Welcome to the Twin Disc, Incorporated Fiscal Second Quarter 2026 Conference Call. We will begin with introductory remarks from Jeffrey S. Knutson, Twin Disc's CFO. Good morning, and thank you for joining us today to discuss our fiscal 2026 second quarter results. On the call with me today is John H. Batten, Twin Disc's CEO. I would like to remind everyone that certain statements made during this conference call, 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-Ks, 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 the definition of non-GAAP financial measures, 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 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, approximately 3% of the 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 network. Including actions such as adjusting production flows, or where appropriate, overtime, 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 products in a tariff-advantaged environment, reducing 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 a 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 Twin Disc as 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.…

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 CoVelt. 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 CoVelt as well as ongoing wage and professional service inflation. Net income attributable to Twin Disc for the quarter was $22.4 million or $1.55 per diluted share compared to income of $919,000 or 7¢ 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 mix, and nonrecurring items. Geographically, sales growth was led by North America and Europe, supported by sustained demand for Veth 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 million in the second quarter, primarily reflecting our strategic acquisition of…

Thanks, Jeff. In closing, while the second quarter included near-term challenges, the underlying fundamentals of our business remain strong. Demand across our core markets continues to be supported by a strong and diversified backlog with growing defense exposure and a portfolio that is well aligned with our customer needs. We are actively addressing the factors that impacted results during the quarter, including mitigating tariff exposure, improving operational execution, and continuing our focus on converting backlog into revenue and cash. As these actions take hold and shipment patterns normalize, we believe Twin Disc is well-positioned to deliver improved performance over the balance of the fiscal year. With that, I would like to open the line for questions.

Thank you. We will now begin the question and answer session. Raise your hand and join the queue. If you would like to withdraw your questions, our first question comes from David S. MacGregor from Longbow Research. Please go ahead.

Hey. Good morning. This is Joe Nolan on for David. Hi, Joe. Joe?

Hey, guys.

So this quarter, you guys faced a pretty difficult revenue comp of up 23%. Year ago, compares get a little bit easier in the second half, but are still up low double digits. I guess my question is, just with the delayed shipments and some of these factors, just wondering how much push for it on some of that business you got from 3Q and what do you think is achievable for top line growth for the balance of the year?

Yeah. I mean, it's a good question, Joe. Think tariffs are unpredictable. I think you know, we expect to see good growth in the second half and sort of progressing from Q2 to Q3 to Q4. So with March being our stronger quarters, I don't really have a percentage growth, but I think, you know, we should trend sort of like what we did in the previous years as we grow through the year. With the you know, like, we had the noise in Q2. Right? Which it's a little bit unpredictable what customers are going to do regarding tariffs, and it's unpredictable how the tariff environment will evolve. Sort of day to day, week to week. But given some consistency in that, I think we're set up for a pretty good second half revenue-wise. Got it. Okay.

And then on gross margin, could you just talk about the puts and takes in sequential gross margin bridge from '26? I know you mentioned the delayed shipments, and I believe you mentioned the warranty cost impact, if I heard correctly in the prepared remarks.

Yeah. We had a few things happen. So some isolated things. I think you know, if we get into the details of it, they're all kind of you know, not huge impacts, but, you know, they move the needle. For instance, as we invoice tariff revenue, so the tariff expense flows through our revenue line with no margin, that serves to gross up our revenue and dilute our margin percentage. That has an impact of 50 or 60 basis points compared to Q1. We had an operational delay at our factory in Finland. We had an isolated quality issue that we captured in the quarter. Those two in combination are about 60 basis points. So those are what we would call kind of noise in the quarter that wouldn't recur. And then the rest is essentially mix. So aftermarket, you know, being our higher margin business saw some delays in the quarter. Again, with customers pushing out shipments and orders related primarily to tariff and timing of when they're gonna get that inventory. And outside of that, it's, you know, project-related revenue and margin at Veth, some of that was a bit of a drag on the quarter compared to Q1. So, you know, kind of a broad-based mix impact outside of those two kind of discrete items impacting the quarter.

Got it. Okay. And then, just on tariffs, it sounds like you're expecting tariff impact to moderate as we move through the year. If you could just maybe give any detail on just how mitigation efforts are going on your end and just kind of how you expect that impact the trends for the year?

Yeah, Joe. I would it's John. So I guess what will so the tariffs, the 230 Twos, Right Now, Our Assumption Is That We're Gonna Have The Same Percentage On Steel, And Aluminum So We're Not So What's Gonna What's Gonna Help The Overall Mix Of Tariffs Tariff Impact That We're Going To Be Selling More Products That Aren't As Affected As Much By The Tariffs. The Primary So The Products That Have The Most Impact Are ARF Transmissions Where A Lot Of It Is Sourced A Lot Of The Components Are Sourced Overseas. We Assemble And Test In Racine, Wisconsin. And then ship out overseas. So we get a big a 50% tariff on a lot of the parts and we ship the transmission out from Racine. The other part the other components sorry. The other product line that's the most effective is our industrial products at Lufkin. Again, a lot of those parts come from India. They're now tariffed at 50%. And the majority of the shipments are into The US. So there's the tariff impact there. One of the things that we're doing, and it won't affect this year, but it will set up 27, is we're moving assembly and test of the majority of the ARF transmissions down to Lufkin, which is in a free trade zone. And so we can bring the parts in from India or wherever they're coming in from, assemble and test, and paint in Lufkin, and then ship out, and we won't have the tariff impact. And that's about Right now, the tariff impact on those units is probably 10 full percentage points of gross margin. So thankfully, the balance of the year, the ARF transmissions aren't as big a percentage of sales as they were the second quarter. Or the first half. So the margin improvement we're slated is to take effect in fiscal 'twenty seven. So that's the big I would say biggest thing that we're focused on right now is changing the location of assembly test paint of our RF transmission to mitigate the gross margin percentage. But that won't have an effect on the balance of this year We'll see that in the '7.

Got it. Okay. That's helpful, Pete. I also just wanted to ask about that margins. You guys had a nice margin performance. I assume those margins are continuing to improve. Can you just talk about your confidence in that business and confidence in growing margins over the next few quarters?

Yeah. It's John again. So they have done a great job coming out of COVID where a lot of projects were quoted. At a fixed price, and then we saw the inflation and supply chain issues. They've done a much better job at estimating their cost. Building in known inflationary increases, But then just on pricing discipline, understanding the value in the marketplace, and going after markets that appreciate the value of what they're selling. So I'm fairly confident that they can, you know, continue this level and even continue to grow. They've they have now tapped into our supply chain in India. And are finding alternate sources that may have been sourced in Europe in lower-cost countries. So pretty confident in that group. They're doing a very good job understanding their business. What the cost drivers are, how they can mitigate it, and more importantly, where they can find value in the market to warrant a higher price.

Got it. Okay. Alright. And then also on oil and gas, the international oil and gas business, you mentioned seeing some improvements in China and then that Yeah. Exceeded expectations. Can you just talk about what was happening there?

Yeah. So, I can't make a direct correlation, but we got the order more or less within a week of Venezuela. So, I can't say there's a direct correlation. But it seems like the activity for domestic production in China started to grow, and they realized that there may not be a reliable supply chain coming from someplace else. No one said that, but it was just kind of interesting timing When we've been hearing that for the last quarter, of the calendar year, so our fiscal second quarter, that things were slow. They had too much inventory sitting idle. And then all of a sudden, you know, the very first week of the year, They basically came in. What he anticipated we were hoping for a budget you know, for the entire fiscal '26. They came in with one order and exceeded that budget.

Got it. That is interesting timing. And then just just last one for me. Could you just update us on I think, military orders you said backlog up 18% sequentially. Just talk about the strength in that business.

Yeah. It's I Jones, it's I'm a broken record. It's really, again, two buckets primarily. It's the unmanned vessels that the navy are doing. We got more orders for those vessels. And in Europe, at our at Casa in Finland, more orders for the four sorry, the six by six and the eight by eights. That are being built for the NATO countries. So the OEM got more orders from more countries and therefore, we got more orders from the OEM. So that is, you know, the focus for us is to make sure that we have the capability to we can meet production today, but we're fully anticipating that both programs are gonna grow significantly. We've been told that. So you know, there's focus here in The US to make sure that we have capacity for those marine transmissions. And likewise, in Finland, make sure that we can grow that we have the capacity to meet that growing demand. And keep all of our other business. So we're hyper-focused on both of those areas.

Okay. Great. That's all for me. Thanks, guys. I'll pass it on.

Alright. Thanks. Thanks, Joe.

There are no further questions. I would like to turn the call back over to John Batten, CEO, for closing remarks.

Thanks, Jericho. We hope that we've answered all of your questions today. If not, please contact either Jeff or myself. And we'll answer as quickly as possible. And, again, we appreciate your continued interest in Twin Disc and we look forward to speaking with you in May after our third quarter results. Jerica will turn the call back to you.

Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.