**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

** **

**FORM10-Q**

** **

**(Mark One)**

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

 

**For thequarterly period ended August 2, 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 of registrant as specified in itscharter)

 

|                                                                                 | **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) |
|                                                                                      |                                                                 |        |                                       |        |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.         Yes  ý     Noo

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).     Yesý    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**                                                               |   | **28,572,414  Shares**                 |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------|
|                (Class) |   | (Outstanding at  August 15, 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 – August 2, 2003 and January 31, 2003.                                                                                                 |
|                                                                                                                                                                                         |
| Consolidated  Condensed Statements of Earnings – Three and Six Months Ended August 2,  2003 and August 3, 2002.                                                               |
|                                                                                                                                                                                         |
| Consolidated  Condensed Statements of Cash Flows – Three and Six Months Ended  August 2, 2003 and August 3, 2002.                                                             |
|                                                                                                                                                                                         |
| Notes  to Consolidated Condensed Financial Statements.                                                                                                                                       |

 

2

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**STEWART & STEVENSON SERVICES,INC. AND SUBSIDIARIES****CONSOLIDATED CONDENSED BALANCE SHEETS*******(In thousands, except share data)*

 
|                                                                                                                    |   | **August 2, 2003** |    | **January 31, 2003** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|----------------------|--------|
|                                                                                                                    |   | **(Unaudited)**    |    | **(Audited)**        |   |
| Assets                                                                                                                  |   |               |    |                 |   |
| Current Assets:                                                                                                         |   |               |    |                 |   |
| Cash and cash equivalents                                                                                               |   | $                  | 80,442  |                 | $      | 107,994 |   |
| Accounts and notes  receivable, net                                                                                     |   | 151,285            |    | 151,839              |   |
| Recoverable costs and  accrued profits not yet billed                                                                   |   | 44,489             |    | 11,668               |   |
| Inventories                                                                                                             |   | 237,660            |    | 244,416              |   |
| Excess of current cost  over LIFO values                                                                                |   | (43,401            | )       | (42,785              | )      |
| Deferred income tax asset                                                                                               |   | 16,004             |    | 16,126               |   |
| Other current assets                                                                                                    |   | 8,423              |    | 3,967                |   |
| Total assets of  discontinued operations                                                                                |   | 8,861              |    | 14,404               |   |
| Total Current Assets                                                                                                    |   | 503,763            |    | 507,629              |   |
|                                                                                                                    |   |               |    |                 |   |
| Property, Plant and  Equipment, net                                                                                     |   | 118,781            |    | 118,964              |   |
| Deferred Income Tax Asset                                                                                               |   | 13,572             |    | 11,754               |   |
| Intangibles and Other  Assets, net                                                                                      |   | 15,197             |    | 14,288               |   |
| Total Assets                                                                                                            |   | $                  | 651,313 |                 | $      | 652,635 |   |
|                                                                                                                    |   |               |    |                 |   |
| Liabilities and Shareholders’ Equity                                                                               |   |               |    |                 |   |
| Current Liabilities:                                                                                                    |   |               |    |                 |   |
| Notes payable                                                                                                           |   | $                  | 2,546   |                 | $      | 1,454 |   |
| Current portion of  long-term debt                                                                                      |   | 250                |    | 30,250               |   |
| Accounts payable                                                                                                        |   | 74,121             |    | 60,159               |   |
| Accrued payrolls and  incentives                                                                                        |   | 14,773             |    | 17,408               |   |
| Billings in excess of  incurred costs                                                                                   |   | 71,611             |    | 62,568               |   |
| Other current liabilities                                                                                               |   | 34,412             |    | 29,537               |   |
| Total liabilities of  discontinued operations                                                                           |   | 3,021              |    | 4,092                |   |
| Total Current Liabilities                                                                                               |   | 200,734            |    | 205,468              |   |
|                                                                                                                    |   |               |    |                 |   |
| Long-Term Debt, net                                                                                                     |   | 26,531             |    | 26,531               |   |
| Accrued Postretirement  Benefits and Pension                                                                            |   | 57,972             |    | 54,681               |   |
| Other Long-Term  Liabilities                                                                                            |   | 4,042              |    | 3,947                |   |
| Total Liabilities                                                                                                       |   | 289,279            |    | 290,627              |   |
| Shareholders’ Equity:                                                                                              |   |               |    |                 |   |
| Common stock, without par  value, 100,000,000 shares authorized; 28,564,414 and 28,490,849 shares  issued, respectively |   | 56,085             |    | 54,843               |   |
| Accumulated other  comprehensive loss                                                                                   |   | (21,980            | )       | (21,703              | )      |
| Retained earnings                                                                                                       |   | 327,929            |    | 328,868              |   |
| Total Shareholders’ Equity                                                                                         |   | 362,034            |    | 362,008              |   |
| Total Liabilities and  Shareholders’ Equity                                                                        |   | $                  | 651,313 |                 | $      | 652,635 |   |

 

*See accompanyingnotes to consolidated condensed financial statements.*

 

3

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**STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTSOF EARNINGS***(In thousands, except per share data)*

 
|                                                                                                 |   | **Three Months  Ended** |    | **Six Months Ended** |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|----------------------|--------|
|                                                                                                 |   | **August 2, 2003**      |    | **August 3, 2002**   |   | **August 2, 2003** |   | **August 3, 2002** |   |
|                                                                                                 |   | **(Unaudited)**         |    | **(Unaudited)**      |   |
|                                                                                                 |   |                    |    |                 |   |   |   |   |   |
| Sales                                                                                                |   | $                       | 312,851 |                 | $      | 285,035 |   | $ | 602,623 |   | $ | 584,705 |   |
| Cost of sales                                                                                        |   | 272,190                 |    | 243,158              |   | 521,082 |   | 499,076 |   |
|                                                                                                 |   |                    |    |                 |   |   |   |   |   |
| Gross profit                                                                                         |   | 40,661                  |    | 41,877               |   | 81,541 |   | 85,629 |   |
|                                                                                                 |   |                    |    |                 |   |   |   |   |   |
| Selling and administrative  expenses                                                                 |   | 36,515                  |    | 35,063               |   | 71,824 |   | 70,487 |   |
| Pension curtailment  expense                                                                         |   | —                  |    | —               |   | 2,400 |   | — |   |
| Interest expense                                                                                     |   | 693                     |    | 837                  |   | 1,936 |   | 1,969 |   |
| Interest and investment  income                                                                      |   | (559                    | )       | (374                 | )      | (1,059 | ) | (712 | ) |
| Other income, net                                                                                    |   | (564                    | )       | (492                 | )      | (476 | ) | (513 | ) |
|                                                                                                 |   | 36,085                  |    | 35,034               |   | 74,625 |   | 71,231 |   |
|                                                                                                 |   |                    |    |                 |   |   |   |   |   |
| Earnings from continuing  operations before income taxes                                             |   | 4,576                   |    | 6,843                |   | 6,916 |   | 14,398 |   |
| Income tax provision                                                                                 |   | 1,348                   |    | 2,236                |   | 2,029 |   | 4,895 |   |
| Net earnings from  continuing operations before cumulative effect of change in accounting  principle |   | 3,228                   |    | 4,607                |   | 4,887 |   | 9,503 |   |
| Loss from discontinued  operations, net of tax of $(284), $(2,649), $(710) and $(3,248)              |   | (158                    | )       | (5,503               | )      | (982 | ) | (6,600 | ) |
| Loss from disposal of  discontinued operations, net of tax of $(2,705)                               |   | —                  |    | (5,551               | )      | — |   | (5,551 | ) |
| Cumulative effect of  change in accounting principle, net of tax of $(1,798)                         |   | —                  |    | —               |   | — |   | (3,682 | ) |
| Net earnings (loss)                                                                                  |   | $                       | 3,070   |                 | $      | (6,447 | ) | $ | 3,905 |   | $ | (6,330 | ) |
|                                                                                                 |   |                    |    |                 |   |   |   |   |   |
| Weighted average shares  outstanding:                                                                |   |                    |    |                 |   |   |   |   |   |
| Basic                                                                                                |   | 28,522                  |    | 28,483               |   | 28,507 |   | 28,469 |   |
| Diluted                                                                                              |   | 28,967                  |    | 28,754               |   | 28,804 |   | 28,761 |   |
|                                                                                                 |   |                    |    |                 |   |   |   |   |   |
| Earnings (loss) per share:                                                                           |   |                    |    |                 |   |   |   |   |   |
| Basic:                                                                                               |   |                    |    |                 |   |   |   |   |   |
| Continuing operations  before cumulative effect                                                      |   | $                       | 0.11    |                 | $      | 0.16 |   | $ | 0.17 |   | $ | 0.33 |   |
| Loss from discontinued  operations, net                                                              |   | —                  |    | (0.39                | )      | (0.03 | ) | (0.43 | ) |
| Cumulative effect of  change in accounting principle                                                 |   | —                  |    | —               |   | — |   | (0.13 | ) |
| Net earnings (loss) per  share                                                                       |   | $                       | 0.11    |                 | $      | (0.23 | ) | $ | 0.14 |   | $ | (0.22 | ) |
|                                                                                                 |   |                    |    |                 |   |   |   |   |   |
| Diluted:                                                                                             |   |                    |    |                 |   |   |   |   |   |
| Continuing operations  before cumulative effect                                                      |   | $                       | 0.11    |                 | $      | 0.16 |   | $ | 0.17 |   | $ | 0.33 |   |
| Loss from discontinued  operations, net                                                              |   | —                  |    | (0.38                | )      | (0.03 | ) | (0.42 | ) |
| Cumulative effect of  change in accounting principle                                                 |   | —                  |    | —               |   | — |   | (0.13 | ) |
| Net earnings (loss) per  share                                                                       |   | $                       | 0.11    |                 | $      | (0.22 | ) | $ | 0.14 |   | $ | (0.22 | ) |
|                                                                                                 |   |                    |    |                 |   |   |   |   |   |
| Cash dividends per share                                                                             |   | $                       | 0.085   |                 | $      | 0.085 |   | $ | 0.170 |   | $ | 0.170 |   |

 

*See accompanying notes to consolidated condensed financialstatements.*

 

4

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**STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTSOF CASH FLOWS***(In thousands)*

 
|                                                                                                        |   | **Three Months  Ended** |   | **Six Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|----------------------|--------|
|                                                                                                        |   | **August 2, 2003**      |   | **August 3, 2002**   |   | **August 2, 2003** |   | **August 3, 2002** |   |
|                                                                                                        |   | **(Unaudited)**         |   | **(Unaudited)**      |   |
| **Operating  Activities**                                                                                   |   |                    |   |                 |   |   |   |   |   |
| Net earnings (loss)                                                                                         |   | $                       | 3,070  |                 | $      | (6,447 | ) | $ | 3,905 |   | $ | (6,330 | ) |
| Adjustments to reconcile  net earnings to net cash provided by (used in) operating activities:              |   |                    |   |                 |   |   |   |   |   |
| Net loss from discontinued  operations                                                                      |   | 158                     |   | 11,054               |   | 982 |   | 12,151 |   |
| Cumulative effect of  change in accounting principle                                                        |   | —                  |   | —               |   | — |   | 3,682 |   |
| Depreciation and  amortization                                                                              |   | 5,679                   |   | 5,575                |   | 11,221 |   | 10,427 |   |
| Change in operating assets  and liabilities net of the effect of acquisitions and discontinued  operations: |   |                    |   |                 |   |   |   |   |   |
| Accounts and notes  receivable, net                                                                         |   | (3,887                  | )      | 23,727               |   | 697 |   | 21,379 |   |
| Recoverable costs and  accrued profits not yet billed                                                       |   | (29,187                 | )      | (3,787               | )      | (32,821 | ) | (4,768 | ) |
| Inventories                                                                                                 |   | 12,796                  |   | (7,545               | )      | 7,373 |   | (12,698 | ) |
| Other current and  noncurrent assets                                                                        |   | (5,245                  | )      | (3,165               | )      | (6,879 | ) | 8,699 |   |
| Accounts payable                                                                                            |   | 16,988                  |   | 2,610                |   | 13,962 |   | (23,015 | ) |
| Accrued payrolls and  incentives                                                                            |   | (4,806                  | )      | (3,420               | )      | (2,289 | ) | (4,229 | ) |
| Billings in excess of  incurred costs                                                                       |   | 7,413                   |   | 23,209               |   | 9,043 |   | 28,113 |   |
| Other current liabilities                                                                                   |   | 1,465                   |   | 1,117                |   | 4,944 |   | 8,491 |   |
| Accrued postretirement  benefits and pension                                                                |   | (539                    | )      | 1,114                |   | 3,283 |   | 2,019 |   |
| Other long-term  liabilities                                                                                |   | (290                    | )      | (553                 | )      | (241 | ) | (749 | ) |
| **Net Cash  Provided By Continuing Operations**                                                             |   | 3,615                   |   | 43,489               |   | 13,180 |   | 43,172 |   |
| Net Cash Provided By (Used  In) Discontinued Operations                                                     |   | 212                     |   | (2,372               | )      | 3,490 |   | (4,583 | ) |
| **Net Cash  Provided By Operating Activities**                                                              |   | 3,827                   |   | 41,117               |   | 16,670 |   | 38,589 |   |
|                                                                                                        |   |                    |   |                 |   |   |   |   |   |
| **Investing  Activities**                                                                                   |   |                    |   |                 |   |   |   |   |   |
| Expenditures for property,  plant and equipment                                                             |   | (7,855                  | )      | (6,807               | )      | (11,552 | ) | (16,802 | ) |
| Acquisition of businesses                                                                                   |   | —                  |   | —               |   | (409 | ) | — |   |
| Disposal of property,  plant and equipment, net                                                             |   | 202                     |   | 804                  |   | 596 |   | 1,349 |   |
| **Net Cash  Used In Investing Activities**                                                                  |   | (7,653                  | )      | (6,003               | )      | (11,365 | ) | (15,453 | ) |
|                                                                                                        |   |                    |   |                 |   |   |   |   |   |
| **Financing  Activities**                                                                                   |   |                    |   |                 |   |   |   |   |   |
| Change in short-term notes  payable                                                                         |   | 20                      |   | (985                 | )      | 1,092 |   | (1,033 | ) |
| Payments on long-term  borrowings                                                                           |   | (30,000                 | )      | —               |   | (30,000 | ) | — |   |
| Dividends paid                                                                                              |   | (2,423                  | )      | (2,417               | )      | (4,845 | ) | (4,835 | ) |
| Proceeds from exercise of  stock options                                                                    |   | 855                     |   | 311                  |   | 896 |   | 635 |   |
| **Net Cash  Used In Financing Activities**                                                                  |   | (31,548                 | )      | (3,091               | )      | (32,857 | ) | (5,233 | ) |
|                                                                                                        |   |                    |   |                 |   |   |   |   |   |
| Increase (decrease) in  cash and cash equivalents                                                           |   | (35,374                 | )      | 32,023               |   | (27,552 | ) | 17,903 |   |
| Cash and cash equivalents,  beginning of period                                                             |   | 115,816                 |   | 67,318               |   | 107,994 |   | 81,438 |   |
| Cash and cash equivalents,  end of period                                                                   |   | $                       | 80,442 |                 | $      | 99,341 |   | $ | 80,442 |   | $ | 99,341 |   |
|                                                                                                        |   |                    |   |                 |   |   |   |   |   |
| Cash Paid For:                                                                                              |   |                    |   |                 |   |   |   |   |   |
| Interest                                                                                                    |   | $                       | 2,257  |                 | $      | 2,185 |   | $ | 2,425 |   | $ | 2,534 |   |
| Income taxes (excluding  refunds)                                                                           |   | 2,907                   |   | 2,991                |   | 3,010 |   | 3,463 |   |

 

*See accompanying notes to consolidated condensed financialstatements.*

 

5

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**STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATEDCONDENSED FINANCIAL 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 six months ended August 2, 2003 are notnecessarily indicative of the results that will be realized for the fiscal yearending January 31, 2004.

 

TheCompany’s fiscal year begins on February 1 of the year stated and ends onJanuary 31 of the following year. For example, the Company’s “Fiscal 2003” commenced on February 1,2003 and ends on January 31, 2004. The Company reports results on the fiscal quarter method with eachquarter 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 theCompany’s Annual Report on Form 10-K for the year ended January 31, 2003.

 

Theaccompanying consolidated condensed financial statements for Fiscal 2002 andrelated 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** |       | **Six Months Ended** |       |
|----------------------------------------------------------|--------|------------------------|------------|----------------------|------------|
|                                                     |   | **August 2, 2003**     |       | **August 3, 2002**   |       | **August 2, 2003** |   | **August 3, 2002** |   |
|                                                     |   |                   | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| Net earnings (loss)                                      |   | $                      | 3,070      |                 | $          | (6,447 | ) | $ | 3,905 |   | $ | (6,330 | ) |
| Unrealized gain (loss) on  forward contracts, net of tax |   | (132                   | )          | 397                  |       | (98 | ) | 284 |   |
| Currency translation gain  (loss), net of tax            |   | (287                   | )          | (1,239               | )          | (178 | ) | (1,472 | ) |
| Comprehensive income  (loss)                             |   | $                      | 2,651      |                 | $          | (7,289 | ) | $ | 3,629 |   | $ | (7,518 | ) |

 

**Note 3 - Segment Information**

 

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

 

•                  The Utilities Equipment business has beenremoved from the Airline Products segment and identified as a separatereporting segment.  The UtilitiesEquipment business, which manufactures mobile railcar movers, snowblowers andoff-road seismic vehicles, has been consolidated with Distributed EnergySolutions and Petroleum Equipment in the newly formed Engineered ProductsDivision.

 

•                  Certain business operations, which wereexited in 2002, have been reclassified from Other Business Activities to thePower Products segment.  This businessoperation consisted primarily of sales of gas compression equipment.

 

•                  The marketing services andtransportation/logistics business units were reclassified from the PowerProducts segment to Other Business Activities. These business units provide services to both internal customers andexternal unaffiliated customers.

 

•                  Interest and investment income has beenremoved from segment operating profit (loss) measurements.

 

The corresponding segment informationfor Fiscal 2002 has been restated to conform to the new business segmentpresentation.  Intercompany sales havebeen eliminated in all periods presented.

 

6

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

 
|                                                         |   | **Three Months  Ended** |    | **Six Months Ended** |   |
|--------------------------------------------------------------|--------|-------------------------|---------|----------------------|--------|
|                                                         |   | **August 2, 2003**      |    | **August 3, 2002**   |   | **August 2, 2003** |   | **August 3, 2002** |   |
| **Sales**                                                    |   |                    |    |                 |   |   |   |   |   |
| Tactical Vehicle Systems                                     |   | $                       | 108,365 |                 | $      | 105,405 |   | $ | 219,342 |   | $ | 220,866 |   |
| Power Products                                               |   | 126,825                 |    | 133,522              |   | 251,175 |   | 282,798 |   |
| Engineered Products:                                         |   |                    |    |                 |   |   |   |   |   |
| Petroleum Equipment                                          |   | 34,779                  |    | 8,792                |   | 57,839 |   | 15,310 |   |
| Distributed Energy  Solutions                                |   | 20,033                  |    | 17,832               |   | 33,102 |   | 29,615 |   |
| Utilities Equipment                                          |   | 3,436                   |    | 1,803                |   | 6,024 |   | 3,387 |   |
| Airline Products                                             |   | 18,352                  |    | 15,353               |   | 32,596 |   | 28,070 |   |
| Other Business Activities                                    |   | 1,061                   |    | 2,328                |   | 2,545 |   | 4,659 |   |
| Total Sales                                                  |   | $                       | 312,851 |                 | $      | 285,035 |   | $ | 602,623 |   | $ | 584,705 |   |
|                                                         |   |                    |    |                 |   |   |   |   |   |
| **Operating  Profit (Loss)**                                 |   |                    |    |                 |   |   |   |   |   |
| Tactical Vehicle Systems                                     |   | $                       | 17,283  |                 | $      | 15,577 |   | $ | 35,066 |   | $ | 30,491 |   |
| Power Products                                               |   | (5,196                  | )       | 332                  |   | (8,047 | ) | 3,607 |   |
| Engineered Products:                                         |   |                    |    |                 |   |   |   |   |   |
| Petroleum Equipment                                          |   | 1,625                   |    | (1,527               | )      | 2,233 |   | (2,091 | ) |
| Distributed Energy  Solutions                                |   | (2,990                  | )       | (2,052               | )      | (6,972 | ) | (4,253 | ) |
| Utilities Equipment                                          |   | (923                    | )       | (569                 | )      | (1,815 | ) | (1,488 | ) |
| Airline Products                                             |   | (712                    | )       | (993                 | )      | (2,704 | ) | (3,207 | ) |
| Other Business Activities                                    |   | (527                    | )       | 221                  |   | (1,048 | ) | 174 |   |
| Total Operating Profit                                       |   | 8,560                   |    | 10,989               |   | 16,713 |   | 23,233 |   |
|                                                         |   |                    |    |                 |   |   |   |   |   |
| Corporate expenses, net                                      |   | (3,850                  | )       | (3,683               | )      | (6,520 | ) | (7,578 | ) |
| Pension curtailment  expense                                 |   | —                  |    | —               |   | (2,400 | ) | — |   |
| Interest and investment  income                              |   | 559                     |    | 374                  |   | 1,059 |   | 712 |   |
| Interest expense                                             |   | (693                    | )       | (837                 | )      | (1,936 | ) | (1,969 | ) |
| **Earnings  from continuing operations before income taxes** |   | $                       | 4,576   |                 | $      | 6,843 |   | $ | 6,916 |   | $ | 14,398 |   |
|                                                         |   |                    |    |                 |   |   |   |   |   |
| **Operating  Profit (Loss) Percentage**                      |   |                    |    |                 |   |   |   |   |   |
| Tactical Vehicle Systems                                     |   | 15.9                    | %       | 14.8                 | %      | 16.0 | % | 13.8 | % |
| Power Products                                               |   | (4.1                    | )       | 0.2                  |   | (3.2 | ) | 1.3 |   |
| Engineered Products:                                         |   |                    |    |                 |   |   |   |   |   |
| Petroleum Equipment                                          |   | 4.7                     |    | (17.4                | )      | 3.9 |   | (13.7 | ) |
| Distributed Energy  Solutions                                |   | (14.9                   | )       | (11.5                | )      | (21.1 | ) | (14.4 | ) |
| Utilities Equipment                                          |   | (26.9                   | )       | (31.6                | )      | (30.1 | ) | (43.9 | ) |
| Airline Products                                             |   | (3.9                    | )       | (6.5                 | )      | (8.3 | ) | (11.4 | ) |
| Other Business Activities                                    |   | (49.7                   | )       | 9.5                  |   | (41.2 | ) | 3.7 |   |
| Consolidated                                                 |   | 2.7                     | %       | 3.9                  | %      | 2.8 | % | 4.0 | % |

 

Selling and administrativeexpenses in Fiscal 2003 include costs associated with restructuring activities,primarily related to the consolidation of manufacturing operations in theEngineered Products Division and severance and other costs related to theelimination of certain positions in the Power Products and Corporate segments.  A summary of restructuring costs incurredfor the three and six months ended August 2, 2003 follows *(in thousands)*:

 
|                                       |   | **Three Months  Ended  August 2, 2003** |   | **Six Months Ended  August 2, 2003** |   |
|--------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------|--------|
| Power Products                             |   | $                                       | — |                                 | $      | 282 |   |
| Engineered Products:                       |   |                                    |   |                                 |   |
| Petroleum Equipment                        |   | 194                                     |   | 367                                  |   |
| Distributed Energy  Solutions              |   | 442                                     |   | 967                                  |   |
| Utilities Equipment                        |   | 289                                     |   | 548                                  |   |
| Corporate                                  |   | 1,325                                   |   | 1,737                                |   |
| Total restructuring costs  incurred        |   | $                                       | 2,250  |                                 | $      | 3,901 |   |
| Severance costs included  in restructuring |   | $                                       | 1,300  |                                 | $      | 2,000 |   |

 

7

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As of August 2, 2003,$1.8 million of restructuring costs were accrued and expected to be paid infuture periods.

 

**Note 4 –Recent Accounting Pronouncements**

 

InJune 2001, the Financial Accounting Standard Board (“FASB”) issuedStatement Of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill andOther Intangible Assets.”  SFAS No. 142requires that the balance sheet valuation of goodwill and other intangibleassets be evaluated for impairment at least annually.  Further, it requires that amortization of goodwill ceasebeginning with the Company’s Fiscal 2002. The Company implemented SFAS No. 142 effective February 1, 2002and, accordingly, net goodwill balances as of such date were tested forimpairment by comparing the fair value of each reporting unit to its carryingvalue.  Fair value was determined usingdiscounted estimated future cash flows and market multiples of earningsestimates.  Significant estimates usedin the methodologies included estimates of future earnings, future growthrates, weighted average cost of capital and market valuation multiples for eachreporting unit.  Based upon theseimpairment tests performed upon adoption of SFAS No. 142, the Companyrecognized, as a cumulative effect of a change in accounting principle in thefirst quarter of Fiscal 2002, a charge of $3.7 million, or $0.13 per dilutedshare, net of tax benefit of $1.8 million. This impairment charge primarily related to the Airline Productssegment.

 

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

 

InNovember 2002, the FASB issued Interpretation (“FIN”) No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” which requires a guarantor to recognize,at the inception of a guarantee, a liability for the fair value of theobligations 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.

 

InJanuary 2003, the FASB issued FIN No. 46, “Consolidation of VariableInterest Entities,” which requires that a company that controls another entitythrough interests other than voting interests should consolidate suchcontrolled entity.  FIN No. 46 appliesto variable interest entities created after January 31, 2003, and is effectivefor interim periods beginning after June 15, 2003 for existing variableinterest entities.  As the Company hasno material exposures to special purpose entities or other off-balance sheetarrangements, the adoption of FIN No. 46 is not expected to have a materialeffect 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.

 

8

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Thefollowing pro forma data are calculated as if compensation expense for theCompany’s stock option plans was determined based on the fair value at thegrant 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** |   | **Six Months Ended** |   |
|---------------------------------------------------------------------------------|--------|-------------------------|--------|----------------------|--------|
| **(In thousands,  except per share data)**                                      |   | **August 2, 2003**      |   | **August 3, 2002**   |   | **August 2, 2003** |   | **August 3, 2002** |   |
|                                                                            |   |                    |   |                 |   |   |   |   |   |
| Net earnings (loss):                                                            |   |                    |   |                 |   |   |   |   |   |
| As reported                                                                     |   | $                       | 3,070  |                 | $      | (6,447 | ) | $ | 3,905 |   | $ | (6,330 | ) |
| Pro forma compensation  expense, determined under fair value method, net of tax |   | (443                    | )      | (503                 | )      | (682 | ) | (1,003 | ) |
| Pro forma                                                                       |   | $                       | 2,627  |                 | $      | (6,950 | ) | $ | 3,223 |   | $ | (7,333 | ) |
|                                                                            |   |                    |   |                 |   |   |   |   |   |
| Basic earnings (loss) per  share:                                               |   |                    |   |                 |   |   |   |   |   |
| As reported                                                                     |   | $                       | 0.11   |                 | $      | (0.23 | ) | $ | 0.14 |   | $ | (0.22 | ) |
| Pro forma                                                                       |   | 0.09                    |   | (0.24                | )      | 0.11 |   | (0.26 | ) |
|                                                                            |   |                    |   |                 |   |   |   |   |   |
| Diluted earnings (loss)  per share:                                             |   |                    |   |                 |   |   |   |   |   |
| As reported                                                                     |   | $                       | 0.11   |                 | $      | (0.22 | ) | $ | 0.14 |   | $ | (0.22 | ) |
| Pro forma                                                                       |   | 0.09                    |   | (0.24                | )      | 0.11 |   | (0.25 | ) |

 

For purposes of the proforma disclosures, the fair value of each option grant is estimated on the dateof grant using the Black-Scholes option pricing model.

 

**Note 5 -Commitments and Contingencies**

 

Asa custom packager of power systems, the Company issues bid and performanceguarantees in the form of performance bonds or standby letters of credit.  As of August 2, 2003 andJanuary 31, 2003, performance type letters of credit totaled approximately$9.4 million and $5.7 million, respectively. In addition, the Company had contingent performance indemnities ofapproximately $6.7 million as of August 2, 2003 and January 31, 2003.

 

TheCompany has provided certain guarantees in support of its customers’ financingof purchases from the Company in the form of debt guarantees.  Pursuant to such guarantees, once thecustomer has satisfied its debt obligation to the lender, the Company’sguarantee is released.  Should acustomer fail to meet its obligation to the lender, the lender could requirethe Company to satisfy such obligation, in which case the Company would havesome legal recourse against the customer. The amount of such guarantees is approximately $0.6 million and $0.9million as of August 2, 2003 and January 31, 2003, respectively.

 

TheCompany leases certain facilities and equipment from third parties underoperating lease arrangements of varying terms whose annual rentals are lessthan 1% of consolidated sales.

 

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

 

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

 

TheCompany is a defendant in a suit brought under the *qui tam* provision of the False Claims Act, United States ofAmerica, *ex rel.  Werner Stebner v. Stewart & Stevenson Services, Inc. andMcLaughlin Body Co.*, Civil Action No. H-96-3363, in the UnitedStates District Court for the Southern District of Texas, HoustonDivision.  The plaintiff’s complaintseeks penalties and damages in an unspecified amount.  The suit alleges that the Company made false statements andcertifications in connection with claims for payment for Family of MediumTactical Vehicles delivered to the U.S. Army starting in 1995, and the suitalleges that the vehicles were substandard because of corrosion problems.  The suit was filed under seal in 1996, andfollowing an investigation by the Justice Department, the United Statesdeclined to intervene in the suit, which was unsealed on August 29,2000.  The case is set for trial in

 

9

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January 2004.  The Company believes the claims in the suitare without merit and is vigorously defending the suit.  Nevertheless, an unexpected outcome in thesuit could have a material adverse impact on the Company’s results ofoperations, consolidated financial position and liquidity.

 

TheCompany is a defendant in a suit brought by several subsidiaries of DiamondOffshore Drilling, Inc. (collectively, “Diamond Offshore”) on May 30,2002, arising out of claims relating to a marine riser manufactured by theCompany and purchased by Diamond Offshore for use on its Ocean Baroness semi-submersibledrilling rig, Cause No. 2002-27831; *DiamondOffshore International Corporation, Diamond Offshore Company, Diamond OffshoreServices Company, Diamond Offshore (USA), Inc., Diamond Offshore InternationalLimited, and Diamond Offshore Drilling, Ltd. v. Stewart & StevensonServices, Inc.*; in the District Court of Harris County, Texas 125thJudicial District Court (the “Baroness Litigation”).  The suit was filed following a separation of the marine riserduring deep water drilling operations and seeks to recover damages that are notspecified in the complaint.

 

Ina separate transaction on or about September 13, 2001, Diamond Offshorecontracted with the Company for a marine riser for use on its Ocean Roversemi-submersible drilling rig.  TheCompany was fulfilling this contract, when, on August 19, 2002, Diamondoffshore amended its petition in the Baroness Litigation to seek a declarationthat 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.

 

Itis presently impossible to determine the ultimate outcome of these matters orwhether the resolution will have a material adverse effect on the Company’sresults of operations, consolidated financial position or liquidity, though theCompany has recorded reserves that it believes are adequate for certainestimated legal fees associated with such matters as of the balance sheet date.

 

In2001, the Company received from the United States Environmental ProtectionAgency (the “EPA”) a Request for Information under Section 104(e) of theComprehensive Environmental Response, Compensation, and Liability Act of 1980,for information pertaining to the R&H Oil Company Site in San Antonio,Texas (the “Site”).  Informationprovided to the Company by the EPA indicates that the Company may have sentwaste oils to the Site for recycling in the late 1980s, and that such wasteoils may potentially account for between one and two percent of the volume oftotal wastes received by the oil recycler at the Site.  Since the Company expects to receive a claimfor cleanup and other costs related to this site, it has established additionalreserves in Fiscal 2002, which it believes to be adequate at this time.  As additional facts are developed anddefinitive remediation plans and necessary regulatory approvals forimplementation of remediation are established, changes in these and otherfactors may result in actual costs exceeding the current environmental reserves.While uncertainties are inherent in the final outcome of these environmentalmatters, and it is presently impossible to determine the actual costs thatultimately may be incurred, management currently believes that the resolutionof such uncertainties should not have a material adverse effect on theCompany’s results of operations, consolidated financial position or liquidity.

 

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

 

TheCompany is also a defendant in a number of lawsuits relating to contractual,product liability, personal injury and warranty matters normally incident tothe Company’s business.  No individualcase, or group of cases presenting substantially similar issues of law or fact,are expected to have a material effect on the manner in which the Companyconducts its business or on its consolidated financial position orliquidity.  The Company maintainscertain insurance policies that provide coverage for product liability and personalinjury cases.  The Company has establishedreserves that it believes to be adequate based on current evaluations.  Nevertheless, an unexpected outcome in suchcases could have a material adverse impact on the results of operations in theperiod it occurs.  Moreover, futureadverse developments in such cases could require material changes in therecorded reserve amounts.

 

**Note 6 – Government Contracting**

 

TheU.S. government is one of the Company’s key customers. As such, decreasedgovernment spending or termination of significant government programs couldadversely 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 fifthproduction year of its second multi-year contract with the U.S. Department ofthe Army (“U.S. Army”) for production of the Family of Medium Tactical Vehicles(“FMTV”).  In the fourth quarter ofFiscal 2002, the U.S. Army exercised an option to award a sixth program year tothe current contract, which begins in October 2003 and is expected to becompleted by September 2004.  Thefunding of the FMTV contract is subject to the inherent uncertainties ofCongressional appropriations.  As istypical of multi-year defense contracts that may be canceled or adjusted by thegovernment, the FMTV contract must be funded annually by the U.S. Army and maybe terminated at

 

10

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anytime for the convenience of the government. If the FMTV contract is terminated, other than for the Company’s default(in which event there could be serious adverse consequences and claims againstthe Company), it provides for termination charges that will reimburse theCompany for certain allowable costs but not necessarily for all costs incurred.

 

InApril 2003, the U.S. Army awarded the Company the FMTV A1 CompetitiveRebuy (“A1CR”) production contract.  TheA1CR contract includes production of nearly 11,000 FMTV trucks and trailersover a five-year period, with an option for 12,000 additional vehicles.  Production under the A1CR contract isexpected to begin in October 2004, after completion of the current FMTVcontract.  The Company’s profit marginson the A1CR contract are expected to be lower than historical margin levels forthe current FMTV contract.

 

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

 

**Note 7 -Discontinued Operations**

 

During the fourth quarter ofFiscal 2001, the Company determined that the Petroleum Equipment segment’sblowout preventer and controls, valve and drilling riser business was notstrategically aligned with the Company’s core competencies.  The Company announced its intention to sellthis business and, consequently, these activities were reclassified forreporting purposes for all periods shown as discontinued operations.  These discontinued operations generated thefollowing sales and operating losses in the three- and six-month periods endedAugust 2, 2003 and August 3, 2002:

 
|                          |   | **Three Months  Ended** |       | **Six Months Ended** |       |
|-------------------------------|--------|-------------------------|------------|----------------------|------------|
| **(In thousands)**            |   | **August 2, 2003**      |       | **August 3, 2002**   |       | **August 2, 2003** |   | **August 3, 2002** |   |
|                          |   |                    | ** ** |                 | ** ** |   | ** ** |   | ** ** |
| Sales                         |   | 942                     |       | 5,248                |       | 1,380 |   | 15,183 |   |
| Operating loss                |   | (442                    | )          | (8,152               | )          | (1,692 | ) | (9,848 | ) |
| Operating loss, net of  taxes |   | (158                    | )          | (5,503               | )          | (982 | ) | (6,600 | ) |

 

Additionally, the Companyrecognized a loss from the disposal of such discontinued operations in thesecond quarter of Fiscal 2002 of $8.3 million ($5.6 million, net of tax).

 

When the transactionconsummated on September 13, 2002, the Company sold certain assets andretained certain contracts and related assets as well as the receivables andcertain liabilities of the business, including warranty responsibility forproducts sold before closing as well as warranty responsibility for retainedcontracts to be completed.  In somecases, the Company has agreements with customers on commitments to support itsproducts, including retained warranties and contracts.

 

**Note 8 –Inventories**

 

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

 
| **(In thousands)**                       |   | **August 2, 2003** |       | **January 31, 2003** |       |
|------------------------------------------|--------|--------------------|------------|----------------------|------------|
|                                     |   |               | ** ** |                 | ** ** |
| Tactical Vehicle Systems                 |   | $                  | 6,631      |                 | $          | 7,444 |   |
| Power Products                           |   | 150,055            |       | 141,649              |       |
| Engineered Products  Division:           |   |               |       |                 |       |
| Distributed Energy  Solutions            |   | 35,871             |       | 44,514               |       |
| Petroleum Equipment                      |   | 6,754              |       | 12,314               |       |
| Utilities Equipment                      |   | 12,375             |       | 10,018               |       |
| Airline Products                         |   | 25,951             |       | 28,468               |       |
| Other Business Activities                |   | 23                 |       | 9                    |       |
|                                     |   | 237,660            |       | 244,416              |       |
| Excess of current cost  over LIFO values |   | (43,401            | )          | (42,785              | )          |
| Total Inventories                        |   | $                  | 194,259    |                 | $          | 201,631 |   |

 

11

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

 

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

 

**Note 9 –Earnings Per Share**

 

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

 
|                                                            |   | **Three Months  Ended** |   | **Six Months Ended** |   |
|-----------------------------------------------------------------|--------|-------------------------|--------|----------------------|--------|
| **(In thousands,  except per share data)**                      |   | **August 2, 2003**      |   | **August 3, 2002**   |   | **August 2, 2003** |   | **August 3, 2002** |   |
| Numerator:                                                      |   |                    |   |                 |   |   |   |   |   |
| Earnings available to  common shareholders                      |   |                    |   |                 |   |   |   |   |   |
| From continuing operations                                      |   | $                       | 3,228  |                 | $      | 4,607 |   | $ | 4,887 |   | $ | 9,503 |   |
| From discontinued  operations                                   |   | (158                    | )      | (11,054              | )      | (982 | ) | (12,151 | ) |
| From cumulative effect of  change in accounting principle       |   | —                  |   | —               |   | — |   | (3,682 | ) |
| Net earnings (loss)                                             |   | $                       | 3,070  |                 | $      | (6,447 | ) | $ | 3,905 |   | $ | (6,330 | ) |
|                                                            |   |                    |   |                 |   |   |   |   |   |
| Denominator:                                                    |   |                    |   |                 |   |   |   |   |   |
| Denominator for basic  earnings per share                       |   |                    |   |                 |   |   |   |   |   |
| Weighted average shares  outstanding                            |   | 28,522                  |   | 28,483               |   | 28,507 |   | 28,469 |   |
| Effect of dilutive  securities:                                 |   |                    |   |                 |   |   |   |   |   |
| Employee and director  stock options                            |   | 445                     |   | 271                  |   | 297 |   | 292 |   |
| Denominator for diluted  earnings per share -                   |   |                    |   |                 |   |   |   |   |   |
| Adjusted weighted average  shares outstanding                   |   | 28,967                  |   | 28,754               |   | 28,804 |   | 28,761 |   |
|                                                            |   |                    |   |                 |   |   |   |   |   |
| Basic earnings (loss) per  share:                               |   |                    |   |                 |   |   |   |   |   |
| From continuing operations                                      |   | $                       | 0.11   |                 | $      | 0.16 |   | $ | 0.17 |   | $ | 0.33 |   |
| From discontinued  operations                                   |   | —                  |   | (0.39                | )      | (0.03 | ) | (0.43 | ) |
| From cumulative effect of  change in accounting principle       |   | —                  |   | —               |   | — |   | (0.13 | ) |
| Net earnings (loss) per  share                                  |   | $                       | 0.11   |                 | $      | (0.23 | ) | $ | 0.14 |   | $ | (0.22 | ) |
|                                                            |   |                    |   |                 |   |   |   |   |   |
| Diluted earnings (loss)  per share:                             |   |                    |   |                 |   |   |   |   |   |
| From continuing operations                                      |   | $                       | 0.11   |                 | $      | 0.16 |   | $ | 0.17 |   | $ | 0.33 |   |
| From discontinued  operations                                   |   | —                  |   | (0.38                | )      | (0.03 | ) | (0.42 | ) |
| From cumulative effect of  change in accounting principle       |   | —                  |   | —               |   | — |   | (0.13 | ) |
| Net earnings (loss) per  share                                  |   | $                       | 0.11   |                 | $      | (0.22 | ) | $ | 0.14 |   | $ | (0.22 | ) |
|                                                            |   |                    |   |                 |   |   |   |   |   |
| Number of shares under  anti-dilutive stock options outstanding |   | 1,255                   |   | 1,396                |   | 1,255 |   | 1,361 |   |

 

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**Note 10 –Warranty Costs**

 

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

 

A summary of warrantyactivity for the three and six months ended August 2, 2003 follows *(in thousands):*

 
|                                            |   | **Three Months  Ended  August 2, 2003** |   | **Six Months Ended  August 2, 2003** |   |
|-------------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------|--------|
| Accrued warranty costs -  Beginning of period   |   | $                                       | 4,795  |                                 | $      | 6,073 |   |
| Payments for completed  warranty obligations    |   | (1,401                                  | )      | (3,912                               | )      |
| Warranty accrual for  current period production |   | 1,683                                   |   | 2,916                                |   |
| Adjustments to warranty  accrual                |   | 280                                     |   | 280                                  |   |
| Accrued warranty costs -  End of period         |   | $                                       | 5,357  |                                 | $      | 5,357 |   |

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

Thisdiscussion should be read in conjunction with the attached condensedconsolidated financial statements and notes thereto, and with our Form 10-K andnotes thereto for the fiscal year ended January 31, 2003.  The following discussion containsforward-looking statements.  Inconnection therewith, please see the Cautionary Statements contained in our Form10-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.

 

Ourfiscal year begins on February 1 of the year stated and ends onJanuary 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 secondquarter of Fiscal 2003 commenced on May 4, 2003 and ended onAugust 2, 2003, and the second quarter of Fiscal 2002 commenced onMay 5, 2002 and ended on August 3, 2002.

 

**RESULTS OF OPERATIONS**

 

Salesfor the second quarter of Fiscal 2003 increased $27.8 million, or 10%, from thesecond quarter of Fiscal 2002.  Thisincrease in sales was driven largely by higher sales in the Petroleum Equipmentsegment.  For the first half of Fiscal2003, sales increased $17.9 million, or 3%, from the first half of 2002.  This increase is also attributable to thehigher sales in the Petroleum Equipment segment, as well as increased sales inthe Airline Products, Distributed Energy Solutions, and Utilities Equipmentsegments.  The sales increases in thesesegments in the first half of the year were partially offset by a decrease inPower Products segment sales.

 

Grossprofit decreased $1.2 million to $40.7 million in the second quarter of Fiscal2003 from the second quarter of Fiscal 2002, and decreased $4.1 million to$81.5 million in the first half of Fiscal 2003 from the first half of Fiscal2002.  Gross profit margin decreased to13.5% in the first half of Fiscal 2003 compared to 14.6% for the same period of2002.  The decline in gross profitmargin for the second quarter and first half of Fiscal 2003 are primarilyattributable to the change in segment sales mix, as margin rates in thesegments experiencing the largest sales increases are generally lower than thecompany average.  Additionally, incomparing Fiscal 2003 year-to-date results to Fiscal 2002, gross profit marginshave deteriorated within the Power Products segment, primarily as a result oflower sales volume.

 

Sellingand administrative expenses increased by $1.5 million, or 4.1%, to $36.5million in the second quarter of Fiscal 2003 from the second quarter of Fiscal 2002,and increased by $1.3 million, or 1.9%, to $71.8 million in the first half ofFiscal 2003 from the first half of Fiscal 2002.  Selling and administrative expenses in Fiscal 2003 include costsassociated with restructuring activities, primarily related to theconsolidation of manufacturing operations in the Engineered Products Divisionand severance and other costs related to the elimination of certain positionsin the Power Products and Corporate segments. A summary of restructuring costs incurred for the three and six monthsended August 2, 2003 follows *(inthousands)*:

 
|                                       |   | **Three Months  Ended  August 2, 2003** |   | **Six Months Ended  August 2, 2003** |   |
|--------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------|--------|
| Total restructuring costs  incurred        |   | $                                       | 2,250  |                                 | $      | 3,901 |   |
| Severance costs included  in restructuring |   | 1,300                                   |   | 2,000                                |   |
|                                            |        |                                         |        |                                      |        |  |  |

 

As of August 2, 2003,$1.8 million of restructuring costs were accrued and expected to be paid infuture periods.  In addition, we expectto incur $0.5 million to $1.0 million of additional restructuring expenses inFiscal 2003 to complete the Engineering Products Division consolidation.  Excluding costs related to restructuringactivities, selling and administrative expenses as a percentage of salesdeclined to 11.3% for the six months ended August 2, 2003, compared to12.1% for the corresponding period of Fiscal 2002.  This improvement is primarily attributable to expense reductionsresulting from changes to our defined benefit plans and other cost reductionefforts.

 

During the first quarter ofFiscal 2003, we decided to freeze the benefits earned under our defined benefitpension plan, defined benefit supplemental executive retirement plan and ourpostretirement medical plan effective July 1, 2003.  These changes are expected to reduce pensionand postretirement benefits expense by over $5.0 million in Fiscal 2003.  The first quarter 2003 operating resultsincluded a one-time non-cash write-off of $2.4 million of previouslyunamortized prior service costs (pension curtailment expense).

 

Compared to thecorresponding periods of Fiscal 2002, net interest expense decreased $0.4million to $0.1 million in the second quarter of Fiscal 2003 and by $0.3million to $0.9 million in the first half of Fiscal 2003.  The decrease in interest expense isprimarily attributable to the payment of $30.0 million on long-term borrowingsin May 2003.  Additionally, thesecond quarter of Fiscal 2003 included $0.3 million of interest incomeresulting from the completion of a federal income tax audit of certain prioryears.

 

The net income tax provisiondecreased in the Fiscal 2003 periods compared to the corresponding periods inFiscal 2002 as a result of the lower current year earnings.  The effective tax rate was 29.3% in thefirst half of Fiscal 2003 compared to 34.0% for the corresponding

 

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period in 2002.  The decline in effective tax rate isprimarily a result of certain state tax benefits and tax credits in Fiscal 2003being a larger proportion of the pre-tax earnings than in Fiscal 2002.

 

Discontinued operationsgenerated an after-tax loss of $0.2 million in the second quarter of Fiscal2003 and $1.0 million in the first half of Fiscal 2003, compared to $5.5million and $6.6 million in the corresponding periods in Fiscal 2002,respectively.  These losses primarilyrepresent costs associated with retained contracts, warranty and legal claimsand obligations associated with our discontinued blowout preventer andcontrols, valve and drilling 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.

 

In the first quarter ofFiscal 2002, we recognized, as a cumulative effect of a change in accountingprinciple, a charge of $3.7 million net of tax, or $0.13 per diluted share,upon adoption of new accounting standards related to the valuation of goodwilland other intangible assets.

 

**SEGMENTDATA**

 

Wereport financial results in six business segments based on distinct product andcustomer types.  Three of these segmentshave been combined in Fiscal 2003 into the Engineered Products Division.  This division includes the Petroleum Equipment,Distributed Energy Solutions and Utilities Equipment business segments.  The remaining three segments includeTactical Vehicle Systems, Power Products and Airline Products.  Businesses not otherwise classified areshown 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.

 

Thefollowing table represents sales and operating profit (loss) by businesssegment *(in thousands)*:

 
|                                                         |   | **Three Months  Ended** |    | **Six Months Ended** |   |
|--------------------------------------------------------------|--------|-------------------------|---------|----------------------|--------|
|                                                         |   | **August 2, 2003**      |    | **August 3, 2002**   |   | **August 2, 2003** |   | **August 3, 2002** |   |
| **Sales**                                                    |   |                    |    |                 |   |   |   |   |   |
| Tactical Vehicle Systems                                     |   | $                       | 108,365 |                 | $      | 105,405 |   | $ | 219,342 |   | $ | 220,866 |   |
| Power Products                                               |   | 126,825                 |    | 133,522              |   | 251,175 |   | 282,798 |   |
| Engineered Products Division:                                |   |                    |    |                 |   |   |   |   |   |
| Petroleum Equipment                                          |   | 34,779                  |    | 8,792                |   | 57,839 |   | 15,310 |   |
| Distributed Energy  Solutions                                |   | 20,033                  |    | 17,832               |   | 33,102 |   | 29,615 |   |
| Utilities Equipment                                          |   | 3,436                   |    | 1,803                |   | 6,024 |   | 3,387 |   |
| Airline Products                                             |   | 18,352                  |    | 15,353               |   | 32,596 |   | 28,070 |   |
| Other Business Activities                                    |   | 1,061                   |    | 2,328                |   | 2,545 |   | 4,659 |   |
| Total Sales                                                  |   | $                       | 312,851 |                 | $      | 285,035 |   | $ | 602,623 |   | $ | 584,705 |   |
|                                                         |   |                    |    |                 |   |   |   |   |   |
| **Operating  Profit (Loss)**                                 |   |                    |    |                 |   |   |   |   |   |
| Tactical Vehicle Systems                                     |   | $                       | 17,283  |                 | $      | 15,577 |   | $ | 35,066 |   | $ | 30,491 |   |
| Power Products                                               |   | (5,196                  | )       | 332                  |   | (8,047 | ) | 3,607 |   |
| Engineered Products  Division:                               |   |                    |    |                 |   |   |   |   |   |
| Petroleum Equipment                                          |   | 1,625                   |    | (1,527               | )      | 2,233 |   | (2,091 | ) |
| Distributed Energy  Solutions                                |   | (2,990                  | )       | (2,052               | )      | (6,972 | ) | (4,253 | ) |
| Utilities Equipment                                          |   | (923                    | )       | (569                 | )      | (1,815 | ) | (1,488 | ) |
| Airline Products                                             |   | (712                    | )       | (993                 | )      | (2,704 | ) | (3,207 | ) |
| Other Business Activities                                    |   | (527                    | )       | 221                  |   | (1,048 | ) | 174 |   |
| Total Operating Profit                                       |   | 8,560                   |    | 10,989               |   | 16,713 |   | 23,233 |   |
|                                                         |   |                    |    |                 |   |   |   |   |   |
| Corporate expenses, net                                      |   | (3,850                  | )       | (3,683               | )      | (6,520 | ) | (7,578 | ) |
| Pension curtailment  expense                                 |   | —                  |    | —               |   | (2,400 | ) | — |   |
| Interest and investment  income                              |   | 559                     |    | 374                  |   | 1,059 |   | 712 |   |
| Interest expense                                             |   | (693                    | )       | (837                 | )      | (1,936 | ) | (1,969 | ) |
| **Earnings  from continuing operations before income taxes** |   | $                       | 4,576   |                 | $      | 6,843 |   | $ | 6,916 |   | $ | 14,398 |   |

 

**Tactical Vehicle Systems**

 

TheTactical Vehicle Systems segment, which manufactures tactical vehicles for theU.S. Army and others, recorded sales of $108.4 million in the second quarter ofFiscal 2003 compared to $105.4 million a year ago.  The increase in sales was due to higher truck

 

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volumeswhile the level of service and other revenue was relatively unchanged.  For the first half, segment sales were$219.3 million in Fiscal 2003, down slightly from $220.9 million in Fiscal2002.  The segment delivered 1,275trucks and 258 trailers in the first six months of Fiscal 2003, compared to1,177 trucks and 262 trailers in the first six months of Fiscal 2002.  By comparison, the Fiscal 2003 quantitiesincluded a lower proportion of large vehicles, which have higher unit salesprices.  Operating profit for the secondquarter of Fiscal 2003 increased to $17.3 million (15.9% operating margin) from$15.6 million (14.8% operating margin) in the second quarter of Fiscal2002.  For the first half of Fiscal2003, operating profit increased to $35.1 million (16.0% operating margin) from$30.5 million in Fiscal 2002 (13.8% operating margin).  The increased operating profit for thesecond quarter and the first half of Fiscal 2003 is driven by increasedproductivity, a favorable product mix and lower costs associated with bid andproposal activities in the Fiscal 2003 period compared to the comparable periodin Fiscal 2002.

 

Productionunder the A1CR contract is expected to begin in October 2004, aftercompletion of the current FMTV contract. Our profit margins on the A1CR contract are expected to be lower thanhistorical margin levels for the current FMTV contract.  Actual future margins of this segment willbe dependent upon a number of factors including our ability to achieveefficiencies and other materials and labor cost control measures, the actualquantities and variations of vehicles purchased by the U.S. Army under the A1CRcontract, the potential for additional contracts, bid and proposal activitiesand other factors.  The operating marginthis segment will achieve in total may also be impacted by additional sales toother allied governments and the level of engineering and service provided.

 

**Power Products**

 

ThePower Products segment, which is responsible for marketing and aftermarketsupport of a wide range of industrial equipment, recorded sales of $126.8million in the second quarter of Fiscal 2003, a decline from $133.5 million inthe corresponding period in Fiscal 2002. Sales in the first half of Fiscal 2003 were $251.2 million, down from$282.8 million recorded in the first half of Fiscal 2002.  The decline in sales was primarily driven bylower equipment sales volume along with declines in rental, parts and servicesales, which is largely attributable to overall weakness in the markets weserve.  The segment generated anoperating loss of $5.2 million in the second quarter and $8.0 million in thefirst half of Fiscal 2003, compared to an operating profit of $0.3 million inthe second quarter and $3.6 million in the first half of Fiscal 2002.  The decrease in operating profit compared toFiscal 2002 was primarily driven by the lower sales volume, an unfavorablecustomer mix within the equipment, parts, and service sales, combined withhigher operating expenses.

 

Secondquarter and first half sales in Fiscal 2003 have decreased in all categoriesfrom the same periods in Fiscal 2002 reflecting the overall weakness in theeconomy.  Compared to the last sixmonths of Fiscal 2002, however, parts and services sales have increased in thefirst six months of Fiscal 2003. Additionally, leading economic indicators in the key markets we serve,including U.S. rig count and truck tonnage indices, have improved in recentmonths.  In future periods, the generalconditions of the economy as well as the composition of sales within thissegment will continue to have a significant impact on the operating profit.

 

**Engineered Products**

 

TheEngineered Products Division was formed in 2003, consisting of the PetroleumEquipment, Distributed Energy Solutions and Utilities Equipment businesses.

 

ThePetroleum Equipment segment manufactures equipment for the well servicingindustry.  Sales in this segmentincreased by $26.0 million to $34.8 million in the second quarter of Fiscal2003 and increased by $42.5 million to $57.8 million in the first half ofFiscal 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 has increasedsignificantly over 2002 levels. Operating profit in this segment increased by $3.2 million in the secondquarter of Fiscal 2003 and $4.3 million in the first half of Fiscal 2003 fromthe corresponding periods in Fiscal 2002. The improvement in operating profit is primarily attributable to thesales volume growth partially offset by higher operating expenses attributableto the consolidation of Engineered Products Division manufacturingoperations.  Operating profit marginlevels are anticipated to remain stable in the near term.

 

TheDistributed Energy Solutions segment primarily packages engine generator sets,performs power plant installations on a turnkey basis and services power plantoperations.  Sales for this segmentincreased $2.2 million to $20.0 million in the second quarter of Fiscal 2003and increased $3.5 million to $33.1 million in first half of Fiscal 2003,compared to the corresponding periods in Fiscal 2002.  This segment posted a second quarter operating loss of $3.0million in Fiscal 2003, compared to a $2.1 million operating loss in the secondquarter of Fiscal 2002.  For the firstsix months, this segment’s operating loss was $7.0 million in Fiscal 2003,compared to $4.3 million in Fiscal 2002. This increased loss is primarily attributable to certain low margincontracts that were completed during Fiscal 2003 that allowed us to reduce equipmentinventory in this segment.  Additionally,operating profit in this segment includes expenses of $0.4 million in thesecond quarter and $1.0 million in the first half of Fiscal 2003 related to theconsolidation of manufacturing operations.

 

TheUtilities Equipment segment, which manufactures mobile railcar movers,snowblowers and off-road seismic vehicles, generated a $1.6 million salesincrease to $3.4 million in the second quarter of Fiscal 2003 and a $2.6million increase to $6.0 million in the first

 

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halfof Fiscal 2003 from the corresponding periods in Fiscal 2002.  The sales growth is primarily attributableto a contract awarded in December 2002 to provide off-road seismicvehicles for Input/Output, Inc. Production under this contract began during the second quarter of Fiscal2003.  This segment posted a secondquarter operating loss of $0.9 million in Fiscal 2003, compared to a $0.6million loss in Fiscal 2002.  For thefirst half, this segment’s operating loss was $1.8 million, compared to $1.5million in Fiscal 2002.  This segment’soperating loss in Fiscal 2003 includes $0.3 million of expenses in the secondquarter and $0.5 million of expenses in the first six months related to theconsolidation of manufacturing operations in the Engineered Products Division.

 

**Airline Products**

 

TheAirline Products segment, which manufactures airline ground support products,recognized a sales increase of $3.0 million to $18.4 million in the secondquarter of Fiscal 2003 and a $4.5 million increase to $32.6 million in thefirst half of Fiscal 2003 compared to the respective corresponding periods inFiscal 2002.  The increasing sales areprimarily attributable to increased sales volume to government and packagecarrier customers, as well as sales of products in the DAVCO product line,which was acquired in December 2002. Operating loss for this segment was reduced to $0.7 million in thesecond quarter of Fiscal 2003 and $2.7 million in the first half of Fiscal2003, compared to $1.0 million in the second quarter and $3.2 million in thefirst half of Fiscal 2002.  Thereduction in operating loss results primarily from the sales volumegrowth.  Order backlog is $2.5 million atthe end of the second quarter, a $1.5 million increase from the end of Fiscal 2002.

 

**UNFILLED ORDERS**

 

Unfilledorders consist of written purchase orders and signed contracts.  These unfilled orders are generally subjectto cancellation or modification due to customer relationships or otherconditions.  Purchase options are notincluded in unfilled orders until exercised. Unfilled orders as of August 2, 2003 and January 31, 2003 wereas follows:

 

|                          |   | **August 2,  2003** |   | **January 31,  2003** |   |
|-------------------------------|--------|---------------------|--------|-----------------------|--------|
|                          |   | **(In millions)**   |   |
|                          |   |                |   |                  |   |
| Tactical Vehicle Systems      |   | $                   | 627.1  |                  | $      | 659.5 |   |
| Power Products                |   | 45.8                |   | 38.7                  |   |
| Engineered Products  Division |   |                |   |                  |   |
| Petroleum Products            |   | 35.2                |   | 64.6                  |   |
| Distributed Energy  Solutions |   | 30.0                |   | 42.5                  |   |
| Utilities Equipment           |   | 5.1                 |   | 0.7                   |   |
| Airline Products              |   | 2.5                 |   | 1.0                   |   |
|                          |   | $                   | 745.7  |                  | $      | 807.0 |   |

 

Unfilledorders of the Tactical Vehicle Systems segment consist principally ofproduction authorized and appropriated by the U.S. Congress under contractsawarded by the U.S. Army Tank-Automotive and Armament Command (“TACOM”) tomanufacture medium tactical vehicles and trailers.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Oursources of cash liquidity include cash and cash equivalents, cash fromoperations, amounts available under credit facilities and other externalsources of funds.  We believe that thesesources are sufficient to fund the current requirements of working capital,capital expenditures, dividends and other financial commitments.

 

Wehave a $150 million unsecured revolving credit facility, which matures onJanuary 31, 2004.  No borrowingswere outstanding under the facility at any time during Fiscal 2003 or Fiscal2002.  The revolving credit facility hasa $25 million sub facility, which may be used for letters of credit.  Approximately $9.7 million in letters ofcredit under the revolving credit facility were outstanding at August 2,2003.  Pursuant to covenant limitationsof the revolving credit facility, approximately $75.3 million was available forborrowing at August 2, 2003.  Acommitment fee ranging from 20 to 50 basis points is paid on the daily averageunused balance based on our leverage ratio. Borrowings outstanding would bear interest at several options, includingLIBOR plus 75 to 175 basis points based on our leverage ratio, the prime rate,or a competitive bid among the banks. Based on the first option (LIBOR plus 75 to 175 basis points based onour leverage ratio), the borrowing rate would have been approximately 1.94% asof August 2, 2003.  We intend tonegotiate an extension of the revolving credit facility on similar terms andconditions prior to its expiration in January 2004.  There can be no assurance that we will beable to successfully negotiate such an extension or, if we do, that suchextension will include similar terms and conditions, rates of interest andcovenants.  Although no borrowings arecurrently outstanding under the revolving

 

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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.

 

Duringthe first six months of Fiscal 2003, we entered into separate letter of creditfacilities with financial institutions totaling $12.5 million, to allow us toissue letters of credit that extend beyond January 31, 2004 asnecessary.  Approximately $3.3 millionletters of credit under these facilities were outstanding as of August 3,2003.

 

Inaddition, we have $25 million in senior notes outstanding as of August 2,2003.  The senior notes are unsecured andwere issued pursuant to an agreement containing a covenant, which imposes adebt to total capitalization requirement. The senior notes, which bear interest at a rate of 7.38%, are due andpayable in May 2006.  Additionally,$30.0 million of such senior notes were paid when due in May 2003.

 

Therevolving credit facility and the senior notes mentioned above were issuedpursuant to agreements containing covenants that restrict indebtedness,guarantees, sales of assets, rentals and other items.  Additional covenants in the revolving credit facility require usto maintain a minimum tangible net worth and interest coverage.  Since these requirements are calculated fromearnings and cash flow, our ability to declare and pay dividends could berestricted indirectly.  Based on ourfinancial condition as of August 2, 2003, the restrictions imposed by ourdebt instruments do not currently restrict our ability to declare and paydividends.

 

Inaddition, our international subsidiaries had foreign currency bank notes payabletotaling $2.5 million and $1.5 million at August 2, 2003 andJanuary 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.

 

Wehave additional banking relationships, which provide uncommitted borrowingarrangements.  In the event that anyacquisition of additional operations, growth in existing operations,settlements of lawsuits or disputes, changes in inventory levels, accountsreceivable, tax payments or other working capital items create a permanent needfor working capital or capital expenditures in excess of the existing cash andcash equivalents and committed lines of credit, we may seek to borrow underother long-term financing instruments or seek additional equity capital.

 

Asof August 2, 2003, we had net working capital of $303.0 million, comparedto $302.2 million at January 31, 2003. Total current assets at August 2, 2003 were $503.8 million,including $80.4 million of cash and cash equivalents.  Total current liabilities at August 2, 2003 were $200.7million, including $71.6 million of billings in excess of costs incurred onuncompleted contracts.

 

Netcash provided by continuing operations was $13.2 million for the first sixmonths of Fiscal 2003, compared to $43.2 million for the corresponding periodin Fiscal 2002.  This decrease isprimarily attributable to working capital and other operating accounts, whichprovided cash of $23.2 million during the first six months of Fiscal 2002, butused cash of $2.9 million during the first six months of Fiscal 2003.  Working capital consumed cash during thefirst six months of Fiscal 2003, primarily as a result of the increased number ofPetroleum Equipment projects in progress. Working capital provided cash during the first six months of Fiscal 2002as 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.

 

Cashusage for investing activities in the first half of 2003 declined by $4.1million to $11.4 million from the comparable period in 2002, which includedsignificant investment in a fabrication facility at the Tactical VehicleSystems plant in Sealy, Texas.

 

Netcash usage in financing activities in 2003 increased by $27.6 million for thefirst half of Fiscal 2003 compared to the corresponding period in 2002.  The increase is primarily attributable tothe repayment of $30 million in senior notes, which were due on May 30,2003.

 

**FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

**Forward-Looking Statements**

 

Thisfiling contains forward-looking statements that are based on management’scurrent expectations, estimates, and projections. These statements are notguarantees of future performance and involve a number of risks, uncertainties,and assumptions and are made pursuant to the Safe Harbor Provisions of thePrivate Securities Litigation Reform Act of 1995.  Many factors, including those discussed more fully elsewhere inthis release and in the Company’s filings with the Securities and ExchangeCommission, particularly its latest annual report on Form 10-K, as well asothers, could cause results to differ materially from those stated.  Specific important factors that could causeactual results, performance, or achievements to differ materially from suchforward-looking statements include risk of competition, risks relating totechnology, risks of general economic conditions, risks of oil and gas industryeconomic conditions, risks of airline industry economic conditions, risks as toterrorist attacks on the U.S. and their impact on the U.S. economy,

 

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risksrelating to personnel, risks of dependence on government and failure to obtainnew government contracts, inherent risks of government contracts, risks ofclaims and litigation, risks of product defects, risks as to foreign sales andglobal trade matters, risks as to cost controls, risks as to informationtechnology, risks as to acquisitions, risks as to currency fluctuations, risksas to environmental and safety matters, risks as to distributorships, risks asto licenses, and credit risks, all as more specifically outlined in theCompany’s latest annual report on Form 10-K. In addition, such forward-looking statements could be affected bygeneral industry and market conditions and growth rates, general domestic andinternational conditions including interest rates, inflation and currencyexchange rates and other future factors. Actual outcomes and results may differ materially from what is expressedor forecasted in such forward-looking statements.

 

**Item 3. Quantitative and Qualitative Disclosures about MarketRisk**

 

Ourquantitative and qualitative disclosures about market risk for changes ininterest rates and foreign exchange risk are incorporated by reference in Item7A of our Annual Report on Form 10-K for the year ended January 31, 2003and have not materially changed since that report was filed, except asdisclosed in Item 2 – “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” herein.

 

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

## ** **

Within 90 days before thedate of this report on Form 10-Q, under the supervision and with theparticipation of our management, including our Chief Executive Officer (ourprincipal executive officer) and our Chief Financial Officer (our principalfinancial officer), we evaluated the effectiveness of our disclosure controlsand procedures (as defined under Rule 13a-14(c) of the Securities Exchange Actof 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and our ChiefFinancial Officer believe that our disclosure controls and procedures areeffective to ensure that information we are required to disclose in the reportsthat we file or submit under the Exchange Act fairly represents, in allmaterial respects, our financial condition, results of operations and cashflows.

 

Therewere no significant changes in our internal controls or in other factors thatcould significantly affect these controls subsequent to the date of suchevaluation.

 

**PARTII.  OTHER INFORMATION**

 

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

 

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

 

TheCompany is a defendant in a suit brought under the *qui tam* provision of the False Claims Act, United States ofAmerica, *ex rel.  Werner Stebner v. Stewart & Stevenson Services, Inc. andMcLaughlin Body Co.*, Civil Action No. H-96-3363, in the UnitedStates District Court for the Southern District of Texas, Houston Division.  The plaintiff’s complaint seeks penaltiesand damages in an unspecified amount. The suit alleges that the Company made false statements andcertifications in connection with claims for payment for Family of MediumTactical Vehicles delivered to the U.S. Army starting in 1995, and the suitalleges that the vehicles were substandard because of corrosion problems.  The suit was filed under seal in 1996, andfollowing an investigation by the Justice Department, the United Statesdeclined to intervene in the suit, which was unsealed on August 29,2000.  The case is set for trial inJanuary 2004.  The Company believesthe claims in the suit are without merit and is vigorously defending thesuit.  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 defendantin a suit brought by several subsidiaries of Diamond Offshore Drilling, Inc.(collectively, “Diamond Offshore”) on May 30, 2002, arising out of claimsrelating to a marine riser manufactured by the Company and purchased by DiamondOffshore for use on its Ocean Baroness semi-submersible drilling rig, Cause No.2002-27831; *Diamond Offshore InternationalCorporation, Diamond Offshore Company, Diamond Offshore Services Company,Diamond Offshore (USA), Inc., Diamond Offshore International Limited, andDiamond Offshore Drilling Ltd. v. Stewart & Stevenson Services, Inc.*;in the District Court of Harris County, Texas 125th JudicialDistrict Court (the “Baroness Litigation”). The suit was filed following a separation of the marine riser duringdeep water drilling operations and seeks to recover damages that are notspecified in the complaint.

 

In a separate transaction onor about September 13, 2001, Diamond Offshore contracted with the Companyfor a marine riser for use on its Ocean Rover semi-submersible drillingrig.  The Company was fulfilling thiscontract, when, on August 19, 2002, Diamond Offshore

 

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amended its petition in theBaroness Litigation to seek a declaration that Diamond Offshore has no furthercontractual obligations to the Company. On August 21, 2002, before being served with Diamond Offshore’samended petition in the Baroness Litigation, the Company filed a separatelawsuit against Diamond Offshore seeking to recover damages, includingattorneys’ fees (the “Rover Litigation”). On August 30, 2002, the Court transferred the Rover Litigation tothe 125th Judicial Court where the Baroness Litigation ispending.  The two cases have beenconsolidated into one lawsuit in the 125th Judicial Court.  The Company is vigorously prosecuting itsclaims against Diamond Offshore and defending the claims asserted against it byDiamond Offshore in this lawsuit.

 

Itis presently impossible to determine the ultimate outcome of these matters orwhether the resolution will have a material adverse effect on the Company’sresults of operations, consolidated financial position or liquidity, though theCompany has recorded reserves that it believes are adequate for certainestimated legal fees associated with such matters as of the balance sheet date.

 

In2001, the Company received from the United States Environmental ProtectionAgency (“EPA”) a Request for Information under Section 104(e) of theComprehensive Environmental Response, Compensation, and Liability Act of 1980,for information pertaining to the R&H Oil Company Site in San Antonio,Texas (the “Site”).  Informationprovided to the Company by the EPA indicates that the Company may have sentwaste oils to the Site for recycling in the late 1980s, and that such wasteoils may potentially account for between one and two percent of the volume oftotal wastes received by the oil recycler at the Site.  Since the Company expects to receive a claimfor cleanup and other costs related to this site, it has established additionalreserves in Fiscal 2002, which it believes to be adequate at this time.  As additional facts are developed and definitiveremediation plans and necessary regulatory approvals for implementation ofremediation are established, changes in these and other factors may result inactual costs exceeding the current environmental reserves.  While uncertainties are inherent in thefinal outcome of these environmental matters, and it is presently impossible todetermine the actual costs that ultimately may be incurred, managementcurrently believes that the resolution of such uncertainties should not have amaterial adverse effect on the Company’s results of operations, consolidatedfinancial position or liquidity.

 

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

 

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

 

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

 

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

 

10.7                           Contract Number DAAE07-03-C-S023 datedApril 17, 2003 between Stewart & Stevenson Tactical Vehicle Systems,LP and the United States Department of Defense, U.S. Army Tank-Automotive andArmaments Command.

 

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 – May 20, 2003 (Stewart & StevensonAnnounces Fiscal 2003 First Quarter Earnings Release and Conference CallSchedule)

ItemsReported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form8-K Report Date – May 30, 2003 (Stewart & Stevenson Reports Fiscal2003 First Quarter Results)

ItemsReported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form8-K Report Date – June 6, 2003 (Stewart & Stevenson Services, Inc. andSubsidiaries Segment Information)

ItemsReported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

20

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Form8-K Report Date – June 25, 2003 (Stewart & Stevenson “Presentation toInvestors”)

ItemsReported -  Item 7.  Exhibits

Item 9. Regulation FD Disclosure

 

Form8-K Report Date – July 2, 2003 (Stewart & Stevenson Services AnnouncesChange in Board Membership)

ItemsReported -  Item 7.  Exhibits

Item9.  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 4th day of September 2003.

 

**STEWART & STEVENSON SERVICES, INC**.

 

 
| By:                                         | /s/  Michael L. Grimes |   |
|---------------------------------------------|-----------------------------|--------|
| Michael  L. Grimes                          |
| President  and Chief Executive Officer      |
| (Principal  Executive Officer)              |
|                                        |
|                                        |
| By:                                         | /s/  John B. Simmons        |   |
| John  B. Simmons                            |
| Vice  President and Chief Financial Officer |
| (Principal  Financial Officer)              |
|                                        |
|                                        |
| By:                                         | /s/  L. Scott Biar          |   |
| L.  Scott Biar                              |
| Controller  and Chief Accounting Officer    |
| (Principal  Accounting Officer)             |
|                                             |                             |        |  |  |

 

22

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**EXHIBIT INDEX**

 

Exhibit Number and Description

 

10.7                           Contract Number DAAE07-03-C-S023 datedApril 17, 2003 between Stewart & Stevenson Tactical Vehicle Systems,LP and the United States Department of Defense, U.S. Army Tank-Automotive andArmaments Command.

 

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.

 

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