Twin Disc (TWIN): Record Quarter Comes With A Margin Warning Attached

On August 20, Twin Disc (NASDAQ:TWIN) announced its fourth-quarter earnings, showing an 18.3% year-over-year revenue increase to $114.4 million, and a net income of $9.4 million, more than tripling the $2.6 million recorded in the same period last year. The company's free cash flow surged to $17.2 million, and shareholders received a 25% dividend boost to $0.05 per share.

However, the company's gross margin fell to 26.3% from 32.3% the previous year, a 600-basis-point decline attributed to product mix, tariff dilution, and a $3 million one-time adjustment. Marine and propulsion systems sales grew 20% to $63.6 million, and land-based transmission sales expanded 26.2% to $33.0 million, indicating growth in both key product lines.

Defense now accounts for 17% of the total backlog, a 56% increase from the previous year, with $30 million to $50 million in defense orders tied to US Navy autonomous vessel programs and NATO orders through Twin Disc's Finnish subsidiary, Katsa. Oil and gas contributed over 10% of quarterly revenue, double the average of the first three quarters of the fiscal year, as customers embraced higher-margin equipment.

Despite steady backlog, the company's industrial sales declined 1.6% to $12.9 million. The margin decline is attributed to product mix, tariffs, and a $3 million one-time adjustment, which, if removed, would have resulted in a 28% margin. Management is constructing a new facility in Finland to accommodate defense and NATO orders, while relocating assembly work to Lufkin, Texas, to reduce exposure to Indian components.

A $2.5 million tax benefit also contributed to the income jump. Twin Disc aims for $500 million in revenue and 30% gross margins by 2030, but the current margin figure lags behind. Hedge fund ownership decreased from 15 funds to 13, and short interest stands at 5.73% of float. The company's shares trade at a forward price-to-earnings ratio of 7.48, undervaluing the growth story.