Exhibit 13. Portions of Lufkin Industries, Inc. Annual Report to Shareholders
LUFKIN INDUSTRIES, INC.
LETTER TO SHAREHOLDERS
For the year ended December 31, 1994, Lufkin Industries made great strides in
improving our operating results. The actions taken the last two years to
increase our competitive position in each of our major product groups are
producing positive results. Sales in 1994 increased 7% to $217.3 million
compared with $202.2 million for the year ended December 31, 1993. Three out of
our four major product groups -- power transmission products, foundry castings,
and trailers -- showed strong increases in sales compared with 1993.
The general improvement in economic conditions created stronger demand which
contributed to trailer sales being up 37% to $87.8 million. Sales of power
transmission products were up 16% to $55.3 million. This increase reflects a
greater presence in the international markets we serve and in the repair and
after-service markets. Our foundry castings sales increased 25% in 1994 to
$30.2 million as Lufkin continued to expand its market share in engineered
castings and maintained our strong presence in the forklift counterweight
market.
Oil field equipment sales, which declined 30% to $40.9 million in 1994,
continued to be adversely affected by the record low levels of activity in the
oil fields, particularly in the United States. To partially offset the decline
in revenues, we have significantly reduced operating costs through consolidation
in the Lufkin, Texas facility as well as a restructuring of our sales and
marketing functions. Product redesign to better serve our customers and to
reduce costs is an ongoing process. Our more efficient operations provide the
Company with added flexibility to meet the needs of our worldwide customers.
Lufkin reported a net loss for the year ended December 31, 1994, of $1.2
million, or $.18 per share, including the $11.2 million pre-tax special
inventory write-downs taken during the second and third quarters. Because of
the severe decline in oil field sales during 1994 and the unstable economic
conditions in both Russia and Venezuela, the Company reviewed its inventories
and made the decision to write down certain high quality products that were
built primarily for the Russian and Venezuelan markets to a conservative
estimate of their net realizable value based on current market conditions.
Lufkin continues to review its product offerings and look for new opportunities.
During 1994, Lufkin exited the industrial supply business to focus on engineered
products which are our core businesses.
Lufkin ended fiscal 1994 in a stronger operating position. At December 31,
1994, the Company's working capital was $70.8 million and our backlog totaled
$109 million. The balance sheet and financial strength of the Company were
improved with the sale of surplus assets and through cash generated from
operations.
We enter 1995 in an improved position to continue to leverage on the success we
have achieved in improving our operations and in developing new products. For
the future, our focus remains clear. Lufkin will continue to capitalize on its
reputation for manufacturing the highest quality products for the industries we
serve. In addition, we are dedicated to maximizing our many strengths to
achieve further improvement in our financial results.
Sincerely,
Douglas V. Smith
President and Chief Executive Officer
LUFKIN INDUSTRIES, INC.
OIL FIELD PUMPING UNITS
The decline in the domestic market for pumping units stems from a 30-year low in
activity mainly reflecting the decline in oil prices since 1993. As a result,
drilling rig counts were down and oil well completions were at a historic low.
However, Lufkin's well-established position in the major oil producing areas of
the world has enabled the Company to maintain its presence in all major markets.
Lufkin's oil field pumping units are known throughout the world as the industry
standard. The types of units produced include conventional, beam-balanced, air-
balanced, low profile, slant hole, and trailer mounted. The Company's units are
extremely adaptable to meet customers' various production demands.
Lufkin's success in the world's market for pumping units has been achieved in
part by our production engineering which utilizes machining cells and a conveyor
system for mechanical handling. The manufacturing process uses a continuous
flow operation that reduces manufacturing time and improves efficiency. Lufkin
also has local manufacturing capability in many of our international markets
which allows us to meet specific country content requirements. The ability to
deliver quality products, the availability of onsite installation and necessary
technical support, and the capability to respond to customers' needs in a timely
fashion will allow Lufkin to capitalize on its strengths when the oil market
improves.
The domestic oil field pumping unit market remains the largest in the world with
over 580,000 wells in operation. Approximately 96% of these wells require some
type of artificial lift or pumping unit and around 87% need the type of beam-
pumping unit Lufkin manufactures. Internationally, there are bright spots in
certain markets of South America as privatization of state-owned oil industries
takes place; in Canada, where there have been government incentives to drill for
natural gas and oil; and in forming alliances with oil companies to supply some
of the less developed, but rapidly growing areas of the world.
The future for the type of equipment Lufkin manufactures is brighter today than
it has been during the recent past. Our worldwide surplus of oil is declining
as economies around the world continue to expand. As supply and demand factors
for oil continue to come more closely in line, Lufkin is in an excellent
position to participate in the growth of this market.
TRAILERS
The U.S. trailer market is estimated to be approximately $3.5 billion.
Historically, it is a market that is sensitive to overall economic conditions in
the transportation industry as well as to the general economy. Demand for
trailers was very strong in 1994 and Lufkin was positioned to improve its
operating results.
Lufkin manufactures many sizes and styles of vans, platforms, and high capacity,
light-weight dump trailers. The Company's trailers are known for their quality
construction, reliability, innovation of design, and competitive price, all of
which are important to Lufkin's diverse customer base.
Lufkin's ability to design products using the most effective engineering
technology was enhanced in 1994 with the addition of several CAD-CAM work
stations. Lufkin's use of the latest technology has been incorporated into two
new trailer products, a composite flat bed introduced in June 1994 which has
been well received and a plate trailer which is being introduced in 1995 with
full production scheduled for 1996.
The outlook for trailers is expected to remain strong through 1995 driven in
part by a robust U.S. manufacturing sector. Coming out of the slower economic
environment of the last few years, there has been a pent-up demand for trailers.
Additionally, the demand for trailers has increased as a result of many
shippers' adopting just-in-time inventory systems which require more frequent
deliveries, companies choosing to outsource their transportation needs and more
trailers being used as warehouses for short-term storage. NAFTA has also
offered some opportunity for sales into Mexico and Canada. These trends, as
well as a
2
LUFKIN INDUSTRIES, INC.
TRAILERS (CONTINUED)
general aging of trailer fleets, bode well for Lufkin trailers in the future.
FOUNDRY CASTINGS
The past year was an excellent one for Lufkin's foundry castings. The general
improvement in the overall domestic economy led to a record year. Contributing
also to the year's achievement was the unleashing of pent-up demand from the
previous business cycle and the effect of several players in the foundry
industry being forced out during the last business cycle, which reduced the
supply available -- all to the benefit of Lufkin.
Lufkin's foundry casting capabilities span the spectrum of castings
specifications used in many industrial applications from gray iron to ductile
iron. The Company has the capability to produce over 300 tons of iron castings
a day.
Customers for Lufkin's foundry castings are mainly in the manufacturing segment
of the economy. They include those in the heavy equipment, pump and compressor,
valve, and machine tool industries. Lufkin has targeted the more technically
demanding ductile and gray iron castings used in the valve, compressor, and
machine tools industries as good growth prospects.
The goal for the coming year is to build on the success achieved in 1994.
Lufkin is dedicated to manufacturing the highest quality products and improving
further its well-engineered products while maximizing its manufacturing
capabilities.
POWER TRANSMISSION
Lufkin is a leading manufacturer of power transmission equipment used throughout
the world. The Company's precision-made gears range in sizes up to 192 inches
in diameter, in weights from 300 pounds to 250 tons, and in power requirements
from 20 to 85,000 horsepower. By serving a wide array of applications in the
power generation, petro-chemical, gas transmission, and marine propulsion
markets to applications in the steel, rubber, sugar, and mining industries, many
of the Company's products become integral parts of large processing units.
Lufkin Industries' power transmission products are primarily parallel shaft,
enclosed gear drives. However, the product line is being expanded to encompass
other types of gearing. Customers for the full range of Lufkin products have
very stringent performance requirements. Often these requirements must be
proved through extensive testing prior to shipment. Lufkin has one of the most
advanced test facilities in the industry, staffed by experienced test engineers.
The expanding market for gas turbine-powered generators for use in electrical
power generation is fueling demand for Lufkin's high-speed gear units. Lufkin's
gears are required to convert the energy from the turbine to the correct speed
to drive the generators. High performance demands of these applications require
state-of-the-art design, manufacturing, assembly, and testing capabilities. In
the global market for these products, Lufkin is recognized as an industry
leader.
The demand for power generation equipment has grown significantly in developing
countries, particularly in China and Southeast Asia. In this rapidly developing
part of the world, the demand for electricity far exceeds current supply. The
small-to-medium-size gas-powered generators can be brought on stream much faster
and more economically than larger power stations, thereby enabling quick,
incremental additions to electricity grids that are unable to meet the increased
local demand.
Demand for co-generation applications is also expected to increase in the
medium-term, as emphasis is placed
3
LUFKIN INDUSTRIES, INC.
POWER TRANSMISSION (CONTINUED)
on energy efficiency in response to both environmental concerns and energy
conservation. Lufkin's gears are also used in a variety of applications in the
petroleum refining and petro-chemical industry. The petro-chemical industry is
experiencing a resurgence, driven in part by relatively cheap feedstocks,
coupled with the general expansion in the global economy, which is stimulating
demand for chemicals, plastics, and other petro-chemical products.
Another significant market for Lufkin's gear products is in the field of energy
transforming equipment. In these applications Lufkin gears drive pumps and
compressors. Gas transmission, as well as oil and gas drilling and refining,
are end markets for products of this type.
The industries that call for Lufkin's low-speed, high-torque gears are also
showing signs of growth. The sugar refining sector will be modernizing and
consolidating to achieve higher efficiencies. Demand for sugar products is
growing, particularly in the developing world. Rubber and steel industries have
been expanding as the U.S. and Europe move out of recession and as demand for
automobiles and industrial products increases. The demand by mining and cement
industries for Lufkin's low-speed units is steadily increasing as activity
associated with economic revitalization gathers pace in the rebuilding of
infrastructure around the globe.
Lufkin also manufactures and markets a line of heavy duty winches that is
respected throughout the timber industry. This product line is being expanded
through the creation of new, lighter weight, higher capacity winches designed to
meet the changing needs of timber harvesters around the world.
Lufkin has successfully expanded its worldwide power transmission markets by
providing its customers with a full range of new high value-added products
coupled with superior marketing and technical support. Through the Company's
vertical integration of its engineering, manufacturing, and service
capabilities, these expanded product and service offerings can be custom
tailored for applications in both the new equipment and aftermarket markets.
Lufkin continues to develop new products for existing markets and to select new
market niches for new product technologies. The Company maintains a strong
commitment to ongoing investments in technology, training, and recruitment of
high caliber people. These factors, combined with Lufkin's focus on continuous
improvement, have resulted in the Company being recognized as an industry leader
in quality, as demonstrated by the Company's certification to ISO 9001.
4
LUFKIN INDUSTRIES, INC.
FINANCIAL REVIEW
Lufkin Industries, Inc. and Subsidiaries
COMMON STOCK INFORMATION
1994 1993
------------------------ ------------------------
Stock Price Stock Price
------------ -----------
Quarter High Low Dividend High Low Dividend
- ------- ---- --- -------- ---- --- --------
First $19.50 $16.50 $.15 $20.00 $14.50 $.15
Second 20.00 17.63 .15 17.50 15.00 .15
Third 20.75 18.00 .15 19.00 14.75 .15
Fourth 18.75 15.50 .15 21.75 16.75 .15
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol LUFK and as of February 28, 1995, there were approximately 900 record
holders of its common stock.
The Company has paid cash dividends for 55 consecutive years. Total dividend
payments were $4,075,000 in 1994 and 1993.
QUARTERLY FINANCIAL DATA (UNAUDITED)
In millions, except First Second Third Fourth
per share data Quarter Quarter Quarter Quarter
- ------------------- ------- -------- -------- ---------
1994
Net sales $49.1 $53.9 $55.9 $58.4
Gross margin 5.7 5.0(a) (3.7)(a)(b) 9.2 (b)
Net earnings (loss) .4 .5(a) (5.1)(a)(b) 3.0 (b)
Earnings (loss) per share .06 .07(a) (.75)(a)(b) .44(b)
1993
Net sales $45.8 $48.3 $52.8 $55.3
Gross margin 4.4 4.7 7.0 10.0
Net earnings (loss) (1.2) (1.1) 1.3 3.5
Earnings (loss) per share (.17) (.16) .19 .52
- --------------
(a) Gross margins in the second and third quarters were reduced by special
inventory provisions of $1.0 million and $12.7 million, respectively. The net
after tax effect of these special writedowns was $.7 million or $.10 per share
in the second quarter and $8.4 million or $1.23 per share in the third quarter.
(b) Includes LIFO benefits of $2.5 million and $2.9 million in the third and
fourth quarters, respectively. The net after tax effect of these LIFO benefits
was $1.7 million or $.25 per share in the third quarter and $1.9 million or
$.28 per share in the fourth quarter.
ADDITIONAL FINANCIAL INFORMATION
Stockholders may obtain additional information for the year ended
December 31, 1994, from the Company's Form 10-K Report filed with the Securities
and Exchange Commission. A copy of such report may be obtained without charge
by written request to the Secretary, Lufkin Industries, Inc., P.O. Box 849,
Lufkin, Texas 75902-0849.
5
LUFKIN INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Lufkin Industries, Inc. and Subsidiaries
RESULTS OF OPERATIONS
Net sales for 1994 were $217.3 million compared to $202.2 and $178.6 million
for 1993 and 1992, respectively. The Company reported an operating loss of $3.1
million for 1994. In 1993 and 1992, the Company had operating income of $1.7
million and an operating loss of $41.5 million, respectively. The Company
reported a net loss of $1.2 million for 1994, compared to net income of $2.5
million in 1993 and a net loss of $34.8 million in 1992. The 1994 results
included an $11.2 million pre-tax charge for special inventory write downs and
the 1992 results include restructuring charges totaling $24.3 million.
In 1994, the Company experienced revenue growth in three of its four major
product groups. The Company sold its Industrial Supplies unit in June of 1994.
The annual percentage increase (decrease) of revenues for the Company's product
groups for the three years ended December 31, 1994 were as follows:
Annual increase (decrease)
---------------------------
1994 1993 1992
------ ------ ------
Oil field pumping units (30)% 6% (56)%
Power transmission products 16 9 (7)
Foundry castings 25 21 31
Trailers 37 24 (3)
------ ----- -----
Total company 7% 13% (28)%
------ ----- -----
The sales mix of the Company's products for the three years ended December 31,
1994 were as follows:
Percent of total sales
---------------------------
1994 1993 1992
------ ------ ------
Oil field pumping units 19% 29% 31%
Power transmission products 25 23 25
Foundry castings 14 12 11
Trailers 41 32 29
Industrial supplies 1 4 4
----- ---- ----
Total company 100% 100% 100%
----- ---- ----
During 1994, U.S. drilling activities continued at record low levels. The
Company experienced a 30% reduction of its 1994 oil field revenues compared to
1993. Oil field revenues in 1994 were $40.9 million compared to $58.6 million
and $55.1 million in 1993 and 1992, respectively. In contrast to the declining
revenues, the Company strengthened oil field margins by reducing operating costs
through the completion of the consolidation of all U.S. manufacturing into the
Lufkin, Texas facility and through the realization of a favorable product mix
due to larger sized pumping units being sold into the Argentine market. Oil
field bookings for 1994 were $42.9 million and the year-end backlog was $8.5
million, compared to 1993 bookings of $56.0 million and backlog of $6.8 million.
Power Transmission sales of $55.3 million were 16% higher than 1993 sales.
Sales for 1993 and 1992 were $47.6 million and $43.6 million, respectively. In
1994, the Company booked new orders totalling $54.0 million compared to $48.2
million in 1993. The increase in new orders reflects the Company's focused
efforts to expand its international presence and its participation in the higher
margin repair and service after markets. Power Transmission ended 1994 with a
$21.1 million backlog, compared to $22.1 million and $21.6 million in 1993 and
1992, respectively.
Foundry castings sales increased 25% to $30.2 million in 1994 as compared to
$24.2 million in 1993 and $20.0 million in 1992. The increase in the 1994 sales
continues the favorable growth reported in 1993 and 1992 which included sales
increases of 21% and 31%, respectively. During 1994, the Company expanded its
participation in the engineered castings market and maintained its strong
position in the forklift counterweight market. By expanding the product
offering to a full range of engineered grey and ductile iron castings, the
Company realized an improved product mix with improved profit margins. In 1994,
the Company booked $30.3 million in new orders compared to $27.0 million in
1993. At December 31, 1994, the Company ended the year with a $4.2 million
backlog compared to $4.9 million in 1993 and $2.3 million in 1992.
6
LUFKIN INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Lufkin Industries, Inc. and Subsidiaries
Trailer product sales of $87.8 million were up 37% over 1993 and 69% over 1992.
This strong performance followed the Company's January 1994 decision to not sell
its Trailer Division as previously announced. During 1994, the Company
increased its production capacity while maintaining its favorably restructured
cost position enabling the Company to respond to strong near term market
conditions. In 1994, the Company booked $112.4 million in new business compared
to $93.0 million in 1993. The Company ended the year on December 31, 1994 with
a Trailer backlog of $75.6 million compared to $51.3 million in 1993.
The Company's 1994 gross profit before the special inventory write downs and
the 1993 gross profit were 13% in both years compared to 7% in 1992. The
Company maintained its gross margin in 1994 through improved product mixes in
the Company's Oil Field, Power Transmission and Foundry Castings business groups
and focused cost reduction programs as higher margin oil field sales were
replaced with historically lower margin trailer sales.
During the second and third quarters of 1994, the Company reported special
inventory write downs, which totaled $13.7 million (pre-tax/pre-LIFO benefit),
to reduce inventory values for certain oil field inventories previously
manufactured for the former Soviet Union and Venezuelan markets as well as
certain other slow moving products. An estimated LIFO benefit of $2.5 million
was recognized as part of the third quarter write down. During the fourth
quarter, the final LIFO impacts were determined and an additional year end LIFO
benefit of $2.9 million was recorded as a credit to cost of sales.
Selling, General and Administrative expenses (S. G. & A.) decreased by 16% in
1994 to $20.9 million, compared to $24.7 million in 1993. S. G. & A. expenses
in 1992 were $27.5 million. The major components of the 1994 expense reductions
were reduced sales commissions to overseas representatives, reduced salaries and
related benefits, reduced travel costs and reduced expenses associated with the
consolidation of the Company's Churchill unit formerly in Chanute, Kansas into
the Company's Lufkin, Texas facilities and the sale of the Company's Industrial
Supply facility.
Other income increased to $1.6 million in 1994 compared to income of $.3
million in 1993 and a net expense of $1.6 million in 1992. The primary reason
for this favorable improvement was a gain of $1.4 million recognized during 1994
on the sale of the Company's Oil field Division Churchill manufacturing facility
and related equipment in Chanute, Kansas, which was partially offset by a minor
loss from the sale of the Company's Industrial Supply unit. Investment income
decreased $1.3 million in 1994. The 1994 investment income totaled $1.3 million
compared to $2.6 million in 1993 and $3.3 million in 1992. Although the average
balance of temporary investments increased during the year, the Company realized
capital losses on investments of $.9 million and the interest income from notes
receivable declined $.8 million as the balance of notes receivable was reduced
during the year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had working capital of $70.8 million
compared to $71.6 million in 1993 and $62.1 million in 1992. The Company
generated $25.6 million net cash from operating activities in 1994. The net
cash provided from operating activities in 1993 and 1992 was $24.3 million and
$25.5 million, respectively. Dividends totaling $4.1 million were paid in both
1994 and 1993. The 1992 dividends were $9.2 million. The Company believes that
existing working capital will be sufficient to satisfy its 1995 requirements.
In recent years, the expansion of facilities has been financed with internally
generated funds, and the Company plans to finance future improvements of its
facilities in this manner. No significant commitments were outstanding at
December 31, 1994.
7
LUFKIN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
Lufkin Industries, Inc. and Subsidiaries
December 31, 1994 and 1993
(Thousands of dollars)
ASSETS 1994 1993
- ------ ------- -------
Current assets:
Cash $ 207 $ 816
Temporary investments 36,716 19,539
Receivables, net 28,262 37,603
Inventories 21,919 33,158
Deferred income taxes 4,522 3,130
-------- --------
Total current assets 91,626 94,246
Property, plant and equipment:
Land and improvements 8,801 8,974
Buildings 52,076 51,493
Machinery and equipment 167,387 165,327
-------- --------
Total property, plant and equipment 228,264 225,794
Less accumulated depreciation (167,558) (161,538)
-------- --------
Total property, plant and equipment - net 60,706 64,256
Prepaid pension costs 17,784 14,156
Assets held for sale - 3,164
Other assets 6,658 6,724
-------- --------
Total $176,774 $182,546
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current liabilities:
Accounts payable $ 10,661 $ 9,865
Accrued liabilities:
Payrolls and benefits 4,574 4,683
Accrued warranty expenses 2,265 2,941
Property taxes 2,158 2,786
Commissions and other 1,137 2,401
-------- --------
Total current liabilities 20,795 22,676
Deferred income taxes 6,172 4,752
Post retirement benefits liability 11,843 11,627
Stockholders' equity:
Common stock, par $1 per share; 20,000,000 shares
authorized; 6,792,381 shares issued 6,792 6,792
Capital in excess of par 15,372 15,372
Retained earnings 116,845 122,127
Cumulative translation adjustment (1,045) (800)
-------- --------
Total stockholders' equity 137,964 143,491
-------- --------
Total $176,774 $182,546
-------- --------
See notes to consolidated financial statements
8
LUFKIN INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF EARNINGS
Lufkin Industries, Inc. and Subsidiaries
Years ended December 31, 1994, 1993 and 1992
(Thousands of dollars, except per share data)
1994 1993 1992
-------- -------- --------
Sales $217,273 $202,225 $178,565
-------- -------- --------
Costs and expenses:
Cost of sales 189,826 176,099 166,620
Selling, general and
administrative expenses 20,898 24,737 27,539
Special inventory provision 11,224 - -
Restructuring costs - - 24,339
Other expense (income), net (1,610) (347) 1,552
-------- -------- --------
Total costs and expenses 220,338 200,489 220,050
-------- -------- --------
Operating income (loss) (3,065) 1,736 (41,485)
Investment income 1,266 2,558 3,255
-------- -------- --------
Earnings (loss) before income taxes (1,799) 4,294 (38,230)
Income taxes (benefits) (592) 1,745 (10,977)
-------- -------- --------
Earnings (loss) before cumulative
effect of a change in accounting
for post retirement benefits (1,207) 2,549 (27,253)
Cumulative effect of a change in accounting
for post-retirement benefits including
applicable income tax benefit of $3,866 - - (7,506)
-------- -------- --------
Net earnings (loss) $ (1,207) $ 2,549 $(34,759)
-------- -------- --------
Earnings (loss) per share:
Net earnings (loss) before
cumulative effect of change in accounting $(.18) $.38 $ (4.01)
Cumulative effect of change in accounting - - (1.11)
-------- -------- --------
Net earnings (loss) per share $(.18) $.38 $ (5.12)
-------- -------- --------
See notes to consolidated financial statements
9
LUFKIN INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Lufkin Industries, Inc. and Subsidiaries
Years ended December 31, 1994, 1993, and 1992
(Thousands of dollars, except share data)
Common Stock Capital Cumulative
----------------- In Excess Retained Translation
Shares Amount Of Par Earnings Adjustment
------- ------- --------- --------- -----------
Balance December 31, 1991 6,792,381 $6,792 $15,372 $167,582 $ -
Net loss (34,759)
Cash dividends,
$1.35 per share (9,170)
Foreign currency translation
adjustment (736)
--------- ------ ------- -------- ---------
Balance December 31, 1992 6,792,381 6,792 15,372 123,653 (736)
Net earnings 2,549
Cash dividends, $.60 per share (4,075)
Foreign currency translation
adjustment (64)
--------- ------ ------- -------- ---------
Balance December 31, 1993 6,792,381 6,792 15,372 122,127 (800)
Net earnings (1,207)
Cash dividends, $.60 per share (4,075)
Foreign currency translation
adjustment (245)
--------- ------ ------- -------- ---------
Balance December 31, 1994 6,792,381 $6,792 $15,372 $116,845 $(1,045)
--------- ------ ------- -------- ---------
See notes to consolidated financial statements
10
LUFKIN INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Lufkin Industries, Inc. and Subsidiaries
Years ended December 31, 1994, 1993 and 1992
(Thousands of dollars)
1994 1993 1992
-------- --------- ---------
Cash flow from operating activities:
Net earnings (loss) $(1,207) $ 2,549 $(34,759)
Adjustments to reconcile earnings (loss) to net
cash provided by operating activities:
Depreciation 7,895 9,890 11,613
Restructuring charges - - 21,002
Deferred income tax provision (benefit) 28 1,622 (14,843)
Post retirement benefits 216 255 11,372
Changes in assets and liabilities:
Receivables 9,341 3,821 31,887
Inventories 11,239 921 (3,962)
Accounts payable 796 4,324 (2,762)
Accrued liabilities (2,677) 884 5,955
------- ------- -------
Net cash provided by operating activities 25,631 24,266 25,503
Cash flows from investing activities:
Additions to property, plant and equipment (5,238) (5,885) (9,373)
Retirement of property, plant and equipment 4,057 483 472
Increase in other assets (3,562) (5,938) (665)
------- ------- -------
Net cash used by investing activities (4,743) (11,340) (9,566)
Cash flows from financing activities:
Dividends paid (4,075) (4,075) (9,170)
------- ------- -------
Net cash used by financing activities (4,075) (4,075) (9,170)
Effect of translation on cash and
temporary investments (245) (64) (736)
------- ------- -------
Net increase in cash and
temporary investments 16,568 8,787 6,031
Cash and temporary investments,
at beginning of year 20,355 11,568 5,537
------- ------- -------
Cash and temporary investments,
at end of year $36,923 $20,355 $11,568
------- ------- -------
See notes to consolidated financial statements
11
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(1) SUMMARY OF MAJOR ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its subsidiaries after elimination of all
significant intercompany accounts and transactions.
TRANSLATION OF FOREIGN CURRENCIES. Assets and liabilities of foreign
operations are translated into U. S. dollars at the exchange rate in effect at
the end of each accounting period and income statement accounts are translated
at the average exchange rates prevailing during the period.
TEMPORARY INVESTMENTS: The Company's temporary investments consisting of
highly liquid government and debt securities have been classified as trading
securities which are carried at market value. All realized and unrealized gains
and losses are recognized currently in investment income.
RECEIVABLES: The following is a summary of the Company's receivable balances
(thousands of dollars):
1994 1993
------- -------
Accounts receivable $24,803 $29,296
Notes receivable 3,838 7,736
Other receivables 221 1,171
------- -------
28,862 38,203
Allowance for doubtful accounts (600) (600)
------- -------
Net receivables $28,262 $37,603
------- -------
Installment notes due after one year which equalled $584,000 at December 31,
1994 and $2,958,000 at December 31, 1993 are included in current assets.
INVENTORIES: The Company reports its inventories by using the last-in, first-
out (LIFO) and the first-in, first-out (FIFO) methods less reserves necessary to
report inventories at the lower of cost or estimated market. Inventory costs
include material, labor and factory overhead.
PROPERTY, PLANT AND EQUIPMENT: The Company records investments in these
assets at cost. Improvements are capitalized, while repair and maintenance
costs are charged to operations as incurred. Gains or losses realized on the
sale or retirement of these assets are reflected in income. Depreciation for
financial reporting purposes is provided on a straight-line method based upon
the estimated useful lives of the assets. Accelerated depreciation methods are
used for tax purposes. In 1992, restructuring charges of $21,002,000 were
reported as additional accumulated depreciation to reflect the write down of
certain assets. Expenditures for maintenance and repairs were $8,924,000 in
1994, $8,240,000 in 1993 and $7,644,000 in 1992.
EARNINGS PER SHARE: Earnings per share amounts are based on the weighted
average number of shares of common stock outstanding during the period. The
weighted average number of shares used to compute earnings per share was
6,792,381 shares, 6,801,131 shares and 6,792,381 shares for 1994, 1993 and 1992,
respectively.
OTHER: Certain items have been reclassified in the 1993 and 1992 consolidated
financial statements to conform with 1994 classifications.
12
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(2) INCOME TAXES
During the fourth quarter of 1992, the Company changed its method of
accounting for income taxes to adopt Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes," effective January 1, 1992.
Previously, the Company was using SFAS No. 96 for income tax accounting. This
change had no effect on the Company's consolidated financial statements. Under
SFAS No. 109, deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases of assets and
liabilities using enacted tax rates. The net deferred tax liability is
comprised of the following (thousands of dollars):
1994 1993
-------- --------
Current deferred tax assets
Gross assets $ 4,648 $ 3,343
Gross liabilities (126) (213)
-------- --------
Total, net 4,522 3,130
-------- --------
Noncurrent deferred tax payable
Gross assets 6,851 7,148
Gross liabilities (13,023) (11,900)
-------- --------
Total, net (6,172) (4,752)
-------- --------
Net deferred income taxes payable $ (1,650) $ (1,622)
-------- --------
The tax effects of significant temporary differences representing deferred tax
assets and liabilities are as follows (thousands of dollars):
1994 1993
------- -------
Inventory $ 3,092 $ 1,160
Prepaid pension costs (6,055) (4,805)
Accrued warranty expenses 770 1,025
Post retirement benefits 4,027 3,953
Net operating loss and tax credit carry forwards 2,077 2,501
Depreciation (6,588) (6,380)
Other, net 1,027 924
------- -------
Net deferred income taxes payable $(1,650) $(1,622)
------- -------
The income tax provision (benefit) for 1994, 1993, and 1992 consisted of the
following (thousands of dollars):
1994 1993 1992
------ ------ --------
Current $(620) $ 123 $ -
Deferred 28 1,622 (10,977)
Accounting change for post retirement benefits - - (3,866)
----- ------ --------
Total $(592) $1,745 $(14,843)
----- ------ --------
A reconciliation of the income tax provision (benefit) as computed at the
statutory U. S. income tax rate and the income tax provision (benefit) presented
in the consolidated financial statements is as follows (thousands of dollars):
1994 1993 1992
----- ------ ---------
Tax provision (benefit) computed at statutory rate $(612) $1,460 $(16,865)
Tax effect of:
Expenses for which no benefit was realized - 300 2,100
Tax-exempt interest and dividend
income exclusion (72) (52) (116)
Other, net 92 37 38
----- ------ --------
Actual provision (benefit) $(592) $1,745 $(14,843)
----- ------ --------
13
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
Cash payments for income taxes were $235,000, $801,000, and $1,036,000 for
1994, 1993 and 1992, respectively.
For income tax reporting purposes, the Company has net operating loss carry
forwards at December 31, 1994 of approximately $2,121,000 which are available to
reduce future U.S. taxable income. These carry forwards begin to expire in the
year 2007. The Company also has unused alternative minimum tax carry forwards
of $1,356,000 which can be carried forward indefinitely.
(3) INVENTORIES
Inventories used in determining cost of sales were as follows (thousands of
dollars):
1994 1993
------- -------
Finished goods $ 7,995 $13,123
Work in process 4,911 6,773
Raw materials 9,013 13,262
------- -------
Total $21,919 $33,158
------- -------
Inventories accounted for on a LIFO basis were $15,514,000 and $22,530,000 and
on a FIFO basis were $6,405,000 and $10,628,000 at December 31, 1994 and 1993,
respectively. Had the FIFO method been used in determining all inventory
values, inventories would have been $16,581,000 and $23,146,000 higher at
December 31, 1994 and 1993, respectively. During 1994, LIFO inventories were
reduced and these reductions resulted in a liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years. The after tax
effect of these LIFO inventory liquidations reduced the net loss in 1994 by
approximately $3,600,000 or $.53 per share.
(4) EMPLOYEE STOCK OPTION PLAN
The Company's 1990 Stock Option Plan provides for the granting of options to key
employees to purchase an aggregate of not more than 400,000 shares of the
Company's stock at fair market value on the date of grant. One fourth of
granted options generally become exercisable after one year and each year
thereafter. The options may not be exercised after ten years from the date of
grant. Outstanding options may be cancelled and reissued under terms specified
in the plan.
The following table summarizes activity under the Company's stock option plans:
1994 1993 1992
------- ------- -------
Outstanding, beginning of year 260,715 172,715 82,715
Granted (per share)
1992 ($17.50) - - 90,000
1993 ($15.31 to $21.375) - 122,000 -
1994 ($15.875 to $18.625) 94,750 - -
Forfeited - (34,000) -
------- ------- -------
Outstanding, end of year 355,465 260,715 172,715
------- ------- -------
At December 31, 1994, there were 152,515 options exercisable at a price of
$15.31 to $30.00 per share.
(5) CAPITAL STOCK
In May 1987, the Board of Directors adopted a "Shareholder Rights Plan"
designed to protect against unsolicited attempts to acquire control of the
Company that the Board believes are not in the best interest of the
shareholders. The Plan provides for the possible issuance of a dividend of one
common stock purchase right for each outstanding share of common stock. Under
certain conditions, each right may be exercised to purchase one share of common
stock at an exercise price of $100, subject to adjustment. Under certain
circumstances, the rights entitle holders to purchase the common stock of the
Company or an acquiring company having a value of twice the exercise price of
the rights. The rights would become exercisable, or transferable apart from the
common stock, ten days after a person or group acquired 20% or more, or
announced or made a tender offer for 30% or more, of the outstanding common
stock. Under certain circumstances, all rights owned by an acquiring person
would be null and void. The rights expire on May 31, 1996, and may be redeemed
by the Company at any time prior to the occurrence of certain events at $.05 per
right.
The Company is authorized to issue 2.0 million shares of Preferred Stock, the
terms and conditions to be determined by the Board of Directors in creating any
particular series.
14
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(6) RETIREMENT BENEFITS
The Company has noncontributory pension plans covering substantially all
employees. The benefits provided by these plans are measured by length of
service, compensation and other factors, and are currently funded by trusts
established under the plans. Funding of retirement costs for these plans
complies with the minimum funding requirements specified by the Employee
Retirement Income Security Act. Plan investment assets are invested primarily
in equity securities, United States government securities and cash equivalents.
The following tables provide the detail of the components of pension income
and expense, the funded status of the plans and amounts of prepaid pension cost
recognized in the Company's consolidated balance sheet, and major assumptions
used to determine these amounts.
(Thousands of dollars) 1994 1993 1992
- ---------------------- -------- --------- ---------
Components of pension income:
Service cost $ 2,092 $ 2,269 $ 2,207
Interest cost 5,334 5,334 5,184
Actual return on plan assets 97 (7,178) (6,353)
Net amortization and deferral (11,151) (3,700) (4,208)
-------- -------- --------
Net pension income (3,628) $ (3,275) $ (3,170)
-------- -------- --------
Plan assets at fair value $105,902 $110,752 $108,035
Actuarial present value of projected
benefit obligations:
Accumulated benefit obligations
Vested (56,406) (58,120) (50,074)
Nonvested (5,358) (6,446) (6,014)
Provision for future salary increases (8,259) (11,569) (14,039)
-------- -------- --------
Plan assets over projected benefit obligations 35,879 34,617 37,908
Unrecognized transition gain (12,683) (13,609) (14,536)
Unrecognized gain (3,161) (3,888) (8,630)
Unrecognized prior service cost (2,251) (2,964) (3,861)
-------- -------- --------
Net prepaid pension cost 17,784 $ 14,156 $ 10,881
-------- -------- --------
Major assumptions at year end:
Discount rate 8.25% 7.25% 8%
Rate of increase in compensation levels 5% 5% 6%
Expected long-term rate of return on plan assets 9% 9% 9%
-------- -------- --------
The Company also has defined contribution retirement plans covering
substantially all of its employees. During the year, the Company makes
contributions of 75% of employee contributions up to a maximum of 6% of employee
earnings. All obligations of the Company are funded through December 31, 1994.
Pension expense for these plans totaled $1,444,000, $1,456,000 and $1,295,000 in
1994, 1993 and 1992, respectively.
The Company sponsors two defined benefit post retirement plans that cover both
salaried and hourly employees. One plan provides medical benefits, and the
other plan provides life insurance benefits. Both plans are contributory, with
retiree contributions adjusted periodically. Prior to 1992, the costs of these
plans were charged to expense when paid. Effective January 1, 1992, the Company
adopted SFAS No. 106 "Employers' Accounting for Post-retirement Benefits Other
Than Pensions." This standard requires that the Company accrue the estimated
costs of these plans over the employee service period. The accumulated
obligation at January 1, 1992 was approximately $11,000,000 and this estimated
amount, net of tax benefit, was recorded as the cumulative effect of an
accounting change in the 1992 Consolidated Statement of Earnings.
15
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(6) RETIREMENT BENEFITS (CONTINUED)
The following table sets forth the plans' combined funded status reconciled with
the amount shown in the Company's balance sheet at December 31, 1994 and 1993
(thousands of dollars):
1994 1993
------- -------
Accumulated post retirement benefit obligation:
Retirees $ 9,208 $ 9,400
Fully eligible active plan participants 883 1,176
Other active plan participants not yet eligible 1,932 2,320
------- -------
Total accumulated post retirement benefit obligation 12,023 12,896
Unrecognized net actuarial gain (180) (1,269)
------- -------
Accrued post retirement benefit cost $11,843 $11,627
------- -------
Net periodic cost of post retirement benefit:
Service cost $ 168 $ 108
Interest cost 882 931
------- -------
Net periodic post retirement benefit cost $ 1,050 $ 1,039
------- -------
The Company's post retirement health care plan is unfunded and there are no
plan assets. For measurement purposes, the submitted claims medical trend was
assumed to be 12% in 1994, grading down to 5.5% in years 2006 and thereafter. A
one percentage point increase in each year's healthcare costs trend rate would
increase the accumulated post retirement benefit obligations as of December 31,
1994 by approximately $242,000 and the aggregate of the service and interest
costs components of net periodic post retirement cost for the year ended
December 31, 1994 by $25,000. In determining the accumulated post retirement
obligation, weighted-average discount rates of 8.25% in 1994 and 7.25% in 1993
were used.
(7) BUSINESS SEGMENT INFORMATION
The Company manufactures, sells and services various types of oil field
pumping units, power transmission products, foundry castings and trailers.
Corporate expenses are allocated to industry segments primarily based upon
outside revenues. The following is a summary of key business segment and product
group information:
(Thousands of dollars) 1994 1993 1992
- ---------------------- -------- --------- ---------
NET SALES:
Machinery Division
Oil field pumping units $ 40,938 $ 58,579 $ 55,116
Power transmission products 55,334 47,561 43,580
Foundry castings 30,165 24,169 20,028
Industrial supplies 3,051 7,761 7,912
Trailer Division 87,785 64,155 51,929
-------- -------- --------
Total net sales $217,273 $202,225 $178,565
-------- -------- --------
NET SALES BY GEOGRAPHIC REGION:
United States $183,147 $165,446 $133,704
Europe 2,916 7,262 21,838
Canada 8,273 7,520 5,544
Latin America 14,765 14,473 9,292
Other 8,172 7,524 8,187
-------- -------- --------
Total net sales $217,273 $202,225 $178,565
-------- -------- --------
16
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(7) BUSINESS SEGMENT INFORMATION (CONTINUED)
1994 1993 1992
-------- -------- ---------
OPERATING INCOME (LOSS):
Machinery Division $ (9,382) $ 1 $(41,485)
Trailer Division 6,317 1,735 -
-------- -------- --------
Total operating income (loss) $ (3,065) $ 1,736 $(41,485)
-------- -------- --------
ASSETS:
Machinery Division $ 83,155 $105,709 $101,703
Trailer Division 19,046 19,270 22,770
General Corporate 74,573 57,567 51,812
-------- -------- --------
Total assets $176,774 $182,546 $176,285
-------- -------- --------
CAPITAL EXPENDITURES:
Machinery Division $ 4,016 $ 5,255 $ 9,103
Trailer Division 356 283 195
General Corporate 866 347 75
-------- -------- --------
Total capital expenditures $ 5,238 $ 5,885 $ 9,373
-------- -------- --------
DEPRECIATION:
Machinery Division $ 6,345 $ 7,378 $ 9,859
Trailer Division 930 1,909 965
General Corporate 620 603 789
-------- -------- --------
Total depreciation $ 7,895 $ 9,890 $ 11,613
-------- -------- --------
17
LUFKIN INDUSTRIES, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Lufkin Industries, Inc. and Subsidiaries
To the Stockholders of Lufkin Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Lufkin
Industries, Inc. (a Texas corporation) and subsidiaries as of December 31, 1994
and 1993, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lufkin Industries, Inc., and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in notes 2 and 6 to the consolidated financial statements,
effective January 1, 1992, the Company changed its method of accounting for
income taxes and post retirement benefits other than pensions.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
- -----------------------
Houston, Texas
February 14, 1995
18