<PAGE>
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
December 31,
For the fiscal year ended 1996 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
incorporation or organization) Identification No.)
601 South Raguet, Lufkin, Texas 75901
- ----------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 409/634-2211
------------------------------
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. [ ]
The aggregate market value of the Company's voting stock held by non-affiliates
as of January 31, 1997 is $132,928,000.
6,558,383 shares of the Company's Common Stock were outstanding on December 31,
1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the sections entitled "Financial Review", "Letter to the
Shareholders", "Management's Discussion and Analysis", "Product Line
Information" and the consolidated financial statements of the Company's Annual
Report to Shareholders for the year ended December 31, 1996, are incorporated by
reference in Parts I, II and IV, hereof and are included as Exhibit 13.
The sections entitled "Voting Securities", "Directors and Nominees for Director"
and "Executive Compensation" of the Company's definitive Proxy Statement for its
annual meeting of shareholders on May 7, 1997, are incorporated by reference in
Part III hereof and are included as Exhibit 99.
<PAGE>
Part I
Item 1. Business
- -----------------
The Company was incorporated under the laws of Texas on March 4, 1902 and
since that date, has maintained its principal office and manufacturing
facilities in Lufkin, Texas. The Company designs, manufactures, sells, and
services various types of oil field pumping units, power transmission products,
foundry castings and highway trailers. Lufkin manufactures four basic types of
pumping units: 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. The Company's power transmission
products (speed increasers and reducers) are designed, manufactured and sold
primarily for use in industrial applications such as petrochemical, refining,
rubber, plastics and steel and for use in marine propulsion applications. The
Company produces numerous sizes and combinations of gears. The Company's
foundry castings are primarily customer designed components manufactured by
Lufkin for use in customer products. Lufkin also produces various sizes and
styles of trailers, including vans, platforms, and dumps.
The Company manufactures most of the component parts used in its Machinery
Division products and purchases the raw materials and outside manufactured parts
from a variety of suppliers on an order basis. The Trailer Division generally
assembles various component parts manufactured by others. The inventory
consists primarily of raw materials and component parts which are generally
assembled into finished products to fill specific customer orders. These
finished products are sold primarily by the Company's own employees.
Oil field pumping units are the Company's primary products sold for export.
These sales, other than to Canada, are made principally through foreign sales
representatives, licensees and distributors. During 1996, foreign sales
accounted for approximately 19 percent of the Company's total sales.
The Company's domestic and international markets are highly competitive with
price, quality and speed of delivery being important factors. While the Company
believes that it is one of the larger manufacturers of sucker rod pumping units
in the United States, manufacturers of other types of units (submersibles and
hydraulics) have a significant share of the total pumping unit market. The
Company does not believe it has a large market share in the power transmission,
castings or trailer markets.
The Company employed approximately 1,900 people at December 31, 1996,
including approximately 1,340 that were paid on an hourly basis. The Company
has an open shop contract, which runs to October 3, 1999, with three AFL-CIO
labor unions. The Company considers its employee relations to be satisfactory.
Additional information required by Item 1 is included in the sections
entitled "Management's Discussion and Analysis", "Letter to the Shareholders",
and "Product Line Information" of the Annual Report, portions of which sections
are incorporated herein by reference and included as part of Exhibit 13.
Item 2. Properties
- -------------------
The Company's major manufacturing facilities are located in and near Lufkin,
are owned in fee and include approximately 150 acres and a foundry, machine
shop, structural shops, assembly shops and warehouses. The Company also has a
plant in Nisku, Canada which 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.
Item 3. Legal Proceedings
- --------------------------
None
Item 4. Submission of Matters to a Vote of Shareholders
- --------------------------------------------------------
None
<PAGE>
Item 4A. Executive Officers of the Registrant
- ----------------------------------------------
The following information is submitted with respect to the executive officers
of the Company as of March 1, 1997:
<TABLE>
<CAPTION>
Officer
Name Position with Company Age Since
---- --------------------- --- -----
<S> <C> <C> <C>
D. V. Smith Chairman, President &
Chief Executive Officer 54 1993
J. W. Barber Vice President 64 1994
J. F. Glick Vice President 44 1994
J. R. Partridge Vice President 61 1986
M. A. Penn Vice President 56 1983
E. G. Pittman Vice President 63 1976
S. H. Semlinger Vice President 43 1992
C. J. Haley, Jr. Secretary-Treasurer 54 1973
L. M. Hoes Vice President 50 1996
P. G. Perez Vice President 51 1996
</TABLE>
There is no significant family relationship either by blood or by marriage
among the officers of the Company.
All of the executive officers of the Company, with the exception of Mr.
Smith, Mr. Barber, Mr. Glick, Mr. Hoes and Mr. Perez have been employed by the
Company for more than five years in the same or similar positions. Mr. Smith
was first employed by the Company in January 1993 to serve as President and
Chief Executive Officer. For the five year period prior to his employment with
the Company, Mr. Smith was employed and served as Vice President of
Manufacturing of Cooper Industries (1989-93) and as Vice President of Oil Tool
Division of Cameron Iron Works (1982-89). Both companies are based in Houston,
Texas. Mr. Barber was first employed by the Company in July 1990 to serve as
sales manager for trailer products. Mr. Barber was previously employed by
Fruehauf Trailers as Vice President of Welded Products in Detroit, Michigan.
Mr. Glick was first employed by the Company in September 1994 to serve as Vice
President and General Manager of the Power Transmission Division. Prior to
joining the Company, Mr. Glick served as Director of Manufacturing, U.K. and
Ireland, with Cooper Oil Tools and as Plant Manager of Cooper Oil Tools in
Leeds, England. Mr. Hoes was first employed by the Company in May, 1996 to
serve as Vice President and General Manager of the Oil Field Products Division.
Prior to joining the Company, Mr. Hoes was employed as Vice President of
Manufacturing for Cooper Cameron Inc. in Houston, Texas, as Vice President of
Manufacturing for Cooper Oil Tool Division and as Vice President of Engineering
for Cooper Oil Tool Division based in Houston, Texas. Mr. Perez was first
employed by the Company in July, 1993 to serve as Director of Human Resources.
Mr. Perez was previously employed by Cooper Industries as Manager of Employee
Relations for the Oil Tool Division in Houston, Texas and by Cameron Iron Works
as Manager of Labor Relations in Houston, Texas . The executive officers of the
Company serve at the pleasure of the Board of Directors of the Company. The
term of office for all officers expires at the next annual meeting of the Board
of Directors of the Company.
Part II
Item 5. Market for the Registrant's Common Stock
and Related Shareholder Matters
- --------------------------------------------------
The information required by Item 5 is included in the section entitled
"Financial Review" of the Annual Report, which section is incorporated herein by
reference and included as part of Exhibit 13.
Item 6. Selected Financial Data
- --------------------------------
FIVE YEAR SUMMARY OF SELECTED
CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(In millions, except per share data) 1996 1995 1994 1993 1992
- ------------------------------------ ------ ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
Sales $226.0 $248.9 $217.3 $202.2 $178.6
Earnings (loss) from operations 10.5 8.9 (1.2)* 2.5 (27.3)**
Earnings (loss) per share 1.56 1.31 (.18)* .38 (4.01)**
Total assets 185.9 186.3 176.8 182.5 176.3
Cash dividends per share .60 .60 .60 .60 1.35
</TABLE>
*Includes pretax charges of $11.2 million for special inventory writedowns.
**Includes a $24.3 million restructuring charge. The Company adopted SFAS No.
109 effective January 1, 1992, but this change had no effect on the Company's
financial statements. In addition, the Company adopted SFAS No. 106 effective
January 1, 1992. The cumulative effect of the change in accounting for post-
retirement benefits including the applicable income tax benefit was a charge to
income of $7.5 million or $1.11 per share.
<PAGE>
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -----------------------------------------------------------------
The information required by Item 7 is included in the section entitled
"Management's Discussion and Analysis" of the Company's Annual Report, portions
of which section are incorporated herein by reference and included as part of
Exhibit 13.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The information required by Item 8 is included in the consolidated financial
statements and related notes and the "Report of Independent Public Accountants"
of the Company's Annual Report, which consolidated financial statements and
related notes and report of independent public accountants are incorporated
herein by reference and included as part of Exhibit 13.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
- ---------------------------------------------------------
None
Part III
Item 10. Directors and Executive Officers of
the Registrant
- ----------------------------------------------
The information required by Item 10 relating to the directors of the Company
is included in the section entitled "Directors and Nominees for Director" on
pages 2 through 5 of the definitive Proxy Statement for the annual meeting of
Company shareholders on May 7, 1997 ("Proxy Statement"), which section is
incorporated herein by reference and included as part of Exhibit 99. The
information relating to the executive officers of the Company is provided in
Item 4A of Part I of this Annual Report.
Item 11. Executive Compensation
- --------------------------------
The information required by Item 11 is included in the section entitled
"Executive Compensation" on pages 6 through 9 of the Proxy Statement, which
section is incorporated herein by reference and included as part of Exhibit 99.
Item 12. Security Ownership of Certain Beneficial
Owners and Management
- --------------------------------------------------
The information required by Item 12 is included in the sections entitled
"Voting Securities" and "Election of Directors" on pages 1 through 5 of the
Company's Proxy Statement, which sections are incorporated herein by reference
and included as part of Exhibit 99.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
None
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
- --------------------------------------------------
(a) Documents filed as part of the report
1. Consolidated Financial Statements (incorporated by
reference to the Annual Report)
Report of Independent Public Accountants
Consolidated Balance Sheet
Consolidated Statement of Earnings
Consolidated Statement of Stockholders'
Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
2. Financial statement schedules
Schedules Omitted--All schedules for which
provision is made in the applicable regulations of
the Securities and Exchange Commission have been
omitted because they are not applicable or not re-
quired or the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
(3) Articles of Incorporation, as amended, and
Bylaws, as amended, were included as exhibit 3
to Form 10-K of the registrant for the year
ended December 31, 1990, which exhibits are
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 28.1 to the Company's registration
statement on Form S-8 dated September 24, 1990
(File No. 33-36976), which plan is incorporated
herein by reference.
(13) Portions of the Annual Report
to Shareholders for the year ended
December 31, 1996 are included as an
exhibit to this report for the informa-
tion of the Securities and Exchange Com-
mission.
(22) Schedule listing subsidiaries of the
registrant
(24) Consent of Independent Public Accountants
(27) Financial Data Schedule
(99) Portions of the definitive proxy statement of Lufkin
Industries, Inc., for the annual meeting
of shareholders on May 7, 1997 are included
as an exhibit to this report for the informa-
tion of the Securities and Exchange Commission.
*Compensatory plan.
(b) Reports on Form 8-K filed during the fourth quarter of 1996
None
<PAGE>
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 February 19, 1997.
LUFKIN INDUSTRIES, INC.
BY /s/ C. James Haley, Jr.
----------------------------------------------
C. James Haley, Jr., Secretary-Treasurer
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on February 19, 1997, below 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/ S. W. Henderson, III
------------------------------------------------
S. W. Henderson, III, Director
By /s/ L. R. Jalenak, Jr.
------------------------------------------------
L. R. Jalenak, Jr., Director
By /s/ H. H. King
------------------------------------------------
H. H. King, Director
By /s/ M. E. Kurth, Jr.
------------------------------------------------
M. E. Kurth, Jr., Director
By /s/ W. T. Little
------------------------------------------------
W. T. Little, Director
By /s/ B. H. O'Neal
------------------------------------------------
B. H. O'Neal, Director
By /s/ F. B. Stevenson
------------------------------------------------
F. B. Stevenson, Director
By /s/ H. J. Trout, Jr.
------------------------------------------------
H. J. Trout, Jr., Director
By /s/ W. W. Trout, Jr.
------------------------------------------------
W. W. Trout, Jr., Director
By /s/ T. E. Wiener
------------------------------------------------
T. E. Wiener, Director
<PAGE>
EXHIBIT 13
PORTIONS OF LUFKIN INDUSTRIES, INC. ANNUAL REPORT TO SHAREHOLDERS
LUFKIN INDUSTRIES, INC.
LETTER TO SHAREHOLDERS
LETTER TO THE SHAREHOLDERS
1996 was marked by the continued improvement of the Company's financial
performance. Sales were down almost 10% due to a major downturn in demand for
trailers, but profits were up in all other product lines. Our customer base was
expanded in all areas, and our international presence was increased. We were
successful in adapting to a different mix of products and were successful in
achieving our goals for the year. We believe that this improvement will continue
and that the outlook for 1997 is promising.
For the year ended December 31, 1996, net sales were $226.0 million compared
with $248.9 million reported for the year ended December 31, 1995. Sales of
power transmission products increased 22% to $73.1 million compared with $60.1
million in 1995. Power transmission sales benefited from stronger foreign
markets. Oil field products sales rose 8% in 1996 to $50.0 million from $46.4
million in 1995 fueled in part by an improved price for oil around the world.
Foundry castings products sales were up 2% to $32.5 million from $31.8 million a
year ago. As anticipated, trailer products sales in 1996 were lower than in 1995
brought on by a decline in trailer orders and soft economic conditions affecting
the trucking industry. For 1996, sales were $70.4 million, a decrease of 36%
from $110.5 million in 1995. We are encouraged by the increase in order level
during the year from the low point which occurred in the first quarter.
Operating income in 1996 increased 36% to $14.3 million from $10.5 million in
1995. The increase reflects improvements in our operations to increase
productivity and lower costs and a favorable mix effect of increased shipments
of oil field and power transmission products. Cost of sales as a percentage of
total sales decreased to 83.6% from 87.1% a year ago. Net income rose 18% to
$10.5 million compared with $8.9 million, and earnings per share increased 19%
to $1.56 per share compared with $1.31 per share, a year ago.
Lufkin's total backlog as of December 31, 1996, was $99.7 million compared with
$76.6 million at the end of the third quarter in 1996 and $100.1 million at the
end of 1995. At year end, the backlog for oil field was $12.1 million compared
with $8.1 million. The backlog was at its highest level since 1991 having
increased sequentially in each of the last three quarters. The backlog at year
end for trailers was $40.1 million compared with $40.2 million a year ago. The
backlog showed significant improvement from the $24.9 million level of the first
quarter of 1996, and we have entered 1997 in a strong position. For foundry
products, the backlog at year end was $17.4 million compared with $15.8 million
and for power transmission products it was $30.1 million compared with $36.0
million a year ago.
The Company added to its sound financial position in 1996. Lufkin ended the year
with total assets of $185.9 million and working capital of $69.4 million.
Lufkin's shareholders' equity at year end was $144.6 million, and the book value
was $22.05 per share. Cash and temporary investments totaled $30.9 million, and
Lufkin had no outstanding debt at year end.
To increase the value of the Company's common stock, the Board of Directors
authorized the use of up to $4.0 million for the repurchase of shares of
Lufkin's common stock during 1996. As of December 31, 1996, a total of 238,000
shares have been repurchased under the Company's repurchase programs. The
current repurchase program is the Company's third such program. It is the
Board's belief that periodic repurchase of common stock of Lufkin
<PAGE>
represents a sound use of a portion of available cash.
Lufkin paid four quarterly cash dividends of $0.15 per share on the Company's
common stock for a total of $0.60 per share paid in 1996. Effective with the
first quarter of 1997, the quarterly dividend was increased 13% to $0.17 per
share. Lufkin has paid a quarterly cash dividend for 57 consecutive years.
During 1996 Lufkin was able to strengthen its market position within each of its
product lines. We accomplished this by:
. Introducing new trailer products
. Developing new gearing in direct support of the power generation market
. Extending our international sales presence
. Installing new iron melting capability for engineered castings
. Increasing our customer support of oil field markets
. Improving operational capability and
performance
. Providing enhanced training for employees.
Our plan for the future is to continue to focus on investment opportunities
where we can capitalize on Lufkin's expertise within engineered industrial
products based in metalworking, strengthen our superior customer service and
improve the support facilities of all our product lines.
Lufkin's growth and financial performance is clearly supported by an excellent
organization structure. We are proud to employ some of the most experienced and
highly regarded people in our industry and to have the necessary financial
resources to achieve continued improvement. Our goal for 1997 is to see that all
Lufkin's stakeholders share in the increased performance it achieves.
Overall, we are very pleased with the results Lufkin achieved during the past
year. We are encouraged about the trends affecting our product lines,
particularly for oil field and trailer products and remain optimistic about
reporting 1997 results that compare favorably with 1996.
Sincerely,
/s/ Douglas V. Smith
Douglas V. Smith
President and Chief Executive Officer
2
<PAGE>
OIL FIELD
Overall demand for oil field pumping units in 1996 increased 8.0% over the 1995
level. This improvement was fueled by increased global investment in oil
production. Shipments in the domestic market, increased 14% in 1996. Increased
domestic drilling and the tight availability of used pumping units accounted for
the improved demand. The 1997 domestic outlook is expected to continue to
expand.
Revenue in Canada, where the government continues to stress incentives to drill
for natural gas and oil , increased 35% in 1996. The increase in Canada was
offset primarily by a slow down in Argentina. For 1997, we are expecting sales
in Canada to remain strong, a rebound in South America, and improved sales in
the Eastern Hemisphere.
The Company's presence in key South American, Far East, and Canadian markets
with local manufacturing capabilities provides the Company with the ability to
meet local demand with faster deliveries and prices competitive with local
economic conditions. This in-country presence also allows the Company to provide
technical support as well as field service which gives the Company an additional
competitive advantage.
With the completion of a factory consolidation project at the main manufacturing
facility during the third quarter of 1996, the division is positioned with
improved work flow, more efficient material handling, and new machine tool
technology which will further reduce costs and improve productivity.
The oil field division ended 1996 in a strong position. The backlog was $12.1
million, a 49% increase from $8.1 million at the end of 1995. The increase in
the average oil price (20% up over 1995) is generally expected to result in
higher investments by the oil industry in 1997. Prices for oil field equipment
are expected to outpace inflation. As a result, revenues are anticipated to show
continued improvement; and the combination of stronger prices, reduced cost, and
leverage on increased volume should yield improved financial performance in
1997.
Longer term, the future for the type of oil field equipment Lufkin manufactures
is positive. The oil industry is in better economic shape than it has been since
1981. Demand for oil continues to increase, and the ratio of supply to demand
for oil is supporting an oil price more stable than in the past 15 years. The
investments by the Company's customers in the business continues to grow. As the
major supplier worldwide, Lufkin is ready to meet the needs as the market
continues to expand.
POWER TRANSMISSION
Power transmission enjoyed one of its best years in 1996 with revenues rising
22% over 1995. This marked the fifth consecutive year of revenue growth for the
division. Earnings were also up significantly, due to both added volume and
improvements in productivity.
While demand was strong in virtually all segments of power transmission's
business, there was some softening mid-year in bookings in both the power
generation and petrochemical segments. These were offset by growth in demand for
gears used in the steel and marine industries. In addition, orders received from
new international accounts provided new opportunities and countered the effect
of the temporary drop in demand in the power generation and petrochemical
sectors. Demand strengthened in these two markets during the fourth quarter, and
the outlook for 1997 is strong.
The demand for gears in the power generation sector will grow from the need for
electrical power generation in developing countries and the continuing move to
combined cycle operations in industrialized countries. The petrochemical sector
will respond to continued investment in new plants in developing countries, as
well as the drive to update existing refineries and petrochemical plants to
improve efficiency and address the ongoing safety and environmental
requirements.
Lufkin's products and services are ideally positioned to compete successfully as
its major markets continue their
3
<PAGE>
trend of steady growth. Product development efforts have yielded significant
improvements in product performance, while investments in both capital equipment
and training have improved operational efficiency.
Lufkin's sales and services coverage are recognized as among the best in the
industry. Efforts in 1997 will be directed at strong customer support as the
primary strategy for growth in those sectors that offer attractive returns,
coupled with a strong focus on operational and quality improvement in our design
and manufacturing activities.
FOUNDRY CASTINGS
Lufkin's foundry division experienced continued strong demand from commercial
castings during 1996. The division again achieved a new cupola tonnage record of
charging over 67,000 tons of ductile and gray iron. This was approximately 200
tons above the record set during 1995. While continuing to operate at near
capacity levels, revenues also increased modestly due to some product mix shift
to higher value-added engineered castings.
Lufkin's casting capabilities include low-to medium-volume ductile and gray iron
castings which are used as components for numerous original equipment
manufacturers (OEMs). Over 300 tons of iron are poured each production day for
castings ranging in size from 100 pounds to over 30,000 pounds. This capacity
ranks Lufkin as one of the largest suppliers in the United States.
The foundry's customer base expanded during the past several years to include
such industrial sectors as building construction equipment, material handling
equipment, machine tools, valves and water works, pump and compressor, as well
as heavy truck suspension manufacturers. Lufkin's casting products can be found
in such diverse applications as strainer bodies for fire protection systems,
bridge support bearings, horizontal and vertical CNC machining centers, or
front-end loaders working in quarries.
In 1997, Lufkin's efforts will remain focused on expanding the more technically
demanding, higher value-added engineered castings. The strategy will allow for
the continued development of profitable, long-term relationships with strategic
customers while remaining focused on unsurpassed customer service. These efforts
will be maintained while continuing to support Lufkin's power transmission and
oil field divisions where it is economically advantageous.
TRAILERS
While overall economic conditions in 1996 were generally favorable in most of
Lufkin's markets, the factors directly affecting the transportation industry
were negative. The trailer industry saw consolidation among its participants and
some of the weaker companies falling by the wayside. The decline experienced in
1996 was moderated as a result of the strategy Lufkin implemented in 1995 to
position itself for an anticipated downturn in the trailer market by bringing
its production capability and workforce in line with expected demand. Although
financial performance in the trailer division was depressed from record levels
of the past two years, 1996 was a good, steady business year in which Lufkin had
several noteworthy achievements.
During the past year, Lufkin was able to expand its customer base by making a
concerted effort to reach a greater number of users and dealers. This action
lessened the dependency on its largest customers and showed positive results.
Lufkin's reputation for quality construction, reliability, innovation of design,
and competitive prices has helped it expand the customer base. Also, Lufkin's
solid financial base made it a more reliable supplier in the financially
distressed trailer industry.
During the past year the trailer division added to its diverse product offering
by introducing a new open-top chip trailer. In addition, the new plate trailer
introduced in 1995 went into full production and has been well received by
customers. The many different sizes and styles of vans, platforms, and high
capacity and light-weight dump trailers have tended to minimize the risk
associated with dependency on one type of trailer.
With the economy holding steady, the trailer division is expected to benefit
from growth in the demand for trailers.
4
<PAGE>
The division is focused on continuing to improve productivity and is well
positioned to capitalize on opportunities to increase market share. Lufkin's
established manufacturing facilities provide ample capability to meet short-term
supply. On a long-term basis, several favorable trends are expected to increase
the demand for trailers. One, the average age of trailer fleets is increasing.
Secondly, more companies are outsourcing their transportation needs. And, third,
more trailers are being used as warehouses for short-term storage. These
industry trends should favorably impact the trailer division.
5
<PAGE>
LUFKIN INDUSTRIES, INC.
FINANCIAL REVIEW
Lufkin Industries, Inc. and Subsidiaries
COMMON STOCK INFORMATION
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Stock Price Stock Price
-------------- --------------
Quarter High Low Dividend High Low Dividend
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $22.50 $17.00 $.15 $18.50 $16.63 $.15
Second 21.75 18.00 .15 20.00 18.00 .15
Third 21.25 18.00 .15 23.50 18.50 .15
Fourth 25.25 20.75 .15 23.50 18.50 .15
</TABLE>
The Company's common stock is traded on The Nasdaq Stock Market (National
Market) under the symbol LUFK and as of February 28, 1997, there were
approximately 800 record holders of its common stock.
The Company has paid cash dividends for 57 consecutive years. Total dividend
payments were $3,993,000 and $4,071,000 in 1996 and 1995, respectively.
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
In millions, except First Second Third Fourth
per share data Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
- ---------------------------------------------------------
1996
Net sales $55.9 $55.6 $55.1 $59.4
Gross margin 8.8 9.9 8.9 9.5
Net earnings 2.4 2.9 2.5 2.6
Earnings per share .36 .43 .38 .39
1995
Net sales $59.0 $58.6 $62.9 $68.4
Gross margin 6.7 8.4 8.3 8.8
Net earnings 1.6 2.4 2.1 2.8
Earnings per share .24 .36 .31 .40
</TABLE>
_________________________________________________________
ADDITIONAL FINANCIAL INFORMATION
Shareholders may obtain additional information for the year ended December 31,
1996, from the Company's Form 10-K Report filed with the Securities and Exchange
Commission. A copy of such report may be obtained without charge by written
request to the Secretary, Lufkin Industries, Inc., P.O. Box 849, Lufkin, Texas
75902-0849.
6
<PAGE>
LUFKIN INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Lufkin Industries, Inc. and Subsidiaries
RESULTS OF OPERATIONS
Net sales for 1996 were $226.0 million compared to $248.9 million for
1995 and $217.3 million for 1994. The Company reported net operating income of
$14.3 million and $10.5 million for 1996 and 1995, respectively. In 1994, the
Company had an operating loss of $3.1 million. For 1996, the Company reported
net income of $10.5 million, compared to a net income of $8.9 million for 1995
and a net loss of $1.2 million for 1994. The 1994 results included an $11.2
million pre-tax charge for special inventory write-downs.
During 1996, the Company experienced a decline in trailer revenues
while revenues for all other product groups increased. The annual percentage
increases (decreases) in revenues for the Company's product groups for the three
years ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Annual increases (decreases) in revenues
- --------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oil field pumping units 8 13% (30)%
Power transmission products 22 9 16
Foundry castings 2 5 25
Trailers (36) 26 37
- --------------------------------------------------------------------------------------
Total company (9)% 15% 7 %
- --------------------------------------------------------------------------------------
</TABLE>
The sales mix of the Company's products for the three years ended December 31,
1996 was as follows:
<TABLE>
<CAPTION>
Percent of total sales
- --------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------
Oil field pumping units 22% 19% 19%
Power transmission products 32 24 25
Foundry castings 15 13 14
Trailers 31 44 41
Other - - 1
- --------------------------------------------------------------------
Total company 100% 100% 100%
- --------------------------------------------------------------------
</TABLE>
Oil field revenues increased 8% to $50.0 million in 1996 over 1995
revenues of $46.4 million. Oil field revenues were $40.9 million in 1994.
During 1996, the Company booked new orders of $54.0 million compared to $47.3
million in 1995 and $42.9 million in 1994. Demand for oil field products
increased at the end of 1996 resulting in a backlog for oil field products at
December 31, 1996 of $12.1 million, its highest level since 1991. At December
31, 1995 and December 31, 1994, the backlog for oil field products was $8.1
million and $8.5 million, respectively.
Sales of power transmission products increased 22% to $73.1 million
from sales of $60.1 million in 1995. Power transmission sales for 1994 were
$55.3 million. New order bookings totaled $67.2 million for 1996 compared to
$75.5 million and $54.0 million for 1995 and 1994, respectively. At December
31, 1996, the power transmission backlog was $30.1 million compared to $36.0
million at the end of 1995 and $21.1 million at year end 1994.
Foundry castings revenues increased to $32.5 million for 1996, up 2%
from 1995. Sales of foundry castings were $31.8 million in 1995 and $30.2
million in 1994. New order bookings totaled $34.0 million in 1996 and 1995. The
backlog for foundry castings at December 31, 1996 was $17.4 million compared to
$15.8 million and $4.2 million at the end of 1995 and 1994, respectively.
The Company's trailer product sales decreased by 36% to $70.4 million
from $110.5 million in 1995 due to decreased sales volumes as a result of lower
trailer market demand levels. Trailer product sales in 1994 were $87.8 million.
New trailer orders booked during 1996 totaled $70.3 million compared to $79.0
million in 1995 and $112.4 million in 1994. At the end of 1996, the trailer
backlog was $40.1 million compared to $40.2 million at December 31, 1995 and
$75.6 million at December 31, 1994.
Gross profit margins before special inventory write-downs increased to
16% for 1996 from 13% for 1995 and 1994. The 1996 sales mix reflected increased
sales in the higher margin oil field and power transmission product lines while
lower margin trailer sales decreased. In addition, the Company continued to
emphasize cost awareness and cost reduction programs.
Selling, General and Administrative (S. G. & A.) expenses were $23.2
million in 1996 compared to $22.2 million and $20.7 million in 1995 and 1994,
respectively. The increase in SG & A expenses was due primarily to increased
power transmission selling expenses associated with expansion of the Company's
selling efforts and market presence in western Europe and other areas.
7
<PAGE>
LUFKIN INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Lufkin Industries, Inc. and Subsidiaries
RESULTS OF OPERATIONS (CONTINUED)
Net operating income for 1996 was $14.3 million. The Company realized net
operating income of $10.5 million in 1995 and a net operating loss of $3.1
million in 1994. The Machinery Division's net operating income as a percentage
of sales before special inventory writedowns was 6% for 1996 compared to 2% for
1995 and 1% in 1994. The increase reflects improved product mix and increased
sales volumes in Machinery Division products. The Trailer Division's net
operating income as a percentage of sales was 6% for 1996, down from 7% for 1995
and 1994. The decrease in net operating income for the Trailer Division was due
to decreased sales volumes partially offset by cost reductions in the area of
fixed costs.
Other income was $.3 million in 1996 compared to $.5 million in 1995.
Investment income decreased in 1996 to $1.9 million from $3.1 million in 1995.
The decrease in investment income was due to lower investment balances resulting
in decreased interest income. In addition, capital gains on investments were
lower in 1996 than 1995.
Net income was increased by approximately $.4 million ($.06 per share) for
1996 and was reduced by approximately $1.0 million ($.15 per share), for 1995,
as a result of using the LIFO method as compared to the FIFO method of
accounting for certain inventories. During 1996 and 1994, LIFO inventories were
reduced and these reductions resulted in a liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years. The impact of
these LIFO inventory liquidations increased net income in 1996 and reduced the
net loss in 1994 by approximately $.1 million ($.02 per share) and $3.6 million
($.53 per share), respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $69.4 million
compared to $74.9 million in 1995 and $70.8 million in 1994. The Company
generated $19.1 million net cash from operating activities in 1996. Net cash
provided from operating activities in 1995 and 1994 was $7.4 million and $20.7
million, respectively. Accounts receivable decreased by 7.5% to $33.5 million
from $36.2 million at the end of 1995 primarily as a result of decreased sales
volumes. At December 31, 1996 inventories were $3.2 million lower and accounts
payable were $4.4 million lower than the December 31, 1995 balances. These
decreases were primarily due to the lower sales volumes of trailer products in
1996. Dividends of $.60 per share totaling $4.0 million were paid in 1996.
During 1995 and 1994, dividends totaled $4.1 million ($.60 per share) each year.
During 1996, the Company's expenditures for property, plant and equipment (PP &
E) totaled $12.4 million related to capacity expansions in the foundry and power
transmission repair businesses, equipment replacement and business
consolidation. PP&E expenditures for 1995 and 1994 totaled $7.6 million and $5.2
million, respectively. Treasury stock purchases increased to $4.4 million in
1996 over $.4 million in 1995. Under the Company's current stock repurchase
program, authorizations of approximately $1.3 million remained at December 31,
1996 for future treasury stock purchases. The Company believes that existing
working capital will be sufficient to satisfy its 1997 requirements. In recent
years, capital expenditures have been financed with internally generated funds,
and the Company plans to finance future improvements of its facilities in this
manner. No significant commitments were outstanding at December 31, 1996.
The Internal Revenue Service (IRS) has examined the Company's federal income
tax returns for calendar years 1991 through 1993. The IRS has recommended an
assessment of additional taxes for 1991 and 1993. The Company disagrees with
the IRS' position and is currently pursuing its rights of administrative review
and appeal and intends to vigorously contest this matter. Although the
resolution of these remaining issues could affect the timing of the payment of
previously accrued tax liabilities and require the use of a portion of its
available capital, the Company does not believe that the results of the audit or
the ultimate resolution of the IRS' proposed adjustments will have a material
impact on its consolidated results of operations or financial position.
FORWARD-LOOKING STATEMENTS AND ASSUMPTIONS
This Annual Report may contain or incorporate by reference certain forward-
looking statements, including by way of illustration and not of limitation,
statements relating to liquidity, revenues, expenses, margins and contract rates
and terms. The Company strongly encourages readers to note that some or all of
the assumptions, upon which such forward-looking statements are based, are
beyond the Company's ability to control or estimate precisely, and may in some
cases be subject to rapid and material changes.
8
<PAGE>
CONSOLIDATED BALANCE SHEET
Lufkin Industries, Inc. and Subsidiaries
December 31, 1996 and 1995
(Thousands of dollars except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------
Current assets:
Cash $ 655 $ 277
Temporary investments 30,211 33,040
Receivables, net 33,472 36,204
Inventories 21,563 24,737
Deferred income taxes 2,132 3,853
- --------------------------------------------------------------------------------
Total current assets 88,033 98,111
Property, plant and equipment, net 65,993 60,823
Prepaid pension costs 24,469 20,936
Other assets 7,430 6,426
- --------------------------------------------------------------------------------
Total assets $185,925 $186,296
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 7,035 $ 11,430
Accrued liabilities:
Payroll and benefits 5,050 5,084
Accrued warranty expenses 1,329 2,032
Taxes payable 3,072 2,849
Commissions and other 2,162 1,774
- -------------------------------------------------------------------------------
Total current liabilities 18,648 23,169
Deferred income taxes 10,478 8,500
Post retirement benefits 12,192 12,035
Shareholders' equity:
Common stock, par $1 per share; 20,000,000 shares
authorized; 6,792,381 shares issued 6,792 6,792
Capital in excess of par 15,367 15,367
Retained earnings 128,150 121,692
Treasury stock, 233,998 shares and 16,108 shares, at cost (4,754) (311)
Cumulative translation adjustment (948) (948)
- -------------------------------------------------------------------------------
Total shareholders' equity 144,607 142,592
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $185,925 $186,296
- -------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS
Lufkin Industries, Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
(Thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $225,974 $248,909 $217,273
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 188,877 216,733 189,999
Selling, general and
administrative expenses 23,163 22,171 20,725
Special inventory provisions - - 11,224
Other income, net (345) (481) (1,610)
- --------------------------------------------------------------------------------
Total costs and expenses 211,695 238,423 220,338
- --------------------------------------------------------------------------------
Operating income (loss) 14,279 10,486 (3,065)
Investment income 1,928 3,118 1,266
- --------------------------------------------------------------------------------
Earnings (loss) before income taxes 16,207 13,604 (1,799)
Income taxes (benefits) 5,756 4,686 (592)
- --------------------------------------------------------------------------------
Net earnings (loss) $ 10,451 $ 8,918 $ (1,207)
- --------------------------------------------------------------------------------
Net earnings (loss) per share $1.56 $1.31 $(.18)
- --------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Lufkin Industries, Inc. and Subsidiaries
Years ended December 31, 1996, 1995, and 1994
(Thousands of dollars, except share and per share data)
<TABLE>
<CAPTION>
Common Stock Capital Cumulative
---------------------- In Excess Retained Treasury Translation
Shares Amount Of Par Earnings Stock Adjustment
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 6,792,381 $ 6,792 $15,372 $122,127 $ (800)
Net loss (1,207)
Cash dividends,
$.60 per share (4,075)
Foreign currency translation
adjustment (245)
- ----------------------------------------------------------------------------------------------------------
Balance December 31, 1994 6,792,381 6,792 15,372 116,845 (1,045)
Net earnings 8,918
Cash dividends,
$.60 per share (4,071)
Foreign currency translation
adjustment 97
Purchases of Treasury Stock
(20,108 shares) (384)
Exercise of Stock Options
(4,000 shares) (5) 73
- ----------------------------------------------------------------------------------------------------------
Balance December 31, 1995 6,792,381 6,792 15,367 121,692 (311) (948)
Net earnings 10,451
Cash dividends,
$.60 per share (3,993)
Purchases of Treasury Stock
(218,015 shares) (4,445)
Exercise of Stock Options
(125 shares) 2
- ----------------------------------------------------------------------------------------------------------
Balance December 31, 1996 6,792,381 $ 6,792 $15,367 $128,150 $(4,754) $ (948)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Lufkin Industries, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
(Thousands of dollars)
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net earnings (loss) $ 10,451 $ 8,918 $(1,207)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation 6,950 7,050 7,895
Deferred income tax provision 3,699 2,997 28
Pension income (3,533) (3,151) (3,628)
Post retirement benefits 157 192 216
Gain on sales of property,
plant and equipment (45) (247) (1,299)
Changes in:
Receivables 2,732 (7,942) 9,341
Inventories 3,174 (2,818) 11,239
Accounts payable (4,395) 769 796
Accrued liabilities (126) 1,605 (2,677)
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 19,064 7,373 20,704
Cash flows from investing activities:
Additions to property, plant and equipment (12,357) (7,646) (5,238)
Proceeds from disposition of property,
plant and equipment 282 725 5,356
(Increase) decrease in other assets (1,004) 232 66
- -----------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (13,079) (6,689) 184
Cash flows from financing activities:
Dividends paid (3,993) (4,071) (4,075)
Proceeds from exercise of stock options 2 68 -
Purchase of treasury stock (4,445) (384) -
- -----------------------------------------------------------------------------------------
Net cash used by financing activities (8,436) (4,387) (4,075)
Effect of translation on cash and
temporary investments - 97 (245)
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash and
temporary investments (2,451) (3,606) 16,568
Cash and temporary investments,
at beginning of year 33,317 36,923 20,355
- -----------------------------------------------------------------------------------------
Cash and temporary investments,
at end of year $ 30,866 $33,317 $36,923
- -----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(1) SUMMARY OF MAJOR ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Lufkin Industries, Inc. and Subsidiaries (the Company) after
elimination of all significant intercompany accounts and transactions.
USE OF ESTIMATES: The preparation of the financial statements in conformity
with generally accepted accounting principles requires the use of certain
estimates by management in determining the Company's assets, liabilities,
revenue and expenses.
TRANSLATION OF 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 and income statement accounts are translated
at the average exchange rates prevailing during the period.
TEMPORARY INVESTMENTS: The Company's temporary investments consisting of
highly liquid government and corporate debt securities have been classified as
trading securities which are carried at market value. All realized and
unrealized gains and losses are recognized currently in investment income.
RECEIVABLES: The following is a summary of the Company's receivable balances:
<TABLE>
<CAPTION>
(Thousands of dollars) 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Accounts receivable $31,586 $34,645
Notes receivable 2,486 2,159
- --------------------------------------------------------
34,072 36,804
Allowance for doubtful accounts (600) (600)
- --------------------------------------------------------
Net receivables $33,472 $36,204
- --------------------------------------------------------
</TABLE>
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.
PROPERTY, PLANT AND EQUIPMENT: 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. 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 property,
plant and equipment balances and useful lives.
<TABLE>
<CAPTION>
Useful
Life
(Thousands of dollars) in Years 1996 1995
- ---------------------------------------------- -------- ---------- ----------
<S> <C> <C> <C>
Land - $ 2,800 $ 2,819
Land improvements 10-25 6,015 5,965
Buildings 12.5-40 54,339 52,555
Machinery and equipment 3-12.5 162,542 155,702
Furniture and fixtures 5-12.5 17,318 16,735
- --------------------------------------------------------------------------------
Total property, plant and equipment 243,014 233,776
Less accumulated depreciation (177,021) (172,953)
- --------------------------------------------------------------------------------
Total property, plant and equipment, net $ 65,993 $ 60,823
- --------------------------------------------------------------------------------
</TABLE>
The Company applies Statement of Financial Accounting Standards (SFAS) No. 121
for recognition of a loss if impairment occurs in its fixed assets. The adoption
of this policy in 1996 had no impact on the Company's results of operations or
financial condition.
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 earnings per share was 6,714,812 shares, 6,823,776 shares, and 6,792,381
shares for 1996, 1995, and 1994, respectively.
OTHER: Certain prior year amounts have been reclassified to conform with the
current year presentation.
INCOME TAXES: The Company follows Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes". Under SFAS No. 109, deferred 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.
13
<PAGE>
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(2) INCOME TAXES
The net deferred income tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Current deferred income tax assets
Gross assets $ 3,404 $ 5,300
Gross liabilities (1,272) (1,447)
- ------------------------------------------------------------------
Total, net 2,132 3,853
- ------------------------------------------------------------------
Noncurrent deferred income tax liabilities
Gross assets 8,245 6,715
Gross liabilities (18,723) (15,215)
- ------------------------------------------------------------------
Total, net (10,478) (8,500)
- ------------------------------------------------------------------
Net deferred income tax liabilities $ (8,346) $ (4,647)
- ------------------------------------------------------------------
</TABLE>
The tax effects of significant temporary differences representing deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
(Thousands of dollars) 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Inventories $ 156 $ 1,732
Prepaid pension costs (8,564) (7,336)
Payroll and benefits 1,073 1,174
Accrued warranty expenses 465 711
Post retirement benefits 4,267 4,212
Capital loss and tax credit carryforwards 1,598 2,509
Depreciation (7,387) (7,053)
Other, net 46 (596)
- ----------------------------------------------------------------
Net deferred income tax liabilities $(8,346) $(4,647)
- ----------------------------------------------------------------
</TABLE>
The income tax provision (benefit) for 1996, 1995, and 1994 consisted of the
following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1996 1995 1994
- ------------------------------------------------
<S> <C> <C> <C>
Current $2,057 $1,689 $(620)
Deferred 3,699 2,997 28
- ------------------------------------------------
Total $5,756 $4,686 $(592)
- ------------------------------------------------
</TABLE>
A reconciliation of the income tax provision (benefit) as computed at the
statutory U. S. income tax rate and the income tax provision (benefit) presented
in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
(Thousands of dollars) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) computed at statutory rate $5,672 $4,693 $(612)
Tax effect of:
Expenses for which no benefit was realized 362 271 -
Tax-exempt interest and dividend
income exclusion (158) (170) (72)
Other, net (120) (108) 92
- ------------------------------------------------------------------------------
Actual provision (benefit) $5,756 $4,686 $(592)
- ------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
Cash payments for income taxes totaled $2,178,000, $2,292,000 and $235,000
for 1996, 1995 and 1994, respectively.
For income tax reporting purposes at December 31, 1996, the Company has
alternative minimum tax carryforwards of $785,000 and foreign tax credit
carryforwards of $796,000.
The Internal Revenue Service (IRS) has examined the Company's federal income
tax returns for calendar years 1991 through 1993. The IRS has recommended an
assessment of additional taxes for 1991 and 1993. The Company disagrees with the
IRS' position and is currently pursuing its rights of administrative review and
appeal and intends to vigorously contest this matter. Although the resolution of
these remaining issues could affect the timing of the payment of previously
accrued tax liabilities and require the use of a portion of its available
capital, the Company does not believe that the results of the audit or the
ultimate resolution of the IRS' proposed adjustments will have a material impact
on its consolidated results of operations or financial position .
(3) INVENTORIES
Inventories used in determining cost of sales were as follows:
<TABLE>
<CAPTION>
(Thousands of dollars) 1996 1995
- ------------------------------------------
<S> <C> <C>
Finished goods $ 5,898 $ 6,845
Work in process 4,566 6,050
Raw materials 11,099 11,842
- ------------------------------------------
Total $21,563 $24,737
- ------------------------------------------
</TABLE>
Inventories accounted for on a LIFO basis were $16,655,000 and $19,258,000 and
on a FIFO basis were $4,908,000 and $5,479,000 at December 31, 1996 and 1995,
respectively. Had the FIFO method been used in determining all inventory
values, inventories would have been $17,624,000 and $18,194,000 higher at
December 31, 1996 and 1995, respectively.
Net income was increased by approximately $.4 million ($.06 per share) for
1996 and was reduced by approximately $1.0 million (15 per share), for 1995, as
a result of using the LIFO method as compared to the FIFO method of accounting
for certain inventories. During 1996 and 1994, LIFO inventories were reduced and
these reductions resulted in a liquidation of LIFO inventory quantities carried
at lower costs prevailing in prior years. The impact of these LIFO inventory
liquidations increased net income in 1996 and reduced the net loss in 1994 by
approximately $.1 million ($.02 per share) and $3.6 million ($.53 per share),
respectively.
(4) EMPLOYEE STOCK OPTION PLAN
The Company's 1990 Stock Option Plan provides for the granting of options to
key employees to purchase an aggregate of not more than 900,000 shares of the
Company's stock at fair market value on the date of grant. One fourth of
granted options generally become exercisable after one year and each year
thereafter. The options may not be exercised after ten years from the date of
grant. Outstanding options may be canceled and reissued under terms specified
in the plan.
The following table summarizes activity under the Company's stock option plan:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
Options outstanding, beginning of year 447,965 355,465 260,715
Granted (per share)
1994 ($15.875 to $18.625) 94,750
1995 ($19.00 to $20.00) 97,500
1996 ($18.125 to $21.75) 106,150
Exercised (per share)
1995 ($15.31 to $17.50) (4,000)
1996 ($15.875) (125)
Forfeited (per share)
1995 ($30.00) (1,000)
1996 ($15.875 to $20.00) (3,000)
- --------------------------------------------------------------------------------------
Options outstanding, end of year 550,990 447,965 355,465
- --------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
4) EMPLOYEE STOCK OPTION PLAN (CONTINUED)
The Company accounts for its stock option plan under APB opinion No. 25 under
which no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS Statement No. 123, "Accounting for
Stock-Based Compensation", the Company's net income and earnings per share would
have been reduced to the following pro forma amounts, (in thousands except per
share data):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C> <C>
Net Earnings As reported $10,451 $8,918
Pro forma $10,316 $8,897
Earnings Per Share As reported $ 1.56 $ 1.31
Pro forma $ 1.54 $ 1.30
- --------------------------------------------------
</TABLE>
The effects of applying SFAS No. 123 in the pro forma disclosure 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:
Expected dividend yield 2.8% - 3.3%
Expected stock price volatility 25.69%-27.25%
Risk free interest rate 6.03% - 6.71%
Expected life of options 10 years
During 1996, 106,150 options were granted. These options had a weighted
average fair value of $7.11 per option and a weighted average exercise price of
$21.13 per option.
The following table summarizes information about stock options outstanding at
December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Wgtd. Avg.
Range of Number Remaining Wgtd. Avg. Number Wgtd. Avg.
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
- ---------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$15.31-$18.625 230,625 6.9 years $16.98 167,250 $17.11
$19.00-$21.75 255,650 8.6 years $20.90 75,875 $20.89
$28.50-$30.00 64,715 3.8 years $29.89 64,715 $29.89
- ---------------- ------- ----------- ------ ------- ------
$15.31-$30.00 550,990 7.3 years $20.32 307,840 $20.73
- ---------------- ------- ----------- ------ ------- ------
</TABLE>
(5) STOCK REPURCHASE PLAN
In March, 1995, the Company began a stock repurchase plan under which the
Company was authorized to spend up to $2.1 million for purchases of its common
stock. During 1996, an additional $4.0 million was authorized for the purchase
of common stock. The Company repurchased 218,015 shares at an aggregate cost of
approximately $4.4 million in 1996 and 20,108 shares at an aggregate cost of $.4
million in 1995. Repurchased shares are added to treasury stock and are
available for general corporate purposes including the funding of the Company's
employee stock option plan.
(6) CAPITAL STOCK
In May 1987, the Board of Directors adopted a "Shareholder Rights 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, which was renewed on May 31, 1996, 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
16
<PAGE>
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(6) CAPITAL STOCK (CONTINUED)
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 authorized to issue 2.0 million shares of preferred stock, the
terms and conditions to be determined by the Board of Directors in creating any
particular series.
(7) 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. Plan investment assets are invested primarily
in equity securities, United States government securities and cash equivalents.
The following tables provide the detail of the components of pension income
and expense, the funded status of the plans and amounts of prepaid pension cost
recognized as an asset in the Company's consolidated balance sheet, and major
assumptions used to determine these amounts.
<TABLE>
<CAPTION>
(Thousands of dollars) 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of pension income:
Service cost $ 2,304 $ 1,780 $ 2,092
Interest cost 6,539 5,698 5,334
Actual return on plan assets (13,660) (27,424) 97
Net (amortization) and deferral 1,284 16,795 (11,151)
- --------------------------------------------------------------------------------------
Net pension income $ (3,533) $ (3,151) $ (3,628)
- --------------------------------------------------------------------------------------
Plan assets at fair value $137,039 $128,361 $105,902
Actuarial present value of projected
benefit obligations:
Accumulated benefit obligations
Vested (76,447) (72,644) (56,406)
Nonvested (9,496) (9,164) (5,358)
Provision for future salary increases (7,802) (7,703) (8,259)
- --------------------------------------------------------------------------------------
Plan assets over projected benefit obligations 43,294 38,850 35,879
Unrecognized transition gain (10,830) (11,756) (12,683)
Other unrecognized gain (6,369) (4,393) (3,161)
Unrecognized prior service credits (1,626) (1,765) (2,251)
- --------------------------------------------------------------------------------------
Net prepaid pension costs $ 24,469 $ 20,936 $ 17,784
- --------------------------------------------------------------------------------------
Major assumptions at year end:
Discount rate 7.50% 7.50% 8.25%
Rate of assumed increase in compensation levels 5% 5% 5%
Expected long-term rate of return on plan assets 9% 9% 9%
- --------------------------------------------------------------------------------------
</TABLE>
The Company also has defined contribution retirement plans covering
substantially all of its employees. During the year, the Company makes
contributions of 75% of employee contributions up to a maximum of 6% of employee
earnings. All obligations of the Company are funded through December 31, 1996.
The Company's expense for these plans totaled $1,610,000, $1,560,000 and
$1,444,000 in 1996, 1995 and 1994, respectively.
The Company sponsors two defined benefit post retirement 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. Under SFAS No. 106 "Employers'
Accounting for Post-retirement Benefits Other than Pensions", the Company
accrues the estimated costs of the plans over the employee's service periods.
17
<PAGE>
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(7) RETIREMENT BENEFITS (CONTINUED)
The following table sets forth the plans' combined funded status December 31,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
(Thousands of dollars) 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated post retirement benefit obligation:
Retirees $ 7,213 $ 7,701 $ 9,208
Fully eligible active plan participants 1,357 951 883
Other active plan participants not yet eligible 2,554 2,133 1,932
- ----------------------------------------------------------------------------------
Total accumulated post retirement benefit obligation 11,124 10,785 12,023
Unrecognized net actuarial gain (loss) 1,068 1,250 (180)
- ----------------------------------------------------------------------------------
Accrued post retirement benefit cost $12,192 $12,035 $11,843
- ----------------------------------------------------------------------------------
Net periodic cost of post retirement benefit:
Service cost $ 156 $ 135 $ 168
Interest cost 801 923 882
- ----------------------------------------------------------------------------------
Net periodic post retirement benefit cost $ 957 $ 1,058 $ 1,050
- ----------------------------------------------------------------------------------
</TABLE>
The Company's post retirement health care plan is unfunded. For measurement
purposes, the submitted claims medical trend was assumed to be 10% in 1996, and
9.25% in 1997. Thereafter, the Company's obligation is fixed at the amount of
the Company's contribution for 1997. A one percentage point increase in each
year's healthcare costs trend rate would increase the accumulated post
retirement benefit obligations as of December 31, 1996 by approximately $125,000
and the aggregate of the service and interest costs components of net periodic
post retirement cost for the year ended December 31, 1996 by $11,000. In
determining the accumulated post retirement obligation, a weighted-average
discount rate of 7.50% in 1996 was used.
(8) BUSINESS SEGMENT INFORMATION
The Company manufactures, sells and services various types of oil field
pumping units, power transmission products, foundry castings and trailers.
Corporate expenses are allocated to industry segments primarily based upon
outside revenues. The following is a summary of key business segment and
product group information:
<TABLE>
<CAPTION>
(Thousands of dollars) 1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------
SALES:
Machinery Division
Oil field pumping units $ 49,952 $ 46,449 $ 40,938
Power transmission products 73,127 60,131 55,334
Foundry castings 32,487 31,792 30,165
Other - - 3,051
Trailer Division 70,408 110,537 87,785
- ----------------------------------------------------------------
Total sales $225,974 $248,909 $217,273
- ----------------------------------------------------------------
SALES BY GEOGRAPHIC REGION:
United States $182,724 $208,989 $183,147
Europe 2,980 3,362 2,916
Canada 12,470 10,870 8,273
Latin America 16,326 16,411 14,765
Other 11,474 9,277 8,172
- ----------------------------------------------------------------
Total sales $225,974 $248,909 $217,273
- ----------------------------------------------------------------
</TABLE>
18
<PAGE>
LUFKIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCCIAL STATEMENTS
Lufkin Industries, Inc. and Subsidiaries
(8) BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
OPERATING INCOME (LOSS):
Machinery Division $ 9,993 $ 2,257 $ (9,382)
Trailer Division 4,286 8,229 6,317
- -----------------------------------------------------------------------------
Total operating income (loss) $ 14,279 $ 10,486 $ (3,065)
- -----------------------------------------------------------------------------
ASSETS:
Machinery Division $ 96,574 $ 90,866 $ 83,155
Trailer Division 16,125 23,058 19,046
General Corporate 73,226 72,372 74,573
- -----------------------------------------------------------------------------
Total assets $185,925 $186,296 $176,774
- -----------------------------------------------------------------------------
CAPITAL EXPENDITURES:
Machinery Division $ 11,295 $ 6,600 $ 4,016
Trailer Division 634 835 356
General Corporate 428 211 866
- -----------------------------------------------------------------------------
Total capital expenditures $ 12,357 $ 7,646 $ 5,238
- -----------------------------------------------------------------------------
DEPRECIATION:
Machinery Division $ 5,622 $ 5,621 $ 6,345
Trailer Division 848 878 930
General Corporate 480 551 620
- -----------------------------------------------------------------------------
Total depreciation $ 6,950 $ 7,050 $ 7,895
- -----------------------------------------------------------------------------
</TABLE>
19
<PAGE>
LUFKIN INDUSTRIES, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Lufkin Industries, Inc. and Subsidiaries
To the Shareholders of Lufkin Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Lufkin
Industries, Inc. (a Texas corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lufkin Industries, Inc., and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
February 18, 1997
20
<PAGE>
EXHIBIT 22
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
----------------------------------------
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Name under which
Jurisdiction such subsidiary
Name of subsidiary of Incorporation does business
- ------------------------------------ ---------------- ----------------
Lufkin Industries Canada, Ltd. Province of Alberta, Same
Canada
P. T. Lufkin Indonesia Republic of Indonesia Same
Lufkin Industries FSC, Inc. Barbados Same
Lufkin Industries Europe, Bv. The Netherlands Same
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 18, 1997, incorporated by reference in
this Form 10-K for the year ended December 31, 1996, into the Lufkin Industries,
Inc. previously filed Form S-8 Registration Statements File No. 33-36976 and
File No. 33-62021.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 655
<SECURITIES> 30,211
<RECEIVABLES> 34,072
<ALLOWANCES> 600
<INVENTORY> 21,563
<CURRENT-ASSETS> 88,033
<PP&E> 243,014
<DEPRECIATION> 177,021
<TOTAL-ASSETS> 185,925
<CURRENT-LIABILITIES> 18,648
<BONDS> 0
0
0
<COMMON> 6,792
<OTHER-SE> 137,815
<TOTAL-LIABILITY-AND-EQUITY> 185,925
<SALES> 225,974
<TOTAL-REVENUES> 225,974
<CGS> 188,877
<TOTAL-COSTS> 211,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,207
<INCOME-TAX> 5,756
<INCOME-CONTINUING> 10,451
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,451
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
</TABLE>
<PAGE>
LUFKIN INDUSTRIES, INC.
P.O. BOX 849
601 SOUTH RAGUET
LUFKIN, TEXAS 75902
PROXY STATEMENT
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The accompanying proxy is solicited by the Board of Directors of Lufkin
Industries, Inc. (the "Company") for use at the Annual Meeting of Shareholders
to be held on May 7, 1997, and any adjournments thereof. The annual meeting
will be held at 9:00 a.m. Lufkin Time, at the Museum of East Texas, 503 North
Second, Lufkin, Texas. When such proxy is properly executed and returned, the
shares it represents will be voted at the meeting in accordance with the
directions noted thereon; or if no direction is indicated, it will be voted in
favor of the proposals set forth in the notice attached hereto. Any shareholder
giving a proxy has the power to revoke it by oral or written notice to the
Secretary of the Company at any time before it is voted.
A shareholder entitled to vote for the election of directors can withhold
authority to vote for all nominees for directors or can withhold authority to
vote for certain nominees for directors. Abstentions from either the proposal
to elect directors or the proposal to approve the appointment of independent
certified public accountants are treated as votes against the particular
proposal. Broker non-votes on any of such matters are treated as shares as to
which voting power has been withheld by the beneficial holders of those shares
and, therefore, as shares not entitled to vote on the proposal as to which
there is the broker non-vote.
The cost of solicitation of these proxies will be borne by the Company. In
addition to solicitation by mail, certain directors, officers, and regular
employees of the Company may solicit proxies by telephone and personal
interview.
The approximate date on which this Proxy Statement will first be sent to
shareholders is April 7, 1997.
- --------------------------------------------------------------------------------
VOTING SECURITIES
- --------------------------------------------------------------------------------
At the close of business on March 31, 1997, which is the record date for the
determination of shareholders of the Company entitled to receive notice of and
to vote at the annual meeting or any adjournments thereof, the Company had
outstanding 6,544,808 shares of common stock, $1.00 par value (the "Common
Stock"). Each share of Common Stock is entitled to one vote upon each of the
matters to be voted on at the meeting.
<PAGE>
- --------------------------------------------------------------------------------
PROPOSAL 1. ELECTION OF DIRECTORS
- --------------------------------------------------------------------------------
The Board of Directors has nominated and urges you to vote FOR the election
of the three directors who have been nominated to serve a three-year term of
office in the 2000 class of directors. Proxies solicited hereby will be so
voted unless shareholders specify otherwise in their proxies. The affirmative
vote of the holders of a majority of the Common Stock present in person or by
proxy at the meeting and entitled to vote is required for approval of this
Proposal.
The Company's Fourth Restated Articles of Incorporation (the "Articles")
divide the Board of Directors, with respect to terms of office, into three
classes, designated as Class I, Class II and Class III. Each class of directors
is to be elected to serve a three-year term and is to consist of, as nearly as
possible, one-third of the members of the entire Board. In accordance with the
Company's Bylaws, the Company's Board of Directors is currently fixed at 11
members.
The term of office of each of the Class III Directors expires at the time of
the 1997 Annual Meeting of Shareholders, or as soon thereafter as their
successors are elected or qualified. Mr. Henderson, Mr. Kurth, and Mr. Little
have been nominated to serve an additional three-year term as Class III
Directors. Each of the nominees has consented to be named in this Proxy
Statement and to serve as a director, if elected.
It is intended that the proxies solicited hereby will be voted FOR the
election of the nominees for director listed below, unless authority to do so
has been withheld. If, at the time of the 1997 Annual Meeting of Shareholders,
any of the nominees should be unable or decline to serve, the discretionary
authority provided in the proxy will be used to vote for a substitute or
substitutes designated by the Board of Directors. The Board of Directors has no
reason to believe that any substitute nominee or nominees will be required.
DIRECTORS AND NOMINEES FOR DIRECTOR
The nominees for Class III Directors, if elected, whose term of office as
directors will expire in 2000, and certain additional information with respect
to each of them, are as follows:
Simon W. Henderson, III, manager of his own investments. Age 63. Mr.
Henderson has been a director of the Company since 1971 and currently
serves as a member of the Compensation Committee, the Executive Committee
and the Nominating Committee.
Melvin E. Kurth, Jr., manager of his own investments. Age 66. Mr. Kurth
has been a director of the Company since 1968 and currently serves as a
member of the Audit Committee and the Nominating Committee.
W. T. Little, a self-employed management consultant. Age 63. He became a
director of the Company in 1968.
The Class I Directors, whose present term of office as directors will
continue after the meeting and expire in 1998, and certain additional
information with respect to each of them, are as follows:
Bob H. O'Neal, President and a Director of Stewart & Stevenson Services,
Inc. Age 62. Mr. O'Neal became a director in 1992 and currently serves on
the Compensation Committee and the Nominating Committee. In May 1995, an
indictment was returned by a Federal Grand Jury accusing Stewart &
Stevenson Services, Inc., a former consultant and four of its employees,
including
2
<PAGE>
Mr. O'Neal, of one count of major fraud against the United States, four
counts of false statements and one count of conspiracy to commit major
fraud, make false statements and interfere with the administration of a
foreign military sale. Mr. O'Neal is currently on administrative leave from
his duties at Stewart & Stevenson Services, Inc.
Frank B. Stevenson, formerly Chairman of the Board, President and Chief
Executive Officer of the Company. Age 69. He became a director of the
Company in 1983 and currently serves on the Audit Committee.
H. J. Trout, Jr., manager of his own investments. Age 52. Mr. Trout has
been a director of the Company since 1980 and serves as a member of the
Executive Committee and the Nominating Committee.
Thomas E. Wiener, attorney. Age 56. Mr. Wiener became a director of the
Company in 1987 and currently serves on the Audit Committee and the
Executive Committee.
The Class II Directors, whose present term of office as directors will
continue after the meeting and expire in 1999, and certain additional
information with respect to each of them, are as follows:
L. R. Jalenak, Jr., formerly Chairman of the Board of Cleo Inc., a Gibson
Greetings Company, is a director of Perrigo Company and Dyersburg Corp. He
also serves as an Independent Trustee for First Funds (a family of mutual
funds). Age 66. Mr. Jalenak has been a director since 1990 and also serves
on the Compensation Committee and Audit Committee.
Henry H. King, President of Henry H. King & Associates. Age 64. Mr. King
has been a director since 1990 and also serves on the Executive Committee
and the Compensation Committee.
Douglas V. Smith, President, Chief Executive Officer and Chairman of the
Board of the Company. Age 54. Mr. Smith was elected President and Chief
Executive Officer of the Company in January 1993 and Chairman of the Board
in May 1995. He was also elected as a director in January 1993. He
previously served as Vice President--Worldwide Manufacturing for Cooper Oil
Tool Division of Cooper Industries (Houston, Texas).
W. W. Trout, Jr., retired Vice President of the Company. Age 65. Mr.
Trout has been a director of the Company since 1968.
Mr. W. W. Trout, Jr., is the first cousin of H. J. Trout, Jr.
3
<PAGE>
The following table reflects the beneficial ownership of the Company's Common
Stock as of December 31, 1996, with respect to (i) each person who is known by
the Company to own beneficially more than 5% of the outstanding shares of the
Company's Common Stock; (ii) the directors and nominees for director; (iii)
each executive officer named in the Summary Compensation Table; and (iv) the
Company's directors and officers as a group.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF SHARES OWNED PERCENT
BENEFICIAL OWNER BENEFICIALLY OF CLASS
---------------- ------------ --------
<S> <C> <C>
The TCW Group, Inc. (1)................................ 374,060 5.5%
Quest Advisory Corp. (2) .............................. 357,972 5.3
James W. Barber (3).................................... 10,275 *
John F. Glick (3)...................................... 4,775 *
C. James Haley, Jr. (3)................................ 21,170 *
Simon W. Henderson, III (3)............................ 91,033 1.3
L. R. Jalenak, Jr. (3)................................. 6,400 *
Henry H. King (3)...................................... 7,128 *
Melvin E. Kurth, Jr. (3)............................... 117,740 1.7
W. T. Little (3)....................................... 74,675 1.1
Bob H. O'Neal (3)...................................... 5,500 *
Scott H. Semlinger (3)................................. 17,770 *
Douglas V. Smith (3)................................... 61,750 *
Frank B. Stevenson (3)................................. 31,150 *
H. J. Trout, Jr. (3)................................... 325,184 4.8
W. W. Trout, Jr. (3)................................... 24,614 *
Thomas E. Wiener (3)................................... 74,836 1.1
Directors and officers as a group (20 persons) (3)..... 918,615 13.6
</TABLE>
- --------
* Indicates ownership of less than one percent of the outstanding shares of
Common Stock of the Company.
1. Pursuant to a Schedule 13G filed with the Company, The TCW Group, Inc. may
be deemed to be controlled by Robert Day.
2. Pursuant to a Schedule 13G filed with the Company, Quest Advisory Corp. may
be deemed to be controlled by Charles M. Royce. Mr. Royce disclaims any
beneficial ownership of the shares owned by Quest Advisory Corp.
3. Includes shares subject to presently exercisable options.
Each director and nominee for director listed above possessed sole voting and
investment powers as to all the shares listed as being beneficially owned by
such person, except Melvin E. Kurth, Jr. who has a limited term interest in the
income of 26,712 of the listed shares which are held in trust for the benefit
of himself and his sons, H. J. Trout, Jr. who has a remainder interest as to
272,980 of the listed shares which are held in a trust for his mother for which
he is trustee and Thomas E. Wiener who shares voting and dispositive powers as
to 48,864 of the listed shares.
The Board of Directors has a standing Audit Committee. The Audit Committee is
currently comprised of Messrs. L. R. Jalenak, Jr., M. E. Kurth, Jr., F.B.
Stevenson and T. E. Wiener. The Audit Committee's functions include making
recommendations concerning the engagement of independent auditors, reviewing
with the independent auditors the plan and results of the auditing engagement,
reviewing the scope and results of the Company's procedures for internal
auditing, reviewing professional services provided by the
4
<PAGE>
independent auditors, reviewing the independence of the independent auditors,
considering the range of audit and nonaudit fees and reviewing the adequacy of
the Company's internal accounting controls.
The Board of Directors also has a standing Compensation Committee which is
currently comprised of Messrs. S. W. Henderson, III, L. R. Jalenak, Jr., H. H.
King and B. H. O'Neal. The functions performed by the Compensation Committee
include: reviewing executive salary and bonus structure; reviewing the
Company's stock option plan (and making grants thereunder); setting bonus
goals; and approving salary and bonus awards to key executives.
The Board of Directors also has a standing Nominating Committee which is
currently comprised of Messrs. M. E. Kurth, S. W. Henderson III, B. H. O'Neal
and H. J. Trout, Jr.
During 1996, the Audit Committee had two meetings; the Compensation Committee
had four meetings; the Executive Committee had one meeting and the Board of
Directors had four meetings. During 1996 each continuing member of the Board of
Directors attended 75% or more of the meetings of the Board of Directors and
the committees of which he was a member.
During 1996, the directors received $1,000 for each meeting of the Board of
Directors and $850 for each committee meeting that they attended in addition to
a quarterly payment of $3,000.
Each director and officer of the Company filed on a timely basis all reports
required pursuant to Section 16 of the Securities Exchange Act of 1934.
5
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors of Lufkin Industries,
Inc. (the "Committee") is pleased to present the 1996 report on executive
compensation. This Committee report documents the components of the Company's
executive officer compensation program and describes the basis on which the
compensation program determinations were made by the Committee with respect to
the executive officers of the Company, including the executive officers that
are named in the compensation tables. The Committee meets regularly and is
comprised entirely of non-employee directors. The duty of the Committee is to
review compensation levels of members of management, as well as administer the
Company's various incentive plans including its annual bonus plan and its stock
option plan. The Committee reviews with the Board of Directors in detail all
aspects of compensation for all of the Company's senior officers.
The Committee has retained the services of a national compensation consulting
firm, to assist the Committee in connection with the performance of its various
duties. Such firm provides advice to the Committee with respect to how
compensation paid by the Company to its senior officers compares to
compensation paid by other companies. Members of the Committee review
compensation surveys provided by the consulting firm as well as surveys
provided by other sources.
EXECUTIVE COMPENSATION PROGRAM PHILOSOPHY
The design of the Company's executive compensation program is based on three
fundamental principles. First, compensation must support the concept of pay for
performance, that is, compensation awards are directly related to the financial
results of the Company, to increasing shareholders value, and to individual
contributions and accomplishments. As a result, much of an executive officer's
compensation is "at risk" with annual bonus compensation, at target levels,
amounting to approximately 35% of total cash compensation.
The second principle of the program is that it should offer compensation
opportunities competitive with those provided by other comparable industrial
companies. It is essential that the Company be able to retain and reward its
executives who are critical to the long-term success of the Company's
diversified and complex businesses.
The final principle is that the compensation program must provide a direct
link between the long-term interests of the executives and the shareholders.
Through the use of stock-based incentives, the Committee focuses the attention
of executives on managing the Company from the perspective of an owner with an
equity stake.
COMPENSATION PLAN COMPONENTS
Base Salary. The Committee has established base salary levels for the
Company's executive officers that are generally comparable to similar executive
positions in companies of similar size and complexity as the Company. The
Company obtains comparative salary information from published market surveys
and from a national compensation consulting firm. The comparative data is from
industrial companies of a comparable size in revenue during this period. The
Company's salaries were competitive with the market at the fiftieth percentile
in these comparisons. As part of its responsibilities the Committee approves
all salary changes for the Company's officers and bases individual salary
changes on a combination of factors such as the performance of the executive,
salary level relative to the competitive market, the salary increase budget for
the Company and the recommendation of the Chief Executive Officer. In
accordance with its review process, the Committee approved base salary
increases for those officers whose salary level and performance warranted an
adjustment. Base salary increases approved for those officers in 1996 averaged
5.5%.
6
<PAGE>
Incentive Compensation. The Company's performance, or that of a division or
business unit, as the case may be, for purposes of compensation decisions is
measured under the annual bonus plan against goals established at the start of
the year by the Committee. In each instance, the goals consisted in most part
of making budgeted sales and expense levels, as well as subjective individual
performance goals. Such goals were generally met in 1996.
Chief Executive Officer Compensation. Mr. Smith's base salary for 1996 was
$280,000 and his annual bonus was $140,000. These amounts were determined by
the Compensation Committee as a part of a four year employment contract that
began on January 1, 1995 and will expire on December 31, 1998. Factors that
influenced the Committee's recommendation to amend the CEO contract were the
Company's improved operating results and the reorganizational plans that were
successfully implemented. The amount of Mr. Smith's bonus was predetermined
based on the final earnings per share of the Company. The maximum amount of
bonus that could have been paid to Mr. Smith under the bonus arrangement was
$140,000. The Committee believes that the contract is competitive and that the
employment contract is critical to attract and retain the best qualified
executives.
Stock Options. During 1996, the Committee also made stock option grants to
the CEO and to each of the senior officers of the Company. Each of those
officers received stock options which were based on his responsibilities and
relative position in the Company. In 1996, 48,600 shares of stock options were
granted to the Company's officers which compares to 37,700 shares granted to
officers in 1995. Of the options granted to officers, 16,000 shares of stock
options were granted to Mr. Smith in 1996 compared to 15,000 shares granted to
him in 1995. The number of options granted is determined as a percentage of
each officer's salary. The increase in options granted from 1995 to 1996 is due
to increases in the officers' salaries. The Committee's policy is to make stock
option grants annually and for the purpose of tying a portion of the employees
compensation to the long-term performance of the Company's Common Stock. By
making such grants, the Committee feels that these grants help senior officers'
interests coincide with those of the shareholders.
No member of the Committee is a former or current officer or employee of the
Company or any of its subsidiaries. The following members of the Compensation
Committee have delivered the foregoing report.
H. H. King, Chairman
S. W. Henderson, III
L. R. Jalenak, Jr.
B. H. O'Neal
The foregoing report and the performance graph and related description
included in this proxy statement shall not be deemed to be filed with the
Securities and Exchange Commission except to the extent the Company
specifically incorporates such items by reference into a filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
7
<PAGE>
PERFORMANCE GRAPH
The following performance graph compares the performance of the Company's
common stock to the NASDAQ Market Value Index and to the Media General Oilfield
Services Index (which includes the Company) for the last five years. The graph
assumes that the value of the investment in the Company's common stock and each
index was $100 at December 31, 1991.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1991 1992 1993 1994 1995 1996
---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Lufkin Industries, Inc. .......... 100 79.34 73.86 79.65 100.51 114.47
Media General Oilfield Services
Index............................ 100 99.65 116.32 103.98 153.69 227.84
NASDAQ Market Value Index......... 100 100.98 121.13 127.17 164.96 204.98
</TABLE>
8
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief
Executive Officer and the four most highly compensated executive officers of
the Company as to whom the total annual salary and bonus for the year ended
December 31, 1996, exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
- ----------------------------------------------- ------------
STOCK
NAME AND PRINCIPAL OPTIONS ALL OTHER
POSITION YEAR SALARY BONUS(1) (SHARES) COMPENSATION(2)
------------------ ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Douglas V. Smith........ 1996 $280,000 $140,000 16,000 $17,250
President and 1995 255,000 100,000 15,000 13,786
Chief Executive Officer 1994 225,000 50,000 -- 12,590
John F. Glick........... 1996 147,616 34,740 3,500 8,869
Vice President 1995 140,811 47,650 3,500 6,453
James W. Barber......... 1996 125,762 40,000 3,500 8,822
Vice President 1995 118,545 54,000 3,500 7,481
1994 95,153 45,000 4,000 5,404
Scott H. Semlinger...... 1996 131,960 22,825 3,500 7,413
Vice President 1995 124,008 31,255 3,500 6,381
1994 113,136 17,000 4,000 5,926
C. James Haley, Jr...... 1996 113,754 34,355 2,800 6,858
Secretary-Treasurer 1995 112,020 36,700 2,800 5,157
1994 106,272 -- 4,000 5,850
</TABLE>
- --------
(1) Annual bonus amounts are earned and accrued during the years indicated, and
paid in the first quarter of the following year.
(2) The All Other Compensation consists of the Company's contribution to the
Thrift Plan.
9
