TWIN DISC INC (TWIN)·Q2 2025 Earnings Summary

Executive Summary

• Sales rose 23.2% year-over-year to $89.9M; sequentially, revenue increased from $72.9M in Q1 to $89.9M in Q2, driven in part by Katsa Oy ($10M incremental). EPS improved to $0.07 from -$0.20 in Q1, while gross margin compressed to 24.1% on inventory rationalization and mix headwinds .
• EBITDA was $6.3M, up 13.5% YoY and materially higher than Q1 ($1.7M); operating cash flow recovered to $4.3M in Q2 from a weak Q1 (-$4.3M) as inventory actions and timing normalized .
• Backlog remained healthy at $124.0M, though down from $144.3M in Q1; mix shifts favored Europe and North America, while Asia-Pacific softened on oil & gas. Veth thrusters saw record orders and ongoing strength in commercial and luxury yacht markets .
• No specific quarterly revenue/margin guidance was issued; capex outlook was raised to $12–$14M for FY2025, dividend maintained at $0.04 per share, and management continues to target ~60% EBITDA-to-FCF conversion (acknowledged as a stretch for FY2025) .
• Post-quarter, TWIN announced acquisition of Kobelt ($16.5M; ~$14M revenue in 2024; immediately accretive to GAAP), expanding controls/braking portfolio—an additional narrative catalyst tied to systems integration strategy .

What Went Well and What Went Wrong

What Went Well

• Double-digit top-line growth with broad-based segment gains: Marine & Propulsion +23.9%, Land-Based Transmissions +19.8%, Industrial +44.8%; organic growth +10.1% .
• Veth thrusters reached record orders with strong North American demand; management emphasized synergy capture and electrification/hybrid leadership ambitions. “We remain focused on leveraging these synergies to address evolving customer needs, particularly around sustainability and electrification.” — CEO John Batten .
• Cash generation and EBITDA improved sequentially; operating cash flow of $4.3M and EBITDA $6.3M, reflecting easing supply chain delays and disciplined inventory management .

What Went Wrong

• Gross margin fell ~420 bps YoY to 24.1% on a $1.6M inventory write-down tied to Katsa rationalization, $0.3M purchase accounting amortization, and unfavorable mix .
• Backlog decreased sequentially to $124.0M (from $144.3M), with FX headwinds and high shipments cited; inventory/backlog ratio rose to 103.4% from 99.7% .
• Oil & gas exposure remained soft: ~8% of Q2 revenue and down ~24% YoY; management cited subdued new builds in North America and Asian macro headwinds .

Financial Results

Note: Minor rounding discrepancy between call commentary ($89.3M) and press release/8-K ($89.921M) reflects reporting precision .

Segment Sales (Q2 2025 vs Q2 2024):

Key KPIs:

Non-GAAP notes: EBITDA reconciliation provided; inventory write-down and purchase accounting amortization impacted gross margin in Q2 .

Guidance Changes

No explicit guidance provided for OpEx, OI&E, tax rate, or segment-specific revenue/margins in Q2 materials .

Earnings Call Themes & Trends

Management Commentary

• CEO: “Veth products continued to expand to record levels… With healthy end-market demand, we aim to… advance toward becoming the leading provider of hybrid and electric solutions in our industry.” — John H. Batten .
• CFO: “Near-term pressure on margins… due to inventory rationalization from the Katsa acquisition… We remain confident in the strength of our financial position and our ability to support continued growth while maintaining a healthy balance sheet.” — Jeffrey S. Knutson .
• CEO (call): “Our backlog remains healthy… we remain committed to disciplined inventory management… leveraging cross-selling opportunities… positioning us for sustained margin expansion.” — John H. Batten .

Q&A Highlights

• Oil & Gas contribution was “a little under 8% of revenue” in Q2 and down ~24% YoY; activity/quoting improving across North America, Asia, and South America (too early to call a full recovery) .
• Free cash flow conversion: still targeting ~60% of EBITDA; Q2 free cash flow was ~$6.4M; reiterated goal but noted FY2025 could be a “stretch” given Q1 .
• CapEx outlook raised to $12–$14M in FY2025 (spent ~$5M 1H); larger projects slated for 2H .
• R&D commercialization: “not ready to talk about” specifics; emphasis remains on hybrid/electric capabilities .
• Electric frac pilot: “stable… ongoing,” no new developments to report .

Estimates Context

• Wall Street consensus estimates (EPS and revenue) for Q2 2025 via S&P Global were unavailable at time of writing due to SPGI access limits, so beat/miss versus consensus cannot be quantified. We will update comparisons when S&P Global data access is restored.

Key Takeaways for Investors

• Top-line momentum intact with 23.2% YoY growth; sequential rebound from Q1 supported by Veth demand and Katsa contribution; watch for continued order strength and cross-selling realization .
• Margin compression driven by one-time rationalization and mix; monitor cadence of margin recovery as inventory actions and product mix normalize through FY2025 .
• Backlog remains strong but down sequentially; FX and shipment timing matter—track backlog trajectories and inventory/backlog ratio for near-term visibility .
• Capital deployment accelerating: capex guide raised to $12–$14M to support growth/efficiencies; dividend maintained at $0.04, signaling balanced capital allocation .
• Oil & gas still a headwind but stabilizing; upside optionality if quoting activity converts to orders; exposure was ~8% of Q2 revenue, down ~24% YoY .
• Systems integration and electrification remain the strategic north star; Kobelt acquisition adds adjacent controls/braking, offering incremental accretive earnings and portfolio breadth .
• Near-term trading lens: watch for margin trajectory (post-rationalization), backlog trends, and electrification wins (Veth/ELITE) as drivers; absence of quantified guidance and consensus comparisons limits immediate estimate recalibration but qualitative tone was confident on operational improvements .