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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 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 Number)
1328 Racine Street, Racine, Wisconsin 53403
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including area code: (262) 638-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
Common stock, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X .
At August 30, 2004, the aggregate market value of the common stock held by
non-affiliates of the registrant was $66,665,702. Determination of stock
ownership by affiliates was made solely for the purpose of responding to this
requirement and registrant is not bound by this determination for any other
purpose.
The Company hereby amends Form 10-K for the year ended June 30, 2004, filed on
September 20, 2004. This amendment restates items in the Company's
Consolidated Balance Sheets, Consolidated Statements of Operations,
Consolidated Statements of Cash Flows, Consolidated Statements of Changes in
Shareholders' equity and Notes to Consolidated Financial Statements for
intercompany profit in inventory transferred or sold within the entities of the
consolidated company.
See Note B, "Restatement" in our Notes to Consolidated Financial Statements for
further information regarding this restatement.
This amendment also revises the description regarding legal proceedings in Item
3, the description of the Company's revenue recognition accounting policies in
Footnote A to the Company's financial statements, and 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. With respect to legal proceedings and revenue recognition accounting
policies, only the descriptions have been changed; the Company's determination
regarding the effect of legal proceedings, and the Company's revenue
recognition accounting policies, remain the same.
At August 30, 2004, the registrant had 2,867,342 shares of its common stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE:
The incorporated portions of such documents being specifically identified in
the applicable Items of this report.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held October 15, 2004 are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
Twin Disc was incorporated under the laws of the state of Wisconsin in
1918. Twin Disc designs, manufactures and sells heavy duty off-highway power
transmission equipment. Products offered include: hydraulic torque converters;
power-shift transmissions; marine transmissions and surface drives; universal
joints; gas turbine starting drives; power take-offs and reduction gears;
industrial clutches; fluid couplings and control systems. The Company sells its
products to customers primarily in the construction equipment, industrial
equipment, government, marine, energy and natural resources and agricultural
markets. The Company's worldwide sales to both domestic and foreign customers
are transacted through a direct sales force and a distributor network. At the
end of May, 2004, the Company acquired Rolla SP Propellers SA a manufacturer of
custom high performance propellers. The products described above have accounted
for more than 90% of revenues in each of the last three fiscal years.
Most of the Company's products are machined from cast iron, forgings, cast
aluminum and bar steel which generally are available from multiple sources and
which are believed to be in adequate supply.
The Company has pursued a policy of applying for patents in both the United
States and certain foreign countries on inventions made in the course of its
development work for which commercial applications are considered probable.
The Company regards its patents collectively as important but does not consider
its business dependent upon any one of such patents.
The business is not considered to be seasonal except to the extent that
employee vacations are taken mainly in the months of July and August curtailing
production during that period.
The Company's products receive direct widespread competition, including
from divisions of other larger independent manufacturers. The Company also
competes for business with parts manufacturing divisions of some of its major
customers. Primary competitive factors for the Company's products are
performance, price, service and availability. Ten customers accounted for
approximately 32% of the Company's consolidated net sales during the year ended
June 30, 2004. Sewart Supply, Inc., an independent distributor of Twin Disc
products, accounted for approximately 11% of consolidated net sales in 2004.
Unfilled open orders for the next six months of $49,400,000 at June 30,
2004 compares to $30,593,000 at June 30, 2003. Since orders are subject to
cancellation and rescheduling by the customer, the six-month order backlog is
considered more representative of operating conditions than total backlog.
However, as procurement and manufacturing "lead times" change, the backlog will
increase or decrease; and thus it does not necessarily provide a valid indicator
of the shipping rate. Cancellations are generally the result of rescheduling
activity and do not represent a material change in backlog.
Management recognizes that there are attendant risks that foreign
governments may place restrictions on dividend payments and other movements of
money, but these risks are considered minimal due to the political relations the
United States maintains with the countries in which the Company operates or the
relatively low investment within individual countries. The Company's business
is not subject to renegotiation of profits or termination of contracts at the
election of the Government.
Engineering and development costs include research and development expenses
for new product 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 $2,840,000, $2,220,000 and
$1,887,000 in 2004, 2003 and 2002, respectively. Total engineering and
development costs were $7,600,000, $7,190,000 and $6,718,000 in 2004, 2003 and
2002, respectively.
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Compliance with federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, is not anticipated to have a material effect
on capital expenditures, earnings or the competitive position of the Company.
The number of persons employed by the Company at June 30, 2004 was 860.
A summary of financial data by segment and geographic area for the years
ended June 30, 2004, 2003 and 2002 appears in Note N to the consolidated
financial statements on pages 41 through 43 of this form.
ITEM 2. PROPERTIES
The Company owns two manufacturing, assembly and office facilities in
Racine, Wisconsin, U.S.A. , one in Nivelles, Belgium and one in Decima, Italy.
The aggregate floor space of these four plants approximates 692,000 square feet.
One of the Racine facilities includes office space, which is the location of the
Company's corporate headquarters. The Company leases additional manufacturing,
assembly and office facilities in Decima, Italy and Balerna, Switzerland
The Company also has operations in the following locations, all of which
are used for sales offices, warehousing and light assembly or product service.
The following properties are leased:
Jacksonville, Florida, U.S.A. Chambery, France
Miami, Florida, U.S.A. Brisbane, Queensland, Australia
Coburg, Oregon, U.S.A. Perth, Western Australia, Australia
Kent, Washington, U.S.A. Singapore
Edmonton, Alberta, Canada Shanghai, China
Vancouver, British Columbia, Canada Capezzano Planore, Italy
The properties are generally suitable for operations and are utilized in
the manner for which they were designed. Manufacturing facilities are currently
operating at less than 80% capacity and are adequate to meet foreseeable needs
of the Company.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended June 30, 2004.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Shareholders to
be held on October 15, 2004.
Principal Occupation
Name Last Five Years Age
------ ---------------------- ---
Michael E. Batten Chairman, Chief Executive Officer since 1983 64
Michael H. Joyce President - Chief Operating Officer since 1995 63
James E. Feiertag Executive Vice President since October 2001: 47
formerly Vice President - Manufacturing since
November 2000; formerly Vice President of
Manufacturing for the Drives and Systems Group,
Rockwell Automation Group
Christopher J. Eperjesy
Vice President - Finance and Treasurer since 36
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November 2002: formerly Divisional Vice President -
Financial Planning & Analysis, Kmart Corporation
since 2001; formerly Senior Manager - Corporate
Finance, DaimlerChrysler AG
Henri Claude Fabry Vice President - Global Distribution since 58
October 2001; formerly Vice President Marine and
Distribution
Fred H. Timm Vice President - Administration and Secretary 58
since October 2001, formerly Corporate Controller
And Secretary
John H. Batten Vice President and General Manager - Marine and 39
Propulsion since October 2001; formerly Commercial
Manager - Marine and Propulsion
Officers are elected annually by the Board of Directors at the Board
meeting held preceding each Annual Meeting of the Shareholders. Each officer
holds office until his successor is duly elected, or until he resigns or is
removed from office. John H. Batten is the son of Michael E. Batten.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under
the symbol TDI. The price information below represents the high and low sales
prices for each period:
First Quarter 17.00 14.12 First Quarter 15.14 12.90
Second Quarter 19.54 16.55 Second Quarter 13.25 11.90
Third Quarter 21.25 19.00 Third Quarter 13.35 9.90
Fourth Quarter 25.15 19.44 Fourth Quarter 14.35 10.70
Quarterly dividends of $0.175 per share were declared and paid for each of
the quarters above. As of June 30, 2004 there were 917 shareholder accounts.
The sales price of Twin Disc common stock as of August 30, 2004 was $23.25.
Pursuant to a shareholder rights plan (the "Rights Plan"), on April 17,
1998, the Board of Directors declared a dividend distribution, payable to
shareholders of record at the close of business on June 30, 1998, of one
Preferred Stock Purchase Right ("Rights") for each outstanding share of Common
Stock. The Rights will expire 10 years after issuance, and will be exercisable
only if a person or group becomes the beneficial owner of 15% or more of the
Common Stock (or 25% in the case of any person or group which currently owns 15%
or more of the shares or who shall become the Beneficial Owner of 15% or more of
the shares as a result of any transfer by reason of the death of or by gift from
any other person who is an Affiliate or an Associate of such existing holder or
by succeeding such a person as trustee of a trust existing on the record date)
(an "Acquiring Person"), or 10 business days following the commencement of a
tender or exchange offer that would result in the offeror beneficially owning
25% or more of the Common Stock. A person who is not an Acquiring Person will
not be deemed to have become an Acquiring Person solely as a result of a
reduction in the number of shares of Common Stock outstanding due to a
repurchase of Common Stock by the Company until such person becomes beneficial
owner of any additional shares of Common Stock. Each Right will entitle
shareholders who received the Rights to buy one newly issued unit of 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 Company will
generally be entitled to redeem the Rights at $.05 per Right at any time prior
to 10 business days after a public announcement of the existence of an acquiring
Person. In addition, if (i) a person or group accumulates more than 25% of the
Common Stock (except pursuant to an offer for all outstanding shares of Common
Stock which the independent directors of the Company determine to be fair to
and otherwise in the best interests of the Company and its shareholders and
except solely due to a reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the Company), (ii) a merger
takes place with an Acquiring Person where the Company is the surviving
corporation and its Common Stock is not changed or exchanged, (iii) an Acquiring
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Person engages in certain self-dealing transactions, or (iv) during such time as
there is an Acquiring Person, an event occurs which results in such Acquiring
Person's ownership interest being increased by more than 1% (e.g., a reverse
stock split), each Right (other than Rights held by the Acquiring Person and
certain related parties which become void) will represent the right to purchase,
at the exercise price, Common Stock (or in certain circumstances, a combination
of securities and/or assets) having a value of twice the exercise price. In
addition, if following the public announcement of the existence of an Acquiring
Person the Company is acquired in a merger or other business combination
transaction, except a merger or other business combination transaction that
takes place after the consummation of an offer for all outstanding shares of
Common Stock that the independent directors of the Company have determined to be
fair,or a sale or transfer of 50% or more of the Company's assets or earning
power is made, each Right (unless previously voided) will represent the right to
purchase, at the exercise price, common stock of the acquiring entity having a
value of twice the exercise price at the time.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on a substantial number of Rights being acquired.
However, the Rights are not intended to prevent a take-over, but rather are
designed to enhance the ability of the Board of Directors to negotiate with an
acquirer on behalf of all of the shareholders. In addition, the Rights should
not interfere with a proxy contest.
The Rights should not interfere with any merger or other business
combination approved by the Board of Directors since the Rights may be redeemed
by the Company at $.05 per Right prior to 10 business days after the public
announcement of the existence of an Acquiring Person.
The news release announcing the declaration of the Rights dividend,
dated April 17, 1998, filed as Item 14(a)(3), Exhibit 4(b) of Part IV of the
Annual Report on Form 10-K for the year ended June 30, 1998 is hereby
incorporated by reference.
Recent Sales of Unregistered Securities
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, 2002, 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 6. SELECTED FINANCIAL DATA (Restated)
As further discussed in note B, the Company previously did not properly
eliminate its intercompany profit in inventory. Accordingly, the Company has
restated the financial highlights below to fully eliminate intercompany profits
relating to inventory in accordance with generally accepted accounting
principles.
Financial Highlights
(dollars in thousands, except per share amounts and shares outstanding)
For the years ended June 30,
Statement of Operations Data: 2004(1) 2003(1) 2002(1) 2001(2) 2000(2)
Net sales $186,089 $179,591 $179,385 $180,786 $177,987
Net earnings (loss) 5,643 (2,394) 2,276 6,885 4,456
Basic earnings (loss) per share 2.01 (.85) .81 2.45 1.58
Diluted earnings (loss) per share 1.98 (.85) .81 2.45 1.58
Dividends per share .70 .70 .70 .70 .70
Balance Sheet Data (at end of period):
Total assets $174,622 $167,944 $154,892 $154,127 $170,867
Total Long-Term Debt 16,813 16,584 18,583 23,404 31,524
(1) See footnote B to the Consolidated Financial Statements for further
information regarding this restatement.
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(2) This financial data has been restated for adjustments as described in
footnote B to the Consolidated Financial Statements. The adjustments
increased net earnings by $716,000 and $683,000 and basic and diluted
earnings per share by $.25 and $.24 per share for fiscal years ended
June 30, 2001 and 2000, respectively.
Effective May 31, 2004, the company acquired 100% of the common stock of
Rolla SP Propellers SA of Balerna, Switzerland. Rolla designs and manufactures
custom propellers. Rolla will have a fiscal year ended May 31, since the
acquisition was also effective May 31. No results of operations of Rolla are
included in consolidated results for the year ended June 30, 2004.
In January 2004, the Company sold its 25% minority interest in Palmer
Johnson Distributors, LLC (PJD) to the majority holder, PJD, Inc. for $3,811,000
cash, which approximated the net book value of the investment. The Company
recognized pre-tax earnings of $240,000, $414,000 and $481,000 in fiscal years
2004, 2003 and 2002 respectively, from its investment in PJD. In addition, the
Company received cash distributions of $195,000, $303,000 and $400,000 in fiscal
years 2004, 2003 and 2002, respectively.
During the third quarter of 2001, the Company sold its investment in
Niigata Converter Company, Ltd., resulting in a net gain of $2,288,000 or $.81
per share.
On April 2, 2001, the Company entered into a Joint Venture Agreement with
Niigata Engineering Co. LTD., Japan to form NICO Transmissions Co., Inc. (NTC).
Effective April 1, 2003, Niigata Engineering Co. LTD's ownership interest was
transferred to Hitachi Nico Transmission Co. LTD. and NTC was renamed Twin Disc
Nico Co. LTD (TDN). TDN's balance sheet as of March 31, 2004 and 2003 are
consolidated with the Company's balance sheet as of June 30, 2004 and 2003,
respectively. TDN's statement of operations for the years ended March 31, 2004,
2003 and 2002 are consolidated with the Company's statement of operations for
the years ended June 30, 2004, 2003 and 2002, respectively. TDN contributed the
following for the years ended June 30 (dollars in thousands, except per share
amounts):
2004 2003 2002
---- ---- ----
Net sales $ 1,180 $13,708 $12,217
Net earnings 48 23 263
Basic and diluted earnings per share .02 .01 .09
Total assets 3,162 6,076 6,169
Total long-term obligations 0 0 0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Restatement
As further described in note B to the Consolidated Financial Statements, the
Company has restated its financial statements as of and for the years ended
June 30, 2004, 2003, and 2002 to fully eliminate intercompany profits relating
to inventory. The management discussion and analysis of financial condition
and results of operations contained herein have been revised as applicable.
Note on Forward Looking Statements
Statements in this report (including but not limited to certain statements in
Items 1 and 7) and in other Company communications that are not historical
facts are forward-looking statements, which are based on managements 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.
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Results of Operations (Restated)
(In thousands)
2004 % 2003 % 2002 %
---- -- ---- -- ---- --
Net sales $186,089 $179,591 $179,385
Cost of goods sold 137,804 144,618 138,788
------- ------- -------
Gross profit 48,285 25.9% 34,973 19.5% 40,597 22.6%
Marketing, engineering and
administrative expenses 37,168 20.0 34,790 19.4 34,638 19.3
Restructuring of operations - 0.0 2,042 1.1 - 0.0
------ ---- ------- --- ------- ---
Earnings (loss) from operations $11,117 6.0 $(1,859) (1.0) $5,959 3.3
======== === ======== === ====== ===
Fiscal 2004 Compared to Fiscal 2003
Net Sales
Net sales increased $6.5 million, or nearly four percent in fiscal 2004.
In fiscal 2004, the joint venture agreement governing Twin Disc Nico Co.,
LTD (TDN) was amended. Under the new agreement, sales into certain
territories have been transferred to the joint venture partner in exchange
for which TDN receives a product development fee equal to the gross margin
formerly earned on such sales. The effect of this change was to reduce sales
by $13.7 million for the fiscal year ended June 30, 2004, with no effect on
net earnings. Product development fees included in net sales in fiscal year
2004 approximated $ 0.7 million. In fiscal 2003, the company recognized
$13.0 million of sales that are no longer recognized in accordance with the
new agreement. As a result of the strong Euro and Asian currencies versus
the dollar, foreign currency exchange had a net favorable impact on sales
of $10.4 million in fiscal 2004, compared to fiscal 2003.
In fiscal 2004, sales for our worldwide manufacturing operations, before
eliminating intra-segment and inter-segment sales, were $19.0 million, or 12.3%,
higher than in the prior year. Over half of this increase came at our domestic
manufacturing operations, which saw a recovery across most of its product
markets. Of the remaining increase, approximately $5.9 million was due to the
impact of net favorable exchange rate movements on our European operations in
Belgium and Italy.
Net sales for distribution operations were down $4.2 million, or 6.7%, in
fiscal 2004. However, there was a $13.0 million decrease due to the change in
the TDN agreement mentioned above. Adjusting for this change, sales were $8.8
million, or 17.5%, higher than fiscal 2003. Of this increase, the net positive
impact due to the change in foreign exchange rates was $4.5 million, or 8.9%.
From a product perspective, the Company saw increases in its industrial,
transmission and propulsion product sales. After adjusting for the impact of
the change in the TDN agreement, marine product sales were also higher. Of
particular note in fiscal 2004 was the continued acceptance of our QuickShiftTM
marine transmissions, the overall recovery of the marine pleasure craft market,
the growth in our Arneson Surface Drives (propulsion) and 8500 series
transmission for oilfield applications.
Gross Profit
Gross profit as a percentage of sales improved 640 basis points in fiscal
2004 to 25.9%, compared to 19.5% in fiscal 2003. The improvement in fiscal 2004
can be attributed to a number of factors: (1) increased sales and favorable
product mix, which accounted for over half of the current year's improvement,
(2) increased productivity and absorption, (3) lower fixed costs as a result of
cost reduction initiatives, (4) favorable purchase price variances as a result
of a material cost reduction program and (5) the absence in fiscal 2004 of a
$0.8 million SFAS 144 impairment charge taken in fiscal 2003. These were
partially offset by a $1 million increase in pension expense in fiscal 2004
compared to fiscal 2003.
Marketing, Engineering and Administrative (ME&A) Expenses
Marketing, engineering, and administrative (ME&A) expenses increased $2.4
million, or 6.8%, in fiscal 2004 versus fiscal 2003. Over $1.5 million, or 425
basis points, of this increase can be attributed to the unfavorable exchange
rate impact of the weakening dollar on our overseas operations' ME&A expenses.
Increased pension expense for salaried and administrative employees accounted
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for another $0.8 million of the increase.
Restructuring
During the second quarter of 2003, the Company recorded a pre-tax
restructuring charge of $2.0 million in connection with the reduction of its
workforce. These actions were taken in an effort to streamline the Company's
cost structure and align its corporate workforce with market conditions. The
charge consisted of employee termination and severance benefits for a total of
58 employees; 48 production employees and 10 salaried employees. During 2004
and 2003, the Company made cash payments of $0.4 million and $0.6 million,
respectively. Accrued restructuring costs were $0.9 million and $1.3 million at
June 30, 2004 and 2003, respectively.
Interest Expense
Interest expense decreased by $250,000, or 19%, in fiscal 2004. The
average outstanding debt for fiscal 2004 of $20.4 million (computed monthly) was
$2.3 million lower than fiscal 2003. The decrease in interest expense for the
fifth straight year can be attributed to overall lower debt levels and a lower
weighted interest rate. The latter is partially due to the fact that the
Company continues to pay down its Senior Notes, which carry a fixed rate of
7.37%, which is significantly higher than the interest rate on its other credit
facilities.
Equity in Net Earnings of Affiliate
In January 2004, the Company sold its 25% minority interest in Palmer
Johnson Distributors,LLC. to the majority holder, PJD, Inc. for $3,811,000 cash,
which approximated the net book value of the investment. The Company recognized
pre-tax earnings of $240,000 and $414,000 in fiscal years 2004 and 2003
respectively, from its investment in PJD. In addition, the Company received
cash distributions of $195,000 and $303,000 in fiscal years 2004 and 2003,
respectively.
Income Taxes
In fiscal 2004, the effective income tax rate was adversely impacted by the
inability to utilize foreign tax credits and a relatively high proportion of
foreign earnings. The low effective tax rate in fiscal 2003 results from the
benefit of domestic losses partially offset by taxes incurred on foreign
earnings, the inability to utilize foreign tax credits and a reduction in
statutory rates at some foreign locations.
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize deferred
tax assets except for certain foreign tax credit carryforwards for which a
valuation allowance has been recorded.
Order Rates
In fiscal 2004, we saw an improvement in our order rates for most of our
products. As of fiscal year end, our manufacturing facilities in the United
States, Belgium and Italy saw year-over-over increases in their six-month
backlogs of 15.8%, 10.0% and 21.4%, respectively. The backlog of orders
scheduled for shipment during the next six months (six-month backlog) of $49.4
million at the end of fiscal 2004 compared favorably to the $30.6 million for
fiscal year end 2003. In June 2003, the Company announced that it had received
an order to provide transmission systems for medium tactical vehicles to be
supplied to Israeli Defense Forces. As of June 30, 2004, $6.7 million of the
six-month backlog related to this military contract. Prior to the over 60%
improvement experienced this fiscal year, order rates for most of our products
were down throughout much of the prior three fiscal years, contributing along
with improved deliveries, to a steady decline in backlog. The year-over-year
change in foreign exchange rates resulted in an approximately $0.8 million
increase in the backlog at June 30, 2004 versus June 30, 2003.
Other
On July 15, 2003, the Company announced a number of actions to address
rising pension and retiree healthcare costs, meant to ensure both the future
strength of our pension fund and the Company's ability to remain globally
competitive. In addition to changes to both the pension and post-retirement
healthcare plans (see Footnote Q to the consolidated financial statements), the
Company announced across-the-board wage reductions for corporate officers, and
most domestic salaried and hourly employees. Domestic employee groups,
including officers, also will forego performance bonuses in both fiscal 2003 and
2004. The 401(k) company match also has been reduced from 75 percent to 50
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percent on the first six percent of employees' contributions. The combined
effect of these actions approximately offset projected increases for both
pension and post-retirement healthcare costs in fiscal 2004. In the first
quarter of fiscal 2005, the Company will restore salary and wages to their prior
levels and plans to implement a new incentive plan 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. It is estimated that the
annual net pre-tax impact of the salary and wage restoration will be
approximately $0.7 million.
FISCAL 2003 COMPARED TO FISCAL 2002
Net Sales
Net sales increased less than one percent to $179.6 million in fiscal 2003
from $179.4 million in the prior fiscal year. As a result of the strong Euro
and Asian currencies versus the dollar, foreign currency exchange had a net
favorable impact on sales of $9.6 million in fiscal 2003, compared to fiscal
2002.
In fiscal 2003, our domestic operations experienced a decline in sales
versus 2002 in all market segments except for Propulsion, which had a very
strong year. After adjusting for the impact of foreign exchange rate changes,
sales for overseas operations were slightly higher in fiscal 2003 compared to
2002. Overall, the Company's three major markets, marine, transmission and
industrial products, all continued to be impacted by global economic conditions.
However, the second half of the fiscal 2003 saw significant contributions from
new-product introductions, such as our high-performance QuickShift TM marine
transmissions and the 8500 series transmissions for oilfield applications, which
supplemented improving core business strength. Our continuing ability to
compete successfully for defense applications was underscored by the $14.8
million contract for transmission systems announced in June 2003, augmenting
recently awarded U.S. defense contracts for other land-based transmissions.
Sales from this contract were first realized in late fiscal 2004.
For fiscal 2003, the Company's wholly-owned distribution companies posted
a 9% improvement in sales, of which 6% can be attributed to the favorable impact
of exchange rate fluctuations versus fiscal 2002. In particular, we saw strong
sales for Arneson Surface Drives and the Italian Luxury Yacht industry weathered
the pleasure craft downturn better than any other segment. Our distribution
offices in Italy and the Pacific Rim continued to show strength in spite of weak
global market conditions.
We had mixed results in our manufacturing operations in fiscal 2003. Our
Italian operations posted another strong sales year with an increase
versus fiscal 2002. However, the majority of this increase was caused by the
strengthening Euro. Although our Belgian operations got off to a slow start in
fiscal 2003, the second half of the year saw some recovery as we began to
produce and see the effects of our new QuickShift TM marine transmissions.
After adjusting for the impact of a strengthening Euro in fiscal 2003, our
Belgian operations posted a slight increase in sales, primarily driven
by a very strong fourth quarter. In the U.S., our domestic operations were
faced with a number of challenges early in fiscal 2003. In the first quarter,
quality problems necessitated downtime in order to segregate non-conforming
parts received from two of the Company's vendors. By the end of the second
quarter, the disruption of production flow as a result of these vendor-supplied
off-spec parts was normalized. In the second quarter, the Company announced
restructuring actions that impacted both our U.S. and Belgian manufacturing
operations (see Footnote T to the consolidated financial statements). These
actions were taken in an effort to streamline the Company's cost structure and
align its corporate workforce with market conditions. In addition to these
challenges, the Company continued to be confronted with softness in many of its
key markets. However, propulsion products continued to be a strong area for
the Company in fiscal 2003.
Gross Profit
Gross profit as a percentage of sales deteriorated 310 basis points to
19.5% in fiscal 2003 compared to fiscal 2002. Almost half of the deterioration
can be attributed to increased pension and medical costs of nearly $1.6 million,
and a $0.8 million impairment charge taken in the second quarter (see Footnote
G to the consolidated financial statements). The remaining deterioration was
due to unfavorable volume and mix in fiscal 2003 as well as supplier quality
issues the Company experienced in the first and second quarters of fiscal 2003.
The latter was somewhat offset by ongoing productivity and cost improvement
initiatives in our manufacturing operations. Despite early setbacks caused by
10
the supplier quality issues and restructuring actions taken in the first half
of 2003, the second half of the year was much stronger. For example, fourth
quarter gross profit as a percentage of sales of 22.7% compared favorably with
fiscal 2002 at 22.9%.
Marketing, Engineering and Administrative (ME&A) Expenses
In fiscal 2003, marketing, engineering, and administrative (ME&A) expenses
remained flat versus the prior year, in spite of an almost $1.4 million increase
attributable to the unfavorable exchange rate impact of the weakening dollar on
our overseas operations. This was achievable primarily as a result of ongoing
cost reduction initiatives, including the restructuring actions announced in the
2nd quarter. For fiscal 2003, total engineering related expenses were
approximately $1 million higher than the prior year as the Company continued to
invest in engineering projects related to the development of new marine,
industrial, surface drive and electronic control products. This increase was
more than offset by reductions in marketing and administrative expenses, even
with the negative foreign exchange impact. Approximately one-half of the $2.9
million increase in fiscal 2002 spending was due to the first-year expenses of
NTC, and the balance consisted of added marketing and engineering expenses
related to a new product introduction.
Restructuring
During the second quarter of 2003, the Company recorded a pre-tax
restructuring charge of $2.0 million in connection with the reduction of its
workforce. These actions were taken in an effort to streamline the Company's
cost structure and align its corporate workforce with market conditions. The
charge consisted of employee termination and severance benefits for a total of
58 employees; 48 production employees and 10 salaried employees. During 2003,
the Company made cash payments of $0.6 million. Accrued restructuring costs
were $1.3 million at June 30, 2003.
Interest Expense
Interest expense declined for the fourth straight year in fiscal 2003 as
debt was further reduced by $2 million, excluding the impact of foreign
exchange, and the company continued to pay down its senior notes, which carry
a significantly higher interest rate than its revolver facility.
Income Taxes
The effective tax rate in fiscal 2004 was adversely effected by state
income taxes and higher taxes at foreign operations. The low effective tax rate
in fiscal 2003 results from the benefit of domestic losses partially offset by
taxes incurred on foreign earnings, the inability to utilize foreign tax credits
and a reduction in statutory rates at some foreign locations. In fiscal year
2002, limitations on foreign tax credit utilization, the relatively high
proportion of foreign earnings and settlement of some state tax issues resulted
in an unusually high tax rate. The effective rate in fiscal 2002 was increased
further by two third-quarter adjustments totaling about $300,000. Also in
fiscal 2002, a tax incentive provided by the Belgian government several years
ago was disallowed by the European Commission and was refunded to the
government, and the United States tax provision was adjusted upward for the
taxes due on an asset sale gain recorded in the prior year's third quarter.
Statutory rate changes at European operations reduced taxes in 2003 by
approximately $100,000.
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize deferred
tax assets except for certain foreign tax credit carryforwards for which a
valuation allowance has been recorded.
Order Rates
Order rates for most of our products were down throughout much of fiscal
2003 and 2002, contributing along with improved deliveries, to a steady decline
in backlog. The backlog of orders scheduled for shipment during the next six
months (six-month backlog) remained relatively flat at $31 million at the end of
fiscal 2003. However, the year-over-year change in foreign exchange rates
resulted in an approximately $2.1 million increase in the backlog at June 30,
2003 versus June 30, 2002. The year-over-year change in foreign exchange rates
resulted in an approximately $1.0 million increase in the backlog at June 30,
2002 versus June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Years 2004, 2003 and 2002
11
The net cash provided by operating activities in fiscal 2004 totaled $12.2
million versus $6.7 million in fiscal 2003, for a net increase of $5.5 million.
This increase was primarily driven by an increase in net earnings of $8.0
million over fiscal 2003's net loss. This was partially offset by increased
inventories at our domestic manufacturing location as we prepared to deliver
transmission systems for military contracts. Accounts receivable at June 30,
2004 were approximately $0.6 million lower, adjusted for the impact of exchange
rate changes, than at June 30, 2003. The change in the TDN agreement
previously discussed resulted in a net reduction in accounts receivable of $3.6
million. This was offset by increased accounts receivable of $3.9 million at
our domestic manufacturing location, driven by increased sales is fiscal 2004's
fourth quarter of over $7 million versus the prior fiscal year's fourth quarter.
The change in TDN agreement also resulted in a net reduction in accounts
payable of $3.8. This was partially offset by a net increase of $3.0 million
in accounts payable at our domestic manufacturing locations due to the
increased sales activity noted above.
The net cash provided by operating activities in fiscal 2003 totaled $6.7
million versus $13.2 million in fiscal 2002. This decline was primarily driven
by the net loss experienced in fiscal 2003. In addition, the net change in
operating assets and liabilities contributed $2.8 million to operating cash
flow in fiscal 2003, compared with to nearly $5 million in the prior year.
While the continued reduction of inventories contributed $3.7 million to
operating cash flow in both 2003 and 2002, accounts receivable at June 30, 2003
were approximately $3.0 million higher, adjusted for the impact of exchange
rate changes, than at June 30, 2002. While fourth quarter sales were flat
year-over-year, there was a significant shift from domestic to overseas sales
in fiscal 2003's fourth quarter. In general, customer credit terms in both our
European and Asian markets are longer, partially explaining this increase.
Additionally, our domestic operations had a past due balance of $0.6 million
from one overseas customer, of which $0.5 million had been collected subsequent
to year-end.
The net cash used for investing activities in fiscal 2004 consisted of the
net acquisition price for Rolla SP Propellers SA of $5.1 million, net of $1.2
million cash acquired, and nearly $4.2 million in investments in capital
equipment offset by the net proceeds from the sale of the Company's 25% minority
interest in PJD, Inc. to the majority holder for $3.8 million.
With the acquisition of Rolla SP Propellers SA in Balerna, Switzerland
in May 2004, the Company is in the process of constructing a new
state-of-the-art facility for the design and manufacturing of high-performance,
custom propellers. As a result, management expects capital expenditures in
fiscal 2005 to significantly exceed recent years, reversing a trend of below
depreciation capital spending.
In fiscal 2003 and 2002, the net cash used for investing activities
consisted primarily of capital expenditures at our domestic and European
manufacturing locations.
In fiscal 2004, 2003 and 2002, the net cash flow used by financing
activities consisted primarily of dividends paid to shareholders of $2.0
million and the repayment of long-term debt. In each fiscal year, the Company
repaid $2.9 million of its 7.37% Senior Notes due 2006. The net
payments/proceeds from long-term debt were payments or borrowings on the
Company's revolving credit facility.
Future Liquidity and Capital Resources
Twin Disc has a three-year $20 million revolving credit facility that
expires in October 2005. This credit facility is used to fund seasonal working
capital requirements and other financing needs. This facility and Twin Disc's
other indebtedness contain certain restrictive covenants as are fully disclosed
in Note K of the Notes to the Consolidated Financial Statements. Twin Disc is
currently renegotiating its revolving credit agreement and plans to have a new
agreement negotiated by the end of fiscal 2005's first quarter. At this time,
we do not foresee any difficulties in securing an extension as well as an
increase in the available borrowings under the agreement.
The overall liquidity of the Company remains strong. We continue to reduce
total borrowings, have over $7.2 million of available borrowings on our $20
million revolving loan agreement, and continue to generate enough cash from
operations to meet our operating and investing needs. In fiscal 2005, the
Company expects to contribute $7.5 million to its pension plans, an increase of
nearly $3 million over fiscal 2004. The Company intends to meet this funding
requirement from cash from operations and, if necessary, from available
borrowings under existing credit facilities. Working capital increased $5
million to about $56 million in fiscal 2004, and the current ratio has been
unchanged at between 2.1 and 2.2 for the past four fiscal years. The Company's
balance sheet is strong, there are no off-balance sheet arrangements, and we
12
continue to have sufficient liquidity for near-term needs.
Twin Disc expects capital expenditures to be up to $10 million in fiscal
2005, partially reflecting the impact of the cost of a new a facility under
construction in Switzerland noted above. These anticipated expenditures reflect
our plans to continue to reinvest in modern equipment and facilities, and new
products.
Management believes that available cash, the credit facility, cash
generated from future operations, existing lines of credit and access to debt
markets will be adequate to fund Twin Disc's capital requirements for the
foreseeable future.
Off Balance Sheet Arrangements and Contractual Obligations
The Company had no off-balance sheet arrangements, guarantees or
obligations except for normal open purchase orders and operating leases as of
June 30, 2004 and 2003. Obligations for operating leases are listed in the
table below.
The Company has obligations under non-cancelable operating lease contracts
and loan and senior note agreements for certain future payments. A summary of
those commitments follows (in thousands):
Less than 1-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
Short-term debt $ 1,607 $ 1,607 - - -
Revolving loan borrowing $12,800 - $12,800 - -
Long-term debt $ 7,031 $ 3,018 $ 4,013 - -
Operation Leases $10,285 $ 2,700 $ 3,711 $2,404 $1,470
The Company believes the capital resources available in the form of
existing cash, lines of credit (see Footnote K to the consolidated financial
statements), and funds provided by operations will be adequate to meet
anticipated capital expenditures and other foreseeable future business
requirements, including pension funding requirements. As noted above, the
Company is currently in discussions to increase the borrowings available under
and extend its $20,000,000 revolving loan agreement, which expires on
October 31, 2005. Management expects to have the amended agreement finalized
before the end of fiscal 2005's first quarter.
OTHER MATTERS
Environmental Matters
The Company has been involved in various stages of investigation relative
to hazardous waste sites, two of which were on the United States EPA National
Priorities List (Superfund sites). The Company's involvement in one of the
Superfund sites was settled in 2003 for approximately $191,000. The Company
has made a $117,000 payment in trust in settlement of its exposure related to
the second Superfund site and anticipates that no further payments will be
required. The excess reserve for these sites of $300,000 was reversed against
cost of sales in 2003.
Critical Accounting Policies
The preparation of this Annual 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 to the
consolidated financial statements on pages 32 through 34 of this form. Not
all of these significant accounting policies require management to make
difficult, subjective, or complex judgments or estimates. However, the
policies management considers most critical to understanding and evaluating
our reported financial results are the following:
Revenue Recognition
Twin Disc recognizes revenue from product sales at the time of shipment
and passage of title. While we respect the customer's right to return products
that were shipped in error or do not function properly, historical experience
shows those types of adjustments have been immaterial and thus no provision is
made. With respect to other revenue recognition issues, management has
concluded that its policies are appropriate and in accordance with the guidance
13
provided by Securities and Exchange Commissions' Staff Accounting Bulletin (SAB)
No. 104, "Revenue Recognition".
Accounts Receivable
Twin Disc performs ongoing credit evaluations of our customers and adjusts
credit limits based on payment history and the customer's credit-worthiness as
determined by review of current credit information. We continuously monitor
collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer-collection issues. In addition, senior management reviews the accounts
receivable aging on a monthly basis to determine if any receivable balances may
be uncollectible. Although our accounts receivable are dispersed among a large
customer base, a significant change in the liquidity or financial position of
any one of our largest customers could have a material adverse impact on the
collectibility of our accounts receivable and future operating results.
Inventory
Inventories are valued at the lower of cost or market. Cost has been
determined by the last-in, first-out (LIFO) method for the majority of the
inventories located in the United States, and by the first-in, first-out (FIFO)
method for all other inventories. Management specifically identifies obsolete
products and analyzes historical usage, forecasted production based on future
orders, demand forecasts, and economic trends when evaluating the adequacy of
the reserve for excess and obsolete inventory. The adjustments to the reserve
are estimates that could vary significantly, either favorably or unfavorably,
from the actual requirements if future economic conditions, customer demand or
competitive conditions differ from expectations.
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 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.
Income Taxes
As part of the process of preparing our consolidated financial statements,
income taxes in each of the jurisdictions in which we operate must be estimated.
This process involves estimating the actual current tax exposure and assessing
the realizability of deferred tax assets. If it is deemed more likely than not
that a deferred tax asset will be realized, a valuation allowance is recorded.
Recently Issued Accounting Standards
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45").
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements of FAS 5, "Accounting for Contingencies," relating to guarantor's
accounting for, and disclosure of, the issuance of certain types of guarantees.
The Interpretation's provisions for initial recognition and measurement should
be applied on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of annual periods that end after December 15, 2002. The adoption
of the accounting and disclosure provisions of this Interpretation did not have
a significant impact on the Company's financial statements for the year ending
June 30, 2004.
In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of
14
the provisions of this Statement to have a significant impact on its financial
statements.
ITEM 7(a). 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
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. Discussions of the Company's accounting
policies and further disclosure relating to financial instruments is included
in Note A to the consolidated financial statements on pages 33 through 35 of
this form.
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. During
fiscal 2003, the Company entered into a $20,000,000 revolving loan agreement,
which expires on October 31, 2005. In accordance with the loan agreement, the
Company has the option of borrowing at the prime interest rate or LIBOR plus an
additional "Add-On", between 1% and 2.75%, depending on the Company's Total
Funded Debt to EBITDA ratio. Due to the relative stability of interest rates,
the Company did not utilize any financial instruments at June 30, 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 $30,000.
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 one-third of the Company's revenues in the years
ended June 30, 2004, 2003 and 2002 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 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 2004, 2003 and 2002 was the Euro. 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. At June 30, 2003, the Company had net outstanding forward exchange
contracts to purchase Euros in the value of $2,701,000 with a weighted average
maturity of 50 days. The fair value of the Company's contracts was approximately
zero at June 30, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See consolidated financial statements and Financial Statement Schedule on Pages
10 through 28 of this form.
For the reasons described in note B to the Consolidated Finacial Statements,
the Company has restated the following financial data for the quarters in the
years ended June 30, 2004 and 2003 to fully eliminate intercompany profits
relating to inventory in accordance with generally accepted accounting
principles.
15
Sales and Earnings by Quarter (dollars in thousands, except per share amounts)
As Restated
2004 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
Net sales $37,966 $42,371 $48,606 $57,146 $186,089
Gross profit 9,541 10,445 13,074 15,225 48,285
Net earnings 564 340 1,872 2,867 5,643
Basic earnings per share .20 .12 .66 1.02 2.00
Diluted earnings per share .20 .12 .66 1.00 1.98
Dividends per share .175 .175 .175 .175 .70
As Reported
2004 1st Qtr. 2nd Qtr. 3rd Qrt. 4th Qtr. Year
Net sales $37,966 $42,371 $48,606 $57,146 $186,089
Gross profit 8,896 10,721 12,917 15,096 47,630
Net earnings 171 508 1,776 2,788 5,243
Basic earnings per share .06 .18 .63 .99 1.86
Diluted earnings per share .06 .18 .62 .97 1.84
Dividends per share .175 .175 .175 .175 .70
As Restated
2003 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
Net sales $36,521 $42,794 $47,177 $53,099 $179,591
Gross profit 5,994 6,664 10,426 11,889 34,973
Net earnings (loss) (1,692) (3,097) 510 1,885 (2,394)
Basic earnings (loss)
per share (.60) (1.10) .18 .67 (.85)
Diluted earnings (loss)
per share (.60) (1.10) .18 .67 (.85)
Dividends per share .175 .175 .175 .175 .70
As Reported
2003 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
Net sales $36,521 $42,794 $47,177 $53,099 $179,591
Gross profit 5,930 6,680 10,425 11,981 35,016
Net earnings (loss) (1,731) (3,087) 509 1,941 (2,368)
Basic earnings (loss)
per share (.62) (1.10) .18 .70 (.84)
Diluted earnings (loss)
per share (.62) (1.10) .18 .70 (.84)
Dividends per share .175 .175 .175 .175 .70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9(a). 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 fiscal years ended June 30,
2004, 2003, and 2002 and the quarterly periods with the fiscal years ended June
30, 2005 and 2004 as the impact of this error is material to the previously
issued financial statments.
Evaluation of Disclosure Controls and Procedures
16
In connection with 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
effective as of June 30, 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 III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the Registrant,
see "Executive Officers of the Registrant" at the end of Part I of this report.
For information with respect to the Directors of the Registrant, see
"Election of Directors" in the Proxy Statement for the Annual Meeting of
Shareholders to be held October 15, 2004, which is incorporated into this report
by reference.
For information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934, see "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement for the Annual Meeting of
Shareholders to be held October 15, 2004, which is incorporated into this
report by reference.
For information with respect to the Company's Code of Ethics , see "Code
of Ethics" in the Proxy Statement for the Annual Meeting of Shareholders to be
held October 15, 2004, which is incorporated into this report by reference. The
Company's Code of Ethics, entitled, "Guidelines for Business Conduct and
Ethics", is included on the Company's website, www.twindisc.com.
For information with respect to changes to procedures by which shareholders
may recommend nominees to the Company's Board of Directors, see "Selection of
Nominees for the Board" in the Proxy Statement for the Annual Meeting of
Shareholders to be held October 15, 2004, which is incorporated into this
report by reference.
For information with respect to the Audit Committee Financial Expert, see
"Roles of the Board's Committees: Audit Committee" in the Proxy Statement for
the Annual Meeting of Shareholders to be held October 15, 2004, which is
incorporated into this report by reference.
For information with respect to the Audit Committee Disclosure, see
"Roles of the Board's Committees: Audit Committee" in the Proxy Statement for
the Annual Meeting of Shareholders to be held October 15, 2004, which is
incorporated into this report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Compensation of Executive
Officers", "Stock Options","Retirement Income Plan", "Supplemental Retirement
Benefit Plan", "Compensation of Directors" and "Employment Contracts" in the
Proxy Statement for the Annual Meeting of Shareholders to be held on October 15,
2004 is incorporated into this report by reference. Discussion in the Proxy
Statement under the captions "Board Compensation Committee Report on Executive
Compensation" and "Corporate Performance Graph" is incorporated by reference
but shall not be deemed "soliciting material" or to be "filed" as part of this
report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners and management is set
17
forth in the Proxy Statement for the Annual Meeting of Shareholders to be held
on October 15, 2004 under the caption "Principal Shareholders, Directors and
Executive Officers" and incorporated into this report by reference.
There are no arrangements known to the Registrant, the operation of which
may at a subsequent date result in a change in control of the Registrant.
The following table summarizes certain information regarding the Company's
equity-based compensation plans:
# of Securities
# of Securities to Remaining
be Issued Under Weighted Average Available for
Exercise of Price of Future Issuance
Outstanding Options, Outstanding OptionS Under Equity
Plan Category Warrants and Rights Warrants and Rights Compensation Plans
------------- ------------------- ------------------- ------------------
Equity
Compensation
Plans Approved
by Shareholders 188,200 $19.69 $24,250
Equity
Compensation
Plans Not
Approved By
Shareholders 0 N/A 0
------------------ ------------------- ----------------
Total 188,200 $19.69 $24,250
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company incorporates by reference the information contained in the Proxy
Statement for the Annual Meeting of Shareholders to be held on October 15, 2004
under the heading "Fees to Independent Registered Public Accounting Firm".
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
See "Index to Consolidated Financial Statements and Financial Statement
Schedule" on page 26, the Report of Independent Registered Public Accounting
Firm on page 27 and the Consolidated Financial Statements on pages 28 to 52,
all of which are incorporated by reference.
Individual financial statements of the 50% or less owned entities accounted
for by the equity method are not required because the 50% or less owned entities
do not constitute significant subsidiaries.
(a)(2) Consolidated Financial Statement Schedules
See "Index to Consolidated Financial Statements and Financial Statement
Schedule" on page 26, and the Consolidated Financial Statement Schedule on page
53, all of which are incorporated by reference.
(a)(3) Exhibits. See Exhibit Index included as the last page of this form,
which is incorporated by reference.
Copies of exhibits filed as a part of this Annual Report on Form 10-K may
be obtained by shareholders of record upon written request directed to the
Secretary, Twin Disc, Incorporated, 1328 Racine Street, Racine, Wisconsin 53403.
(b) A Form 8-K was filed on April 16, 2004 announcing the financial results
for the third fiscal quarter of 2004.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm................. 27
Consolidated Balance Sheets as of June 30, 2004 and 2003(as restated)... 28
Consolidated Statements of Operations for the years
ended June 30, 2004, 2003 and 2002(as restated)........................ 29
Consolidated Statements of Cash Flows for the years
ended June 30, 2004, 2003 and 2002 (as restated)........................30
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income for the years ended June 30, 2004, 2003 and 2002 (as
restated)............................................................... 31
Notes to Consolidated Financial Statements (as restated)............... 32-52
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts........................ 53
Schedules, other than those listed, are omitted for the reason that they are
inapplicable, are not required, or the information required is shown in the
financial statements or the related notes.
Report of Independent Registered Public Accounting Firm
To the Shareholders of
Twin Disc, Incorporated:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Twin Disc, Incorporated and Subsidiaries at June 30, 2004
and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2004 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards 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 our
opinion.
As discussed in Note B to the consolidated financial statements, the Company
has restated its consolidated financial statements for each of the three years
in the period ended June 30, 2004.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 30, 2004, except for Note B, as to which the date is July 27, 2005
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 and 2003
(Dollars in thousands) 2004 2003
---- ----
(As Restated) (As Restated)
19
ASSETS
Current assets:
Cash and cash equivalents $ 9,127 $ 5,908
Trade accounts receivable, net 37,091 35,367
Inventories, net 48,777 43,289
Deferred income taxes 4,216 4,469
Other 3,111 4,104
------- ------
Total current assets 102,322 93,137
Property, plant and equipment, net 33,222 30,210
Investment in affiliate - 2,550
Goodwill, net 12,717 12,876
Deferred income taxes 16,955 21,708
Intangible pension asset - 24
Other assets 9,406 7,439
------- -------
$174,622 $167,944
======= =======
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,607 $ 2,429
Current maturities on long-term debt 3,018 2,857
Accounts payable 17,241 16,115
Accrued liabilities 27,262 24,885
------- -------
Total current liabilities 49,128 46,286
Long-term debt 16,813 16,584
Accrued retirement benefits 49,456 56,732
------- -------
115,397 119,602
Minority interest 509 485
Shareholders' equity:
Preferred shares authorized: 200,000;
issued: none; no par - -
Common shares authorized: 15,000,000;
issued: 3,643,630; no par value 11,653 11,653
Retained earnings 84,428 80,777
Unearned Compensation (304) -
Accumulated other comprehensive loss (20,301) (26,978)
------- -------
75,476 65,452
Less treasury stock, at cost 16,760 17,595
------- -------
Total shareholders' equity 58,716 47,857
------- -------
$174,622 $167,944
======= =======
The notes to consolidated financial statements are an integral part of
these statements.
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 2004, 2003 and 2002
(In thousands, except per share data)
2004 2003 2002
(As Restated)(As Restated)(As Restated)
Net sales $186,089 $179,591 $179,385
Cost of goods sold 137,804 144,618 138,788
------- ------- -------
Gross profit 48,285 34,973 40,597
Marketing, engineering and
administrative expenses 37,168 34,790 34,638
Restructuring of operations - 2,042 -
------- ------- -------
Earnings(Loss)from operations 11,117 (1,859) 5,959
20
Other income (expense):
Interest income 252 167 294
Interest expense (1,078) (1,323) (1,700)
Equity in net earnings
of affiliate 240 414 481
Other, net 101 (81) 467
------- ------- -------
(485) (823) (458)
------- ------- -------
Earnings (loss) before income
taxes and minority interest 10,632 (2,682) 5,501
Income taxes 4,964 (300) 3,090
------- ------- -------
Earnings (loss) before
minority interest 5,668 (2,382) 2,411
Minority interest (25) (12) (135)
------- ------- -------
Net earnings (loss) $ 5,642 $ (2,394) $ 2,276
======= ======= =======
Earnings (loss) per share data:
Basic earnings (loss) per share $ 2.01 $ (0.85) $ .81
Diluted earnings (loss) per share 1.98 (0.85) .81
Weighted average shares outstanding data:
Basic shares outstanding 2,814 2,805 2,808
Dilutive stock options 29 - -
------- ------- -------
Diluted shares outstanding 2,843 2,805 2,808
======= ======= =======
The notes to consolidated financial statements are an integral part of
these statements.
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2004, 2003 and 2002
(In thousands) 2004 2003 2002
---- ---- ----
(As (As (As
Restated) Restated) Restated)
Cash flows from operating activities:
Net earnings (loss) $ 5,643 $(2,394) $ 2,276
Adjustments to reconcile net earnings
(loss)to net cash provided by
operating activities:
Depreciation and amortization 5,692 5,673 5,709
Write-off of impaired asset - 773 -
Loss on sale of plant assets 55 105 90
Minority interest 25 12 135
(Gain)loss on restructuring
of operations - 1,278 (53)
Unearned compensation 188 - -
Equity in net earnings of affiliate (240) (414) (481)
Provision for deferred income taxes 1,312 (1,424) 378
Dividends received from affiliate 195 303 400
Changes in operating assets and
liabilities:
Trade accounts receivable, net 622 (2,977) (995)
Inventories, net (3,230) 3,768 3,366
Other assets 1,195 (1,210) 207
Accounts payable (377) 1,489 2,456
Accrued liabilities 427 577 (3,702)
Accrued/prepaid retirement benefits 733 1,151 3,375
------ ------ ------
Net cash provided by
operating activities 12,241 6,710 13,161
------ ------ ------
21
Cash flows from investing activities:
Proceeds from sale of plant assets 1 20 25
Proceeds from sale of affiliate 3,811 - -
Acquisitions of plant assets (4,180) (4,410) (2,063)
Acquisition of affiliate, net of
cash acquired (5,085) - -
------ ------ ------
Net cash used by investing activities (5,453) (4,390) (2,038)
------ ------ ------
Cash flows from financing activities:
Decreases in notes payable, net (1,382) (23) (3,082)
Payments of long-term debt (922) (1,992) (4,857)
Proceeds from exercise of stock options 343 - -
Acquisition of treasury stock - (114) -
Dividends paid (1,991) (1,965) (1,965)
------ ------ ------
Net cash used by financing activities (3,952) (4,094) (9,904)
------ ------ ------
Effect of exchange rate changes on cash 384 282 220
------ ------ ------
Net change in cash and cash equivalents 3,219 (1,492) 1,439
Cash and cash equivalents:
Beginning of year 5,908 7,400 5,961
------ ------ ------
End of year $ 9,127 $ 5,908 $ 7,400
====== ====== ======
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 1,563 $ 1,870 $ 1,882
Income taxes 2,127 1,675 1,908
The notes to consolidated financial statements
are an integral part of these statements.
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
for the years ended June 30, 2004, 2003 and 2002
(In thousands) 2004 2003 2002
---- ---- ----
(As (As (As
Restated) Restated) Restated)
Common stock
Balance, June 30 $ 11,653 $ 11,653 $ 11,653
------- ------- -------
Retained earnings
Balance, July 1 80,777 85,136 84,825
Net earnings (loss) 5,643 (2,394) 2,276
Cash dividends (1,992) (1,965) (1,965)
------- ------- -------
Balance, June 30 84,428 80,777 85,136
------- ------- -------
Accumulated other comprehensive loss
Balance, July 1 (26,978) (23,187) (23,181)
------- ------- -------
Foreign currency translation adjustment
Balance, July 1 4,409 (1,520) (5,420)
Current adjustment 2,480 5,929 3,900
------- ------- -------
Balance, June 30 6,889 4,409 (1,520)
------- ------- -------
Minimum pension liability adjustment, net
Balance, July 1 (31,387) (21,667) (17,761)
Current adjustment, net of related income
taxes (($2,683) in 2004 $6,215 in 2003,
and $2,497 in 2002) 4,197 (9,720) (3,906)
------- ------- -------
Balance, June 30 (27,190) (31,387) (21,667)
------- ------- -------
Accumulated other comprehensive loss
Balance, June 30 (20,301) (26,978) (23,187)
22 ------- ------- -------
Treasury stock, at cost
Balance, July 1 (17,595) (17,481) (17,481)
Shares issued (acquired) 531 (114) -
------- ------- -------
Balance, June 30 (17,064) (17,595) (17,481)
------- ------- -------
Shareholders' equity balance, June 30 $ 60,731 $ 50,271 $ 58,509
======= ======= =======
Comprehensive income (loss)
Net earnings (loss) $ 5,642 $ (2,394) $ 2,276
Other comprehensive income (loss)
Foreign currency translation adjustment 2,480 5,929 3,900
Minimum pension liability adjustment, net 4,197 (9,720) (3,906)
------- ------- -------
Other comprehensive income (loss) 6,677 (3,791) (6)
------- ------- -------
Comprehensive income (loss) $ 12,319 $(6,185) $ 2,270
======= ======= =======
The notes to consolidated financial statements
are an integral part of these statements.
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 wholly and partially owned
domestic and foreign subsidiaries. Certain foreign subsidiaries are included
based on fiscal years ending March 31 or May 31, to facilitate prompt reporting
of consolidated accounts. All significant intercompany transactions have been
eliminated.
Translation of Foreign Currencies -- The financial statements of the
Company's non-U.S. subsidiaries are translated using the current exchange rate
for assets and liabilities and the weighted average exchange rate for the year
for revenues and expenses. 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) are foreign currency transaction losses (gains) of $73,000, $123,000
and $(170,000) in 2004, 2003 and 2002, 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 $604,000 and $502,000 at June 30, 2004 and 2003,
respectively.
23
Fair Value of Financial Instruments -- The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents, accounts receivable,
accounts payable and notes payable approximate fair value because of the
immediate short-term maturity of these financial instruments. The fair value
of long-term debt exceeds its carrying amount by $252,000 and $438,000 at
June 30, 2004 and 2003, respectively, based on the current rates that would be
offered to the Company for debt with the same remaining maturity.
Derivative Financial Instruments -- The Company has written policies and
procedures that place all financial instruments under the direction of the
Company's corporate treasury and restrict all 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 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 2004, 2003
and 2002 was the Euro. 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. At June 30, 2003, the
Company had net outstanding forward exchange contracts to purchase Euros in the
value of $2,701,000 with a weighted average maturity of 50 days. The fair value
of the Company's contracts was approximately zero at June 30, 2003.
Inventories -- Inventories are valued at the lower of cost or market. Cost
has been determined by the last-in, first-out (LIFO) method for the majority of
inventories located in the United States, 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 depreciated. 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.
Impairment of Long-lived Assets -- The Company reviews long-lived assets
for impairment whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully recoverable in
accordance with the Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment of Long-lived Assets". For property,
plant and equipment and other long-lived assets, excluding indefinite lived
intangible assets, the Company performs undiscounted operating cash flow
analyses to determine if an impairment exists. If an impairment is determined
to exist, any related impairment loss is calculated based on fair value.
Investments in Affiliates -- The Company's investments in 20% to 50%-owned
affiliates in which it has significant influence are accounted for using the
equity method. Investments in affiliates where significant control does not
exist are accounted for using the cost method.
Revenue Recognition -- Generally revenue is recognized at the time product
is shipped to the customer, except for certain domestic shipments to overseas
customers where revenue is recognized upon receipt by the customer.
Goodwill and Other Intangibles -- Goodwill is tested for impairment at
least annually and more frequently if an event occurs which indicates the
goodwill may be impaired in accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
Impairment of goodwill is measured according to a two step approach. In the
first step, the fair value of a reporting unit, as defined by the statement,
is compared to the carrying value of the reporting unit, including goodwill.
If the carrying amount exceeds the fair value, the second step of the goodwill
24
impairment test is performed to measure the amount of the impairment loss, if
any. In the second step the implied value of the goodwill is estimated as the
fair value of the reporting unit less the fair value of all other tangible and
identifiable intangible assets of the reporting unit. If the carrying amount
of the goodwill exceeds the implied fair value of the goodwill, an impairment
loss is recognized in an amount equal to that excess, not to exceed the
carrying amount of the goodwill.
Deferred 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.
Stock-Based Compensation -- At June 30, 2004, the Company has two
stock-based compensation plans, which are described more fully in Note O,
"Stock Option Plans." The Company accounts for these plans under the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
No stock-based employee compensation cost related to stock options is reflected
in earnings, as all option grants under those plans had an exercise price equal
to or greater than the market value of the underlying common stock on the date
of grant. The effect on net earnings and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation is disclosed in
Note O.
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.
Shipping and Handling Fees and Costs -- The Company records revenue from
shipping and handling costs in net sales. The cost associated with shipping
and handling of products is reflected in cost of sales.
Reclassification -- Certain amounts in prior year financial statements
have been reclassified to conform to the presentation in the 2004 financial
statements.
B. RESTATEMENT
The Company previously did not properly eliminate its intercompany profit in
inventory. Accordingly, the Company has restated its financial statements
for the years ended June 30, 2004, 2003, and 2002 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 Consolidated Balance Sheets and Consolidated Statements of
Operations:
As Restated As Reported
----------- -----------
2004 2003 2004 2003
---- ---- ---- ----
Consolidated Balance Sheets:
Inventories $48,777 $43,289 $52,079 $47,247
Deferred income taxes 16,955 21,708 15,668 20,164
Retained earnings 84,428 80,777 86,443 83,191
Additionally, retained earnings as of July 1, 2002 has been restated to
$84,825 from the originally reported amount of $87,431.
25
Consolidated Statements of Operations and earnings per share data:
As Restated
-----------
2004 2003 2002
---- ---- ----
Cost of goods sold $137,804 $144,618 $138,788
Income taxes 4,965 (300) 3,090
Net earnings (loss) 5,642 (2,394) 2,276
Basic earnings (loss) per share $2.00 $(.85) $.81
Diluted earnings (loss) per share 1.98 (.85) .81
As Reported
-----------
2004 2003 2002
---- ---- ----
Cost of goods sold $138,459 $144,575 $139,146
Income taxes 4,709 (283) 2,950
Net earnings (loss) 5,243 (2,368) 2,058
Basic earnings (loss) per share $1.86 $(.84) $.73
Diluted earnings (loss)per share 1.84 (.84) .73
C. ACQUISITION
Effective May 31, 2004, the company acquired 100% of the common stock of
Rolla SP Propellers SA of Balerna, Switzerland. Rolla designs and manufactures
custom propellers.
Rolla will have a fiscal year ended May 31, since the acquisition was also
effective May 31. No results of operations of Rolla are included in consolidated
results for the year ended June 30, 2004.
The acquisition cost, including consulting fees, net of cash acquired was
$5,085,000.
The condensed balance sheet of Rolla as of May 31, 2004 is as follows(in
thousands):
Current assets $ 3,323
Net fixed Assets 3,636
Intangibles 3,189
-------
Total $10,148
=======
Current liabilities $ 2,056
Long term debt 1,146
Deferred taxes 655
Stockholders' equity 6,291
- - - -
Total $10,148
=======
Intangible Assets Identified and the Amounts
Assigned are as Follows:
Intangible Assets Subject
to amortization:
Proprietary Technology $ 840
Computer Software 860
Other 408
-------
$ 2,108
=======
26
The Weighted Average Amortization Period is 7 years.
Intangible Assets Not Subject to Amortization:
Goodwill $ 927
Tradename 154
-------
$ 1,081
=======
The goodwill is not expected to be deductible for tax purposes.
D. INVENTORIES (As Restated)
The major classes of inventories at June 30 were as follows (in thousands):
2004 2003
---- ----
Finished parts $35,837 $32,217
Work-in-process 8,187 7,003
Raw materials 4,753 4,069
------ ------
$48,777 $43,289
====== ======
Inventories stated on a LIFO basis represent approximately 45% and 43% of total
inventories at June 30, 2004 and 2003, respectively. The approximate current
cost of the LIFO inventories exceeded the LIFO cost by $19,898,000 and
$20,542,000 at June 30, 2004 and 2003, respectively. Inventory quantities were
reduced in 2003 resulting in a liquidation of LIFO inventory quantities carried
at costs prevailing in prior years which were lower than current costs. The
effect was to decrease the 2003 net loss by $70,000.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 were as follows (in thousands):
2004 2003
---- ----
Land $ 3,414 $ 1,412
Buildings 26,421 24,948
Machinery and equipment 96,749 92,371
------ ------
126,584 118,731
Less accumulated depreciation 93,362 88,521
------ ------
$ 33,222 $ 30,210
====== ======
F. INVESTMENT IN AFFILIATE
The Company's investment in affiliate consisted of a 25% minority interest
in Palmer Johnson Distributors, LLC (PJD) a domestic distributor of Twin Disc
products.
In January 2004, the Company sold its 25% minority interest in PJD to the
majority holder, PJD, Inc. for $3,811,000 cash, which approximated the net book
value of the investment. The Company recognized pre-tax earnings of $240,000,
$414,000 and $481,000 in fiscal years 2004, 2003 and 2002 respectively, from its
investment in PJD. In addition, the Company received cash distributions of
$195,000, $303,000 and $400,000 in fiscal years 2004, 2003 and 2002,
respectively.
Combined condensed financial data for the investment in affiliate accounted
for under the equity method of accounting through the date of sale are
summarized below (in thousands). The statement of operations information
includes the results of operations of the domestic distributor from June 1
through December 31 for 2004 and from June 1 through May 31 for 2003 and 2002.
27
2003
----
Current assets $ 12,792
Other assets 2,125
-------
$ 14,917
=======
Current liabilities $ 2,662
Other liabilities 2,164
Shareholders' equity 10,091
-------
$ 14,917
=======
2004 2003 2002
---- ---- ----
Net sales $15,165 $ 27,008 $23,774
Gross profit 4,710 8,831 8,300
Net earnings 962 1,607 1,925
At June 30, 2003, trade receivables from the 25% owned distributor were
$1,719,000.
Sales to the Company's 25% owned domestic distributor were the same terms
and conditions as sales to independent distributors. Sales to this distributor
were $6,240,000, $10,886,000 and $9,250,000 in fiscal 2004, 2003 and 2002,
respectively.
G. GOODWILL AND OTHER INTANGIBLES
The Company performed impairment tests of its goodwill during 2004 ,2003
and 2002 and determined that no impairment of goodwill existed. Goodwill at
June 30, 2004 and 2003 is net of accumulated amortization of $789,000. There
were no other significant indefinite lived intangible assets identified by the
Company at June 30, 2004 or 2003.
The changes in the carrying amount of goodwill, substantially all of which
is allocated to the manufacturing segment, for the years ended June 30, 2004 and
2003 were as follows (in thousands):
Balance at June 30, 2002 $ 12,311
Translation adjustment 565
-----
Balance at June 30, 2003 12,876
Disposal (1,188)
Translation adjustment 102
Acquisition 927
-----
Balance at June 30, 2004 $12,717
=====
Included in Other assets on the Company's Consolidated Balance Sheet as of the
end of June 30, 2004 and 2003, respectively, are the following acquired
intangible assets (in thousands):
2004 2003
---- ----
Intangible assets with finite lives:
Licensing agreements $ 3,015 $ 5,490
Other 2,865 1,259
------ ------
5,880 6,749
Accumulated amortization 2,475 4,211
Write off of impaired asset - 773
------ ------
Total $ 3,405 $ 1,765
====== ======
In the second quarter of 2003, a charge of $773,000 was recorded based on
SFAS 144 impairment tests. This charge was classified as a component of cost of
28
sales pertaining to the Company's Manufacturing segment.
The weighted average remaining useful life of the intangible assets
included in the table above is approximately 11 years.
Intangible amortization expense for the year ended June 30, 2004 , 2003
and 2002 was $466,000, $601,000 and $726,000, respectively. Estimated
intangible amortization expense for each of the subsequent five fiscal years
is as follows (in thousands):
Fiscal Year
2005 $ 495
2006 382
2007 374
2008 374
2009 374
Thereafter 1,406
-----
$3,405
=====
H. JOINT VENTURE
On April 2, 2001, the Company entered into a Joint Venture Agreement with
Niigata Engineering Co. LTD., Japan to form NICO Transmissions Co., Inc. (NTC).
NTC is an engineering and marketing company supporting the Company's expanding
global marine product line as well as a distribution company for Niigata's
family of transmission products.
In 2002, Niigata filed for creditor protection in Japan under the
local bankruptcy code. Niigata was acquired out of bankruptcy in 2003 and the
acquiring company is participating in the joint venture under the original terms
of the joint agreement. Subsequent to the acquisition of Niigata, the name of
the Joint Venture was changed to Twin Disc Nico Co. LTD. During 2002 the
Company fully reserved for its receivable from Niigata in the amount of $237,000
as a result of this filing and wrote off this amount in 2003.
I. ACCRUED LIABILITIES
Accrued liabilities at June 30 were as follows (in thousands):
2004 2003
---- ----
Salaries and wages $ 4,911 $ 4,756
Retirement benefits 7,559 6,309
Warranty 6,478 6,070
Other 8,314 7,750
------- -------
$ 27,262 $ 24,885
======= =======
J. WARRANTY
The Company warrants all assembled products and parts (except component
products or parts on which written warranties are issued by the respective
manufacturers thereof and are furnished to the original customer, as to which
the Company makes no warranty and assumes no liability) against defective
materials or workmanship. Such warranty generally extends from periods ranging
from 12 months to 24 months.
The Company 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 the Company's 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
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 the Company believes 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.
29
The following is a listing of the activity in the warranty reserve during the
years ended June 30 (in thousands):
2004 2003
----- -----
Reserve balance, July 1 $6,070 $5,294
Current period expense 4,764 4,417
Payments or credits to customers (4,356) (3,766)
Adjustments to pre-existing warranties - 125
----- -----
Reserve balance, June 30 $6,478 $6,070
===== =====
K. DEBT
Notes payable consists of amounts borrowed under unsecured line of credit
agreements. Unused lines of credit total $8,969,000 at June 30, 2004. These
lines of credit may be withdrawn at the option of the banks. The weighted
average interest rate of the lines outstanding was 2.8% and 3.4% at June 30,
2004 and 2003, respectively.
Included in long-term debt is $2,841,000 and $5,698,000 of 7.37% ten-year
unsecured notes at June 30, 2004 and 2003, respectively. The current portion
of these notes was $2,857,000 at June 30, 2004 and 2003. These notes contain
certain covenants, including the maintenance of a current ratio of not less
than 1.5 and the maintenance of an EBITDA to fixed charges ratio greater than
1.75. Consolidated net worth must be at least equal to the sum of $60,310,000
plus 35% of consolidated net earnings for each quarter from July 1, 1996,
however the Company may exclude up to $34,000,000 of net worth adjustments that
result from changes to the assumptions used by the Company in determining its
pension liability or changes in the market value of plan assets. As of June 30,
2004, the Company was in compliance with all debt covenants.
In December 2002, the Company entered into a $20,000,000 revolving loan
agreement which expires on October 31, 2005. This agreement contains certain
covenants, including restrictions on investments, acquisitions and indebtedness.
Financial covenants include a minimum consolidated net worth calculated
consistently with the net worth covenant discussed in the above paragraph,
minimum EBITDA of $11,000,000 at June 30, 2004 and a maximum total funded debt
to EBITDA ratio of 2.5 at June 30, 2004. As of June 30, 2004, the Company was
in compliance with all debt covenants. The outstanding balance of $12,800,000
and $10,865,000 at June 30, 2004 and 2003, respectively, is classified as
long-term debt. Notes under this agreement bear interest on a schedule
determined by the Company's leverage ratio and the LIBOR interest rate (LIBOR
plus 1.25% and 2.75% at June 30, 2004 and 2003, respectively). The rate was
2.375% and 4.07% at June 30, 2004 and 2003, respectively.
As part of the acquisition of Rolla SP Propellers S.A., the Company assumed
$1,077,020 of secured long term debt which is due May 28, 2008. The long term
debt bears interest of 4.25%. The debt is to be used for the construction of a
new manufacturing facility and is secured by that facility. An additional
secured line of credit of $1,777,000 is available for the construction of the
new facility and is secured by the facility. The line of credit bears interest
of 3.0% at June 30, 2004. In addition the Company assumed short and long term
capital lease obligations of $161,000 and $ 69,000, respectively.
The aggregate scheduled maturities of outstanding long term debt
obligations in subsequent years are as follows (in thousands):
Fiscal Year
2005 $ 3,018
2006 15,736
2007 -
2008 1,077
------
$19,831
======
L. LEASE COMMITMENTS
30
Approximate future minimum rental commitments under noncancellable
operating leases are as follows (in thousands):
Fiscal Year
2005 $ 2,700
2006 2,205
2007 1,506
2008 1,257
2009 1,147
Thereafter 1,470
------
$10,285
======
Total rent expense for operating leases approximated $3,587,000,
$3,320,000, and $3,135,000 in 2004, 2003, and 2002 respectively.
M. SHAREHOLDERS' EQUITY
At June 30, 2004 and 2003, treasury stock consisted of 792,748 and 845,798
shares of common stock, respectively. The Company issued 23,050 shares of
treasury stock in 2004 to fulfill its obligations under the stock option plans
and 25,000 shares were issued as stock grants. The difference between the cost
of treasury shares and the option price is recorded in retained earnings. The
fair value of the stock grants are recorded as unearned compensation and
amortized over 2 and 4 year periods. The Company acquired 10,000 shares of
treasury stock in 2003 for $114,000.
Cash dividends per share were $0.70 in 2004, 2003 and 2002.
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.
N. BUSINESS SEGMENTS AND FOREIGN OPERATIONS (As Restated)
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 and
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.
Information about the Company's segments is summarized as follows (in
thousands):
Manufacturing Distribution Total
2004 ------------- ------------ -----
31
Net sales $172,688 $59,176 $231,864
Intra-segment sales 8,930 2,512 11,442
Inter-segment sales 30,081 4,252 34,333
Interest income 395 36 431
Interest expense 1,176 111 1,287
Income taxes 3,990 1,671 5,661
Depreciation and amortization 5,284 355 5,639
Segment earnings 5,755 2,975 8,730
Segment assets 166,049 28,232 194,281
Expenditures for segment assets 8,980 285 9,265
2003
Net sales $153,713 $63,413 $217,126
Intra-segment sales 6,587 2,890 9,477
Inter-segment sales 25,848 2,210 28,058
Interest income 470 25 495
Interest expense 1,480 137 1,617
Income taxes (1,071) 1,073 2
Depreciation and amortization 5,291 292 5,583
Segment (loss) earnings (1,892) 1,943 51
Segment assets 152,093 30,347 182,440
Expenditures for segment assets 3,882 528 4,410
2002
Net sales $155,730 $61,848 $217,578
Intra-segment sales 6,696 1,870 8,566
Inter-segment sales 22,784 6,843 29,627
Interest income 468 43 511
Interest expense 1,783 131 1,914
Income taxes 2,080 1,362 3,442
Depreciation and amortization 5,409 210 5,619
Segment earnings 2,465 2,366 4,831
Segment assets 139,810 27,887 167,697
Expenditures for segment assets 1,851 212 2,063
The following is a reconciliation of reportable segment net sales, earnings
and assets to the Company's consolidated totals (in thousands):
2004 2003 2002
---- ---- ----
Net sales:
Total net sales from reportable segments $231,864 $217,126 $217,578
Elimination of inter-company sales (45,775) (37,535) (38,193)
------- ------- -------
Total consolidated net sales $186,089 $179,591 $179,385
======= ======= =======
Earnings (loss):
Total earnings from
reportable segments $ 8,731 $ 51 $ 4,831
Other corporate expenses (3,088) (2,445) (2,555)
------- ------- -------
Total consolidated net (loss) earnings $ 5,643 $( 2,394) $ 2,276
======= ======= =======
Assets
Total assets for reportable segments $194,281 $182,440
Elimination of inter-company assets (21,100) (19,402)
Corporate assets 1,441 4,906
------- -------
Total consolidated assets $174,622 $167,944
======= =======
Other significant items:
Elimination
Segment and Corporate Consolidated
Totals Adjustments Totals
------- ----------- ------------
2004
Interest income $ 431 $ (179) $ 252
Interest expense 1,287 (209) 1,078
Income taxes 5,661 (696) 4,965
Depreciation and amortization 5,639 53 5,692
Expenditures for segment assets 9,265 - 9,265
32
2003
Interest income $ 495 $ (328) $ 167
Interest expense 1,617 (294) 1,323
Income taxes 2 (302) (300)
Depreciation and amortization 5,583 90 5,673
Expenditures for segment assets 4,410 - 4,410
2002
Interest income $ 511 $ (217) $ 294
Interest expense 1,914 (214) 1,700
Income taxes 3,442 (352) 3,090
Depreciation and amortization 5,619 90 5,709
Expenditures for segment assets 2,063 - 2,063
Geographic information about the Company is summarized as follows
(in thousands):
2004 2003 2002
---- ---- ----
Net sales
United States $107,146 $ 95,813 $108,288
Other countries 78,943 83,778 71,097
------- ------- -------
Total $186,089 $179,591 $179,385
======= ======= =======
Long-lived assets
United States $ 55,774 $ 63,865
Belgium 11,490 11,228
Other countries 12,995 6,646
Elimination of inter-company assets (9,246) (8,476)
------- -------
Total $ 71,013 $ 73,263
======= =======
One customer accounted for approximately 11%, 10% and 11% of consolidated
net sales in 2004, 2003 and 2002, respectively.
O. STOCK OPTION PLANS (As Restated)
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, vest immediately 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
34,200 incentive stock option plan options and 31,300 non-qualified stock option
plan options outstanding at June 30, 2004 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. Stock
options can no longer be issued from the 1988 Plans.
Shares available for future options as of June 30 were as follows:
2004 2003
---- ----
1998 Stock Option Plan for Non-Employee Directors 6,400 6,400
1998 Incentive Compensation Plan 17,850 47,250
33
Stock option transactions under the plans during 2004, 2003 and 2002 were
as follows:
Weighted Weighted Weighted
Average Average Average
2004 Price 2003 Price 2002 Price
---- -------- ---- ------- ---- --------
Non-qualified stock options:
Options outstanding
at beginning of year 133,150 $18.54 102,350 $20.46 88,350 $21.31
Granted - - 48,800 14.37 14,500 15.05
Canceled (15,450) 19.89 (18,000) 18.14 (500) 14.00
Exercised (13,350) 14.18 - - - -
------- ------ ------ ------ ------ -----
Options outstanding
at June 30 104,350 $18.90 133,150 $18.54 102,350 $20.46
======= ====== ======= ====== ======= ======
Options price range
($14.45 - $20.00)
Number of shares 72,650
Weighted average price $ 16.28
Weighted average remaining life 8.40 years
Options price range
($21.875 - $28.75)
Number of shares 31,700
Weighted average price $ 24.90
Weighted average remaining life 4.83 years
Weighted Weighted Weighted
Average Average Average
2004 Price 2003 Price 2002 Price
---- -------- ---- ------- ---- -------
Incentive stock options:
Options outstanding
at beginning of year 106,700 $20.55 146,000 $20.75 125,650 $22.29
Granted - - - - 30,200 15.25
Canceled (13,150) 23.16 (39,300) 21.32 (9,850) 23.47
Exercised ( 9,700) 15.86 - - - -
------- ------ ------- ------ ------- ------
Options outstanding
at June 30 83,850 $20.68 106,700 $20.55 146,000 $20.75
======= ====== ======= ====== ======= ======
Options price range
($15.05 - $20.00)
Number of shares 51,450
Weighted average price $ 17.77
Weighted average remaining life 7.40 years
Options price range
($21.875 - $28.75)
Number of shares 32,400
Weighted average price $ 25.30
Weighted average remaining life 4.99 years
The Company accounts for its stock option plans under the guidelines of
Accounting Principles Board Opinion No. 25. 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):
2004 2003 2002
---- ---- ----
Net earnings (loss)
As reported $ 5,642 $(2,394) $ 2,276
Pro forma 5,642 (2,468) 2,172
Basic earnings (loss) per share
As reported $ 2.00 $( 0.85) $ 0.81
34
Pro forma 2.00 ( 0.88) 0.77
Diluted earnings (loss) per share
As reported $ 1.98 $( 0.85) $ 0.81
Pro forma 1.98 ( 0.88) 0.77
There were no options granted during 2004. 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: 22%
volatility, 4.8% annual dividend yield, risk free interest rates of 3.58% and
2.71% in 2003 and 23% volatility, 4.5% annual dividend yield, risk free
interest rate of 4.53% in 2002, 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 2003 and 2002 with exercise prices equal to
the grant date fair market value, the exercise prices and weighted average fair
values of the options were $14.34 and $1.83 in 2003 and $15.05 and $2.37 in
2002, 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 none in 2003 and $16.56 and $1.83 in 2002,
respectively.
In fiscal 2004, the Company issued restricted stock grants for 25,000
shares, 12,500 of these shares vest in two years from the date of grant and
12,500 vest in four years. The fair 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 two and four year periods. Amortization expense
as of June 30, 2004 approximated $188,500.
P. 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 $2,840,000,
$2,220,000, and $1,887,000 in 2004, 2003 and 2002 respectively. Total
engineering and development costs were $7,600,000, $7,190,000, and $6,718,000
in 2004, 2003 and 2002 respectively.
Q. Pension and Other Postretirement Benefit Plans
The Company has non-contributory, qualified defined benefit pension plans
covering substantially all domestic employees hired prior to October 1, 2003
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 deducted for federal
income tax purposes. Domestic plan assets consist principally of listed equity
and fixed income securities.
On June 20, 2003 the Board of Directors amended the defined benefit pension
plans covering domestic salaried and hourly employees to exclude all employees
hired after October 1, 2003 from the plans. In addition, a portion of the
medical supplement for post-1992 retirees that is payable prior to Medicare
eligibility has been removed from the plan. The $19.24 per month benefit times
years of service has been reduced to $4.42 per month times years of service.
This is effective October 1, 2003 for all participants. The $14.82 benefit
removed is now provided through the retiree health plan discussed below. The
remaining medical supplement will be calculated using service frozen as of
October 1, 2003.
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. On June 20,
2003 the Board of Directors amended the coverage under the plans as follows:
* Pre-1993 retirees are required to pay any cost increases after 2003 for
retiree medical coverage.
35
* Dental and vision coverage for Pre-1993 retirees was eliminated.
* Life insurance coverage for individuals who retire on or after
October 1, 2003 was eliminated.
* Access to retiree medical coverage after age 65 for individuals who
retire on or after October 1, 2003 and their spouses was eliminated.
* Retiree medical coverage was eliminated for all employees hired on or
after October 1, 2003.
* A Healthcare Reimbursement Account ("HRA") program will be established
for individuals who retire after January 1, 1993 but before age 65.
OBLIGATIONS AND FUNDED STATUS
The following table sets forth the Company's defined benefit pension plans'
and other post-retirement 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):
Other
Pension Post-Retirement
Benefits Benefits
---------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation, beginning of year $115,960 $115,147 $ 32,369 $ 32,999
Service cost 1,260 1,344 45 17
Interest cost 7,475 8,277 2,057 2,362
Amendments - (6,376) - (6,106)
Actuarial loss 9,603 7,034 (633) 6,678
Benefits paid (10,147) (9,466) (4,043) (3,581)
------- ------- ------ ------
Benefit obligation, end of year $124,151 $115,960 $ 29,795 $ 32,369
======= ======= ====== ======
Change in plan assets:
Fair value of assets, beginning of year $ 75,278 $ 92,405 $ - $ -
Actual return on plan assets 19,325 (9,403) - -
Employer contribution 4,582 1,742 4,043 3,581
Benefits paid (10,147) (9,466) (4,043) (3,581)
------- ------- ------ ------
Fair value of assets, end of year $ 89,038 $ 75,278 $ - $ -
======= ======= ====== ======
Funded status $(35,113)$(40,682)$(29,795)$(32,369)
Unrecognized net transition obligation 358 391 - -
Unrecognized actuarial loss 50,252 58,128 14,979 17,159
Unrecognized prior service cost (5,467) (5,842) (5,427) (6,106)
------ ------ ------ -------
Net amount recognized $ 10,030 $ 11,995 $(20,243)$(21,316)
====== ====== ====== =======
Amounts recognized in the balance sheet
consist of:
Accrued benefit liability (34,544) (39,483) (20,243) (21,316)
Intangible asset - 24 - -
Deferred tax asset 17,384 20,067 - -
Minimum pension liability adjustment 27,190 31,387 - -
------- ------ ------- -------
Net amount recognized $ 10,030 $ 11,995 $(20,243)$(21,316)
======= ====== ======= =======
The accumulated benefit obligation for all defined benefit pension plans
was $124,151,000 and $115,960,000 at June 30, 2004 and 2003, respectively.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets:
June 30
2004 2003
---- ----
Projected and accumulated benefit obligation $124,151 $115,960
36
Fair value of plan assets 89,038 75,278
Components of Net Periodic Benefit Cost
Pension Benefits
2004 2003 2002
---- ---- ----
Service cost $ 1,260 $ 1,344 $ 1,361
Interest cost 7,475 8,277 8,203
Expected return on plan assets (6,361) (7,883) (8,476)
Amortization of prior service cost 124 624 625
Amortization of transition obligation 60 56 49
Unrecognized net loss 3,990 2,492 1,802
------ ------ ------
Net periodic benefit cost $ 6,548 $ 4,910 $ 3,564
====== ====== ======
Postretirement Benefits
2004 2003 2002
---- ---- ----
Service cost $ 45 $ 17 $ 17
Interest cost 2,057 2,362 2,281
Recognized prior service cost (678) - -
Recognized net actuarial loss 1,547 798 580
------ ------ ------
Net periodic benefit cost $ 2,971 $ 3,177 $ 2,878
====== ====== ======
Additional Information
Pension Benefits Other Benefits
2004 2003 2004 2003
---- ---- ---- ----
Increase (decrease) in minimum
liability included in other
comprehensive income $ 4,197 $(9,720) N/A N/A
Assumptions
2004 2003 2004 2003
---- ---- ---- ----
Weighted average assumptions used
to determine benefit obligations
at June 30:
Discount rate 6.00% 6.75% 6.00% 6.75%
Expected return on plan assets 8.50% 9.00%
2004 2003 2004 2003
---- ---- ---- ----
Weighted average assumptions used
to determine net periodic benefit
cost for years ended June 30:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.00% 5.00%
The assumed weighted average health care cost trend rate was 8% in 2004.
A 1% increase in the assumed health care cost trend would increase the
accumulated postretirement benefit obligation by approximately $401,000 and
the service and interest cost by approximately $24,000. A 1% decrease in the
assumed health care cost trend would decrease the accumulated postretirement
benefit obligation by approximately $376,000 and the service and interest cost
by approximately $22,000.
The Medicare Prescription Drug Improvement and Modernization Act of 2003
provides for a prescription drug benefit beginning in 2006 under Medicare Part
D as well as a subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D.
Based on the benefits provided and expected future prescription costs it has
been estimated that the Company's plans will be actuarially equivalent through
37
fiscal 2008. The effect of this was to reduce the Company's benefit obligation
by approximately $1,600,000 and reduced related expense in fiscal 2005 by
approximately $225,000.
PLAN ASSETS
The Company's pension plan weighted-average asset allocations at June 30,
2004 and 2003, by asset category are as follows:
Target June 30
Allocation 2004 2003
--------- ---- ----
Asset Category
Equity securities 61% 66% 58%
Debt securities 35% 30% 42%
Real Estate 4% 4% -
---- ---- ----
100% 100% 100%
====== ====== ======
Due to market conditions and other factors, actual asset allocation may
vary from the target allocation outlined above. The pension plans held 62,402
shares of Company stock with a fair market value of $1,522,609 ( 1.7% percent
of total plan assets) and $882,988 (1.2% percent of total plan assets) at
June 30, 2004 and 2003, respectively.
Twin Disc employs a total return on investment approach whereby a mix of
equities and fixed income investments are used to maximize long-term return of
plan assets while avoiding excessive risk. Pension plan guidelines have been
established based upon an evaluation of market conditions, tolerance for risk,
and cash requirements for benefit payments. Investment risk is measured and
monitored on an ongoing basis through quarterly investment portfolio reviews,
and annual liability measurements.
The plans have a long-term return assumption of 8.50%. This rate was
derived based upon historical experience and forward-looking return expectations
for major asset class categories.
CASH FLOWS
Contributions
The Company expects to contribute $7,476,000 to its pension plans in
fiscal 2005.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service,
as appropriate, are expected to be paid:
Pension Other
Benefits Benefits
-------- --------
2005 $9,269 $3,799
2006 8,931 4,603
2007 9,129 5,273
2008 9,259 5,673
2009 9,350 6,131
Years 2010-2014 47,273 33,776
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 $1,266,000, $1,568,000 and $1,780,000 in 2004, 2003,
and 2002 respectively.
R. INCOME TAXES (As Restated)
United States and foreign (loss) earnings before income taxes and after
minority interest were as follows (in thousands):
38
2004 2003 2002
---- ---- ----
United States $ 3,898 $ (6,851) $ 1,061
Foreign 6,734 4,169 4,440
------ ------ ------
$ 10,632 $ (2,682) $ 5,501
====== ====== ======
The provision (credit) for income taxes is comprised of the following
(in thousands):
2004 2003 2002
---- ---- ----
Currently payable:
Federal $ 545 $ ( 176) $ 168
State 50 48 70
Foreign 2,802 1,269 2,334
------ ------ ------
3,397 1,141 2,572
------ ------ ------
Deferred:
Federal 1,082 (1,298) 581
State 279 (587) (83)
Foreign 207 444 20
------ ------ ------
1,568 (1,441) 518
------ ------ ------
$ 4,965 $( 300) $ 3,090
====== ====== ======
The components of the net deferred tax asset as of June 30 are summarized
in the table below (in thousands).
2004 2003
---- ----
Deferred tax assets:
Retirement plans and employee benefits $20,280 $23,571
Alternative minimum tax credit
carryforwards 986 509
Foreign tax credit carryforwards 1,403 641
State net operating loss and other
state credit carryforwards 406 553
Federal net operating loss carryforward - 1,206
Other 4,877 5,154
------ ------
27,952 31,634
------ ------
Deferred tax liabilities:
Property, plant and equipment 3,996 4,222
Intangibles 1,382 594
------ ------
5,378 4,816
------ ------
Valuation allowance (1,403) (641)
------ ------
Total net deferred tax assets $21,171 $26,177
====== ======
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize deferred
tax assets except for certain foreign tax credit carryforwards. Of the
$1,403,000 in foreign tax credit carryforwards at June 30, 2004, $257,000 will
expire in 2005, $223,000 will expire in 2006, $161,000 will expire in 2007 and
$762,000 will expire in 2009. The alternative minimum tax credit carryforwards
will be carried forward indefinitely. Of the $347,000 of state net operating
loss carryforwards, net of Federal tax, at June 30, 2004, $326,000 will expire
in 2014, $17,000 will expire in 2015 and $4,000 will expire in 2017. Of the
$58,000 net of federal tax of state credit carryforwards, any credits not used
by 2006 will be deducted in 2007 and 2008.
Following is a reconciliation of the applicable U.S. federal income taxes
to the actual income taxes reflected in the statements of operations (in
thousands):
39
2004 2003 2002
---- ---- ----
U.S. federal income tax at 34% $ 3,606 $ ( 916) $ 1,870
Increases (reductions)
in tax resulting from:
Foreign tax items 1,082 291 144
State taxes 347 ( 368) ( 279)
Valuation allowance - - 920
Disposition of investment in subsidiary - - 522
Statutory rate change - 97 -
Other, net ( 70) 596 ( 87)
----- ----- -----
$ 4,965 $ ( 300) $ 3,090
===== ===== =====
The Company has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely
reinvested in foreign operations. The undistributed earnings amount to
approximately $20.8 million at June 30, 2004. If these earnings were
remitted to the U.S., they would be subject to U.S. income tax. However
this tax would be substantially less than the U.S. statutory income tax
because of available foreign tax credits.
S. 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.
T. RESTRUCTURING OF OPERATIONS
During the second quarter of fiscal 2003, the Company recorded a pre-tax
restructuring charge of $2.0 million in connection with the reduction of its
workforce. These actions were taken in an effort to streamline the Company's
cost structure and align its corporate workforce with market conditions. The
charge consists of employee termination and severance benefits for a total of
58 employees; 48 production employees and 10 salaried employees. During 2004
and 2003, the Company made cash payments of $358,000 and $600,000, respectively.
Accrued restructuring costs were $942,000 and $1,300,000 at June 30, 2004 and
2003,respectively.
TWIN DISC, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended June 30, 2004, 2003 and 2002
(In thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and end of
Description of Period Expenses Deductions(F1) Period
----------- --------- -------- ---------- ---------
2004:
Allowance for losses on
accounts receivable $ 502 $ 208 $ 106 $ 604
Reserve for inventory
obsolescence 5,413 1,873 2,614 4,672
2003:
Allowance for losses on
accounts receivable $ 756 $ 135 $ 389 $ 502
Reserve for inventory
obsolescence 4,593 1,822 1,002 5,413
2002:
Allowance for losses on
accounts receivable $ 699 $ 336 $ 279 $ 756
Reserve for inventory
40
obsolescence 3,346 2,178 931 4,593
(FN)
(F1) Accounts receivable written-off and inventory disposed of during the
year and other adjustments (primarily foreign currency translation adjustments).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ FRED H. TIMM
Fred H. Timm, Vice President -
Administration and Secretary
(Chief Accounting Officer)
August 12, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
( By /s/ MICHAEL E. BATTEN
( Michael E. Batten, Chairman,
( Chief Executive Officer and Director
(
(
(
August 12, 2005 ( By /s/ MICHAEL H. JOYCE
( Michael H. Joyce, President,
( Chief Operating Officer and Director
(
(
(
( By /s/ CHRISTOPHER J. EPERJESY
( Christopher J. Eperjesy, Vice
( President-Finance, Treasurer and
( Chief Financial Officer
( Harold M. Stratton II, Director
August 12, 2005 ( David L. Swift, Director
( John A. Mellowes, Director
( George E. Wardeberg, Director
( David R. Zimmer, Director
( David B. Rayburn, Director
( John H. Batten, Director
(
( By /s/ CHRISTOPHER J. EPERJESY
( Christopher J. Eperjesy, Attorney in
Fact
EXHIBIT INDEX
EXHIBIT INDEX
TWIN DISC, INCORPORATED
10-K for Year Ended June 30, 2004
Filed
Exhibit Description Herewith
3a) Articles of Incorporation, as restated October 21, 1988
(Incorporated by reference to Exhibit 3(a) of the
Company's Form 10-K for the year ended June 30, 2004).
b) Corporate Bylaws, as amended through July 30, 2004
(Incorporated by reference to Exhibit 3(b) of the Company's
Form 10-K for the year ended June 30, 2004).
41
4a) Form of Rights Agreement dated as of April 17, 1998 by and
between the Company and the Firstar Trust Company, as Rights
Agent, with Form of Rights Certificate (Incorporated by
reference to Exhibits 1 and 2 of the Company's Form 8-A
dated May 4, 1998).
b) Announcement of Shareholder Rights Plan per news release
dated April 17, 1998 (Incorporated by reference to Exhibit
6(a), of the Company's Form 10-Q dated May 4, 1998).
Material Contracts
10a) The 1988 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10(a) of the Company's Form 10-K for
the year ended June 30, 2004).
b) The 1988 Non-Qualified Stock Option Plan for Officers, Key
Employees and Directors (Incorporated by reference to
Exhibit 10(b) of the Company's Form 10-K for the year ended
June 30, 2004).
c) Amendment to 1988 Incentive Stock Option Plan of Twin Disc,
Incorporated (Incorporated by reference to Exhibit 10(c)of
the Company's Form 10-K for the year ended June 30, 2004).
d) Amendment to 1988 Non-Qualified Incentive Stock Option
Plan for Officers, Key Employees and Directors of Twin
Disc, Incorporated (Incorporated by reference to Exhibit
10(d) of the Company's Form 10-K for the year ended
June 30, 2004).
e) Form of Severance Agreement for Senior Officers and form
of Severance Agreement for Senior Officers (Incorporated
by reference to Exhibit 10(e) of the Company's Form 10-K
for the year ended June 30, 2004).
f) Supplemental Retirement Plan (Incorporated by reference
to Exhibit 10(f) of the Company's Form 10-K for the year
ended June 30, 1998).
g) Director Tenure and Retirement Policy (Incorporated by
reference to Exhibit 10(g) of the Company's Form 10-K for
the year ended June 30, 2004).
10h) Form of Twin Disc, Incorporated Corporate Short Term
Incentive Plan (Incorporated by reference to Exhibit 10(h)
of the Company's Form 10-K for the year ended June 30,
2004). i) The 1998 Incentive Compensation Plan
(Incorporated by reference to Exhibit A of the Proxy
Statement for the Annual Meeting of Shareholders held on
October 16, 1998).
j) The 1998 Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit B of the Proxy
Statement for the Annual Meeting of Shareholders held
on October 16, 1998).
21 Subsidiaries of the Registrant X
23 Consent of Independent Registered Public Accounting Firm X
24 Power of Attorney X
31a Certification X
31b Certification X
32a Certification pursuant to 18 U.S.C. Section 1350 X
32b Certification pursuant to 18 U.S.C. Section 1350 X