Quarterly Report for Quarter Ending September 25, 2026 (Form 10-Q)

In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our condensed consolidated financial statements as of September 25, 2026, and related notes, as reported in Item 1 of this Quarterly Report.

Some of the statements in this Quarterly Report on Form 10-Q are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the Company's description of plans and objectives for future operations and assumptions behind those plans. The words "anticipates," "believes," "intends," "estimates," and "expects," or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by the Company should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.

In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company's Annual Report filed on Form 10-K for June 30, 2026, as supplemented in this Quarterly Report, could cause actual results to be materially different from what is expressed or implied in any forward-looking statement.

Results of Operations

Comparison of the First Quarter of Fiscal 2027 with the First Quarter of Fiscal 2026

Net sales for the first quarter increased 10.9%, or $8.7 million, to $88.7 million from $80.0 million in fiscal 2026. The Company continues to see strong growth from the Veth product line, along with the initial impact of expanding military demand at the Katsa operation in Finland, improved oil and gas demand and generally strong market conditions across the global enterprise. Global sales of marine and propulsion products improved 14.4% from the prior year, largely on the strength of the Veth product demand. Sales of industrial products improved 35.3% from the prior year first quarter, with a significant contribution from demand for military applications at our Finnish operation. Shipments of off-highway transmission products decreased (14.7%) with reduced shipments of ARFF transmissions as we transition assembly to our Lufkin facility. The North American region, saw a significant decrease in revenue ($3.1 million or 11.8%) as the current tariff structure continues to hamper shipments into the region. Sales into the North American region represented 26.3% of total revenue compared to 33.1% in the prior year first quarter. Sales into Europe increased 31.4%, or $9.8 million, on growing demand for the Veth and Katsa product lines. With this growth, Europe represented 46.4% of total revenue for the quarter compared to 39.1% in the prior year. The Asia Pacific region increased 26.2%, or $3.8 million, on stronger commercial marine demand and improved shipments of oilfield transmissions into China. With this improvement, Asia Pacific represented 20.4% of fiscal first quarter revenue compared to 17.9% in the first quarter of fiscal 2026. Currency translation had an unfavorable impact on fiscal 2027 sales compared to the prior year totaling $0.7 million, primarily due to the weakening of the euro against the U.S. dollar.

Sales for our manufacturing segment increased 8.4%, or $6.2 million, versus the same period last year. The Company's Veth propulsion operation in the Netherlands experienced a 17.5% increase in sales compared to fiscal 2026, continuing a strong growth trend. The primary driver for this increase remains growing demand through market and geographic penetration for the Company's innovative propulsion solutions around the globe, along with improving supply chain and operational performance. The Company's Katsa operation in Finland experienced an increase of 31.9%, with acceleration in demand from European military applications. The Company's domestic manufacturing operation had essentially flat revenue compared to the prior year first quarter, as improved oil and gas demand was offset by reduced ARFF shipments. The Company's Italian manufacturing operations reported a 6.7% decrease in sales from fiscal 2026 reflecting a difficult European market for its marine and propulsion products. The Company's Belgian manufacturing operation was essentially flat with the prior year first quarter, with shipments into the US still hampered by the existing tariff structure. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 15.0% decrease in sales compared to the first quarter of fiscal 2026, primarily due shipment timing on some larger propulsion projects.

Sales for our distribution segment were up 23.3%, or $5.1 million, compared to fiscal 2026. The Company's Asian distribution operations in Singapore, China and Japan experienced a 32.5% increase in sales on improved demand for energy related products in China and strong commercial marine activity in the region. The Company's North American distribution operation reported a 23.8% increase compared to the prior year on a catch-up in tariff delayed demand. The Company's European distribution operation was up 15.1% from the prior year, driven by improving European demand. The Company's distribution operation in Australia and New Zealand, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw a 14.7% increase in revenue on improving demand for pleasure craft products in the region.

Gross profit for the first quarter of fiscal 2027 improved $2.5 million, or 10.9%, to $25.4 million on a sales increase of $8.7 million. Gross profit as a percentage of sales remained level with the prior year first quarter at 28.7%. Margin for the quarter was favorably impacted by the additional sales volume (approximately $3.5 million). This positive movement was partially offset by a less favorable mix of products ($1.0 million), along with the incremental impact of tariff dilution.

Marketing, engineering, and administrative (ME&A) expenses of $20.8 million were up just $0.1 million, or 0.7%, in the first quarter of fiscal 2027 compared to the prior fiscal year. As a percentage of sales, ME&A expenses decreased to 23.5% of sales versus 25.9% of sales in the first quarter of fiscal 2026. The small increase in ME&A spending in fiscal 2027 compared to the prior year first quarter was primarily driven by an inflationary impact to wages and benefits nearly offset by active and aggressive spending controls.

Interest expense of $0.4 million for the fiscal 2027 first quarter was $0.4 million lower than fiscal 2026 due to a reduced average balance and a lower average interest rate.

In the fiscal 2027 first quarter, other expense, net, of $0.2 million decreased by $0.6 million from the prior fiscal year first quarter other expense, net, of $0.9 million. This change is primarily due to a decrease in defined benefit pension amortization ($0.6 million).

The fiscal 2027 first quarter effective tax rate was 10.6% compared to 172.2% in the prior fiscal year first quarter. The full domestic valuation allowance in the comparable prior year first quarter contributed to a very volatile effective tax rate. This, along with the mix of foreign earnings by jurisdiction, resulted in the change to the effective tax rate.

Financial Condition, Liquidity and Capital Resources

Comparison between September 25, 2026 and June 30, 2026

As of September 25, 2026, the Company had net working capital of $165.9 million, which represents an increase of $6.2 million, or 3.9%, from the net working capital of $159.6 million as of June 30, 2026.

Cash of $26.7 million as of September 25, 2026 was up $10.7 million from June 30, 2026. As of September 25, 2026, the majority of the cash was at the Company's overseas operations in Europe ($5.3 million) and Asia-Pacific ($12.0 million). The remaining domestic balance of approximately $9.0 million reflects short term funds driven by timing of payments on the Company's credit facility.

Trade receivables of $55.0 million were down $11.8 million, or 17.7%, when compared to last fiscal year-end. The impact of foreign currency translation was essentially neutral versus June 30, 2026. As a percent of sales, trade receivables finished at 61.9% in the first quarter of fiscal 2027 compared to 79.9% for the comparable period in fiscal 2026 and 58.4% for the fourth quarter of fiscal 2026.

Inventories increased by $1.0 million, or 0.5%, versus June 30, 2026 to $178.9 million. The impact of foreign currency translation was to increase inventories by $0.2 million versus June 30, 2026. The largest increase came at our distribution entity in Singapore, a $2.6 million increase, related to the timing of oilfield transmissions into China. Our operations in Finland and Belgium saw a $1.1 million and $1.2 million increase, respectively, driven by growing demand for product in the defense and commercial marine markets. Our operation in the Netherlands saw a $2.7 million decrease due to the shipments of large projects. On a consolidated basis, as of September 25, 2026, the Company's backlog of orders to be shipped over the next six months approximates $190.6 million, compared to $178.3 million at June 30, 2026 and $163.3 million at September 26, 2025. As a percentage of six-month backlog, inventory has decreased from 99% at June 30, 2026 to 94% at September 25, 2026.

Net property, plant and equipment increased $2.5 million (3.7%) to $70.6 million versus $68.1 million at June 30, 2026. The Company had capital spending of $5.5 million in the quarter. This increase was offset by depreciation of $2.7 million, along with some disposal activity. Capital spending occurring in the first quarter was primarily related to replacement capital, along with capital to drive growth and operating efficiencies. In total, the Company expects to invest between $20 and $25 million in capital assets in fiscal 2027. The Company continues to review its capital plans based on overall market conditions and availability of capital and may make changes to its capital plans accordingly. The Company's capital program is focused on modernizing key core manufacturing, assembly and testing processes and improving efficiencies at its facilities around the world.

Accounts payable as of September 25, 2026 of $30.5 million was down $0.3 million, or 1.0%, from June 30, 2026. The decrease is primarily related to the normal timing of inventory receipts and payments within the quarter.

Total borrowings and long-term debt as of September 25, 2026 increased $10.0 million to $39.8 million versus $29.8 million at June 30, 2026. During the first quarter, the Company reported positive free cash flow of $5.6 million (defined as operating cash flow less acquisitions of fixed assets), driven by favorable working capital movement related primarily to inventory, timing of trade receivable receipts and capital spending. The Company ended the quarter with total debt, net of cash, of $13.1 million, compared to $13.8 million at June 30, 2026, for a net improvement of $0.7 million.

Total equity increased $0.4 million to $220.3 million as of September 25, 2026. The net income during the first quarter increased equity by $3.5 million, partially offset by an unfavorable foreign currency translation of $0.2 million. The net change in common stock and treasury stock resulting from the accounting for stock-based compensation decreased equity by $2.2 million. The quarterly dividend decreased equity by $0.7 million.

On June 30, 2026, Twin Disc, Incorporated (the "Company") entered into a Credit Agreement (the "Credit Agreement") among the Company, as Borrower; Kobelt Manufacturing Co. Ltd. ("Kobelt"), as Guarantor; Bank of Montreal, as a Lender, Administrative Agent, Swing Line Lender, and L/C Issuer; and JPMorgan Chase Bank, N.A. ("Chase"), as a Lender. The Credit Agreement refinanced and replaced the credit agreement dated February 14, 2025 among the Company, Kobelt, and Bank of Montreal. Capitalized terms that are not otherwise defined herein are defined in the Credit Agreement.

Pursuant to the Credit Agreement, Bank of Montreal and Chase (the "Lenders") made Term Loans to the Company in an aggregate principal amount of $30.0 million. The maturity date of the Term Loans is June 30, 2031, and the Company is required to make principal installments on the Term Loans of at least $0.4 million per quarter (increasing to $0.6 million per quarter for the quarter ending on or about September 30, 2028, and $0.8 million per quarter for the quarter ending on or about September 30, 2030).

The Credit Agreement also allows the Company to enter into Revolving Loans with the Lenders from time to time prior to June 30, 2031 (the "Revolving Credit Termination Date") in amounts not to exceed $60.0 million (the "Revolving Credit Commitment"). The Revolving Credit Commitment includes a $5.0 million sublimit for Swing Loans and a $4.0 million sublimit for Letters of Credit that may be requested by the Company from time to time until the Revolving Credit Termination Date. Each Swing Loan or Letter of Credit provided pursuant to the terms of the Credit Agreement shall be a Revolving Loan provided under the Revolving Credit Commitment.

Interest rates under the Credit Agreement are based on the secured overnight financing rate ("SOFR"), the euro interbank offered rate (the "EURIBO Rate"), the Canadian Overnight Repo Rate Average (the "CORRA"), or a Base Rate based on the highest of the prime rate, federal funds rate, or Term SOFR. Loans under the Credit Agreement are designated as either as SOFR Loans, which accrue interest at a Term SOFR plus an Applicable Margin; Base Rate Loans, which accrue interest at the Base Rate plus an Applicable Margin; Eurodollar Loans, which accrue interest at the EURIBO Rate plus an Applicable Margin; Term CORRA Loans, which accrue interest at an Adjusted Term CORRA plus an Applicable Margin; Daily Compounded CORRA Loans, which accrue interest at a Daily Compounded CORRA plus an Applicable Margin; or Canadian Prime Rate Loans, which accrue interest at the Canadian Prime Rate plus an Applicable Margin. The Applicable Margin for Loans is between 1.50% and 3.00%, and the Applicable Margin for the Unused Revolving Credit Commitment is between 0.15% and 0.30% (each depending on the Company's Total Funded Debt to EBITDA ratio). The Term Loan has been designated as a SOFR Loan.

Borrowings under the Credit Agreement are secured by substantially all of the Company's and Kobelt's personal property, including accounts receivable, inventory, machinery and equipment, and intellectual property. The Company has also pledged 65% of its equity interests in certain foreign subsidiaries. To effect these security interests, the Company entered into an Amended and Restated Security Agreement, Amended and Restated IP Security Agreement, Amended and Restated Pledge Agreement, and Amended and Restated Perfection Certificate with the Administrative Agent, and the Company has entered into an Amended Restated Agreement as to Liens and Encumbrances and an Amended and Restated Negative Pledge Agreement with the Administrative Agent with regard to the Company's real property.

Upon the occurrence of an Event of Default, the Administrative Agent may take the following actions upon written notice to the Company: (1) terminate the remaining Commitments and all obligations of the Lenders under the Credit Agreement; (2) declare the principal and accrued interest of all Loans outstanding under the Credit Agreement to be immediately due and payable; and (3) demand the Company to immediately Cash Collateralize the outstanding L/C Obligations in an amount equal to 105% of the aggregate L/C Obligations. If such Event of Default is due to the Company's bankruptcy, the actions and obligations listed above shall occur without notice to the Company.

The Company remains in compliance with its liquidity and other covenants under the Credit Agreement.

Management believes that available cash, the Credit Agreement, the unsecured lines of credit, cash generated from future operations, and potential access to debt markets will be adequate to fund the Company's cash and capital requirements for the foreseeable future.

Contractual Obligations

Other significant contractual obligations as of September 25, 2026 are disclosed in Note N "Lease Liabilities" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There are no material undisclosed guarantees. As of September 25, 2026, the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant, and equipment, which generally have terms of less than 90 days. The Company has long-term obligations related to its postretirement plans which are discussed in detail in Note H "Pension and Other Postretirement Benefit Plans" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q. Postretirement medical claims are paid by the Company as they are submitted. In fiscal 2027, the Company expects to contribute $0.6 million to postretirement benefits based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured. In fiscal 2027, the Company expects to contribute $2.0 million to its defined benefit pension plans. The Company does not have any material off-balance sheet arrangements.

New Accounting Releases

See Note A, Basis of Presentation, to the condensed consolidated financial statements for a discussion of recently issued accounting standards.

Critical Accounting Policies

The preparation of this Quarterly Report requires management's judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

The Company's critical accounting policies are described in Item 7 of the Company's Annual Report filed on Form 10-K for June 30, 2026. There have been no significant changes to those accounting policies subsequent to June 30, 2026.