Document:

Exhibit 10.3

    
      

    

    Exhibit
      10.3

    

    EMPLOYMENT
      AGREEMENT

    

    THIS
      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 Scott
      H. Semlinger
      of
      Lufkin, Texas (the “Executive”).

    

    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 second annual anniversary of
      the
      Effective Date (the “Initial Term”), unless sooner terminated in accordance with
      the terms and provisions hereinafter set forth. The Initial Term shall be
      automatically renewed and extended for a period of twelve (12) months commencing
      on the first annual anniversary of the Effective Date and on each successive
      annual anniversary thereafter 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
      first annual anniversary of the Effective Date of this Agreement (or, if
      previously renewed and extended, at least sixty (60) days prior to any
      succeeding annual anniversary), 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.

    

    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.

    

    
      
        
          
          

        

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

    

    (b)    Bonus.
      The
      Executive will have an opportunity to receive a bonus with respect to each
      year
      during the Term. The level or levels of the annual bonus for each year during
      the Term and the criteria for entitlement to such level or levels shall be
      reasonable and reflective of industry norms as shall be determined in good
      faith
      by the Company with the advice and counsel of competent compensation consultants
      of the Company’s choosing who shall currently review such data as may be
      available with respect to bonuses that are made available to similarly situated
      executives of companies that are in the same industry and are approximately
      the
      same size (based on sales) as the Company. The bonus for any bonus year during
      the Term shall be paid in the form of a lump sum cash payment on the last day
      of
      the bonus year to which the annual bonus relates; provided, however, if
      calculation of the amount of the annual bonus is not administratively
      practicable due to events beyond the control of the Company, such annual bonus
      shall be paid during the first bonus year 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.

    

    (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.

     

    
      
        
          
          

        

        
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      Such
        reimbursements and payments shall be paid in a lump sum in cash not later
        than
        the 15th day of the third month following the last day of the calendar year
        in
        which the reimbursable costs were incurred or the payment was initially
        due.

       

    

    5.    
      Termination
      of Employment.

    

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

    

    5.1  
Death
      or Disability.

    

    If
      the
      Executive’s employment is terminated due to his death or total disability, as
      determined under the Company’s applicable long-term disability plan, then,
      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 and benefit
      coverages for a period of six months from and after the date of termination
      of
      employment; and

    

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

    

    To
      the
      extent that any benefit described in the immediately preceding sentence cannot
      be provided without contravening the requirements of applicable law because
      the
      Executive ceased to be employed by the Company, the Company shall pay an amount
      hereunder equal to its cost of providing such benefit for the period described
      in the immediately preceding sentence and such amount shall be payable in
      accordance with the Company’s payroll procedures commencing with the first
      payroll period that begins on or immediately after the Executive’s termination
      of employment due to death or total disability.

    

    
      
        
          
          

        

        
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    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 rate in effect on the Effective
      Date, or (B) the rate in effect on termination of his employment;
      and

    

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

    

    (iii)   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; provided, however, that to the extent any such benefit
      cannot be continued as a matter of law during the remaining period of the Term
      because the Executive is no longer employed by the Company or because providing
      the benefit would subject the Executive to additional income taxes under Section
      409A of the Internal Revenue Code of 1986, as amended (the “Code”), the
      Company shall pay the Executive in accordance with the Company’s payroll
      procedures (commencing with the first payroll period that begins on or
      immediately after the termination by the Company of the Executive’s employment
      without cause) an amount equal to its cost of providing such benefit at the
      same
      rate or level as such benefit was provided or available at the time the benefit
      was required as a matter of law to be discontinued because the Executive ceased
      to be employed by the Company or because providing the benefit would subject
      the
      Executive to additional income taxes under Section 409A of the Code and;
      provided, further, that any such benefit shall be discontinued on the date
      that
      the Executive becomes entitled to coverage for a substantially equivalent rate
      or level of a comparable benefit as a result of his employment by a successor
      employer.

    

    
      
        
          
          

        

        
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    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, and any benefits, accrued as of the effective date of termination.
      Any
      other benefits shall be determined under applicable plans, programs or other
      coverages of the Company. For purposes of this Agreement, the term “Cause” shall
      mean:

    

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

    

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

    

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

     

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

    

    
      
        
          
          

        

        
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    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 any benefits accrued as of the
      effective date of termination as determined under applicable plans, programs
      or
      other coverages of the Company.

    

    5.5   Termination
      of the Executive for Good Reason.

    

    In
      the
      event the Executive’s employment by the Company is terminated by the Executive
      for Good Reason, as defined in this Section 5.5, such termination shall be
      deemed to be a termination by the Company of the Executive’s employment without
      Cause, as such term is defined in Section 5.3 above, in which case, 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 shall have occurred and shall not been
      corrected within thirty days following written notice by the Executive to the
      Company:

    

    
      
        
          
          

        

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

    

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

    

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

    

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

    

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

    

    
      
        
          
          

        

        
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    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.

    

    (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.

    

    
      
        
          
          

        

        
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    (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.

    

    (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.

    

    
      
        
          
          

        

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

    

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

    

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

    

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

    

    
      
        
          
          

        

        
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    (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.

    

    
      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

      

    

    

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

    

    9.    Withholding.

    

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

    

    10.   Assignability;
      Binding Nature.

    

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

    

    
      
        
          
          

        

        
          16

          
            

          

        

        
          
          

        

      

    

    

    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.

    

    
      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

      

    

    

    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.

    

    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:

            	 	
              Scott
                H. Semlinger

            
	 	 	
              1009
                Champions 

            
	 	 	
              Lufkin,
                Texas 75901

            

    

    

    

    
      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

    

    

    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.

    

    
      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

      

    

    

    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 (i) shall automatically be amended to
      the
      extent necessary to incorporate any provisions required to ensure such
      compliance (which the Parties hereby agree are hereby adopted, approved,
      consented to, ratified and incorporated herein by reference) and (ii) 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, to the extent that the Executive is a key employee (as defined
      in
      Section 416(i) of the Code without regard to paragraph 5 thereof) at any time
      prescribed under regulations or other regulatory guidance issued under Section
      409A of the Code, no distribution or payment that is subject to Code Section
      409A shall be made under this Agreement on account of the Executive’s separation
      from service with the Company (at any time when the Executive is deemed under
      regulations or other regulatory guidance issued under Code Section 409A to
      be a
      specified employee described in Code Section 409A and regulations or other
      regulatory authority issued thereunder and any stock of the Company is publicly
      traded on an established securities market or otherwise) before the date that
      is
      the first day of the month that occurs six months after the date of his
      separation from service (or, if earlier, the date of death of the Executive
      or
      any other date permitted under regulations or other regulatory guidance issued
      under Code Section 409A).

    

    
      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

      

    

    

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

    

    
      	 	
              LUFKIN
                INDUSTRIES, INC.

            
	 	 	 	 
	 	 	 	 
	 	
              By: 
                

            	
              /s/ 
                

            	
              Douglas
                V. Smith

            
	 	
              Name:
                

            	
              Douglas
                V. Smith

            
	 	
              Title:
                

            	
              President
                & CEO

            

    

     

    
      
        
          
            
              
                	 	
                        EXECUTIVE

                      
	 	 	 
	 	 	 
	 	
                        /s/
                          Scott
                          H. Semlinger

                      
	 	
                        Name:
                          

                      	
                        Scott
                          H. Semlinger

                      
	 	
                        Title: 

                      	
                        Vice
                          President and General Manager- Trailer
                          Division 

                      

              

            

          

        

      

    

     

     

     
21Exhibit 10.4

    
      

    

    
      
        Exhibit
          10.4

        

        EMPLOYMENT
          AGREEMENT

        

        THIS
          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 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.

        
          
            
            

          

          
            1

            
              

            

          

          
            
            

          

        

        

        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 second annual anniversary
          of the
          Effective Date (the “Initial Term”), unless sooner terminated in accordance with
          the terms and provisions hereinafter set forth. The Initial Term shall
          be
          automatically renewed and extended for a period of twelve (12) months commencing
          on the first annual anniversary of the Effective Date and on each successive
          annual anniversary thereafter 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
          first annual anniversary of the Effective Date of this Agreement (or, if
          previously renewed and extended, at least sixty (60) days prior to any
          succeeding annual anniversary), 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.

        

        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.

        
          
            
            

          

          
            2

            
              

            

          

          
            
            

          

        

        

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

        

        (b)    Bonus.
          The
          Executive will have an opportunity to receive a bonus with respect to each
          year
          during the Term. The level or levels of the annual bonus for each year
          during
          the Term and the criteria for entitlement to such level or levels shall
          be
          reasonable and reflective of industry norms as shall be determined in good
          faith
          by the Company with the advice and counsel of competent compensation consultants
          of the Company’s choosing who shall currently review such data as may be
          available with respect to bonuses that are made available to similarly
          situated
          executives of companies that are in the same industry and are approximately
          the
          same size (based on sales) as the Company. The bonus for any bonus year
          during
          the Term shall be paid in the form of a lump sum cash payment on the last
          day of
          the bonus year to which the annual bonus relates; provided, however, if
          calculation of the amount of the annual bonus is not administratively
          practicable due to events beyond the control of the Company, such annual
          bonus
          shall be paid during the first bonus year in which calculation is
          administratively practicable.

        
          
            
            

          

          
            3

            
              

            

          

          
            
            

          

        

        

        (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.

        

        (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.

        
          
            
            

          

          
            4

            
              

            

          

          
            
            

          

        

        

        Such
          reimbursements and payments shall be paid in a lump sum in cash not later
          than
          the 15th day of the third month following the last day of the calendar
          year in
          which the reimbursable costs were incurred or the payment was initially
          due.

        

        5.    
          Termination
          of Employment.

        

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

        

        5.1   Death
          or Disability.

        

        If
          the
          Executive’s employment is terminated due to his death or total disability, as
          determined under the Company’s applicable long-term disability plan, then,
          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 and benefit
          coverages for a period of six months from and after the date of termination
          of
          employment; and

        

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

        

        To
          the
          extent that any benefit described in the immediately preceding sentence
          cannot
          be provided without contravening the requirements of applicable law because
          the
          Executive ceased to be employed by the Company, the Company shall pay an
          amount
          hereunder equal to its cost of providing such benefit for the period described
          in the immediately preceding sentence and such amount shall be payable
          in
          accordance with the Company’s payroll procedures commencing with the first
          payroll period that begins on or immediately after the Executive’s termination
          of employment due to death or total disability.

        
          
            
            

          

          
            5

            
              

            

          

          
            
            

          

        

        

        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 rate in effect on the Effective
          Date, or (B) the rate in effect on termination of his employment;
          and

        

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

        

        (iii)   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; provided, however, that to the extent any such benefit
          cannot be continued as a matter of law during the remaining period of the
          Term
          because the Executive is no longer employed by the Company or because providing
          the benefit would subject the Executive to additional income taxes under
          Section
          409A of the Internal Revenue Code of 1986, as amended (the “Code”), the
          Company shall pay the Executive in accordance with the Company’s payroll
          procedures (commencing with the first payroll period that begins on or
          immediately after the termination by the Company of the Executive’s employment
          without cause) an amount equal to its cost of providing such benefit at
          the same
          rate or level as such benefit was provided or available at the time the
          benefit
          was required as a matter of law to be discontinued because the Executive
          ceased
          to be employed by the Company or because providing the benefit would subject
          the
          Executive to additional income taxes under Section 409A of the Code and;
          provided, further, that any such benefit shall be discontinued on the date
          that
          the Executive becomes entitled to coverage for a substantially equivalent
          rate
          or level of a comparable benefit as a result of his employment by a successor
          employer.

        
          
            
            

          

          
            6

            
              

            

          

          
            
            

          

        

        

        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, and any benefits, accrued as of the effective date of termination.
          Any
          other benefits shall be determined under applicable plans, programs or
          other
          coverages of the Company. For purposes of this Agreement, the term “Cause” shall
          mean:

        

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

        

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

        

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

        

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

        
          
            
            

          

          
            7

            
              

            

          

          
            
            

          

        

        

        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 any benefits accrued as of
          the
          effective date of termination as determined under applicable plans, programs
          or
          other coverages of the Company.

        

        5.5   Termination
          of the Executive for Good Reason.

        

        In
          the
          event the Executive’s employment by the Company is terminated by the Executive
          for Good Reason, as defined in this Section 5.5, such termination shall
          be
          deemed to be a termination by the Company of the Executive’s employment without
          Cause, as such term is defined in Section 5.3 above, in which case, 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 shall have occurred and shall not been
          corrected within thirty days following written notice by the Executive
          to the
          Company:

        

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

        
          
            
            

          

          
            8

            
              

            

          

          
            
            

          

        

        

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

        

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

        

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

        

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

        
          
            
            

          

          
            9

            
              

            

          

          
            
            

          

        

        

        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.

        
          
            
            

          

          
            10

            
              

            

          

          
            
            

          

        

        

        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.

        
          
            
            

          

          
            11

            
              

            

          

          
            
            

          

        

        

        (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.

        

        (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.

        
          
            
            

          

          
            12

            
              

            

          

          
            
            

          

        

        

        (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.

        

        (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.

        
          
            
            

          

          
            13

            
              

            

          

          
            
            

          

        

        

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

        

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

        

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

        

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

        
          
            
            

          

          
            14

            
              

            

          

          
            
            

          

        

        

        (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.

        
          
            
            

          

          
            15

            
              

            

          

          
            
            

          

        

        

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

        

        9.    Withholding.

        

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

        

        10.   Assignability;
          Binding Nature.

        

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

        
          
            
            

          

          
            16

            
              

            

          

          
            
            

          

        

        

        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.

         

        
          
            
            

          

          
            17

            
              

            

          

          
            
            

          

        

        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

                

        

        

          
            
              
              

            

            
              18

              
                

              

            

            
              
              

            

          

        

        

        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.

        
          
            
            

          

          
            19

            
              

            

          

          
            
            

          

        

        

        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 (i) shall automatically be amended
          to the
          extent necessary to incorporate any provisions required to ensure such
          compliance (which the Parties hereby agree are hereby adopted, approved,
          consented to, ratified and incorporated herein by reference) and (ii) 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, to the extent that the Executive is a key employee (as defined
          in
          Section 416(i) of the Code without regard to paragraph 5 thereof) at any
          time
          prescribed under regulations or other regulatory guidance issued under
          Section
          409A of the Code, no distribution or payment that is subject to Code Section
          409A shall be made under this Agreement on account of the Executive’s separation
          from service with the Company (at any time when the Executive is deemed
          under
          regulations or other regulatory guidance issued under Code Section 409A
          to be a
          specified employee described in Code Section 409A and regulations or other
          regulatory authority issued thereunder and any stock of the Company is
          publicly
          traded on an established securities market or otherwise) before the date
          that is
          the first day of the month that occurs six months after the date of his
          separation from service (or, if earlier, the date of death of the Executive
          or
          any other date permitted under regulations or other regulatory guidance
          issued
          under Code Section 409A).

        
          
            
            

          

          
            20

            
              

            

          

          
            
            

          

        

        

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

        

        
          	 	
                  LUFKIN
                    INDUSTRIES, INC.

                
	 	 	 	 
	 	 	 	 
	 	
                  By:
                    

                	
                  /s/

                	
                  Douglas
                    V. Smith

                
	 	
                  Name:

                	
                  Douglas
                    V. Smith

                
	 	
                  Title:

                	
                  President
                    & CEO

                

        

         

        
          
            
              	 	
                      EXECUTIVE

                    
	 	 	 
	 	 	 
	 	
                      /s/
                        Paul G. Perez

                    
	 	
                      Name:
                        

                    	
                      Paul
                        G. Perez

                    
	 	
                      Title: 

                    	
                      Vice
                        President, General Counsel and Corporate
                        Secretary 

                    

            

          

        

         

         

      

    

     21

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