UNITED STATES

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 June 30, 2004

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 000-00822

THE OILGEAR COMPANY

Registrant’s telephone number, including area code (414) 327-1700

Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES     X                           NO             

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

YES                                  NO      X     

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See accompanying notes to consolidated financial statements.

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THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes to consolidated financial statements.

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THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes to consolidated financial statements.

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THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

See accompanying notes to consolidated financial statements.

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THE OILGEAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Basis of Presentation

These unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods in accordance with accounting principles generally accepted in the United States of America. All such adjustments are of a normal recurring nature. Management assumes the reader will have access to the December 31, 2003 Annual Report on Form 10-K, a copy of which is available upon request, and these notes should be read in conjunction with the Consolidated Financial Statements and the related notes in the Form 10-K.

Business Description and Operations

The Company manages its operations in three reportable segments based upon geographic area. Domestic includes the United States and Canada, European includes Europe and International includes Asia, Latin America, Australia and Africa.

The individual subsidiaries of the Company operate predominantly in the fluid power industry. The Company provides advanced technology in the design and production of unique fluid power components. Products include piston pumps, motors, valves, controls, manifolds, electrohydraulic components, cylinders, reservoirs, skids and meters. Industries that use these products are primary metals, machine tool, automobile, aerospace, petroleum, construction equipment, chemical, plastic, glass, lumber, rubber and food. The products are sold as individual components or integrated into high performance applications.

Segment information is as follows:

The Company’s sources of capital historically have been cash generated from operations and bank borrowings. The fluctuations in working capital requirements are covered by bank lines of credit at the Company’s subsidiaries in England and India and a bank revolving line of credit in the United States. The Company’s current credit facility in the United States expires on April 1, 2005 and the Company is currently negotiating a new credit facility with alternative lenders. The Company expects the new credit facility to be secured by the end of the third quarter of 2004. However, if the Company cannot secure the new credit facility before the expiration of the current United States credit facility, it cannot ensure that it will be able to repay the amounts under the current credit facility or fund its operations after April 1, 2005.

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Inventories

Inventories at June 30, 2004 and December 31, 2003 consisted of the following:

Inventories stated on the last-in, first-out (LIFO) basis, including amounts allocated to contracts that have not been completed, are valued at $14,353,000 and $14,192,000 at June 30, 2004 and December 31, 2003, respectively. The remaining inventory is stated on the first-in, first-out (FIFO) or average cost basis.

EMPLOYEE BENEFIT PLANS

(A)     PENSION PLANS

The Company has non-contributory defined benefit retirement plans covering substantially all domestic employees. The plan covering salaried and management employees provides pension benefits that are based on years of service and the employee’s compensation during the last ten years prior to retirement. This plan was frozen on December 31, 2002. Benefits payable under this plan may be reduced by benefits payable under The Oilgear Stock Retirement Plan (Stock Retirement Plan). The plan covering hourly employees and union members generally provides benefits of stated amounts for each year of service. The Company’s policy is to fund pension costs to conform to the Employee Retirement Income Security Act of 1974. The minimum required contributions for 2004 for these defined benefit retirement plans are approximately $2,946,000 of which $112,000 was paid in the first six months of 2004 and $365,400 relating to the plan covering hourly employees and union members at the Milwaukee, WI plant was delinquently paid in August 2004. The Company is currently delinquent by $1,615,542 in its contributions to the Oilgear Salaried Retirement Plan and it has filed a written notice with the Pension Benefit Guaranty Corporation of this deficiency. The Company intends that this deficiency will be corrected after the new bank financing agreement is completed, which bank financing is further discussed under the caption “Financial Condition and Liquidity” in Item 2 hereof.

Net pension expense under these plans for the three and six months ended June 30 is comprised of the following:

The Company has a pension plan (UK Plan) for substantially all United Kingdom employees that provides defined benefits based upon years of service and salary. This plan was frozen on December 31, 2002. The minimum required contributions for 2004 are approximately $395,000 of which approximately $198,000 was paid in the first six months of 2004.

Net pension expense under this plan for the three and six months ended June 30 is comprised of the following:

(B)     POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired domestic employees. All non-bargaining unit domestic employees who were eligible to receive retiree health care benefits as of December 31, 1991 are eligible to receive a health care credit based upon a defined formula or a percentage multiplied by the Medicare eligible premium. Non-bargaining unit domestic employees hired subsequent to, or ineligible at December 31, 1991, will receive no future retiree health care benefits. Beginning February 22, 1996, active bargaining unit domestic employees are provided retiree health care benefits up to the amount of credits each employee accumulates during his or her employment with the Company. All bargaining unit domestic retirees after February 22, 1996 are provided retiree health care benefits in accordance with the employment agreement at the time of their retirement. Employees terminating their employment prior to normal retirement age forfeit their rights, if any, to receive health care and life insurance benefits.

The post-retirement health care and life insurance benefits are 100% funded by the Company on a pay as you go basis. There are no assets in these plans. Net periodic post-retirement benefit cost for the three and six months ended June 30 includes the following components:

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EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per common share:

Options to purchase 118,493 shares of common stock with a weighted average exercise price of $5.57 per share were outstanding at June 30, 2004. Options to purchase 95,717 shares of common stock with a weighted average exercise price of $6.92 per share were outstanding at June 30, 2003.

Options to purchase 67,960 and 72,217 shares of common stock were not included in the computations of diluted earnings per share for the three month periods ended June 30, 2004 and 2003, respectively, because the options’ exercise prices were greater than the average market price of common stock during the periods then ended.

Had compensation cost for the Company’s stock options been recognized using the fair value method, the Company’s pro forma operating results would have been as follows:

The fair value of the Company’s stock options used to compute pro forma net income (loss) and income (loss) per share disclosures is the estimated fair value at grant date using the Black-Scholes option pricing model with a risk-free interest rate equivalent to 3 year Treasury securities and an expected life of 3.5 years. The Black-Scholes option pricing model also used the following weighted- average assumptions:      2004- expected volatility of 44% and expected dividend yield of 0%;      2003- expected volatility of 38% and expected dividend yield of 0%. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s options have characteristics significantly different from traded options, and because changes in the subjective input can materially affect the fair value estimates, in the opinion of management, the existing models do not necessarily provide a reliable single value of its options and may not be representative of the future effects on reported net earnings or the future stock price of the Company’s common stock. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option’s vesting period.

COSTS ASSOCIATED WITH EXIT ACTIVITIES

During the second quarter and the first six months of 2003, the Company recorded approximately $59,000 and $237,000, respectively, in charges related to: (i) a downsizing of the corporate staff; and (ii) additional costs to move the manufacturing formerly performed in Longview, Texas to Milwaukee, Wisconsin. The amount recorded includes $235,000 of employee termination benefits for 15 notified employees and $61,000 for moving expenses. Approximately $78,000 and $159,000 of these charges were recorded in cost of sales and selling, general and administrative expenses, respectively. There were no costs associated with exit activities in the first six months of 2004. The Company had utilized all accruals related to exit activities as of December 31, 2003.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION AND LIQUIDITY

The Company’s sources of capital historically have been cash generated from operations and bank borrowings. The fluctuations in working capital requirements are covered by bank lines of credit at the Company’s subsidiaries in England and India and a bank revolving line of credit in the United States. The Company’s current credit facility in the United States expires on April 1, 2005 and the Company is currently negotiating a new credit facility with alternative lenders. The Company expects the new credit facility to be secured by the end of the third quarter of 2004. However, if the Company cannot secure the new credit facility before the expiration of the current United States credit facility, it cannot ensure that it will be able to repay the amounts under the current credit facility or fund its operations after April 1, 2005.

For the six months ended June 30, 2004, approximately $1,349,000 of cash was provided by operations compared to approximately $1,071,000 of cash used by operations during the same period in 2003. Net earnings of approximately $13,000 in the first six months of 2004 compared to a net loss of approximately $1,145,000 for the same period in 2003 was the principal reason for the improvement in cash from operations. Cash provided from operations was also increased by approximately $990,00 of pension contributions due but not paid in the second quarter of 2004. The company intends to catch up with its delinquent defined benefit contributions after the new bank financing agreement is completed. Days sales outstanding in receivables were 60 and 62 at June 30, 2004 and June 30, 2003, respectively. Inventory turns were 2.86 at June 30, 2004 compared to 2.98 at June 30, 2003.

Property, plant and equipment additions consisting primarily of purchases of machinery and equipment were approximately $432,000 in the first six months of 2004 compared to approximately $590,000 in the first six months of 2003. Property, plant and equipment additions are expected to total approximately $1,200,000 for 2004.

WORKING CAPITAL

Working capital decreased by approximately $17,564,000 at June 30, 2004 compared to December 31, 2003. We are working to replace our current credit facility from a structure using a domestic regional bank where loans are denominated in US dollars to a global bank debt arrangement where loans are denominated in US dollars, British pound sterling and EURO currencies. Because our current United States credit facility expires on April 1, 2005, the outstanding $17,269,000 of debt under that facility was reclassified from long-term debt to current debt at June 30, 2004. Without considering this loan reclassification, working capital decreased by approximately $295,000 and the current ratio would have been 2.21.

CAPITALIZATION

The capitalization of the Company had only a slight change during the first six months of 2004.

Based on the potential sale of our land and buildings in Leeds, England, Barclays Bank plc provided us with a bridge loan for 750,000 British pounds in May 2003 and a commitment for another 750,000 British pounds to be drawn when the property’s zoning is changed to residential. The Leeds city planning committee approved the residential zoning on July 15, 2004. The interest rate on the loan is LIBOR plus 2.25% and the loan is secured by the Leeds facility. The Barclays loans will be paid off when we receive the proceeds, expected to be approximately 4,050,000 British pounds, from the sale of this facility.

The Company is in negotiations to refinance its United States Credit facility which expires April 1, 2005. Completion of these arrangements are taking longer than we expected but we are making progress and expect to finalize them during the third quarter of 2004.

The Company is currently in compliance with all bank covenants in its United States and foreign credit facilities. The covenants for the Company’s United States credit facility were set taking into account both the Company’s expected levels of capital expenditures and earnings for 2004 and early 2005 and the bank’s requirements for debt service, but there are risks and uncertainties that could result in a shortfall. If we do not meet the required minimums, the loans could be accelerated, and the Company might not have sufficient liquid resources to satisfy these obligations.

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RESULTS OF OPERATIONS

Shipments and Orders