<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] 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
(State or other jurisdiction of incorporation or organization)
75-0404410
(I.R.S. Employer Identification Number)
601 SOUTH RAGUET, LUFKIN, TEXAS
(Address of principal executive offices)
75904
(Zip Code)
(936) 634-2211
(Registrant's telephone number, including area code)
_________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period as the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
There were 6,281,951 shares of Common Stock, $1.00 par value per share,
outstanding as of June 30, 2000, not including 610,430 shares classified as
Treasury Stock.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ---------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash $ 2,945 $ 1,065
Invested funds 584 584
Receivables, net 37,812 34,526
Income taxes receivable 2,718 2,564
Inventories 38,640 32,761
Deferred income tax assets 1,228 1,228
-------- ---------
Total current assets 83,927 72,728
-------- ---------
Property, plant and equipment, at cost 257,185 254,827
Less accumulated depreciation 169,071 164,868
-------- ---------
88,114 89,959
-------- ---------
Prepaid pension costs 40,058 37,105
Invested funds 5,281 5,281
Goodwill, net 8,825 8,951
Other assets, net 7,386 7,342
-------- ---------
Total assets $233,591 $221,366
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 13,000 $ 5,200
Current portion of long-term notes payable 2,126 2,750
Accounts payable 14,433 9,895
Accrued payroll and benefits 5,660 4,731
Accrued warranty expenses 1,442 1,493
Taxes payable 4,127 3,189
Accrued commissions and other 4,962 4,685
-------- ---------
Total current liabilities 45,750 31,943
-------- ---------
Deferred income tax liabilities 16,794 16,795
Postretirement benefits liability 11,415 11,116
Long-term notes payable, net of current portion 7,975 9,103
Commitments and contingencies
Shareholders' equity:
Common stock, $1.00 par value per share;
60,000,000 shares authorized;
6,892,381 shares issued 6,892 6,892
Capital in excess of par 18,066 18,066
Retained earnings 141,522 141,491
Treasury stock, 610,430 and 571,880
shares, respectively, at cost (12,656) (12,019)
Accumulated other comprehensive income:
Cumulative translation adjustment (2,167) (2,021)
-------- ---------
Total shareholders' equity 151,657 152,409
-------- ---------
Total liabilities and shareholders' equity $233,591 $ 221,366
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(In thousands of dollars, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 66,712 $ 57,594 $ 122,775 $ 115,541
Cost of sales 54,578 49,513 102,338 101,241
---------- ---------- ---------- ----------
Gross profit 12,134 8,081 20,437 14,300
Selling, general and administrative
expenses 8,325 7,987 16,429 18,064
---------- ---------- ---------- ----------
Operating income (loss) 3,809 94 4,008 (3,764)
Interest and other income (expense), net (234) 27 (101) (477)
---------- ---------- ---------- ----------
Earnings (loss) before income tax
provision (benefit) 3,575 121 3,907 (4,241)
Income tax provision (benefit) 1,479 46 1,605 (1,568)
---------- ---------- ---------- ----------
Net earnings (loss) 2,096 75 2,302 (2,673)
Change in foreign currency translation
adjustment 409 (103) (146) (213)
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ 2,505 $ (28) $ 2,156 $ (2,886)
========== ========== ========== ==========
Earnings (loss) per share:
Basic $ 0.33 $ 0.01 $ 0.37 $ (0.41)
========== ========== ========== ==========
Diluted $ 0.33 $ 0.01 $ 0.37 $ (0.41)
========== ========== ========== ==========
Dividends per share $ 0.18 $ 0.18 $ 0.36 $ 0.36
========== ========== ========== ==========
Weighted average number of shares outstanding:
Basic 6,290,413 6,394,492 6,294,500 6,421,997
Diluted 6,306,386 6,396,090 6,307,663 6,421,997
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
------- -------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 2,302 $(2,673)
Adjustments to reconcile net earnings (loss)
to cash provided by operating activities:
Depreciation and amortization 5,574 5,415
Pension income (2,952) (2,532)
Postretirement benefits 299 186
(Gain) loss on disposition of
property, plant and equipment (155) 319
Changes in:
Trade receivables (3,211) 8,393
Income taxes receivable (156) 476
Inventories (6,238) 2,312
Accounts payable 4,631 (2,725)
Accrued liabilities 2,163 (229)
------- -------
Net cash provided by operating activities 2,257 8,942
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (3,587) (4,162)
Proceeds from disposition of
property, plant and equipment 420 120
Acquisitions, net of cash received - (261)
Decrease in invested funds - 209
Increase in other assets (470) 17
------- -------
Net cash used in investing activities (3,637) (4,077)
------- -------
Cash flows from financing activities:
Net proceeds from (payments of) short-term debt 7,800 (500)
Payments on long-term debt (1,558) (994)
Dividends paid (2,271) (2,352)
Proceeds from exercise of stock options - 7
Purchases of treasury stock (637) (1,757)
------- -------
Net cash provided by (used in)
financing activities 3,334 (5,596)
------- -------
Effect of translation on cash and
cash equivalents (74) (213)
------- -------
Net increase (decrease) in cash and cash equivalents 1,880 (944)
Cash and cash equivalents at beginning
of period 1,065 1,617
------- -------
Cash and cash equivalents at end
of period $ 2,945 $ 673
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LUFKIN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include
the accounts of Lufkin Industries, Inc. and its consolidated subsidiaries (the
"Company") and have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information in the notes to the
consolidated financial statements normally included in financial statements
prepared in accordance with generally accepted accounting principles has been
condensed or omitted pursuant to these rules and regulations. In the opinion of
management, all adjustments, consisting of normal recurring accruals unless
specified, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows have been included. For further
information, refer to the consolidated financial statements and related
footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 1999. The results of operations for the three and six months
ended June 30, 2000, are not necessarily indicative of the results that may be
expected for the full fiscal year. Certain prior period amounts have been
reclassified to conform to the current presentation.
2. Inventories
Consolidated inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
(In thousands of dollars)
<S> <C> <C>
Finished goods $ 3,231 $ 3,193
Work in process 12,501 8,285
Raw materials 22,908 21,283
------- -------
$38,640 $32,761
======= =======
</TABLE>
3. Earnings Per Share
The Company reports earnings per share ("EPS") in accordance with the
provisions of SFAS No. 128, "Earnings per Share". Basic EPS is computed by
dividing net earnings (loss) by the weighted average number of shares
outstanding during the period. Diluted EPS is computed considering the
potentially dilutive effect of outstanding stock options. A reconciliation of
the numerator and denominators of the basic and diluted per share computations
follows ( in thousands, except share and per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $ 2,096 $ 75 $ 2,302 $ (2,673)
Denominator:
Weighted average shares (Basic) 6,290,413 6,394,492 6,294,500 6,421,997
Effect of outstanding options 15,973 1,598 13,163 -
---------- ---------- ---------- ----------
Weighted average shares including
assumed conversions (Diluted) 6,306,386 6,396,090 6,307,663 6,421,997
========== ========== ========== ==========
Basic earnings (loss) per share $ 0.33 $ 0.01 $ 0.37 $ (0.41)
========== ========== ========== ==========
Diluted earnings (loss) per share $ 0.33 $ 0.01 $ 0.37 $ (0.41)
========== ========== ========== ==========
</TABLE>
<PAGE>
3. Earnings Per Share (continued)
Options to purchase a total of 748,293 and 739,666 shares of the Company's
common outstanding at June 30, 2000 and 1999, respectively, were excluded from
the calculation of earnings per share because their effect on diluted earnings
per share for the respective periods was antidilutive.
4. Legal Proceedings
A class action complaint was filed in the United States District Court for
the Eastern District of Texas on March 7, 1997 by an employee and a former
employee which alleged race discrimination in employment. Certification
hearings were conducted in Beaumont, Texas in February of 1998 and in Lufkin,
Texas in August of 1998. The District Court in April of 1999 issued a decision
that certified a class for this case which includes all persons of a certain
minority employed by the Company from March 6, 1994 to the present. The Company
appealed this class certification decision by the District Court to the 5th
Circuit United States Courts 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.
5. Segment Data
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 corporate group. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies in the footnotes to the consolidated financial
statements included in the Company's annual report on Form 10-K for the year
ended December 31, 1999. Corporate expenses and assets are allocated to the
operating segments based primarily upon third party revenues. Following is a
summary of key segment and product group information (in thousands of
dollars):
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
--------------------------------
Power
Oil Field Transmission Foundry Trailer Corporate Total
---------- ------------ -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross sales $21,526 $17,258 $ 8,974 $23,695 $ - $71,453
Intercompany sales (197) (1,022) (3,522) - - (4,741)
------- ------- ------- ------- -------- -------
Net sales $21,329 $16,236 $ 5,452 $23,695 $ - $66,712
======= ======= ======= ======= ======== =======
Operating income
(loss) $ 2,357 $ (181) $ 390 $ 1,243 $ - $ 3,809
Other income (expense) (15) (103) (1) (1) (114) (234)
------- ------- ------- ------- -------- -------
Income (loss) before
tax provision (benefit) $ 2,342 $ (284) $ 389 $ 1,242 $ (114) $ 3,575
======= ======= ======= ======= ======== =======
</TABLE>
<PAGE>
5. Segment Data (continued)
<TABLE>
<CAPTION>
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
Other income (expense) (114) (12) 4 3 146 27
------- ------- ------- ------- ------- -------
Income (loss) before
tax provision (benefit) $(1,598) $ 122 $ (307) $ 1,758 $ 146 $ 121
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
--------------------------------
Power
Oil Field Transmission Foundry Trailer Corporate Total
---------- ------------ -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross sales $36,943 $31,242 $15,867 $45,306 $ - $129,358
Intercompany sales (264) (1,097) (5,222) - - (6,583)
------- ------- ------- ------- ----- --------
Net sales $36,679 $30,145 $10,645 $45,306 $ - $122,775
======= ======= ======= ======= ===== ========
Operating income
(loss) $ 2,856 $(1,057) $ 255 $ 1,954 $ - $ 4,008
Other income (expense) 3 (37) - 111 (178) (101)
------- ------- ------- ------- ----- --------
Income (loss) before
tax provision (benefit) $ 2,859 $(1,094) $ 255 $ 2,065 $(178) $ 3,907
======= ======= ======= ======= ===== ========
</TABLE>
<TABLE>
<CAPTION>
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)
Other income (expense) (449) (43) - 15 - (477)
-------- ------- ------- ------- ----- --------
Income (loss) before
tax provision (benefit) $ (4,074) $(1,334) $(1,273) $ 2,440 $ - $ (4,241)
======== ======= ======= ======= ===== ========
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company designs, manufactures, sells and services various types of oil field
pumping units, power transmission products, foundry castings and highway
trailers. The Company's oil field division manufactures numerous sizes and
configurations of oil field pumping units. 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 also for use in marine propulsion applications.
The Company's foundry castings are primarily customer-designed components
manufactured by the Company for use in customer products. The Company also
produces various types and styles of highway trailers, including vans, platforms
and dumps. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THREE MONTHS ENDED JUNE 30, 1999:
Net revenues for the three months ended June 30, 2000, increased 15.8% or
$9,118,000 to $66,712,000 from $57,594,000 for the three months ended June 30,
1999. The increase in revenues reflects a substantial improvement in oil field
activity, offset in part by continuing weakness in the power transmission and
trailer markets.
The Company reported net earnings of $2,096,000 or $0.33 per share (diluted) for
the three months ended June 30, 2000 compared to earnings of $75,000 or $0.01
per share (diluted) for the prior year quarter.
The following table summarizes the Company's net revenues and gross profit by
operating segment (in thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended
June 30, %
----------------------- Increase Increase
2000 1999 (Decrease) (Decrease)
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net Revenues
-------------
Oil Field $21,329 $ 8,740 $12,589 144.0
Power Transmission 16,236 18,367 (2,131) (11.6)
Foundry Castings 5,452 5,883 (431) (7.3)
Trailers 23,695 24,604 (909) (3.7)
------- ------- -------
Total $66,712 $57,594 $ 9,118 15.8
======= ======= =======
Gross Profit
-------------
Oil Field $ 4,994 $ 873 $ 4,121 472.1
Power Transmission 3,569 3,987 (418) (10.5)
Foundry Castings 947 211 736 348.8
Trailers 2,624 3,010 (386) (12.8)
------- ------- -------
Total $12,134 $ 8,081 $ 4,053 50.2
======= ======= =======
</TABLE>
Oil Field revenues increased 144.0% to $21,329,000 from $8,740,000 in the second
quarter of 1999. New pumping unit sales accounted for a significant portion of
the increase as a result of increased drilling activity among oil producers.
The strengthening oil field market is also reflected in the Company's Oil Field
backlog which increased to $15,300,000 at June 30, 2000, from $4,250,000 for the
same period last year and from $8,100,000 at March 31, 2000.
<PAGE>
Gross profit for the Oil Field Division increased to $4,994,000 for the three
months ended June 30, 2000 compared to $873,000 for the prior year quarter due
primarily to the increase in sales volumes noted above. Gross margin for the
comparable periods improved to 23.4% in 2000 compared to 10.0% in 1999 due
primarily to improvements in product mix and the ability to spread fixed
operating costs over a larger revenue base.
Revenues for the Company's Power Transmission segment decreased to $16,236,000
for the second quarter of 2000 compared to $18,367,000 for the 1999 second
quarter as continuing uncertain economic conditions in many of the Company's
domestic and international industrial markets have resulted in reduced capital
spending. The Company has noted improvements in this segment, however, as
reflected in increased bookings in the first and second quarters of 2000. The
Company's Power Transmission backlog at June 30, 2000 declined to $27,200,000
from $32,124,000 at June 30, 1999, but has shown improvement over the March 31,
2000 backlog of $26,200,000.
Power Transmission gross profit reflects this decrease in revenues, declining to
$3,569,000 for the three months ended June 30, 2000 compared to $3,987,000 for
the comparable prior year quarter. Gross margin, however, increased to 22.0%
for the second quarter of 2000 compared to 21.7% for the same period in 1999.
This improvement is due primarily to management initiatives begun in 1999 to
increase manufacturing and operational efficiencies.
Foundry castings revenues for the 2000 second quarter totaled $5,452,000
compared to $5,883,000 for the same period last year as pricing pressure from
foreign competition in the counterweight markets continues to offset increases
in oil field activity. Foundry backlog at June 30, 2000 declined to $6,400,000
from $7,472,000 at June 30, 1999, and $7,300,000 at March 31, 2000.
Foundry gross profit and gross margin increased to $947,000 and 17.4%,
respectively, for the second quarter of 2000 compared to $211,000 and 3.6%,
respectively, for the 1999 second quarter. The improvement in gross margin is
due primarily to increased absorption of fixed overhead costs resulting from
volume increases attributable to castings supplied to the Company's Oil Field
Division.
Trailer revenues for the second quarter of 2000 decreased to $23,695,000 from
$24,604,000 for the three months ended June 30, 1999 as higher fuel costs
continue to adversely affect demand in the Company's trailer markets. Backlog
for the trailer segment totaled $20,500,000 at June 30, 2000, compared to
$33,388,000 at June 30, 1999 and $34,500,000 at March 31, 2000.
Trailer gross profit decreased to $2,624,000 for the three months ended June 30,
2000 from $3,010,000 for the comparable prior year quarter due to the revenue
decline noted above. Gross margin for the 2000 second quarter reflects this
decrease in revenues, declining to 11.1% from 12.2% for the second quarter of
1999 due to the negative impact of the volume declines on labor and overhead
absorption.
Selling, general and administrative ("SG&A") expenses for the second quarter of
2000 increased to $8,325,000 from $7,987,000 for the same period in 1999. SG&A
expenses as a percentage of consolidated net revenues, however, decreased to
12.5% compared to 13.9% for the prior year second quarter as these expenses are
spread over a larger revenue base.
Interest and other income (expense) for the three months ended June 30, 2000
totaled $234,000 of net expense for the quarter ended June 30, 2000, compared to
income of $27,000 for the prior year quarter due primarily to an increase in
interest expense resulting from higher short-term debt balances.
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS ENDED JUNE 30, 1999:
Net revenues for the six months ended June 30, 2000, increased 6.3% or
$7,234,000 to $122,775,000 from $115,541,000 for the six months ended June 30,
1999. This increase in revenues is due primarily to a substantial increase in
oil field activity, offset in part by continuing weakness in the power
transmission and trailer markets.
The Company reported net earnings of $2,302,000 or $0.37 per share (diluted) for
the six months ended June 30, 2000 compared to a net loss of $2,673,000 or $0.41
per share (diluted) for the comparable prior year period. The net loss for the
six months ended June 30, 1999 includes non-recurring charges totaling
approximately $1,395,000, after taxes, or $0.21 per share, related to the
relocation of facilities, staffing level reductions and legal and warranty
expenses in the first quarter of 1999.
The following table summarizes the Company's net revenues and gross profit by
operating segment (in thousands of dollars):
<TABLE>
<CAPTION>
Six Months Ended
June 30, %
----------------------- Increase Increase
2000 1999 (Decrease) (Decrease)
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net Revenues
--------------
Oil Field $ 36,679 $ 18,229 $18,450 101.2
Power Transmission 30,145 36,368 (6,223) (17.1)
Foundry Castings 10,645 11,090 (445) (4.0)
Trailers 45,306 49,854 (4,548) (9.1)
-------- -------- -------
Total $122,775 $115,541 $ 7,234 6.3
======== ======== =======
Gross Profit
--------------
Oil Field $ 7,946 $ 1,835 $ 6,111 333.0
Power Transmission 6,496 7,299 (803) (11.0)
Foundry Castings 1,329 (17) 1,346 N/A
Trailers 4,666 5,183 (517) (10.0)
-------- -------- -------
Total $ 20,437 $ 14,300 $ 6,137 42.9
======== ======== =======
</TABLE>
Oil Field revenues increased 101.2% to $36,679,000 from $18,229,000 in the first
half of 1999. Increases in drilling activity among oil producers have resulted
in significant increases in both new pumping unit sales and oil field service
activity. Oil Field backlog reflects this increase in activity, increasing to
$15,300,000 at June 30, 2000 from $4,250,000 for the same period last year and
from $4,000,000 at December 31, 1999.
Gross profit for the Oil Field Division increased to $7,946,000 for the six
months ended June 30, 2000 compared to $1,835,000 for the comparable prior year
period due primarily to the increase in volumes noted above. Gross margin for
the comparable periods improved to 21.7% in 2000 compared to 10.1% in 1999 as
the Company was able to spread fixed operating costs over a larger revenue base.
<PAGE>
Revenues for the Company's Power Transmission segment decreased to $30,145,000
for the six months ended June 30, 2000 compared to $36,368,000 for the
comparable 1999 period as uncertain economic conditions in many of the Company's
domestic and international industrial markets experienced in 1999 have continued
into 2000. The Company has noted a slight upturn in activity in this segment,
however, as reflected in increased bookings in the first half of 2000. The
Company's Power Transmission backlog at June 30, 2000 declined to $27,200,000
from $32,124,000 at June 30, 1999, but has shown improvement over the December
31, 1999 backlog of $21,400,000.
Power Transmission gross profit reflects this decrease in revenues, declining to
$6,496,000 for the six months ended June 30, 2000 compared to $7,299,000 for the
comparable period in 1999. Gross margin, however, increased to 21.5% for the
first half of 2000 compared to 20.1% for the same period in 1999. This
improvement was due primarily to non-recurring warranty expenses totaling
approximately $440,000 recorded in the first quarter of 1999 along with the
effect of management initiatives begun in 1999 to increase manufacturing and
operational efficiencies, offset in part by the impact of the volume declines on
absorption of fixed overhead costs.
Foundry castings revenues for the six months ended June 30, 2000 totaled
$10,645,000 compared to $11,090,000 for the same period last year as continuing
pricing pressure from foreign competition in the counterweight markets offset
increases in oil field activity. Foundry backlog at June 30, 2000 declined to
$6,400,000 from $7,472,000 at June 30, 1999, but has improved from $6,000,000 at
December 31, 1999.
Foundry gross profit increased to $1,329,000 for the first half of 2000 from a
loss of $17,000 for the comparable 1999 period due primarily to the inter-
segment volume increases noted above in the discussion of second quarter
results.
Trailer revenues for the first half of 2000 decreased to $45,306,000 from
$49,854,000 for the six months ended June 30, 1999 due to the continuing adverse
effect of higher fuel prices on the demand for new trailers. Backlog for the
trailer segment totaled $20,500,000 at June 30, 2000, compared to $33,388,000 at
June 30, 1999 and $42,200,000 at December 31, 1999.
Trailer gross profit decreased to $4,666,000 for the six months ended June 30,
2000 from $5,183,000 for the comparable prior year period due to the revenue
declines noted above. Gross margin for the 2000 period also declined slightly
to 10.3% from 10.4% for the first half of 1999.
Selling, general and administrative ("SG&A") expenses for the six months ended
June 30, 2000 decreased to $16,429,000 from $18,064,000 for the same period in
1999. SG&A expenses for the 1999 period include $1,434,000 of non-recurring
severance, relocation and legal expenses occurring in the first quarter of 1999.
Excluding the effect of these non-recurring expenses, SG&A expenses decreased to
13.4% of consolidated net revenues compared to 14.4% for the prior year period.
This improvement is due primarily to the Company's ability to leverage its SG&A
expenses over a larger revenue base, along with the effect of management's cost-
cutting initiatives implemented in 1999.
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Interest and other income (expense) for the six months ended June 30, 2000
improved to $101,000 of net expense compared to net expense of $477,000 for the
prior year period. This improvement was due primarily to a non-recurring charge
of $228,000 recorded in the first quarter of 1999 related to the consolidation
and relocation of the Company's primary Oil Field manufacturing facilities to
the Company's Lufkin, Texas Buck Creek facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on cash flows from operations and third-
party borrowings to finance its operations, including acquisitions, dividend
payments and stock purchases.
The Company's cash balance totaled $2.9 million at June 30, 2000, compared to
$1.1 million at December 31, 1999. For the six months ended June 30, 2000, net
cash flows provided by operating activities were $2.3 million, cash used in
investing activities totaled $3.6 million and cash provided by financing
activities amounted to $3.3 million. Significant components of cash provided by
operating activities include net earnings adjusted for non-cash expenses, offset
in part by a $2.8 million net increase in working capital items. Cash used in
investing activities included capital expenditures totaling approximately $3.6
million for, among other things, ongoing additions and modifications to certain
of the Company's production facilities along with purchases and replacements of
production equipment and operating vehicles. Significant components of cash
provided by financing activities include (i) a net increase of approximately
$7.8 million in short-term debt; (ii) payments on long-term debt totaling $1.6
million; and (iii) dividend payments totaling approximately $2.3 million or
$0.36 per share.
Total debt balances, including current maturities of long-term debt, at June 30,
2000 include $5.0 million outstanding under the Company's discretionary short-
term demand facility, a total of $8.0 million outstanding under the Bank
Facility discussed below and $10.1 million of notes payable to various banks and
individuals. Total debt increased to $23.1 million at June 30, 2000 compared to
$17.1 million at December 31, 1999. This increase was attributable to net short-
term demand borrowings totaling approximately $7.8 million, offset in part by
principal payments on long-term notes payable totaling $1.6 million during the
first six months of 2000.
The Company completed an agreement in the first quarter of 2000 with a domestic
bank (the "Bank Facility") for a revolving line of credit that provides for up
to $20.0 million of borrowings outstanding at any one time expiring September 2,
2002, along with an additional $5.0 million demand facility. Borrowings under
the Bank Facility bear interest, at the Company's option, at either (i) the
prime rate or (ii) the London Interbank Offered Rate plus an applicable margin,
depending on certain ratios as defined in the agreement. The weighted average
interest rate on amounts outstanding under the Bank Facility was 7.8% at June
30, 2000. As of June 30, 2000, $17.0 million of the revolving line of credit was
available for borrowings under the terms of the Bank Facility.
The Company's short-term discretionary demand facility, as amended, provides for
up to $5.0 million of borrowings outstanding at any one time, at the bank's
discretion, and is unsecured. Borrowings under this facility bear interest at
the bank's borrowing rate plus an applicable margin. Interest rates on amounts
outstanding under this facility were 8.2% and 5.9% at June 30, 2000 and December
31, 1999, respectively.
The Company has a stock purchase plan under which the Company is authorized to
spend up to $17.1 million for purchases of its common stock. Pursuant to this
plan, the Company repurchased 38,550 shares of its common stock at an aggregate
cost of approximately $0.6 million during the first six months of 2000.
Purchased shares are added to treasury stock and are available for general
corporate purposes including the funding of the Company's stock option plans. As
of June 30, 2000, the Company held
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610,430 shares of treasury stock at an aggregate cost of approximately $12.7
million. Authorizations of approximately $1.5 million remained at June 30, 2000.
The Company believes that its cash flows from operations and its available
borrowing capacity under its credit agreements will be sufficient to fund its
operations, including planned capital expenditures, dividend payments and stock
purchases, through June 30, 2001.
FORWARD-LOOKING STATEMENTS AND ASSUMPTIONS
This Quarterly Report contains forward-looking statements and information that
are based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this report, the words
"anticipate", "believe", "estimate", "expect" and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
Company's current views with respect to certain events and are subject to
certain assumptions, risks and uncertainties, many of which are outside the
control of the Company. These risks and uncertainties include, but are not
limited to, (i) oil prices, (ii) capital spending levels of oil producers,
(iii) availability and prices for raw materials and (iv) general industry and
economic conditions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated or expected. The
Company does not intend to update these forward-looking statements and
information.
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 that could expose the Company to
significant market risk. The Company's financial instruments include cash,
accounts receivable, accounts payable and debt obligations. The book value of
accounts receivable, short-term debt and accounts payable are considered to be
representative of their fair market value because of the short maturity of these
instruments. The Company believes the carrying values of its long-term debt
obligations approximate fair values because the interest rates on these
obligations are comparable to what the Company believes it could currently
obtain for debt with similar terms and maturities. The Company's accounts
receivable are not concentrated in one customer or industry and are not viewed
as an unusual credit risk.
<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
that alleged race discrimination in employment. Certification hearings were
conducted in Beaumont, Texas in February of 1998 and in Lufkin, Texas in August
of 1998. The District Court in April of 1999 issued a decision that certified a
class for this case which includes all persons of a certain minority employed by
the Company from March 6, 1994 to the present. The Company appealed this class
certification decision by the District Court to the 5th Circuit United States
Courts 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 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Shareholders of the Company was held on May 3, 2000.
Matters presented to the shareholders at the meeting were the election of three
directors, a proposal to adopt the Lufkin Industries, Inc. Incentive Stock
Compensation Plan 2000 (the "Plan") and the ratification of the appointment of
the Company's independent auditors for the year 2000. The following numbers of
votes were cast as to the nominees for director: Douglas V. Smith, 4,376,310
votes for and 472,214 votes withheld; S. W. Henderson, III, 4,373,343 votes for
and 475,181 votes withheld; and M. E. Kurth, Jr., 4,375,027 votes for and
473,497 votes withheld. Shares voted for the adoption of the Plan totaled
2,329,294, with 1,139,992 shares voting against, and 340,149 votes withheld. In
connection with the appointment of the independent auditors, 4,800,991 shares
voted for ratification, 41,708 shares voted against and 340,149 votes were
withheld.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Lufkin Industries, Inc. Incentive Stock Compensation Plan 2000,
dated May 3, 2000 (filed as Appendix A to the Company's Proxy
Statement on Schedule 14A, filed with the Securities and Exchange
Commission on March 28, 2000).
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Date: August 11, 2000
LUFKIN INDUSTRIES, INC.
By /s/ R. D. Leslie
-------------------------
Vice President/Treasurer/Chief Financial Officer
Principal Financial and Accounting Officer
