| LUFKIN INDUSTRIES INC Item 1A Risk Factors |
| Any of the risk factors described below could significantly and adversely affect its business, prospects, financial condition and results of operations |
| A decline in domestic and worldwide oil and gas drilling activity would adversely affect the Company’s results of operations |
| The Oil Field segment is materially dependent on the level of oil and gas drilling activity in North America and worldwide, which in turn depends on the level of capital spending by major, independent and state-owned exploration and production companies |
| This capital spending is driven by current prices for oil and gas and the perceived stability and sustainability of those prices |
| Oil and gas prices have been subject to significant fluctuation in recent years in response to changes in the supply and demand for oil and gas, market uncertainty, world events, governmental actions, and a variety of additional factors that are beyond the Company’s control, including: • the level of North American and worldwide oil and gas exploration and production activity; • worldwide economic conditions, particularly economic conditions in North America; • oil and gas production costs; • weather conditions; • the expected costs of developing new reserves; • national government political requirements and the policies of OPEC; • the price and availability of alternative fuels; • the effect of worldwide energy conservation measures; • environmental regulation; and • tax policies |
| 6 ______________________________________________________________________ Item 1A Risk Factors (continued) |
| The business of the Trailer segment is highly cyclical, which could adversely affect its business and results of operations |
| The truck trailer manufacturing industry historically has been and is expected to continue to be cyclical, as well as affected by overall economic conditions |
| New trailer production for the trailer industry reached its most recent peak of approximately 306cmam000 units in 1999, falling to approximately 140cmam000 by 2001 and rebounding to approximately 250cmam000 units in 2005 |
| Customers historically have replaced trailers in cycles that run from five to 12 years, depending on service and trailer type |
| Poor economic conditions can adversely affect demand for new trailers and in the past have led to an overall aging of trailer fleets beyond this typical replacement cycle |
| Customers’ buying patterns can also reflect regulatory changes, such as the new federal hours-of-service rules and anticipated 2007 federal emissions standards |
| Trailer’s business is likely to continue to be highly cyclical based on current and expected economic conditions and regulatory factors |
| Increases in the prices of our raw materials could adversely affect our margins and results of operations |
| The Company uses large amounts of steel, iron and electricity in the manufacture of its products |
| The price of these raw materials has a significant impact on the cost of producing products |
| Steel and electricity prices have increased significantly since the end of 2003, caused primarily by higher energy prices and increased global demand |
| Since most of the Company’s suppliers are not currently parties to long-term contracts with us, the Company is vulnerable to fluctuations in prices of such raw materials |
| Factors such as supply and demand, freight costs and transportation availability, inventory levels of brokers and dealers, the level of imports and general economic conditions may affect the price of cast iron and steel |
| During 2004, the Company encountered rapid raw material price increases |
| While raw material prices stabilized in 2005, the prices may increase significantly in the future |
| If the Company is unable to pass future raw material price increases on to its customers, margins, results of operations, cash flow and financial condition could be adversely affected |
| Interruption in our supply of raw materials could adversely affect our results of operations |
| The Company relies on various suppliers to supply the components utilized to manufacture our products |
| The availability of the raw materials is not only a function of the availability of steel and iron, but also the alloy materials that are utilized by our suppliers |
| To date, these shortages have not caused a material disruption in availability or our manufacturing operations |
| However, there can be no assurance that material disruptions could not occur in the future |
| Raw material shortages and allocations may result in inefficient operations and a build-up of inventory, which can negatively affect the Company’s working capital position |
| The loss of any of the Company’s suppliers or their inability to meet its price, quality, quantity and delivery requirements could have an adverse effect on the Company’s business and results of operations |
| The inherent dangers and complexity of the Company’s operations could subject it to substantial liability claims that could adversely affect our results of operations |
| The products that the Company manufactures and the services that it provides are complex, and the failure of this equipment to operate properly or to meet specifications may greatly increase our customers’ costs |
| In addition, many of these products are used in inherently hazardous industries, such as the oil and gas drilling and production industry where an accident or product failure can cause personal injury or loss of life, damage to property, equipment, or the environment, regulatory investigations and penalties and the suspension of the end-user’s operations |
| If the Company’s products or services fail to meet specifications or are involved in accidents or failures, we could face warranty, contract, or other litigation claims for which it may be held responsible and its reputation for providing quality products may suffer |
| The Company’s insurance may not be adequate in risk coverage or policy limits to cover all losses or liabilities that we may incur or be responsible |
| Moreover, in the future we may not be able to maintain insurance at levels of risk coverage or policy limits that we deem adequate or at premiums that are reasonable for us, particularly in the recent environment of significant insurance premium increases |
| Further, any claims made under the Company’s policies will likely cause its premiums to increase |
| Any future damages deemed to be caused by the Company’s products or services that are assessed against it and that are not covered by insurance, or that are in excess of policy limits or subject to substantial deductibles, could have a material 7 ______________________________________________________________________ adverse effect on our results of operations and financial condition |
| Litigation and claims for which we are not insured can occur, including employee claims, intellectual property claims, breach of contract claims, and warranty claims |
| Item 1A Risk Factors (continued) |
| The Company continually explores opportunities to acquire related businesses, some of which could be material to the Company |
| The ability to continue to grow, however, may depend upon identifying and successfully acquiring attractive companies, effectively integrating these companies, achieving cost efficiencies and managing these businesses as part of the Company |
| The Company may not be able to effectively integrate the acquired companies and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions |
| The Company’s efforts to integrate these businesses could be affected by a number of factors beyond its control, such as regulatory developments, general economic conditions and increased competition |
| In addition, the process of integrating these businesses could cause the interruption of, or loss of momentum in, the activities of our existing business |
| The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of these businesses could negatively impact the Company’s business and results of operations |
| Further, the benefits that the Company anticipates from these acquisitions may not develop |
| Labor disputes and increasing labor costs could have a material adverse effect on our business |
| The Company’s main US manufacturing facilities are unionized and the current labor contract with respect to those facilities expires in October 2008 |
| The Company cannot assure that any disputes, work stoppages or strikes will not arise in the future |
| In 2002, a strike involving union employees, which continued for approximately 14 consecutive days, resulted in operating losses for us |
| In addition, when our existing collective bargaining agreement expires, the Company cannot assure that it will be able to reach a new agreement with its employees or that any new agreement will be on substantially similar terms as the existing agreement |
| Labor costs may increase significantly as a result of the negotiations for any new labor agreement |
| Future disputes with and labor concessions to the Company’s employees could have a material adverse effect upon its results of operations and financial position |
| The inability to hire and retain qualified employees may hinder our growth |
| The ability to provide high-quality products and services depends in part on the Company’s ability to hire and retain skilled personnel in the areas of management, product engineering, servicing and sales |
| Competition for such personnel is intense and competitors can be expected to attempt to hire the Company’s skilled employees from time to time |
| In particular, the Company’s business and results of operations could be materially adversely affected if it is unable to retain the customer relationships and technical expertise provided by the Company’s management team and professional personnel |
| Significant competition in the industries in which the Company operates may result in its competitors offering new or better products and services or lower prices, which could result in a loss of customers and a decrease in revenues |
| The industries in which the Company operates are highly competitive |
| The Company competes with other manufacturers and service providers of varying sizes, some of which may have greater financial and technological resources than it does |
| As an example, barriers to entry in the standard truck trailer manufacturing industry are low |
| As a result, it is possible that additional competitors could enter the trailer market at any time |
| In the recent past, the manufacturing over-capacity and high leverage of some of our competitors in the trailer industry, along with the bankruptcies and financial stresses that affected the industry, contributed to significant pricing pressures |
| If the Company is unable to compete successfully with other manufacturers and service providers, it could lose customers and its revenues may decline |
| In addition, competitive pressures in the industry may affect the market prices of the Company’s new and used equipment, which, in turn, may adversely affect its sales margins, results of operations, cash flow and financial condition |
| Disruption of our manufacturing operations or management information systems would have an adverse effect or our financial condition and results of operations |
| While the Company owns numerous facilities domestically and internationally, its primary manufacturing facilities in and around Lufkin, Texas accounts for a significant percentage of its manufacturing output |
| An unexpected disruption in the Company’s production at these facilities or in its management information systems for any length of time would have an adverse effect on our business, financial condition and results of operations |
| 8 ______________________________________________________________________ Item 1A Risk Factors (continued) |
| The Company has foreign operations that would be adversely impacted in the event of war, political disruption, civil disturbance, economic and legal sanctions and changes in global trade policies |
| The Company has operations in certain international areas, including parts of the Middle East and South America, that are subject to risks of war, political disruption, civil disturbance, economic and legal sanctions (such as restrictions against countries that the US government may deem to sponsor terrorism) and changes in global trade policies |
| The Company’s operations may be restricted or prohibited in any country in which these risks occur |
| In particular, the occurrence of any of these risks could result in the following events, which in turn, could materially and adversely impact the Company’s results of operations: • disruption of oil and natural gas exploration and production activities; • restriction of the movement and exchange of funds; • inhibition of our ability to collect receivables; • enactment of additional or stricter US government or international sanctions; and • limitation of our access to markets for periods of time |
| Results of operations could be adversely affected by actions under US trade laws |
| Although the Company is a US-based manufacturing and services company, it does own and operate international manufacturing operations that support its US-based business |
| If actions under US trade laws were instituted that limited the Company’s access to these products, the ability to meet its customer specifications and delivery requirements would be reduced |
| Any adverse effects on the Company’s ability to import products from its foreign subsidiaries could have a material adverse effect on our results of operations |
| The Company is subject to currency exchange rate risk, which could adversely affect its results of operations |
| The Company is subject to currency exchange rate risk with debt denominated in US dollars owed to its US entity by its French and Canadian subsidiaries |
| The Company cannot assure that future currency exchange rate fluctuations will not have an adverse affect on its results of operations |
| The Company’s common stock has experienced, and may continue to experience, price volatility |
| The trading price of the Company’s common stock has been and may continue to be subject to large fluctuations |
| The Company’s common stock price may increase or decrease in response to a number of events and factors, including: • trends in the Company’s industries and the markets in which it operates; • changes in the market price of the products the Company sells; • the introduction of new technologies or products by the Company or its competitors; • changes in expectations as to the Company’s future financial performance, including financial estimates by securities analysts and investors; • operating results that vary from the expectations of securities analysts and investors; 9 ______________________________________________________________________ • announcements by the Company or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, financings or capital commitments; • changes in laws and regulations; and • general economic and competitive conditions |