From the just-filed 10-K:
LUFKIN INDUSTRIES, INC.
LETTER TO SHAREHOLDERS
To Our Shareholders
Operating Highlights
I am pleased to report that 1997 was a year of continued improvement in the
financial results of Lufkin Industries, Inc. Operating income for the year
ended December 31, 1997 increased 49% to $21.3 million compared with $14.3
million in 1996. Net earnings for the year increased 42% to $14.8 million, the
highest level since 1985, from $10.5 million, and earnings per share rose 42% to
$2.22 (diluted) from $1.56 (diluted) a year ago. These increases reflect
improvements in our operations to increase productivity and lower costs as
demonstrated by the decrease in cost of sales as a percentage of sales to 83.0%
from 83.6% a year ago, a favorable shift in product mix toward higher margin
products, and strong increases in sales of oil field and trailer products.
For the year ended December 31, 1997, net sales increased 27% to $287.6
million compared with $226.0 million for the year ended December 31, 1996. The
increase primarily reflects the strong demand for oil field products and
trailers throughout the year. Sales of oil field products and trailers
increased in each quarter during 1997 compared with sales in 1996. Overall for
the year, sales of oil field products increased 63% to $81.6 million from $50.0
million.
Sales of trailers in 1997 increased 43% to $100.7 million from $70.4 million in
1996. Contributing to the increase was the growing acceptance by customers of
new types of trailers introduced over the last few years. Foundry casting
product sales in 1997 increased 6% to $34.5 million from $32.5 a year ago. Power
transmission products decreased 3% to $70.8 million compared with $73.1 million
in 1996. Power transmissions' sales were impacted by a temporary slowdown in
incoming orders during the fourth quarter of 1996 that affected shipments during
1997.
Lufkin's total backlog as of December 31, 1997, rose to $130.4 million
compared with $97.6 million a year ago. The backlog for oil field products was
$15.2 million compared with $12.1 million a year ago, the highest level since
1991. At year-end the backlog for power transmission products was $36.6 million
compared with $30.1 million; for trailers it was $62.8 million compared with
$40.1 million; and foundry was $15.7 million compared with $15.3 million a year
ago. We are encouraged by our backlog at year-end, which we believe bodes well
for overall business in 1998.
Acquisitions
Aiding the strong performance of Lufkin's oil field products was the
completion of two acquisitions in the third quarter of 1997. The acquisition of
Fannie Lee Mitchell of Texas, Inc. expanded the range of the oil field services
Lufkin provides. These new services include pumping unit deliveries,
installation of old and new units, maintenance and repair of units and gear
reducers, manufacture of parts and bases, and sales of used units primarily to
the oil and gas industries in West Texas and New Mexico. The acquisition of the
Nabla Corporation, a provider of oil field technical services including analysis
for oil wells, developing software for oil field engineers to design artificial
lift systems, manufacturing devices for oil field automation, and training for
engineers opened new markets for Lufkin. Nabla operates throughout most oil
fields in the United States, Venezuela, Canada and Colombia.
Financial Position
Lufkin continued to maintain its sound financial position in 1997. Lufkin
ended the year with total assets of $210.0 million and working capital of $68.9
million. Lufkin's shareholders' equity at year-end was $155.3 million; the book
value was $23.56, an increase of 7% from $22.05 per share at December 31, 1996.
Earnings before interest, taxes, depreciation and amortization (EBITDA), a
traditional financial measure that shows true earning capability, continued to
trend upward increasing to $ 28.9 million in 1997. EBITDA has increased in each
of the last five years. The Company's current ratio was better than 4.1 to 1,
with cash and temporary investments totaling $18.3 million.
During 1997, the Company repurchased 20,383 shares of its common stock
pursuant to its existing $6.1 million repurchase authorization. As of December
31, 1997, a total of 259,000 shares have been repurchased under the Company's
repurchase programs. The Board continues to believe that periodic repurchase of
common stock of Lufkin represents an attractive use of a portion of available
cash. The Board also approved in March 1997 a 13% increase in the Company's
quarterly cash dividend to $0.17 per share from the previous rate of $0.15 per
share. Lufkin has paid a quarterly cash dividend for 58 consecutive years.
Strategic Direction
Over the last few years Lufkin has strengthened its market position with each
of its four business units. We have accomplished this by greatly improving our
operational capability and performance by decreasing product cycle times,
reducing scrap and work in process, introducing new and innovative products,
developing new support for markets we serve, expanding our international sales
presence, making new capital investments, increasing our customer support,
completing synergistic acquisitions, and providing the tools and training for
our employees to increase productivity.
The results position Lufkin to leverage the past into greater achievement in
the future. As an outcome of our strategic planning process begun in 1997, the
Board of Directors and management of Lufkin have thoroughly analyzed each of our
four major business units and identified the appropriate strategies for each to
follow. A brief review of each business unit follows.
Oil field
Overall demand for oil field products increased in 1997 as the cyclical
improvement in the global investment for oil production continued. Lufkin's
shipments to both the domestic and international markets showed solid
improvement in 1997 over 1996 levels. Oil prices have remained at levels
attractive enough so as to increase domestic drilling. Tight availability of
used pumping units and foreign governmental policies that stress incentives to
drill for oil and natural gas and further the trend toward privatization also
contributed to the increase in demand for oil field products.
Lufkin's strategy for the future is to continue to focus on the faster growing
markets of the United States, Canada, the Middle East, the Far East and South
America where the outlook for growth is most promising. Lufkin's position in
domestic markets allow us to
further participate in the largest market in the world. Internationally, one of
Lufkin's important competitive strengths is its established presence in key
South American, Far East and Canadian markets with local manufacturing
capabilities. The "local" presence has provided the Company with the ability to
better meet demand and also allows the Company to provide technical support as
well as field service.
In addition, Lufkin intends to further leverage its strong brand name
awareness using the resources of the acquisitions made to supply a broader array
of products and services. Both of the acquisitions made during the third
quarter of 1997, the Nabla Corporation and Fannie Lee Mitchell of Texas, Inc.,
have unique strengths and capabilities to assist in the pursuit of this
strategic objective. We are pleased with the results of the acquisitions and
will continue to examine other similar acquisition opportunities in the future
as part of our strategy to grow the oil field products business.
We firmly believe the long-term future for the type of oil field equipment
Lufkin manufactures and services is positive. While the daily price of oil may
fluctuate and cause short-term swings in the markets Lufkin serves, we believe
the oil industry is in the best economic shape that it has been in since 1981.
Barring an unforeseen worldwide recession that could lower the price of oil,
overall demand for oil appears to be increasing while the factors affecting
supply and demand for oil are fairly stable. We believe the strategies we have
in place will help to keep us focused on serving the needs of our customers.
Trailers
Overall economic conditions in 1997 were generally favorable in the primary
markets Lufkin serves, U.S. trucking lines and regional carriers. After a
period where the trailer industry experienced a decline and as a result,
consolidation, Lufkin was well positioned in 1997. As a result of bringing
production capability and workforce levels in line with lower demand in 1995-
1996, Lufkin benefited from the upturn in the market.
As part of the strategic direction for the Trailer Division, Lufkin's plans
are to focus on increasing its penetration in the various trailer distribution
channels and expanding its customer base by making a concerted effort to reach a
greater number of users and dealers. Our expanded manufacturing capacity and
Lufkin's reputation for quality construction, reliability, innovation of design,
and competitive prices are helping to meet or exceed our customer's needs.
Lufkin has also sought to leverage its reputation for quality by adding to our
diverse product offering by introducing new types of trailers. The open top
chip van and combination flat bed trailers introduced in the last two years have
been well received by customers. The many different sizes and styles of vans,
platforms, and high capacity and lightweight dump trailers have tended to
minimize the risk associated with dependency on one type of trailer. Lufkin's
strategy is to selectively expand into market niches where competition is less
and the opportunity for higher margin is great.
With the recent economic expansion carrying into 1998, the Trailer Division is
expected to benefit from a further growth in demand for trailers as a result.
The following underlying fundamental trends should favorably impact the
financial results of the Trailer Division:
.The average age of trailer fleets is increasing.
.More and more companies are outsourcing their transportation needs.
.More trailers are being used as short-term storage.
We continue to focus on improving productivity and seeking opportunities to
increase market share as part of our long-term strategy to grow the trailer
business in 1998 and beyond.
Power Transmission
Shipments of Power Transmission products in 1997 were slightly below the
record levels of 1996. Demand for power generation load gears was weaker in
early 1997. However, the pace of new orders strengthened during the second half
of the year. Lufkin continued as the market leader in enclosed gear drives for
use in the petrochemical and power generation industries. Demand was up for
gears used to drive API pumps and marine propulsion.
The factors affecting future demand for power transmission products are
positive. In the power generation sector, the need for electrical power
generation will continue to grow. We expect this growth to be greatest in the
developing economies. However, even in industrialized countries, power cost
savings can be achieved by converting waste energy to electricity with combined
cycle generating technologies that utilize load gears in the electricity
generating process. Investment in the petrochemical and refinery sectors will
continue, as companies seek to improve efficiency and safety. In addition,
environmental concerns will drive demands for new process technology in the
petrochemical and refinery sectors, which in turn will drive demands for new
gear products to support these new processes.
Lufkin's products and services are ideally positioned to compete successfully
in each of our major markets. Our global sales and service network provides
support to our customers and end users anywhere our products are in service.
This support has proved crucial to the success of our efforts to expand into new
markets. Lufkin will continue to build on the strengths that differentiate it
from other, less capable suppliers. We will focus on developing new, more
efficient products capable of running at higher loads for the petrochemical and
power generation industries. These new products, higher technology service
support, coupled with ongoing improvements in operational performance will yield
ever improving returns from power transmission products in the future.
Foundry
Although the smallest of Lufkin's four business units, the Foundry Division
continues to experience increased demand for its commercial castings. Operating
at near capacity for most of 1997, a new melting record was achieved with 79,000
tons of ductile iron and gray iron. Record sales were also achieved in 1997 as
the division continued to shift its product mix to higher value-added castings.
While the Foundry Division supplies engineered castings to the oilfield and
power transmission divisions of the company, the majority of its capacity is
dedicated to a diversified customer base. Customers include such industrial
sectors as building construction equipment, material handling equipment, valves,
pumps, and compressors. Further, Lufkin has the unique capabilities required
for supplying the highly engineered castings for the machine tool market.
Lufkin's strategy for the future is to leverage the strong relationships with
strategic customers in the attractive markets for large, engineered castings
which are more technically demanding and carry higher margins for the higher
value provided. Capital expenditures planned for 1998 will give the Foundry
Division some added capacity. At the same time we are expanding our focus on
achieving unsurpassed customer service. These efforts support Lufkin's other
divisions with renewed emphasis of ongoing service after the initial sale. We
believe this will continue to distinguish Lufkin as a market leader and is an
important facet to achieving growth in the future.
Summary
Overall, we are very pleased with the results Lufkin achieved during the past
year and the strategic direction for the future. As always, we will stay
focused on the things we do well, capitalize on the opportunities that we face
and be innovative in dealing with any problems that may arise. I want to thank
our employees, suppliers and customers for their dedication and
loyalty in helping Lufkin achieve another successful year in 1997 and for
working to make Lufkin a world-class company of the future. We are encouraged
about the trends affecting our business units, particularly for oil field and
trailer products and are optimistic about the overall outlook for our business
in the future.
Sincerely,
Douglas V. Smith
President and Chief Executive Officer |
