<PAGE> 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, 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 March 31, 1999, the registrant had 2,835,184 shares of its common stock
outstanding.
<PAGE> 2
FINANCIAL STATEMENTS
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31 June 30
1999 1998
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,735 $ 5,087
Trade accounts receivable, net 27,309 28,320
Inventories 60,521 53,280
Deferred income taxes 1,987 1,987
Other 6,899 4,906
-------- --------
Total current assets 101,451 93,580
Property, plant and equipment, net 39,361 35,728
Investments in affiliates 7,993 10,356
Deferred income taxes 1,241 1,241
Intangible pension asset 4,082 4,082
Other assets 31,365 15,967
-------- --------
$185,493 $160,954
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 21,597 $ 276
Accounts payable 14,624 9,917
Accrued liabilities 21,451 19,360
-------- --------
Total current liabilities 57,672 29,553
Long-term debt 19,960 19,949
Accrued retirement benefits 29,486 29,457
-------- --------
107,118 78,959
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 81,459 84,738
Accumulated other comprehensive income 2,370 2,757
-------- --------
95,482 99,148
Less treasury stock, at cost 17,107 17,153
-------- --------
Total shareholders' equity 78,375 81,995
-------- --------
$185,493 $160,954
-------- --------
-------- --------
The notes to consolidated financial statements are an integral part of this
statement. Amounts in thousands.
</TABLE>
<PAGE> 3
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $41,139 $49,029 $121,872 $150,903
Cost of goods sold 33,823 36,219 96,061 115,907
------- ------- ------- -------
7,316 12,810 25,811 34,996
Marketing, engineering and
administrative expenses 8,488 8,246 25,303 24,473
Interest expense 573 376 1,325 1,135
Other (income) and expense, net 273 38 304 (571)
------- ------- ------- -------
9,334 8,660 26,932 25,037
------- ------- ------- -------
Earnings (loss) before income tax (2,018) 4,150 (1,121) 9,959
Income taxes (236) 1,766 364 4,103
------- ------- ------- -------
Net earnings (loss) ($1,782) $ 2,384 ($1,485) $ 5,856
------- ------- ------- -------
------- ------- ------- -------
Dividends per share $ 0.21 $ 0.19 $ 0.63 $ 0.57
Earnings per share data:
Basic earnings (loss) per share ($ 0.63) $ 0.84 ($ 0.52) $ 2.07
Diluted earnings (loss) per share($ 0.63) $ 0.82 ($ 0.52) $ 2.03
Shares outstanding data:
Average shares outstanding 2,835 2,842 2,835 2,829
Dilutive stock options 4 57 13 54
------- ------- ------- -------
Diluted shares outstanding 2,839 2,899 2,848 2,883
------- ------- ------- -------
------- ------- ------- -------
Comprehensive income (loss):
Net earnings (loss) ($ 1,782) $ 2,384 ($ 1,485) $ 5,856
Other comprehensive income (loss):
Foreign currency
translation adjustment (1,942) (1,281) (387) (2,604)
------- ------- ------- -------
Comprehensive income (loss) ($ 3,724) $ 1,103 ($ 1,872) $ 3,252
------- ------- ------- -------
------- ------- ------- -------
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>
<PAGE> 4
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ($ 1,485) $ 5,856
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 4,654 4,065
(Gain) loss on sale of fixed assets 35 (360)
Gain on partial sale of affiliate (1,371) --
Equity in (earnings) losses of affiliates 1,191 (509)
Dividends received from affiliate 625 270
Net change in working capital,
excluding cash, debt, and other 4,334 (4,938)
------- -------
7,983 4,384
------- -------
Cash flows from investing activities:
Acquisitions of fixed assets (4,873) (5,825)
Proceeds from sale of fixed assets 17 426
Business acquisitions (16,340) (1,021)
------ ------
(21,196) (6,420)
------ ------
Cash flows from financing activities:
Increase in notes payable, net 14,721 99
Treasury stock activity 38 1,076
Dividends paid (1,786) (1,616)
------ ------
12,973 (441)
------ ------
Effect of exchange rate changes on cash (112) (277)
------ ------
Net change in cash and cash equivalents (352) (2,754)
Cash and cash equivalents:
Beginning of period 5,087 8,983
------ ------
End of period $ 4,735 $ 6,229
------ ------
------ ------
The notes to consolidated financial statements are an integral part of this
statement. Amounts in thousands.
</TABLE>
<PAGE> 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):
March 31 June 30
1999 1998
----------- ---------
Inventories:
Finished parts $48,449 $43,848
Work in process 6,684 5,524
Raw materials 5,388 3,908
------- -------
$60,521 $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 March 31, 1999 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.
D. ACQUISITIONS
During the third fiscal quarter ended March 31, 1999, the Company completed
two acquisitions which significantly broadened existing industrial and marine
product lines and strengthened the Company's global market position.
In January, the Company purchased the mechanical power take-off product line
manufactured by Rockford Powertrain, Inc. for approximately $13.5 million.
This transaction resulted in goodwill of approximately $11 million.
In February, the Company purchased Technodrive S.p.A. of Decima, Italy for
approximately $3.9 million, resulting in goodwill of approximately $2.9
million. Technodrive manufactures industrial power take-offs, clutches,
hydraulic pump mount drives and marine transmissions.
E. PARTIAL SALE OF AFFILIATE
In March, the Company sold a portion of its investment in Niigata Converter
Co., LTD. As a result, a pre-tax gain of approximately $1,371,000 was
recorded in the third fiscal quarter. The sale reduced the Company's
ownership from 25% to 19.5%.
<PAGE> 6
MANAGEMENT DISCUSSION AND ANALYSIS
Third quarter net sales were slightly higher than the previous period due to
the two acquisitions made early in the quarter. However, compared with a year
ago, sales were down 16 percent for the quarter and 19 percent for the nine
months. Net losses for the period primarily resulted from restructuring
actions taken to position the Company for the current cyclical downturn.
While some of our distribution subsidiaries reported revenue improvements,
sales were off last years' pace at most operations. Our domestic
manufacturing operation was especially hard hit as weak worldwide demand for
key commodities adversely affected many of our customers. Demand for marine
products used in commercial boat production and repair was down sharply,
partially due to low oil prices, and demand from the marine pleasure craft
market moderated somewhat. Other product lines were affected similarly but
not to the same extent as marine. There continues to be very weak demand for
replacement parts which, combined with our reduced delivery lead times, has
slowed recovery and caused a considerable reduction in sales of the higher
margin service parts. The acquisition of the net assets of Technodrive
S.p.A., completed in February, and integration of the newly acquired
mechanical power take-off product line into our Racine facilities, added both
sales and earnings for the period.
Sales and earnings of most of our marketing subsidiaries were down from a year
ago with the most significant declines continuing to be recorded at operations
in Singapore and Australia. Competitive pressure caused by the stronger
dollar and the Asian economic crisis were the principal causes of the
weakness.
The gross margin for the quarter declined to 18 percent, its lowest level in
five years, as a result of workforce restructuring expense, lower sales volume
and the related decline in production efficiency. There were productivity
declines in both domestic and overseas manufacturing operations. Domestically,
there was a voluntary separation program for manufacturing associates which
increased cost and dampened productivity. In Belgium, the work-week was
shortened through the use of a government sponsored layoff program, and there
was a salaried staff reduction consistent with the decline in sales volume.
The cost of those restructuring actions included in the quarter accounted for
about one-third of the after-tax loss.
Marketing, engineering and administrative expense was slightly higher than
last year with the addition of Technodrive; but, as a result of cost control
and the second quarter domestic salaried staff reduction, it was down 5
percent from the second fiscal quarter. Interest expense was about 50 percent
higher than a year ago due to acquisition related debt of about $21 million.
There also was a reduction in the average interest rate with the addition of
lower-cost, short-term borrowing. The change in Other expense from last year
is primarily an increase in currency exchange losses. Also netted in that
line item are the current operating losses of our Japanese affiliate and the
gain recognized on the sale of a portion of that joint venture holding. While
that pre-tax net loss was negligible, different tax treatment of the
components resulted in an approximate $500,000 loss after tax and caused the
low effective tax rate reported for the quarter.
As a result of the significant additional short-term borrowing, working
capital dropped by about one-third to $44 million; and the current ratio fell
to 1.8 from 3.1 at the end of December. The large increase in Other assets is
principally goodwill associated with the two acquisitions completed during the
quarter. Accounts receivable rose from the previous quarter-end due to the
Technodrive acquisition but remains below the level at last year-end. In
addition to the inventory from acquisitions during the past quarter, levels
have risen since year-end as a result of raw material purchased for new and
anticipated transmission contracts and a mismatch between product on hand and
current demand. For the nine months, cash flow from operating activities,
about one-half from working capital, was more than needed to fund fixed asset
purchases and dividends. While liquidity was reduced during the quarter, we
continue to maintain a strong balance sheet and believe we have liquidity
sufficient to meet our near-term needs.
Year 2000 Readiness
Updating the reports provided in prior quarters, 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 actual transactions for 2000. 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 at the beginning
of the new fiscal year.
<PAGE> 7
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 during the fiscal 1999 fourth quarter. The Company believes the
expense to be incurred in achieving full compliance will not be material.
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.
<PAGE> 8
OTHER INFORMATION
Item 1. Legal Proceedings.
There were no reports on Form 8-K during the three months ended March 31,
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 March 31, 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".
<PAGE> 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
<PAGE> 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 March 31, 1999, and the related
condensed consolidated statements of operations for the three and nine-month
periods ended March 31, 1999 and 1998 and the related condensed consolidated
statements of cash flows for the nine-month period ended March 31, 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, 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
May 5, 1999
<PAGE> 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 May 5, 1999 on our review of
interim financial information of Twin Disc, Incorporated for the
three and nine-month periods ended March 31, 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
May 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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 MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1999
<CASH> 4,735
<SECURITIES> 0
<RECEIVABLES> 27,952
<ALLOWANCES> 643
<INVENTORY> 60,521
<CURRENT-ASSETS> 101,451
<PP&E> 119,838
<DEPRECIATION> 80,477
<TOTAL-ASSETS> 185,493
<CURRENT-LIABILITIES> 57,672
<BONDS> 19,960
<COMMON> 11,653
0
0
<OTHER-SE> 66,722
<TOTAL-LIABILITY-AND-EQUITY> 185,493
<SALES> 121,872
<TOTAL-REVENUES> 121,872
<CGS> 96,061
<TOTAL-COSTS> 96,061
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,325
<INCOME-PRETAX> (1,121)
<INCOME-TAX> 364
<INCOME-CONTINUING> (1,485)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,485)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
