<PAGE>
FORM 10-Q/A
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 June 30, 1999.
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-2612
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LUFKIN INDUSTRIES, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-040-4410
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 South Raguet, Lufkin, Texas 75904
- ------------------------------------------------------------------------------
(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
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
----- -----
There were 6,472,101 shares of Common Stock, $1.00 par value per share,
outstanding as of June 30, 1999, not including 420,280 shares classified as
Treasury Stock.
EXPLANATORY NOTE
This Form 10-Q/A is being filed by Lufkin Industries, Inc., a Texas Corporation
(the Company), as an amendment to its Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999, filed August 12, 1999, to correct a
typographical error in Item 2. "Management's Discussion and Analysis". The
backlog at June 30, 1999 for the power transmission group was incorrectly
reported as $2,124 when that figure is correctly reported as $32,124. A
corrected Item 2. "Management's Discussion and Analysis" is filed herewith.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1999 AND DECEMBER 31, 1998
(Thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 6-30-99 12-31-98
------ ---------- ---------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 673 $ 1,617
Temporary investments 5,938 6,147
Receivables, net 30,511 38,904
Income taxes receivable 3,090 3,566
Inventories 46,032 48,344
Deferred income tax assets 2,615 2,616
-------- ---------
Total current assets 88,859 101,194
-------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost 264,457 261,946
Less - Accumulated depreciation 170,740 166,787
-------- ---------
93,717 95,159
PREPAID PENSION COSTS 34,146 31,614
GOODWILL, net 8,159 8,148
OTHER ASSETS 6,663 6,680
-------- ---------
$231,544 $ 242,795
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 9,292 $ 12,017
Short term notes payable 8,000 8,500
Current portion of long
term notes payable 2,687 2,687
Payroll and benefits 6,593 6,687
Accrued warranty expenses 2,735 2,213
Taxes payable 1,899 2,561
Other accrued liabilities 5,555 5,551
-------- ---------
Total current liabilities 36,761 40,216
-------- ---------
DEFERRED INCOME TAX LIABILITIES 16,774 16,774
POST RETIREMENT BENEFITS LIABILITY 11,567 11,381
LONG TERM NOTES PAYABLE, NET OF CURRENT PORTION 10,534 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 18,076 18,080
Retained earnings 142,388 147,413
Treasury stock, 420,280 shares
and 315,330 shares, respectively, at cost (9,760) (8,014)
Accumulated other comprehensive income
Cumulative translation adjustment (1,688) (1,475)
-------- ---------
Total shareholders' equity 155,908 162,896
-------- ---------
$231,544 $ 242,795
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Thousands of dollars, except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------------------ --------------------
(Unaudited) (Unaudited)
1999 1998 1999 1998
-------------- ------- --------- --------
<S> <C> <C> <C> <C>
NET SALES $57,594 $79,962 $115,541 $153,598
COST OF SALES 49,513 65,978 101,241 126,349
------- ------- -------- --------
Gross profit 8,081 13,984 14,300 27,249
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,987 6,780 18,064 13,597
------- ------- -------- --------
Operating income (loss) 94 7,204 (3,764) 13,652
INTEREST AND OTHER INCOME (EXPENSE), NET 27 329 (477) 818
------- ------- -------- --------
Earnings (loss) before provision
(benefit) for income taxes 121 7,533 (4,241) 14,470
PROVISION (BENEFIT) FOR INCOME TAXES 46 2,712 (1,568) 5,209
------- ------- -------- --------
Net earnings (loss) $ 75 $ 4,821 $ (2,673) $ 9,261
======= ======= ======== ========
CHANGE IN FOREIGN CURRENCY
TRANSLATION ADJUSTMENT (103) 9 (213) 85
------- ------- -------- --------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (28) $ 4,830 $ (2,886) $ 9,346
======= ======= ======== ========
EARNINGS (LOSS)PER SHARE
Basic $ .01 $ .73 $ (0.41) $ 1.41
======= ======= ======== ========
Diluted $ .01 $ .72 $ (0.41) $ 1.38
======= ======= ======== ========
DIVIDENDS PER SHARE $ .18 $ .18 $ .36 $ .36
======= ======= ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 6,394,492 6,588,716 6,421,997 6,590,145
========= ========= ========= =========
Diluted 6,396,090 6,707,300 6,421,997 6,724,861
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Thousands of dollars)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30
----------------------------------
1999 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(2,673) $ 9,261
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 5,415 4,196
Deferred income tax asset 1 -
Pension income (2,532) (1,610)
Post retirement benefits 186 79
(Gain)loss on disposition of property,
plant and equipment 319 (74)
Changes in:
Receivables, net 8,393 (4,573)
Income taxes receivable 476 -
Inventories 2,312 (9,212)
Accounts payable (2,725) 5,414
Accrued liabilities (230) (1,298)
------- -------
Net cash provided by operating activities 8,942 2,183
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,162) (9,880)
Proceeds from disposition of property,
plant and equipment 120 116
Acquisitions of other companies, net of cash received (261) -
(Increase) decrease in other assets 17 (162)
------- -------
Net cash used in investing activities (4,286) (9,926)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment of)notes payable (1,494) 4,713
Dividends paid (2,352) (2,383)
Proceeds from exercise of stock options 7 1,900
Purchase of treasury stock (1,757) (3,074)
------- -------
Net cash provided by (used in) financing activities (5,596) 1,156
Effect of translation on cash and temporary investments (213) 85
------- -------
Net decrease in cash and temporary investments (1,153) (6,502)
Cash and temporary investments, at beginning of period 7,764 18,317
------- -------
Cash and temporary investments, at end of period $ 6,611 $11,815
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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.
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments, except as discussed below,
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, 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 six months
ended June 30, 1999, are not necessarily indicative of the results that may be
expected for the full fiscal year.
Net earnings (loss)for the six months ended June 30, 1999 include non-
recurring charges of $1,395,000 related to the relocation of facilities,
staffing level reductions and unusual legal and warranty expenses.
(2) Consolidated inventories consist of the following:
6-30-99 12-31-98
---------- --------
(Thousands of dollars)
Raw materials and purchased parts $ 26,467 $28,208
Work in process 14,360 14,805
Finished goods 5,205 5,331
--------- -------
$ 46,032 $48,344
========= =======
(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 basic and diluted earnings (loss) per share
for the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 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 $ 75 $ 4,821 $ (2,673) $ 9,261
Denominator:
Denominator for basic earnings (loss)
per share-weighted-average shares 6,394,492 6,588,716 6,421,997 6,590,145
Effect of dilutive securities:
employee stock options 1,598 118,584 - 134,716
---------- ---------- ---------- ----------
Denominator for diluted earnings (loss)
per share-adjusted weighted-average
shares and assumed conversions 6,396,090 6,707,300 6,421,997 6,724,861
========== ========== ========== ==========
Basic earnings (loss) per share $ .01 $ .73 $ (0.41) $ 1.41
========== ========== ========== ==========
Diluted earnings (loss) per share $ .01 $ .72 $ (0.41) $ 1.38
========== ========== ========== ==========
</TABLE>
5
<PAGE>
(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 consolidated statements of earnings and comprehensive income from
their respective acquisition dates forward. The accompanying balance sheet as of
June, 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.
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 year being reported:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
(Thousands of dollars, 1999 1998 1999 1998
Except per share amounts) (Unaudited) (Unaudited)
- ------------------------------------------------ --------------------------- -------------------------
<S> <C> <C> <C> <C>
Pro forma revenues $57,594 $84,773 $115,541 $164,222
Pro forma net earnings (loss) 75 4,975 (2,673) 9,797
Pro forma earnings (loss) per common share:
Basic .01 .74 (0.41) 1.46
Diluted .01 .73 (0.41) 1.44
</TABLE>
These proforma 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 year 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
which 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.
This decision by the District Court has been appealed by the Company to the
5th Circuit United States Court of Appeals in New Orleans, Louisiana. 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 first six months of 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
<PAGE>
(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 those described in the
summary of significant accounting policies. 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).
<TABLE>
<CAPTION>
For the three months ended June 30, 1999
----------------------------------------
Power
Oil field Transmission Foundry Trailer Corporate Total
---------- ------------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross sales $ 9,588 $18,389 $6,417 $24,604 $ - $58,998
Intercompany sales (848) (22) (534) - - (1,404)
------- ------- ------ ------- --------- -------
Net sales $ 8,740 $18,367 $5,883 $24,604 $ - $57,594
======= ======= ====== ======= ========= =======
Operating income
(loss) $(1,484) $ 134 $ (311) $ 1,755 $ - $ 94
Interest and other
income - - - - 27 27
------- ------- ------ ------- --------- -------
Income (loss) before tax
provision (benefit) $(1,484) $ 134 $ (311) $ 1,755 $27 $ 121
======= ======= ====== ======= ========= =======
<CAPTION>
For the three months ended June 30, 1998
----------------------------------------
Power
Oil field Transmission Foundry Trailer Corporate Total
---------- ------------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross sales $17,563 $18,629 $8,417 $36,437 $ - $81,046
Intercompany sales (1,075) (9) - - - (1,084)
------- ------- ------ ------- --------- -------
Net sales $16,488 $18,620 $8,417 $36,437 $ - $79,962
======= ======= ====== ======= ========= =======
Operating income $ 995 $ 2,446 $ 394 $ 3,369 $ - $ 7,204
Interest and other
income - - - - 329 329
------- ------- ------ ------- --------- -------
Income before tax
provision $ 995 $ 2,446 $ 394 $ 3,369 $329 $ 7,533
======= ======= ====== ======= ========= =======
<CAPTION>
For the six months ended June 30, 1999
--------------------------------------
Power
Oil field Transmission Foundry Trailer Corporate Total
----------------- ------------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross sales $19,727 $36,420 $12,860 $49,854 $ - $118,861
Intercompany sales (1,498) (52) (1,770) - - (3,320)
------- ------- ------- ------- --------- --------
Net sales $18,229 $36,368 $11,090 $49,854 $ - $115,541
======= ======= ======= ======= ========= ========
Operating income
(loss) $(3,625) $(1,291) $(1,273) $ 2,425 $ - $ (3,764)
Interest and other
expense - - - - (477) (477)
------- ------- ------- ------- --------- --------
Income (loss)before tax
provision (benefit) $(3,625) $(1,291) $(1,273) $ 2,425 $ (477) $(4,241)
======== ======= ======= ======= ========= ========
<CAPTION>
For the six months ended June 30, 1998
-------------------------------------------
Power
Oil field Transmission Foundry Trailer Corporate Total
------------ ------------ ------- ------- --------- --------
Gross sales $ 40,560 $35,696 $17,887 $63,894 $ - $158,037
Intercompany sales (4,426) (13) - - - (4,439)
--------- ------- ------- ------- --------- --------
Net sales $ 36,134 $35,683 $17,887 $63,894 $ - $153,598
========= ======= ======= ======= ========= ========
Operating income $ 3,730 $ 3,524 $ 1,285 $ 5,113 $ - $ 13,652
Interest and other
income - - - - 818 818
--------- ------- ------- ------- --------- --------
Income before tax
provision $ 3,730 $ 3,524 $ 1,285 $ 5,113 $ 818 $ 14,470
========= ======= ======= ======= ========= ========
</TABLE>
7
<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
Net sales for the three months and six months ended June 30, 1999 were
$57,594,000 and $115,541,000, decreasing 28.0% and 24.8%, respectively from
$79,962,000 and $153,598,000 for the same periods in 1998. All product groups
experienced a decrease with the exception of the power transmission group, which
increased 1.9% for the six months ended June 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 Six Months Ended
June 30 % June 30 %
----------------------- -------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- --------- ----------- -------- -------- -----------
(thousands of dollars) (thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Oil field $ 8,740 $16,488 (47.0%) $ 18,229 $ 36,134 (49.6%)
Power transmission 18,367 18,620 (1.4%) 36,368 35,683 1.9%
Foundry castings 5,883 8,417 (30.1%) 11,090 17,887 (38.0%)
Trailers 24,604 36,437 (32.5%) 49,854 63,894 (22.0%)
------- ------- -------- --------
Total $57,594 $79,962 (28.0%) $115,541 $153,598 (24.8%)
======= ======= ======== ========
</TABLE>
The oil field group experienced a significant decline in sales both in the
second quarter and six months ended June 30, 1999. While the price per barrel
of oil increased during the second quarter of 1999, the overall gas and oil
economy is slower to react in the areas of capital spending, which has affected
sales in the oil field and foundry business groups. 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, although improvements in manufacturing and
engineering design have enabled the power transmission business group to shorten
lead times and take advantage of opportunities that were unavailable previously.
Increased pricing pressure from the Far East and South American markets
continues to impact sales in the foundry business group. The trailer business
group continues to ride out the current downturn in the cyclical nature of their
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
charge discussed below for staffing level adjustments.
The Company reported gross profit for the three and six months ended June 30,
1999 of $8,081,000 and $14,300,000, respectively, compared to $13,984,000 and
$27,249,000 for the same periods in 1998. Gross profit as a percent of sales
decreased to 14% and 12% for the three and six months ended June 30, 1999,
respectively, from 17% and 16% for the same periods in 1998. While this
reflects a decrease overall, gross profit as a percent of sales for the second
quarter ended June 30, 1999 has shown an improvement over the three months ended
March 31, 1999, in part due to the non-recurring charges, unusual warranty
expenses and staffing level reductions occurring earlier in the year.
The Company reported operating income of $94,000 and an operating loss of
$3,764,000 for the three and six months ended June 30, 1999, respectively,
compared to operating income of $7,204,000 and $13,652,000 for the same periods
in 1998. While the six months ended June 30, 1999 reflected an operating loss,
$1,251,000 (net of income tax effects) of the loss was due to non-recurring
charges related to the relocation of facilities, staffing level reductions and
unusual legal and warranty expenses.
Selling, General and Administrative expenses as a percent of sales increased
to 14% and 16% for the three and six months ended June 30, 1999, respectively,
from 8% and 9% for the same periods in 1998. A significant portion of the
change, $1,434,000, is due to non-recurring charges related to staffing level
reductions, relocation of facilities and unusual legal expenses occurring in the
current year first quarter.
Interest and other income and expense, composed primarily of interest income
and expense has declined to income of $27,000 and expense of $477,000 for the
three and six months ended June 30, 1999, respectively, compared to income of
$329,000 and $818,000 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.
8
<PAGE>
For the three and six months ended June 30, 1999, the Company reported net
earnings of $75,000 and a net loss of $2,673,000, respectively, compared to net
earnings of $4,821,000 and $9,261,000 for the same periods in 1998.
Contributing to the decline in net earnings were non-recurring charges for
staffing level reductions, relocation of facilities and unusual legal and
warranty expenses of $1,394,820 (net of income tax effects), or $0.21 for
diluted earnings per share occurring in the current year prior to the second
quarter.
At June 30, 1999, the backlog was $77,234,000 as compared to $90,532,000 and
$88,019,000 at March 31, 1999 and December 31, 1998, respectively, a decrease
of $13,298,000 and $10,785,000. All business segments experienced decreases
with the exception of slight increases in the oil field and power transmission
business groups. Backlog by product group at June 30 and March 31, 1999 and
December 31, 1998 was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, 1999 June 30, 1999
June 30 March 31 Increase December 31 Increase
1999 1999 (Decrease) 1998 (Decrease)
------- -------- ------------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Oil field $ 4,250 $ 1,850 $ 2,400 $ 3,746 $ 504
Power transmission 32,124 36,194 (4,070) 31,103 1,021
Foundry castings 7,472 8,798 (1,326) 8,426 (954)
Trailers 33,388 43,690 (10,302) 44,744 (11,356)
------- ------- -------- ------- --------
Total $77,234 $90,532 $(13,298) $88,019 $(10,785)
======= ======= ======== ======= ========
</TABLE>
Liquidity and Capital Resources
Working capital decreased $8,880,000 to $52,098,000 from $60,978,000 at
December 31, 1998. At June 30, 1999 accounts receivable decreased $8,393,000 to
$30,511,000 from $38,904,000 at December 31, 1998. Inventory totaled
$46,032,000 at June 30, 1999, a decrease of $2,312,000 from $48,344,000 at
December 31, 1998. Accounts payable decreased $2,725,000 to $9,292,000 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. At August 2, 1999, $2,000,000 remained available for borrowing.
During the first six months of 1999, the Company expended $2,101,000 for
additions to Property, Plant & Equipment (P. P. & E.) for capacity expansions
and equipment replacements as compared to $9,900,000 for the six months ended
June 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.
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 substantially complete and should be completely
finished by the end of the third quarter of 1999.
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
9
<PAGE>
electrical equipment, embedded microprocessor chips and machine controls
throughout the Company.
The Company has begun the process of requesting information about Y2K
readiness from its vendors. This process is about 80% complete. 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. It has been estimated that the
capitalizable costs of the new information technology software and its
implementation will be approximately $9,500,000. The Company has capitalized
such costs of $9,451,000 at June 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 $0.1 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
all 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.
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 discretionary line
of credit, of which $8,000,000 had been borrowed as of June 30, 1999 and
$11,000,000 had been borrowed as of August 2, 1999. The weighted average
interest rate on the $8,000,000 of outstanding indebtedness was 6.0% at June 30,
1999.
In addition, the Company has a credit line of $6,000,000 expiring in March
2000. At June 30 and August 2, 1999, $6,000,000 remained available for
borrowing.
10
<PAGE>
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 which 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.
This decision by the District Court has been appealed by the Company to the
5th Circuit United States Court of Appeals in New Orleans, Louisiana. 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 on Form 8-K
None
11
<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 August 20, 1999 /s/ R. D. Leslie
------------------------- -------------------------------------
R. D. Leslie
Treasurer
(Principal financial officer
and officer authorized to
sign on behalf of the registrant)
12
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