** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM10-Q**

** **

**(Mark One)**

**ý****   QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterlyperiod ended May 1, 2004**

 

**OR**

 

**o****   TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(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 checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.          Yes  ý     No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).   Yes ý   No o

 

Numberof shares outstanding of each of the registrant’s classes of common stock, asof May 24, 2004:

 

**Common Stock, without Par Value:  28,728,885 Shares**

 

 

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# **PARTI. 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 1, 2004 and January 31, 2004.                                                                                                               |
|                                                                                                                                                                                          |
| Consolidated  Condensed Statements of Operations – Three Months Ended May 1, 2004 and May  3, 2003.                                                                                      |
|                                                                                                                                                                                          |
| Consolidated  Condensed Statements of Cash Flows – Three Months Ended May 1, 2004 and May  3, 2003.                                                                                      |
|                                                                                                                                                                                          |
| Notes  to Consolidated Condensed Financial Statements.                                                                                                                                        |

 

2

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

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| **(In thousands)**                                                                                                      |   | **May 1,  2004** |    | **January  31, 2004** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|-----------------------|--------|
|                                                                                                                    |   | **(Unaudited)**  |    |                  |   |
| Assets                                                                                                                  |   |             |    |                  |   |
| Current Assets:                                                                                                         |   |             |    |                  |   |
| Cash and cash equivalents                                                                                               |   | $                | 95,068  |                  | $      | 53,959 |   |
| Short-term investments                                                                                                  |   | 11,235           |    | 7,745                 |   |
| Accounts receivable, net                                                                                                |   | 134,162          |    | 163,324               |   |
| Recoverable costs and accrued profits not  yet billed                                                                   |   | 23,863           |    | 21,653                |   |
| Inventories                                                                                                             |   | 156,164          |    | 166,315               |   |
| Excess of current cost over LIFO values                                                                                 |   | (45,889          | )       | (45,330               | )      |
| Deferred income tax asset                                                                                               |   | 23,571           |    | 23,591                |   |
| Income tax receivable                                                                                                   |   | 25,203           |    | 25,846                |   |
| Other current assets                                                                                                    |   | 15,432           |    | 17,310                |   |
| Total assets of discontinued operations                                                                                 |   | 4,725            |    | 8,059                 |   |
| Total Current Assets                                                                                                    |   | 443,534          |    | 442,472               |   |
|                                                                                                                    |   |             |    |                  |   |
| Property, Plant and Equipment, net                                                                                      |   | 129,887          |    | 136,165               |   |
| Deferred Income Tax Asset                                                                                               |   | 14,020           |    | 15,523                |   |
| Intangibles and Other Assets, net                                                                                       |   | 9,283            |    | 9,300                 |   |
| Total Assets                                                                                                            |   | $                | 596,724 |                  | $      | 603,460 |   |
|                                                                                                                    |   |             |    |                  |   |
| Liabilities and Shareholders’ Equity                                                                               |   |             |    |                  |   |
| Current Liabilities:                                                                                                    |   |             |    |                  |   |
| Notes payable                                                                                                           |   | $                | 1,908   |                  | $      | 1,932 |   |
| Current portion of long-term debt                                                                                       |   | 250              |    | 250                   |   |
| Accounts payable                                                                                                        |   | 63,902           |    | 72,028                |   |
| Accrued payrolls and incentives                                                                                         |   | 18,657           |    | 18,092                |   |
| Billings in excess of incurred costs                                                                                    |   | 65,430           |    | 69,376                |   |
| Estimated losses on uncompleted contracts                                                                               |   | 16,055           |    | 16,306                |   |
| Other current liabilities                                                                                               |   | 45,021           |    | 43,049                |   |
| Total liabilities of discontinued  operations                                                                           |   | 2,152            |    | 1,908                 |   |
| Total Current Liabilities                                                                                               |   | 213,375          |    | 222,941               |   |
|                                                                                                                    |   |             |    |                  |   |
| Long-Term Debt, net of current portion                                                                                  |   | 26,260           |    | 26,260                |   |
| Accrued Postretirement Benefits and Pension                                                                             |   | 52,611           |    | 52,056                |   |
| Other Long-Term Liabilities                                                                                             |   | 3,753            |    | 4,720                 |   |
| Total Liabilities                                                                                                       |   | 295,999          |    | 305,977               |   |
| Shareholders’ Equity:                                                                                              |   |             |    |                  |   |
| Common stock, without par value,  100,000,000 shares authorized; 28,718,885 and 28,644,510 shares issued,  respectively |   | 57,939           |    | 57,056                |   |
| Accumulated other comprehensive loss                                                                                    |   | (26,183          | )       | (25,534               | )      |
| Retained earnings                                                                                                       |   | 268,969          |    | 265,961               |   |
| Total Shareholders’ Equity                                                                                         |   | 300,725          |    | 297,483               |   |
| Total Liabilities and Shareholders’ Equity                                                                         |   | $                | 596,724 |                  | $      | 603,460 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

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

**CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS**

 
|                                                               |   | **Three  Months Ended** |       |
|--------------------------------------------------------------------|--------|-------------------------|------------|
| **(In thousands, except per share data)**                          |   | **May 1,  2004**        |       | **May 3,  2003** |   |
|                                                               |   | **(Unaudited)**         | ** ** |
|                                                               |   |                    |       |   |   |
| Sales                                                              |   | $                       | 304,288    |   | $ | 289,772 |   |
| Cost of sales                                                      |   | 266,228                 |       | 248,893 |   |
|                                                               |   |                    |       |   |   |
| Gross profit                                                       |   | 38,060                  |       | 40,879 |   |
|                                                               |   |                    |       |   |   |
| Selling and administrative expenses                                |   | 29,779                  |       | 35,309 |   |
| Pension curtailment expense                                        |   | —                  |       | 2,400 |   |
| Other (income) expense, net                                        |   | (606                    | )          | 86 |   |
|                                                               |   |                    |       |   |   |
| Operating profit                                                   |   | 8,887                   |       | 3,084 |   |
|                                                               |   |                    |       |   |   |
| Interest expense                                                   |   | 517                     |       | 1,244 |   |
| Interest and investment income                                     |   | (254                    | )          | (500 | ) |
|                                                               |   |                    |       |   |   |
| Earnings from continuing operations before  income taxes           |   | 8,624                   |       | 2,340 |   |
| Income tax expense                                                 |   | 3,118                   |       | 682 |   |
| Net earnings from continuing operations                            |   | 5,506                   |       | 1,658 |   |
| Loss from discontinued operations, net of  tax of ($34) and ($426) |   | (64                     | )          | (823 | ) |
| Net earnings                                                       |   | $                       | 5,442      |   | $ | 835 |   |
|                                                               |   |                    |       |   |   |
| Weighted average shares outstanding:                               |   |                    |       |   |   |
| Basic                                                              |   | 28,671                  |       | 28,492 |   |
| Diluted                                                            |   | 28,934                  |       | 28,643 |   |
|                                                               |   |                    |       |   |   |
| Earnings per share:                                                |   |                    |       |   |   |
| Basic:                                                             |   |                    |       |   |   |
| Continuing operations                                              |   | $                       | 0.19       |   | $ | 0.06 |   |
| Discontinued operations                                            |   | —                  |       | (0.03 | ) |
| Net earnings per share                                             |   | $                       | 0.19       |   | $ | 0.03 |   |
|                                                               |   |                    |       |   |   |
| Diluted:                                                           |   |                    |       |   |   |
| Continuing operations                                              |   | $                       | 0.19       |   | $ | 0.06 |   |
| Discontinued operations                                            |   | —                  |       | (0.03 | ) |
| Net earnings per share                                             |   | $                       | 0.19       |   | $ | 0.03 |   |
|                                                               |   |                    |       |   |   |
| Cash dividends per share                                           |   | $                       | 0.085      |   | $ | 0.085 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

4

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

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

 
|                                                                                                                   |   | **Three  Months Ended** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
| **(In thousands)**                                                                                                     |   | **May 1,  2004**        |   | **May 3,  2003** |   |
|                                                                                                                   |   | **(Unaudited)**         |   |
| **Operating Activities**                                                                                               |   |                    |   |   |   |
| Net earnings                                                                                                           |   | $                       | 5,442  |   | $ | 835 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities:                                   |   |                    |   |   |   |
| Net loss from discontinued operations                                                                                  |   | 64                      |   | 823 |   |
| Deferred tax expense (benefit)                                                                                         |   | 1,888                   |   | (1,808 | ) |
| Depreciation and amortization                                                                                          |   | 7,041                   |   | 7,021 |   |
| Gain on sale of assets                                                                                                 |   | (346                    | )      | — |   |
| Change in operating assets and liabilities  net of the effect of acquisition, divestiture and discontinued operations: |   |                    |   |   |   |
| Accounts receivable, net                                                                                               |   | 30,211                  |   | 4,584 |   |
| Recoverable costs and accrued profits not  yet billed                                                                  |   | (2,210                  | )      | (3,634 | ) |
| Inventories                                                                                                            |   | 6,284                   |   | (5,441 | ) |
| Other current and noncurrent assets                                                                                    |   | 5,691                   |   | 174 |   |
| Accounts payable                                                                                                       |   | (8,126                  | )      | (3,026 | ) |
| Accrued payrolls and incentives                                                                                        |   | 565                     |   | 2,517 |   |
| Billings in excess of incurred costs                                                                                   |   | (3,946                  | )      | 1,630 |   |
| Estimated losses on uncompleted contracts                                                                              |   | (251                    | )      | — |   |
| Other current liabilities                                                                                              |   | 2,424                   |   | 3,479 |   |
| Accrued postretirement benefits and pension                                                                            |   | 555                     |   | 3,823 |   |
| Other, net                                                                                                             |   | (1,670                  | )      | 51 |   |
| **Net Cash Provided by Continuing Operations**                                                                         |   | 43,616                  |   | 11,028 |   |
| Net Cash Provided by (Used in) Discontinued  Operations                                                                |   | (41                     | )      | 3,278 |   |
| **Net Cash Provided by Operating Activities**                                                                          |   | 43,575                  |   | 14,306 |   |
|                                                                                                                   |   |                    |   |   |   |
| **Investing Activities**                                                                                               |   |                    |   |   |   |
| Capital expenditures, excluding rental  equipment                                                                      |   | (2,138                  | )      | (2,912 | ) |
| Additions to rental equipment                                                                                          |   | (814                    | )      | (2,624 | ) |
| Proceeds from sale of businesses                                                                                       |   | 3,168                   |   | — |   |
| Acquisition of businesses                                                                                              |   | —                  |   | (409 | ) |
| Proceeds from disposal of property, plant  and equipment                                                               |   | 2,489                   |   | 770 |   |
| Short-term investments                                                                                                 |   | (3,490                  | )      | (10,370 | ) |
| Net investing activities of discontinued  operations                                                                   |   | 37                      |   | — |   |
| **Net Cash Used in Investing Activities**                                                                              |   | (748                    | )      | (15,545 | ) |
|                                                                                                                   |   |                    |   |   |   |
| **Financing Activities**                                                                                               |   |                    |   |   |   |
| Change in short-term notes payable                                                                                     |   | (24                     | )      | 1,072 |   |
| Dividends paid                                                                                                         |   | (2,434                  | )      | (2,422 | ) |
| Proceeds from exercise of stock options                                                                                |   | 740                     |   | 41 |   |
| **Net Cash Used in Financing Activities**                                                                              |   | (1,718                  | )      | (1,309 | ) |
|                                                                                                                   |   |                    |   |   |   |
| Increase (decrease) in cash and cash  equivalents                                                                      |   | 41,109                  |   | (2,548 | ) |
| Cash and cash equivalents, beginning of  period                                                                        |   | 53,959                  |   | 107,994 |   |
| Cash and cash equivalents, end of period                                                                               |   | $                       | 95,068 |   | $ | 105,446 |   |
|                                                                                                                   |   |                    |   |   |   |
| Cash Paid For:                                                                                                         |   |                    |   |   |   |
| Interest                                                                                                               |   | $                       | 137    |   | $ | 168 |   |
| Income taxes (excluding refunds)                                                                                       |   | 135                     |   | 103 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

5

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**STEWART & STEVENSON SERVICES, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATEDCONDENSED FINANCIAL STATEMENTS**

** **

**Note 1 - Basis of Presentation**

 

Theaccompanying unaudited consolidated condensed financial statements of Stewart& Stevenson Services, Inc. and Subsidiaries (collectively, the “Company”)have been prepared in accordance with Rule 10-01 of Regulation S-X for interimfinancial statements required to be filed with the Securities and ExchangeCommission and do not include all information and footnotes required by generallyaccepted accounting 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 1, 2004 are not necessarily indicative of theresults that will be realized for the fiscal year ending January 31, 2005.

 

The Company’s fiscal year begins on February 1 of the year stated andends on January 31 of the following year. For example, the Company’s “Fiscal 2004” commenced on February 1, 2004and ends on January 31, 2005.  TheCompany reports results on the fiscal quarter method with each quartercomprising approximately 13 weeks.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to the rules and regulations of the Securitiesand Exchange Commission.  Theseconsolidated condensed financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended January 31, 2004.

 

The accompanyingconsolidated financial statements for Fiscal 2003 and related notes containcertain reclassifications to conform with the presentation used in Fiscal 2004.

 

**Note 2 – Comprehensive Income**

 

Totalcomprehensive income is as follows *(inthousands*):

 

|                                                     |   | **Three  Months Ended** |   |
|----------------------------------------------------------|--------|-------------------------|--------|
|                                                     |   | **May 1,  2004**        |   | **May 3,  2003** |   |
|                                                     |   |                    |   |   |   |
| Net earnings                                             |   | $                       | 5,442  |   | $ | 835 |   |
| Unrealized gain (loss) on forward  contracts, net of tax |   | (199                    | )      | 34 |   |
| Currency translation gain (loss), net of  tax            |   | (450                    | )      | 111 |   |
| Comprehensive income                                     |   | $                       | 4,793  |   | $ | 980 |   |

 

**Note 3 - Segment Information**

 

TheCompany’s operating reportable segments are organized based on the products andservices offered and are aligned with the Company’s internal managementstructure.  Inter-segment andintra-segment revenues and costs are eliminated, and the operating profit(loss) represents the earnings (loss) from continuing operations beforeinterest and income taxes, net of certain corporate allocations.

 

6

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TheCompany has identified five operating segments.  Sales and operating profit (loss) by operating segment are asfollows (*in thousands, except percentages*):

 

|                                                         |   | **Three  Months Ended** |    |
|--------------------------------------------------------------|--------|-------------------------|---------|
|                                                         |   | **May 1,  2004**        |    | **May 3,  2003** |   |
| **Sales**                                                    |   |                    |    |   |   |
| Tactical Vehicle Systems                                     |   | $                       | 138,783 |   | $ | 110,977 |   |
| Power Products                                               |   | 120,719                 |    | 125,834 |   |
| Engineered Products                                          |   | 17,268                  |    | 26,111 |   |
| Distributed Energy Solutions                                 |   | 4,443                   |    | 12,606 |   |
| Airline Products                                             |   | 23,075                  |    | 14,244 |   |
| Total Sales                                                  |   | $                       | 304,288 |   | $ | 289,772 |   |
|                                                         |   |                    |    |   |   |
| **Operating profit (loss)**                                  |   |                    |    |   |   |
| Tactical Vehicle Systems                                     |   | $                       | 19,490  |   | $ | 17,787 |   |
| Power Products                                               |   | 83                      |    | (3,126 | ) |
| Engineered Products                                          |   | (1,787                  | )       | (408 | ) |
| Distributed Energy Solutions                                 |   | (5,140                  | )       | (3,858 | ) |
| Airline Products                                             |   | (295                    | )       | (1,993 | ) |
| Corporate                                                    |   | (3,464                  | )       | (5,318 | ) |
| Total operating profit                                       |   | 8,887                   |    | 3,084 |   |
|                                                         |   |                    |    |   |   |
| Interest expense                                             |   | 517                     |    | 1,244 |   |
| Interest and investment income                               |   | (254                    | )       | (500 | ) |
| **Earnings from continuing operations before  income taxes** |   | $                       | 8,624   |   | $ | 2,340 |   |
|                                                         |   |                    |    |   |   |
| **Operating profit (loss) percentage**                       |   |                    |    |   |   |
| Tactical Vehicle Systems                                     |   | 14.0                    | %       | 16.0 | % |
| Power Products                                               |   | 0.1                     |    | (2.5 | ) |
| Engineered Products                                          |   | (10.3                   | )       | (1.6 | ) |
| Distributed Energy Solutions                                 |   | (115.7                  | )       | (30.6 | ) |
| Airline Products                                             |   | (1.3                    | )       | (14.0 | ) |
| Consolidated                                                 |   | 2.9                     | %       | 1.1 | % |

 

*Power Products*

 

During the first quarter of Fiscal 2004, theCompany exited the business activities associated with the distribution ofMercury Marine and MerCruiser products. As a result, the distribution agreement for these products wasterminated in March 2004 and the assets of this product line were sold for cashproceeds of $3.1 million, subject to adjustment.  Also in the first quarter of Fiscal 2004, the Company sold thenet assets and exited the activities associated with its wheelchair liftmanufacturing operation.  Considerationreceived for this asset sale included a receivable of $0.9 million which is duelater in Fiscal 2004, along with royalty rights based on wheelchair lift salesover the next five years.  No materialgain or loss was recognized on these transactions, individually or in theaggregate.

 

The activities above resulted in the closureof two branch locations which were primarily focused on the sale of MercuryMarine and MerCruiser products in Florida and Virginia.  Additionally during the first quarter ofFiscal 2004, the Company closed an under-performing branch location in Auburn,Washington.  Exit costs associated withthese actions were $0.2 million, which was charged to selling andadministrative expenses during the first quarter of Fiscal 2004, of which $0.1 million was accrued and unpaid at May 1, 2004.

 

*Distributed Energy Solutions*

 

During Fiscal2003, the Company announced the decision to exit the turnkey engineering,procurement and construction (“EPC”) activities within the Distributed EnergySolutions segment.  Under this exitplan, the Company expects that all remaining EPC contractual obligations willbe substantially completed in Fiscal 2004. The Company will, however, retain and execute obligations under certainfixed price operation and/or maintenance contracts related to EPC projects,which have terms ranging from two to ten years.  Nearly all exit costs associated with the EPC plan relate to thetermination of employees.  Totalestimated exit costs are $0.4 million, of which $0.1 million were expensed andpaid in the first quarter of Fiscal 2004. No liability was established for the remaining exit costs as of May 1,2004, or January 31, 2004, as these costs do not meet the recognition criteriaset forth under Statement of Financial Standards (“SFAS”) No. 146.

 

7

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*Airline Products*

 

Subsequent to the end of the first quarter ofFiscal 2004, the Company announced its intention to sell its Airline Productsbusiness located in Marietta, Georgia. While the Company expects the sale of this business to be completedduring Fiscal 2004, a buyer has not yet been identified and no assurance can begiven as to when, or if, a transaction will take place.

 

**Note 4 - Guarantees and Contingencies**

 

*Warranties*: Based on historical experience and contract terms, the Company providesfor the estimated cost of product and service warranties at the time of saleor, in some cases, when specific warranty problems are identified.  Accrued warranty costs are adjustedperiodically to reflect actual experience. Certain warranty and other related claims involve matters of disputethat ultimately are resolved by negotiation, arbitration or litigation.  Occasionally, a material warranty issue canarise that is beyond the Company’s historical experience.  The Company provides for any such warrantyissues as they become known and estimable.

 

A summary of warranty activity follows*:*

 
|                                            |   | **Three  Months Ended** |   |
|-------------------------------------------------|--------|-------------------------|--------|
| **(In  thousands)**                             |   | **May 1, 2004**         |   | **May 3, 2003** |   |
|                                            |   |                    |   |   |   |
| Accrued warranty costs - Beginning of  period   |   | $                       | 7,816  |   | $ | 6,073 |   |
| Payments for completed warranty obligations     |   | (1,621                  | )      | (2,511 | ) |
| Warranty accrual for current period  production |   | 1,258                   |   | 1,233 |   |
| Adjustments to warranty accrual                 |   | 14                      |   | — |   |
| Accrued warranty costs - End of period          |   | $                       | 7,467  |   | $ | 4,795 |   |

 

*Guarantees:*  TheCompany is occasionally required to issue performance indemnities or to postletters of credit, generally issued by a bank, to collateralize certaininsurance programs, to secure credit facilities or to ensure performance undercontracts.  A letter of credit commitsthe issuer to remit specified amounts to the holder, if the holder demonstratesthat the Company has failed to meet its obligations under the letter ofcredit.  If this were to occur, theCompany would be obligated to reimburse the issuer for any payments the issuerwas required to remit to the holder of the letter of credit.  Generally, a letter of credit is releasedwhen the Company has satisfied the obligations that the letter of credit issecuring.  As of May 1, 2004 and January31, 2004, the Company had letters of credit outstanding totaling approximately$12.8 million and $12.7 million, respectively. Also, the Company has guaranteed the performance output levels ofequipment serviced by the Company under certain operation and maintenancecontracts, which have terms ranging from two to ten years.  Some of these contracts contain liquidateddamages provisions.  In addition, theCompany had contingent performance indemnities of approximately $6.7 million asof May 1, 2004 and January 31, 2004, which expire in Fiscal 2007.

 

*U.S. Government Contingencies*:  During Fiscal 1998, the U.S. Customs Servicedetained a medium tactical vehicle that was being shipped by the Company fordisplay in a European trade show.  TheCompany is advised that the U.S. Customs Service and the Department of Justicehave since such event carried on an investigation of potential violations bythe Company of laws relating to the export of controlled military vehicles,weapons mounting systems and firearms. Such investigation could result in the filing of civil or administrativesanctions against the Company and/or individual employees, and could result ina suspension or debarment of the Company from receiving new contracts orsubcontracts with agencies of the U.S. government or the benefit of federalassistance payments.  While they arepossible, the Company does not believe that criminal sanctions will besought.  The Company believes thatresolution of this matter will not have a material adverse effect on itsconsolidated results of operations in any period or upon its consolidatedfinancial condition or liquidity and believes that the resolution of the matterthat is possibly most adverse to the Company will involve the payment of acivil penalty that will not materially adversely affect the Company.

 

The Company is adefendant in a suit brought under the qui tam provision of the False ClaimsAct, *UnitedStates of America,**ex rel. Werner Stebner v. Stewart & StevensonServices, Inc. and McLaughlin Body Co.*, Civil Action No. H-96-3363,in the United States 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 Department, the United Statesdeclined to intervene in the suit, which was unsealed on August 29, 2000.  On February 2, 2004, the District Courtfound in favor of the Company and dismissed all of the plaintiff’s claims bysummary judgment without proceeding to trial. After having all claims dismissedby the District Court, the plaintiffs then filed a notice of appeal on March 1,2004 in the United States Court of Appeals for the Fifth Circuit, No. 04-20209.The briefing schedule has not yet been finally determined by the Court ofAppeals. A decision by the Fifth Circuit is not expected until the fourthquarter of Fiscal 2004 or sometime in Fiscal 2005.  The grounds for appeal are not fully known, but the Companybelieves the District Court correctly dismissed all of the plaintiff’s claimsas being without merit and will continue to vigorously defend the suit in thecourt of appeals.  While the Companydoes not believe that an adverse outcome is

 

8

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reasonably likely, anunexpected adverse outcome in the suit could have a material adverse impact onthe Company’s consolidated results of operations, financial position andliquidity.  The Company is presentlyunable to determine whether any liability has been incurred in this matter,other than legal fees and expenses, which have been provided for, or toreasonably estimate the amount or range of any loss that may result from thismatter, and thus no accruals have been recorded in this matter other thanestimated legal fees and expenses relating to the appeal.

 

*Diamond Offshore Litigation*:  The Company is a defendant in a suit broughtby several subsidiaries of Diamond Offshore Drilling, Inc.  (collectively, “Diamond Offshore”) on May30, 2002, arising out of claims relating to a marine riser manufactured by theCompany and purchased by Diamond Offshore for use on its Ocean Baronesssemi-submersible drilling rig, Cause No. 2002-27831; *Diamond Offshore InternationalCorporation, Diamond Offshore Company, Diamond Offshore Services Company,Diamond Offshore (USA), Inc., Diamond Offshore International Limited, andDiamond Offshore Drilling, Ltd. 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 separation of the marine riser during deep water drillingoperations.  The suit seeks to recoverdamages that are not specified in the petition.

 

In a separatetransaction on or about September 13, 2001, Diamond Offshore contracted withthe Company for a marine riser for use on its Ocean Rover semi-submersibledrilling rig.  The Company wasfulfilling this contract, when, on August 19, 2002, Diamond Offshore amendedits petition in the Baroness Litigation to seek a declaration that DiamondOffshore has no further contractual obligations to the Company with respect tothe Ocean Rover riser.  On August 21,2002, before being served with Diamond Offshore’s amended petition in theBaroness Litigation, the Company filed a separate lawsuit against DiamondOffshore seeking to recover damages, including attorneys’ fees for theunilateral cancellation of the Rover contract (the “Rover Litigation”).  On August 30, 2002, the Court transferredthe Rover Litigation to the 125th Judicial District Court where the BaronessLitigation is pending.  The two caseshave been consolidated into one lawsuit in the 125th Judicial District Court.  The Company is vigorously prosecuting itsclaims against Diamond Offshore and defending the claims asserted against it byDiamond Offshore in this lawsuit.

 

It is presentlyimpossible for the Company to determine the ultimate outcome of the DiamondOffshore disputes or whether their resolution will, in the future, have a materialadverse effect on the Company’s consolidated results of operations, financialposition or liquidity.  The Company ispresently unable to determine whether a material liability has been incurred inthese matters or to reasonably estimate the amount or range of any loss thatmay result from these matters. Consequently, the Company has recorded no accrual for any losses relatedto the ultimate outcome of this litigation. The Company has, however, recorded accruals that it believes areadequate for certain estimated legal fees that it expects to incur associatedwith these matters, which estimated legal fees are based on the Company’sexperience to date in this litigation as to discovery activities and proceduralfilings with respect to the case.

 

*Distributed Energy SolutionsContingencies*:  Duringthe third quarter of Fiscal 2003, the Company decided to exit the turnkeyengineering, procurement and construction activities of the Distributed EnergySolutions business.  With respect tosuch turnkey activities, the Company will not be quoting any new business butwill be continuing to perform under existing contracts.  In connection with certain existingcontracts, the Company has received a written notice of dispute from a customerregarding equipment and services to be provided to several sites operated bythe customer.  In the dispute notice,the customer alleged various contractual claims, including claims forliquidated damages.  The customeracknowledged the expectation of continuing negotiations, but indicated that ifthe parties were unable to resolve the dispute, it would seek relief inarbitration.  Additional issues havebeen raised by the customer, and issues exist with respect to the enginesinstalled at the customer’s sites and as to engine supplier obligations.  Accordingly, the Company is activelyreviewing issues regarding this situation. In Fiscal 2003, the Company incurred substantial losses on the contractsthat are in dispute based on estimated costs to complete the contracts and tootherwise address customer issues on the contracts.  The Company is continuing to work with the customer on thesecontracts in dispute to resolve the customer’s issues.  At present, the Company is unable to predictthe outcome of this situation or even the aggregate amount of claims, if any,that may ultimately be asserted by the customer.  The Company is presently unable to determine whether anyadditional liability has been incurred in this matter beyond that which hasbeen recorded or to reasonably estimate any amount or range of any furtherlosses that may result from these contracts. The Company intends to vigorously assert its positions in anyarbitration of this matter should it not be resolved with the customer beforeany formal arbitration is initiated.

 

*Environmental Contingencies*:  In 2001, the Company received from theUnited States Environmental Protection Agency (the “EPA”) a Request forInformation under Section 104(e) of the Comprehensive Environmental Response,Compensation, and Liability Act of 1980, for information pertaining to theR&H Oil Company Site in San Antonio, Texas (the “Site”).  Information provided to the Company by theEPA indicates that the Company may have sent waste oils to the Site forrecycling in the late 1980s, and that such waste oils may potentially accountfor between one and two percent of the volume of total wastes received by theoil recycler at the Site.  Since theCompany expects to receive a claim for cleanup and other costs related to thissite, it has established reserves which it believes to be adequate at thistime.  As additional facts are developedand definitive remediation plans and necessary regulatory approvals forimplementation of remediation are established, changes in these and otherfactors may result in actual costs exceeding the current environmentalreserves.  While uncertainties areinherent in the final outcome of these environmental matters, and it ispresently impossible to determine the actual costs that ultimately may beincurred, management currently believes that the resolution of suchuncertainties should not have a material adverse effect on the Company’sconsolidated results of operations, financial position or liquidity.  The Company believes that the most likelyoutcome in this environmental matter is the expenditure of an immaterial amountof

 

9

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consideration as acontribution to the remediation effort.

 

The Company isalso a defendant in a number of lawsuits relating to contractual, productliability, personal injury and warranty matters normally incident to theCompany’s business.  No individual case,or group of cases presenting substantially similar issues of law or fact, isexpected to have a material effect on the manner in which the Company conductsits business or on its consolidated results of operations, financial positionor liquidity.  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 and its experience in these types of claim situations.  Nevertheless, an unexpected outcome in anysuch case could have a material adverse impact on the Company’s consolidatedresults of operations in the period it occurs. Moreover, future adverse developments in such cases could requirematerial changes in the recorded reserve amounts.

 

**Note 5 - Discontinued Operations**

 

During Fiscal2002, the Company sold certain assets and exited the activities related to itsblowout preventer and controls, valve and drilling riser business.  When the transaction was consummated, theCompany retained certain contracts and related assets as well as the receivablesand certain liabilities of the business, including warranty responsibility forproducts sold before closing as well as warranty responsibility for retainedcontracts to be completed.  In somecases, the Company has agreements with customers on commitments to support itsproducts, including retained warranties and contracts.  The assets and liabilities as well as theresults of operations of this business are reported as discontinued operations.

 

Discontinuedoperations also include a note receivable related to certain gas turbineequipment in Argentina.  In accordancewith a financing agreement negotiated between the Company and the Argentine enduser of the equipment in Fiscal 2003, the note receivable will be repaid over anine-year term.

 

Discontinuedoperations generated the following sales and operating losses in the threemonth periods ended May 1, 2004 and May 3, 2003:

 

|                         |   | **Three  Months Ended** |   |
|------------------------------|--------|-------------------------|--------|
| **(In thousands)**           |   | **May 1,  2004**        |   | **May 3,  2003** |   |
|                         |   |                    |   |   |   |
| Sales                        |   | $                       | 585    |   | $ | 436 |   |
| Operating loss               |   | (98                     | )      | (1,249 | ) |
| Operating loss, net of taxes |   | (64                     | )      | (823 | ) |
|                              |        |                         |        |  |  |  |  |

 

**Note6 – Inventories**

 

Summarized beloware the components of inventories related to continuing operations, net ofcustomer deposits:

 

| **(In thousands)**                                |   | **May 1,  2004** |    | **January  31, 2004** |   |
|---------------------------------------------------|--------|------------------|---------|-----------------------|--------|
|                                              |   |             |    |                  |   |
| Inventory purchased under distributor  agreements |   | $                | 79,201  |                  | $      | 87,712 |   |
| Raw materials and spare parts                     |   | 43,885           |    | 35,932                |   |
| Work in process                                   |   | 17,721           |    | 22,517                |   |
| Finished goods                                    |   | 15,357           |    | 20,154                |   |
|                                              |   | 156,164          |    | 166,315               |   |
| Excess of current cost over LIFO values           |   | (45,889          | )       | (45,330               | )      |
| Total Inventories                                 |   | $                | 110,275 |                  | $      | 120,985 |   |

 

Rawmaterials and spare parts include OEM equipment and components used in themanufacturing segments.  The Companyuses the last-in, first-out (“LIFO”) method of valuing the majority of itsinventory.  An actual valuation ofinventory under the LIFO method can be made only at the end of each year basedon the inventory levels and costs at that time.  Accordingly, interim LIFO calculations are based on management’sestimates of expected year-end inventory levels and costs and are subject tothe final year-end LIFO inventory valuation.

 

10

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**Note7 – Earnings Per Share**

 

The followingtable is a reconciliation of the numerators and denominators used in thecalculation of basic and diluted earnings per share as presented on theconsolidated condensed statements of operations.

 
|                                                                                        |   | **Three  Months Ended** |   |
|---------------------------------------------------------------------------------------------|--------|-------------------------|--------|
| **(In  thousands, except per share data)**                                                  |   | **May 1, 2004**         |   | **May 3, 2003** |   |
| Numerator:                                                                                  |   |                    |   |   |   |
| Earnings (loss) available to common  shareholders                                           |   |                    |   |   |   |
| From continuing operations                                                                  |   | $                       | 5,506  |   | $ | 1,658 |   |
| From discontinued operations                                                                |   | (64                     | )      | (823 | ) |
| Net earnings                                                                                |   | $                       | 5,442  |   | $ | 835 |   |
|                                                                                        |   |                    |   |   |   |
| Denominator:                                                                                |   |                    |   |   |   |
| Denominator for basic earnings per share                                                    |   |                    |   |   |   |
| Weighted average shares outstanding                                                         |   | 28,671                  |   | 28,492 |   |
| Effect of dilutive securities:                                                              |   |                    |   |   |   |
| Employee and director stock options                                                         |   | 263                     |   | 151 |   |
| Denominator for diluted earnings per share  -  Adjusted weighted average shares outstanding |   | 28,934                  |   | 28,643 |   |
|                                                                                        |   |                    |   |   |   |
| Basic earnings per share:                                                                   |   |                    |   |   |   |
| From continuing operations                                                                  |   | $                       | 0.19   |   | $ | 0.06 |   |
| From discontinued operations                                                                |   | —                  |   | (0.03 | ) |
| Net earnings per share                                                                      |   | $                       | 0.19   |   | $ | 0.03 |   |
|                                                                                        |   |                    |   |   |   |
| Diluted earnings per share:                                                                 |   |                    |   |   |   |
| From continuing operations                                                                  |   | $                       | 0.19   |   | $ | 0.06 |   |
| From discontinued operations                                                                |   | —                  |   | (0.03 | ) |
| Net earnings per share                                                                      |   | $                       | 0.19   |   | $ | 0.03 |   |
|                                                                                        |   |                    |   |   |   |
| Number of shares under anti-dilutive stock  options outstanding                             |   | 2,031                   |   | 1,435 |   |

 

**Note 8 – Stock-Based Compensation**

 

In December 2002, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure,” which amends SFAS No. 123, “Accountingfor Stock-Based Compensation,” by providing alternative methods of transitionfor a voluntary change to the fair value method of accounting for stock optionsand other stock-based employee compensation. As permitted under SFAS No. 123, the Company continues to use theintrinsic value method of accounting prescribed by Accounting Principles BoardOpinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” to accountfor its stock-based compensation programs. Accordingly, no compensation expense is recognized when the exerciseprice of an employee stock option is equal to or greater than the market priceof the Company’s common stock on the grant date.

 

The following pro forma data are calculated as if compensation expensefor the Company’s stock option plans was determined based on the fair value atthe grant date for awards under these plans, amortized to expense on a pro ratabasis over the option vesting period, in accordance with the methodologyprescribed by SFAS No. 123:

 

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|                                                                            |   | **Three  Months Ended** |   |
|---------------------------------------------------------------------------------|--------|-------------------------|--------|
| **(In thousands, except per share data)**                                       |   | **May 1,  2004**        |   | **May 3,  2003** |   |
|                                                                            |   |                    |   |   |   |
| Net earnings:                                                                   |   |                    |   |   |   |
| As reported                                                                     |   | $                       | 5,442  |   | $ | 835 |   |
| Pro forma compensation expense, determined  under fair value method, net of tax |   | (468                    | )      | (239 | ) |
| Pro forma                                                                       |   | $                       | 4,974  |   | $ | 596 |   |
|                                                                            |   |                    |   |   |   |
| Basic earnings per share:                                                       |   |                    |   |   |   |
| As reported                                                                     |   | $                       | 0.19   |   | $ | 0.03 |   |
| Pro forma                                                                       |   | 0.17                    |   | 0.02 |   |
|                                                                            |   |                    |   |   |   |
| Diluted earnings per share:                                                     |   |                    |   |   |   |
| As reported                                                                     |   | $                       | 0.19   |   | $ | 0.03 |   |
| Pro forma                                                                       |   | 0.17                    |   | 0.02 |   |

 

For purposes of the pro forma disclosures, the fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model.

 

**Note 9 -****Employee Pension and Other Benefit Plans**

 

The Company has a noncontributory defined benefitpension plan that covered substantially all of its full-time employees and anunfunded defined benefit supplemental executive retirement plan covering certainhighly compensated employees.  EffectiveJuly 1, 2003, the Company froze the benefits earned under both defined benefitpension plans, with the exception of a small transition group.

 

The Company also has a defined benefit postretirementmedical plan, which provides for the payment of certain medical costs ofeligible employees and dependents upon retirement.  The plan is currently not funded.  The Company expects to continue paying postretirement medicalcosts as covered claims are incurred. Effective July 1, 2003, the Company decided that postretirement medicalbenefits will not be provided to future retirees, with the exception of a smalltransition group.

 

The net periodic benefit cost associated with theCompany’s defined benefit pension plans and defined benefit postretirementmedical plan consisted of the following components for the three months ended:

 

|                               |   | **Pension  Benefits** |   | **Other  Postretirement Benefits** |   |
|------------------------------------|--------|-----------------------|--------|------------------------------------|--------|
| **(In thousands)**                 |   | **May 1,  2004**      |   | **May 3,  2003**                   |   | **May 1,  2004** |   | **May 3,  2003** |   |
| Service cost                       |   | $                     | 183    |                               | $      | 649 |   | $ | — |   | $ | 138 |   |
| Interest cost                      |   | 1,888                 |   | 1,938                              |   | 164 |   | 260 |   |
| Expected return on plan assets     |   | (2,048                | )      | (1,909                             | )      | — |   | — |   |
| Curtailment expense/(gain)         |   | —                |   | 2,369                              |   | — |   | (142 | ) |
| Amortization of prior service cost |   | —                |   | 31                                 |   | (191 | ) | (113 | ) |
| Amortization of net loss           |   | 365                   |   | 169                                |   | 73 |   | 93 |   |
| Net periodic benefit cost          |   | $                     | 388    |                               | $      | 3,247 |   | $ | 46 |   | $ | 236 |   |

 

Aspreviously disclosed in the Company’s consolidated financial statements for theyear ended January 31, 2004, the Company expects to contribute at least $4.0million to its defined benefit pension plans during Fiscal 2004.  During the three months ended May 1, 2004,no contributions were made.

 

OnDecember 8, 2003, President Bush signed into law the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003 (the “Act”).  The Act introduced a prescription drugbenefit under Medicare (“Medicare Part D”) as well as a federal subsidy tosponsors of retiree health care benefit plans that provide a benefit that is atleast actuarially equivalent to Medicare Part D.  As allowed by FASB Staff Position 106-1, “Accounting andDisclosure Requirements Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003,” the Company has elected to defer recognizingthe effects of the Act on its accumulated postretirement benefit obligation andnet periodic postretirement benefit cost in the consolidated financialstatements and notes thereto.  FASBStaff Position 106-2, issued in May 2004, provides guidance on the accountingfor the effects of the Act.  The Companyis currently evaluating the impact of such guidance, which the Company isrequired to adopt in the third quarter of Fiscal 2004.

 

12

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

 

This discussion should be read in conjunction with the attachedconsolidated condensed financial statements and notes thereto, and with ourAnnual Report on Form 10-K and notes thereto for the fiscal year ended January31, 2004.  The following discussioncontains forward-looking statements.  Inconnection therewith, please see “Factors That May Affect Future Results”below, which identifies important factors that could cause actual results todiffer materially from those predicted or implied in the forward-lookingstatements.

 

Our fiscal year begins onFebruary 1 of the year stated and ends on January 31 of the followingyear.  For example, our “Fiscal 2004”commenced on February 1, 2004 and ends on January 31, 2005.  We report results on the fiscal quartermethod with each quarter comprising approximately 13 weeks.  The first quarter of Fiscal 2004 commencedon February 1, 2004 and ended on May 1, 2004, and the first quarter of Fiscal2003 commenced on February 1, 2003 and ended on May 3, 2003.

 

**RESULTS OF OPERATIONS**

 

**Overview**

 

Duringthe first quarter of Fiscal 2004, we have continued to make progress in ourexecution of the management action plans required to achieve acceptablefinancial returns throughout all of our operating segments.  The significant highlights of our progressin each operating segment are described below.

 

***TacticalVehicle Systems*** – We continue the transitionefforts that will result in full rate production under the new Family of MediumTactical Vehicles (“FMTV”) contract later this year.  Our current multi-year contract with the U.S. Army to produce theFMTV is expected to conclude during the second half of Fiscal 2004, at whichtime production is expected to begin under the new multi-year contract with theU.S. Army.  We expect the fourth quarterof Fiscal 2004 to be one of transition with lower sales as production commencesunder the new contract.

** **

*Power Products –*We**completednumerous streamlining and cost reduction actions in the first quarter of Fiscal2004, and we continue to look at the cost structure for additionalopportunities.  Key actions taken in thefirst quarter include the sale of assets of the Mercury Marine MerCruiserproduct line, the sale of assets of the wheelchair lift manufacturing productline, the sale of certain undeveloped real estate and the closure of anunder-performing branch located in Auburn, Washington.  As a result of the many actions taken duringthe second half of Fiscal 2003 and the first quarter of 2004, total headcountfor this segment as of May 1, 2004 has been reduced by 323 personnel sinceSeptember 2003, of which 126 such reductions have occurred since January 31,2004.

 

*Engineered Products* – Weare continuing to evaluate the long-term earnings potential for the primarycomponents of this segment, including the petroleum equipment and utilityequipment product lines.  Uponcompleting this evaluation, we plan to take the strategic actions necessary togenerate acceptable returns in this segment, which may include the exit of someor all of the product lines of this segment.

 

***Distributed EnergySolutions*** – Our effortsin this segment continue to be focused upon completing remaining contractualobligations and winding down the engineering, procurement and construction(“EPC”) activities of this business.

** **

*Airline Products* – Subsequent to the end of the firstquarter, we announced our decision topursue the sale of our Airline Products business.  We concluded that this business is not core to the long-termdirection of the Company, and therefore, it is in the best interest of ourshareholders to redeploy the capital invested in this segment to other morestrategic activities.

 

**First Quarter Fiscal 2004 vs. First Quarter Fiscal 2003**

 

Sales for the first quarter ofFiscal 2004 of $304.3 million increased $14.5 million, or 5%, from the firstquarter of Fiscal 2003.  This increasein sales is primarily attributable to a $27.8 million increase in our TacticalVehicle Systems segment along with an $8.8 million increase in our AirlineProducts Segment.  These increases werepartially offset by lower sales in the Engineered Products, Distributed EnergySolutions and Power Products segments. The changes within each segment are explained in greater detail in theSegment Data section below.

 

Gross profit decreased by $2.8million to $38.1 million in the first quarter of Fiscal 2004 from the firstquarter of Fiscal 2003.  This decreasereflects a decline in gross profit margin to 12.5% in the first quarter ofFiscal 2004 from 14.1% in the first quarter of Fiscal 2003.  The decrease in gross profit is primarilyattributable to higher costs in our Distributed Energy Solutions and TacticalVehicle Systems segments.  Within ourDistributed Energy Solutions segment, the first quarter of Fiscal 2004 included$2.5 million of gross profit margin erosion primarily associated with thecontinued progress on existing EPC customer obligations.  Within our Tactical Vehicle Systems segment,the gross profit declined $4.4 million as a result of product mix changesassociated with option truck production under the current FMTV contract andincreased material costs, primarily associated with higher steel prices.  This decline

 

13

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was substantially offset by theimpact of higher sales volume.  Salesvolume changes in all other segments combined to generate the remaining $0.3million of gross profit decline.

 

Selling and administrativeexpenses decreased to $29.8 million (9.8% of sales) in the first quarter ofFiscal 2004 from $35.3 million (12.2% of sales) in the first quarter of Fiscal2003.  This $5.5 million (16%) reductionin selling and administrative expenses is primarily attributable to a $2.8million cost savings from employee workforce reductions during Fiscal 2003, a$1.0 million reduction in fringe benefits expense associated with changes madein our employee pension, postretirement and medical benefit plans, and $1.7million associated with reductions in other expenses.

 

First quarter of Fiscal 2003 operating results included a one-timenon-cash write-off of $2.4 million of previously unamortized prior servicecosts (pension curtailment expense). This charge was associated with our decision to freeze the benefitsearned under our defined benefit pension plan, defined benefit supplementalexecutive retirement plan and our postretirement medical plan effective July 1,2003, with the exception of a small transition group.

 

Other (income) expense, net, changed from a net expense of $0.1 millionin the first quarter of Fiscal 2003 to net income of $0.6 million in the firstquarter of Fiscal 2004, primarily as a result of a net gain on sales of assetsand compensation earned from a supply partner during Fiscal 2004.

 

Net interest expense decreased $0.5 million to $0.2 million in the firstquarter of Fiscal 2004.  The decrease ininterest expense is primarily attributable to lower debt balances as a resultof the scheduled debt payment of $30.0 million in May 2003.

 

The effective tax rate was 36.1% in the first quarter of Fiscal 2004compared to 29.1% for the corresponding period in 2003.  The increase in effective tax rate isprimarily a result of an expected reduction in certain state tax benefits andtax credits in Fiscal 2004 compared to the first quarter of Fiscal 2003.

 

Discontinued operations generated an after-tax loss of $0.1 million inthe first quarter of Fiscal 2004, compared to an $0.8 million after-tax loss inthe first quarter of Fiscal 2003.  Theselosses primarily represent costs associated with retained contracts, warrantyand legal claims and obligations associated with our discontinued blowoutpreventer and controls, valve and drilling riser business, which was soldduring Fiscal 2002.

 

**SegmentData**

 

Our operating reportable segments are organized basedon the products and services offered and are aligned with the internalmanagement structure.  Inter-segment andintra-segment revenues and costs are eliminated, and the operating profit(loss) represents the earnings (loss) before interest and income taxes fromcontinuing operations, net of certain corporate allocations.

 

The followingtable represents sales and operating profit (loss) by business segment *(in thousands)*:

 

|                                                         |   | **Three  Months Ended** |    |
|--------------------------------------------------------------|--------|-------------------------|---------|
|                                                         |   | **May 1,  2004**        |    | **May 3,  2003** |   |
| **Sales**                                                    |   |                    |    |   |   |
| Tactical Vehicle Systems                                     |   | $                       | 138,783 |   | $ | 110,977 |   |
| Power Products                                               |   | 120,719                 |    | 125,834 |   |
| Engineered Products                                          |   | 17,268                  |    | 26,111 |   |
| Distributed Energy Solutions                                 |   | 4,443                   |    | 12,606 |   |
| Airline Products                                             |   | 23,075                  |    | 14,244 |   |
| Total Sales                                                  |   | $                       | 304,288 |   | $ | 289,772 |   |
|                                                         |   |                    |    |   |   |
| **Operating profit (loss)**                                  |   |                    |    |   |   |
| Tactical Vehicle Systems                                     |   | $                       | 19,490  |   | $ | 17,787 |   |
| Power Products                                               |   | 83                      |    | (3,126 | ) |
| Engineered Products                                          |   | (1,787                  | )       | (408 | ) |
| Distributed Energy Solutions                                 |   | (5,140                  | )       | (3,858 | ) |
| Airline Products                                             |   | (295                    | )       | (1,993 | ) |
| Corporate                                                    |   | (3,464                  | )       | (5,318 | ) |
| Total operating profit                                       |   | 8,887                   |    | 3,084 |   |
|                                                         |   |                    |    |   |   |
| Interest expense                                             |   | 517                     |    | 1,244 |   |
| Interest and investment income                               |   | (254                    | )       | (500 | ) |
| **Earnings from continuing operations before  income taxes** |   | $                       | 8,624   |   | $ | 2,340 |   |

 

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**Tactical Vehicle Systems**

 

The Tactical Vehicle Systems segment manufactures tacticalvehicles under contracts with the U.S. Army and provides sustaining designengineering, service and support.  Othercontracts within and outside of the U.S. are also being pursued in thesegment.  During the first quarter ofFiscal 2004, this segment recorded $138.8 million of sales, a $27.8 million(25%) increase from the $111.0 million of sales recorded in the first quarter ofFiscal 2003.  The sales increase is attributable toincreased production volume as this segment delivered 743 trucks and 204trailers in the first quarter of Fiscal 2004, compared to 631 trucks and 132trailers in the same period of Fiscal 2003. Operating profit for the firstquarter of Fiscal 2004 increased to $19.5 million (14.0% operating margin) from$17.8 million (16.0% operating margin) in the first quarter of Fiscal2003.  The increased sales volumegenerated a $4.4 million improvement to operating profit.  This improvement was partially offset by$1.8 million of margin deterioration associated with product mix and $0.9million of increased material costs, primarily associated with higher steelprices.

 

As mentionedabove, full rate production under the new multi-year FMTV contract is scheduledto begin in the fourth quarter of Fiscal 2004. The delivery schedule at the outset of the new contract is expected toresult in a decline in sales volume during the fourth quarter of Fiscal 2004.  The total sales volume for Fiscal 2004,however, is currently expected to exceed Fiscal 2003 sales levels due to higherunit volumes during the first three quarters of Fiscal 2004.  As a result of the new contract, our profitmargins in this segment are expected to be lower than historical margin levelsachieved with the current FMTV contract, which we believe to have beensubstantially higher than those typically achieved by defense contractors.  Actual future margins of this segment will,however, be dependent upon a number of factors including our ability to achieveefficiencies and other materials and labor cost control measures, the actualquantities and variations of vehicles purchased by the U.S. Army under the newcontract, future prices for steel and other materials, the potential foradditional contracts, bid and proposal activities and other factors.  The operating margin this segment willachieve in total may also be impacted by additional sales, if any, to otherallied governments and the level of engineering and service provided.

 

**Power Products**

 

The Power Products segment, which is responsible for marketing andaftermarket support of a wide range of industrial equipment, recorded sales of$120.7 million in the first quarter of Fiscal 2004, down $5.1 million (4%) from$125.8 million in the first quarter of Fiscal 2003.  A breakdown of Power Products segment sales follows:

 

|                     |   | **Three Months Ended** |    |
|--------------------------|--------|------------------------|---------|
| **(In thousands)**       |   | **May 1,  2004**       |    | **May 3,  2003** |   |
| Equipment sales          |   | $                      | 36,259  |   | $ | 37,138 |   |
| Parts sales              |   | 56,098                 |    | 60,778 |   |
| Service and rental sales |   | 28,362                 |    | 27,918 |   |
|                     |   | $                      | 120,719 |   | $ | 125,834 |   |

 

The decline in sales was primarily attributable to the closure of fiveunder-performing branch locations during the fourth quarter of Fiscal 2003 andfirst quarter of Fiscal 2004, along with the exit of the ThermoKing productoffering in Texas and Louisiana, and the wheelchair lift manufacturing andMerCruiser product offerings.  Thissegment reported an operating profit of $0.1 million in the first quarter ofFiscal 2004 compared to a $3.1 million operating loss in the first quarter ofFiscal 2003.  The improvement inoperating profit is primarily attributable to on-going cost reductionprograms.  Workforce reductions resultedin a $3.2 million decrease in employee compensation costs between the twoperiods.  Additionally, changes inemployee benefit programs described above resulted in an additional $1.0million decrease in operating expenses. The earnings improvements generated by these reductions were partiallyoffset by a $1.0 million decline resulting from the decrease in sales volume.

 

As mentioned above, wesold the assets of our wheelchair lift manufacturing and MerCruiserdistribution product offerings during the first quarter of Fiscal 2004 for aggregate cash proceeds of $3.2 millionand a receivable of $0.9 million.  Nomaterial gain or loss was recognized on these transactions, individually or inthe aggregate.  We intend to continue toevaluate the many activities in this business segment in Fiscal 2004 and takethe appropriate actions in order to improve the segment’s contribution to theCompany’s return on invested capital.

 

**EngineeredProducts**

 

The Engineered Products segment consists oftwo primary product lines, petroleum equipment and utilities equipment.  The petroleum equipment businessmanufactures equipment primarily for the well stimulation segment of the oilservice industry.  The utilitiesequipment products include mobile railcar movers, snowblowers and off-roadseismic vehicles.  Sales in this segmentdecreased to $17.3 million in the first quarter of Fiscal 2004 from $26.1million in the first quarter of Fiscal 2003, representing a 34% decline.  This net decrease included a decline inpetroleum equipment sales of $11.9 million, primarily resulting from our executionof several large

 

15

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international orders during thefirst quarter of Fiscal 2003.  Thisdecline was partially offset by a $3.1 million increase in utilities equipmentsales, largely associated with off-road seismic vehicle sales.  Operating loss for the first quarter ofFiscal 2004 was $1.8 million, a $1.4 million change from the $0.4 million lossgenerated in the first quarter of Fiscal 2003. The increased operating loss is primarily attributable to a $0.8 milliondecline related to the reduced sales volume along with a $0.4 million chargefor potential inventory impairment associated with the recent U.S. tradesanctions against Syria, and $0.2 million associated with increased unabsorbedoperating expenses.

 

Our order backlog in this segmenthas increased to $30.9 million at May 1, 2004 from $20.1 million at the end ofFiscal 2003.  The execution of thecontracts currently in backlog are expected to improve sales and reduce futureoperating losses from the first quarter Fiscal 2004 levels.

 

**DistributedEnergy Solutions**

 

The Distributed Energy Solutions segment packagesreciprocating diesel and natural gas engine generator sets and markets powergeneration solutions in domestic and certain international markets.  As previously communicated, we announced thedecision to exit EPC activities within this segment during the third quarter ofFiscal 2003.  With respect to such EPCactivities, we are not quoting any new business but we continue to perform underexisting contracts.

 

Sales for this segmentdecreased $8.2 million to $4.4 million in the first quarter of Fiscal 2004compared to $12.6 million in the first quarter of Fiscal 2003.  The decline in sales is primarily the resultof our decision to exit the EPC activities. Sales in the first quarter of Fiscal 2004 primarily relate to ourcontinued execution of remaining customer obligations under existingcontracts.  Operating loss for the firstquarter of Fiscal 2004 was $5.1 million, compared to a $3.9 million operatingloss in the first quarter of Fiscal 2003.  The increased operating loss is largely attributable to continuedcosts incurred on existing contractual obligations, costs related to certaincontract issues and disputes and the overall low volume of sales and marginthat is not sufficient to cover this segment’s infrastructure costs remainingin place to service existing obligations.

 

The EPC contractual obligations are expectedto be substantially completed by the end of Fiscal 2004.  We will, however, retain and executeobligations under certain fixed-price operation and/or maintenance contractsrelated to EPC projects, which have terms ranging from two to ten years.

 

**AirlineProducts**

 

The Airline Products segment,which manufactures aircraft ground support equipment, recognized sales of $23.1million in the first quarter of Fiscal 2004, an $8.9 million (62%) increasefrom the $14.2 million of sales in the first quarter of Fiscal 2003.  The increased sales in Fiscal 2004 areprimarily attributable to increased capital spending in the domestic commercialairline industry.  This segmentdelivered 571 units in the first quarter of Fiscal 2004, compared to 325 unitsin the first quarter of Fiscal 2003. Operating loss for this segment was $0.3 million in the first quarter ofFiscal 2004, a $1.7 million improvement from the $2.0 million operating loss inthe first quarter of Fiscal 2003.  Theimprovement in operating loss is primarily attributable to the increased salesvolume.  Our order backlog in thissegment is $14.3 million at the end of the first quarter, a $7.3 millionincrease from the end of Fiscal 2003.

 

During the first quarter ofFiscal 2004, the Airline Products business was awarded contracts by theU.S. Navy, Naval Air Warfare Center to deliver tow tractors and airconditioning units.  The initialcontract awards of $2.6 million cover the design and testing of 5pilot-production tow tractor units and 5 pilot-production air conditioningunits, along with associated technical data and training and pilot-productiontesting.  These contracts are expectedto be executed in the second and third quarters of Fiscal 2004.  Pending successful completion of the initialaward, the contracts include four individual option years beginning in lateFiscal 2004 or early Fiscal 2005 which have a total contract value ofapproximately $72 million, if all options are fully exercised.

 

As mentioned above, we arecurrently pursuing the sale of our Airline Products business.  Until a suitable buyer is found for thisbusiness, the sale process is not expected to have a material impact to theon-going operations of this segment. Additionally, we will continue to provide the capital and otherresources needed to continue our execution in this business.

 

**Corporate**

 

Corporate expenses consist of costs incurred bythe corporate headquarters group, which cannot be directly attributed to theactivities of the business segments. Corporate expenses incurred in the first quarter of Fiscal 2004 were$3.5 million, a $1.8 million decrease from the $5.3 million incurred in thefirst quarter of Fiscal 2003.  Thedecrease in corporate expenses is primarily attributable to a $2.4 millionone-time non-cash pension curtailment expense in the first quarter of Fiscal2003 resulting from changes made to our defined benefit pension andpostretirement medical plans.  Theimpact of other cost reduction efforts including corporate staff reductionswere offset by higher legal and professional expenses, including $0.6 millionassociated with the requirements of Section 404 of the Sarbanes-Oxley Act of2002.  While the requirements ofSarbanes-Oxley Act are expected to result in some level of increased corporateexpenses, we expect the on-going expenses to be lower than the levelsexperienced in the first quarter of Fiscal 2004.

 

16

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**UNFILLEDORDERS**

 

The Company’sunfilled orders consist of written purchase orders and signed contracts.  Historically, cancellations are rare;however, 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 relating to continuing operations were as follows:

 

|                         |   | **May 1,  2004**   |   | **January  31, 2004** |   |
|------------------------------|--------|--------------------|--------|-----------------------|--------|
|                         |   | **(In  millions)** |   |
|                         |   |               |   |                  |   |
| Tactical Vehicle Systems     |   | $                  | 591.2  |                  | $      | 453.0 |   |
| Power Products               |   | 29.3               |   | 26.4                  |   |
| Engineered Products Division |   | 30.9               |   | 20.1                  |   |
| Distributed Energy Solutions |   | 14.1               |   | 19.5                  |   |
| Airline Products             |   | 14.3               |   | 7.0                   |   |
|                         |   | $                  | 679.8  |                  | $      | 526.0 |   |

 

Unfilled orders ofthe Tactical Vehicle Systems segment at May 1, 2004 consisted principally ofremaining production related to the sixth program year under the U.S. Armycontract awarded in October 1998, as well as the funded portion of the newmulti-year FMTV contract awarded in April 2003.  Production under the October 1998 contract is expected to becomplete in December 2004, and full rate production under the new FMTV contractis expected to begin in November 2004.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our sources of cash liquidity include cash and cashequivalents, short-term investments and cash from operations.  We believe that these sources will providesufficient capital to fund our working capital requirements, capitalexpenditure needs, dividends and other financial commitments.

 

We had a $150 million unsecured revolving creditfacility, which expired on January 31, 2004. No borrowings were outstanding under the facility at any time during thepast three fiscal years.  Based onnon-usage of the revolving credit facility combined with the current cash andcash equivalents balance and the expected cash from operations for theforeseeable future, we elected not to renew the facility.  To provide additional financial flexibility,we intend to negotiate a smaller revolving credit facility later in Fiscal2004.  There can be no assurance that wewill be able to successfully negotiate such a facility or, if we do, that suchfacility will include terms and conditions similar to the expiredfacility.  Failure to negotiate a new facilityon terms acceptable to us could restrict our future ability to makeacquisitions and fund working capital, capital expenditures, common stockdividends or other financial obligations.

 

DuringFiscal 2003, we entered into letter of credit facilities totaling $17.5 millionwith financial institutions, to allow us to issue letters of credit as neededto support our commercial operations. Approximately $12.8 million of letters of credit under these facilitieswere outstanding as of May 1, 2004.

 

We have $25.0 million in unsecured senior notesoutstanding, which bear interest at a rate of 7.38% and are due and payable inMay 2006.  The senior notes agreementlimits sales of assets and other items and contains a maximum debt-to-totalcapitalization covenant. Based on our financial condition as of May 1, 2004,the restrictions imposed by our senior notes do not currently restrict ourability to meet our obligations or to declare and pay dividends at historicallevels.

 

InFiscal 2002, we entered into an interest rate swap agreement, which expires inNovember 2004, with a notional amount of $15 million related to $15 million ofthe senior notes due in 2006.  Thistransaction, which is designated as a fair value hedge, effectively converts$15 million of fixed rate debt with an interest rate of 7.38% into floatingrate debt with an interest rate of LIBOR plus 436 basis points.  The applicable floating interest rate as ofMay 1, 2004 was approximately 5.7%.  Thenet interest received or paid as a result of the interest rate swap is includedin interest expense on the consolidated statements of operations.  The recorded value of the swap and therelated fair value adjustment to the debt are carried on the consolidatedbalance sheets at fair value.

 

Inaddition, our international subsidiaries had foreign currency bank notespayable totaling $1.9 million at May 1, 2004 and January 31, 2004.  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 America operations.

 

In the event that anyacquisition of additional operations, growth in existing operations,settlements of lawsuits or disputes, changes in

 

17

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inventory levels, accountsreceivable, tax payments or other working capital items create a permanent needfor working capital or capital expenditures in excess of the existing cash andcash equivalents and committed lines of credit, we may seek to borrow underother long-term financing instruments or seek additional equity capital.

 

**Statementsof Cash Flows Data**

 
|                                              |   | **Three  Months Ended** |   |
|---------------------------------------------------|--------|-------------------------|--------|
| **(In thousands)**                                |   | **May 1,  2004**        |   | **May 3,  2003** |   |
| Net cash provided by (used in):                   |   |                    |   |   |   |
| Operating activities                              |   | $                       | 43,575 |   | $ | 14,306 |   |
| Investing activities                              |   | (748                    | )      | (15,545 | ) |
| Financing activities                              |   | (1,718                  | )      | (1,309 | ) |
| Increase (decrease) in cash and cash  equivalents |   | $                       | 41,109 |   | $ | (2,548 | ) |

 

**SelectedBalance Sheet Data**

 
| **(In thousands)**                                  |   | **May 1,  2004** | ** ** | **January  31, 2004** | ** ** |
|-----------------------------------------------------|--------|------------------|------------|-----------------------|------------|
| Cash, cash equivalents, and short-term  investments |   | $                | 106,303    |                  | $          | 61,704 |   |
| Working capital                                     |   | 230,159          |       | 219,531               |       |
| Total debt                                          |   | 28,418           |       | 28,442                |       |
|                                                     |        |                  |            |                       |            |  |  |

 

Total cash flow changed by $43.7 million to a$41.1 million cash increase during the first quarter of Fiscal 2004, comparedto a $2.5 million cash decrease in the first quarter of Fiscal 2003.  This change in cash flow primarily relatesto a $29.3 million improvement in cash provided by operating activities asaccounts receivable balances were reduced by $30.2 million in the first quarterof Fiscal 2004. This decrease relates to customer receipts related to largeequipment orders which were completed in our Engineered Products segment duringthe fourth quarter of Fiscal 2003.

 

Investing activities contributed anadditional $14.8 million improvement in cash flow during the first quarter ofFiscal 2004 compared to the first quarter of Fiscal 2003, as capitalexpenditures decreased by $2.5 million and cash invested in short-terminvestments decreased by $6.9 million. Additionally, during the first quarter of Fiscal 2004, we received $3.2million of cash proceeds related to the sale of the MerCruiser product offeringin our Power Products segment.

 

As a result of the cash provided by operatingactivities in the first quarter of Fiscal 2004, total cash and short-terminvestments has increased by $44.6 million to $106.3 million as of May 1,2004.  We anticipate that this balancewill remain relatively stable in the near-term; however, we anticipate that wewill use cash during the second half of Fiscal 2004 to fund working capitalrelated to additional orders in the Engineered Products segment.  Additionally, cash will be used to satisfyour production requirements under the expiring FMTV contract in the TacticalVehicle Systems segment, which is expected to result in a decrease in billingsin excess of costs on our consolidated condensed balance sheet.  We believe that these activities in ourEngineered Products and Tactical Vehicle Systems segments could consumeapproximately $40-50 million of cash during the second half of Fiscal 2004.

 

Our working capital balance increased by$10.5 million during the first quarter of Fiscal 2004, primarily attributableto the $8.6 million of earnings before income taxes.

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

 

*Risks as to Rising Steel Prices.*  Inrecent months, U.S. manufacturers and distributors of steel, which is used inmany of our products, have experienced sharply increased prices and limitedavailability of steel and component parts containing steel. These increasedsteel prices have had and are expected to continue to have a negative impact onour margins in the near future, particularly on fixed-price contracts and othercontracts for which we are unable to pass such cost increases on to our customers.  If these steel price conditions continue,and if we are unable to raise our prices to keep pace with the material costincreases, our sales trends, operating margins and results of operations couldbe adversely impacted in future periods.

 

**Forward-LookingStatements**

 

This filing contains forward-looking statements that are based onmanagement’s current expectations, estimates, and projections. These statementsare not guarantees of future performance and involve a number of risks,uncertainties, and assumptions and are made pursuant to the Safe HarborProvisions of the Private Securities Litigation Reform Act of 1995.  Many factors, including those discussed morefully elsewhere herein, in the Company’s latest annual report on Form 10-K, andin the Company’s quarterly reports on Form 10-Q, as well as others, could causeresults to differ materially from those stated.  Specific important factors that could cause actual results,performance, or achievements to differ materially from such forward-lookingstatements include risks of dependence on government and failure to obtain newgovernment contracts, inherent risks of government contracts, risks of supplyinterruptions to

 

18

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Tactical Vehicle Systems segment, risks associated with DistributedEnergy Solutions segment, risks of fixed-price contracts, risks as to costcontrols, risks of general economic conditions, risks of oil and gas industryeconomic conditions, risks of airline industry economic conditions, risks as todistributorships, risks as to licenses, risk of competition, risks relating totechnology, risks as to terrorist attacks on the U.S. and their impact on theU.S. economy, risks relating to personnel, risks of claims and litigation, risksof product defects, risks of no credit facility, risks as to foreign sales andglobal trade matters, risks as to information technology, risks as toacquisitions and restructuring activities, risks as to currency fluctuations,risks as to environmental and safety matters, and credit risks, all as morespecifically outlined in the Company’s latest annual report on Form 10-K.  In addition, such forward-looking statementscould be affected by general industry and market conditions and growth rates,general domestic and international conditions including interest rates,inflation and currency exchange rates and other future factors.  Actual outcomes and results may differmaterially from what is expressed or forecasted in such forward-lookingstatements.

 

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

 

Our quantitativeand qualitative 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, 2004 and have not materiallychanged since that report was filed.

 

## **Item 4.  Controls and Procedures**

 

The Company carried out an evaluationrequired by the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Rule 13a-15 under the Exchange Act asof May 1, 2004. Based upon that evaluation, the Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures are effective in alerting them on a timely basis to materialinformation relating to the Company and required to be included in theCompany’s periodic filings under the Exchange Act.  During the first quarter of Fiscal 2004, there have been nochanges in the Company’s internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**PARTII.  OTHER INFORMATION**

 

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

 

*U.S.Government Contingencies:* During Fiscal 1998, the U.S. Customs Service detained a medium tacticalvehicle that was being shipped by the Company for display in a European tradeshow.  The Company is advised that theU.S. Customs Service and the Department of Justice have since such eventcarried on an investigation of potential violations by the Company of lawsrelating to the export of controlled military vehicles, weapons mountingsystems, and firearms.  Suchinvestigation could result in the filing of civil or administrative sanctionsagainst 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.  While they arepossible, the Company does not believe that criminal sanctions will besought.  The Company believes thatresolution of this matter will not have a material adverse effect on itsconsolidated results of operations in any period or upon its consolidatedfinancial condition or liquidity and believes that the resolution of the matterthat is possibly most adverse to the Company will involve the payment of acivil penalty that will not materially adversely affect the Company.

 

The Company is a defendant in a suit brought under the*qui tam* provision of the FalseClaims Act, *UnitedStates of America,**ex rel.  Werner Stebner v. Stewart & StevensonServices, Inc. and McLaughlin Body Co*., Civil Action No. H-96-3363,in the United States 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 Department, the United Statesdeclined to intervene in the suit, which was unsealed on August 29, 2000.  On February 2, 2004, the District Courtfound in favor of the Company and dismissed all of the plaintiff’s claims bysummary judgment without proceeding to trial. After having all claims dismissed by the District Court, the plaintiffsthen filed a notice of appeal on March 1, 2004 in the United States Court ofAppeals for the Fifth Circuit, No. 04-20209. The briefing schedule has not yetbeen finally determined by the Court of Appeals.  A decision by the Fifth Circuit is not expected until the fourthquarter of Fiscal 2004 or sometime in Fiscal 2005.  The grounds for appeal are not fully known, but the Companybelieves the District Court correctly dismissed all of the plaintiff’s claimsas being without merit and will continue to vigorously defend the suit in thecourt of appeals.  While the Companydoes not believe that an adverse outcome is reasonably likely, an unexpectedadverse outcome in the suit could have a material adverse impact on the Company’sconsolidated results of operations, financial position and liquidity.  The Company is presently unable to determinewhether any liability has been incurred in this matter, other than legal feesand expenses, which have been provided for, or to reasonably estimate theamount or range of any loss that may result from this matter, and thus noaccruals have been recorded in this matter other than estimated legal fees andexpenses relating to the appeal.

 

19

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*Diamond Offshore Litigation:*  The Company is a defendant in a suit broughtby several subsidiaries of Diamond Offshore on May 30, 2002, arising out ofclaims relating to a marine riser manufactured by the Company and purchased byDiamond Offshore for use on its Ocean Baroness semi-submersible drilling rig,Cause No. 2002-27831; *Diamond OffshoreInternational Corporation, Diamond Offshore Company, Diamond Offshore ServicesCompany, Diamond Offshore (USA), Inc., Diamond Offshore International Limited,and Diamond Offshore Drilling, Ltd. v. Stewart & Stevenson Services, Inc.*;in the District Court of Harris County, Texas 125th  Judicial District Court (the “BaronessLitigation”).  The suit was filedfollowing a parting of the marine riser during deep water drillingoperations.  The suit seeks to recoverdamages that are not specified in the petition.

 

In a separate transaction on orabout September 13, 2001, Diamond Offshore contracted with the Company for amarine riser for use on its Ocean Rover semi-submersible drilling rig.  The Company was fulfilling this order, when,on August 19, 2002, Diamond Offshore amended its petition in the BaronessLitigation to seek a declaration that Diamond Offshore has no further contractualobligations to the Company with respect to the Ocean Rover riser.  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 for the unilateral cancellation of the Rovercontract, (the “Rover Litigation”).  OnAugust 30, 2002, the Court transferred the Rover Litigation to the 125thJudicial District Court where the Baroness Litigation is pending.  The two cases have been consolidated intoone lawsuit in the 125th Judicial District Court.  The Company is vigorously prosecuting itsclaims against Diamond Offshore and defending the claims asserted against it byDiamond Offshore in this lawsuit.

 

It is presently impossible for the Company todetermine the ultimate outcome of the Diamond Offshore disputes or whethertheir resolution will, in the future, have a material adverse effect on theCompany’s consolidated results of operations, financial position or liquidity.  The Company is presently unable to determinewhether a material liability has been incurred in these matters or toreasonably estimate the amount or range of any loss that may result from thesematters.  Consequently, the Company hasrecorded no accrual for any losses related to the ultimate outcome of thislitigation.  The Company has, however,recorded accruals that it believes are adequate for certain estimated legalfees that it expects to incur associated with these matters, which estimatedlegal fees are based on the Company’s experience to date in this litigation asto discovery activities and procedural filings with respect to the case.

 

*EnvironmentalContingencies:*  In 2001, the Company received from theUnited States Environmental Protection Agency (“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 EPA indicatesthat the Company may have sent waste oils to the Site for recycling in the late1980s, and that such waste oils may potentially account for between one and twopercent of the volume of total 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 reserveswhich it believes to be adequate at this time. As additional facts are developed and definitive remediation plans andnecessary regulatory approvals for implementation of remediation areestablished, changes in these and other factors may result in actual costsexceeding the current environmental reserves. While uncertainties are inherentin the final outcome of these environmental matters, and it is presentlyimpossible to determine the actual costs that ultimately may be incurred,management currently believes that the resolution of such uncertainties shouldnot have a material adverse effect on the Company’s consolidated results ofoperations, financial position or liquidity. The Company believes that the most likely outcome in this environmentalmatter is the expenditure of an immaterial amount of consideration as acontribution to the remediation effort.

 

The Company is also a defendant in a number oflawsuits relating to contractual, product liability, personal injury andwarranty matters normally incident to the Company’s business.  No individual case, or group of casespresenting substantially similar issues of law or fact, is expected to have amaterial effect on the manner in which the Company conducts its business or onits consolidated results of operations, financial position or liquidity.  The Company maintains certain insurancepolicies that provide coverage for product liability and personal injurycases.  The Company has establishedreserves that it believes to be adequate based on current evaluations and itsexperience in these types of claim situations. Nevertheless, an unexpected outcome in any such case could have amaterial adverse impact on the Company’s consolidated results of operations inthe period it occurs.  Moreover, futureadverse developments in such cases could require material changes in therecorded reserve 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.

 
| 3.2        |   | Sixth  Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of  April 11, 2000, as amended. |
|------------|--------|----------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                           |
| †10.1 |   | Employment  Agreement, effective as of February 1, 2004, with Max L. Lukens.                                   |
|       |   |                                                                                                           |
| †10.2 |   | Severance  Agreement, effective as of February 1, 2004, with Max L. Lukens.                                    |
|       |   |                                                                                                           |
| †10.3 |   | Nonqualified  Stock Option Agreement, entered into as of March 31, 2004, with Max L.  Lukens.                  |

 

20

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| 31.1   |   | Chief  Executive Officer Certification                                                                                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                             |
| 31.2   |   | Chief  Financial Officer Certification.                                                                                                                                                          |
|   |   |                                                                                                                                                                                             |
| 32.1   |   | Statement  of Max L. Lukens, Chief Executive Officer, and John B. Simmons, Chief  Financial Officer, furnished pursuant to Rule 13(a)-14(b) of the Securities  Exchange Act of 1934, as amended. |

 

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†  Identifies management contracts orcompensation plans or arrangements required to be filed as an exhibit hereto.

 

(b)         Form8-K Report Date – March 2, 2004 (Stewart & Stevenson Services AnnouncesPreliminary Fourth Quarter Results and Leadership Changes)

 

Items Reported -  Item 7.  Exhibits

Item 12. Results of Operations and Financial Condition

 

Form 8-K Report Date – March 23, 2004 (Stewart & Stevenson ServicesAnnounces Fiscal 2003 Fourth Quarter Earnings Release and Conference CallSchedule)

Items Reported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form 8-K Report Date – March 29, 2004 (Stewart & Stevenson ReportsFourth Quarter and Fiscal 2004 Results)

Items Reported -  Item 7.  Exhibits

Item 12. Results of Operations and Financial Condition

 

Form 8-K Report Date – March 31, 2004 (Transcript of Stewart &Stevenson’s Conference Call Held March 29, 2004)

Items Reported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form 8-K Report Date – April 19, 2004 (Stewart & StevensonAnnounces Date of 2004 Annual Meeting of Stockholders)

Items Reported -  Item 5.  Other Events

Item 7. Exhibits

 

21

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**SIGNATURES**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized on the 25th day of May 2004.

 

**STEWART & STEVENSON SERVICES, INC**.

 

 
| By:                                         | /s/  Max L. Lukens |   |   |
|---------------------------------------------|-------------------------|--------|--------|
| Max  L. Lukens                              |                    |
| 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

 
| 3.2    |   | Sixth  Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of  April 11, 2000, as amended.                                                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                             |
| 10.1   |   | Employment  Agreement, effective as of February 1, 2004, with Max L. Lukens.                                                                                                                     |
|   |   |                                                                                                                                                                                             |
| 10.2   |   | Severance  Agreement, effective as of February 1, 2004, with Max L. Lukens.                                                                                                                      |
|   |   |                                                                                                                                                                                             |
| 10.3   |   | Nonqualified  Stock Option Agreement, entered into as of March 31, 2004, with Max L.  Lukens.                                                                                                    |
|   |   |                                                                                                                                                                                             |
| 31.1   |   | Chief  Executive Officer Certification.                                                                                                                                                          |
|   |   |                                                                                                                                                                                             |
| 31.2   |   | Chief  Financial Officer Certification.                                                                                                                                                          |
|   |   |                                                                                                                                                                                             |
| 32.1   |   | Statement  of Max L. Lukens, Chief Executive Officer, and John B. Simmons, Chief  Financial Officer, furnished pursuant to Rule 13(a)-14(b) of the Securities  Exchange Act of 1934, as amended. |

 

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