**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****   QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended July 30, 2005**

 

**OR**

 

**o****   TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from               to               **

 

**Commission file number 0-8493**

 

**STEWART & STEVENSON SERVICES, INC.**

(Exact name of registrant as specified in 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) |
|                                                                                      |            |                                       |        |  |  |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.          Yes  ý     No o

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    oYes    ýNo

 

Number of shares outstandingof each of the registrant’s classes of common stock, as of August 16, 2005:

 

**Common Stock, without Par Value:  29,107,553 Shares**

 

 

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# **PARTI. FINANCIAL INFORMATION**

 

**Item 1.  FinancialStatements**

 

The following informationrequired 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 – July 30, 2005 and January 31, 2005                                    |   |
|---------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                |   |
| Consolidated Condensed  Statements of Operations – Three and Six Months Ended July 30, 2005 and July  31, 2004 |   |
|                                                                                                                |   |
| Consolidated Condensed  Statements of Cash Flows – Three and Six Months Ended July 30, 2005 and July  31, 2004 |   |
|                                                                                                                |   |
| 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)*

 
| ** **                                                                                                              | ** ** | **July 30, 2005** | ** ** | **January 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                              | ** ** | **(Unaudited)**   | ** ** | ** **           | ** ** |
| Assets                                                                                                                  |       |              |       |                 |       |
| Current Assets:                                                                                                         |       |              |       |                 |       |
| Cash and cash equivalents                                                                                               |       | $                 | 62,053     |                 | $          | 130,447 |   |
| Short-term investments                                                                                                  |       | 11,040            |       | 2,480                |       |
| Accounts receivable, net                                                                                                |       | 126,777           |       | 143,600              |       |
| Recoverable costs and accrued profits not  yet billed                                                                   |       | 37,834            |       | 26,544               |       |
| Inventories                                                                                                             |       | 138,424           |       | 112,889              |       |
| Excess of current cost over LIFO values                                                                                 |       | (36,021           | )          | (35,168              | )          |
| Deferred income tax asset                                                                                               |       | 4,646             |       | 5,647                |       |
| Income tax receivable                                                                                                   |       | 6,205             |       | 7,223                |       |
| Other current assets                                                                                                    |       | 8,350             |       | 4,987                |       |
| Total assets of discontinued operations                                                                                 |       | 44,351            |       | 68,186               |       |
| Total Current Assets                                                                                                    |       | 403,659           |       | 466,835              |       |
|                                                                                                                    |       |              |       |                 |       |
| Property, Plant and Equipment, net                                                                                      |       | 111,364           |       | 115,568              |       |
| Deferred Income Tax Asset                                                                                               |       | 16,108            |       | 20,874               |       |
| Intangibles and Other Assets, net                                                                                       |       | 53,383            |       | 10,065               |       |
| Total Assets                                                                                                            |       | $                 | 584,514    |                 | $          | 613,342 |   |
|                                                                                                                    |       |              |       |                 |       |
| Liabilities and Shareholders’ Equity                                                                               |       |              |       |                 |       |
| Current Liabilities:                                                                                                    |       |              |       |                 |       |
| Notes payable                                                                                                           |       | $                 | 4,196      |                 | $          | 1,671 |   |
| Current portion of long-term debt                                                                                       |       | 25,000            |       | —               |       |
| Accounts payable                                                                                                        |       | 99,397            |       | 81,716               |       |
| Accrued payrolls and incentives                                                                                         |       | 16,735            |       | 22,941               |       |
| Billings in excess of incurred costs                                                                                    |       | —            |       | 59,894               |       |
| Other current liabilities                                                                                               |       | 42,499            |       | 36,691               |       |
| Total liabilities of discontinued  operations                                                                           |       | 32,661            |       | 38,770               |       |
| Total Current Liabilities                                                                                               |       | 220,488           |       | 241,683              |       |
|                                                                                                                    |       |              |       |                 |       |
| Long-Term Debt, net of current portion                                                                                  |       | 75                |       | 25,000               |       |
| Accrued Postretirement Benefits and Pension                                                                             |       | 58,336            |       | 57,621               |       |
| Other Long-Term Liabilities                                                                                             |       | 3,899             |       | 4,318                |       |
| Total Liabilities                                                                                                       |       | 282,798           |       | 328,622              |       |
| Shareholders’ Equity:                                                                                              |       |              |       |                 |       |
| Common stock, without par value,  100,000,000 shares authorized; 29,104,803 and 28,865,070 shares issued,  respectively |       | 63,937            |       | 59,616               |       |
| Accumulated other comprehensive loss                                                                                    |       | (35,434           | )          | (36,048              | )          |
| Retained earnings                                                                                                       |       | 273,213           |       | 261,152              |       |
| Total Shareholders’ Equity                                                                                         |       | 301,716           |       | 284,720              |       |
| Total Liabilities and Shareholders’ Equity                                                                         |       | $                 | 584,514    |                 | $          | 613,342 |   |

 

*See accompanying notes to consolidated condensed financialstatements.*

 

3

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

**CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS**

*(In thousands, except per share data)*

 
| ** **                                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                  | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)**      | ** ** |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Sales                                                                                       |       | $                      | 368,976    |                 | $          | 272,394 |   | $ | 680,538 |   | $ | 534,744 |   |
| Cost of sales                                                                               |       | 322,497                |       | 232,128              |       | 597,406 |   | 457,888 |   |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Gross profit                                                                                |       | 46,479                 |       | 40,266               |       | 83,132 |   | 76,856 |   |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Selling and administrative expenses                                                         |       | 23,038                 |       | 23,379               |       | 46,108 |   | 46,620 |   |
| Other income, net                                                                           |       | (1,427                 | )          | (1,323               | )          | (2,166 | ) | (1,910 | ) |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Operating profit                                                                            |       | 24,868                 |       | 18,210               |       | 39,190 |   | 32,146 |   |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Interest expense                                                                            |       | 548                    |       | 436                  |       | 1,073 |   | 953 |   |
| Interest income                                                                             |       | (797                   | )          | (332                 | )          | (1,557 | ) | (586 | ) |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Earnings from continuing operations before  income taxes                                    |       | 25,117                 |       | 18,106               |       | 39,674 |   | 31,779 |   |
| Income tax expense                                                                          |       | 8,645                  |       | 6,515                |       | 13,869 |   | 11,381 |   |
| Net earnings from continuing operations                                                     |       | 16,472                 |       | 11,591               |       | 25,805 |   | 20,398 |   |
| Loss from discontinued operations, net of  tax of ($4,070), ($3,086), ($4,487) and ($4,870) |       | (7,170                 | )          | (5,714               | )          | (8,811 | ) | (9,079 | ) |
| Net earnings                                                                                |       | $                      | 9,302      |                 | $          | 5,877 |   | $ | 16,994 |   | $ | 11,319 |   |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Weighted average shares outstanding:                                                        |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                       |       | 29,058                 |       | 28,749               |       | 28,993 |   | 28,709 |   |
| Diluted                                                                                     |       | 29,560                 |       | 29,182               |       | 29,513 |   | 29,058 |   |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| **Earnings (loss) per share:**                                                              |       |                   |       |                 |       |   |   |   |   |
| Basic:                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Continuing operations                                                                       |       | $                      | 0.57       |                 | $          | 0.40 |   | $ | 0.89 |   | $ | 0.71 |   |
| Discontinued operations                                                                     |       | (0.25                  | )          | (0.20                | )          | (0.30 | ) | (0.32 | ) |
| Net earnings per share                                                                      |       | $                      | 0.32       |                 | $          | 0.20 |   | $ | 0.59 |   | $ | 0.39 |   |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Diluted:                                                                                    |       |                   |       |                 |       |   |   |   |   |
| Continuing operations                                                                       |       | $                      | 0.56       |                 | $          | 0.40 |   | $ | 0.87 |   | $ | 0.70 |   |
| Discontinued operations                                                                     |       | (0.25                  | )          | (0.20                | )          | (0.30 | ) | (0.31 | ) |
| Net earnings per share                                                                      |       | $                      | 0.31       |                 | $          | 0.20 |   | $ | 0.57 |   | $ | 0.39 |   |
|                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Cash dividends per share                                                                    |       | $                      | 0.085      |                 | $          | 0.085 |   | $ | 0.170 |   | $ | 0.170 |   |

 

*See accompanying notes to consolidated condensedfinancial statements.*

 

4

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

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

*(In thousands)*

 
| ** **                                                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                             | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| ** **                                                                                                             | ** ** | **(Unaudited)**        | ** ** | ** **           | ** ** |
| **Operating Activities**                                                                                               |       |                   |       |                 |       |   |   |   |   |
| Net earnings                                                                                                           |       | $                      | 9,302      |                 | $          | 5,877 |   | $ | 16,994 |   | $ | 11,319 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities:                                   |       |                   |       |                 |       |   |   |   |   |
| Net loss from discontinued operations                                                                                  |       | 7,170                  |       | 5,714                |       | 8,811 |   | 9,079 |   |
| Deferred tax expense                                                                                                   |       | 3,168                  |       | 2,403                |       | 6,275 |   | 2,920 |   |
| Depreciation and amortization                                                                                          |       | 5,833                  |       | 7,332                |       | 11,278 |   | 13,856 |   |
| Unrealized foreign exchange losses                                                                                     |       | 1,414                  |       | —               |       | 1,414 |   | — |   |
| Gain on sale of assets                                                                                                 |       | (792                   | )          | (795                 | )          | (779 | ) | (1,141 | ) |
| Change in operating assets and liabilities  net of the effect of acquisition, divestiture and discontinued operations: |       |                   |       |                 |       |   |   |   |   |
| Accounts receivable, net                                                                                               |       | 2,116                  |       | (11,685              | )          | 8,946 |   | 21,913 |   |
| Recoverable costs and accrued profits not  yet billed                                                                  |       | (13,084                | )          | 1,588                |       | (11,290 | ) | 2,934 |   |
| Inventories                                                                                                            |       | (9,958                 | )          | 1,230                |       | (18,103 | ) | 4,850 |   |
| Other current and noncurrent assets                                                                                    |       | (2,664                 | )          | 15,473               |       | (434 | ) | 21,187 |   |
| Accounts payable                                                                                                       |       | 10,215                 |       | 5,599                |       | 11,180 |   | (2,855 | ) |
| Accrued payrolls and incentives                                                                                        |       | (4,055                 | )          | (2,190               | )          | (8,257 | ) | (1,851 | ) |
| Billings in excess of incurred costs                                                                                   |       | (45,227                | )          | (34,049              | )          | (59,894 | ) | (37,820 | ) |
| Other current liabilities                                                                                              |       | (452                   | )          | 3,272                |       | (2,351 | ) | 4,967 |   |
| Accrued postretirement benefits and pension                                                                            |       | 331                    |       | 159                  |       | 715 |   | 714 |   |
| Other, net                                                                                                             |       | 387                    |       | 93                   |       | (372 | ) | (1,577 | ) |
| **Net Cash Provided by (Used in) Continuing  Operations**                                                              |       | (36,296                | )          | 21                   |       | (35,867 | ) | 48,495 |   |
| Net Cash Provided by (Used in) Discontinued  Operations                                                                |       | (1,230                 | )          | (8,362               | )          | 8,251 |   | (13,219 | ) |
| **Net Cash Provided by (Used in) Operating  Activities**                                                               |       | (37,526                | )          | (8,341               | )          | (27,616 | ) | 35,276 |   |
|                                                                                                                   |       |                   |       |                 |       |   |   |   |   |
| **Investing Activities**                                                                                               |       |                   |       |                 |       |   |   |   |   |
| Capital expenditures, excluding rental  equipment                                                                      |       | (1,917                 | )          | (3,863               | )          | (3,549 | ) | (5,871 | ) |
| Additions to rental equipment                                                                                          |       | (1,871                 | )          | (2,204               | )          | (2,641 | ) | (2,967 | ) |
| Proceeds from sale of businesses                                                                                       |       | 79                     |       | 464                  |       | 15,205 |   | 3,632 |   |
| Acquisition of businesses, net of cash  acquired                                                                       |       | (470                   | )          | —               |       | (42,778 | ) | — |   |
| Proceeds from disposal of property, plant  and equipment                                                               |       | 1,885                  |       | 9,371                |       | 2,473 |   | 11,637 |   |
| Short-term investment activity, net                                                                                    |       | (265                   | )          | 300                  |       | (8,560 | ) | (3,190 | ) |
| Net investing activities of discontinued  operations                                                                   |       | 27                     |       | 37                   |       | 66 |   | 74 |   |
| **Net Cash Provided by (Used in) Investing  Activities**                                                               |       | (2,532                 | )          | 4,105                |       | (39,784 | ) | 3,315 |   |
|                                                                                                                   |       |                   |       |                 |       |   |   |   |   |
| **Financing Activities**                                                                                               |       |                   |       |                 |       |   |   |   |   |
| Loan acquisition costs                                                                                                 |       | —                 |       | —               |       | (76 | ) | — |   |
| Change in short-term notes payable                                                                                     |       | 543                    |       | (85                  | )          | 612 |   | (109 | ) |
| Dividends paid                                                                                                         |       | (2,479                 | )          | (2,442               | )          | (4,933 | ) | (4,876 | ) |
| Proceeds from exercise of stock options                                                                                |       | 1,582                  |       | 510                  |       | 3,647 |   | 1,250 |   |
| **Net Cash Used in Financing Activities**                                                                              |       | (354                   | )          | (2,017               | )          | (750 | ) | (3,735 | ) |
|                                                                                                                   |       |                   |       |                 |       |   |   |   |   |
| **Effect of exchange rate changes on cash**                                                                            |       | (296                   | )          | —               |       | (244 | ) | — |   |
|                                                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Increase (decrease) in cash and cash  equivalents                                                                      |       | (40,708                | )          | (6,253               | )          | (68,394 | ) | 34,856 |   |
| Cash and cash equivalents, beginning of  period                                                                        |       | 102,761                |       | 95,068               |       | 130,447 |   | 53,959 |   |
| Cash and cash equivalents, end of period                                                                               |       | $                      | 62,053     |                 | $          | 88,815 |   | $ | 62,053 |   | $ | 88,815 |   |
|                                                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Cash Paid For:                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Interest                                                                                                               |       | $                      | 991        |                 | $          | 980 |   | $ | 1,035 |   | $ | 1,117 |   |
| Income taxes (excluding refunds)                                                                                       |       | 90                     |       | 175                  |       | 261 |   | 310 |   |

 

*See accompanying notes to consolidated condensed financialstatements.*

 

5

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

**NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS**

(Unaudited)

 

**Note 1 – Summary of Significant Accounting Policies and Basisof Presentation**

 

The accompanying unaudited consolidatedcondensed financial statements of Stewart & Stevenson Services, Inc. andSubsidiaries (collectively, the “Company”) have been prepared in accordancewith Rule 10-01 of Regulation S-X for interim financial statements required tobe filed with the Securities and Exchange Commission and do not include allinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. However, the information furnished herein reflects all normal recurringadjustments, which are, in the opinion of management, necessary for a fairpresentation of the results for the interim periods.  The results of operations for the three andsix months ended July 30, 2005 are not necessarily indicative of the resultsthat will be realized for the fiscal year ending January 31, 2006.

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenueand expenses during the reporting period. Actual results may differ from these estimates.

 

The Company’s fiscal yearbegins on February 1 of the year stated and ends on January 31 of the followingyear.  For example, the Company’s “Fiscal2005” commenced on February 1, 2005 and ends on January 31, 2006.  The Company reports results on the fiscalquarter method with each quarter comprising approximately 13 weeks.

 

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to the rules and regulations of the Securities and ExchangeCommission.  These consolidated condensedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended January 31, 2005.

 

The accompanying consolidated condensed financial statements for Fiscal2004 and related notes contain certain reclassifications to conform with thepresentation used in Fiscal 2005.

 

As permitted under Statement of Financial Accounting Standards (“SFAS”)No. 123, the Company continues to use the intrinsic value method of accountingprescribed by Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” to account for its stock-based compensationprograms.  Accordingly, no compensationexpense is recognized when the exercise price of an employee stock option isequal to or greater than the market price of the Company’s common stock on thegrant date and all other provisions of the award are fixed.  In December 2004, the Financial AccountingStandards Board (the “FASB”) issued SFAS No. 123 (revised 2004), “Share-BasedPayment,” which requires all share-based payments to employees, includinggrants of employee stock options, to be recognized as compensation expense inthe statements of operations based on their fair values.  The Company is currently evaluating theimpact of the new standard, which is required to be adopted in the firstquarter of Fiscal 2006.

 

6

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The following pro forma data are calculated as if compensation expensefor the Company’s stock option plans was determined based on the fair value atthe grant date for awards under these plans, amortized to expense on a pro ratabasis over the option vesting period *(in thousands, except pershare data)*:

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| Net earnings:                                                                   |       |                   |       |                 |       |   |   |   |   |
| As reported                                                                     |       | $                      | 9,302      |                 | $          | 5,877 |   | $ | 16,994 |   | $ | 11,319 |   |
| Pro forma compensation expense, determined  under fair value method, net of tax |       | (636                   | )          | (591                 | )          | (1,214 | ) | (1,059 | ) |
| Pro forma                                                                       |       | $                      | 8,666      |                 | $          | 5,286 |   | $ | 15,780 |   | $ | 10,260 |   |
|                                                                            |       |                   |       |                 |       |   |   |   |   |
| Basic earnings per share:                                                       |       |                   |       |                 |       |   |   |   |   |
| As reported                                                                     |       | $                      | 0.32       |                 | $          | 0.20 |   | $ | 0.59 |   | $ | 0.39 |   |
| Pro forma                                                                       |       | 0.30                   |       | 0.18                 |       | 0.54 |   | 0.36 |   |
|                                                                            |       |                   |       |                 |       |   |   |   |   |
| Diluted earnings per share:                                                     |       |                   |       |                 |       |   |   |   |   |
| As reported                                                                     |       | $                      | 0.31       |                 | $          | 0.20 |   | $ | 0.57 |   | $ | 0.39 |   |
| Pro forma                                                                       |       | 0.29                   |       | 0.18                 |       | 0.53 |   | 0.35 |   |

 

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

 

**Note 2 – Comprehensive Income**

 

Total comprehensive incomeis as follows *(in thousands*):

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| ** **                                        | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings                                      |       | $                      | 9,302      |                 | $          | 5,877 |   | $ | 16,994 |   | $ | 11,319 |   |
| Unrealized loss on forward contracts, net  of tax |       | (66                    | )          | (76                  | )          | (66 | ) | (275 | ) |
| Currency translation gain (loss), net of  tax     |       | 887                    |       | —               |       | 680 |   | (450 | ) |
| Comprehensive income                              |       | $                      | 10,123     |                 | $          | 5,801 |   | $ | 17,608 |   | $ | 10,594 |   |

 

**Note 3 – Acquisitions andDivestitures**

 

On April 8, 2005, the Company acquired alloutstanding shares of Automotive Technik (Holdings) Limited (“ATHL”), a lighttactical vehicle manufacturer headquartered in the United Kingdom.  The aggregate purchase price for thetransaction was approximately $48.2 million, including cash of $45.3 million,notes of $1.9 million and transaction costs of approximately $1.0 million.  The acquisition of ATHL broadens the Company’sproduct offerings and provides additional marketing opportunities for theTactical Vehicle Systems segment.  ATHLis currently under contract to produce vehicles for the United Kingdom Ministryof Defence and the New Zealand Ministry of Defence, in addition to otherprograms worldwide.  The results ofoperations for ATHL are included in the Company’s consolidated condensedfinancial statements since the date of acquisition.  The ATHL operations contributed sales of$16.6 million and $20.1 million for the three months and six months ended July30, 2005, respectively, and had no material impact on operating income during eitherperiod of Fiscal 2005.  Pro formainformation is not presented, as this acquisition is not material to theCompany’s consolidated results of operations.

 

7

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The following table summarizes the estimatedfair value of the assets acquired and liabilities assumed at the date ofacquisition. The Company is in the process of finalizing third-party valuationsof certain long-lived and intangible assets; consequently, the allocation ofthe purchase price is subject to refinement. The Company believes that a substantial portion of the long-term assetbalance will be allocated to goodwill and other identified intangibles.

 

| **(In  thousands)**                    | ** ** | **April 8, 2005** | ** ** |
|----------------------------------------|------------|-------------------|------------|
|                                   |       |              |       |
| Cash and cash equivalents              |       | $                 | 3,552      |   |
| Other current assets                   |       | 16,740            |       |
| Total Current Assets                   |       | 20,292            |       |
|                                   |       |              |       |
| Property, Plant and Equipment          |       | 2,553             |       |
| Other Long-Term Assets                 |       | 43,477            |       |
| Total Assets Acquired                  |       | 66,322            |       |
|                                   |       |              |       |
| Notes payable                          |       | 149               |       |
| Other current liabilities              |       | 17,901            |       |
| Total Current Liabilities              |       | 18,050            |       |
| Long-Term Debt, net of current portion |       | 68                |       |
| Total Liabilities Assumed              |       | 18,118            |       |
|                                   |       |              |       |
| Purchase Price Allocated               |       | $                 | 48,204     |   |

 

During the second quarter ofFiscal 2005, the Company disposed of an idle distribution facility in SanAntonio, Texas, which was previously used by the Power Products segment.  The disposal of this facility resulted in netcash proceeds of $1.0 million and a gain of $0.8 million in the second quarterof Fiscal 2005 within the Power Products segment.

 

During the second quarter ofFiscal 2004, the Company decided to outsource the provision of lease financingassociated with certain sales-type equipment leases within the Power Productssegment.  In conjunction with thisdecision, the Company sold assets previously classified as rental equipmentwithin property, plant and equipment for cash proceeds of $7.3 million, with noresulting gain or loss.  Additionallyduring the second quarter of Fiscal 2004, the Company disposed of an idlemanufacturing facility in Commerce City, Colorado for cash proceeds of $1.2million, resulting in a net gain of $0.3 million.

 

Also, during the second quarterof Fiscal 2004, the Company disposed of an idle manufacturing facility whichwas previously used for the production of the Engineered Products segment’sutilities equipment and Distributed Energy Solutions products.  This facility was vacated during Fiscal 2003following a consolidation of manufacturing operations at another Houston, Texaslocation.  The disposal of this facilityresulted in net cash proceeds of $4.9 million. As a result of this sale, the Company recognized a gain of $0.6 millionin the second quarter of Fiscal 2004 within the Engineered Products segment.

 

During the first quarter of Fiscal 2004, theCompany exited the business activities associated with the distribution ofMercury Marine and MerCruiser products within the Power Products segment.  As a result, the distribution agreement forthese products was terminated in March 2004 and the assets of this product linewere sold for adjusted cash proceeds of $3.3 million.  Also in the first quarter of Fiscal 2004, theCompany sold the net assets and exited the activities associated with the PowerProducts segment’s wheelchair lift manufacturing operation.  Consideration received for this asset saleincluded cash of $0.6 million and a receivable of $0.3 million, of which $0.1was outstanding at July 30, 2005, along with royalty rights based on wheelchairlift sales over the next five years.  Nomaterial gain or loss was recognized on these transactions, individually or inthe aggregate.

 

The activities above resulted in the closureof two branch locations which were primarily focused on the sale of MercuryMarine and MerCruiser products in Florida and Virginia.  Additionally during the first quarter ofFiscal 2004, the Company closed an under-performing Power Products branchlocation in Auburn, Washington.  Exit costsassociated with these actions were $0.2 million, which was charged to sellingand administrative expenses during the first quarter of Fiscal 2004.  As of July 30, 2005, $0.1 million of theseexit costs remained accrued and unpaid.

 

8

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**Note 4 - Discontinued Operations**

 

On August 18, 2005, the Company entered into a definitiveagreement to sell substantially all of the inventory, property, plant andequipment, distribution rights, and operations of four Power Products segmentdistribution locations in California.  The sale is expected to be completed duringthe third quarter of Fiscal 2005, subject to the customary documentation andother third party consents.  Accordingly,the identified assets and liabilities held for sale and results of operationsfor this business are reported as discontinued operations for all periodspresented.  The Company recorded a $4.0million pre-tax charge during the second quarter of Fiscal 2005, reflecting theestimated withdrawal liability from a union pension plan and a reduction in thecarrying value of the net assets of this business to their fair value lessestimated costs to sell.

 

During the fourth quarter of Fiscal 2004, the Company soldsubstantially all of the assets and business of its Airline Productssegment.  Sale proceeds were $60 millionand included $45 million of cash and a $15 million senior secured note paid inApril 2005, as well as the assumption of certain specified liabilities.  The total sales proceeds are subject tofurther adjustment in Fiscal 2005 based on the amount of working capitalconveyed at closing.  In May 2005, theCompany received the buyer’s calculation of working capital at closing, which proposesthat sales proceeds should be adjusted downward by approximately $17.0 millionfrom that reflected in the consolidated financial statements at January 31,2005, which would result in a loss for the Company.  The Company does not agree with the buyer’scalculation and has objected in accordance with the terms of the sale agreement.  It is presently impossible for the Company todetermine the ultimate outcome of this matter. The Company has, however, recorded accruals that it currently believesto be adequate and within the range of potential outcomes.  Pursuant to the sale agreement, the Companyretained certain product liability claims and other obligations of the AirlineProducts business, for which the Company has recorded accruals it believes tobe adequate at this time.

 

Additionally, the Company’s discontinuedoperations include the continued wind-down of the turnkey engineering,procurement and construction activities of the Distributed Energy Solutionssegment, which the Company decided to exit in Fiscal 2003, and the retainedwarranty and contract obligations from the Fiscal 2002 sale of the blowoutpreventer and controls, valve and drilling riser business previously included inthe Engineered Products segment.

 

During the second quarter of Fiscal 2005, theCompany recorded a $4.0 million pre-tax charge related to the settlement of customerdisputes in the Distributed Energy Solutions business.  See Note 6 for further discussion.

 

Sales and operating loss in the three and sixmonths ended July 30, 2005 and July 31, 2004 from discontinued operations wereas follows (*in thousands)*:

* *
| ** **                   | ** ** | **Three Months Ended July 30, 2005** | ** ** | **Six Months Ended July 30, 2005** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **Sales**                            | ** ** | **Operating  income (loss)**       | ** ** | **Operating income  (loss), net of taxes** | ** ** | **Sales** | ** ** | **Operating loss** | ** ** | **Operating loss,  net of taxes** | ** ** |
|                         |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Power Products               |       | $                                    | 14,540     |                               | $          | (3,637 | ) | $ | (2,390 | ) | $ | 26,522 |   | $ | (3,791 | ) | $ | (2,513 | ) |
| Airline Products             |       | —                               |       | (3,096                             | )          | (1,929 | ) | — |   | (3,997 | ) | (2,648 | ) |
| Distributed Energy Solutions |       | 2,382                                |       | (4,548                             | )          | (2,896 | ) | 3,860 |   | (5,419 | ) | (3,590 | ) |
| Engineered Products          |       | 189                                  |       | 41                                 |       | 45 |   | 254 |   | (91 | ) | (60 | ) |
|                         |       | $                                    | 17,111     |                               | $          | (11,240 | ) | $ | (7,170 | ) | $ | 30,636 |   | $ | (13,298 | ) | $ | (8,811 | ) |

 
| ** **                   | ** ** | **Three Months Ended July 31, 2004** | ** ** | **Six Months Ended July 31, 2004** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **Sales**                            | ** ** | **Operating loss**                 | ** ** | **Operating loss,  net of taxes** | ** ** | **Sales** | ** ** | **Operating loss** | ** ** | **Operating loss,  net of taxes** | ** ** |
|                         |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Power Products               |       | $                                    | 13,959     |                               | $          | (537 | ) | $ | (350 | ) | $ | 28,379 |   | $ | (418 | ) | $ | (272 | ) |
| Airline Products             |       | 23,734                               |       | (379                               | )          | (246 | ) | 46,809 |   | (481 | ) | (313 | ) |
| Distributed Energy Solutions |       | 6,234                                |       | (5,695                             | )          | (3,695 | ) | 10,678 |   | (10,763 | ) | (7,007 | ) |
| Engineered Products          |       | 402                                  |       | (2,189                             | )          | (1,423 | ) | 987 |   | (2,287 | ) | (1,487 | ) |
|                         |       | $                                    | 44,329     |                               | $          | (8,800 | ) | $ | (5,714 | ) | $ | 86,853 |   | $ | (13,949 | ) | $ | (9,079 | ) |

 

9

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**Note 5 - Segment Information**

 

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

 

The Company has identified three operating segments.  Sales and operating profit (loss) byoperating segment are as follows (*inthousands*):

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| **Sales**                                                |       |                   |       |                 |       |   |   |   |   |
| Tactical Vehicle Systems                                 |       | $                      | 204,175    |                 | $          | 140,737 |   | $ | 369,693 |   | $ | 279,520 |   |
| Power Products                                           |       | 125,049                |       | 109,721              |       | 242,060 |   | 216,020 |   |
| Engineered Products                                      |       | 39,752                 |       | 21,936               |       | 68,785 |   | 39,204 |   |
| Total Sales                                              |       | $                      | 368,976    |                 | $          | 272,394 |   | $ | 680,538 |   | $ | 534,744 |   |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| **Operating profit (loss)**                              |       |                   |       |                 |       |   |   |   |   |
| Tactical Vehicle Systems                                 |       | $                      | 19,100     |                 | $          | 18,711 |   | $ | 32,275 |   | $ | 38,153 |   |
| Power Products                                           |       | 5,958                  |       | 2,200                |       | 8,335 |   | 1,971 |   |
| Engineered Products                                      |       | 2,693                  |       | 1,113                |       | 3,967 |   | (697 | ) |
| Corporate                                                |       | (2,883                 | )          | (3,814               | )          | (5,387 | ) | (7,281 | ) |
| Total operating profit                                   |       | 24,868                 |       | 18,210               |       | 39,190 |   | 32,146 |   |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Interest expense                                         |       | 548                    |       | 436                  |       | 1,073 |   | 953 |   |
| Interest income                                          |       | (797                   | )          | (332                 | )          | (1,557 | ) | (586 | ) |
| Earnings from continuing operations before  income taxes |       | $                      | 25,117     |                 | $          | 18,106 |   | $ | 39,674 |   | $ | 31,779 |   |

 

**Note 6 - Guarantees and Contingencies**

 

*Warranties*:  Based on historical experience and contractterms, the Company provides for the estimated cost of product and servicewarranties at the time of sale or, in some cases, when specific warrantyproblems are identified.  Accruedwarranty costs are adjusted periodically to reflect actual experience.  Certain warranty and other related claimsinvolve matters of dispute that ultimately are resolved by negotiation,arbitration or litigation.  Occasionally,a material warranty issue can arise that is beyond the Company’s historicalexperience.  The Company provides for anysuch warranty issues as they become known and estimable.

 

A summary of warranty activity associated with continuing operationsfor three and six months ended July 30, 2005 and July 31, 2004 follows (*in thousands*):

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                   | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
|                                                         |       |                   |       |                 |       |   |   |   |   |
| Accrued warranty costs at beginning of  period               |       | $                      | 3,999      |                 | $          | 3,221 |   | $ | 3,537 |   | $ | 3,517 |   |
| Payments for warranty obligations                            |       | (513                   | )          | (563                 | )          | (1,216 | ) | (1,971 | ) |
| Warranty accrual for current period sales                    |       | 992                    |       | 624                  |       | 2,019 |   | 1,688 |   |
| Changes related to pre-existing warranties  and acquisitions |       | (358                   | )          | 147                  |       | (220 | ) | 195 |   |
| Accrued warranty costs at end of period                      |       | $                      | 4,120      |                 | $          | 3,429 |   | $ | 4,120 |   | $ | 3,429 |   |

 

*Guarantees*:  TheCompany is occasionally required to issue performance indemnities or to postletters of credit, generally issued by a bank, to collateralize certaininsurance programs, to secure credit facilities or to ensure performance undercontracts.  A letter of credit commitsthe issuer to remit specified amounts to the holder, if the holder demonstratesthat the Company has failed to meet its obligations under the letter ofcredit.  If this were to occur, theCompany would be obligated to reimburse the issuer for any payments the issuerwas required to remit to the holder of the letter of credit.  Generally, a letter of credit is releasedwhen the Company has satisfied the obligations that the letter of credit issecuring.  As of July 30, 2005 andJanuary 31, 2005, the Company had letters of credit outstanding totalingapproximately $14.4 million and $13.2 million, respectively.  In addition, the Company had contingentperformance indemnities of approximately $3.2 million and $3.8 million as of July30, 2005 and January 31, 2005, respectively.

 

10

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*U.S. Government Contingencies*:  During 1998, theU.S. Customs Service detained a medium tactical vehicle that was being shippedby the Company for display in a European trade show.  The Company is advised that the U.S. CustomsService and the Department of Justice have conducted an investigation ofpotential violations by the Company of laws relating to the export ofcontrolled military vehicles, weapons mounting systems and firearms.  Such investigation could result in the filingof civil or administrative sanctions against the Company and/or individualemployees, and could result in a suspension or debarment of the Company fromreceiving new contracts or subcontracts with agencies of the U.S. government orthe benefit of federal assistance payments. While they are possible, the Company does not believe that criminalsanctions will be sought.  The Companybelieves that resolution of this matter will not have a material adverse effecton its consolidated results of operations, financial condition or liquidity andbelieves that the resolution of the matter that is possibly most adverse to theCompany will involve the payment of a civil penalty that will not materiallyadversely affect the Company.

 

The Company is a defendant in a suit filed in 1996 under the *qui tam* provision of the False Claims Act, *United States of America, ex rel. Werner Stebner v. Stewart &Stevenson Services, Inc.**and McLaughlin Body Co.*,Civil Action No. H-96-3363, in the United States District Court for theSouthern District of Texas, Houston Division. The plaintiff’s complaint seeks penalties and damages in an unspecifiedamount.  The suit alleges that theCompany made false statements and certifications in connection with claims forpayment for medium tactical vehicles delivered to the U.S. Army before 1998,and that the vehicles were substandard because of corrosion problems.  Following an investigation by the JusticeDepartment, the United States declined to intervene in the suit.  In February 2005, the District Court found infavor of the Company and dismissed all of the plaintiff’s claims by summaryjudgment without proceeding to trial. The plaintiff filed a notice of appeal in March 2004 in the UnitedStates Court of Appeals for the Fifth Circuit, No. 04-20209.  On August 8, 2005, a panel of the FifthCircuit issued an opinion affirming the district court’s summary judgmentorder.  While the plaintiff could ask forrehearing by the panel or by the full Fifth Circuit, or could petition theUnited States Supreme Court to issue a writ of certiorari authorizing an appealto the Supreme Court, the Company believes any such action by the plaintiff isunlikely to be successful.  However,until all issues are exhausted, the Company’s consolidated results ofoperations, financial position and liquidity could still be affected by thissuit.

 

*KlickitatLitigation*:  The Company and several of its subsidiariesin the Distributed Energy Solutions business are defendants in a suit filed bythe Klickitat County Public Utility District No. 1 on December 11, 2003 arisingout of claims relating to a landfill gas power generation facility inRoosevelt, Washington, Cause No. CY-03-3175-LRS;*KlickitatCounty Public Utility District No. 1 v. Stewart & Stevenson Services, Inc.,Stewart & Stevenson Power, Inc., Sierra Detroit Diesel Allison, Inc., PamcoInternational, Inc. and Waukesha Engine Dresser, Inc.*; in the UnitedStates District Court for the Eastern District of Washington.  The plaintiff has asserted claims withrespect to equipment installed and used since 1999 for breach of contract;promissory estoppel; violations of the Washington Products Liability Act;breach of warranties; intentional or negligent misrepresentation; andviolations of the Washington Consumer Protection Act and seeks recovery ofdamages in excess of $13 million.  TheCompany is vigorously defending this suit. It is presently impossible for the Company to determine the ultimateoutcome of this suit or whether its resolution will, in the future, have amaterial adverse effect on the Company’s consolidated results of operations,financial position or liquidity.  TheCompany is presently unable to determine whether a material liability has beenincurred in this matter or to reasonably estimate the amount of any loss thatmay result from this matter. Consequently, the Company has recorded no accrual for any losses relatedto the ultimate outcome of this litigation. The Company has, however, recorded accruals that it believes areadequate for estimated legal fees that it expects to incur associated with thismatter.

 

*NEO Dispute*:  On November 3, 2004, the Companywas served with a demand for arbitration by NEO California Power, LLC and NEOCorporation (collectively, “NEO”) with respect to two contracts (entered intoin December 2000 and March 2001) between a subsidiary of the Company in theDistributed Energy Solutions business and NEO, for the engineering andconstruction of two natural gas fueled electricity generating facilities inCalifornia, and with respect to a related “Payment Agreement” entered into inOctober 2001.  In July 2005, the Companyreached a settlement with NEO, pursuant to which the Company agreed to pay NEO$4.3 million.  The Company recorded thesettlement, which was paid in August 2005, to loss from discontinued operationsduring the second quarter of Fiscal 2005.

 

*AntitrustLitigation*:  The Company is a co-defendant with DetroitDiesel Corporation and other Detroit Diesel distributors in two putative classaction suits filed on February 9, 2005, Civil Action No. 05-616; *Cumberland Truck Equipment Co. et al. v. Detroit Diesel Corp., et al.*(the “Cumberland Litigation”), and Civil Action No. 05-625; *Diamond International Trucks, Inc. et al. v. Detroit Diesel Corp., etal.* (the “DIT Litigation”). Each suit relates to the Power Products segment and has been filed**in the United States District Court for the EasternDistrict of Pennsylvania.  In theCumberland Litigation, plaintiffs were dealers of Detroit Diesel parts whoseagreements were terminated or not renewed on or after February 9, 2001.  The plaintiffs are claiming antitrustviolations arising out of the termination or non-renewal of their dealeragreements.  In the DIT Litigation,plaintiffs are dealers of Detroit Diesel parts whose dealership classificationwas changed on or after February 9, 2001. The plaintiffs in the DIT Litigation are claiming antitrust violationsarising out of changes to the classification of their dealerships.

 

11

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TheCompany is a distributor of Detroit Diesel parts and had a dealer agreementwith one or more of the named plaintiffs in each suit.  The plaintiffs in each suit have also allegedprice fixing and group boycott in violation of Section 1 of the Sherman Act andhave made claims for treble damages and injunctive and other relief.  The Company is vigorously defending bothsuits.  It is presently impossible forthe Company to determine the ultimate outcome of either suit or whether theirresolution will, in the future, have a material adverse effect on the Company’sconsolidated results of operations, financial position or liquidity.  The Company is presently unable to determinewhether a material liability has been incurred in these matters or toreasonably estimate the amount of any loss that may result from thesematters.  Consequently, the Company hasrecorded no accrual for any losses related to the ultimate outcome of thislitigation.  The Company has, however,recorded accruals that it currently believes are adequate for estimated legalfees that it expects to incur associated with these matters.

 

*Environmental Contingencies*:  In 2001, theCompany received from the United States Environmental Protection Agency (the “EPA”)a Request for Information under Section 104(e) of the ComprehensiveEnvironmental Response, Compensation, and Liability Act of 1980, forinformation pertaining to the R&H Oil Company Site in San Antonio, Texas(the “Site”).  Information provided tothe Company by the EPA indicates that the Company may have sent waste oils tothe Site for recycling in the late 1980s, and that such waste oils maypotentially account for between one and two percent of the volume of totalwastes 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 recorded accrualswhich it believes to be adequate at this time. As additional facts are developed and definitive remediation plans andnecessary regulatory approvals for implementation of remediation areestablished, changes in these and other factors may result in actual costsexceeding the amounts accrued.  Whileuncertainties are inherent in the final outcome of these environmental matters,and it is presently impossible to determine the actual costs that ultimatelymay be incurred, management currently believes that the resolution of suchuncertainties should not have a material adverse effect on the Company’sconsolidated results of operations, financial position or liquidity. TheCompany believes that the most likely outcome in this environmental matter isthe expenditure of an immaterial amount of consideration as a contribution tothe remediation effort.

 

The Company is also a defendant in a number of lawsuits relating tocontractual, product liability, personal injury and warranty matters normallyincident to the Company’s business.  Noindividual case, or group of cases presenting substantially similar issues oflaw or fact, is expected to have a material effect on the manner in which theCompany conducts its business or on its consolidated results of operations,financial position or liquidity.  TheCompany maintains certain insurance policies that provide coverage for productliability and personal injury cases.  TheCompany has established reserves that it believes to be adequate based oncurrent evaluations and its experience in these types of claim situations.  Nevertheless, an unexpected outcome oradverse development in any such case could have a material adverse impact onthe Company’s consolidated results of operations in the period it occurs.

 

**Note 7 – Inventories**

 

Summarizedbelow are the components of inventories related to continuing operations, netof customer deposits *(in thousands)*:

 

| ** **                                        | ** ** | **July 30, 2005** | ** ** | **January 31, 2005** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                        | ** ** | ** **        | ** ** | ** **           | ** ** |
| Inventory purchased under distributor  agreements |       | $                 | 71,038     |                 | $          | 71,583 |   |
| Raw materials and spare parts                     |       | 35,559            |       | 22,811               |       |
| Work in process                                   |       | 29,359            |       | 16,228               |       |
| Finished goods                                    |       | 2,468             |       | 2,267                |       |
|                                              |       | 138,424           |       | 112,889              |       |
| Excess of current cost over LIFO values           |       | (36,021           | )          | (35,168              | )          |
| Total Inventories                                 |       | $                 | 102,403    |                 | $          | 77,721 |   |

 

Rawmaterials and spare parts include OEM equipment and components used in themanufacturing segments.  Inventorybalances have increased since January 31, 2005 primarily to support increasedorder and production activity in all of our operating segments.  The Company uses the last-in, first-out (“LIFO”)method of valuing the majority of its inventory.  An actual valuation of inventory under theLIFO method can be made only at the end of each fiscal year based on theinventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’sestimates of expected year-end inventory levels and costs and are subject tothe final year-end LIFO inventory valuation.

 

12

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**Note 8 – 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 operations *(in thousands, except pershare data)*:

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                      | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| Numerator:                                                      |       |                   |       |                 |       |   |   |   |   |
| Earnings (loss) available to common  shareholders               |       |                   |       |                 |       |   |   |   |   |
| From continuing operations                                      |       | $                      | 16,472     |                 | $          | 11,591 |   | $ | 25,805 |   | $ | 20,398 |   |
| From discontinued operations                                    |       | (7,170                 | )          | (5,714               | )          | (8,811 | ) | (9,079 | ) |
| Net earnings                                                    |       | $                      | 9,302      |                 | $          | 5,877 |   | $ | 16,994 |   | $ | 11,319 |   |
|                                                            |       |                   |       |                 |       |   |   |   |   |
| Denominator:                                                    |       |                   |       |                 |       |   |   |   |   |
| Denominator for basic earnings per share                        |       |                   |       |                 |       |   |   |   |   |
| Weighted average shares outstanding                             |       | 29,058                 |       | 28,749               |       | 28,993 |   | 28,709 |   |
| Effect of dilutive securities:                                  |       |                   |       |                 |       |   |   |   |   |
| Employee and director stock options                             |       | 502                    |       | 433                  |       | 520 |   | 349 |   |
| Denominator for diluted earnings per share  -                   |       |                   |       |                 |       |   |   |   |   |
| Adjusted weighted average shares  outstanding                   |       | 29,560                 |       | 29,182               |       | 29,513 |   | 29,058 |   |
|                                                            |       |                   |       |                 |       |   |   |   |   |
| Basic earnings per share:                                       |       |                   |       |                 |       |   |   |   |   |
| From continuing operations                                      |       | $                      | 0.57       |                 | $          | 0.40 |   | $ | 0.89 |   | $ | 0.71 |   |
| From discontinued operations                                    |       | (0.25                  | )          | (0.20                | )          | (0.30 | ) | (0.32 | ) |
| Net earnings per share                                          |       | $                      | 0.32       |                 | $          | 0.20 |   | $ | 0.59 |   | $ | 0.39 |   |
|                                                            |       |                   |       |                 |       |   |   |   |   |
| Diluted earnings per share:                                     |       |                   |       |                 |       |   |   |   |   |
| From continuing operations                                      |       | $                      | 0.56       |                 | $          | 0.40 |   | $ | 0.87 |   | $ | 0.70 |   |
| From discontinued operations                                    |       | (0.25                  | )          | (0.20                | )          | (0.30 | ) | (0.31 | ) |
| Net earnings per share                                          |       | $                      | 0.31       |                 | $          | 0.20 |   | $ | 0.57 |   | $ | 0.39 |   |
|                                                            |       |                   |       |                 |       |   |   |   |   |
| Number of shares under anti-dilutive stock  options outstanding |       | 410                    |       | 1,000                |       | 429 |   | 1,009 |   |

 

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

 

Effective July 1, 2003, the Company froze the benefits earned under itsdefined benefit pension plans and its defined benefit postretirement medicalplan, with the exception of a small transition group.

 

InDecember 2003, the Medicare Prescription Drug, Improvement and ModernizationAct of 2003 (the “Act”) was signed into law. The Act introduced a prescriptiondrug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy tosponsors of retiree health care benefit plans that provide a benefit that is atleast actuarially equivalent to Medicare Part D.  Prior to the end of Fiscal 2004, the Companyannounced that the defined benefit postretirement medical plan is being amendedeffective January 1, 2006, to discontinue prescription medication coverage forall participants who are both eligible for prescription drug benefits underMedicare and for whom Medicare is the primary payor.  This plan change has reduced the plan’s netperiodic benefit cost beginning in the first quarter of Fiscal 2005.

 

The net periodic benefit cost associated with the Company’s definedbenefit pension plans and defined benefit postretirement medical plan consistedof the following components *(in thousands)*:

 

13

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| ** **                     | ** ** | **Pension Benefits**   | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                     | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004** | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| Service cost                   |       | $                      | 154        |   | $ | 133 |   | $ | 308 |   | $ | 266 |   |
| Interest cost                  |       | 1,988                  |       | 1,939 |   | 3,976 |   | 3,878 |   |
| Expected return on plan assets |       | (2,241                 | )          | (2,113 | ) | (4,482 | ) | (4,226 | ) |
| Recognized actuarial loss      |       | 728                    |       | 430 |   | 1,456 |   | 860 |   |
| Net periodic benefit cost      |       | $                      | 629        |   | $ | 389 |   | $ | 1,258 |   | $ | 778 |   |

 

| ** **                                     | ** ** | **Other Postretirement Benefits** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **Three Months Ended**            | ** ** | **Six Months Ended** | ** ** |
| ** **                                     | ** ** | **July 30, 2005**                 | ** ** | **July 31, 2004** | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| Interest cost                                  |       | $                                 | 40         |   | $ | 158 |   | $ | 80 |   | $ | 316 |   |
| Amortization of deferred plan amendment  gains |       | (363                              | )          | (207 | ) | (726 | ) | (414 | ) |
| Recognized actuarial loss                      |       | 125                               |       | 112 |   | 250 |   | 224 |   |
| Net periodic benefit cost (income)             |       | $                                 | (198       | ) | $ | 63 |   | $ | (396 | ) | $ | 126 |   |

 

Aspreviously disclosed in the Company’s consolidated financial statements for theyear ended January 31, 2005, the Company expects to contribute approximately$1.0 million to its defined benefit pension plans during Fiscal 2005.  No contributions were made during the six monthsended July 30, 2005.

 

14

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

This discussion should be read in conjunction with theattached consolidated condensed financial statements and notes thereto, andwith our Annual Report on Form 10-K and notes thereto for the fiscal year endedJanuary 31, 2005.  The followingdiscussion contains forward-looking statements. In connection therewith, please see “Factors That May Affect FutureResults” below, which identifies important factors that could cause actualresults to differ materially from those predicted or implied in theforward-looking statements.

 

Our fiscal year begins on February 1 of theyear stated and ends on January 31 of the following year.  For example, our “Fiscal 2005” commenced onFebruary 1, 2005 and ends on January 31, 2006. We report results on the fiscal quarter method with each quartercomprising approximately 13 weeks.  Thesecond quarter of Fiscal 2005 commenced on May 1, 2005 and ended on July 30,2005, and the second quarter of Fiscal 2004 commenced on May 2, 2004 and endedon July 31, 2004.

 

**RESULTS OF OPERATIONS**

 

**Strategic Overview**

 

During the last two years,we have taken numerous actions aimed at generating acceptable returns in all ofour core businesses.  This process beganduring the second half of Fiscal 2003, when we refocused our primary operatingmetrics and management incentive measurements to emphasize the need for each ofour businesses to achieve acceptable returns on shareholder investedcapital.  During Fiscal 2005, we arecontinuing to take actions to exit non-core and under-performing businesses andinvest in our core operating segments in order to improve our returns onshareholder invested capital.   Thesignificant highlights of our progress during the first half of Fiscal 2005 aredescribed below.

 

*Tactical Vehicle Systems* – In April 2005, we acquired all outstandingshares of Automotive Technik (Holdings) Limited (“ATHL”), the manufacturer ofthe Pinzgauer light tactical vehicle headquartered in the United Kingdom, for atotal purchase price of approximately $48.2 million.  The acquisition of ATHL broadens our productofferings in our Tactical Vehicle Systems segment and provides additionalmarketing opportunities worldwide.  ATHLis currently under contract to produce vehicles for the United Kingdom Ministryof Defence and the New Zealand Ministry of Defence, in addition to otherprograms worldwide.

 

Additionally, we received contractmodifications from the U.S. Army in June 2005, valued at approximately $483million.  These modifications are fundedby the 2005 U.S. Congress Supplemental Spending Bill and added 3,016 truck andtrailer deliveries to the current U.S. Army production contract.  These additional deliveries are scheduledfrom June 2006 to September 2008.

 

*Power Products –*On August 18, 2005, we entered into adefinitive agreement to sell substantially all of the inventory, property,plant and equipment, distribution rights, and operations of four Power Productssegment distribution locations in California. The sale is expected to be completed during the third quarter of Fiscal2005 subject to customary documentation and other third party consents and isexpected to reduce working capital requirements of this segment byapproximately $20 million.  We recorded a$4.0 million pre-tax charge in the second quarter of Fiscal 2005, reflectingthe estimated withdrawal liability from a union pension plan and a reduction inthe carrying value of the net assets of this business to their fair value lessestimated costs to sell.  This sale isanother in a series of actions taken in the Power Products segment to exitnon-strategic product lines and locations and streamline our efforts to improveour return on invested capital to acceptable levels.

 

Additionally,our Power Products segment is now operating through two geographic regionscompared to fourteen regions two years ago and four regions at the beginning ofFiscal 2005.  This condensed reportingstructure has resulted in substantial administrative cost savings.

 

**Fiscal 2005 vs. Fiscal 2004**

 

Sales from continuing operations for thesecond quarter of Fiscal 2005 were $369.0 million, a $96.6 million (35%)increase over the $272.4 million recorded in the second quarter of Fiscal2004.  This increase in sales isattributable to higher sales volume in all operating segments.  The Tactical Vehicle Systems segmentaccounted for the largest sales increase, contributing $63.4 million ofadditional sales, while the Power Products and Engineered Products segmentsrecorded sales increases of $15.3 million and $17.8 million, respectively, overthe second quarter of Fiscal 2004.  Forthe first half of Fiscal 2005, sales were $680.5 million, representing a $145.8million (27%) increase over the $534.7 million recorded in the first half ofFiscal 2004.  The increased sales volumein the first half of Fiscal 2005 is also attributable to higher sales volume inall operating segments.  The changeswithin each segment are explained in greater detail in the Segment Data sectionbelow.

 

15

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Gross profit increased to $46.5 million inthe second quarter of Fiscal 2005 from $40.3 million in the second quarter ofFiscal 2004, reflecting a decline in gross profit margin from 14.8% to 12.6% onthe higher revenue base.  For the firsthalf of Fiscal 2005, gross profit increased to $83.1 million from $76.9 millionin the first half of Fiscal 2004, reflecting a decline in gross profit marginfrom 14.4% to 12.2%.  Improved margins inthe Power Products and Engineered Products segments were offset by lowermargins in the Tactical Vehicle Systems segment.  The decrease in gross profit margin for thesecond quarter and first half of Fiscal 2005 is primarily attributable to thetransition to the current multi-year FMTV production contract, which began inthe fourth quarter of Fiscal 2004.  Thesechanges are explained in greater detail in the Segment Data section below.

 

Selling and administrative expenses decreasedto $23.0 million (6.2% of sales) in the second quarter of Fiscal 2005 from$23.4 million (8.6% of sales) in the second quarter of Fiscal 2004.  For the first half of Fiscal 2005, sellingand administrative expenses decreased to $46.1 million (6.8% of sales) from$46.6 million (8.7% of sales) in the first half of Fiscal 2004.  The reduction in selling and administrativeexpenses in Fiscal 2005 is primarily the result of cost control effortsthroughout all operating segments, while sales have significantly increased.  Additionally, the second quarter and firsthalf of Fiscal 2004 included initial start-up costs of $0.1 million and $0.7million, respectively, associated with implementing the provisions of Section404 of the Sarbanes-Oxley Act of 2002.

 

Other income, net was $1.4 million in the secondquarter of Fiscal 2005, a $0.1 million increase from the $1.3 million in thesecond quarter of Fiscal 2004.  For thefirst half of Fiscal 2005, other income, net was $2.2 million, a $0.3 millionincrease from the $1.9 million in the first half of Fiscal 2004.  The second quarter of Fiscal 2005 includes a$0.8 million gain on the sale of an idle facility within the Power Productssegment, while the second quarter of Fiscal 2004 included $0.9 million of gainson sales of two idle manufacturing facilities. The remainder of other income consists primarily of compensation earnedfrom Power Products segment supply partners, under a program that will bediscontinued by the end of Fiscal 2005.

 

Net interest income improved by $0.4 million to $0.2million of income in the second quarter of Fiscal 2005, and improved by $0.9million to $0.5 million of income in the first half of Fiscal 2005.   This improvement is primarily the result ofhigher interest income due to higher invested cash balances and higher interestrates on invested cash.

 

The effective tax rate was 35.0% in the first halfof Fiscal 2005 compared to 35.8% for the first half of Fiscal 2004.  The reduction in effective rate is the resultof increases in expected tax credits during Fiscal 2005.

 

Discontinued operations generated an after-tax lossof $7.2 million in the second quarter of Fiscal 2005, compared to a $5.7million after-tax loss in the second quarter of Fiscal 2004. Discontinuedoperations include the results of our exited Distributed Energy Solutions andAirline Products segments, as well as certain Power Products distributionlocations in California which are under contract to be sold and costsassociated with retained obligations associated with our discontinued blowoutpreventer and controls, valve and drilling riser business, which was soldduring Fiscal 2002.  The increased lossesin Fiscal 2005 are primarily attributable to a $4.3 million settlement of acustomer dispute in the Distributed Energy Solutions business, a $3.1 millioncharge related to residual costs associated with the exited Airline Productsbusiness, and a $4.0 million charge related to the California operations heldfor sale reflecting the recognition of certain liabilities and asset impairmentrelated to the pending sale.

 

For the first half of Fiscal 2005, discontinuedoperations generated an after-tax loss of $8.8 million, down $0.3 million fromthe $9.1 million after-tax loss recorded in the first half of Fiscal 2004.  This decreased operating loss is due to loweron-going operating losses in the exited Distributed Energy Solutions business,partially offset by the charges in the second quarter of Fiscal 2005 describedabove.

 

**Segment Data**

 

Our operating segments are organized based on the products and servicesoffered and are aligned with the internal management structure.  Inter-segment and intra-segment revenues andcosts are eliminated, and the operating profit (loss) represents the earnings(loss) before interest and income taxes from continuing operations, net ofcertain corporate allocations.

 

The following table represents sales and operating profit (loss) bybusiness segment in continuing operations *(inthousands, except percentages)*:

 

16

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| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| **Sales**                                                |       |                   |       |                 |       |   |   |   |   |
| Tactical Vehicle Systems                                 |       | $                      | 204,175    |                 | $          | 140,737 |   | $ | 369,693 |   | $ | 279,520 |   |
| Power Products                                           |       | 125,049                |       | 109,721              |       | 242,060 |   | 216,020 |   |
| Engineered Products                                      |       | 39,752                 |       | 21,936               |       | 68,785 |   | 39,204 |   |
| Total Sales                                              |       | $                      | 368,976    |                 | $          | 272,394 |   | $ | 680,538 |   | $ | 534,744 |   |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| **Operating profit (loss)**                              |       |                   |       |                 |       |   |   |   |   |
| Tactical Vehicle Systems                                 |       | $                      | 19,100     |                 | $          | 18,711 |   | $ | 32,275 |   | $ | 38,153 |   |
| Power Products                                           |       | 5,958                  |       | 2,200                |       | 8,335 |   | 1,971 |   |
| Engineered Products                                      |       | 2,693                  |       | 1,113                |       | 3,967 |   | (697 | ) |
| Corporate                                                |       | (2,883                 | )          | (3,814               | )          | (5,387 | ) | (7,281 | ) |
| Total operating profit                                   |       | 24,868                 |       | 18,210               |       | 39,190 |   | 32,146 |   |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| Interest expense                                         |       | 548                    |       | 436                  |       | 1,073 |   | 953 |   |
| Interest income                                          |       | (797                   | )          | (332                 | )          | (1,557 | ) | (586 | ) |
| Earnings from continuing operations before  income taxes |       | $                      | 25,117     |                 | $          | 18,106 |   | $ | 39,674 |   | $ | 31,779 |   |
|                                                     |       |                   |       |                 |       |   |   |   |   |
| **Operating profit (loss) percentage**                   |       |                   |       |                 |       |   |   |   |   |
| Tactical Vehicle Systems                                 |       | 9.4                    | %          | 13.3                 | %          | 8.7 | % | 13.6 | % |
| Power Products                                           |       | 4.8                    |       | 2.0                  |       | 3.4 |   | 0.9 |   |
| Engineered Products                                      |       | 6.8                    |       | 5.1                  |       | 5.8 |   | (1.8 | ) |
| Consolidated                                             |       | 6.7                    |       | 6.7                  |       | 5.8 |   | 6.0 |   |

 

**TacticalVehicle Systems**

 

The Tactical Vehicle Systems segment manufactures theFamily of Medium Tactical Vehicles (“FMTV”) and related armoring undercontracts with the U.S. Army and provides sustaining design engineering,service and support.  With the ATHLacquisition described above, this segment also manufactures Pinzgauer lighttactical vehicles for the United Kingdom Ministry of Defence, the New ZealandMinistry of Defence and other customers. Other contracts within and outside of the U.S. are also being pursued inthe segment.  During the second quarterof Fiscal 2005, this segment recorded $204.2 million of sales, a $63.4 million(45%) increase from the $140.7 million of sales recorded in the second quarterof Fiscal 2004.  For the first half ofFiscal 2005, this segment recorded $369.7 million of sales, a $90.2 million(32%) increase from the $279.5 million recorded in the first half of Fiscal2004.  The sales increase is primarilyattributable to increased production volume of Low Signature Armored Cabs (“LSAC”).  A breakdown of unit deliveries from thissegment is as follows:

 

| ** **                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                 | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| Trucks                     |       | 711                    |       | 751                  |       | 1,338 |   | 1,494 |   |
| Trailers                   |       | 337                    |       | 201                  |       | 628 |   | 405 |   |
| Low Signature Armored Cabs |       | 852                    |       | —               |       | 1,473 |   | — |   |

 

This segment recorded $74.2 million of sales in the secondquarter and $127.4 million in the first half of Fiscal 2005 associated with theLSAC production.  Additionally, thissegment recorded $15.2 million of sales in the second quarter and $18.7 millionin the first half of Fiscal 2005 attributable to Pinzgauer truck sales in ournewly-acquired U.K. manufacturing operation. These sales increases were partially offset by declines in salesattributable to the U.S. Army FMTV production contracts.  Equipment sales under the FMTV contractsdeclined $37.6 million in the second quarter and $74.4 million in the firsthalf of Fiscal 2005 from the comparable periods of Fiscal 2004, primarily dueto lower truck volumes and lower pricing under the current FMTV productioncontract.  Parts and service salesincreased to $32.3 million in the second quarter and $56.7 million in the firsthalf of Fiscal 2005, compared to $20.7 million and $38.2 million, respectively,in the comparable periods of Fiscal 2004. The increase in parts and service sales is primarily attributable to $8.6million and $16.3 million of sales in the second quarter and first half ofFiscal 2005, respectively, related to vehicle reset programs awarded duringFiscal 2004, as well as $1.4 million generated by the newly-acquired ATHLoperation in the second quarter of Fiscal 2005.

 

Operating profit for the second quarter of Fiscal 2005increased to $19.1 million (9.4% operating margin) from $18.7 million (13.3%operating margin) in the second quarter of Fiscal 2004.  For the first half of Fiscal 2005, operatingprofit decreased to $32.3 million (8.7% operating margin) from $38.2 million(13.6% operating margin) in the first half of Fiscal 2004.  Lower

 

17

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margins on the new FMTV production contract were partiallyoffset by higher operating profit generated from the LSAC production.  In addition, operating margins on parts andservice sales declined as margins on the vehicle reset programs and sustainingengineering services provided under the current FMTV contract are lower thanhistorical margin rates.

 

During the first quarter of Fiscal 2005, thethird program year of the current FMTV contract valued at $316 million wasfunded, extending production through September 2006.  Additionally, we received contractmodifications from the U.S. Army in June 2005 valued at approximately $483million.  These modifications were fundedby the 2005 U.S. Congress Supplemental Spending Bill and added 3,016 truck andtrailer deliveries between June 2006 and September 2008 to the U.S. Armyproduction contract.  Consequently,backlog in this segment at July 30, 2005 was $1.2 billion, compared to $457million at January 31, 2005.  While theadditional contract modifications received in the second quarter of Fiscal 2005will significantly increase anticipated sales volumes in Fiscal 2006 and Fiscal2007, we are still in the process of assessing the net impact that this salesvolume will have on future operating profits of this segment.

 

Scheduled deliveries for the remainder of Fiscal 2005currently include 1,556 trucks, 927 trailers and 292 LSAC units.  The current delivery schedule is subject tochange at the request of the customer. Expected operating margins on the components of this segment’s backlogvary considerably among the numerous contracts and variants provided.  This variability is attributable to a numberof factors including recent volatility in prices for steel and othercommodities, base versus option production, the material content within eachvariant and other factors, many of which are not within our control.  Consequently, depending on the mix of vehicles,LSACs, parts and services delivered in each quarter, the segment operatingmargin could vary significantly from one fiscal quarter to the next.  Furthermore, we expect operating margins inthis segment to be lower in the second half of Fiscal 2005 than they have beenin the first half of the year.  Theoperating margin that this segment will achieve in total may also be impactedby proposal activities, additional contract awards and modifications and thelevel of engineering service and spare parts provided.

 

**Power Products**

 

The Power Products segment, which is responsible formarketing and aftermarket support of a wide range of industrial equipment,recorded sales of $125.0 million in the second quarter of Fiscal 2005, a $15.3million (14%) increase from $109.7 million recorded in the second quarter ofFiscal 2004. For the first half of Fiscal 2005, this segment recorded sales of$242.1 million, a $26.0 million (12%) increase from $216.0 million recorded inthe first half of Fiscal 2004.  Abreakdown of Power Products segment sales follows *(inthousands)*:

 

| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------|------------|
| ** **               | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
|                     |       |                   |       |                 |       |   |   |   |   |
| Equipment sales          |       | $                      | 45,489     |                 | $          | 38,089 |   | $ | 88,364 |   | $ | 72,516 |   |
| Parts sales              |       | 54,311                 |       | 47,123               |       | 104,601 |   | 95,315 |   |
| Service and rental sales |       | 25,249                 |       | 24,509               |       | 49,095 |   | 48,189 |   |
|                     |       | $                      | 125,049    |                 | $          | 109,721 |   | $ | 242,060 |   | $ | 216,020 |   |

 

The improved sales volume in the secondquarter and first half of Fiscal 2005 from the comparable periods of Fiscal2004 is primarily attributable to improved pricing and sales execution alongwith general improvements in the heavy equipment markets we serve.

 

This segment recorded an operating profit of$6.0 million in the second quarter of Fiscal 2005 compared to $2.2 million inthe second quarter of Fiscal 2004.  Forthe first half of Fiscal 2005, this segment recorded an operating profit of$8.3 million compared to $2.0 million in the comparable period of Fiscal2004.  The improvement in operatingprofit in Fiscal 2005 is primarily attributable to the additional gross profitgenerated by the higher sales volume while selling and administrative expenseshave remained relatively flat to comparable periods of Fiscal 2004.

 

Our order backlog in this segment hasincreased to $56.6 million at July 30, 2005, compared to $39.3 million atJanuary 31, 2005.  Due to the increasingorder backlog combined with the results of the many actions taken in the PowerProducts segment, we anticipate that this segment will continue to generatepositive operating profit and cash flow and improved returns in thenear-term.  However, due to the manyuncertainties involved with this business, including the general economicconditions in the markets we serve, we cannot predict with certainty when thissegment will consistently achieve our targeted level of financial return.

 

18

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**EngineeredProducts**

 

The Engineered Products segment consists oftwo primary product lines, petroleum equipment and utilities equipment.  The petroleum equipment business manufacturesequipment primarily for the well stimulation segment of the oil serviceindustry.  The utilities equipmentproducts include mobile railcar movers, snowblowers and off-road seismicvehicles.  Sales in this segmentincreased to $39.8 million in the second quarter of Fiscal 2005 from $21.9million in the second quarter of Fiscal 2004, representing an increase of $17.8million (81%).  For the first half ofFiscal 2005, this segment recorded sales of $68.8 million, an increase of $29.6million (75%) from the $39.2 million of sales recorded in the comparable periodof Fiscal 2004.  The sales increaseresulted from the continued progress and execution of several large petroleumequipment orders that were received during Fiscal 2004.

 

Operating profit for the second quarter ofFiscal 2005 was $2.7 million, a $1.6 million improvement from the $1.1 millionoperating profit in the second quarter of Fiscal 2004.  The improvement in operating profit includes$2.2 million attributable to the increased sales volume.  Fiscal 2004 results included a $0.6 milliongain associated with the disposal of an idle manufacturing facility.

 

For the first half of Fiscal 2005, operatingprofit was $4.0 million, a $4.7 million improvement from the $0.7 million operatingloss for the first half of Fiscal 2004. The improvement in operating profit includes $2.6 million attributableto the increased sales volume and $2.3 million attributable to marginimprovements through pricing and manufacturing and other cost reductions on theFiscal 2005 equipment projects.  Fiscal2004 results included a $0.4 million inventory impairment charge resulting fromU.S. trade sanctions against Syria and the $0.6 million gain associated withthe disposal of an idle manufacturing facility.

 

Our order backlog in this segment was $91.1million at July 30, 2005 compared to $91.9 million at the end of Fiscal2004.  As a result of our backlog andfavorable economic conditions within the markets that we serve, sales volumesand operating profits are expected to continue to be higher for the remainderof Fiscal 2005 compared to Fiscal 2004. Beyond Fiscal 2005, however, sales are more difficult to predict andtypically come in large volume orders that require long lead times tocomplete.  The sales derived fromcustomers in the United States are primarily driven by the capital spendingbudgets of the oilfield service companies we serve and, to some extent, theinternal capacity of some customers to package their own equipment.

 

**Corporate**

 

Corporate expenses consist of costs incurredby the corporate headquarters group that cannot be directly attributed to theactivities of the business segments. Corporate expenses incurred in the second quarter of Fiscal 2005 were$2.9 million, down $0.9 million from the $3.8 million incurred in the secondquarter of Fiscal 2004.  The decrease incorporate expenses is primarily attributable to $0.5 million of employeeseparation costs incurred in the second quarter of Fiscal 2004, which did notrecur in Fiscal 2005, combined with a reduction in legal and professionalexpenses, including initial start-up costs associated with the implementationof the internal control reporting requirements of the Sarbanes-Oxley Act of2002 which did not recur in Fiscal 2005.

 

For the first half of Fiscal 2005, corporateexpenses were reduced to $5.4 million from $7.3 million in the first half ofFiscal 2004.  The decrease in corporateexpenses is primarily attributable to $0.5 million of employee separation costsincurred in the second quarter of Fiscal 2004, which did not recur in Fiscal2005, combined with a reduction in legal and professional expenses, including$0.7 million of initial start-up costs associated with the implementation ofthe internal control reporting requirements of the Sarbanes-Oxley Act of 2002which did not recur in Fiscal 2005.

 

In the remainder of Fiscal 2005, weanticipate that corporate expenses will continue to be lower than Fiscal 2004levels, partially due to anticipated reductions in costs associated with therequirements of the Sarbanes-Oxley Act, as well as the benefits of continuedcost reduction programs.

 

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**UNFILLEDORDERS**

 

The Company’s unfilled orders consist of written purchase orders andsigned contracts.  Historically,cancellations are rare; however, these unfilled orders are generally subject tocancellation or modification due to customer relationships or otherconditions.  Purchase options are notincluded in unfilled orders until exercised. Due to the inherent uncertainties of the Congressional appropriationsprocess, the Company includes only the funded portions of awarded U.S.government contracts in the table below. Unfilled orders relating to continuing operations were as follows (*in millions*):

 

| ** **               | ** ** | **July 30, 2005** | ** ** | **January 31, 2005** | ** ** |
|--------------------------|------------|-------------------|------------|----------------------|------------|
|                     |       |              |       |                 |       |
| Tactical Vehicle Systems |       | $                 | 1,204.5    |                 | $          | 456.6 |   |
| Power Products           |       | 56.6              |       | 39.3                 |       |
| Engineered Products      |       | 91.1              |       | 91.9                 |       |
|                     |       | $                 | 1,352.2    |                 | $          | 587.8 |   |

 

Unfilled orders of the Tactical Vehicle Systems segment at July 30,2005 consisted primarily of vehicle production funded under the FMTV contract,production of Pinzgauer trucks in the recently-acquired U.K. operation anduncompleted reset contracts for vehicles ongoing in Sealy and Ft. Hood,Texas.  During the first quarter ofFiscal 2005, the third program year of the FMTV contract was funded, extendingproduction through September 2006 and increasing backlog by $316 million.During the second quarter of Fiscal 2005, we received contract modificationsfrom the U.S. Army resulting from the 2005 U.S. Congress Supplemental Spending Bill,increasing backlog by $483 million.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our sources of cash liquidity include cash and cash equivalents,short-term investments, amounts available under credit facilities and cash fromoperations.  We believe that thesesources will provide sufficient capital to fund our working capitalrequirements, capital expenditure needs, foreseeable acquisition activity,dividends and other financial commitments.

 

In January 2005, we entered into a $100 millionunsecured revolving credit facility which expires in January 2009.  No borrowings have been made under thisfacility, which in effect replaced a $150 million revolving credit facilitythat expired in January 2004.  Therevolving credit facility has a $25 million sub-facility which may be used forletters of credit.  Approximately $7.7million in letters of credit under the revolving credit facility wereoutstanding at July 30, 2005 and $92.3 million was available for borrowing.

 

This revolving credit facility was issued pursuant to agreementscontaining covenants that restrict indebtedness, guarantees, sales of assetsand other items, and require us to maintain a minimum fixed charge coverageratio and maximum leverage ratio.  Basedon our financial condition as of July 30, 2005, the restrictions imposed by theCompany’s revolving credit facility do not currently restrict our ability tomeet our obligations or to declare and pay dividends at historical levels.

 

We have $25.0 million in unsecured senior notes outstanding, which bearinterest at a rate of 7.38% and are due and payable in May 2006.  The senior notes agreement limits sales ofassets and other items and contains a maximum debt-to-total capitalizationcovenant.  Based on our financialcondition as of July 30, 2005, the restrictions imposed by our senior notes donot currently restrict our ability to meet our obligations or to declare andpay dividends at historical levels.

 

To facilitate the purchase of new and used inventory for ourFreightliner truck dealership in the Power Products segment, we entered into afloor plan financing agreement with a commercial bank during Fiscal 2004.  The secured facility, which matures inDecember 2005, allows for short-term borrowings up to $3.0 million, of which$1.7 million and $0.5 million were outstanding at July 30, 2005 and January 31,2005, respectively.  Advances under thisfacility bear interest at the prime rate.

 

Inaddition, our South American subsidiaries had foreign currency bank notespayable totaling $0.7 million and $1.1 million at July 30, 2005 and January 31,2005, respectively.  Such notes payableconsist of renewable, secured loans for the purpose of financing our SouthAmerican operations.  These loans aredenominated in local currency (Colombian Pesos and Venezuelan Bolivars) and aresecured by letters of credit issued by us and principally bear market-basedvariable rates of interest.  We useforeign denominated debt to limit our exposure to foreign currency exchangerate fluctuations on our South America operations.

 

Asa result of the ATHL acquisition in the first quarter of Fiscal 2005, our U.K.subsidiaries have $1.9 million of notes payable at July 30, 2005, which aredenominated in British pounds.  Thesenotes include $1.7 million of deferred consideration payable to ATHL’s formershareholders, bearing interest at 2% per annum, and $0.2 million of assumedcapital lease obligations.

 

20

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Includingadditions to our rental fleet, we incurred $6.2 million of capital spendingduring the first half of Fiscal 2005, compared to $8.8 million for the sameperiod in Fiscal 2004.  We are currentlyevaluating the production requirements under the FMTV contract modificationsresulting from the 2005 U.S. Congress Supplemental Spending Bill and anticipatethe need to increase production capacity for 2006 in order to meet the requireddelivery schedule.  This will requirecapital expenditures of approximately $25 million for additional equipment andfacilities to be committed during the second half of Fiscal 2005.

 

Inthe event that any acquisition of additional operations, growth in existingoperations, settlements of lawsuits or disputes, changes in inventory levels,accounts receivable, tax payments or other working capital items create apermanent need for working capital or capital expenditures in excess of theexisting cash and cash equivalents and committed lines of credit, we may seekadditional capital financing in the form of new debt or equity instruments.

 

**Statements of Cash Flows Data**

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(In  thousands)**                               | ** ** | **July 30, 2005**      | ** ** | **July 31, 2004**    | ** ** | **July 30, 2005** | ** ** | **July 31, 2004** | ** ** |
| Net cash provided by (used in):                   |       |                   |       |                 |       |   |   |   |   |
| Operating activities                              |       | $                      | (37,526    | )                    | $          | (8,341 | ) | $ | (27,616 | ) | $ | 35,276 |   |
| Investing activities                              |       | (2,532                 | )          | 4,105                |       | (39,784 | ) | 3,315 |   |
| Financing activities                              |       | (354                   | )          | (2,017               | )          | (750 | ) | (3,735 | ) |
| Effect of exchange rate changes on cash           |       | (296                   | )          | —               |       | (244 | ) | — |   |
| Increase (decrease) in cash and cash  equivalents |       | $                      | (40,708    | )                    | $          | (6,253 | ) | $ | (68,394 | ) | $ | 34,856 |   |

 

**Selected Balance Sheet Data**

** **
| **(In  thousands)**                                 | ** ** | **July 30, 2005** | ** ** | **January 31, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|----------------------|------------|------------|------------|------------|------------|
| Cash, cash equivalents, and short-term  investments |       | $                 | 73,093     |                 | $          | 132,927    |       |       |       |   |   |
| Working capital                                     |       | 183,171           |       | 225,152              |       |       |       |       |       |
| Total debt                                          |       | 29,271            |       | 26,671               |       |       |       |       |       |
|                                                     |            |                   |            |                      |            |            |            |            |            |  |  |

 

Total cash flows decreased $34.5 millionduring the second quarter of Fiscal 2005 compared to the second quarter ofFiscal 2004.  Net cash used in operatingactivities increased by $29.2 million primarily as a result of timing ofprogress payments within our Tactical Vehicle Systems and Engineered Productssegments.  While progress payments aregenerally attached to specific milestones within each production contract,these milestones do not necessarily correlate to the pattern of expenditure oneach project.  Consequently, theseprojects generate significant changes in operating cash flows in each quarter,depending on expenditure patterns and contractual progress paymentschedules.  As a result of reductions inprogress payments during the second quarter of Fiscal 2005 compared to thelevel of costs incurred on the related production contracts, changes inbillings in excess of incurred costs and recoverable costs and accrued profitsnot yet billed generated a cash usage of $58.3 million during the secondquarter of Fiscal 2005, compared to a $32.5 million usage in the second quarterof Fiscal 2004.  All other operatingactivities provided cash of $20.8 million in the second quarter of Fiscal 2005compared to $24.1 million provided in the second quarter of Fiscal 2004.  We anticipate that the timing of progresspayments will provide positive cash flow in the third quarter of Fiscal 2005.

 

Investing activities consumed $2.5 million ofcash in the second quarter of Fiscal 2005 compared to $4.1 million of net cashprovided in the second quarter of Fiscal 2004. This $6.6 million change is primarily attributable to a $9.6 milliondecline in cash provided by disposals of property, plant and equipment resultingfrom the sale of an idle manufacturing facility during the second quarter ofFiscal 2004.  All other investingactivities consumed $0.8 million less cash in the second quarter of Fiscal 2005compared to the second quarter of Fiscal 2004 due primarily to lower capitalexpenditures.

 

Financing activities used only $0.4 millionof cash in the second quarter of Fiscal 2005 compared to $2.0 million in Fiscal2004, primarily as a result of increased proceeds from the exercise of stockoptions, along with increases in short-term notes receivable.

 

For the first half of Fiscal 2005, total cashflows decreased by $103.3 million compared to the first half of Fiscal2004.  Operating activities contributed$62.9 million to this decrease, including $36.3 million attributable to changesin billings in excess of costs incurred and recoverable costs and accruedprofits not yet billed, along with a $13.0 million decrease from changes inaccounts receivable.  All other operatingactivities generated the remaining $13.6 million decrease.

 

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Investing activities consumed $39.8 millionin the first half of Fiscal 2005, compared to $3.3 million of cash provided inthe first half of Fiscal 2004.  This$43.1 million change is primarily attributable to the ATHL acquisition, whichconsumed $42.8 million during the first half of Fiscal 2005.

 

Cash used in financing activities decreasedby $3.0 million, primarily as a result of increased proceeds from the exerciseof stock options, along with increases in short-term notes receivable.

 

Totalcash and short-term investments declined to $73.1 million at July 30, 2005 from$132.9 million at January 31, 2005.  Thedecline in cash is primarily attributable to the timing of progress payments describedabove, which resulted in a $71.2 million cash usage during the first half ofFiscal 2005.  Additionally, theacquisition of ATHL during the first quarter consumed $42.8 million. Thesereductions in cash are partially offset by net earnings of $17.0 million andadjustments for non-cash items.

 

The$42.0 million decline in working capital is also driven by the ATHL acquisitiondescribed above, along with the reclassification of $25.0 million of seniornotes payable May 2006 to current liabilities.  The ATHL acquisition is also primarily responsible for the $2.6 millionincrease in total debt.

** **

**FACTORS THAT MAY AFFECT FUTURERESULTS**

 

**Forward-LookingStatements**

 

This filing contains forward-looking statements that arebased on management’s current expectations, estimates, and projections. Thesestatements are not guarantees of future performance and involve a number ofrisks, uncertainties, and assumptions and are made pursuant to the Safe HarborProvisions of the Private Securities Litigation Reform Act of 1995.  Many factors, including those discussed morefully elsewhere herein, in the Company’s latest annual report on Form 10-K, andin the Company’s quarterly reports on Form 10-Q, as well as others, could causeresults to differ materially from those stated. Specific important factors that could cause actual results, performance,or achievements to differ materially from such forward-looking statementsinclude risks of dependence on government and failure to obtain new governmentcontracts, inherent risks of government contracts, risks of supplyinterruptions to Tactical Vehicle Systems segment, risks associated withDistributed Energy Solutions segment, risks of fixed-price contracts, risks asto rising steel prices, risks as to cost controls, risks of general economicconditions, risks of oil and gas industry economic conditions, risks as todistributorships, risks as to licenses, risk of competition, risks relating totechnology, risks as to terrorist attacks on the U.S. and their impact on theU.S. economy, risks relating to personnel, risks of claims and litigation,risks of product defects, risks as to foreign sales and global trade matters,risks as to acquisitions and restructuring activities, risks as to currencyfluctuations, risks as to environmental and safety matters, and credit risks,all as more specifically outlined in the Company’s latest annual report on Form10-K.  In addition, such forward-lookingstatements could be affected by general industry and market conditions andgrowth rates, general domestic and international conditions including interestrates, inflation and currency exchange rates and other future factors.  Actual outcomes and results may differmaterially from what is expressed or forecasted in such forward-lookingstatements.

 

**Item 3.  Quantitative and Qualitative Disclosures aboutMarket Risk**

 

Our quantitative and qualitative disclosures about market risk for changesin interest rates and foreign exchange risk are incorporated by reference inItem 7A of our Annual Report on Form 10-K for the year ended January 31,2005.  Our market risks have notmaterially changed since that report was filed, except as noted below.  The following changes in market risk haveoccurred during Fiscal 2005, primarily resulting from the acquisition of ATHL.

 

*Foreign Currency Risk*

 

During the first quarter of Fiscal 2005, theCompany acquired all outstanding shares of ATHL, a light tactical vehiclemanufacturer headquartered in the United Kingdom, for a total purchase price,denominated in British pounds, of approximately $48.2 million.   The functional currency for ATHL is theBritish pound.  To partially hedge itsinvestment, the Company established a British pound denominated inter-companynote in the amount of £12.5 million (approximately $21.9 million at July 30, 2005),which is to be repaid in annual installments through December 2009, and enteredinto a series of forward foreign exchange contracts in order to mitigate theexposure related to the inter-company notes receivable denominated in Britishpounds.

 

Substantially all of the sales of ATHL aredenominated in British pounds.  Purchasesof materials and component parts are also substantially denominated in Britishpounds; however, some component purchases are denominated in Euros and otherforeign currencies.  As a result, theearnings from ATHL are affected by fluctuation in the value of the Britishpound against the Euro,

 

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the U.S. dollar and other currencies.

 

Fluctuations in currency exchange rates may also impact the Company’sshareholders’ equity.  Amounts investedin the Company’s non-U.S. subsidiaries are translated into U.S. dollars at theexchange rates in effect at the end of the reporting period.  The resulting translation adjustments arerecorded in shareholders’ equity as cumulative translation adjustments.  With regard to the ATHL acquisition, thehedging program described above mitigates the exposure related to £12.5million, or $23.5 million of the total investment.  The remaining portion of the initialinvestment is impacted by fluctuations in the U.S. dollar equivalent to Britishpound.

 

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

 

**Evaluation of Disclosure Controlsand Procedures**

 

At the end of the period covered by thisQuarterly Report on Form 10-Q, the Company carried out an evaluation requiredby the Securities Exchange Act of 1934, as amended (the “Exchange Act”), underthe supervision and with the participation of the Company’s management,including the Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the Company’s disclosure controls and procedures pursuant toRule 13a-15 under the Exchange Act. Based upon that evaluation, the Company’s Chief Executive Officer andChief Financial Officer have concluded that the Company’s disclosure controlsand procedures are effective as of the end of the period covered by this reportin alerting them on a timely basis to material information relating to theCompany and required to be included in the Company’s periodic filings under theExchange Act.

 

**Internal Controls over Financial Reporting**

 

There have been no changes in the Company’sinternal controls over financial reporting that occurred during the secondquarter of Fiscal 2005 that have materially affected, or are reasonably likelyto materially affect, the Company’s internal controls over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1.  LegalProceedings**

 

*U.S. Government Contingencies*:  During 1998, theU.S. Customs Service detained a medium tactical vehicle that was being shippedby the Company for display in a European trade show.  The Company is advised that the U.S. CustomsService and the Department of Justice have conducted an investigation ofpotential violations by the Company of laws relating to the export ofcontrolled military vehicles, weapons mounting systems and firearms.  Such investigation could result in the filingof civil or administrative sanctions against the Company and/or individualemployees, and could result in a suspension or debarment of the Company fromreceiving new contracts or subcontracts with agencies of the U.S. government orthe benefit of federal assistance payments. While they are possible, the Company does not believe that criminalsanctions will be sought.  The Companybelieves that resolution of this matter will not have a material adverse effecton its consolidated results of operations, financial condition or liquidity andbelieves that the resolution of the matter that is possibly most adverse to theCompany will involve the payment of a civil penalty that will not materiallyadversely affect the Company.

 

The Company is a defendant in a suit filed in 1996 under the *qui tam* provision of the False Claims Act, *United States of America, ex rel. Werner Stebner v. Stewart &Stevenson Services, Inc.**and McLaughlin Body Co.*,Civil Action No. H-96-3363, in the United States District Court for theSouthern District of Texas, Houston Division. The plaintiff’s complaint seeks penalties and damages in an unspecifiedamount.  The suit alleges that theCompany made false statements and certifications in connection with claims forpayment for medium tactical vehicles delivered to the U.S. Army before 1998,and that the vehicles were substandard because of corrosion problems.  Following an investigation by the JusticeDepartment, the United States declined to intervene in the suit.  In February 2005, the District Court found infavor of the Company and dismissed all of the plaintiff’s claims by summaryjudgment without proceeding to trial. The plaintiff filed a notice of appeal in March 2004 in the UnitedStates Court of Appeals for the Fifth Circuit, No. 04-20209.  On August 8, 2005, a panel of the FifthCircuit issued an opinion affirming the district court’s summary judgment order.  While the plaintiff could ask for rehearingby the panel or by the full Fifth Circuit, or could petition the United StatesSupreme Court to issue a writ of certiorari authorizing an appeal to theSupreme Court, the Company believes any such action by the plaintiff isunlikely to be successful.  However,until all issues are exhausted, the Company’s consolidated results ofoperations, financial position and liquidity could still be affected by thissuit.

 

*KlickitatLitigation*:  The Company and several of its subsidiariesin the Distributed Energy Solutions business are defendants in a suit filed bythe Klickitat County Public Utility District No. 1 on December 11, 2003 arisingout of claims relating to a landfill

 

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gaspower generation facility in Roosevelt, Washington, Cause No. CY-03-3175-LRS;*Klickitat County Public Utility District No. 1 v. Stewart &Stevenson Services, Inc., Stewart & Stevenson Power, Inc., Sierra DetroitDiesel Allison, Inc., Pamco International, Inc. and Waukesha Engine Dresser,Inc.*; in the United States District Court for the Eastern Districtof Washington.  The plaintiff hasasserted claims with respect to equipment installed and used since 1999 forbreach of contract; promissory estoppel; violations of the Washington ProductsLiability Act; breach of warranties; intentional or negligentmisrepresentation; and violations of the Washington Consumer Protection Act andseeks recovery of damages in excess of $13 million.  The Company is vigorously defending thissuit.  It is presently impossible for theCompany to determine the ultimate outcome of this suit or whether itsresolution will, in the future, have a material adverse effect on the Company’sconsolidated results of operations, financial position or liquidity.  The Company is presently unable to determinewhether a material liability has been incurred in this matter or to reasonablyestimate the amount of any loss that may result from this matter.  Consequently, the Company has recorded noaccrual for any losses related to the ultimate outcome of this litigation.  The Company has, however, recorded accrualsthat it believes are adequate for estimated legal fees that it expects to incurassociated with this matter.

 

*NEO Dispute*:  On November 3, 2004, the Companywas served with a demand for arbitration by NEO California Power, LLC and NEOCorporation (collectively, “NEO”) with respect to two contracts (entered intoin December 2000 and March 2001) between a subsidiary of the Company in theDistributed Energy Solutions business and NEO, for the engineering andconstruction of two natural gas fueled electricity generating facilities inCalifornia, and with respect to a related “Payment Agreement” entered into inOctober 2001.  In July 2005, the Companyreached a settlement with NEO, pursuant to which the Company agreed to pay NEO$4.3 million.  The Company recorded thesettlement, which was paid in August 2005, to loss from discontinued operationsduring the second quarter of Fiscal 2005.

 

*AntitrustLitigation*:  The Company is a co-defendant with DetroitDiesel Corporation and other Detroit Diesel distributors in two putative classaction suits filed on February 9, 2005, Civil Action No. 05-616; *Cumberland Truck Equipment Co. et al. v. Detroit Diesel Corp., et al.*(the “Cumberland Litigation”), and Civil Action No. 05-625; *Diamond International Trucks, Inc. et al. v. Detroit Diesel Corp., etal.* (the “DIT Litigation”). Each suit relates to the Power Products segment and has been filed**in the United States District Court for the EasternDistrict of Pennsylvania.  In theCumberland Litigation, plaintiffs were dealers of Detroit Diesel parts whoseagreements were terminated or not renewed on or after February 9, 2001.  The Company is a distributor of DetroitDiesel parts and had a dealer agreement with one or more of the namedplaintiffs.  The plaintiffs are claimingantitrust violations arising out of the termination or non-renewal of theirdealer agreements.  The plaintiffs havealso alleged price fixing and group boycott in violation of Section 1 of theSherman Act.  The plaintiffs have madeclaims for treble damages and injunctive and other relief.  In the DIT Litigation, plaintiffs are dealersof Detroit Diesel parts whose dealership classification was changed on or afterFebruary 9, 2001.  The Company also had adealer agreement with one or more of these plaintiffs.  The plaintiffs are claiming antitrust violationsarising out of changes to the classification of their dealerships.  The plaintiffs have also alleged price fixingand group boycott in violation of Section 1 of the Sherman Act.  The plaintiffs have made claims for trebledamages and injunctive and other relief. The Company is vigorously defending both suits.  It is presently impossible for the Company todetermine the ultimate outcome of either suit or whether their resolution will,in the future, have a material adverse effect on the Company’s consolidatedresults of operations, financial position or liquidity.  The Company is presently unable to determinewhether a material liability has been incurred in these matters or toreasonably estimate the amount of any loss that may result from thesematters.  Consequently, the Company hasrecorded no accrual for any losses related to the ultimate outcome of thislitigation.  The Company has, however,recorded accruals that it currently believes are adequate for estimated legalfees that it expects to incur associated with these matters.

 

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

 

The Company is also a defendant in a number of lawsuits relating tocontractual, product liability, personal injury and warranty

 

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matters normally incident to the Company’s business.  No individual case, or group of casespresenting substantially similar issues of law or fact, is expected to have amaterial effect on the manner in which the Company conducts its business or onits consolidated results of operations, financial position or liquidity.  The Company maintains certain insurancepolicies that provide coverage for product liability and personal injurycases.  The Company has establishedreserves that it believes to be adequate based on current evaluations and itsexperience in these types of claim situations. Nevertheless, an unexpected outcome or adverse development in any suchcase could have a material adverse impact on the Company’s consolidated resultsof operations in the period it occurs.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

On June 7, 2005 theCompany’s Annual Meeting of Shareholders was held.  Set forth below is a brief description ofeach matter acted upon at the meeting and the number of votes cast for, againstor withheld, abstaining or not voting as to each matter.

 
| ** ** | ** **             | **For** | ** ** | **Withheld** | ** ** |
|------------|------------------------|---------|------------|--------------|------------|
| 1.         | Election of Directors: |    |       |         |       |   |
|       | Howard Wolf            |    | 26,561,400 |         | 361,127    |   |
|       | Charles S. Ream        |    | 26,564,660 |         | 357,867    |   |

 

Thefollowing directors’ terms of office continued after the meeting:  Max L. Lukens, Robert S. Sullivan, James M.Tidwell, Monroe M. Luther and Charles R. Ofner.

 
| ** ** | ** **                                                            | **For** | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|-----------------------------------------------------------------------|---------|------------|-------------|------------|-------------|------------|
| 2.         | Ratification  of Ernst & Young LLP as the Company’s auditor: |    | 26,712,923 |        | 195,724    |        | 13,880     |   |
|            |                                                                       |         |            |             |            |             |            |  |

 

**Item 6.  Exhibits**

 

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

 

*10.1                    Form of Severance Agreement, dated June 7,2005, by and between Stewart & Stevenson Services, Inc. and L. Scott Biar(filed June 13, 2005 as Exhibit 10.1 to the Company’s Current Report on Form8-K and incorporated herein by reference).

 

  31.1       Chief Executive Officer Certification.

 

  31.2       Chief Financial Officer Certification.

 

32.1                   Statement of Max L. Lukens, Chief ExecutiveOfficer, and John B. Simmons, Chief Financial Officer, furnished pursuant toRule 13(a)-14(b) of the Securities Exchange Act of 1934, as amended.

 

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*Incorporated by reference

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized on the 25th day of August 2005.

 

**STEWART & STEVENSON SERVICES, INC**.

 

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

 

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