1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended December 31, 2003 Commission File Number 1-7635 TWIN DISC, INCORPORATED (Exact name of registrant as specified in its charter) Wisconsin 39-0667110 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 1328 Racine Street, Racine, Wisconsin 53403-1758 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (262) 638-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X . At January 30, 2004, the registrant had 2,844,732 shares of its common stock outstanding.

2 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements. TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) December 31 June 30 2003 2003 ---- ---- Assets Current assets: Cash and cash equivalents $ 9,995 $ 5,908 Trade accounts receivable, net 26,658 35,367 Inventories, net 54,844 47,247 Deferred income taxes 4,469 4,469 Other 4,214 4,104 -------- -------- Total current assets 100,180 97,095 Property, plant and equipment, net 29,111 30,210 Investment in affiliates 2,676 2,550 Goodwill 12,927 12,876 Deferred income taxes 20,070 20,164 Intangible pension asset 24 24 Other assets 7,956 7,439 -------- -------- $172,944 $170,358 -------- -------- -------- -------- Liabilities and Shareholders' Equity Current liabilities: Notes payable $ 1,678 $ 2,429 Current maturities on long-term debt 2,857 2,857 Accounts payable 14,811 16,115 Accrued liabilities 24,451 24,885 -------- -------- Total current liabilities 43,797 46,286 Long-term debt 17,720 16,584 Accrued retirement benefits 57,636 56,732 -------- -------- 119,153 119,602 Minority Interest 503 485 Shareholders' Equity: Common stock 11,653 11,653 Retained earnings 82,875 83,191 Unearned Compensation (388) 0 Accumulated other comprehensive loss (23,957) (26,978) -------- -------- 70,183 67,866 Less treasury stock, at cost 16,895 17,595 -------- -------- Total shareholders' equity 53,288 50,271 -------- -------- $172,944 $170,358 -------- -------- -------- -------- The notes to consolidated financial statements are an integral part of this statement. Amounts in thousands.

3 TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended December 31 December 31 2003 2002 2003 2002 ---- ---- ---- ---- Net sales $42,371 $42,794 $80,337 $79,315 Cost of goods sold 31,650 36,114 60,720 66,705 ------- ------- ------- ------- 10,721 6,680 19,617 12,610 Marketing, engineering and administrative expenses 9,277 8,971 17,635 17,290 Restructuring of operations 0 2,042 0 2,042 Interest expense 283 325 563 633 Other expense (income),net 21 (64) (184) (105) ------- ------- ------- ------- 9,581 11,274 18,014 19,860 ------- ------- ------- ------- Earnings (loss) before income taxes and minority interest 1,140 (4,594) 1,603 (7,250) Income taxes 624 (1,536) 905 (2,431) ------- ------- ------- ------- Earnings (loss) before minority interest 516 (3,058) 698 (4,819) Minority interest (8) (29) (19) 1 ------- ------- ------- ------- Net earnings (loss) $ 508 ($ 3,087) $ 679 ($ 4,818) ------- ------- ------- ------- ------- ------- ------- ------- Dividends per share $ 0.175 $ 0.175 $ 0.35 $ 0.35 Earnings (loss)per share data: Basic earnings (loss) per share $ 0.18 ($ 1.10) $ 0.24 ($ 1.72) Diluted earnings (loss) per share$ 0.18 ($ 1.10) $ 0.24 ($ 1.72) Shares outstanding data: Average shares outstanding 2,813 2,808 2,808 2,808 Dilutive stock options 20 0 15 0 ------- ------- ------- ------- Diluted shares outstanding 2,833 2,808 2,823 2,808 ------- ------- ------- ------- ------- ------- ------- ------- Comprehensive income (loss): Net earnings (loss) $ 508 ($ 3,087) $ 679 ($ 4,818) Foreign currency translation adjustment 3,630 1,487 3,021 1,450 ------- ------- ------- ------- Comprehensive income (loss) $ 4,138 ($ 1,600) $ 3,700 ($ 3,368) ------- ------- ------- ------- ------- ------- ------- ------- In thousands of dollars except per share statistics. Per share figures are based on shares outstanding data. The notes to consolidated financial statements are an integral part of this statement.

4 TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended December 31 2003 2002 ---- ---- Cash flows from operating activities: Net earnings (loss) $ 679 ($ 4,818) Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 2,783 2,774 Unearned Compensation 104 0 Equity in earnings of affiliate (240) (223) Dividends received from affiliate 115 185 Restructuring of operations 0 2,042 Write-off of impaired asset 0 773 Net change in working capital, excluding cash and debt, and other 1,414 3,617 ------ ------ 4,855 4,350 ------ ------ Cash flows from investing activities: Acquisitions of fixed assets (920) (1,764) Proceeds from sales of fixed assets 28 0 ------ ------ (892) (1,764) ------ ------ Cash flows from financing activities: Increase (decrease) in debt, net 372 (687) Proceeds from exercise of stock options 207 0 Dividends paid (995) (983) ------ ------ (416) (1,670) ------ ------ Effect of exchange rate changes on cash 538 400 ------ ------ Net change in cash and cash equivalents 4,087 1,316 Cash and cash equivalents: Beginning of period 5,908 7,313 ------ ------ End of period $ 9,995 $ 8,629 ------ ------ ------ ------ The notes to consolidated financial statements are an integral part of this statement. Amounts in thousands.

5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. Basis of Presentation The unaudited financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of the Company, include all adjustments, consisting only of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with financial statements and the notes thereto included in the Company's latest Annual Report. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. In fiscal 2004, the joint venture agreement governing Twin Disc Nico Co., LTD (TDN) was amended. Under the new agreement, sales into certain territories have been transferred to the joint venture partner in exchange for which TDN receives a product development fee equal to the gross margin formerly earned on such sales. The effect of this change was to reduce sales by $3,200,000 and $6,300,000 for the quarter and six months ended December 31, 2003, with no effect on net earnings. Product development fees included in the quarter and six months ended December 31, 2003 approximated $175,000 and $330,000 respectively. B. Inventory The major classes of inventories were as follows (in thousands): December 31, June 30, 2003 2003 ---------- --------- Inventories: Finished parts $ 42,954 $36,175 Work in process 6,477 7,003 Raw materials 5,413 4,069 ------- ------- $ 54,844 $47,247 ------- ------- ------- ------- C. Warranty Twin Disc engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers. However, its warranty obligation is affected by product failure rates, the extent of the market affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. When evaluating the adequacy of the reserve for warranty costs, management takes into consideration the term of the warranty coverage, historical claim rates and costs of repair, knowledge of the type and volume of new products and economic trends. While we believe the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable in the future could differ materially from what actually transpires. The following is a listing of the activity in the warranty reserve during the period ended December 31, 2003. Three Months Ended Six Months Ended December 31, 2003 December 31, 2003 Reserve balance, beginning of period $6,099,000 $6,070,000 Current period expense 922,000 1,805,000 Payments or credits to customers 770,000 1,624,000 --------- --------- Reserve balance, end of period $6,251,000 $6,251,000 ========= ========= D. Contingencies The Company has made a $117,000 payment in trust in settlement of its exposure to a superfund site and anticipates that no further payments will be required. Additionally, the Company is subject to certain product liability matters in the normal course of business.

6 At December 31, 2003, the Company has accrued approximately $100,000, which represents management's best estimate available for possible losses related to these contingencies. This amount has been provided over the past several years. Based on the information available, the Company does not expect that any unrecorded liability related to these matters would materially affect the consolidated financial position, results of operations or cash flows. E. Business Segments Information about the Company's segments is summarized as follows (in thousands): Three Months Ended Six Months Ended December 31 December 31 2003 2002 2003 2002 --------------- ---------------- Manufacturing segment sales $40,787 $36,428 $73,934 $66,892 Distribution segment sales 14,250 15,671 27,211 29,520 Inter/Intra segment sales (12,666) (9,305) (20,808) (17,097) ------ ------ ------ ------ Net sales $42,371 $42,794 $80,337 $79,315 ====== ====== ====== ====== Manufacturing segment earnings $ 1,564 $(4,516) $ 1,531 $(6,993) Distribution segment earnings 815 710 1,979 1,165 Inter/Intra segment loss (1,239) (788) (1,907) (1,422) ------ ------ ------ ------ Earnings (loss) before income taxes and minority interest $ 1,140 $(4,594) $ 1,603 $(7,250) ====== ====== ====== ====== Assets December 31, June 30, 2003 2003 ------------- ------------ Manufacturing segment assets $155,632 $152,093 Distribution segment assets 30,318 32,761 Corporate assets and elimination of inter-company assets (13,006) (14,496) -------- -------- $172,944 $170,358 ======= ======= F. Recently Issued Accounting Standards In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of this Statement and it had no impact on its financial statements. G. Stock Option Plans The Company accounts for its stock option plans under the guidelines of Accounting Principles Board Opinion No. 25. Accordingly, no compensation cost has been recognized in the condensed consolidated statements of operations. During the third quarter of fiscal 2003, the Company adopted the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Had the Company recognized compensation expense determined based on the fair value at the grant date for awards under the plans, the net earnings and earnings per share would have been as follows (in thousands, except per share amounts): Three Months Ended Six Months Ended December 31, December 31, ------------------ ---------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net earnings (loss) As reported $ 508 ($ 3,087) $ 679 ($4,818) Pro forma 508 ( 3,087) 679 ( 4,892) Basic earnings (loss) per share As reported $ 0.18 ($ 1.10) $ 0.24 ($ 1.72) Pro forma 0.18 ( 1.10) 0.24 ( 1.74) Diluted earnings (loss) per share As reported $ 0.18 ($ 1.10) $ 0.24 ($ 1.72) Pro forma 0.18 ( 1.10) 0.24 ( 1.74)

7 In fiscal 2004, The Company issued restricted stock grants for 25,000 shares, 12,500 of these shares vest in 2 years from the date of grant and 12,500 vest in 4 years. The fair market value of the grants based on the market price at the date of grant was $421,000. The grants are recorded as Unearned Compensation and amortized over 2 and 4 year periods, amortization in the quarter ended December 31, 2003 approximated $104,000. H. Subsequent Event In January 2004, the Company sold its 25% minority interest in Palmer Johnson Distributors, LLC (PJD) to the majority holder, PJD, Inc. for $3,900,000 cash, which approximated the net book value of the investment. The results of this transaction will be reflected in the Company's third quarter financial results. For the six months ended December 31, 2003 and the fiscal year ended June 30, 2003, the Company recognized pre-tax earnings of $240,000 and $414,000, respectively, from its investment in PJD. In addition, the Company received cash distributions of $195,000 and $303,000 for the first half of fiscal year 2004 and all of fiscal year 2003, respectively. Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations. In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated financial statements and related notes. Results of Operations - --------------------- Comparison of the Second Quarter of FY 2004 with the Second Quarter of FY - ------------------------------------------------------------------------- 2003 - ---- Net sales for the second quarter were 1.0% below year-ago levels. In fiscal 2004, the Company's joint venture agreement governing Twin Disc Nico Co., LTD (TDN) was amended. Under the new agreement, sales into certain territories have been transferred to the joint venture partner in exchange for which TDN receives an engineering and product development fee equal to the gross margin formerly earned on such sales. The effect of this change was to reduce sales by $3.2 million for the quarter ended December 31, 2003, with no effect on net earnings. Compared to the second quarter of fiscal 2003, the Euro and Asian currencies strengthened against the US dollar. The impact of this strengthening on foreign operations was to increase revenues by approximately $3.3 million versus the prior year, before eliminations. Sales at our manufacturing operations were up 12% versus the same period last year. Of this increase, our domestic manufacturing operations in the U.S. accounted for 4.0 percentage points of the total improvement. When compared to the prior fiscal year's second quarter, our domestic manufacturing operations saw double-digit growth in the industrial, marine and propulsion product segments, offset by a decline in the transmission product group. Of the remaining nearly 8.0 percentage point improvement, the impact of a stronger Euro at our Belgian and Italian manufacturing operations accounted for 5.6 percentage points, with the majority of the remaining increase coming from sales growth at our Italian manufacturing operation. Our distribution segment experienced a 9% decline versus the second quarter of fiscal 2003. The change in the TDN agreement discussed above accounted for a decrease of 20%. Adjusted for this change, sales are 11% above the same period last year. A little more than half of this improvement can be attributed to the effect of a weaker dollar among most Asian currencies. The elimination for net inter/intra segment sales increased $3.4 million, accounting for the remainder of the net decrease in sales versus the same period last year. Gross margin as a percentage of sales improved significantly, increasing from 15.6% of sales in fiscal 2003's second quarter to 25.3% of sales in fiscal 2004. This increase was driven primarily by improved product mix, the impact of cost reduction efforts as well as the impact of the restructuring program undertaken in fiscal 2003's second quarter. Supplier quality problems encountered in fiscal 2003's first and second quarters caused last year's gross margin as a percentage of sales to be unusually low. Additionally, the Company took a pre-tax FAS 144 impairment charge of $0.8 million in the prior year's fiscal second quarter to write-down the value of a license agreement to manufacture and distribute certain products. This charge reduced gross margin as a percentage of sales by 180 basis points. The change in the TDN joint venture agreement, mentioned above, accounted for approximately 120 basis points of the current fiscal year's second quarter improvement, as those sales were at historically low margin rates.

8 Marketing, engineering, and administrative (ME&A) expenses were 3.4% higher compared to last year's second fiscal quarter. Favorable improvements at our domestic operations, primarily as a result of recent cost reduction efforts, of over $0.2 million were offset by the unfavorable year-over-year exchange rate impact at our foreign operations of $0.5 million. In the prior fiscal year's second quarter, the Company implemented severance and voluntary separation programs to align its workforce with market conditions. These actions resulted in a pre-tax restructuring charge of $2.0 million and were taken in an effort to streamline the Company's cost structure and align its corporate workforce with market conditions. The charge consisted of employee termination and severance benefits for a total of 58 employees; 48 production employees and 10 salaried employees. Interest expense for the quarter was 13% below the same quarter last year due primarily to lower borrowings as well as a mix of borrowings at a lower weighted interest rate. The consolidated income tax rate was higher than a year ago primarily due to increased overseas earnings, which were taxed at a higher rate. Comparison of the First Six Months of FY 2004 with the First Six Months of FY - ----------------------------------------------------------------------------- 2003 - ---- Net sales for the first six months of fiscal 2004 were $80.3 million, up 1.3% from the $79.3 million reported in the same six-month period of last year. Sales were positively impacted by net favorable currency exchange rates, primarily stronger Euro and Australian Dollar in relation to the U.S. Dollar, of approximately $5.2 million, when compared to the first six months of last fiscal year. The change in the TDN joint venture agreement, mentioned above, reduced sales by $6.3 million for the six months ended December 31, 2003, with no effect on net earnings. Sales at our manufacturing operations were up 11% versus the same six-month period last year. Of this increase, our domestic manufacturing operations in the U.S. accounted for nearly 4.0 percentage points of the total improvement. When compared to the first six months of fiscal 2003, all product groups, except transmission, saw significant year-over-year growth. At our Belgian and Italian operations, a stronger Euro, in relation to the U.S. Dollar, resulted in a net favorable exchange rate impact of $3.1 million for the first six months of fiscal 2004, or 4.6 percentage points of the total manufacturing operations improvement. Our distribution segment experienced an 8% decline versus the first six months of fiscal 2003. The change in the TDN agreement discussed above accounted for a decrease of 18%. Adjusted for this change, sales are 10% above the same period last year. A little more than half of this improvement can be attributed to the effect of a weaker dollar against the Australian, Singapore and Canadian Dollars, and the Japanese Yen. The elimination for net inter/intra segment sales increased $3.7 million, accounting for the remainder of the net decrease in sales versus the same period last year. Gross margin as a percentage of sales of 24.4% was up 8.5 percentage points from the first six months of fiscal 2003. This improvement was driven by a number of factors including improved product mix, the effect of restructuring and cost reduction actions, and the absence of manufacturing inefficiencies caused by supplier quality problems experienced in the first half of the prior fiscal year. Additionally, as mentioned above, the FAS 144 impairment charge taken in the second quarter of the prior fiscal year and the change in the TDN agreement contributed 210 basis points to the year-over-year improvement for the six months ended December 31, 2003. Marketing, engineering, and administrative (ME&A) expenses of $17.6 million, or 22.0% of sales, increased 0.2 percentage points, or $0.3 million, when compared to the first six months of last year. The impact of currency exchange rates, primarily the stronger Euro and Australian Dollar, contributed $0.8 million to the year-over-year increase. In the prior fiscal year's second quarter, the Company implemented severance and voluntary separation programs to align its workforce with market conditions. These actions resulted in a pre-tax restructuring charge of $2.0 million and were taken in an effort to streamline the Company's cost structure and align its corporate workforce with market conditions. The charge consisted of employee termination and severance benefits for a total of 58 employees; 48 production employees and 10 salaried employees.

9 Interest expense was 11% lower than the same six-month period one year ago. Average outstanding debt levels declined 9.6%, or approximately $2.2 million, from the same six-month period one year ago. The decline in interest expense was greater than the corresponding decrease in debt levels primarily due to the fact that the average weighted interest rate decreased year-over-year. The consolidated income tax rate was higher than a year ago primarily due to increased overseas earnings, which were taxed at a higher rate. Financial Condition, Liquidity and Capital Resources - ---------------------------------------------------- Comparison between December 31, 2003 and June 30, 2003 - ------------------------------------------------------ As of December 31, 2003, the Company had net working capital of $56.4 million, which represents an 11% increase from a net working capital of $50.8 million as of June 30, 2003. Cash and cash equivalents increased $4.1 million, or approximately 69.5%, to $10.0 million as of December 31, 2003. This increase came primarily at our two European manufacturing locations in Belgium and Italy and approximately equals the decrease in accounts receivable (including intercompany receivables) at these locations. Trade receivables of $26.7 million were down $8.7 million versus last fiscal year-end. Over $3 million of this change can be attributed to the amendment in the TDN joint venture agreement discussed above. Net inventory increased by $7.6 million versus June 30, 2003. Of this increase, $1.8 million was due to the translation impact of a stronger Euro and Australian Dollar, in relation to the U.S. Dollar, at our foreign operations. The majority of the remaining increase came at our domestic manufacturing location. This increase is primarily due to higher inventory levels in our transmission business as we prepare to deliver systems for a military contract in the second half of this fiscal year and into the next fiscal year. Net property, plant and equipment declined $1.1 million versus June 30, 2003. This is primarily due to the fact that net acquisition of fixed assets of $0.9 million in the first six months of this fiscal year trailed depreciation and amortization expense of $2.8 million. This was offset by the net translation impact of a stronger Euro and Australian Dollar. Accounts payable of $14.8 million were $1.3 million lower than June 2003. Our joint venture in Japan, TDN, experienced a $3 million decrease in accounts payable, attributable primarily to the change in the joint venture agreement mentioned previously. Adjusted for the TDN change, accounts payable increased approximately $1.7 million. The increase came primarily at our domestic U.S manufacturing operation and is consistent with the increase in inventories noted above. The net foreign currency translation impact was to increase accounts payable by $0.3 million. Total borrowings, notes payable and long-term debt, as of December 31, 2003 increased slightly by $0.4 million, or less than 2%, to $22.3 million versus June 30, 2003. Total shareholders' equity increased by $3.0 million to a total of $53.3 million. Retained earnings decreased by $0.3 million. The net decrease in retained earnings included $0.7 million in net earnings reported year-to-date, offset by $1.0 million in dividend payments. Net favorable foreign currency translation of $3.0 million was reported as the U.S. Dollar weakened against the Euro and the Australian Dollar during the first six months. The Company's balance sheet remains very strong, there are no off-balance-sheet arrangements, and we continue to have sufficient liquidity for near-term needs. In January 2004, subsequent to the end of the second fiscal quarter, the company announced the sale of its 25% minority interest in Palmer Johnson Distributors, LLC for $3.9 million in cash, which approximated the net book value of the investment. Management believes that available cash, our revolver facility, cash generated from operations, existing lines of credit and access to debt markets will be adequate to fund our capital requirements for the foreseeable future. The Company has obligations under non-cancelable operating lease contracts and a senior note agreement for certain future payments. A summary of those commitments follows (in thousands):

10 Contractual Obligations Total Less than 1-3 4-5 After 5 1 year Years Years Years Short-term debt $ 1,678 $ 1,678 Revolver borrowing $12,000 $12,000 Long-term debt $ 8,577 $ 2,857 $ 5,720 Operating leases $11,061 $ 2,868 $ 3,762 $2,213 $2,218 Total obligations $33,316 $ 7,403 $21,482 $2,213 $2,218 New Accounting Releases In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of this Statement and it had no impact on its financial statements. Critical Accounting Policies The preparation of this Quarterly Report requires management's judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Twin Disc's significant accounting policies are described in Note A in the Notes to Consolidated Financial Statements in the Annual Report for June 30, 2003. There have been no significant changes to those accounting policies subsequent to June 30, 2003. Item 3. Quantitative and Qualitative Disclosure About Market Risk. The Company is exposed to market risks from changes in interest rates, commodities and foreign exchange. To reduce such risks, the Company selectively uses financial instruments and other pro-active management techniques. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which prohibit the use of financial instruments for trading or speculative purposes. Interest rate risk - The Company's earnings exposure related to adverse movements of interest rates is primarily derived from outstanding floating rate debt instruments that are indexed to the prime and LIBOR interest rates. Those debt facilities bear interest predominantly at the prime interest rate minus .5% or LIBOR plus 2.75%. Due to the relative stability of interest rates, the Company did not utilize any financial instruments at December 31, 2003 to manage interest rate risk exposure. A 10 percent increase or decrease in the applicable interest rate would result in a change in pretax interest expense of approximately $10,000. Commodity price risk - The Company is exposed to fluctuation in market prices for such commodities as steel and aluminum. Due to the relative stability of these commodities, the Company does not utilize commodity price hedges to manage commodity price risk exposure. Currency risk - The Company has exposure to foreign currency exchange fluctuations. Approximately one-third of the Company's revenues in the three months and six months ended December 31, 2003 and 2002 were denominated in currencies other than the U.S. dollar. Of that total, approximately two-thirds was denominated in euros with the balance composed of Japanese yen and the Australian and Singapore dollars. The Company does not hedge the translation exposure represented by the net assets of its foreign subsidiaries Foreign currency translation adjustments are recorded as a component of shareholders' equity. Forward foreign exchange contracts are used to hedge the currency fluctuations on significant transactions denominated in foreign currencies.

11 Derivative Financial Instruments - The Company has written policies and procedures that place all financial instruments under the direction of the company corporate treasury and restrict derivative transactions to those intended for hedging purposes. The use of financial instruments for trading purposes is prohibited. The Company uses financial instruments to manage the market risk from changes in foreign exchange rates. The Company primarily enters into forward exchange contracts to reduce the earnings and cash flow impact of non-functional currency denominated receivables and payables. These contracts are highly effective in hedging the cash flows attributable to changes in currency exchange rates. Gains and losses resulting from these contracts offset the foreign exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of the forward exchange contracts generally coincide with the settlement dates of the related transactions. Gains and losses on these contracts are recorded in Other income (expense), net in the Consolidated Statement of Operations as the changes in the fair value of the contracts are recognized and generally offset the gains and losses on the hedged items in the same period. The primary currency to which the Company was exposed in 2004 and 2003 was the Euro. At December 31, 2003 the Company had net outstanding forward exchange contracts to purchase Euros in the value of $2,684,000 with a weighted average maturity of 42 days. The fair value of the Company's contracts was a loss of approximately $82,000 at December 31, 2003. At June 30, 2003 the Company had net outstanding forward exchange contracts to purchase Euros in the value of $2,701,000 with a weighted average maturity of 50 days. The fair value of the Company's contracts was approximately zero at June 30, 2003. Item 4. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures. As required by new Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, within the 90-day period prior to the filing of this report and under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective in ensuring that material information relating to the Company, including its consolidated subsidiaries, is made known to the certifying officers by others within the Company and its consolidated subsidiaries during the period covered by this report. (b) Changes in Internal Controls. There were no significant changes in the Company's internal controls for financial reporting or in other factors that could significantly affect such internal controls subsequent to the date of such evaluation. However, in connection with the new rules, the Company has been engaged in the process of further reviewing and documenting its disclosure controls and procedures, including its internal accounting controls. The Company may from time to time make changes aimed at enhancing the effectiveness of its disclosure controls and procedures, including its internal controls, to ensure that the Company's systems evolve with its business. Part II. - OTHER INFORMATION Item 1. Legal Proceedings. Twin Disc is a defendant in several product liability or related claims considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition of the Company. Item 2. Changes in Securities and Use of Proceeds. There were no securities of the Company sold by the Company during the six months ended December 31, 2003, which were not registered under the Securities Act of 1933, in reliance upon an exemption from registration provided by Section 4 (2) of the Act.

12 During the period covered by this report, the Company offered participants in the Twin Disc, Incorporated B The Accelerator 401(k) Savings Plan (the "Plan") the option to invest their Plan accounts in a fund comprised of Company stock. Participation interests of Plan participants in the Plan, which may be considered securities, were not registered with the SEC. During the fiscal year ended June 30, 2003, 68 Plan participants allocated an aggregate of $81,000 toward this investment option. Participant accounts in the Plan consist of a combination of employee deferrals, Company matching contributions, and, in some cases, additional Company profit-sharing contributions. No underwriters were involved in these transactions. On September 6, 2002, the Company filed a Form S-8 to register 100,000 shares of Company common stock offered through the Plan, as well as an indeterminate amount of Plan participation interests. Item 4. Submission of Matters to a vote of Security Holders At the Annual Meeting of Shareholders held October 17, 2003, the number of votes cast for, against or abstentions with respect to each matter were as follows: 1. Election of Directors: a) To serve until Annual Meeting in 2006: Michael H. Joyce For: 2,490,889 Authority withheld: 46,630 David B. Rayburn For: 2,492,729 Authority withheld: 44,790 George E. Wardeberg For: 2,490,526 Authority withheld: 46,993 Item 5. Other Information. The discussions in this report on Form 10-Q and in the documents incorporated herein by reference, and oral presentations made by or on behalf of the Company contain or may contain various forward-looking statements (particularly those referring to the expectations as to possible strategic alternatives, future business and/or operations, in the future tense, or using terms such as "believe", "anticipate", "expect" or "intend") that involve risks and uncertainties. The Company's actual future results could differ materially from those discussed, due to the factors which are noted in connection with the statements and other factors. The factors that could cause or contribute to such differences include, but are not limited to, those further described in the "Management's Discussion and Analysis". Item 6. Exhibits and Reports on Form 8-K. A Form 8-K was filed on January 16, 2004 for a press release announcing financial results for fiscal 2004 second quarter. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TWIN DISC, INCORPORATED (Registrant) February 12, 2004 /S/ FRED H. TIMM ----------------------- --------------------------- (Date) Fred H. Timm Vice President - Administration and Secretary and Duly Authorized Officer

1 EXHIBIT 31b CERTIFICATIONS I, Christopher J. Eperjesy, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Twin Disc, Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 12, 2004 /s/ CHRISTOPHER J. EPERJESY Christopher J. Eperjesy Vice President - Finance, Treasurer, Chief Financial Officer

1 EXHIBIT 32a CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Twin Disc, Incorporated (the "Company") on Form 10-Q for the fiscal quarter ending December 31, 2003, as filed with the Securities and Exchange Commission as of the date hereof (the "Report"), I, Michael E. Batten, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with Section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ MICHAEL E. BATTEN Michael E. Batten Chairman, Chief Executive Officer February 12, 2004

1 EXHIBIT 32b CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Twin Disc, Incorporated (the "Company") on Form 10-Q for the fiscal quarter ending December 31, 2003, as filed with the Securities and Exchange Commission as of the date hereof (the "Report"), I, Christopher J. Eperjesy, Vice President - Finance, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (3) the Report fully complies with Section 13(a) of the Securities Exchange Act of 1934, and (4) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ CHRISTOPHER J. EPERJESY Christopher J. Eperjesy Vice President - Finance, Treasurer, Chief Financial Officer February 12, 2004

1 EXHIBIT 31a CERTIFICATIONS I, Michael E. Batten, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Twin Disc, Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 12, 2004 /s/ MICHAEL E. BATTEN Michael E. Batten Chief Executive Officer