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 September 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
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 South Raguet, Lufkin, Texas 75904
- -------------------------------------------------------------------------------
(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 6,544,251 shares of Common Stock, $1.00 par value per share,
outstanding as of September 30, 1998, not including 248,130 shares classified as
Treasury Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Thousands of dollars, except share data)
ASSETS 9-30-98 12-31-97
------ -------- --------
(Unaudited)
CURRENT ASSETS:
Cash $ 961 $ 796
Temporary investments 13,303 17,521
Receivables, net 31,520 40,444
Inventories 42,365 30,078
Deferred income tax assets 1,911 1,911
-------- --------
Total current assets 90,060 90,750
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 241,548 250,727
Less - Accumulated depreciation 155,675 175,249
-------- --------
85,873 75,478
PREPAID PENSION COSTS 30,241 27,689
GOODWILL, net 5,468 8,391
OTHER ASSETS 7,039 7,444
-------- --------
$218,681 $209,752
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,252 $ 7,169
Short term notes payable 3,000 -
Current portion of long term notes payable 742 742
Accrued liabilities:
Payrolls and benefits 5,126 5,430
Accrued warranty expenses 863 1,150
Taxes payable 3,931 5,071
Commissions and other 2,603 2,334
-------- --------
Total current liabilities 24,517 21,896
-------- --------
DEFERRED INCOME TAXES 13,587 13,588
POST RETIREMENT BENEFITS 11,882 12,298
LONG TERM NOTES PAYABLE, NET OF CURRENT PORTION 6,066 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 15,242 15,381
Retained earnings 148,200 138,539
Treasury stock, 248,130 shares
and 199,399 shares, at cost (6,511) (4,244)
Cumulative translation adjustment (1,094) (1,163)
-------- --------
Total shareholders' equity 162,629 155,305
-------- --------
$218,681 $209,752
======== ========
See accompanying notes to consolidated financial statements.
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands of dollars, except share and per share data)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
---------------------- -------------------
(Unaudited) (Unaudited)
1998 1997 1998 1997
NET SALES $66,649 $78,840 $220,247 $207,621
COST OF SALES 53,496 65,080 179,845 173,665
------- ------- -------- --------
Gross profit 13,153 13,760 40,402 33,956
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,174 6,989 20,771 19,979
------- ------- -------- --------
Operating income 5,979 6,771 19,631 13,977
OTHER INCOME, NET 544 317 1,362 1,408
------- ------- -------- --------
Earnings before income taxes 6,523 7,088 20,993 15,385
PROVISION FOR INCOME TAXES 2,558 2,481 7,767 5,385
------- ------- -------- --------
Net earnings $ 3,965 $ 4,607 $ 13,226 $ 10,000
======= ======= ======== ========
EARNINGS PER SHARE
Basic $ .61 $ .70 $ 2.02 $ 1.53
======= ======= ======== ========
Diluted $ .60 $ .69 $ 1.99 $ 1.50
======= ======= ======== ========
DIVIDENDS PER SHARE $ .18 $ .17 $ .54 $ .51
======= ======= ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 6,513,643 6,557,510 6,539,394 6,549,312
========= ========= ========= =========
Diluted 6,598,930 6,668,972 6,660,565 6,650,513
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Thousands of dollars)
For the Nine Months
Ended September 30
----------------------
(Unaudited)
1998 1997
--------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 13,226 $ 10,000
Adjustments to reconcile net earnings
to net cash provided by (used in)operating
activities:
Depreciation and amortization 6,661 5,480
Pension income (2,552) (2,589)
Post retirement benefits (416) 78
(Gain)loss on sales of property,
plant and equipment (246) 156
Changes in:
Receivables 8,924 (12,014)
Inventories (12,287) (7,667)
Accounts payable 1,083 4,962
Accrued liabilities (1,462) 5,851
-------- --------
Net cash provided by operating activities 12,931 4,257
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (17,396) (15,345)
Proceeds from disposition of property,
plant and equipment 586 1,363
Acquisitions of other companies, net of cash
acquired (2,300) (3,594)
Decrease in other assets 5,628 1,591
-------- --------
Net cash used in investing
activities (13,482) (15,985)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term notes payable 5,700 175
Payment of short term notes payable (2,700) -
Payment of long term notes payable (599) -
Dividends paid (3,566) (3,339)
Proceeds from exercise of stock options 2,059 398
Purchase of treasury stock (4,465) (439)
-------- --------
Net cash used in financing activities (3,571) (3,205)
Effect of translation on cash and temporary
investments 69 184
-------- --------
Net decrease in cash and temporary investments (4,053) (14,749)
Cash and temporary investments, at
beginning of period 18,317 30,866
-------- --------
Cash and temporary investments, at
end of period $ 14,264 $ 16,117
======== ========
See accompanying notes to consolidated financial statements.
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) 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.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, which include only normal
recurring adjustments, except as discussed below, 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 nine months ended September 30,
1998, are not necessarily indicative of the results that may be expected for the
full fiscal year.
Net earnings for the three and nine months ended September 30, 1998
include non-recurring gains of approximately $1,000,000, or $0.14 per share
(diluted), related primarily to the sale of certain assets and lower than
expected costs on certain employee benefits and manufacturing items. In July,
1998, the Company began capitalizing certain maintenance and supplies inventory
to better match the estimated cost of such inventory with the related equipment
produced. Such inventory will be capitalized over the three years of its
estimated use and had the effect of increasing net earnings by $472,000, or
$0.07 per share (diluted) for the three and nine months ended September 30,
1998.
(2) Consolidated inventories consist of the following:
9-30-98 12-31-97
-------- --------
(Thousands of dollars)
Raw materials and purchased
parts $26,529 $18,575
Work in process 11,944 6,381
Finished goods 3,892 5,122
------- -------
$42,365 $30,078
======= =======
(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 month
and nine month periods ending September 30, 1998 and 1997:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
Basic EPS-weighted
average shares 6,513,643 6,557,510 6,539,394 6,549,312
Effect of dilutive securities:
employee stock options 85,287 111,462 121,171 101,201
--------- --------- --------- ---------
Diluted EPS-adjusted
weighted average shares
and assumed conversions 6,598,930 6,668,972 6,660,565 6,650,513
========= ========= ========= =========
(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.
Total comprehensive income for the three and nine months ended September 30,
1998 and 1997 is illustrated below:
Three months ended Nine months ended
September 30 September 30
(Thousands of dollars) 1998 1997 1998 1997
- --------------------- ------- ------ ------- -------
Net earnings $3,965 $4,607 $13,226 $10,000
Change in foreign currency
translation adjustment (6) 96 69 184
Total comprehensive income $3,959 $4,703 $13,295 $10,184
====== ====== ======= =======
(5) During the periods covered by this report, the Company acquired the
assets and liabilities of three companies. These acquisitions, accounted for
under the purchase method of accounting, were the result of an asset purchase in
1998 of one company for $2,300,000 cash and two separate stock purchases in 1997
for which the Company paid $3,594,000, net of cash acquired, and issued
$7,050,000 of long term debt obligations. Goodwill related to these
acquisitions, which represents the excess of the respective purchase prices over
the fair value of the net assets acquired was $5,468,000 and $8,391,000 at
September 30, 1998 and December 31, 1997, respectively, and is being amortized
over forty years. The results of these companies' operations are included in
the Company's consolidated statements of earnings since their effective dates of
acquisition. The accompanying balance sheets as of September 30, 1998 and
December 31, 1997 include 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 Nine months ended
September 30 September 30
(Thousands of dollars, except per share data) 1998 1997 1998 1997
- -------------------------------------------- ---------------- -------------------
Pro forma revenues $66,649 $79,615 $221,189 $211,088
Pro forma net earnings 3,965 4,767 13,406 10,713
Pro forma earnings per common share:
Basic .61 .73 2.05 1.64
Diluted .60 .71 2.01 1.61
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.
In addition to the acquisitions discussed above and subsequent to
September 30, 1998, the Company acquired an industrial gear manufacturing
company located in France for $7,500,000 in cash and stock. This acquisition
will be accounted for under the purchase method of accounting.
(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.
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 September 30, 1998, the Company had net working capital of $65,543,000 as
compared to $68,854,000 at December 31, 1997, a decrease of $3,311,000.
Inventories increased by approximately $12,287,000 to $42,365,000 at September
30, 1998 from $30,078,000 at December 31, 1997. The increase in inventory
levels is primarily related to the capitalization of certain maintenance and
supply items. Accounts payable increased $1,083,000 to $8,252,000 at September
30, 1998 from $7,169,000 at December 31, 1997 and can be attributed to increased
inventory levels above the increase due to capitalized maintenance and supply
items discussed above.
In the first nine months of 1998, the Company expended $17,396,000 for
additions to Property, Plant and Equipment (P. P. & E.) for capacity expansions
and equipment replacements as compared to $15,345,000 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 sheets at September 30, 1998 and December 31, 1997. The
Company believes that its existing net working capital, cash provided by
operations and available borrowing capacity will be sufficient to satisfy
current requirements for the next twelve months.
(2) Changes in Results of Operations
Net sales for the three months and the nine months ended September 30, 1998
decreased 15% and increased 6%, respectively, over the same periods ended
September 30, 1997. Sales by product group for the three months and nine months
ended September 30, 1998 and 1997 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 % September 30 %
---------------- Increase ---------------- Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
------- ------- -------- ------- ------ --------
(In thousands) (In thousands)
Oil field pumping
units $11,644 $23,624 (51%) $ 47,778 $ 57,866 (17%)
Power transmission
products 18,068 18,593 (3%) 53,750 51,941 3%
Foundry castings 6,523 9,098 (28%) 24,410 25,938 (6%)
Trailers 30,414 27,525 10% 94,309 71,876 31%
------ ------ ---- ------- ------- ----
$66,649 $78,840 (15%) $220,247 $207,621 6%
======= ======= ======== ========
For the third quarter and first nine months of 1998, trailer sales were
up 10% and 31%, 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 51% in the third quarter of 1998 and 17% in
the nine months ended September 30, 1998 as compared to the same periods in
1997, as anticipated due to the lower price of oil from a year ago. Foundry
castings realized a 6% decrease in sales during the nine months ended September
30, 1998 as compared to the same period in 1997.
Gross profit as a percentage of sales increased 3% from 17% to 20% for
the third quarter of 1998 as compared to the same period in 1997, while showing
a 2% increase to 18% from 16% for the nine months ended September 30, 1998 and
1997, respectively. This increase is due primarily to an increased volume of
higher margin power transmission product sales offset by higher sales volumes of
lower margin products in the trailer division.
Selling, General and Administrative (S.G.& A.) expenses increased
$185,000 for the three months ended September 30, 1998 and $792,000 for the nine
months ended September 30, 1998 over the same periods 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.
Other income increased to $544,000 from $317,000 for the third quarter of
1998 and decreased to $1,362,000 from $1,408,000 for the first nine months of
1998 as compared to the same periods in 1997, in part due to increased temporary
investment balances during the quarter but lower temporary investment balances
year to date resulting from cash used for acquisition activities.
The Company recorded income tax expenses of $7,767,000 for the first nine
months of 1998 compared to $5,385,000 for the same period in 1997, reflecting an
increase of two percentage points in the effective tax rate.
Net earnings for the three months and nine months ended September 30,
1998 were $3,965,000 and $13,226,000, respectively, compared to $4,607,000 and
$10,000,000, respectively, for the same periods in 1997. The decrease in the
third quarter of 1998 is primarily due to lower demands for oil field and
foundry products.
Net earnings for the three and nine months ended September 30, 1998
include non-recurring gains of approximately $1,000,000, or $0.14 per share
(diluted), related primarily to the sale of certain assets and lower than
expected costs on certain employee benefits and manufacturing items. In July,
1998, the Company began capitalizing certain maintenance and supplies inventory
to better match the estimated cost of such inventory with the related equipment
produced. Such inventory will be capitalized over the three years of its
estimated use and had the effect of increasing net earnings by $472,000, or
$0.07 per share (diluted) for the three and nine months ended September 30,
1998.
Backlog by product group at September 30, 1998 and December 31, 1997 was as
follows:
September 30 December 31 %
1998 1997 Change
---------- ---------- --------
(In thousands)
Oil field pumping units $ 2,314 $ 15,235 (85%)
Power transmission products 33,246 36,636 (9%)
Foundry castings 10,373 15,709 (34%)
Trailers 29,784 62,843 (53%)
-------- -------- --
$ 75,717 $130,423 (42%)
======== ========
The total backlog decreased $54,706,000 to $75,717,000 at September 30,
1998 from $130,423,000 at December 31, 1997. The 85% decrease to $2,314,000 at
September 30, 1998 from $15,235,000 at December 31, 1997 for oil field products
was anticipated due to the lower price of oil in the first nine months of 1998
as compared to the previous year which resulted in a reduction in incoming
orders. The Company intends to continue to aggressively manage the cost side of
the business, as the uncertainty surrounding the world oil markets and
industrial sectors causes the outlook for the upcoming fourth quarter to be less
than anticipated earlier.
The backlog for foundry castings has declined $5,336,000 to $10,373,000
at September 30, 1998 from $15,709,000 at December 31, 1997. The decline in
incoming orders is primarily due to increased pricing pressure from the Far East
markets. The depressed Asian economies coupled with unfavorable changes in the
monetary exchange rates contributed to this decline. The captive market for
foundry castings declined due to the uncertainties surrounding the world oil
markets. Also declining due to the general softening of the Asian markets were
backlogs for power transmission products, which experienced a slight decline of
9% to $33,246,000 at September 30, 1998 from $36,636,000 at December 31, 1997.
The backlog for trailers decreased 53%, $33,059,000, to $29,784,000 at September
30, 1998 from $62,843,000, at December 31, 1997. This decrease was due to
recent record shipments of highway trailer products.
During 1997, the Company completed a comprehensive evaluation of its
information technology infrastructure for the Y2K (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 functionality 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. The Company had capitalized $8.8 million and $4.3 million relating to
the project as of September 30, 1998 and December 31, 1997, 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 has developed a comprehensive Y2K compliance program which
encompasses a wide area of related issues. This program will examine not only
internal issues such as machinery and equipment, but when completed, should
provide reasonable assurance that normal operations will not be adversely
affected by Y2K issues from external parties. This plan includes the areas of
transportation, banking, power supply, communications, suppliers and customers.
This program is scheduled for completion by June 30, 1999. Estimates of the
cost of this program have not been finalized, but are not expected to have a
material adverse effect on net earnings. The Company believes that in meeting
these implementation dates the risks of the Year 2000 issue will be addressed.
(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
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 November 12, 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)