Twin Disc, Incorporated (TWIN) Earnings

Management highlights

### Overall Financial Performance - Q4 FY26 operating income was $7.8 million (19.5% YoY increase), net income was $9.4 million, EBITDA was $11.1 million (35.1% YoY increase, 9.7% EBITDA margin), and free cash flow was $17.2 million. - Full year FY26 operating income was $18 million, up from $11.1 million in FY25; full year net income was $27.1 million, compared to a net loss of $697,000 in FY25. - Gross margin was 26.3% in Q4, a 600 basis point decrease YoY, primarily driven by product mix, tariff dilution, and a $3 million one-time favorable inventory cost adjustment in the prior year quarter. Excluding the prior year adjustment, comparable gross margin would have been 28% last year. - SG&A expenses decreased 9.8% YoY to $22.2 million in Q4, and as a percentage of sales fell to 19.4% from 25.5% YoY, demonstrating improved operating leverage. ### Defense Business Growth - Defense is a key structural, multi-year long-term growth driver for TwinDisk, and represented 17% of total backlog as of year end, a 56% year-over-year increase, with 53% backlog growth in Q4 alone. Defense-related projects contribute $30 to $50 million to the company's total project pipeline. - TwinDisk broke ground on a new assembly and test facility in Finland to expand capacity to meet growing European defense demand from NATO. Current defense customers include U.S. Navy shipbuilders (for autonomous unmanned vessel transmissions) and NATO (for military vehicle driveline components). ### Operational Updates - Six-month backlog ended Q4 at $178.3 million, flat sequentially with Q3 despite strong shipments and efforts to reduce past-due backlog, reflecting robust underlying demand. - Inventory as a percentage of backlog decreased to 100% in Q4, and management expects this metric to continue improving with ongoing operational focus. - The company implemented a change in inventory accounting from LIFO to FIFO for certain inventories, which increased reported inventory by $30 million for FY26, enabled the use of expiring tax credits, and creates a more consistent accounting framework as the business scales. - To mitigate tariff exposure on components sourced from India, the company is relocating ARC transmission assembly to Lufkin, Texas (located in a free trade zone), which frees up capacity at the Racine, Wisconsin facility for high-demand marine and oil and gas products. - Capital allocation priorities remain: debt reduction, returning capital to shareholders via dividends and share repurchases, funding organic growth investments, and pursuing selective strategic M&A to expand addressable markets. - The board approved a 25% increase in the quarterly dividend to 5 cents per share following the strong Q4 performance. As of Q4 end, net leverage was 0.5x, down from 0.8x year-over-year, indicating a strong balance sheet. - Geographic revenue contribution in Q4: 41% Europe, 29% North America, 22% Asia Pacific.

Guidance

- Management reaffirms the company's 2030 long-term targets of $500 million in total annual revenue, 30% gross margins, and greater than 60% free cash flow conversion. - Capital expenditures for fiscal 2027 are projected to be north of $20 million, to fund the new Finland facility, the relocation of assembly to Lufkin, Texas, and new production equipment to expand capacity. - Management expects higher-margin EFRAC opportunities in oil and gas will improve the company's overall gross margin profile over the long term, and is confident in driving gross margin improvement toward the 30% 2030 target. - Management expects demand will remain strong across core markets, and that the company's strong backlog and robust project pipeline position it to continue growth momentum into fiscal 2027. - The new Finland facility is expected to be fully operational in fiscal 2028.

Segment performance

Overall company Q4 FY26 revenue was a record $114.4 million, an 18.3% year-over-year increase, with full year FY26 revenue reaching $381.3 million. 1. Marine Propulsion Systems: Sales grew 20% year-over-year, driven by strong demand for the VET propulsion platform, the CoVelt product line, increased military demand for marine transmissions, improving commercial maritime demand in Asia, and strong overall market conditions. 2. Land-based Transmissions: Sales grew 26% year-over-year, driven by higher shipment volumes, particularly from strong oil and gas performance. Oil and gas revenue in Q4 was more than double the average of the first three quarters of FY26, accounting for slightly over 10% of total Q4 revenue. 3. Industrial: Sales decreased modestly year-over-year but the segment is stabilizing. Growth is supported by increasing military demand for defense vehicle components at the company's Finnish subsidiary Katsa, consistent demand from North American construction and recycling markets, and new emerging demand from the data center vertical.

Risks & headwinds

- Tariffs on sourced components create gross margin dilution, which reduced Q4 gross margin by 60 basis points. While management is taking proactive steps to mitigate this impact via supply chain and assembly relocation, the issue still creates near-term margin pressure. - Defense projects typically have longer timelines between pipeline inclusion and order conversion, meaning expected revenue from the $30-$50 million defense pipeline may not materialize as quickly as projected. - Increasing capacity at the Racine facility requires complex operational changes (shift expansion, equipment additions, production reconfiguration) that may face execution delays.

Analyst Q&A

• Q: What are the timelines for the new Finland facility, and what is the status of capacity at the Racine facility? /

  A: The new Finland facility is on track to be enclosed by the end of the 2026 calendar year, but will not be fully operational until fiscal 2028. It will provide purpose-built assembly and test capacity that will meaningfully increase Katsa's output. At Racine, the company is staffing up, adding new capital equipment, and evaluating expanding shifts to increase capacity for high-demand products. Relocating ARC assembly to Lufkin is freeing up Racine capacity for Navy marine and commercial/oil and gas products.

• Q: What is the update on U.S. Navy unmanned vessel shipbuilder relationships and defense backlog growth? /

  A: Multiple shipbuilders are moving quickly to develop unmanned vessel programs, not just the high-profile Saronic; the U.S. Navy is pursuing a multi-builder strategy to revitalize domestic shipbuilding. Defense backlog grew 53% quarter-over-quarter, split between U.S. Navy marine programs and NATO military vehicle programs at Katsa, with growing additional interest in Arneson surface drives for fast patrol boats.

• Q: What is the expected win rate for the $30-$50 million defense opportunity pipeline, and what key new defense programs are expected in FY27? /

  A: Management is conservative when adding projects to the pipeline, and expects to win more than 50% of the included opportunities, though order conversion may take 9-12+ months due to long defense procurement timelines. Key large expected programs for FY27 include Arneson drive fast patrol boats, new military truck programs for Middle Eastern, Asian, and U.S. militaries, and ongoing programs for BAE M88 tank retrievers.

• Q: What is the current size of the oil and gas business, and are you seeing traction for higher-margin EFRAC products? /

  A: Oil and gas revenue in Q4 FY26 was the highest since Q4 FY24, more than doubling the average of the first three quarters of the year to just over 10% of total Q4 revenue. The company has already delivered multiple EFRAC units, with more on order, confirming growing traction for this high-margin product line.