What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-08-26 compared with 2019-08-29 · 340 added, 340 removed, 1032 unchanged (40% of the section changed)

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Restructuring expenses

Net income (loss)

Net income (loss) attributable to Twin Disc

Basic income (loss) per share attributable to Twin Disc common shareholders

Diluted income (loss) per share attributable to Twin Disc common shareholders

Goodwill and other asset impairment charge

Net loss attributable to Twin Disc

Basic loss per share attributable to Twin Disc common shareholders

Diluted loss per share attributable to Twin Disc common shareholders

Dividends per share

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Based upon such evaluation, the Company’s management concluded that its internal control over financial reporting was effective as of June 30, 2020.

For purposes of evaluating the Company’s internal control over financial reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Veth Propulsion Holding B.V.

and Veth Propulsion B.V.

(collectively “Veth Propulsion”), which the Company acquired on July 2, 2018, and which are included in the consolidated balance sheets of the Company as of June 30, 2019, and the related consolidated statements of operations and comprehensive income, cash flows, and changes in shareholders’ equity, for the year then ended.

Veth Propulsion constituted 28% of total assets as of June 30, 2019, and 18% and 7% of net sales and income from operations, respectively, for the year then ended.

RSM US LLP, an independent registered public accounting firm, has audited the Company’s internal control over financial reporting as of June 30, 2020, as stated in their report which appears herein.

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the financial statements of the Company and our report dated August 29, 2019 expressed an unqualified opinion.

As described in Management’s Report on Internal Control Over Financial Reporting in Item 9A.

Controls and Procedures, management has excluded Veth Propulsion Holding B.V.

and Veth Propulsion B.V.

(collectively “Veth Propulsion”) from its assessment of internal control over financial reporting as of June 30, 2019, because it was acquired by the Company in a purchase business combination in the first quarter of fiscal 2019.

We have also excluded Veth Propulsion from our audit of internal control over financial reporting.

Veth Propulsion is a wholly owned subsidiary whose total assets and net income represent approximately 28 percent and (17) percent, respectively, of the related consolidated financial statement amounts as of and for the year ended June 30, 2019.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and our report dated August 26, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting .

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Twin Disc, Incorporated (the Company) as of June 30, 2019 and 2018, the related consolidated statements of operations comprehensive income, changes in equity and cash flows for each of the two years in the period ended June 30, 2019, and the related notes to the consolidated financial statements and schedule (collectively, the financial statements).

We have audited the accompanying consolidated balance sheets of Twin Disc, Incorporated (the Company) as of June 30, 2020 and 2019, the related consolidated statements of operations and comprehensive (loss) income, changes in equity and cash flows for each of the two years in the period ended June 30, 2020, and the related notes to the consolidated financial statements and schedule (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

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Total liabilities

Commitments and contingencies (Note Q)

Commitments and contingencies (Note P)

Twin Disc shareholders' equity:

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Common shares authorized:

14,632,802 and 13,099,468, respectively;

Retained earnings

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TWIN DISC, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

For the years ended June 30, 2020 and 2019

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Restructuring expenses

Goodwill and other asset impairment charge

Other operating income

Income from operations

(Loss) income from operations

Other income (expense):

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Other income (expense), net

Income before income taxes and noncontrolling interest

Income tax expense

(Loss) income before income taxes and noncontrolling interest

Income tax (benefit) expense

Net (loss) income

Net earnings attributable to noncontrolling interest, net of tax

Net income attributable to Twin Disc

Income per share data:

Basic income per share attributable to Twin Disc common shareholders

Diluted income per share attributable to Twin Disc common shareholders

Net (loss) income attributable to Twin Disc

(Loss) income per share data:

Basic (loss) income per share attributable to Twin Disc common shareholders

Diluted (loss) income per share attributable to Twin Disc common shareholders

Weighted average shares outstanding data:

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Diluted shares outstanding

Comprehensive income:

Comprehensive (loss) income:

Net (loss) income

Foreign currency translation adjustment

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Unrealized loss on cash flow hedge, net of income taxes of $185 and $156

Comprehensive income

Comprehensive (loss) income

Comprehensive income attributable to noncontrolling interest

Comprehensive income attributable to Twin Disc

Comprehensive (loss) income attributable to Twin Disc

The notes to consolidated financial statements are an integral part of these statements.

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Cash flows from operating activities:

Adjustments to reconcile net income to net cash (used) provided by operating activities:

Net (loss) income

Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities:

Depreciation and amortization

Amortization of inventory fair value step-up

Stock compensation expense

Goodwill and other asset impairment charge

Restructuring of operations

Gain on sale of Mill Log Business

Gain on contingent consideration of Veth Propulsion acquisition

Stock compensation expense

Provision for deferred income taxes

Amortizations of inventory fair value step-up

Gain on contingent consideration of Veth Propulsion acquisition

Gain on sale of Mill Log Business

Changes in operating assets and liabilities

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Accrued/prepaid retirement benefits

Net cash (used) provided by operating activities

Net cash provided (used) by operating activities

Cash flows from investing activities, net of acquired business:

Capital expenditures

Acquisition of Veth Propulsion, less cash acquired

Proceeds from sale of Mill Log business

Proceeds from sale of plant assets

Proceeds from sale of Mill Log business (see Note R)

Proceeds from life insurance policy

Acquisition of Veth Propulsion, less cash acquired

Net cash used by investing activities

Cash flows from financing activities:

Proceeds from issuance of common stock, net

Borrowings under long-term debt agreement

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Dividends paid to noncontrolling interest

Proceeds from issuance of common stock, net

Proceeds from exercise of stock options

Net cash provided (used) by financing activities

Net cash (used) provided by financing activities

Effect of exchange rate changes on cash

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Supplemental cash flow information:

Cash paid (received) during the year for:

Cash paid during the year for:

The notes to consolidated financial statements are an integral part of these statements.

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Benefit plan adjustments, net of tax

Unrealized loss on cash flow hedge, net of tax

Release stranded tax effects

Cash dividends

Compensation expense

Shares (acquired) issued, net

Shares issued, net

Balance at June 30, 2019

Net (loss) income

Translation adjustments

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Unrealized loss on cash flow hedge, net of tax

Release stranded tax effects

Cash dividends

Compensation expense

Shares issued, net

Shares (acquired) issued, net

Balance at June 30, 2020

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Basis of Presentation

The consolidated financial statements and information included in this Annual Report on Form 10-K (“Form 10-K”) include the financial results of Veth Propulsion Holding B.V.

(“Veth Propulsion”) for the period beginning July 2, 2018 through June 30, 2019.

The financial results included in this Form 10-K related to the acquisition method accounting for the Veth Propulsion acquisition have been finalized.

See Note B, Acquisition of Veth Propulsion Holding B.V., for further information about the acquisition and related transactions and the acquisition accounting.

The consolidated financial statements and information presented herein include the financial results of Veth Propulsion Holding B.V.

(“Veth Propulsion”), the acquisition of which was completed on July 2, 2018.

The financial results included in this Form 10-K related to the acquisition method of accounting for the Veth Propulsion acquisition have been finalized and completed.

Recent Event s

In March 2020, the World Health Organization (“WHO”) declared that a new strain of coronavirus that originated in Wuhan, China, and has rapidly spread around the world (“COVID-19 outbreak’) is a pandemic that poses significant risk to the international community.

This outbreak contributed to shelter-in-place policies, unexpected factory closures, supply chain disruptions, and market volatility causing substantial declines in market capitalization, and occurring in the midst of an already challenging economic environment in some of our markets, most notably the oil and gas market.

As a result of the COVID-19 outbreak, the Company’s operations have decreased, starting on or around mid-March 2020 to curtail the spread of the virus and in compliance with regulatory authorities.

The Company’s plants and offices around the world have been subject to intermittent shutdowns throughout the fourth quarter of fiscal 2020, impacting the timeliness of supply chain arrangements and the Company’s ability to deliver products to its customers.

The COVID-19 outbreak exacerbates an already depressed global oil and gas market, which has recently been severely damaged by unprecedented drastic declines in the price of oil.

The consensus of experts is that the price of oil was driven down by an oversupply in the global market, and aggravated by the price war among members of OPEC and non-OPEC producer nations.

Aside from operational impacts and its results on our operations during the quarter, the occurrence of the COVID-19 outbreak also necessitated a rigorous assessment of the Company’s entire balance sheet.

The accounting policies described below were applied in the context of these recent events.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.

The depth and duration of the pandemic is unknown.

Management is actively monitoring the global situation and its effect on its financial condition, liquidity, operations, suppliers, industry, and workforce.

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 majority-owned domestic and foreign subsidiaries (the “Company”).

Certain foreign subsidiaries are included based on fiscal years ending May 31, to facilitate prompt reporting of consolidated accounts.

The Company also has a controlling interest in a Japanese joint venture, which is consolidated based upon a fiscal year ending March 31.

Consolidation Principles --The consolidated financial statements include the accounts of Twin Disc, Incorporated and its wholly-owned domestic and foreign subsidiaries.

In fiscal 2020, certain subsidiaries changed their reporting periods to conform to the Company’s fiscal year end.

The impact of aligning to the corporate reporting period is not material to the consolidated results.

All significant intercompany transactions have been eliminated.

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Fair Value of Financial Instruments --The carrying amount reported in the consolidated balance sheets for cash, trade accounts receivable and accounts payable approximate fair value because of the immediate short-term maturity of these financial instruments .

If measured at fair value, cash would be classified as Level 1 and all other items listed above would be classified as Level 2 in the fair value hierarchy, as defined in Note O, Pension and Other Postretirement Benefit Plans.

If measured at fair value, cash would be classified as Level 1 and all other items listed above would be classified as Level 2 in the fair value hierarchy, as defined in Note N, Pension and Other Postretirement Benefit Plans.

The Company’s borrowings under the revolving loan agreement, which is classified as long-term debt and consists of loans that are routinely borrowed and repaid throughout the year, approximate fair value at June 30, 2020.

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The Company designates certain financial instruments as cash flow hedges for accounting purposes.

See Note T, Derivative Financial Instruments, for additional information.

See Note S, Derivative Financial Instruments, for additional information.

Inventories --Inventories are valued at the lower of cost or net realizable value.

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If the carrying amount exceeds the fair value, that difference is recognized as an impairment loss.

In fiscal 2018 and prior years, the annual testing date was the last day of the fiscal year.

In fiscal 2019, the Company changed its annual testing date to the first day of the Company’s fourth fiscal quarter in order to provide the Company more time and better information to perform the analyses.

The Company does not believe that this change constitutes a material change to the method in applying an accounting principle.

The Company conducted interim qualitative assessments throughout the year, and its annual assessment for goodwill impairment as of March 30, 2019 and June 30, 2018 using updated inputs, including appropriate risk-based, country and company specific weighted average discount rates for the Company’s reporting units.

The Company reviews goodwill for impairment on a reporting unit basis annually as of the first day of the Company’s fourth fiscal quarter, and whenever events or changes in circumstances (“triggering events”) indicate that the carrying value of goodwill may not be recoverable.

The Company conducted interim qualitative assessments throughout the year.

In the third quarter of fiscal 2020, the Company believed that the economic disruptions and unprecedented market volatilities and uncertainties resulting from the COVID-19 outbreak was a triggering event for the reporting units which contained goodwill.

Consequently, it performed an interim goodwill impairment test as of March 27, 2020 using updated inputs, including appropriate risk-based, country and company specific weighted average discount rates for the Company’s reporting units.

As a result of that test, the Company recorded a goodwill impairment charge of $25,380, which fully removed goodwill from its balance sheet.

See Note E, Goodwill and Other Intangibles, for additional information.

The fair value of the Company’s other intangible assets with indefinite lives, primarily tradenames, is estimated using the relief-from-royalty method, which requires assumptions related to projected revenues;

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and a discount rate.

The Company completed the impairment testing of indefinite-lived intangibles as of June 30, 2019 and concluded there were no impairments.

Long-lived assets, including intangible assets, are assessed for impairment qualitatively on a quarterly basis.

In the third quarter of fiscal 2020, upon management’s determination that adverse macroeconomic developments as a result of the COVID-19 outbreak has given rise to a triggering event for all of the Company’s assets groups, the Company performed a Step 1 assessment, or a recoverability test of its intangibles and other long-lived assets using an undiscounted operating cash flow analysis as of March 27, 2020, as well as the review of other assets in service and their remaining useful lives.

As a result of that assessment, the Company recorded an impairment charge of $2,223.

See Note E, Goodwill and Other Intangibles, for more information.

For the fourth quarter of fiscal 2020, the Company performed a qualitative assessment and concluded that an impairment test was not necessary.

Changes in circumstances, existing at the measurement date or at other times in the future, or in the numerous estimates associated with management’s judgments, assumptions and estimates made in assessing the fair value of goodwill and other indefinite-lived intangibles, could result in an impairment charge in the future.

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The customer’s ability and intent to pay the transaction price is assessed in determining whether a contract exists with the customer.

If collectibility of substantially all of the consideration in a contract is not probable, consideration received is not recognized as revenue unless the consideration is nonrefundable and the Company no longer has an obligation to transfer additional goods or services to the customer or collectibility becomes probable.

If collectability of substantially all of the consideration in a contract is not probable, consideration received is not recognized as revenue unless the consideration is nonrefundable and the Company no longer has an obligation to transfer additional goods or services to the customer or collectability becomes probable.

Goods sold to third party distributors are subject to an annual return policy, for which a provision is made at the time of shipment based upon historical experience.

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Recently Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance (ASU 2014-09) on revenue from contracts with customers.

This revenue recognition guidance supersedes existing guidance, including industry-specific guidance.

The core principle is that an entity should recognize revenue to depict the transfer of control over promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The guidance identifies steps to apply in achieving this principle.

The Company adopted this guidance effective July 1, 2018, using the modified retrospective method.

Prior periods presented were not retrospectively adjusted for this change.

The Company has applied the new revenue recognition standard only to contracts that were not completed as of July 1, 2018.

The Company determined that deferral of revenue is appropriate for certain agreements where the performance of services after product delivery is required.

Such services primarily pertain to technical commissioning services by its entities in its marine and propulsion business, whereby the Company’s technicians calibrate the controls and transmission to ensure proper performance for the customer’s specific application.

This service helps identify issues with the ship's design or performance that need to be remediated by the ship builder or other component suppliers prior to the ship being officially accepted into service by the ship buyer.

The cumulative effect adjustment of adopting the new standard is not significant to the Company’s results of operations and financial condition.

In February 2016, the FASB issued guidance (ASU 2016-02) which replaces the existing guidance for leases.

The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

The Company elected to early adopt the standard effective July 1, 2018 concurrent with the adoption of ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements, which required the Company to restate each prior reporting period presented.

For operating leases in which the Company is a lessee, the Company concluded that all existing operating leases under the old guidance continue to be classified as operating leases under the new guidance, and all existing capital leases under the old guidance are classified as finance leases under the new guidance.

The Company excluded any lease contracts with terms of twelve months or less as of the adoption date.

The Company has lease agreements with lease and non-lease components, which are generally accounted for as separate lease components.

The Company accounts for short-term leases on a straight-line basis over the lease term.

The following table presents the effect of the adoption of ASU 2016-02 on the Company’s condensed consolidated balance sheet as of June 30, 2018:

June 30, 2018

Property, plant and equipment, net

Lease obligations

The adoption of ASU 2014-09 and ASU 2016-02 did not have an impact on the Company’s consolidated statement of operations and comprehensive income or consolidated statement of cash flows for the year ended June 30, 2018.

In March 2017, the FASB issued guidance (ASU 2017-07) intended to improve the presentation of net periodic pension cost and net periodic postretirement cost.

This guidance requires that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period.

The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations.

The Company adopted this guidance effective July 1, 2018 on a retrospective basis, which resulted in the reclassification of certain amounts from cost of goods sold and marketing, engineering and administrative expenses to other income (expense), net in the condensed consolidated statements of operations and comprehensive income.

As a result, prior period amounts impacted have been revised accordingly.

There was no impact to net income.

The following table presents the effect of the adoption of ASU 2017-07 on the Company’s condensed consolidated statements of operations and comprehensive income for the year ended June 30, 2018:

For the Year Ended

June 30, 2018

Cost of goods sold

Marketing, engineering and administrative expenses

Income from operations

Other income (expense), net

In February 2018, the FASB issued guidance (ASU 2018-02) intended to eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act by allowing a reclassification from accumulated other comprehensive income to retained earnings.

The Company elected to early adopt this guidance effective July 1, 2018 by making a reclassification of $6,903 from accumulated other comprehensive loss to retained earnings.

In October 2016, the FASB issued updated guidance (ASU 2016-16) that changes the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory.

The Company adopted this guidance effective July 1, 2018.

The adoption of this guidance did not have a material impact on the Company’s financial statements and disclosures.

In August 2016, the FASB issued updated guidance (ASU 2016-15) that addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.

In June 2018, the FASB issued guidance (ASU 2018-07) intended to simplify the accounting for share based payments granted to nonemployees.

Under the amendments in this guidance, payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.

The Company adopted this guidance effective July 1, 2019.

The adoption of this guidance did not have a material impact on the Company’s financial statements and disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (ASC 815) - Targeted Improvements to Accounting for Hedging Activities.

The amendments in this guidance better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.

The Company elected to early adopt this standard during the fourth quarter of fiscal 2019.

The adoption of this guidance did not have a material impact on the Company’s financial statements and disclosures.

In August 2018, the SEC issued Release No.

33-10532, Disclosure Update and Simplification.

In addition to eliminating certain disclosure requirements, this release also amends the interim financial statement requirements to require provision of the information required by Regulation S-X Rule 3-04 for the current and comparative year-to-date periods, with subtotals for each interim period.

Rule 3-04 requires a reconciliation of stockholders’ equity beginning and ending balances for each period for which a statement of comprehensive income is required to be filed.

The Company adopted this guidance during the Company’s second quarter of fiscal year 2019.

The adoption of this guidance did not have a material impact on the Company’s disclosures.

New Accounting Releases

In June 2018, the FASB issued guidance (ASU 2018-07) intended to simplify the accounting for share based payments granted to nonemployees.

Under the amendments in this guidance, payments to nonemployees would be aligned with the requirements for share based payments granted to employees.

The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, (the Company’s fiscal 2020), including interim periods within that fiscal year.

The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

In June 2016, the FASB issued updated guidance (ASU 2016-13) and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326).

Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost.

This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates.

The amendments in this guidance are effective for fiscal years beginning after December 15, 2019 (the Company’s fiscal 2021), with early adoption permitted for certain amendments.

Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings.

The Company does not expect adoption of the new guidance to have a significant impact on its financial statements.

In August 2018, the FASB issued updated guidance (ASU 2018-13) as part of the disclosure framework project, which focuses on improving the effectiveness of disclosures in the notes to the financial statements.

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The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.

In August 2018, the FASB issued updated guidance (ASU 2018-14) intended to modify the disclosure requirements for employers that sponsor defined pension or postretirement plans.

In August 2018, the FASB issued updated guidance (ASU 2018-14) intended to modify the disclosure requirements for employers that sponsor defined benefit pension or postretirement plans.

The amendments in this guidance are effective for fiscal years ending after December 15, 2020 (the Company’s fiscal 2021), with early adoption permitted.

The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.

In December 2019, the FASB issued guidance (ASU 2019-12) intended to simplify the accounting for income taxes.

The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 (the Company’s fiscal 2022), with early adoption permitted.

The Company is currently evaluating the potential impact of this guidance on the Company’s disclosures.

In March 2020, the FASB issued guidance (ASU 2020-04), intended to provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued.

The amendments in this guidance are effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022.

The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

Special Note Regarding Smaller Reporting Company Status

In June 2018, the SEC issued Release 33-10513;

34-83550, Amendments to Smaller Reporting Company Definition, which changed the definition of a smaller reporting company in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.

Under this release, the new thresholds for qualifying are (1) public float of less than $250 million or (2) annual revenue of less than $100 million and public float of less than $700 million (including no public float).

The rule change was effective on September 10, 2018, the Company’s first fiscal quarter of fiscal year 2019.

The Company continues to qualify as a smaller reporting company based on its public float as of the last business day of its second fiscal quarter of fiscal year 2019.

A smaller reporting company may choose to comply with scaled or non-scaled financial and non-financial disclosure requirements on an item-by-item basis.

The Company has scaled some of its disclosures of financial and non-financial information in this annual report.

The Company may determine to provide scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.

A CQUISITION OF V ETH P ROPULSION HOLDING B .

Under SEC Release 33-10513;

34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller reporting company based on its public float as of the last business day of the second quarter of fiscal 2020.

Accordingly, it has scaled some of its disclosures of financial and non-financial information in this annual report.

The Company will continue to determine whether to provide additional scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.

ACQUISITION OF VETH PROPULSION HOLDING B .

On July 2, 2018, the Company completed the acquisition of 100% of the outstanding common stock of Veth Propulsion.

Veth Propulsion is a global manufacturer of highly-engineered primary and auxiliary propulsions and propulsion machinery for maritime vessels, including rudder propellers, bow thrusters, generator sets and engine service and repair, based in the Netherlands.

These products are complementary to and expand the Company’s current product offerings in the marine and propulsion markets.

These products are complementary to and expand the Company’s product offerings in the marine and propulsion markets.

Prior to the acquisition, the Company was a distributor of Veth Propulsion products in North America and Asia.

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The shares of stock were issued in settlement of the earn-out, a contingent consideration, after Veth Propulsion demonstrated that it achieved the profitability target (earnings before interest, tax, depreciation and amortization or “EBITDA”) under the terms of the Purchase Agreement.

The difference between the fair value at settlement and the initial fair value assigned to the earn-out at acquisition date of $2,921 is recognized in the income statement.

The difference between the fair value at settlement date of $1,991, and the initial fair value assigned to the earn-out at acquisition date of $2,921 was recognized in the income statement.

See Note Q, Restructuring of Operations and Other Operating Income.

The maximum earn-out at acquisition was $3,300.

The fair value at acquisition was determined by using a discounted probability weighted approach.

See Note R, Restructuring of Operations and Other Operating Income.

The total consideration transferred at acquisition date was:

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Fair value of assets acquired and liabilities assumed at acquisition date:

Fair Value of Assets Acquired

Cash, including restricted cash

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Intangibles consist of customer relationships, technology and know-how and tradenames, with estimated useful lives 12 years, 7 years, and 10 years, respectively, and weighted average remaining useful life of approximately 9 years.

The amounts acquired are presented in Note F, Goodwill and Other Intangibles.

The amounts acquired are presented in Note E, Goodwill and Other Intangibles.

The Company is not able to deduct any of the goodwill for tax purposes.

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(the “Credit Agreement”).

The Credit Agreement is further discussed in Note I, Debt.

Summary Pro Forma Financial Information

The following table presents financial information for Veth Propulsion that is included in the Company’s consolidated statement of operations for the year ended June 30, 2019:

June 30, 2019

Gross profit (a)

Operating loss (b)

Net loss attributable to Twin Disc

Gross profit includes the non-recurring purchase accounting charge for the step-up of inventories acquired of $4,277 for the year.

In addition to (a), operating loss includes the depreciation of property, plant and equipment and amortization of intangible assets acquired of $2,636 for the year.

Operating loss also includes one-time transaction charges related to the acquisition of $461 for the year.

The following table presents unaudited supplemental pro forma information as if the acquisition of Veth Propulsion had occurred on July 1, 2017.

June 30, 2019

June 30, 2018

Gross profit (a)

Net income attributable to Twin Disc (b)

Basic income per share attributable to Twin Disc common shareholders

Diluted income per share attributable to Twin Disc common shareholders

Weighted average number of common shares outstanding:

Gross profit includes the amortization of the step-up of inventories of $4,715 for the year ended June 30, 2018.

For the year ended, June 30, 2019, the amortization of the step-up of inventories of $4,277 is excluded.

In addition to (a), this includes the amortization of intangible assets acquired and interest expense on borrowings under the Credit Agreement net of other expenses, amounting to $4,542 before tax, for the year ended June 30, 2018, as well as $1,768 related to one-time transaction charges.

For the year ended June 30, 2019, this excludes one-time transaction charges related to the acquisition of $461.

REVENUE R ECOGNITION

The Company designs, manufactures and sells marine and heavy duty off highway power transmission equipment.

Products offered include:

marine transmissions, azimuth drives, 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 commercial, pleasure craft, 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.

Identify contract with customer:

The Company’s customers consist of distributors and direct end-users.

With regard to distributors, the Company generally has written distribution agreements which describe the terms of the distribution arrangement, such as the product range, the sales territory, product pricing, sales support, payment and returns policy, etc.

Customer contracts are generally in the form of acknowledged purchase orders.

Services to be rendered, as part of the delivery of those products, are also generally specified.

Such services include installation reviews and technical commissioning.

Performance obligations:

The Company’s performance obligations primarily consist of product delivery and certain service obligations such as technical commissioning, repair services, installation reviews, and shift development.

Transaction price:

The Company considers the invoice price as the transaction price.

Allocation of transaction price:

The Company determined that the most relevant allocation method for its service obligations is to apply the expected cost plus appropriate margin.

This is the Company’s practice of billing for repairs, overhaul, and other product service related time incurred by its technicians.

Recognize revenue:

Revenue is recognized as each performance obligation is satisfied which is typically at a point in time.

For technical commissioning, repairs, installation review, and shift development services, revenue is recognized upon completion of the service.

Disaggregated revenue:

The following table presents details deemed most relevant to the users of the financial statements for the year ended June 30, 2019.

Net sales by product group for year ended June 30, 2019 is summarized as follows:

Elimination of

Manufacturing

Intercompany Sales

Land-based transmissions

Marine and propulsion systems

Contract assets/liabilities:

There are no significant balances of contract assets or liabilities as of June 30, 2019.

The Credit Agreement is further discussed in Note H, Debt.

The major classes of inventories at June 30 were as follows:

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In fiscal 2018 and prior years, the annual testing date was the last day of the fiscal year.

The Company does not believe that this change constitutes a material change to the method in applying an accounting principle.

The fair value of reporting units is primarily driven by projected growth rates and operating results under the income approach using a discounted cash flow model, which applies an appropriate market-participant discount rate, and consideration of other market approach data from guideline public companies.

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If the Company’s market capitalization falls below the Company’s carrying value for a sustained period of time or if such a decline becomes indicative that the fair value of the Company’s reporting units has declined to below their carrying values, an interim goodwill impairment test may need to be performed and may result in a non-cash goodwill impairment charge.

On July 2, 2018, as discussed in Note B, Acquisition of Veth Propulsion Holding B.V., the Company acquired goodwill in the amount of $23,999 and intangible assets in the amount of $26,500 consisting of customer relationships, technology and know-how, and trade names as part of the acquisition of Veth Propulsion.

As of June 30, 2019, these amounts are final.

The Company, in coordination with an independent valuation firm, completed its fair value measurements and has recorded all purchase accounting entries in its financial statements for the year ended June 30, 2019.

On July 2, 2018, as described in Note B, Acquisition of Veth Propulsion Holding B.V., the Company acquired goodwill in the amount of $23,999 and intangible assets in the amount of $26,500 consisting of customer relationships, technology and know-how, and trade names as part of the acquisition of Veth Propulsion.

As of June 30, 2019, these amounts were final.

Veth Propulsion is reported as part of the Company’s manufacturing segment and European Propulsion reporting unit.

During the 2019 fiscal year, the Company determined that there were no triggering events to warrant an interim goodwill impairment test.

The Company conducted its annual assessment for goodwill impairment on March 30, 2019, the first day of its fourth fiscal quarter, its measurement date, using current assumptions, including updated forecasted cash flows and reporting unit specific discount rates of 13.0% and 14.0% for its European Propulsion and European Industrial reporting units, respectively, and concluded that goodwill is not impaired.

As of June 30, 2019, goodwill in the amounts of $23,371 and $2,583 is carried in the European Propulsion and European Industrial reporting units, respectively.

The fair values exceeded their carrying value by 118% and 41% for the European Propulsion and European Industrial reporting units, respectively, and therefore no impairment charge was required for these reporting units.

A significant amount of judgment is involved in determining if a triggering event has occurred.

Such indicators may include, among others:

a significant decline in expected future cash flows;

a sustained, significant decline in the Company’s stock price and market capitalization;

a significant adverse change in legal factors or in the business climate;

unanticipated competition;

the testing for recoverability of a significant asset group within a reporting unit;

and slower growth rates.

Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on the Company’s consolidated financial statements.

The Company believes that the economic disruptions and unprecedented market volatilities and uncertainties resulting from the COVID-19 outbreak was a triggering event in the third quarter of fiscal 2020.

Consequently, it performed an interim goodwill impairment test as of the quarter ended March 27, 2020.

Subsequent to the adoption of ASU 2017-04, goodwill impairment charges are recorded using a simplified one-step approach.

The fair value of a reporting unit, as defined, is compared to the carrying value of the reporting unit, including goodwill.

The fair value is primarily determined using discounted cash flow analyses which is driven by projected growth rates, and which applies an appropriate market-participant discount rate;

the fair value determined is also compared to the value obtained using a market approach from guideline public company multiples.

If the carrying amount exceeds the fair value, that difference is recognized as an impairment loss.

The European Propulsion reporting unit, which carried goodwill in the amount of $22,822, had heretofore been experiencing positive operating results.

The Company continues to have a positive outlook of its operations and remains committed to supporting it.

However, the onset of the COVID-19 outbreak and its uncertainties, as described in Note A, Basis of Presentation and Significant Accounting Policies, required the Company to approach the goodwill impairment analysis differently this year;

that past performance is no longer necessarily a good predictor of the future in a COVID-19 environment.

To incorporate uncertainties in its analysis, the Company applied a scenario modeling analysis for its goodwill impairment test this year.

It is deemed to be the most prudent and a more robust approach in the face of uncertainty.

Each scenario was then weighted with management’s expectations of potential outcomes, to arrive at a reasonable conclusion of the fair value of the reporting unit.

This was the approach deployed by the Company in this year’s goodwill and long-lived asset impairment analyses.

In assessing the current environment, management is informed that there is consensus among industry experts that the impacts from the outbreak will be severe and adverse, and that a general contraction in the macroeconomic environment is expected.

The magnitude and duration is unknown.

Management expects that a contraction of the global economy would reduce or shift the demand for its products in the near term.

For example, the reporting unit expects that the demand for certain of its end-market products, such as passenger leisure cruise vessels, passenger ferries, and other commercial vessels that operate based on general economic activities, will likely be adversely impacted as social restrictions by governments remain in place or tighten to curb the outbreak.

Based on additional market insights and expectations of industry and subject matter experts, which also includes the negative impacts of the historic and unprecedented free fall drop in the global price of oil, the Company believes that future cash flow projections of this reporting unit will fall short of its previous projections, which included synergies that are now less likely to be realized in the face of a COVID-19 environment.

The European Industrial reporting unit which carried goodwill in the amount of $2,558 is also challenged with the same macroeconomic conditions and market contraction.

The Company completed its interim assessment for goodwill impairment as of March 27, 2020 with the assistance of the aforementioned third party expert, using updated inputs, including an appropriate risk-based, company specific weighted average discount rate of 13.0%.

The assessment resulted in the full impairment of the European Propulsion and European Industrial reporting units, in the amount of $25,380.

As a result of the full impairment of goodwill, the balance of goodwill at June 30, 2020 is zero.

There will no longer be a need for future goodwill impairment tests.

As a consequence of these macroeconomic developments, market insights and expectations, and the occurrence of a triggering event in the quarter, the Company also performed an assessment of its intangibles and other long-lived assets.

The Company performed an undiscounted operating cash flow analysis as of March 27, 2020, as well as the review of other assets in service and their remaining useful lives.

It was determined that an impairment charge pertaining to certain tradenames, licenses and other assets was required, in the amount of $2,223.

The total non-cash impairment charge of $27,603, as described above, is a non-cash charge and is reported on the goodwill and other impairment charge line in the consolidated statement of operations within the manufacturing segment.

The tax impact of this charge is to increase the income tax (benefit) by $1,199.

The changes in the carrying amount of goodwill are summarized as follows:

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Accumulated Impairment

European Industrial

Balance at June 30, 2018

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Balance at June 30, 2020

Other intangibles consist of certain proprietary technology, computer software, patents and licensing agreements.

Other intangibles consist mainly of computer software.

Amortization is recorded on the basis of straight-line or accelerated, as appropriate, over the estimated useful lives of the assets.

The weighted average remaining useful life of the intangible assets included in the table above is approximately 8 years.

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Estimated intangible amortization expense for each of the next five fiscal years is as follows:

The gross carrying amount of the Company’s intangible assets that have indefinite lives and are not subject to amortization as of June 30, 2019 and 2018 are $200 and $202, respectively.

These assets are comprised of acquired tradenames.

ACCRUED LIABILITIES

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Salaries and wages

Accrued professional fees

Distributor rebates

Retirement benefits

The Company warrants all assembled products, 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) and service against defective materials or workmanship.

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Reserve balance, June 30

Included in expense in the year ending June 30, 2020 is a non-recurring warranty charge in the amount of $6,233, to accrue for estimated costs to resolve a unique product performance issue at certain installations.

The current portion of the warranty accrual ($3,520 and $3,034 for fiscal 2020 and 2019, respectively) is reflected in accrued liabilities, while the long-term portion ($940 and $702 for fiscal 2020 and 2019, respectively) is included in other long-term liabilities on the consolidated balance sheets.

Long-term Debt :

Long-term debt consisted of the following at June 30:

Credit Agreement Debt

Revolving loans (expire June 2023)

Term loan (due March 2026)

current maturities

Total long-term debt

Credit Agreement Debt :

On June 29, 2018, the Company entered into a new credit agreement (the “Credit Agreement”) with BMO Harris Bank N.A.

(“BMO”) that provided for the assignment and assumption of the previously existing loans between the Company and Bank of Montreal (the “2016 Credit Agreement”) and subsequent amendments into a term loan (the “Term Loan”) and revolving credit loans (each a “Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan, the “Loans”).

(“BMO”) that provided for the assignment and assumption of the previously existing loans between the Company and Bank of Montreal and subsequent amendments into a term loan (the “Term Loan”) and revolving credit loans (each a “Revolving Loan” and, collectively, the “Revolving Loans,” and, together with the Term Loan, the “Loans”).

Pursuant to the Credit Agreement, BMO agreed to make the Term Loan to the Company in a principal amount not to exceed $35,000 and the Company may, from time to time prior to the maturity date, enter into Revolving Loans in amounts not to exceed, in the aggregate, $50,000 (the “Revolving Credit Commitment”).

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The new borrowing was used to pay the cash consideration at closing of $58,862, and to pay off the loan owed to the prior parent of Veth Propulsion in the amount of $1,865.

On September 25, 2018, the Company used the proceeds of a stock offering (see Note K, Shareholders’ Equity) of $32,210 to partially pay down the Term Loan and Revolving Loans.

On September 25, 2018, the Company used the proceeds of a stock offering (see Note J, Shareholders’ Equity) of $32,210 to partially pay down the Term Loan and Revolving Loans.

On March 4, 2019, the Company entered into a second amendment (the “Second Amendment”) to the Credit Agreement.

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The Second Amendment also extended the maturity date of the Term Loan from January 2, 2020 to March 4, 2026, and added a requirement that the Company make principal installments of $500 per quarter starting with the quarter ending June 30, 2019.

The Second Amendment also reduces the applicable margin for purposes of determining the interest rate applicable to the Term Loan.

The Second Amendment also reduced the applicable margin for purposes of determining the interest rate applicable to the Term Loan.

Previously, the applicable margin was 3.00%, which was added to the Monthly Reset LIBOR Rate or the Adjusted LIBOR, as applicable.

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Specifically, the Company has covenanted (i) not to allow its total funded debt to EBITDA ratio to be greater than 3.00 to 1.00 (the cap had previously been 3.50 to 1.00 for quarters ending on or before September 30, 2019 and 3.25 to 1.00 for quarters ending on or about December 31, 2019 through September 30, 2020), and (ii) that its tangible net worth will not be less than $100,000 plus 50% of net income for each fiscal year ending on and after June 30, 2019 for which net income is a positive number (the $100,000 figure had previously been $70,000).

On January 28, 2020, the Company entered into a third amendment (the “Third Amendment”).

The Third Amendment restated the financial covenant provisions related to the maximum allowable ratio of total funded debt to EBITDA from 3.00 to 1.00 to 4.00 to 1.00 for the quarter ended December 27, 2019, 5.00 to 1.00 for the quarter ending March 27, 2020, 4.00 to 1.00 for the quarter ending June 30, 2020, 3.50 to 1.00 for the quarter ending September 25, 2020 and 3.00 to 1.00 for quarters ending on or after December 25, 2020.

For purposes of determining EBITDA, the Third Amendment added back extraordinary expenses (not to exceed $3,900 million) related to the previously reported isolated product performance issue on one of the Company’s oil and gas transmission models at certain installations.

Under the Third Amendment, the applicable margin for revolving loans, letters of credit, and term loans was between 1.25% and 3.375%, depending on the Company’s total funded debt to EBITDA ratio.

On April 17, 2020, in connection with a loan obtained under the Payment Protection Plan (the “PPP Loan”) as described below, the Company entered into a fourth amendment (the “Fourth Amendment”).

The Fourth Amendment:

(1) permitted the Company to incur indebtedness in the form of the PPP Loan notwithstanding the Credit Agreement’s restrictions limiting the Company’s ability to incur indebtedness, and (2) provides that the PPP Loan (to the extent that the Loan is forgiven) shall be disregarded for purposes of calculating financial covenants in the Credit Agreement (the “Covenants”).

Any unforgiven portion of the Loan and the interest thereon will not be disregarded for purposes of calculating the Covenants.

On July 22, 2020, the Company entered into a fifth amendment (the "Fifth Amendment"), which is effective June 30, 2020.

Under this amendment, (a) the Revolving Loan availability was reduced from $50,000 to $45,000, (b) the quarterly payments occurring on September 30, 2020 and December 31, 2020 are changed to be interest-only payments at the Company's option, and (c) the applicable margin on the Term Loan was increased from 3.375% to 3.875%.

As a result of this amendment, $1,000 of principal payments originally due in fiscal 2021 have been deferred to fiscal 2026.

In addition, the Company was given financial covenant relief for the quarters ended June 30, 2020 through June 30, 2021.

During this period, in lieu of the Total Funded Debt to EBITDA ratio financial covenant, the Company is required to maintain a minimum cumulative EBITDA, as follows:

(1) $1,000 for the fiscal quarter ended June 30, 2020 and the two fiscal quarters ending September 25, 2020;

(2) $2,500 for the three fiscal quarters ending December 25, 2020;

(3) $6,000 for the four fiscal quarters ending March 26, 2021;

and (4) $10,000 for the four fiscal quarters ending June 30, 2021.

The Company also entered into a Deposit Account Control Agreement with the Bank, reflecting the Bank’s security interest in deposit accounts the Company maintains with the Bank.

Under the Fifth Amendment, the Bank may not provide a notice of exclusive control of a deposit account (thereby obtaining exclusive control of the account) prior to the occurrence or existence of a Default or an Event of Default under the Credit Agreement or otherwise upon the occurrence or existence of an event or condition that would, but for the passage of time or the giving of notice, constitute a Default or an Event of Default under the Credit Agreement.

The Company is also required to maintain a minimum liquidity level, and abide by certain cash dividend and capital expenditure restrictions.

Borrowings under the Credit Agreement are secured by substantially all of the Company’s personal property, including accounts receivable, inventory, machinery and equipment, and intellectual property.

The Company has also pledged 100% of its equity interests in certain domestic subsidiaries and 65% of its equity interests in certain foreign subsidiaries.

The Company also entered into a Collateral Assignment of Rights under Purchase Agreement for its acquisition of Veth Propulsion described in Note B, Acquisition of Veth Propulsion Holding B.V..

The Company also entered into a Collateral Assignment of Rights under Purchase Agreement for its acquisition of Veth Propulsion.

Upon the occurrence of an event of default, BMO may take the following actions upon written notice to the Company:

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The Company may prepay the Loans (or any one of the Loans), subject to certain limitations.

Long-term debt consisted of the following at June 30:

Revolving loan agreement

Term loan (due March 2026)

current maturities

Total long-term debt

The PPP Loa n :

On April 17, 2020, the Company entered into a promissory note (the “PPP Note”) evidencing an unsecured loan in the amount of $8,200 made to the Company under the Payment Protection Plan ("PPP").

The PPP is a liquidity facility program established by the U.S.

government as part of the CARES Act in response to the negative economic impact of the COVID-19 outbreak.

The PPP Loan to the Company is being administered by BMO.

The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum.

Monthly principal and interest payments are deferred for six months.

Beginning November 17, 2020, seven months from the date of the PPP Note, the Company is required to make monthly payments of principal and interest.

The PPP Loan is a forgivable loan to the extent proceeds are used to cover qualified documented payroll, mortgage interest, rent, and utility costs over a 24-week measurement period (as amended) following loan funding.

For the loan to be forgiven, the Company is required to formally apply for forgiveness, and potentially, required to pass an audit that it met the eligibility qualifications of the loan.

Within 150 days from the application, the Company will be notified whether or not the loan is forgiven.

In accounting for the terms of the PPP Loan, the Company is guided by ASC 470 Debt , and ASC 450-30 Gain contingency .

Accordingly, it recorded the proceeds of the PPP Loan of $8,200 as debt and it will derecognize the liability when the loan is paid off or it believes forgiveness is reasonably certain.

The Company believes that the possibility of loan forgiveness is to be regarded as a contingent gain and therefore will not recognize the gain (and derecognize the loan) until all uncertainty is removed (i.e.

all conditions for forgiveness are met).

Other long-term debt pertains mainly to a financing arrangement in Europe.

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If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

On April 22, 2019, the Company entered into an interest rate swap arrangement with Bank of Montreal, with a notional amount of $20,000 and a maturity date of March 4, 2026 to hedge the Term Loan.

The Term Loan is covered by an interest rate swap arrangement with Bank of Montreal, with an outstanding notional amount of $17,500 and a maturity date of March 4, 2026.

This swap has been designated as a cash flow hedge under ASC 815, Derivatives and Hedging.

This swap is included in the disclosures in Note T, Derivative Financial Instruments.

This swap is included in the disclosures in Note S, Derivative Financial Instruments.

The aggregate scheduled maturities of outstanding long-term debt obligations in subsequent years are as follows:

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The Company leases certain office and warehouse space, as well as production and office equipment.

The Company had $14,138 and $6,527 of operating lease right-of-use assets recorded in property, plant and equipment, net as of June 30, 2019 and June 30, 2018, respectively.

The Company had $14,130 and $6,527 of operating lease liabilities recorded in lease obligations as of June 30, 2019 and June 30, 2018, respectively.

The Company had $545 and $11 of finance lease right-of-use assets recorded in property, plant and equipment, net as of June 30, 2019 and June 30, 2018, respectively.

The Company had $553 and $0 of finance lease liabilities recorded in lease obligations as of June 30, 2019 and June 30, 2018, respectively

Approximate future minimum rental commitments under non-cancellable leases as of June 30, 2019 were as follows:

Operating Leases

Finance Leases

Total future lease payments

Amount representing interest

Present value of future payments

The components of lease expense were as follows:

For the Year Ended

June 30, 2019

June 30, 2018

The Company determines if an arrangement is a lease at contract inception.

The lease term begins upon lease commencement, which is when the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised.

As its lease agreements typically do not provide an implicit rate, the Company primarily uses an incremental borrowing rate based upon the information available at lease commencement.

In determining the incremental borrowing rate, the Company considers its current borrowing rate, the term of the lease, and the economic environments where the lease activity is concentrated.

The components of lease expense for the years ended June 30 were as follows:

Finance lease cost:

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Other information related to leases was as follows:

For the Year Ended

June 30, 2019

June 30, 2018

Cash paid for amounts included in the measurement of lease liabilities:

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Finance leases

Approximate future minimum rental commitments under non-cancellable leases as of June 30, 2020 were as follows:

Operating Leases

Finance Leases

Total future lease payments

Amount representing interest

Present value of future payments

The following table provides a summary of leases recorded on the consolidated balance sheet at June 30.

Balance Sheet Location

Operating lease right-of-use assets

Property, plant and equipment, net

Finance lease right-of-use assets

Property, plant and equipment, net

Lease Liabilities

Operating lease liabilities

Accrued liabilities

Operating lease liabilities

Lease obligations

Finance lease liabilities

Accrued liabilities

Finance lease liabilities

Lease obligations

Subsequent Event:

On July 31, 2020, the Company finalized an agreement to lease a manufacturing, assembly and office facility in Lufkin, Texas.

The lease was entered into with the local government as part of the city’s economic development program.

The new lease has an initial term of 15 years and a base rent of $427 per year.

The Company will record $4,500 in finance lease right-of-use assets and $4,500 in finance lease liabilities.

In addition to the lease, the Company has certain leasehold improvements which were made to the facility amounting to $1,041.

SHAREHOLDERS' EQUITY

The Company completed the sale of 1,533,334 shares of its common stock through a registered offering which closed on September 25, 2018, at a price to the public of $22.50 per share.

The net proceeds received by the Company and after underwriting expenses of $2,070 and offering expenses of $220, were $32,210 and were recorded as paid-in capital as of June 30, 2019.

The proceeds were used to partially pay down the Term Loan and Revolving Loans (see Note I, Debt).

The net proceeds received by the Company and after underwriting expenses of $2,070 and offering expenses of $220, were $32,210 and were recorded as common shares as of June 30, 2020.

The proceeds were used to partially pay down the Term Loan and Revolving Loans (see Note H, Debt).

The total number of shares of common stock outstanding at June 30, 2020 and 2019 was 13,405,993 and 13,240,278, respectively.

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Balance at June 30, 2019

Other comprehensive income before reclassifications

Amounts reclassified from accumulated other comprehensive income

Net current period other comprehensive income

Other comprehensive loss before reclassifications

Amounts reclassified from accumulated other comprehensive loss

Net current period other comprehensive loss

Balance at June 30, 2020

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Release stranded tax effects

Amounts reclassified from accumulated other comprehensive income

Net current period other comprehensive income

Amounts reclassified from accumulated other comprehensive loss

Net current period other comprehensive loss

Balance at June 30, 2019

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Management evaluates the performance of its segments based on net earnings.

Information about the Company's segments is summarized as follows:

Information about the Company's segments, before intercompany eliminations, is summarized as follows:

Manufacturing

4 unchanged sentences

Depreciation and amortization

Net income attributable to Twin Disc

Net (loss) income attributable to Twin Disc

Expenditures for segment assets

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Expenditures for segment assets

The following is a reconciliation of reportable segment net sales and net income to the Company’s consolidated totals:

The following is a reconciliation of reportable segment net sales and net (loss) income to the Company’s consolidated totals:

Total net sales from reportable segments

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Total consolidated net sales

Net income attributable to Twin Disc:

Total net income from reportable segments

Net (loss) income attributable to Twin Disc:

Total net (loss) income from reportable segments

Other adjustments and corporate expenses

Total consolidated net income attributable to Twin Disc

Total consolidated net (loss) income attributable to Twin Disc

Corporate expenses pertain to certain costs that are not allocated to the reportable segments, primarily consisting of unallocated corporate overhead costs, including administrative functions and global functional expenses.

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Net sales by geographic region are based on product shipment destination.

Long-lived assets primarily pertain to property, plant and equipment and exclude goodwill and other intangibles.

Long-lived assets primarily pertain to property, plant and equipment and exclude goodwill, other intangibles, and deferred income taxes.

They are summarized as follows:

2 unchanged sentences

Other countries

There were no customers that accounted for 10% of consolidated net sales in fiscal 2019.

The Company has one distributor customer, primarily of its manufacturing segment, that accounted for 10% of total Company sales for fiscal 2020.

There were no customers that accounted for 10% of consolidated net sales in fiscal 2019.

Disaggregated revenue:

The following tables present details deemed most relevant to the users of the financial statements for the years ended June 30, 2020 and June 30, 2019.

Net sales by product group for the year ended June 30, 2020 is summarized as follows:

Manufacturing

Elimination of

Intercompany Sales

Land-based transmissions

Marine and propulsion systems

Net sales by product group for the year ended June 30, 2019 is summarized as follows:

Manufacturing

Elimination of

Intercompany Sales

Land-based transmissions

Marine and propulsion systems

STOCK -BASED COMPENSATION

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These PSAs are subject to adjustment if the Company’s return on invested capital, net sales, and EPS 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 184,766.

Based upon favorable actual results to date, the Company is currently accruing compensation expense for these PSAs.

Based upon actual results to date, the Company is not currently accruing compensation expense for these PSAs.

The PSAs granted in fiscal 2019 will vest if the Company achieves performance-based target objectives relating to average return on invested capital, average annual sales and average annual Earnings Per Share (“EPS”) (as defined in the PSA Grant Agreement), in the cumulative three fiscal year period ending June 30, 2021.

Based upon favorable actual results to date, the Company is currently accruing compensation expense for these PSAs.

Based upon actual results to date, the Company is not currently accruing compensation expense for these PSAs.

There were 167,848 and 96,124 unvested PSAs outstanding at June 30, 2020 and 2019, respectively.

A total of 13,844 and 0 shares of performance stock awards were forfeited during fiscal 2020 and 2019, respectively.

The fair value of the PSAs (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, 2019 and 2018, related PSAs, was $1,196 and $574, respectively.

The tax benefit from compensation expense for the year ended June 30, 2019 and 2018, related PSAs, was $278 and $172, respectively.

The compensation (benefit) expense for the year ended June 30, 2020 and 2019, related PSAs, was ($368) and $1,196, respectively.

The tax (expense) benefit from compensation (benefit) expense for the year ended June 30, 2020 and 2019, related PSAs, was ($87) and $278, respectively.

The weighted average grant date fair value of the unvested awards at June 30, 2020 was $14.78.

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The fair value of the RSUs (on the date of grant) is recorded as compensation expense over the vesting period.

There were 37,950 unvested RSUs outstanding at June 30, 2019.

Compensation expense of $299 was recognized during the year ended June 30, 2019.

The tax benefit from compensation expense for the year ended June 30, 2019, related to these service-based awards, was $69.

There were 37,950 unvested RSUs outstanding at June 30, 2020 and June 30, 2019.

Compensation expense of $326 and $299 was recognized during the year ended June 30, 2020 and 2019, respectively.

The tax benefit from compensation expense for the year ended June 30, 2020 and 2019, related to these service-based awards, was $77 and $69, respectively.

The weighted average grant date fair value of the unvested awards at June 30, 2020 was $25.77.

As of June 30, 2019, the Company had $679 of unrecognized compensation expense related to RSUs which will be recognized over the next three years.

As of June 30, 2020, the Company had $353 of unrecognized compensation expense related to RSUs which will be recognized over the next two years.

Stock Options

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There were no options outstanding under the 2010 Directors’ Plan and the 2018 Employee Incentive Plan as of June 30, 2020 and 2019.

The Company has 3,600 non-qualified stock options outstanding as of June 30, 2019 under the 2004 Twin Disc, Incorporated Plan for Non-Employee Directors and 2004 Twin Disc, Incorporated Stock Incentive Plan.

The 2004 plans were terminated during 2011, except options then outstanding will remain so until exercised or until they expire.

Stock option transactions under the 2004 plans during 2019 were as follows:

Weighted Average

Non-qualified stock options:

Options outstanding at beginning of year

Canceled/expired

Options outstanding at June 30

The Company historically computes its windfall tax pool using the shortcut method.

ASC 718, “Compensation – Stock Compensation”, 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 fiscal 2019 and 2018 the Company granted no non-qualified stock options and all non-qualified stock options from prior periods have fully vested.

As a result, no compensation cost has been recognized in the consolidated statements of operations and comprehensive income for fiscal 2019 and 2018, respectively.

The total intrinsic value of options exercised during the years ended June 30, 2019 and 2018 was approximately $47 and $38, respectively.

ENGINEERING AND DEVELOPMENT COSTS

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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 and comprehensive income as of June 30:

Postretirement

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Interest cost

Actuarial loss (gain)

Actuarial loss

Contributions by plan participants

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Amortization of prior service cost

Amortization of actuarial net loss

Net periodic benefit cost

1 unchanged sentence

Postretirement

Prior service cost

Amortization of transition asset

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pension plans held 98,211 shares of Company stock with a fair market value of $544 (0.7% of total plan assets) at June 30, 2020 and 98,211 shares with a fair market value of $1,483 (1.7% of total plan assets) at June 30, 2019.

The plans have a long-term return assumption of 6.25%.

plans have a long-term return assumption of 6.10%.

This rate was derived based upon historical experience and forward-looking return expectations for major asset class categories.

The weighted average long-term return across all plans is 5.89%.

Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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The total expense under the plans was $1,949 and $2,276 in fiscal 2020 and 2019, respectively.

United States and foreign income before income taxes and minority interest were as follows:

United States and foreign (loss) income before income taxes and minority interest were as follows:

United States

The provision (benefit) for income taxes is comprised of the following:

The (benefit) provision for income taxes is comprised of the following:

Currently payable:

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State net operating loss and other state credit carryforwards

Federal net operating loss

Foreign NOL carryforwards

Right of use assets - leases

Right of use assets - operating leases

Disallowed interest

Disallowed PPP expenses

Deferred tax liabilities:

Property, plant and equipment

Long term lease obligations

Long term operating lease obligations

Other liabilities

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Total net deferred tax assets

At June 30, 2020 the Company has net operating loss carryforwards (“NOLs”) of approximately $7,655 and $23,132 for federal and state income tax purposes, respectively, which will expire at various dates from fiscal year 2023 – 2040.

Federal NOLs generated in fiscal 2020 of $7,655 have an indefinite carryover period.

The Company has federal and state tax credit carryforwards of approximately $9,410 and $975, respectively, which will expire at various dates from fiscal 2026 – 2040.

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.

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federal income taxes to the actual income taxes reflected in the statements of operations:

federal income tax at 21% (27.56% in 2018)

federal income tax at 21%

Increases (reductions) in tax resulting from:

Foreign tax items

Valuation allowance

Change in prior year estimate

Research and development tax credits

Section 199 deduction

Goodwill impairment

Unrecognized tax benefits

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However, several provisions of the Tax Act have differing effective dates, meaning these provisions did not impact the Company’s financial statements until fiscal year 2019.

The provisions impacting the Company’s fiscal year 2019 financial statements include the global intangible low taxed income (“GILTI”) and foreign-derived intangible income (“FDII”) deduction and limitations on the deductibility of executive compensation.

The Securities and Exchange Commission issued Staff Accounting Bulletin 118 to address uncertainty regarding the application of ASC 740 to the income tax effects of the Tax Act, signed into law on December 22, 2017.

The bulletin provides a measurement period (not to exceed one year from the Tax Act enactment date) for companies to complete the accounting under ASC 740.

To the extent that a company’s accounting for certain income tax effects is incomplete, but is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

If a company cannot determine a provisional estimate in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The Tax Act results in comprehensive changes to tax reporting rules.

The Company has thoroughly reviewed all provisions of the Tax Act to determine their applicability to both fiscal year 2019 and future years.

The Company has prepared a complete analysis of all applicable provisions of the Tax Act and has appropriately reflected their impact in the financial statements as per current guidance.

The accounting for those provisions of the Tax Act, which the Company is currently subject to, is disclosed below

Reduction in the Federal Corporate Income Tax Rate:

The Tax Act reduces the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017.

A blended rate is calculated for non-calendar year filers resulting in a 27.56% federal tax rate for fiscal year 2018.

The change in tax rate required a revaluation of the end of year deferred assets and liabilities of the Company.

This resulted in additional tax expense of $3,786.

Deemed Repatriation Transition Tax :

The deemed repatriation transition tax is a tax on previously untaxed accumulated and current earnings and profits of certain foreign subsidiaries.

To determine the amount of the transition tax, the Company calculated the amount of post-1986 earnings and profits for all foreign subsidiaries as well as the amount of non-U.S.

income taxes paid on such earnings.

The Company calculated the amount of the transition tax and determined it to be zero based on overall net historical negative earnings and profits.

The provisions impacting the Company’s fiscal year 2019 financial statements include the global intangible low taxed income (“GILTI”) income and foreign-derived intangible income (“FDII”) deduction and limitations on the deductibility of executive compensation.

Executive Compensation Limitations:

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The Tax Act changed the foreign source income calculations and related foreign tax credit amounts.

The GILTI requires 10% domestic shareholders (U.S.

Shareholders) of controlled foreign corporations (“CFC’s”) to include in gross income annually the U.S.

The GILTI require 10% domestic shareholders (US Shareholders) of controlled foreign corporations (CFC’s) to include in gross income annually the U.S.

Shareholders’ pro rata share of GILTI for the year.

Foreign Derived Intangible Income (“FDII”):

The Tax Act provides companies with this new permanent deduction.

The Tax Act provides companies with a new permanent deduction.

An incentive for C corporations to generate revenue from serving foreign markets, the provision applies a preferential tax rate to eligible income.

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for the foreseeable future.

These earnings relate to ongoing operations and were approximately $6,208 at June 30, 2019.

These earnings relate to ongoing operations and were approximately $1,729 and $6,208 at June 30, 2020 and June 30, 2019, respectively.

Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation.

It is not practicable to estimate the amount of unrecognized withholding taxes and deferred tax liability on such earnings.

The Company’s 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.

Annually, the company files income tax returns in various taxing jurisdictions inside and outside the United States.

In general, the tax years that remain subject to examination are 2015 through 2019 for the Company’s major operations in Italy, Belgium and Japan.

In general, the tax years that remain subject to examination are 2016 through 2020 for our major operations in Italy, Belgium and Japan.

The tax years open to examination in the U.S.

are for years subsequent to fiscal 2016.

The Company has approximately $938 of unrecognized tax benefits as of June 30, 2019, which, if recognized would impact the effective tax rate.

During the fiscal year the amount of unrecognized tax benefits decreased primarily due to reserves which were released upon the conclusion of the fiscal year 2015 IRS income tax audit.

During the next twelve months, the Company anticipates closure of the Wisconsin income tax audit for the periods from fiscal year 2010 through fiscal year 2013.

The Company has approximately $918 and $938 of unrecognized tax benefits as of June 30, 2020 and June 30, 2019, respectively, which, if recognized would impact the effective tax rate.

During the fiscal year the amount of unrecognized tax benefits decreased primarily due to statute of limitations that expired.

During the next twelve months, the Company anticipates closure of the Wisconsin income tax audit for the periods fiscal year 2010 through fiscal year 2013.

This could result in a significant change to the unrecognized tax benefits.

The Company’s policy is to accrue interest and penalties related to unrecognized tax benefits in income tax expense.

Below is a reconciliation of beginning and ending amount of unrecognized tax benefits:

June 30, 2019

June 30, 2018

Below is a reconciliation of beginning and ending amount of unrecognized tax benefits as of June 30:

Unrecognized tax benefits, beginning of year

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Subtractions due to statutes closing

Settlements with taxing authorities

Unrecognized tax benefits, end of year

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These programs primarily involved the reduction of workforce in several of the Company’s manufacturing locations, under a combination of voluntary and involuntary programs.

During the current year, the Company implemented additional actions to reduce personnel costs in its Belgian operations and reorganize for productivity in its European operations.

These actions, together with the costs associated with the India manufacturing operations exit, resulted in pre-tax restructuring charges of $1,179 and $3,398 in fiscal 2019 and 2018, respectively.

In its European operations, the Company also implemented actions to reorganize for productivity.

These actions resulted in restructuring charges of $1,953 and $1,179 in fiscal 2020 and 2019, respectively.

Restructuring activities since June 2015 have resulted in the elimination of 207 full-time employees in the manufacturing segment.

Accumulated costs to date under these programs within the manufacturing segment through June 30, 2020 were $12,405.

During the second quarter of fiscal 2020, a marine propulsion development program, for which the Company had provided development and production services, was terminated.

The cost of exiting the contract consisted of a noncash write-off of assets and liabilities relating to the program amounting to $2,185, and a cash settlement to satisfy supplier commitments associated with the program amounting to $1,000.

The Company has classified the total contract exit cost of $3,185 as a restructuring charge within the manufacturing segment, in the year ended June 30, 2020.

The following is a roll-forward of restructuring activity:

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and western Canada territories.

The Mill Log Business reported pre-tax loss of $1,374 and pre-tax income of $1,139 in fiscal 2019 and 2018, respectively.

The results of operations from the Mill Log Business are reported as part of the Company’s distribution segment.

The Mill Log Business reported pre-tax loss of $1,374 in fiscal 2019.

The results of operations from the Mill Log Business were reported as part of the Company’s distribution segment.

Assets sold consisted primarily of inventories, with a carrying value of $6,298, and property and equipment including right-of-use leases, with a carrying value of $592.

The sale closed on March 4, 2019 and the Company received a total consideration of $7,658, consisting of cash proceeds of $5,158 and a note receivable for $2,500 due on March 4, 2020.

The Company recognized a pre-tax gain on sale of the Mill Log Business of $768, and recorded it as part of other operating income in the statement of operations in the current year.

As of June 30, 2020, the Company has agreed to a revised payment schedule after collecting $500, and is carrying the balance of $1,200 and $800 in other current assets and other assets, respectively.

The Company recognized a pre-tax gain on sale of the Mill Log Business of $768, and recorded it as part of other operating income in the statement of operations in fiscal 2019.

Other Operating Income – Fair Value Adjustment of Contingent Consideration

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On May 13, 2019, the Company issued 139,347 shares of the Company’s common stock, with a fair value of $1,991 in settlement of the contingent consideration.

Under ASC 805, Business Combinations, any change in fair value of the contingent consideration is recognized in the current period income statement and is not an adjustment to the opening balance sheet or the determination of goodwill.

Under ASC 805, Business Combinations, any change in fair value of the contingent consideration is recognized in the current period statement of operations and comprehensive (loss) income and is not an adjustment to the opening balance sheet or the determination of goodwill.

Accordingly, the Company recognized a gain of $809, after foreign exchange impact;

this amount is reported as other operating income in the current fiscal year.

this amount is reported as other operating income in fiscal 2019.

EARNINGS PER SHARE

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The components of basic and diluted earnings per share were as follows:

Net (loss) income

Net earnings attributable to noncontrolling interest

Undistributed earnings attributable to unvested shares

Net income available to Twin Disc shareholders

Net (loss) income available to Twin Disc shareholders

Weighted average shares outstanding - basic

Basic Income Per Share:

Net income per share - basic

Basic (Loss) Income Per Share:

Net (loss) income per share - basic

Net (loss) income

Net earnings attributable to noncontrolling interest

Undistributed earnings attributable to unvested shares

Net income available to Twin Disc shareholders

Net (loss) income available to Twin Disc shareholders

Weighted average shares outstanding - basic

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Weighted average shares outstanding - diluted

Diluted Income Per Share:

Net income per share - diluted

Diluted (Loss) Income Per Share:

Net (loss) income per share - diluted

The following potential common shares were excluded from diluted EPS for the year ended June 30, 2020 as the Company reported a net loss:

167,848 related to the Company’s unvested PSAs, 231,379 related to the Company’s unvested RS awards, and 37,950 related to the Company’s unvested RSUs.

The following potential common shares were excluded from diluted EPS for the year ended June 30, 2019 because they were anti-dilutive:

80,164 related to the Company’s unvested PSAs, 172,637 related to the Company’s unvested RS awards, 13,123 related to the Company’s unvested RSUs, and 3,483 related to outstanding stock options.

The following potential common shares were excluded from diluted EPS for the year ended June 30, 2018 because they were anti-dilutive:

61,286 related to the Company’s unvested PSAs, 237,657 related to the Company’s unvested RS awards, and 3,568 related to outstanding stock options.

D ERIVATIVE FINANCIAL INSTRUMENTS

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The primary purpose of the Company’s cash flow hedging activities is to manage the potential changes in value associated with interest payments on the Company’s LIBOR-based indebtedness.

The Company records gains and losses on interest rate swap contracts qualifying as cash flow hedges in accumulated other comprehensive loss to the extent that these hedges are effective and until the Company recognizes the underlying transactions in net earnings, at which time these gains and losses are recognized in interest expense on its consolidated statements of operations and comprehensive income.

Cash flows from derivative financial instruments are classified as cash flows from financing activities on the consolidated statements of cash flows.

These contracts generally have original maturities of greater than 12 months.

These contracts generally have original maturities of greater than twelve months.

Net unrealized after-tax losses related to cash flow hedging activities that were included in accumulated other comprehensive loss were $1,104 and $509 for the years ended June 30, 2020 and 2019, respectively.

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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 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.

Gains and losses on these contracts are recorded in other expense, net in the consolidated statement of operations and comprehensive (loss) 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 fiscal 2020 and 2019 was the euro.

The Company had no outstanding forward exchange contracts at June 30, 2019 or at June 30, 2018.

At June 30, 2020, one of the Company’s foreign subsidiaries had one outstanding forward exchange contract to purchase U.S.

dollars in the notional value of $1,247 with a weighted average maturity of 7 days.

The fair value of the Company’s contract was a loss of $9 at June 30, 2020.

The Company had no outstanding forward exchange contracts at June 30, 2019.

Other Derivative Instruments

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Other long-term liabilities

The impact of the Company’s derivative instruments on the consolidated statement of operations and comprehensive income for the years ended June 30 was as follows:

Statement of Comprehensive

The impact of the Company’s derivative instruments on the consolidated statement of operations and comprehensive (loss) income for the years ended June 30 was as follows:

Statement of Comprehensive (Loss)

Income Location

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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

for the years ended June 30, 20 1 9 and 20 1 8 ( i n thousands)

F or the years ended June 30, 20 20 and 20 1 9 ( i n thousands)

Deductions (1)

Allowance for losses on accounts receivable

Deferred tax valuation allowance

Reserve for inventory obsolescence

Allowance for losses on accounts receivable

Deferred tax valuation allowance

Reserve for inventory obsolescence

(1) Activity primarily represents amounts written-off during the year, along with other adjustments (primarily foreign currency translation adjustments).

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Form of Performance Stock Award Grant Agreement for award of performance shares on August 1, 2018 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 6, 2018).

Form of Restricted Stock Award Grant Agreement for restricted stock grants on August 2, 2017 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 8, 2017).

Form of Performance Stock Award Grant Agreement for award of performance shares on August 1, 2018 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 6, 2018).

Form of Restricted Stock Unit Grant Agreement for restricted stock units granted on August 1, 2018 (Incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K dated August 6, 2018).

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Form of Restricted Stock Award Grant Agreement for restricted stock grants on August 1, 2019 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 7, 2019).

Form of Performance Stock Award Grant Agreement for award of performance shares on October 31, 2019 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated November 5, 2019).

Form of Restricted Stock Award Grant Agreement for restricted stock grants on October 31, 2019 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated November 5, 2019).

Form of Performance Stock Award Grant Agreement for award of performance shares on August 6, 2020 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 12, 2020).

Form of Restricted Stock Award Grant Agreement for restricted stock grants on August 6, 2020 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 12, 2020).

Twin Disc, Incorporated Supplemental Executive Retirement Plan, amended and restated as of July 29, 2010 (Incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K dated August 4, 2010).

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(Incorporated by reference to Exhibit 1.2 of the Company’s Form 8-K dated March 6, 2019).

Amendment No.

3 to June 29, 2018 Credit Agreement between Twin Disc, Incorporated and BMO Harris Bank, N.A.

(Incorporated by reference to Exhibit 1.1 of the Company’s Form 8-K dated January 30, 2020).

Promissory Note dated April 17, 2020, entered into by Twin Disc, Incorporated, as borrower, for the benefit of BMO Harris Bank, N.A., as lender (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated April 21, 2020).

Amendment No.

4 to June 29, 2018 Credit Agreement between Twin Disc, Incorporated and BMO Harris Bank, N.A.

(Incorporated by reference to Exhibit 1.2 of the Company’s Form 8-K dated April 21, 2020).

Amendment No.

5 to June 29, 2018 Credit Agreement between Twin Disc, Incorporated and BMO Harris Bank, N.A.

(Incorporated by reference to Exhibit 1.1 of the Company’s Form 8-K dated July 28, 2020).

Second Amended and Restated Revolving Note between Twin Disc, Incorporated and BMO Harris Bank, N.A.

(Incorporated by reference to Exhibit 1.2 of the Company’s Form 8-K dated July 28, 2020).

Form of Deposit Account Control Agreement between Twin Disc, Incorporated and BMO Harris Bank, N.A.

(Incorporated by reference to Exhibit 1.3 of the Company’s Form 8-K dated July 28, 2020).

ISDA Master Agreement and Schedule, dated April 11, 2019, between Twin Disc, Incorporated and Bank of Montreal (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated April 26, 2019).

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/s/ JEFFREY S.

Vice President - Finance, Chief Financial Officer,

Treasurer and Secretary

Vice President - Finance, Chief Financial Officer, Treasurer and Secretary

August 26, 2020

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/s/ JEFFREY S.

Vice President - Finance, Chief Financial Officer,

Treasurer and Secretary (Attorney in Fact)

Vice President - Finance, Chief Financial Officer, Treasurer and Secretary (Attorney in Fact)

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data