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0000100378-07-000033.txt : 20070913
0000100378-07-000033.hdr.sgml : 20070913
20070913150422
ACCESSION NUMBER: 0000100378-07-000033
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20070630
FILED AS OF DATE: 20070913
DATE AS OF CHANGE: 20070913
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TWIN DISC INC
CENTRAL INDEX KEY: 0000100378
STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560]
IRS NUMBER: 390667110
STATE OF INCORPORATION: WI
FISCAL YEAR END: 0906
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-07635
FILM NUMBER: 071115403
BUSINESS ADDRESS:
STREET 1: 1328 RACINE ST
CITY: RACINE
STATE: WI
ZIP: 53403
BUSINESS PHONE: 2626384000
MAIL ADDRESS:
STREET 1: 1328 RACINE STREET
CITY: RACINE
STATE: WI
ZIP: 53403
FORMER COMPANY:
FORMER CONFORMED NAME: TWIN DISC CLUTCH CO
DATE OF NAME CHANGE: 19770217
10-K
1
r10k07.htm
r10k07.pdf -- Converted by SECPublisher 4.0, created by BCL Technologies Inc., for SEC Filing
|
|
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, 2007 |
Commission File Number 1-7635 |
|
TWIN DISC, INCORPORATED |
(Exact Name of Registrant as Specified in its
Charter) |
|
Wisconsin |
|
39-0667110 |
(State or Other Jurisdiction of Incorporation or
Organization) |
|
(I.R.S. Employer Identification Number) |
|
1328 Racine Street, Racine, Wisconsin
|
|
53403 |
(Address of Principal Executive Office) |
|
(Zip
Code) |
|
Registrant's Telephone Number, including area code:
(262)638-4000 |
|
Securities registered pursuant to Section 12(b) of the
Act: |
|
Title of each class |
|
Name
of each exchange on which registered: |
Common stock, no par |
|
The NASDAQ Stock Market LLC
|
Securities registered pursuant to Section 12(B) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405of the Securities
Act. YES [ ] NO
[ x
]
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 [ x ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES [ ] NO [ x ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Large Accelerated Filer [
]
Accelerated Filer [ x
]
Non -accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the
Act).
YES [ ]
NO [ x ]
At December 29, 2006, the last business day of the registrants second
fiscal quarter, the aggregate market value of the common stock held by
non-affiliates of the registrant was $161,978,797. 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.
1
At August 31, 2007, the registrant had 5,696,437 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held October 19, 2007, 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.
2
PART I
Item 1. Business
Twin Disc was incorporated under the laws of the state of Wisconsin in 1918. Twin Disc designs, manufactures and sells marine and heavy duty off-highway power transmission equipment.
Products offered include: marine transmissions, surface drives, propellers and boat management systems as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls systems. The Company sells
its products to customers primarily in the pleasure craft, commercial and military marine markets as well as in the energy and natural resources, government and industrial markets. The Company's worldwide sales to both domestic and foreign customers
are transacted through a direct sales force and a distributor network. The products described above have accounted for more than 90% of revenues in each of the last three fiscal years.
Most of the Company's products are machined from cast iron, forgings, cast aluminum and bar steel which generally are available from multiple sources and which are believed to be in
adequate supply.
In May 2006, the Company acquired four related foreign entities: B.C.S. S.r.l., an Italian limited liability company; B.C.S. Service S.r.l., an Italian limited liability company; Boat
Equipment Limited, a Maltese limited liability company; and Vetus Italia S.r.l., an Italian limited liability company. The total purchase price for the acquisition of the four entities was 17,715,000 ($22,707,000). The entire purchase
price was paid in cash by wire transfer at closing. For further information, see Note Q, Acquisitions, in the Notes to the Consolidated Financial Statements. All of the acquired entities are included in the Manufacturing segment, with
the exception of Vetus Italia S.r.l., which is included in the Distribution segment.
The Company has pursued a policy of applying for patents in both the United States and certain foreign countries on inventions made in the course of its development work for which
commercial applications are considered probable. The Company regards its patents collectively as important but does not consider its business dependent upon any one of such patents.
The business is not considered to be seasonal except to the extent that employee vacations are taken mainly in the months of July and August, curtailing production during that
period.
The Company's products receive direct widespread competition, including from divisions of other larger independent manufacturers. The Company also competes for business with parts
manufacturing divisions of some of its major customers. Primary competitive factors for the Companys products are performance, price, service and availability. The Companys top ten customers accounted for approximately 29% of the
Company's consolidated net sales during the year ended June 30, 2007. There was one customer, Sewart Supply, Inc., that accounted for approximately 10% of consolidated net sales in fiscal 2007.
Unfilled open orders for the next six months of $110,357,000 at June 30, 2007 compares to $91,598,000 at June 30, 2006. Since orders are subject to cancellation and
rescheduling by the customer, the six-month order backlog is considered more representative of operating conditions than total backlog. However, as procurement and manufacturing "lead times" change, the backlog will increase or decrease; and thus it
does not necessarily provide a valid indicator of the shipping rate. Cancellations are generally the result of rescheduling activity and do not represent a material change in backlog.
Management recognizes that there are attendant risks that foreign governments may place restrictions on dividend payments and other movements of money, but these risks are considered
minimal due to the political relations the United States maintains with the countries in which the Company operates or the relatively low investment within individual countries. The Companys business is not subject to renegotiation of profits
or termination of contracts at the election of the Government.
Engineering and development costs include research and development expenses for new product development and major improvements to existing products, and other charges for ongoing
efforts to refine existing products. Research and development costs charged to operations totaled $3,329,000, $2,024,000 and $2,278,000 in 2007, 2006 and 2005, respectively. Total engineering and development costs were $9,327,000,
$8,070,000 and $8,050,000 in 2007,
3
2006 and 2005, respectively.
Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not
anticipated to have a material effect on capital expenditures, earnings or the competitive position of the Company.
The number of persons employed by the Company at June 30, 2007 was 1,011.
A summary of financial data by segment and geographic area for the years ended June 30, 2007, 2006 and 2005 appears in Note J to the consolidated financial statements on pages 39
through 41 of this form.
Item 1A. Risk Factors
The Companys 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 or deemed immaterial may also result in adverse results for the Companys business.
As a global company, we are subject to currency fluctuations and any significant movement between the U.S. Dollar and the Euro, in particular, could have an adverse
effect on our profitability. Although the Companys financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are
realized in Euros and other foreign currencies. The Companys profitability is affected by movements of the U.S. dollar against the Euro and the other currencies in which we generate revenues and incur expenses. Significant long-term
fluctuations in relative currency values, in particular a significant change in the relative values of the U.S. dollar or Euro, could have an adverse effect on our profitability and financial condition.
Certain of the Companys products are directly or indirectly used in oil exploration and oil drilling, and are thus dependent upon the strength of those markets
and oil prices. Over the past several years, the Company has seen a significant growth in the sales of its products that are used in oil and energy related markets. The
growth in these markets has been spurred by the rise in oil prices and the global demand for oil. In addition, there has been a substantial increase in capital investment by companies in these markets. A significant decrease in oil prices, the
demand for oil and/or capital investment in the oil and energy markets could have an adverse effect on the sales of these products and ultimately on the Companys profitability.
Many of the Companys 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 can have a material adverse effect on the Companys 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's 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.
Given the 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 recent growth in the global economy and the continued development of certain third world economies, in particular China and
India, the global demand for steel has risen significantly in recent years. The Company selects its suppliers based on a number of criteria, and we expect that they will be able to support our growing needs. However, there can be no assurance that a
significant increase in demand, capacity constraints or other issues experienced by the Companys suppliers
4
will not result in shortages or delays in their supply of raw materials to the Company. If the Company were to experience a significant or prolonged shortage of critical components
from any of its suppliers, particularly those who are sole sources, and could not procure the components from other sources, the Company would be unable to meet its production schedules for some of its key products and would miss product delivery
dates which would adversely affect our sales, profitability and relationships with our customers.
If the Company were to lose business with any key customers, the Companys business would be adversely affected. Although there was only one customer that accounted for 10% or more of consolidated net sales in fiscal 2007, deterioration of a business relationship with one or more of the Companys
significant customers would cause its sales and profitability to be adversely affected.
The Company continues to face increasing commodity costs, including steel, other raw materials and energy that could have an adverse effect on future profitability.
To date, the Company has been successful with offsetting the effects of increased commodity costs through cost reduction programs and pricing actions. However, if
material prices were to continue to increase at a rate that could not be recouped through product pricing, it could potentially have an adverse effect on our future profitability.
The termination of relationships with the Companys 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 Companys
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 Companys 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 Companys products is one of its competitive
advantages. While the Company prides itself on putting in place procedures to ensure the quality and performance of its products and suppliers, a significant quality or product issue, whether due to design, performance, manufacturing or supplier
quality issue, could lead to warranty actions, scrapping of raw materials, finished goods or sold products, the deterioration in a customer relation, 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 45% of our consolidated net sales for fiscal 2007. We have international manufacturing operations in Belgium,
Italy and Switzerland. In addition, we have international distribution operations in Singapore, China, Australia, Japan, Italy and Canada. Our international sales and operations are subject to a number of risks, including:
-
currency exchange rate fluctuations
-
export and import duties, changes to import and export regulations, and restrictions on the transfer of funds
-
problems with the transportation or delivery of our products
-
issues arising from cultural or language differences and labor unrest
-
longer payment cycles and greater difficulty in collecting accounts receivables
-
compliance with trade and other laws in a variety of jurisdictions
These factors could adversely affect our business, results of operations or financial condition.
5
A material disruption at the Companys manufacturing facilities in Racine, Wisconsin could adversely affect its ability to generate sales and meet customer
demand. Nearly two-thirds of the Companys manufacturing, based on fiscal 2007s sales, came from its two facilities in Racine, Wisconsin. If operations at
these facilities were to be disrupted as a result of significant equipment failures, natural disasters, power outages, fires, explosions, adverse weather conditions or other reasons, the Companys 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.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Manufacturing Segment
The Company owns two manufacturing, assembly and office facilities in Racine, Wisconsin, U.S.A., one in Nivelles, Belgium, two in Decima, Italy and one in Novazzano, Switzerland. The
aggregate floor space of these five plants approximates 724,000 square feet. One of the Racine facilities includes office space, which includes the Company's corporate headquarters. The Company leases additional manufacturing, assembly and office
facilities in Italy (Limite sullArno) and India (outsourcing office in Chennai).
Distribution Segment
The Company also has operations in the following locations, all of which are used for sales offices, warehousing and light assembly or product service. The following properties are
leased:
Jacksonville, Florida, U.S.A.
|
|
Limite sullArno, Italy
|
Miami, Florida, U.S.A.
|
|
Brisbane, Queensland, Australia
|
Coburg, Oregon, U.S.A.
|
|
Perth, Western Australia, Australia
|
Kent, Washington, U.S.A.
|
|
Singapore
|
Edmonton, Alberta, Canada
|
|
Shanghai, China
|
Vancouver, British Columbia, Canada
|
|
Guangzhou, China
|
The properties are generally suitable for operations and are utilized in the manner for which they were designed. Manufacturing facilities are currently operating at less than 90%
capacity and are adequate to meet foreseeable needs of the Company.
Item 3. Legal Proceedings
Twin Disc is a defendant in several product liability or related claims of which the ultimate outcome and liability to
6
the Company, if any, is not presently determinable. Management believes that the final disposition of such litigation will not have a material impact on the Companys results of
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the year ended June 30, 2007.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for
the Annual Meeting of Shareholders to be held on October 19, 2007.
Name
|
|
Age
|
|
Position
|
Michael E. Batten
|
|
67
|
|
Chairman, President and Chief Executive Officer
|
Christopher J. Eperjesy
|
|
39
|
|
Vice President Finance, Chief Financial Officer and Secretary
|
James E. Feiertag
|
|
50
|
|
Executive Vice President
|
John H. Batten
|
|
42
|
|
Executive Vice President
|
Henri-Claude Fabry
|
|
61
|
|
Vice President - Global Distribution
|
Dean J. Bratel
|
|
43
|
|
Vice President - Engineering
|
Denise L. Wilcox
|
|
50
|
|
Vice President - Human Resources
|
Jeffrey S. Knutson
|
|
42
|
|
Corporate Controller
|
Officers are elected annually by the Board of Directors at the Board meeting held preceding each Annual Meeting of the Shareholders. Each officer holds office until his successor is
duly elected, or until he resigns or is removed from office. John H. Batten is the son of Michael E. Batten.
Michael E. Batten, Chairman of the Board, President and Chief Executive Officer. Mr. Batten has been employed with the Company since 1970, and was named Chairman and Chief Executive
Officer in 1991. Mr. Batten was named President in 2006, upon the retirement of Michael Joyce.
Christopher J. Eperjesy, Vice President Finance, Chief Financial Officer and Secretary. Mr. Eperjesy joined the Company in November 2002 as Vice President Finance &
Treasurer and Chief Financial Officer. Prior to joining Twin Disc, Mr. Eperjesy was Divisional Vice President Financial Planning & Analysis for Kmart Corporation since 2001, and Senior Manager Corporate Finance with DaimlerChrysler
AG since 1999.
James E. Feiertag, Executive Vice President. Mr. Feiertag was appointed to his present position in October 2001. Prior to being promoted, he served as Vice President
Manufacturing since joining the Company in November 2000. Prior to joining Twin Disc, Mr. Feiertag was the Vice President of Manufacturing for the Drives and Systems Group of Rockwell Automation since 1999.
John H. Batten, Executive Vice President. Mr. Batten was promoted to his current role in November 2004, after serving as Vice President and General Manager Marine and
Propulsion since October 2001 and Commercial Manager Marine and Propulsion since 1998. Mr. Batten joined Twin Disc in 1996 as an Application Engineer. Mr. Batten is the son of Mr. Michael Batten.
Henri Claude Fabry, Vice President Global Distribution. Mr. Fabry was appointed to his current position in October 2001, after serving as Vice President Marine and
Distribution since 1999. Mr. Fabry joined Twin Disc in 1997 as Director, Marketing and Sales of the Belgian subsidiary.
Dean J. Bratel, Vice President - Engineering. Mr. Bratel was promoted to his current role in November 2004 after
7
serving as Director of Corporate Engineering (since January 2003), Chief
Engineer (since October 2001) and Engineering Manager (since December 1999). Mr.
Bratel joined Twin Disc in 1987.
Denise L. Wilcox, Vice President - Human Resources. After joining the
Company as Manager Compensation & Benefits in September 1998, Ms. Wilcox was
promoted to Director Corporate Human Resources in March 2002 and to her current
role in November 2004. Prior to joining Twin Disc, Ms. Wilcox held positions
with Johnson International and Runzheimer International.
Jeffrey S. Knutson, Corporate Controller. Mr. Knutson was appointed to
his current role in October 2005 after joining the Company in February 2005 as
Controller of North American Operations. Prior to joining Twin Disc, Mr. Knutson
held Operational Controller positions with Tower Automotive (since August 2002)
and Rexnord Corporation (since November 1998).
PART
II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's common stock is traded on the NASDAQ Global Market under
the symbol TWIN. Prior to October 21, 2004, the Companys common stock was
traded on the New York Stock Exchange under the symbol TDI. The price
information below, which reflects the impact of the March 31, 2006 stock split,
represents the high and low bid information for the Companys common stock from
July 1, 2005 through June 30, 2006, and the high and low sales prices from July
1, 2006 through June 30, 2007:
|
|
Fiscal Year Ended 6/30/07 |
|
Fiscal Year Ended 6/30/06 |
Quarter |
|
High |
|
Low |
|
Dividend |
|
High |
|
Low |
|
Dividend |
First Quarter |
|
$38.00 |
|
$30.29 |
|
$
0.0950 |
|
$21.50 |
|
$10.73 |
|
$
0.0875 |
Second Quarter |
|
36.56 |
|
31.01 |
|
0.0950 |
|
23.99 |
|
17.50 |
|
0.0875 |
Third Quarter |
|
46.98 |
|
32.50 |
|
0.1100 |
|
30.00 |
|
22.00 |
|
0.0950 |
Fourth Quarter |
|
76.00 |
|
42.20 |
|
0.1100 |
|
35.93 |
|
25.26 |
|
0.0950 |
For information regarding the Companys equity-based compensation plans,
see the discussion under Item 12 on page 25 of this report. As of August 31,
2007 there were 778 shareholder accounts. The closing price of Twin Disc common
stock as of August 31, 2007 was $54.27.
Pursuant to a shareholder rights plan (the "Rights Plan"), on April 17,
1998, the Board of Directors declared a dividend distribution, payable to
shareholders of record at the close of business on June 30, 1998, of one
Preferred Stock Purchase Right ("Rights") for each outstanding share of Common
Stock (pursuant to the split of the Companys stock in fiscal 2006, each share
of common stock currently has one-half of a Right). The Rights will expire 10
years after issuance, and will be exercisable only if a person or group becomes
the beneficial owner of 15% or more of the Common Stock (or 25% in the case of
any person or group which currently owns 15% or more of the shares or who shall
become the Beneficial Owner of 15% or more of the shares as a result of any
transfer by reason of the death of or by gift from any other person who is an
Affiliate or an Associate of such existing holder or by succeeding such a person
as trustee of a trust existing on the record date) (an Acquiring Person), or
10 business days following the commencement of a tender or exchange offer that
would result in the offeror beneficially owning 25% or more of the Common Stock.
A person who is not an Acquiring Person will not be deemed to have become an
Acquiring Person solely as a result of a reduction in the number of shares of
Common Stock outstanding due to a repurchase of Common Stock by the Company
until such person becomes beneficial owner of any additional shares of Common
Stock. Each Right will entitle shareholders who received the Rights to buy one
newly issued unit of one one-hundredth of a share of Series A Junior Preferred
Stock at an exercise price of $160, subject to certain anti-dilution
adjustments. The Company will generally be entitled to redeem the Rights at $.05
per Right at any time prior to 10 business days after a public announcement of
the existence of an Acquiring Person. In addition, if (i) a
8
person or group accumulates more than 25% of the Common Stock (except
pursuant to an offer for all outstanding shares of Common Stock which the
independent directors of the Company determine to be fair to and otherwise in
the best interests of the Company and its shareholders and except solely due to
a reduction in the number of shares of Common Stock outstanding due to the
repurchase of Common Stock by the Company), (ii) a merger takes place with an
Acquiring Person where the Company is the surviving corporation and its Common
Stock is not changed or exchanged, (iii) an Acquiring Person engages in certain
self-dealing transactions, or (iv) during such time as there is an Acquiring
Person, an event occurs which results in such Acquiring Person's ownership
interest being increased by more than 1% (e.g., a reverse stock split), each
Right (other than Rights held by the Acquiring Person and certain related
parties which become void) will represent the right to purchase, at the exercise
price, Common Stock (or in certain circumstances, a combination of securities
and/or assets) having a value of twice the exercise price. In addition, if
following the public announcement of the existence of an Acquiring Person the
Company is acquired in a merger or other business combination transaction,
except a merger or other business combination transaction that takes place after
the consummation of an offer for all outstanding shares of Common Stock that the
independent directors of the Company have determined to be fair, or a sale or
transfer of 50% or more of the Company's assets or earning power is made, each
Right (unless previously voided) will represent the right to purchase, at the
exercise price, common stock of the acquiring entity having a value of twice the
exercise price at the time.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on a substantial number of Rights being acquired.
However, the Rights are not intended to prevent a take-over, but rather are
designed to enhance the ability of the Board of Directors to negotiate with an
acquirer on behalf of all of the shareholders. In addition, the Rights should
not interfere with a proxy contest.
The Rights should not interfere with any merger or other business
combination approved by the Board of Directors since the Rights may be redeemed
by the Company at $.05 per Right prior to 10 business days after the public
announcement of the existence of an Acquiring Person.
The news release announcing the declaration of the Rights dividend, dated
April 17, 1998, filed as Exhibit 99 of the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 1998, is hereby incorporated by
reference.
Recent Sales of Unregistered Securities
During the period covered by this report, the Company offered
participants in the Twin Disc, Incorporated 401(k) Savings Plan (the Plan) the
option to invest their Plan accounts in a fund comprised of Company stock.
Participation interests of Plan participants in the Plan, which may be
considered securities, were not registered with the SEC. Participant accounts in
the Plan consist of a combination of employee deferrals, Company matching
contributions, and, in some cases, additional Company profit-sharing
contributions. No underwriters were involved in these transactions. On September
6, 2002, the Company filed a Form S-8 to register 200,000 shares (split
adjusted) of Company common stock offered through the Plan, as well as an
indeterminate amount of Plan participation interests.
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
(d)
Maximum |
|
|
(a)
Total |
|
|
|
(c)
Total Number of |
|
Number of Shares |
|
|
Number of |
|
(b)
Average |
|
Shares Purchased as Part |
|
that
May Yet Be |
Period |
|
Shares |
|
Price Paid per |
|
of
Publicly Announced |
|
Purchased Under the |
|
|
Purchased |
|
Share |
|
Plans or Programs |
|
Plans or Programs |
|
|
|
|
|
|
|
|
|
April 1 - 30, 2007 |
|
0 |
|
NA |
|
0 |
|
96,871 |
|
|
|
|
|
|
|
|
|
May
1 - 31, 2007 |
|
0 |
|
NA |
|
0 |
|
96,871 |
|
|
|
|
|
|
|
|
|
June 1 - 30, 2007 |
|
0 |
|
NA |
|
0 |
|
96,871 |
|
|
|
|
|
|
|
|
|
Total |
|
0 |
|
|
|
|
|
|
9
In January 2002, the Company authorized 100,000 shares to be purchased in
a Stock Repurchase Program. There is no expiration date for this
program.
On July 27, 2007, the Board of Directors authorized the purchase of up to
200,000 shares of Common Stock at market values. This resolution supersedes the
resolution previously adopted by the Board in January 2002. On August 14, 2007,
the Board of Directors authorized the purchase of an additional 200,000 shares
of Common Stock at market values.
Performance Graph
The following table compares total shareholder return over the last 5
fiscal years to the Standard & Poors 500 Machinery (Industrial) Index and
the Russell 2000 index. The S&P 500 Machinery (Industrial) Index consists of
a broad range of manufacturers. The Russell 2000 Index consists of a broad range
of 2,000 Companies. The Corporation believes, because of the similarity of its
business with those companies contained in the S&P 500 Machinery
(Industrial) Index, that comparison of shareholder return with this index is
appropriate. Total return values for the Corporations common stock, the S&P
500 Machinery (Industrial) Index and the Russell 2000 Index were calculated
based upon an assumption of a $100 investment on June 30, 2002 and based upon
cumulative total return values assuming reinvestment of dividends on a quarterly
basis.
10
Comparison of Five-Year Cumulative Total Return
Twin Disc, Inc.; S&P
Machinery; and Russell 2000
Financial Highlights |
|
|
|
|
|
(dollars in thousands, except per share
amounts) |
|
|
|
|
|
|
Fiscal Years Ended June
30, |
|
|
|
|
Statement of Operations Data: |
2007 |
2006 |
2005 |
2004 |
2003 |
Net
sales |
$317,200 |
$243,287 |
$218,472 |
$186,089 |
$179,591 |
Net
earnings (loss) |
21,852 |
14,453 |
6,910 |
5,643 |
(2,394) |
Basic earnings (loss) per share |
3.76 |
2.51 |
1.21 |
1.00 |
(.42) |
Diluted earnings (loss) per share |
3.68 |
2.43 |
1.19 |
.99 |
(.42) |
Dividends per share |
.410 |
.365 |
.350 |
.350 |
.350 |
|
Balance Sheet Data (at end of period): |
|
|
|
|
Total assets |
$267,184 |
$236,172 |
$188,037 |
$174,622 |
$167,944 |
Total long-term debt |
42,152 |
38,369 |
14,958 |
16,813 |
16,584 |
Effective May 31, 2006, the Company acquired four related foreign
entities: B.C.S. S.r.l., an Italian limited liability company; B.C.S. Service
S.r.l., an Italian limited liability company; Boat Equipment Limited, a Maltese
limited liability company; and Vetus Italia S.r.l., an Italian limited liability
company. All four entities have a fiscal year ending May 31. Since the
acquisition was also effective May 31, no results of operations for these four
acquired entities are included in the consolidated results for the year ended
June 30, 2006. A full years results are included in the consolidated results
for the year ended June 30, 2007.
11
Effective May 31, 2004, the Company acquired 100% of the common stock of
Rolla SP Propellers SA of
Novazzano, Switzerland. Rolla designs and manufactures custom propellers.
Rolla has a fiscal year ending May 31. Since the acquisition was also effective
May 31, no results of operations of Rolla are included in consolidated results
for the year ended June 30, 2004. A full years results are included in the
consolidated results for the years ended June 30, 2005, 2006 and
2007.
In January 2004, the Company sold its 25% minority interest in Palmer
Johnson Distributors, LLC (PJD) to the majority holder, PJD, Inc. for $3,811,000
cash, which approximated the net book value of the investment. The Company
recognized pre-tax earnings of $240,000 in fiscal year 2004 from its investment
in PJD. In addition, the Company received cash distributions of $195,000 in
fiscal year 2004.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Note on Forward-Looking Statements
Statements in this report (including but not limited to certain
statements in Items 1, 3 and 7) and in other Company communications that are not
historical facts are forward-looking statements, which are based on managements
current expectations. These statements involve risks and uncertainties that
could cause actual results to differ materially from what appears
here.
Forward-looking statements include the Companys 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.
Results
of Operations |
|
|
|
|
|
|
(In
thousands) |
|
|
|
|
|
|
|
2007 |
% |
2006 |
% |
2005 |
% |
|
|
|
|
|
|
|
Net
sales |
$317,200 |
|
$243,287 |
|
$218,472 |
|
Cost of goods
sold |
214,291 |
|
168,897 |
|
161,052 |
|
Gross
profit |
102,909 |
32.4% |
74,390 |
30.6% |
57,420 |
26.3% |
Marketing,
engineering and |
|
|
|
|
|
|
administrative
expenses |
63,267 |
19.9 |
49,606 |
20.4 |
44,666 |
20.4 |
Restructuring of
operations |
2,652 |
0.8 |
- |
0.0 |
2,076 |
1.0 |
|
|
|
|
|
|
|
Earnings from
operations |
$36,990 |
11.7 |
$24,784 |
10.2 |
$10,678 |
4.9 |
Fiscal
2007 Compared to Fiscal 2006
Net
Sales
Net sales increased $73.9 million, or 30.4%, in fiscal 2007. The
year-over-year movement in foreign exchange rates
12
resulted in a net favorable translation effect on sales of $7.5 million in fiscal 2007, compared to fiscal 2006.
In fiscal 2007, sales for our worldwide manufacturing operations, before eliminating intra-segment and inter-segment sales, were $61.9 million, or 27.3%, higher than in the prior
fiscal year. Year-over-year changes in foreign exchange rates had a net favorable impact on sales of $4.9 million. The BCS Group manufacturing operations, acquired at the end of the prior fiscal year, contributed $21.9 million to fiscal
2007s net sales. The majority of the net remaining increase of $35.1 million came at our domestic manufacturing operation, which saw continued growth across most of its product markets. Particular strength was experienced in the
off-highway transmission business, where the Companys products are used in the oil-field servicing market and various military vehicle applications, as well as in the commercial marine transmission business.
Net sales for distribution operations were up $20.9 million, or 26.9%, in fiscal 2007. Year-over-year changes in foreign exchange rates had a net favorable impact on sales of
$2.6 million. Vetus Italia Srl, one of the BCS Group acquired companies, contributed $12.1 million of the increase. Of the remaining net increase of $6.2 million, more than half of the increase came from the Companys distribution
operations in Asia, where the company continued to see strong demand for its commercial marine transmission products.
Net sales for the Companys three major product markets, marine and propulsion, off-highway transmissions, and industrial, were up 39%, 37% and 5%, respectively, versus fiscal
2006 sales levels. The net increase for marine and propulsion includes the impact of the BCS Group acquisition, which accounts for nearly two-thirds of the year-over-year increase. These net year-over-year increases are before considering the net
favorable foreign currency translation effect noted above. Growth in the marine and propulsion market was driven primarily by the BCS Group acquisition, increased commercial marine transmission sales as well as increased sales of Arneson Surface
Drives and custom Rolla propellers. In the off-highway transmission market, the year-over-year improvement can be attributed primarily to increased sales in oil field and military markets. The growth experienced in the Companys industrial
products was also due in part to the increased activity related to oil field markets as well as increased sales into the agriculture, mining and general industrial markets.
The elimination for net intra-segment and inter-segment sales increased $8.9 million, or 14.5%, from $61.0 million in fiscal 2006 to $69.9 million in fiscal
2007.
Gross Profit
In fiscal 2007, gross profit increased $28.5 million, or over 38%, to $102.9 million. About a third of the year-over-year increase can be attributed to the impact of the BCS
Group companies that were acquired at the end of fiscal 2006. Nearly half of the overall increase was due to improved profitability, volume and mix experienced in the Companys off-highway transmission products, in particular for military and
oil field related transmissions.
Gross profit as a percentage of sales improved 180 basis points in fiscal 2007 to 32.4%, compared to 30.6% in fiscal 2006. There were a number of factors that impacted the
Companys overall gross margin rate in fiscal 2007. For the year, profitability continued to improve from higher sales volumes, the implementation of cost reduction and outsourcing programs, manufacturing efficiencies, a better product mix and
selective price increases. The
Companys margins continued to be impacted by rising steel, energy and medical costs. In addition, the Companys Belgian operations gross margin was unfavorably
affected by the continued relative strength of Euro versus the US Dollar, when compared to the average rate in fiscal 2006. This operation manufactures with Euro-based costs and sells more than a third of its production into the US market at US
Dollar prices. The average Euro to US Dollar exchange rate, computed monthly, in fiscal 2007 was $1.31, which was 7.6% higher than in fiscal 2006. It is estimated that the year-over-year effect of a stronger Euro, on average, was to deteriorate
margins at our Belgian subsidiary by nearly $1.4 million. Fiscal 2007s gross profit included unfavorable non-cash, non-recurring purchase accounting adjustments to inventory at the recently acquired BCS Group companies of $1.2 million,
pre-tax. The adjustment reduced gross profit by nearly 40 basis points in fiscal 2007. These adverse effects were more than offset
13
by (1) increased sales and improved product mix, particularly from the domestic industrial and off-highway transmission markets, (2) selective pricing actions, (3) improvements
achieved through the Companys outsourcing and cost reduction programs, and (4) lower domestic pension and postretirement healthcare costs of approximately $1.2 million. The year-over-year movement in foreign exchange rates, primarily
driven by movements in the Euro, resulted in a net favorable translation effect on gross profit of $2.3 million in fiscal 2007, compared to fiscal 2006.
Marketing, Engineering and Administrative (ME&A) Expenses
Marketing, engineering, and administrative (ME&A) expenses increased $13.7 million, or 27.5%, in fiscal 2007 versus fiscal 2006. As a percentage of sales, ME&A expenses
decreased by 50 basis points to 19.9% in fiscal 2007, compared to 20.4% in fiscal 2006. The BCS Group companies, acquired at the end of fiscal 2006, added $6.1 million of ME&A expenses in fiscal 2007, or 45% of the overall increase
experienced. Of the remaining $7.6 million increase, the following items account for the majority of the year-over-year increase: (1) a $2.2 million increase in stock-based compensation expense, (2) a $0.6 million write-off of an
impaired intangible asset and (3) an increase of over $1 million in total bonus expense as a result of the improved financial performance year-over-year. In addition, year-over-year changes in foreign exchange rates had a net translation effect
of increasing ME&A expenses by $1.1 million. The majority of the remaining net increase of $3.8 million, or 7.7%, relates to general increases experienced in salaries and wages, marketing and engineering expenses as well as the costs
associated with the implementation of a new global ERP system.
Restructuring of Operations
The Company recorded a restructuring charge of $2.7 million in the fourth quarter of 2007 as the Company restructured its Belgian operation to improve future profitability. The
charge consists of prepension costs for 32 employees; 29 manufacturing employees and 3 salaried employees. As of June 30, 2007, the Company had not made any cash payments related to the above restructuring. The action was taken to allow the Belgian
operation to focus resources on core manufacturing processes, while allowing for savings on the outsourcing of non-core processes. This decision is part of the Companys ongoing commitment to improve the overall cost structure through the
outsourcing of non-core production processes to low cost suppliers and regions. This project will result in outsourcing roughly 20% of the Belgian facilitys machining hours, leaving only core machining, assembly and test processes. The Company
has already completed extensive outsourcing of non-core domestic production to low cost countries, and has recently established a branch office in India to accelerate the cost reduction efforts. The Company estimates annual pre-tax savings upon
completion of this project of approximately $1.0 -$1.2 million.
Interest Expense
Interest expense increased by $1.4 million, or 83.6%, in fiscal 2007. The majority ($1.2 million) of the increase relates to the impact of a full year of interest expense from
the Companys $25 million Senior Notes, which carry an interest rate of 6.05% . Total interest on the Companys $35 million revolving credit facility increased nearly $0.6 million. This increase can be attributed to an overall
increase in the average borrowings year-over-year as well as an increase in the interest rate on the revolver year-over-year. The average borrowing on the revolver, computed monthly, increased to $19.7 million in fiscal 2007, compared to
$13.7 million in fiscal 2006. The interest rate on the revolver increased from a range of 4.59% to 5.45% in fiscal 2006 to a range of 5.45% to 6.60% in fiscal 2007. The net remaining decrease of $0.4 million was due to lower borrowings at
the Companys foreign subsidiaries as well as the payoff of the $20 million of Senior Notes that matured in June 2006.
Income Taxes
In fiscal 2007 and 2006, the Companys effective tax rate approximated 35.8% and 36.7%, respectively. The decrease in the effective tax rate in fiscal 2007 was primarily due to a
$1.2 million research and development
14
(R&D) credit recorded primarily in the fourth quarter. This tax benefit was recorded upon the completion of a study the Company conducted on its R&D expenditures
from 2003 to 2007.
Order Rates
In fiscal 2007, we continued to see an improvement in our order rates for most of our products. The backlog of orders scheduled for shipment during the next six months (six-month
backlog) of $110.4 million at the end of fiscal 2007, including $10.9 million from the recently acquired BCS Group companies, compared favorably to the $91.6 million and $64.8 million for fiscal years ended 2006 and 2005,
respectively.
Fiscal 2006 Compared to Fiscal 2005
Net Sales
Net sales increased $24.8 million, or 11.4%, in fiscal 2006. The year-over-year movement in foreign exchange rates resulted in a net unfavorable translation effect on sales of
$3.2 million in fiscal 2006, compared to fiscal 2005.
In fiscal 2006, sales for our worldwide manufacturing operations, before eliminating intra-segment and inter-segment sales, were $19.9 million, or 9.6%, higher than in the prior
year. Year-over-year changes in foreign exchange rates had a net unfavorable impact on sales of $3.0 million. The majority of the net increase came at our domestic manufacturing operation, which saw continued growth across most of its product
markets. Particular strength was experienced in the off-highway transmission business, where the Companys products are used in the oil-field servicing market and various military vehicle applications, as well as in the commercial marine
transmission business.
Net sales for distribution operations were up $10.0 million, or 14.7%, in fiscal 2006. More than half of the increase came from the Companys Mill-Log Equipment Co., Inc.
(Mill-Log) subsidiary, with operations in the Northwest USA and Southwest Canada. In fiscal 2006, Mill-Log continued to experience strong sales to its oil-field servicing and industrial product markets. About a quarter of the increase came from the
Companys subsidiary in Singapore, Twin Disc (Far East) Ltd., where the operation experienced double-digit growth driven by strong marine transmission sales for commercial applications. Year-over-year changes in foreign exchange rates did not
have a significant impact on sales for the Companys distribution operations.
Net sales for the Companys three major product markets, marine and propulsion, off-highway transmissions, and industrial, were up 9%, 19% and 11%, respectively, versus fiscal
2005 sales levels. These net year-over-year increases are before considering the net unfavorable foreign currency translation effect noted above. Growth in the marine and propulsion market was driven primarily by commercial marine transmission sales
as well as increased sales of Arneson Surface Drives and custom Rolla propellers. In the off-highway transmission market, the year-over-year improvement can be attributed primarily to increased sales in oil field and military markets. The growth
experienced in the Companys industrial products was also due in part to the increased activity related to oil field markets as well as increased sales into the agriculture, mining and general industrial markets.
The elimination for net intra-segment and inter-segment sales increased $5.1 million, or 9.1%, from $55.9 million in fiscal 2005 to $61.0 million in fiscal 2006.
Gross Profit
In fiscal 2006, gross profit increased $17 million, or nearly 30%, to $74.4 million. Nearly half of the overall increase was due to improved profitability, volume and mix
experienced in the Companys off-highway transmission products, in particular for military and oil field related transmissions. Of the remaining year-over-year increase, the
15
majority of the improvement came from the Companys marine products and was due to continued operating performance improvements at our Belgian manufacturing operation as a result
of ongoing restructuring activities as well as the strength of the global commercial marine market.
Gross profit as a percentage of sales improved 430 basis points in fiscal 2006 to 30.6%, compared to 26.3% in fiscal 2005. There were a number of factors that impacted the
Companys overall gross margin rate in fiscal 2006. The Companys margins continued to be adversely impacted by rising steel, energy and medical costs. The Company estimates that the impact of steel surcharges on its domestic operation
alone exceeded $2.2 million. At our domestic operations, the Company experienced an increase of $1.2 million, or nearly 50%, in medical related expenses that were charged to cost of goods sold. The year-over-year movement in foreign exchange
rates, primarily driven by movements in the Euro, resulted in a net unfavorable translation effect on gross profit of $1.0 million in fiscal 2006, compared to fiscal 2005. These adverse effects were more than offset by (1) increased sales and
improved product mix, particularly from the domestic industrial and off-highway transmission markets, (2) selective pricing actions, (3) improvements achieved through the Companys outsourcing and cost reduction programs, and (4) lower domestic
pension and post-retirement healthcare costs of approximately $1.2 million. In addition, the Companys Belgian operations gross margin was favorably affected by the continued relative strength of US Dollar versus the Euro, when
compared to the average rate in fiscal 2005. This operation manufactures with Euro-based costs and sells more than a third of its production into the US market at US Dollar prices. The average Euro to US Dollar exchange rate, computed monthly, in
fiscal 2006 was $1.22, which was 4.0% lower than in fiscal 2005. It is estimated that the year-over-year effect of a stronger US Dollar, on average, was to improve margins at our Belgian subsidiary by over $0.5 million.
Marketing, Engineering and Administrative (ME&A) Expenses
Marketing, engineering, and administrative (ME&A) expenses increased $4.9 million, or 11.1%, in fiscal 2006 versus fiscal 2005. As a percentage of sales, ME&A expenses
remained flat at 20.4% in both fiscal 2005 and fiscal 2006. The Company estimates that it incurred $1.9 million in costs associated with Sarbanes-Oxley compliance activities in fiscal 2006, compared to $0.1 million in fiscal 2005. In
addition, as a result of the improved financial performance year-over-year, the total bonus expense increased by just over $1 million versus the prior fiscal year. The overall costs associated with the Companys stock-related incentive
compensation increased just over $0.9 million in fiscal 2006. Year-over-year changes in foreign exchange rates had a net translation effect of reducing ME&A expenses by $0.6 million. The majority of the remaining net increase of $1.8
million, or 3.7%, relates to general increases experienced in salaries and wages, marketing and engineering expenses.
Interest Expense
Interest expense increased by $0.6 million, or 51.5%, in fiscal 2006. The average outstanding debt for fiscal 2006 of $26.4 million (computed monthly) was $3.4 million
higher than fiscal 2005. However, the average balance of the Companys Senior Notes, which carry an interest rate of 7.37%, decreased by $2.9 million. This was only slightly offset by an increase in the average borrowings under the
Companys revolver of $0.1 million. The interest rate on the revolver increased from a range of 2.61% to 4.39% in fiscal 2005 to a range of 4.59% to 6.29% in fiscal 2006. Total interest on the revolver increased just over $0.3 million
in fiscal 2006 compared to fiscal 2005. In addition, the Company incurred interest of $0.3 million on the $25 million of Senior Notes that were entered into in April 2006.
Income Taxes
In fiscal 2006 and 2005, the Companys effective tax rate approximated 36.7% and 26.1%, respectively. The increase in the effective tax rate in fiscal 2006 was primarily due to a
discrete tax benefit of $1.4 million related to foreign tax credits that the Company recorded in the fourth quarter of fiscal 2005. During the fourth quarter of fiscal
16
2005, the Company undertook certain business restructuring activities which allowed the Company to benefit existing foreign tax credits for which no benefit was previously recorded.
This resulted in the reversal of a $1.1 million valuation allowance as well as a current year benefit of $0.3 million for other foreign tax credits.
Order Rates
In fiscal 2006, we continued to see an improvement in our order rates for most of our products. The backlog of orders scheduled for shipment during the next six months (six-month
backlog) of $91.6 million at the end of fiscal 2006 compared favorably to the $64.8 million and $49.4 million for fiscal years ended 2005 and 2004, respectively. As of fiscal year end, our manufacturing facility in the United States saw
a year-over-over increase in its six-month backlog of almost 46%, which accounted for 87% of the overall increase. The remaining increase came at our Belgian and Italian manufacturing operations. The above figures exclude the impact of the recent
BCS group acquisition.
Liquidity and Capital Resources
Fiscal Years 2007, 2006 and 2005
The net cash provided by operating activities in fiscal 2007 totaled $17.5 million, a decrease of $0.8 million, or 4%, versus fiscal 2006. The net decrease was primarily
driven by a net increase in earnings of $7.4 million offset by increases in working capital, primarily accounts receivable and inventories, and a reduction in accrued retirement benefits as a result of nearly $8 million in domestic pension
contributions that were made in the first half of fiscal 2007. The increases in inventories and accounts receivable were consistent with the increased sales growth and order activity experienced by the Company in its fourth fiscal quarter. Fourth
quarter sales increased over 25% while the six month backlog increased over 21% as of June 30, 2007 versus the end of the prior fiscal year. This compares to increases in accounts receivable and inventories of 13% and 17%, respectively, before the
effect of foreign currency translation.
The net cash provided by operating activities in fiscal 2006 totaled $18.3 million, an increase of $5.3 million, or 41%, versus fiscal 2005. The increase was primarily driven
by a net increase in earnings of $7.5 million and accrued liabilities of $7.3 million, offset by increases in inventories of $6.9 million and accounts receivable of $4.2 million. These net changes exclude the net impact of foreign
currency translation and the BCS Group acquisition discussed in Note Q of the Notes to the Consolidated Financial Statements. The increases in inventories and accounts receivable were consistent with the increased sales growth and order activity
experienced by the Company in its fourth fiscal quarter. Fourth quarter sales increased over 17% while the six month backlog increased over 40% as of June 30, 2006 versus the end of the prior fiscal year. This compares to increases in accounts
receivable and inventories of 11% and 14%, respectively, before the effect of foreign currency translation and the impact of the BCS Group acquisition.
The net cash provided by operating activities in fiscal 2005 totaled $13.0 million versus $12.2 million in fiscal 2004, for a net increase of $0.8 million. This increase
was primarily driven by an increase in accounts payable, accrued liabilities and net earnings as well as a net reduction in inventories. The increase in accounts payable was primarily due to the timing of vendor payments for several large pieces of
equipment acquired in fiscal 2005. The increase in accrued liabilities was primarily due to the accrued bonus that was subsequently paid in August 2005. The decrease in inventories on higher sales was driven by a corporate-wide initiative to reduce
inventories in fiscal 2005. As a percentage of sales, net inventories were reduced 400 basis points to 22.2% .
The net cash used for investing activities in fiscal 2007 consisted primarily of capital expenditures for machinery and equipment, facilities renovations and the implementation of a
new ERP system at our domestic manufacturing location in Racine as well as machinery and equipment purchases at our European manufacturing operations.
17
The net cash used for investing activities in fiscal 2006 consisted primarily of the net acquisition cost, net of cash acquired, for the BCS Group acquisition discussed in Note Q of
the Notes to the Consolidated Financial Statements as well as capital expenditures for machinery, equipment and facilities renovations at our North American and European manufacturing operations.
The net cash used for investing activities in fiscal 2005 consisted primarily of capital expenditures for machinery and equipment at our domestic manufacturing location in Racine and
the construction of a new state-of-the-art facility for the design and manufacturing of high performance, custom propellers at our Swiss operation, Rolla Propellers. In fiscal 2005, Rolla Propellers capital expenditures totaled just under
$4 million and consisted of the construction of and new machinery and equipment for the new facility. At our domestic manufacturing location, capital expenditures amounted to nearly $6.8 million and included the installation of a new
flexible machining system at a cost of just under $3 million.
In fiscal 2007, the net cash used by financing activities consisted primarily of an increase of $5.5 million in the year-end borrowings under the Companys revolving credit
facility offset by a reduction in the prior fiscal years $3.2 million bank overdraft and the payment of dividends of nearly $2.4 million.
In fiscal 2006, the net cash provided by financing activities consisted primarily of the net proceeds of a $25 million private placement of Senior Notes that was finalized in
April 2006 (see Note G of the Notes to the Consolidated Financial Statements) offset by a net decrease in the Companys revolving credit facility of $4.5 million and the payment of $2.1 million in dividends to shareholders.
In fiscal 2005, the net cash flow provided by financing activities consisted primarily of a net bank overdraft at our Belgian operation of $3.5 million as well as a net increase
in borrowing under unsecured bank credit lines of $1.9 million, offset by net payments on long-term debt (including a $2.9 million payment on the Companys 7.37% Senior Notes due June 2006) of $2.1 million and dividends to
shareholders of just over $2 million. In addition, in April 2005, the Company announced the reactivation of its stock purchase plan. As part of this plan, the Company repurchased just under 35,000 shares of its common stock for $0.8 million
in the fourth quarter of fiscal 2005.
Future Liquidity and Capital Resources
On April 10, 2006, the Company entered into a Note Agreement (the Note Agreement) with Prudential Insurance Company of America and certain other entities (collectively,
Purchasers). Pursuant to the Note Agreement, Purchasers acquired, in the aggregate, $25,000,000 in 6.05% Senior Notes (the Notes) due April 10, 2016 (the Payment Date). The Notes mature and become due and
payable in full on April 10, 2016. Prior to the Payment Date, the Company is obligated to make quarterly payments of interest during the term of the Notes, plus prepayments of principal of $3,571,429 on April 10 of each year from 2010 to 2015,
inclusive. In the first quarter of fiscal 2008, the Note Agreement was amended to eliminate the covenants limiting capital expenditures and restricted payments (dividend payments and stock repurchases).
During the first quarter of fiscal 2005, the Companys revolving loan agreement was amended, increasing the limit from $20,000,000 to $35,000,000 and extending the term
by two years to October 31, 2007. The agreement was further amended in the first quarter of fiscal 2007 to extend the term by an additional two years to October 31, 2009. Additionally, certain capital expenditure restrictions were increased. An
additional amendment was agreed to in the first quarter of fiscal 2008 to extend the term by an additional year to October 31, 2010 and eliminate the covenants limiting capital expenditures and restricted payments (dividend payments and stock
repurchases). As a condition to the issuance of the Notes discussed above, the Company entered into an amendment to this agreement, dated as of December 19, 2002, between the Company and M&I Marshall & Ilsley Bank (M&I), as
amended, in which amendment M&I consented to the Company entering into the Note Agreement. This credit facility is used to fund seasonal working capital requirements and other financing needs. This facility and Twin Discs other
indebtedness contain certain restrictive covenants as are fully disclosed in Note G of the Notes to the Consolidated Financial
18
Statements.
The overall liquidity of the Company remains strong. The Company had
$20.5 million of available borrowings on our $35 million revolving loan
agreement as of June 30, 2007, and continues to generate enough cash from
operations to meet our operating and investing needs. As of June 30, 2007, the
Company also had cash and cash equivalents of over $19.5 million, primarily at
its overseas operations. These funds, with limited restrictions, are available
for repatriation as deemed necessary by the Company. In fiscal 2008, the Company
expects to contribute around $1.8 million to its pension plans. The Company
intends to meet any pension funding requirements using cash from operations and,
if necessary, from available borrowings under existing credit
facilities.
Net working capital increased approximately $22 million in fiscal 2007,
and the current ratio increased slightly from 1.9 at June 30, 2006 to 2.2 at
June 30, 2007. The increase was primarily driven by increases in inventories and
receivables, as a result of significant increases in sales and order activities.
The Companys balance sheet is strong, there are no off-balance sheet
arrangements, and we continue to have sufficient liquidity for near-term
needs.
Twin Disc expects capital expenditures to be between $15 and $17 million
in fiscal 2008. These anticipated expenditures reflect the Companys plans to
continue investing in modern equipment and facilities, a global ERP system and
new products.
Management believes that available cash, the credit facility, cash
generated from future operations, existing lines of credit and access to debt
markets will be adequate to fund Twin Discs capital requirements for the
foreseeable future.
Off
Balance Sheet Arrangements and Contractual Obligations
The Company had no off-balance sheet arrangements as of June 30, 2007 and
2006.
The Company has obligations under non-cancelable operating lease
contracts and loan and senior note agreements for certain future payments. A
summary of those commitments follows (in thousands):
|
|
Less than
1 |
1-3 |
3-5 |
After
5 |
Contractual
Obligations |
Total |
Year |
Years |
Years |
Years |
|
|
|
|
|
|
Revolving loan
borrowing |
$14,525 |
$ - |
$
14,525 |
$
- |
$
- |
|
|
|
|
|
|
Long-term
debt |
$29,395 |
$1,768 |
$5,039 |
$8,054 |
$
14,534 |
|
|
|
|
|
|
Operating
leases |
$
10,983 |
$3,159 |
$4,593 |
$2,682 |
$
549 |
|
|
|
|
|
|
The Company believes the capital resources available in the form of
existing cash, lines of credit (see Note G of the Notes to the Consolidated
Financial Statements), and funds provided by operations will be adequate to meet
anticipated capital expenditures and other foreseeable future business
requirements, including pension funding requirements. As noted above, the
Companys revolving loan agreement was amended during the first quarter of
fiscal 2005, increasing the limit from $20 million to $35 million and extending
the term by two years to October 31, 2007. During the first quarter of fiscal
2007, the term was extended by an additional two years to October 31, 2009. The
term was then extended an additional year to October 31, 2010 in the first
quarter of fiscal 2008. As of June 30, 2007, there was $20.5 million of
available borrowings under the revolver. In addition, the Company entered into a
$25 million Senior Note in April 2006. The acquisition of the BCS Group
companies in May 2006 was financed with $22.7 million of the proceeds from this
private debt placement. In addition, the Company has $19.5 million of
19
cash and cash equivalents on hand as of June 30, 2007.
Other Matters
Critical Accounting Policies
The preparation of this Annual Report requires managements judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Twin Discs significant accounting policies are described in Note A to the consolidated financial statements on pages 33 through 35 of this form. Not all of these significant
accounting policies require management to make difficult, subjective, or complex judgments or estimates. However, the policies management considers most critical to understanding and evaluating our reported financial results are the
following:
Revenue Recognition
Twin Disc recognizes revenue from product sales at the time of shipment and passage of title. While we respect the customers right to return products that were shipped in error,
historical experience shows those types of adjustments have been immaterial and thus no provision is made. With respect to other revenue recognition issues, management has concluded that its policies are appropriate and in accordance with the
guidance provided by the Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition.
Accounts Receivable
Twin Disc performs ongoing credit evaluations of our customers and adjusts credit limits based on payment history and the customers credit-worthiness as determined by review of
current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer-collection issues. In addition,
senior management reviews the accounts receivable aging on a monthly basis to determine if any receivable balances may be uncollectible. Although our accounts receivable are dispersed among a large customer base, a significant change in the
liquidity or financial position of any one of our largest customers could have a material adverse impact on the collectibility of our accounts receivable and future operating results.
Inventory
Inventories are valued at the lower of cost or market. Cost has been determined by the last-in, first-out (LIFO) method for the majority of the inventories located in the United
States, and by the first-in, first-out (FIFO) method for all other inventories. Management specifically identifies obsolete products and analyzes historical usage, forecasted production based on future orders, demand forecasts, and economic trends
when evaluating the adequacy of the reserve for excess and obsolete inventory. The adjustments to the reserve are estimates that could vary significantly, either favorably or unfavorably, from the actual requirements if future economic conditions,
customer demand or competitive conditions differ from expectations.
Warranty
Twin Disc engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers. However, its warranty obligation is
affected by product failure rates, the extent of the market affected by the failure and the expense involved in satisfactorily addressing the situation. The
20
warranty reserve is established based on our best estimate of the amounts
necessary to settle future and existing claims on products sold as of the
balance sheet date. When evaluating the adequacy of the reserve for warranty
costs, management takes into consideration the term of the warranty coverage,
historical claim rates and costs of repair, knowledge of the type and volume of
new products and economic trends. While we believe the warranty reserve is
adequate and that the judgment applied is appropriate, such amounts estimated to
be due and payable in the future could differ materially from what actually
transpires.
Pension and Other Postretirement Benefit Plans
The Company provides a wide range of benefits to employees and retired
employees, including pensions and postretirement health care coverage. Plan
assets and obligations are recorded annually based on the Companys 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
Moodys AA Corporate Bond rate, with appropriate consideration of pension
plans participants demographics and benefit payment terms. |
|
· |
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 UP 1994 Mortality Table for all years presented. |
|
· |
Health
Care Cost Trend Rates developed
based upon historical cost data, near-term outlook and an assessment of
likely long-term trends |
|
Measurements of net periodic benefit cost are based on the assumptions
used for the previous year-end measurements of assets and obligations. The
Company reviews its actuarial assumptions on an annual basis and makes
modifications to the assumptions when appropriate. As required by U.S. GAAP, the
effects of the modifications are recorded currently or amortized over future
periods. Based on information provided by its independent actuaries and other
relevant sources, the Company believes that the assumptions used are reasonable;
however, changes in these assumptions could impact the Companys financial
position, results of operations or cash flows.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for 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 records a
valuation allowance that represents a reserve on deferred tax assets for which
utilization is uncertain. Management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities, and the
valuation allowance recorded against net deferred tax assets. The valuation
allowance would need to be adjusted in the event future taxable income is
materially different than amounts estimated. The Companys policy is to remit
earnings from foreign subsidiaries only to the extent any resultant foreign
taxes are creditable in the United States. Accordingly, the Company does not
currently provide for additional United States and foreign income taxes which
would become payable upon repatriation of undistributed earnings of foreign
subsidiaries.
Recently Issued Accounting Standards
21
In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109. This interpretation clarifies
the accounting for uncertainty in income taxes recognized in an entitys
financial statements in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. It prescribes a
recognition threshold and measurement attribute for tax positions taken or
expected to be taken on a tax return. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006. The Company continues to evaluate the impact
of adoption of FIN No. 48 on its consolidated financial statements. Based upon
preliminary analyses, adoption of FIN 48 is not expected to have a material
impact on the Companys financial statements.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This statement is
effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007 and is not expected to have a material impact on the Companys
financial statements.
Item 7(a). Quantitative and Qualitative Disclosure About Market
Risk
The Company is exposed to market risks from changes in interest rates,
commodities and foreign exchange. To reduce such risks, the Company selectively
uses financial instruments and other pro-active management techniques. All
hedging transactions are authorized and executed pursuant to clearly defined
policies and procedures, which prohibit the use of financial instruments for
trading or speculative purposes. Discussions of the Companys accounting
policies and further disclosure relating to financial instruments is included in
Note A to the consolidated financial statements on pages 33 through 35 of this
form.
Interest rate risk - The Companys earnings exposure related to adverse
movements of interest rates is primarily derived from outstanding floating rate
debt instruments that are indexed to the prime and LIBOR interest rates. During
fiscal 2003, the Company entered into a $20 million revolving loan agreement,
which was due to expire on October 31, 2005. During fiscal 2005, the revolving
credit commitment of the agreement was increased to $35 million and the
termination date of the agreement was extended to October 31, 2007. During the
first quarter of fiscal 2007, the term was extended by an additional two years
to October 31, 2009. During the first quarter of fiscal 2008, the term was
extended an additional year to October 31, 2010. In accordance with the loan
agreement, the Company has the option of borrowing at the prime interest rate or
LIBOR plus an additional Add-On, between 1% and 2.75%, depending on the
Companys Total Funded Debt to EBITDA ratio. Due to the relative stability of
interest rates, the Company did not utilize any financial instruments at June
30, 2007 to manage interest rate risk exposure. A 10 percent increase or
decrease in the applicable interest rate would result in a change in pretax
interest expense of approximately $95,000.
Commodity price risk - The Company is exposed to fluctuation in market
prices for such commodities as steel and aluminum. The Company does not utilize
commodity price hedges to manage commodity price risk exposure.
Currency risk - The Company has exposure to foreign currency exchange
fluctuations. Approximately forty-five percent of the Companys revenues in the
year ended June 30, 2007 were denominated in currencies other than the U.S.
dollar. Of that total, approximately seventy percent was denominated in Euros
with the balance composed of Japanese Yen, Swiss Franc and the Australian and
Singapore dollars. The Company does not hedge the translation exposure
represented by the net assets of its foreign subsidiaries. Foreign currency
translation adjustments are recorded as a component of shareholders equity.
Forward foreign exchange contracts are used to hedge the currency fluctuations
on significant transactions denominated in foreign currencies.
Derivative Financial Instruments - The Company has written policies and
procedures that place all financial instruments under the direction of the
Company corporate treasury department and restrict derivative transactions to
those intended for hedging purposes. The use of financial instruments for
trading purposes is prohibited. The
22
Company uses financial instruments to manage the market risk from changes
in foreign exchange rates.
The Company primarily enters into forward exchange contracts to reduce
the earnings and cash flow impact of nonfunctional currency denominated
receivables and payables. These contracts are highly effective in hedging the
cash flows attributable to changes in currency exchange rates. Gains and losses
resulting from these contracts offset the foreign exchange gains or losses on
the underlying assets and liabilities being hedged. The maturities of the
forward exchange contracts generally coincide with the settlement dates of the
related transactions. Gains and losses on these contracts are recorded in Other
Income (Expense), net in the Consolidated Statement of Operations and
Comprehensive Income as the changes in the fair value of the contracts are
recognized and generally offset the gains and losses on the hedged items in the
same period. The primary currency to which the Company was exposed in 2007 and
2006 was the Euro. At June 30, 2007, the Company had net outstanding forward
exchange contracts to purchase US Dollars in the value of $765,008 with a
weighted average maturity of 29 days. The fair value of the Companys contracts
was a minimal gain at June 30, 2007. At June 30, 2006, the Company had net
outstanding forward exchange contracts to purchase Euros in the value of
$2,250,000 with a weighted average maturity of 47 days. The fair value of the
Companys contracts was a gain of approximately $31,000 at June 30,
2006.
Item 8. Financial Statements and Supplementary Data
See consolidated financial statements and Financial Statement Schedule on
Pages 27 through 53 of this form.
Sales and Earnings by Quarter (dollars in thousands, except per share
amounts)
2007 |
1st Qtr. |
2nd Qtr. |
3rd Qtr. |
4th Qtr. |
Year |
|
Net
sales |
$65,774 |
$74,239 |
$86,405 |
$90,782 |
$317,200 |
Gross profit |
20,313 |
24,389 |
28,185 |
30,022 |
102,909 |
Net
earnings |
3,672 |
5,670 |
7,509 |
5,001 |
21,852 |
Basic earnings per share |
.63 |
.98 |
1.29 |
.86 |
3.76 |
Diluted earnings per share |
.62 |
.96 |
1.27 |
.83 |
3.68 |
Dividends per share |
.0950 |
.0950 |
.1100 |
.1100 |
.4100 |
|
2006 |
1st Qtr. |
2nd Qtr. |
3rd Qtr. |
4th Qtr. |
Year |
|
Net
sales |
$49,577 |
$57,051 |
$64,125 |
$72,534 |
$243,287 |
Gross profit |
14,404 |
16,023 |
19,906 |
24,057 |
74,390 |
Net
earnings |
2,486 |
2,489 |
3,819 |
5,659 |
14,453 |
Basic earnings per share |
.43 |
.43 |
.66 |
.99 |
2.51 |
Diluted earnings per share |
.42 |
.42 |
.64 |
.95 |
2.43 |
Dividends per share |
.0875 |
.0875 |
.0950 |
.0950 |
.3650 |
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9(a). Controls and Procedures
Conclusion
Regarding Disclosure Controls and Procedures
As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of
1934, as of the end of the period covered by this report and under the
supervision and with the participation of management, including the Chief
Executive
23
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 Companys management, including its principal executive
and principal financial officers, as appropriate, to allow timely decisions
regarding disclosure.
Managements
Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Companys 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 Companys internal control over financial reporting
includes those policies and procedures that:
(i) |
pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Company, |
|
(ii) |
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company, and |
|
(iii) |
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that
could have a material effect on financial statements. |
|
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of the effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures included in such controls
may deteriorate.
The Company conducted an evaluation of the effectiveness of our internal
control over financial reporting based upon the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based upon such evaluation, our management concluded
that our internal control over financial reporting was effective as of June 30,
2007.
PricewaterhouseCoopers LLP, an independent registered public accounting
firm, who has audited the Companys consolidated financial statements and the
effectiveness of internal control over financial reporting as of June 30, 2007,
as stated in their report which is included herein on page 28.
Changes in
Internal Control Over Financial Reporting
During the fourth quarter of fiscal 2007, there have not been any changes
in the Companys internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
Item 9(b). Other Information
Not applicable.
24
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the executive officers of the Registrant, see "Executive Officers of the Registrant" at the end of Part I of this report.
For information with respect to the Directors of the Registrant, see "Election of Directors" in the Proxy Statement for the Annual Meeting of Shareholders to be held October 19, 2007,
which is incorporated into this report by reference.
For information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, see "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement for the Annual Meeting of Shareholders to be held October 19, 2007, which is incorporated into this report by reference.
For information with respect to the Companys Code of Ethics, see "Guidelines for Business Conduct and Ethics in the Proxy Statement for the Annual Meeting of Shareholders
to be held October 19, 2007, which is incorporated into this report by reference. The Companys Code of Ethics, entitled, Guidelines for Business Conduct and Ethics, is included on the Companys website, www.twindisc.com.
For information with respect to changes to procedures by which shareholders may recommend nominees to the Companys Board of Directors, see Selection of Nominees for the
Board in the Proxy Statement for the Annual Meeting of Shareholders to be held October 19, 2007, which is incorporated into this report by reference.
For information with respect to the Audit Committee Financial Expert, see Director Committee Functions: Audit Committee in the Proxy Statement for the Annual Meeting of
Shareholders to be held October 19, 2007, which is incorporated into this report by reference.
For information with respect to the Audit Committee Disclosure, see Director Committee Functions: Audit Committee in the Proxy Statement for the Annual Meeting of
Shareholders to be held October 19, 2007, which is incorporated into this report by reference.
For information with respect to the Audit Committee Membership, see Director Committee Functions: Committee Membership in the Proxy Statement for the Annual Meeting of
Shareholders to be held October 19, 2007, which is incorporated into this report by reference.
Item 11. Executive Compensation
The information set forth under the captions "Executive Compensation" and "Director Compensation and Compensation Committee Report, in the Proxy Statement for the
Annual Meeting of Shareholders to be held on October 19, 2007 is incorporated into this report by reference. Discussion in the Proxy Statement under the captions Compensation Committee Report is incorporated by reference but shall not be
deemed soliciting material or to be filed as part of this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership of certain beneficial owners and management is set forth in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 19, 2007 under the
caption "Principal Shareholders, Directors and Executive Officers" and incorporated into this report by reference.
There are no arrangements known to the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant.
25
The following table summarizes certain information regarding the
Companys equity-based compensation plans as of the end of the most recently
completed fiscal year:
|
# of Securities
to be Issued |
|
# of Securities
Remaining |
|
Upon Exercise
of |
Weighted Average
Price of |
Available for
Future |
Plan
Category |
Outstanding
Options, |
Outstanding
Options, |
Issuance Under
Equity |
|
Warrants and
Rights. |
Warrants and
Rights |
Compensation
Plans |
|
|
|
|
Equity
Compensation |
|
|
|
Plans Approved
by |
124,200
|
$10.15
|
259,559
|
Shareholders
|
|
|
|
|
|
|
|
Equity
Compensation |
|
|
|
Plans Not
Approved By |
0
|
N/A
|
0
|
Shareholders
|
|
|
|
|
|
|
|
TOTAL
|
124,200
|
$10.15
|
259,559
|
|
|
|
|
Item 13. Certain Relationships andRelated Transactions, Director
Independence
For information with respect to transactions with related persons and
policies for the review, approval or ratification of such transactions, see
Corporate Governance Review, Approval or Ratification of Transactions with
Related Persons in the Proxy Statement for the Annual Meeting of Shareholders
to be held October 19, 2007, which is incorporated into this report by
reference.
For information with respect to director independence, see Corporate
Governance Board Independence in the Proxy Statement for the Annual Meeting
of Shareholders to be held October 19, 2007, 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
Companys definitive Proxy Statement for the Annual Meeting of Shareholders to
be held October 19, 2007 under the heading Fees to Independent Registered
Public Accounting Firm.
PART
IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Consolidated
Financial Statements
See Index to Consolidated Financial Statements and Financial Statement
Schedule on page 27, the Report of Independent Registered Public Accounting
Firm on page 28 and the Consolidated Financial Statements on pages 29 to 52, all
of which are incorporated by reference.
(a)(2) Consolidated Financial Statement Schedule
See Index to Consolidated Financial Statements and Financial Statement
Schedule on page 27, and the Consolidated Financial Statement Schedule on page
53, all of which are incorporated by reference. (a)(3) Exhibits. See
Exhibit Index included as the last page of this form, which is incorporated by
reference.
26
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
Page |
Report of Independent Registered Public Accounting
Firm.....................................................................28
|
Consolidated Balance Sheets as of June 30, 2007 and
2006......................................................................29
|
Consolidated Statements of Operations and Comprehensive
Income for the years |
ended June 30, 2007, 2006 and
2005
............................................
30 |
Consolidated Statements of Cash Flows for the
years |
ended June 30, 2007, 2006 and
2005
............................................
31 |
Consolidated Statements of Changes in Shareholders
Equity |
for
the years ended June 30, 2007, 2006 and 2005
..
..32 |
Notes to Consolidated Financial
Statements........................................................................................
33-52 |
|
INDEX TO FINANCIAL STATEMENT SCHEDULE |
Schedule II - Valuation and Qualifying
Accounts....................................................................................
53 |
Schedules, other than those listed, are omitted for the reason that they
are inapplicable, are not required, or the information required is shown in the
financial statements or the related notes.
28
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Twin Disc,
Incorporated:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Twin Disc, Incorporated and its subsidiaries at June 30, 2007 and
June 30, 2006, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2007 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
June 30, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for these financial
statements and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management's Report on
Internal Control Over Financial Reporting appearing under Item 9(a). Our
responsibility is to express opinions on these financial statements, on the
financial statement schedule, and on the Company's internal control over
financial reporting based on our integrated audits (which were integrated audits
in 2007 and 2006). We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As discussed in Note M to the consolidated financial statements, the
Company changed the manner in which it accounts for employee pension benefits in
2007.
A companys 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 companys internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys 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.
PricewaterhouseCoopers LLP
Milwaukee,
WI
September 13, 2007
29
TWIN DISC,
INCORPORATED AND SUBSIDIARIES |
CONSOLIDATED
BALANCE SHEETS |
June 30, 2007 and
2006 |
(In thousands,
except per-share amounts) |
|
|
2007 |
2006 |
|
ASSETS
|
|
|
Current
assets: |
|
|
Cash
|
$19,508
|
$
16,427 |
Trade accounts
receivable, net |
63,277
|
55,963
|
Inventories,
net |
76,253
|
65,081
|
Deferred income
taxes |
6,046
|
5,780
|
Other
|
8,156 |
7,880 |
|
Total current
assets |
173,240
|
151,131
|
|
Property, plant
and equipment, net |
56,810
|
46,958
|
Goodwill,
net |
17,171
|
15,304
|
Deferred income
taxes |
3,956
|
4,152
|
Intangible
assets, net |
9,352
|
12,211
|
Other
assets |
6,655 |
6,416 |
|
|
$267,184 |
$236,172 |
|
LIABILITIES
and SHAREHOLDERS' EQUITY |
|
|
Current
liabilities: |
|
|
Bank
overdraft |
$
- |
$
3,194 |
Notes
payable |
-
|
16
|
Current
maturities of long-term debt |
1,768
|
633
|
Accounts
payable |
28,896
|
27,866
|
Accrued
liabilities |
49,254 |
47,912 |
|
Total current
liabilities |
79,918
|
79,621
|
|
Long-term
debt |
42,152
|
38,369
|
Accrued
retirement benefits |
26,392
|
28,065
|
Other long-term
liabilities |
2,640 |
312 |
|
|
151,102
|
146,367
|
|
Minority
interest |
645
|
572
|
|
Shareholders'
equity: |
|
|
Preferred shares
authorized: 200,000; |
|
|
issued: none; no
par value |
-
|
-
|
Common shares
authorized: 15,000,000; |
|
|
issued:
6,549,734; no par value |
13,304
|
11,777
|
Retained
earnings |
121,109
|
101,652
|
Accumulated other
comprehensive loss |
(4,493)
|
(9,166)
|
|
|
129,920
|
104,263
|
Less treasury
stock, at cost |
14,483 |
15,030 |
|
Total
shareholders' equity |
115,437 |
89,233 |
|
|
$267,184 |
$236,172
|
The notes to consolidated financial statements are an integral part of
these statements.
30
TWIN DISC,
INCORPORATED and SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS and COMPREHENSIVE INCOME
For the years ended June 30, 2007, 2006 and 2005 (In thousands, except
per share data)
|
2007 |
2006 |
2005 |
Net
sales |
$317,200 |
$243,287 |
$218,472 |
Cost
of goods sold |
214,291 |
168,897 |
161,052 |
|
|
|
|
|
Gross profit |
102,909 |
74,390 |
57,420 |
|
Marketing, engineering and administrative
expenses |
63,267 |
49,606 |
44,666 |
Restructuring of operations |
2,652 |
- |
2,076 |
|
|
|
|
|
Earnings from operations |
36,990 |
24,784 |
10,678 |
|
Other income (expense): |
|
|
|
Interest income |
443 |
302 |
140 |
Interest expense |
(3,154) |
(1,718) |
(1,134) |
Other, net |
50 |
(316) |
(192) |
|
|
|
|
|
(2,661) |
(1,732) |
(1,186) |
Earnings before income |
|
|
|
taxes and minority interest |
34,329 |
23,052 |
9,492 |
|
Income taxes |
12,273 |
8,470 |
2,485 |
|
|
|
|
|
Earnings before minority interest |
22,056 |
14,582 |
7,007 |
|
Minority interest |
(204) |
(129) |
(97) |
|
|
|
|
|
Net
earnings |
$ 21,852 |
14,453 |
6,910 |
|
Earnings per share data: |
|
|
|
Basic earnings per share |
$
3.76 |
2.51 |
1.21 |
Diluted earnings per share |
3.68 |
2.43 |
1.19 |
|
Weighted average shares outstanding data: |
|
|
|
Basic shares outstanding |
5,811 |
5,767 |
5,722 |
Dilutive stock options |
129 |
174 |
94 |
|
|
|
|
|
Diluted shares outstanding |
5,940 |
5,941 |
5,816 |
|
Comprehensive Income: |
|
|
|
Net
earnings |
$
21,852 |
$
14,453 |
6,910 |
Foreign currency translation adjustment |
4,714 |
1,733 |
1,375 |
Minimum pension liability adjustment, net |
19,752 |
6,668 |
1,359 |
|
|
|
|
|
Comprehensive Income |
$ 46,318 |
$ 22,854 |
9,644 |
The notes to consolidated financial statements are an integral part of
these statements.
31
TWIN DISC,
INCORPORATED and SUBSIDIARIES |
CONSOLIDATED
STATEMENTS OF CASH FLOWS |
For the years
ended June 30, 2007, 2006 and 2005 |
(In
thousands) |
|
2007 |
2006 |
2005 |
Cash flows
from operating activities: |
|
|
|
Net
earnings |
$
21,852 |
$14,453 |
$
6,910 |
Adjustments to
reconcile net earnings to net |
|
|
|
cash
provided by operating activities: |
|
|
|
Depreciation and
amortization |
7,252 |
5,866 |
5,677 |
Write-off of
impaired intangible asset |
600 |
- |
- |
Loss
(gain) on sale of plant assets |
71 |
456 |
(9) |
Minority
interest |
73 |
129 |
97 |
Loss
on restructuring of operations |
2,652 |
- |
2,076 |
Stock
compensation expense |
1,074 |
784 |
203 |
(Benefit)
provision for deferred income taxes |
(41) |
2,758 |
(1,291) |
Changes in
operating assets and liabilities: |
|
|
|
Trade accounts
receivable, net |
(5,325) |
(4,151) |
(186) |
Inventories,
net |
(8,501) |
(6,933) |
897 |
Other
assets |
142 |
(1,883) |
(370) |
Accounts
payable |
216 |
2,209 |
818 |
Accrued
liabilities |
7,814 |
7,318 |
1,019 |
Accrued/prepaid
retirement benefits |
(10,393) |
(2,729) |
(2,864) |
|
Net cash provided
by operating activities |
17,486 |
18,277 |
12,977 |
|
Cash flows
from investing activities: |
|
|
|
Proceeds from
sale of plant assets |
114 |
240 |
34 |
Acquisitions of
plant assets |
(15,681) |
(8,385) |
(12,009) |
Acquisition of
business, net of cash acquired |
- |
(20,330) |
- |
|
|
|
|
|
Net cash used by
investing activities |
(15,567) |
(28,475) |
(11,975) |
|
Cash flows
from financing activities: |
|
|
|
Bank
overdraft |
(3,194) |
(562) |
3,473 |
(Decrease)
increase in notes payable, net |
(701) |
21,518 |
1,886 |
Proceeds from
(payments of) long-term debt |
5,525 |
(4,500) |
(2,104) |
Proceeds from
exercise of stock options |
273 |
1,027 |
1,113 |
Acquisition of
treasury stock |
(51) |
(214) |
(755) |
Dividends
paid |
(2,395) |
(2,117) |
(2,022) |
Other |
396 |
(92) |
- |
|
|
|
|
|
Net cash (used)
provided by financing activities |
(147) |
15,060 |
1,591 |
|
Effect of
exchange rate changes on cash |
1,309 |
(49) |
(106) |
|
|
|
|
|
Net change in
cash and cash equivalents |
3,081 |
4,813 |
2,487 |
|
Cash and cash
equivalents: |
|
|
|
Beginning of
year |
16,427 |
11,614 |
9,127 |
|
|
|
|
|
End of
year |
$19,508 |
$ 16,427 |
$11,614 |
|
Supplemental cash
flow information: |
|
|
|
Cash paid during
the year for: |
|
|
|
Interest |
$
3,048 |
$
1,391 |
$
1,412 |
Income
taxes |
9,361 |
7,565 |
3,788 |
The notes to consolidated financial statements are an integral part of
these statements.
32
TWIN DISC,
INCORPORATED and SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended June 30, 2007, 2006 and 2005 (In
thousands)
|
|
|
Accumulated |
|
|
|
|
|
Other |
|
|
|
Common |
Retained |
Comprehensive |
Treasury |
|
|
Stock |
Earnings |
Loss |
Stock |
Total |
|
Balance at June 30, 2004 |
$
11,080 |
$
84,428 |
$(20,301) |
$(16,491) |
$58,716 |
|
Net
earnings |
- |
6,910 |
- |
- |
6,910 |
Cash
dividends |
- |
(2,022) |
- |
- |
(2,022) |
Translation adjustments |
- |
- |
1,375 |
- |
1,375 |
Minimum pension liability |
|
|
|
|
|
adjustment |
- |
- |
1,359 |
- |
1,359 |
Compensation expense |
203 |
- |
- |
- |
203 |
Shares issued (acquired), net |
(211) |
- |
- |
569 |
358 |
|
|
|
|
|
|
|
Balance at June 30, 2005 |
11,072 |
89,316 |
(17,567) |
(15,922) |
66,899 |
|
Net
earnings |
- |
14,453 |
- |
- |
14,453 |
Cash
dividends |
- |
(2,117) |
- |
- |
(2,117) |
Translation adjustments |
- |
- |
1,733 |
- |
1,733 |
Minimum pension liability |
|
|
|
|
|
adjustment |
- |
- |
6,668 |
- |
6,668 |
Compensation expense |
784 |
- |
- |
- |
784 |
Shares issued (acquired), net |
(79) |
- |
- |
892 |
813 |
|
|
|
|
|
|
|
Balance at June 30, 2006 |
11,777 |
101,652 |
(9,166) |
(15,030) |
89,233 |
|
Net
earnings |
- |
21,852 |
- |
- |
21,852 |
Cash
dividends |
- |
(2,395) |
- |
- |
(2,395) |
Translation adjustments |
- |
- |
4,714 |
- |
4,714 |
Minimum pension liability |
|
|
|
|
|
adjustment |
- |
- |
19,752 |
- |
19,752 |
Adoption of SFAS No. 158 |
- |
- |
(19,793) |
- |
(19,793) |
Compensation expense and |
|
|
|
|
|
windfall tax benefits |
1,852 |
- |
- |
- |
1,852 |
Shares issued (acquired), net |
(325) |
- |
- |
547 |
222 |
|
|
|
|
|
|
|
Balance at June 30, 2007 |
$ 13,304 |
$ 121,109 |
$(4,493) |
$(14,483) |
$115,437 |
The notes to consolidated financial statements are an integral part of
these statements.
33
TWIN DISC,
INCORPORATED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies
followed in the preparation of these financial statements:
Consolidation Principles--The consolidated
financial statements include the accounts of Twin Disc, Incorporated and its
wholly and partially owned domestic and foreign subsidiaries. Certain foreign
subsidiaries are included based on fiscal years ending March 31 or May 31, to
facilitate prompt reporting of consolidated accounts. All significant
intercompany transactions have been eliminated.
Translation of Foreign Currencies--The financial
statements of the Companys non-U.S. subsidiaries are translated using the
current exchange rate for assets and liabilities and the weighted average
exchange rate for the year for revenues and expenses. The resulting translation
adjustments are recorded as a component of accumulated other comprehensive
income (loss), which is included in shareholders equity. Gains and losses from
foreign currency transactions are included in earnings. Included in other income
(expense) are foreign currency transaction losses of $113,000, $38,000 and
$126,000 in 2007, 2006 and 2005, respectively.
Receivables--Trade accounts
receivable are stated net of an allowance for doubtful accounts of $922,000 and
$1,023,000 at June 30, 2007 and 2006, respectively. The allowance for doubtful
accounts is estimated based on various factors including, the aging of the
accounts receivable, the evaluation of the likelihood of success in collecting
the receivable and historical write-off experience.
Fair Value of Financial Instruments--The carrying
amount reported in the consolidated balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and notes payable approximate
fair value because of the immediate short-term maturity of these financial
instruments.
The
fair value of long-term debt exceeds its carrying value at June 30, 2007 by
$409,000 and approximated the carrying amount at June 30, 2006, based on the
current rates that would be offered to the Company for debt with the same
remaining maturity.
Derivative Financial Instruments--The Company has written policies and procedures that place all financial
instruments under the direction of the Companys corporate treasury and
restricts all derivative transactions to those intended for hedging purposes.
The use of financial instruments for trading purposes is prohibited. The Company
uses financial instruments to manage the market risk from changes in foreign
exchange rates.
The Company primarily enters into forward exchange contracts to reduce
the earnings and cash flow impact of nonfunctional currency denominated
receivables and payables. These contracts are highly effective in hedging the
cash flows attributable to changes in currency exchange rates. Gains and losses
resulting from these contracts offset the foreign exchange gains or losses on
the underlying assets and liabilities being hedged. The maturities of the
forward exchange contracts generally coincide with the settlement dates of the
related transactions. Gains and losses on these contracts are recorded in other
income (expense), net as the changes in the fair value of the contracts are
recognized and generally offset the gains and losses on the hedged items in the
same period. The primary currency to which the Company was exposed in 2007 and
2006 was the Euro. At June 30, 2007, the Company had net outstanding forward
exchange contracts to purchase US Dollars in the value of $765,008 with a
weighted average maturity of 29 days. The fair value of the Companys forward
exchange contracts was a minimal gain at June 30, 2007. At June 30, 2006, the
Company had net outstanding forward exchange contracts to purchase Euros in the
value of $2,250,000 with a weighted average maturity of 47 days. The fair value
of the Companys forward exchange contracts was a gain of approximately $31,000
at June 30, 2006.
Inventories--Inventories are
valued at the lower of cost or market. Cost has been determined by the last-in,
first-out (LIFO) method for the majority of inventories located in the United
States, and by the first-in, first-out (FIFO) method for all other inventories.
Management specifically identifies obsolete products and analyzes historical
usage, forecasted production based on future orders, demand forecasts, and
economic trends when evaluating the adequacy of the reserve for excess and
obsolete inventory.
34
Property, Plant and Equipment and Depreciation--Assets are stated
at cost. Expenditures for maintenance, repairs and minor renewals are charged
against earnings as incurred. Expenditures for major renewals and betterments
are capitalized and depreciated. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets for financial reporting and
on accelerated methods for income tax purposes. The lives assigned to buildings
and related improvements range from 10 to 40 years, and the lives assigned to
machinery and equipment range from 5 to 15 years. Upon disposal of property,
plant and equipment, the cost of the asset and the related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
reflected in earnings. Fully depreciated assets are not removed from the
accounts until physically disposed.
Impairment of Long-lived Assets--The Company
reviews long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment of Long-lived Assets. For
property, plant and equipment and other long-lived assets, excluding indefinite
lived intangible assets, the Company performs undiscounted operating cash flow
analyses to determine if an impairment exists. If an impairment is determined to
exist, any related impairment loss is calculated based on fair value.
Revenue Recognition--Revenue is
recognized by the Company when all of the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred and ownership has
transferred to the customer; the price to the customer is fixed or determinable;
and collectability is reasonably assured. Revenue is recognized at the time
product is shipped to the customer, except for certain domestic shipments to
overseas customers where revenue is recognized upon receipt by the
customer.
Goodwill and Other Intangibles--Goodwill is tested
for impairment at least annually and more frequently if an event occurs which
indicates the goodwill may be impaired in accordance with the SFAS No. 142,
Goodwill and Other Intangible Assets. Impairment of goodwill is measured
according to a two step approach. In the first step, the fair value of a
reporting unit, as defined by the statement, is compared to the carrying value
of the reporting unit, including goodwill. The 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. If the carrying amount exceeds the fair value, the
second step of the goodwill impairment test is performed to measure the amount
of the impairment loss, if any. In the second step the implied value of the
goodwill is estimated as the fair value of the reporting unit less the fair
value of all other tangible and identifiable intangible assets of the reporting
unit. If the carrying amount of the goodwill exceeds the implied fair value of
the goodwill, an impairment loss is recognized in an amount equal to that
excess, not to exceed the carrying amount of the goodwill. The Companys other
intangible assets with indefinite lives, including trademarks and tradenames,
are not amortized, but are reviewed annually for possible impairment. The
Companys other intangible assets with defined lives are subject to amortization
and are also reviewed annually for possible impairment.
Warranty--The Company
warrants all assembled products and parts (except component products or parts on
which written warranties are issued by the respective manufacturers thereof and
are furnished to the original customer, as to which the Company makes no
warranty and assumes no liability) against defective materials or workmanship.
Such warranty generally extends from periods ranging from 12 months to 24
months.
The Company engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its suppliers.
However, its warranty obligation is affected by product failure rates, the
extent of the market affected by the failure and the expense involved in
satisfactorily addressing the situation. The warranty reserve is established
based on the Companys best estimate of the amounts necessary to settle future
and existing claims on products sold as of the balance sheet date. When
evaluating the adequacy of the reserve for warranty costs, management takes into
consideration the term of the warranty coverage, historical claim rates and
costs of repair, knowledge of the type and volume of new products and economic
trends. While the Company believes the warranty reserve is adequate and that the
judgment applied is appropriate, such amounts estimated to be due and payable in
the future could differ materially from what actually transpires.
Deferred Taxes--The Company
recognizes deferred tax liabilities and assets for the expected future income
tax consequences of events that have been recognized in the Companys financial
statements. Under this method, deferred tax liabilities and assets are
determined based on the temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities using enacted tax
rates in effect in the years in which temporary differences are expected to
reverse. Valuation allowances are provided for deferred tax assets where it is
considered more likely than not that the Company will not realize the benefit of
such assets.
35
Stock-Based Compensation--At June 30, 2007,
the Company has two stock-based compensation plans, which are described more
fully in Note K, Stock-Based Compensation. The Company accounts for these
plans under the recognition and measurement provisions of SFAS No. 123(R),
Accounting for Stock-Based Compensation, which was adopted July 1, 2005. The
effect on 2005 net earnings and earnings per share if the Company had applied
the fair value recognition provisions of SFAS No.123(R) to stock-based employee
compensation was not material.
Management Estimates--The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual amounts could differ from those
estimates.
Shipping and Handling Fees and Costs--The Company
records revenue from shipping and handling costs in net sales. The cost
associated with shipping and handling of products is reflected in cost of
sales.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109. This interpretation clarifies
the accounting for uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. It prescribes a recognition threshold and measurement attribute for tax
positions taken or expected to be taken on a tax return. FIN No. 48 is effective
for fiscal years beginning after December 15, 2006. The Company continues to
evaluate the impact of adoption of FIN No. 48 on its consolidated financial
statements. Based upon preliminary analyses, adoption of FIN 48 is not expected
to have a material impact on the Companys financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This statement is
effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007 and is not expected to have a material impact on the Companys
financial statements.
B. INVENTORIES
The major classes of inventories at June 30 were as follows (in
thousands):
|
2007 |
2006 |
Finished parts |
$49,594 |
$39,656 |
Work-in-process |
13,011 |
11,176 |
Raw
materials |
13,648 |
14,249 |
|
|
$76,253 |
$65,081 |
Inventories stated on a LIFO basis represent approximately 52% and 47% of
total inventories at June 30, 2007 and 2006, respectively. The approximate
current cost of the LIFO inventories exceeded the LIFO cost by $21,837,000 and
$22,249,000 at June 30, 2007 and 2006, respectively.
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 were as follows (in
thousands):
|
2007 |
2006 |
Land |
$
3,755 |
$
3,534 |
Buildings |
34,000 |
30,772 |
Machinery and equipment |
118,517 |
108,109 |
|
|
156,272 |
142,415 |
Less
accumulated depreciation |
99,462 |
95,457 |
|
|
|
|
$
56,810 |
$
46,958 |
36
Depreciation expense for the year ended June 30, 2007, 2006 and 2005 was
$6,331,000, $5,529,000 and $5,108,000, respectively.
D. GOODWILL AND OTHER INTANGIBLES
The Company performed impairment tests of its goodwill at June 30, 2007
and 2006 and determined that no impairment of goodwill existed.
The changes in the carrying amount of goodwill, substantially all of
which is allocated to the manufacturing segment, for the years ended June 30,
2007 and 2006 were as follows (in thousands):
Balance at June
30, 2005 |
$12,854 |
Translation
adjustment |
36 |
Acquisition |
2,414 |
|
Balance at June
30, 2006 |
15,304 |
Translation
adjustment |
387 |
Acquisition
accounting adjustment |
1,480 |
|
Balance at June
30, 2007 |
$17,171 |
At June 30, the following acquired intangible assets have defined useful
lives and are subject to amortization (in thousands):
|
2007 |
2006 |
Intangible assets with finite lives: |
|
|
Licensing
agreements |
$
3,015 |
$
3,015 |
Non-compete
agreements |
2,050 |
4,732 |
Other |
6,078 |
4,971 |
|
|
11,143 |
12,718 |
Accumulated
amortization |
(4,303) |
(3,382) |
Translation
adjustment |
368 |
116 |
|
Total |
$ 7,208 |
$ 9,452 |
The weighted average remaining useful life of the intangible assets
included in the table above is approximately 10 years.
Intangible amortization expense for the year ended June 30, 2007, 2006
and 2005 was $921,000, $337,000 and $569,000, respectively. Estimated intangible
amortization expense for each of the next five fiscal years is as follows (in
thousands):
Fiscal Year |
|
2008 |
926 |
2009 |
925 |
2010 |
723 |
2011 |
723 |
2012 |
722 |
Thereafter |
3,189 |
|
|
|
$7,208 |
The gross carrying amount of the Companys intangible assets that have
indefinite lives and are not subject to amortization as of June 30, 2007 and
2006 are $2,144,000 and $2,759,000, respectively. These assets are comprised of
acquired tradenames.
37
E. ACCRUED LIABILITIES
Accrued liabilities at June 30 were as follows (in thousands):
|
2007 |
2006 |
Salaries and
wages |
$10,574 |
$10,016 |
Retirement
benefits |
7,229 |
12,837 |
Warranty |
7,266 |
6,948 |
Accrued income
tax |
7,016 |
4,352 |
Other |
17,169 |
13,759 |
|
|
|
|
|
$
49,254 |
$
47,912 |
F. WARRANTY
The following is a listing of the activity in the warranty reserve during
the years ended June 30 (in thousands):
|
2007 |
2006 |
|
Reserve balance,
July 1 |
$6,948 |
$6,679 |
Current period
expense |
4,307 |
3,991 |
Payments or
credits to customers |
(4,427) |
(3,934) |
Purchase
accounting adjustment (BCS) |
210 |
- |
Translation |
228 |
212 |
|
|
|
Reserve balance,
June 30 |
$7,266 |
$6,948 |
G. DEBT
Notes Payable:
Notes payable consists of amounts borrowed under unsecured line of credit
agreements. These lines of credit may be withdrawn at the option of the banks.
The following is aggregate borrowing information at June 30 (in
thousands):
|
2007 |
2006 |
Available credit
lines |
$
9,118 |
4,196 |
Unused credit
lines |
9,118 |
4,196 |
Outstanding
credit lines |
-- |
-- |
Notes
payable-other |
-- |
16 |
Total notes
payable |
$
-- |
$16 |
Weighted-average
interest |
|
|
rates on credit
lines |
6.2% |
3.0% |
Long-term
Debt: |
|
|
Long-term debt
consisted of the following at June 30 (in thousands): |
|
|
2007 |
2006 |
Revolving loan
agreement |
$14,525 |
$9,000 |
10-year unsecured
senior notes |
25,000 |
25,000 |
Secured long-term
debt |
1,140 |
1,140 |
Capital lease
obligations |
281 |
341 |
Other long-term
debt |
2,974 |
3,521 |
|
|
|
38
Subtotal |
43,920 |
39,002 |
Less: current
maturities |
(1,768) |
(633) |
Total long-term
debt |
$ 42,152 |
$38,369 |
In December 2002, the Company entered into a $20,000,000 revolving loan
agreement which had an original expiration date of October 31, 2005. In
September 2004, the revolving loan agreement was amended to increase the
commitment to $35,000,000 and the termination date of the agreement was extended
to October 31, 2007. During the first quarter of fiscal 2007, the term was
extended by an additional two years to October 31, 2009. An additional amendment
was agreed to in the first quarter of fiscal 2008 to extend the term by an
additional year to October 31, 2010 and eliminate the covenants limiting capital
expenditures and restricted payments (dividend payments and stock repurchases).
This agreement contains certain covenants, including restrictions on
investments, acquisitions and indebtedness. Financial covenants include a
minimum consolidated net worth, minimum EBITDA of $11,000,000 at June 30, 2007
and a maximum total funded debt to EBITDA ratio of 2.5 at June 30, 2007. As of
June 30, 2007, the Company was in compliance with these covenants. The
outstanding balance of $14,525,000 and $9,000,000 at June 30, 2007 and 2006,
respectively, is classified as long-term debt. Borrowings under this agreement
bear interest on a schedule determined by the Companys leverage ratio and the
LIBOR interest rate (LIBOR plus 1.25% and 1.00% at June 30, 2007 and 2006,
respectively). The rate was 6.570% and 6.129% at June 30, 2007 and 2006,
respectively.
On April 10, 2006, the Company entered into a Note Agreement (the Note
Agreement) with The Prudential Insurance Company of America and certain other
entities (collectively, Purchasers). Pursuant to the Note Agreement,
Purchasers acquired, in the aggregate, $25,000,000 in 6.05% Senior Notes due
April 10, 2016 (the Notes).
The Notes mature and become due and payable in full on April 10, 2016
(the Payment Date). Prior to the Payment Date, the Company is obligated to
make quarterly payments of interest during the term of the Notes, plus
prepayments of principal of $3,571,429 on April 10 of each year from 2010 to
2015, inclusive. The Company also has the option of making additional
prepayments subject to certain limitations, including the payment of a
Yield-Maintenance Amount as defined in the Note Agreement. In addition, the
Company will be required to make an offer to purchase the Notes upon a Change of
Control, and any such offer must include the payment of a Yield-Maintenance
Amount.
The Note Agreement includes certain financial covenants which are
identical to those associated with the revolving loan agreement discussed above.
The Note Agreement also includes certain restrictive covenants that limit, among
other things, the incurrence of additional indebtedness and the disposition of
assets outside the ordinary course of business,. The Note Agreement provides
that it shall automatically include any covenants or events of default not
previously included in the Note Agreement to the extent such covenants or events
of default are granted to any other lender of an amount in excess of $1,000,000.
Following an Event of Default, each Purchaser may accelerate all amounts
outstanding under the Notes held by such party.
As a condition to the issuance of the Notes, the Company entered into an
amendment to that certain revolving loan agreement, dated as of December 19,
2002, between the Company and M&I Marshall & Ilsley Bank (M&I), as
amended, in which amendment M&I consented to the Company entering into the
Note Agreement.
The secured long term debt of $1,140,000 at June 30, 2007 represents a
Rolla mortgage loan maturing in May 2008, carrying an interest rate of 4.25%
..
The aggregate scheduled maturities of outstanding long-term debt
obligations in subsequent years are as follows (in thousands):
Fiscal Year |
|
2008 |
$
1,768 |
2009 |
753 |
2010 |
18,811 |
2011 |
4,237 |
2012 |
3,817 |
Thereafter |
14,534 |
|
|
|
$43,920 |
39
H. LEASE COMMITMENTS
Approximate future minimum rental commitments under noncancellable
operating leases are as follows (in thousands):
Fiscal
Year |
|
2008 |
$
3,159 |
2009 |
2,525 |
2010 |
2,068 |
2011 |
1,443 |
2012 |
1,239 |
Thereafter |
549 |
|
|
|
$10,983 |
Total rent expense for operating leases approximated $3,513,000,
$3,002,000, and $3,248,000 in 2007, 2006 and 2005, respectively.
I. SHAREHOLDERS' EQUITY
At June 30, 2007 and 2006, treasury stock consisted of 692,136 and
718,236 shares of common stock, respectively. The Company issued 26,100 shares
of treasury stock in 2007, to fulfill its obligations under the stock option
plans and restricted stock grants. The difference between the cost of treasury
shares and the option price is recorded in common shares. The fair value of the
restricted stock grants is recorded as compensation over the vesting period
which is generally 1 to 4 year periods. The Company repurchased no shares of
stock in 2007.
On July 27, 2007, the Board of Directors authorized the purchase of up to
200,000 shares of Common Stock at market values. This resolution supersedes the
resolution previously adopted by the Board in January 2002. On August 14, 2007,
the Board of Directors authorized the purchase of an additional 200,000 shares
of Common Stock at market values.
Cash dividends per share were $0.41, $0.365 and $0.35 in 2007, 2006 and
2005, respectively (on a post-split basis).
In 1998, the Company's Board of Directors established a Shareholder
Rights Plan and distributed to shareholders one preferred stock purchase right
for each outstanding share of common stock (pursuant to the split of the
Companys stock, each share of common stock currently has one-half of a Right).
Under certain circumstances, a right may be exercised to purchase one
one-hundredth of a share of Series A Junior Preferred Stock at an exercise price
of $160, subject to certain anti-dilution adjustments. The rights become
exercisable ten (10) days after a public announcement that a party or group has
either acquired at least 15% (or at least 25% in the case of existing holders
who currently own 15% or more of the common stock), or commenced a tender offer
for at least 25% of the Company's common stock. Generally, after the rights
become exercisable, if the Company is a party to certain merger or business
combination transactions, or transfers 50% or more of its assets or earnings
power, or certain other events occur, each right will entitle its holders, other
than the acquiring person, to buy a number of shares of common stock of the
Company, or of the other party to the transaction, having a value of twice the
exercise price of the right. The rights expire June 30, 2008, and may be
redeemed by the Company for $.05 per right at any time until ten (10) days
following the stock acquisition date. The Company is authorized to issue 200,000
shares of preferred stock, none of which have been issued. The Company has
designated 50,000 shares of the preferred stock for the purpose of the
Shareholder Rights Plan.
J. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company and its subsidiaries are engaged in the manufacture and sale
of marine and heavy duty off-highway power transmission equipment. Principal
products include marine transmissions, surface drives, propellers and boat
management systems, as well as power-shift transmissions, hydraulic torque
converters, power take-offs, industrial clutches and controls systems. The
Company sells to both domestic and foreign customers in a variety of market
areas, principally pleasure craft, commercial and military marine markets, as
well as in the energy and natural resources, government and industrial
markets.
40
The Company has two reportable segments: manufacturing and distribution.
These segments are managed separately because each provides different services
and requires different technology and marketing strategies. The accounting
practices of the segments are the same as those described in the summary of
significant accounting policies. Transfers among segments are at established
inter-company selling prices.
Information about the Company's segments is summarized as follows (in
thousands):
|
Manufacturing |
Distribution |
Total |
2007 |
|
|
|
|
Net
sales |
$288,428 |
$98,619 |
$387,047 |
Intra-segment sales |
15,564 |
6,682 |
22,246 |
Inter-segment sales |
42,649 |
4,952 |
47,601 |
Interest income |
643 |
205 |
848 |
Interest expense |
5,082 |
89 |
5,171 |
Income taxes |
15,067 |
3,220 |
18,287 |
Depreciation and amortization |
6,831 |
414 |
7,245 |
Segment earnings |
31,630 |
5,776 |
37,406 |
Segment assets |
318,983 |
58,501 |
377,484 |
Expenditures for segment assets |
15,331 |
350 |
15,681 |
|
|
2006 |
|
|
|
|
Net
sales |
$226,540 |
$77,729 |
$304,269 |
Intra-segment sales |
10,167 |
3,632 |
13,799 |
Inter-segment sales |
42,462 |
4,721 |
47,183 |
Interest income |
304 |
90 |
394 |
Interest expense |
3,037 |
89 |
3,126 |
Income taxes |
10,039 |
2,416 |
12,455 |
Depreciation and amortization |
5,509 |
356 |
5,865 |
Segment earnings |
18,540 |
4,359 |
22,899 |
Segment assets |
239,138 |
53,896 |
293,034 |
Expenditures for segment assets |
8,098 |
287 |
8,385 |
|
2005 |
|
|
|
|
Net
sales |
$206,630 |
$67,743 |
$274,373 |
Intra-segment sales |
11,084 |
4,221 |
15,305 |
Inter-segment sales |
36,380 |
4,216 |
40,596 |
Interest income |
296 |
29 |
325 |
Interest expense |
1,254 |
89 |
1,343 |
Income taxes |
4,386 |
1,948 |
6,334 |
Depreciation and amortization |
5,310 |
367 |
5,677 |
Segment earnings |
5,831 |
3,286 |
9,117 |
Segment assets |
170,782 |
33,356 |
204,138 |
Expenditures for segment assets |
11,656 |
353 |
12,009 |
The following is a reconciliation of reportable segment net sales,
earnings and assets to the Companys consolidated totals (in
thousands):
|
2007 |
2006 |
2005 |
Net sales: |
|
|
|
Total net sales from reportable segments |
$387,047 |
$304,269 |
$274,373 |
Elimination of inter-company sales |
(69,847) |
(60,982) |
(55,901) |
|
|
|
|
|
Total consolidated net sales |
$317,200 |
$243,287 |
$218,472 |
|
41
Net Earnings:
Total earnings from |
|
|
|
reportable segments |
$
37,406 |
$22,899 |
$ 9,117 |
Other corporate expenses |
(15,554) |
(8,446) |
(2,207) |
|
Total consolidated net earnings |
$ 21,852 |
$14,453 |
$ 6,910 |
|
Assets |
|
|
|
Total assets for reportable segments |
$377,484 |
$293,034 |
|
Elimination of inter-company assets |
(103,548) |
(55,104) |
|
Corporate assets |
(6,752) |
(1,758) |
|
|
Total consolidated assets |
$267,184 |
$236,172 |
|
|
Other significant items: |
|
|
|
|
|
Segment |
|
Consolidated |
|
Totals |
Adjustments |
Totals |
2007 |
|
|
|
Interest income |
$
848 |
$
(405) |
$443 |
Interest expense |
5,171 |
(2,017) |
3,154 |
Income taxes |
18,287 |
(6,014) |
12,273 |
Depreciation and amortization |
7,245 |
7 |
7,252 |
Expenditures for segment assets |
15,681 |
-- |
15,681 |
|
2006 |
|
|
|
Interest income |
$
394 |
$
(92) |
$302 |
Interest expense |
3,126 |
(1,408) |
1,718 |
Income taxes |
12,455 |
(3,985) |
8,470 |
Depreciation and amortization |
5,865 |
1 |
5,866 |
Expenditures for segment assets |
8,385 |
-- |
8,385 |
|
2005 |
|
|
|
Interest income |
$
325 |
$
(185) |
$140 |
Interest expense |
1,343 |
(209) |
1,134 |
Income taxes |
6,334 |
(3,849) |
2,485 |
Depreciation and amortization |
5,677 |
-- |
5,677 |
Expenditures for segment assets |
12,009 |
-- |
12,009 |
All adjustments represent inter-company eliminations and corporate
amounts.
Geographic information about the Company is summarized as follows (in
thousands):
|
2007 |
2006 |
2005 |
Net sales |
|
|
|
United States |
$168,106 |
$148,502 |
$134,646 |
Italy |
65,449 |
15,991 |
15,363 |
Other countries |
83,645 |
78,794 |
68,463 |
|
|
|
|
|
Total |
$317,200 |
$243,287 |
$218,472 |
|
|
Long-lived assets |
|
|
|
United States |
$
56,998 |
$
57,366 |
|
Belgium |
63,753 |
36,414 |
|
Italy |
47,252 |
21,424 |
|
Other countries |
10,142 |
10,541 |
|
Elimination of inter-company assets |
(84,201) |
(40,704) |
|
|
Total |
$ 93,944 |
$ 85,041 |
|
42
One customer accounted for approximately 10% of consolidated net sales in
2007. There were no customers that accounted for 10% or more of consolidated net
sales in 2006 and 2005.
K. STOCK-BASED COMPENSATION
During fiscal 2005, the Company adopted the Twin Disc, Incorporated 2004
Stock Incentive Plan for Non-Employee Directors (the Directors Plan), a plan
to grant non-employee directors options to purchase up to 72,000 shares of
common stock, and the Twin Disc, Incorporated 2004 Stock Incentive Plan (the
Stock Incentive Plan), a plan under which officers and key employees may be
granted options to purchase up to 328,000 shares of common stock as well as
other equity-based awards. The Directors Plan grants non-employee directors who
are elected or reelected to the board, or who continue to serve on the board,
options to purchase 600 shares of common stock as of each annual meeting of
shareholders. Such options carry an exercise price equal to the fair market
value of the Companys common stock as of the date of grant, vest immediately,
and expire ten years after the date of grant. Options granted under the Stock
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
Stock 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
Companys 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.
The Company has 10,800 non-qualified stock options outstanding as of June
30, 2007 under the Twin Disc, Incorporated 2004 Stock Incentive Plan for
Non-Employee Directors.
The Company has 19,200 incentive stock options and 80,000 non-qualified
stock options outstanding at June 30, 2007 under the Twin Disc, Incorporated
1998 Incentive Compensation plan and the 1998 Stock Option Plan for Non-employee
Directors. The 1998 plans were terminated during 2004, except that options then
outstanding will remain so until exercised or until they expire.
The Company has 5,200 incentive stock options and 9,000 non-qualified
stock options outstanding at June 30, 2007 under the Twin Disc, Incorporated
1988 Incentive Stock Option plan and the 1988 Non-Qualified Stock Option Plan
for Officers, Key Employees and Directors. The 1988 plans were terminated during
1999, except that options then outstanding will remain so until exercised or
until they expire.
Shares available
for future options as of June 30 were as follows: |
|
|
|
|
2007 |
2006 |
2004 Stock
Incentive Plan |
209,159 |
239,600 |
2004 Stock
Incentive Plan for Non-employee Directors |
50,400 |
57,600 |
Stock option
transactions under the plans during 2007 were as follows: |
|
|
|
|
Weighted |
Weighted
Average |
Aggregate |
|
|
Average |
Remaining
Contractual |
Intrinsic |
|
2007 |
Price |
Life
(years) |
Value |
|
|
|
|
|
|
|
Non-qualified
stock options: |
|
|
|
|
Options
outstanding |
|
|
|
|
at
beginning of year |
121,900 |
$
9.76 |
|
|
Granted |
3,600 |
36.01 |
|
|
Canceled/expired |
(6,000) |
9.70 |
|
|
Exercised |
(19,700) |
11.64 |
|
|
|
Options
outstanding at June 30 |
99,800 |
$10.30 |
5.18 |
$6,149,080 |
|
|
|
|
|
|
Options
exercisable at June 30 |
99,800 |
$10.30 |
5.18 |
$6,149,080 |
43
Options price
range |
|
|
|
|
($6.50 -
$9.97) |
|
|
|
|
Number of
shares |
72,600 |
|
|
|
Weighted average
price |
$
7.93 |
|
|
|
Weighted average
remaining life |
4.95
years |
|
|
|
Options price
range |
|
|
|
|
($10.94 -
$14.38) |
|
|
|
|
Number of
shares |
20,000 |
|
|
|
Weighted average
price |
$
12.46 |
|
|
|
Weighted average
remaining life |
4.46
years |
|
|
|
Options price
range |
|
|
|
|
($20.23 -
$36.01) |
|
|
|
|
Number of
shares |
7,200 |
|
|
|
Weighted average
price |
$
28.12 |
|
|
|
Weighted average
remaining life |
9.50
years |
|
|
|
|
|
|
Weighted |
Weighted
Average |
Aggregate |
|
|
Average |
Remaining
Contractual |
Intrinsic |
|
2007 |
Price |
Life
(years) |
Value |
|
|
|
|
|
Incentive stock
options: |
|
|
|
|
Options
outstanding |
|
|
|
|
at
beginning of year |
44,000 |
$
9.46 |
|
|
Granted |
- |
- |
|
|
Canceled/expired |
(15,300) |
9.13 |
|
|
Exercised |
(4,300) |
10.14 |
|
|
Options
outstanding at June 30 |
24,400 |
$ 9.55 |
3.70 |
$1,521,654 |
Options
exercisable at June 30 |
24,400 |
$9.55 |
3.70 |
$1,521,654 |
Options price
range |
|
|
|
|
($7.53 -
$9.97) |
|
|
|
|
Number of
shares |
19,200 |
|
|
|
Weighted average
price |
$
8.40 |
|
|
|
Weighted average
remaining life |
4.32
years |
|
|
|
|
Options price
range |
|
|
|
|
($10.94 -
$14.37) |
|
|
|
|
Number of
shares |
5,200 |
|
|
|
44
Weighted average
price |
$
13.79 |
Weighted average
remaining life |
1.42
years |
In July 2005, the Company adopted SFAS No. 123(R), Share Based Payment
(FAS 123R) using the modified prospective approach. In addition, the Company
computed its windfall tax pool using the shortcut method. This statement
requires the Company to expense the cost of employee services received in
exchange for an award of equity instruments using the fair-value-based method.
All options were 100% vested at the adoption of this statement.
During 2007 and 2006, 3,600 and 3,600 stock options were granted,
respectively. As a result, compensation cost of $40,000 and $19,000 has been
recognized in the Consolidated Statements of Operations and Comprehensive Income
for fiscal 2007 and 2006, respectively.
The total instrinsic value of options exercised during the year ended
June 30, 2007 was approximately $890,000.
Prior to July 2005, the Company accounted for its stock option plans
under the guidelines of Accounting Principles Board Opinion No. 25. Accordingly,
no compensation cost was recognized in the Consolidated Statements of Operations
and Comprehensive Income. Had the Company recognized compensation cost
determined based on the fair value at the grant date for awards under the plans,
the impact on net earnings and earnings per share would not have been
material.
Incentive options granted to greater than 10% shareholders are calculated
using a 3 year term and an exercise price equal to 110% of the fair market value
on the date of grant. There were no incentive options granted to a greater than
10% shareholder during the years presented.
In fiscal 2007 and 2006, the Company granted 30,434 and 47,510
performance stock unit award grants, respectively, to various employees of the
Company, including executive officers. The performance stock unit awards granted
in fiscal 2007 will vest if the Company achieves a specified target objective
relating to consolidated net operating profit after tax (NOPAT) in the
cumulative three fiscal year period ending June 30, 2009. The performance stock
unit awards granted in fiscal 2007 are subject to adjustment if the Companys
NOPAT for the period falls below or exceeds the specified target objective, and
the maximum number of performance stock units that can be awarded if the target
objective is exceeded is 36,521. The stock unit awards granted in fiscal 2006
will vest if the Company achieves a specified consolidated gross revenue
objective in the fiscal year ending June 30, 2008. If such objectives are met,
the employees will receive a cash payment equal to the number of units
multiplied by the fair-value of the Companys common stock as of June 30, 2008
and 2009. There were 74,710 and 47,510 unvested stock unit awards outstanding at
June 30, 2007 and 2006, respectively. The weighted average grant date fair value
of the unvested awards at June 30, 2007 was $20.70. The performance stock unit
awards are remeasured at fair-value at the end of each reporting period. The
fair-value of the stock unit awards are expensed over the performance period for
the shares that are expected to ultimately vest. The compensation expense for
the year ended June 30, 2007, 2006 and 2005, related to the performance stock
unit award grants, approximated $2,328,000, $312,000 and $0, respectively. At
June 30, 2007, there was $2,566,000 of unrecognized compensation cost related to
the unvested shares, based upon the June 29, 2007 closing stock price of $71.91.
This cost is expected to be recognized over a weighted average period of 1.5
years.
In fiscal 2007, 2006 and 2005, the Company granted 30,441, 66,700 and
63,000 performance stock awards, respectively, to various employees of the
Company, including executive officers. The performance stock awards granted in
fiscal 2007 will vest if the Company achieves a specified target objective
relating to consolidated NOPAT in the cumulative three fiscal year period ending
June 30, 2009. The performance stock awards granted in fiscal 2007 are subject
to adjustment if the Companys NOPAT 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 36,529. The 2006 and 2005
stock awards will vest if the Company achieves a specified consolidated gross
revenue objective in the fiscal years ending June 30, 2007 and 2008. There were
90,624, 128,650 and 63,000 unvested stock awards outstanding at June 30, 2007,
2006 and 2005, respectively. The fair value of the stock awards (on the date of
grant) is expensed over the performance period for the shares that are expected
to ultimately vest. The compensation expense for the year ended June 30, 2007,
2006 and 2005, related to performance stock awards, approximated $897,000,
$689,000 and $0, respectively. The weighted average grant date fair value of the
unvested awards at June 30, 2007 was $19.39. At June 30, 2007, there was
$856,000 of unrecognized compensation cost related to the unvested shares. This
cost is expected to be recognized over a weighted average period of 1.7
years.
45
In addition to the performance shares mentioned above, the Company has unvested restricted stock outstanding that will vest if certain service conditions are fulfilled. During fiscal
2007, 2006 and 2005, the Company granted 3,600, 3,600 and 9,600 service based restricted shares, respectively, to employees and non-employee directors in each year. There were 31,600, 34,000 and 60,600 unvested shares outstanding at June 30, 2007,
2006 and 2005, respectively. Compensation expense of $156,000, $140,000 and $203,000 was recognized during the year ended June 30, 2007, 2006 and 2005, respectively, related to these service-based awards.
L. ENGINEERING AND DEVELOPMENT COSTS
Engineering and development costs include research and development expenses for new products, development and major improvements to existing products, and other charges for ongoing
efforts to refine existing products. Research and development costs charged to operations totaled $3,329,000, $2,024,000 and $2,278,000 in 2007, 2006 and 2005, respectively. Total engineering and development costs were $9,327,000,
$8,070,000 and $8,050,000 in 2007, 2006 and 2005, respectively.
M. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has non-contributory, qualified defined benefit pension plans covering substantially all domestic employees hired prior to October 1, 2003, and certain foreign employees.
Domestic plan benefits are based on years of service, and, for salaried employees, on average compensation for benefits earned prior to January 1, 1997, and on a cash balance plan for benefits earned after January 1, 1997. The Company's funding
policy for the plans covering domestic employees is to contribute an actuarially determined amount which falls between the minimum and maximum amount that can be deducted for federal income tax purposes. Domestic plan assets consist principally of
listed equity and fixed income securities.
In addition, the Company has unfunded, non-qualified retirement plans for certain management employees and directors. Benefits are based on final average compensation and vest upon
retirement from the Company.
In addition to providing pension benefits, the Company provides health care and life insurance benefits for certain domestic retirees. All employees retiring after December 31, 1992,
and electing to continue coverage through the Company's group plan, are required to pay 100% of the premium cost.
On September 29, 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158). SFAS
No. 158 requires, among other things, the recognition of the funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans on the balance sheet. Each over-funded plan is recognized as an asset and
each underfunded plan is recognized as a liability. The initial impact of the standard due to unrecognized prior service costs or credits and net actuarial gains or losses, as well as subsequent changes in the funded status, is recognized as a
component of accumulated comprehensive income in shareholders equity. Additional minimum pension liabilities and related intangible assets are also derecognized upon adoption of the new standard. SFAS No. 158 requires initial application for
fiscal years ending after December 15, 2006, with earlier application encouraged. The Company adopted SFAS No. 158 as of June 30, 2007.
46
The incremental effect of applying SFAS No. 158 on the Consolidated
Balance Sheet at June 30, 2007 was as follows:
|
|
Incremental
Effect |
After |
|
Before
Application |
of Application
of |
Application
of |
|
of SFAS No. 158 |
SFAS No. 158 |
SFAS No. 158 |
Deferred income
taxes |
$
(8,322) |
$
12,278 |
$
3,956 |
Other
assets |
29,526 |
(22,871) |
6,655 |
Total
assets |
277,777 |
(10,593) |
267,184 |
Accrued
liabilities |
51,077 |
(1,823) |
49,254 |
Total current
liabilities |
81,741 |
(1,823) |
79,918 |
Accrued
retirement benefits |
15,369 |
11,023 |
26,392 |
Total
liabilities |
141,902 |
9,200 |
151,102 |
Accumulated other
comp. income |
15,300 |
(19,793) |
(4,493) |
Total
shareholders equity |
135,230 |
(19,793) |
115,437 |
Total liabilities
& shareholders equity |
277,777 |
(10,593) |
267,184 |
Obligations and Funded Status
The following table sets forth the Company's defined benefit pension
plans and other postretirement benefit plans funded status and the amounts
recognized in the Company's balance sheets and statement of operations as of
June 30 (dollars in thousands):
|
|
|
Other |
|
Pension |
Postretirement |
|
Benefits |
Benefits |
|
2007 |
2006 |
2007 |
2006 |
Change in benefit obligation: |
|
|
|
|
Benefit
obligation, beginning of year |
$121,876 |
$125,402 |
$
23,847 |
$
26,110 |
Service
cost |
1,278 |
1,171 |
75 |
73 |
Interest
cost |
7,029 |
6,974 |
1,335 |
1,406 |
Amendments |
(2) |
- |
- |
- |
Actuarial (gain)
loss |
(885) |
(3,140) |
2,634 |
(399) |
Benefits
paid |
(9,752) |
(8,531) |
(3,431) |
(3,343) |
|
|
|
|
|
|
Benefit
obligation, end of year |
$119,544 |
$121,876 |
$ 24,460 |
$ 23,847 |
|
|
Change in plan assets: |
|
|
|
|
Fair value of
assets, beginning of year |
$104,623 |
$
96,238 |
$
- |
$
- |
Actual return on
plan assets |
14,040 |
12,517 |
- |
- |
Employer
contribution |
8,821 |
4,399 |
3,431 |
3,343 |
Benefits
paid |
(9,752) |
(8,531) |
(3,431) |
(3,343) |
|
|
|
|
|
|
Fair value of
assets, end of year |
$117,732 |
$104,623 |
$ - |
$ - |
|
|
Funded status: |
$
(1,813) |
$(17,253) |
$(24,460) |
$(23,847) |
Unrecognized net
transition obligation |
- |
251 |
- |
- |
Unrecognized
actuarial loss |
- |
35,422 |
- |
10,387 |
Unrecognized
prior service cost |
- |
(4,031) |
- |
(4,070) |
|
|
|
|
|
|
Net amount
recognized |
$ (1,813) |
$14,389 |
$(24,460) |
$(17,530) |
|
|
|
|
|
|
|
Amounts recognized in the balance sheet consist
of: |
|
|
|
Prepaid benefit
cost |
$
2,353 |
- |
$
- |
- |
Deferred tax
asset |
- |
12,252 |
- |
- |
Pension
obligation |
(4,166) |
(17,026) |
- |
- |
Postretirement
health & other obligations |
- |
- |
(24,460) |
(17,530) |
Accumulated other
comprehensive income |
- |
19,163 |
- |
- |
Net amount
recognized |
$
(1,813) |
$
14,389 |
$
(24,460) |
$
(17,530) |
47
Amounts recognized in accumulated other comprehensive income
consist of (net of tax): |
Net
transition obligation |
$123 |
$ - |
Prior service cost |
(2,055) |
(2,069) |
Actuarial net loss |
16,394 |
7,400 |
|
|
|
|
Net
amount recognized |
$ 14,462 |
$5,331 |
The amounts in accumulated other comprehensive income that are expected
to be recognized as components of net periodic benefit cost during the next
fiscal year are as follows (dollars in thousands):
|
|
Other |
|
Pension |
Postretirement |
|
Benefits |
Benefits |
Actuarial loss |
$1,703 |
$889 |
Prior service cost |
(718) |
(678) |
|
|
|
|
Net
amount to be recognized |
$ 985 |
$211 |
The accumulated benefit obligation for all defined benefit pension plans
was $119,544,000 and $121,876,000 at June 30, 2007 and 2006,
respectively.
Information for pension plans with an accumulated benefit
obligation in excess of plan assets: |
|
|
|
|
June 30 |
|
2007 |
2006 |
|
Projected and accumulated benefit obligation |
$
7,612 |
$121,876 |
Fair
value of plan assets |
3,447 |
104,623 |
Components of Net Periodic Benefit Cost |
|
|
|
|
|
Pension Benefits |
|
2007 |
2006 |
2005 |
|
Service cost |
$
1,278 |
$
1,171 |
$
1,285 |
Interest cost |
7,029 |
6,974 |
7,169 |
Expected return on plan assets |
(8,730) |
(7,820) |
(7,321) |
Amortization of prior service cost |
(766) |
96 |
124 |
Amortization of transition obligation |
66 |
63 |
59 |
Amortization of net loss |
2,752 |
3,138 |
3,262 |
|
Net
periodic benefit cost |
$ 1,629 |
$ 3,622 |
$ 4,578 |
|
|
Other Postretirement Benefits |
|
2007 |
2006 |
2005 |
|
Service cost |
$
75 |
$
73 |
$
52 |
Interest cost |
1,335 |
1,406 |
1,674 |
Amoritization of prior service cost |
(678) |
(678) |
(678) |
Amortization of net actuarial loss |
889 |
1,022 |
1,333 |
|
Net
periodic benefit cost |
$ 1,621 |
$ 1,823 |
$ 2,381 |
|
Additional Information |
|
|
|
|
|
|
Other |
|
Pension Benefits |
Postretirement
Benefits |
Assumptions (as of March 31) |
|
|
|
48
Weighted average
assumptions used |
|
|
|
|
|
|
to
determine benefit obligations |
|
|
|
|
|
|
at
June 30 |
|
|
|
|
|
|
|
|
2007 |
2006 |
2007 |
2006 |
|
|
Discount
rate |
|
6.00% |
6.00% |
6.00% |
6.00% |
|
Expected return
on plan assets |
|
8.50% |
8.50% |
|
|
|
|
Weighted average
assumptions used |
|
|
|
|
|
|
to
determine net periodic benefit |
|
|
|
|
|
|
cost
for years ended June 30 |
|
|
|
|
|
|
|
|
2007 |
2006 |
2005 |
2007 |
2006 |
2005 |
|
Discount
rate |
6.00% |
5.75% |
6.00% |
6.00% |
5.75% |
6.00% |
Expected return
on plan assets |
8.50% |
8.50% |
8.50% |
|
|
|
Rate of
compensation increase |
5.00% |
5.00% |
5.00% |
|
|
|
The assumed weighted-average health care cost trend rate was 9% in 2007,
grading down to 6% in 2011. A 1% increase in the assumed health care cost trend
would increase the accumulated postretirement benefit obligation by
approximately $385,000 and the service and interest cost by approximately
$23,000. A 1% decrease in the assumed health care cost trend would decrease the
accumulated postretirement benefit obligation by approximately $359,000 and the
service and interest cost by approximately $22,000.
Plan Assets
The Companys pension plan weighted-average asset allocations at June 30,
2007 and 2006, by asset category are as follows:
|
Target |
June
30 |
Asset Category |
Allocation |
2007 |
2006 |
|
Equity
securities |
70% |
73% |
71% |
Debt
securities |
20% |
18% |
19% |
Real
estate |
10% |
9% |
10% |
|
|
|
|
|
|
100% |
100% |
100% |
Due to market conditions and other factors, actual asset allocation may
vary from the target allocation outlined above. The pension plans held 124,804
shares of Company stock with a fair market value of $8,974,656 (7.4 percent of
total plan assets) and $3,820,250 (3.8 percent of total plan assets) at June 30,
2007 and 2006, respectively.
Twin Disc employs a total return on investment approach whereby a mix of
equities and fixed income investments are used to maximize long-term return of
plan assets while avoiding excessive risk. Pension plan guidelines have been
established based upon an evaluation of market conditions, tolerance for risk,
and cash requirements for benefit payments. Investment risk is measured and
monitored on an ongoing basis through quarterly investment portfolio reviews,
and annual liability measurements.
The plans have a long-term return assumption of 8.50% . This rate was
derived based upon historical experience and forward-looking return expectations
for major asset class categories.
Cash Flows
49
Contributions
The Company expects to contribute $1,823,000 to its pension plan in
fiscal 2008.
Estimated
Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
|
|
Other
Postretirement Benefits |
|
Pension |
Gross |
Part
D |
Net
Benefit |
|
Benefits |
Benefits |
Reimbursement |
Payments |
|
2008 |
$9,544 |
$3,419 |
$73 |
$3,346 |
2009 |
9,301 |
3,328 |
76 |
3,252 |
2010 |
9,384 |
2,899 |
78 |
2,821 |
2011 |
9,417 |
2,808 |
78 |
2,730 |
2012 |
9,421 |
2,669 |
78 |
2,591 |
Years
2013-2017 |
45,824 |
10,710 |
358 |
10,352 |
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 $1,896,000, $1,745,000 and $1,348,000 in 2007, 2006
and 2005, respectively.
N. INCOME TAXES
United States and foreign earnings before income taxes and minority
interest were as follows (in thousands):
|
2007 |
2006 |
2005 |
United
States |
$23,144 |
$13,996 |
$
5,281 |
Foreign |
11,185 |
9,056 |
4,211 |
|
$34,329 |
$23,052 |
$
9,492 |
The provision (credit) for income taxes is comprised of the following (in
thousands):
|
2007 |
2006 |
2005 |
Currently
payable: |
|
|
|
Federal |
$
3,747 |
$
1,640 |
$
446 |
State |
1,080 |
278 |
32 |
Foreign |
7,487 |
3,794 |
3,298 |
|
|
12,314 |
5,712 |
3,776 |
Deferred: |
|
|
|
Federal |
1,808 |
2,001 |
(813) |
State |
100 |
532 |
272 |
Foreign |
(1,949) |
225 |
(750) |
|
|
|
|
|
|
(41) |
2,758 |
(1,291) |
|
|
|
|
|
|
$12,273 |
$
8,470 |
$
2,485 |
The components of the net deferred tax asset as of June 30 are summarized
in the table below (in thousands).
50
|
2007 |
2006 |
Deferred tax assets: |
|
|
Retirement plans and employee benefits |
$14,387 |
$13,843 |
Alternative minimum tax credit carryforwards |
438 |
460 |
Foreign tax credit carryforwards |
- |
1,662 |
State net operating loss and other state credit
carryforwards |
- |
19 |
Inventory |
3,029 |
2,330 |
Reserves |
1,712 |
1,578 |
Research & development capitalization |
1,053 |
1,304 |
Other |
352 |
97 |
|
|
|
|
|
20,971 |
21,293 |
Deferred tax liabilities: |
|
|
Property, plant and equipment |
5,316 |
5,215 |
Intangibles |
5,653 |
6,146 |
|
|
|
|
|
10,969 |
11,361 |
|
Total net deferred tax assets |
$ 10,002 |
$ 9,932 |
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 deferred tax assets. The alternative minimum tax credit
carryforwards will be carried forward indefinitely.
Following is a reconciliation of the applicable U.S. federal income taxes
to the actual income taxes reflected in the statements of operations (in
thousands):
|
2007 |
2006 |
2005 |
|
U.S.
federal income tax at 35% |
$11,944 |
$
8,023 |
$3,194 |
Increases (reductions) in tax resulting from: |
|
|
|
Foreign tax items |
672 |
398 |
(354) |
State taxes |
767 |
563 |
304 |
Valuation allowance |
- |
(270) |
(1,133) |
Research & development tax credits |
(1,235) |
- |
- |
Other, net |
125 |
(244) |
474 |
|
|
|
|
|
$12,273 |
$8,470 |
$
2,485 |
During fiscal 2006 and 2005, the Company reversed its valuation
allowances on certain foreign tax credit carryforwards that were expected to be
utilized as a result of certain internal corporate restructurings and
transactions, along with improved operating results. These foreign tax credit
carryforwards were fully utilized in fiscal 2007.
During fiscal 2007, the Company completed an extensive project to
identify, assess and document its research and development activities to
determine if the nature of these activities qualified for the Federal research
tax credit. This project resulted in the recognition of $1.2 million, primarily
in the fourth quarter of fiscal 2007, of Federal and State research tax credits
related to the previous four years.
The Company has not provided additional U.S. income taxes on cumulative
earnings of consolidated foreign subsidiaries that are considered to be
reinvested indefinitely. These earnings relate to ongoing operations and were
approximately $7.7 million at June 30, 2007. Such earnings could become taxable
upon the sale or liquidation of these foreign subsidiaries or upon dividend
repatriation. The Companys 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. It is not practicable to estimate the
amount of unrecognized withholding taxes or the deferred tax liability on such
earnings.
51
O. CONTINGENCIES
The Company is involved in litigation of which the ultimate outcome and
liability to the Company, if any, is not presently determinable. Management
believes that final disposition of such litigation will not have a material
impact on the Companys results of operations or financial position.
P. RESTRUCTURING OF OPERATIONS
During the fourth quarter of 2007, the Company recorded a pre-tax
restructuring charge of $2,652,000 related to a workforce reduction at its
Belgian operation that will allow for improved profitability through targeted
outsourcing savings and additional focus on core manufacturing processes. The
charge consists of prepension costs for 32 employees; 29 manufacturing employees
and 3 salaried employees. During 2007, the Company made no cash payments.
Accrued restructuring costs were $2,652,000 at June 30, 2007.
The Company recorded a restructuring charge of $2,076,000 in the fourth
quarter of 2005 as the Company restructured its Belgian operation to improve
future profitability. The charge consists of prepension costs for 37 employees;
33 manufacturing employees and 4 salaried employees. During 2007 and 2006, the
Company made cash payments of $177,000 and $214,000, respectively. Accrued
restructuring costs were $1,640,000 and $1,706,000 at June 30, 2007 and 2006,
respectively.
Q. ACQUISITIONS
BCS Group
Acquisition
Effective May 31, 2006, the Company acquired 100% of the outstanding
stock of four related foreign entities: B.C.S. S.r.l., an Italian limited
liability company; B.C.S. Service S.r.l., an Italian limited liability company;
Boat Equipment Limited, a Maltese limited liability company; and Vetus Italia
S.r.l., an Italian limited liability company (collectively the BCS Group).
This acquisition was accounted for using the purchase method of
accounting.
The BCS Group has a fiscal year ended May 31. No results of operations
for the BCS Group are included in the consolidated results for the year ended
June 30, 2006 as the acquisition was effective with their fiscal year end of May
31, consistent with the Companys consolidation principles (see Note A). A full
year of BCS Group activity is included in the consolidated results for the year
ended June 30, 2007.
The purchase price, including acquisition costs, net of cash acquired was
$20,330,000.
The condensed balance sheet of the BCS Group as of May 31, 2006 is as
follows (in thousands):
Current
Assets |
$
25,471 |
Net Fixed
Assets |
4,136 |
Other
Assets |
315 |
Intangibles |
10,971 |
|
|
Total assets
acquired |
$ 40,893 |
|
Current
Liabilities |
$
13,783 |
Deferred
Taxes |
3,836 |
Stockholders
Equity |
23,274 |
|
|
|
$40,893 |
Intangible assets identified and the amounts assigned are as
follows:
Intangible
Assets Subject to Amortization:
Customer
relationships |
$3,156 |
Distribution
Network |
597 |
Non-compete
agreements |
1,449 |
|
$5,202 |
52
The weighted average amortization period is 10
years.
Intangible
Assets Not Subject to Amortization:
Trademark |
$
1,875 |
Goodwill |
3,894 |
|
|
|
$ 5,769 |
Goodwill is not expected to be deductible for tax purposes.
The following unaudited pro forma results of operations of the Company
for fiscal 2006 are stated as though the transaction and related financing
activities had occurred at the beginning of fiscal 2006, in
thousands.
Net
sales |
|
As
reported |
243,287 |
Pro
forma |
269,460 |
|
Net
earnings |
|
As
reported |
14,453 |
Pro
forma |
15,337 |
|
Basic earnings per share |
|
As
reported |
2.51 |
Pro
forma |
2.66 |
|
Diluted earnings per share |
|
As
reported |
2.43 |
Pro
forma |
2.58 |
The unaudited pro forma financial information presented above is for
informational purposes only and does not necessarily reflect the results of
operations that would have occurred had the acquisition taken place on the date
assumed above, and those results are not necessarily indicative of the results
of future combined operations.
R. STOCK SPLIT
In January 2006, the Board of Directors approved a two-for-one stock
split of the Companys outstanding common stock. The split was issued on March
31, 2006 to shareholders of record at the close of business on March 10, 2006.
The split increased the number of shares outstanding to approximately 5.8
million from approximately 2.9 million. The Consolidated Financial Statements
and Notes thereto, including all share and per share data, have been restated as
if the stock split had occurred as of the earliest period presented.
53
TWIN DISC, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS for the years ended June
30, 2007, 2006 and 2005 (In thousands)
|
----------- Additions---------- |
|
|
Balance at |
Charged to |
|
|
Balance at |
|
Beginning |
Costs and |
Net |
|
end
of |
Description |
of Period |
Expenses |
Acquired |
Deductions(1) |
of Period |
|
2007: |
|
|
|
|
|
|
Allowance for losses on |
|
|
|
|
|
accounts receivable |
$1,023 |
$ 123 |
$
- |
$ 224 |
$ 922 |
|
|
|
|
|
|
|
Reserve for inventory |
|
|
|
|
|
obsolescence |
$5,953 |
$2,342 |
$
- |
$3,735 |
$4,560 |
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
Allowance for losses on |
|
|
|
|
|
accounts receivable |
$927 |
$ 126 |
$140 |
$ 170 |
$1,023 |
|
|
|
|
|
|
|
Reserve for inventory |
|
|
|
|
|
obsolescence |
$4,510 |
$1,753 |
$960 |
$1,270 |
$5,953 |
|
|
|
|
|
|
|
|
2005: |
|
|
|
|
|
|
Allowance for losses on |
|
|
|
|
|
accounts receivable |
$ 604 |
$ 365 |
$ - |
$ 42 |
$ 927 |
|
Reserve for inventory |
|
|
|
|
|
obsolescence |
$4,672 |
$2,020 |
$ - |
$2,182 |
$4,510 |
(1) Accounts receivable written-off and inventory disposed of during the
year and other adjustments (primarily foreign currency translation
adjustments).
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TWIN
DISC, INCORPORATED
By /s/ Jeffrey S. Knutson
Jeffrey S. Knutson, Corporate Controller
(Chief Accounting Officer)
September 13, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
( |
By /s/ Michael E. Batten |
|
( |
Michael E. Batten, Chairman, President |
|
( |
Chief Executive Officer and Director |
|
( |
|
|
( |
|
September 13, 2007 |
( |
|
|
( |
By /s/ Christopher J. Eperjesy |
|
( |
Christopher J. Eperjesy, Vice |
|
( |
President-Finance, Chief Financial |
|
( |
Officer and Secretary |
|
|
|
|
( |
John
H. Batten, Director |
September 13, 2007 |
( |
John
A. Mellowes, Director |
|
( |
David B. Rayburn, Director |
|
( |
Harold M. Stratton II, Director |
|
( |
David L. Swift, Director |
|
( |
Malcolm F. Moore, Director |
|
( |
David R. Zimmer, Director |
|
( |
|
|
( |
By /s/ Christopher J. Eperjesy |
|
( |
Christopher J. Eperjesy, Attorney in Fact
|
55
EXHIBIT INDEX
EXHIBIT INDEX
TWIN DISC, INCORPORATED
10-K for Year Ended
June 30, 2007
Exhibit
Description
Included Herewith
3a) |
Articles of
Incorporation, as restated October 21, 1988 (Incorporated
by |
|
reference to
Exhibit 3(a) of the Company's Form 10-K for the year |
|
ended June 30,
2004). File No. 001-07635. |
|
|
|
b) |
Corporate Bylaws,
as amended through July 31, 2006 (Incorporated by |
|
reference to
Exhibit 3.1 of the Company's Form 8-K dated July 31, |
|
2006, File No.
001-07635). |
|
|
|
4a) |
Form of Rights
Agreement dated as of April 17, 1998 by and between |
|
the Company and
the Firstar Trust Company, as Rights Agent, with |
|
Form of Rights
Certificate (Incorporated by reference to Exhibits 1
and |
|
2 of the
Company's Form 8-A dated May 4, 1998). File No.
001-07635. |
|
|
|
b) |
Announcement of
Shareholder Rights Plan per news release dated April |
|
17, 1998
(Incorporated by reference to Exhibit 6(a), of the
Company's |
|
Form 10-Q dated
May 4, 1998). File No. 001-07635. |
|
|
|
|
|
|
Material
Contracts |
|
|
|
10a) |
The 1988
Incentive Stock Option Plan (Incorporated by reference
to |
|
Exhibit 10(a) of
the Company's Form 10-K for the year ended June 30, |
|
2004). File No.
001-07635. |
|
|
|
b) |
The 1988
Non-Qualified Stock Option Plan for Officers, Key |
|
Employees and
Directors (Incorporated by reference to Exhibit 10(b)
of |
|
the Company's
Form 10-K for the year ended June 30, 2004). File No. |
|
001-07635. |
|
|
|
c) |
Amendment to 1988
Incentive Stock Option Plan of Twin Disc, |
|
Incorporated
(Incorporated by reference to Exhibit 10(c) of the |
|
Company's Form
10-K for the year ended June 30, 2004). File No. 001- |
|
07635. |
|
|
|
d) |
Amendment to 1988
Non-Qualified Incentive Stock Option Plan for |
|
Officers, Key
Employees and Directors of Twin Disc, Incorporated |
|
(Incorporated by
reference to Exhibit 10(d) of the Company's Form |
|
10-K for the year
ended June 30, 2004). File No. 001-07635. |
|
|
|
|
e) |
Director Tenure
and Retirement Policy (Incorporated by reference to |
|
Exhibit 10(g) of
the Company's Form 10-K for the year ended June 30, |
|
2004). File No.
001-07635. |
|
|
|
|
f) |
The 1998
Incentive Compensation Plan (Incorporated by reference
to |
|
Exhibit A of the
Proxy Statement for the Annual Meeting of |
|
Shareholders held
on October 16, 1998). File No. 001-07635. |
|
|
56
g) |
The
1998 Stock Option Plan for Non-Employee Directors
(Incorporated |
|
|
by
reference to Exhibit B of the Proxy Statement for the Annual
Meeting |
|
|
of
Shareholders held on October 16, 1998). File No. 001-07635.
|
|
|
h) |
The
2004 Stock Incentive Plan as amended (Incorporated by
reference |
|
|
to
Exhibit B of the Proxy Statement for the Annual Meeting of
|
|
|
Shareholders held on October 20, 2006). File No.
001-07635. |
|
|
i) |
The
2004 Stock Incentive Plan for Non-Employee Directors as
amended |
X |
|
j) |
Form
of Performance Stock Award Agreement (Incorporated by |
|
|
reference to Exhibit 10.1 of the Companys Form 8-K dated
August 2, |
|
|
2005). File No. 001-07635. |
|
|
k) |
Amendment to Supplemental Retirement Plan (Incorporated
by |
|
|
reference to Exhibit 10.2 of the Companys Form 8-K dated
August 2, |
|
|
2005). File No. 001-07635. |
|
|
l) |
Forms of Change in Control Severance Agreements (Incorporated
by |
|
|
reference to Exhibits 10.3, 10.4 and 10.5 of the Companys
Form 8-K |
|
|
dated August 2, 2007). File No. 001-07635. |
|
|
m) |
Form
of Indemnity Agreement (Incorporated by reference to Exhibit
|
|
|
10.5
of the Companys Form 8-K dated August 2, 2005). File No.
001- |
|
|
07635. |
|
|
n) |
Waiver and Release Agreement (Incorporated by reference to
Exhibit |
|
|
10.7
of the Companys Form 8-K dated August 2, 2005). File No.
001- |
|
|
07635. |
|
|
o) |
6.05% Senior Notes (Incorporated by reference to Exhibit 4.1
of the |
|
|
Companys Form 8-K dated April 12, 2006). File No.
001-07635. |
|
p) |
Amendment 1 to 6.05% Senior Notes. |
X |
q) |
Amendment 2 to 6.05% Senior Notes. |
X |
|
|
|
|
21 |
Subsidiaries of the Registrant |
X |
|
|
|
23 |
Consent of Independent Registered Public Accounting
Firm |
X |
|
|
|
24 |
Power of Attorney |
X |
|
|
|
31a |
Certification |
X |
|
|
|
31b |
Certification |
X |
|
|
|
32a |
Certification pursuant to 18 U.S.C. Section 1350
|
X |
|
|
|
32b |
Certification pursuant to 18 U.S.C. Section 1350
|
X |
|
|
|
57
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,`!1110`4444`?__9
`
end
EX-21
3
r10k21.htm
r10k21.pdf -- Converted by SECPublisher 4.0, created by BCL Technologies Inc., for SEC Filing
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.A. (a Belgian corporation) |
|
2. |
Twin Disc
Technodrive Srl (an Italian corporation) |
|
3. |
Rolla Sp
Propellers SA (a Swiss corporation) |
|
4. |
Twin Disc Srl
(an Italian corporation) |
|
5. |
Twin Disc
(Pacific) Pty. Ltd. (an Australian corporation) |
|
6. |
Twin Disc (Far
East) Ltd. (a Delaware corporation operating in Singapore and Hong
Kong) |
|
7. |
Mill-Log
Equipment Co., Inc. (an Oregon corporation) |
|
8.
|
Mill-Log
Equipment Ltd. (a Canadian corporation) |
|
9. |
Twin Disc
Southeast, Inc. (a Florida corporation) |
|
10.
|
Technodrive
SARL (a French corporation) |
|
11.
|
BCS S.r.l. (an
Italian limited liability corporation) |
|
12.
|
BCS Service
S.r.l. (an Italian limited liability corporation) |
|
13.
|
Vetus Italia
S.r.l. (an Italian limited liability corporation) |
|
14.
|
Boat Equipment
Limited (a Maltese limited liability corporation) |
|
15.
|
Twin Disc
Japan (a Japanese corporation) |
|
Twin Disc, Incorporated also owns 66% of Twin Disc Nico Co. LTD. (a
Japanese corporation).
The registrant has no parent nor any other subsidiaries. All of the above
subsidiaries are included in the consolidated financial statements.
EX-23
4
r10k23.htm
r10k23.pdf -- Converted by SECPublisher 4.0, created by BCL Technologies Inc., for SEC Filing
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-99229, 333-69361, 333-69015, 333-119770, 333-119771) of Twin Disc,
Incorporated of our report dated September 13, 2007 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
September 13, 2007
EX-24
5
r10k24.htm
r10k24.pdf -- Converted by SECPublisher 4.0, created by BCL Technologies Inc., for SEC Filing
EXHIBIT 24
POWER OF ATTORNEY
The undersigned directors of Twin Disc, Incorporated hereby severally
constitute Michael E. Batten and Christopher J. Eperjesy, 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, 2007 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/ JOHN A. MELLOWES |
|
) |
John
A. Mellowes, Director |
|
) |
|
|
) |
|
|
) |
/s/ HAROLD M. STRATTON II |
|
) |
Harold M. Stratton II, Director |
|
) |
|
|
) |
|
|
) |
/s/ DAVID B. RAYBURN |
|
) |
David B. Rayburn, Director |
|
) |
|
|
) |
|
|
)
July 27, 2007 |
/s/ DAVID L. SWIFT |
|
) |
David L. Swift, Director |
|
) |
|
|
) |
|
|
) |
/s/ MALCOLM F. MOORE |
|
) |
Malcolm F. Moore, Director |
|
) |
|
|
) |
|
|
) |
/s/ DAVID R. ZIMMER |
|
) |
David R. Zimmer, Director |
|
) |
EX-31
6
r10k31a.htm
r10k31a.pdf -- Converted by SECPublisher 4.0, created by BCL Technologies Inc., for SEC Filing
EXHIBIT 31a
CERTIFICATIONS
I, Michael E. Batten, certify that:
1. I have reviewed this annual report on Form 10-K of Twin Disc,
Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such
internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated the
effectiveness of the registrant's disclosure controls and procedures and
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
annual report based on such evaluation; and
d) disclosed in this
report any change in the registrants internal control over financial reporting
that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of this annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial
information; and
b) any fraud,
whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial
reporting.
Date: September 13,
2007
/s/ Michael
E. Batten
&
nbsp;
Chairman, President and Chief Executive Officer
EX-31
7
r10k31b.htm
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Exhibit 31b
CERTIFICATIONS
I, Christopher J. Eperjesy, certify that:
1. I have reviewed this annual report on Form 10-K of Twin Disc,
Incorporated;
2. 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such
internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated the
effectiveness of the registrant's disclosure controls and procedures and
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
annual report based on such evaluation; and
d) disclosed in this
report any change in the registrants internal control over financial reporting
that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of this annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial
information; and
b) any fraud,
whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial
reporting.
Date: September 13,
2007
/s/ Christopher J. Eperjesy
Vice President Finance, Chief Financial Officer and
Secretary
EX-32
8
r10k32a.htm
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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, 2007, as filed with the Securities and Exchange
Commission as of the date hereof (the Report), I, Michael E. Batten, Chairman,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge:
(1) |
the Report
fully complies with Section 13(a) of the Securities Exchange Act of 1934,
and |
|
(2) |
the
information contained in the report fairly presents, in all material
respects, the financial condition and
results of operations of the Company |
|
&
nbsp;
/s/ Michael E. Batten
Chairman, President and Chief Executive
Officer
 
;
September 13, 2007
EX-32
9
r10k32b.htm
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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, 2007, as filed with the Securities and Exchange
Commission as of the date hereof (the Report), I, Christopher J. Eperjesy,
Vice President Finance, Chief Financial Officer and Secretary of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) |
the Report
fully complies with Section 13(a) of the Securities Exchange Act of 1934,
and |
|
(2) |
the
information contained in the report fairly presents, in all material
respects, the financial condition and results of
operations of the Company. |
|
&
nbsp;
/s/ Christopher J. Eperjesy
Vice President Finance, Chief Financial Officer
and Secretary
 
; September
13, 2007
EX-99
10
r10k07exi.htm
2004 STOCK INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS AS AMENDED
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TWIN
DISC, INCORPORATED
2004
STOCK INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
(As
amended effective July 28, 2006)
ARTICLE
I
PURPOSE
1.1 Purpose. The purpose of the Twin
Disc, Incorporated 2004 Stock Incentive Plan for Non-Employee Directors (the
Directors Plan or Plan) is to promote the financial interests of Twin Disc,
Incorporated (the Company) and its shareholders by providing non-employee
members of the Companys Board of Directors (each a Participant) the
opportunity to acquire Common Stock of the Company (Common Stock), thereby
assisting the Company in its efforts to attract and retain well qualified
individuals to serve as directors and further aligning the interests of such
directors with those of the Companys shareholders. Common Stock under the Plan
will be made available to Participants as either options to purchase Common
Stock (Options) or Common Stock with certain imposed restrictions as defined
herein (Restricted Stock) (collectively with Options, Awards). Options
granted under the Directors Plan are not intended to meet all of the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the Code), and the Directors Plan shall be construed so as to carry out that
intent.
ARTICLE II
EFFECTIVE DATE AND
TERM
2.1 Effective
Date. The
Directors Plan shall become effective on the date that it is approved by
shareholders holding a majority of the outstanding shares of Common Stock of the
Company (the Effective Date).
2.2 Term. No Option may be granted
or Restricted Stock awarded more than ten (10) years after the Effective
Date.
2.3 Post-Term
Activity. Options granted
within the term of the Plan as set forth in Section 2.2, subject to the all
other terms and conditions of the Plan and the agreement(s) governing the grant
of the Options, may be exercised, paid out, or modified more than ten years
after the Effective Date. Restrictions on Restricted Stock may lapse more than
ten (10) years after the Effective Date.
ARTICLE III
STOCK
SUBJECT TO PLAN
3.1 Maximum
Number.
The maximum number of shares of Common Stock that may be issued pursuant to
Awards under the Plan is 36,000 subject to the adjustments provided in Article
XII, below. Such shares may be newly-issued shares, authorized but unissued
shares or shares reacquired by the Company on the open market or
otherwise.
3.2 Availability of Shares for
Award. Shares of
Common Stock that are subject to issuance pursuant to an Award may thereafter be
subject to a new Award:
(a)
|
if the prior Award to
which such shares were subject lapses, expires or terminates without the
issuance of such shares; or |
|
(b)
|
shares issued
pursuant to an Award are reacquired by the Company pursuant to rights
reserved by the Company upon the issuance of such shares; provided, that
shares reacquired by the Company may only be subject to new Awards if the
Participant received no benefit of ownership from the shares.
|
|
Shares
of Common Stock that are received by the Company in connection with the exercise
of an Option, including the satisfaction of any tax liability or the
satisfaction of a tax withholding obligation, may be made subject to issuance
pursuant to a later Option.
ARTICLE
IV
ADMINISTRATION
4.1 General
Administration. The Companys
Board of Directors (the Board) will supervise and administer the Plan;
provided, however, that the Board may appoint a committee (the Committee) of
two (2) or more directors to administer the Plan if deemed necessary or
advisable in order to comply with the exemptive rule promulgated pursuant to
Section 16(b) of the Securities Exchange Act of 1934, as amended (the Exchange
Act).
4.2 Powers. Grants of Options under
the Plan and the amount, price and timing of the awards to be granted will be
automatic as described in Article VI. Awards of Restricted Stock under the Plan
and the amount and timing of the awards will be automatic as described in
Article IX. However, the Board or Committee shall have discretionary authority
to determine all issues with respect to the interpretation of the Plan, Options
granted under the Plan and Restricted Stock awarded under the Plan, and with
respect to all Plan administration issues.
4.3 Section 16
Compliance. Transactions
under this Directors Plan are intended to comply with all applicable conditions
of the exemptive rules promulgated pursuant to Section 16(b) of the Exchange
Act. To the extent any provision of the Directors Plan or action of the Board
or Committee fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Board or Committee.
ARTICLE V
ELIGIBILITY
5.1 Eligibility. All present or future
directors of the Company who are not employees of the Company shall be eligible
to participate in the Directors Plan.
2
ARTICLE
VI
GRANT OF
OPTIONS
6.1 Automatic
Grant. On
each annual stockholders meeting beginning in calendar year 2004, each eligible
director who is elected or re-elected to the Board, and each eligible director
who is continuing to serve on the Board, shall be granted Options to purchase
300 shares of Common Stock, and the grant date for such Options shall be the day
of the annual stockholders meeting. On each annual stockholders meeting
beginning in calendar year 2006, each eligible director who is elected or
re-elected to the Board, and each eligible director who is continuing to serve
on the Board, shall be granted Options to purchase 600 shares of Common Stock,
and the grant date for such Options shall be the day of the annual stockholders
meeting.
6.2 Exercise
Price. The
exercise price per share shall be the fair market value per share of Common
Stock on the date the Option is granted. For this and all other purposes under
the Plan, the fair market value shall be the closing price per share of Common
Stock on the New York Stock Exchange (NYSE) on the date of grant; provided,
that if the Common Stock ceases to be listed on the NYSE, the Board or Committee
shall designate an alternative method of determining the fair market value of
the Common Stock.
6.3 Option
Period. No
Option granted under the Plan shall be exercisable unless and until shareholder
approval of the Plan is obtained. Following such approval, Options may be
exercised in whole at any time or in part from time to time. An Option shall not
be exercisable more than ten years after the date it is granted, and will
terminate no later than three years after termination of director status for any
reason other than death.
6.4 Written
Agreement. Each Option
shall be evidenced by an appropriate written agreement, the form of which shall
be consistent with the terms and conditions of the Plan and applicable law,
which shall be signed by an officer of the Company and the Participant. A single
written agreement may cover the grant of Options in subsequent or prior
years.
ARTICLE VII
PAYMENT FOR
OPTIONS
7.1 General. Payments required, if
any, upon a Participants exercise of an Option under the Plan may be made in
the form of: (i) cash; (ii) Company stock; (iii) a combination of cash and
Company stock; or (iv) such other forms or means that the Board or Committee
shall determine in its discretion and in such manner as is consistent with the
Plans purpose and the Code, the Exchange Act, or other applicable laws or
regulations.
3
ARTICLE VIII
TRANSFERABILITY OF OPTIONS
AND EFFECT OF TERMINATION OF DIRECTOR STATUS
8.1 General. Except as provided
herein, no Option or interest therein shall be transferable by a Participant
other than by will or by the laws of descent and distribution.
8.2 Exercise Upon
Death. In the event of
the death of a Participant prior to termination of an Option held by such
director, each such Option shall be exercisable to the extent provided therein,
but not later than one year after the date of death (and not beyond the stated
duration of the Option). Any such exercise shall be made only:
(a)
|
By the executor or
administrator of the estate of the deceased Participant or the person or
persons to whom the deceased Participants rights under the Option shall
pass by will or the laws of descent and distribution; and |
|
(b)
|
To the extent, if
any, that the deceased Participant was entitled to exercise such Option at
the date of his death. |
|
8.3 Transferability of Option
During Lifetime. Except as
otherwise provided herein, every Option granted under the Plan to a Participant
may be assigned or transferred by the Participant to or for the benefit of a
member of the Participants immediate family or to trusts created for their
benefit and may thereafter be exercised pursuant to its terms by the person or
entity to whom assigned; provided, however, that such transfer does not result
in liability under Section 16 of the Exchange Act to the Participant or other
Participants and is consistent with registration of the Options and sale of
Common Stock on Form S-8 (or a successor form) or the Committees waiver of such
condition.
8.4 Forfeiture. Any unexpired and
unexercised Options held by a Participant shall be immediately forfeited if the
Participant is prohibited from serving on the Board by any court of competent
jurisdiction or other government authority, or if, in the discretion of the
Board or Committee, a Participant is no longer competent to serve on the Board
due to the Participants violation of state or federal securities law or other
rule of the NYSE (or such other listing standards then applicable to the
Company).
8.5 Resale
Limitation. Shares of
Common Stock issued upon exercise of Options under the Plan are subject to
effective registration statements filed with the Securities and Exchange
Commission and are freely transferable. However, any sale of shares acquired
through the exercise of Options by a director must be made pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
or under an applicable exemption from registration (such as SEC Rule 144). Any
such sale be reported to the SEC in accordance with the applicable provisions of
Section 16 of the Exchange Act and rules promulgated thereunder.
4
ARTICLE IX
AWARD
OF RESTRICTED STOCK
9.1 Automatic
Award. On
each annual stockholders meeting beginning in calendar year 2004, each eligible
director who is elected or re-elected to the Board, and each eligible director
who is continuing to serve on the Board, shall be awarded 300 shares of Common
Stock with the transferability restrictions set forth in Article X (Restricted
Stock), and the award date for such Restricted Stock awarded shall be the day
of the annual stockholders meeting. On each annual stockholders meeting
beginning in calendar year 2006, each eligible director who is elected or
reelected to the Board, and each eligible director who is continuing to serve on
the Board, shall be awarded 600 shares of Common Stock with the transferability
restrictions set forth in Article X (Restricted Stock), and the award date for
such Restricted Stock awarded shall be the day of the annual stockholders
meeting.
9.2 Written
Agreement. Each Restricted
Stock award shall be evidenced by an appropriate written agreement, the form of
which shall be consistent with the terms and conditions of the Plan and
applicable law, which shall be signed by an officer of the Company and the
Participant. A single written agreement may cover the award of Restricted Stock
in subsequent or prior years.
9.3 Rights of Holder of
Restricted Stock. Except for the
restrictions on transfer and risk of forfeiture, the Participant shall have,
with respect to shares of Restricted Stock, all of the rights of a shareholder
of Common Stock, including, if applicable, the right to vote the shares and the
right to receive any cash or stock dividends. Unless otherwise determined by the
Board or Committee and subject to the terms of the Plan, cash or stock dividends
on shares of Restricted Stock shall be payable to the Participant as they are
paid by the Company, even if the restrictions on the shares to which such
dividends relate have not yet lapsed. Cash dividends, if deferred, shall be paid
with an appropriate rate of interest, as determined by the Board or
Committee.
ARTICLE X
TRANSFERABILITY OF
RESTRICTED STOCK
10.1 Transferability
Restriction. Except as
otherwise provided for in this Article X, for a period of three (3) years from
the date of award, the Restricted Stock shall not be subject to sale,
assignment, pledge or other transfer of disposition by the Participant, except
by reason of an exchange or conversion of such shares because of merger,
consolidation, reorganization or other corporate action. Any shares into which
the Restricted Stock may be converted or for which the Restricted Stock may be
exchanged in a merger, consolidation, reorganization or other corporate action
shall be subject to the same transferability restrictions as the Restricted
Stock.
10.2 Release of the
Transferability Restriction. One-third (1/3) of the
Restricted Stock awarded on a particular date shall become freely transferable
on each of the subsequent three (3) anniversaries of the date of
award.
5
Example: |
|
If a Restricted
Stock award of 90 shares is made on January 1, 2004, 30 shares of
that |
|
|
award become
freely transferable on January 1, 2005, another 30 shares of that
award |
|
|
become freely
transferable on January 1, 2006 and the final 30 shares of that
award |
|
|
become freely
transferable on January 1, 2007. |
10.3 Transferability of
Restricted Stock Upon Death or Voluntary Retirement. Subject to the forfeiture
provisions set forth in Article XI, all Restricted Stock held by a Participant
shall become freely transferable upon the death of the Participant or the
Participants voluntary retirement from the Board.
10.4 Resale
Limitation. Restricted
Stock awarded under the Plan is subject to effective registration statements
filed with the Securities and Exchange Commission and is freely transferable,
except as provided in this Article X. However, any sale of Restricted Stock by a
director must be made pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or under an applicable exemption from
registration (such as SEC Rule 144). Any such sale be reported to the SEC in
accordance with the applicable provisions of Section 16 of the Exchange Act and
rules promulgated thereunder.
ARTICLE XI
FORFEITURE OF RESTRICTED
STOCK
11.1 General. Any Restricted Stock held
by a Participant that remains subject to the transfer restrictions set forth in
Section 10.2 shall be immediately forfeited if the Participant:
(a)
|
is recommended by the
Company to be re-elected to the Board and fails to be re- elected by the
shareholders of the Company to the Board in that election; or
|
|
(b)
|
is prohibited from
serving on the Board by any court of competent jurisdiction or other
government authority, or in the discretion of the Board or Committee is no
longer competent to serve on the Board due to the Participants violation
of state or federal securities law or other rule of the NYSE (or such
other listing standards then applicable to the Company). |
|
ARTICLE XII
ADJUSTMENT
PROVISIONS
12.1 Changes in
Capitalization. If the Company
shall at any time change the number of issued shares of Common Stock without new
consideration to the Company (by stock dividends, stock splits, split-up,
spin-off or similar transactions):
(a)
|
the total number of
shares reserved for issuance under this Plan and the number of shares
subject to each outstanding Option shall be adjusted so that the aggregate
consideration payable to the Company, if any, and the value of each such
Option shall not be changed; and |
|
(b)
|
for stock dividends,
stock splits, split-up, spin-off or similar transactions that occur on or
after July 28, 2006, the number of Options and shares of Restricted Stock
automatically awarded pursuant to Sections 6.1 and 9.1 of the Plan shall
be proportionately adjusted to reflect the change in the number of issued
shares of Common Stock. |
|
12.2 Reorganization, Sale,
etc. Options granted
hereunder may also contain provisions for their continuation, acceleration,
immediate vesting, or for other equitable adjustments after changes in the
Common Stock resulting from reorganization, sale, merger, consolidation,
dissolution, liquidation or similar circumstances.
ARTICLE XIII
AMENDMENT AND TERMINATION
OF PLAN
13.3 General. The Board, without
further approval of the Companys shareholders, may amend the Plan from time to
time or terminate the Plan at any time, provided that:
(a)
|
no action authorized
by this Article shall reduce the amount of any existing Option or
Restricted Stock award or change the terms and conditions thereof without
the Participants consent; and |
|
(b)
|
no amendment of the
Plan shall, without the approval of the Companys shareholders, (i)
increase the total number of shares of Common Stock that may be issued
under the Plan or increase the amount or type of Option that may be
granted under the Plan or increase the amount of Restricted Stock that may
be awarded under the Plan; (ii) change the minimum purchase price, if any,
of shares of Common Stock that may be made subject to Options under the
Plan; (iii) modify the requirements as to eligibility for an Option under
the Plan; (iv) extend the term of the Plan; or (v) constitute a material
revision of the Plan under the listing standards of the NYSE (or such
other listing standards then applicable to the Company). |
|
ARTICLE
XIV
MISCELLANEOUS
14.1 Withholding
Taxes. No later than
the date as of which an amount first becomes includible in the gross income of
the Participant for federal income tax purposes with respect to the award of
Restricted Stock or the exercise of any Option granted under the Plan, the
Participant shall pay to the Company, or make arrangements satisfactory to the
Company or other entity identified by the Board or Committee regarding the
payment of any federal, state, local or foreign taxes of any kind required by
law to be withheld. Such withholding obligations may be settled with Common
Stock, including Common Stock that is received upon the exercise of the Option
that gives rise to the withholding requirement. The obligations of the Company
under the Plan shall be conditional upon such payment or arrangements, and the
Company shall, to the extent permitted by law, have the right to deduct any such
taxes from any payment otherwise due to the Participant.
7
14.2 Tenure. A Participants right, if
any, to continue to serve the Company as a director shall not be enlarged or
otherwise affected by his designation as a Participant under the Directors
Plan.
14.3 Controlling
Law. The
Plan, all Options granted, all Restricted Stock awarded and actions taken
hereunder shall be governed by and construed in accordance with the laws of the
State of Wisconsin (other than its law respecting choice of law). The Plan shall
be construed to comply with all applicable law and to avoid liability to the
Company or a Subsidiary, including, without limitation, liability under Section
16(b) of the Exchange Act.
14.4 Headings. The headings contained in
the Plan are for reference purposes only, and shall not affect the meaning or
interpretation of the Plan.
14.5 Severability. If any provision of the
Plan shall for any reason be held to be invalid or unenforceable, such
invalidity or unenforceability shall not affect any other provision hereby, and
this Plan shall be construed as if such invalid or unenforceable provision were
omitted.
14.6 Successors and
Assigns. This Plan shall
inure to the benefit of and be binding upon each successor and assign of the
Company. All obligations imposed upon a Participant, and all rights granted to
the Company hereunder, shall be binding upon the Participants heirs, legal
representatives and successors.
14.7 Entire
Agreement. This Plan and
any agreements governing the grant of Options or Restricted Stock awards
hereunder to any Participant constitutes the entire agreement with respect to
the subject matter hereof with respect to such Participant, provided that in the
event of any inconsistency between the Plan and any such agreement(s), the terms
and conditions of the Plan shall control.
8
EX-99
11
r10k07exp.htm
AMENDMENT 1 TO 6.05% SENIOR NOTES
r10k07exp.pdf -- Converted by SECPublisher 4.0, created by BCL Technologies Inc., for SEC Filing
March
1, 2007
Twin
Disc, Incorporated
1328 Racine
Street
Racine, Wisconsin
5340311208
Attention: Mr. Christopher
J. Eperjesy
Re: Amendment No. 1 to Note Agreement
Ladies
and Gentlemen:
This letter amendment (this
Letter) makes
reference to that certain Note Agreement, dated as of April 10, 2006 (the
Note
Agreement), among The Prudential
Insurance Company of America, Pruco Life Insurance Company, Pruco Life Insurance
Company of New Jersey, Security Benefit Life Insurance Company, Inc., American
Skandia Life Assurance Corporation, Mutual of Omaha Insurance Company
(collectively, the Holders and each, a
Holder) and Twin Disc,
Incorporated, a Wisconsin corporation (the Company). Capitalized terms used
herein and not otherwise defined herein shall have the meanings assigned to such
terms in the Note Agreement, as amended hereby.
The Company has requested
that the Holders amend the Note Agreement to permit the consolidation of certain
of its Italian subsidiaries to achieve certain organizational efficiencies and
tax savings and, in connection with such consolidation, a temporary increase to
the maximum Indebtedness under the Credit Agreement permitted under the Note
Agreement, as more particularly set forth below. The Company has further
requested that the Holders amend the Note Agreement to increase the maximum
expenditures for fixed and capital assets permitted under the Note Agreement for
the fiscal year ending June 30, 2007, also as more particularly set forth below.
Subject to the terms and conditions hereof, the Holders are willing to agree to
such requests.
Accordingly, and in
accordance with the provisions of paragraph 11C of the Note Agreement, the
parties hereto agree as follows:
SECTION 1.
Amendments. Effective upon the
Effective Date, the Holders party hereto and the Company agree that the Note
Agreement is amended as follows:
1.1
Paragraph 6I of the Note Agreement is amended and restated as follows
6I. Capital
Expenditures. The Company covenants that
it will not, and will not permit any Subsidiary to, make, or enter into any
binding agreement to make, expenditures for fixed or capital assets (including
expenditures financed with Permitted
Indebtedness) in excess of
$17,000,000 in the aggregate for the fiscal year ending June 30, 2007 or in
excess of $15,000,000 in the aggregate for any other fiscal year, in each case
on a noncumulative basis.
1.2 Clause (ii) of the
definition of Permitted Indebtedness in paragraph 10B of the Note Agreement is
amended and restated as follows:
(ii) Indebtedness under
the Credit Agreement, which Indebtedness shall not exceed (1) $60,000,000 during
the period beginning March 7, 2007 and ending March 16, 2007, provided that any
and all Indebtedness outstanding under the Credit Agreement in excess of
$35,000,000 during such period is loaned to Twinsa to complete the Italian
Restructuring and, concurrently with the making of such loan or promptly
thereafter, the Company shall complete the Italian Restructuring, and (2)
$40,000,000 at any other time, provided that all Indebtedness permitted under
this clause (ii) is unsecured;
1.3 Paragraph 10B is amended by adding the following definition in alphabetical
order:
Italian
Restructuring shall mean, collectively,
the following: a sale by the Company to Twin Disc Technodrive Srl, an Italian
corporation (Technodrive) of the stock of three of
the Companys wholly owned European subsidiaries: B.C.S. Srl, an Italian
corporation (BCS), B.C.S.
Service Srl, an Italian corporation (BCS
Service)
and Vetus Italia Srl, an Italian corporation, (Vetus) for an aggregate
purchase price for the stock of the three companies of €16,715,000. The stock
purchase would be funded by a loan, in an amount not to exceed €16,715,000, from
the Company to Twinsa. Twinsa would, in turn, lend these funds to Technodrive to
complete the stock purchase from the Company. Twinsa would deliver to the
Company its promissory note in the aggregate amount of €16,715,000, and
Technodrive would deliver its promissory note to Twinsa for such amount, in each
case representing a purchase price of €12,285,000 for BCS, €75,600 for BCS
Service and €4,354,400 for Vetus. Technodrive, BCS, BCS Service and Twin Disc
Srl, an Italian corporation, would be consolidated and merged into a single
corporation, with Technodrive being the surviving corporation. Technodrive would
then be renamed Twin Disc Srl. The Italian Restructuring shall all be
accomplished pursuant to and in accordance with the written proposal provided by
the Company to the holders of the Notes on February 5, 2007.
Twinsa shall mean Twin Disc
International, S.A., an Italian corporation.
1.4 Notwithstanding
anything in the Note Agreement to the contrary, the Italian Restructuring shall
not be considered for purposes of determining the Company's compliance with
paragraphs 6B (Indebtedness), 6D (Disposition of Assets), 6E (Investments) and
6G (Transactions with Affiliates) of the Note Agreement.
SECTION 2.
Effectiveness. The amendments in Section 1
of this Letter shall become effective on the date (the Effective
Date) of
satisfaction of the following:
(a) Receipt by each Holder
party hereto of counterparts of this Letter executed by the Company and the
Holders;
2
(b) Receipt by each Holder of a copy of an amendment under the Credit Agreement, providing for a temporary increase in the Revolving Credit Commitment (as
defined in the Credit Agreement) from $35,000,000 to $60,000,000 for the period beginning March 7, 2007 and ending March 16, 2007, and amending the Credit Agreement consistent with the amendments set forth herein and otherwise in form and
substance satisfactory to the Holders, executed by the Company and the Bank, and such amendment shall be in full force and effect; and
(c) All corporate and other proceedings in connection with the transactions contemplated by this Letter shall be satisfactory to the Required Holders, and each
Holder party hereto shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request.
SECTION 3. Representations and Warranties. The Company represents and warrants to the Holders that, after giving effect hereto and the consummation of the Italian
Restructuring (a) each representation and warranty set forth in paragraph 8 of the Note Agreement is true and correct as of the date of the execution and delivery of this Letter by the Company with the same effect as if made on such date (except to
the extent such representations and warranties expressly refer to an earlier date, in which case they were true and correct as of such earlier date), (b) no Event of Default or Default exists and (c) neither the Company nor any of its Subsidiaries
has paid or agreed to pay, and neither the Company nor any of its Subsidiaries will pay or agree to pay, any fees or other consideration to any Person in connection with the amendment referenced in Section 2(b) hereof.
SECTION 4. Reference to and Effect on Note
Agreement. Upon the effectiveness of the amendments made in this Letter, each reference to the Note Agreement in any other document, instrument or agreement shall mean and be
a reference to the Note Agreement as modified by this Letter. Except as specifically set forth in Section 1 hereof, the Note Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. The Company hereby
represents and warrants that all necessary or required consents to this Letter have been obtained and are in full force and effect. Except as specifically stated in Section 1 of this Letter, the execution, delivery and effectiveness of this Letter
shall not (a) amend the Note Agreement or any Note, (b) operate as a waiver of any right, power or remedy of the holder of any Note, or (c) constitute a waiver of, or consent to any departure from, any provision of the Note Agreement or any Note at
any time. The execution, delivery and effectiveness of this Letter shall not be construed as a course of dealing or other implication that any Holder has agreed to or is prepared to grant any amendments to the Note Agreement or any Note in the
future, whether or not under similar circumstances.
SECTION 5. Expenses. The Company hereby confirms its obligations under the Note Agreement, whether or not the transactions hereby
contemplated are consummated, to pay, promptly after request by any Holder, all reasonable out-of-pocket costs and expenses, including attorneys fees and expenses, incurred by the Holders in connection with this Letter or the transactions
contemplated hereby, in enforcing any rights under this Letter, or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Letter or the transactions contemplated hereby. The obligations
of the Company under this Section 5 shall survive transfer by any Holder of any Note and payment of any Note.
3
SECTION 6. Governing Law. THIS LETTER SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS OF SUCH STATE WHICH WOULD OTHERWISE CAUSE THIS LETTER TO BE CONSTRUED OR ENFORCED OTHER THAN IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS.
SECTION 7. Counterparts; Section Titles. This Letter may be executed in any number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Delivery of an executed counterpart of a signature page to this Letter by facsimile or
electronic transmission shall be effective as delivery of a manually executed counterpart of this Letter. The section titles contained in this Letter are and shall be without substance, meaning or content of any kind whatsoever and are not a part of
the agreement between the parties hereto.
[remainder of page intentionally left blank; signature page follows]
4
Very
truly yours,
THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA
By:
___________________________________
Vice President
PRUCO LIFE INSURANCE
COMPANY
By:
___________________________________
Vice President
PRUCO LIFE INSURANCE
COMPANY OF NEW JERSEY
By:
___________________________________
Vice President
SECURITY BENEFIT LIFE
INSURANCE COMPANY, INC.
By:
|
|
Prudential
Private Placement Investors, |
|
|
L.P. (as
Investment Advisor) |
|
By:
|
|
Prudential
Private Placement Investors, Inc. |
|
|
(as its General
Partner) |
By: __________________________________
|
Vice
President |
|
|
Signature Page to |
|
|
Amendment No. 1 |
|
|
AMERICAN SKANDIA LIFE
ASSURANCE CORPORATION
By:
|
|
Prudential
Investment Management, Inc., |
|
|
as investment
manager |
|
|
By:
______________________________ |
Vice
President |
MUTUAL OF OMAHA
INSURANCE COMPANY
By:
|
|
Prudential
Private Placement Investors, |
|
|
L.P. (as
Investment Advisor) |
|
By:
|
|
Prudential
Private Placement Investors, Inc. |
|
|
(as its General
Partner) |
|
|
By: _______________________________
|
Vice
President |
Signature Page to Amendment No. 1
THE
LETTER IS AGREED TO AND ACCEPTED BY:
TWIN DISC,
INCORPORATED
By:
______________________________
Name: ___________________________
Title: ____________________________
Signature Page to Amendment No. 1
EX-99
12
r10k07exq.htm
AMENDMENT 2 TO 6.05% SENIOR NOTES
r10k07exq.pdf -- Converted by SECPublisher 4.0, created by BCL Technologies Inc., for SEC Filing
August 22,
2007
Twin
Disc, Incorporated
1328 Racine
Street
Racine, Wisconsin
5340311208
Attention: Mr. Christopher
J. Eperjesy
Re: Amendment No. 2 to Note Agreement
Ladies
and Gentlemen:
This letter amendment (this
Letter) makes
reference to that certain Note Agreement, dated as of April 10, 2006 (as amended
by Amendment No. 1 thereto dated March 1, 2007, the Note
Agreement), among The Prudential
Insurance Company of America, Pruco Life Insurance Company, Pruco Life Insurance
Company of New Jersey, Security Benefit Life Insurance Company, Inc., American
Skandia Life Assurance Corporation, Mutual of Omaha Insurance Company
(collectively, the Holders and each, a
Holder) and Twin Disc,
Incorporated, a Wisconsin corporation (the Company). Capitalized terms used
herein and not otherwise defined herein shall have the meanings assigned to such
terms in the Note Agreement, as amended hereby.
The Company has requested
that the Holders amend the Note Agreement as set forth below. Subject to the
terms and conditions hereof, the Holders are willing to agree to such
requests.
Accordingly, and in
accordance with the provisions of paragraph 11C of the Note Agreement, the
parties hereto agree as follows:
SECTION 1.
Amendments. Effective upon the
Effective Date (as defined in Section 2 below), the Holders party hereto and the
Company agree that the Note Agreement is amended as follows:
1.1 Paragraph 6F of the Note Agreement is amended and restated as
follows
6F. Restricted
Payments. The Company covenants that
it will not, and will not permit any Subsidiary to, (i) declare or pay any
non-cash dividends; or (ii) purchase, redeem, retire, or otherwise acquire for
value any of its capital stock now or hereafter outstanding; or (iii) make any
distribution of assets to its stockholders as such, whether in assets or in
obligations of the Company; or (iv) allocate or otherwise set apart any sum for
the purchase, redemption, or retirement of any shares of its capital stock; or
(v) make any other distribution by reduction of capital or otherwise in respect
of any shares of its capital stock, or (vi) declare or pay any cash dividends to
any stockholders; provided, however, so long as no Default or Event of Default
then exists or would be created thereby, the Company may (a) pay cash dividends
and (b) purchase, redeem, retire or
otherwise acquire for value
any of its capital stock now or hereafter outstanding.
1.2 Paragraph 6I of the Note
Agreement is amended and restated as
follows
6I. [Intentionally
Omitted]
SECTION
2. Effectiveness. The amendments in Section 1
of this Letter shall become effective on the date (the Effective
Date) of
satisfaction of the following:
(a) Receipt by each Holder
party hereto of counterparts of this Letter executed by the Company and the
Required Holders;
(b) Receipt by each Holder
party hereto of a copy of an amendment under the Credit Agreement, amending the
Credit Agreement consistent with the amendments set forth herein and otherwise
in form and substance satisfactory to the Required Holders, duly executed by the
Company and the Bank, and such amendment shall be in full force and effect;
and
(c) All corporate and other
proceedings in connection with the transactions contemplated by this Letter
shall be satisfactory to the Required Holders, and each Holder party hereto
shall have received all such counterpart originals or certified or other copies
of such documents as it may reasonably request.
SECTION
3. Representations and
Warranties. The Company represents and
warrants to the Holders that, after giving effect hereto (a) each representation
and warranty set forth in paragraph 8 of the Note Agreement is true and correct
as of the date of the execution and delivery of this Letter by the Company with
the same effect as if made on such date (except to the extent such
representations and warranties expressly refer to an earlier date, in which case
they were true and correct as of such earlier date), (b) no Event of Default or
Default exists and (c) neither the Company nor any of its Subsidiaries has paid
or agreed to pay, and neither the Company nor any of its Subsidiaries will pay
or agree to pay, any fees or other consideration to any Person in connection
with the amendment referenced in Section 2(b) hereof.
SECTION
4. Reference to and
Effect on Note Agreement. Upon the effectiveness of
the amendments made in this Letter, each reference to the Note Agreement in any
other document, instrument or agreement shall mean and be a reference to the
Note Agreement as modified by this Letter. Except as specifically set forth in
Section 1 hereof, the Note Agreement shall remain in full force and effect and
is hereby ratified and confirmed in all respects. The Company hereby represents
and warrants that all necessary or required consents to this Letter have been
obtained and are in full force and effect. Except as specifically stated in
Section 1 of this Letter, the execution, delivery and effectiveness of this
Letter shall not (a) amend the Note Agreement or any Note, (b) operate as a
waiver of any right, power or remedy of the holder of any Note, or (c)
constitute a waiver of, or consent to any departure from, any provision of the
Note Agreement or any Note at any time. The execution, delivery and
effectiveness of this Letter shall not be construed as a course of dealing or
other implication that any Holder has agreed to or is prepared to grant any
amendments to the Note Agreement or any Note in the future, whether or not under
similar circumstances.
2
SECTION 5. Expenses. The Company hereby confirms its obligations under the Note Agreement, whether or not the transactions hereby
contemplated are consummated, to pay, promptly after request by any Holder, all reasonable out-of-pocket costs and expenses, including attorneys fees and expenses, incurred by the Holders in connection with this Letter or the transactions
contemplated hereby, in enforcing any rights under this Letter, or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Letter or the transactions contemplated hereby. The obligations
of the Company under this Section 5 shall survive transfer by any Holder of any Note and payment of any Note.
SECTION 6. Governing Law. THIS LETTER SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS OF SUCH STATE WHICH WOULD OTHERWISE CAUSE THIS LETTER TO BE CONSTRUED OR ENFORCED OTHER THAN IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS.
SECTION 7. Counterparts; Section Titles. This Letter may be executed in any number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Delivery of an executed counterpart of a signature page to this Letter by facsimile or
electronic transmission shall be effective as delivery of a manually executed counterpart of this Letter. The section titles contained in this Letter are and shall be without substance, meaning or content of any kind whatsoever and are not a part of
the agreement between the parties hereto.
[remainder of page intentionally left blank; signature page follows]
3
Very
truly yours,
THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA
By:
___________________________________
Vice President
PRUCO LIFE INSURANCE
COMPANY
By:
___________________________________
Vice President
PRUCO LIFE INSURANCE
COMPANY OF NEW JERSEY
By:
___________________________________
Vice President
SECURITY BENEFIT LIFE
INSURANCE COMPANY, INC.
By:
|
|
Prudential
Private Placement Investors, |
|
|
L.P. (as
Investment Advisor) |
|
By:
|
|
Prudential
Private Placement Investors, Inc. |
|
|
(as its General
Partner) |
By: _________________________________
|
Vice
President |
|
|
|
|
|
Signature Page to |
|
|
Amendment No. 2 |
|
|
AMERICAN SKANDIA LIFE
ASSURANCE CORPORATION
By:
|
|
Prudential
Investment Management, Inc., |
|
|
as investment
manager |
|
|
By:
______________________________ |
|
|
Vice
President |
MUTUAL OF OMAHA
INSURANCE COMPANY
By:
|
|
Prudential
Private Placement Investors, |
|
|
L.P. (as
Investment Advisor) |
|
By:
|
|
Prudential
Private Placement Investors, Inc. |
|
|
(as its General
Partner) |
|
|
By: ______________________________
|
|
|
Vice
President |
Signature Page to Amendment No. 2
THE
LETTER IS AGREED TO AND ACCEPTED BY:
TWIN DISC,
INCORPORATED
By:
______________________________
Name: ___________________________
Title: ____________________________
Signature Page to Amendment No. 2
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