Lufkin Industries 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended June 30, 2010
For the transition period from _______ to _______
Commission File Number: 0-02612
LUFKIN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
(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 29,961,074 shares of Common Stock, $1.00 par value per share, outstanding as of August 2, 2010.
The purpose of this Amendment No. 1 to Quarterly Report on Form 10-Q of Lufkin Industries, Inc. for the period ended June 30, 2010, as filed with the Securities and Exchange Commission on August 5, 2010, is to furnish Exhibit 101 to the Form 10-Q as required by Rule 405 of Regulation S-T. Exhibit 101 to this report, which was furnished, in an unreadable format, with the original filing of our Form 10-Q on August 5, 2010, provides the following items from our Form 10-Q formatted in Extensible Business Reporting Language (XBRL): (i) our unaudited Consolidated Statements of Income; (ii) our unaudited Consolidated Balance Sheets; (iii) our unaudited Consolidated Statements of Cash Flows; and (iv) the notes to our unaudited Consolidated Financial Statements, tagged as blocks of text.
Users of this data are advised that pursuant to Rule 406T of Regulation S-T, the XBRL interactive data files furnished as Exhibit 101 to this Quarterly Report shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. No other changes have been made to the original Form 10-Q other than those described above. This Amendment No. 1 does not reflect subsequent events occurring after the original filing date of the Form 10-Q or modify or update in any way disclosures made in the Form 10-Q.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.>
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2009. The results of operations for the three and six months ended June 30, 2010, are not necessarily indicative of the results that may be expected for the full fiscal year.
In June 2010, the Company’s Board of Directors approved a 2-for-1 stock dividend to be effected by issuing one additional share of common stock for every outstanding share of common stock. The additional shares were distributed on June 1, 2010 to stockholders of record at the close of business on May 19, 2010. All prior period shares outstanding, earnings per share and prices per share have been adjusted to reflect the stock dividend.
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 does not have an unusual credit risk or concentration risk.
2. Recently Issued Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605): Multiple – Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force, which changes the accounting for certain revenue arrangements. The new requirements change the allocation methods used in determining how to account for multiple payment streams and will result in the ability to separately account for more deliverables, and potentially less revenue deferrals. Additionally, ASU 2009-13 requires enhanced disclosures in financial statements. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010 on a prospective basis, with early application permitted. The Company is currently evaluating the impact ASU 2009-13 will have on its 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.
On March 1, 2009 the Company acquired International Lift Systems (“ILS”), a Louisiana limited partnership. As a result of this acquisition, the Company 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 was paid 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 June 30, 2010, the liabilities for these hold back payments were included in the accrued liabilities and other liabilities section of the condensed consolidated balance sheet.
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. During the second quarter of 2010, the Company made a one-time payment of $0.3 million, as a result of the final valuation of working capital at the time of the acquisition.
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):
The following is a summary of the Company’s receivable balances (in thousands of dollars):
Bad debt expense related to receivables for the three and six months ended June 30, 2010, resulted in a $0.1 million and $0.2 million recovery of receivables charged to bad debt expense in prior periods. Bad debt expense related to receivables was negligible for the three and six months ended June 30, 2009.
Inventories used in determining cost of sales were as follows (in thousands of dollars):
Gross inventories on a FIFO basis before adjustments for reserves shown above that were accounted for on a LIFO basis were $82.5 million and $76.7 million at June 30, 2010, and December 31, 2009, respectively.
7. Property, Plant & Equipment
The following is a summary of the Company's property, plant and equipment balances (in thousands of dollars):
Depreciation expense related to property, plant and equipment was $4.8 million and $4.3 million for the three months ended June 30, 2010 and 2009, respectively, and was $9.4 million and $8.1 million for the six months ended June 30, 2010 and 2009, respectively.
8. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill during the six months ended June 30, 2010, are as follows (in thousands of dollars):
Goodwill impairment tests were performed in the fourth quarter of 2009 and no impairment losses were recorded.
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):
Amortization expense of intangible assets was approximately $0.4 million and $0.5 million for the three months ended June 30, 2010 and 2009, respectively, and was $0.8 million and $0.5 million for the six months ended June 30, 2010 and 2009, respectively. Expected amortization expense by year is (in thousands of dollars):
9. Other Current Accrued Liabilities
The following is a summary of the Company's other current accrued liabilities balances (in thousands of dollars):
The following is a summary of the Company's outstanding debt balances (in thousands of dollars):
Principal payments of long-term debt by year are as follows (in thousands of dollars):
The Company’s current debt at June 30, 2010 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 June 30, 2011.
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 June 30, 2010, the Company has secured letters of credit for $0.8 million and the remaining $1.4 million is secured by collateral consisting of equipment, inventory, and accounts receivable. The fair market value of the outstanding debt as of June 30, 2010 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 on March 1, 2009. 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 on July 1, 2009.
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 June 30, 2010, 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 $14.9 million, $25.1 million of borrowing capacity was available at June 30, 2010. The fair market value of the outstanding debt as of June 30, 2010 is not materially different than its carrying value.
11. Retirement Benefits
The Company has a qualified noncontributory pension plan covering substantially all U.S. employees. The benefits provided by this plan are measured by length of service, compensation and other factors, and are currently funded by trusts established under the plan. Funding of retirement costs for this plan 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 Condensed 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 June 30, 2010. 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 $0.9 million and $0.9 million in the three months ended June 30, 2010 and 2009, respectively, and $1.9 million and $1.7 million in the six months ended June 30, 2010 and 2009, respectively. The liability for the non-qualified deferred defined contribution plan is included in "Other current accrued liabilities" in the Condensed Consolidated Balance Sheet.
Components of Net Periodic Benefit Cost (in thousands of dollars)
The Company previously disclosed in its consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, that it expected to make contributions of $5.4 million to its pension plans in 2010. The Company also disclosed that it expected to make contributions of $0.6 million to be made to its postretirement plan in 2010. As of June 30, 2010, the Company had made contributions of $0.5 million to its pension plans and $0.3 million to its postretirement plan. The Company presently anticipates making additional contributions of $0.2 million to its pension plans and $0.3 million to its postretirement plan during the remainder of 2010. Due to favorable asset returns in 2009, the originally forecasted pension funding is not required in 2010.
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 5th 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 filed an appeal of the District Court’s interim award of attorney fees with the U.S. Fifth Circuit Court of Appeals. 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 January 15, 2010, the U.S. District Court for the Eastern District of Texas notified the Company that it had entered a final judgment related to the Company’s ongoing class-action lawsuit. The Court ordered the Company to pay the plaintiffs $3.3 million in damages, $2.2 million in pre-judgment interest and 0.41% interest for any post-judgment interest. The Company had previously estimated the total liability for damages and interest to be approximately $5.2 million. The Court also ordered the plaintiffs to submit a request for legal fees and expenses from January 1, 2009 through the date of the final judgment. On January 29, 2010, the plaintiffs filed a motion with the U.S. District Court for the Eastern District of Texas for a supplemental award of $0.7 million for attorney’s fees, costs and expenses incurred between January 1, 2009 and January 15, 2010, as allowed in the final judgment issued by the Court on January 15, 2010, related to the Company’s ongoing class-action lawsuit. The Company recorded provisions for these judgments in 2009.
On January 15, 2010, the plaintiffs filed a notice of appeal with the U.S. Fifth Circuit Court of Appeals of the District Court’s final judgment. On January 21, 2010, The Company filed a notice of cross-appeal with the same court. In addition, the Company filed a motion with the District Court to stay the payment of damages referenced in the District Court’s final judgment pending the outcome of the Fifth Circuit’s decision on both parties’ appeals. The District Court granted this motion to stay.
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):
Accumulated other comprehensive income (loss) in the consolidated balance sheet consists of the following (in thousands of dollars):
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 six months ended June 30, 2010 and 2009, are illustrated below:
Weighted options to purchase a total of 87,000 and 1,007,528 shares of the Company’s common stock for the three months ended June 30, 2010 and 2009, respectively, and 86,575 and 1,001,656 shares of the Company’s common stock for the six months ended June 30, 2010 and 2009, 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 two stock compensation plans. 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 six months ended June 30, 2010 and 2009 (in thousands of dollars):
The fair value of each option grant during the first six months of 2010 and 2009 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
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, the terms of which were equivalent to the expected life of the stock option.
A summary of stock option activity under the plans during the six months ended June 30, 2010, is presented below:
As of June 30, 2010, there was $4.4 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 2.6 years. The intrinsic value of stock options exercised in the first six months of 2010 was $3.3 million.
16. Uncertain Tax Positions
As of December 31, 2009, the Company had approximately $1.5 million of total gross unrecognized tax benefits. If these benefits were recognized, they would favorably affect the net effective income tax rate in any future period. As of June 30, 2010, the Company had approximately $1.6 million of total gross unrecognized tax benefits. If recognized, these benefits 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:
The Company has effectively settled the 2007 and 2008 exams in France for all tax positions with the exception of the research and development tax credit. The Company is in appeals with the tax authorities in France regarding the research and development credit and it is reasonably possible that the amount of the unrecognized tax benefits will decrease within the next twelve months. The estimated decrease is $0.1 million.
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, 2009. Negligible interest and penalties were recognized during the three and six months ended June 30, 2010 and 2009, 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, 2009. The following is a summary of key segment information (in thousands of dollars):