Stewart & Stevenson LLC - FORM 10-Q

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EX-31.2 - CERTIFICATION - Stewart & Stevenson LLC	exh31-2.htm
EX-31.1 - CERTIFICATION - Stewart & Stevenson LLC	exh31-1.htm
EX-32.2 - CERTIFICATION - Stewart & Stevenson LLC	exh32-2.htm
EX-32.1 - CERTIFICATION - Stewart & Stevenson LLC	exh32-1.htm

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 30, 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

(Former name, former address, and former fiscal year if changed since last report)

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 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 ¨ 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 ¨

(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 December 10, 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.

	STEWART & STEVENSON LLC AND SUBSIDIARIES TABLE OF CONTENTS
Part I.	Financial Information		Page
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets – as of October 30, 2010 and January 31, 2010	3
		Condensed Consolidated Statements of Operations – Three and Nine months ended October 30, 2010 and October 31, 2009	4
		Condensed Consolidated Statements of Cash Flows – Nine months ended October 30, 2010 and October 31, 2009	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
	Item 4.	Controls and Procedures	24
Part II.	Other Information
	Item 1.	Legal Proceedings	24
	Item 1A.	Risk Factors	24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
	Item 3.	Defaults Upon Senior Securities	24
	Item 4.	[Removed and Reserved]	24
	Item 5.	Other Information	24
	Item 6.	Exhibits	25

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

Stewart & Stevenson LLC and Subsidiaries
Condensed Consolidated Balance Sheets

	As of
	October 30, 2010		January 31, 2010
(In thousands, except units)	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	5,583	$	3,321
Restricted cash		5,000		3,000
Accounts receivable, net		97,174		81,626
Recoverable costs and accrued profits not yet billed		68,669		38,042
Inventories, net		272,523		248,313
Other current assets		7,248		7,626
Total current assets		456,197		381,928

Property, plant and equipment, net		78,253		79,206
Goodwill and intangibles, net		47,127		46,616
Deferred financing costs and other assets		5,436		6,775
Total assets	$	587,013	$	514,525

Liabilities and shareholders' equity
Current liabilities:
Bank notes payable	$	7,407	$	7,122
Current portion of long-term debt		56		65
Accounts payable		64,959		52,994
Accrued payrolls and incentives		10,390		8,714
Billings in excess of incurred costs		13,229		115
Customer deposits		65,586		26,307
Other current liabilities		52,703		41,126
Total current liabilities		214,330		136,443

Long-term debt, net of current portion		200,138		220,926
Other long-term liabilities		1,581		1,534
Total liabilities		416,049		358,903

Commitments and contingencies
Shareholders' equity:
Common units, 100,005,000 units issued and outstanding		74,113		74,113
Accumulated other comprehensive income		4,357		1,383
Retained earnings		92,494		80,126
Total shareholders' equity		170,964		155,622
Total liabilities and shareholders' equity	$	587,013	$	514,525


See accompanying Notes to Condensed Consolidated Financial Statements

Table of Contents

Stewart & Stevenson LLC and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	October 30, 2010			October 31, 2009			October 30, 2010			October 31, 2009
(In thousands, except per unit data)
Sales	$	228,502		$	167,263		$	596,570		$	530,596
Cost of sales		185,783			143,591			491,127			442,072
Gross profit		42,719			23,672			105,443			88,524

Selling and administrative expenses		27,744			25,691			77,224			88,367
Other (income) expense, net		(526	)		208			(861	)		(1,394	)
Operating profit (loss)		15,501			(2,227	)		29,080			1,551

Interest expense, net		5,079			5,568			14,963			16,293
Earnings (loss) before income taxes		10,422			(7,795	)		14,117			(14,742	)

Income tax expense (benefit)		495			393			1,496			(516	)
Net earnings (loss)	$	9,927		$	(8,188	)	$	12,621		$	(14,226	)

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

Net earnings (loss) per common unit
Basic	$	0.10		$	(0.08	)	$	0.13		$	(0.14	)
Diluted	$	0.10		$	(0.08	)	$	0.13		$	(0.14	)


See accompanying Notes to Condensed Consolidated Financial Statements

Table of Contents

Stewart & Stevenson LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

	For the Nine Months Ended
	October 30, 2010			October 31, 2009
(In thousands)
Operating activities
Net earnings (loss)	$	12,621		$	(14,226	)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Amortization of deferred financing costs		1,259			1,509
Other non-cash items		184			249
Depreciation and amortization		12,755			14,257
Change in operating assets and liabilities:
Accounts receivable, net		(8,400	)		28,394
Recoverable costs and accrued profits not yet billed		(30,616	)		39,853
Inventories, net		(21,493	)		17,268
Accounts payable		11,402			(35,766	)
Accrued payrolls and incentives		1,694			(3,598	)
Billings in excess of incurred costs		13,114			(1,508	)
Customer deposits		32,780			(11,994	)
Other current assets and liabilities		11,932			5,681
Other, net		(90	)		(2,040	)
Net cash provided by operating activities		37,142			38,079

Investing activities
Capital expenditures		(1,293	)		(2,659	)
Additions to rental equipment		(10,246	)		(729	)
Disposals of property, plant and equipment, net		24			413
Increase in restricted cash		(2,000	)		-
Net cash used in investing activities		(13,515	)		(2,975	)

Financing activities
Change in short-term notes payable		(275	)		2,471
Deferred financing costs		-			(375	)
Changes in long-term revolving loans		(20,803	)		(31,518	)
Distributions to shareholders for tax obligations		(253	)		(5,568	)
Net cash used in financing activities		(21,331	)		(34,990	)

Effect of exchange rate on cash		(34	)		737

Increase in cash and cash equivalents		2,262			851
Cash and cash equivalents, beginning of fiscal period		3,321			2,006
Cash and cash equivalents, end of fiscal period	$	5,583		$	2,857

Cash paid for:
Interest	$	9,981		$	11,306
Income taxes	$	1,870		$	2,769

See accompanying Notes to Condensed Consolidated Financial Statements

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Company Overview

Stewart & Stevenson LLC, headquartered in Houston, Texas, was formed for the purpose of acquiring from Stewart & Stevenson Services, Inc. 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. 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.

Note 2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements and do not include all information and footnotes required by United States (“U.S.”) generally accepted accounting principles (“GAAP”) for complete financial statements. However, the information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and nine months ended October 30, 2010 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 2011. These condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K and the notes thereto for the year ended January 31, 2010.

Use of Estimates and Assumptions: The preparation of financial statements in conformity with U.S. 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 2010” commenced on February 1, 2010 and will end on January 31, 2011. We report results on the fiscal quarter method with each quarter comprising approximately 13 weeks. The third quarter of Fiscal 2010 commenced on August 1, 2010 and ended on October 30, 2010.

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.

Note 3. Comprehensive Income

Total comprehensive income was as follows:

	For the Three Months Ended					For the Nine Months Ended
	October 30, 2010		October 31, 2009			October 30, 2010		October 31, 2009
(In thousands)
Net earnings (loss)	$	9,927	$	(8,188	)	$	12,621	$	(14,226	)
Currency translation gian (loss)		562		(2	)		2,974		7,612
Comprehensive income (loss)	$	10,489	$	(8,190	)	$	15,595	$	(6,614	)

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Continued

(Unaudited)

Translation adjustments resulting from changes in exchange rates are reported in other comprehensive income. As of October 30, 2010, and October 31, 2009, the entire accumulated other comprehensive income (loss) balance consisted of currency translation adjustments. Foreign currency transaction exchange gains (losses) are recorded in other (income) expense, net in the consolidated statements of operations. We recorded exchange gains of $29.9 thousand and losses of $44.2 thousand during the three and nine months ended October 30, 2010, respectively, and exchange losses of $0.3 million and $0.2 million during the three and nine months ended October 31, 2009, respectively.

On January 10, 2010, the Venezuelan Government devalued its currency from 2.15 Bolivars per U.S. dollar to 4.30 Bolivars per U.S. dollar (“the official rate”) and the Venezuelan economy has since been designated as hyperinflationary. We have historically utilized the official rate for our Venezuelan operations and will continue to monitor future developments as they may relate to the impact from hyperinflationary currency fluctuations.

Beginning February 1, 2010, we utilize the U.S. dollar as the functional currency for our Venezuelan subsidiary and remeasure its financial statements into U.S. dollars at the official rate. Accordingly, using “hyperinflationary accounting,” we recognize the related losses or gains from such remeasurement of its balance sheet in the consolidated statements of its operations. During the three and nine months ended October 30, 2010, the official rate for Venezuela did not fluctuate significantly. As a result, the effect of remeasuring our Venezuelan subsidiary was insignificant.

Note 4. 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 operating profit (loss) represents earnings (loss) before interest and income taxes.

Our reportable segments include:

Equipment – This segment designs, manufactures, constructs 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 us, 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.

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Continued

(Unaudited)

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:

	For the Three Months Ended						For the Nine Months Ended
	October 30, 2010			October 31, 2009			October 30, 2010			October 31, 2009
(In thousands)
Sales
Equipment	$	140,251		$	96,551		$	357,562		$	303,883
Aftermarket parts and service		81,063			65,873			221,738			211,489
Rental		7,188			4,839			17,270			15,224
Total sales	$	228,502		$	167,263		$	596,570		$	530,596

Operating profit (loss)
Equipment	$	17,448		$	3,725		$	33,747		$	14,291
Aftermarket parts and service		6,304			2,198			16,803			14,351
Rental		1,354			417			1,814			1,573
Corporate		(9,605	)		(8,567	)		(23,284	)		(28,664	)
Total operating profit	$	15,501		$	(2,227	)	$	29,080		$	1,551

Operating profit percentage
Equipment		12.4	%		3.9	%		9.4	%		4.7	%
Aftermarket parts and service		7.8			3.3			7.6			6.8
Rental		18.8			8.6			10.5			10.3
Consolidated		6.8	%		(1.3	) %		4.9	%		0.3	%

Note 5. Long-Term Debt

	As of
	October 30, 2010			January 31, 2010
(In thousands)
Other debt	$	7,463		$	7,243
Revolving credit facility		50,138			70,870
Unsecured senior notes		150,000			150,000
Total	$	207,601		$	228,113
Less: current portion of other debt		(7,463	)		(7,187	)
Long-term debt, net of current portion	$	200,138		$	220,926

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.

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

Revolving Credit Facility: The revolving credit facility is a $250.0 million asset-based facility, which matures in February 2012, and 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. The revolving credit facility has a $25.0 million sub-facility to be used by our Canadian subsidiary. As of October 30, 2010, borrowings under the facility bear interest at a weighted average interest rate of LIBOR plus 1.5%, or 2.27%. 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 October 30, 2010, there were $21.5 million of letters of credit outstanding. Based on the outstanding borrowings, letters of credit issued and the terms of the asset-based revolving credit facility, our available borrowing capacity was approximately $106.4 million at October 30, 2010.

Unsecured Senior Notes: The $150.0 million of unsecured senior notes bear interest at 10% per annum and mature 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 October 30, 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 and capitalized legal and financing costs associated with establishing the revolving credit facility and the issuance of the unsecured senior notes. These deferred financing costs are being amortized over the terms of the credit facility and senior notes of five years and eight years, respectively, as a component of interest expense, net in the consolidated statements of operations. As of October 30, 2010, $4.3 million of unamortized deferred financing costs were 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 October 30, 2010, our senior notes with a carrying value of $150.0 million had a fair value of $151.5 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 consolidated 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.

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Continued

(Unaudited)

Condensed Consolidating Balance Sheets

	As of October 30, 2010
	(Unaudited)
	Guarantor Entities			Non-Guarantor Entities		Eliminations			Consolidated Totals
(In thousands)
Current assets	$	404,404		$	51,793	$	-		$	456,197
Property, plant and equipment		74,969			3,284		-			78,253
Other assets		32,512			34,384		(14,333	)		52,563
Total assets	$	511,885		$	89,461	$	(14,333	)	$	587,013

Current liabilities	$	187,439		$	26,891	$	-		$	214,330
Intercompany payables (receivables)		(46,793	)		46,793		-			-
Long-term liabilities		200,275			1,444		-			201,719
Shareholders' equity		170,964			14,333		(14,333	)		170,964
Total liabilities and shareholders' equity	$	511,885		$	89,461	$	(14,333	)	$	587,013


	As of January 31, 2010
	Guarantor Entities			Non-Guarantor Entities		Eliminations			Consolidated Totals

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

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Continued

(Unaudited)

Condensed Consolidating Statements of Operations
(Unaudited)

	For the Three Months Ended October 30, 2010
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
(In thousands)
Sales	$	204,936		$	23,566		$	-		$	228,502
Cost of sales		166,224			19,559			-			185,783
Gross profit		38,712			4,007			-			42,719

Selling and administrative expenses		24,510			3,234			-			27,744
Equity in loss of subsidiaries		152			-			(152	)		-
Other (income) expense, net		(599	)		73			-			(526	)
Operating profit		14,649			700			152			15,501

Interest expense, net		4,339			740			-			5,079
Earnings (loss) before income taxes		10,310			(40	)		152			10,422

Income tax expense		383			112			-			495
Net earnings (loss)	$	9,927		$	(152	)	$	152		$	9,927


	For the Three Months Ended October 31, 2009
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals

Sales	$	150,681		$	16,582		$	-		$	167,263
Cost of sales		126,074			17,517			-			143,591
Gross profit (loss)		24,607			(935	)		-			23,672

Selling and administrative expenses		21,494			4,197			-			25,691
Equity in loss of subsidiaries		4,394			-			(4,394	)		-
Other expense, net		32			176			-			208
Operating loss		(1,313	)		(5,308	)		4,394			(2,227	)

Interest expense, net		4,801			767			-			5,568
Loss before income taxes		(6,114	)		(6,075	)		4,394			(7,795	)

Income tax expense (benefit)		2,074			(1,681	)		-			393
Net loss	$	(8,188	)	$	(4,394	)	$	4,394		$	(8,188	)

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

Condensed Consolidating Statements of Operations
(Unaudited)

	For the Nine Months Ended October 30, 2010
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
(In thousands)
Sales	$	535,655		$	60,915		$	-		$	596,570
Cost of sales		439,016			52,111			-			491,127
Gross profit		96,639			8,804			-			105,443

Selling and administrative expenses		67,722			9,502			-			77,224
Equity in loss of subsidiaries		3,775			-			(3,775	)		-
Other (income) expense, net		(1,230	)		369			-			(861	)
Operating profit (loss)		26,372			(1,067	)		3,775			29,080

Interest expense, net		12,772			2,191			-			14,963
Earnings (loss) before income taxes		13,600			(3,258	)		3,775			14,117

Income tax expense		979			517			-			1,496
Net earnings (loss)	$	12,621		$	(3,775	)	$	3,775		$	12,621


	For the Nine Months Ended October 31, 2009
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
Sales	$	470,276		$	60,320		$	-		$	530,596
Cost of sales		386,766			55,306			-			442,072
Gross profit		83,510			5,014			-			88,524

Selling and administrative expenses		76,841			11,526			-			88,367
Equity in loss of subsidiaries		7,641			-			(7,641	)		-
Other (income) expense, net		(2,770	)		1,376			-			(1,394	)
Operating profit (loss)		1,798			(7,888	)		7,641			1,551

Interest expense, net		14,165			2,128			-			16,293
Loss before income taxes		(12,367	)		(10,016	)		7,641			(14,742	)

Income tax expense (benefit)		1,859			(2,375	)		-			(516	)
Net loss	$	(14,226	)	$	(7,641	)	$	7,641		$	(14,226	)

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

Condensed Consolidating Statements of Cash Flows
(Unaudited)

	For the Nine Months Ended October 30, 2010
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
(In thousands)
Net cash provided by (used in):
Operating activities
Net income (loss)	$	12,621		$	(3,775	)	$	3,775		$	12,621
Equity in loss of subsidiaries		3,775			-			(3,775	)		-
Other adjustments		18,878			5,643			-			24,521
Operating activities		35,274			1,868			-			37,142
Investing activities		(13,186	)		(329	)		-			(13,515	)
Financing activities		(20,980	)		(351	)		-			(21,331	)
Effect of exchange rate on cash		-			(34	)		-			(34	)
Net increase in cash		1,108			1,154			-			2,262
Cash at the beginning of the period		248			3,073			-			3,321
Cash at the end of the period	$	1,356		$	4,227		$	-		$	5,583


	For the Nine Months Ended October 31, 2009
	Guarantor Entities			Non-Guarantor Entities			Eliminations			Consolidated Totals
Net cash provided by (used in):
Operating activities
Net loss	$	(14,226	)	$	(7,641	)	$	7,641		$	(14,226	)
Equity in loss of subsidiaries		7,641			-			(7,641	)		-
Other adjustments		30,068			22,237			-			52,305
Operating activities		23,483			14,596			-			38,079
Investing activities		412			(3,387	)		-			(2,975	)
Financing activities		(23,701	)		(11,289	)		-			(34,990	)
Effect of exchange rate on cash		-			737			-			737
Net increase in cash		194			657			-			851
Cash at the beginning of the period		26			1,980			-			2,006
Cash at the end of the period	$	220		$	2,637		$	-		$	2,857

Note 6. Significant Balance Sheet Accounts

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

	For the Three Months Ended						For the Nine Months Ended
	October 30, 2010			October 31, 2009			October 30, 2010			October 31, 2009
(In thousands)
Allowance for doubtful accounts at beginning of period	$	4,161		$	4,512		$	4,919		$	3,599
(Reductions) additions to reserves		(300	)		1,088			(632	)		2,354
Writeoffs against allowance for doubtful accounts		(965	)		(291	)		(1,454	)		(729	)
Collections of previously written off items		82			45			145			130
Allowance for doubtful accounts at end of period	$	2,978		$	5,354		$	2,978		$	5,354

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Continued

(Unaudited)

Inventories, net: Summarized below are the components of inventories:

	As of
	October 30, 2010		January 31, 2010
(In thousands)
Inventory purchased under distributor agreements	$	98,083	$	104,542
Raw materials and spare parts		93,951		93,017
Work in process		79,184		34,481
Finished goods		1,305		16,273
Total inventories, net	$	272,523	$	248,313

Raw materials and spare parts include OEM equipment and components used in the equipment segment. Finished goods include manufactured equipment that is essentially complete. The inventory balances above are net of inventory valuation allowances totaling $21.9 million and $20.4 million as of October 30, 2010 and January 31, 2010, respectively.

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

	As of
	October 30, 2010			January 31, 2010
(In thousands)
Machinery and equipment	$	28,930		$	27,892
Buildings and leasehold improvements		27,712			27,299
Rental equipment		67,514			60,655
Computer hardware and software		4,657			4,459
Accumulated depreciation		(58,667	)		(48,546	)
Net depreciable assets	$	70,146		$	71,759
Construction in progress		1,046			384
Land		7,061			7,063
Property, plant and equipment, net	$	78,253		$	79,206

Depreciation expense was $4.0 million and $11.6 million during the three and nine months ended October 30, 2010, respectively, and $4.1 million and $12.0 million during the three and nine months ended October 31, 2009, respectively.

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Continued

(Unaudited)

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

			As of October 30, 2010
(In thousands)	Estimated Useful Life		Gross Carrying Value		Accumulated Amortization			Currency Translation		Net
Non-current amortizable intangible assets:
Engineering drawings	2.5-10 Years		$	6,346	$	(5,145	)	$	189	$	1,390
Distribution contracts	27 Years			3,384		(593	)		-		2,791
Customer relationships	6-11 Years			7,409		(2,858	)		524		5,075
Patents	4 Years			209		(208	)		-		1
Non-compete covenant	5 Years			1,420		(1,084	)		80		416
Total			$	18,768	$	(9,888	)	$	793	$	9,673

Indefinite-lived intangible assets:
Trademarks		-		9,150		-			316		9,466

Total			$	27,918	$	(9,888	)	$	1,109	$	19,139

			As of 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 Years		$	6,346	$	(4,947	)	$	189	$	1,588
Distribution contracts	27 Years			3,384		(499	)		-		2,885
Customer relationships	6-11 Years			7,409		(2,318	)		380		5,471
Patents	4 Years			209		(176	)		-		33
Non-compete covenant	5 Years			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

Amortization expense was $0.3 million and $1.1 million during the three and nine months ended October 30, 2010, respectively, and $0.8 million and $2.2 million during the three and nine months ended October 31, 2009, respectively.

The following table presents goodwill (relating entirely to the equipment segment) as of the dates indicated, as well as changes in the account during the period shown:

	Amount
(In thousands)
Carrying amount as of January 31, 2010	$	26,671
Currency translation		1,317
Carrying amount as of October 30, 2010	$	27,988

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – Continued

(Unaudited)

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.

A summary of activity for accrued warranty costs, recorded in other current liabilities on the consolidated balance sheets, was as follows:

	For the Three Months Ended						For the Nine Months Ended
	October 30, 2010			October 31, 2009			October 30, 2010			October 31, 2009
(In thousands)
Accrued warranty costs at beginning of period	$	4,759		$	4,631		$	4,398		$	4,990
Payments for warranty obligations		(1,214	)		(1,220	)		(2,743	)		(4,781	)
Warranty accrual		2,700			615			4,590			3,817
Accrued warranty costs at end of period	$	6,245		$	4,026		$	6,245		$	4,026

Other current liabilities: Included in other current liabilities are $16.3 million and $15.6 million of accrued job costs as of October 30, 2010 and January 31, 2010, respectively. No other item comprises more than 5% of total current liabilities as of these dates.

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

A short-term foreign currency exchange rate derivative instrument was entered in January 2009 to manage our exposure to fluctuations in foreign currency exchange rates for certain contracts of our Canadian subsidiary that were not denominated in its functional currency. Hedge accounting for this foreign currency derivative was not pursued. The derivative was settled in the second quarter of Fiscal 2009 and resulted in a gain of $1.4 million, which was recorded in other (income) expense, net within our consolidated statements of operations.

Note 7. Equity

We have 100,005,000 common units issued and outstanding, which consist of both Common Units and Common B Units. Additionally, we have authorized 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 October 30, 2010 and January 31, 2010, the number of Common Units and Common B Units issued and outstanding was 48,255,000 and 51,750,000, 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 unit holders’ liability is limited to the capital invested in the Company.

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

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. and Cameron International Corp. 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 October 30, 2010, diluted earnings per share excluded the approximately 410,000 contingent unvested restricted shares.

Note 8. Income Taxes

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 the three and nine months ended October 30, 2010, we recognized tax expense of $0.4 million and $1.0 million, respectively, of Texas Margins tax. During the three and nine months ended October 31, 2009, we recognized tax expense of $2.0 million and $1.8 million, respectively, of Texas Margins tax. Additionally, for the three and nine months ended October 30, 2010, we recognized $0.1 million and $0.5 million, respectively, of tax expense associated with foreign jurisdictions. For the three and nine months ended October 31, 2009, we recognized $1.6 million and $2.3 million, respectively, of tax benefit associated with foreign jurisdictions.

Generally, we make quarterly distributions to our unit holders to fund their tax obligations. During the nine months ended October 30, 2010 and October 31, 2009, we made tax distributions of $0.3 million and $5.6 million, respectively, to our unit holders.

Note 9. Related Party Transactions

During the fourth quarter of Fiscal 2009, we received a $37.5 million 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. Cash payments received and amounts invoiced pursuant to this transaction are recorded as a customer deposit in the consolidated balance sheet and amounted to $25.0 million and $9.4 million as of October 30, 2010 and January 31, 2010, respectively. Included in inventories, net are $27.2 million and $5.8 million of costs related to this transaction, respectively, as of these same dates. No amounts have been recorded in the consolidated statements of operations for this transaction to date.

Note 10. Litigation and Contingencies

In July 2009, we settled an arbitration action brought against one of our suppliers and us. Fiscal 2009 results of operations, after insurance proceeds and receipt of certain inventory, were negatively impacted by approximately $3.5 million, which was 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. As the audit remains on-going, such loss could be higher or lower and remains subject to finalization of 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.

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

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes statements that are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts and are not limited to the outlook for our future business and financial performance. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and some of which are beyond our control. We believe that these risks and uncertainties include:

periodic economic and industry downturns affecting the oil and gas industry;

competitive pressures in the industries we serve;

factors affecting our international sales and operations;

the potential loss of a key OEM supplier;

the occurrence of events not covered by insurance;

our ability to attract and retain qualified employees;

our failure to accurately estimate costs associated with products produced under fixed-price contracts;

our susceptibility to adverse weather conditions affecting the Gulf Coast;

unforeseen difficulties relating to acquisitions;

the impact of governmental laws and regulations, including environmental laws and regulations;

our failure to maintain key licenses;

our ability to protect our intellectual property;

our level of indebtedness; and

the other factors described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2010, which is accessible on the Securities and Exchange Commission’s website at www.sec.gov.

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

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

Any forward-looking statements which we make in this Quarterly Report speak only as of the date of such statement, and, except as required under the federal securities laws and the rules and regulations of the SEC, we undertake no obligation to update publicly any forward-looking statements in this Quarterly Report after the date of this Quarterly Report, whether as a result of new information, future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

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Overview and Outlook

Our business continues to be impacted by the significant decline in gas and oil prices that began in the summer of 2008, as well as the difficulties experienced in the U.S. and global economies and related impacts to the credit markets. While gas and oil prices have remained at relatively stable levels over the past year, they remain below levels in comparison to those preceding the significant decline from Fiscal 2008 that has both tempered and changed our customers’ spending patterns and programs, both in the oil and gas industries and other industries we serve. These factors continue to impact all segments of our business.

We have seen a trend of increasing new equipment orders beginning in the fourth quarter of Fiscal 2009 and continuing through the third quarter of Fiscal 2010 and beyond. This has resulted in an increase in backlog from $130.2 million as of October 31, 2009 to $339.7 million as of October 30, 2010. The increase in backlog is primarily attributable to well stimulation equipment; however, unlike in prior years, rigs and power generation equipment remain at significantly lower levels. These product lines did not achieve their high points in backlog at the same period ends and the overall levels currently being ordered remain less than in fiscal years preceding Fiscal 2009. The impacts of the current new equipment order and backlog growth trends began to benefit the results of our operations through positive earnings during the second quarter and continuing through the third quarter. While our projections remain positive for the remainder of Fiscal 2010, given the current global and domestic environments and related economic uncertainties, it is difficult to determine whether this short-term growth will continue and result in the longer-term growth and rebuilding of our business to the levels previously experienced.

Comparison of Results of Operations—Three Months Ended October 30, 2010 and October 31, 2009

Sales - For the three months ended October 30, 2010, our sales were $228.5 million, an increase of $61.2 million, or 36.6%, compared to the same period of Fiscal 2009 sales of $167.3 million. The increase in sales impacted all segments and was attributable to an overall increase in sales from the oil and gas industry, primarily for our well stimulation equipment.

A breakdown of sales for the periods is as follows:

	For the Three Months Ended						Three Month Change
	October 30, 2010			October 31, 2009			$			%
(In thousands)
Sales
Equipment	$	140,251		$	96,551		$	43,700		45.3	%
Aftermarket parts and service		81,063			65,873			15,190		23.1	%
Rental		7,188			4,839			2,349		48.5	%
Total sales	$	228,502		$	167,263		$	61,239		36.6	%

Operating profit (loss)
Equipment	$	17,448		$	3,725		$	13,723		368.4	%
Aftermarket parts and service		6,304			2,198			4,106		186.8	%
Rental		1,354			417			937		224.7	%
Corporate		(9,605	)		(8,567	)		(1,038	)	-12.1	%
Total operating profit	$	15,501		$	(2,227	)	$	17,728		796.0	%

Operating profit percentage
Equipment		12.4	%		3.9	%
Aftermarket parts and service		7.8			3.3
Rental		18.8			8.6
Consolidated		6.8	%		(1.3	)%

Sales of equipment increased by 45.3%, or $43.7 million, during the three months ended October 30, 2010 compared to the same period in Fiscal 2009. The increase in sales was primarily attributable to higher sales volumes in well stimulation equipment, rigs, transmissions, material handling and other which totaled $83.7 million, partially offset by lower sales volumes in power generation, engines, and other which totaled $40.0 million.

Aftermarket parts and service sales increased by $15.2 million to $81.1 million in the three months ended October 30, 2010 compared to $65.9 million in the comparable period of Fiscal 2009. The increase in aftermarket parts and service sales was attributable to increased parts sales ($10.8 million) and service sales ($4.4 million).

Rental sales increased by 48.5%, or $2.3 million, in the three months ended October 30, 2010 compared to the same period of Fiscal 2009.

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Gross profit – Our gross profit was $42.7 million for the three months ended October 30, 2010 compared to $23.7 million for the same period in Fiscal 2009, reflecting an increase in gross profit margin from 14.2% to 18.7%. Our gross profit margin increased by 4.5 points due to higher sales volumes and product mix. The equipment segment gross profit margin increased from 14.3% to 20.2%, an increase of 5.9 points. The aftermarket parts and service segment gross profit margin increased from 13.1% to 15.0%, an increase of 1.9 points. The rental segment gross profit margin increased from 24.7% to 31.2%, an increase of 6.5 points.

Selling and administrative expenses – Selling and administrative expenses increased by $2.0 million to $27.7 million for the three months ended October 30, 2010 primarily as a result of increases in compensation. As a percentage of sales, selling and administrative expenses decreased to 12.1% from 15.4% for the three months ended October 30, 2010.

Other (income) expense, net – Other income increased by $0.7 million to income of $0.5 million for the three months ended October 30, 2010 compared to other expense of $0.2 million for the three months ended October 31, 2009 primarily as the result of realized gains related to our short-term derivatives which were closed in the three months ended October 30, 2010.

Operating profit (loss) – Our operating profit increased to $15.5 million, or 6.8% of sales, during the three months ended October 30, 2010 from an operating loss of $2.2 million, or 1.3% of sales, in the same period of Fiscal 2009, primarily as the result of higher sales and gross profit margins.

Interest expense, net - Interest expense, net for the three months ended October 30, 2010 decreased by $0.5 million over the same period in Fiscal 2009 mainly as a result of lower borrowings outstanding on and interest rates for our revolving credit facility.

Segment Results Comparison – Three Months Ended October 30, 2010 and October 31, 2009

Equipment – Operating profit generated by the equipment segment increased to $17.4 million, or 12.4% of sales, for the three months ended October 30, 2010 from $3.7 million, or 3.9% of sales, for the same period in Fiscal 2009 primarily due to higher sales volumes and profit margins. The $13.7 million increase in operating profit was attributable to an increase of $6.3 million in sales volume and an increase in margin rate of $7.4 million.

Our equipment order backlog as of October 30, 2010 was $339.7 million, as compared to $130.2 million on October 31, 2009, an increase of 160.9%. We expect to recognize over 50% of this equipment order backlog as revenue during the remainder of Fiscal 2010.

Backlog of $339.7 million as of October 30, 2010 includes a $37.5 million 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. Cash payments received and amounts invoiced pursuant to this transaction are recorded as customer deposits in the consolidated balance sheet and amounted to $25.0 million as of October 30, 2010. Included in inventories, net is $27.2 million of costs related to this transaction and no amounts have been recorded in the consolidated statements of operations for this transaction to date.

Aftermarket Parts and Service – Operating profit generated by the aftermarket parts and service segment increased to $6.3 million in the three months ended October 30, 2010 from $2.2 million in the same period of Fiscal 2009, representing an increase in operating profit percentage from 3.3% to 7.8%. The increase in operating profit was primarily attributable to increases in sales volume of $2.0 million and margin rate of $2.1 million.

Rental – Operating profit generated by the rental segment increased to $1.4 million in the three months ended October 30, 2010, from $0.4 million in the same period of Fiscal 2009. Operating profit percentage increased to 18.8% for the three months ended October 30, 2010 from 8.6% for the same period in Fiscal 2009, mainly as a result of higher sales volumes.

Corporate - Corporate and administrative expenses increased to $9.6 million in the three months ended October 30, 2010 compared to $8.6 million in the same period of 2009 primarily as a result increases in compensation. As a result of higher sales volumes in the third quarter of Fiscal 2010, corporate and administrative expenses decreased from 5.1% to 4.2% as a percentage of sales.

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Comparison of Results of Operations—Nine Months Ended October 30, 2010 and October 31, 2009

Sales - For the nine months ended October 30, 2010, our sales were $596.6 million, an increase of $66.0 million, or 12.4%, compared to the same period of Fiscal 2009 sales of $530.6 million. The increase in sales impacted all segments and was attributable primarily to an overall increase in sales from the oil and gas industry for our well stimulation equipment.

A breakdown of sales for the periods is as follows:

	For the Nine Months Ended						Nine Month Change
	October 30, 2010			October 31, 2009			$		%
(In thousands)
Sales
Equipment	$	357,562		$	303,883		$	53,679	17.7	%
Aftermarket parts and service		221,738			211,489			10,249	4.8	%
Rental		17,270			15,224			2,046	13.4	%
Total sales	$	596,570		$	530,596		$	65,974	12.4	%

Operating profit (loss)
Equipment	$	33,747		$	14,291			19,456	136.1	%
Aftermarket parts and service		16,803			14,351			2,452	17.1	%
Rental		1,814			1,573			241	15.3	%
Corporate		(23,284	)		(28,664	)		5,380	18.8	%
Total operating profit	$	29,080		$	1,551		$	27,529	1774.9	%

Operating profit percentage
Equipment		9.4	%		4.7	%
Aftermarket parts and service		7.6			6.8
Rental		10.5			10.3
Consolidated		4.9	%		0.3	%

Sales of equipment increased by 17.7%, or $53.7 million, during the nine months ended October 30, 2010 compared to the same period in Fiscal 2009. The increase in sales was primarily attributable to higher sales volumes in well stimulation equipment, transmissions, material handling and other, which totaled $155.6 million and which were partially offset by lower sales volumes in power generation, rigs, engines and other, which totaled $101.9 million.

Aftermarket parts and service sales increased by $10.2 million to $221.7 million in the nine months ended October 30, 2010 compared to $211.5 million in the comparable period of Fiscal 2009. The increase in aftermarket parts and service sales was attributable to increased parts sales ($10.4 million) and partially offset by decreased service sales ($0.2 million).

Rental sales increased by 13.4%, or $2.0 million, in the nine months ended October 30, 2010 compared to the same period of Fiscal 2009.

Gross profit – Our gross profit was $105.4 million for the nine months ended October 30, 2010 compared to $88.5 million for the same period in Fiscal 2009, reflecting an increase in gross profit margin from 16.7% to 17.7%. Our gross profit margin increased by 1.0 points due to higher sales volumes and product mix. The equipment segment gross profit margin increased from 16.6% to 18.6%, an increase of 2.0 points. The aftermarket parts and service segment gross profit margin decreased from 16.2% to 15.7%, a decrease of 0.5 points. The rental segment gross profit margin increased from 24.7% to 25.1%, an increase of 0.4 points.

Selling and administrative expenses – Selling and administrative expenses decreased by $11.1 million to $77.2 million for the nine months ended October 30, 2010 primarily as a result of the following items which impacted the second quarter of Fiscal 2009: an accrual for a probable sales tax liability ($3.4 million), the settlement and defense of a claim ($3.5 million), the closure of a facility ($0.9 million) and employee severance ($0.1 million). Further decreases in overall selling and administrative expenses have been experienced in the current year, including lower professional and legal fees, bad debt expense and depreciation, partially offset by higher compensation expense. As a result, selling and administrative expenses as a percentage of sales decreased to 12.9% from 16.7% for the nine months ended October 30, 2010.

Other (income) expense, net – Other income decreased by $0.5 million to $0.9 million for the nine months ended October 30, 2010, mainly as the result of lower gains associated with foreign currency derivative instruments in the current period and lower foreign currency transaction losses associated with our foreign subsidiaries in the current period as compared to the prior period.

Operating profit – Our operating profit increased to $29.1 million, or 4.9% of sales, during the nine months ended October 30, 2010 from $1.6 million, or 0.3% of sales, in the same period of Fiscal 2009, primarily as the result of higher sales and lower selling and administrative expenses.

Interest expense, net - Interest expense, net for the nine months ended October 30, 2010 decreased by $1.3 million over the same period in Fiscal 2009 mainly as a result of lower borrowings outstanding on and interest rates for our revolving credit facility, offset by higher interest income in the prior period.

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Segment Results Comparison – Nine Months Ended October 30, 2010 and October 31, 2009

Equipment – Operating profit generated by the equipment segment increased to $33.7 million, or 9.4% of sales, for the nine months ended October 30, 2010 from $14.3 million, or 4.7% of sales, for the same period in Fiscal 2009 primarily due to higher sales volumes and profit margin. The $19.5 million increase in operating profit was attributable to increases of $8.9 million in sales volume and $10.6 million of margin rate.

Aftermarket Parts and Service – Operating profit generated by the aftermarket parts and service segment increased to $16.8 million in the nine months ended October 30, 2010 from $14.4 million in the same period of Fiscal 2009, representing an increase in operating profit percentage from 6.8% to 7.6%. The increase in operating profit was primarily attributable to increases in sales volume of $1.6 million and margin rate of $0.8 million.

Rental – Operating profit generated by the rental segment increased to $1.8 million in the nine months ended October 30, 2010, from $1.6 million in the same period of Fiscal 2009. Operating profit percentage increased to 10.5% for the nine months ended October 30, 2010 from 10.3% for the same period in Fiscal 2009 mainly as a result of higher sales volumes.

Corporate - Corporate and administrative expenses decreased to $23.3 million in the nine months ended October 30, 2010 compared to $28.7 million in the same period of 2009, primarily as a result of the following items which impacted the second quarter of Fiscal 2009: an accrual for a probable sales tax liability ($3.4 million) and the settlement and defense of a claim ($3.5 million), partially offset by higher compensation expense. As a result of these decreases, and due to higher sales volumes, corporate and administrative expenses decreased from 5.4% to 3.9% as a percentage of sales.

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 the nine months ended October 30, 2010, we generated net cash from operating activities of $37.1 million. The cash generated by operating activities consisted of $10.3 million as a result of changes in operating assets and liabilities, depreciation, amortization and other non-cash items of $14.2 million and $12.6 million of net earnings. The change in operating assets and liabilities is the result of increases in accounts payable, accrued payrolls and incentives, billings in excess of incurred costs, customer deposits and other, which in aggregate totaled $70.8 million and which were offset by increases in accounts receivable, inventory and recoverable costs and accrued profits not yet billed, which in aggregate totaled $60.5 million.

During the nine months ended October 31, 2009, net cash provided by operating activities was $38.1 million. The cash provided by operating activities during the nine months ended October 31, 2009 consisted of depreciation and amortization and other non-cash items of $16.0 million and changes in operating assets and liabilities of $36.3 million, partially offset by losses of $14.2 million. Changes in operating assets and liabilities were the result of decreases in accounts receivable, inventories and recoverable costs and accrued profits not yet billed, and increases in other, which in aggregate totaled $89.2 million and which were offset by decreases in accounts payable, accrued payrolls, customer deposits and billings in excess of incurred costs, which in aggregate totaled $52.9 million.

Net cash used in investing activities was $13.5 million during the nine months ended October 30, 2010, primarily for capital expenditures of $1.3 million, $10.2 million related to additions to our rental fleet and a $2.0 million increase in restricted cash. Net cash used in investing activities was $3.0 million during the nine months ended October 31, 2009. This included $2.7 million of capital expenditures and $0.7 million related to additions to our rental fleet partially offset by $0.4 million for disposals of property, plant and equipment.

Net cash used in financing activities was $21.3 million during the nine months ended October 30, 2010. This included $20.8 million in net payments to our revolving credit facility, tax distributions to holders of common units of $0.3 million and a decrease in notes payable of $0.2 million. Net cash used in financing activities was $35.0 million during the nine months ended October 31, 2009. This included $31.5 million in net payments to our revolving credit facility, tax distributions to holders of common units of $5.6 million and deferred financing costs of $0.4 million partially offset by an increase in notes payable of $2.5 million.

As of October 30, 2010, our cash and cash equivalent balance was $5.6 million. The level of cash and cash equivalents is impacted by the timing of cash receipts, disbursements and borrowings and payments under our revolving credit facility.

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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 and the terms of the asset-based revolving credit facility, our available borrowing capacity was approximately $106.4 million at October 30, 2010. While we expect to be able to refinance or renew our revolving credit facility, there are no guaranties we will be able to do so, or on substantially similar terms and conditions.

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

	As of
	October 30, 2010		January 31, 2010
(In thousands)
Revolving credit facility	$	50,138	$	70,870
Unsecured senior notes		150,000		150,000
Total	$	200,138	$	220,870

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 our total estimated capital expenditures for Fiscal 2010 will not exceed $16.0 million.

Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk

Foreign Exchange Risk

Our international subsidiaries in Colombia and Venezuela transact most of their business in their respective local currencies, while our Canadian subsidiary conducts its business in both Canadian and U.S. dollars. Revenues generated by our Canadian, Colombian and Venezuelan subsidiaries comprised 3.9%, 4.1% and 0.4%, respectively of our total revenue during the nine months ended October 30, 2010. Our results of operations were not significantly impacted by changes in currency exchange rates.

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

Beginning February 1, 2010, we utilize the U.S. dollar as the functional currency for our Venezuelan subsidiary and remeasure its financial statements into U.S. dollars at the official rate. Accordingly, using “hyperinflationary accounting,” we recognize the related losses or gains from such remeasurement of its balance sheet in the consolidated statements of its operations. During the nine months ended October 30, 2010, the official rate for Venezuela did not fluctuate significantly. As a result, the effect of remeasuring our Venezuelan subsidiary was insignificant.

Interest Rate Risk

We use variable-rate debt under our revolving credit facility 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.

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Item 4. Controls and Procedures

Effectiveness of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

Management, including our CEO and CFO, evaluated the changes in our internal control over financial reporting during the quarter ended October 30, 2010. We determined that there were no changes in our internal control over financial reporting during the quarter ended October 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

For a discussion of potential risks and uncertainties relating to our business and an investment in our senior notes, see the factors described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2010, which is accessible on the Securities and Exchange Commission’s website at www.sec.gov. There have been no material changes to the risk factors disclosed in the Form 10-K.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Removed and Reserved

Item 5. Other Information

Not applicable.

Item 6. Exhibits


31.1	Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Rule 13a-14(a)/15d-14(a) certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Section 1350 certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

The Company has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereto duly authorized.

	STEWART & STEVENSON LLC
By:	/S/ ROBERT L. HARGRAVE
	Robert L. Hargrave
	Chief Executive Officer


By:	/S/ JOHN B. SIMMONS
	John B. Simmons
	Chief Financial Officer

December 14, 2010

Stewart & Stevenson LLC - FORM 10-Q - December 14, 2010

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Stewart & Stevenson LLC Reports