<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 September 30, 1999.
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 6,396,501 shares of Common Stock, $1.00 par value per share,
outstanding as of September 30, 1999, not including 495,880 shares classified as
Treasury Stock.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Thousands of dollars, except share data)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 9-30-99 12-31-98
------ ------- --------
(Unaudited)
CURRENT ASSETS:
Cash $ 649 $ 1,617
Temporary investments 5,937 6,147
Receivables, net 36,710 38,904
Income taxes receivable 2,756 3,566
Inventories 38,273 48,344
Deferred income tax assets 2,615 2,616
-------- --------
Total current assets 86,940 101,194
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 265,563 261,946
Less - Accumulated depreciation 172,631 166,787
-------- --------
92,932 95,159
PREPAID PENSION COSTS 35,627 31,614
GOODWILL, net 8,194 8,148
OTHER ASSETS 10,763 6,680
-------- --------
$234,456 $242,795
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short term notes payable $ 12,300 $ 8,500
Current portion of long term notes payable 2,687 2,687
Accounts payable 9,211 12,017
Accrued liabilities:
Payroll and benefits 6,808 6,687
Accrued warranty expenses 2,272 2,213
Taxes payable 2,555 2,561
Commissions and other 6,037 5,551
-------- --------
Total current liabilities 41,870 40,216
-------- --------
DEFERRED INCOME TAX LIABILITIES 16,750 16,774
POST RETIREMENT BENEFITS 11,709 11,381
LONG TERM NOTES PAYABLE, NET OF CURRENT PORTION 9,879 11,528
SHAREHOLDERS' EQUITY:
Common stock, $1 par value per share;
20,000,000 shares authorized;
6,892,381 shares issued 6,892 6,892
Capital in excess of par 18,077 18,080
Retained earnings 141,804 147,413
Treasury stock, 495,880 shares
and 315,330 shares, respectively, at cost (11,025) (8,014)
Cumulative translation adjustment (1,500) (1,475)
-------- --------
Total shareholders' equity 154,248 162,896
-------- --------
$234,456 $242,795
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Thousands of dollars, except share and per share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
--------------------- ------------------------
(Unaudited) (Unaudited)
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $64,952 $66,649 $180,493 $220,247
COST OF SALES 56,402 53,496 157,644 179,845
------- ------- -------- --------
Gross profit 8,550 13,153 22,849 40,402
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,485 7,174 25,550 20,771
------- ------- -------- --------
Operating income (loss) 1,065 5,979 (2,701) 19,631
INTEREST AND OTHER INCOME (EXPENSE), NET (158) 544 (634) 1,362
------- ------- -------- --------
Earnings (loss) before income taxes 907 6,523 (3,335) 20,993
INCOME TAX PROVISION (BENEFIT) 336 2,558 (1,234) 7,767
------- ------- -------- --------
Net earnings (loss) 571 3,965 (2,101) 13,226
CHANGE IN CUMULATIVE TRANSLATION
ADJUSTMENT 188 (16) (25) 69
------- ------- -------- --------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 759 $ 3,949 $ (2,126) $ 13,295
======= ======= ======== ========
EARNINGS (LOSS) PER SHARE
Basic $ 0.09 $ 0.61 $ (0.33) $ 2.02
======= ======= ======== ========
Diluted $ 0.09 $ 0.60 $ (0.33) $ 1.99
======= ======= ======== ========
DIVIDENDS PER SHARE $ 0.18 $ 0.18 $ 0.54 $ 0.54
======= ======= ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 6,249,115 6,513,643 6,384,574 6,539,394
========= ========= ========= =========
Diluted 6,252,490 6,598,930 6,384,574 6,660,565
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Thousands of dollars)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
-----------------------
(Unaudited)
1999 1998
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (2,101) $13,226
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Depreciation and amortization 7,888 6,661
Deferred income tax benefit (24) -
Pension income (4,012) (2,552)
Post retirement benefits 328 (416)
(Gain) loss on sales of property,
plant and equipment 338 (246)
Increase (decrease) in cash flows
from changes in assets and liabilities
excluding effects of acquisitions:
Receivables, net 2,194 8,924
Income taxes receivable 810 -
Inventories 5,879 (12,287)
Accounts payable (2,806) 1,083
Accrued liabilities 659 (1,462)
-------- -------
Net cash provided by operating activities 9,153 12,931
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,847) (17,396)
Proceeds from disposition of property,
plant and equipment 70 586
Acquisitions of other companies, net of cash
acquired (101) (2,300)
(Increase) decrease in other assets (58) 5,628
-------- -------
Net cash used in investing activities (5,936) (13,482)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term debt, net of repayments 2,151 2,401
Dividends paid (3,508) (3,566)
Proceeds from exercise of stock options 8 2,059
Purchase of treasury stock (3,021) (4,465)
-------- -------
Net cash used in financing activities (4,370) (3,571)
Effect of translation on cash and temporary
investments (25) 69
-------- -------
Net decrease in cash and temporary investments (1,178) (4,053)
Cash and temporary investments, at
beginning of period 7,764 18,317
-------- -------
Cash and temporary investments, at
end of period $ 6,586 $14,264
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) 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, 1998. Certain prior period amounts have been reclassified to
conform to the current presentation.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, which include only
normal recurring adjustments, except as discussed below, necessary to present
fairly the financial position, results of operations and cash flows of Lufkin
Industries, Inc. and its consolidated subsidiaries (the "Company") for all
periods presented. The condensed consolidated balance sheet as of December 31,
1998, was derived from the audited consolidated balance sheet included in the
Company's 1998 annual report on Form 10-K. The results of operations for the
nine months ended September 30, 1999, are not necessarily indicative of the
results that may be expected for the full fiscal year.
Included in the results for the nine months ended September 30, 1999 is a
non-recurring charge of $1,395,000 after-tax, or $0.21 per share (diluted),
related to relocation of facilities, staffing level reductions and unusual legal
and warranty expenses incurred during the first quarter.
Operating results for the three and nine months ended September 30, 1998
include non-recurring gains totaling approximately $1,000,000, or $0.14 per
share (diluted), related primarily to the sale of certain assets and lower than
expected costs on certain employee benefits and manufacturing items. In July,
1998, the Company began capitalizing certain maintenance and supplies inventory
to better match the estimated cost of such inventory with the related equipment
produced. Such inventory will be capitalized over the three years of its
estimated use and had the effect increasing net earnings by $472,000, or $0.07
per share (diluted) for the three and nine months ended September 30, 1998.
(2) Consolidated inventories consist of the following:
9-30-99 12-31-98
------- --------
(Thousands of dollars)
Raw materials and purchased
parts $22,624 $ 28,208
Work in process 11,730 14,805
Finished goods 3,919 5,331
------- --------
$38,273 $ 48,344
======= ========
<PAGE>
(3) Basic earnings per share (EPS) is computed by dividing net earnings by
the weighted average number of shares outstanding during the period presented.
Diluted EPS is computed considering potentially dilutive outstanding options.
The following table sets forth the computation of basic and diluted earnings
(loss) per share for the three and nine months ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
1999 1998 1999 1998
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
(Thousands of dollars,
except share and per
share data)
Numerator:
Numerator for basic
and diluted earnings
(loss) per share-
income available to
common shareholders $ 571 $ 3,965 $ (2,101) $ 13,226
========== ========== ========== ==========
Denominator:
Denominator for basic
earnings (loss) per
share-weighted-
average shares 6,249,115 6,513,643 6,384,574 6,539,394
Effect of dilutive
securities:
Employee stock
options 3,375 85,287 - 121,171
---------- ---------- ---------- ----------
Denominator for diluted
earnings (loss) per
share-adjusted weighted-
average shares and
assumed conversions 6,252,490 6,598,930 6,384,574 6,660,565
========== ========== ========== ==========
Basic earnings (loss)
per share $ 0.09 $ 0.61 $ (0.33) $ 2.02
========== ========== ========== ==========
Diluted earnings (loss)
per share $ 0.09 $ 0.60 $ (0.33) $ 1.99
========== ========== ========== ==========
</TABLE>
The effect of employee stock options has been excluded from the calculation
of diluted EPS for the nine months ended September 1999 because their effect on
diluted EPS would be antidilutive.
(4) All acquisitions have been accounted for under the purchase method.
Goodwill, if any, resulting from each acquisition is being amortized over a
forty year life. The results of these companies' operations are included in the
Company's condensed consolidated statements of earnings and comprehensive income
from their respective acquisition dates forward. The accompanying condensed
consolidated balance sheet as of September 30, 1999 includes estimated
allocations of the respective purchase prices which may be subject to later
adjustment.
In November 1998, the Company completed the acquisition of the French
company COMELOR, a manufacturer of industrial gears, for a purchase price of
$7,615,000 in cash and 100,000 shares of common stock. The fair value of the
net assets acquired exceeded the purchase price, therefore net assets were
recorded based on the purchase price.
In December 1998, the Company completed the acquisition of the Delta-X
Corporation, a software and hardware manufacturer for the oil field service
industry. Total cash payments were $4,087,000 and goodwill was $977,000.
<PAGE>
The following unaudited pro forma information presents the results of the
Company's consolidated results of operations had the acquisitions taken place on
the first day of the period being reported:
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
(Thousands of dollars, 1999 1998 1999 1998
except per share data) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pro forma revenues $64,952 $71,550 $180,493 $235,772
Pro forma net
earnings (loss) 75 4,191 (2,598) 13,988
Pro forma earnings
(loss) per common
share:
Basic .01 .63 (0.41) 2.11
Diluted .01 .63 (0.41) 2.07
</TABLE>
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.
(5) A class action complaint was filed in the United States District Court
for the Eastern District of Texas on March 7, 1997 by an employee and a former
employee which alleged race discrimination in employment. Certification
hearings were conducted in Beaumont, Texas in February of 1998 and in Lufkin,
Texas in August of 1998. The District Court in April of 1999 issued a decision
that certified a class for this case, which includes all persons of a certain
minority employed by the Company from March 6, 1994 to the present. The Company
appealed this decision by the District Court to the 5th Circuit United States
Court of Appeals in New Orleans, Louisiana. This appeal was denied on June 23,
1999.
The Company is defending this action vigorously. Furthermore, the Company
believes that the facts and the law in this action support its position and is
confident that it will prevail if this case is tried on the merits.
The net loss reported by the Company for the nine months ended September 30,
1999 includes an unusual charge of $630,000 (net of income tax effects), for
legal expenses related to this legal action.
There are various other claims and legal proceedings arising in the ordinary
course of business pending against or involving the Company wherein monetary
damages are sought. It is management's opinion that the Company's liability, if
any, under such claims or proceedings would not materially affect its financial
position or results of operations.
(6) The Company operates with four business segments-- oil field, power
transmission, foundry and trailer. In keeping with the Company's strategic
objective of vertical integration, the Company's foundry segment also provides
its oil field and power transmission segments with commercial castings. The
four operating segments are supported by a common corporate group. The
accounting policies of the segments are the same as for the consolidated
financial statements as described in the summary of significant accounting
policies disclosed in the Company's annual report on Form 10-K. Corporate
expenses are allocated to the operating segments primarily based upon third
party revenues. The following is a summary of key business segment and product
group information (in thousands of dollars):
<PAGE>
For the three months ended September 30, 1999
<TABLE>
<CAPTION>
Power
Oil Field Transmission Foundry Trailer Corporate Total
--------- ------------ ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross sales $ 13,601 $ 17,041 $ 5,555 $29,550 $ - $ 65,747
Intercompany (781) (14) - - - (795)
--------- ------------ ------- ------- --------- --------
Net sales $ 12,820 $ 17,027 $ 5,555 $29,550 $ - $ 64,952
========= ============ ======= ======= ========= ========
Operating income
(loss) $ (1,054) $ (232) $ (252) $ 2,603 $ - $ 1,065
Interest and
other expense,
net - - - - (158) (158)
--------- ------------ ------- ------- --------- --------
Earnings (loss)
before income
taxes $ (1,054) $ (232) $ (252) $ 2,603 $ (158) $ 907
========= ============ ======= ======= ========= ========
</TABLE>
For the three months ended September 30, 1998
<TABLE>
<CAPTION>
Power
Oil Field Transmission Foundry Trailer Corporate Total
--------- ------------ ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross sales $ 13,001 $ 18,069 $ 6,523 $30,414 $ - $ 68,007
Intercompany (1,357) (1) - - - (1,358)
--------- ------------ ------- ------- --------- --------
Net sales $ 11,644 $ 18,068 $ 6,523 $30,414 $ - $ 66,649
========= ============ ======= ======= ========= ========
Operating income
(loss) $ (391) $ 1,962 $ (22) $ 4,430 $ - $ 5,979
Interest and
other expense,
net - - - - 544 544
--------- ------------ ------- ------- --------- --------
Earnings (loss)
before income
taxes $ (391) $ 1,962 $ (22) $ 4,430 $ 544 $ 6,523
========= ============ ======= ======= ========= ========
</TABLE>
<PAGE>
For the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Power
Oil Field Transmission Foundry Trailer Corporate Total
--------- ------------ ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross sales $ 33,325 $ 53,461 $18,415 $79,404 $ - $184,605
Intercompany (2,276) (66) (1,770) - - (4,112)
--------- ------------ ------- ------- --------- --------
Net sales $ 31,049 $ 53,395 $16,645 $79,404 $ - $180,493
========= ============ ======= ======= ========= ========
Operating income
(loss) $ (4,679) $ (1,524) $(1,526) $ 5,028 $ - $ (2,701)
Interest and
other expense,
net - - - - (634) (634)
--------- ------------ ------- ------- --------- --------
Earnings (loss)
before income
taxes $ (4,679) $ (1,524) $(1,526) $ 5,028 $ (634) $ (3,335)
========= ============ ======= ======= ========= ========
</TABLE>
For the nine months ended September 30, 1998
<TABLE>
<CAPTION>
Power
Oil Field Transmission Foundry Trailer Corporate Total
--------- ------------ ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross sales $ 53,561 $ 53,765 $24,410 $94,309 $ - $226,045
Intercompany (5,783) (15) - - - (5,798)
--------- ------------ ------- ------- --------- --------
Net sales $ 47,778 $ 53,750 $24,410 $94,309 $ - $220,247
========= ============ ======= ======= ========= ========
Operating income
(loss) $ 3,345 $ 5,487 $ 1,263 $ 9,536 $ - $ 19,631
Interest and
other income,
net - - - - 1,362 1,362
--------- ------------ ------- ------- --------- --------
Earnings (loss)
before income
taxes $ 3,345 $ 5,487 $ 1,263 $ 9,536 $ 1,362 $ 20,993
========= ============ ======= ======= ========= ========
</TABLE>
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the three and nine months ended September 30, 1999 were
$64,952,000 and $180,493,000, decreasing 3% and 18%, respectively, from
$66,649,000 and $220,247,000 for the same periods in 1998. All product groups
experienced a decline with the exception of the oil field group which increased
10% for the three months ended September 30, 1999 over the same period in 1998.
The following table summarizes the changes in net sales by product group.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 % September 30 %
------------------------------ Increase --------------------- Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
------------- ----------- ------------ ---------- -------- ------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Oil field $12,820 $11,644 10% $ 31,049 $ 47,778 (35%)
Power transmission 17,027 18,068 (6%) 53,395 53,750 (1%)
Foundry 5,555 6,523 (15%) 16,645 24,410 (32%)
Trailers 29,550 30,414 (3%) 79,404 94,309 (16%)
------- ------- -------- --------
$64,952 $66,649 (3%) $180,493 $220,247 (18%)
======= ======= ======== ========
</TABLE>
The increase in oil field product sales for the third quarter of 1999
reflects the improvement in the price of oil compared to a year ago. Decreased
capital spending in the petro chemical industry combined with a general
softening of the customer base in the tire and rubber industry has affected
sales in the power transmission and foundry groups. The foundry group continues
to be impacted by increased pricing pressure from the Far East and South
American markets. The trailer business continues to ride out the current
downturn in the cyclical nature of this industry, which typically runs a five to
seven year cycle. While the decline in sales directly affected earnings,
management continues to take actions to bring costs in line with current
business levels, as evidenced by the non-recurring charges discussed below for
staffing level adjustments.
The Company reported gross profit for the three and nine months ended
September 30, 1999 of $8,550,000 and $22,849,000, respectively, compared to
$13,153,000 and $40,402,000 for the same periods in 1998. Gross profit as a
percent of sales declined to 13% for the three and nine months ended September
30, 1999 compared to 20% and 18%, respectively, for the same periods in 1998.
This decrease is due in part to the non-recurring charges, unusual warranty
expenses and staffing level reductions occurring earlier in the year.
The Company reported operating income of $1,065,000 and an operating loss
of $2,701,000 for the three and nine months ended September 30, 1999,
respectively, as compared to operating income of $5,979,000 and $19,631,000 for
the same periods in 1998. While these are decreases from the previous year
results, operating income has shown steady improvement since the first quarter
of 1999. The operating loss for the nine months ended September 30, 1999
includes $1,251,000 (net of income tax effects) of non-recurring charges related
to the relocation of facilities, staffing level reductions and unusual legal and
warranty expenses occurring in the current year first quarter.
Selling, General and Administrative expenses (S.G.& A.) as a percent of
sales increased to 12% and 14% for the three and nine months ended September 30,
1999, respectively, as compared to 11% and 9% for the same periods in 1998.
While this is an unfavorable change from 1998, S. G. & A. expenses as a percent
of sales have steadily improved to 14% for the nine months ended September 30,
1999 from 17% in the first quarter of 1999. A significant portion of the change
is due to the non-recurring charges discussed above.
<PAGE>
Interest and other income and expense, composed primarily of interest
income and expense declined to expense of $158,000 and $634,000 for the three
and nine months ended September 30, 1999, respectively, compared to income of
$544,000 and $1,362,000 for the same periods in 1998. The increase in expense
in the 1999 reporting periods is primarily due to increased interest expense
related to long term and current borrowing and a non recurring charge of
$144,000 (net of income tax effects) resulting from asset dispositions due to
facilities relocations.
For the three and nine months ended September 30, 1999, the Company
reported net earnings of $571,000 and a net loss of $2,101,000, respectively,
compared to net earnings of $3,965,000 and $13,226,000 for the same periods in
1998. Contributing to the decline in net earnings were the non-recurring
charges for staffing level reductions, relocation of facilities and unusual
legal and warranty expenses totaling $1,395,000 net of tax, discussed above.
At September 30, 1999, the backlog was $73,249,000 as compared to
$75,717,000 at September 30, 1998. The oil field and power transmission
business segments experienced decreases while the foundry and trailer business
groups increased. Backlog by product group at September 30, 1999, June 30, 1999
and December 31, 1998 was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
September 30 June 30 Increase December 31 Increase
1999 1999 (Decrease) 1998 (Decrease)
---------------- --------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Oil field $ 3,030 $ 4,250 $(1,220) $ 3,746 $ (716)
Power transmission 26,756 32,124 (5,368) 31,103 (4,347)
Foundry castings 8,713 7,472 1,241 8,426 287
Trailers 34,750 33,388 1,362 44,744 (9,994)
------- ------- ------- ------- --------
Total $73,249 $77,234 $(3,985) $88,019 $(14,770)
======= ======= ======= ======= ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $15,908,000 to $45,070,000 at September 30,
1999, from $60,978,000 at December 31, 1998. Accounts receivable decreased
$2,194,000 to $36,710,000 at September 30, 1999 from $38,904,000 at December
1998. Inventory totaled $38,273,000 at September 30, 1999, a decrease of
$10,071,000 from $48,344,000 at December 31, 1998. Accounts payable decreased
$2,806,000 to $9,211,000 from $12,017,000 at the end of 1998. These decreases
can be attributed to the decreased business levels across the four business
groups.
In June 1998 the Company entered into a credit agreement for a
discretionary line of credit totaling $10,000,000. This agreement was
superseded by an agreement in December 1998 increasing the discretionary line of
credit to $13,000,000. As of November 4, 1999, $3,400,000 remained available
for borrowing.
The Company has an additional credit line of $6,000,000 expiring in March
2000. At September 30 and November 4, 1999, $6,000,000 remained available for
borrowing.
During the first nine months of 1999, the Company expended $5,847,000 for
additions to Property, Plant & Equipment (P. P. & E.) for capacity expansions
and equipment replacements as compared to $17,396,000 for nine months ended
September 30, 1998. In recent years P. P. & E. expenditures have been financed
with internally generated funds. During 1998, the Company financed a portion of
its acquisitions program through the issuance of long term notes payable. The
Company plans to fund future P. P. & E. expenditures and its acquisitions
program using these two methods. The Company believes that its existing working
capital and available borrowing capacity will be sufficient to satisfy 1999 cash
requirements.
<PAGE>
IMPACT OF THE YEAR 2000
Year 2000 issue. Many software applications, hardware and equipment and
embedded chip systems identify dates using only the last two digits of the year.
These products may be unable to distinguish between dates in the year 2000 and
the dates in the year 1900. That inability, if not addressed, could cause
applications, equipment or systems to fail or provide incorrect information
after December 31, 1999, or when using dates after December 31, 1999. This in
turn could have an adverse effect on the Company due to the Company's direct
dependence on its own applications, equipment and systems and indirect
dependence on those of other entities with which the Company must interact.
Compliance program and Company readiness. Prior to 1998, the Company
completed a comprehensive evaluation of its information technology systems to
determine which systems would be affected by the year 2000 ("Y2K"). Following
this evaluation, the Company determined that the purchase of new Y2K compliant
software applications would provide increased commercial and financial
functionality when compared to its existing mature software. The new
information technology system is complete.
The Company is currently assessing the Y2K readiness of its non-
information technology systems. This process is substantially complete and has
involved the testing and evaluation of electrical equipment, embedded
microprocessor chips and machine controls throughout the Company.
The Company has now completed the process of requesting information about
Y2K readiness from its vendors. The Company believes that the risk of sole-
source exposure is minimal since alternate sources exist for most of the items
purchased by the Company. Utility and communication providers and financial
institutions have been contacted. They have responded that they are actively
addressing the Y2K issue and feel that the risk of any interruption of service
will be minimal.
The Company is receiving Y2K compliance questionnaires from its customers
daily, indicating their awareness of the Y2K issue and its possible risks; thus
the Company has chosen not to pursue the Y2K compliance of its customer base.
Costs to address year 2000 compliance issues. The Company has estimated
that the capitalizable costs of the new information technology software and its
implementation will be approximately $9,500,000, substantially all of which has
been capitalized at September 30, 1999. The new information technology system
is being depreciated over a seven year useful life. The Company estimates that
it will have to dispose of non-Y2K compliant computer equipment with a net book
value of approximately $0.l million. The non-information technology systems
found to date to be non-compliant were immaterial in nature and of minimal cost
to repair or replace.
Risk of non-compliance and contingency plans. The Company recognizes the
possibility that its systems may not be completely Y2K compliant by December 31,
1999. There is also a risk that all third parties upon whom the Company relies
will not be completely Y2K compliant at year end 1999. The effects of any
degree of Y2K non-compliance on revenues, costs and net earnings is not possible
to accurately predict at this time.
Worst case scenarios include a total shutdown of all operations and a
loss of revenues in fiscal year 2000; however, the Company believes that the
risk of this worst case scenario is remote. Although no assurance can be given,
the Company believes that business interruption will be minimal and should not
result in a material adverse effect on the Company's consolidated statement of
earnings.
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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize financial instruments for trading purposes
and holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's exposure to market risk for changes in
interest rates relates primarily to its obligation under the $13,000,000
discretionary line of credit discussed above. The weighted average interest
rate on this line of credit was 6.33% at September 30, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A class action complaint was filed in the United States District Court
for the Eastern District of Texas on March 7, 1997 by an employee and a former
employee which alleged race discrimination in employment. Certification
hearings were conducted in Beaumont, Texas in February of 1998 and in Lufkin,
Texas in August of 1998. The District Court in April of 1999 issued a decision
that certified a class for this case which includes all persons of a certain
minority employed by the Company from March 6, 1994 to the present. The Company
appealed this decision by the District Court to the 5th Circuit United States
Court of Appeals in New Orleans, Louisiana. This appeal was denied on June 23,
1999.
The Company is defending this action vigorously. Furthermore, the
Company believes that the facts and the law in this action support its position
and is confident that it will prevail if this case is tried on the merits.
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 November 15, 1999 /s/ R. D. Leslie
---------------------- ----------------------------------------
R. D. Leslie
Treasurer/Director of
Financial Operations
(Principal financial officer
and officer authorized to
sign on behalf of the
registrant)
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