FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
OR
[_] 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 75-040-4410
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 South Raguet, Lufkin, Texas 75901
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 409-634-2211
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 12 months (or for such shorter period that 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 6,581,750 shares of Common Stock, $1.00 par value per share,
outstanding as of June 30, 1998, not including 210,631 shares classified as
Treasury Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET--JUNE 30, 1998 AND DECEMBER 31, 1997
(Thousands of dollars)
ASSETS 6-30-98 12-31-97
------ -------- ---------
(Unaudited)
CURRENT ASSETS:
Cash $ 251 $ 796
Temporary investments 11,564 17,521
Receivables, net 45,017 40,444
Inventories 39,290 30,078
Deferred income tax assets 1,911 1,911
-------- ---------
Total current assets 98,033 90,750
-------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost 258,200 250,727
Less - Accumulated depreciation 176,937 175,249
-------- ---------
81,263 75,478
PREPAID PENSION COSTS 29,299 27,689
GOODWILL, net 8,016 8,391
OTHER ASSETS 7,829 7,444
-------- ---------
$224,440 $ 209,752
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 12,584 $ 7,169
Short term notes payable 5,000 -
Current portion of long term notes
payable 742 742
Payrolls and benefits 5,540 5,430
Accrued warranty expenses 868 1,150
Taxes payable 3,617 5,071
Other accrued liabilities 2,662 2,334
-------- --------
Total current liabilities 31,013 21,896
-------- --------
DEFERRED INCOME TAX LIABILITIES 13,588 13,588
POST RETIREMENT BENEFITS LIABILITY 12,377 12,298
LONG TERM NOTES PAYABLE 6,377 6,665
SHAREHOLDERS' EQUITY:
Common stock, $1 par value per share;
20,000,000 shares authorized;
6,792,381 shares issued 6,792 6,792
Capital in excess of par 15,266 15,381
Retained earnings 145,417 138,539
Treasury stock, 210,631 shares
and 199,399 shares, at cost (5,302) (4,244)
Cumulative translation adjustment (1,088) (1,163)
-------- --------
Total shareholders' equity 161,085 155,305
-------- --------
$224,440 $209,752
======== ========
See accompanying notes to consolidated financial statements.
2
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Thousands of dollars, except per share data)
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------------------ -------------------
(Unaudited) (Unaudited)
1998 1997 1998 1997
-------------- ------- -------- --------
NET SALES $79,962 $68,740 $153,598 $128,781
COST OF SALES 65,978 56,642 126,349 108,585
------- ------- -------- --------
Gross profit 13,984 12,098 27,249 20,196
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,780 6,637 13,597 12,990
------- ------- -------- --------
Operating income 7,204 5,461 13,652 7,206
OTHER INCOME, NET 329 507 818 1,091
------- ------- -------- --------
Earnings before income taxes 7,533 5,968 14,470 8,297
PROVISION FOR INCOME TAXES 2,712 2,089 5,209 2,904
------- ------- -------- --------
Net earnings $ 4,821 $ 3,879 $ 9,261 $ 5,393
======= ======= ======== ========
EARNINGS PER SHARE
Basic $ .73 $ .59 $ 1.41 $ .82
======= ======= ======== ========
Diluted $ .72 $ .59 $ 1.38 $ .81
======= ======= ======== ========
DIVIDENDS PER SHARE $ .18 $ .17 $ .36 $ .34
======= ======= ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 6,588,716 6,543,226 6,590,145 6,545,144
========= ========= ========= =========
Diluted 6,707,300 6,614,390 6,724,861 6,619,608
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
3
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Thousands of dollars)
For the Six Months
Ended June 30
-----------------------
(Unaudited)
1998 1997
-------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 9,261 $ 5,393
Adjustments to reconcile net earnings
to net cash provided by (used in) operating
activities:
Depreciation and amortization 4,196 3,582
Pension income (1,610) (1,957)
Post retirement benefits 79 57
(Gain)loss on sales of property,
plant and equipment (74) 14
Changes in:
Receivables (4,573) (2,458)
Inventories (9,212) (8,792)
Accounts payable 5,414 944
Accrued liabilities (1,298) 197
------- --------
Net cash provided by (used in) operating activities 2,183 (3,020)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (9,880) (7,902)
Proceeds from disposition of property,
plant and equipment 116 61
Increase in other assets (162) (138)
------- --------
Net cash used in investing
activities (9,926) (7,979)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term notes payable 5,000 -
Payment of current portion of long term notes payable (287) -
Dividends paid (2,383) (2,223)
Proceeds from exercise of stock options 1,900 46
Purchase of treasury stock (3,074) (428)
------- --------
Net cash provided by (used in) financing activities 1,156 (2,605)
Effect of translation on cash and temporary
investments 85 88
------- --------
Net decrease in cash and
temporary investments (6,502) (13,516)
Cash and temporary investments, at
beginning of period 18,317 30,866
------- --------
Cash and temporary investments, at
end of period $11,815 $ 17,350
======= ========
See accompanying notes to consolidated financial statements.
4
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows of Lufkin Industries, Inc. and Subsidiaries
(the "Company") for all periods presented. The consolidated balance sheet as of
December 31, 1997, was derived from the audited consolidated balance sheet
included in the Company's 1997 annual report on Form 10-K. The results of
operations for the six months ended June 30, 1998, are not necessarily
indicative of the results that may be expected for the full fiscal year.
These statements have been prepared in accordance with the requirements
for interim financial statements contained in Regulation S-X, which do not
require all the information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Therefore, these statements should be
read in conjunction with the consolidated financial statements and related
footnotes included in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1997.
(2) Consolidated inventories consist of the following:
6-30-98 12-31-97
-------- ---------
(Thousands of dollars)
Raw materials and purchased
parts $ 27,687 $ 18,575
Work in process 7,871 6,381
Finished goods 3,732 5,122
(3) Basic earnings per share (EPS) is computed by dividing net earnings by
the weighted average number of shares outstanding during the year. Diluted EPS
is computed considering potentially dilutive outstanding options. The following
table sets forth the computation of weighted average shares for the three months
and six months periods ending June 30, 1998 and 1997:
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
--------- --------- --------- ---------
Basic EPS-weighted
average shares 6,588,716 6,543,226 6,590,145 6,545,144
Effect of dilutive securities:
employee stock options 118,584 71,164 134,716 74,464
--------- --------- --------- ---------
Diluted EPS-adjusted
weighted average shares
and assumed conversions 6,707,300 6,614,390 6,724,861 6,619,608
========= ========= ========= =========
(4) In June, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses).
The company adopted SFAS No. 130 effective January 1, 1998.
5
Total comprehensive income for the three and six months ended June 30, 1998
and 1997 is illustrated below:
Three months ended Six months ended
June 30 June 30
(Thousands of dollars) 1998 1997 1998 1997
- ---------------------- -------- --------- ------- ------
Net earnings $4,821 $3,879 $9,261 $5,393
Change in foreign currency
translation adjustment (2) (33) 75 88
------ ------ ------ ------
Total comprehensive income $4,819 $3,846 $9,336 $5,481
====== ====== ====== ======
(5) During the periods covered by this report, the Company assumed the
assets and liabilities of several companies through its acquisition activities.
The results of these companies' operations are included in the Company's
consolidated statement of earnings as of their effective dates of acquisition.
All of these acquisitions were accounted for under the purchase method. The
accompanying balance sheet as of June 30, 1998 includes estimated allocations of
the respective purchase prices which are subject to later adjustment. The
Company's consolidated results of operations on an unaudited proforma basis, as
though the businesses acquired had been acquired on the first day of the period
being reported are presented below:
Three months ended Six months ended
June 30, June 30,
(Thousands of dollars, except per share data) 1998 1997 1998 1997
- ------------------------------------------------ ------- ------- -------- --------
Pro forma revenues $79,962 $72,036 $154,540 $136,808
Pro forma net earnings 4,821 4,447 9,441 6,387
Pro forma earnings per common share:
Basic .73 .68 1.43 .98
Diluted .72 .67 1.40 .96
These proforma results are presented for information purposes only and
do not purport to show the actual results which would have occurred had the
business combinations been consummated on the first day of the period being
reported, nor should they be viewed as indicative of future results of
operations.
(6) In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP provides guidance with respect to accounting for the
various types of costs incurred for computer software developed or obtained for
the Company's use. The Company intends to adopt SOP 98-1 in the first quarter
of 1999 and believes that adoption will not have a significant effect on its
consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities". At adoption, SOP 98-5 requires the Company to write off any
unamortized start-up costs as a cumulative change in accounting principle and
expense all future start-up costs as they are incurred. The Company intends to
adopt SOP 98-5 in the first quarter of 1999 and believes that adoption will not
have a significant effect on its consolidated financial statements.
6
Management's Discussion and Analysis
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(1) Changes in Financial Condition
At June 30, 1998, the Company had working capital of $67,020,000 as compared
to $68,854,000 at December 31, 1997, a decrease of $1,834,000. Inventories
increased by approximately $9,212,000 to $39,290,000 at June 30, 1998 from
$30,078,000 at December 31, 1997. The increase in inventory levels is primarily
related to increased sales volumes. Accounts payable increased $5,415,000 to
$12,584,000 at June 30, 1998 from $7,169,000 at December 31, 1998. This
increase is due primarily to increased inventory levels.
In the first six months of 1998, the Company expended $9.9 million for
additions to Property, Plant and Equipment (P. P. & E.) for capacity expansions
and equipment replacements as compared to $7.7 million for the same period in
1997. During 1997 and 1998, the Company financed a portion of its acquisition
program through the issuance of long term notes payable as reflected in the
accompanying balance sheet at June 30, 1998. The Company believes that the
existing working capital, cash provided by operations and available borrowing
capacity will be sufficient to satisfy current requirements.
(2) Changes in Results of Operations
Net sales for the three months and the six months ended June 30, 1998
increased 24% and 15%, respectively, over the same periods ended June 30, 1997.
Sales by product group for the three months and six months ended June 30, 1998
and 1997 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 % June 30 %
------------------ Increase ----------------- Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
-------- ------- ----------- ------- ------- ----------
(In thousands) (In thousands)
Oil field pumping
units $16,488 $18,652 (12%) $36,134 $34,242 6%
Power transmission
products 18,620 17,704 5% 35,683 33,348 7%
Foundry castings 8,417 8,409 0% 17,887 16,840 6%
Trailers 36,437 23,975 52% 63,894 44,351 44%
For the second quarter and first six months of 1998, trailer sales were
up 52% and 44%, respectively, compared to the same periods in 1997. Trailer
sales volumes increased as a result of stronger trailer market demands. Oil
field pumping unit sales declined 12% in the second quarter of 1998 as compared
to the same period in 1997, as anticipated due to the lower price of oil from a
year ago. Foundry castings realized a 6% increase in sales during the six
months ended June 30, 1998 as compared to the same period in 1997.
Gross profit as a percentage of sales was 17% for the second quarter in
1998 and 18% for the same period in 1997. The decrease in gross margin for the
second quarter of 1998 reflects the mix effect of increased lower margin trailer
sales for the second quarter of 1998, partially offset by increased volumes of
higher margin power transmission products sales. For the first six months of
1998, gross profit as a percentage of sales was 18% as compared to 16% for the
same period in 1997. This increase is due primarily to increased sales volumes.
Selling, General and Administrative (S.G.& A.) expenses increased
$143,000 for the three months ended June 30, 1998 and $607,000 for the six
months ended June 30, 1998 over the same period in 1997. The increase in S.G.&
A. expenses resulted primarily from increased selling expenses associated with
the Company's efforts to expand its presence in new markets world wide.
7
Other income decreased to $329,000 from $507,000 for the second quarter
of 1998 and decreased to $818,000 from $1,091,000 for the first six months of
1998 as compared to the same periods in 1997, in part due to lower temporary
investment balances resulting from acquisition activities.
The Company recorded income tax expenses of $5,209,000 for the first six
months of 1998 compared to $2,904,000 for the same period in 1997, reflecting an
increase of one percentage point in the effective tax rate.
Net earnings for the three months and six months ended June 30, 1998 were
$4,821,000 and $9,261,000, respectively, compared to $3,879,000 and $5,393,000
for the same periods in 1997.
At June 30, 1998, the backlog was $103,519,000 compared to $130,423,000
at December 31, 1997. The backlog for trailers decreased 21% from $62,843,000
at December 31, 1997 to $49,699,000 at June 30, 1998. This decrease was a
result of record shipments of trailers in the second quarter of 1998. The
decrease in backlog for oil field products of 53% from $15,235,000 to $7,104,000
at June 30, 1998 was anticipated due to the lower price of oil from the previous
year.
Backlog by product group at June 30, 1998 and December 31, 1997 was as follows:
June 30 December 31 %
1998 1997 Change
-------- ----------- --------
(In thousands)
Oil field pumping units $ 7,104 $ 15,235 (53%)
Power transmission products 36,403 36,636 -
Foundry castings 10,313 15,709 (34%)
Trailers 49,699 62,843 (21%)
-------- -------- ----
$103,519 $ 130,423 (21%)
======== ========
The lower price of oil in the first six months of 1998 compared to the
previous year contributed to the lower backlog and a reduction in incoming
orders for oil field products. While management is concerned about the decline
in oil field products, expectations are for a solid financial performance for
the Company as a whole in 1998.
During 1997, the Company completed a comprehensive evaluation of its
information technology infrastructure for the year 2000 compliance. Following
its evaluation, the Company determined that the purchase of new information
technology systems provided the best remediation solution as well as provided
increased commercial and financial funtionality when compared to modifying its
existing mature system. Management estimates that the capitalizable cost of the
system and implementation will be approximately $9.3 million, which will be
capitalized as incurred. The Company had capitalized $4.3 million and $7.4
million relating to the project as of December 31, 1997 and June 30, 1998,
respectively. The new system implementation is scheduled for completion by
December 31, 1998 and will be amortized over a seven year estimated useful life.
The Company believes that in meeting these implementation dates the risks of the
year 2000 issue will be addressed.
8
(3) Forward-looking Statements and Assumptions
This Quarterly Report may contain or incorporate by reference certain
forward-looking statements, including by way of illustration and not of
limitation, statements relating to liquidity, revenues, expenses, margins and
contract rates and terms. The Company strongly encourages readers to note that
some or all of the assumptions, upon which such forward-looking statements are
based, are beyond the Company's ability to control or estimate precisely, and
may in some cases be subject to rapid and material changes.
PART II - OTHER INFORMATION
Item 6, Exhibits and Reports Form 8-K
(A) Exhibits
27-Financial Data Schedule
(B) Reports of Form 8-K
None
9
SIGNATURES
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 thereunto duly authorized.
LUFKIN INDUSTRIES, INC.
Date August 14, 1998 /s/ C. James Haley, Jr.
-------------------------------------
C. James Haley, Jr.
Secretary-Treasurer
(Principal financial officer
and officer authorized to
sign on behalf of the
registrant)
10