B.	Acquisition of Veth Propulsion Holding BV

July 2, 2018,

the Company completed the acquisition of

100%

of the outstanding common stock of Veth Propulsion. Veth Propulsion is a global manufacturer of highly-engineered primary and auxiliary propulsions and propulsion machinery for maritime vessels, including rudder propellers, bow thrusters, generator sets and engine service and repair, based in the Netherlands. These products are complementary to and expand the Company’s current product offerings in the marine and propulsion markets. Prior to the acquisition, the Company was a distributor of Veth 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

$60,729

in cash at closing, which included a base payment plus adjustments for net cash and working capital. This amount is subject to a final determination of working capital adjustments and an earn-out. The maximum earn-out is approximately

$3,800.

The earn-out will be paid if the earnings before interest, tax, depreciation and amortization of Veth Propulsion in the period

January 1, 2018

through

December 31, 2018

exceeds the agreed upon threshold amount. The earn-out is payable in the form of Company stock or cash, and will be determined by

April 2019.

The Company financed the payment of the cash consideration through borrowings of

$60,729

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 L, Debt.

Consideration Transferred

The following table summarizes the consideration transferred at the acquisition date. This amount is subject to a final determination of a working capital adjustment and earn-out, which will be settled prior to the end of the measurement period ending

July 1, 2019.

Cash (a)	$	60,729
Fair value of contingent consideration (b)		2,920
Total	$	63,649

In the statement of cash flows, the cash used in the acquisition of Veth Propulsion in the amount of

$59,651

is net of the cash, including restricted cash, acquired in the transaction, of

$1,078

(see below for fair value of assets acquired and liabilities assumed).

This pertains to the fair value of the earn-out, which was estimated based on a probability-weighted approach.

Fair Value Estimate of Assets Acquired and Liabilities Assumed

The Company is continuing its review of the fair value estimate of assets acquired and liabilities assumed during the measurement period, which will conclude as soon as the necessary information regarding the facts and circumstances that existed as of the acquisition date is obtained, or otherwise

not

available. This measurement period will

not

exceed

one

year from the acquisition date. At the effective date of the acquisition, the assets acquired and liabilities assumed are required to be measured at fair value. The fair value estimates are pending completion of several elements, including the finalization of an independent appraisal and final review by the Company. Accordingly, until the fair values are final, there could be material adjustments to the Company’s consolidated financial statements, including changes to depreciation and amortization expense related to the valuation of property and equipment and intangible assets acquired and their respective useful lives, among other adjustments.

Upon the final determination of the fair value of assets acquired and liabilities assumed, the excess of the purchase price over such fair values is allocated to goodwill. The final determination of the purchase price, fair values and resulting goodwill

may

differ significantly from what is reflected in these consolidated financial statements.

The following summarizes the preliminary estimate of fair value of the assets acquired and liabilities assumed at the acquisition date. Some of these amounts reflect updated values from those previously reported as of

September 28, 2018,

the Company's prior fiscal quarter, due to management's ongoing fair value assessment during the measurement period.

Cash, including restricted cash	$	1,078		(a)
Accounts receivable and other current assets		9,999		(b)
Inventories		27,273		(c)
Property, plant and equipment		2,641		(d)
Intangibles		22,000		(e)
Other assets		258
Accounts payable and customer deposits and other current liabilities		(18,402	)
Deferred tax liability		(6,877	)	(f)
Total net assets acquired		37,970
Goodwill		25,679		(g)
Total consideration	$	63,649

The following information provides further details about the estimated net step-up in fair value and/or the estimated fair value at the acquisition date for some key balance sheet items.

(a) Included in cash is restricted cash in the amount of

$685.

This amount is restricted and

not

available for general business use in order to guarantee performance obligations by Veth Propulsion under certain customer contracts. A significant majority of these arrangements have expired as of

December 28, 2018

and they are

not

expected to be renewed.

(b) Accounts receivable represents contractual amounts receivable from customers less an allowance for doubtful accounts. This amount approximates fair value.

Raw materials	$	12,804
Projects work in progress at fair value		14,469
Inventories at fair value		27,273
Inventories at book value		22,871
Step-up	$	4,402

As of the effective date of the acquisition, inventory is required to be measured at fair value. Raw materials are typically utilized in operations within

one

year of purchase and therefore book values approximate fair value. Projects work in progress are estimated to be approximately

70%

complete, and the step-up to fair value less estimated costs to complete and sell resulted in a step-up value of approximately

$4,402.

(d) The fair value of property, plant and equipment is estimated at

$2,641.

These assets primarily consist of manufacturing equipment, test equipment, vehicles, and office and plant fixtures. Their estimated useful lives range from

years.

(e) Intangible assets consist of:

	Estimated fair value		Estimated average useful lives		Annual amortization
Customer relationships	$	12,300		12	$	1,025
Technology and know-how		8,000		7		1,143
Tradename		1,700		10		170
Total	$	22,000			$	2,338

The preliminary fair values were determined primarily using an income method, which utilizes financial forecasts of expected future cash flows. Some of the more significant assumptions used in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in future cash flows, and the assessment of the asset’s life cycle and competitive trends impacting the asset, as well as other factors.

(f) This represents the net deferred tax liability associated with the fair value of assets acquired and liabilities assumed.

(g) The Company is

not

able to deduct any of the goodwill for tax purposes.

The fair values presented above are preliminary until the final purchase price consideration is determined and the Company completes its work with the use of a

third

party valuation firm. These values are subject to change. Any changes to the initial estimates of the fair value of assets and liabilities will impact residual goodwill and

may

affect future earnings.

As part of the acquisition, the Company entered into a

fifteen

-year lease with Het Komt Vast Goed B.V., the owner of the real property where Veth Propulsion’s operations are located. Under this lease, the Company pays an annual market-based rent of

$1,249,

with provisions for increasing rent based on the prevailing consumer price index.

Summary Financial Information

The following table presents financial information for Veth Propulsion that is included in the Company’s consolidated statement of operations for the quarter and

two

quarters ended

December 28, 2018:

	Quarter Ended		Two Quarters Ended
	December 28, 2018		December 28, 2018
Net sales	$	14,083	$	27,436
Gross profit (a)		3,706		5,892
Operating income (loss) (b)		681		(40	)
Net income (loss) attributable to Twin Disc		376		(575	)

(a)	Gross profit includes the non-recurring charge for the step-up of inventories acquired of $1,002 and $2,173 for the quarter and two quarters ended December 28, 2018, respectively.

(b) In addition to (a), operating income (loss) includes the depreciation of property, plant and equipment and amortization of intangible assets acquired of

$647

and

$1,268

for the quarter and

two

quarters ended

December 28, 2018,

respectively. Operating income (loss) also includes

one

-time transaction charges related to the acquisition of

$256

and

$460

for the quarter and

two

quarters ended

December 28, 2018,

respectively.

The following table presents unaudited supplemental pro forma information as if the acquisition of Veth Propulsion had occurred on

July 1, 2017.

	Quarter Ended			Two Quarters Ended
	December 29, 2017			December 29, 2017
Net sales	$	71,191		$	130,902
Gross profit (a)		21,420			38,609
Net loss attributable to Twin Disc (b)		(4,790	)		(2,075	)
Basic loss per share attributable to Twin Disc common shareholders	$	(0.42	)	$	(0.18	)
Diluted loss per share attributable to Twin Disc common shareholders	$	(0.42	)	$	(0.18	)

Weighted average number of common shares outstanding:
Basic		11,297			11,278
Diluted		11,297			11,278

(a)	Gross profit includes the amortization of the step-up of inventories of $1,179 and $2,358 for the quarter and two quarters ended December 29, 2017, respectively.

(b)	In addition to (a), this includes the amortization of intangible assets acquired and interest expense on borrowings under the Credit Agreement net of other expenses, amounting to $1,136 and $2,271, before tax, for the quarter and two quarters ended December 29, 2017, respectively.