I got a first look at engine-oil lubricants maker Lubrizol (NYSE:LZ) after coming across last night's earnings release.

The news was bad: The company lowered its earnings-per-share guidance for 2003, saying it has experienced -- and expects to continue experiencing, through year-end -- weakened demand for its products. A look behind this quick snippet reveals a company with appealing cash flow and financial dynamics facing serious challenges as a business.

About 80% of Ohio-based Lubrizol's sales is tied to additives used in engine oils. Its customers are generally oil refiners and oil blenders -- none of which hold undue sway over its revenues. (More details on this, as well as the information in the next paragraph, are laid out in the company's 10-K.)

Lubrizol has a large and diverse group of competitors, though among the notables -- in the transportation segment, anyway -- are Infineum, Chevron Oronite, and Ethyl Corp. (NYSE:EY). Infineum is a joint venture between Exxon Mobil (NYSE:XOM) and the Shell Oil partnership between Royal Dutch Petroleum (NYSE:RD) and Shell Transport and Trading (NYSE:SC), while Chevron Oronite is part of ChevronTexaco (NYSE:CVX).

OK, so the business isn't the most exciting on the planet, but the company knows how to perform. Operating margins improved to more than 10% in 2002, providing plenty of net income. The picture looks even better from there, as cash flow from operations routinely comes in at more than twice net income. When the "machine" is firing smoothly, the company generates hefty free cash flow.

Investors in Lubrizol's shares have had a pretty wild ride these past five years, but the business continued to churn out cash all the while. That said, it's no big surprise investors sold today: Several significant challenges -- including rising raw material and manufacturing costs, competitive pressures, and the loss of a major international customer in the first quarter -- continue to dog the company.

Quality companies are often unfairly hurt in day-to-day trading. In Lubrizol's case, however, it appears today's loss is deserved. Should the aforementioned problems continue, the company's cash flow history will be less and less useful as an indicator of its quality.

Dave Marino-Nachison doesn't own shares of any of the companies mentioned in this article. He can be reached at dmarnach@fool.com.