[Management View]
Twin Disc reported significantly higher revenue, gross profit, and margin metrics for fiscal Q1 2026, driven by robust demand in marine, defense, and industrial applications, along with continued acquisition integration. The defense segment saw a sequential $4 million backlog increase, now at 15% of the total, with multiyear contracts linked to NATO and U.S. Navy platforms supporting future revenue visibility. Management reasserted a focus on inventory optimization and margin expansion while signaling upcoming tariff-related cost headwinds for cost of sales in the next quarter.

[Outlook]
Management expects a 1% to 3% tariff impact on second-quarter cost of sales, returning to 1% for the remainder of fiscal 2026. The company highlighted a healthy balance sheet, with an emphasis on prudent capital deployment, deleveraging, and M&A targeting innovation and productivity-focused growth. Cash generation targets remain unchanged, despite temporary inventory and tariff-linked working capital pressures.

[Financial Performance]
- Revenue: $80 million, up 9.7% YoY
- Organic net sales growth: 1.1%
- Gross profit: $22.9 million, up 18.7% YoY
- Gross margin: 28.7%, up 220 basis points YoY
- EBITDA: $4.7 million, up 172% YoY
- Net loss: $518,000, improved from a loss of $2.8 million YoY
- Backlog: $163.3 million, up 13% YoY and 9% sequentially
- Marine and propulsion sales: $48.2 million, up 14.6% YoY
- Industrial business sales: up 13.2% YoY
- Land-based transmission sales: $17.6 million, up 1.6% YoY
- Aftermarket sales: flat YoY
- Initial e-frac order: 14 units totaling $2.3 million
- Cash balance: $14.2 million, down 14.8% YoY
- Net debt: Rose slightly due to seasonal revolver usage

[Q&A Highlights]
Question 1: Let's start off with military just because you really called that out. Can you just help us with the timing of shipment acceleration here as well as the expected margin impact?
Answer: In Finland, for the NATO vehicles, we are very much in the beginning stages. We expect that business to double in a year and continue to grow from there. In the US, the autonomous vessels are driving growth, and we expect volume to double by 2027. We have the capability to meet demand in the US and Europe, focusing on test stands and assembly fixtures rather than machining capacity.

Question 2: Can you talk about what you may be seeing in the way of changes in business conditions and order activity in the oil and gas business?
Answer: The oil and gas business remains strong despite a conscious decision to diversify away from it. China has seen a slowdown, but we expect demand to return. The rebuild activity in the US has been good, and we have e-frac orders coming online. We are optimistic about natural gas opportunities, especially for data centers powered by natural gas plants.

Question 3: Can you talk about the puts and takes within the land-based transmissions business that led to the relatively flat top line?
Answer: The land-based transmissions business is steady, with ARF demand being full. We have traded some unit volume in China for North America. Oil and gas was down a couple of percent from last year's Q1, and there is some shift between quarters depending on customer schedules.

Question 4: Can you bridge the first-quarter gross margins of 28.7% and explain the factors contributing to the 220 basis points increase?
Answer: The vet business delivered its best margin quarter since acquisition, driven by incremental volume and margin improvement initiatives. The team has worked on lean principles and finding new suppliers, which contributed to the margin improvement. We expect to sustain this trend line, although the second quarter may see some impact from tariffs.

Question 5: How are you thinking about free cash flow conversion for this year?
Answer: We target 60% free cash flow as a percent of EBITDA. Despite a difficult Q1 due to inventory growth and payouts, we aim to recover in Q2. We focus on managing incoming inventory to meet growing demand without hampering our ability to grow.

[Sentiment Analysis]
Analysts were positive and congratulatory about the strong quarter and the company's strategic direction. Management maintained a confident and optimistic tone, emphasizing their ability to navigate challenges and sustain growth.

[Quarterly Comparison]
| Metric | Q1 2026 | Q1 2025 | YoY Change |
|-------------------------|------------------|------------------|------------------|
| Revenue | $80 million | $73 million | +9.7% |
| Gross Profit | $22.9 million | $19.3 million | +18.7% |
| Gross Margin | 28.7% | 26.5% | +220 bps |
| EBITDA | $4.7 million | $1.7 million | +172% |
| Net Loss | $518,000 | $2.8 million | Improved |
| Backlog | $163.3 million | $144.5 million | +13% |
| Marine & Propulsion | $48.2 million | $42.1 million | +14.6% |
| Industrial Sales | +13.2% | | |
| Land-based Transmission | $17.6 million | $17.3 million | +1.6% |
| Aftermarket Sales | Flat | | |
| Cash Balance | $14.2 million | $16.7 million | -14.8% |

[Risks and Concerns]
- Tariff impacts: Expected 1% to 3% impact on Q2 cost of sales, returning to 1% for the remainder of fiscal 2026.
- Inventory-driven cash outflows: Inventory growth and payouts affecting free cash flow in Q1.
- Dependence on defense and marine sectors: High reliance on these sectors for growth.

[Final Takeaway]
Twin Disc delivered a strong Q1 2026 performance, driven by robust demand in marine, defense, and industrial applications. The company continues to focus on inventory optimization, margin expansion, and prudent capital deployment. Despite upcoming tariff-related cost headwinds, management remains confident in their ability to sustain growth and deliver long-term value for shareholders. The positive outlook and strategic initiatives position Twin Disc well for continued success in fiscal 2026.