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Lufkin Industries 10-Q 2010

Documents found in this filing:

  1. 10-Q/A
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q/A
AMENDMENT 1


 
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

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 29,961,074 shares of Common Stock, $1.00 par value per share, outstanding as of August 2, 2010.
 
Explanatory Note
 
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

 
LUFKIN INDUSTRIES, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
   
(Thousands of dollars, except share and per share data)
           
   
June 30,
   
December 31,
 
Assets
 
2010
   
2009
 
Current Assets:
           
Cash and cash equivalents
  $ 91,075     $ 100,858  
Receivables, net
    99,964       92,506  
Income tax receivable
    4,063       4,303  
Inventories
    117,381       110,605  
Deferred income tax assets
    6,021       5,198  
Other current assets
    5,387       4,351  
Current assets from discontinued operations
    802       811  
Total current assets
    324,693       318,632  
                 
Property, plant and equipment, net
    179,990       159,770  
Goodwill, net
    44,978       45,001  
Other assets, net
    16,900       18,187  
Total assets
  $ 566,561     $ 541,590  
                 
Liabilities and Shareholders' Equity
               
                 
Current liabilities:
               
Accounts payable
  $ 28,049     $ 19,993  
Current portion of long-term debt
    1,417       1,372  
Accrued liabilities:
               
Payroll and benefits
    11,847       9,568  
Warranty expenses
    4,059       4,220  
Taxes payable
    5,050       4,562  
Other
    25,065       24,147  
Current liabilities from discontinued operations
    988       1,026  
Total current liabilities
    76,475       64,888  
                 
Long-term debt
    800       1,516  
Deferred income tax liabilities
    13,558       10,950  
Postretirement benefits
    5,939       7,874  
Other liabilities
    17,494       20,647  
Commitments and contingencies
    -       -  
Long-term liabilities from discontinued operations
    37       37  
                 
Shareholders' equity:
               
                 
Common stock, $1.00 par value per share; 60,000,000 shares authorized; 31,797,411 and 31,617,176 shares issued and outstanding, respectively
    31,797       31,618  
Capital in excess par
    62,829       54,699  
Retained earnings
    431,013       421,908  
Treasury stock, 1,836,336 and 1,862,336 shares, respectively, at cost
    (35,352 )     (34,621 )
Accumulated other comprehensive loss
    (38,029 )     (37,926 )
Total shareholders' equity
    452,258       435,678  
Total liabilities and shareholders' equity
  $ 566,561     $ 541,590  
                 
See notes to condensed 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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Sales
  $ 152,847     $ 123,739     $ 279,969     $ 276,877  
                                 
Cost of sales
    115,507       96,743       214,006       215,698  
                                 
Gross profit
    37,340       26,996       65,963       61,179  
                                 
Selling, general and administrative expenses
    20,313       18,593       39,641       37,023  
Litigation reserve
    -       2,000       -       5,000  
                                 
Operating income
    17,027       6,403       26,322       19,156  
                                 
Interest income
    26       28       31       888  
Interest expense
    (120 )     (174 )     (271 )     (301 )
Other (expense) income, net
    (367 )     821       (146 )     628  
                                 
Earnings from continuing operations before income tax provision and discontinued operations
    16,566       7,078       25,936       20,371  
                                 
Income tax provision
    5,964       2,344       9,337       6,537  
                                 
Earnings from continuing operations before discontinued operations
    10,602       4,734       16,599       13,834  
                                 
Loss from discontinued operations, net of tax
    (11 )     (237 )     (16 )     (359 )
                                 
Net earnings
  $ 10,591     $ 4,497     $ 16,583     $ 13,475  
                                 
Basic earnings per share:
                               
                                 
Earnings from continuing operations
  $ 0.35     $ 0.16     $ 0.56     $ 0.47  
Loss from discontinued operations
    -       (0.01 )     -       (0.01 )
                                 
Net earnings
  $ 0.35     $ 0.15     $ 0.56     $ 0.46  
                                 
Diluted earnings per share:
                               
                                 
Earnings from continuing operations
  $ 0.35     $ 0.16     $ 0.55     $ 0.47  
Loss from discontinued operations
    -       (0.01 )     -       (0.01 )
                                 
Net earnings
  $ 0.35     $ 0.15     $ 0.55     $ 0.46  
                                 
                                 
Dividends per share
  $ 0.125     $ 0.125     $ 0.25     $ 0.25  
                                 
See notes to condensed consolidated financial statements.

 
 
 
 

LUFKIN INDUSTRIES INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(In thousands of dollars)
 
             
   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Cash flows form operating activities:
           
Net earnings
  $ 16,583     $ 13,475  
Adjustments to reconcile net earnings to cash provided by operating activities:
         
Depreciation and amortization
    10,248       8,620  
(Recovery of) provision for losses on receivables
    (177 )     19  
LIFO expense (income)
    437       (217 )
Deferred income tax benefit
    (778 )     (1,435 )
Excess tax benefit from share-based compensation
    (584 )     (2 )
Share-based compensation expense
    1,924       953  
Pension expense
    3,930       5,099  
Postretirement obligation
    199       142  
(Gain) loss on disposition of property, plant and equipment
    (270 )     267  
Loss from discontinued operations
    16       359  
Changes in:
               
Receivables, net
    (8,618 )     55,199  
Income tax receivable
    224       (494 )
Inventories
    (9,693 )     7,592  
Other current assets
    (2,184 )     (1,674 )
Accounts payable
    8,617       (20,221 )
Accrued liabilities
    7,191       (17,674 )
Net cash provided by continuing operations
    27,065       50,008  
Net cash used in discontinued operations
    -       -  
Net cash provided by operating activities
    27,065       50,008  
                 
Cash flows from investing activites:
               
Additions to property, plant and equipment
    (32,024 )     (16,880 )
Proceeds from disposition of property, plant and equipment
    387       119  
Decrease (increase) in other assets
    398       (475 )
Acquisition of other companies
    (1,842 )     (45,500 )
Net cash used in continuing operations
    (33,081 )     (62,736 )
Net cash provided by discontinued operations
    -       -  
Net cash used in investing activities
    (33,081 )     (62,736 )
                 
Cash flows from financing activites:
               
Payments of notes payable
    (672 )     (1,211 )
Dividends paid
    (7,478 )     (7,430 )
Excess tax benefit from share-based compensation
    584       2  
Proceeds from exercise of stock options
    4,412       7  
Refund of prior treasury stock purchases
    -       11  
Net cash used in financing activities
    (3,154 )     (8,621 )
                 
Effect of translation on cash and cash equivalents
    (613 )     (128 )
                 
Net decrease in cash and cash equivalents
    (9,783 )     (21,477 )
                 
Cash and cash equivalents at beginning of period
    100,858       107,756  
                 
Cash and cash equivalents at end of period
  $ 91,075     $ 86,279  
                 
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, 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.

3. Acquisitions
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):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Sales
  $ -     $ 1     $ 1     $ 36  
                                 
Loss before income tax provision
    (17 )     (365 )     (25 )     (552 )
                                 
Income tax benefit
    6       128       9       193  
                                 
Loss from discontinued operations, net of tax
  $ (11 )   $ (237 )   $ (16 )   $ (359 )
                                 

   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Receivables, net
  $ -     $ 17  
Income tax receivable
    456       302  
Deferred income tax assets
    346       492  
                 
Current assets from discontinued operations
    802       811  
                 
Total assets from discontinued operations
  $ 802     $ 811  
                 

Accounts payable
  $ -     $ 10  
Accrued liabilities:
               
Payroll and benefits
    73       70  
Warranty expenses
    209       240  
Other
    706       706  
                 
Current liabilities from discontinued operations
    988       1,026  
                 
Long-term liabilities
    37       37  
                 
Total liabilities from discontinued operations
  $ 1,025     $ 1,063  
                 
5. Receivables
The following is a summary of the Company’s receivable balances (in thousands of dollars):
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Accounts receivable
  $ 96,813     $ 87,497  
Notes receivable
    31       482  
Other receivables
    3,379       4,767  
Gross receivables
    100,223       92,746  
                 
Allowance for doubtful accounts receivable
    (259 )     (240 )
Net receivables
  $ 99,964     $ 92,506  
                 
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.
 
6. Inventories
Inventories used in determining cost of sales were as follows (in thousands of dollars):

   
June 30,
   
December 31,
 
   
2010
   
2009
 
Gross inventories @ FIFO:
           
Finished goods
  $ 7,001     $ 7,545  
Work in progress
    24,883       21,435  
Raw materials & component parts
    104,497       100,347  
Maintenance, tooling & supplies
    13,850       13,882  
Total gross inventories @ FIFO
    150,231       143,209  
Less reserves:
               
LIFO
    30,398       29,961  
Valuation
    2,452       2,643  
Total inventories as reported
  $ 117,381     $ 110,605  
                 
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):

   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Land
  $ 19,685     $ 6,735  
Land improvements
    10,379       10,146  
Buildings
    98,653       92,467  
Machinery and equipment
    269,171       265,958  
Furniture and fixtures
    6,363       5,985  
Computer equipment and software
    18,281       15,388  
Total property, plant and equipment
    422,532       396,679  
Less accumulated depreciation
    (242,542 )     (236,909 )
Total property, plant and equipment, net
  $ 179,990     $ 159,770  
                 
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

Goodwill
 
The changes in the carrying amount of goodwill during the six months ended June 30, 2010, are as follows (in thousands of dollars):

         
Power
       
   
Oil Field
   
Transmission
   
Total
 
                   
Balance as of 12/31/09
  $ 38,018     $ 6,983     $ 45,001  
                         
Final purchase price adjustment
    11       331       342  
Foreign currency translation
    (1 )     (364 )     (365 )
Balance as of 6/30/10
  $ 38,028     $ 6,950     $ 44,978  
                         
Goodwill impairment tests were performed in the fourth 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
 
   
June 30, 2010
   
Average
 
   
Gross
               
Amortization
 
   
Carrying
   
Accumulated
         
Period
 
   
Amount
   
Amortization
   
Net
   
(years)
 
                         
Non-compete agreements and trademarks
  $ 2,064     $ 434     $ 1,630       7.2  
Customer relationships and contracts
    13,216       1,704       11,512       10.0  
                                 
    $ 15,280     $ 2,138     $ 13,142       8.0  
                                 

                     
Weighted
 
   
December 31, 2009
   
Average
 
   
Gross
               
Amortization
 
   
Carrying
   
Accumulated
         
Period
 
   
Amount
   
Amortization
   
Net
   
(years)
 
                         
Non-compete agreements and trademarks
  $ 2,064     $ 258     $ 1,806       7.2  
Customer relationships and contracts
    13,216       1,043       12,173       10.0  
                                 
    $ 15,280     $ 1,301     $ 13,979       8.0  
                                 
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):

For the year ended 12/31/11
  $ 1,672  
For the year ended 12/31/12
    1,573  
For the year ended 12/31/13
    1,553  
For the year ended 12/31/14
    1,441  
For the year ended 12/31/15
    1,416  
Thereafter
  $ 4,651  

9. Other Current Accrued Liabilities
The following is a summary of the Company's other current accrued liabilities balances (in thousands of dollars):

   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Customer prepayments
  $ 9,455     $ 7,945  
Litigation reserves
    6,187       6,637  
Deferred compensation plans
    5,532       5,500  
Accrued professional services
    665       548  
Hold back consideration
    1,540       1,605  
Other accrued liabilities
    1,686       1,912  
Total other current accrued liabilities
  $ 25,065     $ 24,147  
                 
10. Debt

The following is a summary of the Company's outstanding debt balances (in thousands of dollars):

   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Long-term notes payable
  $ 2,217     $ 2,888  
                 
Less current portion of long-term debt
    (1,417 )     (1,372 )
                 
Long-term debt
  $ 800     $ 1,516  
                 
Principal payments of long-term debt by year are as follows (in thousands of dollars):

2011
  $ 800  
         
Total
  $ 800  
         
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)

   
Pension Benefits
   
Other Benefits
 
Three Months Ended June 30,
 
2010
   
2009
   
2010
   
2009
 
                         
Service cost
  $ 1,239     $ 1,658     $ (3 )   $ 46  
Interest cost
    2,846       2,957       68       137  
Expected return on plan assets
    (3,233 )     (3,160 )     -       -  
Amortization of prior service cost
    197       225       13       30  
Amortization of unrecognized net loss (gain)
    628       1,414       (111 )     (47 )
Net periodic benefit cost (income)
  $ 1,677     $ 3,094     $ (33 )   $ 166  
                                 

   
Pension Benefits
   
Other Benefits
 
Six Months Ended June 30,
 
2010
   
2009
   
2010
   
2009
 
                         
Service cost
  $ 2,828     $ 2,814     $ 46     $ 86  
Interest cost
    5,793       5,781       176       245  
Expected return on plan assets
    (6,376 )     (6,271 )     -       -  
Amortization of prior service cost
    393       449       26       30  
Amortization of unrecognized net loss (gain)
    1,856       2,672       (146 )     (90 )
Net periodic benefit cost
  $ 4,494     $ 5,445     $ 102     $ 271  
                                 
Employer Contributions

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):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net earnings
  $ 10,591     $ 4,497     $ 16,583     $ 13,475  
                                 
Other comprehensive income, before tax:
                               
                                 
Foreign currency translation adjustments
    (3,856 )     2,857       (4,957 )     1,047  
                                 
Defined benefit pension plans:
                               
                                 
Amortization of prior service cost included in net periodic benefit cost
    197       225       393       449  
Amortization of unrecognized net loss included in net periodic benefit cost
    628       1,414       1,856       2,672  
Net gain (loss) arising during period
    3,634       (7,464 )     3,634       (7,464 )
                                 
Total defined benefit pension plans
    4,459       (5,825 )     5,883       (4,343 )
                                 
Defined benefit postretirement plans:
                               
                                 
Amortization of prior service cost includedin net periodic benefit cost
    13       30       26       30  
Amortization of unrecognized net gain included in net periodic benefit cost
    (111 )     (47 )     (146 )     (90 )
Net gain (loss) arising during period
    1,942       (474 )     1,942       (474 )
                                 
Total defined benefit postretirement plans
    1,844       (491 )     1,822       (534 )
                                 
Total other comprehensive income (loss), before tax
    2,447       (3,459 )     2,748       (3,830 )
                                 
Income tax (expense) benefit related to items of other comprehensive income
    (2,332 )     2,337       (2,851 )     1,804  
                                 
Total other comprehensive income (loss), net of tax
    115       (1,122 )     (103 )     (2,026 )
                                 
Total comprehensive income
  $ 10,706     $ 3,375     $ 16,480     $ 11,449  
                                 
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, 2009
  $ 6,037     $ (44,928 )   $ 965     $ (37,926 )
                                 
Current-period change
    (4,957 )     3,706       1,148       (103 )
                                 
Balance, June 30, 2010
  $ 1,080     $ (41,222 )   $ 2,113     $ (38,029 )
                                 
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:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Weighted average common shares outstanding for basic EPS
    29,929,176       29,721,606       29,871,425       29,721,598  
                                 
Effect of dilutive securities: employee stockoptions
    321,226       73,794       299,778       68,646  
                                 
Adjusted weighted average common shares outstanding for diluted EPS
    30,250,402       29,795,400       30,171,203       29,790,244  
                                 
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):

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Stock-based compensation expense
  $ 1,145     $ 607     $ 1,924     $ 953  
Tax benefit
    (424 )     (225 )     (712 )     (353 )
Stock-based compensation expense, net of tax
  $ 721     $ 382     $ 1,212     $ 600  
                                 
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:
 
   
2010
   
2009
 
             
Expected dividend yield
    1.25% - 1.60 %     2.56% - 2.80 %
Expected stock price volatility
    51.3% - 57.0 %     46.8% - 54.0 %
Risk free interest rate
    1.37% - 2.96 %     1.09% - 2.23 %
Expected life options
 
3 - 6 years
   
3 - 7 years
 
Weighted-average fair value per share at grant date
  $ 14.79     $ 6.85  

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:

               
Weighted-
       
         
Weighted-
   
Average
   
Aggregate
 
         
Average
   
Remaining
   
Intrinsic
 
         
Exercise
   
Contractual
   
Value
 
Options
 
Shares
   
Price
   
Term
   
($000's)
 
                         
Outstanding at January 1, 2010
    1,418,028     $ 26.28              
Granted
    143,000       35.14              
Exercised
    (190,234 )     23.19              
Forfeited or expired
    (1,500 )     29.93              
Outstanding at June 30, 2010
    1,369,294     $ 27.63       7.7     $ 15,591  
Exercisable at June 30, 2010
    667,720     $ 26.98       6.7     $ 8,054  
                                 
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:

(Thousands of dollars)
     
       
Balance at December 31, 2009
  $ 1,509  
         
Gross increases- current year tax positions
    -  
Gross increases- tax positions from prior periods
    352  
Gross decreases- tax positions from prior periods
    (220 )
Settlements
    -  
         
Balance at June 30, 2010
  $ 1,641  
         
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):

Three Months Ended June 30, 2010
 
                         
         
Power
   
Corporate
       
   
Oil Field
   
Transmission
   
& Other*
   
Total
 
                         
Gross sales
  $ 114,896     $ 39,549     $ -     $ 154,445  
Inter-segment sales
    (632 )     (966 )     -       (1,598 )
Net sales
  $ 114,264     $ 38,583     $ -     $ 152,847  
                                 
Operating income
  $ 15,431     $ 1,596     $ -     $ 17,027  
Other income (expense), net
    (516 )     20       35       (461 )
Earnings from continuing operations before income tax provision
  $ 14,915     $ 1,616     $ 35     $ 16,566  
                                 

Three Months Ended June 30, 2009
 
                         
         
Power
   
Corporate
       
   
Oil Field
   
Transmission
   
& Other*
   
Total
 
                         
Gross sales
  $ 75,474     $ 49,288     $ -     $ 124,762  
Inter-segment sales
    (480 )     (543 )     -       (1,023 )
Net sales
  $ 74,994     $ 48,745     $ -     $ 123,739  
                                 
Operating income (loss)
  $ 1,628     $ 6,775     $ (2,000 )   $ 6,403  
Other income (expense), net
    740       (17 )     (48 )     675  
Earnings (loss) from continuing operations before income tax provision
  $ 2,368     $ 6,758     $ (2,048 )   $ 7,078  
                                 

Six Months Ended June 30, 2010
 
                         
         
Power
   
Corporate
       
   
Oil Field
   
Transmission
   
& Other*
   
Total
 
                         
Gross sales
  $ 205,097     $ 77,417     $ -     $ 282,514  
Inter-segment sales
    (913 )