Lufkin Industries 10Q 2009 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2008

( ) 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

LUFKIN INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

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)

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer X Accelerated filer ______

Non-accelerated filer ______ Smaller reporting company ______

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 14,783,674 shares of Common Stock, $1.00 par value per share, outstanding as of May 8, 2008.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

LUFKIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Thousands of dollars, except share and per share data)
	March 31,			December 31,
Assets	2008			2007
Current Assets:
Cash and cash equivalents	$	103,291		$	95,748
Receivables, net		91,716			93,634
Income tax receivable		4,608			4,637
Inventories		103,533			95,821
Deferred income tax assets		1,969			1,615
Other current assets		3,273			1,412
Total current assets		308,390			292,867

Property, plant and equipment, net		121,537			120,129
Prepaid pension costs		72,059			71,571
Goodwill, net		12,194			11,990
Other assets, net		4,782			4,099
Total assets	$	518,962		$	500,656

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable	$	23,736		$	23,977
Accrued liabilities:
Payroll and benefits		10,263			11,444
Warranty expenses		3,770			3,641
Taxes payable		12,518			7,131
Other		22,258			21,941
Total current liabilities		72,545			68,134

Deferred income tax liabilities		34,658			34,600
Postretirement benefits		7,298			7,303
Other liabilities		6,019			5,966
Commitments and contingencies		-			-

Shareholders' equity:

Common stock, $1.00 par value per share; 60,000,000 shares authorized;
15,566,598 and 15,534,184 shares issued and outstanding, respectively		15,567			15,534
Capital in excess par		50,321			48,315
Retained earnings		353,283			341,315
Treasury stock, 915,278 and 895,278 shares, respectively, at cost		(32,662	)		(31,580	)
Accumulated other comprehensive income		11,933			11,069
Total shareholders' equity		398,442			384,653
Total liabilities and shareholders' equity	$	518,962		$	500,656

See notes to condensed consolidated financial statements.

LUFKIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands of dollars, except per share and share data)


	Three Months Ended
	March 31,
	2008			2007

Sales	$	147,011		$	148,081

Cost of sales		105,652			108,030

Gross profit		41,359			40,051

Selling, general and administrative expenses		17,532			14,544

Operating income		23,827			25,507

Interest income		679			865
Interest expense		(79	)		(34	)
Other income (expense), net		(382	)		103

Earnings before income tax provision		24,045			26,441

Income tax provision		8,416			8,672

Net earnings		15,629			17,769


Net earnings per share
Basic	$	1.07		$	1.19
Diluted	$	1.06		$	1.17

Dividends per share	$	0.25		$	0.21

Weighted average number of shares outstanding:
Basic		14,642,174			14,938,614
Diluted		14,789,535			15,171,170

See notes to condensed consolidated financial statements.

LUFKIN INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)

	Three Months Ended
	March 31,
	2008			2007
Cash flows from operating activities:
Net earnings	$	15,629		$	17,769
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization		3,883			3,215
Deferred income tax provision		(354	)		(370	)
Excess tax benefit from share-based compensation		(411	)		(247	)
Share-based compensation expense		964			995
Pension income		(507	)		(808	)
Postretirement benefits		(29	)		4
(Gain) loss on disposition of property, plant and equipment		15			(93	)
Changes in:
Receivables, net		2,503			12,936
Inventories		(6,900	)		(8,737	)
Other current assets		(1,886	)		(1,537	)
Accounts payable		(375	)		3,013
Accrued liabilities		4,014			7,105
Net cash provided by operating activities		16,546			33,245

Cash flows from investing activites:
Additions to property, plant and equipment		(4,927	)		(4,350	)
Proceeds from disposition of property, plant and equipment		90			366
Increase in other assets		(663	)		(90	)
Net cash used in investing activities		(5,500	)		(4,074	)

Cash flows from financing activites:
Dividends paid		(3,661	)		(3,138	)
Excess tax benefit from share-based compensation		411			247
Proceeds from exercise of stock options		598			242
Purchases of treasury stock		(1,117	)		-
Net cash used in financing activities		(3,769	)		(2,649	)

Effect of translation on cash and cash equivalents		266			7

Net increase in cash and cash equivalents		7,543			26,529

Cash and cash equivalents at beginning of period		95,748			57,797

Cash and cash equivalents at end of period	$	103,291		$	84,326

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED 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 for interim financial statements 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 for the interim periods included in this report 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, 2007. The results of operations for the three months ended March 31, 2008, are not necessarily indicative of the results that may be expected for the full fiscal year.

2. Receivables

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

	March 31,			December 31,
	2008			2007

Accounts receivable	$	91,319		$	93,293
Notes receivable		442			447
Other receivables		482			406
Gross receivables		92,243			94,146

Allowance for doubtful accounts receivable		(140	)		(125	)
Allowance for doubtful notes receivable		(387	)		(387	)
Net receivables	$	91,716		$	93,634

Bad debt expense related to receivables was negligible for the three months ended March 31, 2008 and 2007.

3. Other Current Accrued Liabilities

The following is a summary of the Company's other current accrued liabilities balances (in thousands of dollars):

	March 31,		December 31,
	2008		2007

Customer prepayments	$	15,406	$	15,370
Deferred compensation plans		4,690		4,650
Accrued professional services		664		802
Other accrued liabilities		1,498		1,119
Total other current accrued liabilities	$	22,258	$	21,941

4. Property, Plant & Equipment

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

	March 31,			December 31,
	2008			2007

Land	$	5,153		$	3,517
Land improvements		9,413			9,398
Buildings		76,226			76,095
Machinery and equipment		237,752			235,834
Furniture and fixtures		5,442			5,315
Computer equipment and software		13,980			14,327
Total property, plant and equipment		347,966			344,486
Less accumulated depreciation		(226,429	)		(224,357	)
Total property, plant and equipment, net	$	121,537		$	120,129

Depreciation expense related to property, plant and equipment was $3.9 million and $3.2 million for the three months ended March 31, 2008 and 2007, respectively.

5. Inventories

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

	March 31,		December 31,
	2008		2007
Gross inventories @ FIFO:
Finished goods	$	4,682	$	5,790
Work in progress		26,506		21,674
Raw materials & component parts		91,896		88,722
Maintenance, tooling & supplies		11,497		11,638
Total gross inventories @ FIFO		134,581		127,824
Less reserves:
LIFO		28,777		30,110
Valuation		2,271		1,893
Total inventories as reported	$	103,533	$	95,821

Gross inventories on a FIFO basis before adjustments for reserves shown above that were accounted for on a LIFO basis were $86.5 million and $84.8 million at March 31, 2008, and December 31, 2007, respectively. In the first quarter of 2008, certain inventory quantities associated with the Trailer segment were reduced, resulting in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect was an increase in net income of approximately $1.4 million.

6. Net Earnings Per Share

Net earnings per share amounts are based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The weighted average number of shares used to compute basic and diluted net earnings per share for the three months ended March 31, 2008 and 2007, are illustrated below (in thousands of dollars, except share and per share data):

	Three Months Ended
	March 31,
	2008		2007
Numerator:
Numerator for basic and diluted earnings per share-net earnings	$	15,629	$	17,769

Denominator:
Denominator for basic net earnings per share weighted-average shares		14,642,174		14,938,614
Effect of dilutive securities: employee stock options		147,361		232,556
Denominator for diluted net earnings per share adjusted weighted-average shares assumed conversions		14,789,535		15,171,170

Basic net earnings per share	$	1.07	$	1.19
Diluted net earnings per share	$	1.06	$	1.17

Weighted options to purchase a total of 313,414 and 183,736 shares of the Company’s common stock for the three months ended March 31, 2008 and 2007, respectively were excluded from the calculation of fully diluted earnings per share because their effect on fully diluted earnings per share for the period were antidilutive.

7. Legal Proceedings

On March 7, 1997, a class action complaint was filed against Lufkin Industries, Inc. (the “Company”) in the U.S. District Court for the Eastern District of Texas by an employee and a former employee of the Company who 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 was $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 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. On April 3, 2007, the Company appeared before the appellate court in New Orleans for oral argument in this case. The appellate court subsequently issued a decision on Friday, February 29, 2008 that reversed and vacated the plaintiff’s claim regarding the initial assignment of black employees into the Foundry Division. The court also denied plaintiff’s appeal for class certification in order to claim disparate treatment. Plaintiff’s claim on the issue of the Company’s promotional practices was affirmed but the backpay award was vacated and remanded for recomputation in accordance with the opinion. The District Court’s injunction was vacated and remanded with instructions to enter appropriate injunctive relief. Finally, the issue of plaintiff’s attorney’s fees was remanded to the district court for further consideration in accordance with prevailing authority. Plaintiffs and the Company subsequently filed requests for rehearing with the court on March 20, 2008 in order to address significant issues. On April 10, 2008 the Company was informed that the Fifth U.S. Circuit Court of Appeals had denied both requests for a rehearing. The Company, with the assistance of outside counsel, is reviewing its appellate options at this time as well as its position in future proceedings in the District Court. At present, however, the district court will conduct further proceedings on the injunctive relief to be entered, back pay and plaintiffs’ request for attorneys’ fees. The Fifth Circuit’s opinion to reverse and affirm portions of the District Court’s decision, together with the assignment of a different judge for this case in the District Court (the trial judge who wrote the trial court decision is deceased) prevents the Company from estimating the back pay or attorneys’ fees award at this time. The District Court will interpret the Fifth Circuit’s instructions and take additional evidence to determine these issues. Prior to the case returning to the District Court, the Company will review its appellate options. This review will address the remaining issue in this case. The Company believes that its position is supported by legal authority that would reverse the decisions of the lower courts.

The Company believes that resolution of these proceedings will not have a material adverse effect on its consolidated financial position. However, should the Company elect not to appeal or if further appellate review is unsuccessful, the proceedings in the District Court for a final determination of back pay and attorney’s fees could have a material impact on the Company’s reported earnings and results of operations 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. Comprehensive Income

Comprehensive income includes net income and changes in the components of accumulated other comprehensive income during the periods presented. The Company’s comprehensive income is as follows (in thousands of dollars):

	Three Months Ended
	March 31,
	2008			2007

Net earnings	$	15,629		$	17,769

Other comprehensive income, before tax:

Change in foreign currency translation

Foreign currency translation adjustments		892			368

Defined benefit pension plans:

Amortization of prior service cost included in net periodic benefit cost		141			142
Amortization of unrecognized transition asset included in net periodic benefit cost		(160	)		(232	)
Amortization of unrecognized net loss included in net periodic benefit cost		21			12

Total defined benefit pension plans		2			(78	)

Defined benefit postretirement plans:

Amortization of unrecognized net gain included in net periodic benefit cost		(46	)		(45	)

Total defined benefit postretirement plans		(46	)		(45	)

Total other comprehensive income, before tax		848			245

Income tax benefit related to items of other comprehensive income		16			43

Total other comprehensive income, net of tax		864			288

Total comprehensive income	$	16,493		$	18,057

Accumulated other comprehensive income in the consolidated balance sheet consists of the following (in thousands of dollars):

			Defined		Defined			Accumulated
	Foreign		Benefit		Benefit			Other
	Currency		Pension		Postretirement			Comprehensive
	Translation		Plans		Plans			Income

Balance, Dec. 31, 2007	$	8,015	$	1,221	$	1,833		$	11,069

Current-period change		892		2		(30	)		864

Balance, Mar. 31, 2008	$	8,907	$	1,223	$	1,803		$	11,933

9. Segment Data

The Company operates with three business segments - Oil Field, Power Transmission and Trailer. The three operating segments are supported by a common corporate group. 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, 2007. The following is a summary of key segment information (in thousands of dollars):

Three Months Ended March 31, 2008

				Power
	Oil Field			Transmission			Trailer			Corporate		Total

Gross sales	$	101,500		$	40,595		$	5,970		$	-	$	148,065
Inter-segment sales		(591	)		(434	)		(29	)		-		(1,054	)
Net sales	$	100,909		$	40,161		$	5,941		$	-	$	147,011

Operating income (loss)	$	20,531		$	4,795		$	(1,499	)	$	-	$	23,827
Other income (expense), net		(268	)		(62	)		-			548		218
Earnings (loss) before
income tax provision	$	20,263		$	4,733		$	(1,499	)	$	548	$	24,045

Three Months Ended March 31, 2007

				Power
	Oil Field			Transmission			Trailer			Corporate		Total

Gross sales	$	102,160		$	35,067		$	13,176		$	-	$	150,403
Inter-segment sales		(874	)		(1,369	)		(79	)		-		(2,322	)
Net sales	$	101,286		$	33,698		$	13,097		$	-	$	148,081

Operating income (loss)	$	21,436		$	5,110		$	(1,039	)	$	-	$	25,507
Other income (expense), net		6			93			(3	)		838		934
Earnings (loss) before
income tax provision	$	21,442		$	5,203		$	(1,042	)	$	838	$	26,441

Due to unfavorable current and projected market conditions in the flatbed and dump markets, in January 2008, the Company announced the decision to suspend its participation in the commercial trailer markets and to develop a plan to run-out existing inventories, fulfill contractual obligations and close all trailer facilities in 2008. During the first quarter, all remaining trailer orders were manufactured and the manufacturing workforce was redeployed throughout the Company or terminated. Also, several service centers were closed and the inventory was consolidated at the Lufkin, Texas facility for future aftermarket sales. During the second quarter of 2008, it is expected that the remaining backlog of trailers will be sold, the manufacturing facility will be closed, with any remaining equipment sold, and the remaining service center will be closed and consolidated into the Lufkin, Texas facility. The Company is exploring options for serving the future aftermarket parts business and fulfilling contractual warranty obligations.

10. Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the three months ended March 31, 2008, are as follows (in thousands of dollars):

				Power
	Oil Field			Transmission		Total

Balance as of 12/31/07	$	9,447		$	2,543	$	11,990

Foreign currency translation		(4	)		208		204
Balance as of 3/31/08	$	9,443		$	2,751	$	12,194

Goodwill impairment tests were performed in the first quarter of 2008 and no impairment losses were recorded.

Intangible Assets

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

	March 31,			December 31,
	2008			2007
Intangible assets subject to amortization:
Non-compete agreements
Original balance	$	463		$	463
Foreign currency translation		16			26
Accumulated amortization		(401	)		(378	)

Ending balance	$	78		$	111

11. Stock Option Plans

The Company currently has three stock compensation plans. The 1990 Stock Option Plan, the 1996 Nonemployee Director Stock Option Plan and the 2000 Incentive Stock Compensation Plan provide for the granting of stock options to officers, employees and non-employee directors at an exercise price equal to the fair market value of the stock at the date of grant. The 2000 Incentive Stock Compensation Plan also provides for other forms of stock-based compensation such as restricted stock, but none have been granted to date. Options granted to employees vest over two to four years and are exercisable up to ten years from the grant date. Upon retirement, any unvested options become exercisable immediately. Options granted to directors vest at the grant date and are exercisable up to ten years from the grant date.

The following table is a summary of the stock-based compensation expense recognized under SFAS 123R for the three months ended March 31, 2008 and 2007 (in thousands of dollars):

	Three Months Ended
	March 31,
	2008			2007

Stock-based compensation expense	$	964		$	995
Tax benefit		(357	)		(368	)
Stock-based compensation expense, net of tax	$	607		$	627

The fair value of each option grant during the first three months of 2008 and 2007 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	2008			2007

Expected dividend yield		1.70	%		1.38	%
Expected stock price volatility		41.00% - 46.00	%		42.00% - 45.00	%
Risk free interest rate		1.90% - 3.00	%		4.81% - 4.85	%
Expected life options	2 - 6 years			3 - 5 years
Weighted-average fair value per share at grant date	$	18.14		$	21.88

The expected life of options was determined based on the exercise history of employees and directors since the inception of the plans. The expected volatility is based upon the historical weekly and daily stock price for the prior number of years equivalent to the expected life of the stock option. The expected dividend yield was based on the dividend yield of the Company’s common stock at the date of the grant. The risk free interest rate was based upon the yield of U.S. Treasuries which terms were equivalent to the expected life of the stock option.

A summary of stock option activity under the plans during the three months ended March 31, 2008, is presented below:

						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
Options	Shares			Price		Term		($000's)

Outstanding at January 1, 2008		659,143		$	39.28
Granted		90,000			55.45
Exercised		(33,414	)		17.89
Forfeited or expired		(17,725	)		46.06
Outstanding at March 31, 2008		698,004		$	42.22		7.5	$	15,127
Exercisable at March 31, 2008		439,026		$	36.43		6.7	$	12,074

As of March 31, 2008, there was $3.6 million of total unrecognized compensation expense related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 2.4 years. The intrinsic value of stock options exercised in the first three months of 2008 was $1.4 million.

12. Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Prior to SFAS 157, there were different definitions of fair value and limited and dispersed guidance for applying those definitions. SFAS 157 retains the exchange price notion of fair value and clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement and establishes a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from independent sources and the reporting entity’s own assumptions. SFAS 157 also clarifies that market participant assumptions should include assumptions about risk and the effect of a restriction on the sale or use of an asset. SFAS 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods and the inputs used to measure fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied except for certain types of financial instruments. In February 2008, the Financial Accounting Standards Board issued FASB Staff Position (“FSP”) No. FAS 157-1 and No. FAS 157-2, which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, and removes certain leasing transactions from the scope of SFAS 157. On January 1, 2008, the Company adopted the initial requirements of SFAS 157 and it had no significant impact on its consolidated financial position or results of operations. The Company doe not expect the adoption of the remaining requirements of SFAS 157 to have a significant impact on its consolidated financial position or results of operations.

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (revised 2007) “Business Combinations” (“SFAS 141R”), replacing Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS 141”). SFAS 141R broadens the scope of SFAS 141 by applying the acquisition method of accounting to all transactions and other events in which one entity obtains control over one or more businesses and not just business combinations in which control was obtained by transferring consideration. SFAS 141R also modifies the application of the acquisition method. SFAS 141R requires acquired assets and liabilities to be measured at fair value at the acquisition date versus the cost-allocation process used under SFAS 141. This change will require acquisition-related costs and restructuring costs that are expected but not legally obligated to be recognized separately from the acquisition. SFAS 141R also provides revised guidance on accounting for step acquisitions, assets and liabilities arising from contingencies, measuring goodwill and gains from bargain purchases and contingent consideration at the acquisition date. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

Management believes the impact of other recently issued standards, which are not yet effective, will not have a material impact on the Company's condensed consolidated condensed financial statements upon adoption.

13. Retirement Benefits

The Company has a qualified noncontributory pension plan covering substantially all U.S. employees. The benefits provided by these plans are measured by length of service, compensation and other factors, and are currently funded by trusts established under the plans. Funding of retirement costs for these plans complies with the minimum funding requirements specified by the Employee Retirement Income Security Act, as amended. In addition, the Company has two unfunded non-qualified deferred compensation pension plans for certain U.S. employees. The Pension Restoration Plan provides supplemental retirement benefits. The benefit is based on the same benefit formula as the qualified pension plan except that it does not limit the amount of a participant's compensation or maximum benefit. The Company also provides a Supplemental Executive Retirement Plan that credits an individual with 0.5 years of service for each year of service credited under the qualified plan. The benefits calculated under the non-qualified pension plans are offset by the participant's benefit payable under the qualified plan. The liabilities for the non-qualified deferred compensation pensions plans are included in "Other current accrued liabilities" and “Other liabilities” in the Consolidated Balance Sheet.

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. For measurement purposes, the submitted claims medical trend was assumed to be 9.25% in 1997. Thereafter, the Company’s obligation is fixed at the amount of the Company’s contribution for 1997.

The Company also has qualified defined contribution retirement plans covering substantially all of its U.S. and Canadian employees. For U.S. employees, the Company makes contributions of 75% of employee contributions up to a maximum employee contribution of 6% of employee earnings. Employees may contribute up to an additional 18% (in 1% increments), which is not subject to match by the Company. For Canadian employees, the Company makes contributions of 3%-8% of an employee’s salary with no individual employee match required. All obligations of the Company are funded through March 31, 2008. In addition, the Company provides an unfunded non-qualified deferred compensation defined contribution plan for certain U.S. employees. The Company's and individual's contributions are based on the same formula as the qualified contribution plan except that it does not limit the amount of a participant's compensation or maximum benefit. The contribution calculated under the non-qualified defined contribution plan is offset by the Company's and participant's contributions under the qualified plan. The Company’s expense for these plans totaled $1.0 million and $0.9 million in the three months ended March 31, 2008 and 2007, respectively. The liability for the non-qualified deferred defined contribution plan is included in "Other current accrued liabilities" in the Consolidated Balance Sheet.

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

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

	Pension Benefits						Other Benefits
Three Months Ended March 31,	2008			2007			2008			2007

Service cost	$	1,237		$	1,369		$	46		$	45
Interest cost		2,650			2,400			109			122
Expected return on plan assets		(4,257	)		(4,388	)		-			-
Amortization of prior service cost		141			141			-			-
Amortization of unrecognized net (gain) loss		21			12			(46	)		(45	)
Amortization of unrecognized transition asset		(160	)		(232	)		-			-
Net periodic benefit cost (income)	$	(368	)	$	(698	)	$	109		$	122

Employer Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2007, that it expected to make contributions of $250,000 to its pension plans in 2008. The Company also disclosed that it expected contributions of $642,000 to be made to its postretirement plan in 2008. As of March 31, 2008, the Company has made contributions of $33,000 to its pension plans and has made contributions of $153,000 to its postretirement plan. The Company presently anticipates making additional contributions of $217,000 to its pension plans and $489,000 to its postretirement plan during the remainder of 2008.

14. Stock Repurchase Plans

During the first quarter of 2008, the Company repurchased shares pursuant to a plan approved by the Board of Directors in the third quarter of 2007, under which the Company was authorized to spend up to an aggregate of $30.0 million. Repurchased shares are added to treasury stock and are available for general corporate purposes including the funding of the Company’s stock option plan. As of December 31, 2007, 462,131 shares had been repurchased at an aggregate price of $25.4 million, or $54.91 per share under this plan. During the first quarter of 2008, 20,000 shares were repurchased at an aggregate price of $1.1 million, or $55.85 per share under the 2007 plan. As of March 31, 2008, the Company held 915,278 shares of treasury stock at an aggregate cost of approximately $32.7 million. At March 31, 2008, approximately $3.5 million of repurchase authorizations remained under the 2007 plan. While this repurchase authorization has no expiration date, the Company expects to spend this remaining authorization during 2008.

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

Overview

General

Lufkin Industries is a global supplier of oil field, power transmission and trailer products. Through its Oil Field segment, the Company manufactures and services artificial reciprocating rod lift equipment and related products, which are used to extract crude oil and other fluids from wells. Through its Power Transmission segment, the Company manufactures and services high-speed and low-speed speed increasing and reducing gearboxes for industrial applications. Through its Trailer segment, the Company manufactures various highway trailers, including 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, the Company has been making capital investments in Oil Field to increase manufacturing capacity and capabilities in its three main manufacturing facilities in Lufkin, Texas, Canada and Argentina. These investments should reduce production lead times and improve quality. Investments also continue to be made to expand the Company’s presence in automation products and international service, as with the recently opened service facility in Oman. In Power Transmission, the Company continues to expand its gear repair network by opening and expanding facilities in various locations in the U.S. and Canada. The Company is making targeted capital investments in the U.S. and France to expand capacity and reduce manufacturing lead times as well as certain capital investments targeting cost reductions. In Trailer, due to poor current and forecasted market conditions, the Company announced in January 2008 the decision to suspend its participation in the commercial trailer markets and to develop a plan to run-out existing inventories, fulfill contractual obligations and close all trailer facilities during 2008.

Trends/Outlook

Oilfield

Demand for pumping unit equipment primarily depends on the level of new onshore oil well and workover drilling activity as well as the depth and fluid conditions of that drilling. Drilling activity is driven by the available cash flow of the Company’s customers as well as their long-term perceptions of the level and stability of the price of oil. The higher energy prices experienced since 2004 have increased the demand for pumping units and related service and products from higher drilling activity, activation of idle wells and the upgrading of existing wells. During 2007, demand in the North American market was negatively affected by the impact of lower natural gas prices on coal-bed methane and other unconventional gas production that use rod pumps to de-water wells, drilling program delays from M&A activity, cost control efforts deferring or reducing capital spending programs and the competitive pressure from lower-priced pumping units in areas traditionally served by the used unit market. Traditionally, as pumping unit demand increases and availability of used equipment diminishes, demand for new equipment increases. In 2007, lower-priced imported pumping units entered the North American market in place of used equipment and reduced the incremental demand for the Company’s new pumping units. During the first quarter of 2008, demand levels in North America increased over the levels experienced in the latter half of 2007 as higher energy prices drove increased drilling and workover activity. Additionally, the demand for pumping units, oilfield services and automation equipment continues to increase in international markets. While a majority of the segment’s revenues are in North America, international opportunities continue to increase as new drilling increases and existing fields mature, requiring increased use of pumping units for artificial lift, especially in the South American, Russian and Middle Eastern markets.

Power Transmission

Power Transmission services many diverse markets, with high-speed gearing for markets such as petrochemicals, refineries, offshore production and transmission of oil and slow-speed gearing for the gas, rubber, sugar, paper, steel, plastics, mining, cement and marine propulsion, each of which has its own unique set of drivers. Favorable conditions for one market may be unfavorable for another market. Generally, if general global industrial capacity utilizations are not high, spending on new equipment lags. Also impacting demand are government regulations involving safety and environmental issues that can require capital spending. Recent market demand increases have come from energy-related markets such as refining, petrochemical, drilling, coal, marine and power generation in response to higher global energy prices. These market trends are expected to continue throughout 2008, assuming energy prices stay at recent levels.

Trailer

Summary of Results

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 three months ended March 31, 2008, decreased to $147.0 million from $148.1 million for the three months ended March 31, 2007, or 0.7%. This decline was primarily driven by decreased sales of new trailers offsetting continued growth in Power Transmission sales.

Gross margin for the three months ended March 31, 2008, increased to 28.1% from 27.0% for the three months ended March 31, 2007. This gross margin increase was primarily due to the net favorable effect of the liquidation of trailer-related LIFO inventory carried at lower costs prevailing in prior years. Additional segment data on gross margin is provided later in this section.

The improvement in gross margin in the first quarter of 2008 was offset by higher selling, general and administrative expenses and a higher net tax rate. Selling, general and administrative expenses increased to 11.9% of sales during the first quarter of 2008 compared to 9.8% in the first quarter of 2007 due to higher personnel-related costs, foreign sales commissions and general liability claims. The net tax rate in the first quarter of 2008 was 35.0%, compared to 32.8% in the first quarter of 2007, due to the resolution of previously reserved items falling out of statute in the first quarter of 2007. The Company reported net earnings of $15.7 million or $1.06 per share (diluted) for the three months ended March 31, 2008, compared to net earnings of $17.8 million or $1.17 per share (diluted) for the three months ended March 31, 2007.

Debt/equity (long-term debt net of current portion as a percentage of total equity) levels were 0.0% as of March 31, 2008, and March 31, 2007. Cash balances at March 31, 2008, were $103.3 million, up from $95.7 million at December 31, 2007.

Three Months Ended March 31, 2008, Compared to Three Months Ended March 31, 2007

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

	Three Months Ended
	March 31,				Increase/			% Increase/
	2008		2007		(Decrease)			(Decrease)
Sales
Oil Field	$	100,909	$	101,286	$	(377	)		(0.4	)
Power Transmission		40,161		33,698		6,463			19.2
Trailer		5,941		13,097		(7,156	)		(54.6	)
Total	$	147,011	$	148,081	$	(1,070	)		(0.7	)

Gross Profit
Oil Field	$	28,230	$	27,974	$	256			0.9
Power Transmission		12,188		11,236		952			8.5
Trailer		941		841		100			11.9
Total	$	41,359	$	40,051	$	1,308			3.3

Oil Field

Oil Field sales decreased slightly to $100.9 million, or 0.4%, for the three months ended March 31, 2008, from $101.3 million for the three months ended March 31, 2007. New unit revenue of $55.7 million was down $3.0 million, or 5.1%, primarily from lower North American demand offsetting international growth as compared to first quarter 2007 levels, service revenue of $21.0 million was up $1.9 million, or 5.8%, from growth in the U.S. market, automation revenue of $18.4 million was up $4.2 million or 29.1% from growth in international sales and commercial casting revenue of $5.9 million was down $2.6 million, or 31.3%, from lower sales to the machine tool market. However, Oil Field’s backlog increased to $97.1 million as of March 31, 2008, from $58.1 million at March 31, 2007, and $76.9 million at December 31, 2007. This increase over the December 31, 2007, level was driven by increased bookings for new units for the U.S. market as higher energy prices drove increased drilling and workover activity. The increase over the March 31, 2007, level also reflects the growth of international orders for new units.

Gross margin (gross profit as a percentage of sales) for the Oil Field segment increased to 28.0% for three months ended March 31, 2008, compared to 27.6% for the three months ended March 31, 2007, or 0.4 percentage points.

Direct selling, general and administrative expenses for Oil Field increased to $5.1 million, or 16.0%, for the three months ended March 31, 2008, from $4.4 million for the three months ended March 31, 2007. This increase is due to higher employee-related expenses in support of increased sales volumes and third-party commissions in certain international markets. Direct selling, general and administrative expenses as a percentage of sales also increased to 5.0% for the three months ended March 31, 2008, from 4.3% for the three months ended March 31, 2007.

Power Transmission

Sales for the Company’s Power Transmission segment increased to $40.2 million, or 19.2%, for the three months ended March 31, 2008, compared to $33.7 million for the three months ended March 31, 2007. New unit revenue of $31.5 million was up $5.9 million, or 23.0%, from increased high-speed units for the oil and gas markets and increased marine units for the coastal, river and inland-waterway transportation markets. Repair and service revenue of $8.6 million was up $0.6 million or, 7.1%. Power Transmission backlog at March 31, 2008, increased to $137.6 million from $103.5 million at March 31, 2007, and $122.2 million at December 31, 2007, primarily from increased bookings of new units for the energy-related and marine markets.

Gross margin for the Power Transmission segment decreased to 30.3% for the three months ended March 31, 2008, compared to 33.3% for the three months ended March 31, 2007, from the unfavorable mix effect of increased marine unit sales, higher steel prices and inefficiencies associated with the training of transferred Trailer employees.

Direct selling, general and administrative expenses for Power Transmission increased to $5.3 million, or 20.4%, for the three months ended March 31, 2008, from $4.4 million for the three months ended March 31, 2007. This increase is due to higher employee-related expenses in support of increased sales volumes. Direct selling, general and administrative expenses as a percentage of sales increased slightly to 13.3% for the three months ended March 31, 2008, from 13.2% for the three months ended March 31, 2007.

Trailer

Trailer sales for the three months ended March 31, 2008, decreased to $5.9 million, or 54.6%, from $13.1 million for the three months ended March 31, 2007. This decrease reflects the decision in January 2008 to suspend operations of the Trailer segment and develop a plan to cease operations.

Trailer gross margin increased to 15.8% for the three months ended March 31, 2008, from 6.4% for the three months ended March 31, 2007, or 9.4 percentage points. This increase was primarily due to the benefit from the liquidation of LIFO reserves as inventory levels decreased.

Direct selling, general and administrative expenses for Trailer increased to $0.8 million, or 51.5%, for the three months ended March 31, 2008, from $0.5 million for the three months ended March 31, 2007, from higher general liability legal and claims expenses. Direct selling, general and administrative expenses as a percentage of sales increased to 13.4% for the three months ended March 31, 2008, from 4.0% for the three months ended March 31, 2007.

Corporate/Other

Corporate administrative expenses, which are allocated to the segments primarily based on historical third-party revenues, increased to $6.3 million, or 21.4%, for the three months ended March 31, 2008, from $5.2 million for the three months ended March 31, 2007, primarily from the higher employee-related and incremental costs associated with management changes.

Interest income, interest expense and other income and expense for the three months ended March 31, 2008, totaled $0.2 million of income compared to income of $0.9 million for the three months ended March 31, 2007, primarily due to lower interest rates on invested cash balances and the unfavorable currency impact of the weakening Canadian dollar during the first quarter of 2008.

Pension income, which is reported as a reduction of cost of sales, decreased to $0.5 million for the three months ended March 31, 2008, or 37%, compared to $0.8 million for the three months ended March 31, 2007. This decrease is primarily due to lower expected returns on asset balances.

The net tax rate for the three months ended March 31, 2008, was 35.0% compared to 32.8% in the three months ended March 31, 2007. The net tax rate for the first three months of 2007 was the result of the effective tax rate of 35.0% benefiting from a reduction in tax reserves on items falling out of statute.

Liquidity and Capital Resources

The Company has historically relied on cash flows from operations and third-party borrowing to finance its operations, including acquisitions, dividend payments and stock repurchases. 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, 2008, and the foreseeable future.

The Company’s cash balance totaled $103.3 million at March 31, 2008, compared to $95.7 million at December 31, 2007. For the three months ended March 31, 2008, net cash provided by operating activities was $16.5 million, net cash used in investing activities totaled $5.5 million and net cash used in financing activities amounted to $3.8 million. Significant components of cash provided by operating activities included net earnings, adjusted for non-cash expenses, of $19.2 million and an increase in working capital of $2.6 million. This working capital increase was primarily due to increased inventory balances from higher production activity in Power Transmission. Net cash used in investing activities included net capital expenditures totaling $4.8 million and an increase in other assets of $0.7 million. Capital expenditures in the first three months of 2008 were primarily for the expansion of manufacturing and service capacity and efficiency improvements in the Oil Field and Power Transmission segments. Capital expenditures for 2008 are projected to be approximately $50.0 million, primarily for the expansion of manufacturing and service capacity and equipment replacement for efficiency improvements in the Oil Field and Power Transmission segments and will be funded by operating cash flows. Significant components of net cash used by financing activities included dividend payments of $3.7 million, or $0.25 per share and treasury stock purchases of $1.1 million, partially offset by the impact of stock option exercises, including the excess tax benefit from actual gains on stock option exercises, of $1.0 million.

The Company has a three-year credit facility with a domestic bank (the “Bank Facility”) consisting of an unsecured revolving line of credit that provides up to $40.0 million of aggregate borrowing. This Bank Facility expires on December 31, 2010. 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 March 31, 2008, no debt was outstanding under the Bank Facility. The Company was in compliance with all financial covenants under the terms of the Bank Facility. Deducting outstanding letters of credit of $7.7 million, $32.3 million of borrowing capacity was available at March 31, 2008.

During the first quarter of 2008, the Company repurchased shares pursuant to a plan approved by the Board of Directors in the third quarter of 2007, under which the Company was authorized to spend up to an aggregate of $30.0 million. 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 December 31, 2007, 462,131 shares had been repurchased at an aggregate price of $25.4 million, or $54.91 per share under this plan. During the first quarter of 2008, 20,000 shares were repurchased at an aggregate price of $1.1 million, or $55.85 per share under the 2007 plan. As of March 31, 2008, the Company held 915,278 shares of treasury stock at an aggregate cost of approximately $32.7 million. At March 31, 2008, approximately $3.5 million of repurchase authorizations remained under the 2007 plan. While this repurchase authorization has no expiration date, the Company expects to spend this remaining authorization during 2008.

Recently Issued Accounting Pronouncements

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 completed 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. 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. Generally, annual increases in the inflation rate or the FIFO value of inventory cause the value of the LIFO reserve to increase.

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.

The Company adopted FIN 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes, by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The application of income tax law is inherently complex. The Company is required to determine if an income tax position meets the criteria of more-likely-than-not to be realized based on the merits of the position under tax laws, in order to recognize an income tax benefit. This requires the Company to make many assumptions and judgments regarding merits of income tax positions and the application of income tax law. Additionally, if a tax position meets the recognition criteria of more-likely-than-not the Company is required to make judgments and assumptions to measure the amount of the tax benefits to recognize based on the probability of the amount of tax benefits that would be realized if the tax position was challenged by the taxing authorities. Interpretations and guidance surrounding income tax laws and regulations change over time. As a consequence, changes in assumptions and judgments can materially affect amounts recognized in the consolidated financial statements.

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 defined benefit plans 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, 2007.

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,” “plan,” “schedule,” “could,” “may,” “might,” “should,” “project” or similar expressions are intended to identify forward-looking statements. Similarly, statements that describe the Company’s future plans, objectives or goals are also 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. Undue reliance should not be place on forward-looking statements. These risks and uncertainties include, but are not limited to:

●	oil price volatility;
●	declines in domestic and worldwide oil and gas drilling;
●	capital spending levels of oil producers;
●	the cyclicality of the trailer industry;
●	availability and prices for raw materials;
●	the inherent dangers and complexities of our operations;
●	uninsured judgments or a rise in insurance premiums;
●	the inability to effectively integrate acquisitions;
●	labor disruptions and increasing labor costs;
●	the availability of qualified and skilled labor;
●	disruption of our operating facilities or management information systems;
●	the impact on foreign operations of war, political disruption, civil disturbance, economic and legal sanctions and changes in global trade policies;
●	currency exchange rate fluctuations in the markets in which the Company operates;
●	changes in the laws, regulations, policies or other activities of governments, agencies and similar organizations where such actions may affect the production, licensing, distribution or sale of the Company’s products, the cost thereof or applicable tax rates;
●	costs related to legal and administrative proceedings, including adverse judgments against the Company if the Company fails to prevail in reversing such judgments; and
●	general industry, political and economic conditions in the markets where the Company 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.

Additional information about risks and uncertainties that could cause actual results to differ materially from forward-looking statements is contained in Part I, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these factors. 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 forward-looking statements included in this report are only made as of the date of this report and, except as required by securities laws, the Company disclaims any obligation to publicly update forward-looking statements to reflect subsequent events or circumstances.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company’s financial instruments include cash, accounts receivable, accounts payable 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 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 exposure since the interest rate is variable. In addition, the Company primarily invoices and purchases in the same currency as the functional currency of its operations, which minimizes exposure to currency rate fluctuations.

The Company is exposed to currency fluctuations with debt denominated in U.S. dollars owed to the Company’s U.S. entity by its French and Canadian entities. As of March 31, 2008 this inter-company debt was comprised of 0.1 million euros and $8.8 million Canadian dollars. As of March 31, 2008, if the U.S. dollar strengthened by 10% over these currencies, the net income impact would be $0.6 million of expense and if the U.S. dollar weakened by 10% over these currencies, the net income impact would be $0.6 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 March 31, 2008, if the U.S. dollar strengthened by 10% over these currencies, the net income impact would be $0.0 million of expense and if the U.S. dollar weakened by 10% over these currencies, the net income impact would be $0.0 million of income.

Item 4. Controls and Procedures.

Based on their evaluation of the Company’s disclosure controls and procedures as of March 31, 2008, the Chief Executive Officer of the Company, John F. Glick, and the Chief Financial Officer of the Company, Christopher L. Boone, have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed in reports that the Company files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and effective to ensure that information required to be disclosed in such reports is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, to allow timely decisions regarding disclosure.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II- OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risks Factors.

In addition to other information set forth in this quarterly report, the factors discussed in Part I, Item 1A. “Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect the Company's business, financial condition and/or operating results, should be carefully considered. The risks described in the Company's Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect the Company's business, financial condition and/or operating results.

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

A summary of the Company’s repurchase activity for the three months ended March 31, 2008, is as follows:

Issuers Purchases of Equity Securities

					Total Number of		Approximate Dollar
	Total Number		Average		Shares Purchased as		Value of Shares That
	of Shares		Price Paid		Part of Publicly		May Yet Be Purchased
Period	Purchased (1)		per Share		Announced Plans		Under the Plans

January 1 - January 31		-	$	-		-	$	4,623,916
February 1 - February 29		20,000		55.85		20,000		3,506,845
March 1 - March 31		-		-		-		3,506,845

Total		20,000	$	55.85		20,000	$	3,506,845

Item 6. Exhibits.

Exhibit Number		Description

*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.

**10.1		Lufkin Industries, Inc. 2008 Variable Compensation Plan, included as Exhibit 10.1 to Form 8-K filed February 19, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

* Filed herewith

** Incorporated by reference

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: May 12, 2008

LUFKIN INDUSTRIES, INC.

By: /s/ Christopher L. Boone

Christopher L. Boone

Signing on behalf of the registrant and as

Vice President/Treasurer/Chief Financial Officer

(Principal Financial and Accounting Officer)

INDEX TO EXHIBITS

Exhibit Number		Description

*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.

**10.1		Lufkin Industries, Inc. 2008 Variable Compensation Plan, included as Exhibit 10.1 to Form 8-K filed February 19, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

* Filed herewith

** Incorporated by reference

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Lufkin Industries (LUFK) Inactive 10-Q2009 Q1 Quarterly report

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