Rising oil prices and increased activity in oil and gas markets are prompting Racine-based Twin Disc Inc. to invest in additional production capacity after the company dealt with weak demand for its products in 2016 and 2017.
The maker of power transmission equipment saw revenue fall 37 percent from fiscal 2015 to 2016 and there was roughly 1 percent growth in fiscal 2017. But an improvement in oil and gas markets has helped the company report four straight quarters with at least a 25 percent increase in revenue, including a 45 percent increase during the third quarter of fiscal 2018.
John Batten, Twin Disc president and chief executive officer, said the company is seeing stronger demand from customers in the North American fracking market, but demand is also improving in other markets around the world.
“This is putting a lot of pressure on our supply chain,” Batten said. “A lot of our management time has been spent on securing the parts and processes needed to meet this ramp up. The overall situation improved throughout the quarter, but we still have work to do. Many of our key suppliers are at capacity and we are adding capacity through new suppliers and new internal (capital expenditures).”
Twin Disc reported $65.4 million in revenue during the quarter, but Batten said sales could have increased another $7 million if the company had been able to address supply issues.
Batten said Twin Disc currently has $6 million in new equipment on order to improve production. He added the company would be moving distribution functions it brought back to Racine in recent years to a new location to make space for the new machines.
He said the new equipment will help productivity once it arrives, but the bigger challenges are finding additional suppliers and bringing new employees up to speed.
“Finding people here that want to work in manufacturing has always been a challenge, but the guys that are coming out of the trade schools are going to fit nicely with the machines we have coming in,” he said.
Twin Disc reported net income of $4.3 million in the quarter, an improvement over a $1.9 million loss last year. Earnings swung from a 16 cent loss to a profit of 37 cents per diluted share.
Gross profit margins also improved from 29.5 percent to 31.7 percent. Batten said there’s an opportunity for margins to go even higher, potentially eclipsing their previous peak by 3 percentage points. He noted at the last peak in the oil and gas market, Twin Disc had about 250 hourly employees in Racine. Entering this upswing, the company has fewer employees, fewer facilities worldwide and has made more capital investments.
Batten said there was a lot of optimism at a recent industry conference and many customers are discussing follow-on orders even as their initial orders are in the midst of production.
“Many of our customers had a very positive outlook throughout 2019 and into 2020. We share that optimism, but it is our goal to use this opportunity to invest in new products and technologies to diversify our business,” Batten said. “I think there’s more investment to come. I don’t know how long it’s going to last, but it certainly seems there’s a lot more runway.”