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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30, 2004



| ̈ | 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: 0-2612



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LUFKIN INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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|                                         |  |                    
|---------------------------------------- |  | -------------------
|TEXAS                                    |  | 75-0404410         
|(State or other jurisdiction             |  | (I.R.S. Employer   
|of incorporation or organization)        |  | 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)



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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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



There were 7,123,583 shares of Common Stock, $1.00 par value per share, outstanding as of November 2, 2004, not including 247,639 shares classified as Treasury Stock.



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PART I - FINANCIAL INFORMATION



Item 1. Financial Statements



CONSOLIDATED BALANCE SHEETS

UNAUDITED

(In thousands of dollars)



|                                                                                                                           |  |                   |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                           |  | September 30,2004 |         |   | December 31,2003 |  
|ASSETS                                                                                                                     |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                            |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                  |  | $                 | 13,381  |   |                  | $ | 19,408  |  
|Receivables, net                                                                                                           |  |                   | 49,911  |   |                  |   | 42,908  |  
|Inventories                                                                                                                |  |                   | 58,971  |   |                  |   | 39,460  |  
|Deferred income tax assets                                                                                                 |  |                   | 1,472   |   |                  |   | 1,472   |  
|Other current assets                                                                                                       |  |                   | 1,639   |   |                  |   | 1,051   |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                       |  |                   | 125,374 |   |                  |   | 104,299 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Property, plant and equipment, at cost                                                                                     |  |                   | 279,173 |   |                  |   | 278,352 |  
|Less accumulated depreciation                                                                                              |  |                   | 192,283 |   |                  |   | 189,352 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|                                                                                                                           |  |                   | 86,890  |   |                  |   | 89,000  |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Prepaid pension costs                                                                                                      |  |                   | 59,071  |   |                  |   | 56,563  |  
|Goodwill, net                                                                                                              |  |                   | 11,514  |   |                  |   | 11,539  |  
|Other assets, net                                                                                                          |  |                   | 2,250   |   |                  |   | 2,255   |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                               |  | $                 | 285,099 |   |                  | $ | 263,656 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                       |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                       |  |                   |         |   |                  |   |         |  
|Short-term notes payable                                                                                                   |  | $                 | 600     |   |                  | $ | 493     |  
|Current portion of long-term notes payable                                                                                 |  |                   | 10      |   |                  |   | 196     |  
|Accounts payable                                                                                                           |  |                   | 21,801  |   |                  |   | 14,037  |  
|Accrued liabilities:                                                                                                       |  |                   |         |   |                  |   |         |  
|Payroll and benefits                                                                                                       |  |                   | 6,307   |   |                  |   | 5,965   |  
|Warranty expenses                                                                                                          |  |                   | 1,977   |   |                  |   | 1,698   |  
|Taxes payable                                                                                                              |  |                   | 2,992   |   |                  |   | 4,361   |  
|Other                                                                                                                      |  |                   | 8,214   |   |                  |   | 6,718   |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                  |  |                   | 41,901  |   |                  |   | 33,468  |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Deferred income tax liabilities                                                                                            |  |                   | 31,845  |   |                  |   | 31,349  |  
|Postretirement benefits                                                                                                    |  |                   | 10,643  |   |                  |   | 10,643  |  
|                                                                                                                           |  |                  
|Shareholders equity:                                                                                                      |  |                   |         |   |                  |   |         |  
|Common stock, $1.00 par value per share; 60,000,000 shares authorized; 7,092,833 and 6,892,381 shares issued,
respectively |  |                   | 7,093   |   |                  |   | 6,892   |  
|                                                                                                                           | 
|                                                                                                                           | 
|Capital in excess of par                                                                                                   |  |                   | 23,115  |   |                  |   | 18,480  |  
|Retained earnings                                                                                                          |  |                   | 174,288 |   |                  |   | 167,862 |  
|Treasury stock, 249,639 and 302,239 shares, respectively, at cost                                                          |  |                   | (5,157  | ) |                  |   | (6,244  | )
|Accumulated other comprehensive income:                                                                                    |  |                   |         |   |                  |   |         |  
|Cumulative translation adjustment                                                                                          |  |                   | 1,371   |   |                  |   | 1,206   |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total shareholders equity                                                                                                 |  |                   | 200,710 |   |                  |   | 188,196 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                 |  | $                 | 285,099 |   |                  | $ | 263,656 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  



See accompanying notes
to consolidated financial statements.



2



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CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME (UNAUDITED)

(In thousands of dollars, except per share
data)



|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                  |  | Three Months EndedSeptember 30, |           |   | Nine Months EndedSeptember 30, |  
|                                                  |  | 2004                            |           |   | 2003                           |   |           | 2004 |  |   | 2003      |  
|Sales                                             |  | $                               | 95,766    |   |                                | $ | 71,455    |      |  | $ | 248,923   |   |  | $ | 187,593   |  
|                                                  |  |                                 |           |  
|Cost of sales                                     |  |                                 | 78,744    |   |                                |   | 55,244    |      |  |   | 204,815   |   |  |   | 151,049   |  
|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Gross profit                                      |  |                                 | 17,022    |   |                                |   | 16,211    |      |  |   | 44,108    |   |  |   | 36,544    |  
|                                                  |  |                                 |           |  
|Selling, general and administrative expenses      |  |                                 | 9,438     |   |                                |   | 10,596    |      |  |   | 28,027    |   |  |   | 27,479    |  
|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Operating income                                  |  |                                 | 7,584     |   |                                |   | 5,615     |      |  |   | 16,081    |   |  |   | 9,065     |  
|                                                  |  |                                 |           |  
|Interest income                                   |  |                                 | 43        |   |                                |   | 23        |      |  |   | 193       |   |  |   | 155       |  
|Interest expense                                  |  |                                 | (31       | ) |                                |   | (32       | )    |  |   | (104      | ) |  |   | (91       | )
|Other income (expense), net                       |  |                                 | (7        | ) |                                |   | (164      | )    |  |   | (304      | ) |  |   | 1,128     |  
|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Earnings before income tax provision              |  |                                 | 7,589     |   |                                |   | 5,442     |      |  |   | 15,866    |   |  |   | 10,257    |  
|                                                  |  |                                 |           |  
|Income tax provision                              |  |                                 | 2,728     |   |                                |   | 2,068     |      |  |   | 5,791     |   |  |   | 3,898     |  
|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Net earnings                                      |  |                                 | 4,861     |   |                                |   | 3,374     |      |  |   | 10,075    |   |  |   | 6,359     |  
|                                                  |  |                                 |           |  
|Change in foreign currency translation adjustment |  |                                 | 721       |   |                                |   | 108       |      |  |   | 165       |   |  |   | 1,872     |  
|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Total comprehensive income                        |  | $                               | 5,582     |   |                                | $ | 3,482     |      |  | $ | 10,240    |   |  | $ | 8,231     |  
|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Net earnings per share:                           |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Basic                                             |  | $                               | 0.71      |   |                                | $ | 0.52      |      |  | $ | 1.50      |   |  | $ | 0.97      |  
|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Diluted                                           |  | $                               | 0.70      |   |                                | $ | 0.51      |      |  | $ | 1.46      |   |  | $ | 0.96      |  
|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Dividends per share                               |  | $                               | 0.18      |   |                                | $ | 0.18      |      |  | $ | 0.54      |   |  | $ | 0.54      |  
|                                                  |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Weighted average number of shares outstanding:    |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Basic                                             |  |                                 | 6,800,634 |   |                                |   | 6,541,936 |      |  |   | 6,738,457 |   |  |   | 6,533,855 |  
|Diluted                                           |  |                                 | 6,973,104 |   |                                |   | 6,668,012 |      |  |   | 6,913,064 |   |  |   | 6,632,587 |  



See accompanying notes
to consolidated financial statements.



3



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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands of dollars)



|                                                                                |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                |  | Nine Months EndedSeptember 30, |        
|                                                                                |  | 2004                           |         |   | 2003 |  
|Cash flows from operating activities:                                           |  |                                |         |   |      |   |         |  
|Net earnings                                                                    |  | $                              | 10,075  |   |      | $ | 6,359   |  
|Adjustments to reconcile net earnings to cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                   |  |                                | 8,747   |   |      |   | 8,791   |  
|Deferred income tax provision                                                   |  |                                | 2,150   |   |      |   | 1,143   |  
|Pension income                                                                  |  |                                | (2,508  | ) |      |   | (1,500  | )
|Gain on disposition of property, plant and equipment                            |  |                                | (28     | ) |      |   | (1,032  | )
|Changes in:                                                                     |  |                                |         |   |      |   |         |  
|Receivables, net                                                                |  |                                | (6,921  | ) |      |   | (3,722  | )
|Income taxes receivable                                                         |  |                                | (24     | ) |      |   | (20     | )
|Inventories                                                                     |  |                                | (19,404 | ) |      |   | (6,724  | )
|Other current assets                                                            |  |                                | (487    | ) |      |   | (510    | )
|Accounts payable                                                                |  |                                | 7,650   |   |      |   | (1,834  | )
|Accrued liabilities                                                             |  |                                | 1,155   |   |      |   | 2,411   |  
|                                                                                |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                       |  |                                | 405     |   |      |   | 3,362   |  
|                                                                                |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                           |  |                                |         |   |      |   |         |  
|Additions to property, plant and equipment                                      |  |                                | (7,533  | ) |      |   | (11,304 | )
|Proceeds from disposition of property, plant and equipment                      |  |                                | 172     |   |      |   | 1,177   |  
|Increase in other assets                                                        |  |                                | (64     | ) |      |   | (730    | )
|Acquisition of other companies                                                  |  |                                | (7      | ) |      |   | (3493   | )
|                                                                                |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                           |  |                                | (7,432  | ) |      |   | (14,350 | )
|                                                                                |  |                                |         |   |      |   |         |  
|Cash flows from financing activities:                                           |  |                                |         |   |      |   |         |  
|Proceeds from short-term notes payable                                          |  |                                | 137     |   |      |   | 527     |  
|Payments on long-term notes payable                                             |  |                                | (182    | ) |      |   | (198    | )
|Dividends paid                                                                  |  |                                | (3,649  | ) |      |   | (3,531  | )
|Proceeds from exercise of stock options                                         |  |                                | 4,709   |   |      |   | 422     |  
|Purchases of treasury stock                                                     |  |                                |        |   |      |   | (31     | )
|                                                                                |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                             |  |                                | 1,015   |   |      |   | (2,811  | )
|                                                                                |  |                                |         |   |      |   |         |  
|Effect of translation on cash and cash equivalents                              |  |                                | (15     | ) |      |   | 325     |  
|                                                                                |  |                                |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                       |  |                                | (6,027  | ) |      |   | (13,474 | )
|                                                                                |  |                               
|Cash and cash equivalents at beginning of period                                |  |                                | 19,408  |   |      |   | 27,608  |  
|                                                                                |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                      |  | $                              | 13,381  |   |      | $ | 14,134  |  
|                                                                                |  |                                |         |   |      |   |         |  



See accompanying notes
to consolidated financial statements



4



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. Basis
of Presentation



The accompanying unaudited 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 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. 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 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, 2003.
The results of operations for the three and nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2004.



2. Acquisitions



During the third quarter of 2003, the Company completed two strategic acquisitions that expanded its Oil Field segment. The Company
purchased the remaining shares of Lufkin Argentina S.A., its 1992 Argentina joint venture with Baker Hughes, Inc, effective July 1, 2003. Lufkin Argentina manufactures and services oil field pumping units and automation equipment for use in
Argentina and other South American countries. The Company also purchased the operating assets of Basin Technical Services in Midland, Texas on July 30, 2003. This acquisition enhanced Oil Fields product and service offerings in the oil field
automation marketplace. The aggregate purchase price for these acquisitions was $3.9 million in cash.



On December 9, 2003, the Company acquired the operating assets and commercial operations of D&R Oil Field Services, located in Drayton Valley, Alberta, Canada. This acquisition within the Oil Field segment
strengthened the Companys presence in Canadas oil field service business. The aggregate purchase price for this acquisition was $1.9 million in cash.



The Company has completed the purchase allocation process for the Argentina and Basin acquisitions. The Company has substantially completed
the purchase allocation process for the D&R acquisition and no additional significant adjustments to asset and liability valuations are expected to be made in 2004.



3. Receivables



The following is a summary of the Companys receivable balances (in thousands of dollars):



|                                |  |                   |        |   |                  |   |        |  
|------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                |  | September 30,2004 |        |   | December 31,2003 |  
|Accounts receivable             |  | $                 | 50,101 |   |                  | $ | 43,154 |  
|Notes receivable                |  |                   | 36     |   |                  |   | 45     |  
|                                |  |                   |        |   |                  |   |        |  
|Total receivables               |  |                   | 50,137 |   |                  |   | 43,199 |  
|Allowance for doubtful accounts |  |                   | (226   | ) |                  |   | (291   | )
|                                |  |                   |        |   |                  |   |        |  
|Net receivables                 |  | $                 | 49,911 |   |                  | $ | 42,908 |  
|                                |  |                   |        |   |                  |   |        |  



Bad debt expense related to
receivables was negative $0.1 million and $0.0 million for the three months ended September 30, 2004 and 2003, respectively, and $0.2 million and $0.2 million for the nine months ended September 30, 2004 and 2003, respectively.



5



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4. Property, Plant & Equipment



The following is a summary of the Companys property, plant and equipment balances (in thousands of dollars):



|                                         |  |                   |          |   |                  |   |          |  
|---------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                         |  | September 30,2004 |          |   | December 31,2003 |  
|Land                                     |  | $                 | 3,188    |   |                  | $ | 3,060    |  
|Land improvements                        |  |                   | 6,917    |   |                  |   | 6,864    |  
|Buildings                                |  |                   | 68,558   |   |                  |   | 65,197   |  
|Machinery and equipment                  |  |                   | 183,725  |   |                  |   | 186,361  |  
|Furniture and fixtures                   |  |                   | 3,999    |   |                  |   | 3,978    |  
|Computer equipment and software          |  |                   | 12,786   |   |                  |   | 12,892   |  
|                                         |  |                   |          |   |                  |   |          |  
|Total property, plant and equipment      |  |                   | 279,173  |   |                  |   | 278,352  |  
|Less accumulated depreciation            |  |                   | (192,283 | ) |                  |   | (189,352 | )
|                                         |  |                   |          |   |                  |   |          |  
|Total property, plant and equipment, net |  | $                 | 86,890   |   |                  | $ | 89,000   |  
|                                         |  |                   |          |   |                  |   |          |  



Depreciation expense related to
property, plant and equipment was $3.0 million and $2.8 million for the three months ended September 30, 2004 and 2003, respectively, and $8.7 million and $8.7 million for the nine months ended September 30, 2004 and 2003, respectively.



|5. | Inventories
|-- | -----------



Inventories used in determining cost of sales were as follows (in thousands of dollars):



|                                |  |                    |        |                   |   |       
|------------------------------- |  | ------------------ | ------ | ----------------- | - | ------
|                                |  | September 30, 2004 |        | December 31, 2003
|                                | 
|Gross inventories @ FIFO:       |  |                    |        |                   |   |       
|Finished goods                  |  | $                  | 7,795  |                   | $ | 3,475 
|Work in process                 |  |                    | 12,420 |                   |   | 7,411 
|Raw materials & component parts |  |                    | 59,206 |                   |   | 47,967
|                                |  |                    |        |                   |   |       
|Total gross inventories @ FIFO  |  |                    | 79,421 |                   |   | 58,853
|Less reserves:                  |  |                    |        |                   |   |       
|LIFO                            |  |                    | 19,149 |                   |   | 17,778
|Valuation                       |  |                    | 1,301  |                   |   | 1,615 
|                                |  |                    |        |                   |   |       
|Total inventories as reported   |  | $                  | 58,971 |                   | $ | 39,460
|                                |  |                    |        |                   |   |       



Gross inventories on a FIFO basis
before adjustments for reserves shown above that were accounted for on a LIFO basis were $59,1 million and $40.2 million at September 30, 2004, and December 31, 2003, respectively.



6



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6. Net Earnings Per Share



Net earnings per share amounts are based on the weighted average number of shares of common stock and common stock equivalents outstanding
during the period. The weighted average number of shares used to compute basic and diluted net earnings per share for the three and nine months ended September 30, 2004 and 2003 are illustrated below (in thousands of dollars, except share and per
share data):



|                                                                                                        |  |                                 |           |                                |   |           |  |      |           |  |   |          
|------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------ | - | --------- |  | ---- | --------- |  | - | ---------
|                                                                                                        |  | Three Months EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|                                                                                                        |  | 2004                            |           | 2003                           |   | 2004      |  | 2003
|Numerator:                                                                                              |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Numerator for basic and diluted earnings per share-net earnings                                         |  | $                               | 4,861     |                                | $ | 3,374     |  | $    | 10,075    |  | $ | 6,359    
|                                                                                                        |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Denominator:                                                                                            |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Denominator for basic net earnings per share-weighted-average shares                                    |  |                                 | 6,800,634 |                                |   | 6,541,936 |  |      | 6,738,457 |  |   | 6,533,855
|                                                                                                        |  |                                 |           |                               
|Effect of dilutive securities: employee stock options                                                   |  |                                 | 172,470   |                                |   | 126,076   |  |      | 174,607   |  |   | 98,732   
|                                                                                                        |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Denominator for diluted net earnings per share-adjusted weighted-average shares and assumed conversions |  |                                 | 6,973,104 |                                |   | 6,668,012 |  |      | 6,913,064 |  |   | 6,632,587
|                                                                                                        |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Basic net earnings per share                                                                            |  | $                               | 0.71      |                                | $ | 0.52      |  | $    | 1.50      |  | $ | 0.97     
|                                                                                                        |  |                                 |           |                                |   |           |  |      |           |  |   |          
|Diluted net earnings per share                                                                          |  | $                               | 0.70      |                                | $ | 0.51      |  | $    | 1.46      |  | $ | 0.96     
|                                                                                                        |  |                                 |           |                                |   |           |  |      |           |  |   |          



Options to purchase a total of 20,298
and 305,811 shares of the Companys common stock at September 30, 2004 and 2003, respectively, were excluded from the calculation of fully diluted earnings per share for the three months ended September 30, 2004 and 2003, respectively, and
options to purchase a total of 20,298 and 306,154 shares of the Companys stock at September 30, 2004 and 2003, respectively, were excluded from the calculation of fully diluted earnings per share for the nine months ended September 30, 2004
and 2003, respectively, because their effect on fully diluted earnings per share for the period were antidilutive.



7. Legal Proceedings



A class action complaint was filed in the United States District Court for the Eastern District of Texas on March 7, 1997, by an employee and a former employee that alleged race discrimination in employment.
Certification hearings were conducted in Beaumont, Texas in February of 1998 and in Lufkin, Texas in August of 1998. In April 1999, the District Court issued a decision that certified a class for this case, which includes all persons of a certain
minority employed by the Company from March 6, 1994, to the present. The Company appealed this class certification decision by the District Court to the 5th Circuit United States Court of Appeals in New Orleans, Louisiana. This appeal was denied on
June 23, 1999. Trial for this case began in December 2003 but was postponed by the Court. The trial resumed on October 12, 2004, and was concluded on October 14, 2004. Both parties have been asked to submit briefs before the judge issues his
decision. The Company believes the claim is without merit and is defending this action vigorously. Furthermore, the Company believes that the facts and the law in this action support its position.



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. It is managements opinion that the Companys liability, if any, under such claims or proceedings would not materially affect its consolidated financial
position, results of operations or cash flow.



7



---

8. Segment Data



The Company operates with three business segments  Oil Field, Power Transmission and Trailer. The Companys Corporate group provides administrative services to
the three business segments. Corporate expenses and certain assets are allocated to the operating segments based primarily upon third-party revenues. 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, 2003. The following is a summary of key segment information (in
thousands of dollars):



|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  
|------------------------------------------- |  | ------------------------------------- | ------ | - | ----------------- | - | ------ | ------- |  | - | --------- | - | ----- | - | -- |  | - | ------ | -
|                                            |  | Three Months Ended September 30, 2004 |       
|                                            |  | Oil Field                             |        |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|Gross sales                                 |  | $                                     | 57,907 |   |                   | $ | 20,131 |         |  | $ | 19,102    |   |       | $ |   |  | $ | 97,140 |  
|Inter-segment sales                         |  |                                       | (687   | ) |                   |   | (680   | )       |  |   | (7        | ) |       |   |   |  |   | (1,374 | )
|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  
|Net sales                                   |  | $                                     | 57,220 |   |                   | $ | 19,451 |         |  | $ | 19,095    |   |       | $ |   |  | $ | 95,766 |  
|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  
|Operating income (loss)                     |  | $                                     | 7,917  |   |                   | $ | 821    |         |  | $ | (1,154    | ) |       | $ |   |  | $ | 7,584  |  
|Other income (expense), net                 |  |                                       | (102   | ) |                   |   | 31     |         |  |   | (2        | ) |       |   | 78 |  |   | 5      |  
|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  
|Earnings (loss) before income tax provision |  | $                                     | 7,815  |   |                   | $ | 852    |         |  | $ | (1,156    | ) |       | $ | 78 |  | $ | 7,589  |  
|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  



|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  
|------------------------------------------- |  | ------------------------------------- | ------ | - | ----------------- | - | ------ | ------- |  | - | --------- | - | ----- | - | -- |  | - | ------ | -
|                                            |  | Three Months Ended September 30, 2003 |       
|                                            |  | Oil Field                             |        |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|Gross sales                                 |  | $                                     | 41,595 |   |                   | $ | 21,111 |         |  | $ | 9,550     |   |       | $ |   |  | $ | 72,256 |  
|Inter-segment sales                         |  |                                       | (440   | ) |                   |   | (319   | )       |  |   | (42       | ) |       |   |   |  |   | (801   | )
|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  
|Net sales                                   |  | $                                     | 41,155 |   |                   | $ | 20,792 |         |  | $ | 9,508     |   |       | $ |   |  | $ | 71,455 |  
|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  
|Operating income (loss)                     |  | $                                     | 5,730  |   |                   | $ | 1,616  |         |  | $ | (1,731    | ) |       | $ |   |  | $ | 5,615  |  
|Other income (expense), net                 |  |                                       | (215   | ) |                   |   | 8      |         |  |   | 9         |   |       |   | 25 |  |   | (173   | )
|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  
|Earnings (loss) before income tax provision |  | $                                     | 5,515  |   |                   | $ | 1,624  |         |  | $ | (1,722    | ) |       | $ | 25 |  | $ | 5,442  |  
|                                            |  |                                       |        |   |                   |   |        |         |  |   |           |   |       |   |    |  |   |        |  



|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|------------------------------------------- |  | ------------------------------------ | ------- | - | ----------------- | - | ------ | ------- |  | - | --------- | - | ----- | - | --- |  | - | ------- | -
|                                            |  | Nine Months Ended September 30, 2004 |        
|                                            |  | Oil Field                            |         |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|Gross sales                                 |  | $                                    | 152,644 |   |                   | $ | 56,685 |         |  | $ | 42,411    |   |       | $ |    |  | $ | 251,740 |  
|Inter-segment sales                         |  |                                      | (1,432  | ) |                   |   | (1,363 | )       |  |   | (22       | ) |       |   |    |  |   | (2,817  | )
|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Net sales                                   |  | $                                    | 151,212 |   |                   | $ | 55,322 |         |  | $ | 42,389    |   |       | $ |    |  | $ | 248,923 |  
|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Operating income (loss)                     |  | $                                    | 18,065  |   |                   | $ | 1,412  |         |  | $ | (3,396    | ) |       | $ |    |  | $ | 16,081  |  
|Other income (expense), net                 |  |                                      | (475    | ) |                   |   | 40     |         |  |   | 4         |   |       |   | 216 |  |   | (215    | )
|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Earnings (loss) before income tax provision |  | $                                    | 17,590  |   |                   | $ | 1,452  |         |  | $ | (3,392    | ) |       | $ | 216 |  | $ | 15,866  |  
|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  



8



---

8. Segment Data (Continued)



|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |       |  |   |         |  
|------------------------------------------- |  | ------------------------------------ | ------- | - | ----------------- | - | ------ | ------- |  | - | --------- | - | ----- | - | ----- |  | - | ------- | -
|                                            |  | Nine Months Ended September 30, 2003 |        
|                                            |  | Oil Field                            |         |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|Gross sales                                 |  | $                                    | 101,780 |   |                   | $ | 56,654 |         |  | $ | 31,397    |   |       | $ |      |  | $ | 189,831 |  
|Inter-segment sales                         |  |                                      | (1,028  | ) |                   |   | (1,169 | )       |  |   | (41       | ) |       |   |      |  |   | (2,238  | )
|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |       |  |   |         |  
|Net sales                                   |  | $                                    | 100,752 |   |                   | $ | 55,485 |         |  | $ | 31,356    |   |       | $ |      |  | $ | 187,593 |  
|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |       |  |   |         |  
|Operating income (loss)                     |  | $                                    | 11,593  |   |                   | $ | 1,672  |         |  | $ | (4,200    | ) |       | $ |      |  | $ | 9,065   |  
|Other income (expense), net                 |  |                                      | (141    | ) |                   |   | 156    |         |  |   | 67        |   |       |   | 1,110 |  |   | 1,192   |  
|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |       |  |   |         |  
|Earnings (loss) before income tax provision |  | $                                    | 11,452  |   |                   | $ | 1,828  |         |  | $ | (4,133    | ) |       | $ | 1,110 |  | $ | 10,257  |  
|                                            |  |                                      |         |   |                   |   |        |         |  |   |           |   |       |   |       |  |   |         |  



9. Goodwill and Intangible Assets



Goodwill



The changes in the carrying amount of goodwill for the nine months ended September 30, 2004,
are as follows:



|                                                      |  |           |       |                    |   |       |         |  |       |   |  |   |        |  
|----------------------------------------------------- |  | --------- | ----- | ------------------ | - | ----- | ------- |  | ----- | - |  | - | ------ | -
|(In thousands of dollars)                             |  | Oil Field |       | Power Transmission |   |       | Trailer |  | Total |  
|Balance a.s of 12/31/03                               |  | $         | 9,348 |                    | $ | 2,191 |         |  | $     |  |  | $ | 11,539 |  
|Goodwill acquired during year                         |  |           |      |                    |   |      |         |  |       |  |  |   |       |  
|Impairment losses                                     |  |           |      |                    |   |      |         |  |       |  |  |   |       |  
|Goodwill written off related to sale of business unit |  |           |      |                    |   |      |         |  |       |  |  |   |       |  
|Foreign currency translation                          |  |           |      |                    |   | (25   | )       |  |       |  |  |   | (25    | )
|                                                      |  |           |       |                    |   |       |         |  |       |   |  |   |        |  
|Balance as of 9/30/04                                 |  | $         | 9,348 |                    | $ | 2,166 |         |  | $     |  |  | $ | 11,514 |  
|                                                      |  |           |       |                    |   |       |         |  |       |   |  |   |        |  



Goodwill impairment tests were
performed in the first quarter of 2004 and no impairment losses were recorded.



Intangible Assets



Balances and related accumulated
amortization of intangible assets are as follows (in thousands of dollars):



|                                               |  |                   |     |   |                  |   |     |  
|---------------------------------------------- |  | ----------------- | --- | - | ---------------- | - | --- | -
|                                               |  | September 30,2004 |     |   | December 31,2003 |  
|Intangible assets subject to amortization:     |  |                   |     |   |                  |   |     |  
|Non-compete agreements                         |  |                   |     |   |                  |   |     |  
|Original balance                               |  | $                 | 463 |   |                  | $ | 463 |  
|Foreign currency translation                   |  |                   | 10  |   |                  |   |    |  
|Accumulated amortization                       |  |                   | (77 | ) |                  |   | (8  | )
|                                               |  |                   |     |   |                  |   |     |  
|Ending balance                                 |  | $                 | 396 |   |                  | $ | 455 |  
|                                               |  |                   |     |   |                  |   |     |  
|Intangible assets not subject to amortization: |  |                   |     |   |                  |   |     |  
|None                                           |  |                   |    |   |                  |   |    |  



9



---

10. Stock Option Plans



The Company accounts for its stock option plans under APB Opinion No. 25 under which no compensation cost has been recognized. Had compensation cost for these plans
been accounted for consistent with SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure, the Companys net earnings and net earnings
per share would have been reduced to the following pro forma amounts, (in thousands except per share data):



|                                                                                                                                            |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                                                                                            |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|                                                                                                                                            |  | 2004                             |       |   | 2003                            |   |       | 2004 |  |   | 2003   |  
|Net earnings, as reported                                                                                                                   |  | $                                | 4,861 |   |                                 | $ | 3,374 |      |  | $ | 10,075 |   |  | $ | 6,359 |  
|                                                                                                                                            |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                  | (164  | ) |                                 |   | (146  | )    |  |   | (652   | ) |  |   | (587  | )
|                                                                                                                                            |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|Pro forma net earnings                                                                                                                      |  | $                                | 4,697 |   |                                 | $ | 3,228 |      |  | $ | 9,423  |   |  | $ | 5,772 |  
|                                                                                                                                            |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|Net earnings per share:                                                                                                                     |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|As reported                                                                                                                                 |  | $                                | 0.71  |   |                                 | $ | 0.52  |      |  | $ | 1.50   |   |  | $ | 0.97  |  
|                                                                                                                                            |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|Pro forma                                                                                                                                   |  | $                                | 0.69  |   |                                 | $ | 0.49  |      |  | $ | 1.40   |   |  | $ | 0.88  |  
|                                                                                                                                            |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|Diluted net earnings per share                                                                                                              |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|As reported                                                                                                                                 |  | $                                | 0.70  |   |                                 | $ | 0.51  |      |  | $ | 1.46   |   |  | $ | 0.96  |  
|                                                                                                                                            |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|Pro forma                                                                                                                                   |  | $                                | 0.67  |   |                                 | $ | 0.48  |      |  | $ | 1.36   |   |  | $ | 0.87  |  
|                                                                                                                                            |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  



The effects of applying SFAS No. 123
to the pro forma disclosure amounts may not be indicative of future amounts. SFAS No. 123 does not apply to options awarded prior to 1995, and additional awards in future years are anticipated. The fair value of each option grant during the first
nine months of 2004 and 2003 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:



|            |  |                                 |  |                
|----------- |  | ------------------------------- |  | ---------------
|2004 Grants |  | Expected dividend yield         |  | 2.25% - 2.35%  
|            |  | Expected stock price volatility |  | 38.80% - 38.82%
|            |  | Risk free interest rate         |  | 4.10% - 4.57%  
|            |  | Expected life of options        |  | 10 years       
|            |  |                                
|2003 Grants |  | Expected dividend yield         |  | 3.23% - 3.28%  
|            |  | Expected stock price volatility |  | 37.23% - 38.68%
|            |  | Risk free interest rate         |  | 3.69% - 3.96%  
|            |  | Expected life of options        |  | 10 years       



No options were granted in the third
quarter of 2004. Options granted during the first nine months of 2004 had a weighted average fair value of $12.34 per option and a weighted average exercise price of $30.84 per option.



11. Recently Issued Accounting Pronouncements



In December 2003, the Financial Accounting Standards Board issued a revision to Statement of Financial Accounting Standards No. 132
(SFAS 132), Employers Disclosures about Pensions and Other Postretirement Benefits. This revision requires additional disclosures to those in the original Statement about the assets, obligations, cash flows and net
periodic benefit cost of defined benefit pension plans and other defined postretirement plans. Except for certain items, the provisions of the revised Statement were effective for fiscal years ending after December 15, 2003, and the Company adopted
these disclosures. As is permitted in the revised Statement, the Company has deferred disclosure of estimated future benefit payments, the disclosure of which is effective for fiscal years ending after June 15, 2004.



10



---

12. Retirement Benefits



The Company has a noncontributory pension plan covering substantially all employees. The benefits provided by this plan are measured by length of service, compensation
and other factors, and are currently funded by a trust 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 of 1974, as amended.



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 and the Companys obligation is fixed at the 1997 contribution level.



On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed
into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Measures of the
accumulated postretirement benefit obligation and net periodic postretirement benefit cost do not reflect any amount associated with the subsidy because the Companys plan is not actuarially equivalent to Medicare Part D and is not expected to
receive any subsidy.



Components of Net Periodic Benefit Cost (in thousands
of dollars)



|                                              |  |                  |        |   |                |   |        |      |  |      |     |  |   |    
|--------------------------------------------- |  | ---------------- | ------ | - | -------------- | - | ------ | ---- |  | ---- | --- |  | - | ---
|                                              |  | Pension Benefits |        |   | Other Benefits
|Three Months Ended September 30,              |  | 2004             |        |   | 2003           |   |        | 2004 |  | 2003
|Service cost                                  |  | $                | 1,002  |   |                | $ | 971    |      |  | $    | 55  |  | $ | 50 
|Interest cost                                 |  |                  | 2,208  |   |                |   | 2,282  |      |  |      | 177 |  |   | 182
|Expected return on plan assets                |  |                  | (3,936 | ) |                |   | (3,575 | )    |  |      |    |  |   |   
|Amortization of prior service cost            |  |                  | 78     |   |                |   | 111    |      |  |      |    |  |   |   
|Amortization of unrecognized net (gain) loss  |  |                  |       |   |                |   | 99     |      |  |      | 3   |  |   |   
|Amortization of unrecognized transition asset |  |                  | (231   | ) |                |   | (231   | )    |  |      |    |  |   |   
|                                              |  |                  |        |   |                |   |        |      |  |      |     |  |   |    
|Net periodic benefit cost (income)            |  | $                | (879   | ) |                | $ | (343   | )    |  | $    | 235 |  | $ | 232
|                                              |  |                  |        |   |                |   |        |      |  |      |     |  |   |    



|                                              |  |                  |         |   |                |   |         |      |  |      |     |  |   |    
|--------------------------------------------- |  | ---------------- | ------- | - | -------------- | - | ------- | ---- |  | ---- | --- |  | - | ---
|                                              |  | Pension Benefits |         |   | Other Benefits
|Nine Months Ended September 30,               |  | 2004             |         |   | 2003           |   |         | 2004 |  | 2003
|Service cost                                  |  | $                | 3,060   |   |                | $ | 2,899   |      |  | $    | 165 |  | $ | 150
|Interest cost                                 |  |                  | 6,724   |   |                |   | 6,570   |      |  |      | 531 |  |   | 546
|Expected return on plan assets                |  |                  | (11,831 | ) |                |   | (10,745 | )    |  |      |    |  |   |   
|Amortization of prior service cost            |  |                  | 234     |   |                |   | 200     |      |  |      |    |  |   |   
|Amortization of unrecognized net (gain) loss  |  |                  |        |   |                |   | 272     |      |  |      | 9   |  |   |   
|Amortization of unrecognized transition asset |  |                  | (695    | ) |                |   | (695    | )    |  |      |    |  |   |   
|                                              |  |                  |         |   |                |   |         |      |  |      |     |  |   |    
|Net periodic benefit cost (income)            |  | $                | (2,508  | ) |                | $ | (1,499  | )    |  | $    | 705 |  | $ | 696
|                                              |  |                  |         |   |                |   |         |      |  |      |     |  |   |    



Employer Contributions



The Company previously disclosed in its financial statements for the year
ended December 31, 2003, that it did not expect to make any contributions to the pension plan in 2004. The Company also disclosed that it expected total contributions of $932,000 to be made to its postretirement plan in 2004, of which the Company
was responsible for approximately 50%, or $466,000. As of September 30, 2004, the Company has made no contributions to its pension plan and has made contributions of $354,000 to its postretirement plan. The Company presently anticipates making no
contributions to its pension plan and an additional $117,000 to its postretirement plan during the last three months of 2004.



11



---

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



Lufkin Industries, Inc. (the Company) is a global supplier of oil field, power transmission and trailer products. Through its
Oil Field segment, the Company manufactures and services artificial reciprocating rod lift equipment and related products, which are used to extract crude oil and other fluids from wells. Through its Power Transmission segment, the Company
manufactures and services high-speed and low-speed speed increasing and reducing gearboxes for industrial applications. Through its Trailer segment, the Company manufactures and services various highway trailers, including van, float and dump
trailers. While these markets are price-competitive, technological and quality differences can provide product differentiation.



The Companys strategy is to differentiate its products through additional value-add capabilities. Examples of these capabilities are high-quality engineering,
customized designs, rapid manufacturing response to demand through plant capacity, inventory and vertical integration, superior quality and customer service, and an international network of service locations. In addition, the Companys strategy
is to maintain a low debt to equity ratio in order to quickly take advantage of growth opportunities and pay dividends, even during unfavorable business cycles.



In support of the above strategy, during the third quarter of 2003, the Company completed two strategic acquisitions that expanded its Oil Field segment. The Company
purchased the remaining shares of Lufkin Argentina S.A., its 1992 Argentina joint venture with Baker Hughes, Inc., effective July 1, 2003. Lufkin Argentina manufactures and services oil field pumping units and automation equipment for use in
Argentina and other South American countries. The Company also purchased the operating assets of Basin Technical Services in Midland, Texas on July 30, 2003. This acquisition enhanced Oil Fields product and service offerings in the oil field
automation marketplace. On December 9, 2003, the Company acquired the operating assets and commercial operations of D&R Oil Field Services, located in Drayton Valley, Alberta, Canada. This acquisition within the Oil Field segment strengthened
the Companys presence in Canadas oil field service business. During the first nine months of 2004, the Company continued to integrate these acquisitions with its existing operations and developed additional expansion plans for these
markets.



In addition, the Company expanded its Power Transmission capabilities
in 2003 through a new gear repair facility in Alabama that will service the Southeast U.S. and through new high-speed gearbox manufacturing capabilities in its French operation.



The Company generally monitors its performance through analysis of sales, gross margin (gross profit as a percentage of sales) and net
earnings, as well as debt/equity levels, short-term debt levels, and cash balances.



Overall, sales for the quarter ended September 30, 2004, increased to $95.8 million from $71.5 million for the quarter ended September 30, 2003, or 34.0%, and sales for the first nine months of 2004 increased to $248.9 million from $187.6
million for the nine months of 2003, or 32.7%. This growth was primarily driven by increased sales of new oil field equipment, oil field acquisitions in the past year and sales of new van trailers. Additional segment data on sales is provided later
in this section.



Gross margin for the quarter ended September 30, 2004,
decreased to 17.8% from 22.7% for the quarter ended September 30, 2003, and gross margin for the first nine months of 2004 decreased to 17.7% from 19.5% for the first nine months of 2003. While gross margins have benefited from sales volume
increasing fixed cost coverage, margins have been negatively impacted by rapidly rising material costs, especially steel, and their related impact on the LIFO inventory reserve, plant inefficiencies due to rapid growth and continued pressure in
raising prices. Raw material price inflation is the primary driver for the increase in the LIFO reserve. Additional segment data on gross margin is provided later in this section.



The increase in sales volumes primarily drove the changes in net earnings for the three and nine months ended September 30, 2004, but
decreases in selling, general and administrative expenses for the first nine months of 2004 also contributed to the improvement in net earnings. The Company reported net earnings of $4.9 million or $0.70 per share (diluted) for the quarter ended
September 30, 2004, compared to net earnings of $3.4 million or $0.51 per share (diluted) for the quarter ended September 30, 2003. The Company reported net earnings of $10.1 million or $1.46 per share (diluted) for the nine months ended September
30, 2004, compared to net earnings of $6.4 million or $0.96 per share (diluted) for the nine months ended September 30, 2003.



12



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Debt/equity (long-term debt net of current portion as a percentage of total equity) levels remained at 0.0% at September
30, 2004, from December 31, 2003. Short-term debt and the current portion of long-term debt was $0.6 million at September 30, 2004, down from $0.7 million at December 31, 2003, due to reduced borrowing by the Companys French subsidiary. Cash
balances at September 30, 2004, were $13.4 million, down from $19.4 million at December 31, 2003. This decrease is primarily related to increased working capital requirements. Inventory levels increased to support higher backlog levels and rising
material costs while receivable levels increased from the volume impact of higher sales.



Other Events



In the second quarter of
2003, the Company incurred a one-time severance expense of $354,000 for the lay-offs and early-retirements of certain employees. These employee reductions were related to modifying the strategy of the Trailer branch facilities to focus primarily on
parts from parts and service and other targeted cost reductions in areas not achieving profitability goals. Of this severance expense, the Oil Field segment incurred $89,000, the Power Transmission segment incurred $144,000, the Trailer segment
incurred $104,000 and the Corporate segment incurred $17,000.



In the first
quarter of 2004, the Company incurred a one-time severance expense of $317,000 for employee reductions in the French operation of the Power Transmission segment. These cost reductions were related to the Companys continuing strategy of
targeting areas not achieving profitability goals.



Three Months Ended
September 30, 2004, Compared to the Three Months Ended September 30, 2003:



The following table summarizes the Companys sales and gross profit by operating segment (in thousands of dollars):



|                   |  |                                 |        |                      |   |        |                        |   |        |   |  |       |  
|------------------ |  | ------------------------------- | ------ | -------------------- | - | ------ | ---------------------- | - | ------ | - |  | ----- | -
|                   |  | Three Months EndedSeptember 30, |        | Increase/ (Decrease) |   |        | % Increase/ (Decrease) |  
|                   |  | 2004                            |        | 2003                 |   |       
|Sales              |  |                                 |        |                      |   |        |                        |   |        |   |  |       |  
|Oil Field          |  | $                               | 57,220 |                      | $ | 41,155 |                        | $ | 16,065 |   |  | 39.0  |  
|Power Transmission |  |                                 | 19,451 |                      |   | 20,792 |                        |   | (1,341 | ) |  | (6.4  | )
|Trailer            |  |                                 | 19,095 |                      |   | 9,508  |                        |   | 9,587  |   |  | 100.8 |  
|                   |  |                                 |        |                      |   |        |                        |   |        |   |  |       |  
|Total              |  | $                               | 95,766 |                      | $ | 71,455 |                        | $ | 24,311 |   |  | 34.0  |  
|                   |  |                                 |        |                      |   |        |                        |   |        |   |  |       |  
|Gross Profit       |  |                                 |        |                      |   |        |                        |   |        |   |  |       |  
|Oil Field          |  | $                               | 11,841 |                      | $ | 10,036 |                        | $ | 1,805  |   |  | 18.0  |  
|Power Transmission |  |                                 | 4,786  |                      |   | 6,138  |                        |   | (1,352 | ) |  | (22.0 | )
|Trailer            |  |                                 | 395    |                      |   | 37     |                        |   | 358    |   |  | 967.6 |  
|                   |  |                                 |        |                      |   |        |                        |   |        |   |  |       |  
|Total              |  | $                               | 17,022 |                      | $ | 16,211 |                        | $ | 811    |   |  | 5.0   |  
|                   |  |                                 |        |                      |   |        |                        |   |        |   |  |       |  



Oil Field sales increased to $57.2
million, or 39.0%, for the quarter ended September 30, 2004, from $41.2 million for the quarter ended September 30, 2003. The added sales of the Canadian acquisition and the benefit of the stronger Canadian dollar in the third quarter of 2004
contributed 2.2 percentage points of this increase. Increased sales of new pumping units, and related service, and foundry castings account for the majority of the balance of the increase of 36.8 percentage points. Sales of new pumping units in the
U.S. and Canada, and related service, increased from higher drilling and production activity associated with higher energy prices and from higher use of pumping units to pump water from gas fields. In addition, sales of automation equipment
continued to increase as it grows market share from new product offerings. Commercial casting sales from the foundry operation grew significantly from the prior year quarter as general economic levels in the U.S. improved, especially in the machine
tool market. Oil Fields backlog increased to $47.4 million as of September 30, 2004, from $21.7 million at September 30, 2003. This backlog increase was from increased bookings of new pumping units in the U.S. and Argentina markets and from
foundry machine tool casting orders. Backlog levels also increased when compared to the $44.0 million level at June 30, 2004, which was primarily driven by increased foundry casting orders.



13



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Gross margin (gross profit as a percentage of revenue) for the Oil Field segment decreased to 20.7% for quarter ended
September 30, 2004, compared to 24.4% for the quarter ended September 30, 2003, or 3.7 percentage points. This decline was caused by higher raw material prices, especially steel and raw scrap iron, and the related LIFO reserve impact, higher fuel
prices and legal costs in the service operations and the mix of sales shifting from higher margin service and automation product lines to commercial castings, offsetting the benefit of higher plant utilization on fixed cost coverage in the
manufacturing operations.



Direct selling, general and administrative expenses
for Oil Field increased to $2.5 million, or 13.0%, for the quarter ended September 30, 2004, from $2.2 million for the quarter ended September 30, 2003. This increase is attributed to higher employee-related expenses and third-party commissions in
support of the higher sales volumes in all product lines.



Sales for the
Companys Power Transmission segment decreased to $19.5 million, or 6.4%, for the quarter ended September 30, 2004, compared to $20.8 million for the quarter ended September 30, 2003. The benefit of the stronger euro on the sales of the French
division offset this decrease by 1.0 percentage points. The net 7.4 percentage points of decrease was the result of decreased sales of high-speed units to the oil and gas development market from customer project delays and reduced orders for oil
pipeline projects. This was partially offset by increased sales from the gear repair expansion in the Southeast U.S. The Companys Power Transmission backlog at September 30, 2004, increased to $38.3 million from $26.4 million at September 30,
2003. This backlog increase was from increased orders for high-speed units for the power generation market, low-speed units for the oil drilling equipment market and higher orders in the repair sector from the Southeast U.S expansion. Backlog also
increased from the $36.2 million level at June 30, 2004. This increase is the result of increased bookings of low-speed units for the oil drilling equipment market.



Gross margin for the Power Transmission segment decreased to 24.6% for the quarter ended September 30, 2004, compared to 29.5% for the
quarter ended September 30, 2003, or 4.9 percentage points. This decrease was from lower margins on new units for the power generation market from price competition and production inefficiencies. In addition, margins on longer lead-time orders have
been impacted by rapidly rising raw material pricing, and the related LIFO reserve impact, not being reflected in the original selling price.



Direct selling, general and administrative expenses for Power Transmission remained at $2.9 million for the quarter ended September 30, 2004, compared to $2.9 million for
the quarter ended September 30, 2003. Lower third-party commissions and bad debt expense offset the impact of the stronger euro on the French operation.



Trailer sales for the quarter ended September 30, 2004, increased to $19.1 million, or 100.8%, from $9.5 million for the quarter ended September 30, 2003. This increase
resulted from higher sales of all models of new trailers. Freight industry demand has continued to improve due to replacement trailer demand and from increases in freight volume levels. The freight industry delayed new purchases for several years
due to poor economic conditions. Backlog for the Trailer segment increased to $15.0 million at September 30, 2004, compared to $9.3 million at September 30, 2003, for the reasons discussed above. However, backlog levels decreased from the $29.0
million level at June 30, 2004. This decrease is from customers temporarily delaying additional bookings as a result of recent price increases. Customers anticipate raw material prices to decrease and result in lower trailer sales prices.
Additionally, freight companies have been unable to meet the growth in freight demand from driver shortages, which has impacted short-term equipment purchases. New trailer bookings are expected to rise again in the fourth quarter of 2004 as freight
haulers resume replacing aging fleets and meeting increased freight demand.



Trailer gross margin increased to 2.1% for the quarter ended September 30, 2004, from 0.4% for the quarter ended September 30, 2003, or 1.7 percentage points. This margin increase was from the benefit of higher plant utilization on fixed
cost coverage and from some improvements in pricing levels. These gains were partially offset by the impact of higher raw material prices, especially steel, and the related LIFO reserve impact.



Direct selling, general and administrative expenses for Trailer increased to $0.7 million, or
43.5%, for the quarter ended September 30, 2004, compared to $0.5 million for the quarter ended September 30, 2003, primarily from higher employee-related expenses and third-party commissions in support of the higher sales volumes in all product
lines.



14



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Corporate administrative expenses, which are allocated to the segments primarily based on third-party revenues, decreased
to $3.4 million, or 32.2%, for the quarter ended September 30, 2004, from $5.0 million for the quarter ended September 30, 2003, primarily from lower expenses for litigation and other legal matters.



Investment income, interest expense and other income and expense for the quarter ended
September 30, 2004, totaled $0.0 million compared to an expense of $0.2 million for the quarter ended September 30, 2003. This increase was due primarily from certain foreign currency exchange gains.



Pension income, which is reported as a reduction of cost of sales, increased to $0.9 million
for the quarter ended September 30, 2004, or 156%, compared to $0.3 million for the quarter ended September 30, 2003. For the full year, pension income is expected to be approximately $3.4 million compared to $1.8 million for 2003, or an 89%
increase. This increase is due to higher expected returns on plan assets due to the higher fair market value of the plan assets.



The effective tax rate for the quarter ended September 30, 2004, was 36.0% compared to 38.0% for the quarter ended September 30, 2003. This decrease was primarily from
the favorable impact of certain tax benefits on export sales. The full year effective tax rate is expected to be approximately 36.5%.



Nine Months Ended September 30, 2004, Compared to the Nine Months Ended September 30, 2003:



The following table summarizes the Companys sales and gross profit by operating segment (in thousands of dollars):



|                   |  |                                |         |                     |   |         |                       |   |        |   |  |       |  
|------------------ |  | ------------------------------ | ------- | ------------------- | - | ------- | --------------------- | - | ------ | - |  | ----- | -
|                   |  | Nine Months EndedSeptember 30, |         | Increase/(Decrease) |   |         | % Increase/(Decrease) |  
|                   |  | 2004                           |         | 2003                |   |        
|Sales              |  |                                |         |                     |   |         |                       |   |        |   |  |       |  
|Oil Field          |  | $                              | 151,212 |                     | $ | 100,752 |                       | $ | 50,460 |   |  | 50.1  |  
|Power Transmission |  |                                | 55,322  |                     |   | 55,485  |                       |   | (163   | ) |  | (0.3  | )
|Trailer            |  |                                | 42,389  |                     |   | 31,356  |                       |   | 11,033 |   |  | 35.2  |  
|                   |  |                                |         |                     |   |         |                       |   |        |   |  |       |  
|Total              |  | $                              | 248,923 |                     | $ | 187,593 |                       | $ | 61,330 |   |  | 32.7  |  
|                   |  |                                |         |                     |   |         |                       |   |        |   |  |       |  
|Gross Profit       |  |                                |         |                     |   |         |                       |   |        |   |  |       |  
|Oil Field          |  | $                              | 29,786  |                     | $ | 22,249  |                       | $ | 7,537  |   |  | 33.9  |  
|Power Transmission |  |                                | 13,511  |                     |   | 14,188  |                       |   | (677   | ) |  | (4.8  | )
|Trailer            |  |                                | 811     |                     |   | 107     |                       |   | 704    |   |  | 657.9 |  
|                   |  |                                |         |                     |   |         |                       |   |        |   |  |       |  
|Total              |  | $                              | 44,108  |                     | $ | 36,544  |                       | $ | 7,564  |   |  | 20.7  |  
|                   |  |                                |         |                     |   |         |                       |   |        |   |  |       |  



Oil Field sales increased to $151.2
million, or 50.1%, for the nine months ended September 30, 2004, from $100.8 million for the nine months ended September 30, 2003. The added sales of the acquisitions and the benefit of the stronger Canadian dollar in 2004 contributed 9.3 percentage
points of this increase. Increased sales of new pumping units account for a majority of the balance of the increase of 40.8 percentage points. Sales of new pumping units in the U.S. and Canada, and related service, increased from higher drilling and
production activity associated with higher energy prices and from higher use of pumping units to pump water from gas fields. In addition, sales of automation equipment continued to increase as it grows market share from new product offerings.
Commercial casting sales from the foundry operation grew significantly from the prior year as general economic levels in the U.S. improved, especially in the machine tool market. Oil Fields backlog increased to $47.4 million as of September
30, 2004, from $24.9 million at December 31, 2003. This backlog increase was from increased bookings of new pumping units in the U.S. and Argentina markets and from foundry machine tool casting orders.



Gross margin (gross profit as a percentage of revenue) for the Oil Field segment decreased to
19.7% for nine months ended September 30, 2004, compared to 22.1% for the nine months ended September 30, 2003, or 2.4 percentage points. This decline was caused by higher raw material prices, especially steel and raw scrap iron, and the related
LIFO reserve impact, higher fuel prices and legal costs in the service operations and plant inefficiencies in the foundry operation associated with rapid production ramp-up for the volume increases, offsetting the benefit of higher plant utilization
on fixed cost coverage in the pumping unit manufacturing operations.



15



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Direct selling, general and administrative expenses for Oil Field increased to $7.7 million, or 27.6%, for the nine
months ended September 30, 2004, from $6.0 million for the for nine months ended September 30, 2003. The additional expenses of Lufkin Argentina contributed 11.6 percentage points of this increase, with the balance of the increase primarily
associated with higher employee-related expenses in support of higher sales volumes.



Sales for the Companys Power Transmission segment decreased slightly to $55.3 million, or 0.3%, for the nine months ended September 30, 2004, compared to $55.5 million for the nine months ended September 30, 2003. The benefit of the
stronger euro on the sales of the French division contributed a 1.7 percentage point increase. The net 2.0 percentage points of decrease was the result of lower sales of high-speed units to the oil and gas development market from customer project
delays and reduced orders for oil pipeline projects. This was partially offset by increased sales from the gear repair expansion in the Southeast U.S. The Companys Power Transmission backlog at September 30, 2004, increased to $38.3million
from $24.8 million at December 31, 2003. This backlog increase was from increased orders for high-speed units for the power generation market, low-speed units for the oil drilling equipment market and higher orders in the repair sector from the
Southeast U.S expansion.



Gross margin for the Power Transmission segment
decreased to 24.4% for the nine months ended September 30, 2004, compared to 25.6% for the nine months ended September 30, 2003, or 1.2 percentage points. This decline was from lower margins on new units for the power generation market from price
competition and production inefficiencies. In addition, margins on longer lead-time orders have been impacted by rapidly rising raw material pricing, and the related LIFO reserve impact, not being reflected in the original selling price.



Direct selling, general and administrative expenses for Power Transmission remained at
$8.9 million for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003. Lower third-party commissions and bad debt expense offset the impact of the stronger euro on the French operation.



Trailer sales for the nine months ended September 30, 2004, increased to $42.4 million, or
35.2%, from $31.4 million for the nine months ended September 30, 2003. This increase resulted from higher sales of all models of new trailers. Freight industry demand has continued to improve due to replacement trailer demand and from increases in
freight volume levels. The freight industry delayed new purchases for several years due to poor economic conditions. This increase was partially offset by the 4.7 percentage point impact of the change of strategy, implemented in the second quarter
of 2003, of its branch locations to focus primarily on parts sales instead of parts and service. Backlog for the Trailer segment increased to $15.0 million at September 30, 2004, compared to $11.1 million at December 31, 2003. The backlog increase
was primarily from orders for new van trailers for the reasons mentioned above. However, new booking levels decreased in the third quarter of 2004 as customers temporarily delayed additional bookings as a result of recent price increases. Customers
anticipate raw material prices to decrease and result in lower trailer sales prices. Additionally, freight companies have been unable to meet the growth in freight demand from driver shortages, which has impacted short-term equipment purchases. New
trailer bookings are expected to rise again in the fourth quarter of 2004 as freight haulers resume replacing aging fleets and meeting increased freight demand.



Trailer gross margin increased to 1.9% for the nine months ended September 30, 2004, from 0.3% for the nine months ended September 30, 2003, or 1.6 percentage
points. This increase was from the benefit of higher plant utilization on fixed cost coverage and from some improvements in pricing levels. These gains were partially offset by the impact of higher raw material prices, especially steel, and the
related LIFO reserve impact.



Direct selling, general and administrative
expenses for Trailer increased to $1.7 million, or 19.2%, for the nine months ended September 30, 2004, from $1.4 million for the nine months ended September 30, 2003, primarily from employee-related expenses and third-party commissions in support
of the sales volume growth.



Corporate administrative expenses, which are
allocated to the segments primarily based on third-party revenues, decreased to $9.7 million, or 12.8%, for the nine months ended September 30, 2004, from $11.1 million for the nine months ended September 30, 2003, primarily from lower expenses for
litigation and other legal matters.



Investment income, interest expense and
other income and expense for the nine months ended September 30, 2004, totaled $0.2 million of expense compared to income of $1.2 million for the nine months ended September 30, 2003. In the second quarter of 2003, a one-time gain of $1.0 million
from the sale of the Company aircraft was recorded. The additional decrease was due primarily from certain foreign currency exchange losses and other miscellaneous finance charges.



16



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Pension income, which is reported as a reduction of cost of sales, increased to $2.5 million for the nine months ended
September 30, 2004, or 67%, compared to $1.5 million for the nine months ended September 30, 2003. For the full year, pension income is expected to be approximately $3.4 million compared to $1.8 million for 2003, or an 89% increase. This increase is
due to higher expected returns on plan assets due to the higher fair market value of the plan assets.



The effective tax rate for the nine months ended September 30, 2004, was 36.5% compared to 38.0% for the nine months ended September 30, 2003. This decrease was primarily from the favorable impact of certain tax
benefits on export sales. The full year effective tax rate is expected to be approximately 36.5%.



17



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Liquidity and Capital Resources



The Company has historically relied on cash flows from operations and third-party borrowings to finance its operations, including
acquisitions, dividend payments and stock repurchases.



The Companys cash
balance totaled $13.4 million at September 30, 2004, compared to $19.4 million at December 31, 2003. For the nine months ended September 30, 2004, net cash provided by operating activities was $0.4 million, cash used in investing activities totaled
$7.4 million and cash provided by financing activities amounted to $1.0 million. Significant components of cash provided by operating activities include net earnings adjusted for non-cash expenses of $18.4 million, offset by a net increase in
working capital of $18.0 million. This increase was primarily due to higher inventory and accounts receivable, which consumed $19.4 million and $7.2 million, respectively. Inventory increased in support the higher sales volumes in Oilfield and
Trailer and from price increases on raw materials. Accounts receivable increased primarily in Oil Field and Trailer from higher sales volume, partially offset by fewer accounts receivable with extended terms. Higher accounts payable balances,
related to higher activity and inventory levels, partially offset these items by $7.7 million. Cash used in investing activities included net capital expenditures totaling $7.4 million and an increase in other long-term assets of $0.1 million.
Capital expenditures in the first nine months of 2004 were primarily for additions to and replacements of production equipment and operating vehicles in the Oil Field segment. Capital expenditures for 2004 are projected to be in the range of $12.0
million to $14.0 million. Significant components of cash provided by financing activities included proceeds from short-term notes payable of $0.1 million, payments on long-term debt of $0.2 million, proceeds from the exercise of stock options of
$4.7 million and dividend payments of $3.6 million or $0.54 per share.



Total
debt balances at September 30, 2004, including current maturities of long-term debt, consisted of $0.6 million of short-term notes payable and $0.0 million of long-term notes payable, all current, to various banks. This debt is associated with the
Companys French operations. As of September 30, 2004, the Company had no outstanding debt associated with the Bank Facility discussed below. Total debt decreased by $0.1 million, consisting of short-term borrowings of $0.1 million and payments
on long-term notes payable of $0.2 million during the first nine months of 2004.



The Company has a three-year $27.5 million credit facility with a domestic bank (the Bank Facility) consisting of an unsecured revolving line of credit that provides for up to $17.5 million of committed borrowings along with an
additional $10.0 million discretionary line of credit. This facility was originally set to expire on December 30, 2005, but was renewed during the third quarter of 2004. The renewed facility expires on June 30, 2007. Borrowings under the Bank
Facility bear interest, at the Companys option, at either the greater of (i) the prime rate, (ii) the base CD rate plus an applicable margin or (iii) the Federal Funds Effective Rate plus an applicable margin or the London Interbank Offered
Rate plus an applicable margin, depending on certain ratios as defined in the Bank Facility. As of September 30, 2004, no amounts were outstanding on the $27.5 million revolving line of credit and the Company was in compliance with all financial
covenants under the terms of the Bank Facility.



In addition, the Company has
short-term borrowing capabilities with a French bank for the working capital needs of its French operation. The repayment terms are 60 days with interest calculated at the Euro Overnight Index Average plus an applicable margin, with specific
accounts receivable provided as security. As of September 30, 2004, $0.6 million was outstanding under this borrowing arrangement.



The Company currently has a stock repurchase plan under which the Company is authorized to spend up to $19.1 million for repurchases of its common stock. In the second
quarter of 2003, the Board of Directors authorized an additional $2.0 million of stock repurchases to the plan. Pursuant to this plan, the Company has repurchased a total of 828,370 shares of its common stock at an aggregate purchase price of $17.0
million. No shares were repurchased during the nine months ended September 30, 2004. Repurchased shares are added to treasury stock and are available for general corporate purposes including the funding of the Companys stock option plans. As
of September 30, 2004, the Company held 249,639 shares of treasury stock at an aggregate cost of approximately $5.2 million. Authorizations of approximately $2.1 million remained at September 30, 2004.



18



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The following table summarizes the Companys expected cash outflows by period from financial contracts and
commitments as of September 30, 2004. Information on recurring purchases of materials for use in manufacturing and service operations have not been included. These amounts are not long-term in nature (less than three months) and are generally
consistent from year to year.



|                                                 |  |       |       |      |   |            |  |            |     |             |   |     |  |   |    
|------------------------------------------------ |  | ----- | ----- | ---- | - | ---------- |  | ---------- | --- | ----------- | - | --- |  | - | ---
|(Thousands of dollars)                           |  | Total |       | 2004 |   | 2005 &2006 |  | 2007 &2008 |     | Beyond 2008
|Operating lease obligations                      |  | $     | 1,315 |      | $ | 160        |  | $          | 474 |             | $ | 369 |  | $ | 312
|Contractual commitments for capital expenditures |  |       | 3,358 |      |   | 3,282      |  |            | 76  |             |   |    |  |   |   
|Long-term debt obligations                       |  |       | 10    |      |   | 10         |  |            |    |             |   |    |  |   |   
|                                                 |  |       |       |      |   |            |  |            |     |             |   |     |  |   |    
|Total                                            |  | $     | 4,683 |      | $ | 3,452      |  | $          | 550 |             | $ | 369 |  | $ | 312
|                                                 |  |       |       |      |   |            |  |            |     |             |   |     |  |   |    



Since the Company has no significant
tax loss carryforwards, the Company expects to make quarterly estimated tax payments in 2004 based on taxable income levels. Also, the Company has various retirement plans for which the Company has committed a certain level of benefit. The defined
benefit plan is overfunded and no contributions are expected in the short-term. The Company expects to make contributions to its defined contribution and post-retirement health and life plans of approximately $2.7 million annually, depending on
participation levels in these plans.



The Company believes that its cash flows
from operations and its available borrowing capacity under its credit agreements will be sufficient to fund its operations, including planned capital expenditures, dividend payments and stock repurchases, through December 31, 2004.



Recently Issued Accounting Pronouncements



In December 2003, the Financial Accounting Standards Board issued a revision to Statement of
Financial Accounting Standards No. 132 (SFAS 132), Employers Disclosures about Pensions and Other Postretirement Benefits. This revision requires additional disclosures to those in the original Statement about the
assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined postretirement plans. Except for certain items, the provisions of the revised Statement were effective for fiscal years ending after
December 15, 2003, and the Company adopted these disclosures. As is permitted in the revised Statement, the Company has deferred disclosure of estimated future benefit payments, the disclosure of which is effective for fiscal years ending after June
15, 2004.



Critical Accounting Policies and Estimates



The discussion and analysis of financial condition and results of operations are based upon
the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, based on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting
policies affect its more significant judgments and estimates used in preparation of its consolidated statements.



The Company extends credit to customers in the normal course of business. Management performs ongoing credit evaluations of our customers and adjusts credit limits based
upon payment history and the customers current credit worthiness. An allowance for doubtful accounts has been established to provide for estimated losses on receivable collections. The balance of this allowance is determined by regular reviews
of outstanding receivables and historical experience. As the financial condition of customers change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required.



Revenue is not recognized until it is realized or realizable and earned. The criteria to
meet this guideline are: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable and collectibility is reasonably assured. The Company also recognizes
Bill-and-Hold transactions when the product is completed and is ready to be shipped and the risk of loss on the product has been transferred to the customer.



19



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The Company has made significant investments in inventory to service its customers. On a routine basis, the Company uses
estimates in determining the level of reserves required to state inventory at the lower of cost or market. Managements estimates are primarily influenced by market activity levels, production requirements, the physical condition of products
and technological innovation. Changes in any of these factors may result in adjustments to the carrying value of inventory. Also, the Company accounts for a significant portion of its inventory under the LIFO method. The LIFO reserve can be impacted
by changes in the LIFO layers and by inflation index adjustments.



Long-lived
assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses the recoverability of long-lived assets by
determining whether the carrying value can be recovered through projected undiscounted cash flows, based on expected future operating results. Future adverse market conditions or poor operating results could result in the inability to recover the
current carrying value and thereby possibly requiring an impairment charge in the future.



Deferred tax assets and liabilities are recognized for the differences between the book basis and tax basis of the net assets of the Company. In providing for deferred taxes, management considers current tax
regulations, estimates of future taxable income and available tax planning strategies. Changes in state, federal and foreign tax laws as well as changes in the financial position of the Company could also affect the carrying value of deferred tax
assets and liabilities. If management estimates that some or all of any deferred tax assets will expire before realization or that the future deductibility is not probable, a valuation allowance would be recorded.



The Company is subject to claims and legal actions in the ordinary course of business. The
Company maintains insurance coverage for various aspects of its businesses and operations. The Company retains a portion of the insured losses that occur through the use of deductibles. Management regularly reviews estimates of reported and
unreported insured and non-insured claims and legal actions and provides for losses through reserves. As circumstances develop and additional information becomes available, adjustments to loss reserves may be required.



The Company sells certain of its products to customers with a product warranty that provides
repairs at no cost to the customer or the issuance of credit to the customer. The length of the warranty term depends on the product being sold, but ranges from one year to five years. The Company accrues its estimated exposure to warranty claims
based upon historical warranty claim costs as a percentage of sales multiplied by prior sales still under warranty at the end of any period. Management reviews these estimates on a regular basis and adjusts the warranty provisions as actual
experience differs from historical estimates or other information becomes available.



The Company offers a defined benefit plan and other benefits upon the retirement of its employees. Assets and liabilities associated with these benefits are calculated by third-party actuaries under the rules provided by various accounting
standards, with certain estimates provided by management. These estimates include the discount rate, expected rate of return of assets and the rate of increase of compensation and health claims. On a regular basis, management reviews these estimates
by comparing them to actual experience and those used by other companies. If a change in an estimate is made, the carrying value of these assets and liabilities may have to be adjusted. The impact of changes in these estimates does not differ
significantly from those disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.



Forward-Looking Statements and Assumptions



This Quarterly Report on Form 10-Q contains forward-looking statements and information, within the meaning of the Private Securities Litigation Reform Act of 1995, that
are based on managements beliefs as well as assumptions made by and information currently available to management. When used in this report, the words anticipate, believe, estimate, project,
plan, expect and similar expressions are intended to identify forward-looking statements. Such statements reflect the Companys current views with respect to certain events and are subject to certain assumptions, risks
and uncertainties, many of which are outside the control of the Company. These risks and uncertainties include, but are not limited to:



| |  | oil prices;
| | - | -----------



20



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| |  | capital spending levels of oil producers;
| | - | -----------------------------------------



| |  | availability and prices for raw materials;
| | - | ------------------------------------------



| |  | currency exchange rate fluctuations in the markets in which the Company operates;
| | - | ---------------------------------------------------------------------------------



| |  | changes in the laws, regulations, policies or other activities of governments, agencies and similar organizations where such actions may affect the production, licensing,
distribution or sale of the Companys products, the cost thereof or applicable tax rates;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | costs related to legal and administrative proceedings, including adverse judgments against the Company if the Company fails to prevail in reversing such judgments; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | general industry, political and economic conditions in the markets where the Companys procures material, components and supplies for the production of the Companys
principal products or where the Companys products are produced, distributed or sold.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. The Company
undertakes no obligations to update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



The Companys financial instruments include cash, accounts receivable, accounts payable, invested funds and debt obligations. The book value of accounts receivable,
short-term debt and accounts payable are considered to be representative of their fair market value because of the short maturity of these instruments. The Company believes the carrying values of its long-term debt obligations approximate fair
values because the interest rates on these obligations are comparable to what the Company believes it could currently obtain for debt with similar terms and maturities. The Companys accounts receivable are not concentrated in one customer or
industry and are not viewed as an unusual credit risk.



The Company does not
utilize financial or derivative instruments for trading purposes or to hedge exposures to interest rates, foreign currency rates or commodity prices. Due to the low level of current debt exposure, the Company does not have any significant exposure
to interest rate fluctuations. However, if the Company drew on its line of credit with its Bank Facility, the Company would have exposure since the interest rate is variable. In addition, the Company primarily invoices and purchases in the same
currency as the functional currency of its operations, which minimizes exposure to currency rate fluctuations. The Company is exposed to currency fluctuations with debt denominated in U.S. dollars owed to the Companys U.S. entity by its French
and Canadian entities. As of September 30, 2004, this inter-company debt was comprised of 1.1 million euros and 1.9 million Canadian dollars. Also, certain assets and liabilities, primarily employee and tax related, denominated in the local currency
of foreign operations whose functional currency is the U.S. dollar are exposed to fluctuations in currency rates.



Item 4. Controls and Procedures



Based on their evaluation of the Companys disclosure controls and procedures as of September 30, 2004, the Chief Executive Officer of the Company, Douglas V. Smith,
and the Chief Financial Officer of the Company, R. D. Leslie, have concluded that the Companys disclosure controls and procedures (as defined in Rule13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934) are
effective. There were no significant changes in the Companys internal control over financial reporting that occurred during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.



21



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PART II  OTHER INFORMATION



Item 1. Legal Proceedings



A class action complaint was filed in the United States District Court for the Eastern District of Texas on March 7, 1997, by an employee and a former employee that
alleged race discrimination in employment. Certification hearings were conducted in Beaumont, Texas in February of 1998 and in Lufkin, Texas in August of 1998. In April 1999, the District Court issued a decision that certified a class for this case,
which includes all persons of a certain minority employed by the Company from March 6, 1994, to the present. The Company appealed this class certification decision by the District Court to the 5th Circuit United States Court of Appeals in New
Orleans, Louisiana. This appeal was denied on June 23, 1999. Trial for this case began in December 2003 but was postponed by the Court. The trial resumed on October 12, 2004, and was concluded on October 14, 2004. Both parties have been asked to
submit briefs before the judge issues his decision. The Company believes the claim is without merit and is defending this action vigorously. Furthermore, the Company believes that the facts and the law in this action support its position.



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. It is managements opinion that the Companys liability, if any, under such claims or proceedings would not materially affect its consolidated
financial position, results of operations or cash flow.



Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds



None.



Item 3. Defaults Upon Senior Securities



None.



Item 4. Submission of Matters to a Vote of Security Holders



|(a) | The Company held its Annual Meeting of Stockholders on May 5, 2004, in Lufkin Texas to elect three directors.
|--- | -------------------------------------------------------------------------------------------------------------



|(b) | Directors elected at the Annual Meeting:
|--- | ----------------------------------------



John H. Lollar

Bob H. ONeal

Thomas E. Wiener



Directors with terms of office continuing after the Annual Meeting:



Directors with terms expiring in 2005:



H. J. Trout, Jr.

J. T. Jongebloed



Directors with terms expiring in
2006:



Douglas V. Smith

Simon W. Henderson

John F. Anderson



22



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Item 4. Submission of Matters to a Vote of Security Holders (Continued)



|(c) | The annual meeting was held to elect to elect three directors. All of the nominated directors were elected and will serve a three-year term expiring in 2007. The number of votes
cast for, against or withheld, as well as the number of abstentions and broker non-votes, for each nominated director are as follows:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                 |  |               |  |              |  |               |  |             |  |                
|---------------- |  | ------------- |  | ------------ |  | ------------- |  | ----------- |  | ---------------
|                 |  | Votes inFavor |  | VotesAgainst |  | VotesWithheld |  | Abstentions |  | BrokerNon-Votes
|John H. Lollar   |  | 5,917,938     |  |             |  | 170,026       |  |            |  |               
|Bob H. ONeal    |  | 5,916,678     |  |             |  | 171,286       |  |            |  |               
|Thomas E. Wiener |  | 5,821,512     |  |             |  | 266,452       |  |            |  |               



Item 5. Other Information



None.



Item 6. Exhibits and Reports on Form 8-K



|(a) | Exhibits
|--- | --------



|     |  |                                                                  
|---- |  | -----------------------------------------------------------------
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|     | 
|32.1 |  | Section 1350 Certification of Chief Executive Officer            
|     | 
|32.2 |  | Section 1350 Certification of Chief Financial Officer            



|(b) | Reports on Form 8-K during the third quarter of 2004
|--- | ----------------------------------------------------



None



23



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned duly
authorized.



Date: November 5, 2004



|                        |  |                                                                                                        
|----------------------- |  | -------------------------------------------------------------------------------------------------------
|LUFKIN INDUSTRIES, INC.
|                        | 
|By                      |  | /s/ R. D. Leslie                                                                                       
|                        |  | R.D. Leslie Vice President/Treasurer/Chief Financial
Officer Principal Financial and Accounting Officer





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