1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 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 March 31, 1998, the registrant had 2,844,834 shares of its common stock outstanding.
2 FINANCIAL STATEMENTS TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> March 31 June 30 1998 1997 ---- ---- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 6,229 $ 8,983 Trade accounts receivable, net 29,429 32,428 Inventories 51,592 47,844 Deferred income taxes 3,491 3,491 Other 3,464 5,216 -------- -------- Total current assets 94,205 97,962 Property, plant and equipment, net 35,769 34,249 Investments in affiliates 10,577 10,880 Deferred income taxes 4,650 4,559 Intangible pension asset 4,779 4,779 Other assets 16,112 6,326 -------- -------- $166,092 $158,755 -------- -------- -------- -------- Liabilities and Shareholders' Equity Current liabilities: Notes payable $ 256 $ 169 Accounts payable 13,747 12,834 Accrued liabilities 20,150 16,618 -------- -------- Total current liabilities 34,153 29,621 Long-term debt 19,943 19,944 Accrued retirement benefits 35,487 35,393 -------- -------- 89,583 84,958 Shareholders' Equity: Common stock 11,653 11,653 Retained earnings 81,682 77,424 Foreign currency translation adjustment 3,456 6,060 Minimum pension liability adjustment (3,708) (3,708) -------- -------- 93,083 91,429 Less treasury stock, at cost 16,574 17,632 -------- -------- Total shareholders' equity 76,509 73,797 -------- -------- $166,092 $158,755 -------- -------- -------- -------- The notes to consolidated financial statements are an integral part of this statement. Amounts in thousands. </TABLE>
3 TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended March 31 March 31 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $49,029 $49,204 $150,903 $135,641 Cost of goods sold 36,219 37,480 115,907 104,250 ------- ------- ------- ------- 12,810 11,724 34,996 31,391 Marketing, engineering and administrative expenses 8,246 7,819 24,473 22,553 Interest expense 376 443 1,135 1,418 Other (income) and expense, net 38 133 (571) (951) ------- ------- ------- ------- 8,660 8,395 25,037 23,020 ------- ------- ------- ------- Earnings before income tax 4,150 3,329 9,959 8,371 Income taxes 1,766 1,413 4,103 3,581 ------- ------- ------- ------- Net earnings $ 2,384 $ 1,916 $ 5,856 $ 4,790 ------- ------- ------- ------- ------- ------- ------- ------- Dividends per share $ .190 $ .175 $ .570 $ .525 Earnings per share data: Basic earnings per share $ .84 $ .69 $ 2.07 $ 1.73 Diluted earnings per share $ .82 $ .68 $ 2.03 $ 1.71 Shares outstanding data: Average shares outstanding 2,842 2,783 2,829 2,780 Dilutive stock options 57 34 54 27 ------- ------- ------- ------- Fully diluted shares 2,899 2,817 2,883 2,807 ------- ------- ------- ------- ------- ------- ------- ------- Translation component of equity Balance - beginning of the period $ 4,737 $ 9,562 $ 6,060 $ 9,706 Translation adjustment (1,281) (2,197) (2,604) (2,341) ------- ------- ------- ------- Balance - end of the period $ 3,456 $ 7,365 $ 3,456 $ 7,365 ------- ------- ------- ------- ------- ------- ------- ------- Amounts in thousands except per share data. Per share figures are based on shares outstanding data. The notes to consolidated financial statements are an integral part of this statement. </TABLE>
4 TWIN DISC, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Nine Months Ended March 31 1998 1997 ---- ---- <S> <C> <C> Cash flows from operating activities: Net earnings $ 5,856 $ 4,790 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 4,065 3,754 Gain on sale of fixed assets (360) (239) Equity in (earnings) losses of affiliates (509) 560 Dividends received from affiliate 270 200 Net change in working capital, excluding cash and debt, and other (4,938) 6,289 ------- ------- 4,384 15,354 ------- ------- Cash flows from investing activities: Acquisitions of fixed assets (5,825) (3,264) Proceeds from sale of fixed assets 426 436 Business acquisition (1,021) - ------ ------ (6,420) (2,828) ------ ------ Cash flows from financing activities: Increase (decrease) in notes payable, net 99 (5,145) Treasury stock activity 1,076 118 Dividends paid (1,616) (1,460) ------ ------ (441) (6,487) ------ ------ Effect of exchange rate changes on cash (277) (279) ------ ------ Net change in cash and cash equivalents (2,754) 5,760 Cash and cash equivalents: Beginning of period 8,983 2,043 ------ ------ End of period $ 6,229 $ 7,803 ------ ------ ------ ------ The notes to consolidated financial statements are an integral part of this statement. Amounts in thousands. </TABLE>
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): March 31 June 30 1998 1997 ----------- --------- Inventories: Finished parts $43,246 $38,713 Work in process 4,918 5,997 Raw materials 3,428 3,134 ------- ------- $51,592 $47,844 ------- ------- 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 March 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 D. Earnings Per Share During the second quarter, the Company adopted Statement of Financial Accounting Standards (FAS) 128 "Earnings Per Share", which establishes new standards for reporting earnings per share. The earnings per share computations for prior periods have been restated to conform with the provisions of FAS 128.
7 MANAGEMENT DISCUSSION AND ANALYSIS Consolidated sales were off from the third quarter last year but about 11 percent ahead for the nine months. Net earnings were almost 25 percent higher than last year's third quarter as a result of the higher sales and improved margins overseas. The contract with a European vehicle manufacturer was completed early in the quarter and caused a decline in net sales. Offsetting some of that reduction were higher domestic shipments of power take-offs, aftermarket renewal parts, and Arneson surface drives. In addition, sales from our Belgian manufacturing subsidiary were up considerably due to improved demand for lower horsepower marine transmissions used in pleasure craft applications and torque converters for light construction equipment. As discussed below, the stronger dollar helped boost margins, but it served to reduce the dollar value of the sales reported by that operation. The changes in sales and earnings of our marketing subsidiaries were mixed. Sales generally were up domestically, stable in Europe and down in the Pacific Basin. Earnings generally followed the same pattern but with less improvement domestically. Competitive pressure caused by the stronger dollar and the Asian economic crisis were the principal causes of the declines in Australia and Singapore. The gross margin for the quarter showed significant improvement with all of the gains attributed to our European manufacturing operation. Increases in production activity since last year at that facility have provided for a significant component of the improved profitability. Also, since a large portion of the sales from that subsidiary are dollar denominated, the stronger dollar has positively impacted its margins. Domestic margins were comparable to a year ago. Marketing, engineering and administrative expenses increased slightly from the level of last year's third quarter. Most of the change was due to increased product development and sales promotion expense. Interest expense was down about 15 percent from a year ago due to reduction in domestic short-term borrowing and the absence of the accrual made last year for a possible tax adjustment. Working capital declined by about 10 percent during the quarter primarily due to pension plan contributions made in advance of their normal due dates. These earlier contributions will help improve the plan funding levels and are responsible for most of the increase in Other Assets. Accounts receivable declined to its lowest level in two years, but inventory increased by $4 million from the previous quarter primarily as a result of increased material in Europe to serve the higher marine transmission demand. As a result of the factors cited above, the current ratio declined to 2.8 compared to 3.1 at the end of the previous quarter. For the nine months, the cash flow from earnings and depreciation was more than needed to fund fixed asset purchases and dividends. Although cash reserves were used to provide for the pension contributions mentioned earlier, we continue to maintain a strong balance sheet and believe we have liquidity sufficient to meet our near-term needs. The company has assessed the potential impact of the Year 2000 date change on its business systems. With the change to a new information system for domestic operations in late 1995 and a similar update currently being implemented at its Belgian manufacturing subsidiary, the Company's system will be prepared to handle the century date change. Testing of these systems will occur in fiscal year 1999. Other network systems either are already capable of handling the date change, or will be as updates are completed in 1998. The Company's other subsidiary's systems are already Year 2000 compliant, or have upgrades scheduled
8 for completion during 1998 that will achieve compliance. The remaining costs of complying with the Year 2000 requirements are not expected to be significant.
9 OTHER INFORMATION Item 1. Legal Proceedings. There were no reports on Form 8-K during the three months ended March 31, 1998. The financial statements included herein have been subjected to a limited review by Coopers & Lybrand L.L.P., 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 March 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. On April 17, 1998, the Board of Directors of the Company at its regular meeting approved the extension of the benefits afforded by the Company's existing shareholder rights plan by adopting a new shareholder rights agreement. The new agreement, like the existing agreement, is intended to promote continuity and stability, deter coercive and partial offers which will not provide fair value to all shareholders and enhance the Board of Directors' ability to represent all shareholders and thereby maximize shareholder values. Pursuant to the new Rights Agreement between the Company and Firstar Trust Company, as Rights Agent (the "1998 Rights Agreement"), one Right will be issued for each share of Common Stock outstanding upon the close of business on June 30, 1998. Each of the new Rights will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Preferred Stock of the Company, no par value, at a price of $160 per one one-hundredth of a share. The Rights generally will not become exercisable unless and until, among other things, any person acquires 15% or more of the outstanding stock of the Company. The new Rights are redeemable under certain circumstances at $.05 per Right and will expire, unless earlier redeemed, on June 30, 2008. The description and terms of the new Rights are set forth in the 1998 Rights Agreement, a copy of which is filed herewith and is incorporated by reference. Item 6. Exhibits. (a) Exhibit No. Exhibit Page ----------- ------- ---- 4 Rights Agreement dated as of April 11 17, 1998 between the Registrant and Firstar Trust Company, which includes as Exhibit A thereto, the Form of Rights Certificate. 99 News Release of Twin Disc, Incorporated 59 dated April 17, 1998.
10 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 4, 1998 /S/ FRED H. TIMM ----------------------- --------------------------- (Date) Fred H. Timm Corporate Controller and Secretary
11 Report of Independent Accountants Board of Directors Twin Disc, Incorporated Racine, Wisconsin We have reviewed the condensed consolidated balance sheet of Twin Disc, Incorporated and subsidiaries as of March 31, 1998, and the related condensed consolidated statements of operations and cash flows for the three and nine-month periods ended March 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, 1997, 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 18, 1997, 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, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ - ------------------------------------ Coopers & Lybrand Milwaukee, Wisconsin April 10, 1998
11 [TYPE] EX-15 EXHIBIT 15 Awareness Letter of Independent Accountants Securities and Exchange Commission Washington, D.C. RE: Twin Disc, Incorporated We are aware that our report dated April 10, 1998 on our review of interim financial information of Twin Disc, Incorporated for the three and nine-month periods ended March 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 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/ - --------------------------------------- Coopers & Lybrand Milwaukee, Wisconsin April 29, 1998