Executive Summary / Key Takeaways

• Strategic Transformation Underway: Twin Disc is actively reshaping its business through targeted acquisitions like Katsa and Kobelt, expanding its global footprint, diversifying its product portfolio, and enhancing its engineering capabilities, particularly in Europe and North America.
• Hybrid & Electrification Leadership: The company is intensifying investments in controls and systems integration to become a leading provider of hybrid and electrification solutions for marine and off-highway applications, demonstrated by significant orders and growing customer interest.
• Robust Backlog & Defense Momentum: A strong six-month backlog of $150.5 million, up 13% year-over-year, is significantly bolstered by a growing defense market, with a $50 million to $75 million pipeline and defense-related orders increasing 45% in fiscal 2025.
• Operational Efficiency & Financial Discipline: Despite a net loss in fiscal 2025, Twin Disc is focused on operational streamlining, inventory reduction, and cost optimization, aiming for 30% gross margins and 60%+ free cash flow conversion by 2030, supported by a conservative net leverage ratio of 0.8x.
• Specialized Competitive Edge: Twin Disc differentiates itself through proprietary technology offering superior reliability in demanding environments and established global distribution networks, allowing it to capture niche markets despite facing larger, more diversified competitors.

The Engine of Progress: Twin Disc's Strategic Evolution

Twin Disc, Incorporated, established in 1918, has long been a foundational player in the design, manufacture, and sale of marine and heavy-duty off-highway power transmission equipment. Its extensive product range, including marine transmissions, azimuth drives, surface drives, propellers, power-shift transmissions, hydraulic torque converters, and industrial clutches, serves critical sectors such as pleasure craft, commercial and military marine, energy, natural resources, government, and industrial markets. The company's enduring presence is built upon a global footprint, with manufacturing facilities spanning the United States, Belgium, Canada, Finland, Italy, the Netherlands, and Switzerland, complemented by distribution hubs across Asia and Oceania.

The company's overarching strategy is centered on global footprint optimization, operational excellence, and targeted acquisitions, all aimed at positioning Twin Disc as a leader in hybrid and electrification solutions. This strategic pivot is not merely an aspiration but a tangible roadmap, with significant investments in controls and systems integration designed to multiply content and margin potential across its diverse applications. This forward-looking approach is crucial in an industry increasingly driven by sustainability requirements and technological advancement.

Technological Edge: Powering the Future

Twin Disc's competitive advantage is deeply rooted in its proprietary technology, which delivers tangible benefits in demanding operational environments. For instance, its Veth ELITE thrusters are highly sought after for their increased fuel efficiency, enhanced maneuverability, and notably low noise and vibration levels. This technological superiority has led to record orders and significant traction in new geographic markets, including North America, where a major distributor is becoming one of its largest customers. The "so what" for investors is clear: these performance advantages translate directly into stronger customer loyalty and the potential for premium pricing, bolstering Twin Disc's market position.

In the land-based transmission segment, Twin Disc's E-frac system offers a differentiated solution for the oil and gas market. Unlike conventional variable frequency drives, Twin Disc's approach utilizes a standard geared transmission (the 7600 series) with a regular electric motor to shift speed. Management highlights this solution as not only less expensive but also more robust and longer-lasting, providing a superior method for driving pumps. This innovation validates Twin Disc's technical offering and supports a more optimistic medium-term outlook for the segment. Furthermore, the company is actively modifying its 7600 transmission to integrate with pure natural gas engines, identifying this as a significant opportunity for fiscal years 2026 and 2027.

The company's commitment to innovation extends to hybrid and electrification solutions. Twin Disc is actively developing PTI (power take-off) gearboxes designed to make its marine transmissions hybrid-ready or fully electric. This proactive R&D ensures the company remains a partner of choice as global sustainability requirements tighten. A recent hybrid system order for a sightseeing vessel in the northeast exemplifies this, where Twin Disc will supply ten times the content—including batteries, motors, controls, converters, and inverters—compared to a traditional internal combustion engine ship. This capability to offer comprehensive, integrated hybrid systems significantly enhances its value proposition and revenue potential per unit.

Strategic Expansion and Operational Streamlining

Twin Disc's recent history is marked by strategic acquisitions designed to broaden its capabilities and market reach. On May 31, 2024, the company acquired Katsa Oy, a Finnish manufacturer renowned for custom-designed, high-quality power transmission components and gearboxes. This acquisition significantly expanded Twin Disc's presence in Europe and is already contributing to lower gear production costs across other operations due to Katsa's effective manufacturing methods. Following this, on February 14, 2025, Twin Disc acquired Kobelt Manufacturing Co. Ltd., a Canadian manufacturer of controls, propulsion, steering, and braking systems. Kobelt's expertise in bronze die casting, precision machining, and assembly further reinforces Twin Disc's position as a global leader in power transmission solutions. These integrations are not merely about adding revenue; they are about unlocking meaningful synergies, leveraging cross-selling opportunities, and enhancing the overall product portfolio.

To support this expanded and diversified business, Twin Disc has modernized its operating model, organizing into four distinct product line business units. This structure underpins an agile global manufacturing and supply chain, enabling efficient scaling and seamless integration of new acquisitions without necessitating a proportional expansion of fixed infrastructure. The company is also rigorously pursuing operational efficiencies, including disciplined inventory management, product rationalization (discontinuing less profitable lines), and cost reduction initiatives, all contributing to improved profitability and service levels.

Financial Performance and Liquidity

Fiscal year 2025 marked a period of significant strategic activity and mixed financial results for Twin Disc. Net sales increased by a robust 15.5% to $340.7 million, up from $295.1 million in fiscal 2024. This growth was substantially driven by the Katsa and Kobelt acquisitions, which contributed $39.1 million and $4.9 million in incremental revenue, respectively. Excluding these acquisitions, revenue remained relatively flat, as strong performance in Veth products was offset by weaker oil and gas transmission shipments to China and softness in European industrial and commercial marine markets.

Gross profit for fiscal 2025 improved by 11.3% to $92.7 million. However, the gross profit margin as a percentage of sales decreased by 100 basis points to 27.2% from 28.2% in fiscal 2024. This margin compression was primarily due to a less favorable product mix, particularly from weaker demand for oil and gas products, and a $0.9 million impact from purchase accounting amortization. In the fourth quarter of fiscal 2025, gross margin showed improvement, rising 130 basis points to 31%, supported by a favorable product mix and a one-time inventory cost capitalization adjustment related to Katsa. Excluding this adjustment, the gross margin was 28% for the quarter, demonstrating sequential improvement.

Operating expenses, specifically Marketing, Engineering, and Administrative (MEA) expenses, increased by 15.1% to $82.4 million in fiscal 2025. This rise was largely attributable to the integration of Katsa and Kobelt operations ($8.6 million), inflationary pressures on salaries and benefits ($1.5 million), and increased professional fees ($1.3 million). Despite these increases, MEA expenses as a percentage of sales remained relatively stable at 24.2%.

The company reported a net loss of $1.9 million for fiscal 2025, compared to a net income of $11 million in fiscal 2024. This shift was influenced by several non-operating and non-cash items, including a $5.2 million increase in currency translation losses, a $2 million increase in defined benefit pension amortization, and the absence of the prior year's $3.7 million bargain purchase gain from the Katsa acquisition. Fiscal 2025 EBITDA stood at $19 million, down from $26.5 million in fiscal 2024, reflecting these impacts.

From a liquidity perspective, net cash provided by operating activities in fiscal 2025 was $24 million, a decrease of $9.7 million from the prior year. This reduction was primarily due to an increase in inventory, driven by shipping delays and the need to support a growing backlog. Management anticipates driving inventory reductions through fiscal 2026 to improve cash flow. Net cash used in investing activities totaled $32.9 million, largely for the Kobelt acquisition ($17.2 million) and capital expenditures ($15.2 million), reflecting increased investment in modern equipment and the needs of acquired businesses. The company ended fiscal 2025 with a cash balance of $16.1 million and a conservative net leverage ratio of 0.8x. Twin Disc's amended Credit Agreement with Bank of Montreal (BMO) provides a Term Loan of $15 million and Revolving Loans up to $50 million, with approximately $32.1 million in available borrowings as of June 30, 2025. Management believes its current liquidity and future cash generation will be adequate to fund its capital requirements.

Segmental Performance Highlights

Marine and Propulsion Systems was a standout performer, with sales growing 17.1% to $201.1 million in fiscal 2025. This growth was fueled by robust activity in workboats, government contracts, and the continued global expansion of Veth's ELITE thrusters. The company is experiencing strong order momentum for unmanned U.S. Navy vessels and a growing backlog for Veth thrusters in both workboat and cruise vessel segments. The integration of Kobelt's commercial marine controls business further enhances this segment. The marine aftermarket also demonstrated strength, contributing $4.7 million in the fourth quarter of fiscal 2025 with margins exceeding 60%.

Land-based Transmissions saw a 2.1% increase in sales to $80.19 million in fiscal 2025. Demand for Airport Rescue and Firefighting (ARFF) transmissions remained robust, reaching record backlog levels. While oil and gas shipments to China declined, the segment is seeing renewed quoting activity in North and South America. The oil and gas business constituted about 8% of fiscal 2025 revenue, down significantly from prior years, but management projects a potential return to 15% of total sales in the future. A notable development was the first meaningful order for new E-frac systems, totaling $2.3 million for 14 units, validating Twin Disc's differentiated technical offering.

The Industrial segment experienced substantial growth, with sales increasing 61.7% to $41.5 million in fiscal 2025. This was primarily driven by the addition of Katsa and a rebound in Lufkin orders. Demand for higher-end content industrial products has shown resilience, even as some commoditized products faced softer demand.

Competitive Landscape and Positioning

Twin Disc operates in a competitive environment, facing direct competition from divisions of larger independent manufacturers and even parts manufacturing divisions of some major customers. Key competitive factors include design, technology, performance, price, service, and availability.

Against competitors like MYR Group Inc. (MYRG), Allison Transmission Holdings, Inc. (ALSN), Eaton Corporation plc (ETN), and Dana Incorporated (DAN), Twin Disc carves out a specialized niche. While MYR Group focuses on broader electrical infrastructure, Twin Disc's strength lies in its application-specific, heavy-duty power transmission solutions for marine and off-highway sectors. Its proprietary technology, such as the Veth ELITE thrusters and the robust E-frac transmission, offers superior reliability and performance in demanding environments, translating into stronger customer loyalty and pricing power. This specialized expertise allows Twin Disc to differentiate itself from more generalist competitors.

Twin Disc's established global direct sales and distributor networks are a significant competitive advantage, fostering recurring revenue from long-term contracts. This contrasts with more volume-based strategies of some rivals, enabling Twin Disc to penetrate niche markets effectively. For example, the company is leveraging its global support system to expand Katsa's product line internationally and integrate Kobelt's offerings into its existing network.

However, Twin Disc faces vulnerabilities due to its smaller scale compared to industry giants like Eaton, which can lead to higher operating costs and potential challenges in price competition. There are also technological gaps in broader electrification trends where companies like Dana are making significant strides. Twin Disc's strategic response involves intensifying its own R&D in hybrid and electrification, leveraging its Veth and Katsa platforms for a tangible head start in these emerging markets. Barriers to entry in its core industries, such as high capital requirements and regulatory approvals, provide a degree of protection, favoring Twin Disc's niche strategy.

Outlook and Growth Trajectory

Twin Disc's outlook is underpinned by a strong six-month backlog, which stood at $150.5 million as of June 30, 2025, representing a 13% increase year-over-year. This growth is largely attributed to the continued strength in Veth product demand and the contributions from the Katsa and Kobelt acquisitions.

Management expresses confidence in the company's growth trajectory, particularly in the defense market. Orders related to defense products surged approximately 45% in fiscal 2025, now constituting nearly 15% of the total backlog. With a substantial $50 million to $75 million defense-related pipeline, Twin Disc sees significant runway for growth, serving as an approved supplier to entities like the U.S. Army, U.S. Navy, and NATO. The company anticipates capital expenditures for fiscal 2026 to be in the range of $12 million to $14 million, reflecting ongoing investments in modern equipment to drive growth, efficiencies, and quality improvements.

Looking further ahead, Twin Disc has set ambitious 2030 objectives: approximately $500 million in revenue, 30% gross margins, and consistent free cash flow conversion of at least 60%. The existing ME&A infrastructure is projected to support revenue well north of $400 million without significant additional investment, indicating operational leverage. Management expects to reduce inventory levels in fiscal 2026, which should contribute positively to operating cash flow.

Key Risks and Considerations

While the outlook is positive, several risks warrant investor attention. As a global company, Twin Disc is exposed to currency fluctuations, particularly between the U.S. dollar and the euro, which can impact profitability. The cyclical nature of markets such as oil and gas, and general economic downturns, can lead to volatile demand for its products. Increasing commodity costs and evolving tariff regulations, though currently mitigated by pricing actions and alternative sourcing, pose ongoing threats to profitability.

The integration of recent acquisitions like Katsa and Kobelt carries inherent risks, including the potential for inaccurate synergy assumptions, higher-than-expected integration costs, or unforeseen liabilities. The company also carries a significant amount of intangible assets from these acquisitions, which are subject to impairment reviews. Furthermore, international operations, which accounted for 73% of consolidated net sales in fiscal 2025, expose Twin Disc to political and social risks, differing legal systems, and cybersecurity threats. The company's ability to meet debt obligations and financial covenants under its Credit Agreement is also a continuous monitoring point, although management believes it will remain in compliance.

Conclusion

Twin Disc is undergoing a significant transformation, strategically repositioning itself through targeted acquisitions and an unwavering focus on hybrid and electrification solutions. The company's rich history and established expertise in specialized power transmission equipment provide a strong foundation, while recent integrations of Katsa and Kobelt are expanding its capabilities and market reach. The growing backlog, particularly in the defense sector and for innovative Veth propulsion systems, signals robust demand and a clear path for revenue expansion.

Despite a net loss in the most recent fiscal year, influenced by non-cash items and strategic investments, Twin Disc maintains a disciplined approach to operational efficiency and capital management. Its technological differentiators, offering superior performance and efficiency in niche applications, are critical competitive advantages against larger, more diversified rivals. With clear 2030 financial targets and a strategic roadmap centered on high-value, sustainable solutions, Twin Disc is poised to capitalize on evolving industry trends. Investors should closely monitor the successful integration of acquisitions, the continued traction of its hybrid and electric offerings, and its ability to convert strong backlog into profitable growth, as these factors will be pivotal in realizing the company's long-term value creation potential.