Twin Disc, Incorporated 2026 Q4 Earnings Call

Please go ahead. Good morning, and thank you for joining us today to discuss our fiscal 2026 fourth quarter results.

On the call with me today is John H. Batten, Twin Disc CEO. I would like to remind everyone that certain statements made during this conference call, especially statements expressing hopes, beliefs, expectations, or predictions for the future, are forward-looking statements. It is important to remember that the company's actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in the company's annual report on Form 10-K, copies of which may be obtained by contacting either the company or the SEC.

Any forward-looking statements that are made during this call are based on assumptions as of today, and the company undertakes no obligation to publicly update or revise these statements to reflect subsequent events or new information. During today's call, management will also discuss certain non-GAAP financial measures. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. Now I'll turn the call over to John.

Good morning, everyone, and welcome to our fiscal 2026 fourth quarter conference call. We closed out the fiscal year with record revenue in the fourth quarter of 2026 as we continue to build on the strong demand and order momentum that we saw throughout the fiscal year.

Our 18% top-line growth for the quarter resulted in operating income of $7.8 million, net income of $9.4 million, $11.1 million in EBITDA, and free cash flow of $17.2 million. Defense activity is strong and continues to be a key structural growth driver for us, supported by increasing demand from customers that include the U.S. Navy and NATO. More to come on this. Oil and gas also performed well in the quarter and is trending positively as we prioritize e-frac opportunities that drive a higher margin profile. While gross margins were down in the quarter, primarily related to product mix, tariff dilution, and a prior year favorable adjustment, we continue to pursue higher margin opportunities like e-frac that we expect to enhance our gross margins over the long term.

Thanks to our strong order activity in the quarter, our six-month backlog was level with the third quarter of 2026 at $178.3 million, despite strong shipments and a concerted effort to reduce past due backlog. Both our six-month and total backlogs remain strong and are supported by a robust project pipeline and considerable sales momentum in the markets we serve. Our cash flow improved meaningfully in the quarter to $17.2 million. As a result of this strong performance and our confidence in the business going forward, our board recently approved a 25% increase in our quarterly dividend to $0.05 per share. Overall, our fourth quarter performance capped off a strong year of operational execution for Twin Disc, and we believe that we are well-positioned with strong demand, a healthy backlog, and robust project pipeline to continue this trend into fiscal 2027.

Before getting into our individual product groups, I'd like to provide an update on our defense-related business. As I mentioned before, defense is a key structural growth driver for our business and represents a significant long-term revenue opportunity. Our current defense customers include shipbuilders for the U.S. Navy, for which we provide transmissions to be used in unmanned autonomous U.S. Navy vessel programs, and NATO, to whom we supply driveline components through our Finnish subsidiary, Katsa, for military vehicles across an expanding NATO-wide order book. On that front, we've broken ground on our new facility in Finland to add test stand and assembly capacity and to further support expected growth in the European defense demand. With global defense becoming more of a priority given the current geopolitical environment, we believe that we're well-positioned to benefit from increased spending as defense budgets grow.

As of year-end, defense comprises 17% of our total backlog, representing a 56% increase year over year. Sales momentum is also strong, with defense-related projects contributing $30 million-$50 million to our pipeline as of June 30th. Results have been encouraging, and looking ahead, we view defense as a reliable and durable multi-year growth driver for our business. Now let's get into our product groups. Sales in our marine propulsion systems grew 20% in the quarter when compared to the prior year period, primarily driven by strong demand for our Veth propulsion platform. Other factors contributing to revenue growth include performance of the Kobelt product line, as well as improved military demand for marine transmissions, improved commercial maritime demand in Asia, and overall strong market conditions driving increased demand across the product group. Land-based transmission sales grew 26% year over year, primarily due to improved shipment volumes in the quarter.

Specifically, oil and gas performed well. As we continue to prioritize higher margin e-frac opportunities, we expect this segment to be a key driver of our improved margin profile. We also took meaningful steps to reduce our tariff impact in the quarter as we work to relocate our ARF assembly to Lufkin, Texas, which would help reduce tariff exposure on components sourced in India. Similar to last quarter, land-based transmission also continues to benefit from strengthening demand trends across our core geographic markets in North America and Asia, increasing global demand for energy-related products and continued progress on next-generation electrified and hybrid solutions that support long-term demand.

Additionally, improving sentiment from North American energy customers points to additional investment in e-frac rigs, both rebuilds and new units, positioning the company well for enhanced performance. While industrial sales decreased modestly compared with the prior year, we remain encouraged by the opportunities that we are seeing as this segment continues to stabilize. The Kobelt product line provides considerable market opportunity, and our Finnish subsidiary, Katsa, is positioned to be a strong near-term growth driver thanks to increasing global military demand for defense vehicle components. We are also seeing consistent demand from North American construction and recycling markets, as well as stable underlying demand from industrial end markets. Also, we were pleased to see that Katsa has received orders in the emerging data center vertical. This opportunity represents a large part of their total backlog and is encouraged to see initial demand for our products in this fast-growing market segment.

Our six-month backlog at the end of the fourth quarter was approximately $178.3 million, which is consistent with the backlog at the end of the third quarter of $179.5 million. We are particularly pleased with this backlog, given that during the quarter, we made solid progress on shipments and continued to make a concerted effort to reduce past due backlog during the fourth quarter. In light of this, our backlog demonstrates the strength of our pipeline and demand across our product groups. Inventories to percentage of backlog decreased to 100% in the quarter, and we expect inventory as a percentage of backlog to continue to improve as we focus on operational execution. Looking ahead, we remain confident in our long-term strategy and are focused on driving profitable growth for our shareholders. Twin Disc is well established as a leading hybrid and electric solution provider for niche marine and land-based applications.

Through organic growth, continued strategic acquisitions that expand our addressable market, and ongoing disciplined capital allocation across the enterprise, we believe that we are well-positioned to expand our footprint and to meet our stated 2030 full-year targets of $500 million in revenue, 30% gross margins, and greater than 60% free cash flow conversion. With that, I will turn the call over to Jeff to discuss our financial results in greater detail.

Thanks, John. Good morning, everyone. Sales in the fourth quarter of 2026 totaled $114.4 million, representing a record quarter and an 18.3% increase over the fourth quarter of fiscal 2025. Full-year sales were $381.3 million. Revenue growth in both the fourth quarter and full year was primarily driven by increased demand in our land-based transmission markets in the fourth quarter, as well as strength in marine and propulsion systems and stabilization in our industrial segment. On an organic basis, which adjusts for the impact of acquisitions and foreign currency exchange, revenue increased 15.9% in the quarter and 4.6% for the full year. Gross profit decreased slightly by 3.5% in the quarter to $30.1 million.