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, 2010

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

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. YesX    No____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    No_X__

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 14,964,537 shares of Common Stock, $1.00 par value per share, outstanding as of May 7, 2010.

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	2010			2009
Current Assets:
Cash and cash equivalents	$	107,895		$	100,858
Receivables, net		92,341			92,506
Income tax receivable		4,269			4,303
Inventories		114,258			110,605
Deferred income tax assets		5,480			5,198
Other current assets		8,252			4,351
Current assets from discontinued operations		813			811
Total current assets		333,308			318,632
Property, plant and equipment, net		160,758			159,770
Goodwill, net		44,881			45,001
Other assets, net		17,862			18,187
Long-term assets from discontinued operations		-			-
Total assets	$	556,809		$	541,590
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	24,766		$	19,993
Current portion of long-term debt		1,408			1,372
Accrued liabilities:
Payroll and benefits		12,791			9,568
Warranty expenses		4,104			4,220
Taxes payable		5,939			4,562
Other		24,955			24,147
Current liabilities from discontinued operations		1,002			1,026
Total current liabilities		74,965			64,888
Long-term debt		1,146			1,516
Deferred income tax liabilities		11,370			10,950
Postretirement benefits		7,874			7,874
Other liabilities		20,390			20,647
Commitments and contingencies		-			-
Long-term liabilities from discontinued operations		37			37
Shareholders' equity:
Common stock, $1.00 par value per share; 60,000,000 shares authorized; 15,851,015 and 15,808,588 shares issued , respectively		15,851			15,809
Capital in excess par		73,623			70,508
Retained earnings		424,168			421,908
Treasury stock, 919,168 and 923,168 shares, respectively, at cost		(34,471	)		(34,621	)
Accumulated other comprehensive (loss)		(38,144	)		(37,926	)
Total shareholders' equity		441,027			435,678
Total liabilities and shareholders' equity	$	556,809		$	541,590

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,
	2010			2009
Sales	$	127,123		$	153,138
Cost of Sales		98,500			118,955
Gross Profit		28,623			34,183
Selling, general and administrative expenses		19,327			18,430
Litigation reserve		-			3,000
Operating income		9,296			12,753
Interest income		4			860
Interest expense		(150	)		(127	)
Other income (expense), net		221			(193	)
Earnings from continuing operations before income tax provision and discontinued operations		9,371			13,293
Income tax provision		3,374			4,210
Earnings from continuing operations before discontinued operations		5,997			9,083
Loss from discontinued operations, net of tax		(5	)		(105	)
Net earnings	$	5,992		$	8,978
Basic earnings per share:
Earnings from continuing operations	$	0.40		$	0.61
Loss from discontinued operations		-			(0.01	)
Net earnings	$	0.40		$	0.60
Diluted earnings per share:
Earnings from continuing operations	$	0.40		$	0.61
Loss from discontinued operations		-			(0.01	)
Net earnings	$	0.40		$	0.60
Dividends per share	$	0.25		$	0.25

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,
	2010			2009
Cash flows from operating activities:
Net earnings	$	5,992		$	8,978
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		5,042			3,894
Recovery for losses on receivables		(122	)		(115	)
LIFO expense		-			640
Deferred income tax benefit		(290	)		(1,215	)
Excess tax benefit from share-based compensation		(309	)		-
Share-based compensation expense		779			347
Pension expense		2,595			2,174
Postretirement obligation		102			77
(Gain) loss on disposition of property, plant and equipment		(133	)		9
Loss from discontinued operations		5			105
Changes in:
Receivables, net		(103	)		46,591
Income tax receivable		62			(403	)
Inventories		(4,187	)		(11,360	)
Other current assets		(3,057	)		(1,778	)
Accounts payable		4,584			(6,395	)
Accrued liabilities		5,637			697
Net cash provided by continuing operations		16,597			42,246
Net cash used in discontinued operations		-			-
Net cash provided by operating activities		16,597			42,246
Cash flows from investing activites:
Additions to property, plant and equipment		(6,242	)		(6,960	)
Proceeds from disposition of property, plant and equipment		238			41
Increase in other assets		(123	)		(98	)
Acquisition of other companies		(1,500	)		(45,500	)
Net cash used in continuing operations		(7,627	)		(52,517	)
Net cash provided by discontinued operations		-			-
Net cash used in investing activities		(7,627	)		(52,517	)
Cash flows from financing activites:
Payments of notes payable		(334	)		(904	)
Dividends paid		(3,733	)		(3,715	)
Excess tax benefit from share-based compensation		309			-
Proceeds from exercise of stock options		1,915			-
Net cash used in financing activities		(1,843	)		(4,619	)
Effect of translation on cash and cash equivalents		(90	)		(416	)
Net increase (decrease) in cash and cash equivalents		7,037			(15,306	)
Cash and cash equivalents at beginning of period		100,858			107,756
Cash and cash equivalents at end of period	$	107,895		$	92,450

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed 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 for interim financial statements. 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, 2009. The results of operations for the three months ended March 31, 2010, are not necessarily indicative of the results that may be expected for the full fiscal year.

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’s accounts receivable are not concentrated in one customer and are not viewed as an unusual credit risk.

2. Recently Issued Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605):  Multiple – Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force, which changes the accounting for certain revenue arrangements. The new requirements change the allocation methods used in determining how to account for multiple payment streams and will result in the ability to separately account for more deliverables, and potentially less revenue deferrals. Additionally, ASU 2009-13 requires enhanced disclosures in financial statements. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010 on a prospective basis, with early application permitted. The Company is currently evaluating the impact ASU 2009-13 will have on its financial statements.

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

3. Acquisitions

On March 1, 2009 the Company acquired International Lift Systems (“ILS”), a Louisiana limited partnership.  As a result of this acquisition the Company entered into a hold back agreement with the former owners of ILS.  The total hold back is $4.5 million payable in three equal installments of $1.5 million each plus interest.  Interest is calculated annually at 4% of the remaining balance of the hold back portion.  The first installment was paid March 1, 2010; the second and third installments, each plus interest to date, are payable on March 1, 2011 and 2012, respectively.  These hold back payments are not contingent upon any subsequent events.  At March 31, 2010, the liabilities for these hold back payments were included in the accrued liabilities and other liabilities section of the consolidated balance sheet.

On July 1, 2009 the Company completed the acquisition of Rotating Machinery Technology, Inc. (“RMT”), a New York corporation.  RMT is a recognized leader in the turbo-machinery industry, specializing in the analysis design and manufacture of precision, custom-engineered tilting-pad bearings and related components for high-speed turbo equipment operating in critical duty applications.  RMT also services, repairs and upgrades turbo-expander process units for air and gas separation, both on-site with its skilled field service team and at its repair facility in Wellsville, New York.

4. Discontinued Operations

During the second quarter of 2008, the Trailer segment was classified as a discontinued operation.

Operating results of discontinued operations were as follows (in thousands of dollars):

	Three Months Ended
	March 31,
	2010			2009
Sales	$	1		$	35
Loss before income tax provision		(8	)		(187	)
Income tax benefit		3			82
Loss from discontinued operations, net of tax	$	(5	)	$	(105	)
	March 31,			December 31,
	2010			2009
Receivables, net	$	17		$	17
Income tax receivable		313			302
Deferred income tax assets		483			492
Current assets from discontinued operations		813			811
Total assets from discontinued operations	$	813		$	811
Accounts payable	$	8		$	10
Accrued liabilities:
Payroll and benefits		74			70
Warranty expenses		214			240
Other		706			706
Current liabilities from discontinued operations		1,002			1,026
Long-term liabilities		37			37
Total liabilities from discontinued operations	$	1,039		$	1,063

5. Receivables

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

	March 31,			December 31,
	2010			2009
Accounts receivable	$	89,338		$	87,497
Notes receivable		23			482
Other receivables		3,276			4,767
Gross receivables		92,637			92,746
Allowance for doubtful accounts receivable		(296	)		(240	)
Net receivables	$	92,341		$	92,506

For the three months ended March 31, 2010 and March 31, 2009, the Company recovered $0.1 million of receivables charged to bad debt expense in prior periods.

6. Inventories

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

	March 31,		December 31,
	2010		2009
Gross inventories @ FIFO:
Finished goods	$	10,365	$	7,545
Work in progress		23,450		21,435
Raw materials & component parts		99,409		100,347
Maintenance, tooling & supplies		13,635		13,882
Total gross inventories @ FIFO		146,859		143,209
Less reserves:
LIFO		29,961		29,961
Valuation		2,640		2,643
Total inventories as reported	$	114,258	$	110,605

Gross inventories on a FIFO basis before adjustments for reserves shown above that were accounted for on a LIFO basis were $81.1 million and $76.7 million at March 31, 2010, and December 31, 2009, respectively.

7. 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,
	2010			2009
Land	$	6,726		$	6,735
Land improvements		10,242			10,146
Buildings		95,550			92,467
Machinery and equipment		267,375			265,958
Furniture and fixtures		5,922			5,985
Computer equipment and software		15,313			15,388
Total property, plant and equipment		401,128			396,679
Less accumulated depreciation		(240,370	)		(236,909	)
Total property, plant and equipment, net	$	160,758		$	159,770

Depreciation expense related to property, plant and equipment was $4.6 million and $3.8 million for the three months ended March 31, 2010 and 2009, respectively.

8. Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill during the three months ended March 31, 2010, were

 as follows (in thousands of dollars):

			Power
	Oil Field		Transmission			Total
Balance as of 12/31/09	$	38,018	$	6,983		$	45,001
Final purchase price adjustment		17		-			17
Foreign currency translation		4		(141	)		(137	)
Balance as of 3/31/10	$	38,039	$	6,842		$	44,881

Goodwill impairment tests were performed in the fourth quarter of 2009 and no impairment losses were recorded.

Intangible Assets

The Company amortizes identifiable intangible assets on a straight-line basis over the periods expected to be benefitted. All of the below intangible assets relate to the ILS and RMT acquisitions.  The components of these intangible assets are as follows (in thousands of dollars):

							Weighted
	March 31, 2010						Average
	Gross						Amortization
	Carrying		Accumulated				Period
	Amount		Amortization		Net		(years)
Non-compete agreements and trademarks	$	2,064	$	346	$	1,718		7.2
Customer relationships and contracts		13,216		1,373		11,843		10.0
	$	15,280	$	1,719	$	13,561		8.0

							Weighted
	December 31, 2009						Average
	Gross						Amortization
	Carrying		Accumulated				Period
	Amount		Amortization		Net		(years)
Non-compete agreements and trademarks	$	2,064	$	258	$	1,806		7.2
Customer relationships and contracts		13,216		1,043		12,173		10.0
	$	15,280	$	1,301	$	13,979		8.0

Amortization expense of intangible assets was approximately $0.4 million for the three months ended March 31, 2010, and was negligible for the three months ended March 31, 2009.  Expected amortization expense by year is (in thousands of dollars):

For the year ended 12/31/11	$	1,672
For the year ended 12/31/12		1,573
For the year ended 12/31/13		1,553
For the year ended 12/31/14		1,441
For the year ended 12/31/15		1,416
Thereafter	$	4,651

9. 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,
	2010		2009
Customer prepayments	$	9,176	$	7,945
Litigation reserves		6,187		6,637
Deferred compensation plans		5,773		5,500
Accrued professional services		636		548
Hold back consideration		1,510		1,605
Other accrued liabilities		1,673		1,912
Total other current accrued liabilities	$	24,955	$	24,147

10. Debt

The following is a summary of the Company's outstanding debt balances (in thousands of dollars):

	March 31,			December 31,
	2010			2009
Long-term notes payable	$	2,554		$	2,888
Less current portion of long-term debt		(1,408	)		(1,372	)
Long-term debt	$	1,146		$	1,516

Principal payments of long-term debt by year are as follows (in thousands of dollars):

2011	$	1,096
2012		50
Total	$	1,146

The Company’s current debt at March 31, 2010, primarily consists of assumed notes from the ILS acquisition, which are described below.  The current portion of long-term debt reflects scheduled principal payments due on or before March 31, 2011.

On March 1, 2009, the Company assumed from ILS several notes payable, associated with prior acquisitions undertaken by ILS.  The notes payable have a remaining aggregate principal balance of $3.9 million and interest rates ranging from 0% to 6% with a weighted average of 4.5%.  On the outstanding principal balance as of March 31, 2010, the Company has secured letters of credit for $1.1 million and the remaining $1.4 million is secured by collateral consisting of equipment, inventory, and accounts receivable.  The fair market value of the outstanding debt as of March 31, 2010 is not materially different than its carrying value.

In connection with the ILS acquisition, the Company also assumed a note payable to a bank in the amount of $0.8 million, which was paid in full at closing on March 1, 2009. In connection with the RMT acquisition, the Company also assumed several notes payable to individuals and banks in the amount of $1.5 million, which were paid in full at closing on July 1, 2009.

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, 2010, no debt was outstanding under the Bank Facility and the Company was in compliance with all financial covenants under the terms of the Bank Facility. Deducting outstanding letters of credit of $15.1 million, $24.9 million of borrowing capacity was available at March 31, 2010.  The fair market value of the outstanding debt as of March 31, 2010 is not materially different than its carrying value.

11. Retirement Benefits

The Company has a qualified noncontributory pension plan covering substantially all U.S. employees. The benefits provided by this plan are measured by length of service, compensation and other factors, and are currently funded by trusts 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, 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, 2010. In addition, the Company provides an unfunded non-qualified deferred compensation defined contribution plan for certain U.S. employees. The Company’s and individuals’ 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 the participant’s contributions under the qualified plan. The Company’s expense for these plans totaled $0.9 million and $0.9 million in the three months ended March 31, 2010 and 2009, respectively. The liability for the non-qualified deferred defined contribution plan is included in “Other current accrued liabilities” in the Consolidated Balance Sheets.

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

	Pension Benefits						Other Benefits
Three Months Ended March 31,	2010			2009			2010			2009
Service cost	$	1,589		$	1,156		$	49		$	40
Interest cost		2,947			2,823			108			108
Expected return on plan assets		(3,143	)		(3,111	)		-			-
Amortization of prior service cost		196			225			13			-
Amortization of unrecognized net (gain) loss		1,228			1,257			(35	)		(43	)
Amortization of unrecognized transition asset		-			-			-			-
Net periodic benefit cost (income)	$	2,817		$	2,350		$	135		$	105

Employer Contributions

The Company previously disclosed in its consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, that it expected to make contributions of $5.4 million to its pension plans in 2010. The Company also disclosed that it expected to make contributions of $0.6 million to be made to its postretirement plan in 2010. As of March 31, 2010, the Company had made contributions of $0.1 million to its pension plans and $0.2 million to its postretirement plan. The Company presently anticipates making additional contributions of $5.3 million to its pension plans and $0.4 million to its postretirement plan during the remainder of 2010.

12. 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 administratively closed from 2001 to 2003 while the parties unsuccessfully attempted mediation. Trial for this case began in December 2003, and after the close of plaintiff’s evidence, the court adjourned and did not complete the trial until October 2004. Although plaintiff’s class certification encompassed a wide variety of employment practices, plaintiffs presented only disparate impact claims relating to discrimination in initial assignments and promotions at trial.

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 back pay 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 of a class disparate treatment claim. Plaintiff’s claim on the issue of the Company’s promotional practices was affirmed but the back pay 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 and specific 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.  

On December 5, 2008, the U.S. District Court Judge Clark held a hearing in Beaumont, Texas during which he reviewed the 5th U.S. Circuit Court of Appeals class action decision and informed the parties that he intended to implement the decision in order to conclude this litigation. At the conclusion of the hearing Judge Clark ordered the parties to submit positions regarding the issues of attorney fees, a damage award and injunctive relief. Subsequently, the Company reviewed the plaintiff’s submissions which described the formula and underlying assumptions that supported their positions on attorney fees and damages. After careful review of the plaintiff’s submission to the court the Company continued to have significant differences regarding legal issues that materially impacted the plaintiff’s requests. As a result of these different results, the court requested further evidence from the parties regarding their positions in order to render a final decision.  The judge reviewed both parties arguments regarding legal fees, and awarded the plaintiffs an interim fee, but at a reduced level from the plaintiffs original request. The Company and the plaintiffs reconciled the majority of the differences and the damage calculations which also lowered the originally requested amounts of the plaintiffs on those matters.  Due to the resolution of certain legal proceedings on damages during first half of 2009 and the District Court awarding the plaintiffs an interim award of attorney fees and cost totaling $5.8 million, the Company recorded an additional provision of $5.0 million in the first half of 2009 above the $6.0 million recorded in fourth quarter of 2008. The plaintiffs filed an appeal of the District Court’s interim award of attorney fees with the U.S. Fifth Circuit Court of Appeals. The Fifth Circuit subsequently dismissed these appeals on August 28, 2009 on the basis that an appealable final judgment in this case had not been issued.  The court commented that this issue can be reviewed with an appeal of final judgment.

On January 15, 2010, the U.S. District Court for the Eastern District of Texas notified the Company that it had entered a final judgment related to the Company’s ongoing class-action lawsuit. The Court ordered the Company to pay the plaintiffs $3.3 million in damages, $2.2 million in pre-judgment interest and 0.41% interest for any post-judgment interest. The Company had previously estimated the total liability for damages and interest to be approximately $5.2 million. The Court also ordered the plaintiffs to submit a request for legal fees and expenses from January 1, 2009 through the date of the final judgment. On January 29, 2010, the plaintiffs filed a motion with the U.S. District Court for the Eastern District of Texas for a supplemental award of $0.7 million for attorney’s fees, costs and expenses incurred between January 1, 2009 and January 15, 2010, as allowed in the final judgment issued by the Court on January 15, 2010, related to the Company’s ongoing class-action lawsuit. The Company recorded provisions for these judgments in 2009.

On January 15, 2010, the plaintiffs filed a notice of appeal with the U.S. Fifth Circuit Court of Appeals of the District Court’s final judgment. On January 21, 2010, The Company filed a notice of cross-appeal with the same court.  In addition, the Company filed a motion with the District Court to stay the payment of damages referenced in the District Court’s final judgment pending the outcome of the Fifth Circuit’s decision on both parties’ appeals. The District Court granted this motion to stay.

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.  For certain of these claims, the Company maintains insurance coverage while retaining a portion of the losses that occur through the use of deductibles and retention limits.  Amounts in excess of the self-insured retention levels are fully insured to limits believed appropriate for the Company’s operations.  Self-insurance accruals are based on claims filed and an estimate for claims incurred but not reported.  While the Company does maintain insurance above its self-insured levels, a decline in the financial condition of its insurer, while not currently anticipated, could result in the Company recording additional liabilities.  It is management’s opinion that the Company’s liability under such circumstances or involving any other non-insured claims or legal proceedings would not materially affect its consolidated financial position, results of operations, or cash flow.

13. Comprehensive Income

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

	Three Months Ended
	March 31
	2010			2009
Net earnings	$	5,992		$	8,978
Other comprehensive income, before tax:
Foreign currency translation adjustments		(1,101	)		(1,811	)
Defined benefit pension plans:
Amortization of prior service cost included in net periodic benefit cost		196			225
Amortization of unrecognized net loss included in net periodic benefit cost		1,228			1,257
Total defined benefit pension plans		1,424			1,482
Defined benefit postretirement plans:
Amortization of prior service cost included in net periodic benefit cost		13			-
Amortization of unrecognized net gain included in net periodic benefit cost		(35	)		(43	)
Total defined benefit postretirement plans		(22	)		(43	)
Total other comprehensive income (loss), before tax		301			(372	)
Income tax benefit related to items of other comprehensive income		(519	)		(532	)
Total other comprehensive (loss), net of tax		(218	)		(904	)
Total comprehensive income	$	5,774		$	8,074

Accumulated other comprehensive income (loss) 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			Loss
Balance, Dec. 31, 2009	$	6,037		$	(44,928	)	$	965		$	(37,926	)
Current-period change		(1,101	)		897			(14	)		(218	)
Balance, March 31, 2010	$	4,936		$	(44,031	)	$	951		$	(38,144	)

14. Net Earnings Per Share

Reconciliations of the number of weighted shares used to compute basic and diluted net earnings per share for the three months ended March 31, 2010 and 2009, are illustrated below:

	Three Months Ended
	March 31,
	2010		2009
Weighted average common shares outstanding for basic EPS		14,906,517		14,860,795
Effect of dilutive securities: employee stock options		135,807		32,797
Adjusted weighted average common shares outstanding for diluted EPS		15,042,324		14,893,592

Weighted options to purchase a total of 132,668 and 487,903 shares of the Company’s common stock for the three months ended March 31, 2010 and 2009, respectively, were excluded from the calculations of fully diluted earnings per share, in each case because the effect on fully diluted earnings per share for the period was antidilutive.

15. 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 for the three months ended March 31, 2010 and 2009 (in thousands of dollars):

	Three Months Ended
	March 31,
	2010			2009
Stock-based compensation expense	$	779		$	346
Tax benefit		(288	)		(128	)
Stock-based compensation expense, net of tax	$	491		$	218

The fair value of each option granted during the first three months of 2010 and 2009 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	2010			2009
Expected dividend yield		1.25% - 1.60	%		2.8	%
Expected stock price volatility		51.3% - 57.0	%		46.8% - 54.0	%
Risk free interest rate		1.37% - 2.96	%		1.09% - 2.23	%
Expected life options	3 - 6 years			3 - 7 years
Weighted-average fair value per share at grant date	$	27.79		$	13.08

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 on 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 with terms 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, 2010, is presented below:

						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
Options	Shares			Price		Term		($000's)
Outstanding at January 1, 2010		709,015		$	52.56
Granted		53,500			67.11
Exercised		(46,427	)		41.25
Forfeited or expired		(751	)		59.86
Outstanding at March 31, 2010		715,337		$	54.38		7.9	$	17,725
Exercisable at March 31, 2010		364,570		$	52.32		6.9	$	9,781

As of March 31, 2010, there was $4.9 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 2.8 years. The intrinsic value of stock options exercised in the first three months of 2010 was $1.6 million.

16. Uncertain Tax Positions

As of December 31, 2009, the Company had approximately $1.5 million of total gross unrecognized tax benefits.  If these benefits were recognized, they would favorably affect the net effective income tax rate in any future period.  As of March 31, 2010, the Company had approximately $1.7 million of total gross unrecognized tax benefits.  If recognized, these benefits would favorably affect the net effective income tax rate in any future period. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(Thousands of dollars)
Balance at December 31, 2009	$	1,509
Gross increases- current year tax positions		-
Gross increases- tax positions from prior periods		162
Gross decreases- tax positions from prior periods		-
Settlements		-
Balance at March 31, 2010	$	1,671

The Company has unrecognized tax positions for which it is reasonably possible that the amounts of unrecognized tax benefits will decrease within the next twelve months.  The possible decrease of these unrecognized tax benefits is due to the closure of income tax examinations in France for tax years 2007 and 2008.  The unrecognized tax benefits related to the tax examinations in France is estimated to be $.2 million.

The Company’s continuing practice is to recognize interest and penalties related to income tax matters in administrative costs.  The Company had $0.1 million accrued for interest and penalties at December 31, 2009.  Negligible interest and penalties were recognized during the three months ended March 31, 2010 and 2009, respectively.

17. Segment Data

The Company operates with two business segments - Oil Field and Power Transmission. The two 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, 2009. The following is a summary of key segment information (in thousands of dollars):

Three Months Ended March 31, 2010
				Power			Corporate
	Oil Field			Transmission			& Other*			Total
Gross sales	$	90,202		$	37,868		$	-		$	128,070
Inter-segment sales		(281	)		(666	)		-			(947	)
Net sales	$	89,921		$	37,202		$	-		$	127,123
Operating income	$	7,031		$	2,265		$	-		$	9,296
Other income (expense), net		114			34			(73	)		75
Earnings from continuing operations before income tax provision	$	7,145		$	2,299		$	(73	)	$	9,371

Three Months Ended March 31, 2009
				Power			Corporate
	Oil Field			Transmission			& Other*			Total
Gross sales	$	113,014		$	42,340		$	-		$	155,354
Inter-segment sales		(1,331	)		(885	)		-			(2,216	)
Net sales	$	111,683		$	41,455		$	-		$	153,138
Operating income (loss)	$	12,111		$	3,642		$	(3,000	)	$	12,753
Other income (expense), net		(295	)		108			727			540
Earnings (loss) from continuing operations before income tax provision	$	11,816		$	3,750		$	(2,273	)	$	13,293

* Corporate & Other includes the litigation reserve.

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 and power transmission products. Through its Oil Field segment, the Company manufactures and services artificial 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 increasing and reducing gearboxes for industrial applications. 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 seeks to maintain a low debt-to-equity ratio in order to quickly take advantage of growth opportunities and to continue to pay dividends even during unfavorable business cycles.

In support of its strategy, the Company has made capital investments in the Oil Field segment 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, improve quality and reduce manufacturing costs. Investments also continue to be made to expand the Company’s presence in automation products and international service. During the first quarter of 2009, the Company purchased International Lift Systems (“ILS”), which manufactures and services gas lift, plunger lift and completion equipment for the oil and gas industry. In the Power Transmission segment, the Company continues to expand its gear repair network by opening and expanding facilities in various locations in the United States and Canada. The Company is making targeted capital investments in the United States and France to expand capacity, develop new product lines and reduce manufacturing lead times, in addition to certain capital investments targeting cost reductions.  On July 1, 2009, the Company purchased Rotating Machinery Technology, Inc. (RMT), which specializes in the analysis, design and manufacture of precision, custom-engineered tilting-pad bearings and related components for high-speed turbo equipment operating in critical duty applications. RMT also services, repairs and upgrades turbo-expander process units for air and gas separation, both on-site with its skilled field service team and at its repair facility in Wellsville, New York. The Company intends to focus future capital investments for Oilfield and Power Transmission on international geographic expansion of manufacturing and service centers.

Trends/Outlook

Oil Field

Demand for the Company’s artificial lift equipment is primarily dependent on the level of new onshore oil wells, workover drilling activity, the depth and fluid conditions of such drilling activity and general field maintenance budgets. 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. Increasing energy prices from 2004 to late 2008 increased the demand for pumping units and related service and products as a result of higher drilling activity, activation of idle wells and the upgrading of existing wells. In the fourth quarter of 2008, energy prices dramatically declined due to reductions in global demand. Planned new drilling and workover activity also reduced significantly as capital and operating budgets were reduced. These negative trends continued into the first quarter of 2009 and worsened during the second quarter of 2009 as E&P companies deferred or cancelled drilling programs and reduced field spending in response to lower energy prices. This trend was more pronounced in North America than in international markets. Lower selling prices combined with the negative impact of low capacity utilization in manufacturing facilities caused gross margins to decline in 2009. In the second half of 2009, oil prices increased back to 2007 levels and drilling activity, especially for oil, increased.

During the first quarter of 2010, oil prices continued to increase, driving increased oil drilling activity, especially in North America. While order levels have continued to increase sequentially over the last two quarters, the ability to raise prices remains a challenge. Also, raw material prices for steel and iron castings began increasing during the first quarter of 2010. These trends could potentially offset some of the gross margin benefit expected from higher plant utilization.

While the oil market is cyclical, the Company continues to believe that there are long-term positive growth trends for artificial lift equipment, and as existing fields mature, the market will require an increased use of artificial lift, especially in the South American, Russian and Middle Eastern markets.   The acquisition of ILS was consistent with the Company’s long-term growth strategy of integrating strategic assets to leverage the Company’s position of industry leadership.  ILS has a solid reputation for high-quality products, customer responsiveness and long-standing relationships with major independent and super-major integrated companies.  This provides an entry for Lufkin into the offshore market for artificial lift wells, including deepwater plays, and expanded reach into the artificial lift market.

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 markets, each of which has its own unique set of drivers. Generally, if 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. During the latter part of 2008, energy prices decreased significantly, global growth slowed and large project financing became difficult to secure. New order booking declined in the first half of 2009, which negatively impacted sales starting in late 2009. While sales are expected to remain at these lower levels throughout the first half of 2010, new order and quotation activity, especially from the energy markets, increased during the first quarter of 2010 over levels seen in 2009.

Discontinued Operations

During the second quarter of 2008, the Trailer segment was classified as a discontinued operation. 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 second quarter of 2008, this plan was completed, with the majority of the remaining inventory and manufacturing equipment sold and all facilities closed.

Other

During the first quarter of 2009, the Company recorded a contingent liability provision of $3.0 million (pre-tax) for its ongoing class-action lawsuit.  For additional information, please see Part II, Item 1 of this Form 10-Q.

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, 2010, decreased to $127.1 million from $153.1 million for the three months ended March 31, 2009, or 17.0%. Sales levels in the first quarter of 2009 benefitted from pumping unit orders placed in 2008 at higher energy drilling levels.

Gross margin for the three months ended March 31, 2010, increased slightly to 22.5% from 22.3% for the three months ended March 31, 2009. This gross margin increase was primarily related to the favorable mix effect in Power Transmission of lower sales of marine units. Additional segment data on gross margin is provided later in this section.

Higher selling, general and administrative expenses negatively impacted net earnings, with these expenses increasing to $19.3 million during the first quarter of 2010 from $18.4 million during the first quarter of 2009. This increase was primarily related to higher divisional spending to support geographic expansion efforts. As a percentage of sales, selling, general and administrative expenses also increased to 15.2% in the first quarter of 2010 compared to 12.0% in the first quarter of 2009.

The Company reported net earnings from continuing operations of $5.9 million or $0.40 per share (diluted) for the three months ended March 31, 2010, compared to net earnings from continuing operations of $9.1 million or $0.61 per share (diluted) for the three months ended March 31, 2009.

Debt/equity (long-term debt net of current portion as a percentage of total equity) levels were 0.3% at both March 31, 2010 and December 31, 2009. Cash balances at March 31, 2010, were $107.9 million, up from $100.9 million at December 31, 2009.

Three Months Ended March 31, 2010, Compared to Three Months Ended March 31, 2009

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/
	2010		2009		(Decrease)			(Decrease)
Sales
Oil Field	$	89,921	$	111,683	$	(21,762	)		(19.5	)
Power Transmission		37,202		41,455		(4,253	)		(10.3	)
Total	$	127,123	$	153,138	$	(26,015	)		(17.0	)
Gross Profit
Oil Field	$	18,473	$	23,329	$	(4,856	)		(20.8	)
Power Transmission		10,150		10,854		(704	)		(6.5	)
Total	$	28,623	$	34,183	$	(5,560	)		(16.3	)

Oil Field

Oil Field sales decreased to $89.9 million, or 19.5%, for the three months ended March 31, 2010, from $111.7 million for the three months ended March 31, 2009. New unit sales of $45.9 million during the first quarter of 2010 were down $22.9 million, or 33.3%, compared to $68.8 million during the first quarter 2009, primarily from lower U.S. demand. Pumping unit service sales of $21.4 million during the first quarter of 2010 were down $0.6 million, or 2.5%, compared to $22.0 million during the first quarter 2009. Automation sales of $14.7 million during the first quarter of 2010 were down $0.9 million, or 6.1%, compared to $15.6 million during the first quarter 2009. Commercial casting sales of $2.5 million during the first quarter of 2010 were down $0.9 million, or 25.6%, compared to $3.4 million during the first quarter 2009. Sales from Lufkin ILS contributed $5.5 million during the first quarter of 2010 compared to $2.0 million in the first quarter of 2009. Lufkin ILS sales in the first quarter of 2009 were only for the month of March. Oil Field’s backlog decreased to $86.5 million as of March 31, 2010, from $93.3 million at March 31, 2009, but increased from $43.3 million at December 31, 2009. This sequential increase was caused primarily by higher orders for new pumping units in the U.S. as oil-directed drilling activity increased.

Gross margin (gross profit as a percentage of sales) for the Oil Field segment decreased to 20.5% for three months ended March 31, 2010, compared to 20.9% for the three months ended March 31, 2009, or 0.4 percentage points. This gross margin decrease was related to the negative impact of lower plant utilization on fixed cost coverage.

Direct selling, general and administrative expenses for Oil Field increased to $7.4 million, or 18.9%, for the three months ended March 31, 2010, from $6.2 million for the three months ended March 31, 2009. This increase was due to higher employee-related expenses in support of international expansion efforts and the ILS acquisition. Direct selling, general and administrative expenses as a percentage of sales increased to 12.7% for the three months ended March 31, 2010, from 10.0% for the three months ended March 31, 2009.

Power Transmission

Sales for the Company’s Power Transmission segment decreased to $37.2 million, or 10.3%, for the three months ended March 31, 2010, compared to $41.5 million for the three months ended March 31, 2009. New unit sales of $24.5 million during the first quarter of 2010 were down $8.7 million, or 26.0%, compared to $33.1 million during the first quarter of 2009, as a result of decreased sales of marine units and high-speed units for oil and gas markets. Repair and service sales of $11.6 million during the first quarter of 2010 were up $3.2 million, or 38.7%, compared to $8.4 million during the first quarter 2009 due to increases in the oil and gas sector and the benefits of new gear repair facilities. Power Transmission backlog at March 31, 2010, decreased to $106.0 million from $114.7 million at March 31, 2009, but increased from $97.0 million at December 31, 2009, primarily from increased bookings of new units for the energy-related and marine markets.

Gross margin for the Power Transmission segment increased to 27.3% for the three months ended March 31, 2010, compared to 26.2% for the three months ended March 31, 2009, or 1.1 percentage points. This gross margin increase was primarily from the favorable mix effect of decreased marine unit sales.

Direct selling, general and administrative expenses for Power Transmission increased to $6.1 million, or 9.8%, for the three months ended March 31, 2010, from $5.5 million for the three months ended March 31, 2009. This increase was primarily due to the RMT acquisition. Direct selling, general and administrative expenses as a percentage of sales increased to 21.2% for the three months ended March 31, 2010, from 17.4% for the three months ended March 31, 2009.

Corporate/Other

Corporate administrative expenses, which are allocated to the segments primarily based on historical third-party revenues, were $5.9 million for the three months ended March 31, 2010, an decrease of $0.8 million or 12.2%, from $6.7 million for the three months ended March 31, 2009, primarily from reduced professional service and legal fees and general liability claims.

Interest income, interest expense and other income and expense for the three months ended March 31, 2010, reduced to income of $0.1 million compared to income of $0.5 million for the three months ended March 31, 2009. Interest income in the first quarter of 2009 was higher due to interest income on tax refund payments.

Pension expense, which is reported as a component of cost of sales, increased to $2.6 million for the three months ended March 31, 2010, compared to $2.2 million for the three months ended March 31, 2009.

The net tax rate for the three months ended March 31, 2010, was 36.0% compared to 31.5% for the three months ended March 31, 2009. The net tax rate in 2009 benefited from the settlement of the 2006 Internal Revenue Service tax audit and research and experimentation (R&E) tax credit estimate adjustments.

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 facility will be sufficient to fund its operations, including planned capital expenditures, dividend payments and stock repurchases, through December 31, 2010, and the foreseeable future.

The Company’s cash balance totaled $107.9 million at March 31, 2010, compared to $100.9 million at December 31, 2009. For the three months ended March 31, 2010, net cash provided by operating activities was $16.6 million, net cash used in investing activities totaled $7.6 million and net cash used in financing activities amounted to $1.8 million. Significant components of cash provided by operating activities for the three months ended March 31, 2010 included net earnings from continuing operations, adjusted for non-cash expenses, of $13.7 million and a decrease in working capital of $2.9 million. Net cash used in investing activities for the three months ended March 31, 2010 included net capital expenditures totaling $6.0 million and holdback payments of $1.5 million related to the ILS acquisition. Capital expenditures in the first three months of 2010 were primarily for the new Odessa service center and machine tools in Oilfield and Power Transmission. Capital expenditures for 2010 are projected to approximately remain at the 2009 spending levels, primarily for the new facilities to support geographical and product line expansions and equipment replacement for efficiency improvements in the Oil Field and Power Transmission segments and will be funded by operating cash flows. The Company is reviewing additional international expansion opportunities that would require significant capital spending over several years, but these plans have not been finalized. Significant components of net cash used by financing activities for the three months ended March 31, 2010 included dividend payments of $3.7 million, or $0.25, per share, long-term debt repayment of $0.3 million, and proceeds from stock option exercises of $1.9 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. The 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, 2010, no debt was outstanding under the Bank Facility and the Company was in compliance with all financial covenants under the terms of the Bank Facility. Deducting outstanding letters of credit of $15.1 million, $24.9 million of borrowing capacity was available at March 31, 2010.  The fair market value of the outstanding debt as of March 31, 2010 is not materially different than its carrying value.  The maturity date of the Bank Facility is December 31, 2010.  The Company expects to successfully negotiate a new credit facility prior to the maturity date of the Bank Facility.  In the event the Company is unsuccessful, it still believes that its cash flows from operations will be sufficient to fund its operations, including planned capital expenditures, dividend payments and stock repurchases through the next twelve months.

The Company assumed various notes payable in conjunction with the ILS and RMT acquisitions in 2009. These obligations will require principal payments of $1.0 million during the last nine months of 2010.

Recently Issued Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605):  Multiple – Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force, which changes the accounting for certain revenue arrangements. The new requirements change the allocation methods used in determining how to account for multiple payment streams and will result in the ability to separately account for more deliverables, and potentially less revenue deferrals. Additionally, ASU 2009-13 requires enhanced disclosures in financial statements. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010 on a prospective basis, with early application permitted. The Company is currently evaluating the impact ASU 2009-13 will have on our financial statements.

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

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 collectability 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 a 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:

l	The customer has accepted title and risk of loss;
l	The customer has provided a written purchase order for the product;
l	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;
l	The customer must provide a storage period and future shipping date;
l	The Company must not have retained any future performance obligations on the product;
l	The Company must segregate the stored product and not make it available to use on other orders; and
l	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 represents 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 application of income tax law is inherently complex. In order to recognize an income tax benefit, 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. 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 uncertain, 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, 2009.

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,” “will,” “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:

l	oil price volatility;
l	declines in domestic and worldwide oil and gas drilling;
l	capital spending levels of oil producers;
l	availability and prices for raw materials;
l	the inherent dangers and complexities of our operations;
l	uninsured judgments or a rise in insurance premiums;
l	the inability to effectively integrate acquisitions;
l	labor disruptions and increasing labor costs;
l	the availability of qualified and skilled labor;
l	disruption of our operating facilities or management information systems;
l	the impact on foreign operations of war, political disruption, civil disturbance, economic and legal sanctions and changes in global trade policies;
l	currency exchange rate fluctuations in the markets in which the Company operates;
l	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;
l	costs related to legal and administrative proceedings, including adverse judgments against the Company if the Company fails to prevail in reversing such judgments; and
l	general industry, political and economic conditions in the markets where the Company procures materials, 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, 2009. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these risk 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, 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. While the Company’s accounts receivable are concentrated with customers in the energy industry the Company performs credit evaluations on current and potential customers and adjusts credit limits as appropriate.  In certain circumstances the Company will obtain collateral to mitigate higher 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 lack of current debt, 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 uses large amounts of steel, iron and electricity in the manufacture of its products.  The price of these raw materials has a significant impact on the cost of producing products.  Steel and electricity prices have increased significantly in the last five years, caused primarily by higher energy prices and increased global demand.  Since most of the Company’s suppliers are not currently parties to long-term contracts with us, the Company is vulnerable to fluctuations in prices of such raw materials.  Factors such as supply and demand, freight costs and transportation availability, inventory levels of brokers and dealers, the level of imports and general economic conditions may affect the price of cast iron and steel. Raw material prices may increase significantly in the future.  Certain items such as steel round, bearings and aluminum have continued to experience price increases, price volatility and longer lead times. If the Company is unable to pass future raw material price increases on to its customers, margins, results of operations, cash flow and financial condition could be adversely affected.

The Company is exposed to currency fluctuations with intercompany debt denominated in U.S. dollars owed by its French and Canadian subsidiaries. As of March 31, 2010, this inter-company debt was comprised of a $0.1 million payable and a $9.7 million payable from France and Canada, respectively. As of March 31, 2010, 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 in Argentina, 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, 2010, if the U.S. dollar strengthened by 10% over these currencies, the net income impact would be $0.2 million of expense and if the U.S. dollar weakened by 10% over these currencies, the net income impact would be $0.2 million of income.

Item 4.   Controls and Procedures.

Based on their evaluation of the Company’s disclosure controls and procedures as of March 31, 2010, 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, 2010, 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.

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 administratively closed from 2001 to 2003 while the parties unsuccessfully attempted mediation. Trial for this case began in December 2003, and after the close of plaintiff’s evidence, the court adjourned and did not complete the trial until October 2004. Although plaintiff’s class certification encompassed a wide variety of employment practices, plaintiffs presented only disparate impact claims relating to discrimination in initial assignments and promotions at trial.

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 back pay 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 Divisi100on. The court also denied plaintiff’s appeal for class certification of a class disparate treatment claim. Plaintiff’s claim on the issue of the Company’s promotional practices was affirmed but the back pay 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 and specific 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.  

On December 5, 2008, the U.S. District Court Judge Clark held a hearing in Beaumont, Texas during which he reviewed the 5th U.S. Circuit Court of Appeals class action decision and informed the parties that he intended to implement the decision in order to conclude this litigation. At the conclusion of the hearing Judge Clark ordered the parties to submit positions regarding the issues of attorney fees, a damage award and injunctive relief. Subsequently, the Company reviewed the plaintiff’s submissions which described the formula and underlying assumptions that supported their positions on attorney fees and damages. After careful review of the plaintiff’s submission to the court the Company continued to have significant differences regarding legal issues that materially impacted the plaintiff’s requests. As a result of these different results, the court requested further evidence from the parties regarding their positions in order to render a final decision.  The judge reviewed both parties arguments regarding legal fees, and awarded the plaintiffs an interim fee, but at a reduced level from the plaintiffs original request. The Company and the plaintiffs reconciled the majority of the differences and the damage calculations which also lowered the originally requested amounts of the plaintiffs on those matters.  Due to the resolution of certain legal proceedings on damages during first half of 2009 and the District Court awarding the plaintiffs an interim award of attorney fees and cost totaling $5.8 million, the Company recorded an additional provision of $5.0 million in the first half of 2009 above the $6.0 million recorded in fourth quarter of 2008. The plaintiffs filed an appeal of the District Court’s interim award of attorney fees with the U.S. Fifth Circuit Court of Appeals. The Fifth Circuit subsequently dismissed these appeals on August 28, 2009 on the basis that an appealable final judgment in this case had not been issued.  The court commented that this issue can be reviewed with an appeal of final judgment.

On January 15, 2010, the U.S. District Court for the Eastern District of Texas notified the Company that it had entered a final judgment related to the Company’s ongoing class-action lawsuit. The Court ordered the Company to pay the plaintiffs $3.3 million in damages, $2.2 million in pre-judgment interest and 0.41% interest for any post-judgment interest. The Company had previously estimated the total liability for damages and interest to be approximately $5.2 million. The Court also ordered the plaintiffs to submit a request for legal fees and expenses from January 1, 2009 through the date of the final judgment. On January 29, 2010, the plaintiffs filed a motion with the U.S. District Court for the Eastern District of Texas for a supplemental award of $0.7 million for attorney’s fees, costs and expenses incurred between January 1, 2009 and January 15, 2010, as allowed in the final judgment issued by the Court on January 15, 2010, related to the Company’s ongoing class-action lawsuit. The Company recorded provisions for these judgments in 2009.

On January 15, 2010, the plaintiffs filed a notice of appeal with the U.S. Fifth Circuit Court of Appeals of the District Court’s final judgment. On January 21, 2010, The Company filed a notice of cross-appeal with the same court.  In addition, the Company filed a motion with the District Court to stay the payment of damages referenced in the District Court’s final judgment pending the outcome of the Fifth Circuit’s decision on both parties’ appeals. The District Court granted this motion to stay.

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.  For certain of these claims, the Company maintains insurance coverage while retaining a portion of the losses that occur through the use of deductibles and retention limits.  Amounts in excess of the self-insured retention levels are fully insured to limits believed appropriate for the Company’s operations.  Self-insurance accruals are based on claims filed and an estimate for claims incurred but not reported.  While the Company does maintain insurance above its self-insured levels, a decline in the financial condition of its insurer, while not currently anticipated, could result in the Company recording additional liabilities.  It is management’s opinion that the Company’s liability under such circumstances or involving any other non-insured claims or legal proceedings would not materially affect its consolidated financial position, results of operations, or cash flow.

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, 2009, 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 6.  Exhibits.

***3.1	Fourth Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-8 filed on February 17, 2004 (SEC File No. 333-112890)).
***3.2	Articles of Amendment to Fourth Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed on December 10, 1999 (File No. 0-02612)).
***3.3	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed on October 9, 2007 (File No. 0-02612)).
*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.

*     Filed herewith

**   Furnished 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 10, 2010

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

***3.1	Fourth Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-8 filed on February 17, 2004 (SEC File No. 333-112890)).
***3.2	Articles of Amendment to Fourth Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed on December 10, 1999 (File No. 0-02612)).
***3.3	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed on October 9, 2007 (File No. 0-02612)).
*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.

*     Filed herewith

**   Furnished herewith

*** Incorporated by reference