DEF: Twin Disc Sets 2025 Annual Meeting Agenda

Twin Disc, Incorporated announces its 2025 Annual Meeting of Shareholders to address director elections, executive compensation, and auditor ratification, alongside detailed compensation and governance disclosures.

Summary

• The Annual Meeting of Shareholders will be held on Thursday, October 30, 2025, at 2:00 P.M. (Central Time) in Milwaukee, Wisconsin.
• Shareholders of record at the close of business on August 22, 2025, are entitled to vote at the Annual Meeting.
• Proposals include the election of three Directors (John H. Batten, Juliann Larimer, Kevin M. Olsen) to serve until the 2028 Annual Meeting.
• Shareholders will consider an advisory vote to approve the compensation of the Named Executive Officers for the fiscal year ending June 30, 2025.
• The appointment of RSM US LLP as the independent registered public accounting firm for the fiscal year ending June 30, 2026, is up for ratification.
• For fiscal year 2025, CEO John H. Batten's total compensation was $2,411,245, and CFO Jeffrey S. Knutson's total compensation was $1,156,197.
• Performance stock awards granted in 2022 vested at 166.2% of target in fiscal 2025, driven by an Average Return on Invested Capital of 6.40% (exceeding the 6.0% maximum) and Cumulative EBITDA of $86,170,000 (exceeding the $70,000,000 target).
• The Corporate Incentive Plan (CIP) for FY2025 paid out at 81.9% of target for Mr. Batten and 84.9% for Mr. Knutson, influenced by net sales of $340,738,000 (target $336,000,000), EBITDA percentage of net sales of 9.28% (target 10.0%), and inventory percentage of net sales of 41.0% (target 37.8%).
• Shareholders approved the 'Say on Pay' proposal at the October 31, 2024, Annual Meeting with over 90% of votes cast in favor.

Sentiment

Score: 4

Explanation: While the company demonstrated strong long-term performance with 2022 performance stock awards vesting at 166.2% of target and maintains robust governance, the significant net loss in FY2025 and underperformance on key short-term operational metrics (EBITDA % and Inventory %) indicate underlying business challenges. The compensation structure is sound, but the actual financial results are concerning.

Positives

• Performance stock awards granted in 2022 vested at 166.2% of target in fiscal 2025, exceeding the maximum performance level for Average Return on Invested Capital (6.40% vs. 6.0% maximum) and exceeding the target for Cumulative EBITDA ($86.17 million vs. $70 million target).
• Shareholders overwhelmingly approved the fiscal 2024 executive compensation ('Say on Pay') proposal with over 90% of votes cast in favor, indicating strong support for compensation practices.
• The company maintains robust corporate governance policies, including a majority of independent directors and the separation of the Chairman and CEO roles.
• Executive compensation programs are designed to attract and retain key employees, with a significant portion of pay linked to company performance and shareholder value creation.
• Compensation practices align with sound governance, avoiding excise tax gross-ups for excess parachute payments and incorporating double-trigger provisions for change-in-control severance.
• An Insider Trading Policy is in place, prohibiting trading on material nonpublic information, short sales, hedging, and pledging of company securities by executives and directors.
• All directors attended at least 75% of the aggregate of the total number of Board of Directors and Committee meetings during fiscal year 2025.

Negatives

• Net income for fiscal year 2025 was a loss of $1,894,000, a significant decline from profits of $10,988,000 in fiscal year 2024 and $10,380,000 in fiscal year 2023.
• The EBITDA percentage of net sales for fiscal year 2025 was 9.28%, falling below the Corporate Incentive Plan target of 10.0% and maximum of 11.0%.
• The inventory percentage of net sales for fiscal year 2025 was 41.0%, which was above the Corporate Incentive Plan target of 37.8% and maximum of 33.1%.
• Corporate Incentive Plan payouts for Named Executive Officers were below target (81.9% for CEO and 84.9% for CFO) due to not fully meeting all performance metrics.
• Forms 4 filed by John H. Batten and Jeffrey S. Knutson on August 6, 2024, were initially delinquent as they did not include restricted stock unit awards, requiring subsequent amendments.

Risks

• The Board of Directors is responsible for overseeing the company's approach to business risks, receiving regular reports on significant developments in industries and markets, financial performance, capital needs, and liquidity.
• Risk management is an integral part of the annual strategic planning process, with identified risks reviewed and discussed by the full Board.
• The Audit Committee focuses on financial risk, including internal controls regarding finance, accounting, legal compliance, and ethical behavior.
• The Compensation and Human Capital Committee evaluates risks that may be created by compensation policies and practices and annually reviews the adequacy and status of management succession plans.
• The Compensation and Human Capital Committee annually evaluates compensation programs to ensure they do not encourage unnecessary risk-taking.

Future Outlook

The Compensation and Human Capital Committee will consider the results of the advisory vote on executive compensation in addressing future compensation policies and practices. For fiscal year 2026, the Corporate Incentive Plan will base payouts on net sales, EBITDA percentage of net sales, inventory percentage of net sales, and strategic objectives related to growth and individual performance. Long-term incentive awards for fiscal year 2026, covering the three-year period ending June 30, 2028, will utilize Average Return on Invested Capital (50%) and Cumulative EBITDA (50%) as performance goals, with a possible payout range of 50% to 200% of target. The Audit Committee will reconsider the appointment of independent auditors if the ratification of RSM US LLP is not approved by shareholders.

Management Comments

• The Corporation has established a compensation program designed to attract and retain key employees, rewarding them for short-term and long-term performance.
• A significant portion of potential compensation for Named Executive Officers is directly linked to the Corporation's performance and shareholder value creation, with incentive payments correlating to actual performance.
• Twin Disc believes that knowledgeable, motivated, and dedicated employees are crucial for executing business strategy and excelling in the marketplace.
• The Compensation and Human Capital Committee has concluded that the Corporation's compensation policies and practices are not likely to have a material adverse effect on the Corporation.

Industry Context

The company benchmarks its executive compensation against companies of comparable size and in similar industries, including those in engineered products, complex manufacturing, and the global automotive aftermarket. While the filing highlights strong long-term performance metrics for executive incentives, the reported net loss in FY2025 suggests the company may be facing specific operational or market challenges that are not explicitly detailed as broader industry trends within this document.

Comparison to Industry Standards

• Executive compensation targets are set between the 50th and 75th percentile for public companies of similar size and in similar industries, with base salary and annual incentive compensation aiming for the market median.
• The company utilizes an independent compensation advisory firm, Pay Governance LLC, to conduct detailed reviews of competitive compensation levels for CEO and CFO positions, referencing data from a selected peer group and survey data consistent with Twin Disc's industry and size.
• The filing does not provide specific comparable companies, projects, or results for financial performance metrics (e.g., net income, sales, EBITDA) against industry benchmarks.

Corporate Governance

Related Party Transactions

• Timothy Batten, brother of President and CEO John Batten, serves as the Corporation's Executive Vice President. His total compensation for FY2025 was approximately $518,000 and for FY2024 was approximately $503,000, which is consistent with compensation for other employees in similar positions. He also participates in standard employee benefit plans.

Stakeholder Impact

• **Shareholders**: Directly impacted by the proposals to elect directors, approve executive compensation, and ratify auditors. The negative net income in FY2025 and the decline in total shareholder return from FY2024 to FY2025 could negatively affect investment value. Strong corporate governance policies aim to protect shareholder interests.
• **Employees**: Executive compensation programs are designed to attract, retain, and motivate key employees. The company's financial performance and strategic objectives outlined in the Corporate Incentive Plan can influence future compensation and job security.
• **Management**: Executive officers' compensation is directly tied to corporate performance metrics, providing incentives for achieving short-term and long-term goals. The advisory vote on executive compensation provides feedback on their pay structure.
• **Auditors**: RSM US LLP's continued appointment as independent auditors for FY2026 is subject to shareholder ratification, impacting their ongoing professional relationship with the company.

Next Steps

• Shareholders are requested to vote on the election of Directors, the advisory approval of executive compensation, and the ratification of independent auditors at the Annual Meeting on October 30, 2025.
• The Audit Committee will reconsider the appointment of independent auditors if the ratification of RSM US LLP is not approved.
• The Compensation and Human Capital Committee will consider the results of the advisory vote on executive compensation in addressing future compensation policies and practices.
• The Corporate Incentive Plan for FY2026 will be based on specific net sales, EBITDA percentage of net sales, inventory percentage of net sales, and strategic objectives.
• Long-term incentive awards for FY2026 will vest based on Average Return on Invested Capital and Cumulative EBITDA over the three-year performance period ending June 30, 2028.

Key Dates

Recommendation

The company demonstrated strong long-term performance with 2022 performance stock awards vesting at 166.2% of target, driven by exceeding Return on Invested Capital and Cumulative EBITDA goals over three years. This indicates effective long-term strategy and execution. However, the reported net loss of $1.894 million for FY2025, a sharp reversal from previous profits, and underperformance on short-term operational metrics like EBITDA percentage and inventory management, raise immediate concerns about current operational efficiency and profitability. While governance practices appear robust, the recent financial downturn suggests a 'hold' recommendation is appropriate. Investors should monitor upcoming quarterly reports for signs of a turnaround in profitability and operational metrics before considering further investment, or divestment if the negative trend persists.

Keywords

Twin Disc, DEF 14A, Proxy Statement, Annual Meeting, Shareholder Vote, Executive Compensation, Corporate Governance, Director Election, Auditor Ratification, SEC Filing, Financial Performance, EBITDA, Return on Invested Capital, Stock Awards, Risk Management, Insider Trading Policy