Twin Disc, Incorporated Q2 FY2026 earnings call

Management Statement and Operational Highlights:

• Despite challenging operating backdrop, diversified portfolio showed resilience with strong demand in marine, defense, and select industrial applications. Six-month backlog reached record level. Tariff impacts were ~3% of cost of sales, with mitigation strategies like pricing discipline, operational enhancements, and footprint optimization in place.
• Defense is a strategic growth driver with demand building across multiple programs and geographies. Defense-related opportunities up 18% sequentially, pipeline exceeds $50 million.
• Financials: Second quarter sales $90.2 million, up 0.3% from prior year. Gross profit rose 3.2% to $22.4 million, gross margin improved 70 basis points to 24.8%. Net income $22.4 million or $1.55 per diluted share. EBITDA $4.7 million, down 25% vs prior year. Geographically, sales growth led by North America and Europe.

Segment Performance:

• Marine and Propulsion: Sales flat year over year. Robust demand in workboat, government, and specialty marine applications, with Jet Propulsion performing strongly. However, aftermarket had short-term softness late in the quarter but early signs of improvement. Revenue contribution not explicitly stated in absolute % but performance noted.
• Land-based Transmission: Sales decreased 8.1% year over year to $17.5 million, driven by shipment delays to ARF customers. Oil and gas in NA cautious, but international demand showing improvement, especially in China. Revenue contribution not explicitly stated in absolute % but performance noted.
• Industrial: Sales up 22% year over year to $11.5 million,受益于产品组合广度及近期收购贡献。虽季度中有临时运营中断，但客户需求稳健。 Revenue contribution not explicitly stated in absolute % but performance noted.
• Backlog: $175.3 million, up 41.4% year over year and 7% sequentially. Inventory levels increased during the quarter, but inventory as a percentage of backlog improved by approximately 400 basis points sequentially.

Guidance:

• Tariff-related impacts are expected to moderate in coming quarters. Second half revenue growth expected with trends progressing from Q2 to Q3 to Q4. Mitigation tactics like moving RF assembly to Lufkin to reduce tariff exposure to take effect, though not impacting the balance of the current year but setting up for FY27.

Risks:

• Tariff impacts creating friction across the industry, influencing customer behavior and affecting mix and margins.
• Operational disruptions in the industrial segment during the quarter.
• Inventory levels increased due to delayed shipments, though inventory as a percentage of backlog improved.

Q: 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?

A: 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.

Q: 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.

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: Just update us on I think, military orders you said backlog up 18% sequentially. Just talk about the strength in that business.

A: 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.