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 March 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 (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 2003, the registrant had 2,797,832 shares of its common stock outstanding.
2 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31 June 30 2003 2002 ---- ---- Assets Current assets: Cash and cash equivalents $ 4,851 $ 7,313 Trade accounts receivable, net 31,853 29,006 Inventories, net 47,737 44,504 Deferred income taxes 4,505 4,505 Other 6,936 4,126 -------- -------- Total current assets 95,882 89,454 Property, plant and equipment, net 29,371 29,549 Investment in affiliate 2,524 2,439 Goodwill 12,651 12,311 Deferred income taxes 12,306 12,246 Prepaid pension asset 1,383 1,383 Other assets 7,947 9,898 -------- -------- $162,064 $157,280 -------- -------- -------- -------- Liabilities and Shareholders' Equity Current liabilities: Notes payable $ 1,904 $ 1,708 Current maturities on long-term debt 2,857 2,857 Accounts payable 17,863 13,042 Accrued liabilities 24,143 22,312 -------- -------- Total current liabilities 46,767 39,919 Long-term debt 16,579 18,583 Accrued retirement benefits 42,402 39,797 -------- -------- 105,748 98,299 Minority Interest 479 472 Shareholders' Equity: Common stock 11,653 11,653 Retained earnings 81,741 87,524 Accumulated other comprehensive loss (19,962) (23,187) -------- -------- 73,432 75,990 Less treasury stock, at cost 17,595 17,481 -------- -------- Total shareholders' equity 55,837 58,509 -------- -------- $162,064 $157,280 -------- -------- -------- -------- T notes to condensed consolidated financial statements are an integral part of this statement. Amounts in thousands.
3 TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended March 31 March 31 2003 2002 2003 2002 ---- ---- ---- ---- Net sales $47,177 $41,928 $126,491 $126,545 Cost of goods sold 36,752 32,314 103,457 98,423 ------- ------- ------- ------- 10,425 9,614 23,034 28,122 Marketing, engineering and administrative expenses 9,041 9,238 26,331 25,784 Restructuring of operations - - 2,042 - Interest expense 350 423 983 1,355 Other income, net (133) (588) (238) (879) ------- ------- ------- ------- 9,258 9,073 29,118 26,260 ------- ------- ------- ------- Earnings (loss) before income taxes and minority interest 1,167 541 (6,084) 1,862 Income taxes 653 546 (1,779) 1,150 ------- ------- ------- ------- Earnings (loss) before minority interest 514 (5) (4,305) 712 Minority interest, net of income taxes (5) (32) (4) (54) ------- ------- ------- ------- Net earnings (loss) $ 509 ($ 37) ($ 4,309) $ 658 ------- ------- ------- ------- ------- ------- ------- ------- Dividends per share $ 0.175 $ 0.175 $ 0.525 $ 0.525 Earnings (loss) per share data: Basic earnings (loss) per share $ 0.18 ($ 0.01) ( $ 1.54) $ 0.23 Diluted earnings(loss)per share $ 0.18 ($ 0.01) ( $ 1.54) $ 0.23 Shares outstanding data: Average shares outstanding 2,806 2,808 2,807 2,808 Dilutive stock options - - - - ------- ------- ------- ------- Diluted shares outstanding 2,806 2,808 2,807 2,808 ------- ------- ------- ------- ------- ------- ------- ------- Comprehensive income: Net earnings (loss) $ 509 ($ 37) ($ 4,309) $ 658 Foreign currency translation adjustment 1,775 (546) 3,225 336 ------- ------- ------- ------- Comprehensive income (loss) $ 2,284 ($ 583) ($ 1,084) $ 994 ------- ------- ------- ------- ------- ------- ------- ------- In thousands of dollars except per share statistics. Per share figures are based on shares outstanding data. The notes to condensed consolidated financial statements are an integral part of this statement.
4 TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended March 31 2003 2002 ---- ---- Cash flows from operating activities: Net (loss) earnings ($4,309) $ 658 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 4,191 4,230 Equity in earnings of affiliate (270) (385) Dividends received from affiliate 185 267 Minority interest 4 54 Restructuring of operations 1,463 - Write-off of impaired asset 773 - Net change in working capital, excluding cash and debt, and other 1,330 4,726 ------ ------ 3,367 9,550 ------ ------ Cash flows from investing activities: Acquisitions of fixed assets (2,765) (1,192) Proceeds from sales of fixed assets 37 30 ------ ------ (2,728) (1,162) ------ ------ Cash flows from financing activities: Decrease in notes payable, net (2,056) (3,446) Acquisition of treasury stock (114) - Dividends paid (1,474) (1,474) ------ ------ (3,644) (4,920) ------ ------ Effect of exchange rate changes on cash 543 (83) ------ ------ Net change in cash and cash equivalents (2,462) 3,385 Cash and cash equivalents: Beginning of period 7,313 5,961 ------ ------ End of period $ 4,851 $ 9,346 ------ ------ ------ ------ The notes to condensed 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. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. B. INVENTORY The major classes of inventories were as follows (in thousands): March 31, June 30 2003 2002 ---------- --------- Inventories: Finished parts $35,562 $35,485 Work in process 7,908 5,668 Raw materials 4,267 3,351 ------- ------- $47,737 $44,504 ------- ------- ------- ------- C. DEBT During the second fiscal quarter, the Company finalized a new three-year, $20 million revolving line of credit facility which matures on October 31, 2005. In accordance with the loan agreement, the Company has the option of borrowing at the prime interest rate or LIBOR plus an additional "Add-On", between 1% and 2.75%, depending on the Company's Total Funded Debt to EBITDA ratio. As of March 31, 2003, the Company had $8 million outstanding under the facility, borrowed at LIBOR plus 2.75%. For the quarter ended March 31, 2003, the Company was in compliance with all of its financial covenants under both the revolving line of credit and senior note facilities.
6 D. CONTINGENCIES The Company is involved in various stages of investigation relative to hazardous waste sites, one of which is on the United States EPA National Priorities List (Superfund sites). The Company's assigned responsibility at the Superfund site is less than 3%. The Company's involvement in a second Superfund site was settled during the third quarter for an amount less than had been previously reserved. The excess reserve of $100,000 was reversed against cost of sales. 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, 2003 the Company has accrued approximately $340,000, 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. 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 March 31, 2003. Three Months Ended Nine Months Ended March 31, 2003 March 31, 2003 Reserve balance, beginning of period $5,545,000 $5,294,000 Current period expense 1,025,000 2,727,000 Payments or credits to customers (927,000) (2,584,000) Adjustment to preexisting warranties - 206,000 --------- --------- Reserve balance, end of period $5,643,000 $5,643,000 ========= =========
7 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 2003 2002 2003 2002 ---- ---- ---- ---- Manufacturing segment sales $40,804 $37,535 $107,696 $110,651 Distribution segment sales 16,228 14,167 45,748 43,975 Inter/Intra segment sales (9,855) (9,774) (26,953) (28,081) ------- ------- ------- ------- Net sales $47,177 $41,928 $126,491 $126,545 ------- ------- ------- ------- ------- ------- ------- ------- Manufacturing segment earnings(loss)$ 1,072 $ 328 $ (5,921) $ 1,114 Distribution segment earnings 777 1,006 1,939 2,776 Inter/Intra segment loss (682) (793) (2,102) (2,028) ------ ------- ------- ------- Earnings (loss) before income taxes and minority interest $ 1,167 $ 541 $ (6,084) $ 1,862 ------- ------- ------- ------- ------- ------- ------- ------- Assets March 31, June 30, 2002 2002 ------------- ------------- Manufacturing segment assets $143,437 $139,810 Distribution segment assets 31,942 30,275 Corporate assets and elimination of inter-company assets (13,315) (12,805) -------- -------- $162,064 $157,280 -------- -------- -------- -------- G. STOCK OPTION PLANS The Company accounts for its stock option plans under the guidelines of Accounting Principles Board Opinion No. 25. Accordingly, no compensation cost has been recognized in the condensed consolidated statements of operations. During the third quarter of fiscal 2003, the Company adopted the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Had the Company recognized compensation expense determined based on the fair value at the grant date for awards under the plans, the net earnings and earnings per share would have been as follows (in thousands, except per share amounts): Three Months Ended Nine Months Ended March 31, March 31, ------------------ ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net earnings (loss) As reported $ 509 ($ 37) ($ 4,309) $ 658 Pro forma 509 ( 37) ( 4,383) 554 Basic earnings (loss) per share As reported $ 0.18 ($ 0.01) ($ 1.54) $ 0.23 Pro forma 0.18 ( 0.01) ( 1.56) 0.20 Diluted earnings (loss) per share As reported $ 0.18 ($ 0.01) ($ 1.54) $ 0.23 Pro forma 0.18 ( 0.01) ( 1.56) 0.20
8 H. RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets as of the beginning of the fiscal year. The adoption of these Statements did not have a significant impact on the Company's results of operations or its financial position. In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," related to accounting for debt extinguishments, leases, and intangible assets of motor carriers. The provisions of SFAS No. 145 are effective for the Company on July 1, 2002, however the adoption of this Statement did not have a significant impact on the Company's results of operations or its financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, accordingly management will apply the provisions of SFAS No. 146 to costs incurred in conjunction with exit or disposal activities occurring in subsequent periods. The adoption of this Statement will not affect the accounting for costs previously recorded for exit or disposal activities. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of this statement are effective for entities with a fiscal year ending after December 15, 2002. The new disclosure provisions for interim financial information are first effective for the quarter ending March 31, 2003. The adoption of this Statement will not have a significant impact on the Company's results of operations or its financial position. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34)." FIN 45 clarifies the requirements of FAS 5, "Accounting for Contingencies," relating to guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The Interpretation's provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of both interim and annual periods that end after December 15, 2002. The adoption of the disclosure provisions of this Interpretation did not have a significant impact on the Company disclosures for the second and third quarters and the adoption of the accounting provisions of this Interpretation are not expected to have a significant impact on the Company's results of operations or its financial position. I. RESTRUCTURING OF OPERATIONS During the second quarter of 2003, the Company recorded a pre-tax restructuring charge of $2.0 million in connection with the reduction of its workforce. These actions were taken in an effort to streamline the Company's cost structure and align its corporate workforce with market conditions. The charge consists of employee termination and severance benefits for a total of 58 employees; 48 production employees and 10 salaried employees. During the first nine months of 2003 the Company made cash payments of $0.5 million and has a remaining balance in accrued liabilities of $1.5 million as of March 31, 2003.
9 J. IMPAIRMENT OF LONG-LIVED ASSET A review of long-lived assets revealed a permanent impairment in the value of a license agreement to manufacture and distribute certain products. It was determined that these assets should be subjected to FAS 144 impairment tests due to current period operating and cash flow losses generated on products sold under the agreement in conjunction with recent projections that these losses will continue. The fair value of assets being held for use was determined based on discounted cash flows generated from the use of the asset using a discount rate reflecting the Company's average cost of funds, plus salvage value. It was determined that the carrying value of the license exceeded the fair value and a charge of $0.8 million was recorded during the quarter ended December 31, 2002 to write-down this asset to its fair value. This charge was classified as a component of cost of sales pertaining to the Company's Manufacturing segment. 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. Net revenues for the third fiscal quarter were 12.5% percent above year-ago levels primarily driven by higher marine sales at our European and Asian-Pacific operations, continued growth in our propulsion business as well as the favorable impact of a weaker dollar on the revenues of our overseas operations. Net earnings for the quarter were $0.5 million versus a slight loss in the same quarter of last year. This improvement was primarily driven by higher sales volume offset by an unfavorable impact due to product mix. For the first nine months of the year, revenues were flat to year ago levels. However, the revenues of our foreign operations reflect the favorable impact of a weaker dollar versus last year. The net loss for the first nine months of this year was $4.3 million, which includes restructuring and SFAS 144 impairment charges of $1.7 million, net of income taxes, in the second quarter, versus a net profit of $0.7 million for the same period last year. While the Company continued to experience softness in many of its global markets, sales at our foreign operations were stronger than for the same period last year. Sales of our marine and propulsion products were particularly strong in comparison to the third fiscal quarter of last year. Domestically, continued softness in our industrial and non-marine transmission products was somewhat offset by favorable year-over-year growth in our propulsion business, driven by sales of Arneson surface drives. Shipments of industrial products and marine transmissions for commercial boats continue to be off the pace of last year. As a whole, sales from our distribution subsidiaries throughout the world were $2 million higher than in the comparable period last year, partially driven by the favorable impact of a weaker dollar. Gross income as a percentage of sales in the third fiscal quarter of 22.1% was slightly lower than the same period last year, but a significant improvement over the 15.6% reported in the second fiscal quarter of this year. The improvement versus the second fiscal quarter is due primarily to a favorable mix impact of increased industrial and propulsion product sales in the current quarter as well as the overall impact of higher sales volume on fixed manufacturing cost absorption. In addition, cost of goods sold in the second fiscal quarter included a non-cash pre-tax charge of $0.8 million related to the impairment of a license agreement, which had an impact of reducing gross income as a percentage of sales by almost 2% in the second fiscal quarter. Marketing, engineering, and administrative (ME&A) expenses decreased by over two percent from last year's third fiscal quarter. Continued decreases in administrative expenses have been somewhat offset by increases in engineering-related expenses related to ongoing projects as well as the unfavorable exchange rate impact of a weakening dollar on our overseas operations. Year-to-date ME&A expenses are approximately 2% higher than last year due primarily to the previously mentioned impact of a weakening dollar and higher engineering expenses offset by lower administrative expenses. Interest expense for the quarter was 17% below the same quarter last year due primarily to lower borrowings. The average income tax rate was lower than a year ago due to a greater proportion of domestic losses incurred versus overseas earnings, which are taxed at a higher rate. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" as of the beginning of the fiscal year. The adoption of these Statements did not have a significant impact on the Company's results of operations or its financial position.
10 Financial Condition, Liquidity and Capital Resources As of March 31, 2003, the Company had net working capital of $49.1 million, which remained unchanged from the end of the second quarter and represents a slight decrease from a net working capital of $49.5 million as of June 30, 2002. Net cash flows from operations were $3.4 million for the nine months ending March 31, 2003, and a net cash usage of $1.0 million was experienced during the third fiscal quarter. The main drivers of this change were increased inventories as we prepare for anticipated sales volumes in the fourth quarter and first half of the next fiscal year, increased account receivables due to the higher sales volume experienced in the quarter, offset partially by higher trade accounts payable. Net acquisitions of fixed assets for the quarter totaled $1.0 million as we continue to make necessary capital investments, bringing the year-to-date total to $2.8 million versus $1.1 million for the same period last year. The Company used excess cash to continue to pay down the balance on its revolver, which had outstanding balances of $8 million and $10 million as of March 31, 2003 and December 31, 2002, respectively. The impact of the above cash flows was a net decrease of $3.8 million in cash during the quarter. The Company's balance sheet remains strong, there are no off-balance-sheet arrangements, and we continue to have sufficient liquidity for near-term needs. In March 2003, the Company repurchased 10,000 shares of common stock at $11.35 per share for its treasury at a cost of $113,500. The Company currently has 141,000 shares remaining to be purchased under its previously approved stock repurchase authorization. Management believes repurchasing Company stock back at a substantial discount to book value should benefit our shareholders by increasing both earnings and book value on a per-share basis. 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): ] Contractual Obligations Total Less than 1-3 4-5 After 5 1 year Years Years Years Short-term debt $ 1,094 $ 1,094 Revolver borrowing $ 8,000 $ 8,000 Long-term debt $11,436 $ 2,857 $ 5,722 $2,857 Operating leases $ 7,890 $ 2,605 $ 2,981 $1,152 $1,152 Total obligations $29,230 $ 7,366 $16,703 $4,009 $1,152
11 New Accounting Releases In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," related to accounting for debt extinguishments, leases, and intangible assets of motor carriers. The provisions of SFAS No. 145 are effective for the Company on July 1, 2002, however the adoption of this Statement did not have a significant impact on the Company's results of operations or its financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, accordingly management will apply the provisions of SFAS No. 146 to costs incurred in conjunction with exit or disposal activities occurring in subsequent periods. The adoption of this Statement will not affect the accounting for costs previously recorded for exit or disposal activities. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of this statement are effective for entities with a fiscal year ending after December 15, 2002. The new disclosure provisions for interim financial information were effective for the quarter ending March 31, 2003. The adoption of this Statement did not have a significant impact on the Company's results of operations or its financial position. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34)." FIN 45 clarifies the requirements of FAS 5, "Accounting for Contingencies," relating to guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The Interpretation's provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of both interim and annual periods that end after December 15, 2002. The adoption of the disclosure provisions of this Interpretation did not have a significant impact on the Company disclosures for the second and third quarters and the adoption of the accounting provisions of this Interpretation are not expected to have a significant impact on the Company's results of operations or its financial position. 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.
12 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, 2002. There have been no significant changes to those accounting policies subsequent to June 30, 2002 other than the required adoption of SFAS No. 143 and No. 144. 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 LIBOR plus 2.75%. Due to the relative stability of interest rates, the Company did not utilize any financial instruments at March 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 $33,000. 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 nine months ended March 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. Derivative Financial Instruments - The Company has written policies and procedures that place all financial instruments under the direction of the Company's 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 2003 and 2002 was the Euro. At March 31, 2003 the Company had net outstanding forward exchange contracts to purchase Euros in the value of $2,916,000 with a weighted average maturity of 48 days. The fair value of the Company=s contracts was approximately $40,000 at March 31, 2003. At June 30, 2002 the Company had net outstanding forward exchange contracts to purchase Euros in the value of $2,053,000 with a weighted average maturity of 40 days. The fair value of the Company=s contracts was approximately $230,000 at June 30, 2002.
13 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.
14 Part II. OTHER INFORMATION Item 1. Legal Proceedings. Twin Disc is a defendant in several product liability or related claims considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition of the Company. Item 2. Changes in Securities and Use of Proceeds. There were no securities of the Company sold by the Company during the nine months ended March 31, 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. During the period covered by this report, the Company offered participants in the Twin Disc, Incorporated B The Accelerator 401(k) Savings Plan (the APlan@) 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, 2002, 68 Plan participants allocated an aggregate of $81,000 toward this investment option. Participant accounts in the Plan consist of a combination of employee deferrals, Company matching contributions, and, in some cases, additional Company profit-sharing contributions. No underwriters were involved in these transactions. On September 6, 2002, the Company filed a Form S-8 to register 100,000 shares of Company common stock offered through the Plan, as well as an indeterminate amount of Plan participation interests. Item 5. Other Information. The discussions in this report on Form 10-Q and in the documents incorporated herein by reference, and oral presentations made by or on behalf of the Company contain or may contain various forward-looking statements (particularly those referring to the expectations as to possible strategic alternatives, future business and/or operations, in the future tense, or using terms such as "believe", "anticipate", "expect" or "intend") that involve risks and uncertainties. The Company's actual future results could differ materially from those discussed, due to the factors which are noted in connection with the statements and other factors. The factors that could cause or contribute to such differences include, but are not limited to, those further described in the "Management's Discussion and Analysis". Item 6. Exhibits and Reports on Form 8-K. There were no reports on Form 8-K during the nine months ended March 31, 2003.
15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TWIN DISC, INCORPORATED (Registrant) May 14, 2003 /S/ FRED H. TIMM ----------------------- --------------------------- (Date) Fred H. Timm Vice President - Administration and Secretary
16 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: May 14, 2003 /s/ MICHAEL E. BATTEN Michael E. Batten Chairman, Chief Executive Officer
17 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: May 14, 2003 /s/ CHRISTOPHER J. EPERJESY Christopher J. Eperjesy Vice President - Finance, Treasurer, Chief Financial Officer
1 EXHIBIT 99a 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 March 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. May 14, 2003 /s/ MICHAEL E. BATTEN Michael E. Batten Chairman, Chief Executive Officer
1 EXHIBIT 99b 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 March 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: (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. May 14, 2003 /s/ CHRISTOPHER J. EPERJESY Christopher J. Eperjesy Vice President - Finance, Treasurer, Chief Financial Officer