Stewart & Stevenson LLC - FORM 10-K

Attached files

file	filename
EX-32.1 - CERTIFICATION - Stewart & Stevenson LLC	exh32-1.htm
EX-31.1 - CERTIFICATION - Stewart & Stevenson LLC	exh31-1.htm

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

þ	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended January 31, 2010

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______________ to _________________

Commission File Number 001-33836

Stewart & Stevenson LLC

(Exact name of registrant as specified in its charter)

Delaware	20-3974034
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1000 Louisiana St., Suite 5900, Houston, TX	77002
(Address of Principal Executive Offices)	(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 ¨ No þ

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 þ No ¨

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 þ * No ¨

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. þ

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 if such shorter period that the registrant was required to submit and post such files).Yes þ No ¨

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 ¨ Accelerated filer ¨ Non-accelerated filer þ Smaller reporting company filer ¨

(Do not check if a smaller reporting company)

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

There is no market for the registrant’s equity. As of January 31, 2010, there were 100,005,000 common units outstanding.

* The registrant is currently not required to file reports, including this report, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 but is voluntarily filing this report with the Securities and Exchange Commission.

TABLE OF CONTENTS

	PART I
Item 1.	Business	4
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	15
Item 2.	Properties	15
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A.	Quantitative and Qualitative Disclosure about Market Risk	29
Item 8.	Financial Statements and Supplementary Data	29
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29
Item 9A.	Controls and Procedures	30
Item 9A (T).	Controls and Procedures	30
Item 9B.	Other Information	30
	PART III
Item 10.	Directors and Executive Officers of the Registrant	31
Item 11.	Executive Compensation	33
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	36
Item 13.	Certain Relationships and Related Transactions	38
Item 14.	Principal Accountant Fees and Services	38
	PART IV
Item 15.	Exhibits, Financial Statement Schedules	39

	Signatures
	Certifications

Cautionary Note Regarding Forward-looking Statements

This Annual Report on Form 10-K (this “Annual Report” or “Form 10-K”), including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance.

Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to global political, economic, business, competitive, market, regulatory and other factors, including, but not limited to, the items identified under “Item 1A. Risk Factors.” We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Table of Contents

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 2009 commenced on February 1, 2009 and ended on January 31, 2010.

ITEM 1. Business

Our Company

Stewart & Stevenson LLC, headquartered in Houston, Texas, was formed for the purpose of acquiring from Stewart & Stevenson Services, Inc. (“SSSI” or the “Predecessor”) 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.

We are a leading designer, manufacturer and marketer of specialized equipment and provide aftermarket parts and service to the oil and gas and other industries that we have served for over 100 years. Our diversified product lines include equipment for well stimulation, well servicing and workover rigs, drilling rigs, coiled tubing, cementing, nitrogen pumping, power generation and electrical systems as well as engines, transmissions and material handling equipment. We have a substantial installed base of equipment, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues and also provide rental equipment to our customers.

Demand for our products has been driven primarily by capital spending in the oil and gas industry, which accounted for an estimated 76.0% of our equipment revenues and an estimated 72.2% of our total revenues in Fiscal 2009. 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.

We operate our business through our equipment, aftermarket parts and service and rental operating segments. In our equipment operating segment, which generated approximately 57.5% of our Fiscal 2009 revenues, we design, manufacture and market equipment for oilfield service providers, drilling and workover contractors and major U.S. and international oil companies that require integrated and customized product solutions. Our aftermarket parts and service operating segment, which generated approximately 39.7% of our Fiscal 2009 revenues, provides aftermarket parts and service for products manufactured by us, our six key original equipment manufacturers (“OEMs”) and other manufacturers. Our rental operating segment, which generated approximately 2.8% of our Fiscal 2009 revenues, rents equipment consisting primarily of generators, material handling equipment and air compressors and serves a wide range of end markets, principally on a short-term basis, as a complementary solution to equipment sales.

Crown Acquisition

On February 26, 2007, we acquired substantially all of the net operating assets of Crown Energy Technologies, Inc. (“Crown”) for total consideration of approximately $70.5 million (the “Crown Acquisition”). Information relating to our results of operations for Fiscal 2006 and prior periods does not include the impact of the Crown Acquisition. Information relating to our results of operations for Fiscal 2007 includes the impact of the Crown Acquisition from February 26, 2007 to January 31, 2008. Crown, which was headquartered in Calgary, Alberta, Canada, with multiple U.S. operations, manufactured well stimulation, drilling, workover and well servicing rigs and provided related parts and service to the oil and gas industry. The Crown Acquisition enhanced our position as a leading supplier of well stimulation, coiled tubing, cementing and nitrogen pumping equipment and expanded our product offerings to include drilling rigs and a full range of workover and well servicing rigs. As a result of the Crown Acquisition, we increased our manufacturing capabilities and broadened the markets we serve with a manufacturing facility in Calgary, Alberta, Canada and four service facilities in strategic locations in the United States.

Products and Services

Through our three 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.

Equipment

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 also sell engines, transmissions, utility, and material handling equipment for well servicing, well workover, drilling rigs, pumping and other applications outside the oil and gas industry. A substantial portion of the products we sell includes components

Table of Contents

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 only factory-authorized provider of a substantial portion of the stand-alone products of our six key OEMs in these territories, which principally cover major oil and gas fields in the United States, for an average of approximately 40 years. For Fiscal 2009, approximately 81.1% and 18.9% of our equipment sales revenues were derived from sales of engineered products and stand-alone products, respectively. We use equipment supplied to us by these OEMs in combination with our design, engineering, and manufacturing expertise to deliver a value-added, integrated solution to our customers.

The following table lists the equipment we provide:

Product line		Product description
Well Stimulation		Equipment that includes fracturing pumps, blenders, hydration, chemical additive systems and control systems and software used to enhance oil and gas production
Engines		Internal combustion diesel and natural gas engines
Power Generation		Standby, emergency backup, fire suppression and prime power in a variety of configurations and capacities using natural gas and diesel engines
Drilling, Workover and Well Servicing Rigs		Various equipment used in drilling, workover and well servicing to find and/or enhance oil and gas production
Transmissions		Automatic transmissions and related products
Prime Mover Packages		Engineered packages; mating internal combustion engines to a transmission or torque converter to power specific customer applications
Material Handling		Forklift trucks and ancillary equipment
Seismic		Contract manufacturing of seismic equipment
Rail Car Movers		Engine-driven equipment used in rail car switching operations
Coiled Tubing		Well workover, stimulation and drilling equipment used on land and offshore applications which include patented products such as injector heads
Other		Various equipment utilized in the oil and gas services industry, such as cementing, nitrogen pumping and fluid pumping

Aftermarket Parts and Service

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 a substantial portion of our product offerings from our six key OEMs, we have been the only factory-authorized parts and service provider for specified territories, principally in major oil and gas fields in the United States. For Fiscal 2009, approximately 51.8% and 48.2% of revenues derived from our aftermarket parts and service business were related to parts and service, respectively. For Fiscal 2009, approximately 57.7% of the aftermarket parts and service revenues pertained to products sourced from our six key OEMs with whom we have had long-standing relationships.

We believe there are a number of factors which affect our customer’s decision when choosing their 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, 2010, we employed approximately 673 highly skilled service technicians utilizing approximately 580 service bays in the United States, Canada and abroad. We also have significant capabilities to service the customer at their site 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 provide aftermarket parts through our network of approximately 185 authorized dealers. We believe that the broad installed base of our equipment, our customers’ general preference to use factory-authorized parts and service, our proximity to the customer, and our service capabilities provide us with a strong foundation for a stable aftermarket parts and service revenue stream.

Table of Contents

Rental

Our rental products primarily consist of generators, material handling equipment and air compressors 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. As of January 31, 2010, our rental fleet consisted of over 1,250 units. We are able to complement our equipment offerings by providing our customers the flexibility of renting certain equipment versus purchasing. Our rental products generate our highest margins and provide us with a strong return on our investment.

The following table lists our rental products:

Product line		Product description
Material Handling Equipment		Forklift trucks, railcar movers and ancillary equipment
Generators		Engines/generators ranging from 25 to 2,000 kilowatts
Air Compressors		Air compressors ranging from 375 to 1,600 cubic feet per minute

Our utilization rate of our available rental fleet for Fiscal 2009 was approximately 43.8% 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 customer base of more than 3,000 customers 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 in Fiscal 2009 no single customer accounted for more than 8.9% of our total revenues. Our top 10 customers, which include domestic and international businesses, generated approximately 26.3% of our total revenues during Fiscal 2009. The demand of our customers for the products we provide has not historically been characterized by seasonality. During Fiscal 2009, customers in the oil and gas services market accounted for approximately 72.2% of our total revenues, compared to 78.7% and 80.8% in Fiscal 2008 and 2007, respectively.

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

Market		Types of customers
Oil and gas services		Well stimulation providers, drilling contractors, well servicing companies, integrated oil companies and national oil companies
Commercial vehicles		Freight transportation companies, emergency services, transit authorities and recreational vehicle users. Primarily aftermarket parts and service
Material handling		Warehouse /distribution companies, manufacturing companies, chemical companies and various others utilizing forklifts and rail car spotters
Power generation		Providers of electricity for commercial and personal consumption
Marine		Offshore work boat providers, tug boat operators and recreational boat users
Construction		Commercial building and home construction companies and highway construction companies
Government		Federal agencies (such as the U.S. Department of Defense), state agencies (such as departments of transportation) and local agencies (such as departments of public works)
Mining		Companies involved in the extraction of raw materials through various mining methods
Other		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.

Table of Contents

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 240 employees. We also utilize a network of approximately 185 authorized dealers and approximately 40 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 provided to our customers on a direct basis. We also utilize a network of authorized dealers to market and distribute parts.

Backlog

As of January 31, 2010 and January 31, 2009, our unfilled equipment order backlog was $203.3 million and $287.9 million, respectively. We expect to recognize a significant portion of the January 31, 2010 equipment order backlog as revenue in Fiscal 2010. We have seen significant declines in demand 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 $203.3 million as of January 31, 2010 includes $37.5 million of related party transaction reflecting an order from an affiliate of the Company's shareholder. 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 the consolidated balance sheet of the Company. 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.

Our unfilled equipment orders that we include in equipment order backlog consist of written purchase orders and signed contracts accompanied, where required by our credit policies, by credit support (typically down payments 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.

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.

For our well stimulation, 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 decision 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 genuine parts, with providers of non-genuine parts and remanufactured parts and other distributors of genuine 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 customer’s decision when choosing their supplier of aftermarket parts and service, including their preference to use factory-authorized genuine parts and service. Customers also consider price, parts availability, level and number of experienced technicians, proximity to their 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 decision 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 an extensive and 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 2009, approximately 72.7% of our cost of goods sold consisted of raw materials and component parts, with the other 27.3% being labor and overhead. Approximately 37.1% 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 62.9% were obtained from a variety of other suppliers.

Our supply agreements with our six key OEMs are non-exclusive, typically short term and generally have historically been renewed on an ongoing basis, however no assurances can be given that they will be renewed beyond their expiration dates. We have been the only factory-authorized provider of a substantial portion of our product offerings from these OEMs in the territories below for an average of 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 date
Detroit Diesel Corporation	1938	High-speed diesel engines	Texas, Colorado, New Mexico, Wyoming, Western Nebraska, South Louisiana, Coastal Mississippi, Coastal Alabama and Colombia	2017
MTU 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	2010
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	2010
Hyster Company	1959	Material handling equipment	Texas and New Mexico	No expiration date
Allison Transmission, Inc.	1973	Automatic transmissions, power shift transmissions and torque converters	Texas, Colorado, New Mexico, Wyoming, Western Nebraska, South Louisiana, Coastal Mississippi, Coastal Alabama, Venezuela and Colombia	2011
Deutz 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

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, hydraulic and electrical components, among many other items, from an extensive supplier base.

Employees

As of January 31, 2010, we had approximately 2,276 employees of whom approximately 1,957 were employed in the United States and Canada and approximately 319 were employed abroad. 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—Our success is dependent on our ability to attract and retain qualified employees.”

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 around the United States and Canada.

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.

Table of Contents

Although we manufacture many 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 will generally be sufficient for our needs for the foreseeable future.

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. In 2009, we acquired from SSSI and its affiliates all of their rights in the “Stewart & Stevenson” trademark and logo, which we had previously licensed from them. In the Crown Acquisition, we purchased from Crown all rights to the use of the “Crown” trademark and logo. 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 secrets 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 and Health and Safety 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 cleanup 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 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.

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 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 has retained environmental liabilities relating to pre-closing conditions or occurrences, subject to certain dollar limitations and caps. As such, there is or could be contamination at some of our current or formerly owned or operated facilities for which we could be liable under applicable environmental laws.

Regulatory Matters

Our operations and the operations of our customers are subject to federal, state, local and provincial as well as other 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. These laws and regulations affect the products and services we design, market and sell, the facilities where we manufacture and service our products and our customers’ exploration and production activities.

Table of Contents

In addition, 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

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

At January 31, 2010, we had approximately $228.1 million of indebtedness, consisting of $70.9 million outstanding under our asset-based revolving credit facility, $150.0 million of our senior notes and $7.2 million of other notes payable. We may make additional borrowings under the revolving credit facility, which provides for maximum borrowings of $250.0 million (expandable, subject to certain conditions and commitments, to $325.0 million), at any time. 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 the indenture governing our senior notes and our senior credit facility, we may also incur additional indebtedness.

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

·	our use of a substantial portion of our cash flow from operations to pay interest on our indebtedness will reduce the funds available to us for operations and other purposes;

·	our ability to obtain additional debt or equity financing for working capital, capital expenditures, product development, debt service requirements, acquisitions or general corporate purposes may be impaired;

·	our indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;

·	our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and

·	our indebtedness makes us more vulnerable to economic downturns and adverse developments in our business.

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:

·	incur or assume indebtedness, or provide guarantees in respect of obligations of other persons;

·	purchase, redeem or repay subordinated indebtedness prior to stated maturities;

·	pay dividends on or redeem or repurchase our stock or make other distributions;

·	issue redeemable stock and preferred stock;

·	make loans, investments or acquisitions;

·	incur liens;

·	engage in sale/leaseback transactions;

·	restrict dividends, distributions, loans or other payments or asset transfers from our subsidiaries;

·	sell or otherwise dispose of assets, including capital stock of our subsidiaries;

·	enter into certain transactions with affiliates;

·	consolidate or merge with or into, or sell substantially all of our assets to, another person;

·	enter into new lines of business; and

·	otherwise conduct necessary corporate activities.

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. The financial covenant for the revolving credit facility requires a fixed charge coverage ratio, as defined in the underlying 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 is applicable were we to incur additional indebtedness (subject to various exceptions set forth in the underlying indenture) and requires that, after giving effect to the incurrence of such additional indebtedness, we have a consolidated coverage ratio, as defined in the underlying indenture, of at least 2.5 to 1.0.

Table of Contents

A breach of any of these covenants or the inability to comply with the required financial ratios 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 elect to declare all outstanding borrowings, 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 financings.

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

Our equipment sales business and, to a lesser extent, our aftermarket parts and service business 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 influenced by a combination of long-term and cyclical trends including:

·	oil and gas prices and industry perceptions of future price levels;

·	the cost of exploring for, producing and delivering oil and gas; and

·	the ability of oil and gas companies to generate capital for investment purposes.

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 current significant slowdown in the U.S. and worldwide economic activities which has followed the global financial crisis has resulted in delays in capital equipment projects, impacting the activities of the industries we serve. Ongoing difficulty in accessing credit markets has diminished product demand, adversely affecting activities in manufacturing and putting 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.

Oil and gas prices have declined significantly from previous levels. 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 now or in the future would adversely affect the demand for our products and services and our business, financial condition and results of operations.

We face intense competition in each of our lines of business.

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.

In the equipment sales business, where we experience our greatest levels of competition, 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 broader geographical presence, than us.

In our aftermarket parts and service business, we compete with regional and local non-genuine 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.

In our rental business, we 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 sales and aftermarket parts and service operations are subject to factors that could have an adverse effect on our business, financial condition and results of operations.

We have significant sales to customers outside the United States and also maintain aftermarket parts and service operations outside the United States. In connection with the Crown Acquisition, we acquired significant manufacturing and service facilities in the U.S. and Calgary, Canada. As a result, for Fiscal 2009, we derived approximately 29.9% of our revenues from sales of products and services to customers outside the United States. Subject to normalization of the credit markets and the recovery of the global economic activity, we intend to continue to expand our international sales and operations.

Table of Contents

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:

·	the effect of exchange rates on purchasing decisions and power of our foreign customers;

·	changes in exchange rates which could result in increases or decreases in our costs and earnings;

·	foreign exchange risks resulting from changes in foreign exchange rates which could increase or decrease our costs and earnings and the implementation of exchange controls;

·	limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in another country; and

·	government regulation and the imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements, including those pertaining to import duties and quotas, taxes, trade and employment restrictions.

If we successfully grow our international operations, our exposure to these and other risks will increase. 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.

The occurrence of any of the foregoing factors may have a material adverse effect on our business, financial condition and results of operations.

In addition, many of our customers and the end-users of our equipment operate in international jurisdictions and so 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 equipment that we sell is manufactured by, or incorporates components manufactured by, our six key OEMs:

·	Detroit Diesel Corporation,

·	MTU Friedrichshafen,

·	Allison Transmission, Inc.,

·	Electro-Motive Diesel, Inc.,

·	Hyster Company, and

·	Deutz Corporation.

In Fiscal 2009, approximately 37.1% of our cost of goods sold was attributable to products purchased from these OEMs. In addition, in Fiscal 2009, a material portion of our revenues was attributable to (i) sales of equipment that included components manufactured by these suppliers and (ii) 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, which are currently effective for varying periods of time and are not exclusive, are subject to risks that include:

·	the nonrenewal or termination, or material change in the terms, of such supplier contracts;

·	the acquisition of one or more of our six key OEMs by one of our competitors or another entity that could adversely affect our relationship;

·	the inability of our suppliers to provide us with sufficient quantities of equipment and parts to meet the demands of our customers; and

·	the appointment by our suppliers of additional providers in designated territories in which we are currently the only provider.

Table of Contents

The occurrence of any of these could have a material adverse effect on our business, financial condition and results of operations. See “Item 1. Business—Suppliers and Raw Materials.”

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 we cannot assure you that it will 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, there can be no assurance that any particular type of insurance coverage will continue to be available to us in the future, that we will not accept retention of additional risk through higher insurance deductibles or otherwise or that we will be able to continue to purchase our desired level of insurance coverage at commercially reasonable rates.

Because many of our products 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 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 insurance. 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.

Our success is dependent on our ability to attract and retain qualified employees.

There is significant demand in our industry for skilled technicians and other experienced 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.

Our customers are generally quoted 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 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 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.

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 in our operations because customers may curtail their activities due to damage to their facilities in and near the Gulf of Mexico.

Table of Contents

Due to the losses as a consequence of the hurricanes that affected the Gulf Coast in 2005 and 2008 and that may occur again in the future, we may not be able to obtain future insurance coverage comparable with that of prior years, thus putting us at a greater risk of loss due to severe weather conditions. Our premiums for hurricane insurance have increased and future hurricanes in the region, particularly those of comparable magnitude, may increase costs and deductibles further, or limit maximum aggregate recoveries under available policies. 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 companies, which may divert our management’s attention, may result in dilution to our stockholders and may 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:

·	integration of product lines, sales forces, customer lists and manufacturing facilities;

·	development of expertise outside our existing business;

·	diversion of management time and resources;

·	harm to our existing business relationships;

·	the potential loss of key employees of the acquired business; and

·	possible divestitures, inventory write-offs and other charges.

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 in a position 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, such as government regulation, which are beyond our control. Consequently, we can make no assurances that these transactions, once undertaken and announced, will close.

In addition, the combined entity may have lower revenues or higher expenses and therefore may not achieve the results that we anticipated at the time of the acquisition. Acquired entities also may be highly leveraged, dilutive to our earnings per share or may have unknown liabilities.

Our operations 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, foreign and provincial 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. These laws and regulations affect the products and services 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 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 fair share of, or 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.

Table of Contents

We invest financial and managerial resources to comply with environmental laws and regulations and anticipate that we 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. The modification of, or changes in the 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 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.

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 which are subject to annual renewal. While these licenses have historically 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 own intellectual property rights or the value thereof, including our rights to use the “Stewart & Stevenson” and “Crown” trademarks, 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” and “Crown” trademarks and logos 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. We have registrations for some of our trademarks in certain countries, such as the United States. Nevertheless, protection for intellectual property rights is territorial and protection 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” and “Crown” trademarks and logos, particularly in countries where we, or our licensors, do not have trademark registrations, patents for our technology or copyright protection. The risks 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:

·	the patents, copyrights, trademarks, domain names, intellectual property licenses and other intellectual property held by, used and/or licensed to us, may be challenged, rejected or determined to be invalid; and

·	the confidentiality procedures we have in place for maintaining trade secrets and other proprietary information are not properly followed which may result in the loss of such rights.

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 essential, 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. Moreover, the value of our intellectual property rights may be impaired without infringement occurring. For example, if other entities that have rights to use the “Stewart & Stevenson” or “Crown” trademark and logo engage in activities that generate adverse publicity or otherwise harm the value of the “Stewart & Stevenson” or “Crown” brand, we may be adversely affected even though those activities may be unrelated to our businesses and we have no control over them.

Table of Contents

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. We may also incur higher costs to maintain insurance for directors and officers.

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 attestation as to the effectiveness of our internal controls over financial reporting, our independent registered public accounting firm has not yet attested to the effectiveness of our internal accounting controls 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 internal 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 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 or our independent registered public accounting firm may not be able to conclude that our internal controls are effective. Ineffective internal controls subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business.

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 owns a 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 2.3 million square feet of manufacturing, service and sales facilities throughout the central U.S., Canada, Venezuela and Colombia, as well as sales offices in Beijing and Moscow. We have a total of 59 facilities, of which 50 are located in the United States and Canada, consisting of 18 owned and 32 leased properties. The remaining 9, all of which are leased, are located abroad. Furthermore, the facilities contain over 290 acres of land to be used for future expansions. We believe our properties are in good condition, well-maintained and sufficient for our current operations.

Table of Contents

Our facilities are located close to major onshore and offshore petroleum fields 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	Type
Dallas, TX	Owned	Manufacturing /Service /Sales
Houston, TX (East)	Owned	Manufacturing /Service /Sales
Houston, TX (Northwest)	Owned	Manufacturing /Service /Sales
Odessa, TX	Owned	Manufacturing /Service /Sales
Denver, CO	Owned	Manufacturing /Service /Sales
San Antonio, TX	Owned	Service /Sales
New Orleans, LA	Owned/Leased	Manufacturing /Service /Sales
Farmington, NM	Owned	Service /Sales
Corpus Christi, TX	Owned	Service /Sales
Odessa, TX	Leased	Manufacturing /Service /Sales
Edmond, OK	Leased	Manufacturing /Service /Sales
Victoria, TX	Leased	Manufacturing /Service /Sales
Calgary, Canada	Leased	Manufacturing /Service /Sales

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.

The State of Texas began conducting a sales and use tax audit for the fiscal years 2006 through 2008 during Fiscal 2009. During the second quarter of Fiscal 2009, management completed a preliminary analysis and recorded a charge of $3.4 million to selling and administrative expenses and other current liabilities. This amount represents management’s best estimate of probable loss, though such loss could be higher or lower and remains subject to the audit by the State of Texas. We are in discussions with our customers and will attempt to recoup such sales tax where possible and will record such recoveries, if any, upon receipt.

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. 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. Submission of Matters to a Vote of Security Holders

None.

PART II

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

As of January 31, 2010, there were four record holders of our outstanding units. There is no established public trading market for any class of our common equity.

Subsequent to the SSSI Acquisition, 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 2009, 2008 and 2007, $5.6 million, $33.6 million and $20.3 million, respectively, was distributed to shareholders for their tax obligations.

Table of Contents

ITEM 6. Selected Financial Data

The following table sets forth our selected historical consolidated financial data as of and for the five years ended January 31, 2006, 2007, 2008, 2009 and 2010. The selected historical consolidated financial data as of and for each of the years ended January 31, 2007, 2008, 2009 and 2010 were derived from our audited consolidated financial statements included elsewhere in this Annual Report or in our previous filings. The data for the year ended January 31, 2006 has been derived by combining the results of the business acquired in the SSSI Acquisition (the “SSSI Acquired Business”) for the period of February 1, 2005 to January 22, 2006 and our results for the period of January 23, 2006 to January 31, 2006, which are not included in this Form 10-K. You should read this information in conjunction with the discussion under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this Annual Report.

	Year ended January 31,
	Combined			Successor
	2006 (2)			2007			2008			2009			2010
(In thousands, except per unit data)	(Non-GAAP)
Statement of operations data:
Sales	$	690,673		$	942,148		$	1,335,427		$	1,217,142		$	688,676
Cost of sales		582,750			774,060			1,070,396			1,002,166			577,028
Gross profit		107,923			168,088			265,031			214,976			111,648
Selling and administrative expenses		84,500			108,005			139,947			138,141			114,188
Other (income) expense, net		(2,427	)		(1,900	)		(989	)		(1,311	)		54
Operating profit (loss)		25,850			61,983			126,073			78,146			(2,594	)
Interest expense, net		439			19,756			29,058			24,931			20,489
Earnings (loss) from continuing
operations before income taxes		25,411			42,227			97,015			53,215			(23,083	)
Income tax expense (1)		10,255			742			5,192			2,659			816
Net earnings (loss) from continuing
operations		15,156			41,485			91,823			50,556			(23,899	)
Loss from discontinued operations,
net of tax		(4,037	)		—			—			—			—
Net earnings (loss)		11,119			41,485			91,823			50,556			(23,899	)
Preferred dividends		(128	)		(4,017	)		—			—			—
Net earnings (loss) available for
common unit holders	$	10,991		$	37,468		$	91,823		$	50,556		$	(23,899	)

Net earnings (loss) from continuing operations per unit:
Basic	$	0.20		$	0.51		$	0.92		$	0.51		$	(0.24	)
Diluted	$	0.15		$	0.41		$	0.92		$	0.51		$	(0.24	)
Net earnings (loss) available for common unit holders per common unit:
Basic	$	0.15		$	0.46		$	0.92		$	0.51		$	(0.24	)
Diluted	$	0.11		$	0.41		$	0.92		$	0.51		$	(0.24	)
Weighted average units outstanding:
Basic		75,000			80,745			100,005			100,005			100,005
Diluted		100,005			100,005			100,005			100,005			100,005
Balance sheet data (end of period):
Working capital	$	190,130		$	214,718		$	318,072		$	313,574		$	245,485
Cash & cash equivalents		1,093			5,852			12,382			2,006			3,321
Property, plant and equipment, net		45,858			61,303			82,606			93,170			79,206
Total assets		395,822			456,801			673,621			653,962			514,525
Total debt		194,525			204,474			294,592			285,370			228,113
Total shareholders’ equity		69,814			94,872			174,941			179,944			155,622

Table of Contents

(1)

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 for the period from January 23, 2006 to January 31, 2006 and the years ended January 31, 2007, 2008, 2009 and 2010. The amounts shown reflect taxes paid to foreign jurisdictions and certain state taxes.

(2)

The statement of operations data for the year ended January 31, 2006 is a non-GAAP financial measurement. The data for the year ended January 31, 2006 has been derived by combining the SSSI Acquired Business’ results for the period of February 1, 2005 to January 22, 2006 and our results for the period of January 23, 2006 to January 31, 2006. We have included the combined financial data for Fiscal 2005 because we believe that a full year measurement for Fiscal 2005 is more useful to investors to analyze our operating results. See below for a reconciliation of the audited financial statements to the Combined Fiscal 2005 Non-GAAP financial data included above.

Our operating results for the period from February 1, 2005 to January 22, 2006 reflect carved-out presentations of the SSSI Acquired Business from the Predecessor’s financial statements presented on a stand-alone basis. For the purposes of presenting Fiscal 2005 data, we have combined the period of February 1, 2005 to January 22, 2006 from the carved-out Predecessor financial statements with our operating results for the period of January 23, 2006 to January 31, 2006. This combined presentation for the year ending January 31, 2006 reflects a non-GAAP financial measurement and the combined results are not intended to reflect pro forma results, as if the businesses were combined for the entire fiscal year. However, the combined Fiscal 2005 data is presented in order to provide a more meaningful measure of our financial performance in Fiscal 2005 as it reflects an entire year of operations. Although there were certain changes to the successor depreciation and amortization expense as a result of purchase accounting adjustments, these adjustments did not have a material impact in Fiscal 2005. The following table provides a reconciliation of the audited financial statements to the combined Fiscal 2005 results:

	Predecessor			Successor
	February 1, 2005 to January 22, 2006			January 23, 2006 to January 31, 2006			Combined Fiscal 2005
(In thousands)							(non-GAAP)
Statement of operations data:
Sales	$	673,175		$	17,498		$	690,673
Cost of sales		567,432			15,318			582,750
Gross profit		105,743			2,180			107,923
Selling and administrative expenses		82,472			2,028			84,500
Other income, net		(2,411	)		(16	)		(2,427	)
Operating profit		25,682			168			25,850
Interest expense, net		109			330			439
Earnings (loss) from continuing operations before income taxes		25,573			(162	)		25,411
Income tax expense		10,255			—			10,255
Net earnings (loss) from continuing operations		15,318			(162	)		15,156
Loss from discontinued operations, net of tax		(4,037	)		—			(4,037	)
Net earnings (loss)		11,281			(162	)		11,119
Preferred dividends		—			(128	)		(128	)
Net earnings (loss) available for common unit holders	$	11,281		$	(290	)	$	10,991
Segment results data:
Sales
Equipment	$	348,736		$	10,822		$	359,558
Aftermarket parts and service		298,086			5,999			304,085
Rental		26,353			677			27,030
Total sales	$	673,175		$	17,498		$	690,673
Operating profit (loss)
Equipment	$	10,117		$	248		$	10,365
Aftermarket parts and service		28,028			277			28,305
Rental		8,194			63			8,257
Corporate		(20,657	)		(420	)		(21,077	)
Total operating profit	$	25,682		$	168		$	25,850

Table of Contents

The presentation of the carved-out Predecessor financial statements requires certain assumptions in order to reflect the business as a stand-alone entity. The Predecessor financial statements also include 19 operating business units which were exited by the Predecessor’s Power Products Segment prior to the SSSI Acquisition. The results of these exited businesses were reflected as discontinued operations in the Predecessor financial statements. The acquired businesses were reflected as continuing operations in the Predecessor financial statements.

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 thereto included 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

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is a non-GAAP financial measurement. 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 to make informed investment decisions. You should not consider it in isolation from or as a substitute for net earnings or cash flow measures prepared in accordance with GAAP or as a measure of profitability or liquidity. EBITDA calculations made by one company may not be comparable to EBITDA calculations made by another company.

In Fiscal 2009, we generated revenues of $688.7 million, operating loss of $2.6 million and EBITDA of $15.8 million, compared with revenues of $1,217.1 million, operating profit of $78.1 million and EBITDA of $97.0 million in Fiscal 2008, representing decreases of 43.4%, 103.3% and 83.7%, respectively. Fiscal 2008 represented decreases of 8.9%, 38.1% and 33.2%, respectively when compared to revenues of $1,335.4 million, operating profit of $126.1 million and EBITDA of $145.3 million in Fiscal 2007. The following table provides a reconciliation of net earnings from continuing operations (a GAAP financial measure) to EBITDA (a non-GAAP financial measure):

	Fiscal Year Ended January 31,
(In thousands)	2010			2009		2008
Net earnings (loss) from continuing operations	$	(23,899	)	$	50,556	$	91,823
Interest expense		20,489			24,931		29,058
Income tax expense		816			2,659		5,192
Depreciation and amortization		18,402			18,869		19,237

EBITDA	$	15,808		$	97,015	$	145,310

Sales of our equipment are significantly driven by the capital spending programs of our customers. Due to low customer confidence resulting from the downturn in the U.S. and global economies, unstable oil and gas prices and the tight credit markets, many of our customers have curtailed their capital expenditures, resulting in decreased revenues.

On February 26, 2007, we acquired substantially all of the operating assets and assumed certain liabilities of Crown, a supplier of well stimulation, drilling, workover, and well servicing rigs to the oil and gas industry. The Crown Acquisition enhanced our position as a leading supplier of well stimulation, coiled tubing, cementing and nitrogen pumping equipment and expanded our product offerings to include drilling rigs, and a full range of workover and well servicing rigs. As a result of the Crown Acquisition, we have increased our manufacturing capabilities and broadened the markets we serve with an extensive manufacturing facility in Calgary, Alberta, Canada and four service facilities in strategic locations in the United States. Our results of operations for Fiscal 2007 reflect the impact of the Crown Acquisition for the period from February 26, 2007 to January 31, 2008.

Table of Contents

Our 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 2009 began on February 1, 2009 and ended on January 31, 2010. We report results on the fiscal quarter method with each quarter comprising approximately 13 weeks.

Stewart & Stevenson LLC was formed for the purpose of acquiring from SSSI and its affiliates substantially all of the equipment, aftermarket parts and service and rental businesses that primarily serve the oil and gas industry. We began operations on January 23, 2006 upon consummation of the SSSI Acquisition pursuant to which we acquired substantially all of the assets and operations of SSSI’s Power Products and Engineered Products operating segments. Upon acquiring these businesses, these operations were combined and restructured into three reportable operating segments: Equipment, Aftermarket Parts and Service and Rental.

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 statement of operations for the years ended January 31, 2008, January 31, 2009 and January 31, 2010.

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 revenue 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 contracts that extend beyond two fiscal quarters, revenue is recognized using the percentage-of-completion method. The majority of our long-term contracts are fixed-price contracts, and measurement of progress toward completion is based on direct labor hours incurred. 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.

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.

Table of Contents

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.

Business Combinations and Goodwill and Indefinite-Lived Intangible Assets: Goodwill and intangible assets acquired in connection with business combinations represent the excess of consideration over the fair value of tangible net assets acquired. Certain assumptions and estimates are employed in determining the fair value of assets acquired and liabilities assumed, as well as in determining the allocation of goodwill to the appropriate reporting unit.

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, as occurred during our Fiscal 2009 second quarter. 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. We performed our annual impairment test during the fourth quarter, as well as an interim impairment test during the second quarter, and determined that no impairment exists.

During Fiscal 2009 we assigned a weighting of 40% to the income approach, 40% to the public company market approach and 20% to the transaction approach, which is consistent with Fiscal 2008. For the Fiscal 2009 year end test, the fair value exceeded the carrying value for one of our reporting units by 11.4%, or $9.6 million. The material assumptions used for the income approach included a weighted average cost of capital of 20.5% and a long-term growth rate of 4.5%. This reporting unit had a goodwill balance of $26.7 million at January 31, 2010. Under the income approach, a one percentage point increase in the discount rate and a one percentage point decrease in the long-term growth rate would have decreased the fair value of this reporting unit by $2.5 million. Under the public company market and transaction approaches, a 10% decrease in the multiples used would have decreased the fair value of this reporting unit by $3.6 million and $1.4 million, respectively.

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. While we believe we have made reasonable estimates and assumptions to estimate the fair value of our reporting units, it is possible that a material change could occur. If actual results are not consistent with our current estimates and assumptions, or the current economic conditions worsen or recover at a slower pace, goodwill impairment charges may be recorded in future periods.

Long-Lived Assets: Long-lived assets, which include property, plant and equipment and definite-lived intangibles, comprise a significant amount of our total assets. 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 years
Leasehold improvements	Lesser of lease term or asset life
Rental equipment	2-8 years
Machinery and equipment	4-7 years
Computer hardware and software	3-4 years
Intangible 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 intangible assets are determined by the years over which we expect the assets to generate a benefit based on legal, contractual or regulatory terms.

Table of Contents

We assess the valuation of components of our property, plant and equipment and other long-lived 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: We generally provide product and service warranties for periods of six to 18 months. Based on historical experience and contract terms, we accrue the estimated cost of product and service warranties at the time of sale or, in some cases, when specific warranty problems are identified. 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. Substantially all obligations related to general liability, vehicle liability, group medical and workers’ compensation claims related to the SSSI Acquisition and the Crown Acquisition were retained by SSSI and Crown, respectively.

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. Sales declined in all segments. The decrease in sales impacted all segments and results 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:

	Fiscal Year Ended January 31,				Change
	2010		2009		$			%
(In thousands)
Sales
Equipment	$	395,641	$	792,919	$	(397,278	)	-50.1	%
Aftermarket parts and service		273,640		382,787		(109,147	)	-28.5	%
Rental		19,395		41,436		(22,041	)	-53.2	%
Total sales	$	688,676	$	1,217,142	$	(528,466	)	-43.4	%

Sales of equipment fell by 50.1%, or $397.3 million, during Fiscal 2009 compared to Fiscal 2008. The decrease in sales was primarily attributable to lower sales volumes across all product lines except power generation ($445.9 million). Well stimulation, seismic and rig sales represented approximately 69.3% of the decline. The decrease was partially offset by an increase in power generation sales of $48.6 million compared to Fiscal 2008.

Aftermarket parts and service sales fell by 28.5%, or $109.1 million, to $273.6 million during Fiscal 2009 from $382.8 million in Fiscal 2008. Parts sales fell by $72.3 million and service sales fell by $36.8 million.

Table of Contents

Rental sales fell by 53.2%, or $22.0 million, during Fiscal 2009 when compared to Fiscal 2008. 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.

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 equipment segment gross profit margin decreased slightly from 16.9% to 16.7% primarily driven by lower sales and changes in sales mix. The aftermarket parts and service segment gross profit margin decreased from 17.6% to 15.0%, as a result of changes in sales mix and increases in indirect costs such as inventory reserves. The rental segment gross profit margin declined from 33.5% to 22.2%, primarily as the result of lower sales and its relation to the fixed costs associated with the rental fleet.

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 lower sales volumes. 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 SOX 404 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 instrument.

Operating (loss) profit—Our operating loss decreased to $2.6 million, or 0.4% of sales, in Fiscal 2009, from 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 is 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.

Comparison of the Results of Operations—Fiscal 2008 and Fiscal 2007

Sales—For Fiscal 2008, our sales were $1,217.1 million, a decrease of $118.3 million, or 8.9%, compared to Fiscal 2007 sales of $1,335.4 million. The decrease in equipment sales was partially offset by increases in aftermarket parts and service and rental sales. A breakdown of sales for these periods is as follows:

	Fiscal Year Ended January 31,				Change
	2009		2008		$			%
(In thousands)
Sales
Equipment	$	792,919	$	930,357	$	(137,438	)	-14.8	%
Aftermarket parts and service		382,787		376,327		6,460		1.7	%
Rental		41,436		28,743		12,693		44.2	%
Total sales	$	1,217,142	$	1,335,427	$	(118,285	)	-8.9	%

Sales of equipment fell by 14.8%, or $137.4 million, during Fiscal 2008 compared to Fiscal 2007. The decrease in sales was primarily attributable to lower sales volumes in well stimulation, seismic, engines, transmissions, and other equipment ($184.5 million) as a result of the weakening U.S. and global economy, the tightening of credit markets and lower gas and oil prices. This was partially offset by increases in rigs, power generation and material handling equipment ($47.1 million). The increased rig sales were primarily attributable to the inclusion of an additional month of Crown sales in Fiscal 2008, which approximated $20.0 million, while the growth in power generation sales is largely due to the higher demand associated with deepwater drilling.

Aftermarket parts and service sales grew by 1.7%, or $6.5 million, to $382.8 million during Fiscal 2008 from $376.3 million in Fiscal 2007. The increase in aftermarket parts and service sales was primarily attributable to an increased volume of parts sales associated with our distributor agreements.

Table of Contents

Rental sales grew by 44.2%, or $12.7 million, during Fiscal 2008 when compared to Fiscal 2007. The growth in rental sales was primarily attributable to compressor and generator rentals associated with the effects of Hurricanes Gustav and Ike.

Gross profit—Our gross profit was $215.0 million for Fiscal 2008, a decrease of $50.0 million, compared to $265.0 million in Fiscal 2007, reflecting a decline in gross profit margin from 19.8% to 17.7%, due to higher costs associated with product development, increased material costs and higher indirect costs, such as freight, fuel and utilities. The equipment segment gross profit margin declined from 19.3% to 16.9%, primarily driven by higher product development costs. The aftermarket parts and service segment gross profit margin decreased from 19.6% to 17.6%, as a result of increases in maintenance contract expense and indirect costs such as freight and fuel. The rental segment gross profit margin declined from 43.0% to 33.5%, primarily as the result of higher costs associated with units we rented from third parties and re-rented to our customers, fleet maintenance, depreciation and freight.

Selling and administrative expenses—Selling and administrative expenses decreased by $1.8 million to $138.1 million in Fiscal 2008 compared to $139.9 million in Fiscal 2007. Selling and administrative expenses as a percentage of sales increased to 11.3% from 10.5% for Fiscal 2008, primarily as a result of lower sales volumes. During Fiscal 2008, we incurred legal and professional expenses of approximately $2.6 million associated with the pursuit of strategic alternatives, $1.6 million related to SOX 404 implementation costs, and $3.2 million of non-cash amortization of other intangible assets. Fiscal 2007 included $6.3 million of non-cash amortization of expense pertaining to acquired backlog and other intangibles and $0.4 million of non-cash compensation charges associated with the sale of common equity from our principal shareholder to our former president and chief operating officer. There was no related amortization during Fiscal 2008 as the acquired backlog and non-cash compensation were fully amortized during Fiscal 2007.

Other expense (income), net—Other income was $1.3 million in Fiscal 2008, an increase of $0.3 million compared to other income of $1.0 million in Fiscal 2007 mainly as the result of foreign currency transaction gains associated with our Canadian subsidiary.

Operating profit—Our operating profit decreased to $78.1 million, or 6.4% of sales, in Fiscal 2008, from $126.1 million, or 9.4% of sales, in Fiscal 2007, primarily as the result of lower sales and gross profit margins.

Interest expense, net—Net interest expense was $24.9 million in Fiscal 2008, a decrease of $4.2 million compared to net interest expense of $29.1 million in Fiscal 2007. The decrease in interest expense is primarily a result of lower interest rates for our revolving credit facility and lower outstanding balances.

Segment Data

Our reportable segments include:

Equipment—This segment designs, manufactures and markets equipment for well stimulation, drilling and well servicing rigs, coiled tubing, cementing, nitrogen pumping, power generation and electrical systems, serving the oil and gas industry. This segment also sells engines, transmissions and material handling equipment for well servicing, workover, drilling, pumping and other applications for a wide range of other industries.

Aftermarket Parts and Service—This segment provides aftermarket parts and service for products we manufacture and products manufactured by others, 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.

Rental—This segment provides equipment on a short-term rental basis, including generators, material handling equipment and air compressors, to a wide range of end-markets.

Corporate—Our corporate segment includes administrative overhead normally not associated with the specific activities within the operating segments. Such expenses include legal, finance and accounting, internal audit, human resources, information technology and other similar corporate office costs.

Table of Contents

Certain general and administrative costs which are incurred to support all operating segments are allocated to the segment operating results presented. Operating results by segment are as follows:

	Fiscal Year Ended January 31,
	2010			2009			2008
(In thousands)
Sales
Equipment	$	395,641		$	792,919		$	930,357
Aftermarket parts and service		273,640			382,787			376,327
Rental		19,395			41,436			28,743
Total sales	$	688,676		$	1,217,142		$	1,335,427

Operating profit (loss)
Equipment	$	16,865		$	65,049		$	101,350
Aftermarket parts and service		14,259			38,637			44,909
Rental		1,280			9,420			9,078
Corporate		(34,998	)		(34,960	)		(29,264	)
Total operating profit (loss)	$	(2,594	)	$	78,146		$	126,073

Operating profit percentage
Equipment		4.3	%		8.2	%		10.9	%
Aftermarket parts and service		5.2			10.1			11.9
Rental		6.6			22.7			31.6
Consolidated		(0.4	) %		6.4	%		9.4	%

Segment Results Comparison —Fiscal 2009 and Fiscal 2008

Equipment—Operating profit generated by the equipment segment decreased to $16.9 million in Fiscal 2009 from $65.1 million in Fiscal 2008, a decrease in operating profit margin from 8.2% to 4.3%, primarily due to higher costs and lower sales volumes. The $48.2 million decrease in operating profit was attributable to $67.1 million in decreased sales volumes partially offset by $18.9 million relating to higher pricing and productivity.

Our equipment order backlog as of January 31, 2010 was $203.3 million compared to $287.9 million as of January 31, 2009, a decrease of 29.4%. We have experienced significant declines in demand 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. We expect to recognize a significant portion of this equipment order backlog as revenue during Fiscal 2010.

Aftermarket Parts and Service—Operating profit generated by the aftermarket parts and service segment decreased to $14.3 million in Fiscal 2009 from $38.6 million in Fiscal 2008, while operating profit margin decreased from 10.1% to 5.2%. Operating profit margin decreased by $24.4 million due to lower pricing and productivity ($5.2 million) and lower sales volumes ($19.2 million).

Rental—Operating profit generated by the rental segment decreased to $1.3 million in Fiscal 2009 from $9.4 million in Fiscal 2008. Operating profit margin decreased from 22.7% for Fiscal 2008 from 6.6% in Fiscal 2009, mainly as a result lower sales volumes and the impacts of Hurricanes Ike and Gustav in Fiscal 2008. During Fiscal 2009, our rental fleet utilization was approximately 43.8%.

Corporate—Corporate and administrative expenses remained constant at $35.0 million in Fiscal 2009 compared to Fiscal 2008 and increased as a percentage of sales from 2.9% to 5.1% as a result of lower sales volumes. Corporate and administrative expenses in Fiscal 2009 included $3.4 million of charges related to the accrual for a probable sales tax liability and $3.5 million in defense and settlement of a claim.

Table of Contents

Segment Results Comparison —Fiscal 2008 and Fiscal 2007

Equipment—Operating profit generated by the equipment segment decreased to $65.1 million in Fiscal 2008 from $101.3 million in Fiscal 2007, a decrease in operating profit margin from 10.9% to 8.2%, primarily due to higher costs and lower sales volumes. The $36.3 million decrease in operating profit was attributable to $26.6 million in decreased sales volumes and $9.7 million relating to lower pricing and productivity.

Our equipment order backlog as of January 31, 2009 was $287.9 million compared to $498.9 million as of January 31, 2008, a decrease of 42.3%. We experienced significant declines in demand for our well stimulation and drilling rig products as a result of lower oil and gas prices, the tightening of the credit markets and the downturn of the global economy. An area of growth in our backlog during Fiscal 2008 related to our power generation product offerings for deep water drilling applications. We recognized a significant portion of this equipment order backlog as revenue during Fiscal 2009.

Aftermarket Parts and Service—Operating profit generated by the aftermarket parts and service segment decreased to $38.6 million in Fiscal 2008 from $44.9 million in Fiscal 2007, while operating profit margin decreased from 11.9% to 10.1%. Operating profit margin decreased $7.5 million due to lower pricing and productivity, which was partially offset by an increase of $1.2 million of incremental operating profit generated by increased sales.

Rental—Operating profit generated by the rental segment increased to $9.4 million in Fiscal 2008 from $9.1 million in Fiscal 2007. Operating profit margin decreased to 22.7% for Fiscal 2008 from 31.6% in Fiscal 2007, mainly as a result of higher costs associated with units we rented from third parties and re-rented to our customers and increased depreciation associated with purchases of new equipment. During Fiscal 2008, our rental fleet utilization was approximately 58.3%.

Corporate—Corporate and administrative expenses increased to $35.0 million in Fiscal 2008 compared to $29.3 million in Fiscal 2007 and increased as a percentage of sales from 2.2% to 2.9%. The $5.7 million increase in expenses is primarily due to legal and professional expenses, including $2.6 million associated with the pursuit of strategic alternatives, $1.6 million related to SOX 404 implementation costs, and $1.3 million in foreign currency differences associated with our foreign subsidiaries.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated by operations. We also have a $250 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.

During Fiscal 2009, we generated net cash from operating activities of $66.3 million compared to net cash generated from operating activities of $58.5 million during Fiscal 2008. The cash provided by operating activities consisted of $69.8 million as a result of changes in operating assets and liabilities increased by non-cash items of $20.4 million for depreciation and amortization offset by $23.9 million of net losses. The change in operating assets and liabilities is the result of decreases in accounts receivable, recoverable costs and accrued profits not yet billed, inventory, and increases in customer deposits, which in aggregate totaled $142.5 million and were partially offset by decreases in accounts payable, billings in excess of incurred costs and increases in other, which in aggregate totaled $72.7 million.

During Fiscal 2008, we generated net cash from operating activities of $58.5 million compared to net cash generated from operating activities of $39.1 million during Fiscal 2007. The cash generated by operating activities during Fiscal 2008 consisted of $50.6 million of cash generated by net earnings and depreciation and amortization and non-cash foreign exchange gains of $17.8 million, partially offset by changes in operating assets and liabilities of $9.9 million. Changes in operating assets and liabilities were the result of decreases in accounts receivable, recoverable costs not yet billed and other and increases in customer deposits, which in aggregate totaled $31.6 million and which were offset by increases in inventories and decreases in accounts payable, accrued payrolls and billings in excess of incurred costs which in aggregate totaled $41.5 million.

Net cash used in investing activities was $2.9 million during Fiscal 2009. This included $3.3 million of capital expenditures, of which $0.8 million related to additions to our rental fleet, offset by $0.4 million received for disposals of property, plant and equipment. Net cash used in investing activities was $27.8 million during Fiscal 2008. This included $27.8 million of capital expenditures, of which $22.3 million related to additions to our rental fleet.

Table of Contents

Net cash used in financing activities was $63.7 million during Fiscal 2009. This includes $57.7 million in net payments on our revolving credit facility, tax distributions to holders of common units of $5.6 million and deferred financing costs of $0.4 million. Net cash used in financing activities was $42.4 million during Fiscal 2008. This includes $8.4 million in net payments on our outstanding debt, tax distributions to holders of common units of $33.6 million and deferred financing costs of $0.4 million.

As of January 31, 2010, our cash and cash equivalent balance was $3.3 million, reflecting timing of cash receipts, disbursements and borrowings under our revolving credit facility.

Current Resources

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 ($21.2 million) and the terms of the asset-based revolving credit facility, our available borrowing capacity was approximately $68.3 million at January 31, 2010.

Borrowings under our senior credit facility and our senior notes were as follows:

	As of January 31,
	2010		2009
(In thousands)
Revolving credit facility	$	70,870	$	130,219
Unsecured senior notes		150,000		150,000
Total	$	220,870	$	280,219

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, 2010. 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.

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.

We currently believe that we will make approximately $16.0 million of capital expenditures during Fiscal 2010.

Table of Contents

Scheduled maturities under the revolving credit facility, our senior notes and other operating lease commitments as of January 31, 2010, are as follows:

Description	Fiscal 2010		Fiscal 2011		Fiscal 2012		Fiscal 2013		Fiscal 2014		Thereafter		Total
(In thousands)
Senior note obligations	$	-	$	-	$	-	$	-	$	150,000	$	-	$	150,000
Revolving line of credit		-		-		70,870		-		-		-		70,870
Notes payable (1)		7,243		-		-		-		-		-		7,243
Interest on senior debt (1)		17,507		17,507		15,104		15,000		7,500		-		72,618
Operating leases:
Equipment		1,098		314		115		13		3		1		1,544
Property		5,794		5,057		1,864		955		475		163		14,308
Vehicles		2,711		1,985		734		80		-		-		5,510
Total operating leases	$	9,603	$	7,356	$	2,713	$	1,048	$	478	$	164	$	21,362

Total	$	34,353	$	24,863	$	88,687	$	16,048	$	157,978	$	164	$	322,093

(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, 2010 remain unchanged over the term of the agreements.

Recent Accounting Pronouncements

Business Combinations: In December 2007, the Financial Accounting Standards Board (“FASB”) issued revised and clarified authoritative guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests and goodwill acquired in a business combination. The required disclosures surrounding the nature and financial effects of business combinations have also been expanded. The new guidance was effective prospectively for fiscal years beginning after December 15, 2008. The Company adopted the revised guidance on February 1, 2009 and it is expected to impact certain aspects of our accounting for any future acquisitions or other business combinations which may be consummated, including the accounting for acquisition costs and determination of fair values assigned to certain purchased assets and liabilities.

Disclosures about Derivative Instruments and Hedging Activities: In March 2008, the FASB issued new and expanded authoritative guidance that requires qualitative disclosures about a company’s objectives and strategies with respect to its use of derivative instruments, quantitative disclosures about the fair value, gains and losses of its derivative contracts and details of credit-risk-related contingent features in hedged positions. This guidance requires disclosure of how and why a company uses and accounts for derivative instruments and their related hedged items and their effects on its financial position, financial performance and cash flows. The new guidance was effective prospectively for fiscal years beginning on or after November 15, 2008. The Company adopted the new guidance on February 1, 2009 and it did not have a material impact on the notes and disclosures to our consolidated financial statements.

Determination of the Useful Life of Intangible Assets: In April 2008, the FASB provided new authoritative guidance that revised the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The goal of this guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. This new guidance was effective for fiscal years beginning after December 15, 2008. The Company adopted the new guidance on February 1, 2009 and it may impact certain aspects of our accounting for intangible assets and the determination of useful lives assigned to them in any future acquisitions or other business combinations.

Subsequent Events: In May 2009, the FASB established standards related to accounting for and disclosure of events occurring after the balance sheet date and prior to issuance of the financial statements. This standard sets the period during which management must evaluate events for inclusion via recognition and/or disclosure in the financial statements. The standard also defines events as either recognized or non-recognized and requires disclosure of when subsequent events were evaluated. We have adopted the provisions of this new standard, which became effective for interim and annual reporting periods ending after June 15, 2009. Subsequent events have been evaluated through the date this annual report was issued and have been either recognized and/or disclosed, when necessary, in our current period financial statements.

Table of Contents

ITEM 7A. Quantitative and Qualitative Disclosure 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. While local currency transactions arising from our Canadian operations represented approximately 3.9% of our revenue stream during Fiscal 2009, our results of operations were not significantly impacted by changes in currency exchange rates. We entered into a 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. The derivative was settled in May 2009 resulting in a realized gain of $1.4 million. Revenues generated by our Colombian and Venezuelan subsidiaries comprised 3.9% and 2.3%, respectively of our total revenue.

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 has historically utilized the official rate for its Venezuelan operations and will continue to monitor future developments as they may relate to the impact from hyperinflationary currency fluctuations. As such, the Company uses the official rate to translate, and will use it to remeasure, its Venezuelan subsidiary’s financial statements.

The Company recognized a translation loss of $3.1 million as of January 31, 2010, which is recorded in currency translation adjustment, a component of accumulated other comprehensive income (loss) in our consolidated balance sheets. Beginning February 1, 2010, the Company will utilize the U.S. dollar as the functional currency for its Venezuelan subsidiary and remeasure its financial statements into U.S. dollars. Accordingly, using “hyperinflationary accounting”, it will recognize the related losses or gains from such remeasurement of its balance sheet in the consolidated statements of its operations. As the Venezuelan subsidiary was translated at the official rate as of January 31, 2010, the result of applying hyperinflationary accounting is not expected to have a material impact to the Company’s financial statements as of February 1, 2010; however, remeasurement impacts subsequent to this date could be material.

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 was 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 the Consolidated Financial Statements beginning on Page F-1.

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

None.

Table of Contents

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 or submit with 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 Robert L. Hargrave, our Chief Executive Officer and Chief Financial Officer (collectively for purposes of this Item 9A, our "CEO"), 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 has 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, as appropriate, to allow timely decisions regarding disclosure.

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, 2010 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, 2010.

Changes in Internal Control over Financial Reporting

Management, including our CEO, evaluated the changes in our internal control over financial reporting during the quarter ended January 31, 2010. We determined that there were no changes in our internal control over financial reporting during the quarter ended January 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting .

ITEM 9A(T). Controls and Procedures

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in the Annual Report. See “Item 9A. Controls and Procedures” for a description of our controls and procedures and management’s report on internal control over financial reporting.

ITEM 9B. Other Information

None.

Table of Contents

PART III

ITEM 10. Directors and Executive Officers of the Registrant

Executive Officers and Directors

The following table sets forth information with respect to our directors and executive officers as of April 30, 2010.

Name	Age	Position(s)
Hushang Ansary	82	Chairman of the Board of Directors
Frank C. Carlucci	79	Director and Vice Chairman
Nina Ansary	43	Director
James W. Crystal	72	Director
Robert L. Hargrave	69	Director, Chief Executive Officer and Chief Financial Officer
John D. Macomber	82	Director
Stephen Solarz	69	Director
Andrew M. Cannon	36	Chief Accounting Officer
Kenneth W. Simmons	54	Vice President—Domestic Sales and Aftermarket
David C. Sulkis	53	General Counsel

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 shareholder. From June 2000 to November 2005, Mr. Ansary was a private investor. 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, after the merger of IRI with National Oilwell, Inc., 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/CEO of National Iranian Oil Company.

Frank C. Carlucci (Director and Vice Chairman). Mr. Carlucci has been a member of our board of directors since January 2006 and our Vice Chairman of the 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 2003 to 2006, Mr. Carlucci was a private investor. 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 President and Secretary of Defense. Mr. Carlucci currently serves on the board of directors of Collexis Holdings, Inc. and is a Trustee of the RAND Corporation.

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. Since 1958, 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. Mr. Crystal also serves on the board of directors of Blockbuster LLC, an in-home movie and game entertainment provider.

Robert L. Hargrave (Director, Chief Executive Officer and Chief Financial Officer). Mr. Hargrave has been our Chief Executive Officer since January 2007 and Acting Chief Financial Officer since January 2010. 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 the Chief Financial Officer from 1983 to 1997. Mr. Hargrave served as Vice Chairman and Chief Financial Officer at IRI from 1999 to 2000.

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 Chairman of The Council for Excellence in Government and Vice Chairman of The Atlantic Council. He has been a Director of Lehman Brothers Holdings Inc., which filed for bankruptcy in 2008, since 1994 and is a member of the board of directors of Collexis Holdings. He was Chairman and President of the Export-Import Bank of the U.S. from 1989 to 1992.

Table of Contents

Stephen Solarz (Director). Mr. Solarz has been a member of our board of directors since January 2006. He has been the President of Solarz Associates, an international consulting firm, since January 1993 and since 1994, also serves as a Senior Counselor to APCO Associates, a public affairs firm. Mr. Solarz was a member of the board of directors of GlobalSantaFe Corporation from 2003 to 2009. Mr. Solarz was elected to the U.S. Congress in 1974 and was re-elected eight times.

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.

Kenneth W. Simmons, Jr. (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.

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.

Director Independence

Our board of directors has determined that each of Messrs. Carlucci, Crystal, Macomber and Solarz is an “independent” director within the meaning of the applicable rules of the SEC.

Board Committees

Executive Committee

Our executive committee consists of Mr. Hushang Ansary, as Chairman, Ms. Nina Ansary, Mr. Frank C. Carlucci, and Mr. John D. Macomber. 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

The members of the audit committee are Mr. James W. Crystal, who serves as the audit committee financial expert and as the Chairman of the committee, Mr. Frank C. Carlucci and Mr. Stephen Solarz. 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:

·	selecting independent auditors;

·	reviewing the scope of the audit to be conducted by them, as well as the results of their audit;

·	approving non-audit services provided to us by the independent auditor;

·	reviewing the organization and scope of our internal system of audit, financial and disclosure controls;

·	appraising our financial reporting activities, including our annual report, and the accounting standards and principles followed; and

·	conducting other reviews relating to compliance by our employees with our policies and applicable laws.

Compensation Committee

Our compensation committee consists of Mr. John D. Macomber, as Chairman, and Mr. Hushang Ansary. 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.

Table of Contents

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: Robert L. Hargrave.

ITEM 11. Executive Compensation

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. We have a written employment agreement with Mr. Ansary. However, none of our other executive officers are party to written or unwritten employment agreements or severance or change in control arrangements with us.

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 and approving the compensation level of each of our executive officers.

Compensation Components

Executive compensation consists of the following:

Base Salary

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 2009 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 2009, although an across the board pay cut was implemented in March 2009 as a response to the economic downturn in the global economy. 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. For Fiscal 2009, as in Fiscal 2008, the base salary for Mr. Ansary, our chairman of the board of directors and of the executive committee and our founder, was significantly higher than that of our other executive officers. Mr. Ansary determines our overall strategy and direction. Mr. Ansary has a major role in the creation of our organic and acquisitive growth opportunities, expanding our international presence, enhancing our productivity and the overall achievement of our global strategic objectives. Mr. Ansary’s base compensation for Fiscal 2009 of $2.1 million was established in light of his unique role in our company and that level of compensation was agreed to as part of the terms of our senior credit facility. Pursuant to the terms of our senior 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 to be not less than $2.0 million as adjusted for salary reductions implemented during Fiscal 2009.

Table of Contents

Bonus

In the face of the global financial turmoil and economic downturn, the Company has discontinued its previously reported bonus practice of awarding our executives discretionary cash bonuses. Accordingly, no cash bonuses or discretionary cash bonuses were awarded to the named executives for Fiscal 2009 or Fiscal 2008. Discretionary cash bonus awards for Fiscal 2007 were determined and paid on December 29, 2008. Fiscal 2007 bonus amounts are set forth in the Summary Compensation Table. No bonus provisions were made for Fiscal 2007 for Mr. Robert L. Hargrave.

The Company has not made any determination of its practice with respect to executive bonuses for Fiscal 2010 and future years.

401(k) Plan

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 2009, 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.

Executive Officer Benefits

We also currently provide our executive officers with the following benefits: (i) payment of life insurance premiums, (ii) payment of medical insurance premiums, (iii) accidental death and dismemberment insurance, (iv) long term disability insurance and (v) payment of parking expenses at our headquarters. We provide these benefits as we feel they are appropriate for executives providing the level of service our executive officers provide to us and are consistent with, and comparable to, the types and levels of benefits generally provided in the marketplace.

2007 Incentive Compensation Plan

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. The purpose of 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, stock appreciation rights, restricted shares of common stock, restricted stock units, performance shares, performance units and senior executive plan bonuses (which may be in shares of common stock 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 2,500,000 shares (which may be in the form of units prior to our conversion to a corporation) will be available for grants of all equity awards under the incentive plan. The shares of common stock to be issued under the incentive plan consist of authorized but unissued shares of our common stock. 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.

Awards under the incentive plan are subject to the following limitations: (A) the maximum number of shares of common stock 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).

Table of Contents

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 2009, 2008 and 2007. We refer to these individuals as our named executive officers.

						Equity		All Other
Name and Principal Position	Year	Salary		Bonus		Awards		Compensation (1)		Total
Hushang Ansary	2009	$	2,082,572	$	-	$	-	$	40,525	$	2,123,097
Chairman of the Board of Directors	2008		2,500,000		-		-		42,431		2,542,431
and of the Executive Committee	2007		2,500,000		-		-		19,372		2,519,372
Robert L. Hargrave	2009		518,726		-		-		32,212		550,938
Chief Executive Officer, Chief	2008		600,000		-		-		33,425		633,425
Financial Officer and Director	2007		600,000		-		-		18,679		618,679
Jeffery W. Merecka (2)	2009		208,550		-		-		28,495		237,045
Vice President, Chief Financial	2008		225,000		-		-		28,835		253,835
Officer and Secretary	2007		225,000		175,000		-		19,217		419,217
Kenneth W. Simmons	2009		185,072		-		-		15,728		200,800
Vice President - Domestic Sales	2008		200,000		-		-		16,828		216,828
& Aftermarket	2007		200,000		120,000		-		12,882		332,882
David C. Sulkis	2009		228,438		-		-		7,716		236,154
General Counsel

(1)	Consists of executive officer benefits listed above and 401(k) matching contributions.

(2)	Mr. Merecka resigned as our Chief Financial Officer effective January 15, 2010.

Equity Awards

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 five non-executive directors totaled 300,000 restricted shares vesting in five (5) 60,000 share tranches, with each such tranche vesting upon board service for a complete fiscal year. In addition, approximately 54,000 of the restricted shares granted to two 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., Cameron International Corp. and BJ Services Company and are subject to acceleration in the case of an executive’s death or disability. As this performance condition was not met for Fiscal 2009 or Fiscal 2008, 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, 2010, diluted earnings per share excluded the approximately 410,000 contingent unvested restricted shares.

Table of Contents

Units Vested During Fiscal 2009

None.

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 2009, 2008 and 2007.

		Fees Earned or
Name of Director	Year	Paid in Cash		Total
Nina Ansary	2009	$	65,000	$	65,000
	2008		65,000		65,000
	2007		65,000		65,000
Frank C. Carlucci	2009		70,000		70,000
	2008		70,000		70,000
	2007		70,000		70,000
James W. Crystal	2009		75,000		75,000
	2008		75,000		75,000
	2007		75,000		75,000
Jack F. Kemp (1)	2009		16,250		16,250
	2008		65,000		65,000
	2007		65,000		65,000
John Macomber	2009		75,000		75,000
	2008		66,250		66,250
	2007		65,000		65,000
Stephen Solarz	2009		65,000		65,000
	2008		65,000		65,000
	2007		65,000		65,000

(1)	Mr. Kemp passed away in May 2009.

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, 2010 regarding the beneficial ownership of our outstanding common equity, by:

·	each person or entity known by us to beneficially own more than 5% of our outstanding common stock;

·	each of our directors and named executive officers; and

·	all of our directors and executive officers as a group.

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, 2010 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 individuals listed below is: c/o Stewart & Stevenson LLC, 1000 Louisiana St., Suite 5900, Houston, Texas 77002.

Table of Contents

	Number of units beneficially owned
Name and address of beneficial owner	Number of units	Percentage
Parman Capital Group LLC(1)(2)	51,750,000	51.75%
EC Investments B.V.(3)	40,005,000	40.00%
Ennia Caribe Holding N.V.(4)	40,005,000	40.00%
Hushang Ansary(2)(4)(5)	51,750,000	51.75%
Robert L. Hargrave	—	—
David C. Sulkis	—	—
Kenneth W. Simmons	—	—
Nina Ansary(6)	4,300,000	4.30%
Frank C. Carlucci(4)(7)	3,950,000	3.95%
James W. Crystal(4)	—	—
John D. Macomber(4)	—	—
Stephen Solarz	—	—
All directors and executive officers as a group (9 persons)	60,000,000	60.00%

(1)	Mr. Hushang Ansary is the sole member of Parman Capital Group LLC and has sole voting and dispositive power with respect to the units held by Parman Capital Group LLC.

(2)	Excludes 12,000,000 units which Parman Capital Group LLC has the right to reacquire from EC Investments B.V. until April 2011.

(3)	EC Investments B.V. is a wholly owned subsidiary of Ennia Caribe Holding N.V. Voting and dispositive power with respect to the units held by EC Investments B.V. is held by the Supervisory Board of Ennia Caribe Holding N.V.

(4)	Units beneficially owned by Ennia Caribe Holding N.V. reflect beneficial ownership of units held by EC Investments B.V. Mr. Hushang Ansary is Chairman of the Supervisory Board of Ennia Caribe Holding N.V. Messrs. Ansary and Carlucci and Ms. Ansary collectively own a minority interest in a private investment company that holds a majority equity interest in 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. Ansary, Carlucci, Crystal and Macomber and Ms. Ansary disclaim beneficial ownership of such units.

(5)	Reflects beneficial ownership of units held by Parman Capital Group LLC.

(6)	Excludes 1,700,000 units which Ms. Ansary has the right to reacquire from EC Investments B.V. until April 2011.

(7)	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.

Table of Contents

ITEM 13. Certain Relationships and Related 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 2009, 2008 and 2007, we purchased insurance coverage through Frank Crystal & Company, Inc., generating commissions to Frank Crystal and Company, Inc. of $358,426, $360,662 and $535,568, 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.

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.

ITEM 14. Principal Accountant Fees and Services

Ernst and Young LLP, an independent registered public accounting firm, served as our auditors for Fiscal 2009 and 2008.

	Fiscal Year Ended January 31,
	2010		2009
Audit fees	$	1,679,200	$	2,709,145
Audit-related fees		-		640,184
Tax fees		-		12,810
All other fees		2,120		43,579
	$	1,681,320	$	3,405,718

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.

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.

Table of Contents

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-1
Consolidated Balance Sheets		F-2
Consolidated Statements of Operations		F-3
Consolidated Statements of Stockholders’ Equity		F-4
Consolidated Statements of Cash Flows		F-5
Notes 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		Description
3.1		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.)
10.1		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.)
10.2		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.)
10.7		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.)
21.1		Subsidiaries of the Registrant. (Filed as Exhibit 21.1 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.)
31.1		Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Section 1350 certification of the Principal Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 LLC


By:	/s/ ROBERT L. HARGRAVE
	Chief Executive Officer and Chief Financial Officer

Date: May 3, 2010

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 the dates indicated:

Signature	Title	Date

/s/ HUSHANG ANSARY	Chairman of the Board of Directors	May 3, 2010
Hushang Ansary

/s/ ROBERT L. HARGRAVE	Chief Executive Officer, Chief Financial Officer and Director	May 3, 2010
Robert L. Hargrave

/s/ ANDREW M. CANNON	Chief Accounting Officer	May 3, 2010
Andrew M. Cannon

/s/ NINA ANSARY	Director	May 3, 2010
Nina Ansary

/s/ FRANK C. CARLUCCI	Director	May 3, 2010
Frank C. Carlucci

/s/ JAMES W. CRYSTAL	Director	May 3, 2010
James W. Crystal

/s/ JOHN D. MACOMBER	Director	May 3, 2010
John D. Macomber

/s/ STEPHEN SOLARZ	Director	May 3, 2010
Stephen Solarz

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, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended January 31, 2010. 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, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2010, in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Houston, Texas

May 3, 2010

F-1

Table of Contents

Stewart & Stevenson LLC and Subsidiaries
Consolidated Balance Sheets

(In thousands, except units)	January 31, 2010		January 31, 2009
Assets
Current assets:
Cash and cash equivalents	$	3,321	$	2,006
Restricted cash		3,000		3,000
Accounts receivable, net		81,626		148,330
Recoverable costs and accrued profits not yet billed		38,042		54,975
Inventories, net		248,313		293,207
Other current assets		7,626		5,650
Total current assets		381,928		507,168

Property, plant and equipment, net		79,206		93,170
Goodwill and intangibles, net		46,616		44,622
Deferred financing costs and other assets		6,775		9,002
Total assets	$	514,525	$	653,962

Liabilities and shareholders' equity
Current liabilities:
Bank notes payable	$	7,122	$	4,921
Current portion of long-term debt		65		212
Accounts payable		52,994		87,383
Accrued payrolls and incentives		8,714		10,854
Billings in excess of incurred costs		115		27,960
Customer deposits		26,307		20,547
Other current liabilities		41,126		41,717
Total current liabilities		136,443		193,594

Long-term debt, net of current portion		220,926		280,237
Other long-term liabilities		1,534		187
Total liabilities		358,903		474,018

Commitments and contingencies
Shareholders' equity:
Common units, 100,005,000 units issued and outstanding		74,113		74,113
Accumulated other comprehensive income (loss)		1,383		(3,762	)
Retained earnings		80,126		109,593
Total shareholders' equity		155,622		179,944
Total liabilities and shareholders' equity	$	514,525	$	653,962


See accompanying Notes to Consolidated Financial Statements

F-2

Table of Contents

Stewart & Stevenson LLC and Subsidiaries
Consolidated Statements of Operations

	Fiscal Year Ended
	January 31, 2010			January 31, 2009			January 31, 2008
(In thousands, except per unit data)
Sales	$	688,676		$	1,217,142		$	1,335,427
Cost of sales		577,028			1,002,166			1,070,396

Gross profit		111,648			214,976			265,031

Selling and administrative expenses		114,188			138,141			139,947
Other expense (income), net		54			(1,311	)		(989	)
Operating (loss) profit		(2,594	)		78,146			126,073

Interest expense, net		20,489			24,931			29,058
(Loss) earnings from continuing operations
before income taxes		(23,083	)		53,215			97,015

Income tax expense		816			2,659			5,192
Net (loss) earnings available for common unit holders	$	(23,899	)	$	50,556		$	91,823

Weighted average units outstanding:
Basic		100,005			100,005			100,005
Diluted		100,005			100,005			100,005

Net (loss) earnings available for common unit
holders per common unit
Basic	$	(0.24	)	$	0.51		$	0.92
Diluted	$	(0.24	)	$	0.51		$	0.92

See accompanying Notes to Consolidated Financial Statements

F-3

Table of Contents

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

	Common Units		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
(In thousands)
Balance, January 31, 2007	$	73,669	$	125		$	21,078		$	94,872
Net earnings		-		-			91,823			91,823
Other comprehensive income		-		8,108			-			8,108
Share-based compensation		444		-			-			444
Distributions to unit holders for tax obligations		-		-			(20,306	)		(20,306	)
Balance, January 31, 2008	$	74,113	$	8,233		$	92,595		$	174,941
Net earnings		-		-			50,556			50,556
Other 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		$	179,944
Net loss		-		-			(23,899	)		(23,899	)
Other comprehensive income		-		5,145			-			5,145
Distributions to unit holders for tax obligations		-		-			(5,568	)		(5,568	)
Balance, January 31, 2010	$	74,113	$	1,383		$	80,126		$	155,622

See accompanying Notes to Consolidated Financial Statements

F-4

Table of Contents

Stewart & Stevenson LLC and Subsidiaries
Consolidated Statements of Cash Flows

	Fiscal Year Ended
(In thousands)	January 31, 2010			January 31, 2009			January 31, 2008
Operating activities
Net (loss) earnings	$	(23,899	)	$	50,556		$	91,823
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Amortization of deferred financing costs		2,011			1,980			1,807
Share-based compensation expense		-			-			444
Depreciation and amortization		18,402			18,869			19,237
Non-cash foreign exchange (gains) losses		29			(3,017	)		-
Change in operating assets and liabilities net of the effect
of acquisitions:
Accounts receivable, net		68,413			7,879			(20,176	)
Recoverable costs and accrued profits not yet billed		19,091			4,182			(28,040	)
Inventories		49,464			(7,300	)		(18,142	)
Accounts payable		(35,627	)		(29,045	)		6,767
Accrued payrolls and incentives		(2,381	)		(1,755	)		(4,941	)
Billings in excess of incurred costs		(27,889	)		(3,370	)		22,765
Customer deposits		5,500			5,143			(41,499	)
Other current assets and liabilities		(3,274	)		17,225			9,417
Other, net		(3,519	)		(2,877	)		(324	)
Net cash provided by operating activities		66,321			58,470			39,138

Investing activities
Capital expenditures		(2,536	)		(5,469	)		(15,967	)
Additions to rental equipment		(777	)		(22,333	)		(10,294	)
Acquisition of businesses		-			-			(70,507	)
Disposal of property, plant and equipment, net		373			26			1
Net cash used in investing activities		(2,940	)		(27,776	)		(96,767	)

Financing activities
Change in short-term notes payable		1,525			1,836			377
Deferred financing costs		(375	)		(375	)		(2,926	)
Changes in long-term revolving loans		(59,315	)		(10,267	)		88,308
Distributions to shareholders for tax obligations		(5,568	)		(33,558	)		(20,306	)
Deferred equity issuance costs		-			-			(1,378	)
Net cash (used in) provided by financing activities		(63,733	)		(42,364	)		64,075

Effect of exchange rate on cash		1,667			1,294			84

Increase (decrease) in cash and cash equivalents		1,315			(10,376	)		6,530
Cash and cash equivalents, beginning of fiscal period		2,006			12,382			5,852
Cash and cash equivalents, end of fiscal period	$	3,321		$	2,006		$	12,382

Cash paid for:
Interest	$	19,709		$	22,883		$	27,269
Income taxes	$	1,278		$	4,346		$	1,991

See accompanying Notes to Consolidated Financial Statements

F-5

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 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”). 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.

We are a leading designer, manufacturer and marketer of specialized equipment and provide aftermarket parts and service to the oil and gas and other industries. Our diversified product lines include equipment for well stimulation, well servicing and workover rigs, drilling rigs, coiled tubing, cementing, nitrogen pumping, power generation and electrical systems as well as engines, transmissions and material handling equipment. We have a substantial installed base of equipment, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues and also provide rental equipment to our customers.

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 (“Crown”) for cash consideration of approximately $70.5 million (the “Crown Acquisition”). Crown, which was headquartered in Calgary, Alberta, Canada and had multiple U.S. operations, manufactured drilling, well servicing and workover rigs, stimulation equipment and provided related parts and services. As a result of the Crown Acquisition, we increased our manufacturing capabilities and broadened the markets we serve with an extensive manufacturing facility in Calgary, Alberta, Canada and five service facilities in strategic locations in the United States.

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. 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 2009” commenced on February 1, 2009 and ended on January 31, 2010. 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. The Company has reclassified the prior year accrued contract costs from accounts payable and inventories, net to other current liabilities.

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.

Derivative financial 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. The estimated fair values of a derivative fluctuate over time and should be viewed in relation to the underlying transaction and the overall management of our exposure to fluctuations in the underlying risks. Hedge accounting for our foreign currency derivative was not pursued. The derivative instrument was settled on May 22, 2009 and resulted in a realized gain of $1.4 million which was recorded in other expense (income), net within our consolidated statements of operations.

F-6

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

With respect to long-term contracts that extend into two or more fiscal quarters, which accounted for approximately 30.3% of total sales in Fiscal 2009, revenue is recognized using the percentage-of-completion method. The majority of our long-term contracts are fixed-price contracts, and measurement of progress toward completion is based on direct labor hours incurred. 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, 2010 and 2009 included contract retentions totaling $7.6 million and $17.5 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 $1.1 million and $2.4 million of accrued start-up costs that had not yet been performed as of January 31, 2010 and January 31, 2009, respectively.

Buildings	10-25 years
Leasehold improvements	Lesser of lease term or asset life
Rental equipment	2-8 years
Machinery and equipment	4-7 years
Computer hardware and software	3-4 years
Intangible assets	4 months-27 years

F-7

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

We assess the valuation of components of our property, plant and equipment and other long-lived 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 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, as occurred during our Fiscal 2009 second quarter. 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. We performed our annual impairment test during the fourth quarter, as well as an interim impairment test during the second quarter, and determined that no impairment exists.

During Fiscal 2009 we assigned a weighting of 40% to the income approach, 40% to the public company market approach and 20% to the transaction approach, which is consistent with Fiscal 2008. For the Fiscal 2009 yearend test, the fair value exceeded the carrying value for one of our reporting units by 11.4%, or $9.6 million. The material assumptions used for the income approach included a weighted average cost of capital of 20.5% and a long-term growth rate of 4.5%. This reporting unit had a goodwill balance of $26.7 million at January 31, 2010. Under the income approach, a one percentage point increase in the discount rate and a one percentage point decrease in the long-term growth rate would have decreased the fair value of this reporting unit by $2.5 million. Under the public company market and transaction approaches, a 10% decrease in the multiples used would have decreased the fair value of this reporting unit by $3.6 million and $1.4 million, respectively.

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. Substantially all obligations related to general liability, vehicle liability, group medical and workers compensation claims related to the SSSI Acquisition and Crown Acquisition were retained by SSSI and Crown, respectively.

Advertising: Advertising costs are included in selling and administrative expenses and are expensed as incurred. These expenses totaled $1.4 million, $2.8 million and $2.0 million for Fiscal 2009, 2008 and 2007, respectively.

Research and Development: Expenditures for research and development activities are charged to expense as incurred and were $1.0 million, $3.3 million and $1.8 million in Fiscal 2009, 2008 and 2007, respectively.

Translation of Foreign Currency: The local currency is the functional currency for our Canadian, Colombian and Venezuelan 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.

F-8

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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, 2010, our senior notes with a carrying value of $150.0 million had a fair value of $141.0 million.

Warranty Costs: We generally provide product and service warranties for periods of six months to 18 months. Based on historical experience and contract terms, we provide for the estimated cost of product and service warranties at the time of sale or, in some cases, when specific warranty problems are identified. Accrued warranty costs are adjusted periodically to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately may be resolved by negotiation, arbitration or litigation. Occasionally, a material warranty issue can arise that is beyond our historical experience. We provide 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 2009 was approximately 3.5%, 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 2009, we recorded $1.2 million of Texas Margins tax and $0.4 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 2009, 2008 and 2007, we made tax distributions of $5.6 million, $33.6 million and $20.3 million, respectively, to our unit holders.

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

		Fiscal Year Ended January 31,
(In thousands)		2010			2009		2008
Net (loss) earnings from continuing
operations before income taxes:
	U.S.	$	(6,205	)	$	52,970	$	92,305
	Foreign		(16,878	)		245		4,710
Total		$	(23,083	)	$	53,215	$	97,015

F-9

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The provision for income taxes consisted of the following:

	Fiscal Year Ended January 31,
	2010			2009			2008
(In thousands)
Current expense (benefit)
U.S.
Federal	$	-		$	-		$	-
State		1,285			1,684			2,246
Total U.S.		1,285			1,684			2,246

Foreign		(1,446	)		1,502			2,533
Total current (benefit) expense		(161	)		3,186			4,779

Deferred expense (benefit)
U.S.
Federal		-			-			-
State		(84	)		(104	)		227
Total U.S.		(84	)		(104	)		227

Foreign		1,061			(423	)		186
Total deferred expense (benefit)		977			(527	)		413

Income tax expense	$	816		$	2,659		$	5,192

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,
	2010			2009			2008
(In thousands)
Tax (benefit) provision at statutory rate	$	(8,079	)	$	18,625		$	33,955
Add (deduct):
State income tax		1,201			1,580			2,473
Valuation allowance		3,114			-			-
Foreign credits		(41	)		7			(19	)
Benefit (tax) on LLC income not subject to taxation at the statutory rate		4,621			(17,553	)		(31,217	)
Income tax expense	$	816		$	2,659		$	5,192

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

	As of January 31,
(In thousands)	2010			2009
Deferred tax assets:
Net operating loss carryforward	$	1,808		$	-
Reserves, allowances and accruals		389			149
Amortizable intangible assets		745			419
Property and equipment		172			51
		3,114			619
Valuation allowance		(3,114	)		-

Deferred tax liabilities:
Goodwill and non-amortizable intangibles		(1,046	)		(626	)

Net deferred tax liability	$	(1,046	)	$	(7	)

F-10

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As of January 31, 2010, the Company had a gross Canadian net operating loss carry forward of $7.2 million which expires in 2030. A full valuation allowance has been provided for this asset and other deferred tax assets and the valuation allowance increased $3.1 million in Fiscal 2009. 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 410,000 contingent dilutive unvested restricted shares that would be considered common stock equivalents using the treasury stock method because as of January 31, 2010, the contingent condition had not occurred. See “Note 9 - Equity ” for a discussion of the outstanding restricted share grants.

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

	Fiscal Year Ended January 31,
	2010			2009		2008
(In thousands, except per unit data)
Numerator:
Net (loss) earnings available for common unit holders	$	(23,899	)	$	50,556	$	91,823

Denominator:
Basic weighted average units outstanding		100,005			100,005		100,005
Effect of dilutive securities		-			-		-
Diluted weighted average units outstanding		100,005			100,005		100,005
Basic (loss) earnings per unit	$	(0.24	)	$	0.51	$	0.92
Diluted (loss) earnings per unit	$	(0.24	)	$	0.51	$	0.92

Note 5. Comprehensive Income

Total comprehensive income was as follows:

	Fiscal Year Ended January 31,
(In thousands)	2010			2009			2008
Net (loss) earnings	$	(23,899	)	$	50,556		$	91,823

Currency translation gain (loss)		5,145			(11,995	)		8,108

Comprehensive (loss) income	$	(18,754	)	$	38,561		$	99,931

Translation adjustments resulting from changes in exchange rates are reported in other comprehensive income. As of January 31, 2010, 2009 and 2008, 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 ($1.7) million, $1.3 million and $0.7 million during Fiscal 2009, 2008 and 2007, respectively.

Note 6. Segment Data

Our reportable operating segments are based on the types of products and services offered and are aligned with our internal management structure. Intra-segment revenues and costs are eliminated, and the operating profit (loss) represents the earnings (loss) before interest and income taxes. The Crown results have been integrated into our existing segments and aligned with our internal management structure. As of February 26, 2007, total assets related to the Crown Acquisition, including goodwill, were $122.5 million, and were primarily identified as part of our equipment segment.

F-11

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Our reportable segments include:

Equipment – This segment designs, manufactures and markets equipment for well stimulation, coiled tubing, cementing, nitrogen pumping, power generation and electrical systems as well as workover rigs, drilling rigs, service rigs and related equipment, serving the oil and gas industry. This segment also sells engines, transmissions and material handling equipment for well servicing, workover, drilling, pumping and other applications for a wide range of other industries.

Aftermarket Parts and Service – This segment provides aftermarket parts and service for products manufactured by the Company, and others, 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.

Rental – This segment provides equipment on a short-term rental basis, including generators, material handling equipment and air compressors, to a wide range of end-markets.

Corporate – This segment includes administrative overhead normally not associated with the specific activities within the operating segments. Such expenses include legal, finance and accounting, internal audit, human resources, information technology and other similar corporate office costs.

Certain general and administrative costs which are incurred to support all operating segments are allocated to the segment operating results presented. Operating results by segment are as follows:

	Fiscal Year Ended January 31,
	2010			2009			2008
(In thousands)
Sales
Equipment	$	395,641		$	792,919		$	930,357
Aftermarket parts and service		273,640			382,787			376,327
Rental		19,395			41,436			28,743
Total sales	$	688,676		$	1,217,142		$	1,335,427

Operating profit (loss)
Equipment	$	16,865		$	65,049		$	101,350
Aftermarket parts and service		14,259			38,637			44,909
Rental		1,280			9,420			9,078
Corporate		(34,998	)		(34,960	)		(29,264	)
Total operating profit (loss)	$	(2,594	)	$	78,146		$	126,073

Operating profit percentage
Equipment		4.3	%		8.2	%		10.9	%
Aftermarket parts and service		5.2			10.1			11.9
Rental		6.6			22.7			31.6
Consolidated		(0.4	) %		6.4	%		9.4	%

	Fiscal Year Ended January 31,
	2010		2009		2008
(In thousands)
Assets
Equipment	$	199,510	$	238,796	$	260,899
Aftermarket parts and service		98,869		125,807		104,665
Rental		40,201		48,217		32,311
Corporate		175,945		241,142		275,746
Total assets	$	514,525	$	653,962	$	673,621

F-12

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

	Fiscal Year Ended January 31,
	2010		2009		2008
(In thousands)
Capital expenditures
Equipment	$	764	$	945	$	9,867
Aftermarket parts and service		1,307		2,759		5,099
Rental		777		22,333		10,294
Corporate		465		1,765		1,001
Total capital expenditures	$	3,313	$	27,802	$	26,261

	Fiscal Year Ended January 31,
	2010		2009		2008
(In thousands)
Depreciation & amortization
Equipment	$	4,997	$	6,389	$	7,821
Aftermarket parts and service		4,363		3,925		4,036
Rental		8,017		7,383		6,027
Corporate		1,025		1,172		1,353
Total depreciation & amortization	$	18,402	$	18,869	$	19,237

Geographic Information:

	Fiscal Year Ended January 31,
	2010		2009		2008
(In thousands)
Sales
United States	$	483,078	$	786,641	$	1,020,036
International		205,598		430,501		315,391
Total	$	688,676	$	1,217,142	$	1,335,427


	As of January 31,
(In thousands)	2010		2009
Assets
United States	$	431,684	$	549,608
International		82,841		104,354
Total	$	514,525	$	653,962

Note 7. Long-Term Debt

	As of January 31,
	2010			2009
(In thousands)
Other debt	$	7,243		$	5,151
Revolving credit facility		70,870			130,219
Unsecured senior notes		150,000			150,000
Total		228,113			285,370
Less: current portion of other debt		(7,187	)		(5,133	)
Long-term debt, net of current portion	$	220,926		$	280,237

Other debt: Other debt includes certain 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 11.1%, 11.7%, and 12.1% in Fiscal 2009, 2008 and 2007, respectively. The interest rate for the floor plan financing agreement was 3.3%, 3.3%, and 6.0% in Fiscal 2009, 2008 and 2007, respectively.

F-13

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 2.59% and 2.71% as of January 31, 2010 and January 31, 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, 2010, there were $21.2 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 $68.3 million and $83.1 million at January 31, 2010 and January 31, 2009, 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, 2010. 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.

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, 2010, $5.6 million of unamortized costs are included in the balance sheet.

The estimated fair value of our senior notes is based on unadjusted quoted market prices from an active market (Level 1 inputs). At January 31, 2010, our senior notes with a carrying value of $150.0 million had a fair value of $141.0 million.

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.

F-14

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Condensed Consolidating Balance Sheet
	January 31, 2010
	Guarantor Entities			Non-Guarantor Entities		Eliminations			Total
(In thousands)
Current assets	$	333,191		$	48,737	$	-		$	381,928
Property, plant and equipment		75,072			4,134		-			79,206
Other assets		35,150			33,376		(15,135	)		53,391
Total assets	$	443,413		$	86,247	$	(15,135	)	$	514,525

Current liabilities	$	113,997		$	22,446	$	-		$	136,443
Intercompany payables (receivables)		(47,474	)		47,474		-			-
Long-term liabilities		221,268			1,192		-			222,460
Shareholders' equity		155,622			15,135		(15,135	)		155,622
Total liabilities and shareholders' equity	$	443,413		$	86,247	$	(15,135	)	$	514,525

	January 31, 2009
	Guarantor Entities			Non-Guarantor Entities		Eliminations			Total

Current assets	$	434,068		$	73,100	$	-		$	507,168
Property, plant and equipment		89,472			3,698		-			93,170
Other assets		48,254			31,311		(25,941	)		53,624
Total assets	$	571,794		$	108,109	$	(25,941	)	$	653,962

Current liabilities	$	169,940		$	23,654	$	-		$	193,594
Intercompany payables (receivables)		(58,310	)		58,310		-			-
Long-term liabilities		280,220			204		-			280,424
Shareholders' equity		179,944			25,941		(25,941	)		179,944
Total liabilities and shareholders' equity	$	571,794		$	108,109	$	(25,941	)	$	653,962

F-15

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Condensed Consolidated Results of Operations
	Fiscal Year Ended January 31, 2010
(In thousands)	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
Sales	$	609,961		$	78,715		$	-		$	688,676
Cost of sales		505,191			71,837			-			577,028

Gross profit		104,770			6,878			-			111,648

Selling and administrative expenses		96,705			17,483			-			114,188
Equity in loss of subsidiaries		15,953			-			(15,953	)		-
Other expense (income), net		(2,872	)		2,926			-			54
Operating loss		(5,016	)		(13,531	)		15,953			(2,594	)

Interest expense, net		17,637			2,852			-			20,489
Loss before income taxes		(22,653	)		(16,383	)		15,953			(23,083	)
Income tax expense (benefit)		1,246			(430	)		-			816
Net loss	$	(23,899	)	$	(15,953	)	$	15,953		$	(23,899	)

	Fiscal Year Ended January 31, 2009
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
Sales	$	1,080,120		$	137,022		$	-		$	1,217,142
Cost of sales		885,866			116,300			-			1,002,166

Gross profit		194,254			20,722			-			214,976

Selling and administrative expenses		118,844			19,297			-			138,141
Equity in earnings of subsidiaries		(759	)		-			759			-
Other expense (income), net		1,809			(3,120	)		-			(1,311	)
Operating profit		74,360			4,545			(759	)		78,146

Interest expense, net		22,021			2,910			-			24,931
Earnings before income taxes		52,339			1,635			(759	)		53,215
Income tax expense		1,783			876			-			2,659
Net earnings	$	50,556		$	759		$	(759	)	$	50,556


	Fiscal Year Ended January 31, 2008
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
Sales	$	1,177,294		$	158,133		$	-		$	1,335,427
Cost of sales		939,376			131,020			-			1,070,396

Gross profit		237,918			27,113			-			265,031

Selling and administrative expenses		121,073			18,874			-			139,947
Equity in earnings of subsidiaries		(3,489	)		-			3,489			-
Other income, net		(219	)		(770	)		-			(989	)
Operating profit		120,553			9,009			(3,489	)		126,073

Interest expense, net		26,300			2,758			-			29,058
Earnings before income taxes		94,253			6,251			(3,489	)		97,015
Income tax expense		2,430			2,762			-			5,192
Net earnings	$	91,823		$	3,489		$	(3,489	)	$	91,823

F-16

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Condensed Consolidating Cash Flows

	Fiscal Year Ended January 31, 2010
(In thousands)	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
Net cash provided by (used for):
Operating activities
Net loss	$	(23,899	)	$	(15,953	)	$	15,953		$	(23,899	)
Equity in loss of subsidiaries		15,953			-			(15,953	)		-
Other adjustments		64,661			25,559			-			90,220
Operating activities		56,715			9,606			-			66,321
Investing activities		(1,301	)		(1,639	)		-			(2,940	)
Financing activities		(55,192	)		(8,541	)		-			(63,733	)
Effect of exchange rate on cash		-			1,667			-			1,667
Net increase in cash		222			1,093			-			1,315
Cash at the beginning of the period		26			1,980			-			2,006
Cash at the end of the period	$	248		$	3,073		$	-		$	3,321


	Fiscal Year Ended January 31, 2009
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
Net cash provided by (used for):
Operating activities
Net earnings	$	50,556		$	759		$	(759	)	$	50,556
Equity in earnings of subsidiaries		(759	)		-			759			-
Other adjustments		34,180			(26,266	)		-			7,914
Operating activities		83,977			(25,507	)		-			58,470
Investing activities		(27,971	)		195			-			(27,776	)
Financing activities		(61,937	)		19,573			-			(42,364	)
Effect of exchange rate on cash		-			1,294			-			1,294
Net decrease in cash		(5,931	)		(4,445	)		-			(10,376	)
Cash at the beginning of the period		5,957			6,425			-			12,382
Cash at the end of the period	$	26		$	1,980		$	-		$	2,006


	Fiscal Year Ended January 31, 2008
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
Net cash provided by (used for):
Operating activities
Net earnings	$	91,823		$	3,489		$	(3,489	)	$	91,823
Equity in earnings of subsidiaries		(3,489	)		-			3,489			-
Other adjustments		(48,640	)		(4,045	)		-			(52,685	)
Operating activities		39,694			(556	)		-			39,138
Investing activities		(64,461	)		(32,306	)		-			(96,767	)
Financing activities		27,375			36,700			-			64,075
Effect of exchange rate on cash		-			84			-			84
Net increase in cash		2,608			3,922			-			6,530
Cash at the beginning of the period		3,349			2,503			-			5,852
Cash at the end of the period	$	5,957		$	6,425		$	-		$	12,382

F-17

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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,
(In thousands)	2010			2009			2008
Allowance for doubtful accounts at beginning of period	$	3,599		$	3,140		$	1,725
Acquired reserves		-			-			1,359
Accruals to bad debt expense		2,482			1,281			1,048
Writeoffs against allowance for doubtful accounts		(1,327	)		(1,189	)		(1,205	)
Collections of previously reserved items		165			367			213
Allowance for doubtful accounts at end of period	$	4,919		$	3,599		$	3,140

Inventories: Summarized below are the components of inventories:

	As of January 31,
	2010		2009
(In thousands)
Inventory purchased under distributor agreements	$	104,542	$	124,844
Raw materials and spare parts		93,017		111,848
Work in process		34,481		56,515
Finished goods		16,273		-
Total inventories, net	$	248,313	$	293,207

Raw materials and spare parts include OEM equipment and components used in the equipment 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 $20.4 million and $13.0 million at January 31, 2010 and January 31, 2009, respectively.

Contracts in Process: Recoverable costs and accrued profits not yet billed primarily relate to oilfield service equipment projects which extend beyond two fiscal quarters. 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,
(In thousands)	2010			2009
Costs incurred on uncompleted contracts	$	109,788		$	143,882
Accrued profits		33,800			39,893
	$	143,588		$	183,775
Less billings to date		(105,661	)		(156,760	)
	$	37,927		$	27,015

Recoverable costs and accrued profits not yet billed	$	38,042		$	54,975
Billings in excess of incurred costs and accrued profits		(115	)		(27,960	)
	$	37,927		$	27,015

F-18

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

	As of January 31,
	2010			2009
(In thousands)
Machinery and equipment	$	27,892		$	25,841
Buildings and leasehold improvements		27,299			27,082
Rental equipment		60,655			63,947
Computer hardware and software		4,459			3,043
Accumulated depreciation		(48,546	)		(35,420	)
Net depreciable assets		71,759			84,493
Construction in progress		384			1,629
Land		7,063			7,048
Property, plant and equipment, net	$	79,206		$	93,170

Depreciation expense was $16.1 million, $15.7 million and $12.9 million in Fiscal 2009, 2008 and 2007, respectively.

Rental equipment includes forklift equipment, generator sets and other 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:

			January 31, 2010
(In thousands)	Estimated Useful Life		Gross Carrying Value		Accumulated Amortization			Currency Translation		Net
Non-current amortizable intangible assets:
Engineering drawings	2.5-10 Yrs.		$	6,346	$	(4,947	)	$	189	$	1,588
Distribution contracts	27 Yrs.			3,384		(499	)		-		2,885
Customer relationships	6-11 Yrs.			7,409		(2,318	)		380		5,471
Patents	4 Yrs.			209		(176	)		-		33
Non-compete covenant	5 Yrs.			1,420		(871	)		78		627
Total				18,768		(8,811	)		647		10,604

Indefinite-lived intangible assets:
Trademarks		-		9,150		-			191		9,341

Total			$	27,918	$	(8,811	)	$	838	$	19,945

			January 31, 2009
(In thousands)	Estimated Useful Life		Gross Carrying Value		Accumulated Amortization			Currency Translation			Net
Non-current amortizable intangible assets:
Engineering drawings	2.5-10 Yrs.		$	6,346	$	(3,824	)	$	157		$	2,679
Distribution contracts	27 Yrs.			3,384		(373	)		-			3,011
Customer relationships	6-11 Yrs.			7,409		(1,587	)		(140	)		5,682
Patents	4 Yrs.			209		(135	)		-			74
Non-compete covenant	5 Yrs.			1,420		(580	)		2			842
Total				18,768		(6,499	)		19			12,288

Indefinite-lived intangible assets:
Trademarks		-		9,130		-			(125	)		9,005

Total			$	27,898	$	(6,499	)	$	(106	)	$	21,293

F-19

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Amortization expense was $2.3 million, $3.2 million and $6.3 million in Fiscal 2009, 2008 and 2007, respectively. Amortization expense for the next 5 years is expected to be as follows:

(In thousands)	Amount
Fiscal 2010	$	1,430
Fiscal 2011		1,398
Fiscal 2012		1,063
Fiscal 2013		1,001
Fiscal 2014		1,001
Total	$	5,893

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.

(In thousands)	Amount
Carrying amount as of January 31, 2009	$	23,329
Currency translation		3,342
Carrying amount as of January 31, 2010	$	26,671

For Canadian tax purposes, 75% of goodwill is expected to be deductible. Substantially all of the goodwill relates to the equipment segment.

Warranty Costs: A summary of activity for accrued warranty costs, recorded in other current liabilities on the consolidated balance sheets, for the periods ended January 31, 2010, 2009 and 2008 is as follows:


	Fiscal Year Ended January 31,
	2010			2009			2008
(In thousands)
Accrued warranty costs at beginning of period	$	4,990		$	5,982		$	2,673
Acquired reserves		-			-			714
Payments for warranty obligations		(6,174	)		(6,222	)		(4,616	)
Warranty accrual for current period sales		5,582			5,230			7,211
Accrued warranty costs at end of period	$	4,398		$	4,990		$	5,982

Other current liabilities: Included in other current liabilities are $15.6 million and $19.1 million of accrued job costs as of January 31, 2010 and January 31, 2009, respectively. No other item comprises more than 5% of total current liabilities as of January 31, 2010 or January 31, 2009.

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, 2010, the number of Common Units and Common B Units issued and outstanding was 48,255,000 and 51,750,000, respectively, and as of January 31, 2009 the number of Common Units and Common B Units issued and outstanding was 36,255,000 and 63,750,000, respectively.

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.

F-20

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 five non-executive directors totaled 300,000 restricted shares vesting in five (5) 60,000 share tranches, with each such tranche vesting upon board service for a complete fiscal year. In addition, approximately 54,000 of the restricted shares granted to two 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., Cameron International Corp. and BJ Services Company and are subject to acceleration in the case of an executive’s death or disability. As this performance condition was not met for Fiscal 2009 or Fiscal 2008, 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, 2010, diluted earnings per share excluded the approximately 410,000 contingent unvested restricted shares.

Note 10. Crown Acquisition

On February 26, 2007 we acquired substantially all of the operating assets and assumed certain liabilities of Crown for cash consideration of approximately $70.5 million. Crown, which was headquartered in Calgary, Alberta, Canada, and had multiple U.S. operations, manufactured drilling, well servicing and workover rigs, stimulation equipment and provided related parts and services. The acquisition enhanced our position as a leading supplier of well stimulation, coiled tubing, cementing, and nitrogen pumping equipment and expanded our product offerings to include drilling rigs and well workover and service rigs. Information relating to our results of operations for Fiscal 2007 includes the impact of the Crown Acquisition from February 26, 2007 to January 31, 2008.

The unaudited pro forma information for the fiscal year ended January 31, 2008 gives effect to the February 26, 2007 consummation of the Crown Acquisition as if the transaction occurred on February 1, 2007. The unaudited pro forma information is presented for illustration purposes only and is not necessarily indicative of results of operations which would actually have been reported had the combination been in effect during this period or which we might expect to report in the future.

Pro Forma Results including Crown Energy
	Fiscal Year Ended
	January 31, 2008
(In thousands, except units outstanding and per unit data)	(Unaudited)
Sales	$	1,355,162

Net earnings		94,741

Preferred stock dividends		-
Net earnings available for common unit holders	$	94,741

Weighted average units outstanding:
Basic		100,005,000
Diluted		100,005,000

Net earnings available for common unit holders per common unit
Basic	$	0.95
Diluted	$	0.95

F-21

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 11. Employee Retirement Savings Plan

We sponsor an employee retirement savings plan which qualifies under Section 401(k) of the Internal Revenue Code. The savings pan 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 2009, we matched employee contributions at the rate of 35% up to 6% of eligible earnings. During Fiscal 2008 and Fiscal 2007, we matched employee contributions at the rate of 50% up to 6% of eligible earnings. We incurred expenses of $1.4 million, $3.5 million and $3.1 million for Fiscal 2009, 2008 and 2007, respectively. During Fiscal 2010, we will match employee contributions at the rate of 35% up to 6% of eligible earnings.

Note 12. Recent Accounting Pronouncements

Subsequent Events: In May 2009, the FASB established standards related to accounting for and disclosure of events occurring after the balance sheet date and prior to issuance of the financial statements. This standard sets the period during which management must evaluate events for inclusion via recognition and/or disclosure in the financial statements. The standard also defines events as either recognized or non-recognized and requires disclosure of when subsequent events were evaluated. We have adopted the provisions of this new standard, which became effective for interim and annual reporting periods ending after June 15, 2009. Subsequent events have been evaluated through the date our annual report was issued and have been either recognized and/or disclosed, when necessary, in our current period financial statements.

Note 13. 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 $10.2 million, $10.4 million and $9.8 million in Fiscal 2009, 2008 and 2007, respectively.

F-22

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Future minimum lease payments under operating leases as of January 31, 2010 are as follows:

(In thousands)	Amount
2011	$	9,603
2012		7,356
2013		2,713
2014		1,048
2015 and thereafter		642
Total	$	21,362

Note 14. Related Party Transactions

Note 15. Litigation and Contingencies

F-23

Table of Contents

STEWART & STEVENSON LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 16. 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 $205.6 million, $430.5 million and $315.4 million in Fiscal 2009, 2008 and 2007, respectively. We are not dependent on any single customer and in Fiscal 2009, no single customer accounted for more than 8.9% of our total revenues. Our top 10 customers generated approximately 26.3% of our total revenues during Fiscal 2009.

Note 17. Quarterly Financial Information – Unaudited

Fiscal year ended January 31, 2010
	Quarter ended											Total
	May 2, 2009		August 1, 2009			October 31, 2009			January 31, 2010			Year
(In thousands)
Sales	$	190,128	$	173,205		$	167,263		$	158,080		$	688,676
Gross profit		38,896		25,956			23,672			23,124			111,648

Net earnings (loss) available for
common unit holders	$	3,710	$	(9,748	)	$	(8,188	)	$	(9,673	)	$	(23,899	)

Net earnings (loss) available for common unit holders per common unit:
Basic	$	0.04	$	(0.10	)	$	(0.08	)	$	(0.10	)	$	(0.24	)
Diluted	$	0.04	$	(0.10	)	$	(0.08	)	$	(0.10	)	$	(0.24	)

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

Fiscal year ended January 31, 2009
	Quarter ended								Total
	May 3, 2008		August 2, 2008		November 1, 2008		January 31, 2009		Year
(In thousands)
Sales	$	318,272	$	334,195	$	307,739	$	256,936	$	1,217,142
Gross profit		62,098		57,400		57,609		37,869		214,976

Net earnings available for
common unit holders	$	20,554	$	13,078	$	15,798	$	1,126	$	50,556

Net earnings available for common unit holders per common unit:
Basic	$	0.21	$	0.13	$	0.16	$	0.01	$	0.51
Diluted	$	0.21	$	0.13	$	0.16	$	0.01	$	0.51

Sales and general administrative expenses for the quarter ended November 1, 2008 included $2.4 million in legal and professional expenses associated with the pursuit of strategic alternatives.

F-24

Attached files

Stewart & Stevenson LLC Reports

Also read