1
TWIN DISC, INCORPORATED
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003 Commission File Number 1-7635
TWIN DISC, INCORPORATED
(Exact name of registrant as specified in its charter)
Wisconsin 39-0667110
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1328 Racine Street, Racine, Wisconsin 53403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (262) 638-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
At March 31 2003, the registrant had 2,797,832 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
(Unaudited)
March 31 June 30
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 4,851 $ 7,313
Trade accounts receivable, net 31,853 29,006
Inventories, net 47,737 44,504
Deferred income taxes 4,505 4,505
Other 6,936 4,126
-------- --------
Total current assets 95,882 89,454
Property, plant and equipment, net 29,371 29,549
Investment in affiliate 2,524 2,439
Goodwill 12,651 12,311
Deferred income taxes 12,306 12,246
Prepaid pension asset 1,383 1,383
Other assets 7,947 9,898
-------- --------
$162,064 $157,280
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 1,904 $ 1,708
Current maturities on long-term debt 2,857 2,857
Accounts payable 17,863 13,042
Accrued liabilities 24,143 22,312
-------- --------
Total current liabilities 46,767 39,919
Long-term debt 16,579 18,583
Accrued retirement benefits 42,402 39,797
-------- --------
105,748 98,299
Minority Interest 479 472
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 81,741 87,524
Accumulated other comprehensive loss (19,962) (23,187)
-------- --------
73,432 75,990
Less treasury stock, at cost 17,595 17,481
-------- --------
Total shareholders' equity 55,837 58,509
-------- --------
$162,064 $157,280
-------- --------
-------- --------
T notes to condensed consolidated financial statements are an integral part of
this statement. Amounts in thousands.
3
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2003 2002 2003 2002
---- ---- ---- ----
Net sales $47,177 $41,928 $126,491 $126,545
Cost of goods sold 36,752 32,314 103,457 98,423
------- ------- ------- -------
10,425 9,614 23,034 28,122
Marketing, engineering and
administrative expenses 9,041 9,238 26,331 25,784
Restructuring of operations - - 2,042 -
Interest expense 350 423 983 1,355
Other income, net (133) (588) (238) (879)
------- ------- ------- -------
9,258 9,073 29,118 26,260
------- ------- ------- -------
Earnings (loss) before income taxes
and minority interest 1,167 541 (6,084) 1,862
Income taxes 653 546 (1,779) 1,150
------- ------- ------- -------
Earnings (loss) before minority
interest 514 (5) (4,305) 712
Minority interest, net of
income taxes (5) (32) (4) (54)
------- ------- ------- -------
Net earnings (loss) $ 509 ($ 37) ($ 4,309) $ 658
------- ------- ------- -------
------- ------- ------- -------
Dividends per share $ 0.175 $ 0.175 $ 0.525 $ 0.525
Earnings (loss) per share data:
Basic earnings (loss) per share $ 0.18 ($ 0.01) ( $ 1.54) $ 0.23
Diluted earnings(loss)per share $ 0.18 ($ 0.01) ( $ 1.54) $ 0.23
Shares outstanding data:
Average shares outstanding 2,806 2,808 2,807 2,808
Dilutive stock options - - - -
------- ------- ------- -------
Diluted shares outstanding 2,806 2,808 2,807 2,808
------- ------- ------- -------
------- ------- ------- -------
Comprehensive income:
Net earnings (loss) $ 509 ($ 37) ($ 4,309) $ 658
Foreign currency translation
adjustment 1,775 (546) 3,225 336
------- ------- ------- -------
Comprehensive income (loss) $ 2,284 ($ 583) ($ 1,084) $ 994
------- ------- ------- -------
------- ------- ------- -------
In thousands of dollars except per share statistics. Per share figures are
based on shares outstanding data.
The notes to condensed consolidated financial statements are an integral part
of this statement.
4
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31
2003 2002
---- ----
Cash flows from operating activities:
Net (loss) earnings ($4,309) $ 658
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 4,191 4,230
Equity in earnings of affiliate (270) (385)
Dividends received from affiliate 185 267
Minority interest 4 54
Restructuring of operations 1,463 -
Write-off of impaired asset 773 -
Net change in working capital,
excluding cash and debt, and other 1,330 4,726
------ ------
3,367 9,550
------ ------
Cash flows from investing activities:
Acquisitions of fixed assets (2,765) (1,192)
Proceeds from sales of fixed assets 37 30
------ ------
(2,728) (1,162)
------ ------
Cash flows from financing activities:
Decrease in notes payable, net (2,056) (3,446)
Acquisition of treasury stock (114) -
Dividends paid (1,474) (1,474)
------ ------
(3,644) (4,920)
------ ------
Effect of exchange rate changes on cash 543 (83)
------ ------
Net change in cash and cash equivalents (2,462) 3,385
Cash and cash equivalents:
Beginning of period 7,313 5,961
------ ------
End of period $ 4,851 $ 9,346
------ ------
------ ------
The notes to condensed consolidated financial statements are an integral part
of this statement. Amounts in thousands.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The unaudited financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC)
and, in the opinion of the Company, include all adjustments, consisting only
of normal recurring items, necessary for a fair statement of results for each
period. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. The Company believes that the disclosures made are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with financial statements and the
notes thereto included in the Company's latest Annual Report. The year end
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles.
Certain amounts in the prior year financial statements have been reclassified
to conform to the current year presentation.
B. INVENTORY
The major classes of inventories were as follows (in thousands):
March 31, June 30
2003 2002
---------- ---------
Inventories:
Finished parts $35,562 $35,485
Work in process 7,908 5,668
Raw materials 4,267 3,351
------- -------
$47,737 $44,504
------- -------
------- -------
C. DEBT
During the second fiscal quarter, the Company finalized a new three-year, $20
million revolving line of credit facility which matures on October 31, 2005.
In accordance with the loan agreement, the Company has the option of borrowing
at the prime interest rate or LIBOR plus an additional "Add-On", between 1%
and 2.75%, depending on the Company's Total Funded Debt to EBITDA ratio. As
of March 31, 2003, the Company had $8 million outstanding under the facility,
borrowed at LIBOR plus 2.75%. For the quarter ended March 31, 2003, the
Company was in compliance with all of its financial covenants under both the
revolving line of credit and senior note facilities.
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D. CONTINGENCIES
The Company is involved in various stages of investigation relative to
hazardous waste sites, one of which is on the United States EPA National
Priorities List (Superfund sites). The Company's assigned responsibility at
the Superfund site is less than 3%. The Company's involvement in a second
Superfund site was settled during the third quarter for an amount less than
had been previously reserved. The excess reserve of $100,000 was reversed
against cost of sales.
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 March 31, 2003 the Company has accrued approximately $340,000, 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.
E. WARRANTY
Twin Disc engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its suppliers.
However, its warranty obligation is affected by product failure rates, the
extent of the market affected by the failure and the expense involved in
satisfactorily addressing the situation. The warranty reserve is established
based on our best estimate of the amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. When evaluating
the adequacy of the reserve for warranty costs, management takes into
consideration the term of the warranty coverage, historical claim rates and
costs of repair, knowledge of the type and volume of new products and economic
trends. While we believe the warranty reserve is adequate and that the
judgment applied is appropriate, such amounts estimated to be due and payable
in the future could differ materially from what actually transpires.
The following is a listing of the activity in the warranty reserve during the
period ended March 31, 2003.
Three Months Ended Nine Months Ended
March 31, 2003 March 31, 2003
Reserve balance, beginning of period $5,545,000 $5,294,000
Current period expense 1,025,000 2,727,000
Payments or credits to customers (927,000) (2,584,000)
Adjustment to preexisting warranties - 206,000
--------- ---------
Reserve balance, end of period $5,643,000 $5,643,000
========= =========
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F. BUSINESS SEGMENTS
Information about the Company's segments is summarized as follows (in
thousands):
Three Months Ended Nine Months Ended
March 31 March 31
2003 2002 2003 2002
---- ---- ---- ----
Manufacturing segment sales $40,804 $37,535 $107,696 $110,651
Distribution segment sales 16,228 14,167 45,748 43,975
Inter/Intra segment sales (9,855) (9,774) (26,953) (28,081)
------- ------- ------- -------
Net sales $47,177 $41,928 $126,491 $126,545
------- ------- ------- -------
------- ------- ------- -------
Manufacturing segment earnings(loss)$ 1,072 $ 328 $ (5,921) $ 1,114
Distribution segment earnings 777 1,006 1,939 2,776
Inter/Intra segment loss (682) (793) (2,102) (2,028)
------ ------- ------- -------
Earnings (loss) before income
taxes and minority interest $ 1,167 $ 541 $ (6,084) $ 1,862
------- ------- ------- -------
------- ------- ------- -------
Assets March 31, June 30,
2002 2002
------------- -------------
Manufacturing segment assets $143,437 $139,810
Distribution segment assets 31,942 30,275
Corporate assets and elimination
of inter-company assets (13,315) (12,805)
-------- --------
$162,064 $157,280
-------- --------
-------- --------
G. STOCK OPTION PLANS
The Company accounts for its stock option plans under the guidelines of
Accounting Principles Board Opinion No. 25. Accordingly, no compensation cost
has been recognized in the condensed consolidated statements of operations.
During the third quarter of fiscal 2003, the Company adopted the disclosure
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." Had the Company recognized compensation expense
determined based on the fair value at the grant date for awards under the
plans, the net earnings and earnings per share would have been as follows (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net earnings (loss)
As reported $ 509 ($ 37) ($ 4,309) $ 658
Pro forma 509 ( 37) ( 4,383) 554
Basic earnings (loss) per share
As reported $ 0.18 ($ 0.01) ($ 1.54) $ 0.23
Pro forma 0.18 ( 0.01) ( 1.56) 0.20
Diluted earnings (loss) per share
As reported $ 0.18 ($ 0.01) ($ 1.54) $ 0.23
Pro forma 0.18 ( 0.01) ( 1.56) 0.20
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H. RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
143, Accounting for Obligations Associated with the Retirement of Long-Lived
Assets and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets as of the beginning of the fiscal year. The adoption of
these Statements did not have a significant impact on the Company's results of
operations or its financial position.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," related to accounting for debt
extinguishments, leases, and intangible assets of motor carriers. The
provisions of SFAS No. 145 are effective for the Company on July 1, 2002,
however the adoption of this Statement did not have a significant impact on
the Company's results of operations or its financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, accordingly management will apply
the provisions of SFAS No. 146 to costs incurred in conjunction with exit or
disposal activities occurring in subsequent periods. The adoption of this
Statement will not affect the accounting for costs previously recorded for
exit or disposal activities.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The provisions of this statement are
effective for entities with a fiscal year ending after December 15, 2002. The
new disclosure provisions for interim financial information are first
effective for the quarter ending March 31, 2003. The adoption of this
Statement will not have a significant impact on the Company's results of
operations or its financial position.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34)."
FIN 45 clarifies the requirements of FAS 5, "Accounting for Contingencies,"
relating to guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The Interpretation's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The adoption of the disclosure
provisions of this Interpretation did not have a significant impact on the
Company disclosures for the second and third quarters and the adoption of the
accounting provisions of this Interpretation are not expected to have a
significant impact on the Company's results of operations or its financial
position.
I. RESTRUCTURING OF OPERATIONS
During the second quarter of 2003, the Company recorded a pre-tax
restructuring charge of $2.0 million in connection with the reduction of its
workforce. These actions were taken in an effort to streamline the Company's
cost structure and align its corporate workforce with market conditions. The
charge consists of employee termination and severance benefits for a total of
58 employees; 48 production employees and 10 salaried employees. During the
first nine months of 2003 the Company made cash payments of $0.5 million and
has a remaining balance in accrued liabilities of $1.5 million as of March 31,
2003.
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J. IMPAIRMENT OF LONG-LIVED ASSET
A review of long-lived assets revealed a permanent impairment in the value of
a license agreement to manufacture and distribute certain products. It was
determined that these assets should be subjected to FAS 144 impairment tests
due to current period operating and cash flow losses generated on products
sold under the agreement in conjunction with recent projections that these
losses will continue. The fair value of assets being held for use was
determined based on discounted cash flows generated from the use of the asset
using a discount rate reflecting the Company's average cost of funds, plus
salvage value. It was determined that the carrying value of the license
exceeded the fair value and a charge of $0.8 million was recorded during the
quarter ended December 31, 2002 to write-down this asset to its fair value.
This charge was classified as a component of cost of sales pertaining to the
Company's Manufacturing segment.
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS
In the financial review that follows, we discuss our results of operations,
financial condition and certain other information. This discussion should be
read in conjunction with our consolidated financial statements and related
notes.
Net revenues for the third fiscal quarter were 12.5% percent above year-ago
levels primarily driven by higher marine sales at our European and
Asian-Pacific operations, continued growth in our propulsion business as well
as the favorable impact of a weaker dollar on the revenues of our overseas
operations. Net earnings for the quarter were $0.5 million versus a slight
loss in the same quarter of last year. This improvement was primarily driven
by higher sales volume offset by an unfavorable impact due to product mix.
For the first nine months of the year, revenues were flat to year ago levels.
However, the revenues of our foreign operations reflect the favorable impact
of a weaker dollar versus last year. The net loss for the first nine months
of this year was $4.3 million, which includes restructuring and SFAS 144
impairment charges of $1.7 million, net of income taxes, in the second
quarter, versus a net profit of $0.7 million for the same period last year.
While the Company continued to experience softness in many of its global
markets, sales at our foreign operations were stronger than for the same
period last year. Sales of our marine and propulsion products were
particularly strong in comparison to the third fiscal quarter of last year.
Domestically, continued softness in our industrial and non-marine transmission
products was somewhat offset by favorable year-over-year growth in our
propulsion business, driven by sales of Arneson surface drives.
Shipments of industrial products and marine transmissions for commercial boats
continue to be off the pace of last year. As a whole, sales from our
distribution subsidiaries throughout the world were $2 million higher than in
the comparable period last year, partially driven by the favorable impact of a
weaker dollar.
Gross income as a percentage of sales in the third fiscal quarter of 22.1% was
slightly lower than the same period last year, but a significant improvement
over the 15.6% reported in the second fiscal quarter of this year. The
improvement versus the second fiscal quarter is due primarily to a favorable
mix impact of increased industrial and propulsion product sales in the current
quarter as well as the overall impact of higher sales volume on fixed
manufacturing cost absorption. In addition, cost of goods sold in the second
fiscal quarter included a non-cash pre-tax charge of $0.8 million related to
the impairment of a license agreement, which had an impact of reducing gross
income as a percentage of sales by almost 2% in the second fiscal quarter.
Marketing, engineering, and administrative (ME&A) expenses decreased by over
two percent from last year's third fiscal quarter. Continued decreases in
administrative expenses have been somewhat offset by increases in
engineering-related expenses related to ongoing projects as well as the
unfavorable exchange rate impact of a weakening dollar on our overseas
operations. Year-to-date ME&A expenses are approximately 2% higher than last
year due primarily to the previously mentioned impact of a weakening dollar
and higher engineering expenses offset by lower administrative expenses.
Interest expense for the quarter was 17% below the same quarter last year due
primarily to lower borrowings. The average income tax rate was lower than a
year ago due to a greater proportion of domestic losses incurred versus
overseas earnings, which are taxed at a higher rate.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" as of the beginning of the fiscal year. The adoption of
these Statements did not have a significant impact on the Company's results of
operations or its financial position.
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Financial Condition, Liquidity and Capital Resources
As of March 31, 2003, the Company had net working capital of $49.1 million,
which remained unchanged from the end of the second quarter and represents a
slight decrease from a net working capital of $49.5 million as of June 30,
2002. Net cash flows from operations were $3.4 million for the nine months
ending March 31, 2003, and a net cash usage of $1.0 million was experienced
during the third fiscal quarter. The main drivers of this change were
increased inventories as we prepare for anticipated sales volumes in the
fourth quarter and first half of the next fiscal year, increased account
receivables due to the higher sales volume experienced in the quarter, offset
partially by higher trade accounts payable. Net acquisitions of fixed assets
for the quarter totaled $1.0 million as we continue to make necessary capital
investments, bringing the year-to-date total to $2.8 million versus $1.1
million for the same period last year. The Company used excess cash to
continue to pay down the balance on its revolver, which had outstanding
balances of $8 million and $10 million as of March 31, 2003 and December 31,
2002, respectively. The impact of the above cash flows was a net decrease of
$3.8 million in cash during the quarter. The Company's balance sheet remains
strong, there are no off-balance-sheet arrangements, and we continue to have
sufficient liquidity for near-term needs.
In March 2003, the Company repurchased 10,000 shares of common stock at $11.35
per share for its treasury at a cost of $113,500. The Company currently has
141,000 shares remaining to be purchased under its previously approved stock
repurchase authorization. Management believes repurchasing Company stock back
at a substantial discount to book value should benefit our shareholders by
increasing both earnings and book value on a per-share basis.
The Company has obligations under non-cancelable operating lease contracts and
a senior note agreement for certain future payments. A summary of those
commitments follows (in thousands):
]
Contractual Obligations Total Less than 1-3 4-5 After 5
1 year Years Years Years
Short-term debt $ 1,094 $ 1,094
Revolver borrowing $ 8,000 $ 8,000
Long-term debt $11,436 $ 2,857 $ 5,722 $2,857
Operating leases $ 7,890 $ 2,605 $ 2,981 $1,152 $1,152
Total obligations $29,230 $ 7,366 $16,703 $4,009 $1,152
11
New Accounting Releases
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
related to accounting for debt extinguishments, leases, and intangible assets
of motor carriers. The provisions of SFAS No. 145 are effective for the
Company on July 1, 2002, however the adoption of this Statement did not have a
significant impact on the Company's results of operations or its financial
position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, accordingly management will apply
the provisions of SFAS No. 146 to costs incurred in conjunction with exit or
disposal activities occurring in subsequent periods. The adoption of this
Statement will not affect the accounting for costs previously recorded for
exit or disposal activities.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The provisions of this statement are
effective for entities with a fiscal year ending after December 15, 2002. The
new disclosure provisions for interim financial information were effective for
the quarter ending March 31, 2003. The adoption of this Statement did not
have a significant impact on the Company's results of operations or its
financial position.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34)."
FIN 45 clarifies the requirements of FAS 5, "Accounting for Contingencies,"
relating to guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The Interpretation's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The adoption of the disclosure
provisions of this Interpretation did not have a significant impact on the
Company disclosures for the second and third quarters and the adoption of the
accounting provisions of this Interpretation are not expected to have a
significant impact on the Company's results of operations or its financial
position.
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.
12
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,
2002. There have been no significant changes to those accounting policies
subsequent to June 30, 2002 other than the required adoption of SFAS No. 143
and No. 144.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to market risks from changes in interest rates,
commodities and foreign exchange. To reduce such risks, the Company
selectively uses financial instruments and other pro-active management
techniques. All hedging transactions are authorized and executed pursuant to
clearly defined policies and procedures, which prohibit the use of financial
instruments for trading or speculative purposes.
Interest rate risk - The Company=s earnings exposure related to adverse
movements of interest rates is primarily derived from outstanding floating
rate debt instruments that are indexed to the prime and LIBOR interest rates.
Those debt facilities bear interest predominantly at LIBOR plus 2.75%. Due to
the relative stability of interest rates, the Company did not utilize any
financial instruments at March 31, 2003 to manage interest rate risk exposure.
A 10 percent increase or decrease in the applicable interest rate would result
in a change in pretax interest expense of approximately $33,000.
Commodity price risk - The Company is exposed to fluctuation in market prices
for such commodities as steel and aluminum. Due to the relative stability of
these commodities, the Company does not utilize commodity price hedges to
manage commodity price risk exposure.
Currency risk - The Company has exposure to foreign currency exchange
fluctuations. Approximately one-third of the Company=s revenues in the nine
months ended March 31, 2003 and 2002 were denominated in currencies other than
the U.S. dollar. Of that total, approximately two-thirds was denominated in
Euros with the balance composed of Japanese yen and the Australian and
Singapore dollars. The Company does not hedge the translation exposure
represented by the net assets of its foreign subsidiaries. Foreign currency
translation adjustments are recorded as a component of shareholders= equity.
Forward foreign exchange contracts are used to hedge the currency fluctuations
on significant transactions denominated in foreign currencies.
Derivative Financial Instruments - The Company has written policies and
procedures that place all financial instruments under the direction of the
Company's corporate treasury and restrict derivative transactions to those
intended for hedging purposes. The use of financial instruments for trading
purposes is prohibited. The Company uses financial instruments to manage the
market risk from changes in foreign exchange rates.
The Company primarily enters into forward exchange contracts to reduce the
earnings and cash flow impact of non-functional currency denominated
receivables and payables. These contracts are highly effective in hedging the
cash flows attributable to changes in currency exchange rates. Gains and
losses resulting from these contracts offset the foreign exchange gains or
losses on the underlying assets and liabilities being hedged. The maturities
of the forward exchange contracts generally coincide with the settlement dates
of the related transactions. Gains and losses on these contracts are recorded
in Other income (expense), net in the Consolidated Statement of Operations as
the changes in the fair value of the contracts are recognized and generally
offset the gains and losses on the hedged items in the same period. The
primary currency to which the Company was exposed in 2003 and 2002 was the
Euro. At March 31, 2003 the Company had net outstanding forward exchange
contracts to purchase Euros in the value of $2,916,000 with a weighted average
maturity of 48 days. The fair value of the Company=s contracts was
approximately $40,000 at March 31, 2003. At June 30, 2002 the Company had net
outstanding forward exchange contracts to purchase Euros in the value of
$2,053,000 with a weighted average maturity of 40 days. The fair value of the
Company=s contracts was approximately $230,000 at June 30, 2002.
13
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.
14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Twin Disc is a defendant in several product liability or related claims
considered either adequately covered by appropriate liability insurance or
involving amounts not deemed material to the business or financial condition
of the Company.
Item 2. Changes in Securities and Use of Proceeds.
There were no securities of the Company sold by the Company during the nine
months ended March 31, 2003, which were not registered under the Securities
Act of 1933, in reliance upon an exemption from registration provided by
Section 4 (2) of the Act.
During the period covered by this report, the Company offered participants in
the Twin Disc, Incorporated B The Accelerator 401(k) Savings Plan (the APlan@)
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, 2002, 68 Plan participants allocated an aggregate of
$81,000 toward this investment option. Participant accounts in the Plan
consist of a combination of employee deferrals, Company matching
contributions, and, in some cases, additional Company profit-sharing
contributions. No underwriters were involved in these transactions. On
September 6, 2002, the Company filed a Form S-8 to register 100,000 shares of
Company common stock offered through the Plan, as well as an indeterminate
amount of Plan participation interests.
Item 5. Other Information.
The discussions in this report on Form 10-Q and in the documents incorporated
herein by reference, and oral presentations made by or on behalf of the
Company contain or may contain various forward-looking statements
(particularly those referring to the expectations as to possible strategic
alternatives, future business and/or operations, in the future tense, or using
terms such as "believe", "anticipate", "expect" or "intend") that involve
risks and uncertainties. The Company's actual future results could differ
materially from those discussed, due to the factors which are noted in
connection with the statements and other factors. The factors that could
cause or contribute to such differences include, but are not limited to, those
further described in the "Management's Discussion and Analysis".
Item 6. Exhibits and Reports on Form 8-K.
There were no reports on Form 8-K during the nine months ended March 31, 2003.
15
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)
May 14, 2003 /S/ FRED H. TIMM
----------------------- ---------------------------
(Date) Fred H. Timm
Vice President - Administration and
Secretary
16
CERTIFICATIONS
I, Michael E. Batten, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Twin Disc,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ MICHAEL E. BATTEN
Michael E. Batten
Chairman, Chief Executive Officer
17
CERTIFICATIONS
I, Christopher J. Eperjesy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Twin Disc,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ CHRISTOPHER J. EPERJESY
Christopher J. Eperjesy
Vice President - Finance, Treasurer,
Chief Financial Officer