Note on Forward-Looking Statements

Statements in this report (including but not limited to certain statements in Items 1, 3 and 7) and in other Company communications that are not historical facts are forward-looking statements, which are based on management's current expectations. These statements involve risks and uncertainties that could cause actual results to differ materially from what appears here.

Forward-looking statements include the Company's description of plans and objectives for future operations and assumptions behind those plans. The words "anticipates," "believes," "intends," "estimates," and "expects," or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by the Company should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.

In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including, but not limited to those factors discussed under Item 1A, Risk Factors, could cause actual results to be materially different from what is presented in any forward looking statements.

Results of Operations

(In thousands)

                     2012    %     2011    %     2010    %
Net sales        $355,870      $310,393      $227,534
Cost of goods     234,238       202,710       167,069
sold

Gross profit      121,632 34.2  107,683 34.7   60,465 26.6

Marketing,         73,091 20.5   72,967 23.5   57,380 25.2
engineering and
administrative
expenses*
Impairment          3,670  1.0        -  0.0        -  0.0
charge

Earnings from     $44,871 12.6  $34,716 11.2   $3,085  1.4
operations

* Certain amounts in the fiscal 2011 and 2010 figures have been reclassified to conform to the fiscal 2012 presentation. See Note A for further discussion.

Fiscal 2012 Compared to Fiscal 2011

Net Sales

Net sales increased $45.5 million, or 14.7%, in fiscal 2012. The year-over-year movement in foreign exchange rates resulted in a net favorable translation effect on sales of $0.4 million in fiscal 2012 compared to fiscal 2011.

In fiscal 2012, sales for our worldwide manufacturing operations, before eliminating intra-segment and inter-segment sales, were higher by $57.5 million, or 21.5%, than in the prior fiscal year. Year-over-year changes in foreign exchange rates had a net unfavorable impact on sales of $0.6 million. In fiscal 2012, our domestic manufacturing operation saw continued growth, with a 25.9% increase in sales versus fiscal 2011. The primary driver for this increase was the sale of transmissions and related products for the North American and Asian oil and gas markets as well as increased commercial marine transmission shipments. The Company's Italian manufacturing operations, which continued to be adversely impacted by the softness in the European mega yacht market in fiscal 2012, experienced a 4.1% decrease in sales compared to the prior fiscal year. The Company's Belgian manufacturing operation saw a 28.4% increase in sales versus the prior year, although it continued to be adversely impacted by the softness in the global mega yacht market. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 10.7% decrease in sales compared to the prior fiscal year, primarily due to the impact of continued softness in the global mega yacht market as well as the timing of shipments for the patrol boat market.

Our distribution segment, buoyed by strong demand in Asia and the global oil and gas markets, experienced a slight increase of $0.9 million, or 0.7%, in sales in fiscal 2012 compared to fiscal 2011's record results. Compared to fiscal 2011, on average, the Asian currencies strengthened against the U.S. Dollar. The net translation effect of this on foreign distribution operations was to increase revenues for the distribution segment by approximately $1.5 million versus the prior year, before eliminations. The Company's distribution operations in Singapore continued to experience strong demand for marine transmission products for use in various commercial applications as well as growing demand in the Asia pressure pumping market. This operation saw a 3.2% increase in sales versus the same period a year ago, and set a new sales record. The Company's distribution operation in the Northwest of the United States and Southwest of Canada experienced a 1% decline from fiscal 2011's record levels, and continued to benefit from the strength in the Canadian oil and gas market through most of fiscal 2012. The Company's distribution operation in Italy, which provides boat accessories and propulsion systems for the pleasure craft market, saw an increase in sales of 41.3% after several years of decline due to continued weakness in the Italian mega yacht market. The Company's distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in sales of 6.3%, due to improving market conditions, including sales of components parts for the Company's new Express Joystick SystemŽ that were shipped in fiscal 2012. The Company's joint venture in Japan, which sells large marine transmissions for commercial applications throughout Asia, experienced a decrease of nearly 25% in sales in fiscal 2012 compared to fiscal 2011. As reported in the Company's second fiscal quarter's results, this decrease was primarily a result of the impact of the Japanese tsunami on this operation, as our joint venture partner's production facility was impacted by power shortages as well as delayed shipments from suppliers. These issues were substantially resolved in the second fiscal quarter.

Net sales for the Company's largest product market, marine transmission and propulsion systems, were up 8% compared to the prior fiscal year. The majority of the growth was experienced in the second half of fiscal 2012 as the Company experienced increased demand in the global commercial marine market, which more than offset continued weakness in the global pleasure craft market. Sales of the Company's boat management systems manufactured at our Italian operation and servicing the global mega yacht market, were down approximately 14% versus the prior fiscal year, as the European mega yacht market continued to experience softness in demand. In the off-highway transmission market, the year-over-year increase of just over 20% can be attributed primarily to increased sales of the 8500 and 7500 series transmission systems for the oil and gas markets. In addition, sales of transmission systems for the military market and vehicular transmissions were up double-digit percentages versus the prior fiscal year. The increase experienced in the Company's industrial products of roughly 34% was due to

increased sales into the agriculture, mining and general industrial markets, primarily in the North American and Italian markets, as well as increased activity related to oil field markets.

Geographically, sales to the U.S. and Canada represented roughly 59% of consolidated sales for fiscal 2012 compared to 55% in fiscal 2011. This growth was primarily driven by the strength of the North American pressure pumping market through the first three fiscal quarters of fiscal 2012 as well as growing demand in the U.S. gulf region for commercial marine transmission systems in the second half of the fiscal year. Fiscal 2012 proved to be a milestone year for our global sales, as Asia became our second largest end market, surpassing Europe. In particular, the Company experienced triple-digit growth in sales to the Chinese market. See Note J for more information on the Company's business segments and foreign operations.

The elimination for net intra-segment and inter-segment sales increased $12.9 million, or 15.1%, from $85.8 million in fiscal 2011 to $98.7 million in fiscal 2012. Year-over-year changes in foreign exchange rates had a net unfavorable impact of $0.5 million on net intra-segment and inter-segment sales.

Gross Profit


In fiscal 2012, gross profit increased $13.9 million, or 13.0%, to $121.6
million. Gross profit as a percentage of sales decreased 50 basis points in
fiscal 2012 to 34.2%, compared to 34.7% in fiscal 2011. The table below
summarizes the gross profit trend by quarter for fiscal years 2012 and 2011:

              1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year
Gross Profit:
($ millions)
  2012        $30.8   $29.6   $33.1   $28.2   $121.6
  2011        $20.0   $23.8   $27.8   $36.1   $107.7

% of Sales:
  2012        37.8%   35.6%   34.6%   29.4%   34.2%
  2011        32.6%   31.6%   36.3%   37.1%   34.7%

There were a number of factors that impacted the Company's overall gross margin rate in fiscal 2012. Gross margin for the year was favorably impacted by higher volumes, favorable product mix and lower domestic pension expense, partially offset by higher material costs and surcharges, and unfavorable manufacturing absorption primarily in the fiscal fourth quarter. The Company estimates the net favorable impact of higher volumes on gross margin in fiscal 2012 was approximately $21.7 million. The favorable shift in product mix related to the Company's oil and gas transmission business had an estimated impact of $2.0 million. Domestic pension expense included in cost of goods sold decreased from $1.9 million in fiscal 2011 to $0.2 million in fiscal 2012. In addition, warranty expense as a percentage of sales decreased from 1.27% in fiscal 2011 to 1.02% in fiscal 2012 (for additional information on the Company's warranty expense, see Note F of the Notes to the Consolidated Financial Statements). The decrease in warranty expense as a percentage of sales can be attributed to an increase in volume and an overall reduction in specific warranty campaigns. In addition, the year-over-year movement in foreign exchange rates, primarily driven by movements in the Euro and Asian currencies, resulted in a net favorable translation effect on gross profit of $0.8 million in fiscal 2012 compared to fiscal 2011.

Marketing, Engineering and Administrative (ME&A) Expenses

Marketing, engineering, and administrative (ME&A) expenses remained relatively flat at $73.1 million in fiscal 2012. As a percentage of sales, ME&A expenses decreased by 300 basis points to 20.5% in fiscal 2012, compared to 23.5% in fiscal 2011. The table below summarizes significant changes in certain ME&A expenses for the fiscal year:

Fiscal Year Ended Increase/ $ thousands - (Income)/Expense June 30, 2012 June 30, 2011 (Decrease)

Stock-Based Compensation           $  1,642      $  6,148        $  (4,506)
Severance                              684             -              684
Domestic Pension Expense               121           975             (854)
Incentive/Bonus Expense               5,013         4,964              49
                                                                   (4,627)
                                Foreign Currency Translation          342
                                                                   (4,285)
                                              All Other, Net        4,409
                                                                 $    124

The net remaining increase in ME&A expenses for the year of $4.4 million was primarily driven by wage inflation and additional headcount, higher benefit costs, increased travel, higher project related expenses and a continued emphasis on the Company's product development program.

Impairment Charge

The Company conducted its annual assessment for goodwill impairment in the fourth quarter of fiscal 2012 by applying a fair value based test using discounted cash flow analyses, in accordance with ASC 350-10, "Intangibles - Goodwill and Other." The result of this assessment identified that one of the Company's reporting units goodwill was fully impaired, necessitating a charge of $3.7 million. The impairment was due to a declining outlook in the global pleasure craft/megayacht market, the continued weakened European economy and few signs of significant near-term recovery in the markets served by this reporting unit. These factors were identified as the Company conducted its annual budget review process during the fourth fiscal quarter, and the Company concluded that the impairment charge was necessary in connection with the preparation of the year end financial statements during the fourth fiscal quarter. This impairment charge was not deductible for tax purposes. The fair value of the goodwill for the remaining reporting units exceeds the respective carrying values.

Interest Expense

Interest expense decreased by $0.2 million, or 14.2%, in fiscal 2012. Total interest on the Company's $40 million revolving credit facility ("revolver") remained relatively flat at $0.4 million in fiscal 2012. The average borrowing on the revolver, computed monthly, increased to $20.4 million in fiscal 2012, compared to $9.9 million in fiscal 2011. In fiscal 2011, the interest rate on the revolver remained flat at 4.00%, the rate floor, for the first eleven months of the fiscal year. In the fourth fiscal quarter of fiscal 2011, the Company entered into an amended revolver agreement that eliminated the rate floor. As of June 30, 2012, the rate on the revolver was 1.74%. Interest expense for the Company's $25 million Senior Notes, which carry a fixed interest rate of 6.05%, decreased by $0.2 million to $1.0 million in fiscal 2012 due to a lower average outstanding balance during the fiscal year.

Other, Net

For the fiscal 2012 full year, Other, net improved by $2.3 million to a current year income due primarily to favorable exchange movements relative to the Euro, Swiss Franc, Canadian Dollar and Japanese Yen.

Income Taxes

The effective tax rate for the fourth quarter of fiscal 2012 was 76.3 percent, significantly higher than the prior year fourth quarter rate of 41.4 percent. The primary factor increasing the fiscal 2012 rate was the impact of a non

deductible impairment charge of $3.7 million, which increased the effective rate by approximately 32 percentage points. The remaining rate increase was due to a combination of reduced foreign tax credits, elimination of the R&D tax credit and additional impact of the valuation allowance related to the Company's Belgian facility. The effective tax rate for fiscal 2012 was 41.2 percent, slightly higher than the prior year rate of 40.8 percent.

The Company maintains valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. During fiscal 2012, the Company continued to incur operating losses in certain foreign jurisdictions where the loss carryforward period is unlimited. The Company has evaluated the realizability of the net deferred tax assets related to these jurisdictions and concluded that based primarily upon continuing losses in these jurisdictions and failure to achieve targeted levels of improvement, a full valuation allowance continues to be necessary. Therefore, the Company recorded an additional valuation allowance of $1.1 million. 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 the remaining deferred tax assets.

Order Rates

As of June 30, 2012, the Company's backlog of orders scheduled for shipment during the next six months (six-month backlog) was $98.7 million, or approximately 33% lower than the six-month backlog of $146.9 million as of June 30, 2011. The decrease in backlog is primarily a result of decreased orders by North American oil and gas customers for the Company's 8500 series transmission as rig operators adjust to the natural gas supply overhang and lower prices. In fiscal 2012, the Company began to accept orders and ship units of its new 7500 series transmission for the oil and gas market. Partially offsetting the slowdown in the North American pressure pumping market, the Company saw modest growth in the six-month backlog for commercial marine transmissions for both the U.S. Gulf Region and Asia.

Fiscal 2011 Compared to Fiscal 2010

Net Sales

Net sales increased $82.9 million, or 36.4%, in fiscal 2011. The year-over-year movement in foreign exchange rates resulted in a net favorable translation effect on sales of $3.2 million in fiscal 2011 compared to fiscal 2010.

In fiscal 2011, sales for our worldwide manufacturing operations, before eliminating intra-segment and inter-segment sales, were higher by $84.3 million, or 46.0%, than in the prior fiscal year. Year-over-year changes in foreign exchange rates had a net favorable impact on sales of $0.7 million. In fiscal 2011, our domestic manufacturing operation saw the largest growth, with a 63.8% increase in sales versus fiscal 2010. The primary driver for this increase was the sale of transmissions and related products for the oil and gas markets as well as increased aftermarket shipments. The Company's Italian manufacturing operations, which were adversely impacted by the softness in the European mega yacht and industrial markets in fiscal 2009 and 2010, experienced some growth, with a 28.2% increase in sales compared to the prior fiscal year, after an extended period of decline in the second half of fiscal 2009 and throughout fiscal 2010. The Company's Belgian manufacturing operation saw an 11.8% increase in sales versus the prior year, although it continued to be adversely impacted by the softness in the global mega yacht market. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega

yacht and patrol boat markets, experienced a 10.1% increase in sales compared to the prior fiscal year, primarily due to the impact of the strengthening Swiss Franc compared to the US Dollar.

Our distribution segment, buoyed by continued growth in Asia and the North American oil and gas markets, experienced an increase of $27.2 million, or 26.9%, in sales in fiscal 2011 compared to fiscal 2010. Compared to fiscal 2010, on average, the Asian currencies strengthened against the U.S. Dollar. The net translation effect of this on foreign distribution operations was to increase revenues for the distribution segment by approximately $7.8 million versus the prior year, before eliminations. The Company's distribution operations in Singapore continued to experience strong demand for marine transmission products for use in various commercial applications. This operation saw a 7.6% increase in sales versus the same period a year ago, and set a new sales record. The Company's distribution operation in the Northwest of the United States and Southwest of Canada experienced nearly a tripling of its sales due to strength in the Canadian oil and gas market. The Company's distribution operation in Italy, which provides boat accessories and propulsion systems for the pleasure craft market, saw a decrease in sales of 23.6% due to continued weakness in the Italian mega yacht market. The Company's distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in sales of 26.1%, due to improving market conditions, including sales of components parts for the Company's new Express Joystick SystemŽ that were shipped in fiscal 2011.

Net sales for the Company's largest product market, marine transmission and propulsion systems, were up 9% compared to the prior fiscal year. Sales of the Company's boat management systems manufactured at our Italian operation and servicing the global mega yacht market, were up approximately 12% versus the prior fiscal year. The Company saw modest recovery across most of the marine product markets it serves. In the off-highway transmission market, the year-over-year increase of just over 124% can be attributed primarily to increased sales of the 8500 series transmission system for the oil and gas markets. Sales of transmission systems for the military market were up slightly over the prior fiscal year. Vehicular transmissions for the airport rescue and fire fighting (ARFF) and agricultural tractor markets were down versus fiscal 2010, however, the year-end backlog was up versus the prior fiscal year end. The increase experienced in the Company's industrial products of roughly 10% was due to increased sales into the agriculture, mining and general industrial markets, primarily in the North American and Italian markets, as well as increased activity related to oil field markets.

The elimination for net intra-segment and inter-segment sales increased $28.6 million, or 50.1%, from $57.2 million in fiscal 2010 to $85.8 million in fiscal 2011. Year-over-year changes in foreign exchange rates had a net unfavorable impact of $5.2 million on net intra-segment and inter-segment sales.

Gross Profit


In fiscal 2011, gross profit increased $47.2 million, or 78.1%, to $107.7
million. Gross profit as a percentage of sales increased 810 basis points in
fiscal 2011 to 34.7%, compared to 26.6% in fiscal 2010. The table below
summarizes the gross profit trend by quarter for fiscal years 2011 and 2010:

              1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year
Gross Profit:
($ millions)
  2011        $20.0   $23.8   $27.8   $36.1   $107.7
  2010        $ 9.7   $14.8   $16.5   $19.5   $ 60.5

% of Sales:
  2011        32.6%   31.6%   36.3%   37.1%   34.7%
  2010        20.7%   26.8%   27.1%   30.2%   26.6%

There were a number of factors that impacted the Company's overall gross margin rate in fiscal 2011. Gross margin

for the year was favorably impacted by higher volumes, improved product mix, the absence of extended shutdowns in the first half of the fiscal year at the Company's domestic and European manufacturing operations, which occurred in fiscal 2010, and a decrease in expenses related to the Company's defined benefit plans. In addition, warranty expense as a percentage of sales decreased from 1.63%, or $3.7 million, in fiscal 2010 to 1.27%, or $3.9 million, in fiscal 2011 (for additional information on the Company's warranty expense, see Note F of the Notes to the Consolidated Financial Statements). The Company estimates the net favorable impact of higher volumes on gross margin in fiscal 2011 was approximately $36 million. The favorable shift in product mix related to the Company's oil and gas transmission business had an estimated impact of $7 million. The decrease in warranty expense as a percentage of sales can be attributed to an increase in volume and an overall reduction in specific warranty campaigns that were experienced in fiscal 2010. In addition, the year-over-year movement in foreign exchange rates, primarily driven by movements in the Euro and Asian currencies, resulted in a net favorable translation effect on gross profit of $1.9 million in fiscal 2011 compared to fiscal 2010. Partially offsetting the above favorable items, the Company reinstituted its annual incentive plan in fiscal 2011. Approximately $1.5 million of the expense associated with the plan was recorded in cost of goods sold in fiscal 2011 compared to $0 in fiscal 2010.

Marketing, Engineering and Administrative (ME&A) Expenses

Marketing, engineering, and administrative (ME&A) expenses increased $15.8 million, or 27.8%, in fiscal 2011 versus fiscal 2010. Despite a significant increase in sales, and an increase in compensation related costs, as a percentage of sales, ME&A expenses decreased by 160 basis points to 23.4% in fiscal 2011, compared to 25.0% in fiscal 2010. The table below summarizes significant changes in certain ME&A expenses for the fiscal year:

Fiscal Year Ended Increase/ $ thousands - (Income)/Expense June 30, 2011 June 30, 2010 (Decrease)

Stock-Based Compensation           $  6,148      $    507        $   5,641
Incentive/Bonus Expense               4,964            -            4,964
                                                                   10,605
                                Foreign Currency Translation        1,015
                                                                   11,620
                                              All Other, Net        4,207
                                                                 $  15,827

The net remaining increase in ME&A expenses for the year of $4,207,000 was primarily driven by the restoration of salary and wage reductions effected in fiscal 2010, higher benefit costs, increased travel, higher project related expenses and a continued emphasis on the Company's product development program. As announced in June 2009, the Company implemented various measures which included a reduction of annual base salaries of the Company's salaried employees including all executive officers, removal of the fiscal 2010 bonus/incentive plan, changes to several benefit programs, an across-the-board reduction of marketing, advertising, travel and entertainment expenses, and staff reductions and layoffs. The significant increase in stock-based compensation versus the prior year ($5,641,000) was driven by the accrual for performance-based awards granted in fiscal 2011, a catch-up accrual for performance-based awards granted in fiscal 2010 and the impact of the significant increase in the Company's stock price (+340%) on the cash-based performance stock unit awards. The Company began accruing the performance-based awards granted in fiscal 2009 and 2010 at the maximum payout level in fiscal 2011 due to the strong improvement in operating results. No accrual was recorded for performance awards in fiscal 2010 due to the shortfall against performance targets, resulting in the required "catch-up" accrual for the fiscal 2010 awards. For additional information on the Company's stock-based compensation, see Note K of the Notes to the Consolidated Financial Statements.

Restructuring of Operations

During the fourth quarter of fiscal 2009, the Company recorded a pre-tax restructuring charge of $948,000 related to

a workforce reduction at its Racine, Canadian and Australian operations. The charge consisted of severance costs for 22 salaried employees and voluntary early retirement charges for an additional 16 manufacturing employees. During fiscal 2009, the Company made cash payments of $180,000, resulting in an accrual . . .