporated 1988 Non-Qualified Stock
Option Plan for Officers, Key Employees and Directors; Twin Disc, Incorporated
1998 Incentive Compensation Plan; and Twin Disc, Incorporated 1998 Stock
Option Plan for Non-Employee Directors).
/S/
- ---------------------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
January 27, 2000