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 September 30, 1998 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 (414) 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 September 30, 1998, the registrant had 2,835,184 shares of its common stock
outstanding.
2
FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30 June 30
1998 1998
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 3,450 $ 5,087
Trade accounts receivable, net 27,215 28,320
Inventories 53,515 53,280
Deferred income taxes 1,987 1,987
Other 5,221 4,906
-------- --------
Total current assets 91,388 93,580
Property, plant and equipment, net 36,262 35,728
Investments in affiliates 9,720 10,356
Deferred income taxes 1,128 1,241
Intangible pension asset 4,082 4,082
Other assets 15,992 15,967
-------- --------
$158,572 $160,954
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 776 $ 276
Accounts payable 7,642 9,917
Accrued liabilities 18,441 19,360
-------- --------
Total current liabilities 26,859 29,553
Long-term debt 19,952 19,949
Accrued retirement benefits 29,542 29,457
-------- --------
76,353 78,959
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 84,723 84,738
Foreign currency translation adjustment 3,611 3,418
Minimum pension liability adjustment (661) (661)
-------- --------
99,326 99,148
Less treasury stock, at cost 17,107 17,153
-------- --------
Total shareholders' equity 82,219 81,995
-------- --------
$158,572 $160,954
-------- --------
-------- --------
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
September 30
1998 1997
---- ----
Net sales $40,625 $47,880
Cost of goods sold 31,405 37,944
------- -------
9,220 9,936
Marketing, engineering and
administrative expenses 7,851 7,430
Interest expense 377 376
Other income, net (117) (112)
------- -------
8,111 7,694
------- -------
Earnings before income taxes 1,109 2,242
Income taxes 521 886
------- -------
Net earnings $ 588 $ 1,356
------- -------
------- -------
Dividends per share $ 0.21 $ 0.19
Earnings per share data:
Basic earnings per share $ 0.21 $ 0.48
Diluted earnings per share $ 0.21 $ 0.47
Shares outstanding data:
Average shares outstanding 2,834 2,810
Dilutive stock options 28 54
------- -------
Diluted shares outstanding 2,862 2,864
------- -------
------- -------
Comprehensive income:
Net earnings $ 588 $ 1,356
Foreign currency translation adjustment 193 (254)
------- -------
Comprehensive income $ 781 $ 1,102
------- -------
------- -------
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)
Three Months Ended
September 30
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 588 $1,356
Adjustments to reconcile to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,368 1,280
Gain on sale of fixed assets --- (358)
Equity in (earnings) losses of affiliates (52) 123
Dividends received from affiliate 250 100
Net change in working capital,
excluding cash, and debt, and other (2,268) (253)
------ ------
(114) 2,248
------ ------
Cash flows from investing activities:
Acquisitions of fixed assets (1,434) (1,654)
Proceeds from sale of fixed assets --- 417
Business acquisition --- (1,059)
------ ------
(1,434) (2,296)
------ ------
Cash flows from financing activities:
Increase in notes payable, net 500 46
Treasury stock activity 38 781
Dividends paid (595) (535)
------ ------
(57) 292
------ ------
Effect of exchange rate changes on cash (32) (85)
------ ------
Net change in cash and cash equivalents (1,637) 159
Cash and cash equivalents:
Beginning of period 5,087 8,983
------ ------
End of period $3,450 $9,142
------ ------
------ ------
The notes to consolidated financial statements are an integral part of
this statement. Amounts in thousands.
5
NOTES TO 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):
September 30 June 30
1998 1998
----------- ---------
Inventories:
Finished parts $44,619 $43,848
Work in process 5,016 5,524
Raw materials 3,880 3,908
------- -------
$53,515 $53,280
------- -------
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.
At September 30, 1998 the Company has accrued approximately $1,350,000, which
represents the best estimate available for the possible losses. This amount
has
been accrued 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.
6
MANAGEMENT DISCUSSION AND ANALYSIS
Net sales were 15 percent lower than the first quarter a year ago and earnings
were down 57 percent. The decline in sales and earnings resulted primarily
from
the absence of a contract to supply automatic transmissions which was in place
during the past two years and was completed last January. Although down from a
year ago, the results were better than the normal seasonally low first
quarter.
In addition to the lower transmission sales, domestic marine sales were
affected
by a decline in shipments to the commercial marine markets. Slight increases
in
surface drives and electronic controls offset a decline in aftermarket sales.
Continuing demand for pleasure craft marine transmissions led to a 15 percent
increase in the volume of shipments from the Belgian operation. Sales and
earnings of the Company's distribution operations were about even with the
same
period last year as the benefit of last years' Canadian acquisition and
strength
in Europe offset declines in the Pacific Rim. That decline, most of which was
at the Singapore subsidiary, was due in large part to the stronger dollar and
economic crisis in the region.
The consolidated gross margin for the quarter increased approximately two
percentage points to 22.7 percent from 20.8 percent for the same period last
year. Greater production volume and cost control were the key elements of
the
increase with most of the improvement coming from European operations.
Marketing, engineering, and administrative expenses for the current period
were
up about 6 percent from a year ago mainly due to the cost of additional
engineering and marketing personnel, and, as a percent of sales, rose four
percentage points on the lower sales volume.
There was a slight increase in working capital during the quarter, but the
amount
was $3 million lower than a year ago as a result of reduced cash and accounts
receivable. The current ratio of 3.4 was up from 3.2 a year ago because of a
temporary reduction in payables. The inventory increase was in Belgium and
commensurate to the operation's increased production activity. Positive cash
flows from earnings and depreciation were sufficient to cover capital
equipment
purchases and dividends. The Company's balance sheet remains strong and
continues to provide liquidity sufficient for near-term needs.
The Company has assigned its chief financial officer and information systems
manager responsibility for facilitating year 2000 (Y2K) readiness. The
project
has been divided into the phases of identification, assessment, remediation,
and
testing. Mainframe and network hardware, operating systems software, and
business systems software at the Company's domestic manufacturing operation
and
all other non-manufacturing subsidiaries are scheduled to be replaced or
remediated by December 1998. Currently, some of the business systems are
processing actual Y2K transactions. Testing of those changes is ongoing and
will
be completed by the end of the current fiscal year. Installation and
implementation of Y2K ready hardware and software is scheduled for completion
at
the Company's Belgian manufacturing operation in March 1999, with testing to
be
completed by fiscal year-end.
A Company-wide inventory of all other systems and equipment (e.g. building and
communications control systems, research and production equipment, products)
possibly affected by the date change has been completed. Assessment,
remediation, and testing of those systems is taking place now and should be
completed by February 1999.
7
During the past five years approximately $4.2 million has been spent for
computer
hardware and software which will provide the facility to process transactions
in
the new millennium. No significant additional incremental expenses are
expected
to be incurred to reach the readiness state. Work has been absorbed by
current
staff with no appreciable negative impact on other ongoing responsibilities.
Approximately 80 percent of the cost has been incurred. In addition, the
Company
has contacted suppliers and service providers to ensure they are actively
involved in a program to address the Y2K issue and provide uninterrupted
service
to Twin Disc. With the exception of utilities, steps are being taken to
provide
back-up sourcing for critical suppliers, and contingency plans are being
developed to solve internal problems should they occur. If Company efforts
are
unsuccessful in mitigating the effects of Y2K or if key suppliers are unable
to
provide their products and services, the Company may be unable to continue
normal
operations.
At this time, the Company does not expect the reasonably foreseeable
consequences
of Y2K compliance to have material effects on the Company's business,
operations
or financial condition. However, Y2K compliance has many elements and
potential
consequences, some of which may not be foreseeable. Therefore, there can be
no
assurance that unforeseen circumstances will not arise, or that the Company
will
not in the future identify equipment or systems which are not Y2K compliant.
8
OTHER INFORMATION
Item 1. Legal Proceedings.
There were no reports on Form 8-K during the three months ended September 30,
1998. The financial statements included herein have been subjected to a
limited
review by PricewaterhouseCoopers LLP, the registrant's independent public
auditors, 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 September 30, 1998 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 on 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".
9
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
10
Report of Independent Accountants
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 September 30, 1998, and the
related condensed consolidated statements of operations and cash flows for
the three-month periods ended September 30, 1998 and 1997. 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 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, 1998, and the
related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the year then ended (not presented herein); and
in our report dated July 24, 1998, 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, 1998, 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
October 9, 1998
11
[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 October 9, 1998 on our review of interim
financial information of Twin Disc, Incorporated for the three-month periods
ended September 30, 1998 and 1997 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 and Twin Disc,
Incorporated 1988 Non-Qualified Stock Option Plan for Officers, Key Employees
and Directors). Pursuant to Rule 436(c) under the Securities Act of 1933,
this report should not be considered a part of the registration statement
prepared or certified by us within the meaning of Sections 7 and 11 of that
Act.
/S/
- ---------------------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
October 27, 1998
5
1,000
3-MOS
JUN-30-1998
SEP-30-1998
3,450
0
28,271
1,056
53,515
91,388
115,193
78,931
158,572
26,859
19,952
11,653
0
0
70,566
158,572
40,625
40,625
31,405
31,405
0
0
377
1,109
521
588
0
0
0
588
.21
.21
