Unassociated Document


    
      

    

    
      SEVERANCE
AGREEMENT

      (Amended
and Restated)

       

      THIS AMENDED AND RESTATED SEVERANCE
AGREEMENT (“Agreement”) is made and entered into as of January 1,
2005, by and between LUFKIN
INDUSTRIES, INC., a Texas corporation (the “Company”) and Paul G. Perez of Lufkin, Texas
(the “Executive”).

       

      WHEREAS, the Company currently
employs the Executive as Vice President of the Company; and

       

      WHEREAS, the board of
directors of the Company (the “Board”) has determined that it is in the best
interests of the Company and its shareholders to provide certain terms and
conditions of the Executive’s employment upon the occurrence of a “Change in
Control”, as defined below; and

       

      WHEREAS, the Company and
Executive (each a “Party” and collectively, the “Parties”) now wish to amend and
restate the original severance agreement from the Effective Date in order to
bring the terms of the arrangement into compliance with Section 409A of the
Internal Revenue Code of 1986, as amended (the “Code”) within the transition
period ending December 31, 2008; and

       

      NOW, THEREFORE, in
consideration of the premises and mutual covenants contained herein, and for
other consideration mutually acknowledged, the Company and the Executive (the
“Parties”) agree as follows:

       

      
        	
                 
      

              	
                1.

              	
                Term.

              


      

       

      The term
of this Agreement (the “Term”) shall commence on the date first set forth
above (the “Start Date”), and shall continue through December 31, 2011;
provided, however, that on December 31, 2009 and on each succeeding December 31,
the Term shall automatically extend for one calendar year, unless either party
gives written notice to the contrary at least sixty (60) days prior to the date
the Agreement would otherwise be extended. Notwithstanding the above, if the
Executive’s employment terminates for any reason prior to a Change in Control
then, except as provided in Section 2(c), this Agreement shall
terminate.

       

      
        	
                 
      

              	
                2.

              	
                Employment.

              


      

       

      (a)           If,
during the Term, a Change in Control occurs while the Executive is employed by
the Company, the Company shall continue to employ the Executive, and the
Executive shall remain in employment with the Company, subject to this
Agreement, for the period commencing on the Effective Date (as defined below)
and ending on the earlier of (A) the second anniversary of such date, or (B) the
first day of the month coinciding with or next following the Executive’s “normal
retirement age” under the U.S. Social Security Act, as amended from time to time
(the “Protection Period”).

       

      (b)           For
purposes of this Agreement, the Effective Date shall be the date on which occurs
the earliest of the following events, each of which is hereinafter referred to
as a “Change in Control”:


      
        
           


        

        
          1

          
            

          

        

        
           


        

      

       

      (i)    any “person,”
as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than
the Company, any trustee or other fiduciary holding securities under an
executive benefit plan of the Company, or any company owned, directly or
indirectly, by the shareholders of the Company in substantially the same
proportions as their ownership of stock of the Company) together with its
“Affiliates” and “Associates”, as such term is defined in Rule 12b-2 of the
Exchange Act, is or becomes the “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 25% or more of the Company’s common stock or of the combined voting
power of the Company’s then outstanding securities entitled to vote generally in
the election of directors;

       

      (ii)           during
any period of two consecutive years, individuals who at the beginning of such
period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii) or (iv) of this definition)
whose election by the Board or nomination for election by the Company’s
shareholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for
any reason to constitute at least a majority thereof;

       

      (iii)          the
shareholders of the Company approve a merger or consolidation of the Company
with any other company other than (A) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 65% of the
combined voting power of the voting securities of the Company (or such surviving
entity) outstanding immediately after such merger or consolidation, or (B) a
merger or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no “person” (as hereinabove defined) acquires
more than 25% of the combined voting power of the Company’s then outstanding
securities; or

       

      (iv)          the
shareholders of the Company adopt a plan of complete liquidation of the Company
or approve an agreement for the sale, exchange or disposition by the Company of
“all or a significant portion of the Company’s assets,” which for this purpose
shall mean a sale or other disposition transaction or series of related
transactions involving assets of the Company or any subsidiary (including the
stock of any subsidiary) in which the value of the assets or stock being sold or
otherwise disposed of (as measured by the purchase price being paid therefor or
by such other method as the Board determines is appropriate in a case where
there is no readily ascertainable purchase price) constitutes more than 35% of
the fair market value of the Company (as hereinafter defined).  For
purposes of the preceding sentence, the “fair market value of the Company” shall
be the aggregate market value of the outstanding shares of common stock of the
Company (on a fully diluted basis) plus the aggregate market value of the
Company’s other outstanding equity securities.  The aggregate market
value of the shares of common stock of the Company shall be determined by
multiplying the number of shares of the Company’s common stock (on a fully
diluted basis) outstanding on the date of the execution and delivery of a
definitive agreement with respect to the transaction or series of related
transactions (the “Transaction Date”) by the market value per share immediately
preceding the Transaction Date or by such other method as the Board shall
reasonably determine is appropriate.  The aggregate market value of
any other equity securities of the Company shall be determined in a manner
similar to that prescribed in the immediately preceding sentence for determining
the aggregate market value of the shares of common stock of the Company or by
such other method as the Board shall reasonably determine is
appropriate.


      
        
           


        

        
          2

          
            

          

        

        
           


        

      

       

      (c)           If
within one year prior to the date on which a Change in Control occurs, the
Executive’s employment with the Company is terminated by the Company other than
for Cause or by the Executive in a way which if occurring after a Change in
Control would constitute Good Reason (as defined in Section 4.4(b) of this
Agreement), and it is reasonably demonstrated that such termination or effect
(1) was at the request of a third party who had taken steps reasonably
calculated to effect a Change in Control or (2) otherwise arose in connection
with or anticipation of a Change in Control, then both the Change in Control and
the Effective Date shall be deemed to have occurred on the date immediately
prior to such termination of employment and the Executive’s rights shall be as
determined under Section 4.4 below on such basis.

       

      
        	
                 
      

              	
                3.

              	
                Terms of
      Employment.

              


      

       

      
        	
                 
      

              	
                (a)

              	
                Position and
      Duties.

              


      

       

      (i)           During
the Protection Period, (A) the Executive’s position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 90-day period
immediately preceding the Effective Date and (B) the Executive’s services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date, or any office or location less than thirty-five
(35) miles from such location.

       

      (ii)           During
the Protection Period, and excluding any periods of vacation and sick leave to
which the Executive is entitled, the Executive agrees to devote reasonable
attention and time during normal business hours to the business and affairs of
the Company and, to the extent necessary to discharge the responsibilities
assigned to the Executive hereunder, to use the Executive’s reasonable best
efforts to perform faithfully and efficiently such
responsibilities.  During the Protection Period, it shall not be a
violation of this Agreement for the Executive to (A) serve on corporate, civic
or charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C) manage personal
investments, so long as such activities do not significantly interfere with the
performance of the Executive’s responsibilities as an executive of the Company
in accordance with this Agreement.  It is expressly understood and
agreed that to the extent that any such activities have been conducted by the
Executive prior to the Effective Date, the continued conduct of such activities
(or the conduct of activities similar in nature and scope thereto), subsequent
to the Effective Date shall not thereafter be deemed to interfere with the
performance of the Executive’s responsibilities to the Company.


      
        
           


        

        
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                (b)

              	
                Compensation.

              


      

       

      (i)    Base
Salary.  During the Protection Period, the Executive shall
receive a base salary (“Base Salary”) at a monthly rate (payable not less
frequently than monthly) at least equal to the highest monthly base salary paid
or payable to the Executive by the Company during the thirty-six month period
immediately preceding the month in which the Effective Date
occurs.  During the Protection Period, the Base Salary shall be
reviewed at least annually and shall be increased at any time and from time to
time as shall be substantially consistent with increases in base salary awarded
in the ordinary course of business to other key executives of the Company and
its subsidiaries.  Any increase in Base Salary shall not serve to
limit or reduce any other obligation to the Executive under this
Agreement.  Base Salary shall not be reduced after any such
increase.

       

      (ii)           Annual
Bonus.  In addition to Base Salary, the Executive shall be
awarded, for each fiscal year during the Protection Period, an annual bonus (an
“Annual Bonus”) in cash at least equal to the highest bonus payable to the
Executive from the Company and its subsidiaries in respect of the three fiscal
years immediately preceding the fiscal year in which the Effective Date
occurs.  The Annual Bonus for each fiscal year during
the Protection Period shall be paid in the form of a lump sum cash payment on
the last day of the fiscal year to which the Annual Bonus relates; provided,
however, if calculation of the amount of the Annual Bonus by the last day of the
fiscal year is not administratively practicable due to events beyond the control
of the Company, such Annual Bonus shall be paid during the first taxable year of
the Executive in which calculation is administratively practicable.

       

      (iii)          Incentive, Savings and
Retirement Plans.  In addition to Base Salary and Annual Bonus
payable as hereinafter provided, the Executive shall be entitled to participate
during the Protection Period in all incentive, savings and retirement plans,
practices, policies and programs applicable to other key executives of the
Company and its subsidiaries, and in each case, providing benefits which are the
economic equivalent to those currently in effect or as subsequently
amended.  Such plans, practices, policies and programs, in the
aggregate, shall provide the Executive with compensation, benefits and reward
opportunities at least as favorable as the most favorable of such compensation,
benefits and reward opportunities provided by the Company for the Executive
under such plans, practices, policies and programs as in effect at any time
during the 90-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided at any time thereafter with respect to
other key executives of the Company and its subsidiaries.

       

      (iv)          Welfare Benefit
Plans.  During the Protection Period, the Executive and/or the
Executive’s family, as the case may be, shall be eligible for participation in
and shall receive all benefits under welfare benefit plans, practices, policies
and programs provided by the Company and its subsidiaries, at least as favorable
as the most favorable of such plans, practices, policies and programs in effect
at any time during the 90-day period immediately preceding the Effective Date
or, if more favorable to the Executive and/or the Executive’s family, as in
effect at any time thereafter with respect to other key executives of the
Company and its subsidiaries.


      
        
           


        

        
          4

          
            

          

        

        
           


        

      

       

      (v)           Expenses.  During
the Protection Period, the Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Executive in
accordance with the most favorable policies, practices and procedures of the
Company and its subsidiaries in effect at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the Executive,
as in effect at any time thereafter with respect to other key executives of the
Company and its subsidiaries.

       

      (vi)          Fringe
Benefits.  During the Protection Period, the Executive shall be
entitled to fringe benefits in accordance with the most favorable plans,
practices, programs and policies of the Company and its subsidiaries in effect
at any time during the 90-day period immediately preceding the Effective Date
or, if more favorable to the Executive, as in effect at any time thereafter with
respect to other key executives of the Company and its
subsidiaries.

       

      (vii)         Office and Support
Staff.  During the Protection Period, the Executive shall be
entitled to an office or offices of a size and with furnishings and other
appointments, and to secretarial and other assistance, at least equal to the
most favorable of the foregoing provided to the Executive by the Company and its
subsidiaries at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as provided at any time
thereafter with respect to other key executives of the Company and its
subsidiaries.

       

      (viii)        Vacation.  During
the Protection Period, the Executive shall be entitled to paid vacation in
accordance with the most favorable plans, policies, programs and practices of
the Company and its subsidiaries as in effect at any time during the 90-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect at any time thereafter with respect to other key
executives of the Company and its subsidiaries.

       

      
        	
                 
      

              	
                4.

              	
                Termination of
      Employment.

              


      

       

      The
Executive’s employment is subject to termination during the Protection Period
only as provided in this Section 4.  The provisions of this Section 4
are subject to, among others, the provisions of Section 22 of this
Agreement.

       

      
        	
                 
      

              	
                4.1

              	
                Death or
      Disability.

              


      

       

      (a)           In
General.  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, this Agreement shall terminate without further
obligation under this Agreement to the Executive or, in the case of the
Executive’s death, to the Executive’s legal representatives, other than those
obligations accrued or earned and vested (if applicable) by the Executive as of
the date of termination of employment (the “Termination Date”), including, for
this purpose the Executive’s (i) Accrued Base Salary, (ii) Accrued Annual Bonus,
(iii) Accrued Vacation Pay, and (iv) Other Vested Benefits (all of which terms
are defined below) (collectively, “Accrued Obligations”).  All such
Accrued Obligations, excluding Other Vested Benefits, shall be paid to the
Executive or, in the event of the Executive’s death, to the Executive’s estate
or beneficiary, as applicable, in a lump sum in cash within thirty (30) days of
the Termination Date.  All Other Vested Benefits shall be paid in
accordance with the terms of the plan or arrangement defining Executive’s rights
therein without any change or modification by this
Agreement.  Anything in this Agreement to the contrary
notwithstanding, the Executive, or the Executive’s family as appropriate, shall
be entitled to receive welfare and other benefits (in addition to the Accrued
Obligations) at least equal to the most favorable benefits provided by the
Company and any of its subsidiaries under all plans, programs, practices and
policies relating to disability or family death benefits, as applicable, if any,
in accordance with the most favorable plans, programs, practices and policies of
the Company and its subsidiaries in effect at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the Executive
and/or the Executive’s family, as in effect on the date of the Executive’s
disability or death with respect to other key executives of the Company and its
subsidiaries and their families.

       

      
        
          
             


          

          
            5

            
              

            

          

          
             


          

        

      

       

      
        	
                 
      

              	
                (b)

              	
                Certain
      Terms.  For purposes of this
  Agreement:

              


      

       

      (i)           “Accrued
Base Salary” means the Executive’s accrued and unpaid Base Salary through the
Termination Date determined at the Highest Base Salary Rate.

       

      (ii)           “Accrued
Annual Bonus” means the product of (A) the Annual Bonus, if any, paid to the
Executive for the last full fiscal year preceding the Termination Date, and (B)
a fraction, the numerator of which is the number of days in the current fiscal
year through the Termination Date, and the denominator of which is
365.

       

      (iii)           “Accrued
Vacation Pay” means an amount equal to the value of the Executive’s accrued and
unused paid vacation leave through the Termination Date determined at the
Highest Base Salary Rate.

       

      (iv)           “Highest
Base Salary Rate” means the highest annual rate of Base Salary in effect at any
time during the period beginning 90 days prior to the Effective Date and ending
with the Termination Date.

       

      (v)           “Other
Vested Benefits” means Executive’s accrued and vested rights to any nonqualified
deferred compensation (including all interest and earnings, as applicable)
previously unpaid.

       

      
        	
                 
      

              	
                4.2

              	
                Termination by the
      Company for Cause.

              


      

       

      If the
Company terminates the Executive’s employment for Cause (as defined below), the
Executive shall be entitled under this Agreement only to payment of his Accrued
Base Salary, which amount shall be paid in a lump sum in cash within thirty (30)
days of the Termination Date.  Any other benefits to which Executive
and/or his dependents or beneficiaries are entitled shall be determined in
accordance with the plans, programs, practices and policies of the Company and
applicable law.

       

      For
purposes of this Agreement, the term “Cause” shall mean:

       

      (i)           an
act or acts of personal dishonesty taken by the Executive and intended to result
in substantial personal enrichment of the Executive at the expense of the
Company;


      
        
           


        

        
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      (ii)           repeated
violations by the Executive of the Executive’s obligations under Section 3 of
this Agreement which are demonstrably willful and deliberate on the Executive’s
part and which are not remedied in a reasonable period of time after receipt of
written notice from the Company; or

       

      (iii)           the
conviction of the Executive of, or plea of nolo contendere by the Executive to,
a felony.

       

      The
Executive must be notified in writing of any termination of his employment for
Cause, which writing shall set forth in reasonable detail the facts and
circumstances relied upon therefor.  The Executive will then have the
right, within ten days of receipt of such notice, to file a written request for
review.  In such case, the Executive will be given the opportunity to
be heard, personally or by counsel, by the members of the Board who are not then
executives of the Company (the “Independent Directors”) and a majority of the
Independent Directors must thereafter confirm that such termination is for
Cause.  If the Independent Directors do not provide such confirmation,
the termination shall be treated as a termination by the Company without
Cause.

       

      
        	
                 
      

              	
                4.3

              	
                Termination by the
      Executive.

              


      

       

      The
Executive may terminate his employment at any time, in which case, except as
otherwise provided in Sections 4.4 and 4.5 below, the Executive shall be
entitled only to his Accrued Obligations as of the Termination
Date.  The Accrued Obligations, excluding Other Vested Benefits, shall
be paid to the Executive in a lump sum in cash within thirty (30) days of the
Termination Date.  All Other Vested Benefits shall be paid in
accordance with the terms of the plan or arrangement defining Executive’s rights
therein without any change or modification by this Agreement.  Any
other benefits to which Executive and/or his dependents or beneficiaries are
entitled shall be determined in accordance with the plans, programs, practices
and policies of the Company and applicable law.

       

      
        	
                 
      

              	
                4.4

              	
                Termination of the
      Executive for Good Reason; Termination by the Company without
      Cause.

              


      

       

      (a)           In
General.  In the event the Executive’s employment is terminated
during the Protection Period (i) by the Executive for Good Reason (as defined
below), or (ii) by the Company without Cause, then:

       

      (i)           the
Company shall pay to the Executive in a lump sum in cash within thirty (30) days
after the Termination Date the aggregate of the following amounts:

       

      A.    the
Executive’s Accrued Base Salary;

       

      B.           the
product of (x) the Annual Bonus paid to the Executive for the last full fiscal
year (if any) ending during the Protection Period or, if higher, the Annual
Bonus paid to the Executive for the last full fiscal year prior to the Effective
Date (as applicable, the “Recent Bonus”) and (y) a fraction, the numerator of
which is the number of days in the current fiscal year through the Termination
Date and the denominator of which is 365; and


      
        
           


        

        
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      C.           the
product of (x) 2.00 and (y) the sum of (i) the Highest Base Salary and (ii) the
Recent Bonus;

       

      (ii)           Other
Vested Benefits, if any, shall be paid in accordance with the terms of the plan
or arrangement defining Executive’s rights therein without any change or
modification by this Agreement.  Any other benefits to which Executive
and/or his dependents or beneficiaries are entitled shall be determined in
accordance with the plans, programs, practices and policies of the Company and
applicable law;

       

      (iii)           the
Company shall pay to the Executive in cash within thirty (30) days after the
Termination Date a lump sum retirement benefit equal to the difference between
(a) the actuarial equivalent of the benefit the Executive would receive under
all retirement plans if he remained employed by the Company at the compensation
level provided for in Section 3 of this Agreement (and continued to vest in such
benefits) for the remainder of the Protection Period, and (b) the actuarial
equivalent of his benefit, if any, actually accrued and vested under the
Company’s plans; and

       

      (iv)           for
the remainder of the Protection Period, or such longer period as any plan,
program, practice or policy may provide, the Company shall continue benefits to
the Executive and/or the Executive’s family at least equal to those which would
have been provided to them in accordance with the plans, programs, practices and
policies as described in Section 3 of this Agreement if the Executive’s
employment had not been terminated, including health insurance and life
insurance, in accordance with the most favorable plans, practices, programs or
policies of the Company and its subsidiaries during the 90-day period
immediately preceding the Effective Date, or, if more favorable to the
Executive, as in effect at any time thereafter with respect to other key
executives of the Company and its subsidiaries and their
families.  For purposes of eligibility for retiree benefits pursuant
to such plans, practices, programs and policies, the Executive shall be
considered to have remained employed until the end of the Protection Period, to
have retired on the last day of such period and to have satisfied all conditions
for eligibility for all such retiree benefits.

       

      (b)           Good
Reason.  For purposes of this Agreement, Good Reason means any
one of the following shall have occurred and not been corrected within ten (10)
days following written notice to the Company:

       

      (i)           the
Executive reports to someone other than the chief executive officer of the
Company;

       

      (ii)           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 notice thereof given by the Executive;


      
        
           


        

        
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      (iii)          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 notice thereof given by the Executive;

       

      (iv)          the
Company’s requiring the Executive to be based at any office or location other
than that described in Section 3 hereof, except for travel reasonably required
in the performance of the Executive’s responsibilities;

       

      (v)           any
purported termination by the Company of the Executive’s employment otherwise
than as expressly permitted by this Agreement; or

       

      (vi)          any
failure by the Company to comply with and satisfy Section 10(c) of this
Agreement.

       

      For
purposes of this Section 4.4(b), any good faith determination of “Good Reason”
made by the Executive shall be final and binding upon the Parties.

       

      (c)           Termination Under Section
2(c).  If this Section 4.4 applies to a termination of the
Executive’s employment by virtue of the provisions of Section 2(c), the lump sum
amounts described in Section 4.4(a)(i) and (iii) shall not be paid at the times
prescribed above, but instead shall be paid as follows:

       

      (i)           If
the Change in Control that invokes Sections 2(c) and 4.4 constitutes a “change
in control event” within the meaning of Treas. Reg. §1.409A-1(i)(5), the lump
sum amounts described in Section 4.4(a)(i) and (iii) shall be paid at the time
of such Change in Control, subject to Section 22.

       

      (ii)           In
all other cases, the lump sum amounts described in Section 4.4(a)(i) and (iii)
shall be paid during the 30-day period beginning on the first anniversary of the
Termination Date.

       

      
        	
                 
      

              	
                4.5

              	
                Termination by the
      Executive Following the First Anniversary of the Protection
      Period.

              


      

       

      In the
event that the Executive remains in the employ of the Company on the first day
of the month coinciding with or next following the first anniversary of the
Effective Date (the “Anniversary Date”), then the Executive may elect the
provisions of this Section 4.5 by delivering a notice of termination within the
period commencing on the Anniversary Date and ending thirty (30) days after the
Anniversary Date (the “Window Period”), resigning as a director if applicable,
and officer, and terminating his employment.  If the Company receives
such notice of termination from the Executive within the Window Period, then the
Executive shall be entitled to the same compensation, benefits and other
remuneration as described in Section 4.4 applicable to a termination by the
Company without Cause.


      
        
           


        

        
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                5.

              	
                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 5 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this
Agreement.

       

      
        	
                 
      

              	
                6.

              	
                Indemnification.

              


      

       

      6.1           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.

       

      6.2           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.

       

      6.3           All
claims for indemnification under this Agreement shall be asserted and resolved
as follows:

       

      (i)           
The Executive (a) 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 (b) 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.


      
        
           


        

        
          10

          
            

          

        

        
           


        

      


      (ii)           Within
thirty (30) days after receipt of any Claim Notice (“Election Period”), the
Company shall notify the Executive (a) whether the Company disputes its
potential liability to the Executive under this Section 6 with respect to such
Third Party Claim and (b) 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 6.3(ii).  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 6.3 and the
Company shall bear his costs and expenses with respect to such
participation.

       

      (iii)           If
the Company fails to notify the Executive within the Election Period that the
Company elects to defend the Executive pursuant to subsection 6.3(ii), or if the
Company elects to defend the Executive pursuant to subsection 6.3(ii) 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 6, 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 6 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
6.3(iii), and the Company shall bear its own costs and expenses with respect to
such participation.

       

      (iv)           The
indemnification provided by this Section 6 shall apply whether or not the
negligence of a party is alleged or proved.

       

      6.4           To
the extent that the Company’s obligations under this Section 6 fail to qualify
under the exception from deferred compensation under Treas. Reg.
§1.409A-1(b)(10), then those obligations failing to so qualify shall instead
become the obligations to reimburse the Executive for the costs, expenses and
other amounts described in this Section 6 and/or incurred by Executive, subject
to the limitations and requirements of Section 22(iii) of this
Agreement.


      
        
           


        

        
          11

          
            

          

        

        
           


        

      


      
        	
                 
      

              	
                7.

              	
                Non-exclusivity of
      Rights.

              


      

       

      Nothing
in this Agreement shall prevent or limit the Executive’s continuing or future
participation in any benefit, bonus, incentive or other plans, programs,
policies or practices provided by the Company or any of its subsidiaries and for
which the Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any stock option or other
agreements with the Company or any of its subsidiaries.  Amounts which
are vested benefits or which the Executive is otherwise entitled to receive
under any plan, policy, practice or program of the Company or any of its
subsidiaries at or subsequent to the Termination Date shall be payable in
accordance with such plan, policy, practice or program.

       

      
        	
                 
      

              	
                8.

              	
                Full
      Settlement.

              


      

       

      The
Company’s obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action which
the Company may have against the Executive or others.  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.  The Company agrees to pay, to the
full extent permitted by law, all legal fees and expenses which the Executive
may reasonably incur as a result of any contest (regardless of the outcome
thereof) by the Company or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of performance
thereof, plus in each case interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.

       

      
        	
                 
      

              	
                9.

              	
                Certain Additional
      Payments by the Company.

              


      

       

      9.1           If
any payments or benefits received or to be received by Executive (whether
pursuant to the terms of this Agreement or any other plan or agreement with the
Company, any person whose actions results in a Change in Control or any person
affiliated with the Company or such Person) (such payments or benefits,
excluding the Gross-Up Payment, the “Total Payments”) are determined to result
in the imposition of excise tax under section 4999 of the Code or any similar
excise tax under the Code or under state or local statute (the “Excise Tax”),
the Company shall pay Executive an additional amount (such amount in the
aggregate, the “Gross-Up Amount,” and each payment thereof, or all such payments
together, the “Gross-Up Payment”) intended to compensate or reimburse Executive
for the Excise Tax resulting from the Total Payments and for the federal, state
and local income tax, employment tax and Excise Tax on the Gross-Up
Payment.  The purpose of this subsection 9.1 is to place Executive in
the same economic position Executive would have been in had the Total Payments
not been subject to the Excise Tax.  For theses purposes:

       

      (i)    the Total
Payments, which will consist of those amounts as constituting “parachute
payments” (within the meaning of section 280G(b)(2) of the Code after giving
effect to Section 280G(b)(4)(A));


      
        
           


        

        
          12

          
            

          

        

        
           


        

      

       

      (ii)   the value of any
non-cash benefits or any deferred payment or benefit to be taken into account in
determining the Total Payments;

       

      (iii)          the
amount of the Total Payments to be treated as “excess parachute payments” within
the meaning of Section 280G(b)(1) of the Code, all reductions thereof for
amounts representing “reasonable compensation for personal services” (within the
meaning of Section 280G(b)(4) of the Code) in excess of the “base amount”
(within the meaning of Section 280G(b)(3) of the Code) allocable to such
“reasonable compensation for personal services” and all reductions by or for all
such other amounts as are not subject to the Excise Tax;

       

      (iv)         
the amount of the Excise Tax; and

       

      (v)           the
Gross-Up Amount and each Gross-Up Payment with respect thereto (which in the
aggregate, shall equal the Gross-Up Amount), shall be
determined by the accounting firm which was the Company’s independent auditor
immediately prior to the Change in Control (the “Auditor”) which determinations
shall be subject to approval by written legal opinion (which may be subject to
and reflect assumptions, exceptions and standards of certainly normal and
reasonable for legal opinions of this type) of tax counsel (the “Tax Counsel”)
selected by the Auditor and approved by the Executive as acceptable, which
approval of Tax Counsel by the Executive shall be timely and not unreasonably
withheld.

       

      9.2           A
Gross-Up Payment shall be paid by the Company to the Executive (or for the
Executive, if and to the extent the Gross-Up Payment is determined to be subject
to tax withholding), by no later than the earlier of (i) each date as of which
Excise Tax under Section 4999 of the Code is paid or is payable, whichever comes
first; and (ii) each date as of which any portion of the Total Payments
resulting in the Excise Tax are paid or otherwise provided (excluding dates, but
not the amounts of, Total Payments paid or provided other than on, as of or
properly with respect to, an event or time that constitutes a permissible
payment event under Treas. Reg. §1.409A-3) so as to then become properly
includable in Executive’s gross income for federal income tax purposes;
provided, however, that notwithstanding any contrary provision hereof (other
than Section 22, if applicable), if and to the extent that any amount owed
hereunder by the Company to the Executive constitutes a “reimbursement of
expenses” within the meaning of Treas. Reg. §1.409A-3(i)(1)(iv) or a “tax
gross-up payment” within the meaning of Treas. Reg. §1.409A-3(i)(1)(v), such
amounts shall be paid by no later than the end of the Executive’s taxable year
following the taxable year in which the amount being reimbursed was
paid.

       

      9.3           As
a result of the uncertainty in the application of Section 4999 of the Code,
it is possible that the Gross-Up Amount and the aggregate of all Gross-Up
Payments made as of any point in time as determined by the Auditor to be due to
(or on behalf of) the Executive will be lower than the Gross-Up Amount actually
due (“Underpayment”).  In the event that the Executive thereafter is
required to make a payment of any additional Excise Tax, the Auditor shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be paid by the Company to or for the benefit of the Executive
as an additional Gross-Up Payment, which shall be paid to or for the Executive
(as applicable) on the date the Excise Tax is paid or payable by the Executive
(whichever comes first), or as soon thereafter as the calculation of the amount
of such additional Gross-Up Payment shall be administratively practicable, but
in all events, no later than the end of the Executive’s taxable year next
following the Executive’s taxable year in which the related taxes are remitted
to the taxing authority.


      
        
           


        

        
          13

          
            

          

        

        
           


        

      

       

      9.4           In
the event that the Excise Tax is finally determined to be less than the amount
taken into account hereunder in calculating the Gross-Up Amount and the Gross-Up
Payments paid, the Executive shall repay to the Company, within ten (10)
business days following the time that the amount of such reduction in the Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax and federal, state and local income and employment taxes imposed on
the Gross-Up Payment benefit being repaid by the Executive, to the extent that
such repayment results in a reduction in the Excise Tax and a dollar-for-dollar
reduction in the Executive’s taxable income and wages for purposes of federal,
state and local income and employment taxes), plus interest on the amount of
such repayment at 120 percent of the rate provided in Section 1274(b)(2)(B) of
the Code.  In the event that the Excise Tax is determined to exceed
the amount taken into account hereunder in calculating the Gross-Up Payment
(including by reason of any payment, the existence or amount of, which cannot be
determined at the time of the payment of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) within five (5) business days following the time that the amount of such
excess is finally determined, but no later than the end of the calendar year
following the calendar year in which the taxes related to the additional
Gross-Up Payment and other amounts are remitted.

       

      9.5           If
the Executive duly reports Total Payments for purposes of the Excise Tax in a
proper and timely manner in accordance with the information, if any, as reported
to the Executive by the Company on IRS Form W-2, and timely pays the resulting
Excise Tax, if any, and incurs any penalty and/or interest attributable to any
inaccuracy or delinquency in the Company’s reporting to the Executive of the
Total Payments for Excise Tax purposes, the Company shall reimburse the
Executive for all such penalty and interest on the date(s) such amounts are paid
by the Executive, or within 10 days thereafter.  In addition, at the
time of each such reimbursement of penalty and interest, the Company shall
simultaneously pay the Executive a “tax gross-up payment” within the meaning of
Treas. Reg. §1.409A-3(i)(1)(v) to reimburse or compensate the Executive for all
of the federal, state and local income tax, employment tax and Excise Tax on the
reimbursement and on the tax gross-up payment itself.  The amount of
such tax-gross up payment shall be determined in the same manner as prescribed
above for the determination of the Gross-Up Amount and the Gross-Up Payments on
Excise Tax.

       

      9.6           Executive
and the Company shall each reasonably cooperate with the other relative to any
administrative or judicial proceedings concerning the existence or amount of
liability for the Excise Tax.


      
        
           


        

        
          14

          
            

          

        

        
           


        

      

       

      
        	
                 
      

              	
                10.

              	
                Successors.

              


      

       

      (a)           This
Agreement is personal to the Executive and without the prior written consent of
the Company shall not be assignable by the Executive otherwise than by will or
the laws of descent and distribution.  This Agreement shall inure to
the benefit of and be enforceable by the Executive’s legal
representatives.

       

      (b)           This
Agreement shall inure to the benefit of and be binding upon the Company and its
successors and assigns.

       

      (c)           The
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all or substantially all of the business
and/or assets of the Company to assume expressly and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.  As used
in this Agreement, “Company” shall mean the Company as hereinbefore defined and
any successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise.

       

      
        	
                 
      

              	
                11.

              	
                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.

       

      
        	
                 
      

              	
                12.

              	
                Effect of Severance
      Agreement.

              


      

       

      This
Agreement contains the entire agreement between the Parties concerning the
rights and obligations of the Executive upon a Change in Control and supersedes
all prior agreements, understandings, discussions, negotiations, and
undertakings, whether written or oral, between the Parties with respect
thereto.

       

      
        	
                 
      

              	
                13.

              	
                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.


      
        
           


        

        
          15

          
            

          

        

        
           


        

      

       

      
        	
                 
      

              	
                14.

              	
                Mediation and Legal
      Actions.

              


      

       

      If a
dispute arises out of or related to this Agreement or its breach and 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 and
prevails in such legal action, the other Party, in addition to the remedy or
relief obtained in such legal action, shall be liable for the expenses incurred
by the successful Party in such legal action, including costs of court and the
fees and expenses of counsel.

       

      
        	
                 
      

              	
                15.

              	
                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

      


      
        	
              	
                To
      the Executive:

              	
                Paul
      G. Perez

              


      

      108
Sawgrass Circle

      Lufkin,
TX 75901

      


      
        	
                 
      

              	
                16.

              	
                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.

       

      
        	
                 
      

              	
                17.

              	
                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.


      
        
           


        

        
          16

          
            

          

        

        
           


        

      

       

      
        	
                 
      

              	
                18.

              	
                References.

              


      

       

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

       

      
        	
                 
      

              	
                19.

              	
                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.

       

      
        	
                 
      

              	
                20.

              	
                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.

       

      
        	
                 
      

              	
                21.

              	
                Counterparts.

              


      

       

      This
Agreement may be executed in one or  more counterparts.

       

      
        	
                 
      

              	
                22.

              	
                Compliance with Code
      Section 409A.

              


      

       

      This
Agreement is intended to comply with the requirements of Section 409A of the
Code and, as a result, this Agreement shall be construed, interpreted and
operated in a manner that will ensure such compliance.  Without
limiting the scope of the preceding provisions of this Section 22, the following
provisions shall apply:

       

      (i)           All
references in this Agreement to the termination of Executive’s employment with
Company shall mean and shall be deemed to occur if and when a termination of
employment that constitutes a “separation from service” within the meaning of
Section 409A(a)(2)(A)(i) of the Code and applicable administrative guidance
issued thereunder has occurred.

       

      (ii)           To
the extent that Executive is a specified employee, as defined in Treas. Reg.
§1.409A-1(i), and any stock of the Company or of any affiliate is publicly
traded on an established securities market or otherwise, no payment or benefit
that is subject to Section 409A of the Code (including payments and benefits
subject to other provisions of this Section 22) shall be made under this
Agreement on account of the Executive’s separation from service with the Company
within the meaning of Section 409A(a)(2)(A)(i) of the Code, before the date that
is the first day of the month that occurs six months after the date of
Executive’s separation from service (or, if earlier, the date of death of
Executive or any other date permitted under Section 409A of the
Code).  The foregoing delay shall not apply to any payment or benefit
hereunder if and to the extent such payment or benefit constitutes, pursuant to
Treas. Reg. §1.409A-1(b)(9)(iii), separation pay payable or to be provided
only upon an involuntary separation from service, does not exceed two times the
lesser of the Executive’s annual Salary at the rate then in effect or the
maximum amount that may be taken into account under a qualified plan pursuant to
Section 401(a)(17) of the Code in the year in which the Executive has a
separation from service, and is paid no later than the last day of the second
year following the year in which the involuntary separation from service
occurs.  In addition, any noncash benefit to be provided under this
Agreement that is described in, and subject to the delay of, the first sentence
of this Section 22(ii), such benefit shall be made available to the Executive
during that six month period, but only upon the full and timely payment in cash
by Executive to the Company of the fair and arms’ length value of such benefit,
which payments shall be reimbursed by the Company to the Executive after the
delay described above and otherwise in accordance with Section
22(iii).


      
        
           


        

        
          17

          
            

          

        

        
           


        

      

       

      (iii)           To
the extent that any amount or benefit hereunder is includable in gross income
for federal income tax purposes and constitutes or is treated hereunder as a
reimbursement or in-kind benefit received or to be received by Executive, such
reimbursement or in-kind benefit shall be administered consistent with the
following additional requirements as set forth in Treas. Reg.
§1.409A-3(i)(1)(iv):  (1) Executive’s eligibility for or receipt of
benefits or reimbursements in one year will not affect Executive’s eligibility
for or the amount of benefits or reimbursements in any other year, (2) any
reimbursement of eligible expenses will be made on or before the last day of the
year following the year in which the expense was incurred, (3) Executive’s right
to benefits or reimbursement is not subject to liquidation or exchange for
another benefit, and (4) the right to reimbursement of expenses incurred or to
the provision of benefits in kind shall terminate ten (10) years from the
Executive’s termination of employment.

       

      (iv)          To
the extent that any payment or benefit to be received by Executive hereunder is
to be offset hereunder, such offset may occur only if it would not result in an
impermissible acceleration under Section 409A of the Code.

       

      (v)           To
the extent that any benefit in kind or coverages to be provided under this
Agreement either cannot be provided without contravening the requirements of
applicable law because the Executive has ceased to be employed by the Company,
or would subject the Executive to additional income taxes under Section 409A of
Code, the Company shall not provide such benefit in kind or coverage, but shall
in lieu thereof pay an amount equal to the Company’s cost (determined as of the
date on which Executive’s coverage terminated) of providing such benefit for the
period such benefit or coverage was otherwise required under this Agreement, and
such amount shall be payable in equal, periodic installments at the same regular
intervals at which Executive’s Salary would be payable under the normal
Company’s payroll practices and procedures commencing with the first payroll
date on or immediately after the Executive’s benefit in kind or coverage
terminates.

       

      (vi)           Each
right to benefits in kind over a period of time that would be treated as a
series of installment payments, and/or each right to payments in respect of such
benefits and Section 22(v), shall at all times be treated as a right to a series
of separate payments.


      
        
           


        

        
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      IN
WITNESS WHEREOF, the undersigned have executed this Agreement on the date first
written above.

      


      
        
          
            
              
                	 
      	
                        LUFKIN
      INDUSTRIES, INC.

                      
	 
      	 
      	 
      
	 
      	
                        By:

                      	
                        /s/ John F. Glick

                      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
                        /s/ Paul G. Perez

                      
	 
      	
                        Paul
      G. Perez

                      


              

            

          

        

      

      
 

    

    19