UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-2612
-----------------------------
LUFKIN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-0404410
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
601 SOUTH RAGUET, LUFKIN, TEXAS 75904
(Address of principal executive offices) (Zip Code)
(936) 634-2211
(Registrant's telephone number, including area code)
---------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period as the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
There were 6,523,867 shares of Common Stock, $1.00 par value per share,
outstanding as of November 6, 2002, not including 368,514 shares classified as
Treasury Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands of dollars)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 23,407 $ 18,087
Invested funds -- 5,863
Receivables, net 33,818 35,956
Income taxes receivable 719 673
Inventories 36,001 34,824
Deferred income tax assets 2,246 2,179
Other current assets 889 811
--------- ---------
Total current assets 97,080 98,393
--------- ---------
Property, plant and equipment, at cost 257,354 250,924
Less accumulated depreciation 177,316 169,628
--------- ---------
80,038 81,296
--------- ---------
Prepaid pension costs 53,187 49,437
Goodwill, net 10,213 10,045
Other assets, net 6,856 6,898
--------- ---------
Total assets $ 247,374 $ 246,069
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term notes payable $ 584 $ 6,598
Accounts payable 9,594 10,680
Accrued payroll and benefits 5,491 6,636
Accrued warranty expenses 2,652 2,275
Taxes payable 6,163 4,487
Accrued commissions and other 6,304 6,373
--------- ---------
Total current liabilities 30,788 37,049
--------- ---------
Deferred income tax liabilities 26,915 26,658
Postretirement benefits liability 11,024 11,024
Long-term notes payable, net of current portion 202 339
Shareholders' equity:
Common stock, $1.00 par value per share;
60,000,000 shares authorized;
6,892,381 shares issued 6,892 6,892
Additional Paid in Capital 18,480 18,200
Retained earnings 162,913 158,973
Treasury stock, 368,514 and 502,348
shares, respectively, at cost (7,607) (10,350)
Accumulated other comprehensive income:
Cumulative translation adjustment (2,233) (2,716)
--------- ---------
Total shareholders' equity 178,445 170,999
--------- ---------
Total liabilities and shareholders' equity $ 247,374 $ 246,069
========= =========
See accompanying notes to consolidated statements.
1
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(In thousands of dollars, except share and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Net sales $ 60,807 $ 75,640 $ 172,724 $ 212,285
Cost of sales 46,605 56,640 136,253 160,283
----------- ----------- ----------- -----------
Gross profit 14,202 19,000 36,471 52,002
Selling, general and administrative
expenses 8,197 8,274 24,676 26,554
----------- ----------- ----------- -----------
Operating income 6,005 10,726 11,795 25,448
Other income (expense) 247 231 495 (744)
----------- ----------- ----------- -----------
Earnings before income tax provision 6,252 10,957 12,290 24,704
Income tax provision 2,470 4,397 4,855 9,758
----------- ----------- ----------- -----------
Net earnings 3,782 6,560 7,435 14,946
Change in foreign currency translation
adjustment (294) (65) 483 (374)
----------- ----------- ----------- -----------
Total comprehensive income $ 3,488 $ 6,495 $ 7,918 $ 14,572
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.57 $ 1.04 $ 1.13 $ 2.39
=========== =========== =========== ===========
Diluted $ 0.56 $ 1.01 $ 1.10 $ 2.33
=========== =========== =========== ===========
Dividends per basic share $ 0.18 $ 0.18 $ 0.54 $ 0.54
=========== =========== =========== ===========
Weighted average number of shares outstanding:
Basic 6,647,279 6,320,272 6,593,681 6,260,959
Diluted 6,807,479 6,498,239 6,748,889 6,404,159
See accompanying notes to consolidated financial statements.
2
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Nine Months Ended September 30,
2002 2001
---------- ----------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 7,435 $ 14,946
Adjustments to reconcile net earnings
to cash provided by operating activities:
Depreciation and amortization 8,390 8,468
Deferred income tax provision 18
Pension income (3,750) (3,750)
(Gain) loss on disposition of
property, plant and equipment (38) 454
Changes in:
Receivables 2,542 (1,592)
Income taxes receivable (46) 1,239
Inventories (955) (6,546)
Other current assets (65) (165)
Accounts payable (1,552) 691
Accrued liabilities 1,172 10,070
-------- --------
Net cash provided by operating activities 13,151 23,815
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (6,532) (6,024)
Proceeds from disposition of
property, plant and equipment 87 193
Proceeds from disposition of invested funds 5,863 --
Increase in other assets (44) (46)
-------- --------
Net cash used in investing activities (626) (5,877)
-------- --------
Cash flows from financing activities:
Net payments of short-term debt -- (7,790)
Payments on long-term debt (6,292) (1,297)
Dividends paid (3,495) (3,336)
Proceeds from exercise of stock options 2,560 1,893
-------- --------
Net cash used in financing activities (7,227) (10,530)
-------- --------
Effect of translation on cash and
cash equivalents 22 (63)
-------- --------
Net increase in cash and cash
equivalents 5,320 7,345
Cash and cash equivalents at beginning
of period 18,087 2,003
-------- --------
Cash and cash equivalents at end
of period $ 23,407 $ 9,348
======== ========
See accompanying notes to consolidated financial statements.
3
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Lufkin Industries, Inc. and its consolidated subsidiaries (the
"Company") and have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information in the notes to the
consolidated financial statements normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America has been condensed or omitted pursuant to these rules
and regulations. In the opinion of management, all adjustments, consisting of
normal recurring accruals unless specified, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows have been
included. For further information, including a summary of major accounting
policies, refer to the consolidated financial statements and related footnotes
included in the Company's annual report on Form 10-K for the year ended December
31, 2001. The results of operations for the three and nine months ended
September 30, 2002, are not necessarily indicative of the results that may be
expected for the full fiscal year.
2. Inventories
Consolidated inventories, net of LIFO reserve, consist of the following:
September 30, December 31,
2002 2001
------------- ------------
(In thousands of dollars)
Finished goods $ 4,302 $ 2,485
Work in process 4,530 4,036
Raw materials 27,169 28,303
-------- ---------
Total $ 36,001 $ 34,824
======== ========
Inventories accounted for on a LIFO basis were $24,072,000 and $22,300,000 and
on a FIFO basis were $11,929,000 and $12,524,000 at September 30, 2002 and
December 31, 2001, respectively. Had the FIFO method been used in determining
all inventory values, inventories would have been $17,565,000 higher at both
September 30, 2002 and December 31, 2001.
3. Earnings Per Share (EPS)
Basic EPS is computed by dividing net earnings by the weighted average number of
shares outstanding during the period. Diluted EPS is computed considering the
potentially dilutive effect of outstanding stock options. A reconciliation of
the numerator and denominators of the basic and diluted per share computations
follows (in thousands, except share and per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------ ------ ------ ------
Numerator:
Net earnings $ 3,782 $ 6,560 $ 7,435 $ 14,946
Denominator:
Weighted average shares (Basic) 6,647,279 6,320,272 6,593,681 6,260,959
Effect of outstanding options 160,200 177,967 155,208 143,200
---------- ---------- ---------- ----------
Weighted average shares including
assumed conversions (Diluted) 6,807,479 6,498,239 6,748,889 6,404,159
========== ========== ========== ==========
Basic earnings per share $ 0.57 $ 1.04 $ 1.13 $ 2.39
========== ========== ========== ==========
Diluted earnings per share $ 0.56 $ 1.01 $ 1.10 $ 2.33
========== ========== ========== ==========
4
3. Earnings Per Share (continued)
Options to purchase a total of 132,986 and 137,686 shares of the Company's
common stock at September 30, 2002 and 2001, respectively, were excluded from
the calculation of earnings per share because their effect on diluted earnings
per share for the respective periods was anti-dilutive.
4. Legal Proceedings
A class action complaint was filed in the United States District Court for the
Eastern District of Texas on March 7, 1997, by an employee and a former employee
whom alleged race discrimination in employment. Certification hearings were
conducted in Beaumont, Texas in February of 1998 and in Lufkin, Texas in August
of 1998. The District Court in April of 1999 issued a decision that certified a
class for this case which includes all persons of a certain minority employed by
the Company from March 6, 1994, to the present. The Company appealed this class
certification decision by the District Court to the 5th Circuit United States
Court of Appeals in New Orleans, Louisiana. This appeal was denied on June 23,
1999.
The Company is defending this action vigorously. Furthermore, the Company
believes that the facts and the law in this action support its position and that
it will prevail if this case is tried on its merits.
The Company is often subject to routine litigation arising in the normal course
of its business. While the outcome of these proceedings cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the Company's consolidated financial statements.
5. Segment Data
The Company operates with three business segments - Oil Field, Power
Transmission and Trailer. As of December 31, 2001, the Foundry segment was
combined with the Oil Field segment. Prior period data has been adjusted to
reflect this change. The Company's Corporate group provides administrative
services to the three business segments. Corporate expenses and certain assets
are allocated to the operating segments based primarily upon third party
revenues. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies in the footnotes to
the consolidated financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 2001. Following is a summary of key
segment information (in thousands of dollars):
Three Months Ended September 30, 2002
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- --------- --------
Gross sales $ 31,336 $ 20,069 $ 9,960 $ -- $ 61,365
Inter-segment sales (251) (284) (23) -- (558)
-------- -------- -------- -------- --------
Net sales $ 31,085 $ 19,785 $ 9,937 $ -- $ 60,807
======== ======== ======== ======== ========
Operating income (loss) $ 3,987 $ 2,664 $ (646) $ -- $ 6,005
Other income (expense) 44 80 13 110 247
-------- -------- -------- -------- --------
Earnings (loss) before
income tax provision $ 4,031 $ 2,744 $ (633) $ 110 $ 6,252
======== ======== ======== ======== ========
5
5. Segment Data (continued)
Three Months Ended September 30, 2001
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- ---------- --------
Gross sales $ 50,979 $ 20,539 $ 9,500 $ -- $ 81,018
Inter-segment sales (1,495) (3,545) (338) -- (5,378)
-------- -------- -------- -------- --------
Net sales $ 49,484 $ 16,994 $ 9,162 $ -- $ 75,640
======== ======== ======== ======== ========
Operating income (loss) $ 9,798 $ 2,251 $ (1,323) $ -- $ 10,726
Other income (expense) (130) 165 95 101 231
-------- -------- -------- -------- --------
Earnings (loss) before
income tax provision $ 9,668 $ 2,416 $ (1,228) $ 101 $ 10,957
======== ======== ======== ======== ========
Nine Months Ended September 30, 2002
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- ---------- --------
Gross sales $ 92,188 $ 53,107 $ 29,629 $ -- $174,924
Inter-segment sales (807) (1,360) (33) -- (2,200)
--------- -------- -------- -------- --------
Net sales $ 91,381 $ 51,747 $ 29,596 $ -- $172,724
========= ======== ======== ======== ========
Operating income (loss) $ 10,239 $ 3,984 $ (2,428) $ -- $ 11,795
Other income (expense) (55) 119 25 406 495
--------- -------- -------- -------- --------
Earnings (loss) before
income tax provision $ 10,184 $ 4,103 $ (2,403) $ 406 $ 12,290
========= ======== ======== ======== ========
Nine Months Ended September 30, 2001
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- ---------- --------
Gross sales $ 145,258 $ 56,571 $ 26,512 $ -- $228,341
Inter-segment sales (4,422) (10,863) (771) -- (16,056)
--------- --------- -------- -------- --------
Net sales $ 140,836 $ 45,708 $ 25,741 $ -- $212,285
========= ========= ======== ======== ========
Operating income (loss) $ 26,052 $ 4,066 $ (4,670) $ -- $ 25,448
Other income (expense) (584) 36 (195) (1) (744)
--------- --------- -------- -------- --------
Earnings (loss) before
income tax provision $ 25,468 $ 4,102 $ (4,865) $ (1) $ 24,704
========= ========= ======== ======== ========
6. Goodwill and Intangible Assets
In 2001, the Financial Accounting Standards Board issued Statement No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 prohibits the amortization
of goodwill and intangible assets with indefinite useful lives. SFAS No. 142
also requires that these assets be reviewed for impairment at least annually.
Intangible assets with finite lives will continue to be amortized over their
estimated useful lives.
6
The Company adopted SFAS No. 142 on January 1, 2002. The discontinuance of
goodwill amortization under SFAS No. 142 will result in an increase in net
income of $0.3 million in 2002. The Company is required to test its goodwill for
impairment using a two-step process described in SFAS No. 142 on an annual basis
or whenever events or circumstances might indicate that the fair value of the
Company's reporting units may have been affected. The first step is a screen for
potential impairment, while the second step measures the amount of impairment,
if any. The standard requires that if impairment were determined to exist under
the initial transition test as of January 1, 2002, it would be reflected as the
cumulative effect of a change in accounting principle. The Company completed the
first step of the transitional goodwill impairment test during the second
quarter of 2002 and found no instances of impairment.
Had the provisions of SFAS No. 142 been applied to previous periods,
amortization of $0.4 million, $0.2 million and $0.3 million, respectively, would
not have been recorded for the years ended December 31, 2001, 2000 and 1999.
7. Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations." This standard requires asset
retirement costs to be capitalized as part of the cost of the related tangible
long-lived asset and subsequently allocated to expense using a systematic and
rational method over the useful life of the asset. The Statement is effective
for fiscal years beginning after June 15, 2002. The transition adjustment
resulting from the adoption of this Statement will be reported as a cumulative
effect of a change in accounting principle. The adoption of Statement No. 143 is
not expected to have a significant impact on the Company's consolidated
financial position or results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." This
Statement requires companies to recognize costs associated with restructurings,
discontinued operations, plant closings or other exit or disposal activities
when incurred rather than at the date a plan is committed to. The Statement is
effective for exit or disposal activities initiated after December 31, 2002. The
Company plans to adopt this statement as of the effective date and will
implement its provisions on a prospective basis.
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
The Company designs, manufactures, sells and services various types of oil field
pumping units, power transmission products and highway trailers. The Company's
Oil Field segment manufactures and services numerous sizes and configurations of
oil field pumping and related automation equipment, as well as commercial
castings. The Power Transmission segment designs, manufactures, repairs and
services speed increasers and reducers for use in industrial applications such
as petrochemical, refining, rubber, plastics and steel and also for use in
marine propulsion applications. The Trailer segment produces and services
various types and styles of highway trailers, including vans, platforms and
dumps.
The Company changed its segment reporting methodology in 2001 to consolidate the
Foundry segment into the Oil Field segment. All prior period data has been
adjusted to reflect this change. This segment consolidation occurred for several
reasons: a management restructuring reflecting this change had taken place,
lower domestic spending by customers and increased foreign imports decreased the
demand for domestic iron castings and transfers to the oil field product line
became a significant percentage of the output of Foundry, causing the activity
level of oil field products to more directly impact the financial performance of
Foundry. However, the Company will continue to aggressively pursue external
casting opportunities.
7
Results of Operations
Three Months Ended September 30, 2002, Compared to Three Months Ended September
30, 2001:
Net sales for the three months ended September 30, 2002, decreased to
$60,807,000 from $75,640,000 for the three months ended September 30, 2001. Net
earnings were $3,782,000 or $0.56 per share (diluted) for the three months ended
September 30, 2002, compared to net earnings of $6,560,000 or $1.01 per share
(diluted) for the three months ended September 30, 2001.
The following table summarizes the Company's net sales and gross profit by
operating segment (in thousands of dollars):
Three Months Ended
September 30, %
----------------- Increase Increase
2002 2001 (Decrease) (Decrease)
------ ------ ---------- ----------
Net Sales
Oil Field $ 31,085 $ 49,484 $(18,399) (37.2)
Power Transmission 19,785 16,994 2,791 16.4
Trailer 9,937 9,162 775 8.5
-------- -------- --------
Total $ 60,807 $ 75,640 $(14,833) (19.6)
======== ======== ========
Three Months Ended
September 30, %
----------------- Increase Increase
2002 2001 (Decrease) (Decrease)
------ ------ ---------- ----------
Gross Profit
Oil Field $ 7,205 $ 13,213 $ (6,008) (45.5)
Power Transmission 6,461 5,669 792 14.0
Trailer 536 118 418 354.2
-------- -------- --------
Total $ 14,202 $ 19,000 $ (4,798) (25.3)
======== ======== ========
Oil Field sales decreased 37.2% to $31,085,000 in the third quarter of 2002 from
$49,484,000 in the third quarter of 2001 as the decrease in oil field drilling
and production activity from lower energy prices that began in the second half
of 2001 continued into the third quarter of this year, despite recent higher
energy prices. Drilling activity has not increased with higher energy prices due
to uncertainty over both the future global demand levels and the stability of
the price of oil. Oil Field's backlog decreased to $18,300,000 as of September
30, 2002, from $21,900,000 at June 30, 2002 and $26,000,000 for the same period
last year due primarily to reduced bookings for new pumping units.
Gross profit for the Oil Field segment decreased to $7,205,000 for the three
months ended September 30, 2002, or 45.5%, compared to $13,213,000 for the prior
year quarter due primarily to the decline in sales of oil field products but
also due to a decline in the gross margin. Gross margin for the comparable
periods declined to 23.2% in 2002 compared to 26.7% in 2001 due to the product
mix shifting towards lower margin commercial castings and decreased fixed cost
absorption in the foundry operations. While commercial activity in the foundry
operations increased over the prior year quarter, overall production volumes
lowered due to the decline in oil field products produced.
Direct selling, general and administrative expenses for Oil Field decreased
slightly to $1,910,000, or 3.7%, for the quarter ended September 30, 2002, from
$1,983,000 for the quarter ended September 30,
8
2001. This decrease was due primarily to lower commission expenses to
third-party agents, offset by the non-recurrence of the benefit of certain
insurance reserve changes in the third quarter of 2001.
Sales for the Company's Power Transmission segment increased to $19,785,000, or
16.4%, for the third quarter of 2002 compared to $16,994,000 for the third
quarter of 2001 due to increased volume of new gearboxes manufactured for the
aluminum and waste water treatment markets, higher parts sales for both capital
spares and replacements and repair activity in the sugar, cement and rubber
markets. The Company's Power Transmission backlog at September 30, 2002,
increased to $33,600,000 from $33,100,000 at June 30, 2002 and from $30,300,000
at September 30, 2001, due to higher bookings for new high-speed gearboxes.
Gross profit for the Power Transmission segment increased to $6,461,000 for the
three months ended September 30, 2002, or 14.0%, compared to $5,669,000 for the
prior year quarter due to the sales volume increases mentioned above, offset
partially by a decline in the gross margin. Gross margin for the comparable
periods declined to 32.7% in 2002 compared to 33.4% in 2001. This decline was
due to the reduction of gear reducers produced for the Oil Field Division, which
had provided increased absorption of fixed manufacturing overhead costs.
Inter-segment revenue declined by 92.0% for this period, from $3,545,000 in the
third quarter of 2001 to $284,000 in the third quarter of 2002. However, this
was partially offset by the favorable mix effect of increased sales of higher
margin high-speed units and spare parts.
Direct selling, general and administrative expenses for Power Transmission
increased to $2,775,000, or 20.6%, for the quarter ended September 30, 2002,
from $2,301,000 for the quarter ended September 30, 2001, due to increased
personnel-related costs from higher staffing, higher bad debt expense and higher
third-party commissions.
Trailer sales for the third quarter of 2002 increased to $9,937,000, or 8.5%,
from $9,162,000 for the third quarter of 2001, due to some improvement in the
freight hauling market. However, the market remained depressed due to a
combination of lower shipping volumes, higher fuel costs, higher personnel costs
and higher insurance rates. Also, freight companies have focused capital
spending on new tractor purchases before new federal regulations requiring
cleaner but less efficient engines went into effect recently. Backlog for the
Trailer segment totaled $12,000,000 at September 30, 2002, compared to
$13,600,000 at June 30, 2002, and $4,800,000 at September 30, 2001. This backlog
decrease reflects the resistance of freight haulers to place orders for new
trailers due to the continued uncertainty in the recovery of the U.S. economy.
General economic conditions drive freight volumes and the need for additional
trailers.
Trailer gross profit improved to $536,000, or 354.2%, for the three months ended
September 30, 2002, from $118,000 for the comparable prior year quarter. This
increase was primarily driven from improvements in the gross margin for Trailer.
Gross margin for the third quarter of 2002 increased to 5.4% from 1.3% in the
third quarter of 2001. This improvement was due to higher manufacturing volumes
absorbing more fixed overhead costs.
Direct selling, general and administrative expenses for Trailer decreased to
$363,000, or 33.4%, for the quarter ended September 30, 2002, from $545,000 for
the quarter ended September 30, 2001, due to lower insurance claim expenses.
Corporate administrative expenses, which are allocated to the segments primarily
based on third-party revenues, decreased to $3,150,000, or 8.6%, for the quarter
ended September 30, 2002, from $3,445,000 for the quarter ended September 30,
2001, due to lower expenses related to the Company's 100th anniversary.
Other income and expense for the three months ended September 30, 2002, totaled
$247,000 of income compared to income of $231,000 for the prior year quarter.
The increase was due primarily to the repayment of the majority of long-term
debt early in the third quarter of 2002 lowering interest expense, partially
offset by the non-recurrence of a gains on asset disposals in the third quarter
of 2001.
9
Pension income, which is reported as a reduction of cost of sales, was
$1,250,000 for both the quarter ended September 30, 2002 and the quarter ended
September 30, 2001.
Nine Months Ended September 30, 2002, Compared to Nine Months Ended September
30, 2001:
Net sales for the nine months ended September 30, 2002, decreased to
$172,724,000 from $212,285,000 for the nine months ended September 30, 2001. Net
earnings were $7,435,000 or $1.10 per share (diluted) for the nine months ended
September 30, 2002, compared to net earnings of $14,946,000 or $2.33 per share
(diluted) for the nine months ended September 30, 2001.
The following table summarizes the Company's net sales and gross profit by
operating segment (in thousands of dollars):
Nine Months Ended
September 30, %
------------------ Increase Increase
2002 2001 (Decrease) (Decrease)
------ ------ ---------- ----------
Net Sales
Oil Field $ 91,381 $ 140,836 $ (49,455) (35.1)
Power Transmission 51,747 45,708 6,039 13.2
Trailer 29,596 25,741 3,855 15.0
--------- --------- ---------
Total $ 172,724 $ 212,285 $ (39,561) (18.6)
========= ========= =========
Nine Months Ended
September 30, %
------------------ Increase Increase
2002 2001 (Decrease) (Decrease)
------ ------ ---------- ----------
Gross Profit
Oil Field $ 20,077 $ 37,606 $ (17,529) (46.6)
Power Transmission 14,982 14,837 145 1.0
Trailer 1,412 (441) 1,853 420.2
--------- --------- ---------
Total $ 36,471 $ 52,002 $ (15,531) (29.9)
========= ========= =========
Oil Field sales decreased 35.1% to $91,381,000 in the first nine months of 2002
from $140,836,000 in the first nine months of 2001 as the decrease in oil field
drilling and production activity from lower energy prices that began in the
second half of 2001 continued into 2002, despite recent higher energy prices.
Drilling activity has not increased with higher energy prices due to uncertainty
over both the future global demand levels and the stability of the price of oil.
Oil Field's backlog declined to $18,300,000 as of September 30, 2002, compared
to $26,000,000 at September 30, 2001 and $19,400,000 at December 31, 2001, due
to decline in demand for new pumping units.
Gross profit for the Oil Field segment decreased to $20,077,000 for the nine
months ended September 30, 2002, or 46.6%, compared to $37,606,000 for the
comparable 2001 period, due to lower revenue volumes and lower gross margins.
Gross margin for the comparable periods declined to 22.0% in 2002 compared to
26.7% in 2001 due to fixed manufacturing overhead costs not declining at the
same rate as revenue.
Direct selling, general and administrative expenses for Oil Field decreased to
$5,575,000, or 25.0%, for the nine months ended September 30, 2002, from
$7,431,000 for the nine months ended September 30, 2001. This decrease was due
primarily to lower commission expenses to third-party agents, reduced legal
expenses associated with ongoing and routine litigation and lower
personnel-related costs.
Sales for the Company's Power Transmission segment increased to $51,747,000, or
13.2%, for the first nine months of 2002 compared to $45,708,000 for the first
nine months of 2001 due to increased volume
10
of new high-speed gearboxes to the refinery, petrochemical and pump markets, new
low-speed gearboxes to the aluminum, rubber and sugar markets and higher parts
sales for both capital spares and replacements. The Company's Power Transmission
backlog at September 30, 2002, increased to $33,600,000 from $30,300,000 at
September 30, 2001, and $31,500,000 at December 31, 2001, due to the increased
activity in the high-speed and parts markets mentioned above.
Gross profit for the Power Transmission segment increased to $14,982,000 for the
nine months ended September 30, 2002, or 1.0%, compared to $14,837,000 for the
nine months ended September 30, 2001. Gross profits did not increase in
proportion to revenue due to the decline in gross margins, which decreased for
the comparable periods to 29.0% in 2002 compared to 32.5% in 2001. While margins
for power transmission products increased from the favorable mix of high-speed
units and parts, declines in plant utilization due to the reduction of gear
reducers produced for the Oil Field segment lowered absorption of fixed
manufacturing overhead costs. Inter-segment revenue declined by 87.5% for this
period, from $10,863,000 in the first nine months of 2001 to $1,360,000 in the
first nine months of 2002.
Direct selling, general and administrative expenses for Power Transmission
increased to $7,668,000, or 1.5%, for the nine months ended September 30, 2002,
from $7,553,000 for the nine months ended September 30, 2001, due to increased
engineering expenses associated with the greater sales volume of high-speed
units.
Trailer sales for the nine months ended September 30, 2002, increased to
$29,596,000, or 15.0%, from $25,741,000 for the nine months ended September 30,
2001, due to some improvement in the freight hauling market. However, the market
remained depressed due to a combination of lower shipping volumes, higher fuel
costs, higher personnel costs and higher insurance rates. Also, freight
companies have focused capital spending on new tractor purchases before new
federal regulations requiring cleaner but less efficient engines went into
effect recently. Backlog for the Trailer segment totaled $12,000,000 at
September 30, 2002, compared to $4,800,000 at September 30, 2001, and
$13,500,000 at December 31, 2001. This backlog increase over 2001 is indicative
of the overall improvement of the market but the decline of the backlog from
year-end reflects the recent resistance of freight haulers to place orders for
new trailers due to the continued uncertainty in the recovery of the U.S.
economy. General economic conditions drive freight volumes and the need for
additional trailers.
Trailer gross profit improved to $1,412,000, or 420.2%, for the nine months
ended September 30, 2002, from a loss of $441,000 for the nine months ended
September 30, 2001. This increase was significantly greater than the increase in
sales volume due to the improvement in gross margin. Gross margin for the first
nine months of 2002 increased to 4.8% from a negative 1.7% for the first nine
months of 2001. This improvement was primarily due to higher manufacturing
volumes absorbing more fixed overhead costs coupled with the benefit of cost
containment efforts, lower warranty expenses and the sale of trailers in 2002
that were reserved in 2001.
Direct selling, general and administrative expenses for Trailer decreased to
$1,171,000, or 29.0%, for the nine months ended September 30, 2002, from
$1,650,000 for the nine months ended September 30, 2001, due to lower insurance
claim expenses.
Corporate administrative expenses, which are allocated to the segments primarily
based on third-party revenues, increased to $10,262,000, or 3.4%, for the nine
months ended September 30, 2002, from $9,920,000 for the nine months ended
September 30, 2001, due to increased legal costs associated with ongoing and
routine litigation.
Other income and expense for the nine months ended September 30, 2002, totaled
$495,000 of income compared to an expense of $744,000 for nine months ended
September 30, 2001, due to the reduction of interest expense from the
elimination of short-term debt early in the third quarter of 2001 and the
majority of long-term debt early in the third quarter of 2002, increased
interest income from greater invested cash, a favorable currency exchange impact
from the stronger euro and the non-recurrence of losses recorded on the disposal
of certain of the Company's fixed assets in the first half of 2001.
11
Pension income, which is reported as a reduction of cost of sales, was
$3,750,000 for both the nine months ended September 30, 2002 and the nine months
ended September 30, 2001.
Liquidity and Capital Resources
The Company has historically relied on cash flows from operations and
third-party borrowings to finance its operations, including acquisitions,
dividend payments and stock repurchases.
The Company's cash balance totaled $23.4 million at September 30, 2002, compared
to $18.1 million at December 31, 2001. For the nine months ended September 30,
2002, net cash provided by operating activities was $13.1 million, cash used in
investing activities totaled $0.6 million and cash used in financing activities
amounted to $7.2 million. Significant components of cash used by operating
activities include net earnings adjusted for non-cash expenses of $12.0 million
and a net increase in working capital of $1.1 million. Cash used in investing
activities included capital expenditures totaling $6.5 million, primarily for
additions and replacements of production equipment, operating vehicles and
environmental compliance in the Oil Field segment. Capital expenditures for 2002
are projected to be in the range of $8 to $10 million, which is higher than
level seen in 2001. Other capital projects for 2002 include the building of a
power transmission repair facility in Alabama to better serve the southeastern
U.S. market and high-speed testing equipment in Power Transmission's France
facility to expand its product offerings. Also, invested funds of $5.9 million
escrowed against long-term debt were converted to cash in conjunction with the
repayment of that debt in the third quarter of 2002. Significant components of
cash used in financing activities included payments on long-term debt of $6.3
million, proceeds from stock option exercises of $2.6 million and dividend
payments of $3.5 million or $0.54 per share.
Total debt balances at September 30, 2002, including current maturities of
long-term debt, consisted of $0.8 million of notes payable to various banks. As
of September 30, 2002, the Company had no outstanding debt associated with its
discretionary short-term demand facility or with the Bank Facility discussed
below. Total debt decreased by $6.2 million during the first nine months of 2002
from the $6.9 million level at December 31, 2001, due to principal payments on
long-term notes payable totaling $6.3 million, offset by foreign currency
changes of $0.1 million.
During the third quarter of 2002, the Company completed its due diligence and
negotiations for a three year unsecured revolving line of credit with a major
domestic bank and signed an agreement in principle. The new facility will
provide up to $27.5 million in credit, with $10.0 million to be available as a
demand facility. It is anticipated that this credit agreement will be signed and
closed by the end of November 2002.
Additionally, the Company is renegotiating the renewal of an existing unsecured
short-term demand facility in the amount of $5.0 million with a regional
domestic bank, previously referred to as the "LIBOR Demand Line". It is also
anticipated that this facility will be finalized during the fourth quarter of
2002.
Once completed, both of these facilities will replace the three facilities that
expired during the third quarter of 2002.
The Company currently has a stock repurchase plan under which the Company is
authorized to spend up to $17.1 million for purchases of its common stock.
Pursuant to this plan, the Company has purchased a total of 826,870 shares of
its common stock at an aggregate purchase price of $16.9 million. No shares were
purchased during the nine months ended September 30, 2002. Purchased shares are
added to treasury stock and are available for general corporate purposes
including the funding of the Company's stock option plans. As of September 30,
2002, the Company held 368,514 shares of treasury stock at an aggregate cost of
approximately $7.6 million. Authorizations of approximately $0.2 million
remained at September 30, 2002.
12
The Company believes that its cash flows from operations and its available
borrowing capacity under its credit agreements will be sufficient to fund its
operations, including planned capital expenditures, dividend payments and stock
repurchases, through December 31, 2003.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations." This standard requires asset
retirement costs to be capitalized as part of the cost of the related tangible
long-lived asset and subsequently allocated to expense using a systematic and
rational method over the useful life of the asset. The Statement is effective
for fiscal years beginning after June 15, 2002. The transition adjustment
resulting from the adoption of this Statement will be reported as a cumulative
effect of a change in accounting principle. The adoption of Statement No. 143 is
not expected to have a significant impact on the Company's consolidated
financial position or results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." This
statement requires companies to recognize costs associated with restructurings,
discontinued operations, plant closings or other exit or disposal activities
when incurred rather than at the date a plan is committed to. The Statement is
effective for exit or disposal activities initiated after December 31, 2002. The
Company plans to adopt this statement as of the effective date and will
implement its provisions on a prospective basis.
Critical Accounting Policies and Estimates
The discussion and analysis of financial condition and results of operations are
based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. The Company evaluates its estimates on an ongoing basis,
based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The Company
believes the following critical accounting policies affect its more significant
judgments and estimates used in preparation of its consolidated statements.
The Company extends credit to customers in the normal course of business.
Management performs ongoing credit evaluations of our customers and adjusts
credit limits based upon payment history and the customer's current credit
worthiness. An allowance for doubtful accounts has been established to provide
for estimated losses on receivable collections. The balance of this allowance is
determined by regular reviews of outstanding receivables and historical
experience. As the financial condition of customers change, circumstances
develop or additional information becomes available, adjustments to the
allowance for doubtful accounts may be required.
The Company has made significant investments in inventory to service its
customers. On a routine basis, the Company uses estimates in determining the
level of reserves required to state inventory at the lower of cost or market.
Management's estimates are primarily influenced by market activity levels,
production requirements, the physical condition of products and technological
innovation. Changes in any of these factors may result in adjustments to the
carrying value of inventory.
Long-lived assets, including goodwill, held and used by the Company are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be reasonable. The Company assesses the
recoverability of long-lived assets by determining whether the carrying value
can be recovered through projected discounted cash flows, based on expected
future operating results. Future adverse market conditions or poor operating
results could result in the inability to recover the current carrying value and
thereby possibly requiring an impairment charge in the future.
13
Deferred tax assets and liabilities are recognized for the differences between
the book basis and tax basis of the net assets of the Company. In providing for
deferred taxes, management considers current tax regulations, estimates of
future taxable income and available tax planning strategies. Changes in state,
federal and foreign tax laws as well as changes in the financial position of the
Company could also affect the carrying value of deferred tax assets and
liabilities. If management estimates that some or all of any deferred tax assets
will expire before realization or that the future deductibility is not probable,
a valuation allowance would be recorded.
The Company is subject to claims and legal actions in the ordinary course of
business. The Company maintains insurance coverage for various aspects of its
businesses and operations. The Company retains a portion of the insured losses
that occur through the use of deductibles. Management regularly reviews
estimates of reported and unreported insured and non-insured claims and legal
actions and provides for losses through reserves. As circumstances develop and
additional information becomes available, adjustments to loss reserves may be
required.
The Company offers warranties on products and services ranging from one to five
years, depending on the product or service sold. Based upon historical
experience, the Company records a provision at the time of sale for future
estimated warranty claims. Management reviews these estimates on a regular basis
and adjusts the warranty provisions as actual experience differs from historical
estimates or other information becomes available.
The Company offers a defined benefit plan and other benefits upon the retirement
of its employees. Assets and liabilities associated with these benefits are
calculated by third-party actuaries under the rules provided by various
accounting standards, with certain estimates provided by management. These
estimates include the discount rate, expected rate of return of assets and the
rate of increase of compensation and health claims. On a regular basis,
management reviews these estimates by comparing them to actual experience and
those used by other companies. If a change in an estimate is made, the carrying
value of these assets and liabilities may have to be adjusted.
Forward-Looking Statements and Assumptions
This Quarterly Report contains forward-looking statements and information within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are based on management's beliefs as well
as assumptions made by and information currently available to management. When
used in this report, the words "anticipate", "believe", "estimate", "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the Company's current views with respect to certain events
and are subject to certain assumptions, risks and uncertainties, many of which
are outside the control of the Company. These risks and uncertainties include,
but are not limited to, (i) oil prices, (ii) capital spending levels of oil
producers, (iii) availability and prices for raw materials and (iv) general
industry and economic conditions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, estimated
or expected. The Company does not intend to update these forward-looking
statements and information.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not utilize financial instruments for trading purposes. The one
derivative financial instrument held, a note payable that is a hedge on the
Company's French operations, does not expose the Company to significant market
risk. The Company's financial instruments include cash, accounts receivable,
accounts payable, invested funds and debt obligations. The book value of
accounts receivable, short-term debt and accounts payable are considered to be
representative of their fair market value because of the short maturity of these
instruments. The Company believes the carrying values of its long-term debt
obligations approximate fair values because the interest rates on these
obligations are comparable to what the Company believes it could currently
obtain for debt with
14
similar terms and maturities. The Company's accounts receivable are not
concentrated in one customer or industry and are not viewed as an unusual credit
risk.
Item 4. Controls and Procedures
Based on their evaluation of the disclosure controls and procedures as of a date
within 90 days of the filing of this report on Form 10-Q, the Chief Executive
Officer of the Company, Douglas V. Smith, and the Chief Financial Officer of the
Company, R. D. Leslie, have concluded that the disclosure controls and
procedures (as defined in Rules 13a-14(c) promulgated under the Securities
Exchange Act of 1934) are effective. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls subsequent to the date of their evaluation.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A class action complaint was filed in the United States District Court for the
Eastern District of Texas on March 7, 1997, by an employee and a former employee
that alleged race discrimination in employment. Certification hearings were
conducted in Beaumont, Texas in February of 1998 and in Lufkin, Texas in August
of 1998. The District Court in April of 1999 issued a decision that certified a
class for this case which includes all persons of a certain minority employed by
the Company from March 6, 1994, to the present. The Company appealed this class
certification decision by the District Court to the 5th Circuit United States
Court of Appeals in New Orleans, Louisiana. This appeal was denied on June 23,
1999.
The Company is defending this action vigorously. Furthermore, the Company
believes that the facts and the law in this action support its position and that
it will prevail if this case is tried on its merits.
The Company is often subject to routine litigation arising in the normal course
of its business. While the outcome of these proceedings cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the Company's consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Articles of Incorporation, as amended, included as Exhibit 3
to Form 10-K of the registrant for the year ended December 31,
1990, which exhibit is incorporated herein by reference
*3.2 Articles of Amendment to Fourth Restated Articles of
Incorporation of Lufkin Industries, Inc. included as Exhibit
3.1 to Form 8-K of the registrant filed December 10, 1999,
which exhibit is incorporated herein by reference.
*3.3 Restated Bylaws of Lufkin Industries, Inc., included as
Exhibit 3.2 to Form 8-K of the registrant filed December 10,
1999, which exhibit is incorporated herein by reference.
*4.1 Shareholder Rights Agreement, dated as of May 4, 1987,
included as Exhibit 1 to Form 8-A of the registrant dated May
13, 1987, which agreement is incorporated herein by reference.
*10.1 1990 Stock Option Plan, included as Exhibit 4.3 to the
Company's registration statement on Form S-8 dated August 23,
1995 (File No. 33-62021), which plan is incorporated herein by
reference.
*10.2 1996 Nonemployee Director Stock Option Plan, included as
Exhibit 4.3 to the Company's registration statement on Form
S-8 dated June 28, 1996 (File No. 333-07129), which plan is
incorporated herein by reference.
99.1 Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Incorporated by reference
16
(b) Reports on Form 8-K
None
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Date: November 12, 2002
LUFKIN INDUSTRIES, INC.
By /s/ R.D. Leslie
---------------------------
R.D. Leslie
Vice President/Treasurer/Chief Financial Officer
Principal Financial and Accounting Officer
18
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Douglas V. Smith, the Chief Executive Officer of Lufkin Industries, Inc., a
Texas corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lufkin Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Douglas V. Smith
- --------------------------
Douglas V. Smith
Chief Executive Officer
19
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, R. D. Leslie, the Chief Financial Officer of Lufkin Industries, Inc., a Texas
corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lufkin Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ R. D. Leslie
- --------------------------
R. D. Leslie
Chief Financial Officer
20