When reading through a company's financial statements, one of the items investors should look for is the status of the pension plan, if applicable. As Twin Disc recently disclosed in its annual report, the difference between its pension plan assets, and its pension and post-retirement obligations is about $60 million, up from $34 million last year. (For a company with a market cap of just $160 million, this $60 million obligation is indeed significant!)
The company clearly recognizes this as a problem, as three months ago management decided to freeze benefit accruals for employees. Nevertheless, the looming obligations remain. Shareholders running discounted cash flow estimates into the future must be certain to subtract these obligations from the estimated value of the company's equity - shareholders who ignore them are likely to overpay for this company.
Pension obligations of this nature are included in the balance sheet, and so the company's price to book ratio (of around 1.5) does take these requirements into account. However, the company's P/E (of around 15) does not, and therefore investors estimating the value of this company based on earnings projections must be sure to take factors such as this one into account.
Twin Disc is far from the only company suffering from this phenomenon, as many companies have seen their pension assets shrink, resulting in significant shortfalls.