1
TWIN DISC, INCORPORATED
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 September 30, 2001 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 September 30, 2001, the registrant had 2,807,832 shares of its common stock
outstanding.
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TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30 June 30
2001 2001
---- ----
Assets
Current assets:
Cash and cash equivalents $ 10,604 $ 5,961
Trade accounts receivable, net 25,837 27,058
Inventories, net 50,576 46,492
Deferred income taxes 8,330 8,330
Other 3,269 3,925
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Total current assets 98,616 91,766
Property, plant and equipment, net 31,178 31,584
Investments in affiliates 2,558 2,358
Goodwill 12,237 12,119
Deferred income taxes 6,302 6,302
Prepaid pension asset 1,988 1,988
Other assets 9,626 10,617
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$162,505 $156,734
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Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 4,256 $ 4,797
Current maturities on long-term debt 2,857 2,857
Accounts payable 14,139 10,368
Accrued liabilities 24,081 23,428
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Total current liabilities 45,333 41,450
Long-term debt 23,432 23,404
Accrued retirement benefits 33,360 33,121
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102,125 97,975
Minority Interest 360 337
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 87,212 87,431
Accumulated other comprehensive loss (21,364) (23,181)
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77,501 75,903
Less treasury stock, at cost 17,481 17,481
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Total shareholders' equity 60,020 58,422
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$162,505 $156,734
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The notes to consolidated financial statements are an integral part of
this statement. Amounts in thousands.
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TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30
2001 2000
---- ----
Net sales $40,631 $41,349
Cost of goods sold 32,085 31,605
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8,546 9,744
Marketing, engineering and
administrative expenses 7,848 7,529
Interest expense 488 758
Other income, net (305) (177)
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8,031 8,110
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Earnings before income taxes 515 1,634
Income taxes 220 728
Minority Interest 23 -
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Net earnings $ 272 $ 906
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Dividends per share $ 0.175 $ 0.175
Earnings per share data:
Basic earnings per share $ 0.10 $ 0.32
Diluted earnings per share $ 0.10 $ 0.32
Shares outstanding data:
Average shares outstanding 2,808 2,810
Dilutive stock options 0 0
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Diluted shares outstanding 2,808 2,810
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Comprehensive income:
Net earnings $ 272 $ 906
Other comprehensive income (loss):
Foreign currency translation adjustment 1,817 (1,628)
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Comprehensive income (loss): $ 2,089 ($ 722)
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In thousands of dollars except per share statistics. Per share figures are
based on shares outstanding data.
The notes to consolidated financial statements are an integral part of this
statement.
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TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $ 272 $ 906
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 1,381 1,583
Equity in earnings of affiliates (200) (145)
Dividends received from affiliate - 100
Net change in working capital,
excluding cash and debt, and other 4,491 (2,421)
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5,944 23
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Cash flows from investing activities:
Acquisitions of fixed assets (339) (341)
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(339) (341)
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Cash flows from financing activities:
Decrease in notes payable, net (694) -
Treasury stock activity - (34)
Dividends paid (491) (492)
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(1,185) (526)
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Effect of exchange rate changes on cash 223 (187)
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Net change in cash and cash equivalents 4,643 (1,031)
Cash and cash equivalents:
Beginning of period 5,961 5,651
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End of period $10,604 $ 4,620
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The notes to consolidated financial statements are an integral part of
this statement. Amounts in thousands.
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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.
Certain amounts in the prior year financial statements have been reclassified
to conform to the current year presentation.
B. Inventory
The major classes of inventories were as follows (in thousands):
September 30 June 30
2001 2001
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Inventories:
Finished parts $39,516 $37,711
Work in process 6,216 4,931
Raw materials 4,844 3,850
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$50,576 $46,492
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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.
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At September 30, 2001 the Company has accrued approximately $1,049,000, 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):
September 30, September 30,
2001 2000
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Manufacturing segment sales $ 34,758 $ 38,638
Distribution segment sales 14,135 11,328
Inter/Intra segment sales (8,262) (8,617)
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Net sales $ 40,631 $ 41,349
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Manufacturing segment earnings $ 113 $ 1,207
Distribution segment earnings 1,019 947
Inter/Intra segment loss (617) (520)
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Pretax earnings $ 515 $ 1,634
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Assets September 30, September 30,
2001 2000
------------- -------------
Manufacturing segment assets $ 141,646 $ 151,963
Distribution segment assets 29,505 23,992
Corporate assets and elimination
of inter-company assets (8,646) (2,799)
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$ 162,505 $ 173,156
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E. GOODWILL AND OTHER INTANGIBLES
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 requires the use of a nonamortization
approach to account for purchased goodwill and certain intangibles. Under a
nonamortization approach, goodwill and certain intangibles will not be
amortized into results of operations, but instead will be reviewed for
impairment and written down in the periods in which the recorded value of
goodwill and certain intangibles is determined to be greater than its fair
value. The Company adopted the provisions of SFAS No. 142 as of July 1, 2001.
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The principal effect of adopting SFAS No. 142 was the cessation of the
amortization of goodwill in the current quarter. The initial evaluation of
impairment of existing goodwill was completed with no impairment charge being
recorded. This standard only permits prospective application of the new
accounting. Therefore, adoption of this standard will not affect previously
reported financial information. Goodwill amortization for the quarter ended
September 30, 2000 amounted to approximately $0.1 million net of tax, which
would have impacted the reported basic and diluted earnings per share by
approximately $0.02
F. RESTRUCTURING OF OPERATIONS
During the fourth quarter of 2001, the Company recorded a pre-tax
restructuring charge of $1.5 million in connection with the reduction of its
workforce and consolidation of facilities. These actions were taken in an
effort to streamline the Company's cost structure and improve utilization of
available capacity at other locations. The charge included $1.0 million in
employee termination and severance benefits, $0.3 million for remaining costs
related to preexisting leases, $0.1 million for the estimated loss on fixed
assets which were held for disposal, and $0.1 million in miscellaneous costs.
During 2001 and the first quarter of 2002 the Company has cash payments of
$0.2 million and $0.4 million, respectively, and has a remaining balance in
accrued liabilities of $0.9 million as of September 30, 2001.
G. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which amends SFAS No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies", and is effective for all companies. This
statement addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently reviewing this
statement to determine its effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" and the accounting and reporting provisions of Accounting
Principle Board (APB) Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and is effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. The
Company is currently reviewing this statement to determine its effect on the
Company's financial statements.
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MANAGEMENT DISCUSSION AND ANALYSIS
Net revenues for the first fiscal quarter were down less than two percent from
year-ago levels, with softness in some of our markets being offset by initial
sales from our newly established Japanese joint venture. Net earnings
reflected the change in sales mix among our operations and were down sharply
from last year's first quarter.
The general decline in global economic activity experienced in the last six
months of fiscal 2001 and into the first quarter of fiscal 2002 has negatively
impacted many of our markets. The economic weakness appears to be continuing,
and may be exacerbated by the terrorist attacks in September. The Company
expects that it will continue to be affected by the economy; but it is not in
a position to determine how extensive those effects will be and, in
particular, whether there will be any specific effects on the Company as a
result of the terrorist incidents or the response thereto.
Almost all of our operations have been affected by the worldwide slowdown.
The weakness in pleasure craft activity was the largest single factor
adversely affecting sales and that impact was felt most keenly by our Belgian
manufacturing facility. Our domestic manufacturing operation declined
modestly. This was primarily a result of the reduction in shipments of power-
shift transmissions for four-wheel-drive agricultural tractors. While demand
remained relatively stable for Arneson surface drives, sales were slightly
below last year's high levels. Demand for industrial products and marine
transmissions for commercial boats also remained steady with comparable
shipments versus last year's first quarter. Sales from our distribution
subsidiaries were down modestly in the United States and Europe reflecting
current economic conditions; and in the Pacific Rim, the general worldwide
downturn was compounded by the further strengthening of the U.S. dollar
during the past year.
The Company adopted the Statement of Financial Accounting Standards Board No.
142, "Goodwill and Other Intangible Assets," at the beginning of the fiscal
year. On review, it was determined that there is no impairment in these
assets and thus no losses were recorded in the first fiscal quarter or
anticipated for the fiscal year. The favorable after-tax impact on earnings
for the quarter was $54,000, or $.02 per share.
The reduction in profitability from last year's first quarter was all
traceable to a decline in the gross margin. As expected, the major cause was
the decline in production volume at our Belgian and U.S. manufacturing
operations. Another contributing factor was the component of consolidated
sales contributed by our new joint venture. A large part of that operation's
sales are made into the Japanese market by our partner and do not reflect the
higher margins earned on export sales.
Marketing, engineering, and administrative (ME&A) expenses were about four
percent higher than a year ago due to the inclusion of the joint-venture
expense as well as a small inflationary component. With interest rates
dropping throughout the past year and debt reduced by about 20 percent from a
year ago, interest expense reached its lowest level in more than two years.
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The income tax rate was comparable to a year ago and elevated slightly due to
the mix of domestic losses incurred and overseas earnings, which are taxed at
a higher rate.
Working capital increased from $50 million to $53 million during the quarter
because the seasonal increase in inventory more than offset the reduction in
accounts receivable driven by the same seasonal factors. The cash balance was
$4 million higher than the previous quarter, matching the increase in accounts
payable. The Company's balance sheet remains strong with anticipated
operating cash flows and existing financing arrangements sufficient to provide
liquidity for near-term needs.
The Financial Accounting Standards Board recently issued Statement of
Financial Standards (SFAS) No. 143, "Accounting for Obligations Associated
with the Retirement of Long-Lived Assets" and No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 143 establishes
accounting standards for the measurement and recognition of an asset
retirement obligation and its associated retirement cost. SFAS No. 144 also
addresses financial accounting and reporting issues and supercedes SFAS No.
121. The statements are effective for the Company beginning July 1, 2002,
although early application is encouraged. The Company is currently evaluating
the impact of these statements.
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OTHER INFORMATION
Item 1. Legal Proceedings.
There were no reports on Form 8-K during the three months ended September 30,
2001.
Item 2. Changes in Securities and Use of Proceeds.
There were no securities of the Company sold by the Company during the three
months ended September 30, 2001 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.
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".
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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)
November 8, 2001 /S/ FRED H. TIMM
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(Date) Fred H. Timm
Vice President - Administration and
Secretary