I agree that this $60MM pension obligation should be a concern, but let's make sure we understands how this obligation increased from $34MM last year. Like many pension funds, Twin Disc invests its assets in the open market.
- In 2009, TWIN began the fiscal year (which ended June 30th) with $111MM in plan assets. The company lost $24MM due to the perils of the market. The company paid out just under $9MM in benefits. On June 30, 2009, the pension plan had assets of $77MM.
- In 2008, TWIN began the fiscal year with $117MM in plan assets. Those assets experienced a negligible gain, but the company paid about $9MM in benefits.
Okay, so for the last two years, the company's plan assets have declined from $117MM to $77MM. The bulk of this decline can be attributed to declining markets and not by mismanagement. If it were due to mismanagement, I would be running in the opposite direction as fast as I could. But, if you go back one more year, to 2007, TWIN began the fiscal year with $104MM in plan assets. The plan earned $14MM on those assets, but only paid out $9.7MM in benefits. Additionally, the company contributed $8.8MM to the plan. So while the company began the fiscal year with $104MM, it ended it with $117MM.
The company has frozen benefit accruals effective August 1, 2009. It estimates benefit payments will average $10MM per year through 2019. It also reports a historical return of 8.5% on its investments. The company needs $118MM in assets earning 8.5% annually to fund pension obligations out of earnings.
- With markets rebounding, isn't it possible that pension assets could grow by more than 8.5% this year?
- The company earned $11MM in fiscal 2009, and paid out $3MM in dividends. Assuming business only improves from here, could profits be diverted to the pension plan?