SEC Filing - Twin Disc, Inc.

1 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 March 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 March 31, 2000, the registrant had 2,809,890 shares of its common stock outstanding.

2 FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31 June 30 2000 1999 ---- ---- Assets Current assets: Cash and cash equivalents $ 8,481 $ 4,136 Trade accounts receivable, net 31,598 27,201 Inventories 52,772 54,500 Deferred income taxes 6,004 6,004 Other 6,029 5,906 -------- -------- Total current assets 104,884 97,747 Property, plant and equipment, net 35,508 38,935 Investments in affiliates 6,864 6,663 Deferred income taxes 4,526 4,349 Intangible pension asset 3,385 3,385 Other assets 24,721 25,821 -------- -------- $179,888 $176,900 -------- -------- -------- -------- Liabilities and Shareholders' Equity Current liabilities: Notes payable $ 8,573 $ 23,015 Accounts payable 14,900 10,724 Accrued liabilities 21,670 21,022 -------- -------- Total current liabilities 45,143 54,761 Long-term debt 35,116 17,112 Accrued retirement benefits 34,671 37,567 -------- -------- 114,930 109,440 Shareholders' Equity: Common stock 11,653 11,653 Retained earnings 81,464 81,430 Accumulated other comprehensive loss (10,712) (8,516) -------- -------- 82,405 84,567 Less treasury stock, at cost 17,447 17,107 -------- -------- Total shareholders' equity 64,958 67,460 -------- -------- $179,888 $176,900 -------- -------- -------- -------- 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 Nine Months Ended March 31 March 31 2000 1999 2000 1999 ---- ---- ---- ---- Net sales $49,467 $41,139 $129,087 $121,872 Cost of goods sold 37,877 33,823 100,688 96,061 ------- ------- ------- ------- 11,590 7,316 28,399 25,811 Marketing, engineering and administrative expenses 8,034 8,488 23,918 25,303 Interest expense 777 573 2,261 1,325 Other (income) expense, net (542) 273 (894) 304 ------- ------- ------- ------- 8,269 9,334 25,285 26,932 ------- ------- ------- ------- Earnings (loss) before income taxes 3,321 (2,018) 3,114 (1,121) Income taxes 1,595 (236) 1,592 364 ------- ------- ------- ------- Net earnings (loss) $ 1,726 ($ 1,782) $ 1,522 ($ 1,485) ------- ------- ------- ------- ------- ------- ------- ------- Dividends per share $ 0.175 $ 0.21 $ 0.525 $ 0.63 Earnings per share data: Basic earnings (loss) per share $ 0.61 ($ 0.63) $ 0.54 ($ 0.52) Diluted earnings (loss)per share $ 0.61 ($ 0.63) $ 0.54 ($ 0.52) Shares outstanding data: Average shares outstanding 2,811 2,835 2,824 2,835 Dilutive stock options 0 4 0 13 ------- ------- ------- ------- Diluted shares outstanding 2,811 2,839 2,824 2,848 ------- ------- ------- ------- ------- ------- ------- ------- Comprehensive income: Net earnings (loss) $ 1,726 ($ 1,782) $ 1,522 ($ 1,485) Other comprehensive income: Foreign currency translation adjustment (1,326) (1,942) (2,196) (387) ------- ------- ------- ------- Comprehensive income (loss) $ 400 ($ 3,724) ($ 674) ($ 1,872) ------- ------- ------- ------- ------- ------- ------- ------- In thousands of dollars except per share statistics and shares outstanding data. 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) Nine Months Ended March 31 2000 1999 ---- ---- Cash flows from operating activities: Net earnings (loss) $ 1,522 ($ 1,485) Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 5,120 4,654 Loss on sale of fixed assets 6 35 Gain on partial sale of affiliate 0 (1,371) Equity in (earnings)loss of affiliates (701) 1,191 Dividends received from affiliate 500 625 Net change in working capital, excluding cash and debt, and other (725) 4,334 ------ ------ 5,722 7,983 ------ ------ Cash flows from investing activities: Acquisitions of fixed assets (1,679) (4,873) Proceeds from sale of fixed assets 90 17 Business acquisitions 0 (16,340) ------ ------ (1,589) (21,196) ------ ------ Cash flows from financing activities: Increase in notes payable, net 2,308 14,721 Treasury stock activity (340) 38 Dividends paid (1,488) (1,786) ------ ------ 480 12,973 ------ ------ Effect of exchange rate changes on cash (268) (112) ------ ------ Net change in cash and cash equivalents 4,345 (352) Cash and cash equivalents: Beginning of period 4,136 5,087 ------ ------ End of period $8,481 $4,735 ------ ------ ------ ------ 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): March 31 June 30 2000 1999 ---------- --------- Inventories: Finished parts $42,056 $42,405 Work in process 6,594 6,385 Raw materials 4,122 5,710 ------- ------- $52,772 $54,500 ------- ------- ------- ------- 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 March 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 Nine Months Ended March 31 March 31 2000 1999 2000 1999 ---- ---- ---- ---- Manufacturing segment sales $48,026 $37,032 $120,239 $113,283 Distribution segment sales 12,052 10,459 34,300 30,825 Inter/Intra segment sales (10,611) (6,352) (25,452) (22,236) ------- ------- ------- ------- Net sales $49,467 $41,139 $129,087 $121,872 ------- ------- ------- ------- ------- ------- ------- ------- Manufacturing segment earnings(loss)$ 2,855 ($ 1,578) $ 1,840 ($ 155) Distribution segment earnings 727 539 2,120 1,682 Inter/Intra segment earnings (loss) (261) (979) (846) (2,648) ------ ------- ------- ------- Pretax earnings (loss) $ 3,321 ($ 2,018) $ 3,114 ($ 1,121) ------- ------- ------- ------- ------- ------- ------- ------- Assets March 31, June 30, 2000 1999 ------------- ------------ Manufacturing segment assets $153,631 $152,251 Distribution segment assets 26,766 25,448 Corporate assets and elimination of inter-company assets (509) (799) -------- -------- $179,888 $176,900 -------- -------- -------- --------

6 MANAGEMENT DISCUSSION AND ANALYSIS Third-quarter net sales were up from the previous quarter and more than 20 percent ahead of the same three-month period a year ago. More importantly, net earnings were more than double those of the second fiscal quarter and represent a marked turnaround from the quarterly loss reported last year. The largest component of the revenue increase, both in terms of dollars and percent improvement, was contributed by our domestic manufacturing operation. Resurgence in demand for transmissions used in commercial marine applications and improved service parts sales were among the main components of the improvement. Also contributing were higher sales of power take-offs for irrigation and other industrial applications and power-shift transmissions for four-wheel drive and all-wheel drive vehicles. The power take-off surge was due primarily to market demand but also included new volume from the product line acquisition made in last year's third fiscal quarter. Sales increases of a lesser magnitude also were reported by our Belgian manufacturing operation as strong demand for pleasure craft marine transmissions offset some softness in marine control drives. Our Italian subsidiary, acquired in February 1999, contributed to Twin Disc for the full fiscal quarter this year and supported the improvement. Sales and earnings of most of our marketing subsidiaries were up from a year ago with the most significant improvements reported by our operations in Singapore, Australia, and Italy. While continued strengthening of the dollar, especially in Europe, adversely impacts our competitive position and reported sales gains from the offshore subsidiaries, dollar denominated sales from Belgium have had a positive offsetting effect on margins. The gross margin for the quarter rose to 23 percent, a modest improvement over the previous quarter and well ahead of last year. Last year's third fiscal quarter margin was unusually low as a result of workforce restructuring expense, reduced productivity and lower production volume. This year, the productivity of both domestic and overseas manufacturing operations has improved, and that improvement coupled with the higher level of activity provided the higher margin. As noted in last year's third-quarter report, the restructuring costs included in both manufacturing and administrative expenses accounted for about one-third of the after-tax loss. Marketing, engineering and administrative expense was down from last year despite a full fiscal quarter of expenses associated with the Italian acquisition mentioned previously. Interest expense was down slightly from the second quarter but was about 36 percent higher than a year ago due to the higher, acquisition-related debt level and an increase in the average domestic interest rate over the past year. Other income and expense for the recently completed quarter was favorable compared with last year due to improved affiliate earnings and the absence of currency exchange losses present in the year-ago results. While individual country tax rates were unchanged, the effective consolidated rate remains high due to the mix of domestic losses incurred during the fiscal year and overseas earnings, which are taxed at a higher rate. A year ago, the effective rate was unusually low due to the tax treatment of our Japanese affiliate's losses. Working capital, at $60 million, was comparable to the previous quarter but much greater than at the prior fiscal year-end. The increase was caused by restructuring much of the current borrowings at year-end to long-term debt during the first fiscal quarter. Accounts receivable were up from the previous quarter as a result of increased sales, while inventory declined by more than $2 million as turnover continued to improve. For the nine months, cash flow from operating activities was more than needed to finance fixed asset acquisitions and dividend payments. While debt levels are high by our historical standards, 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 March 31, 2000. The financial statements included herein have been subjected to a limited review by PricewaterhouseCoopers LLP, the registrant's independent public accountants, in accordance with professional standards and procedures for such review. 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 March 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. 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) /S/ FRED H. TIMM ----------------------- --------------------------- (Date) Fred H. Timm Corporate Controller and Secretary

9 Report of Independent Accountants To the Board of Directors Twin Disc, Incorporated Racine, Wisconsin We have reviewed the accompanying condensed consolidated balance sheet of Twin Disc, Incorporated and subsidiaries as of March 31, 2000, and the related condensed consolidated statements of operations for the three and nine-month periods ended March 31, 2000 and 1999 and the related condensed consolidated statements of cash flows for the nine-month periods ended March 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data, and making inquiries of persons responsible for financial accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of June 30, 1999, and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated July 23, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ - ------------------------------------ PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 2, 2000

10 [TYPE] EX-15 EXHIBIT 15 Awareness Letter of Independent Accountants Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Twin Disc, Incorporated We are aware that our report dated May 2, 2000 on our review of interim financial information of Twin Disc, Incorporated for the three and nine month periods ended March 31, 2000 and 1999 and included in the Company's quarterly report on Form 10-Q for the quarter then ended, is incorporated by reference in the registration statements of Twin Disc, Incorporated on Form S-8 (Twin Disc, Incorporated 1988 Incentive Stock Option Plan; Twin Disc, Incorporated 1988 Non-Qualified Stock Option Plan for Officers, Key Employees and Directors; Twin Disc, Incorporated 1998 Incentive Compensation Plan; and Twin Disc, Incorporated 1998 Stock Option Plan for Non-Employee Directors). /S/ - --------------------------------------- PricewaterhouseCoopers LLP Milwaukee, Wisconsin May 2, 2000

5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SET FORTH IN THE THIRD QUARTER REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-30-1999 MAR-31-2000 8,481 0 32,161 563 52,772 104,884 117,476 81,968 179,888 45,143 35,116 11,653 0 0 53,305 179,888 129,087 129,087 100,688 100,688 0 0 2,261 3,114 1,592 1,522 0 0 0 1,522 .054 .054