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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



(Mark One)

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



For the quarterly period ended September 30, 2003



| ̈ | 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)



|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 twelve months (or for such shorter
period as 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 Act).

Yes x No ̈



There were 6,562,839 shares of Common Stock, $1.00 par value per share, outstanding as of November 10, 2003, not including 329,542 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, |         |   | December 31, |  
|----------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | -
|                                                                  |  | 2003          |         |   | 2002         |  
|ASSETS                                                            |  |               |         |   |              |  
|Current assets:                                                   |  |               |         |   |              |  
|Cash and cash equivalents                                         |  | $             | 14,134  |   |              | $
|Receivables, net                                                  |  |               | 41,112  |   |              |  
|Income taxes receivable                                           |  |               | 741     |   |              |  
|Inventories                                                       |  |               | 42,667  |   |              |  
|Deferred income tax assets                                        |  |               | 948     |   |              |  
|Other current assets                                              |  |               | 1,030   |   |              |  
|                                                                  |  |               |         |   |              |  
|Total current assets                                              |  |               | 100,632 |   |              |  
|                                                                  |  |               |         |   |              |  
|Property, plant and equipment, at cost                            |  |               | 287,062 |   |              |  
|Less accumulated depreciation                                     |  |               | 200,431 |   |              |  
|                                                                  |  |               |         |   |              |  
|                                                                  |  |               | 86,631  |   |              |  
|                                                                  |  |               |         |   |              |  
|Prepaid pension costs                                             |  |               | 56,220  |   |              |  
|Goodwill, net                                                     |  |               | 11,380  |   |              |  
|Other assets, net                                                 |  |               | 1,823   |   |              |  
|                                                                  |  |               |         |   |              |  
|Total assets                                                      |  | $             | 256,686 |   |              | $
|                                                                  |  |               |         |   |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY                              |  |               |         |   |              |  
|Current liabilities:                                              |  |               |         |   |              |  
|Short-term notes payable                                          |  | $             | 526     |   |              | $
|Current portion of long-term notes payable                        |  |               | 229     |   |              |  
|Accounts payable                                                  |  |               | 11,839  |   |              |  
|Accrued liabilities:                                              |  |               |         |   |              |  
|Payroll and benefits                                              |  |               | 5,667   |   |              |  
|Warranty expenses                                                 |  |               | 1,847   |   |              |  
|Taxes payable                                                     |  |               | 4,309   |   |              |  
|Other                                                             |  |               | 8,421   |   |              |  
|                                                                  |  |               |         |   |              |  
|Total current liabilities                                         |  |               | 32,838  |   |              |  
|                                                                  |  |               |         |   |              |  
|Deferred income tax liabilities                                   |  |               | 28,791  |   |              |  
|Postretirement benefits                                           |  |               | 10,956  |   |              |  
|Long-term notes payable, net of current portion                   |  |               | 10      |   |              |  
|Shareholders equity:                                             |  |               |         |   |              |  
|Common stock, $1.00 par value per share;                          |  |               |         |   |              |  
|60,000,000 shares authorized;                                     |  |               |         |   |              |  
|6,892,381 shares issued                                           |  |               | 6,892   |   |              |  
|Capital in excess of par                                          |  |               | 18,483  |   |              |  
|Retained earnings                                                 |  |               | 165,667 |   |              |  
|Treasury stock, 343,292 and 364,462 shares, respectively, at cost |  |               | (7,089  | ) |              |  
|Accumulated other comprehensive income:                           |  |               |         |   |              |  
|Cumulative translation adjustment                                 |  |               | 138     |   |              |  
|                                                                  |  |               |         |   |              |  
|Total shareholders equity                                        |  |               | 184,091 |   |              |  
|                                                                  |  |               |         |   |              |  
|Total liabilities and shareholders equity                        |  | $             | 256,686 |   |              | $
|                                                                  |  |               |         |   |              |  



See accompanying notes
to consolidated financial statements.





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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, |  
|------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------ | -
|                                                  |  | 2003                            |           |   | 2002                           |  
|Sales                                             |  | $                               | 71,455    |   |                                | $
|Cost of sales                                     |  |                                 | 55,244    |   |                                |  
|                                                  |  |                                 |           |   |                                |  
|Gross profit                                      |  |                                 | 16,211    |   |                                |  
|Selling, general and administrative expenses      |  |                                 | 10,596    |   |                                |  
|                                                  |  |                                 |           |   |                                |  
|Operating income                                  |  |                                 | 5,615     |   |                                |  
|Interest income                                   |  |                                 | 23        |   |                                |  
|Interest expense                                  |  |                                 | (32       | ) |                                |  
|Other income (expense), net                       |  |                                 | (164      | ) |                                |  
|                                                  |  |                                 |           |   |                                |  
|Earnings before income tax provision              |  |                                 | 5,442     |   |                                |  
|Income tax provision                              |  |                                 | 2,068     |   |                                |  
|                                                  |  |                                 |           |   |                                |  
|Net earnings                                      |  |                                 | 3,374     |   |                                |  
|Change in foreign currency translation adjustment |  |                                 | 108       |   |                                |  
|                                                  |  |                                 |           |   |                                |  
|Total comprehensive income                        |  | $                               | 3,482     |   |                                | $
|                                                  |  |                                 |           |   |                                |  
|Net earnings per share:                           |  |                                 |           |   |                                |  
|Basic                                             |  | $                               | 0.52      |   |                                | $
|                                                  |  |                                 |           |   |                                |  
|Diluted                                           |  | $                               | 0.51      |   |                                | $
|                                                  |  |                                 |           |   |                                |  
|Dividends per share                               |  | $                               | 0.18      |   |                                | $
|                                                  |  |                                 |           |   |                                |  
|Weighted average number of shares outstanding:    |  |                                 |           |   |                                |  
|Basic                                             |  |                                 | 6,541,936 |   |                                |  
|Diluted                                           |  |                                 | 6,668,012 |   |                                |  



See accompanying notes
to consolidated financial statements.





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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands of dollars)



|                                                                                |  | Nine Months EndedSeptember 30, |        
|------------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                                |  | 2003                           |        
|Cash flows from operating activities:                                           |  |                                |        
|Net earnings                                                                    |  | $                              | 6,359  
|Adjustments to reconcile net earnings to cash provided by operating activities: |  |                                |        
|Depreciation and amortization                                                   |  |                                | 8,791  
|Deferred income tax provision                                                   |  |                                | 1,143  
|Pension income                                                                  |  |                                | (1,500 
|Gain on disposition of property, plant and equipment                            |  |                                | (1,032 
|Changes in:                                                                     |  |                                |        
|Receivables, net                                                                |  |                                | (3,722 
|Income taxes receivable                                                         |  |                                | (20    
|Inventories                                                                     |  |                                | (6,724 
|Other current assets                                                            |  |                                | (510   
|Accounts payable                                                                |  |                                | (1,834 
|Accrued liabilities                                                             |  |                                | 2,411  
|                                                                                |  |                                |        
|Net cash provided by operating activities                                       |  |                                | 3,362  
|                                                                                |  |                                |        
|Cash flows from investing activities:                                           |  |                                |        
|Additions to property, plant and equipment                                      |  |                                | (11,304
|Proceeds from disposition of property, plant and equipment                      |  |                                | 1,177  
|Proceeds from disposition of invested funds                                     |  |                                |       
|Increase in other assets                                                        |  |                                | (730   
|Acquisition of other companies                                                  |  |                                | (3,493 
|                                                                                |  |                                |        
|Net cash used in investing activities                                           |  |                                | (14,350
|                                                                                |  |                                |        
|Cash flows from financing activities:                                           |  |                                |        
|Proceeds from short-term notes payable                                          |  |                                | 527    
|Payments on long-term notes payable                                             |  |                                | (198   
|Dividends paid                                                                  |  |                                | (3,531 
|Proceeds from exercise of stock options                                         |  |                                | 422    
|Purchases of treasury stock                                                     |  |                                | (31    
|                                                                                |  |                                |        
|Net cash used in financing activities                                           |  |                                | (2,811 
|                                                                                |  |                                |        
|Effect of translation on cash and cash equivalents                              |  |                                | 325    
|                                                                                |  |                                |        
|Net increase (decrease) in cash and cash equivalents                            |  |                                | (13,474
|Cash and cash equivalents at beginning of period                                |  |                                | 27,608 
|                                                                                |  |                                |        
|Cash and cash equivalents at end of period                                      |  | $                              | 14,134 
|                                                                                |  |                                |        



See accompanying notes
to consolidated financial statements





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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, 2002. The results of operations for the three and nine months ended September 30, 2003, are not necessarily indicative of the results that may be expected for the full fiscal year.



2. Acquisitions



During the third quarter of 2003, the Company completed two strategic acquisitions that will expand 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 enhances Oil Fields product and service offerings in the oil field automation
marketplace. The aggregate purchase price for these acquisitions was $3.5 million in cash.



3. Receivables



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



|                                |  | September 30, |        |   | December 31, |  
|------------------------------- |  | ------------- | ------ | - | ------------ | -
|                                |  | 2003          |        |   | 2002         |  
|Accounts receivable             |  | $             | 41,332 |   |              | $
|Notes receivable                |  |               | 48     |   |              |  
|                                |  |               |        |   |              |  
|Total receivables               |  |               | 41,380 |   |              |  
|Allowance for doubtful accounts |  |               | (268   | ) |              |  
|                                |  |               |        |   |              |  
|Net receivables                 |  | $             | 41,112 |   |              | $
|                                |  |               |        |   |              |  





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4. Property, Plant & Equipment



The following is a summary of the Companys P. P. & E. balances (in thousands of dollars):



|                                         |  | September 30, |          |   | December 31, |  
|---------------------------------------- |  | ------------- | -------- | - | ------------ | -
|                                         |  | 2003          |          |   | 2002         |  
|Land                                     |  | $             | 2,796    |   |              | $
|Land improvements                        |  |               | 6,783    |   |              |  
|Buildings                                |  |               | 67,847   |   |              |  
|Machinery and equipment                  |  |               | 192,726  |   |              |  
|Furniture and fixtures                   |  |               | 4,200    |   |              |  
|Computer equipment and software          |  |               | 12,710   |   |              |  
|                                         |  |               |          |   |              |  
|Total property, plant and equipment      |  |               | 287,062  |   |              |  
|Less accumulated depreciation            |  |               | (200,431 | ) |              |  
|                                         |  |               |          |   |              |  
|Total property, plant and equipment, net |  | $             | 86,631   |   |              | $
|                                         |  |               |          |   |              |  



Depreciation expense
related to property, plant and equipment was $2.8 million and $2.7 million in the three months ended September 30, 2003 and 2002, respectively, and $8.7 million and $8.3 million in the nine months ended September 30, 2003 and 2002, respectively.



5. Inventories



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



|                                |  | September30, |        | December31,
|------------------------------- |  | ------------ | ------ | -----------
|                                |  |              | 2003   |            
|                                |  |              |        |            
|Gross inventories @ FIFO:       |  |              |        |            
|Finished goods                  |  | $            | 6,517  |            
|Work in process                 |  |              | 8,231  |            
|Raw materials & component parts |  |              | 47,013 |            
|                                |  |              |        |            
|Total gross inventories @ FIFO  |  |              | 61,761 |            
|Less reserves:                  |  |              |        |            
|LIFO                            |  |              | 17,749 |            
|Valuation                       |  |              | 1,345  |            
|                                |  |              |        |            
|Total inventories as reported   |  | $            | 42,667 |            
|                                |  |              |        |            



Gross inventories on
a FIFO basis shown above that were accounted for on a LIFO basis were $42,741,000 and $37,257,000 at September 30, 2003, and December 31, 2002, respectively.





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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 months and nine months ended September 30, 2003 and 2002, are illustrated below (in thousands of
dollars, except share and per share data):



|                                                                                                        |  | Three Months EndedSeptember 30, |           | Nine Months Ended September 30
|------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------
|                                                                                                        |  | 2003                            |           | 2002                          
|Numerator:                                                                                              |  |                                 |           |                               
|Numerator for basic and diluted earnings per share-net earnings                                         |  | $                               | 3,374     |                               
|                                                                                                        |  |                                 |           |                               
|Denominator:                                                                                            |  |                                 |           |                               
|Denominator for basic net earnings per share-weighted-average shares                                    |  |                                 | 6,541,936 |                               
|Effect of dilutive securities: employee stock options                                                   |  |                                 | 126,076   |                               
|                                                                                                        |  |                                 |           |                               
|Denominator for diluted net earnings per share-adjusted weighted-average shares and assumed conversions |  |                                 | 6,668,012 |                               
|                                                                                                        |  |                                 |           |                               
|Basic net earnings per share                                                                            |  | $                               | 0.52      |                               
|                                                                                                        |  |                                 |           |                               
|Diluted net earnings per share                                                                          |  | $                               | 0.51      |                               
|                                                                                                        |  |                                 |           |                               



Options to purchase a
total of 305,811 and 132,986 shares of the Companys common stock at September 30, 2003, and 2002, respectively, were excluded from the calculation of fully diluted earnings per share for the three months ended September 30, 2003, and options
to purchase a total of 306,154 and 132,986 shares of the Companys common stock at September 30, 2003, and 2002, respectively, were excluded from the calculation of fully diluted earnings per share for the nine months ended September 30, 2003,
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 which alleged race discrimination in employment. Certification hearings were conducted in
Beaumont, Texas in February of 1998 and in Lufkin, Texas in August of 1998. The District Court in April of 1999 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. The Company is
defending this action vigorously. Furthermore, the Company believes that the facts and the law in this action support its position and is confident that it will prevail if this case is tried on its merits. Trial for this case is scheduled for
December 2003.



In the case of Echometer and James N. McCoy
vs. Lufkin Industries, Inc., the plaintiff filed suit in U.S. District Court alleging infringement of a fluid-level device patent and received a jury verdict on September 26, 2003, in the amount of $150,000. The trial court judge is reviewing
post-trial motions before finalizing the judgement, which could materially impact the amount of the verdict.



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 or results of operations.





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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, 2002. Following is a summary of key segment
information (in thousands of dollars):

|
|

Three Months Ended September 30, 2003



|                                     |  | Oil Field |        |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|------------------------------------ |  | --------- | ------ | - | ----------------- | - | ------ | ------- |  | - | --------- | - | ----- | -
|Gross sales                          |  | $         | 41,595 |   |                   | $ | 21,111 |         |  | $ | 9,550     |   |       | $
|Inter-segment sales                  |  |           | (440   | ) |                   |   | (319   | )       |  |   | (42       | ) |       |  
|                                     |  |           |        |   |                   |   |        |         |  |   |           |   |       |  
|Net sales                            |  | $         | 41,155 |   |                   | $ | 20,792 |         |  | $ | 9,508     |   |       | $
|                                     |  |           |        |   |                   |   |        |         |  |   |           |   |       |  
|Operating income (loss)              |  | $         | 5,730  |   |                   | $ | 1,616  |         |  | $ | (1,731    | ) |       | $
|Other income (expense)               |  |           | (215   | ) |                   |   | 8      |         |  |   | 9         |   |       |  
|                                     |  |           |        |   |                   |   |        |         |  |   |           |   |       |  
|Earnings (loss) before tax provision |  | $         | 5,515  |   |                   | $ | 1,624  |         |  | $ | (1,722    | ) |       | $
|                                     |  |           |        |   |                   |   |        |         |  |   |           |   |       |  



Three Months
Ended September 30, 2002



|                                     |  | Oil Field |        |   | Power Transmission |   |        | Trailer |  |   | Corporate |   | Total |  
|------------------------------------ |  | --------- | ------ | - | ------------------ | - | ------ | ------- |  | - | --------- | - | ----- | -
|Gross sales                          |  | $         | 31,336 |   |                    | $ | 20,069 |         |  | $ | 9,960     |   |       | $
|Inter-segment sales                  |  |           | (251   | ) |                    |   | (284   | )       |  |   | (23       | ) |       |  
|                                     |  |           |        |   |                    |   |        |         |  |   |           |   |       |  
|Net sales                            |  | $         | 31,085 |   |                    | $ | 19,785 |         |  | $ | 9,937     |   |       | $
|                                     |  |           |        |   |                    |   |        |         |  |   |           |   |       |  
|Operating income (loss)              |  | $         | 3,987  |   |                    | $ | 2,664  |         |  | $ | (646      | ) |       | $
|Other income (expense)               |  |           | 44     |   |                    |   | 80     |         |  |   | 13        |   |       |  
|                                     |  |           |        |   |                    |   |        |         |  |   |           |   |       |  
|Earnings (loss) before tax provision |  | $         | 4,031  |   |                    | $ | 2,744  |         |  | $ | (633      | ) |       | $
|                                     |  |           |        |   |                    |   |        |         |  |   |           |   |       |  



Nine Months Ended
September 30, 2003



|                                     |  | Oil Field |         |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|------------------------------------ |  | --------- | ------- | - | ----------------- | - | ------ | ------- |  | - | --------- | - | ----- | -
|Gross sales                          |  | $         | 101,780 |   |                   | $ | 56,654 |         |  | $ | 31,397    |   |       | $
|Inter-segment sales                  |  |           | (1,028  | ) |                   |   | (1,169 | )       |  |   | (41       | ) |       |  
|                                     |  |           |         |   |                   |   |        |         |  |   |           |   |       |  
|Net sales                            |  | $         | 100,752 |   |                   | $ | 55,485 |         |  | $ | 31,356    |   |       | $
|                                     |  |           |         |   |                   |   |        |         |  |   |           |   |       |  
|Operating income (loss)              |  | $         | 11,593  |   |                   | $ | 1,672  |         |  | $ | (4,200    | ) |       | $
|Other income (expense)               |  |           | (141    | ) |                   |   | 156    |         |  |   | 67        |   |       |  
|                                     |  |           |         |   |                   |   |        |         |  |   |           |   |       |  
|Earnings (loss) before tax provision |  | $         | 11,452  |   |                   | $ | 1,828  |         |  | $ | (4,133    | ) |       | $
|                                     |  |           |         |   |                   |   |        |         |  |   |           |   |       |  



|Nine Months Ended September 30, 2002
|------------------------------------



|                                     |  | Oil Field |        |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|------------------------------------ |  | --------- | ------ | - | ----------------- | - | ------ | ------- |  | - | --------- | - | ----- | -
|Gross sales                          |  | $         | 92,188 |   |                   | $ | 53,107 |         |  | $ | 29,629    |   |       | $
|Inter-segment sales                  |  |           | (807   | ) |                   |   | (1,360 | )       |  |   | (33       | ) |       |  
|                                     |  |           |        |   |                   |   |        |         |  |   |           |   |       |  
|Net sales                            |  | $         | 91,381 |   |                   | $ | 51,747 |         |  | $ | 29,596    |   |       | $
|                                     |  |           |        |   |                   |   |        |         |  |   |           |   |       |  
|Operating income (loss)              |  | $         | 10,239 |   |                   | $ | 3,984  |         |  | $ | (2,428    | ) |       | $
|Other income (expense)               |  |           | (55    | ) |                   |   | 119    |         |  |   | 25        |   |       |  
|                                     |  |           |        |   |                   |   |        |         |  |   |           |   |       |  
|Earnings (loss) before tax provision |  | $         | 10,184 |   |                   | $ | 4,103  |         |  | $ | (2,403    | ) |       | $
|                                     |  |           |        |   |                   |   |        |         |  |   |           |   |       |  





---

9. Goodwill and Intangible Assets



Goodwill



The changes in the carrying amount of goodwill for the nine months ended September 30, 2003, are as follows:



|(Thousands of dollars)                                |  | OilField |       | PowerTransmission |   | Trailer |  | Total
|----------------------------------------------------- |  | -------- | ----- | ----------------- | - | ------- |  | -----
|Balance as of 12/31/02                                |  | $        | 8,492 |                   | $ | 1,829   |  | $    
|Goodwill acquired during year                         |  |          | 856   |                   |   |        |  |      
|Impairment losses                                     |  |          |      |                   |   |        |  |      
|Goodwill written off related to sale of business unit |  |          |      |                   |   |        |  |      
|Foreign currency translation                          |  |          |      |                   |   | 203     |  |      
|                                                      |  |          |       |                   |   |         |  |      
|Balance as of 9/30/03                                 |  | $        | 9,348 |                   | $ | 2,032   |  | $    
|                                                      |  |          |       |                   |   |         |  |      



Goodwill impairment
tests were performed in the first quarter of 2003 and no impairment losses were recorded.



The company completed its preliminary purchase allocations of the acquisitions discussed in Footnote 2, which resulted in the addition of $856,000 of goodwill, as shown above. However, the final purchase allocations
may change as a result of further fair value analysis of intangible assets.



Intangible Assets



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



|-                                              |  | September 30,2003 |      |   | December 31,2002 |  
|---------------------------------------------- |  | ----------------- | ---- | - | ---------------- | -
|Intangible assets subject to amortization:     |  |                   |      |   |                  |  
|Non-compete agreements                         |  |                   |      |   |                  |  
|Original balance                               |  | $                 | 500  |   |                  | $
|Less accumulated amortization                  |  |                   | (500 | ) |                  |  
|                                               |  |                   |      |   |                  |  
|Ending balance                                 |  | $                 |     |   |                  | $
|                                               |  |                   |      |   |                  |  
|Intangible assets not subject to amortization: |  |                   |      |   |                  |  
|None                                           |  |                   |     |   |                  |  



During the third
quarter of 2003, the Company entered into two non-compete agreements worth a total of $300,000, to be paid in equal monthly installments over 5 years beginning August 2003 and ending July 2007, subject to compliance with the terms of the agreements.





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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 MonthsEndedSeptember 30, |       |   | Nine MonthsEndedSeptember 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | -
|                                                                                                                                            |  | 2003                           |       |   | 2002                          |  
|Net earnings, as reported                                                                                                                   |  | $                              | 3,374 |   |                               | $
|                                                                                                                                            |  |                                |       |   |                               |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |  |                                | (146  | ) |                               |  
|                                                                                                                                            |  |                                |       |   |                               |  
|Pro forma net earnings                                                                                                                      |  | $                              | 3,228 |   |                               | $
|                                                                                                                                            |  |                                |       |   |                               |  
|Net earnings per share:                                                                                                                     |  |                                |       |   |                               |  
|Basic net earnings per share                                                                                                                |  |                                |       |   |                               |  
|As reported                                                                                                                                 |  | $                              | 0.52  |   |                               | $
|                                                                                                                                            |  |                                |       |   |                               |  
|Pro forma                                                                                                                                   |  | $                              | 0.49  |   |                               | $
|                                                                                                                                            |  |                                |       |   |                               |  
|Diluted net earnings per share                                                                                                              |  |                                |       |   |                               |  
|As reported                                                                                                                                 |  | $                              | 0.51  |   |                               | $
|                                                                                                                                            |  |                                |       |   |                               |  
|Pro forma                                                                                                                                   |  | $                              | 0.48  |   |                               | $
|                                                                                                                                            |  |                                |       |   |                               |  



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 nine months ended 2003 and 2002 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:



|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     
|            |  |                                 |  |              
|2002 Grants |  | Expected dividend yield         |  | 2.49%3.19%  
|            |  | Expected stock price volatility |  | 38.31%38.59%
|            |  | Risk free interest rate         |  | 4.85%5.06%  
|            |  | Expected life of options        |  | 10 years     



Options granted during
the first nine months of 2003 had a weighted average fair value of $7.63 per option and a weighted average exercise price of $22.23 per option.





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11. Recently Issued Accounting Pronouncements



On April 30, 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149
(SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including derivative instruments embedded in other contracts,
and hedging activities under Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 improves the financial reporting by requiring that contracts with comparable characteristics be accounted for
similarly, clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows and amends certain other existing pronouncements for more consistent reporting of contracts that derivatives in
their entirety or that contain embedded derivatives that warrant separate accounting. SFAS 149 is effective for contracts entered into or modified after June 15, 2003 and for hedging relationships designated after June 30, 2003. The Company has
adopted SFAS 149 and it did not have an impact on the Companys financial position or results of operations.



On May 15, 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 (SFAS 150),
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer to transfer assets or to issue equity shares. SFAS 150
is effective for instruments entered into or modified after May 31, 2003, and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company has adopted SFAS 150 and it did not have an impact
on the Companys financial position or results of operations.



In January 2003, the Financial Accounting Standards Board issued Financial Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities- An Interpretation of Accounting Research Bulletin 51. FIN 46 addresses
consolidation by business enterprises of variable interest entities (VIEs) and the primary objective is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than
voting rights. FIN 46 requires an entity to consolidate a VIE if the entity has a variable interest (or combination of variable interests) that will absorb a majority of the entitys expected losses if they occur, receive a majority of the
entitys expected residual returns if they occur or both. This guidance applies immediately to VIEs created after January 1, 2003, and to VIEs in which an enterprise obtains an interest after that date. However, On October 8, 2003, the FASB
decided to grant a broader deferral of the implementation of FIN46. Pursuant to this deferral, public companies must complete their evaluations of VIEs that existed prior to February 1, 2003, and the consolidation of those for which they are the
primary beneficiary for financial statements issued for the first period ending after December 15, 2003. For calendar year companies, consolidation of previously existing VIEs will be required in their December 31, 2003, financial statements. While
the Company is still evaluating the potential impact of FIN 46, the Company does not believe it has any VIEs and does not believe that FIN 46 will have an impact on its consolidated financial position or results of operations.





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



The Company designs, manufactures, sells and services
various types of oil field pumping units, power transmission products and highway trailers. The Companys Oil Field segment manufactures and services numerous sizes and configurations of oil field pumping and related automation equipment, as
well as commercial castings. The Power Transmission segment designs, manufactures, repairs and services speed increasers and reducers for use in industrial applications such as petrochemical, refining, rubber, plastics and steel and also for use in
marine propulsion applications. The Trailer segment produces various types and styles of highway trailers, including vans, platforms and dumps.



During the third quarter of 2003, the Company completed two strategic acquisitions that will expand its Oil Field segment. The Company purchased the
remaining shares of Lufkin Argentina S.A., its 1992 Argentina joint venture with Baker Hughes, Inc. 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. This acquisition enhances Oil Fields product and service offerings in the oil field automation marketplace.



Results of Operations



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. The Oil Field segment incurred $89,000, Power Transmission incurred $144,000, Trailer incurred $104,000 and Corporate incurred $17,000 of this severance expense.



Three Months Ended September 30, 2003, Compared to Three Months Ended
September 30, 2002:



Net sales for the three months ended
September 30, 2003, increased to $71,455,000 from $60,807,000 for the three months ended September 30, 2002. Net earnings were $3,374,000 or $0.51 per share (diluted) for the three months ended September 30, 2003, compared to net earnings of
$3,782,000 or $0.56 per share (diluted) for the three months ended September 30, 2002.



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) |  
|------------------ |  | ------------------------------- | ------ | ---------------------- | - | ------ | ---------------------- | -
|                   |  | 2003                            |        | 2002                   |   |       
|Sales              |  |                                 |        |                        |   |        |                        |  
|Oil Field          |  | $                               | 41,155 |                        | $ | 31,085 |                        | $
|Power Transmission |  |                                 | 20,792 |                        |   | 19,785 |                        |  
|Trailer            |  |                                 | 9,508  |                        |   | 9,937  |                        |  
|                   |  |                                 |        |                        |   |        |                        |  
|Total              |  | $                               | 71,455 |                        | $ | 60,807 |                        | $
|                   |  |                                 |        |                        |   |        |                        |  
|                   |  |                                 |        |                        |   |        |                        |  
|Gross Profit       |  |                                 |        |                        |   |        |                        |  
|Oil Field          |  | $                               | 10,036 |                        | $ | 7,205  |                        | $
|Power Transmission |  |                                 | 6,138  |                        |   | 6,461  |                        |  
|Trailer            |  |                                 | 37     |                        |   | 536    |                        |  
|                   |  |                                 |        |                        |   |        |                        |  
|Total              |  | $                               | 16,211 |                        | $ | 14,202 |                        | $
|                   |  |                                 |        |                        |   |        |                        |  



Oil Field sales
increased to $41,155,000, or 32.4%, in the third quarter of 2003 from $31,085,000 in the third quarter of 2002. Excluding the added sales of the two acquisitions and the benefit of the stronger Canadian dollar in the third quarter of 2003, sales
increased 12.3%. This is accounted for by increased sales of new pumping units in the Middle East and U.S. and service in the U.S. from higher drilling and production activity associated with higher energy prices. This was partially offset by
continued losses in commercial casting sales due to Chinese import competition. Oil Fields backlog increased to $21,700,000 as of September 30, 2003, from $19,200,000 at June 30, 2003, and $18,300,000 at September 30, 2002, primarily from the
additional backlog of Lufkin Argentina. Excluding the benefit of the Lufkin Argentina backlog, Oil Fields backlog as of September 30, 2003, would have



---

been $17,100,000. This decline from the prior quarter and prior year quarter is from lower commercial casting orders for
the machine tool industry.



Gross profit as a percentage of sales (gross
margin) for the Oil Field segment increased to 24.4% for the three months ended September 30, 2003, or 1.2% percentage points, compared to 23.2% for the prior year quarter. Excluding the impact of reduced pension income and higher utility expenses,
the margin would have been 1.5% percentage points higher, or 25.9%. This margin improvement was primarily the result of higher utilization of manufacturing facilities and continued cost containment efforts.



Direct selling, general and administrative expenses for Oil Field increased to $2,224,000, or
16.5%, for the quarter ended September 30, 2003, from $1,910,000 for the quarter ended September 30, 2002. Excluding the additional expenses of Lufkin Argentina, direct selling, general and administrative expenses for Oil Field would have increased
2.8%.



Sales for the Companys Power Transmission segment increased to
$20,792,000, or 5.1%, for the third quarter of 2003 compared to $19,785,000 for the third quarter of 2002. Excluding the benefit of the stronger euro on the sales of the French division, sales would have increased 2.4%. Sales in the French operation
increased, in euros, due to the addition of the high-speed product line and increased in the U.S. from sales of new high-speed units to the oil and gas and LNG markets. These gains were partially offset by a drop in sales in the U.S. gear repair
business due to weakness in the sugar markets. The Companys Power Transmission backlog at September 30, 2003, decreased to $26,400,000 from $32,400,000 at June 30, 2003, and $33,600,000 at September 30, 2002. This backlog decline was from
lower orders of new high-speed units in the oil and gas market due to short-term project delays and price competition and in the power generation market from limited capital expansion activity.



Gross margin for the Power Transmission segment decreased to 29.5% for the three months ended
September 30, 2003, or 3.1% percentage points, compared to 32.7% for the prior year quarter. Excluding the impact of reduced pension income and higher utility expenses, the margin decline would have been 1.2% percentage points. This decline was due
to lower margins on new high-speed units in the U.S. from several large project orders comprising multiple units, which are typically more competitive and price-sensitive.



Direct selling, general and administrative expenses for Power Transmission increased to $2,895,000, or 4.3%, for the quarter ended September
30, 2003, from $2,775,000 for the quarter ended September 30, 2002. Excluding the impact of the stronger euro, expenses would have increased 0.2%.



Trailer sales for the third quarter of 2003 decreased to $9,508,000, or 4.3%, from $9,937,000 for the third quarter of 2002. In the second quarter 2003, Trailer modified
the strategy of its branch locations to focus primarily on parts sales instead of parts and service. Excluding the impact of this change, trailer sales would have increased 5.4%, primarily from increased sales of flatbed trailers due to the
introduction of a new model capable of carrying a fork truck. Backlog for the Trailer segment totaled $9,300,000 at September 30, 2003, compared to $8,000,000 at June 30, 2003, and $12,000,000 at September 30, 2002. The backlog increase from the
prior quarter was primarily due to higher bookings in new vans from greater activity from freight haulers as U.S. shipping tonnage has grown during 2003.



Trailer gross margin declined to 0.4%, or 5.0% percentage points, for the three months ended September 30, 2003, from 5.4% for the comparable prior year quarter.
Excluding the impact of reduced pension income and higher utility expenses, the margin decline would have been 1.5% percentage points. This margin decline was due to continued pricing pressure on all models of trailers in the depressed
freight-hauling market.



Direct selling, general and administrative expenses
for Trailer increased to $464,000, or 28.0%, for the quarter ended September 30, 2003, from $363,000 for the quarter ended September 30, 2002, due to an increase in general liability insurance claims. While insurance claim filings cannot be
accurately forecasted, this increase is not expected to recur on an ongoing and regular basis.



Corporate administrative expenses, which are allocated to the segments primarily based on third-party revenues, increased to $5,012,000, or 59.1%, for the quarter ended September 30, 2003, from $3,150,000 for the
quarter ended September 30, 2002, primarily due to higher legal expenses associated with the Echometer trial in September of 2003 and the upcoming class action trial.





---

Interest and other income and expense for the three months ended September 30, 2003, totaled $173,000 of expense compared
to income of $247,000 for the prior year quarter. The decrease was due primarily to decreased interest income from lower cash balances and losses on currency exchange.



Pension income, which is reported as a reduction of cost of sales, declined to $343,000 for the quarter ended September 30, 2003, or 72.6%,
compared to $1,250,000 for the quarter ended September 30, 2002. This decline was due to lower expected returns on plan assets due to the lower fair market value of the plan assets. For the full year, pension income is expected to decline 65% to
$1,800,000 for the same reason.



Nine Months Ended September 30, 2003,
Compared to Nine Months Ended September 30, 2002:



Net sales for the nine
months ended September 30, 2003, increased to $187,593,000 from $172,724,000 for the nine months ended September 30, 2002. Net earnings were $6,359,000 or $0.96 per share (diluted) for the nine months ended September 30, 2003, compared to net
earnings of $7,435,000 or $1.10 per share (diluted) for the nine months ended September 30, 2002.



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) |  
|------------------ |  | ------------------------------ | ------- | ------------------- | - | ------- | ---------------------- | -
|                   |  | 2003                           |         | 2002                |   |        
|Sales              |  |                                |         |                     |   |         |                        |  
|Oil Field          |  | $                              | 100,752 |                     | $ | 91,381  |                        | $
|Power Transmission |  |                                | 55,485  |                     |   | 51,747  |                        |  
|Trailer            |  |                                | 31,356  |                     |   | 29,596  |                        |  
|                   |  |                                |         |                     |   |         |                        |  
|Total              |  | $                              | 187,593 |                     | $ | 172,724 |                        | $
|                   |  |                                |         |                     |   |         |                        |  
|Gross Profit       |  |                                |         |                     |   |         |                        |  
|Oil Field          |  | $                              | 22,249  |                     | $ | 20,077  |                        | $
|Power Transmission |  |                                | 14,188  |                     |   | 14,982  |                        |  
|Trailer            |  |                                | 107     |                     |   | 1,412   |                        |  
|                   |  |                                |         |                     |   |         |                        |  
|Total              |  | $                              | 36,544  |                     | $ | 36,471  |                        | $
|                   |  |                                |         |                     |   |         |                        |  



Oil Field sales increased to
$100,752,000, or 10.3%, in the first nine months of 2003 from $91,381,000 in the first nine months of 2002. Excluding the added sales of the two acquisitions and the benefit of the stronger Canadian dollar in 2003, sales increased 3.1%. This is
accounted for by increased sales of new pumping units in the Middle East and U.S. from higher drilling and production activity associated with higher energy prices. This increase was partially offset by a decline in sales to the Indonesia market,
lower sales of new pumping units into Canada from new drilling activity in Canada focusing on shallow wells which use other forms of artificial lift, and continued losses in commercial casting sales due to Chinese import competition. Oil
Fields backlog increased to $21,700,000 as of September 30, 2003, from $12,600,000 at December 31, 2002. Excluding the benefit of the Lufkin Argentina backlog, Oil Fields backlog as of September 30, 2003, would have been $17,100,000. The
net backlog increase was primarily from increased bookings of new pumping units in the U.S. small independent market and the Middle East. Compared to the backlog of $18,300,000 at September 30, 2002, net backlog declined due to lower commercial
casting orders for the machine tool industry.



Gross margin for the Oil Field
segment increased slightly to 22.1% for the nine months ended September 30, 2003, or 0.1% percentage points, compared to 22.0% for the same period in the prior year. Excluding the impact of reduced pension income, severance expenses and higher
utility expenses, the margin would have been 1.7% percentage points higher, or 23.8%. This margin improvement was primarily the result of higher utilization of manufacturing facilities and continued cost containment efforts.



Direct selling, general and administrative expenses for Oil Field increased to $6,024,000, or
8.1%, for the nine months ended September 30, 2003, from $5,575,000 for the nine months ended September 30, 2002. Excluding the additional expenses of Lufkin Argentina, direct selling, general and administrative expenses for Oil Field would have
increased 3.4%.





---

Sales for the Companys Power Transmission segment increased to $55,485,000, or 7.2%, for the first nine months of
2003 compared to $51,747,000 for the first nine months of 2002. Excluding the benefit of the stronger euro on the sales of the French division, sales would have increased 3.0%. Sales in the French operation increased, in euros, due to the addition
of the high-speed product line and increased in the U.S. from sales of new high-speed units to the oil and gas and LNG markets. These gains were partially offset by a drop in sales in new low-speed units and gear repair business due to weakness in
the sugar markets. The Companys Power Transmission backlog at September 30, 2003, decreased to $26,400,000 from $30,900,000 at December 31, 2002, and $33,600,000 at September 30, 2002. This backlog decline was from lower orders of new
high-speed units in the oil and gas market due to short term project delays and price competition and in the power generation market from limited capital expansion activity.



Gross margin for the Power Transmission segment decreased to 25.6% for the nine months ended September 30, 2003, or 3.4% percentage points,
compared to 29.0% for the same prior year period. Excluding the impact of reduced pension income, severance expenses and higher utility expenses, the margin decline would have been 1.3% percentage points. This decline was due to lower margins on new
high-speed units in the U.S. from several large project orders comprising multiple units, which are typically more competitive and price-sensitive.



Direct selling, general and administrative expenses for Power Transmission increased to $8,899,000, or 16.0%, for the nine months ended September 30, 2003, from
$7,668,000 for the nine months ended September 30, 2002. Excluding the impact of the stronger euro, expenses would have increased 8.8%. This increase was due to higher third-party commissions in the U.S. associated with the above-mentioned large
project orders, higher engineering expenses in France in support of the new high-speed product line and increased selling effort in the gear repair market.



Trailer sales for the first nine months of 2003 increased to $31,356,000, or 5.9%, from $29,596,000 for the first nine months of 2002. In the second quarter 2003, Trailer
changed the strategy of its branch locations to focus primarily on parts sales instead of parts and service. Excluding the impact of this change, trailer sales would have increased 10.8%, primarily from increased sales of new vans as higher U.S.
freight tonnage has led to more orders from freight-haulers and increased sales of floats due to the introduction of a new model capable of carrying a fork truck. These increases were partially offset by a decline in sales of dump trailers as orders
from the construction market have been weak. Backlog for the Trailer segment totaled $9,300,000 at September 30, 2003, compared to $10,100,000 at December 31, 2002, and $12,000,000 at September 30, 2002. The backlog decrease was primarily due to
lower bookings in new vans due the sporadic nature of large order bookings.



Trailer gross margin declined to 0.3%, or 4.5% percentage points, for the nine months ended September 30, 2003, from 4.8% for the comparable prior year period. Excluding the impact of reduced pension income, severance expenses and higher
utility expenses, the margin decline would have been 1.5% percentage points. This margin decline was due to continued pricing pressure on all models of trailers in the depressed freight-hauling market.



Direct selling, general and administrative expenses for Trailer increased to $1,409,000, or
20.3%, for the nine months ended September 30, 2003, from $1,171,000 for the nine months ended September 30, 2002, due to an increase in general liability insurance claims. While insurance claim filings cannot be accurately forecasted, this increase
is not expected to recur on an ongoing and regular basis.



Corporate
administrative expenses, which are allocated to the segments primarily based on third-party revenues, increased to $11,147,000, or 8.6%, for the nine months ended September 30, 2003, from $10,262,000 for the nine months ended September 30, 2002,
primarily due to higher legal expenses associated with the Echometer trial in September of 2003 and the upcoming class action trial.



Interest and other income and expense for the nine months ended September 30, 2003, totaled $1,192,000 of income compared to income of $495,000 for the comparable prior
year period. The increase was due primarily to the one-time gain of almost $1,000,000 on the sale of the Companys twenty-year old aircraft, partially offset by lower interest income from lower cash balances.



Pension income, which is reported as a reduction of cost of sales, declined to $1,500,000 for
the nine months ended September 30, 2003, or 60.0%, compared to $3,750,000 for the nine months ended September 30, 2002. This decline was due to lower expected returns on plan assets due to the lower fair market value of the plan assets. For the
full year, pension income is expected to decline 65% to $1,800,000 for the same reason.





---

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 $14.1 million at September 30, 2003, compared to $27.6 million at December 31, 2002. For the nine months ended September 30, 2003, net cash provided by operating activities was $3.4 million, cash used in investing activities totaled
$14.4 million, cash used in financing activities amounted to $2.8 million and the favorable effect of foreign currency translation amounted to $0.3 million. Significant components of cash provided by operating activities include net earnings
adjusted for non-cash expenses of $13.8 million offset by a net increase in working capital of $10.4 million. This increase was primarily due to higher inventory and accounts receivable, which consumed $6.7 million and $3.8 million, respectively.
Oilfield inventory increased due to planned inventory build in anticipation of higher demand and Power Transmission inventory increased from greater work in process from higher business levels. Accounts receivable increased primarily in Power
Transmission, which historically has longer credit terms, and the granting of more extended credit terms to various customers. Cash used in investing activities included net capital expenditures totaling $10.2 million, an increase in other long-term
assets of $0.7 million and acquisitions of other companies for $3.5 million. Capital expenditures in the first nine months of 2003 were primarily for additions and replacements of production equipment and operating vehicles in the Oil Field segment,
the expansion into the Southeast U.S. for repairing power transmission equipment and the replacement of the Companys twenty year-old aircraft, partially offset by the proceeds from the sale of the old plane. Capital expenditures for 2003 are
projected to be approximately $13.0 million. Significant components of cash used in financing activities included proceeds from short-term notes payable of $0.5 million, payments on long-term debt of $0.2 million, proceeds from the exercise of stock
options of $0.4 million and dividend payments of $3.5 million or $0.54 per share.



Total debt balances at September 30, 2003, including current maturities of long-term debt, consisted of $0.5 million of short-term notes payable and $0.2 million of long-term notes payable to various banks, all associated with its French
operations. As of September 30, 2003, the Company had no outstanding debt associated with the Bank Facility discussed below. Total debt increased by $0.3 million, consisting of short-term borrowings of $0.5 million and payments on long-term notes
payable of $0.2 million during the first nine months of 2003.



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 expires December 30, 2005. 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 (LIBOR) plus an applicable margin, depending on certain ratios as defined in the agreement. As of September 30, 2003, no amounts were
outstanding of the $27.5 million of the revolving line of credit under the terms of the Bank Facility.



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. A total of 1,500 shares were
repurchased during the nine months ended September 30, 2003, at an average price of $20.46 per share. 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, 2003, the Company held 343,292 shares of treasury stock at an aggregate cost of approximately $7.1 million. Authorizations of approximately $2.1 million remained at September 30, 2003.



The Company had no significant lease or contractual obligations as of September 30, 2003,
that would negatively impact cash requirements through subsequent periods.



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, 2003.





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Recently Issued Accounting Pronouncements



On April 30, 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149 (SFAS
149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including derivative instruments embedded in other contracts, and hedging
activities under Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 improves the financial reporting by requiring that contracts with comparable characteristics be accounted for similarly, clarifies
when a derivative contains a financing component that warrants special reporting in the statement of cash flows and amends certain other existing pronouncements for more consistent reporting of contracts that derivatives in their entirety or that
contain embedded derivatives that warrant separate accounting. SFAS 149 is effective for contracts entered into or modified after June 15, 2003 and for hedging relationships designated after June 30, 2003. The Company has adopted SFAS 149 and it did
not have a significant impact on the Companys financial position or results of operations.



On May 15, 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument
that is within its scope as a liability because that financial instrument embodies an obligation of the issuer to transfer assets or to issue equity shares. SFAS 150 is effective for instruments entered into or modified after May 31, 2003, and
pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company has adopted SFAS 150 and it did not have a significant impact on the Companys financial position or results of operations.



In January 2003, the Financial Accounting Standards Board issued Financial
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities- An Interpretation of Accounting Research Bulletin 51. FIN 46 addresses consolidation by business enterprises of variable interest entities (VIEs) and the
primary objective is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights. FIN 46 requires an entity to consolidate a VIE if the entity has a
variable interest (or combination of variable interests) that will absorb a majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur or both. This guidance applies
immediately to VIEs created after January 1, 2003, and to VIEs in which an enterprise obtains an interest after that date. However, On October 8, 2003, the FASB decided to grant a broader deferral of the implementation of FIN46. Pursuant to this
deferral, public companies must complete their evaluations of VIEs that existed prior to February 1, 2003, and the consolidation of those for which they are the primary beneficiary for financial statements issued for the first period ending after
December 15, 2003. For calendar year companies, consolidation of previously existing VIEs will be required in their December 31, 2003, financial statements. While the Company is still evaluating the potential impact of FIN 46, the Company does not
believe it has any VIEs and does not believe that FIN 46 will have an impact on its consolidated financial position or results of operations.



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.



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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.



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, including goodwill, 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 reasonable. The Company assesses the recoverability of long-lived assets by determining whether the carrying
value can be recovered through projected discounted 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.



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, 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, (i) oil prices, (ii) capital spending levels of oil producers, (iii) availability and prices for raw materials and (iv) general industry and economic
conditions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from



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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 does not utilize financial instruments for trading purposes. 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.



Item 4. Controls and Procedures



Based on their evaluation of
the disclosure controls and procedures as of a date within 90 days of the filing of this report on Form 10-Q, 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 disclosure controls and procedures (as defined in Rules 13a-14(c) promulgated under the Securities Exchange Act of 1934) are effective. There were no significant changes in the Companys internal controls or in other factors
that could significantly affect such controls subsequent to the date of their evaluation.



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 which alleged race discrimination in employment. Certification hearings were conducted in
Beaumont, Texas in February of 1998 and in Lufkin, Texas in August of 1998. The District Court in April of 1999 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. The Company is
defending this action vigorously. Furthermore, the Company believes that the facts and the law in this action support its position and is confident that it will prevail if this case is tried on its merits. Trial for this case is scheduled for
December 2003.



In the case of Echometer and James N. McCoy vs. Lufkin
Industries, Inc., the plaintiff filed suit in U.S. District Court alleging infringement of a fluid-level device patent and received a jury verdict on September 26, 2003, in the amount of $150,000. The trial court judge is reviewing post-trial
motions before finalizing the judgement, which could materially impact the amount of the verdict.



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 or results of operations.



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Item 6. Exhibits and Reports on Form 8-K



(a) Exhibits



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|*3.1  | 
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|*3.2  | 
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|*3.3  | 
|      | 
|*10.1 | 
|      | 
|*10.2 | 
|      | 
|*10.3 | 
|      | 
|31.1  | 
|      | 
|31.2  | 
|      | 
|32.1  | 
|      | 
|32.2  | 



* Incorporated by reference



|(b) | Reports on Form 8-K
|--- | -------------------



None







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SIGNATURE



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 11, 2003



|LUFKIN INDUSTRIES, INC.
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|By:                    
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