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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2005
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 Number)
1328 Racine Street, Racine, Wisconsin 53403
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including area code: (262)638-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
None None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X .
At August 26, 2005, the aggregate market value of the common stock held by
non-affiliates of the registrant was $71,535,899. Determination of stock
ownership by affiliates was made solely for the purpose of responding to this
requirement and registrant is not bound by this determination for any other
purpose.
At August 26, 2005, the registrant had 2,902,034 shares of its common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The incorporated portions of such documents being specifically identified in
the applicable Items of this report.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held October 21, 2005 are incorporated by reference into Part III.
PART I
Item 1. Business
Twin Disc was incorporated under the laws of the state of Wisconsin in 1918.
Twin Disc designs, manufactures and sells heavy duty off-highway power
transmission equipment. Products offered include: hydraulic torque converters;
power-shift transmissions; marine transmissions and surface drives; universal
joints; gas turbine starting drives; power take-offs and reduction gears;
industrial clutches; fluid couplings and control systems. The Company sells its
products to customers primarily in the construction equipment, industrial
equipment, government, marine, energy and natural resources and agricultural
markets. The Company's worldwide sales to both domestic and foreign customers
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are transacted through a direct sales force and a distributor network. At the
end of May 2004, the Company acquired Rolla SP Propellers SA a manufacturer of
custom high performance propellers. The products described above have accounted
for more than 90% of revenues in each of the last three fiscal years.
Most of the Company's products are machined from cast iron, forgings, cast
aluminum and bar steel which generally are available from multiple sources and
which are believed to be in adequate supply.
The Company has pursued a policy of applying for patents in both the United
States and certain foreign countries on inventions made in the course of its
development work for which commercial applications are considered probable.
The Company regards its patents collectively as important but does not consider
its business dependent upon any one of such patents.
The business is not considered to be seasonal except to the extent that
employee vacations are taken mainly in the months of July and August curtailing
production during that period.
The Company's products receive direct widespread competition, including from
divisions of other larger independent manufacturers. The Company also competes
for business with parts manufacturing divisions of some of its major customers.
Primary competitive factors for the Company's products are performance, price,
service and availability. The Company's top ten customers accounted for
approximately 34% of the Company's consolidated net sales during the year ended
June 30, 2005. There were no customers that accounted for 10% or more of
consolidated net sales in fiscal 2005.
Unfilled open orders for the next six months of $62,000,000 at June 30, 2005
compares to $49,400,000 at June 30, 2004. Since orders are subject to
cancellation and rescheduling by the customer, the six-month order backlog is
considered more representative of operating conditions than total backlog.
However, as procurement and manufacturing "lead times" change, the backlog will
increase or decrease; and thus it does not necessarily provide a valid
indicator of the shipping rate. Cancellations are generally the result of
rescheduling activity and do not represent a material change in backlog.
Management recognizes that there are attendant risks that foreign governments
may place restrictions on dividend payments and other movements of money, but
these risks are considered minimal due to the political relations the United
States maintains with the countries in which the Company operates or
the relatively low investment within individual countries. The Company's
business is not subject to renegotiation of profits or termination of contracts
at the election of the Government.
Engineering and development costs include research and development expenses for
new product development and major improvements to existing products, and other
charges for ongoing efforts to refine existing products. Research and
development costs charged to operations totaled $2,278,000, $2,840,000 and
$2,220,000 in 2005, 2004 and 2003, respectively. Total engineering and
development costs were $8,050,000, $7,600,000 and $7,190,000 in 2005, 2004 and
2003, respectively.
Compliance with federal, state and local provisions regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, is not anticipated to have a material effect on capital
expenditures, earnings or the competitive position of the Company.
The number of persons employed by the Company at June 30, 2005 was 901.
A summary of financial data by segment and geographic area for the years ended
June 30, 2005, 2004 and 2003 appears in Note K to the consolidated financial
statements on pages 29 through 31 of this form.
Item 2. Properties
The Company owns two manufacturing, assembly and office facilities in Racine,
Wisconsin, U.S.A., one in Nivelles, Belgium, one in Decima, Italy and one in
Novazzano, Switerland. The aggregate floor space of these five plants
approximates 724,000 square feet. One of the Racine facilities includes office
space, which is the location of the Company's corporate headquarters. The
Company leases additional manufacturing, assembly and office facilities in
Decima, Italy.
The Company also has operations in the following locations, all of which are
used for sales offices, warehousing and light assembly or product service. The
following properties are leased:
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Jacksonville, Florida, U.S.A. Capezzano Planore, Italy
Miami, Florida, U.S.A. Brisbane, Queensland, Australia
Coburg, Oregon, U.S.A. Perth, Western Australia, Australia
Kent, Washington, U.S.A. Singapore
Edmonton, Alberta, Canada Shanghai, China
Vancouver, British Columbia, Canada
The properties are generally suitable for operations and are utilized in the
manner for which they were designed. Manufacturing facilities are currently
operating at less than 80% capacity and are adequate to meet foreseeable needs
of the Company.
Item 3. Legal Proceedings
Twin Disc is a defendant in several product liability or related claims of
which the ultimate outcome and liability to the Company, if any, is not
presently determinable. Management believes that the final disposition of
such litigation will not have a material impact on the Company's results of
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended June 30, 2005.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Shareholders to
be held on October 21, 2005.
Principal Occupation
Name Last Five Years Age
Michael E. Batten Chairman, Chief Executive Officer since 1983 65
Michael H. Joyce President - Chief Operating Officer since 1995 64
Christopher J. Eperjesy
Vice President - Finance & Treasurer and Chief 37
Financial Officer since November 2002: formerly
Divisional Vice President - Financial Planning &
Analysis, Kmart Corporation since 2001; formerly
Senior Manager - Corporate Finance,
DaimlerChrysler AG since 1999
James E. Feiertag Executive Vice President since October 2001: 48
formerly Vice President - Manufacturing since
November 2000; formerly Vice President of
Manufacturing for the Drives and Systems Group,
Rockwell Automation Group since 1999
John H. Batten Executive Vice President since November 2004; 40
formerly Vice President and General Manager -
Marine and Propulsion since October 2001;
formerly Commercial Manager - Marine and
Propulsion since 1998
Henri Claude Fabry Vice President - Global Distribution since 59
October 2001; formerly Vice President Marine and
Distribution since 1999
Fred H. Timm Vice President - Administration and Secretary 59
since October 2001, formerly Corporate Controller
and Secretary since 1995
Dean J. Bratel Vice President Engineering since November 2004; 41
formerly Director of Corporate Engineering since
January 2003;formerly Chief Engineer since October
2001;formerly Engineering Manager since December 1999
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Denise L. Wilcox Vice President Human Resources since November 48
2004; formerly Director Corporate Human Resources
since March 2002;formerly Manager Compensation &
Benefits since September 1998
Officers are elected annually by the Board of Directors at the Board meeting
held preceding each Annual Meeting of the Shareholders. Each officer holds
office until his successor is duly elected, or until he resigns or is removed
from office. John H. Batten is the son of Michael E. Batten.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's common stock is traded on the NASDAQ National Market under the
symbol TWIN. Prior to October 21, 2004, the Company's common stock was traded
on the New York Stock Exchange under the symbol TDI. The price information
below represents the high and low sales prices for the Company's common stock
from July 1, 2004 through October 20, 2004 and, from October 21, 2004 through
June 30, 2005, the high and low bid information for the Company's common stock:
Fiscal Year Ended June 30, 2005 Fiscal Year Ended June 30, 2004
High Low High Low
First Quarter 26.20 22.15 First Quarter 17.00 14.12
Second Quarter 26.00 22.25 Second Quarter 19.54 16.55
Third Quarter 28.25 24.01 Third Quarter 21.25 19.00
Fourth Quarter 25.98 19.75 Fourth Quarter 25.15 19.44
For information regarding the Company's equity-based compensation plans, see
the discussion under Item 12 on page 14 of this report. Quarterly dividends of
$0.175 per share were declared and paid for each of the quarters above. As of
June 30, 2005 there were 888 shareholder accounts. The bid information of Twin
Disc common stock as of August 26, 2005 was $33.05.
Pursuant to a shareholder rights plan (the "Rights Plan"), on April 17, 1998,
the Board of Directors declared a dividend distribution, payable to
shareholders of record at the close of business on June 30, 1998, of one
Preferred Stock Purchase Right ("Rights") for each outstanding share of Common
Stock. The Rights will expire 10 years after issuance, and will be exercisable
only if a person or group becomes the beneficial owner of 15% or more of the
Common Stock (or 25% in the case of any person or group which currently owns
15% or more of the shares or who shall become the Beneficial Owner of 15% or
more of the shares as a result of any transfer by reason of the death of or by
gift from any other person who is an Affiliate or an Associate of such existing
holder or by succeeding such a person as trustee of a trust existing on the
record date) (an "Acquiring Person"), or 10 business days following the
commencement of a tender or exchange offer that would result in the offeror
beneficially owning 25% or more of the Common Stock. A person who is not an
Acquiring Person will not be deemed to have become an Acquiring Person solely
as a result of a reduction in the number of shares of Common Stock outstanding
due to a repurchase of Common Stock by the Company until such person becomes
beneficial owner of any additional shares of Common Stock. Each Right will
entitle shareholders who received the Rights to buy one newly issued unit of
one one-hundredth of a share of Series A Junior Preferred Stock at an exercise
price of $160, subject to certain anti-dilution adjustments. The Company will
generally be entitled to redeem the Rights at $.05 per Right at any time prior
to 10 business days after a public announcement of the existence of an
Acquiring Person. In addition, if (i) a person or group accumulates more than
25% of the Common Stock (except pursuant to an offer for all outstanding shares
of Common Stock which the independent directors of the Company determine to be
fair to and otherwise in the best interests of the Company and its shareholders
and except solely due to a reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the Company), (ii) a
merger takes place with an Acquiring Person where the Company is the surviving
corporation and its Common Stock is not changed or exchanged, (iii) an
Acquiring Person engages in certain self-dealing transactions, or (iv) during
such time as there is an Acquiring Person, an event occurs which results in
such Acquiring Person's ownership interest being increased by more than 1%
(e.g., a reverse stock split), each Right (other than Rights held by the
Acquiring Person and certain related parties which become void) will represent
the right to purchase, at the exercise price, Common Stock (or in certain
circumstances, a combination of securities and/or assets) having a value of
twice the exercise price. In addition, if following the public announcement
of the existence of an Acquiring Person the Company is acquired in a merger or
other business combination transaction, except a merger or other business
combination transaction that takes place after the consummation of an offer for
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all outstanding shares of Common Stock that the independent directors of the
Company have determined to be fair, or a sale or transfer of 50% or more of the
Company's assets or earning power is made, each Right (unless previously
voided) will represent the right to purchase, at the exercise price, common
stock of the acquiring entity having a value of twice the exercise price at the
time.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on a substantial number of Rights being
acquired. However, the Rights are not intended to prevent a take-over, but
rather are designed to enhance the ability of the Board of Directors to
negotiate with an acquirer on behalf of all of the shareholders. In addition,
the Rights should not interfere with a proxy contest.
The Rights should not interfere with any merger or other business combination
approved by the Board of Directors since the Rights may be redeemed by the
Company at $.05 per Right prior to 10 business days after the public
announcement of the existence of an Acquiring Person.
The news release announcing the declaration of the Rights dividend, dated
April 17, 1998, filed as Item 14(a)(3), Exhibit 4(b) of Part IV of the Annual
Report on Form 10-K for the year ended June 30, 1998 is hereby incorporated by
reference.
Recent Sales of Unregistered Securities
During the period covered by this report, the Company offered participants in
the Twin Disc, Incorporated 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, and, in some cases, additional
Company profit-sharing contributions. No underwriters were involved in these
transactions. On September 6, 2003, 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.
Issuer Purchases of Equity Securities
(c) Total Number (d) Maximum Number
(a) Total (b) of Shares Purchased of Shares that May
Period Number of Average as Part of Publicly Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans
Purchased per Share or Programs or Programs
April
1 - 30, 3,499 21.13 64,440 135,560
2005
May
1 - 31, 20,820 21.58 85,260 114,740
2005
June
1 - 30, 10,627 21.82 95,887 104,113
2005
Total 34,946
In April 1995, the Company authorized 100,000 shares to be purchased in a Stock
Repurchase Program. In January 2002, the program was extended to authorize an
additional 100,000 shares to be purchased. There is no expiration date for
this program.
Item 6. Selected Financial Data
Financial Highlights
(dollars in thousands, except per share amounts and shares outstanding)
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For the years ended June 30,
Statement of Operations Data: 2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Net sales $218,472 $186,089 $179,591 $179,385 $180,786
Net earnings (loss) 6,910 5,643 (2,394) 2,276 6,885
Basic earnings (loss) per share 2.42 2.01 (.85) .81 2.45
Diluted earnings (loss) per share 2.38 1.98 (.85) .81 2.45
Dividends per share .70 .70 .70 .70 .70
Balance Sheet Data (at end of period):
Total assets $185,295 $174,622 $167,944 $154,892 $154,127
Total long-term debt 14,958 16,813 16,584 18,583 23,404
Effective May 31, 2004, the company acquired 100% of the common stock of Rolla
SP Propellers SA of Novazzano, Switzerland. Rolla designs and manufactures
custom propellers. Rolla has a fiscal year ending May 31. Since the
acquisition was also effective May 31, no results of operations of Rolla are
included in consolidated results for the year ended June 30, 2004. A full
year's results are included in the consolidated results for the year ended
June 30, 2005.
In January 2004, the Company sold its 25% minority interest in Palmer Johnson
Distributors, LLC (PJD) to the majority holder, PJD, Inc. for $3,811,000 cash,
which approximated the net book value of the investment. The Company
recognized pre-tax earnings of $240,000 and $414,000 in fiscal years 2004 and
2003, respectively, from its investment in PJD. In addition, the Company
received cash distributions of $195,000 and $303,000 in fiscal years 2004 and
2003, respectively.
During the third quarter of 2001, the Company sold its investment in Niigata
Converter Company, Ltd., resulting in a net gain of $2,288,000 or $.81 per
share.
Twin Disc Nico Co. Ltd. (TDN) is a joint venture between the Company and
Hitachi Nico Transmission Co. Ltd. TDN's balance sheet and statement of
operations have been combined with the Company since the inception of the
joint venture. TDN contributed the following for the years ended June 30
(dollars in thousands, except per share amounts):
2005 2004 2003
---- ---- ----
Net sales $ 809 $ 1,180 $13,708
Net earnings 188 48 23
Basic earnings per share .07 .02 .01
Diluted earnings per share .06 .02 .01
Total assets 3,434 3,162 6,076
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Note on Forward-Looking Statements
Statements in this report (including but not limited to certain statements in
Items 1, 3 and 7) and in other Company communications that are not historical
facts are forward-looking statements, which are based on management's current
expectations. These statements involve risks and uncertainties that could
cause actual results to differ materially from what appears here.
Forward-looking statements include the Company's description of plans and
objectives for future operations and assumptions behind those plans. The words
"anticipates," "believes," "intends," "estimates," and "expects," or similar
anticipatory expressions, usually identify forward-looking statements. In
addition, goals established by Twin Disc, Incorporated should not be viewed
as guarantees or promises of future performance. There can be no assurance
the Company will be successful in achieving its goals.
In addition to the assumptions and information referred to specifically in
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the forward-looking statements, other factors could cause actual results to be
materially different from what is presented here.
Results of Operations
(In thousands)
2005 % 2004 % 2003 %
----- -- ----- -- ----- --
Net sales $218,472 $186,089 $179,591
Cost of goods sold 161,052 137,804 144,618
------- ------- -------
Gross profit 57,420 26.3% 48,285 25.9% 34,973 19.5%
Marketing, engineering and
administrative expenses 44,666 20.4 37,168 20.0 34,790 19.4
Restructuring of operations 2,076 1.0 - 0.0 2,042 1.1
----- ---- ------- --- ------- ---
Earnings (loss) from operations $10,678 4.9 $11,117 6.0 $(1,859) (1.0)
======= === ======= === ======= ====
Fiscal 2005 Compared to Fiscal 2004
Net Sales
Net sales increased $32.4 million, or 17.4%, in fiscal 2005. Rolla SP
Propellers SA (Rolla Propellers), acquired at the end of fiscal 2004,
contibuted over $6.1 million to net sales. The continued strength of the Euro
and Asian currencies versus the dollar resulted in a net favorable impact from
foreign currency exchange on sales of $5.8 million in fiscal 2005, compared to
fiscal 2004.
In fiscal 2005, sales for our worldwide manufacturing operations, before
eliminating intra-segment and inter-segment sales, were $33.9 million, or
19.7%, higher than in the prior year. Over sixty percent of this increase came
at our domestic manufacturing operation, which saw a recovery across most of
its product markets. Particular strength was experienced in the off-highway
transmission business, where the Company's products are used in the oil-field
servicing market and various military vehicle applications. Of the remaining
increase, approximately $3.1 million was due to the impact of net favorable
exchange rate movements on our European operations in Belgium and Italy, and
$6.1 million was related to the additional sales from the Company's recently
acquired Swiss operation, Rolla Propellers.
Net sales for distribution operations were up $8.6 million, or 14.5%, in fiscal
2005. Nearly half of the increase came from the Company's Mill-Log Equipment
Co., Inc. (Mill-Log) subsidiary, with operations in the Northwest USA and
Southwest Canada. In fiscal 2005, Mill-Log continued to experience strong
sales to its oil-field servicing and industrial product markets. Nearly forty
percent of the increase came from the Company's subsidiary in Singapore, Twin
Disc (Far East) Ltd., where the operation experienced double-digit growth
driven by strong marine transmission sales for commercial applications. Of the
overall increase, the net positive impact due to the change in foreign exchange
rates was $2.7 million, or nearly a third of the overall increase.
The elimination for net intra-segment and inter-segment sales increased $10.1
million, or 22.1%, from $45.8 million in fiscal 2004 to $55.9 million in fiscal
2005.
Gross Profit
Gross profit as a percentage of sales improved 40 basis points in fiscal 2005
to 26.3%, compared to 25.9% in fiscal 2004. There were a number of factors
that impacted the Company's overall gross margin rate in fiscal 2005. The
Company's margins continued to be adversely impacted by rising steel and energy
costs. The Company estimates that the impact of steel surcharges on its
domestic operation alone exceeded $2.4 million. In addition, the Company's
Belgian operation's gross margin was adversely affected by the continued
relative strength of Euro versus the US Dollar. This operation manufactures
with Euro-based costs and sells more than a third of its production into the US
market at US Dollar prices. The average Euro to US Dollar exchange rate in
fiscal 2005 was $1.27, which was 6.1% higher than in fiscal 2004. It is
estimated that the year-over-year effect of a stronger Euro was to deteriorate
margins at our Belgian subsidiary by nearly $1 million. These adverse effects
were offset by (1) increased sales and improved product mix, particularly from
the domestic industrial and off-highway transmission markets, (2) selective
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pricing actions taken in the fourth quarter, (3) lower domestic pension and
post-retirement healthcare costs of approximately $2.0 million, and (4) the
favorable impact of foreign currency translation at our overseas operations due
to the strengthening of the Euro and Asian currencies versus the US Dollar of
$1.4 million.
Marketing, Engineering and Administrative (ME&A) Expenses
Marketing, engineering, and administrative (ME&A) expenses increased $7.5
million, or 20.2%, in fiscal 2005 versus fiscal 2004. As a percentage of
sales, ME&A expenses increased slightly from 20.0% in fiscal 2004 to 20.4% in
fiscal 2005. Compared to fiscal 2004, Rolla Propellers added an additional
$2.1 million to ME&A expenses in fiscal 2005, having been acquired at the end
of fiscal 2004. Approximately $0.9 million, or 242 basis points, of the
increase can be attributed to the unfavorable exchange rate impact of the
weakening dollar on our overseas operations' ME&A expenses. As part of a
temporary corporate-wide wage reduction program in fiscal 2004, the corporate
annual incentive program was suspended. In fiscal 2005, a new bonus program was
implemented that emphasizes the achievement of earning returns in excess of the
Company's cost of capital as well as other financial and non-financial
objectives. Fiscal 2005's ME&A expenses include the impact of the accrued
bonuses that were earned in fiscal 2005 of approximately $3.2 million.
Restructuring of Operations
The Company recorded a restructuring charge of $2.1 million in the fourth
quarter of 2005 as the Company restructured its Belgian operation to improve
future profitability. The charge consists of prepension costs for 37 employees;
33 manufacturing employees and 4 salaried employees. As of June 30, 2005 the
Company had not made any cash payments related to the above restructuring.
Interest Expense
Interest expense increased by $56,000, or 5.2%, in fiscal 2005. The average
outstanding debt for fiscal 2005 of $23.0 million (computed monthly) was $2.6
million higher than fiscal 2004. However, the average balance of the Company's
Senior Notes, which carry an interest rate of 7.37%, decreased by $2.9 million.
This was offset by an increase in the average borrowings under the Company's
revolver of $3.2 million. The revolver carried an average interest rate in
fiscal 2005 and 2004 of between 3.5% and 4.0%. Rolla Propellers, acquired
effective June 2004, added an additional $2.7 million in average borrowings in
fiscal 2005, at an average interest rate of just over 3%. As a result, while
overall average borrowings were up 12.7%, the overall average interest rate for
fiscal 2005 decreased by 40 basis points to 4.9%.
Equity in Net Earnings of Affiliate
In January 2004, the Company sold its 25% minority interest in Palmer Johnson
Distributors,LLC. to the majority holder, PJD, Inc. for $3,811,000 cash, which
approximated the net book value of the investment. The Company recognized
pre-tax earnings of $0 and $240,000 in fiscal years 2005 and 2004,respectively,
from its investment in PJD. In addition, the Company received cash
distributions of $0 and $195,000 in fiscal years 2005 and 2004, respectively.
Income Taxes
During the fourth quarter of fiscal 2005, the Company undertook certain
business restructuring activities which will allow it to utilize previously
unutilized foreign tax credits. These restructuring activities resulted in a
$1.4 million tax benefit during the fourth quarter. For fiscal 2005, the
effective income tax rate was favorably impacted by these activities. In
fiscal 2004, the effective income tax rate was adversely impacted by the
inability to utilize foreign tax credits and a relatively high proportion of
foreign earnings.
Management believes that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets except for certain foreign tax credit carryforwards for which a
valuation allowance has been recorded.
Order Rates
In fiscal 2005, we continued to see an improvement in our order rates for most
of our products. As of fiscal year end, our manufacturing facility in the
United States saw a year-over-over increase in its six-month backlog of almost
37%. Our Belgian manufacturing operation experienced a modest decline in its
six-month backlog of approximately 10%, while our Italian manufacturing
operation's six-month backlog was relatively flat year-over-year. The backlog
of orders scheduled for shipment during the next six months (six-month backlog)
of $61.9 million at the end of fiscal 2005 compared favorably to the $49.4
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million and $30.6 million for fiscal years ended 2004 and 2003, respectively.
Rolla Propeller's backlog, not included in the figures above, amounted to just
under $3 million as of June 30, 2005.
Fiscal 2004 Compared to Fiscal 2003
Net Sales
Net sales increased $6.5 million, or nearly four percent in fiscal 2004. In
fiscal 2004, the joint venture agreement governing Twin Disc Nico Co., LTD
(TDN) was amended. Under the new agreement, sales into certain territories
were 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 $13.7 million
for the fiscal year ended June 30, 2004, with no effect on net earnings.
Product development fees included in net sales in fiscal year 2004 approximated
$ 0.7 million. As a result of the strong Euro and Asian currencies versus the
U.S. dollar, foreign currency exchange had a net favorable impact on sales of
$10.4 million in fiscal 2004, compared to fiscal 2003.
In fiscal 2004, sales for our worldwide manufacturing operations, before
eliminating intra-segment and inter-segment sales, were $19.0 million, or
12.3%, higher than in the prior year. Over half of this increase came at our
domestic manufacturing operations, which saw a recovery across most of its
product markets. Of the remaining increase, approximately $5.9 million was due
to the impact of net favorable exchange rate movements on our European
operations in Belgium and Italy.
Net sales for distribution operations were down $4.2 million, or 6.7%, in
fiscal 2004. However, there was a $13.0 million decrease due to the change in
the TDN agreement mentioned above. Adjusting for this change, sales were $8.8
million, or 17.5%, higher than fiscal 2003. Of this increase, the net positive
impact due to the change in foreign exchange rates was $4.5 million, or 8.9%.
From a product perspective, the Company saw increases in its industrial,
transmission and propulsion product sales. After adjusting for the impact of
the change in the TDN agreement, marine product sales were ,also higher. Of
particular note in fiscal 2004 was the continued acceptance of our
QuickShift(r) marine transmissions, the overall recovery of the marine
pleasure craft market, the growth in our Arneson Surface Drives (propulsion)
and 8500 series transmission for oilfield applications.
Gross Profit
Gross profit as a percentage of sales improved 640 basis points in fiscal 2004
to 25.9%, compared to 19.5% in fiscal 2003. The improvement in fiscal 2004 can
be attributed to a number of factors: (1) increased sales and favorable
product mix, which accounted for over half of the current year's improvement,
(2) increased productivity and absorption, (3) lower fixed costs as a result of
cost reduction initiatives, (4) favorable purchase price variances as a result
of a material cost reduction program and (5) the absence in fiscal 2004 of a
$0.8 million SFAS 144 impairment charge taken in fiscal 2003. These were
partially offset by a $1 million increase in pension expense in fiscal 2004
compared to fiscal 2003.
Marketing, Engineering and Administrative (ME&A) Expenses
Marketing, engineering, and administrative (ME&A) expenses increased $2.4
million, or 6.8%, in fiscal 2004 versus fiscal 2003. Over $1.5 million, or 425
basis points, of this increase can be attributed to the unfavorable exchange
rate impact of the weakening dollar on our overseas operations' ME&A expenses.
Increased pension expense for salaried and administrative employees accounted
for another $0.8 million of the increase.
Restructuring of Operations
During the second quarter of 2003, the Company recorded a pre-tax restructuring
charge of $2.0 million in connection with the reduction of its workforce.
These actions were taken in an effort to streamline the Company's cost
structure and align its corporate workforce with market conditions. The charge
consisted of employee termination and severance benefits for a total of 58
employees; 48 production employees and 10 salaried employees. During 2004 and
2003, the Company made cash payments of $0.4 million and $0.6 million,
respectively. Accrued restructuring costs were $0.9 million and $1.3 million
at June 30, 2004 and 2003, respectively.
Interest Expense
Interest expense decreased by $250,000, or 19%, in fiscal 2004. The average
10
outstanding debt for fiscal 2004 of $20.4 million (computed monthly) was $2.3
million lower than fiscal 2003. The decrease in interest expense for the fifth
straight year can be attributed to overall lower debt levels and a lower
weighted interest rate. The latter is partially due to the fact that the
Company continues to pay down its Senior Notes, which carry a fixed rate of
7.37%, which is significantly higher than the interest rate on its other credit
facilities.
Equity in Net Earnings of Affiliate
In January 2004, the Company sold its 25% minority interest in Palmer Johnson
Distributors,LLC. to the majority holder, PJD, Inc. for $3,811,000 cash, which
approximated the net book value of the investment. The Company recognized
pre-tax earnings of $240,000 and $414,000 in fiscal years 2004 and 2003
respectively, from its investment in PJD. In addition, the Company received
cash distributions of $195,000 and $303,000 in fiscal years 2004 and 2003,
respectively.
Income Taxes
In fiscal 2004, the effective income tax rate was adversely impacted by the
inability to utilize foreign tax credits and a relatively high proportion of
foreign earnings. The low effective tax rate in fiscal 2003 results from the
benefit of domestic losses partially offset by taxes incurred on foreign
earnings, the inability to utilize foreign tax credits and a reduction in
statutory rates at some foreign locations.
Management believes that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize deferred tax
assets except for certain foreign tax credit carryforwards for which a
valuation allowance has been recorded.
Other
On July 15, 2003, the Company announced a number of actions to address rising
pension and retiree healthcare costs, meant to ensure both the future strength
of our pension fund and the Company's ability to remain globally competitive.
In addition to changes to both the pension and post-retirement healthcare plans
(see Footnote N to the consolidated financial statements), the Company
announced across-the-board wage reductions for corporate officers, and most
domestic salaried and hourly employees. Domestic employee groups, including
officers, foregoed performance bonuses in both fiscal 2003 and 2004. The
401(k) company match was reduced from 75 percent to 50 percent on the first six
percent of employees' contributions. The combined effect of these actions
approximately offset projected increases for both pension and post-retirement
healthcare costs in fiscal 2004. In the first quarter of fiscal 2005, the
Company restored salary and wages to their prior levels and implemented a new
incentive plan that emphasizes the achievement of earning returns in excess of
the Company's cost of capital as well as other financial and non-financial
objectives. The annual net pre-tax impact of the salary and wage restoration
was approximately $0.7 million.
Liquidity and Capital Resources
Fiscal Years 2005, 2004 and 2003
The net cash provided by operating activities in fiscal 2005 totaled $16.5
million versus $12.2 million in fiscal 2004, for a net increase of $4.3
million. This increase was primarily driven by an increase in accounts
payable, accrued liabilities and net earnings as well as a net reduction in
inventories. The increase in accounts payable was primarily due to the timing
of vendor payments for several large pieces of equipment acquired in fiscal
2005. The increase in accrued liabilities was primarily due to the accrued
bonus that was subsequently paid in August 2005. The decrease in inventories
on higher sales was driven by a corporate-wide initiative to reduce inventories
in fiscal 2005. As a percentage of sales, net inventories were reduced 400
basis points to 22.2%.
The net cash provided by operating activities in fiscal 2004 totaled $12.2
million versus $6.7 million in fiscal 2003, for a net increase of $5.5 million.
This increase was primarily driven by an increase in net earnings of $8.0
million over fiscal 2003's net loss. This was partially offset by increased
inventories at our domestic manufacturing location as we prepared to deliver
transmission systems for military contracts. Accounts receivable at June 30,
2004 were approximately $0.6 million lower, adjusted for the impact of exchange
rate changes, than at June 30, 2003. The change in the TDN agreement
previously discussed resulted in a net reduction in accounts receivable of $3.6
million. This was offset by increased accounts receivable of $3.9 million at
our domestic manufacturing location, driven by increased sales in fiscal 2004's
11
fourth quarter of over $7 million versus the prior fiscal year's fourth
quarter. The change in the TDN agreement also resulted in a net reduction in
accounts payable of $3.8 million. This was partially offset by a net increase
of $3.0 million in accounts payable at our domestic manufacturing location due
to the increased sales activity noted above.
The net cash used for investing activities in fiscal 2005 consisted primarily
of capital expenditures for machinery and equipment at our domestic
manufacturing location in Racine and the construction of a new state-of-the-art
facility for the design and manufacturing of high performance, custom
propellers at our Swiss operation, Rolla Propellers. In fiscal 2005, Rolla
Propellers' capital expenditures totaled just under $4 million and consisted of
the construction of and new machinery and equipment for the new facility. At
our domestic manufacturing location, capital expenditures amounted to nearly
$6.8 million and included the installation of a new flexible machining system
at a cost of just under $3 million.
The net cash used for investing activities in fiscal 2004 consisted of the net
acquisition price for Rolla SP Propellers SA for $5.1 million, net of $1.2
million cash acquired, and nearly $4.2 million in investments in capital
equipment offset by the net proceeds from the sale of the Company's 25%
minority interest in PJD, Inc. to the majority holder for $3.8 million. In
fiscal 2003, the net cash used for investing activities consisted primarily of
capital expenditures at our domestic and European manufacturing locations.
In fiscal 2005, 2004 and 2003, the net cash flow used by financing activities
consisted primarily of dividends paid to shareholders of $2.0 million and the
repayment of long-term debt. In each fiscal year, the Company repaid $2.9
million of its 7.37% Senior Notes due 2006. The net payments/proceeds from
long-term debt were payments or borrowings on the Company's revolving credit
facility and the borrowings at Rolla Propellers for the construction of its
new facility in fiscal 2005. In April 2005, the Company announced the
reactivation of its stock purchase plan. In the fourth quarter of fiscal 2005,
the Company repurchased just under 35,000 shares of its common stock for
$755,000. In fiscal 2005 and 2004, proceeds from the exercise of stock options
totaled $1.1 million and $0.3 million, respectively.
Future Liquidity and Capital Resources
During the first quarter of fiscal 2005, the Company's revolving loan agreement
was amended, increasing the limit from $20,000,000 to $35,000,000 and extending
the term by two years to October 31, 2007. Additionally, certain capital
expenditure restrictions were increased. This credit facility is used to fund
seasonal working capital requirements and other financing needs. This facility
and Twin Disc's other indebtedness contain certain restrictive covenants as are
fully disclosed in Note H of the Notes to the Consolidated Financial
Statements.
The overall liquidity of the Company remains strong. We continue to reduce
total long-term indebtedness, have $21.5 million of available borrowings on our
$35 million revolving loan agreement as of June 30, 2005, and continue to
generate enough cash from operations to meet our operating and investing needs.
In fiscal 2006, the Company expects to contribute around $4.5 million to its
pension plans, a decrease of nearly $3 million over fiscal 2005. The Company
intends to meet this funding requirement using cash from operations and, if
necessary, from available borrowings under existing credit facilities. Working
capital decreased about $2 million to about $43.6 million in fiscal 2005, and
the current ratio decreased slightly from 1.8 at June 30, 2004 to 1.7 at
June 30, 2005. The Company's balance sheet is strong, there are no off-balance
sheet arrangements, and we continue to have sufficient liquidity for near-term
needs.
Twin Disc expects capital expenditures to be over $10 million in fiscal 2006.
These anticipated expenditures reflect the Company's plans to continue
investing in modern equipment and facilities, and new products.
Management believes that available cash, the credit facility, cash generated
from future operations, existing lines of credit and access to debt markets
will be adequate to fund Twin Disc's capital requirements for the foreseeable
future.
Off Balance Sheet Arrangements and Contractual Obligations
The Company had no off-balance sheet arrangements, guarantees or obligations
except for normal open purchase orders and operating leases as of June 30, 2005
and 2004. Obligations for operating leases are listed in the table below.
The Company has obligations under non-cancelable operating lease contracts and
loan and senior note agreements for certain future payments. A summary of
12
those commitments follows (in thousands):
Less than 1-3 3-5 After 5
Contractual Obligations Total 1 Year Years Years Years
Notes Payable $ 3,522 $ 3,522
Revolving loan borrowing $13,500 $13,500
Long-term debt $ 4,307 $ 2,849 $ 321 $ 1,137
Operating leases $ 8,535 $2,449 $ 2,951 $ 2,071 $ 1,064
The Company believes the capital resources available in the form of existing
cash, lines of credit (see Footnote H to the consolidated financial
statements), and funds provided by operations will be adequate to meet
anticipated capital expenditures and other foreseeable future business
requirements, including pension funding requirements. As noted above, the
Company's revolving loan agreement was amended during the first quarter of
fiscal 2005, increasing the limit from $20,000,000 to $35,000,000 and extending
the term by two years to October 31, 2007. As of June 30, 2005, there was
$21.5 million of available borrowings under the revolver.
Other Matters
Environmental Matters
The Company has been involved in various stages of investigation relative to
hazardous waste sites, two of which were on the United States EPA National
Priorities List (Superfund sites). The Company's involvement in one of the
Superfund sites was settled in 2004 for approximately $191,000. The Company
has made a $117,000 payment in trust in settlement of its exposure related to
the second Superfund site and anticipates that no further payments will be
required. The excess reserve for these sites of $300,000 was reversed against
cost of sales in 2004.
Critical Accounting Policies
The preparation of this Annual 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.
Twin Disc's significant accounting policies are described in Note A to the
consolidated financial statements on pages 22 through 24 of this form. Not all
of these significant accounting policies require management to make difficult,
subjective, or complex judgments or estimates. However, the policies
management considers most critical to understanding and evaluating our reported
financial results are the following:
Revenue Recognition
Twin Disc recognizes revenue from product sales at the time of shipment and
passage of title. While we respect the customer's right to return products
that were shipped in error, historical experience shows those types of
adjustments have been immaterial and thus no provision is made. With respect
to other revenue recognition issues, management has concluded that its policies
are appropriate and in accordance with the guidance provided by Securities and
Exchange Commissions' Staff Accounting Bulletin (SAB) No. 104, "Revenue
Recognition".
Accounts Receivable
Twin Disc performs ongoing credit evaluations of our customers and adjusts
credit limits based on payment history and the customer's credit-worthiness as
determined by review of current credit information. We continuously monitor
collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer-collection issues. In addition, senior management reviews the
accounts receivable aging on a monthly basis to determine if any receivable
balances may be uncollectible. Although our accounts receivable are dispersed
among a large customer base, a significant change in the liquidity or financial
position of any one of our largest customers could have a material adverse
13
impact on the collectibility of our accounts receivable and future operating
results.
Inventory
Inventories are valued at the lower of cost or market. Cost has been
determined by the last-in, first-out (LIFO) method for the majority of the
inventories located in the United States, and by the first-in, first-out (FIFO)
method for all other inventories. Management specifically identifies obsolete
products and analyzes historical usage, forecasted production based on future
orders, demand forecasts, and economic trends when evaluating the adequacy of
the reserve for excess and obsolete inventory. The adjustments to the reserve
are estimates that could vary significantly, either favorably or unfavorably,
from the actual requirements if future economic conditions, customer demand or
competitive conditions differ from expectations.
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.
Income Taxes
As part of the process of preparing our consolidated financial statements,
income taxes in each of the jurisdictions in which we operate must be
estimated. This process involves estimating the actual current tax exposure
and assessing the realizability of deferred tax assets. If it is deemed more
likely than not that a deferred tax asset will be realized, a valuation a
llowance is recorded.
Recently Issued Accounting Standards
During December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R) "Share-Based Payment" ("SFAS 123(R)"), which revises SFAS 123
and supercedes APB 25. SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized as
expense based on their fair values beginning with the first interim or annual
period beginning after June 15, 2005, with early adoption encouraged. In April
2005, the Securities and Exchange Commission ("SEC") amended the compliance
date to the first annual period beginning after June 15, 2005. The pro-forma
disclosures previously permitted under SFAS 123 will no longer be an
alternative to expense recognition. We will adopt SFAS 123(R) using the
modified-prospective method beginning in the first quarter of fiscal 2006.
Adoption of this standard will not have an impact on consolidated net earnings
as it relates to existing stock options as these options are fully vested at
June 30, 2005. Future impacts will depend on share-based payment activity
going forward.
During December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance on the
accounting for the potential impact of the repatriation provisions of the
American Jobs Creation Act of 2004 (the "Jobs Act") on enterprises' income tax
expense and deferred tax liability. The Jobs Act, which was signed into law on
October 22, 2004, introduces relief on the potential income tax impact of
repatriating foreign earnings and certain other provisions. FSP 109-2 states
that an enterprise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment
or repatriation of foreign earnings for purposes of applying SFAS 109. Based
on our analysis to date, we are not in a position to decide on whether, or to
what extent, we might repatriate foreign earnings under the provision of the
Jobs Act. However, we expect to be in a position to finalize our assessment by
June 2006. It is not expected that this will have a significant impact on the
Company's financial statements.
These statements are effective for financial statements for fiscal years
beginning after June 15, 2005. The adoption of these statements is not expected
to have a significant impact on the Company's financial statements
14
Item 7(a). 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. Discussions of the Company's accounting
policies and further disclosure relating to financial instruments is included
in Note A to the consolidated financial statements on pages 22 through 24 of
this form.
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.
During fiscal 2003, the Company entered into a $20,000,000 revolving loan
agreement, which expires on October 31, 2005. During fiscal 2005, the revolving
credit commitment of the agreement was increased to $35,000,000 and the
termination date of the agreement has been extended to October 31, 2007. In
accordance with the loan agreement, the Company has the option of borrowing at
the prime interest rate or LIBOR plus an additional "Add-On", between 1% and
2.75%, depending on the Company's Total Funded Debt to EBITDA ratio. Due to
the relative stability of interest rates, the Company did not utilize any
financial instruments at June 30, 2005 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 $60,000.
Commodity price risk - The Company is exposed to fluctuation in market prices
for such commodities as steel and aluminum. 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 years
ended June 30, 2005, 2004 and 2003 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 2005 and 2004 was the
Euro. At June 30, 2005, the Company had net outstanding forward exchange
contracts to purchase Euros in the value of $2,153,000 with a weighted average
maturity of 31 days. The fair value of the Company's contracts was a loss of
approximately $56,000 at June 30, 2005. At June 30, 2004, the Company had net
outstanding forward exchange contracts to purchase Euros in the value of
$2,901,000 with a weighted average maturity of 45 days. The fair value of the
Company's contracts was a loss of approximately $58,000 at June 30, 2004.
Item 8. Financial Statements and Supplementary Data
See consolidated financial statements and Financial Statement Schedule on
Pages 16 through 40 of this form.
Sales and Earnings by Quarter (dollars in thousands, except per share amounts)
15
2005 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
Net sales $45,382 $54,731 $56,436 $61,923 $218,472
Gross profit 11,652 13,938 14,675 17,155 57,420
Net earnings (loss) 1,077 1,113 1,579 3,141 6,910
Basic earnings per share .38 .39 .55 1.09 2.42
Diluted earnings per share .37 .38 .54 1.08 2.38
Dividends per share .175 .175 .175 .175 .70
2004 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
Net sales $37,966 $42,371 $48,606 $57,146 $186,089
Gross profit 9,541 10,445 13,074 15,225 48,285
Net earnings (loss) 564 340 1,872 2,867 5,643
Basic earnings per share .20 .12 .66 1.02 2.01
Diluted earnings per share .20 .12 .66 1.00 1.98
Dividends per share .175 .175 .175 .175 .70
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9(a). Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934,
as of the end of the period covered by 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.
During the fourth quarter of the most recent fiscal year, the Company enhanced
its inventory accounting procedures to include a calculation of the
intercompany profit in inventory at each period end and timely elimination of
this amount during the consolidation process. The Company's management
believes that this corrective action has remediated the identified deficiency
in the Company's disclosure controls and procedures as of the date of this
filing.
There were no other changes in the Company's internal controls for financial
reporting or other factors during the fourth quarter of the most recent fiscal
year that could significantly affect such internal controls. 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 III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the executive officers of the Registrant, see
"Executive Officers of the Registrant" at the end of Part I of this report.
For information with respect to the Directors of the Registrant, see "Election
of Directors" in the Proxy Statement for the Annual Meeting of Shareholders to
be held October 21, 2005, which is incorporated into this report by reference.
16
For information with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934, see "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement for the Annual Meeting of Shareholders to be
held October 21, 2005, which is incorporated into this report by reference.
For information with respect to the Company's Code of Ethics, see "Guidelines
for Business Conduct and Ethics" in the Proxy Statement for the Annual Meeting
of Shareholders to be held October 21, 2005, which is incorporated into this
report by reference. The Company's Code of Ethics, entitled, "Guidelines for
Business Conduct and Ethics", is included on the Company's website,
www. twindisc.com.
For information with respect to changes to procedures by which shareholders may
recommend nominees to the Company's Board of Directors, see "Selection of
Nominees for the Board" in the Proxy Statement for the Annual Meeting of
Shareholders to be held October 21, 2005, which is incorporated into this
report by reference.
For information with respect to the Audit Committee Financial Expert, see
"Director Committee Functions: Audit Committee" in the Proxy Statement for the
Annual Meeting of Shareholders to be held October 21, 2005, which is
incorporated into this report by reference.
For information with respect to the Audit Committee Disclosure, see "Director
Committee Functions: Audit Committee" in the Proxy Statement for the Annual
Meeting of Shareholders to be held October 21, 2005, which is incorporated into
this report by reference.
For information with respect to the Audit Committee Membership, see "Director
Committee Functions: Committee Membership" in the Proxy Statement for the
Annual Meeting of Shareholders to be held October 21, 2005, which is
incorporated into this report by reference.
Item 11. Executive Compensation
The information set forth under the captions "Compensation of Executive
Officers", "Aggregated Option Exercises in Last Fiscal Year and Year-end
Option Values", "Long-term Incentive Plans - Awards in Last Fiscal Year",
"Retirement Income Plan", "Supplemental Retirement Benefit Plan", "Retention
and Non-Compete Agreement", "Compensation of Directors" and "Employment
Contracts and Change in Control Agreements", in the Proxy Statement for the
Annual Meeting of Shareholders to be held on October 21, 2005 is incorporated
into this report by reference. Discussion in the Proxy Statement under the
captions "Board Compensation Committee Report on Executive Compensation" and
"Corporate Performance Graph" is incorporated by reference but shall not be
deemed "soliciting material" or to be "filed" as part of this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership of certain beneficial owners and management is set forth in
the Proxy Statement for the Annual Meeting of Shareholders to be held on
October 21, 2005 under the caption "Principal Shareholders, Directors and
Executive Officers" and incorporated into this report by reference.
There are no arrangements known to the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.
The following table summarizes certain information regarding the Company's
equity-based compensation plans:
of Securities to # of Securities
be Issued Upon Weighted Average Remaining Available
Exercise of Price of Outstanding for Future Issuance
Outstanding Options, Options, Warrants Under Equity
Plan Category Warrants and Rights and Rights Compensation Plans
Equity
Compensation
Plans 123,850 $20.08 183,550
Approved
by Shareholders
Equity
Compensation
Plans Not 0 N/A 0
Approved By
17
Shareholders
TOTAL 123,850 $20.08 183,550
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Principal Accounting Fees and Services
The Company incorporates by reference the information contained in the
Company's definitive Proxy Statement dated October 21, 2005 under the heading
"Fees to Independent Registered Public Accounting Firm".
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Consolidated Financial Statements
See "Index to Consolidated Financial Statements and Financial Statement
Schedule" on page 16, the Report of Independent Registered Public Accounting
Firm on page 17 and the Consolidated Financial Statements on pages 18 to 39,
all of which are incorporated by reference.
Individual financial statements of the 50% or less owned entities accounted for
by the equity method are not required because the 50% or less owned entities do
not constitute significant subsidiaries.
(a)(2) Consolidated Financial Statement Schedule
See "Index to Consolidated Financial Statements and Financial Statement
Schedule" on page 16, and the Consolidated Financial Statement Schedule on
page 40, all of which are incorporated by reference.
(a)(3) Exhibits. See Exhibit Index included as the last page of this form,
which is incorporated by reference.
Copies of exhibits filed as a part of this Annual Report on Form 10-K may be
obtained by shareholders of record upon written request directed to the
Secretary, Twin Disc, Incorporated, 1328 Racine Street, Racine,Wisconsin 53403.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm................. 17
Consolidated Balance Sheets as of June 30, 2005 and 2004................ 18
Consolidated Statements of Operations for the years
ended June 30, 2005, 2004 and 2003..................................... 19
Consolidated Statements of Cash Flows for the years
ended June 30, 2005, 2004 and 2003..................................... 20
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income for the years ended June 30, 2005, 2004 and 2003.. 21
Notes to Consolidated Financial Statements........................... 22-39
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts......................... 40
Schedules, other than those listed, are omitted for the reason that they are
inapplicable, are not required, or the information required is shown in the
financial statements or the related notes.
18
Report of Independent Registered Public Accounting Firm
To the Shareholders
Twin Disc, Incorporated
Racine, Wisconsin
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Twin Disc, Incorporated and Subsidiaries at June 30, 2005
and 2004, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2005 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a) (2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
September 16, 2005
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 and 2004
(Dollars in thousands) 2005 2004
---- ----
ASSETS
Current assets:
Cash $ 11,614 $ 9,127
Trade accounts receivable, net 37,751 37,091
Inventories, net 48,481 48,777
Deferred income taxes 5,514 4,216
Other 3,423 3,054
------- -------
Total current assets 106,783 102,265
Property, plant and equipment, net 40,331 33,222
Goodwill, net 12,854 12,717
19
Deferred income taxes 16,230 17,025
Other assets 9,097 9,393
------- -------
$185,295 $174,622
======= =======
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,522 $ 1,607
Current maturities of long-term debt 2,849 3,018
Accounts payable 21,746 17,241
Accrued liabilities 35,050 34,738
------- -------
Total current liabilities 63,167 56,604
Long-term debt 14,958 16,813
Accrued retirement benefits 39,680 41,980
------- -------
117,805 115,397
Minority interest 591 509
Shareholders' equity:
Preferred shares authorized: 200,000;
issued: none; no par - -
Common shares authorized: 15,000,000;
issued: 3,643,630; no par value 11,653 11,653
Retained earnings 89,316 84,428
Unearned Compensation (203) (304)
Accumulated other comprehensive loss (17,567) (20,301)
------- -------
83,199 75,476
Less treasury stock, at cost 16,300 16,760
------- -------
Total shareholders' equity 66,899 58,716
------- -------
$185,295 $174,622
======= =======
The notes to consolidated financial statements are an integral part of these
statements.
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 2005, 2004 and 2003
(In thousands, except per share data)
2005 2004 2003
---- ---- ----
<c>
Net sales $218,472 $186,089 $179,591
Cost of goods sold 161,052 137,804 144,618
------- ------- -------
Gross profit 57,420 48,285 34,973
Marketing, engineering and
administrative expenses 44,666 37,168 34,790
Restructuring of operations 2,076 - 2,042
------- ------- -------
Earnings(Loss)from operations 10,678 11,117 (1,859)
Other income (expense):
Interest income 140 252 167
Interest expense (1,134) (1,078) (1,323)
Equity in net earnings
of affiliate -- 240 414
Other, net (192) 101 (81)
------- ------- -------
20
(1,186) (485) (823)
------- ------- -------
Earnings (loss) before income
taxes and minority interest 9,492 10,632 (2,682)
Income taxes 2,485 4,964 (300)
------- ------- -------
Earnings (loss) before
minority interest 7,007 5,668 (2,382)
Minority interest (97) (25) (12)
------- ------- -------
Net earnings (loss) $ 6,910 $ 5,643 $(2,394)
======= ====== =======
Earnings (loss) per share data:
Basic earnings (loss) per share $ 2.42 $ 2.01 $(0.85)
Diluted earnings (loss) per share 2.38 1.98 (0.85)
Weighted average shares outstanding data:
Basic shares outstanding 2,861 2,814 2,805
Dilutive stock options 47 29 -
------- ------- -------
Diluted shares outstanding 2,908 2,843 2,805
====== ======= =======
The notes to consolidated financial statements are an integral part of these
statements.
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2005, 2004 and 2003
(In thousands) 2005 2004 2003
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $ 6,910 $ 5,643 $ (2,394)
Adjustments to reconcile net earnings
(loss)to net cash provided by
operating activities:
Depreciation and amortization 5,677 5,692 5,673
Write-off of impaired asset -- -- 773
(Gain)loss on sale of plant assets (9) 55 105
Minority interest 97 25 12
Loss on restructuring
of operations 2,076 -- 1,278
Unearned compensation 203 188 --
Equity in net earnings of affiliate -- (240) (414)
Provision for deferred income taxes (1,291) 1,567 (1,441)
Dividends received from affiliate -- 195 303
Changes in operating assets and
liabilities:
Trade accounts receivable, net (186) 622 (2,977)
Inventories, net 897 (3,230) 3,768
Other assets (370) 941 (1,193)
Accounts payable 4,291 (377) 1,489
Accrued liabilities 1,019 427 577
Accrued/prepaid retirement benefits (2,864) 733 1,151
------ ------ ------
Net cash provided by
operating activities 16,450 12,241 6,710
------ ------ ------
Cash flows from investing activities:
Proceeds from sale of plant assets 34 1 20
Proceeds from sale of affiliate -- 3,811 --
Acquisitions of plant assets (12,009) (4,180) (4,410)
Acquisition of affiliate, net of
cash acquired -- (5,085) --
------ ------ ------
Net cash used by investing activities (11,975) (5,453) (4,390)
21
------ ------ ------
Cash flows from financing activities:
Increase(decrease) in notes payable, net 1,886 (1,382) (23)
Payments of long-term debt (2,104) (922) (1,992)
Proceeds from exercise of stock options 1,113 343 --
Acquisition of treasury stock (755) -- (114)
Dividends paid (2,022) (1,992) (1,965)
------ ------ ------
Net cash used by financing activities (1,882) (3,953) (4,094)
------ ------ ------
Effect of exchange rate changes on cash (106) 384 282
------ ------ ------
Net change in cash and cash equivalents 2,487 3,219 (1,492)
Cash and cash equivalents:
Beginning of year 9,127 5,908 7,400
------ ------ ------
End of year $ 11,614 $ 9,127 $ 5,908
====== ====== ======
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 1,412 $ 1,563 $ 1,870
Income taxes 3,788 2,127 1,675
The notes to consolidated financial statements
are an integral part of these statements.
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
for the years ended June 30, 2005, 2004 and 2003
(In thousands) 2005 2004 2003
---- ---- ----
Common stock
Balance, June 30 $ 11,653 $ 11,653 $ 11,653
------- ------- -------
Retained earnings
Balance, July 1 84,428 80,777 85,136
Net earnings (loss) 6,910 5,643 (2,394)
Cash dividends (2,022) (1,992) (1,965)
------- ------- -------
Balance, June 30 89,316 84,428 80,777
------- ------- -------
Accumulated other comprehensive loss
Balance, July 1 (20,301) (26,978) (23,187)
------- ------- -------
Foreign currency translation adjustment
Balance, July 1 6,889 4,409 (1,520)
Current adjustment 1,375 2,480 5,929
------- ------- -------
Balance, June 30 8,264 6,889 4,409
------- ------- -------
Minimum pension liability adjustment, net
Balance, July 1 (27,190) (31,387) (21,667)
Current adjustment, net of related income
taxes (($869) in 2005, ($2,683) in 2004,
and $6,215 in 2003) 1,359 4,197 (9,720)
------- ------- -------
Balance, June 30 (25,831) (27,190) (31,387)
------ ------ ------
Accumulated other comprehensive loss
Balance, June 30 (17,567) (20,301) (26,978)
------- ------- -------
Treasury stock, at cost
Balance, July 1 (17,064) (17,595) (17,481)
Shares issued (acquired) 561 531 (114)
------- ------- -------
Balance, June 30 (16,503) (17,064) (17,595)
22
------- ------- -------
Shareholders' equity balance, June 30 $ 66,899 $ 58,716 $ 47,857
======= ======= =======
Comprehensive income (loss)
Net earnings (loss) $ 6,910 $ 5,643 $ (2,394)
Other comprehensive income (loss)
Foreign currency translation adjustment 1,375 2,480 5,929
Minimum pension liability adjustment, net 1,359 4,197 (9,720)
------- ------- -------
Other comprehensive income (loss) 2,734 6,677 (3,791)
------- ------- -------
Comprehensive income (loss) $ 9,644 $ 12,320 $ (6,185)
======= ======= =======
The notes to consolidated financial statements
are an integral part of these statements.
TWIN DISC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in
the preparation of these financial statements:
Consolidation Principles--The consolidated financial statements include the
accounts of Twin Disc, Incorporated and its wholly and partially owned domestic
and foreign subsidiaries. Certain foreign subsidiaries are included based on
fiscal years ending March 31 or May 31, to facilitate prompt reporting of
consolidated accounts. All significant intercompany transactions have been
eliminated.
Translation of Foreign Currencies--The financial statements of the Company's
non-U.S. subsidiaries are translated using the current exchange rate for assets
and liabilities and the weighted average exchange rate for the year for
revenues and expenses. The resulting translation adjustments are recorded as a
component of accumulated other comprehensive income (loss), which is included
in shareholders' equity. Gains and losses from foreign currency transactions
are included in earnings. Included in other income (expense) are foreign
currency transaction losses of $126,000, $73,000 and $123,000 in 2005, 2004
and 2003, respectively.
Receivables--Trade accounts receivable are stated net of an allowance for
doubtful accounts of $927,000 and $604,000 at June 30, 2005 and 2004,
respectively. The allowance for doubtful accounts is estimated based on
various factors including, the aging of the accounts receivable, the
evaluation of the likelihood of success in collecting the receivable and
historical write-off experience.
Fair Value of Financial Instruments--The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents, accounts receivable,
accounts payable and notes payable approximate fair value because of the
immediate short-term maturity of these financial instruments. The fair value
of long-term debt exceeds its carrying amount by $66,000 and $252,000 at
June 30, 2005 and 2004, respectively, based on the current rates that would be
offered to the Company for debt with the same remaining maturity.
Derivative Financial Instruments--The Company has written policies and
procedures that place all financial instruments under the direction of the
Company's corporate treasury and restricts all 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 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
23
exposed in 2005 and 2004 was the Euro. At June 30, 2005, the Company had net
outstanding forward exchange contracts to purchase Euros in the value of
$2,153,000 with a weighted average maturity of 31 days. The fair value of the
Company's contracts was a loss of approximately $56,000 at June 30, 2005. At
June 30, 2004, the Company had net outstanding forward exchange contracts to
purchase Euros in the value of $2,901,000 with a weighted average maturity of
45 days. The fair value of the Company's contracts was a loss of approximately
$58,000 at June 30, 2004.
Inventories--Inventories are valued at the lower of cost or market. Cost has
been determined by the last-in, first-out (LIFO) method for the majority of
inventories located in the United States, and by the first-in, first-out (FIFO)
method for all other inventories. Management specifically identifies obsolete
products and analyzes historical usage, forecasted production based on future
orders, demand forecasts, and economic trends when evaluating the adequacy of
the reserve for excess and obsolete inventory.
Property, Plant and Equipment and Depreciation--Assets are stated at cost.
Expenditures for maintenance, repairs and minor renewals are charged against
earnings as incurred. Expenditures for major renewals and betterments are
capitalized and depreciated. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets for financial reporting
and on accelerated methods for income tax purposes. The lives assigned to
buildings and related improvements range from 10 to 40 years, and the lives
assigned to machinery and equipment range from 5 to 15 years. Upon disposal
of property, plant and equipment, the cost of the asset and the related
accumulated depreciation are removed from the accounts and the resulting gain
or loss is reflected in earnings. Fully depreciated assets are not removed
from the accounts until physically disposed.
Impairment of Long-lived Assets--The Company reviews long-lived assets for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable in accordance
with the Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment of Long-lived Assets". For property, plant and
equipment and other long-lived assets, excluding indefinite lived intangible
assets, the Company performs undiscounted operating cash flow analyses to
determine if an impairment exists. If an impairment is determined to exist,
any related impairment loss is calculated based on fair value.
Investments in Affiliates--The Company's investments in 20% to 50%-owned
affiliates in which it has significant influence are accounted for using the
equity method. Investments in affiliates where significant control does not
exist are accounted for using the cost method.
Revenue Recognition--Revenue is recognized by the Company when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred and ownership has transferred to the customer; the price
to the customer is fixed or determinable; and collectability is reasonably
assured. Revenue is recognized at the time product is shipped to the customer,
except for certain domestic shipments to overseas customers where revenue is
recognized upon receipt by the customer.
Goodwill and Other Intangibles--Goodwill is tested for impairment at least
annually and more frequently if an event occurs which indicates the goodwill
may be impaired in accordance with the Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". Impairment
of goodwill is measured according to a two step approach. In the first step,
the fair value of a reporting unit, as defined by the statement, is compared to
the carrying value of the reporting unit, including goodwill. The fair value
is primarily determined using discounted cash flow analyses, however other
methods may be used to substantiate the discounted cash flow analyses,
including third party valuations when necessary. If the carrying amount exceeds
the fair value, the second step of the goodwill impairment test is performed to
measure the amount of the impairment loss, if any. In the second step the
implied value of the goodwill is estimated as the fair value of the reporting
unit less the fair value of all other tangible and identifiable intangible
assets of the reporting unit. If the carrying amount of the goodwill exceeds
the implied fair value of the goodwill, an impairment loss is recognized in an
amount equal to that excess, not to exceed the carrying amount of the goodwill.
In the second quarter of 2003, a charge of $773,000 was recorded based on SFAS
144 impairment tests. This charge was classified as a component of cost of
sales pertaining to the Company's manufacturing segment.
Warranty--The Company warrants all assembled products and parts (except
component products or parts on which written warranties are issued by the
respective manufacturers thereof and are furnished to the original customer, as
to which the Company makes no warranty and assumes no liability) against
defective materials or workmanship. Such warranty generally extends from
24
periods ranging from 12 months to 24 months.
The Company 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 the Company's 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 the Company believes 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.
Deferred Taxes--The Company has provided for the estimated residual U.S. tax on
a portion of these earnings, which may not be indefinitely reinvested. The
remaining earnings are considered to be indefinitely reinvested. If these
indefinitely reinvested earnings were remitted to the U.S they would be subject
to U.S. income tax. However, this tax would be substantially less than the U.S.
statutory income tax because of available foreign tax credits.
The Company has provided for the estimated residual U.S. tax on a portion of
these earnings, which may not be indefinitely reinvested. The remaining
earnings are considered to be indefinitely reinvested. If these indefinitely
reinvested earnings were remitted to the U.S. they would be subject to U.S.
income tax. However this tax would be substantially less than the U.S.
statutory income tax because of available foreign tax credits.
Stock-Based Compensation--At June 30, 2005, the Company has two stock-based
compensation plans, which are described more fully in Note L, "Stock Option
Plans." The Company accounts for these plans under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost related to stock options is reflected in
earnings, as all option grants under those plans had an exercise price equal to
or greater than the market value of the underlying common stock on the date of
grant. The effect on net earnings and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation is disclosed in
Note L. The Company will adopt SFAS 123(R) effective July 1, 2005 which will
require the recognition of compensation expense for stock options granted.
Management Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual amounts could differ from those estimates.
Shipping and Handling Fees and Costs--The Company records revenue from shipping
and handling costs in net sales. The cost associated with shipping and
handling of products is reflected in cost of sales.
Reclassification--Certain amounts in the 2004 financial statements have been
reclassified to conform to the presentation in the 2005 financial statements.
Recently Issued Accounting Standards
During December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R) "Share-Based Payment" ("SFAS 123(R)"), which revises SFAS 123
and supercedes APB 25. SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized as
expense based on their fair values beginning with the first interim or annual
period beginning after June 15, 2005. In April 2005, the Securities and
Exchange Commission ("SEC") amended the compliance date to the first annual
period beginning after June 15, 2005. The pro-forma disclosures previously
permitted under SFAS 123 will no longer be an alternative to expense
recognition. We will adopt SFAS 123(R) using the modified-prospective method
beginning in the first quarter of fiscal 2006. Adoption of this standard will
not have an impact on consolidated net earnings as it relates to existing stock
options as these options are fully vested as of June 30, 2005. Future impacts
will depend on stock option activity going forward.
During December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance on the
25
accounting for the potential impact of the repatriation provisions of the
American Jobs Creation Act of 2004 (the "Jobs Act") on enterprises' income tax
expense and deferred tax liability. The Jobs Act, which was signed into law on
October 22, 2004, introduces relief on the potential income tax impact of
repatriating foreign earnings and certain other provisions. FSP 109-2 states
that an enterprise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment
or repatriation of foreign earnings for purposes of applying SFAS 109. Based
on our analysis to date, we are not in a position to decide on whether, or to
what extent, we might repatriate foreign earnings under the provision of the
Jobs Act. However, we expect to be in a position to finalize our assessment by
June 2006. It is not expected that this will have a significant impact on the
Company's financial statements.
These statements are effective for financial statements for fiscal years
beginning after June 15, 2005. The adoption of these statements is not expected
to have a significant impact on the Company's financial statements.
B. INVENTORIES
The major classes of inventories at June 30 were as follows (in thousands):
2005 2004
---- ----
Finished parts $35,591 $35,837
Work-in-process 7,565 8,187
Raw materials 5,325 4,753
------ ------
$48,481 $48,777
====== ======
Inventories stated on a LIFO basis represent approximately 41% and 45% of total
inventories at June 30, 2005 and 2004, respectively. The approximate current
cost of the LIFO inventories exceeded the LIFO cost by $22,082,000 and
$19,898,000 at June 30, 2005 and 2004, respectively. Inventory quantities were
reduced in 2005 resulting in a liquidation of LIFO inventory quantities carried
at costs prevailing in prior years which were lower than current costs. The
effect was to increase the 2005 net income by $133,000.
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 were as follows (in thousands):
2005 2004
---- ----
Land $ 3,526 $ 3,414
Buildings 30,408 26,421
Machinery and equipment 101,146 96,749
------ ------
135,080 126,584
Less accumulated depreciation 94,749 93,362
------ ------
$ 40,331 $ 33,222
====== ======
Depreciation expense for the year ended June 30, 2005, 2004 and 2003 was
$5,108,000, $5,226,000 and $5,072,000, respectively.
D. INVESTMENT IN AFFILIATE
The Company's investment in affiliate consisted of a 25% minority interest in
Palmer Johnson Distributors, LLC (PJD) a domestic distributor of Twin Disc
products.
In January 2004, the Company sold its 25% minority interest in PJD to the
majority holder, PJD, Inc. for $3,811,000 cash, which approximated the net book
value of the investment. The Company recognized pre-tax earnings of $240,000
26
and $414,000 in fiscal years 2004 and 2003 respectively, from its investment in
PJD. In addition, the Company received cash distributions of $195,000 and
$303,000 in fiscal years 2004 and 2003, respectively.
E. GOODWILL AND OTHER INTANGIBLES
The Company performed impairment tests of its goodwill at June 30, 2005 and
2004 and determined that no impairment of goodwill existed. Goodwill at
June 30, 2005 and 2004 is net of accumulated amortization of $789,000. There
were no other significant indefinite lived intangible assets recorded by the
Company at June 30, 2005 or 2004.
The changes in the carrying amount of goodwill, substantially all of which is
allocated to the manufacturing segment, for the years ended June 30, 2005 and
2004 were as follows (in thousands):
Balance at June 30, 2003 $12,876
Disposal (1,188)
Translation adjustment 102
Acquisition 927
-----
Balance at June 30, 2004 12,717
Translation adjustment 137
-----
Balance at June 30, 2005 $12,854
=====
Included in Other assets at June 30, are the following acquired intangible
assets (in thousands):
2005 2004
---- ----
Intangible assets with finite lives:
Licensing agreements $ 3,015 $ 3,015
Other 2,865 2,865
------ ------
5,880 5,880
Accumulated amortization (3,045) (2,475)
Translation adjustment 125 -
------ ------
Total $ 2,960 $ 3,405
====== ======
The weighted average remaining useful life of the intangible assets included in
the table above is approximately 11 years.
Intangible amortization expense for the year ended June 30, 2005 , 2004 and
2003 was $569,000, $466,000 and $601,000, respectively. Estimated intangible
amortization expense for each of the next five fiscal years is as follows (in
thousands):
Fiscal Year
-----------
2006 350
2007 392
2008 392
2009 392
2010 189
Thereafter 1,245
-----
$2,960
=====
27
F. ACCRUED LIABILITIES
Accrued liabilities at June 30 were as follows (in thousands):
2005 2004
---- ----
Salaries and wages $ 7,802 $ 4,911
Retirement benefits 12,178 15,035
Warranty 6,679 6,478
Other 8,391 8,314
------- -------
$ 35,050 $ 34,738
======= =======
G. WARRANTY
The following is a listing of the activity in the warranty reserve during the
years ended June 30 (in thousands):
2005 2004 2003
---- ---- ----
Reserve balance, July 1 $6,478 $6,070 $5,294
Current period expense 4,654 4,764 4,417
Payments or credits to customers (4,428) (4,290) (3,766)
Translation (25) (66) 125
----- ----- -----
Reserve balance, June 30 $6,679 $6,478 $6,070
===== ===== =====
H. DEBT
Notes Payable:
Notes payable consists of amounts borrowed under unsecured line of credit
agreements. These lines of credit may be withdrawn at the option of the banks.
The following is aggregate borrowing information at June 30 (in thousands):
2005 2004
---- ----
Available credit lines $ 13,396 $ 10,479
Unused credit lines 9,874 8,969
------ ------
Outstanding credit lines 3,522 1,510
Notes payable-other -- 97
------ ------
Total notes payable $ 3,522 $ 1,607
------ ------
------ ------
Weighted-average interest rates
on credit lines 3.0% 2.8%
Long-term Debt:
Long-term debt consisted of the following at June 30 (in thousands):
2005 2004
---- ----
Revolving loan agreement $ 13,500 $ 12,800
28
10-year unsecured senior notes 2,849 5,698
Secured long-term debt 1,137 1,077
Capital lease obligations 70 161
Other long-term debt 251 95
------ ------
Subtotal 17,807 19,831
Less: current maturities (2,849) (3,018)
------ ------
Total long-term debt $ 14,958 $ 16,813
------ ------
------ ------
In December 2002, the Company entered into a $20,000,000 revolving loan
agreement which had an original expiration date of October 31, 2005. In
September 2004, the revolving loan agreement was amended increase the
commitment to $35,000,000 and extend the termination date of the agreement
to October 31, 2007. This agreement contains certain covenants, including
restrictions on investments, acquisitions and indebtedness. Financial covenants
include a minimum consolidated net worth calculated consistently with the net
worth covenant discussed in the paragraph below, minimum EBITDA of $11,000,000
at June 30, 2005 and a maximum total funded debt to EBITDA ratio of 2.5 at
June 30, 2005. As of June 30, 2005, the Company was in compliance with these
covenants. The outstanding balance of $13,500,000 and $12,800,000 at June 30,
2005 and 2004, respectively, is classified as long-term debt. Borrowings under
this agreement bear interest on a schedule determined by the Company's leverage
ratio and the LIBOR interest rate (LIBOR plus 1.25% at June 30, 2005 and 2004,
respectively). The rate was 4.390% and 2.375% at June 30, 2005 and 2004,
respectively.
Included in long-term debt is $0 and $2,841,000 of 7.37% ten-year unsecured
notes at June 30, 2005 and 2004, respectively. The current portion of these
notes was $2,849,000 and $2,857,000 at June 30, 2005 and 2004, respectively.
These notes contain certain covenants, including the maintenance of a current
ratio of not less than 1.5 and the maintenance of an EBITDA to fixed charges
ratio greater than 1.75. Consolidated net worth must be at least equal to the
sum of $60,310,000 plus 35% of consolidated net earnings for each quarter from
July 1, 1996, however the Company may exclude up to $34,000,000 of net worth
adjustments that result from changes to the assumptions used by the Company in
determining its pension liability or changes in the market value of plan
assets. As of June 30, 2005, the Company was in compliance with these
covenants.
The Company has a secured long term debt of $1,137,000 and 1,077,000 at
June 30, 2005 and 2004, respectively. The long term debt is due May 28, 2008
and bears interest of 4.25% at June 30, 2005 and 2004, respectively. The debt
was used for the construction of a new manufacturing facility at Rolla SP
Propllers S.A. and is secured by that facility.
The aggregate scheduled maturities of outstanding long term debt obligations in
subsequent years are as follows (in thousands):
Fiscal Year
2006 $ 2,849
2007 308
2008 13,513
2009 --
2010 --
Thereafter 1,137
------
$17,807
======
I. LEASE COMMITMENTS
Approximate future minimum rental commitments under noncancellable operating
leases are as follows (in thousands):
Fiscal Year
-----------
29
2006 $ 2,449
2007 1,651
2008 1,300
2009 1,055
2010 1,016
Thereafter 1,064
------
$ 8,535
======
Total rent expense for operating leases approximated $3,248,000, $3,587,000,
and $3,320,000 in 2005, 2004, and 2003 respectively.
J. SHAREHOLDERS' EQUITY
At June 30, 2005 and 2004, treasury stock consisted of 764,044 and 792,748
shares of common stock, respectively. The Company issued 65,650 shares of
treasury stock in 2005, to fulfill its obligations under the stock option plans
and restricted stock grants. The difference between the cost of treasury shares
and the option price is recorded in retained earnings. The fair value of the
restricted stock grants are recorded as unearned compensation and amortized
over the vesting period which is generally 1 to 4 year periods. The Company
repurchased 34,946 shares of stock in 2005 for $755,000, which was recorded as
treasury stock.
Cash dividends per share were $0.70 in 2005, 2004 and 2003.
In 1998, the Company's Board of Directors established a Shareholder Rights Plan
and distributed to shareholders one preferred stock purchase right for each
outstanding share of common stock. Under certain circumstances, a right may be
exercised to purchase one one-hundredth of a share of Series A Junior Preferred
Stock at an exercise price of $160, subject to certain anti-dilution
adjustments. The rights become exercisable ten (10) days after a public
announcement that a party or group has either acquired at least 15% (or at
least 25% in the case of existing holders who currently own 15% or more of the
common stock), or commenced a tender offer for at least 25% of the Company's
common stock. Generally, after the rights become exercisable, if the Company
is a party to certain merger or business combination transactions, or transfers
50% or more of its assets or earnings power, or certain other events occur,
each right will entitle its holders, other than the acquiring person, to buy a
number of shares of common stock of the Company, or of the other party to the
transaction, having a value of twice the exercise price of the right. The
rights expire June 30, 2008, and may be redeemed by the Company for $.05 per
right at any time until ten (10) days following the stock acquisition date.
The Company is authorized to issue 200,000 shares of preferred stock, none of
which have been issued. The Company has designated 50,000 shares of the
preferred stock for the purpose of the Shareholder Rights Plan.
K. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company and its subsidiaries are engaged in the manufacture and sale of
power transmission equipment. Principal products include industrial clutches,
hydraulic torque converters, fluid couplings, power-shift transmissions, marine
transmissions, universal joints, power take-offs and reduction gears. The
Company sells to both domestic and foreign customers in a variety of market
areas, principally construction, industrial, energy and natural resources and
marine and agricultural.
The Company has two reportable segments: manufacturing and distribution. These
segments are managed separately because each provides different services and
requires different technology and marketing strategies. The accounting
practices of the segments are the same as those described in the summary of
significant accounting policies. Transfers among segments are at established
inter-company selling prices.
Information about the Company's segments is summarized as follows
(in thousands):
Manufacturing Distribution Total
2005 ------------- ------------ -----
30
Net sales $206,630 $67,743 $274,373
Intra-segment sales 11,084 4,221 15,305
Inter-segment sales 36,380 4,216 40,596
Interest income 296 29 325
Interest expense 1,254 89 1,343
Income taxes 4,386 1,948 6,334
Depreciation and amortization 5,310 367 5,677
Segment (loss) earnings 5,831 3,286 9,117
Segment assets 170,782 33,356 204,138
Expenditures for segment assets 11,656 353 12,009
2004
Net sales $172,688 $59,176 $231,864
Intra-segment sales 8,930 4,252 13,182
Inter-segment sales 30,081 2,512 32,593
Interest income 395 36 431
Interest expense 1,176 111 1,287
Income taxes 3,989 1,671 5,660
Depreciation and amortization 5,284 355 5,639
Segment (loss) earnings 5,756 2,975 8,731
Segment assets 166,049 28,232 194,281
Expenditures for segment assets 8,980 285 9,265
2003
Net sales $153,713 $63,413 $217,126
Intra-segment sales 6,587 2,210 8,797
Inter-segment sales 25,848 2,890 28,738
Interest income 470 25 495
Interest expense 1,480 137 1,617
Income taxes (1,071) 1,073 2
Depreciation and amortization 5,291 292 5,583
Segment (loss) earnings (1,892) 1,943 51
Segment assets 152,093 30,347 182,440
Expenditures for segment assets 3,882 528 4,410
The following is a reconciliation of reportable segment net sales, earnings and
assets to the Company's consolidated totals (in thousands):
2005 2004 2003
Net sales: ---- ---- ----
Total net sales from reportable segments $274,373 $231,864 $217,126
Elimination of inter-company sales (55,901) (45,775) (37,535)
------- ------- -------
Total consolidated net sales $218,472 $186,089 $179,591
======= ======= =======
(Loss) earnings:
Total earnings from
reportable segments $ 9,117 $ 8,731 $ 51
Other corporate expenses (2,207) (3,088) (2,445)
------- ------- -------
Total consolidated net (loss) earnings $ 6,910 $ 5,643 $ (2,394)
======= ======= =======
Assets
Total assets for reportable segments $204,138 $194,281
Elimination of inter-company assets (20,050) (21,100)
Corporate assets 1,207 1,441
------- -------
Total consolidated assets $185,295 $174,622
======= =======
Other significant items:
Segment Consolidated
Totals Adjustments Totals
31
2005 ------- ----------- ------------
Interest income $ 325 $ (185) $ 140
Interest expense 1,343 (209) 1,134
Income taxes 6,334 (3,849) 2,485
Depreciation and amortization 5,677 -- 5,677
Expenditures for segment assets 12,009 -- 12,009
2004
Interest income $ 431 $ (179) $ 252
Interest expense 1,287 (209) 1,078
Income taxes 5,660 (696) 4,964
Depreciation and amortization 5,639 53 5,692
Expenditures for segment assets 9,265 - 9,265
2003
Interest income $ 495 $ (328) $ 167
Interest expense 1,617 (294) 1,323
Income taxes 2 (302) (300)
Depreciation and amortization 5,583 90 5,673
Expenditures for segment assets 4,410 - 4,410
All adjustments represent inter-company eliminations and corporate amounts.
Geographic information about the Company is summarized as follows
(in thousands):
2005 2004 2003
---- ---- ----
Net sales
United States $134,646 $107,146 $ 95,813
Other countries 83,826 78,943 83,778
------- ------- -------
Total $218,472 $186,089 $179,591
======= ======= =======
Long-lived assets
United States $ 59,171 $ 57,061
Belgium 7,999 11,490
Other countries 16,850 13,052
Elimination of inter-company assets (5,508) (9,246)
------- -------
Total $ 78,512 $ 72,357
======= =======
There were no customers that accounted for 10% or more of consolidated net
sales in 2005 and 2004. One customer accounted for approximately 10% of
consolidated net sales in 2003.
L. STOCK OPTION PLANS
During fiscal 2005, the Company adopted the Twin Disc, Incorporated 2004 Stock
Incentive Plan for Non-Employee Directors, a non-qualified plan for
non-employee directors to purchase up to 36,000 shares of common stock, and the
Twin Disc, Incorporated 2004 Stock Incentive Plan, a plan where options are
determined to be non-qualified or incentive at the date of grant, for officers
and key employees to purchase up to 164,000 shares of common stock. The plans
are administered by the Compensation Committee of the Board of Directors which
has the authority to determine which officers and key employees will be granted
options or other stock related benefits. The grant of options to non-employee
directors is fixed at options to purchase 300 shares of common stock per year.
All options allow for exercise prices not less than the grant date fair market
value, vest immediately and expire ten years after the date of grant. For
options under the Twin Disc, Incorporated 2004 Stock Incentive Plan, if the
optionee owns more than 10% of the total combined voting power of all classes
of the Company's stock, the price will be not less than 110% of the grant date
fair market value and the options expire five years after the grant date.
The Company has 23,450, incentive stock options outstanding under the Twin
Disc, Incorporated 1998 Incentive Compensation Plan and 56,450 non-qualified
stock options outstanding under the Twin Disc, Incorporated 1998 Stock Option
32
Plan for Non-employee Directors at June 30, 2005. The 1998 plans were
terminated during 2004, except that options then outstanding will remain so
until exercised or until they expire.
The Company has 22,150 incentive stock options outstanding under the Twin Disc,
Incorporated 1988 Incentive Stock Option plan and 21,800 non-qualified stock
options outstanding under the Twin Disc, Incorporated 1988 Non-Qualified Stock
Option Plan for Officers, Key Employees and Directors at June 30, 2005. The
1998 plans terminated during 1999, except that options then outstanding will
remain so until exercised or until they expire.
In fiscal 2005, the Company granted 34,500 performance stock awards to various
employees of the Company, including executive officers. The stock will be
awarded if the Company achieves a specified consolidated gross revenue
objective in the fiscal year ending June 30, 2007. No compensation expense has
been recorded in 2005.
Shares available for future options as of June 30 were as follows:
2005 2004
---- ----
2004 Stock Incentive Plan 147,550 --
2004 Stock Incentive Plan for Non-employee Directors 36,000 --
Stock option transactions under the plans during 2005, 2004 and 2003 were
as follows:
Weighted Weighted Weighted
Average Average Average
2005 Price 2004 Price 2003 Price
---- -------- ---- ------- ---- --------
Non-qualified stock options:
Options outstanding
at beginning of year 104,350 $18.82 133,150 $ 18.54 102,350 $20.46
Granted 2,100 24.90 - - 48,800 14.37
Canceled/Expired (2,500) 25.55 (15,450) 19.89 (18,000) 18.14
Exercised (25,700) 17.51 (13,350) 14.18 - -
------- ------- ------
Options outstanding
at June 30 78,250 $19.20 104,350 $18.82 133,150 $18.54
======= ======= ======
Options price range
($14.45 - $20.00)
Number of shares 49,400
Weighted average price $ 15.85
Weighted average remaining life 8.92 years
Options price range
($21.875 - $28.75)
Number of shares 28,850
Weighted average price $ 24.92
Weighted average remaining life 6.08 years
Weighted Weighted Weighted
Average Average Average
2005 Price 2004 Price 2003 Price
---- -------- ---- ------- ---- -------
Incentive stock options:
Options outstanding
at beginning of year 83,850 $20.68 106,700 $20.55 146,000 $20.75
Granted - - - - - -
Canceled/Expired (3,100) 22.65 (13,150) 23.16 (39,300) 21.32
33
Exercised (35,150) 19.32 (9,700) 15.86 - -
------- ------- -------
Options outstanding
at June 30 45,600 $21.59 83,850 $20.68 106,700 $20.55
======= ======= =======
Options price range
($15.05 - $20.00)
Number of shares 22,950
Weighted average price $ 17.28
Weighted average remaining life 8.33 years
Options price range
($21.875 - $28.75)
Number of shares 22,650
Weighted average price $ 25.96
Weighted average remaining life 5.08 years
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.
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):
2005 2004 2003
---- ---- ----
Net earnings (loss)
As reported $ 6,910 $ 5,643 $(2,394)
Pro forma 6,900 5,643 (2,468)
Basic earnings (loss) per share
As reported $ 2.42 $ 2.01 $(0.85)
Pro forma 2.41 2.01 (0.88)
Diluted earnings (loss) per share
As reported $ 2.38 $ 1.98 $(0.85)
Pro forma 2.37 1.98 (0.88)
The above pro forma net earnings and earnings per share were computed using the
fair value of options at the date of grant (for options granted after June
1995) as calculated by the Black-Scholes option-pricing method and the
following assumptions:
2005 2004 2003
---- ---- ----
Dividend yield 3.65% -- 4.80%
Volatility 32.67% -- 22.00%
Risk-free interest rate(s) 3.30% -- 3.58% and 2.71%
Expected life in years 5.00 -- 5.00
Exercise price equal to fair
value at grant date $ 24.90 -- $ 14.34
Weighted average fair value
at grant date $ 5.72 -- $ 1.83
Incentive options granted to greater than 10% shareholders are calculated using
a 3 year term and an exercise price equal to 110% of the fair market value on
the date of grant. There were no incentive options granted to a greater than
10% shareholder in the years presented.
34
In fiscal 2005, the Company issued restricted stock grants for 4,800 shares,
600 shares vest in 1 year from the date of grant, 2,100 shares vest in 2 years,
600 shares vest in 3 years, and 1,500 shares vest in four years. The fair
market value of the grants based on the market price at the date of grant was
$120,000.
In fiscal 2004, the Company issued restricted stock grants for 25,000 shares,
12,500 of these shares 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 the vesting
period. The total compensation expense recorded during 2005 and 2004 related
to restricted stock grants approximated $203,000 and $189,000, respectively.
M. ENGINEERING AND DEVELOPMENT COSTS
Engineering and development costs include research and development expenses for
new products, development and major improvements to existing products, and
other charges for ongoing efforts to refine existing products. Research and
development costs charged to operations totaled $2,278,000, $2,840,000, and
$2,220,000 in 2005, 2004 and 2003 respectively. Total engineering and
development costs were $8,050,000, $7,600,000, and $7,190,000 in 2005, 2004 and
2003 respectively.
N. Pension and Other Postretirement Benefit Plans
The Company has non-contributory, qualified defined benefit pension plans
covering substantially all domestic employees hired prior to October 1, 2003
and certain foreign employees. Domestic plan benefits are based on years of
service, and, for salaried employees, on average compensation for benefits
earned prior to January 1, 1997 and on a cash balance plan for benefits earned
after January 1, 1997. The Company's funding policy for the plans covering
domestic employees is to contribute an actuarially determined amount which
falls between the minimum and maximum amount that can be deducted for federal
income tax purposes. Domestic plan assets consist principally of listed equity
and fixed income securities.
On June 20, 2003 the Board of Directors amended the defined benefit pension
plans covering domestic salaried and hourly employees to exclude all employees
hired after October 1, 2003 from the plans. In addition, effective October 1,
2003, a portion of the medical supplement for post-1992 retirees that is
payable prior to Medicare eligibility has been removed from the plan. The
$19.24 per month benefit times years of service has been reduced to $4.42 per
month times years of service. The $14.82 benefit removed is now provided
through the retiree health plan discussed below. The remaining medical
supplement is calculated using service frozen as of October 1, 2003.
In addition, the Company has unfunded, non-qualified retirement plans for
certain management employees and directors. Benefits are based on final
average compensation and vest upon retirement from the Company.
In addition to providing pension benefits, the Company provides health care and
life insurance benefits for certain domestic retirees. All employees retiring
after December 31, 1992, and electing to continue coverage through the
Company's group plan, are required to pay 100% of the premium cost. On June 20,
2003 the Board of Directors amended the coverage under the plans as follows:
* Pre-1993 retirees are required to pay any cost increases after 2003 for
retiree medical coverage.
* Dental and vision coverage for Pre-1993 retirees was eliminated.
* Life insurance coverage for individuals who retire on or after October 1,
2003 was eliminated.
* Access to retiree medical coverage after age 65 for individuals who retire on
or after October 1, 2003 and their spouses was eliminated.
* Retiree medical coverage was eliminated for all employees hired on or after
October 1, 2003.
* A Healthcare Reimbursement Account ("HRA") program will be established for
individuals who retire after January 1, 1993 but before age 65.
Obligations and Funded Status
The following table sets forth the Company's defined benefit pension plans' and
other post-retirement benefit plan's funded status and the amounts recognized
in the Company's balance sheets and statement of operations as of June 30
(dollars in thousands):
35
Other
Pension Post-Retirement
Benefits Benefits
---------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation, beginning of year $124,151 $115,960 $ 29,795 $ 32,369
Service cost 1,285 1,260 52 45
Interest cost 7,169 7,475 1,674 2,057
Amendments - - - -
Actuarial loss (gain) 1,992 9,603 (1,838) (633)
Benefits paid ( 9,195) (10,147) (3,573) (4,043)
------- ------- ------ ------
Benefit obligation, end of year $125,402 $124,151 $ 26,110 $ 29,795
======= ======= ====== ======
Change in plan assets:
Fair value of assets, beginning of year $ 89,038 $ 75,278 $ - $ -
Actual return on plan assets 8,239 19,325 - -
Employer contribution 8,156 4,582 3,573 4,043
Benefits paid ( 9,195) (10,147) (3,573) (4,043)
------- ------- ------ ------
Fair value of assets, end of year $ 96,238 $ 89,038 $ - $ -
======= ======= ====== ======
Funded status: $(29,164)$(35,113)$(26,109)$(29,795)
Unrecognized net transition obligation 296 358 - -
Unrecognized actuarial loss 47,130 50,252 11,808 14,979
Unrecognized prior service cost (4,653) (5,467) (4,749) (5,427)
------ ------ ------ -------
Net amount recognized $ 13,609 $ 10,030 $(19,050)$(20,243)
====== ====== ====== =======
Amounts recognized in the balance sheet
consist of:
Accrued benefit liability $(28,737)$(34,544)$(19,050)$(20,243)
Intangible asset - - - -
Deferred tax asset 16,515 17,384 - -
Minimum pension liability adjustment 25,831 27,190 - -
------- ------ ------- -------
Net amount recognized $ 13,609 $ 10,030 $(19,050)$(20,243)
======= ====== ======= =======
The accumulated benefit obligation for all defined benefit pension plans was
$125,402,000 and $124,151,000 at June 30, 2005 and 2004, respectively. The
Medicare Part D subsidy reduced the accumulated postretirement benefit
obligation by $1,680,000 as of June 30,2005.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets:
June 30
----------------
2005 2004
---- ----
Projected and accumulated benefit obligation $125,402 $124,151
Fair value of plan assets 96,238 89,038
Components of Net Periodic Benefit Cost
Pension Benefits
----------------
2005 2004 2003
---- ---- ----
<C.
Service cost $ 1,285 $ 1,260 $ 1,344
36
Interest cost 7,169 7,475 8,277
Expected return on plan assets (7,321) (6,361) (7,883)
Amortization of prior service cost 124 124 624
Amortization of transition obligation 59 60 56
Amortization of net loss 3,262 3,990 2,492
------ ------ ------
Net periodic benefit cost $ 4,578 $ 6,548 $ 4,910
====== ====== ======
Postretirement Benefits
--------------------------
2005 2004 2003
---- ---- ----
Service cost $ 52 $ 45 $ 17
Interest cost 1,674 2,057 2,362
Recognized prior service cost (678) (678) -
Recognized net actuarial loss 1,333 1,547 798
------ ------ ------
Net periodic benefit cost $ 2,381 $ 2,971 $ 3,177
====== ====== ======
The Medicare Part D subsidy reduced the postretirement benefit expense by
$270,000 for fiscal 2005.
Additional Information
Pension Benefits Other Benefits
2005 2004 2005 2004
---- ---- ---- ----
Increase (decrease) in minimum
liability included in other
comprehensive income $ (1,359) $ 4,197 N/A N/A
Assumptions
Weighted average assumptions used
to determine benefit obligations
at June 30
2005 2004 2005 2004
---- ---- ---- ----
Discount rate 5.75% 6.00% 5.75% 6.00%
Expected return on plan assets 8.50% 8.50%
Weighted average assumptions used
to determine net periodic benefit
cost for years ended June 30
2005 2004 2005 2004
---- ---- ---- ----
Discount rate 6.00% 6.75% 6.00% 6.75%
Expected return on plan assets 8.50% 9.00%
Rate of compensation increase 5.00% 5.00%
The assumed weighted average health care cost trend rate was 9% in 2005,
grading down to 6% in 2008. A 1% increase in the assumed health care cost
trend would increase the accumulated postretirement benefit obligation by
approximately $457,000 and the service and interest cost by approximately
37
$24,000. A 1% decrease in the assumed health care cost trend would decrease
the accumulated postretirement benefit obligation by approximately $444,000
and the service and interest cost by approximately $23,000.
Plan Assets
The Company's pension plan weighted-average asset allocations at June 30, 2005
and 2004, by asset category are as follows:
June 30
Target ----------------
Asset Category Allocation 2005 2004
---------- ---- ----
Equity securities 61% 64% 66%
Debt securities 35% 32% 30%
Real Estate 4% 4% 4%
---- ---- ----
100% 100% 100%
====== ====== ======
Due to market conditions and other factors, actual asset allocation may vary
from the target allocation outlined above. The pension plans held 62,402 shares
of Company stock with a fair market value of $1,366,604 (1.5% percent of total
plan assets) and $1,522,609 (1.7% percent of total plan assets) at June 30,
2005 and 2004, respectively.
Twin Disc employs a total return on investment approach whereby a mix of
equities and fixed income investments are used to maximize long-term return of
plan assets while avoiding excessive risk. Pension plan guidelines have been
established based upon an evaluation of market conditions, tolerance for risk,
and cash requirements for benefit payments. Investment risk is measured and
monitored on an ongoing basis through quarterly investment portfolio reviews,
and annual liability measurements.
The plans have a long-term return assumption of 8.50%. This rate was derived
based upon historical experience and forward-looking return expectations for
major asset class categories.
Cash Flows
Contributions
The Company expects to contribute $4,457,000 to its pension plan in fiscal
2006.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Other Benefits
----------------------------------
Pension Gross Part D Net Benefit
Benefits Benefits Reimbursement Payments
-------- -------- ------------- --------
2006 9,215 3,246 329 2,917
2007 8,990 3,136 332 2.804
2008 9,108 2,961 331 2,630
2009 9,181 2,844 324 2,520
2010 9,215 2,744 317 2,427
Years 2011-2015 46,154 11,057 714 10,343
The Company sponsors defined contribution plans covering substantially all
domestic employees and certain foreign employees. These plans provide for
employer contributions based primarily on employee participation. The total
expense under the plans was $1,348,000, $1,266,000 and $1,568,000 in 2005,
2004, and 2003 respectively.
38
O. INCOME TAXES
United States and foreign (loss) earnings before income taxes and minority
interest were as follows (in thousands):
2005 2004 2003
---- ---- ----
United States $ 5,281 $ 3,898 $(6,851)
Foreign 4,211 6,734 4,169
------ ------ ------
$ 9,492 $ 10,632 $(2,682)
====== ====== ======
The provision (credit) for income taxes is comprised of the following (in
thousands):
2005 2004 2003
---- ---- ----
Currently payable:
Federal $ 446 $ 545 $ (176)
State 32 50 48
Foreign 3,298 2,802 1,269
------ ------ ------
3,776 3,397 1,141
------ ------ ------
Deferred:
Federal (813) 1,081 (1,298)
State 272 279 (587)
Foreign (750) 207 444
------ ------ -----
(1,291) 1,567 (1,441)
------ ------ ------
$ 2,485 $ 4,964 $ (300)
====== ====== ======
The components of the net deferred tax asset as of June 30 are summarized in
the table below (in thousands).
2005 2004
---- ----
Deferred tax assets:
Retirement plans and employee benefits $18,967 $20,280
Alternative minimum tax credit
carryforwards 1,159 986
Foreign tax credit carryforwards 2,297 1,403
State net operating loss and other
state credit carryforwards 399 406
Other 5,036 4,947
------ ------
27,858 28,022
------ ------
Deferred tax liabilities:
Property, plant and equipment 4,064 3,996
Intangibles 1,780 1,382
------ ------
5,844 5,378
------ ------
Valuation allowance (270) (1,403)
------ ------
Total net deferred tax assets $21,744 $21,241
====== ======
Management believes that it is more likely than not that the results of future
operations will generate sufficient taxable income and foreign source income to
39
realize deferred tax assets. Of the $2,297,000 in foreign tax credit
carryforwards at June 30, 2005, $177,000 will expire in 2010, $623,000 will
expire in 2011, $58,000 will expire in 2012, $662,000 will expire in 2013 and
$777,000 will expire in 2014. The alternative minimum tax credit carryforwards
will be carried forward indefinitely. Of the $341,000 of state net operating
loss carryforwards at June 30, 2005, $317,000 will expire in 2014, $18,000 will
expire in 2015, $4,000 will expire in 2017 and $2,000 will expire in 2018. Of
the $58,000 carryforwards, any credits not used by 2006 will be deducted in
2007 and 2008.
A valuation allowance of $270,000 has been recorded as of June 30, 2005, as
management believes that realization of certain foreign tax credit
carryforwards and other deferred tax assets is unlikely. During 2005, the
Company reversed a $1,100,000 valuation allowance on certain foreign tax credit
carryforwards that are expected to be utilized as a result of certain internal
corporate restructurings and transactions.
Following is a reconciliation of the applicable U.S. federal income taxes to
the actual income taxes reflected in the statements of operations (in
thousands):
2005 2004 2003
---- ---- ----
U.S. federal income tax at 34% $ 3,194 $ 3,605 $ ( 916)
Increases (reductions)
in tax resulting from:
Foreign tax items (354) 1,082 291
State taxes 304 347 ( 368)
Valuation allowance (1,133) - -
Disposition of investment in subsidiary - - -
Statutory rate change - 97
Other, net 474 ( 70) 596
----- ----- -----
$ 2,485 $ 4,964 $ ( 300)
===== ===== =====
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $6.4 million at June 30, 2005. The Company has provided for the
estimated residual U.S. tax on a portion of these earnings, which may not be
indefinitely reinvested. The remaining earnings are considered to be
indefinitely reinvested. If these indefinitely reinvested earnings were
remitted to the U.S. they would be subject to U.S. income tax. However this
tax would be substantially less than the U.S. statutory income tax because of
available foreign tax credits.
P. CONTINGENCIES
The Company is involved in litigation of which the ultimate outcome and
liability to the Company, if any, is not presently determinable. Management
believes that final disposition of such litigation will not have a material
impact on the Company's results of operations or financial position.
Q. RESTRUCTURING OF OPERATIONS
The Company recorded a restructuring charge of $2,076,000 in the fourth
quarter of 2005 as the Company restructured its Belgian operation to improve
future profitability. The charge consists of prepension costs for 37 employees;
33 manufacturing employees and 4 salaried employees. As of June 30, 2005 the
Company had not made any cash payments related to the above restructuring.
During the second quarter of 2003, the Company recorded a pre-tax restructuring
charge of $2,042,000 million in connection with the reduction of its workforce.
These actions were taken in an effort to streamline the Company's cost
structure and align its corporate workforce with market conditions. The charge
consists of employee termination and severance benefits for a total of 58
employees; 48 production employees and 10 salaried employees. During 2005 and
2004, the Company made cash payments of $143,000 and $358,000, respectively.
Accrued restructuring costs were $743,000 and $942,000 at June 30, 2005 and
2004,respectively.
R. ACQUISITION
Effective May 31, 2004, The company acquired 100% of the common stock of Rolla
SP Propellers SA of Novazzano, Switzerland. Rolla designs and manufactures
40
custom propellers.
Rolla has a fiscal year ending May 31. No results of operations of Rolla are
included in consolidated results for the year ended June 30, 2004. A full
year's results are included in the consolidated results for the year ended
June 30, 2005.
The acquisition cost, including consulting fees, net of cash acquired was
$5,085,000.
The condensed balance sheet of Rolla as of May 31, 2004 is as follows (in
thousands):
Current assets $ 3,323
Net Fixed Assets 3,636
Intangibles 3,189
- - - -
Total assets acquired $10,148
=======
Current Liabilities $ 2,056
Long Term Debt $ 1,146
Deferred Taxes 655
Stockholders' Equity 6,291
- - - -
$10,148
=======
Intangible Assets Identified and the Amounts
Assigned are as Follows:
Intangible Assets Subject to amortization:
Proprietary Technology $ 840
Computer Software 860
Other 408
-------
$ 2,108
=======
The Weighted Average Amortization Period is 7 years.
Intangible Assets Not Subject to Amortization:
Goodwill $ 927
Tradename 154
-------
$ 1,081
=======
The goodwill is not expected to be deductible for tax purposes.
TWIN DISC, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended June 30, 2005, 2004 and 2003
(In thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and end of
Description of Period Expenses Deductions(F1) of Period
2005:
Allowance for losses on
41
accounts receivable $ 604 $ 365 $ 42 $ 927
Reserve for inventory
obsolescence 4,672 2,020 2,182 4,510
2004:
Allowance for losses on
accounts receivable $ 502 $ 208 $ 106 $ 604
Reserve for inventory
obsolescence 5,413 1,873 2,614 4,672
2003:
Allowance for losses on
accounts receivable $ 756 $ 135 $ 389 $ 502
Reserve for inventory
obsolescence 4,593 1,822 1,002 5,413
(F1) Accounts receivable written-off and inventory disposed of during the
year and other adjustments (primarily foreign currency translation adjustments)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ FRED H. TIMM
-------------------------------
Vice President -
Administration and Secretary
(Chief Accounting Officer)
September 21, 2005
42
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
( By /s/ MICHAEL E. BATTEN
( ---------------------------
( Michael E. Batten, Chairman,
( Chief Executive Officer and Director
(
(
(
September 21, 2005 ( By /s/ MICHAEL H. JOYCE
( ----------------------------
( Michael H. Joyce, President,
( Chief Operating Officer and Director
(
(
(
( By /s/ CHRISTOPHER J. EPERJESY
( ----------------------------
( Christopher J. Eperjesy, Vice
( (President-Finance & Treasurer and
( Chief Financial Officer)
( John H. Batten, Director
September 21, 2005 ( John A. Mellowes, Director
( David B. Rayburn, Director
( Harold M. Stratton II, Director
( David L. Swift, Director
( George E. Wardeberg, Director
( David R. Zimmer, Director
(
( By /s/ CHRISTOPHER J. EPERJESY
( ----------------------------
( Christopher J. Eperjesy,
Attorney in Fact
EXHIBIT INDEX
EXHIBIT INDEX
TWIN DISC, INCORPORATED
10-K for Year Ended June 30, 2005
Included
Exhibit Description Herewith
- ------ ----------- --------
3a) Articles of Incorporation, as restated October 21, 1988
(Incorporated by reference to Exhibit 3(a) of the Company's
Form 10-K for the year ended June 30, 2004).
b) Corporate Bylaws, as amended through July 30, 2004 (Incorporated
by reference to Exhibit 3(b) of the Company's Form 10-K for the
year ended June 30, 2004).
4a) Form of Rights Agreement dated as of April 17, 1998 by and
between the Company and the Firstar Trust Company, as Rights Agent,
with Form of Rights Certificate (Incorporated by reference to
Exhibits 1 and 2 of the Company's Form 8-A dated May 4, 1998).
b) Announcement of Shareholder Rights Plan per news release dated
April 17, 1998 (Incorporated by reference to Exhibit 6(a), of
the Company's Form 10-Q dated May 4, 1998).
Material Contracts
10a) The 1988 Incentive Stock Option Plan (Incorporated by reference
to Exhibit 10(a) of the Company's Form 10-K for the year ended
June 30, 2004).
b) The 1988 Non-Qualified Stock Option Plan for Officers, Key
Employees and Directors (Incorporated by reference to Exhibit
10(b) of the Company's Form 10-K for the year ended June 30, 2004).
c) Amendment to 1988 Incentive Stock Option Plan of Twin Disc,
Incorporated (Incorporated by reference to Exhibit 10(c) of the
Company's Form 10-K for the year ended June 30, 2004).
d) Amendment to 1988 Non-Qualified Incentive Stock Option Plan for
Officers, Key Employees and Directors of Twin Disc, Incorporated
(Incorporated by reference to Exhibit 10(d) of the Company's Form
10-K for the year ended June 30, 2004).
e) Form of Severance Agreement for Senior Officers and form of
Severance Agreement for Other Officers (Incorporated by reference
to Exhibit 10(e) of the Company's Form 10-K for the year ended
June 30, 2004).
f) Director Tenure and Retirement Policy (Incorporated by reference
to Exhibit 10(g) of the Company's Form 10-K for the year ended
June 30, 2004).
g) Form of Twin Disc, Incorporated Corporate Short Term Incentive Plan
(Incorporated by reference to Exhibit 10(h) of the Company's Form
10-K for the year ended June 30, 2004).
h) The 1998 Incentive Compensation Plan (Incorporated by reference to
Exhibit A of the Proxy Statement for the Annual Meeting of
Shareholders held on October 16, 1998).
i) The 1998 Stock Option Plan for Non-Employee Directors (Incorporated
by reference to Exhibit B of the Proxy Statement for the Annual
Meeting of Shareholders held on October 16, 1998).
j) The 2004 Stock Incentive Plan (Incorporated by reference to Exhibit
B of the Proxy Statement for the Annual Meeting of Shareholders held
on October 15, 2004).
k) The 2004 Stock Incentive Plan for Non-Employee Directors (Incorporated
by reference to Exhibit C of the Proxy Statement for the Annual
Meeting of Shareholders held on October 15, 2004).
l) Performance Stock Award Agreement (Incorporated by reference to
Exhibit 10.1 of the Company's Form 8-K dated August 2, 2005).
m) Amendment to Supplemental Retirement Plan (Incorporated by reference
to Exhibit 10.2 of the Company's Form 8-K dated August 2, 2005).
43
n) Change in Control Severance Agreements (Incorporated by reference
to Exhibits 10.3, 10.4 and 10.6 of the Company's Form 8-K dated
August 2, 2005).
o) Indemnity Agreement (Incorporated by reference to Exhibit 10.5 of
the Company's Form 8-K dated August 2, 2005).
p) Waiver and Release Agreement (Incorporated by reference to Exhibit
10.7 of the Company's Form 8-K dated August 2, 2005).
21 Subsidiaries of the Registrant X
23 Consent of Independent Registered Public Accounting Firm X
24 Power of Attorney X
31a Certification X
31b Certification X
32a Certification pursuant to 18 U.S.C. Section 1350 X
32b Certification pursuant to 18 U.S.C. Section 1350 X