<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ---------------------
Commission File Number 0-2612
LUFKIN INDUSTRIES, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-040-4410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 South Raguet, Lufkin, Texas 75901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 409-634-2211
Indicate by check mark whether the registrant (1) has filed all reports re-
quired 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 re-
gistrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
There were 6,613,338 shares of Common Stock, $1.00 par value per share,
outstanding as of March 31, 1998, not including 179,043 shares classified as
Treasury Stock.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 3-31-98 12-31-97
- -------------------------------------------------- --------- ---------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash $ 270 $ 796
Temporary investments 15,059 17,521
Receivables, net 41,750 40,444
Inventories 38,427 30,078
Deferred income tax assets 1,911 1,911
--------- ---------
Total current assets 97,417 90,750
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost 254,375 250,727
Less - Accumulated depreciation (176,648) (175,249)
--------- ---------
77,727 75,478
--------- ---------
PREPAID PENSION COSTS 28,494 27,689
GOODWILL 8,032 8,391
OTHER ASSETS 5,961 7,444
--------- ---------
$ 217,631 $ 209,752
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 12,181 $ 7,169
Current portion of long
term notes payable 742 742
Payrolls and benefits 5,874 5,430
Accrued warranty expenses 843 1,150
Taxes payable 4,666 5,071
Commissions and other 2,249 2,334
--------- ---------
Total current liabilities 26,555 21,896
--------- ---------
DEFERRED INCOME TAX LIABILITIES 13,588 13,588
POST RETIREMENT BENEFITS LIABILITY 12,335 12,298
LONG TERM NOTES PAYABLE, NET OF CURRENT PORTION 6,521 6,665
SHAREHOLDERS' EQUITY:
Common stock, $1 par value per share;
20,000,000 shares authorized;
6,792,381 shares issued 6,792 6,792
Capital in excess of par 15,285 15,381
Retained earnings 141,784 138,539
Cumulative translation adjustment (1,087) (1,163)
Treasury stock, 199,399 shares
and 179,043 shares, at cost (4,142) (4,244)
--------- ---------
Total shareholders' equity 158,632 155,305
--------- ---------
$ 217,631 $ 209,752
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Thousands of dollars, except per share and share data)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
-----------------------
(Unaudited)
<S> <C> <C>
1998 1997
---------- ----------
NET SALES $ 73,637 $ 60,041
COST OF SALES 60,372 51,943
---------- ----------
Gross profit 13,265 8,098
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,817 6,353
---------- ----------
Operating income 6,448 1,745
OTHER INCOME, NET 489 584
---------- ----------
Earnings before provision for income taxes 6,937 2,329
PROVISION FOR INCOME TAXES 2,497 815
---------- ----------
Net earnings $ 4,440 $ 1,514
========== ==========
EARNINGS PER SHARE:
Basic $ .67 $ .23
========== ==========
Diluted $ .66 $ .23
========== ==========
DIVIDENDS PER SHARE $ .18 $ .17
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 6,623,182 6,547,081
Diluted 6,769,582 6,610,967
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
----------------------
(Unaudited)
1998 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,440 $ 1,514
Adjustments to reconcile net earnings
to net cash provided by (used in)operating
activities:
Depreciation and amortization 2,090 1,770
Increase in prepaid pension cost (805) (979)
Post retirement benefits 36 32
(Gain)loss on sales of property,
plant and equipment (6) 36
Changes in:
Receivables (1,306) (8,458)
Inventories (8,349) (3,715)
Accounts payable 5,012 6,076
Accrued liabilities (353) (1,900)
------- --------
Net cash provided by (used in)operating activities 759 (5,624)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (4,272) (5,648)
Proceeds from disposition of property,
plant and equipment 9 6
(Increase) decrease in other assets 1,773 (223)
------- --------
Net cash used in investing
activities (2,490) (5,865)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long term notes payable (144) -
Dividends paid (1,195) (1,113)
Proceeds from exercise of stock options 1,695 29
Purchase of treasury stock (1,689) (410)
------- --------
Net cash used in financing activities (1,333) (1,494)
Effect of foreign currency translation on
cash and temporary investments 76 122
------- --------
Net decrease in cash and
temporary investments (2,988) (12,861)
Cash and temporary investments, at
beginning of period 18,317 30,866
------- --------
Cash and temporary investments, at
end of period $15,329 $ 18,005
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows of Lufkin Industries, Inc. and Subsidiaries
(the "Company") for all periods presented. The consolidated balance sheet as of
December 31, 1997, was derived from the audited consolidated balance sheet
included in the Company's 1997 annual report on Form 10-K. The results of
operations for the three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the full fiscal year.
These statements have been prepared in accordance with the requirements for
interim financial statements contained in Regulation S-X, which do not require
all the information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Therefore, these statements should be read in
conjunction with the consolidated financial statements and related footnotes
included in the Company's annual report on Form 10-K for the year ended December
31, 1997.
(2) Consolidated inventories consist of the following:
3-31-98 12-31-97
--------- --------
(Thousands of dollars)
Raw materials and purchased parts $ 23,432 $18,575
Work in process 7,095 6,381
Finished goods 7,900 5,122
--------- -------
$ 38,427 $30,078
========= =======
(3) Basic earnings per share (EPS) is computed by dividing net earnings by
the weighted average number of shares outstanding during the year. Diluted EPS
is computed considering potentially dilutive outstanding options. The following
table sets forth the computation of weighted average shares for the three month
periods ending March 31, 1998 and 1997:
Three months ended March 31,
----------------------------
1998 1997
------------- ------------
Basic earnings per share-
weighted-average shares 6,623,182 6,547,081
Effect of dilutive securities:
employee stock options 146,400 63,886
--------- ---------
Diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 6,769,582 6,610,967
========= =========
(4) In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses). The Company adopted SFAS No. 130 effective January 1, 1998.
Total Accumulated Comprehensive Income, $4.5 million at March 31, 1998,
consisted of $4.4 million net earnings and $0.1 million change in foreign
currency translation adjustment as compared to a total of $1.6 million at March
31, 1997 which consisted of $1.5 million net earnings and $0.1 million change in
foreign currency translation adjustment.
<PAGE>
(5) In July 1997, the Company acquired all assets and assumed all
liabilities of two oil field service companies through two separate stock
purchase agreements. The results of these companies' operations are included in
the Company's consolidated statement of earnings from July 1, 1997 forward,
since both acquisitions were accounted for under the purchase method of
accounting. The accompanying balance sheet as of March 31, 1998 includes
estimated allocations of the respective purchase prices which are subject to
later adjustment. The Company's consolidated results of operations on an
unaudited proforma basis, as though the businesses acquired during 1997 had been
acquired on the first day of the period are presented below:
Three Months
Ended March 31,
(Thousands of dollars, except per share data) 1997
- ---------------------------------------------- ---------------
Pro forma revenues $62,908
Pro forma net earnings 1,735
Pro forma earnings per common share:
Basic .27
Diluted .26
These pro forma results are presented for informational purposes only and do
not purport to show the actual results which would have occurred had the
business combinations been consummated on the first day of the period being
reported, nor should they be viewed as indicative of future results of
operations.
(6) In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP provides guidance with respect to accounting for the
various types of costs incurred for computer software developed or obtained for
the Company's use. The Company intends to adopt SOP 98-1 in the first quarter
of 1999 and believes that adoption will not have a significant effect on its
consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities". At adoption, SOP 98-5 requires the Company to write off any
unamortized start-up costs as a cumulative change in accounting principle and
expense all future start-up costs as they are incurred. The Company intends to
adopt SOP 98-5 in the first quarter of 1999 and believes that adoption will not
have a significant effect on its consolidated financial statements.
(7) Effective April 1, 1998 the Company acquired all of the assets and
assumed all liabilities of the Lone Star Machine Shop, Inc. for approximately
$3.0 million in cash. The acquisition was accounted for under the purchase
method of accounting.
<PAGE>
Item 2. Management's Discussion and Analysis
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the first quarter of 1998 net sales increased in all product groups
as compared to the same reporting period of 1997. The following table
summarizes the increase in net sales by product group.
Three Months Ended
March 31
1998 1997 Increase
-------- ------- ---------
(thousands of dollars)
Oil field $19,646 $15,590 26%
Power transmission 17,063 15,644 9%
Foundry castings 9,469 8,431 12%
Trailers 27,459 20,376 35%
------- -------
Total $73,637 $60,041 23%
======= =======
The Company reported operating income of $6.4 million and $1.7 million for
the first quarters of 1998 and 1997, respectively, an increase of $4.7 million.
Of this increase, $1.1 million is attributed to the oil field service companies
acquired in 1997. Also contributing to this increase was an increased gross
profit as a percent of sales of 18% in the first quarter of 1998 compared to 14%
in the first quarter of 1997, resulting from increased contribution margins in
the oil field, power transmission and foundry castings product groups. The
trailer product group's gross profit as a percentage of net sales remained
relatively constant.
Selling, General and Administrative (S. G. & A.) Expenses and other income
remained relatively static for the first quarter of 1998 and 1997, reflecting an
increase of $0.5 million and a decrease of $0.1 million, respectively.
For the quarter ended March 31, 1998 the Company reported net earnings of
$4.4 million as compared to $1.5 million in the first quarter of 1997.
At March 31, 1998, the backlog was $125,830,000 as compared to
$130,423,000 at December 31, 1997, a decrease of $4.6 million. Backlog by
product group at March 31, 1998 and December 31, 1997 was as follows:
March 31 December 31 Increase
1998 1997 (Decrease)
-------- ----------- -----------
(thousands of dollars)
Oil field $ 10,139 $ 15,235 (33%)
Power transmission 39,080 36,636 7%
Foundry castings 13,932 15,709 (11%)
Trailers 62,679 62,843 -
-------- --------
Total $125,830 $130,423 (4%)
======== ========
The lower price of oil in the first quarter from the previous year contributed
to the lower backlog and a reduction in incoming orders for oil field products.
Although the decline did not have a significant negative affect on the first
quarter 1998 results, if such a decline is sustained for an extended period of
time, it could negatively affect the Company's operating results.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $2.0 million to $70.9 million from $68.9 million
at March 31, 1998. At March 31, 1998 accounts receivable had increased $1.4
million to $41.8 million from $40.4 million at December 31, 1997. Inventory
totaled $38.4 million at March 31, 1998, an increase of $8.3 million from $30.1
million at December 31, 1997. Accounts payable increased $5.0 million to $12.2
million from $7.2 million at the end of 1997. The increases in accounts
receivable, inventory and accounts payable are primarily due to increased sales
in all product groups.
In July 1997, the Company acquired all assets and assumed all liabilities
of two oil field service companies through two separate stock purchase
agreements. The company paid $2.8 million in cash, net of cash acquired and
issued $7.6 million of long term notes payable in conjunction with these
acquisitions. Both acquisitions were accounted for under the purchase method of
accounting. The estimated allocations of the purchase price include goodwill of
$8,391,000, which is being amortized over forty years.
<PAGE>
In the first quarter of 1998, the Company expended $4.3 million for
additions to Property, Plant & Equipment (P.P. & E.) for capacity expansions and
equipment replacements as compared to $5.6 million for the period ending March
31, 1997. During 1997, the Company financed a portion of its acquisition
program through the issuance of long term notes payable as noted above. The
Company believes that the existing working capital, cash provided by operations
and available borrowing capacity will be sufficient to satisfy current
requirements. In recent years P. P. & E. expenditures have been financed with
internally generated funds.
During 1997, the Company completed a comprehensive evaluation of its
information technology infrastructure for the year 2000 compliance. Following
its evaluation, the Company determined that the purchase of new information
technology systems provided the best remediation solution as well as provided
increased commercial and financial functionality when compared to modifying its
existing mature system. Management estimates that the capitalizable cost of the
system and implementation will be approximately $9.3 million, which will be
capitalized as incurred. The Company had capitalized $4.3 million and $5.8
million relating to the project as of December 31, 1997 and March 31, 1998,
respectively. The new system implementation is scheduled for completion by
December 31, 1998 and will be amortized over a seven year estimated useful life.
The Company believes that in meeting these implementation dates the risks of the
year 2000 issue will be addressed.
Effective April 1, 1998 Company acquired all assets and assumed all
liabilities of the Lone Star Machine Shop, Inc. for approximately $3.0 million
in cash. The acquisition was accounted for under the purchase method of
accounting. This acquisition is a direct result of management's desire to
expand the Company's service capabilities in the oil and gas industries.
FORWARD-LOOKING STATEMENTS AND ASSUMPTIONS
This quarterly report may contain or incorporate by reference certain
forward-looking statements, including by way of illustration and not of
limitation, statements relating to liquidity, revenues, expenses, margins and
contract rates and terms. The Company strongly encourages readers to note that
some or all of the assumptions, upon which such forward-looking statements are
based, are beyond the Company's ability to control or estimate precisely, and
may in some cases be subject to rapid and material changes.
PART II - OTHER INFORMATION
Item 6, Exhibits and Reports Form 8-K
(A) Exhibits
27-Financial Data Schedule
(B) Reports of Form 8-K
None
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LUFKIN INDUSTRIES, INC.
-------------------------------------
Date May 14, 1998 /s/ C. James Haley, Jr.
---------------------- -------------------------------------
C. James Haley, Jr.
Secretary-Treasurer
(Principal financial officer
and officer authorized to
sign on behalf of the registrant)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 270 796
<SECURITIES> 15,059 17,521
<RECEIVABLES> 42,350 41,044
<ALLOWANCES> 600 600
<INVENTORY> 38,427 30,078
<CURRENT-ASSETS> 97,416 90,750
<PP&E> 254,375 250,727
<DEPRECIATION> 176,648 175,249
<TOTAL-ASSETS> 217,631 209,752
<CURRENT-LIABILITIES> 26,555 21,896
<BONDS> 0 0
0 0
0 0
<COMMON> 6,792 6,792
<OTHER-SE> 151,840 148,513
<TOTAL-LIABILITY-AND-EQUITY> 217,631 209,752
<SALES> 73,637 60,041
<TOTAL-REVENUES> 73,637 60,041
<CGS> 60,372 51,943
<TOTAL-COSTS> 67,189 58,296
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 6,937 2,329
<INCOME-TAX> 2,497 815
<INCOME-CONTINUING> 4,440 1,514
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,440 1,514
<EPS-PRIMARY> .67 .23
<EPS-DILUTED> .66 .23
</TABLE>
