Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
LUFK > SEC Filings for LUFK > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for LUFKIN INDUSTRIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LUFKIN INDUSTRIES INC


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The discussion below and the other sections of this report contain forward-looking statements. These forward-looking statements reflect the expectations, beliefs, plans and objectives of management about future financial performance and assumptions underlying management's judgment concerning the matters discussed and, accordingly, involve estimates, assumptions, judgments and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in Item 1A "Risk Factors" and below in "Cautionary Statement Regarding Forward-Looking Statements and Assumptions."

The Company is a global supplier of oilfield and power transmission products. Through its Oilfield segment, the Company manufactures and services artificial lift products, technology, services and solutions, including automated control equipment and analytical products for artificial lift equipment, which are used to extract crude oil and other fluids from wells. Through its Power Transmission segment, the Company manufactures and services high-speed and low-speed increasing and reducing gearboxes for energy and industrial applications. While these markets are price-competitive, technological and quality differences can provide product differentiation.

As more fully described in Note 2 of the Notes to Condensed Consolidated Financial Statements, on April 5, 2013, the Company entered into the Merger Agreement with GE, in an all-cash transaction. Under the terms of the Merger Agreement, which provides for a subsidiary of GE to merge with the Company and for the Company to survive such merger as a wholly owned subsidiary of GE upon the closing of the Merger, the Company's shareholders (other than certain excluded shareholders) will receive $88.50 in cash for each common share of the Company they own. The consummation of the Merger is conditioned upon customary closing conditions contained in the Merger Agreement and summarized in Note 2 of the Notes to Condensed Consolidated Financial Statements.

Unless expressly noted to the contrary, all forward-looking statements in the discussion and analysis of financial condition and results of operations that follows relate to the Company on a stand-alone basis and are not reflective of the impact of the proposed merger with GE.

The Company's objective is to extend its position as a leading global supplier of high quality, mission critical artificial lift and power transmission products, and related aftermarket services. The Company intends to accomplish its objective and capitalize on long-term industry growth trends through the execution of the following strategies:

Position the Company as the preferred source for artificial lift solutions. The Company believes it offers one of the industry's broadest portfolios of artificial lift products, including reciprocating rod, gas, plunger and hydraulic lift equipment, progressive cavity pumps, or PCPs, and measurement and control equipment for all types of artificial lift, including ESPs. The Company has developed a specialized optimization team which focuses on assisting producers with well completion design and production management. The Company is integrating its portfolio of artificial lift products, automation technologies, global service team and optimization team to deliver complete artificial lift solutions to its customers. The Company believes that the combination of its more than 80 years of artificial lift experience and its optimization expertise will allow its customers to offset the diminishing artificial lift knowledge base in their organizations.

Continue to expand the Company's global reach. The Company intends to continue to expand its global reach by establishing manufacturing, engineering and service platforms on three continents, which will in turn support a network of regional service centers in areas with high actual or potential demand for artificial lift solutions. These platforms include:

o Lufkin, Texas, which supports its operations in the United States and Canada;

o Comodoro Rivadavia, Argentina, which supports its operations in South America; and

o Ploiesti, Romania and Eastern France, which support or will support the Company's operations in Europe, the Middle East, North Africa and elsewhere in the Eastern Hemisphere.

The Company also plans to exploit new market opportunities by deploying sales, distribution, service and manufacturing resources in markets where it believes it is currently under-represented. The Company believes that this strategy has already strengthened its customer relationships and that further expansion will allow it to respond more quickly to its customers' needs. The Company also expects that a broad geographical footprint will improve its support logistics and reduce its costs.


Expand the Company's portfolio of artificial lift products and solutions through acquisitions and internal development. The Company intends to continue to selectively pursue acquisitions that increase its exposure to the most important growth trends in the industry, fill critical product gaps and expand its geographic scope. Since the beginning of 2009 the Company has successfully acquired and integrated several businesses across both its segments, including Pentagon and Quinn's reciprocating down-hole pump and PCP businesses. In 2012, the Company completed the acquisitions of Datac, RealFlex and Zenith. The Company believes these transactions demonstrate its ability to identify and complete strategic transactions that are consistent with its long-term strategy.

Develop the next generation of automation solutions. As producers increasingly focus on maximizing the production from existing wells and deploy their capital resources in newer, unconventional plays where reservoir pressures deplete more rapidly, the Company is developing the technologies that will allow its customers to automatically control surface and down-hole pumps, based on real time temperature, pressure and flow data, to optimize artificial lift performance across a variety of well conditions, thereby maximizing recovery rates. The Company's optimization team provides expertise to help producers design full field optimization programs in order to produce their reserves at a lower cost and with greater reliability. This expertise includes the selection of the appropriate artificial lift and automation technology, facility layout and field electrification. As automation technology evolves, the Company intends to take advantage of opportunities to retrofit existing equipment and then provide its customers with ongoing upgrades.

Trends/Outlook

The Company's business is largely dependent on the level of capital expenditures in the energy industry, which affects the drilling of new wells, the use of artificial lift technologies to improve the recovery from existing wells and the construction of new energy infrastructure. The Company believes the significant trends impacting its industry include the following:

World oil and natural gas consumption continues to increase, driven by growing economies in emerging markets;

Growing economies are creating the need for large-scale energy infrastructure projects, such as refineries and LNG facilities; and

Natural gas is gaining market share as a source of fuel for power generation.

In addition, the following trends are influencing demand for artificial lift solutions:

Producers are increasingly focused on optimizing the ultimate recoveries from mature oilfields, such as the Permian Basin in west Texas and in central California;

North American exploration and production activity is shifting toward unconventional plays such as the Bakken and Eagle Ford Shale formations, which often require some form of artificial lift earlier in the production life of the well than production from a conventional reservoir does. This trend towards shale exploration is expected to spread globally in coming years; and

Producers are facing a shortage of experienced personnel due to retirements, and are increasingly relying on outside expertise.

We believe the long-term outlook for the global energy industry is favorable. According to the U.S. Energy Information Administration, or EIA, oil was the single most significant component of world energy consumption in 2010, representing 34% of total demand. Forecasts published by the EIA anticipate that worldwide demand for oil will grow 28% from 87.4 million barrels per day in 2010 to 112.2 million barrels per day in 2035.

As more readily accessible oil reserves are depleted, producers have been required to make increasing investments in order to maintain their production and increase their reserves to meet the growing demand for energy resources worldwide. As a result, many producers are focused on extending the ultimate recovery from existing producing wells, through enhanced oil recovery methods such as infill drilling, CO2 injection and artificial lift, as a profitable alternative to finding and developing new reservoirs. The benefits of enhanced oil recovery can be dramatic. For example, according to BP, the average recovery factor for a typical oil reservoir is only 35%, and a 5% increase in the average recovery factor for all reservoirs would add an estimated 300 to 600 billion additional barrels of oil to the global reserve pool, an amount equal to the total reserves that have been attributable to all discoveries over the last 20 years.


In their search for new reserves, oil and gas producers are increasingly turning to unconventional reservoirs such as shale formations. Due to their geologic characteristics, shale reservoirs have a natural pressure that typically declines more rapidly than a conventional reservoir's. As a result, the Company expects that current trends in shale development will result in increased demand for artificial lift solutions worldwide.

According to Spears, the global artificial lift market was approximately $11.0 billion in 2012 and was expected to be $13.0 billion in 2013, an 18% increase. The market share of rod lift and other non-ESP forms of artificial lift is expected to increase to 54% in 2012 from 46% in 2011, according to Spears, and the Company expects this trend to continue as land-based oil drilling in unconventional plays continues to grow.

During the fourth quarter of 2012, drilling activity slowed in the U.S. as customers reduced spending levels due to overspending capital budgets earlier in 2012. While drilling activity levels improved during the first quarter of 2013, they did not return to levels seen in the second and third quarters of 2012. The Company expects activity levels to continually improve throughout the remainder of 2013. Significant declines in the oil-directed rig count in future periods would have a negative impact on the sales of artificial lift equipment and services.

The Power Transmission segment also benefits from many of these industry trends. Approximately two-thirds of the products the Company sells in this segment are for applications in the oil and gas, refining and power generation industries. The Company believes growing global populations and energy consumption will create increased demand for energy infrastructure, and with it increased demand for custom engineered, mission critical gearboxes. The Company also believes that the combination of engineering knowledge, specialized machine tools, mechanical test capabilities and reliability that is required in the power transmission industry constitute a significant barrier to entry to potential new competitors and limit the competitive landscape to a relatively small number of suppliers. New orders for high-speed equipment for the energy industries improved in the first quarter of 2013 and are expected to gradually improve throughout the remainder of 2013 .

Summary of Results

The Company generally monitors its performance through analysis of sales, gross margin (gross profit as a percentage of sales) and net earnings.

Overall, sales for the first quarter of 2013 increased to $318.0 million from $279.5 million for the first quarter of 2012, or 13.8%. This increase was primarily driven by higher sales of Oilfield products and services in the North American markets driven by increased oil-focused drilling activities in unconventional resource plays and the acquisitions completed in the first quarter of 2012.

Gross margin for the first quarter of 2013 decreased to 23.0% compared to 24.2% in the first quarter of 2012, due primarily to the start-up costs for the new Romania plant and lower utilization in the Oilfield service and manufacturing locations due to the lower market activity levels.

Higher selling, general and administrative expenses negatively impacted net earnings, with these expenses increasing to $42.4 million during the first quarter of 2013 from $36.2 million during the first quarter of 2012. This increase was primarily related to resources added from the acquisitions and to support greater global operations and higher costs of the new ERP system and related post-implementation support costs. As a percentage of sales, selling, general and administrative expenses increased slightly to 13.3% during the first quarter of 2013 compared to 13.0% during the first quarter of 2012.

The Company reported net earnings of $19.1 million, or $0.56 per share (diluted), for the first quarter of 2013, compared to net earnings of $10.9 million, or $0.34 per share (diluted), for the first quarter of 2012.


Three Months Ended March 31, 2013, Compared to Three Months Ended March 31, 2012

The following table summarizes the Company's sales and gross profit by operating
segment (in thousands of dollars):

                       Three Months Ended
                            March 31,             Increase/       % Increase/
                       2013          2012        (Decrease)       (Decrease)
Sales
Oilfield             $ 274,597     $ 236,007     $    38,590              16.4
Power Transmission      43,382        43,529            (147 )            (0.3 )
Total                $ 317,979     $ 279,536     $    38,443              13.8

Gross Profit
Oilfield             $  61,233     $  56,200     $     5,033               9.0
Power Transmission      11,084        11,339            (255 )            (2.2 )
Total                $  72,317     $  67,539     $     4,778               7.1

Oilfield

Oilfield sales increased to $274.6 million, or 16.4%, for the quarter ended March 31, 2013, from $236.0 million for the quarter ended March 31, 2012. New pumping unit sales for the first quarter of 2013 were $119.2 million, up $8.9 million, or 8.1%, compared to $110.3 million during the first quarter of 2012, primarily from higher North American demand from increased oil drilling in the Bakken, Eagle Ford and Permian plays. For the first quarter of 2013, pumping unit service sales of $34.3 million were up $1.6 million, or 4.8%, compared to $32.7 million during the first quarter of 2012 from higher installation and general field activity. Automation sales of $55.1 million during the first quarter of 2013 were up $19.8 million, or 56.0%, compared to $35.3 million during the first quarter of 2012 from higher product sales and revenues attributable to the Zenith acquisition completed in the first quarter of 2012 and higher international sales. Sales from gas and plunger lift equipment of $11.5 million during the first quarter of 2013 were up $1.7 million, or 17.7%, compared to $9.8 million in the first quarter of 2012. Sales from Quinn's of $50.8 million in the first quarter of 2013 were up 17.2% compared to $43.3 million during the first quarter of 2012. Commercial casting sales of $3.7 million during the first quarter of 2013 were down $0.9 million, or 18.6%, compared to $4.6 million during the first quarter of 2012, as available capacity was directed towards internal production. Oilfield's backlog decreased to $195.2 million as of March 31, 2013 from $223.7 million at December 31, 2012. The decrease was due to lower orders for pumping units in the North American market and seasonality of Latin America orders.

Gross margin for Oilfield decreased to 22.3% for quarter ended March 31, 2013, compared to 23.8% for the quarter ended March 31, 2012, due primarily to start-up costs associated with the Romania plant and lower manufacturing and service utilization in the U.S. Capacity in the U.S. was expanded during 2013 compared to first quarter 2012 levels.

Direct selling, general and administrative expenses for Oilfield increased to $21.7 million, or 25.4%, for the quarter ended March 31, 2013, from $17.3 million for the quarter ended March 31, 2012. This increase was due to resources added from the acquisitions completed in the first quarter of 2012, additional resources associated with the Romania facility and higher bad debt reserves for certain international customers. Direct selling, general and administrative expenses as a percentage of sales increased to 7.9% for the quarter ended March 31, 2013, from 7.3% for the quarter ended March 31, 2012.

Power Transmission

Power Transmission sales decreased slightly to $43.4 million, or 0.3%, for the quarter ended March 31, 2013, compared to $43.5 million for the quarter ended March 31, 2012. New unit sales of $31.1 million during the first quarter of 2013 were up $0.9 million, or 2.8%, compared to $30.2 million during the first quarter of 2012. Repair and service sales of $10.5 million for the quarter ended March 31, 2013, were down $1.1 million, or 9.6%, compared to $11.6 million for the quarter ended March 31, 2012, primarily due to weaker sales in the petrochemical markets. Bearing sales of $1.8 million for the quarter ended March 31, 2013 were up $0.1 million, or 6.9%, as compared to the sales of $1.7 million for the quarter ended March 31, 2012. Power Transmission backlog at March 31, 2013 increased to $108.4 million from $99.9 million at December 31, 2012, primarily from increased orders of high-speed equipment for the energy markets.

Gross margin for Power Transmission decreased to 25.5% for the quarter ended March 31, 2013, compared to 26.0% for the quarter ended March 31, 2012. This decrease is primarily related to product mix shifts.


Direct selling, general and administrative expenses for Power Transmission increased slightly to $7.1 million, or 1.4%, for the quarter ended March 31, 2013, from $7.0 million for the quarter ended March 31, 2012. Direct selling, general and administrative expenses as a percentage of sales increased slightly to 16.2% for the quarter ended March 31, 2013, from 16.1% for the quarter ended March 31, 2012.

Corporate/Other

Corporate administrative expenses, which are allocated to the segments primarily based on budgeted sales levels, were $13.6 million for the quarter ended March 31, 2013, an increase of $1.6 million, or 13.3%, from $12.0 million for the quarter ended March 31, 2012, primarily due to higher employee related expenses.

Interest income, interest expense and other income and expense for the quarter ended March 31, 2013 decreased to $0.9 million of expense compared to $3.8 million of expense for the quarter ended March 31, 2012. This decrease in expense is related to lower interest expense related to lower net borrowing and interest rates and favorable currency gains.

The net tax rate for the quarter ended March 31, 2013 was 34.0% compared to 46.2% for the quarter ended March 31, 2012. The first quarter of 2012 was negatively impacted by the non-deductibility of certain acquisition-related expenses.

Liquidity and Capital Resources

The Company has historically relied on cash flows from operations and third-party borrowings to finance its operations, including acquisitions, dividend payments and stock repurchases. The Company believes that its cash flows from operations and its available borrowing capacity under its Bank Facility described below will be sufficient to fund its operations, including planned capital expenditures, dividend payments and stock repurchases, through December 31, 2013, and for the foreseeable future.

The Company's cash balance totaled $63.1 million at March 31, 2013, compared to $72.3 million at December 31, 2012. For the three months ended March 31, 2013, net cash provided by operating activities was $5.9 million, net cash used in investing activities totaled $4.7 million and net cash used in financing activities amounted to $9.5 million. Significant components of cash provided by operating activities for the three months ended March 31, 2013 included net earnings from continuing operations, adjusted for non-cash expenses, of $38.3 million and an increase in working capital of $32.4 million. This working capital increase was primarily due to an increase in inventory of $25.0 million.

Net cash used in investing activities for the three months ended March 31, 2013 included net capital expenditures totaling $5.9 million, net of $2.9 million in government incentives. Capital expenditures in the first three months of 2013 were primarily for the new manufacturing facility in Romania, IT upgrades and new machine tools. Capital expenditures for 2013, which are projected to be funded by operating cash flows, are projected to remain at approximately 2012 spending levels, primarily for the manufacturing capacity additions, other new manufacturing and service facilities to support geographical and product line expansions and equipment replacement for efficiency improvements in the Oilfield and Power Transmission segments.

Significant components of net cash used in financing activities for the three months ended March 31, 2013 include note payments that total $6.6 million and dividend payments of $4.2 million, or $0.125 per share.

The Company executed a five year secured credit facility in November 2011 with a group of lenders (the "Bank Facility") consisting of a revolving line of credit that provides for up to $175.0 million of aggregate borrowing and an amortizing $350.0 million term loan. Under the Bank Facility the Company has granted a first priority lien on, security interest in and collateral assignment of substantially all of its assets. The Bank Facility matures on November 30, 2016. Borrowings under the Bank Facility bear interest, at the Company's option, at either (A) the highest of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus 0.5%, and (iii) the Adjusted LIBO Rate for an Interest Period of one month plus 1.0%, in each case plus an Applicable Margin based on the Company's Leverage Ratio or (B) the interest rate equal to (i) the rate for US dollar deposits in the London interbank market for the applicable Interest Period multiplied by (ii) the Statutory Reserve Rate, plus (iii) the Applicable Margin. Throughout the term of the Bank Facility, the Company pays an Unused Commitment Fee which ranges from 0.25 percent to 0.50 percent based on the Company's Leverage Ratio. As of March 31, 2013, $295.1 million of the term loan and $25.0 million of the revolving line of credit were outstanding. Additionally, there were $11.2 million in letters of credit outstanding against the revolving credit facility. As of March 31, 2013 the interest rate was 2.75% on the Bank Facility and the Company paid $2.1 million of interest expense in the quarter ended March 31, 2013. The carrying value of debt is not materially different from its fair value. The Company was in compliance with all financial covenants under the Bank Facility as of March 31, 2013 and had borrowing capacity of $138.8 million under the revolving line of credit.


Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see "Note 4. Recently Issued Accounting Pronouncements" to our condensed consolidated financial statements (unaudited).

Critical Accounting Policies and Estimates

During the quarter ended March 31, 2013, there were no material changes from our critical accounting policies and estimates as presented in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Cautionary Statement Regarding Forward-Looking Statements and Assumptions

This quarterly report on Form 10-Q contains forward-looking statements and information, within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended, that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this report, the words "will," "anticipate," "believe," "estimate," "expect," "plan," "schedule," "could," "may," "might," "should," "project" or similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying them. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such statements reflect the Company's current views with respect to certain events and are subject to certain assumptions, risks and uncertainties, many of which are outside the control of the Company. These risks and uncertainties include, but are not limited to:

oil and natural gas prices;

declines in domestic and worldwide oil and natural gas drilling;

capital spending levels of exploration and production companies;

availability and prices for raw materials;

the inherent dangers and complexities of the Company's operations;

uninsured judgments or a rise in insurance premiums;

the inability to effectively identify and integrate acquisitions and to achieve cost savings and revenue growth;

labor disruptions and increasing labor costs;

the availability of qualified and skilled labor;

disruption of the Company's operating facilities or management information systems, including cyber-attacks;

the impact on foreign operations of war, political disruption, civil disturbance, economic and legal sanctions and changes in global trade policies;

currency exchange rate fluctuations in the markets in which the Company operates;

changes in the laws, regulations, policies or other activities of governments, agencies and similar organizations where such actions may affect the production, licensing, distribution or sale of the Company's products, the cost thereof or applicable tax rates, or have similar adverse effects on our customers;

unfavorable results of litigation and the fruition of contingencies referred to in the notes to the financial statements included in this report;

general industry, political and economic conditions in the markets where the Company's procures materials, components and supplies for the production of the Company's principal products or where the Company's products are produced, distributed or sold; and

the inability to complete the Merger due to the failure to obtain shareholder approval, the failure to satisfy other conditions to completion of the Merger, or any other reason;

the amount of costs, fees, expenses and charges related to the Merger; and the effect of the announcement of the Merger Agreement on our client relationships, operating results and business generally, including without limitation our ability to retain key employees.

Forward-looking statements speak only as of the date they were made and, except to the extent required by law, we undertake no obligation to update or review . . .

  Add LUFK to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for LUFK - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.