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| TDI > SEC Filings for TDI > Form 10-Q on 12-Feb-2004 | All Recent SEC Filings |
12-Feb-2004
Quarterly Report
In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated financial statements and related notes.
Results of Operations -
Comparison of the Second Quarter of FY 2004 with the Second Quarter of FY -
Net sales for the second quarter were 1.0% below year-ago levels. In fiscal 2004, the Company's 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 an engineering and product development fee equal to the gross margin formerly earned on such sales. The effect of this change was to reduce sales by $3.2 million for the quarter ended December 31, 2003, with no effect on net earnings. Compared to the second quarter of fiscal 2003, the Euro and Asian currencies strengthened against the US dollar. The impact of this strengthening on foreign operations was to increase revenues by approximately $3.3 million versus the prior year, before eliminations.
Sales at our manufacturing operations were up 12% versus the same period last year. Of this increase, our domestic manufacturing operations in the U.S. accounted for 4.0 percentage points of the total improvement. When compared to the prior fiscal year's second quarter, our domestic manufacturing operations saw double-digit growth in the industrial, marine and propulsion product segments, offset by a decline in the transmission product group. Of the remaining nearly 8.0 percentage point improvement, the impact of a stronger Euro at our Belgian and Italian manufacturing operations accounted for 5.6 percentage points, with the majority of the remaining increase coming from sales growth at our Italian manufacturing operation.
Our distribution segment experienced a 9% decline versus the second quarter of fiscal 2003. The change in the TDN agreement discussed above accounted for a decrease of 20%. Adjusted for this change, sales are 11% above the same period last year. A little more than half of this improvement can be attributed to the effect of a weaker dollar among most Asian currencies. The elimination for net inter/intra segment sales increased $3.4 million, accounting for the remainder of the net decrease in sales versus the same period last year.
Gross margin as a percentage of sales improved significantly, increasing from 15.6% of sales in fiscal 2003's second quarter to 25.3% of sales in fiscal 2004. This increase was driven primarily by improved product mix, the impact of cost reduction efforts as well as the impact of the restructuring program undertaken in fiscal 2003's second quarter. Supplier quality problems encountered in fiscal 2003's first and second quarters caused last year's gross margin as a percentage of sales to be unusually low. Additionally, the Company took a pre-tax FAS 144 impairment charge of $0.8 million in the prior year's fiscal second quarter to write-down the value of a license agreement to manufacture and distribute certain products. This charge reduced gross margin as a percentage of sales by 180 basis points. The change in the TDN joint venture agreement, mentioned above, accounted for approximately 120 basis points of the current fiscal year's second quarter improvement, as those sales were at historically low margin rates.
Marketing, engineering, and administrative (ME&A) expenses were 3.4% higher compared to last year's second fiscal quarter. Favorable improvements at our domestic operations, primarily as a result of recent cost reduction efforts, of over $0.2 million were offset by the unfavorable year-over-year exchange rate impact at our foreign operations of $0.5 million.
In the prior fiscal year's second quarter, the Company implemented severance and voluntary separation programs to align its workforce with market conditions. These actions resulted in a pre-tax restructuring charge of $2.0 million and 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.
Interest expense for the quarter was 13% below the same quarter last year due primarily to lower borrowings as well as a mix of borrowings at a lower weighted interest rate.
The consolidated income tax rate was higher than a year ago primarily due to increased overseas earnings, which were taxed at a higher rate.
Comparison of the First Six Months of FY 2004 with the First Six Months of FY - Net sales for the first six months of fiscal 2004 were $80.3 million, up 1.3% from the $79.3 million reported in the same six-month period of last year. Sales were positively impacted by net favorable currency exchange rates, primarily stronger Euro and Australian Dollar in relation to the U.S. Dollar, of approximately $5.2 million, when compared to the first six months of last fiscal year. The change in the TDN joint venture agreement, mentioned above, reduced sales by $6.3 million for the six months ended December 31, 2003, with no effect on net earnings.
Sales at our manufacturing operations were up 11% versus the same six-month period last year. Of this increase, our domestic manufacturing operations in the U.S. accounted for nearly 4.0 percentage points of the total improvement. When compared to the first six months of fiscal 2003, all product groups, except transmission, saw significant year-over-year growth. At our Belgian and Italian operations, a stronger Euro, in relation to the U.S. Dollar, resulted in a net favorable exchange rate impact of $3.1 million for the first six months of fiscal 2004, or 4.6 percentage points of the total manufacturing operations improvement.
Our distribution segment experienced an 8% decline versus the first six months of fiscal 2003. The change in the TDN agreement discussed above accounted for a decrease of 18%. Adjusted for this change, sales are 10% above the same period last year. A little more than half of this improvement can be attributed to the effect of a weaker dollar against the Australian, Singapore and Canadian Dollars, and the Japanese Yen.
The elimination for net inter/intra segment sales increased $3.7 million, accounting for the remainder of the net decrease in sales versus the same period last year.
Gross margin as a percentage of sales of 24.4% was up 8.5 percentage points from the first six months of fiscal 2003. This improvement was driven by a number of factors including improved product mix, the effect of restructuring and cost reduction actions, and the absence of manufacturing inefficiencies caused by supplier quality problems experienced in the first half of the prior fiscal year. Additionally, as mentioned above, the FAS 144 impairment charge taken in the second quarter of the prior fiscal year and the change in the TDN agreement contributed 210 basis points to the year-over-year improvement for the six months ended December 31, 2003.
Marketing, engineering, and administrative (ME&A) expenses of $17.6 million, or 22.0% of sales, increased 0.2 percentage points, or $0.3 million, when compared to the first six months of last year. The impact of currency exchange rates, primarily the stronger Euro and Australian Dollar, contributed $0.8 million to the year-over-year increase.
In the prior fiscal year's second quarter, the Company implemented severance and voluntary separation programs to align its workforce with market conditions. These actions resulted in a pre-tax restructuring charge of $2.0 million and 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.
Interest expense was 11% lower than the same six-month period one year ago. Average outstanding debt levels declined 9.6%, or approximately $2.2 million, from the same six-month period one year ago. The decline in interest expense was greater than the corresponding decrease in debt levels primarily due to the fact that the average weighted interest rate decreased year-over-year.
The consolidated income tax rate was higher than a year ago primarily due to increased overseas earnings, which were taxed at a higher rate.
Financial Condition, Liquidity and Capital Resources
Comparison between December 31, 2003 and June 30, 2003
As of December 31, 2003, the Company had net working capital of $56.4 million, which represents an 11% increase from a net working capital of $50.8 million as of June 30, 2003.
Cash and cash equivalents increased $4.1 million, or approximately 69.5%, to $10.0 million as of December 31, 2003. This increase came primarily at our two European manufacturing locations in Belgium and Italy and approximately equals the decrease in accounts receivable (including intercompany receivables) at these locations.
Trade receivables of $26.7 million were down $8.7 million versus last fiscal year-end. Over $3 million of this change can be attributed to the amendment in the TDN joint venture agreement discussed above.
Net inventory increased by $7.6 million versus June 30, 2003. Of this increase, $1.8 million was due to the translation impact of a stronger Euro and Australian Dollar, in relation to the U.S. Dollar, at our foreign operations. The majority of the remaining increase came at our domestic manufacturing location. This increase is primarily due to higher inventory levels in our transmission business as we prepare to deliver systems for a military contract in the second half of this fiscal year and into the next fiscal year.
Net property, plant and equipment declined $1.1 million versus June 30, 2003. This is primarily due to the fact that net acquisition of fixed assets of $0.9 million in the first six months of this fiscal year trailed depreciation and amortization expense of $2.8 million. This was offset by the net translation impact of a stronger Euro and Australian Dollar.
Accounts payable of $14.8 million were $1.3 million lower than June 2003. Our joint venture in Japan, TDN, experienced a $3 million decrease in accounts payable, attributable primarily to the change in the joint venture agreement mentioned previously. Adjusted for the TDN change, accounts payable increased approximately $1.7 million. The increase came primarily at our domestic U.S manufacturing operation and is consistent with the increase in inventories noted above. The net foreign currency translation impact was to increase accounts payable by $0.3 million.
Total borrowings, notes payable and long-term debt, as of December 31, 2003 increased slightly by $0.4 million, or less than 2%, to $22.3 million versus June 30, 2003.
Total shareholders' equity increased by $3.0 million to a total of $53.3 million. Retained earnings decreased by $0.3 million. The net decrease in retained earnings included $0.7 million in net earnings reported year-to-date, offset by $1.0 million in dividend payments. Net favorable foreign currency translation of $3.0 million was reported as the U.S. Dollar weakened against the Euro and the Australian Dollar during the first six months.
The Company's balance sheet remains very strong, there are no off-balance-sheet arrangements, and we continue to have sufficient liquidity for near-term needs. In January 2004, subsequent to the end of the second fiscal quarter, the company announced the sale of its 25% minority interest in Palmer Johnson Distributors, LLC for $3.9 million in cash, which approximated the net book value of the investment. Management believes that available cash, our revolver facility, cash generated from operations, existing lines of credit and access to debt markets will be adequate to fund our capital requirements for the foreseeable future.
The Company has obligations under non-cancelable operating lease contracts and a senior note agreement for certain future payments. A summary of those commitments follows (in thousands):
Contractual Obligations Total Less than 1-3 4-5 After 5
1 year Years Years Years
Short-term debt $ 1,678 $ 1,678
Revolver borrowing $12,000 $12,000
Long-term debt $ 8,577 $ 2,857 $ 5,720
Operating leases $11,061 $ 2,868 $ 3,762 $2,213 $2,218
Total obligations $33,316 $ 7,403 $21,482 $2,213 $2,218
New Accounting Releases
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 adopted the provisions of this Statement and it had no impact on its financial statements.
Critical Accounting Policies
The preparation of this Quarterly Report requires management's judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Twin Disc's significant accounting policies are described in Note A in the Notes to Consolidated Financial Statements in the Annual Report for June 30, 2003. There have been no significant changes to those accounting policies subsequent to June 30, 2003.
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