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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30, 2005



or



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



For the transition period from  to



Commission File Number: 0-02612



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LUFKIN INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|TEXAS                                                          |  | 75-0404410                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|601 SOUTH RAGUET, LUFKIN, TEXAS          |  | 75904     
|(Address of principal executive offices) |  | (Zip Code)



(936) 634-2211

(Registrants telephone number, including area code)



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Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes   x    No ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x



There were 14,630,938 shares of Common Stock, $1.00 par value per share, outstanding as of
November 3, 2005, not including 399,278 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 30,2005 |         |   | December 31,2004 |  
|ASSETS                                                                                                                     |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                            |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                  |  | $                 | 18,673  |   |                  | $ | 17,097  |  
|Receivables, net                                                                                                           |  |                   | 73,803  |   |                  |   | 61,038  |  
|Inventories                                                                                                                |  |                   | 86,726  |   |                  |   | 54,637  |  
|Deferred income tax assets                                                                                                 |  |                   | 2,521   |   |                  |   | 2,447   |  
|Other current assets                                                                                                       |  |                   | 1,545   |   |                  |   | 1,117   |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                       |  |                   | 183,268 |   |                  |   | 136,336 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Property, plant and equipment, at cost                                                                                     |  |                   | 290,517 |   |                  |   | 284,300 |  
|Less accumulated depreciation                                                                                              |  |                   | 201,420 |   |                  |   | 194,745 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|                                                                                                                           |  |                   | 89,097  |   |                  |   | 89,555  |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Prepaid pension costs                                                                                                      |  |                   | 61,760  |   |                  |   | 59,950  |  
|Goodwill, net                                                                                                              |  |                   | 11,527  |   |                  |   | 11,790  |  
|Other assets, net                                                                                                          |  |                   | 3,070   |   |                  |   | 2,638   |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                               |  | $                 | 348,722 |   |                  | $ | 300,269 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                       |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                       |  |                   |         |   |                  |   |         |  
|Short-term notes payable                                                                                                   |  | $                 | 7,178   |   |                  | $ | 1,976   |  
|Accounts payable                                                                                                           |  |                   | 28,799  |   |                  |   | 23,706  |  
|Accrued liabilities:                                                                                                       |  |                   |         |   |                  |   |         |  
|Payroll and benefits                                                                                                       |  |                   | 8,044   |   |                  |   | 6,240   |  
|Warranty expenses                                                                                                          |  |                   | 2,779   |   |                  |   | 2,729   |  
|Taxes payable                                                                                                              |  |                   | (944    | ) |                  |   | 5,213   |  
|Other                                                                                                                      |  |                   | 10,763  |   |                  |   | 9,241   |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                  |  |                   | 56,619  |   |                  |   | 49,105  |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Deferred income tax liabilities                                                                                            |  |                   | 34,174  |   |                  |   | 31,584  |  
|Postretirement benefits                                                                                                    |  |                   | 11,027  |   |                  |   | 10,648  |  
|                                                                                                                           |  |                  
|Shareholders equity:                                                                                                      |  |                   |         |   |                  |   |         |  
|Common stock, $1.00 par value per share; 60,000,000shares authorized; 15,021,216 and 14,471,958 sharesissued,
respectively |  |                   | 15,021  |   |                  |   | 14,472  |  
|Capital in excess of par                                                                                                   |  |                   | 31,257  |   |                  |   | 19,488  |  
|Retained earnings                                                                                                          |  |                   | 202,679 |   |                  |   | 177,374 |  
|Treasury stock, 399,278 and 491,278 shares, respectively, at cost                                                          |  |                   | (4,124  | ) |                  |   | (5,075  | )
|Accumulated other comprehensive income:                                                                                    |  |                   |         |   |                  |   |         |  
|Cumulative translation adjustment                                                                                          |  |                   | 2,069   |   |                  |   | 2,673   |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total shareholders equity                                                                                                 |  |                   | 246,902 |   |                  |   | 208,932 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                 |  | $                 | 348,722 |   |                  | $ | 300,269 |  
|                                                                                                                           |  |                   |         |   |                  |   |         |  



See accompanying notes
to consolidated financial statements.



2



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CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME (UNAUDITED)

(In thousands of dollars, except per share
and share data)



|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                  |  | Three Months EndedSeptember 30, |            |   | Nine Months Ended September 30, |  
|                                                  |  | 2005                            |            |   | 2004                            |   |            | 2005 |  |   | 2004       |  
|Sales                                             |  | $                               | 123,681    |   |                                 | $ | 95,766     |      |  | $ | 346,757    |   |  | $ | 248,923    |  
|Cost of sales                                     |  |                                 | 95,292     |   |                                 |   | 78,744     |      |  |   | 267,893    |   |  |   | 204,815    |  
|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                      |  |                                 | 28,389     |   |                                 |   | 17,022     |      |  |   | 78,864     |   |  |   | 44,108     |  
|                                                  |  |                                 |            |  
|Selling, general and administrative expenses      |  |                                 | 10,961     |   |                                 |   | 9,438      |      |  |   | 33,307     |   |  |   | 28,027     |  
|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Operating income                                  |  |                                 | 17,428     |   |                                 |   | 7,584      |      |  |   | 45,557     |   |  |   | 16,081     |  
|                                                  |  |                                 |            |  
|Interest income                                   |  |                                 | 88         |   |                                 |   | 43         |      |  |   | 333        |   |  |   | 192        |  
|Interest expense                                  |  |                                 | (43        | ) |                                 |   | (31        | )    |  |   | (123       | ) |  |   | (104       | )
|Other income (expense), net                       |  |                                 | 204        |   |                                 |   | (7         | )    |  |   | (174       | ) |  |   | (303       | )
|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Earnings before income tax provision              |  |                                 | 17,677     |   |                                 |   | 7,589      |      |  |   | 45,593     |   |  |   | 15,866     |  
|                                                  |  |                                 |            |  
|Income tax provision                              |  |                                 | 6,364      |   |                                 |   | 2,728      |      |  |   | 16,413     |   |  |   | 5,791      |  
|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net earnings                                      |  |                                 | 11,313     |   |                                 |   | 4,861      |      |  |   | 29,180     |   |  |   | 10,075     |  
|                                                  |  |                                 |            |  
|Change in foreign currency translation adjustment |  |                                 | 622        |   |                                 |   | 721        |      |  |   | (604       | ) |  |   | 165        |  
|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total comprehensive income                        |  | $                               | 11,935     |   |                                 | $ | 5,582      |      |  | $ | 28,576     |   |  | $ | 10,240     |  
|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net earnings per share:                           |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic                                             |  | $                               | 0.78       |   |                                 | $ | 0.36       |      |  | $ | 2.04       |   |  | $ | 0.75       |  
|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                           |  | $                               | 0.76       |   |                                 | $ | 0.35       |      |  | $ | 2.00       |   |  | $ | 0.73       |  
|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Dividends per share                               |  | $                               | 0.09       |   |                                 | $ | 0.09       |      |  | $ | 0.27       |   |  | $ | 0.27       |  
|                                                  |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding:    |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic                                             |  |                                 | 14,537,195 |   |                                 |   | 13,601,268 |      |  |   | 14,268,920 |   |  |   | 13,476,914 |  
|Diluted                                           |  |                                 | 14,886,528 |   |                                 |   | 13,946,208 |      |  |   | 14,587,003 |   |  |   | 13,826,128 |  



See accompanying notes
to consolidated financial statements.



3



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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands of dollars)



|                                                                                |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                |  | Nine Months EndedSeptember 30, |        
|                                                                                |  | 2005                           |         |   | 2004 |  
|Cash flows from operating activities:                                           |  |                                |         |   |      |   |         |  
|Net earnings                                                                    |  | $                              | 29,180  |   |      | $ | 10,075  |  
|Adjustments to reconcile net earnings to cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                   |  |                                | 8,546   |   |      |   | 8,747   |  
|Deferred income tax provision                                                   |  |                                | 2,733   |   |      |   | 2,150   |  
|Pension income                                                                  |  |                                | (1,810  | ) |      |   | (2,508  | )
|Postretirement benefits                                                         |  |                                | 379     |   |      |   |        |  
|Loss on disposition of property, plant and equipment Changes in:                |  |                                | 43      |   |      |   | 28      |  
|Receivables, net                                                                |  |                                | (13,126 | ) |      |   | (6,921  | )
|Income taxes receivable                                                         |  |                                |        |   |      |   | (24     | )
|Inventories                                                                     |  |                                | (32,395 | ) |      |   | (19,404 | )
|Other current assets                                                            |  |                                | (414    | ) |      |   | (487    | )
|Accounts payable                                                                |  |                                | 5,521   |   |      |   | 7,650   |  
|Accrued liabilities                                                             |  |                                | 3,443   |   |      |   | 1,155   |  
|                                                                                |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                       |  |                                | 2,100   |   |      |   | 405     |  
|                                                                                |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                           |  |                                |         |   |      |   |         |  
|Additions to property, plant and equipment                                      |  |                                | (8,932  | ) |      |   | (7,533  | )
|Proceeds from disposition of property, plant and equipment                      |  |                                | 142     |   |      |   | 172     |  
|Increase in other assets                                                        |  |                                | (520    | ) |      |   | (64     | )
|Acquisition of other companies                                                  |  |                                | (3      | ) |      |   | (7      | )
|                                                                                |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                           |  |                                | (9,313  | ) |      |   | (7,432  | )
|                                                                                |  |                                |         |   |      |   |         |  
|Cash flows from financing activities:                                           |  |                                |         |   |      |   |         |  
|Proceeds from short-term notes payable                                          |  |                                | 5,449   |   |      |   | 137     |  
|Payments on long-term notes payable                                             |  |                                |        |   |      |   | (182    | )
|Dividends paid                                                                  |  |                                | (3,874  | ) |      |   | (3,649  | )
|Proceeds from exercise of stock options                                         |  |                                | 7,247   |   |      |   | 4,709   |  
|                                                                                |  |                                |         |   |      |   |         |  
|Net cash provided by financing activities                                       |  |                                | 8,822   |   |      |   | 1,015   |  
|                                                                                |  |                               
|Effect of translation on cash and cash equivalents                              |  |                                | (33     | ) |      |   | (15     | )
|                                                                                |  |                                |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                            |  |                                | 1,576   |   |      |   | (6,027  | )
|                                                                                |  |                               
|Cash and cash equivalents at beginning of period                                |  |                                | 17,097  |   |      |   | 19,408  |  
|                                                                                |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                      |  | $                              | 18,673  |   |      | $ | 13,381  |  
|                                                                                |  |                                |         |   |      |   |         |  



See accompanying notes
to consolidated financial statements



4



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. Basis
of Presentation



The accompanying unaudited consolidated financial
statements include the accounts of Lufkin Industries, Inc. and its consolidated subsidiaries (the Company) and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information in the
notes to the consolidated financial statements normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America has been condensed or omitted pursuant to these rules and
regulations. In the opinion of management, all adjustments, consisting of normal recurring accruals unless specified, necessary for a fair presentation of the Companys financial position, results of operations and cash flows have been
included. For further information, including a summary of major accounting policies, refer to the consolidated financial statements and related footnotes included in the Companys Annual Report on Form 10-K for the year ended December 31,
2004. The results of operations for the three and nine months ended September 30, 2005, are not necessarily indicative of the results that may be expected for the full fiscal year.



In March 2005, the Companys Board of Directors approved a 2-for-1 stock split to be effected by issuing one additional share of common
stock for every outstanding share of common stock. The additional shares were distributed on April 19, 2005, to stockholders of record at the close of business on April 4, 2005. All prior period shares outstanding, earnings per share and
prices per share have been adjusted to reflect the stock split.



2.
Acquisitions



The Company completed the acquisition on November 1,
2004, of the operating assets and commercial operations of Black Widow Oil Field Services located in Medicine Hat, Alberta, Canada, to further expand its oil field service presence in Canada. The aggregate purchase price for this acquisition was
$0.3 million in cash. The purchase allocation process for this acquisition was completed in the third quarter of 2005 and no additional adjustments were required.



3. Receivables



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



|                                |  |                   |        |   |                  |   |        |  
|------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                |  | September 30,2005 |        |   | December 31,2004 |  
|Accounts receivable             |  | $                 | 74,208 |   |                  | $ | 61,182 |  
|Notes receivable                |  |                   | 24     |   |                  |   | 32     |  
|                                |  |                   |        |   |                  |   |        |  
|Total receivables               |  |                   | 74,232 |   |                  |   | 61,214 |  
|Allowance for doubtful accounts |  |                   | (429   | ) |                  |   | (176   | )
|                                |  |                   |        |   |                  |   |        |  
|Net receivables                 |  | $                 | 73,803 |   |                  | $ | 61,038 |  
|                                |  |                   |        |   |                  |   |        |  



Bad debt expense related to
receivables was $0.1 million and $0.1 million in the three months ended September 30, 2005 and 2004, respectively, and $0.7 million and $0.2 million in the nine months ended September 30, 2005 and 2004, respectively.



5



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4. Property, Plant & Equipment



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



|                                         |  |                   |          |   |                  |   |          |  
|---------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                         |  | September 30,2005 |          |   | December 31,2004 |  
|Land                                     |  | $                 | 3,224    |   |                  | $ | 3,231    |  
|Land improvements                        |  |                   | 7,320    |   |                  |   | 7,042    |  
|Buildings                                |  |                   | 70,545   |   |                  |   | 69,232   |  
|Machinery and equipment                  |  |                   | 192,591  |   |                  |   | 187,741  |  
|Furniture and fixtures                   |  |                   | 3,988    |   |                  |   | 4,095    |  
|Computer equipment and software          |  |                   | 12,849   |   |                  |   | 12,959   |  
|                                         |  |                   |          |   |                  |   |          |  
|Total property, plant and equipment      |  |                   | 290,517  |   |                  |   | 284,300  |  
|Less accumulated depreciation            |  |                   | (201,420 | ) |                  |   | (194,745 | )
|                                         |  |                   |          |   |                  |   |          |  
|Total property, plant and equipment, net |  | $                 | 89,097   |   |                  | $ | 89,555   |  
|                                         |  |                   |          |   |                  |   |          |  



Depreciation expense related to
property, plant and equipment was $2.7 million and $3.0 million in the three months ended September 30, 2005 and 2004, respectively, and $8.5 million and $8.7 million in the nine months ended September 30, 2005 and 2004, respectively.



5. Inventories



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



|                                |  |                   |         |                  |   |       
|------------------------------- |  | ----------------- | ------- | ---------------- | - | ------
|                                |  | September 30,2005 |         | December 31,2004
|Gross inventories @ FIFO:       |  |                   |         |                  |   |       
|Finished goods                  |  | $                 | 6,387   |                  | $ | 7,770 
|Work in process                 |  |                   | 23,409  |                  |   | 10,604
|Raw materials & component parts |  |                   | 81,299  |                  |   | 58,399
|                                |  |                   |         |                  |   |       
|Total gross inventories @ FIFO  |  |                   | 111,095 |                  |   | 76,773
|Less reserves:                  |  |                   |         |                  |   |       
|LIFO                            |  |                   | 23,253  |                  |   | 20,985
|Valuation                       |  |                   | 1,116   |                  |   | 1,151 
|                                |  |                   |         |                  |   |       
|Total inventories as reported   |  | $                 | 86,726  |                  | $ | 54,637
|                                |  |                   |         |                  |   |       



Gross inventories on a FIFO basis
before adjustments for reserves shown above that were accounted for on a LIFO basis were $83.5 million and $57.3 million at September 30, 2005, and December 31, 2004, respectively.



6



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6. Net Earnings Per Share



Net earnings per share amounts are based on the weighted average number of shares of common stock and common stock equivalents outstanding
during the period. The weighted average number of shares used to compute basic and diluted net earnings per share for the three and nine months ended September 30, 2005 and 2004, are illustrated below (in thousands of dollars, except share and
per share data):



|                                                                                                        |  |                    |            |                   |   |            |  |      |            |  |   |           
|------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                                                                        |  | Three Months Ended |            | Nine Months Ended
|                                                                                                        |  | September 30,      |            | September 30,    
|                                                                                                        |  | 2005               |            | 2004              |   | 2005       |  | 2004
|Numerator:                                                                                              |  |                    |            |                   |   |            |  |      |            |  |   |           
|Numerator for basic and diluted earnings per share-net earnings                                         |  | $                  | 11,313     |                   | $ | 4,861      |  | $    | 29,180     |  | $ | 10,075    
|                                                                                                        |  |                    |            |                   |   |            |  |      |            |  |   |           
|Denominator:                                                                                            |  |                    |            |                   |   |            |  |      |            |  |   |           
|Denominator for basic net earnings per share-weighted-average shares                                    |  |                    | 14,537,195 |                   |   | 13,601,268 |  |      | 14,268,920 |  |   | 13,476,914
|Effect of dilutive securities: employee stock options                                                   |  |                    | 349,333    |                   |   | 344,940    |  |      | 318,083    |  |   | 349,214   
|                                                                                                        |  |                    |            |                   |   |            |  |      |            |  |   |           
|Denominator for diluted net earnings per share-adjusted weighted-average shares and assumed conversions |  |                    | 14,886,528 |                   |   | 13,946,208 |  |      | 14,587,003 |  |   | 13,826,128
|                                                                                                        |  |                    |            |                   |   |            |  |      |            |  |   |           
|Basic net earnings per share                                                                            |  | $                  | 0.78       |                   | $ | 0.36       |  | $    | 2.04       |  | $ | 0.75      
|                                                                                                        |  |                    |            |                   |   |            |  |      |            |  |   |           
|Diluted net earnings per share                                                                          |  | $                  | 0.76       |                   | $ | 0.35       |  | $    | 2.00       |  | $ | 0.73      
|                                                                                                        |  |                    |            |                   |   |            |  |      |            |  |   |           



Options to purchase a total of 10,000
and 40,596 shares of the Companys common stock at September 30, 2005 and 2004, respectively, were excluded from the calculation of fully diluted earnings per share for the three months ended September 30, 2005 and 2004, respectively,
and options to purchase a total of 10,000 and 40,596 shares of the Companys common stock at September 30, 2005 and 2004, respectively, were excluded from the calculation of fully diluted earnings per share for the nine months ended
September 30, 2005 and 2004, respectively, because their effect on fully diluted earnings per share for the period were antidilutive.



7. Legal Proceedings



A class action complaint was filed in the U.S. 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 1998 and in Lufkin, Texas in August 1998. In April 1999, the District Court issued a decision that certified a class for this case, which included all black employees employed by
the Company from March 6, 1994, to the present. The case was closed from 2001 to 2003 while the parties unsuccessfully attempted mediation. Trial for this case began in December 2003, but was postponed by the District Court and was completed in
October 2004. The only claims made at trial were those of discrimination in initial assignments and promotions.



On January 13, 2005, the District Court entered its decision finding that the Company discriminated against African-American employees in initial assignments and
promotions. The District Court also concluded that the discrimination resulted in a shortfall in income for those employees and ordered that the Company pay those employees back pay to remedy such shortfall, together with pre-judgment interest in
the amount of 5%. On August 29, 2005, the District Court determined that the backpay award for the class of affected employees would be $3.4 million (including interest to January 1, 2005) and provided a formula for attorney fees that the
Company estimates will result in a total not to exceed $2.5 million. In addition to back pay with interest, the District Court (i) enjoined and ordered the Company to cease and desist all racially biased assignment and promotion practices and
(ii) ordered the Company to pay court costs and expenses.



7



---

7. Legal Proceedings (continued)



The Company has reviewed this decision with its outside counsel and on September 19, 2005, appealed the decision to the U.S. Court of
Appeals for the Fifth Circuit. The Company believes that after a full and fair review of the evidence, the Court of Appeals will determine that the plaintiffs have not established their claims of discrimination by the Company against the plaintiffs
and will enter a decision to that effect and will dismiss the case against the Company. At this time, the Company has concluded that an unfavorable ultimate outcome is not probable. If the District Courts decision is reversed and remanded for
a new trial, the Company will vigorously defend itself on retrial. While the ultimate outcome and impact of these claims against the Company cannot be predicted with certainty, the Company believes that the resolutions of these proceedings will not
have a material adverse effect on its consolidated financial position. However, should the Company be unsuccessful in its appeal, the final determination could have a material impact on the Companys reported earnings and cash flows in a future
reporting period.



There are various other claims and legal proceedings arising
in the ordinary course of business pending against or involving the Company wherein monetary damages are sought. It is managements opinion that the Companys liability, if any, under such claims or proceedings would not materially affect
its consolidated financial position, results of operations or cash flow.



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. Inter-segment sales and transfers are accounted for as if the sales and transfers were to third parties, that is, at current market prices, as available. The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the footnotes to the consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004. The following is a summary of key segment
information (in thousands of dollars):



Three Months
Ended September 30, 2005



|                                            |  |           |        |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|------------------------------------------- |  | --------- | ------ | - | ----------------- | - | ------ | ------- |  | - | --------- | - | ----- | - | --- |  | - | ------- | -
|                                            |  | Oil Field |        |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|Gross sales                                 |  | $         | 76,785 |   |                   | $ | 26,520 |         |  | $ | 22,713    |   |       | $ |    |  | $ | 126,018 |  
|Inter-segment sales                         |  |           | (953   | ) |                   |   | (1,382 | )       |  |   | (2        | ) |       |   |    |  |   | (2,337  | )
|                                            |  |           |        |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Net sales                                   |  | $         | 75,832 |   |                   | $ | 25,138 |         |  | $ | 22,711    |   |       | $ |    |  | $ | 123,681 |  
|                                            |  |           |        |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Operating income (loss)                     |  | $         | 14,390 |   |                   | $ | 3,155  |         |  | $ | (117      | ) |       | $ |    |  | $ | 17,428  |  
|Other income (expense), net                 |  |           | 235    |   |                   |   | (100   | )       |  |   | (2        | ) |       |   | 116 |  |   | 249     |  
|                                            |  |           |        |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Earnings (loss) before income tax provision |  | $         | 14,625 |   |                   | $ | 3,055  |         |  | $ | (119      | ) |       | $ | 116 |  | $ | 17,677  |  
|                                            |  |           |        |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|                                           
|Three Months Ended September 30, 2004       | 
|                                            |  | Oil Field |        |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|Gross sales                                 |  | $         | 57,907 |   |                   | $ | 20,131 |         |  | $ | 19,102    |   |       | $ |    |  | $ | 97,140  |  
|Inter-segment sales                         |  |           | (687   | ) |                   |   | (680   | )       |  |   | (7        | ) |       |   |    |  |   | (1,374  | )
|                                            |  |           |        |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Net sales                                   |  | $         | 57,220 |   |                   | $ | 19,451 |         |  | $ | 19,095    |   |       | $ |    |  | $ | 95,766  |  
|                                            |  |           |        |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Operating income (loss)                     |  | $         | 7,917  |   |                   | $ | 821    |         |  | $ | (1,154    | ) |       | $ |    |  | $ | 7,584   |  
|Other income (expense), net                 |  |           | (102   | ) |                   |   | 31     |         |  |   | (2        | ) |       |   | 78  |  |   | 5       |  
|                                            |  |           |        |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Earnings (loss) before income tax provision |  | $         | 7,815  |   |                   | $ | 852    |         |  | $ | (1,156    | ) |       | $ | 78  |  | $ | 7,589   |  
|                                            |  |           |        |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  



8



---

8. Segment Data (Continued)



Nine Months Ended September 30, 2005



|                                            |  |           |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|------------------------------------------- |  | --------- | ------- | - | ----------------- | - | ------ | ------- |  | - | --------- | - | ----- | - | --- |  | - | ------- | -
|                                            |  |           |         |   |                  
|                                            |  | Oil Field |         |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|Gross sales                                 |  | $         | 220,028 |   |                   | $ | 76,892 |         |  | $ | 59,834    |   |       | $ |    |  | $ | 356,754 |  
|Inter-segment sales                         |  |           | (5,277  | ) |                   |   | (4,718 | )       |  |   | (2        | ) |       |   |    |  |   | (9,997  | )
|                                            |  |           |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Net sales                                   |  | $         | 214,751 |   |                   | $ | 72,174 |         |  | $ | 59,832    |   |       | $ |    |  | $ | 346,757 |  
|                                            |  |           |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Operating income (loss)                     |  | $         | 38,505  |   |                   | $ | 8,784  |         |  | $ | (1,732    | ) |       | $ |    |  | $ | 45,557  |  
|Other income (expense), net                 |  |           | (130    | ) |                   |   | (124   | )       |  |   | (1        | ) |       |   | 291 |  |   | 36      |  
|                                            |  |           |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Earnings (loss) before income tax provision |  | $         | 38,375  |   |                   | $ | 8,660  |         |  | $ | (1,733    | ) |       | $ | 291 |  | $ | 45,593  |  
|                                            |  |           |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|                                           
|Nine Months Ended September 30, 2004        | 
|                                            |  |           |         |   |                  
|                                            |  | Oil Field |         |   | PowerTransmission |   |        | Trailer |  |   | Corporate |   | Total |  
|Gross sales                                 |  | $         | 152,644 |   |                   | $ | 56,685 |         |  | $ | 42,411    |   |       | $ |    |  | $ | 251,740 |  
|Inter-segment sales                         |  |           | (1,432  | ) |                   |   | (1,363 | )       |  |   | (22       | ) |       |   |    |  |   | (2,817  | )
|                                            |  |           |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Net sales                                   |  | $         | 151,212 |   |                   | $ | 55,322 |         |  | $ | 42,389    |   |       | $ |    |  | $ | 248,923 |  
|                                            |  |           |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Operating income (loss)                     |  | $         | 18,065  |   |                   | $ | 1,412  |         |  | $ | (3,396    | ) |       | $ |    |  | $ | 16,081  |  
|Other income (expense), net                 |  |           | (475    | ) |                   |   | 40     |         |  |   | 4         |   |       |   | 216 |  |   | (215    | )
|                                            |  |           |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  
|Earnings (loss) before income tax provision |  | $         | 17,590  |   |                   | $ | 1,452  |         |  | $ | (3,392    | ) |       | $ | 216 |  | $ | 15,866  |  
|                                            |  |           |         |   |                   |   |        |         |  |   |           |   |       |   |     |  |   |         |  



9



---

9. Goodwill and Intangible Assets



Goodwill



The changes in the carrying amount of goodwill for the nine months ended September 30, 2005, are as follows:



|                                                      |  |           |       |                   |   |       |         |  |       |   |  |   |        |  
|----------------------------------------------------- |  | --------- | ----- | ----------------- | - | ----- | ------- |  | ----- | - |  | - | ------ | -
|(In thousands of dollars)                             |  | Oil Field |       | PowerTransmission |   |       | Trailer |  | Total |  
|Balance as of 12/31/04                                |  | $         | 9,427 |                   | $ | 2,363 |         |  | $     |  |  | $ | 11,790 |  
|Goodwill acquired during year                         |  |           | 3     |                   |   |      |         |  |       |  |  |   | 3      |  
|Impairment losses                                     |  |           |      |                   |   |      |         |  |       |  |  |   |       |  
|Goodwill written off related to sale of business unit |  |           |      |                   |   |      |         |  |       |  |  |   |       |  
|Foreign currency translation                          |  |           | 2     |                   |   | (268  | )       |  |       |  |  |   | (266   | )
|                                                      |  |           |       |                   |   |       |         |  |       |   |  |   |        |  
|Balance as of 9/30/05                                 |  | $         | 9,432 |                   | $ | 2,095 |         |  | $     |  |  | $ | 11,527 |  
|                                                      |  |           |       |                   |   |       |         |  |       |   |  |   |        |  



|Goodwill | impairment tests were performed in the first quarter of 2005 and no impairment losses were recorded.
|-------- | ----------------------------------------------------------------------------------------------------



Intangible Assets



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



|                                               |  |                   |      |   |                  |   |      |  
|---------------------------------------------- |  | ----------------- | ---- | - | ---------------- | - | ---- | -
|                                               |  | September 30,2005 |      |   | December 31,2004 |  
|Intangible assets subject to amortization:     |  |                   |      |   |                  |   |      |  
|                                               |  |                  
|Non-compete agreements                         |  |                   |      |   |                  |   |      |  
|Original balance                               |  | $                 | 463  |   |                  | $ | 463  |  
|Foreign currency translation                   |  |                   | 34   |   |                  |   | 29   |  
|Accumulated amortization                       |  |                   | (170 | ) |                  |   | (100 | )
|                                               |  |                   |      |   |                  |   |      |  
|Ending balance                                 |  | $                 | 327  |   |                  | $ | 392  |  
|                                               |  |                   |      |   |                  |   |      |  
|Intangible assets not subject to amortization: |  |                   |      |   |                  |   |      |  
|None                                           |  |                   |     |   |                  |   |     |  



10



---

10. Stock Option Plans



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



|                                                                                                                                            |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                            |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                                                            |  | 2005                            |        |   | 2004                           |   |       | 2005 |  |   | 2004   |  
|Net earnings, as reported                                                                                                                   |  | $                               | 11,313 |   |                                | $ | 4,861 |      |  | $ | 29,180 |   |  | $ | 10,075 |  
|                                                                                                                                            |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                 | (335   | ) |                                |   | (164  | )    |  |   | (966   | ) |  |   | (652   | )
|                                                                                                                                            |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Pro forma net earnings                                                                                                                      |  | $                               | 10,978 |   |                                | $ | 4,697 |      |  | $ | 28,214 |   |  | $ | 9,423  |  
|                                                                                                                                            |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Net earnings per share:                                                                                                                     |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|                                                                                                                                            |  |                                 |        |  
|As reported                                                                                                                                 |  | $                               | 0.78   |   |                                | $ | 0.36  |      |  | $ | 2.04   |   |  | $ | 0.75   |  
|                                                                                                                                            |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                                   |  | $                               | 0.76   |   |                                | $ | 0.35  |      |  | $ | 1.98   |   |  | $ | 0.70   |  
|                                                                                                                                            |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Diluted net earnings per share                                                                                                              |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|                                                                                                                                            |  |                                 |        |  
|As reported                                                                                                                                 |  | $                               | 0.76   |   |                                | $ | 0.35  |      |  | $ | 2.00   |   |  | $ | 0.73   |  
|                                                                                                                                            |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                                   |  | $                               | 0.74   |   |                                | $ | 0.34  |      |  | $ | 1.93   |   |  | $ | 0.68   |  
|                                                                                                                                            |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  



The effects of applying SFAS
No. 123 to the pro forma disclosure amounts may not be indicative of future amounts. SFAS No. 123 does not apply to options awarded prior to 1995, and additional awards in future years are anticipated. The fair value of each option grant
during the first nine months of 2005 and 2004 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:



|            |  |                                 |  |                
|----------- |  | ------------------------------- |  | ---------------
|2005 Grants |  | Expected dividend yield         |  | 0.75% - 1.17%  
|            |  | Expected stock price volatility |  | 38.62% - 40.21%
|            |  | Risk free interest rate         |  | 4.04% - 4.24%  
|            |  | Expected life of options        |  | 6 - 8 years    
|            |  |                                
|2004 Grants |  | Expected dividend yield         |  | 2.25% - 2.35%  
|            |  | Expected stock price volatility |  | 38.80% - 38.82%
|            |  | Risk free interest rate         |  | 4.10% - 4.57%  
|            |  | Expected life of options        |  | 10 years       



Options granted during the three
months ended September 30, 2005, had a weighted average fair value of $20.33 per option and a weighted average exercise price of $48.04 per option. Options granted during the nine months ended September 30, 2005, had a weighted average
fair value of $10.87 per option and a weighted average exercise price of $25.90 per option.



11



---

11. Recently Issued Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151 (SFAS
151), Inventory Costs, an amendment of ARB No. 43, Chapter 4. This Statement amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be
recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005, but early application is permitted during fiscal years after the date this Statement is issued. The Company does not expect the adoption of SFAS 151 to impact the Companys
consolidated financial position or results of operations.



In December 2004,
the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152 (SFAS 152), Accounting for Real Estate Time-Sharing Transactions. This Statement provides that real estate time-sharing
transactions should be accounted for as non-retail land sales as discussed in the recently issued SOP 04-02, Accounting for Real Estate Time-Sharing Transactions. SFAS 152 amends FASB Statement No. 66, Accounting for Sales of
Real Estate, to reference SOP 04-02 and amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects to state that the guidance for incidental operations and costs incurred to sell
real estate projects does not apply to real estate time-sharing transactions. SFAS 152 is effective for financial statements for fiscal years beginning after June 15, 2005. Restatement of previously issued financial statements is not permitted.
The Company does not expect the adoption of SFAS 152 to impact the Companys consolidated financial position or results of operations.



In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153 (SFAS 153), Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No, 29. This Statement addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets
in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date this Statement is issued. The Company does not expect the adoption of SFAS 153 to impact the Companys consolidated financial position
or results of operations.



In December 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123-Revised 2004 (SFAS 123R), Share-Based Payment, a revision of SFAS No. 123 Accounting for Stock-Based Compensation, and supersedes APB
No. 25, Accounting for Stock Issued to Employees. This Statement requires that the cost of employee services received in exchange for stock based on the grant-date fair value be measured and that the cost be recognized over the
period during which the employee is required to provide service in exchange for the award. The fair value will be estimated using an option-pricing model. Excess tax benefits, as defined in SFAS 123R, will be recognized as additional
paid-in-capital. SFAS 123R initially was to be adopted as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, on April 15, 2005, the Securities and Exchange Commission announced a new
rule that amended the adoption date for SFAS 123R. The new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year that begins after June 15, 2005. As noted in Footnote 10 of the Notes to Consolidated Financial
Statements, the Company does not currently record compensation expense for stock-based compensation. Although the Company continues to evaluate SFAS 123R and related transition matters, the adoption of SFAS 123R is expected to impact net earnings by
approximately $0.6 million ($0.04 per diluted share), $0.3 million ($0.02 per diluted share) and $0.02 million ($0.01 per diluted share) for the years ending December 31, 2006, 2007 and 2008, respectively, for stock options previously granted.



12



---

11. Recently Issued Accounting Pronouncements (continued)



In March 2005, the Financial Accounting Standards Board issued FASB Interpretation
No. 47 (Interpretation 47), Accounting for Conditional Asset Retirement Obligations, Interpretation 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143
Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control
of an entity. If an entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation, it must recognize a liability at the time the liability is incurred. If the liabilitys fair value cannot be
reasonably estimated, that fact and the reasons shall be disclosed. Interpretation 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises). An entity shall
recognize the cumulative effect of initially applying this Interpretation as a change in accounting principle. The Company does not expect the adoption of Interpretation 47 to impact the Companys consolidated financial position or results of
operations.



In May 2005, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 154 (SFAS 154), Accounting Changes and Error Corrections. This Statement requires retrospective application for voluntary changes in accounting principle unless it is
impracticable to do so. Statement 154s retrospective application requirement replaces APB Opinion No. 20, Accounting Changes requirement to recognize most voluntary changes in accounting principle by including in net income of
the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors occurring in fiscal periods beginning after the date this Statement is issued. The Company does not expect the adoption of SFAS 154 to impact the Companys consolidated financial
position or results of operations.



13



---

12. Retirement Benefits



The Company has a noncontributory pension plan covering substantially all employees. The benefits provided by this plan are measured by length of service, compensation
and other factors, and are currently funded by a trust established under the plan. Funding of retirement costs for this plan complies with the minimum funding requirements specified by the Employee Retirement Income Security Act of 1974, as amended.



The Company sponsors two defined benefit postretirement plans that cover both
salaried and hourly employees. One plan provides medical benefits, and the other plan provides life insurance benefits. Both plans are contributory, with retiree contributions adjusted periodically. The Company accrues the estimated costs of the
plans over the employees service periods. The Companys postretirement health care plan is unfunded and the Companys obligation is fixed at the 1997 contribution level.



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



On October 2, 2005, the pension benefits
for the Companys bargaining employees were increased as part of the new three-year contract. The projected benefit obligation (PBO) was remeasured as of October 1, 2005, to reflect these increased benefits. As part of the remeasurement of
the PBO, the assumptions for the rate of return on assets, discount rate and compensation rate were reviewed and the discount rate was lowered to 5.5% from 6.0%. This remeasurement is expected to increase the PBO by $3.5 to $4.0 million and reduce
net periodic benefit income by $281,000 during the fourth quarter of 2005, or $0.01 per diluted share.



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



|                                              |      |                  |         |      |                |   |         |   |      |   |     |  |   |    
|--------------------------------------------- | ---- | ---------------- | ------- | ---- | -------------- | - | ------- | - | ---- | - | --- |  | - | ---
|Three Months Ended September 30,              |      | Pension Benefits |         |      | Other Benefits
|                                              | 2005 |                  |         | 2004 |                |   | 2005    |   | 2004
|Service cost                                  |      | $                | 1,171   |      |                | $ | 1,002   |   |      | $ | 75  |  | $ | 55 
|Interest cost                                 |      |                  | 2,324   |      |                |   | 2,208   |   |      |   | 179 |  |   | 177
|Expected return on plan assets                |      |                  | (3,927  | )    |                |   | (3,936  | ) |      |   |    |  |   |   
|Amortization of prior service cost            |      |                  | 78      |      |                |   | 78      |   |      |   |    |  |   |   
|Amortization of unrecognized net (gain) loss  |      |                  |        |      |                |   |        |   |      |   | 17  |  |   | 3  
|Amortization of unrecognized transition asset |      |                  | (232    | )    |                |   | (231    | ) |      |   |    |  |   |   
|                                              |      |                  |         |      |                |   |         |   |      |   |     |  |   |    
|Net periodic benefit cost (income)            |      | $                | (586    | )    |                | $ | (879    | ) |      | $ | 271 |  | $ | 235
|                                              |      |                  |         |      |                |   |         |   |      |   |     |  |   |    
|                                              |      |                 
|Nine Months Ended September 30,               |      | Pension Benefits |         |      | Other Benefits
|                                              | 2005 |                  |         | 2004 |                |   | 2005    |   | 2004
|Service cost                                  |      | $                | 3,443   |      |                | $ | 3,060   |   |      | $ | 205 |  | $ | 165
|Interest cost                                 |      |                  | 6,997   |      |                |   | 6,724   |   |      |   | 525 |  |   | 531
|Expected return on plan assets                |      |                  | (11,788 | )    |                |   | (11,831 | ) |      |   |    |  |   |   
|Amortization of prior service cost            |      |                  | 233     |      |                |   | 234     |   |      |   |    |  |   |   
|Amortization of unrecognized net (gain) loss  |      |                  |        |      |                |   |        |   |      |   | 35  |  |   | 9  
|Amortization of unrecognized transition asset |      |                  | (695    | )    |                |   | (695    | ) |      |   |    |  |   |   
|                                              |      |                  |         |      |                |   |         |   |      |   |     |  |   |    
|Net periodic benefit cost (income)            |      | $                | (1,810  | )    |                | $ | (2,508  | ) |      | $ | 765 |  | $ | 705
|                                              |      |                  |         |      |                |   |         |   |      |   |     |  |   |    



14



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12. Retirement Benefits (Continued)



Employer Contributions



The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it did not expect to make any contributions to the pension
plan in 2005. The Company also disclosed that it expected contributions of $450,000 to be made to its postretirement plan in 2005. As of September 30, 2005, the Company has made no contributions to its pension plan and has made contributions of
$263,000 to its postretirement plan. The Company presently anticipates making no contributions to its pension plan and an additional $85,000 to its postretirement plan during the last three months of 2005.



15



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.



Overview



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



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



In support of the above strategy, during the fourth quarter of 2004, the Company completed the acquisition of the operating assets and commercial operations of Black
Widow Oilfield Services located in Drayton Valley, Alberta, Canada to further expand its service presence in Canada. In addition to acquisitions, the Company has been making capital investments within the Oil Field segment for more efficient
replacement equipment and for capacity expansion to meet the growing demand for its products and generate cost savings.



Within the Power Transmission segment, additional gear repair facilities have been opened to serve the Midwest and Northeast U.S. markets following the successful
expansion into the Southeast U.S. market. Capital investments targeting cost reductions and shorter manufacturing lead times are also being made in the Power Transmission segment.



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



Overall, sales for the quarter ended September 30, 2005, increased to $123.7 million, or 29.1%, from $95.8 million for the quarter ended September 30, 2004, and sales for the nine months ended September 30, 2005, increased to
$346.8 million, or 39.3%, from $248.9 million for the nine months ended September 30, 2004. This growth was primarily driven by increased sales of new oil field equipment but also by higher sales of new Power Transmission gearboxes and new
trailers. Additional segment data on sales is provided later in this section.



Gross margin for the quarter ended September 30, 2005, increased to 23.0% from 17.8% for the quarter ended September 30, 2004, and gross margin for the nine months ended September 30, 2005, increased to 22.7% from 17.7% for
the nine months ended September 30, 2004. This overall gross margin increase was primarily due to improved fixed cost leverage, plant efficiency improvements from higher volumes and price increases implemented in 2004 and 2005 in response to
the rapid material cost increases experienced in 2004. Additional segment data on gross margin is provided later in this section.



The increase in sales and gross margin primarily drove the changes in net earnings, but was partially offset by increases in selling, general and administrative expenses.
However, greater sales volumes did provide leverage on selling, general and administrative expenses, which improved overall net margins. The Company reported net earnings of $11.3 million, or $0.76 per share (diluted), for the quarter ended
September 30, 2005, compared to net earnings of $4.9 million, or $0.35 per share (diluted), for the quarter ended September 30, 2004, and net earnings of $29.2 million, or $2.00 per share (diluted), for the nine months ended
September 30, 2005, compared to net earnings of $10.1 million, or $0.73 per share (diluted), for the nine months ended September 30, 2004.



Debt/equity (long-term debt net of current portion as a percentage of total equity) levels remained at 0.0% at September 30, 2005. Short-term debt was $7.2 million
at September 30, 2005, up from $2.0 million at December 31, 2004, due to additional borrowing to cover working capital requirements. Cash balances at September 30, 2005, were $18.7 million, up from $17.1 million at December 31,
2004.



16



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Other Events



On Saturday, September 24, 2005, Hurricane Rita passed through the East Texas region, where the Companys principal manufacturing facilities are located. While
the office and production facilities sustained minimal direct damage, the financial results for the quarter ended September 30, 2005, were negatively impacted. Due to storm preparation and subsequent absenteeism, approximately three production
days were lost, which lowered plant utilization and efficiency. Also, shipments of approximately $5.0 million were delayed due to shipping and other logistical issues associated with the storm.



Three Months Ended September 30, 2005, Compared to the Three Months Ended
September 30, 2004:



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



|                   |  |                                  |         |                      |   |                        |  |   |        |  |      
|------------------ |  | -------------------------------- | ------- | -------------------- | - | ---------------------- |  | - | ------ |  | -----
|                   |  | Three Months Ended September 30, |         | Increase/ (Decrease) |   | % Increase/ (Decrease)
|                   |  |                                 
|                   |  | 2005                             |         | 2004                 |   |                       
|Sales              |  |                                  |         |                      |   |                        |  |   |        |  |      
|Oil Field          |  | $                                | 75,832  |                      | $ | 57,220                 |  | $ | 18,612 |  | 32.5 
|Power Transmission |  |                                  | 25,138  |                      |   | 19,451                 |  |   | 5,687  |  | 29.2 
|Trailer            |  |                                  | 22,711  |                      |   | 19,095                 |  |   | 3,616  |  | 18.9 
|                   |  |                                  |         |                      |   |                        |  |   |        |  |      
|Total              |  | $                                | 123,681 |                      | $ | 95,766                 |  | $ | 27,915 |  | 29.1 
|                   |  |                                  |         |                      |   |                        |  |   |        |  |      
|Gross Profit       |  |                                  |         |                      |   |                        |  |   |        |  |      
|Oil Field          |  | $                                | 19,107  |                      | $ | 11,841                 |  | $ | 7,266  |  | 61.4 
|Power Transmission |  |                                  | 7,721   |                      |   | 4,786                  |  |   | 2,935  |  | 61.3 
|Trailer            |  |                                  | 1,561   |                      |   | 395                    |  |   | 1,166  |  | 295.2
|                   |  |                                  |         |                      |   |                        |  |   |        |  |      
|Total              |  | $                                | 28,389  |                      | $ | 17,022                 |  | $ | 11,367 |  | 66.8 
|                   |  |                                  |         |                      |   |                        |  |   |        |  |      



Oil Field sales increased to $75.8
million, or 32.5%, for the quarter ended September 30, 2005, from $57.2 million for the quarter ended September 30, 2004. The added sales from 2004 acquisitions and the benefit of the stronger Canadian dollar in the third quarter of 2005
contributed 1.9 percentage points of this increase. Increased sales of new pumping units account for a majority of the balance of the increase of 30.7 percentage points. Sales of new pumping units in the U.S. and Canada, and related service,
increased from higher drilling and production activity associated with higher energy prices and from greater use of pumping units to pump water from gas fields. In addition, sales of automation equipment continued to increase due to market share
growth from new product offerings. Oil Fields backlog increased to $72.7 million as of September 30, 2005, from $47.4 million at September 30, 2004. This backlog increase was from increased bookings of new pumping units in the U.S
and Argentina markets and from foundry machine tool casting orders.



Gross
margin (gross profit as a percentage of revenue) for the Oil Field segment increased to 25.2% for quarter ended September 30, 2005, compared to 20.7% for the quarter ended September 30, 2004, or 4.5 percentage points. During the third
quarter of 2004, higher raw material prices, especially steel, and higher fuel prices in the service operations negatively impacted margins. Throughout 2004 and 2005, sales prices were increased to recover these higher material costs, contributing
to the improved gross margin in the third quarter of 2005 and enabling the segment to return to margin levels of past years. This recovery was partially offset by impacts on plant utilization from lost production days as a result of Hurricane Rita.



Direct selling, general and administrative expenses for Oil Field increased to
$3.2 million for the quarter ended September 30, 2005, compared to $2.5 million for the quarter ended September 30, 2004 as a result of higher employee-related expenses in support of increased sales volumes.



Sales for the Companys Power Transmission segment increased to $25.1 million, or 29.2%,
for the quarter ended September 30, 2005, compared to $19.5 million for the quarter ended September 30, 2004. This growth was the result of increased sales from the energy-related markets, such as power generation and refining, as well as
increased low-speed unit sales to the steel and sugar markets. The Companys Power Transmission backlog at September 30, 2005, increased to $64.6 million from $38.3 million at September 30, 2004, primarily from new high-speed units
for the energy-related markets.



17



---

Gross margin for the Power Transmission segment increased to 30.7% for the quarter ended September 30, 2005,
compared to 24.6% for the quarter ended September 30, 2004, or 6.1 percentage points. This increase resulted from the favorable impact of higher volumes on plant efficiencies and fixed costs. Also, increased inter-segment production in support
of the Oil Field segment provided additional manufacturing volume that contributed to greater fixed cost absorption and improved gross margins, partially offset by the impact on plant utilization from lost production days as a result of Hurricane
Rita.



Direct selling, general and administrative expenses for Power
Transmission increased $0.5 million to $3.4 million, or 17.2%, for the quarter ended September 30, 2005, from $2.9 million for the quarter ended September 30, 2004, due to higher employee related expenses in support of increased sales
volumes.



Trailer sales for the quarter ended September 30, 2005,
increased to $22.7 million, or 18.9%, from $19.1 million for the quarter ended September 30, 2004. This increase resulted from higher sales of new flatbed and dump trailers. Sales growth in flatbeds was particularly strong due to the
introduction of new models and demand from the construction market. Backlog for the Trailer segment increased to $28.1 million at September 30, 2005, compared to $15.0 million at September 30, 2004. The backlog increase was primarily from
orders for new flatbed trailers for the reasons mentioned above and from van trailers as freight industry demand has improved due to replacement trailer demand and from increases in freight volume levels



Trailer gross margin increased to 6.9% for the quarter ended September 30, 2005, from
2.1% for the quarter ended September 30, 2004, or 4.8 percentage points. This margin improvement was due to higher selling prices on new trailers and the favorable mix impact of higher-margin flatbed and dump trailers, partially offset by plant
inefficiencies from rapid production ramp-up and by impacts on plant utilization from lost production days as a result of Hurricane Rita.



Direct selling, general and administrative expenses for Trailer remained at $0.7 million for the quarter ended September 30, 2005, compared to the quarter ended
September 30, 2004.



Corporate administrative expenses, which are
allocated to the segments primarily based on third-party revenues, increased to $3.7 million, or 10.0%, for the quarter ended September 30, 2005, from $3.4 million for the quarter ended September 30, 2004, primarily from higher
employee-related expenses in support of increased sales volumes.



Investment
income, interest expense and other income and expense for the quarter ended September 30, 2005, totaled $0.2 million of income compared to expense of $0.0 million for the quarter ended September 30, 2004, due to various miscellaneous
income items.



Pension income, which is reported as a reduction of cost of
sales, decreased to $0.6 million for the quarter ended September 30, 2005, or 37%, compared to $0.9 million for the quarter ended September 30, 2004. For the full year, pension income is expected to be approximately $2.1 million compared
to $3.4 million for 2004, or a 38% decrease. This decrease is due to lower expected returns on plan assets from lowering the expected return rate from 8.5% to 8.0%, from lowering the discount rate from 6.25% to 6.0% for the first nine months of 2005
and to 5.5% for the last three months of 2005 and from higher benefits granted to bargaining employees in the new three-year contract signed October 2, 2005.



The effective tax rate for the quarter ending September 30, 2005, remained at 36.0% compared to the quarter ended September 30,
2004.



18



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Nine Months Ended September 30, 2005, Compared to the Nine Months Ended September 30, 2004:



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



|                   |  |                                 |         |                      |   |                        |  |   |        |  |      
|------------------ |  | ------------------------------- | ------- | -------------------- | - | ---------------------- |  | - | ------ |  | -----
|                   |  | Nine Months Ended September 30, |         | Increase/ (Decrease) |   | % Increase/ (Decrease)
|                   |  |                                
|                   |  | 2005                            |         | 2004                 |   |                       
|Sales              |  |                                 |         |                      |   |                        |  |   |        |  |      
|Oil Field          |  | $                               | 214,751 |                      | $ | 151,212                |  | $ | 63,539 |  | 42.0 
|Power Transmission |  |                                 | 72,174  |                      |   | 55,322                 |  |   | 16,852 |  | 30.5 
|Trailer            |  |                                 | 59,832  |                      |   | 42,389                 |  |   | 17,443 |  | 41.1 
|                   |  |                                 |         |                      |   |                        |  |   |        |  |      
|Total              |  | $                               | 346,757 |                      | $ | 248,923                |  | $ | 97,834 |  | 39.3 
|                   |  |                                 |         |                      |   |                        |  |   |        |  |      
|Gross Profit       |  |                                 |         |                      |   |                        |  |   |        |  |      
|Oil Field          |  | $                               | 52,307  |                      | $ | 29,786                 |  | $ | 22,521 |  | 75.6 
|Power Transmission |  |                                 | 22,736  |                      |   | 13,511                 |  |   | 9,225  |  | 68.3 
|Trailer            |  |                                 | 3,821   |                      |   | 811                    |  |   | 3,010  |  | 371.1
|                   |  |                                 |         |                      |   |                        |  |   |        |  |      
|Total              |  | $                               | 78,864  |                      | $ | 44,108                 |  | $ | 34,756 |  | 78.8 
|                   |  |                                 |         |                      |   |                        |  |   |        |  |      



Oil Field sales increased to $214.8
million, or 42.0%, for the nine months ended September 30, 2005, from $151.2 million for the nine months ended September 30, 2004. The added sales of 2004 acquisitions and the benefit of the stronger Canadian dollar in the first nine
months of 2005 contributed 2.0 percentage points of this increase. Increased sales of new pumping units account for a majority of the balance of the increase of 40.0 percentage points. Sales of new pumping units in the U.S., Canada and Argentina,
and related service, increased from higher drilling and production activity associated with higher energy prices and from higher use of pumping units to pump water from gas fields. In addition, sales of automation equipment continued to increase due
to market share growth from new product offerings. Commercial casting sales from the foundry operation grew significantly from the prior year as general economic levels in the U.S. continued to improve, especially in the industrial and
construction-related markets. In addition, sales growth was impacted from price increases instituted throughout 2004 in response to dramatic raw material price increases. Oil Fields backlog increased to $72.7 million as of September 30,
2005, from $61.6 million at December 31, 2004. This backlog increase was from increased bookings of new pumping units in the U.S., Canada and Argentina markets and from foundry machine tool casting orders.



Gross margin (gross profit as a percentage of revenue) for the Oil Field segment increased to
24.4% for nine months ended September 30, 2005, compared to 19.7% for the nine months ended September 30, 2004, or 4.7 percentage points. During the third quarter of 2004, higher raw material prices, especially steel, and higher fuel
prices in the service operations impacted margins. Throughout 2004 and 2005, sales prices were increased to recover these higher material costs, contributing to the improved gross margin in the first nine months of 2005 and enabling the segment to
return to margin levels of past years.



Direct selling, general and
administrative expenses for Oil Field increased to $8.7 million, or 13.5%, for the nine months ended September 30, 2005, from $7.7 million for the nine months ended September 30, 2004 due to higher employee-related expenses in support of
increased sales volumes.



Sales for the Companys Power Transmission
segment increased to $72.2 million, or 30.5%, for the nine months ended September 30, 2005, compared to $55.3 million for the nine months ended September 30, 2004. The benefit of the stronger euro on the sales of the French division and
the opening of new gear repair facilities contributed 1.6 percentage points of this increase. The additional 28.9 percentage points of growth was the result of increased sales from the energy-related markets, such as power generation and refining,
as well as increased low-speed unit sales to the steel and sugar markets. The Companys Power Transmission backlog at June 30, 2005, increased to $64.6 million from $40.1 million at December 31, 2004, primarily from new high-speed
units for the reasons noted above.



Gross margin for the Power Transmission
segment increased to 31.5% for the nine months ended September 30, 2005, compared to 24.4% for the nine months ended September 30, 2004, or 7.1 percentage points. This increase resulted from



19



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the favorable impact of higher volumes on plant efficiencies and fixed cost coverage as well as from the benefit of
increased selling prices. Also, increased inter-segment production in support of the Oil Field segment provided additional manufacturing volume that contributed to improved gross margins.



Direct selling, general and administrative expenses for Power Transmission increased $1.1 million to $10.0 million, or 11.6%, for the nine
months ended September 30, 2005, from $8.9 million for the nine months ended September 30, 2004, due to higher employee-related expenses in support of increased sales volumes.



Trailer sales for the nine months ended September 30, 2005, increased to $59.8 million, or 41.1%, from $42.4 million for the nine
months ended September 30, 2004. This increase resulted from higher sales of all models of new trailers. Freight industry demand has continued to improve due to replacement trailer demand and from increases in freight volume levels. Sales
growth in flatbeds was particularly strong due to the introduction of new models and demand from the construction market. Backlog for the Trailer segment increased to $28.1 million at September 30, 2005, compared to $11.5 million at
December 31, 2004. The backlog increase was primarily from orders for new van and flatbed trailers for the reasons mentioned above.



Trailer gross margin increased to 6.4% for the nine months ended September 30, 2005, from 1.9% for the nine months ended September 30, 2004, or 4.5 percentage
points. This margin improvement was due to higher selling prices on new trailers and the favorable mix impact of higher-margin flatbed and dump trailers, partially offset by plant inefficiencies from rapid production ramp-up.



Direct selling, general and administrative expenses for Trailer increased to $2.4 million for
the nine months ended September 30, 2005, from $1.7 million for the nine months ended September 30, 2004, from higher bad debt expense associated with a disputed receivable that is currently in litigation.



Corporate administrative expenses, which are allocated to the segments primarily based on
third-party revenues, increased to $12.2 million, or 25.9%, for the nine months ended September 30, 2005, from $9.7 million for the nine months ended September 30, 2004, primarily from higher employee-related, legal and audit expenses.



Investment income, interest expense and other income and expense for the nine
months ended September 30, 2005, totaled $0.0 million of expense compared to expense of $0.2 million for the nine months ended September 30, 2004, due to an increase in investment income.



Pension income, which is reported as a reduction of cost of sales, decreased to $1.8 million
for the nine months ended September 30, 2005, or 39%, compared to $2.5 million for the nine months ended September 30, 2004. For the full year, pension income is expected to be approximately $2.1 million compared to $3.4 million for 2004,
or a 38% decrease. This decrease is due to lower expected returns on plan assets from lowering the expected return rate from 8.5% to 8.0%, from lowering the discount rate from 6.25% to 6.0% for the first nine months of 2005 and to 5.5% for the last
three months of 2005 and from higher benefits granted to bargaining employees in the new three-year contract signed October 2, 2005.



The effective tax rate for the nine months ending September 30, 2005, was 36.0% compared to 36.5% for the nine months ended September 30, 2004, due to the
favorable impact of the new manufacturing income deduction.



20



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Liquidity and Capital Resources



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



The Companys cash
balance totaled $18.7 million at September 30, 2005, compared to $17.1 million at December 31, 2004. For the nine months ended September 30, 2005, net cash provided by operating activities was $2.1 million, net cash used in investing
activities totaled $9.3 million and net cash provided by financing activities amounted to $8.8 million. Significant components of cash used in operating activities include net earnings adjusted for non-cash expenses of $39.1 million, offset by a net
increase in working capital of $37.0 million. This increase was primarily due to higher inventory and higher accounts receivable, which consumed $32.4 million and $13.1 million, respectively. The inventory increase was primarily due to higher
inventory levels in all segments to support higher sales volumes and to replace strategic inventory sold in previous periods. Accounts receivable increased in all segments primarily from higher sales. Higher accounts payable balances, related to
higher activity and inventory levels, partially offset these items by $5.5 million. Net cash used in investing activities included net capital expenditures totaling $8.8 million and an increase in other assets of $0.5 million. Capital expenditures
for 2005 are projected to be in the range of $15.0 million to $17.0 million, primarily for the expansion of manufacturing capacity and efficiency improvements in the Oil Field segment. Significant components of net cash provided by financing
activities included proceeds from short-term notes payable of $5.5 million, proceeds from the exercise of stock options of $7.2 million and dividend payments of $3.9 million, or $0.27 per share.



Total debt balances at September 30, 2005, consisted of $7.2 million of short-term notes
payable. As of September 30, 2005, the Company had outstanding debt of $5.0 million associated with the Bank Facility discussed below and $2.2 million of debt associated with the short-term French credit facility discussed below. Total debt
increased by $5.2 million from short-term borrowings during the nine months ended September 30, 2005.



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 up to $17.5 million of committed
borrowings along with an additional $10.0 million discretionary line of credit. This Bank Facility expires on June 30, 2007. Borrowings under the Bank Facility bear interest, at the Companys option, at either the greater of (i) the
prime rate, (ii) the base CD rate plus an applicable margin or (iii) the Federal Funds Effective Rate plus an applicable margin or the London Interbank Offered Rate plus an applicable margin, depending on certain ratios as defined in the
Bank Facility. As of September 30, 2005, $5.0 million was outstanding under the Bank Facility and the Company was in compliance with all financial covenants under the terms of the Bank Facility.



In addition, the Company has short-term borrowing capabilities with a French bank for the
working capital needs of its French operation. Specific accounts receivable are provided as security, with repayment due 15 days after the date the accounts receivable are due from the customer. Interest is calculated at the three-month EURIBOR rate
plus an applicable margin. As of September 30, 2005, $2.2 million was outstanding under this borrowing arrangement.



The Company currently has a stock repurchase plan under which the Company is authorized to spend up to $19.1 million for repurchases of its common stock. Pursuant to this
plan, the Company has repurchased a total of 1,656,740 shares of its common stock at an aggregate purchase price of $17.0 million. No shares were repurchased during the quarter or nine months ended September 30, 2005. 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, 2005, the Company held 399,278 shares of treasury stock at an aggregate cost of
approximately $4.1 million. Authorizations of approximately $2.1 million remained at September 30, 2005.



21



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The following table summarizes the Companys expected cash outflows from financial contracts and commitments as of
September 30, 2005. Information on recurring purchases of materials for use in manufacturing and service operations has not been included. These amounts are not long-term in nature (less than three months) and are generally consistent from year
to year.



|                                                 |  |                        |       |                  |   |            |  |            |     |                   |   |     |  |   |    
|------------------------------------------------ |  | ---------------------- | ----- | ---------------- | - | ---------- |  | ---------- | --- | ----------------- | - | --- |  | - | ---
|                                                 |  | Payments due by period
|(In thousands of dollars)                        |  | Total                  |       | Less than 1 year |   | 1- 3 years |  | 3- 5 years |     | More than 5 years
|Operating lease obligations                      |  | $                      | 1,804 |                  | $ | 105        |  | $          | 994 |                   | $ | 540 |  | $ | 165
|Contractual commitments for capital expenditures |  |                        | 6,652 |                  |   | 6,652      |  |            |    |                   |   |    |  |   |   
|                                                 |  |                        |       |                  |   |            |  |            |     |                   |   |     |  |   |    
|Total                                            |  | $                      | 8,456 |                  | $ | 6,757      |  | $          | 994 |                   | $ | 540 |  | $ | 165
|                                                 |  |                        |       |                  |   |            |  |            |     |                   |   |     |  |   |    



Since the Company has no significant
tax loss carryforwards, the Company expects to make quarterly estimated tax payments in 2005 based on taxable income levels. Also, the Company has various retirement plans for which the Company has committed a certain level of benefits. The defined
benefit plan is overfunded and no contributions are expected in the short-term. The Company expects to make contributions to its defined contribution and postretirement health and life plans of approximately $2.5 million annually, depending on
participation levels in these plans.



The Company believes that its cash flows
from operations and its available borrowing capacity under its credit agreements will be sufficient to fund its operations, including planned capital expenditures, dividend payments and stock repurchases, through December 31, 2005.



22



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Recently Issued Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151 (SFAS
151), Inventory Costs, an amendment of ARB No. 43, Chapter 4. This Statement amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be
recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005, but early application is permitted during fiscal years after the date this Statement is issued. The Company does not expect the adoption of SFAS 151 to impact the Companys
consolidated financial position or results of operations.



In December 2004,
the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152 (SFAS 152), Accounting for Real Estate Time-Sharing Transactions. This Statement provides that real estate time-sharing
transactions should be accounted for as non-retail land sales as discussed in the recently issued SOP 04-02, Accounting for Real Estate Time-Sharing Transactions. SFAS 152 amends FASB Statement No. 66, Accounting for Sales of
Real Estate, to reference SOP 04-02 and amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects to state that the guidance for incidental operations and costs incurred to sell
real estate projects does not apply to real estate time-sharing transactions. SFAS 152 is effective for financial statements for fiscal years beginning after June 15, 2005. Restatement of previously issued financial statements is not permitted.
The Company does not expect the adoption of SFAS 152 to impact the Companys consolidated financial position or results of operations.



In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153 (SFAS 153), Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No, 29. This Statement addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets
in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date this Statement is issued. The Company does not expect the adoption of SFAS 153 to impact the Companys consolidated financial position
or results of operations.



In December 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123-Revised 2004 (SFAS 123R), Share-Based Payment, a revision of SFAS No. 123 Accounting for Stock-Based Compensation, and supersedes APB
No. 25, Accounting for Stock Issued to Employees. This Statement requires that the cost of employee services received in exchange for stock based on the grant-date fair value be measured and that the cost be recognized over the
period during which the employee is required to provide service in exchange for the award. The fair value will be estimated using an option-pricing model. Excess tax benefits, as defined in SFAS 123R, will be recognized as additional
paid-in-capital. SFAS 123R initially was to be adopted as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, on April 15, 2005, the Securities and Exchange Commission announced a new
rule that amended the adoption date for SFAS 123R. The new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year that begins after June 15, 2005. As noted in the Companys significant accounting policies,
the Company does not record compensation expense for stock-based compensation. Although the Company continues to evaluate SFAS 123R and related transition matters, the adoption of SFAS 123R is expected to impact net earnings by approximately $0.6
million ($0.04 per diluted share), $0.3 million ($0.02 per diluted share) and $0.02 million ($0.01 per diluted share) for the years ending December 31, 2006, 2007 and 2008, respectively, for stock options previously granted.



23



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In March 2005, the Financial Accounting Standards Board issued FASB Interpretation No. 47 (Interpretation
47), Accounting for Conditional Asset Retirement Obligations, Interpretation 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143 Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of an entity. If an entity has
sufficient information to reasonably estimate the fair value of an asset retirement obligation, it must recognize a liability at the time the liability is incurred. If the liabilitys fair value cannot be reasonably estimated, that fact and the
reasons shall be disclosed. Interpretation 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises). An entity shall recognize the cumulative effect of initially
applying this Interpretation as a change in accounting principle. The Company does not expect the adoption of Interpretation 47 to impact the Companys consolidated financial position or results of operations.



In May 2005, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 154 (SFAS 154), Accounting Changes and Error Corrections. This Statement requires retrospective application for voluntary changes in accounting principle unless it is impracticable to do so.
Statement 154s retrospective application requirement replaces APB Opinion No. 20, Accounting Changes requirement to recognize most voluntary changes in accounting principle by including in net income of the period of the
change the cumulative effect of changing to the new accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for
accounting changes and corrections of errors occurring in fiscal periods beginning after the date this Statement is issued. The Company does not expect the adoption of SFAS 154 to impact the Companys 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.



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. In some cases, a customer is not
able to take delivery of a completed product and requests that the Company store the product for defined period of time. The Company will process a Bill-and-Hold invoice and recognize revenue at the time of the storage request if all of the
following criteria are met:



| |  |  | The customer has accepted title and risk of loss;
| | - |  | -------------------------------------------------



| |  |  | The customer has provided a written purchase order for the product;
| | - |  | -------------------------------------------------------------------



| |  |  | The customer, not the Company, requested the product to be stored and to be invoiced under a Bill-and-Hold arrangement. The customer must also provide the business purpose for the
storage request;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The customer must provide a storage period and future shipping date;
| | - |  | --------------------------------------------------------------------



| |  |  | The Company must not have retained any future performance obligations on the product;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | The Company must segregate the stored product and not make it available to use on other orders; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | The product must be complete and ready for shipment.
| | - |  | ----------------------------------------------------



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.



24



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Managements estimates are primarily influenced by market activity levels, production requirements, the physical
condition of products and technological innovation. Changes in any of these factors may result in adjustments to the carrying value of inventory. Also, the Company accounts for a significant portion of its inventory under the LIFO method. The LIFO
reserve can be impacted by changes in the LIFO layers and by inflation index adjustments.



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



Goodwill acquired in connection with business combinations represent the excess of consideration over the fair value of net assets acquired. The Company performs
impairment tests on the carrying value of goodwill at least annually or whenever events or changes in circumstances indicate the carrying value of goodwill may be greater than fair value, such as significant underperformance relative to historical
or projected operating results and significant negative industry or economic trends. The Companys fair value is primarily determined using discounted cash flows, which requires management to make judgments about future operating results,
working capital requirements and capital spending levels. Changes in cash flow assumptions or other factors which negatively impact the fair value of the operations would influence the evaluation and may result in a determination that goodwill is
impaired and a corresponding impairment charge.



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



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



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



The Company offers a defined benefit plan and other benefits upon the
retirement of its employees. Assets and liabilities associated with these benefits are calculated by third-party actuaries under the rules provided by various accounting standards, with certain estimates provided by management. These estimates
include the discount rate, expected rate of return of assets and the rate of increase of compensation and health claims. On a regular basis, management reviews these estimates by comparing them to actual experience and those used by other companies.
If a change in an estimate is made, the carrying value of these assets and liabilities may have to be adjusted. The impact of changes in these estimates does not differ significantly from those disclosed in the Companys Annual Report on Form
10-K for the year ended December 31, 2004.



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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, (iv) currency exchange rate fluctuations in the markets in which the Company operates, (v) changes in the laws, regulations, policies or other activities of governments, agencies and similar organizations where such
actions may affect the production, licensing, distribution or sale of the Companys products, the cost thereof or applicable tax rates, (vi) costs related to legal and administrative proceedings, including adverse judgments against the
Company if the Company fails to prevail in reversing such judgments, and (vii) general industry, political and economic conditions in the markets where the Company procures material, components and supplies for the production of the
Companys principal products or where the Companys products are produced, distributed or sold. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, estimated or expected. The Company undertakes no obligations to update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



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



The Company does not utilize financial or derivative instruments for trading purposes or to hedge exposures to interest rates, foreign currency rates or commodity prices.
Due to the low level of current debt exposure, the Company does not have any significant exposure to interest rate fluctuations. However, if the Company drew on its line of credit under its Bank Facility, the Company would have interest rate risk
since the interest rate is variable. In addition, the Company primarily invoices and purchases in the same currency as the functional currency of its operations, which minimizes exposure to currency rate fluctuations.



The Company is exposed to currency fluctuations with debt denominated in U.S. dollars owed to
the Companys U.S. entity by its French and Canadian entities. As of September 30, 2005, this inter-company debt was comprised of 0.6 million euros and 6.5 million Canadian dollars. As of September 30, 2005, if the U.S.
dollar strengthens by 10% over these currencies, the net income impact would be $0.4 million of expense and if the U.S. dollar weakens by 10% over these currencies, the net income impact would be $0.4 million of income. Also, certain assets and
liabilities, primarily employee and tax related, denominated in the local currency of foreign operations whose functional currency is the U.S. dollar are exposed to fluctuations in currency rates. As of September 30, 2005, if the U.S. dollar
strengthens by 10% over these currencies, the net income impact would be $0.1 million of expense and if the U.S. dollar weakens by 10% over these currencies, the net income impact would be $0.1 million of income.



Item 4. Controls and Procedures.



Based on their evaluation of the Companys disclosure controls and procedures as of
September 30, 2005, the Chief Executive Officer of the Company, Douglas V. Smith, and the Chief Financial Officer of the Company, R. D. Leslie, have concluded that the Companys disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934) are effective.



There were no changes in the Companys internal control over financial reporting that occurred during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.



26



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PART II  OTHER INFORMATION



Item 1. Legal Proceedings.



A class action complaint was filed in the U.S. 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 1998 and in Lufkin, Texas in August 1998. In April 1999, the District Court issued a decision that certified a class for this case, which
included all black employees employed by the Company from March 6, 1994, to the present. The case was closed from 2001 to 2003 while the parties unsuccessfully attempted mediation. Trial for this case began in December 2003, but was postponed
by the District Court and was completed in October 2004. The only claims made at trial were those of discrimination in initial assignments and promotions.



On January 13, 2005, the District Court entered its decision finding that the Company discriminated against African-American employees in initial assignments and
promotions. The District Court also concluded that the discrimination resulted in a shortfall in income for those employees and ordered that the Company pay those employees back pay to remedy such shortfall, together with pre-judgment interest in
the amount of 5%. On August 29, 2005, the District Court determined that the backpay award for the class of affected employees would be $3.4 million (including interest to January 1, 2005) and provided a formula for attorney fees that the
Company estimates will result in a total not to exceed $2.5 million. In addition to back pay with interest, the District Court (i) enjoined and ordered the Company to cease and desist all racially biased assignment and promotion practices and
(ii) ordered the Company to pay court costs and expenses.



The Company has
reviewed this decision with its outside counsel and on September 19, 2005, appealed the decision to the U.S. Court of Appeals for the Fifth Circuit. The Company believes that after a full and fair review of the evidence, the Court of Appeals
will determine that the plaintiffs have not established their claims of discrimination by the Company against the plaintiffs and will enter a decision to that effect and will dismiss the case against the Company. At this time, the Company has
concluded that an unfavorable ultimate outcome is not probable. If the District Courts decision is reversed and remanded for a new trial, the Company will vigorously defend itself on retrial. While the ultimate outcome and impact of these
claims against the Company cannot be predicted with certainty, the Company believes that the resolutions of these proceedings will not have a material adverse effect on its consolidated financial position. However, should the Company be unsuccessful
in its appeal, the final determination could have a material impact on the Companys reported earnings and cash flows in a future reporting period.



There are various other claims and legal proceedings arising in the ordinary course of business pending against or involving the Company wherein monetary damages are
sought. It is managements opinion that the Companys liability, if any, under such claims or proceedings would not materially affect its consolidated financial position, results of operations or cash flow.



27



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Item 6. Exhibits.



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



28



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SIGNATURES



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



Date: November 7, 2005



|                        |  |                                                 
|----------------------- |  | ------------------------------------------------
|LUFKIN INDUSTRIES, INC.
|                        | 
|By                      |  | /s/ R. D. Leslie                                
|                        |  | R.D. Leslie                                     
|                        |  | Signing on behalf of the registrant and as      
|                        |  | Vice President/Treasurer/Chief Financial Officer
|                        |  | (Principal Financial and Accounting Officer)    



29



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Index of Exhibits



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



30