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 December 31, 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 December 31, 2001, the registrant had 2,807,832 shares of its common stock
outstanding.
2
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31 June 30
2001 2001
---- ----
Assets
Current assets:
Cash and cash equivalents $ 11,397 $ 5,961
Trade accounts receivable, net 26,115 27,058
Inventories, net 49,006 46,492
Deferred income taxes 8,330 8,330
Other 4,273 3,925
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Total current assets 99,121 91,766
Property, plant and equipment, net 30,054 31,584
Investments in affiliates 2,439 2,358
Goodwill 12,187 12,119
Deferred income taxes 6,302 6,302
Intangible pension asset 1,988 1,988
Other assets 9,897 10,617
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$161,988 $156,734
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-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 3,824 $ 4,797
Current maturities on long-term debt 2,857 2,857
Accounts payable 14,921 10,368
Accrued liabilities 23,734 23,428
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Total current liabilities 45,336 41,450
Long-term debt 23,433 23,404
Accrued retirement benefits 33,832 33,121
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102,601 97,975
Minority Interest 371 337
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 87,143 87,431
Accumulated other comprehensive loss (22,299) (23,181)
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76,497 75,903
Less treasury stock, at cost 17,481 17,481
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Total shareholders' equity 59,016 58,422
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$161,988 $156,734
-------- --------
-------- --------
The notes to consolidated financial statements are an integral part of
this statement. Amounts in thousands.
3
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2001 2000 2001 2000
---- ---- ---- ----
Net sales $43,986 $44,025 $84,617 $85,374
Cost of goods sold 34,024 33,569 66,109 65,174
------- ------- ------- -------
9,962 10,456 18,508 20,200
Marketing, engineering and
administrative expenses 8,698 8,049 16,546 15,578
Interest expense 444 685 932 1,443
Minority Interest 11 0 34 0
Other expense (income) 14 (54) (291) (231)
------- ------- ------- -------
9,167 8,680 17,221 16,790
------- ------- ------- -------
Earnings before income taxes 795 1,776 1,287 3,410
Income taxes 372 816 592 1,544
------- ------- ------- -------
Net earnings $ 423 $ 960 $ 695 $ 1,866
------- ------- ------- -------
------- ------- ------- -------
Dividends per share $ 0.175 $ 0.175 $ 0.35 $ 0.35
Earnings per share data:
Basic earnings per share $ 0.15 $ 0.34 $ 0.25 $ 0.66
Diluted earnings per share $ 0.15 $ 0.34 $ 0.25 $ 0.66
Shares outstanding data:
Average shares outstanding 2,808 2,808 2,808 2,808
Dilutive stock options 0 0 0 0
------- ------- ------- -------
Diluted shares outstanding 2,808 2,808 2,808 2,808
------- ------- ------- -------
------- ------- ------- -------
Comprehensive income:
Net earnings $ 423 $ 960 $ 695 $ 1,866
Foreign currency translation
adjustment (935) (167) 882 (1,795)
------- ------- ------- -------
Comprehensive (loss) income $ (512) $ 793 $ 1,577 $ 71
------- ------- ------- -------
------- ------- ------- -------
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. Amounts in thousands.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $ 695 $ 1,866
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 2,802 3,184
Equity in earnings of affiliates (261) (451)
Dividends received from affiliate 180 263
Minority Interest 34 0
Net change in working capital,
excluding cash and debt, and other 4,571 (3,017)
------ ------
8,021 1,845
------ ------
Cash flows from investing activities:
Acquisitions of fixed assets (758) (1,096)
Proceeds from sale of fixed assets 19 7
------ ------
(739) (1,089)
Cash flows from financing activities:
(Decrease) Increase in notes payable (981) 2,100
Treasury stock activity 0 (34)
Dividends paid (983) (983)
------ ------
(1,964) 1,083
------ ------
Effect of exchange rate changes on cash 118 (321)
------ ------
Net change in cash and cash equivalents 5,436 1,518
Cash and cash equivalents:
Beginning of period 5,961 5,651
------ ------
End of period $11,397 $ 7,169
------ ------
------ ------
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.
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):
December 31 June 30
2001 2001
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Inventories:
Finished parts $38,641 $37,711
Work in process 5,638 4,931
Raw materials 4,727 3,850
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$49,006 $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 December 31, 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):
Three Months Ended Six Months Ended
December 31 December 31
2001 2000 2001 2000
---- ---- ---- ----
Manufacturing segment sales $38,358 $42,516 $73,116 $81,154
Distribution segment sales 15,673 10,848 29,808 22,176
Inter/Intra segment sales (10,045) (9,339) (18,307) (17,956)
------- ------- ------- -------
Net sales $43,986 $44,025 $84,617 $85,374
------- ------- ------- -------
------- ------- ------- -------
Manufacturing segment earnings $ 673 $ 2,035 $ 786 $ 3,242
Distribution segment earnings 717 483 1,736 1,430
Inter/Intra segment loss (595) (742) (1,235) (1,262)
------ ------- ------- -------
Pretax earnings $ 795 $ 1,776 $ 1,287 $ 3,410
------- ------- ------- -------
------- ------- ------- -------
Assets December 31, June 30,
2001 2001
------------- -------------
Manufacturing segment assets $142,953 $141,737
Distribution segment assets 30,328 24,822
Corporate assets and elimination
of inter-company assets (11,293) (9,825)
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$161,988 $156,734
-------- --------
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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.
7
The principal effect of adopting SFAS No. 142 was the cessation of the
amortization of goodwill. 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 and six months
ended December 31, 2001 amounted to approximately $0.1 million and $0.2
million net of tax, respectively, which would have impacted the reported basic
and diluted earnings per share by approximately $0.02 and $0.04, respectively.
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 six months of 2002 the Company made cash payments of
$0.2 million and $0.7 million, respectively, and has a remaining balance in
accrued liabilities of $0.6 million as of December 31, 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
Consolidated net sales for the second fiscal quarter were even with a year
ago, the net result of first-time revenues from our Japanese sales joint
venture and weakness in our core markets. However, with relatively low margins
on the joint-venture sales, margins and net earnings were down from last
year's second quarter.
Revenues from our domestic manufacturing operations were off versus year-ago
levels, continuing the trend from this year's first fiscal quarter. While
sales of marine transmissions for commercial applications and propulsion
products improved from a year ago, those gains were offset by declines in
other markets. The industrial products group saw stable demand for power
take-offs (PTOs) sold to engine packagers, primarily for irrigation
applications; but there was reduced demand for PTOs and clutches used in
environmental and recycling applications. Although sales of power-shift
transmissions for military applications improved from a year ago, total
transmission sales were down as demand declined for transmissions used in
construction and other applications. Shipments of product to the aftermarket
also continued to lag slightly those of a year ago. In terms of our core
businesses, however, 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 operation. Elsewhere in Europe, shipments from
our Italian subsidiary, primarily industrial products, were well ahead of last
year. Sales from our distribution subsidiaries throughout the world were down
modestly from last year reflecting current economic conditions and weakness of
various currencies against the U.S. dollar. The revenue declines, about
evenly split between domestic and offshore operations, were offset by sales
into the home markets of our new Japanese sales and engineering affiliate.
The consolidated gross margin improved slightly from the first fiscal quarter
but was down from a year ago mainly as a result of reduced production volumes
in Europe. Another unfavorable element of the reduced margins 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 spending for the quarter was above a
year ago due to the first-time inclusion of the expenses of operating our new
joint venture and due to a one-time charge related to a customer's bankruptcy
proceedings. Part of those additional expenses were offset by a 35 percent
reduction in interest expense. Interest rates have dropped throughout the
past year and debt is about 25 percent lower than a year ago. The income tax
rate for the quarter 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.
9
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 two fiscal quarters or
are anticipated for the fiscal year. The favorable after-tax impact on
earnings for the six months was $108,000, or $.04 per share.
Working capital, at $54 million, was slightly higher than the balance at the
end of the first fiscal quarter and about $5 million above the year-ago level.
Most of the difference from last year is in the higher cash balance, as
receivables and inventory are both below last year's second quarter. For the
six months, cash flows from operating activities were well in excess of our
needs for capital expenditures and dividend payments. The Company's balance
sheet is strong, and we continue to have sufficient 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 supersedes 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 six months ended December 31,
2001.
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, 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.
At the Annual Meeting of Shareholders held October 19, 2001, 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 2004:
James O. Parrish For: 2,586,365 Authority withheld: 23,844
Paul J. Powers For: 2,578,082 Authority withheld: 32,127
John A. Mellowes For: 2,584,437 Authority withheld: 25,772
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".
11
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)
February 11, 2002 /S/ FRED H. TIMM
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(Date) Fred H. Timm
Vice President - Administration and
Secretary