Twin Disc (TWIN) Q2 2026 Earnings Call Transcript

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DATE

Wednesday, February 4, 2026 at 9 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — John H. Batten
• Chief Financial Officer — Jeffrey S. Knutson

TAKEAWAYS

• Revenue -- $90.2 million, up 0.3% from $89.9 million driven by marine and industrial groups and the CoVelt acquisition.
• Organic Revenue Decline -- Down 7.9%, adjusting for M&A and currency impacts; shipment delays from customer tariff timing contributed.
• Gross Profit -- $22.4 million, an increase of 3.2% with gross margin improving 70 basis points to 24.8% due to absence of prior year inventory charges, partially offset by unfavorable mix.
• Net Income -- $22.4 million, or $1.55 per diluted share, up from $919,000 or $0.07 per share; primarily from a $21.8 million income tax benefit related to the reversal of a valuation allowance.
• EBITDA -- $4.7 million, a 25% year-over-year decrease due to M&A expenses, tariff-related mix impacts, and nonrecurring items.
• Defense Backlog Growth -- Up 18% sequentially, with defense pipeline now exceeding $50 million, reflecting expanded exposure across U.S. and NATO defense programs.
• Backlog -- $175.3 million, an increase of 41.4% year over year and 7% sequentially; record level cited as key visibility driver.
• Land-Based Transmission Sales -- Decreased 8.1% to $17.5 million, driven mainly by shipment delays to ARF customers and cautious oil and gas customer behavior in North America.
• Industrial Segment Sales -- Up 22% to $11.5 million, citing contributions from recent acquisitions and steady demand.
• Inventory -- Increased due to shipment delays; inventory as a percentage of backlog improved by 400 basis points sequentially.
• Tariff Pressures -- Tariffs affected 3% of the cost of sales for the quarter, causing shipment delays but described as timing-related rather than indicative of lost orders.
• Free Cash Flow -- Generated $1.2 million, sequentially higher than the prior quarter, mainly from improved operating performance and disciplined capital spending.
• Net Debt -- Increased to $29 million, attributed to the CoVelt acquisition.
• Cash Balance -- Ended at $14.9 million, down 6.4% from last year.
• Tariff Mitigation Plans -- Planned relocation of ARF transmission assembly to Lufkin’s free trade zone facility, aimed at structurally reducing tariffs by approximately 10 percentage points of gross margin; expected to impact fiscal 2027.
• Geographical Sales Shifts -- Sales concentration increased in North America and Europe, while Asia Pacific and Latin America saw declines, altering exposure to tariff risks.

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RISKS

• Tariff-related costs accounted for approximately 3% of cost of sales, with management noting these "continue to create friction across the industry, influencing customer behavior related to order placement timing and shipping lead times."
• EBITDA fell 25% year over year due to "higher M&A expenses, tariff-related impacts that affected mix, and nonrecurring items."
• Land-based transmission sales dropped 8.1% from shipment delays to ARF customers as "Oil and gas customer behavior remained cautious, particularly in North America, where rebuilds and refurbishments continue to outpace new equipment purchases."
• CFO Knutson indicated working capital remains a headwind due to delayed shipments and associated higher inventory levels.

SUMMARY

Management reported that overall revenue was stable year over year, while organic sales fell due to shipment timing linked to tariff costs. Net income increased sharply, mainly from a one-time tax benefit, while operational profitability contracted as tariff charges, mix shifts, and nonrecurring factors weighed on quarterly earnings. The company recorded a record six-month backlog and signaled growing exposure to global defense platforms, with the defense pipeline exceeding $50 million and sequential defense backlog up 18%. Executives outlined specific mitigation actions, including shifting ARF assembly to a free trade zone, to structurally address tariffs in future years and said such efforts will not affect current-year margin. Cash flow and working capital management were identified as priorities amid rising inventories attributed to shipment delays, with improvements expected as backlog converts to revenue.

• CFO Knutson said, "On an organic basis, adjusting for M&A and FX, revenue decreased approximately 7.9% in the quarter, partially due to shipment delays related to customer attempts to time tariff impacts."
• CEO Batten outlined, "we are planning to move RF assembly to our Lufkin facility, which allows us to assemble products in a tariff-advantaged environment, reducing the impact of import duties on finished goods," clarifying the timing is for fiscal 2027 impact.
• The industrial segment benefited from recent acquisitions and ongoing product differentiation initiatives, with sales growth outpacing other business lines.
• Management signaled anticipation of a moderated tariff impact as shipment mix and mitigation strategies progress over the coming quarters.
• Executives described defense as a "strategic growth driver," with both existing capability and planned investments directed to support U.S. and NATO demand expansion.

INDUSTRY GLOSSARY

• ARF Transmissions: Application-specific transmissions designed for demanding land-based or off-highway vehicles, referenced as subject to high import tariffs due to content sourcing.
• RF Assembly: Manufacturing process for "RF" model transmissions, with assembly location cited as key to tariff mitigation strategy.
• CASA: Subsidiary in Finland, referenced as an engineering and manufacturing contributor for industrial and defense segments.
• Veth Products: A line of marine propulsion systems highlighted for contributing to regional sales growth.
• CoVelt: Recently acquired company, cited as a contributor to revenue growth and increased ME&A expenses.

Full Conference Call Transcript

John H. Batten: Good morning, everyone, and welcome to our fiscal 2026 second quarter conference call. Despite a challenging operating backdrop, our diversified portfolio continued to demonstrate resilience. The demand remained robust across marine, defense, and select industrial applications. This strong demand continues to fuel confidence in the positioning of the business as our six-month backlog reached a record level once again during the quarter. As anticipated, tariff impacts were elevated in the quarter, approximately 3% of the cost of sales, as they continue to create friction across the industry, influencing customer behavior related to order placement timing and shipping lead times. Importantly, these impacts reflect modest delays in timing rather than lost orders.

In response to these pressures, we continue to make progress implementing the mitigation strategies we've outlined in previous quarters, including pricing discipline, operational enhancements, and footprint optimization. During the quarter, we advanced planning efforts focused on evaluating footprint utilization and operating flexibility across our existing manufacturing network. Including actions such as adjusting production flows, or where appropriate, overtime, relocating certain activities to reduce structural tariff exposure. For example, we are planning to move RF assembly to our Lufkin facility, which allows us to assemble products in a tariff-advantaged environment, reducing the impact of import duties on finished goods. In the coming quarters, we'll expect tariff-related impacts to moderate, mix to improve, and our mitigation tactics to take effect.

Our actions, combined with a record backlog, leave us well-positioned to capture underlying demand and drive further progress toward our long-term growth and profitability objectives. Defense continues to be a strategic growth driver for Twin Disc as demand builds across multiple programs and geographies, supported by elevated defense spending in The United States and NATO. Defense-related opportunities represent an increasingly diversified and durable portion of our total backlog, up 18% sequentially. As governments prioritize the modernization of marine, land-based, and autonomous platforms, we continue to support a broad range of defense platforms, including naval vessels, autonomous and unmanned systems, and land-based applications.

This includes higher content items on US Navy patrol and autonomous vessel programs, as well as drivetrain and power transmission solutions supporting NATO land-based vehicle initiatives. Overall, our defense-related pipeline exceeds $50 million, which, in combination with our robust backlog, reflects our growing presence in the defense market. To support this growth, we have a substantial portion of the required capacity in place today, particularly in North America, leveraging our existing footprint and operational flexibility. Investments regarding capacity are expected to be related to European demand, focused on test stands and assembly capacity, not machining capability. Now let me walk you through the segment performance. Our marine and propulsion business demonstrated mixed results as sales were flat year over year.

Robust demand across workboat, government, and specialty marine applications, supported by ongoing interest in higher content systems, hybrid propulsion, and advanced maneuvering solutions, drove performance during the quarter. However, this strength is partially offset by challenges in our commercial marine business in Asia Pacific amid a dynamic environment. Jet Propulsion specifically performed at a high level during the quarter, with customer engagement remaining strong. We also continue to see progress in autonomous and unmanned vessel applications where Twin Disc technologies are increasingly specified in higher value platforms. Aftermarket activity experienced some short-term softness late in the quarter, driven largely by customer timing and year-end dynamics.

Encouragingly, early indications in the subsequent period point to improving activity, reinforcing our view that the demand environment remains constructive. With land-based transmission, sales decreased 8.1% year over year, to $17.5 million, primarily driven by shipment delays to ARF customers. Oil and gas customer behavior remained cautious, particularly in North America, where rebuilds and refurbishments continue to outpace new equipment purchases. That said, we are beginning to see signs that this cycle is maturing, which could support replacement demand over time. Internationally, oil and gas demand showed early signs of improvement, including increased activity in China, where customer engagement exceeded our initial expectations.

We recently received a strong order for our 8,500 transmission and continue to see favorable demand trends in the region moving forward. International ARF demand remained healthy. We continue to advance next-generation electrified and hybrid solutions that position us well as customers evaluate longer-term fleet upgrades. Our industrial business continued to benefit from the breadth of our portfolio and the contributions from recent acquisitions, with sales up 22% year over year, to $11.5 million. Demand remains steady, and we are increasingly leveraging CASA's engineering and manufacturing capabilities across the broader organization.

While the quarter included temporary operational disruptions, we are encouraged by underlying customer demand and the opportunity to drive higher content solutions across industrial applications as we work to enhance mix, further differentiate our offerings, and support long-term margin performance. Our backlog of $175.3 million was up 41.4% year over year and 7% sequentially. This record backlog remains a key strength for Twin Disc, providing solid visibility into 2026, reflecting underlying demand across our markets, with particular strength in global defense-related applications. Inventory levels increased during the quarter, primarily due to delayed shipments. However, inventory as a percentage of backlog improved by approximately 400 basis points sequentially, underscoring the strength of our backlog position.

As these dynamics unwind and backlog converts, we expect working capital to improve as we move through the remainder of the year. Moving forward, our long-term strategy remains unchanged. We are focused on global footprint optimization, operational excellence, and disciplined capital allocation. We are continuing to streamline our organization and operate as a more integrated global platform, an important enabler of our tariff mitigation and capacity utilization strategies, as improved cross-business coordination allows us to better centralize sourcing, optimize resource allocation across sites, and respond more quickly to changes in demand or cost dynamics. Looking ahead, while near-term volatility remains, we are confident in our ability to execute through the cycle.

Our diversified end markets, growing defense exposures, strong backlog, and ongoing operations initiatives position Twin Disc to improve performance as conditions normalize, and we deliver sustainable value over the long term. With that, I'll now turn the call over to Jeffrey S. Knutson to discuss our financial results in greater detail.

Jeffrey S. Knutson: Thanks, John. Good morning, everyone. During the second quarter, we delivered $90.2 million in sales, up 0.3% from $89.9 million in the prior year period, primarily driven by strength in the marine and industrial product groups as well as the addition of CoVelt. On an organic basis, adjusting for M&A and FX, revenue decreased approximately 7.9% in the quarter, partially due to shipment delays related to customer attempts to time tariff impacts. Second quarter gross profit rose 3.2% to $22.4 million, and gross margin improved 70 basis points to 24.8%, reflecting the absence of inventory-related charges recorded last year, partially offset by unfavorable product mix in the quarter.

ME&A expenses were $20.7 million in the second quarter compared to $18.9 million last year. The increase reflects the addition of CoVelt as well as ongoing wage and professional service inflation. Net income attributable to Twin Disc for the quarter was $22.4 million or $1.55 per diluted share compared to income of $919,000 or 7¢ per share last year. This large year-over-year improvement is due to an income tax benefit of $21.8 million, primarily related to the reversal of the domestic valuation allowance. EBITDA was $4.7 million for the second quarter, representing a 25% decrease versus the prior year, due to higher M&A expenses, tariff-related impacts that affected mix, and nonrecurring items.

Geographically, sales growth was led by North America and Europe, supported by sustained demand for Veth products and incremental contribution from recent acquisitions. As a result, North America represented a higher share of quarterly revenue, while Asia Pacific and Latin America made up a smaller portion, reflecting regional market dynamics, a trend that we expect to continue and should soften tariff impact moving forward. Net debt increased to $29 million in the second quarter, primarily reflecting our strategic acquisition of CoVelt. We ended the quarter with a cash balance of $14.9 million, down 6.4% from the prior year.

Turning to cash flow, we generated $1.2 million in free cash flow during the second quarter, representing a meaningful sequential improvement from the first quarter. This improvement was driven primarily by stronger operating performance and disciplined capital spending. However, working capital remains a headwind during the quarter as shipment delays and customer behavior resulted in higher inventory levels. As these shipments convert and backlog is realized, we expect working capital to improve and cash generation to strengthen as we move through the second half of the fiscal year. As such, our focus remains on disciplined inventory management, converting backlog into cash, and improving overall cash flow consistency over time.

Although lower sequentially, gross margin improved 70 basis points compared to the prior year period, reflecting the absence of prior year inventory-related charges. Margins in the quarter were pressured by several temporary factors, including unfavorable mix due in part to delayed aftermarket shipments as well as incremental costs associated with an isolated warranty replacement. While these near-term pressures weighed on results this quarter, they are largely timing-related or nonrecurring in nature. Moving forward, as shipment patterns and mix normalize, we remain confident in our ability to deliver sustainable, profitable growth. From a capital allocation perspective, our priorities remain unchanged.

We continue to focus first on supporting the business through organic investment, including capacity, operational efficiency, and product development, while maintaining a strong and flexible balance sheet. We remain disciplined in our approach to capital deployment with an emphasis on preserving liquidity, managing leverage, and selectively evaluating acquisition opportunities that align strategically and meet our return thresholds. At the same time, we continue to balance growth investments with cash generation and working capital efficiency, particularly as we focus on converting backlog into revenue and cash in the second half of the fiscal year. I'll now turn the call back to John for his closing remarks.

John H. Batten: Thanks, Jeff. In closing, while the second quarter included near-term challenges, the underlying fundamentals of our business remain strong. Demand across our core markets continues to be supported by a strong and diversified backlog with growing defense exposure and a portfolio that is well aligned with our customer needs. We are actively addressing the factors that impacted results during the quarter, including mitigating tariff exposure, improving operational execution, and continuing our focus on converting backlog into revenue and cash. As these actions take hold and shipment patterns normalize, we believe Twin Disc is well-positioned to deliver improved performance over the balance of the fiscal year. With that, I would like to open the line for questions.

Operator: Thank you. We will now begin the question and answer session. Raise your hand and join the queue. If you would like to withdraw your questions, our first question comes from David S. MacGregor from Longbow Research. Please go ahead.

David S. MacGregor: Hey. Good morning. This is Joe Nolan on for David. Hi, Joe. Joe?

Jeffrey S. Knutson: Hey, guys.

David S. MacGregor: So this quarter, you guys faced a pretty difficult revenue comp of up 23%. Year ago, compares get a little bit easier in the second half, but are still up low double digits. I guess my question is, just with the delayed shipments and some of these factors, just wondering how much push for it on some of that business you got from 3Q and what do you think is achievable for top line growth for the balance of the year?

Jeffrey S. Knutson: Yeah. I mean, it's a good question, Joe. Think tariffs are unpredictable. I think you know, we expect to see good growth in the second half and sort of progressing from Q2 to Q3 to Q4. So with March being our stronger quarters, I don't really have a percentage growth, but I think, you know, we should trend sort of like what we did in the previous years as we grow through the year. With the you know, like, we had the noise in Q2. Right? Which it's a little bit unpredictable what customers are going to do regarding tariffs, and it's unpredictable how the tariff environment will evolve. Sort of day to day, week to week.

But given some consistency in that, I think we're set up for a pretty good second half revenue-wise. Got it. Okay.

David S. MacGregor: And then on gross margin, could you just talk about the puts and takes in sequential gross margin bridge from '26? I know you mentioned the delayed shipments, and I believe you mentioned the warranty cost impact, if I heard correctly in the prepared remarks.

Jeffrey S. Knutson: Yeah. We had a few things happen. So some isolated things. I think you know, if we get into the details of it, they're all kind of you know, not huge impacts, but, you know, they move the needle. For instance, as we invoice tariff revenue, so the tariff expense flows through our revenue line with no margin, that serves to gross up our revenue and dilute our margin percentage. That has an impact of 50 or 60 basis points compared to Q1. We had an operational delay at our factory in Finland. We had an isolated quality issue that we captured in the quarter. Those two in combination are about 60 basis points.

So those are what we would call kind of noise in the quarter that wouldn't recur. And then the rest is essentially mix. So aftermarket, you know, being our higher margin business saw some delays in the quarter. Again, with customers pushing out shipments and orders related primarily to tariff and timing of when they're gonna get that inventory. And outside of that, it's, you know, project-related revenue and margin at Veth, some of that was a bit of a drag on the quarter compared to Q1. So, you know, kind of a broad-based mix impact outside of those two kind of discrete items impacting the quarter.

David S. MacGregor: Got it. Okay. And then, just on tariffs, it sounds like you're expecting tariff impact to moderate as we move through the year. If you could just maybe give any detail on just how mitigation efforts are going on your end and just kind of how you expect that impact the trends for the year?

John H. Batten: Yeah, Joe. I would it's John. So I guess what will so the tariffs, the 230 Twos, Right Now, Our Assumption Is That We're Gonna Have The Same Percentage On Steel, And Aluminum So We're Not So What's Gonna What's Gonna Help The Overall Mix Of Tariffs Tariff Impact That We're Going To Be Selling More Products That Aren't As Affected As Much By The Tariffs. The Primary So The Products That Have The Most Impact Are ARF Transmissions Where A Lot Of It Is Sourced A Lot Of The Components Are Sourced Overseas. We Assemble And Test In Racine, Wisconsin. And then ship out overseas.

So we get a big a 50% tariff on a lot of the parts and we ship the transmission out from Racine. The other part the other components sorry. The other product line that's the most effective is our industrial products at Lufkin. Again, a lot of those parts come from India. They're now tariffed at 50%. And the majority of the shipments are into The US. So there's the tariff impact there. One of the things that we're doing, and it won't affect this year, but it will set up 27, is we're moving assembly and test of the majority of the ARF transmissions down to Lufkin, which is in a free trade zone.

And so we can bring the parts in from India or wherever they're coming in from, assemble and test, and paint in Lufkin, and then ship out, and we won't have the tariff impact. And that's about Right now, the tariff impact on those units is probably 10 full percentage points of gross margin. So thankfully, the balance of the year, the ARF transmissions aren't as big a percentage of sales as they were the second quarter. Or the first half. So the margin improvement we're slated is to take effect in fiscal 'twenty seven.

So that's the big I would say biggest thing that we're focused on right now is changing the location of assembly test paint of our RF transmission to mitigate the gross margin percentage. But that won't have an effect on the balance of this year We'll see that in the '7.

David S. MacGregor: Got it. Okay. That's helpful, Pete. I also just wanted to ask about that margins. You guys had a nice margin performance. I assume those margins are continuing to improve. Can you just talk about your confidence in that business and confidence in growing margins over the next few quarters?

John H. Batten: Yeah. It's John again. So they have done a great job coming out of COVID where a lot of projects were quoted. At a fixed price, and then we saw the inflation and supply chain issues. They've done a much better job at estimating their cost. Building in known inflationary increases, But then just on pricing discipline, understanding the value in the marketplace, and going after markets that appreciate the value of what they're selling. So I'm fairly confident that they can, you know, continue this level and even continue to grow. They've they have now tapped into our supply chain in India. And are finding alternate sources that may have been sourced in Europe in lower-cost countries.

So pretty confident in that group. They're doing a very good job understanding their business. What the cost drivers are, how they can mitigate it, and more importantly, where they can find value in the market to warrant a higher price.

David S. MacGregor: Got it. Okay. Alright. And then also on oil and gas, the international oil and gas business, you mentioned seeing some improvements in China and then that Yeah. Exceeded expectations. Can you just talk about what was happening there?

John H. Batten: Yeah. So, I can't make a direct correlation, but we got the order more or less within a week of Venezuela. So, I can't say there's a direct correlation. But it seems like the activity for domestic production in China started to grow, and they realized that there may not be a reliable supply chain coming from someplace else. No one said that, but it was just kind of interesting timing When we've been hearing that for the last quarter, of the calendar year, so our fiscal second quarter, that things were slow. They had too much inventory sitting idle. And then all of a sudden, you know, the very first week of the year, They basically came in.

What he anticipated we were hoping for a budget you know, for the entire fiscal '26. They came in with one order and exceeded that budget.

David S. MacGregor: Got it. That is interesting timing. And then just last one for me. Could you just update us on I think, military orders you said backlog up 18% sequentially. Just talk about the strength in that business.

John H. Batten: Yeah. It's I Jones, it's I'm a broken record. It's really, again, two buckets primarily. It's the unmanned vessels that the navy are doing. We got more orders for those vessels. And in Europe, at our at Casa in Finland, more orders for the four sorry, the six by six and the eight by eights. That are being built for the NATO countries. So the OEM got more orders from more countries and therefore, we got more orders from the OEM. So that is, you know, the focus for us is to make sure that we have the capability to we can meet production today, but we're fully anticipating that both programs are gonna grow significantly. We've been told that.

So you know, there's focus here in The US to make sure that we have capacity for those marine transmissions. And likewise, in Finland, make sure that we can grow that we have the capacity to meet that growing demand. And keep all of our other business. So we're hyper-focused on both of those areas.

David S. MacGregor: Okay. Great. That's all for me. Thanks, guys. I'll pass it on.

John H. Batten: Alright. Thanks. Thanks, Joe.

Operator: There are no further questions. I would like to turn the call back over to John Batten, CEO, for closing remarks.

John H. Batten: Thanks, Jericho. We hope that we've answered all of your questions today. If not, please contact either Jeff or myself. And we'll answer as quickly as possible. And, again, we appreciate your continued interest in Twin Disc and we look forward to speaking with you in May after our third quarter results. Jerica will turn the call back to you.

Operator: Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.

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