Use these links to rapidly review the documentTABLE OF CONTENTS PART IV

Table of Contents



United States
Securities and Exchange CommissionWashington, D.C. 20549

FORM 10-K

ý

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended January 31, 2011o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period
from                                 to


Commission File Number 001-33836

Stewart & Stevenson LLC(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

20-3974034(I.R.S. employer
identification number)1000 Louisiana St., Suite 5900, Houston, TX(Address of principal executive offices)

77002(Zip code)


(713) 751-2700(Registrant's telephone number; including area code)

None(Securities registered pursuant to Section 12(b) of the Act)

None(Securities registered pursuant to Section 12(g) of the Act)

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ý    No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  ý

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)
Yes o    No ý

There is no market for the registrant's equity. As of January 31, 2011, there were 100,005,000 common units outstanding.

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Table of Contents



TABLE OF CONTENTS



PART IItem 1.

Business


2Item 1A.

Risk Factors


13Item 1B.

Unresolved Staff Comments


23Item 2.

Properties


23Item 3.

Legal Proceedings


24Item 4.

[Removed and Reserved]


24PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


25Item 6.

Selected Financial Data


25Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations


27Item 7A.

Quantitative and Qualitative Disclosures about Market Risk


44Item 8.

Financial Statements and Supplementary Data


45Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


45Item 9A.

Controls and Procedures


45Item 9B.

Other Information


46PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


47Item 11.

Executive Compensation


50Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


55Item 13.

Certain Relationships and Related Transactions and Director Independence


57Item 14.

Principal Accountant Fees and Services


57PART IVItem 15.

Exhibits, Financial Statement Schedules


58Signatures


61Certifications


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Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K (this "Annual Report" or "Form 10-K") includes statements that
are, or may be deemed to be, "forward-looking statements." These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes," "estimates,"
"anticipates," "expects," "intends," "plans," "may," "will" or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all
matters that are not historical facts and are not limited to the outlook for our future business and financial performance. They appear in a number of places throughout this Annual Report and include
statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the
industry in which we operate.

By
their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and some of
which are beyond our control. We believe that these risks and uncertainties include:



These
factors should not be construed as exhaustive and should be read with the other cautionary statements in this Annual Report.

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We
caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in
the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this Annual Report. In addition, even if our results of
operations, financial condition, liquidity and growth, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Annual Report, those
results or developments may not be indicative of results or developments in subsequent periods.

Any
forward-looking statements which we make in this Annual Report speak only as of the dates of such statements, and, except as required under the federal securities laws and the rules
and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after we distribute this Annual Report, whether as a result of new information,
future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and
should only be viewed as historical data.

PART I

Unless otherwise indicated or the context otherwise requires, the terms "Stewart & Stevenson," the "Company," "we," "our" and
"us" refer to Stewart & Stevenson LLC and its subsidiaries. Our fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For
example, Fiscal 2010 commenced on February 1, 2010 and ended on January 31, 2011.

Stewart &
Stevenson LLC, headquartered in Houston, Texas, was formed in November 2005 for the purpose of acquiring from Stewart & Stevenson Services, Inc.
("SSSI") and its affiliates on January 23, 2006 substantially all of their equipment, aftermarket parts and service and rental businesses that primarily served the oil and gas industry (the
"SSSI Acquisition"). Except as otherwise expressly noted, when we refer to financial and other information about us on a historical basis prior to the date of the SSSI Acquisition, the information
reflects the operations we acquired from SSSI prior to such acquisition.

ITEM 1.Business

Our company

We are a leading designer, manufacturer and provider of specialized equipment and aftermarket parts and service for the oil and gas
industry and other industries that we have served for over 100 years.

Our
wide range of products covers hydraulic fracturing, well stimulation, workover, intervention and drilling operations. These products include pumping, acidizing, coil tubing,
cementing and nitrogen units, drilling rigs, workover rigs, power generation systems and electrical support and distribution systems, as well as engines, transmissions and material handling equipment.
We have a substantial installed base of products, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues from customers in the oil and
gas, power generation and various other industries. In addition, we provide rental equipment to our customers, including generator sets, air compressors, rail car movers and material handling
equipment.

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With more than a century of continuous service across diverse industries, we have an established track record of providing a high-quality,
technologically advanced series of products using state-of-the-art components, processes and techniques. We have long-standing relationships with six
globally recognized original equipment suppliers, or OEMsDetroit Diesel, MTU Friedrichshafen, Electro-Motive Diesel, Hyster, Allison Transmission and Deutzwith which we have
conducted business for more than 40 years on average.

Demand
for our products has been driven primarily by capital spending in the oil and gas industry, which accounted for an estimated 81.5% and 76.0% of our equipment revenues and an
estimated 77.6% and 72.2% of our total revenues in Fiscal 2010 and Fiscal 2009, respectively. Our extensive and diverse customer base includes many of the world's leading oilfield service companies,
as well as customers in the power generation, marine, mining, construction, commercial vehicle and material handling industries.

Crown acquisition

On February 26, 2007, we acquired substantially all of the operating assets and assumed certain liabilities of Crown Energy
Technologies, Inc. and certain of its affiliates (collectively, "Crown"), which we refer to as the "Crown Acquisition." Crown, which was headquartered in Calgary, Alberta, had multiple U.S.
operations. Crown manufactured drilling, well servicing and workover rigs, stimulation equipment and provided related parts and services.

EMDSI acquisition

On March 23, 2011, we acquired 100% of the stock of EMDSI-Hunt Power, L.L.C. ("EMDSI") in an all cash
transaction from ITOCHU Corporation of Japan for total consideration of approximately $25.7 million, subject to final closing adjustments. The acquisition was funded from available cash and
through borrowings under our revolving credit facility. EMDSI, which is based in Harvey, Louisiana, specializes in the marketing and distribution of medium speed diesel engines for marine propulsion,
drilling and power generation applications and is a provider of aftermarket parts and service.

Financial
statements for EMDSI and related pro forma information will be filed with the Securities and Exchange Commission within the time period prescribed.

Our business

We manage our business through the following two segments:

Manufacturing.Our manufacturing segment, which generated approximately 39.8%, 35.8% and 42.7% of our revenues in Fiscal 2010, Fiscal
2009 and Fiscal
2008, respectively, designs, manufactures and markets equipment for oilfield service providers and drilling and workover contractors as well as national oil companies that require integrated and
customized product solutions. We manufacture equipment specifically for hydraulic fracturing, well stimulation, well workover, intervention and drilling operations. Our manufactured products include
integrated solutions, which incorporate a variety of components into a single system, for a wide range of oilfield services and support applications. Our
manufacturing segment benefits from long-standing relationships with our globally recognized OEMs. We have 5 main manufacturing facilities across North America, comprising more than
600,000 square feet of space, that are strategically located to service our customers' needs.

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Distribution.Our distribution segment, which generated approximately 60.2%, 64.2% and 57.3% of our revenues in Fiscal 2010, Fiscal
2009 and Fiscal
2008, respectively, provides stand-alone products and aftermarket parts and service for products manufactured by us, our six key OEMs and other manufacturers. In addition, we provide rental
equipment including generator sets, air compressors, rail car movers and material handling equipment to our customers. Our aftermarket parts and service operations, which provide us with a recurring
higher-margin source of revenue, serve customers engaged in the oil and gas, power generation, marine, mining, construction, commercial vehicle and material handling industries, as well as other
industries. Throughout the period of our relationship with our six key OEMs, we have been the only factory-authorized provider of a substantial portion of their stand-alone products in specified
territories, which include major oil and gas producing regions in the United States. Our arrangements with our key OEMs generated approximately 57.1%, 55.8% and 54.9% of our aftermarket parts
and service revenues in Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively. Our extensive distribution network is strategically positioned throughout major oil and gas producing regions, enabling
us to effectively support our customers. We provide in-house servicing in close proximity to our customers' operational locations as well as on-site servicing. As of
January 31, 2011, we employed over 650 highly trained service technicians utilizing approximately 575 service bays in the United States, Canada and abroad. Additionally, we provide aftermarket
parts through our network of approximately 185 authorized dealers.

Products and services

Through our two operating segments, we design, manufacture, and market a wide-range of equipment, provide aftermarket parts
and service, and provide rental equipment to a broad range of customers.



We design, manufacture and market equipment for well stimulation, drilling and well servicing rigs, coiled tubing, cementing, nitrogen
pumping, power generation and electrical systems. We record sales of these products in our manufacturing segment. We distribute stand-alone products manufactured by us. We record sales of these
products in our distribution segment.

A
substantial portion of the products we sell in both the manufacturing and distribution segments includes components provided by our six key OEMs. Our relationships with these
OEMs generally enable us to sell their products globally as components of our engineered equipment and in specified territories as stand-alone products. We have been the factory-authorized
provider of stand-alone products of our six key OEMs in these territories, which principally cover major oil and gas producing regions in the United States, for an average of approximately
40 years. For Fiscal 2010, approximately 76.1% and 23.9% of our equipment sales revenues were derived from engineered products and stand-alone products, respectively. Approximately 40.4% of our
product costs for Fiscal 2010 represented equipment supplied to us by these OEMs, which we use in combination with our design, engineering, and manufacturing expertise to deliver a value-added,
integrated solution to our customers.

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The
following table lists the equipment we provide:

Product line

Percentage of total
equipment sales in
Fiscal 2010

Product description

SegmentWell stimulation

49.1%

Equipment that includes fracturing pumps, blenders, hydration, chemical additive systems and control systems and software used to enhance oil and gas production.

ManufacturingPower generation

12.3%

Standby, emergency backup, fire suppression and prime power in a variety of configurations and capacities using natural gas and
diesel engines.

Manufacturing and DistributionTransmissions

8.9%

Automatic transmissions and related products.

DistributionPrime movers

6.4%

Engineered packages, mating internal combustion engines to a transmission or torque converter to power specific customer
applications.

DistributionMaterial handling

5.8%

Fork lift trucks and ancillary equipment.

DistributionEngines

5.4%

Internal combustion diesel and natural gas engines.

DistributionRigs

2.7%

Equipment used in drilling, workover and well servicing and exploration and enhancement of oil and gas production.

ManufacturingRail car movers

2.2%

Engine-driven equipment used in rail car switching operations.

Distribution


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Product line

Percentage of total
equipment sales in
Fiscal 2010

Product description

SegmentCoiled tubing

1.8%

Well workover, stimulation and drilling equipment used on land and offshore applications.

ManufacturingOther

5.4%

Various equipment utilized in the oil and gas services industry, such as cementing, nitrogen pumping, fluid pumping and contract
manufacturing of seismic and electric equipment.

Manufacturing and Distribution




We provide aftermarket parts and service to customers in the oil and gas industry, as well as customers in the power generation,
marine, mining, construction, commercial vehicle and material handling industries. Our aftermarket parts and service business supports equipment manufactured by approximately 100 manufacturers, and in
certain cases, including for our product offerings from our six key OEMs, we have been the factory-authorized parts and service provider for specified territories, principally in major oil and gas
producing regions in the United States. Approximately 34.9% of our total revenues for Fiscal 2010 were from aftermarket parts and service operations. For Fiscal 2010, approximately 57.1% of the
aftermarket parts and service revenues pertained to products sourced from our six key OEMs. Both our manufacturing and distribution segments generate revenues from aftermarket parts and
service.

We
believe there are a number of factors which affect a customer's choice of its supplier of aftermarket parts and service, including the customer's preference to use factory-authorized
parts and service, price, parts availability, level and number of experienced technicians, proximity to the customer's location and flexibility to service products in the field. As of
January 31, 2011, we employed over 650 highly trained service technicians, utilizing approximately 575 service bays in the United States, Canada and abroad. We also have significant
capabilities to service customers at their sites, due to our large number of technicians and our close proximity to the customer. Additionally, we maintain a substantial investment in parts inventory
managed by our experienced parts personnel, and we provide aftermarket parts through our extensive network of approximately 185 authorized dealers.



Our rental products primarily consist of generator sets, air compressors, rail car movers and material handling equipment that are
offered to a wide range of end markets and are principally rented on a short-term basis as a complementary solution to equipment sales. Our rental fleet consists of over 1,300 units as of
January 31, 2011, and we are able to complement our equipment offering by providing our customers the flexibility of renting versus purchasing certain equipment. Revenues for Fiscal 2010
represented approximately 2.7% of our total revenues, and our rental products generate our highest margins and provide us with a strong return on our investment. We record these revenues within our
distribution segment.

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The
following table lists our rental products:

Product line

Percentage of
total rental sales
in Fiscal 2010

Product descriptionGenerators

41.8%

Engines/generators ranging from 25 to 2,000 kilowatts.Material handling equipment

36.0%

Fork lift trucks, rail car movers and ancillary equipment.Air compressors

22.2%

Air compressors ranging from 375 to 1,600 cubic feet per minute.


Our
utilization rate for Fiscal 2010 and Fiscal 2009 was approximately 49.1% and 43.8%, respectively, of our available rental fleet, and we generally recover our costs to acquire rental
equipment over a three-year period. The average useful life of our rental equipment is approximately five years and our practice is to sell a unit out of the rental fleet upon reaching its
useful life. We closely monitor our utilization rate before making capital investments used to replenish or grow the rental fleet.

Customers and Markets

We maintain a broad and diverse customer base, including leading oil and gas service companies, drilling contractors, integrated oil
companies and national oil companies, as well as customers in the power generation, marine, mining, construction, commercial vehicles and material handling industries. We are not dependent on any
single customer, and during Fiscal 2010, our ten largest customers accounted for approximately 30.7% of our total sales and no single customer accounted for more than 5.4% of our total sales. The
demand of our customers for the products we provide has not historically been characterized by seasonality.

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The
following table lists the markets and types of customers we serve:

Market

Percentage of
total sales in
Fiscal 2010

Types of customersOil and gas services

81.5%

Well stimulation providers, drilling contractors, well servicing companies, integrated oil companies and national oil companies.Material handling

4.3%

Warehouse /distribution companies, manufacturing companies, chemical companies and various other companies that utilize fork
lifts and rail car spotters.Power generation

3.5%

Commercial facilities that need back-up power generation capabilities.Commercial vehicles

2.5%

Freight transportation companies, emergency services, transit authorities and recreational vehicle users. Primarily aftermarket
parts and service.Construction

1.0%

Commercial building and home construction companies and highway construction companies.Mining

0.2%

Companies involved in the extraction of raw materials through various mining methods.Government

0.2%

Federal agencies (such as the U.S. Department of Defense), state agencies (e.g.,departments of transportation) and local agencies(e.g.,departments of public works)Marine

0.1%

Offshore work boat providers, tug boat operators and recreational boat users.Other

6.7%

Primarily authorized dealers and distributors of our products in various markets, including the primary markets we serve, and
various other industries


We
believe that our wide range of high-quality standard products, demonstrated by our ISO 9001:2000 certifications, and our partnership-based approach generate high
levels of customer satisfaction and result in repeat business.

We
sell a significant portion of our equipment and parts and service to our customers pursuant to purchase orders subject to our standard terms and conditions, which generally provide
for payment within 30 days. Historically, cancellations are infrequent, but customers generally have the right to cancel an order until it is filled.

For
larger equipment, particularly for customers in the oil and gas industry, we often enter into fixed-price contracts, and the measurement of progress toward completion is based on
direct labor hours incurred. Many of these contracts require downpayments from the customer or, for international customers, credit support. Some of our contracts are
cost-plus-fixed-fee contracts, which provide for reimbursement of specified costs plus a fixed fee.

For
Fiscal 2010 and Fiscal 2009, we derived approximately 19.4% and 29.9%, respectively, of our revenues from sales of products and services to customers outside the United States,
including sales to U.S. customers for export.

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Manufacturing and engineering design

Our manufacturing processes generally consist of fabrication, machining, assembly and testing. Many of our products are designed,
manufactured and produced to clients' specifications, often for long-life and harsh environment applications. To facilitate quality and productivity, we are continuing to implement a
variety of manufacturing strategies, including inventory management, flow line manufacturing and integrated supply chain management. As a result of these manufacturing strategies, we have increased
our capacity throughput, reduced our production costs and lowered manufacturing cycle times for our products. In addition, we have been successful in outsourcing the fabrication of subassemblies and
components of our products, such as trailers, whenever costs are significantly lower and quality is comparable to our own manufacturing. Our manufacturing operations are principally conducted in 10
locations throughout the United States and Canada. See "Item 2.Properties."

We
strive to manufacture the highest quality products and are committed to improving the quality and efficiency of our products and processes. We are certified in compliance with
ISO 9001:2000.

Although
we manufacture some of the components included in our products, the principal raw materials required for the manufacture of our products are purchased from our six key OEMs, and
we believe that available sources of supply generally will be sufficient for our needs for the foreseeable future.

Sales and Marketing

We primarily sell and market our products directly to our customers through our sales and service centers in the United States and
abroad with a direct sales force of approximately 200 employees. We also utilize a network of approximately 185 authorized dealers and approximately 16 independent overseas sales representatives to
market and distribute our products. Our equipment product lines are generally sold directly to the end users and, in certain international markets, we may use authorized sales representatives to help
facilitate the marketing of our products. Our aftermarket parts and service and rental product lines are also provided to our customers on a direct basis. We also utilize a network of authorized
dealers to market and distribute parts. During Fiscal 2010, 96.7% of our total sales resulted from direct sales to the customer, while 3.3% was derived from sales to our dealer network.

Our
authorized dealers and our independent overseas sales representatives are independent contractors and are not our employees. Our authorized dealers buy our products and resell to
their end customers. Our independent overseas sales representatives assist in arranging for sales to international customers and generally do not take resale risk with respect to our products but
receive commissions based on completed sales. We provide training to our authorized dealers and independent overseas sales representatives.

Backlog

Our unfilled equipment orders that we include in equipment order backlog consist of written purchase orders and signed contracts
accompanied, if required by our credit policies, by credit support (typically downpayments or letters of credit), determined in accordance with our credit policies. Historically, cancellations are
infrequent; however, these unfilled orders are generally subject to cancellation. Purchase options are not included in equipment order backlog until exercised.

Our
unfilled equipment order backlog has increased since the third quarter of Fiscal 2009 and, as of January 31, 2011, was $375.0 million. We expect to recognize most of
this backlog in Fiscal 2011.

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Backlog
of $375.0 million as of January 31, 2011 includes $37.5 million of related party transactions reflecting an order in Fiscal 2009 from an affiliate. Revenue
recognition from this transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. A deposit in the amount of
$31.2 million is recorded as a customer deposit in our consolidated balance sheet. Included in inventories, net is $29.5 million in costs related to this contract, and no amounts have
been recorded in the consolidated statements of operations through January 31, 2011.

Competition

We operate in highly fragmented and very competitive markets, and, as a result, we compete against numerous businesses. Some of our
competitors have achieved substantially more market penetration with respect to certain products, such as coiled tubing and generators, and some of our competitors are larger and have greater
financial and other resources.

Major
competitors for well stimulation equipment include Enerflow Industries Inc., United Engines Manufacturing (a subsidiary of United Holdings LLC), Dragon Products (a
division of Modern Group Inc.) and National Oilwell Varco, Inc. For our well servicing, drilling and coiled tubing products, our major competitor is National Oilwell Varco, Inc.
In our rail car mover product line, we compete against Trackmobile, Inc. and Central Manufacturing Inc., and we compete with Cummins Inc. and Caterpillar, Inc. and their
distributors for generators and other types of engine-driven products. ZF Industries Inc. and Twin Disc Incorporated are our primary competitors for transmissions. We believe that our customers
base their decisions to purchase equipment based on price, lead time and delivery, quality, and aftermarket parts and service capabilities.

For
aftermarket parts sales, we compete with distributors of factory-authorized OEM parts, with providers of non-OEM parts and remanufactured parts, and other distributors of
OEM parts. For aftermarket service sales, the market is highly fragmented and characterized by numerous small, independent providers. We believe there are a number of factors that affect our
customers' decisions when choosing their supplier of aftermarket parts and service, including the customer's preference to use factory-authorized OEM parts and service. Customers also consider price,
parts availability, level and number of experienced technicians, proximity to the customer's location and flexibility to service products in the field.

Our
rental business focuses on generators, material handling equipment and air compressors and we compete with much larger companies, including United Rentals Inc., NationsRent
Companies Inc., Hertz Equipment Rental Corporation and Aggreko plc. We believe our customers base their decisions to rent equipment based on price, availability and aftermarket parts,
support and service.

We
believe that the significant capital required to obtain and operate manufacturing facilities, acquire and maintain adequate inventory levels, and hire and maintain a highly skilled
labor force, along with our long-standing relationships with our six key OEMs, is a disincentive for new market entrants.

Suppliers and Raw Materials

In Fiscal 2010, approximately 77.2% of our cost of goods sold consisted of raw materials and component parts, with the other 22.8%
being labor and overhead. Approximately 44.4% of the raw materials and component parts in cost of goods sold were obtained from our six key OEMs pursuant to long-standing
relationships, and 55.6% were obtained from a variety of other suppliers.

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Our
supply agreements with our six key OEMs are non-exclusive and typically short-term and have been renewed on an ongoing basis, but no assurances can be
given that they will be renewed beyond their expiration dates. We have been the factory-authorized provider of our product offerings from these OEMs in the territories below for many years, and
our relationships with these OEMs average approximately 40 years. The following table lists our key OEMs, the products they provide, the designated geographic territories that we serve
and the expiration date of our current supply agreements:

OEM

Supplier
since

Products

Designated geographic territories

Expiration
dateDetroit Diesel Corporation

1938

Parts for high-speed diesel engines

Texas, Colorado, New Mexico, Wyoming, Western Nebraska, South Louisiana, Coastal Mississippi, Coastal Alabama and Colombia

2017MTU Friedrichshafen

1938

Heavy-duty high-speed diesel and natural gas engines

Texas, Colorado, New Mexico, Wyoming, Western Nebraska, South Louisiana, Coastal Mississippi, Coastal Alabama and
Colombia

2011* (Colombia 2012)Electro-Motive Diesel, Inc.

1956

Heavy-duty medium-speed diesel engines

Texas, Colorado, New Mexico, Oklahoma, Arkansas, Louisiana, Tennessee, Mississippi, Alabama, Mexico, Central America and parts of
South America

2013Hyster Company

1959

Material handling equipment

Texas and New Mexico

No expiration dateAllison Transmission, Inc.

1973

Automatic transmissions, power shift transmissions and torque converters

Texas, Colorado, New Mexico, Wyoming, Western Nebraska, South Louisiana, Coastal Mississippi, Coastal Alabama, parts of Utah and
Arizona and Colombia

2013Deutz Corporation

1996

Diesel and natural gas engines

Colorado, Eastern Wyoming, Arizona, New Mexico, Texas, Oklahoma, Kansas, Arkansas, Louisiana, Mississippi, Western Tennessee,
Venezuela and Colombia

No expiration date


*We
continue to operate under our prior agreement and are in the process of renewing this agreement.


Our six key OEMs supply us with diesel engines, transmissions, material handling equipment and natural gas engines, as well as the
aftermarket parts used to support those components. We also purchase large fluid pumps, generators and hydraulic and electrical components, among many other items, from an extensive supplier base.

We
generally have been able to recover component price increases by raising the prices of our goods and services. We expect to continue the practice of raising our prices to offset these
increases, but we can give no assurance that we will be able to do so. Our ability to raise our prices depends on market conditions and prices for similar products in the market. In addition, for
larger equipment, particularly for customers in the oil and gas industry, we often enter into fixed-price contracts, which are typically performed within one year. Our ability to raise prices on
fixed-price contracts is limited.

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Employees

As of January 31, 2011, we had approximately 2,300 employees of whom approximately 2,000 were employed in the United States and
Canada and approximately 300 were employed abroad. Of the approximately 2,000 U.S. and Canadian employees, we have approximately 70 engineers, 575 service technicians, 170 sales and marketing
employees and 1,200 aftermarket, manufacturing and administrative employees. We consider our current labor relations to be good and do not have any employees in the United States and Canada that are
represented by labor unions. See "Item 1A. Risk FactorsRisks related to our businessWe may not be able to attract and retain qualified employees."

Trademarks and patents

We rely on a combination of patent, trademark, copyright, unfair competition and trade secret laws in the United States and other
jurisdictions, as well as employee and third-party non-disclosure agreements, license arrangements and domain name
registrations, as well as unpatented proprietary know-how and other trade secrets, to protect our products, components, processes and applications. With the exception of the
"Stewart & Stevenson" trademark and logo, we do not believe any single patent, copyright, trademark or trade name is material to our business as a whole. Any issued patents that cover our
proprietary technology and any of our other intellectual property rights may not provide us with adequate protection or be commercially beneficial to us and, if applied for, may not be issued. The
issuance of a patent is not conclusive as to its validity or its enforceability. Competitors may also be able to design around our patents. If we are unable to protect our patented technologies, our
competitors could commercialize technologies or products which are substantially similar to ours.

With
respect to proprietary know-how and other proprietary information, we rely on trade secret laws in the United States and other jurisdictions and confidentiality
agreements. Monitoring the unauthorized use of our technology is difficult, and the steps we have taken may not prevent unauthorized use of our technology. The disclosure or misappropriation of our
intellectual property could harm our ability to protect our rights and our competitive position.

Environmental, health and safety matters and other regulatory matters

We are subject to a variety of federal, state, local, foreign and provincial environmental laws and regulations, including those
governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances and wastes and the responsibility to investigate and remediate contaminated sites that
are or were owned, leased, operated or used by us or our predecessors. Many of our operations require environmental permits and controls to prevent and limit air and water pollution. These permits
contain terms and conditions that impose limitations on our manufacturing activities, production levels and associated activities and periodically may be subject to modification, renewal and
revocation by issuing authorities. Fines and penalties may be imposed for non-compliance with applicable environmental laws and regulations and the failure to have or to comply with the
terms and conditions of required permits. We believe that we are currently in compliance in all material respects with the terms and conditions of our permits. We are also subject to the federal
Occupational Safety and Health Act and similar state and foreign laws, which impose requirements and standards of conduct on our operations for the health and safety of our workers. We periodically
review our procedures and policies for compliance with environmental and health and safety requirements. We believe that our operations are generally in compliance with applicable environmental and
health and safety regulatory requirements or that any non-compliance will not result in a material liability or cost to achieve compliance. Historically, the costs of achieving and
maintaining compliance with environmental and health and safety requirements have not been material.

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Certain
environmental laws in the United States, such as the federal Superfund law and similar state laws, impose liability for investigating and remediating contaminated sites on
"responsible parties." These parties include, for example: current owners and operators of the site; parties who owned or operated the site at the time hazardous substances were released or spilled at
the site; parties who generated wastes and arranged to send them to the site for disposal; and parties who transported wastes to the site. Liability under such laws is strict, meaning, for example,
that current owners or operators can be liable even if all releases of hazardous substances occurred before they owned or operated the site, regardless of the lawfulness of the original disposal
activities. Liability under such laws is also joint and several, meaning that a responsible party might be held liable for more than its fair share of investigation or cleanup costs. As a practical
matter, however, when more than one responsible party is involved at a site, the costs of investigation and remediation are often allocated among the viable responsible parties on some form of
equitable basis. In connection with each of the SSSI Acquisition and the Crown Acquisition, the previous owner retained environmental liabilities relating to pre-closing conditions or
occurrences, subject to certain dollar limitations and caps. However, for the reasons set forth above, there could be contamination at some of our current or formerly owned or operated facilities for
which we could be liable under applicable environmental laws.

In
addition to the environmental health and safety measures described above, the part of our business that consists of the sale, distribution, installation and warranty repair of large
engines and transmissions used in commercial vehicle applications in Texas requires certain Texas state motor vehicle licenses, which are subject to annual renewal.

ITEM 1A.Risk Factors

Periodic economic and industry downturns may adversely impact our operating results.

Our equipment sales and, to a lesser extent, our aftermarket parts and service sales depend primarily on the level of activity in the
oil and gas industry. The oil and gas industry traditionally has been volatile, is highly sensitive to supply and demand cycles and is influenced by a combination of long-term and cyclical
trends including:



Our
customers in the oil and gas industry historically have tended to delay capital equipment projects, including maintenance and upgrades, during industry downturns. Accordingly, the
recent slowdown in the U.S. and worldwide economic activities that followed the global financial crisis resulted in delays in capital equipment projects, impacting the activities of the industries we
serve and resulting in significantly lower new orders. Difficulty in accessing credit markets diminished product demand, adversely affected activities in manufacturing and put downward pressure on
selling prices. In the United States, producers generally react to declining oil and gas prices by reducing expenditures. This has in the past, and may in the future, adversely affect our business.

There
can be no assurance that oil and gas prices will remain at current levels or will not decrease significantly. We are unable to predict future oil and gas prices or the level of oil
and gas industry activity. A prolonged low level of activity in the oil and gas industry would adversely affect the demand for our products and services and our business, financial condition and
results of operations.

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We face competition in each of our businesses.

We encounter competition in all areas of our business. The principal factors on which we compete include performance, quality, customer
service, timely delivery of products, product lead times, global reach and presence, brand reputation, breadth of product line, quality of aftermarket service and support and price. In addition, our
customers increasingly demand more technologically advanced and integrated products, and we must continue to develop our expertise and technical capabilities in order to manufacture and market these
products and associated services successfully. To remain competitive, we must invest continuously in the education of our workforce, manufacturing capabilities and efficiencies, marketing, client
service and support, distribution networks and research and development.

We
experience our greatest levels of competition in equipment sales, in terms of both engineered equipment and stand-alone products. We compete with a number of large,
well-known OEMs, manufacturers and distributors that, in some cases, have greater financial and human resources, as well as a broader geographical presence, than we do.

With
respect to aftermarket parts and service sales, we compete with regional and local non-OEM parts and service providers, our customers' in-house service
providers, non-OEM and remanufactured parts and service providers and, for certain product offerings, other factory-authorized providers.

Our
rental operations compete against large, well-recognized companies. Maintaining a rental fleet requires significant investment from year-to-year.
If our access to capital is substantially limited due to contractual restrictions or otherwise, or if capital becomes more costly, we may not be able to make the investments necessary to remain
competitive.

Our international equipment sales and aftermarket parts and service operations are subject to risks associated with the political, economic and other uncertainties inherent
in foreign operations.

We have significant equipment sales to customers outside the United States and also maintain aftermarket parts and service operations
outside the United States. For Fiscal 2010 and Fiscal 2009, we derived approximately 19.4% and 29.9%, respectively, of our revenues from sales of products and services to customers outside the United
States, including sales to U.S. customers for export. We intend to expand our international sales and operations, thereby increasing our exposure to risks associated with operating outside of the
United States.

Our
international sales, manufacturing and aftermarket parts and service activities are subject to risks associated with the political, economic and other uncertainties inherent in
foreign operations, which include, but are not limited to:



Some
of the markets in which we operate are politically unstable and are subject to civil and communal unrest. Riots, strikes, the outbreak of war or terrorist attacks in locations where
we have operations or conduct business, could also adversely affect our business.

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Also,
we operate in some countries in which the risk of bribery is recognized. We have clear policies addressing our prohibition against illegal payments and have a comprehensive
training and certification of compliance program. However, a risk remains despite our efforts. In such circumstances, we could also face fines, sanctions and other penalties from authorities in the
relevant jurisdictions, including prohibition of our participating in or curtailment of business operations in those jurisdictions.

The
occurrence of any of the foregoing factors may have a material adverse effect on our business, financial condition and results of operations. For example, to the extent we make
significant investments in foreign facilities or otherwise expand our overseas presence, the risk that our assets and our income could be adversely affected by fluctuations in the value of local
currencies will increase.

In
addition, many of our customers and the end-users of our equipment operate in international jurisdictions and therefore are subject to the foregoing risks, as well as
other risks
associated with international operations. The occurrence of any of these factors may have a material adverse impact on the business and operations of our customers and end-users, which in
turn may have a material adverse effect on us.

If our arrangements with our suppliers, including our key OEMs, were to be adversely affected, our equipment sales and aftermarket parts and service businesses may suffer.

We currently depend on a limited number of suppliers for certain important components for our products, which include diesel engines,
transmissions, fluid pumps and material handling equipment. Our purchases from some of these suppliers are not made pursuant to long-term contracts, and our arrangements with these
suppliers may be terminated, in the case of certain arrangements, upon certain notifications and, otherwise, upon the occurrence of certain events, many of which may be beyond our control. The loss of
any of these suppliers could have a material adverse effect on our business, financial condition and results of operations.

In
addition, a significant portion of the stand-alone equipment that we sell is manufactured by, and, in the case of our engineered equipment, incorporates components provided by, our
six key OEMs:



Approximately
44.4% and 37.1% of our cost of goods sold was attributable to stand-alone products purchased from these OEMs in Fiscal 2010 and Fiscal 2009, respectively. In
addition, a material portion of our revenues was attributable to (1) sales of equipment manufactured by us, including components manufactured by these suppliers and (2) servicing and
supplying parts for certain products provided by these OEMs, including parts and products that are components of the equipment we manufacture.

Our
OEM supplier arrangements, pursuant to which we distribute stand-alone products manufactured by these OEMs, which are currently effective for varying periods of time and are not
exclusive, are subject to risks that include:



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The
occurrence of any of these could have a material adverse effect on our business, financial condition and results of operations. See "BusinessSuppliers and raw
materials."

We generally quote our customers a fixed price for the equipment that we sell, which exposes us to the risk of cost overruns if we do not accurately estimate the costs
associated with the product.

Most of our engineered equipment sales contracts are "fixed-price" contracts where the original price may be set at an early stage of
the process. The terms of these contracts require us to guarantee the price of products and services that we provide and to assume the risk that the costs to provide such products and services will be
greater than anticipated. The profitability of these contracts is therefore dependent on the ability to reasonably predict the costs associated with performing the contracts. These costs may be
affected by a variety of factors, some of which are beyond our control. Our failure to accurately estimate the resources required for a project or our failure to complete our contractual obligations
in a manner consistent with the project plan upon which our fixed-price contract was based could adversely affect our profitability and could have a material adverse effect on our business, financial
condition and results of operations.

Amounts included in our backlog may not result in actual revenue or translate into profits.

Our backlog may not be realized as revenue or, if realized, may not result in profits. As of January 31, 2011, our equipment
order backlog was $375.0 million. Reductions in backlog due to cancellation by a customer or for other reasons could significantly reduce the revenue and profit we actually receive from
contracts included in backlog. If our backlog fails to materialize, we could experience a reduction in revenue and a decline in profitability, which would result in a deterioration of our financial
condition, profitability and liquidity.

Increased regulation of current fracturing techniques could reduce demand for our well stimulation equipment.

Fracturing is a process that results in the creation of fractures in geological formations in order to stimulate production from oil
and gas wells. Fracturing seeks to increase the rate and ultimate recovery of oil and natural gas. Concerns have been raised over possible environmental damages related to fluids used in the
fracturing process. The FRAC (Fracturing Responsibility and Awareness of Chemicals) Act was introduced in the U.S. Congress in June 2010 seeks to amend the Safe Drinking Water Act so that hydraulic
fracturing would be regulated on a
federal level. A number of state and provincial regulatory authorities are also considering more stringent regulation of fracturing.

Increased
regulation of hydraulic fracturing would likely delay or halt some projects, including unconventional oil and gas projects. Expanded regulations would likely introduce a period
of uncertainty as companies determine how to proceed. This could result in a reduction of demand for our products and services and could have a material adverse effect on our business, financial
condition and results of operations.

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Our and our customers' operations are subject to a variety of environmental, health and safety laws and regulations that may increase our costs, limit the demand for our
products and services or restrict our operations.

Our operations and the operations of our customers are subject to federal, state, local and foreign laws and regulations relating to
the protection of the environment and of human health and safety, including laws and regulations governing the investigation and clean-up of contaminated properties, as well as air
emissions, water discharges, waste management and disposal. Such laws and regulations have, and are expected to continue to, become more stringent over time, requiring modifications to our products
and operations. These laws and regulations affect the products and services that we design, market and sell, as well as the facilities where we manufacture and service our products. In addition,
environmental laws and regulations could limit our customers' activities in the oil and gas sector and subsequently the demand for our products.

Environmental
laws and regulations may provide for "strict liability" for damages to the environment or natural resources or threats to public health and safety, rendering a party liable
without regard to negligence of or fault on the part of such party. Sanctions for noncompliance may include revocation of permits, temporary or permanent shutdown of certain operations, corrective
action orders, administrative or civil penalties, and criminal prosecution. Some environmental laws and regulations provide for joint and several strict liability for the investigation or remediation
of spills and releases of hazardous substances, rendering a party potentially responsible for more than its proportionate share of, or responsible for the entire, liability. In addition, we may become
subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as well as damage to natural resources. Pursuant to certain environmental laws
and regulations, we may become subject to liability (including with respect to off-site disposal matters or formerly owned or operated facilities) for the conduct of or conditions caused
by others, or for our own acts that were in compliance with all applicable laws and regulations at the time such acts were performed. Any of these laws and regulations could result in claims, fines,
expenditures or other requirements that could have a material adverse effect on our business.

We
invest financial and managerial resources to comply with environmental laws and regulations and will continue to do so in the future. We cannot determine the future cost of compliance
or the impact of environmental regulation on our future operations. In the future, we and our OEMs may not be able to produce adequate supplies of equipment that are compliant with increasing
emission or other environmental standards to meet existing demand, which would have an adverse effect on us. The modification of, or changes in the interpretation or enforcement of, existing laws or
regulations, or the adoption of new laws or regulations imposing more stringent environmental restrictions, could have a material adverse effect on our business, financial condition and results of
operations.

Our
businesses are subject to a variety of other regulatory restrictions, such as those governing workplace safety and health. The failure to comply with these rules may result in civil
penalties and criminal prosecution. Further, laws and regulations in this and other areas are complex and change frequently. Changes in laws or regulations, or in their enforcement or interpretation,
could subject us to material costs. We cannot determine the extent to which our future operations and earnings may be so affected.

We
also expect that scientific examination of and political attention to issues surrounding the existence and extent of climate change will continue. A variety of regulatory
developments, both domestic and international, have been introduced that are focused on restricting or managing the emission of carbon dioxide, methane and other greenhouse gases. These developments
and further legislation that may be enacted, or the development or changes within international accords could adversely affect the demand for or suitability of our products and services.

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Our projects are subject to numerous hazards and, our record and reputation for safety is important to our business. If we do not maintain an adequate safety record, we may
be ineligible to bid on certain projects, could be terminated from existing projects and our reputation could be harmed.

Our employees and customers are exposed to numerous hazards during the conduct of our business, including electrical contacts and
flashes, fires, natural gas explosions, mechanical failures and transportation accidents. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and
equipment and other consequential damages, and may result in suspension of operations, civil damage claims and criminal fines and penalties that could have a material adverse effect on our business
and results of operations.

Our
safety record is important. If serious accidents or fatalities occur or our safety record deteriorates, our reputation or prospects for obtaining future business could be negatively
affected.

The occurrence of an event not fully covered by insurance could have a material adverse effect on our business, financial condition and results of operations.

Our insurance does not provide coverage for all risks, and it may not be adequate to cover all claims that may arise. The occurrence of
an event not fully covered by insurance could have a material adverse effect on our business, financial condition and results of operations. Moreover, particular types of insurance coverage may not be
available to us in the future, we may retain additional risk through higher insurance deductibles or we may be unable to continue to obtain our desired level of insurance coverage at commercially
reasonable rates.

Because
many of our products and the products that we distribute are complex and utilize many components, processes and techniques, undetected errors and design flaws may occur. Product
defects result in higher product service, warranty and replacement costs and may cause damage to our customer relationships and industry reputation, all of which may negatively impact our results of
operations.

The
industries that we serve are subject to inherent risks, including equipment defects, malfunctions, failures and natural disasters. These risks may expose our customers to liability
for personal injury, wrongful death, property damage, pollution and other environmental damage. We also may become involved in litigation related to such matters. Any litigation arising from a
catastrophic occurrence involving our equipment or services could result in large claims for damages. Any increase in the frequency or severity of such incidents, or the general level of compensation
awards with respect to such incidents, could affect our ability to obtain projects from our customers or acquire adequate insurance coverage at commercially reasonable rates. In addition to seeking
compensation from us, customers who suffer losses as a result of the occurrence of such events may also reduce or terminate their business with us, which may further harm our results of operations.

We are susceptible to adverse weather conditions affecting the Gulf Coast.

Certain areas in and near the Gulf Coast experience hurricanes and other extreme weather conditions on a relatively frequent basis. Our
headquarters, manufacturing and aftermarket parts and service facilities in Houston are susceptible to significant damage, and our New Orleans and other Gulf Coast facilities are subject to
significant damage or total loss by these storms. Damage caused by high winds and floodwater could potentially cause us to curtail operations at these facilities for a significant period of time until
damage can be assessed and repaired. Moreover, even if we do not experience direct damage from any of these storms, we may experience disruptions of our operations because customers may curtail their
activities due to damage to their facilities in and near the Gulf of Mexico.

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Due
to the losses as a consequence of the hurricanes that may affect the Gulf Coast in the future, we may not be able to obtain future insurance coverage comparable to our current
coverage, putting us at a greater risk of loss due to severe weather conditions. Future hurricanes in the region may increase costs and deductibles, limit maximum aggregate recoveries under available
policies or decrease the availability of insurance. Any significant uninsured losses could have a material adverse effect on our business, financial condition and results of operations.

We may continue to expand through acquisitions of other businesses, which may divert our management's attention, result in dilution to our stockholders and consume resources
that are necessary to sustain our business. We may not be able to successfully integrate acquired businesses with our business, and we may not realize the anticipated benefits of such acquisitions.

Acquiring complementary businesses from third parties is an important part of our growth strategy. Our acquisition strategy depends on
the availability of suitable acquisition candidates at reasonable prices. This strategy also depends on our ability to resolve challenges associated with integrating acquired businesses into our
existing business. These challenges include:



We
cannot be certain that we will find suitable acquisition candidates or that we will be able to meet these challenges successfully.

An
acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or issue additional common or preferred equity. Restrictions in the agreements
governing our indebtedness may prohibit us from obtaining additional financing, and, if we are not able to obtain financing, we may not be able to consummate acquisitions.

Negotiating
these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may often be subject to approvals, including from
regulatory authorities, that are beyond our control. Consequently, we can make no assurances that these transactions, once undertaken and announced, will close.

In
addition, following an acquisition, we may have higher expenses and therefore may not achieve the results that we anticipated at the time of the acquisition, especially if we are not
able to maintain or increase the revenues of the combined business. Acquired entities also may be highly leveraged, dilutive to our earnings per share or have unknown liabilities.

We may not be able to attract and retain qualified employees.

There is significant demand in our industry for skilled technicians and other qualified employees, including specialty servicing and
material handling technicians, direct manufacturing labor and engineers. This demand is more pronounced in certain locations in which we operate where the demand for skilled workers is high. The
delivery of our products and services requires personnel with specialized skills. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor
force, increases in the wage rates that we must pay or both. If either of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired.

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Failure to maintain key licenses could have a material impact on our operations.

The part of our business that consists of the sale, distribution, installation and warranty repair of large engines and transmissions
used in commercial vehicle applications in Texas requires certain Texas state motor vehicle licenses that are subject to annual renewal. While these licenses historically have been renewed on a
regular basis, there can be no assurance that any particular license will be renewed in the future. The termination of, or failure to renew, licenses could have a material adverse effect on our
financial position, results of operations and cash flows.

We may be unable to adequately protect or enforce our intellectual property rights or the value thereof, including our rights to use the "Stewart & Stevenson"
trademark, which could have a material adverse effect on our business.

The protection of our patents, trademarks, service marks, copyrights, trade secrets, domain names and other intellectual property
rights, including know-how, confidential or proprietary technical and business information, is important to our businesses. In particular, our rights to the "Stewart & Stevenson"
trademark and logo are important to our sales and marketing efforts.

To
protect our intellectual property, including our know-how and other proprietary information, we rely on a combination of copyright, patent, trademark, domain name, trade
secret and unfair competition laws, along with confidentiality procedures, contractual provisions and other similar
measures. While we have registrations for some of our trademarks in certain countries, including the United States, protection for intellectual property rights is territorial, and may not be available
or enforceable in every country in which our intellectual property and technology is used. Accordingly, we cannot ensure our ability to use, on an exclusive basis or otherwise, without risk, our
intellectual property, including the "Stewart & Stevenson" trademark and logo, particularly in countries where we, or our licensors, do not have trademark registrations, patents for our
technology or copyright protection. The risks relating to our intellectual property include, among others, potentially being sued for infringement or other violations, paying related damage awards or
other fees and costs or having to redesign or cease use of our intellectual property in a country where a third party has previously established rights in such intellectual property.

With
respect to intellectual property for which we or our licensors currently have protection, there is also the risk that:



Policing
and enforcing our intellectual property rights, protecting our trade secrets and other know-how, and determining the validity and scope of our intellectual property
and related rights is important, but requires significant resources, particularly if litigation is necessary. Potential litigation could divert our management's time, attention and resources, delay
our product shipments or require us to enter into royalty or license agreements, which may not be available under commercially reasonable terms, if at all. Moreover, the value of our intellectual
property rights may be impaired without infringement occurring.

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Our level of indebtedness could negatively affect our financial condition, adversely affect our ability to raise additional capital and harm our ability to react to changes
to our business.

At January 31, 2011, we had approximately $192.6 million of indebtedness, consisting of $35.2 million outstanding
under our asset-based revolving credit facility, $150.0 million of outstanding senior notes and $7.4 million of other notes payable. We may make additional borrowings at any time under
our revolving credit facility, which provides for maximum borrowings of $250.0 million (expandable, subject to certain conditions and commitments, to $325.0 million). Borrowings under
our revolving credit facility accrue interest at a floating rate and, accordingly, an increase in interest rates would result in a corresponding increase in our debt servicing requirements. Subject to
restrictions in our revolving credit facility and the indenture governing our senior notes, we may also incur additional indebtedness.

Our
level of indebtedness could have important consequences to you, including the following:



Our revolving credit facility and the indenture governing our senior notes impose significant operating and financial restrictions on us, which may prevent us from pursuing
our business strategies or favorable business opportunities.

Our revolving credit facility and the indenture governing our senior notes impose significant operating and financial restrictions on
us. These restrictions limit or prohibit, among other things, our ability to:



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The
revolving credit facility and the indenture governing the senior notes contain financial and operating covenants with which we must comply during the term of the agreements. These
covenants include the maintenance of certain financial ratios, restrictions related to the incurrence of certain indebtedness and investments, and a prohibition on the creation of certain liens. The
financial covenant for the revolving credit facility requires that we maintain a fixed charge coverage ratio, as defined in the credit agreement, of at least 1.1 to 1.0 at such time that our available
borrowing capacity under the revolving credit facility is $30.0 million or less. The financial covenant for the senior notes, which is applicable were we to incur additional indebtedness
(subject to various exceptions set forth in the
underlying indenture), requires that, after giving effect to the incurrence of such additional indebtedness, we have a fixed charge coverage ratio, as described in the indenture, of at
least 2.5 to 1.0.

A
breach of any of these covenants could result in a default under our revolving credit facility or our senior notes. If any such default occurs, the lenders under our revolving credit
facility and the holders of our senior notes may declare all outstanding amounts, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders
under our revolving credit facility also have the right in these circumstances to terminate any commitments they have to provide further funds. In addition, following an event of default under our
revolving credit facility, the lenders under the revolving credit facility will have the right to proceed against the collateral granted to them to secure the amounts payable thereunder, and which
force us into bankruptcy or liquidation. A default on certain other indebtedness could give rise to cross-default or cross-acceleration rights under our revolving credit facility or our senior notes.

As an SEC reporting company, we are subject to additional regulation and will incur additional administrative costs relating to compliance with U.S. securities laws.

We are subject to reporting and other obligations under the Securities Exchange Act of 1934. These requirements include the preparation
and filing of detailed annual, quarterly and current reports. In addition, we are required to keep abreast of and comply with material changes in the applicable rules and regulations promulgated by
the SEC, including the changes and requirements mandated by the Sarbanes-Oxley Act of 2002. Compliance with these rules and regulations has resulted in an ongoing increase in our legal, audit and
financial compliance costs, the diversion of management attention from operations and strategic opportunities and has made legal, accounting and administrative activities more
time-consuming and costly.

If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud.

We produce our financial statements in accordance with the requirements of U.S. generally accepted accounting principles ("GAAP");
however, while we have performed our own analysis as to the effectiveness of our internal control over financial reporting, our independent registered public accounting firm has not attested to the
effectiveness of our internal accounting control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act ("Section 404"). Effective internal controls are necessary for
us to provide reliable financial reports and to prevent fraud. Our efforts to maintain an effective system of controls may not be successful, and we may be unable to maintain adequate controls over
our financial processes and reporting in the future, including compliance with the obligations under Section 404. Any failure to maintain effective internal controls, difficulties encountered
in their implementation or other effective improvement of our internal controls could impact our operating results or cause us to fail to meet our reporting obligations. Given the difficulties
inherent in the design and operation of internal controls over financial reporting, in the future, we may not be able to conclude that our internal control is effective. Ineffective internal
controls may subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business.

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The interests of the controlling holder of our common equity may not be aligned with your interests.

Mr. Hushang Ansary, our Chairman of the Board of Directors, indirectly beneficially owns a substantial majority of our common
equity. As a result, Mr. Ansary is in a position to control our affairs, policies and decisions to enter into any transaction. In this context, circumstances may occur in which the interests of
Mr. Ansary as an equity owner may conflict with the interests of holders of our senior notes. In addition, Mr. Ansary may have an interest in pursuing acquisitions, divestitures or other
transactions that could enhance his equity investment in us, even though such transactions might involve risks to holders of our senior notes.

ITEM 1B.Unresolved Staff Comments

None.

ITEM 2.Properties

In addition to our leased headquarters in the central business district of Houston, Texas, we also maintain over 2.5 million
square feet of manufacturing, service and sales facilities throughout the central United States, Canada, Colombia and Venezuela, as well as sales offices in Beijing and Moscow. We have a total of 57
facilities, of which 48 are located in the United States and Canada (17 are owned and 31 are leased), and the remaining nine, all of which are leased, are located abroad.

Our
facilities are located close to major onshore and offshore petroleum producing regions in the United States and in a number of the world's energy producing nations. A summary of our
major locations is shown below:

Location

Leased /Owned

SegmentDallas, TX

Owned

DistributionHouston, TX (East)

Owned

DistributionHouston, TX (Northwest)

Owned

ManufacturingOdessa, TX

Owned

DistributionDenver, CO

Owned

DistributionSan Antonio, TX

Owned

DistributionNew Orleans, LA

Owned/Leased

DistributionFarmington, NM

Owned

DistributionCorpus Christi, TX

Owned

DistributionOdessa, TX

Leased

ManufacturingEdmond, OK

Leased

ManufacturingVictoria, TX

Leased

ManufacturingCalgary, Canada

Leased

Manufacturing


For
the fiscal year ended January 31, 2011, our international assets represented approximately 10.7% of our total assets.

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ITEM 3.Legal Proceedings

In July 2009, we settled an arbitration action brought against one of our suppliers and us. Fiscal 2009 results of operations, after
insurance proceeds and receipt of certain inventory, were negatively impacted by approximately $3.5 million, which is recorded in selling and administrative expenses. The settlement resolved
the arbitration action and resulted in dismissal and release of all claims alleged.

During
Fiscal 2009, the State of Texas began conducting a sales and use tax audit for Fiscal 2006, 2007 and 2008. Recently, the audit period has been expanded to include Fiscal 2009. In
the second quarter of Fiscal 2009, we completed a preliminary analysis and recorded our then best estimate of probable loss as a charge to selling and administrative expenses and other current
liabilities in our consolidated
financial statements. As the audit process and periods have evolved, we have continued to evaluate this analysis and have recorded adjustments to the accrual reflecting our best estimate of probable
loss. The audit remains in process and, accordingly, our ultimate loss could be greater, or less, than the amounts we have recorded.

We
are also a defendant in a number of lawsuits relating to matters normally incident to our business. No individual case, or group of cases presenting substantially similar issues of
law or fact, is expected to have a material effect on the manner in which we conduct our business or on our consolidated results of operations, financial position or liquidity. We maintain certain
insurance policies that provide coverage for product liability and personal injury cases. These insurance policies are subject to a self-insured retention for which we are responsible,
which is generally $500,000 for newer cases and $1.0 million for cases initiated before Fiscal 2009. We have established reserves that we believe to be adequate based on current evaluations and
our experience in these types of claim situations. Nevertheless, an unexpected outcome or adverse development in any such case could have a material adverse impact on our consolidated results of
operations in the period in which it occurs.

ITEM 4.[Removed and Reserved]

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PART II

ITEM 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities

As
of January 31, 2011, there were four record holders of our outstanding units. There is no established public trading market for any class of our
common equity.

Our
income is reported for federal and certain states by our shareholders. We make quarterly distributions to them to fund these tax obligations. During Fiscal 2010, 2009 and 2008,
$0.3 million, $5.6 million and $33.6 million, respectively, was distributed to shareholders for their tax obligations.

ITEM 6.Selected Financial Data

The following table sets forth our selected historical consolidated financial data as of and for each of the five years ended
January 31, 2007, 2008, 2009, 2010 and 2011. The selected historical consolidated financial data was derived from our audited consolidated financial statements included elsewhere in this Annual
Report or in our previous SEC filings. The selected historical financial data for the year ended January 31, 2008 includes the results of the Crown Acquisition from the date of its acquisition
on February 26, 2007. You should read this information in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes included elsewhere in this Annual Report.

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Table of Contents

Year ended January 31,(Dollars and units in thousands)

2007

2008

2009

2010

2011Statement of operations data:Sales

$
942,148

$
1,335,427

$
1,217,142

$
688,676

$
861,234Cost of sales


774,060


1,070,396


1,002,166


577,028


715,967Gross profit


168,088


265,031


214,976


111,648


145,267Selling and administrative expenses


108,005


139,947


138,141


114,188


104,252Impairment of goodwill and indefinite-lived intangible assets(1)














31,487Other (income) expense, net


(1,900
)

(989
)

(1,311
)

54


(1,026
)Operating profit (loss)


61,983


126,073


78,146


(2,594
)

10,554Interest expense, net


19,756


29,058


24,931


20,489


19,886Earnings (loss) before income taxes


42,227


97,015


53,215


(23,083
)

(9,332
)Income tax expense(2)


742


5,192


2,659


816


700Net earnings (loss)


41,485


91,823


50,556


(23,899
)

(10,032
)Preferred dividends


(4,017
)










Net earnings (loss) available for common unit holders

$
37,468

$
91,823

$
50,556

$
(23,899
)
$
(10,032
)Net earnings (loss) per unit:Basic

$
0.51

$
0.92

$
0.51

$
(0.24
)
$
(0.10
)Diluted

$
0.41

$
0.92

$
0.51

$
(0.24
)
$
(0.10
)Net earnings (loss) available for common unit holders per common unit:Basic

$
0.46

$
0.92

$
0.51

$
(0.24
)
$
(0.10
)Diluted

$
0.41

$
0.92

$
0.51

$
(0.24
)
$
(0.10
)Weighted average units outstanding:Basic


80,745


100,005


100,005


100,005


100,005Diluted


100,005


100,005


100,005


100,005


100,005Balance sheet data (end of period):Working capital(3)

$
214,718

$
318,072

$
313,574

$
245,485

$
238,271Cash & cash equivalents


5,852


12,382


2,006


3,321


9,168Property, plant and equipment, net


61,303


82,606


93,170


79,206


75,077Total assets


456,801


673,621


653,962


514,525


567,603Total debt


204,474


294,592


285,370


228,113


192,622Total shareholders' equity


94,872


174,941


179,944


155,622


149,034


(1)See
discussion of this impairment in Item 7"Critical accounting policiesGoodwill and indefinite-lived intangible assets."(2)We
conduct our operations as Stewart & Stevenson LLC, a limited liability company, and, as a result, U.S. federal and certain state income
taxes are paid by the holders of our equity interests. Therefore, no U.S. federal income tax expense was recorded in our statements of operations. The amounts shown reflect income tax expense
associated with foreign jurisdictions and certain state taxes.(3)Working
capital is total current assets minus total current liabilities.


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ITEM 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

The
following discussion should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and related notes included
elsewhere in this Annual Report. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties
materialize, our actual results may differ from those expressed or implied by the forward-looking statements.

Overview

We are a leading designer, manufacturer and provider of specialized equipment and aftermarket parts and service for the oil and gas
industry and other industries that we have served for over 100 years.

Our
wide range of products covers hydraulic fracturing, well stimulation, workover, intervention and drilling operations. These products include well stimulation equipment; pumping,
acidizing, coiled tubing, cementing and nitrogen units; drilling rigs and workover rigs; power generation systems; and electrical support and distribution systems, as well as engines, transmissions,
prime movers and material handling equipment. We have a substantial installed base of products, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and
service revenues from customers in the oil and gas, power generation and various other industries. In addition, we provide rental equipment to our customers, including generator sets, air compressors,
rail car movers and material handling equipment.

EBITDA
means earnings before interest, taxes, depreciation, amortization and impairment of goodwill and indefinite-lived intangible assets and is a non-GAAP financial
measure. We use EBITDA because we believe that such a measurement is a widely accepted financial indicator used by investors and analysts to analyze and compare companies on the basis of operating
performance and that this measurement may be used by some investors and others to make informed investment
decisions. You should not consider it in isolation from or as a substitute for net income or cash flow measures prepared in accordance with GAAP or as a measure of profitability or liquidity. EBITDA
has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations
are:



In
Fiscal 2010, we generated revenues of $861.2 million, operating profit of $10.6 million and EBITDA of $59.1 million, compared with revenues of
$688.7 million, operating loss of $2.6 million and EBITDA of $15.8 million in Fiscal 2009 and revenues of $1,217.1 million, operating profit of $78.1 million and
EBITDA of $97.0 million in Fiscal 2008.

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EBITDA
calculations by one company may not be comparable to EBITDA calculations made by another company. The following table provides a reconciliation of net earnings (loss) (a GAAP
financial measure) to EBITDA (a non-GAAP financial measure):

Fiscal Year ended January 31,(Dollars in thousands)

2011

2010

2009Net (loss) earnings

$
(10,032
)
$
(23,899
)
$
50,556Add:Interest expense, net


19,886


20,489


24,931Income tax expense


700


816


2,659Depreciation and amortization


17,053


18,402


18,869Impairment of goodwill and indefinite-lived intangible assets


31,487





EBITDA (unaudited)

$
59,094

$
15,808

$
97,015


Business drivers and measures

Revenue factors

Oil and gas industry capital expenditures.Sales of our equipment are significantly driven by the capital spending programs of our
customers. Growing
worldwide demand for energy has resulted in significantly increased capital expenditures by oil and gas producers in recent years. We believe that we are well positioned for the rapid growth in the
development of unconventional oil and gas resources, particularly in North America, which require utilization of technologically advanced well stimulation equipment of the nature that we provide.
Although commodity price fluctuations may impact the level of oil and gas exploration activity in the long term, we believe the capital spending programs of our customers at this time continue to be
strong. A decrease in the capital spending programs of our customers would adversely impact our equipment sales and, to a lesser extent, our aftermarket parts and service and rental sales.
Approximately 77.6% and 72.2% of our revenues in Fiscal 2010 and Fiscal 2009, respectively, came from customers in the oil and gas industry.

Non-oil and gas industries.We believe that many of the non-oil and gas industries we serve, particularly the commercial
vehicle and material handling industries, provide us with opportunities to continue to grow our business.

Aftermarket parts and service demand.In addition, we provide aftermarket parts and service and rent equipment to customers in the oil
and gas, power
generation, marine, mining, construction, commercial vehicle and material handling industries. These sales generated approximately 34.9% and 39.8% of our revenues during Fiscal 2010 and Fiscal 2009,
respectively. We provide aftermarket parts and service for equipment manufactured by approximately 100 manufacturers, including products manufactured by us
and our key OEMs, and our aftermarket business provides us with a recurring revenue stream. Our rental revenue includes generators, compressors and material handling equipment.

Backlog.Among the metrics we track to monitor demand in our business is equipment order backlog. We define backlog as unfilled
equipment orders that
consist of written purchase orders or signed contracts accompanied, if required by our credit policies, by credit support (typically down payments or letters of credit). As of January 31, 2011,
our equipment order backlog was $375.0 million, compared to $203.2 million as of January 31, 2010.

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Backlog
of $375.0 million as of January 31, 2011 includes $37.5 million of related party transactions reflecting an order in Fiscal 2009 from an affiliate. Revenue
recognition from this transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. A deposit in the amount of
$31.2 million is recorded as a customer deposit in our consolidated balance sheet. Included in inventories, net is $29.5 million in costs related to this contract, and no amounts have
been recorded in the consolidated statements of operations through January 31, 2011.

Seasonality.Our revenues are not significantly affected by seasonality.

Operational factors

Ensuring timely supply of components.While we believe that the opportunities to grow our business are significant, there are also
challenges and
uncertainties we face in executing our business plans. In the current environment of strong demand for products and services of the type we provide, our ability to procure certain components on a
timely basis to meet the delivery needs of our customers is a concern.
A substantial portion of the products we sell includes components provided by our six key OEMs and on occasion we need to rely upon alternative sources of supply for those components because of
the current levels of high demand for the components we require. Our ability to satisfy the delivery requirements of a customer on a timely basis is critical to our success.

Labor market constraints.Although we have the benefit of a highly trained and experienced workforce, we believe that attracting and
retaining high
quality and experienced personnel is a significant challenge in the current competitive environment, particularly in oil- and gas-related activities. Accordingly, we place
particular emphasis on career development programs that seek to improve the retention of employees, including senior and middle management.

Presentation of historical financial information

Our fiscal year begins on February 1 of the stated year and ends on January 31 of the following year. For example, Fiscal
2010 began on February 1, 2010 and ended on January 31, 2011. We report results on the fiscal quarter method, with each quarter comprising approximately 13 weeks.

Operation as an LLC

We have conducted our operations through Stewart & Stevenson LLC, a limited liability company, and, as a result, U.S.
federal and certain state income taxes were paid by the holders of our equity interests. Therefore, no U.S. federal income tax expense is recorded in our statement of operations. The amounts shown
under "income taxes" in our audited consolidated financial statements reflect income tax expense associated with foreign jurisdictions and certain state taxes.

Segment presentation

We recently revised our segment presentation to present the following reportable segments:



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For
more information on our segments, see "Segment data."

In
our prior reports filed with the SEC, we presented four segments: equipment, aftermarket parts and service, rental and corporate. The audited consolidated financial statements
included elsewhere in this Annual Report have been recast to reflect our new segment presentation.

Critical accounting policies

Use of estimates and assumptions

The preparation of financial statements in conformance with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expense during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these estimates.

Revenue recognition

Revenue from equipment and parts sales is recognized when the product is shipped, collection is reasonably assured, risks of ownership
have been transferred to and accepted by the customer and contract terms are met. Cash discounts or other incentives to customers are recorded as a reduction of revenue. Revenue from service
agreements is recognized as earned when services have been rendered. Revenue from rental agreements is recognized on a straight-line basis over the rental period. We report revenue net of
any revenue-based taxes assessed by governmental authorities.

With
respect to long-term equipment contracts, revenue is recognized using the percentage-of-completion method. The majority of our contracts are fixed-price
contracts, and measurement of progress toward completion is based on direct labor hours incurred. For long-term equipment contracts to build land-based drilling, workover and
service rigs, measurement of progress toward completion is based on the cost-to-cost method. Changes in estimates for revenues, costs to complete and profit margins are
recognized in the period in which they are reasonably determinable. Any anticipated losses on uncompleted contracts are recognized whenever evidence indicates that the estimated total cost of a
contract exceeds its estimated total revenue. With respect to cost-plus-fixed-fee contracts, we recognize the fee ratably as the actual costs are incurred, based
upon the total fee amounts expected to be realized upon completion of the contracts. Bid and proposal costs are expensed as incurred.

Recoverable
costs and accrued profits not yet billed ("Unbilled Revenue") represent the cumulative revenue recognized less the cumulative billings to the customer. Any billed revenue
that has not been collected is reported as accounts receivable. The timing of when we bill our customers is generally based upon advance billing terms or contingent upon completion of certain phases
of the work, as stipulated in the contract. Billings in excess of incurred costs represent progress billings in excess of Unbilled Revenue.

We
frequently sell equipment together with "start-up" services, which typically involve adding fuel to the engine, starting the equipment for the first time and observing it
to ensure that it is operating properly. In cases where start-up services are required on an equipment sale, the estimated start-up costs are accrued when revenue from the
equipment sale is recognized.

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Accounts receivable

Accounts receivable are recorded when billed and represent claims against third parties that will be settled in cash. The carrying
value of our accounts receivable, net of the allowance for doubtful accounts, represents the estimated net realizable value. We maintain an allowance for doubtful accounts for estimated losses related
to credit extended to our customers. We base such estimates on our current accounts receivable aging and historical collections and settlements experience, existing economic conditions and any
specific customer collection issues we have identified. Uncollectible accounts receivable are written off when we determine that the balance cannot be collected.

Inventories

Inventories are stated at the lower of cost or market, with cost primarily determined on a first-in, first-out
("FIFO") basis and market determined on the basis of estimated realizable values. We purchase a considerable amount of our inventory for resale from independent manufacturers pursuant to distribution
agreements. Cost represents invoice or production cost for new items and original cost less allowance for condition for used equipment inventory. Production cost includes material, labor and
manufacturing overhead. When circumstances dictate, we write inventory down to its estimated realizable value based upon assumptions about future demand, technological innovations, market conditions,
plans for disposal and the physical condition of products. Shipping and handling costs are expensed as incurred in cost of sales. Shipping and handling costs billed to customers are recorded as sales.

Goodwill and indefinite-lived intangible assets

We perform an impairment test for goodwill and indefinite-lived intangible assets annually during the fourth quarter, or earlier if
indicators of potential impairment exist. Our goodwill impairment test involves a comparison of the fair value of each of our reporting units with their carrying value. Our impairment test for
indefinite-lived intangible assets involves the comparison of the fair value of the intangible asset and its carrying value. The fair value is determined using discounted cash flows ("income
approach") and other market-related valuation models, including earnings multiples ("public company market approach") and comparable asset market values ("transaction approach"). Certain estimates and
judgments are required in the application of these fair value models. The income approach consists of estimating the future cash flows that are directly associated with each of our reporting units.
There are significant inherent uncertainties and management judgment involved in estimating the fair value of each reporting unit, including historical experience and future expectations such as
budgets and industry projections. We believe we have made reasonable estimates and assumptions to estimate the fair value of our reporting units.

We
performed the first step for our annual impairment test, which compares the fair value of our reporting units to their carrying values, during the Fiscal 2010 fourth quarter and the
result of this test indicated that a probable impairment existed for our Crown reporting unit. The Fiscal 2010 results of operations for the Crown reporting unit did not achieve our expectations. In
particular, the anticipated rebound for and growth in rig and well stimulation equipment sales and backlog growth for the Crown reporting unit have not reached pre-2009 levels. These
assumptions had been factored into our budgets and forecasts and specific sales were anticipated to occur during Fiscal 2010, including the fourth quarter, coupled with growth in backlog for these
products. Because oil prices have risen, it was anticipated that capital spending for land-based drilling, workover and service rigs would return and be reflected in backlog and equipment
ordering trends. As a result of this prolonged downturn, our cash flow projections for Crown have been substantially revised downward.

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The
Crown reporting unit had goodwill of $28.7 million and indefinite-lived intangible assets (trademarks) of $4.1 million subject to this annual impairment test. In
determining the fair value in the step one test, the material assumptions used for the income approach included a weighted average cost of capital of 21.4% and a long-term growth rate of
4.1%. Based on our future cash flow projections for the Crown reporting unit, the result of the income approach indicated the carrying amount of the Crown reporting unit exceeded its estimated fair
value. In addition, these cash flow projections did not result in meaningful market-related comparisons under the public company market and transaction approaches. Therefore, under the second step of
the impairment test, we allocated the estimated fair value indicated by the income approach to the identifiable tangible and intangible assets
and liabilities based on their respective values. This allocation indicated a partial impairment for the indefinite-lived intangible assets and no residual value for goodwill.

The
below table details the impact of this impairment charge, which resulted in an overall decrease to goodwill and intangibles, net in our consolidated balance sheets of
$31.5 million as follows:

Indefinite-Lived
Intangible Assets

GoodwillCrown reporting unit before impairment test

$
4,084

$
28,653Impairment charges


(2,834
)

(28,653
)Crown reporting unit after impairment test

$
1,250

$



We
recorded a $31.5 million impairment charge in our consolidated results of operations for Fiscal 2010.

Long-lived assets

Long-lived assets, which include property, plant and equipment and acquired definite-lived intangible assets, comprise a
significant amount of our total assets. We carry our property, plant and equipment at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred and expenditures for
renewals, replacements and improvements are capitalized. We depreciate our property, plant and equipment on a straight-line basis
over their estimated useful lives. Definite-lived intangibles are amortized on a straight-line basis over their estimated useful lives.

In
accounting for long-lived assets, we must make estimates about the expected useful lives of the assets and the potential for impairment based on the fair value of the
assets and the cash flows they are expected to generate. The value of the long-lived assets is then amortized over their expected useful lives. A change in the estimated useful lives of
our long-lived assets would have an impact on our results of operations. We estimate the useful lives of our long-lived asset groups as follows:

Buildings

10 - 25 yearsLeasehold improvements

Lesser of lease term or asset lifeRental equipment

2 - 8 yearsMachinery and equipment

4 - 7 yearsComputer hardware and software

3 - 4 yearsIntangible assets

4 months - 27 years


In
estimating the useful lives of our property, plant and equipment, we rely primarily on our actual experience with the same or similar assets. The useful lives of our definite-lived
intangible assets are determined by the years over which we expect the assets to generate a benefit based on legal, contractual or regulatory terms.

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We assess the valuation of components of our property, plant and equipment and definite-lived intangible assets whenever events or circumstances dictate that the
carrying value might not be recoverable. We base our evaluation on indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability
measurements and other external market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset or asset group may not be recoverable, we determine
whether impairment has occurred by analyzing an estimate of undiscounted future cash flows at the lowest level for which identifiable cash flows exist. If our estimate of undiscounted future cash
flows during the estimated useful life of the asset is less than the carrying value of the asset, we recognize a loss for the difference between the carrying value of the asset and its estimated fair
value, measured by the present value of estimated future cash flows or other means, as appropriate under the circumstances.

Warranty costs

Generally, the only warranty provided to our customers for products we sell that were originally manufactured by others, including our
key OEMs, is the warranty provided by those original manufacturers. We warrant products manufactured, and services provided, by us for periods of three to 18 months. Based on historical
experience and contract terms, we accrue the estimated cost of our product and service warranties at the time of sale or, in some cases, when specific warranty exposures are identified and
quantifiable. Accrued warranty costs are adjusted periodically to
reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. Occasionally, a material
warranty issue can arise that is beyond our historical experience. We accrue for any such warranty issues as they become known and estimable.

Customer deposits

We sometimes collect advance customer deposits to secure customers' obligations to pay the purchase price of ordered equipment. For
long-term construction contracts, these customer deposits are recorded as current liabilities until construction begins. During construction, the deposit liability is reclassified into
billings in excess of incurred costs and, ultimately, recognized into revenue under the percentage-of-completion method. For all other sales, these deposits are recorded as
current liabilities until revenue is recognized.

Insurance

We maintain a variety of insurance for our operations that we believe to be customary and reasonable. We are self-insured
up to certain levels in the form of deductibles and retentions for general liability, vehicle liability, group medical and workers' compensation claims. Other than normal business and contractual
risks that are not insurable, our risks are commonly insured against and the effect of a loss occurrence is not expected to be significant. We accrue for estimated self-insurance costs and
uninsured exposures based on estimated development of claims filed and an estimate of claims incurred but not reported as of each balance sheet date. We regularly review estimates of reported and
unreported claims and provide for losses accordingly.

Comparison of results of operationsFiscal 2010 and Fiscal 2009

Sales

In Fiscal 2010, our sales were $861.2 million, an increase of $172.6 million, or 25.1%, compared to the same period of
Fiscal 2009 sales of $688.7 million. The increase in sales impacted both segments and was attributable primarily to an overall increase in equipment sales in the manufacturing segment to
customers in the oil and gas industry for our well stimulation equipment. Parts and service sales increased in both segments and higher transmission sales for oilfield equipment were primarily
responsible for the increase in equipment sales for the distribution segment.

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Table of Contents

A
breakdown of sales for the periods is as follows:

For the Year Ended
January 31,

Change(Dollars in thousands)

2011

2010

$

%Manufacturing segmentEquipment

$
321,008

$
230,796

$
90,212


39.1
%Parts and service


21,386


15,558


5,828


37.5
%Total manufacturing sales

$
342,394

$
246,354

$
96,040


39.0
%Distribution segmentEquipment

$
216,251

$
164,846

$
51,405


31.2
%Parts and service


279,341


258,082


21,259


8.2
%Rentals


23,248


19,394


3,854


19.9
%Total distribution sales

$
518,840

$
442,322

$
76,518


17.3
%Total sales

$
861,234

$
688,676

$
172,558


25.1
%Operating profit (loss)Manufacturing(1)

$
11,277

$
15,875

$
(4,598
)

(29.0
)%Distribution


37,481


23,640


13,841


58.5
%Corporate and shared services


(38,204
)

(42,109
)

3,905


(9.3
)%Total operating profit

$
10,554

$
(2,594
)
$
13,148Operating profit percentageManufacturing(1)


3.3
%

6.4
%Distribution


7.2
%

5.3
%Consolidated


1.2
%

(0.4
)%


(1)The
Fiscal 2010 operating profit for the manufacturing segment includes the impact of the $31.5 million goodwill and indefinite-lived intangible assets
impairment charge for Crown.


Manufacturing
sales increased by 39.0%, or $96.0 million, during Fiscal 2010 compared to Fiscal 2009, of which $90.2 million of this increase was related to equipment sales
and $5.8 million was related to an increase in parts and service sales. The increase in equipment sales was primarily attributable to higher sales volumes for well stimulation equipment, which
was partially offset by lower sales volumes in power generation (associated with deepwater drilling rig build cycles) and rigs as follows:

For the Fiscal Year EndedChangeJanuary 31, 2011

January 31, 2010(Dollars in thousands)

$

%Manufacturing equipment salesWell stimulation

$
275,271

$
60,016

$
215,255


358.7
%Power generation


17,889


116,749


(98,860
)

(84.7
)%Rigs


14,673


42,215


(27,542
)

(65.2
)%Seismic products


6,192


2,220


3,972


178.9
%Electric products


5,382


6,931


(1,549
)

(22.3
)%Other


1,601


2,665


(1,064
)

(39.9
)%Total equipment

$
321,008

$
230,796

$
90,212


39.1
%


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Distribution
sales increased by $76.5 million to $518.8 million in Fiscal 2010 compared to $442.3 million in Fiscal 2009. The increase in distribution sales was due
to increased equipment sales of $51.4 million, parts and service of $21.3 million and rentals of $3.8 million. The increase in transmissions is due to higher sales volumes for
oilfield equipment. Equipment sales increased due to the following changes in our distribution products:

For the Year Ended
January 31,

Change(Dollars in thousands)

2011

2010

$

%Distribution equipment salesPower generation

$
48,427

$
48,348

$
79


0.2
%Engines


28,845


32,631


(3,786
)

(11.6
)%Transmissions


47,661


17,769


29,892


168.2
%Prime movers


34,488


26,962


7,526


27.9
%Material handling


31,099


24,609


6,490


26.4
%Rail car movers


11,638


8,390


3,248


38.7
%Other


14,093


6,137


7,956


129.6
%Total equipment sales

$
216,251

$
164,846

$
51,405


31.2
%


Gross profit

Our gross profit was $145.3 million for Fiscal 2010 compared to $111.6 million for Fiscal 2009, reflecting an increase in
gross profit margin from 16.2% to 16.9%. Our gross profit margin increased by 0.7 points due to higher sales volumes and product mix. The manufacturing segment gross profit margin increased from 15.4%
to 17.0%, an increase of 1.6 points. The distribution segment gross profit margin remained flat at 16.8%.

Selling and administrative expenses

Selling and administrative expenses decreased by $9.9 million to $104.3 million for Fiscal 2010, primarily as a result of
the following items, which impacted Fiscal 2009: (i) an accrual for a probable sales tax liability ($3.4 million); (ii) the settlement and defense of a claim
($3.5 million); and (iii) the closure of a facility ($0.9 million). Further decreases in overall selling and administrative expenses have been experienced in Fiscal 2010,
including lower professional and legal fees, bad debt expense and depreciation, partially offset by higher compensation expense. As a result, selling and administrative expenses as a percentage of
sales decreased to 12.1% in Fiscal 2010 from 16.6% for Fiscal 2009.

Other (income) expense, net

Other income increased by $1.1 million to $1.0 million for Fiscal 2010, mainly as the result of gains associated with
foreign currency derivative instruments in Fiscal 2010, and lower foreign currency transaction losses associated with our foreign subsidiaries in Fiscal 2010 as compared to Fiscal 2009. Our foreign
subsidiaries in Canada, Colombia and Venezuela generated 4.0%, 3.9% and 0.3%, respectively, of our sales for Fiscal 2010.

Operating profit

Our operating profit increased to $10.6 million, or 1.2% of sales, during Fiscal 2010 from an operating loss of
$2.6 million, or 0.4% of sales, in Fiscal 2009, primarily as the result of higher sales volumes, gross profit margins and lower selling and administrative expenses; however, operating profit
margin was significantly reduced by the impact of the goodwill and indefinite-lived intangible assets impairment charge of $31.5 million. See discussion of this impairment in
Item 7 "Critical accounting policiesGoodwill and indefinite-lived intangible assets."

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Interest expense, net

Interest expense, net for Fiscal 2010 decreased by $0.6 million compared to Fiscal 2009, primarily as a result of lower
outstanding borrowings and interest rates for our revolving credit facility during Fiscal 2010, partially offset by higher interest income during Fiscal 2009.

Comparison of the results of operationsFiscal 2009 and Fiscal 2008

Sales

For Fiscal 2009, our sales were $688.7 million, a decrease of $528.5 million, or 43.4%, compared to Fiscal 2008 sales of
$1,217.1 million. The decrease in sales impacted both segments and resulted from low customer confidence due to the weak U.S. and global economies, tight credit markets and unstable gas and oil
prices.

A
breakdown of sales for these periods is as follows:

For the Year Ended
January 31,

Change(Dollars in thousands)

2010

2009

$

%Manufacturing segmentEquipment

$
230,796

$
485,165

$
(254,369
)

(52.4
)%Parts and service


15,558


34,890


(19,332
)

(55.4
)%Total manufacturing sales

$
246,354

$
520,055

$
(273,701
)

(52.6
)%Distribution segmentEquipment

$
164,846

$
307,754

$
(142,908
)

(46.4
)%Parts and service


258,082


347,898


(89,816
)

(25.8
)%Rentals


19,394


41,435


(22,041
)

(53.2
)%Total distribution sales

$
442,322

$
697,087

$
(254,765
)

(36.5
)%Total sales

$
688,676

$
1,217,142

$
(528,466
)

(43.4
)%Operating profit (loss)Manufacturing

$
15,875

$
50,110

$
(34,235
)

(68.3
)%Distribution


23,640


66,456


(42,816
)

(64.4
)%Corporate and shared services


(42,109
)

(38,420
)

(3,689
)

9.6
%Total operating (loss) profit

$
(2,594
)
$
78,146

$
(80,740
)

(103.3
)%Operating (loss) profit percentageManufacturing


6.4
%

9.6
%Distribution


5.3
%

9.5
%Consolidated


(0.4
)%

6.4
%


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Manufacturing
sales decreased by 52.6%, or $273.7 million, during Fiscal 2009 compared to Fiscal 2008. The decrease in sales was attributable to lower equipment sales of
$254.4 million and net decreases in parts and service of $19.3 million. Equipment sales decreased for all products, except power generation equipment (due to higher demand associated
with deepwater drilling rig build cycles) and other equipment, as indicated in the following chart:

For the Year Ended
January 31,

Change(In thousands)

2010

2009

$

%Manufacturing equipment salesWell stimulation

$
60,016

$
255,343

$
(195,327
)

(76.5
)%Rigs


42,215


121,145


(78,930
)

(65.2
)%Power generation


116,749


58,141


58,608


100.8
%Seismic


2,220


36,776


(34,556
)

(94.0
)%Electric products


6,931


12,131


(5,200
)

(42.9
)%Other


2,665


1,629


1,036


63.6
%Total equipment sales

$
230,796

$
485,165

$
(254,369
)

(52.4
)%


Distribution
sales fell by 36.5%, or $254.8 million, to $442.3 million during Fiscal 2009 from $697.1 million in Fiscal 2008. Equipment sales fell by
$142.9 million, parts and service sales fell by $89.8 million, and rental sales fell by $22.1 million. Rental sales during Fiscal 2008 included revenues of approximately
$11.2 million related to Hurricanes Gustav and Ike, which were not repeated during Fiscal 2009. Sales of equipment by product decreased as follows:

For the Year Ended
January 31,

Change(In thousands)

2010

2009

$

%Distribution equipment salesPower generation

$
48,348

$
58,358

$
(10,010
)

(17.2
)%Engines


32,631


65,344


(32,713
)

(50.1
)%Transmissions


17,769


49,757


(31,988
)

(64.3
)%Prime movers


26,962


52,658


(25,696
)

(48.8
)%Material handling


24,609


52,468


(27,859
)

(53.1
)%Rail king


8,390


20,230


(11,840
)

(58.5
)%Other


6,137


8,939


(2,802
)

(31.3
)%Total equipment sales

$
164,846

$
307,754

$
(142,908
)

(46.4
)%


Gross profit

Our gross profit was $111.6 million for Fiscal 2009, a decrease of $103.4 million, compared to $215.0 million in
Fiscal 2008, reflecting a decline in gross profit margin from 17.7% to 16.2%, due to lower sales volumes, product mix and pricing pressures. The manufacturing segment gross profit margin increased
slightly from 14.6% to 15.4%, primarily driven by changes in product mix. The distribution segment gross profit margin decreased from 20.1% to 16.8%, as a result of changes in product mix, pricing
pressures and increases in indirect costs such as inventory reserves.

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Selling and administrative expenses

Selling and administrative expenses decreased by $23.9 million to $114.2 million in Fiscal 2009 compared to
$138.1 million in Fiscal 2008. Selling and administrative expenses as a percentage of sales increased to 16.6% from 11.3% for Fiscal 2009, primarily as a result of the impact of lower sales
volumes and our fixed costs. The decrease of $23.9 million during Fiscal 2009 was partially offset by approximately $3.4 million related to an accrual for a probable sales tax liability
and $3.5 million related to the settlement and defense of a claim. Fiscal 2008 included legal and professional expenses of approximately $2.6 million associated with the pursuit of
strategic alternatives, $1.6 million related to Sarbanes-Oxley 404 internal controls implementation costs, and $3.2 million of non-cash amortization of other intangible
assets.

Other expense (income), net

Other expense was $0.1 million in Fiscal 2009, a decrease of $1.4 million compared to other income of $1.3 million
in Fiscal 2008, mainly as the result of foreign currency transaction losses associated with our Canadian subsidiary, partially offset by realized gains associated with our foreign currency derivative
instruments in place at that time.

Operating (loss) profit

Our operating loss was $2.6 million, or 0.4% of sales, in Fiscal 2009, compared to operating profit of $78.1 million, or
6.4% of sales, in Fiscal 2008, primarily as the result of lower sales and gross profit margins.

Interest expense, net

Net interest expense was $20.5 million in Fiscal 2009, a decrease of $4.4 million compared to net interest expense of
$24.9 million in Fiscal 2008. The decrease in interest expense was primarily a result of lower outstanding balances and lower interest rates for our revolving credit facility and an increase in
interest income as compared to Fiscal 2008.

Segment data

In our prior reports filed with the SEC, we presented four segments: equipment, aftermarket parts and service, rental and corporate. We
have revised our segments to the following three segments: manufacturing, distribution and corporate and shared services. The audited consolidated financial statements included elsewhere in this
Annual Report have been recast to reflect our new segment presentation.

Through
our two operating segments, we design, manufacture and market a wide range of equipment and provide aftermarket parts and service to a broad range of customers. We also provide
rental equipment through our distribution segment. These products and services are consistent with our activities in prior periods and were reported in prior periods as three distinct operating
segments. We now report these same product categories within our two operating segments, which reflect our internal management structure.

This
operational and management structure was clarified and defined in the fourth quarter of Fiscal 2010 as the result of senior management's assessment and recommendations made to the
board of directors. This operational and management realignment was approved by our board and is reflected in the segments we now report. We believe that the two operating segment presentation
continues to report the products and services we provide, while also providing a view of how we manage our business and a better platform from which to explain the key activities within, and drivers
for, our business.

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Our
reportable segments are as follows:

Manufacturing

We design, manufacture and market equipment for U.S. and international oilfield service providers and drilling and workover
contractors, as well as national oil companies that require integrated and customized product solutions. We manufacture equipment specifically for
hydraulic fracturing, well stimulation, well workover, intervention and drilling operations. Our manufactured products include integrated solutions, which incorporate a variety of components into a
single system, for a wide range of oilfield services and support applications. In addition, we provide parts and service to customers primarily in the oil and gas industry.

Distribution

We provide stand-alone products and aftermarket parts and service for products manufactured by us, our six key OEMs and other
manufacturers. In addition, we provide rental equipment including generator sets, air compressors, rail car movers and material handling equipment to our customers. Our aftermarket parts and service
operations, which provide us with a recurring, higher-margin source of revenue, serve customers engaged in the oil and gas, power generation, marine, mining, construction, commercial vehicle and
material handling industries, as well as other industries.

Corporate and shared services

Our corporate and shared services segment includes administrative overhead normally not associated with specific activities within the
operating segments. These expenses include legal, finance and accounting, internal audit, human resources, information technology, marketing, supply chain and similar corporate office costs.

Intra-segment
revenues and costs are eliminated, and operating profit (loss) represents earnings (loss) before interest and income taxes.

Segment results comparisonFiscal 2010 and Fiscal 2009

Manufacturing

Operating profit generated by our manufacturing segment decreased to $11.3 million, or 3.3% of sales, for Fiscal 2010, from
$15.9 million, or 6.4% of sales for Fiscal 2009. The $4.6 million decrease in operating profit was attributable to a goodwill and indefinite-lived intangible asset impairment charge of
$31.5 million. This impairment charge was offset by increases of $14.8 million in sales volume, $5.5 million in increases due to a higher average profit margin, a
$3.8 million decrease in selling and administrative expenses and a $2.8 million decrease in other expense. The decrease in selling and administrative expenses primarily related to lower
depreciation, rent and facility-related costs and lower bad debt expense. The decrease in other expense was the result of foreign currency transaction losses attributable to our Canadian subsidiary in
Fiscal 2009 that were lower in Fiscal 2010.

Our
manufacturing backlog as of January 31, 2011 was $273.6 million, as compared to $158.6 million on January 31, 2010, an increase of 72.5%. Backlog of
$273.6 million as of January 31, 2011 includes a $37.5 million related party transaction, reflecting an order in Fiscal 2009 from an affiliate. Revenue recognition from this
transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. Cash payments received pursuant to this transaction are
recorded as customer deposits in the consolidated balance sheet and amounted to $31.2 million as of January 31, 2011. Included in inventories, net is $29.5 million of costs
related to this transaction, and no amounts have been recorded in the consolidated statement of operations for this transaction to date.

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Distribution

Operating profit generated by the distribution segment increased to $37.5 million in Fiscal 2010 from $23.6 million in
Fiscal 2009, representing an increase in operating profit percentage from 5.3% to 7.2%. The $13.9 million increase in operating profit was attributable to increases of $12.9 million in
sales volume and decreases of $1.7 million in selling and administrative expenses, partially offset by a $0.2 million decrease in average gross profit margin and an increase of
$0.5 million in other expense.

Our
distribution backlog as of January 31, 2011 was $101.4 million, as compared to $44.7 million on January 31, 2010 an increase of 126.8%.

Corporate and shared services

Corporate and shared services expenses decreased to $38.2 million in Fiscal 2010 compared to $42.1 million in Fiscal
2009, primarily as a result of the following items that impacted Fiscal 2009: an accrual for a probable sales tax liability ($3.4 million) and the settlement and defense of a claim
($3.5 million). These decreases were offset by an increase in bonuses ($2.8 million). As a result of these decreases, and due to higher sales volumes, corporate and shared services
expenses decreased from 6.1% to 4.4% as a percentage of sales.

Segment results comparisonFiscal 2009 and Fiscal 2008

Manufacturing

Operating profit generated by the manufacturing segment decreased to $15.9 million in Fiscal 2009 from $50.1 million in
Fiscal 2008, a decrease in operating profit margin from 9.6% to 6.4%, primarily due to higher costs and lower sales volumes. The $34.2 million decrease in operating profit was attributable to a
decrease of $39.9 million in sales volume and an increase in other expense of $7.3 million, partially offset by $10.9 million decrease in selling and administrative expenses and
an increase of $2.1 million in our average profit margin. The increase in other expense resulted from foreign currency transaction gains in Fiscal 2008 for our Canadian subsidiary, while
foreign currency transaction losses occurred in Fiscal 2009. Selling and administrative expenses decreased as a result of lower salaries and wages, including the impact of headcount reductions,
depreciation, facilities costs and other items.

Our
manufacturing backlog as of January 31, 2010 was $158.6 million compared to $223.7 million as of January 31, 2009, a decrease of 31.7%. We experienced
significant declines in demand in fiscal 2009 for our well stimulation and drilling rig products as a result of lower oil and gas prices, the tight credit markets and the weak U.S. and global
economies. Backlog of $158.6 million as of January 31, 2010 includes $37.5 million of related party transaction reflecting an order in Fiscal 2009 from an affiliate. Revenue
recognition from this transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. A deposit in the amount of
$9.4 million is recorded as a customer deposit in our consolidated balance sheet. Included in inventories, net is $5.8 million in costs related to this contract, and no amounts have been
recorded in the consolidated statements of operations through January 31, 2010.

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Distribution

Operating profit generated by the distribution segment decreased to $23.6 million in Fiscal 2009 from $66.4 million in
Fiscal 2008, while operating profit margin decreased from 9.5% to 5.3%. The $42.8 million decrease in operating profit was attributable to decreases of $51.2 million in sales volume and
$14.6 million in our average profit margin. Decreases in selling and administrative expenses of $21.7 million and $1.3 million in other expense partially offset the overall
decrease in operating profit. Selling and administrative expenses decreased due to lower salaries and wages, including the impact of headcount reductions, depreciation, rent and facility costs, among
other items. The decrease in other expense is primarily attributable to foreign currency transaction losses occurring in our Venezuelan subsidiary in Fiscal 2008 that did not occur in Fiscal 2009.

Our
distribution backlog as of January 31, 2010 was $44.7 million, as compared to $64.2 million on January 31, 2009, a decrease of 30.4%.

Corporate and shared services

Corporate and shared services expenses increased to $42.1 million in Fiscal 2009 compared to $38.4 million in Fiscal 2008
and increased as a percentage of sales from 3.2% to 6.1% as a result of lower sales volumes. Corporate and shared services expenses in Fiscal 2009 included $3.4 million of charges related to
the accrual for a probable sales tax liability, $3.5 million in defense and settlement of a claim, an increase of $2.7 million in facility related expenses and an increase of
$1.0 million in warranty expense.

Liquidity and capital resources

Our principal source of liquidity is cash generated by operations. We also have a $250.0 million asset-based revolving credit
facility, which we draw upon when necessary to satisfy our working capital needs and generally pay down with available cash. Our liquidity needs are primarily driven by changes in working capital
associated with execution of large manufacturing projects. While many of our contracts include advance customer deposits and progress billings, some international contracts provide for substantial
portions of funding under confirmed letters of credit upon delivery of the products.

We
have funded, and expect to continue to fund, operations through cash flows generated by operating activities and borrowings under our revolving credit facility. We also expect that
ongoing requirements for debt service and capital expenditures will be funded from these sources.

Our
future liquidity requirements will be for working capital, capital expenditures, debt service and general corporate purposes. Our borrowing capacity under the revolving credit
facility is impacted by, among other factors, the amount of working capital and qualifying assets therein. Based on our current level of operations, we believe that cash flow from operations and
available cash, together with available borrowings under our revolving credit facility, will be adequate to meet our short-term and long-term liquidity needs. However, our
ability to meet our working capital and debt service requirements is subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. If we are
not able to meet such requirements, we may be required to seek additional sources of capital.

Cash Flows

Year ended January 31,(Dollars in thousands)

2011

2010

2009Net cash provided by operating activities

$
56,864

$
66,321

$
58,470Net cash used in investing activities


(14,924
)

(2,940
)

(27,776
)Net cash used in financing activities


(36,150
)

(63,733
)

(42,364
)


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As
of January 31, 2011, our cash and cash equivalent balance was $9.2 million. The level of cash and cash equivalents is impacted by the timing of cash receipts,
disbursements and borrowings and payments under our revolving credit facility.

Fiscal 2010 compared to Fiscal 2009

Operating cash flow for Fiscal 2010 decreased by $9.5 million compared to Fiscal 2009. Fiscal 2009 reflects the conversion of
working capital to cash given the completion of large jobs and the overall decrease in business activity. Fiscal 2010 reflects the overall increase in business activity and resultant
build-up for long-term contracts and inventory. These increases were funded in large part by customer deposits, thus offsetting the cash outlays.

Cash
flow used in investing activities increased by $12.0 million for Fiscal 2010 compared to Fiscal 2009. This increase is due to the substantial curtailment of capital
expenditures during Fiscal 2009 as a result of the overall economic and business conditions due to the global recession, tight credit markets and unstable gas and oil prices. Given the increase in our
business activity, capital spending increased in Fiscal 2010, particularly for our rental business.

Cash
flow used in financing activities decreased by $27.6 million for Fiscal 2010 compared to Fiscal 2009 and primarily relates to lower payments in Fiscal 2010 under our
revolving credit facility. This overall decrease in payments under our revolving credit facility results from the use of cash flow for investing activities and lower overall cash flow from operations
in Fiscal 2010, whereas cash flow was used to pay down our revolving credit facility in Fiscal 2009.

Fiscal 2009 compared to Fiscal 2008

Operating cash flow increased by $7.9 million in Fiscal 2009 as compared Fiscal 2008, despite a net loss of
$23.9 million. This increase stems from working capital being converted to cash flow as large projects were completed and paid and a lack of further build-up of inventory due to the
slow-down in business activity.

Cash
flow used in investing activities decreased by $24.9 million in Fiscal 2009 as compared to Fiscal 2008. This decrease was due to the substantial curtailment of capital
expenditures during Fiscal 2009 as a result of overall economic and business conditions due to the global recession, tight credit markets and unstable gas and oil prices.

Cash
flow used in financing activities increased by $21.4 million in Fiscal 2009 as compared to Fiscal 2008. This increase was attributable to increased payments under our
revolving credit facility of $49.0 million as a result of increased available cash flow from operations and lower investments of cash
outflows. This increase was partially offset by a $28.0 million decrease in distributions to shareholders for tax obligations, which was attributable to the overall net loss for Fiscal 2009.

Financing sources

We have an asset-based revolving credit facility in the amount of $250.0 million with a $25.0 million
sub-facility to be used by our Canadian subsidiary. The $250.0 million revolving credit facility, which matures in February 2012, is secured by substantially all accounts
receivable, inventory and property, plant and equipment and provides for borrowings at LIBOR, plus a margin ranging from 1.25% to 2.00% per annum, based on our leverage ratios, as specified in the
credit agreement. Based on the outstanding borrowings, letters of credit issued and the terms of the asset-based revolving credit facility, our available borrowing capacity was approximately
$124.3 million at January 31, 2011. While we expect to be able to refinance or renew our revolving credit facility, there are no guarantees we will be able to do so, at all or on
substantially similar terms and conditions.

In
June 2006, we issued $150.0 million in principal amount of 10% Senior Notes due 2014. The senior notes are unsecured and are guaranteed on an unsecured basis by our domestic
restricted

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subsidiaries.
The senior notes mature on July 15, 2014, and interest is payable semi-annually on January 15 and July 15.

Borrowings
under our revolving credit facility and our senior notes were as follows as of the dates indicated:

(Dollars in thousands)

January 31, 2011

January 31, 2010Revolving credit facility

$
35,181

$
70,870Unsecured senior notes


150,000


150,000Total

$
185,181

$
220,870


The
revolving credit facility and the senior notes contain financial and operating covenants with which we must comply during the terms of the agreements. These covenants
include the maintenance of certain financial ratios, restrictions related to the incurrence of certain indebtedness and investments, and prohibition of the creation of certain liens. We were in
compliance with all covenants as of January 31, 2011. The financial covenant for the revolving credit facility requires that we maintain a fixed charge coverage ratio, as defined in the
agreement, of at least 1.1 to 1.0; however, this covenant does not take effect until our available borrowing capacity is $30.0 million or less. The covenants in the senior notes indenture
require that, if were we to incur additional indebtedness, pay dividends or make certain other restricted payments (in each case, subject to various exceptions set forth in the indenture), after
giving effect to the incurrence of such additional indebtedness, we have a fixed charge coverage ratio, as described in the indenture, of at least 2.5 to 1.0.

Capital expenditures

Our estimated capital expenditures for Fiscal 2011 are not anticipated to exceed $30.0 million, and up to $19.0 million
of this amount is available for rental equipment additions.

Contractual obligations and commitments

The following table summarizes the scheduled maturities under our revolving credit facility and our senior notes and our expected
payments for other significant contractual obligations as of January 31, 2011:

Description

Fiscal 2011

Fiscal 2012

Fiscal 2013

Fiscal 2014

Fiscal 2015

Thereafter

Total(Dollars in thousands)Senior notes

$


$


$


$
150,000

$


$


$
150,000Revolving credit facility





35,181














35,181Notes payable(1)


7,441

















7,441Interest on senior debt(1)


16,516


15,063


15,000


7,500








54,079Operating leases:Equipment


1,267


590


482


66


17





2,422Property


5,958


2,897


1,848


1,323


896


192


13,114Vehicles


2,245


1,166


530


364


24





4,329Total operating leases

$
9,470

$
4,653

$
2,860

$
1,753

$
937

$
192

$
19,865Total

$
33,427

$
54,897

$
17,860

$
159,253

$
937

$
192

$
266,566


(1)Interest
in respect of our revolving credit facility and notes payable is calculated assuming the outstanding balance and the current average borrowing rate
at January 31, 2011 remain unchanged over the terms of the agreements.


Off-balance sheet arrangements

We did not have material off-balance sheet arrangements as of January 31, 2011. We lease certain facilities and
equipment from third parties under operating lease arrangements. For more information about these leases, see Note 13 to our audited consolidated financial statements included elsewhere in this
Annual Report.

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Effects of inflation

We do not believe that inflation has had a material adverse effect on our financial condition or results of operations in recent years.
However, to the extent that the cost of
components and other supplies that we purchase rise and we are unable to pass those price increases on to our customers, our financial condition and results of operations would be adversely affected.
In instances in which we enter into contracts, such as for the manufacture of certain equipment that requires lead time between the placing of the order and delivery, the majority of those contracts
are at a fixed price. Any increase in component and other supply costs over the term of these contracts would reduce our profit margin on those products.

Recent Accounting Pronouncements

Revenue recognition for arrangements with multiple deliverables.In October 2009, the Financial Accounting Standards Board issued an
update to
existing guidance on revenue recognition for arrangements with multiple deliverables. This update will allow companies to allocate consideration received for qualified separate deliverables using
estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable. Additional disclosures discussing the nature of
multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices
are required. We will adopt this update for new revenue arrangements entered into beginning, or materially modified on or after, February 1, 2011. We do not expect the provisions of this update
to have a material impact on our consolidated financial statements.

ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates and
commodity prices, which could impact our financial condition, results of operations and cash flows. We plan to manage our exposure to these and other market risks through regular operating and
financing activities and on a limited basis, the use of derivative financial instruments. We intend to use such derivative financial instruments as risk management tools and not for speculative
investment purposes.

Foreign Exchange Risk

Our international subsidiaries in Colombia and Venezuela transact most of their business in their respective local currencies, while
our Canadian subsidiary conducts its business in both Canadian and U.S. dollars. Revenues generated by our Canadian, Colombian and Venezuelan subsidiaries comprised 4.0%, 3.9% and 0.3%, respectively,
of our total revenue during Fiscal 2010. Our results of operations were not significantly impacted by changes in currency exchange rates.

During
the second quarter of Fiscal 2010, we entered into four short-term foreign currency exchange rate contracts to manage our exposure to fluctuations in foreign currency
for certain purchase orders that were denominated in Euros. As of October 30, 2010, all of these contracts were closed and we recognized a $0.8 million realized gain, which was recorded
in other (income) expense, net within our consolidated statements of operations. We did not apply hedge accounting for these derivative instruments. We entered into a short-term foreign
currency exchange rate derivative instrument in January 2009 to manage our exposure to fluctuations in foreign currency exchange rates for certain contracts of our Canadian subsidiary that were not
denominated in its functional currency. This derivative was settled in the second quarter of Fiscal 2009 and resulted in a realized gain of $1.4 million, which was recorded in other (income)
expense, net within our consolidated statements of operations.

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A
10% depreciation of the Canadian dollar with respect to the U.S. dollar would have caused our Canadian subsidiary's assets and sales as of and for the year ended January 31,
2011 to decrease in U.S. dollar terms by approximately $5.5 million and $4.3 million, respectively. A 10% depreciation of the Colombian peso with respect to the U.S. dollar would have
caused our Colombian subsidiary's assets and sales as of and for the year ended January 31, 2011 to decrease in U.S. dollar terms by approximately $2.0 million and $3.1 million,
respectively.

On
January 10, 2010, the Venezuelan government devalued its currency from 2.15 Bolivars per U.S. dollar to 4.30 Bolivars per U.S. dollar ("the official rate") and the Venezuelan
economy has since been designated as hyperinflationary. We have historically utilized the official rate for our Venezuelan operations. Beginning February 1, 2010, we utilized the U.S. dollar as
the functional currency for our Venezuelan subsidiary and remeasured its financial statements into U.S. dollars at the official rate. Accordingly, using "hyperinflationary accounting," we recognized
the related losses or gains from such remeasurement of its balance sheet in the consolidated statements of its operations. During Fiscal 2010, the official rate for Venezuela did not fluctuate
significantly. As a result, the effect of remeasuring our Venezuelan subsidiary was insignificant.

At
January 31, 2011, we evaluated the rate at which we remeasure our Venezuelan subsidiary and concluded that based on the continued slow-down of its economy and
resultant constraints presently impacting the banking environment and associated limitations therein, that the SITME rate of 5.30 Bolivars per U.S. dollar was a more appropriate remeasurement rate.
The result of this change in remeasurement rate did not have a material impact to our financial statements. The total assets for our Venezuela subsidiary are approximately $4.0 million.

Interest Rate Risk

We use variable-rate debt to finance certain of our operations and capital expenditures. Assuming the entire
$250.0 million revolving credit facility were drawn, each quarter point change in interest rates would result in a $0.6 million change in annual interest expense.

ITEM 8.Financial Statements and Supplementary Data

The information required by this item is incorporated by reference to our Consolidated Financial Statements beginning on
Page F-1.

ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.Controls and Procedures

Effectiveness of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information we are required to disclose in reports that
we file with or submit to the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC. An evaluation was carried out under the supervision and with the
participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance
that information required to be disclosed by us in reports we file with the SEC is recorded, processed, summarized and reported within the time periods required by the SEC, and is accumulated and
communicated to management including our CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.

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Management's Report on Internal Control Over Financial Reporting

Management of the Company, including the CEO, is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Our internal controls were designed to provide reasonable
assurance as to (i) the reliability of our financial reporting and (ii) the reliability of the preparation and presentation of the consolidated financial statements for external purposes
in accordance with accounting principles generally accepted in the United States.

We
conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 31, 2011 based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. There are inherent limitations in the effectiveness of any system of internal
control over financial reporting; however, based on our evaluation, we have concluded that our internal control over financial reporting was effective as of January 31, 2011.

This
Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting, which is not required by voluntary
filers pursuant to the rules of the Securities and Exchange Commission.

Changes in Internal Control over Financial Reporting

Management, including our CEO and CFO, evaluated the changes in our internal control over financial reporting during the quarter ended
January 31, 2011. We determined that there were no changes in our internal control over financial reporting during the quarter ended January 31, 2011, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.Other Information

None.

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PART III

ITEM 10.Directors, Executive Officers and Corporate Governance

Executive Officers and Directors

The following table sets forth information with respect to our directors and executive officers as of April 30, 2011:

Name

Age

Position(s)Hushang Ansary


83

Chairman of the Board of DirectorsFrank Carlucci


80

Vice Chairman and DirectorRobert L. Hargrave


70

Vice Chairman and DirectorSteve Fulgham


50

Chief Executive Officer and DirectorJohn B. Simmons


58

Chief Financial Officer and DirectorAndrew M. Cannon


37

Chief Accounting OfficerJack L. Pieper


40

Vice PresidentOperational FinanceDavid C. Sulkis


54

General CounselKenneth W. Simmons


55

Vice PresidentDomestic Sales and AftermarketCharles T. Hatcher


62

Vice PresidentHuman ResourcesDavid E. Christensen


56

Senior Vice PresidentManufacturing and EngineeringNina Ansary


44

DirectorJames Crystal


73

DirectorMunawar Hidayatallah


66

DirectorJohn Macomber


83

DirectorAnthony G. Petrello


56

DirectorJ. Robinson West


64

Director


Hushang Ansary(Chairman).    Mr. Ansary is a Houston oil industry entrepreneur and philanthropist. He has been our Chairman of the
Board since
January 2006. He has served as Chairman of the Board of Parman Capital Group LLC since December 2005 and is our principal stockholder. From March 1995 to June 2000, Mr. Ansary was
Chairman and Chief Executive Officer of IRI International Corporation (IRI), a New York Stock Exchange oilfield equipment company. From June 2000 to March 2005, Mr. Ansary served on the board
of directors of National Oilwell, Inc. Mr. Ansary is a former Economic and Finance Minister of Iran, Iranian Ambassador to the United States and Chairman and Chief Executive Officer of
National Iranian Oil Company.

Frank C. Carlucci(Vice Chairman and Director).    Mr. Carlucci has been a member of our board of
directors since January 2006 and the Vice Chairman of our board of directors since March 2006. From 1993 to January 2003, Mr. Carlucci was Chairman, and from 2003 to 2005, Chairman Emeritus, of
The Carlyle Group, a private equity firm. From June 2000 to November 2005, he was a member of the board of directors of IRI. Mr. Carlucci served as National Security Advisor to the U.S.
President and the U.S. Secretary of Defense in the Reagan Administration. Mr. Carlucci is a Trustee of the RAND Corporation.

Robert L. Hargrave(Vice Chairman and Director).    Mr. Hargrave has been our Vice Chairman since February 2011. Prior to that, he
was our Chief
Executive Officer from January 2007 to January 2011. From 1999 to 2007, he was a private entrepreneur. He served as President and Chief Executive Officer of Stewart & Stevenson
Services, Inc. from 1997 to 1999 and its Chief Financial Officer from 1983 to 1997. Mr. Hargrave served as Vice Chairman and Chief Financial Officer at IRI from 1999 to 2000.

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Steve Fulgham(Chief Executive Officer and Director).    Mr. Fulgham has been our Chief Executive Officer and Director since February
2011. He
was most recently with Schlumberger, where he served for 27 years in several capacities, most recently as PresidentSchlumberger North America Land. His other management positions
covered locations in Africa, Asia and Europe. He holds a B.S. in Petroleum Engineering and is a member of several oil and gas associations.

John B. Simmons(Chief Financial Officer and Director).    Mr. Simmons has been our Chief Financial Officer and Director since
September 2010.
From February 2007 to August 2010, Mr. Simmons was a private entrepreneur. From January 2006 to January 2007, Mr. Simmons was our Vice Chairman and Chief Executive Officer.

Andrew M. Cannon(Chief Accounting Officer).    Mr. Cannon has been our Chief Accounting Officer since January 2009. Mr. Cannon
is a
Certified Public Accountant, most recently with Ernst & Young LLP from November 2002 through December 2008, and has worked primarily with the oilfield services, energy and related
supporting industries.

Jack L. Pieper(Vice PresidentOperational Finance).    Mr. Pieper has been our Vice PresidentOperational Finance since
January 2009. Prior to that, he was our Corporate Controller and has served in several roles in his 15 year tenure with Stewart & Stevenson. He is a Certified Public Accountant.

David C. Sulkis(General Counsel).    Mr. Sulkis has been our General Counsel since January 2007. From 2002 to 2007, Mr. Sulkis
practiced
law at Baker Botts L.L.P.

Kenneth W. Simmons(Vice President, Domestic Sales and Aftermarket).    Mr. Simmons has been our Vice President of Domestic Sales and
Aftermarket
since November 2006. From January 2006 to October 2006, he served as Vice President of North Region Distribution and Rental Operations. From January 2005 to January 2006, Mr. Simmons was Vice
President of North Region Distribution Rental Operations and from August 2003 to December 2004, Regional Operations Manager at Stewart & Stevenson & Stevenson Services, Inc.
Mr. Simmons was Chief Operating Officer of USA Compression from March 2001 to March 2003.

Charles T. Hatcher(Vice PresidentHuman Resources).    Mr. Hatcher has been our Vice PresidentHuman Resources since May
2006. Mr. Hatcher was Vice President of Human Resources for the Power Products Division of Stewart & Stevenson Services, Inc. from September 2003 to May 2006. From January 2000 to
June 2003, Mr. Hatcher was employed by GE Oil & Gas Pipeline Inspection & Integrity Services, North America, a pipeline inspection company, as its Director of Human Resources.

David E. Christensen(Senior Vice PresidentManufacturing and Engineering).    Mr. Christensen has been our Senior Vice
PresidentManufacturing and Engineering since May 2008. Prior to that, he was our Vice President of Engineering from May 2006 to April 2008. From June 2001 to
April 2006, he served as the General Manager of the Utility Equipment Division of Stewart & Stevenson Services, Inc. Mr. Christensen has been employed with Stewart & Stevenson for
29 years.

Nina Ansary(Director).    Ms. Ansary has been a member of our board of directors since January 2006. Since April 1997, she has served
as
President of The Ansary Foundation, an organization dedicated to
philanthropic activities. She is also a member of the board of trustees of the Pacific Region of the Boys and Girls Clubs of America. Ms. Ansary is the daughter of Mr. Ansary, our
Chairman of the Board of Directors.

James W. Crystal(Director).    Mr. Crystal has been a member of our board of directors since March 2006. For more than the past five
years,
Mr. Crystal has been Chairman and Chief Executive Officer of Frank Crystal & Company, an insurance brokerage firm. He is Vice Chairman and Trustee of Mount Sinai Medical
Center, Inc., a medical service provider. He is a director of Global Indemnity plc. Mr. Crystal was a director of Blockbuster from February 2008 until May 2010.

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Munawar H. Hidayatallah(Director).    Mr. Hidayatallah has been a member of our board of directors since March 2011.
Mr. Hidayatallah
served as Chairman and Chief Executive Officer of Allis Chalmers Energy Inc. from 2001 to 2011. He was Chief Financial Officer of IRI from 1994 to 1999 and served as a director of that company
prior to its merger with National Oilwell Varco, Inc. in 2000. Mr. Hidayatallah is a member of the Institute of Chartered Accountants.

John D. Macomber(Director).    Mr. Macomber has been a member of our board of directors since January 2006. He has been a Principal
of JDM
Investment Group, a private investment firm, since 1992. From June 2000 to November 2005, he was a member of the board of directors of IRI. He was Chairman and Chief Executive Officer of Celanese
Corporation from 1973 to 1986 and a Senior Partner at McKinsey & Company from 1954 to 1973. Mr. Macomber is Vice Chairman of The Atlantic Council. He has been a Director of Lehman
Brothers Holdings Inc., which filed for bankruptcy in 2008. He was Chairman and President of the Export-Import Bank of the U.S. from 1989 to 1992.

Anthony G. Petrello(Director).    Mr. Petrello has been a member of our board of directors since March 2011. Mr. Petrello has
been
President and Chief Operating Officer of Nabors Industries Ltd. since 1992, a director of that company since 1991 and its Deputy Chairman since 2003.

J. Robinson West(Director).    Mr. West has been a member of our board of directors since March 2011. Mr. West has been
Chairman and
Chief Executive Officer of PFC Energy, Inc., an international energy consulting firm, since 1985. He is a director of Key Energy, Inc. and Chairman of Magellan Petroleum Corporation.
Mr. West is Chairman of the U.S. Institute of Peace and served as Assistant Secretary of the Interior in the Reagan Administration. He is a member of the National Petroleum Council and the
Council on Foreign Relations.

Director Independence

Our board of directors has determined that each of Messrs. Carlucci, Crystal, Hidayatallah, Macomber, Petrello and West is an
"independent" director within the meaning of the applicable rules of the SEC.

Board Committees

The standing committees of our board of directors are the executive committee, the audit committee and, the compensation committee.
These committees are described below.

Executive Committee

Our executive committee consists of Mr. Ansary, as Chairman, Ms. Ansary and Messrs. Carlucci, Macomber and
Petrello. Except as limited by Delaware law, the executive committee will exercise the authority of our board of directors when the full board of directors is not in session.

Audit Committee

Our audit committee consists of Mr. Hidayatallah, as Chairman, and Messrs. Carlucci and Crystal. Mr. Hidayatallah
and Mr. Crystal serve as audit committee financial experts. This committee is concerned primarily with the accuracy and effectiveness of the audits of our financial statements by our internal
audit staff and by our independent auditors. Its duties include:



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Compensation Committee

Our compensation committee consists of Mr. Macomber, as Chairman, and Messrs. Carlucci and Hidayatallah. Our compensation
committee reviews and recommends policy relating to compensation and benefits of our directors and executive officers, including evaluating executive officer performance, reviewing and approving
executive officer compensation, reviewing director compensation, making recommendations to the board with respect to the approval, adoption and amendment of incentive compensation plans, administering
equity-based incentive compensation and other plans and reviewing executive officer employment agreements and severance arrangements.

Compensation Committee Interlocks and Insider Participation

None of our executive officers has served as a member of a compensation committee (or if no committee performs that function, the board
of directors) of any other entity that has an executive officer serving as a member of our compensation committee.

Director Compensation

Directors who are also full-time officers or employees of our company receive no additional compensation for serving as
directors. All other directors receive an annual retainer of $60,000. Each non-employee director also receives an annual fee of $10,000 for serving as the chair of a standing committee,
with the exception of the chair of the audit committee, who receives an annual fee of $15,000. In addition, each director who otherwise serves on a committee receives an annual fee of $5,000. For a
discussion of equity awards made to our non-executive directors in anticipation of our initial public offering, see See "Item 11. Executive CompensationDirector
Compensation."

Code of Ethics

In Fiscal 2007, we adopted our corporate code of business conduct and ethics which describes the basic principles of conduct of our
officers, directors and employees. We will provide to any person without charge, upon written request, a copy of our corporate code of business conduct and ethics. In addition, copies of our Annual
Report on Form 10-K may also be requested. Requests should be directed to Stewart & Stevenson LLC, 1000 Louisiana, Suite 5900, Houston, TX 77002, Attention:
John B. Simmons.

ITEM 11.Executive Compensation

Compensation Philosophy and Objectives

The primary objectives of our compensation policies with respect to executive compensation are to attract and retain the best possible
executives to lead us and to properly motivate these executives to perform at the highest levels of which they are capable. Compensation levels established for our executives are designed to promote
loyalty and long-term commitment to us and the achievement of our goals, to motivate the best possible performance and to award achievement of budgetary goals to the extent such
responsibility is within the executive's job description.

Role of Compensation Committee

Our compensation committee is responsible for reviewing, and modifying when appropriate, the overall goals and objectives of our
executive compensation programs, as well as our levels of compensation. In addition, our compensation committee is responsible for evaluating the performance

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and
approving the compensation level of each of our executive officers, taking into account the Chairman's recommendations, who does not participate in the Incentive Plan. Our compensation committee
did not engage the services of an independent compensation advisor in connection with compensation decisions made in Fiscal 2010.

Compensation Components

Our executive compensation program consists of the following elements:



The primary component of compensation of our executives is base salary. We believe that the base salary element is required in order to
provide our executive officers with a stable income stream that is commensurate with their responsibilities and the competitive market conditions. The base salary levels of our executives with respect
to Fiscal 2010 were established based upon: (i) the individual's particular background and circumstances, including experience and skills, (ii) our knowledge of competitive factors
within the industry in which we operate, (iii) the job responsibilities of the individual, (iv) our expectations as to the performance and contribution of the individual and our judgment
as to the individual's potential future value to us and (v) existing base salary levels. In establishing the current base salary levels, we did not engage in any particular benchmarking
activities or engage any outside compensation advisors. Base salaries remained unchanged from the end of Fiscal 2008 through Fiscal 2010, although an across the board pay cut, ranging from 5% to 20%,
was implemented in March 2009 as a response to the economic downturn in the global economy. In August 2010, due to improved economic conditions affecting our industry, our compensation committee
restored the base salaries of all of our employees, including our named executive officers, to previous levels, except for Mr. Ansary and Mr. Hargrave, who voluntarily continued their
salary reductions. In addition, effective January 2011, Mr. Ansary voluntarily reduced his salary a
further $0.5 million on an annual basis, in order to offset increases in the costs of certain health insurance benefits for all employees.

We
expect that in future years, base salary levels will be established based upon these factors as well as additional factors including prior year's performance, the individual's length
of service to us and other elements. Mr. Ansary plays a major role in creating our organic and acquisitive growth opportunities, expanding our international presence and the achieving of our
global strategic objectives. Mr. Ansary's base salary for Fiscal 2010, before giving effect to the reduction effected in Fiscal 2009 and voluntarily continued in Fiscal 2010 and to the further
voluntary reduction in Fiscal 2010, was established in light of his unique role in our company. Pursuant to the terms of our revolving credit facility, Mr. Ansary's total compensation for any
fiscal year commencing in Fiscal 2007 may not exceed $5 million, provided that after consummation of an initial public equity offering, any change in Mr. Ansary's total compensation will
be subject only to the approval of our board of directors. On November 6, 2007, we entered into an employment agreement with Mr. Ansary pursuant to which Mr. Ansary's annual base
salary will continue, subject to voluntary reductions, to be not less than $2.0 million.



In the face of the global financial turmoil and economic downturn, we discontinued our previously reported bonus practice of awarding
our executives discretionary cash bonuses. Accordingly, no cash bonuses or discretionary cash bonuses were awarded to the named executive officers for Fiscal 2009 or Fiscal 2008. We resumed cash and
discretionary cash bonuses in Fiscal 2010.

With
respect to executive bonuses for Fiscal 2011 and future years, absent extraordinary circumstances, it will be our practice to provide our executives discretionary cash bonuses and
equity awards in years when our Board-approved EBITDA target is achieved. Any such cash bonuses and equity awards are expected to be comparable to the median of those generally awarded by a peer

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group
of companies, currently consisting of Schlumberger, Ltd., National Oilwell Varco, Inc., Weatherford International Ltd. and Baker Hughes Incorporated, to their executives for
achievement of performance measures.



We maintain a retirement savings plan, or a 401(k) Plan, for the benefit of all eligible employees. Currently, employees may elect to
defer their compensation up to the statutorily prescribed limit. During Fiscal 2010, we matched 35% of employee contributions to the 401(k) Plan, capped at 6% of the employee's salary. An employee's
interests in his or her deferrals are 100% vested when contributed. The 401(k) Plan is intended to qualify under Sections 401(a) and 501(a) of the Internal Revenue Code. As such, contributions
to the 401(k) Plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) Plan, and all contributions are deductible by us when made. We provide this
benefit to our executive officers because it is a benefit we provide to all of our eligible employees and it is provided to our executive officers on the same basis as all other eligible employees.



We provided our executive officers with the following benefits: (i) payment of life insurance premiums, (ii) payment of
medical insurance premiums, (iii) payment of accidental death and dismemberment insurance premiums and (iv) payment of long term disability insurance premiums in previous years and for a
portion of Fiscal 2010, but have discontinued this practice due to recent regulatory changes. We pay for the parking expenses of our executive officers at our headquarters.



The purpose of the 2007 Incentive Compensation Plan (the "Incentive Plan") is to attract, reward and retain qualified personnel, and to
provide incentives for our directors, officers and employees to set forth maximum efforts for the success of our business. Our Incentive Plan permits the granting of awards in the form of options to
purchase common stock or units, stock appreciation rights, restricted shares of common stock or units, restricted stock units, performance shares, performance units and senior executive plan bonuses
(which may be in shares of common stock or units and/or cash).

Subject
to certain adjustments that may be required from time to time to prevent dilution or enlargement of the rights of participants in the Incentive Plan, a maximum of 5,000,000
shares (which may be in the form of units prior to our conversion to a corporation) are available for grants of all equity awards under the Incentive Plan. The shares of common stock or units to be
issued under the
Incentive Plan consist of authorized but unissued shares of our common stock or units. If any shares are subject to an award that expires or are forfeited, then such shares will, to the extent of any
forfeiture or termination, again be available for making awards under the Incentive Plan. To the extent any awards granted are subject to the achievement of a performance goal in respect of a fiscal
year or other period, upon the occurrence of a change of control during the period, the performance goal shall be deemed satisfied.

The
performance goals applicable to any award under the Incentive Plan in respect of any participant who is or is likely to become a "covered employee" within the meaning of
Section 162(m) of the Internal Revenue Code will be based on specified levels of, growth in, or performance relative to peer company or peer company group performance in one or more of the
following categories (excluding extraordinary or non-recurring items unless otherwise specified): (a) profitability measures; (b) revenue, sales and same store sales
measures; (c) business unit performance; (d) leverage measures; (e) stockholder return; (f) expense management; (g) asset and liability measures;
(h) individual performance; (i) supply chain efficiency; (j) customer satisfaction; (k) productivity measures; (l) cash flow measures; (m) return measures;
and (n) product development and/or performance.

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Awards under the Incentive Plan are subject to the following limitations: (A) the maximum number of shares of common stock or units that (i) may be
subject to stock options or appreciation rights granted to a participant during any calendar year is 400,000 shares plus an additional 100,000 shares in respect of a participant who has not previously
been employed by us and (ii) may be subject to performance shares, restricted shares or restricted stock units granted to a participant during any calendar year is 200,000 shares plus an
additional 50,000 shares in respect of a participant who has not previously been employed by us and (B) the maximum aggregate cash value of payments to any participant for any performance
period pursuant to an award of performance units and the payment of a senior executive plan bonus to any participant in respect of any fiscal year may not in either case exceed 2% of EBITDA (excluding
the effects of discontinued operations or extraordinary or non-recurring items).

Our
compensation committee administers the Incentive Plan. The compensation committee has the ability to: select individuals to receive awards; select the types of awards to be granted;
determine the terms and conditions of the awards, including the number of shares, the purchase price or exercise price of the awards, if any, and restrictions and performance goals, if any, relating
to any award; establish the time when the awards and/or restrictions become exercisable, vest or lapse; and make all other determinations deemed necessary or advisable for the administration of the
plan.

While
our board of directors may terminate or amend the Incentive Plan at any time, no amendment may adversely impair the rights of grantees with respect to outstanding awards. In
addition, an amendment will be contingent on approval of our stockholders to the extent required by law. Unless
terminated earlier, the Incentive Plan will terminate on the tenth anniversary of the date on which it was approved by our stockholders, after which no further awards may be made under the Incentive
Plan, but will continue to govern unexpired awards.

Summary Compensation Table

The following table sets forth the compensation of our most highly compensated executive officers, which include our chief executive
officer, for Fiscal 2010, 2009 and 2008. We refer to these individuals as our named executive officers.

Name and Principal Position

Fiscal
Year

Salary

Cash
Bonus

Equity
Awards

All Other
Compensation (1)

TotalHushang Ansary


2010

$
2,008,894

$


$


$
45,009

$
2,053,903Chairman of the Board of Directors


2009


2,082,572








40,525


2,123,097and of the Executive Committee


2008


2,500,000








42,431


2,542,431Robert L. Hargrave(2)


2010


508,125


500,000





36,570


1,044,695Vice Chairman


2009


518,726








32,212


550,9382008


600,000








33,425


633,425John B Simmons(3)


2010


183,569


250,000





15,196


448,765Chief Financial OfficerDavid E. Christensen


2010


190,914


157,381





25,629


373,924Senior Vice PresidentManufacturingand EngineeringKenneth W. Simmons


2010


190,914


105,381





20,726


317,021Vice PresidentDomestic Sales


2009


185,072








15,728


200,800& Aftermarket


2008


200,000








16,828


216,828


(1)Consists
of executive officer benefits listed above and 401(k) matching contributions.(2)Mr. Hargrave
also served as our Chief Executive Officer through January 2011.(3)Mr. Simmons
became our Chief Financial Officer effective September 14, 2010.


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Equity Awards

On September 5, 2007, our board of directors adopted the Incentive Plan. The Incentive Plan received the required approval of a
majority of our unit holders and became effective on September 27, 2007. In connection with the adoption and approval of the Incentive Plan, the compensation committee of the board, which has
the responsibility to administer the Incentive Plan, made certain grants of restricted shares to our non-executive directors and certain members of our senior executive management. The
grants to our four non-executive directors totaled 240,000 restricted shares vesting in five (5) 48,000 share tranches, with each such tranche vesting upon board service for a
complete fiscal year. In addition, approximately 112,000 of the restricted shares granted to three former directors were earned as part of their service to the Company with the balance of their grants
being forfeited. The executive grants total 60,000 restricted shares vesting in five (5) 12,000 share tranches, with each tranche vesting upon employment for a complete fiscal year. In
addition, approximately 20,000 of the restricted shares granted to a former executive were earned before his resignation from the Company with the balance being forfeited. The executive grants are
subject to the achievement of net pre-tax income growth in the relevant fiscal year that exceeds the median net pre-tax income growth of a peer group of companies consisting of
Schlumberger, Ltd., National Oilwell Varco, Inc., Weatherford International Ltd., and Cameron International Corp. and are subject to acceleration in the case of an executive's
death or disability. This performance condition was met for Fiscal 2010 and 12,000 shares vested; however, this performance condition was not met for Fiscal 2009 or Fiscal 2008 and those tranches were
forfeited. All grants are subject to (i) the completion of an initial public equity offering and (ii) accelerated vesting upon a change-in-control of the Company.
No expense has been recognized for these grants because the contingent condition has not occurred and as of January 31, 2011, diluted earnings per share excluded the approximately 408,000
contingent unvested restricted shares. A total of 396,000 restricted shares will vest upon completion of an initial public equity offering, and we will record a non-cash compensation
expense in connection therewith in an amount equal to the grant-date fair value of such vested shares, estimated to be approximately $5.0 million.



We have a written employment agreement with Mr. Ansary. In addition, we entered into an employment agreement with
Mr. Fulgham in connection with his hiring in February 2011. None of our other executive officers are party to written or unwritten employment agreements or
severance or change in control arrangements with us. For a description of the material terms of the employment agreement with Mr. Ansary, see "Compensation ComponentsBase Salary."



We did not grant any incentive awards or equity awards to our named executive officers in Fiscal 2010.



Mr. Hargrave holds 36,000 restricted shares, of which 12,000 are subject to forfeiture if certain performance goals are not
achieved in Fiscal 2011. See "Equity Awards" in the narrative disclosure to the Summary Compensation Table for a discussion. All restricted shares held by Mr. Hargrave, if not previously
forfeited, will vest upon (i) the completion of an initial public equity offering or (ii) a change-in-control of the Company.



Our named executive officers did not exercise any options and did not have any stock awards vest during Fiscal 2010.

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We have not entered into any agreement with any of our named executive officers that would provide for severance payments upon a
termination of employment or payments made in connection with a change in control.

Mr. Hargrave
holds 36,000 restricted shares, of which 12,000 are subject to forfeiture if certain performance goals are not achieved in Fiscal 2011. See "Equity Awards" in the
narrative disclosure to the Summary Compensation Table for a discussion. All restricted shares held by Mr. Hargrave, if not previously forfeited, will vest upon (i) the completion of an
initial public equity offering or (ii) a change-in-control of the Company.

Director Compensation

Directors who are also full-time officers or employees of our company receive no additional compensation for serving as
directors. All other directors receive an annual retainer of $60,000. For a discussion of equity awards made to our non-executive directors in anticipation of our initial public offering,
see Equity Awards above. Each non-employee director also receives an annual fee of $10,000 for serving as the chair of a standing committee, with the exception of the chair of the audit
committee, who receives an annual fee of $15,000. In addition, each director who otherwise serves on a committee receives an annual fee of $5,000. The following table sets forth compensation earned by
our non-employee directors in Fiscal 2010.

Name of Director

Fees Earned or
Paid in Cash

TotalNina Ansary

$
65,000

$
65,000Frank C. Carlucci


70,000


70,000James W. Crystal


75,000


75,000John D. Macomber


70,000


70,000Stephen Solarz(1)


65,000


65,000


(1)Mr. Solarz
passed away in November 2010.


ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth certain information as of April 30, 2011 regarding the beneficial ownership of our outstanding
common equity, by:



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Beneficial
ownership of shares is determined under rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. In
computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable
or exercisable within 60 days of April 30, 2011 are deemed outstanding. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any
other person. Except as indicated in the footnotes to this table and as provided pursuant to applicable community property laws, the stockholders named in the table have sole voting and investment
power with respect to the shares set forth opposite each stockholder's name. Unless otherwise indicated, the address for each of the persons listed below is: c/o Stewart & Stevenson LLC,
1000 Louisiana St., Suite 5900, Houston, Texas 77002.

Number of units
beneficially ownedName and address of beneficial owner

Number of units

PercentageParman Capital Group LLC(1)


51,750,000


51.75
%EC Investments B.V.(2)(3)


40,005,000


40.00
%Hushang Ansary(1)(3)(4)


91,755,000


91.75
%Steve Fulgham





Robert L. Hargrave





John B. Simmons





David E. Christensen





Kenneth W. Simmons





Nina Ansary(3)(5)


4,300,000


4.30
%Frank C. Carlucci(3)(6)


3,950,000


3.95
%James W. Crystal(3)





Munawar H. Hidayatallah





John D. Macomber(3)





Anthony G. Petrello





J. Robinson West





All directors and executive officers as a group (17 persons)


100,005,000


100.00
%


(1)Mr. Ansary
and his wife are the sole members of Parman Capital Group LLC. Mr. Ansary has sole voting and dispositive power with respect
to the units held by Parman Capital Group LLC. Excludes 12,000,000 units which Parman Capital Group LLC has the right to reacquire from EC Investments B.V. until April
2011.(2)Includes
12,000,000 units which Parman Capital Group LLC has the right to reacquire, 1,700,000 units which Ms. Ansary has the right to
reacquire and 1,300,000 units which the Frank C. Carlucci III Revocable Trust has the right to reacquire from EC Investments B.V. until April 2011.(3)EC
Investments B.V. is a wholly owned subsidiary of EnniaCaribe Holding N.V., which is in turn a wholly-owned subsidiary of Parman
International B.V., a private investment company in which Mr. Ansary owns a controlling equity interest and Mr. Carlucci and Ms. Ansary each own a minority equity interest. Mr. Ansary is
Chairman of the Supervisory Board of Ennia Caribe Holding N.V. Messrs. Carlucci, Crystal and Macomber and Ms. Ansary are also members of the Supervisory Board of Ennia Caribe
Holding N.V. Each of Messrs. Carlucci, Crystal and Macomber and Ms. Ansary disclaim beneficial ownership of such units.(4)Reflects
beneficial ownership of units held by Parman Capital Group LLC and EC Investments B.V.


56

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(5)Excludes
1,700,000 units which Ms. Ansary has the right to reacquire from EC Investments B.V. until April 2011.(6)Reflects
units held by Frank C. Carlucci III Revocable Trust. Excludes 1,300,000 units which the Frank C. Carlucci III Revocable Trust has the right to
reacquire from EC Investments B.V. until April 2011.


ITEM 13.Certain Relationships and Related Transactions, and Director Independence

James W. Crystal, a member of our board of directors, is also the Chairman and Chief Executive Officer of Frank Crystal &
Company, Inc., an insurance brokerage firm. In Fiscal 2010, 2009 and 2008, we purchased insurance coverage through Frank Crystal & Company, Inc., generating commissions to Frank
Crystal & Company, Inc. of $477,799, $358,426 and $360,662, respectively. The purchase of this coverage was negotiated on an arm's length basis and we believe that the premium was within
the range of market prices for similar types of insurance coverage. We currently anticipate that we will continue to procure insurance from Frank Crystal & Company, Inc.

Backlog
of $375.0 million as of January 31, 2011 includes a $37.5 million related party transaction reflecting an order in Fiscal 2009 from EC
Investments B.V., an entity indirectly controlled by a private investment company in which Mr. Ansary holds a controlling equity interest and in which Mr. Carlucci and
Ms. Ansary, each of whom is a member of our board of directors, each hold minority interests. Revenue recognition from this transaction will be deferred until title to the product passes to a
third party and all other revenue recognition criteria have been met. A deposit in the amount of $31.2 million is recorded as a customer deposit in our consolidated balance sheet. Included in
inventories, net is $29.5 million in costs related to this contract and no amounts had been recorded in the consolidated statements of operations for this transaction as of January 31,
2011.

Our
Company's current practice with respect to related party transactions is as follows: (i) transactions with a value not exceeding $10,000 are subject to approval by our
Chairman (other than transactions in which our Chairman may be a party); (ii) transactions in which our Chairman may be a party or transactions with a value in excess of $10,000 but not
exceeding $100,000 are subject to approval by our Executive Committee (excluding, as appropriate, the participation of a member of the Executive Committee who may be a party to such transactions); and
(iii) all other transactions are subject to approval of our board of directors (excluding, as appropriate, the participation of a member of our board of directors who may be a party to such
transactions).

ITEM 14.Principal Accountant Fees and Services

Ernst and Young LLP, an independent registered public accounting firm, served as our auditors for Fiscal 2010 and 2009.

Fiscal Year Ended
January 31,2011

2010Audit fees

$
1,662,365

$
1,679,200Audit-related fees





Tax fees





All other fees


2,120


2,120$
1,664,485

$
1,681,320


The
nature of each category of fees is described below:

Audit Fees

Audit fees relate to the audit of our consolidated financial statements, the reviews of quarterly reports on
Form 10-Q, the review of the annual report on Form 10-K and assistance with SEC filings including consent and comfort letters and certain required statutory
audits in our foreign locations.

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Table of Contents

Audit-Related Fees

Audit-related fees include fees for due diligence related to acquisition transactions and accounting consultations.

Tax Fees

Tax fees relate to tax compliance, tax advice and tax planning services.

All Other Fees

All other fees principally include risk management advisory services.

Our
audit committee appoints our independent auditors. The audit committee is solely and directly responsible for the approval of the appointment, re-appointment,
compensation and oversight of our independent auditors. The audit committee approves in advance all work to be performed by the independent auditors. Our audit committee has determined that the
services provided by Ernst & Young LLP do not impair its independence from us.

PART IV

ITEM 15.Exhibits and Financial Statement Schedules

(1)   Financial
Statements

The
Consolidated Financial Statements of Stewart & Stevenson LLC and its subsidiaries and the Report of Independent Registered Public Accounting Firm are included in this
Form 10-K beginning on page F-1:



Description

Page No.Report of Independent Registered Public Accounting Firm

F-1Consolidated Balance Sheets

F-2Consolidated Statements of Operations

F-3Consolidated Statements of Shareholders' Equity

F-4Consolidated Statements of Cash Flows

F-5Notes to Consolidated Financial Statements

F-6


(2)   Financial
Statement Schedules

All
schedules required by Regulation S-X have been omitted as not applicable or not required, or the information required has been included in the Notes to the
financial statements.

(3)   Index
to Exhibits

Number

Description3.1

Stewart & Stevenson LLC's Certificate of Formation. (Filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 filed on February 2, 2007 (File No. 333-140441) and
incorporated herein by reference.)3.2

Stewart & Stevenson LLC's Operating Agreement. (Filed as Exhibit 3.7 to the Registrant's Registration Statement on Form S-4 filed on February 2, 2007 (File No. 333-140441) and
incorporated herein by reference.)


58

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Table of Contents

Number

Description10.1

Indenture, dated as of July 6, 2006, among Stewart & Stevenson LLC, Stewart & Stevenson Corp., the Subsidiary Guarantors (as defined therein) and Wells Fargo Bank, National Association. (Filed
as Exhibit 10.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 filed on February 1, 2007 (File No. 333-138952) and incorporated herein by reference.)10.1
(a)
First Supplemental Indenture, dated as of March 10, 2010, among Stewart & Stevenson, LLC, Stewart & Stevenson Manufacturing Technologies LLC and Wells Fargo Bank, National Association, to
Indenture dated as of July 6, 2006 (Filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 2010 filed on June 6, 2010 (File No. 001-33836) and incorporated herein by
reference.)10.1
(b)
Second Supplemental Indenture, dated as of March 23, 2011, among Stewart & Stevenson LLC, EMDSI-Hunt Power, L.L.C. and Wells Fargo Bank National Association, to Indenture dated as of July 6,
2006.10.2

Second Amended and Restated Credit Agreement, dated as of February 13, 2007 by and among Stewart & Stevenson LLC, Stewart & Stevenson Distributor Holdings LLC, Stewart & Stevenson
Power Products LLC, Stewart & Stevenson Petroleum Services LLC, Stewart & Stevenson Funding Corp., S&S Agent LLC, the Canadian Borrowers party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A. as
Administrative Agent and as U.S. Collateral Agent, JPMorgan Chase Bank, NA, Toronto Branch as Canadian Administrative Agent and as Canadian Collateral Agent and JPMorgan Chase Bank, N.A., as Export-Related Lender. (Filed as Exhibit 10.1 to
Amendment No. 1 to the Registrant's Registration Statement of Form S-4 filed on February 28, 2007 (File No. 333-140441) and incorporated herein by reference.)10.3

Asset Purchase Agreement, dated as of October 24, 2005, by and among Stewart & Stevenson Services, Inc., IPSC Co. Inc., Stewart & Stevenson Holdings, Inc., Stewart &
Stevenson De Las Americas, Inc., Stewart & Stevenson International, Inc., Stewart & Stevenson Power, Inc., S&S Trust and Hushang Ansary. (Filed as Exhibit 10.3 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 filed on February 1, 2007 (File No. 333-138952) and incorporated herein by reference.)10.4

Asset Purchase Agreement, dated as of September 27, 2005, by and among Stewart & Stevenson Services, Inc., Stewart & Stevenson Petroleum Services, Inc., Stewart & Stevenson
International, Inc., Sierra Detroit Diesel Allison, Inc., S&S Trust and Hushang Ansary. (Filed as Exhibit 10.4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 filed on February 1, 2007 (File
No. 333-138952) and incorporated herein by reference.)10.5

Asset Purchase Agreement, dated February 25, 2007, by and among Stewart & Stevenson LLC, Crown Energy Technologies Inc., Crown Energy Technologies, Inc., Crown Energy Technologies
(Oklahoma) Inc., Crown Energy Technologies (Odessa) Inc., Crown Energy Technologies (Victoria) Inc., Crown Energy Technologies (Casper) Inc., Crown Energy Technologies (Bakersfield), Inc., Rance E. Fisher, and Todd E. Fisher.
(Filed as Exhibit 10.4 to Amendment No. 1 to the Registrant's Registration Statement on Form S-4 filed on February 28, 2007 (File No. 333-140441) and incorporated herein by reference.)10.6

Stewart & Stevenson 2007 Incentive Compensation Plan. (Filed as Exhibit 10.7 to Amendment No. 3 to the Registrant's Registration Statement on Form S-1 filed on September 28, 2007 (File
No. 333-138952) and incorporated herein by reference.)


59

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Table of Contents

Number

Description10.7

Employment Agreement, dated as of November 6, 2007, between Stewart & Stevenson LLC and Hushang Ansary. (Filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on
November 13, 2007 and incorporated herein by reference.)10.8

Employment Agreement, dated February 2, 2011 between Stewart & Stevenson LLC and Stephen Fulgham21.1

Subsidiaries of the Registrant.31.1

Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Rule 13a-14(a)/15d-14(a) certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Section 1350 certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


60

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

STEWART & STEVENSON LLCBy:

/s/ JOHN B. SIMMONS Chief Financial Officer


Date:
May 2, 2011

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
May 2, 2011:

Signature

Title/s/ HUSHANG ANSARY Hushang Ansary

Chairman of the Board of Directors/s/ FRANK C. CARLUCCI Frank C. Carlucci

Vice Chairman and Director/s/ ROBERT L. HARGRAVE Robert L. Hargrave

Vice Chairman and Director/s/ STEVE FULGHAM Steve Fulgham

Chief Executive Officer and Director (Principal Executive Officer)/s/ JOHN B. SIMMONS John B. Simmons

Chief Financial Officer and Director (Principal Financial Officer)/s/ ANDREW M. CANNON Andrew M. Cannon

Chief Accounting Officer (Principal Accounting Officer)/s/ NINA ANSARY Nina Ansary

Director


61

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Table of Contents

Signature

Title/s/ JAMES W. CRYSTAL James W. Crystal

Director/s/ MUNAWAR H. HIDAYATALLAH Munawar H. Hidayatallah

Director/s/ JOHN D. MACOMBER John D. Macomber

Director/s/ ANTHONY G. PETRELLO Anthony G. Petrello

Director/s/ J. ROBINSON WEST J. Robinson West

Director


62

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
Stewart & Stevenson LLC

We
have audited the accompanying consolidated balance sheets of Stewart & Stevenson LLC and subsidiaries as of January 31, 2011 and 2010, and the related
consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2011. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stewart & Stevenson LLC and
subsidiaries at January 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2011, in
conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Houston,
Texas
May 2, 2011

F-1

---



Table of Contents

Stewart & Stevenson LLC and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)

January 31, 2011

January 31, 2010AssetsCurrent assets:Cash and cash equivalents

$
9,168

$
3,321Restricted cash


5,000


3,000Accounts receivable, net


85,236


81,626Recoverable costs and accrued profits not yet billed


78,934


38,042Inventories, net


285,909


248,313Other current assets


7,186


7,626Total current assets


471,433


381,928Property, plant and equipment, net


75,077


79,206Goodwill and intangibles, net


16,064


46,616Deferred financing costs and other assets


5,029


6,775Total assets

$
567,603

$
514,525Liabilities and shareholders' equityCurrent liabilities:Bank notes payable

$
7,401

$
7,122Current portion of long-term debt


40


65Accounts payable


81,198


52,994Accrued payrolls and incentives


15,913


8,714Billings in excess of incurred costs


4,285


115Customer deposits


80,346


26,307Other current liabilities


43,979


41,126Total current liabilities


233,162


136,443Long-term debt, net of current portion


185,181


220,926Other long-term liabilities


226


1,534Total liabilities


418,569


358,903Commitments and contingenciesShareholders' equity:Common units, 100,005,000 units issued and outstanding


74,113


74,113Accumulated other comprehensive income


5,092


1,383Retained earnings


69,829


80,126Total shareholders' equity


149,034


155,622Total liabilities and shareholders' equity

$
567,603

$
514,525


See
accompanying Notes to Consolidated Financial Statements

F-2

---





Table of Contents

Stewart & Stevenson LLC and Subsidiaries        Consolidated Statements of Operations

Fiscal Year Ended(Dollars and units in thousands)

January 31, 2011

January 31, 2010

January 31, 2009Sales

$
861,234

$
688,676

$
1,217,142Cost of sales


715,967


577,028


1,002,166Gross profit


145,267


111,648


214,976Selling and administrative expenses


104,252


114,188


138,141Impairment of goodwill and indefinite-lived intangible assets


31,487





Other (income) expense, net


(1,026
)

54


(1,311
)Operating profit (loss)


10,554


(2,594
)

78,146Interest expense, net


19,886


20,489


24,931(Loss) earnings before income taxes


(9,332
)

(23,083
)

53,215Income tax expense


700


816


2,659Net (loss) earnings

$
(10,032
)
$
(23,899
)
$
50,556Weighted average units outstanding:Basic


100,005


100,005


100,005Diluted


100,005


100,005


100,005Net (loss) earnings per common unitBasic

$
(0.10
)
$
(0.24
)
$
0.51Diluted

$
(0.10
)
$
(0.24
)
$
0.51


See
accompanying Notes to Consolidated Financial Statements

F-3

---





Table of Contents

Stewart & Stevenson LLC and Subsidiaries        Consolidated Statements of Shareholders' Equity

(Dollars in thousands)

Common
Units

Accumulated Other
Comprehensive
Income (Loss)

Retained
Earnings

TotalBalance, January 31, 2008

$
74,113

$
8,233

$
92,595

$
174,941Net earnings








50,556


50,556Other comprehensive loss





(11,995
)




(11,995
)Distributions to unit holders for tax obligations








(33,558
)

(33,558
)Balance, January 31, 2009

$
74,113

$
(3,762
)
$
109,593

$
179,944Net loss








(23,899
)

(23,899
)Other comprehensive income





5,145





5,145Distributions to unit holders for tax obligations








(5,568
)

(5,568
)Balance, January 31, 2010

$
74,113

$
1,383

$
80,126

$
155,622Net loss








(10,032
)

(10,032
)Other comprehensive income





3,709





3,709Distributions to unit holders for tax obligations








(265
)

(265
)Balance January 31, 2011

$
74,113

$
5,092

$
69,829

$
149,034


See
accompanying Notes to Consolidated Financial Statements

F-4

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Table of Contents

Stewart & Stevenson LLC and Subsidiaries        Consolidated Statements of Cash Flows

Fiscal Year Ended(Dollars in thousands)

January 31, 2011

January 31, 2010

January 31, 2009Operating activitiesNet (loss) earnings

$
(10,032
)
$
(23,899
)
$
50,556Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:Amortization of deferred financing costs


1,668


2,011


1,980Depreciation and amortization


17,053


18,402


18,869Impairment of goodwill and indefinite-lived intangible assets


31,487





Non-cash foreign exchange (gains) losses


(71
)

29


(3,017
)Change in operating assets and liabilities net of the effect of acquisitions:Accounts receivable, net


(2,985
)

68,413


7,879Recoverable costs and accrued profits not yet billed


(40,857
)

19,091


4,182Inventories, net


(34,108
)

49,464


(7,300
)Accounts payable


27,695


(35,627
)

(29,045
)Accrued payrolls and incentives


7,237


(2,381
)

(1,755
)Billings in excess of incurred costs


4,088


(27,889
)

(3,370
)Customer deposits


53,840


5,500


5,143Other current assets and liabilities


2,989


(3,274
)

17,225Other, net


(1,140
)

(3,519
)

(2,877
)Net cash provided by operating activities


56,864


66,321


58,470Investing activitiesCapital expenditures


(2,211
)

(2,536
)

(5,469
)Additions to rental equipment


(10,747
)

(777
)

(22,333
)Increase in restricted cash


(2,000
)




Proceeds from sale of property, plant and equipment, net


34


373


26Net cash used in investing activities


(14,924
)

(2,940
)

(27,776
)Financing activitiesChange in short-term notes payable


(108
)

1,525


1,836Deferred financing costs





(375
)

(375
)Changes in long-term revolving loans


(35,777
)

(59,315
)

(10,267
)Distributions to shareholders for tax obligations


(265
)

(5,568
)

(33,558
)Net cash used in financing activities


(36,150
)

(63,733
)

(42,364
)Effect of exchange rate on cash


57


1,667


1,294Increase (decrease) in cash and cash equivalents


5,847


1,315


(10,376
)Cash and cash equivalents, beginning of fiscal period


3,321


2,006


12,382Cash and cash equivalents, end of fiscal period

$
9,168

$
3,321

$
2,006Cash paid for:Interest

$
18,187

$
19,709

$
22,883Income taxes

$
2,169

$
1,278

$
4,346


See accompanying Notes to Consolidated Financial Statements

F-5

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Company Overview

Stewart & Stevenson LLC, headquartered in Houston, Texas was formed for the purpose of acquiring from Stewart & Stevenson Services, Inc. ("SSSI") and its
affiliates on January 23, 2006 substantially all of their equipment, aftermarket parts and service and rental businesses that primarily served the oil and gas industry (the "SSSI Acquisition").
Unless otherwise indicated or the context otherwise requires, the terms "Stewart & Stevenson," the "Company," "we," "our" and "us" refer to Stewart & Stevenson LLC and its
subsidiaries.

On
February 26, 2007, we acquired substantially all of the operating assets and assumed certain liabilities of Crown Energy Technologies, Inc. and certain of its affiliates
(collectively, "Crown"), which we refer to as the "Crown Acquisition." Crown, which was headquartered in Calgary, Alberta, had multiple U.S. operations. Crown manufactured drilling, well servicing and
workover rigs, stimulation equipment and provided related parts and services.

We
are a leading designer, manufacturer and provider of specialized equipment and aftermarket parts and service for the oil and gas and other industries. Our wide range of products
covers hydraulic fracturing, well stimulation, workover, intervention and drilling operations. These products include well stimulation equipment, pumping, acidizing, coiled tubing, cementing and
nitrogen units, drilling rigs and workover rigs, power generation systems, and electrical support and distribution systems, as well as engines, transmissions, prime movers and material handling
equipment. We have a substantial installed base of products, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues from customers in the
oil and gas, power generation and various other industries. In addition, we provide rental equipment to our customers, including generator sets, air compressors, rail car movers and material handling
equipment.

Note 2. Summary of Significant Accounting Policies

Use of Estimates and Assumptions:The preparation of financial statements in conformity with generally accepted accounting principles
in the United
States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Fiscal Year:Our fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For
example, our
"Fiscal 2010" commenced on February 1, 2010 and ended on January 31, 2011. We report results on the fiscal quarter method with each quarter comprising approximately 13 weeks.

Consolidation:The consolidated financial statements include the accounts of Stewart & Stevenson LLC and all enterprises
in which we
have a controlling interest. All intercompany accounts and transactions have been eliminated. We do not have any variable-interest entities.

Reclassifications:Certain reclassifications have been made in the prior year consolidated financial statements to conform to the
current period
presentation. In our prior reports filed with the SEC, we presented four segments: equipment, aftermarket parts and service, rental and corporate. We have
revised our segments to the following three segments: manufacturing, distribution and corporate and shared services. The audited consolidated financial statements have been recast to reflect our new
segment presentation. See "Note 6Segment Data."

F-6

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)

Cash Equivalents:Interest-bearing deposits, investments in government securities, commercial paper, money market funds and other
highly liquid
investments with original maturities of three months or less are considered cash equivalents.

Accounts Receivable:Accounts receivable are recorded when billed and represent claims against third parties that will be settled in
cash. The
carrying value of our accounts receivable, net of the allowance for doubtful accounts, represents the estimated net realizable value. We maintain an allowance for doubtful accounts for estimated
losses related to credit extended to our customers. We base such estimates on our current accounts receivable aging and historical collections and settlements experience, existing economic conditions
and any specific customer collection issues we have identified. Uncollectible accounts receivable are written off when we determine that the balance cannot be collected.

Derivative financial instruments:On occasion, we enter into derivative financial instruments to manage certain exposures to our
operations; however,
this activity has been relatively insignificant to our financial statements. During the second quarter of Fiscal 2010, we entered into four short-term foreign currency exchange rate
contracts to manage our exposure to fluctuations in foreign currency for certain purchase orders that were denominated in Euros. As of October 30, 2010, all of these contracts were closed and the
Company recognized a $0.8 million realized gain, which was recorded in other (income) expense, net within our consolidated statements of operations. A short-term foreign currency
exchange rate derivative instrument was entered in January 2009 to manage our exposure to fluctuations in foreign currency exchange rates for certain contracts of our Canadian subsidiary that were not
denominated in its functional currency. The derivative was settled in the second quarter of Fiscal 2009 and resulted in a gain of $1.4 million, which was recorded in other (income) expense, net
within our consolidated statements of operations.

Inventories:Inventories are stated at the lower of cost or market, with cost primarily determined on a first-in, first-out
("FIFO") basis and market determined on the basis of estimated realizable values. We purchase a considerable amount of our inventory for resale from independent manufacturers pursuant to distribution
agreements. Cost represents invoice or production cost for new items and original cost less allowance for condition for used equipment inventory. Production cost includes material, labor and
manufacturing overhead. When circumstances dictate, we write inventory down to its estimated realizable value based upon assumptions about future demand, technological innovations, market conditions,
plans for disposal and the physical condition of products. Shipping and handling costs are expensed as incurred in cost of sales. Shipping and handling costs billed to customers are recorded as sales.

Revenue Recognition:Revenue from equipment and parts sales is recognized when the product is shipped, collection is reasonably assured,
 risks of
ownership have been transferred to and accepted by the customer and contract terms are met. Cash discounts or other incentives to customers are recorded as a reduction of revenue. Revenue from service
agreements is recognized as earned, when services have been rendered. Revenue from rental agreements is recognized on a straight-line basis over the rental period. We report revenue net of
any revenue-based taxes assessed by governmental authorities.

F-7

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)

With
respect to long-term equipment contracts, which accounted for approximately 28.7% of total sales in Fiscal 2010, revenue is recognized using the
percentage-of-completion method. The majority of our contracts are fixed-price contracts, and measurement of progress toward completion is based on direct labor hours incurred.
For long-term equipment contracts to build land-based drilling, workover and service rigs, measurement of progress toward completion is based on the cost-to-cost method. Changes in estimates for
revenues, costs to complete and profit margins are recognized in the period in which they are reasonably determinable. Any anticipated losses on uncompleted contracts are recognized whenever evidence
indicates that the estimated total cost of a contract exceeds its estimated total revenue. With respect to cost-plus-fixed-fee contracts, we recognize the fee
ratably as the actual costs are incurred, based upon the total fee amounts expected to be realized upon completion of the contracts. Bid and proposal costs are expensed as incurred.

Recoverable
costs and accrued profits not yet billed ("Unbilled Revenue") represent the cumulative revenue recognized less the cumulative billings to the customer. Any billed revenue
that has not been collected is reported as accounts receivable. The timing of when we bill our customers is generally based upon advance billing terms or contingent upon completion of certain phases
of the work, as stipulated in the contract. Progress billings in accounts receivable at January 31, 2011 and 2010 included contract retentions totaling $3.5 million and
$7.6 million, respectively, which are anticipated to be
collected within one year. Billings in excess of incurred costs represent progress billings in excess of Unbilled Revenue.

We
frequently sell equipment together with "start-up" services, which typically involve adding fuel to the engine, starting the equipment for the first time, and observing it
to ensure that it is operating properly. In cases where start-up services are required on an equipment sale, the estimated start-up costs are accrued when revenue from the
equipment sale is recognized. We had approximately $2.6 million and $1.1 million of accrued start-up costs that had not yet been performed as of January 31, 2011 and
January 31, 2010, respectively.

Customer Deposits:We sometimes collect advance customer deposits to secure customers' obligations to pay the purchase price of ordered
equipment.
For long-term construction contracts, these customer deposits are recorded as current liabilities until construction begins. During construction, the deposit liability is reclassified into
billings in excess of incurred costs and, ultimately, recognized into revenue under the percentage-of-completion method. For all other sales, these deposits are recorded as
current liabilities until revenue is recognized.

Long-Lived Assets:Long-lived assets, which include property, plant and equipment and acquired definite-lived intangible
assets, comprise a significant amount of our total assets. We carry our property, plant and equipment at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred and
expenditures for renewals, replacements and improvements are capitalized. We depreciate our property, plant and equipment on a straight-line basis over their estimated useful lives.
Definite-lived intangibles are amortized on a straight-line basis over their estimated useful lives.

F-8

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)

In
accounting for long-lived assets, we must make estimates about the expected useful lives of the assets and the potential for impairment based on the fair value of the
assets and the cash flows they are expected to generate. The value of the long-lived assets is then amortized over their expected useful lives. A change in the estimated useful lives of
our long-lived assets would have an impact on our results of operations. We estimate the useful lives of our long-lived asset groups as follows:

Buildings

10 - 25 yearsLeasehold improvements

Lesser of lease term or asset lifeRental equipment

2 - 8 yearsMachinery and equipment

4 - 7 yearsComputer hardware and software

3 - 4 yearsIntangible assets

4 months - 27 years


In
estimating the useful lives of our property, plant and equipment, we rely primarily on our actual experience with the same or similar assets. The useful lives of our definite-lived
intangible assets are determined by the years over which we expect the assets to generate a benefit based on legal, contractual or regulatory terms.

We
assess the valuation of components of our property, plant and equipment and definite-lived intangible assets whenever events or circumstances dictate that the carrying value might not
be recoverable. We base our evaluation on indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external
market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset or asset group may not be recoverable, we determine whether impairment has occurred by
analyzing an estimate of undiscounted future cash flows at the lowest level for which identifiable cash flows exist. If the estimate of undiscounted future cash flows during the estimated useful life
of the asset is less than the carrying value of the asset, we recognize a loss for the difference between the carrying value of the asset and its estimated fair value, measured by the present value of
estimated future cash flows or third party appraisal, as appropriate under the circumstances.

Goodwill and indefinite-lived intangible assets:We perform an impairment test for goodwill and
indefinite-lived intangible assets annually during the fourth quarter, or earlier if indicators of potential impairment exist. Our goodwill impairment test involves a comparison of the fair value of
each of our reporting units with their carrying value. Our impairment test for indefinite-lived intangible assets involves the comparison of the fair value of the intangible asset and its carrying
value. The fair value is determined using discounted cash flows ("income approach") and other market-related valuation models, including earnings multiples ("public company market approach") and
comparable asset market values ("transaction approach"). Certain estimates and judgments are required in the application of these fair value models. The income approach consists of estimating the
future cash flows that are directly associated with each of our reporting units. There are significant inherent uncertainties and management judgment involved in estimating the fair value of each
reporting unit, including historical experience and future expectations such as budgets and industry projections. We believe we have made reasonable estimates and assumptions to estimate the fair
value of our reporting units.

F-9

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)

We
performed the first step for our annual impairment test, which compares the fair value of our reporting units to their carrying values, during the Fiscal 2010 fourth quarter and the
result of this test indicated that a probable impairment existed for our Crown reporting unit. The Fiscal 2010 results of operations for the Crown reporting unit did not achieve our expectations. In
particular, the anticipated rebound for and growth in rig and well stimulation equipment sales and backlog growth for the Crown reporting unit have not reached pre-2009 levels. These
assumptions had been factored into our budgets and forecasts and specific sales were anticipated to occur during Fiscal 2010, including the fourth quarter, coupled with growth in backlog for these
products. Because oil prices have risen, it was anticipated that capital spending for land-based drilling, workover and service rigs would return and be reflected in backlog and equipment
ordering trends. As a result of this prolonged downturn, our cash flow projections for Crown have been substantially revised downward.

The
Crown reporting unit had goodwill of $28.7 million and indefinite-lived intangible assets (trademarks) of $4.1 million subject to this annual impairment test. In
determining the fair value in the step one test, the material assumptions used for the income approach included a weighted average cost of capital of 21.4% and a long-term growth rate of
4.1%. Based on our future cash flow projections for the Crown reporting unit, the result of the income approach indicated the carrying amount of the Crown reporting unit exceeded its estimated fair
value. In addition, these cash flow projections did not result in meaningful market-related comparisons under the public company market and transaction approaches. Therefore, under the second step of
the impairment test, we allocated the estimated fair value indicated by the income approach to the identifiable tangible and intangible assets and liabilities based on their respective values. This
allocation indicated a partial impairment for the indefinite-lived intangible assets and no residual value for goodwill.

The
below table details the impact of this impairment charge, which resulted in an overall decrease to goodwill and intangibles, net in our consolidated balance sheets of
$31.5 million as follows:

Indefinite-Lived
Intangible Assets

GoodwillCrown reporting unit before impairment test

$
4,084

$
28,653Impairment charges


(2,834
)

(28,653
)Crown reporting unit after impairment test

$
1,250

$



We
recorded a $31.5 million impairment charge in our consolidated results of operations for Fiscal 2010.

Insurance:We maintain a variety of insurance for our operations that we believe to be customary and reasonable. We are self-insured up
to certain levels in the form of deductibles and retentions for general liability, vehicle liability, group medical and workers compensation claims. Other than normal business and contractual risks
that are not insurable, our risk is commonly insured and the effect of a loss occurrence is not expected to be significant. We accrue for estimated self-insurance costs and uninsured
exposures based on estimated development of claims filed and an estimate of claims incurred but not reported. We regularly review estimates of reported and unreported claims and provide for losses
accordingly.

F-10

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)

Advertising:Advertising costs are included in selling and administrative expenses and are expensed as incurred. These expenses totaled
$1.7 million, $1.4 million and $2.8 million for Fiscal 2010, 2009 and 2008, respectively.

Research and Development:Expenditures for research and development activities are charged to expense as incurred and were
$0.6 million,
$1.0 million and $3.3 million in Fiscal 2010, 2009 and 2008, respectively.

Translation of Foreign Currency:The local currency is the functional currency for our Canadian and Colombian subsidiaries and, as such,
 assets and
liabilities are translated into U.S. dollars at year end exchange rates. Income and expense items are translated at average exchange rates during the year. Translation adjustments resulting from
changes in exchange rates are reported in accumulated other comprehensive income. Gains or losses from foreign currency transactions are recognized in current earnings as a component of other expense
(income), net in our consolidated statements of operations.

On
January 10, 2010, the Venezuelan government devalued its currency from 2.15 Bolivars per U.S. dollar to 4.30 Bolivars per U.S. dollar ("the official rate") and the Venezuelan
economy has since been designated as hyperinflationary. The Company recognized a translation loss of $3.1 million as of January 31, 2010, which was recorded in currency translation
adjustment, a component of accumulated other comprehensive income (loss) in our consolidated balance sheets. We have historically utilized the official rate for our Venezuelan operations. Beginning
February 1, 2010, we utilized the U.S. dollar as the functional currency for our Venezuelan subsidiary and remeasured its financial statements into U.S. dollars at the official rate.
Accordingly, using "hyperinflationary accounting," we recognized the related losses or gains from such remeasurement of its balance sheet in the consolidated statements of its operations. During
Fiscal 2010, the official rate for Venezuela did not fluctuate significantly. As a result, the effect of remeasuring our Venezuelan subsidiary was insignificant.

At
January 31, 2011, we evaluated the rate at which we remeasure our Venezuelan subsidiary and concluded that based on the continued slow-down of its economy and
resultant constraints presently impacting the banking environment and associated limitations therein, that the SITME rate of 5.30 Bolivars per U.S. dollar was a more appropriate remeasurement rate.
The result of
this change in remeasurement rate did not have a material impact to our financial statements. The total assets for our Venezuela subsidiary are approximately $4.0 million.

Fair Value of Financial Instruments:Our financial instruments consist primarily of cash equivalents, trade receivables, trade payables
and debt
instruments. The recorded values of cash equivalents, trade receivables and trade payables are considered to be representative of their respective fair values. Generally, our notes payable and
revolving credit facility have interest rates which are tied to current market rates, and thus, their fair value is consistent with their recorded amounts. The estimated fair value of our senior notes
is based on quoted market prices (Level 1). At January 31, 2011, our senior notes with a carrying value of $150.0 million had a fair value of $153.2 million.

F-11

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Summary of Significant Accounting Policies (Continued)

Warranty Costs:Generally, the only warranty provided to our customers for products we sell that were originally manufactured by others,
 including
our key OEMs, is the warranty provided by those original manufacturers. We warrant products manufactured, and services provided, by us for periods of three to 18 months. Based on historical
experience and contract terms, we accrue the estimated cost of our product and service warranties at the time of sale or, in some cases, when specific warranty exposures are identified and
quantifiable. Accrued warranty costs are adjusted periodically to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by
negotiation, arbitration or litigation. Occasionally, a material warranty issue can arise that is beyond our historical experience. We accrue for any such warranty issues as they become known and
estimable.See Note 8"Significant Balance Sheet Accounts."

Income Taxes:As a limited liability company, income is reported for federal and state income tax purposes by our unit holders.
Generally, we make
quarterly distributions to our unit holders to fund their tax obligations. We are responsible, however, for paying taxes such as Texas Margins tax and other foreign income taxes.

Note 3. Income Taxes

Our effective tax rate for Fiscal 2010 was approximately 7.5%, which excludes our tax distributions to the unit holders of our limited liability company. As a limited liability company,
income is reported for federal and state income tax purposes (except for the Texas Margins tax and foreign taxes reported at the entity level) by our unit holders. During Fiscal 2010, we recorded
$1.4 million of Texas Margins tax and $0.7 million of income tax benefit associated with foreign jurisdictions. Generally, we make quarterly distributions to the unit holders to fund
their tax obligations. During Fiscal 2010, 2009 and 2008, we made tax distributions of $0.3 million, $5.6 million and $33.6 million, respectively, to our unit holders.

The
following table lists the pre-tax earnings by geographic area:

Fiscal Year Ended January 31,(Dollars in thousands)

2011

2010

2009Net earnings (loss) before income taxes:U.S.

$
25,570

$
(6,205
)
$
52,970Foreign


(34,902
)

(16,878
)

245Total

$
(9,332
)
$
(23,083
)
$
53,215


F-12

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3. Income Taxes (Continued)

The
provision for income taxes consisted of the following:

Fiscal Year Ended January 31,(Dollars in thousands)

2011

2010

2009Current expense (benefit)U.S.Federal

$


$


$
State


1,297


1,285


1,684Total U.S.


1,297


1,285


1,684Foreign


208


(1,446
)

1,502Total current (benefit) expense


1,505


(161
)

3,186Deferred expense (benefit)U.S.Federal








State


54


(84
)

(104
)Total U.S.


54


(84
)

(104
)Foreign


(859
)

1,061


(423
)Total deferred expense (benefit)


(805
)

977


(527
)Income tax expense

$
700

$
816

$
2,659


A
reconciliation between the provision for income taxes and income taxes computed by applying the statutory rate is as follows:

Fiscal Year Ended January 31,(Dollars in thousands)

2011

2010

2009Tax (benefit) provision at statutory rate

$
(3,266
)
$
(8,079
)
$
18,625Add (deduct):State income tax


1,351


1,201


1,580Valuation allowance


5,145


3,114


Foreign credits


76


(41
)

7Benefit (tax) on LLC income not subject to taxation at the statutory rate


(2,606
)

4,621


(17,553
)Income tax expense

$
700

$
816

$
2,659


F-13

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3. Income Taxes (Continued)

The
tax effects of temporary differences that give rise to the deferred tax assets and liabilities were as follows:

As of January 31,(Dollars in thousands)

2011

2010Deferred tax assets:Net operating loss carryforward

$
2,263

$
1,808Reserves, allowances and accruals


756


389Amortizable intangible assets


720


745Non-amortizable intangible assets


4,184


Property and equipment


336


1728,259


3,114Valuation allowance


(8,259
)

(3,114
)Deferred tax liabilities:Goodwill and non-amortizable intangibles





(1,046
)Net deferred tax assets (liabilities)

$


$
(1,046
)


As
of January 31, 2011, the Company had a gross Canadian net operating loss carry forward of $9.1 million which expires in 2031. A full valuation allowance has been
provided for this asset and other deferred tax assets and the valuation allowance increased $5.1 million in Fiscal 2010. We have established valuation allowances for uncertainties in realizing
the benefit of this tax loss carry forward and other deferred tax assets. Changes in estimates of future taxable income or in tax laws may alter this expectation.

Note 4. Net Earnings Per Share

Accounting standards require dual presentation of earnings per share ("EPS"): Basic EPS and Diluted EPS. Basic EPS is computed by dividing net earnings or loss available to common unit
holders by the weighted average number of common units outstanding for the period. For purposes of EPS, one unit is equivalent to one share. Diluted EPS excludes 408,000 contingent dilutive unvested
restricted shares that would be considered common stock equivalents using the treasury stock method because as of
January 31, 2011, the contingent condition had not occurred. See "Note 9Equity" for a discussion of the outstanding
restricted share grants.

F-14

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4. Net Earnings Per Share (Continued)

The following table sets forth the computation of basic and diluted earnings per common unit:

Fiscal Year Ended January 31,(Dollars and units in thousands)

2011

2010

2009Numerator:Net (loss) earnings

$
(10,032
)
$
(23,899
)
$
50,556Denominator:Basic weighted average units outstanding


100,005


100,005


100,005Effect of dilutive securities








Diluted weighted average units outstanding


100,005


100,005


100,005Basic (loss) earnings per unit

$
(0.10
)
$
(0.24
)
$
0.51Diluted (loss) earnings per unit

$
(0.10
)
$
(0.24
)
$
0.51


Note 5. Comprehensive Income

Total comprehensive income was as follows:

Fiscal Year Ended January 31,(Dollars in thousands)

2011

2010

2009Net (loss) earnings

$
(10,032
)
$
(23,899
)
$
50,556Currency translation gain (loss)


3,709


5,145


(11,995
)Comprehensive (loss) income

$
(6,323
)
$
(18,754
)
$
38,561


Translation
adjustments resulting from changes in exchange rates are reported in other comprehensive income. As of January 31, 2011, 2010 and 2009, the entire accumulated other
comprehensive gain (loss) balance consisted of currency translation adjustments. Foreign currency transaction exchange gains (losses) are recorded in other expense (income), net in the consolidated
statements of operations and were $0.1 million, ($1.7) million and $1.3 million during Fiscal 2010, 2009 and 2008, respectively.

Note 6. Segment Data

In our prior reports filed with the SEC, we presented four segments: equipment, aftermarket parts and service, rental and corporate. We have revised our segments to the following three
segments: manufacturing, distribution and corporate and shared services. The consolidated financial statements have been recast to reflect our new segment presentation.

Through
our two operating segments, we design, manufacture and market a wide range of equipment and provide aftermarket parts and service to a broad range of customers. We also provide
rental equipment through our distribution segment. These products and services are consistent with our activities in prior periods and were reported in prior periods as three distinct operating
segments. We now report these same product categories within our two operating segments, which reflects our internal management structure.

F-15

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6. Segment Data (Continued)

This
operational and management structure was clarified and defined in the fourth quarter of Fiscal 2010 as the result of senior management's assessment and recommendations made to the
board of directors. This operational and management realignment was approved by our board and is reflected in the segments we now report. We believe that the two operating segment presentation
continues to report the products and services we provide, while also providing a view of how we manage our business and a better platform from which to explain the key activities within, and drivers
for, our business.

The
Crown results are included in our manufacturing segment and are aligned with our internal management structure.

Our
reportable segments are as follows:

Manufacturing

We design, manufacture and market equipment for U.S. and international oilfield service providers and drilling and workover
contractors, as well as national oil companies that require integrated and customized product solutions. We manufacture equipment specifically for hydraulic fracturing, well stimulation, well
workover, intervention and drilling operations. Our manufactured products include integrated solutions, which incorporate a variety of components into a single system, for a wide range of oilfield
services and support applications. In addition, we provide parts and service to customers primarily in the oil and gas industry.

Distribution

We provide stand-alone products and aftermarket parts and service for products manufactured by us, our six key OEMs and other
manufacturers. In addition, we provide rental equipment including generator sets, air compressors, rail car movers and material handling equipment to our customers. Our aftermarket parts and service
operations, which provide us with a recurring, higher-margin source of revenue, serve customers engaged in the oil and gas, power generation, marine, mining, construction, commercial vehicle and
material handling industries, as well as other industries.

Corporate and shared services

Our corporate and shared services segment includes administrative overhead normally not associated with specific activities within the
operating segments. These expenses include legal, finance and accounting, internal audit, human resources, information technology, marketing, supply chain and similar corporate office costs.

F-16

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6. Segment Data (Continued)

Intra-segment
revenues and costs are eliminated, and operating profit (loss) represents earnings (loss) before interest and income taxes. Operating results by segment were as follows:

Fiscal Year Ended January 31,(Dollars in thousands)

2011

2010

2009SalesManufacturing

$
342,394

$
246,354

$
520,055Distribution


518,840


442,322


697,087Total sales

$
861,234

$
688,676

$
1,217,142Operating profit (loss)Manufacturing

$
11,277

$
15,875

$
50,110Distribution


37,481


23,640


66,456Corporate and shared services


(38,204
)

(42,109
)

(38,420
)Total operating profit

$
10,554

$
(2,594
)
$
78,146Operating profit percentageManufacturing


3.3
%

6.4
%

9.6
%Distribution


7.2


5.3


9.5Consolidated


1.2
%

(0.4
)%

6.4
%


The
Fiscal 2010 operating profit for the manufacturing segment includes the impact of the $31.5 million goodwill and indefinite-lived intangible assets impairment charge for Crown.

Assets
by segment were as follows:

Fiscal Year Ended January 31,(Dollars in thousands)

2011

2010

2009AssetsManufacturing

$
274,183

$
254,070

$
309,255Distribution


278,382


248,178


327,935Corporate and shared services


15,038


12,277


16,772Total Assets

$
567,603

$
514,525

$
653,962


Capital
expenditures by segment were as follows:

Fiscal Year Ended January 31,(Dollars in thousands)

2011

2010

2009Capital ExpendituresManufacturing

$
238

$
784

$
346Distribution


12,071


1,998


25,821Corporate and shared services


649


531


1,635Total capital expenditures

$
12,958

$
3,313

$
27,802


F-17

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6. Segment Data (Continued)

Depreciation
and amortization by segment were as follows:

Fiscal Year Ended January 31,(Dollars in thousands)

2011

2010

2009Depreciation & amortizationManufacturing

$
5,672

$
6,388

$
7,218Distribution


10,729


10,970


10,479Corporate and shared services


652


1,044


1,172Total deprecation & amortization

$
17,053

$
18,402

$
18,869


Geographic
Information for the periods presented is shown below:

Fiscal Year Ended January 31(Dollars in thousands)

2011

2010

2009SalesUnited States

$
694,506

$
483,078

$
786,641International


166,728


205,598


430,501Total

$
861,234

$
688,676

$
1,217,142


International
sales reflects sales in and to countries outside the United States, including sales to U.S. customers for export.

As of January 31,(Dollars in thousands)

2011

2010AssetsUnited States

$
506,670

$
431,684International


60,933


82,841Total

$
567,603

$
514,525


Note 7. Long-Term Debt

As of(Dollars in thousands)

January 31, 2011

January 31, 2010Other debt

$
7,441

$
7,243Revolving credit facility


35,181


70,870Unsecured senior notes


150,000


150,000Total


192,622


228,113Less: current portion of other debt


(7,441
)

(7,187
)Long-term debt, net of current portion

$
185,181

$
220,926


F-18

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Long-Term Debt (Continued)

Future
maturities of debt by year at January 31, 2011 are as follows:

(Dollars in thousands)Fiscal 2011

$
7,441Fiscal 2012


35,181Fiscal 2013


Fiscal 2014


150,000Fiscal 2015 and thereafter


Total

$
192,622


Other debt:Other debt includes certain short-term secured loans within our South American operations, a floor plan financing agreement
and other
equipment loans. The restricted cash on our balance sheet relates to collateral securing certain of this debt. The weighted average interest rate for the South American operations debt was 5.7%,
11.1%, and 11.7% in Fiscal 2010, 2009 and 2008, respectively. The interest rate for the floor plan financing agreement was 3.3% in each of Fiscal 2010, 2009 and 2008.

Revolving Credit Facility:In February 2007, we amended our senior credit facility, increased the revolving credit facility to
$250.0 million
and added a $25.0 million sub-facility to be used by our Canadian operations. The amended $250.0 million revolving credit facility, which matures in February 2012, is an
asset-based revolving credit facility which is secured by substantially all accounts receivable, inventory and property, plant and equipment and provides for borrowings at LIBOR plus a margin ranging
from 1.25% to 2.00% per annum, based on our leverage ratios, as specified in the credit agreement. Borrowings under the facility bear interest at a weighted average interest rate of 2.02%, 2.59% and
2.71% as of January 31, 2011, 2010 and 2009, respectively. A commitment fee of 0.30% to 0.375% per annum is payable on all unused portions of the revolving credit facility based on our
leverage ratios. Interest payments are due monthly, or as LIBOR contracts expire. The revolving credit facility also has a $30.0 million sub-facility which may be used for letters
of credit. The credit agreement limits available borrowings to certain percentages of our assets. As of January 31, 2011, there were $19.5 million of letters of credit outstanding. Based
on the outstanding borrowings, letters of credit issued and the terms of the asset-based revolving credit facility, our available borrowing capacity was approximately $124.3 million and
$68.3 million at January 31, 2011 and 2010, respectively.

Unsecured Senior Notes:During the second quarter of Fiscal 2006, we issued $150.0 million of senior unsecured notes, bearing
interest at
10.0% per annum and maturing in July 2014.

The
revolving credit facility and the senior notes contain financial and operating covenants with which we must comply during the terms of the agreements. These covenants include the
maintenance of certain financial ratios, restrictions related to the incurrence of certain indebtedness and investments, and prohibition of the creation of certain liens. We were in compliance with
all covenants as of January 31, 2011. The financial covenant for the revolving credit facility requires that we maintain a fixed charge coverage ratio, as defined in the agreement, of at least
1.1 to 1.0; however, this covenant does not take effect until our available borrowing capacity is $30.0 million or less. The financial covenant for the senior notes indenture requires that,
were we to incur additional indebtedness (subject to various exceptions set forth in the indenture), after giving effect to the incurrence of such additional indebtedness, we have a consolidated
coverage ratio, as defined in the indenture, of at least 2.5 to 1.0.

F-19

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Long-Term Debt (Continued)

We incurred $3.3 million of capitalized legal and financing charges associated with establishing the original $250.0 million senior credit facility, which are being
amortized over the five year term of the facility. As a result of the amendment reducing the facility to $125.0 million in June 2006, we recorded a $1.5 million non-cash
charge during the second quarter of Fiscal 2006 as interest expense. We also incurred $5.1 million of capitalized legal and financing charges associated with the issuance of the
$150.0 million senior unsecured notes during the second quarter of Fiscal 2006. These costs are being amortized over the eight year term of the notes. During the first quarter of Fiscal 2007,
we incurred $2.2 million of capitalized legal and financing costs associated with the February 2007 amendment to the senior credit facility. As of January 31, 2011, $3.9 million
of unamortized costs are included in the balance sheet.

Guarantor entities:The senior notes were co-issued by Stewart & Stevenson, LLC and Stewart & Stevenson Funding
Corp. and are guaranteed by all of our subsidiaries except one domestic subsidiary, one subsidiary in Canada and two subsidiaries in South America. Stewart & Stevenson LLC and all of its
subsidiaries except one domestic subsidiary, one subsidiary in Canada and two subsidiaries in South America are co-borrowers on the $250.0 million revolving credit facility.

The
following condensed consolidating financial statements present separately the financial position, results of operations and cash flows of the co-issuers/guarantors
("Guarantor Entities"), and all non-guarantor subsidiaries of the Company ("Non-Guarantor Entities") based on the equity method of accounting.

Condensed Consolidating Balance Sheets

As of January 31, 2011(Dollars in thousands)

Guarantor
Entities

Non-Guarantor
Entities

Eliminations

Consolidated
TotalsCurrent assets

$
414,311

$
57,122

$


$
471,433Property, plant and equipment


72,246


2,831





75,077Other assets


881


4,827


15,385


21,093Total assets

$
487,438

$
64,780

$
15,385

$
567,603Current liabilities

$
200,693

$
32,469

$


$
233,162Intercompany payables (receivables)


(47,606
)

47,606





Long-term liabilities


185,317


90





185,407Shareholders' equity


149,034


(15,385
)

15,385


149,034Total liabilities and shareholders' equity

$
487,438

$
64,780

$
15,385

$
567,603


F-20

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Long-Term Debt (Continued)



As of January 31, 2010Guarantor
Entities

Non-Guarantor
Entities

Eliminations

Consolidated
TotalsCurrent assets

$
333,191

$
48,737

$


$
381,928Property, plant and equipment


75,072


4,134





79,206Other assets


35,150


33,376


(15,135
)

53,391Total assets

$
443,413

$
86,247

$
(15,135
)
$
514,525Current liabilities

$
113,997

$
22,446

$


$
136,443Intercompany payables (receivables)


(47,474
)

47,474





Long-term liabilities


221,268


1,192





222,460Shareholders' equity


155,622


15,135


(15,135
)

155,622Total liabilities and shareholders' equity

$
443,413

$
86,247

$
(15,135
)
$
514,525


Condensed Consolidating Statements of Operations

For the Fiscal Year Ended January 31, 2011(Dollars in thousands)

Guarantor
Entities

Non-Guarantor
Entities

Eliminations

Consolidated
TotalsSales

$
771,592

$
89,642

$


$
861,234Cost of sales


638,761


77,206





715,967Gross profit


132,831


12,436





145,267Selling and administrative expenses


90,474


13,778





104,252Impairment of goodwill and indefinite-lived intangible assets


1,316


30,171





31,487Equity in loss of subsidiaries


34,228





(34,228
)

Other (income) expense, net


(1,434
)

408





(1,026
)Operating profit (loss)


8,247


(31,921
)

34,228


10,554Interest expense, net


16,927


2,959





19,886Earnings (loss) before income taxes


(8,680
)

(34,880
)

34,228


(9,332
)Income tax expense (benefit)


1,352


(652
)




700Net loss

$
(10,032
)
$
(34,228
)
$
34,228

$
(10,032
)


F-21

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Long-Term Debt (Continued)

For the Fiscal Year Ended January 31, 2010Guarantor
Entities

Non-Guarantor
Entities

Eliminations

Consolidated
TotalsSales

$
609,961

$
78,715

$


$
688,676Cost of sales


505,191


71,837





577,028Gross profit


104,770


6,878





111,648Selling and administrative expenses


96,705


17,483





114,188Equity in loss of subsidiaries


15,953





(15,953
)

Other (income) expense, net


(2,872
)

2,926





54Operating loss


(5,016
)

(13,531
)

15,953


(2,594
)Interest expense, net


17,637


2,852





20,489Loss before income taxes


(22,653
)

(16,383
)

15,953


(23,083
)Income tax expense (benefit)


1,246


(430
)




816Net loss

$
(23,899
)
$
(15,953
)
$
15,953

$
(23,899
)




For the Fiscal Year Ended January 31, 2009Guarantor
Entities

Non-Guarantor
Entities

Eliminations

Consolidated
TotalsSales

$
1,080,120

$
137,022

$


$
1,217,142Cost of sales


885,866


116,300





1,002,166Gross profit


194,254


20,722





214,976Selling and administrative expenses


118,844


19,297





138,141Equity in earnings of subsidiaries


(759
)




759


Other expense (income), net


1,809


(3,120
)




(1,311
)Operating profit


74,360


4,545


(759
)

78,146Interest expense, net


22,021


2,910





24,931Earnings before income taxes


52,339


1,635


(759
)

53,215Income tax expense


1,783


876





2,659Net earnings

$
50,556

$
759

$
(759
)
$
50,556


F-22

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Long-Term Debt (Continued)

Condensed Consolidating Statements of Cash Flows

For the Fiscal Year Ended January 31, 2011(Dollars in thousands)

Guarantor
Entities

Non-Guarantor
Entities

Eliminations

Consolidated
TotalsNet cash provided by (used in):Operating activitiesNet loss

$
(10,032
)
$
(34,228
)
$
34,228

$
(10,032
)Equity in loss of subsidiaries


34,228





(34,228
)

Other adjustments


28,970


37,926





66,896Operating activities


53,166


3,698





56,864Investing activities


(14,525
)

(399
)




(14,924
)Financing activities


(36,617
)

467





(36,150
)Effect of exchange rate on cash





57





57Net increase in cash


2,024


3,823





5,847Cash at the beginning of the period


248


3,073





3,321Cash at the end of the period

$
2,272

$
6,896

$


$
9,168




For the Fiscal Year Ended January 31, 2010Guarantor
Entities

Non-Guarantor
Entities

Eliminations

Consolidated
TotalsNet cash provided by (used in):Operating activitiesNet loss

$
(23,899
)
$
(15,953
)
$
15,953

$
(23,899
)Equity in loss of subsidiaries


15,953





(15,953
)

Other adjustments


64,661


25,559





90,220Operating activities


56,715


9,606





66,321Investing activities


(1,301
)

(1,639
)




(2,940
)Financing activities


(55,192
)

(8,541
)




(63,733
)Effect of exchange rate on cash





1,667





1,667Net increase in cash


222


1,093





1,315Cash at the beginning of the period


26


1,980





2,006Cash at the end of the period

$
248

$
3,073

$


$
3,321


F-23

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Long-Term Debt (Continued)



For the Fiscal Year Ended January 31, 2009Guarantor
Entities

Non-Guarantor
Entities

Eliminations

Consolidated
TotalsNet cash provided by (used in):Operating activitiesNet earnings

$
50,556

$
759

$
(759
)
$
50,556Equity in earnings of subsidiaries


(759
)




759


Other adjustments


34,180


(26,266
)




7,914Operating activities


83,977


(25,507
)




58,470Investing activities


(27,971
)

195





(27,776
)Financing activities


(61,937
)

19,573





(42,364
)Effect of exchange rate on cash





1,294





1,294Net decrease in cash


(5,931
)

(4,445
)




(10,376
)Cash at the beginning of the period


5,957


6,425





12,382Cash at the end of the period

$
26

$
1,980

$


$
2,006


Note 8. Significant Balance Sheet Accounts

Allowance for Doubtful Accounts:Activity in the allowance for doubtful accounts was as follows:

Fiscal Year Ended January 31,(Dollars in thousands)

2011

2010

2009Allowance for doubtful accounts at beginning of period

$
4,919

$
3,599

$
3,140Additions to reserves


684


2,482


1,281Writeoffs against allowance for doubtful accounts


(3,085
)

(1,327
)

(1,189
)Collections of previously reserved items


189


165


367Allowance for doubtful accounts at end of period

$
2,707

$
4,919

$
3,599


Inventories:Summarized below are the components of inventories:

As of January 31,(Dollars in thousands)

2011

2010Inventory purchased under distributor agreements

$
107,872

$
104,542Raw materials and spare parts


79,231


93,017Work in process


97,501


34,481Finished goods


1,305


16,273Total inventories, net

$
285,909

$
248,313


F-24

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8. Significant Balance Sheet Accounts (Continued)

Raw materials and spare parts include OEM equipment and components used in the manufacturing segment. Finished goods includes manufactured equipment that is essentially complete at
January 31, 2010. The inventory balances above are net of inventory valuation allowances of $30.4 million and $20.4 million at January 31, 2011 and January 31, 2010,
respectively.

Contracts in Process:Recoverable costs and accrued profits not yet billed relate to long-term equipment contracts. Amounts included in
the financial
statements which relate to recoverable costs and accrued profits not yet billed on contracts in process are classified as current assets. Billings on uncompleted contracts in excess of incurred costs
are classified as current liabilities. Progress billings on contracts are made in accordance with the terms and conditions of the contracts, which often differ from the revenue recognition process. A
summary of the status of uncompleted contracts is as follows:

As of January 31,(Dollars in thousands)

2011

2010Costs incurred on uncompleted contracts

$
91,768

$
109,788Accrued profits


22,744


33,800$
114,512

$
143,588Less billings to date


(39,863
)

(105,661
)$
74,649

$
37,927Recoverable costs and accrued profits not yet billed (CIEB)

$
78,934

$
38,042Billings in excess of incurred costs and accrued profits (BIEC)


(4,285
)

(115
)$
74,649

$
37,927


Property, Plant and Equipment:Components of property, plant and equipment, net, were as follows:

As of January 31,(Dollars in thousands)

2011

2010Machinery and equipment

$
29,852

$
27,892Buildings and leasehold improvements


27,918


27,299Rental equipment


67,067


60,655Computer hardware and software


4,701


4,459Accumulated depreciation


(62,220
)

(48,546
)Net depreciable assets

$
67,318

$
71,759Construction in progress


696


384Land


7,063


7,063Property, plant and equipment, net

$
75,077

$
79,206


Depreciation
expense was $15.5 million, $16.1 million and $15.7 million in Fiscal 2010, 2009 and 2008, respectively.

F-25

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8. Significant Balance Sheet Accounts (Continued)

Rental
equipment includes generator sets, air compressors, rail car movers and material handling equipment that is leased to customers under operating lease arrangements with terms
ranging from one month up to three years. Rental equipment is depreciated over its estimated useful life, and is occasionally transferred into finished goods inventory for resale to customers.

Intangible Assets and Goodwill:Amounts allocated to intangible assets are amortized on a straight-line basis over their estimated
useful
lives. Intangible assets include the following:

As of January 31, 2011(Dollars in thousands)

Estimated
Useful Life

Gross
Carrying
Value

Accumulated
Amortization

Impairment

Currency
Translation

NetNon-current amortizable intangible assets:Engineering drawings

2.5 - 10 Years

$
6,346

$
(5,211
)
$


$
189

$
1,324Distribution contracts

27 Years


3,384


(624
)







2,760Customer relationships

6 - 11 Years


7,409


(3,097
)




635


4,947Patents

4 Years


209


(209
)







Non-compete covenant

5 Years


1,420


(1,182
)




105


343Total



$
18,768

$
(10,323
)
$


$
929

$
9,374Indefinite-lived intangible assets:Trademarks




9,150





(2,834
)

374


6,690Total



$
27,918

$
(10,323
)
$
(2,834
)
$
1,303

$
16,064




As of January 31, 2010(Dollars in thousands)

Estimated
Useful Life

Gross
Carrying
Value

Accumulated
Amortization

Impairment

Currency
Translation

NetNon-current amortizable intangible assets:Engineering drawings

2.5 - 10 Years

$
6,346

$
(4,947
)
$


$
189

$
1,588Distribution contracts

27 Years


3,384


(499
)







2,885Customer relationships

6 - 11 Years


7,409


(2,318
)




380


5,471Patents

4 Years


209


(176
)







33Non-compete covenant

5 Years


1,420


(871
)




78


627Total



$
18,768

$
(8,811
)
$


$
647

$
10,604Indefinite-lived intangible assets:Trademarks




9,150








191


9,341Total



$
27,918

$
(8,811
)
$


$
838

$
19,945


F-26

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8. Significant Balance Sheet Accounts (Continued)

Amortization
expense was $1.5 million, $2.3 million and $3.2 million in Fiscal 2010, 2009 and 2008, respectively. Amortization expense for the next 5 years is
expected to be as follows:

(Dollars in thousands)Fiscal 2011

$
1,398Fiscal 2012


1,135Fiscal 2013


1,007Fiscal 2014


1,001Fiscal 2015


1,001Total

$
5,542


The
following table presents goodwill, which resulted from the Crown Acquisition, as of the dates indicated, as well as changes in the account during the period shown.

(Dollars in thousands)

AmountCarrying amount as of January 31, 2010

$
26,671Currency translation


1,982Impairment


(28,653
)Carrying amount as of January 31, 2011

$



Warranty Costs:A summary of activity for accrued warranty costs, recorded in other current liabilities on the consolidated balance
sheet, for the
periods ended January 31, 2011, 2010 and 2009 was as follows:

Fiscal Year Ended January 31,Dollars in thousands

2011

2010

2009Accrued warranty costs at beginning of period

$
4,398

$
4,990

$
5,982Payments for warranty obligations


(4,245
)

(6,174
)

(6,222
)Warranty accrual


8,957


5,582


5,230Accrued warranty costs at end of period

$
9,110

$
4,398

$
4,990


Other current liabilities:Included in other current liabilities are $12.2 million and $15.6 million of accrued job costs as
of
January 31, 2011 and January 31, 2010, respectively. No other item comprised more than 5% of total current liabilities as of January 31, 2010 or January 31, 2009.

F-27

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 9. Equity

The Company has 100,005,000 common units issued and outstanding, which consist of both Common Units and Common B Units. Additionally, the Company has Common A Units, none of which are
issued or outstanding. These three classes of Units have the same economic rights. The voting and transfer rights of the three classes differ in that the Common Units are entitled to one vote per
Common Unit and upon transfer shall remain designated as Common Units. The Common A Units are entitled to ten votes per Common A Unit and upon transfer will be designated as Common Units. The Common B
Units are entitled to ten votes per Common B Unit and upon transfer may be designated by the transferor as Common B Units, Common A Units or Common Units. As of January 31, 2011 and 2010, the
number of Common Units and Common B Units issued and outstanding was 48,255,000 and 51,750,000.

Stewart &
Stevenson LLC is a limited liability company, therefore, U.S. federal and certain state taxes are paid by the holders of our common units. As a limited liability
company, the common interest holders' liability is limited to the capital invested in the Company.

Share-Based Compensation:On September 5, 2007, our board of directors adopted the 2007 Incentive Compensation Plan ("Incentive
Plan"). The
Incentive Plan received the required approval of a majority of our unit holders and became effective on September 27, 2007. In connection with the adoption and approval of the Incentive Plan,
the compensation committee of the board, which has the responsibility to administer the Incentive Plan, made certain grants of restricted shares to our non-executive directors and certain
members of our senior executive management. The grants to our four non-executive directors totaled 240,000 restricted shares vesting in five (5) 48,000 share tranches, with each
such tranche vesting upon board service for a complete fiscal year. In addition, approximately 112,000 of the restricted shares granted to three former directors were earned as part of their service
to us with the balance of their grants being forfeited. The executive grants total 60,000 restricted shares vesting in five (5) 12,000 share tranches, with each tranche vesting upon employment
for a complete fiscal year. In addition, approximately 20,000 of the restricted shares granted to a former executive were earned before his resignation from the company with the balance being
forfeited. The executive grants are subject to the achievement of net pre-tax income growth in the relevant fiscal year that exceeds the median net pre-tax income
growth of a peer group of companies consisting of Schlumberger, Ltd., National Oilwell Varco, Inc., Weatherford International Ltd. and Cameron International Corp. and are subject
to acceleration in the case of an executive's death or disability. This performance condition was met for Fiscal 2010 and 12,000 shares vested; however, this performance condition was not met for
Fiscal 2009 or Fiscal 2008 and those tranches were forfeited. All grants are subject to (i) the completion of an initial public equity offering and (ii) accelerated vesting upon a
change-in-control of the company. No expense has been recognized for these grants because the contingent condition has not occurred and as of January 31, 2011, diluted
earnings per share excluded the approximately 408,000 contingent unvested restricted shares. A total of 396,000 restricted shares will vest upon completion of an initial public equity offering, and we
will record a non-cash compensation expense in connection therewith in an amount equal to the grant-date fair value of such vested shares, estimated to be approximately
$5.0 million.

F-28

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10. Employee Retirement Savings Plan

We sponsor an employee retirement savings plan which qualifies under Section 401(k) of the Internal Revenue Code. The savings plan is designed to provide eligible employees with
an opportunity to make regular contributions into a long-term investment and savings program. Substantially all U.S. employees are eligible to participate in the savings plan beginning on
the first full pay period after employment. During Fiscal 2010 and Fiscal 2009, we matched employee contributions at the rate of 35% up to 6% of eligible earnings. During Fiscal 2008, we matched
employee contributions at the rate of 50% up to 6% of eligible earnings. We incurred expenses of $1.5 million, $1.4 million and $3.5 million for Fiscal 2010, 2009 and 2008,
respectively. During Fiscal 2011, we will match employee contributions at the rate of 35% up to 6% of eligible earnings.

Note 11. Recent Accounting Pronouncements

Revenue recognition for arrangements with multiple deliverables:In October 2009, the Financial Accounting Standards Board issued an
update to
existing guidance on revenue recognition for arrangements with multiple deliverables. This update will allow companies to allocate consideration received for qualified separate deliverables using
estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable. Additional disclosures discussing the nature of
multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices
are required. We will adopt this update for new revenue arrangements entered into beginning, or materially modified on or after, February 1, 2011. We do not expect the provisions of this update
to have a material impact on our consolidated financial statements.

Note 12. Leases

Operating Lease Commitments:We lease certain facilities and equipment from third parties under operating lease arrangements of varying
terms. Under
the terms of these operating lease arrangements, we are generally obligated to make monthly rental payments to the lessors, and include no further obligations at the end of the lease terms. If we
elect to cancel or terminate a lease prior to the end of its term, we are typically obligated to make all remaining lease payments. In certain cases, however, we are allowed to sublet the assets to
another party. Total rent expense was $9.6 million, $10.2 million and $10.4 million in Fiscal 2010, 2009 and 2008, respectively.

Future
minimum lease payments under operating leases as of January 31, 2011 are as follows:

(Dollars in thousands)Fiscal 2011

$
9,470Fiscal 2012


4,653Fiscal 2013


2,860Fiscal 2014


1,753Fiscal 2015 and thereafter


1,129Total

$
19,865


F-29

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 13. Related Party Transactions

James W. Crystal, a member of our board of directors, is also the Chairman and Chief Executive Officer of Frank Crystal & Company, Inc., an insurance brokerage firm. In
Fiscal 2010, 2009 and 2008, we purchased insurance coverage through Frank Crystal & Company, Inc., generating commissions to Frank Crystal and Company, Inc. of $477,799, $358,426
and $360,662, respectively. The purchase of this coverage was negotiated on an arm's length basis and we believe that the premium was within the range of market prices for similar types of insurance
coverage. We currently anticipate that we will continue to procure insurance from Frank Crystal & Company, Inc.

Backlog
as of January 31, 2011 includes $37.5 million of related party transactions reflecting an order in Fiscal 2009 from an affiliate. Revenue recognition from this
transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. A deposit in the amount of $31.2 million is recorded as
a customer deposit in our consolidated balance sheet. Included in inventories, net is $29.5 million in costs related to this contract, and no amounts have been recorded in the consolidated
statements of operations through January 31, 2011.

The
Company's current practice with respect to related party transactions is as follows: (i) transactions with a value not exceeding $10,000 are subject to approval by our
Chairman (other than transactions in which our Chairman may be a party), (ii) transactions in which our Chairman may be a party or transactions with a value in excess of $10,000 but not
exceeding $100,000 are subject to approval by our Executive Committee (excluding, as appropriate, the participation of a member of the Executive Committee who may be a party to such transactions) and
(iii) all other transactions are subject to approval of our board of directors (excluding, as appropriate, the participation of a member of the board of directors who may be a party to such
transaction).

Note 14. Litigation and Contingencies

In July 2009, we settled an arbitration action brought against one of our suppliers and us. Fiscal 2009 results of operations, after insurance proceeds and receipt of certain inventory,
were negatively impacted by approximately $3.5 million, which is recorded in selling and administrative expenses. The settlement resolved the arbitration action and resulted in dismissal and
release of all claims alleged.

During
Fiscal 2009, the State of Texas began conducting a sales and use tax audit for Fiscal 2006, 2007 and 2008. Recently, the audit period has been expanded to include Fiscal 2009. In
the second quarter of Fiscal 2009, we completed a preliminary analysis and recorded our then best estimate of probable loss as a charge to selling and administrative expenses and other current
liabilities in our consolidated financial statements. As the audit process and periods have evolved, we have continued to evaluate this analysis and have recorded adjustments to the accrual reflecting
our best estimate of probable loss. The
audit remains in process and, accordingly, our ultimate loss could be greater, or less, than the amounts we have recorded.

We
are also a defendant in a number of lawsuits relating to matters normally incident to our business. No individual case, or group of cases presenting substantially similar issues of
law or fact, is expected to have a material effect on the manner in which we conduct our business or on our consolidated results of operations, financial position or liquidity. We maintain certain
insurance policies that provide coverage for product liability and personal injury cases. These insurance policies are subject to a self-insured retention for which we are responsible, which is
generally $500,000 for newer cases and $1.0 million for cases initiated before Fiscal 2009. We have established reserves that we believe to be adequate based on current evaluations and our
experience in these types of claim situations. Nevertheless, an unexpected outcome or adverse development in any such case could have a material adverse impact on our consolidated results of
operations in the period in which it occurs.

F-30

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 15. Concentrations

Our principal distribution agreements, which account for a significant portion of total purchases, are generally non-exclusive agreements and are subject to early termination
by either party for a variety of causes. No assurance can be given that such distribution agreements will be renewed beyond their expiration dates. Any interruption in the supply of materials from the
original manufacturers, or a termination of a distributor agreement, could have a material adverse effect on the results of operations.

We
market our products and services throughout the world and are not dependent upon any single geographic region outside the United States. Substantially all of our
long-lived assets are located in the United States. Our sales to countries outside the United States, including sales to U.S. customers for export, totaled $166.7 million,
$205.6 million and $430.5 million in Fiscal 2010, 2009 and 2008, respectively. We are not dependent on any single customer and in Fiscal 2010, no single customer accounted for more than
5.4% of our total revenues. Our top 10 customers generated approximately 30.7% of our total revenues during Fiscal 2010.

Note 16. Quarterly Financial InformationUnaudited

Fiscal year ended January 31, 2011

Quarter ended(Dollars in thousands)

May 1, 2010

July 31, 2010

October 30, 2010

January 31, 2011

Total
YearSales

$
161,936

$
206,132

$
228,502

$
264,664

$
861,234Gross profit


25,679


37,045


42,719


39,824


145,267Net (loss) earnings

$
(4,699
)
$
7,393

$
9,927

$
(22,653
)
$
(10,032
)Net (loss) earnings per unit:Basic

$
(0.05
)
$
0.07

$
0.10

$
(0.23
)
$
(0.10
)Diluted

$
(0.05
)
$
0.07

$
0.10

$
(0.23
)
$
(0.10
)


Net
loss for the quarter ended January 31, 2011 includes the impact of the $31.5 million goodwill and indefinite-lived intangible assets impairment charge for Crown.

Fiscal year ended January 31, 2010

Quarter ended(Dollars in thousands)

May 2, 2009

August 1, 2009

October 31, 2009

January 31, 2010

Total
YearSales

$
190,128

$
173,205

$
167,263

$
158,080

$
688,676Gross profit


38,896


25,956


23,672


23,124


111,648Net earnings (loss)

$
3,710

$
(9,748
)
$
(8,188
)
$
(9,673
)
$
(23,899
)Net earnings (loss) per unit:Basic

$
0.04

$
(0.10
)
$
(0.08
)
$
(0.10
)
$
(0.24
)Diluted

$
0.04

$
(0.10
)
$
(0.08
)
$
(0.10
)
$
(0.24
)


Selling
and general administrative expenses for the quarter ended August 1, 2009 included $3.4 million for a probable sales tax liability.

F-31

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Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 17. Subsequent Event (unaudited)

EMDSI acquisition.On March 23, 2011, we acquired 100% of the stock of EMDSI-Hunt Power, L.L.C. ("EMDSI") in an all cash
transaction from ITOCHU Corporation of Japan for total consideration of approximately $25.7 million, subject to final closing adjustments. The acquisition was funded from available cash and
through borrowings under our revolving credit facility. EMDSI, which is based in Harvey, Louisiana, specializes in the marketing and distribution of medium speed diesel engines for marine propulsion,
drilling and power generation applications and is a provider of aftermarket parts and service.

The
following summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date. The assets acquired and liabilities assumed remain subject to
final closing adjustments, and our ongoing evaluation thereof, which could impact the amount of net tangible assets acquired and, thus, increase or decrease the total consideration transferred. We are
in the process of obtaining third-party valuations for the inventories, property, plant and equipment, intangible assets and goodwill acquired. Accordingly, the amounts below, which are reflective as
of the acquisition date, remain subject to change.

(Dollars in thousands)

As of
March 23, 2011Cash

$
2,345Accounts receivable


5,009Inventories


9,494Property, plant and equipment


3,206Other assets


178Total identifiable tangible assets acquired


20,232Total liabilities (current) assumed


6,922Net identifiable tangible assets acquired


13,310Intangible assets and goodwill


12,437Net assets acquired

$
25,747


The
summary results of operations information for EMDSI for the twelve months ended December 31, 2010 are as follows:

(Dollars in thousands)Sales

$
24,963Net loss

$
(20,375
)Adjusted net loss

$
(3,935
)


Adjusted
net loss, a non-GAAP financial measure, reflects the exclusion of a $16.4 million goodwill and intangible assets impairment recorded by EMDSI in its 2010 results of operations.

F-32

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