T w i n D i s c , i n c o r p o r a TeD
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1328 Racine Street Racine, Wisconsin 53403 United States of America www.twindisc.com
LOCATION: Petro Jilin Oil Field, China — — EQUIPMENT: Twin Disc TA91-8501 Power-Shift Transmission System
T w i n D i s c , i n c o r p o r a TeD
an n u a l re p o r T 2 0 1 2
Twin Disc, Incorporated is an international manufacturer and
distributor of heavy-duty off-highway power transmission equipment.
LOCATION: Odessa, Texas, USA — — EQUIPMENT: Twin Disc SP211 Power Take-off
Cover: SJ Petroleum Machinery Company has this fracturing rig,
equipped with a Cummins 3000-hp (2237-kW) engine driving
the high-pressure pump through a Twin Disc 8500 transmission
system, operating in the China Petro Jilin Oil Field.
Above: This Mustang 600HD Mobile Land Rig owned by Rig
Works, Inc. uses a variety of Twin Disc PO air clutches to control
the double-drum drawworks as the unit completes, maintains
and drills oil and gas wells in the Odessa/Midland oil fields of
western Texas.
2009
2008
2007
2006
2005
2004
2003
$295,618
275,833
19,785
(1,740 )
18,045
6,257
(286 )
11,502
13,266
53,367
92,331
14,957
173,921
50,288
65,799
290,008
70,252
46,348
65,583
106,988
837
290,008
$331,694
292,802
38,892
(3,644 )
35,248
10,904
(92 )
24,252
14,447
67,611
97,691
15,946
195,695
41,078
67,855
304,628
89,588
48,227
36,488
129,646
679
304,628
$317,200
280,210
36,990
(2,661 )
34,329
12,273
(204 )
21,852
19,508
63,277
76,253
14,202
173,240
37,134
56,810
267,184
79,918
42,152
29,032
115,437
645
267,184
$243,287
218,503
24,784
(1,732 )
23,052
8,470
(129 )
14,453
16,427
55,963
65,081
13,660
151,131
38,083
46,958
236,172
79,621
38,369
28,377
89,233
572
236,172
$218,472
207,794
10,678
(1,186 )
9,492
2,485
(97 )
6,910
11,614
37,751
48,481
11,679
109,525
38,181
40,331
188,037
65,909
14,958
39,680
66,899
591
188,037
$186,089
174,972
11,117
(485 )
10,632
4,964
(25 )
5,643
9,127
37,091
48,777
7,270
102,265
39,135
33,222
174,622
56,604
16,813
41,980
58,716
509
174,622
1.04
1.03
0.28
9.72
10.7 %
4.0 %
3.9 %
2.15
2.13
0.265
11.55
18.6 %
8.0 %
7.3 %
1.88
1.84
0.205
9.93
18.9 %
8.2 %
6.9 %
1.26
1.22
0.1825
7.74
16.2 %
6.1 %
5.9 %
0.60
0.59
0.175
5.85
10.3 %
3.7 %
3.2 %
0.50
0.50
0.175
5.22
9.6 %
3.2 %
3.0 %
11,096,750
11,194,170
761
959
8,895
8,766
103,669
11,278,885
11,411,927
756
1,019
14,999
6,921
106,107
11,622,620
11,880,432
778
1,011
15,681
6,331
93,322
11,533,276
11,881,208
804
962
11,442,168
11,631,592
888
901
11,256,788
11,373,496
917
860
8,385
5,529
71,510
12,009
5,108
43,616
4,180
5,226
45,661
$179,591
181,450
(1,859 )
(823 )
(2,682 )
(300 )
(12 )
(2,394 )
5,908
35,367
43,289
8,573
93,137
44,597
30,210
167,944
46,286
16,584
56,732
47,857
485
167,944
(0.21 )
(0.21 )
0.175
14.97
(5.0 )%
(1.4 )%
(1.3 )%
11,219,660
11,219,660
966
832
4,410
5,072
46,851
78
Company engineers work hand-in-hand with customers and engine
manufacturers to design products with characteristics unique to their specific
applications. Twin Disc supplies the commercial, pleasure craft and military
segments of the marine market with transmissions, surface and waterjet
drives, electronic controls, propellers and boat management systems. Its off-
highway transmission products are used in agricultural, all-terrain specialty
vehicle and military applications.
Twin Disc also sells industrial products such as power take-offs, mechanical,
hydraulic and modulating clutches and control systems to the agricultural,
environmental and energy and natural resources markets. The Corporation,
which is a multinational organization headquartered in Racine, Wisconsin,
currently has a diverse shareholder base with approximately one-third of the
outstanding shares held by management, active and retired employees and
other long-term investors.
financial highlights
2012
2011
2010
Net Sales
Net Earnings
Basic Earnings Per Share
Diluted Earnings Per Share
Dividends Per Share
$355,870
$310,393
$227,534
26,112
18,830
2.29
2.26
0.34
1.66
1.64
0.30
597
0.05
0.05
0.28
Average Shares Outstanding For The Year
11,409,467
11,319,081
11,063,417
Diluted Shares Outstanding For The Year
11,555,561
11,462,562
11,159,282
In thousands of dollars except per share and shares outstanding statistics.
LOCATION: India — — EQUIPMENT: MGX-5145SC Marine Transmissions, Arneson Surface Drives™ and Rolla™ Propellers
Indian Customs spec’d this 59.4-foot (18-meter) patrol boat
built by Destination Marine for speed and agility with twin
Caterpillar 873-hp (651-kW) engines driving through Twin
Disc MGX-5145SC QuickShift® transmissions to ASD14
Arneson Surface Drives™ with Rolla™ Propellers.
2
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salE s anD EaRnings by quaR tER
2012
Net Sales
Gross Profit
Net Earnings
Basic Earnings Per Share
Diluted Earnings Per Share
Dividends Per Share
1st QTR
$81,330
30,768
9,581
0.84
0.83
0.08
2nd QTR
$82,941
29,562
5,857
0.51
0.51
0.08
3rd QTR
$95,490
33,056
9,393
0.82
0.81
0.09
4th QTR
$96,109
28,246
1,281
0.11
0.11
0.09
YEAR
$355,870
121,632
26,112
2.29
2.26
0.34
Stock Price Range (High – Low)
42.82 – 25.72
47.39 – 23.08
40.51 – 26.00
26.97 – 16.55
47.39 – 16.55
2011
Net Sales
Gross Profit
Net Earnings
Basic Earnings Per Share
Diluted Earnings Per Share
Dividends Per Share
$61,395
20,023
2,656
0.24
0.24
0.07
$75,160
23,757
4,034
0.36
0.35
0.07
$76,471
27,782
4,548
0.40
0.40
0.08
$97,367
$310,393
36,121
7,592
0.67
0.66
0.08
107,683
18,830
1.66
1.64
0.30
Stock Price Range (High – Low)
13.95 – 10.52
30.25 – 12.68
35.10 – 25.24
39.43 – 29.22
39.43 – 10.52
In thousands of dollars except per share and stock price range statistics.
LOCATION: Santa Barbara, California, USA — — EQUIPMENT: MGX-6599RV Marine Transmissions and EC300 Controls
Clean Seas LLD operates the 65-foot (20-meter) “Ocean” Class OSR/V Oil Spill Response
Vessel built by Rozema Boat Works and uses three-station EC300 controls to precisely
manage two Twin Disc MGX-6599RV QuickShift® transmissions driven by twin Caterpillar
1500-hp (1119-kW) engines to patrol the Santa Barbara coast and Channel Islands.
tO OuR shaREhOlDERs
Driven by an exceptionally strong first nine months of the year reflecting historically high
demand for oil and gas transmissions, fiscal year 2012 produced record results in both sales
and earnings. Beyond the solid performance in the energy sector, improving demand in most
of our other markets also contributed to the very positive result.
We are pleased to report that the Company continues to be economically profitable—earning
a return greater than our cost of capital.
Continuing challenging conditions in the global megayacht market required us to take a
non-cash goodwill impairment charge at our Italian subsidiary. We remain optimistic that this
market will recover in due course and that our differentiating product technologies will gain
increased market share in the meantime.
Fiscal year 2012 was a busy year—introducing new products, getting shipments to customers
and expanding our global reach. We could not have accomplished all that we did without the
leadership and support of our associates around the world. To them we are very grateful.
financial REsults
Net sales for fiscal 2012 were $355.9 million compared to $310.4 million in fiscal 2011. Net
earnings for the current fiscal year was $26.1 million, or $2.26 per diluted share, compared to
$18.8 million, or $1.64 per diluted share, for the prior year.
The year began strongly and momentum increased through the first nine months of the fiscal
year at which point the softening outlook for our oil and gas transmission business impacted
unfavorably the fourth quarter.
Gross profit, as a percent of sales, for fiscal year 2012 held at 34.2 percent compared to 34.7
percent a year ago. However, gross margin dipped in the fourth quarter to 29.4 percent,
compared to 37.1 percent for the prior year, reflecting the change in our mix of sales resulting
from lower energy shipments as well as due to the unfavorable absorption impact of a
significant inventory reduction realized in the final quarter of the year.
Spending on marketing, engineering and administrative (MEA) expenses held steady at
$73 million for both fiscal years 2011 and 2012.
LOCATION: Laos — — EQUIPMENT: IG-5145 Transmission
Dewatering a copper/gold mine in Laos, this Weir Minerals Multiflo®
Pump uses a Twin Disc IG-5145 transmission to precisely match
engine speed and pump speed for maximum efficiency.
4
t w i n D i s c , i n c O R P O Ra tE D
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Rosenbauer Panther Class 5 6x6 Stinger Rapid Intervention Vehicle
with High Reach Extendable Turret is equipped with a Detroit
Diesel 665-hp (496-kW) engine working through a TD61-1180 fully
automatic power-shift 6-speed transmission to quickly “pump and
roll” at Dallas Love Field Airport, Dallas, Texas.
Opposite: Four Caterpillar engines totaling 9000 hp (6711 kW)
driving through four MGX-61000SC QuickShift® transmissions
to power four jet drives to move the Gulf Craft M/V Bluewater
Chief crisply through the water at 25 knots, fully laden at
150 tons (136 metric tons).
LOCATION: Dallas, Texas, USA — — EQUIPMENT: Twin Disc TD61-1180 Automatic Transmission System
NET SALES ($ millions)
0
50
100
150
200
250
300
350
2012
2011
2010
2009
CAPiTAL ExPENDiTuRES ($ thousands)
9,000
6,000
3,000
0
12,000
15,000
2012
2011
2010
2009
In preparing our financial statements for fiscal year 2012, we concluded that we were
required to take in the fourth quarter a non-cash impairment charge, amounting to $3.7
million, or $0.32 per diluted share, for the write-down of goodwill for our Italian operation
due to the softness in the megayacht market.
The net effective tax rate for the fiscal year 2012 was 41.2 percent, slightly higher than the
prior year rate of 40.8 percent. However, the net effective tax rate for the fourth quarter was
significantly higher due to the non-deductible impairment charge and to a lesser extent a
combination of other tax-related adjustments.
Our financial condition continues to be strong. Total debt to total capital stands at 19.0 percent
as of the end of fiscal year 2012 compared to 17.7 percent for the prior fiscal year. EBITDA
improved to $56.8 million in the current fiscal year compared to $43.5 million for the prior
year. Capital expenditures in fiscal 2012 increased slightly to $13.7 million from $12.0 million
a year ago. During the year we raised our dividend 12.5 percent to $0.36 per diluted share and
in the fourth quarter we repurchased 125,000 shares of common stock.
OPERatiOns REViEw
Serving diverse product markets and geographies continued to support our growth strategy.
While the pressure-pumping market provided the major impetus for growth during the year,
our sales to our industrial and commercial marine sectors also contributed to increased
revenues. Other markets, such as land- and marine-based military and airport rescue and
fire fighting, held steady. The global megayacht market remained challenging. More specific
discussion of our markets may be seen in the following section of this report.
While our North American end market maintained its leadership in our sales mix, sales to Asia
surpassed Europe for the first time reflecting both solid growth in Asia and revenue declines
from Europe's softer market conditions.
Early in the fiscal year we announced the consummation of a strategic partnership with
Caterpillar to develop our joystick technology solutions for vessels that use a standard
LOCATION: Louisiana, USA — — EQUIPMENT: MGX-61000SC QuickShift® Marine Transmissions
NET EARNiNGS diluted (per share)/DiViDENDS
1.0
0.0
2.0
0.5
1.5
2.5
NET CASH PROViDED by operating activities ($ thousands)
0
10,000
20,000
30,000
40,000
2012
2011
2010
2009
2012
2011
2010
2009
6
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LOCATION: Midland oil fields, Texas, USA — — EQUIPMENT: Twin Disc TA91-8501 Automatic Transmission System
Pumpco Energy Services, a leading provider of pressure-pumping services for the
oil and gas industry and operating in key oil and gas basins in the United States,
is a long-time user of Twin Disc’s larger 8500 transmission system for its higher
horsepower fracturing and cementing operations.
conventional shaft arrangement and to develop a future innovative Cat POD system which
®
transmission technology. Leveraging our new
will incorporate our patented QuickShift
transmission and controls technology through Caterpillar’s sales, marketing and distribution
channels should provide substantial growth opportunities in the future.
During the year we introduced the 7500 transmission to the pressure-pumping market and
have received very positive feedback from customers. While market demand has softened
due to macro economic factors, this transmission has solid prospects for the future.
Finally, during the past year we have reorganized to be more effective in the geographies
we serve. Two areas of focus have been Europe and Asia. In Europe we have implemented a
“pan-European” management structure to be more customer focused as well as more efficient.
In Asia we have been expanding our human resources and assets to take better advantage of
the market opportunities.
OUTLOOK
Our six-month backlog at June 30, 2012, was $99 million, compared to $147 million at the end
of fiscal 2011. Certain areas of our business are demonstrating improving trends, especially
customers in our industrial and commercial marine markets. Sales to our Asian customers,
including oil and gas transmissions, continue to be strong and sales of marine products into
the U.S. Gulf Region have improved.
Nevertheless, changes to the oil and gas market are impacting our near-term outlook. We
anticipate a challenging North American pressure-pumping market to remain for at least
the first half of fiscal 2013 as rig operators adjust to the North American natural gas supply
overhang and lower prices. The slowdown will impact our sales and profitability, and we remain
cautious about the outlook for fiscal 2013.
MiCHAEL E. BATTEN
Chairman, Chief Executive Officer
JOHN H. BATTEN
President, Chief Operating Officer
8
t w i n D i s c , i n c O R P O Ra tE D
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LOCATION: Pennsylvania, USA — — EQUIPMENT: Twin Disc 7500 Transmission
This page: CS&P Technologies, Houston, TX, designs and manufactures
a comprehensive array of oil and gas exploring, drilling and recovery
equipment, including powerful but relatively compact and “road legal”
fracturing rigs featuring Cummins 2500-hp (1864-kW) engines driving
pumps through Twin Disc’s new 7500 transmission.
Bottom left: Long-time Twin Disc customer Trican, with fractur-
ing operations all over the world, has this one near Spirit River,
Alberta, Canada, where 50 Stewart-Stevenson-manufactured frac
rigs using Cummins 2300-hp (1715-kW) engines working through
Twin Disc 8500 transmission systems create up to 10,000 psi
(70 MPa) pumping pressure down the well.
inDustRial tRans MissiOns
Twin Disc benefitted from a very strong demand in the pressure-pumping sector of the
oil and gas industry, as a result of the continuing growth in the numbers of drilling and
fracturing rigs which began in fiscal 2011. Orders from our North American customers
almost doubled from the previous peak in fiscal 2007, and interest in our 8500
transmission system and 7500 transmission continued to grow in China, which now
represents 25% of our 8500 backlog.
In the second half of the fiscal year, North American sales in pressure-pumping equipment
began to subside as the inventory of natural gas continued to grow. A mild winter, coupled
with increased well initiation on expiring leases, created an oversupply situation. However,
we remain very optimistic about the medium- to long-term prospects for increased
numbers of fracturing rig installations and resulting orders for our products.
While the North American market takes a short pause as the inventory, both in gas and
equipment, continues to be worked down from current levels, we are seeing a growing
demand both in Asia and South America.
Our new 7500 transmission went into full production in the second half of the year, only to
suffer, as did the 8500, from the temporary reduced market demand. Nevertheless, in the
field the 7500 has demonstrated excellent performance, productivity and reliability.
The global ARFF (Airport Rescue and Fire Fighting) market continued to grow throughout
fiscal 2012, propelled in large part by expanding markets in the Middle East and South
America. Ongoing projects in Saudi Arabia, Brazil and China should continue to drive sales
in fiscal 2013 and beyond. To meet the future needs of our global ARFF customers, our
engineering team is spending a lot of time in the lab and end markets, as they design the
next generation 4001 Series ARFF transmission.
Our legacy military business remained level during fiscal 2012, as demand for our
XT-1410 transmission for use in the M88 tank retriever remains at historically high levels.
Production estimates for the M88 now extend out to 2016/17.
This Oshkosh Striker™ 4500 8x8 ARFF (Airport Rescue & Fire
Fighting) Rapid Intervention Vehicle with its 950-hp (708-kW)
Caterpillar engine driving a TD61-2619 electronic automatic power-
shift 6-speed transmission can charge from 0 to 50 mph (80 km/h)
within 35 seconds, to offer the ultimate in rapid emergency response
to Dallas/Fort Worth International Airport.
10
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LOCATION: Odessa/Midland Oil Fields, Texas, USA — — EQUIPMENT: Twin Disc PO-124, PO-324, and PO-108 Air Clutches
This Mustang 600HD Mobile Land Rig owned by Rig Works, Inc.
uses a variety of Twin Disc PO air clutches to control the double-
drum drawworks as the unit completes, maintains and drills oil
and gas wells in the Odessa/Midland oil fields of western Texas.
inDustRial PRODucts
Our global industrial markets saw a significant recovery in fiscal 2012. In North America,
our larger PTOs and air clutches drove the growth, as the aggregate, recycling, construction
and oil and gas markets recovered from post-recession levels. Demand for our hydraulic
PTOs also increased during the year as we released new models.
In Asia, we saw demand for our large PTOs increase for flood pumps in Taiwan and oil
field applications in China.
Fiscal 2012 sales in Australia jumped significantly from last year primarily because of
the resources and mining boom and demand for our clutches and PTOs.
Our industrial markets in Europe remained the lone bright spot for these troubled
economies. Small construction and forestry equipment fed the demand. In addition,
the engineering team at our Italian operations released a new high-horsepower pump
drive for the global market, and we are anticipating its acquiring good market share in
fiscal 2013.
LOCATION: Adelaide, South Australia — — EQUIPMENT: Twin Disc SP314P1 Power Take-off
Broons Pty Ltd, Adelaide, South Australia, counts on many
years of rugged reliability of a Twin Disc SP314P1 PTO to
actuate its Cat engine-driven hammer mill rock crusher to
produce in excess of 3531 cubic feet (100 cubic meters) per
hour of granular stone from large oversize hard rock.
In order to meet stringent Coast Guard safety and
emissions requirements, C&C Marine uses a specially
designed Laborde 170-hp (127-kW) barge power unit
working through a Twin Disc SP211HP PTO to drive the
pump on a liquid cargo barge.
12
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Kvichak Marine, Ballard, Washington, announced
the launch of their 500th hull this year, with a 45-foot
(14-meter) Response Boat Medium – C “Patrol 9” for
the Seattle Police Department Harbor Patrol Unit,
equipped with twin Detroit Diesel 825-hp (615-kW)
engines driving through Twin Disc MG-5114SC
transmissions. Also pictured are the USCG RBM-M
and NYPD sister ships.
LOCATION: Panama Canal, Panama — — EQUIPMENT: Twin Disc 3000-8-HD Marine Control Drives
The Port Authority of Panama Canal depends on the
precision maneuvering of this 90-foot (27.4-meter) ship-
handling tug built by Cheoy Lee and powered by two
GE engines rated at 2923 hp (2180 kW) driving two Twin
Disc 3000-8-HD Marine Control Drives (MCDs).
The 168-foot (51-meter), 600-passenger Statue Cruises boat Barrow,
operated by Hornblower Cruises and Events out of New York City, was
converted to twin, bi-directional, battery-powered electric motors
driving through specially designed Twin Disc MG-5204SC transmissions
with EC300 controls, to provide motor speed and directional control.
cOMMERcial MaRinE MaRkEts
Another fiscal 2012 highlight was the continued recovery of our global commercial marine
markets. In some areas, like North America, revenues are approaching pre-recession levels,
especially in the brown water inland waterway business. The offshore market has also
rebounded after the Macondo Deepwater Horizon well blowout in the Gulf, and new orders
for the offshore crew and supply vessels continue to improve. With oil still in the $80-100 per
barrel range, we can expect continued strength from the offshore oil and gas market.
High demand for coal transportation tugs in Indonesia drove increased sales from Asia for
our deep case work boat marine transmissions, and a rebounding offshore market in Malaysia
and China stimulated orders for our FSV and OSV marine transmissions.
Patrol boat projects showed further growth in Asia, especially China, as the need for coastal
®
security continues to increase. Our propulsion package of Twin Disc QuickShift
marine
transmissions, electronic controls, Arneson Surface Drives™ and Rolla™ propellers are
recognized as the standard of fast patrol-boat technology.
In Australia, sales to commercial marine projects remained steady with increased
activity in new technologies such as our EC300DP (electronic controls for use in Dynamic
Positioning applications) in support vessels for offshore oil and gas operations. Our Australian
team successfully commissioned their first EC300DP system for an offshore service vessel in
this sector. Marine transmission sales to government and military vessels remained strong, as
our QuickShift technology is fast being recognized as the industry standard.
LOCATION: Pucallpa, Peru — — EQUIPMENT: Twin Disc MG-5222 Marine Transmissions
In the port of Pucallpa, in the Peruvian jungle, M/F Pacifico IV,
a 201-foot (61-meter) cargo vessel owned by Transpacifico SAC,
prepares to embark on the Rio Ucayali with the reliable power
package of a 600-hp (447-kW) Caterpillar engine driving through
a Twin Disc MG-5222 marine transmission.
The 175' crewboat “Big Blue,” built by Breaux’s Bay
Craft and owned by CrewBoats, Inc., uses four
Caterpillar 1923-hp (1434-kW) engines working through
Twin Disc MGX-61000SC transmissions with EC300
controls to deliver men and materials to offshore rigs
in the Gulf of Mexico at speeds up to 28 knots.
14
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LOCATION: New Zealand — — EQUIPMENT: MGX-6599A Marine Transmissions, EJS™, BCS Power Steering and Hydraulic Bow and Stern Thrusters
This Riviera 75 Enclosed Flybridge Cruiser, designed especially for
New Zealand waters, features a full contingent of Twin Disc products
including twin QuickShift® MGX-6599A marine transmissions, EC300
controls, BCS Power Steering and the revolutionary Express Joystick
System® with BCS BP550 Hydraulic Bow and Stern Thrusters.
PlEasuRE cRaft MaRkEt
The faltering world economy continued to stifle the global pleasure craft markets.
®
But our new Express Joystick System
, EJS™, has allowed us to capture new business
in Australia and Asia, as our breakthrough technology very favorably differentiates us
®
from the competition. Caterpillar has released the Cat
Three60 joystick system—
which incorporates our EJS—to their dealers, and we are anticipating that this will
begin to drive an increased pleasure craft demand for us in fiscal 2013.
16
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2012
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
Incorporation or Organization)
1328 Racine Street, Racine, Wisconsin
(I.R.S. Employer
Identification Number)
53403
(Address of Principal Executive Office)
(262) 638-4000
(Zip Code)
Registrant’s Telephone Number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common stock, no par
Title of each class
Preferred stock purchase rights
The NASDAQ Stock Market, LLC
Name of each exchange on which registered:
The NASDAQ Stock Market, LLC
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [√]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [√]
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 [√] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [√] 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 refer-
ence in Part III of this Form 10-K or any amendment to this Form 10-K. [√]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer [ ] Accelerated Filer [√] Non-accelerated Filer [ ] Smaller Reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [√]
At December 31, 2011, the last business day of the registrant’s second fiscal quarter, the aggregate market value of the common
stock held by non affiliates of the registrant was $313,655,596. 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.
At August 17, 2012, the registrant had 11,404,246 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held October 19, 2012, which will be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III.
17
17
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 marine
and heavy duty off-highway power transmission equipment. Products offered include: marine transmissions, surface drives,
propellers and boat management systems as well as power-shift transmissions, hydraulic torque converters, power take-offs,
industrial clutches and controls systems. The Company sells its products to customers primarily in the pleasure craft, commercial
and military marine markets as well as in the energy and natural resources, government and industrial markets. The Company’s
worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network.
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 manufac-
turers. 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. The Company’s top ten customers
accounted for approximately 49% of the Company’s consolidated net sales during the year ended June 30, 2012. There were no
customers that accounted for 10% or more of consolidated net sales in fiscal 2012.
Unfilled open orders for the next six months of $98,746,000 at June 30, 2012, compares to $146,899,000 at June 30, 2011.
The Company saw a decline in orders by oil and gas customers for its 8500 transmission system as current demand has softened
for new high-horsepower rigs due to the North American natural gas supply overhang and lower prices. In addition, the Company
has begun to accept orders and has shipped initial units of its new 7500 transmission for the oil and gas market. Since orders are
subject to cancellation and rescheduling by the customer, the six-month order backlog is considered more representative of oper-
ating 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. No material por-
tion of the Company’s business is 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 costs for ongoing efforts to refine existing products. Research and development
costs charged to operations totaled $2,657,000, $2,475,000 and $2,347,000 in fiscal 2012, 2011 and 2010, respectively. Total
engineering and development costs were $9,508,000, $8,776,000 and $7,885,000 in fiscal 2012, 2011 and 2010, respectively.
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, 2012, was 1,029.
A summary of financial data by segment and geographic area for the years ended June 30, 2012, 2011 and 2010 appears in Note J
to the consolidated financial statements.
The Company’s internet website address is www.twindisc.com. The Company makes available free of charge (other than an
investor’s own internet access charges) through its website the Company’s Annual Report on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the United States Securities and Exchange Commission. In
addition, the Company makes available, through its website, important corporate governance materials. This information is also
available from the Company upon request. The Company is not including the information contained on or available through its
website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
18
18 T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
ITEM 1(a). RISK FACTORS
The Company’s business involves risk. The following information about these risks should be considered carefully together
with other information contained in this report. The risks described below are not the only risks the Company faces. Additional
risks not currently known, deemed immaterial or that could apply to any issuer may also result in adverse results for the
As a global company, we are subject to currency fluctuations and any significant movement between the U.S. dollar and the
Company’s business.
euro, in particular, could have an adverse effect on our profitability.
in U.S. dollars, a significant portion of our sales and operating costs are realized in euros and other foreign currencies. The
Company’s profitability is affected by movements of the U.S. dollar against the euro and the other currencies in which we
generate revenues and incur expenses. Significant long-term fluctuations in relative currency values, in particular a significant
Certain of the Company’s products are directly or indirectly used in oil exploration and oil drilling, and are thus dependent
change in the relative values of the U.S. dollar or euro, could have an adverse effect on our profitability and financial condition.
upon the strength of those markets and oil prices.
Although the Company’s financial results are reported
In recent years, the Company has seen a significant growth in the sales of
its products that are used in oil and energy-related markets. The growth in these markets has been spurred by the rise in oil
prices and the global demand for oil. In addition, there has been a substantial increase in capital investment by companies in
these markets. In fiscal 2009, a significant decrease in oil prices, the demand for oil and capital investment in the oil and energy
markets had an adverse effect on the sales of these products and ultimately on the Company’s profitability. While this market
has recovered to historically high levels in fiscal 2011 and 2012, the cyclical nature of the global oil and gas market presents the
ongoing possibility of a severe cutback in demand, which would create a significant adverse effect on the sales of these products
Many of the Company’s product markets are cyclical in nature or are otherwise sensitive to volatile or variable factors. A
and ultimately on the Company’s profitability.
downturn or weakness in overall economic activity or fluctuations in those other factors can have a material adverse effect
on the Company’s overall financial performance.
Historically, sales of many of the products that the Company manufactures
and sells have been subject to cyclical variations caused by changes in general economic conditions and other factors. In particu-
lar, the Company sells its products to customers primarily in the pleasure craft, commercial and military marine markets, as well
as in the energy and natural resources, government and industrial markets. The demand for the products may be impacted by
the strength of the economy generally, governmental spending and appropriations, including security and defense outlays, fuel
prices, interest rates, as well as many other factors. Adverse economic and other conditions may cause the Company’s customers
In the event of an increase in the global demand for steel, the Company could be adversely affected if it experiences
to forego or otherwise postpone purchases in favor of repairing existing equipment.
shortages of raw castings and forgings used in the manufacturing of its products.
With the continued development of
certain developing economies, in particular China and India, the global demand for steel has risen significantly in recent years.
The Company selects its suppliers based on a number of criteria, and we expect that they will be able to support our growing
needs. However, there can be no assurance that a significant increase in demand, capacity constraints or other issues experienced
by the Company’s suppliers will not result in shortages or delays in their supply of raw materials to the Company. If the Company
were to experience a significant or prolonged shortage of critical components from any of its suppliers, particularly those who
are sole sources, and could not procure the components from other sources, the Company would be unable to meet its production
schedules for some of its key products and would miss product delivery dates which would adversely affect our sales, profitability
If the Company were to lose business with any key customers, the Company’s business would be adversely affected.
and relationships with our customers.
Although
there were no customers that accounted for 10% or more of consolidated net sales in fiscal 2012, deterioration of a business rela-
The Company continues to face the prospect of increasing commodity costs, including steel, other raw materials and
tionship with one or more of the Company’s significant customers would cause its sales and profitability to be adversely affected.
energy that could have an adverse effect on future profitability.
effects of increased commodity costs through cost reduction programs and pricing actions. However, if material prices were to
continue to increase at a rate that could not be recouped through product pricing, it could potentially have an adverse effect on
The termination of relationships with the Company’s suppliers, or the inability of such suppliers to perform, could disrupt
our future profitability.
its business and have an adverse effect on its ability to manufacture and deliver products.
To date, the Company has been successful with offsetting the
materials, component parts, and services supplied by outside third parties. If a supplier of significant raw materials, component
parts or services were to terminate its relationship with the Company, or otherwise cease supplying raw materials, component
parts, or services consistent with past practice, the Company’s ability to meet its obligations to its customers may be affected.
Such a disruption with respect to numerous products, or with respect to a few significant products, could have an adverse effect
on the Company’s profitability and financial condition.
The Company relies on raw
19
A significant design, manufacturing or supplier quality issue could result in recalls or other actions by the Company that
could adversely affect profitability.
As a manufacturer of highly engineered products, the performance, reliability and pro-
ductivity of the Company’s products is one of its competitive advantages. While the Company prides itself on putting in place
procedures to ensure the quality and performance of its products and suppliers, a significant quality or product issue, whether
due to design, performance, manufacturing or supplier quality issue, could lead to warranty actions, scrapping of raw materials,
finished goods or returned products, the deterioration in a customer relation, or other action that could adversely affect warranty
The Company faces risks associated with its international sales and operations that could adversely affect its business,
and quality costs, future sales and profitability.
results of operations or financial condition.
Sales to customers outside the United States approximated 53% of our consoli-
dated net sales for fiscal 2012. We have international manufacturing operations in Belgium, Italy and Switzerland. In addition,
we have international distribution operations in Singapore, China, Australia, Japan, Italy and Canada. Our international sales and
operations are subject to a number of risks, including:
– currency exchange rate fluctuations
– export and import duties, changes to import and export regulations, and restrictions on the transfer of funds
– problems with the transportation or delivery of our products
– issues arising from cultural or language differences and labor unrest
– longer payment cycles and greater difficulty in collecting accounts receivables
– compliance with trade and other laws in a variety of jurisdictions
– changes in tax law
A material disruption at the Company’s manufacturing facilities in Racine, Wisconsin, could adversely affect its ability to
These factors could adversely affect our business, results of operations or financial condition.
generate sales and meet customer demand.
The majority of the Company’s manufacturing, based on fiscal 2012’s sales, came
from its two facilities in Racine, Wisconsin. If operations at these facilities were to be disrupted as a result of significant equipment
failures, natural disasters, power outages, fires, explosions, adverse weather conditions or other reasons, the Company’s busi-
ness and results of operations could be adversely affected. Interruptions in production would increase costs and reduce sales. Any
interruption in production capability could require the Company to make substantial capital expenditures to remedy the situation,
which could negatively affect its profitability and financial condition. The Company maintains property damage insurance which it
believes to be adequate to provide for reconstruction of its facilities and equipment, as well as business interruption insurance to
mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under
this insurance policy may not offset the lost sales or increased costs that may be experienced during the disruption of operations.
Lost sales may not be recoverable under the policy and long-term business disruptions could result in a loss of customers. If this
Any failure to meet our debt obligations and satisfy financial covenants could adversely affect our business and financial
were to occur, future sales levels and costs of doing business, and therefore profitability, could be adversely affected.
condition.
Beginning in 2008 and continuing into 2010, general worldwide economic conditions experienced a downturn due
to the combined effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking
industries, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse
business conditions and liquidity concerns. While some recovery has been seen in 2011and 2012, these conditions made it
difficult for customers, vendors and the Company to accurately forecast and plan future business activities, and cause U.S. and
foreign businesses to slow spending on products, which delay and lengthen sales cycles. These conditions led to declining
revenues in several of the Company’s divisions in fiscal 2009 and 2010. The Company’s amended revolving credit facility and
senior notes agreements require it to maintain specified quarterly financial covenants such as a minimum consolidated net worth
amount, a minimum EBITDA, as defined, for the most recent four fiscal quarters of $11,000,000 and a funded debt to EBITDA
ratio of 3.0 or less. At June 30, 2012, the Company was in compliance with these financial covenants. Based on its annual financial
plan, the Company believes that it will generate sufficient EBITDA levels throughout fiscal 2013 in order to maintain compliance
with its financial covenants. However, as with all forward-looking information, there can be no assurance that the Company will
achieve the planned results in future periods especially due to the significant uncertainties flowing from the current economic
environment. If the Company is not able to achieve these objectives and to meet the required covenants under the agreements,
the Company may require forbearance from its existing lenders in the form of waivers and/or amendments of its credit facilities
or be required to arrange alternative financing. Failure to obtain relief from covenant violations or to obtain alternative financing,
if necessary, would have a material adverse impact on the Company.
20
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
The Company may experience negative or unforeseen tax consequences.
realization of our net deferred tax assets each period based on forecasts of taxable income in both the U.S. and foreign jurisdic-
tions. This review uses historical results, projected future operating results based upon approved business plans, eligible carry-
forward periods, tax planning opportunities and other relevant considerations. Adverse changes in the profitability and financial
outlook in the U.S. or foreign jurisdictions may require the creation of a valuation allowance to reduce our net deferred tax assets.
Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material
adverse impact on the Company’s results of operations and financial condition.
ITEM 1B. UNRESOLvED STAFF COMMENTS
The Company reviews the probability of the
None.
ITEM 2. PROPERTIES
Manufacturing Segment
The Company owns two manufacturing, assembly and office facilities in Racine, Wisconsin, U.S.A., one in Nivelles, Belgium, two in
Decima, Italy, and one in Novazzano, Switzerland. The aggregate floor space of these six plants approximates 847,000 square feet.
One of the Racine facilities includes office space, which includes the Company’s corporate headquarters. The Company leases
Distribution Segment
additional manufacturing, assembly and office facilities in Italy (Limite sull’Arno) and India (outsourcing office in Chennai).
The Company also has operations in the following locations, all of which are leased and are used for sales offices, warehousing
and light assembly or product service:
Jacksonville, Florida, U.S.A.
Medley, Florida, U.S.A.
Tampa, Florida, U.S.A.
Coburg, Oregon, U.S.A.
Kent, Washington, U.S.A.
Chesapeake, Virginia, U.S.A.
Rock Hill, South Carolina, U.S.A.
Edmonton, Alberta, Canada
Burnaby, British Columbia, Canada
Brisbane, Queensland, Australia
Perth, Western Australia, Australia
Limite sull’Arno, Italy
Singapore
Shanghai, China
Guangzhou, China
The Company believes its properties are well maintained and adequate for its present and anticipated needs.
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, are 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, financial position or statement of cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Executive Officers of the Registrant
Not applicable.
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
Name
lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 19, 2012.
Position
Age
Michael E. Batten
John H. Batten
Christopher J. Eperjesy
James E. Feiertag
Dean J. Bratel
Henri-Claude Fabry
Denise L. Wilcox
Jeffrey S. Knutson
Thomas E. Valentyn
Chairman and Chief Executive Officer
President and Chief Operating Officer
Vice President – Finance, Chief Financial Officer and Treasurer
Executive Vice President
Vice President – Engineering
Vice President – International Distribution
Vice President – Human Resources
Corporate Controller
General Counsel and Secretary
72
47
44
55
48
66
55
47
53
Officers are elected annually by the Board of Directors at the Board meeting held in conjunction with each Annual Meeting of the
Shareholders. Each officer holds office until a successor is duly elected, or until he/she resigns or is removed from office.
21
Michael E. Batten, Chairman and Chief Executive Officer. Mr. Batten has been employed with the Company since 1970, and was
named Chairman and Chief Executive Officer in 1991.
John H. Batten, President and Chief Operating Officer. Effective July 1, 2008, Mr. Batten was named President and Chief
Operating Officer. Prior to this promotion, Mr. Batten served as Executive Vice President since November 2004, Vice President
and General Manager – Marine and Propulsion since October 2001 and Commercial Manager – Marine and Propulsion since
1998. Mr. Batten joined Twin Disc in 1996 as an Application Engineer. Mr. Batten is the son of Mr. Michael Batten.
Christopher J. Eperjesy, Vice President – Finance, Chief Financial Officer and Treasurer. Mr. Eperjesy joined the Company in his
current role in November 2002. Prior to joining Twin Disc, Mr. Eperjesy was Divisional Vice President – Financial Planning &
Analysis for Kmart Corporation since 2001, and Senior Manager – Corporate Finance with DaimlerChrysler AG since 1999.
James E. Feiertag, Executive Vice President. Mr. Feiertag was appointed to his present position in October 2001. Prior to being
promoted, he served as Vice President – Manufacturing since joining the Company in November 2000. Prior to joining Twin Disc,
Mr. Feiertag was the Vice President of Manufacturing for the Drives and Systems Group of Rockwell Automation since 1999.
Dean J. Bratel, Vice President – Engineering. Mr. Bratel was promoted to his current role in November 2004 after serving as
Director of Corporate Engineering (since January 2003), Chief Engineer (since October 2001) and Engineering Manager (since
December 1999). Mr. Bratel joined Twin Disc in 1987.
Henri-Claude Fabry, Vice President – International Distribution. Mr. Fabry was appointed to his current position in January 2009,
after serving as Vice President – Global Distribution since 2001. Mr. Fabry joined Twin Disc in 1997 as Director, Marketing and
Sales of the Belgian subsidiary.
Denise L. Wilcox, Vice President – Human Resources. After joining the Company as Manager Compensation & Benefits in Septem-
ber 1998, Ms. Wilcox was promoted to Director Corporate Human Resources in March 2002 and to her current role in November
2004. Prior to joining Twin Disc, Ms. Wilcox held positions with Johnson International and Runzheimer International.
Jeffrey S. Knutson, Corporate Controller. Mr. Knutson was appointed to his current role in October 2005 after joining the
Company in February 2005 as Controller of North American Operations. Prior to joining Twin Disc, Mr. Knutson held Operational
Controller positions with Tower Automotive (since August 2002) and Rexnord Corporation (since November 1998).
Thomas E. Valentyn, General Counsel and Secretary. Mr. Valentyn joined the Company in his current role in September 2007.
Prior to joining Twin Disc, Mr. Valentyn served as Vice President and General Counsel at Norlight Telecommunications, Inc. since
July 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol TWIN. The price information
below represents the high and low sales prices from July 1, 2010 through June 30, 2012:
Fiscal Year Ended June 30, 2012
Fiscal Year Ended June 30, 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$42.82
47.39
40.51
26.97
Low
$25.72
23.08
26.00
16.55
Dividend
$0.08
0.08
0.09
0.09
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$13.95
30.25
35.10
39.43
Low
$10.52
12.68
25.24
29.22
Dividend
$0.07
0.07
0.08
0.08
For information regarding the Company’s equity-based compensation plans, see the discussion under Item 12 of this report.
As of August 17, 2012, shareholders of record numbered 651. The closing price of Twin Disc common stock as of August 17, 2012
was $19.95.
22
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
Issuer Purchases of Equity Securities
Period
March 31, 2012–April 27, 2012
April 28, 2012–May 25, 2012
May 26, 2012–June 30, 2012
Total
(a) Total
number
of shares
purchased
____________
0
0
125,000
__________
125,000
__________
__________
(b) Average
price paid
per share
____________
N/A
N/A
19.40
__________
19.40
__________
__________
(c) Total number of
shares purchased as part
of publicly announced
plans or programs
(d) Maximum number
of shares that may yet
be purchased under
the plans or programs
____________________________
0
0
125,000
__________
125,000
__________
__________
_________________________
250,000
250,000
125,000
__________
125,000
__________
__________
On February 1, 2008, the Board of Directors authorized the purchase of up to 500,000 shares of Common Stock at market values,
of which 250,000 were purchased during the second quarter of fiscal 2009. An additional 125,000 shares were purchased in open
market transactions during the fourth quarter of fiscal 2012. On July 27, 2012, the Board of Directors authorized the purchase of
Performance Graph
up to an additional 375,000 shares of Common Stock at market values. This authorization has no expiration.
The following table compares total shareholder return over the last 5 fiscal years to the Standard & Poor’s 500 Machinery
(Industrial) Index and the Russell 2000 index. The S&P 500 Machinery (Industrial) Index consists of a broad range of manufac-
turers. The Russell 2000 Index consists of a broad range of 2,000 companies. The Company believes, because of the similarity of
its business with those companies contained in the S&P 500 Machinery (Industrial) Index, that comparison of shareholder return
with this index is appropriate. Total return values for the Corporation’s common stock, the S&P 500 Machinery (Industrial) Index
and the Russell 2000 Index were calculated based upon an assumption of a $100 investment on June 30, 2007, and based upon
cumulative total return values assuming reinvestment of dividends on a quarterly basis.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
TWIN DISC, INCORPORATED; S&P MACHINERY; AND RUSSELL 2000
150
125
100
75
50
25
00
100.00
100.00
100.00
95.29
83.80
58.69
JUNE 30, 2007
Twin Disc
S&P Machinery
Russell 2000
62.97
58.34
19.94
130.39
117.46
114.58
105.11
102.92
58.90
83.64
76.50
34.10
23
JUNE 30, 2008JUNE 30, 2009JUNE 30, 2010JUNE 30, 2011JUNE 30, 2012
ITEM 6. SELECTED FINANCIAL DATA
Financial Highlights
(in thousands, except per share amounts)
Statement of Operations Data:
2012
For the years ended June 30,
2010
2011
2009
2008
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to Twin Disc. . . . . . . . . . . . . . . .
Basic earnings per share attributable to
Twin Disc common shareholders. . . . . . . . . . . . . . . . . . .
Diluted earnings per share attributable to
Twin Disc common shareholders. . . . . . . . . . . . . . . . . . .
Balance Sheet Data (at end of period):
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
___________
$355,870
26,112
___________
$310,393
18,830
___________
$227,534
597
___________
$295,618
11,502
___________
$331,694
24,252
2.29
1.66
0.05
1.04
2.15
2.26
0.34
1.64
0.30
0.05
0.28
1.03
0.28
2.13
0.265
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$303,832
28,401
$309,120
25,784
$259,056
27,211
$290,008
46,348
$304,628
48,227
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note on Forward-Looking Statements
Statements in this report (including but not limited to certain statements in Items 1, 3 and 7) and in other Company communica-
tions that are not historical facts are forward-looking statements, which are based on management’s current expectations. These
statements involve risks and uncertainties that could cause actual results to differ materially from what appears here.
Forward-looking statements include the Company’s description of plans and objectives for future operations and assumptions
behind those plans. The words “anticipates,” “believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions,
usually identify forward-looking statements. In addition, goals established by the Company 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, includ-
ing, but not limited to those factors discussed under Item 1A, Risk Factors, could cause actual results to be materially different
from what is presented in any forward looking statements.
Results of Operations
(In thousands)
2012
%
2011
%
2010
%
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing, engineering and administrative
___________
$355,870
234,238
___________
121,632
_______ ___________
$310,393
202,710
___________
34.2% 107,683
_______
34.7%
___________
$227,534
167,069
___________
60,465
_______
26.6%
expenses* . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge . . . . . . . . . . . . . . . . . . . . . . . .
73,091
3,670
___________
$ 44,871
* Certain amounts in the fiscal 2011 and 2010 figures have been reclassified to conform to the fiscal 2012 presentation.
___________
___________
72,967
—
___________
12.6% $ 34,716
_______ ___________
_______ ___________
57,380
—
___________
$ 3,085
___________
___________
Earnings from operations . . . . . . . . . . . . .
23.5%
0.0%
20.5%
1.0%
11.2%
_______
_______
25.2%
0.0%
1.4%
_______
_______
See Note A for further discussion.
Fiscal 2012 Compared to Fiscal 2011
Net Sales
Net sales increased $45.5 million, or 14.7%, in fiscal 2012. The year-over-year movement in foreign exchange rates resulted
in a net favorable translation effect on sales of $0.4 million in fiscal 2012 compared to fiscal 2011.
In fiscal 2012, sales for our worldwide manufacturing operations, before eliminating intra-segment and inter-segment sales,
were higher by $57.5 million, or 21.5%, than in the prior fiscal year. Year-over-year changes in foreign exchange rates had a net
unfavorable impact on sales of $0.6 million. In fiscal 2012, our domestic manufacturing operation saw continued growth, with
a 25.9% increase in sales versus fiscal 2011. The primary driver for this increase was the sale of transmissions and related prod-
ucts for the North American and Asian oil and gas markets as well as increased commercial marine transmission shipments.
24
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
The Company’s Italian manufacturing operations, which continued to be adversely impacted by the softness in the European
megayacht market in fiscal 2012, experienced a 4.1% decrease in sales compared to the prior fiscal year. The Company’s Belgian
manufacturing operation saw a 28.4% increase in sales versus the prior year, although it continued to be adversely impacted
by the softness in the global megayacht market. The Company’s Swiss manufacturing operation, which supplies customized
propellers for the global megayacht and patrol boat markets, experienced a 10.7% decrease in sales compared to the prior fiscal
year, primarily due to the impact of continued softness in the global megayacht market as well as the timing of shipments for the
patrol boat market.
Our distribution segment, buoyed by strong demand in Asia and the global oil and gas markets, experienced a slight increase of
$0.9 million, or 0.7%, in sales in fiscal 2012 compared to fiscal 2011’s record results. Compared to fiscal 2011, on average, the
Asian currencies strengthened against the U.S. dollar. The net translation effect of this on foreign distribution operations was
to increase revenues for the distribution segment by approximately $1.5 million versus the prior year, before eliminations. The
Company’s distribution operations in Singapore continued to experience strong demand for marine transmission products for
use in various commercial applications as well as growing demand in the Asia pressure-pumping market. This operation saw a
3.2% increase in sales versus the same period a year ago, and set a new sales record. The Company’s distribution operation in the
Northwest of the United States and Southwest of Canada experienced a 1% decline from fiscal 2011’s record levels, and continued
to benefit from the strength in the Canadian oil and gas market through most of fiscal 2012. The Company’s distribution operation
in Italy, which provides boat accessories and propulsion systems for the pleasure craft market, saw an increase in sales of 41.3%
after several years of decline due to continued weakness in the Italian megayacht market. The Company’s distribution operation
in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an
increase in sales of 6.3%, due to improving market conditions, including sales of components parts for the Company’s new Express
®
Joystick System
that were shipped in fiscal 2012. The Company’s joint venture in Japan, which sells large marine transmissions for
commercial applications throughout Asia, experienced a decrease of nearly 25% in sales in fiscal 2012 compared to fiscal 2011. As
reported in the Company’s second fiscal quarter’s results, the decrease was primarily a result of the impact of the Japanese tsunami
on this operation, as our joint venture partner’s production facility was impacted by power shortages as well as delayed shipments
from suppliers. These issues were substantially resolved in the second fiscal quarter.
Net sales for the Company’s largest product market, marine transmission and propulsion systems, were up 8% compared to
the prior fiscal year. The majority of the growth was experienced in the second half of fiscal 2012 as the Company experienced
increased demand in the global commercial marine market, which more than offset continued weakness in the global pleasure
craft market. Sales of the Company’s boat management systems manufactured at our Italian operation and servicing the global
megayacht market, were down approximately 14% versus the prior fiscal year, as the European megayacht market continued to
experience softness in demand. In the off-highway transmission market, the year-over-year increase of just over 20% can be
attributed primarily to increased sales of the 8500 and 7500 transmission systems for the oil and gas markets. In addition, sales of
transmission systems for the military market and vehicular transmissions were up double-digit percentages versus the prior fiscal
year. The increase experienced in the Company’s industrial products of roughly 34% was due to increased sales in the agriculture,
mining and general industrial markets, primarily in the North American and Italian markets, as well as increased activity related to
oil field markets.
Geographically, sales to the U.S. and Canada represented roughly 59% of consolidated sales for fiscal 2012 compared to 55% in
fiscal 2011. This growth was primarily driven by the strength of the North American pressure-pumping market through the first
three fiscal quarters of fiscal 2012 as well as growing demand in the U.S. Gulf Coast region for commercial marine transmission
systems in the second half of the fiscal year. Fiscal 2012 proved to be a milestone year for our global sales, as Asia became our
second largest end market, surpassing Europe. In particular, the Company experienced triple-digit growth in sales to the Chinese
market. See Note J for more information on the Company’s business segments and foreign operations.
The elimination for net intra-segment and inter-segment sales increased $12.9 million, or 15.1%, from $85.8 million in fiscal 2011
to $98.7 million in fiscal 2012. Year-over-year changes in foreign exchange rates had a net unfavorable impact of $0.5 million on net
intra-segment and inter-segment sales.
25
Gross Profit
In fiscal 2012, gross profit increased $13.9 million, or 13.0%, to $121.6 million. Gross profit as a percentage of sales decreased
50 basis points in fiscal 2012 to 34.2%, compared to 34.7% in fiscal 2011. The table below summarizes the gross profit trend by
Gross Profit ($ millions)
quarter for fiscal years 2012 and 2011:
3rd Quarter
2nd Quarter
4th Quarter
1st Quarter
Year
2012 . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of Sales
_____________
$30.8
$20.0
______________
$29.6
$23.8
______________
$33.1
$27.8
______________
$28.2
$36.1
________
$121.6
$107.7
2012 . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . .
37.8%
32.6%
35.6%
31.6%
34.6%
36.3%
29.4%
37.1%
34.2%
34.7%
There were a number of factors that impacted the Company’s overall gross margin rate in fiscal 2012. Gross margin for the year
was favorably impacted by higher volumes, favorable product mix and lower domestic pension expense, partially offset by higher
material costs and surcharges, and unfavorable manufacturing absorption primarily in the fiscal fourth quarter. The Company
estimates the net favorable impact of higher volumes on gross margin in fiscal 2012 was approximately $21.7 million. The favor-
able shift in product mix related to the Company’s oil and gas transmission business had an estimated impact of $2.0 million.
Domestic pension expense included in cost of goods sold decreased from $1.9 million in fiscal 2011 to $0.2 million in fiscal
2012. In addition, warranty expense as a percentage of sales decreased from 1.27% in fiscal 2011 to 1.02% in fiscal 2012 (for
additional information on the Company’s warranty expense, see Note F of the Notes to the Consolidated Financial Statements).
The decrease in warranty expense as a percentage of sales can be attributed to an increase in volume and an overall reduction in
specific warranty campaigns. In addition, the year-over-year movement in foreign exchange rates, primarily driven by move-
ments in the euro and Asian currencies, resulted in a net favorable translation effect on gross profit of $0.8 million in fiscal 2012
Marketing, Engineering and Administrative (ME
compared to fiscal 2011.
A) Expenses
&
Marketing, engineering, and administrative (ME&A) expenses remained relatively flat at $73.1 million in fiscal 2012. As a
percentage of sales, ME&A expenses decreased by 300 basis points to 20.5% in fiscal 2012, compared to 23.5% in fiscal 2011.
The table below summarizes significant changes in certain ME&A expenses for the fiscal year:
Fiscal Year Ended
$ thousands – (Income)/Expense
June 30, 2012
June 30, 2011
Increase/(Decrease)
Stock-Based Compensation . . . . . . . . . . . . . . . . . . . . . .
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic Pension Expense. . . . . . . . . . . . . . . . . . . . . . .
Incentive/Bonus Expense . . . . . . . . . . . . . . . . . . . . . . . . 5
________________
$1,642
684
121
,013
________________
$6,148
—
975
4,964
________________________
Foreign Currency Translation . . . . . . . . . . . .
All Other, Net . . . . . . . . . . . .
$(4,506 )
684
(854 )
49
_________
(4,627 )
342
_________
(4,285 )
4,409
_________
$ 124
_________
_________
The net remaining increase in ME&A expenses for the year of $4.4 million was primarily driven by wage inflation and additional
headcount, higher benefit costs, increased travel, higher project related expenses and a continued emphasis on the Company’s
Impairment Charge
product development program.
The Company conducted its annual assessment for goodwill impairment in the fourth quarter of fiscal 2012 by applying a fair
value based test using discounted cash flow analyses, in accordance with ASC 350-10, “Intangibles – Goodwill and Other.” The
result of this assessment identified that one of the Company’s reporting units goodwill was fully impaired, necessitating a charge
of $3.7 million. The impairment was due to a declining outlook in the global pleasure craft/megayacht market, the continued
weakened European economy and few signs of significant near-term recovery in the markets served by this reporting unit. These
factors were identified as the Company conducted its annual budget review process during the fourth fiscal quarter, and the
Company concluded that the impairment charge was necessary in connection with the preparation of the year end financial state-
ments during the fourth fiscal quarter. This impairment charge was not deductible for tax purposes. The fair value of the goodwill
for the remaining reporting units significantly exceeds the respective carrying values.
26
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
Interest Expense
Interest expense decreased by $0.2 million, or 14.2%, in fiscal 2012. Total interest on the Company’s $40 million revolving credit
facility (“revolver”) remained relatively flat at $0.4 million in fiscal 2012. The average borrowing on the revolver, computed
monthly, increased to $20.4 million in fiscal 2012, compared to $9.9 million in fiscal 2011. In fiscal 2011, the interest rate on the
revolver remained flat at 4.00%, the rate floor, for the first eleven months of the fiscal year. In the fourth fiscal quarter of fiscal
2011, the Company entered into an amended revolver agreement that eliminated the rate floor. As of June 30, 2012, the rate on
the revolver was 1.74%. Interest expense for the Company’s $25 million Senior Notes, which carry a fixed interest rate of 6.05%,
Other, Net
decreased by $0.2 million to $1.0 million in fiscal 2012 due to a lower average outstanding balance during the fiscal year.
For the fiscal 2012 full year, Other, net improved by $2.3 million to a current year income due primarily to favorable exchange
Income Taxes
movements relative to the euro, Swiss franc, Canadian dollar and Japanese yen.
The effective tax rate for the fourth quarter of fiscal 2012 was 76.3 percent, significantly higher than the prior year fourth quarter
rate of 41.4 percent. The primary factor increasing the fiscal 2012 rate was the impact of a non-deductible impairment charge of
$3.7 million, which increased the effective rate by approximately 32 percentage points. The remaining rate increase was due to
a combination of reduced foreign tax credits, elimination of the R&D tax credit and additional impact of the valuation allowance
related to the Company’s Belgian facility. The effective tax rate for fiscal 2012 was 41.2 percent, slightly higher than the prior year
rate of 40.8 percent.
The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not
be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In
determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history,
expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood
of realization of a deferred tax asset. During fiscal 2012, the Company continued to incur operating losses in certain foreign
jurisdictions where the loss carryforward period is unlimited. The Company has evaluated the realizability of the net deferred tax
assets related to these jurisdictions and concluded that based primarily upon continuing losses in these jurisdictions and failure
to achieve targeted levels of improvement, a full valuation allowance continues to be necessary. Therefore, the Company recorded
an additional valuation allowance of $1.1 million. Management believes that it is more likely than not that the results of future
Order Rates
operations will generate sufficient taxable income and foreign source income to realize the remaining deferred tax assets.
As of June 30, 2012, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog)
was $98.7 million, or approximately 33% lower than the six-month backlog of $146.9 million as of June 30, 2011. The decrease in
backlog is primarily a result of decreased orders by North American oil and gas customers for the Company’s 8500 transmission
system as rig operators adjust to the natural gas supply overhang and lower prices. In fiscal 2012, the Company began to accept
orders and ship units of its new 7500 transmission for the oil and gas market. Partially offsetting the slowdown in the North
American pressure-pumping market, the Company saw modest growth in the six-month backlog for commercial marine
Fiscal 2011 Compared to Fiscal 2010
transmissions for both the U.S. Gulf Region and Asia.
Net Sales
Net sales increased $82.9 million, or 36.4%, in fiscal 2011. The year-over-year movement in foreign exchange rates resulted in a net
favorable translation effect on sales of $3.2 million in fiscal 2011 compared to fiscal 2010.
In fiscal 2011, sales for our worldwide manufacturing operations, before eliminating intra-segment and inter-segment sales, were
higher by $84.3 million, or 46.0%, than in the prior fiscal year. Year-over-year changes in foreign exchange rates had a net favor-
able impact on sales of $0.7 million. In fiscal 2011, our domestic manufacturing operation saw the largest growth, with a 63.8%
increase in sales versus fiscal 2010. The primary driver for this increase was the sale of transmissions and related products for
the oil and gas markets as well as increased aftermarket shipments. The Company’s Italian manufacturing operations, which were
adversely impacted by the softness in the European megayacht and industrial markets in fiscal 2009 and 2010, experienced some
growth, with a 28.2% increase in sales compared to the prior fiscal year, after an extended period of decline in the second half of
fiscal 2009 and throughout fiscal 2010. The Company’s Belgian manufacturing operation saw an 11.8% increase in sales versus the
prior year, although it continued to be adversely impacted by the softness in the global megayacht market. The Company’s Swiss
manufacturing operation, which supplies customized propellers for the global megayacht and patrol boat markets, experienced a
10.1% increase in sales compared to the prior fiscal year, primarily due to the impact of the strengthening Swiss franc compared to
the U.S. dollar.
27
Our distribution segment, buoyed by continued growth in Asia and the North American oil and gas markets, experienced an
increase of $27.2 million, or 26.9%, in sales in fiscal 2011 compared to fiscal 2010. Compared to fiscal 2010, on average, the Asian
currencies strengthened against the U.S. dollar. The net translation effect of this on foreign distribution operations was to increase
revenues for the distribution segment by approximately $7.8 million versus the prior year, before eliminations. The Company’s
distribution operations in Singapore continued to experience strong demand for marine transmission products for use in various
commercial applications. This operation saw a 7.6% increase in sales versus the same period a year ago, and set a new sales record.
The Company’s distribution operation in the Northwest of the United States and Southwest of Canada experienced nearly a tripling
of its sales due to strength in the Canadian oil and gas market. The Company’s distribution operation in Italy, which provides boat
accessories and propulsion systems for the pleasure craft market, saw a decrease in sales of 23.6% due to continued weakness in
the Italian megayacht market. The Company’s distribution operation in Australia, which provides boat accessories, propulsion and
marine transmission systems for the pleasure craft market, saw an increase in sales of 26.1%, due to improving market conditions,
®
including sales of components parts for the Company’s new Express Joystick System
that were shipped in fiscal 2011.
Net sales for the Company’s largest product market, marine transmission and propulsion systems, were up 9% compared to the
prior fiscal year. Sales of the Company’s boat management systems manufactured at our Italian operation and servicing the global
megayacht market, were up approximately 12% versus the prior fiscal year. The Company saw modest recovery across most of the
marine product markets it serves. In the off-highway transmission market, the year-over-year increase of just over 124% can be
attributed primarily to increased sales of the 8500 transmission system for the oil and gas markets. Sales of transmission systems
for the military market were up slightly over the prior fiscal year. Vehicular transmissions for the airport rescue and fire fighting
(ARFF) and agricultural tractor markets were down versus fiscal 2010, however, the year-end backlog was up versus the prior fiscal
year end. The increase experienced in the Company’s industrial products of roughly 10% was due to increased sales in the agri-
culture, mining and general industrial markets, primarily in the North American and Italian markets, as well as increased activity
related to oil field markets.
The elimination for net intra-segment and inter-segment sales increased $28.6 million, or 50.1%, from $57.2 million in fiscal 2010
to $85.8 million in fiscal 2011. Year-over-year changes in foreign exchange rates had a net unfavorable impact of $5.2 million on net
Gross Profit
intra-segment and inter-segment sales.
In fiscal 2011, gross profit increased $47.2 million, or 78.1%, to $107.7 million. Gross profit as a percentage of sales increased
810 basis points in fiscal 2011 to 34.7%, compared to 26.6% in fiscal 2010. The table below summarizes the gross profit trend by
Gross Profit ($ millions)
2nd Quarter
quarter for fiscal years 2011 and 2010:
3rd Quarter
4th Quarter
1st Quarter
Year
2011 . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of Sales
______________
$20.0
$ 9.7
_______________
$23.8
$14.8
______________
$27.8
$16.5
______________
$36.1
$19.5
________
$107.7
$ 60.5
2011 . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . .
32.6%
20.7%
31.6%
26.8%
36.3%
27.1%
37.1%
30.2%
34.7%
26.6%
There were a number of factors that impacted the Company’s overall gross margin rate in fiscal 2011. Gross margin for the year
was favorably impacted by higher volumes, improved product mix, the absence of extended shutdowns in the first half of the
fiscal year at the Company’s domestic and European manufacturing operations, which occurred in fiscal 2010, and a decrease in
expenses related to the Company’s defined benefit plans. In addition, warranty expense as a percentage of sales decreased from
1.63%, or $3.7 million, in fiscal 2010 to 1.27%, or $3.9 million, in fiscal 2011 (for additional information on the Company’s
warranty expense, see Note F of the Notes to the Consolidated Financial Statements). The Company estimates the net favorable
impact of higher volumes on gross margin in fiscal 2011 was approximately $36 million. The favorable shift in product mix related
to the Company’s oil and gas transmission business had an estimated impact of $7 million. The decrease in warranty expense as a
percentage of sales can be attributed to an increase in volume and an overall reduction in specific warranty campaigns that were
experienced in fiscal 2010. In addition, the year-over-year movement in foreign exchange rates, primarily driven by movements in
the euro and Asian currencies, resulted in a net favorable translation effect on gross profit of $1.9 million in fiscal 2011 compared
to fiscal 2010. Partially offsetting the above favorable items, the Company reinstituted its annual incentive plan in fiscal 2011.
Approximately $1.5 million of the expense associated with the plan was recorded in cost of goods sold in fiscal 2011 compared to
Marketing, Engineering and Administrative (ME
$0 in fiscal 2010.
A) Expenses
Marketing, engineering, and administrative (ME&A) expenses increased $15.8 million, or 27.8%, in fiscal 2011 versus fiscal 2010.
Despite a significant increase in sales, and an increase in compensation related costs, as a percentage of sales, ME&A expenses
decreased by 160 basis points to 23.4% in fiscal 2011, compared to 25.0% in fiscal 2010.
&
28
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
The table below summarizes significant changes in certain ME&A expenses for the fiscal year:
$ thousands – (Income)/Expense
June 30, 2011
June 30, 2010
Fiscal Year Ended
Stock-Based Compensation . . . . . . . . . . . . . . . . . . . . . .
Incentive/Bonus Expense . . . . . . . . . . . . . . . . . . . . . . . .
________________
$6,148
4,964
________________
$507
—
Foreign Currency Translation . . . . . . . . . .
All Other, Net . . . . . . . . . . . . . .
Increase
__________
$5,641
4,964
_________
10,605
1,015
_________
11,620
4,207
_________
$15,827
_________
_________
The net remaining increase in ME&A expenses for the year of $4,207,000 was primarily driven by the restoration of salary and
wage reductions effected in fiscal 2010, higher benefit costs, increased travel, higher project-related expenses and a continued
emphasis on the Company’s product development program. As announced in June 2009, the Company implemented various
measures which included a reduction of annual base salaries of the Company’s salaried employees including all executive officers,
removal of the fiscal 2010 bonus/incentive plan, changes to several benefit programs, an across-the-board reduction of marketing,
advertising, travel and entertainment expenses, and staff reductions and layoffs. The significant increase in stock-based compen-
sation versus the prior year ($5,641,000) was driven by the accrual for performance-based awards granted in fiscal 2011, a catch-
up accrual for performance-based awards granted in fiscal 2010 and the impact of the significant increase in the Company’s stock
price (+340%) on the cash-based performance stock unit awards. The Company began accruing the performance-based awards
granted in fiscal 2009 and 2010 at the maximum payout level in fiscal 2011 due to the strong improvement in operating results.
No accrual was recorded for performance awards in fiscal 2010 due to the shortfall against performance targets, resulting in the
required “catch-up” accrual for the fiscal 2010 awards. For additional information on the Company’s stock-based compensation,
Restructuring of Operations
see Note K of the Notes to the Consolidated Financial Statements.
During the fourth quarter of fiscal 2009, the Company recorded a pre-tax restructuring charge of $948,000 related to a workforce
reduction at its Racine, Canadian and Australian operations. The charge consisted of severance costs for 22 salaried employees
and voluntary early retirement charges for an additional 16 manufacturing employees. During fiscal 2009, the Company made
cash payments of $180,000, resulting in an accrual balance at June 30, 2009, of $767,000. The remainder of this balance was paid
during fiscal 2010, resulting in no accrual balance at June 30, 2010 or 2011.
During the fourth quarter of fiscal 2007, the Company recorded a pre-tax restructuring charge of $2,652,000 related to a
workforce reduction at its Belgian operation that will allow for improved profitability through targeted outsourcing savings and
additional focus on core manufacturing processes. The charge consisted of prepension costs for 32 employees: 29 manufacturing
employees and 3 salaried employees. This charge was adjusted in the fourth quarter of fiscal 2008, resulting in a pre-tax benefit
of $373,000, due to final negotiations primarily related to notice period pay. Further adjustments were made in the fourth quar-
ter of fiscal 2009 (resulting in a pre-tax expense of $240,000 related to legally required inflationary adjustments to benefits) and
fiscal 2010 (resulting in a pre-tax expense of $342,000 primarily related to a Belgian legislation change surrounding the prepen-
sion costs and legally required inflationary adjustments). An additional adjustment was made during the fourth quarter of fiscal
2011, resulting in pre-tax expense of $187,000 related to the annual legally required inflationary adjustments to benefits. During
fiscal 2011 and 2010, the Company made cash payments of $252,000 and $152,000, respectively. The exchange impact in fiscal
2011 was to increase the accrual by $413,000. Accrued restructuring costs were $2,663,000 and $2,315,000 at June 30, 2011 and
2010, respectively.
The Company recorded a restructuring charge of $2,076,000 in the fourth quarter of fiscal 2005 as the Company restructured its
Belgian operation to improve future profitability. The charge consists of prepension costs for 37 employees: 33 manufacturing
employees and 4 salaried employees. An adjustment was made in the fourth quarter of fiscal 2010, resulting in a pre-tax expense
of $138,000 primarily related to a Belgian legislation change surrounding the prepension costs and legally required inflationary
adjustments. An additional adjustment was made in the fourth quarter of fiscal 2011, resulting in pre-tax expense of $58,000
related to the annual legally required inflationary adjustments to benefits. During fiscal 2011 and 2010, the Company made cash
payments of $220,000 and $192,000, respectively. The exchange impact in fiscal 2011 was to increase the accrual by $161,000.
Interest Expense
Accrued restructuring costs were $944,000 and $945,000 at June 30, 2011 and 2010, respectively.
Interest expense decreased by $0.5 million, or 24.7%, in fiscal 2011. Total interest on the Company’s $40 million revolving credit
facility (“revolver”) decreased $0.2 million from $0.6 million in fiscal 2010 to $0.4 million in fiscal 2011. This decrease can be
attributed to an overall decrease in the average borrowings year-over-year. The average borrowing on the revolver, computed
29
monthly, decreased to $9.9 million in fiscal 2011, compared to $14.4 million in fiscal 2010. The interest rate on the revolver
remained flat at 4.00%, the rate floor, for the first eleven months of the fiscal year. In the fourth fiscal quarter of fiscal 2011, the
Company entered into an amended revolver agreement that eliminated the rate floor. As of June 30, 2011, the rate on the revolver
was 2.09%. Interest expense for the Company’s $25 million Senior Notes, which carries a fixed interest rate of 6.05%, decreased
Income Taxes
by $0.2 million to $1.2 million in fiscal 2011.
The effective tax rate for fiscal 2011 of 40.8 percent is significantly lower than the prior year rate of 57.6 percent. As announced
in the third fiscal quarter, the current year rate was unfavorably impacted by the recording of a valuation allowance against
the net deferred tax asset at one of the Company’s foreign jurisdictions, resulting in additional tax expense of approximately
$1,613,000 related to the reversal of the fiscal 2010 ending deferred tax asset, along with the absence of a tax benefit on the cur-
rent year losses in this jurisdiction. This unfavorable item was partially offset by a $794,000 benefit due to a favorable adjustment
to the domestic net deferred tax asset resulting from the increase in the domestic estimated tax rate from 34.0 percent to 35.0
percent during fiscal 2011. The current year also includes the favorable impact of the reinstatement of the R&D credit, which was
passed into law during the second fiscal quarter. The annualized effective rate before 2011 discrete items is 33.3 percent. The
prior year rate was relatively high due to the impact of permanent deferred items, which remained relatively constant but had a
Order Rates
greater impact on the rate due to the low base of earnings.
As of June 30, 2011, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog)
was $146.9 million, or approximately 74% higher than the six-month backlog of $84.4 million as of June 30, 2010. The improve-
ment in backlog is a result of increased orders by oil and gas customers for the Company’s 8500 transmission system as stable
oil and gas prices have driven demand for new high-horsepower rigs. With oil and gas prices remaining firm, the Company is
optimistic demand for these transmissions will continue. In addition, the Company has begun to accept orders and has shipped
initial units of its new 7500 transmission for the oil and gas market. In the second half of fiscal 2011, the Company also saw
Liquidity and Capital Resources
modest growth in the six-month backlog for most of its marine and industrial products.
Fiscal Years 2012, 2011 and 2010
The net cash provided by operating activities in fiscal 2012 totaled $14.4 million, an increase of $0.6 million, or 4%, versus fiscal
2011. The slight increase was driven by a 39% increase in net earnings to $26.1 million largely offset by an increase in working
capital. Adjusted for the impact of foreign currency translation, net inventory increased $9.6 million. The majority of the net
increase in inventory came at the Company’s North American manufacturing and distribution operations. This increase was
driven by strong demand for the Company’s commercial marine transmissions as well as inventory to serve the Company’s North
American and Asian oil and gas markets. Net inventory as a percentage of the six-month backlog increased from 67.4% as of
June 30, 2011, to 104.5% as of June 30, 2012. The increase in trade accounts receivable was a result of higher sales in the second
half of fiscal 2012 compared to the same period in fiscal 2011, $191.6 million versus $173.9 million, respectively. The decrease
in trade accounts payable was due to a reduction in purchasing activity related to significant decrease in inventory in the fourth
quarter of fiscal 2012 ($14.6 million) compared to an increase in inventory in the fourth quarter of fiscal 2011 ($5.8 million).
The net cash provided by operating activities in fiscal 2011 totaled $13.9 million, a decrease of $21.3 million, or 61%, versus
fiscal 2010. The net decrease was driven by a net increase in working capital, primarily due to increases in net inventories and
trade accounts receivable balances, partially offset by a net increase in trade accounts payable and an increase in net earnings of
$18.2 million. The majority of the net increase in inventory came at the Company’s North American manufacturing and distri-
bution operations. This increase was driven by strong demand for the Company’s 8500 transmission system for the oil and gas
market as well as a build-up of inventory in anticipation of the demand for the Company’s new 7500 transmission. Net inventory
as a percentage of the six-month backlog decreased from 86.2% as of June 30, 2010, to 67.4% as of June 30, 2011. The increase in
trade accounts receivable was a result of higher sales in the second half of fiscal 2011 compared to the same period in fiscal 2010.
The net cash provided by operating activities in fiscal 2010 totaled $35.1 million, an increase of $23.5 million, or 203%,
versus fiscal 2009. The net increase was driven by a net decrease in working capital, primarily due to decreases in net inventories
and trade accounts receivable balances, partially offset by a net decrease in net earnings of $11.1 million. The net decrease in
inventory came primarily at the Company’s European manufacturing locations and its distribution operation in Singapore. The
decrease in trade accounts receivable was a result of lower sales in the second half of fiscal 2010 compared to the same period in
fiscal 2009 as well as a continued effort to collect outstanding receivables balances globally.
The net cash used for investing activities in fiscal 2012 of $13.9 million consisted primarily of capital expenditures for machinery
and equipment at our U.S. and Belgian manufacturing operations. In fiscal 2012, the Company spent $13.7 million for capital
expenditures, up from $12.0 million and $4.5 million in fiscal years 2011 and 2010, respectively.
30
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
The net cash used for investing activities in fiscal 2011 of $12.0 million consisted primarily of capital expenditures for machinery
and equipment at our U.S. and Belgian manufacturing operations. In fiscal 2011, the Company spent $12.0 million for capital
expenditures, up from $4.5 million and $8.9 million in fiscal years 2010 and 2009, respectively.
The net cash used for investing activities in fiscal 2010 of $4.6 million consisted primarily of capital expenditures for machinery
and equipment at our U.S. and Belgian manufacturing operations, and the continuation of the global implementation of a new ERP
system started in fiscal 2007. In fiscal 2010, the Company spent $4.5 million for capital expenditures, down from $8.9 million and
$15.0 million in fiscal years 2009 and 2008, respectively. The software costs associated with the new ERP have been substantially
paid for and were capitalized in fiscal years 2007 and 2008.
In fiscal 2012, the net cash used by financing activities of $3.5 million consisted primarily of the acquisition of treasury stock of
$2.4 million, under a Board-authorized stock repurchase program, and dividends paid to shareholders of the Company of $3.9
million, partially offset by proceeds from long-term debt of $2.6 million. On February 1, 2008, the Board of Directors authorized
the purchase of 500,000 shares of Common Stock at market values. In fiscal 2012, the Company purchased 125,000 shares of its
outstanding common stock at an average price of $19.40 per share for a total cost of $2.4 million.
In fiscal 2011, the net cash used by financing activities of $4.2 million consisted primarily of payments on long-term debt of $1.4
million and dividends paid to shareholders of the Company of $3.4 million.
In fiscal 2010, the net cash used by financing activities of $23.2 million consisted primarily of payments on long-term debt and
Future Liquidity and Capital Resources
dividends paid to shareholders of the Company.
In December 2002, the Company entered into a $20,000,000 revolving loan agreement with M&I Marshall & Ilsley Bank (“M&I”),
which had an original expiration date of October 31, 2005. Through a series of amendments, the last of which was agreed to
during the fourth quarter of fiscal 2011, the total commitment was increased to $40,000,000 and the term was extended to May 31,
2015. This agreement contains certain covenants, including restrictions on investments, acquisitions and indebtedness. Financial
covenants include a minimum consolidated net worth amount, a minimum EBITDA for the most recent four fiscal quarters of
$11,000,000 at June 30, 2012, and a maximum total funded debt to EBITDA ratio of 3.0 at June 30, 2012. As of June 30, 2012, the
Company was in compliance with these covenants with a four quarter EBITDA total of $56,789,000 and a funded debt to EBITDA
ratio of 0.57. The minimum net worth covenant fluctuates based upon actual earnings and is subject to adjustment for certain
pension accounting adjustments to equity. As of June 30, 2012, the minimum equity requirement was $117,468,000 compared to
an actual result of $169,983,000 after all required adjustments. The outstanding balance under the revolving loan agreement of
$17,550,000 and $11,300,000 at June 30, 2012 and June 30, 2011, respectively, is classified as long-term debt. In accordance with
the loan agreement as amended, the Company can borrow at LIBOR plus an additional “Add-On,” between 1.5% and 2.5%, depend-
ing on the Company’s Total Funded Debt to EBITDA ratio. The rate was 1.74% and 2.09% at June 30, 2012 and 2011, respectively.
On April 10, 2006, the Company entered into a Note Agreement (the “Note Agreement”) with The Prudential Insurance Company
of America and certain other entities (collectively, “Purchasers”). Pursuant to the Note Agreement, Purchasers acquired, in the
aggregate, $25,000,000 in 6.05% Senior Notes due April 10, 2016 (the “Notes”). The Notes mature and become due and payable
in full on April 10, 2016 (the “Payment Date”). Prior to the Payment Date, the Company is obligated to make quarterly payments
of interest during the term of the Notes, plus prepayments of principal of $3,571,429 on April 10 of each year from 2010 to 2015,
inclusive. The outstanding balance was $14,285,714 and $17,857,143 at June 30, 2012 and 2011, respectively. Of the outstanding
balance, $3,571,429 was classified as a current maturity of long-term debt at June 30, 2012 and 2011, respectively. The remaining
$10,714,286 and $14,285,714 is classified as long-term debt as of June 30, 2012 and 2011, respectively. The Company also has the
option of making additional prepayments subject to certain limitations, including the payment of a Yield-Maintenance Amount as
defined in the Note Agreement. In addition, the Company will be required to make an offer to purchase the Notes upon a Change
of Control, as defined in the Note Agreement, and any such offer must include the payment of a Yield-Maintenance Amount. The
Note Agreement includes certain financial covenants which are identical to those associated with the revolving loan agreement
discussed above. The Note Agreement also includes certain restrictive covenants that limit, among other things, the incurrence of
additional indebtedness and the disposition of assets outside the ordinary course of business. The Note Agreement provides that
it shall automatically include any covenants or events of default not previously included in the Note Agreement to the extent such
covenants or events of default are granted to any other lender of an amount in excess of $1,000,000. Following an Event of Default,
each Purchaser may accelerate all amounts outstanding under the Notes held by such party.
Four quarter EBITDA and total funded debt are non-GAAP measures, and are included herein for the purpose of disclosing the
status of the Company’s compliance with the four quarter EBITDA covenant and the total funded debt to four quarter EBITDA ratio
covenant described above. In accordance with the Company’s revolving loan agreement with M&I and the Note Agreement:
• “ Four quarter EBITDA” is defined as “the sum of (i) Net Income plus, to the extent deducted in the calculation of Net Income, (ii)
interest expense, (iii) depreciation and amortization expense, and (iv) income tax expense;” and
31
• “ Total funded debt” is defined as “(i) all Indebtedness for borrowed money (including without limitation, Indebtedness
evidenced by promissory notes, bonds, debentures and similar interest-bearing instruments), plus (ii) all purchase money
Indebtedness, plus (iii) the principal portion of capital lease obligations, plus (iv) the maximum amount which is available to
be drawn under letters of credit then outstanding, all as determined for the Company and its consolidated Subsidiaries as of
the date of determination, without duplication, and in accordance with generally accepted accounting principles applied on a
consistent basis.”
• “ Total funded debt to four quarter EBITDA” is defined as the ratio of total funded debt to four quarter EBITDA calculated in
accordance with the above definitions.
The Company’s total funded debt as of June 30, 2012 and June 30, 2011, was equal to the total debt reported on the Company’s
June 30, 2012 and June 30, 2011, Consolidated Balance Sheet, and therefore no reconciliation is included herein. The following
table sets forth the reconciliation of the Company’s reported Net Earnings to the calculation of four quarter EBITDA for the four
Four Quarter EBITDA Reconciliation
quarters ended June 30, 2012:
Net Earnings Attributable to Twin Disc . . . . . . . . .
Depreciation & Amortization. . . . . . . . . . . . . . . . . . .
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Four Quarter EBITDA. . . . . . . . . . . . . . . . . . . . . . . .
Total Funded Debt to Four Quarter EBITDA
Total Funded Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divided by: Four Quarter EBITDA . . . . . . . . . . . . . .
Total Funded Debt to Four Quarter EBITDA . . .
$26,112,000
10,756,000
1,475,000
18,446,000
_______________
$56,789,000
_______________
_______________
$32,145,000
56,789,000
_______________
0.57
_______________
_______________
As of June 30, 2012, the Company was in compliance with all of the covenants described above. As of June 30, 2012, the
Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was $98.7 million, or
approximately 33% lower than the six-month backlog of $146.9 million as of June 30, 2011. In spite of the decrease in order back-
log driven primarily by the recent decline in the North American oil and gas market, as rig operators adjust to the natural
gas supply overhang and lower prices, the Company does not expect to violate any of its financial covenants in fiscal 2013. The
current margin surrounding ongoing compliance with the above covenants, in particular, minimum EBITDA for the most recent
four fiscal quarters and total funded debt to EBITDA, are expected to decrease in fiscal 2013. Please see the factors discussed
under Item 1(a), Risk Factors, of this Form 10-K for further discussion of this topic.
The Company’s balance sheet remains very strong, there are no off-balance-sheet arrangements other than the operating
leases listed below, and we continue to have sufficient liquidity for near-term needs. The Company had $22.5 million of available
borrowings on our $40 million revolving loan agreement as of June 30, 2012, and expects to generate enough cash from opera-
tions to meet our operating and investing needs. For the years ended June 30, 2012 and June 30, 2011, respectively, the Company
generated net cash from operating activities of $14.4 million and $13.9 million, respectively. As of June 30, 2012, the Company
also had cash of $15.7 million, primarily at its overseas operations. These funds, with some restrictions, are available for repatria-
tion as deemed necessary by the Company. In fiscal 2013, the Company expects to contribute $6.5 million to its defined benefit
pension plans, the minimum contributions required. However, if the Company elects to make voluntary contributions in fiscal
2013, it intends to do so using cash from operations and, if necessary, from available borrowings under existing credit facilities.
Net working capital increased $19.0 million, or 17.1%, in fiscal 2012, and the current ratio increased from 2.3 at June 30, 2011
to 2.9 at June 30, 2012. The increase in net working capital was primarily driven by an increase in accounts receivable and
inventories as a result of a significant increase in sales and orders in fiscal 2012, as well as a decrease in trade accounts payable
due to the significant reduction in inventory in the fourth fiscal quarter of 2012.
Twin Disc expects capital expenditures to be between $15 and $20 million in fiscal 2013. These anticipated expenditures reflect
the Company’s plans to continue investing in modern equipment and facilities, its global sourcing program and new products as
well as expanding capacity at facilities around the world.
Management believes that available cash, the credit facility, cash generated from future operations, existing lines of credit and
potential access to debt markets will be adequate to fund Twin Disc’s capital requirements for the foreseeable future.
32
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
Off Balance Sheet Arrangements and Contractual Obligations
The Company had no off-balance sheet arrangements, other than operating leases, as of June 30, 2012 and 2011.
The Company has obligations under non-cancelable operating lease contracts and loan and senior note agreements for certain
Less than
future payments. A summary of those commitments follows (in thousands):
1 Year
Contractual Obligations
After
5 Years
3–5
Years
1–3
Years
Total
Revolving loan borrowing
Long-term debt
Operating leases
$17,550
$ 14,595
$ 6,981
—
$3,744
$3,120
$17,550
$7,253
$2,705
—
$ 3,571
$ 1,156 —
—
$27
The table above does not include accrued interest of approximately $230,000 related to the revolving loan borrowing. The table
above also does not include tax liabilities for unrecognized tax benefits totaling $560,000, excluding related interest and penalties,
as the timing of their resolution cannot be estimated. See Note N of the Consolidated Financial Statements for disclosures surround-
ing uncertain income tax positions.
The Company maintains defined benefit pension plans for some of its operations in the United States and Europe. The Company
has established the Pension Committee to oversee the operations and administration of the defined benefit plans. The Company
estimates that fiscal 2012 contributions to all defined benefit plans will total $6,479,000. As part of the pension funding provisions
contained in the Surface Transportation Extension Act of 2012 passed by Congress in June 2012, Twin Disc, Inc.’s fiscal 2013
Other Matters
pension contributions are projected to be reduced to $4 million from $6 million, pending a final interest rate to be issued by the IRS.
Critical Accounting Policies
The preparation of this Annual Report requires management’s judgment to make estimates and assumptions that affect the re-
ported 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.
The Company’s significant accounting policies are described in Note A to the consolidated financial statements. Not all of these
significant accounting policies require management to make difficult, subjective, or complex judgments or estimates. However, the
Accounts Receivable
policies management considers most critical to understanding and evaluating our reported financial results are the following:
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
Inventory
adverse impact on the collectibility of our accounts receivable and future operating results.
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 inven-
tory. The adjustments to the reserve are estimates that could vary significantly, either favorably or unfavorably, from the actual
Goodwill
requirements if future economic conditions, customer demand or competitive conditions differ from expectations.
In conformity with U.S. GAAP, goodwill is tested for impairment annually or more frequently if events or changes in circumstances
indicate that an impairment might exist. The Company performs impairment reviews for its four reporting units using a fair-value
method based on management’s judgments and assumptions or third party valuations. The Company is subject to financial risk to
the extent the carrying amount of a reporting unit exceeds its fair value. Based upon the goodwill impairment review completed
at the end of fiscal 2012, it was determined that the goodwill for one of the Company’s reporting units was fully impaired. The fair
value for each of the remaining reporting units at June 30, 2012 significantly exceeded the carrying value and therefore goodwill
was not impaired. See Note D for additional discussion of the fiscal 2012 impairment charge.
33
In determining the fair value of our reporting units, management is required to make estimates of future operating results,
including growth rates, and a weighted-average cost of capital that reflects current market conditions, among others. Our
development of future operating results incorporate management’s best estimates of current and future economic and market
conditions which are derived from a review of past results, current results and approved business plans. Many of the factors used
in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods.
While the Company believes its judgments and assumptions were reasonable, different assumptions, economic factors and/or
market indicators could materially change the estimated fair values of the Company’s reporting units and, therefore, impairment
charges could be required in the future.
The following assumptions are key to our discounted cash flow model:
Business Projections – We make assumptions about the level of sales for each fiscal year including expected growth, if any.
This assumption drives our planning for volumes, mix and pricing. We also make assumptions about our cost levels (e.g.,
capacity utilization, cost performance, etc.). These assumptions are key inputs for developing our cash flow projections. These
projections are derived using our internal business plans that are reviewed annually during the annual budget process;
Discount Rates – When measuring a possible impairment, future cash flows are discounted at a rate that is consistent with a
weighted average cost of capital for a potential market participant. The weighted average cost of a capital is an estimate of the
overall after-tax rate of return required by equity and debt holders of a business enterprise.
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
Pension and Other Postretirement Benefit Plans
future could differ materially from what actually transpires.
The Company provides a wide range of benefits to employees and retired employees, including pensions and postretirement
health care coverage. Plan assets and obligations are recorded annually based on the Company’s measurement date utilizing
various actuarial assumptions such as discount rates, expected return on plan assets, compensation increases, retirement and
mortality tables, and health care cost trend rates as of that date. The approach used to determine the annual assumptions are
as follows:
Discount Rate – based on the Hewitt Top Quartile Yield Curve at June 30, 2012, as applied to the expected payouts from
the pension plans. This yield curve is made up of Corporate Bonds rated AA or better.
Expected Return on Plan Assets – based on the expected long-term average rate of return on assets in the pension funds, which
is reflective of the current and projected asset mix of the funds and considers historical returns earned on the funds.
Compensation Increase – reflect the long-term actual experience, the near-term outlook and assumed inflation.
Retirement and Mortality Rates – based upon the Generational Mortality Table for fiscal 2010, 2011 and 2012.
Health Care Cost Trend Rates – developed based upon historical cost data, near-term outlook and an assessment of likely
long-term trends.
Measurements of net periodic benefit cost are based on the assumptions used for the previous year-end measurements of assets
and obligations. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions
when appropriate. As required by U.S. GAAP, the effects of the modifications are recorded currently or amortized over future
periods. Based on information provided by its independent actuaries and other relevant sources, the Company believes that the
assumptions used are reasonable; however, changes in these assumptions could impact the Company’s financial position, results
Income Taxes
of operations or cash flows.
The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company maintains valuation allowances when it is more likely than not
that all or a portion of a deferred tax asset will not be realized. In determining whether a valuation allowance is required, the
34
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
Company takes into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods,
and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. During fiscal 2012, the
Company concluded that it was more likely than not that certain net deferred tax assets in foreign jurisdictions would not be
Recently Issued Accounting Standards
realized, resulting in the recording of a valuation allowance totaling $3,811,000.
In July 2012, the Financial Accounting Standards Board (“FASB”) issued amended guidance that simplifies how entities test
indefinite-lived intangible assets other than goodwill for impairment. After an assessment of certain qualitative factors, if it is
determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impair-
ment test. Otherwise, the quantitative test is optional. The amended guidance is effective for annual and interim impairment tests
performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance is
not expected to have a material impact on the company’s financial results.
In September 2011, the FASB issued a standards update that is intended to simplify how entities test goodwill for impairment.
This update permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value
of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step
goodwill impairment test described in Accounting Standards Codification (“ASC”) Topic 350 “Intangibles-Goodwill and Other.”
This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December
15, 2011 (the Company’s fiscal 2013). This standards update is not expected to have a material impact on the Company’s
financial statements.
In June 2011, FASB issued a standards update that will allow an entity the option to present the total of comprehensive income,
the components of net income, and the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. This standards update eliminates the option of presenting
the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update is effec-
tive for fiscal years, and interim periods within those years, beginning after December 15, 2011 (the Company’s fiscal 2013). This
standards update is not expected to have any impact on the Company’s financial statements.
In May 2011, the FASB issued a standards update which represents the converged guidance of the FASB and the International
Accounting Standards Board (“IASB”) on fair value measurement. This collective effort has resulted in common requirements
for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the
term “fair value.” This update is to be applied prospectively effective for interim and annual periods beginning after December
15, 2011 (the Company’s third fiscal quarter of 2012). This standards update did not have a material impact on the Company’s
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 currency exchange rates. To
reduce such risks, the Company selectively uses financial instruments and other proactive 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. Discussion of the Company’s accounting policies and further disclosure relating to
financial instruments is included in Note A to the consolidated financial statements.
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 LIBOR interest rate. The Company currently has a $40 million
revolving loan agreement, which is due to expire on May 31, 2015. In accordance with the loan agreement as amended, the
Company borrows at LIBOR plus an additional “Add-On,” between 1.5% and 2.5%, 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, 2012,
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 $31,000.
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. Direct material cost as a percent of
total cost of goods sold was 53.8% for fiscal 2012.
Currency risk – The Company has exposure to foreign currency exchange fluctuations. Approximately nineteen percent of the
Company’s revenues in the year ended June 30, 2012, were denominated in currencies other than the U.S. dollar. Of that total,
approximately 73 percent was denominated in euros with the balance comprised of Japanese yen, Swiss franc and the Australian
and Singapore dollars. The Company does not hedge the translation exposure represented by the net assets of its foreign subsid-
iaries. 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.
35
Derivative financial instruments – The Company has written policies and procedures that place all financial instruments under
the direction of the Company corporate treasury department 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.
Periodically, the Company 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 and Comprehensive (Loss) Income 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 fiscal 2012 and 2011 was the euro. At June 30, 2012 and 2011, the Company had no outstanding forward
exchange contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements and Financial Statement Schedule.
2012
Sales and Earnings by Quarter – Unaudited (in thousands, except per share amounts)
2nd Qtr.
1st Qtr.
3rd Qtr.
4th Qtr.
Year
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to Twin Disc. . . . . . . . . . . .
Basic earnings per share attributable
to Twin Disc common shareholders . . . . . . . . . . .
Diluted earnings per share attributable
to Twin Disc common shareholders . . . . . . . . . . .
2011
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to Twin Disc. . . . . . . . . . . .
Basic earnings per share attributable
to Twin Disc common shareholders . . . . . . . . . . .
Diluted earnings per share attributable
to Twin Disc common shareholders . . . . . . . . . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
__________
$81,330
30,768
9,581
__________
$82,941
29,562
5,857
__________
$95,490
33,056
9,393
__________
$96,109
28,246
1,281
___________
$355,870
121,632
26,112
0.84
0.51
0.82
0.11
0.83
1st Qtr.
0.08
0.51
2nd Qtr.
0.08
0.81
3rd Qtr.
0.09
0.11
4th Qtr.
0.09
2.29
2.26
Year
0.34
__________
$61,395
20,023
2,656
__________
$75,160
23,757
4,034
__________
$76,471
27,782
4,548
__________
$97,367
36,121
7,592
___________
$310,393
107,683
18,830
0.24
0.24
0.07
0.36
0.35
0.07
0.40
0.67
0.40
0.08
0.66
0.08
1.66
1.64
0.30
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9(a). CONTROLS AND PROCEDURES
Conclusion Regarding Disclosure Controls and Procedures
As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as of the end of the period covered by this
report and under the supervision and with the participation of management, including the Chief Executive Officer and the
Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and
procedures. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure
controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company
in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms, and to provide reasonable assurance that infor-
mation required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to
allow timely decisions regarding disclosure.
36
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company,
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and directors of the Company, and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the Company’s assets that could have a material effect on financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls
may deteriorate.
The Company conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the
framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based upon such evaluation, our management concluded that our internal control over financial reporting
was effective as of June 30, 2012.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the Company’s consolidated
financial statements included in this annual report and has issued an attestation report on the Company’s internal control over
Changes in Internal Controls Over Financial Reporting
financial reporting.
During the fourth quarter of fiscal 2012, there have not been any changes in the Company’s internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9(b). OTHER INFORMATION
Not applicable.
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 19, 2012, 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 19, 2012,
which is incorporated into this report by reference.
For information with respect to the Company’s Code of Ethics, see “Guidelines for Business Conduct and Ethics” in the Proxy
Statement for the Annual Meeting of Shareholders to be held October 19, 2012, 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 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 19, 2012, which is incorporated into this report by reference. There were no changes to these procedures since the
Company’s last disclosure relating to these procedures.
37
For information with respect to the Audit Committee Financial Expert, see “Director Committee Functions: Audit Committee” in
the Proxy Statement for the Annual Meeting of Shareholders to be held October 19, 2012, which is incorporated into this report
by reference.
For information with respect to the Audit Committee Disclosure, see “Director Committee Functions: Audit Committee” in the Proxy
Statement for the Annual Meeting of Shareholders to be held October 19, 2012, which is incorporated into this report by reference.
For information with respect to the Audit Committee Membership, see “Director Committee Functions: Committee Membership”
in the Proxy Statement for the Annual Meeting of Shareholders to be held October 19, 2012, which is incorporated into this report
by reference.
ITEM 11. EXECUTIvE COMPENSATION
The information set forth under the captions “Executive Compensation,” “Director Compensation,” “Compensation Committee
Interlocks and Insider Participation,” and “Compensation Committee Report,” in the Proxy Statement for the Annual Meeting of
Shareholders to be held on October 19, 2012, is incorporated into this report by reference. Discussion in the Proxy Statement
under the captions “Compensation Committee Report” 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 forth in the Proxy Statement for the Annual Meeting of
Shareholders to be held on October 19, 2012, under the captions “Principal Shareholders” and “Directors and Executive Officers”
and incorporated into this report by reference.
For information regarding securities authorized for issuance under equity compensation plans of the Company, see “Equity
Compensation Plan Information” in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 19, 2012,
which is 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE
For information with respect to transactions with related persons and policies for the review, approval or ratification of such
transactions, see “Corporate Governance – Review, Approval or Ratification of Transactions with Related Persons” in the Proxy
Statement for the Annual Meeting of Shareholders to be held October 19, 2012, which is incorporated into this report by reference.
For information with respect to director independence, see “Corporate Governance – Board Independence” in the Proxy Statement
for the Annual Meeting of Shareholders to be held October 19, 2012, which is incorporated into this report by reference.
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 October 19, 2012, under the heading “Fees to Independent Registered Public Accounting Firm.”
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial Statements
See “Index to Consolidated Financial Statements and Financial Statement Schedule”, the Report of Independent Registered Public
Accounting Firm and the Consolidated Financial Statements, all of which are incorporated by reference.
(a)(2) Consolidated Financial Statement Schedule
See “Index to Consolidated Financial Statements and Financial Statement Schedule”, and the Consolidated Financial Statement
Schedule, 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.
38
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Consolidated Balance Sheets as of June 30, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years
ended June 30, 2012, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Consolidated Statements of Cash Flows for the years ended June 30, 2012, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Consolidated Statements of Changes in Equity for the years
ended June 30, 2012, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45–65
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II – Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
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.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and 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 its subsidiaries at June 30, 2012 and June 30, 2011, and
the results of their operations and their cash flows for each of the three years in the period ended June 30, 2012 in conformity
with accounting principles generally accepted in the United Sates of America. In addition, in our opinion, the financial state-
ment 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. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule,
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item
9(a). Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the
Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit prepara-
tion of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Milwaukee, Wisconsin
September 13, 2012
40
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2012 and 2011
ASSETS
(In thousands, except share amounts)
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES and EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Twin Disc shareholders’ equity:
Preferred shares authorized: 200,000;
issued: none; no par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shares authorized: 30,000,000;
issued: 13,099,468; no par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,794,981 and 1,739,574 shares, respectively)
Total Twin Disc shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The notes to consolidated financial statements are an integral part of these statements.
2012
2011
___________
___________
$ 15,701
63,438
103,178
3,745
11,099
___________
197,161
66,356
13,116
14,335
4,996
7,868
___________
$303,832
___________
___________
$ 3,744
23,550
39,331
___________
66,625
28,401
64,009
3,340
4,171
___________
166,546
$ 20,167
61,007
99,139
3,346
11,509
___________
195,168
65,791
17,871
16,480
6,439
7,371
___________
$309,120
___________
___________
$ 3,915
38,372
41,673
___________
83,960
25,784
50,063
4,170
7,089
___________
171,066
—
—
12,759
185,083
(34,797 )
___________
163,045
26,781
___________
10,863
162,857
(11,383 )
___________
162,337
25,252
___________
136,264
1,022
___________
137,286
___________
$303,832
___________
___________
137,085
969
___________
138,054
___________
$309,120
___________
___________
41
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIvE INCOME (LOSS)
for the years ended June 30, 2012, 2011 and 2010
(In thousands, except per share data)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing, engineering and administrative expenses . . . . . . . . . . . . . . . . . . .
Impairment charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes and noncontrolling interest . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net earnings attributable to noncontrolling interest . . . . . . . . . . . . . . .
Net earnings attributable to Twin Disc . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
___________
$355,870
234,238
___________
121,632
73,091
3,670
___________
44,871
95
(1,475 )
1,265
___________
(115 )
___________
44,756
18,446
___________
26,310
(198 )
___________
$ 26,112
___________
___________
___________
$310,393
202,710
___________
107,683
72,967
—
___________
34,716
98
(1,719 )
(1,066 )
___________
(2,687 )
___________
32,029
13,064
___________
18,965
(135 )
___________
$ 18,830
___________
___________
___________
$227,534
167,069
___________
60,465
57,380
—
___________
3,085
84
(2,282 )
835
___________
(1,363 )
___________
1,722
992
___________
730
(133 )
___________
$ 597
___________
___________
Earnings per share data:
Basic earnings per share attributable to
Twin Disc common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.29
$ 1.66
$ 0.05
Diluted earnings per share attributable to
Twin Disc common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.26
1.64
0.05
Weighted average shares outstanding data:
Basic shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss):
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit plan adjustments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive earnings attributable to noncontrolling interest . . . . . .
Comprehensive income (loss) attributable to Twin Disc. . . . . . . . . . . .
11,410
146
___________
11,556
___________
___________
11,319
144
____________
11,463
____________
____________
$ 26,310
(11,738 )
(11,690 )
___________
2,882
(198 )
___________
$ 2,684
___________
___________
$ 18,965
19,272
11,506
___________
49,743
(135 )
___________
$ 49,608
___________
___________
11,063
96
___________
11,159
___________
___________
$ 730
(9,650 )
(6,414 )
___________
(15,334 )
(133 )
___________
$(15,467 )
___________
___________
The notes to consolidated financial statements are an integral part of these statements.
42
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2012, 2011 and 2010 (in thousands)
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of plant assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for deferred income taxes . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Trade accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued/prepaid retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of plant assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from (payments of) long-term debt . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock compensation . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
2010
_________
_________
_________
$26,310
$18,965
$ 730
10,756
315
3,670
1,642
7,486
(5,982 )
(9,563 )
(915 )
(13,279 )
(2,273 )
(3,723 )
_________
14,444
_________
116
(13,733 )
(293 )
_________
(13,910 )
_________
3
(145 )
2,590
169
(2,425 )
(3,886 )
(131 )
535
(184 )
_________
(3,474 )
_________
(1,526 )
_________
(4,466 )
20,167
_________
$15,701
_________
_________
9,904
120
—
6,148
1,354
(13,605 )
(17,258 )
(1,736 )
11,839
6,713
(8,584 )
_________
13,860
_________
296
(12,028 )
(293 )
_________
(12,025 )
_________
84
(83 )
(1,405 )
322
—
(3,411 )
(138 )
317
136
_________
(4,178 )
_________
3,488
_________
1,145
19,022
_________
$20,167
_________
_________
9,817
261
—
507
(1,474 )
8,181
16,338
1,177
(191 )
(3,285 )
3,055
_________
35,116
_________
148
(4,456 )
(293 )
_________
(4,601 )
_________
86
(690 )
(18,950 )
108
—
(3,133 )
(160 )
(131 )
(318 )
_________
(23,188 )
_________
(1,571 )
_________
5,756
13,266
_________
$19,022
_________
_________
$ 1,507
13,629
$ 1,520
10,453
$ 2,092
2,832
The notes to consolidated financial statements are an integral part of these statements.
43
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
for the years ended June 30, 2012, 2011 and 2010 (in thousands)
Balance at June 30, 2009
Net earnings
Translation adjustments
Benefit plan adjustments, net of tax
Cash dividends
Compensation expense and
windfall tax benefits
Shares (acquired) issued, net
Balance at June 30, 2010
Net earnings
Translation adjustments
Benefit plan adjustments, net of tax
Cash dividends
Compensation expense and
windfall tax benefits
Shares (acquired) issued, net
Balance at June 30, 2011
Net earnings
Translation adjustments
Benefit plan adjustments, net of tax
Cash dividends
Compensation expense and
windfall tax benefits
Balance at June 30, 2012
Shares (acquired) issued, net
Accumulated
Other
Retained Comprehensive
Income (Loss)
Earnings
Non-
Treasury controlling
Interest
Stock
Total
Equity
___________
$149,974
597
—
—
(3,133 )
_________________
$(25,935 )
—
(9,699 )
(6,414 )
—
___________
$(30,256 )
—
—
—
—
________
$837
133
49
—
(160 )
___________
$107,825
730
(9,650 )
(6,414 )
(3,293 )
Common
Stock
__________
$13,205
—
—
—
—
329
(2,867 )
__________
—
—
___________
—
—
____________
—
2,659
___________
—
—
________
329
(208 )
___________
10,667
—
—
—
—
147,438
18,830
—
—
(3,411 )
(42,048 )
—
19,159
11,506
—
(27,597 )
—
—
—
—
859
135
113
—
(138 )
89,319
18,965
19,272
11,506
(3,549 )
2,219
(2,023 )
__________
—
—
___________
—
—
____________
—
2,345
___________
—
—
________
2,219
322
___________
10,863
—
—
—
—
162,857
26,112
—
—
(3,886 )
(11,383 )
—
(11,724 )
(11,690 )
—
(25,252 )
—
—
—
—
969
198
(14 )
—
(131 )
138,054
26,310
(11,738 )
(11,690 )
(4,017 )
2,808
(912 )
__________
$12,759
__________
__________
—
—
___________
$185,083
___________
___________
—
—
____________
$(34,797 )
____________
____________
—
(1,529 )
___________
$(26,781 )
___________
___________
—
—
________
$1,022
________
________
2,808
(2,441 )
___________
$137,286
___________
___________
The notes to consolidated financial statements are an integral part of these statements.
44
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
TWIN DISC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Principles
The following is a summary of the significant accounting policies followed in the preparation of these financial statements:
– 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
May 31, to facilitate prompt reporting of consolidated accounts. The Company also has a noncontrolling interest in a Japanese
joint venture, which is consolidated based upon a fiscal year ending March 31. All significant intercompany transactions have
Translation of Foreign Currencies
been eliminated.
– 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.
The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss), which
is included in equity. Gains and losses from foreign currency transactions are included in earnings. Included in other income
(expense) are foreign currency transaction (gains) losses of ($1,103,000), $1,141,000 and ($571,000) in fiscal 2012, 2011 and
Receivables
2010, respectively.
– Trade accounts receivable are stated net of an allowance for doubtful accounts of $2,194,000 and $2,093,000 at June
30, 2012 and 2011, respectively. The Company records an allowance for doubtful accounts provision for certain customers where
a risk of default has been specifically identified as well as provisions determined on a general basis when it is believed that some
default is probable and estimable but not yet clearly associated with a specific customer. The assessment of likelihood of customer
default is based on a variety of factors, including the length of time the receivables are past due, the historical collection experi-
ence and existing economic conditions. Various factors may adversely impact our customer’s ability to access sufficient liquidity
and capital to fund their operations and render the Company’s estimation of customer defaults inherently uncertain. While the
Company believes current allowances for doubtful accounts are adequate, it is possible that these factors may cause higher levels
Fair Value of Financial Instruments
of customer defaults and bad debt expense in future periods.
– The carrying amount reported in the consolidated balance sheets for cash, trade accounts
receivable, accounts payable and short term borrowings approximate fair value because of the immediate short-term
maturity of these financial instruments. The fair value of the Company’s 6.05% Senior Notes due April 10, 2016, was approxi-
mately $15,768,000 and $19,589,000 at June 30, 2012 and 2011, respectively. The fair value of the Senior Notes is estimated
by discounting the future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. This
rate was represented by the US Treasury Three-Year Yield Curve Rate (0.41% and 0.81% for fiscal 2012 and 2011, respectively),
plus the current add-on related to the Company’s revolving loan agreement (1.50% and 2.00% for fiscal 2012 and 2011,
respectively) resulting in a total rate of 1.91% and 2.81% for fiscal 2012 and 2011, respectively. See Note G, “Debt” for the related
book value of this debt instrument. The Company’s revolving loan agreement approximates fair value at June 30, 2012. If mea-
sured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the
Derivative Financial Instruments
fair value hierarchy, as described in Note M.
– The Company has written policies and procedures that place all financial instruments under the
direction of the Company’s corporate treasury and restricts 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.
Periodically, the Company 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) 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 fiscal 2012 and 2011 was the euro. At June 30, 2012 and
Inventories
2011, the Company had no outstanding forward exchange contracts.
– 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. Management specifically identifies obsolete products and analyzes historical usage, forecasted production based on
future orders, demand forecasts, and economic trends, among others, when evaluating the adequacy of the reserve for excess and
obsolete inventory.
45
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 report-
ing 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
Impairment of Long-lived Assets
loss is reflected in earnings. Fully depreciated assets are not removed from the accounts until physically disposed.
– 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. 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
Revenue Recognition
based on fair value.
– Revenue is recognized by the Company when all of the following criteria are met: persuasive evidence of
an arrangement exists; delivery has occurred and ownership has transferred to the customer; the price to the customer is fixed
or determinable; and collectability is reasonably assured. 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. A
significant portion of our consolidated net sales is transacted through a third party distribution network. Sales to third party
distributors are subject to the revenue recognition criteria described above. Goods sold to third party distributors are subject to
Goodwill and Other Intangibles
an annual return policy, for which a provision is made at the time of shipment based upon historical experience.
– Goodwill and other indefinite-lived intangible assets, primarily tradenames, are tested for
impairment at least annually on the last day of the Company’s fiscal year and more frequently if an event occurs which indicates
the asset may be impaired in accordance with the ASC Topic 350-10, “Intangibles – Goodwill and Other.” If applicable, goodwill
and other indefinite-lived intangible assets not subject to amortization have been assigned to reporting units for purposes of
impairment testing based upon the relative fair value of the asset to each reporting unit.
A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may
include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the Company’s
stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated
competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any
adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material
impact on the Company’s consolidated financial statements.
Impairment of goodwill is measured according to a two step approach. In the first step, the fair value of a reporting unit, as
defined, is compared to the carrying value of the reporting unit, including goodwill. The fair value is primarily determined using
discounted cash flow analyses; however, other methods may be used to substantiate the discounted cash flow analyses, includ-
ing third party valuations when necessary. For purposes of the June 30, 2012, impairment analysis, the Company has utilized
discounted cash flow analyses. If the carrying amount exceeds the fair value, the second step of the goodwill 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.
Based upon the goodwill impairment review completed in conjunction with the preparation of the annual financial statements
at the end of fiscal 2012, which incorporates management’s best estimates of economic and market conditions over the projected
period and a weighted-average cost of capital that reflects current market conditions, it was determined that the goodwill for one
of the Company’s reporting units was fully impaired. The fair value of goodwill for each of the remaining reporting units signifi-
cantly exceeded the carrying value and therefore goodwill was not impaired. See Note D for additional discussion of the fiscal 2012
impairment charge.
The fair value of the Company’s other intangible assets with indefinite lives, primarily tradenames, is estimated using the relief-
from-royalty method, which requires assumptions related to projected revenues; assumed royalty rates that could be payable
if the Company did not own the asset; and a discount rate. The Company completed the impairment testing of indefinite-lived
intangibles as of June 30, 2012, and concluded there were no impairments.
Changes in circumstances, existing at the measurement date or at other times in the future, or in the numerous estimates
associated with management’s judgments, assumptions and estimates made in assessing the fair value of goodwill and other
intangibles, could result in an impairment charge in the future. The Company will continue to monitor all significant estimates
and impairment indicators, and will perform interim impairment reviews as necessary.
46
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
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 temporary differences are expected to reverse. Valuation
allowances are provided for deferred tax assets where it is considered more likely than not that the Company will not realize the
Management Estimates
benefit of such assets.
– The preparation of financial statements in conformity with generally accepted accounting principles re-
quires 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
Shipping and Handling Fees and Costs
reporting periods. Actual amounts could differ from those estimates.
Reclassification
sociated with shipping and handling of products is reflected in cost of goods sold.
– The Company records revenue from shipping and handling costs in net sales. The cost as-
– Certain amounts in the 2011 and 2010 consolidated statements of operations have been reclassified to conform
to the presentation in the fiscal 2012 financial statements. Specifically, the amounts identified as restructuring for the years
ended June 30, 2011 and 2010 ($254,000 and $494,000, respectively) have been reclassified into the Marketing, engineering and
administrative expenses line item. These same amounts were reclassified from the Restructuring of operations line to the
Accrued liabilities line within the operating section of the consolidated statement of cash flows. In addition, $2,419,000 has been
reclassified from the current portion of Deferred income taxes to Other current assets on the fiscal 2011 consolidated balance
sheets. Finally, the amounts classified as Excess tax benefits from stock compensation on the consolidated statement of cash flows
for fiscal 2011 and 2010 ($317,000 and ($131,000), respectively) have been reclassified from Other financing activities.
Recently Issued Accounting Standards
In July 2012, the Financial Accounting Standards Board (“FASB”) issued amended guidance that simplifies how entities test
indefinite-lived intangible assets other than goodwill for impairment. After an assessment of certain qualitative factors, if it is
determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impair-
ment test. Otherwise, the quantitative test is optional. The amended guidance is effective for annual and interim impairment tests
performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance is
not expected to have a material impact on the company’s financial results.
In September 2011, the FASB issued a standards update that is intended to simplify how entities test goodwill for impairment. This
update permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a
reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill
impairment test described in ASC Topic 350 “Intangibles-Goodwill and Other.” This update is effective for annual and interim good-
will impairment tests performed for fiscal years beginning after December 15, 2011 (the Company’s fiscal 2013). This standards
update is not expected to have a material impact on the Company’s financial statements.
In June 2011, FASB issued a standards update that will allow an entity the option to present the total of comprehensive income,
the components of net income, and the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. This standards update eliminates the option of presenting
the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update is effec-
tive for fiscal years, and interim periods within those years, beginning after December 15, 2011 (the Company’s fiscal 2013). This
standards update is not expected to have any impact on the Company’s financial statements.
In May 2011, the FASB issued a standards update which represents the converged guidance of the FASB and the International
Accounting Standards Board (“IASB”) on fair value measurement. This collective effort has resulted in common requirements for
measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair
value.” This update is to be applied prospectively effective for interim and annual periods beginning after December 15, 2011 (the
Company’s third fiscal quarter of 2012). This standards update did not have a material impact on the Company’s financial statements.
47
B. INvENTORIES
The major classes of inventories at June 30 were as follows (in thousands):
2012
2011
Finished parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
___________
$62,909
16,608
23,661
___________
$103,178
___________
___________
__________
$56,074
18,561
24,504
__________
$99,139
__________
__________
Inventories stated on a LIFO basis represent approximately 33% and 32% of total inventories at June 30, 2012 and 2011,
respectively. The approximate current cost of the LIFO inventories exceeded the LIFO cost by $23,970,000 and $23,020,000 at
June 30, 2012 and 2011, respectively. The Company reserves for inventory obsolescence of $6,728,000 and $6,219,000 at June 30,
2012 and 2011, respectively.
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 were as follows (in thousands):
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
2011
__________
$ 4,195
42,470
139,908
__________
186,573
120,217
__________
$66,356
___________
___________
__________
$ 4,445
42,279
139,526
__________
186,250
120,459
__________
$65,791
__________
__________
Depreciation expense for the years ended June 30, 2012, 2011 and 2010 was $9,947,000, $9,110,000 and $9,021,000, respectively.
D. GOODWILL AND OTHER INTANGIBLES
The changes in the carrying amount of goodwill, substantially all of which is allocated to the manufacturing segment, for the
years ended June 30, 2012 and 2011, were as follows (in thousands):
Balance at June 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,440
1,431
_________
17,871
(3,670 )
(1,085 )
_________
$13,116
_________
_________
The Company conducted its annual assessment for goodwill impairment in the fourth quarter of fiscal 2012 by applying a fair
value based test using discounted cash flow analyses, in accordance with ASC 350-10, “Intangibles – Goodwill and Other.” The
result of this assessment identified that one of the Company’s reporting units goodwill was fully impaired, necessitating a non-
cash charge of $3,670,000. The impairment was due to a declining outlook in the global pleasure craft/megayacht market, the
weakened European economy, few signs of significant near-term recovery in the markets served by this reporting unit and the
heightened economic risk profile of this Italian reporting unit as of June 30, 2012. These factors were identified as the Company
conducted its annual budget review process during the fourth fiscal quarter, and the Company concluded that the impairment
charge was necessary in connection with the preparation of the year-end financial statements. The fair value of the goodwill for
the remaining reporting units exceeds the respective carrying values.
48
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
2011
At June 30, the following acquired intangible assets have defined useful lives and are subject to amortization (in thousands):
2012
Licensing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
________
$3,015
2,050
5,991
________
11,056
(8.583 )
469
________
$2,942
________
________
________
$ 3,015
2,050
5,991
________
11,056
(7,774 )
817
________
$4,099
________
________
The weighted average remaining useful life of the intangible assets included in the table above is approximately 6 years.
Intangible amortization expense for the years ended June 30, 2012, 2011 and 2010 was $809,000, $794,000 and $796,000,
respectively. Estimated intangible amortization expense for each of the next five fiscal years is as follows (in thousands):
Fiscal Year
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 699
699
407
272
268
597
________
$2,942
________
________
The gross carrying amount of the Company’s intangible assets that have indefinite lives and are not subject to amortization as of
June 30, 2012 and 2011, are $2,054,000 and $2,340,000, respectively. These assets are comprised of acquired tradenames.
E. ACCRUED LIABILITIES
Accrued liabilities at June 30 were as follows (in thousands):
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer advances/deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F. WARRANTY
2012
2011
_________
$16,190
4,163
3,764
4,206
584
10,424
_________
$39,331
_________
_________
_________
$13,976
4,483
4,503
7,566
4,350
6,795
_________
$41,673
_________
_________
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 number of units 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.
49
The following is a listing of the activity in the warranty reserve during the years ended June 30 (in thousands):
2012
Reserve balance, July 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current period expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments or credits to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve balance, June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
________
$6,022
3,633
(3,623 )
(287 )
________
$5,745
________
________
2011
________
$6,061
3,927
(4,440 )
474
________
$6,022
________
________
The current portion of the warranty accrual ($3,764,000 and $4,503,000 for fiscal 2012 and 2011, respectively) is reflected in
accrued liabilities, while the long-term portion ($1,981,000 and $1,519,000 for fiscal 2012 and 2011, respectively) is included in
other long-term liabilities on the Consolidated Balance Sheets.
G. DEBT
Notes Payable
Notes payable consists of amounts borrowed under unsecured line of credit agreements. These lines of credit may be withdrawn
at the option of the banks. The following is aggregate borrowing information at June 30 (in thousands):
2012
2011
Available credit lines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unused credit lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding credit lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable – other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rates on credit lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Debt
Long-term debt consisted of the following at June 30 (in thousands):
Revolving loan agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10-year unsecured senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
________
$3,495
3,495
________
—
—
________
$ 0
________
________
2.9%
________
$2,733
2,733
________
—
—
________
$ 0
________
________
4.5%
2012
2011
_________
$17,550
14,286
66
7
236
_________
32,145
(3,744 )
_________
$28,401
_________
_________
_________
$11,300
17,857
84
19
439
_________
29,699
(3,915 )
_________
$25,784
_________
_________
The Company has a revolving loan agreement with M&I Marshall & Ilsley Bank (“M&I”). During the fourth quarter of fiscal
2011, the total commitment was increased to $40,000,000 from $35,000,000 and the term was extended to May 31, 2015. The
outstanding balance of $17,550,000 and $11,300,000 at June 30, 2012 and 2011, respectively, is classified as long-term debt.
In accordance with the loan agreement, as amended, the Company can borrow at LIBOR plus an additional “Add-On,” between
1.5% and 2.5%, depending on the Company’s total funded debt to EBITDA ratio. The rate was 1.74% and 2.09% at June 30, 2012
and 2011, respectively. This agreement contains certain covenants, including restrictions on investments, acquisitions and
indebtedness. Financial covenants include a minimum consolidated net worth amount, as defined, a minimum EBITDA for the
most recent four fiscal quarters, and a maximum total funded debt to EBITDA ratio. As of June 30, 2012, the Company was in
compliance with these covenants. Based on its annual financial plan, the Company believes it is well positioned to generate
sufficient EBITDA levels throughout fiscal 2013 in order to maintain compliance with the above covenants. However, as with all
forward-looking information, there can be no assurance that the Company will achieve the planned results in future periods due
to the uncertainties in certain of its markets.
50
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
On April 10, 2006, the Company entered into a Note Agreement (the “Note Agreement”) with The Prudential Insurance Company
of America and certain other entities (collectively, “Purchasers”). Pursuant to the Note Agreement, Purchasers acquired, in the
aggregate, $25,000,000 in 6.05% Senior Notes due April 10, 2016 (the “Notes”). The Notes mature and become due and payable
in full on April 10, 2016 (the “Payment Date”). Prior to the Payment Date, the Company is obligated to make quarterly payments
of interest during the term of the Notes, plus prepayments of principal of $3,571,429 on April 10 of each year from 2010 to 2015,
inclusive. The Company also has the option of making additional prepayments subject to certain limitations, including the pay-
ment of a Yield-Maintenance Amount as defined in the Note Agreement. In addition, the Company will be required to make an
offer to purchase the Notes upon a Change of Control, as defined in the Note Agreement, and any such offer must include the
payment of a Yield-Maintenance Amount. The Note Agreement includes certain financial covenants which are identical to those
associated with the revolving loan agreement discussed above. The Note Agreement also includes certain restrictive covenants
that limit, among other things, the incurrence of additional indebtedness and the disposition of assets outside the ordinary
course of business. The Note Agreement provides that it shall automatically include any covenants or events of default not
previously included in the Note Agreement to the extent such covenants or events of default are granted to any other lender of an
amount in excess of $1,000,000. Following an Event of Default, each Purchaser may accelerate all amounts outstanding under the
Notes held by such party. As of June 30, 2012, the Company was in compliance with these covenants.
The aggregate scheduled maturities of outstanding long-term debt obligations in subsequent years are as follows (in thousands):
Fiscal Year
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H. LEASE COMMITMENTS
$ 3,744
3,682
21,121
3,571
—
27
_________
$32,145
_________
_________
Approximate future minimum rental commitments under noncancellable operating leases are as follows (in thousands):
Fiscal Year
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,120
1,609
1,096
596
60
0
________
$6,981
________
________
Total rent expense for operating leases approximated $3,657,000, $4,103,000 and $3,989,000 in fiscal 2012, 2011 and
2010, respectively.
I. SHAREHOLDERS’ EQUITY
The total number of shares of common stock outstanding at June 30, 2012, 2011 and 2010, was 11,304,487, 11,359,894 and
11,198,226, respectively. At June 30, 2012 and 2011, treasury stock consisted of 1,794,981 and 1,739,574 shares of common
stock, respectively. The Company issued 69,593 and 161,668 shares of treasury stock in fiscal 2012 and 2011, respectively, to
fulfill its obligations under the stock option plans and restricted stock grants. The difference between the cost of treasury shares
and the option price is recorded in common stock.
On February 1, 2008, the Board of Directors authorized the purchase of 500,000 shares of Common Stock at market values. In
fiscal 2012, the Company purchased 125,000 shares of its outstanding common stock at an average price of $19.40 per share for
a total cost of $2,425,000. In fiscal 2009, the Company purchased 250,000 shares of its outstanding common stock at an average
price of $7.25 per share for a total cost of $1,812,500. On July 27, 2012, the Board of Directors authorized the purchase of an
additional 375,000 shares of Common Stock at market values. This authorization has no expiration.
Cash dividends per share were $0.34, $0.30 and $0.28 in fiscal 2012, 2011 and 2010, respectively.
51
Effective June 30, 2008, the Company’s Board of Directors established a Shareholder Rights Plan and distributed to sharehold-
ers one preferred stock purchase right (a “Right’) for each outstanding share of common stock. This Shareholder Rights Plan was
amended on May 1, 2012. Under certain circumstances, a Right can be exercised to purchase one four hundredth of a share of
Series A Junior Preferred Stock at an exercise price of $125, subject to certain anti dilution adjustments. The Rights will become
exercisable on the earlier of: (i) ten business days following a public announcement that a person or group of affiliated or associ-
ated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire from shareholders, beneficial ownership of
20% or more of the outstanding Company’s common stock (or 30% or more in the case of any person or group which currently
owns 20% or more of the shares or who shall become the beneficial owner of 20% 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 (“Existing Holder”)) or (ii) ten business days following
the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or more
of such outstanding Common Stock (or 30% or more for an Existing Holder), as such periods may be extended pursuant to the
Rights Agreement. In the event that any person or group becomes an Acquiring Person, each holder of a Right shall thereafter
have the right to receive, upon exercise, in lieu of Preferred Stock, common stock of the Company having a value equal to two
times the exercise price of the Right. However, Rights are not exercisable as described in this paragraph until such time as the
Rights are no longer redeemable by the Company as set forth below. Notwithstanding any of the foregoing, if any person becomes
an Acquiring Person all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially
owned by an Acquiring Person will become null and void.
The Rights will expire at the close of business on June 30, 2018, unless earlier redeemed or exchanged by the Company. At any
time before a person becomes an Acquiring Person, the Company may redeem the Rights in whole, but not in part, at a price of
$.01 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date
hereof. Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and
the only right of the holders of Rights will be to receive the $.01 redemption price.
The Company is authorized to issue 200,000 shares of preferred stock, none of which have been issued. The Company has
designated 150,000 shares of the preferred stock for the purpose of the Shareholder Rights Plan.
The components of accumulated other comprehensive loss included in equity as of June 30, 2012 and 2011, are as follows
(in thousands):
2012
2011
Translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit plan adjustments, net of income taxes of $29,404 and $22,635, respectively . . . . . . . . .
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
__________
$ 16,373
(51,170 )
__________
$(34,797 )
__________
__________
__________
$ 28,097
(39,480 )
__________
$(11,383 )
__________
__________
52
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
J. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company and its subsidiaries are engaged in the manufacture and sale of marine and heavy duty off-highway power trans-
mission equipment. Principal products include marine transmissions, surface drives, propellers and boat management systems,
as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls systems. The
Company sells to both domestic and foreign customers in a variety of market areas, principally pleasure craft, commercial and
military marine markets, as well as in the energy and natural resources, government and industrial markets.
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. Management evaluates the performance of its segments based on net earnings.
Information about the Company’s segments is summarized as follows (in thousands):
Manufacturing
2012
Distribution
Total
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intra-segment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inter-segment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenditures for segment assets . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
__________________
$325,174
16,189
71,134
688
3,798
20,075
8,373
28,941
272,098
11,821
_______________
$129,411
7,672
3,720
39
64
2,460
871
7,196
58,275
1,158
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intra-segment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inter-segment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenditures for segment assets . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intra-segment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inter-segment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenditures for segment assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$267,630
12,712
56,159
856
4,168
18,565
7,605
25,983
271,454
11,293
$183,369
10,752
29,715
979
4,795
1,475
7,537
400
217,656
3,714
$128,559
13,289
3,636
34
66
3,233
834
6,759
54,028
334
$101,337
12,990
3,715
21
75
2,412
873
5,079
53,514
234
___________
$454,585
23,861
74,854
727
3,862
22,535
9,244
36,137
330,373
12,979
$396,189
26,001
59,795
890
4,234
21,798
8,439
32,742
325,482
11,627
$284,706
23,742
33,430
1,000
4,870
3,887
8,410
5,479
271,170
3,948
53
The following is a reconciliation of reportable segment net sales, net earnings and assets to the Company’s consolidated totals
(in thousands):
2012
2011
2010
___________
___________
___________
Net sales
Total net sales from reportable segments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elimination of inter-company sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consolidated net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings attributable to Twin Disc
Total net earnings from reportable segments . . . . . . . . . . . . . . . . . . . . . . . .
Other corporate expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consolidated net earnings attributable to Twin Disc . . . . . . . . . .
Assets
Total assets for reportable segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate assets and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consolidated assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
Other significant items (in thousands):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenditures for segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenditures for segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenditures for segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$454,585
(98,715 )
___________
$355,870
___________
___________
$ 36,137
(10,025 )
___________
$ 26,112
___________
___________
$330,373
(26,541 )
___________
$303,832
___________
___________
Segment
Totals
___________
$727
3,862
22,535
9,244
12,979
$890
4,234
21,798
8,439
11,627
$1,000
4,870
3,887
8,410
3,948
All adjustments represent intercompany eliminations and corporate amounts.
$284,706
(57,172 )
___________
$227,534
___________
___________
$ 5,479
(4,882 )
___________
$ 597
___________
___________
$396,189
(85,796 )
___________
$310,393
___________
___________
$ 32,742
(13,912 )
___________
$ 18,830
___________
___________
$325,482
(16,362 )
___________
$309,120
___________
___________
Adjustments
Consolidated
Totals
_______________
$ (632 )
(2,387 )
(4,089 )
1,512
754
____________
$ 95
1,475
18,446
10,756
13,733
$ (792 )
(2,515 )
(8,734 )
1,465
401
$ (916 )
(2,588 )
(2,895 )
1,407
508
$ 98
1,719
13,064
9,904
12,028
$ 84
2,282
992
9,817
4,456
54
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
Geographic information about the Company is summarized as follows (in thousands):
2012
2011
2010
Net sales
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales by geographic region are based on product shipment destination.
Long-lived assets
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
___________
___________
___________
$ 79,301
13,600
30,244
104,389
___________
$227,534
___________
___________
$165,658
44,889
27,075
118,248
___________
$355,870
___________
___________
2012
_________
$53,083
7,372
8,278
4,438
1,053
_________
$74,224
_________
_________
$127,469
44,659
32,063
106,202
___________
$310,393
___________
___________
2011
_________
$48,077
8,761
9,574
6,137
613
_________
$73,162
_________
_________
There were no customers that accounted for 10% or more of consolidated net sales in fiscal 2012, 2011 or fiscal 2010.
K. STOCK-BASED COMPENSATION
During fiscal 2011, the Company adopted the Twin Disc, Incorporated 2010 Stock Incentive Plan for Non-Employee Directors
(the “Directors’ Plan”), a plan to grant non-employee directors equity based awards up to 250,000 shares of common stock, and
the Twin Disc, Incorporated 2010 Long-Term Incentive Compensation Plan (the “Incentive Plan”), a plan under which officers and
key employees may be granted equity based awards up to 650,000 shares of common stock. The Directors’ Plan may grant options
to purchase shares of common stock, at the discretion of the board, to non-employee directors who are elected or reelected to the
board, or who continue to serve on the board. Such options carry an exercise price equal to the fair market value of the Com-
pany’s common stock as of the date of grant, vest immediately, and expire ten years after the date of grant. Options granted under
the Incentive Plan are determined to be non-qualified or incentive stock options as of the date of grant, and may carry a vesting
schedule. For options under the Incentive Plan that are intended to qualify as incentive stock options, if the optionee owns more
than 10% of the total combined voting power of the Company’s stock, the price will not be less than 110% of the grant date fair
market value and the options expire five years after the date of grant. There were no incentive options granted to a greater than
10% shareholder during the years presented. There were no options outstanding under the Directors’ Plan and the Incentive Plan
as of June 30, 2012 and 2011.
The Company has 21,600 non-qualified stock options outstanding as of June 30, 2012, under the Twin Disc, Incorporated Plan for
Non-Employee Directors and Twin Disc, Incorporated 2004 Stock Incentive Plan. The 2004 plans were terminated during 2010,
except options then outstanding will remain so until exercised or until they expire.
The Company has 44,000 non-qualified stock options outstanding at June 30, 2012, under the Twin Disc, Incorporated 1998
Incentive Compensation plan and the 1998 Stock Option Plan for Non-employee Directors. The 1998 plans were terminated
2011
during 2004, except that options then outstanding will remain so until exercised or until they expire.
2012
Shares available for future options as of June 30 were as follows:
2010 Long-term Stock Incentive Compensation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 Stock Incentive Plan for Non-employee Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
________
600,831
223,726
________
650,000
233,512
55
Weighted
Stock option transactions under the plans during 2012 were as follows:
Average
Price
2012
Weighted Average
Remaining Contractual
Life (Years)
Aggregate
Intrinsic
value
______ _______________
___________________________
____________
$6.76
—
—
5.58
_______
$7.30
_______
_______
$7.30
_______
_______
_______
2.63
_______
_______
2.63
_______
_______
___________
$784,062
___________
___________
$784,062
___________
___________
Non-qualified stock options:
Options outstanding at beginning of year . . . 95,400
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Canceled/Expired . . . . . . . . . . . . . . . . . . . . . . . . . . —
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,800 )
_________
65,600
_________
_________
65,600
_________
_________
Options outstanding at June 30. . . . . . . . . . . . . .
Options exercisable at June 30 . . . . . . . . . . . . . .
Options price range ($3.25 – $4.98)
Number of shares . . . . . . . . . . . . . . . . . . . . . . . . 44,000
Weighted average price . . . . . . . . . . . . . . . . . .
$ 3.58
Weighted average remaining life . . . . . . . . .
1.00 years
Options price range ($5.73 – $7.19)
Number of shares . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average price . . . . . . . . . . . . . . . . . .
Weighted average remaining life . . . . . . . . .
2,400
$ 6.23
3.00 years
Options price range ($10.01 – $27.55)
Number of shares . . . . . . . . . . . . . . . . . . . . . . . . 19,200
Weighted average price . . . . . . . . . . . . . . . . . . $ 15.96
Weighted average remaining life . . . . . . . . .
6.31 years
Weighted
Average
Price
2012
Weighted Average
Remaining Contractual
Life (Years)
Aggregate
Intrinsic
value
______ _______________
___________________________
____________
Incentive stock options:
Options outstanding at beginning of year . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled/Expired. . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at June 30 . . . . . . . . . . . . .
Options exercisable at June 30 . . . . . . . . . . . . . .
8,200
—
(7,400 )
(800 )
________
—
________
________
—
________
________
$3.76
—
3.76
3.76
________
—
________
________
$ —
________
________
Options price range ($3.76 – $4.98)
Number of shares . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average price. . . . . . . . . . . . . . . . . . .
Weighted average remaining life. . . . . . . . . .
—
$ —
0 years
________
0.00
________
________
0.00
________
________
___________
$0
___________
___________
$0
___________
___________
The Company accounts for stock-based compensation in accordance with ASC Topic 718-10, “Compensation – Stock Compensa-
tion.” In addition, the Company computes its windfall tax pool using the shortcut method. ASC Topic 718-10 requires the Company
to expense the cost of employee services received in exchange for an award of equity instruments using the fair-value-based
method. All options were 100% vested at the adoption of this statement.
During fiscal 2012, 2011 and 2010, 0, 0 and 7,200 non-qualified stock options were granted, respectively. As a result, compensation
cost of $0, $0 and $44,000 has been recognized in the Consolidated Statements of Operations and Comprehensive (Loss) Income
for fiscal 2012, 2011 and 2010, respectively.
The total intrinsic value of options exercised during the years ended June 30, 2012, 2011 and 2010, was approximately $1,002,000,
$630,000 and $89,000, respectively.
56
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
In fiscal 2012, 2011 and 2010, the Company granted a target number of 15,449, 98,358 and 91,807 performance stock unit awards,
respectively, to various employees of the Company, including executive officers. The performance stock unit awards granted in
fiscal 2012 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the
Performance Stock Unit Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2014. The performance
stock unit awards granted in fiscal 2012 are subject to adjustment if the Company’s economic profit for the period falls below or
exceeds the specified target objective, and the maximum number of performance stock units that can be awarded if the target
objective is exceeded is 18,539. Based upon actual results to date and the probability of achieving the targeted performance levels,
the Company is accruing the performance stock unit awards granted in fiscal 2012 at the target level. The performance stock unit
awards granted in fiscal 2011 will vest if the Company achieves a specified target objective relating to consolidated economic
profit (as defined in the Performance Stock Unit Award Grant Agreement) in the cumulative three fiscal year period ending June
30, 2013. The performance stock unit awards granted in fiscal 2011 are subject to adjustment if the Company’s economic profit
for the period falls below or exceeds the specified target objective, and the maximum number of performance stock units that can
be awarded if the target objective is exceeded is 118,030. Based upon actual results to date and the probability of achieving the
maximum performance levels, the Company is accruing the performance stock unit awards granted in fiscal 2011 at the maximum
level. The performance stock unit awards granted in fiscal 2010 will vest if the Company achieves a specified target objective relat-
ing to consolidated economic profit (as defined in the Performance Stock Unit Award Grant Agreement) in the cumulative three
fiscal year period ending June 30, 2012. The performance stock unit awards granted in fiscal 2010 are subject to adjustment if the
Company’s economic profit for the period falls below or exceeds the specified target objective, and the maximum number of
performance stock units that can be awarded if the target objective is exceeded is 110,168. Based upon actual results to date, the
Company is accruing the performance stock unit awards granted in fiscal 2010 at the maximum level. There were 133,479, 316,698
and 233,065 unvested performance stock unit awards outstanding at June 30, 2012, 2011 and 2010, respectively. The weighted
average grant date fair value of the unvested awards at June 30, 2012, was $15.79. The performance stock unit awards are
remeasured at fair-value based upon the Company’s stock price at the end of each reporting period. The fair-value of the stock unit
awards are expensed over the performance period for the shares that are expected to ultimately vest. The compensation (income)
expense for the year ended June 30, 2012, 2011 and 2010, related to the performance stock unit award grants, approximated
($631,000), $4,246,000 and $0, respectively. At June 30, 2012, the Company had $958,000 of unrecognized compensation expense
related to the unvested shares that are ultimately expected to vest based upon the probability of achieving threshold performance
levels. The total fair value of performance stock unit awards vested in fiscal 2012, 2011 and 2010 was $2,068,000, $0 and $0,
respectively. The performance stock unit awards are cash based, and are thus recorded as a liability on the Company’s Consoli-
dated Balance Sheets. As of June 30, 2012, these awards are included in “Accrued liabilities” ($2,068,000) and “Other long-term
liabilities” ($1,547,000) due to a portion of the awards having performance periods ending in less than one year, with the others all
exceeding one year. As of June 30, 2011, these awards were included in “Other long-term liabilites” ($4,246,000) due to the perfor-
mance periods all exceeding one year.
In fiscal 2012, 2011 and 2010, the Company granted a target number of 15,335, 72,546 and 74,173 performance stock awards,
respectively, to various employees of the Company, including executive officers. The performance stock awards granted in fiscal
2012 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the
Performance Stock Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2014. The performance
stock awards granted in fiscal 2012 are subject to adjustment if the Company’s economic profit for the period falls below or
exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objec-
tive is exceeded is 18,402. Based upon actual results to date and the probability of achieving the targeted performance levels,
the Company is accruing the performance stock awards granted in fiscal 2012 at the target level. The performance stock awards
granted in fiscal 2011 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as
defined in the Performance Stock Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2013. The
performance stock awards granted in fiscal 2011 are subject to adjustment if the Company’s economic profit for the period falls
below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target
objective is exceeded is 87,055. Based upon actual results to date, the Company is accruing the performance stock awards granted
in fiscal 2011 at the maximum level. The performance stock awards granted in fiscal 2010 will vest if the Company achieves a
specified target objective relating to consolidated economic profit (as defined in the Performance Stock Award Grant Agreement)
in the cumulative three fiscal year period ending June 30, 2012. The performance stock awards granted in fiscal 2010 are subject to
adjustment if the Company’s economic profit for the period falls below or exceeds the specified target objective, and the maximum
number of performance shares that can be awarded if the target objective is exceeded is 89,008. Based upon actual results to date,
the Company is accruing the performance stock awards granted in fiscal 2010 at the maximum level. There were 102,391, 242,563
and 177,983 unvested performance stock awards outstanding at June 30, 2012, 2011 and 2010, respectively. The fair value of the
stock awards (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest.
The compensation expense for the year ended June 30, 2012, 2011 and 2010, related to performance stock awards, approximated
57
$838,000, $876,000 and $0, respectively. The weighted average grant date fair value of the unvested awards at June 30, 2012, was
$16.60. At June 30, 2012, the Company had $778,000 of unrecognized compensation expense related to the unvested shares that
are ultimately expected to vest based upon the probability of achieving threshold performance levels. The total fair value of perfor-
mance stock awards vested in fiscal 2012, 2011 and 2010 was $1,671,000, $0 and $0, respectively.
In addition to the performance shares mentioned above, the Company has unvested restricted stock outstanding that will vest if
certain service conditions are fulfilled. The fair value of the restricted stock grants is recorded as compensation over the vesting
period, which is generally 1 to 4 years. During fiscal 2012, 2011 and 2010, the Company granted 43,620 119,268 and 109,123
service-based restricted shares, respectively, to employees and non-employee directors in each year. There were 250,323, 237,691
and 126,423 unvested shares outstanding at June 30, 2012, 2011 and 2010, respectively. Compensation expense of $1,435,000,
$1,026,000 and $463,000 was recognized during the year ended June 30, 2012, 2011 and 2010, respectively, related to these
service-based awards. The total fair value of restricted stock grants vested in fiscal 2012, 2011 and 2010 was $977,000, $133,000
and $138,000, respectively. As of June 30, 2012, the Company had $1,451,000 of unrecognized compensation expense related to
restricted stock which will be recognized over the next three years.
L. 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 costs for ongoing efforts to refine existing products. Research and development
costs charged to operations totaled $2,657,000, $2,475,000 and $2,347,000 in fiscal 2012, 2011 and 2010, respectively. Total
engineering and development costs were $9,508,000, $8,776,000 and $7,885,000 in fiscal 2012, 2011 and 2010, respectively.
M. 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.
On June 3, 2009, the Company announced it would freeze future accruals under the domestic defined benefit pension plans
effective August 1, 2009.
In addition, the Company has unfunded, non-qualified retirement plans for certain management employees and Directors. In the
case of management employees, benefits are based either on final average compensation or on an annual credit to a bookkeeping
account, intended to restore the benefits that would have been earned under the qualified plans, but for the earnings limitations
under the Internal Revenue Code. In the case of Directors, benefits are based on years of service on the Board. All benefits vest
upon retirement from the Company.
In addition to providing pension benefits, the Company provides other postretirement benefits, including health care and life
insurance benefits for certain domestic retirees. All employees retiring after December 31, 1992, and electing to continue health
care coverage through the Company’s group plan, are required to pay 100% of the premium cost.
The measurement date for the Company’s pension and postretirement benefit plans in fiscal 2012 and 2011 was June 30.
58
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
Obligations and Funded Status
The following table sets forth the Company’s defined benefit pension plans’ and other postretirement benefit plans’ funded
status and the amounts recognized in the Company’s balance sheets and statement of operations as of June 30 (in thousands):
Other
Postretirement Benefits
Pension Benefits
Change in benefit obligation:
Benefit obligation, beginning of year . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions by plan participants . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation, end of year . . . . . . . . . . . . . . . . . . . . . .
Change in plan assets:
Fair value of assets, beginning of year . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions by plan participants . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of assets, end of year . . . . . . . . . . . . . . . . . . . . .
2012
2011
2012
2011
___________
___________
__________
__________
$126,514
292
6,231
9,082
182
(9,040 )
___________
$133,261
___________
___________
$ 97,530
(4,077 )
4,180
182
(9,040 )
___________
$ 88,775
___________
___________
$125,857
198
6,324
4,523
—
(10,388 )
___________
$126,514
___________
___________
$ 20,571
41
985
161
—
(2,113 )
__________
$19,645
__________
__________
$ 22,834
32
1,096
(1,038 )
—
(2,353 )
__________
$20,571
__________
__________
$ 76,391
21,810 —
9,717
—
(10,388 )
___________
$ 97,530
___________
___________
$ —
$ —
—
2,113
—
(2,113 )
__________
$ —
__________
__________
2,353
—
(2,353 )
__________
$ —
__________
__________
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (44,486 )
___________
___________
$(28,984 )
___________
___________
$(19,645 )
__________
__________
$(20,571 )
__________
__________
Amounts recognized in the balance sheet consist of:
Other assets – noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities – current . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement benefits – noncurrent . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts recognized in accumulated other
comprehensive loss consist of (net of tax):
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 411
(113 )
(44,784 )
___________
$ (44,486 )
___________
___________
$ 587
(130 )
(29,441 )
___________
$ (28,984 )
___________
___________
$ —
(2,862 )
(16,783 )
__________
$(19,645 )
__________
__________
$ —
(3,008 )
(17,563 )
__________
$(20,571 )
__________
__________
$ —
369
46,163
___________
$ 46,532
___________
___________
$ —
—
34,768
___________
$ 34,768
___________
___________
$ —
—
4,549
__________
$ 4,549
__________
__________
$ (321 )
—
5,033
__________
$ 4,712
__________
__________
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic
benefit cost during the next fiscal year for the qualified domestic defined benefit and other postretirement benefit plans
are as follows (in thousands):
Other Postretirement Benefits
Pension Benefits
Net transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount to be recognized . . . . . . . . . . . . . . . . . . . . . . . . . .
___________________
$ 35
3,380
_________
$3,415
_________
_________
__________________________________
$ —
792
_________
$792
_________
_________
The accumulated benefit obligation for all defined benefit pension plans was approximately $133,261,000 and $126,514,000 at
June 30, 2012 and 2011, respectively.
59
Information for pension plans with an accumulated benefit obligation in excess of plan assets (in thousands):
June 30, 2012
June 30, 2011
Projected and accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of Net Periodic Benefit Cost
(in thousands)
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
________________
$131,369
86,472
________________
$124,328
94,757
2012
Pension Benefits
2011
2010
________
$ 292
6,231
(7,766 )
11
34
2,319
________
$1,121
________
________
________
$ 198
6,324
(6,096 )
23
—
3,118
________
$3,567
________
________
Other Postretirement Benefits
________
$ 292
7,282
(6,052 )
99
60
2,637
________
$4,318
________
________
2012
2011
2010
________
$ 41
985
(508 )
929
________
$1,447
________
________
________
$ 32
1,096
(678 )
1,124
________
$1,574
________
________
________
$ 28
1,347
(678 )
859
________
$1,556
________
________
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income for Fiscal 2012
(Pre-tax, in thousands)
Net (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service benefit . . . . . . . . . . . . . . . . . . . . . .
Amortization of transition asset . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in other comprehensive income . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in net periodic benefit cost and
other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information
Assumptions (as of June 30, 2012 and 2011)
Weighted average assumptions used to determine
benefit obligations at June 30:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
Pension Benefits
Other Postretirement Benefits
___________________
$21,183
—
(34 )
(2,330 )
__________
18,819
1,121
__________
__________________________________
$(161 )
(509 )
—
929
________
259
1,447
________
$19,940
__________
__________
$1,706
________
________
Pension Benefits
2012
2011
Other Postretirement Benefits
2012
2011
_______
_______
_______
_______
4.20%
7.50%
Pension Benefits
2011
5.16%
8.50%
4.20%
—
Other Postretirement Benefits
5.16%
—
2010
2012
2011
2010
Weighted average assumptions used to determine
net periodic benefit cost for years ended June 30:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . .
Rate of compensation increase. . . . . . . . . . . . . . . . .
5.16%
8.50%
N/A
5.09%
8.50%
N/A
6.60%
8.50%
5.00%
5.16%
5.09%
6.60%
_______
_______
_______
_______
_______
_______
60
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
The assumed weighted-average health care cost trend rate was 7.5% in 2012, grading down to 5% in 2017. A 1% increase in
the assumed health care cost trend would increase the accumulated postretirement benefit obligation by approximately
$468,000 and the service and interest cost by approximately $25,000. A 1% decrease in the assumed health care cost trend
would decrease the accumulated postretirement benefit obligation by approximately $419,000 and the service and interest
Plan Assets
cost by approximately $23,000.
The Company’s Pension Committee (“Committee”) oversees investment matters related to the Company’s funded benefit plans.
The Committee works with external actuaries and investment consultants on an ongoing basis to establish and monitor invest-
ment strategies and target asset allocations. The overall objective of the Committee’s investment strategy is to earn a rate of
return over time to satisfy the benefit obligations of the pension plans and to maintain sufficient liquidity to pay benefits and
address other cash requirements of the pension plans. The Committee has established an Investment Policy Statement which
provides written documentation of the Company’s expectations regarding its investment programs for the pension plans, estab-
lishes objectives and guidelines for the investment of the plan assets consistent with the Company’s financial and benefit-related
goals, and outlines criteria and procedures for the ongoing evaluation of the investment program. The Company employs a total
return on investment approach whereby a mix of investments among several asset classes are used to maximize long-term return
of plan assets while avoiding excessive risk. Investment risk is measured and monitored on an ongoing basis through quarterly
investment portfolio reviews, and annual liability measurements.
The Company’s pension plan weighted-average asset allocations at June 30, 2012 and 2011, by asset category are as follows:
2011
2012
Target
Allocation
June 30
Asset Category
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
_____________
65%
25%
10%
__________
100%
__________
__________
________
64%
25%
11%
________
100%
________
________
________
66%
25%
9%
________
100%
________
________
Due to market conditions and other factors, actual asset allocation may vary from the target allocation outlined above. The
pension plans held 98,211 shares of Company stock with a fair market value of $1,815,921 (2.2 percent of total plan assets) at
June 30, 2012, and 98,211 shares with a fair market value of $3,793,891 (4.1 percent of total plan assets) at June 30, 2011.
The plans have a long-term return assumption of 7.50%. This rate was derived based upon historical experience and forward-
looking return expectations for major asset class categories.
Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The inputs used to measure fair value are classified into
the following hierarchy:
Level I
Unadjusted quoted prices in active markets for identical instruments
Level II
Unadjusted quoted prices in active markets for similar instruments, or
Unadjusted quoted prices for identical or similar instruments in markets that are not active, or
Other inputs that are observable in the market or can be corroborated by observable market data
Level III Use of one or more significant unobservable inputs
61
The following table presents plan assets using the fair value hierarchy as of June 30, 2012 (in thousands):
Total
Level I
Level II
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
U.S. (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
_________
$ 748
_________
$ 748
_________
$ —
27,549
13,348
20,652
5,333
9,157
11,988
_________
$88,775
_________
_________
27,549
8,747
6,876
—
—
—
_________
$43,920
_________
_________
—
4,601
13,776
—
3,833
—
_________
$22,210
_________
_________
Level III
_________
$ —
—
—
—
5,333
5,324
11,988
_________
$22,645
_________
_________
(a) U.S. equity securities include companies that are well diversified by industry sector and equity style (i.e., growth and value
strategies). Investments are primarily in large capitalization stocks and, to a lesser extent, mid- and small-cap stocks.
(b) International equities are invested in companies that are traded on exchanges outside the U.S. and are well diversified
by industry sector, country, capitalization and equity style (i.e., growth and value strategies). The vast majority of the
investments are made in companies in developed markets with a smaller percentage in emerging markets.
(c) Fixed income consists of corporate bonds with investment grade BBB or better from diversified industries, as well as
government debt securities.
(d) Other consists of hedged equity.
The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level III) as
of June 30, 2012 (in thousands):
Annuity Contracts
Real Estate
Other
Balance – June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets:
Relating to assets still held at reporting date. . . . . . . . . . . . .
Relating to assets sold during the period . . . . . . . . . . . . . . . .
Purchases, sales and settlements, net . . . . . . . . . . . . . . . . . . . . . .
Transfers in and/or out of Level III . . . . . . . . . . . . . . . . . . . . . . . .
Balance – June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows
Contributions
_____________________
$5,810
_____________
$5,260
_________
$12,368
(681 )
—
204
—
_________
$5,333
_________
_________
334
—
—
(270 )
________
$5,324
________
________
(380 )
—
—
—
_________
$11,988
_________
_________
The Company expects to contribute $6,479,000 to its defined benefit pension plans in fiscal 2013. As part of the pension funding
provisions contained in the Surface Transportation Extension Act of 2012 passed by Congress in June 2012, Twin Disc, Inc.’s fiscal
2013 pension contributions are projected to be reduced to $4 million from $6 million, pending a final interest rate to be issued by
Estimated Future Benefit Payments
the IRS.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
Part D Net Benefit
Payments
Gross
Benefits
Pension
Benefits
Reimbursement
Other Postretirement Benefits
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years 2018–2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
__________
$10,248
9,514
9,494
9,376
9,045
44,148
__________
$2,862
2,298
2,180
2,053
1,923
7,595
___________________
$ —
—
—
—
—
—
_____________
$2,862
2,298
2,180
2,053
1,923
7,595
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 $2,411,000, $2,469,000 and $2,111,000 in fiscal 2012, 2011 and 2010, respectively.
62
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
N. INCOME TAXES
United States and foreign earnings before income taxes and noncontrolling interest were as follows (in thousands):
2012
2011
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
_________
$43,335
1,421
_________
$44,756
_________
_________
_________
$27,914
4,115
_________
$32,029
_________
_________
2010
_________
$4,127
(2,405)
_________
$1,722
_________
_________
The provision (benefit) for income taxes is comprised of the following (in thousands):
2012
2011
2010
_________
_________
________
Currently payable:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,241
188
3,531
_________
10,960
_________
7,653
662
(829 )
_________
7,486
_________
$18,446
_________
_________
$ 8,704
373
2,633
_________
11,710
_________
(315 )
(97 )
1,766
_________
1,354
_________
$13,064
_________
_________
The components of the net deferred tax asset as of June 30 are summarized in the table below (in thousands):
2012
Deferred tax assets:
Retirement plans and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State net operating loss and other state credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign NOL carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
_________
$25,316
14
1,283
2,016
63
4,359
543
96
_________
33,690
_________
8,780
5,869
490
_________
15,139
_________
(3,811 )
_________
$14,740
_________
_________
$ 490
302
1,674
________
2,466
________
532
(58 )
(1,948 )
________
(1,474 )
________
$ 992
________
________
2011
_________
$24,387
240
1,353
1,810
186
3,379
306
124
_________
31,785
_________
6,704
6,313
361
_________
13,378
_________
(2,751 )
_________
$15,656
_________
_________
The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be
realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In deter-
mining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history,
expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of
realization of a deferred tax asset. During fiscal 2012, the Company continued to incur operating losses in certain foreign jurisdic-
tions where the loss carryforward period is unlimited. The Company has evaluated the realizability of the net deferred tax assets
related to these jurisdictions and concluded that based primarily upon continuing losses in these jurisdictions and failure to
achieve targeted levels of improvement, a full valuation allowance continues to be necessary. Therefore, the Company recorded an
additional valuation allowance of $1,060,000 in fiscal 2012. Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income and foreign source income to realize the remaining deferred tax assets.
63
During fiscal 2010, the Company identified and recorded three out-of-period tax errors that related to prior fiscal periods.
Recording these out-of-period tax errors in fiscal 2010 reduced total income tax expense by $28,000. The Company believes
these tax errors were not material to the 2010 or any previously issued financial statements. In addition, these errors do not
impact the fiscal 2011 or 2012 consolidated financial statements.
During the third quarter of fiscal 2012, the Company completed and filed its 2011 Federal and State income tax returns. subse-
quently, the Company completed its return-to-provision reconciliation to determine differences between positions taken per the
year-end fiscal 2011 book tax provision and the actual positions taken per the 2011 returns. This reconciliation identified an
error in the fiscal 2011 tax provision, which resulted in overstating fiscal 2011 earnings by $608,000. To correct this error, the
Company increased tax expense by $608,000 in the third quarter of fiscal 2012. This adjustment was effectively offset by normal
provision to return adjustments in the quarter, resulting in a minimal impact on the effective tax rate. The Company believes this
tax error was not material to the 2012 or any previously issued financial statements.
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):
2012
2011
2010
U.S. federal income tax at 35% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases (reductions) in tax resulting from:
Foreign tax items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in prior year estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 199 deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
_________
_________
$15,595 $11,163
________
$540
869
797
1,060
96
(215 )
(908 )
1,292
(140 )
_________
$18,446
_________
_________
419
129
2,491
(157 )
(387 )
(735 )
—
141
_________
$13,064
_________
_________
587
160
48
(216 )
(184 )
—
—
57
________
$992
________
________
The Company has not provided additional U.S. income taxes on cumulative earnings of consolidated foreign subsidiaries that are
considered to be reinvested indefinitely. The Company reaffirms its position that these earnings remain permanently reinvested,
and has no plans to repatriate funds to the U.S. for the foreseeable future. These earnings relate to ongoing operations and were
approximately $8.1 million at June 30, 2012. Such earnings could become taxable upon the sale or liquidation of these foreign
subsidiaries or upon dividend repatriation. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to
be repatriated only when it would be tax effective through the utilization of foreign tax credits.
Annually, we file income tax returns in various taxing jurisdictions inside and outside the United States. In general, the tax years
that remain subject to examination are 2008 through 2012 for our major operations in the U.S., Italy, Belgium and Japan. The tax
years open to examination in the U.S. are for years subsequent to fiscal 2008, but currently fiscal 2010 and 2011 are under audit.
It is reasonably possible that at least one of these audit cycles will be completed during fiscal 2013.
The Company has approximately $560,000 of unrecognized tax benefits as of June 30, 2012, which, if recognized, would impact the
effective tax rate. The company has settled the IRS audit for fiscal years 2003 through 2007, resulting in a decrease of approximate-
ly $350,000. The Company’s policy is to accrue interest and penalties related to unrecognized tax benefits in income tax expense.
Below is a reconciliation of beginning and ending amount of unrecognized tax benefits (in thousands):
June 30, 2012
Unrecognized tax benefits, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the prior year . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . .
Reductions based on tax positions related to the prior year . . . . . . . . . . . . . . . . . . . . . . . . —
Subtractions due to statutes closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefits, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
________________
$853
—
107
(50 )
(350 )
___________
$560
___________
___________
June 30, 2011
________________
$808
6
136
—
(60 )
(37 )
___________
$853
___________
___________
As of June 30, 2012 and 2011, the amounts accrued for interest and penalties totaled $41,000 and $136,000, respectively, and are
not included in the reconciliation above.
64
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
O. CONTINGENCIES
The Company is involved in litigation of which the ultimate outcome and liability to the Company, if any, are 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.
65
TWIN DISC, INCORPORATED AND SUBSIDIARIES
SCHEDULE II – vALUATION AND QUALIFYING ACCOUNTS
for the years ended June 30, 2012, 2011 and 2010 (in thousands)
Balance at
Beginning
of Period
—— Additions ——
Charged to
Costs and
Expenses
Net
Acquired
Deductions1
Balance
at End of
of Period
Description
2012:
Allowance for losses on accounts receivable
Deferred tax valuation allowance
2011:
$2,093
$2,751
$ 549
$ 1,060
Allowance for losses on accounts receivable
Deferred tax valuation allowance
2010:
$ 1,792
$ 260
$ 1,078
$ 2,751
Allowance for losses on accounts receivable
Deferred tax valuation allowance
$ 1,623
$ 212
$ 412
$ 48
$ —
$ —
$ —
$ —
$ —
$ —
$ 448
$ —
$ 2,194
$ 3,811
$ 777
$ 260
$ 2,093
$ 2,751
$ 243
$ —
$ 1,792
$ 260
1 Amounts primarily represent accounts receivable written-off during the year along with other adjustments (primarily foreign currency
translation adjustments).
66
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
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
MICHAEL E. BATTEN
September 13, 2012
By /s/
Michael E. Batten
Chairman and Chief Executive Officer
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.
MICHAEL E. BATTEN
September 13, 2012
By /s/
Michael E. Batten, Chairman,
Chief Executive Officer and Director
JOHN H. BATTEN
September 13, 2012
By /s/
John H. Batten,
President, Chief Operating Officer and Director
CHRISTOPHER J. EPERJESY
September 13, 2012
By /s/
Christopher J. Eperjesy, Vice President – Finance,
Chief Financial Officer and Treasurer
JEFFREY S. KNUTSON
September 13, 2012
By /s/
Jeffrey S. Knutson, Corporate Controller
(Chief Accounting Officer)
September 13, 2012
Michael Doar, Director
Malcolm F. Moore, Director
David B. Rayburn, Director
Michael C. Smiley, Director
Harold M. Stratton II, Director
David R. Zimmer, Director
THOMAS E. vALENTYN
By /s/
Thomas E. Valentyn,
General Counsel and Secretary
(Attorney In Fact)
67
EXHIBIT INDEX
TWIN DISC, INCORPORATED
Exhibit No.
10-K for Year Ended June 30, 2012
Description
Included
Herewith
Restated Articles of Incorporation of Twin Disc, Incorporated (Incorporated by reference to
Exhibit 3.1 of the Company’s Form 8-K dated December 6, 2007). File No. 001-07635.
Restated Bylaws of Twin Disc, Incorporated, as amended through January 19, 2010 (Incorporated
by reference to Exhibit 3.1 of the Company’s Form 8-K dated January 21, 2010). File No. 001-07635.
Description of Shareholder Rights Plan and Form of Rights Agreement dated as of December 20, 2007,
by and between the Company and Mellon Investor Services, LLC, as Rights Agent, with Form of Rights
Certificate (Incorporated by reference to Item 3.03 and Exhibit 4 of the Company’s Form 8-K dated
December 20, 2007). File No. 001-07635.
3a)
3b)
4a)
4b)
First Amendment to Rights Agreement, effective as of May 1, 2012, between Twin Disc, Incorporated
and Computershare Shareowner Services, LLC (Incorporated by reference to Exhibit 4.1 of the Company’s
Form 8-K dated May 1, 2012). File No. 001-07635.
Material Contracts
Exhibit 10
a)
Director Tenure and Retirement Policy (Incorporated by reference to Exhibit 10a of the Company’s
Form 10-K/A filed September 19, 2011, for the year ended June 30, 2011). File No. 001-07635.
b)
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). File No. 001-07635.
c)
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). File No. 001-07635.
d)
The 2004 Stock Incentive Plan as amended (Incorporated by reference to Exhibit B of the Proxy Statement
for the Annual Meeting of Shareholders held on October 20, 2006). File No. 001-07635.
e)
f)
g)
The 2004 Stock Incentive Plan for Non-Employee Directors as amended (Incorporated by reference to
Exhibit 99 of the Company’s Form 10-K for the year ended June 30, 2007). File No. 001-07635.
The 2010 Long-Term Incentive Compensation Plan (Incorporated by reference to Appendix A of the
Proxy Statement for the Annual Meeting of Shareholders held on October 15, 2010). File No. 001-07635.
The 2010 Stock Incentive Plan for Non-Employee Directors (Incorporated by reference to Appendix B of
the Proxy Statement for the Annual Meeting of Shareholders held on October 15, 2010). File No. 001-07635.
h)
Form of Performance Stock Award Grant Agreement (Incorporated by reference to Exhibit 10.1 of the
Company’s Form 8-K dated July 30, 2008). File No. 001-07635.
i)
j)
Form of Performance Stock Unit Award Grant Agreement (Incorporated by reference to Exhibit 10.2 of
the Company’s Form 8-K dated July 30, 2008). File No. 001-07635.
Form of Restricted Stock Grant Agreement (Incorporated by reference to Exhibit 10.3 of the Company’s
Form 8-K dated July 30, 2008). File No. 001-07635.
k)
Form of Performance Stock Award Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s
Form 8-K dated August 5, 2009). File No. 001-07635.
l)
Form of Performance Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.2 of the
Company’s Form 8-K dated August 5, 2009). File No. 001-07635.
m)
n)
o)
p)
q)
Form of Restricted Stock Grant Agreement (Incorporated by reference to Exhibit 10.3 of the Company’s
Form 8-K dated August 5, 2009). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares on July 29, 2010
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 4, 2010). File No. 001-07635.
Form of Performance Stock Unit Award Agreement for award of performance stock units on July 29, 2010
(Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 4, 2010). File No. 001-07635.
Form of Restricted Stock Grant Agreement for restricted stock grants on July 29, 2010 (Incorporated by
reference to Exhibit 10.3 of the Company’s Form 8-K dated August 4, 2010). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares on July 28, 2011
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 3, 2011). File No. 001-07635.
68
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
EXHIBIT INDEX
TWIN DISC, INCORPORATED
Exhibit No.
10-K for Year Ended June 30, 2012
Material Contracts
Included
Herewith
r)
s)
t)
Form of Performance Stock Unit Award Agreement for award of performance stock units on
July 28, 2011 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated
August 3, 2011). File No. 001-07635.
Form of Restricted Stock Grant Agreement for restricted stock grants on July 28, 2011 (Incorporated
by reference to Exhibit 10.3 of the Company’s Form 8-K dated August 3, 2011). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares on July 26, 2012
(Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 1, 2012).
File No. 001-07635.
u)
Form of Performance Stock Unit Award Agreement for award of performance stock units on July 26,
2012 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 1, 2012).
File No. 001-07635.
v)
Form of Restricted Stock Grant Agreement for restricted stock grants on July 26, 2012 (Incorporated
by reference to Exhibit 10.3 of the Company’s Form 8-K dated August 1, 2012). File No. 001-07635.
w)
Twin Disc, Incorporated Supplemental Executive Retirement Plan, amended and restated as of July 29,
2010 (Incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K dated August 4, 2010).
File No. 001-07635.
x)
y)
z)
aa)
bb)
cc)
dd)
ee)
Pension Promise Agreement between Twin Disc International, S.A. and Henri Claude Fabry (Incorporated
by reference to Exhibit 10.5 of the Company’s Form 8-K dated August 4, 2010). File No. 001-07635.
Management Agreement between Twin Disc International S.A. and H. Claude Fabry (Incorporated by
reference to Exhibit 10.4 of the Company’s Form 8-K dated August 1, 2012). File No. 001-07635.
Forms of Change in Control Severance Agreements (Incorporated by reference to Exhibits 10.3, 10.4 and
10.5 of the Company’s Form 8-K dated August 2, 2007). File No. 001-07635.
Form of Indemnity Agreement (Incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K dated
August 2, 2005). File No. 001-07635.
Amended and Restated Loan Agreement for $40,000,000 Revolving Credit Dated May 13, 2011 (Incorporated
by reference to Exhibit 10.1 of the Company’s Form 8-K Dated May 13, 2011). File No. 001-07635.
Note Agreement for $25,000,000 of 6.05% Senior Notes due April 10, 2016 (Incorporated by reference to
Exhibit 4.1 of the Company’s Form 8-K dated April 12, 2006). File No. 001-07635.
Amendment 1 to Note Agreement for 6.05% Senior Notes (Incorporated by reference to Exhibit 10p of the
Company’s Form 10-K for the year ended June 30, 2007). File No. 001-07635.
Amendment 2 to Note Agreement for 6.05% Senior Notes (Incorporated by reference to Exhibit 10q of the
Company’s Form 10-K for the year ended June 30, 2007). File No. 001-07635.
ff)
Amendment 3 to Note Agreement for 6.05% Senior Notes (Incorporated by reference to Exhibit 10w of the
Company’s Forms 10-K and 10-K/A for the year ended June 30, 2009). File No. 001-07635.
gg)
Amendment 4 to Note Agreement for 6.05% Senior Notes (Incorporated by reference to Exhibit 10x of the
Company’s Forms 10-K and 10-K/A for the year ended June 30, 2009). File No. 001-07635.
hh)
Exhibit No.
Amendment 5 to Note Agreement for 6.05% Senior Notes. (Incorporated by reference to Exhibit 10ff of the
Company’s Form 10-K for the year ended June 30, 2011). File No. 001-07635.
Description
21
23
24
31a
31b
32a
32b
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification
Certification
Certification pursuant to 18 U.S.C. Section 1350
Certification pursuant to 18 U.S.C. Section 1350
69
X
X
X
X
X
X
X
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Twin Disc, Incorporated, the registrant (a Wisconsin Corporation) owns directly or indirectly 100% of the following subsidiaries:
Twin Disc International, S.A. (a Belgian corporation)
Twin Disc Srl (an Italian corporation)
Rolla SP Propellers SA (a Swiss corporation)
Twin Disc (Pacific) Pty. Ltd. (an Australian corporation)
Twin Disc (Far East) Ltd. (a Delaware corporation operating in Singapore and Hong Kong)
Twin Disc (Far East) Pte. Ltd. (a Singapore corporation)
Mill Log Equipment Co., Inc. (an Oregon corporation)
Mill Log Marine, Inc. (an Oregon corporation)
Mill Log Wilson Equipment Ltd. (a Canadian corporation)
Twin Disc Southeast, Inc. (a Florida corporation)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11. Vetus Italia Srl (an Italian corporation)
12.
13.
Twin Disc Japan (a Japanese corporation)
Twin Disc Power Transmission Private, Ltd. (an Indian limited liability corporation)
Twin Disc, Incorporated also owns 66% of Twin Disc Nico Co. LTD. (a Japanese corporation).
The registrant has no parent nor any other subsidiaries. All of the above subsidiaries are included in the consolidated
financial statements.
EXHIBIT 23
cOnsEnT OF InDEPEnDEnT REGIsTERED PuBlIc AccOunTInG FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S 8 (Nos. 333-99229, 333-119770,
333-119771, 333-69361, 333-69015, 333-169965, 333-169963 and 333-169962) of Twin Disc, Incorporated of our report dated
September 13, 2012 relating to the financial statements, financial statement schedule and the effectiveness of internal control
over financial reporting, which appears in this Form 10-K.
Milwaukee, Wisconsin
September 13, 2012
70
T wIn DIs c , In cO R P O R A T E D
A n n uAl RE P O R T 2 0 1 2
EXHIBIT 24
POWER OF ATTORNEY
The undersigned directors of Twin Disc, Incorporated hereby severally constitute Michael E. Batten and Thomas E. Valentyn, and
each of them singly, true and lawful attorneys with full power to them, and each of them, singly, to sign for us and in our names as
directors the Form 10-K Annual Report for the fiscal year ended June 30, 2012, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, and generally do all such things in our names and behalf as directors to enable Twin Disc, Incorporated to
comply with the provisions of the Securities and Exchange Act of 1934 and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures so they may be signed by our attorneys, or either of them, as set
forth below.
July 27, 2012
MICHAEL DOAR
MICHAEL C. SMILEY
/s/
Michael Doar, Director
MALCOLM F. MOORE
/s/
Michael C. Smiley, Director
HAROLD M. STRATTON II
/s/
Malcolm F. Moore, Director
DAvID B. RAYBURN
/s/
Harold M. Stratton II, Director
DAvID R. ZIMMER
/s/
David B. Rayburn, Director
/s/
David R. Zimmer, Director
71
EXHIBIT 31a
CERTIFICATIONS
I, Michael E. Batten, certify that:
1. I have reviewed this annual report on Form 10-K of Twin Disc, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
annual report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of this annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: September 13, 2012
MICHAEL E. BATTEN
/s/
Michael E. Batten
Chairman and Chief Executive Officer
72
T w i n D iS C, i nC O R P O R AT E D
A n n u Al RE P O R T 2 0 1 2
EXHIBIT 31b
CERTIFICATIONS
I, Christopher J. Eperjesy, certify that:
1. I have reviewed this annual report on Form 10-K of Twin Disc, Incorporated;
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
annual report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of this annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: September 13, 2012
CHRISTOPHER J. EPERJESY
/s/
Christopher J. Eperjesy
Vice President – Finance,
Chief Financial Officer and Treasurer
73
EXHIBIT 32a
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Twin Disc, Incorporated (the “Company”) on Form 10-K for the fiscal year
ending June 30, 2012, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, Michael
E. Batten, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) the Report fully complies with Section 13(a) of the Securities Exchange Act of 1934, and
(2) the information contained in the report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: September 13, 2012
MICHAEL E. BATTEN
/s/
Michael E. Batten
Chairman and Chief Executive Officer
EXHIBIT 32b
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Twin Disc, Incorporated (the “Company”) on Form 10-K for the fiscal year ending
June 30, 2012, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, Christopher
J. Eperjesy, Vice President – Finance, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) the Report fully complies with Section 13(a) of the Securities Exchange Act of 1934, and
(2) the information contained in the report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: September 13, 2012
CHRISTOPHER J. EPERJESY
/s/
Christopher J. Eperjesy
Vice President – Finance,
Chief Financial Officer and Treasurer
74
T w i n D iS C, i nC O R P O R AT E D
A n n u Al RE P O R T 2 0 1 2
DIRECTORS
MICHAEL E. BATTEN
Chairman and Chief Executive Officer
JOHN H. BATTEN
President and Chief Operating Officer
MICHAEL DOAR
Chairman, Chief Executive Officer and President
Hurco Companies, Inc.
(A global manufacturer of machine tools)
Indianapolis, Indiana
MALCOLM F. MOORE
Chairman
Digi-Star, LLC
(A provider of weighing systems for Precision Agriculture)
Fort Atkinson, Wisconsin
Chief Executive Officer
Port Royal Partners, LLC
(An enterprise focusing on investments in
the marine industry)
Naples, Florida
DAvID B. RAYBURN
Retired President and Chief Executive Officer
Modine Manufacturing Company
(A manufacturer of heat exchange equipment)
Racine, Wisconsin
MICHAEL C. SMILEY
Chief Financial Officer
Zebra Technologies Corporation
(A global provider of asset management solutions)
Lincolnshire, Illinois
HAROLD M. STRATTON II
Chairman
STRATTEC SECURITY CORPORATION
(A manufacturer of security and access control
products for the global automotive industry)
Milwaukee, Wisconsin
DAvID R. ZIMMER
Managing Partner
Stonebridge Equity, LLC
(A merger, acquisition and finance value consulting firm)
Troy, Michigan
OFFICERS
MICHAEL E. BATTEN
HENRI-CLAUDE FABRY
Chairman and Chief Executive Officer
JOHN H. BATTEN
Vice President – International Distribution
DENISE L. WILCOX
President and Chief Operating Officer
CHRISTOPHER J. EPERJESY
Vice President – Human Resources
THOMAS E. vALENTYN
Vice President – Finance, Chief Financial Officer
and Treasurer
JAMES E. FEIERTAG
General Counsel and Secretary
JEFFREY S. KNUTSON
Corporate Controller
Executive Vice President
DEAN J. BRATEL
Vice President – Engineering
75
CORPORATE DATA
ANNUAL MEETING
Twin Disc Corporate Offices
Racine, Wisconsin
2:00 P.M.
October 19, 2012
SHARES TRADED
NASDAQ: Symbol TWIN
ANNUAL REPORT ON SECURITIES AND
EXCHANGE COMMISSION FORM 10-K
Single copies of the Company’s 2012
Annual Report on Securities and Exchange
Commission Form 10-K, including exhibits, will
be provided without charge to shareholders
after September 13, 2012, upon written request
directed to Secretary, Twin Disc, Incorporated,
1328 Racine Street, Racine, Wisconsin 53403.
TRANSFER AGENT & REGISTRAR
Computershare/BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, New Jersey 07310
Toll Free: 800-839-2614
Web: www.bnymellon.com/shareowner/isd
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
CORPORATE OFFICES
Twin Disc, Incorporated
Racine, Wisconsin 53403
Telephone: (262) 638-4000
WHOLLY-OWNED SUBSIDIARIES
Twin Disc International S.A.
Nivelles, Belgium
Twin Disc Srl
Decima, Italy
Rolla SP Propellers SA
Novazzano, Switzerland
Twin Disc (Pacific) Pty. Ltd.
Brisbane, Queensland, Australia
Twin Disc (Far East) Ltd.
Singapore
Twin Disc (Far East) Pte. Ltd.
Singapore
Mill Log Equipment Co., Inc.
Coburg, Oregon
Mill Log Marine, Inc.
Coburg, Oregon
Mill Log Wilson Equipment Ltd.
Burnaby, British Columbia
Twin Disc Southeast, Inc.
Jacksonville, Florida
Vetus Italia Srl
Limite sull’Arno, Italy
Twin Disc Japan
Saitama, Japan
Twin Disc Power Transmission Private, Ltd.
Chennai, India
PARTIALLY-OWNED SUBSIDIARIES
Twin Disc Nico Co. Ltd.
MANUFACTURING FACILITIES
Racine, Wisconsin
Nivelles, Belgium
Decima, Italy
Novazzano, Switzerland
Limite sull’Arno, Italy
SALES OFFICES
Domestic
Racine, Wisconsin
Coburg, Oregon
Kent, Washington
Medley, Florida
Jacksonville, Florida
Tampa, Florida
Chesapeake, Virginia
Foreign
Rock Hill, South Carolina
Nivelles, Belgium
Brisbane, Australia
Perth, Australia
Singapore
Decima, Italy
Limite sull’Arno, Italy
Novazzano, Switzerland
Edmonton, Canada
Burnaby, Canada
Chennai, India
Saitama, Japan
Shanghai, China
Guangzhou, China
MANUFACTURING LICENSES
Hitachi-Nico Transmission Co., Ltd.
Tokyo, Japan
76
T w i n D iS C, i nC O R P O R AT E D
A n n u Al RE P O R T 2 0 1 2
5-YEAR FINANCIAL SUMMARY
STATEMENTS OF OPERATIONS AND COMPREHENSIvE INCOME (LOSS)
(In thousands of dollars, except where noted)
Net sales
Costs and expenses, including marketing, engineering and administrative
Earnings from operations
Other expense
Earnings before income taxes and minority interest
Income taxes
Noncontrolling interest
BALANCE SHEET
Net earnings attributable to Twin Disc
Assets
Cash
Receivables, net
Inventories, net
Other current assets
Total current assets
Investments and other assets
Fixed assets less accumulated depreciation
Total assets
Liabilities and Equity
Current liabilities
Long-term debt
Deferred liabilities
Shareholders’ equity
Noncontrolling interest
Total liabilities and equity
Comparative Financial Information
Per share statistics:
Basic earnings
Diluted earnings
Dividends
Shareholders’ equity
Return on equity
Return on assets
Return on sales
Average shares outstanding
Diluted shares outstanding
Number of shareholder accounts
Number of employees
Additions to plant and equipment
Depreciation
Net working capital
77
2012
2011
2010
$355,870
310,999
44,871
(115 )
44,756
18,446
(198 )
26,112
15,701
63,438
103,178
14,844
197,161
40,315
66,356
303,832
66,625
28,401
71,520
136,264
1,022
303,832
$310,393
275,677
34,716
(2,687 )
32,029
13,064
(135 )
18,830
20,167
61,007
99,139
14,855
195,168
48,161
65,791
309,120
83,960
25,784
61,322
137,085
969
309,120
2.29
2.26
0.34
11.94
19.2 %
8.6 %
7.3 %
1.66
1.64
0.30
12.11
13.7 %
6.1 %
6.1 %
$227,534
224,449
3,085
(1,363 )
1,722
992
(133 )
597
19,022
43,014
72,799
12,615
147,450
53,363
58,243
259,056
63,307
27,211
79,219
88,460
859
259,056
0.05
0.05
0.28
8.00
0.7 %
0.2 %
0.3 %
11,409,467
11,555,561
651
1,029
13,733
9,947
130,536
11,319,081
11,462,562
699
941
12,028
9,110
111,208
11,063,417
11,159,282
736
913
4,456
9,021
84,143
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
STATEMENTS OF OPERATIONS AND COMPREHENSIvE INCOME (LOSS)
(In thousands of dollars, except where noted)
Costs and expenses, including marketing, engineering and administrative
Net sales
Earnings from operations
Other expense
Earnings before income taxes and minority interest
Income taxes
Noncontrolling interest
BALANCE SHEET
Net earnings attributable to Twin Disc
Assets
Cash
Receivables, net
Inventories, net
Other current assets
Total current assets
Investments and other assets
Fixed assets less accumulated depreciation
Total assets
Liabilities and Equity
Current liabilities
Long-term debt
Deferred liabilities
Shareholders’ equity
Noncontrolling interest
Total liabilities and equity
Comparative Financial Information
Per share statistics:
Basic earnings
Diluted earnings
Dividends
Shareholders’ equity
Return on equity
Return on assets
Return on sales
Average shares outstanding
Diluted shares outstanding
Number of shareholder accounts
Number of employees
Additions to plant and equipment
Depreciation
Net working capital
$310,393
275,677
$227,534
224,449
$355,870
310,999
44,871
(115 )
44,756
18,446
(198 )
26,112
15,701
63,438
103,178
14,844
197,161
40,315
66,356
303,832
66,625
28,401
71,520
136,264
1,022
303,832
34,716
(2,687 )
32,029
13,064
(135 )
18,830
20,167
61,007
99,139
14,855
195,168
48,161
65,791
309,120
83,960
25,784
61,322
137,085
969
309,120
2.29
2.26
0.34
11.94
19.2 %
8.6 %
7.3 %
1.66
1.64
0.30
12.11
13.7 %
6.1 %
6.1 %
651
1,029
13,733
9,947
130,536
699
941
12,028
9,110
111,208
11,409,467
11,555,561
11,319,081
11,462,562
11,063,417
11,159,282
3,085
(1,363 )
1,722
992
(133 )
597
19,022
43,014
72,799
12,615
147,450
53,363
58,243
259,056
63,307
27,211
79,219
88,460
859
259,056
0.05
0.05
0.28
8.00
0.7 %
0.2 %
0.3 %
736
913
4,456
9,021
84,143
$295,618
275,833
19,785
(1,740 )
18,045
6,257
(286 )
11,502
13,266
53,367
92,331
14,957
173,921
50,288
65,799
290,008
70,252
46,348
65,583
106,988
837
290,008
$331,694
292,802
38,892
(3,644 )
35,248
10,904
(92 )
24,252
14,447
67,611
97,691
15,946
195,695
41,078
67,855
304,628
89,588
48,227
36,488
129,646
679
304,628
$317,200
280,210
36,990
(2,661 )
34,329
12,273
(204 )
21,852
19,508
63,277
76,253
14,202
173,240
37,134
56,810
267,184
79,918
42,152
29,032
115,437
645
267,184
$243,287
218,503
24,784
(1,732 )
23,052
8,470
(129 )
14,453
16,427
55,963
65,081
13,660
151,131
38,083
46,958
236,172
79,621
38,369
28,377
89,233
572
236,172
$218,472
207,794
10,678
(1,186 )
9,492
2,485
(97 )
6,910
11,614
37,751
48,481
11,679
109,525
38,181
40,331
188,037
65,909
14,958
39,680
66,899
591
188,037
$186,089
174,972
11,117
(485 )
10,632
4,964
(25 )
5,643
9,127
37,091
48,777
7,270
102,265
39,135
33,222
174,622
56,604
16,813
41,980
58,716
509
174,622
1.04
1.03
0.28
9.72
10.7 %
4.0 %
3.9 %
2.15
2.13
0.265
11.55
18.6 %
8.0 %
7.3 %
1.88
1.84
0.205
9.93
18.9 %
8.2 %
6.9 %
1.26
1.22
0.1825
7.74
16.2 %
6.1 %
5.9 %
0.60
0.59
0.175
5.85
10.3 %
3.7 %
3.2 %
0.50
0.50
0.175
5.22
9.6 %
3.2 %
3.0 %
11,096,750
11,194,170
761
959
8,895
8,766
103,669
11,278,885
11,411,927
756
1,019
14,999
6,921
106,107
11,622,620
11,880,432
778
1,011
15,681
6,331
93,322
11,533,276
11,881,208
804
962
11,442,168
11,631,592
888
901
11,256,788
11,373,496
917
860
8,385
5,529
71,510
12,009
5,108
43,616
4,180
5,226
45,661
$179,591
181,450
(1,859 )
(823 )
(2,682 )
(300 )
(12 )
(2,394 )
5,908
35,367
43,289
8,573
93,137
44,597
30,210
167,944
46,286
16,584
56,732
47,857
485
167,944
(0.21 )
(0.21 )
0.175
14.97
(5.0 )%
(1.4 )%
(1.3 )%
11,219,660
11,219,660
966
832
4,410
5,072
46,851
78
T w i n D i s c , i n c o r p o r a TeD
an n u a l re p o r T 2 0 1 2
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1328 Racine Street Racine, Wisconsin 53403 United States of America www.twindisc.com
LOCATION: Petro Jilin Oil Field, China — — EQUIPMENT: Twin Disc TA91-8501 Power-Shift Transmission System