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Lufkin Industries, Inc. (NASDAQ:LUFK)

Q4 2008 Earnings Call Transcript

February 12, 2009 10:00 am ET

Executives

Jack Lascar - Dennard Rupp Gray & Easterly LLC

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

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

Analyst

Terese Fabian – Sidoti & Company

Collin Gerry – Raymond James

Eric Mintz – Eagle Asset Management

Kyle Kavanaugh – Palisade Capital Management

Operator

Ladies and gentlemen thank you for standing by and welcome to the Lufkin Industries fourth quarter earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today February 12, 2009.

And now I would like to turn the conference over to Jack Lascar with DRG&E. Please go ahead.

Jack Lascar

Thank you [Nicole] and good morning. With me this morning are Jay Glick, Lufkin’s President and CEO; Chris Boone, Vice President and Chief Financial Officer and Angela McCarthy, Corporate Controller. Before I turn the call over to Jay, I have a couple of housekeeping items. If you would like to be on our e-mail distribution list to receive future news releases, please call DRG&E at 713-529-6600 and we would be happy to add you.

If you would like to listen to a replay of today’s call, it will be available via webcast by going to the Earnings Conference Call section of Lufkin’s website at www.lufkin.com or via recorded replay until February 19. This information was also provided in this morning’s earnings release. The information reported on this call speaks only as of today, February 12, 2009. So be aware that time sensitive information may no longer be accurate as of the time of any replay.

Also please be aware that today’s conference call may contain certain forward-looking statements. The assumptions upon which these forward-looking statements are based are beyond the company’s ability to control or estimate precisely and 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 Glick.

John Glick

Thank you, Jack. Good morning everyone. This morning we report a record quarter and a record year for Lufkin Industries both in terms of revenue and earnings. In 2008, we also saw the largest volume of new business booked in the company's history. While these results are gratifying given the global economic downturn and its impact on oil prices, we recognized that the industry will face more challenging economic headwinds in the coming quarters.

Excluding the impact of a contingent liability, we booked in the fourth quarter in connection with the ongoing class-action lawsuit, which Chris will cover in the financial impact in a few moments, net earnings from continuing operations for the fourth quarter were $30.1 million, or $2.02 per diluted share for the fourth quarter of 2008, up 61% from a year ago. Our fourth quarter earnings were well above our November guidance of $1.51 to $1.71 per share, and the fourth quarter was the most profitable quarter in our history.

Total revenues for the fourth quarter were $231 million, which is a 54% increase from the year ago. Oilfield led our revenue growth up 67% from a year ago as we saw strong shipments to customers with projects in California, in the Permian Basin in West Texas and in the Bakken Shale of North Dakota. Our transmission revenues grew by 22% year-over-year led by continued strong activity in offshore oil and gas projects, refining and power generation.

Reflecting on 2008, our challenge for the first ten months of the year was to respond to the unprecedented demand for our products and services both in oilfield and in power transmission. We met that demand through a combination of efforts to expand the capacity of our supply chain and to introduce new manufacturing capacity. We also worked a considerable amount of overtime in our manufacturing operations. All of this resulted in higher production levels to satisfy the demands for products on the delivery schedules required by our customers.

But with the unfolding crisis in the banking sector, the recession that dampened consumer spending and the resulting global drop in demand for oil and gas, we experienced an equally sudden drop in demand on the oilfield side of our business during November and December.

Demand for power transmission products has remained steady due to longer-term nature of these projects. Our management team has been through a number of cycles in the oil and gas business, and we’re drawing on that experienced position Lufkin Industries to compete effectively in a much more challenging market. We are taking proactive steps to properly size the company for the expected business levels in 2009. As a first step we reduced our manufacturing workforce by 53 positions at the end of January.

We will continue to monitor and revise our operational and capital spending plans to ensure the company’s balance sheet remain strong, while at the same time making investments that strategically position the company for future growth in its core markets for artifical lift and specialty industrial gearboxes. We expect to emerge from this cycle with a stronger better-positioned company in the global marketplace for energy services.

Looking at our two businesses in more detail. In oilfield, the fourth quarter was a busy quarter for both our factories and our field service groups but new order intake was sharply lower. New orders declined almost 67% from 256 million in the third quarter of 2008 to $86 million in the fourth quarter. Order cancellations accounted for $36 million of that decrease. We saw weaker orders in virtually every area of the oilfield pumping sector with the exception of the Middle East and North Africa.

Of our new orders in the fourth quarter, 63% were domestic and 37% were international. Comparing that to prior periods 31% of our new bookings were international in the third quarter, and 51% a year ago.

Demand was weakest for pumping units but our service and automation businesses held up well. In down cycles, we expect demand for automation systems and services to remain strong because of the operational and maintenance savings that oil and gas operators can realize through investing in equipment to optimize their production.

In past down cycles we have seen that our service crews continue to be in demand for activities like equipment moves and maintenance work and we expect to see that continue through 2009 and in particularly out for automation.

Year in, year out our domestic oilfield business roughly tracks the U.S. rotary land rig count. Since its high in early September that rig count has fallen by 31% or 632 rigs. We expect the rig counts to decline further in 2009. As a result, we will continue to closely follow global supply and demand data that drive the projections for oil prices along with the capital spending plans for our major customers. Our sales and service organizations are also working with our customers to make sure our production plans are aligned with the needs of the market.

The lower volume of orders in the fourth quarter along with cancellations and price adjustments reduced our oilfield backlog by about one-third versus the prior quarter to $188 million. If you look at the backlog year-over-year however our backlog for oilfield was up 143% from December 2007 and our current run rate for Q4 this represents approximately four months of production in backlog.

For the first quarter we are expecting continued softening in demand throughout North America, although we do expect a few areas of more stable demand in South America and other international markets. The expansion of our international business that began several years ago has provided the foundation for greater participation in these international markets that we believe will be more stable acting as a cushion to the impact from a softer U.S. market.

We’ll focus capital spending on projects that reduced operational and product cost as well as projects that expand our geographic presence outside of United States to better support our international operations. I should also point out that we expect international activity to hold relatively steady in 2009, since these projects have historically been less sensitive to sudden shifts in market. We do recognize the formidability of certain international projects and the tightening credit markets harder.

We expect to see continued margin pressure going forward. Fortunately raw material and finished steel prices have also come down. We are hopeful that we will see more meaningful reductions in the second half of the year in those areas.

Power transmission fortunately was a different story. 2008 was another record year for both bookings and revenues as this division continued to generate steady growth and increasingly strong divisional operating income.

Customer projects served by this segment tend to be large capital projects, like large offshore oil and gas developments with long lead times, though the business is not as deeply affected by rapid changes in commodity prices as the U.S. oilfield pumping businesses.

Overall for the fourth quarter, power transmission’s new bookings were up 7% from the fourth quarter of 2007, and up 12% from the third quarter levels to more than $48 million. The geographic mix was equally split between the U.S. and international business. With the exception of petrochemicals and marine propulsion, the division saw year-on-year growth in bookings from all the sectors we serve.

Year-on-year growth was most significant in oil and gas particularly in West Africa and power generation where we are seeing a lot of U.S. activity for gas turbines that are used in distributed power generation. Also those are used in developing countries for similar purpose.

These modular systems can be erected in a short timeframe and generate electricity much sooner than utility scale coal or nuclear plants, which require longer planning processes in permitting periods. The backlog in power transmission remained comparatively stable. It increased 6% from a year ago to $120 million, but was up by about 4% from the third quarter, which was our all time high.

During 2008, power transmission began work on contracts to repair wind turbines gearboxes both in Europe, through our operations in France and in the U.S. While the wind sector wasn’t a big contributor to power generation’s bookings for 2008, we are focussing management and technical resources on this market because we think it has significant potential for future profitable growth, as renewable energy gains more traction globally and particularly in the United States.

For 2009 and beyond we expect growth in products and services for public infrastructure in such areas as roads and bridges, which use steel and concrete, both sectors relying heavily on gearboxes for their production; flood control projects also using gears with high volume pumps in the renewable power sector, which we mentioned previously. We are hopeful that the public works portion of President Obama’s stimulus plan will create opportunities for booking in these areas.

Given the current market environment, we would not be surprised to see some softening in the power transmission business this year particularly for marine, refining, petrochemical, rubber and sugar industries. But because our gearbox components are used in large-scale projects that tend to have longer lead times, we don’t expect the bookings in this division to be as also as those in our oilfield division.

Looking at the combined company, total bookings for the fourth quarter were $134 million, which is up by about 19% from a year ago but our total order booked at December 31, increased 59% from a year ago to $317 million.

Let me stress again that we are in a very strong position to weather this cycle with $108 million of cash, no debt and $40 million of unused credit facility.

We expect this downturn to produce some opportunities for attractively priced acquisitions. We have the liquidity that will enable us to pursue those opportunities for growth through acquisition as well as through organic growth. We will be looking for assets that will enhance our technology portfolio and are a good fit with both of our business lines. We will remain focused this year on cost control. In 2009, we expect to fully realize the benefits of our investment in lean manufacturing initiatives and process innovations that we implemented last year to help us increase productivity and reduce cost. And we’re also continuing to realize procurement cost efficiencies from sourcing initiatives we took last year.

To sum it up, we have an outstanding financial and operating result for the fourth quarter and for the full year 2008, but we definitely reached the inflection point in November, and we expect 2009 to be a more challenging year.

With a backlog of more than $317 million, we still have a lot of business to keep our factories utilized well into the spring. And unless we see a marked change in commodity prices, we expect slower levels of activities in the second half of 2009.

We ordinally provide EPS guidance as a part of our fourth quarter call, but this year with the uncertainty in the market and the lack of visibility into commodity prices and customer spending, we don’t feel it would be wise to provide the guidance at this time. However, I cannot offer guidance for the 2009 CapEx. Our 2008 spending came in around $30 million and we will expect capital spending in roughly that same neighborhood for 2009 or potentially up slightly.

We will revisit our capital spending plan quarter-by-quarter and we intend to keep our capital outlays well inline with cash flow from operations. The focus of 2009 capital spending will be to continue to expand our manufacturing and service capabilities outside of the U.S. We will also continue to invest in cost efficiency measures at our factories and in new technologies and areas like our automation business. We will pay for our capacity increases as we see the market return to healthier levels.

Now I’ll ask Chris Boone to give you a more detailed review of Lufkin's financial performance during the fourth quarter. Chris?

Christopher Boone

Thank you, Jay. Good morning everyone. To briefly recap fourth quarter results from continuing operations and this excludes results from our trailer business that we discontinued in the second quarter of 2008.

Net income from continuing operation excluding the litigation provision it was $30.1 million, or $2.02 per diluted share. This compares to earnings from continuing operations of $18.7 million, or $1.26 a share a year ago and $24.9 million, or $1.66 per diluted share in the third quarter.

As Jay mentioned a minute ago in the fourth quarter of 2008, we booked a pre-tax contingent liability of $6 million, or $3.8 million net of tax, or $0.25 per diluted share in connection with a class-action lawsuit filed against the company in 1997. Additional disclosures about this case will be provided in the company's upcoming 10-K filing.

EBITDA from continuing operations excluding the legal provision for the fourth quarter was $52.2 million, or 22.6% of revenue versus $32.1 million, or 21.4% of revenue for the fourth quarter of 2007.

Looking at sales and gross margins by division. Starting with oilfield, fourth quarter revenues increased $177.3 million, which was a 67% increase year-over-year. Breaking those revenues down by product line, $114.3 million was from new pumping units, which is up almost 85% from the fourth quarter of 2007. Services contributed $30.5 million, up 43% from a year ago. Automation contributed $27.2 million, which is up nearly 64% year-over-year and commercial castings generated over $5.2 million, which is up about 18% from a year ago.

Comparing those same numbers for the third quarter of 2008, revenue from new pumping units was up 23%, services were up 12%, automation sales increased 42% and foundry revenues declined 31%. The sequential and year-over-year decline in foundry was due to the weakness in the machine tool market.

Gross margin for the oilfield division was 28.9% in the fourth quarter versus 28.0% in the third quarter of 2008, and 27.8% a year ago. Favorable LIFO inventory adjustments partially offset by accruals for obsolete inventory accounted for most of the margin improvement versus the third quarter of 2008.

LIFO reserve reductions were primarily due to raw material price declines in steel and castings. The margin improvement over the fourth quarter of 2007 was primarily due to the favorable mix effect of an increased new pumping unit sale.

Turning to power transmission, revenue was $53 million, which is up 22.4% from a year ago and up almost 11% from the third quarter of 2008. Breaking that down by product line, new units contributed $40.3 million, which is up 21% versus the fourth quarter of last year and up about 12% from the third quarter of 2008. And repair contributed $12.9 million, which is up more than 26% versus a year ago and up about 7% from the third quarter.

Gross margin in power transmission was 35.2% versus 31.4% a year ago and 30.4% in the third quarter of 2008. This improvement was primarily due to the same benefit of LIFO reserve reductions.

Looking forward for 2009, we can’t forecast with any certainty what LIFO changes will be for each division. While global demand for steel and castings will probably be lower in 2009, lower processing capacities will probably reduce the likelihood that we’ll see additional significant price decreases. We would not expect the impact of the LIFO to be as significant in 2009 as it has been in 2008.

On a consolidated company wide basis, overall gross margin for the fourth quarter was 30.3% versus 28.6% in the third quarter and 28.9% in the fourth quarter of 2007. Again this improvement was primarily due to the benefit of LIFO reserve reductions partially offset by accurals for obsolete inventory.

Now looking at some of our individual expense items for the fourth quarter. Selling, general and administrative expenses from continuing operations increased to $21.2 million from $17.0 million last quarter and $15.5 million a year ago. About $2.5 million of the higher expense was due to accurals for bad debt expense. Oilfield and power transmission incurred a charge of about $1.2 million each. Power transmission had a refinery customer that recently declared bankruptcy and the oilfield is facing a probable bankruptcy of a Middle Eastern customer.

The remainder was primarily due to higher third-party commissions for international sales. As a percent of revenues, fourth quarter 2008 SG&A expenses increased to 9.2% from 8.7% in the prior quarter, again primarily due to the bad debt expense. Excluding bad debt expense in both years, we expect SG&A for 2009 to be flat to slightly lower than in 2008 due to potentially lower sales commissions and more aggressive expense management.

Depreciation and amortization in the fourth quarter was $4.2 million. We expect D&A for the full year 2009 to be in the range of $15 million to $16 million.

Looking at a few numbers for the full year 2008, earnings from continuing operations excluding the litigation provision were $92 million, or $6.16 of share, which is up 28% from 2007. Revenue from continuing operations was $741.2 million, which is an increase of 33% from 2007.

Oilfield revenue was $551.8 million, which is up almost 40% from the prior year. Power transmission was $189.4 million, up 19.5% from 2007. Overall gross margin for the combined company for full year was 28.9% versus 29.2% in 2007. EBITDA from continuing operations, excluding the legal provision, for the full year was $158 million or 21.4% of revenue versus $124 million, or 22.3% for 2007.

Looking quickly at the balance sheet, we ended the year with $108 million in cash and cash equivalent and up $12 million from a year ago. Working capital for accounts receivable and inventory net of accounts payable was $229 million, an increase of about $69 million from a year ago due to increased sales volume and slightly higher DSO.

Capital expenditures from continuing operations in the fourth quarter were $11.7 million and for the full year we spent about $30 million. At December 31, we had no short-term or long-term debt and we continue to have access to $40 million credit facility that is scheduled to retire at the end of the 2010.

An additional footnote on the balance sheet at year-end, like every other company that offers a defined benefit pension plan, Lufkin’s funding levels were severally impacted by the sharp decline in the capital markets in 2008. We went from being about $72 million over funded at the end of 2007 to being about $5 million underfunded in December. While we hope market values will recover in future periods, we will have to record non-cash, pension expense of about $8 million to $9 million pre-tax in 2009 to amortize these market value losses. As of now we recorded pension income of about $1.3 million pre-tax in 2008.

During the fourth quarter of 2008, the company paid dividends of $3.7 million, or $0.25 per share. Fourth quarter tax rate from continuing operations before the legal provision was 37.3%, which is a little higher than we had expected. This was due to higher estimates of state taxes resulting from increased sales and higher tax jurisdiction compared to 2007. For modeling purposes, we expect a tax rate of approximately 35.5% for 2009.

That concludes the financial overview, so I’ll turn it back to Jay.

John Glick

Thanks Chris. Operator we are ready to take questions now.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Terese Fabian with Sidoti & Company. Please go ahead.

Terese Fabian – Sidoti & Company

Good morning. I have a question on your non-guidance sort of guidance. You said that Lufkin Oilfield segment sort of tracks the rotary land rig count, and we know where that is going. Do you think it’s on a percentage basis similar and would that affect the backlog as well as the new unit sales?

Christopher Boone

Yeah, I don’t think it’s going to be quite as sharper drop through us although we’re certainly watching that. First quarter does not look like it’s going to be quite as sharper drop, as we are seeing overall the rig count. But I would caution here we continue to watch our bookings, from a revenue point of view, our run rate in the first quarter will probably be similar what you would have seen as an average for the last three quarters of '08. So, that’s all I can tell you, but from a bookings point of view for the balance of the year, I guess we’ll continue to be vigilant on what's going to happen. We do not anticipate quite a sharper drop.

Terese Fabian – Sidoti & Company

Okay, and on the cancellations on your backlog. Are those coming from any particular type of client or areas?

Christopher Boone

Yeah they’re almost all domestic. Number one, we had one cancellation on an international order last year that was really due to other things other than the field economics. So it’s primarily domestic. I guess probably two-thirds that would be the majors who have canceled, and then the balance will be made up of smaller independents.

Terese Fabian – Sidoti & Company

And if I could just followup on that because you said last time around that you had extraordinarily high bookings at the end of the third quarter, and many of those were for more than one unit, so that people could assure themselves getting deliveries. Is that the type of cancellations you saw going up from two units to one and are people or company is now booking single units as far as you can tell?

Christopher Boone

Well I think two comments, one I think the cancellations as you correctly pointed out were due to the spectra orders that have been entered in Q3, and they were at the back-end of our schedule. So, I think people – I think several of our customers began to reassess their commitments towards the latter part of the year of 2009. Secondly, I think their capital plans changed and so they realized that they didn’t need the equipment at least on the volume side they had expected, I think they also realized that they could with lead times being shorter, they didn’t need to get in the queue quite so early. So, we are now back on our oilfield side operating with our normal six to eight week lead time and shorter in some cases and I think that they have caused customers to rethink their supply line strategies.

Terese Fabian – Sidoti & Company

Thank you. I’ll queue back up. Thank you.

Christopher Boone

Okay.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Collin Gerry with Raymond James. Please go ahead.

Collin Gerry – Raymond James

Hey good morning guys. Okay, just delve back into the oilfield side. So I’m trying to get a better gauge of where we could see revenues go, and we’re going to downturn about $177 million this quarter, your averaging goes to $100 million in ’07. But if you go back ’01 or ’02 that number was $30 million, $40 million, $50 million. And so I’m just trying to reconcile prior downturns to where the company is now with obviously much bigger company and trying to see what we’re going to see on a quarterly basis if we do see the rig count go down 60% big drop.

John Glick

Yeah. Collin, you are engaged in the same activity we’ve been engaged in for the last month and half or so. We’re trying to go back and look at history as well. I guess all this is obviously subject to ongoing revision as more tea leaves are red, but our position right now is we don’t think it’s going to be as severe as the ‘01, ‘02 period was, but equally we don’t think it’s going to be as strong as ‘08 or ‘07 though somewhere south of those figures if I guess where we're modelling the oilfield right now, and again a lot of work we will know about this year would be learned in the next two to three months as some projects on hold in various parts of the world. And I think as we get some better visibility about the long-term price per barrel.

Collin Gerry – Raymond James

Okay, so just kind of reading into that, it’s not outside of yours expectations around the possibilities to see that oilfield revenue number come back down lower than a $100 million, maybe in the $70 million or $80 million on a quarterly basis at some point in ‘09?

John Glick

Not out of the rig book, we’re not modelling that.

Collin Gerry – Raymond James

Okay.

John Glick

And I think we’re a little higher than that.

Collin Gerry – Raymond James

Okay. And then just kind of following up on that, margins haven't really changed for you guys too much as you ramped up your revenue base in the north, so I mean we’ve been looking at kind of high 20s for a while here. On the way down is it as equally as resilient or have you added some fixed costs along the way that may hurt a little bit on the way down. How should we think about the margins?

John Glick

We haven’t added significant fixed cost. I guess the real question for us on the margin side is what we can do with our raw material supply sources, and we manage to cover the increases on the way up. We expect to give back those increases as we negotiate our raw material prices down. I think Collin, one of the things we are accounting on is that our customer base will recognize the restraint we use on the way up, and we will honor that restraint on the way down as well.

Collin Gerry – Raymond James

Okay, and just final question here Chris. I missed what the depreciation was for the quarter. Could you repeat that for me?

Christopher Boone

It was, I think 4.9, or 4.2.

Collin Gerry – Raymond James

And then the guidance was 15 to 16 for calendar ’09?

Christopher Boone

Correct.

Collin Gerry – Raymond James

Okay, thanks guys.

Christopher Boone

Thank you, Collin.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Terese Fabian with Sidoti & Company. Please go ahead.

Terese Fabian – Sidoti & Company

Yes, thank you. I have a question on your international plans. You have a relatively small portion of revenue about 35% coming from outside of North America. Where do you see business expanding and how?

Christopher Boone

Yeah, I think we see business expanding in Latin America and again the investments we’ve made in our Argentina operation position us well to serve that market. I think we’re expecting strengthening or at least a more stable market environment in the Middle East and in North Africa, and I think we see some possibilities in Eastern Europe.

Terese Fabian – Sidoti & Company

And with those latter areas with the Eastern Hemisphere, how do you taken steps - concrete steps that would be a base for the growth?

Christopher Boone

That we have over the last several years and we have budget plans to continue those steps.

Terese Fabian – Sidoti & Company

And that would be with the rod pump sales and servicing?

Christopher Boone

In the automation and also for the power transmission are active in the Middle East.

Terese Fabian – Sidoti & Company

Okay, thank you.

Christopher Boone

You’re welcome.

Operator

Thank you. Our next question is the followup question from the line of Collin Gerry with Raymond James. Please go ahead.

Collin Gerry – Raymond James

Hey guys, again just kind of a housekeeping item. I don’t know if I miss this. Did you give us the oilfield revenue by international and U.S. I got the booking, but I didn’t get the revenue side?

Christopher Boone

We didn’t, but we have it. Just one second.

Collin Gerry – Raymond James

In the past, I’ve kind of always modeled about 30% international. It seems like that’s been going on in the past three quarters.

Christopher Boone

It was in the fourth quarter. It was about 75 domestic, 25 international.

Collin Gerry – Raymond James

Okay great, thanks guys.

John Glick

It’s been extra, forecast was basically all domestic.

Christopher Boone

Yeah, a couple of things you need maybe think about Collin on from a model point of view. You remember that we have several contracts that have taken pay portion in Q4 and those are all domestic projects.

Collin Gerry – Raymond James

Okay.

Christopher Boone

Either domestic, international number all that.

Collin Gerry – Raymond James

And on the backlog cancellations those were exclusive in the U.S. those or?

Christopher Boone

I think we had one international but everything else was in the U.S.

Collin Gerry – Raymond James

So, mostly in the U.S. okay.

Christopher Boone

10%

Collin Gerry – Raymond James

That’s it from me.

John Glick

Okay.

Operator

Thank you. We do have a follow-up question from the line of Terese, please go ahead.

Terese Fabian – Sidoti & Company

Bad debt expense, you had two customers at some relatively high price points. Do you expect more of this to come and how are you monitoring and following this?

John Glick

Right, I guess the answers we’re monitoring it very carefully. We hope to recover some on both of these, but the prudent thing to do is recognize the exposure. Our DSO is something we watch very carefully. We have a number of mechanisms in place with our field sales group and our administrative group to closely track those and we’re double checking credit limits and other things on customers at the momentum to try and avoid the future exposure.

Terese Fabian – Sidoti & Company

How much do you think the type credit markets are affecting your customers? Just can you sort of push that out from the energy prices and so?

John Glick

I’m not sure it’s a huge issue. It’s certainly not a big issue for our majors. I think it’s probably a big issue for independence and particularly those independents that are running operations through means other than cash flow, though I would guess that it may represent 25% of our oilfield customers. All of that we are going to recognize that as an issue but I think 25% would be critically affected life time credit marketing.

Terese Fabian – Sidoti & Company

Okay and then a last question on your use of cash. You still have a relatively nice amount there? And I know you said you would be looking at opportunities as they arose, but aside from that are you just going to put a hold on to it?

John Glick

Well I think our plan is, we actually have some things well in place Terese that we will be talking about certainly in next quarter that will involve using that cash for some strategic moves. But I think we plan to keep an aggressive capital spending program, shifting it from capacity expansion to cost reduction. And we will use it wisely in the international investments. But we will also try and keep a cushion. I think part of the things that allow Lufkin to survive 108 years that we have been prudent with our cash and we have not got ourselves exposed in down cycles.

Terese Fabian – Sidoti & Company

Okay that's helpful. I have a question on your reduced manufacturing manpower. You said that you had cut 53 positions? What percentage of your workforce is that and although is that part of unionized labor force or how does that work?

John Glick

Yeah. It is fairly seldom it's about 2% of our workforce. It was mainly in our direct labor group. I think it was exclusively in our direct labor group in Lufkin, Texas. So that's all for the place that we did the greatest amount of the expansion, so a number of the people that were affected where not long-term employees, but recent hire, so I guess, all I can tell you.

Terese Fabian – Sidoti & Company

Do you have the flexibility to do further reduction if you need?

John Glick

Certainly, I mean we have the flexibility to size the company, as we need to ensure that we were often able to serve the market, but also able to do so at the most efficient cost.

Terese Fabian – Sidoti & Company

Okay, thank you.

John Glick

Welcome.

Operator

Thank you. Our next question comes from the line of Eric Mintz with Eagle Asset Management. Please go ahead.

Eric Mintz – Eagle Asset Management

Hey congrats on a really good quarter to the end. You would have put it up on a day when oil is below 35 bucks, but nice job there?

John Glick

Thanks, timing is everything.

Eric Mintz – Eagle Asset Management

Hey, would you give an exact cash balance?

John Glick

That one is $108 million.

Eric Mintz – Eagle Asset Management

Okay. It sounds like you guys are closing in on an acquisition. Is that right? Is that what you are employing?

John Glick

Well we certainly are in the latter stages of looking at a couple of companies. So we’ve got issue to clear but that were we are moving forward on that.

Eric Mintz – Eagle Asset Management

Okay, and are these bolt-on type opportunities? Are they potentially larger scale?

John Glick

Yeah I’d rather just come back to that in a month or so, Eric, if you don’t mine.

Eric Mintz – Eagle Asset Management

Okay, yeah no problem. But just as you size these up I assume accretive to earnings is a key parameter for you?

John Glick

Yes and technology additions and getting expertise that we think is strategically important to the company’s growth down the road is on the consideration.

Eric Mintz – Eagle Asset Management

Okay, great one, I guess of a success on the acquisition from the past so I look forward to hearing about that. Thanks.

John Glick

All right Eric.

Operator

Thank you. Our next question comes from the line of Kyle Kavanaugh with Palisade Capital Management. Please go ahead.

Kyle Kavanaugh – Palisade Capital Management

Hi, good morning. I just have some pretty basic questions. I was wondering as I have learned your company, how do you correlate your volumes and backlog to the rig count?

John Glick

That the land rotary rig count is probably the best correlation, but I would caution you that some times the cycles of that don’t exactly refresh in our cycles because it’s largely U.S. based then it does not accounts the international mix.

Kyle Kavanaugh – Palisade Capital Management

Okay. So, would you sort of more towards the one or more towards like 50%.

John Glick

I’m not sure I can’t answer that to be honest it’s certainly not one-to-one.

Kyle Kavanaugh – Palisade Capital Management

Okay.

John Glick

And I don’t know what's moving back I mean you could probably ratio what we given in terms of international to domestic and working on that.

Kyle Kavanaugh – Palisade Capital Management

Okay. And then also I guess my understanding as part of your backlog ramp up now in past couple of quarters is somewhat of a mind going effect from when things were looking a little better in the beginning of 2008. And I guess some orders are prudent to assure availability. Is that the case?

John Glick

I think we made that point in prior conference calls that we thought there was an element of people trying to secure position in the delivery schedule because delivery recapture were extending.

Kyle Kavanaugh – Palisade Capital Management

Okay. Now I might have missed in the call I think you mentioned clearly the outlook is changed dramatically in the past three, four months. Now could you mention something about backlog being cutting from further in the current quarter, you may have $36 million in cancellations is that accelerating in anyway?

John Glick

I don’t know that I would say it’s accelerating, but we certainly continued to see cancellations into 2009 year. And we don’t know in part of the reason we are not offering guidance as we really don’t know the extent of which that’s going to move, I guess the thing that we come back to is essentially the fundamentals of the industry and this is what we’re facing our long-term investment decisions on, oil prices are at $147, I think for all of you it is overbought unsustainable equally oil prices were $35 of barrel or oversold and unsustainably low. We have to make any decision based on current conditions otherwise as making them on the 147 level. Unfortunately our press releases and information we get from our major customers subsequently the all major confirms if they’re continuing to take a long-term view of this industry. And we think that’s the right thing to do, and its clearly our view, our strategy will be. So, now the psychology have to shift around little bit and until that happens this is going to be the crazy volatility that we’re seeing today. And I don’t think any of know when that's going to stop and it's very difficult to make projections.

Kyle Kavanaugh – Palisade Capital Management

Sure. Yeah I guess I was just trying to figure out more of, since there was your backlog is kind of grew rapidly, in the last year. At the end I was trying to figure out more normalized kind of backlog and I was surprised actually that the backlogs remain even as higher they are considering the massive decline in capital expenditures by many of the E&P companies out there.

John Glick

Yeah. I think as our lead times come down that the backlog will become less of an indicator of forward business levels If you go back to our example of 2007 ending backlog, we’ve historically operated with a very, very small backlogs in the oilfield division

Kyle Kavanaugh – Palisade Capital Management

Yeah that’s right.

John Glick

And it's really because our lead times historically are so short that we can book and shift very, very rapidly and customers don’t feel need to order well in advance.

Kyle Kavanaugh – Palisade Capital Management

All right. So I guess we can just say that things will be evolving over the next couple of quarter with that?

John Glick

I think that’s the good way to characterize that we hope that is evolving on an improving basis, but we will continue to watch.

Kyle Kavanaugh – Palisade Capital Management

Okay. And just one last on the strategic things that you are looking, are you looking at the oilfield services or the power transmission or both?

John Glick

We are looking at both.

Kyle Kavanaugh – Palisade Capital Management

Okay, all right. Thank you.

Operator

Thank you. (Operator Instructions) And there are no further questions at this time. I like to turn the call back over to management for any closing remarks.

John Glick

Okay thanks operator. I guess in summary we are delighted with the 2008 results, and we think it’s proved that our capabilities exist rapidly ramp up production to satisfy very strong market demand. But we also recognize now that we’re in a very different and more challenging market.

We will confront these challenges with the result of three things. One is to maintain our exciting market position, two is to intelligently grow our international business and thirdly is to acquire a new technologies. But the overarching aim is to maintain or better position the company for future growth as a global economy recovers. With that we thank everyone for jointing us this morning.

Operator

Thank you ladies and gentlemen. That does conclude the Lufkin Industries fourth quarter earnings conference call. Thank you so much for your participation. You may now disconnect.

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