1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 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 53403-1758
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (262) 638-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X .
At January 30, 2004, the registrant had 2,844,732 shares of its common stock
outstanding.
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31 June 30
2003 2003
---- ----
Assets
Current assets:
Cash and cash equivalents $ 9,995 $ 5,908
Trade accounts receivable, net 26,658 35,367
Inventories, net 54,844 47,247
Deferred income taxes 4,469 4,469
Other 4,214 4,104
-------- --------
Total current assets 100,180 97,095
Property, plant and equipment, net 29,111 30,210
Investment in affiliates 2,676 2,550
Goodwill 12,927 12,876
Deferred income taxes 20,070 20,164
Intangible pension asset 24 24
Other assets 7,956 7,439
-------- --------
$172,944 $170,358
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 1,678 $ 2,429
Current maturities on long-term debt 2,857 2,857
Accounts payable 14,811 16,115
Accrued liabilities 24,451 24,885
-------- --------
Total current liabilities 43,797 46,286
Long-term debt 17,720 16,584
Accrued retirement benefits 57,636 56,732
-------- --------
119,153 119,602
Minority Interest 503 485
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 82,875 83,191
Unearned Compensation (388) 0
Accumulated other comprehensive loss (23,957) (26,978)
-------- --------
70,183 67,866
Less treasury stock, at cost 16,895 17,595
-------- --------
Total shareholders' equity 53,288 50,271
-------- --------
$172,944 $170,358
-------- --------
-------- --------
The notes to consolidated financial statements are an integral part of this
statement. Amounts in thousands.
3
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
2003 2002 2003 2002
---- ---- ---- ----
Net sales $42,371 $42,794 $80,337 $79,315
Cost of goods sold 31,650 36,114 60,720 66,705
------- ------- ------- -------
10,721 6,680 19,617 12,610
Marketing, engineering and
administrative expenses 9,277 8,971 17,635 17,290
Restructuring of operations 0 2,042 0 2,042
Interest expense 283 325 563 633
Other expense (income),net 21 (64) (184) (105)
------- ------- ------- -------
9,581 11,274 18,014 19,860
------- ------- ------- -------
Earnings (loss) before income taxes
and minority interest 1,140 (4,594) 1,603 (7,250)
Income taxes 624 (1,536) 905 (2,431)
------- ------- ------- -------
Earnings (loss) before minority
interest 516 (3,058) 698 (4,819)
Minority interest (8) (29) (19) 1
------- ------- ------- -------
Net earnings (loss) $ 508 ($ 3,087) $ 679 ($ 4,818)
------- ------- ------- -------
------- ------- ------- -------
Dividends per share $ 0.175 $ 0.175 $ 0.35 $ 0.35
Earnings (loss)per share data:
Basic earnings (loss) per share $ 0.18 ($ 1.10) $ 0.24 ($ 1.72)
Diluted earnings (loss) per share$ 0.18 ($ 1.10) $ 0.24 ($ 1.72)
Shares outstanding data:
Average shares outstanding 2,813 2,808 2,808 2,808
Dilutive stock options 20 0 15 0
------- ------- ------- -------
Diluted shares outstanding 2,833 2,808 2,823 2,808
------- ------- ------- -------
------- ------- ------- -------
Comprehensive income (loss):
Net earnings (loss) $ 508 ($ 3,087) $ 679 ($ 4,818)
Foreign currency translation
adjustment 3,630 1,487 3,021 1,450
------- ------- ------- -------
Comprehensive income (loss) $ 4,138 ($ 1,600) $ 3,700 ($ 3,368)
------- ------- ------- -------
------- ------- ------- -------
In thousands of dollars except per share statistics. Per share figures are
based on shares outstanding data.
The notes to consolidated financial statements are an integral part of this
statement.
4
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31
2003 2002
---- ----
Cash flows from operating activities:
Net earnings (loss) $ 679 ($ 4,818)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 2,783 2,774
Unearned Compensation 104 0
Equity in earnings of affiliate (240) (223)
Dividends received from affiliate 115 185
Restructuring of operations 0 2,042
Write-off of impaired asset 0 773
Net change in working capital,
excluding cash and debt, and other 1,414 3,617
------ ------
4,855 4,350
------ ------
Cash flows from investing activities:
Acquisitions of fixed assets (920) (1,764)
Proceeds from sales of fixed assets 28 0
------ ------
(892) (1,764)
------ ------
Cash flows from financing activities:
Increase (decrease) in debt, net 372 (687)
Proceeds from exercise of stock options 207 0
Dividends paid (995) (983)
------ ------
(416) (1,670)
------ ------
Effect of exchange rate changes on cash 538 400
------ ------
Net change in cash and cash equivalents 4,087 1,316
Cash and cash equivalents:
Beginning of period 5,908 7,313
------ ------
End of period $ 9,995 $ 8,629
------ ------
------ ------
The notes to consolidated financial statements are an integral part of
this statement. Amounts in thousands.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Basis of Presentation
The unaudited financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC)
and, in the opinion of the Company, include all adjustments, consisting only
of normal recurring items, necessary for a fair statement of results for each
period. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC
rules and regulations. The Company believes that the disclosures made are
adequate to make the information presented not misleading. It is suggested
that these financial statements be read in conjunction with financial
statements and the notes thereto included in the Company's latest Annual
Report. The year-end condensed consolidated balance sheet data was derived
from audited financial statements but does not include all disclosures
required by generally accepted accounting principles. In fiscal 2004, the
joint venture agreement governing Twin Disc Nico Co., LTD (TDN) was amended.
Under the new agreement, sales into certain territories have been transferred
to the joint venture partner in exchange for which TDN receives a product
development fee equal to the gross margin formerly earned on such sales. The
effect of this change was to reduce sales by $3,200,000 and $6,300,000 for
the quarter and six months ended December 31, 2003, with no effect on net
earnings. Product development fees included in the quarter and six months
ended December 31, 2003 approximated $175,000 and $330,000 respectively.
B. Inventory
The major classes of inventories were as follows (in thousands):
December 31, June 30,
2003 2003
---------- ---------
Inventories:
Finished parts $ 42,954 $36,175
Work in process 6,477 7,003
Raw materials 5,413 4,069
------- -------
$ 54,844 $47,247
------- -------
------- -------
C. Warranty
Twin Disc engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its suppliers.
However, its warranty obligation is affected by product failure rates, the
extent of the market affected by the failure and the expense involved in
satisfactorily addressing the situation. The warranty reserve is established
based on our best estimate of the amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. When
evaluating the adequacy of the reserve for warranty costs, management takes
into consideration the term of the warranty coverage, historical claim rates
and costs of repair, knowledge of the type and volume of new products and
economic trends. While we believe the warranty reserve is adequate and that
the judgment applied is appropriate, such amounts estimated to be due and
payable in the future could differ materially from what actually transpires.
The following is a listing of the activity in the warranty reserve during the
period ended December 31, 2003.
Three Months Ended Six Months Ended
December 31, 2003 December 31, 2003
Reserve balance, beginning of period $6,099,000 $6,070,000
Current period expense 922,000 1,805,000
Payments or credits to customers 770,000 1,624,000
--------- ---------
Reserve balance, end of period $6,251,000 $6,251,000
========= =========
D. Contingencies
The Company has made a $117,000 payment in trust in settlement of its
exposure to a superfund site and anticipates that no further payments will be
required. Additionally, the Company is subject to certain product liability
matters in the normal course of business.
6
At December 31, 2003, the Company has accrued approximately $100,000, which
represents management's best estimate available for possible losses related
to these contingencies. This amount has been provided over the past several
years. Based on the information available, the Company does not expect that
any unrecorded liability related to these matters would materially affect the
consolidated financial position, results of operations or cash flows.
E. Business Segments
Information about the Company's segments is summarized as follows (in
thousands):
Three Months Ended Six Months Ended
December 31 December 31
2003 2002 2003 2002
--------------- ----------------
Manufacturing segment sales $40,787 $36,428 $73,934 $66,892
Distribution segment sales 14,250 15,671 27,211 29,520
Inter/Intra segment sales (12,666) (9,305) (20,808) (17,097)
------ ------ ------ ------
Net sales $42,371 $42,794 $80,337 $79,315
====== ====== ====== ======
Manufacturing segment earnings $ 1,564 $(4,516) $ 1,531 $(6,993)
Distribution segment earnings 815 710 1,979 1,165
Inter/Intra segment loss (1,239) (788) (1,907) (1,422)
------ ------ ------ ------
Earnings (loss) before income taxes
and minority interest $ 1,140 $(4,594) $ 1,603 $(7,250)
====== ====== ====== ======
Assets December 31, June 30,
2003 2003
------------- ------------
Manufacturing segment assets $155,632 $152,093
Distribution segment assets 30,318 32,761
Corporate assets and elimination
of inter-company assets (13,006) (14,496)
-------- --------
$172,944 $170,358
======= =======
F. Recently Issued Accounting Standards
In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted the provisions of this
Statement and it had no impact on its financial statements.
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 Six Months Ended
December 31, December 31,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net earnings (loss)
As reported $ 508 ($ 3,087) $ 679 ($4,818)
Pro forma 508 ( 3,087) 679 ( 4,892)
Basic earnings (loss) per share
As reported $ 0.18 ($ 1.10) $ 0.24 ($ 1.72)
Pro forma 0.18 ( 1.10) 0.24 ( 1.74)
Diluted earnings (loss) per share
As reported $ 0.18 ($ 1.10) $ 0.24 ($ 1.72)
Pro forma 0.18 ( 1.10) 0.24 ( 1.74)
7
In fiscal 2004, The Company issued restricted stock grants for 25,000 shares,
12,500 of these shares vest in 2 years from the date of grant and 12,500 vest
in 4 years. The fair market value of the grants based on the market price at
the date of grant was $421,000. The grants are recorded as Unearned
Compensation and amortized over 2 and 4 year periods, amortization in the
quarter ended December 31, 2003 approximated $104,000.
H. Subsequent Event
In January 2004, the Company sold its 25% minority interest in Palmer Johnson
Distributors, LLC (PJD) to the majority holder, PJD, Inc. for $3,900,000 cash,
which approximated the net book value of the investment. The results of this
transaction will be reflected in the Company's third quarter financial results.
For the six months ended December 31, 2003 and the fiscal year ended
June 30, 2003, the Company recognized pre-tax earnings of $240,000 and $414,000,
respectively, from its investment in PJD. In addition, the Company received
cash distributions of $195,000 and $303,000 for the first half of fiscal year
2004 and all of fiscal year 2003, respectively.
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations.
In the financial review that follows, we discuss our results of operations,
financial condition and certain other information. This discussion should be
read in conjunction with our consolidated financial statements and related
notes.
Results of Operations
- ---------------------
Comparison of the Second Quarter of FY 2004 with the Second Quarter of FY
- -------------------------------------------------------------------------
2003
- ----
Net sales for the second quarter were 1.0% below year-ago levels. In fiscal
2004, the Company's joint venture agreement governing Twin Disc Nico Co., LTD
(TDN) was amended. Under the new agreement, sales into certain territories
have been transferred to the joint venture partner in exchange for which TDN
receives an engineering and product development fee equal to the gross margin
formerly earned on such sales. The effect of this change was to reduce sales
by $3.2 million for the quarter ended December 31, 2003, with no effect on net
earnings. Compared to the second quarter of fiscal 2003, the Euro and Asian
currencies strengthened against the US dollar. The impact of this
strengthening on foreign operations was to increase revenues by approximately
$3.3 million versus the prior year, before eliminations.
Sales at our manufacturing operations were up 12% versus the same period last
year. Of this increase, our domestic manufacturing operations in the U.S.
accounted for 4.0 percentage points of the total improvement. When compared
to the prior fiscal year's second quarter, our domestic manufacturing
operations saw double-digit growth in the industrial, marine and propulsion
product segments, offset by a decline in the transmission product group.
Of the remaining nearly 8.0 percentage point improvement, the impact of a
stronger Euro at our Belgian and Italian manufacturing operations accounted
for 5.6 percentage points, with the majority of the remaining increase coming
from sales growth at our Italian manufacturing operation.
Our distribution segment experienced a 9% decline versus the second quarter of
fiscal 2003. The change in the TDN agreement discussed above accounted for a
decrease of 20%. Adjusted for this change, sales are 11% above the same
period last year. A little more than half of this improvement can be
attributed to the effect of a weaker dollar among most Asian currencies.
The elimination for net inter/intra segment sales increased $3.4 million,
accounting for the remainder of the net decrease in sales versus the same
period last year.
Gross margin as a percentage of sales improved significantly, increasing from
15.6% of sales in fiscal 2003's second quarter to 25.3% of sales in fiscal
2004. This increase was driven primarily by improved product mix, the impact
of cost reduction efforts as well as the impact of the restructuring program
undertaken in fiscal 2003's second quarter. Supplier quality problems
encountered in fiscal 2003's first and second quarters caused last year's
gross margin as a percentage of sales to be unusually low. Additionally, the
Company took a pre-tax FAS 144 impairment charge of $0.8 million in the prior
year's fiscal second quarter to write-down the value of a license agreement
to manufacture and distribute certain products. This charge reduced gross
margin as a percentage of sales by 180 basis points. The change in the TDN
joint venture agreement, mentioned above, accounted for approximately 120
basis points of the current fiscal year's second quarter improvement, as those
sales were at historically low margin rates.
8
Marketing, engineering, and administrative (ME&A) expenses were 3.4% higher
compared to last year's second fiscal quarter. Favorable improvements at our
domestic operations, primarily as a result of recent cost reduction efforts,
of over $0.2 million were offset by the unfavorable year-over-year exchange
rate impact at our foreign operations of $0.5 million.
In the prior fiscal year's second quarter, the Company implemented severance
and voluntary separation programs to align its workforce with market
conditions. These actions resulted in a pre-tax restructuring charge of $2.0
million and were taken in an effort to streamline the Company's cost
structure and align its corporate workforce with market conditions. The
charge consisted of employee termination and severance benefits for a total
of 58 employees; 48 production employees and 10 salaried employees.
Interest expense for the quarter was 13% below the same quarter last year due
primarily to lower borrowings as well as a mix of borrowings at a lower
weighted interest rate.
The consolidated income tax rate was higher than a year ago primarily due to
increased overseas earnings, which were taxed at a higher rate.
Comparison of the First Six Months of FY 2004 with the First Six Months of FY
- -----------------------------------------------------------------------------
2003
- ----
Net sales for the first six months of fiscal 2004 were $80.3 million, up 1.3%
from the $79.3 million reported in the same six-month period of last year.
Sales were positively impacted by net favorable currency exchange rates,
primarily stronger Euro and Australian Dollar in relation to the U.S. Dollar,
of approximately $5.2 million, when compared to the first six months of last
fiscal year. The change in the TDN joint venture agreement, mentioned above,
reduced sales by $6.3 million for the six months ended December 31, 2003,
with no effect on net earnings.
Sales at our manufacturing operations were up 11% versus the same six-month
period last year. Of this increase, our domestic manufacturing operations in
the U.S. accounted for nearly 4.0 percentage points of the total improvement.
When compared to the first six months of fiscal 2003, all product groups,
except transmission, saw significant year-over-year growth. At our Belgian
and Italian operations, a stronger Euro, in relation to the U.S. Dollar,
resulted in a net favorable exchange rate impact of $3.1 million for the first
six months of fiscal 2004, or 4.6 percentage points of the total manufacturing
operations improvement.
Our distribution segment experienced an 8% decline versus the first six months
of fiscal 2003. The change in the TDN agreement discussed above accounted for
a decrease of 18%. Adjusted for this change, sales are 10% above the same
period last year. A little more than half of this improvement can be
attributed to the effect of a weaker dollar against the Australian, Singapore
and Canadian Dollars, and the Japanese Yen.
The elimination for net inter/intra segment sales increased $3.7 million,
accounting for the remainder of the net decrease in sales versus the same
period last year.
Gross margin as a percentage of sales of 24.4% was up 8.5 percentage points
from the first six months of fiscal 2003. This improvement was driven by a
number of factors including improved product mix, the effect of restructuring
and cost reduction actions, and the absence of manufacturing inefficiencies
caused by supplier quality problems experienced in the first half of the prior
fiscal year. Additionally, as mentioned above, the FAS 144 impairment charge
taken in the second quarter of the prior fiscal year and the change in the TDN
agreement contributed 210 basis points to the year-over-year improvement for
the six months ended December 31, 2003.
Marketing, engineering, and administrative (ME&A) expenses of $17.6 million,
or 22.0% of sales, increased 0.2 percentage points, or $0.3 million, when
compared to the first six months of last year. The impact of currency
exchange rates, primarily the stronger Euro and Australian Dollar, contributed
$0.8 million to the year-over-year increase.
In the prior fiscal year's second quarter, the Company implemented severance
and voluntary separation programs to align its workforce with market
conditions. These actions resulted in a pre-tax restructuring charge of $2.0
million and were taken in an effort to streamline the Company's cost
structure and align its corporate workforce with market conditions. The
charge consisted of employee termination and severance benefits for a total
of 58 employees; 48 production employees and 10 salaried employees.
9
Interest expense was 11% lower than the same six-month period one year ago.
Average outstanding debt levels declined 9.6%, or approximately $2.2 million,
from the same six-month period one year ago. The decline in interest expense
was greater than the corresponding decrease in debt levels primarily due to
the fact that the average weighted interest rate decreased year-over-year.
The consolidated income tax rate was higher than a year ago primarily due to
increased overseas earnings, which were taxed at a higher rate.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
Comparison between December 31, 2003 and June 30, 2003
- ------------------------------------------------------
As of December 31, 2003, the Company had net working capital of $56.4 million,
which represents an 11% increase from a net working capital of $50.8 million
as of June 30, 2003.
Cash and cash equivalents increased $4.1 million, or approximately 69.5%, to
$10.0 million as of December 31, 2003. This increase came primarily at our
two European manufacturing locations in Belgium and Italy and approximately
equals the decrease in accounts receivable (including intercompany
receivables) at these locations.
Trade receivables of $26.7 million were down $8.7 million versus last fiscal
year-end. Over $3 million of this change can be attributed to the amendment
in the TDN joint venture agreement discussed above.
Net inventory increased by $7.6 million versus June 30, 2003. Of this
increase, $1.8 million was due to the translation impact of a stronger Euro
and Australian Dollar, in relation to the U.S. Dollar, at our foreign
operations. The majority of the remaining increase came at our domestic
manufacturing location. This increase is primarily due to higher inventory
levels in our transmission business as we prepare to deliver systems for a
military contract in the second half of this fiscal year and into the next
fiscal year.
Net property, plant and equipment declined $1.1 million versus June 30, 2003.
This is primarily due to the fact that net acquisition of fixed assets of
$0.9 million in the first six months of this fiscal year trailed depreciation
and amortization expense of $2.8 million. This was offset by the net
translation impact of a stronger Euro and Australian Dollar.
Accounts payable of $14.8 million were $1.3 million lower than June 2003.
Our joint venture in Japan, TDN, experienced a $3 million decrease in accounts
payable, attributable primarily to the change in the joint venture agreement
mentioned previously. Adjusted for the TDN change, accounts payable increased
approximately $1.7 million. The increase came primarily at our domestic U.S
manufacturing operation and is consistent with the increase in inventories
noted above. The net foreign currency translation impact was to increase
accounts payable by $0.3 million.
Total borrowings, notes payable and long-term debt, as of December 31, 2003
increased slightly by $0.4 million, or less than 2%, to $22.3 million versus
June 30, 2003.
Total shareholders' equity increased by $3.0 million to a total of $53.3
million. Retained earnings decreased by $0.3 million. The net decrease in
retained earnings included $0.7 million in net earnings reported year-to-date,
offset by $1.0 million in dividend payments. Net favorable foreign currency
translation of $3.0 million was reported as the U.S. Dollar weakened against
the Euro and the Australian Dollar during the first six months.
The Company's balance sheet remains very strong, there are no off-balance-sheet
arrangements, and we continue to have sufficient liquidity for near-term needs.
In January 2004, subsequent to the end of the second fiscal quarter, the
company announced the sale of its 25% minority interest in Palmer Johnson
Distributors, LLC for $3.9 million in cash, which approximated the net book
value of the investment. Management believes that available cash, our revolver
facility, cash generated from operations, existing lines of credit and access
to debt markets will be adequate to fund our capital requirements for the
foreseeable future.
The Company has obligations under non-cancelable operating lease contracts
and a senior note agreement for certain future payments. A summary of those
commitments follows (in thousands):
10
Contractual Obligations Total Less than 1-3 4-5 After 5
1 year Years Years Years
Short-term debt $ 1,678 $ 1,678
Revolver borrowing $12,000 $12,000
Long-term debt $ 8,577 $ 2,857 $ 5,720
Operating leases $11,061 $ 2,868 $ 3,762 $2,213 $2,218
Total obligations $33,316 $ 7,403 $21,482 $2,213 $2,218
New Accounting Releases
In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted the provisions of this
Statement and it had no impact on its financial statements.
Critical Accounting Policies
The preparation of this Quarterly Report requires management's judgment to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the dates of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. There can be no assurance that actual results
will not differ from those estimates.
Twin Disc's significant accounting policies are described in Note A in the
Notes to Consolidated Financial Statements in the Annual Report for
June 30, 2003. There have been no significant changes to those accounting
policies subsequent to June 30, 2003.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to market risks from changes in interest rates,
commodities and foreign exchange. To reduce such risks, the Company
selectively uses financial instruments and other pro-active management
techniques. All hedging transactions are authorized and executed pursuant to
clearly defined policies and procedures, which prohibit the use of financial
instruments for trading or speculative purposes.
Interest rate risk - The Company's earnings exposure related to adverse
movements of interest rates is primarily derived from outstanding floating
rate debt instruments that are indexed to the prime and LIBOR interest rates.
Those debt facilities bear interest predominantly at the prime interest
rate minus .5% or LIBOR plus 2.75%. Due to the relative stability of
interest rates, the Company did not utilize any financial instruments at
December 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 $10,000.
Commodity price risk - The Company is exposed to fluctuation in market prices
for such commodities as steel and aluminum. Due to the relative stability of
these commodities, the Company does not utilize commodity price hedges to
manage commodity price risk exposure.
Currency risk - The Company has exposure to foreign currency exchange
fluctuations. Approximately one-third of the Company's revenues in the
three months and six months ended December 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.
11
Derivative Financial Instruments - The Company has written policies and
procedures that place all financial instruments under the direction of the
company corporate treasury and restrict derivative transactions to those
intended for hedging purposes. The use of financial instruments for trading
purposes is prohibited. The Company uses financial instruments to manage the
market risk from changes in foreign exchange rates.
The Company primarily enters into forward exchange contracts to reduce the
earnings and cash flow impact of non-functional currency denominated
receivables and payables. These contracts are highly effective in hedging
the cash flows attributable to changes in currency exchange rates. Gains and
losses resulting from these contracts offset the foreign exchange gains or
losses on the underlying assets and liabilities being hedged. The maturities
of the forward exchange contracts generally coincide with the settlement dates
of the related transactions. Gains and losses on these contracts are recorded
in Other income (expense), net in the Consolidated Statement of Operations as
the changes in the fair value of the contracts are recognized and generally
offset the gains and losses on the hedged items in the same period. The
primary currency to which the Company was exposed in 2004 and 2003 was the
Euro. At December 31, 2003 the Company had net outstanding forward exchange
contracts to purchase Euros in the value of $2,684,000 with a weighted average
maturity of 42 days. The fair value of the Company's contracts was a loss of
approximately $82,000 at December 31, 2003. At June 30, 2003 the Company had
net outstanding forward exchange contracts to purchase Euros in the value of
$2,701,000 with a weighted average maturity of 50 days. The fair value of the
Company's contracts was approximately zero at June 30, 2003.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
As required by new Rules 13a-15 and 15d-15 of the Securities Exchange Act of
1934, within the 90-day period prior to the filing of this report and under
the supervision and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, the Company has evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures. Based on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that such disclosure controls and procedures
are effective in ensuring that material information relating to the Company,
including its consolidated subsidiaries, is made known to the certifying
officers by others within the Company and its consolidated subsidiaries
during the period covered by this report.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls for
financial reporting or in other factors that could significantly affect such
internal controls subsequent to the date of such evaluation. However, in
connection with the new rules, the Company has been engaged in the process of
further reviewing and documenting its disclosure controls and procedures,
including its internal accounting controls. The Company may from time to time
make changes aimed at enhancing the effectiveness of its disclosure controls
and procedures, including its internal controls, to ensure that the Company's
systems evolve with its business.
Part II. - OTHER INFORMATION
Item 1. Legal Proceedings.
Twin Disc is a defendant in several product liability or related claims
considered either adequately covered by appropriate liability insurance or
involving amounts not deemed material to the business or financial condition
of the Company.
Item 2. Changes in Securities and Use of Proceeds.
There were no securities of the Company sold by the Company during the six
months ended December 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.
12
During the period covered by this report, the Company offered participants in
the Twin Disc, Incorporated B The Accelerator 401(k) Savings Plan (the "Plan")
the option to invest their Plan accounts in a fund comprised of Company stock.
Participation interests of Plan participants in the Plan, which may be
considered securities, were not registered with the SEC. During the fiscal
year ended June 30, 2003, 68 Plan participants allocated an aggregate of
$81,000 toward this investment option. Participant accounts in the Plan
consist of a combination of employee deferrals, Company matching contributions,
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 4. Submission of Matters to a vote of Security Holders
At the Annual Meeting of Shareholders held October 17, 2003, the number of
votes cast for, against or abstentions with respect to each matter were as
follows:
1. Election of Directors:
a) To serve until Annual Meeting in 2006:
Michael H. Joyce For: 2,490,889 Authority withheld: 46,630
David B. Rayburn For: 2,492,729 Authority withheld: 44,790
George E. Wardeberg For: 2,490,526 Authority withheld: 46,993
Item 5. Other Information.
The discussions in this report on Form 10-Q and in the documents incorporated
herein by reference, and oral presentations made by or on behalf of the
Company contain or may contain various forward-looking statements
(particularly those referring to the expectations as to possible strategic
alternatives, future business and/or operations, in the future tense, or using
terms such as "believe", "anticipate", "expect" or "intend") that involve
risks and uncertainties. The Company's actual future results could differ
materially from those discussed, due to the factors which are noted in
connection with the statements and other factors. The factors that could
cause or contribute to such differences include, but are not limited to,
those further described in the "Management's Discussion and Analysis".
Item 6. Exhibits and Reports on Form 8-K.
A Form 8-K was filed on January 16, 2004 for a press release announcing
financial results for fiscal 2004 second quarter.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TWIN DISC, INCORPORATED
(Registrant)
February 12, 2004 /S/ FRED H. TIMM
----------------------- ---------------------------
(Date) Fred H. Timm
Vice President - Administration and
Secretary and Duly Authorized Officer