Twin Disc, Incorporated (TWIN) Q2 2026 Earnings Call Transcript
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Overview
The earnings call highlights strong growth in defense and marine sectors, an increased backlog, and improved gross margins. Despite challenges like tariff impacts and shipment delays, the company expects revenue growth in the second half. Management's confidence in margin improvements and strategic mitigation efforts, along with a significant year-over-year net income increase, support a positive outlook. Analysts' questions reveal some uncertainties, but overall sentiment remains optimistic, suggesting a positive stock price movement.
Key Financial Performance
Sales $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 Kobelt. 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.
Gross Profit $22.4 million, up 3.2% year-over-year. 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 $20.7 million compared to $18.9 million last year, reflecting the addition of Kobelt as well as ongoing wage and professional service inflation.
Net Income $22.4 million or $1.55 per diluted share compared to income of $919,000 or $0.07 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 $4.7 million for the second quarter, representing a 25% decrease versus the prior year due to higher ME&A expenses, tariff-related impacts that affected mix and nonrecurring items.
Backlog $175.3 million, up 41.4% year-over-year and 7% sequentially, reflecting underlying demand across markets with particular strength in global defense-related applications.
Net Debt $29.6 million, primarily reflecting the strategic acquisition of Kobelt.
Cash Balance $14.9 million, down 6.4% from the prior year.
Free Cash Flow $1.2 million during the second quarter, representing a meaningful sequential improvement from the first quarter, driven primarily by stronger operating performance and disciplined capital spending.
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Operating Highlights
Marine and Propulsion: Sales were flat year-over-year, driven by robust demand in workboats, government, and specialty marine applications. However, challenges in the commercial marine business in Asia Pacific partially offset this strength.
Industrial Business: Sales increased by 22% year-over-year to $11.5 million, benefiting from portfolio breadth and contributions from recent acquisitions.
Defense-related Pipeline: Exceeds $50 million, reflecting growing presence in defense markets with demand for naval vessels, autonomous systems, and NATO land-based vehicle initiatives.
Geographical Sales Growth: North America and Europe led sales growth, supported by demand for Veth products and acquisitions. Asia Pacific and Latin America contributed less, reflecting regional dynamics.
International Oil and Gas Demand: Showed early signs of improvement, particularly in China, with increased activity and strong orders for the 8500 transmission.
Tariff Mitigation Strategies: Implemented pricing discipline, operational enhancements, and footprint optimization. Planning to move ARFF assembly to Lufkin facility to reduce tariff impacts.
Operational Flexibility: Evaluating footprint utilization and adjusting production flows to improve efficiency and reduce costs.
Defense as Strategic Growth Driver: Defense-related opportunities are growing, supported by elevated U.S. and NATO spending. Investments in capacity are focused on European demand.
Long-term Strategy: Focused on global footprint optimization, operational excellence, and disciplined capital allocation to streamline operations and enhance resource allocation.
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Risk or Challenges
Tariff Impacts: Tariffs elevated costs by approximately 3% of cost of sales, causing friction in order placement timing and shipping lead times. This has led to modest delays in timing rather than lost orders.
Commercial Marine Business in Asia Pacific: Challenges in the commercial marine business in Asia Pacific due to a dynamic environment have partially offset robust demand in other marine segments.
Aftermarket Activity: Short-term softness in aftermarket activity late in the quarter, driven by customer timing and year-end dynamics, impacted performance.
Land-Based Transmission Sales: Sales decreased 8.1% year-over-year due to shipment delays to ARFF customers and cautious oil and gas customer behavior in North America, where rebuilds and refurbishments outpace new equipment purchases.
Inventory Levels: Inventory levels increased due to delayed shipments, creating a working capital headwind. However, inventory as a percentage of backlog improved sequentially.
Unfavorable Product Mix: Gross margins were pressured by unfavorable product mix, delayed aftermarket shipments, and incremental costs associated with an isolated warranty replacement.
Operational Disruptions: Temporary operational disruptions in the industrial business impacted performance during the quarter.
Geographical Market Dynamics: Asia Pacific and Latin America represented a smaller portion of revenue due to regional market dynamics, which may continue to affect performance.
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Guidance & Outlook
Tariff-related impacts: Tariff-related impacts are expected to moderate in the coming quarters as mitigation strategies, including pricing discipline, operational enhancements, and footprint optimization, take effect. The company plans to move ARFF assembly to a tariff-advantaged facility in Lufkin to reduce import duties on finished goods.
Defense market growth: Defense-related opportunities are growing, with a pipeline exceeding $50 million. The company expects continued demand growth in defense programs, supported by elevated U.S. and NATO defense spending. Investments in capacity will focus on European demand, particularly test stands and assembly capacity.
Marine and Propulsion business: The company anticipates continued robust demand in workboats, government, and specialty marine applications, driven by interest in higher content systems, hybrid propulsion, and advanced maneuvering solutions. Autonomous and unmanned vessel applications are expected to grow.
Oil and gas market trends: The company sees signs of maturing cycles in North America, which could support replacement demand over time. Internationally, oil and gas demand is improving, with favorable trends in China and strong orders for the 8500 transmission.
Industrial business growth: The industrial segment is expected to benefit from leveraging Katsa's engineering and manufacturing capabilities, driving higher content solutions and supporting long-term margin performance.
Backlog and working capital: The record backlog of $175.3 million provides solid visibility into the second half of fiscal 2026. As backlog converts, working capital is expected to improve, and cash generation is anticipated to strengthen.
Operational and strategic focus: The company remains focused on global footprint optimization, operational excellence, and disciplined capital allocation. Improved cross-business coordination is expected to enhance resource allocation and responsiveness to demand changes.
Long-term strategy and outlook: Despite near-term volatility, the company is confident in its ability to execute through the cycle. Diversified end markets, growing defense exposure, and operational initiatives are expected to drive sustainable value over the long term.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:How much push forward on some of the delayed business from Q3 is expected, and what is achievable for top-line growth for the balance of the year?
A:John Batten stated that tariffs are unpredictable, but they expect good growth in the second half, progressing from Q2 to Q3 to Q4. He did not provide a specific percentage growth but mentioned that they should trend similarly to previous years. The tariff environment remains unpredictable, but they are set up for a good second half revenue-wise.
Q:Can you discuss the sequential gross margin bridge from the first quarter of '26, including the impact of delayed shipments and warranty costs?
A:Jeffrey Knutson explained that several factors impacted gross margin, including tariff revenue diluting margin percentage by 50-60 basis points, operational delays in Finland, and an isolated quality issue. These factors combined contributed about 60 basis points. Additionally, aftermarket delays and project-related revenue mix also impacted margins.
Q:What are the expectations for tariff impact moderation and mitigation efforts?
A:John Batten explained that the tariff impact is expected to moderate as they sell more products less affected by tariffs. He detailed efforts to move assembly and testing of ARFF transmissions to a free trade zone in Lufkin, which will mitigate tariff impacts starting in fiscal '27. However, this will not affect the current fiscal year.
Q:Can you provide insights into Veth margins and confidence in growing margins over the next few quarters?
A:John Batten expressed confidence in Veth's margin performance, citing improved cost estimation, pricing discipline, and sourcing from lower-cost countries like India. He believes they can maintain and grow margins by understanding cost drivers and market value.
Q:What improvements were seen in the international oil and gas business, particularly in China?
A:John Batten noted unexpected improvements in China, with orders exceeding expectations. He speculated that domestic production activity increased due to concerns about reliable supply chains, coinciding with geopolitical events like Venezuela.
Q:Can you update on military orders and the strength in that business?
A:John Batten highlighted growth in military orders, particularly for unmanned Navy vessels and NATO 6x6 and 8x8 vehicles. He emphasized the need to ensure production capacity to meet growing demand while maintaining other business operations.
Q:Review of Unclear Management Responses
A:Management avoided providing specific percentage growth figures for top-line growth in the second half of the year, citing unpredictability in tariffs and customer behavior. Additionally, while they discussed mitigation efforts for tariff impacts, the benefits of these efforts will not be realized until fiscal '27, leaving some uncertainty for the current fiscal year.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
ARFF
CFO
Kobelt
North America
absence inventory
acquisition
allocation
backlog cash
backlog position
backlog record
basis point
capacity
capital
content
customer behavior
customer engagement
defense application
delay customer
environment
footprint
income
inventory charge
land
level shipment
mitigation
platform
portion
product
record backlog
shipment delay
sign
solution
tariff impact
term
timing
TWIN Transcript
Twin Disc, Incorporated (TWIN) Q2 2026 Earnings Call Transcript
Positive2-4
The earnings call highlights strong growth in defense and marine sectors, an increased backlog, and improved gross margins. Despite challenges like tariff impacts and shipment delays, the company expects revenue growth in the second half. Management's confidence in margin improvements and strategic mitigation efforts, along with a significant year-over-year net income increase, support a positive outlook. Analysts' questions reveal some uncertainties, but overall sentiment remains optimistic, suggesting a positive stock price movement.
Twin Disc, Incorporated (TWIN) Q1 2026 Earnings Call Transcript
Positive11-5
The earnings call reveals strong financial performance with increased sales, improved gross margins, and a significant backlog, especially in defense markets. The company is investing in growth areas like hybrid solutions and has a solid strategy for managing cost pressures. While some risks exist, like currency challenges and debt levels, the overall sentiment is positive, supported by optimistic guidance and strategic growth initiatives. The Q&A session reinforces confidence in military program expansions and margin improvements, with analysts showing interest in the company’s growth potential.
Corporación América Airports S.A. (CAAP) Q2 2025 Earnings Call Transcript
Positive8-21
The earnings call highlights strong financial performance, with significant revenue and adjusted EBITDA growth, improved net debt, and positive traffic momentum in key markets. Despite risks in Ecuador and Uruguay, the overall outlook is optimistic, with strategic expansions and dividend distributions. The Q&A section shows management's proactive engagement in Argentina, albeit with some lack of detail. Given the positive financial metrics and strategic initiatives, a positive stock price movement is anticipated over the next two weeks.
Twin Disc, Incorporated (TWIN) Q4 2025 Earnings Call Transcript
Positive8-21
The earnings call presents a generally positive outlook, with strong industrial segment sales, an improved gross margin, and a significant backlog driven by defense and propulsion markets. While net income and EBITDA have declined, the company is optimistic about future growth, supported by recent acquisitions and a focus on higher-margin products. The Q&A section highlights potential for margin improvement and expansion in defense and oil & gas sectors. Despite some uncertainties in management's responses, the overall sentiment is positive, indicating a likely stock price increase.
TWIN Report
Frequently Asked Questions
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