1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 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 No.)
1328 Racine Street, Racine, Wisconsin 53403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (262) 638-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer __ Accelerated Filer __ Non-accelerated filer _X_
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X .
At January 31, 2006, the registrant had 2,904,044 shares of its common stock
outstanding.
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Unaudited)
December 31 June 30
2005 2005
---- ----
Assets
Current assets:
Cash and cash equivalents $ 11,493 $ 11,614
Trade accounts receivable, net 33,623 37,751
Inventories, net 54,778 48,481
Deferred income taxes 6,944 5,514
Other 2,437 3,423
Total current assets 109,275 106,783
Property, plant and equipment, net 38,771 40,331
Goodwill 12,591 12,854
Deferred income taxes 14,680 16,230
Other assets 9,026 9,097
$184,343 $185,295
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 831 $ 3,522
Current maturities of long-term debt 2,854 2,849
Accounts payable 17,897 21,746
Accrued liabilities 32,085 35,050
Total current liabilities 53,667 63,167
Long-term debt 21,631 14,958
Accrued retirement benefits 38,639 39,680
113,937 117,805
Minority Interest 527 591
Shareholders' Equity:
Common stock 11,518 11,450
Retained earnings 93,277 89,316
Accumulated other comprehensive loss (19,478) (17,567)
85,317 83,199
Less treasury stock, at cost 15,438 16,300
Total shareholders' equity 69,879 66,899
$184,343 $185,295
The notes to consolidated financial statements are an integral part of this
statement.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data, Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2005 2004 2005 2004
---- ---- ---- ----
Net sales $57,051 $54,731 $106,628 $100,113
Cost of goods sold 41,028 40,793 76,201 74,523
16,023 13,938 30,427 25,590
Marketing, engineering and
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administrative expenses 11,489 11,261 21,637 20,770
Interest expense 399 291 715 510
Other expense (income),net (47) 185 (101) 141
11,841 11,737 22,251 21,421
Earnings before income taxes
and minority interest 4,182 2,201 8,176 4,169
Income taxes 1,671 1,045 3,137 1,911
Earnings before minority
interest 2,511 1,156 5,039 2,258
Minority interest (22) (43) (65) (68)
Net earnings $ 2,489 $ 1,113 $ 4,974 $2,190
Dividends per share $ 0.175 $ 0.175 $ 0.35 $ 0.35
Earnings per share data:
Basic earnings per share $ 0.86 $ 0.39 $ 1.73 $ 0.77
Diluted earnings per share $ 0.84 $ 0.38 $ 1.70 $ 0.76
Shares outstanding data:
Average shares outstanding 2,888 2,859 2,877 2,848
Dilutive stock options 62 48 57 47
Diluted shares outstanding 2,950 2,907 2,934 2,895
Comprehensive income:
Net earnings $ 2,489 $ 1,113 $ 4,974 $ 2,190
Foreign currency translation
adjustment (1,636) 5,353 (1,911) 5,582
Comprehensive income $ 853 $ 6,466 $ 3,063 $ 7,772
The notes to consolidated financial statements are an integral part of this
statement.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Unaudited)
Six Months Ended
December 31,
2005 2004
---- ----
Cash flows from operating activities:
Net earnings $ 4,974 $ 2,190
Adjustments to reconcile net earnings to
net cash used by operating activities:
Depreciation and amortization 2,721 2,552
Net change in working capital,
excluding cash (9,146) (4,722)
(1,451) 20
Cash flows from investing activities:
Acquisitions of fixed assets (2,089) (3,809)
Proceeds from sale of fixed assets 16 31
(2,073) (3,778)
Cash flows from financing activities:
Decrease in notes payable (2,517) (269)
Proceeds from long-term debt 6,813 3,325
Proceeds from exercise of stock options 731 957
Purchase of treasury stock (206) -
Dividends paid (1,013) (1,005)
3,808 3,008
Effect of exchange rate changes on cash (405) 537
Net change in cash and cash equivalents (121) (213)
4
Cash and cash equivalents:
Beginning of period 11,614 9,127
End of period $11,493 $ 8,914
The notes to consolidated financial statements are an integral part of
this statement.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Basis of Presentation
The unaudited financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC)
and, in the opinion of the Company, include all adjustments, consisting only
of normal recurring items, necessary for a fair statement of results for each
period. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. The Company believes that the disclosures made are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with financial statements and the
notes thereto included in the Company's latest Annual Report. The year-end
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles.
B. Inventory
The major classes of inventories were as follows (in thousands):
December 31, June 30,
2005 2005
---- ----
Inventories:
Finished parts $37,627 $35,591
Work in process 11,289 7,565
Raw materials 5,862 5,325
$54,778 $48,481
C. Warranty
Twin Disc engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its suppliers.
However, its warranty obligation is affected by product failure rates, the
extent of the market affected by the failure and the expense involved in
satisfactorily addressing the situation. The warranty reserve is established
based on our best estimate of the amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. When
evaluating the adequacy of the reserve for warranty costs, management takes
into consideration the term of the warranty coverage, historical claim rates
and costs of repair, knowledge of the type and volume of new products and
economic trends. While we believe the warranty reserve is adequate and that
the judgment applied is appropriate, such amounts estimated to be due and
payable in the future could differ materially from what actually transpires.
The following is a listing of the activity in the warranty reserve during the
three and six months periods ended December 31, 2005 and 2004 (in thousands).
Three Months Ended Six Months Ended
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December 31, December 31,
2005 2004 2005 2004
---- ---- ---- ----
Beginning reserve balance $6,437 $6,658 $6,679 $6,478
Current period expense 939 835 1,775 2,052
Payments or credits to customers 862 1,186 1,915 2,243
Translation (57) 413 (82) 433
Reserve balance, end of period $6,457 $6,720 $6,457 $6,720
D. 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.
E. Business Segments
Information about the Company's segments is summarized as follows (in
thousands):
Three Months Ended Six Months Ended
December 31 December 31
2005 2004 2005 2004
---- ---- ---- ----
Manufacturing segment sales $54,106 $53,239 $98,511 $94,038
Distribution segment sales 19,460 15,900 38,911 31,368
Inter/Intra segment sales (16,515) (14,408) (30,794) (25,293)
Net sales $57,051 $54,731 $106,628 $100,113
Manufacturing segment earnings $ 4,601 $ 3,034 $ 8,354 $ 5,160
Distribution segment earnings 1,595 1,024 3,640 2,360
Inter/Intra segment loss (2,014) (1,857) (3,818) (3,351)
Earnings before income taxes
and minority interest $ 4,182 $ 2,201 $ 8,176 $ 4,169
December 31, June 30,
2005 2005
Assets ---- ----
Manufacturing segment assets $198,507 $170,782
Distribution segment assets 37,816 33,356
Corporate assets and elimination
of inter-company assets (51,980) (18,843)
$184,343 $185,295
F. Stock Option Plans
In July 2005, the Company adopted Financial Accounting Standard No. 123(R)
"Share Based Payment" (FAS 123R). This statement requires the Company to
expense the cost of employee services received in exchange for an award of
equity instruments using the fair-value-based method. No options were granted
in the first and second quarters of fiscal 2006 or 2005. All options
outstanding were 100% vested at the adoption of this statement, therefore no
compensation cost has been recognized in the condensed consolidated statements
of operations.
Prior to July 2005, the Company accounted for its stock option plans under the
guidelines of Accounting Principles Board Opinion No. 25. Accordingly, no
compensation cost was 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):
6
Three Months Ended Six Months Ended
December 31, December 31,
2004 2004
---- ----
Net earnings
As reported $ 1,113 $ 2,190
Pro forma 1,113 2,190
Basic earnings per share
As reported $ 0.39 $ 0.77
Pro forma 0.39 0.77
Diluted earnings per share
As reported $ 0.38 $ 0.76
Pro forma 0.38 0.76
In fiscal 2006 and 2005, the Company granted 32,850 and 31,500 performance
stock awards, respectively, to various employees of the Company, including
executive officers. The stock awards will vest if the Company achieves
specified consolidated gross revenue objectives in the fiscal years ending
June 30, 2007 and 2008. The fair-value of the performance shares is based on
the closing trading value of the Company's stock on the date of grant. The
fair value of the stock awards is expensed over the performance period for the
shares that are expected to ultimately vest. The compensation expense for the
six months ended December 31, 2005 and 2004, related to performance stock
awards, approximated $336,000 and $0, respectively.
In addition to the performance shares mentioned above, the Company has unvested
restricted stock outstanding that will vest if certain service conditions are
fulfilled. During fiscal 2006 and 2005, the Company granted 0 and 4,800
service based restricted shares to employees. There were 15,700 and 30,300
unvested shares outstanding at December 31, 2005 and 2004, respectively.
Compensation expense of $68,000 and $97,000 was recognized during the six
months ended December 31, 2005 and 2004, respectively, related to these
service-based awards. Compensation expense of $23,000 and $55,000 was
recognized during the three months ended December 31, 2005 and 2004,
respectively, related to these service-based awards.
G. Periodic Benefit Cost
The Company has non-contributory, qualified defined benefit plans covering
substantially all domestic employees hired prior to October 1, 2003 and
certain foreign employees. Additionally, the Company provides health care
and life insurance benefits for certain domestic retirees. Components of Net
Periodic Benefit Cost for the defined benefit pension plans and other
post-retirement benefit plan are as follows(in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2005 2004 2005 2004
---- ---- ---- ----
Pension Benefits:
Service cost $ 292 $ 301 $ 574 $ 588
Interest cost 1,744 1,799 3,475 3,579
Expected return on plan assets (1,955) (1,837) (3,900) (3,658)
Amortization of prior service cost (156) (149) (311) (297)
Amortization of transition obligation 16 18 27 28
Amortization of net loss 964 995 1,926 1,988
Net periodic benefit cost $ 905 $1,127 $1,791 $2,228
Postretirement Benefits:
Service cost $ 18 $ 13 $ 36 $ 26
Interest cost 352 418 703 836
Amortization of net actuarial loss 86 164 172 328
Net periodic benefit cost $ 456 $ 595 $ 911 $1,190
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The Company previously disclosed in its financial statements for the year ended
June 30, 2005, that it expected to contribute $4,457,000 to its pension plan in
fiscal 2006. As of December 31, 2005, $2,442,000 of contributions have been
made.
Item 2. Management Discussion and Analysis
In the financial review that follows, we discuss our results of operations,
financial condition and certain other information. This discussion should be
read in conjunction with our consolidated financial statements and related
notes.
Results of Operations
Comparison of the Second Quarter of FY 2006 with the Second Quarter of FY 2005
Net sales for the second quarter improved 4.4%, or $2.4 million, to $57.1
million from $54.7 million in the same period a year ago. The year-over-year
improvement came in a number of the Company's product markets. The Company's
North American manufacturing and distribution operations saw increased demand
for transmission and industrial products for oil-servicing and commercial
applications. In addition, sales of the Company's military transmissions were
up significantly. Sales of marine transmissions for commercial applications
also saw significant year-over-year improvement in sales and order activities.
Compared to the second quarter of fiscal 2005, the Euro and Asian currencies
weakened against the US dollar. The translation effect of this weakening on
foreign operations was to decrease revenues by approximately $2 million versus
the prior year, before eliminations.
Sales at our manufacturing operations were up 1.6% versus the same period last
year. Sales at our US domestic manufacturing location were up nearly 4%. As
noted above, the sales growth in our domestic operations was primarily driven
by increased sales of commercial marine transmissions, military and oilfield
series transmissions, and industrial products. Sales at our Belgian
manufacturing location were down over 1% over the same period last year.
However, on a local currency basis, sales were up nearly 10%. Our Italian and
Swiss manufacturing operations saw modest increases versus the prior fiscal
year's second quarter.
Our distribution segment experienced an increase of 22.4% in sales compared to
the second quarter of fiscal 2005. The majority of this increase came from our
distribution operations in Asia-Pacific and North America. Sales growth in our
commercial and pleasure craft marine transmission product lines primarily drove
the increase in Asia-Pacific, while increased transmission and industrial
product sales drove the growth in North America.
The elimination for net inter/intra segment sales increased $2.1 million,
accounting for the remainder of the net change in sales versus the same period
last year. This increase was consistent with the overall increase in sales and
order levels experienced by the Company in the second quarter.
Gross margin as a percentage of sales increased to 28.1% of sales, compared to
25.5% of sales for the same period last year. This 260 basis point improvement
can be attributed to improved product mix, selective price increases, improved
productivity and absorption, and the impact of cost reduction programs. These
favorable margin items were partially offset by higher prices for steel,
shipping and energy versus the same period of the prior fiscal year. Higher
volume, level fixed costs, increased manufacturing productivity and absorption
at our domestic manufacturing operations, and lower pension expense helped to
partially offset higher raw material and other costs.
Marketing, engineering, and administrative (ME&A) expenses were 2.0% higher
compared to last year's second fiscal quarter. As a percentage of sales, ME&A
expenses were down slightly to 20.1% of sales versus 20.6% of sales in the
second quarter of fiscal 2005. The overall increase can be attributed to (1)
the year-over-year increase in salary and wage costs, and (2) increased
professional service and external consulting fees related to the internal
control requirements of Section 404 of Sarbanes-Oxley.
Interest expense of $0.4 million for the quarter was up 37% versus last year's
second fiscal quarter. The increase can be attributed to higher borrowing
levels, as well as an overall increase in interest rates versus the prior year.
For the second quarter of fiscal 2005, the interest rate on the Company's
revolving credit facility was in the range of 3.1% to just under 3.6%, whereas
for the second quarter of fiscal 2006 the range was 5.1% to just under 5.6%.
The consolidated income tax rate was lower than a year ago primarily due to (1)
8
the impact of certain business restructuring activities undertaken in the
fourth quarter of fiscal 2005, which will allow the Company to utilize
previously unutilized foreign tax credits and (2) changes in the mix of foreign
versus domestic earnings.
Comparison of the First Six Months of FY 2006 with the First Six Months of
FY 2005
Net sales for the first six months of 2006 improved 6.5% to $106.6 million from
$100.1 million in the same period a year ago. Consistent with the second
quarter results, the year-over-year improvement for the first six months of the
fiscal year came in a number of the Company's product markets. The Company's
North American manufacturing and distribution operations saw increased demand
for transmission and industrial products for oil-servicing and commercial
applications. In addition, sales of the Company's military transmissions were
up significantly. Sales of marine transmissions for commercial applications
also saw significant year-over-year improvement in sales and order activities.
Compared to the first six months of fiscal 2005, the Euro and Asian currencies
weakened against the US dollar. The translation effect of this weakening on
foreign operations was to decrease revenues by approximately $1.3 million
versus the prior year, before eliminations.
Sales at our manufacturing operations were up just under 5% versus the same
period last year. Sales at our US domestic manufacturing location were up over
10%. As noted above, the sales growth in our domestic operations was primarily
driven by increased sales of commercial marine transmissions, military and
oilfield series transmissions, and industrial products. Sales at our Belgian
manufacturing location were down over 9% over the same period last year,
primarily due to certain material shortages, critical equipment downtime
encountered in the first quarter and the translation effect of a weakening
Euro. The latter contributed to nearly two-thirds of the year-over-year
decrease.
Our distribution segment experienced an increase of 24.0% in sales compared to
the first six months of fiscal 2005. The majority of this increase came from
our distribution operations in Asia-Pacific and North America. Sales growth in
our commercial and pleasure craft marine transmission product lines primarily
drove the increase in Asia-Pacific, while increased transmission and industrial
product sales drove the growth in North America.
The elimination for net inter/intra segment sales increased $5.5 million,
accounting for the remainder of the net change in sales versus the same period
last year. This increase was consistent with the overall increase in sales and
order levels experienced by the Company in the second quarter.
Gross margin as a percentage of sales increased to 28.5% of sales, compared to
25.6% of sales for the same period last year. This 290 basis point improvement
can be attributed to improved product mix, selective price increases, improved
productivity and absorption, and the impact of cost reduction programs. These
favorable margin items were partially offset by higher prices for steel,
shipping and energy versus the same period of the prior fiscal year. Higher
volume, level fixed costs, increased manufacturing productivity and absorption
at our domestic manufacturing operations, and lower pension expense helped to
partially offset higher raw material and other costs.
Marketing, engineering, and administrative (ME&A) expenses were 4.2% higher
compared to the first half of fiscal 2005. As a percentage of sales, ME&A
expenses were down slightly to 20.3% of sales versus 20.7% of sales in the
first six months of fiscal 2005. The overall dollar increase can be attributed
to (1) the year-over-year increase in salary and wage costs, and (2) increased
professional service and external consulting fees related to the internal
control requirements of Section 404 of Sarbanes-Oxley.
Interest expense of $0.7 million for the six months was up 40% versus the same
period last year. The increase can be attributed to higher borrowing levels,
as well as an overall increase in interest rates versus the prior year. For
the first six months of fiscal 2005, the interest rate on the Company's
revolving credit facility was in the range of 2.6% to just under 3.6%, whereas
for the first half of fiscal 2006 the range was 4.6% to just under 5.6%.
The consolidated income tax rate was lower than a year ago primarily due to (1)
the impact of certain business restructuring activities undertaken in the
fourth quarter of fiscal 2005, which will allow the Company to utilize
previously unutilized foreign tax credits and (2) changes in the mix of foreign
versus domestic earnings.
Financial Condition, Liquidity and Capital Resources
9
Comparison between December 31, 2005 and June 30, 2005
As of December 31, 2005, the Company had net working capital of $55.6 million,
which represents an increase of $12.0 million from the net working capital of
$43.6 million as of June 30, 2005.
Cash and cash equivalents decreased slightly (1%) to $11.5 million as of
December 31, 2005. The majority of the cash and cash equivalents as of
December 31, 2005 are at our overseas operations in Europe and Asia-Pacific.
Trade receivables of $33.6 million were down $4.1 million versus last fiscal
year-end. The net change is consistent with the sales volume experienced in
the fourth fiscal quarter of the prior fiscal year versus the first and second
fiscal quarters of fiscal 2006.
Net inventory increased by $6.3 million versus June 30, 2005 to $54.8 million.
The majority of the increase came at the Company's domestic manufacturing
location, where a significant increase in the order rate has been experienced.
As compared to June 30, 2005, the Company's domestic operations saw a 48%
increase in its order backlog, including a 18% increase in orders to be shipped
in the next six months. On a consolidated basis, as of December 31, 2005, the
Company's backlog of orders to be shipped over the next six months approximates
$87.0 million, up 40% since the year began and up 60% compared with the same
period a year ago.
Net property, plant and equipment (PP&E) decreased $1.6 million versus June 30,
2005. This includes the addition of $2.1 million in capital expenditures,
primarily at the Company's Racine-based manufacturing operation, which was more
than offset by depreciation. In total, the Company expects to invest more than
$10 million in capital assets in fiscal 2006. The quoted lead times on certain
manufacturing equipment purchases may push some of the capital expenditures
into the next fiscal year. This compares to just over $12 million in fiscal
2005. The Company's capital program is focusing on modernizing key core
manufacturing, assembly and testing processes at its facilities around the
world.
Accounts payable as of December 31, 2005 of $17.9 million were down $3.8
million, or 18%, from June 30, 2005. Included in the June 30, 2005 balance
were $2.7 million of outstanding payables related to a flexible machining
system and grinding machine acquired at the Company's domestic manufacturing
operation during the fourth quarter of the prior fiscal year.
Total borrowings, notes payable and long-term debt, as of December 31, 2005
increased by $4.0 million, or 19%, to $25.3 million versus June 30, 2005.
This increase is primarily attributable to increased working capital
requirements, primarily inventory driven, due to significant increased sales
and order activities. In addition, the Company made pension contributions of
over $2.4 million in the first half of the year, a $2.3 million payment on a
nearly $3 million flexible machining system capitalized in fiscal 2005, and the
payment of fiscal 2005 incentive bonuses. In fiscal 2006, the Company expects
to make pension contributions of just under $4.5 million, compared to just over
$8.1 million in fiscal 2005.
Total shareholders' equity increased by $3.0 million to a total of $69.9
million. Retained earnings increased by $4.0 million. The net increase in
retained earnings included $5.0 million in net earnings reported year-to-date,
offset by $1.0 million in dividend payments. Net unfavorable foreign currency
translation of $1.9 million was reported as the U.S. Dollar strengthened
against the Euro and Asian currencies during the first six months. Accounting
for the balance of the change, treasury stock decreased nearly $0.9 million
from the prior fiscal year-end due to the exercising of stock options in the
first six months of fiscal 2006.
The Company's balance sheet remains very strong, there are no off-balance-sheet
arrangements, and we continue to have sufficient liquidity for near-term needs.
As of December 31, 2005, the Company had outstanding available borrowing under
its revolving line of credit of $16.5 million. Furthermore, the Company has
over $11.5 million in cash and cash equivalents at its subsidiaries around the
world. Management believes that available cash, our revolver facility, cash
generated from operations, existing lines of credit and access to debt markets
will be adequate to fund our capital requirements for the foreseeable future.
The Company has obligations under non-cancelable operating lease contracts and
a senior note agreement for certain future payments. A summary of those
commitments follows (in thousands):
10
Less than 1-3 3-5 After 5
Total 1 year Years Years Years
Contractual Obligations
Short-term debt $ 831 $ 831
Revolver borrowing $18,500 $18,500
Long-term debt $ 5,985 $ 2,854 $ 2,373 $ 758
Operating leases $ 8,535 $ 2,449 $ 2,951 $2,071 $1,064
Total obligations $33,851 $ 6,134 $23,824 $2,829 $1,064
New Accounting Releases
During December 2004, the Financial Accounting Standards Board ("FASB") issued
FSP FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP FAS
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 FAS 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.
Critical Accounting Policies
The preparation of this Quarterly Report requires management's judgment to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the dates of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. There can be no assurance that actual results
will not differ from those estimates.
Twin Disc's significant accounting policies are described in Note A in the
Notes to Consolidated Financial Statements in the Annual Report for June 30,
2005. There have been no significant changes to those accounting policies
subsequent to June 30, 2005.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to market risks from changes in interest rates,
commodities and foreign exchange. To reduce such risks, the Company selectively
uses financial instruments and other pro-active management techniques. All
hedging transactions are authorized and executed pursuant to clearly defined
policies and procedures, which prohibit the use of financial instruments for
trading or speculative purposes.
Interest rate risk - The Company's earnings exposure related to adverse
movements of interest rates is primarily derived from outstanding floating rate
debt instruments that are indexed to the prime and LIBOR interest rates. In
accordance with the $35,000,000 revolving loan agreement expiring October 31,
2007, 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
December 31, 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 $103,000.
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 40% of the Company's revenues in the three months
and six months ended December 31, 2005 and 2004 were denominated in currencies
other than the U.S. dollar. Of that total, approximately 55% was denominated
in euros with the balance composed of Japanese yen and the Australian and
11
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 fiscal 2006 and 2005 was
the Euro. At December 31, 2005 the Company had net outstanding forward
exchange contracts to purchase Euros in the value of $3,000,000 with a weighted
average maturity of 53 days. The fair value of the Company's contracts was a
loss of approximately $55,000 at December 31, 2005. 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.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
As required by new Rules 13a-15 and 15d-15 of the Securities Exchange Act of
1934, within the 90-day period prior to the filing of this report and under the
supervision and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, the Company has evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures. Based on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that such disclosure controls and procedures
are effective in ensuring that material information relating to the Company,
including its consolidated subsidiaries, is made known to the certifying
officers by others within the Company and its consolidated subsidiaries during
the period covered by this report.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls for
financial reporting or in other factors that could significantly affect such
internal controls subsequent to the date of such evaluation. However, in
connection with the new rules, the Company has been engaged in the process of
further reviewing and documenting its disclosure controls and procedures,
including its internal accounting controls. The Company may from time to time
make changes aimed at enhancing the effectiveness of its disclosure controls
and procedures, including its internal controls, to ensure that the Company's
systems evolve with its business.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Twin Disc is a defendant in several product liability or related claims
considered either adequately covered by appropriate liability insurance or
involving amounts not deemed material to the business or financial condition
of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no securities of the Company sold by the Company during the three
months ended December 31, 2005, which were not registered under the Securities
Act of 1933, in reliance upon an exemption from registration provided by
Section 4 (2) of the Act.
During the period covered by this report, the Company offered participants in
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the Twin Disc, Incorporated B The Accelerator 401(k) Savings Plan (the "Plan")
the option to invest their Plan accounts in a fund comprised of Company stock.
Participation interests of Plan participants in the Plan, which may be
considered securities, were not registered with the SEC. During the fiscal
year ended June 30, 2005, 83 Plan participants allocated an aggregate of
$153,000 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, 2002, the
Company filed a Form S-8 to register 100,000 shares of Company common stock
offered through the Plan, as well as an indeterminate amount of Plan
participation interests.
Issuer Purchases of Equity Securities
(c) Total Number (d) Maximum
of Shares Number of Shares
(a) Total (b) Purchased as Part that May Yet Be
Number of Average of Publicly Purchased Under
Period Shares Price Paid Announced Plans the Plans or
Purchased per Share or Programs Programs
October
1 - 31, 0 NA 101,514 98,486
2005
November
1 - 30, 790 39.15 102,304 97,696
2005
December
1 - 31, 0 NA 102,304 97,696
2005
Total 790
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 4. Submission of Matters to a vote of Security Holders
At the Annual Meeting of Shareholders held October 21, 2005, the number of
votes cast for, against or abstentions with respect to each matter were as
follows:
1. Election of Directors
a) To serve until Annual Meeting in 2008:
Michael E. Batten For: 2,404,840 Authority Withheld: 122,709
David A. Swift For: 2,403,571 Authority Withheld: 123,978
David R. Zimmer For: 2,227,421 Authority Withheld: 300,128
Item 5. Other Information.
The discussions in this report on Form 10-Q and in the documents incorporated
herein by reference, and oral presentations made by or on behalf of the Company
contain or may contain various forward-looking statements (particularly those
referring to the expectations as to possible strategic alternatives, future
business and/or operations, in the future tense, or using terms such as
"believe", "anticipate", "expect" or "intend") that involve risks and
uncertainties. The Company's actual future results could differ materially
from those discussed, due to the factors which are noted in connection with the
statements and other factors. The factors that could cause or contribute to
such differences include, but are not limited to, those further described in
the "Management's Discussion and Analysis".
Item 6. Exhibits.
31a Certfication of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31b Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32a Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32b Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TWIN DISC, INCORPORATED
(Registrant)
February 8, 2006 /S/JEFFREY S. KNUTSON
----------------------- ---------------------------
(Date) Jeffrey S. Knutson
Corporate Controller
Chief Accounting Officer