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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 June 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 6,504,854 shares of Common Stock, $1.00 par value per share,
outstanding as of August 7, 2002, not including 387,527 shares classified as
Treasury Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
June 30, December 31,
2002 2001
-------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,109 $ 18,087
Invested funds 5,863 5,863
Receivables, net 38,118 35,956
Income taxes receivable 671 673
Inventories 35,771 34,824
Deferred income tax assets 2,249 2,179
Other current assets 1,218 811
-------------- ---------------
Total current assets 100,999 98,393
-------------- ---------------
Property, plant and equipment, at cost 254,758 250,924
Less accumulated depreciation 174,718 169,628
-------------- ---------------
80,040 81,296
-------------- ---------------
Prepaid pension costs 51,937 49,437
Goodwill, net 10,219 10,045
Other assets, net 6,737 6,898
-------------- ---------------
Total assets $ 249,932 $ 246,069
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ - $ -
Current portion of long-term notes payable 5,968 6,598
Accounts payable 11,147 10,680
Accrued payroll and benefits 5,918 6,636
Accrued warranty expenses 2,626 2,275
Taxes payable 4,353 4,487
Accrued commissions and other 6,034 6,373
-------------- ---------------
Total current liabilities 36,046 37,049
-------------- ---------------
Deferred income tax liabilities 26,908 26,658
Postretirement benefits liability 11,024 11,024
Long-term notes payable, net of current portion 250 339
Shareholders' equity:
Common stock, $1.00 par value per share;
60,000,000 shares authorized;
6,892,381 shares issued 6,892 6,892
Capital in excess of par 18,443 18,200
Retained earnings 160,304 158,973
Treasury stock, 387,527 and 502,348
shares, respectively, at cost (7,996) (10,350)
Accumulated other comprehensive income:
Cumulative translation adjustment (1,939) (2,716)
-------------- ---------------
Total shareholders' equity 175,704 170,999
-------------- ---------------
Total liabilities and shareholders' equity $ 249,932 $ 246,069
============== ===============
See accompanying notes to consolidated financial 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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales $ 60,910 $ 73,185 $ 111,917 $ 136,644
Cost of sales 46,845 54,910 89,648 103,643
-------- --------- --------- ---------
Gross profit 14,065 18,275 22,269 33,001
Selling, general and administrative
expenses 8,519 9,238 16,479 18,280
--------- --------- --------- ---------
Operating income 5,546 9,037 5,790 14,721
Other income (expense) 181 (227) 248 (974)
--------- --------- --------- ---------
Earnings before income tax provision 5,727 8,810 6,038 13,747
Income tax provision 2,262 3,480 2,385 5,361
---------- --------- --------- ---------
Net earnings 3,465 5,330 3,653 8,386
Change in foreign currency translation
adjustment 858 114 777 (309)
--------- --------- --------- ---------
Total comprehensive income $ 4,323 $ 5,444 $ 4,430 $ 8,077
========= ========= ========= =========
Earnings per share:
Basic $ 0.53 $ 0.85 $ 0.56 $ 1.35
========= ========= ========= =========
Diluted $ 0.52 $ 0.83 $ 0.55 $ 1.32
========= ========= ========= =========
Dividends per basic share $ 0.18 $ 0.18 $ 0.36 $ 0.36
========= ========= ========= =========
Weighted average number of shares outstanding:
Basic 6,510,292 6,248,121 6,508,629 6,231,076
Diluted 6,677,601 6,431,741 6,661,341 6,356,893
See accompanying notes to consolidated financial statements.
2
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Six Months Ended June 30,
----------------------------------------
2002 2001
------------ -------------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 3,653 $ 8,386
Adjustments to reconcile net earnings
to cash provided by operating activities:
Depreciation and amortization 5,632 5,673
Pension income (2,500) (2,500)
Postretirement benefits - -
(Gain) loss on disposition of
property, plant and equipment (27) 633
Changes in:
Trade receivables (1,702) (1,656)
Income taxes receivable 3 1,239
Inventories (587) (6,359)
Other current assets (399) (743)
Accounts payable 41 (212)
Accrued liabilities (638) 5,142
------------ -------------
Net cash provided by operating activities 3,476 9,603
------------ -------------
Cash flows from investing activities:
Additions to property, plant and equipment (3,748) (3,693)
Proceeds from disposition of
property, plant and equipment 59 90
Decrease in other assets 105 108
------------ -------------
Net cash used in investing activities (3,584) (3,495)
------------ -------------
Cash flows from financing activities:
Net payments of short-term debt - (3,110)
Payments on long-term debt (873) (856)
Dividends paid (2,322) (2,198)
Proceeds from exercise of stock options 2,196 621
------------ -------------
Net cash used in financing activities (999) (5,543)
------------ -------------
Effect of translation on cash and
cash equivalents 129 (71)
------------ -------------
Net increase (decrease) in cash and
cash equivalents (978) 494
Cash and cash equivalents at beginning
of period 18,087 2,003
------------ -------------
Cash and cash equivalents at end
of period $ 17,109 $ 2,497
============ =============
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 six months ended June 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:
June 30, December 31,
2002 2001
-------- ------------
(In thousands of dollars)
Finished goods $ 3,193 $ 2,485
Work in process 4,492 4,036
Raw materials 28,086 28,303
-------- --------
Total $ 35,771 $ 34,824
======== ========
3. Earnings Per Share
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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net earnings $ 3,465 $ 5,330 $ 3,653 $ 8,386
Denominator:
Weighted average shares (Basic) 6,510,292 6,248,121 6,508,629 6,231,076
Effect of outstanding options 167,309 183,620 152,712 125,817
----------- ----------- ----------- -----------
Weighted average shares including
assumed conversions (Diluted) 6,677,601 6,431,741 6,661,341 6,356,893
=========== =========== =========== ===========
Basic earnings per share $ 0.53 $ 0.85 $ 0.56 $ 1.35
=========== =========== =========== ===========
Diluted earnings per share $ 0.52 $ 0.83 $ 0.55 $ 1.32
=========== =========== =========== ===========
4
3. Earnings Per Share (continued)
Options to purchase a total of 128,886 and 129,036 shares of the Company's
common stock at June 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 antidilutive.
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 Courts 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 June 30, 2002
------------------------------------------------------------------------
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- --------- -----
Gross sales $32,482 $18,669 $ 10,404 $ - $61,555
Inter-segment sales (319) (316) (10) - (645)
------- ------- -------- -------- -------
Net sales $32,163 $18,353 $ 10,394 $ - $60,910
======= ======= ======== ======== =======
Operating income (loss) $ 4,399 $ 1,958 $ (811) $ - $ 5,546
Other income (expense) (44) 87 8 130 181
------- ------- -------- -------- -------
Earnings (loss) before
income tax provision $ 4,355 $ 2,045 $ (803) $ 130 $ 5,727
======= ======= ======== ======== =======
5
5. Segment Data (continued)
Three Months Ended June 30, 2001
--------------------------------------------------------------------------
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- --------- --------
Gross sales $50,374 $17,915 $10,005 $ - $ 78,294
Inter-segment sales (1,345) (3,426) (338) - (5,109)
------- ------- ------- ------- --------
Net sales $49,029 $14,489 $ 9,667 $ - $ 73,185
======= ======= ======= ======= ========
Operating income (loss) $ 9,220 $ 1,285 $(1,468) $ - $ 9,037
Other income (expense) (83) (62) 11 (93) (227)
------- ------- ------- ------- --------
Earnings (loss) before
income tax provision $ 9,137 $ 1,223 $(1,457) $ (93) $ 8,810
======= ======= ======= ======= ========
Six Months Ended June 30, 2002
--------------------------------------------------------------------------
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- --------- --------
Gross sales $60,851 $33,039 $ 19,668 $ - $113,558
Inter-segment sales (555) (1,076) (10) - (1,641)
------- ------ -------- ------- --------
Net sales $60,296 $31,963 $ 19,658 $ - $111,917
======= ======= ======== ======= ========
Operating income (loss) $ 6,252 $ 1,319 $ (1,781) $ - $ 5,790
Other income (expense) (98) 39 11 296 248
------- ------- -------- ------- --------
Earnings (loss) before
income tax provision $ 6,154 $ 1,358 $ (1,770) $ 296 $ 6,038
======= ======= ======== ======= ========
Six Months Ended June 30, 2001
--------------------------------------------------------------------------
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- --------- --------
Gross sales $94,278 $36,033 $17,012 $ - $147,323
Inter-segment sales (2,927) (7,319) (433) - (10,679)
------- ------- ------- ------- --------
Net sales $91,351 $28,714 $16,579 $ - $136,644
======= ======= ======= ======= ========
Operating income (loss) $16,254 $ 1,815 $(3,348) $ - $ 14,721
Other income (expense) (454) (129) (289) (102) (974)
------- ------- ------- ------- --------
Earnings (loss) before
income tax provision $15,800 $ 1,686 $(3,637) $ (102) $ 13,747
======= ======= ======= ======= ========
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 test 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. At this time, the Company does not
believe the adoption of Statement No. 143 will have a significant impact on the
Company's consolidated financial position or results of operations.
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 units as well as related automation equipment. 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.
Results of Operations
Three Months Ended June 30, 2002, Compared to Three Months Ended June 30, 2001:
Net sales for the three months ended June 30, 2002, decreased to $60,910,000
from $73,185,000 for the three months ended June 30, 2001, as Oil Field revenues
decreased due to lower drilling and production activity from lower energy
prices.
7
The Company reported net earnings of $3,465,000 or $0.52 per share (diluted) for
the three months ended June 30, 2002, compared to net earnings of $5,330,000 or
$0.83 per share (diluted) for the three months ended June 30, 2001.
The following table summarizes the Company's net sales and gross profit by
operating segment (in thousands of dollars):
Three Months Ended
June 30, %
----------------------- Increase Increase
2002 2001 (Decrease) (Decrease)
--------- ---------- ---------- ----------
Net Sales
Oil Field $ 32,163 $ 49,029 $(16,866) (34.4)
Power Transmission 18,353 14,489 3,864 26.7
Trailer 10,394 9,667 727 7.5
-------- -------- --------
Total $ 60,910 $ 73,185 $(12,275) (16.8)
======== ======== ========
Three Months Ended
June 30, %
----------------------- Increase Increase
2002 2001 (Decrease) (Decrease)
--------- ---------- ---------- ----------
Gross Profit
Oil Field $ 7,808 $ 13,300 $ (5,492) (41.3)
Power Transmission 5,697 4,988 709 14.2
Trailer 560 (13) 573 4,407.7
-------- -------- --------
Total $ 14,065 $ 18,275 $ (4,210) (23.0)
======== ======== ========
Oil Field sales decreased 34.4% to $32,163,000 in the second quarter of 2002
from $49,029,000 in the second 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 second quarter of this year. While the
Company's Oil Field backlog slightly decreased to $21,900,000 as of June 30,
2002, from $22,000,000 at March 31, 2002, backlog was down from $33,500,000 for
the same period last year.
Gross profit for the Oil Field segment decreased to $7,808,000 for the three
months ended June 30, 2002, or 41.3%, compared to $13,300,000 for the prior year
quarter. Gross margin for the comparable periods declined to 24.3% in 2002
compared to 27.1% 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
$1,861,000, or 32.6%, for the quarter ended June 30, 2002, from $2,762,000 for
the quarter ended June 30, 2001. This decrease was due primarily to lower
commission expenses to third-party agents and reduced legal expenses associated
with ongoing and routine litigation.
Sales for the Company's Power Transmission segment increased to $18,353,000 for
the second quarter of 2002 compared to $14,489,000 for the second quarter of
2001 due to increased volume of new gearboxes manufactured for the offshore oil
and gas equipment, refinery, sugar and marine markets. The Company's Power
Transmission backlog at June 30, 2002, decreased slightly to $33,100,000 from
$33,900,000 at March 31, 2002. However, backlog increased from $28,900,000 at
June 30, 2001, due to the activity of the markets mentioned above.
Gross profit for the Power Transmission segment increased to $5,697,000 for the
three months ended June 30, 2002, or 14.2%, compared to $4,988,000 for the prior
year quarter. However, gross margin for the comparable periods declined to 31.0%
in 2002 compared to 34.4% 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 90.9% for this period, from $3,426,000 in the second quarter of 2001 to
$316,000 in the second quarter of 2002.
8
Direct selling, general and administrative expenses for Power Transmission
decreased to $2,530,000, or 5.3%, for the quarter ended June 30, 2002, from
$2,672,000 for the quarter ended June 30, 2001, due to reduced bad debt expense.
Trailer sales for the second quarter of 2002 increased to $10,394,000, or 7.5%,
from $9,667,000 for the second 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 are focusing capital
spending on new tractor purchases before new federal regulations requiring
cleaner but less efficient engines goes into effect later in 2002. Backlog for
the Trailer segment totaled $13,600,000 at June 30, 2002, compared to
$11,400,000 at March 31, 2002, and $6,900,000 at June 30, 2001. This backlog
increase is due to the freight haulers' improving financial condition and their
starting to replace dry freight vans after postponing replacement purchases for
nearly two years.
Trailer gross profit improved to $560,000 for the three months ended June 30,
2002, from a loss of $13,000 for the comparable prior year quarter. Gross margin
for the second quarter of 2002 increased to 5.4% from a negative 0.1% for the
second quarter of 2001. This improvement was due to higher manufacturing volumes
absorbing more fixed overhead costs and lower warranty expenses.
Direct selling, general and administrative expenses for Trailer decreased to
$402,000, or 36.2%, for the quarter ended June 30, 2002, from $630,000 for the
quarter ended June 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 $3,727,000, or 17.4%, for the
quarter ended June 30, 2002, from $3,174,000 for the quarter ended June 30,
2001, due to increased legal costs associated with ongoing and routine
litigation.
Other income and expense for the three months ended June 30, 2002, totaled
$181,000 of income compared to an expense of $227,000 for the prior year quarter
due primarily to the elimination of short-term debt early in the third quarter
of 2001, increased income from invested cash in the second quarter of 2002, a
favorable currency exchange impact from the stronger euro and the non-recurrence
of a loss on an asset disposal in Corporate in the second quarter of 2001.
Pension income, which is reported as a reduction of cost of sales, increased to
$1,250,000, or 11.1%, for the quarter ended June 30, 2002, from $1,125,000 for
the quarter ended June 30, 2001. However, when compared to one quarter of the
total 2001 pension income, or $1,486,000, pension income decreased 15.9% during
the second quarter of 2002.
Six Months Ended June 30, 2002, Compared to Six Months Ended June 30, 2001:
Net sales for the six months ended June 30, 2002, decreased to $111,917,000 from
$136,644,000 for the six months ended June 30, 2001, as Oil Field revenues
decreased due to lower drilling and production activity from lower energy
prices.
The Company reported net earnings of $3,653,000 or $0.55 per share (diluted) for
the six months ended June 30, 2002, compared to net earnings of $8,386,000 or
$1.32 per share (diluted) for the six months ended June 30, 2001.
9
The following table summarizes the Company's net sales and gross profit by
operating segment (in thousands of dollars):
Six Months Ended
June 30, %
----------------------- Increase Increase
2002 2001 (Decrease) (Decrease)
--------- ---------- ---------- ----------
Net Sales
Oil Field $ 60,296 $ 91,351 $(31,055) (34.0)
Power Transmission 31,963 28,714 3,249 11.3
Trailer 19,658 16,579 3,079 18.6
--------- --------- ---------
Total $ 111,917 $ 136,644 $ (24,727) (18.1)
========= ========= =========
Six Months Ended
June 30, %
----------------------- Increase Increase
2002 2001 (Decrease) (Decrease)
--------- ---------- ---------- ----------
Gross Profit
Oil Field $ 12,872 $ 24,392 $ (11,520) (47.2)
Power Transmission 8,521 9,168 (647) (7.1)
Trailer 876 (559) 1,435 256.7
--------- --------- ---------
Total $ 22,269 $ 33,001 $ (10,732) (32.5)
========= ========= =========
Oil Field sales decreased 34.0% to $60,296,000 in the first six months of 2002
from $91,351,000 in the first six 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. Oil Field's backlog declined to
$21,900,000 as of June 30, 2002, compared to $33,500,000 at June 30, 2001.
However, backlog has increased from $19,400,000 at December 31, 2001, reflecting
increased oil and gas drilling and production activity compared to the latter
part of 2001.
Gross profit for the Oil Field Division decreased to $12,872,000 for the six
months ended June 30, 2002, or 47.2%, compared to $24,392,000 for the comparable
2001 period. Gross margin for the comparable periods declined to 21.3% 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
$3,665,000, or 32.7%, for the six months ended June 30, 2002, from $5,449,000
for the six months ended June 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 $31,963,000 for
the first half of 2002 compared to $28,714,000 for the first half of 2001 due to
increased volume of new gearboxes to the offshore oil and gas equipment,
refinery, sugar and marine markets. The Company's Power Transmission backlog at
June 30, 2002, increased to $33,100,000 from $28,900,000 at June 30, 2001, and
$31,500,000 at December 31, 2001, due to the activity of the markets mentioned
above.
Gross profit for the Power Transmission Division decreased to $8,521,000 for the
six months ended June 30, 2002, or 7.1%, compared to $9,168,000 for the six
months ended June 301, 2001, and gross margin for the comparable periods
declined to 26.7% in 2002 compared to 31.9% 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 85.3% for this period, from $7,319,000 in the
first half of 2001 to $1,076,000 in the first half of 2002.
Direct selling, general and administrative expenses for Power Transmission
decreased to $4,878,000, or 7.1%, for the six months ended June 30, 2002, from
$5,251,000 for the six months ended June 30, 2001, due to reduced bad debt
expense.
10
Trailer sales for the six months ended June 30, 2002, increased to $19,658,000,
or 18.6%, from $16,579,000 for the six months ended June 30, 2001, due to some
improvement in the freight hauling market. However, the market remained
depressed due the reasons already noted in the previous section. Backlog for the
Trailer segment totaled $13,600,000 at June 30, 2002, compared to $6,900,000 at
June 30, 2001, and $13,500,000 at December 31, 2001. This backlog increase is
due to the reasons already noted in the previous section.
Trailer gross profit improved to $876,000 for the six months ended June 30,
2002, from a loss of $559,000 for the six months ended June 30, 2001. Gross
margin for the first half of 2002 increased to 4.5% from a negative 3.4% for the
first half of 2001. This improvement was primarily due to higher manufacturing
volumes absorbing more fixed overhead costs, 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
$809,000, or 26.8%, for the six months ended June 30, 2002, from $1,105,000 for
the six months ended June 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 $7,112,000, or 9.8%, for the six
months ended June 30, 2002, from $6,475,000 for the six months ended June 30,
2001, due to increased legal costs associated with ongoing and routine
litigation.
Other income and expense for the six months ended June 30, 2002, totaled
$248,000 of income compared to an expense of $974,000 for six months ended June
30, 2001, due primarily to the elimination of short-term debt early in the third
quarter of 2001, increased income from invested cash in the first half of 2002,
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.
Pension income, which is reported as a reduction of cost of sales, of $2,500,000
in the first half of 2002 did not change from the $2,500,000 of pension income
reported in the first half of 2001. However, when compared to one half of the
actual 2001 pension income, or $2,972,000, pension income decreased 15.9% during
the first half of 2002.
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 $17.1 million at June 30, 2002, compared to
$18.1 million at December 31, 2001. For the six months ended June 30, 2002, net
cash provided by operating activities was $3.5 million, cash used in investing
activities totaled $3.6 million, cash used in financing activities amounted to
$1.0 million and the favorable effect of foreign currency translation was $0.1
million. Significant components of cash used by operating activities include net
earnings adjusted for non-cash expenses of $6.8 million and a net increase in
working capital of $3.3 million. Cash used in investing activities included
capital expenditures totaling $3.8 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 at or somewhat above the 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 US market and high-speed testing equipment in
Power Transmission's France facility to expand its product offerings.
Significant components of cash used in financing activities included payments on
long-term debt of $0.9 million, proceeds from stock option exercises of $2.2
million and dividend payments of $2.3 million or $0.36 per share.
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Total debt balances at June 30, 2002, including current maturities of long-term
debt, consisted of $6.2 million of notes payable to various banks and
individuals. As of June 30, 2002, the Company had no outstanding debt associated
with its discretionary short-term demand facilities or with the Bank Facility
discussed below. Total debt decreased by $0.7 million during the first half of
2002 compared to $6.9 million at December 31, 2001, due to principal payments on
long-term notes payable totaling $0.7 million. Approximately 81% of the
outstanding debt at June 30, 2002, will be repaid in July 2002.
The Company has an agreement with a domestic bank (the "Bank Facility") for an
unsecured revolving line of credit that provides for up to $20.0 million of
borrowings outstanding at any one time expiring September 1, 2002, along with an
additional $5.0 million demand facility. Borrowings under the Bank Facility bear
interest, at the Company's option, at either (i) the prime rate or (ii) the
London Interbank Offered Rate ("LIBOR") plus an applicable margin, depending on
certain ratios as defined in the agreement. As of June 30, 2002, no amounts were
outstanding of the $25.0 million of the revolving line of credit under the terms
of the Bank Facility.
The Company has two additional short-term demand lines. One demand line (the
"LIBOR Demand Line") is an unsecured revolving line of credit with a domestic
bank that provides up to $5.0 million of borrowings at any one time and expires
on September 22, 2002. Borrowings under the LIBOR Demand Line bear interest at
LIBOR plus 1%. The second demand line (the "Floating Demand Line") is an
unsecured revolving line of credit with a domestic bank that provides up to $5.0
million of borrowings at any one time. The Floating Demand Line expires on
December 30, 2002, and is renewable annually. Borrowings under the Floating
Demand Line bear interest at a floating rate agreed to by the Company and the
bank. As of June 30, 2002, no amounts were outstanding of the revolving line of
credit under the terms of the LIBOR Demand Line or the Floating Demand Line.
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 six months ended June 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 June 30, 2002, the Company
held 387,527 shares of treasury stock at an aggregate cost of approximately $8.0
million. Authorizations of approximately $0.2 million remained at June 30, 2002.
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, 2002. The Company is currently in the process
of renewing its credit facilities and believes it will successfully complete the
process before the current agreements expire.
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. At this time, the Company does not
believe the adoption of Statement No. 143 will have a significant impact on the
Company's consolidated financial position or results of operations.
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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 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.
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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
Courts 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
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
(b) Reports on Form 8-K
On May 10, 2002, Lufkin Industries, Inc. filed a report on Form 8-K
reporting the dismissal of Arthur Andersen LLP as its certifying
accountant and the engagement of Deloitte & Touche LLP as its
certifying accountant for the fiscal year ending December 31, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Date: August 9, 2002
LUFKIN INDUSTRIES, INC.
By /s/ R. D. Leslie
------------------------
R. D. Leslie
Vice President/Treasurer/Chief Financial Officer
Principal Financial and Accounting Officer
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