TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 1
2020 ANNUAL REPORT BUILDING ON STRATEGY
Twin Disc invents, engineers and produces the products, controls and systems that put horsepower to work. Throughout
the year we have aggressively eliminated expenses, reduced working capital and improved our balance sheet. Our strategy
positions Twin Disc to deliver the quality, craftsmanship and innovation essential to our worldwide customers, building on
strength for today and tomorrow.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 2
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 2
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (in thousands)-6,000-4,000-2,00002,0004,0006,00010,0008,0003,178201720186,5112019(5,461)20209,118-3.5-2.0-2.5-3.0-1.5-1.0-0.50.00.51.020190.83(0.56)2017(3.03)202020180.82DILUTED (LOSS) INCOME PER SHARECAPITAL EXPENDITURES (in thousands)02,0004,0006,0008,00010,00012,00020173,13320186,328202010,699201911,979FINANCIAL HIGHLIGHTS (in thousands)202020192018Net sales$ 246,838 $ 302,663 $ 240,733 Net (loss) income (39,817) 10,673 9,528 Basic (loss) income per share (3.03) 0.84 0.82 Diluted (loss) income per share (3.03) 0.83 0.82 Dividends per share–––Average basic shares outstanding 13,153 12,571 11,295 Average diluted shares outstanding 13,153 12,682 11,395 OPERATING RESULTS BY QUARTER1ST QTR2ND QTR3RD QTR4TH QTRYEAR2020Net sales$ 59,290 $ 59,536 $ 68,636 $ 59,376 $ 246,838 Gross profit 9,636 15,711 16,549 13,812 55,708 Net loss (6,311) (6,516) (25,230) (1,760) (39,817)Basic loss per share (0.48) (0.49) (1.92) (0.13) (3.03)Diluted loss per share (0.48) (0.49) (1.92) (0.13) (3.03)Dividends per share–––––Stock price range (high-low)15.18 - 9.6012.59 - 9.5011.61 - 6.068.35 - 4.8415.18 - 4.842019Net sales$ 74,689 $ 78,107 $ 77,420 $ 72,447 $ 302,663 Gross profit 23,985 26,088 23,117 16,451 89,641 Net (income) loss 2,862 4,073 4,560 (822) 10,673 Basic (income) loss per share 0.24 0.31 0.35 (0.06) 0.84 Diluted income (loss) per share 0.24 0.31 0.34 (0.06) 0.83 Dividends per share–––––Stock price range (high-low)27.97 - 22.3123.65 - 13.4019.11 - 13.9319.15 - 13.3327.97 - 13.33 “Twin Disc has persevered for more than a century thanks to a solid foundation of
resilience and adaptability. Drawing on that same grit, determination and experience,
we will prevail over today’s challenges.” JOHN BATTEN CHIEF EXECUTIVE OFFICER
More than five years ago we launched ongoing strategies to
manage capital spending, improve manufacturing efficiency,
reduce costs and diversify our markets and geographic
footprint. These strategies have been crucial as we seek
to navigate current challenges while protecting the health
and safety of our employees, customers and communities.
During the fiscal year, Twin Disc faced three strong
headwinds. The U.S – China trade war and the Russia –
OPEC oil war had already reduced demand for oil and gas.
And then came COVID-19. While none of these headwinds
are fully behind us, we should begin to see improvement
in the months ahead.
Sales for the fiscal 2020 fourth quarter were $59.4 million,
compared to $72.4 million for the same period last year. The
18% decrease was primarily due to continued softness in oil
and gas markets, along with weaker demand for industrial
and marine products. For the fiscal 2020 full year, sales were
$246.8 million, compared to $302.7 million for fiscal 2019.
Despite a difficult global economy, Veth Propulsion reported
a 6.2% increase in sales for fiscal 2020 and a 26% increase
over the prior fiscal year fourth quarter. This growth reflects
our synergies in market penetration, including moving Veth
products into Asia and North America.
Gross profit percent for the fiscal 2020 fourth quarter
was 23.3%, compared to 22.7% in the fiscal 2019 fourth
quarter. The increase resulted primarily from cost reduction
initiatives and a global focus on cost containment. For the
fiscal 2020 full year, gross profit was 22.6%, compared to
29.6% for fiscal 2019. This year-over-year decline was a
function of a less profitable product mix and an isolated
product performance issue totaling $6.1 million, recorded
during the year. We made significant progress on our cost
reduction programs, as evidenced by the fourth quarter
margin performance. These efforts will remain a focus
as we enter fiscal 2021.
By many measures, fiscal 2020 has been one of the most
challenging years in Twin Disc’s history. Our response is
to manage what we can control. We reduced expenses
through prudent, aggressive payroll actions, initially saving
an estimated $4.1 million. All of our global operations
deferred unnecessary spending, reduced costs and sought
to take full advantage of available government assistance.
In April we secured an $8.2 million loan under the U.S.
Small Business Administration Paycheck Protection
Program. With this funding, we were able to bring our
North American operations employees back full-time,
with full pay.
By the end of July, we had consumed our PPP funds,
primarily for payroll costs. With no meaningful recovery
in our markets, we again were challenged with reducing
our cost structure. We expanded our earlier reductions
to achieve $7.2 million in annualized savings.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 3
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 3
TO OUR SHAREHOLDERS Given the unprecedented pace and scope of the pandemic, our focus continues
to be on immediate support for our global customers, associates and distribution
partners. Yet even in this difficult time, I believe Twin Disc has reason for optimism,
building on strength:
LEADERSHIP. You can find Twin Disc products in the
drivelines and powertrains of a huge array of equipment—
from chippers, trucks and turbines to work boats and
pleasure craft. Our solutions continue to be at the industry
forefront, and we’re working to stay there with our long-
term hybridization and electrification strategy (see page 8).
FOCUS. Our entire organization is united in making Twin
Disc ever more agile and efficient. Building on the initiatives
of the last five years, we’re introducing a formal sales,
inventory and operations planning (SIOP) process. This
effort gathers inputs from across Twin Disc to drive more
efficient production and inventory planning, improving
working capital, margin and on-time delivery performance.
Although work-from-home temporarily halted training in
Racine, we’ve already seen improvements in inventory
management. SIOP principles were also key as we
designed our Lufkin facility (see page 6). We plan to
roll out SIOP training to all locations in the years ahead.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 4
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 4
EXPERIENCE. Throughout our history, Twin Disc has
navigated through numerous market cycles; we have
more than a century of experience in managing the ups
and downs. The steps we’ve taken in recent years to
prepare for and, where possible, smooth those ups and
downs have served us well in these extraordinary times.
STRATEGY. Our strategy remains sound and consistent.
Our goal to diversify away from the hyper-cyclical
energy market led to the successful acquisition of Veth
Propulsion in fiscal 2019. Veth continues to perform
beyond expectations, as noted above, reporting annual
growth of 9.8% in fiscal 2020 despite market challenges.
The new Lufkin facility is complete and ready to begin
manufacturing by the end of calendar 2020. This will drive
focus on our industrial business, connect us to a strong
labor market and provide an easily accessible location
for many of our key customers and markets.
RELATIONSHIPS. The way we operate as a company—
emphasizing excellence at every step—affects the way
we’re seen by customers, investors and communities.
Customers know we’re here to collaborate with them
on achieving their goals. Investors and creditors know
we will act in good faith, and the communities where
we operate know our history of corporate citizenship.
The relationships we’ve built over many years give us
a valuable advantage today.
PEOPLE. Simply put, our people hit a home run this spring.
Our IT department started planning early in 2020 for a large
part of our workforce to work remotely. With the framework
in place, everyone who could work from home did so,
staying safe and productive. The associates who kept
production going were equally fantastic, muscling through
every obstacle. Our teams have remained dedicated to
delivering quality, craftsmanship and innovation to our
worldwide customers. At Twin Disc, our people truly
are the reason we win.
I’m confident we will come out of this year’s challenges as a
stronger and leaner company, better positioned to compete
in our markets. Thank you for your continuing support, and
for joining Twin Disc as we put horsepower to work.
JOHN H. BATTEN
Chief Executive Officer
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 5
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 5
BUILDING ON
CONNECTIONS
“This facility is an investment in Twin Disc as well as in Lufkin. It’s designed
for efficient operation to help us keep pace with our customers’ needs,
providing exceptional value and superior service at every step.”
TIM STACY BUSINESS UNIT MANAGER FOR INDUSTRIAL PRODUCTS
Our new home for industrial/land-based products is built to connect Twin Disc with global
customers, capable workers and clear opportunity.
THE 55,000-SQUARE-FOOT FACILITY IN LUFKIN, TEXAS,
offers the space to assemble our complete industrial/
land-based product line. We’re set to launch mechanical
power take-off production later this year, adding hydraulic
power take-offs in mid-2021.
Tim Stacy, business unit manager for industrial products,
says the facility’s location offers key advantages. “We’re
close to the Gulf of Mexico, so we can serve as a global
distribution center, handling products coming from our
European operations,” Stacy says. “And we’re closer to
a lot of our end users in this region, so we can increase
responsiveness.”
RESPONSIVENESS IS ALSO KEY TO THE FACILITY’S
BUSINESS MODEL. The emphasis will be on make-to-
order, building what customers want when they want it,
Stacy says. “That will lower inventory costs and help us
drastically cut lead times.”
The facility itself is like “walking into a showroom, and
we’re going to keep it that way,” Stacy says. The main
conference room has a window overlooking the shop
floor, where high windows, inspired by Twin Disc European
facilities, let in natural light. Ergonomic material handling
and assembly systems are designed for efficient flow.
The entire facility is air-conditioned, preventing humidity
from corroding products.
LUFKIN OFFERS A CAPABLE WORKFORCE, and Twin
Disc is working with the local technical college, a nearby
university and a regional manufacturing alliance to keep
the talent pipeline full. “We want to generate interest in
the trades,” Stacy says.
Stacy says the Lufkin team is excited to focus on heavy-
duty industrial equipment. “Because it’s independent of oil
and gas, it’s less cyclical,” he says. “We’re well-positioned
to build transmissions for road pavers, agricultural
machinery, cranes…there’s a lot of opportunity here.”
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 6
BUILDING ON
COMMITMENT
The people of Twin Disc are at the heart of carrying out our strategy. Day after day, our
outstanding employees demonstrate their commitment to coworkers and customers alike.
KEEPING EACH OTHER SAFE. When COVID-19 began
moving through Italy, the Twin Disc facilities in San Matteo
della Decima (Bologna) and Limite sull’Arno (Florence)
moved into action. Led by Luca Stefani, operations director
for both plants, the teams instituted heightened safety
protocols and controls, the use of personal protective
equipment, stepped-up cleaning protocols and limits on site
visitors. “It was important to keep safe and to guarantee
business continuity; our customers and shareholders were
counting on us,” Stefani says. “At the same time, it was
important to protect our employees, because that also
meant we were protecting our families and our community.”
As a result of the team’s commitment, the plants saw
no outbreak or major illnesses and managed smoothly
throughout the lockdown.
IMPROVING PERFORMANCE TOGETHER. Every key
performance indicator has improved this fiscal year at our
Racine, Wisconsin, manufacturing facility, driven by fresh
perspectives from the top down. In November 2019, Darryl
Babu, a 23-year Twin Disc veteran, moved from managing
the global distribution network and overseas sales and
service subsidiaries to managing operations. “I’ve sold all
the products and know the business cycles and customer
expectations,” he says. “That helps us all know what’s
important to Twin Disc and what to prioritize.”
As 2020 brought collapsing oil and gas prices as well
as COVID-19 challenges, Babu says the priority became
clear: “Fight for every order, save every dollar.” Daily team
meetings continue to emphasize streamlining processes,
increasing flexibility and improving cash flow. “We have
to balance quick victories with long-term strategies,”
Babu says.
The positive results are clear in all metrics, including
communications. Babu, who now serves as vice president
and general manager, says the facility team makes the
difference. “It’s a good mix of homegrown Twin Disc
experience and external hires—a good team of people,
working hard to succeed.”
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 7
BUILDING ON
CAPABILITIES
Even as our 2020 strategies have focused on managing the challenges of COVID-19,
Twin Disc continues to look to the future, positioning ourselves for propulsion technology
leadership. Our solutions must give customers the flexibility to drive everything from
wheels to propellers with diesel power, full electric, or a hybrid combination that readily
toggles between electric and diesel.
WHY IT MATTERS. Equipment suppliers and operators
continually seek better ways to meet emissions standards,
reduce noise, save on fuel and increase efficiency. They’re
exploring battery and motor technologies that can pack more
energy in a smaller system and release power more efficiently.
These advances make powertrains in all types of vehicles
and equipment, marine and land-based, fair game for
hybridization and electrification. While motors still need to
be mechanically connected, systems are getting simpler.
To remain relevant, Twin Disc is making the evolution
simpler for our customers.
WHAT WE’RE DOING. Over the last two years we’ve
redirected engineering and electronics resources to
expand our hybridization and electrification capabilities
and knowledge. We need to be able to talk with providers
and customers about motors, drives and energy storage
systems that work with our solutions. And we need to
thoroughly understand these building blocks so we can
marry them with Twin Disc products, creating complete
systems that support our customers.
Veth Propulsion gives us an edge in electrification,
with industry-leading technology known for innovation
and reliability. Our well-known expertise in drive train
technology gives us an edge in hybridization. We’re
refining clutches and developing power take-ins to drive
motors with electric as well as diesel power, transmitting
mechanical energy to whatever needs to move.
ELECTRIC POWER FOR GREENER DREDGER. The Afonso De Albuquerque is a trailing suction hopper dredger
built with a state-of-the-art filter system to meet the latest ultra-low emission vessel (ULEV) standards. The
vessel features two electric-driven VZ-1250 rudder propellers (1100 kW) and one 2-K-1300 Veth Jet bow thruster.
The dredger, one of more than two dozen Veth projects with the Jan De Nul Group, plays an important role in
maintaining navigable waterways, enabling offshore energy production and reclaiming land.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 8
SMOOTHER, EMISSION-FREE SAILING. Three Veth VL-700 L-drives (533 kW) provide the primary propulsion for the
Oranje Nassau VI, incorporated in a revolutionary hull design that lets the tanker move smoothly through even shallow
waters. A battery charged by the ship’s engines can power the L-drives’ electric motors when required, enabling the vessel
to sail through harbors emission-free. Veth Propulsion provided an additional three L-drives for the Oranje Nassau V.
We also see expanded opportunity in system controls.
Twin Disc has long offered transmission control for
marine vessels and land-based vehicles. Now we’re tying
in the ability to run not only gearboxes and clutches, but
also motors and batteries—managing the whole system
for maximum efficiency.
WHAT CUSTOMERS WANT. We’re collaborating with
our top customers to ensure the technology we offer is
what the market wants. Our sales teams in Asia, Europe
and the United States have been gathering and providing
feedback. For instance, it’s clear some customers want
a complete solution, while others prefer products that
work with their controls.
Our hybridization and electrification strategy is already
getting results. We have projects underway in North
America, Europe, Asia and Australia, with more on the
horizon—shaping our offering as well as our future.
RePTO DRIVE IS A MODEL FOR SUCCESS.
Industrial solutions in development include this
rear-engine power take-off drive with true hybrid
functionality. Designed to deliver the optimum
balance between electric and hydraulic power
transmission, it’s suitable for driving a motor/
generator and hydraulics, and can also be used
for power regeneration. This solution is ideal
for off-highway hybrid machines and can be
customized for specific applications.
AMSTERDAM FERRIES GO ELECTRIC.
Amsterdam’s ferries carry pedestrians, cyclists
and mopeds across the increasingly busy River IJ.
For two new ferries, the IJveer 64 and 65, powered
in part by lithium ion batteries, Veth Propulsion
is supplying two electric-driven VZ-200E main
propulsion thrusters (250 kW) with electric
steering. The onboard batteries and exhaust
filtering system reduce emissions to a level
even lower than the EU’s Stage V guidelines.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 9
CORPORATE DATA
ANNUAL MEETING
Virtual meeting via webcast
2:00 P.M., October 29, 2020
SHARES TRADED
NASDAQ: Symbol TWIN
ANNUAL REPORT ON SECURITIES
AND EXCHANGE COMMISSION
FORM 10-K Single copies of the
Company’s 2020 Annual Report on
Securities and Exchange Commission
Form 10-K, including exhibits, will be
provided without charge to shareholders
after September 10, 2020, upon written
request directed to Secretary, Twin
Disc, Incorporated, 1328 Racine
Street, Racine, Wisconsin 53403.
TRANSFER AGENT AND REGISTRAR
Computershare
462 S. 4th Street, Suite 100
Louisville, KY 40202
Toll-free: 877-498-8861
www.computershare.com/investor
INDEPENDENT ACCOUNTANTS
RSM US LLP, Milwaukee, Wisconsin
CORPORATE OFFICES
Twin Disc, Incorporated
Racine, Wisconsin 53403
Telephone: (262) 638-4000
WHOLLY OWNED SUBSIDIARIES
Twin Disc International S.P.R.L.,
Nivelles, Belgium
Twin Disc Srl, Decima, Italy
Rolla Sp Propellers SA,
Novazzano, Switzerland
Twin Disc (Pacific) Pty. Ltd.,
Brisbane, Queensland, Australia
Twin Disc (Far East) Ltd., Singapore
Twin Disc (Far East) Pte. Ltd.,
Singapore
Twin Disc Japan, Saitama, Japan
Twin Disc Power Transmission
Private, Ltd., Chennai, India
Twin Disc (Far East) Pte. Ltd.,
India Branch
Twin Disc Power Transmission
(Shanghai) Co. Ltd., Shanghai, China
Twin Disc NL Holding B.V.,
Papendrecht, Netherlands
Veth Propulsion Holding B.V.,
Papendrecht, Netherlands
Veth Propulsion B.V.,
Papendrecht, Netherlands
Twin Disc European Distribution
S.P.R.L., Nivelles, Belgium
TWIN DISC BOARD OF DIRECTORS
DAVID B. RAYBURN
Chairman
Retired President and
Chief Executive Officer,
Modine Manufacturing Company
Racine, Wisconsin
A manufacturer of heat exchange equipment
JOHN H. BATTEN
Chief Executive Officer
Twin Disc, Inc.
Racine, Wisconsin
MICHAEL DOAR
Chairman and Chief Executive Officer
Hurco Companies, Inc.
Indianapolis, Indiana
A global manufacturer of machine tools
JANET P. GIESSELMAN
Retired President and General Manager
Dow Oil & Gas Company
Midland, Michigan
A business unit of Dow Chemical Company
DAVID W. JOHNSON
Chief Financial Officer
Johnson Outdoors, Inc.
Racine, Wisconsin
A global provider of outdoor recreation products
MICHAEL C. SMILEY
Former Chief Financial Officer
Zebra Technologies Corporation
Lincolnshire, Illinois
A global provider of asset management solutions
HAROLD M. STRATTON II
Chairman of the Board and retired
Chief Executive Officer
Strattec Security Corporation
Milwaukee, Wisconsin
A manufacturer of security and access control
products for the global automotive industry
DAVID R. ZIMMER
Retired Managing Partner
Stonebridge Equity, LLC
Troy, Michigan
A merger, acquisition and finance value
consulting firm
PARTIALLY OWNED SUBSIDIARIES
Twin Disc Nico Co. Ltd.
MANUFACTURING FACILITIES
Racine, Wisconsin
Sturtevant, Wisconsin
Lufkin, Texas
Nivelles, Belgium
Decima, Italy
Novazzano, Switzerland
Limite sull’Arno, Italy
Papendrecht, Netherlands
SALES OFFICES
Domestic
Racine, Wisconsin
Foreign
Nivelles, Belgium
Brisbane, Australia
Perth, Australia
Gold Coast, Australia
Singapore
Decima, Italy
Limite sull’Arno, Italy
Novazzano, Switzerland
Chennai, India
Coimbatore, India
Saitama, Japan
Shanghai, China
Guangzhou, China
MANUFACTURING LICENSES
Hitachi-Nico Transmission Co., Ltd.
Tokyo, Japan
TWIN DISC OFFICERS
JOHN H. BATTEN
Chief Executive Officer
JAMES E. FEIERTAG
President and Chief Operating Officer
JEFFREY S. KNUTSON
Vice President – Finance, Chief Financial
Officer, Treasurer and Secretary
DEAN J. BRATEL
Vice President – Engineering
MICHAEL B. GEE
Vice President – Hybrid Engineering
DEBBIE A. LANGE
Corporate Controller
DENISE L. WILCOX
Vice President – Human Resources
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 10
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, 2020
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)
39-0667110
(I.R.S. Employer Identification Number)
1328 Racine Street, Racine, Wisconsin
(Address of Principal Executive Office)
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 Value)
Trading Symbol(s)
TWIN
Name of each exchange on which registered
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to
be submitted 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 such files).
YES [√ ] NO [ ]
YES [√ ] NO [ ]
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 11
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ √ ]
Non-accelerated Filer [ ] Smaller reporting company [ √ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act [ ].
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES [ ] NO [ √ ]
At December 27, 2019, the last business day of the registrant’s most recently completed second fiscal quarter,
the aggregate market value of the common stock held by non-affiliates of the registrant was $107,190,561.
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 20, 2020, the registrant had 13,552,104 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 29, 2020, 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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 12
TABLE OF CONTENTS
TWIN DISC, INC. - FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2020
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosure.
Information About Our Executive Officers.
Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Quantitative and Qualitative Disclosure About Market Risk.
Financial Statements and Supplementary Data.
Change In and Disagreements With Accountants on Accounting and Financial
Disclosure.
Controls and Procedures.
Other Information.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Certain Relationships and Related Transactions, Director Independence.
Principal Accounting Fees and Services.
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Exhibits, Financial Statement Schedules.
Exhibit Index.
Signatures.
14
15
20
21
21
21
21
23
24
24
35
35
36
36
37
37
37
38
38
38
38
87
91
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 13
PART I
Item 1. Business
Twin Disc, Incorporated (“Twin Disc”, or the “Company”) 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, azimuth drives, surface drives, propellers and boat management systems
as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls
systems. The Company sells its products to customers primarily in the pleasure craft, commercial and military marine
markets, as well as in the energy and natural resources, government and industrial markets. The Company's worldwide
sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network.
The products described above have accounted for more than 90% of revenues in each of the last three fiscal years.
On July 2, 2018, the Company completed the acquisition of 100% of the outstanding common stock of Veth
Propulsion Holding B.V. (“Veth Propulsion”). Veth Propulsion is a global manufacturer of highly-engineered
primary and auxiliary propulsions and propulsion machinery for maritime vessels, including rudder propellers,
bow thrusters, and generator sets, and a provider of engine service and repair, based in the Netherlands. These
products are complementary to and expand the Company’s product offerings in the marine and propulsion markets.
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 applied 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 and plant shutdowns,
particularly in Europe, occur 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 51% and 49% of the Company's
consolidated net sales during the years ended June 30, 2020 and June 30, 2019, respectively. There was one customer,
Sewart Supply Company, an authorized distributor of the Company, that accounted for at least 10% of consolidated
net sales in fiscal 2020.
Unfilled open orders for the next six months of $66.6 million at June 30, 2020 compares to $99.6 million at June 30, 2019.
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 low due to the relatively low investment
within individual countries that have currency movement restrictions. 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 $1.8 million and $2.4 million in fiscal 2020 and 2019, respectively.
Total engineering and development costs were $11.0 million and $12.6 million in fiscal 2020 and 2019, respectively.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 14
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, 2020 was 806.
A summary of financial data by segment, geographic area, and classes of products that accounted for more than
10% of consolidated sales revenues for the years ended June 30, 2020 and 2019 appears in Note K, Business
Segments and Foreign Operations, 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. The SEC maintains an internet site
(www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers,
such as the Company, that file electronically with the SEC. 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.
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, the Company is subject to currency fluctuations and any significant movement between the U.S.
dollar and the euro, in particular, could have an adverse effect on its profitability. Although the Company’s financial
results are reported in U.S. dollars, a significant portion of its 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 it generates revenues and incurs 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
the Company’s profitability and financial condition. While the long-term impacts of the United Kingdom’s exit from the
European Union (commonly known as “Brexit”) remain uncertain, any resulting unfavorable currency impact to the euro
could have an adverse effect on the Company’s profitability and financial condition.
The Company expects to be adversely affected by the economic disruptions caused by the global coronavirus
pandemic. In March 2020, the World Health Organization (“WHO”) declared that a new strain of coronavirus
that originated in Wuhan, China, and has rapidly spread around the world (“COVID-19 outbreak’) is a pandemic
that poses significant risk to the international community. This outbreak contributed to shelter-in-place policies,
unexpected factory closures, supply chain disruptions, and market volatility causing substantial declines in market
capitalization, and occurring in the midst of an already challenging economic environment in some of our markets,
most notably the oil and gas market. As a result of the outbreak, starting in March 2020 and intermittently through
June 30, 2020, the Company suspended or reduced its operations, in whole or in part, in many of its locations. The
Company’s businesses operate in market segments impacted by the COVID-19 outbreak. Operating during a global
pandemic has exposed the Company to a number of material risks, including diminished demand for our products
and our customers’ products, suspensions in the operations of our manufacturing facilities, maintenance of
appropriate labor levels, our ability to ship products to our customers, interruptions in our supply chains and
distribution systems, access to capital and potential increases to the cost of capital, collection of trade receivables
in accordance with their terms and potential further impairment of long-lived assets; all of which, in the aggregate,
have had an adverse effect on the Company’s business, financial condition, results of operations and cash flows. The
depth and duration of the pandemic is unknown. Management continues to actively monitor the global situation and
its effect on financial condition, liquidity, operations, suppliers, industry and workforce. We are unable to estimate
the full extent or nature of the impact of COVID-19 at this time.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 15
Many of the Company’s products are directly or indirectly used in oil exploration and oil drilling, and the recent
unprecedented drastic drop in oil prices is expected to have an adverse impact to the Company’s business. 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. Significant decreases in oil prices and reduced demand for oil and capital investment in the oil and energy
markets adversely affect the sales of these products and the Company’s profitability. The recent unprecedented drop
in oil prices, as well as the cyclical nature of the global oil and gas market, presents the high probability of a severe
cutback in demand for our products, which would create a severe 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 the Company expects that they
will be able to support its 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 its sales, profitability
and relationships with its 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. In addition, recent developments in tariff regulations
in the U.S. and foreign jurisdictions have resulted in uncertainty regarding international trade policies and future
commodity prices, contributing to an increased risk of higher commodity costs that could have an adverse impact on
the Company’s profitability, financial condition and results of operations. The Company’s profitability is dependent, in
part, on commodity costs. 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 the Company’s
future profitability.
The current United States administration has signaled support for implementing, and in some instances, has already
proposed or taken action with respect to, major changes to certain trade policies, such as the imposition of additional tariffs
on imported products and the withdrawal from or renegotiation of certain trade agreements. In response to such actions,
certain countries have imposed retaliatory actions against the United States. The Company anticipates that additional
tariffs or trade restrictions resulting from “trade wars” could result in an increase in its cost of sales and there can be no
assurance that the Company will be able to pass any of the increases in raw material costs directly resulting from the tariff
to its customers. Given that it procures many of the raw materials that it uses to create its products directly or indirectly
from outside of the United States, the imposition of tariffs and other potential changes in U.S. trade policy could increase
the cost or limit the availability of such raw materials, which could hurt its competitive position and adversely impact
its business, financial condition and results of operations. In addition, the Company sells a significant proportion of its
products to customers outside of the United States. Retaliatory actions by other countries could result in increases in the
price of its products, which could limit demand for such products, hurt its global competitive position and have a material
adverse effect on the Company’s business, financial condition and results of operations.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 16
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 that accounted for 10% or more of consolidated net sales in fiscal
2020, 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.
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 are some 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
66% of the Company’s consolidated net sales for fiscal 2020. The Company has international manufacturing
operations in Belgium, Italy, the Netherlands and Switzerland. In addition, the Company has international
distribution operations in Singapore, China, Australia, Japan, Italy, Belgium, and India. The Company’s
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, including dividends
® problems with the transportation or delivery of its products
® issues arising from cultural or language differences
® potential social and labor unrest as well as public health and political crises
® 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
® compliance with the Foreign Corrupt Practices Act
These factors could adversely affect the Company’s 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
2020 sales, came from its 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,
labor force disruptions 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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 17
A relocation of part of the Company’s manufacturing facilities from Racine, WI to Lufkin, TX could adversely
affect its business, financial condition and results of operations. Effective with the execution of a lease agreement
with the city of Lufkin, Texas on July 31, 2020, the Company will begin the transfer of inventories and certain
manufacturing assets and its manufacturing process for its Industrial products line to Lufkin, Texas. The costs of
building out and relocating a production facility could be significant. This relocation may pose significant risks,
which could include the risks that:
® we may be unable to integrate successfully the relocated manufacturing operations;
® we may be unable to coordinate management and integrate and retain employees of the relocated
manufacturing operations;
® we may face difficulties in implementing and maintaining consistent standards, controls, procedures,
policies and information systems;
® we may fail to realize anticipated synergies, economies of scale or other anticipated benefits, or to
maintain operating margins;
® potential strains on our personnel, systems and resources, and diversion of attention from other priorities; and
® any unforeseen or contingent liabilities of the relocated manufacturing operations.
The Company entered into a new credit agreement in June 2018 and significantly increased its indebtedness.
The ability to service the requirements of the new debt depends on the ability to generate cash and/or refinance
its indebtedness as it becomes due, and depends on many factors, some of which are beyond the Company’s control.
The Company entered into a new credit agreement on June 29, 2018. The Company’s ability to make payments on
its indebtedness, including those under the new credit agreement, and to fund planned capital expenditures, research
and development efforts and other corporate expenses depends on the Company’s future operating performance and
on economic, financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond its
control. The Company cannot assure that its business will generate sufficient cash flow from operations, or operating
improvements will be realized or that future borrowings will be available to it in an amount sufficient to enable it to repay
its indebtedness or to fund its other operating requirements. Significant delays in its planned capital expenditures may
materially and adversely affect the Company’s future revenue prospects.
Any failure to meet debt obligations and financial covenants, and maintain adequate asset-based borrowing
capacity could adversely affect the Company’s business and financial condition. The Company’s five-year
revolving credit facility entered into on June 29, 2018 is secured by certain personal property assets such as
accounts receivable, inventory, and machinery and equipment. Under this agreement, the Company’s borrowing
capacity is based on the eligible balances of these assets and it is required to maintain sufficient borrowing base
at all times to secure its outstanding borrowings. The Company is also required to comply with a minimum Debt
to EBITDA ratio and/ or a minimum EBITDA. As of June 30, 2020, the Company had a borrowing capacity that
exceeded its outstanding loan balance (see Note H, Debt, of the notes to the consolidated financial statements).
It has also complied with financial covenants, after successfully negotiating and amending portions of the credit
agreement with the bank. Based on its annual financial plan, the Company believes that it will generate sufficient
cash flow levels throughout fiscal 2021 in order to maintain compliance with this borrowing base. 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.
The Company may not be entitled to forgiveness of its recently received Paycheck Protection Program Loan
(“PPP loan”), and its application for the PPP loan could in the future be determined to have been impermissible.
On April 17, 2020 the Company received proceeds of $8,200 from a loan under the PPP of the CARES Act,
which it has used to retain current employees, maintain payroll and make lease and utility payments. The PPP loan
matures on April 17, 2022 if not forgiven and bears annual interest at a rate of 1.0%. The Company has accounted
for the full proceeds as a loan, and has not given accounting consideration of the potential forgiveness in its June
30, 2020 financial statements.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 18
Under the terms of the CARES Act, PPP loan recipients must meet certain eligibility criteria. Due to the size of the
PPP loan, it is subject to review by regulators. The Company can be granted forgiveness for all or a portion of loans
granted under the PPP. Such forgiveness will be determined by the bank, subject to limitations, based on the use of
loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The Company
has considered the requirements of the PPP Loan and believes it is within the eligibility threshold. It has used the
loan proceeds in accordance with PPP loan forgiveness requirements. However, no assurance is provided that the
Company will obtain forgiveness for any portion of the PPP Loan.
Further, if despite the Company’s actions and certification that it satisfied all eligibility requirements for the PPP
loan, it is later determined that it violated applicable laws or was otherwise ineligible to receive the PPP loan, it
may be required to repay the PPP loan in its entirety in a lump sum or be subject to additional penalties, which
could result in adverse publicity and damage to the Company’s reputation. If these events were to transpire, they
could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company has made certain assumptions relating to the acquisition of Veth Propulsion in its forecasts that may
prove to be materially inaccurate. The integration of Veth Propulsion into the Company’s business processes continues.
While the integration is currently proceeding as planned, the Company has made certain longer term assumptions relating
to the forecast level of synergies and associated costs of the acquisition of Veth Propulsion that may be inaccurate based
on the information that was available to the Company or as a result of the failure to realize the expected benefits of the
acquisition, higher than expected integration costs, unknown liabilities and global economic and business conditions
that may adversely affect the combined company following the completion of the acquisition. The combination of the
businesses will require significant management attention, and the Company may incur significant additional integration
costs because of integration difficulties and other challenges.
The Company carries a significant amount of intangible assets, but it may never fully realize the full value of these
assets. The Company recorded significant non-cash goodwill impairment charges in the third quarter of fiscal 2020,
as well as in prior fiscal years. As part of the acquisition of Veth Propulsion in July 2018, the Company recorded
goodwill of about $24.0 million and intangible assets in the amount of $26.5 million. In the third quarter of fiscal 2020,
due to its assessment of the adverse economic consequences of the COVID-19 outbreak and the negative trends in its
markets as explained in Note E, Goodwill and Other Intangibles, the Company recorded significant impairment charges
in the amount of $27.6 million, writing off all the goodwill in its books, as well as writing down some intangibles and
other assets. In fiscal 2017 and 2016, when the Company’s markets were significantly adversely affected by the global
oil and gas decline, it recorded significant impairment charges related to two of its prior acquisitions. Any deterioration
in the industries or businesses of the Company may trigger future impairment charges, which may have a material adverse
effect to the Company’s financial results.
The Company may experience negative or unforeseen tax consequences. The Company reviews the probability
of the realization of its 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 the Company’s 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 and changes to tax laws 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.
The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in December 2017. The new law made numerous
changes to U.S. federal corporate tax law that the Company expects will impact its effective tax rate in future
periods. The changes included in the Tax Act are broad and complex. The final impact of the Tax Act may differ
from the Company’s current estimates, possibly materially, due to, among other things, changes in interpretations of
the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 19
standards for U.S. federal income taxes or related interpretations in response to the Tax Act or any updates or
changes to estimates the Company has utilized to calculate the impact. Future changes in tax law in the United
States or the various jurisdictions in which the Company operates 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 breaches 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 fines or penalties, including, among others, under the European Union’s newly
enacted General Data Privacy Regulation, disrupt the Company’s operations, damage its reputation and/or cause a loss
of confidence in the Company’s products and services, which could adversely affect its business, financial condition
and results of operations.
Item 1B. Unresolved Staff Comments
None.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 20
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 763,000 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, Sturtevant, Wisconsin, Lufkin, Texas, Limite sull’Arno, Italy and Papendrecht, Netherlands.
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:
Brisbane, Queensland, Australia
Perth, Western Australia, Australia
Gold Coast, Queensland, Australia
Singapore
Shanghai, China
Guangzhou, China
Chennai, India
Coimbatore, India
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 certain 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 cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
Information About Our Executive Officers
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 29, 2020.
Name
John H. Batten
James E. Feiertag
Jeffrey S. Knutson
Dean J. Bratel
Michael B. Gee
Debbie A. Lange
Denise L. Wilcox
Age
55
63
55
56
53
62
63
Position
Chief Executive Officer
President, Chief Operating Officer
Vice President – Finance, Chief Financial Officer, Treasurer and Secretary
Vice President – Engineering
Vice President – Hybrid Engineering
Corporate Controller
Vice President – Human Resources
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 21
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, Chief Executive Officer. Effective May 2019, Mr. Batten was named Chief Executive Officer.
Prior to that, Mr. Batten served as President and Chief Executive Officer since July 2013, President and Chief
Operations Officer since July 2008, Executive Vice President since October 2004, Vice President and General
Manager – Marine Products since October 2001 and Commercial Manager – Marine since 1998. Mr. Batten
joined Twin Disc in 1996 as an Application Engineer.
James E. Feiertag, President, Chief Operating Officer. Mr. Feiertag joined the company as President and Chief
Operating Officer effective May 1, 2019. Prior to his joining the company, Mr. Feiertag served as President and
CEO of Bemis Manufacturing Company beginning in 2014. Before his role at Bemis, Mr. Feiertag was employed
at Twin Disc from 2000 to 2014 in various roles, including Executive Vice President and Vice President, Manufacturing.
Prior to these roles at Twin Disc, Mr. Feiertag was the Vice President of Manufacturing for the Drives and System
Group of Rockwell Automation.
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).
Dean J. Bratel, Vice President – Engineering. Mr. Bratel assumed his current role on July 13, 2020, after serving as
Vice President, Sales and Applied Technology since August 2016. He served as Vice President, Sales and Marketing
(since 2015), 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.
Michael B. Gee, Vice President – Hybrid Engineering. Mr. Gee assumed his current role on July 13, 2020, after
serving as Vice President, Engineering since January 2015. Prior to that, he was Director of Engineering (since
July 2013), Chief Engineer (since September 2004) and has held several other positions in the Company, including
Engineering Manager, Project Engineer, Design Engineer, and Experimental 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 her role at Sealed Air, Ms. Lange held the position of Director of Global
Accounting and Reporting at Diversey, Inc.
Denise L. Wilcox, Vice President - Human Resources. Ms. Wilcox was promoted to her current role in November
2004, after serving in the role of Director, Corporate Human Resources since 2002. Prior to that, she held the role
of Manager, Compensation and Benefits since her hire in 1998. Before joining the Company, Ms. Wilcox held
positions at Johnson International and Runzheimer International.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 22
PART II
Item 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases
of Equity Securities
The Company's common stock is traded on the NASDAQ Global Select Market under the symbol TWIN.
Quarter
Fiscal Year Ended
June 30,2020
Low
High
Fiscal Year Ended
June 30, 2019
Low
High
First Quarter
$ 15.18
$ 9.60
$ 27.97
$ 22.31
Second Quarter
12.59
9.50
23.65
13.40
Third Quarter
11.61
6.06
19.11
13.93
Fourth Quarter
8.35
4.84
19.15
13.33
There were no dividend payments made in the fiscal years ended June 30, 2020 and 2019.
For information regarding the Company’s equity-based compensation plans, see the discussion under Item 12 of this
report. As of August 20, 2020, shareholders of record numbered 405.
Recent Sales of Unregistered Securities
On May 13, 2019, the Company issued 139,347 shares of its common stock, valued at $1,991 ($14.29 per share),
to settle its earn-out obligation under the June 13, 2018 Share Purchase Agreement entered into by Twin Disc NL
Holding B.V., a wholly-owned subsidiary of the Company, with Het Komt Vast Goed B.V., the prior parent of
Veth Propulsion Holding B.V. The shares were issued pursuant to Section 4(a)(2) of the Securities Act of 1933,
as amended, as the Share Purchase Agreement was a privately negotiated transaction that involved substantial due
diligence on the part of all parties, and the shares were issued to three entities related to Het Komt Vast Goed B.V.
Issuer Purchases of Equity Securities
Period
(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
March 28, 2020 – April 24, 2020
April 25, 2020 – May 29, 2020
May 30, 2020 – June 30, 2020
Total
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. The Company did not make any
purchases during fiscal 2019 and 2020. As of June 30, 2020, 315,000 shares remain authorized for purchase.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 23
Item 6. Selected Financial Data
Financial Highlights
(in thousands, except per share amounts)
Statement of Operations Data:
Net sales
Net (loss) income
$
2020
246,838
(39,571)
$
2019
302,663
10,796
$
2018
240,733
9,647
$
2017
168,182
(6,115)
$
2016
166,282
(13,013)
Fiscal Years Ended June 30,
Net (loss) income attributable to Twin Disc
(39,817)
10,673
9,528
(6,294)
(13,104)
Basic (loss) income per share attributable to
Twin Disc common shareholders
Diluted (loss) income per share attributable to
Twin Disc common shareholders
Dividends per share
0.84
0.83
-
0.82
0.82
-
(0.56)
(0.56)
-
(1.17)
(1.17)
0.18
(3.03)
(3.03)
-
June 30,
Balance Sheet Data
Total assets
Total long-term debt
$
2020
294,127
42,587
$
2019
346,870
42,491
$
2018
241,240
4,824
$
2017
210,898
6,323
$
2016
213,922
8,501
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Smaller Reporting Company Status
Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company
qualifies as a smaller reporting company based on its public float as of the last business day of the second quarter
of fiscal 2020. Accordingly, it has scaled some of its disclosures of financial and non-financial information in this
annual report. The Company will continue to determine whether to provide additional scaled disclosures of financial
or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller
reporting company under SEC rules.
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.
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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 24
As discussed in Item 1A, Risk Factors, and Note A, Basis of Presentation and Significant Accounting Policies of
the notes to the consolidated financial statements, as a result of the COVID-19 outbreak, the Company’s operations
have decreased, starting on or around mid-March 2020, on a staggered basis, to curtail the spread of the virus and
in compliance with regulatory authorities. The Company’s plants and offices around the world have been subject
to intermittent shutdowns, impacting the timeliness of supply chain arrangements and product shipments.
The COVID-19 outbreak exacerbates an already depressed global oil and gas market, which has recently been
severely damaged by unprecedented drastic declines in the price of oil. The consensus of experts is that the price
of oil was driven down by an oversupply in the global market, and aggravated by the price war among members
of OPEC and non-OPEC producer nations. The COVID-19 outbreak, and its impact on consumption behaviors
and expected general market contraction, impacts the future demand for oil, and exacerbates the already challenging
market conditions.
The Company has already seen the impact of the depressed global energy market on its operations. Its North
American incoming orders for the fiscal 2020 fourth quarter were down approximately 50% from the fiscal
year-to-date run rate through the third fiscal quarter.
As described further in Note E, Goodwill and Other Intangibles, the Company recorded significant non-cash
impairment charges during the year. While the Company continues to have a positive outlook of its operations
in Europe, both in the European Propulsion and European Industrial reporting units, and remains committed
to supporting those operations, the adverse economic effects of the COVID-19 outbreak are not fully known.
However, there is consensus that the impact will be adverse. Hence, management has modeled those expectations
from industry and subject matter experts and determined that prudence in the face of uncertainty warrants a
robust scenario modeling approach. This approach was deployed in the Company’s goodwill and long-lived asset
impairment analyses. In assessing the current environment, management expects that a contraction of the global
economy, as is predicted by many experts, would reduce or shift the demand for its products in the near term.
For example, the Company expects that the demand for certain of the reporting units’ end-market products, such
as passenger leisure cruise vessels, passenger ferries, and other commercial vessels that operate based on general
economic activities, will likely be adversely impacted as social restrictions are put in place by governments to
curb the outbreak. As a consequence of these macroeconomic developments, market insights and expectations,
the Company recorded asset impairment charges in the third fiscal quarter, primarily consisting of goodwill
and other intangibles, in the amount of $27,603.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. The depth and duration
of the economic effects caused by the outbreak are unknown. Management is actively monitoring the global situation
and its effect on its financial condition, liquidity, operations, suppliers, industry, and workforce. Some of the initiatives
undertaken so far include:
• Protecting the welfare of our employees worldwide by implementing remote work arrangements,
temporarily closing or suspending plants and offices, enhancing safety protocols to those employees
who cannot work from home;
• Availing of programs made available by the various countries through government-sponsored programs,
such as emergency liquidity credit facilities, enhanced unemployment compensation benefits and furlough
arrangements;
• Working with customers to address the timing of customer orders and payment needs during the crisis;
•
Implementing wage reduction actions, curtailing non-critical capital expenditures, and other cost reduction
and cash preservation actions;
• Maintaining effective governance and internal controls in a remote environment.
The Company continues to evaluate all possible avenues to reduce costs and improve liquidity in light of the
unprecedented uncertainty in the global economy.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 25
The following discussion of results of operations reflects actual Company performance through June 30, 2020.
They do not include management’s view of future performance as the COVID-19 impacts, as severe as they are
expected to be, are difficult to predict with specificity.
Results of Operations
(In thousands)
Net sales
Cost of goods sold
Gross profit
M arketing, engineering and administrative expenses
Restructuring expenses
Goodwill and other asset impairment charge
Other operating income
(Loss) income from operations
Fiscal 2020 Compared to Fiscal 2019
Net Sales
% of
Sales
2020
$ 246,838
191,130
2019
$ 302,663
213,022
% of
Sales
55,708 22.6
89,641 29.6
63,218 25.6
71,541 23.6
5,138 2.1
27,603 11.2
1,179 0.4
- -
- - (1,577) (0.5)
$ 18,498 6.1
$ (40,251) (16.3)
Net sales for fiscal 2020 decreased 18.4%, or $55.8 million, to $246.8 million from $302.7 million in fiscal 2019.
The Company experienced weakness in North American demand for the Company’s oil and gas related products,
with a decline of approximately $49.7 million compared to the prior year. This weakness was a function of a cyclical
downturn that began at the end of fiscal 2019, exacerbated by an oil price war between Russia and Saudi Arabi in
the third quarter of fiscal 2020, and the significant decline in global demand for oil as a result of the COVID-19
pandemic. Similarly, the remaining decline in the Company’s global industrial markets can be attributed primarily
to global economic weakness during the second half of the fiscal year, brought on by the COVID-19 pandemic.
Currency translation had a $4.8 million unfavorable impact on fiscal 2020 sales.
Sales at our manufacturing segment decreased 18.9%, or $52.9 million, versus the same period last year. The largest
decline was seen at the Company’s North American manufacturing operation, the largest, which experienced a 27.4%
decline in sales compared to fiscal 2019. The primary driver for this decrease was reduced demand for the Company’s oil
and gas related products, primarily new and replacement units, throughout the fiscal year. This operation also experienced
a general decline across its product lines as a result of the global economic impact of the COVID-19 pandemic. The
Company’s Veth Propulsion operation in the Netherlands generated a 6.2% increase in sales in fiscal 2020, offsetting
the impact of the weakening global economy with improved market penetration and acceptance in their non-traditional
markets (Asia and North America). The Company’s Italian manufacturing operations were essentially flat for the year,
as a weaker fourth quarter offset some improvement through the first three fiscal quarters. The Company’s Belgian
manufacturing operation saw a 27.8% decrease in sales in fiscal 2020 on weaker demand in the marine markets served by
this operation resulting from the COVID-19 impact, along with a currency impact. The Company’s Swiss manufacturing
operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 25.9%
decrease in sales, also due to generally weaker economic conditions.
Sales at our distribution segment were down 10.0%, or $10.7 million, compared to fiscal 2019. The Company’s
Asian distribution operation in Singapore, China and Japan experienced a 2.6% increase in sales due to a strong
demand for the Company’s oil and gas transmissions, partially offset by a weakening Asian economy primarily in
the fourth fiscal quarter. The Company’s distribution operation in the Northwest of the United States and Southwest
of Canada experienced a decrease in sales of $13.2 million as this business was sold in early March 2019. The Company’s
European distribution operation saw an increase of $2.5 million as this is a new entity established in fiscal 2019 to
distribute the Company’s products in the European market. The Company’s North American distribution operation
saw a decline of 4.3% on the reduced activity in the North American oil and gas market and a weaker North American
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 26
economy in the fourth fiscal quarter. The Company’s distribution operation in Australia, which provides boat
accessories, propulsion and marine transmission systems primarily for the pleasure craft market, saw sales decline
slightly (1.2%), driven by a significant unfavorable currency impact (7.7%).
Net sales for the Company’s marine transmission, propulsion and boat management systems were up 1.5% compared
to the prior fiscal year. This increase primarily reflects a strong performance from the Veth Propulsion acquisition, which
saw sales increase by $3.4 million (6.2%) compared to fiscal 2019. In the off-highway transmission market, the
year-over-year decrease of 44.4% can be attributed primarily to decreased shipments of the Company’s pressure
pumping transmission systems and components to the North American market driven by the significant decline in global
oil prices. The decrease experienced in the Company’s industrial products of 22.3% was seen primarily in the second half
of the fiscal year, brought on by a weakening global economy and the impacts of the COVID-19 pandemic.
Geographically, sales to the U.S. and Canada declined 38% in fiscal 2020 compared to fiscal 2019, representing
36% of consolidated sales for fiscal 2020 compared to 47% in fiscal 2019. The reduction is primarily due to the
reduced shipments of oil and gas related products into North America during the fiscal 2020. Sales into the Asia
Pacific market declined 9% compared to fiscal 2019 and represented approximately 21% of sales in fiscal 2020,
compared to 18% in fiscal 2019. Sales into the European market improved approximately 8% from fiscal 2019
levels while accounting for 37% of consolidated net sales compared to 28% in fiscal 2019. The increase is primarily
the result of the strong performance by the Veth Propulsion acquisition, which has a high percentage of sales into
the European market. See Note K, Business Segments and Foreign Operations, of the notes to the consolidated
financial statements for more information on the Company’s business segments and foreign operations.
Gross Profit
In fiscal 2020, gross profit decreased $33.9 million, or 37.9%, to $55.7 million on a sales decrease of $55.8 million.
Gross profit as a percentage of sales decreased 700 basis points in fiscal 2020 to 22.6%, compared to 29.6% in fiscal
2019. The table below summarizes the gross profit trend by quarter for fiscal years 2020 and 2019:
Gross Profit:
($ millions)
2020
2019
2020
2019
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Year
$9.6
$24.0
$15.7
$26.1
$16.5
$23.1
$13.9
$16.4
$55.7
$89.6
16.3%
32.1%
26.4%
33.4%
24.1%
29.9%
23.3%
22.7%
22.6%
29.6%
There were a number of factors that impacted the Company’s overall gross profit rate in fiscal 2020. Gross profit for
the year was primarily impacted by reduced volumes and an unfavorable product mix. This was driven by reduced
sales of high-margin oil and gas transmissions and parts. Margin was also negatively impacted by a $6.2 million
charge for a product performance issue related to one of the Company’s oil and gas transmission models. The Company
estimates the net unfavorable impact of reduced volumes on gross profit in fiscal 2020 was approximately $16.5
million. The unfavorable shift in product mix, primarily related to the reduced shipments of the Company’s high
margin oil and gas transmission units and aftermarket products, had an estimated unfavorable impact of $15.3 million.
Marketing, Engineering and Administrative (ME&A) Expenses
Marketing, engineering, and administrative (ME&A) expenses of $63.2 million were down $8.3 million, or 11.6%,
compared to the prior fiscal year. As a percentage of sales, ME&A expenses increased to 25.6% of sales versus
23.6% of sales in fiscal 2019. The decrease in spending in fiscal 2020 compared to the prior year was driven by
reduced spending on professional fees ($1.9 million), the elimination of the global bonus program for fiscal 2020
($1.7 million), the impact of the sale of Mill Log in the fiscal 2019 third quarter ($1.8 million), reduced stock based
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 27
compensation ($0.7 million), lower marketing spending ($0.8 million), reduced corporate travel expense ($0.7
million), a favorable foreign currency impact ($0.9 million) and general cost containment measures ($1.7 million).
These decreases were partially offset by an increase to intangible amortization expense ($1.9 million).
Restructuring of Operations
During the course of fiscal 2020, the Company incurred $5.1 million in restructuring charges. Included in this amount
is $3.2 million related to the termination of a marine propulsion program, for which the Company had provided
development and production services. The $3.2 million included a $2.2 million non-cash write-off of assets and
liabilities associated with the program and $1.0 million of cash payments to satisfy supplier commitments related to
the program. The remaining $1.9 million of restructuring charges relates to productivity and cost reduction actions
at the Company’s domestic and European operations. The Company continues to focus on actively managing its cost
structure and reducing fixed costs in light of the ongoing market challenges.
Impairment Charges
As described in Note E, Goodwill and Other Intangibles, due to the occurrence of a triggering event in the third
fiscal quarter, the Company performed an assessment of its goodwill, intangibles and other long-lived assets as of
March 27, 2020. As a result, the Company recorded an impairment charge of $27.6 million during the third quarter
of fiscal 2020. This non-cash impairment charge does not result in any future cash expenditures, impact liquidity,
affect ongoing business or financial performance of the Company, impact compliance with our lending arrangements
or reduce borrowing capacity.
Interest Expense
Interest expense of $1.9 million for fiscal 2020 was essentially unchanged from the prior fiscal year.
Other Income (Expense), Net and Interest Income
In fiscal 2020, other expense, net, decreased $0.4 million primarily due to the impact of currency movements related
to the euro and Asian currencies.
Income Taxes
The effective tax rate for the twelve months of fiscal 2020 was 9.5%, which was significantly lower than the prior
year rate of 25.6%. Under the Tax Cuts and Jobs Act, a company is prohibited from recognizing certain foreign
global intangible low taxed income (“GILTI”) deductions and credits when in a domestic loss position, but is
required to include the foreign GILTI income inclusions. In the current year, the benefit generated from domestic
losses was reduced by the required GILTI foreign income inclusions and no GILTI deductions. The $5.8 million
GILTI inclusion and deemed taxes decreased the rate by 2.8%. Management determined that the carrying value of
certain goodwill and intangibles exceeded the fair value and a $27.6 million impairment loss was calculated which
resulted in a decrease to the effective tax rate of 10.9%. Income generated in foreign jurisdictions and other tax
preference items also impacted the rate.
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. 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 all of the deferred tax assets.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 28
Order Rates
As of June 30, 2020, the Company’s backlog of orders scheduled for shipment during the next six months (six-
month backlog) was $66.6 million or approximately 33% lower than the six-month backlog of $99.8 million as
of June 30, 2019. The reduced backlog is primarily attributable to a lower level of North American oil and gas
transmission units on order, along with the global economic weakness resulting from the COVID-19 pandemic
and its impact across the Company’s products.
Liquidity and Capital Resources
Fiscal Years 2020 and 2019
The net cash provided by operating activities in fiscal 2020 totaled $9.1 million, an increase of $14.6 million from
the prior fiscal year. While net earnings decreased by $50.4 million from the prior year, a significant portion of this
decline related to a $27.6 million non-cash impairment charge. In addition, working capital improved by $20.0 million
during the year, with the largest contributions coming from trade receivables ($13.1 million) and inventory ($6.8
million), as the Company focused on working capital management in light of difficult market conditions.
The net cash used by investing activities for fiscal 2020 primarily represents capital spending activity totaling
$10.7 million. This represents a $1.3 million (10.7%) decrease in spending on capital projects compared to fiscal
2019. The Company continued to invest in critical machine tools with improved technology to increase productivity
and quality performance.
The net cash used by financing activities relates to payments of withholding taxes on stock compensation ($0.9
million) and dividends paid to a noncontrolling interest ($0.3 million). Total debt remained relatively unchanged
compared to the prior year-end. During fiscal 2020, 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.
Future Liquidity and Capital Resources
On June 29, 2018, the Company entered into the Credit Agreement (the “Credit Agreement”) with BMO Harris
Bank N.A. (“BMO”) that provided for the assignment and assumption of the previously existing loans between the
Company and Bank of Montreal (the “2016 Credit Agreement”) and subsequent amendments into a term loan (the
“Term Loan”) and revolving credit loans (each a “Revolving Loan” and, collectively, the “Revolving Loans,” and,
together with the Term Loan, the “Loans”). Pursuant to the Credit Agreement, BMO agreed to make the Term Loan
to the Company in a principal amount not to exceed $35.0 million and the Company may, from time to time prior to
the maturity date, enter into Revolving Loans in amounts not to exceed, in the aggregate, $50.0 million (the “Revolving
Credit Commitment”). The Credit Agreement also allows the Company to obtain Letters of Credit from BMO,
which if drawn upon by the beneficiary thereof and paid by BMO, would become Revolving Loans. Under the
Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $3.0 million in
any fiscal year.
On March 4, 2019, the Company entered into a second amendment (the “Second Amendment”) to the Credit
Agreement. The Second Amendment reduced the principal amount of the term loan commitment under the Credit
Agreement from $35.0 million to $20.0 million. In connection with the Second Amendment, the Company issued
an amended and restated term note in the amount of $20.0 million to the Bank, which amended the original $35.0
million note provided under the Credit Agreement.
Prior to entering into the Second Amendment, the outstanding principal amount of the term loan (the “Term Loan”)
under the Credit Agreement was $10.8 million. On the date of the Second Amendment, the Bank made an additional
advance on the Term Loan to the Company in the amount of $9.2 million. The Second Amendment also extended
the maturity date of the Term Loan from January 2, 2020 to March 4, 2026, and added a requirement that the
Company make principal installments of $0.5 million per quarter starting with the quarter ending June 30, 2019.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 29
The Second Amendment also reduced the applicable margin for purposes of determining the interest rate applicable
to the Term Loan. Previously, the applicable margin was 3.00%, which was added to the Monthly Reset LIBOR
Rate or the Adjusted LIBOR, as applicable. Under the Second Amendment, the applicable margin was between
1.375% and 2.375%, depending on the Company’s total funded debt to EBITDA ratio.
The Second Amendment also adjusted certain financial covenants made by the Company under the Credit Agreement.
Specifically, the Company covenanted (i) not to allow its total funded debt to EBITDA ratio to be greater than 3.00
to 1.00 (the cap had previously been 3.50 to 1.00 for quarters ending on or before September 30, 2019 and 3.25 to 1.00
for quarters ending on or about December 31, 2019 through September 30, 2020), and (ii) that its tangible net worth will
not be less than $100.0 million plus 50% of net income for each fiscal year ending on and after June 30, 2019 for which
net income is a positive number (the $100.0 million figure had previously been $70.0 million).
On January 28, 2020, the Company entered into a third amendment (the “Third Amendment”) to the Credit Agreement.
The Third Amendment restated the financial covenant provisions related to the maximum allowable ratio of total funded
debt to EBITDA from 3.00 to 1.00 to 4.00 to 1.00 for the quarter ended December 27, 2019, 5.00 to 1.00 for the quarter
ending March 27, 2020, 4.00 to 1.00 for the quarter ending June 30, 2020, 3.50 to 1.00 for the quarter ending September
25, 2020 and 3.00 to 1.00 for quarters ending on or after December 25, 2020. For purposes of determining EBITDA, the
Third Amendment added back extraordinary expenses (not to exceed $3.9 million) related to the previously reported
isolated product performance issue on one of the Company’s oil and gas transmission models at certain installations.
Under the Third Amendment, the applicable margin for revolving loans, letters of credit, and term loans was between
1.25% and 3.375%, depending on the Company’s total funded debt to EBITDA ratio.
On July 22 2020, the Company entered into a fifth amendment to the Credit Agreement (the “Fifth Amendment”)
that amends the Credit Agreement dated as of June 29, 2018, as amended between the Company and BMO. The
Fifth Amendment reduced BMO’s Revolving Credit Commitment from $50.0 million to $45.0 million. The Fifth
Amendment also gives the Company the option to make interest-only payments on the Term Loan for quarterly
payments occurring on September 30, 2020 and December 31, 2020, and limits the Company’s Capital Expenditures
for the fiscal year ending June 30, 2021 to $10.0 million.
The Fifth Amendment provides the Company with relief from its Total Funded Debt to EBITDA ratio financial
covenant under the Credit Agreement through (and including) the earlier of June 30, 2021 or a date selected by
the Company. During the financial covenant relief period:
• The “Applicable Margin” to be applied to Revolving Loans, the Term Loan, and the Commitment/
Facility Fee will be increased to 3.25%, 3.875%, and 0.20%, respectively.
• The Company may not make certain restricted payments (specifically, cash dividends, distributions,
purchases, redemptions or other acquisitions of or with respect to shares of its common stock or other
common equity interests).
• The Company must maintain liquidity (as defined in the Fifth Amendment) of at least $15.0 million.
• The Company must maintain minimum EBITDA of at least (1) $1.0 million for the fiscal quarter ending
June 30, 2020 and the two fiscal quarters ending on or about September 30, 2020; (2) $2.5 million for the
three fiscal quarters ending on or about December 31, 2020; (3) $6.0 million for the four fiscal quarters
ending on or about March 31, 2021; and (4) $10.0 million for the four fiscal quarters ending June 30, 2021.
For purposes of the minimum EBITDA covenant and the Total Funded Debt to EBITDA ratio, the Fifth Amendment
clarified that EBITDA shall exclude any gain that is realized on the forgiveness of the Small Business Administration
Paycheck Protection Program loan that the Company previously received.
The Fifth Amendment also changed the definition of “LIBOR” (used in calculating interest on Eurodollar Loans),
“Monthly Reset LIBOR Rate” (used in calculating interest on LIBOR Loans), and “LIBOR Quoted Rate” (used
in the definition of “Base Rate,” which is used in calculating interest on Letters of Credit that are drawn upon
and not timely reimbursed).
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 30
The Company also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security
interest in deposit accounts the Company maintains with the Bank. Under the Fifth Amendment, the Bank may not
provide a notice of exclusive control of a deposit account (thereby obtaining exclusive control of the account) prior
to the occurrence or existence of a Default or an Event of Default under the Credit Agreement or otherwise upon
the occurrence or existence of an event or condition that would, but for the passage of time or the giving of notice,
constitute a Default or an Event of Default under the Credit Agreement.
Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property,
including accounts receivable, inventory, machinery and equipment, and intellectual property. The Company has
also pledged 100% of its equity interests in certain domestic subsidiaries and 65% of its equity interests in certain
foreign subsidiaries. The Company also entered into a Collateral Assignment of Rights under Purchase Agreement
for its acquisition of Veth Propulsion. To effect these security interests, the Company entered into various amendment and
assignment agreements that consent to the assignment of certain agreements previously entered into between the Company
and the Bank of Montreal in connection with the 2016 Credit Agreement. The Company also amended and assigned to
BMO a Negative Pledge Agreement that it has previously entered into with Bank of Montreal, pursuant to which it agreed
not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Credit Agreement and the
Negative Pledge Agreement.
Upon the occurrence of an Event of Default, BMO may take the following actions upon written notice to the
Company: (1) terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding
under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately Cash
Collateralize L/C Obligations in an amount equal to 105% of the aggregate L/C Obligations or a greater amount if
BMO determines a greater amount is necessary. If such Event of Default is due to the Company’s bankruptcy, BMO
may take the three actions listed above without notice to the Company.
On April 17, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in
the amount of $8.2 million (the “PPP Loan”) made to the Company under the Paycheck Protection Program (“PPP”). The
PPP was established under the CARES Act and is a program under the U.S. Small Business Administration (the “SBA”).
The PPP Loan to the Company is administered by BMO. The PPP Loan has a two-year term and bears interest at a rate
of 1.0% per annum. Monthly principal and interest payments are deferred for six months. Beginning November 17, 2020,
seven months from the date of the PPP Note, the Company is required to make monthly payments of principal and interest
to BMO.
Under the terms of the CARES Act, PPP loan recipients can be granted forgiveness for all or a portion of loans granted
under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment
of payroll costs and any payments of mortgage interest, rent, and utilities. The Company intends to use the Loan proceeds
in accordance with PPP loan forgiveness requirements. However, no assurance is provided that the Company will obtain
forgiveness for any portion of the PPP Loan.
In connection with the PPP Loan, the Company entered into a fourth amendment to the Credit Agreement (the “Fourth
Amendment”) on April 17, 2020. The Fourth Amendment: (1) permits the Company to incur indebtedness in the form
of the PPP Loan notwithstanding the Credit Agreement’s restrictions limiting the Company’s ability to incur indebtedness,
and (2) provides that the PPP Loan (to the extent that the PPP Loan is forgiven) shall be disregarded for purposes of
calculating financial covenants in the Credit Agreement. Any unforgiven portion of the PPP Loan and the interest thereon
will not be disregarded for purposes of calculating the covenants.
The Company is closely tracking qualified expenses to ensure its compliance to the PPP program and to support its
application for forgiveness. As of June 30, 2020, the Company estimates that the amount of forgivable expenses it
has incurred to date is approximately $6.0 million. These expenses are included in cost of goods sold and marketing,
engineering and administrative expenses in the accompanying statement of operations and comprehensive (loss)
income. While the forgiveness of the loan is not taxable, the expenses that were used by the funds are not deductible
for tax purposes. Although the rules are still fluid and subject to revisions, currently the Company expects that at the
end of the measurement period, it would be able to provide support and qualify for loan forgiveness in the amount of
approximately $7.0 million to $7.6 million. If, and when, forgiveness of this amount is assured, the Company would
record this as a gain on debt extinguishment in fiscal 2021. This is described further in Note H, Debt, of the notes
to the consolidated financial statements.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 31
The Company has no material off-balance-sheet arrangements, and it continues to have sufficient liquidity for near-term
needs. The Company had approximately $27.0 million of available borrowings under the Credit Agreement as of June 30,
2020. The Company expects to continue to generate enough cash from operations, as well as its credit facilities, to meet its
operating and investing needs. As of June 30, 2020, the Company also had cash of $10.7 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 2021, the Company expects to contribute $2.3 million to its defined benefit pension plans, the
minimum contribution required.
Net working capital decreased $20.0 million, or 15.7%, during fiscal 2020 and the current ratio (calculated as total
current assets divided by total current liabilities) decreased from 2.7 at June 30, 2019 to 2.6 at June 30, 2020. The
decrease in net working capital was primarily driven by volume driven reductions in trade accounts receivable and
inventory, along with aggressive management of working capital in light of difficult economic conditions.
The Company expects capital expenditures to be approximately $7 million - $9 million in fiscal 2021. These
anticipated expenditures reflect the Company’s plans to moderate investment in maintenance capital and modern
equipment to address the liquidity demands of an anticipated challenging global economy.
Management believes that available cash, the BMO credit facility, cash generated from future operations, 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 material off-balance sheet arrangements as of June 30, 2020 and 2019. On July 31, 2020,
the Company finalized an agreement to lease a manufacturing, assembly and office facility in Lufkin, Texas,
with an initial term of 15 years and minimum annual lease payments of $0.4 million.
Other Matters
Critical Accounting Policies and Estimates
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, Basis of Presentation and Significant
Accounting Policies, of the notes 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 its reported financial results are the following:
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on payment history
and the customer’s credit-worthiness as determined by review of current credit information. The Company continuously
monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon
its historical experience and any specific customer-collection issues. In addition, senior management reviews the accounts
receivable aging on a monthly basis to determine if any receivable balances may be uncollectible. Although the
Company’s accounts receivable are dispersed among a large customer base, a significant change in the liquidity
or financial position of any one of its largest customers could have a material adverse impact on the collectability
of its accounts receivable and future operating results.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 32
Inventory
Inventories are valued at the lower of cost or net realizable value. 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
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 reporting units using a fair-value method
based on management’s judgments and assumptions or third party valuations.
In determining the fair value of the Company’s 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. The 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.
The following are key assumptions to the Company’s discounted cash flow model:
Business Projections – The Company makes assumptions about the level of sales for each fiscal year including
expected growth, if any. This assumption drives its planning for volumes, mix, and pricing. The Company also
makes assumptions about its cost levels (e.g., capacity utilization, cost performance, etc.). These assumptions are
key inputs for developing its cash flow projections. These projections are derived using the Company’s internal
business plans that are reviewed 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.
The Company is subject to financial statement risk to the extent the carrying amount of a reporting unit exceeds its
fair value. The Company believes that the economic disruptions and unprecedented market volatilities and uncertainties
resulting from the COVID-19 outbreak was a triggering event in the third quarter of fiscal 2020. Consequently, it
performed an interim goodwill impairment test as of the quarter ended March 27, 2020, and recorded a goodwill
impairment charge of $25.4 million, that completely wrote-off goodwill from its financial statements. See discussion
in Note E, Goodwill and Other Intangibles, of the notes to the consolidated financial statements.
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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 33
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 the Company’s best estimate of the amounts necessary to settle future and existing claims on
products sold as of the balance sheet date. When evaluating the adequacy of the reserve for warranty costs, management
takes into consideration the term of the warranty coverage, historical claim rates and costs of repair, knowledge of the type
and volume of new products and economic trends. While the Company believes that 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 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 Willis Towers Watson BOND:Link model at June 30, 2020 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 Society of Actuaries PRI-2012 base tables for annuitants and
non-annuitants, adjusted for generational mortality improvement based on the Society of Actuaries MP-2019
projection scale.
• 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. 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.
Recently Issued Accounting Standards
See Note A, Basis of Presentation and Significant Accounting Policies, of the notes to the consolidated financial
statements for a discussion of recently issued accounting standards.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 34
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company is electing not to provide this disclosure due to its status as a Smaller Reporting Company.
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)
2020
1st Qtr.
2nd Qtr.
3rd Qtr.
4th Qtr.
Year
Net sales
Gross profit
Restructuring expenses
Goodwill and other asset impairment charge -
$ 59,290 $ 59,536 $ 68,636 $ 59,376 $ 246,838
9,636 15,711 16,549 13,812 55,708
121 4,248 532 237 5,138
-
27,603
(6,293) (6,466) (25,176) (1,636) (39,571)
(6,311) (6,516) (25,230) (1,760) (39,817)
27,603 -
Net loss
Net loss attributable to Twin Disc
Basic loss per share
attributable to Twin Disc common
shareholders
Diluted loss per share
attributable to Twin Disc common
shareholders
Dividends per share
2019
Net sales
Gross profit
Restructuring expenses
Net income (loss)
Net income (loss) attributable to Twin Disc
Basic income (loss) per share
attributable to Twin Disc common
shareholders
Diluted income (loss) per share
attributable to Twin Disc common
shareholders
Dividends per share
(0.48) (0.49) (1.92) (0.13) (3.03)
(0.48) (0.49) (1.92) (0.13) (3.03)
-
-
-
-
-
$ 74,689 $ 78,107 $ 77,420 $ 72,447 $ 302,663
23,985 26,088 23,117 16,451 89,641
173 434 131 441 1,179
2,903 4,079 4,587 (773) 10,796
2,862 4,073 4,560 (822) 10,673
0.24 0.31 0.35 (0.06) 0.84
0.24 0.31 0.34 (0.06) 0.83
-
-
-
-
-
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 35
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding Disclosure Controls and Procedures
As required by Rules 13a-15(e) and 15d-15(e) 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
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 its 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, the Company’s management
concluded that its internal control over financial reporting was effective as of June 30, 2020.
RSM US LLP, an independent registered public accounting firm, has audited the Company’s internal control over
financial reporting as of June 30, 2020, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of fiscal 2020, 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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 36
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
For information with respect to the executive officers of the Registrant, see "Information About Our Executive
Officers" 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 29, 2020, 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 29, 2020, 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 or Chief Accounting Officer (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 29, 2020, 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 29, 2020, 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 29, 2020, 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 29, 2020, which
is incorporated into this report by reference.
Item 11. Executive Compensation
The information set forth under the captions "Executive Compensation" and "Director Compensation” in the Proxy
Statement for the Annual Meeting of Shareholders to be held on October 29, 2020, is incorporated into this report
by reference.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 37
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
For information regarding security ownership of certain beneficial owners and management, see the Proxy Statement
for the Annual Meeting of Shareholders to be held on October 29, 2020 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 29, 2020, which is incorporated into this report by reference.
There are no arrangements known to the Registrant, the operation of which may at a subsequent date result in
a change in control of the Registrant.
Item 13. Certain Relationships and Related Transactions, Director Independence
For information with respect to transactions with related persons and policies for the review, approval or ratification
of such transactions, see “Corporate Governance – Review, Approval or Ratification of Transactions with Related
Persons” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020, 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 29, 2020, 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 29, 2020 under the headings “Fees to Independent Registered Public Accounting
Firm” and “Pre-approval Policies and Procedures.”
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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2020 and 2019
Consolidated Statements of Operations and Comprehensive Income for the years
ended June 30, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended June 30, 2020 and 2019
Consolidated Statements of Changes in Equity for the years ended June 30, 2020 and 2019
Notes to Consolidated Financial Statements
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts
40
42
43
44
45
46
86
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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 39
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Twin Disc, Incorporated:
Opinion on the Internal Control Over Financial Reporting
We have audited Twin Disc, Incorporated’s (the Company) internal control over financial reporting as of June 30, 2020,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements of the Company and our report dated August 26, 2020 expressed
an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report
on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit 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 audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
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 (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets 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 (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 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/ RSM US LLP
Milwaukee, Wisconsin
August 26, 2020
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 40
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Twin Disc, Incorporated:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Twin Disc, Incorporated (the Company) as
of June 30, 2020 and 2019, the related consolidated statements of operations and comprehensive (loss) income,
changes in equity and cash flows for each of the two years in the period ended June 30, 2020, and the related notes
to the consolidated financial statements and schedule (collectively, the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020
and 2019, and the results of its operations and its cash flows for each of the two years in the period ended June 30,
2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2020, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission in 2013, and our report dated August 26, 2020 expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company's auditor since 2018.
Milwaukee, Wisconsin
August 26, 2020
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 41
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2020 and 2019
(In thousands, except share amounts)
ASSETS
Current assets:
Cash
Accounts receivable, net
Inventories
Prepaid expenses
Other
Total current assets
Property, plant and equipment, net
Goodwill, net
Deferred income taxes
Intangible assets, net
Other assets
2020
2019
$
10,688
30,682
120,607
5,269
6,739
$
12,362
44,013
125,893
11,681
8,420
173,985
202,369
72,732
-
24,445
18,973
3,992
71,258
25,954
18,178
25,353
3,758
Total assets
$
294,127
$
346,870
LIABILITIES AND EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt
Accounts payable
Accrued liabilities
Total current liabilities
Long-term debt
Lease obligations
Accrued retirement benefits
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note P)
Twin Disc shareholders' equity:
Preferred shares authorized: 200,000; issued: none; no par value
Common shares authorized: 30,000,000; issued: 14,632,802; no par value
Retained earnings
Accumulated other comprehensive loss
Less treasury stock, at cost (1,226,809 and 1,392,524 shares, respectively)
Total Twin Disc shareholders' equity
Noncontrolling interest
Total equity
Total liabilities and equity
$
4,691
25,663
36,380
$
2,000
31,468
41,646
66,734
75,114
37,896
13,495
27,938
5,501
2,605
40,491
12,646
25,878
7,429
2,494
154,169
164,052
-
42,756
156,655
(41,226)
158,185
18,796
-
45,047
196,472
(37,971)
203,548
21,332
139,389
182,216
569
602
139,958
182,818
$
294,127
$
346,870
The notes to consolidated financial statements are an integral part of these statements.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 42
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
For the years ended June 30, 2020 and 2019
(In thousands, except per share amounts)
Net sales
Cost of goods sold
Gross profit
Marketing, engineering and administrative expenses
Restructuring expenses
Goodwill and other asset impairment charge
Other operating income
(Loss) income from operations
Other income (expense):
Interest income
Interest expense
Other income (expense), net
(Loss) income before income taxes and noncontrolling interest
Income tax (benefit) expense
Net (loss) income
2020
2019
$
246,838
191,130
55,708
$
302,663
213,022
89,641
63,218
5,138
27,603
-
(40,251)
78
(1,860)
(1,707)
(3,489)
(43,740)
(4,169)
(39,571)
71,541
1,179
-
(1,577)
18,498
43
(1,927)
(2,107)
(3,991)
14,507
3,711
10,796
Less: Net earnings attributable to noncontrolling interest, net of tax
(246)
(123)
Net (loss) income attributable to Twin Disc
$
(39,817)
$
10,673
(Loss) income per share data:
Basic (loss) income per share attributable to Twin Disc common
shareholders
Diluted (loss) income per share attributable to Twin Disc common
shareholders
Weighted average shares outstanding data:
Basic shares outstanding
Dilutive stock awards
Diluted shares outstanding
Comprehensive (loss) income:
$
(3.03)
$
0.84
$
(3.03)
$
0.83
13,153
-
13,153
12,571
111
12,682
Net (loss) income
Foreign currency translation adjustment
Benefit plan adjustments, net of income taxes of ($530) and ($1,242),
respectively
Unrealized loss on cash flow hedge, net of income taxes of $185 and $156
Comprehensive (loss) income
Less: Comprehensive income attributable to noncontrolling interest
$
(39,571)
(966)
$
10,796
(2,671)
(1,675)
(595)
(42,807)
(266)
(4,121)
(509)
3,495
(98)
Comprehensive (loss) income attributable to Twin Disc
$
(43,073)
$
3,397
The notes to consolidated financial statements are an integral part of these statements.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 43
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2020 and 2019
(In thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided
(used) by operating activities:
Depreciation and amortization
Goodwill and other asset impairment charge
Restructuring of operations
Stock compensation expense
Provision for deferred income taxes
Amortization of inventory fair value step-up
Gain on contingent consideration of Veth Propulsion acquisition
Gain on sale of Mill Log Business
Other, net
Changes in operating assets and liabilities
Trade accounts receivable
Inventories
Other assets
Accounts payable
Accrued liabilities
Accrued/prepaid retirement benefits
Net cash provided (used) by operating activities
Cash flows from investing activities, net of acquired business:
Capital expenditures
Proceeds from sale of Mill Log business
Proceeds from sale of plant assets
Proceeds from life insurance policy
Acquisition of Veth Propulsion, less cash acquired
Other, net
Net cash used by investing activities
Cash flows from financing activities:
Borrowings under long-term debt agreement
Borrowings under revolving loan agreement
Repayments under revolving loan agreement
Repayments of long-term borrowings
Payments of withholding taxes on stock compensation
Dividends paid to noncontrolling interest
Proceeds from issuance of common stock, net
Proceeds from exercise of stock options
2020
2019
$ (39,571)
$ 10,796
11,925
27,603
2,269
1,158
(8,072)
-
-
-
258
13,132
6,775
2,246
(3,342)
(5,807)
544
9,118
(10,699)
500
137
102
-
(159)
(10,119)
8,200
99,262
(105,065)
(2,241)
(913)
(298)
-
-
9,335
-
-
2,591
6,846
4,277
(809)
(768)
84
11,177
(27,671)
(10,159)
(1,013)
(9,896)
(251)
(5,461)
(11,979)
5,158
239
101
(60,195)
(233)
(66,909)
44,480
147,854
(129,548)
(24,752)
(1,005)
(115)
32,210
36
Net cash (used) provided by financing activities
(1,055)
69,160
Effect of exchange rate changes on cash
382
401
Net change in cash
Cash:
Beginning of year
End of year
Supplemental cash flow information:
Cash paid during the year for:
Interest
Income taxes
(1,674)
(2,809)
12,362
15,171
$ 10,688
$ 12,362
$
1,861
3,481
$
1,906
1,927
The notes to consolidated financial statements are an integral part of these statements.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 44
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended June 30, 2020 and 2019
(In thousands)
Twin Disc, Inc. Shareholders’ Equity
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-
Treasury Controlling
Stock
Interest
Total
Equity
Balance at June 30, 2018
$ 11,570 $ 178,896 $ (23,792) $ (23,677) $ 619 $ 143,616
Net income
Translation adjustments
Benefit plan adjustments, net of tax
Unrealized loss on cash flow hedge, net of tax
Release stranded tax effects
Cash dividends
Compensation expense
Shares issued, net
10,673
(2,646)
(4,121)
(509)
6,903 (6,903)
123 10,796
(25) (2,671)
(4,121)
(509)
2,591
30,886
(115) (115)
2,591
33,231
2,345
Balance at June 30, 2019
45,047 196,472 (37,971) (21,332) 602 182,818
Net (loss) income
Translation adjustments
Benefit plan adjustments, net of tax
Unrealized loss on cash flow hedge, net of tax
Cash dividends
Compensation expense
Shares (acquired) issued, net
(39,817)
(985)
(1,675)
(595)
1,158
(3,449)
2,536
246 (39,571)
19 (966)
(1,675)
(595)
(298) (298)
1,158
(913)
Balance at June 30, 2020
$ 42,756 $ 156,655 $ (41,226) $ (18,796) $ 569 $ 139,958
The notes to consolidated financial statements are an integral part of these statements.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 45
TWIN DISC, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE DATA)
A. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements and information presented herein include the financial results of Veth Propulsion
Holding B.V. (“Veth Propulsion”), the acquisition of which was completed on July 2, 2018. The financial results included
in this Form 10-K related to the acquisition method of accounting for the Veth Propulsion acquisition have been
finalized and completed.
Recent Events
In March 2020, the World Health Organization (“WHO”) declared that a new strain of coronavirus that originated in
Wuhan, China, and has rapidly spread around the world (“COVID-19 outbreak”) is a pandemic that poses significant
risk to the international community. This outbreak contributed to shelter-in-place policies, unexpected factory closures,
supply chain disruptions, and market volatility causing substantial declines in market capitalization, and occurring in
the midst of an already challenging economic environment in some of our markets, most notably the oil and gas market.
As a result of the COVID-19 outbreak, the Company’s operations have decreased, starting on or around mid-March
2020 to curtail the spread of the virus and in compliance with regulatory authorities. The Company’s plants and offices
around the world have been subject to intermittent shutdowns throughout the fourth quarter of fiscal 2020, impacting
the timeliness of supply chain arrangements and the Company’s ability to deliver products to its customers.
The COVID-19 outbreak exacerbates an already depressed global oil and gas market, which has recently been
severely damaged by unprecedented drastic declines in the price of oil. The consensus of experts is that the price
of oil was driven down by an oversupply in the global market, and aggravated by the price war among members
of OPEC and non-OPEC producer nations.
Aside from operational impacts and its results on our operations during the quarter, the occurrence of the COVID-19
outbreak also necessitated a rigorous assessment of the Company’s entire balance sheet. The accounting policies
described below were applied in the context of these recent events.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. The depth and duration
of the pandemic is unknown. Management is actively monitoring the global situation and its effect on its financial
condition, liquidity, operations, suppliers, industry, and workforce.
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-owned domestic and foreign subsidiaries. In fiscal 2020, certain subsidiaries changed their reporting
periods to conform to the Company’s fiscal year end. The impact of aligning to the corporate reporting period is
not material to the consolidated results. All significant intercompany transactions have been eliminated.
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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 46
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 losses of ($570) and
($681) in fiscal 2020 and 2019, 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.
Accounts Receivable--These represent trade accounts receivable and are stated net of an allowance for doubtful
accounts of $1,740 and $1,582 at June 30, 2020 and 2019, respectively. The Company records an allowance for
doubtful accounts 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
its 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 and accounts payable 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 defined in Note N, Pension and Other Postretirement
Benefit Plans. The Company’s borrowings under the revolving loan agreement, which is classified as long-term debt and
consists of loans that are routinely borrowed and repaid throughout the year, approximate fair value at June 30, 2020. The
Company’s term loan borrowing, which is LIBOR-based, approximates fair value at June 30, 2020. If measured at fair
value in the financial statements, long-term debt (including any current portion) would be classified as Level 2 in the
fair value hierarchy.
Derivative Financial Instruments--The Company has written policies and procedures that place all financial instruments
under the direction of the Company’s corporate treasury department and restrict all derivative transactions to those
intended for hedging purposes. The use of financial instruments for trading purposes is prohibited. The Company uses
derivative financial instruments to manage certain financial risks. The Company enters into forward contracts to reduce
the earnings and cash flow impact of non-functional currency denominated receivables and payables. The Company
uses interest rate swap contracts to reduce the exposure to variability in interest rates on floating debt borrowings. The
Company designates certain financial instruments as cash flow hedges for accounting purposes. See Note S, Derivative
Financial Instruments, for additional information.
Inventories--Inventories are valued at the lower of cost or net realizable value. 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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 47
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.
Goodwill and Other Intangibles--Goodwill and other indefinite-lived intangible assets, primarily tradenames, are
tested for impairment at least annually during the Company’s fourth fiscal quarter 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.
Goodwill impairment charges are recorded using a simplified one-step approach. 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 which is driven by projected growth rates, and which applies an
appropriate market-participant discount rate; the fair value determined is also compared to the value obtained using
a market approach from guideline public company multiples. If the carrying amount exceeds the fair value, that
difference is recognized as an impairment loss.
The Company reviews goodwill for impairment on a reporting unit basis annually as of the first day of the Company’s
fourth fiscal quarter, and whenever events or changes in circumstances (“triggering events”) indicate that the carrying
value of goodwill may not be recoverable.
The Company conducted interim qualitative assessments throughout the year. In the third quarter of fiscal 2020, the
Company believed that the economic disruptions and unprecedented market volatilities and uncertainties resulting
from the COVID-19 outbreak was a triggering event for the reporting units which contained goodwill. Consequently,
it performed an interim goodwill impairment test as of March 27, 2020 using updated inputs, including appropriate risk-
based, country and company specific weighted average discount rates for the Company’s reporting units. As a result
of that test, the Company recorded a goodwill impairment charge of $25,380, which fully removed goodwill from
its balance sheet. See Note E, Goodwill and Other Intangibles, for additional information.
The fair value of the Company’s other intangible assets with indefinite lives, primarily tradenames, is estimated
using the relief-from-royalty method, which requires assumptions related to projected revenues; assumed royalty
rates that could be payable if the Company did not own the asset; and a discount rate. Long-lived assets, including
intangible assets, are assessed for impairment qualitatively on a quarterly basis. In the third quarter of fiscal 2020,
upon management’s determination that adverse macroeconomic developments as a result of the COVID-19 outbreak
has given rise to a triggering event for all of the Company’s assets groups, the Company performed a Step 1 assessment,
or a recoverability test of its intangibles and other long-lived assets using an undiscounted operating cash flow analysis
as of March 27, 2020, as well as the review of other assets in service and their remaining useful lives. As a result
of that assessment, the Company recorded an impairment charge of $2,223. See Note E, Goodwill and Other
Intangibles, for more information. For the fourth quarter of fiscal 2020, the Company performed a qualitative
assessment and concluded that an impairment test was not necessary.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 48
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, 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.
Income Taxes--The Company recognizes deferred tax assets and liabilities for the expected future income tax
consequences of events that have been recognized in the Company’s financial statements. Under this method,
deferred tax assets and liabilities 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. The Company evaluates
its uncertain tax positions as new information becomes available. Tax benefits are recognized to the extent a position
is more likely than not to be sustained upon examination by the taxing authority.
Revenue Recognition--Revenue from contracts with customers is recognized using a five-step model consisting
of the following: (1) identify the contract with a customer; (2) identify the performance obligations in the contract;
(3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract;
and (5) recognize revenue when (or as) the Company satisfies a performance obligation. Performance obligations
are satisfied when the Company transfers control of a good or service to a customer, which can occur over time or
at a point in time. The amount of revenue recognized is based on the consideration to which the Company expects
to be entitled in exchange for those goods or services, including the expected value of variable consideration. The
customer’s ability and intent to pay the transaction price is assessed in determining whether a contract exists with
the customer. If collectability of substantially all of the consideration in a contract is not probable, consideration
received is not recognized as revenue unless the consideration is nonrefundable and the Company no longer has
an obligation to transfer additional goods or services to the customer or collectability becomes probable.
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.
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.
Recently Adopted Accounting Standards
a.
In June 2018, the FASB issued guidance (ASU 2018-07) intended to simplify the accounting for
share based payments granted to nonemployees. Under the amendments in this guidance, payments to
nonemployees would be aligned with the requirements for share-based payments granted to employees.
The Company adopted this guidance effective July 1, 2019. The adoption of this guidance did not have
a material impact on the Company’s financial statements and disclosures.
New Accounting Releases
a.
In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments
to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326). Topic
326 requires the measurement and recognition of expected credit losses for financial assets held at amortized
cost. This replaces the existing incurred loss model with an expected loss model and requires the use of
forward-looking information to calculate credit loss estimates. The amendments in this guidance are effective
for fiscal years beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption
permitted for certain amendments. Topic 326 must be adopted by applying a cumulative effect adjustment
to retained earnings. The Company does not expect adoption of the new guidance to have a significant
impact on its financial statements.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 49
b.
c.
d.
e.
In August 2018, the FASB issued updated guidance (ASU 2018-13) as part of the disclosure framework
project, which focuses on improving the effectiveness of disclosures in the notes to the financial statements.
The amendments in this update modify the disclosure requirements on fair value measurements in Topic
820, Fair Value Measurement. The amendments in this guidance are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019 (the Company’s fiscal 2021), with
early adoption permitted. The Company is currently evaluating the potential impact of this guidance on
the Company’s disclosures.
In August 2018, the FASB issued updated guidance (ASU 2018-14) intended to modify the disclosure
requirements for employers that sponsor defined benefit pension or postretirement plans. The amendments
in this guidance are effective for fiscal years ending after December 15, 2020 (the Company’s fiscal 2021),
with early adoption permitted. The Company is currently evaluating the potential impact of this guidance
on the Company’s disclosures.
In December 2019, the FASB issued guidance (ASU 2019-12) intended to simplify the accounting for income
taxes. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2020 (the Company’s fiscal 2022), with early adoption permitted. The
Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.
In March 2020, the FASB issued guidance (ASU 2020-04), intended to provide optional expedients and
exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and
other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or
by another reference rate expected to be discontinued. The amendments in this guidance are effective
beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through
December 31, 2022. The Company is currently evaluating the potential impact of this guidance on the
Company’s financial statements and disclosures.
Special Note Regarding Smaller Reporting Company Status
Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company
qualifies as a smaller reporting company based on its public float as of the last business day of the second quarter
of fiscal 2020. Accordingly, it has scaled some of its disclosures of financial and non-financial information in this
annual report. The Company will continue to determine whether to provide additional scaled disclosures of financial
or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a
smaller reporting company under SEC rules.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 50
B. ACQUISITION OF VETH PROPULSION HOLDING B.V.
On July 2, 2018, the Company completed the acquisition of 100% of the outstanding common stock of Veth
Propulsion. Veth Propulsion is a global manufacturer of highly-engineered primary and auxiliary propulsions and
propulsion machinery for maritime vessels, including rudder propellers, bow thrusters, generator sets and engine
service and repair, based in the Netherlands. These products are complementary to and expand the Company’s
product offerings in the marine and propulsion markets. Prior to the acquisition, the Company was a distributor of
Veth Propulsion products in North America and Asia. This acquisition was pursuant to a Share Purchase Agreement
(“Purchase Agreement”) entered into by Twin Disc NL Holding B.V., a wholly-owned subsidiary of the Company,
with Het Komt Vast Goed B.V., the prior parent of Veth Propulsion, on June 13, 2018. Veth Propulsion is reported
as part of the Company’s manufacturing segment.
Under the terms of the Purchase Agreement, the Company paid an aggregate of approximately $59,407 in cash, and
$1,991 in shares of common stock on May 13, 2019, which represents the fair value of 139,347 shares. The shares
of stock were issued in settlement of the earn-out, a contingent consideration, after Veth Propulsion demonstrated
that it achieved the profitability target (earnings before interest, tax, depreciation and amortization or “EBITDA”)
under the terms of the Purchase Agreement. The difference between the fair value at settlement date of $1,991, and
the initial fair value assigned to the earn-out at acquisition date of $2,921 was recognized in the income statement.
See Note Q, Restructuring of Operations and Other Operating Income. The maximum earn-out at acquisition was
$3,300. The fair value at acquisition was determined by using a discounted probability weighted approach.
The total consideration transferred at acquisition date was:
Cash, paid at closing and after agreed-upon working capital adjustments
Fair value of contingent consideration at acquisition date
Total
$
59,407
2,921
62,328
$
Fair value of assets acquired and liabilities assumed at acquisition date:
Cash, including restricted cash
Accounts receivable and other current assets
Inventories
Property, plant and equipment
Intangibles (a)
Accounts payable and accrued liabilities
Deferred tax liability
Total net assets acquired
Goodwill (b)
Total consideration
$
1,078
10,437
26,862
2,661
26,500
(21,208)
(8,001)
38,329
23,999
62,328
$
(a) Intangibles consist of customer relationships, technology and know-how and tradenames,
with estimated useful lives 12 years, 7 years, and 10 years, respectively, and weighted average
remaining useful life of approximately 9 years. The amounts acquired are presented in Note E,
Goodwill and Other Intangibles.
(b) The Company is not able to deduct any of the goodwill for tax purposes.
The Company financed the payment of the cash consideration through borrowings under a new credit agreement
entered into on June 29, 2018 with BMO Harris Bank N.A. (the “Credit Agreement”). The Credit Agreement is
further discussed in Note H, Debt.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 51
C. INVENTORIES
The major classes of inventories at June 30 were as follows:
Finished parts
Work in process
Raw materials
2020
2019
$ 62,394
17,844
40,369
$ 120,607
$ 57,682
23,812
44,399
$ 125,893
Inventories stated on a LIFO basis represent approximately 50% and 52% of total inventories at June 30, 2020
and 2019, respectively. The approximate current cost of the LIFO inventories exceeded the LIFO cost by $27,225
and $25,709 at June 30, 2020 and 2019, respectively. The Company had reserves for inventory obsolescence
of $9,863 and $10,463 at June 30, 2020 and 2019, respectively.
D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 were as follows:
Land
Buildings
Machinery and equipment
Less: accumulated depreciation
2020
2019
$ 6,589
48,168
164,039
218,796
$ 6,479
47,627
158,183
212,289
(146,064)
$ 72,732
(141,031)
$ 71,258
Depreciation expense for the years ended June 30, 2020 and 2019 was $7,394 and $6,682, respectively.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 52
E. GOODWILL AND OTHER INTANGIBLES
Goodwill
The Company reviews goodwill for impairment on a reporting unit basis annually as of the first day of the Company’s
fourth fiscal quarter, and whenever events or changes in circumstances (“triggering events”) indicate that the carrying
value of goodwill may not be recoverable.
The fair value of reporting units is primarily driven by projected growth rates and operating results under the income
approach using a discounted cash flow model, which applies an appropriate market-participant discount rate, and
consideration of other market approach data from guideline public companies. If declining actual operating results
or future operating results become indicative that the fair value of the Company’s reporting units has declined below
their carrying values, an interim goodwill impairment test may need to be performed and may result in a non-cash
goodwill impairment charge. If the Company’s market capitalization falls below the Company’s carrying value for
a sustained period of time or if such a decline becomes indicative that the fair value of the Company’s reporting
units has declined to below their carrying values, an interim goodwill impairment test may need to be performed
and may result in a non-cash goodwill impairment charge.
On July 2, 2018, as described in Note B, Acquisition of Veth Propulsion Holding B.V., the Company acquired goodwill in
the amount of $23,999 and intangible assets in the amount of $26,500 consisting of customer relationships, technology and
know-how, and trade names as part of the acquisition of Veth Propulsion. As of June 30, 2019, these amounts were final.
Veth Propulsion is reported as part of the Company’s manufacturing segment and European Propulsion reporting unit.
A significant amount of judgment is involved in determining if a triggering event 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.
The Company believes that the economic disruptions and unprecedented market volatilities and uncertainties
resulting from the COVID-19 outbreak was a triggering event in the third quarter of fiscal 2020. Consequently,
it performed an interim goodwill impairment test as of the quarter ended March 27, 2020.
Subsequent to the adoption of ASU 2017-04, goodwill impairment charges are recorded using a simplified one-
step approach. 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 which is driven by
projected growth rates, and which applies an appropriate market-participant discount rate; the fair value determined
is also compared to the value obtained using a market approach from guideline public company multiples. If the
carrying amount exceeds the fair value, that difference is recognized as an impairment loss.
The European Propulsion reporting unit, which carried goodwill in the amount of $22,822, had heretofore been
experiencing positive operating results. The Company continues to have a positive outlook of its operations and remains
committed to supporting it. However, the onset of the COVID-19 outbreak and its uncertainties, as described in Note A,
Basis of Presentation and Significant Accounting Policies, required the Company to approach the goodwill impairment
analysis differently this year; that past performance is no longer necessarily a good predictor of the future in a COVID-19
environment. To incorporate uncertainties in its analysis, the Company applied a scenario modeling analysis for its
goodwill impairment test this year. It is deemed to be the most prudent and a more robust approach in the face of
uncertainty. Each scenario was then weighted with management’s expectations of potential outcomes, to arrive at
a reasonable conclusion of the fair value of the reporting unit. This was the approach deployed by the Company
in this year’s goodwill and long-lived asset impairment analyses.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 53
In assessing the current environment, management is informed that there is consensus among industry experts
that the impacts from the outbreak will be severe and adverse, and that a general contraction in the macroeconomic
environment is expected. The magnitude and duration is unknown. Management expects that a contraction of the
global economy would reduce or shift the demand for its products in the near term. For example, the reporting unit
expects that the demand for certain of its end-market products, such as passenger leisure cruise vessels, passenger
ferries, and other commercial vessels that operate based on general economic activities, will likely be adversely
impacted as social restrictions by governments remain in place or tighten to curb the outbreak. Based on additional
market insights and expectations of industry and subject matter experts, which also includes the negative impacts
of the historic and unprecedented free fall drop in the global price of oil, the Company believes that future cash
flow projections of this reporting unit will fall short of its previous projections, which included synergies that are
now less likely to be realized in the face of a COVID-19 environment.
The European Industrial reporting unit which carried goodwill in the amount of $2,558 is also challenged with the
same macroeconomic conditions and market contraction.
The Company completed its interim assessment for goodwill impairment as of March 27, 2020 with the assistance
of a third party expert, using updated inputs, including an appropriate risk-based, company specific weighted average
discount rate of 13.0%. The assessment resulted in the full impairment of the European Propulsion and European
Industrial reporting units, in the amount of $25,380.
As a result of the full impairment of goodwill, the balance of goodwill at June 30, 2020 is zero. There will no longer
be a need for future goodwill impairment tests.
As a consequence of these macroeconomic developments, market insights and expectations, and the occurrence of
a triggering event in the quarter, the Company also performed an assessment of its intangibles and other long-lived
assets. The Company performed an undiscounted operating cash flow analysis as of March 27, 2020, as well as the
review of other assets in service and their remaining useful lives. It was determined that an impairment charge
pertaining to certain tradenames, licenses and other assets was required, in the amount of $2,223.
The total non-cash impairment charge of $27,603, as described above, is a non-cash charge and is reported on the
goodwill and other impairment charge line in the consolidated statement of operations within the manufacturing
segment. The tax impact of this charge is to increase the income tax (benefit) by $1,199.
The changes in the carrying amount of goodwill are summarized as follows:
Net Book Value Rollforward
Net Book Value By
Reporting Unit
Gross Carrying
Amount
Accumulated
Impairment
Net Book
Value
European
Propulsion
European
Industrial
$ 16,514
$ (13,822) $ 2,692
$ - $ 2,692
23,999
(737)
39,776
-
(574)
$ 39,202
- 23,999
(737)
-
(13,822) 25,954
(25,380) (25,380)
-
(574)
$ (39,202) $ -
23,999
(628)
-
(109)
23,371
(22,822)
(549)
2,583
(2,558)
(25)
$ - $ -
Balance at June 30, 2018
Acquisition
Translation adjustment
Balance at June 30, 2019
Impairment
Translation adjustment
Balance at June 30, 2020
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 54
Other Intangibles
At June 30, the following acquired intangible assets have definite useful lives and are subject to amortization:
Net Book Value Rollforward
Net Book Value By Asset Type
Balance at June 30, 2018
Addition
Acquistion
Amortization
Translation adjustment
Balance at June 30, 2019
Addition
Amortization
Impairment
Translation adjustment
Balance at June 30, 2020
Gross Carrying
Amount
$ 13,485
236
26,500
-
(634)
39,587
92
-
-
(434)
$
39,245
Accumulated
Amortization /
Impairment
Net Book
Value
Customer
Relationships
Technology
Know-how
Trade Name
Other
$ (11,781) $ 1,704
- 236
- 26,500
(2,653) (2,653)
- (634)
25,153
92
(4,532) (4,532)
(1,306)
- (434)
18,973
$
(14,434)
-
$
(20,272)
(1,306)
$
$
1,288
-
1,800
$
-
-
8,400
$
-
-
16,300
416
236
-
(1,123) (1,172) (261) (97)
(334) (203) (94) (3)
552
92
(3,003) (1,139) (232) (158)
(226)
(286) (102) (33) (13)
247
$
14,843
-
7,025
-
2,733
-
$
$
$
(1,080)
11,554
1,388
5,784
-
-
Other intangibles consist mainly of computer software. Amortization is recorded on the basis of straight-line or
accelerated, as appropriate, over the estimated useful lives of the assets.
The weighted average remaining useful life of the intangible assets included in the table above is approximately 8 years.
Intangible amortization expense for the years ended June 30, 2020 and 2019 was $4,532 and $2,653, respectively.
Estimated intangible amortization expense for each of the next five fiscal years is as follows:
Fiscal Year
2021
2022
2023
2024
2025
Thereafter
$ 3,173
2,989
2,827
2,679
2,495
4,810
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 55
F. ACCRUED LIABILITIES
Accrued liabilities at June 30 were as follows:
Customer deposits
Salaries and wages
Distributor rebates
Retirement benefits
Warranty
Other
2020
2019
$
$
11,541
5,116
3,769
3,559
3,520
8,875
14,924
6,982
2,943
2,730
3,034
11,033
$ 36,380 $ 41,646
G. WARRANTY
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 the Company’s best estimate of the amounts
necessary to settle future and existing claims on products sold as of the balance sheet date. When evaluating the adequacy
of the reserve for warranty costs, management takes into consideration the term of the warranty coverage, historical claim
rates and costs of repair, knowledge of the type and volume of new products and economic trends. While the Company
believes that 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:
2020
2019
Reserve balance, July 1
Current period expense and adjustments
Payments or credits to customers
Translation adjustment
Reserve balance, June 30
$ 3,736
10,369
(9,629)
(16)
$ 4,460
$ 4,407
3,323
(3,953)
(41)
$ 3,736
Included in expense in the year ending June 30, 2020 is a non-recurring warranty charge in the amount of $6,233,
to accrue for estimated costs to resolve a unique product performance issue at certain installations.
The current portion of the warranty accrual ($3,520 and $3,034 for fiscal 2020 and 2019, respectively) is reflected
in accrued liabilities, while the long-term portion ($940 and $702 for fiscal 2020 and 2019, respectively) is included
in other long-term liabilities on the consolidated balance sheets.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 56
H. DEBT
Long-term debt consisted of the following at June 30:
Credit Agreement Debt
Revolving loans (expire June 2023)
Term loan (due March 2026)
PPP loan
Other
Subtotal
Less: current maturities
Total long-term debt
2020
2019
$
16,641
17,500
8,200
246
42,587
$
22,666
19,500
-
325
42,491
(4,691)
37,896
$
(2,000)
40,491
$
Credit Agreement Debt:
On June 29, 2018, the Company entered into a new credit agreement (the “Credit Agreement”) with BMO Harris
Bank N.A. (“BMO”) that provided for the assignment and assumption of the previously existing loans between
the Company and Bank of Montreal and subsequent amendments into a term loan (the “Term Loan”) and revolving
credit loans (each a “Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan,
the “Loans”). Pursuant to the Credit Agreement, BMO agreed to make the Term Loan to the Company in a principal
amount not to exceed $35,000 and the Company may, from time to time prior to the maturity date, enter into
Revolving Loans in amounts not to exceed, in the aggregate, $50,000 (the “Revolving Credit Commitment”).
The Credit Agreement also allows the Company to obtain Letters of Credit from BMO, which if drawn upon
by the beneficiary thereof and paid by BMO, would become Revolving Loans.
On July 2, 2018, in connection with the acquisition of Veth Propulsion, as described in Note B, Acquisition of Veth
Propulsion Holding B.V., the Company drew a total of $60,729 of additional borrowings on the Credit Agreement,
consisting of a $35,000 Term Loan payable and revolver borrowings of $25,729. The new borrowing was used to
pay the cash consideration at closing of $58,862, and to pay off the loan owed to the prior parent of Veth Propulsion
in the amount of $1,865.
On September 25, 2018, the Company used the proceeds of a stock offering (see Note J, Shareholders’ Equity)
of $32,210 to partially pay down the Term Loan and Revolving Loans.
On March 4, 2019, the Company entered into a second amendment (the “Second Amendment”) to the Credit
Agreement. The Second Amendment reduced the principal amount of the Term Loan commitment under the Credit
Agreement from $35,000 to $20,000. In connection with the Second Amendment, the Company issued an amended
and restated term note in the amount of $20,000 to BMO, which amended the original $35,000 note provided under
the Credit Agreement.
Prior to entering into the Second Amendment, the outstanding principal amount of the Term Loan under the Credit
Agreement was $10,849. On the date of the Second Amendment, the BMO made an additional advance on the Term
Loan to the Company in the amount of $9,151. The Second Amendment also extended the maturity date of the Term
Loan from January 2, 2020 to March 4, 2026, and added a requirement that the Company make principal installments of
$500 per quarter starting with the quarter ending June 30, 2019.
The Second Amendment also reduced the applicable margin for purposes of determining the interest rate applicable
to the Term Loan. Previously, the applicable margin was 3.00%, which was added to the Monthly Reset LIBOR
Rate or the Adjusted LIBOR, as applicable. Under the Second Amendment, the applicable margin is between
1.375% and 2.375%, depending on the Company’s total funded debt to EBITDA ratio.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 57
The Second Amendment also adjusts certain financial covenants made by the Company under the Credit Agreement.
Specifically, the Company has covenanted (i) not to allow its total funded debt to EBITDA ratio to be greater than
3.00 to 1.00 (the cap had previously been 3.50 to 1.00 for quarters ending on or before September 30, 2019 and 3.25
to 1.00 for quarters ending on or about December 31, 2019 through September 30, 2020), and (ii) that its tangible
net worth will not be less than $100,000 plus 50% of net income for each fiscal year ending on and after June 30,
2019 for which net income is a positive number (the $100,000 figure had previously been $70,000).
On January 28, 2020, the Company entered into a third amendment (the “Third Amendment”). The Third Amendment
restated the financial covenant provisions related to the maximum allowable ratio of total funded debt to EBITDA from
3.00 to 1.00 to 4.00 to 1.00 for the quarter ended December 27, 2019, 5.00 to 1.00 for the quarter ending March 27, 2020,
4.00 to 1.00 for the quarter ending June 30, 2020, 3.50 to 1.00 for the quarter ending September 25, 2020 and 3.00 to 1.00
for quarters ending on or after December 25, 2020. For purposes of determining EBITDA, the Third Amendment
added back extraordinary expenses (not to exceed $3,900 million) related to the previously reported isolated product
performance issue on one of the Company’s oil and gas transmission models at certain installations. Under the Third
Amendment, the applicable margin for revolving loans, letters of credit, and term loans was between 1.25% and 3.375%,
depending on the Company’s total funded debt to EBITDA ratio.
On April 17, 2020, in connection with a loan obtained under the Payment Protection Plan (the “PPP Loan”) as described
below, the Company entered into a fourth amendment (the “Fourth Amendment”). The Fourth Amendment: (1) permitted
the Company to incur indebtedness in the form of the PPP Loan notwithstanding the Credit Agreement’s restrictions
limiting the Company’s ability to incur indebtedness, and (2) provides that the PPP Loan (to the extent that the
Loan is forgiven) shall be disregarded for purposes of calculating financial covenants in the Credit Agreement
(the “Covenants”). Any unforgiven portion of the Loan and the interest thereon will not be disregarded for purposes
of calculating the Covenants.
On July 22, 2020, the Company entered into a fifth amendment (the "Fifth Amendment"), which is effective June
30, 2020. Under this amendment, (a) the Revolving Loan availability was reduced from $50,000 to $45,000, (b)
the quarterly payments occurring on September 30, 2020 and December 31, 2020 are changed to be interest-only
payments at the Company's option, and (c) the applicable margin on the Term Loan was increased from 3.375%
to 3.875%. As a result of this amendment, $1,000 of principal payments originally due in fiscal 2021 have been
deferred to fiscal 2026.
In addition, the Company was given financial covenant relief for the quarters ended June 30, 2020 through June 30,
2021. During this period, in lieu of the Total Funded Debt to EBITDA ratio financial covenant, the Company is required
to maintain a minimum cumulative EBITDA, as follows: (1) $1,000 for the fiscal quarter ended June 30, 2020 and the two
fiscal quarters ending September 25, 2020; (2) $2,500 for the three fiscal quarters ending December 25, 2020; (3) $6,000
for the four fiscal quarters ending March 26, 2021; and (4) $10,000 for the four fiscal quarters ending June 30, 2021.
The Company also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security
interest in deposit accounts the Company maintains with the Bank. Under the Fifth Amendment, the Bank may not
provide a notice of exclusive control of a deposit account (thereby obtaining exclusive control of the account) prior
to the occurrence or existence of a Default or an Event of Default under the Credit Agreement or otherwise upon
the occurrence or existence of an event or condition that would, but for the passage of time or the giving of notice,
constitute a Default or an Event of Default under the Credit Agreement.
The Company is also required to maintain a minimum liquidity level, and abide by certain cash dividend and capital
expenditure restrictions.
Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property,
including accounts receivable, inventory, machinery and equipment, and intellectual property. The Company has
also pledged 100% of its equity interests in certain domestic subsidiaries and 65% of its equity interests in certain
foreign subsidiaries. The Company also entered into a Collateral Assignment of Rights under Purchase Agreement
for its acquisition of Veth Propulsion.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 58
Upon the occurrence of an event of default, BMO may take the following actions upon written notice to the
Company: (1) terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding
under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately cash
collateralize letter of credit obligations in an amount equal to 105% of the aggregate letter of credit obligations or a
greater amount if BMO determines a greater amount is necessary. If such event of default is due to the Company’s
bankruptcy, BMO may take the three actions listed above without notice to the Company.
In addition to the monthly interest payments and any mandatory principal payments required by the Credit Agreement
(if applicable), the Company is responsible for paying a quarterly Revolving Credit Commitment Fee and quarterly
Letter of Credit Fees. The Revolving Credit Commitment Fee is paid at an annual rate equal to the Applicable Margin
on the average daily unused portion of the Revolving Credit Commitment. The Letter of Credit Fee is paid at the
Applicable Margin for Revolving Loans that are Eurodollar Loans on the daily average face amount of Letters of
Credit outstanding during the preceding calendar quarter. The Company may prepay the Loans (or any one of the
Loans), subject to certain limitations.
The PPP Loan:
On April 17, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan
in the amount of $8,200 made to the Company under the Payment Protection Plan ("PPP"). The PPP is a liquidity
facility program established by the U.S. government as part of the CARES Act in response to the negative economic
impact of the COVID-19 outbreak. The PPP Loan to the Company is being administered by BMO. The PPP Loan
has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are
deferred for six months. Beginning November 17, 2020, seven months from the date of the PPP Note, the Company
is required to make monthly payments of principal and interest.
The PPP Loan is a forgivable loan to the extent proceeds are used to cover qualified documented payroll, mortgage
interest, rent, and utility costs over a 24-week measurement period (as amended) following loan funding. For the
loan to be forgiven, the Company is required to formally apply for forgiveness, and potentially, required to pass an
audit that it met the eligibility qualifications of the loan. Within 150 days from the application, the Company will
be notified whether or not the loan is forgiven.
In accounting for the terms of the PPP Loan, the Company is guided by ASC 470 Debt, and ASC 450-30 Gain
contingency. Accordingly, it recorded the proceeds of the PPP Loan of $8,200 as debt and it will derecognize the
liability when the loan is paid off or it believes forgiveness is reasonably certain. The Company believes that the
possibility of loan forgiveness is to be regarded as a contingent gain and therefore will not recognize the gain
(and derecognize the loan) until all uncertainty is removed (i.e. all conditions for forgiveness are met).
Other:
Other long-term debt pertains mainly to a financing arrangement in Europe. During fiscal 2019, the Company
entered into sale leaseback agreements with a leasing company covering various Company vehicles. Under the terms
of the agreements, the Company received $329 in cash proceeds and agreed to lease back those same vehicles under
various terms, ranging from 3 to 5 years. Under ASC 842, Leases, these agreements are required to be accounted for
as financing transactions. Consequently, the Company recorded long-term liabilities for the proceeds received, and
they are reduced as lease payments are made. These liabilities carry implied interest rates ranging from 7% to 25%.
A total amount of $74 in principal was paid on these liabilities during the current fiscal year.
During fiscal year 2020, the average interest rate was 3.64% on the Term Loan, and 2.72% on the Revolving Loans.
As of June 30, 2020, the Company’s borrowing capacity under the terms of the Credit Agreement was approximately
$43,681 and the Company had approximately $27,040 of available borrowings.
The Company’s borrowings described above approximates fair value at June 30, 2020 and June 30, 2019. 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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 59
The Term Loan is covered by an interest rate swap arrangement with Bank of Montreal, with an outstanding
notional amount of $17,500 and a maturity date of March 4, 2026. This swap has been designated as a cash flow
hedge under ASC 815, Derivatives and Hedging. This swap is included in the disclosures in Note S, Derivative
Financial Instruments.
The aggregate scheduled maturities of outstanding long-term debt obligations in subsequent years are as follows:
Fiscal Year
2021
2022
2023
2024
2025
Thereafter
$ 4,691
6,672
18,684
2,016
2,000
8,524
$ 42,587
Other lines of credit:
The Company has established unsecured lines of credit, which may be withdrawn at the option of the banks. Under
these arrangements, the Company has unused and available credit lines of $943 with a weighted average interest
rate of 5.6% as of June 30, 2020, and $952 with a weighted average interest rate of 5.0% as of June 30, 2019.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 60
I. LEASE OBLIGATIONS
In accordance with ASC 842, Leases, the Company’s leases with terms longer than twelve months are recorded
on the consolidated balance sheets. The Company leases certain office and warehouse space, as well as production
and office equipment.
The Company determines if an arrangement is a lease at contract inception. The lease term begins upon lease
commencement, which is when the Company takes possession of the asset, and may include options to extend or
terminate the lease when it is reasonably certain that such options will be exercised. As its lease agreements typically
do not provide an implicit rate, the Company primarily uses an incremental borrowing rate based upon the information
available at lease commencement. In determining the incremental borrowing rate, the Company considers its current
borrowing rate, the term of the lease, and the economic environments where the lease activity is concentrated.
The components of lease expense for the years ended June 30 were as follows:
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
Less: Sublease income
Net lease cost
2020
2019
$
188
56
3,137
64
58
$
27
8
3,348
40
37
3,503
(212)
3,460
(222)
$
3,291
$
3,238
Other information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use-assets obtained in exchange for lease obligations:
Operating leases
Finance leases
Weighted average remaining lease term (years):
Operating leases
Finance lease
Weighted average discount rate:
Operating leases
Finance leases
2020
2019
$
3,141
167
56
$
3,338
18
9
2,757
592
10.7
4.0
7.4%
6.2%
13,875
553
11.1
4.8
7.7%
7.3%
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 61
Approximate future minimum rental commitments under non-cancellable leases as of June 30, 2020 were as follows:
2021
2022
2023
2024
2025
Thereafter
$
Operating Leases Finance Leases
284
$
284
275
234
31
-
2,724
2,233
1,988
1,793
1,567
10,930
Total future lease payments
Less: Amount representing interest
21,235
(6,773)
1,108
(118)
Present value of future payments
$
14,462
$
990
The following table provides a summary of leases recorded on the consolidated balance sheet at June 30.
Lease Assets
Operating lease right-of-use assets Property, plant and equipment, net
Property, plant and equipment, net
Finance lease right-of-use assets
$
14,448
959
$
14,138
545
Balance Sheet Location
2020
2019
Lease Liabilities
Operating lease liabilities
Operating lease liabilities
Finance lease liabilities
Finance lease liabilities
Subsequent Event:
Accrued liabilities
Lease obligations
Accrued liabilities
Lease obligations
$
1,724
12,738
233
757
$
1,933
12,197
104
449
On July 31, 2020, the Company finalized an agreement to lease a manufacturing, assembly and office facility in
Lufkin, Texas. The lease was entered into with the local government as part of the city’s economic development
program. The new lease has an initial term of 15 years and a base rent of $427 per year. The Company will record
$4,500 in finance lease right-of-use assets and $4,500 in finance lease liabilities. In addition to the lease, the
Company has certain leasehold improvements which were made to the facility amounting to $1,041.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 62
J. SHAREHOLDERS' EQUITY
The Company completed the sale of 1,533,334 shares of its common stock through a registered offering which
closed on September 25, 2018, at a price to the public of $22.50 per share. The net proceeds received by the
Company and after underwriting expenses of $2,070 and offering expenses of $220, were $32,210 and were
recorded as common shares as of June 30, 2020. The proceeds were used to partially pay down the Term Loan
and Revolving Loans (see Note H, Debt).
The total number of shares of common stock outstanding at June 30, 2020 and 2019 was 13,405,993 and 13,240,278,
respectively. At June 30, 2020 and 2019, treasury stock consisted of 1,226,809 and 1,392,524 shares of common stock,
respectively. The Company issued 186,226 and 157,043 shares of treasury stock in fiscal 2020 and 2019, respectively,
to fulfill its obligations under the stock option plans and restricted stock and performance share award grants, as well
as the contingent consideration related to the acquisition of Veth Propulsion Holding B.V. The Company also recorded
forfeitures of 20,511 and 3,784 shares of previously issued restricted stock in fiscal 2020 and 2019, respectively. The
difference between the cost of treasury shares and the option price is recorded in common stock.
Under an authorization given by the Board of Directors on July 27, 2012, the Company is permitted to make open
market purchases of its common stock. The Company did not make any open market purchases during the two
most recent fiscal years. As of June 30, 2020 and 2019, 315,000 shares remain authorized for purchase.
Cash dividends per share were $0.00 in both fiscal 2020 and 2019.
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 as Series A Junior Preferred Stock.
The components of accumulated other comprehensive loss included in equity as of June 30, 2020 and 2019 are as follows:
Translation adjustments
Net loss on cash flow hedge derivatives, net
of income taxes of $341 and $156,
respectively
Benefit plan adjustments, net of income taxes
2020
$ 3,454
2019
$ 4,439
(1,104) (509)
of $13,316 and $12,707 respectively
(43,576) (41,901)
Accumulated other comprehensive loss
$ (41,226) $ (37,971)
A reconciliation for the changes in accumulated other comprehensive income (loss), net of tax, by component for
the years ended June 30, 2020 and June 30, 2019 is as follows:
Balance at June 30, 2019
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Benefit Plan
Adjustment
Translation
Adjustment
$ 4,439
$ (41,901) $ (509)
(985) (3,792) (595)
-
- 2,117
Cash Flow
Hedges
Net current period other comprehensive loss
Balance at June 30, 2020
(985) (1,675) (595)
$ (43,576) $ (1,104)
$ 3,454
Balance at June 30, 2018
Other comprehensive loss before reclassifications
Release stranded tax effects
Benefit Plan
Adjustment
Translation
Adjustment
$ 7,085
$ (30,877) $ -
(2,646) (6,068) (509)
- (6,903) -
Cash Flow
Hedges
Amounts reclassified from accumulated other comprehensive loss
Net current period other comprehensive loss
Balance at June 30, 2019
-
-
1,947
(2,646) (11,024) (509)
$ (41,901) $ (509)
$ 4,439
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 63
A reconciliation for the reclassifications out of accumulated other comprehensive income (loss), net of tax for the
year ended June 30, 2020 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
$ (2,982)
195
(2,787)
670
$ (2,117)
A reconciliation for the reclassifications out of accumulated other comprehensive income (loss), net of tax for the
year ended June 30, 2019 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
$ (2,710)
176
(2,534)
587
$ (1,947)
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 64
K. 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, azimuth drives, 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, energy and natural
resources, government, and industrial markets.
Net sales by product group is summarized as follows:
Industrial
Land-based transmissions
2020
2019
$ 26,343
$ 34,042
62,697
112,793
Marine and propulsion systems
152,501
150,237
Other
Total
5,297
5,591
$ 246,838
$ 302,663
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, azimuth
drives, controls, surface drives, propellers and boat management systems for the global commercial marine, pleasure
craft and patrol boat markets. Other includes non-Twin Disc manufactured product sold through Company-owned
distribution entities.
The Company has two reportable segments: manufacturing and distribution. Its segment structure reflects the way
management makes operating decisions and manages the growth and profitability of the business. It also corresponds with
management’s approach of allocating resources and assessing the performance of its segments. 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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 65
Information about the Company's segments, before intercompany eliminations, is summarized as follows:
2020
Net Sales
Intra-segment sales
Inter-segment sales
Interest income
Interest expense
Income taxes
Depreciation and amortization
Net (loss) income attributable to Twin Disc
Assets
Expenditures for segment assets
Manufacturing
Distribution
Total
$
227,565
14,230
43,854
346
2,128
(2,027)
11,151
(31,603)
365,417
9,615
$
95,824
12,889
5,578
22
-
268
379
553
43,118
734
$
323,389
27,119
49,432
368
2,128
(1,759)
11,530
(31,050)
408,535
10,349
2019
Net Sales
Intra-segment sales
Inter-segment sales
Interest income
Interest expense
Income taxes
Depreciation and amortization
Net income attributable to Twin Disc
Assets
Expenditures for segment assets
Manufacturing
Distribution
Total
$
280,428
20,384
46,078
1,154
3,086
7,939
12,893
25,062
384,612
10,725
$
106,481
14,026
3,758
26
(37)
353
402
248
46,076
663
$
386,909
34,410
49,836
1,180
3,049
8,292
13,295
25,310
430,688
11,388
The following is a reconciliation of reportable segment net sales and net (loss) income to the Company’s
consolidated totals:
Net sales:
Total net sales from reportable segments
Elimination of inter-company sales
Total consolidated net sales
2020
2019
$
323,389
(76,551)
$
386,909
(84,246)
$
246,838
$
302,663
Net (loss) income attributable to Twin Disc:
Total net (loss) income from reportable
segments
Other adjustments and corporate expenses
Total consolidated net (loss) income
attributable to Twin Disc
$
(31,050)
(8,767)
$
25,310
(14,637)
$
(39,817)
$
10,673
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 66
Corporate expenses pertain to certain costs that are not allocated to the reportable segments, primarily consisting
of unallocated corporate overhead costs, including administrative functions and global functional expenses.
Other significant items:
2020
Interest income
Interest expense
Income taxes
Depreciation and amortization
Assets
Expenditures for segment assets
2019
Interest income
Interest expense
Income taxes
Depreciation and amortization
Assets
Expenditures for segment assets
Segment
Totals
Consolidated
Adjustments
Totals
$
368
2,128
(1,759)
11,530
408,535
10,349
$
(290)
(268)
(2,410)
395
(114,408)
350
$
78
1,860
(4,169)
11,925
294,127
10,699
$
1,180
3,049
8,292
13,295
430,688
11,388
$
(1,137)
(1,122)
(4,581)
317
(83,818)
591
$
43
1,927
3,711
13,612
346,870
11,979
All adjustments represent inter-company eliminations and corporate amounts.
Geographic information about the Company is summarized as follows:
Net sales
United States
Netherlands
China
Austria
Australia
Italy
Canada
Other countries
Total
2020
2019
$
83,771
39,501
26,354
12,552
12,438
11,802
5,664
54,756
$
132,467
31,521
28,772
10,464
12,463
12,755
10,875
63,346
$
246,838
$
302,663
Net sales by geographic region are based on product shipment destination.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 67
Long-lived assets primarily pertain to property, plant and equipment and exclude goodwill, other intangibles,
and deferred income taxes. They are summarized as follows:
Long-lived assets
United States
Netherlands
Belgium
Switzerland
Italy
Other countries
Total
2020
$
41,996
12,659
8,363
6,804
1,697
5,205
2019
$
41,233
13,186
8,595
6,810
1,894
3,298
$
76,724
$
75,016
The Company has one distributor customer, primarily of its manufacturing segment, that accounted for 10% of total
Company sales for fiscal 2020. There were no customers that accounted for 10% of consolidated net sales in fiscal 2019.
Disaggregated revenue:
The following tables present details deemed most relevant to the users of the financial statements for the years ended
June 30, 2020 and June 30, 2019.
Net sales by product group for the year ended June 30, 2020 is summarized as follows:
Industrial
Land-based transmissions
Marine and propulsion systems
Other
Manufacturing
$
24,143
63,523
139,833
66
Distribution
5,634
$
25,699
59,212
5,279
Elimination of
Intercompany Sales
(3,434)
$
(26,525)
(46,544)
(48)
Total
$
26,343
62,697
152,501
5,297
Total
$
227,565
$
95,824
$
(76,551)
$
246,838
Net sales by product group for the year ended June 30, 2019 is summarized as follows:
Industrial
Land-based transmissions
Marine and propulsion systems
Other
Manufacturing
$
30,393
111,260
138,704
71
Distribution
8,079
$
30,483
62,329
5,590
Elimination of
Intercompany Sales
(4,430)
$
(28,950)
(50,796)
(70)
Total
$
34,042
112,793
150,237
5,591
Total
$
280,428
$
106,481
$
(84,246)
$
302,663
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 68
L. STOCK-BASED COMPENSATION
In fiscal 2019, the Company adopted the Twin Disc, Incorporated 2018 Long-Term Incentive Plan (the “2018 LTI
Plan”). Benefits under the 2018 LTI Plan may be granted, awarded or paid in any one or a combination of stock
options, stock appreciation rights, restricted stock awards, restricted stock units, cash-settled restricted stock units,
performance stock awards, performance stock unit awards, performance unit awards, and dividend equivalent
awards. There is reserved for issuance under the Plan an aggregate of 850,000 shares of the Company’s common
stock, which may be authorized and unissued shares or shares reacquired by the Company in the open market or a
combination of both. The aggregate amount is subject to proportionate adjustments for stock dividends, stock splits
and similar changes.
In fiscal 2011, the Company adopted the Twin Disc, Incorporated 2010 Stock Incentive Plan for Non-Employee
Directors (the “2010 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 “2010
Employee Incentive Plan”), a plan under which officers and key employees may be granted equity-based awards up
to 650,000 shares of common stock. Equity-based awards granted under these plans include performance shares and
restricted stock.
Shares available for future awards as of June 30 were as follows:
2018 LTI Plan
2010 Directors' Plan
Performance Stock Awards (“PSA”)
2020
2019
492,591 742,325
12,865 61,354
In fiscal 2020 and 2019, the Company granted a target number of 131,688 and 50,004 PSAs, respectively, to various
employees of the Company, including executive officers.
The PSAs granted in fiscal 2020 will vest if the Company achieves performance-based target objectives relating to
average return on invested capital, average annual sales and average annual Earnings Per Share (“EPS”) (as defined
in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2022. These PSAs are
subject to adjustment if the Company’s return on invested capital, net sales, and EPS 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 184,766. Based upon actual results to date, the Company is not currently accruing
compensation expense for these PSAs.
The PSAs granted in fiscal 2019 will vest if the Company achieves performance-based target objectives relating to
average return on invested capital, average annual sales and average annual Earnings Per Share (“EPS”) (as defined
in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2021. These PSAs are
subject to adjustment if the Company’s return on invested capital, net sales, and EPS 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 67,007. Based upon actual results to date, the Company is not currently accruing
compensation expense for these PSAs.
There were 167,848 and 96,124 unvested PSAs outstanding at June 30, 2020 and 2019, respectively. A total of
13,844 and 0 shares of performance stock awards were forfeited during fiscal 2020 and 2019, respectively. The fair
value of the PSAs (on the date of grant) is expensed over the performance period for the shares that are expected to
ultimately vest. The compensation (benefit) expense for the year ended June 30, 2020 and 2019, related PSAs, was
($368) and $1,196, respectively. The tax (expense) benefit from compensation (benefit) expense for the year ended
June 30, 2020 and 2019, related PSAs, was ($87) and $278, respectively. The weighted average grant date fair value
of the unvested awards at June 30, 2020 was $14.78. At June 30, 2020, the Company had $2,480 of unrecognized
compensation expense related to the unvested shares that would vest if the specified target objective was achieved
for the fiscal 2020 and 2019 awards. The total fair value of performance stock awards vested in fiscal 2020 was
$167. The total fair value of performance stock awards vested in fiscal 2019 was $1,228.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 69
Restricted Stock Awards (“RS”)
The Company has unvested RS outstanding that will vest if certain service conditions are fulfilled. The fair value
of the RS grants is recorded as compensation over the vesting period, which is generally 1 to 3 years. During fiscal
2020 and 2019, the Company granted 180,379 and 43,305 service based restricted shares, respectively, to employees
and non-employee directors in each year. A total of 20,511 and 3,784 shares of restricted stock were forfeited during
fiscal 2020 and 2019, respectively. There were 231,379 and 172,637 unvested shares outstanding at June 30, 2020
and 2019, respectively. Compensation expense of $1,200 and $1,096 was recognized during the year ended June 30,
2020 and 2019, respectively, related to these service-based awards. The tax benefit from compensation expense for
the year ended June 30, 2020 and 2019 related to these service-based awards, was $283 and $255, respectively. The
total fair value of restricted stock grants vested in fiscal 2020 and 2019 was $1,241 and $2,391, respectively. As of
June 30, 2020, the Company had $1,307 of unrecognized compensation expense related to restricted stock which
will be recognized over the next three years.
Restricted Stock Unit Awards (“RSU”)
Under the 2018 Long Term Incentive Plan, the Company has been authorized to issue RSUs. The RSUs entitle the
employee to shares of common stock of the Company if the employee remains employed by the Company through
a specified date, generally three years from the date of grant. During fiscal 2019, the Company granted 37,950 RSUs
to various employees of the Company, including executive officers. The fair value of the RSUs (on the date of grant)
is recorded as compensation expense over the vesting period. There were 37,950 unvested RSUs outstanding at June
30, 2020 and June 30, 2019. Compensation expense of $326 and $299 was recognized during the year ended June
30, 2020 and 2019, respectively. The tax benefit from compensation expense for the year ended June 30, 2020 and
2019, related to these service-based awards, was $77 and $69, respectively. The weighted average grant date fair
value of the unvested awards at June 30, 2020 was $25.77. As of June 30, 2020, the Company had $353 of
unrecognized compensation expense related to RSUs which will be recognized over the next two years.
Stock Options
The 2010 Directors’ Plan may grant options to purchase shares of common stock, at the discretion of the Board
of Directors, 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 2018
Employee 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 2018 Employee 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 2010 Directors’ Plan and the 2018 Employee Incentive Plan
as of June 30, 2020 and 2019.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 70
M. 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 $1,820 and $2,385 in fiscal 2020 and 2019, respectively.
Total engineering and development costs were $10,998 and $12,594 in fiscal 2020 and 2019, respectively.
N. 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 from January 1, 1997 through July 31, 2009, at which time the Company
froze future accruals under domestic defined benefit pension plans. The Company's funding policy for the plans
covering domestic employees is to contribute an actuarially determined amount which falls between the minimum
required contribution and maximum amount that can be deducted for federal income tax purposes.
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 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.
The measurement date for the Company’s pension and postretirement benefit plans in fiscal 2020 and 2019 was June 30.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 71
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 (loss) income as of June 30:
Pension
Benefits
Other
Postretirement
Benefits
2020
2019
2020
2019
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial loss
Contributions by plan participants
Benefits paid
$ 107,322
653
3,305
3,161
93
(9,014)
$ 105,012
795
4,020
6,718
103
(9,326)
$ 7,451
17
219
211
352
(1,191)
$ 8,077
19
305
18
389
(1,357)
Benefit obligation, end of year
$ 105,520
$ 107,322
$ 7,059
$ 7,451
Change in plan assets:
Fair value of assets, beginning of year
Actual return on plan assets
Employer contribution
Contributions by plan participants
Benefits paid
$
87,291
3,541
1,373
93
(9,014)
$
90,258
4,125
2,131
103
(9,326)
-
$
-
839
352
(1,191)
-
$
-
968
389
(1,357)
Fair value of assets, end of year
$
83,284
$
87,291
$
-
$
-
Funded status
$
(22,236)
$
(20,031)
$
(7,059)
$
(7,451)
Amounts recognized in the balance sheet consist of:
Other assets - noncurrent
Accrued liabilities - current
Accrued retirement benefits - noncurrent
-
$
(276)
(21,960)
3
$
(645)
(19,389)
$
-
(1,081)
(5,978)
-
$
(962)
(6,489)
Net amount recognized
$
(22,236)
$
(20,031)
$
(7,059)
$
(7,451)
Amounts recognized in accumulated other comprehensive loss consist of (net of tax):
178
Net transition obligation
144
Prior service cost
42,185
Actuarial net loss
42,507
Net amount recognized
158
104
43,548
43,810
$
$
$
$
$
-
(697)
463
(234)
$
$
-
(908)
302
(606)
$
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 72
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 defined benefit and other postretirement benefit
plans are as follows:
Net transition obligation
Prior service cost
Actuarial net loss
Net amount to be recognized
Pension
Benefits
$
35
45
3,246
3,326
$
Other
Postretirement
Benefits
-
$
(275)
-
(275)
$
The accumulated benefit obligation for all defined benefit pension plans was approximately $105,520 and $107,322
at June 30, 2020 and 2019, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
Projected and accumulated benefit obligation
Fair value of plan assets
Components of Net Periodic Benefit Cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of prior service cost
Amortization of actuarial net loss
Net periodic benefit cost
Service cost
Interest cost
Amortization of prior service cost
Net periodic benefit cost
June 30
2020
2019
$
105,520
83,284
$
102,879
82,845
Pension Benefits
2020
2019
$
648
3,304
(4,894)
35
45
2,982
$
792
4,019
(5,238)
34
64
2,710
$
2,120
$
2,381
Other Postretirement Benefits
2020
$
17
219
(274)
2019
$
18
304
(274)
$
(38)
$
48
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 73
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income for Fiscal
2020 (Pre-tax):
Net loss
Amortization of transition asset
Amortization of prior service (cost) benefit
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
Pension
$
4,770
(35)
(45)
(2,978)
Other
Postretirement
Benefits
211
$
-
275
-
1,712
2,120
486
(38)
$
3,832
$
448
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income for Fiscal
2019 (Pre-tax):
Net loss
Prior service cost
Amortization of transition asset
Amortization of prior service (cost) benefit
Amortization of net (loss) gain
Total recognized in other comprehensive income
Net periodic benefit cost
Total recognized in net periodic benefit cost and other
comprehensive income
Additional Information
Assumptions
Pension
$
8,098
(211)
(34)
(64)
(2,711)
5,078
2,381
Other
Postretirement
Benefits
18
$
-
-
275
-
293
48
$
7,459
$
341
Pension Benefits
Other
Postretirement Benefits
2020
2.49%
5.89%
2019
3.22%
6.04%
2020
2.37%
2019
3.15%
Pension Benefits
Other
Postretirement Benefits
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 costs for
years ended June 30
Discount rate
Expected return on plan assets
2020
3.22%
6.04%
2019
4.01%
6.74%
2020
3.15%
2019
4.09%
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 74
The assumed weighted-average healthcare cost trend rate was 6.25% in 2020, grading down to 5% in 2025. A 1%
increase in the assumed health care cost trend would increase the accumulated postretirement benefit obligation by
approximately $84 and the service and interest cost by approximately $3. A 1% decrease in the assumed health care
cost trend would decrease the accumulated postretirement benefit obligation by approximately $71 and the service
and interest cost by approximately $3.
Plan Assets
The Company’s Benefits Committee (“Committee”), a non-board management 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, 2020 and 2019 by asset category were
as follows:
Asset Category
Equity securities
Debt securities
Real estate
Target
Allocation
51%
40%
9%
100%
June 30
2020
47%
44%
9%
100%
2019
49%
42%
9%
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 $544 (0.7% of total plan assets)
at June 30, 2020 and 98,211 shares with a fair market value of $1,483 (1.7% of total plan assets) at June 30, 2019.
The U.S. plans have a long-term return assumption of 6.10%. This rate was derived based upon historical experience
and forward-looking return expectations for major asset class categories. The weighted average long-term return
across all plans is 5.89%.
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 similar instruments, or
Unadjusted quoted prices in active markets for identical instruments
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
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 75
The following table presents plan assets using the fair value hierarchy as of June 30, 2020:
Cash and cash equivalents
Equity securities:
Company common stock (a)
Common stock (a)
Mutual funds (b)
Annuity contracts (c)
Total
Total
Level I
$
920
$
920
Level II
$
-
Level III
$
-
544
14,551
7,916
6,095
544
14,551
7,916
-
-
-
-
-
-
-
-
6,095
$
30,026
$
23,931
$
-
$
6,095
Investments Measured at Net Asset Value (d)
53,258
Total
$
83,284
The following table presents plan assets using the fair value hierarchy as of June 30, 2019:
Cash and cash equivalents
Equity securities:
Company common stock (a)
Common stock (a)
Mutual funds (b)
Annuity contracts (c)
Total
Total
Level I
$
971
$
971
Level II
$
-
Level III
$
-
1,483
16,713
7,963
6,171
1,483
16,713
7,963
-
-
-
-
-
-
-
-
6,171
$
33,301
$
27,130
$
-
$
6,171
Investments Measured at Net Asset Value (d)
53,990
Total
$
87,291
(a) Common stock is valued at the closing price reported on the active market on which the individual securities are
traded. These securities include U.S. equity securities invested in companies that are traded on exchanges inside the
U.S. and international equity securities invested in companies that are traded on exchanges outside the U.S.
(b) Mutual funds are valued at the daily closing price as reported by the fund. Mutual funds held by the Company’s
funded benefit plans are open-end mutual funds that are registered with the Securities Exchange Commission. These
funds are required to publish their daily net asset value (“NAV”) and to transact at that price. The mutual funds held
by the Company’s funded benefit plans are deemed to be actively traded.
(c) 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.
(d) In accordance with ASC 820-10, certain investments that were measured at net asset value per share (or its
equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are
intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at the end of the year.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 76
The following table sets forth additional disclosures for the fair value measurement of the fair value of pension plan
assets that calculate fair value based on NAV per share practical expedient as of June 30, 2020 and June 30, 2019:
Fixed income funds
International equity securities
Real estate
Hedged equity mutual funds
Total
2020
$
33,032
2,840
7,186
10,200
2019
$
33,568
3,168
7,069
10,185
$
53,258
$
53,990
The following tables present a reconciliation of the fair value measurements using significant unobservable inputs
(Level III) as of June 30, 2020 and 2019:
Beginning balance
Actual return on plan assets:
Relating to assets still held at reporting date
Purchases, sales and settlements, net
2020
$
6,171
2019
$
6,113
75
(151)
216
(158)
Ending balance
$
6,095
$
6,171
Cash Flows
Contributions
The Company expects to contribute $2,346 to its defined benefit pension plans in fiscal 2021.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
2021
2022
2023
2024
2025
Years 2026 - 2030
Pension
Benefits
Other
Postretirement
Benefits
$
8,944
8,230
7,936
7,547
7,197
32,605
$
1,094
843
769
693
608
2,273
The Company does not expect to make any Part D reimbursements for the periods presented.
The Company sponsors defined contribution plans covering substantially all domestic employees and certain foreign
employees. These plans provide for employer contributions based primarily on employee participation. The total
expense under the plans was $1,949 and $2,276 in fiscal 2020 and 2019, respectively.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 77
O. INCOME TAXES
United States and foreign (loss) income before income taxes and minority interest were as follows:
United States
Foreign
2020
$
(29,332)
(14,408)
2019
$
7,059
7,448
$
(43,740)
$
14,507
The (benefit) provision for income taxes is comprised of the following:
Currently payable:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
2020
2019
$
(149)
30
4,022
$
248
261
(3,644)
3,903
(3,135)
(5,673)
(860)
(1,539)
(8,072)
920
(7)
5,933
6,846
$
(4,169)
$
3,711
The components of the net deferred tax asset as of June 30 are summarized in the table below.
2020
2019
Deferred tax assets:
Retirement plans and employee benefits
Foreign tax credit carryforwards
Federal tax credits
State net operating loss and other state credit carryforwards
Federal net operating loss
Inventory
Reserves
Foreign NOL carryforwards
Accruals
Right of use assets - operating leases
Disallowed interest
Disallowed PPP expenses
Other assets
$
7,934
7,429
1,585
1,696
1,607
205
1,056
555
823
3,920
418
1,320
832
$
7,732
6,296
1,057
1,269
-
757
765
775
339
3,691
-
-
656
Deferred tax liabilities:
Property, plant and equipment
Intangibles
Long term operating lease obligations
Other liabilities
Valuation allowance
29,380
23,337
3,231
3,306
3,855
44
10,436
-
3,432
5,345
3,617
194
12,588
-
Total net deferred tax assets
$
18,944
$
10,749
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 78
At June 30, 2020 the Company has net operating loss carryforwards (“NOLs”) of approximately $7,655 and
$23,132 for federal and state income tax purposes, respectively, which will expire at various dates from fiscal year
2023 – 2040. Federal NOLs generated in fiscal 2020 of $7,655 have an indefinite carryover period. The Company has
federal and state tax credit carryforwards of approximately $9,410 and $975, respectively, which will expire at various
dates from fiscal 2026 – 2040.
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. The Company has evaluated the
likelihood of whether the net deferred tax assets would be realized and concluded that it is more likely than not that all
of deferred tax assets would be realized. 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 all the 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:
U.S. federal income tax at 21%
Increases (reductions) in tax resulting from:
Foreign tax items
State taxes
Change in prior year estimate
Research and development tax credits
Goodwill impairment
Unrecognized tax benefits
Stock compensation
Rate changes
Deferred tax basis adjustments
Executive compensation
GILTI inclusion
FDII deduction
Other, net
2020
2019
$
(9,185)
$
3,046
236
(716)
(213)
(412)
4,814
9
(93)
237
(138)
-
1,220
-
72
281
209
(50)
(306)
-
158
(153)
15
(111)
291
284
(74)
121
$
(4,169)
$
3,711
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the Internal Revenue Code. The
Tax Act is generally applicable for tax years beginning after December 31, 2017, which is the Company’s fiscal year
2018. However, several provisions of the Tax Act have differing effective dates, meaning these provisions did not impact
the Company’s financial statements until fiscal year 2019. The provisions impacting the Company’s fiscal year 2019
financial statements include the global intangible low taxed income (“GILTI”) income and foreign-derived intangible
income (“FDII”) deduction and limitations on the deductibility of executive compensation.
Executive Compensation Limitations: The Tax Act substantially modifies the limitation on corporate deductibility
of executive compensation under Section 162(m) of the Code. Section 162(m) limits the deduction for compensation
paid by a publicly held corporation to certain of its executive employees to $1,000 per year. The Tax Act has amended
the definition of “covered employee” to correspond to the general SEC reporting requirements for named executive
officers. These are the corporation’s principal executive officer, principal financial officer, and the next three highest-
paid executive officers. Most significantly, the Tax Act has eliminated the exemptions for commissions and
performance-based compensation.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 79
Global Intangible Low Taxed Income (“GILTI”): The Tax Act changed the foreign source income calculations
and related foreign tax credit amounts. The GILTI require 10% domestic shareholders (US Shareholders) of controlled
foreign corporations (CFC’s) to include in gross income annually the U.S. Shareholders’ pro rata share of GILTI
for the year.
Foreign Derived Intangible Income (“FDII”): The Tax Act provides companies with a new permanent deduction.
An incentive for C corporations to generate revenue from serving foreign markets, the provision applies a preferential tax
rate to eligible income. The new tax law assumes a fixed rate of return on a corporation’s tangible assets. Any remaining
income is deemed to be generated by intangible assets.
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 $1,729 and $6,208 at June 30, 2020 and June 30, 2019, respectively. Such
earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation.
The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would
be tax effective through the utilization of foreign tax credits.
Annually, the company files income tax returns in various taxing jurisdictions inside and outside the United States.
In general, the tax years that remain subject to examination are 2016 through 2020 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 2016.
The Company has approximately $918 and $938 of unrecognized tax benefits as of June 30, 2020 and June 30, 2019,
respectively, which, if recognized would impact the effective tax rate. During the fiscal year the amount of unrecognized
tax benefits decreased primarily due to statute of limitations that expired. During the next twelve months, the Company
anticipates closure of the Wisconsin income tax audit for the periods fiscal year 2010 through fiscal year 2013. This could
result in a significant change to the 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 as of June 30:
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
2020
$
938
17
2019
$
816
31
87
(19)
(105)
91
-
-
Unrecognized tax benefits, end of year
$
918
$
938
Substantially all of the Company’s unrecognized tax benefits as of June 30, 3020, if recognized, would affect the
effective tax rate. As of June 30, 2020 and 2019, the amounts accrued for interest and penalties totaled $185 and
$148, respectively, and are not included in the reconciliation above.
P. 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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 80
Q. RESTRUCTURING OF OPERATIONS AND OTHER OPERATING INCOME
Restructuring expenses
The Company has implemented various restructuring programs in response to unfavorable macroeconomic trends
in certain of the Company’s markets since the fourth quarter of fiscal 2015. These programs primarily involved the
reduction of workforce in several of the Company’s manufacturing locations, under a combination of voluntary and
involuntary programs. In its European operations, the Company also implemented actions to reorganize
for productivity.
These actions resulted in restructuring charges of $1,953 and $1,179 in fiscal 2020 and 2019, respectively.
Restructuring activities since June 2015 have resulted in the elimination of 207 full-time employees in the manufacturing
segment. Accumulated costs to date under these programs within the manufacturing segment through June 30, 2020
were $12,405.
During the second quarter of fiscal 2020, a marine propulsion development program, for which the Company
had provided development and production services, was terminated. The cost of exiting the contract consisted
of a noncash write-off of assets and liabilities relating to the program amounting to $2,185, and a cash settlement
to satisfy supplier commitments associated with the program amounting to $1,000. The Company has classified
the total contract exit cost of $3,185 as a restructuring charge within the manufacturing segment, in the year ended
June 30, 2020.
The following is a roll-forward of restructuring activity:
Accrued restructuring liability, June 30, 2018
Additions
Payments and adjustments
Accrued restructuring liability, June 30, 2019
Additions
Payments and adjustments
Accrued restructuring liability, June 30, 2020
$
90
1,179
(1,269)
-
5,138
(5,054)
84
$
Other Operating Income – Sale of Mill Log Business
On February 7, 2019, as part of its ongoing initiative to focus resources on core manufacturing and product development
activities, the Company entered into an asset purchase agreement with one of its major distributor customers. Under this
agreement, the Company sold substantially all of the assets and intangible rights of Mill-Log Equipment Co., Inc. and
Mill-Log Wilson Equipment Ltd. (the “Mill Log Business”), its wholly-owned subsidiaries which distributed Twin Disc
products in the northwestern U.S. and western Canada territories. The Mill Log Business reported pre-tax loss of $1,374
in fiscal 2019. The results of operations from the Mill Log Business were reported as part of the Company’s distribution
segment. Assets sold consisted primarily of inventories, with a carrying value of $6,298, and property and equipment
including right-of-use leases, with a carrying value of $592. The sale closed on March 4, 2019 and the Company received
a total consideration of $7,658, consisting of cash proceeds of $5,158 and a note receivable for $2,500 due on March 4,
2020. As of June 30, 2020, the Company has agreed to a revised payment schedule after collecting $500, and is carrying
the balance of $1,200 and $800 in other current assets and other assets, respectively. The Company recognized a pre-tax
gain on sale of the Mill Log Business of $768, and recorded it as part of other operating income in the statement of
operations in fiscal 2019.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 81
Other Operating Income – Fair Value Adjustment of Contingent Consideration
As discussed in Note B, Acquisition of Veth Propulsion Holding B.V., the Company issued a contingent
consideration as part of the Veth Propulsion acquisition; the fair value at acquisition date was $2,921. The
contingency was settled after Veth Propulsion demonstrated that it achieved the earnings before interest, tax,
depreciation and amortization (“EBITDA”) amount as provided for under the Purchase Agreement.
On May 13, 2019, the Company issued 139,347 shares of the Company’s common stock, with a fair value of
$1,991 in settlement of the contingent consideration. Under ASC 805, Business Combinations, any change in fair
value of the contingent consideration is recognized in the current period statement of operations and comprehensive
(loss) income and is not an adjustment to the opening balance sheet or the determination of goodwill. Accordingly,
the Company recognized a gain of $809, after foreign exchange impact; this amount is reported as other operating
income in fiscal 2019.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 82
R. EARNINGS PER SHARE
The Company calculates basic earnings per share based upon the weighted average number of common shares
outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of
potential common shares outstanding during the period. The calculation of diluted earnings per share excludes
all potential common shares if their inclusion would have an anti-dilutive effect. Restricted stock award recipients
under the 2010 LTI Plan have a non-forfeitable right to receive dividends declared by the Company, and are
therefore included in computing earnings per share pursuant to the two-class method.
The components of basic and diluted earnings per share were as follows:
Basic:
Net (loss) income
Less: Net earnings attributable to noncontrolling interest
Less: Undistributed earnings attributable to unvested shares
Net (loss) income available to Twin Disc shareholders
2020
2019
$
$
(39,571)
(246)
-
(39,817)
10,796
(123)
(148)
10,525
Weighted average shares outstanding - basic
13,153
12,571
Basic (Loss) Income Per Share:
Net (loss) income per share - basic
$
(3.03)
$
0.84
Diluted:
Net (loss) income
Less: Net earnings attributable to noncontrolling interest
Less: Undistributed earnings attributable to unvested shares
Net (loss) income available to Twin Disc shareholders
Weighted average shares outstanding - basic
Effect of dilutive stock awards
Weighted average shares outstanding - diluted
Diluted (Loss) Income Per Share:
Net (loss) income per share - diluted
$
$
(39,571)
(246)
-
(39,817)
13,153
-
13,153
10,796
(123)
(148)
10,525
12,571
111
12,682
$
(3.03)
$
0.83
The following potential common shares were excluded from diluted EPS for the year ended June 30, 2020 as the
Company reported a net loss: 167,848 related to the Company’s unvested PSAs, 231,379 related to the Company’s
unvested RS awards, and 37,950 related to the Company’s unvested RSUs.
The following potential common shares were excluded from diluted EPS for the year ended June 30, 2019 because they
were anti-dilutive: 80,164 related to the Company’s unvested PSAs, 172,637 related to the Company’s unvested
RS awards, 13,123 related to the Company’s unvested RSUs, and 3,483 related to outstanding stock options.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 83
S. DERIVATIVE FINANCIAL INSTRUMENTS
The Company reports all derivative instruments on its consolidated balance sheets at fair value and establishes
criteria for designation and effectiveness of transactions entered into for hedging purposes.
As a global organization, the Company faces exposure to market risks, such as fluctuations in foreign currency exchange
rates, interest rates and commodity prices. To manage the volatility relating to these exposures, the Company enters into
various derivative instruments from time to time under its risk management policies. The Company designates derivative
instruments as hedges on a transaction basis to support hedge accounting. The changes in fair value of these hedging
instruments offset in part or in whole corresponding changes in the fair value or cash flows of the underlying exposures
being hedged. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance
with its policy. The Company does not purchase, hold or sell derivative financial instruments for trading purposes.
The Company’s practice is to terminate derivative transactions if the underlying asset or liability matures or is sold
or terminated, or if it determines the underlying forecasted transaction is no longer probable of occurring.
Interest Rate Swaps Designated as Cash Flow Hedges
The primary purpose of the Company’s cash flow hedging activities is to manage the potential changes in value
associated with interest payments on the Company’s LIBOR-based indebtedness. The Company records gains and
losses on interest rate swap contracts qualifying as cash flow hedges in accumulated other comprehensive loss to the
extent that these hedges are effective and until the Company recognizes the underlying transactions in net earnings,
at which time these gains and losses are recognized in interest expense on its consolidated statements of operations
and comprehensive (loss) income. Cash flows from derivative financial instruments are classified as cash flows from
financing activities on the consolidated statements of cash flows. These contracts generally have original maturities
of greater than twelve months.
Net unrealized after-tax losses related to cash flow hedging activities that were included in accumulated other
comprehensive loss were $1,104 and $509 for the years ended June 30, 2020 and 2019, respectively. The unrealized
amounts in accumulated other comprehensive loss will fluctuate based on changes in the fair value of open contracts
during each reporting period.
The Company estimates that $392 of net unrealized losses related to cash flow hedging activities included in
accumulated other comprehensive loss will be reclassified into earnings within the next twelve months.
Foreign Currency Forward Contracts Not Designated as Hedges
The Company primarily enters into forward exchange contracts to reduce the earnings and cash flow impact of non-
functional currency denominated receivables and payables. These contracts are highly effective in hedging the cash
flows attributable to changes in currency exchange rates. Gains and losses resulting from these contracts offset the
foreign exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of the forward
exchange contracts generally coincide with the settlement dates of the related transactions. Gains and losses on these
contracts are recorded in other expense, net in the consolidated statement of operations and comprehensive (loss)
income as the changes in the fair value of the contracts are recognized and generally offset the gains and losses
on the hedged items in the same period. The primary currency to which the Company was exposed in fiscal 2020
and 2019 was the euro. At June 30, 2020, one of the Company’s foreign subsidiaries had one outstanding forward
exchange contract to purchase U.S. dollars in the notional value of $1,247 with a weighted average maturity of 7
days. The fair value of the Company’s contract was a loss of $9 at June 30, 2020. The Company had no outstanding
forward exchange contracts at June 30, 2019.
Other Derivative Instruments
The Company does not utilize commodity price hedges to manage commodity price risk exposure. Likewise,
the Company does not hedge the translation exposure represented by the net assets of its foreign subsidiaries.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 84
Fair Value of Derivative Instruments
The Company’s interest rate swaps and foreign currency forward contracts are recorded at fair value on the
consolidated balance sheets using a discounted cash flow analysis that incorporates observable market inputs.
These market inputs include foreign currency spot and forward rates, and various interest rate curves, and are
obtained from pricing data quoted by various banks, third-party sources and foreign currency dealers involving
identical or comparable instruments (Level 2).
Counterparties to these foreign currency forward contracts have at least an investment grade rating. Credit ratings
on some of the Company’s counterparties may change during the term of the financial instruments. The Company
closely monitors its counterparties’ credit ratings and, if necessary, will make any appropriate changes to its
financial instruments. The fair value generally reflects the estimated amounts that the Company would receive
or pay to terminate the contracts at the reporting date.
The fair value of derivative instruments included in the consolidated balance sheets at June 30 were as follows:
Derivatives designated as hedges:
Interest rate swaps
Interest rate swaps
Accrued liabilities
Other long-term liabilities
$
392
1,052
$
122
544
Balance Sheet Location
2020
2019
The impact of the Company’s derivative instruments on the consolidated statement of operations and comprehensive
(loss) income for the years ended June 30 was as follows:
Derivatives designated as hedges:
Interest rate swaps
Interest rate swaps
Derivatives not designated as hedges:
Foreign currency forward contracts
Statement of Comprehensive
(Loss) Income Location
2020
2019
Interest expense
Unrealized loss on cash flow hedge
$
171
(595)
$
1
(509)
Other income (expense), net
$
(9)
$
4
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 85
TWIN DISC, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 2020 and 2019
(in thousands)
Balance at
-----------
Additions------
Charged to
Beginning
Costs and
of Period
Expenses
Balance at
End of
Period
Deductions
(1)
Description
2020:
Allowance for losses on
accounts receivable
$ 1,582 $ 399 $ 241
$ 1,740
Reserve for inventory
obsolescence
$ 10,463 $ 1,532 $ 2,132
$ 9,863
2019:
Allowance for losses on
accounts receivable
$ 1,478 $ 236 $ 132
$ 1,582
Reserve for inventory
obsolescence
$ 8,427 $ 1,934 $ (102) $ 10,463
(1) Activity primarily represents amounts written-off during the year, along with other adjustments (primarily
foreign currency translation adjustments).
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 86
EXHIBIT INDEX
Exhibit
Description
TWIN DISC, INCORPORATED
10-K for Year Ended June 30, 2020
3a)
3b)
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
May 1, 2019 (Incorporated by reference to Exhibit 3.1 of the
Company's Form 8-K dated May 3, 2019). File No. 001-07635.
Exhibit 10 Material Contracts
Included
Herewith
Included
Herewith
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
Director Tenure and Retirement Policy (Incorporated by reference
to Exhibit 10a) of the Company’s June 30, 2016 Form 10-K dated
September 13, 2016). 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.
The Twin Disc, Incorporated 2018 Long-Term Incentive Compensation
Plan (Incorporated by reference to Exhibit 10.1 of the Company’s
Form 8-K dated August 6, 2018). File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of
performance shares on August 1, 2018 (Incorporated by reference
to Exhibit 10.2 of the Company’s Form 8-K dated August 6, 2018).
File No. 001-07635.
Form of Restricted Stock Unit Grant Agreement for restricted
stock units granted on August 1, 2018 (Incorporated by reference
to Exhibit 10.3 of the Company’s Form 8-K dated August 6, 2018).
File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of
performance shares on August 24, 2018 (Incorporated by reference
to Exhibit 10.1 of the Company’s Form 8-K dated August 28, 2018).
File No. 001-07635.
Form of Restricted Stock Unit Grant Agreement for restricted
stock units granted on August 24, 2018 (Incorporated by reference
to Exhibit 10.2 of the Company’s Form 8-K dated August 28, 2018).
File No. 001-07635.
Form of Restricted Stock Award Grant Agreement for restricted
stock grants on May 1, 2019 (Incorporated by reference to
Exhibit 10.1 of the Company’s Form 8-K dated May 3, 2019).
File No. 001-07635.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 87
k)
l)
m)
n)
o)
p)
q)
r)
s)
t)
u)
v)
w)
Form of Performance Stock Award Grant Agreement for award
of performance shares on May 1, 2019 (Incorporated by reference
to Exhibit 10.2 of the Company’s Form 8-K dated May 3, 2019).
File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award
of performance shares on August 1, 2019 (Incorporated by reference
to Exhibit 10.1 of the Company’s Form 8-K dated August 7, 2019).
File No. 001-07635.
Form of Restricted Stock Award Grant Agreement for restricted
stock grants on August 1, 2019 (Incorporated by reference to
Exhibit 10.2 of the Company’s Form 8-K dated August 7, 2019).
File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award of
performance shares on October 31, 2019 (Incorporated by reference
to Exhibit 10.1 of the Company’s Form 8-K dated November 5,
2019). File No. 001-07635.
Form of Restricted Stock Award Grant Agreement for restricted
stock grants on October 31, 2019 (Incorporated by reference to
Exhibit 10.2 of the Company’s Form 8-K dated November 5, 2019).
File No. 001-07635.
Form of Performance Stock Award Grant Agreement for award
of performance shares on August 6, 2020 (Incorporated by reference
to Exhibit 10.1 of the Company’s Form 8-K dated August 12, 2020).
File No. 001-07635.
Form of Restricted Stock Award Grant Agreement for restricted
stock grants on August 6, 2020 (Incorporated by reference to
Exhibit 10.2 of the Company’s Form 8-K dated August 12, 2020).
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 6, 2018). 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 and BMO
Harris Bank, dated June 29, 2018 (Incorporated by reference to
Exhibit 10.1 of the Company’s Form 8-K dated July 3, 2018).
File No. 001-07635.
Amendment and Assignment of Revolving Loan Note between
Bank of Montreal and BMO Harris Bank, N.A., dated June 29, 2018.
(Incorporated by reference to Exhibit 10.2 of the Company’s Form
8-K dated July 3, 2018). File No. 001-07635.
Assignment of and Amendment to Security Agreement By and
Among Bank of Montreal, BMO Harris Bank, N.A., and Twin Disc,
Incorporated, dated June 29, 2018. (Incorporated by reference to
Exhibit 10.3 of the Company’s Form 8-K dated July 3, 2018).
File No. 001-07635.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 88
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Assignment of and Amendment to IP Security Agreement By and
Among Bank of Montreal, BMO Harris Bank, N.A., and Twin Disc,
Incorporated, dated June 29, 2018. (Incorporated by reference to
Exhibit 10.4 of the Company’s Form 8-K dated July 3, 2018).
File No. 001-07635.
Assignment of and Amendment to Pledge Agreement By and Among
Bank of Montreal, BMO Harris Bank, N.A., Twin Disc, Incorporated,
and Mill-Log Equipment Co., Inc., dated June 29, 2018. (Incorporated
by reference to Exhibit 10.5 of the Company’s Form 8-K dated July 3,
2018). File No. 001-07635.
Assignment of and Amendment to the Guaranty Agreement By and
Among Bank of Montreal, BMO Harris Bank, N.A., and Mill-Log
Equipment Co., Inc., dated June 29, 2018. (Incorporated by reference
to Exhibit 10.6 of the Company’s Form 8-K dated July 3, 2018).
File No. 001-07635.
Assignment of and Amendment to Guarantor Security Agreement
By and Among Bank of Montreal, BMO Harris Bank, N.A., and
Mill-Log Equipment Co., Inc., dated June 29, 2018. (Incorporated
by reference to Exhibit 10.7 of the Company’s Form 8-K dated
July 3, 2018). File No. 001-07635.
Assignment of and Amendment to Negative Pledge Agreement By
and Among Twin Disc, Incorporated, Bank of Montreal, and BMO
Harris Bank N.A., dated June 29, 2018. (Incorporated by reference
to Exhibit 10.8 of the Company’s Form 8-K dated July 3, 2018).
File No. 001-07635.
Collateral Assignment of Rights under Purchase Agreement from
Twin Disc, Incorporated and Twin Disc NL Holding B.V. in favor
of BMO Harris Bank N.A., dated July 2, 2018. (Incorporated by
reference to Exhibit 10.9 of the Company’s Form 8-K dated July 3,
2018). File No. 001-07635.
First Amendment to June 29, 2018 Credit Agreement between
Twin Disc, Incorporated and BMO Harris Bank, N.A. (Incorporated
by reference to Exhibit 1.2 of the Company’s Form 8-K dated
September 21, 2018). File No. 001-07635.
Amendment No. 2 to June 29, 2018 Credit Agreement between
Twin Disc, Incorporated and BMO Harris Bank, N.A. (Incorporated
by reference to Exhibit 1.1 of the Company’s Form 8-K dated March
6, 2019). File No. 001-07635.
Amended and Restated Term Note between Twin Disc, Incorporated
and BMO Harris Bank, N.A. (Incorporated by reference to Exhibit
1.2 of the Company’s Form 8-K dated March 6, 2019). File No.
001-07635.
Amendment No. 3 to June 29, 2018 Credit Agreement between
Twin Disc, Incorporated and BMO Harris Bank, N.A. (Incorporated
by reference to Exhibit 1.1 of the Company’s Form 8-K dated
January 30, 2020). File No. 001-07635.
Promissory Note dated April 17, 2020, entered into by Twin Disc,
Incorporated, as borrower, for the benefit of BMO Harris Bank,
N.A., as lender (Incorporated by reference to Exhibit 10.1 of the
Company’s Form 8-K dated April 21, 2020). File No. 001-07635.
Amendment No. 4 to June 29, 2018 Credit Agreement between
Twin Disc, Incorporated and BMO Harris Bank, N.A. (Incorporated
by reference to Exhibit 1.2 of the Company’s Form 8-K dated April
21, 2020). File No. 001-07635.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 89
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Amendment No. 5 to June 29, 2018 Credit Agreement between
Twin Disc, Incorporated and BMO Harris Bank, N.A. (Incorporated
by reference to Exhibit 1.1 of the Company’s Form 8-K dated July
28, 2020). File No. 001-07635.
Second Amended and Restated Revolving Note between Twin Disc,
Incorporated and BMO Harris Bank, N.A. (Incorporated by reference
to Exhibit 1.2 of the Company’s Form 8-K dated July 28, 2020).
File No. 001-07635.
Form of Deposit Account Control Agreement between Twin Disc,
Incorporated and BMO Harris Bank, N.A. (Incorporated by reference
to Exhibit 1.3 of the Company’s Form 8-K dated July 28, 2020).
File No. 001-07635.
ISDA Master Agreement and Schedule, dated April 11, 2019, between
Twin Disc, Incorporated and Bank of Montreal (Incorporated by
reference to Exhibit 10.1 of the Company’s Form 8-K dated April 26,
2019). File No. 001-07635.
Confirmation of swap transaction, dated April 22, 2019, from Bank
of Montreal to Twin Disc, Incorporated (Incorporated by reference
to Exhibit 10.2 of the Company’s Form 8-K dated April 26, 2019).
File No. 001-07635.
Exhibit
21
23a
24
31a
31b
32a
32b
Description
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
Herewith
X
X
X
X
X
X
X
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document, filed herewith
XBRL Schema Document, filed herewith
XBRL Calculation Linkbase Document, filed herewith
XBRL Definition Linkbase Document, filed herewith
XBRL Label Linkbase Document, filed herewith
XBRL Presentation Linkbase, filed herewith
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 90
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.
August 26, 2020
TWIN DISC, INCORPORATED
By: /s/ JOHN H. BATTEN
John H. Batten
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.
August 26, 2020
August 26, 2020
August 26, 2020
August 26, 2020
August 26, 2020
By: /s/ DAVID B. RAYBURN
David B. Rayburn
Chairman of the Board
By: /s/ JOHN H. BATTEN
John H. Batten
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
David W. Johnson, 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)
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 91
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. Twin Disc Japan (a Japanese corporation)
8. Twin Disc Power Transmission Private, Ltd. (an Indian limited liability corporation)
9. Twin Disc Power Transmission (Shanghai) Co. Ltd. (a Chinese corporation)
10. Twin Disc Netherlands Holdings B.V. (a Netherlands corporation)
11. Twin Disc NL Holding B.V. (a Netherlands corporation)
12. Veth Propulsion Holding B.V. (a Netherlands corporation)
13. Veth Propulsion B.V. (a Netherlands corporation)
14. Twin Disc European Distribution S.P.R.L (a Belgian 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.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 92
EXHIBIT 23a
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Nos. 333-99229, 333-119770, 333-
169963, 333-169962 and 333-228245) on Form S-8 and (No. 333-227130) on Form S-3 of Twin Disc, Incorporated
of our reports dated August 26, 2020, relating to the consolidated financial statements, the financial statement
schedule and the effectiveness of internal control over financial reporting of Twin Disc, Incorporated, appearing
in this Annual Report on Form 10-K of Twin Disc, Incorporated for the year ended June 30, 2020.
/s/ RSM US LLP
Milwaukee, Wisconsin
August 26, 2020
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 93
.
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, 2020
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 W. JOHNSON
David W. Johnson, 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
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)
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August 6, 2020
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 94
EXHIBIT 31a
CERTIFICATIONS
I, John H. Batten, certify that:
1.
I have reviewed this annual report on Form 10-K of Twin Disc, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this 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 an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the 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: August 26, 2020
By: /s/ JOHN H. BATTEN
John H. Batten
Chief Executive Officer
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 95
EXHIBIT 31b
CERTIFICATIONS
I, Jeffrey S. Knutson, certify that:
1.
I have reviewed this annual report on Form 10-K of Twin Disc, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this 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 an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant's auditors and the audit committee of the
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: August 26, 2020
/s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial
Officer, Treasurer and Secretary
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 96
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, 2020, as filed with the Securities and Exchange Commission as of the date hereof (the “Report”),
I, John H. Batten, 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: August 26, 2020
By: /s/ JOHN H. BATTEN
John H. Batten
Chief Executive Officer
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 97
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, 2020, 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)
(2)
the Report fully complies with Section 13(a) of the Securities Exchange Act of 1934, and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: August 26, 2020
By: /s/ JEFFREY S. KNUTSON
Jeffrey S. Knutson
Vice President - Finance, Chief Financial
Officer, Treasurer and Secretary
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 98
5-YEAR
FINANCIAL SUMMARY
(Dollar amounts in thousands, except per share statistics)
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
Net sales
Cost and expenses, including marketing,
engineering and administrative
(Loss) income from operations
Other income (expense)
(Loss) income before income taxes and
noncontrolling interest
Income taxes
Noncontrolling interest
Net (loss) income attributable to Twin Disc
2020
2019
2018
2017
2016
$ 246,838
287,089
$ 302,663
284,165
$ 240,733
224,585
$ 168,182
177,160
$ 166,282
190,878
(40,251)
(3,489)
(43,740)
(4,169)
(246)
(39,817)
18,498
(3,991)
14,507
3,711
(123)
10,673
16,148
(1,728)
14,420
4,773
(119)
9,528
(8,978)
(551)
(9,529)
(3,414)
(179)
(6,294)
(24,596)
(699)
(25,295)
(12,282)
(91)
(13,104)
BALANCE SHEET
ASSETS
Cash
Accounts receivable, 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
$ 10,688
30,682
120,607
12,008
173,985
47,410
72,732
294,127
$ 12,362
44,013
125,893
20,101
202,369
73,243
71,258
346,870
$ 15,171
45,422
84,001
14,675
159,269
26,504
55,467
241,240
$ 16,367
31,392
66,193
15,482
129,434
33,252
48,212
210,898
$ 18,273
25,363
66,569
14,830
125,035
37,222
51,665
213,922
$ 66,734
37,896
49,539
139,389
569
294,127
$ 73,077
40,491
50,484
182,216
602
346,870
$ 62,344
4,824
30,456
142,997
619
241,240
$ 44,523
6,323
36,485
122,921
646
210,898
$ 36,131
8,501
52,237
116,490
563
213,922
COMPARATIVE FINANCIAL INFORMATION
Per share statistics
Basic (loss) income
Diluted (loss) income
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
$ (3.03)
(3.03)
–
10.60
-28.6%
-13.5%
-16.1%
13,153,330
13,153,330
405
806
$ 10,699
7,394
107,251
$ 0.84
0.83
–
14.49
5.9%
3.1%
3.5%
12,571,013
12,681,574
415
873
$ 11,979
6,682
129,292
$ 0.82
0.82
–
12.66
6.7%
3.9%
4.0%
11,294,914
11,395,072
435
696
$ 6,328
6,315
96,925
$ (0.56)
(0.56)
–
10.94
-5.1%
-3.0%
-3.7%
11,239,474
11,239,474
484
672
$ 3,133
6,849
84,911
$ (1.17)
(1.17)
0.18
10.40
-11.2%
-6.1%
-7.9%
11,202,752
11,202,752
512
742
$ 4,214
8,682
88,904
* Certain amounts in fiscal year 2018 have been restated to conform with recently issued accounting guidance that were effective at the
beginning of fiscal year 2019. See the notes to the financial statements.
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 99
TWIN DISC, INCORPORATED 2020 ANNUAL REPORT | 11
1328 Racine Street, Racine, Wisconsin 53403 USA
TWINDISC.COM