Twin Disc, Inc. (NASDAQ: TWIN) reported its fiscal second quarter 2026 results on February 4, 2026, delivering a financial report that was as complex as the heavy-duty transmissions it manufactures.
Second Quarter 2026 Highlights
Sales increased 0.3% year-over-year to $90.2 million
Gross margin of 24.8%, expanded 70 basis points over prior year
Net income attributable to Twin Disc was $22.4 million and EBITDA of $4.7 million
Robust six-month backlog of $175.3 million supported by healthy ongoing demand
Delivered positive Operating Cash Flow of $4.6 million and Free Cash Flow of $1.2 million during the quarter
Continued momentum in defense, with accelerating orders and an expanding pipeline across U.S. and Europe
Key Takeaways
The Earnings “Mirage”
At first glance, an EPS of $1.55 compared to $0.07 last year looks like a generational breakout. However, the majority of this gain was driven by a $21.8 million one-time income tax benefit related to the reversal of a valuation allowance.
On an operational level, profitability was actually under pressure. Adjusted EBITDA fell 25% to $4.7 million, squeezed by M&A expenses from the Kobelt acquisition, unfavorable product mix, and rising tariff-related costs.
Record Backlog: The “Defense” Moat
The brightest spot in the report was the company’s record six-month backlog of $175.3 million.
Defense Surge: Sequential defense-related orders jumped 18%, with the total defense pipeline now exceeding $50 million. As global governments prioritize naval and land-based modernization, Twin Disc is positioning itself as a key supplier for autonomous and unmanned systems.
Visibility: Management emphasized that this backlog provides “exceptional visibility” for the second half of fiscal 2026.
The Tariff and Shipment Struggle
Timing Issues: CEO John Batten noted that “uneven operating environments” and tariff-related impacts delayed key shipments, particularly in the Land-Based Transmission segment, which saw sales fall 8.1%.
Inventory Build: These delays caused inventory to spike, though management was quick to point out that these are delayed sales, not lost orders.
Management Commentary
CEO John Batten centered his remarks on the resilience of the portfolio despite what he called an “uneven operating environment.”
Defense as a North Star: Batten highlighted the 18% sequential growth in defense orders, noting that the pipeline now exceeds $50 million. He specifically pointed to the Katsa product line and hybrid propulsion systems as the engines of this growth.
The Oil & Gas Cycle: He noted that while North American oil and gas behavior remains “cautious,” with a focus on refurbishments over new purchases, he believes this cycle is “maturing,” which should trigger a wave of replacement demand in late 2026.
CFO Jeffrey Knutson spent significant time clarifying the EPS surprise ($1.55 vs. $0.21) to ensure investors understood the underlying operational health.
The $21.8 Million Factor: Knutson explained that the net income surge was almost entirely due to the reversal of a domestic valuation allowance (a non-cash tax benefit).
Cash Management: Despite the earnings “noise,” Knutson emphasized that the company remained Free Cash Flow positive ($1.2M) and is prioritizing debt reduction following the Kobelt acquisition.
Strategic “Pivots” for 2026-2027
Management outlined two specific tactical moves to combat current headwinds:
Manufacturing Relocation: To mitigate the 1-3% tariff drag, Twin Disc is moving the assembly of Aircraft Rescue and Fire Fighting (ARFF) transmissions to its Lufkin facility. This allows them to assemble in a “tariff-advantaged” environment, though the full margin benefit won’t be felt until Fiscal 2027.
Inventory Normalization: Management is focused on converting its $175.3 million backlog into cash. They noted that inventory as a percentage of backlog improved by 400 basis points, signaling that they are getting better at matching production to delivery dates.
Investor Takeaway
Twin Disc’s Q2 FY2026 results underscore a company navigating short-term operational friction while benefiting from structural demand strength. While headline earnings were inflated by a tax benefit and EBITDA declined, the record backlog and improving gross margins suggest solid fundamentals. Investors are likely to focus on execution in the coming quarters as backlog converts into revenue and margin pressures begin to ease.
