Lufkin Industries, Inc.

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Lufkin Industries, Inc.

601 South Raguet
Lufkin, Texas 75904
U.S.A.
Telephone: (936) 634-2211
Fax: (936) 637-5272
Web site: http://www.lufkin.com

Public Company
Incorporated: 1902
Employees: 2,300
Sales: $492.2 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: LUFK
NAIC: 333911 Pump and Pumping Equipment Manufacturing

Based in Lufkin, Texas, Lufkin Industries, Inc., is a public company best known for its counterbalanced pumping unit, the "pumpjack," used in oil fields around the world. The pump's bobbing hammerhead-shaped counterweight has fascinated filmmakers over the years and achieved almost iconic status. All told, Lufkin's Oil Field Division accounts for more than 60 percent of all sales. The division also refurbishes and sells used pumping units and offers installation, field service, and machine shop repair. In addition, Lufkin maintains a Power Transmission Division, which manufactures and services enclosed gear drives for industrial applications such as pumping, power generation, mining, steel and aluminum mills, rubber mills, sugar milling, and cement mills. Lufkin also operates a Trailer Division, manufacturing and servicing highway freight-hauling trailers.

LUFKIN, TEXAS: 19TH CENTURY TIMBER TOWN

Lufkin Industries was founded in the East Texas town of Lufkin, which itself was founded in 1882 as a stop on the Texas Railway that ran from Houston to Shreveport, Louisiana. It was named after Abraham P. Lufkin, a prominent Galveston merchant, politician, and friend of the railroad's president. As a railroad stop, the town quickly became a commercial center, and lumber became its main trade. Three men came to dominate the business: German immigrant Joseph H. Kurth, Sr.; Sam Weiner, of German Jewish ancestry and raised in Mississippi; and Georgia-born Simon Wood Henderson, Sr. In 1890 they joined forces to form Angelina County Lumber Company, which ran a score of Texas sawmills. The railroad was key, because the mills could no longer rely solely on a local supply of lumber, and had to have materials shipped in. But there developed a need for a local source of parts to repair the sawmills and locomotives. Mills might be forced to shut down for several days before parts and equipment arrived from cities hundreds of miles away.

Frank Kavanaugh, Sr., and his son, Frank Kavanaugh, Jr., operated a small foundry and machine shop in Rusk, Texas, and recognized that the Lufkin sawmills offered a better opportunity for business. In 1901 they decided to move their operation to Lufkin and wrote to Kurth to enlist his help in organizing the venture. Together they would line up investors and customers, and in February 1902, the Kavanaughs, Kurth, Henderson, and Sam Weiner's brother, Eli Weiner, signed the company charter to create the Lufkin Foundry and Machine Shop, capitalized with $30,000. In a subsequent board of director's meeting, Kurth was named the company's first president, with the elder Kavanaugh named vice-president. With 30 years of experience in the foundry and machine field, he also was named the company's first general manager. Within a matter of months, the company was doing business in three frame buildings, offering repair services, a foundry department, blacksmith department, bronze and brass castings, mill supplies, and the buying and selling of used machinery.

A key hire for Lufkin in the early years was Walter Charles "W.C." Trout, who replaced Wiener as secretary in 1905. The 31-year-old Trout, Canadian born, came to the company from Milwaukee's Allis-Chalmers Company, where he designed and sold sawmills. In his mid-20s he came to the conclusion that he wanted to live and work in the South, convinced that conditions were better suited there for workers. According to his ideals, workers should be able to own their own homes, maintain their own gardens, and actively participate in their communities. In the South, he believed, the lower cost of living afforded such an opportunity, and when he was 31 he decided that Lufkin, Texas, was the place where his vision could be fulfilled. For Lufkin Foundry and Machine Company, the arrival of Trout was a godsend. Along with his father, he held a number of patents on sawmill equipment and he was a talented manager as well. In 1906 he succeeded Kavanaugh as general manager of the company, and because of the patents he brought, the company graduated from the repair of locomotives and sawmill equipment to the manufacture of sawmill equipment. By 1910 the company was generating more than $210,000 in sales. It continued to prosper with sawmill equipment over the next decade, but in the 1920s the sawmill business declined while a new opportunity presented itself.

OIL INDUSTRY FOCUS

Cattle had been king in Texas in the 1800s, but in 1901 the state began a transformation with the discovery of oil at Spindletop. The following year saw another discovery in Saratoga, followed by Sour Lake in 1903, and Humble in 1905. Lufkin began servicing this rising industry in 1918 when it first offered refinery equipment. Then, in the 1920s the company directed even more of its focus on the industry. In 1923 it worked with W.H. Taylor of Gulf Production Company to develop the Lufkin-Taylor rotary drill, Lufkin's first oil field product line. It was followed by a new swivel, traveling and crown blocks, drilling draw works, pipeline fittings, and flanged fittings, as well as pressure-screwed end fittings for refineries.

To drum up oil business Trout made the rounds of the North Texas oil fields, where he listened to oilmen voice their frustrations with the standard pumping rigs, which had not changed much since the discovery of oil in Pennsylvania in the 1880s. These rigs relied on a wooden walking beam and sucker rods, powered by a slow-speed gas or oil engine, which turned a shaft by way of a pulley and flat belt. The spring afforded by the belt and the walking beam were intended to keep the sucker rods from breaking. But rain caused the belts to slip off, and the wooden walking beam was balanced with anything heavy at hand and was quite susceptible to breaking. It was obvious that a better rig was needed.

In 1923 Trout had lunch with the president of Humble Oil and Refining Company and future Texas governor, Ross Sterling, who told him about an experiment conducted by some Humble employees, who had rigged up the worm-geared differential from a tractor to a crank and a motor and pumped a shallow well for 18 months. Sterling challenged Trout to develop a worm-geared apparatus for a pumping rig, one that would be direct-drive, thus eliminating the need for a belt. Trout set to work and soon Lufkin developed the industry's first enclosed, geared oil-well pumping unit, which was set up on a Humble well and went into operation in the winter of 1923. Although the pumping unit was superior to the old rigs, it was not able to stand up to large amounts of water, which cracked shafts and damaged gears. The Lufkin unit appeared to be a costly failure, but Trout refused to give up and invested even more money in its development.

COMPANY PERSPECTIVES

Founded in 1902, Lufkin Industries Inc. is a vertically integrated company that designs, engineers, manufactures, sells, installs and services high quality and high value-added oil field equipment, power transmission products across the globe and highway trailers in the South Central United States and Mexico.

In 1925 Trout met with W.L. Todd, general manager of Simms Oil Company, who liked the geared unit but urged Trout to incorporate a counterbalancing mechanism. Out of this discussion Trout made sketches of a pumping unit with a counterbalanced crank. Back at the shop his people began working to turn his sketches into a viable machine, and in September 1925 a unit was put into a Humble well for a trial. With some adjustments the unit was perfectly balanced between the up and down strokes. It was the answer for which oil-men had been looking, but because of its odd appearance, the rig took some time to catch on.

It was not until the fall of 1926, when the Seminole, Oklahoma, oil field came in that it became widely accepted. It would soon become a standard unit around the world. A Lufkin unit also would hold the distinction of receiving the only stateside damage during World War II. In 1942 a Japanese submarine attempted to destroy the Ellwood oil field along California's coast, firing a pair of torpedoes. They only managed to damage a pumpjack and provide Lufkin with a unique souvenir.

When Kurth died in 1930, Trout succeeded him as Lufkin's president. He took over a company that was faring better than most during the early years of the Great Depression, precipitated by the 1929 stock market crash. Nevertheless, sales fell from $2.1 million in 1929 to $1.5 million in 1930, and less than $450,000 in 1931. The company was forced to shut down its plant in 1932 as it sold off inventory. Fortunately Lufkin had no debt and by 1934 was ready to expand again, opening a sales office in Dallas. The company also tried to diversify by acquiring the struggling Williams Gin Company, which now became the Lufkin Gin Company. When the bottom fell out of the price of cotton, however, the need for cotton gins evaporated and the business was soon shut down. Lufkin enjoyed better success with the 1939 acquisition of Martin Wagon and Trailer Company, which like Lufkin began in the early 1900s serving the lumber industry. In addition to log wagons, Martin had made its mark with a pair of inventions: the Martin derailer and rerailer and Martin Grip hooks. The company went bankrupt in 1936, was reorganized, and attempted a comeback with the development of a dump trailer. Although the facilities and equipment were outdated, Trout believed that there was an opportunity in the truck industry and he pushed through the purchase of Martin.

Lufkin would soon find a military market for its trailer division with the advent of World War II in the 1940s. In fact, by 1943, about 85 percent of the company's business was war related. The company manufactured gears for Sherman tanks and landing crafts, three-pound cast iron practice bombs dropped by Navy aviators, and carriages for 155-millimeter Howitzers. In addition to truck trailers, the new trailer division manufactured gasoline transports and mobile laundry units.

POSTWAR EXPANSION

Following the war, Lufkin reached a milestone when Trout, whose health was failing, stepped down in 1947. He was succeeded by his son, Walter W. Trout. The company overcame a brief downturn in business, then enjoyed a long run of growth. By 1950 Lufkin tallied sales of nearly $13.7 million from its three divisions: Machinery, Trailer, and Mill Supplies. Lufkin pumpjacks were in use around the world, but the air tanks they used were built by a Houston company. In the 1950s, Lufkin invested in the necessary equipment and began producing its own tanks. The trailer division, in the meantime, benefited from the rise of the trucking industry, the growth of which was spurred by a massive government investment in highway construction. Lufkin began producing all-steel, stainless steel, and aluminum vans and semi-trailers. The Mill Supplies Division began looking to commercial gears for growth. What began after World War II grew in the early 1950s when Lufkin entered the marine gear field. Later in the decade the company expanded it gear-making facilities and offered a complete line of industrial gears, used in paper mills, sugar mills, rubber mills, pipeline pump stations, and chemical plants, as well as on ships and dredges. Also of note during the postwar years, Lufkin employees established a union in 1949 and two years later went on strike for 100 days. In 1954 the company instituted its first pension plan.

KEY DATES

1902:: The company is founded as Lufkin Foundry and Machine Company.
1906:: W. C. Trout becomes the general manager.
1925:: Trout patents a counterbalanced oil field pumping unit.
1939:: Martin Wagon and Trailer Company is acquired.
1947:: Trout dies.
1970:: The company changes its name to Lufkin Industries, Inc.
1994:: The industrial supplies unit is sold.
1998:: COMELOR is acquired.

The early 1960s was a difficult period for the company. Not only was business in a slump, due in large part to a price war between pumping unit manufacturers, but Lufkin also had to contend with a February 1961 fire that destroyed its main office. The company overcame these problems and by 1965 sales topped $41 million, of which a record $25 million came from the Machinery Division. Business was so strong, despite another long strike in 1966, that in 1967 Lufkin launched the largest capital expansion program in its history by constructing a new Trailer Division manufacturing facility at a cost of $6 million. The main plant was operational in 1969. Also in 1967 Walter Trout turned over the presidency to R.L. Poland and became Lufkin's first chairman of the board, a post he would hold only until his death in July 1971. Poland had joined the company as a mechanical engineer after serving a four-year stint in the Army during World War II.

In 1970 the company changed its name to Lufkin Industries, Inc., a reflection of successful diversification over the years. The company had become known as Lufkin Foundry, a name that had proven to be increasingly confusing to customers for trailers and precision gears. But Lufkin's main money maker continued to be the Machine Division, which was only one of two major companies now offering oil field pumping units. In 1974, when Lufkin sales first reached the $100 million mark and the company celebrated its 50th year in the pumping unit business, 70 percent of that amount came from the Machinery Division that manufactured the famous pumpjacks. Business continued to boom in the second half of the 1970s. In 1980 sales approached $274 million, of which the Machinery Division contributed 88 percent. It was also in the late 1970s that Lufkin completed its first acquisition since Martin Wagon in 1939, the $1.5 million purchase of Little Rock, Arkansas-based Midwest Casting Corporation in 1977. It mostly produced counterweights and auxiliary weights.

1980 AND BEYOND

Lufkin continued to expand in the early 1980s, adding a major extension to its machine shop in 1980, followed by a new $7.5 million gear manufacturing complex in 1981, which allowed the company for the first time to separate its pumping unit manufacturing operation from its industrial gear manufacturing. Construction of a $20 million large-castings foundry began in 1982. Company sales reached $364 million in 1981, but momentum would stall later in the decade due to a downturn in the oil field industry and years would pass before Lufkin again enjoyed sales at these levels.

By the 1990s the oil field equipment segment as well as the company's power transmission products were profitable, but the highway trailer business was struggling. Management elected to exit the trailer business in 1991 but by early 1994 it gave up on its efforts to find a buyer and elected to retain the unit. In the meantime, the oil services industry suffered another slump, resulting in a 1993 restructuring effort that included staff reductions. In 1994 Lufkin sold its industrial supplies unit and one of its manufacturing facilities. Lufkin began to rebound in the second half of the 1990s. Sales reached $226 million in 1996 and improved to $287.6 million in 1997, when the company also posted net income of $14.8 million, the highest level since 1985. The year 1997 also saw Lufkin completing a pair of acquisitions that increased Lufkin's oil field service offerings: Fannie Lee Mitchell of Texas, Inc. and Nabla Corporation. Despite a slight downturn in business, three more acquisitions followed in 1998: Lone Star Machine Shop Inc., a Texas company supporting the oil and gas industries; French company COMELOR, maker of industrial gears; and Delta-X Corporation, a Houston supplier of oil-well automation technology.

Business continued to slide in 1999, when sales dipped to $242.5 million and the company posted a $1.3 million loss, but rebounded in 2000 and 2001, as revenues improved to $278.9 and net income totaled $19.5 million in 2001. The energy field was volatile, however, leading to a significant drop in business in 2002. Although sales fell to $228.7 million, Lufkin was still able to squeeze out a profit of $8.5 million. Business bounced back in 2003, and then record oil prices and an improved domestic economy in 2004 resulted in Lufkin's enjoying a bountiful year, with sales soaring to more than $356 million. The trend continued in 2005 when sales increased to $492.2 million and net income totaled $44.5 million.