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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission file number 0-2612
LUFKIN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-0404410
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
601 South Raguet, Lufkin, Texas 75904
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 936/634-2211
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1 Per Share
(Title of Class)
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 __
Indicate by "X" if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No __
The aggregate market value of the Company's voting stock held by non-affiliates
as of the last day of the second fiscal quarter, June 30, 2002, was
$187,795,135.
6,527,919 shares of the Company's Common Stock were outstanding on March 17,
2003.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Items 10,11,12 and 13 of Part III will be included
in an amendment to Form 10-K or incorporated by reference from the registrant's
definitive proxy statement to be filed pursuant to Regulation 14A.
PART I
ITEM 1. BUSINESS
Lufkin Industries, Inc. (the "Company") was incorporated under the laws
of the State of Texas on March 4, 1902, and since that date has maintained its
principal office and manufacturing facilities in Lufkin, Texas. The Company
employed approximately 1,800 people at December 31, 2002, including
approximately 1,200 that were paid on an hourly basis. The Company is divided
into three operating segments: Oil Field, Power Transmission and Trailer.
OIL FIELD
Products:
The Oil Field segment manufactures and services artificial reciprocating
rod lift equipment, commonly referred to as pumping units, and related
products.
Pumping Units- Four basic types of pumping units are
manufactured: an air-balanced unit; a beam-balanced unit; a
crank-balanced unit; and a Mark II Unitorque unit. The basic
differences between the four types relate to the
counterbalancing system. The depth of a well and the desired
fluid production determine the type of counterbalancing
configuration that is required. There are numerous sizes and
combinations of Lufkin oil field pumping units within the four
basic types.
Service- Through a network of service centers, the Company
transports and repairs pumping units. The service centers also
refurbish used pumping units.
Automation- The Company designs, manufactures, installs and
services computer control equipment and analytical services for
pumping units that lower production costs and optimize well
efficiency.
Foundry Castings- As part of the Company's vertical integration
strategy, the Oil Field segment operates an iron foundry to
produce castings for new pumping units. In order to maximize
utilization of this facility, castings for third parties are
also produced.
Markets:
Demand for pumping unit equipment primarily depends on the level of
onshore oil well drilling activity as well as the depth and fluid
conditions of that drilling. Drilling activity is driven by the
available cash flow of our customers as well as their long-term
perceptions of the level and stability of the price of oil. Also, the
availability of used pumping unit equipment impacts the North American
market.
Competition:
The primary global competition for new pumping units and automation
equipment is Weatherford. Used pumping units are also an important
factor in the North American market, as customers will generally attempt
to satisfy requirements through used equipment before purchasing new
equipment. While the Company believes that it is one of the larger
manufacturers of sucker rod pumping units in the world, manufacturers of
other types of units (submersibles and hydraulics) have a significant
share of the total artificial lift market. While Weatherford is the
Company's single largest competitor in the service market, small
independent operators provide significant competitive pressures.
Because of the competitive nature of the business and the relative age
of many of the product designs, price, delivery time, product quality
and customer service are important factors in winning orders. To this
end, the Company maintains strategic levels of inventories in order to
ensure delivery times and invests in new capital equipment to maintain
quality and price levels.
POWER TRANSMISSION
Products:
The Power Transmission segment designs, manufactures and services speed
increasing and reducing gearboxes for industrial applications. Speed
increasers convert lower speed and higher torque input to higher speed
and lower torque output while speed reducers convert higher speed and
lower torque input to lower speed and higher torque output. The Company
produces numerous sizes and designs of gearboxes depending on the end
use. While there are standard designs, the majority of gearboxes are
customized for each application.
High-Speed Gearboxes- Gearboxes where rotations per minute (RPM)
exceed 4,000 and range up to 60,000. These gearboxes require
extremely high precision manufacturing and testing due to the
stresses on the gearing. The ratio of increasers to reducers is
fairly even. These gearboxes more typically service the energy
related markets of petrochemicals, refineries, offshore drilling
and transmission of oil and gas.
Low-Speed Gearboxes- Gearboxes where RPM are below 4,000. The
majority of low-speed gearboxes are reducers. While still
requiring close tolerances, these gearboxes do not require the
same precision of manufacturing and testing. These gearboxes
more typically service commodity-related industries like rubber,
sugar, paper, steel, plastics, mining and cement as well as
marine propulsion.
Parts- The Company manufactures capital spares for customers in
conjunction with the production of new gearboxes as well as
producing parts for after-market service.
Repair & Service- The Company provides on and off-site repair
and service for not only its own products but also those
manufactured by other companies. Repair work is performed in
dedicated facilities due to the high turn-around times required.
2
Markets:
As noted above, Power Transmission services many diverse markets, each
of which has its own unique set of drivers. Favorable conditions for one
market may be unfavorable for another market. Generally, if general
global industrial capacity utilizations are not high, then spending on
new equipment lags. Also impacting demand are government regulations
involving safety and environmental issues that can require capital
spending.
Competition:
Despite the highly technical nature of this product, there are many
competitors. While several North American competitors recently exited
the market, many European companies remain in the market. They include
Maag, Flender Graffenstaden, BHS, Renk, Allen Gear and Horsburgh &
Scott. While price is an important factor, proven designs and
workmanship are critical factors. Due to this, the Company outsources
very little of the design and manufacturing processes.
TRAILER
Products:
The Trailer segment manufactures and services various highway trailers
for the freight-hauling market.
Vans- General-purpose dry-freight vans. These are the highest
production trailer in the segment.
Floats- Flat-bed style trailers used in hauling heavier loads
that do not require protection from outdoor elements.
Dumps- Trailers designed to haul bulk materials like gravel or
sand.
Service- Through a network of company-owned branches, both
trailers produced by the Company and by others are repaired and
serviced.
Markets:
The Company primarily sells its products in the United States to small
and medium size fleet freight-hauling companies. Demand in this market
is driven by the available cash flow or financing capabilities of the
industry, age of the trailer fleets, changes in government regulations,
availability of quality used trailers and the medium-term outlook for
freight volumes. The profitability of the freight-hauling market is
driven by freight volumes, fuel prices, wage levels and insurance costs.
In the last several years, the freight-hauling market has been severely
depressed due to low freight volumes and higher operating costs. This
has caused many freight companies to go out of business, which have lead
to the bankruptcy of several trailer manufacturers.
Competition:
The new trailer market is highly competitive with relatively low
barriers to entry. The majority of the cost of a new trailer comes from
purchased materials of aluminum, steel, tires, axles and wood flooring.
Since there is minimal product differentiation in this market, price is
the key driver. The companies with the highest market share are Great
Dane and Wabash, along with several other large manufacturers like
Utility, Fontaine and Hyundai. The Company does not have a significant
market share in the new trailer market.
ITEM 2. PROPERTIES
The Company's major manufacturing facilities are located in and near
Lufkin, Texas are owned in fee and include approximately 150 acres, a foundry,
machine shop, structural shops, assembly shops and warehouses. The Company also
has a plant in Nisku, Canada that produces structural parts for pumping units.
These parts are then assembled with parts shipped from Lufkin and are delivered
to the Company's Canadian customers. The Company also has a plant in
Fougerolles, France that manufactures, assembles and sells industrial gears and
power transmission products throughout Europe.
ITEM 3. 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 which alleged race discrimination in employment. Certification hearings
were conducted in Beaumont, Texas in February of 1998 and in Lufkin, Texas in
August of 1998. The District Court in April of 1999 issued a decision that
certified a class for this case, which includes all persons of a certain
minority employed by the Company from March 6, 1994, to the present. The Company
appealed this class certification decision by the District Court to the 5th
Circuit United States Court of Appeals in New Orleans, Louisiana. This appeal
was denied on June 23, 1999. The Company is defending this action vigorously.
Furthermore, the Company believes that the facts and the law in this action
support its position and is confident that it will prevail if this case is tried
on its merits.
In the case of Echometer and James N. McCoy vs. Lufkin Industries, Inc.,
the plaintiff filed suit in U.S. District Court alleging infringement of a Data
Processing and Display for Echo Sounding Patent. The Company has vigorously
defended its position that its fluid level product does not infringe the
plaintiff's patent. Trial for this case is scheduled for May 2003.
There are various other claims and legal proceedings arising in the
ordinary course of business pending against or involving the Company wherein
monetary damages are sought. It is management's opinion that the Company's
liability, if any, under such claims or proceedings would not materially affect
its consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
3
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK INFORMATION
2002 2001
------------------------------------ ------------------------------------
Stock Price Stock Price
- ----------------------------------------------------------------------------------------
Quarter High Low Dividend High Low Dividend
- ----------------------------------------------------------------------------------------
First $ 27.000 $ 21.820 $ 0.18 $ 22.500 $ 16.188 $ 0.18
Second 29.730 23.460 0.18 31.480 18.375 0.18
Third 28.700 23.910 0.18 29.500 20.250 0.18
Fourth 28.180 22.300 0.18 27.250 22.750 0.18
The Company's common stock is traded on the NASDAQ Stock Market
(National Market) under the symbol LUFK and as of March 14, 2003, there were
approximately 600 record holders of its common stock.
The Company has paid cash dividends for 63 consecutive years. Total
dividend payments were $4,670,000, $4,481,000 and $4,549,000 in 2002, 2001 and
2000, respectively.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except per share data) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Sales $ 228.7 $ 278.9 $ 254.6 $ 246.0 $ 287.5
Net earnings (loss) from operations 8.5 19.5 7.0 (1.3) 13.6
Net earnings (loss) per share
Basic 1.29 3.12 1.11 (0.20) 2.11
Diluted 1.26 3.03 1.11 (0.20) 2.08
Total assets 248.4 246.1 233.6 221.4 242.8
Long-term notes payable, net of current 0.2 0.3 7.0 9.1 11.5
Cash dividends per share 0.72 0.72 0.72 0.72 0.72
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
(In millions, except per share data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
2002
Sales $ 51.0 $ 60.9 $ 60.8 $ 56.0
Gross profit 8.2 14.1 14.2 10.3
Net earnings 0.2 3.5 3.8 1.0
Basic earnings per share 0.03 0.53 0.57 0.17
Diluted earnings per share 0.03 0.52 0.56 0.16
2001
Sales 63.5 73.2 75.6 66.6
Gross profit 14.7 18.3 19.0 16.0
Net earnings 3.0 5.3 6.6 4.6
Basic earnings per share 0.49 0.85 1.04 0.72
Diluted earnings per share 0.49 0.83 1.01 0.70
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the year ended December 31, 2002, decreased to $228.7 million
from $278.9 million for the year ended December 31, 2001. Sales for 2000 were
$254.6 million. The Company reported net earnings of $8.5 million or $1.26 per
share (diluted) for the year ended December 31, 2002, compared to net earnings
of $19.5 million or $3.03 per share (diluted) for the year ended December 31,
2001. Net income of $7.0 million or $1.11 per share (diluted) was reported for
the year ended December 31, 2000.
In October 2002, the Company experienced a two-week work stoppage by its
unionized workforce at its primary manufacturing facilities in Lufkin, Texas.
This work stoppage was related to health-care and pension benefit differences
during contract negotiations. While certain shipments were delayed during the
fourth quarter of 2002, this work stoppage did not have a significant impact on
the overall results of the fourth quarter of 2002.
The sales mix of the Company's operating segments for the three years ended
December 31, 2002, was as follows:
Percent of total sales
- -------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------
Oil Field 52% 65% 46%
Power Transmission 31 23 25
Trailer 17 12 29
- -------------------------------------------------------
Total 100% 100% 100%
- -------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001:
The following table summarizes the Company's sales and gross profit by operating
segment (in thousands of dollars):
- ---------------------------------------------------------------------------------------
Increase % Increase
Year Ended December 31, 2002 2001 (Decrease) (Decrease)
- ---------------------------------------------------------------------------------------
Sales
Oil Field $ 118,700 $ 182,271 $ (63,571) (34.9)
Power Transmission 70,455 62,498 7,957 12.7
Trailer 39,569 34,138 5,431 15.9
------------ ------------ ------------
Total $ 228,724 $ 278,907 $ (50,183) (18.0)
============ ============ ============
Gross Profit
Oil Field $ 24,953 $ 48,876 $ (23,923) (48.9)
Power Transmission 19,566 18,946 620 3.3
Trailer 2,319 227 2,092 921.6
------------ ------------ ------------
Total $ 46,838 $ 68,049 $ (21,211) (31.2)
============ ============ ============
Oil Field sales for the year ended December 31, 2002, decreased 34.9% to
$118.7 million from $182.3 million in the year ended December 31, 2001. Lower
energy prices in the first half of 2002 caused declines in oil field drilling
and production activity, directly impacting the sale of new pumping units. The
higher energy prices seen in the last half of 2002 have not translated into
higher activity levels. Drilling activity has not increased with the higher
energy prices due to uncertainty over both future global demand levels and the
stability of the price of oil. This was also reflected in the backlog of Oil
Field, which declined to $12.6 million at December 31, 2002, from $19.4 million
at December 31, 2001.
Gross profit for Oil Field decreased to $25.0 million, or 48.9%, for the
year ended December 31, 2002, compared to $48.9 million for the year ended
December 31, 2001, due primarily to the decline in sales of oil field products
but also due to a decline in the gross margin. Gross margin decreased to 21.1%
in 2002 compared to 26.9% in 2001 due to the product mix shifting towards lower
margin commercial castings and fixed production costs increasing as a percentage
of revenue.
Direct selling, general and administrative expenses for Oil Field
decreased to $7.6 million, or 20.0%, for the year ended December 31, 2002, from
$9.5 million for the year ended December 31, 2001. This decrease was due to
lower third-party sales commissions and lower legal expenses associated with
ongoing and routine litigation. In 2002 certain types of legal expenses
previously charged directly to Oilfield were charged to Corporate.
Sales for the Company's Power Transmission segment increased to $70.5
million, or 12.7%, for the year ended December 31, 2002, compared to $62.5
million for the year ended December 31, 2001. High-speed applications serving
the oil and gas, refinery and petrochemical markets increased in 2002 with some
improvement seen in low-speed applications for the sugar and marine markets.
However, demand in the power generation, steel and rubber markets continues to
remain weak, contributing to the decline in Power Transmission backlog to $30.9
million as of December 31, 2002, compared to $31.5 million as of December 31,
2001.
5
Power Transmission gross profit increased to $19.6 million, or 3.3%, for
the year ended December 31, 2002, from $18.9 million for the year ended December
31, 2001. This improvement did not match the increase in sales, due to a gross
margin decline to 27.8% for the year ended December 31, 2002, from 30.4% for the
year ended December 31, 2001. Higher margins on sales of high-speed gearboxes
and parts were offset by a decline in inter-segment revenue to the Oil Field
segment, reducing from $12.8 million in 2001 to a more normal level of $1.8
million in 2002. Due to the extraordinary demand for pumping units in Oil Field
in 2001, Power Transmission produced a large number of gearboxes for Oil Field.
While these gearboxes were sold near cost to Oil Field, this incremental volume
improved plant utilization and fixed cost absorption of Power Transmission,
improving the overall gross margin.
Direct selling, general and administrative expenses for Power
Transmission increased slightly to $10.2 million, or 1.0%, for the year ended
December 31, 2002, from $10.1 million for the year ended December 31, 2001.
Trailer sales for the year ended December 31, 2002, increased 15.9% to
$39.6 million from $34.1 million for the year ended December 31, 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. The continued depressed state
of the market is reflected in the decline in backlog from $13.5 million at
December 31, 2001, to $10.1 million at December 31, 2002.
Trailer gross profit and margin improved to $2.3 million and 5.9%,
respectively, for the year ended December 31, 2002, from $0.2 and 0.7%,
respectively, for the year ended December 31, 2001. This gross margin
improvement was primarily due to two factors: cost containment efforts and
reduced warranty charges. Labor and overhead costs only increased 12.0% in 2002
compared to 2001 versus the 15.9% revenue increase. Warranty charges were lower
due to improved quality efforts and a lower pool of trailers under warranty.
Direct selling, general and administrative expenses for Trailer
decreased to $1.5 million, or 31.9%, for the year ended December 31, 2002, from
$2.2 million for the year ended December 31, 2001. This decrease was primarily
due to lower insurance claim expenses.
Corporate administrative expenses, which are allocated to the segments
primarily based on third-party revenues, increased to $14.2 million, or 6.8%,
for the year ended December 31, 2002, from $13.3 million for the year ended
December 31, 2001, due to costs associated with the settlement of the labor
dispute in the fourth quarter of 2002 and higher legal expenses associated with
ongoing and routine litigation.
Other income and expense for the year ended December 31, 2002, totaled
$0.4 million of income versus $0.7 million of expense for the year ended
December 31, 2001. This improvement was due to higher interest income from
invested cash, lower interest expense from reduced debt levels and the
non-recurrence of losses on asset disposals incurred in 2001.
Pension income, which is reported as a reduction of cost of sales in
each segment, decreased to $5.3 million, or 10.2%, for the year ended December
31, 2002, from $5.9 million for the year ended December 31, 2001. This decline
was because liabilities of the plan increased while the expected return on
assets declined from a reduction in the fair market value. Pension income in
2003 is expected to decline to approximately $2.5 million due to further
declines in the fair market value of the assets of the plan lowering the
expected return. In conjunction with these market declines, the Company reviewed
its assumptions for 2003 and lowered the discount rate to 6.75% from 7.00%, the
expected long-term return on assets to 8.75% from 9.00% and the compensation
rate increase to 4.50% from 5.00%.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000:
The following table summarizes the Company's net revenues and gross profit by
operating segment (in thousands of dollars):
- --------------------------------------------------------------------------------------
Increase % Increase
Year Ended December 31, 2001 2000 (Decrease) (Decrease)
- --------------------------------------------------------------------------------------
Sales
Oil Field $ 182,271 $ 118,097 $ 64,174 54.3
Power Transmission 62,498 62,923 (425) (0.7)
Trailer 34,138 73,583 (39,445) (53.6)
------------ ------------ ------------
Total $ 278,907 $ 254,603 $ 24,304 9.5
============ ============ ============
Gross Profit
Oil Field $ 48,876 $ 23,739 $ 25,137 105.9
Power Transmission 18,946 15,590 3,356 21.5
Trailer 227 4,921 (4,694) (95.4)
------------ ------------ ------------
Total $ 68,049 $ 44,250 $ 23,799 53.8
============ ============ ============
6
Oil Field sales for the year ended December 31, 2001, increased 54.3% to
$182.3 million from $118.1 million in the year ended December 31, 2000.
Increases in production activity among oil producers resulted in significant
increases in both new pumping unit sales and oil field service activity.
However, lower energy prices and corresponding production activity in the fourth
quarter of 2001 is reflected in the backlog of Oil Field, which declined to
$19.4 million at December 31, 2001, from $33.3 million at December 31, 2000.
Gross profit for Oil Field increased to $48.9 million, or 105.9%, for
the year ended December 31, 2001, compared to $23.7 million for the year ended
December 31, 2000, due to the above noted increases in product volume associated
with higher production activity. Gross margin improved to 26.8% in 2001 compared
to 20.1% in 2000 due primarily to increased leverage on the Company's fixed
costs.
Direct selling, general and administrative expenses for Oil Field
increased to $9.5 million, or 33.7%, for the year ended December 31, 2001, from
$7.1 million for the year ended December 31, 2000. This increase was due to
higher third-party sales commissions and higher internal sales activity in
conjunction with above noted increase in revenue. Also, administrative expenses
increased due to higher legal expenses associated with ongoing and routine
litigation.
Sales for the Company's Power Transmission segment decreased slightly to
$62.5 million for the year ended December 31, 2001, compared to $62.9 million
for the year ended December 31, 2000. The uncertain economic conditions
experienced in the last several years in many of the Company's domestic and
international industrial markets continued to exist in 2001. However, the
activity level in these markets has shown improvement, as evidenced by the Power
Transmission backlog of $31.5 million as of December 31, 2001, compared to $20.8
million as of December 31, 2000.
Power Transmission gross profit and gross margin, however, increased to
$18.9 million and 30.3%, respectively, for the year ended December 31, 2001,
from $15.6 million and 24.8%, respectively, for the year ended December 31,
2000. This improvement was due to a combination of higher margins on new
equipment sales and increased absorption of fixed overhead costs resulting from
volume increases attributable to gearboxes supplied to the Company's Oil Field
segment.
Direct selling, general and administrative expenses for Power
Transmission decreased to $10.1 million, or 5.7%, for the year ended December
31, 2001, from $10.7 million for the year ended December 31, 2000. This decrease
was due to lower personnel-related expenses, reduced severance payments and
lower depreciation expense, partially offset by higher bad debt expense.
Trailer sales for the year ended December 31, 2001, decreased 53.6% to
$34.1 million from $73.6 million for the year ended December 31, 2000, due to
the continued industry-wide decline in the market for new trailers that began in
1999. Due to a combination of lower shipping volumes, higher fuel costs, higher
personnel costs and higher insurance rates, freight companies have either
significantly reduced orders for new trailers or have gone out of business.
Trailer manufacturers have seen revenue declines of as much as 75%, with several
shutting down completely. Some improvement has been seen in the trailer market,
as demonstrated in the increased backlog to $13.5 million as of December 31,
2001, compared to $9.5 million as of December 31, 2000. This backlog level,
though, was still well below traditional levels.
Trailer gross profit and margin declined to $0.2 million and 0.7%,
respectively, for the year ended December 31, 2001, from $4.9 and 6.7%,
respectively, for the year ended December 31, 2000, due to fixed manufacturing
overhead not declining at the same rate as revenue.
Direct selling, general and administrative expenses for Trailer
decreased to $2.2 million, or 16.9%, for the year ended December 31, 2001, from
$2.6 million for the year ended December 31, 2000. This decrease was due to a
combination of lower personnel-related expenses and insurance claims.
Corporate administrative expenses, which are allocated to the segments
primarily based on third-party revenues, increased to $13.3 million, or 13.6%,
for the year ended December 31, 2001, from $11.7 million for the year ended
December 31, 2000, due to increased legal expenses and non-recurring expenses
related to the Company's 100th anniversary.
Interest expense for the year ended December 31, 2001, totaled $0.9
million compared to $1.4 million for the year ended December 31, 2000, due to
lower average short and long-term debt balances in 2001 compared to 2000. Since
the majority of outstanding debt will be repaid in July 2002, interest expense
will be greatly reduced after that date. Other income (expense) of $(0.3)
million for 2001 was reduced from $0.1 million for 2000.
Pension income, which is reported as a reduction of cost of sales in
each segment, decreased to $5.9 million, or 6.9%, for the year ended December
31, 2001, from $6.4 million for the year ended December 31, 2000. While the
actual market return of the plan assets has been down, pension income is based
on expected long-term return projections and not on current year activity.
7
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 $27.6 million at December 31, 2002,
compared to $18.1 million at December 31, 2001. For the year ended December 31,
2002, net cash provided by operating activities was $22.3 million, cash used in
investing activities totaled $4.3 million, cash used in financing activities
amounted to $8.8 million and the effect of foreign currency translation amounted
to $0.2 million. Significant components of cash provided by operating activities
include net earnings adjusted for non-cash expenses of $16.4 million and a net
decrease in working capital of $5.9 million. This decrease was primarily due to
lower trade receivables and inventory in the Oil Field segment. Cash used in
investing activities included net capital expenditures totaling $10.1 million,
partially offset by the sale of securities worth $5.9 million previously
escrowed for the purposes of paying long-term debt. Capital expenditures in 2002
were primarily for additions and replacements of production equipment and
operating vehicles in the Oil Field segment, the expansion into the Southeast
U.S. for repairing power transmission equipment and the addition of high-speed
testing equipment into the French Power Transmission facility. Capital
expenditures for 2003 are projected to be at or greater than the 2002 level.
Significant components of cash used in financing activities included payments on
long-term debt of $6.7 million, proceeds from stock option exercises of $2.6
million and dividend payments of $4.7 million or $0.72 per share.
Total debt balances at December 31, 2002, including current maturities
of long-term debt, consisted of $0.4 million of notes payable to various banks.
As of December 31, 2002, the Company had no outstanding debt associated with the
Bank Facility discussed below. Total debt decreased by $6.5 million during 2002
due to principal payments on long-term notes payable totaling $6.7 million with
an offset of $0.2 million in the Company's foreign currency denominated debt as
a result of changes in exchange rates.
During the fourth quarter of 2002, the Company completed and signed a
three-year $27.5 million credit facility with a domestic bank (the "Bank
Facility") consisting of an unsecured revolving line of credit that provides for
up to $17.5 million of committed borrowings along with an additional $10.0
million discretionary line of credit. Borrowings under the Bank Facility bear
interest, at the Company's option, at either the greater of (i) the prime rate,
(ii) the base CD rate plus an applicable margin or (iii) the Federal Funds
Effective Rate plus an applicable margin or the London Interbank Offered Rate
("LIBOR") plus an applicable margin, depending on certain ratios as defined in
the agreement. As of December 31, 2002, no amounts were outstanding of the $27.5
million of the revolving line of credit under the terms of the Bank Facility.
The Company currently has a stock repurchase plan under which the
Company is authorized to spend up to $17.1 million for repurchases of its common
stock. Pursuant to this plan, the Company has repurchased a total of 826,870
shares of its common stock at an aggregate purchase price of $16.9 million. No
shares were repurchased during the year ended December 31, 2002. Repurchased
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
December 31, 2002, the Company held 364,462 shares of treasury stock at an
aggregate cost of approximately $7.5 million. Authorizations of approximately
$0.2 million remained at December 31, 2002.
The Company had no significant lease or contractual obligations as of
December 31, 2002, that would negatively impact cash requirements in subsequent
periods.
The Company believes that its cash flows from operations and its
available borrowing capacity under its credit agreements will be sufficient to
fund its operations, including planned capital expenditures, dividend payments
and stock repurchases, through December 31, 2003.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
No. 143, "Accounting for Asset Retirement Obligations." This standard requires
asset retirement costs to be capitalized as part of the cost of the related
tangible long-lived asset and subsequently allocated to expense using a
systematic and rational method over the useful life of the asset. The statement
is effective for fiscal years beginning after June 15, 2002. The transition
adjustment resulting from the adoption of this statement will be reported as a
cumulative effect of a change in accounting principle. The Company adopted
Statement No. 143 as of January 1, 2003, and it did not have an impact on the
Company's consolidated financial position or results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB of
FASB Statement No. 13, and Technical Corrections." This standard rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," an amendment of
APB Opinion No. 30, and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements," which amended SFAS 4, as these two standards
required that all gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item. Consequently, such gains
and losses will now be classified as extraordinary only if they meet the
criteria for extraordinary treatment set forth in APB Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The statement also rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers," an amendment of Chapter 5 of ARB No. 43
and an interpretation of APB Opinions 17 and 30, because the discrete event to
which that statement relates is no longer relevant. In addition, SFAS 145 amends
SFAS No. 13, "Accounting for Leases," to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as such transactions. Furthermore, the
statement makes certain technical corrections, which the FASB deemed to be
non-substantive, to a number of existing accounting pronouncements. The
provisions of SFAS 145 related to the rescission of SFAS 4 and 64 are effective
for fiscal years beginning after May 15, 2002. The provisions related to the
amendment of SFAS 13 are effective for transactions occurring after May 15,
2002. All other provisions of SFAS 145 are effective for financial statements
issued on or after May 15, 2002. The Company adopted Statement No. 145 as of
January 1, 2003, and it did not have an impact on the Company's consolidated
financial position or results of operations.
8
In June 2002, the Financial Accounting Standards Board issued Statement
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This statement requires companies to recognize costs associated with
restructurings, discontinued operations, plant closings or other exit or
disposal activities when incurred rather than at the date a plan is committed
to. The statement is effective for exit or disposal activities initiated after
December 31, 2002. The Company adopted Statement No. 145 as of January 1, 2003,
and it did not have an impact on the Company's consolidated financial position
or results of operations.
In October 2002, the Financial Accounting Standards Board issued
Statement No. 147, "Acquisitions of Certain Financial Institutions," which
applies to all acquisitions of financial institutions except those between two
or more mutual enterprises, which is being addressed in a separate project.
Statement 147 supersedes the specialized accounting guidance in paragraph 5 of
SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions," and amends FASB Interpretation No. 9, "Applying APB Opinions No.
16 and 17 When a Savings and Loan Association or a Similar Institution Is
Acquired in a Business Combination Accounted for by the Purchase Method";
therefore, if certain criteria in Statement 147 are met, the amount of the
unidentifiable intangible asset will be reclassified to goodwill upon adoption
of this statement. Restatement of previously issued financial statements will be
required. Those transition provisions are effective as of October 1, 2002;
however, early application is permitted. Statement 147 also amends the scope of
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include long-term customer-relationship intangible assets such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. The Company adopted Statement No. 145 as of January 1,2003,
and it did not have an impact on the Company's consolidated financial position
or results of operations.
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148, "Accounting for Stock-Based Compensation- Transition and
Disclosure." This statement amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternate methods of transition to SFAS
No. 123's fair value method of accounting for stock-based employee compensation.
Statement No. 148 also amends the disclosure provisions of SFAS No. 123 and APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value methods, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of APB
Opinion No. 25. As allowed by SFAS No. 123, the Company has elected to continue
to utilize the accounting method prescribed by APB Opinion No. 25 and has
adopted the disclosure requirements of SFAS No. 148 as of December 31, 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. The Company evaluates its estimates on an
ongoing basis, based on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions. The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in preparation of its consolidated
statements.
The Company extends credit to customers in the normal course of
business. Management performs ongoing credit evaluations of our customers and
adjusts credit limits based upon payment history and the customer's current
credit worthiness. An allowance for doubtful accounts has been established to
provide for estimated losses on receivable collections. The balance of this
allowance is determined by regular reviews of outstanding receivables and
historical experience. As the financial condition of customers change,
circumstances develop or additional information becomes available, adjustments
to the allowance for doubtful accounts may be required.
Revenue is not recognized until it is realized or realizable and earned.
The criteria to meet this guideline are: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price to the
buyer is fixed or determinable and collectibility is reasonably assured. The
Company also recognizes Bill-and-Hold transactions when the product is completed
and is ready to be shipped and the risk of loss on the product has been
transferred to the customer.
The Company has made significant investments in inventory to service its
customers. On a routine basis, the Company uses estimates in determining the
level of reserves required to state inventory at the lower of cost or market.
Management's estimates are primarily influenced by market activity levels,
production requirements, the physical condition of products and technological
innovation. Changes in any of these factors may result in adjustments to the
carrying value of inventory. Also, the Company accounts for a significant
portion of its inventory under the LIFO method. The LIFO reserve can be impacted
by changes in the LIFO layers and by inflation index adjustments.
Long-lived assets, including goodwill, held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be reasonable. The Company assesses
the recoverability of long-lived assets by determining whether the carrying
value can be recovered through projected discounted cash flows, based on
expected future operating results. Future adverse market conditions or poor
operating results could result in the inability to recover the current carrying
value and thereby possibly requiring an impairment charge in the future.
9
Deferred tax assets and liabilities are recognized for the differences
between the book basis and tax basis of the net assets of the Company. In
providing for deferred taxes, management considers current tax regulations,
estimates of future taxable income and available tax planning strategies.
Changes in state, federal and foreign tax laws as well as changes in the
financial position of the Company could also affect the carrying value of
deferred tax assets and liabilities. If management estimates that some or all of
any deferred tax assets will expire before realization or that the future
deductibility is not probable, a valuation allowance would be recorded.
The Company is subject to claims and legal actions in the ordinary
course of business. The Company maintains insurance coverage for various aspects
of its businesses and operations. The Company retains a portion of the insured
losses that occur through the use of deductibles. Management regularly reviews
estimates of reported and unreported insured and non-insured claims and legal
actions and provides for losses through reserves. As circumstances develop and
additional information becomes available, adjustments to loss reserves may be
required.
The Company sells certain of its products to customers with a product
warranty that provides repairs at no cost to the customer or the issuance of
credit to the customer. The length of the warranty term depends on the product
being sold, but ranges from one year to five years. The Company accrues its
estimated exposure to warranty claims based upon historical warranty claim costs
as a percentage of sales multiplied by prior sales still under warranty at the
end of any period. Management reviews these estimates on a regular basis and
adjusts the warranty provisions as actual experience differs from historical
estimates or other information becomes available.
The Company offers a defined benefit plan and other benefits upon the
retirement of its employees. Assets and liabilities associated with these
benefits are calculated by third-party actuaries under the rules provided by
various accounting standards, with certain estimates provided by management.
These estimates include the discount rate, expected rate of return of assets and
the rate of increase of compensation and health claims. On a regular basis,
management reviews these estimates by comparing them to actual experience and
those used by other companies. If a change in an estimate is made, the carrying
value of these assets and liabilities may have to be adjusted.
FORWARD-LOOKING STATEMENTS AND ASSUMPTIONS
This Annual Report on Form 10-K contains forward-looking statements and
information, within the meaning of the Private Securities Litigation Reform Act
of 1995, 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
undertakes no obligations to update or revise its forward-looking statements,
whether as a result of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize financial instruments for trading purposes.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
10
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of Lufkin Industries,
Inc. (the "Company) as of December 31, 2002 and the related statements of
income, stockholders' equity and cash flows for the year then ended. 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 audit. The financial statements of Lufkin Industries, Inc. as of December
31, 2001, and for the two years then ended, were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on those
financial statements in their report dated February 8, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2002, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, effective January 1,
2002, the Company changed its method of accounting for goodwill and other
intangible assets upon adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets."
As discussed above, the consolidated financial statements of the Company
as of December 31, 2001, and for each of the two years in the period ended
December 31, 2001, were audited by other auditors who have ceased operations. As
described in Notes 1 and 7, these financial statements have been revised to
include the transitional disclosures required by SFAS No. 142, which was adopted
by the Company as of January 1, 2002, and have also been adjusted to provide for
a reclassification between current and non- current other assets. Our audit
procedures with respect to the disclosures in Notes 1 and 7, with respect to
2001 and 2000 included (a) agreeing the previously reported net income to the
previously issued financial statements and the adjustments to reported net
income representing amortization expense (including related tax effects)
recognized in those periods related to goodwill to the Company's underlying
records obtained from management, (b) reviewing the underlying records obtained
from management associated with the reclassification, (c) testing the
mathematical accuracy of either the reclassification or the reconciliation of
adjusted net income to reported net income, and the related earnings-per-share
amounts, and (d) recalculating the change in working capital as presented in the
Statement of Cash Flows for the period ended December 31, 2000. In our opinion,
the transitional disclosures and the noted reclassification for 2001 and 2000 in
Note 1 and 7 are appropriate. However we were not engaged to audit, review, or
apply any procedures to the 2001 and 2000 consolidated financial statements of
the Company other than with respect to such disclosures and, accordingly, we do
not express an opinion or any other form of assurance on the 2001 and 2000
consolidated financial statements taken as a whole.
Deloitte & Touche, LLP
March 5, 2003
11
Below is a copy of the report previously issued by Arthur Andersen LLP, the
Company's former independent public accountants, in connection with the
Company's Annual Report for the year ended December 31, 2001. Arthur Andersen is
unable to issue an updated report. Certain financial statements covered by this
opinion have not been included in the accompanying financial statements.
To the Shareholders of Lufkin Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Lufkin
Industries, Inc. (a Texas corporation) and subsidiaries (collectively, the
Company) as of December 31, 2001 and 2000, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lufkin Industries, Inc., and subsidiaries as of December 31, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
Houston, Texas
February 8, 2002
12
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(Thousands of dollars, except share and per share data)
2002 2001
- ---------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 27,608 $ 18,087
Invested funds - 5,863
Receivables, net 33,872 35,956
Income taxes receivable 713 673
Inventories 31,633 34,824
Deferred income tax assets 948 2,179
Other current assets 462 811
- --------------------------------------------------------------------------------------------------------
Total current assets 95,236 98,393
Property, plant and equipment, net 81,231 81,296
Prepaid pension costs 54,720 49,437
Goodwill, net 10,322 10,045
Other assets, net 6,846 6,898
- --------------------------------------------------------------------------------------------------------
Total assets $ 248,355 $ 246,069
- --------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term notes payable $ 259 $ 6,598
Accounts payable 12,003 10,680
Accrued liabilities:
Payroll and benefits 5,833 6,636
Accrued warranty expenses 1,858 2,275
Taxes payable 4,036 4,487
Other 6,826 6,373
- --------------------------------------------------------------------------------------------------------
Total current liabilities 30,815 37,049
Deferred income tax liabilities 27,471 26,658
Postretirement benefits 10,956 11,024
Long-term notes payable, net of current portion 164 339
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, no par value,
2,000,000 shares authorized, none issued or outstanding - -
Common stock, par $1 per share; 60,000,000 shares authorized; 6,892 6,892
6,892,381 shares issued
Capital in excess of par 18,477 18,200
Retained earnings 162,838 158,973
Treasury stock, 364,462 shares and 502,348 shares, respectively, at cost (7,524) (10,350)
Accumulated other comprehensive income:
Cumulative translation adjustment (1,734) (2,716)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 178,949 170,999
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 248,355 $ 246,069
- --------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
13
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 2002, 2001 and 2000
(Thousands of dollars, except per share data)
2002 2001 2000
- --------------------------------------------------------------------------------------------
Sales $ 228,724 $ 278,907 $ 254,603
Cost of sales 181,886 210,858 210,353
- --------------------------------------------------------------------------------------------
Gross profit 46,838 68,049 44,250
Selling, general and administrative expenses 33,428 35,045 32,120
- --------------------------------------------------------------------------------------------
Operating income 13,410 33,004 12,130
Investment income 607 437 412
Interest expense (285) (873) (1,413)
Other income (expense), net 35 (268) 113
- --------------------------------------------------------------------------------------------
Earnings before income taxes 13,767 32,300 11,242
Income tax provision 5,232 12,758 4,272
- --------------------------------------------------------------------------------------------
Net earnings $ 8,535 $ 19,542 $ 6,970
- --------------------------------------------------------------------------------------------
Net earnings per share:
Basic $ 1.29 $ 3.12 $ 1.11
Diluted $ 1.26 $ 3.03 $ 1.11
- --------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY & COMPREHENSIVE INCOME
Years ended December 31, 2002, 2001 and 2000
(Thousands of dollars, except share and per share data)
Compre-
Common Stock Capital In Cumulative hensive
------------------------ Excess Of Retained Treasury Translation Income
Shares Amount Par Earnings Stock Adjustment (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 1999 6,892,381 $ 6,892 $ 18,066 $ 141,491 $ (12,019) $ (2,021)
Comprehensive income:
Net earnings 6,970 $ 6,970
Other comprehensive
income, net of tax
Foreign currency
translation adjustment (224) (224)
----------
Comprehensive income 6,746
----------
Cash dividends,
$.72 per share (4,549)
Purchases of treasury stock
(110,314 shares) (2,009)
Stock grant (1,334 shares) 3 27
Exercise of stock options
(1,500 shares) 24
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2000 6,892,381 6,892 18,069 143,912 (13,977) (2,245)
Comprehensive income:
Net earnings 19,542 19,542
Other comprehensive
income, net of tax
Foreign currency
translation adjustment (471) (471)
----------
Comprehensive income 19,071
----------
Cash dividends,
$.72 per share (4,481)
Stock grant (1,089 shares) 1 23
Exercise of stock options
(176,319 shares) 130 3,604
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2001 6,892,381 6,892 18,200 158,973 (10,350) (2,716)
Comprehensive income:
Net earnings 8,535 8,535
Other comprehensive
income, net of tax
Foreign currency
translation adjustment 982 982
----------
Comprehensive income $ 9,517
----------
Cash dividends,
$.72 per share (4,670)
Stock grant (1,089 shares)
Exercise of stock options
(137,886 shares) 277 2,826
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, Dec. 31, 2002 6,892,381 $ 6,892 $ 18,477 $ 162,838 $ (7,524) $ (1,734)
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
(Thousands of dollars)
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 8,535 $ 19,542 $ 6,970
Adjustments to reconcile net earnings to net cash
Provided by operating activities:
Depreciation and amortization 11,417 11,523 10,895
Deferred income tax provision 1,789 4,536 2,689
Pension income (5,283) (5,945) (6,387)
Postretirement benefits (67) 51 (144)
(Gain) loss on disposition of property, plant and equipment (22) 406 468
Increase (decrease) in cash flows from changes in working
capital excluding effects of acquisitions:
Receivables, net 2,674 4,538 (5,947)
Income taxes receivable (39) 565 1,322
Inventories 3,576 18 (2,683)
Other current assets 298 (67) (195)
Accounts payable 399 (2,321) 3,437
Accrued liabilities (941) 1,852 3,482
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,336 34,698 13,907
Cash flows from investing activities:
Additions to property, plant and equipment (10,410) (7,909) (6,225)
Proceeds from disposition of property, plant and equipment 293 212 448
Decrease in invested funds 5,863 2 -
Increase in other assets (8) (6) (362)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,262) (7,701) (6,139)
Cash flows from financing activities:
Proceeds from (payments of) short-term debt, net - (7,790) 2,590
Payments of long-term notes payable (6,731) (1,721) (2,725)
Dividends paid (4,670) (4,481) (4,549)
Proceeds from exercise of stock options 2,628 3,174 24
Purchases of treasury stock - - (2,009)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (8,773) (10,818) (6,669)
Effect of translation on cash and cash equivalents 220 (95) (161)
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 9,521 16,084 938
Cash and cash equivalents at beginning of year 18,087 2,003 1,065
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 27,608 $ 18,087 $ 2,003
- -----------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lufkin Industries, Inc. and its consolidated subsidiaries (collectively,
the "Company") manufacture and sell oil field pumping units, power transmission
products and highway trailers throughout the world.
Principles of consolidation: The consolidated financial statements
include the accounts of Lufkin Industries, Inc. and its consolidated
subsidiaries after elimination of all significant inter-company accounts and
transactions.
Use of estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
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, with any resulting gain or loss shown in accumulated other
comprehensive income in the shareholders' equity section of the balance sheet.
Income statement accounts are translated at the average exchange rates
prevailing during the period. Any gains or losses on transactions denominated in
another foreign currency are generally included in income as incurred.
Cash equivalents: The Company considers all highly liquid investments
with maturities of three months or less when purchased to be cash equivalents.
Invested funds: The Company's invested funds, which consisted of
government securities, were classified as held-to-maturity securities and were
carried at cost. Substantially all of the Company's invested funds at December
31, 2001, were restricted for payment of certain of the Company's notes payable.
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. On a routine
basis, the Company uses estimates in determining the level of reserves required
to state inventory at the lower of cost or market. Management's estimates are
primarily influenced by market activity levels, production requirements, the
physical condition of products and technological innovation. Changes in any of
these factors may result in adjustments to the carrying value of inventory. In
July, 1998, the Company began capitalizing certain maintenance and supplies
inventories to better match the estimated cost of such inventories with the
related equipment produced. Such inventories were capitalized and were amortized
over the three years of their estimated use and had the effect of increasing net
earnings by $0.3 million ($0.05 per diluted share) and $0.7 million ($0.12 per
diluted share) in 2001 and 2000, respectively.
Property, plant and equipment (P. P. & E.): 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. The
Company periodically reviews its P. P. & E. for possible impairment whenever
events or changes in circumstance might indicate that the carrying amount of an
asset may not be recoverable. 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. The
following is a summary of the Company's P. P. & E. useful lives:
Useful Life (In Years)
- --------------------------------------------------------------------
Land -
Land improvements 10.0 - 25.0
Buildings 12.5 - 40.0
Machinery and equipment 3.0 - 12.5
Furniture and fixtures 5.0 - 12.5
Computer equipment and software 3.0 - 7.0
Goodwill and other intangible assets: In June 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
eliminated the amortization of goodwill and intangible asserts with indefinite
lives and requires that such assets be tested for impairment at least annually.
During the first quarter of 2002, the Company completed the impairment testing
by testing the fair value of each reporting unit to its carrying amount. Since
the fair value of each reporting unit exceeded the carrying value, no impairment
was recorded.
The Company amortizes intangible assets with finite lives over the years
expected to be benefited.
Income taxes: Deferred income tax assets or liabilities are recorded
based on the difference between the financial statement and income tax bases of
assets and liabilities using enacted tax rates. See Footnote 2 for more detail.
Financial instruments: The Company's financial instruments include cash,
accounts receivable, accounts payable and debt obligations. The book value of
accounts receivable, short-term debt and accounts payable are considered to be
representative of their fair value because of the short maturity of these
instruments. The Company believes the carrying value of its long-term debt
approximates fair value because the interest rates of this debt are comparable
to what the Company believes it could currently obtain for debt with similar
terms and maturities.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," an amendment of SFAS No. 133, as of the quarter ended March 31,
2001. These statements establish accounting and reporting standards that require
every derivative instrument, including certain derivative instruments embedded
in other contracts, to be recorded on the balance sheet as either an asset or a
liability measured at its fair value.
17
As of December 31, 2002, the Company had no reportable derivatives. A
note payable, described in Footnote 4, had been designated as a hedge against
the Company's investment in its French operations, but had been fully paid as of
December 31, 2002. The changes in the fair value of this instrument were
recorded in accumulated other comprehensive income.
Revenue recognition: Revenue is not recognized until it is realized or
realizable and earned. The criteria to meet this guideline are: persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the price to the buyer is fixed or determinable and collectibility is
reasonably assured. The Company also recognizes Bill-and-Hold transactions when
the product is completed and is ready to be shipped and the risk of loss on the
product has been transferred to the customer.
Amounts billed for shipping are classified as sales and costs incurred
for shipping are classified as cost of sales in the consolidated income
statement.
Stock-based compensation: The Company has elected to follow the
accounting provisions of APB No. 25, "Accounting for Stock Issued to Employees,"
for stock-based compensation and to furnish the pro-forma disclosures required
under SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and
Disclosures." APB No. 25 requires no recognition of compensation expense for
most stock-based compensation arrangements.
Recently issued accounting pronouncements: In June 2001, the Financial
Accounting Standards Board issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This standard requires asset retirement costs to be
capitalized as part of the cost of the related tangible long-lived asset and
subsequently allocated to expense using a systematic and rational method over
the useful life of the asset. The statement is effective for fiscal years
beginning after June 15, 2002. The transition adjustment resulting from the
adoption of this statement will be reported as a cumulative effect of a change
in accounting principle. The Company adopted Statement No. 143 as of January 1,
2003, and it did not have an impact on the Company's consolidated financial
position or results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB of
FASB Statement No. 13, and Technical Corrections." This standard rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," an amendment of
APB Opinion No. 30, and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements," which amended SFAS 4, as these two standards
required that all gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item. Consequently, such gains
and losses will now be classified as extraordinary only if they meet the
criteria for extraordinary treatment set forth in APB Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The statement also rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers," an amendment of Chapter 5 of ARB No. 43
and an interpretation of APB Opinions 17 and 30, because the discrete event to
which that statement relates is no longer relevant. In addition, SFAS 145 amends
SFAS No. 13, "Accounting for Leases," to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as such transactions. Furthermore, the
statement makes certain technical corrections, which the FASB deemed to be
non-substantive, to a number of existing accounting pronouncements. The
provisions of SFAS 145 related to the rescission of SFAS 4 and 64 are effective
for fiscal years beginning after May 15, 2002. The provisions related to the
amendment of SFAS 13 are effective for transactions occurring after May 15,
2002. All other provisions of SFAS 145 are effective for financial statements
issued on or after May 15, 2002. The Company adopted Statement No. 145 as of
January 1, 2003, and it did not have an impact on the Company's consolidated
financial position or results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This statement requires companies to recognize costs associated with
restructurings, discontinued operations, plant closings or other exit or
disposal activities when incurred rather than at the date a plan is committed
to. The statement is effective for exit or disposal activities initiated after
December 31, 2002. The Company plans to adopt this statement as of the effective
date and will implement its provisions on a prospective basis.
In October 2002, the Financial Accounting Standards Board issued
Statement No. 147, "Acquisitions of Certain Financial Institutions," which
applies to all acquisitions of financial institutions except those between two
or more mutual enterprises, which is being addressed in a separate project.
Statement 147 supersedes the specialized accounting guidance in paragraph 5 of
SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions," and amends FASB Interpretation No. 9, "Applying APB Opinions No.
16 and 17 When a Savings and Loan Association or a Similar Institution Is
Acquired in a Business Combination Accounted for by the Purchase Method";
therefore, if certain criteria in Statement 147 are met, the amount of the
unidentifiable intangible asset will be reclassified to goodwill upon adoption
of this statement. Restatement of previously issued financial statements will be
required. Those transition provisions are effective as of October 1, 2002;
however, early application is permitted. Statement 147 also amends the scope of
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include long-term customer-relationship intangible assets such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. The Company adopted Statement No. 145 and it did not have an
impact on the Company's consolidated financial position or results of
operations.
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148, "Accounting for Stock-Based Compensation- Transition and
Disclosure." This statement amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternate methods of transition to SFAS
No. 123's fair value method of accounting for stock-based employee compensation.
Statement No. 148 also amends the disclosure provisions of SFAS No. 123 and APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value methods, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of APB
Opinion No. 25. As allowed by SFAS No. 123, the Company has elected to continue
to utilize the accounting method prescribed by APB Opinion No. 25 and has
adopted the disclosure requirements of SFAS No. 148 as of December 31, 2002.
18
Product warranties: The Company sells certain of its products to
customers with a product warranty that provides repairs at no cost to the
customer or the issuance of credit to the customer. The length of the warranty
term depends on the product being sold, but ranges from one year to five years.
The Company accrues its estimated exposure to warranty claims based upon
historical warranty claim costs as a percentage of sales multiplied by prior
sales still under warranty at the end of any period. Management reviews these
estimates on a regular basis and adjusts the warranty provisions as actual
experience differs from historical estimates or other information becomes
available.
Other: Certain prior year amounts have been reclassified to conform with
the current year presentation. Included in these reclassifications is a
reclassification to other current assets from other long-term assets totaling
$811,000. The respective reclassification was made to better reflect the
underlying nature and timing of the respective assets consistent with the
Company's current classification of such items. The reclassification had no
change on the Company's total assets of $246,069,000 as previously reported, and
effectively increased the Company's working capital by $811,000.
(2) RECEIVABLES
The following is a summary of the Company's receivable balances:
(Thousands of dollars) 2002 2001
- -------------------------------------------------------------
Accounts receivable $ 33,777 $ 36,506
Notes receivable 335 268
- -------------------------------------------------------------
34,112 36,774
Allowance for doubtful accounts (240) (818)
- -------------------------------------------------------------
Net receivables $ 33,872 $ 35,956
- -------------------------------------------------------------
(3) PROPERTY, PLANT & Equipment
The following is a summary of the Company's P. P. & E. balances:
(Thousands of dollars) 2002 2001
- ----------------------------------------------------------------------------
Land $ 2,693 $ 2,556
Land improvements 6,690 6,693
Buildings 61,358 59,976
Machinery and equipment 173,703 165,427
Furniture and fixtures 3,898 3,726
Computer equipment and software 12,747 12,546
- ----------------------------------------------------------------------------
Total property, plant and equipment 261,089 250,924
Less accumulated depreciation (179,858) (169,628)
- ----------------------------------------------------------------------------
Total property, plant and equipment, net $ 81,231 $ 81,296
- ----------------------------------------------------------------------------
Depreciation expense related to property, plant and equipment was $11.3 million,
$11.0 million and $10.5 million in 2002, 2001 and 2000, respectively.
(4) EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. The weighted average number of shares used to compute basic and diluted
earnings per share for 2002, 2001 and 2000 is illustrated below:
(Thousands of dollars, except share and per share data) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted earnings per share-net earnings $ 8,535 $ 19,542 $ 6,970
- ----------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share-weighted-average shares 6,610,312 6,270,505 6,256,974
Effect of dilutive securities: employee stock options 150,328 148,436 32,748
- ----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 6,760,640 6,418,941 6,289,722
- ----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.29 $ 3.12 $ 1.11
- ----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.26 $ 3.03 $ 1.11
- ----------------------------------------------------------------------------------------------------------
Options to purchase a total of 312,896, 120,986 and 562,874 shares of the
Company's common stock were excluded from the calculation of fully diluted
earnings per share for 2002, 2001 and 2000, respectively, because their effect
on fully diluted earnings per share for the period were antidilutive.
19
(5) INCOME TAXES
Net deferred income tax assets and liabilities are comprised of the following:
(Thousands of dollars) 2002 2001
- ------------------------------------------------------------------------------
Current deferred income tax assets
Gross assets $ 3,469 $ 2,746
Gross liabilities (2,521) (567)
- ------------------------------------------------------------------------------
Total current deferred income tax assets, net 948 2,179
- ------------------------------------------------------------------------------
Noncurrent deferred income tax liabilities
Gross assets 10,498 8,429
Gross liabilities (37,969) (35,087)
- ------------------------------------------------------------------------------
Total noncurrent deferred income tax liabilities, net (27,471) (26,658)
- ------------------------------------------------------------------------------
Net deferred income tax liabilities $ (26,523) $ (24,479)
- ------------------------------------------------------------------------------
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows:
(Thousands of dollars) 2002 2001
- ----------------------------------------------------------------
Inventories $ (957) $ (456)
Prepaid pension costs (19,621) (18,101)
Payroll and benefits 233 773
Accrued warranty expenses 610 767
Postretirement benefits 4,076 4,066
Tax credit carryforwards - 253
Depreciation (11,987) (12,378)
Net operating loss - -
Other, net 1,123 597
- ----------------------------------------------------------------
Net deferred income tax liabilities $ (26,523) $ (24,479)
- ----------------------------------------------------------------
The income tax provision for 2002, 2001 and 2000 consisted of the following:
(Thousands of dollars) 2002 2001 2000
- ---------------------------------------------------------------
Current $ 3,187 $ 8,222 $ 1,583
Deferred 2,044 4,536 2,689
- ---------------------------------------------------------------
Total $ 5,231 $ 12,758 $ 4,272
- ---------------------------------------------------------------
A reconciliation of the income tax provision as computed at the statutory U.S.
income tax rate and the income tax provision presented in the consolidated
financial statements is as follows:
(Thousands of dollars) 2002 2001 2000
- ---------------------------------------------------------------------------------------
Tax provision computed at statutory rate $ 4,818 $ 11,305 $ 3,935
Tax effect of:
Expenses for which no benefit was realized 447 591 353
State taxes net of federal benefit 236 777 254
Other, net (270) 85 (270)
- ---------------------------------------------------------------------------------------
Provision for income taxes $ 5,231 $ 12,758 $ 4,272
- ---------------------------------------------------------------------------------------
Cash payments for income taxes totaled $3,787,000, $5,791,000 and $597,000 for
2002, 2001 and 2000, respectively.
20
(6) INVENTORIES
Inventories used in determining cost of sales were as follows:
(Thousands of dollars) 2002 2001
- -------------------------------------------------------------
Gross inventories @ FIFO:
Finished goods $ 4,656 $ 4,030
Work in process 6,210 6,177
Raw materials & component parts 39,174 42,624
- -------------------------------------------------------------
Total gross inventories @ FIFO 50,040 52,831
- -------------------------------------------------------------
Less reserves:
LIFO 17,682 17,565
Valuation 725 442
- -------------------------------------------------------------
Total inventories as reported $ 31,633 $ 34,824
- -------------------------------------------------------------
Gross inventories on a FIFO basis shown above that were accounted for on
a LIFO basis were $37,257,000 and $39,866,000 at December 31, 2002 and 2001,
respectively.
During 2002 and 2001, LIFO inventories were reduced in certain LIFO
pools and these reductions resulted in a liquidation of LIFO inventory
quantities carried at lower costs in prior years. The impact of the reductions
reduced net income in 2002 by approximately $34,000, net of taxes ($0.00 per
diluted share), and increased net income in 2001 by approximately $328,000, net
of taxes ($0.05 per diluted share.)
(7) GOODWILL & ACQUIRED INTANGIBLE ASSETS
Balances and related amortization expense for goodwill and acquired intangible
assets are as follows:
ACQUIRED INTANGIBLE ASSETS
Gross Carrying Accumulated
(Thousands of dollars) Amount Amortization
- ------------------------------------------------------------------
Amortized intangible assets:
Non-Compete Agreements
As of December 31, 2001 $ 500 $ (386)
As of December 31, 2002 $ 500 $ (462)
Unamortized intangible assets:
None
Aggregate Amortization Expense:
For the year ended 12/31/00 $ 76
For the year ended 12/31/01 $ 76
For the year ended 12/31/02 $ 76
Estimated Amortization Expense:
For the year ended 12/31/03 $ 38
For the year ended 12/31/04 -
For the year ended 12/31/05 -
For the year ended 12/31/06 -
For the year ended 12/31/07 -
The Company also has multi-year non-compete agreements with certain individuals
that are paid and expensed on an annual basis and thus are not recorded as
pre-paid assets. These agreements expire in 2003 and 2004. Expenses related to
these non-compete agreements were $64,000, $64,000 and $60,000 for the years
2002, 2001 and 2000, respectively. Estimated expenses for these agreements are
$51,000 and $4,000 in the years 2003 and 2004, respectively.
21
GOODWILL
Had the non-amortization provisions of SFAS No. 142 been in effect in years
prior to the adoption year of 2002, the impact on earnings at December 31, 2002,
2001 and 2000 would have been:
(Thousands of dollars, except per share amounts) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Reported net earnings $ 8,535 $ 19,542 $ 6,970
Add back: Goodwill Amortization - 229 136
- ---------------------------------------------------------------------------------------------------
Adjusted net earnings $ 8,535 $ 19,771 $ 7,106
===================================================================================================
Basic earnings per share:
Reported net earnings $ 1.29 $ 3.12 $ 1.11
Add back: Goodwill Amortization - 0.04 0.03
- ---------------------------------------------------------------------------------------------------
Adjusted net earnings $ 1.29 $ 3.16 $ 1.14
===================================================================================================
Diluted earnings per share:
Reported net earnings $ 1.26 $ 3.03 $ 1.11
Add back: Goodwill Amortization - 0.04 0.03
- ---------------------------------------------------------------------------------------------------
Adjusted net earnings $ 1.26 $ 3.06 $ 1.14
===================================================================================================
The changes in the carrying amount of goodwill for the year ended
December 31, 2002, are as follows:
Power
(Thousands of dollars) Oil Field Transmission Trailer Total
- ---------------------------------------------------------------------------------------------------
Balance as of 12/31/01 $ 8,492 $ 1,553 $ - $ 10,045
Goodwill acquired during year - - - -
Impairment losses - - - -
Goodwill written off related to sale of
business unit - - - -
Foreign currency translation - 276 - 276
- ---------------------------------------------------------------------------------------------------
Balance as of 12/31/02 $ 8,492 $ 1,829 $ - $ 10,321
===================================================================================================
Goodwill impairment tests were performed in the first quarter of 2002 and no
impairment losses were recorded.
22
(8) DEBT OBLIGATIONS
During the fourth quarter of 2002, the Company completed and signed a
three-year $27.5 million credit facility with a domestic bank (the "Bank
Facility") consisting of an unsecured revolving line of credit that provides for
up to $17.5 million of committed borrowings along with an additional $10.0
million discretionary line of credit. Borrowings under the Bank Facility bear
interest, at the Company's option, at either the greater of (i) the prime rate,
(ii) the base CD rate plus an applicable margin or (iii) the Federal Funds
Effective Rate plus an applicable margin or the London Interbank Offered Rate
("LIBOR") plus an applicable margin, depending on certain ratios as defined in
the agreement. As of December 31, 2002, no amounts were outstanding of the $27.5
million of the revolving line of credit under the terms of the Bank Facility.
The Company's long-term notes payable at December 31, 2002 and 2001 consisted of
the following:
(Thousands of dollars, except payment amounts) 2002 2001
- -----------------------------------------------------------------------------------------
Notes payable to individuals, interest of 6.65%,
due in quarterly installments ranging from
$9,000 to $19,000 with balloon payments at maturity
ranging from $996,000 to $2,162,000 maturing
July 2002, unsecured $ - $ 5,106
Notes payable to banks denominated in euros,
interest ranging from 3.7% to 4.9%, due in quarterly
installments ranging from $8,000 to $44,000
secured by certain assets, maturing through 2004 423 667
Note payable to bank denominated in euros, interest
equal to the Eurocurrency rate plus 1.75%,
unsecured, quarterly installments of approximately
$300,0000, matured December 2002 - 1,164
Less-current maturities of long-term notes payable (259) (6,598)
- -----------------------------------------------------------------------------------------
Total $ 164 $ 339
- -----------------------------------------------------------------------------------------
The Company had designated the note payable denominated in euros that
matured in December 2002 as a hedge against its investment in its French
operations.
Under the terms of the notes payable to individuals, invested funds in
the amount of $5,106,000 at December 31, 2001, were restricted for the payment
of these notes.
Principal payments of long-term notes payable as of December 31, 2002 are as
follows:
(Thousands of dollars)
- ------------------------------------------------------------------
Year ending December 31,
2003 $ 259
2004 164
2005 -
2006 -
2007 -
- ------------------------------------------------------------------
Total $ 423
- ------------------------------------------------------------------
Cash payments for interest totaled $315,000, $838,000 and $1,347,000 in 2002,
2001 and 2000, respectively.
23
(9) STOCK OPTION PLANS
The Company has two stock option plans, the 2000 plan for employees and
the 1996 plan for non-employee directors, that provide for the granting of
options to outside directors and key employees to purchase an aggregate of not
more than 1,050,000 shares of the Company's common stock at fair market value on
the date of grant. Options become exercisable from the initial grant date to
four years after the grant date. The options expire ten years from the date of
grant. Outstanding options may be canceled and reissued under terms specified in
the plans. The 1990 plan, which originally was authorized to grant 1,100,000
options, will remain in effect until all awards granted under this plan have
been satisfied or expire. As of December 31, 2002, 535,333 options remained
outstanding and 494,833 options remained exercisable from the 1990 plan.
The following table summarizes activity under the Company's stock option plans:
2002 2001 2000
- ------------------------------------------------------------------------------------
Options outstanding, beginning of year 949,691 997,853 916,793
Granted (per share)
2000 ($14.625 to $18.250) 139,175
2001 ($18.375 to $25.960) 145,457
2002 ($22.575 to $28.900) 154,404
Exercised (per share)
2000 ($15.875) (1,500)
2001 ($14.000 to $21.750) (176,319)
2002 ($14.000 to $25.455) (137,886)
Forfeited (per share)
2000 ($14.000 to $38.000) (56,615)
2001 ($14.000 to $38.000) (17,300)
2002 ($17.500 to $39.375) (3,161)
- ------------------------------------------------------------------------------------
Options outstanding, end of year 963,048 949,691 997,853
- ------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------
Number Wtd. Avg. Number Wtd. Avg.
Range of Exercise Outstanding at Contractual Wtd. Avg. Exercisable at Contractual Wtd. Avg.
Prices 12/31/02 Remaining Life Exercise Price 12/31/02 Remaining Life Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
$ 14.000-$18.375 382,157 7.0 years $ 16.06 289,620 6.8 years $ 15.95
$ 20.000-$22.575 257,067 5.3 years $ 21.61 226,798 4.8 years $ 21.48
$ 22.750-$33.375 242,776 8.5 years $ 26.65 83,526 6.5 years $ 28.05
$ 35.250-$39.875 81,048 4.9 years $ 37.73 81,048 4.9 years $ 37.73
- -----------------------------------------------------------------------------------------------------------------------------------
$ 14.000-$39.875 963,048 6.7 years $ 22.03 680,992 5.9 years $ 21.87
The Company accounts for its stock option plans under APB Opinion No. 25
under which no compensation cost has been recognized. Had compensation cost for
these plans been accounted for consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net earnings and earnings per share
would have been reduced to the following pro forma amounts, (in thousands except
per share data):
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Net earnings, as reported $ 8,535 $ 19,542 $ 6,970
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (750) (689) (740)
Pro forma net earnings $ 7,785 $ 18,853 $ 6,230
Earnings per share:
Basic earnings per share As reported $ 1.29 $ 3.12 $ 1.11
Pro forma $ 1.18 $ 3.01 $ 1.00
Diluted earnings per share As reported $ 1.26 $ 3.03 $ 1.11
Pro forma $ 1.15 $ 2.94 $ 0.99
24
The effects of applying SFAS No. 123 to the pro forma disclosure amounts
may not be indicative of future amounts. SFAS No. 123 does not apply to options
awarded prior to 1995, and additional awards in future years are anticipated.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
2002 Grants Expected dividend yield 2.49% - 3.19%
Expected stock price volatility 38.31% - 38.59%
Risk free interest rate 4.08% - 5.06%
Expected life of options 10 years
2001 Grants Expected dividend yield 2.80% - 3.80%
Expected stock price volatility 35.74% - 37.91%
Risk free interest rate 4.68% - 5.43%
Expected life of options 8-10 years
2000 Grants Expected dividend yield 4.00% - 4.9%
Expected stock price volatility 34.81% - 35.55%
Risk free interest rate 5.60% - 6.92%
Expected life of options 10 years
Options granted during 2002 had a weighted average fair value of $9.41 per
option and a weighted average exercise price of $25.15 per option. At December
31, 2002, 601,835 options authorized remained available to be granted.
(10) STOCK REPURCHASE PLAN
The Company has a stock repurchase plan under which the Company has been
authorized to spend up to $17,100,000 for repurchases of its common stock. The
Company repurchased no shares in 2002 or 2001 but repurchased 110,314 shares at
an aggregate cost of $2,009,000 in 2000. Repurchased shares are added to
treasury stock and are available for general corporate purposes including the
funding of the Company's stock option plans. Authorizations of approximately
$152,000 remained at December 31, 2002.
(11) CAPITAL STOCK
The Company has adopted a "Shareholder Rights Plan" (the "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 $75, 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, 2006, and may be redeemed
by the Company at any time prior to the occurrence of certain events at $.05 per
right.
The Company is also authorized to issue 2,000,000 shares of preferred
stock, the terms and conditions to be determined by the Board of Directors in
creating any particular series.
25
(12) 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, as amended. Plan investment assets are invested
primarily in equity securities, United States government securities and cash
equivalents.
The following tables illustrate the change in benefit obligation,
change in plan assets and funded status of the pension plans:
(Thousands of dollars) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Change in projected benefit obligation:
Projected benefit obligation, beginning of year $ 128,436 $ 119,323 $ 113,060
Service cost 3,607 3,222 2,942
Interest cost 8,379 8,399 8,071
Amendments 8 - 1,252
Actuarial (gain) loss (2,687) 3,849 227
Benefits paid (6,537) (6,357) (6,229)
- ------------------------------------------------------------------------------------------------------
Projected benefit obligation, end of year $ 131,206 $ 128,436 $ 119,323
- ------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning of year $ 186,037 $ 188,521 $ 181,438
Actual return on plan assets (12,175) 3,873 13,312
Benefits paid (6,537) (6,357) (6,229)
- ------------------------------------------------------------------------------------------------------
Fair value of plan assets, end of year $ 167,325 $ 186,037 $ 188,521
- ------------------------------------------------------------------------------------------------------
Funded status:
Excess of fair value of plan assets over projected
benefit obligation $ 36,119 $ 57,601 $ 69,198
Unrecognized net actuarial (gain)/loss 21,961 (3,962) (20,670)
Unrecognized prior service cost 1,910 1,995 2,088
Unrecognized net transition asset (5,270) (6,197) (7,124)
- ------------------------------------------------------------------------------------------------------
Prepaid pension costs $ 54,720 $ 49,437 $ 43,492
- ------------------------------------------------------------------------------------------------------
Components of net periodic pension cost (income):
Service cost $ 3,607 $ 3,222 $ 2,942
Interest cost 8,379 8,399 8,071
Expected return on plan assets (16,435) (16,632) (16,005)
Amortization of unrecognized (gain) loss (834) (934) (1,395)
- ------------------------------------------------------------------------------------------------------
Net periodic pension cost (income) $ (5,283) $ (5,945) $ (6,387)
- ------------------------------------------------------------------------------------------------------
Weighted-average assumptions at year-end:
Discount rate 7.00% 7.25% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 5.00%
- ------------------------------------------------------------------------------------------------------
The Company also has qualified defined contribution retirement plans
covering substantially all of its employees. The Company makes contributions of
75% of employee contributions up to a maximum employee contribution of 6% of
employee earnings. Employees may contribute up to an additional 6% (in 1%
increments) which is not subject to match by the Company. All obligations of the
Company are funded through December 31, 2002. The Company's expense for these
plans totaled $1,852,000, $1,948,000 and $1,715,000 in 2002, 2001 and 2000,
respectively.
The Company sponsors two defined benefit postretirement 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. The Company accrues the estimated
costs of the plans over the employee's service periods.
26
The following tables illustrate the change in benefit obligation, change
in plan assets and funded status of the postretirement plans:
(Thousands of dollars) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 5,185 $ 5,367 $ 5,748
Fully eligible active plan participants 1,360 1,151 1,073
Other active plan participants not yet eligible 2,982 3,083 2,722
- -----------------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation $ 9,527 $ 9,601 $ 9,543
- -----------------------------------------------------------------------------------------------------------------------
Change in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation, beginning of year $ 9,601 $ 9,543 $ 10,049
Service cost 170 183 159
Interest cost 625 654 677
Participant contributions 1,321 1,239 1,069
Actuarial (gain) loss (77) (63) (432)
Benefits paid (2,113) (1,955) (1,979)
- -----------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation, end of year $ 9,527 $ 9,601 $ 9,543
- -----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------------
Funded status:
Excess of total accumulated postretirement
benefit obligation over fair value of plan assets $ 9,527 $ 9,601 $ 9,543
Unrecognized net actuarial gain 1,429 1,423 1,429
- -----------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 10,956 $ 11,024 $ 10,972
- -----------------------------------------------------------------------------------------------------------------------
Components of net periodic postretirement benefit cost:
Service cost $ 170 $ 183 $ 159
Interest cost 625 654 677
Amortization of net actuarial gain (70) (69) (71)
- -----------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 725 $ 768 $ 765
- -----------------------------------------------------------------------------------------------------------------------
Weighted average assumptions at year-end:
Discount rate 7.00% 7.25% 7.50%
- -----------------------------------------------------------------------------------------------------------------------
The Company's postretirement health care plan is unfunded. For
measurement purposes, the submitted claims medical trend was assumed to be 9.25%
in 1997. Thereafter, the Company's obligation is fixed at the amount of the
Company's contribution for 1997.
(13) COMMITMENTS AND CONTINGENCIES
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 which alleged race discrimination in employment.
Certification hearings were conducted in Beaumont, Texas in February of 1998 and
in Lufkin, Texas in August of 1998. The District Court in April of 1999 issued a
decision that certified a class for this case, which includes all persons of a
certain minority employed by the Company from March 6, 1994, to the present. The
Company appealed this class certification decision by the District Court to the
5th Circuit United States Court of Appeals in New Orleans, Louisiana. This
appeal was denied on June 23, 1999. The Company is defending this action
vigorously. Furthermore, the Company believes that the facts and the law in this
action support its position and is confident that it will prevail if this case
is tried on its merits.
In the case of Echometer and James N. McCoy vs. Lufkin Industries, Inc.,
the plaintiff filed suit in U.S. District Court alleging infringement of a Data
Processing and Display for Echo Sounding Patent. The Company has vigorously
defended its position that its fluid level product does not infringe the
plaintiff's patent. Trial for this case is scheduled for May 2003.
There are various other claims and legal proceedings arising in the
ordinary course of business pending against or involving the Company wherein
monetary damages are sought. It is management's opinion that the Company's
liability, if any, under such claims or proceedings would not materially affect
its consolidated financial position or results of operations.
Product warranties: The change in the aggregate product warranty
liability for the year ended December 31, 2002, is as follows:
($000's)
Beginning balance $ 2,276
Claims paid (1,608)
Additional warranties issued 1,110
Revisions in estimates 80
Other -
---------
Ending Balance $ 1,858
=========
27
(14) CONCENTRATIONS OF CREDIT RISK
The Company's concentration with respect to trade accounts receivable is
limited. The large number of customers and diversified customer base across the
three segments significantly reduces the Company's credit risk. The Company also
has strict policies regarding the granting of credit to customers and does not
offer credit terms to those customers that do not meet certain financial
criteria and other guidelines.
(15) BUSINESS SEGMENT INFORMATION
The Company operates with three business segments--Oil Field, Power
Transmission and Trailer. As stated in the Management's Discussion and Analysis
section, the Foundry segment has been combined with the Oil Field segment to
reflect current business operations. Prior period data has been adjusted to
reflect this change. The three operating segments are supported by a common
corporate group. The accounting policies of the segments are the same as those
described in the summary of major accounting policies. Corporate expenses and
certain assets are allocated to the operating segments primarily based upon
third party revenues. The following is a summary of key business segment and
product group information:
(Thousands of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------------------
Sales:
Oil Field $ 118,700 $ 182,271 $ 118,097
Power Transmission 70,455 62,498 62,923
Trailer 39,569 34,138 73,583
- --------------------------------------------------------------------------------------------
Total sales $ 228,724 $ 278,907 $ 254,603
- --------------------------------------------------------------------------------------------
Sales by geographic region:
United States $ 167,719 $ 195,169 $ 194,221
Europe 12,704 14,752 10,642
Canada 12,368 19,281 12,664
Latin America 23,941 26,009 26,476
Other 11,992 23,696 10,600
- --------------------------------------------------------------------------------------------
Total sales $ 228,724 $ 278,907 $ 254,603
- --------------------------------------------------------------------------------------------
Earnings (loss) before income taxes:
Oil Field $ 11,131 $ 33,306 $ 11,181
Power Transmission 5,001 4,348 1,171
Trailer (2,861) (5,545) (610)
Corporate 495 191 (500)
- --------------------------------------------------------------------------------------------
Total earnings (loss) before income taxes $ 13,766 $ 32,300 $ 11,242
- --------------------------------------------------------------------------------------------
Assets:
Oil Field $ 111,915 $ 117,901 $ 113,730
Power Transmission 69,210 66,331 65,272
Trailer 30,288 25,823 31,182
Corporate 36,942 36,014 25,261
- --------------------------------------------------------------------------------------------
Total assets $ 248,355 $ 246,069 $ 235,445
- --------------------------------------------------------------------------------------------
Capital expenditures:
Oil Field $ 6,799 $ 6,508 $ 4,613
Power Transmission 3,265 1,051 1,004
Trailer 212 147 471
Corporate 134 203 137
- --------------------------------------------------------------------------------------------
Total capital expenditures $ 10,410 $ 7,909 $ 6,225
- --------------------------------------------------------------------------------------------
Depreciation/Amortization:
Oil Field $ 4,620 $ 4,510 $ 4,054
Power Transmission 4,484 4,611 4,447
Trailer 629 713 759
Corporate 1,684 1,689 1,635
- --------------------------------------------------------------------------------------------
Total depreciation/amortization $ 11,417 $ 11,523 $ 10,895
- --------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instructions G(3), information on directors and
executive officers of the registrant will be filed in an amendment to Form 10-K
or incorporated by reference from the Company's Definitive Proxy Statement to be
filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instructions G(3), information on executive
compensation will be filed in an amendment to Form 10-K or incorporated by
reference from the Company's Definitive Proxy Statement to be filed pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instructions G(3), information on security ownership
of certain beneficial owners and management will be filed in an amendment to
Form 10-K or incorporated by reference from the Company's Definitive Proxy
Statement to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instructions G(3), information on certain
relationships and related transactions will be filed in an amendment to Form
10-K or incorporated by reference from the Company's Definitive Proxy Statement
to be filed pursuant to Regulation 14A.
ITEM 14. CONTROLS AND PROCEDURES
Based on their evaluation of the disclosure controls and procedures as
of a date within 90 days of the filing of this report on Form 10-K, the Chief
Executive Officer of the Company, Douglas V. Smith, and the Chief Financial
Officer of the Company, R. D. Leslie, have concluded that the disclosure
controls and procedures (as defined in Rules 13a-14(c) promulgated under the
Securities Exchange Act of 1934) are effective. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect such controls subsequent to the date of their evaluation.
29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report
1. Consolidated Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II- Valuation and Qualifying Accounts
3. Exhibits
(3.1) Articles of Incorporation, as amended,
included as Exhibit 3 to Form 10-K of the
registrant for the year ended December 31,
1990, which exhibit is incorporated herein
by reference.
(3.2) Articles of Amendment to Fourth Restated
Articles of Incorporation, included as
Exhibit 3.1 to Form 8-K of the registrant
filed December 10, 1999, which exhibit is
incorporated herein by reference.
(3.3) Restated Bylaws, included as Exhibit 3.2 to
Form 8-K of the registrant filed December
10, 1999, which exhibit is incorporated
herein by reference.
(10.1) Shareholder Rights Agreement, dated as of
May 4, 1987, was included as Exhibit 1 to
Form 8-A of the registrant dated May 13,
1987, which agreement is incorporated herein
by reference.
(10.2)* Company's 1990 Stock Option Plan was included
as Exhibit 4.3 to the Company's registration
statement on Form S-8 dated August 23,
1995(File No. 33-62021), which plan is
incorporated herein by reference.
(10.3)* Company's 1996 Nonemployee Director Stock
Option Plan was included as Exhibit 4.3 to
the Company's registration statement on Form
S-8 dated June 28, 1996 (File No.
333-07129), which plan is incorporated
herein by reference.
(21) Schedule listing subsidiaries of the
registrant
(23) Consent of Independent Public Accountants
(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
*Compensatory plan.
(b) Reports on Form 8-K filed during the fourth quarter of 2002:
None
30
SCHEDULE II
Lufkin Industries, Inc.
Valuation & Qualifying Accounts
(in thousands of dollars)
Additions
---------------------------
Balance at Charged to Balance at
Beginning Charged Other End
Description of Year To Expense Accounts Deductions of Year
- -----------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts:
Year Ended December 31, 2002 $ 818 $ - $ - $ 578 $ 240
Year Ended December 31, 2001 605 213 - - 818
Year Ended December 31, 2000 605 - - - 605
Inventory: Valuation Reserves:
Year Ended December 31, 2002 $ 442 $ 422 $ - $ 139 $ 725
Year Ended December 31, 2001 1,219 - 82 859 442
Year Ended December 31, 2000 1,996 649 - 1,426 1,219
Inventory: LIFO Reserves:
Year Ended December 31, 2002 $ 17,565 $ 117 $ - $ - $ 17,682
Year Ended December 31, 2001 19,449 - - 1,884 17,565
Year Ended December 31, 2000 20,419 - - 970 19,449
Property, Plant & Equipment Reserve:
Year Ended December 31, 2002 $ 549 $ - $ - $ - $ 549
Year Ended December 31, 2001 549 - - - 549
Year Ended December 31, 2000 549 - - - 549
Health Trust Receivable Reserve:
Year Ended December 31, 2002 $ 460 $ 50 $ - $ 510 $ -
Year Ended December 31, 2001 - 460 - - 460
Year Ended December 31, 2000 - - - - -
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Lufkin Industries, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on March 26,
2003.
LUFKIN INDUSTRIES, INC.
BY /s/ R. D. Leslie
--------------------------------------------
R. D. Leslie, Vice President/Treasurer/Chief
Financial Officer Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 26, 2003, by the following persons on
behalf of Lufkin Industries, Inc. and in the capacities indicated.
By /s/ D. V. Smith
--------------------------------------------
D. V. Smith, President and Chief Executive
Officer
By /s/ R. T. Blakely, III
--------------------------------------------
R. T. Blakely, III, Director
By /s/ S. W. Henderson, III
--------------------------------------------
S. W. Henderson, III, Director
By /s/ J. T. Jongebloed
--------------------------------------------
J. T. Jongebloed, Director
By /s/ M. E. Kurth, Jr.
--------------------------------------------
M. E. Kurth, Jr., Director
By /s/ J. H. Lollar
--------------------------------------------
J. H. Lollar, Director
By /s/ B. H. O'Neal
--------------------------------------------
B. H. O'Neal, Director
By /s/ H. J. Trout, Jr.
--------------------------------------------
H. J. Trout, Jr., Director
By /s/ T. E. Wiener
--------------------------------------------
T. E. Wiener, Director
32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Douglas V. Smith, the Chief Executive Officer of Lufkin Industries, Inc., a
Texas corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of Lufkin Industries,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Douglas V. Smith
- --------------------------------------
Douglas V. Smith
Chief Executive Officer
33
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, R. D. Leslie, the Chief Financial Officer of Lufkin Industries, Inc., a Texas
corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of Lufkin Industries,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ R. D. Leslie
- --------------------------------------
R. D. Leslie
Chief Financial Officer
34
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- ----------------------------------------------------------------------
(3.1) Articles of Incorporation, as amended, included as Exhibit 3 to Form
10-K of the registrant for the year ended December 31, 1990, which
exhibit is incorporated herein by reference.
(3.2) Articles of Amendment to Fourth Restated Articles of Incorporation,
included as Exhibit 3.1 to Form 8-K of the registrant filed December
10, 1999, which exhibit is incorporated herein by reference.
(3.3) Restated Bylaws, included as Exhibit 3.2 to Form 8-K of the registrant
filed December 10, 1999, which exhibit is incorporated herein by
reference.
(10.1) Shareholder Rights Agreement, dated as of May 4, 1987, was included as
Exhibit 1 to Form 8-A of the registrant dated May 13, 1987, which
agreement is incorporated herein by reference.
(10.2)* Company's 1990 Stock Option Plan was included as Exhibit 4.3 to the
Company's registration statement on Form S-8 dated August 23,
1995(File No. 33-62021), which plan is incorporated herein by
reference.
(10.3)* Company's 1996 Nonemployee Director Stock Option Plan was included as
Exhibit 4.3 to the Company's registration statement on Form S-8 dated
June 28, 1996 (File No. 333-07129), which plan is incorporated herein
by reference.
(21) Schedule listing subsidiaries of the registrant
(23) Consent of Independent Public Accountants
(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
*Compensatory plan.
35