Twin Disc surges 6.3% on record backlog, tax-driven earnings beat
One-time $21.8M tax benefit pushes EPS to $1.55; CEO notes tariff delays are temporary
Twin Disc shares surged 6.3% in early trading Wednesday after the power transmission systems manufacturer reported second-quarter earnings that handily exceeded analyst expectations, buoyed by a substantial one-time tax benefit and record backlog that suggests robust future demand despite near-term headwinds.
The Milwaukee-based company reported net income of $22.4 million, or $1.55 per diluted share, for the quarter ended December 26, representing a dramatic improvement from $919,000, or $0.07 per share, in the same period last year. The results far outstripped Wall Street estimates of $0.21 per share. However, the outsized earnings beat was primarily driven by an income tax benefit of $21.8 million resulting from the reversal of a domestic valuation allowance.
Revenue for the quarter totaled $90.2 million, up just 0.3% year-over-year but falling short of the $92.8 million consensus estimate. On an organic basis, excluding the impact of the Kobelt acquisition, sales actually declined 7.9% year-over-year. The company's gross margin expanded 70 basis points to 24.8%, though EBITDA fell 25% to $4.7 million.
Despite the revenue miss and organic sales decline, investors focused on the company's strengthening order book. Twin Disc reported a record six-month backlog of $175.3 million, up from $163.3 million at the end of the first quarter. The backlog growth reflects accelerating demand across defense-related programs and hybrid propulsion systems, according to management commentary.
Chief Executive Officer John Batten acknowledged an "uneven operating environment" during the quarter, noting that "tariff-related impacts affected shipment timing and near-term activity." However, Batten sought to reassure investors that the challenges are temporary rather than structural.
"Planned shipments were delayed rather than lost, and the company is prepared to adapt to revised timelines," Batten stated. The CEO emphasized that Twin Disc is "well-equipped to adapt to revised timelines and convert our record backlog into shipments as timing normalizes."
The defense segment has emerged as a particular growth driver, with orders accelerating and defense-related projects representing an expanding share of the total backlog. According to recent analyst commentary, Twin Disc projects 50% annual growth in its defense segment through 2027, fueled by increased spending in U.S. and NATO budgets. The company maintains a robust defense-related pipeline valued between $50 million and $75 million.
Chief Financial Officer Jeffrey Knutson provided additional color on the operational challenges, explaining that tariff impacts pressured margins due to altered product mix and elevated inventory levels. Nevertheless, the company generated positive free cash flow during the quarter, a metric that investors typically view as a sign of operational discipline.
Analyst sentiment on Twin Disc appears mixed heading into the earnings release. One recent report shows an average price target of $24.00, representing roughly 26% upside from Wednesday's levels. However, some analysts had downgraded their ratings in January, suggesting caution about the sustainability of growth amid macroeconomic uncertainty.
The stock's reaction reflects investors weighing the short-term earnings boost against the longer-term demand picture. With shares trading near their 52-week high of $19.63—more than triple the $6.08 low touched in the past year—the market has been betting on Twin Disc's ability to capitalize on its strong defense positioning and recover from the temporary tariff disruptions.
Looking ahead, management's ability to convert the record backlog into revenue as shipment timing normalizes will be closely watched. The company's performance in defense programs and hybrid propulsion systems, two areas with significant growth projections, could determine whether the current stock momentum can be sustained through fiscal 2026.