TWIN DISC INC 10-K

Item 8. Financial Statements and Supplementary Data See Consolidated Financial Statements and Financial Statement Schedule. Sales and Earnings by Quarter - Unaudited (in thousands, except per share amounts) 2020 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year Net sales $ 59,290 $ 59,536 $ 68,636 $ 59,376 $ 246,838 Gross profit 9,636 15,711 16,549 13,812 55,708 Restructuring expenses 121 4,248 532 237 5,138 Goodwill and other asset impairment charge - - 27,603 - 27,603 Net loss (6,293 ) (6,466 ) (25,176 ) (1,636 ) (39,571 ) Net loss attributable to Twin Disc (6,311 ) (6,516 ) (25,230 ) (1,760 ) (39,817 ) Basic loss per share attributable to Twin Disc common shareholders (0.48 ) (0.49 ) (1.92 ) (0.13 ) (3.03 ) Diluted loss per share attributable to Twin Disc common shareholders (0.48 ) (0.49 ) (1.92 ) (0.13 ) (3.03 ) Dividends per share - - - - - 2019 Net sales $ 74,689 $ 78,107 $ 77,420 $ 72,447 $ 302,663 Gross profit 23,985 26,088 23,117 16,451 89,641 Restructuring expenses 173 434 131 441 1,179 Net income (loss) 2,903 4,079 4,587 (773 ) 10,796 Net income (loss) attributable to Twin Disc 2,862 4,073 4,560 (822 ) 10,673 Basic income (loss) per share attributable to Twin Disc common shareholders 0.24 0.31 0.35 (0.06 ) 0.84 Diluted income (loss) per share attributable to Twin Disc common shareholders 0.24 0.31 0.34 (0.06 ) 0.83 Dividends per share - - - - - Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure None. Ite m 9 A . Controls and Procedures Conclusi on Regarding Dis closure Controls and Procedures As required by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report and under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure. 25 Management’s Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: 1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company, 2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and 3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate. The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the framework (2013 edition) in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon such evaluation, the Company’s management concluded that its internal control over financial reporting was effective as of June 30, 2020. 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. Changes in Internal Contro l Over Financial Reporting During the fourth quarter of fiscal 2020, there have not been any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9 B . Other Information Not applicable. PART III Item 10. Directors , Executive Officers and Corporate Governance For information with respect to the executive officers of the Registrant, see "Information About Our Executive Officers" at the end of Part I of this report. For information with respect to the Directors of the Registrant, see "Election of Directors" in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020, which is incorporated into this report by reference. For information with respect to the Company’s Code of Ethics, see "Guidelines for Business Conduct and Ethics” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020, which is incorporated into this report by reference. The Company’s Code of Ethics, entitled, “Guidelines for Business Conduct and Ethics,” is included on the Company’s website, www.twindisc.com. If the Company makes any substantive amendment to the Code of Ethics, or grants a waiver from a provision of the Code of Ethics for its Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer (or any person performing similar functions), it intends to disclose the nature of such amendment on its website within four business days of the amendment or waiver in lieu of filing a Form 8-K with the SEC. 26 For information with respect to procedures by which shareholders may recommend nominees to the Company’s Board of Directors, see “Director Committee Functions: Nominating and Governance Committee” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020, which is incorporated into this report by reference. There were no changes to these procedures since the Company’s last disclosure relating to these procedures. For information with respect to the Audit Committee Financial Expert, see “Director Committee Functions: Audit Committee” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020, which is incorporated into this report by reference. For information with respect to the Audit Committee Disclosure, see “Director Committee Functions: Audit Committee” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020, which is incorporated into this report by reference. For information with respect to the Audit Committee Membership, see “Director Committee Functions: Committee Membership” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020, which is incorporated into this report by reference. Item 11. Executive Compensation The information set forth under the captions "Executive Compensation" and "Director Compensation” in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 29, 2020, is incorporated into this report by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters For information regarding security ownership of certain beneficial owners and management, see the Proxy Statement for the Annual Meeting of Shareholders to be held on October 29, 2020 under the captions "Principal Shareholders” and “Directors and Executive Officers" and incorporated into this report by reference. For information regarding securities authorized for issuance under equity compensation plans of the Company, see “Equity Compensation Plan Information” in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 29, 2020, which is incorporated into this report by reference. There are no arrangements known to the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant. Item 13. Certain Relationships and Related Transactions , Director Independence For information with respect to transactions with related persons and policies for the review, approval or ratification of such transactions, see “Corporate Governance – Review, Approval or Ratification of Transactions with Related Persons” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020, which is incorporated into this report by reference. For information with respect to director independence, see “Corporate Governance – Board Independence” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020, which is incorporated into this report by reference. 27 Item 14. Principal Accounting Fees and Services The Company incorporates by reference the information contained in the Proxy Statement for the Annual Meeting of Shareholders to be held October 29, 2020 under the headings “Fees to Independent Registered Public Accounting Firm” and “Pre-approval Policies and Procedures.” PART IV Item 15. Exhibits, Financial Statement Schedules (a)(1) Consolidated Financial Statements See Index to Consolidated Financial Statements and Financial Statement Schedule, the Report of Independent Registered Public Accounting Firm and the Consolidated Financial Statements, all of which are incorporated by reference. (a)(2) Consolidated Financial Statement Schedule See Index to Consolidated Financial Statements and Financial Statement Schedule, and the Consolidated Financial Statement Schedule, all of which are incorporated by reference. (a)(3) Exhibits. See Exhibit Index included as the last page of this form, which is incorporated by reference. 28 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 30-31 Consolidated Balance Sheets as of June 30, 2020 and 2019 32 Consolidated Statements of Operations and Comprehensive Income for the years ended June 30, 2020 and 2019 33 Consolidated Statements of Cash Flows for the years ended June 30, 2020 and 2019 34 Consolidated Statements of Changes in Equity for the years ended June 30, 2020 and 2019 35 Notes to Consolidated Financial Statements 36-69 INDEX TO FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts 70 Schedules, other than those listed, are omitted for the reason that they are inapplicable, are not required, or the information required is shown in the financial statements or the related notes. 29 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Twin Disc, Incorporated: Opinion on the Internal Control Over Financial Reporting We have audited Twin Disc, Incorporated’s (the Company) 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. 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 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 in Item 9A . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ RSM US LLP Milwaukee, Wisconsin August 26, 2020 30 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Twin Disc, Incorporated: Opinion on 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. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's 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, and our report dated August 26, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ RSM US LLP We have served as the Company's auditor since 2018. Milwaukee, Wisconsin August 26, 2020 31 TWIN DISC, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2020 and 2019 (In thousands, except share amounts) 2020 2019 ASSETS Current assets: Cash $ 10,688 $ 12,362 Accounts receivable, net 30,682 44,013 Inventories 120,607 125,893 Prepaid expenses 5,269 11,681 Other 6,739 8,420 Total current assets 173,985 202,369 Property, plant and equipment, net 72,732 71,258 Goodwill, net - 25,954 Deferred income taxes 24,445 18,178 Intangible assets, net 18,973 25,353 Other assets 3,992 3,758 Total assets $ 294,127 $ 346,870 LIABILITIES AND EQUITY Current liabilities: Short-term borrowings and current maturities of long-term debt $ 4,691 $ 2,000 Accounts payable 25,663 31,468 Accrued liabilities 36,380 41,646 Total current liabilities 66,734 75,114 Long-term debt 37,896 40,491 Lease obligations 13,495 12,646 Accrued retirement benefits 27,938 25,878 Deferred income taxes 5,501 7,429 Other long-term liabilities 2,605 2,494 Total liabilities 154,169 164,052 Commitments and contingencies (Note P) Twin Disc shareholders' equity: Preferred shares authorized: 200,000; issued: none; no par value - - Common shares authorized: 30,000,000; issued: 14,632,802; no par value 42,756 45,047 Retained earnings 156,655 196,472 Accumulated other comprehensive loss (41,226 ) (37,971 ) 158,185 203,548 Less treasury stock, at cost (1,226,809 and 1,392,524 shares, respectively) 18,796 21,332 Total Twin Disc shareholders' equity 139,389 182,216 Noncontrolling interest 569 602 Total equity 139,958 182,818 Total liabilities and equity $ 294,127 $ 346,870 The notes to consolidated financial statements are an integral part of these statements. 32 TWIN DISC, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME For the years ended June 30, 2020 and 2019 (In thousands, except per share amounts) 2020 2019 Net sales $ 246,838 $ 302,663 Cost of goods sold 191,130 213,022 Gross profit 55,708 89,641 Marketing, engineering and administrative expenses 63,218 71,541 Restructuring expenses 5,138 1,179 Goodwill and other asset impairment charge 27,603 - Other operating income - (1,577 ) (Loss) income from operations (40,251 ) 18,498 Other income (expense): Interest income 78 43 Interest expense (1,860 ) (1,927 ) Other income (expense), net (1,707 ) (2,107 ) (3,489 ) (3,991 ) (Loss) income before income taxes and noncontrolling interest (43,740 ) 14,507 Income tax (benefit) expense (4,169 ) 3,711 Net (loss) income (39,571 ) 10,796 Less: Net earnings attributable to noncontrolling interest, net of tax (246 ) (123 ) Net (loss) income attributable to Twin Disc $ (39,817 ) $ 10,673 (Loss) income per share data: Basic (loss) income per share attributable to Twin Disc common shareholders $ (3.03 ) $ 0.84 Diluted (loss) income per share attributable to Twin Disc common shareholders $ (3.03 ) $ 0.83 Weighted average shares outstanding data: Basic shares outstanding 13,153 12,571 Dilutive stock awards - 111 Diluted shares outstanding 13,153 12,682 Comprehensive (loss) income: Net (loss) income $ (39,571 ) $ 10,796 Foreign currency translation adjustment (966 ) (2,671 ) Benefit plan adjustments, net of income taxes of ($530) and ($1,242), respectively (1,675 ) (4,121 ) Unrealized loss on cash flow hedge, net of income taxes of $185 and $156 (595 ) (509 ) Comprehensive (loss) income (42,807 ) 3,495 Less: Comprehensive income attributable to noncontrolling interest (266 ) (98 ) Comprehensive (loss) income attributable to Twin Disc $ (43,073 ) $ 3,397 The notes to consolidated financial statements are an integral part of these statements. 33 TWIN DISC, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 2020 and 2019 (In thousands) 2020 2019 Cash flows from operating activities: Net (loss) income $ (39,571 ) $ 10,796 Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities: Depreciation and amortization 11,925 9,335 Goodwill and other asset impairment charge 27,603 - Restructuring of operations 2,269 - Stock compensation expense 1,158 2,591 Provision for deferred income taxes (8,072 ) 6,846 Amortizations of inventory fair value step-up - 4,277 Gain on contingent consideration of Veth Propulsion acquisition - (809 ) Gain on sale of Mill Log Business - (768 ) Other, net 258 84 Changes in operating assets and liabilities Trade accounts receivable 13,132 11,177 Inventories 6,775 (27,671 ) Other assets 2,246 (10,159 ) Accounts payable (3,342 ) (1,013 ) Accrued liabilities (5,807 ) (9,896 ) Accrued/prepaid retirement benefits 544 (251 ) Net cash provided (used) by operating activities 9,118 (5,461 ) Cash flows from investing activities, net of acquired business: Capital expenditures (10,699 ) (11,979 ) Proceeds from sale of Mill Log business 500 5,158 Proceeds from sale of plant assets 137 239 Proceeds from life insurance policy 102 101 Acquisition of Veth Propulsion, less cash acquired - (60,195 ) Other, net (159 ) (233 ) Net cash used by investing activities (10,119 ) (66,909 ) Cash flows from financing activities: Borrowings under long-term debt agreement 8,200 44,480 Borrowings under revolving loan agreement 99,262 147,854 Repayments under revolving loan agreement (105,065 ) (129,548 ) Repayments of long-term borrowings (2,241 ) (24,752 ) Payments of withholding taxes on stock compensation (913 ) (1,005 ) Dividends paid to noncontrolling interest (298 ) (115 ) Proceeds from issuance of common stock, net - 32,210 Proceeds from exercise of stock options - 36 Net cash (used) provided by financing activities (1,055 ) 69,160 Effect of exchange rate changes on cash 382 401 Net change in cash (1,674 ) (2,809 ) Cash: Beginning of year 12,362 15,171 End of year $ 10,688 $ 12,362 Supplemental cash flow information: Cash paid during the year for: Interest $ 1,861 $ 1,906 Income taxes 3,481 1,927 The notes to consolidated financial statements are an integral part of these statements. 34 TWIN DISC, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended June 30, 2020 and 2019 (In thousands) Twin Disc, Inc. Shareholders’ Equity Accumulated Other Non- Common Retained Comprehensive Treasury Controlling Total Stock Earnings Income (Loss) Stock Interest Equity Balance at June 30, 2018 $ 11,570 $ 178,896 $ (23,792 ) $ (23,677 ) $ 619 $ 143,616 Net income 10,673 123 10,796 Translation adjustments (2,646 ) (25 ) (2,671 ) Benefit plan adjustments, net of tax (4,121 ) (4,121 ) Unrealized loss on cash flow hedge, net of tax (509 ) (509 ) Release stranded tax effects 6,903 (6,903 ) Cash dividends (115 ) (115 ) Compensation expense 2,591 2,591 Shares issued, net 30,886 2,345 33,231 Balance at June 30, 2019 45,047 196,472 (37,971 ) (21,332 ) 602 182,818 Net (loss) income (39,817 ) 246 (39,571 ) Translation adjustments (985 ) 19 (966 ) Benefit plan adjustments, net of tax (1,675 ) (1,675 ) Unrealized loss on cash flow hedge, net of tax (595 ) (595 ) Cash dividends (298 ) (298 ) Compensation expense 1,158 1,158 Shares (acquired) issued, net (3,449 ) 2,536 (913 ) Balance at June 30, 2020 $ 42,756 $ 156,655 $ (41,226 ) $ (18,796 ) $ 569 $ 139,958 The notes to consolidated financial statements are an integral part of these statements. 35 TWIN DISC, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS AND PER SHARE DATA) A. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation 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-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. Management Estimates-- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates. 36 Translation of Foreign Currencies --The financial statements of the Company’s non-U.S. subsidiaries are translated using the current exchange rate for assets and liabilities and the weighted-average exchange rate for the year for revenues and expenses. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss, which is included in equity. Gains and losses from foreign currency transactions are included in earnings. Included in other income (expense) are foreign currency transaction losses of ($570) and ($681) in fiscal 2020 and 2019, respectively. Cash --The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalent. Under the Company’s cash management system, cash balances at certain banks are funded when checks are presented for payment. To the extent that checks issued, but not yet presented for payment, exceed the balance on hand at the specific bank against which they were written, the amount of those un-presented checks is included in accounts payable. Accounts Receivable --These represent trade accounts receivable and are stated net of an allowance for doubtful accounts of $1,740 and $1,582 at June 30, 2020 and 2019, respectively. The Company records an allowance for doubtful accounts for certain customers where a risk of default has been specifically identified as well as provisions determined on a general basis when it is believed that some default is probable and estimable. The assessment of likelihood of customer default is based on a variety of factors, including the length of time the receivables are past due, the historical collection experience and existing economic conditions. Various factors may adversely impact its customer’s ability to access sufficient liquidity and capital to fund their operations and render the Company’s estimation of customer defaults inherently uncertain. While the Company believes current allowances for doubtful accounts are adequate, it is possible that these factors may cause higher levels of customer defaults and bad debt expense in future periods. 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 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. The Company’s term loan borrowing, which is LIBOR-based, approximates fair value at June 30, 2020. If measured at fair value in the financial statements, long-term debt (including any current portion) would be classified as Level 2 in the fair value hierarchy. Derivative Financial Instruments - - The Company has written policies and procedures that place all financial instruments under the direction of the Company’s corporate treasury department and restrict all derivative transactions to those intended for hedging purposes. The use of financial instruments for trading purposes is prohibited. The Company uses derivative financial instruments to manage certain financial risks. The Company enters into forward contracts to reduce the earnings and cash flow impact of non-functional currency denominated receivables and payables. The Company uses interest rate swap contracts to reduce the exposure to variability in interest rates on floating debt borrowings. The Company designates certain financial instruments as cash flow hedges for accounting purposes. See Note S, Derivative Financial Instruments, for additional information. Inventories --Inventories are valued at the lower of cost or net realizable value. Cost has been determined by the last-in, first-out (LIFO) method for the majority of inventories located in the United States, and by the first-in, first-out (FIFO) method for all other inventories. Management specifically identifies obsolete products and analyzes historical usage, forecasted production based on future orders, demand forecasts, and economic trends, among others, when evaluating the adequacy of the reserve for excess and obsolete inventory. Property, Plant and Equipment and Depreciation --Assets are stated at cost. Expenditures for maintenance, repairs and minor renewals are charged against earnings as incurred. Expenditures for major renewals and betterments are capitalized and depreciated. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. The lives assigned to buildings and related improvements range from 10 to 40 years, and the lives assigned to machinery and equipment range from 5 to 15 years. Upon disposal of property, plant and equipment, the cost of the asset and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in earnings. Fully depreciated assets are not removed from the accounts until physically disposed. Impairment of Long-lived Assets --The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. For property, plant and equipment and other long-lived assets, excluding indefinite-lived intangible assets, the Company performs undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Fair value is primarily determined using discounted cash flow analyses; however, other methods may be used to determine the fair value, including third party valuations when necessary. 37 Goodwill and Other Intangibles --Goodwill and other indefinite-lived intangible assets, primarily tradenames, are tested for impairment at least annually during the Company’s fourth fiscal quarter and more frequently if an event occurs which indicates the asset may be impaired. If applicable, goodwill and other indefinite-lived intangible assets not subject to amortization have been assigned to reporting units for purposes of impairment testing based upon the relative fair value of the asset to each reporting unit. A significant amount of judgment is involved in determining if an indicator of impairment 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. 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 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; assumed royalty rates that could be payable if the Company did not own the asset; and a discount rate. 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. The Company will continue to monitor all significant estimates and impairment indicators, and will perform interim impairment reviews as necessary. Any cost incurred to extend or renew the term of an indefinite lived intangible asset are expensed as incurred. Income Taxes --The Company recognizes deferred tax assets and liabilities for the expected future income tax consequences of events that have been recognized in the Company’s financial statements. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which temporary differences are expected to reverse. Valuation allowances are provided for deferred tax assets where it is considered more likely than not that the Company will not realize the benefit of such assets. The Company evaluates its uncertain tax positions as new information becomes available. Tax benefits are recognized to the extent a position is more likely than not to be sustained upon examination by the taxing authority. 38 Revenue Recognition --Revenue from contracts with customers is recognized using a five-step model consisting of the following: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a performance obligation. Performance obligations are satisfied when the Company transfers control of a good or service to a customer, which can occur over time or at a point in time. The amount of revenue recognized is based on the consideration to which the Company expects to be entitled in exchange for those goods or services, including the expected value of variable consideration. The customer’s ability and intent to pay the transaction price is assessed in determining whether a contract exists with the customer. 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. Shipping and Handling Fees and Costs --The Company records revenue from shipping and handling costs in net sales. The cost associated with shipping and handling of products is reflected in cost of goods sold. Recently Adopted Accounting Standards a. 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. New Accounting Releases a. 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. b. 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. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (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. c. 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. d. 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. e. 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. 39 Special Note Regarding Smaller Reporting Company Status 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. B . ACQUISITION OF VETH PROPULSION HOLDING B . V . 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 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. This acquisition was pursuant to a Share Purchase Agreement (“Purchase Agreement”) entered into by Twin Disc NL Holding B.V., a wholly-owned subsidiary of the Company, with Het Komt Vast Goed B.V., the prior parent of Veth Propulsion, on June 13, 2018. Veth Propulsion is reported as part of the Company’s manufacturing segment. Under the terms of the Purchase Agreement, the Company paid an aggregate of approximately $59,407 in cash, and $1,991 in shares of common stock on May 13, 2019, which represents the fair value of 139,347 shares. 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 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. The total consideration transferred at acquisition date was: Cash, paid at closing and after agreed-upon working capital adjustments $ 59,407 Fair value of contingent consideration at acquisition date 2,921 Total $ 62,328 40 Fair value of assets acquired and liabilities assumed at acquisition date: Cash, including restricted cash $ 1,078 Accounts receivable and other current assets 10,437 Inventories 26,862 Property, plant and equipment 2,661 Intangibles (a) 26,500 Accounts payable and accrued liabilities (21,208 ) Deferred tax liability (8,001 ) Total net assets acquired 38,329 Goodwill (b) 23,999 Total consideration $ 62,328 (a) 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 E, Goodwill and Other Intangibles. (b) The Company is not able to deduct any of the goodwill for tax purposes. The Company financed the payment of the cash consideration through borrowings under a new credit agreement entered into on June 29, 2018 with BMO Harris Bank N.A. (the “Credit Agreement”). The Credit Agreement is further discussed in Note H, Debt. C . INVENTORIES The major classes of inventories at June 30 were as follows: 2020 2019 Finished parts $ 62,394 $ 57,682 Work in process 17,844 23,812 Raw materials 40,369 44,399 $ 120,607 $ 125,893 Inventories stated on a LIFO basis represent approximately 50% and 52% of total inventories at June 30, 2020 and 2019, respectively. The approximate current cost of the LIFO inventories exceeded the LIFO cost by $27,225 and $25,709 at June 30, 2020 and 2019, respectively. The Company had reserves for inventory obsolescence of $9,863 and $10,463 at June 30, 2020 and 2019, respectively. D . PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at June 30 were as follows: 2020 2019 Land $ 6,589 $ 6,479 Buildings 48,168 47,627 Machinery and equipment 164,039 158,183 218,796 212,289 Less: accumulated depreciation (146,064 ) (141,031 ) $ 72,732 $ 71,258 Depreciation expense for the years ended June 30, 2020 and 2019 was $7,394 and $6,682, respectively. 41 E . GOODWILL AND OTHER INTANGIBLES Goodwill 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 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. If declining actual operating results or future operating results become indicative that the fair value of the Company’s reporting units has declined below their carrying values, an interim goodwill impairment test may need to be performed and may result in a non-cash goodwill impairment charge. 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 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. 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. 42 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: Net Book Value Rollforward Net Book Value By Reporting Unit Gross Carrying Amount Accumulated Impairment Net Book Value European Propulsion European Industrial Balance at June 30, 2018 $ 16,514 $ (13,822 ) $ 2,692 $ - $ 2,692 Acquisition 23,999 - 23,999 23,999 - Translation adjustment (737 ) - (737 ) (628 ) (109 ) Balance at June 30, 2019 39,776 (13,822 ) 25,954 23,371 2,583 Impairment - (25,380 ) (25,380 ) (22,822 ) (2,558 ) Translation adjustment (574 ) - (574 ) (549 ) (25 ) Balance at June 30, 2020 $ 39,202 $ (39,202 ) $ - $ - $ - 43 Other Intangibles At June 30, the following acquired intangible assets have definite useful lives and are subject to amortization: Net Book Value Rollforward Net Book Value By Asset Type Gross Carrying Amount Accumulated Amortization / Impairment Net Book Value Customer Relationships Technology Know-how Trade Name Other Balance at June 30, 2018 $ 13,485 $ (11,781 ) $ 1,704 $ - $ - $ 1,288 $ 416 Addition 236 - 236 - - - 236 Acquistion 26,500 - 26,500 16,300 8,400 1,800 - Amortization - (2,653 ) (2,653 ) (1,123 ) (1,172 ) (261 ) (97 ) Translation adjustment (634 ) - (634 ) (334 ) (203 ) (94 ) (3 ) Balance at June 30, 2019 39,587 (14,434 ) 25,153 14,843 7,025 2,733 552 Addition 92 - 92 - - - 92 Amortization - (4,532 ) (4,532 ) (3,003 ) (1,139 ) (232 ) (158 ) Impairment - (1,306 ) (1,306 ) - - (1,080 ) (226 ) Translation adjustment (434 ) - (434 ) (286 ) (102 ) (33 ) (13 ) Balance at June 30, 2020 $ 39,245 $ (20,272 ) $ 18,973 $ 11,554 $ 5,784 $ 1,388 $ 247 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. Intangible amortization expense for the years ended June 30, 2020 and 2019 was $4,532 and $2,653, respectively. Estimated intangible amortization expense for each of the next five fiscal years is as follows: Fiscal Year 2021 $ 3,173 2022 2,989 2023 2,827 2024 2,679 2025 2,495 Thereafter 4,810 F . ACCRUED LIABILITIES Accrued liabilities at June 30 were as follows: 2020 2019 Customer deposits $ 11,541 $ 14,924 Salaries and wages 5,116 6,982 Distributor rebates 3,769 2,943 Retirement benefits 3,559 2,730 Warranty 3,520 3,034 Other 8,875 11,033 $ 36,380 $ 41,646 44 G . WARRANTY 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. Such warranty generally extends from periods ranging from 12 months to 24 months. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers. However, its warranty obligation is affected by product failure rates, the number of units affected by the failure and the expense involved in satisfactorily addressing the situation. The warranty reserve is established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. When evaluating the adequacy of the reserve for warranty costs, management takes into consideration the term of the warranty coverage, historical claim rates and costs of repair, knowledge of the type and volume of new products and economic trends. While the Company believes that the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable in the future could differ materially from what actually transpires. The following is a listing of the activity in the warranty reserve during the years ended June 30: 2020 2019 Reserve balance, July 1 $ 3,736 $ 4,407 Current period expense and adjustments 10,369 3,323 Payments or credits to customers (9,629 ) (3,953 ) Translation adjustment (16 ) (41 ) Reserve balance, June 30 $ 4,460 3,736 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. H . DEBT Long-term debt consisted of the following at June 30: 2020 2019 Credit Agreement Debt Revolving loans (expire June 2023) $ 16,641 $ 22,666 Term loan (due March 2026) 17,500 19,500 PPP loan 8,200 - Other 246 325 Subtotal 42,587 42,491 Less: current maturities (4,691 ) (2,000 ) Total long-term debt $ 37,896 40,491 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 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”). The Credit Agreement also allows the Company to obtain Letters of Credit from BMO, which if drawn upon by the beneficiary thereof and paid by BMO, would become Revolving Loans. On July 2, 2018, in connection with the acquisition of Veth Propulsion, as described in Note B, Acquisition of Veth Propulsion Holding B.V., the Company drew a total of $60,729 of additional borrowings on the Credit Agreement, consisting of a $35,000 Term Loan payable and revolver borrowings of $25,729. 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. 45 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. The Second Amendment reduced the principal amount of the Term Loan commitment under the Credit Agreement from $35,000 to $20,000. In connection with the Second Amendment, the Company issued an amended and restated term note in the amount of $20,000 to BMO, which amended the original $35,000 note provided under the Credit Agreement. Prior to entering into the Second Amendment, the outstanding principal amount of the Term Loan under the Credit Agreement was $10,849. On the date of the Second Amendment, the BMO made an additional advance on the Term Loan to the Company in the amount of $9,151. 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 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. Under the Second Amendment, the applicable margin is between 1.375% and 2.375%, depending on the Company’s total funded debt to EBITDA ratio. The Second Amendment also adjusts certain financial covenants made by the Company under the Credit Agreement. 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. 46 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. Upon the occurrence of an event of default, BMO may take the following actions upon written notice to the Company: (1) terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately cash collateralize letter of credit obligations in an amount equal to 105% of the aggregate letter of credit obligations or a greater amount if BMO determines a greater amount is necessary. If such event of default is due to the Company’s bankruptcy, BMO may take the three actions listed above without notice to the Company. In addition to the monthly interest payments and any mandatory principal payments required by the Credit Agreement (if applicable), the Company is responsible for paying a quarterly Revolving Credit Commitment Fee and quarterly Letter of Credit Fees. The Revolving Credit Commitment Fee is paid at an annual rate equal to the Applicable Margin on the average daily unused portion of the Revolving Credit Commitment. The Letter of Credit Fee is paid at the Applicable Margin for Revolving Loans that are Eurodollar Loans on the daily average face amount of Letters of Credit outstanding during the preceding calendar quarter. The Company may prepay the Loans (or any one of the Loans), subject to certain limitations. 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: Other long-term debt pertains mainly to a financing arrangement in Europe. During fiscal 2019, the Company entered into sale leaseback agreements with a leasing company covering various Company vehicles. Under the terms of the agreements, the Company received $329 in cash proceeds and agreed to lease back those same vehicles under various terms, ranging from 3 to 5 years. Under ASC 842, Leases, these agreements are required to be accounted for as financing transactions. Consequently, the Company recorded long-term liabilities for the proceeds received, and they are reduced as lease payments are made. These liabilities carry implied interest rates ranging from 7% to 25%. A total amount of $74 in principal was paid on these liabilities during the current fiscal year. 47 During fiscal year 2020, the average interest rate was 3.64% on the Term Loan, and 2.72% on the Revolving Loans. As of June 30, 2020, the Company’s borrowing capacity under the terms of the Credit Agreement was approximately $43,681 and the Company had approximately $27,040 of available borrowings. The Company’s borrowings described above approximates fair value at June 30, 2020 and June 30, 2019. 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. 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 S, Derivative Financial Instruments. The aggregate scheduled maturities of outstanding long-term debt obligations in subsequent years are as follows: Fiscal Year 2021 $ 4,691 2022 6,672 2023 18,684 2024 2,016 2025 2,000 Thereafter 8,524 $ 42,587 Other lines of credit : The Company has established unsecured lines of credit, which may be withdrawn at the option of the banks. Under these arrangements, the Company has unused and available credit lines of $943 with a weighted average interest rate of 5.6% as of June 30, 2020, and $952 with a weighted average interest rate of 5.0% as of June 30, 2019. I . LEASE OBLIGATIONS In accordance with ASC 842, Leases, the Company’s leases with terms longer than twelve months are recorded on the consolidated balance sheets. The Company leases certain office and warehouse space, as well as production and office equipment. 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. 48 The components of lease expense for the years ended June 30 were as follows: 2020 2019 Finance lease cost: Amortization of right-of-use assets $ 188 $ 27 Interest on lease liabilities 56 8 Operating lease cost 3,137 3,348 Short-term lease cost 64 40 Variable lease cost 58 37 Total lease cost 3,503 3,460 Less: Sublease income (212 ) (222 ) Net lease cost $ 3,291 $ 3,238 Other information related to leases was as follows: 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 3,141 $ 3,338 Operating cash flows from finance leases 167 18 Financing cash flows from finance leases 56 9 Right-of-use-assets obtained in exchange for lease obligations: Operating leases 2,757 13,875 Finance leases 592 553 Weighted average remaining lease term (years): Operating leases 10.7 11.1 Finance lease 4.0 4.8 Weighted average discount rate: Operating leases 7.4 % 7.7 % Finance leases 6.2 % 7.3 % Approximate future minimum rental commitments under non-cancellable leases as of June 30, 2020 were as follows: Operating Leases Finance Leases 2021 $ 2,724 $ 284 2022 2,233 284 2023 1,988 275 2024 1,793 234 2025 1,567 31 Thereafter 10,930 - Total future lease payments 21,235 1,108 Less: Amount representing interest (6,773 ) (118 ) Present value of future payments $ 14,462 $ 990 The following table provides a summary of leases recorded on the consolidated balance sheet at June 30. Balance Sheet Location 2020 2019 Lease Assets Operating lease right-of-use assets Property, plant and equipment, net $ 14,448 $ 14,138 Finance lease right-of-use assets Property, plant and equipment, net 959 545 Lease Liabilities Operating lease liabilities Accrued liabilities $ 1,724 $ 1,933 Operating lease liabilities Lease obligations 12,738 12,197 Finance lease liabilities Accrued liabilities 233 104 Finance lease liabilities Lease obligations 757 449 49 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. J . 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 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. At June 30, 2020 and 2019, treasury stock consisted of 1,226,809 and 1,392,524 shares of common stock, respectively. The Company issued 186,226 and 157,043 shares of treasury stock in fiscal 2020 and 2019, respectively, to fulfill its obligations under the stock option plans and restricted stock and performance share award grants, as well as the contingent consideration related to the acquisition of Veth Propulsion Holding B.V. The Company also recorded forfeitures of 20,511 and 3,784 shares of previously issued restricted stock in fiscal 2020 and 2019, respectively. The difference between the cost of treasury shares and the option price is recorded in common stock. Under an authorization given by the Board of Directors on July 27, 2012, the Company is permitted to make open market purchases of its common stock. The Company did not make any open market purchases during the two most recent fiscal years. As of June 30, 2020 and 2019, 315,000 shares remain authorized for purchase. Cash dividends per share were $0.00 in both fiscal 2020 and 2019. The Company is authorized to issue 200,000 shares of preferred stock, none of which have been issued. The Company has designated 150,000 shares of the preferred stock as Series A Junior Preferred Stock. The components of accumulated other comprehensive loss included in equity as of June 30, 2020 and 2019 are as follows: 2020 2019 Translation adjustments $ 3,454 $ 4,439 Net loss on cash flow hedge derivatives, net of income taxes of $341 and $156, respectively (1,104 ) (509 ) Benefit plan adjustments, net of income taxes of $13,316 and $12,707 respectively (43,576 ) (41,901 ) Accumulated other comprehensive loss $ (41,226 ) $ (37,971 ) 50 A reconciliation for the changes in accumulated other comprehensive income (loss), net of tax, by component for the years ended June 30, 2020 and June 30, 2019 is as follows: Translation Benefit Plan Cash Flow Adjustment Adjustment Hedges Balance at June 30, 2019 $ 4,439 $ (41,901 ) $ (509 ) Other comprehensive loss before reclassifications (985 ) (3,792 ) (595 ) Amounts reclassified from accumulated other comprehensive loss - 2,117 - Net current period other comprehensive loss (985 ) (1,675 ) (595 ) Balance at June 30, 2020 $ 3,454 $ (43,576 ) $ (1,104 ) Translation Benefit Plan Cash Flow Adjustment Adjustment Hedges Balance at June 30, 2018 $ 7,085 $ (30,877 ) $ - Other comprehensive loss before reclassifications (2,646 ) (6,068 ) (509 ) Release stranded tax effects - (6,903 ) - Amounts reclassified from accumulated other comprehensive loss - 1,947 - Net current period other comprehensive loss (2,646 ) (11,024 ) (509 ) Balance at June 30, 2019 $ 4,439 $ (41,901 ) $ (509 ) A reconciliation for the reclassifications out of accumulated other comprehensive income (loss), net of tax for the year ended June 30, 2020 is as follows: Amount Reclassified Amortization of benefit plan items Actuarial losses $ (2,982 ) Transition asset and prior service benefit 195 Total before tax benefit (2,787 ) Tax benefit 670 Total reclassification net of tax $ (2,117 ) A reconciliation for the reclassifications out of accumulated other comprehensive income (loss), net of tax for the year ended June 30, 2019 is as follows: Amount Reclassified Amortization of benefit plan items Actuarial losses $ (2,710 ) Transition asset and prior service benefit 176 Total before tax benefit (2,534 ) Tax benefit 587 Total reclassification net of tax $ (1,947 ) K . BUSINESS SEGMENTS AND FOREIGN OPERATIONS The Company and its subsidiaries are engaged in the manufacture and sale of marine and heavy duty off-highway power transmission equipment. Principal products 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 to both domestic and foreign customers in a variety of market areas, principally pleasure craft, commercial and military marine markets, energy and natural resources, government, and industrial markets. 51 Net sales by product group is summarized as follows: 2020 2019 Industrial $ 26,343 $ 34,042 Land-based transmissions 62,697 112,793 Marine and propulsion systems 152,501 150,237 Other 5,297 5,591 Total $ 246,838 $ 302,663 Industrial products include clutches, power take-offs and pump drives sold to the agriculture, recycling, construction and oil and gas markets. The land based transmission products include applications for oilfield and natural gas, military and airport rescue and fire fighting. The marine and propulsion systems include marine transmission, azimuth drives, controls, surface drives, propellers and boat management systems for the global commercial marine, pleasure craft and patrol boat markets. Other includes non-Twin Disc manufactured product sold through Company-owned distribution entities. The Company has two reportable segments: manufacturing and distribution. Its segment structure reflects the way management makes operating decisions and manages the growth and profitability of the business. It also corresponds with management’s approach of allocating resources and assessing the performance of its segments. The accounting practices of the segments are the same as those described in the summary of significant accounting policies. Transfers among segments are at established inter-company selling prices. Management evaluates the performance of its segments based on net earnings. Information about the Company's segments, before intercompany eliminations, is summarized as follows: 2020 Manufacturing Distribution Total Net Sales $ 227,565 $ 95,824 $ 323,389 Intra-segment sales 14,230 12,889 27,119 Inter-segment sales 43,854 5,578 49,432 Interest income 346 22 368 Interest expense 2,128 - 2,128 Income taxes (2,027 ) 268 (1,759 ) Depreciation and amortization 11,151 379 11,530 Net (loss) income attributable to Twin Disc (31,603 ) 553 (31,050 ) Assets 365,417 43,118 408,535 Expenditures for segment assets 9,615 734 10,349 2019 Manufacturing Distribution Total Net Sales $ 280,428 $ 106,481 $ 386,909 Intra-segment sales 20,384 14,026 34,410 Inter-segment sales 46,078 3,758 49,836 Interest income 1,154 26 1,180 Interest expense 3,086 (37 ) 3,049 Income taxes 7,939 353 8,292 Depreciation and amortization 12,893 402 13,295 Net income attributable to Twin Disc 25,062 248 25,310 Assets 384,612 46,076 430,688 Expenditures for segment assets 10,725 663 11,388 52 The following is a reconciliation of reportable segment net sales and net (loss) income to the Company’s consolidated totals: 2020 2019 Net sales: Total net sales from reportable segments $ 323,389 $ 386,909 Elimination of inter-company sales (76,551 ) (84,246 ) Total consolidated net sales $ 246,838 $ 302,663 Net (loss) income attributable to Twin Disc: Total net (loss) income from reportable segments $ (31,050 ) $ 25,310 Other adjustments and corporate expenses (8,767 ) (14,637 ) Total consolidated net (loss) income attributable to Twin Disc $ (39,817 ) $ 10,673 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. Other significant items: Segment Consolidated Totals Adjustments Totals 2020 Interest income $ 368 $ (290 ) $ 78 Interest expense 2,128 (268 ) 1,860 Income taxes (1,759 ) (2,410 ) (4,169 ) Depreciation and amortization 11,530 395 11,925 Assets 408,535 (114,408 ) 294,127 Expenditures for segment assets 10,349 350 10,699 2019 Interest income $ 1,180 $ (1,137 ) $ 43 Interest expense 3,049 (1,122 ) 1,927 Income taxes 8,292 (4,581 ) 3,711 Depreciation and amortization 13,295 317 13,612 Assets 430,688 (83,818 ) 346,870 Expenditures for segment assets 11,388 591 11,979 All adjustments represent inter-company eliminations and corporate amounts. 53 Geographic information about the Company is summarized as follows: 2020 2019 Net sales United States $ 83,771 $ 132,467 Netherlands 39,501 31,521 China 26,354 28,772 Austria 12,552 10,464 Australia 12,438 12,463 Italy 11,802 12,755 Canada 5,664 10,875 Other countries 54,756 63,346 Total $ 246,838 $ 302,663 Net sales by geographic region are based on product shipment destination. Long-lived assets primarily pertain to property, plant and equipment and exclude goodwill, other intangibles, and deferred income taxes. They are summarized as follows: 2020 2019 Long-lived assets United States $ 41,996 $ 41,233 Netherlands 12,659 13,186 Belgium 8,363 8,595 Switzerland 6,804 6,810 Italy 1,697 1,894 Other countries 5,205 3,298 Total $ 76,724 $ 75,016 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 Distribution Elimination of Intercompany Sales Total Industrial $ 24,143 $ 5,634 $ (3,434 ) $ 26,343 Land-based transmissions 63,523 25,699 (26,525 ) 62,697 Marine and propulsion systems 139,833 59,212 (46,544 ) 152,501 Other 66 5,279 (48 ) 5,297 Total $ 227,565 $ 95,824 $ (76,551 ) $ 246,838 54 Net sales by product group for the year ended June 30, 2019 is summarized as follows: Manufacturing Distribution Elimination of Intercompany Sales Total Industrial $ 30,393 $ 8,079 $ (4,430 ) $ 34,042 Land-based transmissions 111,260 30,483 (28,950 ) 112,793 Marine and propulsion systems 138,704 62,329 (50,796 ) 150,237 Other 71 5,590 (70 ) 5,591 Total $ 280,428 $ 106,481 $ (84,246 ) $ 302,663 L . STOCK -BASED COMPENSATION In fiscal 2019, the Company adopted the Twin Disc, Incorporated 2018 Long-Term Incentive Plan (the “2018 LTI Plan”). Benefits under the 2018 LTI Plan may be granted, awarded or paid in any one or a combination of stock options, stock appreciation rights, restricted stock awards, restricted stock units, cash-settled restricted stock units, performance stock awards, performance stock unit awards, performance unit awards, and dividend equivalent awards. There is reserved for issuance under the Plan an aggregate of 850,000 shares of the Company’s common stock, which may be authorized and unissued shares or shares reacquired by the Company in the open market or a combination of both. The aggregate amount is subject to proportionate adjustments for stock dividends, stock splits and similar changes. In fiscal 2011, the Company adopted the Twin Disc, Incorporated 2010 Stock Incentive Plan for Non-Employee Directors (the “2010 Directors’ Plan”), a plan to grant non-employee directors equity-based awards up to 250,000 shares of common stock, and the Twin Disc, Incorporated 2010 Long-Term Incentive Compensation Plan (the “2010 Employee Incentive Plan”), a plan under which officers and key employees may be granted equity-based awards up to 650,000 shares of common stock. Equity-based awards granted under these plans include performance shares and restricted stock. Shares available for future awards as of June 30 were as follows: 2020 2019 2018 LTI Plan 492,591 742,325 2010 Directors' Plan 12,865 61,354 Performance Stock Awards (“PSA”) In fiscal 2020 and 2019, the Company granted a target number of 131,688 and 50,004 PSAs, respectively, to various employees of the Company, including executive officers. The PSAs granted in fiscal 2020 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, 2022. 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 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. 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 67,007. 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 (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. At June 30, 2020, the Company had $2,480 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2020 and 2019 awards. The total fair value of performance stock awards vested in fiscal 2020 was $167. The total fair value of performance stock awards vested in fiscal 2019 was $1,228. 55 Restricted Stock Awards (“RS”) The Company has unvested RS outstanding that will vest if certain service conditions are fulfilled. The fair value of the RS grants is recorded as compensation over the vesting period, which is generally 1 to 3 years. During fiscal 2020 and 2019, the Company granted 180,379 and 43,305 service based restricted shares, respectively, to employees and non-employee directors in each year. A total of 20,511 and 3,784 shares of restricted stock were forfeited during fiscal 2020 and 2019, respectively. There were 231,379 and 172,637 unvested shares outstanding at June 30, 2020 and 2019, respectively. Compensation expense of $1,200 and $1,096 was recognized during the year ended June 30, 2020 and 2019, respectively, related to these service-based awards. The tax benefit from compensation expense for the year ended June 30, 2020 and 2019 related to these service-based awards, was $283 and $255, respectively. The total fair value of restricted stock grants vested in fiscal 2020 and 2019 was $1,241 and $2,391, respectively. As of June 30, 2020, the Company had $1,307 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years. Restricted Stock Unit Awards (“RS U ”) Under the 2018 Long Term Incentive Plan, the Company has been authorized to issue RSUs. The RSUs entitle the employee to shares of common stock of the Company if the employee remains employed by the Company through a specified date, generally three years from the date of grant. During fiscal 2019, the Company granted 37,950 RSUs to various employees of the Company, including executive officers. 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, 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, 2020, the Company had $353 of unrecognized compensation expense related to RSUs which will be recognized over the next two years. Stock Options The 2010 Directors’ Plan may grant options to purchase shares of common stock, at the discretion of the Board of Directors, to non-employee directors who are elected or reelected to the board, or who continue to serve on the board. Such options carry an exercise price equal to the fair market value of the Company’s common stock as of the date of grant, vest immediately, and expire ten years after the date of grant. Options granted under the 2018 Employee Incentive Plan are determined to be non-qualified or incentive stock options as of the date of grant, and may carry a vesting schedule. For options under the 2018 Employee Incentive Plan that are intended to qualify as incentive stock options, if the optionee owns more than 10% of the total combined voting power of the Company’s stock, the price will not be less than 110% of the grant date fair market value and the options expire five years after the date of grant. There were no incentive options granted to a greater than 10% shareholder during the years presented. There were no options outstanding under the 2010 Directors’ Plan and the 2018 Employee Incentive Plan as of June 30, 2020 and 2019. M . ENGINEERING AND DEVELOPMENT COSTS Engineering and development costs include research and development expenses for new products, development and major improvements to existing products, and other costs for ongoing efforts to refine existing products. Research and development costs charged to operations totaled $1,820 and $2,385 in fiscal 2020 and 2019, respectively. Total engineering and development costs were $10,998 and $12,594 in fiscal 2020 and 2019, respectively. N . P ENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company has non-contributory, qualified defined benefit pension plans covering substantially all domestic employees hired prior to October 1, 2003, and certain foreign employees. Domestic plan benefits are based on years of service, and, for salaried employees, on average compensation for benefits earned prior to January 1, 1997, and on a cash balance plan for benefits earned from January 1, 1997 through July 31, 2009, at which time the Company froze future accruals under domestic defined benefit pension plans. The Company's funding policy for the plans covering domestic employees is to contribute an actuarially determined amount which falls between the minimum required contribution and maximum amount that can be deducted for federal income tax purposes. 56 In addition, the Company has unfunded, non-qualified retirement plans for certain management employees and Directors. In the case of management employees, benefits are based on an annual credit to a bookkeeping account, intended to restore the benefits that would have been earned under the qualified plans, but for the earnings limitations under the Internal Revenue Code. In the case of Directors, benefits are based on years of service on the Board. All benefits vest upon retirement from the Company. In addition to providing pension benefits, the Company provides other postretirement benefits, including healthcare and life insurance benefits for certain domestic retirees. All employees retiring after December 31, 1992, and electing to continue healthcare coverage through the Company's group plan, are required to pay 100% of the premium cost. The measurement date for the Company’s pension and postretirement benefit plans in fiscal 2020 and 2019 was June 30. 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 (loss) income as of June 30: Other Pension Postretirement Benefits Benefits 2020 2019 2020 2019 Change in benefit obligation: Benefit obligation, beginning of year $ 107,322 $ 105,012 $ 7,451 $ 8,077 Service cost 653 795 17 19 Interest cost 3,305 4,020 219 305 Actuarial loss 3,161 6,718 211 18 Contributions by plan participants 93 103 352 389 Benefits paid (9,014 ) (9,326 ) (1,191 ) (1,357 ) Benefit obligation, end of year $ 105,520 $ 107,322 $ 7,059 $ 7,451 Change in plan assets: Fair value of assets, beginning of year $ 87,291 $ 90,258 $ - $ - Actual return on plan assets 3,541 4,125 - - Employer contribution 1,373 2,131 839 968 Contributions by plan participants 93 103 352 389 Benefits paid (9,014 ) (9,326 ) (1,191 ) (1,357 ) Fair value of assets, end of year $ 83,284 $ 87,291 $ - $ - Funded status $ (22,236 ) $ (20,031 ) $ (7,059 ) $ (7,451 ) Amounts recognized in the balance sheet consist of: Other assets - noncurrent $ - $ 3 $ - $ - Accrued liabilities - current (276 ) (645 ) (1,081 ) (962 ) Accrued retirement benefits - noncurrent (21,960 ) (19,389 ) (5,978 ) (6,489 ) Net amount recognized $ (22,236 ) $ (20,031 ) $ (7,059 ) $ (7,451 ) Amounts recognized in accumulated other comprehensive loss consist of (net of tax): Net transition obligation $ 158 $ 178 $ - $ - Prior service cost 104 144 (697 ) (908 ) Actuarial net loss 43,548 42,185 463 302 Net amount recognized $ 43,810 $ 42,507 $ (234 ) $ (606 ) 57 The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during the next fiscal year for the qualified defined benefit and other postretirement benefit plans are as follows: Other Pension Postretirement Benefits Benefits Net transition obligation $ 35 $ - Prior service cost 45 (275 ) Actuarial net loss 3,246 - Net amount to be recognized $ 3,326 (275 ) The accumulated benefit obligation for all defined benefit pension plans was approximately $105,520 and $107,322 at June 30, 2020 and 2019, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets : June 30 2020 2019 Projected and accumulated benefit obligation $ 105,520 $ 102,879 Fair value of plan assets 83,284 82,845 Components of Net Periodic Benefit Cost : Pension Benefits 2020 2019 Service cost $ 648 $ 792 Interest cost 3,304 4,019 Expected return on plan assets (4,894 ) (5,238 ) Amortization of transition obligation 35 34 Amortization of prior service cost 45 64 Amortization of actuarial net loss 2,982 2,710 Net periodic benefit cost $ 2,120 2,381 Other Postretirement Benefits 2020 2019 Service cost $ 17 $ 18 Interest cost 219 304 Amortization of prior service cost (274 ) (274 ) Net periodic benefit cost $ (38 ) $ 48 58 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income for Fiscal 20 20 (Pre-tax): Other Postretirement Pension Benefits Net loss $ 4,770 $ 211 Amortization of transition asset (35 ) - Amortization of prior service (cost) benefit (45 ) 275 Amortization of net (loss) gain (2,978 ) - Total recognized in other comprehensive income 1,712 486 Net periodic benefit cost 2,120 (38 ) Total recognized in net periodic benefit cost and other comprehensive income $ 3,832 $ 448 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income for Fiscal 201 9 (Pre-tax): Other Postretirement Pension Benefits Net loss $ 8,098 $ 18 Prior service cost (211 ) - Amortization of transition asset (34 ) - Amortization of prior service (cost) benefit (64 ) 275 Amortization of net (loss) gain (2,711 ) - Total recognized in other comprehensive income 5,078 293 Net periodic benefit cost 2,381 48 Total recognized in net periodic benefit cost and other comprehensive income $ 7,459 $ 341 Additional Information Assumptions Other Pension Benefits Postretirement Benefits Weighted average assumptions used to determine benefit obligations at June 30 2020 2019 2020 2019 Discount rate 2.49 % 3.22 % 2.37 % 3.15 % Expected return on plan assets 5.89 % 6.04 % Other Pension Benefits Postretirement Benefits Weighted average assumptions used to determine net periodic benefit costs for years ended June 30 2020 2019 2020 2019 Discount rate 3.22 % 4.01 % 3.15 % 4.09 % Expected return on plan assets 6.04 % 6.74 % The assumed weighted-average healthcare cost trend rate was 6.25% in 2020, grading down to 5% in 2025. A 1% increase in the assumed health care cost trend would increase the accumulated postretirement benefit obligation by approximately $84 and the service and interest cost by approximately $3. A 1% decrease in the assumed health care cost trend would decrease the accumulated postretirement benefit obligation by approximately $71 and the service and interest cost by approximately $3. 59 Plan Assets The Company’s Benefits Committee (“Committee”), a non-board management committee, oversees investment matters related to the Company’s funded benefit plans. The Committee works with external actuaries and investment consultants on an ongoing basis to establish and monitor investment strategies and target asset allocations. The overall objective of the Committee’s investment strategy is to earn a rate of return over time to satisfy the benefit obligations of the pension plans and to maintain sufficient liquidity to pay benefits and address other cash requirements of the pension plans. The Committee has established an Investment Policy Statement which provides written documentation of the Company’s expectations regarding its investment programs for the pension plans, establishes objectives and guidelines for the investment of the plan assets consistent with the Company’s financial and benefit-related goals, and outlines criteria and procedures for the ongoing evaluation of the investment program. The Company employs a total return on investment approach whereby a mix of investments among several asset classes are used to maximize long-term return of plan assets while avoiding excessive risk. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, and annual liability measurements. The Company’s pension plan weighted-average asset allocations at June 30, 2020 and 2019 by asset category were as follows: Target June 30 Asset Category Allocation 2020 2019 Equity securities 51 % 47 % 49 % Debt securities 40 % 44 % 42 % Real estate 9 % 9 % 9 % 100 % 100 % 100 % Due to market conditions and other factors, actual asset allocation may vary from the target allocation outlined above. The U.S. 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 U.S. 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. The inputs used to measure fair value are classified into the following hierarchy: Level I Unadjusted quoted prices in active markets for identical instruments Level II Unadjusted quoted prices in active markets for similar instruments, or Unadjusted quoted prices for identical or similar instruments in markets that are not active, or Other inputs that are observable in the market or can be corroborated by observable market data Level III Use of one or more significant unobservable inputs 60 The following table presents plan assets using the fair value hierarchy as of June 30, 2020: Total Level I Level II Level III Cash and cash equivalents $ 920 $ 920 $ - $ - Equity securities: Company common stock (a) 544 544 - - Common stock (a) 14,551 14,551 - - Mutual funds (b) 7,916 7,916 - - Annuity contracts (c) 6,095 - - 6,095 Total $ 30,026 $ 23,931 $ - $ 6,095 Investments Measured at Net Asset Value (d) 53,258 Total $ 83,284 The following table presents plan assets using the fair value hierarchy as of June 30, 2019: Total Level I Level II Level III Cash and cash equivalents $ 971 $ 971 $ - $ - Equity securities: Company common stock (a) 1,483 1,483 - - Common stock (a) 16,713 16,713 - - Mutual funds (b) 7,963 7,963 - - Annuity contracts (c) 6,171 - - 6,171 Total $ 33,301 $ 27,130 $ - $ 6,171 Investments Measured at Net Asset Value (d) 53,990 Total $ 87,291 (a) Common stock is valued at the closing price reported on the active market on which the individual securities are traded. These securities include U.S. equity securities invested in companies that are traded on exchanges inside the U.S. and international equity securities invested in companies that are traded on exchanges outside the U.S. (b) Mutual funds are valued at the daily closing price as reported by the fund. Mutual funds held by the Company’s funded benefit plans are open-end mutual funds that are registered with the Securities Exchange Commission. These funds are required to publish their daily net asset value (“NAV”) and to transact at that price. The mutual funds held by the Company’s funded benefit plans are deemed to be actively traded. (c) Annuity contracts represent contractual agreements in which payments are made to an insurance company, which agrees to pay out an income or lump sum amount at a later date. Annuity contracts are valued at the net present value of future cash flows. (d) In accordance with ASC 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at the end of the year. The following table sets forth additional disclosures for the fair value measurement of the fair value of pension plan assets that calculate fair value based on NAV per share practical expedient as of June 30, 2020 and June 30, 2019: 2020 2019 Fixed income funds $ 33,032 $ 33,568 International equity securities 2,840 3,168 Real estate 7,186 7,069 Hedged equity mutual funds 10,200 10,185 Total $ 53,258 $ 53,990 61 The following tables present a reconciliation of the fair value measurements using significant unobservable inputs (Level III) as of June 30, 2020 and 2019: 2020 2019 Beginning balance $ 6,171 $ 6,113 Actual return on plan assets: Relating to assets still held at reporting date 75 216 Purchases, sales and settlements, net (151 ) (158 ) Ending balance $ 6,095 $ 6,171 Cash Flows Contributions The Company expects to contribute $2,346 to its defined benefit pension plans in fiscal 2021. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Other Pension Postretirement Benefits Benefits 2021 $ 8,944 $ 1,094 2022 8,230 843 2023 7,936 769 2024 7,547 693 2025 7,197 608 Years 2026 - 2030 32,605 2,273 The Company does not expect to make any Part D reimbursements for the periods presented. The Company sponsors defined contribution plans covering substantially all domestic employees and certain foreign employees. These plans provide for employer contributions based primarily on employee participation. The total expense under the plans was $1,949 and $2,276 in fiscal 2020 and 2019, respectively. O . INCOME TAXES United States and foreign (loss) income before income taxes and minority interest were as follows: 2020 2019 United States $ (29,332 ) $ 7,059 Foreign (14,408 ) 7,448 $ (43,740 ) $ 14,507 62 The (benefit) provision for income taxes is comprised of the following: 2020 2019 Currently payable: Federal $ (149 ) $ 248 State 30 261 Foreign 4,022 (3,644 ) 3,903 (3,135 ) Deferred: Federal (5,673 ) 920 State (860 ) (7 ) Foreign (1,539 ) 5,933 (8,072 ) 6,846 $ (4,169 ) $ 3,711 The components of the net deferred tax asset as of June 30 are summarized in the table below. 2020 2019 Deferred tax assets: Retirement plans and employee benefits $ 7,934 $ 7,732 Foreign tax credit carryforwards 7,429 6,296 Federal tax credits 1,585 1,057 State net operating loss and other state credit carryforwards 1,696 1,269 Federal net operating loss 1,607 - Inventory 205 757 Reserves 1,056 765 Foreign NOL carryforwards 555 775 Accruals 823 339 Right of use assets - operating leases 3,920 3,691 Disallowed interest 418 - Disallowed PPP expenses 1,320 - Other assets 832 656 29,380 23,337 Deferred tax liabilities: Property, plant and equipment 3,231 3,432 Intangibles 3,306 5,345 Long term operating lease obligations 3,855 3,617 Other liabilities 44 194 10,436 12,588 Valuation allowance - - Total net deferred tax assets $ 18,944 $ 10,749 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. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The Company has evaluated the likelihood of whether the net deferred tax assets would be realized and concluded that it is more likely than not that all of deferred tax assets would be realized. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income and foreign source income to realize all the deferred tax assets. 63 Following is a reconciliation of the applicable U.S. federal income taxes to the actual income taxes reflected in the statements of operations: 2020 2019 U.S. federal income tax at 21% $ (9,185 ) $ 3,046 Increases (reductions) in tax resulting from: Foreign tax items 236 281 State taxes (716 ) 209 Change in prior year estimate (213 ) (50 ) Research and development tax credits (412 ) (306 ) Goodwill impairment 4,814 - Unrecognized tax benefits 9 158 Stock compensation (93 ) (153 ) Rate changes 237 15 Deferred tax basis adjustments (138 ) (111 ) Executive compensation - 291 GILTI inclusion 1,220 284 FDII deduction - (74 ) Other, net 72 121 $ (4,169 ) $ 3,711 On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the Internal Revenue Code. The Tax Act is generally applicable for tax years beginning after December 31, 2017, which is the Company’s fiscal year 2018. 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”) income and foreign-derived intangible income (“FDII”) deduction and limitations on the deductibility of executive compensation. Executive Compensation Limitations: The Tax Act substantially modifies the limitation on corporate deductibility of executive compensation under Section 162(m) of the Code. Section 162(m) limits the deduction for compensation paid by a publicly held corporation to certain of its executive employees to $1,000 per year. The Tax Act has amended the definition of “covered employee” to correspond to the general SEC reporting requirements for named executive officers. These are the corporation’s principal executive officer, principal financial officer, and the next three highest-paid executive officers. Most significantly, the Tax Act has eliminated the exemptions for commissions and performance-based compensation. Global Intangible Low Taxed Income (“GILTI”): The Tax Act changed the foreign source income calculations and related foreign tax credit amounts. 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 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. The new tax law assumes a fixed rate of return on a corporation’s tangible assets. Any remaining income is deemed to be generated by intangible assets. The Company has not provided additional U.S. income taxes on cumulative earnings of consolidated foreign subsidiaries that are considered to be reinvested indefinitely. The Company reaffirms its position that these earnings remain permanently invested, and has no plans to repatriate funds to the U.S. for the foreseeable future. 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. 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. 64 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 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 $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 as of June 30: 2020 2019 Unrecognized tax benefits, beginning of year $ 938 $ 816 Additions based on tax positions related to the prior year 17 31 Additions based on tax positions related to the current year 87 91 Reductions based on tax positions related to the prior year (19 ) - Subtractions due to statutes closing (105 ) - Unrecognized tax benefits, end of year $ 918 $ 938 Substantially all of the Company’s unrecognized tax benefits as of June 30, 3020, if recognized, would affect the effective tax rate. As of June 30, 2020 and 2019, the amounts accrued for interest and penalties totaled $185 and $148, respectively, and are not included in the reconciliation above. P . CONTINGENCIES The Company is involved in litigation of which the ultimate outcome and liability to the Company, if any, are not presently determinable. Management believes that final disposition of such litigation will not have a material impact on the Company’s results of operations, financial position or cash flows, either individually or in the aggregate. Q . RESTRUCTURING OF OPERATIONS AND OTHER OPERATING INCOME Restructuring expenses The Company has implemented various restructuring programs in response to unfavorable macroeconomic trends in certain of the Company’s markets since the fourth quarter of fiscal 2015. These programs primarily involved the reduction of workforce in several of the Company’s manufacturing locations, under a combination of voluntary and involuntary programs. 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. 65 The following is a roll-forward of restructuring activity: Accrued restructuring liability, June 30, 2018 $ 90 Additions 1,179 Payments and adjustments (1,269 ) Accrued restructuring liability, June 30, 2019 - Additions 5,138 Payments and adjustments (5,054 ) Accrued restructuring liability, June 30, 2020 $ 84 Other Operating Income – Sale of Mill Log Business On February 7, 2019, as part of its ongoing initiative to focus resources on core manufacturing and product development activities, the Company entered into an asset purchase agreement with one of its major distributor customers. Under this agreement, the Company sold substantially all of the assets and intangible rights of Mill-Log Equipment Co., Inc. and Mill-Log Wilson Equipment Ltd. (the “Mill Log Business”), its wholly-owned subsidiaries which distributed Twin Disc products in the northwestern U.S. and western Canada territories. 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. 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 As discussed in Note B, Acquisition of Veth Propulsion Holding B.V., the Company issued a contingent consideration as part of the Veth Propulsion acquisition; the fair value at acquisition date was $2,921. The contingency was settled after Veth Propulsion demonstrated that it achieved the earnings before interest, tax, depreciation and amortization (“EBITDA”) amount as provided for under the Purchase Agreement. 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 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 fiscal 2019. R . EARNINGS PER SHARE The Company calculates basic earnings per share based upon the weighted average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. Restricted stock award recipients under the 2010 LTI Plan have a non-forfeitable right to receive dividends declared by the Company, and are therefore included in computing earnings per share pursuant to the two-class method. 66 The components of basic and diluted earnings per share were as follows: 2020 2019 Basic: Net (loss) income $ (39,571 ) $ 10,796 Less: Net earnings attributable to noncontrolling interest (246 ) (123 ) Less: Undistributed earnings attributable to unvested shares - (148 ) Net (loss) income available to Twin Disc shareholders (39,817 ) 10,525 Weighted average shares outstanding - basic 13,153 12,571 Basic (Loss) Income Per Share: Net (loss) income per share - basic $ (3.03 ) $ 0.84 Diluted: Net (loss) income $ (39,571 ) $ 10,796 Less: Net earnings attributable to noncontrolling interest (246 ) (123 ) Less: Undistributed earnings attributable to unvested shares - (148 ) Net (loss) income available to Twin Disc shareholders (39,817 ) 10,525 Weighted average shares outstanding - basic 13,153 12,571 Effect of dilutive stock awards - 111 Weighted average shares outstanding - diluted 13,153 12,682 Diluted (Loss) Income Per Share: Net (loss) income per share - diluted $ (3.03 ) $ 0.83 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. S . D ERIVATIVE FINANCIAL INSTRUMENTS The Company reports all derivative instruments on its consolidated balance sheets at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes. As a global organization, the Company faces exposure to market risks, such as fluctuations in foreign currency exchange rates, interest rates and commodity prices. To manage the volatility relating to these exposures, the Company enters into various derivative instruments from time to time under its risk management policies. The Company designates derivative instruments as hedges on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments offset in part or in whole corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its policy. The Company does not purchase, hold or sell derivative financial instruments for trading purposes. The Company’s practice is to terminate derivative transactions if the underlying asset or liability matures or is sold or terminated, or if it determines the underlying forecasted transaction is no longer probable of occurring. 67 Interest Rate Swaps Designated as Cash Flow Hedges 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 (loss) 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 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. The unrealized amounts in accumulated other comprehensive loss will fluctuate based on changes in the fair value of open contracts during each reporting period. The Company estimates that $392 of net unrealized losses related to cash flow hedging activities included in accumulated other comprehensive loss will be reclassified into earnings within the next twelve months. Foreign Currency Forward Contracts Not Designated as Hedges The Company primarily enters into forward exchange contracts to reduce the earnings and cash flow impact of non-functional currency denominated receivables and payables. These contracts are highly effective in hedging the cash flows attributable to changes in currency exchange rates. Gains and losses resulting from these contracts offset the foreign exchange gains or losses on the underlying assets and liabilities being hedged. 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 (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. 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 The Company does not utilize commodity price hedges to manage commodity price risk exposure. Likewise, the Company does not hedge the translation exposure represented by the net assets of its foreign subsidiaries. Fair Value of Derivative Instruments The Company’s interest rate swaps and foreign currency forward contracts are recorded at fair value on the consolidated balance sheets using a discounted cash flow analysis that incorporates observable market inputs. These market inputs include foreign currency spot and forward rates, and various interest rate curves, and are obtained from pricing data quoted by various banks, third-party sources and foreign currency dealers involving identical or comparable instruments (Level 2). Counterparties to these foreign currency forward contracts have at least an investment grade rating. Credit ratings on some of the Company’s counterparties may change during the term of the financial instruments. The Company closely monitors its counterparties’ credit ratings and, if necessary, will make any appropriate changes to its financial instruments. The fair value generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date. 68 The fair value of derivative instruments included in the consolidated balance sheets at June 30 were as follows: Balance Sheet Location 2020 2019 Derivatives designated as hedges: Interest rate swaps Accrued liabilities $ 392 $ 122 Interest rate swaps Other long-term liabilities 1,052 544 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 2020 2019 Derivatives designated as hedges: Interest rate swaps Interest expense $ 171 $ 1 Interest rate swaps Unrealized loss on cash flow hedge (595 ) (509 ) Derivatives not designated as hedges: Foreign currency forward contracts Other income (expense), net $ (9 ) $ 4 69 T WIN DISC, INCORPORATED AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F or the years ended June 30, 20 20 and 20 1 9 ( i n thousands) Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions (1) Period 2020: Allowance for losses on accounts receivable $ 1,582 $ 399 $ 241 $ 1,740 Reserve for inventory obsolescence $ 10,463 $ 1,532 $ 2,132 $ 9,863 2019: Allowance for losses on accounts receivable $ 1,478 $ 236 $ 132 $ 1,582 Reserve for inventory obsolescence $ 8,427 $ 1,934 $ (102 ) $ 10,463 (1) Activity primarily represents amounts written-off during the year, along with other adjustments (primarily foreign currency translation adjustments). 70 EXHIBIT INDEX TWIN DISC, INCORPORATED 10-K for Year Ended June 30, 2020 Exhibit Description Included Herewith 3a) Restated Articles of Incorporation of Twin Disc, Incorporated (Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K dated December 6, 2007). File No. 001-07635. 3b) Restated Bylaws of Twin Disc, Incorporated, as amended through May 1, 2019 (Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K dated May 3, 2019). File No. 001-07635. Exhibit 10 Material Contracts Included Herewith a) Director Tenure and Retirement Policy (Incorporated by reference to Exhibit 10a) of the Company’s June 30, 2016 Form 10-K dated September 13, 2016). File No. 001-07635. b) The 2004 Stock Incentive Plan for Non-Employee Directors as amended (Incorporated by reference to Exhibit 99 of the Company’s Form 10-K for the year ended June 30, 2007). File No. 001-07635. c) The Amended and Restated Twin Disc, Incorporated 2010 Long-Term Incentive Compensation Plan (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 5, 2015). File No. 001-07635. d) The 2010 Stock Incentive Plan for Non-Employee Directors (Incorporated by reference to Appendix B of the Proxy Statement for the Annual Meeting of Shareholders held on October 15, 2010). File No. 001-07635. e) The Twin Disc, Incorporated 2018 Long-Term Incentive Compensation Plan (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 6, 2018). File No. 001-07635. f) 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). File No. 001-07635. g) 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). File No. 001-07635. h) Form of Performance Stock Award Grant Agreement for award of performance shares on August 24, 2018 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 28, 2018). File No. 001-07635. i) Form of Restricted Stock Unit Grant Agreement for restricted stock units granted on August 24, 2018 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated August 28, 2018). File No. 001-07635. j) Form of Restricted Stock Award Grant Agreement for restricted stock grants on May 1, 2019 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated May 3, 2019). File No. 001-07635. k) Form of Performance Stock Award Grant Agreement for award of performance shares on May 1, 2019 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated May 3, 2019). File No. 001-07635. l) Form of Performance Stock Award Grant Agreement for award of performance shares on August 1, 2019 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated August 7, 2019). File No. 001-07635. 71 m) 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). File No. 001-07635. n) 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). File No. 001-07635. o) 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). File No. 001-07635. p) 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). File No. 001-07635. q) 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). File No. 001-07635. r) 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). File No. 001-07635. s) Forms of Change in Control Severance Agreements (Incorporated by reference to Exhibits 10.4 , 10.5 and 10.6 of the Company’s Form 8-K dated August 6, 2018). File No. 001-07635. t) Form of Indemnity Agreement (Incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K dated August 2, 2005). File No. 001-07635. u) Credit Agreement Between Twin Disc, Incorporated and BMO Harris Bank, dated June 29, 2018 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635. v) Amendment and Assignment of Revolving Loan Note between Bank of Montreal and BMO Harris Bank, N.A., dated June 29, 2018. (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635. w) Assignment of and Amendment to Security Agreement By and Among Bank of Montreal, BMO Harris Bank, N.A., and Twin Disc, Incorporated, dated June 29, 2018. (Incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635. x) Assignment of and Amendment to IP Security Agreement By and Among Bank of Montreal, BMO Harris Bank, N.A., and Twin Disc, Incorporated, dated June 29, 2018. (Incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635. y) Assignment of and Amendment to Pledge Agreement By and Among Bank of Montreal, BMO Harris Bank, N.A., Twin Disc, Incorporated, and Mill-Log Equipment Co., Inc., dated June 29, 2018. (Incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635. z) Assignment of and Amendment to the Guaranty Agreement By and Among Bank of Montreal, BMO Harris Bank, N.A., and Mill-Log Equipment Co., Inc., dated June 29, 2018. (Incorporated by reference to Exhibit 10.6 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635. aa) Assignment of and Amendment to Guarantor Security Agreement By and Among Bank of Montreal, BMO Harris Bank, N.A., and Mill-Log Equipment Co., Inc., dated June 29, 2018. (Incorporated by reference to Exhibit 10.7 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635. 72 bb) Assignment of and Amendment to Negative Pledge Agreement By and Among Twin Disc, Incorporated, Bank of Montreal, and BMO Harris Bank N.A., dated June 29, 2018. (Incorporated by reference to Exhibit 10.8 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635. cc) Collateral Assignment of Rights under Purchase Agreement from Twin Disc, Incorporated and Twin Disc NL Holding B.V. in favor of BMO Harris Bank N.A., dated July 2, 2018. (Incorporated by reference to Exhibit 10.9 of the Company’s Form 8-K dated July 3, 2018). File No. 001-07635. dd) First Amendment 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 September 21, 2018). File No. 001-07635. ee) Amendment No. 2 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 March 6, 2019). File No. 001-07635. ff) Amended and Restated Term 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 March 6, 2019). File No. 001-07635. gg) 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). File No. 001-07635. hh) 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). File No. 001-07635. ii) 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). File No. 001-07635. jj) 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). File No. 001-07635. kk) 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). File No. 001-07635. ll) 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). File No. 001-07635. mm) 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). File No. 001-07635. nn) Confirmation of swap transaction, dated April 22, 2019, from Bank of Montreal to Twin Disc, Incorporated (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated April 26, 2019). File No. 001-07635. 73 Exhibit Description Herewith 21 Subsidiaries of the Registrant X 23a Consent of Independent Registered Public Accounting Firm X 24 Power of Attorney X 31a Certification X 31b Certification X 32a Certification pursuant to 18 U.S.C. Section 1350 X 32b Certification pursuant to 18 U.S.C. Section 1350 X 101.INS XBRL Instance Document, filed herewith 101.SCH XBRL Schema Document, filed herewith 101.CAL XBRL Calculation Linkbase Document, filed herewith 101.DEF XBRL Definition Linkbase Document, filed herewith 101.LAB XBRL Label Linkbase Document, filed herewith 101.PRE XBRL Presentation Linkbase, filed herewith 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. August 26, 2020 TWIN DISC, INCORPORATED By: /s/ JOHN H. BATTEN John H. Batten Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. August 26, 2020 By: /s/ DAVID B. RAYBURN David B. Rayburn Chairman of the Board August 26, 2020 By: /s/ JOHN H. BATTEN John H. Batten Chief Executive Officer August 26, 2020 By: /s/ JEFFREY S. KNUTSON Jeffrey S. Knutson Vice President - Finance, Chief Financial Officer, Treasurer and Secretary August 26, 2020 By: /s/ DEBBIE A. LANGE Debbie A. Lange Corporate Controller (Chief Accounting Officer) August 26, 2020 Michael Doar, Director Janet P. Giesselman, Director David W. Johnson, Director Michael C. Smiley, Director Harold M. Stratton II, Director David R. Zimmer, Director By: /s/ JEFFREY S. KNUTSON Jeffrey S. Knutson Vice President - Finance, Chief Financial Officer, Treasurer and Secretary (Attorney in Fact) 75