Lufkin Industries, Inc. Q2 2009 Earnings Call Transcript

| About: Lufkin Industries, (LUFK)

Lufkin Industries, Inc. (NASDAQ:LUFK)

Q2 2009 Earnings Call

July 15, 2009 10:00 am ET


Jack Lascar - Dennard Rupp Gray & Easterly LLC

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

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


Collin Gerry - Raymond James

Jeff Tillery - Tudor, Pickering, Holt & Co.

Terese Fabian - Sidoti & Company


Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Lufkin Industries second quarter earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Jack Lascar. Please go ahead, sir.

Jack Lascar

Thank you, [Brandy], and good morning.

With me today 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 for future news releases, please call DRG&E at 713-529-6600. 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 or via recorded replay until July 22nd. This information was also provided in this morning's news release.

The information reported on this call speaks only as of today, July 15, 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 these forward-looking statements are based on 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'll turn the call over to Jay Glick.

John F. "Jay" Glick

Thank you, Jack. Good morning, everyone, and thanks for being with us today.

Let me begin by saying that market conditions continued to challenge us during the second quarter of 2009. This morning we announced adjusted earnings from continuing operations of $6.0 million or $0.40 per share, which is off by more than two-thirds from the second quarter of last year, when we were enjoying record levels of business in both divisions.

For the combined company, new order bookings in the second quarter were $78 million, which was up more than 78% from the first quarter of this year but down sharply from a year ago when we had new orders of $250 million in a single quarter.

At the same time, our total company backlog at June 30 declined to $162.2 million, down from $208 million in the first quarter and $309.7 million a year ago. We saw continued pressure on pricing in both Oil Field and Power Transmission in the second quarter and a further softening in demand not only for new pumping units but also for services and automation products in the Oil Field division.

Even so, in view of the economic turmoil in the global markets and the extreme volatility in the energy sector, I think our financial performance for the quarter demonstrated Lufkin's ability to adjust to abrupt falls in demand while still generating profitable results.

Oil price volatility severely depressed domestic natural gas prices and the uncertainty surrounding the pace and timing of the global recovery all weighed heavily on the markets for our products, particularly in the Oil Field in the second quarter. And against that backdrop we continued to take decisive steps during the quarter to control costs and reduce waste while at the same time pursuing targeted business opportunities. It was a difficult quarter from a demand standpoint and we responded quickly and decisively to reduce costs as rapidly as possible while maintaining the core capabilities that will position us for an upturn.

We are strategically focused on growth in the quarters ahead and we have maintained a strong balance sheet, with cash of more than $86 million. We reduced our labor force by another 200 employees during the quarter, virtually all in North America and virtually all in the Oil Field organization. And we reduced factory shifts to better match our output to the current and near-term demand. Year-to-date we have reduced our work force by 16%; however, since this figure includes the headcount additions associated with acquisitions, I would point out that the Oil Field manufacturing headcount reductions of 38% in Canada and 68% in the United States underline the severity of the downturn in the North American activity.

This illustrates that the headwinds were very strong in our Oil Field division, which is where I will begin the division overviews.

One of the best indications of the weakness in activity is reflected in the U.S. land rig count, which remained at less than half of the peak of the 2008 levels. We have said in the past that the land rig count, particularly the oil-directed rig count, is strongly correlated to demand for our Oil Field products. Although we believe the number of rigs drilling for oil may have bottomed out in June - and remember that about 60% of our Oil Field business is leveraged to oil - drilling for gas remained extremely sluggish. And depressed natural gas prices impacted our customers' available cash flow to fund drilling operations or drilling projects.

Compounding the fall in demand for our products is the high level of inventory in our major customer storage yard. Since customers purchased much of that inventory and put it in place of the second half of 2008 in anticipation of having a larger number of rigs under the contract, the pace of drawing down that inventory will be slow. We believe it may take at least two more quarters for those inventories to be worked down, assuming the rig count remains roughly at current levels. Until that happens new orders will remain well below those record levels we saw last year.

In the third quarter demand remains uncertain for new pumping units due to the pullback in oil prices over the past few weeks. At this time we anticipate a gradual increase starting in the fourth quarter and possibly a more meaningful uptick in the first quarter of next year. It is worth noting that a continued weakness in oil prices over the next few months would endanger the increase in demand for our products.

Quarter-on-quarter new bookings in the Oil Field division improved from the low levels of less than $17 million that we experienced during the first quarter to almost $35 million in the second quarter. The good news is that the volume of canceled orders for pumping units dropped dramatically to about $8 million for Q2, which is less than one-third of the volume of cancellations we encountered in the first quarter. We believe our Oil Field order book has stabilized now at around $53 million, and we expect cancellations to have a very limited impact on the business in the balance of the year.

At the same time, we expect our Oil Field order intake from international markets to increase in the second half of the year. Several projects are in the final stages of negotiations and should book during the third quarter. Domestically we are seeing early indications of a modest pickup in the third quarter in the Bakken shale, to a lesser extent in West Texas, and we expect a gradual pickup in the Gulf of Mexico, which is served by ILS, the operation we acquired in March.

Having said that, the risk to activity levels posed by price volatility that we've seen over the past several weeks in the oil markets illustrates the risks inherent in trying to forecast our business in this extraordinary economic climate.

One anomaly in the second quarter was the deterioration in service and automation revenues that we began to see in May. We had anticipated that while producers would likely defer capital purchases of new pumping units as their drilling activities declined, we expected that they would continue to spend on oil field maintenance and cost-efficiency improvements along with production optimization projects funded by their operating budgets. Spending by small independents held up fairly well in these areas, but the majors scaled back automation and service spending, apparently to maintain cash for other purposes.

In addition, falling prices for pumping units outpaced the decline in material prices and our ability to reduce labor and overhead costs during the quarter, which exerted further pressure on margins. We expect to see continued price pressure through the remainder of the year, but we also expect operating efficiencies and continued reductions in material costs to provide some cushion in these areas.

Although the first half of the year was extremely trying in Oil Field, we see good opportunities in the second half for increased international work in Latin America, Canada, North Africa and the Middle East. Through our ILS acquisition we are targeting new business opportunities in the Mid-Continent region, the Marcellus shale, and the Rockies, as well as internationally in Asia, Latin America and the Middle East.

The outlook for the Power Transmission division is somewhat brighter. New orders totaled $43.2 million, up from $26.8 million in the first quarter.

We also saw an improvement in gross margins from Power Transmission versus the first quarter, although year-on-year they were down by 1.8 percentage points.

Our backlog in Power Transmission now stands at $109 million versus $115 million at the end of the first quarter and $139 million a year ago. Demand from the energy sector was predictably less robust than it was in 2008, but fortunately the Power Transmission division has been able to attract new business from other industry sectors in which we participate.

A large [inaudible] project for gear-driven pumps used for flood control is one example of how the Power Transmission division successfully targeted business opportunities in diverse markets to offset the energy sector volatility. This is a market we have been in for a number of years, but it's also one we believe has great growth potential both in the United States and internationally.

By sector during the quarter we saw the strongest growth activity in oil and gas even though it was down on a year-on-year basis. Power generation and infrastructure projects also showed growth, although we had continued weaknesses in marine, petrochemical, tire and rubber, mining and the steel industries.

Overall we expect to see revenue soften slightly in the third and fourth quarter from the Power Transmission division, but we are projecting second half bookings to be stronger than those that we saw in the first half in this division based on our proposal activity and our targeted projects list, which bodes well for 2010.

As with the Oil Field division, pricing pressure is an issue in the Power Transmission division. We see third quarter margins in PT weakening to first quarter levels and fourth quarter margins slightly weaker on lower volume. We continue to see opportunities in alternative energy segments and in our more traditional power generation sectors, where demand for low gears for gas turbines and steam generator sets appear strong.

As part of our strategic plan to enhance our capabilities and position the company for growth when the economy recovers, we announced the acquisition of Rotating Machinery Technology in July. RMT specializes in the analysis, design, manufacture and servicing of precision custom-engineered tilting pad bearings and related components for high-speed turbo equipment. While this was a relatively small acquisition, we believe it will be a strong strategic fit for the Power Transmission division.

We will continue to look for acquisitions that will position us to be a more competitive company for long-term growth.

In addition to the two acquisitions we've made this year, we continue to invest organically in our business. Our current estimate for CapEx projects companywide for 2009 excluding acquisitions is in the range of $45 to $50 million, primarily targeted at expanding and upgrading our base of service centers as well as key machine tools that will reduce our manufacturing costs. To that end we will open our new Bakersfield service center during the third quarter of this year and we have broken ground on a similar facility in Odessa, Texas.

We remain committed to the lean manufacturing programs we undertook last year and, while early indications are encouraging, we think the majority of the cost efficiencies to be realized from this program are still ahead of us.

Our focus on international markets remains at the core of our strategy for growth, along with our ongoing investment in developing technologies that bring more value to our customers.

Our company culture and its people are the keys to our success. They differentiate Lufkin from its competitors. To that end we continue to add smart, capable, customer-orientated people to ensure that we have the resources and the depth of talent to build for the future, even in these most challenging of times.

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

Christopher L. Boone

Thanks, Jay. Good morning, everyone.

Just to recap, second quarter results from continuing operations, which excludes the results from the Trailer business we exited in the second quarter of last year, net earnings from continuing operations were $6.0 million or $0.40 per diluted share, excluding the impact of an additional charge we took in connection with the class action lawsuit we've discussed previously. This represents a decline of 57% from the second quarter a year ago. On a GAAP basis net earnings from continuing operations were $4.7 million or $0.32 per diluted share.

We booked a pre-tax charge of $2 million or $0.08 per diluted share after tax related to the lawsuit. The company believes it is now adequately reserved for the awarded legal fees and damages, but the plaintiffs are appealing the legal fee award and that issue will not be resolved until later this year.

Total revenues for the second quarter were $123.7 million, which is down 29% from a year ago.

EBITDA from continuing operations for the second quarter was $14 million or 11.3% of revenue versus $35.2 million or 20.1% of revenue for the second quarter of 2008.

Looking at sales and gross margins by division starting with Oil Field, second quarter Oil Field revenues were $75 million, which is down 41% from a year ago and down 33% from the first quarter. Breaking Oil Field down by product line, $38.6 million was from new pumping units, which is a decline of 51.3% from the second quarter of 2008. Pumping unit services contributed $19.4 million, down 19.1% from a year ago. Automation contributed $11 million, which is down 37.6% year-over-year. Commercial castings generated $1.8 million, which is off by almost 70% from a year ago. And ILS, which we acquired in early March of this year, contributed $4.2 million.

Comparing those same numbers to the first quarter of 2009, revenue from new pumping units declined 43.9%. Pumping unit services revenues were off 11.6%. Automation sales declined by 29.8%. And foundry revenues dropped 46.6%.

Gross margin for the Oil Field division was 17.2% versus 26.1% a year ago and 20.9% in the first quarter. This decrease reflects lower prices in response to material price decreases and lower customer demand, plus the negative impact of lower plant utilization on our fixed-cost coverage.

While we continue to focus on lean manufacturing and other cost reduction efforts, we expect gross margin to stay at roughly the second quarter level for the balance of the year and may decline by a few points unless activity levels start to pick up.

Turning to Power Transmission, revenue in the quarter was $48.7 million, which is up 1.6% from the second quarter a year ago and up 17.6% from the first quarter this year. Looking at that total by product line, new units contributed $38.1 million, which is up 2.6% from the second quarter of last year and up 15.2% from the first quarter of 2009. Repair contributed $10.7 million, which is down 1.7% versus the second quarter a year ago but up 27.2% from the first quarter of this year. Compared with the first quarter, we saw fairly substantial increases in most segments, with the notable exception of marine. Marine sales were off by more than 50% both quarter of 2005 and year-over-year.

Gross margin in Power Transmission was 29% compared to 30.8% for the second quarter of last year and 26.2% in the first quarter of this year. This margin improvement over the first quarter reflects the favorable mix affect of increased high-speed units and lower marine sales. Gross margin should stay flat to down a few points for the balance of the year compared to the year-to-date gross margin level in Power Transmission.

On a consolidated companywide basis, overall gross margin for the second quarter was 21.8% versus 27.4% in the second quarter of last year and 22.3% in the first quarter of 2009.

Looking at some of the other individual expense items for the second quarter, selling, general and administrative expenses from continuing operations were $18.6 million versus $17 million a year ago and roughly flat with the first quarter of this year. SG&A as a percentage of sales increased to 15% for the second quarter from 9.7% a year ago, but we have reduced the labor force by about 530 jobs since the first of the year, virtually all of it in Oil Field. We've made the decision to hold employment steady in the SG&A spending area so we can continue to develop new products and continue geographic expansion opportunities. We expect SG&A expenses to remain in the $19 million range per quarter for the remainder of the year.

Depreciation and amortization in the second quarter was $4.3 million, up from $3.8 million a year ago, primarily reflecting depreciation of intangible assets acquired as part of the ILS transaction in the first quarter and new machine tools we've added to our factories over the last 12 months. We expect D&A for the full year 2009 to be about $18 million.

Turning to the balance sheet, as Jay mentioned a moment ago, we have maintained very strong capital and liquidity positions despite the lower business activity levels we're seeing in 2009. At the end of the second quarter we had $86.3 million of cash and cash equivalents, which is down from $92.5 million at the end of the first quarter. We spent about $10 million in the second quarter on CapEx.

Working capital stayed about flat as reductions in receivables of $8.7 million and inventory of $16.4 million were offset by reductions in accounts payable, taxes payable and other accrued liabilities of $30 million.

At June 30 we had long-term debt of $2.3 million and current debt of $1.3 million on notes we assumed as part of the ILS acquisition. We continue to have access to a $40 million credit facility that is scheduled to retire at the end of 2010. Excluding outstanding letters of credit of $18 million, we have $22 million of borrowing capacity available on the credit facility at June 30th.

During the second quarter the company paid dividends of $3.7 million or $0.25 per share.

Our net effective tax rate was 33.1%. We benefited from adjustments to prior period tax filings in the U.S. from some recent IRS rule changes. The tax rate for the remainder of 2009 is expected to be approximately 36%.

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

John F. "Jay" Glick

Thanks, Chris. I think we're ready for questions now, so I'll turn it back to the operator.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Collin Gerry - Raymond James.

Collin Gerry - Raymond James

Real quick, Chris, I missed the depreciation for the quarter. Could you just give me that real quick again?

Christopher L. Boone

$4.3 million.

Collin Gerry - Raymond James

$4.3 million? Okay, thanks.

I guess my first question, you know, normally we talk about the Oil Field division, but Power Transmission's very surprising on the positive side, you know, revenues, but more importantly on the backlog. We think of that as an economic story and kind of just generally speaking the economy's going to drive things. How is that holding up so well? And your guidance seems to support that going forward. So kind of give us a little bit more detail about what's going on there.

John F. "Jay" Glick

I think, Collin, with Power Transmission the thing you have to understand is they're in a variety of markets that can ebb and flow. Our power generation market has been strong. We think there's continued growth in that sector, particularly in the Middle East, where people are trying to develop a more robust electrical grid and they're using gas turbines to quickly ramp up power production in developing countries and other parts of the Middle East which you wouldn't classify as developing but still the demand for power is increasing. So that's a sector that's growing for us.

Our infrastructure project business we think has some upside even over what we saw in Q2, and so we're working that in both Europe and in the U.S. And so, again, it's a sector we've been in before and been in for some time, but some of the recent projects that are under way as part of the stimulus package and other infrastructure investments that are going on around the globe are driving demand for gears in a number of different applications.

So those are the things. But PT I think benefits from not being a division focused on a singly industry. They really have a lot of diversity in their end markets.

Collin Gerry - Raymond James

I guess back to the Oil Field side, things continue to slide. We can't really see the light at the end of the tunnel in terms of the inventories getting worked off out there in the field. It sounds to me like the speed at which we see those inventory levels go down is going to be very much driven by near-term oil prices. Is that a correct assessment? So if we see things continue to slide here near term than maybe it's not a 2009 event, it’s a 2010 event before we see things bottom?

John F. "Jay" Glick

Yes. My comment would be I think the stability in oil prices is almost as important as an increase in oil prices. You know, I think the thing that arrests investment right now is the uncertainty and the volatility on that price. If we could get to a steady 60 or greater or 65 or greater, I think we'd see activity go back to levels that you would normally associate with prices in that range. So it's this confidence issue on the part of the oil companies, both independents and majors.

But I think internationally we saw some things move to the right based on getting some contracts signed in parts of the world where that can drag on a bit. I think once those are in place in the Middle East, North Africa and also in Latin America, that we'll see a bit of a pickup internationally in our business. And we really look for that to occur some time during Q3, which will help bookings, but it probably will translate into Q4 shipments.

Collin Gerry - Raymond James

Kind of speaking on that Q3/Q4 shipment, I mean, should we think that your current backlog of $53 million in the Oil Field, the bulk of that gets shipped in the third quarter?

John F. "Jay" Glick

I think that's probably an accurate assessment because I don't think we have whole lot in that backlog that stretches out beyond Q3 or early Q4.

Collin Gerry - Raymond James

Which the complement to that means that Q4 revenue is largely going to be a function of Q3's bookings?

John F. "Jay" Glick

Correct. Yes, I think that's right.

Collin Gerry - Raymond James

Okay, so, you know, a little bit more or less backlog insulation in the back half of the year.

My last question: What was your cash at the end of the quarter?

Christopher L. Boone

Around $86 million.


Your next question comes from Jeff Tillery - Tudor, Pickering, Holt & Co.

Jeff Tillery - Tudor, Pickering, Holt & Co.

Jay, when you discuss in the press release a couple of quarters of field level inventory here in the U.S., so if you think there's kind of two quarters' worth of demand in inventory, does that mean we start to see orders in the U.S. pick up noticeably in the fourth quarter? Would that be your assessment as you sit here today?

John F. "Jay" Glick

That's what we're expecting to see. And, you know, the inventory that's in the field, if there's an increase in the rig count, a continued increase in the oil rig count, you know, the burn-off rate could pick up a little bit. But right now we're not anticipating a significant ramp up in the rig count. So we think we're conservatively saying that Q4 ought to see demand coming back as people replenish inventories for early next year.

I will add one caveat to that. We see in a couple of instances projects within the same company but with different profit centers where they may be buying inventory for one profit center when field inventory exists in another location but they're unwilling to transfer to it to the location that's going to have the activity in the quarter. So that clouds our vision a little bit on the burn-off rate and the impact it might have on bookings. But we have tried to research that topic through our service group and our field sales group to just get our arms around it.

Jeff Tillery - Tudor, Pickering, Holt & Co.

And so if I think about this conceptually, the third quarter obviously is going to be impacted by the orders in the second quarter, so down revenue, and then any improvement in revenue in the fourth quarter would more likely be driven by a pickup in international orders in the third quarter. And then kind of the uptick in domestic orders really doesn't benefit much until 2010? Is that fair?

John F. "Jay" Glick

I think that's generally correct, although I think we could see some domestic increase later in the year from a revenue point of view because we've really been at pretty depressed levels at Q2.

Jeff Tillery - Tudor, Pickering, Holt & Co.

And then my last question: Could you just give us a feel - you talked about continued pricing pressure in the Oil Field business; it sounds like you're going to get additional benefit from the raw materials side going forward. How does that shake out in terms of how you're thinking about margins over the next several quarters?

John F. "Jay" Glick

We're really forecasting margins to continue weak at this point, Jeff. We'd like to think we could get some improvement, but realistically I think it's going to be very, very difficult.

Jeff Tillery - Tudor, Pickering, Holt & Co.

So kind of flattish to down a little bit?

John F. "Jay" Glick

Flattish to Q2 levels, potential weakness, you know, in Q3.

Christopher L. Boone

Just as another note, Jeff, I think, as we noted, even though we were seeing maybe a little bit of improvement just on the cost side of the pumping units side, we talked about a new pricing pressure we were seeing in the automation and service and that's going to help keep the margin level somewhat level.


(Operator Instructions) Your next question comes from Terese Fabian - Sidoti & Company.

Terese Fabian - Sidoti & Company

I have a question on your new orders and also on your cancellations. Who are they coming from? Is there any kind of a geographic distribution on that?

John F. "Jay" Glick

I think on the cancellation side we saw cancellations largely from the domestic operation again in Q2. A lot of that was focused in California, a little bit in West Texas. Those were the two areas that we saw the largest cancellation come from.

In terms of new bookings on the Oil Field side, just to kind of give you a split geographically during the quarter, 68.7% of that came from the U.S., 31.3% of it came internationally. And of the international, Latin America was the largest area that we saw bookings in the quarter.

On the PT side it's a little reversed from that. In Power Transmission we had 55% international and 43% domestic. And of the international, the lion's share of that was in the Eastern Hemisphere. They came in at 46%.

So PT, very internationally focused; Oil Field still domestic focused, but significant increases in the international content of our bookings.

Terese Fabian - Sidoti & Company

And in terms of sales to Latin America, is there any specific country or region that you are going to be developing for the future?

John F. "Jay" Glick

We expect to see growth in Brazil. Argentina's been very dormant; we think there'll be some growth there later; the timing on that's a little uncertain right now. We think Colombia will come back. We're not sure about Venezuela; we're certainly not planning on anything there in the short term. And, you know, we have some prospects in Mexico and several other areas of South America. But it's really the main provinces you would expect - Brazil, Argentina, Colombia.

Terese Fabian - Sidoti & Company

And you said that you were seeing project cancellations by majors and that is affecting your sales. Usually one hears about majors spending through a down cycle. What are you experiencing?

John F. "Jay" Glick

We read the same things you read, but we're not experiencing that level of consistent spending. I guess we were a little surprised that the automation spending dropped off in May and June and we're trying to assess some of the reasons for that, but it sounds from what we can learn from our customers like they were just under spending constraints, you know, cut spending even on projects that had good payback. So we'll see if that carries on into Q3 and Q4.

Terese Fabian - Sidoti & Company

Are you seeing any benefits from the rise in North American oil drilling activity?

John F. "Jay" Glick

I guess the only benefit we're seeing is we saw a little uptick in bookings in June and limited uptick this month so far, but it's really early to say. I mean, I would be very reluctant to cast a positive note on domestic U.S. activity or Canadian activity, come to that.


Your next question comes from Collin Gerry - Raymond James.

Collin Gerry - Raymond James

Jay, I think you gave us the domestic and international bookings of 68% U.S. On the revenue side could we get the international and U.S. breakout?

John F. "Jay" Glick

Chris may have that.

Christopher L. Boone

Yes, it was about 55% domestic, 45% international here in the second quarter for Oil Field. In Power Transmission it was about 40% domestic, 60% international.


Your next question comes from Terese Fabian - Sidoti & Company.

Terese Fabian - Sidoti & Company

A question on the new service facilities: Bakersfield you said will be opening in the third quarter and Odessa groundbreaking. When will that open and what will they add, do you think?

John F. "Jay" Glick

Well, in Bakersfield there will be several features that we think will help us. One is we will have everybody under one roof for both the Oil Field division and Power Transmission. It will let us do a lot more local support for our gear repair and service operations on the West Coast and in the Southwest for that matter.

On the Oil Field side we'll be able to bring ILS, automation and our pumping unit teams together, so we think there'll be some synergies there and we think there'll be some efficiency gains associated with that. And we'll have a much more capability facility; we can do a lot more education and training for customers in that facility.

And the same thing in Odessa; Odessa will have, again, both divisions occupying the space. It's much more modern and a much larger space than we have today. And, again, the synergies we think we'll get by having those groups working together will bring benefits in terms of new revenue and better service to our customers.

Terese Fabian - Sidoti & Company

And then for acquisitions, you completed two in the first half and you are looking at others. Is there any particular segment that would interest you - international as opposed to domestic or power transmission as opposed to oil field service?

John F. "Jay" Glick

Well, we'll look at opportunities in both divisions. We'll clearly be looking for technology that is enabling technology to our existing products. We'll look for new artificial lift technology, in the case Oil Field. We'll look for technology on the Power Transmission side that yields higher efficiencies and performance. So it's that type of acquisition.

And, again, I would stress that most of these will likely be small add-on acquisitions that we think have strong upside growth potential. Again, it's the same philosophy that we've used for the last several years in acquisitions.

Terese Fabian - Sidoti & Company

And your CapEx guidance, I think it went up from the previous quarter. Am I correct and is this including some new activities?

Christopher L. Boone

Well, I think what we'd said before is we certainly had a baseline of CapEx of about $30 million and then there was an additional $30 million of projects that were under consideration. And so, as it looks right now, about half of those that were under consideration will be, you know, as the years progress, it looks like will probably start some time during the second half. But there's still a chance they might not be, so the number could still end up closer to $30 million, but we were just giving the most conservative range as far as people's cash flow projections.


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

John F. "Jay" Glick

Thanks, Operator.

To sum up on the industry outlook, volatility in oil prices and the expectation for a further fall in natural gas prices will continue to adversely affect our customers' investment decisions. The outlook for the global economic recovery remains uncertain, which makes demand forecasts for energy an even less exact science than normal.

This is a difficult time for our entire industry and we're mindful of the importance of maintaining a laser focus on managing our business by aggressively controlling costs and improving efficiencies while at the same time investing in improvements in our people, our production equipment and developing technologies that differentiate our products by delivering more value to our customers.

We've acquired companies that fit our strategy for growth through expanding our base of products and service technologies, and we will continue to look for similar opportunities.

Despite the challenges of the current market, we remain strategically focused on positioning Lufkin for strong growth when the economy recovers.

Thank you very much for joining us.


Thank you, ladies and gentlemen. This concludes the Lufkin Industries second quarter earnings conference call. You may now disconnect.

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