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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-2612
-----------------------------
LUFKIN INDUSTRIES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-0404410
----- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
601 SOUTH RAGUET, LUFKIN, TEXAS 75904
------------------------------- -----
(Address of principal executive offices) (Zip Code)
(936) 634-2211
--------------
(Registrant's telephone number, including area code)
---------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period as the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No ___
---
There were 6,533,639 shares of Common Stock, $1.00 par value per share,
outstanding as of May 6, 2003, not including 358,742 shares classified as
Treasury Stock.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of dollars)
March 31, December 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 21,906 $ 27,608
Receivables, net 33,182 33,872
Income taxes receivable 706 713
Inventories 36,180 31,633
Deferred income tax assets 967 948
Other current assets 1,340 462
------------ -----------
Total current assets 94,280 95,236
------------ -----------
Property, plant and equipment, at cost 264,982 261,089
Less accumulated depreciation 183,884 179,858
------------ -----------
81,098 81,231
------------ -----------
Prepaid pension costs 55,345 54,720
Goodwill, net 10,391 10,322
Other assets, net 7,076 6,846
------------ -----------
Total assets $ 248,190 $ 248,355
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term notes payable $ 210 $ 259
Accounts payable 13,095 12,003
Accrued liabilities:
Payroll and benefits 5,168 5,833
Warranty expenses 1,973 1,858
Taxes payable 3,277 4,036
Other 6,398 6,826
------------ -----------
Total current liabilities 30,121 30,815
------------ -----------
Deferred income tax liabilities 27,748 27,471
Postretirement benefits 10,956 10,956
Long-term notes payable, net of current portion 117 164
Shareholders' equity:
Common stock, $1.00 par value per share;
60,000,000 shares authorized;
6,892,381 shares issued 6,892 6,892
Capital in excess of par 18,476 18,477
Retained earnings 162,437 162,838
Treasury stock, 365,742 and 364,462 shares,
respectively, at cost (7,552) (7,524)
Accumulated other comprehensive income:
Cumulative translation adjustment (1,005) (1,734)
------------ -----------
Total shareholders' equity 179,248 178,949
------------ -----------
Total liabilities and shareholders' equity $ 248,190 $ 248,355
============ ===========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME (UNAUDITED)
(In thousands of dollars, except per share data)
Three Months Ended
March 31,
------------------------------
2003 2002
----------- -----------
Sales $ 55,061 $ 51,007
Cost of sales 45,729 42,804
----------- -----------
Gross profit 9,332 8,203
Selling, general and administrative expenses 8,243 7,960
----------- -----------
Operating income 1,089 243
Investment income 69 152
Interest expense (11) (96)
Other income (expense), net 102 11
----------- -----------
Earnings before income tax provision 1,249 310
Income tax provision 475 122
----------- -----------
Net earnings 774 188
Change in foreign currency translation adjustment 729 (81)
----------- -----------
Total comprehensive income $ 1,503 $ 107
=========== ===========
Net earnings per share:
Basic $ 0.12 $ 0.03
=========== ===========
Diluted $ 0.12 $ 0.03
=========== ===========
Dividends per share $ 0.18 $ 0.18
=========== ===========
Weighted average number of shares outstanding:
Basic 6,527,777 6,395,727
Diluted 6,612,789 6,533,842
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
Three Months Ended
March 31,
-------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net earnings $ 774 $ 188
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization 2,951 2,806
Deferred income tax provision 193 -
Pension income (625) (1,250)
Gain on disposition of property, plant and equipment (73) (19)
Changes in:
Receivables, net 926 4,308
Income taxes receivable 10 -
Inventories (4,250) (721)
Other current assets (884) (816)
Accounts payable 793 (617)
Accrued liabilities (1,780) (3,864)
------------ ------------
Net cash provided (used) by operating activities (1,965) 15
------------ ------------
Cash flows from investing activities:
Additions to property, plant and equipment (2,435) (1,485)
Proceeds from disposition of property, plant and
equipment 79 35
Increase in other assets (255) (80)
------------ ------------
Net cash used in investing activities (2,611) (1,530)
------------ ------------
Cash flows from financing activities:
Payments on notes payable (88) (424)
Dividends paid (1,175) (1,151)
Proceeds from exercise of stock options - 55
Purchases of treasury stock (31) -
------------ ------------
Net cash used in financing activities (1,294) (1,520)
------------ ------------
Effect of translation on cash and cash equivalents 168 (30)
------------ ------------
Net decrease in cash and cash equivalents (5,702) (3,065)
Cash and cash equivalents at beginning of period 27,608 18,087
------------ ------------
Cash and cash equivalents at end of period $ 21,906 $ 15,022
============ ============
See accompanying notes to consolidated financial statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Lufkin Industries, Inc. and its consolidated subsidiaries (the
"Company") and have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information in the notes to
the consolidated financial statements normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America has been condensed or omitted
pursuant to these rules and regulations. In the opinion of management, all
adjustments, consisting of normal recurring accruals unless specified,
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows have been included. For further
information, including a summary of major accounting policies, refer to the
consolidated financial statements and related footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
The results of operations for the three months ended March 31, 2003, are not
necessarily indicative of the results that may be expected for the full
fiscal year.
2. Receivables
The following is a summary of the Company's receivable balances (in thousands
of dollars):
March 31, December 31,
2003 2002
------------ --------------
Accounts receivable $ 33,189 $ 33,777
Notes receivable 248 335
------------ -------------
Total receivables 33,437 34,112
Allowance for doubtful accounts (256) (240)
------------ -------------
Net receivables $ 33,181 $ 33,872
============ =============
3. Property, Plant & Equipment
The following is a summary of the Company's P. P. & E. balances (in thousands
of dollars):
March 31, December 31,
2003 2002
------------ --------------
Land $ 2,716 $ 2,693
Land improvements 6,718 6,690
Buildings 62,430 61,358
Machinery and equipment 176,397 173,703
Furniture and fixtures 3,861 3,898
Computer equipment and software 12,860 12,747
------------ -------------
Total property, plant and equipment 264,982 261,089
Less accumulated depreciation (183,884) (179,858)
------------ -------------
Total property, plant and equipment, net $ 81,098 $ 81,231
============ =============
Depreciation expense related to property, plant and equipment was $2.8
million and $2.9 million in the quarters ended March 31, 2003 and 2002,
respectively.
5
4. Inventories
Inventories used in determining cost of sales were as follows (in thousands
of dollars):
March 31, December 31,
2003 2002
--------------- ---------------
Gross inventories @ FIFO:
Finished goods $ 5,481 $ 4,656
Work in process 7,378 6,210
Raw materials & component parts 41,620 39,174
------- -------
Total gross inventories @ FIFO 54,479 50,040
Less reserves:
LIFO 17,682 17,682
Valuation 617 725
------- -------
Total inventories as reported $36,180 $31,633
======= =======
Gross inventories on a FIFO basis shown above that were accounted for on a
LIFO basis were $40,485,000 and $37,257,000 at March 31, 2003, and December
31, 2002, respectively.
5. Net Earnings Per Share
Net 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 net earnings per share for the three months ended March 31 2003 and
2002 are illustrated below (in thousands of dollars, except share and per
share data):
Three Months Ended
March 31,
--------------------------------------
2003 2002
------------------ ------------------
Numerator:
Numerator for basic and diluted earnings per share-net earnings $ 774 $ 188
========== ==========
Denominator:
Denominator for basic net earnings per share-weighted-average shares 6,527,777 6,395,727
Effect of dilutive securities: employee stock options 85,012 138,115
---------- ----------
Denominator for diluted net earnings per share-adjusted
weighted-average shares and assumed conversions 6,612,789 6,533,842
========== ==========
Basic net earnings per share $ 0.12 $ 0.03
========== ==========
Diluted net earnings per share $ 0.12 $ 0.03
========== ==========
Options to purchase a total of 371,558 and 204,382 shares of the Company's
common stock at March 31, 2003 and 2002, respectively, were excluded from the
calculation of fully diluted earnings per share because their effect on fully
diluted earnings per share for the period were antidilutive.
6
6. 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.
7. Segment Data
The Company operates with three business segments - Oil Field, Power
Transmission and Trailer. The Company's Corporate group provides
administrative services to the three business segments. Corporate expenses
and certain assets are allocated to the operating segments based primarily
upon third-party revenues. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies in
the footnotes to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Following is a summary of key segment information (in thousands of dollars):
Three Months Ended March 31, 2003
---------------------------------
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- --------- -----
Gross sales $ 29,113 $ 15,892 $ 11,012 $ - $ 56,017
Inter-segment sales (359) (597) - - (956)
-------- -------- -------- -------- --------
Net sales $ 28,754 $ 15,295 $ 11,012 $ - $ 55,061
======== ======== ======== ======== ========
Operating income (loss) $ 2,411 $ (225) $ (1,097) $ - $ 1,089
Other income (expense) 27 (3) 56 80 160
-------- -------- -------- -------- --------
Earnings (loss) before
tax provision $ 2,438 $ (228) $ (1,041) $ 80 $ 1,249
======== ======== ======== ======== ========
7
Three Months Ended March 31, 2003
---------------------------------
Power
Oil Field Transmission Trailer Corporate Total
--------- ------------ ------- --------- -----
Gross sales $ 28,369 $ 14,369 $ 9,265 $ - $ 52,003
Inter-segment sales (236) (760) - - (996)
-------- -------- -------- -------- --------
Net sales $ 28,133 $ 13,609 $ 9,265 $ - $ 51,007
======== ======== ======== ======== ========
Operating income (loss) $ 1,853 $ (639) $ (971) $ - $ 243
Other income (expense) (54) (47) 3 165 67
-------- -------- -------- -------- --------
Earnings (loss) before
tax provision $ 1,799 $ (686) $ (968) $ 165 $ 310
======== ======== ======== ======== ========
8. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the quarter ended March
31, 2003, are as follows:
Power
(Thousands of dollars) Oil Field Transmission Trailer Total
--------- ------------ ------- -----
Balance as of 12/31/02 $ 8,492 $ 1,830 $ - $ 10,322
Goodwill acquired during year - - - -
Impairment losses - - - -
Goodwill written off related to sale of
business unit - - - -
Foreign currency translation - 69 - 69
--------- --------- --------- ---------
Balance as of 3/31/03 $ 8,492 $ 1,899 $ - $ 10,391
========= ========= ========= =========
Goodwill impairment tests were performed in the first quarter of 2003 and no
impairment losses were recorded.
Intangible Assets
Balances and related accumulated amortization of intangible assets are as
follows (in thousands of dollars):
March 31, December 31,
2003 2002
-------------- -------------
Intangible assets subject to amortization:
Non-compete agreements
----------------------
Original balance $ 500 $ 500
Less accumulated amortization (481) (462)
-------- --------
Ending balance $ 19 $ 38
======== ========
Intangible assets not subject to amortization:
None - -
8
9. Stock Option Plans
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," and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," the Company's net earnings and net
earnings per share would have been reduced to the following pro forma
amounts, (in thousands except per share data):
Three Months Ended
March 31,
----------------------------------
2003 2002
---------------- ----------------
Net earnings, as reported $ 774 $ 188
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (247) (275)
--------- ---------
Pro forma net earnings (loss) $ 527 $ (87)
========= =========
Net earnings (loss) per share:
Basic net earnings (loss) per share As reported $ 0.12 $ 0.03
========= =========
Pro forma $ 0.08 $ (0.01)
========= =========
Diluted net earnings (loss) per share As reported $ 0.12 $ 0.03
========= =========
Pro forma $ 0.08 $ (0.01)
========= =========
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 during the first quarter of
2003 and 2002 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
2003 Grants Expected dividend yield 3.23%
Expected stock price volatility 38.68%
Risk free interest rate 3.96%
Expected life of options 10 years
2002 Grants Expected dividend yield 3.19%
Expected stock price volatility 38.59%
Risk free interest rate 4.85%
Expected life of options 10 years
Options granted during the first quarter of 2003 had a weighted average fair
value of $7.73 per option and a weighted average exercise price of $22.30
per option.
10. Recently Issued Accounting Pronouncements
The Company adopted all recently issued accounting pronouncements as of
January 1, 2003. Such pronouncements are described in the summary of
significant accounting polices in the footnotes to the consolidated
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
9
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
The Company designs, manufactures, sells and services various types of oil field
pumping units, power transmission products and highway trailers. The Company's
Oil Field segment manufactures and services numerous sizes and configurations of
oil field pumping and related automation equipment, as well as commercial
castings. The Power Transmission segment designs, manufactures, repairs and
services speed increasers and reducers for use in industrial applications such
as petrochemical, refining, rubber, plastics and steel and also for use in
marine propulsion applications. The Trailer segment produces and services
various types and styles of highway trailers, including vans, platforms and
dumps.
Results of Operations
Three Months Ended March 31, 2003, Compared to Three Months Ended March 31,
2002:
Net sales for the three months ended March 31, 2003, increased to $55,061,000
from $51,007,000 for the three months ended March 31, 2002. Net earnings were
$774,000 or $0.12 per share (diluted) for the three months ended March 31, 2003,
compared to net earnings of $188,000 or $0.03 per share (diluted) for the three
months ended March 31, 2002.
The following table summarizes the Company's sales and gross profit by operating
segment (in thousands of dollars):
Three Months Ended
March 31, Increase/ % Increase/
--------------------------------
2003 2002 (Decrease) (Decrease)
--------------- --------------- ---------- ----------
Sales
- -----
Oil Field $28,754 $28,133 $ 621 2.2
Power Transmission 15,295 13,609 1,686 12.4
Trailer 11,012 9,265 1,747 18.9
------- ------- ------- -------
Total $55,061 $51,007 $ 4,054 7.9
======= ======= ======= =======
Gross Profit
- ------------
Oil Field $ 5,557 $ 5,063 $ 494 9.8
Power Transmission 3,656 2,824 832 29.5
Trailer 119 316 (197) (62.3)
------- ------- ------- -------
Total $ 9,332 $ 8,203 $ 1,129 13.8
======= ======= ======= =======
Oil Field sales increased slightly to $28,754,000, or 2.2%, in the first quarter
of 2003 from $28,133,000 in the first quarter of 2002 as the general levels of
oil field drilling and production activity had not increased despite recent
higher energy prices. Drilling activity has not increased with higher energy
prices due to uncertainty over both future global demand levels and the
stability of the price of oil. Oil Field's backlog decreased to $12,500,000 as
of March 31, 2003, from $12,600,000 at December 31, 2002, and $22,000,000 for
the same period last year due primarily to reduced bookings for new pumping
units.
Gross profit for the Oil Field segment increased to $5,557,000 for the three
months ended March 31, 2003, or 9.8%, compared to $5,063,000 for the prior year
quarter due primarily to the increase in sales of oil field products but also
due to an increase in the gross margin. Gross margin for the comparable periods
increased to 19.3% in 2003 compared to 18.0% in 2002 due to cost containment
efforts in manufacturing spending.
Direct selling, general and administrative expenses for Oil Field increased
slightly to $1,870,000, or 3.7%, for the quarter ended March 31, 2003, from
$1,804,000 for the quarter ended March 31, 2002.
10
Sales for the Company's Power Transmission segment increased to $15,295,000, or
12.4%, for the first quarter of 2003 compared to $13,609,000 for the first
quarter of 2002 due to increased volume of new high-speed gearboxes manufactured
for the offshore oil and gas market, repair activity in the plastic and
petrochemical markets and the expansion into the Southeast United States. The
Company's Power Transmission backlog at March 31, 2003, increased to $32,300,000
from $30,900,000 at December 31, 2002, due to higher bookings in the Company's
French operations of new low-speed units for the aluminum and mining markets and
repair orders. However, backlog declined from the March 31, 2002, level of
$33,900,000 from lower backlog for the domestic repair business due to a decline
in orders for the sugar and cement markets, which traditionally are large and
long-lead time orders.
Gross profit for the Power Transmission segment increased to $3,656,000 for the
three months ended March 31, 2003, or 29.5%, compared to $2,824,000 for the
prior year quarter due to the sales volume increases mentioned above and an
improvement in the gross margin. Gross margin for the comparable periods
increased to 23.9% in 2003 compared to 20.8% in 2002. This increase was due to
the reduction of warranty expenses and lower material costs.
Direct selling, general and administrative expenses for Power Transmission
increased to $2,885,000, or 22.0%, for the quarter ended March 31, 2003, from
$2,364,000 for the quarter ended March 31, 2002, due to higher third-party
commissions and increased personnel-related costs from higher selling and
engineering staffing in the Company's French operations for the addition of
high-speed gearbox manufacturing.
Trailer sales for the first quarter of 2003 increased to $11,012,000, or 18.9%,
from $9,265,000 for the first quarter of 2002, 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. Backlog for the Trailer segment totaled $10,600,000
at March 31, 2003, compared to $10,100,000 at December 31, 2002, and $11,400,000
at March 31, 2002. The backlog increase from year-end reflects the slight
improvement in the market, but the decline from the previous year quarter
reflects the continued resistance of freight haulers to place orders for new
trailers due to the continued uncertainty in the recovery of the U.S. economy.
General economic conditions drive freight volumes and the need for additional
trailers.
Trailer gross profit declined to $119,000, or 62.3%, for the three months ended
March 31, 2003, from $316,000 for the comparable prior year quarter. This
decrease was primarily driven from a decline in the gross margin, which offset
the benefit of higher volumes. Gross margin for the first quarter of 2003
declined to 1.1% from 3.4% in the first quarter of 2002. This decline was due to
a higher mix of lower-margin vans and the impact of lower pension income.
Direct selling, general and administrative expenses for Trailer increased
slightly to $419,000, or 2.9%, for the quarter ended March 31, 2003, from
$407,000 for the quarter ended March 31, 2002, due to increased engineering
costs related to the increase in the sales volume.
Corporate administrative expenses, which are allocated to the segments primarily
based on third-party revenues, decreased to $3,069,000, or 9.3%, for the quarter
ended March 31, 2003, from $3,385,000 for the quarter ended March 31, 2002,
primarily due to lower expenses for litigation and other legal matters.
Interest and other income and expense for the three months ended March 31, 2003,
totaled $160,000 of income compared to income of $67,000 for the prior year
quarter. The increase was due primarily to the repayment of the majority of
long-term debt early in the third quarter of 2002 lowering interest expense and
gains on the disposal of equipment.
Pension income, which is reported as a reduction of cost of sales, declined to
$625,000 for the quarter ended March 31, 2003, or 50%, compared to $1,250,000
for the quarter ended March 31, 2002. This decline is due to lower expected
returns on plan assets due to the lower fair market value of the plan assets.
11
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 $21.9 million at March 31, 2003, compared to
$27.6 million at December 31, 2002. For the quarter ended March 31, 2003, net
cash used by operating activities was $2.0 million, cash used in investing
activities totaled $2.6 million, cash used in financing activities amounted to
$1.3 million and the favorable 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 $3.2 million offset by a
net increase in working capital of $5.2 million. This increase was primarily due
to higher inventory in the Oil Field and Power Transmission segments. Cash used
in investing activities included net capital expenditures totaling $2.3 million
and an increase in other long-term assets of $0.3 million. Capital expenditures
in the first quarter of 2003 were primarily for additions and replacements of
production equipment and operating vehicles in the Oil Field segment and the
expansion into the Southeast U.S. for repairing power transmission equipment.
Capital expenditures for 2003 are projected to be in the range of $15.0 to $17.0
million. Significant components of cash used in financing activities included
payments on long-term debt of $0.1 million and dividend payments of $1.2 million
or $0.18 per share.
Total debt balances at March 31, 2003, including current maturities of long-term
debt, consisted of $0.3 million of notes payable to various banks. As of March
31, 2003, the Company had no outstanding debt associated with the Bank Facility
discussed below. Total debt decreased by $0.1 million during the first quarter
of 2003 due to principal payments on long-term notes payable.
The Company has 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. This facility expires
December 30, 2005. 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 March 31, 2003, 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 828,370 shares of
its common stock at an aggregate purchase price of $17.0 million. A total of
1,500 shares were repurchased during the quarter ended March 31, 2003, at an
average price of $20.46 per share. 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 March 31, 2003, the Company held 365,742
shares of treasury stock at an aggregate cost of approximately $7.6 million.
Authorizations of approximately $0.1 million remained at March 31, 2003.
The Company had no significant lease or contractual obligations as of March 31,
2003, that would negatively impact cash requirements through 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
The Company adopted all recently issued accounting pronouncements as of January
1, 2003. Such pronouncements are described in the summary of significant
accounting polices in the footnotes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
12
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.
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.
13
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 Quarterly Report on Form 10-Q 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 3. 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 4. 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-Q, 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.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A class action complaint was filed in the United States District Court for the
Eastern District of Texas on March 7, 1997, by an employee and a former employee
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
15
Item 6. Exhibits and Reports on Form 8-K
(a) 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 of Lufkin Industries, Inc. 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 of Lufkin Industries, Inc., 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, included
as Exhibit 1 to Form 8-A of the registrant dated May 13, 1987,
which agreement is incorporated herein by reference.
*10.2 1990 Stock Option Plan, 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 1996 Nonemployee Director Stock Option Plan, 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.
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
* Incorporated by reference
(b) Reports on Form 8-K
None
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Date: May 6, 2003
LUFKIN INDUSTRIES, INC.
By /s/ R. D. Leslie
----------------------
R.D. Leslie
Vice President/Treasurer/Chief Financial Officer
Principal Financial and Accounting Officer
17
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 Quarterly Report on Form 10-Q of Lufkin Industries,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c. presented in this quarterly 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
quarterly 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: May 6, 2003
/s/ Douglas V. Smith
---------------------------
Douglas V. Smith
Chief Executive Officer
18
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 Quarterly Report on Form 10-Q of Lufkin Industries,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c. presented in this quarterly 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
quarterly 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: May 6, 2003
/s/ R. D. Leslie
- -------------------------
R. D. Leslie
Chief Financial Officer
19