This article first appeared on GuruFocus .
Release Date: August 20, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
Positive Points
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Record Q4 revenue of $114.4 million, up 18.3% year-over-year, with strong demand across marine and land-based segments.
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Defense backlog grew 56% year-over-year, now 17% of total backlog, with a $30-50 million project pipeline, positioning Twin Disc Inc ( NASDAQ:TWIN ) for durable multi-year growth.
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Free cash flow improved significantly to $17.2 million in Q4, and net leverage ratio decreased to 0.5, strengthening the balance sheet.
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Board approved a 25% increase in quarterly dividend to $0.05 per share, reflecting confidence in future performance.
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Oil and gas segment ramped up, with revenue over 10% of total in Q4, driven by higher-margin EFRAC opportunities, and improving North American energy sentiment points to further investment.
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Proactive tariff mitigation, including relocating assembly to Lufkin, Texas, and new facility in Finland, supports long-term margin improvement and capacity expansion.
Negative Points
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Gross margin decreased approximately 600 basis points to 26.3% in Q4, impacted by product mix, tariff dilution, and a prior-year favorable adjustment.
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Tariff dilution alone reduced gross margin by 60 basis points in the quarter, and the company continues to face cost pressures.
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Industrial segment sales decreased modestly year-over-year, though stabilizing, indicating ongoing softness in that market.
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Defense business remains fragmented across products and regions, making it difficult to track and report, which could obscure performance visibility.
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New facility in Finland and other capacity expansions are not expected to be fully operational until fiscal 2028, delaying potential benefits.
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CapEx for fiscal 2027 is expected to be north of $20 million, a significant investment that could pressure near-term cash flows.
Q & A Highlights
Q: Can you provide an update on the defense business, specifically the conversations with shipbuilders outside of Saronic and the speed at which they are moving? Also, has the defense pipeline increased from the previously mentioned $50 to $75 million? A: John Batten (CEO): Saronic has set the benchmark for speed to market, but other shipbuilders are also moving quickly by forming alliances with technology companies. The Department of Defense and Navy are not putting all their eggs in one basket and are truly trying to bring back the US shipbuilding industry. The defense backlog grew 53% in the quarter, driven by marine transmissions for the US Navy built in Racine and Belgium, as well as NATO truck components from our Finnish subsidiary, Kotsa. The pipeline is casting a much wider net with different products and customers, including growing interest in our Arneson surface drive for fast patrol boats.
Q: What is the timeline for the new Finland facility, and how is capacity looking at the Racine facility? A: John Batten (CEO): The Finland facility is expected to be enclosed by the Finnish winter, with full operational impact not until fiscal 2028. It will significantly increase the output of Kotsa, which currently uses makeshift facilities not designed for assembly and test. In Racine, we are staffing up and adding machinists, with significant capital purchases like a 1.2m hob and grinder already in place. We are looking to expand to second and third shifts due to high volume. We are also scrambling to move the ARC transmission assembly to Lufkin, Texas (a free trade zone) to reduce tariff exposure and free up Racine capacity for marine transmissions for the Navy and commercial marine markets.
Q: How big is the oil and gas business now, and did you sell any EFRAC units in the quarter? A: John Batten (CEO): Oil and gas revenue was a little over 10% of overall revenue in the quarter, the biggest since fiscal '24 in terms of percentage and pure dollars. It was more than double the average of the first three quarters. Yes, we have delivered approximately two EFRAC spreads, with more coming, as we prioritize these higher-margin opportunities.
Q: What is the CapEx plan for fiscal 2027? A: Jeff Kennison (CFO): CapEx will be north of $20 million, driven by the new facility in Finland, the movement of a significant product line to Lufkin, and additional machine tools. We are in great shape with a new credit agreement and plenty of financial horsepower to fund this growth.
Q: Regarding the military pipeline of $50 to $70 million, how much of that do you think you can win? A: John Batten (CEO): We are conservative when putting projects in the pipeline and believe we have a better than 50/50 chance of winning all of them. We are very good at predicting our confidence of winning; the uncertainty is just the timing of when projects will materialize into orders, which can take longer than expected.
Q: Can you provide more detail on the pipeline of new defense programs for fiscal 2027? A: John Batten (CEO): The biggest opportunities, though under NDAs, are fast patrol boats with Arneson surface drives and roller propellers, similar to products going into Patria trucks but for different truck builders and militaries in the Mideast and Asia. In the US, we expect continuation with BAE on the M88 Hercules tank retriever. These are the most exciting and meaningful programs on the horizon.
Q: How big was the military business in the fourth quarter or fiscal 2026? A: Jeff Kennison (CFO): We don't have a great number to provide as it is fragmented across all products and regions, with a lot going through distribution. We need to do a better job analytically of pulling that together as it becomes a bigger part of the business, but it was definitely up.
Q: Can you elaborate on the gross margin decline and the impact of tariffs? A: Jeff Kennison (CFO): Gross margin decreased to 26.3% in Q4, down 600 basis points year-over-year, primarily due to product mix, tariff dilution, and a $3 million favorable adjustment in the prior year. Excluding the prior year adjustment, gross margin would have been 28%. Tariff dilution alone decreased gross margin by 60 basis points; excluding this, margins would have been approximately 27%. We are confident in our ability to drive margin improvement toward our 2030 target of 30% gross margins.
Q: What is the current backlog level and how does it compare to the previous quarter? A: John Batten (CEO): Our 6-month backlog at the end of Q4 was approximately $178.3 million, consistent with the $179.5 million at the end of Q3. This is particularly pleasing given strong shipments and a concerted effort to reduce past due backlog during the quarter. The backlog demonstrates the strength of our pipeline and demand across our product groups.
Q: Can you provide an update on the change in inventory accounting method and its impact? A: Jeff Kennison (CFO): We elected to change our method of accounting for certain inventories from LIFO to FIFO, which provides better matching of costs and revenues and conforms our inventory to a single method. The change allowed us to utilize expiring tax credits, contributing to the reversal of the valuation allowance. The impact was a $30 million increase in inventory for the fiscal year ended June 30, 2026, and we have recast certain historical information to conform to the updated method.
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
