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, 2005 Commission File Number 1-7635
TWIN DISC, INCORPORATED
(Exact name of registrant as specified in its charter)
Wisconsin 39-0667110
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1328 Racine Street, Racine, Wisconsin 53403-1758
(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 April 29, 2005, the registrant had 2,911,033 shares of its common stock
outstanding.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 June 30
2005 2004
---- ----
Assets
Current assets:
Cash and cash equivalents $ 8,579 $ 9,127
Trade accounts receivable, net 38,383 37,091
Inventories, net 56,137 52,079
Deferred income taxes 4,557 4,216
Other 3,415 3,111
-------- --------
Total current assets 111,071 105,624
Property, plant and equipment, net 36,616 33,222
Goodwill 13,065 12,717
Deferred income taxes 15,454 15,668
Other assets 8,973 9,406
-------- --------
$185,179 $176,637
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 3,575 $ 1,607
Current maturities on long-term debt 2,857 3,018
Accounts payable 17,849 17,241
Accrued liabilities 28,283 27,262
-------- --------
Total current liabilities 52,564 49,128
2
Long-term debt 17,618 16,813
Accrued retirement benefits 46,249 49,456
-------- --------
116,431 115,397
Minority Interest 480 509
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 88,472 86,443
Unearned Compensation (255) (304)
Accumulated other comprehensive loss (16,057) (20,301)
-------- --------
83,813 77,491
Less treasury stock, at cost 15,545 16,760
-------- --------
Total shareholders' equity 68,268 60,731
-------- --------
$185,179 $176,637
-------- --------
-------- --------
The notes to consolidated financial statements are an integral part of this
statement. Amounts in thousands.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31 March 31
2005 2004 2005 2004
---- ---- ---- ----
Net sales $56,436 $48,606 $156,549 $128,943
Cost of goods sold 42,352 35,689 116,652 96,409
------- ------- ------- -------
14,084 12,917 39,897 32,534
Marketing, engineering and
administrative expenses 11,227 9,520 31,997 27,156
Interest expense 304 272 814 835
Other expense (income),net 181 (42) 322 (227)
------- ------- ------- -------
11,712 9,750 33,133 27,764
------- ------- ------- -------
Earnings before income taxes
and minority interest 2,372 3,167 6,764 4,770
Income taxes 1,158 1,393 3,156 2,298
------- ------- ------- -------
Earnings before minority
interest 1,214 1,774 3,608 2,472
Minority interest 4 2 (64) (17)
------- ------- ------- -------
Net earnings $ 1,218 $1,776 $ 3,544 $2,455
------- ------- ------- -------
------- ------- ------- -------
Dividends per share $ 0.175 $ 0.175 $ .525 $ 0.525
Earnings per share data:
Basic earnings per share $ 0.42 $ 0.63 $ 1.24 $ 0.87
Diluted earnings per share $ 0.42 $ 0.62 $ 1.22 $ 0.86
Shares outstanding data:
Average shares outstanding 2,877 2,819 2,858 2,811
Dilutive stock options 51 29 48 21
------- ------- ------- -------
Diluted shares outstanding 2,928 2,848 2,906 2,832
------- ------- ------- -------
------- ------- ------- -------
Comprehensive income:
Net earnings $ 1,218 $ 1,776 $ 3,544 $2,455
Foreign currency translation
adjustment (1,338) 34 4,244 3,055
------- ------- ------- -------
Comprehensive income $ (120) $ 1,810 $ 7,788 $ 5,510
------- ------- ------- -------
------- ------- ------- -------
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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.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31
2005 2004
---- ----
Cash flows from operating activities:
Net earnings $ 3,544 $ 2,455
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,946 4,252
Equity in earnings of affiliate - (240)
Dividends received from affiliate - 195
Unearned Compensation 150 146
Net change in working capital,
excluding cash and debt, and other (4,734) (554)
------ ------
2,906 6,254
------ ------
Cash flows from investing activities:
Acquisitions of fixed assets (5,977) (1,681)
Proceeds from sales of fixed assets 69 48
Proceeds from sale of affiliate - 3,811
------ ------
(5,908) 2,178
------ ------
Cash flows from financing activities:
Increase (decrease) in debt, net 2,075 (2,396)
Proceeds from exercise of stock options 1,215 304
Dividends paid (1,514) (1,493)
------ ------
1,776 (3,585)
------ ------
Effect of exchange rate changes on cash 678 595
------ ------
Net change in cash and cash equivalents (548) 5,442
Cash and cash equivalents:
Beginning of period 9,127 5,908
------ ------
End of period $ 8,579 $11,350
------ ------
------ ------
The notes to consolidated financial statements are an integral part of
this statement. Amounts in thousands.
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
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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.
B. Recently Issued Accounting Standards
In the second quarter of fiscal 2005, the FASB issued SFAS No. 151 "Inventory
Costs-an amendment of ARB No.43 Chapter 4", SFAS No. 123R "Share Based
Payment", and FSP No. 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act
of 2004".
SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material.
During December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R) "Share-Based Payment" ("SFAS 123R"), which revises SFAS 123 and
supercedes APB 25. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized as expense based
on their fair values beginning with the first interim or annual period
beginning after June 15, 2005, with early adoption encouraged. In April 2005,
the Securities and Exchange Commission ("SEC") amended the compliance date to
the first annual period beginning after June 15, 2005. The pro-forma
disclosures previously permitted under SFAS 123 will no longer be an
alternative to expense recognition. We will adopt SFAS 123R using the
modified-prospective method beginning in the first quarter of fiscal 2006.
During December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance on the
accounting for the potential impact of the repatriation provisions of the
American Jobs Creation Act of 2004 (the "Jobs Act") on enterprises' income tax
expense and deferred tax liability. The Jobs Act, which was signed into law on
October 22, 2004, introduces relief on the potential income tax impact of
repatriating foreign earnings and certain other provisions. FSP 109-2 states
that an enterprise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment
or repatriation of foreign earnings for purposes of applying SFAS 109. Based
on our analysis to date, we are not in a position to decide on whether, or to
what extent, we might repatriate foreign earnings under the provision of the
Jobs Act. However, we expect to be in a position to finalize our assessment by
June 2005.
These statements are effective for financial statements for fiscal years
beginning after June 15, 2005. The adoption of these statements is not expected
to have a significant impact on the Company's financial statements.
C. Inventory
The major classes of inventories were as follows (in thousands):
March 31, June 30,
2005 2004
---------- ---------
Inventories:
Finished parts $ 41,076 $39,139
Work in process 9,589 8,187
Raw materials 5,472 4,753
------- -------
$ 56,137 $52,079
------- -------
------- -------
D. 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
5
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, 2005 (in thousands).
Three Months Ended Nine Months Ended
March 31 March 31
2005 2004 2005 2004
--------------- ----------------
Beginning reserve balance $ 6,720 $ 6,251 $ 6,478 $ 6,070
Current period expense 1,107 1,471 3,159 3,276
Payments or credits to customers 1,136 1,236 3,379 3,123
Translation (188) (86) 245 177
------ ------ ------ ------
Ending reserve balance $ 6,503 $ 6,400 $ 6,503 $ 6,400
====== ====== ====== ======
E. Contingencies
The Company is involved in litigation of which the ultimate outcome and
liability to the Company, if any, is not presently determinable. Management
believes that final disposition of such litigation will not have a material
impact on the Company's results of operations or financial position.
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
2005 2004 2005 2004
--------------- ----------------
Manufacturing segment sales $53,453 $45,355 $147,490 $119,289
Distribution segment sales 16,975 16,134 48,343 43,345
Inter/Intra segment sales (13,992) (12,883) (39,284) (33,691)
------ ------ ------ ------
Net sales $56,436 $48,606 $156,549 $128,943
====== ====== ====== ======
Manufacturing segment earnings $ 2,429 $ 2,709 $7,813 $ 4,240
Distribution segment earnings 1,251 1,363 3,611 3,342
Inter/Intra segment loss (1,308) (905) (4,660) (2,812)
------ ------ ------ ------
Earnings before income taxes
and minority interest $ 2,372 $ 3,167 $ 6,764 $ 4,770
====== ====== ====== ======
Assets March 31, June 30,
2005 2004
------------- ------------
Manufacturing segment assets $171,583 $166,049
Distribution segment assets 34,102 30,247
Corporate assets and elimination
of inter-company assets (20,506) (19,659)
-------- --------
$185,179 $176,637
======= =======
G. Stock Option Plans
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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. No
options were granted in the first, second and third quarters of fiscal 2005
or 2004. 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,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
Net earnings
As reported $ 1,218 $ 1,776 $ 3,544 $ 2,455
Pro forma 1,218 1,776 3,544 2,455
Basic earnings per share
As reported $ 0.42 $ 0.63 $ 1.24 $ 0.87
Pro forma 0.42 0.63 1.24 0.87
Diluted earnings per share
As reported $ 0.42 $ 0.62 $ 1.22 $ 0.86
Pro forma 0.42 0.62 1.22 0.86
In October 2004, the Company issued restricted stock grants for 4,800 shares,
600 shares vest in 1 year from the date of grant, 2,100 shares vest in 2 years,
600 shares vest in 3 years, and 1,500 shares vest in four years. The fair
market value of the grants based on the market price at the date of grant was
$120,000.
In October 2004, the Company granted performance stock awards to various
employees of the Company, including executive officers. The stock will be
awarded if the Company achieves a specified consolidated gross revenue
objective in the fiscal year ending June 30, 2007. No compensation expense
has been recorded.
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, 3, and 4 year periods. The total
compensation expense of all restricted stock grants for the nine months ended
March 31, 2005, approximated $150,000.
H. Periodic Benefit Cost
The Company has non-contributory, qualified defined benefit plans covering
substantially all domestic employees hired prior to October 1, 2003 and certain
foreign employees. Components of Net Periodic Benefit Cost (in thousands):
Three months ended Nine months ended
March 31 March 31
2005 2004 2005 2004
---- ---- ---- ----
Pension Benefits
Service cost $ 301 $ 310 $ 889 $ 913
Interest cost 1,799 1,796 5,378 5,367
Expected return on plan assets (1,837) (1,594) (5,495) (4,766)
Amortization of prior service cost (149) (179) (446) (538)
Amortization of transition obligation 18 16 46 42
Amortization of net loss 995 1,182 2,983 3,541
----- ----- ----- -----
Net periodic benefit cost $1,127 $1,531 $3,355 $4,559
===== ===== ===== =====
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Post-retirement Benefits
Service cost $ 13 $ 11 $ 39 $ 34
Interest cost 418 514 1,254 1,543
Amortization of net loss 164 217 492 651
----- ----- ----- -----
Net periodic benefit cost $ 595 742 $1,785 $2,228
===== ===== ===== =====
The Company previously disclosed in its financial statements for the year ended
June 30, 2004, that it expected to contribute $7,476,000 to its pension plan in
fiscal 2005. As of March 31, 2005, $6,352,000 of contributions have been made.
I. Debt
During the first quarter the revolving loan agreement was amended increasing the
limit from $20,000,000 to $35,000,000 and extending the term to October 31,
2007. Additionally certain capital expenditure restrictions were increased.
All other terms and covenants remained the same.
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 2005 with the Third Quarter of FY 2004
Net sales for the third quarter improved 16.1% to $56.4 million from $48.6
million in the same period a year ago. The results for the current fiscal
quarter were favorably impacted by the Company's recent acquisition of Rolla SP
Propellers SA (Rolla). For the quarter, Rolla contributed nearly $1.5 million
in sales. Compared to the third quarter of fiscal 2004, the Euro and Asian
currencies continued to strengthen against the US dollar. The impact of this
strengthening on foreign operations was to increase revenues by approximately
$1.4 million versus the prior year, before eliminations.
Sales at our manufacturing operations were up 17.8% versus the same period last
year. The Company experienced significant increased order activities and sales
at all of our manufacturing locations. Sales at our US domestic manufacturing
location were up nearly 21%. Sales at our European manufacturing locations,
excluding the recent Rolla acquisition, were up over 5% over the same period
last year, with approximately three-quarters of the improvement coming from the
strengthening Euro versus the US Dollar. The third quarter of fiscal 2005
represents the third quarter that the Company has recognized sales from this
acquisition. For the third quarter, Rolla contributed just over $1.5 million
in sales. The sales growth in our domestic operations was primarily driven by
increased sales of military and 8500 series transmission, and industrial
products, while the growth in our European operations was driven primarily by
marine product sales increases.
Our distribution segment experienced an increase of 5.2% in sales compared to
the third quarter of fiscal 2004. The majority of this increase came from our
distribution operations in Asia-Pacific. Sales growth in our commercial and
pleasure craft marine transmission product lines primarily drove the increase.
About two-thirds of the sales growth experienced by our distribution
operations versus the same period last year can be attributed to the effect of
a weaker dollar among most Asian currencies and the Euro.
The elimination for net inter/intra segment sales increased $1.1 million,
accounting for the remainder of the net change in sales versus the same period
last year. This increase was consistent with the overall increase in sales
experienced by the Company in the third quarter.
Gross income as a percentage of sales decreased to 25.0% of sales, compared to
26.6% of sales for the same period last year. This decline results principally
from the inability to offset higher prices for steel, shipping and energy; as
well as, the unfavorable impact of producing pleasure craft marine
transmissions in Euros at the Company's Belgium facility and selling them in US
dollars to the North American market. Management has taken measures to offset
the higher raw material costs through pricing actions to be effective in the
fourth quarter. Higher volume, level fixed costs, increased manufacturing
8
productivity and absorption at our domestic manufacturing operations, and lower
pension expense helped to partially offset higher raw material and other costs.
Marketing, engineering, and administrative (ME&A) expenses were 17.9% higher
compared to last year's third fiscal quarter. As a percentage of sales, ME&A
expenses were up slightly to 19.9% of sales versus 19.6% of sales in the third
quarter of fiscal 2004. In fiscal 2005's third quarter, ME&A expenses include
the impact of the recent Rolla acquisition. As part of a temporary
corporate-wide wage cost reduction program in fiscal 2004, the corporate bonus
program was suspended for the prior fiscal year. For fiscal 2005, a new bonus
program has been implemented that emphasizes the achievement of earning returns
in excess of the Company's cost of capital as well as other financial and
non-financial objectives. The current quarter includes the impact of the
re-introduction of the corporate bonus program. Lastly, there was a net
unfavorable impact on the ME&A expenses of our overseas operations of
approximately $0.2 million related to the continued weakening of the US dollar
versus most Asian currencies and the Euro.
Interest expense of $0.3 million for the quarter was relatively flat to the
same quarter last year. While the average total borrowings for the quarter
were up nearly $3.7 million versus the third fiscal quarter of last year, the
mix of the Company's borrowings were at a lower weighted-average interest rate,
as the Company continues to pay off its 7.37% ten-year unsecured notes.
The consolidated income tax rate was higher than a year ago primarily due to
changes in the mix of foreign versus domestic earnings.
Comparison of the First Nine Months of FY 2005 with the First Nine Months of
FY 2004
Net sales for the first nine months of 2005 improved 21.4% to $156.5 million
from $128.9 million in the same period a year ago. The results for the current
fiscal year's first nine months were favorably impacted by the Company's recent
acquisition of Rolla as well as a previously announced military contract to
supply transmission systems for vehicles to be delivered to the Israeli Defense
Forces (IDF). The latter contributed nearly $6.8 million in sales for the
first nine months of this fiscal year. Compared to the first nine months of
fiscal 2004, the Euro and Asian currencies continued to strengthen against the
US dollar. The impact of this strengthening on foreign operations was to
increase revenues by approximately $4.5 million versus the prior year, before
eliminations.
Sales at our manufacturing operations were up 23.6% versus the same period last
year. The Company experienced significant increased order activities and sales
at all of our manufacturing locations. Sales at our US domestic manufacturing
location were up nearly 25%. Sales at our European manufacturing locations,
excluding the recent Rolla acquisition, were up nearly 12% over the same period
last year, with approximately half of this improvement coming from the
strengthening Euro versus the US Dollar. For the first nine months of fiscal
2005, Rolla contributed just under $4.8 million in sales. The sales growth in
our domestic operations was primarily driven by increased sales of military and
8500 series transmission, and industrial products, while the growth in our
European operations was driven primarily by marine product sales increases.
Our distribution segment experienced an increase of 11.5% in sales compared to
the first nine months of fiscal 2004. The majority of this increase came from
our distribution operations in Asia-Pacific, Japan, Italy and the Northwestern
US and Canada. Sales growth in our commercial and pleasure craft marine
transmission product lines primarily drove the increase in Asia-Pacific and
Japan, while increased surface drive product sales drove the increase in Italy.
The increase sales activity at our distribution operations in the Northwestern
US and Canada came from increased industrial product and transmission sales.
Approximately 38% of the sales growth experienced by our distribution
operations versus the same period last year can be attributed to the effect of
a weaker dollar among most Asian currencies and the Euro.
The elimination for net inter/intra segment sales increased $5.6 million,
accounting for the remainder of the net change in sales versus the same period
last year. This increase was consistent with the overall increase in sales
experienced by the Company in the first nine months.
Gross profit as a percentage of sales increased 30 basis points to 25.5% of
sales, compared to 25.2% of sales for the same period last year. Higher
volume, improved product mix, level fixed costs, increased manufacturing
productivity and absorption, the favorable effect of the Company's outsourcing
activities, and lower pension expense helped to offset higher raw material and
other costs.
9
Marketing, engineering, and administrative (ME&A) expenses were 17.8% higher
compared to the first nine months of fiscal 2004. As a percentage of sales,
ME&A expenses were down slightly to 20.4% of sales versus 21.1% of sales in the
first nine months of fiscal 2004. In fiscal 2005's first nine months, ME&A
expenses include the impact of the recent Rolla acquisition. As part of a
temporary corporate-wide wage cost reduction program in fiscal 2004, the
corporate bonus program was suspended for the prior fiscal year. For fiscal
2005, a new bonus program has been implemented that emphasizes the achievement
of earning returns in excess of the Company's cost of capital as well as other
financial and non-financial objectives. The first nine months of this fiscal
year includes the impact of the re-introduction of the corporate bonus program.
Lastly, there was a net unfavorable impact on the ME&A expenses of our overseas
operations of approximately $0.7 million related to the continued weakening of
the US dollar versus most Asian currencies and the Euro.
Interest expense of $0.8 million for the first nine months was 2.5% lower than
the same period last year. While the average total borrowings for the first
nine months were up nearly $2.5 million versus the first nine months of last
year, the mix of the Company's borrowings were at a lower weighted-average
interest rate, as the Company continues to pay off its 7.37% ten-year unsecured
notes.
For the first nine months of fiscal 2005, the consolidated income tax rate was
slightly lower than a year ago primarily due to increased domestic earnings,
which were taxed at a lower rate and changes in the mix of foreign versus
domestic earnings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Comparison between March 31, 2005 and June 30, 2004
As of March 31, 2005, the Company had net working capital of $58.5 million,
which represents a slight increase from the net working capital of $56.5
million as of June 30, 2004.
Cash and cash equivalents decreased $0.5 million, or approximately 6%, to $8.6
million as of March 31, 2005. The majority of the cash and cash equivalents as
of March 31, 2005 are at our overseas operations in Europe and Asia-Pacific.
Trade receivables of $38.4 million were up $1.3 million versus last fiscal
year-end. However, the change in foreign exchange rates since fiscal year-end
results in an increase in foreign-denominated receivables of approximately $1.3
million. The net change is consistent with the sales volume experienced in the
second and third fiscal quarters of this year versus the third and fourth
fiscal quarters of fiscal 2004.
Net inventory increased by $4.1 million versus June 30, 2004 to $56.1 million.
$2.0 million of the increase can be attributed to the net effect of the change
in foreign exchange rates since fiscal year-end. The net remaining increase
was experienced at the remaining manufacturing and distribution subsidiaries
and is consistent with the increase sales and order activity experienced in the
first nine months of this fiscal year. As of March 31, 2005, the Company's
backlog of orders to be shipped over the next six months, which does not
include any business booked from Rolla, was $62.7 million, up 27% since the
year began and up 20% compared with the same period a year ago. This
represents the highest six month backlog since the third quarter of fiscal
1998.
Net property, plant and equipment (PP&E) increased $3.4 million versus June 30,
2004. In the first nine months of fiscal 2005, the Company's capital
expenditures for PP&E totaled $6.0 million, an over 250% increase compared to
the same period last year. The year-over-year increase is primarily driven by
the construction of a new facility at our manufacturing operation in
Switzerland. In total, the Company expects to more than double its investments
in capital assets in fiscal 2005 compared to fiscal 2004. In addition to the
new facility at Rolla, the Company is focusing on modernizing key core
manufacturing, assembly and testing processes.
Accounts payable of $17.8 million were up 3.5% from June 30, 2004. Accounts
payable at our domestic manufacturing operations were down nearly $2 million
from the beginning of the fiscal year. This was offset by increases at our
overseas manufacturing and distribution operations. The net effect of the
continued weakening US dollar was to increase foreign denominated accounts
payable by $0.7 million compared to fiscal year-end 2004.
Total borrowings, notes payable and long-term debt, as of March 31, 2005
increased by $2.6 million, or 12%, to $24.1 million versus June 30, 2004. This
10
increase is primarily attributable to increased funding in the first nine
months of fiscal 2005 of the Company's pension plan as well as the increased
capital investment noted above. In fiscal 2005's first nine months, the
Company made pension contributions of just under $6.4 million. For the year
ended June 30, 2005, the Company expects to contribute a total of $7.5 million
to its pension plans, compared to $3.7 million in fiscal 2004.
Total shareholders' equity increased by $7.5 million to a total of $68.3
million. Retained earnings increased by $2.0 million. The net increase in
retained earnings included $3.5 million in net earnings reported year-to-date,
offset by $1.5 million in dividend payments. Net favorable foreign currency
translation of $4.2 million was reported as the U.S. Dollar weakened against
the Euro and Asian currencies during the first nine months. Accounting for
the balance of the change, treasury stock decreased nearly $1.2 million from
the prior fiscal year-end due to the exercising of stock options in the first
nine months of fiscal 2005.
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.
During the first fiscal quarter, the Company amended its revolving loan
agreement, increasing the limit to $35,000,000, from $20,000,000, and extending
the term by two years to October 31, 2007. Furthermore, it is the Company's
intention to continue to repatriate foreign cash, as needed, in the coming
quarters. 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):
Less than 1-3 3-5 After 5
Contractual Obligations Total 1 year Years Years Years
Short-term debt $ 3,575 $ 3,575
Revolver borrowing $13,400 $13,400
Long-term debt $ 7,075 $ 2,857 $ 4,218
Operating leases $10,285 $ 2,700 $ 3,711 $2,404 $1,470
Total obligations $34,335 $ 9,132 $21,329 $2,404 $1,470
New Accounting Releases
In the second quarter of fiscal 2005, the FASB issued SFAS No. 151 "Inventory
Costs-an amendment of ARB No.43 Chapter 4", SFAS No. 123R "Share Based
Payment", and FSP No. 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act
of 2004".
SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material.
During December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R) "Share-Based Payment" ("SFAS 123R"), which revises SFAS 123 and
supercedes APB 25. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized as expense based
on their fair values beginning with the first interim or annual period
beginning after June 15, 2005, with early adoption encouraged. In April 2005,
the Securities and Exchange Commission ("SEC") amended the compliance date to
the first annual period beginning after June 15, 2005. The pro-forma
disclosures previously permitted under SFAS 123 will no longer be an
alternative to expense recognition. We will adopt SFAS 123R using the
modified-prospective method beginning in the first quarter of fiscal 2006.
During December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance on the
accounting for the potential impact of the repatriation provisions of the
American Jobs Creation Act of 2004 (the "Jobs Act") on enterprises' income tax
expense and deferred tax liability. The Jobs Act, which was signed into law on
October 22, 2004, introduces relief on the potential income tax impact of
repatriating foreign earnings and certain other provisions. FSP 109-2 states
that an enterprise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment
or repatriation of foreign earnings for purposes of applying SFAS 109. Based
on our analysis to date, we are not in a position to decide on whether, or to
what extent, we might repatriate foreign earnings under the provision of the
Jobs Act. However, we expect to be in a position to finalize our assessment by
June 2005.
11
These statements are effective for financial statements for fiscal years
beginning after June 15, 2005. The adoption of these statements is not expected
to have a significant impact on the Company's financial statements.
Critical Accounting Policies
The preparation of this Quarterly Report requires management's judgment to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the dates of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. There can be no assurance that actual results
will not differ from those estimates.
Twin Disc's significant accounting policies are described in Note A in the
Notes to Consolidated Financial Statements in the Annual Report for June 30,
2004. There have been no significant changes to those accounting policies
subsequent to June 30, 2004.
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 or LIBOR
plus 1.25%. Due to the relative stability of interest rates, the Company did
not utilize any financial instruments at March 31, 2005 to manage interest rate
risk exposure. A 10 percent increase or decrease in the applicable interest
rate would result in a change in pretax interest expense of approximately
$53,000.
Commodity price risk - The Company is exposed to fluctuation in market prices
for such commodities as steel and aluminum. The Company does not utilize
commodity price hedges to manage commodity price risk exposure.
Currency risk - The Company has exposure to foreign currency exchange
fluctuations. Approximately 45% of the Company's revenues in the three months
and nine months ended March 31, 2005 and 2004 were denominated in currencies
other than the U.S. dollar. Of that total, approximately 64% was denominated
in Euros with the balance composed of Japanese yen, Swiss franc 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 2005 and 2004 was the
Euro. At March 31, 2005 the Company had net outstanding forward exchange
contracts to purchase Euros in the value of $2,500,000 with a weighted average
maturity of 35 days. The fair value of the Company's contracts was a loss of
approximately $49,000 at March 31, 2005. At June 30, 2004 the Company had net
outstanding forward exchange contracts to purchase Euros in the value of
$2,901,000 with a weighted average maturity of 45 days. The fair value of the
12
Company's contracts was a loss of approximately $58,000 at June 30, 2004.
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 over
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 controls over financial reporting. The Company may from
time to time make changes aimed at enhancing the effectiveness of its
disclosure controls and procedures, including its internal controls, to ensure
that the Company's systems evolve with its business.
Part II. - OTHER INFORMATION
Item 1. Legal Proceedings.
Twin Disc is a defendant in several product liability or related claims
considered either adequately covered by appropriate liability insurance or
involving amounts not deemed material to the business or financial condition of
the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no securities of the Company sold by the Company during the six
months ended March 31, 2005, that were not registered under the Securities Act
of 1933.
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.
Forward Looking Statements
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".
13
Item 6. Exhibits
31a Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31b Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32a Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32b Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TWIN DISC, INCORPORATED
(Registrant)
May 13, 2005 /S/ FRED H. TIMM
----------------------- ---------------------------
(Date) Fred H. Timm
Vice President - Administration and
Secretary and Chief Accounting Officer