Twin Disc, Incorporated

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, we'll also discuss certain non-GAAP financial measures. For the definition of non-GAAP financial measures and the 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 second quarter conference call. Despite a challenging operating backdrop, our diversified portfolio continued to demonstrate resilience. The demand remained robust across marine, defense, and select industrial applications. This strong demand continues to fuel confidence in the positioning of the business as our six-month backlog reached a record level once again during the quarter. As anticipated, tariff impacts were elevated in the quarter at approximately 3% of cost of sales as they continue to create friction across the industry, influencing customer behavior related to order placement timing and shipping lead times. Importantly, these impacts reflect modest delays in timing rather than lost orders. In response to these pressures, we continue to make progress implementing the mitigation strategies we've outlined in previous quarters, including pricing discipline, operational enhancements, and footprint optimization. During the quarter, we advanced planning efforts focused on evaluating footprint utilization and operating flexibility across our existing manufacturing networks. including actions such as adjusting production flows or, where appropriate, over time, relocating certain activities to reduce structural tariff exposure. For example, we are planning to move RF assembly to our Lufkin facility, which allows us to assemble product in a tariff-advantaged environment and reduce the impact of import duties on finished goods. In the coming quarters, we'll expect tariff-related impacts to moderate, mix to improve, and our mitigation tactics to take effect. Our actions, combined with the record backlog, leave us well-positioned to capture underlying demand and drive further progress toward our long-term growth and profitability objectives. Defense continues to be a strategic growth driver for TwinDISC. Its demand builds across multiple programs and geographies, supported by elevated defense spending in the United States and NATO. Defense-related opportunities represent an increasingly diversified and durable portion of our total backlog, up 18% sequentially, as governments prioritize the modernization of marine, land-based, and autonomous platforms. We continue to support a broad range of defense platforms, including naval vessels, autonomous and unmanned systems, and land-based applications. This includes higher content items on U.S. Navy patrol and autonomous vessel programs, as well as drivetrain and power transmission solutions supporting NATO land-based vehicle initiatives. Overall, our defense-related pipeline exceeds 50 million, which in combination with our robust backlog reflects our growing presence in the defense market. To support this growth, we have a substantial portion of the required capacity in place today, particularly in North America, leveraging our existing footprint and operational flexibility. Investments regarding capacity are expected to be related to European demands, focused on test stands and assembly capacity, not machining capability. Now let me walk you through the segment performance. Our marine propulsion business demonstrated mixed results as sales were flat year over year. Robust demand across work boat government and specialty marine applications supported by ongoing interest in higher content systems, hybrid propulsion and advanced maneuvering solutions drove performance during the quarter. However, this strength is partially offset by challenges in our commercial marine business in Asia Pacific amid a dynamic environment. Vet propulsion specifically performed at a high level during the quarter, with customer engagement remaining strong. We also continue to see progress in autonomous and unmanned vessel applications, where twin-disk technologies are increasingly specified on higher-value platforms. Aftermarket activity experienced some short-term softness late in the quarter, driven largely by customer timing and year-end dynamics. Encouragingly, early indications in the subsequent period point to improving activity, reinforcing our view that demand environment remains constructive. With land-based transmission, sales decreased 8.1% year-over-year to 17.5 million, primarily driven by shipment delays to ARF customers. Oil and gas customer behavior remained cautious, particularly in North America, where rebuilds and refurbishments continue to outpace new equipment purchases. That said, we are beginning to see signs that this cycle is maturing, which could support replacement demand over time. Internationally, oil and gas demand showed early signs of improvement, including increased activity in China, where customer engagement exceeded our initial expectations. We recently received a strong order for our 8,500 transmissions and continue to see favorable demand trends in the region moving forward. International ARF demand remained healthy, We continue to advance next-generation electrified and hybrid solutions that position us well as customers evaluate longer-term fleet upgrades. Our industrial business continued to benefit from the breadth of our portfolio and the contributions from recent acquisitions, with sales up 22% year-over-year to $11.5 million. Demand remains steady, and we are increasingly leveraging COTSA's engineering and manufacturing capabilities across the broader organization. While the quarter included temporary operational disruptions, we are encouraged by underlying customer demand and the opportunity to drive higher content solutions across industrial applications as we work to enhance mix, further differentiate our offerings, and support long-term margin performance. Our backlog of 175.3 million was up 41.4% year-over-year and 7% sequentially. This record backlog remains a key strength for TwinDisk, providing solid visibility into the second half of fiscal 2026, reflecting underlying demand across our markets, with particular strength in global defense-related applications. Inventory levels increased during the quarter, primarily due to delayed shipments. However, inventory as a percentage of backlog improved by approximately 400 basis points, sequentially underscoring the strength of our backlog positions. As these dynamics unwind and backlog converts, we expect working capital to improve as we move through the remainder of the year. Moving forward, our long-term strategy remains unchanged. We are focused on global footprint optimization, operational excellence, and a disciplined capital allocation. We are continuing to streamline our organization and operate as a more integrated global platform, an important enabler of our tariff mitigation and capacity utilization strategies as improved cross-business coordination allows us to better centralize sourcing, optimize resource allocation across sites, and respond more quickly to changes in demand or cost dynamics. Looking ahead, while near-term volatility remains, we are confident in our ability to execute through the cycle. Our diversified end markets, growing defense exposure, strong backlog, and ongoing operational initiatives position TwinDIS to improve performance as conditions normalize and we deliver sustainable value over the long term. With that, I'll turn the call over to Jeff to discuss our financial results in greater detail.

Thanks, John. Good morning, everyone. During the second quarter, we delivered $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 cobalt. 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. Second quarter gross profit rose 3.2% to 22.4 million, and 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 were $20.7 million in the second quarter compared to $18.9 million last year. The increase reflects the addition of CoBELT as well as ongoing wage and professional service inflation. Net income attributable to TwinDISC for the quarter was $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 was $4.7 million for the second quarter, representing a 25% decrease versus the prior year due to higher M&A expenses, tariff-related impacts that affected NICs and non-returning items. Geographically, sales growth was led by North America and Europe, supported by sustained demand for VET products and incremental contribution from recent acquisitions. As a result, North America represented a higher share of quarterly revenue, while Asia Pacific and Latin America made up a smaller portion, reflecting regional market dynamics, a trend that we expect to continue and should soften tariff impact moving forward. Net debt increased to $29.6 million in the second quarter, primarily reflecting our strategic acquisition of Cobalt. We ended the quarter with a cash balance of $14.9 million, down 6.4% from the prior year. Turning to cash flow, we generated $1.2 million in free cash flow during the second quarter, representing a meaningful sequential improvement from the first quarter. This improvement was driven primarily by stronger operating performance and disciplined capital spending. However, working capital remained a headwind during the quarter as shipment delays and customer behavior resulted in higher inventory levels. As these shipments convert and backlog is executed, we expect working capital to improve and cash generation to strengthen as we move through the second half of the fiscal year. As such, our focus remains on disciplined inventory management, converting backlog into cash, and improving overall cash flow consistency over time. Although lower sequentially, gross margin improved 70 basis points compared to the prior year period, reflecting the absence of prior year inventory related charges. Margins in the quarter were pressured by several temporary factors, including unfavorable mix due in part to delayed aftermarket shipments, as well as incremental costs associated with an isolated warranty replacement. While these near-term pressures weighed on results this quarter, they are largely timing related or non-recurring in nature. Moving forward as shipment patterns and mix normalize, we can remain confident in our ability to deliver sustainable, profitable growth. From a capital allocation perspective, our priorities remain unchanged. We continue to focus first on supporting the business through organic investment, including capacity, operational efficiency, and product development, while maintaining a strong and flexible balance sheet. We remain disciplined in our approach to capital deployment with an emphasis on preserving liquidity, managing leverage, and selectively evaluating acquisition opportunities that align strategically and meet our return thresholds. At the same time, we continue to balance growth investments with cash generation and working capital efficiency, particularly as we focus on converting backlog into revenue and cash in the second half of the fiscal year. I'll now turn the call back to John for his closing remarks.