2 0 1 5 A N N U A L R E P O R T
GLOBAL REACH.
CUSTOMER
FOCUS.
“We listen to and collaborate
with our key customers to
drive innovation and deliver
engineering excellence.”
Wherever we are around the world,
we are there with local expertise.
Through the quality of our people who live and work in our global
communities, Twin Disc has a wealth of market, product and
application expertise. We leverage that expertise to help our
customers solve problems and capitalize on market opportunities
with applications ranging from road pavers to cranes, mining trucks
to logging equipment, airport firefighting vehicles to work boats.
Collaboration is key. Each and every customer is facing a unique
challenge. Our capability and long history of working together
to solve those challenges positions us to deliver engineering
excellence that is unmatched in the industries we serve.
SALES BY
REGION
Europe/Middle
East/Africa
19.8%
North America
54.5%
Asia/Pacific
21.1%
Other
4.6%
1
21%74%63 BEYOND THE
STATUS QUO.
“Our organizational
restructuring makes
us an easier company
for our customers to
do business with.”
2
BEYOND THE
STATUS QUO.
To Our Shareholders
Fiscal 2015 came in like a lion, and went out like a lamb. We saw
positive top and bottom-line results, especially compared to our
last two fiscal years. Through the first eight months of the year,
we experienced solid demand from our North American pressure
pumping customers and also positive demand for our marine
transmissions and aftermarket activity. The weakness in the Oil
and Gas market over the final four months, especially in North
America and China, put the brakes on what was shaping up to be
a great fiscal year. Revenue results were also offset by the impact
of the strengthening U.S. dollar on foreign currency transactions.
Over the past several years, we have significantly strengthened
our balance sheet and adjusted our business plan to provide
greater flexibility and resources to weather the cyclical nature
of our end markets, especially the Oil and Gas sector. I believe
fiscal 2015 will be defined as the year that helped Twin Disc
move beyond the status quo and shape a bright new future,
as we made significant progress on a number of key initiatives:
G Strategic cost restructuring to match more appropriately
our capacity and overhead to market demand
G Diversification of our business portfolio through aggressive
growth initiatives in our industrial products markets, and
strategic acquisitions in existing or adjacent markets
G A “think global, act local” organizational restructuring that
makes it easier to do business with us
Our cost restructuring initiative balances short-term tactical
cost-reduction measures with longer-term initiatives that support
growth opportunities in new and emerging markets. For example,
we continue to look for ways to reduce our invested capital in
mature or stagnating markets and redeploy it in new product
development or acquisition opportunities. Meanwhile, our new
facility in India is now operating at full production, providing
greater capacity for products in emerging industrial markets
essential to our diversification strategy.
3
We are diligently exploring acquisition opportunities that support
diversification into markets less affected by Oil and Gas. A key part
of our due diligence process is ensuring that the company and its
products align with our DNA, so we can cost-effectively integrate
operations without adding administration and support functions.
In January, we implemented a global organizational structure
to centralize key functions and better harness our strong, local
presence with processes that increase speed to market and
enhance responsivity to clients. Engineering, sales, marketing,
operations and product service are now aligned around a global
structure that better positions us to collaborate with our customers,
deliver complex solutions and ensure exceptional product quality
and worldwide support.
2016 Outlook
Fiscal 2016 will be a challenging year, as we expect results in
the first two fiscal quarters will be similar to the last half of fiscal
2015. We should see improved results in the 2nd half of fiscal
2016, as the actions we’re implementing generate improved
returns, profitable top line growth and greater shareholder value.
My father and Twin Disc Board Chairman Michael Batten passed
away earlier this year. Yet, he remains an integral part of our
company’s culture. Dad was fond of saying that life is 3D; you
have to see it from everyone’s perspective to really understand
where you are and where you are going. That explains why at
Twin Disc, we believe that our best ideas come from listening
to our customers.
I am thankful to our global Twin Disc team who value our customers
as much as I do. I also want to thank our shareholders for your
ongoing commitment, support and trust. The road ahead will be
demanding, but we are clearly on the right course to build a brighter
future for our customers, our employees and our shareholders.
John H. Batten
President,
Chief Executive Officer
4
SET FOR
THE FUTURE.
“We are now aligned
around a global structure
that better positions
us to collaborate with
our customers...”
John Batten
5
Closer to our Customers. Engineering Excellence.
Around the world, we leverage local Twin Disc expertise to make things work better for our customers in
a broad range of industries and applications. It’s a simple formula: we listen to our customers and respond
with innovative solutions that meet their specific needs.
PLEASURE CRAFT
Maritimo M58 Cruising Motoryacht
Precision control at your fingertips
Dan Plath has been a boating enthusiast all his life and a yacht owner for
the past decade. He recently purchased a Maritimo M58, 61' motor yacht
from Hampton Yacht Group of California.
Solution
Dan’s M58 is equipped with Twin Disc’s Express Joystick System (EJS®),
Express Positioning™ and Quickshift® transmission. With this package, his
M58 has exceptional slow speed control and can be easily moved in any
direction during docking and tight maneuvering. Express Positioning allows
him to maintain a fixed position in a canal’s current, or while waiting for a
bridge or a lock to open.
Benefit
With the Twin Disc EJS, Dan can handle his yacht with ease coming into
and out of marinas. The Quickshift transmissions ensure that the boat
handles smoothly and doesn’t lurch forward, while the EJS offers easy,
fingertip control for direction and speed.
INDUSTRIAL PRODUCTS
VEHICLE
Entech Industries
Removing uncertainty from the equation
Entech Industries manufactures high performance dust collectors for a
variety of applications, ranging from bridge rehabilitation to hazardous
waste remediation.
Solution
Entech is currently field testing the Twin Disc RO-211 Remote Over Center
PTO for one of its large, trailer-mounted dust collectors. The RO-211
leverages a patent-pending design to remotely engage the PTO’s
over-center mechanism via an electronic control.
Benefit
Entech’s dust collectors are used in applications with different operators
on single or multiple jobsites. The RO-211 takes the guesswork out of the
equation; the operator simply engages the clutch with the press of a
button and the electronic controller takes over the engagement process,
greatly minimizing the potential for operator error and costly downtime.
6
LISTENING
+ RESPONSABILITY
= INNOVATION.
Penguin International
We deliver on our promise
Penguin International manufactures high-speed commercial vessels, including
its Flex series of multi-role crew boats. These crew boats take on a variety of
offshore duties, including crew transfer, cargo transport, platform security and
emergency evacuations.
Solution
Penguin puts a high priority on transmission and propulsion systems that
are robust and reliable, yet simple and cost-effective. That’s why virtually all
of its mid-sized Flex crew boats built in the last nine years have Twin Disc
transmission systems.
Benefit
Twin Disc consistently delivers customized transmission and propulsion
solutions that ensure Penguin’s crew boats perform at desired speed, comply
with Penguin’s high standards for quality and reliability; and help Penguin
meet the escalating demand for its crew boats on a timely basis. Despite very
tight production schedules, Penguin knows that Twin Disc will deliver what it
promises and quickly resolve any issues that may arise.
Rosenbauer
Divide power, conquer disasters
Rosenbauer’s Panther fire truck is considered best-in-class for Aircraft Rescue
Fire Fighting (ARFF). Speed, safety, and outstanding firefighting performance
are critical, as the Panther responds to airport disasters worldwide.
Solution
The Panther utilizes a sophisticated Twin Disc transmission system with an
engine-mounted torque converter, 6-speed TD61-1179 or 8-speed TAD81-4001
power-shift transmission, and the advanced TDEC-500 electronic control system.
Benefit
The Twin Disc torque converter’s power dividing capability allows the Panther to
be driven and use the fire pump at the same time, eliminating the need for a
second engine. The Twin Disc electronic control system integrates the drive mode,
PTO engagement and pump and roll, so the vehicle operator can concentrate
on the task at hand. Rosenbauer has recently launched a new version of its
Panther series with an 8-speed Twin Disc 4001 transmission, offering even better
acceleration and fuel economy.
COMMERCIAL MARINE
TRANSMISSIONS SYSTEMS
7
(In thousands, except per share and shares outstanding data.)
Net Cash Provided by
Operating Activities
(in thousands)
Capital Expenditures
(in thousands)
Diluted Earnings per Share
Dividends
$30,000
25,000
20,000
15,000
10,000
5,000
0
$17,060
$12,000
9,000
6,000
3,000
0
$9,049
$2.5
2.0
1.5
1.0
0.5
0.0
.99
.36
2012
2013
2014
2015
2012
2013
2014
2015
2012
2013
2014
2015
8
(In thousands, except per share data.)
FINANCIAL HIGHLIGHTS 2013 2014 2015Net Sales $285,282 $263,909 $265,790Net Earnings 3,882 3,644 11,173 Basic Earnings Per Share 0.34 0.32 0.99 Diluted Earnings Per Share 0.34 0.32 0.99 Dividends Per Share 0.36 0.36 0.36 Average Basic Shares Outstanding 11,304,280 11,258,342 11,273,697 Average Diluted Shares Outstanding 11,377,091 11,264,421 11,277,363 Operating Results by Quarter 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Results2015 Net Sales $64,824 $72,691 $60,941 $67,334 $265,790 Gross Profit 22,389 22,103 19,006 19,534 83,032 Net Earnings 4,043 3,747 2,946 437 11,173 Basic Earnings Per Share 0.36 0.33 0.26 0.04 0.99 Diluted Earnings Per Share 0.36 0.33 0.26 0.04 0.99 Dividends Per Share 0.09 0.09 0.09 0.09 0.36 Stock Price Range (High-Low) 34.38-25.51 28.19-18.05 21.12-15.66 19.67-17.03 34.38-15.66 2014 Net Sales $66,426 $63,212 $60,705 $73,566 $263,909 Gross Profit 20,667 18,544 16,528 21,515 77,254 Net Earnings (Loss) 1,277 518 (475) 2,324 3,644 Basic Earnings (Loss) Per Share 0.11 0.05 (0.04) 0.20 0.32 Diluted Earnings (Loss) Per Share 0.11 0.05 (0.04) 0.20 0.32 Dividends Per Share 0.09 0.09 0.09 0.09 0.36 Stock Price Range (High-Low) 27.32-22.67 29.00-24.16 27.88-18.67 34.34-23.41 34.34-18.67 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, 2015
Commission File Number 1-7635
TWIN DISC, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Wisconsin
(State or Other Jurisdiction of
Incorporation or Organization)
1328 Racine Street, Racine, Wisconsin
(Address of Principal Executive Office)
39-0667110
(I.R.S. Employer
Identification Number)
53403
(Zip Code)
Registrant’s Telephone Number, including area code:
(262) 638-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, no par
Preferred stock purchase rights
Name of each exchange on which registered:
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(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 reference 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 26, 2014, 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 $171,061,739. 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 19, 2015, the registrant had 11,323,394 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 23, 2015, 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.
9
2015 ANNUAL REPORT TWIN DISC, INCORPORATED
Table of Contents
TWIN DISC, INC. - FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2015
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosure.
Executive Officers of the Registrant.
Market for the Registrant’s Common Stock and Related Stockholder Matters.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7(a).
Quantitative and Qualitative Disclosure About Market Risk.
Item 8.
Item 9.
Financial Statements and Supplementary Data.
Change In and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9(a).
Controls and Procedures.
Item 9(b).
Other Information.
PART III
Item 10.
Item 11.
Directors and Executive Officers of the Registrant.
Executive Compensation.
Item 12.
Security Ownership of Certain Beneficial Owners and Management.
Certain Relationships and Related Transactions, Director Independence.
Principal Accounting Fees and Services.
Exhibits, Financial Statement Schedules.
Signatures.
Exhibit Index.
Item 13.
Item 14.
PART IV
Item 15.
10
11
12
14
14
15
15
15
16
17
17
29
30
30
30
31
31
32
32
32
32
32
62
63
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT
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 commercial, pleasure craft, 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, particularly in Europe, are taken mainly in the
months of July and August, curtailing production during that period.
The Company’s products receive direct widespread competition, including from divisions of other larger independent manufacturers. The
Company also competes for business with parts manufacturing divisions of some of its major customers. The primary competitive factors for
the Company’s products are design, technology, performance, price, service and availability. The Company’s top ten customers accounted for
approximately 43% of the Company’s consolidated net sales during the year ended June 30, 2015. There was one customer, Sewart Supply,
Inc., an authorized distributor of the Company, that accounted for 11% of consolidated net sales in fiscal 2015.
Unfilled open orders for the next six months of $34,397,000 at June 30, 2015 compares to $66,102,000 at June 30, 2014. Since orders
are subject to cancellation and rescheduling by the customer, the six month order backlog is considered more representative of operating
conditions than total backlog. However, as procurement and manufacturing “lead times” change, the backlog will increase or decrease, and
thus it does not necessarily provide a valid indicator of the shipping rate. Cancellations are generally the result of rescheduling activity and
do not represent a material change in backlog.
Management recognizes that there are attendant risks that foreign governments may place restrictions on dividend payments and other
movements of money, but these risks are considered minimal due to the political relations the United States maintains with the countries
in which the Company operates or the relatively low investment within individual countries. No material portion of the Company’s business
is subject to renegotiation of profits or termination of contracts at the election of the U.S. 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 $2,288,000, $3,028,000 and $3,058,000 in fiscal 2015, 2014 and 2013, respectively. Total engineering and development costs were
$11,091,000, $10,900,000 and $10,242,000 in fiscal 2015, 2014 and 2013, 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, 2015 was 921.
A summary of financial data by segment and geographic area for the years ended June 30, 2015, 2014 and 2013 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.
11
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Item 1A. 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 Company’s business.
As a global company, we are subject to currency fluctuations and any significant movement between the U.S. dollar and the euro,
in particular, could have an adverse effect on our profitability. Although the Company’s financial results are reported 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 change in the relative values of the U.S. dollar or euro, could have an
adverse effect on our profitability and financial condition.
Certain of the Company’s products are directly or indirectly used in oil exploration and oil drilling, and are thus dependent upon the
strength of those markets and oil prices. In recent years, the Company has seen significant variations in the sales of its products that are
used in oil and energy related markets. The variability in these markets has been defined by the change in oil prices and the global demand for
oil. 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 recovered to historically high levels in
fiscal 2011 and 2012, the Company has since experienced a softening in demand through fiscal 2015. 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 and ultimately on the Company’s profitability.
Many of the Company’s product markets are cyclical in nature or are otherwise sensitive to volatile or variable factors. A downturn
or weakness in overall economic activity or fluctuations in those other factors could 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 particular, 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 to forego or otherwise postpone purchases in favor of repairing existing equipment.
In the event of an increase in the global demand for steel, the Company could be adversely affected if it experiences 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 and relationships with our customers.
The Company continues to face the prospect of increasing commodity costs, including steel, other raw materials and energy that could
have an adverse effect on future profitability. To date, the Company has been successful with offsetting the 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 our future profitability.
If the Company were to lose business with any key customers, the Company’s business would be adversely affected. Although there
was only one customer, Sewart Supply, Inc., that accounted for 10% or more of consolidated net sales in fiscal 2015, deterioration of a business
relationship with one or more of the Company’s significant customers would cause its sales and profitability to be adversely affected.
The termination of relationships with the Company’s suppliers, or the inability of such suppliers to perform, could disrupt its business
and have an adverse effect on its ability to manufacture and deliver products. The Company relies on raw 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.
12
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT 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 productivity 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
relationship, or other action that could adversely affect warranty and quality costs, future sales and profitability.
The Company faces risks associated with its international sales and operations that could adversely affect its business, results of
operations or financial condition. Sales to customers outside the United States approximated 51% of our consolidated net sales for fiscal 2015.
We have international manufacturing operations in Belgium, Italy, India and Switzerland. In addition, we have international distribution operations
in Singapore, China, Australia, Japan, Italy, India 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
These factors could adversely affect our business, results of operations or financial condition.
A material disruption at the Company’s manufacturing facilities in Racine, Wisconsin could adversely affect its ability to generate
sales and meet customer demand. The majority of the Company’s manufacturing, based on fiscal 2015’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 business 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 were to occur, future sales levels and costs of doing business, and therefore profitability, could be adversely affected.
Any failure to meet our debt obligations and satisfy financial covenants could adversely affect our business and financial 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 was seen in the markets served by the Company in 2011 through 2015, these conditions made it difficult for customers, vendors and
the Company to accurately forecast and plan future business activities, and caused U.S. and foreign businesses to slow spending on products,
which delayed and lengthened sales cycles. These conditions led to declining revenues in several of the Company’s divisions in fiscal 2009 and
2010. The Company’s revolving credit facility and senior notes agreement require it to maintain specified quarterly financial covenants such as
a minimum consolidated net worth amount, a minimum Earnings Before Interest Taxes Depreciation and Amortization (“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, 2015, 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 2016 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.
13
2015 ANNUAL REPORT TWIN DISC, INCORPORATED The Company may experience negative or unforeseen tax consequences. The Company reviews the probability of the realization of our
net deferred tax assets each period based on forecasts of taxable income in both the U.S. and foreign jurisdictions. This review uses historical
results, projected future operating results based upon approved business plans, eligible carryforward 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.
Taxing authority challenges may lead to tax payments exceeding current reserves. The Company is subject to ongoing tax examinations
in various jurisdictions. As a result, the Company may record incremental tax expense based on expected outcomes of such matters. In addition,
the Company may adjust previously reported tax reserves based on expected results of these examinations. Such adjustments could result in
an increase or decrease to the Company’s effective tax rate. Future changes in tax law in various jurisdictions around the world and income tax
holidays could have a material impact on the Company’s effective tax rate, foreign rate differential, future income tax expense and cash flows.
Security breaches and other disruptions could compromise the Company’s information and expose it to liability, which would cause
its business and reputation to suffer. In the ordinary course of its business, the Company collects and stores sensitive data, including its
proprietary business information and that of its customers, suppliers and business partners, as well as personally identifiable information of its
customers and employees, in its internal and external data centers, cloud services, and on its networks. The secure processing, maintenance
and transmission of this information is critical to the Company’s operations and business strategy. Despite the Company’s security measures, its
information technology and infrastructure, and that of its partners, may be vulnerable to malicious attacks or breached due to employee error,
malfeasance or other disruptions, including as a result of rollouts of new systems. Any such breach or operational failure would compromise the
Company’s networks and/or that of its partners and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such
access, disclosure or other loss of information could result in legal claims or proceedings and/or regulatory penalties, disrupt the Company’s
operations, damage its reputation, and/or cause a loss of confidence in its products and services, which could adversely affect its business.
Item 1B. Unresolved Staff Comments
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 767,000 square feet. One of the Racine facilities
includes office space, which includes the Company’s corporate headquarters. The Company leases additional manufacturing, assembly and office
facilities in Italy (Limite sull’Arno) and India (manufacturing facility in Kancheepuram).
Distribution Segment
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.
Edmonton, Alberta, Canada
Medley, Florida, U.S.A.
Tampa, Florida, U.S.A.
Coburg, Oregon, U.S.A.
Burnaby, British Columbia, Canada
Brisbane, Queensland, Australia
Perth, Western Australia, Australia
Singapore
Shanghai, China
Guangzhou, China
Chennai, India
Kent, Washington, U.S.A.
Sydney, New South Wales, Australia
Saitama City, Japan
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.
14
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10 K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 23, 2015.
Name
John H. Batten
Jeffrey S. Knutson
Malcolm F. Moore
Dean J. Bratel
Denise L. Wilcox
Michael B. Gee
Debbie A. Lange
Age
Position
50
50
65
51
58
48
57
President – Chief Executive Officer
Vice President – Finance, Chief Financial Officer, Treasurer and Secretary
Executive Vice President – Operations
Vice President – Global Sales and Marketing
Vice President – Human Resources
Vice President – Corporate Engineering
Corporate Controller
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.
John H. Batten, President – Chief Executive Officer. Effective November 1, 2013, Mr. Batten was named President – Chief Executive Officer.
Prior to this promotion, Mr. Batten served as President and Chief Operating Officer since July 2008, 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 the late Mr. Michael Batten, former Chairman of
the Board of Directors.
Jeffrey S. Knutson, Vice President – Finance, Chief Financial Officer, Treasurer and Secretary. Mr. Knutson was named Chief Financial Officer
and Treasurer in June 2015. Mr. Knutson was named Vice President – Finance, Interim Chief Financial Officer and Interim Treasurer in February
2015. Mr. Knutson was appointed Corporate Secretary in June 2013, and was Corporate Controller from his appointment in October 2005
until August 2015. Mr. Knutson joined 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).
Malcolm F. Moore, Executive Vice President – Operations. Mr. Moore was hired as Executive Vice President Finance – Operations effective
July 1, 2015 after resigning from Twin Disc Board of Directors on June 30, 2015. Prior to joining Twin Disc, Mr. Moore was President and CEO
of Digi-Star LLC, a leading supplier of electronic components and software used in precision agriculture. Prior to leading Digi-Star, he held a
variety of positions including Executive Vice President and COO, President and COO, and President and CEO of Gehl Company, a publicly-owned
manufacturer and distributor of equipment used in construction and agriculture.
Dean J. Bratel, Vice President – Global Sales and Marketing. Mr. Bratel was promoted to his current role in January 2015 after serving as
Vice President – Americas (since June 2013), Vice President – Engineering (since November 2004), 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.
Denise L. Wilcox, Vice President – Human Resources. After joining the Company as Manager Compensation & Benefits in September 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.
Michael B. Gee, Vice President – Corporate Engineering. Mr. Gee was promoted to his current role in January 2015 after serving as Director
of Engineering. Mr. Gee joined Twin Disc in 1990 and has held several positions, including: Experimental Engineer, Design Engineer, Project
Engineer, Engineering Manager and Chief Engineer.
Debbie A. Lange, Corporate Controller. Ms. Lange was hired as Corporate Controller effective August 4, 2015. Prior to joining the Company,
Ms. Lange was the Director of Accounting Research & Special Projects at Sealed Air Corporation (since 2011), a global manufacturer and
provider of food packaging solutions, product packaging and cleaning and hygiene solutions. Prior to the role at Sealed Air, Ms. Lange held the
position of Director of Global Accounting and Reporting at Diversey, Inc. (since 2008), a global marketer and manufacturer of cleaning, hygiene,
operational efficiency, appearance enhancing products, and equipment and related services for the institutional and industrial cleaning and
sanitation market.
15
2015 ANNUAL REPORT TWIN DISC, INCORPORATED 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 per quarter from July 1, 2013 through June 30, 2015:
Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended 6/30/15
Fiscal Year Ended 6/30/14
High
$34.38
28.19
21.12
19.67
Low
$25.51
18.05
15.66
17.03
Dividend
$0.09
0.09
0.09
0.09
High
$27.32
29.00
27.88
34.34
Low
$22.67
24.16
18.67
23.41
Dividend
$0.09
0.09
0.09
0.09
For information regarding the Company’s equity-based compensation plans, see the discussion under Item 12 of this report. As of August 19,
2015, shareholders of record numbered 530. The closing price of Twin Disc common stock as of August 19, 2015 was $14.37.
Issuer Purchases of Equity Securities
Period
March 28, 2015 – April 24, 2015
April 25, 2015 – May 29, 2015
May 30, 2015 - June 30, 2015
Total
(a) Total Number of
Shares Purchased
(b) Average Price
Paid per Share
(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
0
0
NA
NA
NA
NA
0
0
0
0
315,000
315,000
315,000
315,000
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 shares were purchased during fiscal 2009 and 125,000 shares were purchased during fiscal 2012. 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.
During the second quarter of fiscal 2013, the Company purchased 185,000 shares under this authorization.
Performance Graph
The following table compares total shareholder return over the last five 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 manufacturers. 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, 2010 and based upon cumulative total return values assuming reinvestment of dividends on a quarterly basis.
16
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT
Comparison of Five-Year Cumulative Total Return
Twin Disc, Incorporated, S&P Machinery, Russell 2000
400
350
300
250
200
150
100
50
0
100.00
100.00
100.00
344.51
155.89
137.40
Twin Disc
S&P Machinery
Russell 2000
217.60
167.09
163.60
220.46
214.30
206.59
220.00
207.83
176.32
166.90
136.98
134.54
June 30, 2010
June 30, 2011
June 30, 2012
June 30, 2013
June 30, 2014
June 30, 2015
Item 6. Selected Financial Data
Financial Highlights
(in thousands, except per share amounts)
Fiscal Years Ended June 30,
Statement of Operations Data:
2015
2014
2013
2012
2011
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
Dividends per share
$265,790
$263,909
$285,282
$355,870
$310,393
11,173
0.99
0.99
0.36
3,644
0.32
0.32
0.36
3,882
0.34
0.34
0.36
26,743
2.34
2.31
0.34
17,997
1.59
1.57
0.30
Balance Sheet Data (at end of period):
Total assets
Total long-term debt
$249,862
$266,985
$285,458
$303,832
10,231
14,800
23,472
28,401
$309,120
25,784
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 communications that are
not historical facts are forward-looking statements, which are based on management’s current expectations. These statements involve risks and
uncertainties that could cause actual results to differ materially from what appears here.
Forward-looking statements include the Company’s description of plans and objectives for future operations and assumptions behind those
plans. The words “anticipates,” “believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions, usually identify
forward-looking statements. In addition, goals established by 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.
17
2015 ANNUAL REPORT TWIN DISC, INCORPORATED In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including, 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)
Net sales
Cost of goods sold
Gross profit
2015
%
2014
%
2013
%
$265,790
182,758
$263,909
186,655
$285,282
205,257
83,032
31.2
77,254
29.3
80,025
28.1
Marketing, engineering and administrative expenses
64,264
24.2
67,406
25.5
67,899
23.8
Restructuring of operations
Impairment charge
Earnings from operations
Fiscal 2015 Compared to Fiscal 2014
3,282
–
$ 15,486
1.2
0.0
5.8
961
–
$ 8,887
0.4
0.0
3.4
708
1,405
$ 10,013
0.2
0.5
3.5
Net Sales
Net sales for fiscal 2015 increased 0.7%, or $1.9 million, to $265.8 million from $263.9 million in fiscal 2014. Currency translation had an
unfavorable impact on fiscal 2015 sales compared to the prior year totaling $8.9 million due to the strengthening of the U.S. dollar against the
euro and Asian currencies. Adjusting for constant currency, sales increased 4.1% compared to fiscal 2014. This increase was driven by strong
demand, especially through the first three fiscal quarters, in the North American oil and gas market for both new units and service parts. This
demand softened in the latter half of the third quarter and continued through the fourth quarter, driven by the global decline in oil prices.
Offsetting the increased volume in North American oil and gas related products was weaker demand in Asia for commercial marine and oilfield
transmissions. This decline is reflective of general economic conditions in the region, along with timing of oilfield related projects in China.
Sales at our manufacturing segment were up 5.5%, or $12.5 million, versus the same period last year. Compared to fiscal 2014, on average,
the U.S. dollar strengthened against the euro. The net translation effect of this on foreign manufacturing operations was to reduce revenues for
the manufacturing segment by approximately $6.7 million versus the prior year, before eliminations. In the current fiscal year, the Company’s
North American manufacturing operation, the largest, experienced a 9.3% increase in sales compared to fiscal 2014. The primary driver for this
increase was stronger North American demand for oil and gas related products through the first three fiscal quarters. This demand began to slow
in the third quarter and continued through the fourth quarter, driven by the decline in global oil prices. The Company’s Italian manufacturing
operations, which have been adversely impacted by the softness in the European mega yacht and industrial markets, experienced a sales
decrease of 7.7% compared to the prior fiscal year. The Company’s Belgian manufacturing operation saw relatively flat sales in fiscal 2015
as improved North American demand was offset by unfavorable currency movements. The Company’s Swiss manufacturing operation, which
supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 10.5% decrease in sales, primarily due to
unfavorable currency movements along with the timing of shipments for the global patrol boat and Italian mega yacht markets.
Sales at our distribution segment were down 17.0%, or $20.7 million, compared to fiscal 2014. Compared to fiscal 2014, on average, the Asian
currencies weakened against the U.S. dollar. The net translation effect of this on foreign distribution operations was to decrease revenues for
the distribution segment by approximately $5.4 million versus the prior year, before eliminations. The Company’s distribution operation in
Singapore, its largest Company-owned distribution operation, experienced a 33.2% reduction in sales due to a decline in demand for various
commercial applications and pressure-pumping transmissions for the Chinese oil and gas market following several years of very strong growth.
The Company’s distribution operation in the Northwest of the United States and Southwest of Canada experienced an increase in sales of 11.6%
on the strength of the North American oil and gas market through the first half of the fiscal year. 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 just over 5% from the prior fiscal year, driven by improved shipments in the Australian mega yacht market over the prior fiscal year.
Net sales for the Company’s largest product market, marine transmission and propulsion systems, were down 5.6% compared to the prior fiscal
year. This decrease reflects a decline in the Asian commercial marine market, continued weakness in the global pleasure craft market and a
significant currency impact. Sales of the Company’s boat management systems manufactured at the Company’s Italian operation and servicing
the global mega yacht market were down approximately 19.3% versus the prior fiscal year as the European mega yacht market continuing to
experience softness in demand, along with the strengthening of the U.S. dollar against the euro. In the off-highway transmission market, the
18
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT year-over-year increase of just over 14% can be attributed primarily to increased shipments of the Company’s pressure pumping transmission
systems and components to the North American oil and gas market. The increase experienced in the Company’s industrial products of just over
2% was due to increased sales into the agriculture, mining and general industrial markets, primarily in the North American and Italian markets,
as well as increased activity related to the North American oil field markets.
Geographically, sales to the U.S. and Canada represented 55% of consolidated sales for fiscal 2015 compared to 45% in fiscal 2014. North
American sales benefited from strong demand for oil and gas related products through the first three quarters of the fiscal year. While China
continued to be our second largest end market in fiscal 2015, representing 7.4% of consolidated sales, this is down from 12.8% in fiscal 2014,
as demand for commercial marine and pressure pumping transmissions eased from fiscal 2014 levels. Overall sales into the Asia Pacific market
represented approximately 21% of sales in fiscal 2015, compared to 29% in fiscal 2014. See Note J of the Notes to the consolidated financial
statements for more information on the Company’s business segments and foreign operations.
The elimination for net intra-segment and inter-segment sales decreased $10.1 million, or 11.8%, from $85.1 million in fiscal 2014 to $75.0
million in fiscal 2015. Year-over-year changes in foreign exchange rates had a net favorable impact of $3.2 million on net intra-segment and
inter-segment sales.
Gross Profit
In fiscal 2015, gross profit increased $5.8 million, or 7.5%, to $83.0 million. Gross profit as a percentage of sales increased 190 basis points in fiscal
2015 to 31.2%, compared to 29.3% in fiscal 2014. The table below summarizes the gross profit trend by quarter for fiscal years 2015 and 2014:
Gross Profit: ($ millions)
2015
2014
% of Sales:
2015
2014
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
$22.4
$20.7
34.5%
31.1%
$22.1
$18.6
30.4%
29.3%
$19.0
$16.5
31.2%
27.2%
$19.5
$21.5
29.0%
29.2%
Year
$83.0
$77.3
31.2%
29.3%
There were a number of factors that impacted the Company’s overall gross margin rate in fiscal 2015. Gross margin for the year was favorably
impacted by higher volumes, a favorable product mix, lower U.S. pension expense and favorable manufacturing absorption, partially offset
by an unfavorable exchange impact. The Company estimates the net favorable impact of increased volumes on gross margin in fiscal 2015
was approximately $4.9 million. The favorable shift in product mix, primarily related to the growth experienced in the Company’s oil and
gas transmission business, had an estimated favorable impact of $1.7 million. U.S. pension expense included in cost of goods sold decreased
by $0.5 million in fiscal 2015. These favorable movements were partially offset by an unfavorable exchange impact of $1.8 million. The net
remaining favorable year-over-year variance was primarily driven by favorable manufacturing absorption and product mix.
Marketing, Engineering and Administrative (ME&A) Expenses
Marketing, engineering, and administrative (ME&A) expenses of $64.3 million were down $3.1 million, or 4.7%, compared to the prior fiscal
year. As a percentage of sales, ME&A expenses decreased to 24.2% of sales versus 25.5% of sales in fiscal 2014. The reduction in fiscal
2015 compared to the prior year was heavily impacted by currency movements ($2.4 million), along with one-time prior year items related
to professional services and an adjustment to the cash surrender value of life insurance policies, reduced bad debt expense, lower pension
expense and aggressive cost containment measures across the global organization. These savings were partially offset by an increase to bonus
expense in fiscal 2015 ($3.1 million).
Restructuring of Operations
During the fourth quarter of fiscal 2015, the Company recorded a pre-tax restructuring charge of $3.3 million, or $0.29 per diluted share,
associated with a reduction in workforce at its North American operation. This restructuring resulted in a reduction of 79 people through a
combination of early retirement and reduction in force. During fiscal 2014, the Company recorded a pre-tax restructuring charge of $1.0 million,
or $0.09 per diluted share, representing the incremental cost above the minimum legal indemnity for a targeted workforce reduction at its
Belgian operation, following finalization of negotiations with the local labor unions. The minimum legal indemnity of $0.5 million was recorded
in the fourth quarter of fiscal 2013, upon announcement of the intended restructuring action. During fiscal 2014, the Company made cash
payments of $0.9 million, resulting in an accrual balance at June 30, 2014 of $0.8 million.
Interest Expense
Interest expense of $0.6 million for the fiscal 2015 was down 35% versus fiscal 2014. Total interest on the Company’s $60 million revolving
credit facility (“revolver”) decreased 46% to $0.1 million in fiscal 2015. The decrease can be attributed to an overall decrease in the average
19
2015 ANNUAL REPORT TWIN DISC, INCORPORATED borrowings year-over-year. The average borrowing on the revolver, computed monthly, decreased to $10.7 million in fiscal 2015, compared to
$13.2 million in the prior fiscal year. The interest rate on the revolver was a range of 1.16% to 1.85% in the prior fiscal year compared to a
range of 1.16% to 1.20% in the current year. The interest expense on the Company’s $25 million Senior Note decreased $0.2 million, or 36%,
at a fixed rate of 6.05%, to $0.4 million, due to a lower remaining principal balance.
Other, Net
For the fiscal 2015 full year, Other, net increased by $0.9 million due primarily to favorable exchange movements related to the Japanese yen
and Singapore dollar, along with the receipt of a life insurance benefit.
Income Taxes
The effective tax rate for the twelve months of fiscal 2015 was 28.4%, which is significantly lower than the prior year rate of 52.2%. The full
year effective rates are impacted by the non-deductibility of operating results in a certain foreign jurisdiction that is subject to a full valuation
allowance. Adjusting both fiscal years for the results of this jurisdiction, the fiscal 2015 full year rate would have been 30.9% compared to
32.7% for the same period in fiscal 2014. The fiscal 2015 rate was favorably impacted by a change in the jurisdictional mix of earnings, along
with favorable discrete items related to foreign earnings, and the reinstatement of the research and development credit for calendar 2015.
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, carry-back
and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. During fiscal
2015, the Company reported operating income in certain foreign jurisdictions where the loss carryforward period is unlimited. The Company
has evaluated the likelihood of whether the net deferred tax assets related to these jurisdictions would be realized and concluded that based
primarily upon the uncertainty in achieving sustained levels of improvement and uncertain exchange rates in these jurisdictions, (a) it is more
likely than not that $3.6 million of deferred tax assets would not be realized; and that (b) a full valuation allowance on the balance of deferred
tax assets relating to these jurisdictions continues to be necessary. The Company recorded a net decrease in valuation allowance of $2.0 million
in fiscal 2015 due to lower cumulative operating losses in these jurisdictions. 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.
Order Rates
As of June 30, 2015, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was $34.4
million, or approximately 48% lower than the six-month backlog of $66.1 million as of June 30, 2014. Along with an unfavorable exchange
impact ($2.1 million), the Company’s backlog declined through the second half of fiscal 2015 as global demand for the Company’s oil and gas
related products have been adversely impacted by the decline in oil prices.
Fiscal 2014 Compared to Fiscal 2013
Net Sales
Net sales for fiscal 2014 decreased 7.5%, or $21.4 million, to $263.9 million from $285.3 million in fiscal 2013. Compared to fiscal 2013, on
average, Asian currencies weakened against the U.S. dollar more than offsetting a strengthening euro against the U.S. dollar. The net translation
effect of this on foreign operations was to decrease revenues by approximately $2.2 million versus the prior year, before eliminations. The
decrease in sales was primarily the result of lower demand from the Company’s customers in North America and Europe, while sales to
customers in Asia Pacific continued at record levels. Additionally, the severe winter weather throughout most of the U.S. and Canada, while
difficult to quantify, impacted the performance of the supply chain causing some shipments to be delayed, and there was a general low level
of order activity for both new units and spares during the cold winter months. Coming off a record year in fiscal 2013, commercial marine
transmission system shipments were down in fiscal 2014. However, the Company continued to experience favorable demand trends from
customers in Asia for both pressure pumping and commercial marine products as a result of overall economic growth in the region and market
share gains. Towards the end of the third fiscal quarter and continuing into the fourth fiscal quarter, demand for pressure pumping transmission
systems began increasing in North America, and the Company is hopeful that these recent trends will continue as the excess field inventory
situation continues to improve. Sales to customers serving the global mega yacht market remained near historical lows.
Sales at our manufacturing segment were down 7.3%, or $18.0 million, versus the same period last year. Compared to fiscal 2013, on
average, the euro strengthened against the U.S. dollar. The net translation effect of this on foreign manufacturing operations was to increase
revenues for the manufacturing segment by approximately $2.7 million versus the prior year, before eliminations. In the current fiscal year,
the Company’s North American manufacturing operation, the largest, experienced a 9% decrease in sales compared to fiscal 2013. The primary
drivers for this decrease were lower sales of legacy military and airport rescue and fire fighting (“ARFF”) transmission systems, and marine
and propulsion systems for the global markets, only partially offset by increased shipments of aftermarket products. In the second half of fiscal
2014, the Company began to experience increased order and shipment activity for its transmission systems for the North American oil and gas
market. The Company’s Italian manufacturing operations, which have been adversely impacted by the softness in the European mega yacht and
20
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT industrial markets, experienced a sales decrease of 1.5% compared to the prior fiscal year. The Company’s Belgian manufacturing operation,
which also continued to be adversely impacted by the softness in the global mega yacht market, experienced a brief strike at its facility in
the first fiscal quarter. This operation saw a 12% decrease in sales versus the prior fiscal year, primarily driven by the continued softness in
its markets and the temporary disruption experienced as a result of the strike in the first fiscal quarter. The Company’s Swiss manufacturing
operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 4% decrease in sales,
primarily due to the timing of shipments for the global patrol boat and Italian mega yacht markets.
Sales at our distribution segment were down 6.9%, or $9.0 million, compared to fiscal 2013. Compared to fiscal 2013, on average, the Asian
currencies weakened against the U.S. dollar. The net translation effect of this on foreign distribution operations was to decrease revenues for
the distribution segment by approximately $5.0 million versus the prior year, before eliminations. The Company’s distribution operation in
Singapore, its largest Company-owned distribution operation, which continues to experience strong demand for marine transmission products
for use in various commercial applications and pressure-pumping transmissions for the Chinese oil and gas market, experienced a less than 2%
decrease in sales compared to the prior fiscal year. This operation acts as the Company’s master distributor for Asia and continues to achieve
near record results as the Company’s products gain greater acceptance in the market. The Company’s distribution operation in the Northwest of
the United States and Southwest of Canada experienced a decrease in sales of 4.5%. In the prior fiscal year’s first nine months, this operation
experienced a 46% decrease in sales versus fiscal 2012 due to weakness in the Canadian oil and gas market as rig operators continued to
adjust to the North American natural gas supply overhang and lower prices. The Canadian oil and gas market remained at depressed levels
in fiscal 2014. The Company’s distribution operation in Italy, which provides boat accessories and propulsion systems for the pleasure craft
market, saw sales decrease slightly due to continued weakness in the global mega yacht market. In fiscal 2013’s fourth quarter, the Company
committed to a plan to exit the third party distribution agreement of this operation and entered negotiations to sell the inventory back to the
parent supplier. Those negotiations were completed in the third fiscal quarter of 2014. 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 just over 12%
from the prior fiscal year, driven by improved shipments in the Australian mega yacht market over the prior fiscal year.
Net sales for the Company’s largest product market, marine transmission and propulsion systems, were down 9.1% compared to the prior fiscal
year. The majority of the decrease was experienced in the first half of fiscal 2014 as the Company experienced decreased demand in the global
commercial marine market, which experienced record shipments in the prior fiscal year, and 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 mega yacht market
were up approximately 5% versus the prior fiscal year, in spite of the European mega yacht market continuing to experience softness in demand.
In the off-highway transmission market, the year-over-year decrease of just over 2% can be attributed primarily to decreased legacy military and
ARFF transmissions shipments, largely offset by shipments of the Company’s pressure pumping transmission systems to the Chinese oil and gas
market. The decrease experienced in the Company’s industrial products of just over 14% was due to decreased sales into the agriculture, mining
and general industrial markets, primarily in the North American and Italian markets, as well as decreased activity related to oil field markets.
Geographically, sales to the U.S. and Canada represented 45% of consolidated sales for fiscal 2014 compared to 49% in fiscal 2013. Fiscal 2014
proved to be another milestone year for our global sales, as China continued to be our second largest end market, after the U.S, at 13% of
consolidated sales in fiscal 2014, compared to 10% in fiscal 2013. Overall sales into the Asian Pacific market represented approximately 29%
of sales in fiscal 2014, compared to just under 27% in fiscal 2013. See Note J of the Notes to the consolidated financial statements for more
information on the Company’s business segments and foreign operations.
The elimination for net intra-segment and inter-segment sales decreased $5.6 million, or 6.2%, from $90.7 million in fiscal 2013 to $85.1
million in fiscal 2014. Year-over-year changes in foreign exchange rates had a net favorable impact of $2.0 million on net intra-segment and
inter-segment sales.
Gross Profit
In fiscal 2014, gross profit decreased $2.8 million, or 3.5%, to $77.3 million. Gross profit as a percentage of sales increased 120 basis points in fiscal
2014 to 29.3%, compared to 28.1% in fiscal 2013. The table below summarizes the gross profit trend by quarter for fiscal years 2014 and 2013:
Gross Profit: ($ millions)
2014
2013
% of Sales:
2014
2013
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
$20.7
$19.4
31.1%
28.2%
$18.6
$22.3
29.3%
30.8%
$16.5
$17.7
27.2%
25.9%
$21.5
$20.6
29.2%
27.2%
Year
$77.3
$80.0
29.3%
28.1%
21
2015 ANNUAL REPORT TWIN DISC, INCORPORATED There were a number of factors that impacted the Company’s overall gross margin rate in fiscal 2014. Gross margin for the year was
unfavorably impacted by lower volumes, which was largely offset by favorable product mix, lower U.S. pension expense, lower warranty
expense and favorable manufacturing absorption. The Company estimates the net unfavorable impact of lower volumes on gross margin in
fiscal 2014 was approximately $9.3 million. The favorable shift in product mix related to the modest growth experienced in the Company’s
oil and gas transmission business had an estimated favorable impact of $0.6 million. U.S. pension expense included in cost of goods sold
decreased from $1.3 million in fiscal 2013 to $0.7 million in fiscal 2014. In addition, warranty expense decreased by $2.7 million from $4.9
million in fiscal 2013 to $2.2 in fiscal 2014 (for additional information on the Company’s warranty expense, see Note F of the Notes to the
consolidated financial statements). The net remaining favorable year-over-year variance was primarily driven by favorable manufacturing
absorption and product mix.
Marketing, Engineering and Administrative (ME&A) Expenses
Marketing, engineering, and administrative (ME&A) expenses of $67.4 million were down $0.5 million, or 0.7%, compared to the prior fiscal
year. As a percentage of sales, ME&A expenses increased to 25.5% of sales versus 23.8% of sales in fiscal 2013. In the fiscal 2014 fourth
quarter, the Company incurred expenses related to the investigation, severance costs and additional audit fees totaling $0.6 million associated
with the previously announced discovery of accounting irregularities at its Belgian operation. The investigation was completed in the fourth
fiscal quarter and did not identify any additional matters requiring adjustment to the Company’s financial statements beyond the immaterial
amounts recorded in the third quarter of fiscal 2014. In addition, the Company recorded a $0.6 million net unfavorable adjustment related
to the cash surrender value of various employee split-dollar life insurance policies in the fourth fiscal quarter, largely due to the rollout of a
policy to the Company’s former Chief Executive Officer as a result of his retirement. The Company also recorded a $0.3 million charge in the
fiscal 2014 fourth quarter related to sales and use tax following the completion of a nexus study at its North American distribution operations.
Adjusting for these one-time items, ME&A expenses were down year-over-year due to a continued focus on controlled spending at the
Company’s North American and European operations and lower stock-based compensation expense (a decrease of $1.5 million), partially offset
by increased spending in the Company’s growing Asia operations and on corporate engineering and development projects.
Restructuring of Operations
During fiscal 2014, the Company recorded a pre-tax restructuring charge of $1.0 million, or $0.09 per diluted share, representing the
incremental cost above the minimum legal indemnity for a targeted workforce reduction at its Belgian operation, following finalization of
negotiations with the local labor unions. The minimum legal indemnity of $0.5 million was recorded in the fourth quarter of fiscal 2013, upon
announcement of the intended restructuring action. During fiscal 2014, the Company made cash payments of $0.9 million, resulting in an
accrual balance at June 30, 2014 of $0.8 million.
Impairment Charge
In connection with preparing its financial statements for fiscal 2013, the Company recorded an impairment charge of $1.4 million, or $0.12 per
diluted share, which represented the remaining intangibles and fixed assets of its Italian distribution entity for which the Company committed
to a plan to exit the distribution agreement and entered negotiations to sell the inventory back to the parent supplier. This decision triggered
an impairment review of the long lived assets at this entity, resulting in the impairment charge of $1.4 million representing a complete
impairment of the remaining intangibles ($1.3 million) and fixed assets ($0.1 million) for this entity.
Interest Expense
Interest expense of $0.9 million for the fiscal 2014 was down 35% versus fiscal 2013. Total interest on the Company’s $40 million revolving
credit facility (“revolver”) decreased 43% to $0.3 million in fiscal 2014. The decrease can be attributed to an overall decrease in the average
borrowings year-over-year. The average borrowing on the revolver, computed monthly, decreased to $13.2 million in fiscal 2014, compared to
$19.8 million in the prior fiscal year. The interest rate on the revolver was a range of 1.70% to 1.84% in the prior fiscal year compared to a
range of 1.80% to 1.85% in the current year. The interest expense on the Company’s $25 million Senior Note decreased $0.2 million, or 26%,
at a fixed rate of 6.05%, to $0.6 million, due to a lower remaining principal balance.
Other, Net
For the fiscal 2014 full year, Other, net declined by $0.5 million due primarily to unfavorable exchange movements related to the euro,
Japanese yen and Indian rupee.
Income Taxes
The effective tax rate for the twelve months of fiscal 2014 was 52.2%, which is in line with the prior year rate of 54.0%. The full year effective
rates are impacted by the non-deductibility of operating losses in a certain foreign jurisdiction that is subject to a full valuation allowance.
Adjusting both fiscal years for the non-deductible losses, the fiscal 2014 full year rate would have been 32.7% compared to 38.4% for the
same period in fiscal 2013. The fiscal 2014 rate was favorably impacted by a change in the jurisdictional mix of earnings, along with favorable
provision to return adjustments recorded in the fiscal 2014 third and fourth quarters.
22
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT 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, carry-back and
carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. During fiscal 2014,
the Company continued to incur operating losses in certain foreign jurisdictions where the loss carryforward period is unlimited. The Company has
evaluated the likelihood that the net deferred tax assets related to these jurisdictions will be realized 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 $1.9 million. 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.
Order Rates
As of June 30, 2014, the Company’s backlog of orders scheduled for shipment during the next six months (six-month backlog) was $66.1
million, or approximately 1% lower than the six-month backlog of $66.8 million as of June 30, 2013. In the fourth fiscal quarter, the backlog
increased approximately 15% versus the end of the third fiscal quarter, as the Company continued to experience increased order activity for its
pressure pumping transmission business.
Liquidity and Capital Resources
Fiscal Years 2015, 2014 and 2013
The net cash provided by operating activities in fiscal 2015 totaled $17.1 million, a decrease of $8.7 million, or approximately 33.7%, versus
fiscal 2014. The reduction compared to fiscal 2014 relates to an increase in accounts receivable, a reduction in accrued retirement benefits and
an increase in a life insurance receivable. These unfavorable movements were partially offset by a significant reduction in inventory. Adjusted
for an $8.1 million impact of foreign currency translation, net inventory decreased by $9.3 million compared to the prior fiscal year end. The
majority of this decrease was seen at the Company’s North American operations in response to the decline in demand through the second half
of the fiscal year. Net inventory as a percentage of the six-month backlog increased from 148% as of June 30, 2014 to 232% as of June 30,
2015. The increase in trade receivables compared to the prior year end relates to timing of shipments within the fourth quarter, along with a
slight easing of payment patterns due to economic pressures in the oil and gas market. The decrease in trade accounts payable is in line with
the reduced purchase activity through the fourth quarter.
The net cash provided by operating activities in fiscal 2014 totaled $25.7 million, an increase of $1.3 million, or approximately 5%, versus
fiscal 2013. The increase was driven by a decrease in working capital, primarily inventories and accounts receivable, partially offset by lower
net earnings. Adjusted for the impact of foreign currency translation, net inventory decreased by $7.1 million. From the end of the fiscal third
quarter, inventory decreased $7.6 million. The majority of the net decrease in inventory came at the Company’s North American and European
manufacturing operations. This decrease was driven by strong shipments to the Company’s global commercial marine transmission and Asian
oil and gas markets. Net inventory as a percentage of the six-month backlog decreased from 154% as of June 30, 2013 to 148% as of June 30,
2014. The decrease in trade accounts receivable was a result of lower sales in the second half of fiscal 2014 compared to the same period in
fiscal 2013, $134.3 million versus $144.2 million, respectively. The increase in trade accounts payable was due to the timing of payments, as
both inventory and volume were down in the quarter compared to the prior fiscal year.
The net cash provided by operating activities in fiscal 2013 totaled $24.5 million, an increase of $10.0 million, or approximately 70%, versus
fiscal 2012. The increase was driven by a decrease in working capital, primarily accounts receivable, partially offset by lower net earnings.
Adjusted for the impact of foreign currency translation, net inventory decreased by $0.2 million. From the end of the fiscal third quarter,
inventory decreased approximately $10 million. The majority of the net decrease in inventory came at the Company’s North American
manufacturing and Asian distribution operations. This decrease was driven by strong shipments to the Company’s global commercial marine
transmission and Asian oil and gas markets. Net inventory as a percentage of the six-month backlog increased from 105% as of June 30, 2012
to 154% as of June 30, 2013. The decrease in trade accounts receivable was a result of lower sales in the second half of fiscal 2013 compared
to the same period in fiscal 2012, $144.2 million versus $191.6 million, respectively. The decrease in trade accounts payable was due to a
reduction in purchasing activity related to a significant decrease in inventory in the fourth quarter of fiscal 2013 ($10.2 million).
The net cash used for investing activities in fiscal 2015 of $6.8 million consisted primarily of capital expenditures for machinery and equipment
and facility upgrades at our U.S., Belgian and Singapore facilities. In fiscal 2015, the Company spent $9.0 million for capital expenditures, up
from $7.2 million in fiscal 2014. The Company also received a net reimbursement of premiums paid on executive split dollar life insurance
policies during the year ($1.9 million) due to resignations and retirements.
The net cash used for investing activities in fiscal 2014 of $7.1 million consisted primarily of capital expenditures for machinery and equipment
at our U.S. and Belgian manufacturing operations. In fiscal 2014, the Company spent $7.2 million for capital expenditures, up from $6.6 million
in fiscal 2013 and down from $13.7 million in fiscal 2012.
23
2015 ANNUAL REPORT TWIN DISC, INCORPORATED The net cash used for investing activities in fiscal 2013 of $6.5 million consisted primarily of capital expenditures for machinery and equipment
at our U.S., Indian and Belgian manufacturing operations. In fiscal 2013, the Company spent $6.6 million for capital expenditures, down from
$13.7 million and $12.0 million in fiscal years 2012 and 2011, respectively.
In fiscal 2015, the net cash used by financing activities of $9.2 million consisted primarily of dividends paid to shareholders of the Company
of $4.1 million and net payments of debt of $4.6 million. During fiscal 2015, the Company did not purchase any shares as part of its Board-
authorized stock repurchase program. The Company has 315,000 shares remaining under its authorized stock repurchase plan.
In fiscal 2014, the net cash used by financing activities of $14.9 million consisted primarily of dividends paid to shareholders of the Company
of $4.1 million and net payments of debt of $8.8 million. During fiscal 2014, the Company did not purchase any shares as part of its Board-
authorized stock repurchase program. The Company has 315,000 shares remaining under its authorized stock repurchase plan.
In fiscal 2013, the net cash used by financing activities of $12.4 million consisted primarily of the acquisition of treasury stock of $3.1 million,
under a Board-authorized stock repurchase program, dividends paid to shareholders of the Company of $4.1 million and payments of long-term
debt of $4.9 million. During the second quarter of fiscal 2013, the Company purchased 185,000 shares under this authorization, at an average
price of $16.59 per share for a total cost of $3.1 million. The Company had 315,000 shares remaining under its authorized stock repurchase
plan as of June 30, 2013.
Future Liquidity and Capital Resources
On June 30, 2014, the Company entered into a revolving loan agreement (the “Credit Agreement”) with Wells Fargo Bank, National
Association. Pursuant to the Credit Agreement, the Company may, from time to time, enter into revolving credit loans in amounts not to
exceed, in the aggregate, Wells Fargo’s revolving credit commitment of $60,000,000. The revolving credit commitment may be increased
under the agreement by an additional $10,000,000 in the event that the conditions for “Incremental Loans” (as defined in the agreement)
are satisfied. In general, outstanding revolving credit loans will bear interest at LIBOR plus 1.00%. The rate was 1.20% at June 30, 2015. In
addition to principal and interest payments, the Borrowers will be responsible for paying monthly commitment fees equal to 0.15% of the
unused revolving credit commitment. The Company has the option of making additional prepayments subject to certain limitations. The Credit
Agreement is scheduled to expire on May 31, 2018. The outstanding balance of $10,208,000 at June 30, 2015 is classified as long-term debt.
This agreement contains certain covenants, including restrictions on investments, acquisitions and indebtedness. Financial covenants include a
minimum consolidated adjusted net worth, a minimum EBITDA for the most recent four fiscal quarters of $11,000,000 at June 30, 2015, and
a maximum total funded debt to EBITDA ratio of 3.0 at June 30, 2015. On August 3, 2015, the Credit Agreement was amended to revise the
definition of EBITDA for the four consecutive fiscal quarters ending on and including June 30, 2015 to and including March 25, 2016 to add
$3,300,000, reflective of the restructuring charge taken by the Company in the fourth quarter of the fiscal year ending June 30, 2015. As of
June 30, 2015, the Company was in compliance with these financial covenants with a four quarter EBITDA total of $29,755,000 and a funded
debt to EBITDA ratio of 0.46. The minimum adjusted net worth covenant fluctuates based upon actual earnings and the Company’s compliance
with that covenant is based on the Company’s shareholders’ equity as adjusted by certain pension accounting items. As of June 30, 2015, the
minimum adjusted equity requirement was $124,741,000 compared to an actual of $173,528,000 after all required adjustments.
On June 30, 2014, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement (the “Prudential
Agreement”). Among other things, the Prudential Agreement: (a) amends and restates the “Note Agreement” between the Company and
Purchasers dated as of April 10, 2006, as it has been amended from time to time (the “2006 Note Agreement”); and (b) sets forth the terms
of the potential sale and purchase of up to $50,000,000 in “Shelf Notes” as defined in the Prudential Agreement (the “Shelf Notes”) by the
Company to Prudential. The notes sold by the Company to the Existing Holders under the 2006 Agreement (the “2006 Notes”) are deemed
outstanding under, and are governed by, the terms of the Prudential Agreement. The 2006 Notes bear interest on the outstanding principal
balance at a fixed rate of 6.05% per annum and mature on April 10, 2016. The 2006 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 2006 Notes, plus prepayments of principal of $3,571,429 on April 10 of each year from 2010 to 2015, inclusive. The outstanding balance
was $3,571,429 and $7,142,857 at June 30, 2015 and June 30, 2014, respectively. Of the outstanding balance, $3,571,429 was classified
as a current maturity of long-term debt at June 30, 2015 and June 30, 2014, respectively. The remaining $3,571,429 was classified as long-
term debt in fiscal 2014. In addition to the interest payments and any mandatory principal payments required under the terms of the Shelf
Note, the Company will pay an issuance fee of 0.10% of the aggregate principal balance of each of the Shelf Notes sold to, and purchased
by, Prudential. The Company may prepay the Shelf Notes or the 2006 Notes, subject to certain limitations. At no time during the term of
the Prudential Agreement may the aggregate outstanding principal amount of the 2006 Notes and the Shelf Notes exceed $35,000,000. The
Prudential Agreement includes financial covenants regarding minimum net worth, minimum EBITDA for the most recent four (4) fiscal quarters
of $11,000,000 and a maximum total funded debt to EBITDA ratio of 3.0. On August 3, 2015, the Prudential Agreement was amended to revise
the definition of EBITDA for the four consecutive fiscal quarters ending on and including June 30, 2015 to and including March 25, 2016 to add
$3,300,000, reflective of the restructuring charge taken by the Company in the fourth quarter of the fiscal year ending June 30, 2015. As of
June 30, 2015, the Company was in compliance with these financial covenants. In addition, the Company will be required to make an offer
to purchase the 2006 Notes and Shelf Notes upon a Change of Control, and any such offer must include the payment of a Yield-Maintenance
24
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Amount. The Prudential Agreement also includes certain covenants that limit, among other things, certain indebtedness, acquisitions and
investments. The Prudential Agreement also has a most favored lender provision whereby the Prudential Agreement shall be automatically
modified to include any additional covenant or event of default that is included in any agreement evidencing, securing, guarantying or
otherwise related to other indebtedness in excess of $1,000,000.
Four quarter EBITDA, total funded debt, and adjusted net worth 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, total funded debt to four quarter EBITDA ratio, and adjusted net worth
covenants described above. In accordance with the Company’s revolving loan agreements and the Prudential 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, (iv) income tax expense, and (v) $3,300,000 adjustment;” and
¨ “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.
¨ “Adjusted net worth” means the Company’s reported shareholder equity, excluding adjustments that result from (i) changes to the
assumptions used by the Company in determining its pension liabilities or (ii) changes in the market value of plan assets up to an aggregate
amount of adjustments equal to $34,000,000 (“Permitted Benefit Plan Adjustments”) for purposes of computing net worth at any time.
The Company’s total funded debt as of June 30, 2015 and June 30, 2014 was equal to the total debt reported on the Company’s June 30,
2015 and June 30, 2014 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 quarters ended June 30, 2015:
Four Quarter EBITDA Reconciliation
Net Earnings Attributable to Twin Disc
Depreciation & Amortization
Restructuring adjustment
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
$ 11,173,000
10,161,000
3,300,000
606,000
4,515,000
$ 29,755,000
$ 13,802,000
29,755,000
0.46
The following table sets forth the reconciliation of the Company’s reported shareholders’ equity to the calculation of adjusted net worth for the
quarter ended June 30, 2015:
Total Twin Disc Shareholders’ Equity
Permitted Benefit Plan Adjustments
Adjusted Net Worth
$139,528,000
34,000,000
$173,528,000
As of June 30, 2015, the Company was in compliance with all of the covenants described above. As of June 30, 2015, the Company’s backlog
of orders scheduled for shipment during the next six months (six-month backlog) was $34.4 million, or approximately 48% lower than the
six-month backlog of $66.1 million as of June 30, 2014. The recent decrease in order backlog has been driven primarily by the slowdown in the
global oil and gas market. The Company does not expect to violate any of its financial covenants in fiscal 2016. Based on its annual financial
plan, the Company believes it is well positioned to generate sufficient EBITDA levels throughout fiscal 2016 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. Please see the factors discussed under Item 1A, Risk Factors,
of this Form 10-K for further discussion of this topic.
25
2015 ANNUAL REPORT TWIN DISC, INCORPORATED 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 $49.8 million of available borrowings on our $60 million
revolving loan agreement as of June 30, 2015. The Company expects to continue to generate enough cash from operations to meet our
operating and investing needs. As of June 30, 2015, the Company also had cash of $22.9 million, primarily at its overseas operations. These
funds, with some restrictions and tax implications, are available for repatriation as deemed necessary by the Company. In fiscal 2016, the
Company expects to contribute $2.2 million to its defined benefit pension plans, the minimum contributions required. However, if the Company
elects to make voluntary contributions in fiscal 2016, it intends to do so using cash from operations and, if necessary, from available borrowings
under existing credit facilities.
Net working capital decreased $10.3 million, or approximately 8%, in fiscal 2015, and the current ratio decreased from 3.2 at June 30, 2014 to
3.0 at June 30, 2015. The decrease in net working capital was primarily driven by a decrease in inventories in fiscal 2015, partially offset by
an increase in accounts receivable and a decrease in accounts payable. The decrease in accounts payable is a function of reduced purchasing
activity driven by reduced demand, while the increase to accounts receivable was the result of timing of shipments and a slowdown in
payment patterns from certain customers impacted by delays in oil and gas related projects.
The Company expects capital expenditures to be approximately $11 million in fiscal 2016. 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 the Company’s capital requirements for the foreseeable future.
Off Balance Sheet Arrangements and Contractual Obligations
The Company had no off-balance sheet arrangements, other than operating leases, as of June 30, 2015 and 2014.
The Company has obligations under non-cancelable operating lease contracts and loan and senior note agreements for certain future payments.
A summary of those commitments follows (in thousands):
Contractual Obligations
Revolving loan borrowing
Long-term debt, including current maturities
Operating leases
Total
Less than 1 Year
1-3 Years
3-5 Years
After 5 Years
$10,208
$ 3,594
$ 8,082
$ –
$3,571
$2,955
$10,208
$ –
$ 4,478
$ –
$ –
$638
$ –
$23
$11
The table above does not include accrued interest of approximately $104,000 related to the revolving loan borrowing. The table above also
does not include tax liabilities for unrecognized tax benefits totaling $810,000, excluding related interest and penalties, as the timing of their
resolution cannot be estimated. See Note N of the Notes to the consolidated financial statements for disclosures surrounding 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 of the Board of Directors to oversee the operations and administration of the defined benefit plans. The Company
estimates that fiscal 2016 contributions to all defined benefit plans will total $2,240,000.
Other Matters
Critical Accounting Policies
The preparation of this Annual Report requires management’s judgment to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
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 policies management
considers most critical to understanding and evaluating our reported financial results are the following:
Accounts Receivable
The Company 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
26
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT uncollectible. Although our accounts receivable are dispersed among a large customer base, a significant change in the liquidity or financial
position of any one of our largest customers could have a material adverse impact on the collectibility of our accounts receivable and future
operating results.
Inventory
Inventories are valued at the lower of cost or market. Cost has been determined by the last-in, first-out (LIFO) method for the majority of the
inventories located in the United States, and by the first-in, first-out (FIFO) method for all other inventories. Management specifically identifies
obsolete products and analyzes historical usage, forecasted production based on future orders, demand forecasts, and economic trends when
evaluating the adequacy of the reserve for excess and obsolete inventory. The adjustments to the reserve are estimates that could vary
significantly, either favorably or unfavorably, from the actual requirements if future economic conditions, customer demand or competitive
conditions differ from expectations.
Goodwill
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 statement 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 2015, it
was determined that the fair value for each of the reporting units exceeded the carrying value and therefore goodwill was not impaired.
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 incorporates 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 are key assumptions 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 capital is an estimate of the overall after-tax rate of return
required by equity and debt holders of a business enterprise. There are a number of assumptions that management makes when calculating
the appropriate discount rate, including the targeted leverage ratio.
Long Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount
of the assets may not be fully recoverable. For property, plant and equipment and other long-lived assets, excluding indefinite-lived intangible
assets, the Company performs undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined
to exist, any related impairment loss is calculated based on fair value. Fair value is primarily determined using discounted cash flow analyses;
however, other methods may be used to substantiate the discounted cash flow analyses, including third party valuations when necessary.
Warranty
The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its
suppliers. However, its warranty obligation is affected by product failure rates, the extent of the market affected by the failure and the expense
involved in satisfactorily addressing the situation. The warranty reserve is established based on 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.
Pension and Other Postretirement Benefit Plans
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
27
2015 ANNUAL REPORT TWIN DISC, INCORPORATED 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 Towers Watson BOND:Link model at June 30, 2015 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 IRS Generational Mortality Table for Annuitants and Non-Annuitants for fiscal 2013,
2014 and 2015.
¨ 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 of operations or cash flows.
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 Company takes into
account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could
potentially enhance the likelihood of realization of a deferred tax asset. During fiscal 2015, the Company reported operating income in certain
foreign jurisdictions where the loss carryforward period is unlimited. The Company has evaluated the likelihood of whether the net deferred tax
assets related to these jurisdictions would be realized and concluded that based primarily upon the uncertainty to achieve levels of sustained
improvement and uncertain exchange rates in these jurisdictions, (a) it is more likely than not that $3.6 million of deferred tax assets would
not be realized; and that (b) a full valuation allowance on the balance of deferred tax assets relating to these jurisdictions continues to be
necessary. The Company recorded a net decrease in this valuation allowance of $2.0 million in fiscal 2015 due to lower cumulative operating
losses in these jurisdictions. 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.
Recently Issued Accounting Standards
In April 2015, the Financial Accounting Standards Board (“FASB”) issued guidance intended to amend current presentation guidance by
requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the
carrying amount of the debt liability, consistent with debt discounts. The amendments in this guidance are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2015 (the Company’s fiscal 2017). The adoption of this guidance is not
expected to have a material impact on the Company’s financial statements and disclosures.
In August 2014, the FASB issued updated guidance intended to define management’s responsibility to evaluate whether there is substantial
doubt about an organization’s ability to continue as a going concern. The amendments in this guidance are effective for fiscal years ending after
December 15, 2016 (the Company’s fiscal 2017), and interim periods within fiscal years beginning after December 15, 2016. The adoption of
this guidance is not expected to have a material impact on the Company’s financial disclosures.
In June 2014, the FASB issued stock compensation guidance requiring that a performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance condition. The amendments in this guidance are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2015 (the Company’s fiscal 2017). The adoption of this guidance is not
expected to have a material impact on the Company’s financial statements and disclosures.
In May 2014, the FASB issued updated guidance on revenue from contracts with customers. This revenue recognition guidance supersedes
existing U.S.GAAP guidance, including most industry-specific guidance. The core principle is that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The guidance identifies steps to apply in achieving this principle. This updated guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (the Company’s fiscal 2019). The Company is
currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.
28
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT In April 2014, the FASB issued updated guidance on the reporting for discontinued operations. Under the new guidance, only disposals
representing a strategic shift in operations should be presented as discontinued operations. The new guidance also requires expanded financial
disclosures about discontinued operations. The amendments in this updated guidance are effective for the first quarter of the Company’s fiscal
2016. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements and disclosures.
In July 2013, the FASB issued guidance stating that, except in certain defined circumstances, an unrecognized tax benefit, or a portion of
an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward. This guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2013 (the Company’s fiscal 2015). The adoption of this guidance did not have a material impact on the
Company’s financial statements and disclosures.
In March 2013, the FASB issued guidance on the parent company’s accounting for the cumulative translation adjustment upon derecognition of
certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance clarifies the circumstances
under which the related cumulative translation adjustment should be released into net income. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2013 (the Company’s fiscal 2015). The adoption of this guidance 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 $60 million revolving loan agreement,
which is due to expire on May 31, 2018. In accordance with the loan agreement as amended, the Company borrows at LIBOR plus an additional
“Add-On” of 1.0%. Due to the relative stability of interest rates, the Company did not utilize any financial instruments at June 30, 2015 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 $12,000.
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 2015.
Currency risk - The Company has exposure to foreign currency exchange fluctuations. Approximately 22 percent of the Company’s revenues
in the year ended June 30, 2015 were denominated in currencies other than the U.S. dollar. Of that total, approximately 61 percent was
denominated in euros with the balance comprised of Japanese yen, Indian rupee, Swiss franc and the Australian and Singapore dollars. The
Company does not hedge the translation exposure represented by the net assets of its foreign subsidiaries. Foreign currency translation
adjustments are recorded as a component of shareholders’ equity. Forward foreign exchange contracts are used to hedge the currency
fluctuations on significant transactions denominated in foreign currencies.
Derivative financial instruments - The Company has written policies and procedures that place all financial instruments under the direction of
the Company corporate treasury 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 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 2015 and 2014 was the euro. At June 30, 2015
and 2014, the Company had no outstanding forward exchange contracts.
29
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements and Financial Statement Schedule.
Sales and Earnings by Quarter - Unaudited (in thousands, except per share amounts)
2015
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
2014
Net sales
Gross profit
Net earnings (loss) attributable to Twin Disc
Basic earnings (loss) per share attributable to Twin Disc
common shareholders
Diluted earnings (loss) per share attributable to Twin Disc
common shareholders
Dividends per share
1st Qtr.
$64,824
22,389
4,043
0.36
0.36
0.09
1st Qtr.
$66,426
20,667
1,277
0.11
0.11
0.09
2nd Qtr.
$72,691
22,103
3,747
0.33
0.33
0.09
2nd Qtr.
$63,212
18,544
518
0.05
0.05
0.09
3rd Qtr.
$60,941
19,006
2,946
0.26
0.26
0.09
3rd Qtr.
$60,705
16,528
(475)
4th Qtr.
$67,334
19,534
437
0.04
0.04
0.09
4th Qtr.
$73,566
21,515
2,324
Year
$265,790
83,032
11,173
0.99
0.99
0.36
Year
$263,909
77,254
3,644
(0.04)
0.20
0.32
(0.04)
0.09
0.20
0.09
0.32
0.36
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 information 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.
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:
1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the Company,
2. 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
30
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT 3. 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 (2013
edition) 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, 2015.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the Company’s internal control over financial
reporting as of June 30, 2015, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of fiscal 2015, 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 23, 2015, 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 23, 2015, 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 23, 2015, 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. If the Company makes any
substantive amendment to the Code of Ethics, or grants a waiver from a provision of the Code of Ethics for its Chief Executive Officer, Chief
Financial Officer, Chief Accounting Officer or Controller (or any person performing similar functions), it intends to disclose the nature of such
amendment on its website within four business days of the amendment or waiver in lieu of filing a Form 8-K with the SEC.
For information with respect to procedures by which shareholders may recommend nominees to the Company’s Board of Directors, see
“Director Committee Functions: Nominating and Governance Committee” in the Proxy Statement for the Annual Meeting of Shareholders to be
held October 23, 2015, 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.
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 23, 2015, 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 23, 2015, 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 23, 2015, which is incorporated into this report by reference.
31
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Item 11. Executive Compensation
The information set forth under the captions “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and
Insider Participation,” and “Compensation and Executive Development Committee Report,” in the Proxy Statement for the Annual Meeting of
Shareholders to be held on October 23, 2015, is incorporated into this report by reference. Discussion in the Proxy Statement under the caption
“Compensation and Executive Development 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 23, 2015 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 23, 2015, which 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 23, 2015, 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 23, 2015, 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 23, 2015 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.
32
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Index To Consolidated Financial Statements and Financial Statement Schedule
Index To Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2015 and 2014
Consolidated Statements of Operations and Comprehensive Income for the years ended June 30, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended June 30, 2015, 2014 and 2013
Consolidated Statements of Changes in Equity for the years ended June 30, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Index To Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Page
34
35
36
37
38
39-61
61
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.
33
2015 ANNUAL REPORT TWIN DISC, INCORPORATED 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 accompanying index present fairly, in all material respects, the financial
position of Twin Disc, Incorporated and its subsidiaries at June 30, 2015 and June 30, 2014, and the results of their operations and their
cash flows for each of the three years in the period ended June 30, 2015 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index 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, 2015, based on
criteria established in Internal Control - Integrated Framework (2013) 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 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 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.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
September 14, 2015
34
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Twin Disc, Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30, 2015 and 2014
(In thousands, except share amounts)
ASSETS
Current assets:
Cash
Trade accounts receivable, net
Inventories
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:
2015
2014
$ 22,936
$ 24,757
43,883
80,241
4,863
17,907
169,830
56,427
12,789
4,878
2,186
3,752
40,219
97,579
4,779
12,763
180,097
60,267
13,463
2,556
2,797
7,805
$249,862
$266,985
Short-term borrowings and current maturities of long-term debt
$ 3,571
$ 3,604
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 (1,832,121 and 1,837,595 shares, respectively)
Total Twin Disc shareholders’ equity
Noncontrolling interest
Total equity
The notes to consolidated financial statements are an integral part of these statements.
20,729
32,754
57,054
10,231
38,362
1,093
2,955
22,111
31,265
56,980
14,800
37,006
1,778
4,110
109,695
114,674
-
12,259
190,807
(35,481)
167,585
28,057
139,528
639
140,167
$249,862
-
11,973
183,695
(15,943)
179,725
28,141
151,584
727
152,311
$266,985
35
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Twin Disc, Incorporated and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
June 30, 2015, 2014 and 2013
(In thousands, except share amounts)
Net sales
Cost of goods sold
Gross profit
Marketing, engineering and administrative expenses
Restructuring of operations
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
2015
$265,790
182,758
83,032
64,264
3,282
-
15,486
124
(606)
896
414
15,900
4,515
11,385
(212)
2014
$263,909
186,655
77,254
67,406
961
-
8,887
121
(936)
24
(791)
8,096
4,226
3,870
(226)
2013
$285,282
205,257
80,025
67,899
708
1,405
10,013
102
(1,435)
557
(776)
9,237
4,986
4,251
(369)
Net earnings attributable to Twin Disc
$ 11,173
$ 3,644
$ 3,882
Earnings per share data:
Basic earnings per share attributable to Twin Disc common shareholders
Diluted earnings per share attributable to Twin Disc common shareholders
$ 0.99
0.99
$ 0.32
0.32
$ 0.34
0.34
Weighted average shares outstanding data:
Basic shares outstanding
Dilutive stock awards
Diluted shares outstanding
Comprehensive (loss) income:
Net earnings
Foreign currency translation adjustment
Benefit plan adjustments, net of income taxes of $(2,974), $3,806 and
$4,163, respectively
Comprehensive (loss) income
Comprehensive income attributable to noncontrolling interest
11,273
4
11,277
11,258
6
11,264
11,304
73
11,377
$ 11,385
(14,119)
$ 3,870
3,760
$ 4,251
447
(5,499)
(8,233)
(132)
6,126
13,756
(156)
8,322
13,020
(240)
Comprehensive (loss) income attributable to Twin Disc
$ (8,365)
$ 13,600
$ 12,780
The notes to consolidated financial statements are an integral part of these statements.
36
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Twin Disc, Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
June 30, 2015, 2014 and 2013
(In thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
2015
2014
2013
$11,385
$ 3,870
$ 4,251
Depreciation and amortization
Loss on sale of plant assets
Impairment charge
Stock compensation expense
Restructuring of operations
Provision for deferred income taxes
Changes in operating assets and liabilities:
Trade accounts receivable
Inventories
Other assets
Accounts payable
Accrued liabilities
Accrued/prepaid retirement benefits
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of plant assets
Capital expenditures
Other, net
Net cash used by investing activities
Cash flows from financing activities:
Proceeds from senior notes
Payments of senior notes
Borrowings under revolving loan agreement
Repayments under revolving loan agreement
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
Payments of withholding taxes on stock compensation
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
The notes to consolidated financial statements are an integral part of these statements.
10,161
215
–
696
3,282
(442)
(7,248)
8,860
(4,090)
914
380
(7,053)
17,060
279
(9,049)
1,934
(6,836)
–
(3,600)
83,681
(84,674)
15
–
(4,061)
(220)
(26)
(313)
(9,198)
(2,847)
(1,821)
24,757
$22,936
10,657
26
–
1,184
961
634
7,076
6,972
2,198
1,364
(8,531)
(662)
25,749
103
(7,245)
34
(7,108)
–
(3,651)
70,443
(75,544)
–
–
(4,059)
(487)
524
(2,169)
(14,943)
335
4,033
10,838
287
1,405
2,681
708
687
17,636
176
(3,136)
(2,457)
(4,969)
(3,631)
24,476
315
(6,582)
(231)
(6,498)
32
(96)
83,450
(88,382)
189
(3,069)
(4,078)
(204)
1,451
(1,700)
(12,407)
(548)
5,023
20,724
$24,757
15,701
$20,724
$ 569
5,061
$ 989
3,691
$ 1,536
2,545
37
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Twin Disc, Incorporated and Subsidiaries
Consolidated Statements of Changes in Equity
June 30, 2015, 2014 and 2013
(In thousands)
Twin Disc, Inc. Shareholders’ Equity
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Non-
Controlling
Interest
Total
Equity
Balance at June 30, 2012
$12,759
$184,306
$(34,797)
$(26,781)
$1,022
$136,509
Net earnings
Translation adjustments
Benefit plan adjustments, net of tax
Cash dividends
3,882
(4,078)
576
8,322
Compensation expense and windfall tax benefits
Shares (acquired) issued, net
2,894
(2,470)
(2,109)
369
(129)
(204)
4,251
447
8,322
(4,282)
2,894
(4,579)
Balance at June 30, 2013
13,183
184,110
(25,899)
(28,890)
1,058
143,562
Net earnings
Translation adjustments
Benefit plan adjustments, net of tax
Cash dividends
3,644
(4,059)
3,830
6,126
Compensation expense and windfall tax benefits
Shares (acquired) issued, net
1,708
(2,918)
749
Balance at June 30, 2014
11,973
183,695
(15,943)
(28,141)
Net earnings
Translation adjustments
Benefit plan adjustments, net of tax
Cash dividends
11,173
(4,061)
(14,039)
(5,499)
Compensation expense and windfall tax benefits
Shares (acquired) issued, net
668
(382)
84
226
(70)
(487)
727
212
(80)
(220)
3,870
3,760
6,126
(4,546)
1,708
(2,169)
152,311
11,385
(14,119)
(5,499)
(4,281)
668
(298)
Balance at June 30, 2015
$12,259
$190,807
$(35,481)
$(28,057)
$ 639
$140,167
The notes to consolidated financial statements are an integral part of these statements.
38
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Twin Disc, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
A. Significant Accounting Policies
The following is a summary of the significant accounting policies followed in the preparation of these financial statements:
Consolidation Principles –— The consolidated financial statements include the accounts of Twin Disc, Incorporated and its wholly and partially
owned domestic and foreign subsidiaries. Certain foreign subsidiaries are included based on fiscal years ending May 31, to facilitate prompt
reporting of consolidated accounts. The Company also has a controlling interest in a Japanese joint venture, which is consolidated based upon
a fiscal year ending March 31. All significant intercompany transactions have been eliminated.
Translation of Foreign Currencies –— The financial statements of the Company’s non-U.S. subsidiaries are translated using the current exchange
rate for assets and liabilities and the weighted-average exchange rate for the year for revenues and expenses. The resulting translation
adjustments are recorded as a component of accumulated other comprehensive 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 of $491,000, $293,000
and $642,000 in fiscal 2015, 2014 and 2013, respectively.
Cash –— The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalent. Under
the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent
that checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the
amount of those un-presented checks is included in accounts payable.
Receivables –— Trade accounts receivable are stated net of an allowance for doubtful accounts of $2,183,000 and $3,637,000 at June 30,
2015 and 2014, 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. 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 experience 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
of customer defaults and bad debt expense in future periods.
Fair Value of Financial Instruments –— 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. If measured at fair value, cash would be classified as Level 1 and all other items listed above would be classified as Level 2 in
the fair value hierarchy, as described in Note M. The fair value of the Company’s 6.05% Senior Notes due April 10, 2016 was approximately
$3,726,000 and $7,605,000 at June 30, 2015 and 2014, 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 U.S. Treasury
Three-Year Yield Curve Rate (1.01% and 0.88% for fiscal 2015 and 2014, respectively), plus the current add-on related to the Company’s
revolving loan agreement (1.00% for both fiscal 2015 and 2014) resulting in a total rate of 2.01% and 1.88% for fiscal 2015 and 2014,
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, 2015. If measured at fair value in the financial statements, long-term debt (including the current portion) would be
classified as Level 2 in the fair value hierarchy, as described in Note M.
Derivative Financial Instruments –— The Company has written policies and procedures that place all financial instruments under the direction
of the Company’s corporate treasury and 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 2015 and 2014 was the euro. At June 30, 2015 and 2014, the Company had no outstanding forward exchange contracts.
39
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Inventories –— Inventories are valued at the lower of cost or market. Cost has been determined by the last in, first out (LIFO) method for the
majority of inventories located in the United States, and by the first in, first out (FIFO) method for all other inventories. 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.
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. The lives assigned to buildings and related improvements
range from 10 to 40 years, and the lives assigned to machinery and equipment range from 5 to 15 years. Upon disposal of property, plant and
equipment, the cost of the asset and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is
reflected in earnings. Fully depreciated assets are not removed from the accounts until physically disposed.
Impairment of Long-lived Assets –— The Company reviews long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. For property, plant and equipment and other long-
lived assets, excluding indefinite-lived intangible assets, the Company performs undiscounted operating cash flow analyses to determine if an
impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Fair value is primarily
determined using discounted cash flow analyses; however, other methods may be used to determine the fair value, including third party
valuations when necessary.
Revenue Recognition –— 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 collectibility 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 an annual return policy, for which a provision is made at the time of shipment based
upon historical experience.
Goodwill and Other Intangibles –— Goodwill and other indefinite-lived intangible assets, primarily trade names, 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.
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 determine the fair value, including third party valuations. For purposes of the June 30, 2015
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 2015, 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 fair value of goodwill for each of the reporting units
exceeded the carrying value and therefore goodwill was not impaired.
The fair value of the Company’s other intangible assets with indefinite lives, primarily trade names, 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, 2015 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 indefinite-lived intangibles,
40
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT 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.
Any cost incurred to extend or renew the term of an indefinite lived intangible asset are expensed as incurred.
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 benefit of such assets.
Management Estimates –— The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual
amounts could differ from those estimates.
Shipping and Handling Fees and Costs –— The Company records revenue from shipping and handling costs in net sales. The cost associated with
shipping and handling of products is reflected in cost of goods sold.
Out-of-Period Adjustments –— During the first quarter of fiscal 2014, the Company recorded out-of-period adjustments related to the correction
of errors identified late in the year-end closing process of fiscal 2013 that were deemed immaterial for adjustment to the fiscal 2013 financial
statements. The impact of these corrections to the fiscal 2014 first quarter and full year results was to increase earnings before income taxes
and noncontrolling interest by $437,000 and increase net earnings attributable to Twin Disc by $69,000 (after considering applicable tax
effects). The nature of these errors is as follows:
¨ The Company had over accrued for certain payroll related items totaling $337,000 as of June 30, 2013, resulting in an increase to
earnings from operations.
¨ The Company had overstated its warranty accrual by $217,000 as of June 30, 2013, resulting in an increase to earnings from operations.
¨ The Company determined that work-in-process inventory had been overstated by $117,000 as of June 30, 2013. As a result, additional
cost of goods sold was recorded in the first quarter of fiscal 2014, resulting in a decrease to earnings from operations.
¨ The Company’s deferred tax liabilities were understated by $285,000 as of June 30, 2013, resulting in additional tax expense.
The Company does not believe these errors were material to its financial statements for any prior period, nor that the correction of these errors
was material to the year ended June 30 2014.
During the third quarter of fiscal 2015, the Company recorded an out-of-period adjustment for the correction of an error related to tax expense.
More specifically, the Company understated tax expense by $175,000 for the year ended June 30, 2014.
The impact of the correction of this error was to decrease net earnings by $175,000 for the fiscal year ended June 30, 2015. The Company does
not believe this error is material to its financial statements for any prior period, nor that the correction of these errors was material to the year
ended June 30, 2015, or any of the quarters therein.
During the fourth quarter of 2015, the Company recorded an out-of-period adjustment to correct an error related to an understatement of its accrued
retirement benefits for certain of its international benefit plans that contain minimum guarantees of approximately $470,000. The impact of this
correction was to increase comprehensive loss by $470,000. The Company does not believe this error is material to its financial statements for any
prior period, nor that the correction of this error is material to the year ended June 30, 2015.
Recently Issued Accounting Standards
In April 2015, the Financial Accounting Standards Board (“FASB”) issued guidance intended to amend current presentation guidance by
requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the
carrying amount of the debt liability, consistent with debt discounts. The amendments in this guidance are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2015 (the Company’s fiscal 2017). The adoption of this guidance is not
expected to have a material impact on the Company’s financial statements and disclosures.
In August 2014, the FASB issued updated guidance intended to define management’s responsibility to evaluate whether there is substantial
doubt about an organization’s ability to continue as a going concern. The amendments in this guidance are effective for fiscal years ending after
December 15, 2016 (the Company’s fiscal 2017), and interim periods within fiscal years beginning after December 15, 2016. The adoption of
this guidance is not expected to have a material impact on the Company’s financial disclosures.
41
2015 ANNUAL REPORT TWIN DISC, INCORPORATED In June 2014, the FASB issued stock compensation guidance requiring that a performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance condition. The amendments in this guidance are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2015 (the Company’s fiscal 2017). The adoption of this guidance is not
expected to have a material impact on the Company’s financial statements and disclosures.
In May 2014, the FASB issued updated guidance on revenue from contracts with customers. This revenue recognition guidance supersedes
existing U.S.GAAP guidance, including most industry-specific guidance. The core principle is that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The guidance identifies steps to apply in achieving this principle. This updated guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (the Company’s fiscal 2019). The Company
is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.
In April 2014, the FASB issued updated guidance on the reporting for discontinued operations. Under the new guidance, only disposals
representing a strategic shift in operations should be presented as discontinued operations. The new guidance also requires expanded financial
disclosures about discontinued operations. The amendments in this updated guidance are effective for the first quarter of the Company’s fiscal
2016. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements and disclosures.
In July 2013, the FASB issued guidance stating that, except in certain defined circumstances, an unrecognized tax benefit, or a portion of
an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward. This guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2013 (the Company’s fiscal 2015). The adoption of this guidance did not have a material impact on the
Company’s financial statements and disclosures.
In March 2013, the FASB issued guidance on the parent company’s accounting for the cumulative translation adjustment upon derecognition of
certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance clarifies the circumstances
under which the related cumulative translation adjustment should be released into net income. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2013 (the Company’s fiscal 2015). The adoption of this guidance did
not have a material impact on the Company’s financial statements.
B. Inventories
The major classes of inventories at June 30 were as follows (in thousands):
Finished parts
Work-in-process
Raw materials
2015
$56,982
8,292
14,967
$80,241
2014
$66,418
12,419
18,742
$97,579
Inventories stated on a LIFO basis represent approximately 28% of total inventories at June 30, 2015 and 2014. The approximate current cost
of the LIFO inventories exceeded the LIFO cost by $26,816,000 and $27,180,000 at June 30, 2015 and 2014, respectively. The Company had
reserves for inventory obsolescence of $8,167,000 and $7,591,000 at June 30, 2015 and 2014, 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
2015
$ 6,646
44,110
133,432
184,188
127,761
$ 56,427
2014
$ 5,310
44,540
141,665
191,515
131,248
$ 60,267
Depreciation expense for the years ended June 30, 2015, 2014 and 2013 was $9,922,000, $10,180,000 and $10,120,000, respectively.
42
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT 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, 2015 and 2014 were as follows (in thousands):
Balance at June 30, 2013
Translation adjustment
Balance at June 30, 2014
Translation adjustment
Balance at June 30, 2015
Gross Carrying Amount
Accumulated Impairment
Net Book Value
$16,902
231
17,133
(674)
$16,459
$(3,670)
-
( 3,670)
-
$(3,670)
$13,232
231
13,463
(674)
$12,789
The Company conducted its annual assessment for goodwill impairment during the fourth fiscal quarter of 2015 and concluded these assets are
not impaired.
At June 30, the following acquired intangible assets have definite useful lives and are subject to amortization (in thousands):
Licensing agreements
Non-compete agreements
Trade name
Other
Licensing agreements
Non-compete agreements
Trade name
Other
Gross Carrying
Amount
$ 3,015
2,128
1,653
6,476
$13,272
Gross Carrying
Amount
$ 3,015
2,128
2,009
6,482
$13,634
2015
Accumulated
Amortization
$ (2,505)
(2,045)
(194)
(5,278)
$(10,022)
2014
Accumulated
Amortization
$(2,445)
(2,045)
(100)
(5,193)
$(9,783)
Accumulated
Impairment
$ –
(83)
–
(1,194)
$(1,277)
Accumulated
Impairment
$ –
(83)
–
(1,194)
$(1,277)
Net Book
Value
$ 510
–
1,459
4
$1,973
Net Book
Value
$ 570
–
1,909
95
$2,574
Other intangibles consist of certain amortizable acquisition costs, proprietary technology, computer software, certain customer relationships and
debt issuance costs on the 6.05% notes.
During the fourth quarter of fiscal 2013, the Company committed to a plan and entered negotiations to exit the distribution agreement and
sell the inventory of its Italian distributor back to the parent supplier. This decision triggered an impairment review of the long lived assets at
this entity, resulting in an impairment charge of $1,405,000, representing a complete impairment of the remaining intangibles ($1,277,000)
and fixed assets ($128,000) for this entity. The impairment charge was determined by deriving the fair value of the asset group utilizing a
discounted cash flow model. Significant inputs to this model include the discount rate, sales projections and profitability estimates. These inputs
would be considered Level 3 in the fair value hierarchy.
The weighted average remaining useful life of the intangible assets included in the table above is approximately 16 years.
43
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Intangible amortization expense for the years ended June 30, 2015, 2014 and 2013 was $239,000, $477,000 and $718,000, respectively.
Estimated intangible amortization expense for each of the next five fiscal years is as follows (in thousands):
Fiscal Year
2016
2017
2018
2019
2020
Thereafter
$ 146
141
141
141
141
1,263
$1,973
The gross carrying amount of the Company’s intangible assets that have indefinite lives and are not subject to amortization as of June 30, 2015
and 2014 are $213,000 and $223,000, respectively. These assets are comprised of acquired trade names.
E. Accrued Liabilities
Accrued liabilities at June 30 were as follows (in thousands):
Salaries and wages
Retirement benefits
Warranty
Customer advances/deferred revenue
Restructuring
Distributor rebate
Other
F. Warranty
2015
$ 8,568
3,773
3,310
2,602
3,776
2,989
7,736
2014
$ 6,648
4,909
3,917
3,082
785
3,242
8,682
$32,754
$31,265
The Company warrants all assembled products, 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) and service 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. The following is
a listing of the activity in the warranty reserve during the years ended June 30 (in thousands):
Reserve balance, July 1
Current period expense
Payments or credits to customers
Translation adjustment
Reserve balance, June 30
2015
$5,968
1,989
(2,332)
(380)
$5,245
2014
$5,701
2,214
(2,055)
108
$5,968
The current portion of the warranty accrual ($3,310,000 and $3,917,000 for fiscal 2015 and 2014, respectively) is reflected in accrued liabilities,
while the long-term portion ($1,935,000 and $2,051,000 for fiscal 2015 and 2014, respectively) is included in other long-term liabilities on the
Consolidated Balance Sheets.
44
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT 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):
Available credit lines
Unused credit lines
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
Capital lease obligations
Other long-term debt
Subtotal
Less: current maturities
Total long-term debt
2015
$1,689
1,689
$ –
5.8%
2015
$10,208
3,571
–
23
13,802
(3,571)
$10,231
2014
$3,372
3,372
$ –
2.9%
2014
$11,200
7,143
29
32
18,404
(3,604)
$14,800
On June 30, 2014, the Company entered into a revolving loan agreement (the “Credit Agreement”) with Wells Fargo Bank, National
Association. Pursuant to the Credit Agreement, the Company may, from time to time, enter into revolving credit loans in amounts not to
exceed, in the aggregate, Wells Fargo’s revolving credit commitment of $60,000,000. The revolving credit commitment may be increased
under the agreement by an additional $10,000,000 in the event that the conditions for “Incremental Loans” (as defined in the agreement)
are satisfied. In general, outstanding revolving credit loans will bear interest at LIBOR plus 1.00%. The rate was 1.20% and 1.16% at June 30,
2015 and June 30, 2014, respectively. In addition to principal and interest payments, the Company will be responsible for paying monthly
commitment fees equal to 0.15% of the unused revolving credit commitment. The Company has the option of making additional prepayments
subject to certain limitations. The Credit Agreement is scheduled to expire on May 31, 2018. The outstanding balance of $10,208,000 and
$11,200,000 at June 30, 2015 and June 30, 2014, respectively, is classified as long-term debt. This agreement contains certain covenants,
including restrictions on investments, acquisitions and indebtedness. Financial covenants include a minimum consolidated adjusted net worth
amount, a minimum EBITDA for the most recent four fiscal quarters of $11,000,000 at June 30, 2015, and a maximum total funded debt
to EBITDA ratio of 3.0 at June 30, 2015. On August 3, 2015, the Credit Agreement was amended to revise the definition of EBITDA for the
four consecutive fiscal quarters ending on and including June 30, 2015 to and including March 25, 2016 to add $3,300,000, reflective of the
restructuring charge taken by the Company in the fourth quarter of the fiscal year ending June 30, 2015. As of June 30, 2015, the Company
was in compliance with these financial covenants. The minimum adjusted net worth covenant fluctuates based upon actual earnings and the
Company’s compliance with that covenant is based on the Company’s shareholders’ equity as adjusted by certain pension accounting items. As
of June 30, 2015, the minimum adjusted equity requirement was $124,741,000, and the Company was in compliance with this covenant.
On June 30, 2014, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement (the “Prudential Agreement”).
Among other things, the Prudential Agreement: (a) amends and restates the “Note Agreement” between the Company and Purchasers dated as of
April 10, 2006, as it has been amended from time to time (the “2006 Agreement”); and (b) sets forth the terms of the potential sale and purchase
of up to $50,000,000 in “Shelf Notes” as defined in the Prudential Agreement (the “Shelf Notes”) by the Company to Prudential. The notes sold
by the Company to the Existing Holders under the 2006 Agreement (the “2006 Notes”) are deemed outstanding under, and are governed by,
the terms of the Prudential Agreement. The 2006 Notes bear interest on the outstanding principal balance at a fixed rate of 6.05% per annum
and mature on April 10, 2016. The 2006 Notes mature and become due and payable in full on April 10, 2016 (the “Payment Date”). Prior to
the Payment Date, the Company was obligated to make quarterly payments of interest during the term of the 2006 Notes, plus prepayments of
principal of $3,571,429 on April 10 of each year from 2010 to 2015, inclusive. The outstanding balance was $3,571,429 and $7,142,857 at June
30, 2015 and June 30, 2014, respectively. Of the outstanding balance, $3,571,429 was classified as a current maturity of long-term debt at June
30, 2015 and June 30, 2014, respectively. The remaining $3,571,429 on June 30, 2014 was classified as long-term debt. In addition to the interest
45
2015 ANNUAL REPORT TWIN DISC, INCORPORATED payments and any mandatory principal payments required under the terms of the Shelf Note, the Company will pay an issuance fee of 0.10% of
the aggregate principal balance of each of the Shelf Notes sold to, and purchased by, Prudential. The Company may prepay the Shelf Notes or the
2006 Notes, subject to certain limitations. At no time during the term of the Prudential Agreement may the aggregate outstanding principal amount
of the 2006 Notes and the Shelf Notes exceed $35,000,000. The Prudential Agreement includes financial covenants regarding minimum net worth,
minimum EBITDA for the most recent four (4) fiscal quarters of $11,000,000 and a maximum total funded debt to EBITDA ratio of 3.0. On August
3, 2015, the Prudential Agreement was amended to revise the definition of EBITDA for the four consecutive fiscal quarters ending on and including
June 30, 2015 to and including March 25, 2016 to add $3,300,000, reflective of the restructuring charge taken by the Company in the fourth
quarter of the fiscal year ending June 30, 2015. As of June 30, 2015, the Company was in compliance with these financial covenants. In addition,
the Company will be required to make an offer to purchase the 2006 Notes and Shelf Notes upon a Change of Control, and any such offer must
include the payment of a Yield-Maintenance Amount. The Prudential Agreement also includes certain covenants that limit, among other things,
certain indebtedness, acquisitions and investments. The Prudential Agreement also has a most favored lender provision whereby the Prudential
Agreement shall be automatically modified to include any additional covenant or event of default that is included in any agreement evidencing,
securing, guarantying or otherwise related to other indebtedness in excess of $1,000,000.
The aggregate scheduled maturities of outstanding long-term debt obligations in subsequent years are as follows (in thousands):
Fiscal Year
2016
2017
2018
2019
2020
Thereafter
H. Lease Commitments
Approximate future minimum rental commitments under noncancellable operating leases are as follows (in thousands):
Fiscal Year
2016
2017
2018
2019
2020
Thereafter
$ 3,571
–
10,208
–
–
23
$13,802
$2,955
2,568
1,910
406
232
11
$8,082
Total rent expense for operating leases approximated $3,550,000, $3,920,000 and $3,863,000 in fiscal 2015, 2014 and 2013, respectively.
I. Shareholders’ Equity
The total number of shares of common stock outstanding at June 30, 2015, 2014 and 2013 was 11,267,347, 11,261,873 and 11,212,952,
respectively. At June 30, 2015, 2014 and 2013, treasury stock consisted of 1,832,121, 1,837,595 and 1,886,516 shares of common stock,
respectively. The Company issued 49,314, 51,921 and 123,997 shares of treasury stock in fiscal 2015, 2014 and 2013, respectively, to fulfill
its obligations under the stock option plans and restricted stock grants. The Company also recorded forfeitures of 46,240 and 3,000 shares of
previously issued restricted stock in fiscal 2015 and 2014, respectively. 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 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.
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. 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. In fiscal 2013, the Company purchased 185,000 shares of its outstanding common stock at an
average price of $16.59 per share for a total cost of $3,068,652.
46
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Cash dividends per share were $0.36, $0.36 and $0.36 in fiscal 2015, 2014 and 2013, respectively.
Effective June 30, 2008, the Company’s Board of Directors established a Shareholder Rights Plan and distributed to shareholders 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 associated 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, 2015 and 2014 are as follows (in thousands):
Translation adjustments
Benefit plan adjustments, net of income taxes of $24,411 and $21,436, respectively
Accumulated other comprehensive loss
2015
$ 6,740
(42,221)
$(35,481)
2014
$ 20,779
(36,722)
$(15,943)
A reconciliation for the changes in accumulated other comprehensive income (loss), net of tax, by component for the years ended June 30,
2014 and June 30, 2015 is as follows:
Balance at June 30, 2013
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive income
Balance at June 30, 2014
Balance at June 30, 2014
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive income
Balance at June 30, 2015
Translation
Adjustment
$ 16,949
3,830
–
3,830
Benefit Plan
Adjustment
$(42,848)
3,950
2,176
6,126
$ 20,779
$(36,722)
Translation
Adjustment
$ 20,779
(14,039)
–
(14,039)
$ 6,740
Benefit Plan
Adjustment
$(36,722)
(7,518)
2,019
(5,499)
$(42,221)
47
2015 ANNUAL REPORT TWIN DISC, INCORPORATED A reconciliation for the reclassifications out of accumulated other comprehensive income (loss), net of tax for the year ended June 30, 2014 is
as follows:
Amortization of benefit plan items
Actuarial losses
Transition asset and prior service benefit
Total before tax benefit
Tax benefit
Total reclassification net of tax
Amount
Reclassified
$(3,496)
(31)
(3,527)
1,351
$(2,176)
A reconciliation for the reclassifications out of accumulated other comprehensive income (loss), net of tax for the year ended June 30, 2015 is
as follows:
Amortization of benefit plan items
Actuarial losses
Transition asset and prior service benefit
Total before tax benefit
Tax benefit
Total reclassification net of tax
Amount
Reclassified
$(3,074)
(36)
(3,110)
1,091
$(2,019)
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 transmission
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.
Net sales by product group is summarized as follows (in thousands):
Industrial
Land based transmissions
Marine and propulsion systems
Other
Total
2015
$ 42,078
76,450
141,137
6,125
$265,790
2014
$ 41,188
67,055
149,432
6,234
$263,909
2013
$ 48,110
68,535
162,823
5,814
$285,282
Industrial products include clutches, power take-offs and pump drives sold to the agriculture, recycling, construction and oil and gas markets.
The land based transmission products include applications for oilfield and natural gas, military and airport rescue and fire fighting. The
marine and propulsion systems include marine transmission, controls, surface drives, propellers and boat management systems for the global
commercial, pleasure craft and patrol boat markets. Other products includes non-Twin Disc manufactured product sold through our Company-
owned distribution entities.
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.
48
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Information about the Company’s segments is summarized as follows (in thousands):
Manufacturing
Distribution
Total
2015
Net sales
Intra-segment sales
Inter-segment sales
Interest income
Interest expense
Income taxes
Depreciation and amortization
Net earnings attributable to Twin Disc
Assets
Expenditures for segment assets
2014
Net sales
Intra-segment sales
Inter-segment sales
Interest income
Interest expense
Income taxes
Depreciation and amortization
Net earnings attributable to Twin Disc
Assets
Expenditures for segment assets
2013
Net sales
Intra-segment sales
Inter-segment sales
Interest income
Interest expense
Income taxes
Depreciation and amortization
Net earnings attributable to Twin Disc
Assets
Expenditures for segment assets
$240,085
19,901
44,864
171
946
7,312
8,106
14,409
254,749
7,335
$227,590
18,416
53,960
311
2,565
6,233
8,566
7,029
254,652
6,429
$245,592
16,140
55,746
479
3,248
5,112
8,817
10,141
258,617
5,705
$100,708
6,961
3,277
33
–
1,459
482
5,013
53,759
1,271
$121,389
9,926
2,768
22
45
1,432
549
6,285
57,233
315
$130,360
15,127
3,657
19
62
1,630
497
5,840
56,965
349
$340,793
26,862
48,141
204
946
8,771
8,588
19,422
308,508
8,606
$348,979
28,342
56,728
333
2,610
7,665
9,115
13,314
311,885
6,744
$375,952
31,267
59,403
498
3,310
6,742
9,314
15,981
315,582
6,054
49
2015 ANNUAL REPORT TWIN DISC, INCORPORATED The following is a reconciliation of reportable segment net sales, net earnings and assets to the Company’s consolidated totals (in thousands):
2015
2014
2013
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
Other significant items (in thousands):
2015
Interest income
Interest expense
Income taxes
Depreciation and amortization
Expenditures for segment assets
2014
Interest income
Interest expense
Income taxes
Depreciation and amortization
Expenditures for segment assets
2013
Interest income
Interest expense
Income taxes
Depreciation and amortization
Expenditures for segment assets
$375,952
(90,670)
$285,282
$ 15,981
(12,099)
$ 3,882
$340,793
(75,003)
$265,790
$ 19,422
(8,249)
$ 11,173
$308,508
(58,646)
$249,862
$348,979
(85,070)
$263,909
$ 13,314
(9,670)
$ 3,644
$311,885
(44,900)
$266,985
Segment
Totals
Adjustments
Consolidated
Totals
$ 204
946
8,771
8,588
8,606
$ 333
2,610
7,665
9,115
6,744
$ 498
3,310
6,742
9,314
6,054
$ (80)
(340)
(4,256)
1,573
443
$ (212)
(1,674)
(3,439)
1,542
501
$ (396)
(1,875)
(1,756)
1,524
528
$ 124
606
4,515
10,161
9,049
$ 121
936
4,226
10,657
7,245
$ 102
1,435
4,986
10,838
6,582
All adjustments represent inter-company eliminations and corporate amounts.
50
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Geographic information about the Company is summarized as follows (in thousands):
Net sales
United States
China
Italy
Singapore
Canada
Other countries
Total
Net sales by geographic region are based on product shipment destination.
Long-lived assets
United States
Switzerland
Belgium
Italy
Other countries
Total
2015
2014
2013
$131,198
$108,380
$127,844
19,712
14,457
13,856
13,661
72,906
33,830
17,396
12,703
9,277
82,323
29,119
19,140
14,214
10,846
84,119
$265,790
$263,909
$285,282
2015
2014
$40,822
7,686
6,709
2,376
2,586
$60,179
$46,821
8,196
7,450
3,531
2,074
$68,072
One customer, Sewart Supply, Inc. (a distributor of Twin Disc), accounted for approximately 11%, 11% and 11% of consolidated net sales in
fiscal 2015, 2014 and 2013, respectively.
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 Company’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, 2015 and 2014.
The Company has 19,200 non-qualified stock options outstanding as of June 30, 2015 under the Twin Disc, Incorporated Plan for Non-Employee
Directors and Twin Disc, Incorporated 2004 Stock Incentive Plans. The 2004 plans were terminated during 2011, except options then outstanding
will remain so until exercised or until they expire.
Shares available for future options as of June 30 were as follows:
2010 Long-Term Incentive Compensation Plan
2010 Stock Incentive Plan for Non-employee Directors
2015
447,730
171,986
2014
466,589
193,858
51
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Stock option transactions under the plans during 2015 were as follows:
2015
Weighted
Average Price
Weighted Average
Remaining Contractual
Life (years)
Aggregate
Intrinsic Value
Non-qualified stock options:
Options outstanding at beginning of year
21,600
$14.88
Granted
Canceled/expired
Exercised
Options outstanding at June 30
Options price range ($10.01 - $27.55)
Number of shares
Weighted average price
Weighted average remaining life
–
–
6.23
$15.96
–
–
(2,400)
19,200
19,200
$15.96
3.31 years
3.31
$81,492
The Company accounts for stock based compensation in accordance with ASC Topic 718-10, “Compensation – Stock Compensation.” 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 2015, 2014 and 2013 the Company granted no non-qualified stock options and all non-qualified stock options from prior periods
have fully vested. As a result, no compensation cost has been recognized in the Consolidated Statements of Operations and Comprehensive
Income for fiscal 2015, 2014 and 2013, respectively.
The total intrinsic value of options exercised during the years ended June 30, 2015, 2014 and 2013 was approximately $55,000, $0 and
$539,000, respectively.
In fiscal 2015, 2014 and 2013, the Company granted a target number of 15,861, 43,154 and 28,255 performance stock unit awards,
respectively, to various employees of the Company, including executive officers. The performance stock unit awards granted in fiscal 2015 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, 2017. The performance stock unit awards granted in fiscal
2015 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 13,621. Based upon actual results to
date and the low probability of achieving the threshold performance levels, the Company is not accruing the performance stock unit awards
granted in fiscal 2015. The performance stock unit awards granted in fiscal 2014 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, 2016. The performance stock unit awards granted in fiscal 2014 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 22,205. Based upon actual results to date and the low probability of achieving the threshold
performance levels, the Company is not accruing the performance stock unit awards granted in fiscal 2014. The performance stock unit awards
granted in fiscal 2013 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 22,487. Based upon
actual results to date and the low probability of achieving the threshold performance levels, the Company is not accruing the performance
stock unit awards granted in fiscal 2013 and has reversed previously recognized expenses related to these awards during the second quarter
of fiscal 2013. There were 29,855, 41,160 and 42,962 unvested performance stock unit awards outstanding at June 30, 2015, 2014 and 2013,
respectively. The weighted average grant date fair value of the unvested awards at June 30, 2015 was $27.24. 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 expense (income)
for the year ended June 30, 2015, 2014 and 2013 related to the performance stock unit award grants, approximated $0, $0 and $1,238,000,
respectively. At June 30, 2015, the Company had $537,000 of unrecognized compensation expense related to the unvested shares that would
vest if the specified target objective was achieved for the fiscal 2015 and 2014 awards. The total fair value of performance stock unit awards
vested in fiscal 2015, 2014 and 2013 was $0, $0 and $2,787,000, respectively. The performance stock unit awards are cash based, and are thus
recorded as a liability on the Company’s Consolidated Balance Sheets. As of June 30, 2015, there were no awards included in “Liabilities” due
to actual results to date and the low probability of achieving any of the threshold performance levels.
52
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT In fiscal 2015, 2014 and 2013, the Company granted a target number of 16,261, 17,312 and 28,535 performance stock awards, respectively, to
various employees of the Company, including executive officers. The performance stock awards granted in fiscal 2015 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, 2017. The performance stock awards granted in fiscal 2015 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 14,101. Based upon actual results to date and the low probability of achieving
the threshold performance levels, the Company is not accruing the performance stock awards granted in fiscal 2015. The performance stock
awards granted in fiscal 2014 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, 2016. The performance stock
awards granted in fiscal 2014 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 17,038. Based
upon actual results to date and the low probability of achieving the threshold performance levels, the Company is not accruing the performance
stock awards granted in fiscal 2014. The performance stock awards granted in fiscal 2013 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 30,635. Based upon actual results to date and the low probability of achieving the threshold
performance levels, the Company is not accruing the performance stock awards granted in fiscal 2013 and has reversed previously recognized
expenses related to these awards during the second quarter of fiscal 2013. There were 25,949, 44,712 and 42,141 unvested performance stock
awards outstanding at June 30, 2015, 2014 and 2013, 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, 2015, 2014
and 2013, related to performance stock awards, approximated $0, $0 and $209,000, respectively. The weighted average grant date fair value
of the unvested awards at June 30, 2015 was $27.36. At June 30, 2015, the Company had $710,000 of unrecognized compensation expense
related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2015 and 2014 awards. The total fair
value of performance stock awards vested in fiscal 2015, 2014 and 2013 was $0, $0 and $2,055,000, 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 3 years. During fiscal 2015, 2014 and 2013, the Company granted 59,494, 51,004 and 83,729 service based restricted shares, respectively,
to employees and non-employee directors in each year. A total of 46,240, 3,000 and 30,532 shares of restricted stock were forfeited during
fiscal 2015, 2014 and 2013, respectively. There were 94,183, 116,297 and 186,469 unvested shares outstanding at June 30, 2015, 2014 and
2013, respectively. Compensation expense of $696,000, $1,184,000 and $1,234,000 was recognized during the year ended June 30, 2015, 2014
and 2013, respectively, related to these service-based awards. The total fair value of restricted stock grants vested in fiscal 2015, 2014 and
2013 was $993,000, $3,053,000 and $2,177,000, respectively. As of June 30, 2015, the Company had $923,000 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 $2,288,000, $3,028,000 and $3,058,000 in fiscal 2015, 2014 and 2013, respectively. Total engineering and development costs were
$11,091,000, $10,900,000 and $10,242,000 in fiscal 2015, 2014 and 2013, 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 healthcare and life insurance benefits
for certain domestic retirees. All employees retiring after December 31, 1992, and electing to continue healthcare coverage through the
Company’s group plan, are required to pay 100% of the premium cost.
53
2015 ANNUAL REPORT TWIN DISC, INCORPORATED The measurement date for the Company’s pension and postretirement benefit plans in fiscal 2015 and 2014 was June 30.
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 and comprehensive income as of June 30 (in thousands):
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Contributions by plan participants
Settlements
Benefits paid
Pension Benefits
Other Postretirement Benefits
2015
2014
2015
2014
$123,832
$125,846
$ 16,584
$ 17,739
465
4,862
8,384
154
–
(9,964)
536
5,425
1,221
174
(121)
(9,249)
30
579
882
547
–
37
659
(60)
581
–
(2,250)
(2,372)
Benefit obligation, end of year
$127,733
$123,832
$ 16,372
$ 16,584
Change in plan assets:
Fair value of assets, beginning of year
Actual return on plan assets
Employer contribution
Contributions by plan participants
Benefits paid
$102,495
5,828
6,168
154
(9,964)
$ 94,723
14,031
2,816
174
(9,249)
$ –
$ –
–
1,703
547
(2,250)
–
1,791
581
(2,372)
Fair value of assets, end of year
$104,681
$102,495
$ –
$ –
Funded status
$ (23,052)
$ (21,337)
$(16,372)
$(16,584)
Amounts recognized in the balance sheet
consist of:
Other assets - noncurrent
Accrued liabilities - current
Accrued retirement benefits - noncurrent
$ 638
(764)
(22,926)
$ 680
(1,189)
(20,828)
$ –
(2,040)
(14,332)
$ –
(2,418)
(14,166)
Net amount recognized
$(23,052)
$ (21,337)
$(16,372)
$(16,584)
Amounts recognized in accumulated other
comprehensive loss consist of (net of tax):
Net transition obligation
Actuarial net loss
Net amount recognized
$ 296
38,613
$ 38,909
$ 340
33,220
$ 33,560
$ –
3,312
$ 3,312
$ –
3,163
$ 3,163
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):
Net transition obligation
Actuarial net loss
Net amount to be recognized
Pension
Benefits
$ 35
3,646
$3,681
Other
Postretirement
Benefits
$ –
728
$728
The accumulated benefit obligation for all defined benefit pension plans was approximately $127,733,000 and $123,832,000 at June 30, 2015
and 2014, respectively.
54
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Information for pension plans with an accumulated benefit obligation in excess of plan assets (in thousands):
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 actuarial net loss
Net periodic benefit cost
June 30
2015
$126,242
102,552
2014
$122,045
100,028
Pension Benefits
2015
$ 465
4,862
(7,272)
-
36
2,436
$ 527
2014
$ 536
5,425
(6,591)
-
32
2,894
$2,296
Other Postretirement Benefits
2015
$ 30
579
638
$1,247
2014
$ 37
659
602
$1,298
2013
$ 367
5,399
(6,382)
5
35
3,357
$2,781
2013
$ 34
766
792
$1,592
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income for Fiscal 2015 (Pre-tax, in thousands):
Net loss
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
Other
Postretirement
Benefits
$ 882
–
(638)
244
1,247
$ 1,491
Pension
$ 9,406
(36)
(2,436)
6,934
527
$ 7,461
55
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Additional Information
Assumptions (as of June 30, 2015 and 2014)
Weighted average assumptions used to
determine benefit obligations at June 30
Discount rate
Expected return on plan assets
Weighted average assumptions used to
determine net periodic benefit cost for
years ended June 30
Discount rate
Expected return on plan assets
Pension Benefits
Other Postretirement Benefits
2015
4.05%
7.11%
2014
4.06%
7.39%
2015
3.93%
2014
3.76%
Pension Benefits
Other Postretirement Benefits
2015
4.06%
7.39%
2014
4.35%
7.41%
2013
4.20%
7.50%
2015
3.76%
2014
3.99%
2013
4.20%
The assumed weighted-average healthcare cost trend rate was 7.8% in 2015, grading down to 5% in 2022. A 1% increase in the assumed
health care cost trend would increase the accumulated postretirement benefit obligation by approximately $336,000 and the service and
interest cost by approximately $13,000. A 1% decrease in the assumed health care cost trend would decrease the accumulated postretirement
benefit obligation by approximately $322,000 and the service and interest cost by approximately $12,000.
Plan Assets
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 investment 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, establishes 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, 2015 and 2014 by asset category are as follows:
Asset Category
Equity securities
Debt securities
Real estate
Target
Allocation
65%
25%
10%
100%
June 30
2015
62%
25%
13%
100%
2014
65%
23%
12%
100%
Due to market conditions and other factors, actual asset allocation may vary from the target allocation outlined above. The U.S. pension plans
held 98,211 shares of Company stock with a fair market value of $1,830,653 (1.8 percent of total plan assets) at June 30, 2015 and 98,211
shares with a fair market value of $3,245,874 (3.2 percent of total plan assets) at June 30, 2014.
The plans have a long-term return assumption of 7.25%. This rate was derived based upon historical experience and forward-looking return
expectations for major asset class categories.
56
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT 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
Level II
Unadjusted quoted prices in active markets for identical instruments
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
The following table presents plan assets using the fair value hierarchy as of June 30, 2015 (in thousands):
Cash and cash equivalents
Equity securities:
U.S. (a)
International (b)
Fixed income (c)
Annuity contracts (d)
Real estate (e)
Other (f)
Total
Total
$ 1,034
28,035
14,819
22,615
9,508
12,770
15,900
Level I
$ 1,034
28,035
10,649
8,993
–
–
–
$104,681
$48,711
The following table presents plan assets using the fair value hierarchy as of June 30, 2014 (in thousands):
Cash and cash equivalents
Equity securities:
U.S. (a)
International (b)
Fixed income (c)
Annuity contracts (d)
Real estate (e)
Other (f)
Total
Total
$ 965
30,727
16,676
21,892
6,340
11,206
14,689
Level I
$ 965
30,727
10,785
7,603
–
–
–
$102,495
$50,080
Level II
$ –
–
4,170
13,622
–
12,770
–
$30,562
Level II
$ –
–
5,891
14,289
–
11,206
–
$31,386
Level III
$ –
–
–
–
9,508
–
15,900
$25,408
Level III
$ –
–
–
–
6,340
–
14,689
$21,029
(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. These securities are valued at the
closing price reported on the active market on which the individual securities are traded.
(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). Certain assets are invested in international commingled equity funds.
The vast majority of the investments are made in companies in developed markets with a smaller percentage in emerging markets. Securities
traded on exchanges are valued at the closing price reported on the active market on which the individual securities are traded. International
commingled funds are valued at the net asset value (“NAV”) as determined by the custodian of the fund. The NAV is based on the fair value of
the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding.
(c) Fixed income consists of corporate bonds with investment grade BBB or better from diversified industries, as well as government debt
securities. Corporate and government debt investments are valued utilizing a market approach that includes various valuation techniques and
sources such as value generation models, broker quotes in active and inactive markets, benchmark yields and securities, reported trades, issuer
spreads, and/or other applicable reference data.
(d) Annuity contracts represent contractual agreements in which payments are made to an insurance company, which agrees to pay out an
income or lump sum amount at a later date. Annuity contracts are valued at the net present value of future cash flows.
57
2015 ANNUAL REPORT TWIN DISC, INCORPORATED (e) Real estate investments invested in common collective trusts and other mutual funds holding real estate investments. They are valued at
the net asset value (“NAV”) as determined by the custodian of the fund. The NAV is based on the fair value of the underlying assets owned
by the fund, minus its liabilities, divided by the number of units outstanding. Level 2 investments represent funds where regular opportunities
exist for the Company to sell the holdings, whereas Level 3 investments represent funds where less frequent opportunities exist during the
year for the Company to sell its holding in the funds.
(f) Other consists of hedged equity mutual funds. These investments are valued at the net asset value (“NAV”) as determined by the custodian
of the fund. The NAV is based on the fair value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units
outstanding.
The following tables present a reconciliation of the fair value measurements using significant unobservable inputs (Level III) as of June 30, 2015
and 2014 (in thousands):
Balance – June 30, 2014
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, 2015
Balance – June 30, 2013
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, 2014
Cash Flows
Contributions
Annuity
Contracts
$6,340
2,978
–
190
–
$9,508
Annuity
Contracts
$5,819
433
–
88
–
$6,340
Other
$14,689
1,211
–
–
–
$15,900
Real Estate
$ 3,012
–
257
(3,269)
–
$ –
Other
$13,153
1,536
–
–
–
$14,689
The Company expects to contribute $2,240,000 to its defined benefit pension plans in fiscal 2016.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
2016
2017
2018
2019
2020
Years 2021- 2025
Pension
Benefits
$10,446
9,927
10,913
9,756
9,231
40,355
Other Postretirement Benefits
Gross
Benefits
$2,379
2,349
1,844
1,734
1,584
6,157
Part D
Reimbursement
Net Benefit
Payments
$ –
–
–
–
–
–
$2,379
2,349
1,844
1,734
1,584
6,157
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 $2,526,000, $2,218,000
and $2,074,000 in fiscal 2015, 2014 and 2013, respectively.
58
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT N. Income Taxes
United States and foreign earnings before income taxes and minority interest were as follows (in thousands):
United States
Foreign
2015
$ 5,614
10,286
$15,900
2014
$1,107
6,989
$8,096
2013
$3,935
5,302
$9,237
The provision (benefit) for income taxes is comprised of the following (in thousands):
2015
2014
2013
Currently payable:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$1,607
518
2,832
4,957
408
5
(855)
(442)
$ 651
104
2,837
3,592
1,309
(95)
(580)
634
$4,515
$4,226
$1,745
(234)
2,788
4,299
1,122
439
(874)
687
$4,986
The components of the net deferred tax asset as of June 30 are summarized in the table below (in thousands).
Deferred tax assets:
Retirement plans and employee benefits
Foreign tax credit carryforwards
Federal tax credits
State net operating loss and other state credit carryforwards
Inventory
Reserves
Foreign NOL carryforwards
Accruals
Other assets
Deferred tax liabilities:
Property, plant and equipment
Intangibles
Other liabilities
Valuation Allowance
Total net deferred tax assets
2015
2014
$15,157
$13,692
–
–
369
1,789
2,587
3,539
584
568
24,593
7,221
4,778
451
12,450
(3,577)
$ 8,566
706
160
348
1,672
2,578
6,090
681
(54)
25,873
8,650
5,528
711
14,889
(5,593)
$ 5,391
Note: $82,000 and $166,000 of this net deferred tax position is included in Accrued Liabilities at June 30, 2015 and 2014, respectively.
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, carry-back
and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. During fiscal
59
2015 ANNUAL REPORT TWIN DISC, INCORPORATED 2015, the Company reported operating income in certain foreign jurisdictions where the loss carryforward period is unlimited. The Company
has evaluated the likelihood of whether the net deferred tax assets related to these jurisdictions would be realized and concluded that based
primarily upon the uncertainty to achieve levels of sustained improvement and uncertain exchange rates in these jurisdictions, (a) it is more
likely than not that $3,577,000 of deferred tax assets would not be realized; and that (b) a full valuation allowance on the balance of deferred
tax assets relating to these jurisdictions continues to be necessary. The company recorded a net decrease in valuation allowance of $2,016,000
in fiscal 2015 due to lower cumulative operating losses in these jurisdictions. 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.
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):
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
Unrecognized tax benefits
Other, net
2015
$5,491
362
32
(1,121)
157
(337)
(96)
5
22
$ 4,515
2014
$2,754
(291)
228
1,551
139
(267)
(109)
183
38
$4,226
2013
$3,104
88
296
1,216
309
(526)
(84)
539
44
$4,986
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 invested, and has no plans to repatriate
funds to the U.S. for the foreseeable future. These earnings relate to ongoing operations and were approximately $3,045,000 at June 30, 2015.
Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation. It is not practicable
to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings. 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 2011 through 2015 for our major operations in Italy, Belgium and Japan. The tax years open to examination in the
U.S. are for years subsequent to fiscal 2012.
The Company has approximately $810,000 of unrecognized tax benefits as of June 30, 2015, which, if recognized would impact the effective
tax rate. During the fiscal year the amount of unrecognized tax benefits decreased primarily due to settlements with various taxing authorities.
During the next twelve months, the Company does not anticipate any significant changes in unrecognized tax benefits. 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):
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
June 30, 2015
June 30, 2014
$1,603
$1,556
–
184
(3)
(60)
(914)
$ 810
7
173
–
(1)
(132)
$1,603
Substantially all of the Company’s unrecognized tax benefits as of June 30, 3015, if recognized, would affect the effective tax rate. As of June
30, 2015 and 2014, the amounts accrued for interest and penalties totaled $62,000 and $309,000, respectively, and are not included in the
reconciliation above.
60
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT 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, financial
position or cash flows, either individually or in the aggregate.
P. Restructuring of Operations
During the fourth quarter of fiscal 2015, the Company committed to a restructuring plan to reduce costs and improve efficiencies at its North
American manufacturing operations. This restructuring resulted in a reduction of 79 people through a combination of early retirement and
reduction in force. The restructuring was meant to be a proactive measure to offset the impact low oil and gas prices had on the demand from
its customers. The Company recorded a pre-tax restructuring charge of $3,282,000 in the fourth quarter of fiscal 2015, upon announcement of
the intended restructuring action. During fiscal 2015, the Company made no cash payments, resulting in an accrual balance of $3,282,000 at
June 30, 2015.
During fiscal 2014, the Company recorded a pre-tax restructuring charge of $961,000 representing the incremental cost above the minimum
legal indemnity for a targeted workforce reduction at its Belgian operation, following finalization of negotiations with the local labor unions.
The minimum legal indemnity of $548,000 was recorded in the fourth quarter of fiscal 2013, upon announcement of the intended restructuring
action. During fiscal 2014, the Company made cash payments of $857,000, resulting in an accrual balance at June 30, 2014 of $785,000. The
Company made additional payments of $156,000 during fiscal 2015, resulting in a June 30, 2015 balance of $494,000 after a foreign exchange
impact of $135,000. This remaining obligation relates to increased pension benefits agreed to as part of the restructuring and is expected to be
paid out over the next several years.
Twin Disc, Incorporated and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
for the years ended June 30, 2015, 2014 and 2013
(in thousands)
Description
2015:
Allowance for losses on accounts receivable
Deferred tax valuation allowance
2014:
Allowance for losses on accounts receivable
Deferred tax valuation allowance
2013:
Allowance for losses on accounts receivable
Deferred tax valuation allowance
Additions
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Net
Acquired
Deductions1
Balance at
End of
Period
$3,637
$5,593
$2,884
$3,724
$2,194
$3,811
$ 304
$ 805
$1,169
$2,140
$1,385
$1,112
$ –
$ –
$ –
$ –
$ –
$ –
$1,758
$2,821
$ 416
$ 271
$ 695
$1,1992
$2,183
$3,577
$3,637
$5,593
$2,884
$3,724
1 Activity primarily represents amounts written-off during the year, along with other adjustments (primarily foreign currency translation adjustments).
2 Represents adjustments resulting from foreign tax audits.
61
2015 ANNUAL REPORT TWIN DISC, INCORPORATED 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.
September 14, 2015
TWIN DISC, INCORPORATED
By: /s/ JOHN H. BATTEN
John H. Batten
President 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.
September 14, 2015
September 14, 2015
September 14, 2015
September 14, 2015
September 14, 2015
By: /s/ DAVID B. RAYBURN
David B. Rayburn
Chairman of the Board
By: /s/ JOHN H. BATTEN
John H. Batten
President and Chief Executive Officer
By: /s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial Officer, Treasurer and Secretary
By: /s/ DEBBIE A. LANGE
Debbie A. Lange
Corporate Controller (Chief Accounting Officer)
Michael Doar, Director
Janet P. Giesselman, Director
Michael C. Smiley, Director
Harold M. Stratton II, Director
David R. Zimmer, Director
By: /s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial Officer, Treasurer and Secretary
(Attorney in Fact)
62
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Included
Herewith
Included
Herewith
Exhibit Index
Twin Disc, Incorporated
10-K for Year Ended June 30, 2015
Exhibit
Description
3a)
3b)
4a)
4b)
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 December 17, 2013). 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.
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.
Exhibit 10
Material Contracts
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
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.
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.
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 Amended and Restated Twin Disc, Incorporated 2010 Long-Term Incentive Compensation Plan (Incorporated by
reference to Exhibit 10.1 of the Company’s Form 8-K dated August 5, 2015). 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.
Form of Performance Stock Award Grant Agreement for award of performance shares on July 25, 2013 (Incorporated
by reference to Exhibit 10.1 of the Company’s Form 8-K dated July 31, 2013). File No. 001-07635.
Form of Performance Stock Unit Award Agreement for award of performance stock units on July 25, 2013
(Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated July 31, 2013). File No. 001-07635.
Form of Restricted Stock Grant Agreement for restricted stock grants on July 25, 2013 (Incorporated by reference to
Exhibit 10.3 of the Company’s Form 8-K dated July 31, 2013). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of performance shares on July 30, 2014 (Incorporated
by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 5, 2014). File No. 001-07635.
Form of Performance Stock Unit Award Agreement for award of performance stock units on July 30, 2014
(Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 5, 2014). File No. 001-07635.
Form of Restricted Stock Grant Agreement for restricted stock grants on July 30, 2014 (Incorporated by reference to
Exhibit 10.3 of the Company’s Form 8-K dated August 5, 2014). File No. 001-07635.
63
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Exhibit Index
Twin Disc, Incorporated
10-K for Year Ended June 30, 2015
Exhibit 10
Material Contracts
l)
m)
n)
o)
p)
q)
r)
s)
t)
Form of Performance Stock Award Grant Agreement for award of performance shares on July 31, 2015 (Incorporated
by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 5, 2015). File No. 001-07635.
Form of Restricted Stock Grant Agreement for restricted stock grants on July 31, 2015 (Incorporated by reference
to Exhibit 10.3 of the Company’s Form 8-K dated August 5, 2015). File No. 001-07635.
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.
Forms of Change in Control Severance Agreements (Incorporated by reference to Exhibits 10.4, 10.5 and 10.6 of the
Company’s Form 8-K dated August 5, 2014). 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.
Credit Agreement Between Twin Disc, Incorporated, Twin Disc International, S.A., and Wells Fargo Bank, National
Association, dated June 30, 2014 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated July
3, 2014). File No. 001-07635.
Amended and Restated Note Purchase and Private Shelf Agreement Between Twin Disc, Incorporated, Prudential
Investment Management, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Pruco
Life Insurance Company of New Jersey, Security Benefit Life Insurance Company, Inc., Prudential Annuities Life
Assurance Corporation, and Mutual of Omaha Insurance Company, dated June 30, 2014 (Incorporated by reference
to Exhibit 10.1 of the Company’s Form 8-K dated July 3, 2014). File No. 001-07635.
August 3, 2015 Amendment to Credit Agreement Between Twin Disc, Incorporated, Twin Disc International, S.A.,
and Wells Fargo Bank, National Association, dated June 30, 2014 (Incorporated by reference to Exhibit 10.1 of the
Company’s Form 8-K dated August 5, 2015). File No. 001-07635.
August 3, 2015 Amendment to Amended and Restated Note Purchase and Private Shelf Agreement Between Twin
Disc, Incorporated, Prudential Investment Management, Inc., The Prudential Insurance Company of America, Pruco
Life Insurance Company, Pruco Life Insurance Company of New Jersey, Security Benefit Life Insurance Company,
Inc., Prudential Annuities Life Assurance Corporation, and Mutual of Omaha Insurance Company (Incorporated by
reference to Exhibit 10.2 of the Company’s Form 8-K dated August 5, 2015). File No. 001-07635.
Exhibit
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
Included
Herewith
Included
Herewith
X
X
X
X
X
X
X
64
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Exhibit 21
Subsidiaries Of The Registrant
Twin Disc, Incorporated, the registrant (a Wisconsin Corporation) owns directly or indirectly 100% of the following subsidiaries:
1. Twin Disc International, S.P.R.L. (a Belgian corporation)
2. Twin Disc Srl (an Italian corporation)
3. Rolla Sp Propellers SA (a Swiss corporation)
4. Twin Disc (Pacific) Pty. Ltd. (an Australian corporation)
5. Twin Disc (Far East) Ltd. (a Delaware corporation operating in Singapore and Hong Kong)
6. Twin Disc (Far East) Pte. Ltd. (a Singapore corporation)
7. Mill Log Equipment Co., Inc. (an Oregon corporation)
8. Mill-Log Marine, Inc. (an Oregon Corporation)
9. Mill-Log Wilson Equipment Ltd. (a Canadian corporation)
10. Twin Disc Southeast, Inc. (a Florida corporation)
11. Twin Disc Japan (a Japanese corporation)
12. Twin Disc Power Transmission Private, Ltd. (an Indian limited liability corporation)
13. Twin Disc Power Transmission (Shanghai) Co. Ltd. (a Chinese corporation)
Twin Disc, Incorporated also owns 66% of Twin Disc Nico Co. LTD. (a Japanese corporation).
The registrant has neither a 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 Statements on Form S 8 (Nos. 333-99229, 333-119770, 333-169965,
333-169963 and 333-169962) of Twin Disc, Incorporated of our report dated September 14, 2015 relating to the financial statements, financial
statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10 K.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
September 14, 2015
65
2015 ANNUAL REPORT TWIN DISC, INCORPORATED Exhibit 24
Power Of Attorney
The undersigned directors of Twin Disc, Incorporated hereby severally constitute John H. Batten and Jeffrey S. Knutson, 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, 2015 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.
/s/ MICHAEL DOAR
Michael Doar, Director
/s/ JANET P. GIESSELMAN
Janet P. Giesselman, Director
/s/ DAVID B. RAYBURN
David B. Rayburn, Director
/s/ MICHAEL C. SMILEY
Michael C. Smiley, Director
/s/ HAROLD M. STRATTON II
Harold M. Stratton II, Director
/s/ DAVID R. ZIMMER
David R. Zimmer, Director
July 31, 2015
66
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT Exhibit 31A
Certifications
I, John H. Batten, certify that:
I have reviewed this annual report on Form 10-K of Twin Disc, Incorporated;
1. 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;
2. 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;
3. 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;
4. 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 14, 2015
By: /s/ JOHN H. BATTEN
John H. Batten
President and Chief Executive Officer
67
2015 ANNUAL REPORT TWIN DISC, INCORPORATED
Exhibit 31B
Certifications
I, Jeffrey S. Knutson, certify that:
I have reviewed this annual report on Form 10-K of Twin Disc, Incorporated;
1. 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;
2. 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;
3. 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;
4. 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 14, 2015
/s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial Officer, Treasurer and Secretary
68
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT
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, 2015, as
filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, John H. Batten, President 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 14, 2015
By: /s/ JOHN H. BATTEN
John H. Batten
President 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, 2015, as
filed with the Securities and Exchange Commission as of the date hereof (the “Report”), I, Jeffrey S. Knutson, Vice President - Finance, Chief
Financial Officer, Treasurer and Secretary 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 14, 2015
/s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial Officer, Treasurer and Secretary
69
2015 ANNUAL REPORT TWIN DISC, INCORPORATED
5-Year Financial Summary
(In thousands, except where noted)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Net sales
$265,790
$263,909
$285,282
$355,870
$310,393
Cost and expenses, including marketing, engineering and administrative
250,304
255,022
275,269
310,999
275,677
2015
2014
2013
2012
2011
Earnings from operations
Other income (expense)
Earnings before income taxes and noncontrolling interest
Income taxes
Noncontrolling interest
Net earnings attributable to Twin Disc
BALANCE SHEET
Assets
Cash
Trade receivables, net
Inventories
Other current assets
Total current assets
Goodwill and other assets
Property, plant and equipment, net
Total assets
Liabilities and Equity
Current liabilities
Long-term debt
Deferred liabilities
Total equity
Noncontrolling interest
Total liabilities and equity
Comparative Financial Information
Per share statistics:
Basic earnings
Diluted earnings
Dividends
Total equity
Return on equity
Return on assets
Return on sales
Average basic shares outstanding
Average diluted shares outstanding
Number of shareholder accounts
Number of employees
Additions to property, plant and equipment
Depreciation
Net working capital
70
15,486
414
15,900
4,515
(212)
11,173
22,936
43,883
80,241
22,770
8,887
(791)
8,096
4,226
(226)
3,644
10,013
44,871
(776)
9,237
4,986
(369)
3,882
(115)
44,756
17,815
(198)
26,743
24,757
40,219
97,579
17,542
20,724
46,331
15,701
63,438
102,774
103,178
18,643
14,844
34,716
(2,687)
32,029
13,897
(135)
17,997
20,167
61,007
99,139
14,855
169,830
180,097
188,472
197,161
195,168
23,605
56,427
26,621
60,267
34,671
62,315
40,315
66,356
48,161
65,791
249,862
266,985
285,458
303,832
309,120
57,054
10,231
42,410
56,980
14,800
42,894
63,503
23,472
54,921
66,625
28,401
72,297
84,660
25,784
62,030
139,528
151,584
142,504
135,487
135,677
639
727
1,058
1,022
969
249,862
266,985
285,458
303,832
309,120
0.99
0.99
0.36
0.32
0.32
0.36
0.34
0.34
0.36
2.34
2.31
0.34
1.59
1.57
0.30
12.38
13.46
12.61
11.88
11.99
8.0%
4.5%
4.2%
2.4%
1.4%
1.4%
2.7%
1.4%
1.4%
19.7%
8.6%
7.5%
13.3%
5.8%
5.8%
11,273,697
11,258,342
11,304,280
11,409,467
11,319,081
11,277,364
11,264,421
11,377,091
11,555,561
11,462,562
530
921
9,049
9,922
580
970
7,245
10,180
617
990
6,582
10,120
651
1,029
13,733
9,947
699
941
12,028
9,110
112,776
123,117
124,969
130,536
111,208
TWIN DISC, INCORPORATED 2015 ANNUAL REPORT
MICHAEL E. BATTEN
Fiscal 2015 saw the passing of our beloved Chairman, Michael E. Batten.
Mike began his career at Twin Disc in 1970 as a Financial Analyst, advancing
through a number of positions to eventually become Chief Executive Officer,
a position he held for more than 30 years. Mike retired from the Company in
2013, and became non-executive Chairman of the Board. During his 43 years
of service, Mike managed the company through various business cycles.
From global recessions through times of prosperity, Mike worked tirelessly
to ensure that Twin Disc was always well positioned in its markets for the
economic situation at hand, in order to ensure the success of the company.
Mike’s leadership and guidance inspired all who knew him. An astute
global businessman, his honesty, integrity and kindness were respected
worldwide. Mike always found time to listen — whether to our customers,
our employees or those in our community. He was knowledgeable and
respectful of all cultures and was truly a global citizen.
TWIN DISC OFFICERS
TWIN DISC BOARD OF DIRECTORS
John H. Batten
President and Chief Executive Officer
Jeffrey S. Knutson
Vice President – Finance, Chief Financial Officer,
Treasurer and Secretary
Malcolm F. Moore
Executive Vice President – Operations
Dean J. Bratel
Vice President – Global Sales and Marketing
Michael B. Gee
Vice President – Corporate Engineering
Denise L. Wilcox
Vice President – Human Resources
Debbie A. Lange
Corporate Controller
Michael C. Smiley
Chief Financial Officer
Zebra Technologies Corporation
(A global provider of asset
management solutions)
Lincolnshire, Illinois
Harold M. Stratton II
Chairman of the Board and
retired Chief Executive Officer
Strattec Security Corporation
(A manufacturer of security
and access control products for
the global automotive industry)
Milwaukee, Wisconsin
David R. Zimmer
Retired Managing Partner
Stonebridge Equity, LLC
(A merger, acquisition and
finance value consulting firm)
Troy, Michigan
David B. Rayburn
Chairman
Retired President and
Chief Executive Officer
Modine Manufacturing Company
(A manufacturer of heat
exchange equipment)
Racine, Wisconsin
John H. Batten
President and Chief Executive Officer
Twin Disc, Inc.
Racine, Wisconsin
Michael Doar
Chairman and Chief Executive Officer
Hurco Companies, Inc.
(A global manufacturer
of machine tools)
Indianapolis, Indiana
Janet P. Giesselman
Retired President and General Manager
Dow Oil & Gas Company
(A business unit of
The Dow Chemical Company)
1 3 2 8 R a c i n e S t r e e t R a c i n e , W i s c o n s i n 5 3 4 0 3 U S A w w w . t w i n d i s c . c o m