H .	Income Taxes

Accounting policies for interim reporting require the Company to adjust its effective tax rate each quarter to be consistent with the estimated Annual Effective Tax Rate (“AETR”). Under this effective tax rate methodology, the Company applies an estimated annual income tax rate to its year-to-date ordinary earnings to derive its income tax provision each quarter. To calculate its AETR, an entity must estimate its ordinary income or loss and the related tax expense or benefit for its full fiscal year. Generally, an entity can reliably estimate ordinary income (or loss); however, there

may

be instances in which the entity is unable to estimate part of its ordinary income (or loss). In situations in which an entity is unable to estimate a portion of its ordinary income (or loss), the guidance in ASC

740

270

applies. If a company’s AETR is highly sensitive to changes in estimates of total ordinary income (or loss), the AETR

may

not

be considered reliable. If a reliable estimate of the AETR cannot be made, the best estimate of the AETR

may

be the actual effective tax rate for the year-to-date. The determination of what constitutes a “reliable estimate” is a matter of professional judgement. As of the

first

fiscal quarter of

2020,

Twin Disc is unable to reliably forecast its annual ordinary income (or loss). As of

September 27, 2019

the Company has recognized a greater loss than that which is forecasted for the full year. Permanent differences continue to remain consistent and significant compared to projected ordinary income. The Company asserts that the best estimate of its AETR is in fact the actual effective rate for the year-to-date.

For the quarter ended

September 27, 2019

and

September 28, 2018

the Company’s effective income tax rate was

20.5%

and

23.4%,

respectively. For the quarter ended

September 27, 2019,

the net income tax benefit reflected is the statutory rate applied to year-to-date income (loss) plus the discrete items. For the quarter ended

September 28, 2018,

the Company was able to reliably forecast annual ordinary income and tax expense realized was based on the estimated AETR. Due to the different methodologies utilized to calculate the interim tax provisions, it is

not

reasonable to numerically reconcile the change in estimated tax rate.

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.

The Company has

not

provided for 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. Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation.

The Company has approximately

$1,116

of unrecognized tax benefits, including related interest and penalties, as of

September 27, 2019,

which, if recognized, would favorably impact the effective tax rate. There was

significant change in the total unrecognized tax benefits due to the settlement of audits, the expiration of statutes of limitations or for other items during the quarter ended

September 27, 2019.

It appears possible that the amount of unrecognized tax benefits could change in the next

twelve

months due to on-going audit activity.

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 in foreign jurisdictions are

2013

through

2019.

The tax year open to examination in the Netherlands is

2019.

The tax years open to examination in the U.S. are for years subsequent to fiscal

2015.

The state of Wisconsin income tax audit remains ongoing for the fiscal years

2011

through

2015.

It is reasonably possible that other audit cycles will be completed during fiscal

2020.