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 March 31, 2004 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 May 11, 2004 the registrant had 2,848,382 shares of its common stock
outstanding.
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 June 30
2004 2003
---- ----
Assets
Current assets:
Cash and cash equivalents $ 11,350 $ 5,908
Trade accounts receivable, net 32,513 35,367
Inventories, net 55,642 47,247
Deferred income taxes 4,469 4,469
Other 2,780 4,104
------- -------
Total current assets 106,754 97,095
Property, plant and equipment, net 28,467 30,210
Investments in affiliates - 2,550
Goodwill 11,856 12,876
Deferred income taxes 20,065 20,164
Intangible pension asset 24 24
Other assets 7,309 7,439
------- -------
$174,475 $170,358
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 1,806 $ 2,429
Current maturities on long-term debt 2,857 2,857
Accounts payable 16,063 16,115
Accrued liabilities 25,421 24,885
------- -------
Total current liabilities 46,147 46,286
Long-term debt 14,921 16,584
Accrued retirement benefits 58,168 56,732
------- -------
119,236 119,602
Minority interest 501 485
Shareholders' equity:
Common stock 11,653 11,653
Retained earnings 84,153 83,191
Unearned Compensation (346) -
Accumulated other comprehensive loss (23,923) (26,978)
------- -------
71,537 67,866
Less treasury stock, at cost 16,799 17,595
------- -------
Total shareholders' equity 54,738 50,271
------- -------
$174,475 $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 Nine Months Ended
March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Net sales $48,606 $47,177 $128,943 $126,491
Cost of goods sold 35,689 36,752 96,409 103,457
------ ------ ------- -------
12,917 10,425 32,534 23,034
Marketing, engineering and
administrative expenses 9,520 9,041 27,156 26,331
Restructuring of operations - - - 2,042
Interest expense 272 350 835 983
Other income (42) (133) (227) (238)
------ ------ ------ -------
9,750 9,258 27,764 29,118
------ ------ ------ -------
Earnings(loss) before income taxes
and minority interest 3,167 1,167 4,770 (6,084)
Income taxes 1,393 650 2,298 (1,781)
------ ------ ------ -------
Earnings(loss) before minority
interest 1,774 517 2,472 (4,303)
Minority interest, net of
income taxes 2 (8) (17) (6)
------ ------ ------ -------
Net earnings(loss) $ 1,776 $ 509 $ 2,455 ($ 4,309)
====== ====== ====== =======
Dividends per share $ 0.175 $ 0.175 $ 0.525 $ 0.525
Earnings(loss) per share data:
Basic earnings(loss) per share $ 0.63 $ 0.18 $ 0.87 ($ 1.54)
Diluted earnings(loss) per share $ 0.62 $ 0.18 $ 0.86 ($ 1.54)
Shares outstanding data:
Average shares outstanding 2,819 2,806 2,811 2,807
Dilutive stock options 29 - 21 -
------ ------ ------ ------
Diluted shares outstanding 2,848 2,806 2,832 2,807
====== ====== ====== ======
Comprehensive Income(loss):
Net earnings(loss) $ 1,776 $ 509 $ 2,455 ($ 4,309)
Foreign currency translation
adjustment 34 1,775 3,055 3,225
------ ------ ------ ------
Comprehensive income (loss) $ 1,810 $ 2,284 $ 5,510 ($ 1,084)
====== ====== ====== =======
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)
Nine Months Ended
March 31
2004 2003
---- ----
Cash flows from operating activities:
Net earnings (loss) $ 2,455 $(4,309)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 4,252 4,191
Equity in earnings of affiliate (240) (270)
Dividends received from affiliate 195 185
Restructuring of operations - 1,463
Unearned compensation 146 -
Write-off of impaired asset - 773
Net change in working capital,
excluding cash and debt, and other (554) 1,334
------ ------
6,254 3,367
------ ------
Cash flows from investing activities:
Acquisitions of fixed assets (1,681) (2,765)
Proceeds from sale of fixed assets 48 37
Proceeds from sale of affiliate 3,811 -
------ ------
2,178 (2,728)
------ ------
Cash flows from financing activities:
Decrease in notes payable (2,396) (2,056)
Proceeds from exercise of stock options 304 -
Treasury stock purchase - (114)
Dividends paid (1,493) (1,474)
------ ------
(3,585) (3,644)
------ ------
Effect of exchange rate changes on cash 595 543
------ ------
Net change in cash and cash equivalents 5,442 (2,462)
Cash and cash equivalents:
Beginning of period 5,908 7,313
------ ------
End of period $11,350 $ 4,851
====== ======
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 $3,552,000 and $9,822,000 for the
quarter and nine months ended March 31, 2004, with no effect on net earnings.
Product development fees included in the quarter and nine months ended
March 31, 2004 approximated $187,000 and $517,000 respectively.
B. Inventory
The major classes of inventories were as follows (in thousands):
March 31, June 30,
2004 2003
---------- ---------
Inventories:
Finished parts $41,498 $36,175
Work in process 9,388 7,003
Raw materials 4,756 4,069
------- -------
$55,642 $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 three and nine ended March 31, 2004.
Three Months Ended Nine Months Ended
March 31, 2004 March 31, 2004
Reserve balance, beginning of period $6,251,000 $6,070,000
Current period expense 1,471,000 3,276,000
Payments or credits to customers (1,323,000) (2,947,000)
--------- ---------
Reserve balance, end of period $6,399,000 $6,399,000
========= =========
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 March 31, 2004, 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 Nine Months Ended
March 31 March 31
2004 2003 2004 2003
--------------- ----------------
Manufacturing segment sales $45,355 $40,804 $119,289 $107,696
Distribution segment sales 16,134 16,228 43,345 45,748
Inter/Intra segment sales (12,883) (9,855) (33,691) (26,953)
------ ------ ------ -------
Net sales $48,606 $47,177 $128,943 $126,491
====== ====== ======= =======
Manufacturing segment earnings $ 2,709 $ 1,072 $ 4,240 $ (5,921)
Distribution segment earnings 1,363 777 3,342 1,939
Inter/Intra segment loss ( 905) (682) (2,812) (2,102)
------ ------ ------ -------
Earnings (loss) before income taxes
and minority interest $ 3,167 $ 1,167 $ 4,770 $ (6,084)
====== ====== ====== =======
Assets March 31, June 30,
2004 2003
------------- ------------
Manufacturing segment assets $161,314 $152,093
Distribution segment assets 33,401 32,761
Corporate assets and elimination
of inter-company assets (20,240) (14,496)
-------- --------
$174,475 $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 Nine Months Ended
March 31, March 31,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings (loss)
As reported $ 1,776 $ 509 $ 2,455 ($4,309)
Pro forma 1,776 509 2,455 ( 4,383)
Basic earnings (loss) per share
As reported $ 0.63 $ 0.18 $ 0.87 ($ 1.54)
Pro forma 0.63 0.18 0.87 ( 1.56)
Diluted earnings (loss) per share
As reported $ 0.62 $ 0.18 $ 0.86 ($ 1.54)
Pro forma 0.62 0.18 0.86 ( 1.56)
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 expense for
the three and nine months ended March 31, 2004 approximated $42,000 and 146,000,
respectively.
H. Sale of Minority Interest
In January 2004, the Company sold its 25% minority interest in Palmer Johnson
Distributors, LLC (PJD) to the majority holder, PJD, Inc. for $3,811,000 cash,
which approximated the net book value of the investment. For the nine months
ended March 31, 2004 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 nine months of fiscal year 2004 and all of
fiscal year 2003, respectively.
I. Components of Net Periodic Benefit Cost (in thousands):
During December 2003, the FASB revised SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits," to require additional
Disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. The interim disclosures required under the revised statement are below.
Three months ended Nine months ended
March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Pension Benefits
Service cost $ 310 $ 336 $ 914 $1,008
Interest cost 1,796 2,069 5,367 6,208
Expected return on plan assets (1,594) (1,971) (4,766) (5,912)
Amortization of prior service cost (179) 156 (538) 468
Amortization of transition obligation 16 14 42 42
Amortization of net loss 1,181 623 3,541 1,869
----- ----- ----- -----
Net periodic benefit cost $1,530 $1,227 $4,560 $3,683
===== ===== ===== =====
Post-retirement Benefits
Service cost $ 11 $ 4 $ 33 $ 13
Interest cost 514 591 1,542 1,772
Recognized net actuarial loss 217 200 651 599
----- ----- ---- -----
Net periodic benefit cost $ 742 795 $2,226 $2,384
===== ===== ===== =====
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS
In the financial review that follows, we discuss our results of operations,
financial condition and certain other information. This discussion should be
read in conjunction with our consolidated financial statements and related
notes.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Third Quarter of FY 2004 with the Third Quarter of FY 2003
- ----------------------------------------------------------------------------
Net sales for the third quarter were 3.0% above 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 $3.5
million for the quarter ended March 31, 2004, with no effect on net earnings.
Compared to the third 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 $3.0 million versus the
prior year.
Sales at our manufacturing operations were up 11.2% versus the same period last
year, driven primarily by our European manufacturing locations in Belgium and
Italy. Sales at our European manufacturing locations were up over 25%, compared
to an increase of just over 3% at our US domestic manufacturing operations.
The company experienced double-digit growth in its industrial, marine and
propulsion products. Transmission product sales were flat to the prior year's
third quarter. The impact of a stronger Euro at our Belgian and Italian
manufacturing operations accounted for just over 4.0 basis points of the
year-over-year improvement at our manufacturing operations.
Our distribution segment experienced relatively flat sales compared to the third
quarter of fiscal 2003. However, the change in the TDN agreement discussed
above accounted for a decrease of $3.5 million. Adjusted for this change, sales
are 21% above the same period last year. About 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 $3.0 million,
accounting for the remainder of the net change in sales versus the same period
last year.
Gross income as a percentage of sales improved significantly, increasing from
22.1% of sales in fiscal 2003's third quarter to 26.6% of sales in fiscal 2004.
This increase was driven primarily by improved product mix, the impact of cost
reduction efforts and improved productivity at our domestic manufacturing
operations as well as the impact of the restructuring program undertaken in
fiscal 2003's second quarter. The change in the TDN joint venture agreement,
mentioned above, accounted for approximately 130 basis points of the current
fiscal year's third quarter improvement, as those sales were at historically
low margin rates.
8
Marketing, engineering, and administrative (ME&A) expenses were 5.3% higher
compared to last year's third fiscal quarter. Favorable improvements at our
domestic manufacturing operations, primarily as a result of recent cost
reduction efforts, of over $0.3 million were offset by the unfavorable
year-over-year exchange rate impact at our foreign operations of nearly $0.5
million.
Interest expense for the quarter was 22.3% 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 lower than a year ago primarily due to
increased domestic earnings, which were taxed at a lower rate.
Comparison of the First Nine Months of FY 2004 with the First Nine Months of FY
- -------------------------------------------------------------------------------
2003
- ----
Net sales for the first nine months of fiscal 2004 were $128.9 million, up 2.0%
from the $126.5 million reported in the same nine-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 $8.3 million, when compared to the first nine months of last
fiscal year. The change in the TDN joint venture agreement, mentioned above,
reduced sales by $9.8 million for the nine months ended March 31, 2004, with no
effect on net earnings.
Sales at our manufacturing operations were up 10.8% versus the same nine-month
period last year. Of this increase, our domestic manufacturing operations in
the U.S. accounted for over 5.0 percentage points of the total improvement.
When compared to the first nine 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 $4.9 million for the first nine
months of fiscal 2004, or 4.5 percentage points of the total manufacturing
operations improvement.
Our distribution segment experienced a 5.3% decline versus the first nine months
of fiscal 2003. The change in the TDN agreement discussed above accounted for a
decrease of 21%. Adjusted for this change, sales are 16% above the same period
last year. Approximately 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 $6.7 million,
accounting for the remainder of the net change in sales versus the same period
last year.
Gross income as a percentage of sales of 25.2% was up 7.0 percentage points
from the first nine 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, in the second quarter of the prior fiscal year, we
recorded a FAS 144 impairment charge of $0.8 million that negatively impacted
gross income. The change in the TDN agreement contributed 160 basis points to
the year-over-year improvement for the nine months ended March 31, 2004.
Marketing, engineering, and administrative (ME&A) expenses of $27.2 million, or
1.1% of sales, increased 0.2 percentage points, or $0.8 million, when compared
to the first nine months of last year. The impact of currency exchange rates,
primarily the stronger Euro and Australian Dollar, contributed $1.3 million
to the year-over-year increase. The offsetting reduction came at our domestic
operations as a result of controlled spending and the effects of cost reduction
efforts.
9
Interest expense was 15% lower than the same nine-month period one year ago.
Average outstanding debt levels declined 8.3%, or approximately $1.9 million,
from the same nine-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
higher domestic earnings compared to a domestic loss last year.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Comparison between March 31, 2004 and June 30, 2003
- ---------------------------------------------------
As of March 31, 2004, the Company had net working capital of $60.6 million,
which represents a 19% increase from the net working capital of $50.8 million
as of June 30, 2003.
Cash and cash equivalents increased $5.4 million, or approximately 92%, to
$11.4 million as of March 31, 2004. This increase came primarily at our
European manufacturing and Asian distribution locations.
Trade receivables of $32.5 million were down $2.9 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. The change in foreign
exchange rates since fiscal year-end resulted in an increase in
foreign-denominated receivables of $1.1 million.
Net inventory increased by $8.4 million versus June 30, 2003. Of this increase,
$1.7 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 fourth
quarter of this fiscal year and into the next fiscal year.
Net property, plant and equipment declined $1.7 million versus June 30, 2003.
This is primarily due to the fact that net acquisition of fixed assets of $1.7
million in the first nine months of this fiscal year trailed depreciation and
amortization expense of $4.3 million. This was offset by the net translation
impact of a stronger Euro and Australian Dollar.
Accounts payable of $16.1 million were about flat to June 2003. Our joint
venture in Japan, TDN, experienced about 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 $3.0 million. The increase came primarily at our domestic U.S.
and European manufacturing operations and is consistent with the increase in
inventories noted above. The net foreign currency translation impact was to
increase accounts payable by $0.6 million.
Total borrowings, notes payable and long-term debt, as of March 31, 2004
decreased by $2.3 million, or over 10%, to $19.6 million versus June 30, 2003.
In January 2004, the Company sold its 25% minority interest in Palmer Johnson
Distributors, LLC to the majority holder, PJD, Inc. for $3.8 million cash. The
proceeds from the sale were partially used to reduce the Company's outstanding
credit facility.
Total shareholders' equity increased by $4.5 million to a total of $54.7
million. Retained earnings increased by $1.0 million. The net increase in
retained earnings included $2.5 million in net earnings reported year-to-date,
offset by $1.5 million in dividend payments. Net favorable foreign currency
translation of $3.1 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.
Furthermore, it is the Company's intention to repatriate foreign cash, as needed
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 $ 1,806 $ 1,806
Revolver borrowing $ 9,200 $ 9,200
Long-term debt $ 8,577 $ 2,857 $ 5,721
Operating leases $11,061 $ 2,868 $ 3,762 $2,213 $2,218
Total obligations $30,644 $ 7,531 $18,682 $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 adoption of the provisions of this
Statement did not have a significant impact on the 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 movement
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 1.5%. Due to the relative stability of interest rates, the Company
did not utilize any financial instruments at March 31, 2004 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 $24,000 on an annual basis.
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 nine months ended March 31, 2004 and 2003 were denominated in
currencies other than the U.S. dollar. Of that total, approximately two-thirds
was denominated in euros with the balance composed of Japanese yen and the
Australian and Singapore dollars. The Company does not hedge the translation
exposure represented by the net assets of its foreign subsidiaries. Foreign
currency translation adjustments are recorded as a component of shareholders'
equity. Forward foreign exchange contracts are used to hedge the currency
fluctuations on significant transactions denominated in foreign currencies.
Derivative Financial Instruments - The Company has written policies and
procedures that place all financial instruments under the direction of the
company corporate treasury and restrict derivative transactions to those
intended for hedging purposes. The use of financial instruments for trading
purposes is prohibited. The Company uses financial instruments to manage
the market risk from changes in foreign exchange rates.
The Company primarily enters into forward exchange contracts to reduce the
earnings and cash flow impact of non-functional currency denominated receivables
and payables. These contracts are highly effective in hedging the cash flows
attributable to changes in currency exchange rates. Gains and losses resulting
from these contracts offset the foreign exchange gains or losses on the
underlying assets and liabilities being hedged. The maturities of the forward
exchange contracts generally coincide with the settlement dates of the related
transactions. Gains and losses on these contracts are recorded in Other income
(expense), net in the Consolidated Statement of Operations as the changes in
the fair value of the contracts are recognized and generally offset the gains
and losses on the hedged items in the same period. The primary currency to
which the Company was exposed in 2004 and 2003 was the Euro. At March 31, 2004
the Company had net outstanding forward exchange contracts to purchase Euros in
the value of $2,652,000 with a weighted average maturity of 41 days. The fair
value of the Company's contracts was a loss of approximately $60,000 at
March 31, 2004. 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 nine
months ended March 31, 2004 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 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 April 16, 2004 for a press release announcing financial
results for fiscal 2004 third 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)
May 14, 2004 /S/ FRED H. TIMM
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(Date) Fred H. Timm
Vice President - Administration and
Secretary and Duly Authorized Officer