Twin Disc (NASDAQ:TWIN) executives told investors the company’s fiscal 2026 second quarter reflected resilient demand across several end markets, but also highlighted shipment timing issues tied to tariffs and a handful of non-recurring operational items that pressured profitability metrics. Management emphasized that backlog reached a record level and said mitigation actions are underway to reduce structural tariff exposure over time.
Demand backdrop and tariff-related disruptions
CEO John Batten said demand remained “robust” across marine, defense, and select industrial applications, helping the company post a record six-month backlog again during the quarter. Batten described the operating environment as challenging, with tariffs creating “friction across the industry” and influencing customer order placement, timing, and shipping lead times.
As part of those efforts, Batten said Twin Disc has been evaluating utilization and flexibility across its manufacturing network, including changes to production flows and potential relocation of certain activities “over time” to reduce tariff exposure. One example he cited was planning to move ARFF assembly to the company’s Lufkin facility, which management characterized as tariff-advantaged.
Defense momentum and capacity planning
Defense remained a key focus on the call. Batten said defense-related opportunities are becoming a larger and more durable portion of backlog, with defense-related backlog up 18% sequentially. He attributed the trend to elevated defense spending in the U.S. and NATO countries and increased modernization priorities for marine, land-based, and autonomous platforms.
Management said Twin Disc supports a range of defense platforms including naval vessels, autonomous and unmanned systems, and land-based applications. Batten added that the company’s defense-related pipeline exceeds $50 million.
On capacity, Batten said a substantial portion of required capacity is already in place in North America due to the current footprint and operational flexibility. He said additional investments are expected to be tied to European demand and would focus on test stands and assembly capacity, rather than machining.
Segment commentary: marine mixed, land-based delays, industrial growth
In marine and propulsion, Batten said sales were flat year over year. He cited strong demand in workboat, government, and specialty marine applications and continuing interest in higher-content systems, hybrid propulsion, and advanced maneuvering solutions. That strength was partly offset by challenges in the company’s commercial marine business in Asia Pacific. Batten said Veth Propulsion performed at a high level and noted progress in autonomous and unmanned vessel applications where Twin Disc technologies are being specified on higher-value platforms.
He also said aftermarket activity softened late in the quarter due largely to customer timing and year-end dynamics, but early indications in the subsequent period pointed to improvement.
In land-based transmission, Batten said sales fell 8.1% year over year to $17.5 million, primarily due to shipment delays to ARFF customers. He said oil and gas customers remained cautious, especially in North America, where rebuilds and refurbishments continued to outpace new equipment purchases, though he added there were signs the cycle may be maturing. Internationally, management cited early improvement in oil and gas demand, including stronger-than-expected activity in China and a “strong order” for the company’s 8500 transmission.
In industrial, Batten said sales increased 22% year over year to $11.5 million, aided by the breadth of the portfolio and contributions from recent acquisitions. He said Twin Disc is increasingly leveraging Katsa’s engineering and manufacturing capabilities across the organization, and noted the quarter included temporary operational disruptions even as underlying customer demand remained encouraging.
Financial results: modest sales growth, tax benefit boosts net income
CFO Jeff Knutson reported fiscal second quarter sales of $90.2 million, up 0.3% from $89.9 million a year earlier. He said results were driven by strength in marine and industrial product groups, as well as the addition of Kobelt. On an organic basis, adjusting for M&A and foreign exchange, Knutson said revenue declined about 7.9%, citing shipment delays related to customer attempts to time tariff impacts.
Gross profit increased 3.2% to $22.4 million and gross margin improved 70 basis points to 24.8%, which Knutson said reflected the absence of inventory-related charges recorded last year, partially offset by unfavorable product mix.
Knutson said operating expenses were $20.7 million, up from $18.9 million last year, reflecting the addition of Kobelt and ongoing wage and professional service inflation. Net income attributable to Twin Disc was $22.4 million, or $1.55 per diluted share, compared with $919,000, or $0.07 per share, in the prior-year period. He attributed the year-over-year change primarily to an income tax benefit of $21.8 million related mainly to the reversal of the domestic valuation allowance.
EBITDA was $4.7 million, down 25% year over year. Knutson cited higher expenses, tariff-related impacts affecting mix, and non-recurring items. He also pointed to temporary factors pressuring margins during the quarter, including unfavorable mix from delayed aftermarket shipments, and incremental costs related to an isolated warranty replacement.
Backlog, cash flow, and outlook themes
Twin Disc ended the quarter with backlog of $175.3 million, up 41.4% year over year and 7% sequentially, which management called a key strength and a source of visibility for the second half of fiscal 2026. Knutson said inventory increased primarily due to delayed shipments, though inventory as a percentage of backlog improved by about 400 basis points sequentially.
Free cash flow was $1.2 million, a sequential improvement from the first quarter, driven by stronger operating performance and disciplined capital spending. Knutson said working capital remained a headwind due to shipment delays and higher inventory, but management expects improvement as shipments convert and backlog is executed in the second half.
On the balance sheet, Knutson said net debt increased to $29.6 million, primarily reflecting the acquisition of Kobelt. Cash ended at $14.9 million, down 6.4% from the prior year.
In the Q&A, management said tariffs remain unpredictable but expressed confidence that revenue should improve through the second half, with the third and fourth quarters typically stronger. Knutson also broke down gross margin pressure versus the first quarter, including the effect of invoiced tariff revenue diluting gross margin percentage, operational delay in Finland, an isolated quality issue, and the impact of delayed higher-margin aftermarket shipments.
Regarding mitigation, Batten said the company’s biggest tariff exposure is in transmissions and certain industrial products, and that moving ARFF transmission assembly and test to Lufkin—described as a free trade zone—should help, though he said the benefit is expected to be more meaningful in fiscal 2027. Batten also said Veth has improved cost estimating and pricing discipline since COVID-era fixed-price quoting, and added that the business has been finding alternate sourcing options through the company’s supply chain in India.
Closing the call, Batten said management is focused on mitigating tariff exposure, improving operational execution, and converting backlog into revenue and cash, and that as shipment patterns normalize the company expects improved performance over the balance of the fiscal year.
About Twin Disc (NASDAQ:TWIN)
Twin Disc, Inc (NASDAQ: TWIN) is a global designer and manufacturer of power transmission equipment for marine and industrial applications. Headquartered in Racine, Wisconsin, the company develops a range of mechanical and digital solutions that control power delivery in demanding environments. Its portfolio includes marine gears, power take-offs, clutches, brakes, transmissions and controllable pitch propeller systems engineered to withstand heavy loads and corrosive conditions.
In addition to original equipment manufacturing, Twin Disc offers aftermarket parts and services, including maintenance, repair and overhaul support through a network of service centers worldwide.
