1 TWIN DISC, INCORPORATED SECURITIES AND EXCHANGE COMMISSION WASHINGTON Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended December 31, 2000 Commission File Number 1-7635 TWIN DISC, INCORPORATED (Exact name of registrant as specified in its charter) Wisconsin 39-0667110 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 1328 Racine Street, Racine, Wisconsin 53403 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (262) 638-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No . At December 31, 2000, the registrant had 2,807,832 shares of its common stock outstanding.
2 FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 31 June 30 2000 2000 ---- ---- Assets Current assets: Cash and cash equivalents $ 7,169 $ 5,651 Trade accounts receivable, net 26,670 28,828 Inventories, net 54,128 50,190 Other 5,785 5,333 -------- -------- Total current assets 93,752 90,002 Property, plant and equipment, net 32,208 34,303 Investments in affiliates 7,158 6,968 Deferred income taxes 4,500 4,416 Prepaid pension asset 14,328 14,335 Other assets 23,394 24,166 -------- -------- $175,340 $174,190 -------- -------- -------- -------- Liabilities and Shareholders' Equity Current liabilities: Notes payable $ 8,817 $ 7,428 Accounts payable 13,648 11,571 Accrued liabilities 22,896 21,909 -------- -------- Total current liabilities 45,361 40,908 Long-term debt 31,258 31,254 Accrued retirement benefits 21,434 23,795 -------- -------- 98,053 95,957 Shareholders' Equity: Common stock 11,653 11,653 Retained earnings 84,111 83,228 Accumulated other comprehensive (loss)income (996) 799 -------- -------- 94,768 95,680 Less treasury stock, at cost 17,481 17,447 -------- -------- Total shareholders' equity 77,287 78,233 -------- -------- $175,340 $174,190 -------- -------- -------- -------- The notes to consolidated financial statements are an integral part of this statement. Amounts in thousands.
3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended December 31 December 31 2000 1999 2000 1999 ---- ---- ---- ---- Net sales $44,025 $44,342 $85,374 $79,619 Cost of goods sold 33,569 34,390 65,174 62,811 ------- ------- ------- ------- 10,456 9,952 20,200 16,808 Marketing, engineering and administrative expenses 8,049 8,139 15,578 15,884 Interest expense 685 828 1,443 1,484 Other income, net (54) (252) (231) (353) ------- ------- ------- ------- 8,680 8,715 16,790 17,015 ------- ------- ------- ------- Earnings (loss) before income taxes 1,776 1,237 3,410 (207) Income taxes 816 544 1,544 (3) ------- ------- ------- ------- Net earnings (loss) $ 960 $ 693 $ 1,866 ($ 204) ------- ------- ------- ------- ------- ------- ------- ------- Dividends per share $ 0.175 $ 0.175 $ 0.35 $ 0.35 Earnings per share data: Basic earnings (loss) per share $ 0.34 $ 0.25 $ 0.66 ($ 0.07) Diluted earnings (loss) per share $ 0.34 $ 0.25 $ 0.66 ($ 0.07) Shares outstanding data: Average shares outstanding 2,808 2,826 2,808 2,831 Dilutive stock options 0 0 0 0 ------- ------- ------- ------- Diluted shares outstanding 2,808 2,826 2,808 2,831 ------- ------- ------- ------- ------- ------- ------- ------- Comprehensive income: Net earnings (loss) $ 960 $ 693 $ 1,866 ($ 204) Foreign currency translation adjustment (167) (857) (1,795) (869) ------- ------- ------- ------- Comprehensive income (loss) $ 793 $ (164) $ 71 ($ 1,073) ------- ------- ------- ------- ------- ------- ------- ------- 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 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended December 31 2000 1999 ---- ---- Cash flows from operating activities: Net earnings (loss) $1,866 ($ 204) Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 3,184 3,060 Equity in earnings of affiliates (451) (405) Dividends received from affiliate 263 250 Net change in working capital, excluding cash and debt, and other (3,017) (3,579) ------ ------ 1,845 (878) ------ ------ Cash flows from investing activities: Acquisitions of fixed assets (1,096) (1,145) Proceeds from sale of fixed assets 7 51 Business acquisition 0 131 ------ ------ (1,089) ( 963) Cash flows from financing activities: Increase in notes payable, net 2,100 2,489 Treasury stock activity (34) (278) Dividends paid (983) (993) ------ ------ 1,083 1,218 ------ ------ Effect of exchange rate changes on cash (321) (58) ------ ------ Net change in cash and cash equivalents 1,518 (681) Cash and cash equivalents: Beginning of period 5,651 4,136 ------ ------ End of period $7,169 $3,455 ------ ------ ------ ------ 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 balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. B. Inventory The major classes of inventories were as follows (in thousands): December 31 June 30 2000 2000 ---------- --------- Inventories: Finished parts $44,429 $40,313 Work in process 4,953 5,880 Raw materials 4,746 3,997 ------- ------- $54,128 $50,190 ------- ------- ------- ------- C. Contingencies The Company is involved in various stages of investigation relative to hazardous waste sites, two of which are on the United States EPA National Priorities List (Superfund sites). The Company's assigned responsibility at each of the Superfund sites is less than 2%. The Company has also been requested to provide administrative information related to two other potential Superfund sites but has not yet been identified as a potentially responsible party. Additionally, the Company is subject to certain product liability matters in the normal course of business. At December 31,2000 the Company has accrued approximately $1,050,000, which represents management's best estimate available for possible losses related to these contingencies. This amount has been provided over the past several years. Based on the information available, the Company does not expect that any unrecorded liability related to these matters would materially affect the consolidated financial position, results of operations or cash flows. D. BUSINESS SEGMENTS Information about the Company's segments is summarized as follows (in thousands): Three Months Ended Six Months Ended December 31 December 31 2000 1999 2000 1999 ---- ---- ---- ---- Manufacturing segment sales $42,516 $40,994 $81,154 $72,213 Distribution segment sales 10,848 11,729 22,176 22,248 Inter/Intra segment sales (9,339) (8,381) (17,956) (14,842) ------- ------- ------- ------- Net sales $44,025 $44,342 $85,374 $79,619 ------- ------- ------- ------- ------- ------- ------- ------- Manufacturing segment earnings(loss)$ 2,035 $ 773 $ 3,242 $(1,015) Distribution segment earnings 483 848 1,430 1,393 Inter/Intra segment loss (742) (384) (1,262) (585) ------ ------- ------- ------- Pretax earnings (loss) $ 1,776 $ 1,237 $ 3,410 ($ 207) ------- ------- ------- ------- ------- ------- ------- ------- Assets December 31, June 30, 2000 2000 ------------- ------------- Manufacturing segment assets $154,086 $154,971 Distribution segment assets 24,257 24,518 Corporate assets and elimination of inter-company assets (3,003) (5,299) -------- -------- $175,340 $174,190 -------- -------- -------- -------- E. NEW ACCOUNTING PRONOUNCEMENT In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." This bulletin summarizes certain views of the SEC staff on applying generally accepted accounting principles to revenue recognition in financial statements. The SEC staff expressed its view that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and collectability is reasonably assured. The Company expects that SAB 101 will not have a material effect on its financial statements
6 MANAGEMENT DISCUSSION AND ANALYSIS Consolidated net sales for the second fiscal quarter were even with a year ago, the net result of higher shipping levels at most operations, reductions caused by translating foreign sales at strong dollar exchange rates, and softening demand in certain markets. However, margins improved and net earnings rose by about 39 percent. Revenues of our domestic manufacturing operations continued their improvement from year-ago levels, but at a lesser rate than in the first fiscal quarter. As in the prior quarter, we reported increased market penetration of our propulsion products, primarily Arneson surface drives, and an improvement in aftermarket parts sales. We continue to see some recovery in demand for the higher horsepower marine transmissions used in commercial applications, and sales to the military gained over last year. On the strength of continuing demand for pleasure craft marine transmissions, the volume of product shipped from our European manufacturing subsidiaries registered a solid improvement in the quarter. While the weak Euro provided a competitive pricing advantage for those products on world markets, the almost 20 percent decline in value of that currency during the past year eliminated the revenue gain when stated in U.S. dollar terms. Likewise, the effect of modest gains in unit shipments from our offshore distribution operations was not proportionately reflected in our reported sales due to the relative weakness against the dollar of other currencies around the world. The consolidated gross margin improved slightly from a year ago as a result of greater production volumes, and improved productivity and the favorable impact of the strong dollar at our Belgian operation. Margins are enhanced by the component of European sales denominated in dollars. Also, in last year's second fiscal quarter, results were affected by lingering production inefficiency cause by the implementation of new business systems late in the first fiscal quarter. Marketing, engineering and administrative spending for the period was slightly below the second quarter last year, in line with the minimal change in sales volume. Interest expense reflects a minor reclassification from the first fiscal quarter, but it is still well below a year ago as a result of the $4 million reduction in debt since last year. Working capital, at $48 million, has changed little in the six months since our previous fiscal year-end. Accounts receivable and inventory balances are comparable to the last quarter with variances from June 30, 2000 due to seasonal factors. Debt also has remained relatively constant since the prior year-end with a small amount of temporary borrowing at the end of December. For the six months, cash flows from operating activities were sufficient to cover capital expenditures and dividend payments. Our balance sheet is strong and we continue to have sufficient liquidity for near-term needs.
7 OTHER INFORMATION Item 1. Legal Proceedings. There were no reports on Form 8-K during the three months ended December 31, 2000. Item 2. Changes in Securities and Use of Proceeds. There were no securities of the Company sold by the Company during the three months ended December 31, 2000 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. Item 5. Other Information. At the Annual Meeting of Shareholders held October 20, 2000, 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 2003: Michael H. Joyce For: 2,536,322 Authority withheld: 36,789 David B. Rayburn For: 2,536,940 Authority withheld: 36,171 George E. Wardeberg For: 2,535,886 Authority withheld: 37,225 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".
8 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) January 26, 2001 /S/ FRED H. TIMM ----------------------- --------------------------- (Date) Fred H. Timm Corporate Controller and Secretary