(14) Commitments and Contingencies

Legal proceedings: On March 7, 1997, a class action complaint was filed against Lufkin Industries, Inc. ("Lufkin") in the U.S. District Court for the Eastern District of Texas by an employee and a former employee of Lufkin who alleged race discrimination in employment. Certification hearings were conducted in Beaumont, Texas in February 1998 and in Lufkin, Texas in August 1998. In April 1999, the District Court issued a decision that certified a class for this case, which included all black employees employed by Lufkin from March 6, 1994, to the present. The case was administratively closed from 2001 to 2003 while the parties unsuccessfully attempted mediation. Trial for this case began in December 2003, and after the close of plaintiff's evidence, the court adjourned and did not complete the trial until October 2004. Although plaintiff's class certification encompassed a wide variety of employment practices, plaintiffs presented only disparate impact claims relating to discrimination in initial assignments and promotions at trial.

On January 13, 2005, the District Court entered its decision finding that Lufkin discriminated against African-American employees in initial assignments and promotions. The District Court also concluded that the discrimination resulted in a shortfall in income for those employees and ordered that Lufkin pay those employees back pay to remedy such shortfall, together with pre-judgment interest in the amount of 5%. On August 29, 2005, the District Court determined that the back pay award for the class of affected employees was $3.4 million (including interest to January 1, 2005) and provided a formula for attorney fees that Lufkin estimates will result in a total not to exceed $2.5 million. In addition to back pay with interest, the District Court (i) enjoined and ordered Lufkin to cease and desist all racially biased assignment and promotion practices and (ii) ordered Lufkin to pay court costs and expenses.

Lufkin reviewed this decision with its outside counsel and on September 19, 2005, appealed the decision to the U.S. Court of Appeals for the Fifth Circuit. On April 3, 2007, the Company appeared before the appellate court in New Orleans for oral argument in this case. The appellate court subsequently issued a decision on February 29, 2008 that reversed and vacated the plaintiff's claim regarding the initial assignment of black employees into the Foundry Division. The court also denied plaintiff's appeal for class certification of a class disparate treatment claim. Plaintiff's claim on the issue of Lufkin's promotional practices was affirmed but the back pay award was vacated and remanded for re-computation in accordance with the opinion. The District Court's injunction was vacated and remanded with instructions to enter appropriate and specific injunctive relief. Finally, the issue of plaintiff's attorney's fees was remanded to the District Court for further consideration in accordance with prevailing authority.

On December 5, 2008, U.S. District Court Judge Clark held a hearing in Beaumont, Texas during which he reviewed the Fifth Circuit class action decision and informed the parties that he intended to implement the decision in order to conclude this litigation. At the conclusion of the hearing Judge Clark ordered the parties to submit positions regarding the issues of attorney fees, a damage award and injunctive relief. Subsequently, Lufkin reviewed the plaintiff's submissions which described the formula and underlying assumptions that supported their positions on attorney fees and damages. After careful review of the plaintiff's submission to the court Lufkin continued to have significant differences regarding legal issues that materially impacted the plaintiff's requests. As a result of these different results, the court requested further evidence from the parties regarding their positions in order to render a final decision. The judge reviewed both parties arguments regarding legal fees, and awarded the plaintiffs an interim fee, but at a reduced level from the plaintiffs original request. Lufkin and the plaintiffs reconciled the majority of the differences and the damage calculations which also lowered the originally requested amounts of the plaintiffs on those matters. Due to the resolution of certain legal proceedings on damages during the first half of 2009 and the District Court awarding the plaintiffs an interim award of attorney fees and cost totaling $5.8 million, Lufkin recorded an additional provision of $5.0 million in the first half of 2009 above the $6.0 million recorded in the fourth quarter of 2008. The plaintiffs filed an appeal of the District Court's interim award of attorney fees with the Fifth Circuit. The Fifth Circuit subsequently dismissed these appeals on August 28, 2009 on the basis that an appealable final judgment in this case had not been issued. The court commented that this issue can be reviewed with an appeal of final judgment.

On January 15, 2010, the U.S. District Court for the Eastern District of Texas notified Lufkin that it had entered a final judgment related to the Lufkin's ongoing class-action lawsuit. On January 15, 2010, the plaintiffs filed a notice of appeal with the Fifth Circuit of the District Court's final judgment. On January 21, 2010, Lufkin filed a notice of cross-appeal with the same court.

On January 15, 2010, in its final judgment, the Court ordered Lufkin to pay the plaintiffs $3.3 million in damages, $2.2 million in pre-judgment interest and 0.41% interest for any post-judgment interest. Lufkin had previously estimated the total liability for damages and interest to be approximately $5.2 million. The Court also ordered the plaintiffs to submit a request for legal fees and expenses from January 1, 2009 through the date of the final judgment. The plaintiffs were required to submit this request within 14 days of the final judgment. On January 21, 2010, Lufkin filed a motion with the District Court to stay the payment of damages referenced in the District Court's final judgment pending the outcome of the Fifth Circuit's decision on both parties' appeals. The District Court granted this motion to stay.

On January 29, 2010, the plaintiffs filed a motion with the U.S. District Court for the Eastern District of Texas for a supplemental award of $0.7 million for attorney's fees, costs and expenses incurred between January 1, 2009 and January 15, 2010, as allowed in the final judgment. In the fourth quarter of 2009, Lufkin recorded a provision of $1.0 million for these legal expenses and accrual adjustments for the final judgment award of damages. On September 28, 2010, the District Court granted plaintiffs' motion for supplemental attorney's fees, costs and expenses in the amount of $0.7 million for the period of January 1, 2009 through January 15, 2010. In order to cover these cost, Lufkin recorded an additional provision of $1.0 million in September 2010 for anticipated costs through the end of 2010.

On February 2, 2011 the Fifth Circuit accepted the oral arguments from the plaintiffs and Lufkin on their respective appeals to the court.

On July 7, 2011, in light of the United States Supreme Court's decision in Wal-Mart Stores, Inc. v. Dukes, Lufkin moved to file supplemental briefs in the pending Fifth Circuit appeal to address two legal principles essential to plaintiffs' theory of liability, which Lufkin believed were foreclosed by the Supreme Court's Wal-Mart decision. Plaintiffs filed an opposition to the motion. On July 14, 2011, the Fifth Circuit denied Lufkin's motion.

On August 8, 2011, the Fifth Circuit issued a final opinion on all appeals before the Court. Lufkin filed a petition for certiorari to the United States Supreme Court on September 16, 2011.

On November 14, 2011, the United States Supreme Court denied Lufkin's petition for certiorari. The District Court subsequently entered an order on November 18, 2011, ordering Lufkin to distribute funds to class members in accordance with that Court's January 15, 2010 final judgment.

On December 13, 2011, Lufkin entered into a settlement agreement with plaintiffs' counsel, pursuant to which Lufkin agreed to pay aggregate attorney fees of approximately $2.7 million. This amount covers all fees of plaintiffs' counsel in respect of work performed prior to entry of the District Court's final judgment on January 15, 2010, work performed since January 15, 2010, and all future work performed in connection with the action. As previously disclosed, Lufkin has recorded provisions in the amount of approximately $900,000 for work performed by plaintiffs' counsel since January 15, 2010. As a result, the settlement resulted in a net pre-tax impact to Lufkin of approximately $1.8 million in the fourth quarter of 2011.

Intellectual Property Matter

In 2009, Lufkin Industries, Inc. ("Lufkin") brought suit in a Texas state court against the former owners of a business acquired by Lufkin in order to protect certain of Lufkin's intellectual property rights. The former owners responded by counter suit against Lufkin as well as its outside counsel, Andrews Kurth LLP ("AK"), claiming that Lufkin had acquired title to their inventions improperly. The case was removed from the Texas state court to a U.S. District Court in Midland, Texas in order to address intellectual property and patent issues as well as other claims made by the parties. After reviewing the facts and positions of the parties, in February 2011, the U.S. District Court granted summary judgment for Lufkin disposing of all federal claims and remanded the remainder of the case back to the Texas state court.

As a defendant, AK independently elected to appeal to the U.S. Court of Appeals for the Federal Circuit (and provisionally to the Fifth Circuit) the decision of the U.S. District Court to remand the case, as well as other issues. Thereafter, both plaintiffs, as well as defendant Lufkin (through its own counsel), filed separate appeals to the U.S. Court of Appeals for the Federal Circuit (and provisionally to the Fifth Circuit) to challenge other decisions of the U.S. District Court. The plaintiffs filed motions to dismiss these appeals based on lack of jurisdiction. In addition, the plaintiffs asked the Texas state court to proceed with a trial on the remanded case. The Texas state court set the case for trial over defendants' objections. The defendants then returned to the U.S. District Court and obtained an injunction against the plaintiffs and their counsel from pursuing the Texas state court case until resolution of the federal appeals. Plaintiffs filed a motion with the U.S. District Court to reconsider that injunction. In July 2011, the U.S. District Court denied the plaintiffs' motion for reconsideration. Plaintiffs appealed the injunction to the U.S. Court of Appeals for the Federal Circuit (and provisionally to the Fifth Circuit). On February 1, 2012, the Federal Circuit issued an order dismissing both sets of appeals for lack of jurisdiction and transferring the appeals to the Fifth Circuit. On February 15, 2012, plaintiff Gibbs filed in the Fifth Circuit "Gibbs F.R.A.P. 8 Motion Seeking Suspension of Injunction Prohibiting Litigation in State Court of Remanded Case." The parties are currently briefing that issue. Due to the number of issues on the initial appeal, it is unclear what issues would be left for trial after appeal and, further, whether that trial would proceed in federal or state court. Until the issues for trial, if any, are resolved, Lufkin cannot determine the potential range of exposure from this litigation, which Lufkin intends to defend vigorously. The Company does not believe that the ultimate outcome of this matter will have a material adverse effect on the Company's financial position.

Other Matters

There are various other claims and legal proceedings arising in the ordinary course of business pending against or involving the Company wherein monetary damages are sought. For certain of these claims, the Company maintains insurance coverage while retaining a portion of the losses that occur through the use of deductibles and retention limits. Amounts in excess of the self-insured retention levels are fully insured to limits believed appropriate for the Company's operations. Self-insurance accruals are based on claims filed and an estimate for claims incurred but not reported. While the Company does maintain insurance above its self-insured levels, a decline in the financial condition of its insurer, while not currently anticipated, could result in the Company recording additional liabilities. It is management's opinion that the Company's liability under such circumstances or involving any other non-insured claims or legal proceedings would not materially affect its consolidated financial position, results of operations, or cash flow.

Product warranties: The change in the aggregate product warranty liability for the years ended December 31, 2011 and 2010, is as follows:

(Thousands of dollars)	2011			2010

Beginning balance	$	3,620		$	4,220

Claims paid or accrued		(3,032	)		(3,213	)
Additional warranties issued		4,225			3,244
Revisions in estimates		67			(678	)
Foreign currency translation		(33	)		47

Ending balance	$	4,847		$	3,620

Operating leases: Future minimum rental payments for operating leases having initial or remaining noncancelable lease terms in excess of one year are:

(Thousands of dollars)

2012	$	2,469
2013		3,714
2014		3,005
2015		2,359
2016		1,446

All years	$	4,473

Expenses for rentals and leases, including short-term rental contracts, were $9.9 million, $7.8 million and $6.0 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Capital expenditures: As of December 31, 2011, the Company had contractual commitments for capital expenditures of $56.0 million and $3.0 million that are expected to be paid in 2012 and 2013, respectively.