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 December 31, 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 December 31, 1998, the registrant had 2,835,184 shares of its common stock
outstanding.
2
FINANCIAL STATEMENTS
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31 June 30
1998 1998
---- ----
Assets
Current assets:
Cash and cash equivalents $ 8,127 $ 5,087
Trade accounts receivable, net 22,709 28,320
Inventories 56,428 53,280
Deferred income taxes 1,987 1,987
Other 5,715 4,906
-------- --------
Total current assets 94,966 93,580
Property, plant and equipment, net 36,809 35,728
Investments in affiliates 9,883 10,356
Deferred income taxes 1,099 1,241
Intangible pension asset 4,082 4,082
Other assets 15,940 15,967
-------- --------
$162,779 $160,954
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 283 $ 276
Accounts payable 10,524 9,917
Accrued liabilities 19,702 19,360
-------- --------
Total current liabilities 30,509 29,553
Long-term debt 19,955 19,949
Accrued retirement benefits 29,621 29,457
-------- --------
80,085 78,959
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 83,836 84,738
Accumulated other comprehensive income 4,312 2,757
-------- --------
99,801 99,148
Less treasury stock, at cost 17,107 17,153
-------- --------
Total shareholders' equity 82,694 81,995
-------- --------
$162,779 $160,954
-------- --------
-------- --------
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
1998 1997 1998 1997
---- ---- ---- ----
Net sales $40,108 $53,994 $80,733 $101,874
Cost of goods sold 30,833 41,744 62,239 79,688
------- ------- ------- -------
9,275 12,250 18,494 22,186
Marketing, engineering and
administrative expenses 8,964 8,797 16,815 16,227
Interest expense 375 383 752 759
Other (income) and expense, net 148 (497) 30 (609)
------- ------- ------- -------
9,487 8,683 17,597 16,377
------- ------- ------- -------
Earnings (loss)before income tax (212) 3,567 897 5,809
Income taxes 79 1,451 600 2,337
------- ------- ------- -------
Net earnings (loss) ($ 291) $ 2,116 $ 297 $ 3,472
------- ------- ------- -------
------- ------- ------- -------
Dividends per share $ 0.21 $ 0.19 $ 0.42 $ 0.38
Earnings per share data:
Basic earnings (loss) per share ($ 0.10) $ 0.75 $ 0.10 $ 1.23
Diluted earnings (loss) per share($ 0.10) $ 0.73 $ 0.10 $ 1.21
Shares outstanding data:
Average shares outstanding 2,835 2,834 2,835 2,822
Dilutive stock options 10 65 18 57
------- ------- ------- -------
Diluted shares outstanding 2,845 2,899 2,853 2,879
------- ------- ------- -------
------- ------- ------- -------
Comprehensive income:
Net earnings (loss) ($ 291) $ 2,116 $ 297 $ 3,472
Other comprehensive income:
Foreign currency translation
adjustment 1,362 (1,069) 1,555 (1,323)
------- ------- ------- -------
Comprehensive income $ 1,071 $ 1,047 $ 1,852 $ 2,149
------- ------- ------- -------
------- ------- ------- -------
In thousands of dollars except per share data statistics. Shares outstanding
data is in thousands. 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
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 297 $ 3,472
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 2,835 2,608
(Gain) loss on sale of fixed assets 45 (364)
Equity in earnings of affiliates (82) (461)
Dividends received from affiliate 375 270
Net change in working capital,
excluding cash and debt 4,226 3,575
------- -------
7,696 9,100
------- -------
Cash flows from investing activities:
Acquisitions of fixed assets (3,240) (3,355)
Proceeds from sale of fixed assets - 426
Business acquisition (437) (1,021)
------ ------
(3,677) (3,950)
------ ------
Cash flows from financing activities:
Increase in notes payable, net 2 15
Treasury stock activity 38 850
Dividends paid (1,191) (1,076)
------ ------
(1,151) (211)
------ ------
Effect of exchange rate changes on cash 172 (216)
------ ------
Net change in cash and cash equivalents 3,040 4,723
Cash and cash equivalents:
Beginning of period 5,087 8,983
------ ------
End of period $ 8,127 $13,706
------ ------
------ ------
The notes to consolidated financial statements are an integral part of this
statement. Amounts in thousands.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Basis of Presentation
The unaudited financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC)
and, in the opinion of the Company, include all adjustments, consisting only
of normal recurring items, necessary for a fair statement of results for each
period. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. The Company believes that the disclosures made are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with financial statements and the
notes thereto included in the Company's latest Annual Report. The year end
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles.
B. Inventory
The major classes of inventories were as follows (in thousands):
December 31 June 30
1998 1998
----------- ---------
Inventories:
Finished parts $48,026 $43,848
Work in process 4,369 5,524
Raw materials 4,033 3,908
------- -------
$56,428 $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 December 31, 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 down 26 percent for the quarter and 21 percent for the six
months compared with the same periods last year. Almost all of the decline
was experienced at our domestic manufacturing operations. The major shortfall
was in our automatic transmission product line due primarily to the absence of
the contract with a European truck manufacturer, which was completed last
January. The sale of automatic transmissions for use in agricultural tractors
also was down considerably from a year ago. Other significant factors in the
domestic decline were a fall-off in commercial boat production and lower oil
prices, which caused a drop in shipments of the higher horsepower marine
transmissions, torque converters, and aftermarket service parts. Aftermarket
sales also were impacted adversely by the shorter lead times resulting from
improved Twin Disc delivery performance.
Shipments from our Belgian manufacturing operation increased compared with the
three- and six-month periods last year as demand for pleasure-craft marine
transmissions remained stable and improved for the universal control drives.
Most of the distribution subsidiaries reported lower sales for the quarter
compared with a year ago with the largest portion of the decline realized at
our operations in Singapore and Australia. While much of the softness can be
attributed to the Asian crisis, weak domestic logging, oil, and commercial
marine markets also affected sales.
The consolidated gross margin was slightly above the second quarter last year
but below the rate established during the last half of fiscal 1998. The
deterioration was primarily at our domestic manufacturing operation and
resulted from the reduced sales volume. Other components of the higher cost
of sales were expenses associated with a salaried staff reduction and a
decline in manufacturing productivity during the last month of the quarter.
Manufacturing margins overseas improved over a year ago and were comparable
with the levels achieved during the second half of last year.
Marketing, engineering, and administrative expenses for the quarter were
slightly higher than the second quarter last year but included a small charge
for the salaried staff reduction. Interest expense was comparable with a year
ago with little change in borrowings. However, interest expense will increase
in the second half of the year to reflect an increase in borrowings to fund
the acquisitions made early in the third quarter. The change in other income
and expense was due to the absence of a gain on the disposal of fixed assets
and a decline in the earnings of our affiliates. While individual country
statutory income tax rates were unchanged, the effective consolidated rate
increased due to the mix of domestic losses and overseas earnings which are
taxed at a higher rate.
Working capital was essentially unchanged from the prior period, and the
current ratio, down to 3.1, was in line with the ratio at the end of fiscal
1998. Accounts receivable declined with the lower volume and better
collection rates, but inventories rose at our Belgian manufacturing operation
and both domestic distributors. With the decline in accounts receivable, cash
flows from operating activities for the six months exceeded investing and
financing requirements and provided an increase in the cash balance. Our
balance sheet remains strong, and we continue to have liquidity sufficient for
our near-term needs.
Year 2000 Readiness
Updating the report provided in the first quarter, our year 2000 (Y2K)
readiness project is proceeding on schedule. Mainframe and network hardware,
operating systems software, and business systems software at the Company's
domestic manufacturing operation and at most other non-manufacturing
subsidiaries has been replaced or remediated, and some of the business systems
currently are processing year 2000 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 now
scheduled for completion at the Company's Belgian manufacturing operation in
the fiscal 1999 fourth quarter.
A Company-wide inventory of all other systems and equipment (e.g. building and
communications control systems, research and production equipment, and
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 during the fiscal 1999 third quarter.
7
In addition, suppliers and service providers are being contacted 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 as 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.
8
OTHER INFORMATION
Item 1. Legal Proceedings.
There were no reports on Form 8-K and two reports on Form S-8 during the three
months ended December 31, 1998. 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 December 31, 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.
At the Annual Meeting of Shareholders held October 16, 1998, 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 2001:
James O. Parrish For: 2,024,187 Authority withheld: 275,969
Paul J. Powers For: 2,024,041 Authority withheld: 276,115
John A. Mellowes For: 2,021,728 Authority withheld: 278,428
2. Approval of the Qualified Incentive Compensation Plan for Qualified
Management Personnel:
For: 1,742,861 Against: 312,050 Abstain: 28,128
3. Approval of Non-Qualified Stock Option Plan for Non-Employee Directors:
For: 2,007,210 Against: 42,304 Abstain: 33,525
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
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 December 31, 1998, and the related
condensed consolidated statements of operations for the three and six-month
periods ended December 31, 1998 and 1997 and the related condensed
consolidated
statements of cash flows for the six-month period ended December 31, 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 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, 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
January 11, 1999
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 January 11, 1999 on our review of
interim financial information of Twin Disc, Incorporated for the
three and six-month periods ended December 31, 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; 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). 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
January 29, 1999
5
1,000
6-MOS
JUN-30-1998
DEC-31-1998
8,127
0
23,383
674
56,428
94,966
117,203
80,394
162,779
30,509
19,955
11,653
0
0
71,041
162,779
80,733
80,733
62,239
62,239
0
0
752
897
600
297
0
0
0
297
(.10)
(.10)
