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TABLE OF CONTENTS
PART IV

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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-K

Commission File Number 001-33836

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

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

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

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

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

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

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

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

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

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

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

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

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*

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.

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Special Note Regarding Forward-Looking Statements

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

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

•

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



•

competitive pressures in the industries that we serve;



•

factors affecting our international sales and operations;



•

the potential loss of a key OEM supplier;



•

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



•

our ability to translate backlog into revenue and profit;



•

the effect of regulation of hydraulic fracturing on the demand for our products;



•

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



•

the hazards to which our employees and customers are exposed during the conduct of our business;



•

the occurrence of events not covered by insurance;



•

our susceptibility to adverse weather conditions affecting the Gulf Coast;



•

unforeseen difficulties relating to acquisitions;



•

our ability to attract and retain qualified employees;



•

our failure to maintain key licenses;



•

our ability to protect our intellectual property;



•

our level of indebtedness and restrictions on our activities imposed by our debt instruments;



•

our principal stockholder could exercise control of our affairs through his beneficial ownership of a majority of our common equity; and



•

the other factors described under "Item 1A.—Risk Factors."

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

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

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

PART I

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

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

ITEM 1.    Business

Our company

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

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

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

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

Crown acquisition

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

EMDSI acquisition

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

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

Our business

        We manage our business through the following two segments:

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

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

Products and services

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

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 record sales of these products in our manufacturing segment. We distribute stand-alone products manufactured by us. We record sales of these products in our distribution segment.

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

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        The following table lists the equipment we provide:

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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 our product offerings from our six key OEMs, we have been the factory-authorized parts and service provider for specified territories, principally in major oil and gas producing regions in the United States. Approximately 34.9% of our total revenues for Fiscal 2010 were from aftermarket parts and service operations. For Fiscal 2010, approximately 57.1% of the aftermarket parts and service revenues pertained to products sourced from our six key OEMs. Both our manufacturing and distribution segments generate revenues from aftermarket parts and service.

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

Rental

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

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        The following table lists our rental products:

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

Customers and Markets

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

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

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

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

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

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

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Manufacturing and engineering design

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

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

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

Sales and Marketing

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

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

Backlog

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

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

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

Competition

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

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

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

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

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

Suppliers and Raw Materials

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

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

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

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

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Employees

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

Trademarks and patents

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

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

Environmental, health and safety matters and other regulatory matters

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

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

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

ITEM 1A.    Risk Factors

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

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

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



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



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

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

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We face competition in each of our businesses.

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

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

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

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

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

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

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

•

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.

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

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

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

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

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

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

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

•

Detroit Diesel Corporation;



•

MTU Friedrichshafen;



•

Allison Transmission, Inc.;



•

Electro-Motive Diesel, Inc.;



•

Hyster Company; and



•

Deutz Corporation.

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

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

•

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

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•

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•

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



•

development of management expertise outside of our existing business;



•

diversion of management time and resources;



•

harm to our existing business relationships;



•

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 able to consummate acquisitions.

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

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

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

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

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

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

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

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

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

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

•

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; or



•

the confidentiality procedures that we have in place for maintaining trade secrets and other proprietary information may not be 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 important, but requires significant resources, particularly if litigation is necessary. Potential litigation could divert our management's time, attention and resources, delay our product shipments or require us to enter into royalty or license agreements, which may not be available under commercially reasonable terms, if at all. Moreover, the value of our intellectual property rights may be impaired without infringement occurring.

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

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

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

•

our 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 level of 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 level of 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.

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

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

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

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

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

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

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

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

ITEM 1B.    Unresolved Staff Comments

        None.

ITEM 2.    Properties

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

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

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

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ITEM 3.    Legal Proceedings

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

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

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

ITEM 4.    [Removed and Reserved]

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PART II

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

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

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

ITEM 6.    Selected Financial Data

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

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

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

Overview

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

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

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

•

EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;



•

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;



•

EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt; and



•

although depreciation, amortization and impairment of goodwill and indefinite-lived intangible assets are non-cash charges, certain of these assets are being depreciated and amortized and will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.

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

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

Business drivers and measures

Revenue factors

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

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

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

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

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

        Seasonality.    Our revenues are not significantly affected by seasonality.

Operational factors

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

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

Presentation of historical financial information

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

Operation as an LLC

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

Segment presentation

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

•

Manufacturing, which includes the design, manufacture and marketing of equipment for oilfield service providers, drilling and workover contractors, U.S. and international oilfield service companies, and national oil companies. We provide parts and service to customers primarily in the oil and gas industry.



•

Distribution, which includes the distribution of stand-alone products and the provision of aftermarket parts and service for products manufactured by us, our key OEMs and other manufacturers, as well as the renting of equipment, including generator sets, rail car movers and material handling equipment.

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•

Corporate and shared services, which includes administrative overhead normally not associated with specific activities within our operating segments.

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

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

Critical accounting policies

Use of estimates and assumptions

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

Revenue recognition

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

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

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

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

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Accounts receivable

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

Inventories

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

Goodwill and indefinite-lived intangible assets

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

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

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

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

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

Long-lived assets

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

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

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

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

Warranty costs

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

Customer deposits

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

Insurance

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

Comparison of results of operations—Fiscal 2010 and Fiscal 2009

Sales

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

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        A breakdown of sales for the periods is as follows:

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

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

Gross profit

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

Selling and administrative expenses

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

Other (income) expense, net

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

Operating profit

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

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Interest expense, net

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

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

Sales

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

        A breakdown of sales for these periods is as follows:

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

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

Gross profit

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

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Selling and administrative expenses

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

Other expense (income), net

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

Operating (loss) profit

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

Interest expense, net

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

Segment data

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

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

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

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        Our reportable segments are as follows:

Manufacturing

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

Distribution

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

Corporate and shared services

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

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

Segment results comparison—Fiscal 2010 and Fiscal 2009

Manufacturing

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

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

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Distribution

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

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

Corporate and shared services

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

Segment results comparison—Fiscal 2009 and Fiscal 2008

Manufacturing

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

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

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Distribution

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

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

Corporate and shared services

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

Liquidity and capital resources

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

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

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

Cash Flows

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