<PAGE> 17
EXHIBIT 13
- - - - -
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net Sales $177,987 $168,142 $202,643
Net Earnings (Loss) 3,773 (1,018) 9,363
Basic Earnings (Loss) Per Share 1.34 (.36) 3.30
Diluted Earnings (Loss) Per Share 1.34 (.36) 3.24
Dividends Per Share .70 .805 .76
Average Shares Outstanding For The Year 2,820,534 2,834,909 2,833,663
Diluted Shares Outstanding For The Year 2,820,730 2,843,877 2,886,209
</TABLE>
Sales and Earnings by Quarter
<TABLE>
<CAPTION>
2000 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
<S> <C> <C> <C> <C> <C>
Net Sales $35,277 $44,342 $49,467 $48,901 $177,987
Gross Profit 6,856 9,952 11,590 12,960 41,358
Net Earnings (897) 693 1,726 2,251 3,773
Basic Earnings Per Share (.32) .25 .61 .80 1.34
Diluted Earnings Per Share (.32) .25 .61 .80 1.34
Dividends Per Share .175 .175 .175 .175 .70
Stock Price Range:
High 20 3/8 16 5/8 18 5/16 17 9/16 20 3/8
Low 16 1/2 11 11 7/8 15 7/16 11
</TABLE>
Sales and Earnings by Quarter
<TABLE>
<CAPTION>
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
<S> <C> <C> <C> <C> <C>
Net Sales $40,625 $40,108 $41,139 $46,270 $168,142
Gross Profit 9,220 9,275 7,316 10,270 36,081
Net Earnings (Loss) 588 (291) (1,782) 467 (1,018)
Basic Earnings (Loss)
Per Share .21 (.10) (.63) .16 (.36)
Diluted Earnings (Loss)
Per Share .21 (.10) (.63) .16 (.36)
Dividends Per Share .21 .21 .21 .175 .805
Stock Price Range:
High 37 3/4 24 1/4 22 3/16 20 3/16 37 3/4
Low 23 3/8 20 1/4 19 18 9/16 18 9/16
</TABLE>
Based on average shares outstanding for the period.
In thousands of dollars except per share and stock price range statistics.
<PAGE> 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net Sales, New Orders and Backlog
- - - - - - - - - - - - - - - - -
Revenues increased in fiscal 2000 as our distribution operations and domestic
manufacturing rebounded from the previous year's downturn. Order rates were
weak throughout fiscal 1999 and the backlog of orders scheduled for shipment
during the next six months (six-month backlog) dropped 26 percent to $40
million by year-end. Improvement in demand began early in fiscal 2000 and
resulted in the six-month backlog rising to $55 million in March 2000 before
easing to end the year at $53 million - a 32 percent increase from the
previous year.
Net sales of $168 million in fiscal 1999 were down 17 percent from fiscal 1998
but rose to $178 million, an increase of six percent, in fiscal 2000. The
1999 sales decline resulted from weak demand in many markets, customer
inventory reductions adversely affecting replacement part sales, and the
absence of the truck transmission contract completed in fiscal 1998. Most
significantly, lower demand from the commercial marine market led to a 34
percent drop in domestic manufacturing sales. Other important factors in the
sales decline were low oil prices; prices for commodities such as lumber and
food, which were adversely affected by the Asian economic crisis; and reduced
capital spending in the agricultural and construction equipment markets. Sales
of lower-horsepower marine transmissions for pleasure craft also were down,
causing a modest decline in sales from our Belgian plant. On the positive
side, the acquisition of an Italian manufacturing company and purchase of a
domestic product line, completed early in the second half of the fiscal year,
provided a sales boost and slight incremental earnings in the last five months
of fiscal 1999. Both acquisitions provided products that strengthen our
global market position in industrial products. Technodrive S.p.A adds to the
lower-horsepower end of our marine transmission line and provides several
complementary industrial products. We also broadened our industrial product
offerings with the mechanical power take-off product line acquired from
Rockford Powertrain, Inc.
While order rates improved early in fiscal year 2000, year-to-year
improvements in shipments began in the second fiscal quarter. The most
significant components of the improvement were registered within our domestic
manufacturing operation. Shipments of power take-offs, attributable to the
product line purchased in the prior year; higher-horsepower marine
transmissions used in commercial boats; power-shift transmissions for
construction applications; and aftermarket parts sales all contributed to the
increase. Shipments from our Belgian plant of lower-horsepower marine
transmissions also increased slightly as demand for their use in pleasure
craft applications remained steady, and shipments from the recently acquired
Italian manufacturing subsidiary contributed for the full year.
Sales at our wholly owned distribution companies varied by global region, but
generally rebounded in fiscal 2000 after the modest decline in 1999. Domestic
declines in 1999 were related to low oil and commodity prices, which recovered
and provided some improvement during the recently completed year. Although
sales from our wholly owned European distributors were affected by changes we
made in market representation, demand from the markets served trended upward
in both years, and shipments were up materially in fiscal 2000. Sales in the
Pacific Rim generally mirrored the economies in which they operate and were
down in fiscal 1999 but began to improve in the year just completed.
<PAGE> 19
The U.S. dollar strengthened against most currencies in each of the last two
fiscal years, particularly Asian currencies in fiscal 1999 and the Euro in
fiscal 2000. As a result, pricing pressure increased, but the effects were
partially offset by sales to U.S. customers from our Belgian operation.
Although the general effect has been a reduction of reported dollar sales, the
impact has not been significant. Price increases, implemented selectively in
each year, generated revenues about equal to the rate of inflation.
At the end of fiscal 1999, the backlog of orders scheduled for shipment during
the next six months was $40 million. As the new fiscal year began, order
rates improved in both commercial marine and certain industrial markets.
There were further improvements as the year progressed and the six-month
backlog rose to $53 million at year-end, an increase of 32 percent for the
year. Although somewhat higher at the end of the third fiscal quarter,
backlog declined due to normal seasonal influences in the fourth quarter.
Margins, Costs and Expenses
Manufacturing method and process improvements, cellular layout of machine
tools, and cost control have all played critical roles in efforts to improve
margins. But, as fixed costs are a large component of manufacturing expense,
production volume is an important element in gross margin fluctuations.
In fiscal 1999, the gross margin was more than three percentage points below
that of fiscal 1998, primarily because of the reduced domestic sales volume,
lower productivity, and unusual separation costs in the second and third
quarters. During the 1999 second fiscal quarter, there was a domestic
salaried staff reduction, and in the following period, a similar program was
implemented overseas along with a voluntary separation program for domestic
hourly associates. In Belgium, the workweek was shortened utilizing a
government-supported layoff program. In addition to the one-time expenses, an
adverse productivity impact, primarily in the third quarter, was associated
with these actions.
The gross margin increased by almost two percentage points in fiscal 2000 with
all manufacturing operations showing improvement. Domestically, higher
production volume, a favorable product mix, and strict control of general
manufacturing costs were the most significant factors, while productivity
improvements, expansion of the workweek, and the favorable impact of sales
denominated in the relatively strong dollar boosted margins overseas.
Marketing, engineering, and administrative (ME&A) expense declined four
percent in fiscal 1999, but increased sharply as a percent of the reduced
sales volume. Included in the expenses for the year were severance costs
associated with the second- and third-quarter reductions in domestic and
Belgian salaried staff. The total pre-tax impact of approximately $350,000
was recovered within one year.
<PAGE> 20
In fiscal 2000, ME&A expense dropped a further four percent as a result of
previous-year staff reductions, continued attention to cost control, and
closure of our South African distribution operation.
In March 1999, we sold a portion of the investment in our Japanese affiliate,
Niigata Converter Company (NICO), which resulted in a pre-tax gain of $1.4
million (discussed further in Footnote D to the consolidated financial
statements), and reduced our ownership interest in NICO from 25.0 percent to
19.5 percent. Our share of NICO losses for fiscal 1999 versus modest earnings
in fiscal 1998 was the cause of the year-to-year decline in the earnings of
affiliates. Those earnings rebounded in fiscal 2000 with a strong performance
from our U.S. distribution affiliate. At fiscal 1999 year-end, we announced
the closure of our South African distribution subsidiary and recorded a
provision to cover anticipated losses from that action.
Interest, Taxes and Net Earnings
Short-term borrowing increased in fiscal 1999 as significant additional debt
was incurred to finance acquisitions, and interest expense increased by almost
40 percent. During the recently completed year, debt was reduced slightly,
but a higher average outstanding balance and higher interest rates caused
interest expense to increase.
The effective income tax rate in fiscal 1998 was above normal due to
relatively higher foreign earnings, generally taxed at a higher rate. The
substantial tax provision on almost-breakeven pre-tax earnings in fiscal 1999
was caused by: lower tax rates on losses domestically, offset by higher rates
on income overseas; and by the lack of a recordable tax benefit on the
provision for loss on the closure of our South African distribution
subsidiary. In fiscal 2000, limitations on foreign tax credit utilization and
a continued high proportion of foreign earnings resulted in a sharp increase
in the effective tax rate. Statutory rates generally have remained unchanged.
Liquidity and Capital Resources
The net cash provided by operating activities in fiscal 1999 was $9 million,
up $2 million from the previous year. Despite operating losses for the year,
reductions in both accounts receivable and inventory generated solid positive
cash flows. In fiscal 2000, cash provided by operations dipped to $7 million.
Positive cash flows from earnings, depreciation, and working capital
reductions were partially offset by increased contributions to Company pension
funds.
Expenditures for capital equipment exceeded depreciation by about $2 million
in fiscal 1998 as experience helped identify the equipment needed to further
improve cell performance. Due to the downturn and a desire to conserve cash,
fiscal 1999 and 2000 capital expenditures were reduced from plan, and in the
most recently completed year, were well below depreciation. As conditions
improve, we expect the level of capital spending will rise to provide for more
efficient machinery and to allow further refinement of individual
manufacturing cells.
<PAGE> 21
Working capital and the current ratio dropped significantly in fiscal 1999 due
to the large increase in short-term debt incurred to finance acquisitions.
Early in fiscal 2000, the short-term borrowings were replaced with a term
revolver. The current ratio of 1.8 at June 30, 1999, rose to 2.2 at the end
of fiscal 2000.
The book value of the Company, and thus its reported capital structure,
changed significantly at both fiscal 1999 and 2000 year-ends. It was reduced
by a non-cash charge to equity of $11.1 million at June 30, 1999. The charge
was caused primarily by using a more conservative mortality table to estimate
pension liabilities and generally reflects the amount by which those
liabilities exceed plan assets. In fiscal 2000, principally as a result of
good market return on plan assets, the charge was reversed, resulting in a
similar increase in equity. In accordance with applicable accounting
standards, the after-tax effects of the changes were charged directly to
equity and shown in comprehensive income but did not affect reported primary
earnings.
The Company believes the capital resources available in the form of existing
cash, lines of credit (see Footnote F to the consolidated financial
statements), and funds provided by operations will be adequate to meet
anticipated capital expenditures and other foreseeable business requirements
in the future.
Other Matters
Environmental Matters
The Company is involved in various stages of investigation relative to
hazardous waste sites on the United States EPA National Priorities List. It
is not possible at this time to determine the ultimate outcome of those
matters; but, as discussed further in Footnote N to the consolidated financial
statements, they are not expected to affect materially the Company's
operations, financial position, or cash flows.
Note on Forward-Looking Statements
Information in this report and in other Company communications that are not
historical facts are forward-looking statements, which are based on
management's current expectations. These statements involve risks and
uncertainties that could cause actual results to differ materially from what
appears here.
Forward-looking statements include the Company's description of plans and
objectives for future operations and assumptions behind those plans. The
words "anticipates," "believes," "intends," "estimates," and "expects," or
similar anticipatory expressions, usually identify forward-looking statements.
In addition, goals established by Twin Disc, Incorporated, should not be
viewed as guarantees or promises of future performance. There can be no
assurance the Company will be successful in achieving its goals.
In addition to the assumptions and information referred to specifically in the
forward-looking statements, other factors could cause actual results to be
materially different from what is presented here.
<PAGE> 22
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 and 1999
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,651 $ 4,136
Trade accounts receivable, net 28,828 27,201
Inventories, net 50,190 54,500
Deferred income taxes - 6,004
Other 5,333 5,906
------- -------
Total current assets 90,002 97,747
Property, plant and equipment, net 34,303 38,935
Investments in affiliates 6,968 6,663
Goodwill, net 14,401 15,235
Deferred income taxes 4,416 4,349
Intangible pension asset - 3,385
Prepaid pension asset 14,335 -
Other assets 9,765 10,586
------- -------
$174,190 $176,900
======= =======
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 4,571 $ 20,158
Current maturities on long-term debt 2,857 2,857
Accounts payable 11,571 10,724
Deferred income taxes 1,157 -
Accrued liabilities 20,752 21,022
------- -------
Total current liabilities 40,908 54,761
Long-term debt 31,254 17,112
Accrued retirement benefits 23,795 37,567
------- -------
95,957 109,440
Shareholders' equity:
Common shares authorized: 15,000,000;
issued: 3,643,630; no par value 11,653 11,653
Retained earnings 83,228 81,430
Accumulated other comprehensive income (loss) 799 (8,516)
------- -------
95,680 84,567
Less treasury stock, at cost 17,447 17,107
------- -------
Total shareholders' equity 78,233 67,460
------- -------
$174,190 $176,900
======= =======
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
<PAGE> 23
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands, except per share data)
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales $177,987 $168,142 $202,643
Cost of goods sold 136,629 132,061 152,515
------- ------- -------
Gross profit 41,358 36,081 50,128
Marketing, engineering and
administrative expenses 31,476 32,755 34,092
------- ------- -------
Earnings from operations 9,882 3,326 16,036
Other income (expense):
Interest income 244 237 550
Interest expense (2,979) (2,070) (1,505)
Equity in net earnings
(loss) of affiliates 906 (945) 651
Gain on partial sale of affiliate - 1,355 -
Loss on closure of subsidiary - (1,140) -
Other, net 14 (749) 313
------- ------- -------
(1,815) (3,312) 9
------- ------- -------
Earnings before income
taxes 8,067 14 16,045
Income taxes 4,294 1,032 6,682
------- ------- -------
Net earnings (loss) $ 3,773 $ (1,018) $ 9,363
======= ======= =======
Earnings (loss) per share data:
Basic earnings (loss) per share $ 1.34 $ (.36) $ 3.30
Diluted earnings (loss) per share 1.34 (.36) 3.24
Shares outstanding data:
Average shares outstanding 2,821 2,835 2,834
Dilutive stock options - 9 52
------- ------- -------
Diluted shares outstanding 2,821 2,844 2,886
======= ======= =======
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
<PAGE> 24
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss) $ 3,773 $ (1,018) $ 9,363
Adjustments to reconcile
to net cash provided
by operating activities:
Depreciation and amortization 6,980 6,454 5,607
(Loss) gain on sale of plant assets (3) 38 (402)
Gain on partial sale of affiliate - (1,355) -
Loss on closure of subsidiary - 1,140 -
Equity in net (earnings)
loss of affiliates (906) 945 (651)
Provision for deferred income taxes (284) - 2,873
Dividends received from affiliate 600 625 495
Changes in operating assets and
liabilities:
Trade accounts receivable, net (2,922) 3,898 3,361
Inventories, net 3,211 3,468 (5,673)
Other assets (770) (1,757) (7,842)
Accounts payable 2,402 (1,360) (2,695)
Accrued liabilities 168 (759) 2,777
Accrued/prepaid retirement benefits (5,364) (1,361) (244)
------- ------- -------
Net cash provided by
operating activities 6,885 8,958 6,969
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of plant assets 92 24 574
Acquisitions of plant assets (2,134) (6,439) (7,154)
Acquisitions of businesses - (16,785) (1,021)
Payment for license agreement - - (1,515)
------- ------- -------
Net cash used by investing activities (2,042) (23,200) (9,116)
------- ------- -------
Cash flows from financing activities:
Increases (decreases) in notes
payable, net (15,000) 15,000 112
Proceeds from long-term debt 18,000 - -
Payments of long-term debt (3,857) - -
Acquisition of treasury stock (343) - (1,314)
Proceeds from exercise of stock options 2 38 1,904
Dividends paid (1,974) (2,282) (2,160)
------- ------- -------
Net cash provided (used) by
financing activities (3,172) 12,756 (1,458)
------- ------- -------
Effect of exchange rate changes on cash (156) 535 (291)
------- ------- -------
Net change in cash and cash equivalents 1,515 (951) (3,896)
Cash and cash equivalents:
Beginning of year 4,136 5,087 8,983
------- ------- -------
End of year $ 5,651 $ 4,136 $ 5,087
======= ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Interest $3,008 $ 2,037 $ 1,505
Income taxes 4,401 127 4,698
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
<PAGE> 25
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
for the years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Common stock
Balance, June 30 $ 11,653 $ 11,653 $ 11,653
------- ------- -------
Retained earnings
Balance, July 1 81,430 84,738 77,424
Net earnings (loss) 3,773 (1,018) 9,363
Cash dividends (1,974) (2,282) (2,160)
Stock options exercised (1) (8) 111
------- ------- -------
Balance, June 30 83,228 81,430 84,738
------- ------- -------
Accumulated other comprehensive income (loss)
Balance, July 1 (8,516) 2,757 2,352
------- ------- -------
Foreign currency translation adjustment
Balance, July 1 3,288 3,418 6,060
Current adjustment (2,489) (130) (2,642)
------- ------- -------
Balance, June 30 799 3,288 3,418
------- ------- -------
Minimum pension liability adjustment, net
Balance, July 1 (11,804) (661) (3,708)
Current adjustment, net of related income
taxes ($(7,547)in 2000, $7,125 in 1999
and $(1,948) in 1998) 11,804 (11,143) 3,047
------- ------- -------
Balance, June 30 - (11,804) (661)
------- ------- -------
Accumulated other comprehensive income (loss)
Balance, June 30 799 (8,516) 2,757
------- ------- -------
Treasury stock, at cost
Balance, July 1 (17,107) (17,153) (17,632)
Shares acquired (343) - (1,314)
Stock options exercised 3 46 1,793
------- ------- -------
Balance, June 30 (17,447) (17,107) (17,153)
------- ------- -------
Shareholders' equity balance, June 30 $ 78,233 $ 67,460 $ 81,995
======= ======= =======
Comprehensive income (loss)
Net earnings (loss) $ 3,773 $ (1,018) $ 9,363
Other comprehensive income (loss)
Foreign currency translation adjustment (2,489) (130) (2,642)
Minimum pension liability adjustment 11,804 (11,143) 3,047
------- ------- -------
Other comprehensive income (loss) 9,315 (11,273) 405
------- ------- -------
Comprehensive income (loss) $ 13,088 $(12,291) $ 9,768
======= ======= =======
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
<PAGE> 26
TWIN DISC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in
the preparation of these financial statements:
Consolidation Principles--The consolidated financial statements include the
accounts of Twin Disc, Incorporated and its subsidiaries, all of which are
wholly owned. Certain foreign subsidiaries are included based on fiscal years
ending May 31, to facilitate prompt reporting of consolidated accounts. All
significant intercompany transactions have been eliminated.
Translation of Foreign Currencies--Substantially all foreign currency balance
sheet accounts are translated into United States dollars at the rates of
exchange prevailing at year-end. Revenues and expenses are translated at
average rates of exchange in effect during the year. Foreign currency
translation adjustments are recorded as a component of shareholders' equity.
Gains and losses from foreign currency transactions are included in earnings.
Included in other income (expense) of the consolidated statement of operations
are foreign currency transaction losses of $144,000, $682,000 and $343,000 in
2000, 1999 and 1998, respectively.
Cash Equivalents--The Company considers all highly liquid marketable
securities purchased with a maturity date of three months or less to be cash
equivalents.
Receivables--Trade accounts receivable are stated net of an allowance for
doubtful accounts of $704,000 and $534,000 at June 30, 2000 and 1999,
respectively.
Fair Value of Financial Instruments--The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents, accounts
receivable, accounts payable, notes payable and current maturities on long-
term debt approximate fair value because of the immediate short-term maturity
of these financial instruments. The carrying amounts reported for long-term
debt approximates fair value because the underlying instruments bear interest
at, or near, a current market rate.
Derivative Financial Instruments--Derivative financial instruments (primarily
forward foreign exchange contracts) may be utilized by the Company to hedge
foreign exchange rate risk. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. The Company does not enter into
financial instruments for trading or speculative purposes. For financial
reporting purposes, forward foreign exchange contracts used to hedge the
currency fluctuations on transactions denominated in foreign currencies are
marked-to-market and the resulting gains and losses, together with the
offsetting losses and gains on hedged transactions, are recorded in the "Other
income (expense)" caption in the statement of operations. At June 30, 2000 and
1999, the Company had outstanding forward foreign exchange contracts to
purchase $4,500,000 and $2,000,000, respectively, of Belgian francs with a
weighted average maturity of 40 days and 33 days, respectively.
Inventories--Inventories are valued at the lower of cost or market. Cost has
been determined by the last-in, first-out (LIFO) method for parent company
inventories, and by the first-in, first-out (FIFO) method for all other
inventories.
Property, Plant and Equipment and Depreciation--Assets are stated at cost.
Expenditures for maintenance, repairs and minor renewals are charged against
earnings as incurred. Expenditures for major renewals and betterments are
capitalized and amortized by depreciation charges. Depreciation is provided
on the straight-line method over the estimated useful lives of the assets for
financial reporting and on accelerated methods for income tax purposes. The
lives assigned to buildings and related improvements range from 10 to 40
years, and the lives assigned to machinery and equipment range from 5 to 15
years. Upon disposal of property, plant and equipment, the cost of the asset
and the related accumulated depreciation are removed from the accounts and the
resulting gain or loss is reflected in earnings. Fully depreciated assets are
not removed from the accounts until physically disposed.
<PAGE> 27
The Company reviews the carrying value of property, plant and equipment for
impairment whenever events and circumstances indicate that the carrying value
of an asset may not be recoverable from the estimated future cash flows
expected to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the carrying value, an
impairment loss is recognized equal to an amount by which the carrying value
exceeds the fair value of assets.
Investments in Affiliates--The majority of the Company's investments in 20% to
50%-owned affiliates are accounted for using the equity method. Investments in
less than 20%-owned affiliates are accounted for using the cost method.
Revenue Recognition--Revenues are recognized when products are shipped and
title has transferred to the customer.
Goodwill--Goodwill consists of costs in excess of net assets of businesses
acquired. Goodwill is amortized using the straight-line method over its
estimated beneficial lives, not to exceed 40 years. Subsequent to an
acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate whether the goodwill should be
evaluated for possible impairment. Goodwill at June 30, 2000 and 1999 of
$14,401,000 and $15,235,000, respectively, are net of accumulated amortization
of $1,542,000 and $839,000, respectively.
Income Taxes--The Company recognizes deferred tax liabilities and assets for
the expected future income tax consequences of events that have been
recognized in the Company's financial statements. Under this method, deferred
tax liabilities and assets are determined based on the temporary differences
between the financial statement carrying amounts and the tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse.
The Company does not provide for taxes which would be payable if undistributed
earnings of its foreign subsidiaries or its foreign affiliate were remitted
because the Company either considers these earnings to be invested for an
indefinite period or anticipates that if such earnings were distributed,
the U.S. income taxes payable would be substantially offset by foreign tax
credits.
Management Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual amounts could differ from those estimates.
Recently Issued Accounting Standards-During 1998, the Financial Accounting
Standards Board (FASB) issued FAS 133 "Accounting for Derivative Instruments
and Hedging Activities" which establishes standards for accounting for
derivatives and hedging activities. In July 1999, the FASB issued FAS 137,
"Deferral of the Effective Date of FAS 133", which delays the effective date
of FAS 133 one year. As a result, FAS 133 will be effective for the Company's
2001 fiscal year. The adoption of FAS 133 is not anticipated to have a
significant impact on the Company's earnings or financial position.
Reclassification--Certain reclassifications have been made to the financial
statements of prior years to conform to the presentation for 2000.
<PAGE> 28
B. INVENTORIES
The major classes of inventories at June 30 were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Finished parts $40,313 $42,405
Work-in-process 5,880 6,385
Raw materials 3,997 5,710
------ ------
$50,190 $54,500
====== ======
</TABLE>
Inventories stated on a LIFO basis represent approximately 35% of total
inventories at June 30, 2000 and 1999. The approximate current cost of the
LIFO inventories exceeded the LIFO cost by $20,549,000 and $17,936,000 at June
30, 2000 and 1999, respectively.
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Land $ 1,406 $ 1,409
Buildings 22,582 22,698
Machinery and equipment 92,715 95,579
------ ------
116,703 119,686
Less accumulated depreciation 82,400 80,751
------ ------
$34,303 $38,935
====== ======
</TABLE>
D. INVESTMENTS IN AFFILIATES
The Company's investments in affiliates consists of a 25% interest in a
domestic distributor of Twin Disc products and an investment in Negate
Converter Company, LTD., Japan ("Negate"), a manufacturer of power
transmission equipment. In March of 1999, the Company sold a portion of its
investment in Negate in exchange for a $1.7 million note receivable due in
various annual amounts commencing December 31, 2002 through December 31, 2008.
The sale was a non-cash transaction for purposes of the consolidated statement
of cash flows. As a result, a pre-tax gain of $1,355,000 was recognized in
1999.
Prior to the sale the Company accounted for its 25% interest in Negate using
the equity method. The Company recognized its share of Negate's loss from
April 1, 1998 through the date of sale of $1.5 million. After the sale, the
Company accounted for its 19.5% interest using the cost method.
Combined condensed financial data for investments in affiliates accounted for
under the equity method of accounting are summarized below (in thousands). The
balance sheet information for 2000 and 1999 includes the domestic distributor
balances only. The statement of operations information for 2000 includes the
results of operation of the domestic distributor from June 1, 1999 through May
31, 2000. The statement of operations information for 1999 includes the
domestic distributor results from June 1, 1998 through May 31, 1999 and Negate
results from April 1, 1998 through the date of sale; the 1998 information
includes the domestic distributor results from June 1, 1997 through May 31,
1998 and Negate results from April 1, 1997 through March 31, 1998.
<PAGE> 29
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current assets $ 10,145 $ 8,734
Other assets 5,452 5,463
------- -------
$ 15,597 $ 14,197
======= =======
Current liabilities $ 6,681 $ 6,530
Other liabilities 235 210
Shareholders' equity 8,681 7,457
------- -------
$ 15,597 $ 14,197
======= =======
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales $ 23,866 $116,115 $152,558
Gross profit 9,813 13,008 20,897
Net earnings (loss) 3,624 (3,780) 2,606
</TABLE>
E. ACCRUED LIABILITIES
Accrued liabilities at June 30 were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Salaries and wages $ 3,989 $ 4,522
Retirement benefits 4,024 3,362
Other 12,739 13,138
------- -------
$ 20,752 $ 21,022
======= =======
</TABLE>
F. DEBT
Notes payable consists of amounts borrowed under unsecured line of credit
agreements. Unused lines of credit total $19,488,000 at June 30, 2000. These
lines of credit are available predominantly at the LIBOR interest rate plus
1.25% and may be withdrawn at the option of the banks. The weighted average
interest rate of the lines outstanding at June 30, 2000 and 1999 was 5.26% and
5.88%, respectively.
Included in long-term debt is $17,142,000 and $20,000,000 on 7.37% ten-year
unsecured notes, net of $51,000 and 60,000 unamortized debt issuance costs at
June 30, 2000 and 1999, respectively. These notes contain certain covenants,
including the maintenance of a current ratio of not less than 1.5. Principal
payments of $2,857,000 are due in the years 2000 through 2005, with the
remaining balance due on June 1, 2006. During 2000 the Company entered into a
$20,000,000 revolving loan agreement. This agreement contains certain
covenants, including restrictions on investments, acquisitions and
indebtedness. The outstanding balance of $17,000,000 at June 30, 2000 is
classified as a long-term liability as repayment is not expected within the
next year. Notes under this agreement bear interest on a schedule determined
by the Company's leverage ratio. The rate was 7.9% at June 30, 2000. Also
included in long-term debt is $20,000 and $29,000 of debt related to a foreign
subsidiary at June 30, 2000 and 1999, respectively.
G. LEASE COMMITMENTS
Approximate future minimum rental commitments under noncancellable operating
leases are as follows (in thousands):
Fiscal Year
-----------
2001 $2,628
2002 2,103
2003 1,429
2004 651
2005 510
Thereafter 1,246
-----
$8,567
=====
Total rent expense for operating leases approximated $3,023,000, $2,941,000
and $2,571,000 in 2000, 1999 and 1998, respectively.
<PAGE> 30
H. SHAREHOLDERS' EQUITY
At June 30, 2000 and 1999, treasury stock consisted of 833,740 and 808,446
shares of common stock, respectively. The Company issued 150 and 2,200 shares
of treasury stock in 2000 and 1999, respectively, to fulfill its obligations
under the stock option plans. The difference between the cost of treasury
shares issued and the option price is recorded in retained earnings. The
Company acquired 25,444 shares of treasury stock in 2000.
Cash dividends per share were $.70 in 2000, $.805 in 1999 and $.76 in 1998.
In 1998, the Company's Board of Directors established a Shareholder Rights
Plan and distributed to shareholders one preferred stock purchase right for
each outstanding share of common stock. Under certain circumstances, a right
may be exercised to purchase one one-hundredth of a share of Series A Junior
Preferred Stock at an exercise price of $160, subject to certain anti-dilution
adjustments. The rights become exercisable ten (10) days after a public
announcement that a party or group has either acquired at least 15% (or at
least 25% in the case of existing holders who currently own 15% or more of the
common stock), or commenced a tender offer for at least 25% of the Company's
common stock. Generally, after the rights become exercisable, if the Company
is a party to certain merger or business combination transactions, or
transfers 50% or more of its assets or earnings power, or certain other events
occur, each right will entitle its holders, other than the acquiring person,
to buy a number of shares of common stock of the Company, or of the other
party to the transaction, having a value of twice the exercise price of the
right. The rights expire June 30, 2008, and may be redeemed by the Company
for $.05 per right at any time until ten (10) days following the stock
acquisition date. The Company is authorized to issue 200,000 shares of
preferred stock, none of which have been issued. The Company has designated
50,000 shares of the preferred stock for the purpose of the Shareholder Rights
Plan.
I. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company and its subsidiaries are engaged in the manufacture and sale of
power transmission equipment. Principal products include industrial clutches,
hydraulic torque converters, fluid couplings, power-shift transmissions,
marine transmissions, universal joints, power take-offs and reduction gears.
The Company sells to both domestic and foreign customers in a variety of
market areas, principally construction, industrial, energy and natural
resources, marine and agricultural.
The Company has two reportable segments: manufacturing and distribution. These
segments are managed separately because each provides different services and
requires different technology and marketing strategies. The accounting
practices of the segments are the same as those described in the summary of
significant accounting policies. Transfers among segments are at established
inter-company selling prices.
<TABLE>
<CAPTION>
Information about the Company's segments is summarized as follows (in
thousands):
Manufacturing Distribution Total
------------- ------------ -----
2000
<S> <C> <C> <C>
Net sales $166,067 $46,726 $212,793
Intra-segment sales 7,176 613 7,789
Inter-segment sales 26,327 690 27,017
Interest income 321 73 394
Interest expense 3,159 125 3,284
Income taxes 3,904 916 4,820
Depreciation and amortization 6,589 264 6,853
Segment earnings 3,464 1,587 5,051
Segment assets 154,971 24,518 179,489
Expenditures for segment assets 1,766 368 2,134
<PAGE> 31
Manufacturing Distribution Total
------------- ------------ -----
1999
<S> <C> <C> <C>
Net sales $156,661 $41,426 $198,087
Intra-segment sales 7,235 439 7,674
Inter-segment sales 21,545 726 22,271
Interest income 350 92 442
Interest expense 2,134 228 2,362
Income taxes 519 1,036 1,555
Depreciation and amortization 6,062 291 6,353
Segment earnings 1,147 170 1,317
Segment assets 152,251 25,448 177,699
Expenditures for segment assets 6,017 422 6,439
1998
<S> <C> <C> <C>
Net sales $206,812 $46,981 $253,793
Intra-segment sales 24,358 502 24,860
Inter-segment sales 25,959 331 26,290
Interest income 626 129 755
Interest expense 1,481 229 1,710
Income taxes 6,246 1,649 7,895
Depreciation and amortization 5,244 274 5,518
Segment earnings 9,196 2,051 11,247
Segment assets 134,870 27,705 162,575
Expenditures for segment assets 6,626 528 7,154
The following is a reconciliation of reportable segment net sales, earnings
(loss) and assets, to the Company's consolidated totals (in thousands):
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales
Total net sales from reportable segments $212,793 $198,087 $253,793
Elimination of inter-company sales (34,806) (29,945) (51,150)
------- ------- -------
Total consolidated net sales $177,987 $168,142 $202,643
======= ======= =======
Earnings (loss)
Total earnings (loss) from
reportable segments $ 5,051 $ 1,317 $ 11,247
Other corporate expenses (1,278) (2,335) (1,884)
------- ------- -------
Total consolidated net earnings (loss) $ 3,773 $ (1,018) $ 9,363
======= ======= =======
Assets
Total assets for reportable segments $179,489 $177,699
Elimination of inter-company assets (18,120) (15,871)
Corporate assets 12,821 15,072
------- -------
Total consolidated assets $174,190 $176,900
======= =======
Other significant items:
Segment Consolidated
Totals Adjustments Totals
2000 ------- ----------- ------------
<S> <C> <C> <C>
Interest income $ 394 $ (150) $ 244
Interest expense 3,284 (305) 2,979
Income taxes 4,820 (526) 4,294
Depreciation and amortization 6,853 127 6,980
Expenditures for segment assets 2,134 - 2,134
1999
Interest income $ 442 $ (205) $ 237
Interest expense 2,362 (292) 2,070
Income taxes 1,555 (523) 1,032
Depreciation and amortization 6,353 101 6,454
Expenditures for segment assets 6,439 - 6,439
<PAGE> 32
1998
Interest income $ 755 $ (205) $ 550
Interest expense 1,710 (205) 1,505
Income taxes 7,895 (1,213) 6,682
Depreciation and amortization 5,518 89 5,607
Expenditures for segment assets 7,154 - 7,154
All adjustments represent inter-company eliminations and corporate amounts.
Geographic information about the Company is summarized as follows (in
thousands):
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales
United States $113,377 $106,051 $133,193
Other countries 64,610 62,091 69,450
------- ------- -------
Total $177,987 $168,142 $202,643
======= ======= =======
Long-lived assets
United States $ 70,831 $ 65,540
Belgium 8,291 10,362
Other countries 5,306 6,086
Elimination of inter-company assets (4,656) (7,184)
------- -------
Total $ 79,772 $ 74,804
======= =======
</TABLE>
One customer accounted for approximately 10%, 8% and 11% of consolidated net
sales in 2000, 1999 and 1998, respectively. Another customer accounted for
approximately 6%, 8% and 11% during those years.
J. STOCK OPTION PLANS
During fiscal 1999, the Company adopted the Twin Disc, Incorporated 1998 Stock
Option Plan for Non-Employee Directors, a non-qualified plan, for non-employee
directors to purchase up to 35,000 shares of common stock, and the Twin Disc,
Incorporated 1998 Incentive Compensation Plan, a plan, where options are
determined to be non-qualified or incentive at the date of grant, for officers
and key employees to purchase up to 165,000 shares of common stock. The plans
are administered by the Executive Selection and Compensation Committee of the
Board of Directors which has the authority to determine which officers and key
employees will be granted options. The grant of options to non-employee
directors is fixed at options to purchase 1,000 shares of common stock per
year or 600 at time of appointment. Except as described in the following
sentence, all options allow for exercise prices not less than the grant date
fair market value, immediately vest and expire ten years after the date of
grant. For options under the Incentive Compensation Plan, if the optionee
owns more than 10% of the total combined voting power of all classes of the
Company's stock, the price will be not less than 110% of the grant date fair
market value and the options expire five years after the grant date. In
addition, the Company has 95,300 incentive stock option plan options and
63,450 non-qualified stock option plan options outstanding at June 30, 2000
under the Twin Disc, Incorporated 1988 Incentive Stock Option plan and the
Twin Disc, Incorporated 1988 Non-Qualified Stock Option Plan for Officers, Key
Employees and Directors, respectively. The plans terminated during 1999.
<TABLE>
<CAPTION>
Shares available for future options as of June 30 were as follows:
2000 1999
---- ----
<S> <C> <C>
1998 Stock Option Plan for Non-Employee Directors 23,000 29,000
1998 Incentive Compensation Plan 132,750 159,500
<PAGE> 33
Stock option transactions under the plans during 2000, 1999 and 1998 were
as follows:
Weighted Weighted Weighted
Average Average Average
2000 Price 1999 Price 1998 Price
---- -------- ---- ------- ---- --------
Non-qualified stock
options:
Options outstanding
at beginning of year 84,600 $22.55 80,500 $22.50 94,150 $21.71
Granted 12,000 19.94 19,000 24.69 13,100 28.75
Canceled (13,000) 23.31 (14,700) 25.08 - -
Exercised - - (200) 26.00 (26,750) 22.81
------ ------- ------
Options outstanding
at June 30 83,600 $22.06 84,600 $22.55 80,500 $22.50
====== ====== ======
Options price range
($14.00 - $20.00)
Number of shares 40,800
Weighted average price $19.36
Weighted average remaining life 5.70 years
Options price range
($20.875 - $28.75)
Number of shares 42,800
Weighted average price $24.63
Weighted average remaining life 7.39 years
Weighted Weighted Weighted
Average Average Average
2000 Price 1999 Price 1998 Price
---- -------- ---- ------- ---- -------
Incentive stock options:
Options outstanding
at beginning of year 132,250 $23.70 124,300 $23.57 161,550 $21.60
Granted 22,800 20.20 33,900 25.80 29,900 29.18
Canceled (35,500) 23.25 (23,950) 26.58 (7,050) 20.15
Exercised (150) 14.00 (2,000) 16.63 (60,100) 21.53
------- ------- -------
Options outstanding
at June 30 119,400 $23.24 132,250 $23.70 124,300 $23.57
======= ======= =======
Options price range
($14.00 - $20.00)
Number of shares 46,050
Weighted average price $19.26
Weighted average remaining life 6.24 years
Options price range
($20.875 - $28.75)
Number of shares 67,850
Weighted average price $25.24
Weighted average remaining life 7.44 years
<PAGE> 34
Options price range
($31.625 - $32.25)
Number of shares 5,500
Weighted average price $31.74
Weighted average remaining life 8.00 years
The Company accounts for its stock option plans under the guidelines of
Accounting Principles Board Opinion No. 25. Accordingly, no compensation cost
has been recognized in the statement of operations. Had the Company
recognized compensation expense determined based on the fair value at the
grant date for awards under the plans, consistent with the method prescribed
by FAS 123, the net earnings and earnings per share would have been as follows
(in thousands, except per share amounts):
2000 1999 1998
---- ---- ----
Net earnings (loss)
As reported $ 3,773 $(1,018) $9,363
Pro forma 3,648 (1,277) 9,125
Basic earnings (loss) per share
As reported $ 1.34 $ (.36) $ 3.30
Pro forma 1.29 (.45) 3.22
Diluted earnings (loss) per share
As reported $ 1.34 $ (.36) $ 3.24
Pro forma 1.29 (.45) 3.16
The above pro forma net earnings and earnings per share were computed using
the fair value of options at the date of grant (for options granted after June
1995) as calculated by the Black-Scholes option-pricing method and the
following assumptions: 21% volatility, 3.8% annual dividend yield, interest
rates based on expected terms and grant dates, a 5 year term and an exercise
price equal to the fair market value on the date of grant except for incentive
options granted to greater than 10% shareholders which are calculated using a
3 year term and an exercise price equal to 110% of the fair market value on
the date of grant. For those options granted during 2000, 1999 and 1998 with
exercise prices equal to the grant date fair market value, the exercise prices
and weighted average fair values of the options were $19.94 and $3.70 in 2000,
$25.26 and $5.02 in 1999 and $28.75 and $5.81 in 1998, respectively. For those
options granted with exercise prices greater than the grant date fair market
value, the exercise prices and weighted average fair values of the options
were $21.93 and $2.43 in 2000, $28.08 and $2.71 in 1999, $31.63 and $3.26 in
1998, respectively.
K. ENGINEERING AND DEVELOPMENT COSTS
Engineering and development costs include research and development expenses
for new products, development and major improvements to existing products, and
other charges for ongoing efforts to refine existing products. Research and
development costs charged to operations totaled $1,852,000, $2,505,000 and
$3,104,000 in 2000, 1999 and 1998, respectively. Total engineering and
development costs were $6,322,000, $7,829,000 and $8,833,000 in 2000, 1999 and
1998, respectively.
<PAGE> 35
L. RETIREMENT PLANS
The Company has noncontributory, qualified defined benefit pension plans
covering substantially all domestic employees and certain foreign employees.
Domestic plan benefits are based on years of service, and, for salaried
employees, on average compensation for benefits earned prior to January 1,
1997 and on a cash balance plan for benefits earned after January 1, 1997.
The Company's funding policy for the plans covering domestic employees is to
contribute an actuarially determined amount which falls between the minimum
and maximum amount that can be contributed for federal income tax purposes.
Domestic plan assets consist principally of listed equity and fixed income
securities.
In addition, the Company has unfunded, non-qualified retirement plans for
certain management employees and directors. Benefits are based on final
average compensation and vest upon retirement from the Company.
In addition to providing pension benefits, the Company provides health care
and life insurance benefits for certain domestic retirees. All employees
retiring after December 31, 1992, and electing to continue coverage through
the Company's group plan, are required to pay 100% of the premium cost.
The following table sets forth the Company's defined benefit pension plans'
and other postretirement benefit plan's funded status and the amounts
recognized in the Company's balance sheets and income statements as of June 30
(dollars in thousands):
</TABLE>
<TABLE>
<CAPTION>
Other
Post
Pension retirement
Benefits Benefits
---------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year $115,865 $104,156 $ 32,749 $ 28,619
Service cost 1,518 1,517 19 23
Interest cost 8,028 7,254 2,265 1,978
Actuarial (gain) loss (6,806) 11,384 (1,481) 4,548
Benefits paid (9,518) (8,446) (3,325) (2,419)
------- ------- ------ ------
Benefit obligation, end of year $109,087 $115,865 $ 30,227 $ 32,749
======= ======= ====== ======
Change in plan assets:
Fair value of assets, beginning of year $ 98,283 $100,265 $ - $ -
Actual return on plan assets 16,876 4,279 - -
Employer contribution 7,048 2,185 3,325 2,419
Benefits paid (9,518) (8,446) (3,325) (2,419)
------- ------- ------ ------
Fair value of assets, end of year $112,689 $ 98,283 $ - $ -
======= ======= ====== ======
Funded status $ 3,602 $(17,582)$(30,227)$(32,749)
Unrecognized net transition obligation 606 836 - -
Unrecognized actuarial loss 4,398 19,972 6,817 8,755
Unrecognized prior service cost 2,495 3,167 - -
------ ------ ------ -------
Net amount recognized $ 11,101 $ 6,393 $(23,410)$(23,994)
====== ====== ====== =======
Amounts recognized in the balance sheet
consist of:
Prepaid benefit cost $ 14,335 $ - $ - $ -
Accrued benefit liability (3,234) (16,343) (23,410) (23,994)
Intangible asset - 3,385 - -
Deferred tax asset - 7,547 - -
Minimum pension liability adjustment - 11,804 - -
------- ------ ------- -------
Net amount recognized $ 11,101 $ 6,393 $(23,410)$(23,994)
======= ====== ======= =======
<PAGE> 36
Weighted average assumptions as of June 30:
Discount rate 8.00% 7.25% 8.00% 7.25%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.00% 5.00%
(37)
Pension Benefits
--------------------------
2000 1999 1998
---- ---- ----
Service cost $ 1,518 $ 1,517 $ 1,328
Interest cost 8,028 7,254 7,235
Expected return on plan assets (8,532) (8,617) (6,750)
Amortization of prior service cost 672 672 672
Amortization of transition obligation 179 183 185
Recognized net actuarial loss 699 102 92
------ ------ ------
Net periodic benefit cost $ 2,564 $ 1,111 $ 2,762
====== ====== ======
Postretirement Benefits
--------------------------
2000 1999 1998
---- ---- ----
Service cost $ 19 $ 23 $ 21
Interest cost 2,265 1,978 2,153
Recognized net actuarial loss 457 399 205
------ ------ ------
Net periodic benefit cost $ 2,741 $ 2,400 $ 2,379
====== ====== ======
</TABLE>
Effective January 1, 1998, the Company changed certain of its actuarial
assumptions including the mortality table used and the assumed retirement age
for the defined benefit plans and the postretirement plan. The changes
resulted in an increase to the benefit obligation and unrecognized actuarial
loss of approximately $10 million.
The pension plans held 62,402 shares of Company stock with a fair market value
of $1,065,000 and $1,252,000 at June 30, 2000 and 1999, respectively.
The assumed weighted average health care cost trend rate was 6% in fiscal year
2000 and 1999. A 1% increase in the assumed health care cost trend would
increase the accumulated postretirement benefit obligation by approximately
$2.0 million and the interest cost by approximately $140,000. A 1% decrease in
the assumed health care cost trend would decrease the accumulated
postretirement benefit obligation by approximately $1.9 million and the
interest cost by approximately $130,000.
The Company sponsors defined contribution plans covering substantially all
domestic employees and certain foreign employees. These plans provide for
employer contributions based primarily on employee participation. The total
expense under the plans was $1,699,000, $1,572,000 and $1,582,000 in 2000,
1999 and 1998, respectively.
<PAGE> 37
M. INCOME TAXES
United States and foreign earnings (loss) before income taxes were as follows
(in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
United States $ 367 $(3,555) $ 7,944
Foreign 7,700 3,569 8,101
------ ------ ------
$ 8,067 $ 14 $16,045
====== ====== ======
The provision (credit) for income taxes is comprised of the following (in
thousands):
2000 1999 1998
---- ---- ----
Currently payable:
Federal $ 664 $(1,376) $ 154
State 6 49 114
Foreign 3,908 2,359 3,541
------ ------ ------
4,578 1,032 3,809
------ ------ ------
Deferred:
Federal (137) 402 2,582
State 220 (292) 183
Foreign (367) (110) 108
------ ------ ------
(284) - 2,873
------ ------ ------
$ 4,294 $ 1,032 $ 6,682
====== ====== ======
The components of the net deferred tax asset as of June 30, were as
follows (in thousands):
2000 1999
---- ----
Deferred tax assets:
Retirement plans and employee benefits $ 4,852 $12,826
Alternative minimum tax credit
carryforwards 301 599
Foreign tax credit carryforwards 1,933 1,968
State net operating loss and other
state credit carryforwards 771 1,075
Research credit carryforwards - 135
Other 3,950 2,581
------ ------
11,807 19,184
------ ------
Deferred tax liabilities:
Property, plant and equipment 5,744 6,182
Other 2,804 2,649
------ ------
8,548 8,831
------ ------
Total net deferred tax assets $ 3,259 $10,353
====== ======
<PAGE> 38
Following is a reconciliation of the applicable U.S. federal income taxes to
the actual income taxes reflected in the statements of operations:
2000 1999 1998
---- ---- ----
U.S. federal income tax at 34% $ 2,743 $ 5 $5,455
Increases (reductions)
in tax resulting from:
Foreign tax items 1,387 463 173
Accrual for prior years 150 74 705
Other, net 14 490 349
---- ----- -----
$ 4,294 $1,032 $6,682
==== ==== ====
</TABLE>
N. 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 June 30, 2000, 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.
O. ACQUISITIONS
In January 1999, the Company purchased the mechanical power take-off product
business from Rockford Powertrain, Inc. for approximately $13.5 million. This
transaction was accounted for using the purchase method of accounting and
resulted in goodwill of approximately $11 million which is being amortized
over 30 years. In February 1999, the Company purchased Technodrive S.p.A of
Decima, Italy for approximately $3.9 million, net of cash acquired of
$700,000. This transaction was accounted for using the purchase method of
accounting and resulted in goodwill of approximately $2.9 million which is
being amortized over 25 years. Technodrive manufactures industrial power take-
offs, clutches, hydraulic pump mount drives and marine transmissions. The pro
forma affects of the acquisitions are not significant to the net sales, net
(loss) earnings, and earnings per share amounts reported in the financial
statements.
P. CLOSURE OF SUBSIDIARY
In June 1999, the Company approved a plan to terminate operations at its South
African subsidiary, Twin Disc (South Africa) Pty. Ltd, early in fiscal 2000.
The Company recorded a loss of $1,140,000 in 1999 related to the termination
of operations, which consists primarily of the recognition of cumulative
translation losses of $829,000 with the remaining amounts related to disposals
of inventories and fixed assets, and severance benefits. The results of the
subsidiary's operations through June 30, 1999 are included in the consolidated
financial statements.
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Twin Disc, Incorporated
Racine, Wisconsin
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the financial position of Twin Disc, Incorporated and Subsidiaries at June 30,
2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 21, 2000
<PAGE> 40
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
(In thousands of dollars, except where noted)
Statement of Operations
<S> <C> <C> <C> <C> <C>
Net sales $177,987 $168,142 $202,643 $189,942 $176,657
Costs and expenses,
including marketing,
engineering and
administrative 168,105 164,816 186,607 177,342 164,486
Earnings
from operations 9,882 3,326 16,036 12,600 12,171
Other income
(expense) (1,815) (3,312) 9 80 (1,264)
Earnings
before income taxes 8,067 14 16,045 12,680 10,907
Income taxes 4,294 1,032 6,682 4,951 4,348
Net earnings (loss) 3,773 (1,018) 9,363 7,729 6,559
Balance Sheet
Assets
Cash and equivalents 5,651 4,136 5,087 8,983 2,043
Receivables, net 28,828 27.201 28,320 32,428 34,917
Inventories 50,190 54,500 53,280 47,844 51,083
Other current assets 5,333 11,910 6,893 8,707 8,597
Total current assets 90,002 97,747 93,580 97,962 96,640
Investments and
other assets 49,885 40,218 31,646 26,544 30,344
Fixed assets less
accumulated
depreciation 34,303 38,935 35,728 34,249 35,715
Total assets 174,190 176,900 160,954 158,755 162,699
Liabilities and Shareholders' Equity
Current liabilities 40,908 54,761 29,553 29,621 34,002
Long-term debt 31,254 17,112 19,949 19,944 19,938
Deferred liabilities 23,795 37,567 29,457 35,393 33,578
Shareholders' equity 78,233 67,460 81,995 73,797 75,181
Total liabilities and
shareholders' equity 174,190 176,900 160,954 158,755 162,699
<PAGE> 41
FINANCIAL SUMMARY (CONTINUED)
2000 1999 1998 1997 1996
(In thousands of dollars, except where noted)
Comparative Financial Information
Per share statistics
Basic earnings (loss) 1.34 (.36) 3.30 2.78 2.36
Diluted earnings (loss) 1.34 (.36) 3.24 2.75 2.34
Dividends .70 .805 .76 .70 .70
Shareholders' equity 27.87 23.79 28.94 26.48 27.07
Return on equity 4.8% (1.5%) 11.4% 10.5% 8.7%
Return on assets 2.2% (.6%) 5.8% 4.9% 4.0%
Return on sales 2.1% (.6%) 4.6% 4.1% 3.7%
Average shares
outstanding 2,820,534 2,834,909 2,833,663 2,781,174 2,776,805
Diluted shares
outstanding 2,820,730 2,843,877 2,886,209 2,808,226 2,805,123
Number of shareholder
accounts 1,480 1,138 774 845 913
Number of employees 999 1,029 1,078 1,081 1,080
Additions to plant
and equipment 2,134 6,439 7,154 4,734 4,140
Depreciation 5,766 5,648 5,205 5,141 5,071
Net working capital 49,094 42,986 64,027 68,341 62,638
<PAGE> 42
DIRECTORS
MICHAEL E. BATTEN
Chairman, Chief Executive Officer
MICHAEL H. JOYCE
President, Chief Operating Officer
JAMES O. PARRISH
Vice President-Finance & Treasurer
JOHN A. MELLOWS
Chairman and Chief Executive Officer, Charter Manufacturing Co., (A privately
held producer of bar, rod wire and wire parts), Maccan, Wisconsin
PAUL J. POWERS
Retired Chairman, President-Chief Executive Officer, Commercial Interject
Corp.,
(Manufacturer of Hydraulic Components, Fluid Purification Products, Pre-
Engineered Buildings and Stamped Metal Products), Youngstown, Ohio
RICHARD T. SAVAGE
Retired Chairman, President-Chief Executive Officer, Moline Manufacturing
Company, (Manufacturer of Heat Exchange Equipment), Racine, Wisconsin
DAVID L. SWIFT
Retired Chairman, President-Chief Executive Officer, Acme-Cleveland
Corporation, (Manufacturer of Diversified Industrial Products), Pepper Pike,
Ohio
GEORGE E. WARDEBERG
Vice Chairman, Wisconsin Energy Corp. (A holding company with subsidiaries
in electric, natural gas, energy services and manufacturing), Milwaukee,
Wisconsin
DAVID R. ZIMMER
Former Executive Vice President, United Dominion Industries, (Manufacturer of
Diversified Engineered Products), Charlotte, North Carolina
DAVID R. RAYBURN
Executive Vice President of Operations, Moline Manufacturing Company,
(Manufacturer of Heat Exchange Equipment), Racine, Wisconsin
<PAGE> 43
OFFICERS
MICHAEL E. BATTEN
Chairman, Chief Executive Officer
MICHAEL H. JOYCE
President, Chief Operating Officer
JAMES O. PARRISH
Vice President-Finance & Treasurer
HENRI-CLAUDE FABRY
Vice President-Marine and Distribution
LANCE J. MELIK
Vice President-Corporate Development
Vice President-Transmission and Industrial Products
FRED H. TIMM
Corporate Controller & Secretary
PAUL A. PELLIGRINO
Vice President-Engineering
ARTHUR A. ZINTEK
Vice President-Human Resources
<PAGE> 44
CORPORATE DATA
ANNUAL MEETING
Twin Disc Corporate Offices, Racine, WI, 2:00 PM, October 20, 2000
SHARES TRADED
New York Stock Exchange: Symbol TDI
ANNUAL REPORT ON SECURITIES AND EXCHANGE COMMISSION FORM 10-K
SINGLE COPIES OF THE COMPANY'S 2000 ANNUAL REPORT ON SECURITIES AND
EXCHANGE
COMMISSION FORM 10-K WILL BE PROVIDED WITHOUT CHARGE TO
SHAREHOLDERS AFTER
SEPTEMBER 30, 2000, UPON WRITTEN REQUEST DIRECTED TO THE SECRETARY,
TWIN DISC,
INCORPORATED, 1328 RACINE STREET, RACINE, WISCONSIN 53403.
TRANSFER AGENT & REGISTRAR
Firstar Trust Company, Milwaukee, Wisconsin
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, Milwaukee, Wisconsin
GENERAL COUNSEL
von Briesen, Purtell, & Roper,s.c., Milwaukee, Wisconsin
CORPORATE OFFICES
Twin Disc, Incorporated, Racine, Wisconsin 53403, Telephone: (414) 638-4000
WHOLLY OWNED SUBSIDIARIES
Twin Disc International S.A., Nivelles, Belgium
Twin Disc Italia S.R.L., Viareggio, Italy
Technodrive S.p.A, Decima, Italy
Twin Disc (Pacific) Pty. Ltd., Brisbane, Queensland, Australia
Twin Disc (Far East) Ltd., Singapore
Mill-Log Equipment Co., Inc., Coburg, Oregon
Southern Diesel Systems Inc., Miami, Florida
TD Electronics, Inc., Loves Park, Illinois
MANUFACTURING FACILITIES
Racine, Wisconsin; Nivelles, Belgium; Decima, Italy; Loves Park, Illinois
SALES OFFICES
DOMESTIC
Racine, Wisconsin; Coburg, Oregon; Portland, Oregon; Kent, Washington;
Miami, Florida; Jacksonville, Florida; Loves Park, Illinois
FOREIGN
Nivelles, Belgium; Brisbane and Perth Australia; Singapore; Viareggio,
Italy; Decima, Italy; Chambery, France; Edmonton, Canada; Vancouver, Canada
MANUFACTURING LICENSES
Negate Converter Company, Ltd., Tokyo, Japan
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