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, 2017.

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.

New Accounting Releases

March 2017,

the Financial Accounting Standards Board (“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 costs 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 amendments in this guidance are effective for annual periods, and interim periods within those annual periods, beginning after

December 15, 2017, (

the Company

’s fiscal

2019

), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

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 amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2017 (

the Company

’s fiscal

2019

), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance 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 amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2017 (

the Company

’s fiscal

2019

), with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on the Company’s financial statements and disclosures.

March 2016,

the FASB issued updated guidance (ASU

2016

) intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this standard in the

first

quarter of fiscal year

2018.

As a result of the adoption, excess tax benefits or deficiencies associated with stock-based compensation award activity are recognized in income tax expense in the consolidated statements of operations. In addition, excess tax benefits associated with award activity is reported as cash flows from operating activities along with all other income tax cash flows. The Company has elected to apply this classification change on a prospective basis.

The adoption of this guidance did

not

have a material impact on the Company's financial statements.

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. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The guidance is effective for fiscal years beginning after

December

15,

2018

(the Company’s fiscal

2020

), including interim periods within those fiscal years and requires retrospective application.

In preparation for the adoption of this guidance, the Company gathered all active lease contracts from all its locations to assess whether or

not

they meet the definition of a lease under the new guidance, specifically, whether there is an identified asset in the contract, and whether or

not

control thereof lies with the Com

pany. The Company assessed the practical expedients that are allowed under the guidance, including the exclusion of lease contracts with terms of

twelve

months or less. It assessed each contract for the appropriate lease payment components, discount rate, lease terms (dependent on renewal options) and compiled a preliminary calculation of the right-of-use assets and operating lease liability amounts that would be recognized on the Company’s balance sheet upon adoption of the guidance.

The Company is continuing its assessment, including the potential operational process changes as a result of the new guidance. It plans to early-adopt the guidance, using the modified retrospective approach, to coincide with its adoption of the new revenue recognition guidance, which

is the

first

quarter of fiscal

2019.

July 2015,

the FASB issued guidance (ASU

2015

) intended to simplify the measurement of inventory and to closely align with International Financial Reporting Standards. Current guidance requires inventories to be measured at the lower of cost or market. Under this new guidance, inventories other than those measured under last in

first

out (“LIFO”) are to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Th

e Company adopted this guidance, prospectively, in the

first

fiscal quarter of

2018.

The adoption of this guidance did

not

have an impact on the Company's financial statements.

May 2014,

the 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. This updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2017 (

the Company’s

first

quarter of fiscal

2019

In preparation for the adoption of this guidance, the Company gathered customer contracts and customer purchase orders of its various locations to assess whether there are separate and distinct performance obligations, as defined by ASU

2014

09,

within these agreements. The assessment has included interviews with various functions, including sales, engineering, customer service, and finance, to further analyze those performance obligations, both explicit and implicit (particularly as they relate to services). Under this ASU, revenue is recognized when or as each performance obligation is satisfied. Based upon the preliminary findings, the Company has identified indicators that suggest a deferral of revenue

may

be required for certain agreements where the performance of services after product delivery

may

be required. In certain agreements where the products are built to customer specifications, revenue

may

need to be accelerated. The Company is continuing its assessment, including whether or

not

these obligations are perfunctory or material to the financial statements. It plans to adopt the guidance, using the modified retrospective approach, on the effective date applicable to the Company, which is the

first

quarter of fiscal

2019.