UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the
quarterly period ended September 30, 2009
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: 0-02612
LUFKIN INDUSTRIES,
INC.
(Exact
name of registrant as specified in its charter)
TEXAS
|
75-0404410
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
601
SOUTH RAGUET, LUFKIN, TEXAS
|
75904
|
(Address
of principal executive offices)
|
(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 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
X
No____
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every
Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
Yes
X
No____
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
X
Accelerated
filer ______
Non-accelerated
filer
______ Smaller
reporting company ______
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
___No
X
There
were 14,877,607 shares of Common Stock, $1.00 par value per share,
outstanding as of November 5, 2009.
PART
I - FINANCIAL INFORMATION
Item 1.
Financial
Statements.
LUFKIN
INDUSTRIES, INC.
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
(Thousands
of dollars, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
Assets
|
|
2009
|
|
|
2008
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
102,174
|
|
|
$
|
107,756
|
|
Receivables,
net
|
|
|
82,989
|
|
|
|
139,144
|
|
Income
tax receivable
|
|
|
844
|
|
|
|
978
|
|
Inventories
|
|
|
116,678
|
|
|
|
128,627
|
|
Deferred
income tax assets
|
|
|
6,717
|
|
|
|
4,941
|
|
Other
current assets
|
|
|
11,768
|
|
|
|
3,674
|
|
Current
assets from discontinued operations
|
|
|
807
|
|
|
|
618
|
|
Total
current assets
|
|
|
321,977
|
|
|
|
385,738
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
152,513
|
|
|
|
130,079
|
|
Goodwill,
net
|
|
|
45,606
|
|
|
|
11,862
|
|
Intangible
assets, net
|
|
|
14,000
|
|
|
|
-
|
|
Other
assets, net
|
|
|
3,695
|
|
|
|
2,546
|
|
Long-term
assets from discontinued operations
|
|
|
493
|
|
|
|
493
|
|
Total
assets
|
|
$
|
538,284
|
|
|
$
|
530,718
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
23,381
|
|
|
$
|
38,543
|
|
Current
portion of long-term debt
|
|
|
1,292
|
|
|
|
-
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Payroll
and benefits
|
|
|
10,915
|
|
|
|
14,046
|
|
Warranty
expenses
|
|
|
3,336
|
|
|
|
3,586
|
|
Taxes
payable
|
|
|
4,802
|
|
|
|
5,894
|
|
Other
|
|
|
23,708
|
|
|
|
25,340
|
|
Current
liabilities from discontinued operations
|
|
|
1,129
|
|
|
|
1,404
|
|
Total
current liabilities
|
|
|
68,563
|
|
|
|
88,813
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,020
|
|
|
|
-
|
|
Deferred
income tax liabilities
|
|
|
9,368
|
|
|
|
9,219
|
|
Postretirement
benefits
|
|
|
7,522
|
|
|
|
7,070
|
|
Other
liabilities
|
|
|
26,171
|
|
|
|
11,618
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
Long-term
liabilities from discontinued operations
|
|
|
37
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $1.00 par value per share; 60,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
15,794,713
and 15,791,963 shares issued and outstanding, respectively
|
|
|
15,795
|
|
|
|
15,792
|
|
Capital
in excess par
|
|
|
64,585
|
|
|
|
63,014
|
|
Retained
earnings
|
|
|
422,069
|
|
|
|
414,748
|
|
Treasury
stock, 931,168 and 931,168 shares, respectively, at cost
|
|
|
(34,907
|
)
|
|
|
(34,917
|
)
|
Accumulated
other comprehensive loss
|
|
|
(42,939
|
)
|
|
|
(44,700
|
)
|
Total
shareholders' equity
|
|
|
424,603
|
|
|
|
413,937
|
|
Total
liabilities and shareholders' equity
|
|
$
|
538,284
|
|
|
$
|
530,718
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
LUFKIN
INDUSTRIES, INC.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
|
|
(In
thousands of dollars, except per share and share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
117,688
|
|
|
$
|
195,090
|
|
|
$
|
394,565
|
|
|
$
|
510,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
92,756
|
|
|
|
139,268
|
|
|
|
308,454
|
|
|
|
366,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
24,932
|
|
|
|
55,822
|
|
|
|
86,111
|
|
|
|
144,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
17,751
|
|
|
|
16,983
|
|
|
|
54,774
|
|
|
|
50,724
|
|
Litigation
reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7,181
|
|
|
|
38,839
|
|
|
|
26,337
|
|
|
|
93,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
8
|
|
|
|
503
|
|
|
|
897
|
|
|
|
1,622
|
|
Interest
expense
|
|
|
(150
|
)
|
|
|
(48
|
)
|
|
|
(452
|
)
|
|
|
(183
|
)
|
Other
income (expense), net
|
|
|
613
|
|
|
|
(396
|
)
|
|
|
1,241
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
tax provision and discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
7,652
|
|
|
|
38,898
|
|
|
|
28,023
|
|
|
|
94,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
2,597
|
|
|
|
13,937
|
|
|
|
9,134
|
|
|
|
32,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
|
5,055
|
|
|
|
24,961
|
|
|
|
18,889
|
|
|
|
61,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax
|
|
|
(63
|
)
|
|
|
(149
|
)
|
|
|
(422
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
4,992
|
|
|
$
|
24,812
|
|
|
$
|
18,467
|
|
|
$
|
61,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.34
|
|
|
$
|
1.68
|
|
|
$
|
1.27
|
|
|
$
|
4.18
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.34
|
|
|
$
|
1.67
|
|
|
$
|
1.24
|
|
|
$
|
4.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.34
|
|
|
$
|
1.66
|
|
|
$
|
1.27
|
|
|
$
|
4.14
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
0.34
|
|
|
$
|
1.65
|
|
|
$
|
1.24
|
|
|
$
|
4.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes
to condensed consolidated financial statements.
LUFKIN
INDUSTRIES INC.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
(In
thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows form operating activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
18,467
|
|
|
$
|
61,673
|
|
Adjustments
to reconcile net earnings to cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,326
|
|
|
|
11,466
|
|
Recovery
of (provision for) losses on receivables
|
|
|
(524
|
)
|
|
|
25
|
|
LIFO
(benefit) expense
|
|
|
(440
|
)
|
|
|
5,019
|
|
Deferred
income tax benefit
|
|
|
(2,357
|
)
|
|
|
(985
|
)
|
Excess
tax benefit from share-based compensation
|
|
|
(32
|
)
|
|
|
(4,118
|
)
|
Share-based
compensation expense
|
|
|
1,510
|
|
|
|
2,595
|
|
Pension
expense (income)
|
|
|
7,649
|
|
|
|
(1,587
|
)
|
Postretirement
obligation (benefit)
|
|
|
203
|
|
|
|
(89
|
)
|
Gain
on disposition of property, plant and equipment
|
|
|
(270
|
)
|
|
|
(157
|
)
|
Loss
(income) from discontinued operations
|
|
|
422
|
|
|
|
(1,293
|
)
|
Changes
in:
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
65,114
|
|
|
|
(28,589
|
)
|
Income
tax receivable
|
|
|
(536
|
)
|
|
|
-
|
|
Inventories
|
|
|
20,341
|
|
|
|
(38,456
|
)
|
Other
current assets
|
|
|
(1,568
|
)
|
|
|
(1,601
|
)
|
Accounts
payable
|
|
|
(19,799
|
)
|
|
|
18,792
|
|
Accrued
liabilities
|
|
|
(13,740
|
)
|
|
|
8,319
|
|
Net
cash provided by continuing operations
|
|
|
87,766
|
|
|
|
31,014
|
|
Net
cash used in discontinued operations
|
|
|
-
|
|
|
|
(278
|
)
|
Net
cash provided by operating activities
|
|
|
87,766
|
|
|
|
30,736
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activites:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(27,588
|
)
|
|
|
(17,808
|
)
|
Proceeds
from disposition of property, plant and equipment
|
|
|
714
|
|
|
|
367
|
|
(Increase)
decrease in other assets
|
|
|
(1,177
|
)
|
|
|
1,262
|
|
Acquisition
of other companies
|
|
|
(51,658
|
)
|
|
|
-
|
|
Net
cash used in continuing operations
|
|
|
(79,709
|
)
|
|
|
(16,179
|
)
|
Net
cash provided by discontinued operations
|
|
|
-
|
|
|
|
278
|
|
Net
cash used in investing activities
|
|
|
(79,709
|
)
|
|
|
(15,901
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activites:
|
|
|
|
|
|
|
|
|
Payments
of notes payable
|
|
|
(3,002
|
)
|
|
|
-
|
|
Dividends
paid
|
|
|
(11,146
|
)
|
|
|
(11,092
|
)
|
Excess
tax benefit from share-based compensation
|
|
|
32
|
|
|
|
4,118
|
|
Proceeds
from exercise of stock options
|
|
|
28
|
|
|
|
8,174
|
|
Refund
of prior treasury stock purchases
|
|
|
11
|
|
|
|
-
|
|
Purchases
of treasury stock
|
|
|
-
|
|
|
|
(1,117
|
)
|
Net
cash used in financing activities
|
|
|
(14,077
|
)
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Effect
of translation on cash and cash equivalents
|
|
|
438
|
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(5,582
|
)
|
|
|
14,442
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
107,756
|
|
|
|
95,748
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
102,174
|
|
|
$
|
110,190
|
|
|
|
|
|
|
|
|
|
|
See notes
to condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed 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 for
interim financial statements 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 accounting
principles generally accepted in the United States of America has been condensed
or omitted pursuant to these rules and regulations for interim financial
statements. 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 for the
interim periods included in this report have been included. For further
information, including a summary of major accounting policies, 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, 2008. The
results of operations for the three and nine months ended September 30, 2009,
are not necessarily indicative of the results that may be expected for the full
fiscal year.
The
Company’s financial instruments include cash, accounts receivable, accounts
payable, invested funds 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’s accounts receivable are not concentrated in one
customer and are not viewed as an unusual credit risk.
2.
Recently Issued Accounting Pronouncements
In
December 2008, the Financial Accounting Standards Board amended “Employer’s
Disclosures about Postretirement Benefit Plan Assets” (ASC
715-20-65-2). This amendment expands the disclosure requirements
about postretirement plan assets to include how investment allocations are made,
including the factors that are pertinent to an understanding of investment
policies and strategies, the major categories of plan assets, the input and
valuation techniques used to measure the fair value of plan assets, the effect
of fair value measurements using significant unobservable inputs (Level 3) on
changes in plan assets for the periods and significant concentration of risk
with plan assets. Such required disclosures will be provided in our
annual financial statements for the year ending December 31, 2009. Upon initial
application, the disclosures of ASC 715-20-65-2 are not required for earlier
periods that are presented for comparative purposes.
In May
2009, the Financial Accounting Standards Board issued “Subsequent Events” (ASC
855-10), which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. ASC 855-10 requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date. The Company adopted this Statement in
these interim financial statements. The Company has evaluated
subsequent events through November 9, 2009, which represents the date that the
financial statements were issued.
In
October 2009, the FASB issued an update to existing guidance on revenue
recognition for arrangements with multiple deliverables. This update
will allow companies to allocate consideration received for qualified separate
deliverables using estimated selling price for both delivered and undelivered
items when vendor-specific objective evidence or third-party evidence is
unavailable. Additional disclosures discussing the nature of multiple
element arrangements, the types of deliverables under the arrangements, the
general timing of their delivery, and significant factors and estimates used to
determine estimated selling prices are required. The Company has not
determined the impact on its condensed consolidated financial
statements.
Management
believes the impact of other recently issued standards, which are not yet
effective, will not have a material impact on the Company's consolidated
financial statements upon adoption.
3.
Acquisitions
On March
1, 2009, the Company completed the acquisition of International Lift Systems,
LLC (“ILS”), a Louisiana limited partnership. ILS manufactures and services gas
lift, plunger lift and completion equipment for the oil and gas
industry.
On July
1, 2009 the Company completed the acquisition of Rotating Machinery Technology,
Inc. (“RMT”), a New York corporation. RMT is a recognized leader in
the turbo-machinery industry, specializing in the analysis design and
manufacture of precision, custom-engineered tilting-pad bearings and related
components for high-speed turbo equipment operating in critical duty
applications. RMT also services, repairs and upgrades turbo-expander
process units for air and gas separation, both on-site with its skilled field
service team and at its repair facility in Wellsville, New York.
The ILS
and RMT acquisitions have been recorded using the acquisition method of
accounting and, accordingly, the acquired operations have been included in the
results of operations since the date of acquisition. The preliminary
purchase price consideration consists of the following (in thousands of
dollars):
Cash
paid at closing, net
|
|
$
|
51,658
|
|
Holdback
consideration
|
|
|
4,500
|
|
|
|
|
|
|
Total
consideration paid
|
|
$
|
56,158
|
|
|
|
|
|
|
The
following table indicates (in thousands of dollars) the preliminary purchase
price allocation to net assets acquired, which was based on estimated fair
values as of the acquisition date. The excess of the purchase price over the net
assets acquired amount to $33.6 million and has been recorded as goodwill in the
accompanying September 30, 2009, condensed consolidated balance sheet. Based on
the structure of the transaction, the majority of the goodwill related to the
transaction is not expected to be deductible for tax purposes.
Purchase
price
|
|
$
|
51,658
|
|
|
|
|
|
|
Receivables
|
|
|
5,799
|
|
Inventories
|
|
|
5,713
|
|
Other
current assets
|
|
|
1,092
|
|
Deferred
tax asset
|
|
|
110
|
|
Property,
plant and equipment
|
|
|
5,794
|
|
Intangible
assets
|
|
|
10,359
|
|
Accounts
payable
|
|
|
(2,429
|
)
|
Other
short-term accrued liabiltiies
|
|
|
(576
|
)
|
Other
long-term accrued liabilities
|
|
|
(363
|
)
|
Deferred
tax liability
|
|
|
(1,144
|
)
|
Long-term
debt
|
|
|
(6,314
|
)
|
|
|
|
|
|
Goodwill
recorded
|
|
$
|
33,617
|
|
|
|
|
|
|
The
Company also entered into a hold back agreement with the former owners of
ILS. The total hold back is $4.5 million payable in three equal
installments of $1.5 million each plus interest. Interest is
calculated annually at 4% of the remaining balance of the hold back
portion. The first installment is due March 1, 2010; the second and
third installments, each plus interest to date, are payable on March 1, 2011 and
2012, respectively. These hold back payments are not contingent upon
any subsequent events. At September 30, 2009, the liabilities for
these hold back payments were included in the accrued liabilities and other
liabilities section of the consolidated balance sheet.
Revenues
and earnings to date on the afore mentioned acquisitions for all periods
presented are not material. Pro forma schedules have not been
included as the impact on the periods presented is not material.
The
preliminary purchase price allocations, which are based on relevant facts and
circumstances and discussions with an independent third-party consultant, are
subject to change upon completion of the final valuation analysis by Lufkin
management. The final valuations for ILS, which is required to be completed by
March 2010, and RMT, which is required to be completed by July 2010, are not
expected to result in material changes to the preliminary
allocations.
4.
Discontinued Operations
During
the second quarter of 2008, the Trailer segment was classified as a discontinued
operation.
Operating
results of discontinued operations were as follows (in thousands of
dollars):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1
|
|
|
$
|
202
|
|
|
$
|
36
|
|
|
$
|
6,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before income tax provision
|
|
|
(97
|
)
|
|
|
(38
|
)
|
|
|
(649
|
)
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
|
34
|
|
|
|
(111
|
)
|
|
|
227
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax
|
|
$
|
(63
|
)
|
|
$
|
(149
|
)
|
|
$
|
(422
|
)
|
|
$
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
$
|
22
|
|
|
$
|
56
|
|
Income
tax receivable
|
|
|
211
|
|
|
|
-
|
|
Deferred
income tax assets
|
|
|
574
|
|
|
|
562
|
|
Other
current assets
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Current
assets from discontinued operations
|
|
|
807
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
|
-
|
|
Deferred
income tax assets
|
|
|
-
|
|
|
|
-
|
|
Other
assets, net
|
|
|
493
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
Long-term
assets from discontinued operations
|
|
|
493
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
Total
assets from discontinued operations
|
|
$
|
1,300
|
|
|
$
|
1,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
-
|
|
|
$
|
154
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Payroll
and benefits
|
|
|
98
|
|
|
|
104
|
|
Warranty
expenses
|
|
|
319
|
|
|
|
410
|
|
Taxes
payable
|
|
|
-
|
|
|
|
120
|
|
Other
|
|
|
712
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities from discontinued operations
|
|
|
1,129
|
|
|
|
1,404
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
37
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities from discontinued operations
|
|
$
|
1,166
|
|
|
$
|
1,465
|
|
|
|
|
|
|
|
|
|
|
5.
Receivables
The
following is a summary of the Company’s receivable balances (in thousands of
dollars):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
80,911
|
|
|
$
|
138,706
|
|
Notes
receivable
|
|
|
243
|
|
|
|
157
|
|
Other
receivables
|
|
|
2,709
|
|
|
|
1,015
|
|
Gross
receivables
|
|
|
83,863
|
|
|
|
139,878
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts receivable
|
|
|
(874
|
)
|
|
|
(734
|
)
|
Net
receivables
|
|
$
|
82,989
|
|
|
$
|
139,144
|
|
|
|
|
|
|
|
|
|
|
Bad debt
expense related to receivables for the three and nine months ended
September 30, 2009 resulted in a $0.5 million recovery of certain receivables
reserved in 2008. Bad debt expense related to receivables was negligible
for the three and nine months ended September 30, 2008.
6.
Inventories
Inventories
used in determining cost of sales were as follows (in thousands of
dollars):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Gross
inventories @ FIFO:
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
8,860
|
|
|
$
|
2,643
|
|
Work
in progress
|
|
|
21,137
|
|
|
|
28,230
|
|
Raw
materials & component parts
|
|
|
107,227
|
|
|
|
122,604
|
|
Maintenance,
tooling & supplies
|
|
|
14,050
|
|
|
|
12,611
|
|
Total
gross inventories @ FIFO
|
|
|
151,274
|
|
|
|
166,088
|
|
Less
reserves:
|
|
|
|
|
|
|
|
|
LIFO
|
|
|
32,486
|
|
|
|
32,926
|
|
Valuation
|
|
|
2,110
|
|
|
|
4,535
|
|
Total
inventories as reported
|
|
$
|
116,678
|
|
|
$
|
128,627
|
|
|
|
|
|
|
|
|
|
|
Gross
inventories on a FIFO basis before adjustments for reserves shown above that
were accounted for on a LIFO basis were $84.4 million and $109.2 million at
September 30, 2009, and December 31, 2008, respectively.
7.
Property, Plant & Equipment
The
following is a summary of the Company's property, plant and equipment balances
(in thousands of dollars):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
5,919
|
|
|
$
|
6,525
|
|
Land
improvements
|
|
|
11,164
|
|
|
|
10,219
|
|
Buildings
|
|
|
86,416
|
|
|
|
75,756
|
|
Machinery
and equipment
|
|
|
263,508
|
|
|
|
245,014
|
|
Furniture
and fixtures
|
|
|
5,926
|
|
|
|
5,616
|
|
Computer
equipment and software
|
|
|
15,346
|
|
|
|
14,666
|
|
Total
property, plant and equipment
|
|
|
388,279
|
|
|
|
357,796
|
|
Less
accumulated depreciation
|
|
|
(235,766
|
)
|
|
|
(227,717
|
)
|
Total
property, plant and equipment, net
|
|
$
|
152,513
|
|
|
$
|
130,079
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense related to property, plant and equipment was $4.3 million and $3.9
million for the three months ended September 30, 2009 and 2008,
respectively, and was $12.4 million and $11.4 million for the nine months
ended September 30, 2009 and 2008, respectively.
8.
Goodwill and Intangible Assets
Goodwill
The
changes in the carrying amount of goodwill during the nine
months ended September 30, 2009, are as follows (in thousands of
dollars):
|
|
|
|
|
Power
|
|
|
|
|
|
|
Oil
Field
|
|
|
Transmission
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of 12/31/08
|
|
$
|
9,428
|
|
|
$
|
2,434
|
|
|
$
|
11,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
acquired during the period
|
|
|
29,115
|
|
|
|
4,502
|
|
|
|
33,617
|
|
Foreign
currency translation
|
|
|
11
|
|
|
|
116
|
|
|
|
127
|
|
Balance
as of 9/30/09
|
|
$
|
38,554
|
|
|
$
|
7,052
|
|
|
$
|
45,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
impairment tests were performed in the first quarter of 2009 and no impairment
losses were recorded.
Intangible
Assets
The
Company amortizes identifiable intangible assets on a straight-line basis over
the periods expected to be benefitted. All of the below intangible assets
relate to the ILS and RMT acquisitions. The components of these
intangible assets are as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
September
30, 2009
|
|
|
Average
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Period
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements and trademarks
|
|
$
|
2,064
|
|
|
$
|
171
|
|
|
$
|
1,893
|
|
|
|
7.2
|
|
Customer
relationships and contracts
|
|
|
12,795
|
|
|
|
688
|
|
|
|
12,107
|
|
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,859
|
|
|
$
|
859
|
|
|
$
|
14,000
|
|
|
|
7.0
|
|
Amortization
expense of intangible assets was approximately $0.4 million and $0.9 million for
the three and nine months ended September 30, 2009, respectively. Expected
amortization expense by year is (in thousands of dollars):
For
the year ended 12/31/10
|
|
$
|
1,630
|
|
For
the year ended 12/31/11
|
|
|
1,630
|
|
For
the year ended 12/31/12
|
|
|
1,531
|
|
For
the year ended 12/31/13
|
|
|
1,511
|
|
For
the year ended 12/31/14
|
|
|
1,399
|
|
Thereafter
|
|
$
|
5,892
|
|
9.
Other Current Accrued Liabilities
The
following is a summary of the Company's other current accrued liabilities
balances (in thousands of dollars):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Customer
prepayments
|
|
$
|
9,535
|
|
|
$
|
12,925
|
|
Litigation
reserves
|
|
|
5,187
|
|
|
|
6,000
|
|
Deferred
compensation plans
|
|
|
5,119
|
|
|
|
4,046
|
|
Accrued
professional services
|
|
|
624
|
|
|
|
1,097
|
|
Hold
back consideration
|
|
|
1,605
|
|
|
|
-
|
|
Other
accrued liabilities
|
|
|
1,638
|
|
|
|
1,272
|
|
Total
other current accrued liabilities
|
|
$
|
23,708
|
|
|
$
|
25,340
|
|
|
|
|
|
|
|
|
|
|
10.
Debt
The
following is a summary of the Company's outstanding debt balances (in thousands
of dollars):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Long-term
notes payable
|
|
$
|
3,312
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Less
current portion of long-term debt
|
|
|
(1,292
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
2,020
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Principal
payments of long-term debt by year are as follows (in thousands of
dollars):
2010
|
|
$
|
375
|
|
2011
|
|
|
1,432
|
|
2012
|
|
|
213
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
2,020
|
|
|
|
|
|
|
The
Company’s current debt at September 30, 2009, primarily consists of assumed
notes from the ILS acquisition, which are described below. The
current portion of long-term debt reflects scheduled principal payments due on
or before September 30, 2010.
On March
1, 2009, the Company assumed from ILS several notes payable, associated with
prior acquisitions undertaken by ILS, with a remaining aggregate principal
balance of $3.9 million at interest rates ranging from 0% to 6% with a weighted
average of 4.5%. On the outstanding principal balance as of September
30, 2009, the Company has secured letters of credit for $1.3 million and the
remaining $2.0 million is secured by collateral consisting of equipment,
inventory, and accounts receivable. The fair market value of the
outstanding debt as of September 30, 2009 is not materially different than
its carrying value.
In
connection with the ILS acquisition, the Company also assumed a note payable to
a bank in the amount of $0.8 million, which was paid in full at closing. In
connection with the RMT acquisition, the Company also assumed several notes
payable to individuals and banks in the amount of $1.5 million, which were paid
in full at closing.
The
Company has a three-year credit facility with a domestic bank (the “Bank
Facility”) consisting of an unsecured revolving line of credit that provides up
to $40.0 million of aggregate borrowing. This Bank Facility expires
on December 31, 2010. Borrowings under the Bank Facility bear interest, at
the Company’s option, at either the greater of (i) the prime rate, (ii) the base
CD rate plus an applicable margin or (iii) the Federal Funds Effective Rate plus
an applicable margin or the London Interbank Offered Rate plus an applicable
margin, depending on certain ratios as defined in the Bank Facility. As of
September 30, 2009, no debt was outstanding under the Bank Facility and the
Company was in compliance with all financial covenants under the terms of the
Bank Facility. Deducting outstanding letters of credit of $17.0 million, $23.0
million of borrowing capacity was available at September 30, 2009.
11.
Retirement Benefits
The
Company has a qualified noncontributory pension plan covering substantially all
U.S. employees. The benefits provided by these plans are measured by length of
service, compensation and other factors, and are currently funded by trusts
established under the plans. Funding of retirement costs for these plans
complies with the minimum funding requirements specified by the Employee
Retirement Income Security Act, as amended. In addition, the Company has two
unfunded non-qualified deferred compensation pension plans for certain U.S.
employees. The Pension Restoration Plan provides supplemental retirement
benefits. The benefit is based on the same benefit formula as the qualified
pension plan except that it does not limit the amount of a participant's
compensation or maximum benefit. The Company also provides a Supplemental
Executive Retirement Plan that credits an individual with 0.5 years of service
for each year of service credited under the qualified plan. The benefits
calculated under the non-qualified pension plans are offset by the participant's
benefit payable under the qualified plan. The liabilities for the non-qualified
deferred compensation pensions plans are included in "Other current accrued
liabilities" and “Other liabilities” in the Consolidated Balance
Sheet.
The
Company sponsors two defined benefit postretirement plans that cover both
salaried and hourly employees. One plan provides medical benefits, and the other
plan provides life insurance benefits. Both plans are contributory, with retiree
contributions adjusted periodically. The Company accrues the estimated costs of
the plans over the employee’s service periods. The Company's postretirement
health care plan is unfunded. For measurement purposes, the submitted claims
medical trend was assumed to be 9.25% in 1997. Thereafter, the Company’s
obligation is fixed at the amount of the Company’s contribution for
1997.
The
Company also has qualified defined contribution retirement plans covering
substantially all of its U.S. and Canadian employees. For U.S. employees, the
Company makes contributions of 75% of employee contributions up to a maximum
employee contribution of 6% of employee earnings. Employees may contribute up to
an additional 18% (in 1% increments), which is not subject to match by the
Company. For Canadian employees, the Company makes contributions of 3%-8% of an
employee’s salary with no individual employee match required. All obligations of
the Company are funded through September 30, 2009. In addition, the Company
provides an unfunded non-qualified deferred compensation defined contribution
plan for certain U.S. employees. The Company's and
individual's contributions are based on the same formula as the
qualified contribution plan except that it does not limit the amount of a
participant's compensation or maximum benefit. The contribution calculated
under the non-qualified defined contribution plan is offset by
the Company's and participant's contributions under the qualified plan. The
Company’s expense for these plans totaled $0.7 million and $0.9 million in the
three months ended September 30, 2009 and 2008, respectively, and $2.4 million
and $2.6 million in the nine months ended September 30, 2009 and 2008,
respectively. The liability for the non-qualified deferred defined contribution
plan is included in "Other current accrued liabilities" in the Consolidated
Balance Sheet.
Components
of Net Periodic Benefit Cost (in thousands of dollars)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
Three
Months Ended September 30,
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,407
|
|
|
$
|
1,280
|
|
|
$
|
43
|
|
|
$
|
38
|
|
Interest
cost
|
|
|
2,890
|
|
|
|
2,625
|
|
|
|
123
|
|
|
|
113
|
|
Expected
return on plan assets
|
|
|
(3,136
|
)
|
|
|
(4,282
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
225
|
|
|
|
141
|
|
|
|
15
|
|
|
|
-
|
|
Amortization
of unrecognized net (gain) loss
|
|
|
1,336
|
|
|
|
45
|
|
|
|
(45
|
)
|
|
|
(54
|
)
|
Amortization
of unrecognized transition asset
|
|
|
-
|
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
periodic benefit cost (income)
|
|
$
|
2,722
|
|
|
$
|
(350
|
)
|
|
$
|
136
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
Nine
Months Ended September 30,
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4,220
|
|
|
$
|
3,841
|
|
|
$
|
129
|
|
|
$
|
114
|
|
Interest
cost
|
|
|
8,671
|
|
|
|
7,877
|
|
|
|
367
|
|
|
|
341
|
|
Expected
return on plan assets
|
|
|
(9,406
|
)
|
|
|
(12,849
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
674
|
|
|
|
424
|
|
|
|
45
|
|
|
|
-
|
|
Amortization
of unrecognized net (gain) loss
|
|
|
4,008
|
|
|
|
135
|
|
|
|
(134
|
)
|
|
|
(163
|
)
|
Amortization
of unrecognized transition asset
|
|
|
-
|
|
|
|
(479
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
periodic benefit cost (income)
|
|
$
|
8,167
|
|
|
$
|
(1,051
|
)
|
|
$
|
407
|
|
|
$
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Contributions
The
Company previously disclosed in its financial statements for the year ended
December 31, 2008, that it expected to make contributions of $0.3 million to
$2.3 million to its pension plans in 2009. The Company also disclosed that
it expected contributions of $0.6 million to be made to its postretirement plan
in 2009. As of September 30, 2009, the Company has made contributions of
$0.2 million to its pension plans and has made contributions of $0.6 million to
its postretirement plan. The Company presently anticipates making additional
contributions of $0.1 million to its pension plans and $0.2 million to its
postretirement plan during the remainder of 2009. Due to changes in funding
elections, the Company now does not expect to make contributions to its
qualified pension plan in 2009.
12.
Legal Proceedings
On March
7, 1997, a class action complaint was filed against Lufkin Industries, Inc. (the
“Company”) in the U.S. District Court for the Eastern District of Texas by an
employee and a former employee of the Company who alleged race discrimination in
employment. Certification hearings were conducted in Beaumont, Texas in February
1998 and in Lufkin, Texas in August 1998. In April 1999, the District Court
issued a decision that certified a class for this case, which included all black
employees employed by the Company from March 6, 1994, to the present. The case
was administratively closed from 2001 to 2003 while the parties unsuccessfully
attempted mediation. Trial for this case began in December 2003, and after the
close of plaintiff’s evidence, the court adjourned and did not complete the
trial until October 2004. Although plaintiff’s class certification encompassed a
wide variety of employment practices, plaintiffs presented only disparate impact
claims relating to discrimination in initial assignments and promotions at
trial.
On
January 13, 2005, the District Court entered its decision finding that the
Company discriminated against African-American employees in initial assignments
and promotions. The District Court also concluded that the discrimination
resulted in a shortfall in income for those employees and ordered that the
Company pay those employees back pay to remedy such shortfall, together with
pre-judgment interest in the amount of 5%. On August 29, 2005, the District
Court determined that the back pay award for the class of affected employees was
$3.4 million (including interest to January 1, 2005) and provided a formula for
attorney fees that the Company estimates will result in a total not to exceed
$2.5 million. In addition to back pay with interest, the District Court (i)
enjoined and ordered the Company to cease and desist all racially biased
assignment and promotion practices and (ii) ordered the Company to pay court
costs and expenses.
The
Company reviewed this decision with its outside counsel and on September 19,
2005, appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
On April 3, 2007, the Company appeared before the appellate court in New Orleans
for oral argument in this case. The appellate court subsequently issued a
decision on Friday, February 29, 2008 that reversed and vacated the plaintiff’s
claim regarding the initial assignment of black employees into the Foundry
Division. The court also denied plaintiff’s appeal for class certification of a
class disparate treatment claim. Plaintiff’s claim on the issue of the Company’s
promotional practices was affirmed but the back pay award was vacated and
remanded for recomputation in accordance with the opinion. The
District Court’s injunction was vacated and remanded with instructions to enter
appropriate and specific injunctive relief. Finally, the issue of plaintiff’s
attorney’s fees was remanded to the District Court for further consideration in
accordance with prevailing authority.
On
December 5, 2008, the U.S. District Court Judge Clark held a hearing in
Beaumont, Texas during which he reviewed the 5
th
U.S.
Circuit Court of Appeals class action decision and informed the parties that he
intended to implement the decision in order to conclude this litigation. At the
conclusion of the hearing Judge Clark ordered the parties to submit positions
regarding the issues of attorney fees, a damage award and injunctive relief.
Subsequently, the Company reviewed the plaintiff’s submissions which described
the formula and underlying assumptions that supported their positions on
attorney fees and damages. After careful review of the plaintiff’s submission to
the court the Company continued to have significant differences regarding legal
issues that materially impacted the plaintiff’s requests. As a result of these
different results, the court requested further evidence from the parties
regarding their positions in order to render a final decision. The
judge reviewed both parties arguments regarding legal fees, and awarded the
plaintiffs an interim fee, but at a reduced level from the plaintiffs original
request. The Company and the plaintiffs reconciled the majority of the
differences and the damage calculations which also lowered the originally
requested amounts of the plaintiffs on those matters. Due to the
resolution of certain legal proceedings on damages during first half of 2009 and
the District Court awarding the plaintiffs an interim award of attorney fees and
cost totaling $5.8 million, the Company recorded an additional provision of $5.0
million in the first half of 2009 above the $6.0 million recorded in fourth
quarter of 2008. The plaintiffs have filed an appeal of the District Court’s
interim award of attorney fees with the U.S. Fifth Circuit Court of Appeals. The
Company has filed a cross-appeal on the attorney fee issue. The Fifth
Circuit subsequently dismissed these appeals on August 28, 2009 on the basis
that an appealable final judgment in this case had not been
issued. The court commented that this issue can be reviewed with an
appeal of final judgment. On June 19, 2009, the District Court issued
a damage award in favor of the plaintiffs totaling $3.1 million for the period
2004 through 2007 plus annual interest 5%. The Company estimates that the total
damage award will be $5.0 million and, as a result, in the second quarter of
2009, the Company increased its damage provision in this case by an additional
$2.0 million
,
which represents
the Company’s best estimate of its ultimate exposure.
Additionally,
during the first quarter of 2009, the court appointed an industrial expert to
review the Company’s promotional policies and practices and prepare a report for
the court which would contain recommendations for injunctive relief in this
case. The Company anticipates the District Court’s injunctive relief award by
the end of the fourth quarter of 2009.
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. For certain of these claims, the Company maintains insurance
coverage while retaining a portion of the losses that occur through the use of
deductibles and retention limits. Amounts in excess of the
self-insured retention levels are fully insured to limits believed appropriate
for the Company’s operations. Self-insurance accruals are based on
claims filed and an estimate for claims incurred but not
reported. While the Company does maintain insurance above its
self-insured levels, a decline in the financial condition of its insurer, while
not currently anticipated, could result in the Company recording additional
liabilities. It is management’s opinion that the Company’s liability
under such circumstances or involving any other non-insured claims or legal
proceedings would not materially affect its consolidated financial position,
results of operations, or cash flow.
13.
Comprehensive Income
Comprehensive
income includes net income and changes in the components of accumulated other
comprehensive income during the periods presented. The Company’s
comprehensive income is as follows (in thousands of dollars):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
4,992
|
|
|
$
|
24,812
|
|
|
$
|
18,467
|
|
|
$
|
61,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
2,822
|
|
|
|
(3,649
|
)
|
|
|
3,869
|
|
|
|
(2,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service cost included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
net periodic benefit cost
|
|
|
225
|
|
|
|
141
|
|
|
|
674
|
|
|
|
424
|
|
Amortization
of unrecognized transition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
asset
included in net periodic benefit cost
|
|
|
-
|
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
(479
|
)
|
Amortization
of unrecognized net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net periodic benefit cost
|
|
|
1,336
|
|
|
|
45
|
|
|
|
4,008
|
|
|
|
135
|
|
Net
income (loss) arising during period
|
|
|
-
|
|
|
|
2
|
|
|
|
(7,464
|
)
|
|
|
(19,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
defined benefit pension plans
|
|
|
1,561
|
|
|
|
29
|
|
|
|
(2,782
|
)
|
|
|
(19,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service cost included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
net periodic benefit cost
|
|
|
15
|
|
|
|
-
|
|
|
|
45
|
|
|
|
-
|
|
Amortization
of unrecognized net gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net periodic benefit cost
|
|
|
(45
|
)
|
|
|
(54
|
)
|
|
|
(134
|
)
|
|
|
(163
|
)
|
Net
gain (loss) arising during period
|
|
|
-
|
|
|
|
-
|
|
|
|
(474
|
)
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
defined benefit postretirement plans
|
|
|
(30
|
)
|
|
|
(54
|
)
|
|
|
(563
|
)
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss), before tax
|
|
|
4,353
|
|
|
|
(3,674
|
)
|
|
|
524
|
|
|
|
(21,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) benefit related to items of other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income
|
|
|
(566
|
)
|
|
|
8
|
|
|
|
1,237
|
|
|
|
7,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss), net of tax
|
|
|
3,787
|
|
|
|
(3,666
|
)
|
|
|
1,761
|
|
|
|
(14,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
8,779
|
|
|
$
|
21,146
|
|
|
$
|
20,228
|
|
|
$
|
47,051
|
|
Accumulated
other comprehensive income (loss) in the consolidated balance sheet consists of
the following (in thousands of dollars):
|
|
|
|
|
Defined
|
|
|
Defined
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Other
|
|
|
|
Currency
|
|
|
Pension
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
|
|
Translation
|
|
|
Plans
|
|
|
Plans
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
Dec. 31, 2008
|
|
$
|
2,512
|
|
|
$
|
(48,921
|
)
|
|
$
|
1,709
|
|
|
$
|
(44,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current-period
change
|
|
|
3,869
|
|
|
|
(1,753
|
)
|
|
|
(355
|
)
|
|
|
1,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2009
|
|
$
|
6,381
|
|
|
$
|
(50,674
|
)
|
|
$
|
1,354
|
|
|
$
|
(42,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
Net Earnings Per Share
A
reconciliation of the number of weighted shares used to compute basic and
diluted net earnings per share for the three and nine months ended September 30,
2009 and 2008, are illustrated below:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
for
basic EPS
|
|
|
14,861,939
|
|
|
|
14,880,637
|
|
|
|
14,861,183
|
|
|
|
14,765,287
|
|
Effect
of dilutive securities: employee stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
|
|
|
40,518
|
|
|
|
132,228
|
|
|
|
36,783
|
|
|
|
150,948
|
|
Adjusted
weighted average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
for diluted EPS
|
|
|
14,902,457
|
|
|
|
15,012,865
|
|
|
|
14,897,966
|
|
|
|
14,916,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
options to purchase a total of 507,460 and zero shares of the
Company’s common stock for the three months ended September 30, 2009 and
2008, respectively, and 500,623 and 54,642 shares of the Company’s common
stock for the nine months ended September 30, 2009 and 2008, respectively,
were excluded from the calculations of fully diluted earnings per share, in each
case because the effect on fully diluted earnings per share for the period was
antidilutive.
15.
Stock Option Plans
The
Company currently has three stock compensation plans. The 1990 Stock Option
Plan, the 1996 Nonemployee Director Stock Option Plan and the 2000 Incentive
Stock Compensation Plan provide for the granting of stock options to officers,
employees and non-employee directors at an exercise price equal to the fair
market value of the stock at the date of grant. The 2000 Incentive Stock
Compensation Plan also provides for other forms of stock-based compensation such
as restricted stock, but none have been granted to date. Options granted to
employees vest over two to four years and are exercisable up to ten years from
the grant date. Upon retirement, any unvested options become exercisable
immediately. Options granted to directors vest at the grant date and are
exercisable up to ten years from the grant date.
The
following table is a summary of the stock-based compensation expense recognized
for the three and nine months ended September 30, 2009 and 2008 (in thousands of
dollars):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$
|
557
|
|
|
$
|
752
|
|
|
$
|
1,510
|
|
|
$
|
2,595
|
|
Tax
benefit
|
|
|
(206
|
)
|
|
|
(278
|
)
|
|
|
(559
|
)
|
|
|
(960
|
)
|
Stock-based
compensation expense, net of tax
|
|
$
|
351
|
|
|
$
|
474
|
|
|
$
|
951
|
|
|
$
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair
value of each option grant during the first nine months of 2009 and
2008 was estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
2.18%
- 2.80
|
%
|
|
|
1.33%
- 1.70
|
%
|
Expected
stock price volatility
|
|
|
46.8%
- 54.0
|
%
|
|
|
41.0%
- 46.0
|
%
|
Risk
free interest rate
|
|
|
1.09%
- 2.73
|
%
|
|
|
1.90%
- 3.27
|
%
|
Expected
life options
|
|
3 -
7 years
|
|
|
2 -
6 years
|
|
Weighted-average
fair value per share at grant date
|
|
$
|
14.52
|
|
|
$
|
19.82
|
|
The
expected life of options was determined based on the exercise history of
employees and directors since the inception of the plans. The expected
volatility is based upon the historical weekly and daily stock price for the
prior number of years equivalent to the expected life of the stock option. The
expected dividend yield was based on the dividend yield of the Company’s common
stock at the date of the grant. The risk free interest rate was based upon the
yield of U.S. Treasuries which terms were equivalent to the expected life of the
stock option.
A summary
of stock option activity under the plans during the nine months ended
September 30, 2009, is presented below:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
($000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2009
|
|
|
548,639
|
|
|
$
|
51.42
|
|
|
|
|
|
|
|
Granted
|
|
|
63,500
|
|
|
|
38.35
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,750
|
)
|
|
|
10.14
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2009
|
|
|
609,389
|
|
|
$
|
50.25
|
|
|
|
7.6
|
|
|
$
|
4,141
|
|
Exercisable
at September 30, 2009
|
|
|
323,284
|
|
|
$
|
47.46
|
|
|
|
6.9
|
|
|
$
|
3,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2009, there was $2.7 million of total unrecognized compensation
expense related to non-vested stock options. That cost is expected to be
recognized over a weighted-average period of 2.3 years. The intrinsic value of
stock options exercised in the first nine months of 2009 was $0.1
million.
16.
Uncertain Tax Positions
As of
January 1, 2009, the Company had approximately $1.4 million of total gross
unrecognized tax benefits. Of this total, $1.4 million (net of the
federal benefit on state issues) represents the amount of unrecognized tax
benefits that, if recognized, would favorably affect the net effective income
tax rate in any future period. As of September 30, 2009, the Company
had approximately $1.5 million of total gross unrecognized tax
benefits. Of this total, $1.5 million (net of the federal benefit on
state issues) represents the amount of unrecognized tax benefits that, if
recognized, would favorably affect the net effective income tax rate in any
future period. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
(Thousands
of dollars)
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$
|
1,368
|
|
|
|
|
|
|
Gross
increases- current year tax positions
|
|
|
497
|
|
Gross
increases- tax positions from prior periods
|
|
|
93
|
|
Gross
decreases- tax positions from prior periods
|
|
|
(262
|
)
|
Settlements
|
|
|
(173
|
)
|
Balance
at September 30, 2009
|
|
$
|
1,523
|
|
|
|
|
|
|
During
the first quarter of 2009, the Company settled the examination of the 2006 tax
year with the IRS. The Company does not expect any additional settlements of its
ASC 740-10 liabilities within the next twelve months.
The
Company’s continuing practice is to recognize interest and penalties related to
income tax matters in administrative costs. The Company had $0.1
million accrued for interest and penalties at December 31,
2008. Negligible interest and penalties were recognized during the
three and nine months ended September 30, 2009 and 2008,
respectively.
17.
Segment Data
The
Company operates with two business segments - Oil Field and Power Transmission.
The two operating segments are supported by a common corporate group. Corporate
expenses and certain assets are allocated to the operating segments based
primarily upon third-party revenues. Inter-segment sales and transfers are
accounted for as if the sales and transfers were to third parties, that is, at
current market prices, as available. 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, 2008. The following
is a summary of key segment information (in thousands of dollars):
Three Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
Oil
Field
|
|
|
Transmission
|
|
|
&
Other*
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
sales
|
|
$
|
74,054
|
|
|
$
|
44,132
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
118,186
|
|
Inter-segment
sales
|
|
|
(322
|
)
|
|
|
(176
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(498
|
)
|
Net
sales
|
|
$
|
73,732
|
|
|
$
|
43,956
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
117,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
628
|
|
|
$
|
6,553
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,181
|
|
Other
income (expense), net
|
|
|
442
|
|
|
|
46
|
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
471
|
|
Earnings
(loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income tax provision
|
|
$
|
1,070
|
|
|
$
|
6,599
|
|
|
$
|
(17
|
)
|
|
$
|
-
|
|
|
$
|
7,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
Oil
Field
|
|
|
Transmission
|
|
|
&
Other*
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
sales
|
|
$
|
149,714
|
|
|
$
|
49,612
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
199,326
|
|
Inter-segment
sales
|
|
|
(2,641
|
)
|
|
|
(1,595
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,236
|
)
|
Net
sales
|
|
$
|
147,073
|
|
|
$
|
48,017
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
195,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
32,598
|
|
|
$
|
6,241
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38,839
|
|
Other
income (expense), net
|
|
|
(347
|
)
|
|
|
61
|
|
|
|
345
|
|
|
|
-
|
|
|
|
59
|
|
Earnings
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income tax provision
|
|
$
|
32,251
|
|
|
$
|
6,302
|
|
|
$
|
345
|
|
|
$
|
-
|
|
|
$
|
38,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
Oil
Field
|
|
|
Transmission
|
|
|
&
Other*
|
|
|
Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
sales
|
|
$
|
262,542
|
|
|
$
|
137,158
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
399,700
|
|
Inter-segment
sales
|
|
|
(2,134
|
)
|
|
|
(3,001
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,135
|
)
|
Net
sales
|
|
$
|
260,408
|
|
|
$
|
134,157
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
394,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
14,366
|
|
|
$
|
16,971
|
|
|
$
|
(5,000
|
)
|
|
$
|
-
|
|
|
$
|
26,337
|
|
Other
income, net
|
|
|
888
|
|
|
|
136
|
|
|
|
662
|
|
|
|
-
|
|
|
|
1,686
|
|
Earnings
(loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income tax provision
|
|
$
|
15,254
|
|
|
$
|
17,107
|
|
|
$
|
(4,338
|
)
|
|
$
|
-
|
|
|
$
|
28,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Corporate & Other includes the litigation reserve.
Nine Months Ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
Oil
Field
|
|
|
Transmission
|
|
|
&
Other
|
|
|
Adjustment*
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
sales
|
|
$
|
378,433
|
|
|
$
|
138,549
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
516,982
|
|
Inter-segment
sales
|
|
|
(3,944
|
)
|
|
|
(2,390
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,334
|
)
|
Net
sales
|
|
$
|
374,489
|
|
|
$
|
136,159
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
510,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
77,600
|
|
|
$
|
17,384
|
|
|
$
|
-
|
|
|
$
|
(1,571
|
)
|
|
$
|
93,413
|
|
Other
income (expense), net
|
|
|
(563
|
)
|
|
|
64
|
|
|
|
1,491
|
|
|
|
-
|
|
|
|
992
|
|
Earnings
(loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income tax provision
|
|
$
|
77,037
|
|
|
$
|
17,448
|
|
|
$
|
1,491
|
|
|
$
|
(1,571
|
)
|
|
$
|
94,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Due to
the discontinuation of the Trailer segment, certain items previously allocated
to that segment have been reclassified to continuing operations. One adjustment
is related to pension and postretirement charges associated with Trailer
personnel that will continue to be a liability in future years. The other
adjustment is for corporate allocations previously charged to Trailer as these
expenses will continue in the future.
Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Overview
General
Lufkin
Industries is a global supplier of oil field and power transmission products.
Through its Oil Field segment, the Company manufactures and services artificial
lift equipment and related products, which are used to extract crude oil and
other fluids from wells. Through its Power Transmission segment, the Company
manufactures and services high-speed and low-speed increasing and reducing
gearboxes for industrial applications. While these markets are
price-competitive, technological and quality differences can provide product
differentiation.
The
Company’s strategy is to differentiate its products through additional
value-added capabilities. Examples of these capabilities are high-quality
engineering, customized designs, rapid manufacturing response to demand through
plant capacity, inventory and vertical integration, superior quality and
customer service, and an international network of service
locations. In addition, the Company’s strategy is to maintain a low
debt-to-equity ratio in order to quickly take advantage of growth opportunities
and pay dividends even during unfavorable business cycles.
In
support of the above strategy, the Company has been making capital investments
in Oil Field to increase manufacturing capacity and capabilities in its three
main manufacturing facilities in Lufkin, Texas, Canada and Argentina. These
investments should reduce production lead times, improve quality and reduce
manufacturing costs. Investments also continue to be made to expand the
Company’s presence in automation products and international service. During the
first quarter of 2009, the Company purchased International Lift Systems (“ILS”),
which manufactures and services gas lift, plunger lift and completion equipment
for the oil and gas industry. In Power Transmission, the Company continues to
expand its gear repair network by opening and expanding facilities in various
locations in the U.S. and Canada. The Company is making targeted capital
investments in the U.S. and France to expand capacity, develop new product lines
and reduce manufacturing lead times, in addition to certain capital investments
targeting cost reductions. On July 1, 2009, the Company purchased
Rotating Machinery Technology, Inc. (RMT), which specializes in the analysis,
design and manufacture of precision, custom-engineered tilting-pad bearings and
related components for high-speed turbo equipment operating in critical duty
applications. RMT also services, repairs and upgrades turbo-expander process
units for air and gas separation, both on-site with its skilled field service
team and at its repair facility in Wellsville, New York.
Trends/Outlook
Oil
Field
Demand
for artificial lift equipment is primarily dependent on the level of new onshore
oil wells, workover drilling activity, the depth and fluid conditions of such
drilling activity and general field maintenance budgets. Drilling activity is
driven by the available cash flow of the Company’s customers as well as their
long-term perceptions of the level and stability of the price of oil. Increasing
energy prices from 2004 to late 2008 increased the demand for pumping units and
related service and products from higher drilling activity, activation of idle
wells and the upgrading of existing wells. During the first nine months of 2008,
demand levels in North America increased over the levels experienced in 2007 as
higher energy prices drove increased drilling and workover activity.
Additionally, the demand for pumping units, oilfield services and automation
equipment continued to increase in international markets as well as a partial
recapture of market share from imported equipment domestically.
In the
fourth quarter of 2008, energy prices dramatically declined due to reductions in
global demand. Planned new drilling and workover activity has also reduced
significantly as capital and operating budgets have been reduced. Exploration
and production (E&P) companies have reduced drilling in higher-cost fields
that are not economically viable at lower energy prices and have reduced overall
capital budgets in order to remain cash-flow positive and avoid the
more-expensive credit markets. These declines were more pronounced in the U.S.,
but are starting to be reflected in international markets. New pumping unit
booking levels declined in the fourth quarter of 2008 from lower demand, order
cancellations for units scheduled to ship in 2009 and price reductions for units
scheduled to ship in 2009. These price reductions were primarily in response to
the decline in raw material costs in the fourth quarter of 2008 for steel and
iron castings.
These
negative trends continued into the first quarter of 2009 and worsened during the
second quarter of 2009 as E&P companies deferred or cancelled drilling
programs and reduced field spending in response to lower energy prices. This
trend has been more pronounced in North America than in international markets.
E&P companies have indicated that drilling activity will not be reactivated
until energy prices stabilize at economically viable levels and drilling and
service costs decrease. While oil prices continued to increase during the third
quarter of 2009, demand levels did not change significantly over the second
quarter of 2009 and will not increase until customers are confident these higher
prices will be maintained. Demand for new equipment in North America during the
fourth quarter of 2009 will continue to be negatively impacted by customer
inventory of new pumping unit equipment ordered in late in 2008 or early 2009
unless oil drilling activity increases over the current levels. Gross margin
levels will be negatively impacted from customer pricing pressure and from
reduced plant utilizations. While net bookings were up 62% in Oil
Field during the third quarter of 2009 compared to the second quarter of 2009,
second quarter bookings were negatively impacted by cancellation of orders
originally placed in late 2008.
While the
market is suffering a cyclical decline, the Company continues to believe that
there are long-term positive growth trends for artificial lift equipment, and as
existing fields mature, the market will require an increased use of artificial
lift, especially in the South American, Russian and Middle Eastern
markets. The acquisition of ILS is consistent with the
company’s long-term growth strategy of integrating strategic assets to leverage
Lufkin’s position of industry leadership. ILS has a solid reputation
for high-quality products, customer responsiveness and long-standing
relationships with major independent and super-major integrated
companies. This provides an entry for Lufkin into the offshore market
for artificial lift wells, including deepwater plays, and expanded reach into
the artificial lift market.
Power
Transmission
Power
Transmission services many diverse markets, with high-speed gearing for markets
such as petrochemicals, refineries, offshore production and transmission of oil
and slow-speed gearing for the gas, rubber, sugar, paper, steel, plastics,
mining, cement and marine propulsion, each of which has its own unique set of
drivers. Generally, if global industrial capacity utilizations are not high,
spending on new equipment lags. Also impacting demand are government regulations
involving safety and environmental issues that can require capital spending.
Recent market demand increases have come from energy-related markets such as
refining, petrochemical, drilling, coal, marine and power generation in response
to higher global energy prices. Recent declines in energy prices and restricted
credit markets have started to impact demand as plans for large energy
infrastructure projects are being deferred or cancelled. This was reflected in
lower bookings in the third quarter of 2009 as compared to the second quarter of
2009. However, governments are increasing funding for infrastructure and
alternative energy projects for economic stimulus purposes, which may create
opportunities for power transmission products.
Discontinued
Operations
During
the second quarter of 2008, the Trailer segment was classified as a discontinued
operation. In January 2008, the Company announced the decision to suspend its
participation in the commercial trailer markets and to develop a plan to run-out
existing inventories, fulfill contractual obligations and close all trailer
facilities in 2008. During the second quarter of 2008, this plan was completed,
with the majority of the remaining inventory and manufacturing equipment sold
and all facilities closed.
Other
During
the first half of 2009, the Company recorded an additional contingent liability
provision of $5.0 million (pre-tax) related to our ongoing class-action
lawsuit. No provisions were recorded during the third quarter of
2009. See Part II, Item 1. “Legal Proceedings” for additional
information.
Summary
of Results
The
Company generally monitors its performance through analysis of sales, gross
margin (gross profit as a percentage of sales) and net earnings, as well as
debt/equity levels, short-term debt levels, and cash balances.
Overall,
sales for the three months ended September 30, 2009, decreased to $117.7 million
from $195.1 million for the three months ended September 30, 2008, or 39.7%, and
sales for the nine months ended September 30, 2009, decreased to $394.6 million
from $510.6 million for the nine months ended September 30, 2008, or 22.7%. This
decrease was primarily driven by lower sales of oil field products and services
in the North American market.
Gross
margin for the three months ended September 30, 2009, decreased to 21.2% from
28.6% for the three months ended September 30, 2008, and gross margin for the
nine months ended September 30, 2009, decreased to 21.8% from 28.2% for the nine
months ended September 30, 2008. This gross margin decrease was primarily
related to price decreases in response to material price decreases and lower
demand and the negative impact of lower plant utilization on fixed cost coverage
in the Oil Field segment. Additional segment data on gross margin is provided
later in this section.
Higher
selling, general and administrative expenses also negatively impacted net
earnings, with these expenses increasing to $17.8 million during the third
quarter of 2009 from $17.0 million during the third quarter of 2008, and
increasing to $54.8 million during the first nine months of 2009 from $50.7
million during the first nine months of 2008. This increase was primarily
related to resources added from the ILS and RMT acquisitions. As a percentage of
sales, selling, general and administrative expenses also increased to 15.1% for
the three months ended September 30, 2009, from 8.7% in the three months ended
September 30, 2008, and increased to 13.9% for the nine months ended September
30, 2009, from 9.9% for the nine months ended September 30, 2008. The Company
has made the strategic decision to maintain employment levels in this area to
focus on new product and geographic expansion opportunities. Operating income
was also impacted by a litigation reserve of $5.0 million during the nine months
ended September 30, 2009, related to its ongoing class-action
lawsuit.
The
Company reported net earnings from continuing operations of $5.1 million or
$0.34 per share (diluted) for the three months ended September 30, 2009,
compared to net earnings from continuing operations of $25.0 million or $1.66
per share (diluted) for the three months ended September 30, 2008. Net earnings
from continuing operations were $18.9 million or $1.27 per share (diluted) for
the nine months ended September 30, 2009, compared to net earnings from
continuing operations of $61.7 million or $4.14 per share (diluted) for the nine
months ended September 30, 2008.
Debt/equity
(long-term debt net of current portion as a percentage of total equity) levels
were 0.5% as of September 30, 2009, and 0.0% at December 31, 2008. Cash balances
at September 30, 2009, were $102.2 million, down from $107.8 million at December
31, 2008.
Three
Months Ended September 30, 2009, Compared to Three Months Ended September 30,
2008
The
following table summarizes the Company’s sales and gross profit by operating
segment (in thousands of dollars):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Increase/
|
|
|
%
Increase/
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
Field
|
|
$
|
73,732
|
|
|
$
|
147,073
|
|
|
$
|
(73,341
|
)
|
|
|
(49.9
|
)
|
Power
Transmission
|
|
|
43,956
|
|
|
|
48,017
|
|
|
|
(4,061
|
)
|
|
|
(8.5
|
)
|
Total
|
|
$
|
117,688
|
|
|
$
|
195,090
|
|
|
$
|
(77,402
|
)
|
|
|
(39.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
Field
|
|
$
|
11,054
|
|
|
$
|
41,232
|
|
|
$
|
(30,178
|
)
|
|
|
(73.2
|
)
|
Power
Transmission
|
|
|
13,878
|
|
|
|
14,590
|
|
|
|
(712
|
)
|
|
|
(4.9
|
)
|
Total
|
|
$
|
24,932
|
|
|
$
|
55,822
|
|
|
$
|
(30,890
|
)
|
|
|
(55.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
Field
Oil Field
sales decreased to $73.7 million, or 49.9%, for the three months ended September
30, 2009, from $147.1 million for the three months ended September 30, 2008. New
unit sales of $37.3 million during the third quarter of 2009 were down $55.6
million, or 59.9%, compared to $92.9 million during the third quarter of 2008,
primarily from lower U.S. demand and pricing pressure. Pumping unit
service sales of $19.9 million during the third quarter of 2009 were down $7.6
million, or 27.6%, compared to $27.4 million during the third quarter of 2008,
from declines in the U.S. market due to demand and pricing pressure. Automation
sales of $9.8 million during the third quarter of 2009 were down $9.3 million,
or 48.6%, compared to $19.2 million during the third quarter of 2008, from lower
sales in the U.S and pricing pressure. Commercial casting sales of $2.0 million
during the third quarter of 2009 were down $5.5 million, or 72.8%, compared to
$7.5 million during the third quarter 2008, from lower sales to the machine tool
market. Sales from Lufkin ILS contributed $4.7 million during the third quarter
of 2009. Oil Field’s backlog decreased to $35.9 million as of September 30,
2009, from $279.8 million at September 30, 2008, and $188.1 million at December
31, 2008. This decrease was caused primarily by lower orders for new pumping
units as U.S. and international customers deferred or cancelled drilling
programs in response to lower energy prices.
Gross
margin (gross profit as a percentage of sales) for the Oil Field segment
decreased to 15.0% for three months ended September 30, 2009, compared to 28.0%
for the three months ended September 30, 2008, or 13.0 percentage points.
This gross margin decrease was related to price reductions in response to
material price decreases and lower customer demand and the negative impact of
lower plant utilization on fixed cost coverage.
Direct
selling, general and administrative expenses for Oil Field increased to $6.2
million, or 26.3%, for the three months ended September 30, 2009, from $4.9
million for the three months ended September 30, 2008. The majority of this
increase is related to the resources added with the ILS acquisition. Direct
selling, general and administrative expenses as a percentage of sales increased
to 8.5% for the three months ended September 30, 2009, from 3.4% for the three
months ended September 30, 2008.
Power
Transmission
Sales for
the Company’s Power Transmission segment decreased to $44.0 million, or 8.5%,
for the three months ended September 30, 2009, compared to $48.0 million for the
three months ended September 30, 2008. New unit sales of $34.0 million during
the third quarter of 2009 were down $2.0 million, or 5.5%, compared to $36.0
million during the third quarter of 2008 from decreased sales of low-speed units
to the industrial and marine markets. Repair and service sales of $9.1 million
during the third quarter of 2009 were down $3.0 million, or 24.5%, compared to
$12.1 million during the third quarter 2008 as customers deferred spending on
maintenance projects due to poor economic conditions. Sales from Lufkin RMT
contributed $0.9 million during the third quarter of 2009. Power Transmission
backlog at September 30, 2009, decreased to $97.9 million from $134.1 million at
September 30, 2008, and $129.3 million at December 31, 2008, primarily from
decreased bookings of new units for the energy-related and marine
markets.
Gross
margin for the Power Transmission segment increased to 31.6% for the
three months ended September 30, 2009, compared to 30.4% for the three months
ended September 30, 2008, or 1.2 percentage points. This gross margin increase
was primarily from the favorable mix effect of increased sales of high-speed
units from marine units and repair work.
Direct
selling, general and administrative expenses for Power Transmission increased to
$5.9 million, or 7.7%, for the three months ended September 30, 2009, from
$5.5 million for the three months ended September 30, 2008. The majority of this
increase is related to the resources added with the RMT acquisition. Direct
selling, general and administrative expenses as a percentage of sales also
increased to 13.5% for the three months ended September 30, 2009, from 11.5% for
the three months ended September 30, 2008.
Corporate/Other
Corporate
administrative expenses, which are allocated to the segments primarily based on
budgeted sales levels, were $5.6 million for the three months ended September
30, 2009, a decrease of $1.0 million or 14.6%, from $6.5 million for the three
months ended September 30, 2008, primarily from decreased personnel-related
expenses.
Interest
income, interest expense and other income and expense for the three months ended
September 30, 2009, increased to $0.5 million of income compared to $0.1 million
of income for the three months ended September 30, 2008, from currency gains
offsetting reduced interest income.
Pension
expense, which is reported as an increase in cost of sales, increased to $2.5
million for the three months ended September 30, 2009, compared to pension
income of $0.5 million for the three months ended September 30, 2008. This
increase in expense was primarily due to lower expected returns on asset
balances and the amortization of 2008 market losses.
The net
tax rate for the three months ended September 30, 2009, was 33.9% compared to
35.8% for the three months ended September 30, 2008. The net tax rate in the
third quarter of 2009 benefitted from adjustments to prior period tax filings in
the U.S. The tax rate for the balance of 2009 is expected to be approximately
36.0%.
Nine
Months Ended September 30, 2009, Compared to Nine Months Ended September 30,
2008
The
following table summarizes the Company’s sales and gross profit by operating
segment (in thousands of dollars):
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Increase/
|
|
|
%
Increase/
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
Field
|
|
$
|
260,408
|
|
|
$
|
374,489
|
|
|
$
|
(114,081
|
)
|
|
|
(30.5
|
)
|
Power
Transmission
|
|
|
134,157
|
|
|
|
136,159
|
|
|
|
(2,002
|
)
|
|
|
(1.5
|
)
|
Total
|
|
$
|
394,565
|
|
|
$
|
510,648
|
|
|
$
|
(116,083
|
)
|
|
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
Field
|
|
$
|
47,255
|
|
|
$
|
102,488
|
|
|
$
|
(55,233
|
)
|
|
|
(53.9
|
)
|
Power
Transmission
|
|
|
38,856
|
|
|
|
41,534
|
|
|
|
(2,678
|
)
|
|
|
(6.4
|
)
|
Adjustment*
|
|
|
-
|
|
|
|
115
|
|
|
|
(115
|
)
|
|
|
(100.0
|
)
|
Total
|
|
$
|
86,111
|
|
|
$
|
144,137
|
|
|
$
|
(58,026
|
)
|
|
|
(40.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Due to
the discontinuation of the Trailer segment, certain items previously allocated
to that segment in cost of sales have been reclassified to continuing
operations. The adjustment is related to pension and postretirement charges
associated with Trailer personnel that will continue to be a liability in future
years.
Oil
Field
Oil Field
sales decreased to $260.4 million, or 30.5%, for the nine months ended September
30, 2009, from $374.5 million for the nine months ended September 30, 2008. New
unit sales of $144.6 million during the first nine months of 2009 were down
$83.2 million, or 36.5%, compared to $227.8 million during the first nine months
2008, primarily from lower U.S. demand and pricing pressure. Pumping
unit service sales of $61.2 million during the first nine months of 2009 were
down $11.2 million, or 15.4%, compared to $72.4 million during the first nine
months of 2008, from declines in the U.S. market. Automation sales of $36.4
million during the first nine months of 2009 were down $18.7 million, or 33.9%,
compared to $55.1 million during the first nine months 2008, from lower sales in
the U.S and pricing pressure. Commercial casting sales of $7.2 million during
the first nine months of 2009 were down $11.9 million, or 62.3%, compared to
$19.1 million during the first nine months 2008, from lower sales to the machine
tool market. Sales from Lufkin ILS contributed $10.9 million during the first
nine months of 2009. Oil Field’s backlog decreased to $35.9 million as of
September 30, 2009, from $188.1 million at December 31, 2008. This decrease was
caused primarily by lower orders for new pumping units as U.S. and international
customers deferred or cancelled drilling programs in response to lower energy
prices.
Gross
margin (gross profit as a percentage of sales) for the Oil Field segment
decreased to 18.1% for nine months ended September 30, 2009, compared to 27.4%
for the nine months ended September 30, 2008, or 9.3 percentage points.
This gross margin decrease was related to price reductions in response to
material price decreases and lower customer demand and the negative impact of
lower plant utilization on fixed cost coverage.
Direct
selling, general and administrative expenses for Oil Field increased to $19.1
million, or 25.9%, for the nine months ended September 30, 2009, from $15.2
million for the nine months ended September 30, 2008. The majority of this
increase is related to higher international sales commissions as well as the
resources added with the ILS acquisition. Direct selling, general and
administrative expenses as a percentage of sales increased to 7.3% for the nine
months ended September 30, 2009, from 4.1% for the nine months ended September
30, 2008.
Power
Transmission
Sales for
the Company’s Power Transmission segment decreased to $134.2 million, or 1.5%,
for the nine months ended September 30, 2009, compared to $136.2 million for the
nine months ended September 30, 2008. New unit sales of $104.9 million during
the first nine months of 2009 were up $0.3 million, or 0.3%, compared to $104.6
million during the first nine months of 2008. Repair and service sales of $28.3
million during the first nine months of 2009 were down $3.2 million, or 10.0%,
compared to $31.5 million during the first nine months 2008 as customers
deferred spending on maintenance projects due to poor economic conditions. Sales
from Lufkin RMT contributed $0.9 million during the first nine months of 2009.
Power Transmission backlog at September 30, 2009, decreased to $97.9 million
from $129.3 million at December 31, 2008, primarily from decreased bookings of
new units for the energy-related and marine markets.
Gross
margin for the Power Transmission segment decreased to 29.0% for the
nine months ended September 30, 2009, compared to 30.5% for the nine months
ended September 30, 2008, or 1.5 percentage points. This gross margin decrease
was primarily from the unfavorable impact of lower production levels in
manufacturing and repair on fixed cost coverage.
Direct
selling, general and administrative expenses for Power Transmission increased to
$17.3 million, or 3.5%, for the nine months ended September 30, 2009, from
$16.7 million for the nine months ended September 30, 2008. Direct selling,
general and administrative expenses as a percentage of sales increased to 12.9%
for the nine months ended September 30, 2009, from 12.3% for the nine months
ended September 30, 2008.
Corporate/Other
Corporate
administrative expenses, which are allocated to the segments primarily based on
budgeted sales levels, were $18.3 million for the nine months ended September
30, 2009, a decrease of $0.5 million or 2.5%, from $18.8 million for the nine
months ended September 30, 2008.
Interest
income, interest expense and other income and expense for the nine months ended
September 30, 2009, increased to $1.7 million of income compared to $1.0 million
of income for the nine months ended September 30, 2008, from currency gains
offsetting reduced interest income.
Pension
expense, which is reported as an increase in cost of sales, increased to $7.6
million for the nine months ended September 30, 2009, compared to pension income
of $1.6 million for the nine months ended September 30, 2008. This expense
increase was primarily due to lower expected returns on asset balances and the
amortization of 2008 market losses.
The net
tax rate for the nine months ended September 30, 2009, was 32.6% compared to
34.6% for the nine months ended September 30, 2008. The net tax rate in the
first nine months of 2009 benefitted from adjustments to prior period tax
filings in the U.S., the settlement of the 2006 IRS tax audit and R&E tax
credit estimate adjustments. The tax rate for the balance of 2009 is expected to
be approximately 36.0%.
Due to
the discontinuation of the Trailer segment, certain items previously allocated
to that segment have been reclassified to continuing operations. One adjustment
is related to pension and postretirement charges associated with Trailer
personnel that will continue to be a liability in future years. The other
adjustment is for corporate allocations previously charged to Trailer as these
expenses will continue in the future.
Liquidity
and Capital Resources
The
Company has historically relied on cash flows from operations and third-party
borrowing to finance its operations, including acquisitions, dividend payments
and stock repurchases. 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 repurchases, through December 31, 2009, and the
foreseeable future.
The
Company’s cash balance totaled $102.2 million at September 30, 2009, compared to
$107.8 million at December 31, 2008. For the nine months ended September
30, 2009, net cash provided by operating activities was $87.8 million, net cash
used in investing activities totaled $79.7 million and net cash used in
financing activities amounted to $14.1 million. Significant components of cash
provided by operating activities included net earnings from continuing
operations, adjusted for non-cash expenses, of $37.6 million and a decrease in
working capital of $49.8 million. This working capital decrease was primarily
due to a reduction in trade receivables balances of $65.1 million and inventory
balances of $20.3 million due to sales volumes declines since the fourth quarter
of 2008, partially offset by reductions in accounts payable and accrued
liabilities of $33.5 million. Net cash used in investing activities included net
capital expenditures totaling $26.9 million and the ILS and RMT acquisitions
totaling $51.7 million. Capital expenditures in the first nine months of
2009 were primarily for new facilities to support geographical and product line
expansions in the Oil Field and Power Transmission segments. Capital
expenditures for 2009 are projected to be approximately $40.0 to $45.0 million,
primarily for the new facilities to support geographical and product line
expansions and equipment replacement for efficiency improvements in the Oil
Field and Power Transmission segments and will be funded by operating cash
flows. Significant components of net cash used by financing activities
included dividend payments of $11.1 million, or $0.75, per share and debt
repayments of $3.0 million.
The
Company has a three-year credit facility with a domestic bank (the “Bank
Facility”) consisting of an unsecured revolving line of credit that provides up
to $40.0 million of aggregate borrowing. This Bank Facility expires
on December 31, 2010. Borrowings under the Bank Facility bear interest, at
the Company’s option, at either the greater of (i) the prime rate, (ii) the base
CD rate plus an applicable margin or (iii) the Federal Funds Effective Rate plus
an applicable margin or the London Interbank Offered Rate plus an applicable
margin, depending on certain ratios as defined in the Bank Facility. As of
September 30, 2009, no debt was outstanding under the Bank Facility and the
Company was in compliance with all financial covenants under the terms of the
Bank Facility. Deducting outstanding letters of credit of $17.0 million, $23.0
million of borrowing capacity was available at September 30,
2009. The fair market value of the outstanding debt as of September
30, 2009 is not materially different than its carrying value.
The
Company assumed various notes payable and entered into purchase price hold back
agreements in conjunction with the ILS and RMT acquisitions in 2009. These
obligations will require principal payments of $0.3 million during the fourth
quarter of 2009.
Recently
Issued Accounting Pronouncements
In
December 2008, the Financial Accounting Standards Board amended “Employer’s
Disclosures about Postretirement Benefit Plan Assets” (ASC
715-20-65-2). This amendment expands the disclosure requirements
about postretirement plan assets to include how investment allocations are made,
including the factors that are pertinent to an understanding of investment
policies and strategies, the major categories of plan assets, the input and
valuation techniques used to measure the fair value of plan assets, the effect
of fair value measurements using significant unobservable inputs (Level 3) on
changes in plan assets for the periods and significant concentration of risk
with plan assets. Such required disclosures will be provided in our
annual financial statements for the year ending December 31, 2009. Upon initial
application, the disclosures of ASC 715-20-65-2 are not required for earlier
periods that are presented for comparative purposes.
In May
2009, the Financial Accounting Standards Board issued “Subsequent Events” (ASC
855-10), which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. ASC 855-10 requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date. The Company adopted this Statement in
these interim financial statements. The Company has evaluated
subsequent events through November 9, 2009, which represents the date that the
financial statements were issued.
In
October 2009, the FASB issued an update to existing guidance on revenue
recognition for arrangements with multiple deliverables. This update
will allow companies to allocate consideration received for qualified separate
deliverables using estimated selling price for both delivered and undelivered
items when vendor-specific objective evidence or third-party evidence is
unavailable. Additional disclosures discussing the nature of multiple
element arrangements, the types of deliverables under the arrangements, the
general timing of their delivery, and significant factors and estimates used to
determine estimated selling prices are required. The Company has not
determined the impact on its condensed consolidated financial
statements.
Management
believes the impact of other recently issued standards, which are not yet
effective, will not have a material impact on the Company's consolidated
financial statements upon adoption.
Critical
Accounting Policies and Estimates
The
discussion and analysis of financial condition and results of operations are
based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. The Company evaluates its estimates on an ongoing basis,
based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. The Company
believes the following critical accounting policies affect its more significant
judgments and estimates used in preparation of its consolidated
statements.
The
Company extends credit to customers in the normal course of business. Management
performs ongoing credit evaluations of our customers and adjusts credit limits
based upon payment history and the customer’s current credit worthiness. An
allowance for doubtful accounts has been established to provide for estimated
losses on receivable collections. The balance of this allowance is determined by
regular reviews of outstanding receivables and historical experience. As the
financial condition of customers change, circumstances develop or additional
information becomes available, adjustments to the allowance for doubtful
accounts may be required.
Revenue
is not recognized until it is realized or realizable and earned. The
criteria to meet this guideline are: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price to the
buyer is fixed or determinable and collectibility is reasonably
assured. In some cases, a customer is not able to take delivery of a
completed product and requests that the Company store the product for defined
period of time. The Company will process a Bill-and-Hold invoice and recognize
revenue at the time of the storage request if all of the following criteria are
met:
●
|
The
customer has accepted title and risk of loss;
|
|
The
customer has provided a written purchase order for the
product;
|
|
The
customer, not the Company, requested the product to be stored and to be
invoiced under a Bill-and-Hold arrangement. The customer must also provide
the business purpose for the storage request;
|
|
The
customer must provide a storage period and future shipping
date;
|
|
The
Company must not have retained any future performance obligations on the
product;
|
|
The
Company must segregate the stored product and not make it available to use
on other orders; and
|
|
The
product must be completed and ready for
shipment.
|
The
Company has made significant investments in inventory to service its customers.
On a routine basis, the Company uses estimates in determining the level of
reserves required to state inventory at the lower of cost or market.
Management’s estimates are primarily influenced by market activity levels,
production requirements, the physical condition of products and technological
innovation. Changes in any of these factors may result in adjustments to the
carrying value of inventory. Also, the Company accounts for a significant
portion of its inventory under the LIFO method. The LIFO reserve can be impacted
by changes in the LIFO layers and by inflation index adjustments. Generally,
annual increases in the inflation rate or the FIFO value of inventory cause the
value of the LIFO reserve to increase.
Long-lived
assets held and used by the Company are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company assesses the recoverability of long-lived assets
by determining whether the carrying value can be recovered through projected
undiscounted cash flows, based on expected future operating results. Future
adverse market conditions or poor operating results could result in the
inability to recover the current carrying value and thereby possibly requiring
an impairment charge in the future.
Goodwill
acquired in connection with business combinations represent the excess of
consideration over the fair value of net assets acquired. The Company performs
impairment tests on the carrying value of goodwill at least annually or whenever
events or changes in circumstances indicate the carrying value of goodwill may
be greater than fair value, such as significant underperformance relative to
historical or projected operating results and significant negative industry or
economic trends. The Company’s fair value is primarily determined using
discounted cash flows, which requires management to make judgments about future
operating results, working capital requirements and capital spending levels.
Changes in cash flow assumptions or other factors which negatively impact the
fair value of the operations would influence the evaluation and may result in a
determination that goodwill is impaired and a corresponding impairment
charge.
The
Company adopted ASC 740-10, “Accounting for Uncertainty in Income Taxes”, on
January 1, 2007. ASC 740-10 clarifies the accounting for
uncertainty in income taxes by prescribing a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The application of
income tax law is inherently complex. The Company is required to determine if an
income tax position meets the criteria of more-likely-than-not to be realized
based on the merits of the position under tax laws, in order to recognize an
income tax benefit. This requires the Company to make many assumptions and
judgments regarding merits of income tax positions and the application of income
tax law. Additionally, if a tax position meets the recognition criteria of
more-likely-than-not the Company is required to make judgments and assumptions
to measure the amount of the tax benefits to recognize based on the probability
of the amount of tax benefits that would be realized if the tax position was
challenged by the taxing authorities. Interpretations and guidance surrounding
income tax laws and regulations change over time. As a consequence, changes in
assumptions and judgments can materially affect amounts recognized in the
consolidated financial statements.
Deferred
tax assets and liabilities are recognized for the differences between the book
basis and tax basis of the net assets of the Company. In providing for deferred
taxes, management considers current tax regulations, estimates of future taxable
income and available tax planning strategies. Changes in state, federal and
foreign tax laws as well as changes in the financial position of the Company
could also affect the carrying value of deferred tax assets and liabilities. If
management estimates that it is more likely than not that some or all of any
deferred tax assets will expire before realization or that the future
deductibility is not more likely-than-not, a valuation allowance would be
recorded.
The
Company is subject to claims and legal actions in the ordinary course of
business. The Company maintains insurance coverage for various aspects of its
businesses and operations. The Company retains a portion of the insured losses
that occur through the use of deductibles. Management regularly reviews
estimates of reported and unreported insured and non-insured claims and legal
actions and provides for losses through reserves. As circumstances develop and
additional information becomes available, adjustments to loss reserves may be
required.
The
Company sells certain of its products to customers with a product warranty that
provides repairs at no cost to the customer or the issuance of credit to the
customer. The length of the warranty term depends on the product being sold, but
ranges from one year to five years. The Company accrues its estimated exposure
to warranty claims based upon historical warranty claim costs as a percentage of
sales multiplied by prior sales still under warranty at the end of any period.
Management reviews these estimates on a regular basis and adjusts the warranty
provisions as actual experience differs from historical estimates or other
information becomes available.
The
Company offers defined benefit plans and other benefits upon the retirement of
its employees. Assets and liabilities associated with these benefits are
calculated by third-party actuaries under the rules provided by various
accounting standards, with certain estimates provided by management. These
estimates include the discount rate, expected rate of return of assets and the
rate of increase of compensation and health claims. On a regular basis,
management reviews these estimates by comparing them to actual experience and
those used by other companies. If a change in an estimate is made, the carrying
value of these assets and liabilities may have to be adjusted. The impact of
changes in these estimates could cause significant fluctuations in these
balances.
Forward-Looking Statements and
Assumptions
This
quarterly report on Form 10-Q contains forward-looking statements and
information, within the meaning of the Private Securities Litigation Reform Act
of 1995, 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,” “plan,” “schedule,”
“could,” “may,” “might,” “should,” “project” or similar expressions are intended
to identify forward-looking statements. Similarly, statements that describe the
Company’s future plans, objectives or goals are also 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. Undue reliance should not be place
on forward-looking statements. These risks and uncertainties include, but are
not limited to:
|
oil
price volatility;
|
|
declines
in domestic and worldwide oil and gas drilling;
|
|
capital
spending levels of oil producers;
|
|
availability
and prices for raw materials;
|
|
the
inherent dangers and complexities of our operations;
|
|
uninsured
judgments or a rise in insurance premiums;
|
|
the
inability to effectively integrate acquisitions;
|
|
labor
disruptions and increasing labor costs;
|
|
the
availability of qualified and skilled labor;
|
|
disruption
of our operating facilities or management information
systems;
|
|
the
impact on foreign operations of war, political disruption, civil
disturbance, economic and legal sanctions and changes in global trade
policies;
|
|
currency
exchange rate fluctuations in the markets in which the Company
operates;
|
|
changes
in the laws, regulations, policies or other activities of governments,
agencies and similar organizations where such actions may affect the
production, licensing, distribution or sale of the Company’s products, the
cost thereof or applicable tax rates;
|
|
costs
related to legal and administrative proceedings, including adverse
judgments against the Company if the Company fails to prevail in reversing
such judgments; and
|
|
general
industry, political and economic conditions in the markets where the
Company procures material, components and supplies for the production of
the Company’s principal products or where the Company’s products are
produced, distributed or sold.
|
Additional
information about risks and uncertainties that could cause actual results to
differ materially from forward-looking statements is contained in Part I, Item
1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008. All forward-looking statements attributable to the
Company or persons acting on the Company’s behalf are expressly qualified in
their entirety by these factors. 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 forward-looking statements included in this report
are only made as of the date of this report and, except as required by
securities laws, the Company disclaims any obligation to publicly update
forward-looking statements to reflect subsequent events or
circumstances.
Item 3.
Quantitative and Qualitative
Disclosures About Market Risk.
The
Company’s financial instruments include cash, accounts receivable, accounts
payable, invested funds 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’s accounts receivable are not concentrated in one
customer and are not viewed as an unusual credit risk.
The
Company does not utilize financial or derivative instruments for trading
purposes or to hedge exposures to interest rates, foreign currency rates or
commodity prices. Due to the lack of current debt, the Company does not have any
significant exposure to interest rate fluctuations. However, if the Company drew
on its line of credit under its Bank Facility, the Company would have exposure
since the interest rate is variable. In addition, the Company primarily invoices
and purchases in the same currency as the functional currency of its operations,
which minimizes exposure to currency rate fluctuations.
The
Company uses large amounts of steel, iron and electricity in the manufacture of
its products. The price of these raw materials has a significant
impact on the cost of producing products. Steel prices increased
significantly between 2004 and 2008 caused primarily by higher energy prices and
increased global demand. In 2009 the Company has seen a reduction in
steel prices but currently estimates that prices will increase in
2010. Since most of the Company’s suppliers are not currently parties
to long-term contracts with us, the Company is vulnerable to fluctuations in
prices of such raw materials. Factors such as supply and demand,
freight costs and transportation availability, inventory levels of brokers and
dealers, the level of imports and general economic conditions may affect the
price of cast iron and steel. Raw material prices may increase significantly in
the future. Certain items such as steel round, bearings and aluminum
have continued to experience price increases, price volatility and longer lead
times. If the Company is unable to pass future raw material price increases on
to its customers, margins, results of operations, cash flow and financial
condition could be adversely affected.
The
Company is exposed to currency fluctuations with debt denominated in U.S.
dollars owed to the Company’s U.S. entity by its French and Canadian entities.
As of September 30, 2009, this inter-company debt was comprised of 0.1 million
euros and $9.0 million Canadian dollars. As of September 30, 2009, if the U.S.
dollar strengthened by 10% over these currencies, the net income impact would be
$0.6 million of expense and if the U.S. dollar weakened by 10% over these
currencies, the net income impact would be $0.6 million of income. Also, certain
assets and liabilities, primarily employee and tax related, denominated in the
local currency of foreign operations whose functional currency is the U.S.
dollar are exposed to fluctuations in currency rates. As of September 30, 2009,
if the U.S. dollar strengthened by 10% over these currencies, the net income
impact would be $0.1 million of income.
Item 4.
Controls and
Procedures.
Based on
their evaluation of the Company’s disclosure controls and procedures as of
September 30, 2009, the Chief Executive Officer of the Company, John F. Glick,
and the Chief Financial Officer of the Company, Christopher L. Boone, have
concluded that the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act
of 1934) are effective to ensure that information required to be disclosed in
reports that the Company files or submits under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and effective to ensure that information required to be
disclosed in such reports is accumulated and communicated to the Company’s
management, including the Company’s principal executive officer and principal
financial officer, to allow timely decisions regarding disclosure.
There
were no changes in the Company’s internal control over financial reporting that
occurred during the quarter ended September 30, 2009, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II- OTHER INFORMATION
Item 1.
Legal
Proceedings
.
On March
7, 1997, a class action complaint was filed against Lufkin Industries, Inc. (the
“Company”) in the U.S. District Court for the Eastern District of Texas by an
employee and a former employee of the Company who alleged race discrimination in
employment. Certification hearings were conducted in Beaumont, Texas in February
1998 and in Lufkin, Texas in August 1998. In April 1999, the District Court
issued a decision that certified a class for this case, which included all black
employees employed by the Company from March 6, 1994, to the present. The case
was administratively closed from 2001 to 2003 while the parties unsuccessfully
attempted mediation. Trial for this case began in December 2003, and after the
close of plaintiff’s evidence, the court adjourned and did not complete the
trial until October 2004. Although plaintiff’s class certification encompassed a
wide variety of employment practices, plaintiffs presented only disparate impact
claims relating to discrimination in initial assignments and promotions at
trial.
On
January 13, 2005, the District Court entered its decision finding that the
Company discriminated against African-American employees in initial assignments
and promotions. The District Court also concluded that the discrimination
resulted in a shortfall in income for those employees and ordered that the
Company pay those employees back pay to remedy such shortfall, together with
pre-judgment interest in the amount of 5%. On August 29, 2005, the District
Court determined that the back pay award for the class of affected employees was
$3.4 million (including interest to January 1, 2005) and provided a formula for
attorney fees that the Company estimates will result in a total not to exceed
$2.5 million. In addition to back pay with interest, the District Court (i)
enjoined and ordered the Company to cease and desist all racially biased
assignment and promotion practices and (ii) ordered the Company to pay court
costs and expenses.
The
Company reviewed this decision with its outside counsel and on September 19,
2005, appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
On April 3, 2007, the Company appeared before the appellate court in New Orleans
for oral argument in this case. The appellate court subsequently issued a
decision on Friday, February 29, 2008 that reversed and vacated the plaintiff’s
claim regarding the initial assignment of black employees into the Foundry
Division. The court also denied plaintiff’s appeal for class certification of a
class disparate treatment claim. Plaintiff’s claim on the issue of the Company’s
promotional practices was affirmed but the back pay award was vacated and
remanded for recomputation in accordance with the opinion. The
District Court’s injunction was vacated and remanded with instructions to enter
appropriate and specific injunctive relief. Finally, the issue of plaintiff’s
attorney’s fees was remanded to the District Court for further consideration in
accordance with prevailing authority.
On
December 5, 2008, the U.S. District Court Judge Clark held a hearing in
Beaumont, Texas during which he reviewed the 5
th
U.S.
Circuit Court of Appeals class action decision and informed the parties that he
intended to implement the decision in order to conclude this litigation. At the
conclusion of the hearing Judge Clark ordered the parties to submit positions
regarding the issues of attorney fees, a damage award and injunctive relief.
Subsequently, the Company reviewed the plaintiff’s submissions which described
the formula and underlying assumptions that supported their positions on
attorney fees and damages. After careful review of the plaintiff’s submission to
the court the Company continued to have significant differences regarding legal
issues that materially impacted the plaintiff’s requests. As a result of these
different results, the court requested further evidence from the parties
regarding their positions in order to render a final decision. The
judge reviewed both parties arguments regarding legal fees, and awarded the
plaintiffs an interim fee, but at a reduced level from the plaintiffs original
request. The Company and the plaintiffs reconciled the majority of the
differences and the damage calculations which also lowered the originally
requested amounts of the plaintiffs on those matters. Due to the
resolution of certain legal proceedings on damages during first half of 2009 and
the District Court awarding the plaintiffs an interim award of attorney fees and
cost totaling $5.8 million, the Company recorded an additional provision of $5.0
million in the first half of 2009 above the $6.0 million recorded in fourth
quarter of 2008. The plaintiffs have filed an appeal of the District Court’s
interim award of attorney fees with the U.S. Fifth Circuit Court of Appeals. The
Company has filed a cross-appeal on the attorney fee issue. The Fifth
Circuit subsequently dismissed these appeals on August 28, 2009 on the basis
that an appealable final judgment in this case had not been
issued. The court commented that this issue can be reviewed with an
appeal of final judgment. On June 19, 2009, the District Court issued
a damage award in favor of the plaintiffs totaling $3.1 million for the period
2004 through 2007 plus annual interest 5%. The Company estimates that the total
damage award will be $5.0 million and, as a result, in the second quarter of
2009, the Company increased its damage provision in this case by an additional
$2.0 million which represents the Company’s best estimate of its ultimate
exposure.
Additionally,
during the first quarter of 2009, the court appointed an industrial expert to
review the Company’s promotional policies and practices and prepare a report for
the court which would contain recommendations for injunctive relief in this
case. The Company anticipates the District Court’s injunctive relief award by
the end of the fourth quarter of 2009.
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. For certain of these claims, the Company maintains insurance
coverage while retaining a portion of the losses that occur through the use of
deductibles and retention limits. Amounts in excess of the
self-insured retention levels are fully insured to limits believed appropriate
for the Company’s operations. Self-insurance accruals are based on
claims filed and an estimate for claims incurred but not
reported. While the Company does maintain insurance above its
self-insured levels, a decline in the financial condition of its insurer, while
not currently anticipated, could result in the Company recording additional
liabilities. It is management’s opinion that the Company’s liability
under such circumstances or involving any other non-insured claims or legal
proceedings would not materially affect its consolidated financial position,
results of operations, or cash flow.
Item
1A. Risks Factors.
In
addition to other information set forth in this quarterly report, the factors
discussed in Part I, Item 1A. “Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2008, which could materially affect
the Company's business, financial condition and/or operating results, should be
carefully considered. The risks described in the Company's Annual Report on Form
10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known to the Company or that it currently deems to
be immaterial also may materially adversely affect the Company's business,
financial condition and/or operating results.
Item
6. Exhibits.
***3.1
|
|
Fourth
Restated Articles of Incorporation, as amended (incorporated by reference
to Exhibit 4.1 to the
Company's
registration statement on Form S-8 filed on February 17, 2004 (SEC File
No. 333-112890)).
|
|
|
|
***3.2
|
|
Articles
of Amendment to Fourth Restated Articles of Incorporation (incorporated by
reference to Exhibit
3.1
to the Company's current report on Form 8-K filed on December 10, 1999
(File No. 0-02612)).
|
|
|
|
***3.3
|
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the
Company's current report
on
Form 8-K filed on October 9, 2007 (File No.
0-02612)).
|
|
|
|
*31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
|
|
|
|
*31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
|
|
|
|
**32.1
|
|
Section
1350 Certification of Chief Executive Officer.
|
|
|
|
**32.2
|
|
Section
1350 Certification of Chief Financial
Officer.
|
* Filed
herewith
** Furnished
herewith
***
Incorporated by reference
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.
Date: November
9, 2009
LUFKIN
INDUSTRIES, INC.
By:
/s/ Christopher L.
Boone
Christopher L. Boone
Signing on behalf of the registrant and
as
Vice President/Treasurer/Chief
Financial Officer
(Principal Financial and Accounting
Officer)
INDEX
TO EXHIBITS
***3.1
|
|
Fourth
Restated Articles of Incorporation, as amended (incorporated by reference
to Exhibit 4.1 to the
Company's
registration statement on Form S-8 filed on February 17, 2004 (SEC File
No. 333-112890)).
|
|
|
|
***3.2
|
|
Articles
of Amendment to Fourth Restated Articles of Incorporation (incorporated by
reference to Exhibit
3.1
to the Company's current report on Form 8-K filed on December 10, 1999
(File No. 0-02612)).
|
|
|
|
***3.3
|
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the
Company's current report
on
Form 8-K filed on October 9, 2007 (File No.
0-02612)).
|
|
|
|
*31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
|
|
|
|
*31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
|
|
|
|
**32.1
|
|
Section
1350 Certification of Chief Executive Officer.
|
|
|
|
**32.2
|
|
Section
1350 Certification of Chief Financial
Officer.
|
* Filed
herewith
** Furnished
herewith
***
Incorporated by reference