3. Acquisitions

On September 1, 2011, the Company completed the acquisition of Pentagon Optimization Services, Inc. ("Pentagon"), an Alberta corporation based in Red Deer, Alberta, Canada. Pentagon, a diversified well optimization company serving the oil and gas industry, provides a wide range of products and services, including plunger lift systems and well engineering and testing. The addition of the proprietary "Angel" pump, which can pump both liquid and gas simultaneously without gas locking, will upgrade the Company's product portfolio and provide a cost effective method to produce pressure-depleted gas wells.

The Pentagon purchase price allocation has been finalized in the third quarter of 2012. The final valuation for Pentagon did not result in material changes to the preliminary allocations.

On December 1, 2011, the Company completed the acquisition of Quinn's Oilfield Supply Ltd., including certain affiliates ("Quinn's"), an Alberta corporation based in Red Deer, Alberta, Canada. Quinn's is one of the largest reciprocating rod pump manufacturers in North America and also manufactures and distributes progressive cavity pumps ("PCPs") and related equipment.

The Quinn's preliminary purchase price allocations, which are based on relevant facts and circumstances, are subject to change upon completion of the final valuation analysis by the Company's management. The Company has reached a preliminary agreement on the final working capital, which will be finalized by December 2012. The final valuations for Quinn's, which are required to be completed by December 2012, are not expected to result in material changes to the preliminary allocations.

On January 19, 2012, the Company completed the acquisition of Datac Instrumentation Limited ("Datac") and RealFlex Technologies Limited ("Realflex"). Datac, based in Dublin, Ireland, is a solutions company serving the oil and gas, power, water and waste water, and transportation and marine industries that provides systems integration for supervisory control and data acquisition ("SCADA"). RealFlex, also based in Dublin, provides real-time software packages for SCADA and process control applications.

The Datac and Realflex acquisition was recorded using the acquisition method of accounting, and accordingly, the acquired operations have been included in the results of operations since the date of acquisition. The preliminary purchase price consideration consisted of the following (in thousands of dollars):

Cash paid at closing, net	$	18,586
Common stock paid at closing		8,414

Total consideration paid	$	27,000

In connection with the Datac and Realflex acquisition, the Company issued 116,716 restricted shares at a value of $72.09 per share. The restrictions on the shares lapsed on July 19, 2012.

The following table indicates (in thousands of dollars) the preliminary purchase price allocation to net assets acquired, which was based on estimated fair values as of the acquisition date. The excess of the purchase price over the net assets acquired, which totaled $20.4 million, was recorded as goodwill in the Company's consolidated balance sheet in the Oilfield segment. Based on the structure of the transaction, the majority of the goodwill related to the transaction is not expected to be deductible for tax purposes.

Purchase price	$	27,000

Receivables		323
Inventories		449
Other current assets		82
Property, plant and equipment		51
Non-compete agreements and trademarks		350
Customer relationships and contracts		5,983
Indemnification asset		5,500
Accounts payable		(136	)
Other accrued liabilities		(484	)
Uncertain tax liability		(5,500	)

Goodwill recorded	$	20,382

In connection with the Datac acquisition the Company identified uncertain tax liabilities of the target company related to previous tax years. As a result, the Company entered into an agreement whereby the former owners funded an escrow account for $5.5 million dollars. In accordance with ASC 805, Business Combinations, the Company has identified an indemnification asset resulting from this agreement.

The Datac and Realflex preliminary purchase price allocations, which are based on relevant facts and circumstances, are subject to change upon completion of the final valuation analysis by the Company's management. The final valuations for Datac and Realflex, which are required to be completed by January 2013, are not expected to result in material changes to the preliminary allocations.

On February 29, 2012, the Company completed the acquisition of Zenith Oilfield Technology Ltd ("Zenith"). Zenith, based in Aberdeen, Scotland, is an international provider of innovative technology and products for the monitoring and analysis of down-hole data and related completion products for the oilfield artificial lift market.

The Zenith acquisition was recorded using the acquisition method of accounting, and accordingly, the acquired operations have been included in the Company's results of operations since the date of acquisition. The preliminary purchase price consideration consisted of the following (in thousands of dollars):

Cash paid at closing, net	$	133,972

Total consideration paid	$	133,972

The following table indicates (in thousands of dollars) the preliminary purchase price allocation to net assets acquired, which was based on estimated fair values as of the acquisition date. The excess of the purchase price over the net assets acquired, which totaled $77.9 million, was recorded as goodwill in the Company's consolidated balance sheet in the Oilfield segment. Based on the structure of the transaction, the majority of the goodwill related to the transaction is not expected to be deductible for tax purposes.

Purchase price	$	133,972

Receivables		13,236
Inventories		4,226
Other current assets		7,711
Property, plant and equipment		518
Non-compete agreements and trademarks		3,614
Customer relationships and contracts		32,665
Other long term assets		355
Accounts payable		(3,698	)
Other accrued liabilities		(2,554	)

Goodwill recorded	$	77,899

The Zenith preliminary purchase price allocations, which are based on relevant facts and circumstances, are subject to change upon completion of the final valuation analysis by the Company's management. The final valuations for Zenith, which are required to be completed by February 2013, are not expected to result in material changes to the preliminary allocations.

Supplemental Pro Forma Data

Revenues and earnings to date for the Pentagon, Datac, Realflex, and Zenith acquisition are not material and pro forma information is not provided. Results of operations for all acquisitions have been included in the Company's financial statements for periods subsequent to the effective date of the acquisition. The following unaudited supplemental pro forma data ("pro forma data") presents consolidated information as if the Quinn's acquisition had been completed on January 1, 2011:

LUFKIN INDUSTRIES, INC.

PRO FORMA

Nine months ended September 30, 2011

(Thousands of dollars, except per share data)

	2011

Sales	$	802,967

Net earnings	$	56,701

Diluted earnings per share from continuing operations	$	1.68

The pro forma data was prepared based on the historical financial information of Quinn's and Lufkin and has been adjusted to give effect to pro forma adjustments that are (i) directly attributable to the transactions, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The pro forma data is not necessarily indicative of what Quinn's results of operations actually would have been had the transactions been completed on January 1, 2011. Additionally, the pro forma data does not project the future results of operations of the combined company nor do they reflect the expected realization of synergies associated with the transactions. The pro forma data reflects the application of the following adjustments:

·	Additional depreciation and amortization expense associated with fair value adjustments to acquired identifiable intangible assets and property, plant and equipment.

·	Increase in interest expense resulting from the issuance of debt to finance the purchase price, as well as the amortization of related deferred financing costs.

·	Elimination of transaction costs incurred in 2011 that are directly related to the transactions, and do not have a continuing impact on the combined company's operating results.