1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q/A
Amendment No. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 2004 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 53403-1758
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (262) 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 .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X .
The Company hereby amends Form 10-Q for the quarter ended December 31, 2004,
filed on February 10, 2005. This amendment restates items in the Company's
Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of
Operations, Condensed Consolidated Statements of Cash Flows and Notes to the
Condensed Consolidated Financial Statements for intercompany profit in
inventory transferred or sold with the entities of the consolidated company.
See Note B, "Restatement" in our Notes to Condensed Consolidated Financial
Statements for further information regarding this restatement.
This amendment also revises the form of the Section 302 Certifications signed
by the Company's Chief Executive Officer and Chief Financial Officer. The
Company agreed to make these changes in response to a comment letter issued
by the Securities and Exchange Commission dated May 18, 2005.
At January 31, 2005, the registrant had 2,901,632 shares of its common stock
outstanding.
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31 June 30
2004 2004
---- ----
(As Restated)
Assets
Current assets:
Cash and cash equivalents $ 8,914 $ 9,127
Trade accounts receivable, net 34,335 37,091
Inventories, net 56,033 48,777
Deferred income taxes 4,557 4,216
Other 3,768 3,111
-------- --------
Total current assets 107,607 102,322
Property, plant and equipment, net 36,234 33,222
Goodwill 13,098 12,717
Deferred income taxes 16,758 16,955
Other assets 9,446 9,406
-------- --------
$183,143 $174,622
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 2,710 $ 1,607
Current maturities on long-term debt 2,857 3,018
Accounts payable 16,242 17,241
Accrued liabilities 28,762 27,262
-------- --------
Total current liabilities 50,571 49,128
Long-term debt 19,370 16,813
Accrued retirement benefits 46,283 49,456
-------- --------
116,224 115,397
Minority Interest 483 509
Shareholders' Equity:
Common stock 11,653 11,653
Retained earnings 85,613 84,428
Unearned Compensation (308) (304)
Accumulated other comprehensive loss (14,719) (20,301)
-------- --------
82,239 75,476
Less treasury stock, at cost 15,803 16,760
-------- --------
Total shareholders' equity 66,436 58,716
-------- --------
$183,143 $174,622
-------- --------
-------- --------
The notes to consolidated financial statements are an integral part of this
statement. Amounts in thousands.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
As Restated
-----------------------------------------
Three Months Ended Six Months Ended
December 31 December 31
2004 2003 2004 2003
---- ---- ---- ----
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Net sales $54,731 $42,371 $100,113 $80,337
Cost of goods sold 40,793 31,926 74,523 60,351
------- ------- ------- -------
13,938 10,445 25,590 19,986
Marketing, engineering and
administrative expenses 11,261 9,277 20,770 17,635
Interest expense 291 283 510 563
Other expense (income),net 185 21 141 (184)
------- ------- ------- -------
11,737 9,581 21,421 18,014
------- ------- ------- -------
Earnings before income taxes
and minority interest 2,201 864 4,169 1,972
Income taxes 1,045 516 1,911 1,049
------- ------- ------- -------
Earnings before minority
interest 1,156 348 2,258 923
Minority interest (43) (8) (68) (19)
------- ------- ------- -------
Net earnings $ 1,113 $ 340 $ 2,190 $ 904
------- ------- ------- -------
------- ------- ------- -------
Dividends per share $ 0.175 $ 0.175 $ 0.35 $ 0.35
Earnings per share data:
Basic earnings per share $ 0.39 $ 0.12 $ 0.77 $ 0.32
Diluted earnings per share $ 0.38 $ 0.12 $ 0.76 $ 0.32
Shares outstanding data:
Average shares outstanding 2,859 2,813 2,848 2,808
Dilutive stock options 48 20 47 15
------- ------- ------- -------
Diluted shares outstanding 2,907 2,833 2,895 2,823
------- ------- ------- -------
------- ------- ------- -------
Comprehensive income:
Net earnings $ 1,113 $ 340 $ 2,190 $ 904
Foreign currency translation
adjustment 5,353 3,630 5,582 3,021
------- ------- ------- -------
Comprehensive income $ 6,466 $ 3,970 $ 7,772 $ 3,925
------- ------- ------- -------
------- ------- ------- -------
In thousands of dollars except per share statistics. Per share figures are
based on shares outstanding data.
The notes to consolidated financial statements are an integral part of this
statement.
TWIN DISC, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
As Restated
------------------------
Six Months Ended
December 31
2004 2003
---- ----
Cash flows from operating activities:
Net earnings $ 2,190 $ 904
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,552 2,783
Unearned Compensation (5) 104
Equity in earnings of affiliate - (240)
Dividends received from affiliate - 115
Net change in working capital,
excluding cash and debt, and other (4,717) 1,191
------ ------
20 4,857
4
------ ------
Cash flows from investing activities:
Acquisitions of fixed assets (3,809) (920)
Proceeds from sales of fixed assets 31 28
------ ------
(3,778) (892)
------ ------
Cash flows from financing activities:
Increase in debt, net 3,056 372
Proceeds from exercise of stock options 957 207
Dividends paid (1,005) (995)
------ ------
3,008 (416)
------ ------
Effect of exchange rate changes on cash 537 538
------ ------
Net change in cash and cash equivalents (213) 4,087
Cash and cash equivalents:
Beginning of period 9,127 5,908
------ ------
End of period $ 8,914 $ 9,995
------ ------
------ ------
The notes to consolidated financial statements are an integral part of
this statement. Amounts in thousands.
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 consolidated balance sheet data was derived
from audited financial statements but does not include all disclosures
required by generally accepted accounting principles.
B. Restatement
The Company previously did not properly eliminate its intercompany profit in
inventory. Accordingly, the Company has restated its financial statements as
of and for the quarter and six months ended December 31, 2004 and 2003 to
fully eliminate intercompany profits relating to inventory in accordance with
generally accepted accounting principles. The Notes to the Consolidated
Financial Statements contained herein have been restated as applicable.
The following table shows the impact of the restatement on the effected
components of the Condensed Consolidated Balance Sheets and Condensed
Consolidated Statements of Operations:
December 31,2004
----------------
As Restated As Reported
----------- -----------
Condensed Consolidated Balance Sheets:
Inventories, net $56,033 $59,558
Deferred income taxes 16,758 15,383
Retained earnings 85,613 87,763
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Condensed Consolidated Statements of Operations and earnings per share data
for the three months ended December 31:
As Restated As Reported
----------- -----------
2004 2003 2004 2003
---- ---- ---- ----
Cost of goods sold $40,793 $31,926 $40,693 $31,650
Income taxes 1,045 516 1,084 624
Net earnings (loss) 1,113 340 1,174 508
Basic earnings(loss)
per share $0.39 $0.12 $0.41 $0.18
Diluted earnings(loss)
per share $0.38 $0.12 $0.40 $0.18
Condensed Consolidated Statements of Operations and earnings per share data
for the six months ended December 31:
As Restated As Reported
----------- -----------
2004 2003 2004 2003
---- ---- ---- ----
Cost of goods sold $ 74,523 $60,351 $116,652 $96,409
Income taxes 1,911 1,049 3,156 2,298
Net earnings (loss) 2,190 904 3,544 2,455
Basic earnings(loss)
per share $0.77 $0.32 $1.24 $0.87
Diluted earnings(loss)
per share $0.76 $0.32 $1.22 $0.86
C. Inventory (As Restated)
The major classes of inventories were as follows (in thousands):
December 31, June 30,
2004 2004
---------- ---------
(As Restated)
Inventories:
Finished parts $ 39,740 $35,837
Work in process 10,454 8,187
Raw materials 5,839 4,753
------- -------
$ 56,033 $48,777
------- -------
------- -------
D. Warranty
Twin Disc engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its suppliers.
However, its warranty obligation is affected by product failure rates, the
extent of the market affected by the failure and the expense involved in
satisfactorily addressing the situation. The warranty reserve is established
based on our best estimate of the amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. When
evaluating the adequacy of the reserve for warranty costs, management takes
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into consideration the term of the warranty coverage, historical claim rates
and costs of repair, knowledge of the type and volume of new products and
economic trends. While we believe the warranty reserve is adequate and that
the judgment applied is appropriate, such amounts estimated to be due and
payable in the future could differ materially from what actually transpires.
The following is a listing of the activity in the warranty reserve during the
period ended December 31, 2004 (in thousands).
Three Months Ended Six Months Ended
December 31 December 31
2004 2003 2004 2003
--------------- ----------------
Beginning reserve balance $ 6,658 $ 6,099 $ 6,478 $ 6,070
Current period expense 835 906 2,052 1,779
Payments or credits to customers 1,186 1,031 2,243 1,888
Translation 413 277 433 290
------ ------ ------ ------
Ending reserve balance $ 6,720 $ 6,251 $ 6,720 $ 6,251
====== ====== ====== ======
E. Contingencies
The Company is involved in litigation of which the ultimate outcome and
liability to the Company, if any, is not presently determinable. Management
believes that final disposition of such litigation will not have a material
impact on the Company's results of operations or financial position.
F. Business Segments
Information about the Company's segments is summarized as follows (in
thousands):
Manufacturing segment sales $53,239 $40,787 $94,038 $73,934
Distribution segment sales 15,900 14,250 31,368 27,211
Inter/Intra segment sales (14,408) (12,666) (25,293) (20,808)
------ ------ ------ ------
Net sales $54,731 $42,371 $100,113 $80,337
====== ====== ====== ======
Manufacturing segment earnings $ 3,034 $ 1,288 $5,160 $ 1,900
Distribution segment earnings 1,024 815 2,360 1,979
Inter/Intra segment loss (1,857) (1,239) (3,351) (1,907)
------ ------ ------ ------
Earnings before income taxes
and minority interest $ 2,201 $ 864 $ 4,169 $ 1,972
====== ====== ====== ======
Assets December 31, June 30,
2004 2004
------------- ------------
(As Restated)
Manufacturing segment assets $172,168 $164,034
Distribution segment assets 33,103 30,247
Corporate assets and elimination
of inter-company assets (22,128) (19,659)
-------- --------
$183,143 $174,622
======= =======
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G. Stock Option Plans (As Restated)
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 condensed consolidated statements of operations. No
options were granted in the first and second quarters of fiscal 2004 or 2005.
Had the Company recognized compensation expense determined based on the fair
value at the grant date for awards under the plans, the net earnings and
earnings per share would have been as follows (in thousands, except per share
amounts):
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings
As reported $ 1,113 $ 340 $ 2,190 $ 904
Pro forma 1,113 340 2,190 904
Basic earnings per share
As reported $ 0.39 $ 0.12 $ 0.77 $ 0.32
Pro forma 0.39 0.12 0.77 0.32
Diluted earnings per share
As reported $ 0.38 $ 0.12 $ 0.76 $ 0.32
Pro forma 0.38 0.12 0.76 0.32
In October 2004, the Company issued restricted stock grants for 4,800 shares,
600 shares vest in 1 year from the date of grant, 2,100 shares vest in 2 years,
600 shares vest in 3 years, and 1,500 shares vest in four years. The fair
market value of the grants based on the market price at the date of grant was
$120,000.
In October 2004, the Company granted performance stock awards to various
employees of the Company, including executive officers. The stock will be
awarded if the Company achieves a specified consolidated gross revenue
objective in the fiscal year ending June 30, 2007.
In fiscal 2004, the Company issued restricted stock grants for 25,000 shares,
12,500 of these shares vest in 2 years from the date of grant and 12,500 vest
in 4 years. The fair market value of the grants based on the market price at
the date of grant was $421,000. The grants are recorded as Unearned
Compensation and amortized over 2, 3, and 4 year periods. The total
compensation expense all restricted stock grants for the six months ended
December 31, 2004, approximated $97,000.
H. Periodic Benefit Cost
The Company has non-contributory, qualified defined benefit plans covering
substantially all domestic employees hired prior to October 1, 2003 and certain
foreign employees. Components of Net Periodic Benefit Cost (in thousands):
Three months ended Six months ended
December 31 December 31
2004 2003 2004 2003
---- ---- ---- ----
Pension Benefits
Service cost $ 301 $ 309 $ 588 $ 603
Interest cost 1,799 1,794 3,579 3,571
Expected return on plan assets (1,837) (1,593) (3,658) (3,172)
Amortization of prior service cost (149) (179) (297) (359)
Amortization of transition obligation 18 16 28 26
Amortization of net loss 995 1,181 1,988 2,359
----- ----- ----- -----
Net periodic benefit cost $1,127 $1,528 $2,228 $3,028
===== ===== ===== =====
Post-retirement Benefits
Service cost $ 13 $ 11 $ 26 $ 22
Interest cost 418 514 836 1,029
Recognized net actuarial loss 164 217 328 435
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----- ----- ----- -----
Net periodic benefit cost $ 595 742 $1,190 $1,486
===== ===== ===== =====
The Company previously disclosed in its financial statements for the year ended
June 30, 2004, that it expected to contribute $7,476,000 to its pension plan in
fiscal 2005. As of December 31, 2004, $5,341,000 of contributions have been
made.
I. Debt
During the first quarter the revolving loan agreement was amended increasing
the limit from $20,000,000 to $35,000,000 and extending the term to October 31,
2007. Additionally certain capital expenditure restrictions were increased.
All other terms and covenants remained the same.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Restatement
As further described in note B to the Condensed Consolidated Financial
Statements,the Company previously did not eliminate its intercompany profit
in inventory. Accordingly, the Company has restated its financial statements
as of and for the quarters and six months ended December 31, 2004 and 2003,
to fully eliminate intercompany profits relating to inventory in accordance
with generally accepted accounting principles. The management discussion and
analysis of financial condition and results of operations contained herein have
been revised as applicable.
In the financial review that follows, we discuss our results of operations,
financial condition and certain other information. This discussion should be
read in conjunction with our consolidated financial statements and related
notes.
RESULTS OF OPERATIONS
Comparison of the Second Quarter of FY 2005 with the Second Quarter of FY 2004
Net sales for the second quarter improved 29.0% to $54.7 million from $42.4
million in the same period a year ago. The results for the current fiscal
quarter were favorably impacted by the Company's recent acquisition of Rolla SP
Propellers SA (Rolla) as well as a previously announced military contract to
supply transmission systems for vehicles to be delivered to the Israeli Defense
Forces (IDF). The latter contributed nearly $3.4 million in sales for the
quarter. Compared to the second quarter of fiscal 2004, the Euro and Asian
currencies continued to strengthen against the US dollar. The impact of this
strengthening on foreign operations was to increase revenues by approximately
$1.9 million versus the prior year, before eliminations.
Sales at our manufacturing operations were up 30.5% versus the same period last
year. The Company experienced significant increased order activities and sales
at all of our manufacturing locations. Sales at our US domestic manufacturing
location were up nearly 34%. Sales at our European manufacturing locations,
excluding the recent Rolla acquisition, were up over 13% over the same period
last year, with just over half of this improvement coming from the
strengthening Euro versus the US Dollar. The second quarter of fiscal 2005
represents the second quarter that the Company has recognized sales from this
acquisition. For the second quarter, Rolla contributed just over $1.7 million
in sales. The sales growth in our domestic operations was primarily driven by
increased sales of military and 8500 series transmissions and industrial
products, while the growth in our European operations was driven primarily by
marine product sales increases.
Our distribution segment experienced an increase of 11.6% in sales compared to
the second quarter of fiscal 2004. The majority of this increase came from our
distribution operations in Asia-Pacific, Italy, and the Northwestern US and
Canada. Sales growth in our commercial and pleasure craft marine transmission
product lines primarily drove the increase in Asia-Pacific, while increased
surface drive product sales drove the increase in Italy. Just under half of
the sales growth experienced by our distribution operations versus the same
period last year can be attributed to the effect of a weaker dollar among most
Asian currencies and the Euro.
The elimination for net inter/intra segment sales increased $1.7 million,
accounting for the remainder of the net change in sales versus the same period
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last year. This increase was consistent with the overall increase in sales
experienced by the Company in the second quarter.
Gross profit as a percentage of sales remained relatively flat at 25.5% of
sales, compared to 24.7% of sales for the same period last year. Higher
volume, level fixed costs, increased manufacturing productivity and absorption,
and lower pension expense helped to offset higher raw material and other costs.
Marketing, engineering, and administrative (ME&A) expenses were 21.4% higher
compared to last year's second fiscal quarter. As a percentage of sales, ME&A
expenses were down slightly to 20.6% of sales versus 21.9% of sales in the
second quarter of fiscal 2004. In fiscal 2005's second quarter, ME&A expenses
include the impact of the recent Rolla acquisition. As part of a temporary
corporate-wide wage cost reduction program in fiscal 2004, the corporate bonus
program was suspended for the prior fiscal year. For fiscal 2005, a new bonus
program has been implemented that emphasizes the achievement of earning returns
in excess of the Company's cost of capital as well as other financial and
non-financial objectives. The current quarter includes the impact of the
re-introduction of the corporate bonus program. Lastly, there was a net
unfavorable impact on the ME&A expenses of our overseas operations of
approximately $0.3 million related to the continued weakening of the US dollar
versus most Asian currencies and the Euro.
Interest expense of $0.3 million for the quarter was relatively flat to the
same quarter last year. While the average total borrowings for the quarter
were up nearly $3.0 million versus the second fiscal quarter of last year, the
mix of the Company's borrowings were at a lower weighted interest rate, as the
Company continues to pay off its 7.37% ten-year unsecured notes.
The consolidated income tax rate was lower than a year ago primarily due to
increased domestic earnings, which were taxed at a lower rate and changes in
the mix of foreign versus domestic earnings.
Comparison of the First Six Months of FY 2005 with the First Six Months of FY
2004
Net sales for the first six months of 2005 improved 24.6% to $100.1 million
from $80.3 million in the same period a year ago. The results for the current
first half were favorably impacted by the Company's recent acquisition of Rolla
as well as a previously announced military contract to supply transmission
systems for vehicles to be delivered to the Israeli Defense Forces (IDF). The
latter contributed nearly $5.8 million in sales for the six months of this
fiscal year. Compared to the first half of fiscal 2004, the Euro and Asian
currencies continued to strengthen against the US dollar. The impact of this
strengthening on foreign operations was to increase revenues by approximately
$3.2 million versus the prior year, before eliminations.
Sales at our manufacturing operations were up 27.2% versus the same period last
year. The Company experienced significant increased order activities and sales
at all of our manufacturing locations. Sales at our US domestic manufacturing
location were up nearly 27%. Sales at our European manufacturing locations,
excluding the recent Rolla acquisition, were up over 15% over the same period
last year, with just over 40% of this improvement coming from the strengthening
Euro versus the US Dollar. For the first six months quarter, Rolla
contributed just under $3.2 million in sales. The sales growth in our
domestic operations was primarily driven by increased sales of military and
8500 series transmissions and industrial products, while the growth in our
European operations was driven primarily by marine product sales increases.
Our distribution segment experienced an increase of 15.3% in sales compared to
the first six months of fiscal 2004. The majority of this increase came from
our distribution operations in Asia-Pacific, Italy, and the Northwestern US and
Canada. Sales growth in our commercial and pleasure craft marine transmission
product lines primarily drove the increase in Asia-Pacific, while increased
surface drive product sales drove the increase in Italy. Just over 30% of the
sales growth experienced by our distribution operations versus the same period
last year can be attributed to the effect of a weaker dollar among most Asian
currencies and the Euro.
The elimination for net inter/intra segment sales increased $4.5 million,
accounting for the remainder of the net change in sales versus the same period
last year. This increase was consistent with the overall increase in sales
experienced by the Company in the first six months.
Gross profit as a percentage of sales increased 70 basis points to 25.6% of
sales, compared to 24.9% of sales for the same period last year. Higher
volume, improved product mix, level fixed costs, increased manufacturing
productivity and absorption, and lower pension expense helped to offset
higher raw material and other costs.
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Marketing, engineering, and administrative (ME&A) expenses were 17.8% higher
compared to the first six months of fiscal 2004. As a percentage of sales,
ME&A expenses were down slightly to 20.7% of sales versus 22.0% of sales in the
first half of fiscal 2004. In fiscal 2005's first half, ME&A expenses include
the impact of the recent Rolla acquisition. As part of a temporary
corporate-wide wage cost reduction program in fiscal 2004, the corporate bonus
program was suspended for the prior fiscal year. For fiscal 2005, a new bonus
program has been implemented that emphasizes the achievement of earning returns
in excess of the Company's cost of capital as well as other financial and
non-financial objectives. The first half of this fiscal year includes the
impact of the re-introduction of the corporate bonus program. Lastly, there
was a net unfavorable impact on the ME&A expenses of our overseas operations of
approximately $0.5 million related to the continued weakening of the US dollar
versus most Asian currencies and the Euro.
Interest expense of $0.5 million for the first six months was 10% lower than
the same period last year. While the average total borrowings for the first
six months were up nearly $1.7 million versus the first six months of last
year, the mix of the Company's borrowings were at a lower weighted interest
rate, as the Company continues to pay off its 7.37% ten-year unsecured notes.
The consolidated income tax rate was lower than a year ago primarily due to
increased domestic earnings, which were taxed at a lower rate and changes in
the mix of foreign versus domestic earnings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Comparison between December 31, 2004 and June 30, 2004
As of December 31, 2004, the Company had net working capital of $60.6 million,
which represents a slight increase from the net working capital of $56.5
million as of June 30, 2004.
Cash and cash equivalents decreased $0.2 million, or approximately 2%, to $8.9
million as of December 31, 2004. The majority of the cash and cash equivalents
as of December 31, 3004 are at our overseas operations in Europe and
Asia-Pacific.
Trade receivables of $34.3 million were down $2.8 million versus last fiscal
year-end. Historically, the Company may experience a larger decrease in
receivables in the second quarter of the fiscal year. However, in fiscal
2005's first and second quarters, sales were up nearly 25% over the prior year,
and as a result, receivables were higher than would normally be expected. In
addition, the change in foreign exchange rates since fiscal year-end results
in an increase in foreign-denominated receivables of approximately $1.3
million.
Net inventory increased by $7.3 million versus June 30, 2004. Approximately
one quarter of the increase came at our domestic manufacturing location and is
primarily due to higher inventory levels as we experienced increased sales and
order activity. $2.9 million of the increase can be attributed to the net
effect of the change in foreign exchange rates since fiscal year-end. The net
remaining increase was experienced at the remaining manufacturing and
distribution subsidiaries and is consistent with the increase sales and order
activity experienced in the first half of this fiscal year.
Net property, plant and equipment (PP&E) increased $3.0 million versus June 30,
2004. In the first half of fiscal 2005, the Company's capital expenditures for
PP&E totaled $3.8 million, an over 300% increase compared to the same period
last year. The year-over-year increase is primarily driven by the construction
of a new facility at our manufacturing operation in Switzerland. In total, the
Company expects to more than double its investments in capital assets in fiscal
2005 compared to fiscal 2004. In addition to the new facility at Rolla, the
Company is focusing on modernizing key core manufacturing, assembly and testing
processes.
Accounts payable of $16.2 million were down 5.8% from June 30, 2004. The
decrease came primarily at our domestic manufacturing. The accounts payable
balance as of June 30, 2004 was historically high as our domestic manufacturing
operations was building inventory in anticipation of IDF contract and other
product deliveries in the first half of fiscal 2005. The net effect of the
continued weakening US dollar was to increase foreign denominated accounts
payable by $0.5 million compared to fiscal year-end 2004.
Total borrowings, notes payable and long-term debt, as of December 31, 2004
increased by $3.5 million, or 16%, to $24.9 million versus June 30, 2004. This
increase is primarily attributable to increased funding in the first six months
of fiscal 2005 of the Company's pension plan as well as the increased capital
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investment noted above. In fiscal 2005's first half, the Company made pension
contributions of just over $5.3 million. For the year ended June 30, 2005, the
Company expects to contribute a total of $7.5 million to its pension plans.
Total shareholders' equity increased by $7.7 million to a total of $66.4
million. Retained earnings increased by $1.2 million. The net increase in
retained earnings included $2.2 million in net earnings reported year-to-date,
offset by $1.0 million in dividend payments. Net favorable foreign currency
translation of $5.6 million was reported as the U.S. Dollar weakened against
the Euro and Asian currencies during the first six months. Accounting for the
balance of the change, treasury stock decreased nearly $1.0 million from the
prior fiscal year-end due to the exercising of stock options in the first six
months of fiscal 2005.
The Company's balance sheet remains very strong, there are no off-balance-sheet
arrangements, and we continue to have sufficient liquidity for near-term needs.
During the first fiscal quarter, the Company amended its revolving loan
agreement, increasing the limit to $35,000,000, from $20,000,000, and extending
the term by two years to October 31, 2007. Furthermore, it is the Company's
intention to repatriate foreign cash, as needed, in the coming quarters.
Management believes that available cash, our revolver facility, cash generated
from operations, existing lines of credit and access to debt markets will be
adequate to fund our capital requirements for the foreseeable future.
The Company has obligations under non-cancelable operating lease contracts and
a senior note agreement for certain future payments. A summary of those
commitments follows (in thousands):
Less than 1-3 3-5 After 5
Contractual Obligations Total 1 year Years Years Years
Short-term debt $ 2,710 $ 2,710
Revolver borrowing $15,100 $15,100
Long-term debt $ 7,128 $ 2,857 $ 4,271
Operating leases $10,285 $ 2,700 $ 3,711 $2,404 $1,470
Total obligations $35,223 $ 8,267 $23,082 $2,404 $1,470
New Accounting Releases
In the second quarter of fiscal 2005, the FASB issued SFAS No. 151 "Inventory
Costs-an amendment of ARB No.43 Chapter 4", SFAS No. 153 "Exchanges of
Nonmonetary Assets-an amendment of APB Opinion 29" and SFAS No. 123R "Share
Based Payment".
SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. SFAS 153, exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. SFAS 123R establishes the standards for the accounting for
transactions in which an entity exchanges its equity for goods or services.
These statements are effective for financial statements for fiscal years
beginning after June 15, 2005. The adoption of these statements is not expected
to have a significant impact on the Company's financial statements.
Critical Accounting Policies
The preparation of this Quarterly Report requires management's judgment to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the dates of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. There can be no assurance that actual results
will not differ from those estimates.
Twin Disc's significant accounting policies are described in Note A in the
Notes to Consolidated Financial Statements in the Annual Report for June 30,
2004. There have been no significant changes to those accounting policies
subsequent to June 30, 2004.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Company is exposed to market risks from changes in interest rates,
commodities and foreign exchange. To reduce such risks, the Company selectively
uses financial instruments and other pro-active management techniques. All
12
hedging transactions are authorized and executed pursuant to clearly defined
policies and procedures, which prohibit the use of financial instruments for
trading or speculative purposes.
Interest rate risk - The Company's earnings exposure related to adverse
movements of interest rates is primarily derived from outstanding floating rate
debt instruments that are indexed to the prime and LIBOR interest rates. Those
debt facilities bear interest predominantly at the prime interest rate or LIBOR
plus 1.25%. Due to the relative stability of interest rates, the Company did
not utilize any financial instruments at December 31, 2004 to manage interest
rate risk exposure. A 10 percent increase or decrease in the applicable
interest rate would result in a change in pretax interest expense of
approximately $50,000.
Commodity price risk - The Company is exposed to fluctuation in market prices
for such commodities as steel and aluminum. The Company does not utilize
commodity price hedges to manage commodity price risk exposure.
Currency risk - The Company has exposure to foreign currency exchange
fluctuations. Approximately 45% of the Company's revenues in the three months
and six months ended December 31, 2004 and 2003 were denominated in currencies
other than the U.S. dollar. Of that total, approximately two-thirds was
denominated in Euros with the balance composed of Japanese yen, Swiss franc and
the Australian and Singapore dollars. The Company does not hedge the
translation exposure represented by the net assets of its foreign subsidiaries.
Foreign currency translation adjustments are recorded as a component of
shareholders' equity. Forward foreign exchange contracts are used to hedge the
currency fluctuations on significant transactions denominated in foreign
currencies.
Derivative Financial Instruments - The Company has written policies and
procedures that place all financial instruments under the direction of the
company corporate treasury and restrict derivative transactions to those
intended for hedging purposes. The use of financial instruments for trading
purposes is prohibited. The Company uses financial instruments to manage the
market risk from changes in foreign exchange rates.
The Company primarily enters into forward exchange contracts to reduce the
earnings and cash flow impact of non-functional currency denominated
receivables and payables. These contracts are highly effective in hedging the
cash flows attributable to changes in currency exchange rates. Gains and
losses resulting from these contracts offset the foreign exchange gains or
losses on the underlying assets and liabilities being hedged. The maturities
of the forward exchange contracts generally coincide with the settlement dates
of the related transactions. Gains and losses on these contracts are recorded
in Other income (expense), net in the Consolidated Statement of Operations as
the changes in the fair value of the contracts are recognized and generally
offset the gains and losses on the hedged items in the same period. The
primary currency to which the Company was exposed in 2005 and 2004 was the
Euro. At December 31, 2004 the Company had net outstanding forward exchange
contracts to purchase Euros in the value of $3,500,000 with a weighted average
maturity of 49 days. The fair value of the Company's contracts was a loss of
approximately $151,000 at December 31, 2004. At June 30, 2004 the Company had
net outstanding forward exchange contracts to purchase Euros in the value of
$2,901,000 with a weighted average maturity of 45 days. The fair value of the
Company's contracts was a loss of approximately $58,000 at June 30, 2004.
Item 4. Controls and Procedures.
Restatement
Historically, the Company did not eliminate intercompany profit in inventory
transferred or sold within the entities of the consolidated company.
The Company recently reevaluated its accounting for intercompany profit in
inventory and has now concluded that the intercompany profit within inventory
at the end of each period should be eliminated. As a result, the Company has
decided to restate its financial statements for the quarter and six months
ended December 31, 2004 and 2003 as the impact of this error is material to
the previously issued financial statements.
Evaluation of Disclosure Controls and Procedures
In connection with the restatement, under the direction of the Chief Executive
Officer and Chief Financial Officer, the Company reevaluated its disclosure
controls and procedures and concluded that a failure to ensure that
intercompany profit in inventory is eliminated during the financial close
process is a material weakness. As a result of this material weakness, the
Company concluded that its disclosure controls and procedures were not
13
effective as of December 31, 2004.
Remediation of Material Weakness in Internal Control
The Company has enhanced its inventory accounting procedures to include a
calculation of the intercompany profit in inventory at each period end and
timely elimination of this amount during the consolidation process. The
Company's management believes that this corrective action has remediated the
identified deficiency in the Company's disclosure controls and procedures as
of the date of this filing.
Part II. - OTHER INFORMATION
Item 1. Legal Proceedings.
Twin Disc is a defendant in several product liability or related claims of
which the ultimate outcome and liability to the Company, if any, is not
presently determinable. Management believes that the final disposition of such
litigation will not have a material impact on the Company's results of
operations or financial position.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no securities of the Company sold by the Company during the six
months ended December 31, 2004, that were not registered under the Securities
Act of 1933.
During the period covered by this report, the Company offered participants in
the Twin Disc, Incorporated B The Accelerator 401(k) Savings Plan (the "Plan")
the option to invest their Plan accounts in a fund comprised of Company stock.
Participation interests of Plan participants in the Plan, which may be
considered securities, were not registered with the SEC. During the fiscal
year ended June 30, 2003, 68 Plan participants allocated an aggregate of
$81,000 toward this investment option. Participant accounts in the Plan
consist of a combination of employee deferrals, Company matching contributions,
and, in some cases, additional Company profit-sharing contributions. No
underwriters were involved in these transactions. On September 6, 2002, the
Company filed a Form S-8 to register 100,000 shares of Company common stock
offered through the Plan, as well as an indeterminate amount of Plan
participation interests.
Item 4. Submission of Matters to a vote of Security Holders
At the Annual Meeting of Shareholders held October 15, 2004, the number of
votes cast for, against or abstentions with respect to each matter were as
follows:
1. Election of Directors:
a) To serve until Annual Meeting in 2007:
John H. Batten For: 2,260,622 Authority withheld: 168,010
John A. Mellowes For: 2,260,622 Authority withheld: 168,010
Harold M. Stratton II For: 2,260,622 Authority withheld: 168,010
2. Approval of 2004 Stock Incentive Plan:
For: 1,417,252 Against: 477,300 Abstain: 9,082
3. Approval of 2004 Stock Incentive Plan for Non-Employee Directors:
For: 1,406,930 Against: 481,363 Abstain: 15,341
Item 5. Other Information.
Grants of Performance Stock Awards
Effective as of October 15, 2004, the Compensation Committee of the Company
made certain performance stock awards pursuant to the 1998 Incentive
Compensation Plan (the "1998 Plan") and the 2004 Stock Incentive Plan (the
"2004 Plan"). Attaining a defined level of Company revenue in the fiscal year
ending June 30, 2007, is the performance milestone used to determine whether a
performance share award will entitle the grantee to the associated number of
Company shares. These awards were not previously disclosed in a Form 8-K
filing. The form of the agreement for performance stock awards granted to
executive officers pursuant to the 1998 Plan is attached as Exhibit 10.01.
The form of the agreement for performance stock awards granted pursuant to
the 2004 Plan is attached as Exhibit 10.2
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Effective as of February 3, 2005, the Compensation Committee amended the
performance stock awards granted on October 15, 2004 pursuant to the 1998 Plan
and the 2004 Plan to permit prorated awards in the event of certain
terminations of employment. The form of the amended agreement for the amended
performance stock awards granted to executive officers pursuant to the 1998
Plan is attached as Exhibit 10.3. The form of the amended agreement for the
amended performance stock awards granted to executive officers pursuant to the
2004 Plan is attached as Exhibit 10.4.
On October 21, 2004, the Company filed a Form 8-K announcing the appointment of
two new executive officers, Denise L. Wilcox and Dean J. Bratel. Ms. Wilcox
and Mr. Bratel were recipients of performance stock awards as of October 15,
2004, which were not previously disclosed as part of the Form 8-K filing.
These awards were also amended effective February 3, 2005. The forms of the
performance share agreement and amended performance share agreement covering
Ms. Wilcox and Mr. Bratel are attached as Exhibits 10.5 and 10.6, respectively.
Grants of Restricted Stock
Effective as of October 15, 2004, the Compensation Committee awarded certain
restricted stock grants pursuant to the 1998 Plan. The form of the agreement
for the restricted stock grants made to executive officers pursuant to the 1998
Plan is attached as Exhibit 10.7.
Forward Looking Statements
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".
Item 6. Exhibits
10.1 Form of Performance Stock Award Grant Agreement for Performance Stock
Awards granted on October 15, 2004, under the 1998 Incentive
Compensation Plan (Incorporated by reference to Exhibit 10.1, of the
Company's Form 10-Q dated February 9, 2005, SEC File No. 1-7635).
10.2 Form of Performance Stock Award Grant Agreement for Performance Stock
Awards granted on October 15, 2004, under the 2004 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.2, of the Company's Form 10-Q
dated February 9, 2005, SEC File No. 1-7635).
10.3 Form of Amended Performance Stock Award Grant Agreement for Performance
Stock Awards granted on October 15, 2004, under the 1998 Incentive
Compensation Plan, and amended effective February 3,2005 (Incorporated
by reference to Exhibit 10.3, of the Company's Form 10-Q dated
February 9, 2005, SEC File No. 1-7635).
10.4 Form of Amended Performance Stock Award Grant Agreement for Performance
Stock Awards granted on October 15, 2004, under the 2004 Stock
Incentive Plan, and amended effective February 3, 2005 (Incorporated by
reference to Exhibit 10.4, of the Company's Form 10-Q dated February 9,
2005, SEC File No. 1-7635).
10.5 Form of Performance Stock Award Grant Agreement for Performance Stock
Awards granted on October 15, 2004, to Denise L. Wilcox and Dean J.
Bratel under the 1998 Incentive Compensation Plan (Incorporated by
reference to Exhibit 10.5, of the Company's Form 10-Q dated February 9,
2005, SEC File No. 1-7635).
10.6 Form of Amended Performance Stock Award Grant Agreement for Performance
Stock Awards granted on October 15, 2004 to Denise L. Wilcox and Dean
J. Bratel under the 1998 Incentive Compensation Plan, and amended
effective February 3, 2005 (Incorporated by reference to Exhibit 10.6,
of the Company's Form 10-Q dated February 9, 2005, SEC File No.1-7635).
10.7 Form of Restricted Stock Award Agreement for Restricted Stock granted
on October 15, 2004, under the 1998 Incentive Plan (Incorporated by
15
reference to Exhibit 10.7, of the Company's Form 10-Q dated February 9,
2005, SEC File No. 1-7635).
31a Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31b Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32a Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32b Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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)
September 9, 2005 /S/ FRED H. TIMM
----------------------- ---------------------------
(Date) Fred H. Timm
Vice President - Administration and
Secretary and Chief Accounting Officer