Unassociated Document


    
      

    

    EMPLOYMENT
AGREEMENT


    (Amended
and Restated)

    


    THIS AMENDED AND RESTATED EMPLOYMENT
AGREEMENT (“Agreement”) is made and entered into effective as of August
18, 2006 (the “Effective Date”), by and between LUFKIN INDUSTRIES, INC., a
Texas corporation (the “Company”), and Paul G. Perez of Lufkin, Texas
(the “Executive”).

    


    WHEREAS, the Company and
Executive now wish to amend and restate to original employment agreement from
its 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

    


    WHEREAS, the Company wishes to
continue the employment of the Executive as a Vice President of the Company,
under the terms and conditions set forth herein; and

    


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

    


    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.             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.


    
      
         


      

      
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    2.             Term.

    


    Subject
to renewal and other provisions as hereinafter set forth in this Section 2, the
term of the Executive’s employment with the Company shall commence on the
Effective Date and shall continue through the date immediately preceding the
second annual anniversary of the Effective Date (the “Initial Term”), unless
sooner terminated in accordance with the terms and provisions hereinafter set
forth.  The term of Executive’s employment with the Company shall be
automatically renewed and extended (without any gap or lapse in such term) for a
period of twelve (12) months commencing immediately following the Initial Term
and on each successive annual anniversary of the Effective Date thereafter on
the same terms and conditions contained herein in effect as of the time of
renewal (the “Extended Term”), unless either Party shall give the other Party
written notice, at least sixty (60) days prior to the expiration of the Initial
Term (or, if previously renewed and extended as provided herein, at least sixty
(60) days prior to the expiration of the Extended Term then in effect), of the
notifying Party’s desire not to renew this Agreement.  The non-renewal
or non-extension of this Agreement by either Party at the end of the Initial
Term or any Extended Term (hereinafter, the “Term,” unless otherwise indicated)
shall not be deemed a termination by the Company without Cause (as such term is
defined below) and the Executive shall only receive those amounts set forth in
Section 5.4 in such circumstances.  The Executive shall, unless
requested otherwise by the Company, remain in the employ of the Company during
the entirety of the remaining Term.  Notwithstanding any other
provision of this Section 2 to the contrary, in no event shall the Term extend
beyond the Executive’s “normal retirement age” under the U.S. Social Security
Act, as amended from time to time.


    
      
         


      

      
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    3.             Position
and Duties.

    


    (a)     
      During the Term, the Executive shall serve
as Vice President of the Company reporting directly to the President or Chief
Operating Officer of the Company.  As such, the Executive shall have
the responsibilities, duties and authority customarily pertaining to such office
and such other duties as may reasonably be assigned to the Executive by the
President or Chief Operating Officer of the Company and consistent with such
position.

    


    (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
$190,000 (the “Base Rate”).  Salary shall be paid in regular
installments of equal amounts not less frequently than monthly and otherwise in
accordance with the Company’s general 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.  Any such adjustment in the Salary shall be effective from and
after the time determined by the Committee.

    


    (b)           
Bonus.  The
Executive will have an opportunity to receive a bonus with respect to each
fiscal year of the Company (each one, a “Bonus Year”) during the
Term.  The level or levels of the annual bonus for each Bonus 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 each Bonus Year during
the Term shall be paid in the form of a lump sum cash payment on the last day of
the Bonus Year to which the bonus relates; provided, however, if calculation of
the amount of the bonus by the last day of the Bonus Year is not
administratively practicable due to events beyond the control of the Company,
such bonus shall be paid during the first taxable year of the Executive in which
calculation is administratively practicable.


    
      
         


      

      
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    (c)           
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, subject to the regular eligibility requirements with
respect to each such employee benefit program, and such other benefits or
perquisites as may be approved for the Executive by the Board of Directors of
the Company.

    


    (d)           
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)    
        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.


    
      
         


      

      
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    (ii)            Club
memberships - in addition to the other business and entertainment expenses
reimbursable pursuant to item (i) above, the Company shall pay membership fees,
dues and assessments for one luncheon or country club membership as the Board of
Directors of the Company may deem to be justified by business
usage.

    


    (iii)           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 up to a maximum of $2,000 per
year.

    


    (iv)           Life
insurance - the Executive’s life insurance benefit coverage will be the same as
that provided to other salaried employees.

    


    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 Disability (as defined
below), then subject to the subsequent provisions of this Section 5.1 and
Section 23:

    


    (i)        
    To the extent permitted without contravening the
requirements of applicable law, the Executive (or his estate) shall be entitled
to receive Salary (based on a Salary rate equal to the greater of (A) the Base
Rate, or (B) the rate in effect on termination of his employment) and benefit
coverages1 at Company
expense for a period of six months from and after the date of termination of
employment commencing with the first payroll period that begins on or
immediately after the Executive’s termination of employment; and

     

    ________________________________

     

    
      	
              1

            	
              The
      IRC §409A consequences will be a function of the coverages provided, the
      timing of payment or provision of benefits and the requirements of the
      plans and arrangements under which these benefits are
      provided.  Further, the amount and timing of the salary
      continuation payments should be specified.  We assume the
      intention is for the terminated Executive to continue receiving payments
      equal to his or her regular salary payments at the Base Rate in effect at
      the time of termination and for such payments to be made with the same
      frequency and on the same dates as the replaced regular salary payments
      would have been paid.  If so, we can include such a
      provision.

            



      
        
           


        

        
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    (ii)       
    The Executive (or his estate) shall be entitled to a
lump-sum bonus payment payable within 30 days after his termination of
employment2 for the
Bonus 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 Bonus Year
in which the Executive’s employment terminates.

    


    Any
benefits coverage or continuation other than as provided in subparagraph (i)
shall be determined under applicable plans, programs or other coverages of the
Company and applicable law.

    


    “Disability”
shall mean that the Executive is, by reason of any medically determinable
physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than 12 months, either (1)
unable to engage in any substantial gainful activity, or (2) receiving income
replacement benefits for a period of not less than three months under an
accident and health plan covering the Company’s employees.

    


    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, subject to Section
23:

    


    (i)        
    The Executive shall be paid a lump sum cash payment,
payable within 30 days after 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 Base Rate,
or (B) the rate in effect on termination of his employment; and

    
________________________________

     

      
        	
                2

              	
                Time
      and form of payment needs to be specified in order to avoid IRC
      §409A.

              


      

      

        
          
             


          

          
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    (ii)     
      The Executive shall be entitled to a lump
sum payment payable within 30 days after his termination of employment equal to
the amount of annual bonuses3 which would have been
paid to him under this Agreement for the remainder of the Term (including the
then-current Bonus Year, if the bonus for such period is unpaid at that time)
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)           Benefits
(as described in Sections 4(c) and 4(d) 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. Any benefits coverage or continuation other than as
provided in this subparagraph (iii) shall be determined under applicable plans,
programs or other coverages of the Company and applicable law.

    


    5.3           Termination
by the Company for Cause.

    


    If the
Company terminates the Executive’s employment for Cause, as defined in this
Agreement, subject to Section 23, the Executive shall be entitled only to
Salary, earned as of the effective date of termination and payable in a lump sum
within 30 days of termination.  Subject to Section 23, any other
accrued benefits or benefit continuation that the Executive may be entitled to
shall be determined under applicable plans, programs or other coverages of the
Company.  For purposes of this Agreement, the term “Cause” shall
mean:

    
________________________________

     

      
        	
                3

              	
                The
      limit on deductibility under Section 162(m) of the Code does not apply to
      compensation that, in addition to meeting other requirements, is payable
      “solely” on account of the attainment of one or more pre-established
      objective performance goals.  Under a recent ruling from the IRS
      (Rev. Rul. 2008-13, Feb. 22, 2008), however, if that same item of
      compensation, or perhaps an amount in lieu of it, would be payable upon an
      involuntary termination in spite of a failure to attain the performance
      goal, the “solely” requirement is violated and the exception to Section
      162(m) cannot apply.  Many questions have been raised and left
      unresolved by Rev. Rul. 2008-13; however, the Ruling does not become
      effective until performance periods beginning after January 1,
      2009.  Our recommendation is to wait for additional guidance --
      either formal or informal -- from the IRS or for a convergence of industry
      standards and market practices before attempting changes to comply with
      the new IRS position.

              


      

      

        
          
             


          

          
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    (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,
subject to Section 23, the Executive shall be entitled only to his Salary earned
through the effective date of termination and payable in a lump sum within 30
days of termination.  Subject to Section 23, any other accrued
benefits or benefit continuation or coverage that the Executive may be entitled
to shall be determined under applicable plans, programs or other coverages of
the Company.


    
      
         


      

      
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    5.5           Termination
by 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, within 180 days of the initial
occurrence without the consent of the Executive of such Good Reason, 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, subject to Section 23, 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
events or conditions shall have occurred and shall not been corrected within 30
days following written notice to the Company by the Executive given within 90
days of the initial occurrence of  such event or
condition:

    


    (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 material diminution
in such position, authority, duties or responsibilities; or

    


    (ii)        
   any action or inaction by the Company that constitutes a
material breach of this Agreement, including, but not limited to failure by the
Company to comply with the provisions of Section 3 of this Agreement;
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, that constitutes a
material change in the geographic location of where Executive must perform his
duties under this Agreement; or


    
      
         


      

      
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    (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.

    


    The
Executive recognizes that the Company’s willingness to enter into this Agreement
is based in material part on the Executive’s agreement to the provisions of this
paragraph 6 and that the Executive’s breach of the provisions of this paragraph
6 could materially damage the Company.  Subject to the further
provisions of this Agreement and in consideration of the Company’s agreement to
provide the Executive Confidential Information (as defined in Section 7) to
which the Executive did not have access prior to the execution of this
Agreement, and the receipt of which is hereby acknowledged, 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.


    
      
         


      

      
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    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.

    


    (a)         
  The Executive acknowledges and agrees that all Confidential
Information (as defined below) of the Company is confidential and a valuable,
special and unique asset of the Company that gives the Company an advantage over
its actual and potential, current and future competitors.  The
Executive further acknowledges and agrees that the Executive owes the Company a
fiduciary duty to preserve and protect all Confidential Information from
unauthorized disclosure or unauthorized use, that certain Confidential
Information constitutes “trade secrets” under applicable laws and that
unauthorized disclosure or unauthorized use of the Company’s Confidential
Information would irreparably injure the Company.


    
      
         


      

      
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    (b)       
    Both during the term of the Executive’s employment and
after the termination of the Executive’s employment for any reason (including
wrongful termination), the Executive shall hold all Confidential Information in
strict confidence, and shall not use any Confidential Information except for the
benefit of the Company, in accordance with the duties assigned to the
Executive.  The Executive shall not, at any time (either during or
after the term of the Executive’s employment), disclose any Confidential
Information to any person or entity (except other employees of the Company who
have a need to know the information in connection with the performance of their
employment duties and except such person or persons to whom such information is
required to be divulged, in which case the Executive 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), or copy, reproduce, modify, decompile or reverse engineer any
Confidential Information, or remove any Confidential Information from the
Company’s premises, without the prior written consent of the Board of Directors,
or permit any other person to do so.  The Executive shall take
reasonable precautions to protect the physical security of all documents and
other material containing Confidential Information (regardless of the medium on
which the Confidential Information is stored).  This Agreement applies
to all Confidential Information, whether now known or later to become known to
the Executive.


    
      
         


      

      
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    (c)       
    Upon the termination of the Executive’s employment with
the Company for any reason, and upon request of the Company at any other time,
the Executive shall promptly surrender and deliver to the Company all documents
and other written material of any nature containing or pertaining to any
Confidential Information and shall not retain any such document or other
material.  Within five days of any such request, the Executive shall
certify to the Company in writing that all such materials have been
returned.

    


    (d)        
   As used in this Agreement, the term “Confidential Information”
shall mean any information or material known to or used by or for the Company
(whether or not owned or developed by the Company and whether or not developed
by the Executive) that is not generally known to persons in the Subject
Businesses.  Confidential Information includes, but is not limited to,
the following: all trade secrets of the Company; all information that the
Company has marked as confidential or has otherwise described to the Executive
(either in writing or orally) as confidential; all nonpublic information
concerning the Company’s products, services, prospective products or services,
research, product designs, prices, discounts, costs, marketing plans, marketing
techniques, market studies, test data, customers, customer lists and records,
suppliers and contracts; all business records and plans; all personnel files;
all financial information of or concerning the Company; all information relating
to operating system software, application software, software and system
methodology, hardware platforms, technical information, inventions, computer
programs and listings, source codes, object codes, copyrights and other
intellectual property; all technical specifications; any proprietary information
belonging to the Company; all computer hardware or software manuals; all
training or instruction manuals; and all data and all computer system passwords
and user codes.


    
      
         


      

      
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    (e)       
    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, described in Section 8.1 shall be paid by the Company at
reasonable intervals prior to 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.


    
      
         


      

      
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    (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.


    
      
         


      

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

    


    8.4      
     To the extent that the Company’s obligations under
this Section 8 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 8 and/or incurred by
Executive, subject to the limitations and requirements of Section 23(iii) of
this Agreement.


    
      
         


      

      
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    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.


    
      
         


      

      
        17

        
          

        

      

      
         


      

    


    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.

    


    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.           Arbitration.

    


    Except
with respect to injunctive relief which may be sought by the Company or the
Executive, the Parties agree to resolve any and all claims or controversies
arising out of or relating to this Agreement, the Executive’s employment and/or
termination of employment with Company including, but not limited to, claims for
wrongful termination of employment, and claims under the Civil Rights Act of
1866, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities
Act, the Age Discrimination in Employment Act, the Family Medical Leave Act, the
Sarbanes-Oxley Act, the Equal Pay Act, Chapter 21 of the Texas Labor Code,
formerly known as the Texas Commission on Human Rights Act, the retaliatory
discharge provisions of the Texas Worker’s Compensation Act, the Texas Pay Day
Act, and any similar state law or local ordinance by binding arbitration under
the Federal Arbitration Act, before one arbitrator in the City of Houston, State
of Texas, in a non-administered proceeding under the American Arbitration
Association National Rules for the Resolution of Employment
Disputes.  The Parties further agree that the work of the Executive
involves interstate commerce, the award rendered by the arbitrator is final and
binding, and judgment thereon may be entered in any court having jurisdiction
thereof.  The invalidity of unenforceability of any provision of this
Section 13 shall not affect the validity or enforceability of any other
provision of this Agreement which shall remain in full force and
effect.  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.


    
      
         


      

      
        18

        
          

        

      

      
         


      

    


    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:

            	
              Michael
      O’Leary, Esq.

            


    

    Andrews
Kurth LLP

    600
Travis, Suite 4200

    Houston,
Texas 77002

    


    
      	
               
      

            	
              To
      the Executive:

            	
              Paul
      G. Perez

            


    

    108
Sawgrass Circle

    Lufkin,
Texas  75901


    
      
         


      

      
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    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

        
          

        

      

      
         


      

    


    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.

    


    23.           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 23, 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 23) 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 last day of the second year
following the year in which occurs the involuntary separation from
service.  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 23(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
23(iii).


    
      
         


      

      
        21

        
          

        

      

      
         


      

    


    (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 received or to be received by Executive, such reimbursement 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.


    
      
         


      

      
        22

        
          

        

      

      
         


      

    


    (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 23(v), shall at all times be treated as a right to a series
of separate payments.


    
      
         


      

      
        23

        
          

        

      

      
         


      

    


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

    


    
      
        
          
            
              	 
      	
                      LUFKIN
      INDUSTRIES, INC.

                    
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
                      By:

                    	
                      /s/ John F. Glick

                    
	 
      	
                      Name:

                    	
                      John
      F. Glick

                    
	 
      	
                      Title:

                    	
                      President
      & CEO

                    
	 
      	 
      	 
      
	 
      	
                      EXECUTIVE

                    
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
                       

                    	/s/
      Paul G. Perez  
	 
      	
                      Name:

                    	
                      Paul
      G. Perez

                    
	 
      	
                      Title:

                    	
                      Vice
      President

                    


            

          

        

      

    

     

     

    24