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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

LUFKIN INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code 1 936/634-2211         

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $1 Per Share

(Title of Class)

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 “X” if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

The aggregate market value of the Company’s voting stock held by non-affiliates as of the last day of the second fiscal quarter, June 30, 2003, was $159,852,557.

6,733,128 shares of the Company’s Common Stock were outstanding on March 8, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Items 10, 11, 12, 13 and 14 of Part III will be incorporated by reference from the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A.

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PART I

Item 1. Business

Lufkin Industries, Inc. (the “Company”) was incorporated under the laws of the State of Texas on March 4, 1902, and since that date has maintained its principal office and manufacturing facilities in Lufkin, Texas. The Company employed approximately 1,900 people at December 31, 2003, including approximately 1,300 that were paid on an hourly basis. The Company is divided into three operating segments: Oil Field, Power Transmission and Trailer.

Oil Field

Products:

The Oil Field segment manufactures and services artificial reciprocating rod lift equipment, commonly referred to as pumping units, and related products.

Pumping Units- Four basic types of pumping units are manufactured: an air-balanced unit; a beam-balanced unit; a crank-balanced unit; and a Mark II Unitorque unit. The basic differences between the four types relate to the counterbalancing system. The depth of a well and the desired fluid production determine the type of counterbalancing configuration that is required. There are numerous sizes and combinations of Lufkin oil field pumping units within the four basic types.

Service- Through a network of service centers, the Company transports and repairs pumping units. The service centers also refurbish used pumping units.

Automation- The Company designs, manufactures, installs and services computer control equipment and analytical services for pumping units that lower production costs and optimize well efficiency.

Foundry Castings- As part of the Company’s vertical integration strategy, the Oil Field segment operates an iron foundry to produce castings for new pumping units. In order to maximize utilization of this facility, castings for third parties are also produced.

Raw Materials:

Oil Field purchases a variety of raw materials in manufacturing its products. The principal raw materials are structural and plate steel, round alloy steel and iron castings from both its own foundry and third-party foundries. Casting costs are subject to change from raw material prices on scrap iron and pig iron in addition to natural gas and electricity prices. Due to the many configurations of its products and thus sizes of raw material used, Oil Field does not enter into long-term contracts for raw materials but generally does not experience shortages of raw materials.

Markets:

Demand for pumping unit equipment primarily depends on the level of onshore oil well drilling activity as well as the depth and fluid conditions of that drilling. Drilling activity is driven by the available cash flow of our customers as well as their long-term perceptions of the level and stability of the price of oil. Also, the availability of used pumping unit equipment impacts the North American market.

Competition:

The primary global competition for new pumping units and automation equipment is Weatherford. Used pumping units are also an important factor in the North American market, as customers will generally attempt to satisfy requirements through used equipment before purchasing new equipment. While the Company believes that it is one of the larger manufacturers of sucker rod pumping units in the world, manufacturers of other types of units (submersibles and hydraulics) have a significant share of the total artificial lift market. While Weatherford is the Company’s single largest competitor in the service market, small independent operators provide significant competitive pressures.

Because of the competitive nature of the business and the relative age of many of the product designs, price, delivery time, product quality and customer service are important factors in winning orders. To this end, the Company maintains strategic levels of inventories in order to ensure delivery times and invests in new capital equipment to maintain quality and price levels.

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Power Transmission

Products:

The Power Transmission segment designs, manufactures and services speed increasing and reducing gearboxes for industrial applications. Speed increasers convert lower speed and higher torque input to higher speed and lower torque output while speed reducers convert higher speed and lower torque input to lower speed and higher torque output. The Company produces numerous sizes and designs of gearboxes depending on the end use. While there are standard designs, the majority of gearboxes are customized for each application.

High-Speed Gearboxes- Gearboxes where revolutions per minute (RPM) exceed 4,000 and range up to 60,000. These gearboxes require extremely high precision manufacturing and testing due to the stresses on the gearing. The ratio of increasers to reducers is fairly even. These gearboxes more typically service the energy related markets of petrochemicals, refineries, offshore production and transmission of oil and gas.

Low-Speed Gearboxes- Gearboxes where RPM are below 4,000. The majority of low-speed gearboxes are reducers. While still requiring close tolerances, these gearboxes do not require the same precision of manufacturing and testing. These gearboxes more typically service commodity-related industries like rubber, sugar, paper, steel, plastics, mining and cement as well as marine propulsion.

Parts- The Company manufactures capital spares for customers in conjunction with the production of new gearboxes as well as producing parts for after-market service.

Repair & Service- The Company provides on and off-site repair and service for not only its own products but also those manufactured by other companies. Repair work is performed in dedicated facilities due to the high turn-around times required.

Raw Materials:

Power Transmission purchases a variety of raw materials in manufacturing its products. The principal raw materials are steel plate, round alloy steel, iron castings and steel forgings. Due to the customized nature of its products, Power Transmission generally does not enter into long-term contracts for raw materials. Though raw material shortages are infrequent, lead times can be long due to the custom nature of many of its orders.

Markets:

As noted above, Power Transmission services many diverse markets, each of which has its own unique set of drivers. Favorable conditions for one market may be unfavorable for another market. Generally, if general global industrial capacity utilizations are not high, then spending on new equipment lags. Also impacting demand are government regulations involving safety and environmental issues that can require capital spending.

Competition:

Despite the highly technical nature of this product, there are many competitors. While several North American competitors have de-emphasized the market, many European companies remain in the market. Competitors include Maag, Flender Graffenstaden, BHS, Renk, Allen Gear and Horsburgh & Scott. While price is an important factor, proven designs and workmanship are critical factors. Due to this, the Company outsources very little of the design and manufacturing processes.

Trailer

Products:

The Trailer segment manufactures and services various highway trailers for the freight-hauling market.

Vans- General-purpose dry-freight vans. These are the highest production trailer in the segment.

Floats- Flat-bed style trailers used in hauling heavier loads that do not require protection from outdoor elements.

Dumps- Trailers designed to haul bulk materials like gravel or sand.

Service- Through a network of company-owned branches, both trailers produced by the Company and by others are repaired and serviced.

Raw Materials:

Trailer purchases a variety of raw materials in manufacturing its products. The principal raw materials are aluminum, structural and plate steel, axles, suspensions, tires, plywood and hardwood flooring. Trailer has annual contracts for aluminum in order to mitigate price fluctuations, but due to the configurable nature of its products, Trailer does not have long-term purchase contracts on its other raw material purchases. However, raw material shortages are infrequent.

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Trailer (Continued)

Markets:

The Company primarily sells its products in the United States to small and medium size fleet freight-hauling companies. Demand in this market is driven by the available cash flow or financing capabilities of the industry, age of the trailer fleets, changes in government regulations, availability of quality used trailers and the medium-term outlook for freight volumes. The profitability of the freight-hauling market is driven by freight volumes, fuel prices, wage levels and insurance costs.

In the last several years, the freight-hauling market has been severely depressed due to low freight volumes and higher operating costs. This has caused many freight companies to go out of business, which has lead to the bankruptcy of some trailer manufacturers.

Competition:

The trailer market is highly competitive with relatively low barriers to entry. The majority of the cost of a new trailer comes from purchased materials of aluminum, steel, tires, axles and wood flooring. Since there is minimal product differentiation in this market, price is the key driver. The companies with the highest market share are Great Dane and Wabash, along with several other large manufacturers like Utility, Fontaine and Hyundai. The Company does not have a significant market share in the trailer market.

For additional information about the Company’s business segments and geographic areas, see Note 16 in Notes to Consolidated Financial Statements included in this report.

We make available, free of charge, through our website, www.lufkin.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Item 2. Properties

The Company’s major manufacturing facilities are located in and near Lufkin, Texas are owned in fee and include approximately 150 acres, a foundry, machine shop, structural shops, assembly shops and warehouses. Also, the Company has numerous service centers throughout the U.S. to support the oil field, power transmission and trailer markets. The majority of these locations are owned in fee, with some leased. Internationally, the Company also has facilities in Canada, Egypt and Argentina for the production and servicing of pumping units and has a plant in France that manufactures, assembles and services industrial gears and power transmission products throughout Europe.

Item 3. Legal Proceedings

A class action complaint was filed in the United States District Court for the Eastern District of Texas on March 7, 1997, by an employee and a former employee which alleged race discrimination in employment. Certification hearings were conducted in Beaumont, Texas in February of 1998 and in Lufkin, Texas in August of 1998. The District Court in April of 1999 issued a decision that certified a class for this case, which includes all persons of a certain minority employed by the Company from March 6, 1994, to the present. The Company appealed this class certification decision by the District Court to the 5th Circuit United States Court of Appeals in New Orleans, Louisiana. This appeal was denied on June 23, 1999. The Company is defending this action vigorously. Furthermore, the Company believes that the facts and the law in this action support its position and is confident that it will prevail if this case is tried on its merits. Trial for this case began in December 2003 but was postponed by the Court and is in recess until further notice.

In the case of Echometer and James N. McCoy vs. Lufkin Industries, Inc., the plaintiff filed suit in U.S. District Court alleging infringement of a fluid-level device patent and received a jury verdict on September 26, 2003, in the amount of $150,000. The trial court judge is reviewing post-trial motions before finalizing the judgment, which could materially impact the amount of the verdict. A final decision on the judgment is expected by the end of March 2004.

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

Item 4. Submission of Matters to a Vote of Security Holders

None

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PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

Common Stock Information

The Company’s common stock is traded on the NASDAQ Stock Market (National Market) under the symbol LUFK and as of February 27, 2004, there were approximately 573 record holders of its common stock.

The Company has paid cash dividends for 64 consecutive years. Total dividend payments were $ 4,714,000, $4,670,000, and $4,481,000 in 2003, 2002 and 2001, respectively.

Securities authorized for issuance under equity compensation plans at December 31, 2003, are as follows:

(a) Excludes securities reflected in the first column, “Number of securities to be issued upon exercise of outstanding options, warrants and rights”.

Item 6. Selected Financial Data

Five Year Summary of Selected Consolidated Financial Data

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Item 6. Selected Financial Data (Continued)

Quarterly Financial Data (Unaudited)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

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

In support of the above strategy, during the third quarter of 2003, the Company completed two strategic acquisitions that will expand its Oil Field segment. The Company purchased the remaining shares of Lufkin Argentina S.A., its 1992 Argentina joint venture with Baker Hughes, Inc, effective July 1, 2003. Lufkin Argentina manufactures and services oil field pumping units and automation equipment for use in Argentina and other South American countries. The Company also purchased the operating assets of Basin Technical Services in Midland, Texas on July 30, 2003. This acquisition enhances Oil Field’s product and service offerings in the oil field automation marketplace. Also, during the fourth quarter of 2003, the Company completed the acquisition on December 9, 2003, of the operating assets and commercial operations of D&R Oilfield Services located in Drayton Valley, Alberta, Canada. This acquisition within the Oilfield segment strengthens the Company’s presence in Canada’s oil field service business.

In addition, the Company expanded its Power Transmission capabilities through a new gear repair facility in Alabama that will service the Southeast U.S. and through new high-speed gearbox manufacturing capabilities in its French operation.

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 year ended December 31, 2003, increased to $262.3 million from $228.7 million for the year ended December 31, 2002, or 14.7%. Sales for 2001 were $278.9 million. This growth in 2003 was primarily driven by increased sales of new oil field equipment, new van trailers and acquisitions. The oil field market, though, has not returned to the activity levels seen in 2001. Additional segment data on sales is provided later in this section.

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Gross margin for the year ended December 31, 2003, decreased to 19.8% from 20.5% for the year ended December 31, 2002, and 24.4% for year ended December 31, 2001. This overall gross margin decline was due to increased price competition in all segments, the impact of reduced volumes on plant efficiency and utilization and reduced pension income. Additional segment data on gross margin is provided later in this section.

The changes in sales and gross margin primarily drove the changes in net earnings. The Company reported net earnings of $9.7 million or $1.46 per share (diluted) for the year ended December 31, 2003, compared to net earnings of $8.5 million or $1.26 per share (diluted) for the year ended December 31, 2002. Net income of $19.5 million or $3.03 per share (diluted) was reported for the year ended December 31, 2001.

Debt/equity (long-term debt net of current portion as a percentage of total equity) levels decreased to 0.0% at December 31, 2003, from 0.1% at December 31, 2002. Short-term debt and the current portion of long-term debt was $0.7 million at December 31, 2003, up slightly from $0.3 million at December 31, 2002. Cash balances at December 31, 2003, were $19.4 million, down from $27.6 million at December 31, 2002, due to higher capital expenditures, acquisitions and inventory levels in support of the Company’s strategies as well as certain volume-related working capital requirements.

Other Events

In October 2002, the Company experienced a two-week work stoppage by its unionized workforce at its primary manufacturing facilities in Lufkin, Texas. This work stoppage was related to health-care and pension benefit differences during contract negotiations. While certain shipments were delayed during the fourth quarter of 2002, this work stoppage did not have a significant impact on the overall results of the fourth quarter of 2002.

In the second quarter of 2003, the Company incurred a one-time severance expense of $354,000 for the lay-offs and early-retirements of certain employees. These employee reductions were related to modifying the strategy of the Trailer branch facilities to focus primarily on parts from parts and service and other targeted cost reductions in areas not achieving profitability goals. The Oil Field segment incurred $89,000, Power Transmission incurred $144,000, Trailer incurred $104,000 and Corporate incurred $17,000 of this severance expense.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002:

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

Oil Field sales increased to $144.1 million, or 21.4%, for the year ended December 31, 2003, from $118.7 million for the year ended December 31, 2002. The added sales of the acquisitions and the benefit of the stronger Canadian dollar in 2003 contributed 10.4 percentage points of this increase. The balance of the increase, 11.0 percentage points, is accounted for by increased sales of new pumping units in the U.S. from higher drilling and production activity associated with higher energy prices and increased sales of automation equipment from new product offerings. This increase was partially offset by a decline in sales of new pumping units into Canada from new drilling activity in Canada focusing on shallow wells, which use other forms of artificial lift. Oil Field’s backlog increased to $25.0 million as of December 31, 2003, from $12.6 million at December 31, 2002. This backlog increase was primarily from a $5.8 million benefit from the Argentina acquisition, increased bookings of new pumping units in the U.S. small independent market, increasing deep-well drilling activity in Canada and Foundry machine tool orders from a general improvement in the U.S. industrial markets.

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Gross margin (gross profit as a percentage of revenue) for the Oil Field segment increased to 22.6% for year ended December 31, 2003, compared to 21.1% for the year ended December 31, 2002, or 1.5 percentage points. This margin improvement was primarily the result of higher utilization of manufacturing facilities and continued cost containment efforts. This was partially offset by the 1.4 percentage point impact of reduced pension income, which is discussed at the end of this section, and severance expenses.

Direct selling, general and administrative expenses for Oil Field increased to $8.4 million, or 10.7%, for year ended December 31, 2003, 2003, from $7.6 million for the for year ended December 31, 2002. The additional expenses of Lufkin Argentina contributed 7.9% percentage points of this increase.

Sales for the Company’s Power Transmission segment increased to $74.6 million, or 5.9%, for the year ended December 31, 2003, compared to $70.5 million for the year ended December 31, 2002. The benefit of the stronger euro on the sales of the French division contributed 3.8 percentage points of this increase. The additional 2.1 percentage points of growth was the result of increased sales in the French operation, in euros, due to the addition of the high-speed product line and increased sales in the U.S. from new high-speed units to the oil and gas markets and the gear repair expansion in the Southeast U.S. These gains were partially offset by a drop in sales in new low-speed units to the rubber market due to capital spending restraints from poor market conditions in the tire industry. The Company’s Power Transmission backlog at December 31, 2003, decreased to $24.8 million from $30.9 million at December 31, 2002. This backlog decline was from lower orders of new high-speed units in the oil and gas market due to short-term project delays and price competition and lower orders in the power generation market from limited capital expansion activity.

Gross margin for the Power Transmission segment decreased to 26.0% for the year ended December 31, 2003, compared to 27.8% for the year ended December 31, 2002, or 1.8 percentage points. This decline was due to lower margins on new high-speed units in the U.S. from several large project orders comprising multiple units, which are typically more competitive and price-sensitive and the 1.4 percentage point impact of reduced pension income and severance expenses.

Direct selling, general and administrative expenses for Power Transmission increased to $11.9 million, or 17.0%, for the year ended December 31, 2003, from $10.2 million for the year ended December 31, 2002. Of this increase, the stronger euro contributed 7.2 percentage points. The balance of the increase was due to higher third-party commissions in the U.S. associated with the above-mentioned large project orders, higher engineering expenses in France in support of the new high-speed product line and increased selling effort in the gear repair market.

Trailer sales for the year ended December 31, 2003, increased to $43.5 million, or 10.1%, from $39.6 million for the year ended December 31, 2002. This growth was negatively impacted by 5.8 percentage points from the change of strategy, implemented in the second quarter of 2003, of its branch locations to focus primarily on parts sales instead of parts and service. The 15.9 percentage point increase in other trailer sales was primarily from increased sales of new vans as higher U.S. freight tonnage has led to more orders from freight-haulers and increased sales of floats due to the introduction of a new model. These increases were partially offset by a decline in sales of dump trailers as orders from the construction market have been weak. Backlog for the Trailer segment totaled $11.1 million at December 31, 2003, compared to $10.1 million at December 31, 2002. The backlog increase was primarily from floats due to the growth in demand for the new model.

Trailer gross margin declined to 0.1% for the year ended December 31, 2003, from 5.9% for the year ended December 31, 2002, or 5.8 percentage points This margin decline was due to continued pricing pressure on all models of trailers in the depressed freight-hauling market and the 3.1 percentage point impact of reduced pension income and severance expenses.

Direct selling, general and administrative expenses for Trailer increased to $2.1 million, or 36.1%, for the year ended December 31, 2003, from $1.5 million for the year ended December 31, 2002, due to an increase in general liability insurance claims. While insurance claim filings cannot be accurately forecasted, this increase is not expected to recur on an ongoing and regular basis.

Corporate administrative expenses, which are allocated to the segments primarily based on sales, increased to $15.2 million, or 7.3%, for the year ended December 31, 2003, from $14.2 million for the year ended December 31, 2002, primarily due to higher legal expenses associated with the Echometer trial in September of 2003 and the class action trial in December of 2003.

Investment income, interest expense and other income and expense for the year ended December 31, 2003, totaled $1.2 million of income compared to income of $0.4 million for the year ended December 31, 2002. The increase was due primarily to the one-time gain of almost $1,000,000 on the sale of the Company’s twenty-year old aircraft, partially offset by lower interest income from lower cash balances.

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Pension income, which is reported as a reduction of cost of sales, declined to $1.8 million for the year ended December 31, 2003, or 65.1%, compared to $5.3 million for the year ended December 31, 2002. This decline was primarily due to lower expected returns on plan assets due to the lower fair market value of the plan assets. Pension income in 2004 is expected to increase to approximately $3.0 million due to higher fair market value of the plan assets increasing the expected return. In deriving this forecast, the Company reviewed its assumptions for 2004 and lowered the discount rate to 6.25% from 6.75%, the expected long-term return on assets to 8.50% from 8.75% and the compensation rate increase to 4.25% from 4.50%.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001:

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