A.	Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared by Twin Disc, Incorporated (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments, consisting only of normal recurring items, necessary for a fair statement of results for each period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to make the information presented

not

misleading. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report filed on Form

-K for

June 30, 2018.

The year-end condensed balance sheet data was derived from audited financial statements, but does

not

include all disclosures required by accounting principles generally accepted in the United States.

The unaudited condensed consolidated financial statements and information included in this Quarterly Report on Form

-Q (“Form

-Q”) includes the financial results of Veth Propulsion Holding BV (“Veth Propulsion”) for the period beginning

July 2, 2018

through

December 28, 2018.

The financial results included in this Form

-Q related to the acquisition method of accounting for the Veth Propulsion acquisition are subject to change as the acquisition method accounting is

not

yet finalized and dependent upon the finalization of management’s review of certain independent valuations and studies that are still in process. See Note B, “Acquisition of Veth Propulsion Holding BV” for further information about the acquisition and related transactions and the acquisition accounting.

Recently Adopted Accounting Standards

May 2014,

the Financial Accounting Standards Board (“FASB”) issued updated guidance (ASU

2014

) on revenue from contracts with customers. This revenue recognition guidance supersedes existing guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of control over promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies steps to apply in achieving this principle. The Company adopted this guidance effective

July 1, 2018,

using the modified retrospective method and applied the cumulative effect to its retained earnings balance as of that date. Prior periods presented were

not

retrospectively adjusted for this change. The Company has applied the new revenue recognition standard only to contracts that were

not

completed as of

July 1, 2018.

The Company determined that deferral of revenue is appropriate for certain agreements where the performance of services after product delivery is required. Such services primarily pertain to technical commissioning services by its distribution entities in its marine business, whereby the Company’s technicians calibrate the controls and transmission to ensure proper performance for the customer’s specific application. This service helps identify issues with the ship's design or performance that need to be remediated by the ship builder or other component suppliers prior to the ship being officially accepted into service by the ship buyer. The cumulative effect adjustment of adopting the new standard is

not

significant to the Company’s results of operations and financial condition.

February 2016,

the FASB issued guidance (ASU

2016

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

months. The Company elected to early adopt the standard effective

July 1, 2018,

concurrent with the adoption of ASU

2014

09,

Revenue from Contracts with Customers, using the modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements, which required the Company to restate each prior reporting period presented.

For operating leases in which the Company is a lessee, the Company concluded that all existing operating leases under the old guidance continue to be classified as operating leases under the new guidance, and all existing capital leases under the old guidance are classified as finance leases under the new guidance. The Company excluded any lease contracts with terms of

twelve

months or less as of the adoption date. The Company has lease agreements with lease and non-lease components, which are generally accounted for as separate lease components. The Company accounts for short-term leases on a straight-line basis over the lease term.

The following table presents the effect of the adoption of ASU

2016

on the Company’s condensed consolidated balance sheet as of

June 30, 2018:

	June 30, 2018		Adoption		June 30, 2018
	As Reported		Impact		Restated
Property, plant and equipment, net	$	48,940	$	6,527	$	55,467
Lease obligations		-		6,527		6,527

The adoption of ASU

2014

and ASU

2016

did

not

have an impact on the Company’s condensed consolidated statement of operations and comprehensive income for the quarter and

two

quarters ended

December 29, 2017,

or condensed consolidated statement of cash flows for the

two

quarters ended

December 29, 2017.

March 2017,

the FASB issued guidance (ASU

2017

) intended to improve the presentation of net periodic pension cost and net periodic postretirement cost. This guidance requires that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations. The Company adopted this guidance effective

July 1, 2018

on a retrospective basis, which resulted in the reclassification of certain amounts from cost of goods sold and marketing, engineering and administrative expenses to other expense (income), net in the condensed consolidated statements of operations and comprehensive income. As a result, prior period amounts impacted have been revised accordingly.

The following table presents the effect of the adoption of ASU

2017

on the Company’s condensed consolidated statements of operations and comprehensive income for the quarter and

two

quarters ended

December 29, 2017:

	For the Quarter Ended							For the Two Quarters Ended
	December 29, 2017		Adoption			December 29, 2017		December 29, 2017		Adoption			December 29, 2017
	As Reported		Impact			Restated		As Reported		Impact			Restated
Cost of goods sold	$	38,420	$	(97	)	$	38,323	$	69,590	$	(194	)	$	69,396
Gross profit		18,126		97			18,223		32,021		194			32,215
Marketing, engineering and administrative expenses		15,268		(198	)		15,070		28,936		(472	)		28,464
Income from operations		2,027		295			2,322		1,036		666			1,702
Other expense (income), net		69		295			364		268		666			934

February 2018,

the FASB issued guidance (ASU

2018

) intended to eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act by allowing a reclassification from accumulated other comprehensive income to retained earnings. The Company elected to early adopt this guidance effective

July 1, 2018

by making a reclassification of

$6,903

from accumulated other comprehensive loss to retained earnings.

October 2016,

the FASB issued updated guidance (ASU

2016

) that changes the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory. The Company adopted this guidance effective

July 1, 2018.

The adoption of this guidance did

not

have a material impact on the Company’s financial statements and disclosures.

August 2016,

the FASB issued updated guidance (ASU

2016

) that addresses

eight

specific cash flow issues with the objective of reducing the existing diversity in practice. The Company adopted this guidance effective

July 1, 2018.

The adoption of this guidance did

not

have a material impact on the Company’s financial statements and disclosures.

August 2018,

the SEC issued Release

No.

10532,

Disclosure Update and Simplification. In addition to eliminating certain disclosure requirements, this release also amends the interim financial statement requirements to require provision of the information required by Regulation S-

Rule

for the current and comparative year-to-date periods, with subtotals for each interim period. Rule

requires a reconciliation of stockholders’ equity beginning and ending balances for each period for which a statement of comprehensive income is required to be filed. The Company adopted this guidance during the Company’s

second

quarter of fiscal year

2019.

The adoption of this guidance did

not

have a material impact on the Company’s disclosures.

New Accounting Releases

August 2018,

the FASB issued updated guidance (ASU

2018

) 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.

August 2018,

the FASB issued updated guidance (ASU

2018

) intended to modify the disclosure requirements for employers that sponsor defined 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.

Special Note Regarding Smaller Reporting Company Status

June 2018,

the SEC issued Release

10513;

83550,

Amendments to Smaller Reporting Company Definition, which changes the definition of a smaller reporting company in Rule

12b

of the Securities Exchange Act of

1934,

as amended. Under this release, the new thresholds for qualifying are (

) public float of less than

$250

million or (

) annual revenue of less than

$100

million and public float of less than

$700

million (including

public float). The rule change is effective on

September 10, 2018,

the Company’s

first

fiscal quarter of fiscal year

2019.

Under this release, the Company continues to qualify as a smaller reporting company based on its public float as of the last business day of its

second

fiscal quarter of fiscal year

2019.

A smaller reporting company

may

choose to comply with scaled or non-scaled financial and non-financial disclosure requirements on an item-by-item basis. The Company has

not

scaled its disclosures of financial and non-financial information in this Quarterly Report. The Company

may

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