1
AMENDMENT NO. 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 September 30, 2003 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 2003, the registrant had 2,836,332 shares of its common stock
outstanding.
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30 June 30
2003 2003
---- ----
Assets
Current assets:
Cash and cash equivalents $ 8,524 $ 5,908
Trade accounts receivable, net 25,945 35,367
Inventories, net 49,291 47,247
Deferred income taxes 4,469 4,469
Other 4,240 4,104
-------- --------
Total current assets 92,469 97,095
Property, plant and equipment, net 29,311 30,210
Investment in affiliates 2,627 2,550
Goodwill 12,690 12,876
Deferred income taxes 20,215 20,164
Intangible pension asset 24 24
Other assets 7,835 7,439
-------- --------
$165,171 $170,358
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 1,057 $ 2,429
Current maturities on long-term debt 2,857 2,857
Accounts payable 14,273 16,115
Accrued liabilities 25,073 24,885
-------- --------
Total current liabilities 43,260 46,286
Long-term debt 15,340 16,584
Accrued retirement benefits 56,528 56,732
-------- --------
115,128 119,602
Minority Interest 495 485
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 82,871 83,191
Unearned Compensation (408) -
Accumulated other comprehensive loss (27,587) (26,978)
-------- --------
66,529 67,866
Less treasury stock, at cost 16,981 17,595
-------- --------
Total shareholders' equity 49,548 50,271
-------- --------
$165,171 $170,358
-------- --------
-------- --------
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
September 30
2003 2002
---- ----
Net sales $37,966 $36,521
Cost of goods sold 29,070 30,591
------- -------
8,896 5 930
Marketing, engineering and
administrative expenses 8,358 8 319
Interest expense 280 308
Other income, net (205) (41)
------- -------
8,433 8,586
------- -------
Earnings (loss) before income taxes
and minority interest 463 (2,656)
Income taxes 281 (895)
------- -------
Earnings (loss) before minority interest 182 (1,761)
Minority Interest (11) 30
------- -------
Net earnings (loss) $ 171 ($ 1,731)
------- -------
------- -------
Dividends per share $ 0.175 $ 0.175
Earnings per share data:
Basic earnings (loss) per share $ 0.06 ($ 0.62)
Diluted earnings (loss) per share $ 0.06 ($ 0.62)
Shares outstanding data:
Average shares outstanding 2,803 2,808
Dilutive stock options 36 -
------- -------
Diluted shares outstanding 2,839 2,808
------- -------
------- -------
Comprehensive income (loss):
Net earnings (loss) $ 171 ($ 1,731)
Other comprehensive loss:
Foreign currency translation adjustment (609) (37)
------- -------
Comprehensive loss: ($ 438) ($ 1,768)
------- -------
------- -------
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.
4
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30
2003 2002
---- ----
Cash flows from operating activities:
Net earnings (loss) $ 171 ($ 1,731)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 1,356 1,354
Equity in earnings of affiliate (122) (147)
Dividends received from affiliate 45 95
Net change in working capital,
excluding cash and debt, and other 4,555 2,571
------ ------
6,005 2 142
------ ------
Cash flows from investing activities:
Acquisitions of fixed assets (550) (703)
------ ------
(550) (703)
------ ------
Cash flows from financing activities:
Decrease in notes payable, net (1,213) (139)
Proceeds (payments) of long-term debt (1,270) 350
Proceeds from exercise of stock options 193 -
Dividends paid (491) (491)
------ ------
(2,781) (280)
------ ------
Effect of exchange rate changes on cash (58) 211
------ ------
Net change in cash and cash equivalents 2,615 1,370
Cash and cash equivalents:
Beginning of period 5,908 7,313
------ ------
End of period $ 8,524 $ 8,683
------ ------
------ ------
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 consolidated balance sheet data was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles. In fiscal 2004, the joint venture agreement governing
Twin Disc Nico Co., LTD (TDN) was amended. Under the new agreement, sales into
certain territories have been transferred to the joint venture partner in
exchange for which TDN receives a product development fee equal to the gross
margin formerly earned on such sales. The effect of this change was to reduce
sales by 3,100,000 for the quarter ended September 30, 2003, with no effect on
net earnings. Product development fees included in first quarter revenue
approximated $155,000.
B. Inventory
The major classes of inventories were as follows (in thousands):
September 30, June 30
2003 2003
---------- ---------
Inventories:
Finished parts $36,621 $36,175
Work in process 7,930 7,003
Raw materials 4,740 4,069
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$49,291 $47,247
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------- -------
C. WARRANTY
Twin Disc engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its suppliers.
However, its warranty obligation is affected by product failure rates, the
extent of the market affected by the failure and the expense involved in
satisfactorily addressing the situation. The warranty reserve is established
based on our best estimate of the amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. When evaluating
the adequacy of the reserve for warranty costs, management takes into
consideration the term of the warranty coverage, historical claim rates and
costs of repair, knowledge of the type and volume of new products and economic
trends. While we believe the warranty reserve is adequate and that the
judgment applied is appropriate, such amounts estimated to be due and payable
in the future could differ materially from what actually transpires.
The following is a listing of the activity in the warranty reserve during the
period ended September 30, 2003.
Three Months Ended
September 30, 2003
Reserve balance, beginning of period $6,070,000
Current period expense 884,000
Payments or credits to customers (855,000)
---------
Reserve balance, end of period $6,099,000
---------
---------
D. Contingencies
The Company has made a $117,000 payment in trust in settlement of its exposure
to a superfund site and anticipates that no further payments will be required.
Additionally, the Company is subject to certain product liability matters in
the normal course of business.
6
At September 30, 2003 the Company has accrued approximately $100,000, 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,
2003 2002
------------- -------------
Manufacturing segment sales $ 33,147 $ 30,464
Distribution segment sales 12,961 13,849
Inter/Intra segment sales (8,142) (7,792)
--------- ---------
Net sales $ 37,966 $ 36,521
--------- ---------
--------- ---------
Manufacturing segment earnings $ (33) $ (2,477)
Distribution segment earnings 1,164 455
Inter/Intra segment loss (668) (634)
--------- ---------
Earnings (loss) income taxes
and minority interest $ 463 $ (2,656)
--------- ---------
--------- ---------
Assets September 30, June 30,
2003 2003
------------- ------------
Manufacturing segment assets $ 148,619 $ 152,093
Distribution segment assets 29,312 32,761
Corporate assets and elimination
of inter-company assets (12,760) (14,496)
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$ 165,171 $ 170,358
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E. RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of
the provisions of this Statement to have a significant impact on its financial
statements.
F. STOCK OPTION PLANS
The Company accounts for its stock option plans under the guidelines of
Accounting Principles Board Opinion No. 25. Accordingly, no compensation cost
has been recognized in the condensed consolidated statements of operations.
During the third quarter of fiscal 2003, the Company adopted the disclosure
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." Had the Company recognized compensation expense
determined based on the fair value at the grant date for awards under the
plans, the net earnings and earnings per share would have been as follows (in
thousands, except per share amounts):
7
Three Months Ended
September 30,
------------------
2003 2002
---- ----
Net earnings (loss)
As reported $ 171 ($ 1,731)
Pro forma 171 ( 1,805)
Basic earnings (loss) per share
As reported $ 0.06 ($ 0.62)
Pro forma 0.06 ( 0.64)
Diluted earnings (loss) per share
As reported $ 0.06 ($ 0.62)
Pro forma 0.06 ( 0.64)
In fiscal 2004, The Company issued stock grants for 25,000 shares, 12,500 of
these grants vest in 2 years from the date of grant and 12,500 vest in 4 years.
The fair market value of the grants based on the market price at the date of
grant was $421,000. The grants are recorded as Unearned Compensation and
amortized over 2 and 4 year periods, amortization in the quarter ended
September 30, 2003 approximated $13,000.
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS
In the financial review that follows, we discuss our results of operations,
financial condition and certain other information. This discussion should be
read in conjunction with our consolidated financial statements and related
notes.
Net sales for the first quarter were 4.0% above year-ago levels. In fiscal
2004, the Company's joint venture agreement governing Twin Disc Nico Co., LTD
(TDN) was amended. Under the new agreement, sales into certain territories
have been transferred to the joint venture partner in exchange for which TDN
receives an engineering and product development fee equal to the gross margin
formerly earned on such sales. The effect of this change was to reduce sales
by $3.1 million for the quarter ended September 30, 2003, with no effect on net
earnings. Product development fees included in first quarter revenue
approximated $155,000. Adjusted for this change, sales would have been up
12.4% versus the comparable quarter in fiscal 2003. Compared to the first
quarter of fiscal 2003, the Euro and Asian currencies strengthened against the
US dollar. The impact of this strengthening on foreign operations was to
increase revenues by approximately $1.6 million versus the prior year.
The increase in fiscal 2004's first quarter sales was driven by improved sales
at our domestic operations as well as year-over-year growth at our foreign
operations. All product markets posted gains versus the prior year, the
largest increases coming in marine and propulsion products. In the first
quarter of fiscal 2003, the Company experienced supplier quality problems at
our domestic manufacturing operations that reduced production efficiency and
delayed shipments, primarily of marine and powershift transmission products.
Our distribution subsidiaries posted double-digit growth in sales versus the
prior year's first quarter, increasing by over $2 million. This growth was
primarily driven by the year-over-year growth in our marine markets. As
noted above, sales of our marine and propulsion products were particularly
strong in comparison to the first fiscal quarter of last year. However,
marine transmissions for the commercial boat market continue to remain weak.
Domestically, continued softness in our industrial and non-marine products
were offset by favorable year-over-year growth in our propulsion business,
driven by sales of Arneson surface drives, and marine business. Despite the
continued softness in the industrial and non-marine transmission markets, the
Company was able to post modest year-over-year increases.
Gross margin as a percentage of sales improved significantly, increasing from
16.2% of sales in fiscal 2003's first quarter to 23.4% of sales in fiscal 2004.
This increase was driven primarily by improved product mix, the impact of cost
reduction efforts as well as the impact of the restructuring program
undertaken in fiscal 2003's second quarter. Additionally, the supplier quality
problems encountered in fiscal 2003's first quarter, mentioned above, caused
last year's gross margin as a percentage of sales to be unusually low. The
change in the TDN joint venture agreement accounted for approximately 140 basis
points of the improvement, as those sales were at lower margin rates.
8
Marketing, engineering, and administrative (ME&A) expenses were relatively flat
to last year's first fiscal quarter. Favorable improvements at our domestic
operations, primarily as a result of recent cost reduction efforts, of over
$0.4 million were offset by the unfavorable year-over-year exchange rate impact
at our foreign operations of $0.3 million. Interest expense for the quarter
was 9% below the same quarter last year due primarily to lower borrowings as
well as a mix of borrowings at a lower weighted average interest rate. The
effective income tax rate was higher than a year ago due to a greater
proportion of overseas earnings, which are taxed at a higher rate.
Financial Condition, Liquidity and Capital Resources
As of September 30, 2003, the Company had net working capital of $49.2 million,
which represents a slight decrease from a net working capital of $50.8 million
as of June 30, 2003. For the three months ended September 30, 2003, net cash
flows from operations were $6.0 million compared to $2.1 million for the first
quarter of fiscal 2003. The first quarter of fiscal 2004 saw a significant
reduction in accounts receivable balances versus June 30, 2003. The reduction
of $9.4 million occurred as the Company realized collections from the strong
sales months of May and June 2003. Our domestic manufacturing and Italian
operations accounted for nearly $6 million of the accounts receivable reduction
The change in the TDN joint venture agreement discussed above accounted for a
further $2 million decrease in accounts receivable.
Net acquisitions of fixed assets for the quarter totaled $0.6 million. In
fiscal 2003, we increased capital spending by $2.3 million compared to fiscal
2002 as the Company further developed its key manufacturing cells in both our
domestic and European operations. We expect this trend to continue in fiscal
2004.
The Company used excess cash to continue to pay down the balance on its
revolver, which had outstanding balances of $9.6 million and $10.9 million as
of September 30, 2003 and June 30, 2003, respectively. The impact of the above
cash flows was a net increase of $2.6 million in cash during the quarter. The
Company's balance sheet remains very strong, there are no off-balance-sheet
arrangements, and we continue to have sufficient liquidity for near-term needs.
The Company has obligations under non-cancelable operating lease contracts and
a senior note agreement for certain future payments. A summary of those
commitments follows (in thousands):
Contractual Obligations Total Less than 1-3 4-5 After 5
1 year Years Years Years
Short-term debt $ 1,057 $ 1,057
Revolver borrowing $ 9,600 $ 9,600
Long-term debt $ 8,597 $ 2,857 $ 5,740
Operating leases $11,061 $ 2,868 $ 3,762 $2,213 $2,218
Total obligations $30,315 $ 6,782 $19,102 $2,213 $2,218
New Accounting Releases
In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of the
provisions of this Statement to have a significant impact on its financial
statements.
Critical Accounting Policies
The preparation of this Quarterly Report requires management's judgment to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the dates of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. There can be no assurance that actual results
will not differ from those estimates.
9
Twin Disc's significant accounting policies are described in Note A in the
Notes to Consolidated Financial Statements in the Annual Report for June 30,
2003. There have been no significant changes to those accounting policies
subsequent to June 30, 2003.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to market risks from changes in interest rates,
commodities and foreign exchange. To reduce such risks, the Company selectively
uses financial instruments and other pro-active management techniques. All
hedging transactions are authorized and executed pursuant to clearly defined
policies and procedures, which prohibit the use of financial instruments for
trading or speculative purposes.
Interest rate risk - The Company's earnings exposure related to adverse
movements of interest rates is primarily derived from outstanding floating
rate debt instruments that are indexed to the prime and LIBOR interest rates.
Those debt facilities bear interest predominantly at the prime interest rate
minus .5% or LIBOR plus 2.75%. Due to the relative stability of interest
rates, the Company did not utilize any financial instruments at
September 30, 2003 to manage interest rate risk exposure. A 10 percent
increase or decrease in the applicable interest rate would result in a change
in pretax interest expense of approximately $10,000.
Commodity price risk - The Company is exposed to fluctuation in market prices
for such commodities as steel and aluminum. Due to the relative stability of
these commodities, the Company does not utilize commodity price hedges to
manage commodity price risk exposure.
Currency risk - The Company has exposure to foreign currency exchange
fluctuations. Approximately one-third of the Company's revenues in the three
months ended September 30, 2003 and 2002 were denominated in currencies other
than the U.S. dollar. Of that total, approximately two-thirds was denominated
in euros with the balance composed of Japanese yen and the Australian and
Singapore dollars. The Company does not hedge the translation exposure
represented by the net assets of its foreign subsidiaries. Foreign currency
translation adjustments are recorded as a component of shareholders' equity.
Forward foreign exchange contracts are used to hedge the currency fluctuations
on significant transactions denominated in foreign currencies.
Derivative Financial Instruments - The Company has written policies and
procedures that place all financial instruments under the direction of the
company corporate treasury and restrict derivative transactions to those
intended for hedging purposes. The use of financial instruments for trading
purposes is prohibited. The Company uses financial instruments to manage the
market risk from changes in foreign exchange rates.
The Company primarily enters into forward exchange contracts to reduce the
earnings and cash flow impact of non-functional currency denominated
receivables and payables. These contracts are highly effective in hedging the
cash flows attributable to changes in currency exchange rates. Gains and
losses resulting from these contracts offset the foreign exchange gains or
losses on the underlying assets and liabilities being hedged. The maturities
of the forward exchange contracts generally coincide with the settlement dates
of the related transactions. Gains and losses on these contracts are recorded
in Other income (expense), net in the Consolidated Statement of Operations as
the changes in the fair value of the contracts are recognized and generally
offset the gains and losses on the hedged items in the same period. The
primary currency to which the Company was exposed in 2003 and 2002 was the
Euro. At September 30, 2003 the Company had net outstanding forward exchange
contracts to purchase Euros in the value of $3,981,000 with a weighted average
maturity of 41 days. The fair value of the Company's contracts was a loss of
approximately $70,000 at September 30, 2003. At June 30, 2003 the Company had
net outstanding forward exchange contracts to purchase Euros in the value of
$2,701,000 with a weighted average maturity of 50 days. The fair value of the
Company's contracts was approximately zero at June 30, 2003.
10
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
As required by new Rules 13a-15 and 15d-15 of the Securities Exchange Act of
1934, within the 90-day period prior to the filing of this report and under the
supervision and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, the Company has evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures. Based on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that such disclosure controls and procedures
are effective in ensuring that material information relating to the Company,
including its consolidated subsidiaries, is made known to the certifying
officers by others within the Company and its consolidated subsidiaries during
the period covered by this report.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls for
financial reporting or in other factors that could significantly affect such
internal controls subsequent to the date of such evaluation. However, in
connection with the new rules, the Company has been engaged in the process of
further reviewing and documenting its disclosure controls and procedures,
including its internal accounting controls. The Company may from time to time
make changes aimed at enhancing the effectiveness of its disclosure controls
and procedures, including its internal controls, to ensure that the Company's
systems evolve with its business.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Twin Disc is a defendant in several product liability or related claims
considered either adequately covered by appropriate liability insurance or
involving amounts not deemed material to the business or financial condition of
the Company.
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, 2003, 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.
During the period covered by this report, the Company offered participants in
the Twin Disc, Incorporated B The Accelerator 401(k) Savings Plan (the "Plan")
the option to invest their Plan accounts in a fund comprised of Company stock.
Participation interests of Plan participants in the Plan, which may be
considered securities, were not registered with the SEC. During the fiscal
year ended June 30, 2003, 68 Plan participants allocated an aggregate of
$81,000 toward this investment option. Participant accounts in the Plan
consist of a combination of employee deferrals, Company matching contributions,
nd, in some cases, additional Company profit-sharing contributions. No
underwriters were involved in these transactions. On September 6, 2002, the
Company filed a Form S-8 to register 100,000 shares of Company common stock
offered through the Plan, as well as an indeterminate amount of Plan
participation interests.
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".
Item 6. Exhibits and Reports on Form 8-K.
A Form 8-K was filed on July 28, 2003 for a press release announcing financial
results for fiscal 2003 fourth quarter and full year.
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)
November 14, 2003 /S/ FRED H. TIMM
----------------------- ---------------------------
(Date) Fred H. Timm
Vice President - Administration and
Secretary