Exhibit 10.22


    

      Exhibit
        10.22

      


      AMENDED
        AND RESTATED

      


      EMPLOYMENT
        AGREEMENT 

      


      THIS
        AMENDED AND RESTATED EMPLOYMENT AGREEMENT
        (“Agreement”) is made and entered into effective as of January 1, 1999 (the
“Effective Date”), by and between LUFKIN
        INDUSTRIES, INC.,
        a
        Texas corporation (the “Company”), and DOUGLAS
        V. SMITH
        of
        Lufkin, Texas (the “Executive”).

      


      WHEREAS,
        the
        Company wishes to continue the employment of the Executive as president and
        Chief Executive Officer of the Company, under the terms and conditions set
        forth
        herein;

      


      WHEREAS,
        the
        Executive wishes to continue his employment under those terms and conditions;
        and

      


      WHEREAS,
        the
        Company and the Executive (the “Parties”) previously entered into an Employment
        Agreement dated as of January 1, 1995 and they desire to amend and restate
        said
        Employment Agreement as provided herein;

      


      NOW,
        THEREFORE,
        in
        consideration of the premises and mutual covenants contained herein, and
        for
        other consideration mutually acknowledged, the Parties agree as
        follows:

      


      1. Employment.

      


      The
        Company hereby agrees to continue to employ the Executive, and the Executive
        hereby agrees to continue his employment with the Company, for the term set
        forth in Section 2 below, in the positions and with the duties and
        responsibilities set forth in Section 3 below, at an office location in Lufkin,
        Texas or such other location as the Parties may mutually agree, and upon
        such
        other terms and conditions as are hereinafter stated.

      


      2. Terms.

      


      Subject
        to renewal as hereinafter provided in this Section 2, the amended term of
        the
        Executive’s employment with the Company (the “Term”) shall commence on the
        Effective Date and shall continue through the third annual anniversary of
        the
        Effective Date, unless sooner terminated in accordance with the terms and
        provisions hereinafter set forth. The Term shall be automatically renewed
        and
        extended for a period of twelve (12) months commencing on the first annual
        anniversary of the Effective Date and on each successive annual anniversary
        thereafter unless the Company shall give the Executive written notice, at
        least
        sixty (60) days prior to the first annual anniversary (or, if previously
        renewed
        and extended, at least sixty (60) days prior to any succeeding annual
        anniversary) of the Effective Date of this Agreement, of the Company’s desire
        not to renew this Agreement. The Executive shall, unless requested otherwise
        by
        the Company, remain in the employ of the Company during the entirety of the
        remaining Term.

      


      3. Position
        and Duties.

      


      
        	 	
                (a)

              	
                During
                  the Term, the Executive shall serve as President and Chief Executive
                  Officer of the Company reporting directly to the Board of Directors
                  of the
                  Company. During the Term, the Company shall cause the Executive
                  to be
                  nominated for election as the Chairman of the Board of Directors
                  of the
                  Company and shall use its reasonable best efforts to secure such
                  election.

              
	 	
                (b)

              	
                While
                  employed hereunder, the Executive shall devote his full business
                  time and
                  attention to the operations and activities of the Company, and
                  shall not
                  be employed by, consult with or otherwise render services to, any
                  other
                  business, except with the consent of the Board of Directors of
                  the
                  Company. The foregoing notwithstanding, the Parties recognize and
                  agree
                  that the Executive may engage in passive personal investments and
                  other
                  business, industry, civic and charitable activities that do not
                  conflict
                  with the business and affairs of the Company or interfere with
                  the
                  Executive’s performance of his duties
                  hereunder.

              


      

      


      4. Compensation
        and Benefits.

      


      
        	 	
                (a)

              	
                Salary.
                  The Company shall pay the Executive a base salary (“Salary”) at an annual
                  rate of $360,000 (the “Base Rate”). Salary shall be payable in accordance
                  with the Company’s payroll practices. The Compensation Committee of the
                  Board of Directors of the Company (the “Committee”) shall review with the
                  Executive the Salary during February of each year in the Term,
                  and may
                  adjust such Salary in its sole discretion, provided that such Salary
                  shall
                  never be at an annual rate less than the Base Rate.

              
	 	
                (b)

              	
                Bonus.
                  The Executive will have an opportunity to receive a bonus with
                  respect to
                  each year during the Term; provided, however, that the maximum
                  annual
                  bonus opportunity for each such year shall not be less than one
                  hundred
                  percent (100%) of the Executive’s Salary for the bonus year. The level or
                  levels of the annual bonus for each year during the Term and the
                  criteria
                  for entitlement to such level or levels shall be reasonable and
                  reflective
                  of industry norms as shall be determined in good faith by the Company
                  with
                  the advice and counsel of competent compensation consultants of
                  the
                  Company’s choosing who shall currently review such data as may be
                  available with respect to bonuses that are made available to similarly
                  situated executives of companies that are in the same industry
                  and are
                  approximately the same size (based on sales) as the Company. The
                  bonus for
                  any bonus year during the Term shall be paid at the time bonuses
                  for such
                  year are generally paid under the Company’s bonus program and shall be in
                  the form of a lump sum cash payment.

              
	 	
                (c)

              	
                Stock
                  Options.
                  On the date of the first regular meeting of the Committee which
                  occurs
                  each calendar year during the Term, the Company shall grant the
                  Executive
                  a ten- year stock option under the Company’s 1990 Stock Option Plan or any
                  successor or other plan maintained by the Company (“Stock Plan”). With
                  respect to any Stock Plan under which the Executive is granted
                  options to
                  purchase shares of the Company’s common stock reserved thereunder at any
                  time when such stock is publicly traded (i) on a national securities
                  exchange on which such stock is listed or (ii) over the counter
                  on an
                  established market, prior to such time as options granted under
                  the Stock
                  Plan to the Executive are first exercisable, the Company shall
                  register
                  the interests in the Stock Plan and the shares of the Company’s common
                  stock reserved thereunder under all applicable securities laws.
                  On the
                  date of the first regular meeting of the Committee in 1999, 2000,
                  2001 and
                  any subsequent year during the Term, the Company shall grant the
                  Executive
                  an additional ten-year option under the Company’s Stock Plan (or any
                  successor plan) to purchase a number of shares of the Company’s common
                  stock not less than that number (rounded up to the next full number)
                  which
                  is equal to the Executive’s Base Rate on such grant date multiplied by 2.5
                  which product shall be divided by the fair market value of a share
                  of
                  common stock (as defined in the Stock Plan) on such date. Each
                  option
                  granted hereunder shall provide that it shall not terminate prior
                  to the
                  expiration of its ten-year term unless the Company terminates the
                  Executive’s employment for Cause and no less than one-third of the
                  Company’s common stock subject to the option shall be cumulatively
                  exercisable on the date of the grant and on each of the succeeding
                  two
                  anniversaries so that after the second anniversary of the grant
                  date of
                  the option the Executive (or his representative or estate, as applicable)
                  may exercise any unexercised portion of such option throughout
                  the
                  remainder of the option’s ten-year term. Subject to the preceding
                  provisions of this Section 4(c), the form and other terms and conditions
                  of such options shall be substantially as set forth in Exhibit
                  A, “Lufkin
                  Industries, Inc. Stock Option Agreement” attached to and forming a part of
                  this Agreement.

              
	 	
                (d)

              	
                Employee
                  Benefit Programs.
                  During the Term, the Executive shall be entitled to participate
                  in all
                  employee benefit programs of the Company as in effect from time
                  to time
                  and in which the Company’s senior executives are eligible to participate,
                  provided that, with respect to all plans other than plans subject
                  to
                  nondiscrimination rules under Section 79, 105(h), 125, 129 or 401(a)
                  of
                  the Internal Revenue Code of 1986, as amended (the “Code”), any minimum
                  service requirement shall be waived. In addition, the Company shall
                  continue to maintain a nonqualified supplemental executive retirement
                  plan
                  (the “SERP”) in which the Executive shall continue to participate
                  effective from and after the Effective Date and for the remainder
                  of the
                  Term, including any extensions thereof, with terms substantially
                  the same
                  as those set forth in the Lufkin Industries, Inc. Supplemental
                  Retirement
                  Plan attached hereto as Exhibit B.

              
	 	
                (e)

              	
                Other
                  Benefits.
                  During his employment hereunder, the Executive shall be afforded
                  each and
                  every one of the following benefits as incidences of his
                  employment:

              
	 	 	
                (i)

              	
                Company
                  automobile - the Company will provide to the Executive for his
                  personal
                  and business use a top-of-the-line automobile, and shall provide,
                  or
                  reimburse the Executive for, maintenance and insurance (liability
                  and
                  collision coverage insuring both the Company and the Executive
                  and
                  covering both business and personal use) for such automobile. Such
                  automobile shall be owned or leased by the Company, and, if requested
                  by
                  the Executive, shall be replaced not less frequently than three
                  (3) years
                  after the date the automobile was provided to the Executive by
                  the
                  Company.

              
	 	 	
                (ii)

              	
                Business
                  and entertainment expenses - the Company will reimburse the Executive
                  for,
                  or pay on behalf of the Executive, reasonable and appropriate expenses
                  incurred by the Executive for business related purposes, including
                  dues
                  and fees to industry and professional organizations, costs of
                  entertainment and business development, and costs reasonably incurred
                  as a
                  result of the Executive’s wife accompanying the Executive on business
                  travel.

              
	 	 	
                (iii)

              	
                Club
                  memberships - in addition to the other business and entertainment
                  expenses
                  reimbursable pursuant to item (ii) above, the Company shall pay
                  membership
                  fees, dues and assessments for (a) one country club located in
                  Angelina
                  County, Texas, to be selected by the Executive, (b) one luncheon
                  club
                  located in Houston, Texas, to be selected by the Executive, and
                  (c) such
                  other luncheon or country club memberships as the Board of Directors
                  of
                  the Company may deem to be justified by business usage.

              
	 	 	
                (iv)

              	
                Annual
                  physical examination - the Company shall pay for the cost of an
                  annual
                  physical examination to be conducted by a doctor or clinic of the
                  Executive’s choosing in Houston, Texas or in Lufkin,
                  Texas.

              
	 	 	
                (v)

              	
                Life
                  insurance - the Company will provide, or cause to be provided,
                  to the
                  Executive, at no cost to the Executive, term life insurance coverage
                  equal
                  to twice the Executive’s Salary. Proceeds of such insurance shall be
                  payable to a beneficiary to be designated in writing by the
                  Executive.

              
	 	 	
                (vi)

              	
                Tax
                  preparation expenses - the Company will reimburse the Executive
                  for
                  expenses incurred by him in connection with the preparation of
                  his federal
                  income tax return up to a maximum of $3,000 per
                  year.

              


      

      


      5. Termination
        of Employment.

      


      The
        Executive’s employment is subject to termination during the Term only as
        provided in this Section 5.

      


      5.1 Death
        or Disability.

      


      If
        the
        Executive’s employment is terminated due to his death or total disability, as
        determined under the Company’s applicable long-term disability plan,
        then:

      


      
        	 	 	
                (i)

              	
                The
                  Executive (or his estate) shall be entitled to receive salary and
                  benefit
                  coverages for a period of six months from and after the date of
                  termination of employment; and

              
	 	 	
                (ii)

              	
                The
                  Executive (or his estate) shall be entitled to a bonus payment
                  for the
                  year in which termination occurs equal to the bonus amount paid
                  or payable
                  by the Company to the Executive for the immediately preceding bonus
                  year
                  prorated to reflect the actual number of full weeks worked during
                  the year
                  in which the Executive’s employment terminates; and

              
	 	 	
                (iii)

              	
                The
                  Executive (or his estate) shall be entitled to the pension provided
                  under
                  the SERP as described in Section 4(d)
                  above.

              


      

      


      5.2 Termination
        by the Company without Cause.

      


      The
        Company may terminate the Executive’s employment at any time without Cause as
        such term is defined in Section 5.3 below, in which case:

      


      
        	 	 	
                (i)

              	
                The
                  Executive shall be paid a lump sum cash payment, payable within
                  30 days of
                  his termination of employment, equal to the total Salary which
                  would have
                  been paid to him under this Agreement for the remainder of the
                  Term, based
                  on a Salary rate equal to the greater of (A) the rate in effect
                  on the
                  Effective Date, or (B) the rate in effect on termination of his
                  employment; and

              
	 	 	 	 
	 	 	
                (ii)

              	
                The
                  Executive shall be entitled to a lump sum payment, payable within
                  30 days
                  of his termination of employment, equal to the amount of annual
                  bonuses
                  which would have been paid to him under this Agreement for the
                  remainder
                  of the Term based upon the bonus rate per annum that is equal to
                  the bonus
                  paid or payable by the Company to the Executive for the immediately
                  preceding bonus year; and

              
	 	 	 	 
	 	 	
                (iii)

              	
                The
                  Executive shall be entitled to the pension provided under the SERF
                  as
                  described in Section 4(d) above;

              
	 	 	 	 
	 	 	
                (iv)

              	
                Benefits
                  (as described in Sections 4(d), other than the pension provided
                  under the
                  SERF that are payable upon termination of employment, and 4(e)
                  above)
                  shall continue to be provided to the Executive by the Company during
                  the
                  period of Salary continuation described in item (i) above as if
                  the
                  Executive’s employment had continued for the remainder of the Term;
                  provided, however, that to the extent any such benefit cannot be
                  continued
                  as a matter of law during the remaining period of the Term because
                  the
                  Executive is no longer employed by the Company, the Company shall
                  pay the
                  Executive an amount equal to the economic value of such benefit
                  at the
                  same rate or level and at the same time as such benefit was provided
                  or
                  available at the time the benefit was required as a matter of law
                  to be
                  discontinued because the Executive ceased to be employed by the
                  Company
                  and; provided, further, that any such benefit shall be discontinued,
                  if
                  earlier, on the date that the Executive becomes entitled to coverage
                  for a
                  substantially equivalent rate or level of a comparable benefit
                  as a result
                  of his employment by a successor
                  employer.

              


      

      


      5.3 Termination
        by the Company for Cause.

      


      If
        the
        Company terminates the Executive’s employment for Cause, as defined in this
        Agreement, the Executive shall be entitled only to Salary, and any benefits,
        accrued as of the effective date of termination. Any other benefits shall
        be
        determined under applicable plans, programs or other coverages of the Company.
        For purposes of this Agreement, the term “Cause” shall mean:

      


      
        	 	 	
                (i)

              	
                the
                  Executive’s conviction for, or plea of nolo contendere to, a felony;
                  or

              
	 	 	
                (ii)

              	
                the
                  commission by the Executive of an act involving fraud or intentional
                  dishonesty, which act is intended to result in substantial personal
                  enrichment of the Executive at the expense of the Company or any
                  of its
                  subsidiaries; or

              
	 	 	
                (iii)

              	
                the
                  Executive’s material breach of any material provision of this Agreement
                  which remains uncorrected for 30 days after written notice and
                  an
                  opportunity to correct; or

              
	 	 	
                (iv)

              	
                the
                  Executive’s knowing and willful misconduct in the performance of his
                  duties, which continues for 30 days after written notice from the
                  Company
                  and which results in material injury to the reputation, business
                  or
                  operation of the Company or any of its
                  subsidiaries.

              


      

      


      The
        existence of “Cause” shall be determined by an affirmative vote of not less than
        two- thirds of the members of the Board of Directors of the Company. If the
        requisite affirmative vote by two thirds of the members of the Board of
        Directors of the Company is not obtained, any termination of the Executive’s
        employment by the Company shall be deemed to be a termination by the Company
        without Cause.

      


      5.4  Voluntary
        Termination by the Executive Without Good Reason.

      


      The
        Executive may terminate his employment at any time without Good Reason (as
        such
        term is defined in Section 5.5 below) on 30 days written notice, in which
        case
        the Executive shall be entitled only to his Salary earned through the effective
        date of termination and any benefits accrued as of the effective date of
        termination as determined under applicable plans, programs or other coverages
        of
        the Company.

      


      5.5 Termination
        of the Executive for Good Reason.

      


      In
        the
        event the Executive’s employment by the Company is terminated by the Executive
        for Good Reason, as defined in this Section 5.5, such termination shall be
        deemed to be a termination by the Company of the Executive’s employment without
        Cause, as such term is defined in Section 5.3 above, in which case the Executive
        shall be entitled to the benefits described in Section 5.2 of this Agreement.
        For purposes of this Agreement, the term “Good Reason” shall mean any one of the
        following shall have occurred and shall not been corrected within thirty
        days
        following written notice by the Executive to the Company:

      


      
        	 	 	
                (i)

              	
                the
                  assignment to the Executive of any duties inconsistent in any respect
                  with
                  the Executive’s position (including status, offices, titles and reporting
                  requirements), authority, duties or responsibilities as contemplated
                  by
                  Section 3 of this Agreement, or any other action by the Company;
                  or any
                  affiliate which results in a diminution in such position, authority,
                  duties or responsibilities, excluding for this purpose an isolated,
                  insubstantial and inadvertent action not taken in bad faith and
                  which is
                  remedied by the Company promptly after receipt of written notice
                  thereof
                  given by the Executive; or

              
	 	 	
                (ii)

              	
                any
                  failure by the Company to comply with any of the provisions of
                  Section 3
                  of this Agreement, other than an isolated, insubstantial and inadvertent
                  failure not occurring in bad faith which is remedied by the Company
                  promptly after receipt of written notice thereof given by the Executive;
                  or

              
	 	 	
                (iii)

              	
                the
                  Company’s requiring the Executive to be based at any office or location
                  other than that described in Section 1 hereof, except for travel
                  reasonably required in the performance of the Executive’s
                  responsibilities; or

              
	 	 	
                (iv)

              	
                any
                  purported termination by the Company of the Executive’s employment
                  otherwise than as expressly permitted by this
                  Agreement.

              


      

      


      For
        purposes of this Section 5.5, any good faith determination of “Good Reason” made
        by the Executive shall be final and binding upon the Parties, unless, within
        thirty days following the Executive’s providing written notice to the Company
        under the first sentence of this Section 5.5, not less than two-thirds of
        the
        members of the Board of Directors of the Company affirmatively votes not
        to
        confirm the Executive’s determination that such termination is for Good Reason.
        If two-thirds of the members of the Board of Directors of the Company
        affirmatively vote not to confirm the Executive’s determination that such
        termination is for Good Reason, any termination by the Executive of his
        employment by the Company shall be deemed to be a termination by the Executive
        without Good Reason.

      


      6. Non-Competition.

      


      During
        the term of his employment hereunder, and, for the period extending to the
        first
        anniversary of his termination of employment for any reason other than
        termination of the Executive’s employment by the Company without Cause or
        termination of the Executive’s employment by the Executive for Good Reason (the
“No-Compete Period”), the Executive shall not, directly or indirectly, manage,
        control, participate in, consult with, render services to, or in any manner
        engage in any pumping unit or gear manufacturing business (the “Subject
        Businesses”) with (any such action to be referred to as an “Association” with)
        any person, corporation, partnership, trust or other business organization
        (any
        such person or entity to be referred to as a “Person”) if such business is
        directly competitive with the Subject Businesses of the Company; provided,
        however, that the foregoing shall not restrict the Executive from having
        an
        Association with a Person that is engaged in the Subject Businesses so long
        as
        the Executive is not personally involved in a material respect in the Subject
        Businesses of such Person, it being understood that an indirect supervisory
        role
        of a Subject Business and other businesses of such Person shall not constitute
        involvement in a material respect. If any court having jurisdiction determines
        that the provisions of this Section 6 are not enforceable to the fullest
        extent,
        because of the provisions as to the time period, the geographical area or
        the
        scope of activity covered, the Parties agree that such court may narrow any
        such
        provision as the court deems necessary to enforceability, and this Section
        6
        shall be enforced as so narrowed.

      


      The
        Executive acknowledges that monetary damages would not constitute an adequate
        remedy for the Company in the event of a breach of this Section 6, and he
        therefore agrees that the Company shall be entitled to injunctive or other
        equitable relief for the enforcement hereof. However, in no event shall an
        asserted violation of the provisions of this Section 6 constitute a basis
        for
        deferring or withholding any amounts otherwise payable to the Executive under
        this Agreement.

      


      7. Confidential
        Information.

      


      The
        Executive shall not, at any time, except in good faith in the performance
        of his
        duties for the Company, divulge any trade secrets or other proprietary or
        confidential information concerning the accounts, business or affairs of
        the
        Company, which shall have been obtained by the Executive during the Executive’s
        employment by the Company and which shall not be or become public knowledge
        other than by acts of the Executive in violation of this Agreement (except
        such
        information as is required by law or legal process to be divulged, in which
        case
        he shall give the Company prompt notice of such required disclosure and use
        his
        reasonable best efforts, in cooperation with the Company, to defend against
        any
        such required disclosure). However, in no event shall an asserted violation
        of
        the provisions of this Section 7 constitute a basis for deferring or withholding
        any amounts otherwise payable to the Executive under this
        Agreement.

      


      8. Indemnification.

      


      8.1 If
        at any
        time the Executive is a party or is threatened to be made a party to any
        threatened, pending or completed action, suit or proceeding, whether civil,
        criminal, administrative or investigative, by reason of the fact that he
        is or
        was a director, officer, employee or agent of the Company, or is or was serving
        at the request of the Company as a director, officer, employee or agent of
        another corporation, partnership, joint venture, trust, employee benefit
        plan or
        other enterprise, the Company shall indemnify the Executive and hold him
        harmless against reasonable expenses (including attorneys’ fees), judgments,
        fines, penalties, amounts paid in settlement and other liabilities actually
        and
        reasonably incurred by him in connection with such action, suit or proceeding
        to
        the full extent permitted by law.

      


      8.2 Expenses
        (including attorneys’ fees) incurred by the Executive in appearing at,
        participating in, or defending any threatened, pending or completed action,
        suit
        or proceeding, whether civil, criminal, administrative or investigative,
        shall
        be paid by the Company at reasonable intervals in advance of the final
        disposition of such action, suit or proceeding upon receipt of an undertaking
        by
        the Executive to repay such amounts if it shall ultimately be determined
        that he
        is not entitled to be indemnified.

      


      8.3 All
        claims for indemnification under this Agreement shall be asserted and resolved
        as is set forth below in this Section 8.3.

      


      
        	 	
                (a)

              	
                The
                  Executive (i) shall promptly notify the Company of any third-party
                  claim
                  or claims asserted against him (“Third Party Claim”) that could give rise
                  to a right of indemnification under this Agreement and (ii) shall
                  transmit
                  to the Company a written notice (“Claim Notice”) describing in reasonable
                  detail the nature of the Third Party Claim, a copy of all papers
                  served
                  with respect to such claim (if any), and the basis of his request
                  for
                  indemnification under this Agreement.

              
	 	
                (b)

              	
                Within
                  30 days after receipt of any Claim Notice (“Election Period”), the Company
                  shall notify the Executive (i) whether the Company disputes its
                  potential
                  liability to the Executive under this Section 8 with respect to
                  such Third
                  Party Claim and (ii) whether the Company desires, at its sole cost
                  and
                  expense, to defend the Executive against such Third Party Claim
                  by any
                  appropriate proceedings, which proceedings shall be prosecuted
                  diligently
                  by the Company to a final conclusion or settled at the discretion
                  of the
                  Company in accordance with this Subsection 8.3(b). The Company
                  shall have
                  full control of such defense and proceedings, including any compromise
                  or
                  settlement thereof. The Executive is hereby authorized, at the
                  Company’s
                  sole cost and expense (but only if he is actually entitled to
                  indemnification hereunder or if the Company assumes the defense
                  with
                  respect to the Third Party Claim), to file, during the Election
                  Period,
                  any motion, answer or other pleadings which he shall deem necessary
                  or
                  appropriate to protect his interests or those of the Company and
                  not
                  prejudicial to the Company. If requested by the Company, the Executive
                  agrees, at the Company’s sole cost and expense, to cooperate with the
                  Company and its counsel in contesting any Third Party Claim that
                  the
                  Company elects to contest, including without limitation, through
                  the
                  making of any related counterclaim against the person asserting
                  the Third
                  Party Claim or any cross-complaint against any person. The Executive
                  may
                  participate in but not control, any defense or settlement of any
                  Third
                  Party Claim controlled by the Company pursuant to this Section
                  8.3 and the
                  Company shall bear his costs and expenses with respect to such
                  participation.

              
	 	
                (c)

              	
                If
                  the Company fails to notify the Executive within the Election Period
                  that
                  the Company elects to defend the Executive pursuant to Subsection
                  8.3(b),
                  or if the Company elects to defend the Executive pursuant to Subsection
                  8.3(b) but fails to diligently and promptly prosecute or settle
                  the Third
                  Party Claim, then the Executive shall have the right to defend,
                  at the
                  sole cost and expense of the Company, the Third Party Claim. The
                  Executive
                  shall have full control of such defense and proceedings; provided,
                  however, that the Executive may not enter into, without the Company’s
                  consent, which shall not be unreasonably withheld, any compromise
                  or
                  settlement of such Third Party Claim. Notwithstanding the foregoing,
                  if
                  the Company has delivered a written notice to the Executive to
                  the effect
                  that the Company disputes its potential liability to the Executive
                  under
                  this Section 8, and if such dispute is resolved in favor of the
                  Company by
                  final, nonappealable order of a court of competent jurisdiction,
                  the
                  Company shall not be required to bear the costs and expenses of
                  the
                  Executive’s defense pursuant to this Section 8 or of the Company’s
                  participation therein at the Executive’s request, and the Executive shall
                  reimburse the Company promptly in full for all costs and expenses
                  of such
                  litigation. The Company may participate in, but not control, any
                  defense
                  or settlement controlled by the Executive pursuant to this Section
                  8.3(c),
                  and the Company shall bear its own costs and expenses with respect
                  to such
                  participation.

              
	 	
                (d)

              	
                The
                  indemnification provided by this Section 8 shall apply whether
                  or not the
                  negligence of a party is alleged or
                  proved.

              


      

      


      


      9. Withholding. 

      


      Anything
        to the contrary notwithstanding, all payments required to be made by the
        Company
        hereunder to the Executive, his spouse, his estate or beneficiaries, shall
        be
        subject to withholding of such amounts relating to taxes as the Company may
        reasonably determine it should withhold pursuant to any applicable law or
        regulation. In lieu of withholding such amounts in whole or in part, the
        Company
        may, in its sole discretion, accept other provisions for payment of taxes
        as
        required by law, provided it is satisfied that all requirements of law affecting
        its responsibilities to withhold such taxes have been satisfied.

      


      10. Assignability;
        Binding Nature.

      


      This
        Agreement is binding upon, and shall inure to the benefit of; the Parties
        hereto
        and their respective successors, heirs, administrators, executors and assigns.
        No rights or obligations of the Executive under this Agreement may be assigned
        or transferred by the Executive except that (i) his rights to compensation
        and
        benefits hereunder, which rights shall remain subject to the limitations
        of this
        Agreement, may be transferred by will or operation of law, and (ii) his rights
        under employee benefit plans or programs as referred to in Section 4, above,
        may
        be assigned or transferred in accordance with such plans or programs. No
        rights
        or obligations of the Company under this Agreement may be assigned or
        transferred except that such rights or obligations may be assigned or
        transferred by operation of law in the event of a merger or consolidation
        in
        which the Company is not the continuing entity, or the sale or liquidation
        of
        all or substantially all of the assets of the Company, provided that the
        assignee or transferee is the successor to all or substantially all of the
        assets of the Company and such assignee or transferee assumes the liabilities,
        obligations and duties of the Company, as contained in this Agreement, either
        contractually or as a matter of law.

      


      11. Effect
        of Agreement.

      


      This
        Agreement contains the entire agreement between the Parties concerning the
        subject matter hereof and supersedes all prior agreements, understandings,
        discussions, negotiations, and undertakings, whether written or oral, between
        the Parties with respect thereto. However, the Parties acknowledge having
        entered into a Severance Agreement as of January 16, 1993 (the “Severance
        Agreement”), and it is understood that such Severance Agreement is independent
        of this Agreement. In the event of a Change in Control of the Company, as
        defined in the Severance Agreement, then, notwithstanding any other provision
        hereof; this Agreement shall terminate and be superseded by the Severance
        Agreement.

      


      12. Amendments
        and Waivers.

      


      This
        Agreement may not be modified or amended except by a writing signed by both
        Parties. A Party may waive compliance by the other Party with any term or
        provision of this Agreement, or any part thereof; provided that the term
        or
        provision, or part thereof; is for the benefit of the waiving Party. Any
        waiver
        shall be limited to the facts or circumstances giving rise to the noncompliance
        and shall not be deemed either a general waiver or modification with respect
        to
        the term or provision, or part thereof; being waived, or as to any other
        term or
        provision of this Agreement, nor shall it be deemed a waiver of compliance
        with
        respect to any other facts or circumstances then or thereafter
        occurring.

      


      13. Mediation
        and Legal Actions.

      


      If
        a
        dispute arises out of or related to this Agreement or its breach arid if
        the
        dispute cannot be settled through direct discussions, then the Company and
        the
        Executive agree first to endeavor to settle the dispute in an amicable manner
        by
        mediation, under the applicable provisions of Sec. 154.001 et seq. Texas
        Civil
        Practices & Remedies Code, as supplemented by the mediation rules of the
        American Arbitration Association, before having recourse to any other proceeding
        or forum. If any Party to this Agreement brings legal action to enforce the
        terms of this Agreement against another Party to this Agreement, except as
        may
        otherwise be ordered by the court or other forum, each such Party shall be
        liable for his or its own expenses incurred in such legal action including
        costs
        of court or other forum and the fees and expenses of counsel.

      


      14. Notices.

      


      Any
        notice given hereunder shall be in writing and shall be deemed given when
        delivered personally or by courier, or five days after being mailed, certified
        or registered mail, duly addressed to the Party concerned at the address
        indicated below or at such other address as such Party may subsequently
        provide:

      


      
        	 	
                To
                  the Company:

              	
                Lufkin
                  Industries, Inc.

                601
                  South Raguet

                Lufkin,
                  Texas 75901

                Attn:
                  Secretary

              
	 	
                with
                  a copy to:

              	
                ________________

                Andrews
                  Kurth, LLP

                ________________

                ________________

              
	 	
                 

                To
                  the Executive:

              	
                 

                Mr.
                  Douglas W. Smith

                2210
                  Copeland Street

                Lufkin,
                  Texas 75901

              


      

      


      15. Severability.

      


      In
        the
        event that any provision or portion of this Agreement shall be determined
        to be
        invalid or unenforceable for any reason, the remaining provisions or portions
        of
        this Agreement shall be unaffected thereby and shall remain in full force
        and
        effect to the fullest extent permitted by law.

      


      16. Survivorship.

      


      The
        respective rights and obligations of the Parties hereunder shall survive
        any
        termination of this Agreement to the extent necessary to the intended
        preservation of such rights and obligations.

      


      17. References.

      


      In
        the
        event of the Executive’s death or a judicial determination of his incompetence,
        reference in this Agreement to the Executive shall be deemed, where appropriate,
        to refer to his legal representative or, where appropriate, to his beneficiary
        or beneficiaries.

      


      18. Governing
        Law.

      


      THIS
        AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE
        WITH
        THE LAWS OF THE STATE OF TEXAS WITHOUT REFERENCE TO THE PRINCIPLES OF CONFLICTS
        OF LAW.

      


      19. Legal
        Fees.

      


      The
        Company promptly shall reimburse the Executive for all of his reasonable
        legal
        fees and expenses incurred in connection with the negotiation and documentation
        of this Agreement.

      


      20. Mitigation.

      


      In
        no
        event shall the Executive be obligated to seek other employment or take any
        other action by way of mitigation of the amounts payable to the Executive
        under
        any of the provisions of this Agreement.

      


      21. Headings.

      


      The
        headings of paragraphs contained in this Agreement are for convenience only
        and
        shall not be deemed to control or affect the meaning or construction of any
        provision of this Agreement.

      


      22. Counterparts.

      


      This
        Agreement may be executed in one or more counterparts.

      


      IN
        WITNESS WHEREOF,
        the
        Parties have executed this Agreement effective for all purposes as the date
        first written above.

       

      

        
          	 	
                  LUFKIN
                    INDUSTRIES, INC.

                   

                   

                
	 	
                  By:

                	
                  /s/
                    C. J. Haley, Sr.

                
	 	
                  Name:

                	
                  C.
                    J. Haley, Sr

                
	 	
                  Title:

                   

                   

                	
                  Secretary/Treasurer

                
	 	
                  EXECUTIVE

                   

                   

                
	 	
                  By:

                	
                  /s/
                    Douglas V. Smith

                
	 	
                  Name:

                	
                  Douglas
                    V. Smith

                
	 	
                  Title:

                	
                  President/Chief
                    Executive Officer