Twin Disc Inc: Form 10-Q for the period ended Dec 26, 2025

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our condensed consolidated financial statements as of December 26, 2025, and related notes, as reported in Item 1 of this Quarterly Report.

Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the Company’s description of plans and objectives for future operations and assumptions behind those plans. The words “anticipates,” “believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by the Company should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.

In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company’s Annual Report filed on Form 10-K for June 30, 2025, as supplemented in this Quarterly Report, could cause actual results to be materially different from what is expressed or implied in any forward-looking statement.

Results of Operations

Comparison of the Second Quarter of Fiscal 2026 with the Second Quarter of Fiscal 2025

Net sales for the second quarter increased 0.3%, or $0.3 million, to $90.2 million from $89.9 million in the same quarter a year ago. The acquisition of Kobelt, completed in the third quarter of fiscal 2025, contributed $3.2 million of additional revenue in the quarter. The remaining decrease of $2.9 million primarily reflects temporary weakness in commercial marine demand, impacted by the existing tariff structure, along with continued soft demand for oil and gas transmissions into China. These decreases were partially offset by continued growth in demand for the Company’s Veth propulsion systems, along with improved shipments of the Company’s Katsa products acquired in fiscal 2024. Global sales of marine and propulsion products were flat with the prior year, as weakness in commercial marine demand was offset by strength in demand for the Veth product. Shipments of off-highway transmission products decreased by 8.1%, with weakness in demand for oil and gas transmissions into China and delayed airport rescue and firefighting transmissions (“ARFF”) shipments resulting from ongoing tariff concerns. Shipments of industrial products improved nearly 22% as demand for Katsa product continues to grow, along with the favorable impact from the Kobelt acquisition. The European region saw a significant increase in revenue ($3.1 million or 8.4%) thanks primarily to strong regional demand for Veth and Katsa products. Sales into North America increased 9.6%, or $2.2 million, driven by the addition of Kobelt. The Asia Pacific region decreased 24.5%, or $5.0 million, on weaker demand for commercial marine and oilfield transmissions in the region. Currency translation had a favorable impact on second quarter fiscal 2026 sales compared to the second quarter of the prior year totaling $4.1 million primarily due to the strengthening of the euro against the U.S. dollar.

Sales at our manufacturing segment increased 3.3%, or $2.4 million, versus the same quarter last year. The Company’s new acquisition, Kobelt, in Canada contributed $3.2 million of incremental revenue. The U.S. manufacturing operations experienced a 10.6%, or $3.3 million, decrease in sales versus the second fiscal quarter of 2025, with shipment delays for ARFF products and weaker demand for oil and gas transmissions in China. The Company’s operation in the Netherlands saw increased revenue of $1.6 million (6.4%) compared to the second fiscal quarter of 2025, as this operation continues to experience record demand for its propulsion systems. The Company’s Belgian operation saw a decrease compared to the prior year second quarter (16.6% or $0.9 million), with weaker demand for its marine transmission products due in part to the domestic tariff structure. The Company’s Italian manufacturing operation was up $2.5 million (77.7%) compared to the second quarter of fiscal 2025, due primarily to stronger European demand for industrial and commercial marine products. The Company’s operation in Finland saw revenue increase 21.2% ($2.1 million), with strong demand for defense related products in the region. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $0.4 million (23.7%) compared to the prior year second quarter.

Our distribution segment experienced a decrease in sales of $10.4 million (29.0%) in the second quarter of fiscal 2026 compared to the second quarter of fiscal 2025. The Company’s Asian distribution operations in Singapore, China and Japan were down 37.2%, or $6.0 million, from the prior year on reduced demand for commercial marine transmissions and oil and gas transmissions for China. The Company’s North America distribution operation saw a decrease ($1.9 million or 32.7%) impacted by the existing tariff structure and related impact on goods coming from European manufacturing operations. Similarly, the Company’s European distribution operation saw a decline ($1.9 million or 30.9%) on weaker shipments of commercial marine projects. The Company’s distribution operation in Australia and New Zealand, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw a decrease in revenue of 6.9% from the prior year second fiscal quarter, primarily due to weaker pleasure craft demand.

Gross profit as a percentage of sales for the second quarter of fiscal 2026 improved to 24.8%, compared to 24.1% for the same period last year. The prior year quarter includes the impact of a non-cash inventory write-down of $1.6 million. This write-down reflected the results of a product rationalization exercise of the Company’s industrial product line following the acquisition of Katsa. The current quarter was impacted by a less favorable product mix, dilution of margin due to invoicing of tariffs and isolated operational/quality issues within the quarter.

For the fiscal 2026 second quarter, marketing, engineering and administrative (“ME&A”) expenses, as a percentage of sales, were 22.9%, compared to 21.0% for the fiscal 2025 second quarter. ME&A expenses increased $1.7 million (9.2%) over the same period last fiscal year. The increase in ME&A spending for the quarter was comprised of the addition of Kobelt ($0.5 million), a foreign currency impact ($0.5 million), increased commission expense ($0.5 million) and a small net inflationary impact of $0.3 million.

Interest expense was up $0.3 million to $0.8 million in the second quarter of fiscal 2026, with a higher average outstanding revolver balance following the Katsa and Kobelt acquisitions.

Other income (expense) of $0.6 million for the second fiscal quarter was primarily attributable to a currency gain ($0.1 million), partially offset by pension amortization expense ($0.7 million).

The fiscal 2026 second quarter effective tax rate was -3,120.4% compared to 58.5% in the prior fiscal year second quarter. The change in the effective tax rate for the quarter resulted from a full reversal of the domestic valuation allowance.

Comparison of the First Six Months of Fiscal 2026 with the First Six Months of Fiscal 2025

Net sales for the first six months increased 4.5%, or $7.4 million, to $170.2 million from $162.8 million in the same period a year ago. The acquisition of Kobelt, completed in the third quarter of fiscal 2025, contributed $6.3 million of additional revenue in the first half. The remaining increase of $1.1 million reflects continued growth in demand for the Company’s Veth propulsion systems, along with improved shipments of the Company’s Katsa products acquired in fiscal 2024. These increases were partially offset by temporary weakness in commercial marine demand, impacted by the existing tariff structure, along with continued soft demand for oil and gas transmissions into China. Global sales of marine and propulsion products improved 5.9% from the prior year, driven by strong demand for Veth product offset by some weakness in commercial marine demand. Shipments of industrial products improved by 17.7%, driven by the addition of Katsa and Kobelt. Shipments of off-highway transmission products declined by 3.5%, with delayed ARFF shipments. The European region saw a significant increase in revenue ($5.1 million or 7.7%) thanks primarily to growing demand for Veth and Katsa products in the region. Sales into North America increased 26.7%, or $10.9 million, on improved industrial and commercial marine shipments in the second quarter. The Asia Pacific region decreased 20.0%, or $7.4 million, on weaker demand for commercial marine and oil and gas transmissions in the region. Currency translation had a favorable impact on first half fiscal 2026 sales compared to the first half of the prior year totaling $4.1 million primarily due to the strengthening of the euro against the U.S. dollar.

Sales at our manufacturing segment increased 11.7%, versus the same period last year. The Company’s new acquisition, Kobelt, in Canada contributed $6.3 million of incremental revenue. The U.S. manufacturing operations experienced a 6.2%, or $3.7 million, decline in sales versus the first half of fiscal 2025, with tariff concerns creating a drag on shipments. The Company’s operation in the Netherlands saw increased revenue of $8.4 million (20.7%) compared to the first half of fiscal 2025, as this operation continues to experience record demand for its propulsion systems and has begun to increase capacity to satisfy the growing demand. The Company’s Belgian operation saw a decrease compared to the prior year first half (16.4% or $1.7 million), with weaker US demand for its marine transmission products, impacted by tariffs. The Company’s Italian manufacturing operation was up $3.1 million (45.4%) compared to the first half of fiscal 2025, due primarily to stronger European demand for industrial and commercial marine products. The Company’s operation in Finland saw revenue increase 14.7% ($2.8 million), with improving demand for defense related products in the region. The Company’s Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, was up $1.1 million (33.7%) compared to the prior year first half.

Our distribution segment experienced a decrease in sales of $18.2 million (27.8%) in the first half of fiscal 2026 compared to the first half of fiscal 2025. The Company’s Asian distribution operations in Singapore, China and Japan were down 31.9% or $9.0 million from the prior year on weaker commercial marine activity in the region, along with reduced demand for oilfield transmissions into China. The Company’s North America distribution operation saw a decrease ($4.0 million or 36.9%) on softening North American demand for European manufactured product, impacted by the current tariff structure. The Company’s European distribution operation saw a decrease ($4.4 million or 37.8%) on soft demand for commercial marine projects in the region. The Company’s distribution operation in Australia and New Zealand, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw a decrease in revenue of 5.0% from the prior year first fiscal half, primarily due to weaker pleasure craft demand partially offset by a favorable currency impact.

Gross profit as a percentage of sales for the first half of fiscal 2026 improved to 26.6%, compared to 25.2% for the same period last year. The prior year includes the impact of a non-cash inventory write-down of $1.6 million. This write-down reflected the results of a product rationalization exercise of the Company’s industrial product line following the acquisition of Katsa. Excluding this adjustment, the fiscal 2025 first half gross profit percentage was 26.2%. The improvement in gross profit percentage versus the prior year first half is attributed to improved operational execution at our Veth operation and successful margin improvement initiatives, partially offset by isolated quality and facility charges.

For the fiscal 2026 first half, ME&Aexpenses, as a percentage of sales, were 24.3%, compared to 23.6% for the first half of fiscal 2025. ME&A expenses increased $3.0 million (7.7%) over the same period last fiscal year. The increase in ME&A spending for the first half was comprised of the addition of Kobelt ($1.1 million), a foreign currency translation impact ($1.0 million), an increase in professional fees ($0.7 million) and the net of savings initiatives offset by inflation related increases ($0.2 million).

Interest expense was up $0.4 million to $1.6 million in the first half of fiscal 2026, with a higher average outstanding revolver balance following the Katsa and Kobelt acquisitions.

Other expense of $1.5 million for the first half was primarily attributable to pension amortization expense ($1.4 million), along with a small currency loss ($0.1 million).

The fiscal 2026 first half effective tax rate was -1,638.9% compared to 430.6% in the prior fiscal year first half. The change in the effective tax rate for the first half resulted from a full reversal of the domestic valuation allowance.

Financial Condition, Liquidity and Capital Resources

Comparison between December 26, 2025 and June 30, 2025

As of December 26, 2025, the Company had net working capital of $133.3 million, which represents an increase of $12.2 million, or 10.1%, from the net working capital of $121.1 million as of June 30, 2025.

Cash decreased by $1.2 million to $14.9 million as of December 26, 2025, versus $16.1 million as of June 30, 2025. As of December 26, 2025, the majority of the cash is at the Company’s overseas operations in Europe ($5.8 million) and Asia-Pacific ($8.1 million).

Trade receivables of $53.6 million were down $5.3 million, or 9.0%, when compared to last fiscal year-end. The impact of foreign currency translation was essentially neutral versus June 30, 2025. As a percent of sales, trade receivables finished at 59.5% in the second quarter of fiscal 2026 compared to 59.7% for the comparable period in fiscal 2025 and 61.0% for the fourth quarter of fiscal 2025.

Inventories increased by $11.2 million, or 7.4%, versus June 30, 2025 to $163.2 million. The impact of foreign currency translation was essentially neutral versus June 30, 2025. The largest increase came at our operations in the United States ($6.0 million), unfavorably impacted by tariff related shipment delays. Our operation in the Netherlands saw an increase ($2.9 million) in support of growing backlog for the Veth product. The Singapore distribution entity experienced a $2.3 million increase primarily related to customer delays of deliveries on oilfield transmissions into China. Our operation in Finland also experienced an increase ($1.2 million or 8.4%) on strong demand for industrial products include defense applications. The global operations team is focused on driving inventory improvements in the second half and beyond. On a consolidated basis, as of December 26, 2025, the Company’s backlog of orders to be shipped over the next six months grew to $175.3 million, compared to $150.5 million at June 30, 2025 and $124.0 million at December 27, 2024. The increase in backlog since June 30, 2025 ($24.8 million) is largely reflective of strong market conditions for the Veth product and increasing global defense spending. As a percentage of six-month backlog, inventory has decreased from 99% at June 30, 2025 to 93% at December 26, 2025.

Net property, plant and equipment increased $1.8 million (2.6%) to $71.4 million versus $69.6 million at June 30, 2025. The Company had capital spending of $6.8 million in the first half, and a relatively neutral exchange impact. This increase was offset by depreciation of $4.5 million. Capital spending occurring in the first half was primarily related to replacement capital, along with capital to drive growth and operating efficiencies. In total, the Company expects to invest between $12 and $15 million in capital assets in fiscal 2026. The Company continues to review its capital plans based on overall market conditions and availability of capital and may make changes to its capital plans accordingly. The Company’s capital program is focused on modernizing key core manufacturing, assembly and testing processes and improving efficiencies at its facilities around the world.

Accounts payable as of December 26, 2025 of $36.7 million was down $2.1 million, or 5.4%, from June 30, 2025. The impact of foreign currency translation was to decrease accounts payable by $0.2 million versus June 30, 2025. The remaining decrease is related to the normal timing of purchasing activity and related payments.

Total borrowings and long-term debt as of December 26, 2025 increased $13.1 million to $44.5 million versus $31.4 million at June 30, 2025. During the first half, the Company reported negative free cash flow of $9.6 million (defined as operating cash flow less acquisitions of fixed assets), driven by an increase to inventory and capital spending. The Company ended the quarter with total debt, net of cash, of $29.7 million, compared to $15.3 million at June 30, 2025, for a net degradation of $14.3 million.

Total equity increased $20.8 million, or 12.6%, to $185.2 million as of December 26, 2025. The net earnings during the first half increased equity by $21.9 million, while other decreases related to a favorable foreign currency translation of $1.4 million and dividends paid to shareholders of $1.1 million. The net change in common stock and treasury stock resulting from the accounting for stock-based compensation increased equity by $0.6 million. The net remaining increase in equity of $1.4 million primarily represents the amortization of benefit plan adjustments on the Company’s defined benefit pension plans, along with the unrealized loss on cash flow hedges.

On February 14, 2025, the Company entered into an amended and restated Credit Agreement (the “Credit Agreement”) with Bank of Montreal (the “Bank”) that refinances and replaces the credit agreement dated as of June 29, 2018, as amended, between the Company and BMO Harris Bank, N.A. (the “Prior Credit Agreement”).

Pursuant to the Credit Agreement, the Bank made a Term Loan to the Company in the principal amount of $15.0 million, consisting of an assignment of a term loan under the Prior Credit Agreement from BMO to the Bank with a remaining principal of $8.5 million and an additional advance of $6.5 million. The maturity date of the Term Loan is April 1, 2027, and the Company is required to make principal installments on the Term Loan of at least $0.75 million per quarter. Under the Credit Agreement, the Company is restricted in making dividend payments beyond $5 million in any fiscal year.

In addition, the Company may, from time to time prior to the maturity date, enter into Revolving Loans in amounts not to exceed, in the aggregate and subject to a Borrowing Base, $50.0 million (the “Revolving Credit Commitment”). The Borrowing Base is the sum of (a) 85% of outstanding unpaid Eligible Receivables and (b) the lesser of $40.0 million for each fiscal month ending on or prior to August 31, 2025 (reduced to $35.0 million for each fiscal month ending on or prior to August 31, 2026, and further reduced to $32.5 million for each fiscal month ending thereafter) and 60% of Eligible Inventory for each fiscal month ending on or prior to August 31, 2025 (reduced to 55% of Eligible Inventory for each fiscal month ending on or prior to February 28, 2026, and 50% of Eligible Inventory for each fiscal month ending thereafter). The Credit Agreement also allows the Company to obtain Letters of Credit from the Bank, which if drawn upon by the beneficiary thereof and paid by the Bank, would become Revolving Loans. Under the Credit Agreement, the Company may not pay cash dividends on its common stock in excess of $5.0 million in any fiscal year. The term of the Revolving Loans under the Credit Agreement runs through April 1, 2027.

The Company used the increased borrowing capacity under the Credit Agreement to help finance its acquisition of Kobelt. Kobelt is included as a Borrower under the Credit Agreement, and may borrow directly under the Credit Agreement up to the lesser of the Revolving Credit Commitment or $25.0 million. For purposes of determining the Borrowing Base under the Credit Agreement, Eligible Receivables and Eligible Inventory of Kobelt are included.

Interest rates under the Credit Agreement are based on the secured overnight financing rate (“SOFR”), the euro interbank offered rate (the “EURIBO Rate”), or the Canadian Overnight Repo Rate Average (the “CORRA”). Loans under the Credit Agreement are designated as either as “SOFR Loans,” which accrue interest at an Adjusted Term SOFR plus an Applicable Margin; “Eurodollar Loans,” which accrue interest at the EURIBO Rate plus an Applicable Margin; “Term CORRA Loans,” which accrue interest at an Adjusted Term CORRA plus an Applicable Margin; “Daily Compounded CORRA Loans,” which accrue interest at a Daily Compounded CORRA plus an Applicable Margin; or Canadian Prime Rate Loans,” which accrue interest at the Canadian Prime Rate plus an Applicable Margin. The Applicable Margins are between 2% and 3.5% for Revolving Loans and Letters of Credit; 2.125% and 3.625% for Term Loans; and .15% and .3% for the Unused Revolving Credit Commitment (each depending on the Company’s Total Funded Debt to EBITDA ratio).

The Credit Agreement requires the Company to meet certain financial covenants. Specifically, the Company’s Total Funded Debt to EBITDA ratio may not exceed 3.50 to 1.00, and the Company’s Fixed Charge Coverage Ratio may not be less than 1.10 to 1.00. In determining whether the Company is in compliance with its Total Funded Debt/EBITDA Ratio, the Company’s EBITDA will include transaction expenses of up to $0.6 million for each of the Company’s Kobelt Acquisition and the Company’s prior Katsa acquisition, as well as pro-forma EBITDA of Katsa and Kobelt as permitted by the Bank. The Company’s Tangible Net Worth may not be less than $100.0 million plus 50% of positive Net Income for each fiscal year ending on or after June 30, 2024.

Borrowings under the Credit Agreement secured by substantially all of the Company’s and Kobelt’s personal property, including accounts receivable, inventory, machinery and equipment, and intellectual property. The Company has also pledged 65% of its equity interests in certain foreign subsidiaries. To effect these security interests, the Company entered into various amendment and assignment agreements that consent to the assignment to the Bank of certain agreements previously entered into between the Company and the Bank in connection with an April 22, 2016 credit agreement between the Company and the Bank, and further amended such agreements pursuant to the terms of the Credit Agreement. Specifically, the Company amended and agreed to the assignment to the Bank of a Security Agreement, IP Security Agreement, Pledge Agreement, Perfection Certificate, and Assignment as to Liens and Encumbrances. The Company also amended and assigned to the Bank a Negative Pledge Agreement, pursuant to which it agreed not to sell, lease or otherwise encumber real estate that it owns except as permitted by the Credit Agreement and the Negative Pledge Agreement. The Company also entered into a Collateral Assignment of Rights under Purchase Agreement for its acquisition of Kobelt. Borrowings under the Credit Agreement are also required to be guaranteed by each U.S. subsidiary of the Company.

Upon the occurrence of an Event of Default, the Bank may take the following actions upon written notice to the Company: (1) terminate its remaining obligations under the Credit Agreement; (2) declare all amounts outstanding under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately Cash Collateralize L/C Obligations in an amount equal to 105% of the aggregate L/C Obligations or a greater amount if the Bank determines a greater amount is necessary. If such Event of Default is due to the Company’s bankruptcy, the Bank may take the three actions listed above without notice to the Company.

The Company remains in compliance with its liquidity and other covenants.

Management believes that available cash, the Credit Agreement, the unsecured lines of credit, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company's cash and capital requirements for the foreseeable future.

Other significant contractual obligations as of December 26, 2025 are disclosed in Note N "Lease Liabilities" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There are no material undisclosed guarantees. As of December 26, 2025, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant, and equipment, which generally have terms of less than 90 days. The Company has long-term obligations related to its postretirement plans which are discussed in detail in Note H "Pension and Other Postretirement Benefit Plans” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q. Postretirement medical claims are paid by the Company as they are submitted. In fiscal 2026, the Company expects to contribute $0.5 million to postretirement benefits based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured. In fiscal 2026, the Company expects to contribute $0.7 million to its defined benefit pension plans. The Company does not have any material off-balance sheet arrangements.

New Accounting Releases

See Note A, Basis of Presentation, to the condensed consolidated financial statements for a discussion of recently issued accounting standards.

Critical Accounting Policies

The preparation of this Quarterly Report requires management’s judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

The Company’s critical accounting policies are described in Item 7 of the Company’s Annual Report filed on Form 10-K for June 30, 2025. There have been no significant changes to those accounting policies subsequent to June 30, 2025.

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). During the most recent fiscal quarter, no changes were made which have materially affected, or which are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 2025 Annual Report on Form 10-K.