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 September 30, 1999 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, 1999, the registrant had 2,835,334 shares of its common stock outstanding.

2 FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30 June 30 1999 1999 ---- ---- Assets Current assets: Cash and cash equivalents $ 5,654 $ 4,136 Trade accounts receivable, net 24,940 27,201 Inventories 56,346 54,500 Deferred income taxes 6,004 6,004 Other 7,270 5,906 -------- -------- Total current assets 100,214 97,747 Property, plant and equipment, net 37,920 38,935 Investments in affiliates 6,681 6,663 Deferred income taxes 4,449 4,349 Intangible pension asset 3,385 3,385 Other assets 24,994 25,821 -------- -------- $177,643 $176,900 -------- -------- -------- -------- Liabilities and Shareholders' Equity Current liabilities: Notes payable $ 9,182 $ 23,015 Accounts payable 11,101 10,724 Accrued liabilities 21,127 21,022 -------- -------- Total current liabilities 41,410 54,761 Long-term debt 35,114 17,112 Accrued retirement benefits 35,062 37,567 -------- -------- 111,586 109,440 Shareholders' Equity: Common stock 11,653 11,653 Retained earnings 80,036 81,430 Accumulated other comprehensive (loss) income (8,528) (8,516) -------- -------- 83,161 84,567 Less treasury stock, at cost 17,104 17,107 -------- -------- Total shareholders' equity 66,057 67,460 -------- -------- $177,643 $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 September 30 1999 1998 ---- ---- Net sales $35,277 $40,625 Cost of goods sold 28,421 31,405 ------- ------- 6,856 9,220 Marketing, engineering and administrative expenses 7,745 7,851 Interest expense 656 377 Other income, net (101) (117) ------- ------- 8,300 8,111 ------- ------- Earnings (loss) before income taxes (1,444) 1,109 Income taxes (547) 521 ------- ------- Net earnings (loss) ($ 897) $ 588 ------- ------- ------- ------- Dividends per share $ 0.175 $ 0.21 Earnings per share data: Basic earnings (loss) per share ($ 0.32) $ 0.21 Diluted earnings (loss)per share ($ 0.32) $ 0.21 Shares outstanding data: Average shares outstanding 2,835 2,834 Dilutive stock options 2 28 ------- ------- Diluted shares outstanding 2,837 2,862 ------- ------- ------- ------- Comprehensive income: Net earnings (loss) ($ 897) $ 588 Other comprehensive income: Foreign currency translation adjustment (12) 193 ------- ------- Comprehensive income (loss) ($ 909) $ 781 ------- ------- ------- ------- 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 1999 1998 ---- ---- Cash flows from operating activities: Net earnings (loss) ($ 897) $ 588 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 1,729 1,368 Equity in earnings of affiliates (143) (52) Dividends received from affiliate 125 250 Net change in working capital, excluding cash and debt, and other (2,313) (2,268) ------ ------ (1,499) (114) ------ ------ Cash flows from investing activities: Acquisitions of fixed assets (427) (1,434) ------ ------ (427) (1,434) ------ ------ Cash flows from financing activities: Increase in notes payable, net 3,933 500 Treasury stock activity 2 38 Dividends paid (497) (595) ------ ------ 3,438 (57) ------ ------ Effect of exchange rate changes on cash 6 (32) ------ ------ Net change in cash and cash equivalents 1,518 (1,637) Cash and cash equivalents: Beginning of period 4,136 5,087 ------ ------ End of period $5,654 $3,450 ------ ------ ------ ------ 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): September 30 June 30 1999 1999 ----------- --------- Inventories: Finished parts $45,461 $42,405 Work in process 5,874 6,385 Raw materials 5,011 5,710 ------- ------- $56,346 $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 September 30, 1999 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): September 30, September 30, 1999 1998 ------------- ------------- Manufacturing segment sales $ 31,219 $ 38,203 Distribution segment sales 10,539 10,140 Inter/Intra segment sales (6,481) (7,718) --------- --------- Net sales $ 35,277 $ 40,625 --------- --------- --------- --------- Manufacturing segment earnings (loss) $ (1,788) $ 1,238 Distribution segment earnings (loss) 546 513 Inter/Intra segment earnings (loss) (202) (642) --------- --------- Pretax earnings (loss) $ (1,444) $ 1,109 --------- --------- --------- --------- Assets September 30, June 30, 1999 1999 ------------- ------------- Manufacturing segment assets $150,966 $152,251 Distribution segment assets 25,125 25,448 Corporate assets and elimination of inter-company assets 1,552 (799) -------- -------- $177,643 $176,900 -------- -------- -------- --------

6 MANAGEMENT DISCUSSION AND ANALYSIS Shipments for the quarter were down due to the normal seasonal reduction in demand. In addition, continuing softness in many of our markets caused sales to decline 13 percent from the first quarter last year. Partially offsetting the softness were the current year sales from the new businesses acquired during fiscal year 1999. The impact of the sales decline on earnings was more dramatic with a net loss in the current quarter compared with net earnings last year. The significant components of the decline were sales from our principal manufacturing subsidiaries as most other operations reported modest improvements from a year ago. Reduced shipments of transmissions for military applications and torque converters for construction equipment were major elements of the decline in domestic sales. Also, aftermarket part sales were down from a year ago as demand continued to be soft. At our Belgian operation, despite a recent improvement in order rates, shipments of marine transmissions and torque converters were off for the quarter. Also, the implementation of new enterprisewide business systems during the quarter temporarily limited our ability to ship service parts from that facility. The installation has been completed and no further adverse impact is anticipated. The consolidated gross margin declined about three percentage points from the year-ago quarter. The lack of profitability resulted principally from lower sales volume, but was magnified by the shortfall in higher-margin after-market service parts. The causes of the decline in marginal income were shared equally by both domestic and Belgian manufacturing operations. Marketing, engineering, and administrative expenses for the current period were slightly lower than a year ago but were higher than expected due to one-time costs associated with the systems implementation in Europe. Debt-restructuring arrangements were completed during the quarter with a resulting sharp increase in working capital and current ratio. However, both measures are below a year ago mainly due to the remaining short-term debt incurred in making acquisitions in the middle of last fiscal year. The volume- related decline in accounts receivable offset an order-driven increase in domestic inventory, and the positive cash flow from depreciation covered equipment purchases and dividends. Increased bank borrowing is attributable to the higher required pension plan contributions and operating losses. Despite the increased leverage from a year ago, the Company's balance sheet remains solid; and existing financing arrangements continue to provide liquidity sufficient for near-term needs. Year 2000 Readiness The Company has assessed the potential impact of the Year 2000 (Y2K) date change on its business systems and operations. New information systems, which are prepared to handle the century date change, have been installed at all operations. Substantial testing of these systems has occurred and will continue prior to December 31, 1999. Network systems and other building, service, and manufacturing equipment throughout the Company and its subsidiaries have been inventoried, assessed, modified as necessary or replaced, and are capable of handling the date change. In addition, suppliers and service providers have been contacted to ensure they are actively involved in programs to address the Year 2000 issue and provide uninterrupted service to Twin Disc. Although the Company cannot assure Y2K compliance by its key suppliers and distributors, no major part or critical operation of the Company relies on a single source for raw materials, supplies, or services, and the Company has multiple distribution channels for its products. Should the Company discover that a supplier or distributor will not be Y2K compliant, the Company believes it will be able to find cost-competitive alternative sources and continue its production and distribution. It is estimated that approximately $5.7 million has been spent on hardware, software, consulting services and staff time during the past four years to become Y2K compliant. Substantially all of the costs have been incurred at this time. The work has been completed in the normal course of operations and has not delayed other projects critical to the financial strength or operating results of the Company. The Company believes the Y2K issue will not pose significant operational problems. However, if all Y2K issues are not properly identified, or assessment, remediation, and testing are not completed for Y2K problems that are identified, there can be no assurance that the Y2K issue will not have a material adverse effect on the Company's relationships with its customers, suppliers, distributors and others. In addition, there can be no assurance that the Y2K issues of other entities will not have a material adverse impact on the Company's systems or results of operations.

7 OTHER INFORMATION Item 1. Legal Proceedings. There were no reports on Form 8-K during the three months ended September 30, 1999. 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 September 30, 1999 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 September 30, 1999, and the related condensed consolidated statements of operations and cash flows for the three- month periods ended September 30, 1999 and 1998. 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 October 8, 1999

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 October 8, 1999 on our review of interim financial information of Twin Disc, Incorporated for the three-month periods ended September 30, 1999 and 1998 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 November 5, 1999

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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-1999 SEP-30-1999 5,654 0 25,485 545 56,346 100,214 120,193 82,273 177,643 41,410 35,114 11,653 0 0 54,404 177,643 35,277 35,277 28,421 28,421 0 0 656 (1,444) (547) (897) 0 0 0 (897) (.32) (.32)