**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended May 3,2003**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from          to             **

 

**Commission file number 0-8493**

 

**STEWART & STEVENSON SERVICES, INC.**

(Exact name of registrant as specified in its charter)

 

| **Texas**                                                                           |   | **74-1051605**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |                                  |
| **2707 North Loop West, Houston, Texas**                                            |   | **77008**                             |
| (Address of principal executive offices)                                            |   | (Zip Code)                            |
|                                                                                |   |                                  |
| **(713) 868-7700**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |                                  |
| **not applicable**                                                                  |
| (Former name, former address and former fiscal year,  if changed since last report) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90days.        Yes  ý       No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).    Yes ý     No o

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Common Stock, Without Par Value** |   | **28,506,995 Shares**         |
|-------------------------------------|--------|-------------------------------|
| (Class)                             |   | (Outstanding at May 30, 2003) |

 

 

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# **PART I. FINANCIAL INFORMATION**

 
| **Item  1.  Financial Statements****.**                                                                                                                                                 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                         |
| The following information  required by Rule 10-01 of Regulation S-X is provided herein for Stewart &  Stevenson Services, Inc. and Subsidiaries (collectively, the “Company”): |
|                                                                                                                                                                                         |
| Consolidated  Condensed Balance Sheets – May 3, 2003 and January 31, 2003.                                                                                                              |
|                                                                                                                                                                                         |
| Consolidated  Condensed Statements of Earnings – Three Months Ended May 3, 2003 and May 4,  2002.                                                                                       |
|                                                                                                                                                                                         |
| Consolidated  Condensed Statements of Cash Flows – Three Months Ended May 3, 2003 and May  4, 2002.                                                                                     |
|                                                                                                                                                                                         |
| Notes  to Consolidated Condensed Financial Statements.                                                                                                                                       |

 

2

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**STEWART& STEVENSON SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

*(Inthousands, except share data)*

 
|                                                                                                                   |   | **May 3, 2003** |    | **January 31, 2003** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------------|---------|----------------------|--------|
|                                                                                                                   |   | **(Unaudited)** |    | **(Audited)**        |   |
| Assets                                                                                                                 |   |            |    |                 |   |
| Current Assets                                                                                                         |   |            |    |                 |   |
| Cash and cash equivalents                                                                                              |   | $               | 115,816 |                 | $      | 107,994 |   |
| Accounts and notes receivable, net                                                                                     |   | 147,398         |    | 151,839              |   |
| Recoverable costs and accrued profits not yet  billed                                                                  |   | 15,302          |    | 11,668               |   |
| Inventories                                                                                                            |   | 250,536         |    | 244,416              |   |
| Excess of current cost over LIFO values                                                                                |   | (43,481         | )       | (42,785              | )      |
| Deferred income tax asset                                                                                              |   | 16,291          |    | 16,126               |   |
| Other current assets                                                                                                   |   | 3,578           |    | 3,967                |   |
| Total assets of discontinued operations                                                                                |   | 10,039          |    | 14,404               |   |
| Total Current Assets                                                                                                   |   | 515,479         |    | 507,629              |   |
|                                                                                                                   |   |            |    |                 |   |
| Property, Plant and Equipment, net                                                                                     |   | 116,767         |    | 118,964              |   |
| Deferred Income Tax Asset                                                                                              |   | 13,316          |    | 11,754               |   |
| Intangibles and Other Assets, net                                                                                      |   | 14,953          |    | 14,288               |   |
| Total Assets                                                                                                           |   | $               | 660,515 |                 | $      | 652,635 |   |
|                                                                                                                   |   |            |    |                 |   |
| Liabilities and Shareholders’ Equity                                                                              |   |            |    |                 |   |
| Current Liabilities                                                                                                    |   |            |    |                 |   |
| Notes payable                                                                                                          |   | $               | 2,526   |                 | $      | 1,454 |   |
| Current portion of long-term debt                                                                                      |   | 30,250          |    | 30,250               |   |
| Accounts payable                                                                                                       |   | 57,133          |    | 60,159               |   |
| Accrued payrolls and incentives                                                                                        |   | 19,579          |    | 17,408               |   |
| Billings in excess of incurred costs                                                                                   |   | 64,198          |    | 62,568               |   |
| Other current liabilities                                                                                              |   | 33,016          |    | 29,537               |   |
| Total liabilities of discontinued operations                                                                           |   | 3,829           |    | 4,092                |   |
| Total Current Liabilities                                                                                              |   | 210,531         |    | 205,468              |   |
|                                                                                                                   |   |            |    |                 |   |
| Long-Term Debt, net                                                                                                    |   | 26,675          |    | 26,531               |   |
| Accrued Postretirement Benefits and Pension                                                                            |   | 58,511          |    | 54,681               |   |
| Other Long-Term Liabilities                                                                                            |   | 3,846           |    | 3,947                |   |
| Total Liabilities                                                                                                      |   | 299,563         |    | 290,627              |   |
| Shareholders’ Equity                                                                                              |   |            |    |                 |   |
| Common stock, without par value, 100,000,000  shares authorized; 28,505,120 and 28,490,849 shares issued, respectively |   | 55,230          |    | 54,843               |   |
| Accumulated other comprehensive loss                                                                                   |   | (21,560         | )       | (21,703              | )      |
| Retained earnings                                                                                                      |   | 327,282         |    | 328,868              |   |
| Total Shareholders’ Equity                                                                                        |   | 360,952         |    | 362,008              |   |
| Total Liabilities and Shareholders’ Equity                                                                        |   | $               | 660,515 |                 | $      | 652,635 |   |

 

*See accompanying notes to consolidated condensed financialstatements.*

 

3

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**STEWART& STEVENSON SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDCONDENSED STATEMENTS OF EARNINGS**

*(Inthousands, except per share data)*

 
|                                                                                                |   | **Three Months Ended** |    |
|-----------------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                                |   | **May 3, 2003**        |    | **May 4, 2002** |   |
|                                                                                                |   | **(Unaudited)**        |    |
|                                                                                                |   |                   |    |   |   |
| Sales                                                                                               |   | $                      | 289,771 |   | $ | 299,670 |   |
| Cost of sales                                                                                       |   | 248,892                |    | 255,918 |   |
|                                                                                                |   |                   |    |   |   |
| Gross profit                                                                                        |   | 40,879                 |    | 43,752 |   |
|                                                                                                |   |                   |    |   |   |
| Selling and administrative expenses                                                                 |   | 35,309                 |    | 35,424 |   |
| Pension curtailment expense                                                                         |   | 2,400                  |    | — |   |
| Interest expense                                                                                    |   | 1,244                  |    | 1,132 |   |
| Interest and investment income                                                                      |   | (500                   | )       | (338 | ) |
| Other expense/(income), net                                                                         |   | 86                     |    | (21 | ) |
|                                                                                                |   | 38,539                 |    | 36,197 |   |
|                                                                                                |   |                   |    |   |   |
| Earnings from continuing operations before income  taxes                                            |   | 2,340                  |    | 7,555 |   |
| Income tax provision, net                                                                           |   | 682                    |    | 2,659 |   |
| Net earnings from continuing operations before  cumulative effect of change in accounting principle |   | 1,658                  |    | 4,896 |   |
| Loss from discontinued operations, net of tax of  $(426) and $(599)                                 |   | (823                   | )       | (1,097 | ) |
| Cumulative effect of change in accounting  principle, net of tax of $(1,798)                        |   | —                 |    | (3,682 | ) |
| Net earnings                                                                                        |   | $                      | 835     |   | $ | 117 |   |
|                                                                                                |   |                   |    |   |   |
| Weighted average shares outstanding:                                                                |   |                   |    |   |   |
| Basic                                                                                               |   | 28,492                 |    | 28,454 |   |
| Diluted                                                                                             |   | 28,643                 |    | 28,767 |   |
|                                                                                                |   |                   |    |   |   |
| Earnings (loss) per share:                                                                          |   |                   |    |   |   |
| Basic:                                                                                              |   |                   |    |   |   |
| Continuing operations before cumulative effect                                                      |   | $                      | 0.06    |   | $ | 0.17 |   |
| Loss from discontinued operations, net                                                              |   | (0.03                  | )       | (0.04 | ) |
| Cumulative effect of change in accounting  principle                                                |   | —                 |    | (0.13 | ) |
| Net earnings per share                                                                              |   | $                      | 0.03    |   | $ | 0.00 |   |
|                                                                                                |   |                   |    |   |   |
| Diluted:                                                                                            |   |                   |    |   |   |
| Continuing operations before cumulative effect                                                      |   | $                      | 0.06    |   | $ | 0.17 |   |
| Loss from discontinued operations, net                                                              |   | (0.03                  | )       | (0.04 | ) |
| Cumulative effect of change in accounting  principle                                                |   | —                 |    | (0.13 | ) |
| Net earnings per share                                                                              |   | $                      | 0.03    |   | $ | 0.00 |   |
|                                                                                                |   |                   |    |   |   |
| Cash dividends per share                                                                            |   | $                      | 0.085   |   | $ | 0.085 |   |

 

*See accompanying notes to consolidated condensed financialstatements.*

 

4

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**STEWART& STEVENSON SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

*(Inthousands)*

 
|                                                                                                       |   | **Three Months Ended** |    |
|------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                                       |   | **May 3, 2003**        |    | **May 4, 2002** |   |
|                                                                                                       |   | **(Unaudited)**        |    |
| **Operating Activities**                                                                                   |   |                   |    |   |   |
| Net earnings                                                                                               |   | $                      | 835     |   | $ | 117 |   |
| Adjustments to reconcile net earnings to net cash  provided by (used in) operating activities:             |   |                   |    |   |   |
| Net loss from discontinued operations                                                                      |   | 823                    |    | 1,097 |   |
| Cumulative effect of change in accounting  principle                                                       |   | —                 |    | 3,682 |   |
| Depreciation and amortization                                                                              |   | 5,543                  |    | 4,852 |   |
| Change in operating assets and liabilities net of  the effect of acquisitions and discontinued operations: |   |                   |    |   |   |
| Accounts and notes receivable, net                                                                         |   | 4,584                  |    | (2,348 | ) |
| Recoverable costs and accrued profits not yet  billed                                                      |   | (3,634                 | )       | (981 | ) |
| Inventories                                                                                                |   | (5,423                 | )       | (5,153 | ) |
| Other current and noncurrent assets                                                                        |   | (1,634                 | )       | 11,864 |   |
| Accounts payable                                                                                           |   | (3,026                 | )       | (25,625 | ) |
| Accrued payrolls and incentives                                                                            |   | 2,517                  |    | (809 | ) |
| Billings in excess of incurred costs                                                                       |   | 1,630                  |    | 4,904 |   |
| Other current liabilities                                                                                  |   | 3,479                  |    | 7,374 |   |
| Accrued postretirement benefits and pension                                                                |   | 3,823                  |    | 905 |   |
| Other long-term liabilities                                                                                |   | 51                     |    | (196 | ) |
| **Net Cash Provided By (Used In)  Continuing Operations**                                                  |   | 9,568                  |    | (317 | ) |
| Net Cash Provided By (Used In) Discontinued  Operations                                                    |   | 3,278                  |    | (2,211 | ) |
| **Net Cash Provided By (Used In)  Operating Activities**                                                   |   | 12,846                 |    | (2,528 | ) |
|                                                                                                       |   |                   |    |   |   |
| **Investing Activities**                                                                                   |   |                   |    |   |   |
| Expenditures for property, plant and equipment                                                             |   | (3,697                 | )       | (9,995 | ) |
| Acquisition of businesses                                                                                  |   | (409                   | )       | — |   |
| Disposal of property, plant and equipment, net                                                             |   | 391                    |    | 545 |   |
| **Net Cash Used In Investing  Activities**                                                                 |   | (3,715                 | )       | (9,450 | ) |
|                                                                                                       |   |                   |    |   |   |
| **Financing Activities**                                                                                   |   |                   |    |   |   |
| Change in short-term notes payable                                                                         |   | 1,072                  |    | (48 | ) |
| Dividends paid                                                                                             |   | (2,422                 | )       | (2,418 | ) |
| Proceeds from exercise of stock options                                                                    |   | 41                     |    | 324 |   |
| **Net Cash Used In Financing  Activities**                                                                 |   | (1,309                 | )       | (2,142 | ) |
|                                                                                                       |   |                   |    |   |   |
| Increase (decrease) in cash and cash equivalents                                                           |   | 7,822                  |    | (14,120 | ) |
| Cash and cash equivalents, beginning of period                                                             |   | 107,994                |    | 81,438 |   |
| Cash and cash equivalents, end of period                                                                   |   | $                      | 115,816 |   | $ | 67,318 |   |
|                                                                                                       |   |                   |    |   |   |
| Cash Paid For:                                                                                             |   |                   |    |   |   |
| Interest                                                                                                   |   | $                      | 168     |   | $ | 350 |   |
| Income taxes (excluding refunds)                                                                           |   | 103                    |    | 472 |   |

 

*See accompanying notes to consolidated condensed financialstatements.*

 

5

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**STEWART& STEVENSON SERVICES, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

 

**Note 1 -Basis of Presentation**

 

The accompanyingconsolidated condensed financial statements of Stewart & StevensonServices, Inc. and Subsidiaries (collectively, the “Company”) have beenprepared in accordance with Rule 10-01 of Regulation S-X for interim financialstatements required to be filed with the Securities and Exchange Commission anddo not include all information and footnotes required by generally acceptedaccounting principles for complete financial statements.  However, the information furnished hereinreflects all normal recurring adjustments, which are, in the opinion ofmanagement, necessary for a fair statement of the results for the interimperiods.  The results of operations forthe three months ended May 3, 2003 are not necessarily indicative of theresults that will be realized for the fiscal year ending January 31, 2004.

 

The Company’s fiscal yearbegins on February 1 of the year stated and ends on January 31 of the followingyear.  For example, the Company’s“Fiscal 2003” commenced on February 1, 2003 and ends on January 31, 2004.  The Company reports results on the fiscalquarter method with each quarter comprising approximately 13 weeks.

 

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to the rules and regulations of the Securities and ExchangeCommission.  These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended January 31, 2003.

 

The accompanying consolidatedcondensed financial statements for Fiscal 2002 and related notes containcertain reclassifications to conform with the presentation used in Fiscal 2003.

 

**Note 2 – Comprehensive Income**

 

Total comprehensiveincome (loss) is as follows *(in thousands*):

 
|                                                     |   | **Three Months Ended** |   |
|----------------------------------------------------------|--------|------------------------|--------|
|                                                     |   | **May 3, 2003**        |   | **May 4, 2002** |   |
|                                                     |   |                   |   |   |   |
| Net earnings                                             |   | $                      | 835    |   | $ | 117 |   |
| Unrealized gain (loss) on forward contracts, net  of tax |   | 34                     |   | (113 | ) |
| Currency translation gain (loss), net of tax             |   | 111                    |   | (233 | ) |
| Comprehensive income (loss)                              |   | $                      | 980    |   | $ | (229 | ) |

 

**Note 3 - Segment Information**

 

The Company modified itsinternal organization structure in 2003. The modifications made were as follows:

 

•                                          The Utilities Equipmentbusiness has been removed from the Airline Products segment and identified as aseparate reporting segment.  Aspreviously announced, the Utilities Equipment business, which manufacturesmobile railcar movers, snowblowers and off-road seismic vehicles, has beenconsolidated with Distributed Energy Solutions and Petroleum Equipment in thenewly formed Engineered Products Division.

 

•                                          Certain businessoperations, which were exited in 2002, have been reclassified from OtherBusiness Activities to the Power Products segment.  This business operation consisted primarily of sales of gascompression equipment.

 

•                                          The marketing servicesand transportation/logistics business units were reclassified from the PowerProducts segment to Other Business Activities. These business units provide services to both internal customers andexternal unaffiliated customers. Intercompany sales have been eliminated.

 

•                                          Interest and investmentincome has been removed from segment operating profit (loss) measurements.

 

The correspondingsegment information for Fiscal 2002 has been restated to conform to the newbusiness segment presentation.

 

6

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Financial informationrelating to industry segments with a reconciliation to earnings from continuingoperations before income taxes is as follows (*inthousands except percentages*):

 
|                                                         |   | **Three Months Ended** |    |
|--------------------------------------------------------------|--------|------------------------|---------|
|                                                         |   | **May 3, 2003**        |    | **May 4, 2002** |   |
| **Sales**                                                    |   |                   |    |   |   |
| Tactical Vehicle Systems                                     |   | $                      | 110,977 |   | $ | 115,461 |   |
| Power Products                                               |   | 124,349                |    | 149,276 |   |
| Engineered Products:                                         |   |                   |    |   |   |
| Petroleum Equipment                                          |   | 23,060                 |    | 6,518 |   |
| Distributed Energy Solutions                                 |   | 13,069                 |    | 11,783 |   |
| Utilities Equipment                                          |   | 2,588                  |    | 1,584 |   |
| Airline Products                                             |   | 14,244                 |    | 12,717 |   |
| Other Business Activities                                    |   | 1,484                  |    | 2,331 |   |
| Total Sales                                                  |   | $                      | 289,771 |   | $ | 299,670 |   |
|                                                         |   |                   |    |   |   |
| **Operating Profit (Loss)**                                  |   |                   |    |   |   |
| Tactical Vehicle Systems                                     |   | $                      | 17,784  |   | $ | 14,914 |   |
| Power Products                                               |   | (2,851                 | )       | 3,275 |   |
| Engineered Products:                                         |   |                   |    |   |   |
| Petroleum Equipment                                          |   | 608                    |    | (564 | ) |
| Distributed Energy Solutions                                 |   | (3,982                 | )       | (2,201 | ) |
| Utilities Equipment                                          |   | (892                   | )       | (919 | ) |
| Airline Products                                             |   | (1,992                 | )       | (2,214 | ) |
| Other Business Activities                                    |   | (521                   | )       | (47 | ) |
| Total Operating Profit                                       |   | 8,154                  |    | 12,244 |   |
|                                                         |   |                   |    |   |   |
| Corporate expenses, net                                      |   | (2,670                 | )       | (3,895 | ) |
| Pension curtailment expense                                  |   | (2,400                 | )       | — |   |
| Interest and investment income                               |   | 500                    |    | 338 |   |
| Interest expense                                             |   | (1,244                 | )       | (1,132 | ) |
| **Earnings from continuing  operations before income taxes** |   | $                      | 2,340   |   | $ | 7,555 |   |
|                                                         |   |                   |    |   |   |
| **Operating Profit (Loss)  Percentage**                      |   |                   |    |   |   |
| Tactical Vehicle Systems                                     |   | 16.0                   | %       | 12.9 | % |
| Power Products                                               |   | (2.3                   | )       | 2.2 |   |
| Engineered Products:                                         |   |                   |    |   |   |
| Petroleum Equipment                                          |   | 2.6                    |    | (8.7 | ) |
| Distributed Energy Solutions                                 |   | (30.5                  | )       | (18.7 | ) |
| Utilities Equipment                                          |   | (34.5                  | )       | (58.0 | ) |
| Airline Products                                             |   | (14.0                  | )       | (17.4 | ) |
| Other Business Activities                                    |   | (35.1                  | )       | (2.0 | ) |
| Consolidated                                                 |   | 2.8                    | %       | 4.1 | % |

 

7

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**Note4 – Recent Accounting Pronouncements**

 

In June 2001, the FinancialAccounting Standard Board (“FASB”) issued Statement Of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 requires that the balance sheetvaluation of goodwill and other intangible assets be evaluated for impairmentat least annually.  Further, it requiresthat amortization of goodwill cease beginning with the Company’s Fiscal2002.  The Company implemented SFAS No.142 effective February 1, 2002 and, accordingly, net goodwill balances as ofsuch date were tested for impairment by comparing the fair value of eachreporting unit to its carrying value. Fair value was determined using discounted estimated future cash flowsand market multiples of earnings estimates. Significant estimates used in the methodologies included estimates offuture earnings, future growth rates, weighted average cost of capital and marketvaluation multiples for each reporting unit. Based upon these impairment tests performed upon adoption of SFAS No.142, the Company recognized, as a cumulative effect of a change in accountingprinciple in the first quarter of Fiscal 2002, a charge of $3.7 million, or$0.13 per diluted share, net of tax benefit of $1.8 million.  This impairment charge primarily related tothe Airline Products segment.

 

In August 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  SFAS No. 143 requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred and can be reasonably estimated.  Such asset retirement costs are to becapitalized as part of the carrying value of the related long-lived asset anddepreciated over the asset’s estimated useful life.  The Company has adopted SFAS No. 143 as of February 1, 2003.  Adoption of the new standard did not have amaterial effect on the Company’s consolidated financial statements.

 

In June 2002, the FASB issuedSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” which requires companies to recognize costs associated with plantclosings or other exit or disposal activities when incurred.  Previous guidance required recognition ofsuch costs as a liability as of the date an entity commits to an exitplan.  SFAS No. 146 is effective forexit or disposal activities that are initiated after December 31, 2002.  Adoption of the new standard impacts thetiming of liability recognition related to future exit or disposal activities,but will not have a material effect on the ultimate costs associated with suchactivities.

 

In November 2002, the FASBissued Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers,” which requires a guarantor to recognize, at the inception of aguarantee, a liability for the fair value of the obligations undertaken inissuing the guarantee.  FIN No. 45 alsoexpands the disclosures required to be made by a guarantor about its obligationunder certain guarantees that it has issued. The recognition provisions of FIN No. 45 do not apply to productwarranties.  Initial recognition andmeasurement provisions of FIN No. 45 are applicable on a prospective basis toguarantees issued after December 31, 2002. Adoption of the new standard did not have a material effect on theCompany’s consolidated financial statements.

 

In January 2003, the FASBissued FIN No. 46, “Consolidation of Variable Interest Entities,” whichrequires that a company that controls another entity through interests otherthan voting interests should consolidate such controlled entity.  FIN No. 46 applies to variable interestentities created after January 31, 2003, and is effective for interim periodsbeginning after June 15, 2003 for existing variable interest entities.  As the Company has no material exposures tospecial purpose entities or other off-balance sheet arrangements, the Companyanticipates that the effects of adopting FIN No. 46 will not be material to itsconsolidated financial statements.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transitionand Disclosure,” which amends SFAS No. 123, “Accounting for Stock-BasedCompensation,” by providing alternative methods of transition for a voluntarychange to the fair value method of accounting for stock options and otherstock-based employee compensation.  Aspermitted under SFAS No. 123, the Company continues to use the intrinsic valuemethod of accounting prescribed by APB No. 25, “Accounting for Stock Issued toEmployees,” to account for its stock-based compensation programs.  Accordingly, no compensation expense isrecognized when the exercise price of an employee stock option is equal to orgreater than the market price of the Company’s common stock on the grant date.

 

8

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The following pro forma dataare calculated as if compensation expense for the Company’s stock option planswas determined based on the fair value at the grant date for awards under theseplans, amortized to expense on a pro rata basis over the option vesting period,in accordance with the methodology prescribed by SFAS No. 123, “Accounting forStock-Based Compensation:”

 
|                                                                            |   | **Three Months Ended** |   |
|---------------------------------------------------------------------------------|--------|------------------------|--------|
| **(In thousands, except per share  data)**                                      |   | **May 3, 2003**        |   | **May 4, 2002** |   |
|                                                                            |   |                   |   |   |   |
| Net earnings (loss):                                                            |   |                   |   |   |   |
| As reported                                                                     |   | $                      | 835    |   | $ | 117 |   |
| Pro forma compensation expense, determined under  fair value method, net of tax |   | (239                   | )      | (500 | ) |
| Pro forma                                                                       |   | $                      | 596    |   | $ | (383 | ) |
|                                                                            |   |                   |   |   |   |
| Basic earnings (loss) per share:                                                |   |                   |   |   |   |
| As reported                                                                     |   | $                      | 0.03   |   | $ | — |   |
| Pro forma                                                                       |   | 0.02                   |   | (0.01 | ) |
|                                                                            |   |                   |   |   |   |
| Diluted earnings (loss) per share:                                              |   |                   |   |   |   |
| As reported                                                                     |   | $                      | 0.03   |   | $ | — |   |
| Pro forma                                                                       |   | 0.02                   |   | (0.01 | ) |

 

For purposes of the pro formadisclosures, the fair value of each option grant is estimated on the date ofgrant using the Black-Scholes option pricing model.

 

**Note 5 - Commitments and Contingencies**

 

Asa custom packager of power systems, the Company issues bid and performanceguarantees in the form of performance bonds or standby letters of credit.  As of May 3, 2003 and January 31, 2003,performance type letters of credit totaled approximately $6.1 million and $5.7million, respectively.  In addition, theCompany had contingent performance indemnities of approximately $6.7 million asof May 3, 2003 and January 31, 2003.

 

The Company has providedcertain guarantees in support of its customers’ financing of purchases from theCompany in the form of debt guarantees. Pursuant to such guarantees, once the customer has satisfied its debtobligation to the lender, the Company’s guarantee is released.  Should a customer fail to meet itsobligation to the lender, the lender could require the Company to satisfy suchobligation, in which case the Company would have some legal recourse againstthe customer.  The amount of suchguarantees is approximately $0.7 million and $0.9 million as of May 3, 2003 andJanuary 31, 2003, respectively.

 

The Company leases certainfacilities and equipment from third parties under operating lease arrangementsof varying terms whose annual rentals are less than 1% of consolidated sales.

 

TheCompany’s government contract operations are subject to U.S. governmentinvestigations of business practices and cost classifications from which legalor administrative proceedings can result. Based on government procurement regulations, under certain circumstancesa contractor can be fined, as well as suspended or debarred from governmentcontracting.  In that event, the Companywould also be unable to sell equipment or services to customers that depend onloans or financial commitments from the Export Import Bank, Overseas PrivateInvestment Corporation and similar government agencies during a suspension ordebarment.

 

DuringFiscal 1998, the U.S. Customs Service detained a medium tactical vehicle thatwas being shipped by the Company for display in a European trade show.  The Company has been advised that the U.S.Customs Service and the Department of Justice are investigating potentialviolations by the Company of laws relating to the export of controlled militaryvehicles, weapons mounting systems and firearms.  Such investigation could result in the filing of criminal, civilor administrative sanctions against the Company and/or individual employees andcould result in a suspension or debarment of the Company from receiving newcontracts or subcontracts with agencies of the U.S. government or the benefitof federal assistance payments.

 

TheCompany is a defendant in a suit brought under the *qui tam* provision of the False Claims Act, United States ofAmerica, *ex rel.  Werner Stebner v. Stewart & Stevenson Services, Inc. andMcLaughlin Body Co.*, Civil Action No. H-96-3363, in the UnitedStates District Court for the Southern District of Texas, HoustonDivision.  The plaintiff’s complaintseeks penalties and damages in an unspecified amount.  The suit alleges that the Company made false statements andcertifications in connection with claims for payment for Family of MediumTactical Vehicles delivered to the U.S. Army starting in 1995, and the suitalleges that the vehicles were substandard because of corrosion problems.  The suit was filed under seal in 1996, andfollowing an investigation by the Justice

 

9

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Department,the United States declined to intervene in the suit, which was unsealed onAugust 29, 2000.  The case is set fortrial in January 2004.  The Companybelieves the claims in the suit are without merit and is vigorously defendingthe suit.

 

The Company is a defendant in asuit brought by Diamond Offshore on May 30, 2002, arising out of claimsrelating to a marine riser manufactured by the Company and purchased by DiamondOffshore for use on its Ocean Baroness semi-submersible drilling rig, Cause No.2002-27831; *Diamond Offshore InternationalCorporation, Diamond Offshore Company, and Diamond Offshore Company d/b/aDiamond Offshore Drilling Co. v. Stewart & Stevenson Services, Inc.*;in the District Court of Harris County, Texas 125th Judicial District Court(the “Baroness Litigation”).  The suitwas filed following a parting of the marine riser during deep water drillingoperations and seeks to recover damages in an unspecified amount.

 

In a separate transaction on orabout September 13, 2001, Diamond Offshore placed a purchase order with theCompany fora marine riser for use on its Ocean Rover semi-submersible drilling rig. TheCompany was fulfilling this order, when, on August 19, 2002, Diamond amendedits petition in the Baroness Litigation to seek a declaration that DiamondOffshore has no further contractual obligations to the Company under the OceanRover riser purchase order. On August 21, 2002, before being served withDiamond Offshore’s amended petition in the Baroness Litigation, the Companyfiled a separate lawsuit against Diamond Offshore seeking to recover damages,including attorneys’ fees (the “Rover Litigation”).  On August 30, 2002, the Court transferred the Rover Litigation tothe 125th Judicial Court where the Baroness Litigation is pending.  The two cases have been consolidated intoone lawsuit in the 125th Judicial Court.  The Company is vigorously prosecuting its claims against DiamondOffshore and defending the claims asserted against it by Diamond Offshore inthis lawsuit.

 

It is presently impossible to determine the ultimate outcome of thesematters or whether the resolution will have a material adverse effect on theCompany’s financial statements, though the Company has recorded reserves thatit believes are adequate for certain estimated legal fees associated with suchmatters as of the balance sheet date.

 

In 2001, the Company received from the UnitedStates Environmental Protection Agency (the “EPA”) a Request for Informationunder Section 104(e) of the Comprehensive Environmental Response, Compensation,and Liability Act of 1980, for information pertaining to the R&H OilCompany Site in San Antonio, Texas (the “Site”).  Information provided to the Company by the EPAindicates that the Company may have sent waste oils to the Site for recyclingin the late 1980s, and that such waste oils may potentially account for betweenone and two percent of the volume of total wastes received by the oil recyclerat the Site.  Since the Company expectsto receive a claim for cleanup and other costs related to this site, it hasestablished additional reserves in Fiscal 2002, which it believes to beadequate at this time.  As additionalfacts are developed and definitive remediation plans and necessary regulatoryapprovals for implementation of remediation are established, changes in theseand other factors may result in actual costs exceeding the currentenvironmental reserves. While uncertainties are inherent in the final outcomeof these environmental matters, and it is presently impossible to determine theactual costs that ultimately may be incurred, management currently believesthat the resolution of such uncertainties should not have a material adverseeffect on the Company’s consolidated financial position or liquidity.

 

Fromtime to time, the Company is subject to various environmental remediationrequirements at certain of its facilities. The Company believes that the exposure associated with such requirementswill not have a material adverse impact on the Company’s financial position orliquidity.

 

TheCompany is also a defendant in a number of lawsuits relating to contractual,product liability, personal injury and warranty matters normally incident tothe Company’s business.  No individualcase, or group of cases presenting substantially similar issues of law or fact,are expected to have a material effect on the manner in which the Companyconducts its business or on its consolidated financial position orliquidity.  The Company maintainscertain insurance policies that provide coverage for product liability andpersonal injury cases.  The Company hasestablished reserves that it believes to be adequate based on currentevaluations.  Nevertheless, anunexpected outcome in such cases could have a material adverse impact on theresults of operations in the period it occurs. Moreover, future adverse developments in such cases could requirematerial changes in the recorded reserve amounts.

 

**Note 6 – Government Contracting**

 

The U.S. government is one ofthe Company’s key customers. As such, decreased government spending ortermination of significant government programs could adversely affect theCompany’s business.  The Company’sTactical Vehicle Systems segment depends largely on U.S. governmentexpenditures.  In recent years,government contracts in this segment have accounted for substantial percentagesof the Company’s annual revenues and operating income.  The Company is currently in the fifthproduction year of its second multi-year contract with the U.S. Department ofthe Army (“U.S. Army”) for production of the Family of Medium Tactical Vehicles(“FMTV”).  In the fourth quarter ofFiscal 2002, the U.S. Army exercised an option to award a sixth program year tothe current contract, which begins in October 2003 and is expected to becompleted by September 2004.  Thefunding of the FMTV contract is subject to the inherent uncertainties ofCongressional appropriations.  As istypical of multi-year defense contracts that may be canceled or adjusted by thegovernment, the FMTV contract must be funded annually by the U.S. Army and maybe terminated at any time for the convenience of the government.  If the FMTV contract is terminated, otherthan for the Company’s default (in which

 

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event there could be serious adverseconsequences and claims against the Company), it provides for terminationcharges that will reimburse the Company for certain allowable costs but notnecessarily for all costs incurred.

 

In April 2003, the U.S. Armyawarded the Company the FMTV A1 Competitive Rebuy (“A1CR”) productioncontract.  The A1CR contract includesproduction of nearly 11,000 FMTV trucks and trailers over a five-year period,with an option for 12,000 additional vehicles. Production under the A1CR contract is expected to begin in October 2004,after completion of the current FMTV contract. The Company’s profit margins on the A1CR contract are expected to belower than historical margin levels for the current FMTV contract.  However, the actual future margin levels onthe A1CR contract cannot be predicted at this time and will be dependent upon anumber of factors, including the Company’s ability to achieve efficiencies andother material and labor cost control measures, the actual quantities andvariations of vehicles purchased by the U.S. Army under the contract, and otherfactors.

 

Long-term success in theTactical Vehicle Systems segment is dependent on securing additional contractswhile maintaining acceptable operating margins.  There can be no assurance that the Company will be successful infuture bids and awards.

 

Major contracts for militarysystems are performed over extended periods of time and are subject to changesin scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extendover prolonged periods of time.  TheCompany’s ultimate profitability on such contracts will depend on the eventualoutcome of an equitable settlement of contractual issues with the U.S.government.

 

**Note 7 - Discontinued Operations**

 

During the fourth quarter ofFiscal 2001, the Company determined that the Petroleum Equipment segment’sblowout preventer and controls, valve and drilling riser business was notstrategically aligned with the Company’s core competencies.  The Company announced its intention to sellthis business and, consequently, these activities were reclassified forreporting purposes for all periods shown as discontinued operations.  These discontinued operations generatedrevenues of $0.4 million and $9.2 million and an operating loss of $1.2 million($0.8 million, net of taxes) and $1.7 million ($1.1 million, net of taxes) inthe first quarter of Fiscal 2003 and 2002, respectively.  When the transaction consummated onSeptember 13, 2002, the Company sold certain assets and retained certaincontracts and related assets as well as the receivables and certain liabilitiesof the business, including warranty responsibility for products sold beforeclosing as well as warranty responsibility for retained contracts to becompleted.  In some cases, the Companyhas agreements with customers on commitments to support its products, includingretained warranties and contracts.

 

**Note8 – Inventories**

 

Summarized below are thecomponents of inventories by segment excluding discontinued operations, net ofcustomer deposits:

 
| **(In thousands)**                      |   | **May 3, 2003** |    | **January 31, 2003** |   |
|-----------------------------------------|--------|-----------------|---------|----------------------|--------|
|                                    |   |            |    |                 |   |
| Tactical Vehicle Systems                |   | $               | 6,587   |                 | $      | 7,444 |   |
| Power Products                          |   | 147,207         |    | 141,649              |   |
| Engineered Products Division:           |   |            |    |                 |   |
| Distributed Energy Solutions            |   | 43,743          |    | 44,514               |   |
| Petroleum Equipment                     |   | 15,191          |    | 12,314               |   |
| Utilities Equipment                     |   | 9,827           |    | 10,018               |   |
| Airline Products                        |   | 27,961          |    | 28,468               |   |
| Other Business Activities               |   | 20              |    | 9                    |   |
|                                    |   | 250,536         |    | 244,416              |   |
| Excess of current cost over LIFO values |   | (43,481         | )       | (42,785              | )      |
| Total Inventories                       |   | $               | 207,055 |                 | $      | 201,631 |   |

 

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The Company’s inventoryclassifications correspond to its reportable segments.  The Power Products segment’s inventoryconsists primarily of industrial equipment, equipment under modification, usedequipment available for sale or rent and parts held in the Company’sdistribution network for resale.  As acustom packager of power systems and other equipment to customerspecifications, the Tactical Vehicle Systems, Distributed Energy Solutions,Petroleum Equipment, Utilities Equipment and Airline Products segments’inventory consists of both work-in-process, which includes purchased andmanufactured components in various stages of assembly, and on-hand parts andequipment to support service and future sales.

 

An actual valuation ofinventory under the last-in-first-out (“LIFO”) method can be made only at theend of each fiscal year based on the inventory levels and costs at thattime.  Accordingly, interim LIFOcalculations are based on management’s estimates of expected year-end inventorylevels and costs.  Interim results aresubject to the final year-end LIFO inventory valuation.

 

**Note9 – Earnings Per Share**

 

The following table is areconciliation of the numerators and denominators used in the calculation ofbasic and diluted earnings per share as presented on the Consolidated CondensedStatements of Earnings.

 
|                                                      |   | **Three Months Ended** |   |
|-----------------------------------------------------------|--------|------------------------|--------|
| **(In thousands, except per share  data)**                |   | **May 3, 2003**        |   | **May 4, 2002** |   |
| Numerator:                                                |   |                   |   |   |   |
| Earnings available to common shareholders                 |   |                   |   |   |   |
| From continuing operations                                |   | $                      | 1,658  |   | $ | 4,896 |   |
| From discontinued operations                              |   | (823                   | )      | (1,097 | ) |
| From cumulative effect of change in accounting  principle |   | —                 |   | (3,682 | ) |
| Net earnings                                              |   | $                      | 835    |   | $ | 117 |   |
|                                                      |   |                   |   |   |   |
| Denominator:                                              |   |                   |   |   |   |
| Denominator for basic earnings per share                  |   |                   |   |   |   |
| Weighted average shares outstanding                       |   | 28,492                 |   | 28,454 |   |
| Effect of dilutive securities:                            |   |                   |   |   |   |
| Employee and director stock options                       |   | 151                    |   | 313 |   |
| Denominator for diluted earnings per share -              |   |                   |   |   |   |
| Adjusted weighted average shares outstanding              |   | 28,643                 |   | 28,767 |   |
|                                                      |   |                   |   |   |   |
| Basic earnings per share:                                 |   |                   |   |   |   |
| From continuing operations                                |   | $                      | 0.06   |   | $ | 0.17 |   |
| From discontinued operations                              |   | (0.03                  | )      | (0.04 | ) |
| From cumulative effect of change in accounting  principle |   | —                 |   | (0.13 | ) |
| Net earnings per share                                    |   | $                      | 0.03   |   | $ | 0.00 |   |
|                                                      |   |                   |   |   |   |
| Diluted earnings per share:                               |   |                   |   |   |   |
| From continuing operations                                |   | $                      | 0.06   |   | $ | 0.17 |   |
| From discontinued operations                              |   | (0.03                  | )      | (0.04 | ) |
| From cumulative effect of change in accounting  principle |   | —                 |   | (0.13 | ) |
| Net earnings per share                                    |   | $                      | 0.03   |   | $ | 0.00 |   |
|                                                      |   |                   |   |   |   |
| Number of anti-dilutive stock options outstanding         |   | 1,435                  |   | 1,375 |   |

 

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**Note 10 – Warranty Costs**

 

Based on historicalexperience and contract terms, the Company provides for the estimated cost ofproduct and service warranties at the time of sale or, in some cases, whenspecific warranty problems are identified. Accrued warranty costs are adjusted periodically to reflect actualexperience.  Certain warranty and otherrelated claims involve matters of dispute that ultimately are resolved bynegotiation, arbitration or litigation. Occasionally, a material warranty issue can arise that is beyond theCompany’s historical experience.  TheCompany provides for any such warranty issues as they become known andestimable.

 

A summary of warrantyactivity for the first quarter of Fiscal 2003 follows *(in thousands):*

 
| Accrued warranty costs  at January 31, 2003    |   | $      | 6,073  |   |
|------------------------------------------------|--------|--------|--------|--------|
| Payments for completed warranty obligations    |   | (2,511 | )      |
| Warranty accrual for current period production |   | 1,233  |   |
| Accrued warranty costs at May 3, 2003          |   | $      | 4,795  |   |

 

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

This discussion should be readin conjunction with the attached condensed consolidated financial statementsand notes thereto, and with our Form 10-K and notes thereto for the fiscal yearended January 31, 2003.  The followingdiscussion contains forward-looking statements.  In connection therewith, please see the Cautionary Statementscontained in our Form 10-K and the heading labeled “Factors That May AffectFuture Results” below, which identify important factors that could cause actualresults to differ materially from those predicted or implied in theforward-looking statements.

 

Our fiscal year begins onFebruary 1 of the year stated and ends on January 31 of the followingyear.  For example, our “Fiscal 2003”commenced on February 1, 2003 and ends on January 31, 2004.  We report results on the fiscal quartermethod with each quarter comprising approximately 13 weeks.  The first quarter of Fiscal 2003 commencedon February 1, 2003 and ended on May 3, 2003, while the first quarter of Fiscal2002 commenced on February 1, 2002 and ended on May 4, 2002.

 

**RESULTS OF OPERATIONS**

 

Sales for the first quarter2003 declined by $9.9 million, or 3%, from the first quarter 2002.  This reduction in sales is the result of a$24.9 million decline in the Power Products segment and a $4.5 million declinein the Tactical Vehicle Systems segment. These sales declines were partially offset by increases in all othermajor business segments.  Additionalinformation regarding these changes is provided below in “Segment Data”.

 

Gross profit decreased $2.9million, or 7%, to $40.9 million for the first quarter of Fiscal 2003 from$43.8 million for the first quarter of Fiscal 2002.  This decrease in gross profit was primarily attributable to thelower sales levels.  Gross profit margindecreased to 14.1% in the first quarter of Fiscal 2003, compared to 14.6% forthe same period of Fiscal 2002.

 

Selling and administrativeexpenses remained relatively unchanged at $35.3 million in the first quarter ofFiscal 2003 compared to $35.4 million in the first quarter of Fiscal 2002.  Selling and administrative expenses inFiscal 2003 included $1.7 million of costs associated with restructuringactivities, primarily related to the consolidation of manufacturing operationsin the Engineered Products Division and severance costs related to theelimination of certain positions in the Power Products and Corporatesegments.  Of the $1.7 million ofrestructuring costs, approximately $0.7 million related to severance, of which$0.5 million was accrued as of May 3, 2003, and will be paid in futureperiods.  We expect to incurapproximately $1.0 million to $1.5 million of additional restructuring expensesin Fiscal 2003 to complete to Engineered Products Division consolidation.  Excluding such costs related torestructuring activities, selling and administrative expense as a percentage ofsales decreased to 11.6% in the first quarter of Fiscal 2003, compared to 11.8%in the first quarter of Fiscal 2002.

 

During the first quarter ofFiscal 2003, we decided to freeze the benefits earned under our defined benefitpension plan, our defined benefit supplemental executive retirement plan andour postretirement medical plan effective July 1, 2003.  These changes are expected to reduce pensionand postretirement benefits expense by over $5.0 million in Fiscal 2003.  A one-time non-cash write-off of $2.4million of previously unamortized prior service costs (pension curtailmentexpense) was required under accounting rules to reflect the pension plan changes.

 

Net interest expense declinedto $0.7 million in the first quarter of Fiscal 2003 compared to $0.8 millionfor the corresponding period in Fiscal 2002, primarily as a result of increasedinterest income earned on higher cash investment balances.

 

Earnings from continuingoperations before income taxes decreased to $2.3 million in the first quarterof Fiscal 2003 compared to $7.6 million for the first quarter of Fiscal 2002,primarily as a result of the lower gross profit and the pension curtailmentexpense incurred in the first quarter of Fiscal 2003.

 

The net income tax provisiondecreased to $0.7 million in the first quarter of Fiscal 2003 from $2.7 millionfor the same period in Fiscal 2002, primarily as a result of the lower pretaxearnings.  The effective tax ratedeclined to 29.1% in the first quarter of Fiscal 2003 compared to 35.2% in thefirst quarter of Fiscal 2002, primarily as a result of certain state taxbenefits and tax credits in Fiscal 2003 being a larger proportion of thepre-tax earnings than in Fiscal 2002.

 

Discontinued operationsgenerated an after-tax loss of $0.8 million in the first quarter of Fiscal 2003compared to a loss of $1.1 million in the first quarter of Fiscal 2002.  These losses primarily represent costsassociated with retained contracts, warranty and legal claims and obligationsassociated with our discontinued blowout preventer and controls, valve anddrilling riser business, which was sold during Fiscal 2002.

 

In the first quarter of Fiscal2002, we recognized, as a cumulative effect of a change in accountingprinciple, a charge of $3.7 million net of tax, or $0.13 per diluted share,upon adoption of new accounting standards related to the valuation of goodwilland other intangible assets.

 

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**SEGMENTDATA**

 

We analyze financial results insix business segments based on distinct product and customer types.  Three of these segments have been combinedin 2003 into the Engineered Products Division. This division includes the Petroleum Equipment, Distributed EnergySolutions and Utilities Equipment business segments.  The remaining three segments include:  Tactical Vehicle Systems, Power Products and AirlineProducts.  Businesses not otherwiseclassified are shown as Other Business Activities.  This classification includes the marketing services andtransportation/logistics organizations, which provide services to bothaffiliated and unaffiliated customers. Intercompany sales have been eliminated.

 

The following table representssales and operating profit (loss) by business segment *(in thousands)*:

 
|                          |   | **Three Months Ended** |    |
|-------------------------------|--------|------------------------|---------|
|                          |   | **May 3, 2003**        |    | **May 4, 2002** |   |
| **Sales**                     |   |                   |    |   |   |
| Tactical Vehicle Systems      |   | $                      | 110,977 |   | $ | 115,461 |   |
| Power Products                |   | 124,349                |    | 149,276 |   |
| Engineered Products Division: |   |                   |    |   |   |
| Petroleum Equipment           |   | 23,060                 |    | 6,518 |   |
| Distributed Energy Solutions  |   | 13,069                 |    | 11,783 |   |
| Utilities Equipment           |   | 2,588                  |    | 1,584 |   |
| Airline Products              |   | 14,244                 |    | 12,717 |   |
| Other Business Activities     |   | 1,484                  |    | 2,331 |   |
| Total Sales                   |   | $                      | 289,771 |   | $ | 299,670 |   |

 
|                                                         |   | **Three Months Ended** |   |
|--------------------------------------------------------------|--------|------------------------|--------|
|                                                         |   | **May 3, 2003**        |   | **May 4, 2002** |   |
| **Operating Profit (Loss)**                                  |   |                   |   |   |   |
| Tactical Vehicle Systems                                     |   | $                      | 17,784 |   | $ | 14,914 |   |
| Power Products                                               |   | (2,851                 | )      | 3,275 |   |
| Engineered Products Division:                                |   |                   |   |   |   |
| Petroleum Equipment                                          |   | 608                    |   | (564 | ) |
| Distributed Energy Solutions                                 |   | (3,982                 | )      | (2,201 | ) |
| Utilities Equipment                                          |   | (892                   | )      | (919 | ) |
| Airline Products                                             |   | (1,992                 | )      | (2,214 | ) |
| Other Business Activities                                    |   | (521                   | )      | (47 | ) |
| Total Operating Profit                                       |   | 8,154                  |   | 12,244 |   |
|                                                         |   |                   |   |   |   |
| Corporate expenses, net                                      |   | (2,670                 | )      | (3,895 | ) |
| Pension curtailment expense                                  |   | (2,400                 | )      | — |   |
| Interest and investment income                               |   | 500                    |   | 338 |   |
| Interest expense                                             |   | (1,244                 | )      | (1,132 | ) |
| **Earnings from continuing  operations before income taxes** |   | $                      | 2,340  |   | $ | 7,555 |   |

 

**TacticalVehicle Systems**

 

The Tactical Vehicle Systemssegment, which manufactures tactical vehicles for the U.S. Army and others,recorded sales of $111.0 million in the first quarter of Fiscal 2003 comparedto $115.5 million a year ago.  Althoughtruck shipments were higher in the current quarter, sales were unfavorablyimpacted by a higher mix of lower priced option trucks, along with a decreasein service sales.  Operating profit forthe quarter increased to $17.8 million, compared with $14.9 million in thefirst quarter of 2002.  This OperatingProfit resulted in a 16.0% operating margin, compared with 12.9% in the prioryear.  The increased operating profit isdriven by increased productivity, a favorable product mix and lower costsassociated with bid and proposal activities in the Fiscal 2003 period compared tothe comparable period in Fiscal 2002.

 

In April 2003, the U.S. Armyawarded us the FMTV A1 Competitive Rebuy (“A1CR”) production contract.  The A1CR contract includes production ofnearly 11,000 FMTV trucks and trailers over a five-year period, with an optionfor 12,000 additional vehicles.

 

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Production under the A1CRcontract is expected to begin in October 2004, after completion of the currentFMTV contract.  Our profit margins onthe A1CR contract are expected to be lower than historical margin levels forthe current FMTV contract.  However, theactual future margin levels on the A1CR contract cannot be predicted at thistime and will be dependent upon a number of factors, including our ability toachieve efficiencies and other material and labor cost control measures, theactual quantities and variations of vehicles purchased by the U.S. Army underthe contract, and other factors.

 

**PowerProducts**

 

The Power Products segment,which is responsible for marketing and aftermarket support of a wide range ofindustrial equipment, recorded first quarter Fiscal 2003 sales of $124.3million, a 17% decrease from sales of $149.3 million in the same period ofFiscal 2002.  The decline in sales wasprimarily driven by lower equipment sales volume, which is partiallyattributable to overall weakness in the markets we serve.  Operating loss for the first quarter ofFiscal 2003 totaled $2.9 million compared to an operating profit of $3.3million in the first quarter of Fiscal 2002. The decrease in operating profit compared to the first quarter of lastyear was primarily driven by the lower sales volume.

 

The profitability of the PowerProducts segment is significantly impacted by the composition of sales betweenequipment, parts and service.  Whilefirst quarter sales in all categories have decreased from Fiscal 2002reflecting the overall weakness in the economy, the mix of sales has improvedfrom the fourth quarter of Fiscal 2002. Parts and service sales have both increased from the fourth quarter,resulting in an improved sales mix and decline in operating loss.  In future periods, the general condition ofthe economy as well as the composition of sales within this segment willcontinue to have a significant impact on the operating profit.  In recent weeks, economic indicators in thekey markets we serve, including U.S. rig count and truck tonnage indices, haveimproved.

 

**EngineeredProducts**

 

As indicated above, theEngineered Products Division was formed in 2003, consisting of the PetroleumEquipment, Distributed Energy Solutions and Utilities Equipment businesses.

 

The Petroleum Equipment segmentmanufactures equipment for the well servicing industry.  Sales in this segment totaled $23.1 millionfor the first quarter of Fiscal 2003, compared to $6.5 million in the sameperiod of Fiscal 2002.  The increase insales for this segment was attributable to execution of orders received in thesecond half of Fiscal 2002.  The orderbacklog at current quarter end was $62.8 million on the continued strength ofinternational orders as well as some improvement in domestic orders.  This segment posted an operating profit forthe first quarter of $0.6 million versus an operating loss of $0.6 million inthe previous year.

 

The Distributed EnergySolutions segment recorded first quarter Fiscal 2003 sales of $13.1 million ascompared to sales of $11.8 million in the same period of Fiscal 2002.  The increased sales figure was primarilyattributable to an increase in sales volume. This segment posted an operating loss of $4.0 million for the currentquarter versus a $2.2 million loss in the same quarter of the previousyear.  This decrease is primarilyattributable to certain low margin contracts that were completed during thefirst quarter of Fiscal 2003 that allowed us to reduce equipment inventory inthis segment.  Operating margins areexpected to improve somewhat in this segment going forward.

 

The Utilities Equipmentsegment, which manufactures mobile railcar movers, snowblowers and off-roadseismic vehicles, recorded sales of $2.6 million in the first quarter of Fiscal2003 compared with $1.6 million in the first quarter of the prior year.  This segment posted an operating loss of$0.9 million in the first quarter of Fiscal 2003, comparable to the operatingloss recorded in the first quarter of Fiscal 2002.  This segment was awarded a contract in December 2002 to provideoff-road seismic vehicles for Input/Output, Inc.  Production under this contract began during the second quarter ofFiscal 2003.

 

**AirlineProducts**

 

The Airline Products segment,which manufactures airline ground support products, recorded sales of $14.2million in the first quarter of Fiscal 2003, compared with $12.7 million in thesame quarter of Fiscal 2002.  The operatingloss for the first quarter of 2003 totaled $2.0 million as compared to anoperating loss of $2.2 million in the first quarter of Fiscal 2002.  This segment continues to operate at saleslevels below breakeven and the low levels of capital spending in the airlineindustry are expected to continue in the near term.  The order backlog at the end of the first quarter of Fiscal 2003increased to $4.9 million, compared with the $1.0 million backlog at the end ofFiscal 2002.

 

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**UNFILLED ORDERS**

 

Unfilled orders consist ofwritten purchase orders and signed contracts. These unfilled orders are generally subject to cancellation ormodification due to customer relationships or other conditions.  Purchase options are not included inunfilled orders until exercised. Unfilled orders as of May 3, 2003 and January 31, 2003 were as follows:

 

|                         |   | **May 3,  2003**  |   | **January 31,  2003** |   |
|------------------------------|--------|-------------------|--------|-----------------------|--------|
|                         |   | **(In millions)** |   |
|                         |   |              |   |                  |   |
| Tactical Vehicle Systems     |   | $                 | 650.1  |                  | $      | 659.5 |   |
| Power Products               |   | 39.9              |   | 38.7                  |   |
| Engineered Products Division |   |              |   |                  |   |
| Petroleum Products           |   | 62.8              |   | 64.6                  |   |
| Distributed Energy Solutions |   | 34.6              |   | 42.5                  |   |
| Utilities Equipment          |   | 4.2               |   | 0.7                   |   |
| Airline Products             |   | 4.9               |   | 1.0                   |   |
|                         |   | $                 | 796.5  |                  | $      | 807.0 |   |

 

Unfilled orders of the TacticalVehicle Systems segment consist principally of production authorized andappropriated by the U.S. Congress under contracts awarded by the U.S. ArmyTank-Automotive and Armament Command (“TACOM”) to manufacture medium tacticalvehicles and trailers.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our sources of cash liquidityinclude cash and cash equivalents, cash from operations, amounts availableunder credit facilities and other external sources of funds.  We believe that these sources are sufficientto fund the current requirements of working capital, capital expenditures,dividends and other financial commitments.

 

We have a $150 millionunsecured revolving credit facility, which matures on January 31, 2004.  No borrowings were outstanding under thefacility at any time during Fiscal 2003 or Fiscal 2002.  The revolving credit facility has a $25million sub facility, which may be used for letters of credit.  Approximately $7.9 million in letters of creditunder the revolving credit facility were outstanding at May 3, 2003.  Pursuant to covenant limitations of therevolving credit facility, approximately $97 million was available forborrowing at May 31, 2003.  A commitmentfee ranging from 20 to 50 basis points is paid on the daily average unusedbalance based on our leverage ratio. Borrowings outstanding would bear interest at several options, includingLIBOR plus 75 to 175 basis points based on our leverage ratio, the prime rate,or a competitive bid among the banks. Based on the first option (LIBOR plus 75 to 175 basis points based onour leverage ratio), the borrowing rate would have been approximately 2.32% asof May 3, 2003.  We intend to negotiatean extension of the revolving credit facility on similar terms and conditionsprior to its expiration in January 2004. There can be no assurance that we will be able to successfully negotiatesuch an extension or, if we do, that such extension will include similar termsand conditions, rates of interest and covenants.  Although no borrowings are currently outstanding under the revolvingcredit facility, failure to negotiate a new facility on terms acceptable to uscould restrict our future ability to make acquisitions and fund workingcapital, capital expenditures, common stock dividends or other financialobligations.

 

During the first quarter ofFiscal 2003, we entered into separate letter of credit facilities withfinancial institutions totaling $7.5 million, to allow us to issue letters ofcredit that extend beyond January 31, 2004 as necessary.  When and if the revolving credit facility isextended, these additional facilities will likely be unnecessary.  No letters of credit under these facilitieswere outstanding as of May 3, 2003.

 

In addition, we have $55million in senior notes outstanding as of May 3, 2003.  The senior notes are unsecured and wereissued pursuant to an agreement containing a covenant, which imposes a debt tototal capitalization requirement.  Ofthis $55 million amount, $30 million was due and paid on May 30, 2003 usingavailable cash on hand.  The remaining$25 million is due and payable in May 2006.

 

The revolving credit facilityand the senior notes mentioned above were issued pursuant to agreementscontaining covenants that restrict indebtedness, guarantees, sales of assets,rentals and other items.  Additionalcovenants in the revolving credit facility require us to maintain a minimumtangible net worth and interest coverage. Since these requirements are calculated from earnings and cash flow, ourability to declare and pay dividends could be restricted indirectly.  Based on our financial condition as of May3, 2003, the restrictions imposed by our debt instruments do not currentlyrestrict our ability to declare and pay dividends at historical levels.

 

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In addition, our internationalsubsidiaries had foreign currency bank notes payable totaling $2.5 million and$1.5 million at May 3, 2003 and January 31, 2003, respectively.  Such notes payable consist of renewable,secured loans for the purpose of financing our South American operations.  These loans are denominated in localcurrency (Colombian Pesos and Venezuelan Bolivars) and are secured by lettersof credit issued by us and principally bear market-based variable rates ofinterest.  We use foreign denominateddebt to offset the impact of foreign currency exchange rate fluctuations on ourSouth American operations.

 

We have additional bankingrelationships, which provide uncommitted borrowing arrangements.  In the event that any acquisition of additionaloperations, growth in existing operations, settlements of lawsuits or disputes,changes in inventory levels, accounts receivable, tax payments or other workingcapital items create a permanent need for working capital or capitalexpenditures in excess of the existing cash and cash equivalents and committedlines of credit, we may seek to borrow under other long-term financinginstruments or seek additional equity capital.

 

As of May 3, 2003, we had networking capital of $304.9 million, compared to $302.2 million at January 31,2003.  Total current assets at May 3,2003 were $515.5 million, including $115.8 million of cash and cashequivalents.  Total current liabilitiesat May 3, 2003 were $210.5 million, including $32.8 million of current debtobligations and $64.2 million of billings in excess of costs incurred onuncompleted contracts.

 

Net cash provided by continuingoperations during the first quarter of Fiscal 2003 was $9.6 million, primarilydriven by net earnings adjusted for non-cash expenses, along with $2.4 millionof reductions in working capital accounts. In the first quarter of Fiscal 2002, net cash used in continuingoperations was $0.3 million, as cash provided by net earnings adjusted fornon-cash expenses was offset by timing of accounts payable payments.

 

Investing activities used $3.7million of cash in the first quarter of Fiscal 2003, compared to $9.5 millionin the first quarter of Fiscal 2002. The decline is the result of lower capital expenditures in Fiscal 2003as the first quarter of Fiscal 2002 included significant investment in afabrication facility at the Tactical Vehicle Systems plant in Sealy, Texas.

 

Financing activities, whichprimarily include common stock dividend payments and net borrowings undershort-term credit facilities, used $1.3 million in the first quarter of 2003,compared to $2.1 million in the prior year. The reduction in cash usage is the result of additional borrowings inour international subsidiaries.

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

 

**Forward-LookingStatements**

 

This filing containsforward-looking statements that are based on management’s current expectations,estimates, and projections. These statements are not guarantees of futureperformance and involve a number of risks, uncertainties, and assumptions andare made pursuant to the Safe Harbor Provisions of the Private SecuritiesLitigation Reform Act of 1995.  Manyfactors, including those discussed more fully elsewhere in this release and inthe Company’s filings with the Securities and Exchange Commission, particularlyits latest annual report on Form 10-K, as well as others, could cause resultsto differ materially from those stated. Specific important factors that could cause actual results, performance,or achievements to differ materially from such forward-looking statementsinclude risk of competition, risks relating to technology, risks of generaleconomic conditions, risks of oil and gas industry economic conditions, risksof airline industry economic conditions, risks as to terrorist attacks on theU.S. and their impact on the U.S. economy, risks relating to personnel, risksof dependence on government and failure to obtain new government contracts,inherent risks of government contracts, risks of claims and litigation, risksof product defects, risks as to foreign sales and global trade matters, risksas to cost controls, risks as to information technology, risks as toacquisitions, risks as to currency fluctuations, risks as to environmental andsafety matters, risks as to distributorships, risks as to licenses, and creditrisks, all as more specifically outlined in the Company’s latest annual reporton Form 10-K.  In addition, suchforward-looking statements could be affected by general industry and marketconditions and growth rates, general domestic and international conditionsincluding interest rates, inflation and currency exchange rates and otherfuture factors.  Actual outcomes andresults may differ materially from what is expressed or forecasted in suchforward-looking statements.

 

**Item3. Quantitative and Qualitative Disclosures about Market Risk**

 

Our quantitative andqualitative disclosures about market risk for changes in interest rates andforeign exchange risk are incorporated by reference in Item 7A of our AnnualReport on Form 10-K for the year ended January 31, 2003 and have not materiallychanged since that report was filed, except as disclosed in Item 2 –“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” herein.

 

 

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**Item4.  Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s periodic reports is recorded,processed, summarized and reported within the time periods specified inthe Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management, includingits Chief Executive Officer and Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.  The Company has evaluated the effectiveness of itsdisclosure controls and procedures within the 90 days prior to the filing ofthis report with the supervision and the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures are effective.

 

**Changein Internal Controls**

 

There have been no significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of the most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings****.**

 

During Fiscal 1998, the U.S.Customs Service detained a medium tactical vehicle that was being shipped bythe Company for display in a European trade show.  The Company has been advised that the U.S. Customs Service andthe Department of Justice are investigating potential violations by the Companyof laws relating to the export of controlled military vehicles, weaponsmounting systems, and firearms.  Suchinvestigation could result in the filing of criminal, civil, or administrativesanctions against the Company and/or individual employees and could result in asuspension or debarment of the Company from receiving new contracts orsubcontracts with agencies of the U.S. government or the benefit of federalassistance payments.

 

The Company is a defendant in asuit brought under the *qui tam*provision of the False Claims Act, United States of America, *ex rel. Werner Stebner v. Stewart & Stevenson Services, Inc. and McLaughlinBody Co.*, Civil Action No. H-96-3363, in the United States DistrictCourt for the Southern District of Texas, Houston Division.  The plaintiff’s complaint seeks penaltiesand damages in an unspecified amount. The suit alleges that the Company made false statements andcertifications in connection with claims for payment for Family of MediumTactical Vehicles delivered to the U.S. Army starting in 1995, and the suitalleges that the vehicles were substandard because of corrosion problems.  The suit was filed under seal in 1996, andfollowing an investigation by the Justice Department, the United Statesdeclined to intervene in the suit, which was unsealed on August 29, 2000.  The case is set for trial in January2004.  The Company believes the claimsin the suit are without merit and is vigorously defending the suit.

 

The Company is a defendant in asuit brought by Diamond Offshore on May 30, 2002, arising out of claimsrelating to a marine riser manufactured by the Company and purchased by DiamondOffshore for use on its Ocean Baroness semi-submersible drilling rig, Cause No.2002-27831; *Diamond Offshore InternationalCorporation, Diamond Offshore Company, and Diamond Offshore Company d/b/aDiamond Offshore Drilling Co. v. Stewart & Stevenson Services, Inc.*;in the District Court of Harris County, Texas 125th Judicial District Court(the “Baroness Litigation”).  The suitwas filed following a parting of the marine riser during deep water drillingoperations and seeks to recover damages in an unspecified amount.

 

In a separate transaction on orabout September 13, 2001, Diamond Offshore placed a purchase order with theCompany for a marine riser for use on its Ocean Rover semi-submersible drillingrig. The Company was fulfilling this order, when, on August 19, 2002, Diamondamended its petition in the Baroness Litigation to seek a declaration thatDiamond has no further contractual obligations to the Company under the OceanRover riser purchase order. On August 21, 2002, before being served withDiamond Offshore’s amended petition in the Baroness Litigation, the Companyfiled a separate lawsuit against Diamond Offshore seeking to recover damages,including attorneys’ fees (the “Rover Litigation”).  On August 30, 2002, the Court transferred the Rover Litigation tothe 125th Judicial Court where the Baroness Litigation is pending.  The two cases have been consolidated intoone lawsuit in the 125th Judicial Court.  The Company is vigorously prosecuting its claims against DiamondOffshore and defending the claims asserted against it by Diamond Offshore inthis lawsuit.

 

In 2001,the Company received from the United States Environmental Protection Agency(“EPA”) a Request for Information under Section 104(e) of the ComprehensiveEnvironmental Response, Compensation, and Liability Act of 1980, forinformation pertaining to the R&H Oil Company Site in San Antonio, Texas(the “Site”).  Informationprovided to the Company by the EPA indicates that the Company may have sentwaste oils to the Site for recycling in the late 1980s, and that such wasteoils may potentially account for between one and two percent of the volume oftotal wastes received by the oil recycler at the Site.  Since the Company expects to receive a claimfor cleanup and other costs related to this site, it has established additionalreserves in Fiscal 2002, which it believes to be adequate at this time.  As additional facts are developed and definitiveremediation plans and necessary regulatory approvals for implementation ofremediation are established, changes in these and other factors may result inactual costs exceeding the current environmental reserves. While uncertaintiesare inherent in the final outcome of these environmental matters, and it ispresently

 

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impossible to determine theactual costs that ultimately may be incurred, management currently believesthat the resolution of such uncertainties should not have a material adverseeffect on the Company’s consolidated financial position or liquidity.

 

From time to time, the Companyis subject to various environmental remediation requirements at certain of itsfacilities.  The Company believes thatthe exposure associated with such requirements will not have a material adverseimpact on the Company’s financial position or liquidity.

 

The Company is also a defendantin a number of lawsuits relating to contractual, product liability, personalinjury and warranty matters normally incident to the Company’s business.  No individual case, or group of casespresenting substantially similar issues of law or fact, are expected to have amaterial effect on the manner in which the Company conducts its business or onits consolidated financial position or liquidity.  The Company maintains certain insurance policies that providecoverage for product liability and personal injury cases.  The Company has established reserves that itbelieves to be adequate based on current evaluations.  Nevertheless, an unexpected outcome in such cases could have amaterial adverse impact on the results of operations in the period itoccurs.  Moreover, future adversedevelopments in such cases could require material changes in the recordedreserve amounts.

 

**Item 6. Exhibits and Reports on Form 8-K.**

 

(a)          The following exhibits are filed as part of this report pursuant toItem 601 of Regulation S-K.

 

None

 

(b)         Form 8-K Report Date – February 18, 2003(Stewart & Stevenson Announces Preliminary Fiscal Fourth Quarter and YearEnd

Results)

Items Reported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form 8-K Report Date – March 18, 2003 (Stewart & StevensonAnnounces Fiscal 2002 Fourth Quarter Earnings Release and Conference CallSchedule)

Items Reported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form 8-K Report Date – March 26, 2003 (Stewart & Stevenson ServicesReports Fiscal 2002 Fourth Quarter and Fiscal Year Results)

Items Reported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form 8-K Report Date – March 27, 2003 (Stewart & Stevenson ServicesReceives Notification of Delay in Award for Multiyear Contract)

Items Reported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form 8-K Report Date – April 9, 2003 (Stewart & StevensonPresentation to Investors)

Items Reported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form 8-K Report Date – April 10, 2003 (Stewart & StevensonAnnounces Filing Date for Form 10-K and Revision to Unaudited Fourth Quarterand Fiscal Year Results)

Items Reported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form 8-K Report Date – April 17, 2003 (Stewart & Stevenson WinsFMTV A1 Competitive Rebuy Contract)

Items Reported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized on the 13th day of June 2003.

 
| **STEWART & STEVENSON SERVICES, INC**. |                                                                       |                        |
|--------------------------------------------|----------------------------------------------------------------------------|-----------------------------|
|                                       |                                                                       |                        |   |
|                                       |                                                                       |                        |   |
|                                       | By:                                                                        | /s/  Michael L. Grimes |   |   |   |
|                                       | Michael  L. Grimes                                                         |                        |   |
|                                       | President  and Chief Executive Officer  (Principal Executive Officer)      |                        |   |
|                                       |                                                                       |                        |   |
|                                       |                                                                       |                        |   |
|                                       | By:                                                                        | /s/  John B. Simmons        |   |   |   |
|                                       | John  B. Simmons                                                           |                        |   |
|                                       | Vice  President and Chief Financial Officer  (Principal Financial Officer) |                        |   |
|                                       |                                                                       |                        |   |
|                                       |                                                                       |                        |   |
|                                       | By:                                                                        | /s/  L. Scott Biar          |   |   |   |
|                                       | L.  Scott Biar                                                             |                        |   |
|                                       | Controller  and Chief Accounting Officer  (Principal Accounting Officer)   |                        |   |
|                                            |                                                                            |                             |  |  |  |  |  |

 

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**EXHIBIT INDEX**

 

ExhibitNumber and Description:   None

 

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**CHIEF EXECUTIVE OFFICER CERTIFICATION**

 

I, Michael L. Grimes, certify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of Stewart & Stevenson Services, Inc.;

 

2. Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge,the financial statements and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors:

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
|   |   | Date:  June 13,  2003                                       |
|--------|--------|-----------------------------------------------------------------------|
|   |   |                                                                  |
|   |   |                                                                  |
|   |   | /s/  Michael L. Grimes                                           |   |
|   |   | Michael  L. Grimes                                                    |
|   |   | President  and Chief Executive Officer  (Principal Executive Officer) |

 

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**CHIEF FINANCIAL OFFICER CERTIFICATION**

 

I, John B. Simmons, certify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of Stewart & Stevenson Services, Inc.;

 

2. Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge,the financial statements and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors:

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
|   |   | Date:  June 13 , 2003                                            |
|--------|--------|----------------------------------------------------------------------------|
|   |   |                                                                       |
|   |   |                                                                       |
|   |   | /s/  John B. Simmons                                                       |   |
|   |   | John  B. Simmons                                                           |
|   |   | Vice  President and Chief Financial Officer  (Principal Financial Officer) |

 

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**Informational Addendum to Report on Form 10-QPursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

***Not Filed Pursuantto the Securities Exchange Act of 1934***

*** ***

Solely for the purpose ofSection 906 of the Sarbanes-Oxley Act of 2002, and solely to the extent thiscertification may be applicable to this Report on Form 10-Q, the undersignedhereby certify that this report on Form 10-Q of Stewart & StevensonServices, Inc. fully complies with the requirements of section 13(a) or 15(d)of the Securities Exchange Act of 1934 and that information contained in thisreport on Form 10-Q fairly presents, in all material respects, the financialcondition and results of operations of Stewart & Stevenson Services,Inc.

 

 
|   |   | /s/ Michael  L. Grimes |                                        |
|--------|--------|------------------------|---------------------------------------------|
|   |   | Name:                  | Michael L.  Grimes                     |
|   |   | Title:                 | President  and Chief Executive Officer      |
|   |
|   |
|   |   | /s/ John B.  Simmons   |                                        |
|   |   | Name:                  | John B.  Simmons                       |
|   |   | Title:                 | Vice  President and Chief Financial Officer |
|        |        |                        |                                             |  |

 

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