FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-8493
STEWART & STEVENSON SERVICES, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1051605
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
2707 North Loop West, Houston, Texas 77008
(Address of principal executive offices) (Zip Code)
(713) 868-7700
(Registrant's telephone number, including area code)
not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check 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 for 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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, Without Par Value 32,975,440 Shares
(Class) (Outstanding at July 31, 1994)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following information required by Rule 10-01 of Regulation S-X is provided
herein for Stewart & Stevenson Services, Inc. and Subsidiaries (the "Company"):
Consolidated Condensed Statement of Financial Position -- July 31, 1994 and
January 31, 1994.
Consolidated Condensed Statement of Earnings -- Six Months and Three Months
Ended July 31, 1994 and 1993.
Consolidated Condensed Statement of Cash Flows -- Six Months Ended July 31,
1994 and 1993.
Notes to Consolidated Condensed Financial Statements.
<TABLE>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
<CAPTION>
July 31 January 31
1994 1994
_____________ ______________
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 6,649 $ 7,788
Accounts and notes receivable 135,061 147,292
Recoverable costs and accrued profits
not yet billed 147,358 115,868
Inventories:
Engineered Power Systems 202,136 217,180
Distribution 95,927 98,885
Adjustments to a LIFO Basis (48,109) (46,460)
_____________ _____________
249,954 269,605
Other 1,304 224
_____________ _____________
TOTAL CURRENT ASSETS 540,326 540,777
PROPERTY, PLANT AND EQUIPMENT 218,525 208,661
Allowances for depreciation and
amortization (91,526) (82,188)
_____________ _____________
126,999 126,473
OTHER ASSETS 28,335 25,374
_____________ _____________
$695,660 $692,624
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 22,000 $ 5,000
Accounts payable 106,857 131,780
Billings on uncompleted contracts in
excess of incurred costs 19,549 31,088
Current income taxes 29,843 27,931
Other current liabilities 37,773 45,387
_____________ _____________
TOTAL CURRENT LIABILITIES 216,022 241,186
LONG-TERM DEBT--less current portion 68,000 68,000
DEFERRED INCOME TAXES 4,992 5,868
ACCRUED POSTRETIREMENT BENEFITS 15,028 15,028
DEFERRED COMPENSATION 4,636 3,884
SHAREHOLDERS' EQUITY
Common Stock, without par value, 50,000,000
shares authorized; 32,987,260 and 32,948,885
shares issued at July 31, 1994 and January 31,
1994, respectively, including 11,820 shares
held in treasury 161,458 160,366
Retained earnings 225,557 198,325
_____________ _____________
387,015 358,691
Less cost of treasury stock (33) (33)
_____________ _____________
TOTAL SHAREHOLDERS' EQUITY 386,982 358,658
_____________ _____________
$695,660 $692,624
============= =============
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(In thousands, except per share data)
<CAPTION>
Six Months Ended Three Months Ended
___________________________ ___________________________
1994 1993 1994 1993
____________ ____________ ____________ ____________
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $546,273 $478,089 $287,118 $257,936
Cost of sales 461,512 406,377 242,903 219,912
____________ ____________ ____________ ____________
Gross profit 84,761 71,712 44,215 38,024
Selling and administrative
expenses 35,335 32,674 18,101 17,261
Interest expense 2,299 1,488 1,260 734
Other income (873) (373) (316) (43)
____________ ____________ ____________ ____________
36,761 33,789 19,045 17,952
____________ ____________ ____________ ____________
Earnings before income taxes 48,000 37,923 25,170 20,072
Income taxes 16,093 12,054 8,497 6,344
____________ ____________ ____________ ____________
Earnings of consolidated
companies 31,907 25,869 16,673 13,728
Equity in net earnings (loss)
of unconsolidated affiliates (390) 12 (185) 61
____________ ____________ ____________ ____________
Net earnings $ 31,517 $ 25,881 $ 16,488 $ 13,789
============ ============ ============ ============
Weighted average number of
shares of Common Stock
outstanding 32,955 32,813 32,968 32,843
============ ============ ============ ============
Net earnings per share $ .96 $ .79 $ .50 $ .42
============ ============ ============ ============
Cash dividends per share $ .13 $ .11 $ .07 $ .06
============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Six Months Ended
July 31
_______________________________
1994 1993
____________ ____________
(Unaudited)
<S> <C> <C>
Operating Activities
Net earnings $ 31,517 $ 25,881
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization 11,318 9,983
Deferred income taxes (876) 763
Other--principally long-term assets and liabilities (3,456) (167)
Change in operating assets and liabilities:
Receivables 12,231 13,427
Recoverable costs and accrued profits not
yet billed (31,490) (30,301)
Inventories 19,651 (965)
Accounts Payable (24,923) (13,383)
Billings on uncompleted contracts in excess
of incurred costs (11,539) 19,317
Current income taxes and other current
liabilities (4,706) 1,856
____________ ____________
Net Cash Provided (Used) By Operating Activities (2,273) 26,411
Investing Activities
Expenditures for property, plant and equipment (12,350) (19,242)
Disposal of property, plant and equipment 673 237
____________ ____________
Net Cash Used By Investing Activities (11,677) (19,005)
Financing Activities
Additions to long-term borrowings 25,216 106,739
Payments on long-term borrowings (26,212) (129,824)
Borrowings and payments on short-term notes payable 17,000 -0-
Dividends paid (4,285) (3,612)
Exercise of stock options 1,092 1,920
____________ ____________
Net Cash Provided (Used) By Financing Activities 12,811 (24,777)
____________ ____________
Decrease in cash and equivalents (1,139) (17,371)
Cash and equivalents, February 1 7,788 21,939
____________ ____________
Cash and equivalents, July 31 $ 6,649 $ 4,568
============ ============
Supplemental disclosure of cash flow information:
Net cash paid during the period for:
Interest payments $ 2,234 $ 1,624
Income tax payments $ 15,058 $ 8,083
See accompanying notes to consolidated condensed financial statements.
</TABLE>
STEWART & STEVENSON SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note A--Basis of Presentation and Significant Accounting Policies
The accompanying consolidated condensed financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X for interim financial
statements required to be filed with the Securities and Exchange Commission and
do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. However, the
information furnished reflects all normal recurring adjustments which are, in
the opinion of management, necessary for a fair statement of the results for
the interim periods. The results of operations for the six and three months
ended July 31, 1994 are not necessarily indicative of the results that will be
realized for the fiscal year ending January 31, 1995.
The accounting policies followed by the Company in preparing interim
consolidated financial statements are similar to those described in the "Notes
to Consolidated Financial Statements" in the Company's January 31, 1994 Form
10-K.
The Company's fiscal year begins on February 1 of the year indicated and ends
on January 31 of the following year. For example, "Fiscal 1994" commenced on
February 1, 1994 and ends on January 31, 1995.
Net earnings per share of Common Stock were computed by dividing net earnings
by the weighted average number of shares outstanding. Common Stock equivalents
(outstanding options to purchase shares of Common Stock) were excluded from the
computations as they were insignificant. The weighted average number of shares
outstanding for the six and three months ended July 31, 1994 includes 38,375
and 30,250 shares, respectively, issued pursuant to exercise of stock options.
Note B--Financing Arrangements
As of July 31, 1994, the Company has received commitments to amend its loan
agreement for revolving credit notes with banks ($55,000,000 subject to
reduction at the Company's election) to extend the maturity date to July 31,
1997 and reduce the commitment fee to .15 of 1% on the daily average unused
balance during the revolving period. Borrowings outstanding under the revolving
credit loan bear interest at various options, the maximum rate being the prime
rate. The revolving credit loan was issued pursuant to an agreement containing
covenants which impose a minimum net worth on the company and restrict
indebtedness and other items. Such covenants are similar to those in effect
under the Company's other long-term debt agreements.
Note C--Commitments and Contingencies
The Company has been advised that on January 5, 1993, a former consultant of
the Company filed a suit for himself and the United States of America alleging
that the Company supplied false information in violation of the False Claims
Act (the "Act"), engaged in common law fraud and misapplied costs incurred in
connection with a change order under a 1987 government subcontract. Under the
provisions of the Act, the suit has not been served upon the Company pending an
investigation of the case by the U. S. Department of Justice and a
determination as to whether the Department of Justice will intervene and pursue
the matter on behalf of the United States. The suit alleges damages of $21
million plus unspecified penalties. The Company has denied any wrongdoing in
connection with the pricing of the change order and believes that the case will
be resolved, if served on the Company, without any material effect on the
financial position, net worth or results of operations of the Company.
The Company is a defendant in a number of other lawsuits of the type normally
associated with the Company's business and involving claims for damages.
Management is of the opinion that such lawsuits will not result in any material
liability to the Company.
In connection with the sale of gas turbine engine-driven equipment and the
execution of an operating and maintenance contract, the Company has entered
into an agreement with a bank under which the Company will repurchase a power
plant in the event that the owner defaults in the repayment of the loan secured
by the power plant. The repurchase obligation runs for eight years from the
date of commercial operation of the power plant and specifies a repurchase
price not to exceed $29 million.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the fiscal year
ended January 31, 1994.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
sales represented by certain items reflected in the Company's Consolidated
Condensed Statement of Earnings.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
July 31 July 31
1994 1993 1994 1993
_________ _________ _________ _________
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 84.5 85.0 84.6 85.3
_________ _________ _________ _________
Gross profit 15.5 15.0 15.4 14.7
Selling and administrative
expenses 6.5 6.9 6.3 6.7
Interest expense .4 .3 .4 .3
Other income (.2) (.1) (.1) .0
_________ _________ _________ _________
6.7 7.1 6.6 7.0
_________ _________ _________ _________
Earnings before income taxes 8.8 7.9 8.8 7.7
Income taxes 2.9 2.5 3.0 2.4
_________ _________ _________ _________
Earnings of consolidated
companies 5.9 5.4 5.8 5.3
Equity in net earnings (loss) (.1) .0 (.1) .0
_________ _________ _________ _________
Earnings before change in
accounting 5.8% 5.4% 5.7% 5.3%
========= ========= ========= =========
</TABLE>
Sales for the first half of the year ending January 31, 1995 ("Fiscal 1994")
increased 14.3% to $546,273,000 compared to sales of $478,089,000 for the same
period in the year ended January 31, 1994 ("Fiscal 1993"). Sales for the
second quarter of Fiscal 1994 increased 11.3% to $287,118,000 compared to sales
of $257,936,000 during the second quarter of Fiscal 1993. The Company's
Tactical Vehicle Systems (TVS) segment was the primary contributor to these
increases, as it increased sales $60,756,000 (243%) and $42,946,000 (256%) for
the first half and second quarter of Fiscal 1994, respectively, compared to the
same periods in Fiscal 1993. Truck production under the "Family of Medium
Tactical Vehicles" (FMTV) contract continues to increase steadily, with 478
trucks produced in the second quarter of Fiscal 1994, up from 237 in the first
quarter. However, discussions are now taking place with the U. S. Army which
could stretch out the FMTV contract. Because of this potential change and two
other contract modifications, expected Fiscal 1994 FMTV production has been
reduced from 2,400 trucks to 1,750 trucks. The Engineered Power Systems (EPS)
segment sales increased $6,325,000 (2.1%) for the first half of Fiscal 1994
compared to Fiscal 1993, but decreased $12,209,000 (7.6%) for the second
quarter of Fiscal 1994 compared to Fiscal 1993. Year-to-date sales of turbine-
driven generators were flat compared to prior year levels, while second quarter
sales decreased. The gas turbine operations and maintenance group continued
its strong performance with a 36% increase over both the first half and second
quarter levels of Fiscal 1993. Within the diesel group, airline product sales
were outstanding for the first half of Fiscal 1994, reflecting the successful
integration of two additional product lines which were acquired a year ago.
Petroleum equipment sales decreased significantly in the second quarter of
Fiscal 1994 compared to Fiscal 1993.
Gross profit margins for the first half and second quarter of Fiscal 1994
strengthened over the same periods in Fiscal 1993 as the EPS, TVS and
Distribution segments all registered operating margins improvements. Gross
profit margins for the TVS segment are now being recorded at 4.4%, up from
4.0%.
Selling and administrative expenses incurred by the Company during the first
half and second quarter of Fiscal 1994 increased 8.1% and 4.9%, respectively,
when compared to the same periods in Fiscal 1993, primarily due to increases in
spending levels associated with the increased sales volume. However, selling
and administrative expenses for the first half and second quarter of Fiscal
1994 have declined as a percentage of sales to 6.5% and 6.3% respectively, as
compared to 6.7% for the same periods in Fiscal 1993.
Interest expense as a percentage of sales remained comparable for both Fiscal
1994 and Fiscal 1993. The dollar increase in interest expense in Fiscal 1994
is the result of an increase in both outstanding debt and interest rates.
Net earnings of $31,517,000 ($.96 per share) and $16,488,000 ($.50 per share)
for the first half and second quarter of Fiscal 1994, respectively, represent
21.8% and 19.6% increases over the same periods in Fiscal 1993. This growth in
earnings is primarily the result of the increases in sales and operating
margins discussed above.
GOVERNMENT CONTRACTING
As discussed previously, the U. S. Army is discussing with the Company the
possibility of stretching out the FMTV contract by twenty-one months. Such
discussions involve modifying the production schedules for Fiscals 1994, 1995
and 1996 to move production into Fiscals 1997 and 1998. Should such a change
be negotiated, the U. S. Army would be expected to absorb any cost impact
caused by a revised production schedule.
UNFILLED ORDERS
The Company's unfilled orders consist of written purchase orders, letters of
intent, and oral commitments. These unfilled orders are generally subject to
cancellation or modification due to customer relationships or other conditions.
Purchase options are not included in unfilled orders until exercised. Unfilled
orders at July 31, 1994, and at the close of Fiscal 1993 were as follows:
<TABLE>
______________________________________________________________________________________________
<CAPTION>
July 31 January 31
1994 1994
______________________________________________________________________________________________
(Dollars in millions)
<S> <C> <C>
Engineered Power Systems
Equipment $ 503.1 $ 491.5
Operations and Maintenance 270.0 269.7
________ ________
773.1 761.2
Distribution 37.6 32.6
Tactical Vehicle Systems 1,032.8 1,119.5
________ ________
Total $1,843.5 $1,913.3
======== ========
</TABLE>
Although no assurance can be given, the Company expects sales of the Engineered
Power Systems segment to continue to be weighted in favor of turbine-driven
equipment because of the large number of unfilled orders for these units, the
number of proposals that are presently outstanding and the current need for
additional electrical generating capacity in the United States and in many
foreign countries.
Unfilled orders of the Tactical Vehicle Systems segment consists principally of
the contracts awarded in October 1991, by the United States Department of the
Army, to manufacture medium tactical vehicles.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital spending for property, plant and equipment totalled $12,350,000 in the
first half of Fiscal 1994 compared to $19,242,000 in the first half of Fiscal
1993. This decrease in the first half of 1994 reflects the return to
historical capital expenditure levels after expansion programs at the EPS and
TVS segment locations during the two previous fiscal years.
LIQUIDITY AND SOURCES OF CAPITAL
Long-term borrowings at July 31, 1994 were unchanged from the end of Fiscal
1993. The Company has $55,000,000 in committed credit facilities, which were
fully utilized as of July 31, 1994. The Company also has additional banking
relationships which provide uncommitted borrowing arrangements. These short-
term borrowings increased to $22,000,000 at July 31, 1994 as compared to
$5,000,000 at the end of Fiscal 1993. The increase in overall borrowing levels
is primarily attributable to increased working capital needs of the gas turbine
operations of the EPS segment and the TVS segment, which fluctuate
significantly depending on the progress payment streams of the contracts-in-
process. The Company regularly bids on large commercial and military contracts
which, if awarded to the Company, could significantly affect both working
capital and capital expenditure needs. The Company may expand its Distribution
and Engineered Power Systems segments by selective acquisition of additional
distribution territories and product lines. In the event that such activities
create a need for working capital or capital expenditures in excess of existing
committed lines of credit, the Company may seek to convert its uncommitted
borrowing arrangements to committed credit facilities, to borrow under other
long-term financing sources or to issue additional equity securities. The
Company's current credit facilities appear adequate to meet its foreseeable
cash requirements.
ACCOUNTING DEVELOPMENTS
In November 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112 "Employers' Accounting for
Postemployment Benefits" (FASB 112), which is effective for fiscal years
beginning after December 15, 1993. The effect of initially applying this
statement is to be reported as the effect of a change in accounting principle.
This new statement will require accrual of postemployment benefits during the
years an employee provides services. The Company anticipates adoption of the
new standard in the fourth quarter of Fiscal 1994, and management's initial
estimates indicate that FASB 112 will not have a material impact on the
Company's financial position or results of operations.
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
(a) Inapplicable.
(b) Note B to the consolidated condensed financial statements in Part I of
this report is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on June 14, 1994.
Set forth below is a brief description of each matter acted upon at the meeting
and the number of votes cast for, against or withheld, and abstaining or not
voting as to each matter.
Election of Directors
<TABLE>
<CAPTION>
AGAINST OR
FOR WITHHELD
___ __________
<S> <C> <C>
C. Jim Stewart II 27,217,137 535,788
J. W. Lander, Jr. 27,233,820 519,105
Bob H. O'Neal 27,286,624 466,301
Jack T. Currie 27,249,080 503,845
</TABLE>
Ratification of Accountants
<TABLE>
<CAPTION>
AGAINST OR ABSTAINED OR
FOR WITHHELD NOT VOTED
___ __________ ____________
<C> <C> <C>
27,659,393 13,872 79,660
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of this report pursuant to Item
601 of Regulation S-K.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the three months ended July 31,
1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEWART & STEVENSON SERVICES, INC.
Date: Sept 13, 1994 By: /s/ Robert L. Hargrave
_____________ _________________________
Robert L. Hargrave
Group Vice President, Chief Financial
Officer & Treasurer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit Number and Description
(27) Financial data schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS QTR-2
<FISCAL-YEAR-END> JAN-31-1995 JAN-31-1995
<PERIOD-END> JUL-31-1994 JUL-31-1994
<CASH> 6,649 6,649
<SECURITIES> 0 0
<RECEIVABLES> 135,061 135,061
<ALLOWANCES> 0 0
<INVENTORY> 397,312 397,312
<CURRENT-ASSETS> 540,326 540,326
<PP&E> 218,525 218,525
<DEPRECIATION> (91,526) (91,526)
<TOTAL-ASSETS> 695,660 695,660
<CURRENT-LIABILITIES> 216,022 216,022
<BONDS> 68,000 68,000
<COMMON> 161,458 161,458
0 0
0 0
<OTHER-SE> 225,524 225,524
<TOTAL-LIABILITY-AND-EQUITY> 695,660 695,660
<SALES> 546,273 287,118
<TOTAL-REVENUES> 546,273 287,118
<CGS> 461,512 242,903
<TOTAL-COSTS> 461,512 242,903
<OTHER-EXPENSES> 36,761 19,045
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,299 1,260
<INCOME-PRETAX> 48,000 25,170
<INCOME-TAX> 16,093 8,497
<INCOME-CONTINUING> 31,517 16,488
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 31,517 16,488
<EPS-PRIMARY> .96 .50
<EPS-DILUTED> 0 0
</TABLE>
