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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

Lufkin Industries (LUFK) Q2 2012 Earnings Call July 30, 2012 10:00 AM ET

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.

The second major item that contributed to the earnings miss was higher cost in our Oilfield business. In order to supply the growing volume of product to satisfy the higher than expected second quarter bookings from North America, we continued to staff up our U.S. pumping manufacturing plant. We added roughly 100 people to the Lufkin Texas plant during the quarter. Most of these were undergoing training. So we carried that cost with only limited production from that group. This meant continued high levels of overtime in addition to the added payroll cost for the training group. Obviously, we're delighted with the higher than planned bookings, but the added drag of having a number of hourly employees in training inflated labor cost during the quarter and reduced operating margins. In addition, we had higher than expected maintenance cost in our pumping unit business, primarily again at our Texas manufacturing plant. We had an excess of $2 million in maintenance expenses at that location. The maintenance spending was on critical machine tools and material handling units. The objective was to offset -- to affect productivity and safety improvements, as well as to improve uptime in the second half of the year when we expect our production levels to be even higher. These 2 factors in our Lufkin Texas plant cost us roughly $0.03 of EPS.

The third contributor to the miss came from our ILS and PHL business segments, which supply plunger lift, gas lift and hydraulic lift equipment. As natural gas prices ebb lower, efforts have been underway for some time to shift people and resources from gas plays that are slowing, such as the Barnett and Haynesville area, to areas with increasing activity, such as Eagle Ford and Permian. However, activity in the Barnett and Haynesville dropped more rapidly than anticipated and coalbed methane dewatering activities in the Rockies, which had been robust in the last half of 2011, also fell off sharply during the quarter, causing lower utilization and a more rapid drop in service and equipment revenues than expected. The earnings contribution from these businesses in the second quarter reduced EPS by another $0.03. Until natural gas prices strengthen to support higher development work in the gassy plays, we expect these product lines to continue to be impacted by weaker demand in North America. Our best opportunity in gas lift are, as I've mentioned a moment ago, in the Eagle Ford, as well as in international markets, particularly in the Far East and Latin America. We look for growth in these markets, but we don't expect that growth to quickly offset the declines in North American demand.

Turning now to the impact from Power Transmission. The revenue shortfall was centered entirely in the U.S. operation and was largely related to site delays at project locations that didn't need or didn't want to take delivery of our products. As we noted in prior calls, the Power Transmission business is much lumpier than our Oilfield business and is comprised of small numbers of highly engineered, large project orders. Shipment delays in our U.S. operation on a few large project -- of these large project orders cost us another $0.03 per share of expected earnings in the second quarter. While Power Transmission improved its execution in manufacturing during the quarter, those improvements didn't translate into forecast revenue growth. As a result, most of the missed shipments are either completed manufacturing or were in assembly. As mentioned, the delays to shipments were largely based on changes in project requirements by customers. Just to illustrate the point, one large contract from a Korean company destined for a Saudi Arabia project accounted for half of the revenue mix. So you can see the lumpy impact. On the positive side, we realized strong operating profits from Power Transmission's aftermarket business. The highlight was the completion of a large power generation project for Iraq during the quarter. Performance from our PT operations and trans were also slightly ahead of plan.

In addition, about $0.02 of EPS miss was related to our SAP implementation support cost. We had some unexpected and unforecasted overlap cost as we changed out the consulting support groups. And with that transaction completed in the second quarter, we expect the consulting cost to decrease in the third and fourth quarter, but we did have the overlap cost in Q2.

And lastly, we lost about $0.01 per share because of a later than expected booking of a large automation order for our Romanian operation. This delayed revenues that we'd expected to see in Q2 to offset training and start-up cost. That order was booked in the third quarter rather than the second quarter, but we missed the revenue stream from that during the quarter.

Despite these factors, we still realized an improved gross margin on a consolidated basis, a 25.5% of revenue before special items, compared to a 25.3% a year ago and a 24.2% in the first quarter of 2012. The margin improvement was a result of improved factory utilization in the U.S. pumping unit plant and some price improvements.

A number of these items I mentioned that impacted Q2's bottom line were beyond our ability to control. There was really little we could do about weak gas prices other than to be nimble and flexible and seize opportunities outside of the areas that were in decline.

The Argentine situation also was largely outside of our control. We remain encouraged by the opportunities for new business there, and we intend to continue developing that market. Some of the hiring and training and equipment maintenance expenses we incurred during the quarter hurt us in the short term but should help us maximize future contributions from the accelerating volumes we expect to put through our factory in the second half of the year.

The North American market has been extremely strong for the last year, and we're encouraged by the accelerating strength of the international market as the second quarter was a busy quarter with Oilfield bookings at $353 million, which was a 27% increase from the prior quarter.

In addition to strength in North American markets, as I mentioned, we also had several large orders from the Arabian Gulf area, North Africa and Latin America.

We will continue to build capacity to support strengthening volumes of bookings. In North America, we expect bookings from customers operating in the Bakken, Eagle Ford shale and the Permian Basin to remain relatively strong so long as WTI prices hold above the $80 threshold. Our expanded service internetwork is also helping win business by offering improved service capabilities closer to the fields they serve. The trend towards larger pumping units that we've mentioned in prior calls continues, particularly in the Bakken and the Permian, and this is a positive for us. As we've discussed before on these calls, operators extend -- as operators extend the lateral reach of these wells and increase the number of frac stages to maximize productivity in the economics of the well, the size of the pumping unit increases.

We were encouraged by the performance of our Canadian-based Quinn downhole rod pump operation, which we acquired at the end of last year and also of the Zenith Oilfield Technology, the downhole gauge and data analysis provider that we acquired earlier this year. Despite winter breakup and heavy spring rains that impacted our revenues from Canada, Quinn's still beat our top line forecast overall.

Margins were slightly lower than we originally forecast, again due to higher costs associated with ramping up production. A portion of that was related to training and new hires to handle what we expect to be a continuing ramp up in both the U.S. and international orders for downhole rod pumps through the rest of the year. Most of the balance of the cost increase was to fine tune our equipment after we relocated machine tools to the new facility. A small portion was outside contract operation rates that came in slightly above what we built in the forecast. Zenith, based in Aberdeen, delivered stronger-than-expected bottom line results in the second quarter. Saudi Arabia, Kuwait, Venezuela, Colombia and Oman were the driving markets for Zenith during the quarter. The integration of Zenith with our existing automation business and with our Ireland-based technology company, which was also purchased earlier in the year, is on schedule and proceeding well.

Returning to bookings. Oilfield's new order bookings totaled $352.9 million, which was an increase of 81% versus the year ago and 27% versus the prior quarter. The increase was mainly due to increased orders for automation products of the company that we acquired earlier this year and for new pumping units.

Our customers continue to recognize the economic returns they can realize by utilizing our automation products to maximize production and reduce operating cost, particularly in this tight pricing environment for oil commodities.

As a result of the Oilfield's backlog increase, which was up 48% from the quarter to $306.7 million and was up 58% versus a year ago, North America accounted for 70% of the Q2 bookings versus 88% in the prior quarter and 72% in the second quarter of last year. As I mentioned earlier, we saw increases in international bookings, mainly in North Africa, the Gulf region and in Latin America, and the Latin America bookings were primarily from Argentina. North America accounted for 71% of Oilfield's backlog at the end of the second quarter versus 86% at the end of the prior quarter, which reflects the stronger international bookings.

Looking at the major contributors to Oilfield bookings in more detail. Starting with rod lift, new pumping unit orders increased by 44.9% versus the first quarter and by 84.2% versus a year ago to $215 million, again led by strong demand from the Bakken, Eagle Ford and Permian. New bookings in automation, including contributions from Zenith and Datac and RealFlex totaled $52 million, which was up 40.8% from the prior quarter and up 62.2% from a year ago. I should point out that the automation group realized its highest direct revenue quarter in its history at $29.7 million, despite some weaknesses in international automation revenues last quarter. And the direct revenue really reflects sales that automation took at the Missouri City plant not -- and doesn't pick up Argentina, Romania and Canada sales, nor does it include the Datac and RealFlex and Zenith acquisition revenues. Pumping unit services had new bookings of $35.4 million, which were down 2% sequentially and up 12.4% from the second quarter of last year. Gas and plunger lift bookings totaled $11.9 million, up 16.6% versus the first quarter and $50.6 million from a year ago, driven largely by increased international bookings and the acquisition of Pentagon.

As we mentioned in this morning's news release, construction and commissioning of our new Romanian facility is actually slightly ahead of schedule. Order intake from Latin America also remains very strong, although it was late. We received a very large multi-quarter order in Argentina, and we expect Latin America to be a buoyant market for the rest of the year, particularly in view of the fact that, that order is now on the books.

Second quarter bookings in Power Transmission were down slightly from last quarter and from the comparable period in 2011, reflecting ongoing nervousness in the broader global economy. The PT business is tied largely to energy-related infrastructure projects. The timing of orders placed for that equipment continues to move to the right as customers are more carefully scrutinizing demand for downstream products and taking a harder look at project budgets. During the second quarter, we booked $48.8 million of new orders in Power Transmission, which was down 3% versus a year ago and down 14% versus the first quarter of this year.

New bookings by Lufkin France rose substantially versus the exceptionally strong bookings they've had in the first quarter, and projects that were expected to book in the second quarter had moved to the right. As a result, our backlog in Power Transmission declined 3% from the end of the first quarter to $117 million or a decline of 7% year-over-year.

Longer term, the lower price feedstock prices we are seeing in the commodity markets, particularly for natural gas and NGLs, are expected to drive expansions in petrochemical capacity, and lower natural gas prices should fuel demand for gas turbines for power generation. Both developments will be constructive to demand for our fuel products.

Chris will now walk you through the second quarter financial results in more detail.

Christopher L. Boone

Thanks, Jay. Good morning, everyone. As usual, I'll begin with a recap of our financial results for the 3 months ended June 30, 2012, then I'll cover some of the expense items for this quarter and our expectations for the remainder of the year.

On an adjusted basis, the company had second quarter net earnings of $22.5 million or $0.66 per share, compared to net earnings of $18.5 million or $0.60 per share for the second quarter of 2011. Including certain nonrecurring items, our reported earnings under GAAP accounting were $0.57 per share. These nonrecurring items include: prior period noncash actuarial remeasurements of pension liabilities that impacted GAAP net earnings in 2012 second quarter by about $1.5 million or $0.04 per share; the final, net of tax acquisition expenses related to recent transactions of about $1.4 million or $0.04 a share; and after-tax expense of about $200,000 related to payroll taxes of the now resolved class-action suit.

Consolidated revenues were $305.6 million or up 34.8% from the second quarter of 2011 and 9.3% sequentially. Consolidated gross margin before special items in the 2012 second quarter was 25.5% compared to 25.3% from the 2011 second quarter and 24.2% in the first quarter of 2012.

Consolidated operating income in the second quarter of 2012 before special items was $37.9 million, which represents a 31% increase over a year ago and a 21% increase from the first quarter. EBITDA from continuing operations before special items for the second quarter was $48.3 million or 15.8% of revenue versus $34

[Audio Gap]

million a year ago and $41.2 million in the first quarter.

Looking at the second quarter financial results by division. Starting with Oilfield. Oilfield revenues totaled $253 million, which was up 41.6% from a

[Audio Gap]

up 7.3% from the first quarter. Oilfield operating income before special items was $34.8 million, which was up 39.5% from a year ago and up 16.7% from the first quarter.

Breaking second quarter Oilfield revenue down by product line. New rod lift pumping unit sales totaled $121.3 million, an increase of 21.8% versus the second quarter of 2011. Automation products contributed $44.2 million, which is up 36.4% year-over-year, reflecting a full quarter contribution from our recent acquisitions. The acquisitions accounted for about $11.9 million of the increase. Pumping unit services contributed $36.3 million, which is up 13.4% from a year ago. Gas and plunger lift sales generated $10.9 million of revenue, which is up 24.9% from the same quarter last year. Foundry contributed to $4.5 million, which is down 28.2% from a year ago as available capacity has been shifted to internal demand. And Quinn's contributed $36.2 million to the quarter, a reminder that this represented a full quarter of ownership and contribution from Quinn's, which we did not own until December 2011.

On a sequential basis, most of our product lines showed improvements in revenue. New rod lift pumping unit sales rose 10%. Automation sales were 25% higher. We had a full quarter benefit from Zenith compared to 1 month in the first quarter. The net sequential benefit from the acquisitions was about $7.5 million. Pumping unit services were up 11.1%. Gas and plunger lift sales increased 11.2%. Foundry revenues declined 2.6%. And Quinn's revenue fell 16.6% due to the expected seasonality in Canada.

In the 2012 second quarter, gross margin before special items from Oilfield was 25.3% compared to 24.3% in the last year's second quarter and 23.8% in the 2012 first quarter. We show short of our prior guidance range of 27% to 28%. As Jay discussed, higher ramp-up cost in the North American factories, along with cost and utilization issues in Argentina, were the main factors driving this shortfall.

Going forward in the third quarter, we expect gross margin levels from the Oilfield Division to be in the range of 26% to 27% and increasing in the fourth quarter to the 28% to 29% range.

Turning to Power Transmission. Total sales for the second quarter were $52.3 million, which is up 9.4% from a year ago and up 20.2% sequentially. Operating income from Power Transmission was $3.2 million, which was down 22% versus a year ago but almost double at 109% increase over the 2012 first quarter.

Looking at revenue breakdown by products. New units accounted for $34.9 million of second quarter PT revenue versus a 1% increase over a year ago and a 15.7% increase from the first quarter. Repair generated $15.3 million in sales, which is up 29.5% from a year ago and up 31.5% sequentially. Bearings contributed $2.1 million of the second quarter revenues, which is up 51.3% from a year ago and up 24% from the first quarter.

Gross margin in Power Transmission was 26.5% versus 29% a year ago and 26% in the 2012 first quarter. This did fall within our guidance range of 26% to 27%. We expect Power Transmission margins in the second half of 2012 to average around 25%.

Looking at individual expense items in the second quarter. Selling, general and administrative expenses before special items increased about 10.3% sequentially to $40 million. Most of the sequential increase reflects the impact of the acquisitions, increased staffing and higher costs associated with the new SAP system. This was at the upper end of our guidance range due to approximately $1 million extra in post-implementation cost for the new SAP system. As a percentage of revenue, SG&A before special items was 13.1% versus 12.5% a year ago and 13% in the first quarter. We expect SG&A to be in the range of $41 million to $42 million per quarter for the third and fourth quarters.

Depreciation and amortization in the second quarter was $10.6 million versus $5.6 million a year ago and $10.3 million in the first quarter. The higher D&A levels, when compared to last year's second quarter, reflect depreciation on newly-acquired assets and intangible amortization from the recent acquisitions, along with the depreciation of new machine tools and service centers we have added through organic growth since the last year. For the third quarter, depreciation and amortization is expected to be about $11 million and about $12 million in the fourth quarter as we start production in the Romania facility.

Capital expenditures in the second quarter totaled $18 million. For the year, we expect total expenditures to be in the range of $85 million to $95 million. As of June 30, we had $311 million term loan outstanding and $25 million drawn on our revolver. We drew this amount at the revolver in the second quarter to cover short-term working capital growth. After letters of credit, we had $138 million available under our credit facilities at the end of the second quarter. We paid dividends of $4.2 million or $0.125 per share during the second quarter. Our net effective tax rate in the second quarter before special items was 35%, and that remains a good run rate for modeling purposes.

That includes the financial overview. So I'll turn it back to you, Jay.

John F. Glick

Thanks, Chris. Before we go to your questions, I'd like to drill down a little deeper into the outlook and update our guidance for the remainder of the year. During the period of great uncertainty in the commodity markets, we are maintaining close dialogues with major customers in both our business segments to monitor their plans for the balance of 2012 and into 2013.

In Oilfield, we anticipate some pullback in a couple of areas, mainly in the Permian Basin, but so far, the consensus among our customers seems to be for fairly modest reductions there. Assuming oil prices remain above the $80 to $85 a barrel, we believe any slowdown would likely be fairly modest. Remember, our backlog in Oilfield grew by nearly half sequentially in the last quarter, and our capacity is still lagging the demand we're seeing in both North America and in international markets. We are actively recruiting additional staff for the U.S. and Canadian plays. Conversely, if WTI falls below $70 for any reasonable length of time, we anticipate a steeper decline in demand. Pricing pressure is strongly tied to commodity prices, and we expect pricing pressures to increase if demand drops further on weaker oil prices. Our customers are continuing to monitor equipment reliability and quality of service, and we continue to secure orders from customers who are switching suppliers and willing to play -- to pay marginally more upfront for equipment to ensure lower OpEx and improved reliability over the life of the well.

From a top line perspective, clearly, the demand side, as reflected in our midyear backlog and our strong Q2 bookings in Oilfield, supports the top line forecast that we included in our fiscal 2012 guidance this morning. The second quarter demonstrated that our supply chain is capable of supporting the forecasted volume growth.

The main challenges we see for the remainder of the year will be with pricing and execution. Materials' prices have trended slightly lower this year, and we think material costs will remain in check for the balance of the year in North America. Argentina may still be subject to some material price volatility. That said, we continue to work this area aggressively on a global basis across both of our business units.

The start-up of our Romanian manufacturing operation in the fourth quarter will add significant capacity to more competitively serve our Eastern Hemisphere customers. As I mentioned earlier, we're actually a little ahead of schedule there. We're running off machine tools and testing first article castings from local vendors.

Execution in Power Transmission manufacturing improved during the second quarter, but reduced bookings due to delays in order placement for several projects could result in lower utilization rates weighing on operating margins over the next 2 quarters.

To sum up, we remain very encouraged by the strength of both North America and international markets on the Oilfield side. While oil prices have recovered from the lows a few weeks ago, we believe that oil price volatility poses a greater risk to our business level and operating margins over the coming quarters than it did when we issued guidance at the end of last quarter. We also built a more cautious outlook on Argentina over the next 2 quarters given our experiences during the past quarter.

As a result, taking a more conservative view of the balance of the year, we are lowering our guidance in the face of this uncertainty. This morning, in our earnings release, we provided third quarter revenue guidance in the range of $330 million to $340 million and EPS guidance during Q3 of $0.70 to $0.80 per share. For the full year, we expect consolidated revenues in the range of $1.25 billion to $1.27 billion and earnings per diluted share to be in the range of $3 to $3.20 before adjusting for acquisition-related expenses. In addition, assuming oil prices remain above $80, we expect the pace of orders to remain steady, but we may see third quarter bookings decline sequentially because several customers place large projects covering multiple quarter requirements during the second quarter.

Now operator, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question does come from the line of Collin Gerry with Raymond James.

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

A few questions. I wanted to start with, I guess, business activity and just kind of the pace of the pulse of the market right now. I believe you said 70% of bookings were North American driven. By my math, I have that equaling roughly flattish growth quarter-over-quarter. Should we take that to believe that you are starting to see at least a slowdown in the growth in North America bookings as it relates to the volatility, I think, you pointed to in your guidance? I mean, what's the customer sentiment out there in North America? Maybe a little bit more color there.

John F. Glick

Yes, I think we're seeing -- I'm not sure I'd say a decline, but I think we're seeing a flattening of the pace of the increase we've seen. I think, Collin, we, in Q2, began to see the impact of all the frac capacity coming in. So there is very little between us and the drillbit right now that is delaying orders. I think the price weakness, as we saw in Q2, certainly caused a lot of our customers in North America to reconsider the timing on order placement and just to take a more conservative view. We haven't seen any sharp decline yet. I know we have one customer that's dropping some rigs. But overall, I think there's a wait-and-see attitude in place.

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

Okay. That's certainly helpful. Chris, I wanted to follow up on more of your guidance just to make sure I got that. Did I hear, on the PT margins, 25% average for the balance of the year?

Christopher L. Boone

That is correct. That again, as Jay said, we're -- we've added some conservatism in there for what we -- some of the bookings levels that we've seen. And there may be issues around plant utilization. As you remember, they will start building things for bookings later on. So the revenues for the quarter may not relate to the productions that they're doing in that quarter.

John F. Glick

Yes. Collin, I think what we may well see in France and to some extent in the U.S. is the delays in order placement means that we're going to have a situation where we likely will receive some orders in Q3 that are in engineering in Q3 and maybe even early Q4 and don't flow to the shop until later in the year, certainly later than we'd anticipated last quarter. So that's going to drag down utilization and kind of weigh on the margins.

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

Understood. And then last one for me. The SAP implementation seems to be a recurring cost that's kind of reared up a few times in the last few quarters. I know you went into this, and I may have missed it. When do we expect some finality or just some conclusion of those ongoing costs? Is that a 2012 event or a 2013 event? What do you think? Just quantify it if you can.

John F. Glick

Yes. I think it's a late '12 event.

Christopher L. Boone

Well, Collin, first of all, we -- there is overall just going to be -- our old system was long depreciated and was being managed by a fairly -- a lighter staff to support that system. So upfront, we knew we would have higher costs just because we were now having to restart depreciating a newer system and having to support it greater than we did with the old system. But there is still extra cost right now as we continue to, let's call it -- I don't want to say debug, but certainly as we work through fine-tuning the system and working out last kinks. There's an extra layer of support cost that were certainly going on in the second quarter more than we've been -- we had hoped. And again, we're starting to see that work itself down to where we're back to set of kind of 2 teams working. We're back to kind of the staffing level we had originally expected for support.

John F. Glick

Yes. Collin, I don't want to overstate the SAP issue, but I think our experience thus far this year is pretty typical of most customers who make a major ERP system change. We've had tremendous management distraction. A lot of our operations-related people have really had to refocus on systems and learn new systems and learn how the transaction is processed through those systems. And so that disruption has clearly been something that's been greater than what we anticipated, particularly during quarter 2. Now on the positive side, we have, I think -- have upgraded the consulting support we have and we've done so at a lower cost, and we had some doubling up of that, as I mentioned in my comments, probably to the tune of $1 million or so. But I think that would -- a lot of that is coming together now. I do think we'll continue to struggle with some SAP issues during Q3, but I believe by the end of the year, much of the operational disruption will be behind us.

Operator

And our next question is coming from the line of Robin Shoemaker with Citi.

Robin E. Shoemaker - Citigroup Inc, Research Division

I wanted to ask in terms of what you're doing at Lufkin at the manufacturing plant there and the people you're hiring, are you adding another shift? Or what kind of level of capacity are you aiming for there?

John F. Glick

Yes. Robin, we're not aiming for a full shift, but we are trying to add where we can more people on day -- first and second shift, in areas where we are not constrained by machine tools, in other words, areas like assembly, final preparation for shipping, areas where we really can throw more people as capacity increases. Just in the shift patterns we have really represent most of the increases. We also are bringing in some new machine tools. So some of the machine-related hires that are in the training process are really in to run those new machines that we're adding, but it won't be a complete shift. The 100 really doesn't represent a complete shift by any means.

Christopher L. Boone

I think it represents trying to boost the capacity enough to increase output another 7% to 10% or anything like that out of that factory in the third quarter.

John F. Glick

Yes. Clearly, we're trying to do it. And we're also trying to reduce the amount of Saturdays' and Sundays' work in areas where we're not -- again, we're not limited by the machine capacity but, in fact, can have more people accomplishing more in the regular shift patterns during the week.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay, good. So I wanted to ask on Quinn's. The -- how would you describe the Canadian market for artificial lift equipment? You gave the revenues for Quinn's in the quarter, something like $36 million. Is that in line with your expectations? And do you still believe Quinn's is accretive to EPS in '12?

John F. Glick

It was in line with our expectation for quarter 2 because the breakup, we knew we were going to be sequentially down. I think as I've stated, Quinn's actually came in stronger than we had forecast for the quarter at the revenue line and we were a little light on the bottom line because of extra subcontracting and adding people. I think we still feel good about the outlook for the Canadian artificial lift market going forward, and we certainly feel good about Quinn's. I think they're performing at levels that are right on our expected rate. I think the other thing that we haven't seen yet from Quinn's, that we were actively working on, is developing the international markets for those products. So we've really seen a modest amount of sales for work outside of North America for the downhole pump. That's really still out there, and customer acceptance seems to be very, very good. So we have very optimistic views on Quinn's.

Robin E. Shoemaker - Citigroup Inc, Research Division

And the synergies that you hope to achieve with Quinn's with regard to the downhole portion of the rod lift system with the surface portion, how do you see that now?

John F. Glick

We still see that as a very strong strategy, particularly in international markets. But even with some domestic customers in North America, we've seen a request that we begin to package the pump and service the pump along with the surface unit. So I think that strategy of putting those technologies together and particularly adding in the automation technology and the downhole gauges that come from Zenith, is still a strategy that's getting traction in the market.

Operator

And our next question is coming from the line of Jeff Tillery with Tudor, Pickering, Holt.

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

Clearly, the order is strong in the quarter, so demand certainly exceeds kind of the revenue run rate where you're at in the quarter. How do you get comfortable that some of the issues that happened in Texas and some of the changing issues because demand continues to exceed your ability to meet in the current quarter don't persist? And the follow-on is that -- question to that is it looks like you assumed these issues subside in the Q4 guidance with margins back to kind of original target.

John F. Glick

Yes. I think we have built in some conservatism on Q3 EPS to assume that some of the things we're seeing at Buck Creek, which is our Lufkin manufacturing plant, will be with us through this quarter and the training issues being high among those. But I think as those people come online, we are seeing from hires that we've had in prior years, they do begin to hit a productivity stride after 4 to 6 months on the job and then they gradually improve from there. So we're forecasting that for later in the year. And I think we've also been able to demonstrate that we can achieve the levels of output that we had in our forecast and have been guiding to. The real problem is -- or the challenge is getting that done at very, very efficient rate so that we can get the bottom -- more of it translated to the bottom line.

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

International orders in Oilfield were, I guess, $105 million or $160 million in the quarter. The range over the past year has been more like $25 million to $60 million. Was the multi-quarter orders large enough to take you back down towards that more historic run rate or you think will persist at more elevated levels?

John F. Glick

Elevated levels for the international bookings?

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

Correct.

John F. Glick

Yes. I think international bookings, I think, will be strong through the balance of the year. We have projects that clearly Argentina may fall off a little bit, but I think Eastern Hemisphere orders are still out there that will put it. I think North America -- depending on, again, what happens with oil prices, if we assume oil prices kind of in current ranges, I think North America will continue to be strong and we'll see an uplift from the international. If oil prices weaken in North America, all bets are off, and we may see North America dropping off and international taking over.

Christopher L. Boone

But again, as we had originally said last quarter, these Argentina orders do represent kind of almost the next 12 months' demand for just the new pumping unit side of that operation. So we will definitely see -- won't see a repeat of that again out of Argentina certainly next quarter, where we still have other opportunities globally. But that certainly was an extra pump in the second quarter that would probably not be repeated in the third and fourth, at least out of Argentina.

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

[indiscernible] Chris, could you give us the breakdown in orders, U.S. versus Canada within Oilfield?

Christopher L. Boone

I will have to get that -- get my Quinn numbers. I don't have my U.S. versus Canada broken out. So I'll have to get that.

Operator

And our next question does come from the line of Neal Dingmann with SunTrust Robinson Humphrey.

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

Say, Jay, can you give me a little color on just the pricing and sort of how you exited second quarter and how it's looking? So I guess domestically pricing versus your peers, where they're going. Your peers, obviously, last week, talked about increasing pricing. And I know last pricing increase you had was a bit of ago. We're just wondering how that's sort of trending now, how you exited that quarter and how it's starting today, quarter-to-date?

John F. Glick

Yes. I mean, pricing has been a challenge for several years now. We are seeing prices largely hold in North America at the levels that we had with price increases we put through in Q3 and 4 of last year. But we had a lot of pressure, Neal, during the quarter. And I think as oil prices weaken, that pressure will intensify going forward. Latin American prices are not quite as buoyant. We had to make -- negotiate very hard on some of the Latin American jobs we took this quarter. They're still attractive, but price pressures are high, really globally, and I think they'll continue that way. The real question on price, I think, really hinges on where the WTI goes and kind of where the global oil prices go. If they go up and the operators can see an attractive investment opportunity, I think they'll be a little less price sensitive. But as prices weaken, I think that sensitivity goes up enormously.

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

So that kind of -- well, I forget, what was the gross margin for second quarter, Chris, for oil service?

Christopher L. Boone

Around 25.3% off the top of my head.

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

And how -- I guess how different -- I guess what I'm getting at is just how different, Jay -- what you and Chris are kind of assuming. I know you gave the new gross margins kind of the 26% to 27% third and 20% in fourth. I guess if you would look like what I'm -- where I'm going with that, I just wonder what just the U.S. Oilfield service margins were in the second quarter and kind of what you're assuming that they'll be for third or fourth, kind of in that lowered guidance?

John F. Glick

I think we probably got a point -- roughly a point improvement in price, Q2 to Q1. And I think our guidance really assumes a flattish price for the balance of the year, the next 2 quarters. We are not making any major assumptions that prices are going to strengthen a lot from where they are.

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

Okay. And then Jay, do you factor in on your guidance. I know not necessarily your segments, and artificial in particular, but I know there's other segments out there that factor kind of the seasonal slowdown that you have in the fourth quarter. I mean, do you factor anything like that in or not necessarily because of your type of business?

John F. Glick

Yes. We do try and factor seasonality in, and order patterns in both divisions, but particularly on the Oilfield side.

Christopher L. Boone

Yes. We see that phenomenon sometimes in -- with holidays, we have to factor in the service days into our numbers. But there's also sometimes still a year-end push for equipment. Or sometimes, those 2 are related to each other.

John F. Glick

Yes. Oftentimes, Neal, we see the trend or the seasonality more pronounced in the bookings side than in the shipment side.

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

Got it. And then last one, if I could. Chris, I'm just kind of wondering on the SG&A that you hit, it looked like your guidance is about the same going forward. And I know that you talked about it in the second quarter having a bit of the staff and different things in there. I guess are you assuming that, that continues? Or is it fair to say you're just kind of keeping the guidance about the same in SG&A just to stay rather conservative there?

Christopher L. Boone

I think there's a little bit of conservatism, but there's also some -- we've been also working to beef up some of our other support costs in some areas, just with the growth of the company and just even some of the financial areas and some of the other operations management areas as well. So I think there'll be a little organic growth as well, even kind of offsetting some of the clients we'll see and some of this extra support costs we've had on the system.

Operator

[Operator Instructions] And our next question comes from the line of Brian Uhlmer with Global Hunter.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

I want to have a quick dialogue on Argentina as most of your comments are -- you talked about some labor disruptions, where there was an excess of plant and then you had some orders pushed back, where revenues didn't come in where you expected. Are the union agreements such that if guys can't get to the plant, you're still paying full time and does that impact? Or how does that work out when the guys can't even come to work?

John F. Glick

Yes. It's -- certainly, the staffing group are paid and I believe -- I'm not absolutely familiar with our operations in Argentina on a payroll basis, but I suspect that people who attempted to get in and were prevented probably got some rate of pay. The big issue, frankly though, is the lack of output from the factory, where we didn't produce product, we didn't absorb overhead and we really continued to kind of drag the cost banker with Argentina during that very weak quarter. That's where the pain came from.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay. And moving forward, with the order that came in, now you think -- you feel that it's effectively and efficiently staffed that this quarter margin should be up substantially. Is that accurate?

John F. Glick

Well, I think this -- the next 2 quarters, we have the security of these 3 large orders in place. We have commitments from vendors on material prices that we think give us cost certainty. Where we are still going to have exposure in Argentina is field access for our customers and our customers' perceptions of where the economics in the country are going with respect to developing and producing oil. So I think we've been able, during Q2, to derisk some of our internal exposure with the labor contract and again securing these orders, but it's the external risks that we're still not totally free of.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Right. That makes sense. Now moving forward on Romania. And obviously, you discussed staffing up a little bit earlier and then getting an order in for the automation side. Moving forward, as we begin the full operations, do you feel that you've accurately forecast the start-up cost of all that into your current guidance? And how, potentially, will that impact the revenue -- I mean, the margin as we progress in the '13 when that thing really starts to get up and running for bigger projects? Should it be accretive to margins or dilutive as it first gets starts up in the first half of '13?

John F. Glick

Well, number one, let me deal with part of this and then Chris can come back in. But I think we've built in some pretty modest expectations for Romania for the balance of this year. We have some manufacturing operations going on in support of our North American operation that really ramps up fairly gradually in Q4 and involves machining of a number of similar parts there to get the group trained. The risk we have in Romania, I think, really has more to do with getting all of our supply sources qualified and getting material flowing into the factory. But the machine tools are in place, they're being run off. Programs are being written. People are being hired and trained. So for '12, there's not a lot of upside built into our number for Romania, and we do have only the downside risk of the subcontract support somehow not coming onstream as quickly as we've modeled. And that would put a bigger load in our U.S. operation if that should happen. For '13, I don't know that we are prepared to tell you exactly what the accretion is from Romania. But I think I would come back to the original assumptions and tell you that we continue to track on those assumptions with respect to volumes and costs in Romania. And our cash flow from the incentives from the Romanian government have come on pretty much onstream. So we feel pretty good about the assumptions holding for that operation.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay. And then 2 quick ones for Chris. Number one, you guided G&A to be roughly in the same range. I think, you said $41 million to $42 million. For Q3 and Q4, you don't expect your typical end of your close out, where your seasonally Q4 is your highest G&A quarter. Is that...

Christopher L. Boone

Yes. I think you're seeing probably a little on the lighter side on Q3 and a little more in Q4. We do have some -- typically in Q4 is when we do certain -- some equity awards. And there are certain people that because of our -- the way our plan works, we had to fully expense those awards at the time of grant. So they can bump it up a little bit. But because there are less of those people today than there used to be, that's not quite as dramatic as they used to be. But there is still an element of that's why I will probably agree, Q3 is probably a little bit on the lower end of that range and Q4 is probably a little bit on the higher end of that range.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay. And then my final question is kind of related to long-term strategy. It's been -- it feels like 4, 5, 6 quarters of cost overruns and issues up in intergalactic headquarters and Lufkin. Is there thoughts moving forward on whether or not a major expansion should be done in a better labor-centric part of the country closer to Houston or something like that where you'll get a better pool of laborers and machines? And how much of a secular tailwind can Lufkin support as this market just continues to grow for your products?

John F. Glick

Well, I'm not sure I want to cover all that, but I can tell you that the Romanian ramp-up really, I think, does achieve the goal of moving our production into a region where we can attract maybe some higher skill levels at more attractive global labor rates. And I think we have a lot of room to develop that further before we think about any other strategic moves with respect to manufacturing location.

Operator

And our next question does come from the line of Blake Hancock (sic) [Hutchinson] with Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

It's Blake Hutchinson. My line dropped off. So I apologize for that. Just some quick questions, just going back to Argentina as it was such a big impact for the quarter, what type of revenue run rate do we need to be looking at there on a quarterly basis so we can kind of be more in tune with how you're operating? I mean, do we need $15 million to $20 million coming out of that to be at a level you think is efficient, productivity-wise?

John F. Glick

Chris is looking at a report here. Just give him one moment, Blake.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

And then just while he's looking, I mean, where are we in terms of backlog so we can kind of match the 2 up and kind of think about how many quarters here we have kind of visibility towards maybe operating at a more efficient run rate, where you're not kind of waiting on order to get a pick on the full efficiency?

John F. Glick

Well, I think the answer to the last question is that we probably have a solid 3 quarters in front of us, with a good order book and good visibility, certainly in the balance of this year. I think we're in very good shape. And I think we'll have enough to kind of hit the run rate that we need for the operation to be a profit contributor again. Chris might be able to tell you what that rate is.

Christopher L. Boone

Right. I mean, so if you -- I mean, if you factor in 2 with all of our field service operations in Argentina as well, because we have quite a number of people in the field as well, you're right. It's somewhere in that $20 million to $25 million range that we kind of need to be hitting quarterly to be at the profitability levels we would expect.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay, that's great. That's very helpful. And then you cited -- I think the figure was $2 million in kind of one-time repair and maintenance costs that were running through the primary beam pumping facility. Was that $2 million that was added and then goes away? Or is there a usual quarterly kind of repair and maintenance run rate that, that $2 million was in excess of?

John F. Glick

Yes, there is clearly a normal run rate on maintenance that we would have. I think last quarter, we had significantly more above that run rate, largely because of some train repairs we made and also a number of machine tool repairs we made during the quarter to, again, get prepared for the second half of the year. But I think our -- that's probably 2 or 3x our normal run rate on maintenance.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay, great. And then Quinn's, any help with regard to the decline in contribution, Q1 to Q2, that the profit level, either in terms of in absolute gross or operating margin or just margins in general, that we can attach to the revenue throughput?

Christopher L. Boone

Yes, as Jay said, that operation as well. We're trying to ramp up capacity. At the same time, it was a breakup time. So even though we got revenue, we're still working to ramp up that increased shifts. And again, this is in a labor market where it takes time to fill positions. But we're trying to satisfy, getting our lead times down, especially to win certain of the international business we think is out there. We really need to work to get our lead times down. We think there is the ability to satisfy more demand, but we've got to get the operation fine-tuned. As Jay said, there were some other just moved to this new factory right when we bought them and there's been some additional work trying to get the -- not only the facility lined out to be more efficient. But again, we've been in a hiring mode there, trying to fill out some additional second shift operations to again pull the lead times down to -- especially try -- hopefully start winning more international business.

John F. Glick

Yes. Blake, the lead time issue that Chris brought up, I think, is what's driving our staffing ramp-up there because not just for Lufkin, but the industry at large has a very long lead time on downhole pumps. And so we're trying to respond to customer demand to reduce that as much as we can. And that's driving a lot of the hiring that we're doing up there.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

So safe to say that Quinn's contribution on the margin line fell more than the revenue decline but we're not going to get it all right back immediately? We're going to have to work a little harder to get margins back to, say Q1 level?

John F. Glick

Yes. I think that's true. I think the part that will respond fairly quickly is the utilization issues that we incurred because of breakup. The revenue drop ought to come back, and that will help the bottom line drop through from Quinn. But the training cost and hiring cost will probably be with us for a couple more quarters.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay. And then finally, just a point of clarification, was the Romanian order in Oilfield bookings this quarter or will that be 3Q?

John F. Glick

It's 3Q.

Christopher L. Boone

Just so you know, it's a multiyear type order that we only book -- it's a call-off type order that we wouldn't book the whole thing in at a time. We'll only book in as we get the call-off, but...

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay. So that will be in the quarters -- in quarterlies over several quarters here coming?

Christopher L. Boone

Correct. I think it was about -- yes.

Operator

[Operator Instructions] And at this time, I'm showing no further questions. I would like to turn the call back to management for any closing comments.

John F. Glick

Okay, operator. We don't have any closing comments other than to thank people for participating this morning and particularly recognizing that this is on very short notice. We look forward to talking to you again next quarter.

Operator

Thank you very much. Ladies and gentlemen, that will conclude the conference for today, and we do thank you for your participation. You may now disconnect your lines at this time.

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