Lufkin Industries Management Discusses Q2 2012 Results - Earnings Call Transcript

Lufkin Industries (LUFK)

Q2 2012 Earnings Call

July 30, 2012 10:00 am ET

Executives

Jack Lascar - Partner

John F. Glick - Chief Executive Officer, President and Director

Christopher L. Boone - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer

Analysts

Collin Gerry - Raymond James & Associates, Inc., Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Lufkin Industries' Second Quarter 2012 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded today, July 30, 2012. I would now like to turn the call over to Jack Lascar with DRG&L. Please go ahead.

Jack Lascar

Thank you, Craig, and good morning, everyone. With me today are Jay Glick, Lufkin's President and Chief Executive Officer; and Chris Boone, Vice President and Chief Financial Officer.

Before I turn the call over to Jay, I have a couple of quick housekeeping items. If you would like to be on our e-mail distribution list for future news releases, please call us at (713) 529-6600. If you would like to listen to a replay of today's call, it will be available via recorded phone replay until August 16, and also by webcast replay by going to the IR section of Lufkin's website. This information was also provided in this morning's news release. The information reported on this call speaks only as of today, July 30, 2012. So please be aware that time-sensitive information may no longer be accurate at the time of any replay.

Also, be aware that today's conference call may contain certain forward-looking statements. The assumptions these forward-looking statements are based on are beyond the company's ability to control or estimate precisely. In some cases, they may be subject to rapid and material changes. Actual results may differ materially.

With that, I will turn the call over to Jay.

John F. Glick

Thank you, Jack. Good morning, everyone. Thanks for being with us today, particularly on short notice. We're reporting our second quarter results 3 days ahead of schedule due to the fact that our second quarter earnings fell short of our guidance, and we felt an obligation to release our second quarter results as soon as possible.

I'd like to open with a quick summary of the highlights of the quarter and then drill down into the earnings' shortfall. And lastly, I will update on the third quarter and -- before handing that -- handing over to Chris, who will provide detailed breakdowns of the financial performance during the quarter. Following his comments, I will come back with a little more color on our outlook for the second half of the year and discuss the updated revenue and EPS guidance.

To summarize our second quarter performance, I want to begin with a 30,000-foot view of the quarter. As we reported, our revenues were in the middle of our guidance range. So on the surface, volume appears to be as forecast. The reality was that we offset revenue shortfalls in a couple of our operating units that were underutilized during the quarter by generating higher-than-forecast output from other operations, particularly the U.S. pumping unit plant in Texas. The bottom line damage was done by carrying the cost of the unutilized operations while also driving costs higher at the plants that produce at above forecast, offsetting revenue levels. I will explain this in more detail in a moment, but I wanted to frame the issue in broader terms at the very start. It was the equivalent of running an 8-cylinder engine pulling a significant load while firing on 6 cylinders.

Conversely, from the point of view of new business, it was an extremely positive quarter. We set another record in terms of new order bookings for the company overall and for the Oilfield Division. New bookings totaled $401.8 million, which is an increase of 20% of the previous record set in the prior quarter and an increase of 63% from the comparable period a year ago. This drove a 33% year-over-year increase in our combined order backlog to $423.7 million, and it drove a 29% increase in backlog sequentially. We reported revenues of $305.6 million, which put us right in the middle of our guidance range, as I mentioned a moment ago, for the second quarter. That range was $300 million to $310 million, if you'll recall. And it represented a 9% increase to the prior quarter and a 35% increase compared with the second quarter of last year.

As I noted at the top, our bottom line results fell short of our guidance, however. On an adjusted basis, earnings were impacted by nonoperational items that totaled $0.09 of earnings impact. Those were, first of all, a prior period pension remeasurement; secondly, a final class action lawsuit settlement cost; and thirdly, additional expenses related to the acquisitions we made earlier this year. Chris will provide more details on these nonoperational items in a moment. However, excluding the impact, we had adjusted net earnings of $22.5 million or $0.66 per diluted share, which is up 10% from a year ago. This compares to our earlier guidance of $0.90 -- sorry, $0.80 to $0.90 per share.

Now let me address the details of the miss. A number of operational issues contributed to the EPS shortfall and all told, they represented about $0.18 per share of expected earnings. I will begin with Argentina, where 3 factors combined to reduce EPS by $0.06 per share. There were 3 categories that caused the problem. First of all, we encountered labor disruptions that blocked access to the plant and prevented workers from producing product over a period of several days. Secondly, we received 3 large multi-quarter orders late in the quarter. While we ultimately received the orders, the delay in placement meant that we were operating the factory at production rates well below the full utilization level. Though we were pleased to get these projects and grateful that the uncertainty surrounding YPF and other major Argentine customers were resolved in a positive way during the quarter, it unfortunately came too late to provide the expected level of work for our plant to produce the forecast revenue stream. The third issue affecting Argentina was cost inflation and labor inflation. We negotiated a new labor contract in line with the national agreement in Argentina, but that increased our cost at an earlier point in the year than we had expected. While we believe we made significant headway in managing the issues under our control in Argentina, the situation with the oil and gas sector will remain very uncertain for the foreseeable future. Just to summarize, again on Argentina, the combined impact of these issues reduced our EPS by $0.06 per share.

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