** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

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

 

**For thequarterly period ended November 1, 2003**

 

**OR**

 

**o****   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from              to              **

 

**Commissionfile number 0-8493**

 

**STEWART& STEVENSON SERVICES, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **Common  Stock, Without Par Value** |   | **28,612,560  Shares**                   |
|--------------------------------------|--------|------------------------------------------|
| (Class)                              |   | (Outstanding at  November 21, 2003) |

 

 

----

 

# **PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements****.**

 
| The following information  required by Rule 10-01 of Regulation S-X is provided herein for Stewart &  Stevenson Services, Inc. and Subsidiaries (collectively, the “Company”): |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                         |   |
| Consolidated  Condensed Balance Sheets – November 1, 2003 and January 31, 2003.                                                                                               |   |
|                                                                                                                                                                                         |   |
| Consolidated  Condensed Statements of Operations - Three and Nine Months Ended  November 1, 2003 and November 2, 2002.                                                             |   |
|                                                                                                                                                                                         |   |
| Consolidated  Condensed Statements of Cash Flows – Three and Nine Months Ended  November 1, 2003 and November 2, 2002.                                                        |   |
|                                                                                                                                                                                         |   |
| Notes  to Consolidated Condensed Financial Statements.                                                                                                                                       |   |

 

2

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

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

*(Inthousands, except share data)*

* *
|                                                                                                                    |   | **November 1,  2003** |    | **January 31,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|----------------------------|--------|
|                                                                                                                    |   | **(Unaudited)**            |    | **(Audited)**              |   |
| Assets                                                                                                                  |   |                       |    |                       |   |
| Current Assets:                                                                                                         |   |                       |    |                       |   |
| Cash and cash equivalents                                                                                               |   | $                          | 54,299  |                       | $      | 107,994 |   |
| Accounts and notes  receivable, net                                                                                     |   | 144,990                    |    | 151,839                    |   |
| Recoverable costs and  accrued profits not yet billed                                                                   |   | 48,623                     |    | 11,668                     |   |
| Inventories                                                                                                             |   | 225,343                    |    | 244,416                    |   |
| Excess of current cost  over LIFO values                                                                                |   | (43,971                    | )       | (42,785                    | )      |
| Deferred income tax asset                                                                                               |   | 20,567                     |    | 16,126                     |   |
| Other current assets                                                                                                    |   | 13,428                     |    | 3,967                      |   |
| Total assets of  discontinued operations                                                                                |   | 9,566                      |    | 14,404                     |   |
| Total Current Assets                                                                                                    |   | 472,845                    |    | 507,629                    |   |
|                                                                                                                    |   |                       |    |                       |   |
| Property, Plant and  Equipment, net                                                                                     |   | 122,223                    |    | 118,964                    |   |
| Deferred Income Tax Asset                                                                                               |   | 11,565                     |    | 11,754                     |   |
| Intangibles and Other  Assets, net                                                                                      |   | 15,288                     |    | 14,288                     |   |
| Total Assets                                                                                                            |   | $                          | 621,921 |                       | $      | 652,635 |   |
|                                                                                                                    |   |                       |    |                       |   |
| Liabilities and  Shareholders’ Equity                                                                              |   |                       |    |                       |   |
| Current Liabilities:                                                                                                    |   |                       |    |                       |   |
| Notes payable                                                                                                           |   | $                          | 2,320   |                       | $      | 1,454 |   |
| Current portion of  long-term debt                                                                                      |   | 250                        |    | 30,250                     |   |
| Accounts payable                                                                                                        |   | 63,792                     |    | 60,159                     |   |
| Accrued payrolls and  incentives                                                                                        |   | 19,669                     |    | 17,408                     |   |
| Billings in excess of  incurred costs                                                                                   |   | 68,206                     |    | 62,568                     |   |
| Other current liabilities                                                                                               |   | 41,056                     |    | 29,537                     |   |
| Total liabilities of  discontinued operations                                                                           |   | 3,865                      |    | 4,092                      |   |
| Total Current Liabilities                                                                                               |   | 199,158                    |    | 205,468                    |   |
|                                                                                                                    |   |                       |    |                       |   |
| Long-Term Debt, net                                                                                                     |   | 26,330                     |    | 26,531                     |   |
| Accrued Postretirement  Benefits and Pension                                                                            |   | 47,550                     |    | 54,681                     |   |
| Other Long-Term  Liabilities                                                                                            |   | 4,058                      |    | 3,947                      |   |
| Total Liabilities                                                                                                       |   | 277,096                    |    | 290,627                    |   |
| Shareholders’ Equity:                                                                                              |   |                       |    |                       |   |
| Common stock, without par  value, 100,000,000 shares authorized; 28,610,914 and 28,490,849 shares  issued, respectively |   | 56,707                     |    | 54,843                     |   |
| Accumulated other  comprehensive loss                                                                                   |   | (21,942                    | )       | (21,703                    | )      |
| Retained earnings                                                                                                       |   | 310,060                    |    | 328,868                    |   |
| Total Shareholders’ Equity                                                                                         |   | 344,825                    |    | 362,008                    |   |
| Total Liabilities and  Shareholders’ Equity                                                                        |   | $                          | 621,921 |                       | $      | 652,635 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

3

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

**CONSOLIDATED CONDENSED STATEMENTS OF OPE****RATIONS**

*(Inthousands, except per share data)*

 
|                                                                                                        |   | **Three  Months Ended**    |    | **Nine  Months Ended**     |       |
|-------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|----------------------------|------------|
|                                                                                                        |   | **November 1,  2003** |    | **November 2,  2002** |       | **November 1,  2003** |   | **November 2,  2002** |   |
|                                                                                                        |   | **(Unaudited)**            |    | **(Unaudited****)**        | ** ** |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Sales                                                                                                       |   | $                          | 290,039 |                       | $          | 296,582 |   | $ | 892,662 |   | $ | 881,287 |   |
| Cost of sales                                                                                               |   | 272,951                    |    | 253,585                    |       | 794,033 |   | 752,661 |   |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Gross profit                                                                                                |   | 17,088                     |    | 42,997                     |       | 98,629 |   | 128,626 |   |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Selling and administrative  expenses                                                                        |   | 41,606                     |    | 34,549                     |       | 113,430 |   | 105,036 |   |
| Pension curtailment  expense                                                                                |   | —                     |    | —                     |       | 2,400 |   | — |   |
| Interest expense                                                                                            |   | 640                        |    | 1,161                      |       | 2,576 |   | 3,131 |   |
| Interest and investment  income                                                                             |   | (142                       | )       | (485                       | )          | (1,201 | ) | (1,197 | ) |
| Other income, net                                                                                           |   | (50                        | )       | (31                        | )          | (526 | ) | (545 | ) |
|                                                                                                        |   | 42,054                     |    | 35,194                     |       | 116,679 |   | 106,425 |   |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Earnings (loss) from  continuing operations before income taxes                                             |   | (24,966                    | )       | 7,803                      |       | (18,050 | ) | 22,201 |   |
| Income tax provision  (benefit)                                                                             |   | (9,468                     | )       | 2,814                      |       | (7,439 | ) | 7,709 |   |
| Net earnings (loss) from  continuing operations before cumulative effect of change in accounting  principle |   | (15,498                    | )       | 4,989                      |       | (10,611 | ) | 14,492 |   |
| Income (loss) from  discontinued operations, net of tax of $(451), $(583), $(1,162) and $(3,831)            |   | 57                         |    | (1,223                     | )          | (925 | ) | (7,826 | ) |
| Loss from disposal of  discontinued operations, net of tax of $(2,705)                                      |   | —                     |    | —                     |       | — |   | (5,551 | ) |
| Cumulative effect of  change in accounting principle, net of tax of $(1,798)                                |   | —                     |    | —                     |       | — |   | (3,682 | ) |
| Net earnings (loss)                                                                                         |   | $                          | (15,441 | )                          | $          | 3,766 |   | $ | (11,536 | ) | $ | (2,567 | ) |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Weighted average shares  outstanding:                                                                       |   |                       |    |                       |       |   |   |   |   |
| Basic                                                                                                       |   | 28,600                     |    | 28,490                     |       | 28,538 |   | 28,475 |   |
| Diluted                                                                                                     |   | 28,600                     |    | 28,585                     |       | 28,538 |   | 28,701 |   |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Earnings (loss) per share:                                                                                  |   |                       |    |                       |       |   |   |   |   |
| Basic:                                                                                                      |   |                       |    |                       |       |   |   |   |   |
| Continuing operations  before cumulative effect                                                             |   | $                          | (0.54   | )                          | $          | 0.18 |   | $ | (0.37 | ) | $ | 0.51 |   |
| Income (loss) from  discontinued operations, net                                                            |   | —                     |    | (0.04                      | )          | (0.03 | ) | (0.47 | ) |
| Cumulative effect of  change in accounting principle                                                        |   | —                     |    | —                     |       | — |   | (0.13 | ) |
| Net earnings (loss) per  share                                                                              |   | $                          | (0.54   | )                          | $          | 0.13 |   | $ | (0.40 | ) | $ | (0.09 | ) |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Diluted:                                                                                                    |   |                       |    |                       |       |   |   |   |   |
| Continuing operations  before cumulative effect                                                             |   | $                          | (0.54   | )                          | $          | 0.17 |   | $ | (0.37 | ) | $ | 0.50 |   |
| Income (loss) from  discontinued operations, net                                                            |   | —                     |    | (0.04                      | )          | (0.03 | ) | (0.47 | ) |
| Cumulative effect of  change in accounting principle                                                        |   | —                     |    | —                     |       | — |   | (0.13 | ) |
| Net earnings (loss) per  share                                                                              |   | $                          | (0.54   | )                          | $          | 0.13 |   | $ | (0.40 | ) | $ | (0.09 | ) |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Cash dividends per share                                                                                    |   | $                          | 0.085   |                       | $          | 0.085 |   | $ | 0.255 |   | $ | 0.255 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

4

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

**CONSOLIDATED CONDENSED STATEMENTS OF CAS****H FLOWS**

*(Inthousands)*

 
|                                                                                                        |   | **Three  Months Ended**    |    | **Nine  Months Ended**     |       |
|-------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|----------------------------|------------|
|                                                                                                        |   | **November 1,  2003** |    | **November 2,  2002** |       | **November 1,  2003** |   | **November 2,  2002** |   |
|                                                                                                        |   | **(Unaudited)**            |    | **(Unaudited****)**        | ** ** |
| **Operating  Activities**                                                                                   |   |                       |    |                       |       |   |   |   |   |
| Net earnings (loss)                                                                                         |   | $                          | (15,441 | )                          | $          | 3,766 |   | $ | (11,536 | ) | $ | (2,567 | ) |
| Adjustments to reconcile  net earnings to net cash provided by (used in) operating activities:              |   |                       |    |                       |       |   |   |   |   |
| Net loss (income) from  discontinued operations                                                             |   | (57                        | )       | 1,223                      |       | 925 |   | 13,377 |   |
| Cumulative effect of  change in accounting principle                                                        |   | —                     |    | —                     |       | — |   | 3,682 |   |
| Depreciation and  amortization                                                                              |   | 5,867                      |    | 5,512                      |       | 17,088 |   | 15,936 |   |
| Provision for excess and  obsolete inventory                                                                |   | 7,800                      |    | —                     |       | 7,800 |   | — |   |
| Change in operating assets  and liabilities net of the effect of acquisitions and discontinued  operations: |   |                       |    |                       |       |   |   |   |   |
| Accounts and notes  receivable, net                                                                         |   | 5,820                      |    | (1,319                     | )          | 6,517 |   | 20,060 |   |
| Recoverable costs and  accrued profits not yet billed                                                       |   | (4,134                     | )       | (7,440                     | )          | (36,955 | ) | (12,208 | ) |
| Inventories                                                                                                 |   | 5,981                      |    | 1,409                      |       | 13,354 |   | (11,289 | ) |
| Other current and  noncurrent assets                                                                        |   | (7,468                     | )       | 4,978                      |       | (14,346 | ) | 13,677 |   |
| Accounts payable                                                                                            |   | (10,328                    | )       | (8,699                     | )          | 3,633 |   | (31,714 | ) |
| Accrued payrolls and  incentives                                                                            |   | 4,896                      |    | 6,134                      |       | 2,607 |   | 1,905 |   |
| Billings in excess of  incurred costs                                                                       |   | (3,405                     | )       | 10,890                     |       | 5,638 |   | 39,003 |   |
| Other current liabilities                                                                                   |   | 6,719                      |    | 3,508                      |       | 11,663 |   | 11,900 |   |
| Accrued postretirement  benefits and pension                                                                |   | (10,422                    | )       | 1,673                      |       | (7,138 | ) | 3,692 |   |
| Other long-term  liabilities                                                                                |   | (23                        | )       | (2,884                     | )          | (263 | ) | (3,632 | ) |
| **Net Cash  Provided By (Used In) Continuing Operations**                                                   |   | (14,195                    | )       | 18,751                     |       | (1,013 | ) | 61,822 |   |
| Net Cash Provided By  Discontinued Operations                                                               |   | 194                        |    | 8,288                      |       | 3,684 |   | 3,803 |   |
| **Net Cash  Provided By (Used In) Operating Activities**                                                    |   | (14,001                    | )       | 27,039                     |       | 2,671 |   | 65,625 |   |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| **Investing  Activities**                                                                                   |   |                       |    |                       |       |   |   |   |   |
| Expenditures for property,  plant and equipment                                                             |   | (9,052                     | )       | (5,942                     | )          | (20,602 | ) | (22,744 | ) |
| Acquisition of businesses                                                                                   |   | (965                       | )       | —                     |       | (1,374 | ) | — |   |
| Disposal of property,  plant and equipment, net                                                             |   | 157                        |    | 1,100                      |       | 749 |   | 2,452 |   |
| **Net Cash  Used In Investing Activities**                                                                  |   | (9,860                     | )       | (4,842                     | )          | (21,227 | ) | (20,292 | ) |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| **Financing  Activities**                                                                                   |   |                       |    |                       |       |   |   |   |   |
| Change in short-term notes  payable                                                                         |   | (226                       | )       | (448                       | )          | 866 |   | (1,481 | ) |
| Payments on long-term  borrowings                                                                           |   | (250                       | )       | (250                       | )          | (30,250 | ) | (250 | ) |
| Dividends paid                                                                                              |   | (2,428                     | )       | (2,422                     | )          | (7,273 | ) | (7,257 | ) |
| Proceeds from exercise of  stock options                                                                    |   | 622                        |    | 9                          |       | 1,518 |   | 644 |   |
| **Net Cash  Used In Financing Activities**                                                                  |   | (2,282                     | )       | (3,111                     | )          | (35,139 | ) | (8,344 | ) |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Increase (decrease) in  cash and cash equivalents                                                           |   | (26,143                    | )       | 19,086                     |       | (53,695 | ) | 36,989 |   |
| Cash and cash equivalents,  beginning of period                                                             |   | 80,442                     |    | 99,341                     |       | 107,994 |   | 81,438 |   |
| Cash and cash equivalents,  end of period                                                                   |   | $                          | 54,299  |                       | $          | 118,427 |   | $ | 54,299 |   | $ | 118,427 |   |
|                                                                                                        |   |                       |    |                       |       |   |   |   |   |
| Cash Paid For:                                                                                              |   |                       |    |                       |       |   |   |   |   |
| Interest                                                                                                    |   | $                          | 83      |                       | $          | 172 |   | $ | 2,508 |   | $ | 2,706 |   |
| Income taxes (excluding  refunds)                                                                           |   | 517                        |    | 1,083                      |       | 3,528 |   | 3,617 |   |

 

*Seeaccompanying notes to consolidated condensed financial statements.*

 

5

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

**NOTES TOCONSOLIDATED CONDENSED FINANCIA**L STATEMENTS

** **

**Note 1 - Basis of Presentation**

 

Theaccompanying consolidated condensed financial statements of Stewart &Stevenson Services, Inc. and Subsidiaries (collectively, the “Company”) havebeen 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 bygenerally accepted accounting principles for complete financialstatements.  However, the informationfurnished herein reflects all normal recurring adjustments, which are, in theopinion of management, necessary for a fair statement of the results for theinterim periods.  The results ofoperations for the three and nine months ended November 1, 2003 are notnecessarily indicative of the results that will be realized for the fiscal yearending January 31, 2004.

 

The Company’s fiscal year begins on February 1 of the year statedand ends on January 31 of the following year.  For example, the Company’s “Fiscal 2003” commenced onFebruary 1, 2003 and ends on January 31, 2004.  The Company reports results on the fiscalquarter method with each quarter comprising 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.  Thesecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended January 31, 2003.

 

The accompanying consolidated condensed financial statements for Fiscal2002 and related notes contain certain reclassifications to conform with thepresentation used in Fiscal 2003.

 

**Note 2 – Comprehensive Income**

 

Totalcomprehensive income (loss) is as follows *(inthousands*):

 
|                                                     |   | **Three  Months Ended**    |       | **Nine  Months Ended**     |       |
|----------------------------------------------------------|--------|----------------------------|------------|----------------------------|------------|
|                                                     |   | **November 1,  2003** |       | **November 2,  2002** |       | **November 1,  2003** |   | **November 2,  2002** |   |
|                                                     |   |                       | ** ** |                       | ** ** |   | ** ** |   | ** ** |
| Net earnings (loss)                                      |   | $                          | (15,441    | )                          | $          | 3,766 |   | $ | (11,536 | ) | $ | (2,567 | ) |
| Unrealized gain (loss) on  forward contracts, net of tax |   | 91                         |       | 52                         |       | (7 | ) | 336 |   |
| Currency translation gain  (loss), net of tax            |   | (53                        | )          | (2,025                     | )          | (230 | ) | (3,498 | ) |
| Comprehensive income  (loss)                             |   | $                          | (15,403    | )                          | $          | 1,793 |   | $ | (11,773 | ) | $ | (5,729 | ) |

 

**Note 3 - Segment Information**

 

TheCompany modified its internal organization structure in 2003.  The modifications made were as follows:

 

•                  TheUtilities Equipment business has been removed from the Airline Products segmentand identified as a separate reporting segment.  The Utilities Equipment business, which manufactures mobilerailcar movers, snowblowers and off-road seismic vehicles, has beenconsolidated with Distributed Energy Solutions and Petroleum Equipment in thenewly formed Engineered Products Division.

 

•                  Certainbusiness operations, which were exited in 2002, have been reclassified fromOther Business Activities to the Power Products segment.  This business operation consisted primarilyof sales of gas compression equipment.

 

•                  Themarketing services and transportation/logistics business units werereclassified from the Power Products segment to Other Business Activities.  These business units provide services toboth internal customers and external unaffiliated customers.

 

•                  Interestand investment income has been removed from segment operating profit (loss)measurements.

 

Thecorresponding segment information for Fiscal 2002 has been restated to conformto the new business segment presentation. Intercompany sales have been eliminated in all periods presented.

 

6

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Financialinformation relating to industry segments with a reconciliation to earningsfrom continuing operations before income taxes is as follows (*in thousands except percentages*):

 
|                                                                |   | **Three  Months Ended**    |    | **Nine  Months Ended**     |   |
|---------------------------------------------------------------------|--------|----------------------------|---------|----------------------------|--------|
|                                                                |   | **November 1,  2003** |    | **November 2,  2002** |   | **November 1,  2003** |   | **November 2,  2002** |   |
| **Sales**                                                           |   |                       |    |                       |   |   |   |   |   |
| Tactical Vehicle Systems                                            |   | $                          | 110,036 |                       | $      | 113,715 |   | $ | 329,378 |   | $ | 334,581 |   |
| Power Products                                                      |   | 127,712                    |    | 127,858                    |   | 378,887 |   | 410,656 |   |
| Engineered Products:                                                |   |                       |    |                       |   |   |   |   |   |
| Petroleum Equipment                                                 |   | 23,507                     |    | 18,405                     |   | 81,346 |   | 33,715 |   |
| Distributed Energy  Solutions                                       |   | 7,616                      |    | 18,285                     |   | 40,718 |   | 47,900 |   |
| Utilities Equipment                                                 |   | 5,600                      |    | 1,843                      |   | 11,624 |   | 5,230 |   |
| Airline Products                                                    |   | 14,379                     |    | 14,737                     |   | 46,975 |   | 42,807 |   |
| Other Business Activities                                           |   | 1,189                      |    | 1,739                      |   | 3,734 |   | 6,398 |   |
| Total Sales                                                         |   | $                          | 290,039 |                       | $      | 296,582 |   | $ | 892,662 |   | $ | 881,287 |   |
|                                                                |   |                       |    |                       |   |   |   |   |   |
| **Operating  Profit (Loss)**                                        |   |                       |    |                       |   |   |   |   |   |
| Tactical Vehicle Systems                                            |   | $                          | 16,786  |                       | $      | 18,442 |   | $ | 51,852 |   | $ | 48,933 |   |
| Power Products                                                      |   | (5,971                     | )       | (4,958                     | )      | (14,018 | ) | (1,351 | ) |
| Engineered Products:                                                |   |                       |    |                       |   |   |   |   |   |
| Petroleum Equipment                                                 |   | (688                       | )       | 350                        |   | 1,545 |   | (1,741 | ) |
| Distributed Energy  Solutions                                       |   | (20,923                    | )       | 635                        |   | (27,895 | ) | (3,618 | ) |
| Utilities Equipment                                                 |   | (625                       | )       | (698                       | )      | (2,440 | ) | (2,186 | ) |
| Airline Products                                                    |   | (6,639                     | )       | (1,987                     | )      | (9,343 | ) | (5,194 | ) |
| Other Business Activities                                           |   | (565                       | )       | (395                       | )      | (1,613 | ) | (221 | ) |
| Total Operating Profit  (Loss)                                      |   | (18,625                    | )       | 11,389                     |   | (1,912 | ) | 34,622 |   |
|                                                                |   |                       |    |                       |   |   |   |   |   |
| Corporate expenses, net                                             |   | (5,843                     | )       | (2,910                     | )      | (12,363 | ) | (10,487 | ) |
| Pension curtailment  expense                                        |   | —                     |    | —                     |   | (2,400 | ) | — |   |
| Interest and investment  income                                     |   | 142                        |    | 485                        |   | 1,201 |   | 1,197 |   |
| Interest expense                                                    |   | (640                       | )       | (1,161                     | )      | (2,576 | ) | (3,131 | ) |
| **Earnings  (loss) from continuing operations before income taxes** |   | $                          | (24,966 | )                          | $      | 7,803 |   | $ | (18,050 | ) | $ | 22,201 |   |
|                                                                |   |                       |    |                       |   |   |   |   |   |
| **Operating  Profit (Loss) Percentage**                             |   |                       |    |                       |   |   |   |   |   |
| Tactical Vehicle Systems                                            |   | 15.3                       | %       | 16.2                       | %      | 15.7 | % | 14.6 | % |
| Power Products                                                      |   | (4.7                       | )       | (3.9                       | )      | (3.7 | ) | (0.3 | ) |
| Engineered Products:                                                |   |                       |    |                       |   |   |   |   |   |
| Petroleum Equipment                                                 |   | (2.9                       | )       | 1.9                        |   | 1.9 |   | (5.2 | ) |
| Distributed Energy  Solutions                                       |   | (274.7                     | )       | 3.5                        |   | (68.5 | ) | (7.6 | ) |
| Utilities Equipment                                                 |   | (11.2                      | )       | (37.9                      | )      | (21.0 | ) | (41.8 | ) |
| Airline Products                                                    |   | (46.2                      | )       | (13.5                      | )      | (19.9 | ) | (12.1 | ) |
| Other Business Activities                                           |   | (47.5                      | )       | (22.7                      | )      | (43.2 | ) | (3.5 | ) |
| Consolidated                                                        |   | (6.4                       | )%      | 3.8                        | %      | (0.2 | )% | 3.9 | % |

 

During the third quarter of Fiscal 2003, the Company decided to exitthe turnkey engineering, procurement and construction activities within theDistributed Energy Solutions segment.

 

During the third quarter of Fiscal 2003, the Company’s Power Productssegment acquired certain assets and assumed certain liabilities from IndustrialPower and Service, Inc., located in Longview, Texas.  The total purchase price for the net acquired assets was $1.7 million,including cash of $1.0 million, a note payable of $0.2 million and othernon-cash consideration of $0.5 million.

 

7

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Selling and administrative expenses in Fiscal 2003 include costsassociated with restructuring activities, primarily related to theconsolidation of manufacturing operations in the Engineered Products Divisionand employee separation costs related to the elimination of certain positionsin the Power Products and Corporate segments. A summary of restructuring costs incurred for the three and nine monthsended November 1, 2003 follows *(inthousands)*:

 
|                                                 |   | **Three  Months Ended  November 1, 2003** |   | **Nine  Months Ended  November 1, 2003** |   |
|------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
| Power Products                                       |   | $                                              | 236    |                                          | $      | 518 |   |
| Engineered Products:                                 |   |                                           |   |                                          |   |
| Petroleum Equipment                                  |   | 285                                            |   | 652                                           |   |
| Distributed Energy  Solutions                        |   | 508                                            |   | 1,475                                         |   |
| Utilities Equipment                                  |   | 229                                            |   | 777                                           |   |
| Corporate                                            |   | —                                         |   | 1,737                                         |   |
| Total restructuring costs  incurred                  |   | $                                              | 1,258  |                                          | $      | 5,159 |   |
| Employee separation costs  included in restructuring |   | $                                              | 352    |                                          | $      | 2,352 |   |

 

Additionally, selling and administration expenses in the corporatesegment in the third quarter of Fiscal 2003 included $2.9 million associatedwith the resignation of the Company’s President and Chief ExecutiveOfficer.  This charge included $1.0million for severance and related costs and $1.9 million of cash paid inexchange for cancellation of stock options.

 

As of November 1, 2003, $2.3 million of employee separation costswere accrued and expected to be paid in future periods, the majority of whichwill be paid within the next fiscal year.

 

**Note 4 – Recent Accounting Pronouncements**

 

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

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities,” which requires companies torecognize costs associated with plant closings or other exit or disposalactivities when incurred.  Previousguidance required recognition of such costs as a liability as of the date anentity commits to an exit plan.  SFASNo. 146 is effective for exit or disposal activities that are initiated afterDecember 31, 2002.  Adoption of thenew standard impacts the timing of liability recognition related to exit ordisposal activities, but does not have a material effect on the ultimate costsassociated with such activities.

 

In November 2002, the FASB issued Interpretation (“FIN”) No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others,” which requires a guarantor torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligations undertaken in issuing the guarantee.  FIN No. 45 also expands the disclosures required to be made by aguarantor about its obligation under certain guarantees that it hasissued.  The recognition provisions ofFIN No. 45 do not apply to product warranties. Initial recognition and measurement provisions of FIN No. 45 areapplicable on a prospective basis to guarantees issued after December 31,2002.  Adoption of the new standard didnot have a material effect on the Company’s consolidated financial statements.

 

In November 2002, the FASB’s Emerging Issues Task Force (“EITF”)reached consensus regarding when a revenue arrangement with multipledeliverables should be divided into separate units of accounting, and, if so,how consideration should be allocated. The new guidance, EITF Abstract No. 00-21, “Accounting for RevenueArrangements with Multiple Deliverables,” applies to revenue arrangementsentered into after June 15, 2003. While the conclusions in this consensus will not have an impact on thetotal amount of revenue recorded under an arrangement, they may have someimpact on the timing of that revenue recognition.  Implementation of the provisions of this consensus did not have amaterial impact on the Company’s consolidated financial statements.

 

In January 2003, the FASB issued FIN No. 46, “Consolidation ofVariable Interest Entities,” which requires a company that controls anotherentity through interests other than voting interests to consolidate suchcontrolled entity.  FIN No. 46 appliesto variable interest entities created after January 31, 2003, and iseffective for interim periods beginning after December 15, 2003 forexisting variable

 

8

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interest entities.  As theCompany has no material exposures to special purpose entities or otheroff-balance sheet arrangements, the adoption of FIN No. 46 is not expected tohave a material effect on the Company’s consolidated financial statements.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure,” which amends SFAS No. 123,“Accounting for Stock-Based Compensation,” by providing alternative methods oftransition for a voluntary change to the fair value method of accounting forstock options and other stock-based employee compensation.  As permitted under SFAS No. 123, the Companycontinues to use the intrinsic value method of accounting prescribed by APB No.25, “Accounting for Stock Issued to Employees,” to account for its stock-basedcompensation programs.  Accordingly, nocompensation expense is recognized when the exercise price of an employee stockoption is equal to or greater than the market price of the Company’s commonstock 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, “Accounting for Stock-Based Compensation”:

 
|                                                                                |   | **Three  Months Ended**    |    | **Nine  Months Ended**     |   |
|-------------------------------------------------------------------------------------|--------|----------------------------|---------|----------------------------|--------|
| **(In  thousands, except per share data)**                                          |   | **November 1,  2003** |    | **November 2,  2002** |   | **November 1,  2003** |   | **November 2,  2002** |   |
|                                                                                |   |                       |    |                       |   |   |   |   |   |
| Net earnings (loss):                                                                |   |                       |    |                       |   |   |   |   |   |
| As reported                                                                         |   | $                          | (15,441 | )                          | $      | 3,766 |   | $ | (11,536 | ) | $ | (2,567 | ) |
| Pro forma compensation  expense, determined under****fair  value method, net of tax |   | (467                       | )       | (511                       | )      | (1,149 | ) | (1,514 | ) |
| Pro forma                                                                           |   | $                          | (15,908 | )                          | $      | 3,255 |   | $ | (12,685 | ) | $ | (4,081 | ) |
|                                                                                |   |                       |    |                       |   |   |   |   |   |
| Basic earnings (loss) per  share:                                                   |   |                       |    |                       |   |   |   |   |   |
| As reported                                                                         |   | $                          | (0.54   | )                          | $      | 0.13 |   | $ | (0.40 | ) | $ | (0.09 | ) |
| Pro forma                                                                           |   | (0.56                      | )       | 0.11                       |   | (0.44 | ) | (0.14 | ) |
|                                                                                |   |                       |    |                       |   |   |   |   |   |
| Diluted earnings (loss)  per share:                                                 |   |                       |    |                       |   |   |   |   |   |
| As reported                                                                         |   | $                          | (0.54   | )                          | $      | 0.13 |   | $ | (0.40 | ) | $ | (0.09 | ) |
| Pro forma                                                                           |   | (0.56                      | )       | 0.11                       |   | (0.44 | ) | (0.14 | ) |

 

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 5 - Commitments and Contingencies**

 

As a custom packager of power systems, the Companyissues bid and performance guarantees in the form of performance bonds orstandby letters of credit.  As of November 1,2003 and January 31, 2003, performance type letters of credit totaledapproximately $10.3 million and $5.7 million, respectively.  Also, the Company has guaranteed theperformance output levels of equipment serviced by the Company under certainoperation and maintenance contracts. Some of these contracts contain liquidated damages provisions.  In addition, the Company had contingentperformance indemnities of approximately $6.7 million as of November 1,2003 and January 31, 2003.

 

The Company has provided certain guarantees in support of itscustomers’ financing of purchases from the Company in the form of debtguarantees.  Pursuant to suchguarantees, once the customer has satisfied its debt obligation to the lender,the Company’s guarantee is released. Should a customer fail to meet its obligation to the lender, the lendercould require the Company to satisfy such obligation, in which case the Companywould have some legal recourse against the customer.  The amount of such guarantees is approximately $0.4 million and$0.9 million as of November 1, 2003 and January 31, 2003,respectively.

 

The Company leases certain facilities and equipment from third partiesunder operating lease arrangements of varying terms whose annual rentals areless than 1% of consolidated sales.

 

The Company’s government contract operations aresubject to U.S. government investigations of business practices and costclassifications from which legal or administrative proceedings can result.  Based on government procurement regulations,under certain circumstances a contractor can be fined, as well as suspended ordebarred from government contracting. In that event, the Company would also be unable to sell equipment orservices to customers that depend on loans or financial commitments from theExport Import Bank, Overseas Private Investment Corporation and similargovernment agencies during a suspension or debarment.

 

For many years, the Company has hadcontractual relationships with Detroit Diesel Corporation (“Detroit Diesel”)for the distribution and servicing of its diesel engine products.  The Company’s current contracts with DetroitDiesel expire on December 31, 2003, and

 

9

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the Company is currently in negotiations to enterinto new contracts.  The Company expectsthat the new contracts will be bifurcated, with the new contracts for“on-highway” equipment and service matters to be with Detroit Diesel, and thenew contracts for “off-highway” equipment and service matters to be withDaimlerChrysler Off-Highway Holding GmbH. Sales covered by the Detroit Diesel contractual arrangements representapproximately 13% of the Company’s total sales during the first nine months ofFiscal 2003.  At present, the Company isneither able to predict the outcome of its negotiations with Detroit Diesel norto predict the effect of expected new contractual arrangements on the Company’sfuture operations.

 

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 has been advised that the U.S. Customs Service and the Department ofJustice are investigating potential violations by the Company of laws relatingto the export of controlled military vehicles, weapons mounting systems andfirearms.  Such investigation couldresult in the filing of criminal, civil or administrative sanctions against theCompany and/or individual employees and could result in a suspension ordebarment of the Company from receiving new contracts or subcontracts withagencies of the U.S. government or the benefit of federal assistance payments.

 

The Company is a defendant in a suit brought underthe *qui tam* provision of theFalse Claims Act, United States of America, *exrel.  Werner Stebner v. Stewart &Stevenson Services, Inc. and McLaughlin Body Co.*, Civil Action No.H-96-3363, in the United States District Court for the Southern District ofTexas, Houston Division.  Theplaintiff’s complaint seeks penalties and damages in an unspecifiedamount.  The suit alleges that theCompany made false statements and certifications in connection with claims forpayment for Family of Medium Tactical Vehicles delivered to the U.S. Army startingin 1995, and the suit alleges that the vehicles were substandard because ofcorrosion problems.  The suit was filedunder seal in 1996, and following an investigation by the Justice Department,the United States declined to intervene in the suit, which was unsealed onAugust 29, 2000.  The case is setfor trial in March 2004.  TheCompany believes the claims in the suit are without merit and is vigorouslydefending the suit.  Nevertheless, anunexpected outcome in the suit could have a material adverse impact on theCompany’s results of operations, consolidated financial position and liquidity.

 

The Company is a defendant in a suit brought by several subsidiaries ofDiamond Offshore Drilling, Inc. (collectively, “Diamond Offshore”) onMay 30, 2002, arising out of claims relating to a marine risermanufactured by the Company and purchased by Diamond Offshore for use on itsOcean Baroness semi-submersible drilling rig, Cause No. 2002-27831; *Diamond Offshore International Corporation, DiamondOffshore Company, Diamond Offshore Services Company, Diamond Offshore (USA),Inc., Diamond Offshore International Limited, and Diamond Offshore Drilling,Ltd. v. Stewart & Stevenson Services, Inc.*; in the DistrictCourt of Harris County, Texas 125th Judicial District Court (the “BaronessLitigation”).  The suit was filedfollowing a separation of the marine riser during deep water drillingoperations and seeks to recover damages that are not specified in thecomplaint.

 

In a separate transaction on or about September 13, 2001, DiamondOffshore contracted with the Company for a marine riser for use on itsOcean Rover semi-submersible drilling rig. The Company was fulfilling this contract, when, on August 19, 2002,Diamond Offshore amended its petition in the Baroness Litigation to seek adeclaration that Diamond Offshore has no further contractual obligations to theCompany.  On August 21, 2002,before being served with Diamond Offshore’s amended petition in the BaronessLitigation, the Company filed a separate lawsuit against Diamond Offshoreseeking to recover damages, including attorneys’ fees (the “RoverLitigation”).  On August 30, 2002,the Court transferred the Rover Litigation to the 125th Judicial Court wherethe Baroness Litigation is pending.  Thetwo cases have been consolidated into one lawsuit in the 125thJudicial Court.  The Company isvigorously prosecuting its claims against Diamond Offshore and defending theclaims asserted against it by Diamond Offshore in this lawsuit.

 

It is presently impossible to determine theultimate outcome of these matters or whether the resolution will have amaterial adverse effect on the Company’s results of operations, consolidatedfinancial position or liquidity, though the Company has recorded reserves thatit believes are adequate for certain estimated legal fees associated with suchmatters as of the balance sheet date.

 

During the third quarter of Fiscal 2003, the Company decided to exitthe turnkey engineering, procurement and construction activities of theDistributed Energy Solutions business. With respect to such turnkey activities, the Company will not be quotingany new business but will be continuing to perform under existingcontracts.  In connection with certainexisting contracts, the Company has received a written notice of dispute from acustomer regarding equipment and services to be provided to several sitesoperated by the customer.  In thedispute notice, the customer alleged various contractual claims, includingclaims for liquidated damages.  Thecustomer acknowledged the expectation of continuing negotiations, but indicatedthat if the 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 engines andthe engine supplier.  Accordingly, theCompany is reviewing issues regarding this situation.  At present, the Company is unable to predict the outcome of thissituation or even the aggregate amount of claims that may be asserted by thecustomer.  The Company intends tovigorously assert its positions in this matter should it go to arbitration.

 

In 2001, theCompany received from the United States Environmental Protection Agency (the“EPA”) a Request for Information under Section 104(e) of the ComprehensiveEnvironmental Response, Compensation, and Liability Act of 1980, forinformation pertaining to the R&H Oil Company Site in San Antonio, Texas(the “Site”).  Informationprovided to the Company by the EPA indicates that the Company may have sentwaste oils to the Site for recycling in the late 1980s, and that such wasteoils may

 

10

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potentially account forbetween one and two percent of the volume of total wastes received by the oilrecycler at the Site.  Since the Companyexpects to receive a claim for cleanup and other costs related to thissite, it has established additional reserves in Fiscal 2002, which it believesto be adequate at this time.  Asadditional facts are developed and definitive remediation plans and necessaryregulatory approvals for implementation of remediation are established, changesin these and other factors may result in actual costs exceeding the currentenvironmental reserves. While uncertainties are inherent in the final outcomeof these environmental matters, and it is presently impossible to determine theactual costs that ultimately may be incurred, management currently believesthat the resolution of such uncertainties should not have a material adverseeffect on the Company’s results of operations, consolidated financial positionor liquidity.

 

From time to time, the Company is subject to various environmentalremediation requirements at certain of its facilities.  The Company believes that the exposureassociated with such requirements will not have a material adverse impact onthe Company’s results of operations, consolidated financial position orliquidity.

 

The Company is also a defendant in a number of lawsuits relating tocontractual, product liability, personal injury and warranty matters normallyincident to the Company’s business.  Noindividual case, or group of cases presenting substantially similar issues oflaw or fact, are expected to have a material effect on the manner in which theCompany conducts its business or on its consolidated financial position orliquidity.  The Company maintainscertain insurance policies that provide coverage for product liability andpersonal injury cases.  The Company hasestablished reserves that it believes to be adequate based on currentevaluations.  Nevertheless, anunexpected outcome in such cases could have a material adverse impact on theresults of operations in the period it occurs. Moreover, future adverse developments in such cases could requirematerial changes in the recorded reserve amounts.

 

**Note 6 – Government Contracting**

 

The U.S. government is one of the Company’s key customers. As such,decreased government spending or termination of significant government programscould adversely affect the Company’s business. The Company’s Tactical Vehicle Systems segment depends largely on U.S.government expenditures.  In recentyears, government contracts in this segment have accounted for substantialpercentages of the Company’s annual revenues and operating income.  The Company is currently in the sixth productionyear of its second multi-year contract with the U.S. Department of the Army(“U.S. Army”) for production of the Family of Medium Tactical Vehicles (“FMTV”)which is expected to be completed by September 2004.

 

In April 2003, the U.S. Army awarded the Company the FMTV A1Competitive Rebuy (“A1CR”) production contract.  The A1CR contract includes production of nearly 11,000 FMTVtrucks and trailers over a five-year period, with an option for 12,000additional vehicles.  Production underthe A1CR contract is expected to begin in October 2004, after completionof the current FMTV contract.  TheCompany’s profit margins on the A1CR contract are expected to be lower thanhistorical margin levels for the current FMTV contract.  The funding of the A1CR contract beyond thefirst program year is subject to the inherent uncertainties of Congressionalappropriations.  As is typical ofmulti-year defense contracts that may be canceled or adjusted by thegovernment, the A1CR contract must be funded annually by the U.S. Army and maybe terminated at any time for the convenience of the government.  If the A1CR contract is terminated, otherthan for the Company’s default (in which event there could be serious adverseconsequences and claims against the Company), it provides for terminationcharges that will reimburse the Company for certain allowable costs but notnecessarily for all costs incurred.

 

Major contracts for military systems are performed over extendedperiods of time and are subject to changes in scope of work and deliveryschedules.  Pricing negotiations onchanges and settlement of claims often extend over prolonged periods oftime.  The Company’s ultimateprofitability on such contracts may depend on the eventual outcome of anequitable settlement of contractual issues with the U.S. government.

 

**Note 7 - Discontinued Operations**

 

During the fourth quarter of Fiscal 2001, the Company determined thatthe Petroleum Equipment segment’s blowout preventer and controls, valve anddrilling riser business was not strategically aligned with the Company’s corecompetencies.  The Company announced itsintention to sell this business and, consequently, these activities werereclassified for reporting purposes for all periods shown as discontinuedoperations.  These discontinuedoperations generated the following sales and operating losses in the three andnine month periods ended November 1, 2003 and November 2, 2002:

 
|                                   |   | **Three  Months Ended**    |       | **Nine  Months Ended**     |       |
|----------------------------------------|--------|----------------------------|------------|----------------------------|------------|
| **(In thousands)**                     |   | **November 1,  2003** |       | **November 2,  2002** |       | **November 1,  2003** |   | **November 2,  2002** |   |
|                                   |   |                       | ** ** |                       | ** ** |   | ** ** |   | ** ** |
| Sales                                  |   | $                          | 122        |                       | $          | 3,359 |   | $ | 1,502 |   | $ | 17,538 |   |
| Operating loss                         |   | (394                       | )          | (1,809                     | )          | (2,087 | ) | (11,657 | ) |
| Operating income (loss),  net of taxes |   | 57                         |       | (1,223                     | )          | (925 | ) | (7,826 | ) |
|                                        |        |                            |            |                            |            |  |  |  |  |  |  |  |  |

 

11

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Additionally, the Company recognized a loss from the disposal of suchdiscontinued operations in the second quarter of Fiscal 2002 of $8.3 million($5.6 million, net of tax).

 

When the transaction consummated on September 13, 2002, the Companysold certain assets and retained certain contracts and related assets as wellas the receivables and certain liabilities of the business, including warrantyresponsibility for products sold before closing as well as warrantyresponsibility for retained contracts to be completed.  In some cases, the Company has agreementswith customers on commitments to support its products, including retainedwarranties and contracts.  

 

**Note 8 – Inventories**

 

Summarized below are the components of inventories by segment excludingdiscontinued operations, net of customer deposits:

 

| **(In thousands)**                       |   | **November 1,  2003** |       | **January 31,  2003** |       |
|------------------------------------------|--------|----------------------------|------------|----------------------------|------------|
|                                     |   |                       | ** ** |                       | ** ** |
| Tactical Vehicle Systems                 |   | $                          | 5,550      |                       | $          | 7,444 |   |
| Power Products                           |   | 150,183                    |       | 141,649                    |       |
| Engineered Products  Division:           |   |                       |       |                       |       |
| Distributed Energy  Solutions            |   | 31,916                     |       | 44,514                     |       |
| Petroleum Equipment                      |   | 4,255                      |       | 12,314                     |       |
| Utilities Equipment                      |   | 11,018                     |       | 10,018                     |       |
| Airline Products                         |   | 22,390                     |       | 28,468                     |       |
| Other Business Activities                |   | 31                         |       | 9                          |       |
|                                     |   | 225,343                    |       | 244,416                    |       |
| Excess of current cost  over LIFO values |   | (43,971                    | )          | (42,785                    | )          |
| Total Inventories                        |   | $                          | 181,372    |                       | $          | 201,631 |   |

 

The Company’s inventory classifications correspond to its reportablesegments.  The Power Products segment’sinventory consists primarily of industrial equipment, equipment undermodification, used equipment available for sale or rent and parts held in theCompany’s distribution network for resale. As a custom packager of power systems and other equipment to customerspecifications, the Tactical Vehicle Systems, Distributed Energy Solutions, PetroleumEquipment, Utilities Equipment and Airline Products segments’ inventoryconsists of finished goods, work-in-process, which includes purchased andmanufactured components in various stages of assembly, and on-hand parts andequipment to support service and future sales.

 

An actual valuation of inventory under the last-in-first-out (“LIFO”)method can be made only at the end of each fiscal year based on the inventorylevels and costs at that time. Accordingly, interim LIFO calculations are based on management’sestimates of expected year-end inventory levels and costs.  Interim results are subject to the finalyear-end LIFO inventory valuation.

 

**Note 9 – Earnings Per Share**

 

The following table is a reconciliation of the numerators anddenominators used in the calculation of basic and diluted earnings per share aspresented on the Consolidated Condensed Statements of Operations.

 
|                                                      |   | **Three Months Ended**    |    | **Nine Months Ended**     |   |
|-----------------------------------------------------------|--------|---------------------------|---------|---------------------------|--------|
| **(In thousands, except per share data)**                 |   | **November 1, 2003** |    | **November 2, 2002** |   | **November 1, 2003** |   | **November 2, 2002** |   |
| Numerator:                                                |   |                      |    |                      |   |   |   |   |   |
| Earnings (loss) available to common shareholders          |   |                      |    |                      |   |   |   |   |   |
| From continuing operations                                |   | $                         | (15,498 | )                         | $      | 4,989 |   | $ | (10,611 | ) | $ | 14,492 |   |
| From discontinued operations                              |   | 57                        |    | (1,223                    | )      | (925 | ) | (13,377 | ) |
| From cumulative effect of change in accounting  principle |   | —                    |    | —                    |   | — |   | (3,682 | ) |
| Net earnings (loss)                                       |   | $                         | (15,441 | )                         | $      | 3,766 |   | $ | (11,536 | ) | $ | (2,567 | ) |
|                                                      |   |                      |    |                      |   |   |   |   |   |
| Denominator:                                              |   |                      |    |                      |   |   |   |   |   |
| Denominator for basic earnings per share                  |   |                      |    |                      |   |   |   |   |   |
| Weighted average shares outstanding                       |   | 28,600                    |    | 28,490                    |   | 28,538 |   | 28,475 |   |
| Effect of dilutive securities:                            |   |                      |    |                      |   |   |   |   |   |
| Employee and director stock options                       |   | —                    |    | 95                        |   | — |   | 226 |   |
| Denominator for diluted earnings per share -              |   |                      |    |                      |   |   |   |   |   |
| Adjusted weighted average shares outstanding              |   | 28,600                    |    | 28,585                    |   | 28,538 |   | 28,701 |   |

 

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|                                                            |   | **Three Months Ended**    |   | **Nine Months Ended**     |   |
|-----------------------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|
| **(In thousands, except per share data)**                       |   | **November 1, 2003** |   | **November 2, 2002** |   | **November 1, 2003** |   | **November 2, 2002** |   |
| Basic earnings (loss) per share:                                |   |                      |   |                      |   |   |   |   |   |
| From continuing operations                                      |   | $                         | (0.54  | )                         | $      | 0.18 |   | $ | (0.37 | ) | $ | 0.51 |   |
| From discontinued operations                                    |   | —                    |   | (0.04                     | )      | (0.03 | ) | (0.47 | ) |
| From cumulative effect of change in  accounting principle       |   | —                    |   | —                    |   | — |   | (0.13 | ) |
| Net earnings (loss) per share                                   |   | $                         | (0.54  | )                         | $      | 0.13 |   | $ | (0.40 | ) | $ | (0.09 | ) |
|                                                            |   |                      |   |                      |   |   |   |   |   |
| Diluted earnings (loss) per share:                              |   |                      |   |                      |   |   |   |   |   |
| From continuing operations                                      |   | $                         | (0.54  | )                         | $      | 0.17 |   | $ | (0.37 | ) | $ | 0.50 |   |
| From discontinued operations                                    |   | —                    |   | (0.04                     | )      | (0.03 | ) | (0.47 | ) |
| From cumulative effect of change in  accounting principle       |   | —                    |   | —                    |   | — |   | (0.13 | ) |
| Net earnings (loss) per share                                   |   | $                         | (0.54  | )                         | $      | 0.13 |   | $ | (0.40 | ) | $ | (0.09 | ) |
|                                                            |   |                      |   |                      |   |   |   |   |   |
| Number of shares under anti-dilutive stock  options outstanding |   | 2,216                     |   | 1,383                     |   | 2,216 |   | 1,327 |   |

 

**Note 10 – Warranty Costs**

 

Basedon historical experience and contract terms, the Company provides for theestimated cost of product and service warranties at the time of sale or, insome 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. 

 

Asummary of warranty activity for the three and nine months endedNovember 1, 2003 follows *(in thousands):*

 
|                                           |   | **Three Months Ended  November 1, 2003** |   | **Nine Months Ended  November 1, 2003** |   |
|------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|
| Accrued warranty costs - Beginning of period   |   | $                                             | 5,357  |                                         | $      | 6,073 |   |
| Payments for completed warranty obligations    |   | (251                                          | )      | (4,163                                       | )      |
| Warranty accrual for current period production |   | 1,301                                         |   | 4,217                                        |   |
| Changes related to pre-existing warranties     |   | 200                                           |   | 480                                          |   |
| Accrued warranty costs - End of period         |   | $                                             | 6,607  |                                         | $      | 6,607 |   |

 

13

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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 attachedcondensed consolidated financial statements and notes thereto, and with ourForm 10-K and notes thereto for the fiscal year ended January 31,2003.  The following discussion containsforward-looking statements.  Inconnection therewith, please see the Cautionary Statements contained in ourForm 10-K and the heading labeled “Factors That May Affect Future Results”below, which identify important factors that could cause actual results todiffer materially from those predicted or implied in the forward-lookingstatements. 

 

Our fiscal year begins on February 1 of the year stated and endson January 31 of the following year. For example, our “Fiscal 2003” commenced on February 1, 2003 andends on January 31, 2004.  Wereport results on the fiscal quarter method with each quarter comprisingapproximately 13 weeks.  The third quarterof Fiscal 2003 commenced on August 3, 2003 and ended on November 1,2003, and the third quarter of Fiscal 2002 commenced on August 4, 2002 andended on November 2, 2002.

 

**RESULTS OF OPERATIONS**

 

The third quarter of Fiscal 2003 included three key actions which had asignificant impact on overall results of operations as well as segment datawithin affected business segments. These actions included the following:

 

1.               On September 15, 2003, we announcedthe resignation of our then President and Chief Executive Officer.  This resulted in a $2.9 million charge toselling and administrative expense for employee separation costs.  This charge included $1.0 million forseverance and related costs and $1.9 million of cash paid in exchange for thecancellation of stock options.

 

2.               We announced the decision to exit theturnkey engineering, procurement and construction activities within theDistributed Energy Solutions business. As a result of this decision, in the third quarter of Fiscal 2003, weincurred non-cash inventory impairment charges of $4.7 million in cost of salesalong with $1.4 million of warranty, legal and other expenses in selling andadministrative expenses.

 

3.               Within the Airline Products segment, werecorded a $3.1 million non-cash charge in cost of sales to write downinventory to expected realizable value in connection with management’s decisionto liquidate certain inventory in the current market environment.

 

In the fourth quarter of Fiscal 2003, we plan to take additionalstrategic actions in order to improve the overall profitability of theCompany.  Some of these actions willlikely impact results of operations in the fourth quarter of Fiscal 2003.

 

Sales for the third quarter of Fiscal 2003 decreased $6.5 million, or2%, from the third quarter of Fiscal 2002. Sales increases in the Petroleum Equipment and Utility Equipment segmentswere offset by a sales decline in the Distributed Energy Solutionssegment.  All other business segmentsexperienced relatively flat sales compared to the previous year.  For the first nine months of Fiscal 2003,sales increased $11.4 million, or 1%, from the first nine months of Fiscal2002.  Increased sales volume in thePetroleum Equipment segment was partially offset by lower sales in the PowerProducts and Distributed Energy Solutions segments.

 

Gross profit decreased $25.9 million to $17.1 million in the thirdquarter of Fiscal 2003 from the third quarter of Fiscal 2002, and decreased$30.0 million to $98.6 million in the first nine months of Fiscal 2003 from thenine months of Fiscal 2002.  Grossprofit margin decreased to 5.9% and 11.0% in the third quarter and first ninemonths of Fiscal 2003, respectively, compared to 14.5% and 14.6% for thecorresponding periods of Fiscal 2002. The decline in gross profit margin for the third quarter and first nine monthsof Fiscal 2003 is primarily attributable to the key actions described above,which resulted in a $7.8 million inventory writedown charge to cost ofsales.  Additionally, the third quarterof Fiscal 2003 included higher costs associated with the execution of certaincustomer contracts within the Distributed Energy Solutions segment.  Gross profit margins were impacted furtherby product mix within the Tactical Vehicle Systems segment and higher operatingcosts in the Power Products segment.

 

Selling and administrative expenses increased by $7.1 million, or 20%,to $41.6 million in the third quarter of Fiscal 2003 from the third quarter ofFiscal 2002, and increased by $8.4 million, or 8%, to $113.4 million in thefirst nine months of Fiscal 2003 from the same period of Fiscal 2002.  Selling and administrative expenses inFiscal 2003 include costs associated with the resignation of the then Presidentand Chief Executive Officer, as well as employee separation costs related tothe elimination of other positions in the Corporate and Power Productssegments.  Fiscal 2003 selling andadministrative expenses also include costs associated with restructuringactivities related to the consolidation of manufacturing operations in theEngineered Products Division.  A summaryof restructuring costs incurred for the three and nine months endedNovember 1, 2003 follows *(in thousands)*:

 
|                                                |   | **Three Months Ended  November 1, 2003** |   | **Nine Months Ended  November 1, 2003** |   |
|-----------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|
| Total restructuring costs incurred                  |   | $                                             | 1,258  |                                         | $      | 5,159 |   |
| Employee separation costs included in restructuring |   | 352                                           |   | 2,352                                        |   |
|                                                     |        |                                               |        |                                              |        |  |  |

 

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As of November 1, 2003, $2.3 million ofrestructuring costs were accrued and expected to be paid in futureperiods.  In addition, we expect toincur $0.5 million to $1.0 million of additional restructuring expenses inFiscal 2003 to complete the Engineered Products Division consolidation.  Excluding costs related to restructuringactivities, selling and administrative expenses as a percentage of salesincreased to 12.1% for the nine months ended November 1, 2003, compared to11.9% for the corresponding period of Fiscal 2002.  This increase is primarily attributable to employee separationcosts of $2.9 million associated with the resignation of our then President andChief Executive Officer.

 

During the first quarter of Fiscal 2003, wedecided to freeze the benefits earned under our defined benefit pension plan,defined benefit supplemental executive retirement plan and our postretirementmedical plan effective July 1, 2003. These changes are expected to reduce pension and postretirement benefitsexpense by over $5.0 million in Fiscal 2003. The first quarter 2003 operating results included a one-time non-cashwrite-off of $2.4 million of previously unamortized prior service costs (pensioncurtailment expense).

 

Compared to the corresponding periods ofFiscal 2002, net interest expense decreased $0.2 million to $0.5 million in thethird quarter of Fiscal 2003 and by $0.6 million to $1.4 million in the firstnine months of Fiscal 2003.  Thedecrease in interest expense is primarily attributable to the payment of $30.0million on long-term borrowings in May 2003. 

 

The effective tax rate was 41.2% in the firstnine months of Fiscal 2003 compared to 34.7% for the corresponding period in 2002.  The increase in effective tax rate isprimarily a result of the company generating a loss from continuing operationsin Fiscal 2003 combined with certain state tax benefits and tax credits beingearned.

 

Discontinued operations generated breakeven operatingresults in the third quarter of Fiscal 2003 and an after-tax loss of $0.9million in the first nine months of Fiscal 2003, compared to a $1.2 million and$7.8 million loss in the corresponding periods in Fiscal 2002, respectively.  These losses primarily represent costsassociated with retained contracts, warranty and legal claims and obligationsassociated with our discontinued blowout preventer and controls, valve anddrilling riser business, which was sold during Fiscal 2002.  In addition, in the second quarter of Fiscal2002, we recognized a loss from disposal of this business of $5.6 million, netof tax, resulting from the sale of these operations.  Results in the third quarter of Fiscal 2003 were positivelyimpacted by the resolution of certain income tax obligations at lower amountsthan previously estimated.

 

In the first quarter of Fiscal 2002, werecognized, as a cumulative effect of a change in accounting principle, acharge of $3.7 million net of tax, or $0.13 per diluted share, upon adoption ofnew accounting standards related to the valuation of goodwill and otherintangible assets.

 

**SEGMENT DATA**

 

We report financial results in six business segments based on distinctproduct and customer types.  Three ofthese segments have been combined in Fiscal 2003 into the Engineered ProductsDivision.  This division includes thePetroleum Equipment, Distributed Energy Solutions and Utilities Equipmentbusiness segments.  The remaining threesegments include Tactical Vehicle Systems, Power Products and AirlineProducts.  Businesses not otherwiseclassified are shown as Other Business Activities.  This classification includes the marketing services andtransportation/logistics organizations, which provide services to bothaffiliated and unaffiliated customers. Intercompany sales have been eliminated.

 

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The following table represents sales and operating profit (loss) bybusiness segment *(in thousands)*:

 
|                                                                |   | **Three  Months Ended**    |    | **Nine  Months Ended**     |   |
|---------------------------------------------------------------------|--------|----------------------------|---------|----------------------------|--------|
|                                                                |   | **November 1,  2003** |    | **November 2,  2002** |   | **November 1,  2003** |   | **November 2,  2002** |   |
| **Sales**                                                           |   |                       |    |                       |   |   |   |   |   |
| Tactical Vehicle Systems                                            |   | $                          | 110,036 |                       | $      | 113,715 |   | $ | 329,378 |   | $ | 334,581 |   |
| Power Products                                                      |   | 127,712                    |    | 127,858                    |   | 378,887 |   | 410,656 |   |
| Engineered Products:                                                |   |                       |    |                       |   |   |   |   |   |
| Petroleum Equipment                                                 |   | 23,507                     |    | 18,405                     |   | 81,346 |   | 33,715 |   |
| Distributed Energy  Solutions                                       |   | 7,616                      |    | 18,285                     |   | 40,718 |   | 47,900 |   |
| Utilities Equipment                                                 |   | 5,600                      |    | 1,843                      |   | 11,624 |   | 5,230 |   |
| Airline Products                                                    |   | 14,379                     |    | 14,737                     |   | 46,975 |   | 42,807 |   |
| Other Business Activities                                           |   | 1,189                      |    | 1,739                      |   | 3,734 |   | 6,398 |   |
| Total Sales                                                         |   | $                          | 290,039 |                       | $      | 296,582 |   | $ | 892,662 |   | $ | 881,287 |   |
|                                                                |   |                       |    |                       |   |   |   |   |   |
| **Operating  Profit (Loss)**                                        |   |                       |    |                       |   |   |   |   |   |
| Tactical Vehicle Systems                                            |   | $                          | 16,786  |                       | $      | 18,442 |   | $ | 51,852 |   | $ | 48,933 |   |
| Power Products                                                      |   | (5,971                     | )       | (4,958                     | )      | (14,018 | ) | (1,351 | ) |
| Engineered Products:                                                |   |                       |    |                       |   |   |   |   |   |
| Petroleum Equipment                                                 |   | (688                       | )       | 350                        |   | 1,545 |   | (1,741 | ) |
| Distributed Energy  Solutions                                       |   | (20,923                    | )       | 635                        |   | (27,895 | ) | (3,618 | ) |
| Utilities Equipment                                                 |   | (625                       | )       | (698                       | )      | (2,440 | ) | (2,186 | ) |
| Airline Products                                                    |   | (6,639                     | )       | (1,987                     | )      | (9,343 | ) | (5,194 | ) |
| Other Business Activities                                           |   | (565                       | )       | (395                       | )      | (1,613 | ) | (221 | ) |
| Total Operating Profit  (Loss)                                      |   | (18,625                    | )       | 11,389                     |   | (1,912 | ) | 34,622 |   |
|                                                                |   |                       |    |                       |   |   |   |   |   |
| Corporate expenses, net                                             |   | (5,843                     | )       | (2,910                     | )      | (12,363 | ) | (10,487 | ) |
| Pension curtailment expense                                         |   | —                     |    | —                     |   | (2,400 | ) | — |   |
| Interest and investment  income                                     |   | 142                        |    | 485                        |   | 1,201 |   | 1,197 |   |
| Interest expense                                                    |   | (640                       | )       | (1,161                     | )      | (2,576 | ) | (3,131 | ) |
| **Earnings  (loss) from continuing operations before income taxes** |   | $                          | (24,966 | )                          | $      | 7,803 |   | $ | (18,050 | ) | $ | 22,201 |   |

 

**Tactical Vehicle Systems**

 

The Tactical Vehicle Systems segment, which manufactures tacticalvehicles for the U.S. Army and others, recorded sales of $110.0 million in thethird quarter of Fiscal 2003 compared to $113.7 million a year ago.  The segment delivered 585 trucks and 121trailers in the third quarter of Fiscal 2003, compared to 571 trucks and 145trailers in the same period of Fiscal 2002. By comparison, the 2003 quantities included a lower proportion of largervehicles, which have a higher unit sales price.  For the first nine months of Fiscal 2003, segment sales were$329.4 million, down slightly from $334.6 million in the first nine months ofFiscal 2002.  Despite an increase inunits delivered, sales for the first nine months of Fiscal 2003 were negativelyimpacted by a higher proportion of lower priced units compared to Fiscal2002.  Operating profit for the thirdquarter of Fiscal 2003 decreased to $16.8 million (15.3% operating margin) from$18.4 million (16.2% operating margin) in the third quarter of Fiscal2002.  For the first nine months ofFiscal 2003, operating profit increased to $51.9 million (15.7% operatingmargin) from $48.9 million in Fiscal 2002 (14.6% operating margin).  The decreased operating profit for the thirdquarter is caused by the product and option mix delivered in Fiscal 2003compared to Fiscal 2002.  For the firstnine months, the increased operating profit is primarily attributable to a moreprofitable product mix, and lower costs associated with bid and proposalactivities in the Fiscal 2003 period compared to the comparable period inFiscal 2002.

 

Production under the FMTV A1 Competitive Rebuy (“A1CR”) productioncontract is expected to begin in October 2004, after completion of thecurrent FMTV contract.  Our profit marginson the A1CR contract are expected to be lower than historical margin levels forthe current FMTV contract.  Actualfuture margins of this segment will be dependent upon a number of factorsincluding our ability to achieve efficiencies and other materials and laborcost control measures, the actual quantities and variations of vehiclespurchased by the U.S. Army under the A1CR contract, 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.

 

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**Power Products**

 

The Power Products segment, which is responsible for marketing andaftermarket support of a wide range of industrial equipment, recorded sales of$127.7 million in the third quarter of Fiscal 2003, flat to the $127.9 millionin the corresponding period in Fiscal 2002. Sales in the first nine months of Fiscal 2003 were $378.9 million, down8% from $410.7 million recorded in the first nine months of Fiscal 2002.  The decline in sales was primarily a resultof lower equipment sales volume, which is largely attributable to overallweakness in the markets we serve.  ThePower Products segment reported an operating loss of $6.0 million in the thirdquarter of Fiscal 2003 compared to a $5.0 million operating loss in the thirdquarter of Fiscal 2002.  The higheroperating loss in the third quarter of Fiscal 2003 was primarily driven byhigher operating costs.  For thenine-month period, the segment’s operating loss increased from $1.4 million inFiscal 2002 to $14.0 million in Fiscal 2003, primarily as a result of the lowersales volume, an unfavorable customer mix within the equipment, parts andservice sales, and higher operating costs.

 

During the fourth quarter of Fiscal 2003, wehave realigned the organizational structure of the Power Products business byconsolidating eleven geographic areas into five.  This new structure is being implemented in order to improvecustomer focus, increase quality and efficiency and achieve significant costsavings.  In addition, we are nearingcompletion of our assessment of our product offerings and facilities todetermine any further actions that may be taken.  Some of these actions will likely impact results of operations inthe fourth quarter of Fiscal 2003.

 

For many years, we have had contractual relationships with DetroitDiesel Corporation (“Detroit Diesel”) for the distribution and servicing of itsdiesel engine products.  Our currentcontracts with Detroit Diesel expire on December 31, 2003, and we arecurrently in negotiations to enter into new contracts.  We expect that the new contracts will bebifurcated, with the new contracts for “on-highway” equipment and servicematters to be with Detroit Diesel, and the new contracts for “off-highway”equipment and service matters to be with DaimlerChrysler Off-Highway HoldingGmbH.  Sales covered by the DetroitDiesel contractual arrangements represent approximately 13% of our total salesduring the first nine months of Fiscal 2003. At present, we are neither able to predict the outcome of ournegotiations with Detroit Diesel nor to predict the effect of expected newcontract arrangements on our future operations.

 

**Engineered Products**

 

The Engineered Products Division was formed in 2003, and consists ofthe Petroleum Equipment, Distributed Energy Solutions and Utilities Equipmentbusinesses.

 

The Petroleum Equipment segment manufactures equipment for the wellservicing industry.  Sales in thissegment increased by $5.1 million to $23.5 million in the third quarter ofFiscal 2003 and increased by $47.6 million to $81.3 million in the first ninemonths of Fiscal 2003 from the corresponding periods in Fiscal 2002.  The increase in sales for this segment wasattributable to increased volume of equipment sales both domestically andinternationally, as capital spending in the oil service industry increased over2002 levels.  Operating profit in thissegment decreased by $1.0 million in the third quarter of Fiscal 2003, butincreased $3.3 million in the first nine months of Fiscal 2003 from thecorresponding periods in Fiscal 2002. The decline in operating profit for the third quarter is primarilyattributable to lower margin international contracts in Fiscal 2003, along with$0.7 million of restructuring costs associated with the consolidation ofmanufacturing operations for Engineered Products.  For the first nine months, the improvement in operating profit isprimarily attributable to the sales volume growth partially offset by thehigher operating expenses attributable to the consolidation of EngineeredProducts manufacturing operations.

 

The Distributed Energy Solutions segment primarily packages enginegenerator sets, performs power plant installations on a turnkey basis andservices power plant operations.  Salesfor this segment decreased $10.7 million to $7.6 million in the third quarterof Fiscal 2003 and increased $7.2 million to $40.7 million in first nine monthsof Fiscal 2003, compared to the corresponding periods in Fiscal 2002.  This segment posted a third quarteroperating loss of $20.9 million in Fiscal 2003, compared to a $0.6 millionoperating profit in the third quarter of Fiscal 2002.  For the first nine months, this segment’s operating loss was$27.9 million in Fiscal 2003, compared to $3.6 million in Fiscal 2002.  The operating loss in the third quarter ofFiscal 2003 was primarily attributable to $6.1 million of costs associated withthe decision to exit the turnkey engineering, procurement and constructionactivities within this segment, significantly higher estimated costs tocomplete certain projects in excess of original estimates, and provisions forcontractual claims made by customers for liquidated damages regarding equipmentand services provided under existing contracts.  Operating losses in this segment also included expenses of $0.5million in the third quarter and $1.5 million in the first nine months ofFiscal 2003 related to the consolidation of manufacturing operations.

 

The Utilities Equipment segment, which manufactures mobile railcarmovers, snowblowers and off-road seismic vehicles, generated a $3.8 millionsales increase to $5.6 million in the third quarter of Fiscal 2003 and a $6.4million increase to $11.6 million in the first nine months of Fiscal 2003 fromthe corresponding periods in Fiscal 2002. The sales growth is primarily attributable to a contract awarded inDecember 2002 to provide off-road seismic vehicles for Input/Output,Inc.  Production under this contractbegan during the second quarter of Fiscal 2003.  This segment posted a third quarter operating loss of $0.6million in Fiscal 2003, compared to a $0.7 million loss in Fiscal 2002.  For the first nine months, this segment’soperating loss was $2.4 million, compared to $2.2 million in

 

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Fiscal 2002.  This segment’soperating loss in Fiscal 2003 includes $0.3 million of expenses in the thirdquarter and $0.8 million of expenses in the first nine months related to theconsolidation of manufacturing operations in the Engineered Products Division.

 

**Airline Products**

 

The Airline Products segment, which manufactures airline ground supportequipment, recognized a slight decrease in sales of $0.4 million to $14.4million in the third quarter of Fiscal 2003 and an increase of $4.2 million to$47.0 million in the first nine months of Fiscal 2003 compared to therespective corresponding periods in Fiscal 2002.  The increased sales in Fiscal 2003 are primarily attributable toincreased sales volume to government and industrial customers, as well as salesof products in the DAVCO product line, which was acquired inDecember 2002.  Operating loss forthis segment increased to $6.6 million in the third quarter of Fiscal 2003 and$9.3 million in the first nine months of Fiscal 2003, compared to $2.0 millionin the third quarter and $5.2 million in the first nine months of Fiscal 2002.  The increased operating loss in Fiscal 2003is primarily attributable a $3.1 million non-cash charge in the third quarterto write down inventory to expected realizable value in connection withmanagement’s decision to liquidate certain inventory in the current marketenvironment.  Order backlog is $4.6million at the end of the third quarter, a $3.6 million increase from the endof Fiscal 2002.

 

**UNFILLED ORDERS**

 

Unfilled orders consist of written purchase orders and signedcontracts.  These unfilled orders aregenerally subject to cancellation or modification due to customer relationshipsor other conditions.  Purchase optionsare not included in unfilled orders until exercised.  Unfilled orders as of November 1, 2003 and January 31,2003 were as follows:

 
|                         |   | **November 1,  2003** |   | **January 31,  2003** |   |
|------------------------------|--------|----------------------------|--------|----------------------------|--------|
|                         |   | **(In millions)**          |   |
|                         |   |                       |   |                       |   |
| Tactical Vehicle Systems     |   | $                          | 550.9  |                       | $      | 659.5 |   |
| Power Products               |   | 51.7                       |   | 38.7                       |   |
| Engineered Products Division |   |                       |   |                       |   |
| Petroleum Equipment          |   | 20.8                       |   | 64.6                       |   |
| Distributed Energy Solutions |   | 23.0                       |   | 42.5                       |   |
| Utilities Equipment          |   | 1.5                        |   | 0.7                        |   |
| Airline Products             |   | 4.6                        |   | 1.0                        |   |
|                         |   | $                          | 652.5  |                       | $      | 807.0 |   |

 

Unfilled orders of the Tactical Vehicle Systems segment consistprincipally of production authorized and appropriated by the U.S. Congressunder contracts awarded by the U.S. Army Tank-Automotive and Armament Command(“TACOM”) to manufacture medium tactical vehicles and trailers.  Approximately $90 million of unfilled ordersin this segment at November 1, 2003 represents authorized production underthe A1CR contract, which is expected to begin production inOctober 2004.  Unfilled orders inthis segment have declined during Fiscal 2003 as we continue to completepreviously authorized production under the current FMTV contract.  Additionally, unfilled orders in the EngineeredProducts Division have declined as work progresses on several large ordersreceived in Fiscal 2002.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our sources of cash liquidity include cash and cash equivalents, cashfrom operations, amounts available under credit facilities and other externalsources of funds.  We believe that thesesources are sufficient to fund current requirements of working capital, capitalexpenditures, common stock dividends and other financial commitments.  

 

We have a $150 million unsecured revolving credit facility, whichmatures on January 31, 2004.  Noborrowings were outstanding under the facility at any time during Fiscal 2003or Fiscal 2002.  The revolving creditfacility has a $25 million sub facility, which may be used for letters ofcredit.  Approximately $6.8 million inletters of credit under the revolving credit facility were outstanding atNovember 1, 2003.  A commitment feeranging from 20 to 50 basis points is paid on the daily average unused balancebased on our leverage ratio.  Borrowingsoutstanding would bear interest at several options, including LIBOR plus 75 to175 basis points based on our leverage ratio, the prime rate, or a competitivebid among the banks.  Based on the firstoption (LIBOR plus 75 to 175 basis points based on our leverage ratio), theborrowing rate would have been approximately 2.17% as of November 1,2003.  Prior to its expiration inJanuary 2004, we intend to negotiate an extension of the revolving creditfacility on commercially reasonable terms and conditions satisfactory to meetour anticipated needs.  There can be noassurance that we will be able to successfully negotiate such an extension or,if we do, that such extension will include similar terms and conditions, ratesof interest and covenants.  Although no

 

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borrowings are currently outstanding under the revolving creditfacility, failure to negotiate a new facility on terms acceptable to us couldrestrict our future ability to make acquisitions and fund working capital,capital expenditures, common stock dividends or other financial obligations.

 

The revolving credit facility agreement contains covenants thatrestrict indebtedness, guarantees, sales of assets, rentals and otheritems.  Additional covenants in therevolving credit facility require us to maintain a minimum tangible net worthand interest coverage.  Since theserequirements are calculated from earnings and cash flow, our ability to declareand pay dividends could be restricted indirectly.  Primarily as a result of operating losses incurred during Fiscal2003, we were not in compliance with the interest coverage ratio covenantcalculated as of November 1, 2003. Consequently, we have obtained a waiver from our bank lenders under therevolving credit facility, waiving this covenant violation throughJanuary 31, 2004.  As a result ofsuch waiver, we are not restricted from declaring and paying common stockdividends.

 

During the first nine months of Fiscal 2003, we entered into separateletter of credit facilities with financial institutions totaling $12.5 million,to allow us to issue letters of credit that extend beyond January 31, 2004as necessary.  Approximately $7.3million letters of credit under these facilities were outstanding as ofNovember 1, 2003.

 

In addition, we have $25.0 million in senior notes outstanding as ofNovember 1, 2003.  The senior notesare unsecured and were issued pursuant to an agreement containing a covenant,which imposes a debt to total capitalization requirement.  The senior notes, which bear interest at arate of 7.38%, are due and payable in May 2006.  Additionally, $30.0 million of such senior notes were paid whendue in May 2003.  

 

In addition, our international subsidiaries had foreign currency banknotes payable totaling $2.3 million and $1.5 million at November 1, 2003and January 31, 2003, respectively. Such notes payable consist of renewable, secured loans for the purposeof financing our South American operations. These loans are denominated in local currency (Colombian Pesos andVenezuelan Bolivars) and are secured by letters of credit issued by us andprincipally bear market-based variable rates of interest.  We use foreign denominated debt to offsetthe impact of foreign currency exchange rate fluctuations on our South Americanoperations.

 

In the event that any acquisition of additional operations, growth inexisting operations, settlements of lawsuits or disputes, changes in inventorylevels, accounts receivable, tax payments or other working capital items createa permanent need for working capital or capital expenditures in excess of theexisting cash and cash equivalents and committed lines of credit, we may seekto borrow under other long-term financing instruments or seek additional equitycapital.

 

As of November 1, 2003, we had net working capital of $275.0million, compared to $302.2 million at January 31, 2003.  Total current assets at November 1,2003 were $472.1 million, including $54.3 million of cash and cash equivalents. Total current liabilities atNovember 1, 2003 were $197.2 million, including $68.2 million of billingsin excess of costs incurred on uncompleted contracts.

 

Net cash provided by operating activities was $2.6 million for thefirst nine months of Fiscal 2003, compared to $65.7 million for thecorresponding period in Fiscal 2002. This decrease is primarily attributable to operating losses andincreased investment in working capital in Fiscal 2003.  Working capital and other operating accountsprovided cash of $31.4 million during the first nine months of Fiscal 2002, butused cash of $15.3 million during the first nine months of Fiscal 2003.  Working capital consumed cash during thefirst nine months of Fiscal 2003, primarily as a result of the increased numberof Petroleum Equipment projects in progress and a $10.6 million pension planpayment made in the third quarter. Working capital provided cash during the first nine months of Fiscal2002 as a result of increased customer advances in the Tactical Vehicle Systemssegment and a reduction in accounts receivable in other segments due to theslowdown in business activity.

 

Cash usage for investing activities in the first nine months of Fiscal2003 increased slightly to $21.2 million compared to the corresponding periodin 2002.  Capital spending in Fiscal2003 includes $3.7 million of buildings and improvements to consolidate theEngineered Products Division’s manufacturing facilities and $4.2 million ofrental equipment in the Power Products segment.

 

Net cash usage in financing activities of $35.1 million in the firstnine months of Fiscal 2003 increased by $26.7 million compared to thecorresponding period in 2002.  Theincrease is primarily attributable to the repayment of $30 million in seniornotes, which were due and paid on May 30, 2003.

 

**FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

*Risk as to Licenses.*  Our Power Products and Petroleum Equipmentsegments are dependent upon and subject to certain Texas state motor vehiclelicensing requirements.  Generally, suchlicenses are renewed annually.  We arecurrently in discussions with the Motor Vehicle Division of the TexasDepartment of Transportation as to issues that have been raised concerninglicenses necessary for the sale, distribution, installation and warranty repairof certain large engines and transmissions. The Motor Vehicle Division has proposed that these issues be presentedto the Texas Motor Vehicle Board for consideration through its formal opinionprocess. Although no enforcement action is

 

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currently pending against us in such situation, our licenses have notbeen renewed pending the resolution of the licensing issues that have beenraised.  While these licenses havehistorically been renewed on a regular basis, there can be no assurance thatany particular license will be renewed in the future.  The termination of, or failure to renew, key licenses could havea material adverse impact on our operations. We have assumed in our forward-looking statements that our principallicenses will not be terminated and/or will be renewed as they come up forrenewal and that we will resolve satisfactorily the Texas licensing matters.

 

**Forward-Looking Statements**

 

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 risk of competition, risks relating to technology, risks ofgeneral economic conditions, risks of oil and gas industry economic conditions,risks of airline industry economic conditions, risks as to terrorist attacks onthe U.S. and their impact on the U.S. economy, risks relating to personnel,risks of dependence on government and failure to obtain new governmentcontracts, inherent risks of government contracts, risks of claims andlitigation, risks of product defects, risks as to foreign sales and globaltrade matters, risks as to cost controls, risks as to information technology,risks as to acquisitions, risks as to currency fluctuations, risks as toenvironmental and safety matters, risks as to distributorships, risks as tolicenses, and credit risks, all as more specifically outlined in the Company’slatest annual report on Form 10-K.  Inaddition, such forward-looking statements could be affected by general industryand market conditions and growth rates, general domestic and internationalconditions including interest rates, inflation and currency exchange rates andother future factors.  Actual outcomesand results may differ materially from what is expressed or forecasted in suchforward-looking statements.

 

**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

 

Our quantitative and qualitative disclosures about market risk forchanges in interest rates and foreign exchange risk are incorporated byreference in Item 7A of our Annual Report on Form 10-K for the year endedJanuary 31, 2003 and have not materially changed since that report wasfiled, except as disclosed in Item 2 – “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” herein.

 

**Item 4. Controls and Procedures**

 

As of November 1, 2003, an evaluation was performed under thesupervision and with the participation of our management, including our InterimChief Executive Officer (our principal executive officer) and our ChiefFinancial Officer (our principal financial officer), of the effectiveness ofthe design and operation of our disclosure controls and procedures (as definedunder Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”)).  Based onthis evaluation, our Interim Chief Executive Officer and our Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof November 1, 2003 in providing reasonable assurances that materialinformation required to be disclosed is included on a timely basis in thereports we file with the Securities and Exchange Commission.

 

There were no significant changes in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof such evaluation.

 

**PART II. OTHER INFORMATION**

 

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

 

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 has been advised thatthe U.S. Customs Service and the Department of Justice are investigatingpotential violations by the Company of laws relating to the export ofcontrolled military vehicles, weapons mounting systems, and firearms.  Such investigation could result in thefiling of criminal, civil, or administrative sanctions against the Companyand/or individual employees and could result in a suspension or debarment ofthe Company from receiving new contracts or subcontracts with agencies of theU.S. government or the benefit of federal assistance payments.

 

The Company is a defendant in a suit brought under the *qui tam* provision of the False Claims Act,United States 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.  The case is set for trial in

 

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March 2004.  The Companybelieves the claims in the suit are without merit and is vigorously defendingthe suit.  Nevertheless, an unexpectedoutcome in the suit could have a material adverse impact on the Company’sresults of operations, consolidated financial position and liquidity.

 

The Company is a defendant in a suit brought by several subsidiaries ofDiamond Offshore Drilling, Inc. (collectively, “Diamond Offshore”) onMay 30, 2002, arising out of claims relating to a marine risermanufactured by the Company and purchased by Diamond Offshore for use on itsOcean Baroness semi-submersible drilling rig, Cause No. 2002-27831; *Diamond Offshore International Corporation, DiamondOffshore Company, Diamond Offshore Services Company, Diamond Offshore (USA),Inc., Diamond Offshore International Limited, and Diamond Offshore DrillingLtd. v. Stewart & Stevenson Services, Inc.*; in the DistrictCourt of Harris County, Texas 125th Judicial District Court (the“Baroness Litigation”).  The suit wasfiled following a separation ofthe marine riser during deep water drilling operations and seeks to recoverdamages that are not specified in the complaint.

 

In a separate transaction on or about September 13, 2001, DiamondOffshore contracted with the Company for a marine riser for use on its OceanRover semi-submersible drilling rig. The Company was fulfilling this contract, when, on August 19, 2002,Diamond Offshore amended its petition in the Baroness Litigation to seek adeclaration that Diamond Offshore has no further contractual obligations to theCompany.  On August 21, 2002,before being served with Diamond Offshore’s amended petition in the BaronessLitigation, the Company filed a separate lawsuit against Diamond Offshoreseeking to recover damages, including attorneys’ fees (the “RoverLitigation”).  On August 30, 2002,the Court transferred the Rover Litigation to the 125th JudicialCourt where the Baroness Litigation is pending.  The two cases have been consolidated into one lawsuit in the 125thJudicial Court.  The Company isvigorously prosecuting its claims against Diamond Offshore and defending theclaims asserted against it by Diamond Offshore in this lawsuit.

It is presently impossible to determine the ultimate outcome of thesematters or whether the resolution will have a material adverse effect on theCompany’s results of operations, consolidated financial position or liquidity,though the Company has recorded reserves that it believes are adequate forcertain estimated legal fees associated with such matters as of the balancesheet date.

 

During the third quarter of Fiscal 2003, we decided to exit turnkeyengineering, procurement and construction activities of our Distributed EnergySolutions business.  With respect tosuch turnkey activities, we will not be quoting any new business but will becontinuing to perform under existing contracts.  In connection with certain existing contracts, we have received awritten notice of dispute from a customer regarding equipment and services tobe provided to several sites operated by the customer.  In the dispute notice, the customer allegedvarious contractual claims, including claims for liquidated damages.  The customer acknowledged the expectation ofcontinuing negotiations, but indicated that if the parties were unable toresolve the dispute, it would seek relief in arbitration.  Additional issues have been raised by the customer,and issues exist with respect to the engines and the engine supplier.  Accordingly, we are reviewing issuesregarding this situation.  At present,we are unable to predict the outcome of this situation or even the aggregateamount of claims that may be asserted by the customer. We intend to vigorouslyassert our positions in this matter should it go to arbitration.

 

In 2001, the Company received from the UnitedStates Environmental Protection Agency (the “EPA”) a Request for Informationunder Section 104(e) of the Comprehensive Environmental Response,Compensation, and Liability Act of 1980, for information pertaining to theR&H Oil Company Site in San Antonio, Texas (the “Site”).  Information provided to theCompany by the EPA indicates that the Company may have sent waste oils to theSite for recycling in the late 1980s, and that such waste oils may potentiallyaccount for between one and two percent of the volume of total wastes receivedby the oil recycler at the Site.  Sincethe Company expects to receive a claim for cleanup and other costs related tothis site, it has established additional reserves in Fiscal 2002, which itbelieves 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 inherent in the final outcome of theseenvironmental matters, and it is presently impossible to determine the actualcosts that ultimately may be incurred, management currently believes that theresolution of such uncertainties should not have a material adverse effect onthe Company’s results of operations, consolidated financial position orliquidity.

 

From time to time, the Company is subject to various environmentalremediation requirements at certain of its facilities.  The Company believes that the exposureassociated with such requirements will not have a material adverse impact onthe Company’s results of operations, consolidated financial position orliquidity.

 

The Company is also a defendant in a number of lawsuits relating tocontractual, product liability, personal injury and warranty matters normallyincident to the Company’s business.  Noindividual case, or group of cases presenting substantially similar issues oflaw or fact, are expected to have a material effect on the manner in which theCompany conducts its business or on its consolidated financial position orliquidity.  The Company maintainscertain insurance policies that provide coverage for product liability andpersonal injury cases.  The Company hasestablished reserves that it believes to be adequate based on currentevaluations.  Nevertheless, anunexpected outcome in such cases could have a material adverse impact on theresults of operations in the period it occurs. Moreover, future adverse developments in such cases could requirematerial changes in the recorded reserve amounts.

 

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**Item 4.Submission of Matters to a Vote of Security Holders**

 

OnJune 10, 2003 the Company’s Annual Meeting of Shareholders was held.  Set forth below is a brief description ofeach matter acted upon at the meeting and the number of votes cast for, againstor withheld and abstaining, or not voting as to each matter.

 
|                  |   | **For**    |   | **Withheld** |   |
|-----------------------|--------|------------|--------|--------------|--------|
|                  |   |       |   |         |   |
| Election of Directors |   |       |   |         |   |
| Michael L. Grimes     |   | 23,202,575 |   | 1,662,487    |   |
| Monroe M. Luther      |   | 23,201,495 |   | 1,663,567    |   |
| Charles R. Ofner      |   | 23,202,563 |   | 1,662,499    |   |

 

Thefollowing directors’ terms of office continued after the meeting:  Max L. Lukens, Donald E. Stevenson, RobertS. Sullivan, Khleber V. Attwell, C. Jim Stewart III, Darvin M. Winick, andHoward Wolf.  Subsequent toJune 10, 2003, Messrs. Grimes and Stewart have resigned from the Board ofDirectors.

 

**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.

 

10.1                           Stewart & Stevenson Services, Inc. 1993Nonofficer Employee Stock Option Plan (Exhibit 4 of Form S-8 RegistrationStatement under Commission File No. 033-52881).

 

31.1                           Chief Executive Officer Certification.

 

31.2                           Chief Financial Officer Certification.

 

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

 

(b)         Form 8-K Report Date – August 15, 2003 (Stewart & StevensonServices Announces Fiscal 2003 Second Quarter Earnings Release and ConferenceCall Schedule)
| Items Reported - | Item 7.  Exhibits                  |
|------------------|-----------------------------------------|
|             | Item 9.  Regulation FD  Disclosure |

 

Form 8-K Report Date – August 28, 2003 (Stewart& Stevenson Services Reports Fiscal 2003 Second Quarter Results)
| Items Reported - | Item 7.  Exhibits                                 |
|------------------|--------------------------------------------------------|
|             | Item 12. Results of Operations and Financial Condition |

 

Form 8-K Report Date – September 15, 2003(Stewart & Stevenson Announces Resignation of Michael L. Grimes, Presidentand CEO)
| Items Reported - | Item 7.  Exhibits                  |
|------------------|-----------------------------------------|
|             | Item 9.  Regulation FD  Disclosure |

 

Form 8-K Report Date – September 17, 2003(Transcript of Stewart & Stevenson’s Conference Call HeldSeptember 16, 2003)
| Items Reported - | Item 7.  Exhibits                  |
|------------------|-----------------------------------------|
|             | Item 9.  Regulation FD  Disclosure |

 

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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 5th day of December 2003.

 

**STEWART & STEVENSON SERVICES, INC**.

 

 
| By:                                           | /s/  Max L. Lukens |   |   |   |
|-----------------------------------------------|-------------------------|--------|--------|--------|
| Max  L. Lukens                                |                    |   |
| Chairman  and Interim 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**

 

Exhibit Number and Description

 
| 10.1   |   | Stewart & Stevenson Services, Inc. 1993 Nonofficer Employee Stock  Option Plan (Exhibit 4 of Form S-8 Registration Statement under Commission  File No. 033-52881). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                    |
| 31.1   |   | Chief Executive Officer Certification.                                                                                                                                  |
|   |   |                                                                                                                                                                    |
| 31.2   |   | Chief Financial Officer Certification.                                                                                                                                  |
|   |   |                                                                                                                                                                    |
| 32.1   |   | Informational Addendum to Report on Form 10-Q Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                          |

 

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