17
EXHIBIT 13
- - - - -
FINANCIAL HIGHLIGHTS
1999 1998 1997
Net Sales $168,142 $202,643 $189,942
Net Earnings (Loss) (1,018) 9,363 7,729
Basic Earnings (Loss) Per Share (.36) 3.30 2.78
Diluted Earnings (Loss) Per Share (.36) 3.24 2.75
Dividends Per Share .805 .76 .70
Average Shares Outstanding For The Year 2,834,909 2,833,663 2,781,174
Diluted Shares Outstanding For The Year 2,843,877 2,886,209 2,808,226
Sales and Earnings by Quarter
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
Net Sales $40,625 $40,108 $41,139 $46,270 $168,142
Gross Profit 9,220 9,275 7,316 10,270 36,081
Net Earnings (Loss) 588 (291) (1,782) 467 (1,018)
Basic Earnings (Loss)
Per Share .21 (.10) (.63) .16 (.36)
Diluted Earnings (Loss)
Per Share .21 (.10) (.63) .16 (.36)
Dividends Per Share .21 .21 .21 .175 .805
Stock Price Range:
High 27 3/4 24 1/4 22 3/16 20 3/16 37 3/4
Low 23 3/8 20 1/4 19 18 9/16 18 9/16
Sales and Earnings by Quarter
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
Net Sales $47,880 $53,994 $49,029 $51,740 $202,643
Gross Profit 9,936 12,250 12,810 15,132 50,128
Net Earnings 1,356 2,116 2,384 3,507 9,363
Basic Earnings Per Share .48 .75 .84 1.23 3.30
Diluted Earnings Per Share .47 .73 .82 1.21 3.24
Dividends Per Share .19 .19 .19 .19 .76
Stock Price Range:
High 30 5/8 34 1/8 33 3/8 33 1/8 34 1/8
Low 28 1/8 29 3/8 29 15/16 32 7/16 28 1/8
Based on average shares outstanding for the period.
In thousands of dollars except per share and stock price range statistics.
18
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net Sales, New Orders and Backlog
- - - - - - - - - - - - - - - -
Revenues declined in fiscal 1999, after six consecutive years of increases.
The decline was most severe at our domestic manufacturing operation, due
primarily to cyclical downturns in certain markets. Order rates for our
traditional products began to moderate in mid-fiscal 1998 and that, combined
with the completion of a truck transmission contract in mid-year, caused the
backlog of orders scheduled for shipment during the next six months to decline
29 percent to $54 million. At the end of fiscal 1999, the six-month backlog
had dropped to $40 million, or 26 percent below the year earlier.
Net sales increased 7 percent in fiscal 1998 to $203 million compared with
fiscal 1997, but declined 17 percent to $168 million in fiscal 1999.
Fiscal 1998 benefitted from the final six months of the truck transmissions
contract as well as growth in other product markets. Principal growth markets
were the pleasure craft marine market, supplied primarily from our Belgian
operation, and a variety of applications for power take-offs and clutches such
as irrigation, recycling, and oilfield. The 1999 sales decline resulted from
weak demand in some markets, customer inventory reductions adversely impacting
replacement part sales, and the absence of the truck transmission contract
completed in the previous year. Most significantly, lower demand from the
commercial marine market led to a 34 percent drop in domestic manufacturing
sales. Other important factors in the sales decline were low oil prices;
prices for commodities such as lumber and food, which were adversely affected
by the Asian economic crisis; and reduced capital spending in the agricultural
and construction equipment markets. Sales of lower-horsepower marine
transmissions for pleasure craft also were down, causing a modest decline in
sales from our Belgium plant. On the positive side, the acquisition of an
Italian manufacturing company and purchase of a domestic product line,
completed early in the second half of the fiscal year, provided a sales boost
and slight incremental earnings in the last five months of the fiscal year.
Both acquisitions provided products that strengthen our global market position
in industrial products. Technodrive S.p.A adds to the lower-horsepower end of
our marine transmission line and provides several complementary industrial
products. We also broadened our industrial product offerings with the
mechanical power take-off product line acquired from Rockford Powertrain, Inc.
Sales at our wholly-owned distribution companies varied by global region.
Domestically, solid improvement in 1998 gave way to modest declines in 1999 as
sales to customers serving the marine and logging markets fell off sharply.
In Europe, there was improvement in both years, but less so in 1999, while
sales in the Pacific Basin were down in both years due primarily to the weak
Asian economies and the strong U.S. dollar. Having lost a significant
customer to bankruptcy, our South African distribution subsidiary has reported
lower sales in each of the last two fiscal years. As a result of that and the
generally weak local economy, a plan to terminate operations at that
subsidiary was approved and resulted in a $1.1 million loss provision in the
fourth quarter.
19
The U.S. dollar strengthened in each of the last two fiscal years, but the
aggregate effect in 1999 was negligible. The currencies of the countries in
which Twin Disc operates were off approximately 10 percent in fiscal 1998,
which equated to a negative impact of about four percent on consolidated net
revenues. Price increases, implemented selectively in each year, raised
revenues by approximately the rate of inflation.
At the beginning of fiscal 1998, the backlog of orders scheduled for shipment
during the next six months was $76 million, about 10 percent of which was
attributable to the truck transmission contract that extended through the
first half of that year. With the contract completed at mid-year and order
rates for traditional products declining during the second half of the year,
particularly for the higher-horsepower marine transmissions, backlog at the
end of fiscal 1998 dropped to $54 million. In fiscal 1999, order rates
continued to decline with market demand and as a result of shortened delivery
lead times. By March 1999, the six-month backlog fell another 26 percent and
remained at the same $40-million level through the fourth quarter. The
largest components of the decline were marine transmissions and automatic
transmissions and torque converters for agricultural and construction
applications.
Margins, Costs and Expenses
Although manufacturing operations have continued to achieve incremental
improvements in manufacturing processes and machine utilization, lower sales
rates, beginning domestically in mid-1998, lowered gross margins in 1998 and
1999.
In fiscal 1998, improved productivity at our domestic plant, coupled with
greater volume in the first half of the year, provided for higher domestic
margins. Production volume at our Belgian subsidiary rose during the second
quarter, with the increased demand for marine transmissions favorably
impacting productivity and margins. Additionally, with a portion of its sales
denominated in the strong U.S. dollar, the margin at our Belgian operation
showed a significant increase for the year.
The gross margin for fiscal 1999 was more than three percentage points below
that of fiscal 1998, primarily because of the reduced domestic sales volume,
lower productivity, and one-time separation costs in the second and third
quarters. During the second fiscal quarter, there was a domestic salaried
staff reduction, and in the following period, a similar program was
implemented overseas along with a voluntary separation program for domestic
hourly associates. The total pre-tax impact of approximately $850,000 will be
recovered within one year. In Belgium the work-week was shortened utilizing a
government-supported layoff program. In addition to the one-time expenses, an
adverse productivity impact, primarily in the third quarter, was associated
with these actions.
Marketing, engineering, and administrative (MEA) expense in terms of dollars
increased by 9 percent in fiscal 1998 but rose only slightly as a percentage
of sales. The principal components of the increase were a write-off resulting
from the bankruptcy of a customer in South Africa, marketing and domestic
engineering personnel additions, and the expenses associated with a mid-year
acquisition.
20
In fiscal 1999, MEA expense declined 4 percent but increased sharply as a
percent of the reduced sales volume. Included in the expenses for the year
were severance costs associated with the second- and third-quarter reductions
in domestic and Belgian salaried staff. The total pre-tax impact of
approximately $350,000 will be recovered within one year.
In March 1999, we sold a portion of the investment in our Japanese affiliate,
Niigata Converter Company (NICO), which resulted in a pre-tax gain of $1.4
million (discussed further in Footnote D to the consolidated financial
statements), and reduced our ownership interest in NICO from 25 to 19.5
percent. Our share of NICO losses for fiscal 1999 versus modest earnings in
fiscal 1998 was the cause of the year-to-year decline in the earnings of
affiliates. Net other income and expense declined $1.1 million due to
increased foreign exchange losses in fiscal 1999 versus a gain on the sale of
land in fiscal 1998.
Interest, Taxes and Net Earnings
Short-term borrowings remained very low in fiscal 1998 and, as a result,
interest expense declined about 15 percent from the prior year. In fiscal
1999, significant additional debt was incurred to finance acquisitions, and
interest expense increased by almost 40 percent.
The effective income tax rates were relatively consistent through 1997 and
1998, with a slight increase in 1998 caused by a different proportion of
foreign earnings, generally taxed at a higher rate, and an additional accrual
for prior years. The substantial tax provision on almost breakeven pre-tax
earnings in fiscal 1999 was caused by: lower tax rates on losses domestically,
offset by higher rates on income overseas; and by the lack of a recordable tax
benefit on the provision for loss on the closure of our South African
distribution subsidiary.
Liquidity and Capital Resources
The net cash provided by operating activities in fiscal 1998 was $7 million.
The positive cash flows from earnings, depreciation, and a further reduction
in accounts receivable days sales outstanding (DSO) were partially offset by
the higher inventory needed to satisfy demand at our Belgium subsidiary and by
the prepayment of the domestic pension contribution. In fiscal 1999, with the
lower sales volume we were able to generate reductions in both inventory and
accounts receivable, and cash flows from operations totaled $9 million.
Despite the reductions, receivable DSO increased slightly and inventory
turnover declined.
For several years prior to fiscal 1998, fixed asset purchases were less than
depreciation as manufacturing cells were established and existing machinery
was rearranged. Expenditures for capital equipment exceeded depreciation by
about $2 million in fiscal 1998 as experience helped identify the equipment
needed to further improve cell performance. Due to the downturn and a desire
to conserve cash, fiscal 1999 capital expenditures were reduced from plan and
were about equal to depreciation and amortization. As conditions improve, we
expect the level of capital spending will rise and allow further refinement of
individual manufacturing cells.
21
After modest declines in working capital and current ratio in fiscal 1998,
those two measures of liquidity and financial strength dropped significantly
in fiscal 1999 due to the large increase in short-term borrowing. The
increase was due to financing the acquisitions of Technodrive and Rockford
with borrowings under our short-term lines of credit. At year-end,
negotiations were underway to replace a portion of the short-term debt with a
term revolver. The current ratio of 1.8 at June 30, 1999 (2.8 after adjusting
for the higher line-of-credit debt level), was down from the 3.2 reported at
the previous year-end.
The book value of the Company, and thus its reported capital structure, were
reduced by a non-cash charge to equity of $11.1 million at June 30, 1999. The
charge was caused primarily by using a more conservative mortality table to
estimate pension
liabilities and generally reflects the amount by which those liabilities
exceed plan assets. In accordance with applicable accounting standards, the
after-tax effect of the increased net liability was charged directly to equity
and shown in comprehensive income but did not impact reported primary
earnings. We do not believe the effect of the revised liability valuation
will have an impact on the underlying financial strength of Twin Disc.
The Company believes the capital resources available in the form of existing
cash, lines of credit (see Footnote F to the consolidated financial
statements) and funds provided by operations will be adequate to meet
anticipated capital expenditures and other foreseeable business requirements
in the future.
Other Matters
Year 2000 Readiness
The Company has assessed the potential impact of the Year 2000 (Y2K) date
change on its business systems and operations. New information systems, which
are prepared to handle the century date change, have been installed at all
operations. Substantial testing of these systems has occurred and will
continue prior to December 31, 1999. Network systems and other building,
service, and manufacturing equipment throughout the Company and its
subsidiaries have been inventoried, assessed, modified as necessary or
replaced, and are capable of handling the date change. In addition, suppliers
and service providers have been contacted to ensure they are actively involved
in programs to address the Year 2000 issue and provide uninterrupted service
to Twin Disc. Although the
Company cannot assure Y2K compliance by its key suppliers and distributors, no
major part or critical operation of the Company relies on a single source for
raw materials, supplies, or services, and the Company has multiple
distribution channels for its products. Should the Company discover that a
supplier or distributor will not be Y2K compliant, the Company believes it
will be able to find cost competitive alternate sources and continue its
production and distribution.
It is estimated that approximately $5.5 million has been spent on hardware,
software, consulting services and staff time during the past four years to
become Y2K compliant. Substantially all of the costs have been incurred at
this time. The work has been completed in the normal course of operations and
has not delayed other projects critical to the financial strength or operating
results of the Company.
22
The Company believes the Y2K issue will not pose significant operational
problems. However, if all Y2K issues are not properly identified, or
assessment, remediation, and testing are not completed for Y2K problems that
are identified, there can be no assurance that the Y2K issue will not have a
material adverse effect on the Company's relationships with its customers,
suppliers, distributors and others. In addition, there can be no assurance
that the Y2K issues of other entities will not have a material adverse impact
on the Company's systems or results of operations.
Environmental Matters
The Company is involved in various stages of investigation relative to
hazardous waste sites on the United States EPA National Priorities List. It
is not possible at this time to determine the ultimate outcome of those
matters; but, as discussed further in Footnote N to the consolidated financial
statements, they are not expected to affect materially the Company's
operations, financial position or cash flows.
Note on Forward-Looking Statements
Information in this report 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 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 the
forward-looking statements, other factors could cause actual results to be
materially different from what is presented here.
23
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 and 1998
(Dollars in thousands) 1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 4,136 $ 5,087
Trade accounts receivable, net 27,201 28,320
Inventories 54,500 53,280
Deferred income taxes 6,004 1,987
Other 5,906 4,906
------- -------
Total current assets 97,747 93,580
Property, plant and equipment, net 38,935 35,728
Investments in affiliates 6,663 8,727
Goodwill, net 15,235 1,435
Deferred income taxes 4,349 1,241
Intangible pension asset 3,385 4,082
Other assets 10,586 16,161
------- -------
$176,900 $160,954
======= =======
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 20,158 $ 276
Current maturities on long-term debt 2,857 -
Accounts payable 10,724 9,917
Accrued liabilities 21,022 19,360
------- -------
Total current liabilities 54,761 29,553
Long-term debt 17,112 19,949
Accrued retirement benefits 37,567 29,457
------- -------
109,440 78,959
Shareholders' equity:
Common shares authorized: 15,000,000;
issued: 3,643,630; no par value 11,653 11,653
Retained earnings 81,430 84,738
Accumulated other comprehensive (loss) income (8,516) 2,757
------- -------
84,567 99,148
Less treasury stock, at cost 17,107 17,153
------- -------
Total shareholders' equity 67,460 81,995
------- -------
$176,900 $160,954
======= =======
The notes to consolidated financial statements
are an integral part of these statements.
24
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1999, 1998 and 1997
(In thousands, except per share data)
1999 1998 1997
---- ---- ----
Net sales $168,142 $202,643 $189,942
Cost of goods sold 132,061 152,515 146,123
------- ------- -------
Gross profit 36,081 50,128 43,819
Marketing, engineering and
administrative expenses 32,755 34,092 31,219
------- ------- -------
Earnings from operations 3,326 16,036 12,600
Other income (expense):
Interest income 237 550 1,335
Interest expense (2,070) (1,505) (1,781)
Equity in net (loss)
earnings of affiliates (945) 651 307
Gain on partial sale of affiliate 1,355 - -
Loss on closure of subsidiary (1,140) - -
Other, net (749) 313 219
------- ------- -------
(3,312) 9 80
------- ------- -------
Earnings before income
taxes 14 16,045 12,680
Income taxes 1,032 6,682 4,951
------- ------- -------
Net (loss) earnings $ (1,018) $ 9,363 $ 7,729
======= ======= =======
(Loss) earnings per share data:
Basic (loss) earnings per share $ (.36) $ 3.30 $ 2.78
Diluted (loss) earnings per share (.36) 3.24 2.75
Shares outstanding data:
Average shares outstanding 2,835 2,834 2,781
Dilutive stock options 9 52 27
------- ------- -------
Diluted shares outstanding 2,844 2,886 2,808
======= ======= =======
The notes to consolidated financial statements
are an integral part of these statements.
25
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1999, 1998 and 1997
(In thousands) 1999 1998 1997
---- ---- ----
Cash flows from operating
activities:
Net (loss) earnings $(1,018) $ 9,363 $ 7,729
Adjustments to reconcile
to net cash provided
by operating activities:
Depreciation and amortization 6,454 5,607 5,489
(Loss) gain on sale of plant assets 38 (402) (127)
Gain on partial sale of affiliate (1,355) - -
Loss on closure of subsidiary 1,140 - -
Equity in net loss
(earnings) of affiliates 945 (651) (307)
Provision for deferred income taxes - 2,873 1,481
Dividends received from affiliate 625 495 300
Changes in operating assets and
liabilities:
Trade accounts receivable, net 3,898 3,361 1,267
Inventories 3,468 (5,673) 2,882
Other assets 6,274 (7,842) (954)
Accounts payable (1,360) (2,695) 3,463
Accrued liabilities (759) 2,777 (391)
Accrued retirement benefits (9,392) (244) (345)
------- ------- -------
Net cash provided by
operating activities 8,958 6,969 20,487
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of plant assets 24 574 501
Acquisitions of plant assets (6,439) (7,154) (4,734)
Acquisitions of businesses (16,785) (1,021) -
Payment for license agreement - (1,515) -
------- ------- -------
Net cash used by investing activities (23,200) (9,116) (4,233)
------- ------- -------
Cash flows from financing activities:
Increases (decreases) in notes
payable, net 15,000 112 (7,182)
Proceeds from long-term debt - - 4
Acquisition of treasury stock - (1,314) -
Proceeds from exercise of stock options 38 1,904 188
Dividends paid (2,282) (2,160) (1,947)
------- ------- -------
Net cash provided (used) by
financing activities 12,756 (1,458) (8,937)
------- ------- -------
Effect of exchange rate changes on cash 535 (291) (377)
------- ------- -------
Net change in cash and cash equivalents (951) (3,896) 6,940
Cash and cash equivalents:
Beginning of year 5,087 8,983 2,043
------- ------- -------
End of year $ 4,136 $ 5,087 $ 8,983
======= ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Interest $2,037 $ 1,505 $ 1,822
Income taxes 127 4,698 3,318
The notes to consolidated financial statements
are an integral part of these statements.
26
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
for the years ended June 30, 1999, 1998 and 1997
(In thousands) 1999 1998 1997
---- ---- ----
Common stock
Balance, June 30 $ 11,653 $ 11,653 $ 11,653
------- ------- -------
Retained earnings
Balance, July 1 84,738 77,424 71,658
Net (loss) earnings (1,018) 9,363 7,729
Cash dividends (2,282) (2,160) (1,947)
Stock options exercised (8) 111 (16)
------- ------- -------
Balance, June 30 81,430 84,738 77,424
------- ------- -------
Accumulated other comprehensive (loss) income
Balance, July 1 2,757 2,352 9,706
------- ------- -------
Foreign currency translation adjustment
Balance, July 1 3,418 6,060 10,326
Current adjustment (130) (2,642) (4,266)
------- ------- -------
Balance, June 30 3,288 3,418 6,060
------- ------- -------
Minimum pension liability adjustment, net
Balance, July 1 (661) (3,708) (620)
Current adjustment, net of related income
taxes ($7,125 in 1999, $(1,948)in 1998
and $1,975 in 1997) (11,143) 3,047 (3,088)
------- ------- -------
Balance, June 30 (11,804) (661) (3,708)
------- ------- -------
Accumulated other comprehensive (loss) income
Balance, June 30 (8,516) 2,757 2,352
------- ------- -------
Treasury stock, at cost
Balance, July 1 (17,153) (17,632) (17,836)
Shares acquired - (1,314) -
Stock options exercised 46 1,793 204
------- ------- -------
Balance, June 30 (17,107) (17,153) (17,632)
------- ------- -------
Shareholders' equity balance, June 30 $ 67,460 $ 81,995 $ 73,797
======= ======= =======
Comprehensive (loss) income
Net (loss) earnings $ (1,018) $ 9,363 $ 7,729
Other comprehensive (loss) income
Foreign currency translation adjustment (130) (2,642) (4,266)
Minimum pension liability adjustment (11,143) 3,047 (3,088)
------- ------- -------
Other comprehensive (loss) income (11,273) 405 (7,354)
------- ------- -------
Comprehensive (loss) income $(12,291) $ 9,768 $ 375
======= ======= =======
The notes to consolidated financial statements
are an integral part of these statements.
27
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 subsidiaries, all of which are
wholly owned. Certain foreign subsidiaries are included based on fiscal years
ending May 31, to facilitate prompt reporting of consolidated accounts. All
significant intercompany transactions have been eliminated.
Translation of Foreign Currencies--Substantially all foreign currency balance
sheet accounts are translated into United States dollars at the rates of
exchange prevailing at year-end. Revenues and expenses are translated at
average rates of exchange in effect during the year. Foreign currency
translation adjustments are recorded as a component of shareholders' equity.
Gains and losses from foreign currency transactions are included in earnings.
Cash Equivalents--The Company considers all highly liquid marketable
securities purchased with a maturity date of three months or less to be cash
equivalents.
Receivables--Trade accounts receivable are stated net of an allowance for
doubtful accounts of $534,000 and $647,000 at June 30, 1999 and 1998,
respectively.
Fair Value of Financial Instruments--The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents, accounts
receivable, accounts payable and short-term debt approximates fair value
because of the immediate short-term maturity of these financial instruments.
The carrying amounts reported for notes receivable and long-term debt
approximate fair value because the underlying instruments bear interest at, or
near, a current market rate.
Derivative Financial Instruments--Derivative financial instruments (primarily
forward foreign exchange contracts) may be utilized by the Company to hedge
foreign exchange rate risk. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. The Company does not enter into
financial instruments for trading or speculative purposes. For financial
reporting purposes, forward foreign exchange contracts used to hedge the
currency fluctuations on transactions denominated in foreign currencies are
marked-to-market and the resulting gains and losses, together with the
offsetting losses and gains on hedged transactions, are recorded in the "Other
income (expense)" caption in the statement of operations. At June 30, 1999 and
1998, the Company had outstanding forward foreign exchange contracts to
purchase $2,000,000 and $5,000,000, respectively, of Belgian francs with a
weighted average maturity of 33 days and 56 days, respectively.
Inventories--Inventories are valued at the lower of cost or market. Cost has
been determined by the last-in, first-out (LIFO) method for parent company
inventories, and by the first-in, first-out (FIFO) method for other
inventories.
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 amortized by depreciation charges. 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.
28
Investments in Affiliates--The majority of the Company's investments in 20% to
50%-owned affiliates are accounted for using the equity method. Investments in
less than 20%-owned affiliates are accounted for using the cost method.
Revenue Recognition--Revenues are recognized when products are shipped.
Goodwill--Goodwill consists of costs in excess of net assets of businesses
acquired. Goodwill is amortized using the straight-line method over its
estimated beneficial lives, not to exceed 40 years. Subsequent to an
acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate the goodwill should be evaluated for
possible impairment. Goodwill at June 30, 1999 and 1998 of $15,235,000 and
$1,435,000, respectively, are net of accumulated amortization of $839,000 and
$518,000, respectively.
Income Taxes--The Company recognizes deferred tax liabilities and assets for
the expected future income tax consequences of events that have been
recognized in the Company's financial statements. Under this method, deferred
tax liabilities and assets are determined based on the temporary differences
between the financial statement carrying amounts and the tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse.
The Company does not provide for taxes which would be payable if undistributed
earnings of its foreign subsidiaries or its foreign affiliate were remitted
because the Company either considers these earnings to be invested for an
indefinite period or anticipates that if such earnings were distributed,
the U.S.income taxes payable would be substantially offset by foreign tax
credits.
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.
Recently Issued Accounting Standards-During the first quarter of 1999, the
Company adopted Statement of Financial Accounting Standards (FAS) 130
"Comprehensive Income", which establishes standards for the reporting and
display of comprehensive income, as defined, and its components within the
financial statements.
The Company adopted FAS 131 "Disclosures about Segments of an Enterprise and
Related Information"in 1999. FAS 131 establishes new standards for the way
that public companies report information about operating segments in annual
financial statements (Note I).
The Company adopted FAS 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits" in 1999. FAS 132 revises disclosures about pensions
and other postretirement benefits (Note L).
During 1998, the Financial Accounting Standards Board (FASB) issued FAS 133
"Accounting for Derivative Instruments and Hedging Activities" which
establishes standards for accounting for derivatives and hedging activities.
In July 1999, the FASB issued FAS 137, "Deferral of the Effective Date of FAS
133", which delays the effective date of FAS 133 one year. As a result, FAS
133 will be effective for the Company's 2001 fiscal year. The adoption of FAS
133 is not anticipated to have a significant impact on the Company's earnings
or financial position.
Reclassification--Certain reclassifications have been made to the financial
statements of prior years to conform to the presentation for 1999 primarily as
a result of the adoption of FAS 130, FAS 131 and FAS 132.
29
B. INVENTORIES
The major classes of inventories at June 30 were as follows (in thousands):
1999 1998
---- ----
Finished parts $42,405 $43,848
Work-in-process 6,385 5,524
Raw materials 5,710 3,908
------ ------
$54,500 $53,280
====== ======
Inventories stated on a LIFO basis represent approximately 35% and 33% of
total inventories at June 30, 1999 and 1998, respectively. The approximate
current cost of the LIFO inventories exceeded the LIFO cost by $17,936,000 and
$18,252,000 at June 30, 1999 and 1998, respectively.
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 were as follows (in thousands):
1999 1998
---- ----
Land $ 1,409 $ 1,295
Buildings 22,698 19,065
Machinery and equipment 95,579 92,309
------ ------
119,686 112,669
Less accumulated depreciation 80,751 76,941
------ ------
$38,935 $35,728
====== ======
D. INVESTMENTS IN AFFILIATES
The Company's investments in affiliates consists of a 25% interest in a
domestic distributor of Twin Disc products and an investment in Niigata
Converter Company, LTD., Japan ("Niigata"), a manufacturer of power
transmission equipment. In March of 1999, the Company sold a portion of its
investment in Niigata in exchange for a $1.7 million note receivable due in
various annual amounts commencing December 31, 2002 through December 31, 2008.
The sale was a non-cash transaction for purposes of the consolidated statement
of cash flows. As a result, a pre-tax gain of $1,355,000 was recognized in
1999.
Prior to the sale the Company accounted for its 25% interest in Niigata using
the equity method. The Company recognized its share of Niigata's loss from
April 1, 1998 through the date of sale of $1.5 million. After the sale, the
Company accounted for its 19.5% interest using the cost method.
Undistributed earnings of the affiliates included in consolidated retained
earnings approximated $1,713,000 and $3,283,000 at June 30, 1999 and 1998,
respectively.
Combined condensed financial data for investments in affiliates accounted for
under the equity method of accounting are summarized below (in thousands). The
balance sheet information for 1999 includes the domestic distributor balances
only and the 1998 information includes both the domestic distributor and
Niigata balances. The statement of operations information for 1999 includes
the domestic distributor results from June 1, 1998 through May 31, 1999 and
Niigata results from April 1, 1998 through the date of sale; the 1998
information includes the domestic distributor results from June 1, 1997
through May 31, 1998 and Niigata results from April 1, 1997 through March 31,
1998.
30
1999 1998
---- ----
Current assets $ 8,734 $ 78,214
Other assets 5,463 40,171
------- -------
$ 14,197 $118,385
======= =======
Current liabilities $ 6,530 $ 83,066
Other liabilities 210 412
Shareholders' equity 7,457 34,907
------- -------
$ 14,197 $118,385
======= =======
1999 1998 1997
---- ---- ----
Net sales $116,115 $152,558 $166,171
Gross profit 13,008 20,897 19,911
Net (loss) earnings (3,780) 2,606 1,228
E. ACCRUED LIABILITIES
Accrued liabilities at June 30 were as follows (in thousands):
1999 1998
---- ----
Salaries and wages $ 4,522 $ 6,871
Retirement benefits 3,362 2,930
Other 13,138 9,559
------- -------
$ 21,022 $ 19,360
======= =======
F. DEBT
Notes payable consists of amounts borrowed under unsecured line of credit
agreements. Unused lines of credit total $14,804,000 at June 30, 1999. These
lines of credit are available predominantly at the LIBOR interest rate plus
1.25% and may be withdrawn at the option of the banks. The weighted average
interest rate of the lines outstanding at June 30, 1999 and 1998 was 5.88% and
6.8%, respectively.
Included in long-term debt is $20 million of 7.37% ten-year unsecured notes,
net of $60,000 unamortized debt issuance costs at June 30, 1999. These notes
contain certain covenants, including the maintenance of a current ratio of not
less than 1.5. Principal payments of $2,857,000 are due in the years 2000
through 2005, with the remaining balance due on June 1, 2006. Also included
in long-term debt is $29,000 of debt related to a foreign subsidiary.
G. LEASE COMMITMENTS
Approximate future minimum rental commitments under noncancellable operating
leases are as follows (in thousands):
Fiscal Year
-----------
2000 $2,755
2001 2,204
2002 1,404
2003 1,146
2004 605
Thereafter 613
-----
$8,727
=====
31
Total rent expense for operating leases approximated $2,941,000, $2,571,000
and $2,254,000 in 1999, 1998 and 1997, respectively.
H. SHAREHOLDERS' EQUITY
At June 30, 1999 and 1998, treasury stock consisted of 808,446 and 810,646
shares of common stock, respectively. The Company issued 2,200 and 86,850
shares of treasury stock in 1999 and 1998, respectively, to fulfill its
obligations under the stock option plans. The difference between the cost of
treasury shares issued and the option price is recorded in retained earnings.
The Company did not acquire any shares of treasury stock in 1999.
Cash dividends per share were $.805 in 1999, $.76 in 1998 and $.70 in 1997.
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.
I. 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, 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
------------- ------------ -----
1999
Net sales $156,661 $41,426 $198,087
Intra-segment sales 7,235 439 7,674
Inter-segment sales 21,545 726 22,271
Interest income 350 92 442
Interest expense 2,134 228 2,362
Income taxes 519 1,036 1,555
Depreciation and amortization 6,062 291 6,353
Segment earnings 1,147 170 1,317
Segment assets 152,251 25,448 177,699
Expenditures for segment assets 6,017 422 6,439
32
Manufacturing Distribution Total
1998 ------------- ------------ -----
Net sales $206,812 $46,981 $253,793
Intra-segment sales 24,358 502 24,860
Inter-segment sales 25,959 331 26,290
Interest income 626 129 755
Interest expense 1,481 229 1,710
Income taxes 6,246 1,649 7,895
Depreciation and amortization 5,244 274 5,518
Segment earnings 9,196 2,051 11,247
Segment assets 134,870 27,705 162,575
Expenditures for segment assets 6,626 528 7,154
1997
Net sales $189,375 $46,096 $235,471
Intra-segment sales 18,732 661 19,393
Inter-segment sales 26,002 134 26,136
Interest income 307 84 391
Interest expense 1,736 222 1,958
Income taxes 4,377 1,537 5,914
Depreciation and amortization 5,152 248 5,400
Segment earnings 6,707 2,576 9,283
Expenditures for segment assets 4,545 189 4,734
The following is a reconciliation of reportable segment net sales, earnings
(loss) and assets, to the Company's consolidated totals (in thousands):
1999 1998 1997
---- ---- ----
Net Sales
Total net sales from reportable segments $198,087 $253,793 $235,471
Elimination of inter-company sales (29,945) (51,150) (45,529)
------- ------- -------
Total consolidated net sales $168,142 $202,643 $189,942
======= ======= =======
Earnings (loss)
Total earnings (loss) from
reportable segments $ 1,317 $ 11,247 $ 9,283
Other corporate expenses (2,335) (1,884) (1,554)
------- ------- -------
Total consolidated net earnings (loss) $ (1,018) $ 9,363 $ 7,729
======= ======= =======
Assets
Total assets for reportable segments $177,699 $162,575
Elimination of inter-company assets (15,871) (13,570)
Corporate assets 15,072 11,949
------- -------
Total consolidated assets $176,900 $160,954
======= =======
(32)
Other significant items:
Segment Consolidated
Totals Adjustments Totals
1999 ------- ----------- ------------
Interest income $ 442 $ (205) $ 237
Interest expense 2,362 (292) 2,070
Income taxes 1,555 (523) 1,032
Depreciation and amortization 6,353 101 6,454
Expenditures for segment assets 6,439 - 6,439
1998
Interest income $ 755 $ (205) $ 550
Interest expense 1,710 (205) 1,505
Income taxes 7,895 (1,213) 6,682
Depreciation and amortization 5,518 89 5,607
Expenditures for segment assets 7,154 - 7,154
33
1997
Interest income $ 391 $ 944 $ 1,335
Interest expense 1,958 (177) 1,781
Income taxes 5,914 (963) 4,951
Depreciation and amortization 5,400 89 5,489
Expenditures for segment assets 4,734 - 4,734
All adjustments represent inter-company eliminations and corporate amounts.
Geographic information about the Company is summarized as follows (in
thousands):
1999 1998 1997
---- ---- ----
Net sales
United States $106,051 $133,193 $117,965
Other countries 62,091 69,450 71,977
------- ------- -------
Total $168,142 $202,643 $189,942
======= ======= =======
Long-lived assets
United States $ 65,540 $ 58,124
Belgium 10,362 9,578
Other countries 6,086 285
Elimination of inter-company assets (7,184) (1,854)
------- -------
Total $ 74,804 $ 66,133
======= =======
Included in earnings are foreign currency transaction gains (losses) of
$(682,000), $(343,000) and $334,000 in 1999, 1998 and 1997, respectively.
Two customers each accounted for approximately 8%, 11% and 11% of consolidated
net sales in 1999, 1998 and 1997, respectively.
J. STOCK OPTION PLANS
During fiscal 1999, the Company adopted the Twin Disc, Incorporated 1998 Stock
Option Plan for Non-Employee Directors, a non-qualified plan, for non-employee
directors to purchase up to 35,000 shares of common stock, and the Twin Disc,
Incorporated 1998 Incentive Compensation 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 165,000 shares of common stock. The plans
are administered by the Executive Selection and Compensation Committee of the
Board of Directors which has the authority to determine which officers and key
employees will be granted options. The grant of options to non-employee
directors is fixed at options to purchase 1,000 shares of common stock per
year or 600 at time of appointment. Except as described in the following
sentence, all options allow for exercise prices not less than the grant date
fair market value, immediately vest and expire ten years after the date of
grant. For options under the Incentive Compensation 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. In
addition, the Company has 128,900 incentive stock option plan options and
76,450 non-qualified stock option plan options outstanding at June 30, 1999
under the Twin Disc, Incorporated 1988 Incentive Stock Option plan and the
Twin Disc, Incorporated 1988 Non-Qualified Stock Option Plan for Officers, Key
Employees and Directors, respectively. The plans terminated during the year.
Shares available for future options as of June 30 were as follows:
1999 1998
---- ----
1998 Stock Option Plan for Non-Employee Directors 29,000 -
1998 Incentive Compensation Plan 159,500 -
1988 Non-Qualified Stock Option Plan for Officers,
Key Employees and Directors - 10,850
1988 Incentive Stock Option Plan - 30,550
34
Stock option transactions under the plans during 1999, 1998 and 1997 were
as follows:
Weighted Weighted Weighted
Average Average Average
1999 Price 1998 Price 1997 Price
---- -------- ---- ------- ---- --------
Non-qualified stock
options:
Options outstanding
at beginning of year 80,500 $22.50 94,150 $21.71 95,350 $21.69
Granted 19,000 24.69 13,100 28.75 15,100 21.88
Cancelled (14,700) 25.08 - - (10,400) 23.32
Exercised (200) 26.00 (26,750) 22.81 (5,900) 19.03
------ ------- ------
Options outstanding
at June 30 84,600 $22.55 80,500 $22.50 94,150 $21.71
====== ======= ======
(34)
Options price range
($14.00 - $20.00)
Number of shares 31,300
Weighted average price $19.10
Weighted average remaining life 4.90 years
Options price range
($20.875 - $28.75)
Number of shares 53,300
Weighted average price $24.58
Weighted average remaining life 7.02 years
Weighted Weighted Weighted
Average Average Average
1999 Price 1998 Price 1997 Price
---- -------- ---- ------- ---- -------
Incentive stock options:
Options outstanding
at beginning of year 124,300 $23.57 161,550 $21.60 151,450 $21.52
Granted 33,900 25.80 29,900 29.18 24,250 22.05
Cancelled (23,950) 26.58 (7,050) 20.15 (10,150) 22.57
Exercised (2,000) 16.63 (60,100) 21.53 (4,000) 18.81
------- ------- -------
Options outstanding
at June 30 132,250 $23.70 124,300 $23.57 161,550 $21.60
======= ======= =======
Options price range
($14.00 - $20.00)
Number of shares 34,100
Weighted average price $18.87
Weighted average remaining life 4.82 years
Options price range
($20.875 - $28.75)
Number of shares 92,650
Weighted average price $24.99
Weighted average remaining life 7.48 years
35
Options price range
($31.625 - $32.25)
Number of shares 5,500
Weighted average price $31.74
Weighted average remaining life 9.00 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 statement of operations. Had the Company
recognized compensation expense determined based on the fair value at the
grant date for awards under the plans, consistent with the method prescribed
by FAS 123, the net earnings and earnings per share would have been as follows
(in thousands, except per share amounts):
1999 1998 1997
---- ---- ----
Net earnings (loss)
As reported $(1,018) $9,363 $7,729
Pro forma (1,277) 9,125 7,554
Basic earnings (loss) per share
As reported $ (.36) $ 3.30 $ 2.78
Pro forma (.45) 3.22 2.72
Diluted earnings (loss) per share
As reported $ (.36) $ 3.24 $ 2.75
Pro forma (.45) 3.16 2.69
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: 19% volatility, 2.5% annual dividend yield, interest
rates based on expected terms and grant dates, a 5 year term and an exercise
price equal to the fair market value on the date of grant except for incentive
options granted to greater than 10% shareholders which are calculated using a
3 year term and an exercise price equal to 110% of the fair market value on
the date of grant. For those options granted during 1999, 1998 and 1997 with
exercise prices equal to the grant date fair market value, the exercise prices
and weighted average fair values of the options were $25.26 and $5.02 in 1999,
$28.75 and $5.81 in 1998 and $21.88 and $4.61 in 1997, respectively. For those
options granted with exercise prices greater than the grant date fair market
value, the exercise prices and weighted average fair values of the options
were $28.08 and $2.71 in 1999, $31.63 and $3.26 in 1998, $24.06 and $2.69 in
1997, respectively.
K. 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 $2,505,000, $3,104,000 and
$3,050,000 in 1999, 1998 and 1997, respectively. Total engineering and
development costs were $7,829,000, $8,833,000 and $8,288,000 in 1999, 1998 and
1997, respectively.
36
L. RETIREMENT PLANS
The Company has noncontributory, qualified defined benefit pension plans
covering substantially all domestic employees 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 contributed for federal income tax purposes.
Domestic plan assets consist principally of listed equity and fixed income
securities.
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.
The following table sets forth the Company's defined benefit pension plans'
and other postretirement benefit plan's funded status and the amounts
recognized in the Company's balance sheets and income statements as of June 30
(dollars in thousands):
Other
Post
Pension retirement
Benefits Benefits
---------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation, beginning of year $104,156 $ 94,479 $ 28,619 $ 27,321
Service cost 1,517 1,328 23 21
Interest cost 7,254 7,235 1,978 2,152
Actuarial loss 11,384 8,835 4,548 1,558
Benefits paid (8,446) (7,721) (2,419) (2,433)
------- ------- ------ ------
Benefit obligation, end of year $115,865 $104,156 $ 32,749 $ 28,619
======= ======= ====== ======
Change in plan assets:
Fair value of assets, beginning of year $100,265 $ 76,661 $ - $ -
Actual return on plan assets 4,279 20,525 - -
Employer contribution 2,185 10,800 2,419 2,433
Benefits paid (8,446) (7,721) (2,419) (2,433)
------- ------- ------ ------
Fair value of assets, end of year $ 98,283 $100,265 $ - $ -
======= ======= ====== ======
Funded status $(17,582)$ (3,891)$(32,749)$(28,619)
Unrecognized net transition obligation 836 1,043 - -
Unrecognized actuarial loss 19,972 4,147 8,755 4,397
Unrecognized prior service cost 3,167 3,839 - -
------ ------ ------ -------
Net amount recognized $ 6,393 $ 5,138 $(23,994)$(24,222)
====== ====== ====== =======
Amounts recognized in the balance sheet
consist of:
Prepaid benefit cost $ - $ 8,031 $ - $ -
Accrued benefit liability (16,343) (8,058) (23,994) (24,222)
Intangible asset 3,385 4,082 - -
Deferred tax asset 7,547 422 - -
Minimum pension liability adjustment 11,804 661 - -
------- ------ ------- -------
Net amount recognized $ 6,393 $ 5,138 $(23,994)$(24,222)
======= ====== ======= =======
37
Weighted average assumptions as of June 30:
Discount rate 7.25% 7.25% 7.25% 7.25%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.00% 4.50%
Pension Benefits
--------------------------
1999 1998 1997
---- ---- ----
Service cost $ 1,517 $ 1,328 $ 1,751
Interest cost 7,254 7,235 7,217
Expected return on plan assets (8,617) (6,750) (5,312)
Amortization of prior service cost 672 672 995
Amortization of transition obligation 183 185 187
Recognized net actuarial loss (gain) 102 92 (1,329)
------ ------ ------
Net periodic benefit cost $ 1,111 $ 2,762 $ 3,509
====== ====== ======
Postretirement Benefits
--------------------------
1999 1998 1997
---- ---- ----
Service cost $ 23 $ 21 $ 27
Interest cost 1,978 2,153 2,128
Expected return on plan assets - - -
Amortization of prior service cost - - -
Amortization of transition obligation - - -
Recognized net actuarial loss 399 205 138
------ ------ ------
Net periodic benefit cost $ 2,400 $ 2,379 $ 2,293
====== ====== ======
Effective January 1, 1998, the Company changed certain of its actuarial
assumptions including the mortality table used and the assumed retirement age
for the defined benefit plans and the postretirement plan. The changes
resulted in an increase to the benefit obligation and unrecognized actuarial
loss of approximately $10 million.
Effective as of January 1, 1997, the Twin Disc, Incorporated Retirement Plan
for Salaried Employees was amended to freeze the benefit formula in effect
prior to January 1, 1997 and to change the formula for benefit accruals to a
cash balance pension plan. The effect of this change was to decrease the
unrecognized prior service cost by $4.2 million.
The pension plans held 62,402 and 62,402 shares of Company stock with a fair
market value of $1,252,000 and $1,888,000 at June 30, 1999 and 1998,
respectively.
The assumed weighted average health care cost trend rate was 6% in fiscal year
1999 and remains constant thereafter. A 1% increase in the assumed health
care cost trend would increase the accumulated postretirement benefit
obligation by approximately $2.3 million and the interest cost by
approximately $140,000. A 1% decrease in the assumed health care cost trend
would decrease the accumulated postretirement benefit obligation by
approximately $2.1 million and the interest cost by approximately $130,000.
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 $1,572,000, $1,582,000 and $1,487,000 in 1999,
1998 and 1997, respectively.
38
M. INCOME TAXES
United States and foreign earnings (loss) before income taxes were as follows
(in thousands):
1999 1998 1997
---- ---- ----
United States $(3,555) $ 7,944 $ 6,009
Foreign 3,569 8,101 6,671
------ ------ ------
$ 14 $16,045 $12,680
====== ====== ======
The provision (credit) for income taxes is comprised of the following (in
thousands):
1999 1998 1997
---- ---- ----
Currently payable:
Federal $(1,376) $ 154 $ 913
State 49 114 100
Foreign 2,359 3,541 2,457
------ ------ ------
1,032 3,809 3,470
------ ------ ------
Deferred:
Federal 402 2,582 1,559
State (292) 183 (51)
Foreign (110) 108 (27)
------ ------ ------
- 2,873 1,481
------ ------ ------
$ 1,032 $ 6,682 $ 4,951
====== ====== ======
The components of the net deferred tax asset as of June 30, were as
follows (in thousands):
1999 1998
---- ----
Deferred tax assets:
Retirement plans and employee benefits $12,826 $ 8,074
Alternative minimum tax credit
carryforwards 599 143
Foreign tax credit carryforwards 1,968 250
State net operating loss and other
state credit carryforwards 1,075 -
Research credit carryforwards 135 -
Other 2,581 3,039
------ ------
19,184 11,506
------ ------
Deferred tax liabilities:
Property, plant and equipment 6,182 5,488
Other 2,649 2,790
------ ------
8,831 8,278
------ ------
Total net deferred tax assets $10,353 $3,228
====== ======
39
Following is a reconciliation of the applicable U.S. federal income taxes to
the actual income taxes reflected in the statements of operations:
1999 1998 1997
---- ---- ----
U.S. federal income tax at 34% $ 5 $5,455 $4,311
Increases (reductions)
in tax resulting from:
Foreign tax items 463 173 30
Accrual for prior years 74 705 470
Other, net 490 349 140
---- ----- -----
$1,032 $6,682 $4,951
==== ==== ====
N. CONTINGENCIES
The Company is involved in various stages of investigation relative to
hazardous waste sites, two of which are on the United States EPA National
Priorities List (Superfund sites). The Company's assigned responsibility at
each of the Superfund sites is less than 2%. The Company has also been
requested to provide administrative information related to two other potential
Superfund sites but has not yet been identified as a potentially responsible
party. Additionally, the Company is subject to certain product liability
matters in the normal course of business.
At June 30, 1999, the Company has accrued approximately $1,050,000, which
represents management's best estimate available for possible losses related to
these contingencies. This amount has been provided over the past several
years. Based on the information available, the Company does not expect that
any unrecorded liability related to these matters would materially affect the
consolidated financial position, results of operations or cash flows.
O. ACQUISITIONS
In January 1999, the Company purchased the mechanical power take-off product
business from Rockford Powertrain, Inc. for approximately $13.5 million. This
transaction was accounted for using the purchase method of accounting and
resulted in goodwill of approximately $11 million which is being amortized
over 30 years. In February 1999, the Company purchased Technodrive S.p.A of
Decima, Italy for approximately $3.9 million, net of cash acquired of
$700,000. This transaction was accounted for using the purchase method of
accounting and resulted in goodwill of approximately $2.9 million which is
being amortized over 25 years. Technodrive manufactures industrial power take-
offs, clutches, hydraulic pump mount drives and marine transmissions. The pro
forma affects of the acquisitions are not significant to the net sales, net
(loss) earnings, and earnings per share amounts reported in the financial
statements.
P. CLOSURE OF SUBSIDIARY
In June 1999, the Company approved a plan to terminate operations at its South
African subsidiary, Twin Disc (South Africa) Pty. Ltd, early in fiscal 2000.
The Company has recorded a loss of $1,140,000 related to the termination of
operations, which consists primarily of the recognition of cumulative
translation losses of $829,000 with the remaining amounts related to disposals
of inventories and fixed assets, and severance benefits. The results of the
subsidiary's operations through June 30, 1999 are included in the consolidated
financial statements.
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Twin Disc, Incorporated
Racine, Wisconsin
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the financial position of Twin Disc, Incorporated and Subsidiaries at June 30,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 23, 1999
41
FINANCIAL SUMMARY
1999 1998 1997 1996 1995
(In thousands of dollars, except where noted)
Statement of Operations
Net sales $168,142 $202,643 $189,942 $176,657 $164,232
Costs and expenses,
including marketing,
engineering and
administrative 164,816 186,607 177,342 164,486 154,347
Earnings
from operations 3,326 16,036 12,600 12,171 9,885
Other income
(expense) (3,312) 9 80 (1,264) (1,301)
Earnings
before income taxes 14 16,045 12,680 10,907 8,584
Income taxes 1,032 6,682 4,951 4,348 2,912
Net earnings (loss) (1,018) 9,363 7,729 6,559 5,672
Balance Sheet
Assets
Cash and equivalents 4,136 5,087 8,983 2,043 3,741
Receivables, net 27.201 28,320 32,428 34,917 29,247
Inventories 54,500 53,280 47,844 51,083 47,157
Other current assets 11,910 6,893 8,707 8,597 10,345
Total current assets 97,747 93,580 97,962 96,640 90,490
Investments and
other assets 40,218 31,646 26,544 30,344 30,463
Fixed assets less
accumulated
depreciation 38,935 35,728 34,249 35,715 37,348
Total assets 176,900 160,954 158,755 162,699 158,301
Liabilities and Shareholders' Equity
Current liabilities 54,761 29,553 29,621 34,002 36,852
Long-term debt 17,112 19,949 19,944 19,938 14,000
Deferred liabilities 37,567 29,457 35,393 33,578 32,827
Shareholders' equity 67,460 81,995 73,797 75,181 74,622
Total liabilities and
shareholders' equity 176,900 160,954 158,755 162,699 158,301
42
FINANCIAL SUMMARY (CONTINUED)
1999 1998 1997 1996 1995
(In thousands of dollars, except where noted)
Comparative Financial Information
Per share statistics
Basic earnings (loss) (.36) 3.30 2.78 2.36 2.03
Diluted earnings (loss) (.36) 3.24 2.75 2.34 2.02
Dividends .805 .76 .70 .70 .70
Shareholders' equity 23.79 28.94 26.48 27.07 26.75
Return on equity (1.5%) 11.4% 10.5% 8.7% 7.6%
Return on assets (.6%) 5.8% 4.9% 4.0% 3.6%
Return on sales (.6%) 4.6% 4.1% 3.7% 3.5%
Average shares
outstanding 2,834,909 2,833,663 2,781,174 2,776,805 2,790,111
Diluted shares
outstanding 2,843,877 2,886,209 2,808,226 2,805,123 2,812,703
Number of shareholder
accounts 1,138 774 845 913 996
Number of employees 1,029 1,078 1,081 1,080 1,097
Additions to plant
and equipment 6,439 7,154 4,734 4,140 4,290
Depreciation 5,648 5,205 5,141 5,071 4,792
Net working capital 42,986 64,027 68,341 62,638 53,638
43
DIRECTORS
MICHAEL E. BATTEN
Chaiman, Chief Executive Officer
MICHAEL H. JOYCE
President, Chief Operating Officer
JAMES O. PARRISH
Vice President-Finance & Treasurer
JOHN A. MELLOWES
Chairman and Chief Executive Officer, Charter Manufacturing Co., (A privately
held producer of bar, rod wire and wire parts), Mequon, Wisconsin
PAUL J. POWERS
Chairman, President-Chief Executive Officer, Commercial Intertech Corp.,
(Manufacturer of Hydraulic Components, Fluid Purification Products, Pre-
Engineered Buildings and Stamped Metal Products), Youngstown, Ohio
RICHARD T. SAVAGE
Chairman and retired President-Chief Executive Officer, Modine Manufacturing
Company, (Manufacturer of Heat Exchange Equipment), Racine, Wisconsin
DAVID L. SWIFT
Retired Chairman, President-Chief Executive Officer, Acme-Cleveland
Corporation, (Manufacturer of Diversified Industrial Products), Pepper Pike,
Ohio
GEORGE E. WARDEBERG
Chairman, Chief Executive Officer, WICOR, Inc. (Parent Company of Wisconsin
Gas Company, Sta-Rite Industries, Shurflo Pump Manufacturing and Hypro
Corporation), Milwaukee, Wisconsin
DAVID R. ZIMMER
Former Executive Vice President-Operations, United Dominion Industries,
(Manufacturer of Diversified Engineered Products), Charlotte, North Carolina
44
OFFICERS
MICHAEL E. BATTEN
Chairman, Chief Executive Officer
MICHAEL H. JOYCE
President, Chief Operating Officer
JAMES O. PARRISH
Vice President-Finance & Treasurer
HENRI CLAUDE FABRY
Vice President-Marine and Distribution
LANCE J. MELIK
Vice President-Corporate Development
Vice President-Transmission and Industrial Products
FRED H. TIMM
Corporate Controller & Secretary
PAUL A. PELLIGRINO
Vice President-Engineering
ARTHUR A. ZINTEK
Vice President-Human Resources
45
CORPORATE DATA
ANNUAL MEETING
Twin Disc Corporate Offices, Racine, WI, 2:00 PM, October 15, 1999
SHARES TRADED
New York Stock Exchange: Symbol TDI
ANNUAL REPORT ON SECURITIES AND EXCHANGE COMMISSION FORM 10-K
SINGLE COPIES OF THE COMPANY'S 1999 ANNUAL REPORT ON SECURITIES AND
EXCHANGE
COMMISSION FORM 10-K WILL BE PROVIDED WITHOUT CHARGE TO
SHAREHOLDERS AFTER
SEPTEMBER 30, 1999, UPON WRITTEN REQUEST DIRECTED TO THE SECRETARY,
TWIN DISC,
INCORPORATED, 1328 RACINE STREET, RACINE, WISCONSIN 53403.
TRANSFER AGENT & REGISTRAR
Firstar Trust Company, Milwaukee, Wisconsin
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, Milwaukee, Wisconsin
GENERAL COUNSEL
von Briesen, Purtell, & Roper,s.c., Milwaukee, Wisconsin
CORPORATE OFFICES
Twin Disc, Incorporated, Racine, Wisconsin 53403, Telephone: (414) 638-4000
WHOLLY OWNED SUBSIDIARIES
Twin Disc International S.A., Nivelles, Belgium
Twin Disc Spain, S.A., Madrid, Spain
Twin Disc Italia S.R.L., Viareggio, Italy
Technodrive S.p.A, Decima, Italy
Twin Disc (Pacific) Pty. Ltd., Brisbane, Queensland, Australia
Twin Disc (Far East) Ltd., Singapore
Twin Disc (South Africa) Pty. Ltd., Johannesburg, South Africa
Mill-Log Equipment Co., Inc., Coburg, Oregon
Southern Diesel Systems Inc., Miami, Florida
TD Electronics, Inc., Loves Park, Illinois
MANUFACTURING FACILITIES
Racine, Wisconsin; Nivelles, Belgium; Decima, Italy
SALES OFFICES
DOMESTIC
Racine, Wisconsin; Coburg, Oregon; Seattle, Washington; Miami, Florida;
Jacksonville, Florida
OVERSEAS
Nivelles, Belgium; Brisbane and Perth Australia; Singapore; Johannesburg,
South Africa; Madrid, Spain; Viareggio, Italy; Decima, Italy; Chambery France
MANUFACTURING LICENSES
Niigata Converter Company, Ltd., Tokyo, Japan; Transfluid S.R.L., Milan,
Italy; Nakamura Jico Co. Ltd., Tokyo, Japan; Hindustan Motors, Ltd., Madras,
India