B. A

CQUISITION

ETH

ROPULSION HOLDING

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 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 and the initial fair value assigned to the earn-out at acquisition date of

$2,921

is recognized in the income statement. The maximum earn-out at acquisition was

$3,300.

The fair value at acquisition was determined by using a discounted probability weighted approach. See Note R, Restructuring of Operations and Other Operating Income.

The total consideration transferred at acquisition date was:

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

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

Fair Value of Assets Acquired
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

years,

years, and

years, respectively, and weighted average remaining useful life of approximately

years. The amounts acquired are presented in Note F, 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 I, Debt.

Summary Pro Forma Financial Information

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

June 30, 2019:

	Year Ended
	June 30, 2019
Net sales	$	54,909
Gross profit (a)		10,085
Operating loss (b)		(1,281	)
Net loss attributable to Twin Disc		(1,849	)

(a)

Gross profit includes the non-recurring purchase accounting charge for the step-up of inventories acquired of

$4,277

for the year.

(b)

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

$2,636

for the year. Operating loss also includes

one

-time transaction charges related to the acquisition of

$461

for the year.

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

July 1, 2017.

		Year Ended	Year Ended
		June 30, 2019	June 30, 2018
Net sales	$	302,663	$	296,556
Gross profit (a)		93,918		92,158
Net income attributable to Twin Disc (b)		14,227		5,277

Basic income per share attributable to Twin Disc common shareholders	$	1.13	$	0.47
Diluted income per share attributable to Twin Disc common shareholders	$	1.12	$	0.46

Weighted average number of common shares outstanding:
Basic		12,571		11,295
Diluted		12,682		11,395

(a)

Gross profit includes the amortization of the step-up of inventories of

$4,715

for the year ended

June 30, 2018.

For the year ended,

June 30, 2019,

the amortization of the step-up of inventories of

$4,277

is excluded.

(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

$4,542

before tax, for the year ended

June 30, 2018,

as well as

$1,768

related to

one

-time transaction charges. For the year ended

June 30, 2019,

this excludes

one

-time transaction charges related to the acquisition of

$461.