UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
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 33,064,088 Shares
(Class) (Outstanding at October 31, 1996)
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 -- October 31, 1996 and
January 31, 1996.
Consolidated Condensed Statement of Earnings -- Nine Months and Three Months
Ended October 31, 1996 and 1995.
Consolidated Condensed Statement of Cash Flows -- Nine Months Ended October
31, 1996 and 1995.
Notes to Consolidated Condensed Financial Statements.
<TABLE>
<CAPTION>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
October 31 January 31
1996 1996
________________ ________________
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalent $ 7,977 $ 6,325
Accounts and notes receivable, net 202,637 196,548
Recoverable costs and accrued profits
not yet billed 295,213 317,855
Inventories:
Engineered Power Systems 365,230 269,119
Distribution 153,697 145,179
Excess of current cost over LIFO values (56,930) (53,580)
________________ ________________
461,997 360,718
Other 847 393
________________ ________________
TOTAL CURRENT ASSETS 968,671 881,839
PROPERTY, PLANT AND EQUIPMENT 256,973 243,491
Allowances for depreciation and
amortization (134,051) (116,436)
________________ ________________
122,922 127,055
OTHER ASSETS 35,784 31,689
________________ ________________
$1,127,377 $1,040,583
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 116,000 $ 65,000
Accounts payable 106,833 134,562
Billings on uncompleted contracts in
excess of incurred costs 6,047 14,417
Current income taxes 57,422 68,650
Other current liabilities 47,930 47,451
________________ ________________
TOTAL CURRENT LIABILITIES 334,232 330,080
COMMITMENTS AND CONTINGENCIES (SEE NOTE B)
LONG-TERM DEBT 295,717 210,800
DEFERRED INCOME TAXES 6,243 6,794
ACCRUED POSTRETIREMENT BENEFITS 15,534 15,454
DEFERRED COMPENSATION 5,477 5,540
SHAREHOLDERS' EQUITY
Common Stock, without par value, 100,000,000
shares authorized; 33,075,908 and 33,061,908
shares issued at October 31, 1996 and January
31, 1996, respectively, including 11,820
shares held in treasury 163,718 163,409
Retained earnings 306,489 308,539
________________ ________________
470,207 471,948
Less cost of treasury stock (33) (33)
________________ ________________
TOTAL SHAREHOLDERS' EQUITY 470,174 471,915
________________ ________________
$1,127,377 $1,040,583
================ ================
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(In thousands, except per share data)
Nine Months Ended Three Months Ended
October 31 October 31
_________________________________ _________________________________
1996 1995 1996 1995
_______________ _______________ _______________ _______________
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 797,100 $ 932,641 $ 336,834 $ 323,779
Cost of sales 677,788 786,193 294,136 275,822
_______________ _______________ _______________ _______________
Gross profit 119,312 146,448 42,698 47,957
Selling and administrative
expenses 75,069 67,624 25,611 23,445
Interest expense 17,625 9,642 6,847 3,542
Settlement of litigation 20,000 0 0 0
Other income, net (2,820) (2,518) (856) (1,399)
_______________ _______________ _______________ _______________
109,874 74,748 31,602 25,588
_______________ _______________ _______________ _______________
Earnings before income
taxes 9,438 71,700 11,096 22,369
Income taxes 3,144 24,021 3,793 7,458
_______________ _______________ _______________ _______________
Earnings of consolidated
companies 6,294 47,679 7,303 14,911
Equity in net earnings (loss)
of unconsolidated affiliates (79) 263 (114) 89
_______________ _______________ _______________ _______________
Net earnings $ 6,215 $ 47,942 $ 7,189 $ 15,000
=============== =============== =============== ===============
Weighted average number
of shares of Common Stock
outstanding 33,062 33,030 33,064 33,045
=============== =============== =============== ===============
Net earnings (loss) per share $ .19 $ 1.45 $ .22 $ .45
=============== =============== =============== ===============
Cash dividends per share $ .25 $ .23 $ .085 $ .08
=============== =============== =============== ===============
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
October 31
_______________________________________
1996 1995
________________ ________________
(Unaudited)
<S> <C> <C>
Operating Activities
Net earnings $ 6,215 $ 47,942
Adjustments to reconcile net earnings to net cash
used in operating activities:
Accrued postretirement benefits 80 0
Depreciation and amortization 20,188 18,222
Deferred income taxes, net (551) (863)
Change in operating assets and liabilities:
Accounts and notes receivable, net ( 6,089) ( 5,174)
Recoverable costs and accrued profits not
yet billed 22,642 (75,563)
Inventories (101,279) (31,885)
Accounts payable (27,729) (19,937)
Billings on uncompleted contracts in excess
of incurred costs (8,370) (1,003)
Current income taxes (11,228) 21,995
Other current liabilities 461 (1,092)
Other--principally long-term assets and
liabilities (4,876) (3,123)
________________ ________________
Net Cash Used In Operating Activities (110,536) (50,481)
Investing Activities
Expenditures for property, plant and equipment (17,181) (16,003)
Disposal of property, plant and equipment 1,390 942
________________ ________________
Net Cash Used In Investing Activities (15,791) (15,061)
Financing Activities
Additions to long-term borrowings 160,018 71
Payments on long-term borrowings (75,083) (67)
Net borrowings and payments on short-term
notes payable 51,000 73,000
Dividends paid (8,265) (7,600)
Exercise of stock options 309 1,259
________________ ________________
Net Cash Provided By Financing Activities 127,979 66,663
________________ ________________
Increase in cash and equivalents 1,652 1,121
Cash and equivalents, February 1 6,325 3,987
________________ ________________
Cash and equivalents, October 31 $ 7,977 $ 5,108
================ ================
Supplemental disclosure of cash flow information:
Net cash paid during the period for:
Interest payments $ 13,139 $ 8,918
Income tax payments $ 13,945 $ 6,881
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 nine months ended
October 31, 1996 are not necessarily indicative of the results that will be
realized for the fiscal year ending January 31, 1997.
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, 1996 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 1996" commenced on
February 1, 1996 and ends on January 31, 1997.
Net earnings (loss) per share of Common Stock are computed by dividing net
earnings (loss) by the weighted average number of shares outstanding. Common
Stock equivalents (outstanding options to purchase shares of Common Stock) are
excluded from the computations as they are insignificant. The weighted
average number of shares outstanding for the nine months ended October 31,
1996 includes 14,000 shares issued pursuant to exercise of stock options.
Note B--Commitments and Contingencies
On May 3, 1995, an indictment was returned by a federal Grand Jury in Houston,
Texas, accusing the Company and four employees, including the Company's
President, of one count of major fraud against the United States, four counts
of false statements and one count of conspiracy to commit major fraud, make
false statements and interfere with the administration of a foreign military
sale. All of the counts arise from a 1987 subcontract to supply diesel
generator sets for installation at long-range radar sites in Saudi Arabia (the
"Peace Shield"). The indictment alleges that a former employee of the general
contractor for the Peace Shield program, who later became a consultant to the
Company, conspired with the Company and the other defendants to award the
subcontract to the Company. The indictment also alleges that the government
was defrauded out of approximately $5 million in connection with cost savings
from a change order under the Peace Shield contract and that the Company made
false statements relating to cost estimates in connection with such change
order. The Company and each individual have denied all charges under the
indictment and the case is pending in the United States District Court,
Southern District of Texas, Houston Division. The Company is not able to make
a reasonable estimate of the fines or penalties that could be imposed under
the Federal Sentencing Guidelines in the event of a conviction under the
indictment. Such fines and penalties could be substantial and adversely affect
the Company's financial position and results of operations. If the Company or
any of the individuals are convicted of any charges under the indictment, the
Company could also be suspended or debarred from entering into new contracts
or subcontracts with agencies of the U.S. Government or receiving the benefit
of federal assistance payments for the duration of such suspension or
debarment. Any such suspension could prevent the Company from receiving a
modification to the Family of Medium Tactical Vehicle ("FMTV") contract that
would fund additional vehicles or extend the delivery schedule of funded
vehicles unless the Secretary of the Army finds a compelling need to enter
into such modification. The Company would also be unable to sell equipment
and services to customers that depend on loans or financial commitments from
the Export Import Bank ("EXIM Bank"), Overseas Private Investment Corporation
("OPIC") and similar government agencies during a suspension or debarment.
The Engineered Power Systems segment frequently sells equipment to customers
that rely on financial commitments from EXIM Bank and/or OPIC. Any such
suspension or debarment could have a material adverse impact on the Company's
financial condition and results of operations.
Also in connection with the Peace Shield contract, the Company has been
advised that the former consultant of the Company referred to above filed a
suit in the United States District Court, Southern District of Texas, Houston
Division, 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. 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 treble
damages of $21 million plus unspecified penalties. Proceedings in this case
have been stayed pending resolution of the criminal matter referred to above.
The Company cannot predict the outcome of this action or the likelihood that
substantial damages will result. However, the Company intends to vigorously
defend this case if it is served upon the Company.
On May 16, 1995, C. Daniel Chill filed a purported class action suit in the
United States District Court, Southern District of Texas, Houston Division,
against the Company and three of its officers and directors on behalf of
himself and all persons that purchased shares of Common Stock between May 2,
1994 and May 3, 1995. An amended complaint was filed on June 7, 1995. The
suit alleged that the Company violated various sections of and rules under the
Securities Exchange Act of 1934 and common law by disseminating material false
and misleading information, failing to disclose material information and
failing to correct earlier statements that were no longer true, all relating
to the Peace Shield investigation and indictment. On September 27, 1996, a
final judgment settling this litigation on terms that were not material to the
Company was approved by the court. The Company reserved all costs incurred in
connection with the settlement of this case in the second quarter of Fiscal
1996.
The Company is a defendant in a number of other lawsuits relating to
contractual, product liability, personal injury and warranty matters and
otherwise of the type normally incident to the Company's business. Management
is of the opinion that such lawsuits will not result in any material liability
to the Company. Except as set forth above, the Company has not established
any reserves or accruals for any potential liability that may be subsequently
found in any of the foregoing cases.
Note C--Long-Term Debt
On May 30, 1996 the Company completed a $135,000,000 private placement of long-
term debt. The notes are unsecured and were issued pursuant to an agreement
containing a covenant which imposes a maximum debt to total capitalization
requirement. The notes will mature in three, five, seven and ten year
increments with semi-annual interest payments at a weighted average coupon
rate of 7.01%, and have a weighted average life of 5 1/2 years. The Company
elected to reduce the $200,000,000 credit facility with commercial banks to
$150,000,000 in connection with the private placement.
Item #2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward-looking statements which are based
on assumptions such as timing, volume and pricing of customers' orders. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those outlined in the forward-looking
statements, including the risk of cancellation or adjustment of specific
orders, termination of significant government programs, decrease in demand in
the markets served, or lower-than-anticipated penetration of markets served.
This 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, 1996.
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>
Nine Months Ended Three Months Ended
October 31 October 31
__________________________________ __________________________________
1996 1995 1996 1995
________________ _______________ _______________ _______________
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 85.0 84.3 87.3 85.2
________________ _______________ _______________ _______________
Gross profit 15.0 15.7 12.7 14.8
Selling and administrative
expenses 9.4 7.3 7.6 7.2
Interest expense 2.2 1.0 2.0 1.1
Settlement of litigation 2.5 0 0 0
Other income, net (.3) (.3) (.2) (.4)
________________ _______________ _______________ _______________
13.8 8.0 9.4 7.9
________________ _______________ _______________ _______________
Earnings (loss) before income
taxes 1.2 7.7 3.3 6.9
Income taxes .4 2.6 1.1 2.3
________________ _______________ _______________ _______________
Earnings (loss) of
consolidated companies .8 5.1 2.2 4.6
Equity in net earnings of
unconsolidated affiliates .0 .0 .0 .0
________________ _______________ _______________ _______________
Net earnings (loss) .8% 5.1% 2.2% 4.6%
================ =============== =============== ===============
</TABLE>
Sales for the first nine months of the year ending January 31, 1997 ("Fiscal
1996") decreased 15% to $797,100,000 compared to sales of $932,641,000 for the
same period of the year ended January 31, 1996 ("Fiscal 1995").
The Distribution segment's Fiscal 1996 sales increased $55,278,000 (18%) in
the first nine months and $13,753,000 (12%) in the third quarter compared to
the comparable periods of Fiscal 1995. A strengthening oil and gas market
served by the Company's Distribution territory contributed to these sales
improvement, particularly among the Company's Detroit Diesel, EMD and Waukesha
product lines.
The Tactical Vehicle Systems (TVS) segment sales decreased $64,310,000 (39%)
for the first nine months of Fiscal 1996 compared to the same period in Fiscal
1995. The decrease in TVS segment sales reflects the decrease in truck
production under the "Family of Medium Tactical Vehicles" (FMTV) contract
during the first six months of Fiscal 1996 due to the scheduled retrofit
program of previously produced vehicles. See "Government Contract Status"
below. The TVS segment sales increased $6,825,000 (10%) for the third quarter
compared to the same period in Fiscal 1995, reflecting the Company's
resumption of truck production during the current year's third quarter.
The Engineered Power Systems (EPS) segment sales were the primary contributor
to the Company's sales decline, decreasing $125,703,000 (27%) for the first
nine months of Fiscal 1996 compared to the same period in Fiscal 1995. The
sales decrease in the EPS segment is attributed to the gas turbine product
line which produced $261,244,000 in sales during the first nine months of
Fiscal 1996 compared to $393,936,000 for the same period in Fiscal 1995.
Turbine-driven equipment sales decreased $156,902,000 (54%) compared to the
first nine months of Fiscal 1995. This decrease was partially offset by the
gas turbine product support group (consisting of the servicing of customers'
equipment and the long-term contracting for the operation and maintenance of
the customers' power plants) which contributed increased sales of $24,210,000
(23%) in the first nine months of Fiscal 1996 compared to the same period in
Fiscal 1995. During the third quarter of Fiscal 1996 the EPS segment sales
decreased $9,248,000 (7%) compared to the same period in Fiscal 1995 as
discussed above.
The gross profit margin of 15.0% for the first nine months of Fiscal 1996 was
comparable to the 15.7% gross profit margin for the same period in Fiscal
1995. Gross profit margins for the third quarter of Fiscal 1996 were 12.7%
compared to 14.8% for the third quarter of Fiscal 1995. This decrease in
gross profit margin reflects the decrease in turbine-driven equipment sales as
well as decrease in the gross profit margin on these sales.
Selling and administrative expenses for the first nine months of Fiscal 1996
increased as a percentage of sales to 9.4% compared to 7.3% for the same
period in Fiscal 1995, due to both the decrease in sales and the increase in
incurred expenses. Selling and administrative expenses increased 11% during
the current year which included a onetime charge of approximately $900,000
related to settling a lawsuit and substantial legal expenses related to the
"Peace Shield" litigation. Exclusive of such legal expenses, selling and
administrative expense grew about 8.2%, primarily in those business lines
having sales growth.
Interest expense for the first nine months of Fiscal 1996 increased to
$17,625,000, up from $9,642,000 for the same period in Fiscal 1995. Interest
expense for the third quarter increased to $6,847,000 up from $3,542,000 for
the same period in Fiscal 1995. The Company began increasing debt during the
fourth quarter of Fiscal 1995 to finance an increase by the EPS segment in
inventory and an increase in recoverable costs and accrued profits not yet
billed.
On July 25, 1996, a jury in Houston, Texas returned a $43,000,000 verdict
against the Company in a case filed by Serv-Tech, Inc. for breach of a secrecy
agreement. The Company's liability in connection with this matter was limited
pursuant to a pretrial agreement between the Company and Serv-Tech. The
Company recognized a pre-tax charge against earnings of $20,000,000
($13,000,000 or $.39 per share after taxes) relating to this case in the
second quarter of Fiscal 1996. The judgment based on this verdict was paid by
the Company in September 1996.
Net earnings of $6,215,000 ($.19 per share) were recorded for the nine months
ended October 31, 1996 as compared to earnings of $47,942,000 ($1.45 per
share) for the nine months ended October 31, 1995. Net earnings for the nine
months, excluding the litigation charge, would have been $19,215,000 or $.58
per share.
GOVERNMENT CONTRACT STATUS
The FMTV contract is a firm fixed-price multi-year contract whereby the price
paid to the Company is not subject to adjustment to reflect the Company's
actual costs, except costs incurred as a result of actions or inactions of
the government. The Company has completed approximately 3,800 of
approximately 11,000 trucks.
Revenues and profits realized on the FMTV contract are based on the Company's
estimates of total contract sales value and costs at completion. Stewart &
Stevenson has incurred significant cost overruns and delivery schedule delays
on the FMTV contract which the Company believes are primarily due to the
government's decision to delay the testing of trucks and other government
directed changes to the contract. The Company has and will continue to submit
a series of Requests for Equitable Adjustments or claims, under the FMTV
contract, seeking increases in the FMTV contract price for those additional
costs that relate to government caused delays and changes. Amounts in excess
of agreed upon contract price for government caused delays, disruptions,
unpriced change orders and government caused additional contract costs are
recognized in contract value when the Company believes it is probable that the
claim for such amounts will result in additional contract revenue and the
amount can be reasonably estimated.
At October 31, 1996, the Company's FMTV contract accounting position reflects
the expected recovery of substantial amounts in excess of the contract price
for government caused delays, disruptions, unpriced change orders and other
government caused additional contract costs. These claims are in varying
stages of negotiations. Although management believes that the FMTV contract
provides a legal basis for the claims and that its estimates are based on
reasonable assumptions and on a reasonable analysis of the contract costs, the
ultimate profitability of the FMTV contract will depend not only on the
accuracy of the Company's cost projections but also on the outcome of these
claims and other contractual issues. Due to uncertainties inherent in the
estimation and claim negotiation process, no assurances can be given that
management's estimates will be accurate, and variances between such estimates
and actual results could be material. If the Company is unable to recover a
substantial portion of the additional costs, previously recognized earnings may
be overstated and the Company may suffer a material adverse effect on its
operations during the accounting period in which such FMTV contract issues
are resolved. Furthermore, future earnings may be recognized at reduced rates.
The funding of the FMTV contract is subject to the inherent uncertainties of
congressional appropriations. As is typical of multi-year defense contracts,
the FMTV contract must be funded annually by the Department of the Army and
may be terminated at any time for the convenience of the government. The
Company has received full funding for the production of approximately
8,538 vehicles through May 1997. Approximately 2,620 vehicles scheduled for
production after that date have not been funded due to reductions in the U.S.
Army's budget for acquisitions. The Company completed negotiations with the
U.S. Army to modify the existing FMTV contract on October 11, 1996 providing
for the production of 7,364 vehicles over a three year period ending December
1998. The Company has requested Government Fiscal Year 1997 funding and
expects that funding to be provided upon completion of a contract modification
formalizing the above negotiations. Government Fiscal Year 1998 funding will
not be available until October 1, 1997. If the FMTV contract is terminated
other than for default, the FMTV contract provides for termination charges
that will reimburse the Company for allowable costs, but not necessarily all
costs.
EFFECT OF CERTAIN LITIGATION
On May 3, 1995, the Company and four employees, including the Company's
President, were indicted by a federal Grand Jury on six counts arising out of
a 1987 subcontract to supply diesel generator sets for installation in Saudi
Arabia. On May 12, 1995, the U.S. Air Force suspended the Company from
contracting with any agency of the U.S. Government and from receiving the
benefit of federal assistance programs. This suspension was temporarily
terminated on November 8, 1995, pending the resolution of the charges covered
by the indictment, pursuant to an Interim Administrative Agreement between the
Company and the U.S. Air Force. The Interim Administrative Agreement does not
have any effect on the indictment.
The Interim Administrative Agreement requires the Company to maintain various
internal procedures and policies intended to assure the U.S. Government that
the Company is a responsible contractor. In the event that the Company or any
of the indicted employees are convicted of the charges contained in the
indictment, the U.S. Air Force may re-evaluate whether the Company should be
suspended or debarred based on all of the facts and circumstances then known.
An acquittal of all parties of the charges does not terminate the Interim
Administrative Agreement and any failure by the Company to perform its
obligations thereunder may also be grounds for suspension or debarment.
If the Company is suspended or debarred, either because of a conviction
pursuant to the indictment or as a result of a breach of the Interim
Administrative Agreement, it would be ineligible to enter into new contracts
or subcontracts with agencies of the U.S. Government or receive the benefit of
federal assistance payments for the duration of such suspension or debarment.
Any such suspension could prevent the Company from receiving a modification to
the FMTV contract to fund additional vehicles or extend the delivery schedule
of funded vehicles unless the Secretary of the Army finds a compelling need to
enter into such modification. The Company would also be unable to sell
equipment and services to customers that depend on loans or financial
commitments from the Export Import Bank ("EXIM Bank"), Overseas Private
Investment Corporation ("OPIC") and similar government agencies during a
suspension or debarment. The Engineered Power Systems segment frequently
sells equipment to customers that rely on financial commitments from EXIM
Bank and/or OPIC. Any such suspension or debarment could have a material
adverse impact on the Company's financial condition and results of operations.
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 October 31, 1996 and at the close of Fiscal
1995 were as follows:
<TABLE>
<CAPTION>
_________________________________________________________________________________________________
October 31 January 31
1996 1996
_________________________________________________________________________________________________
(Dollars in millions)
<S> <C> <C>
Engineered Power Systems
Equipment $ 310.8 $ 208.9
Operations and Maintenance 344.7 321.8
______________ ______________
$ 655.5 $ 530.7
Distribution 77.8 50.9
Tactical Vehicle Systems 919.0 862.7
______________ ______________
Total $ 1,652.3 $ 1,444.3
============== ==============
</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 based on the number of unfilled orders for these
units, the number of proposals that are presently outstanding and the current
worldwide need for additional electrical generating capacity.
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, and options under the FMTV
contract that have been exercised by the U.S. Army to purchase additional
vehicles for the National Guard.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital spending for property, plant and equipment of $17,181,000 for the
first nine months of Fiscal 1996 was comparable to $16,003,000 for the same
period in Fiscal 1995. These amounts are consistent with the historical
capital expenditure levels of the Company.
LIQUIDITY AND SOURCES OF CAPITAL
On May 30, 1996, the Company completed a private placement of $135,000,000
debt securities with an average maturity of 5 1/2 years. The notes are
unsecured and were issued pursuant to an agreement containing a covenant which
imposes a debt to total capitalization requirement. The notes will mature in
three, five, seven and ten years increments with semi-annual interest payments
at a weighted average life and coupon rate of 5 1/2 years and 7.01%,
respectively. The proceeds from the sale of the notes were used to reduce
other outstanding indebtedness of the Company in the amount of $129,000,000
and for general corporate purposes.
Long-term borrowings at October 31, 1996 increased from the end of Fiscal
1995. Upon completion of the $135,000,000 private placement discussed above,
the Company elected to reduce the fully utilized $200,000,000 credit facility
with commercial banks to $150,000,000 which was fully utilized at October 31,
1996. The Company has additional banking relationships which provide
uncommitted borrowing arrangements. These short-term borrowings increased to
$116,000,000 at October 31, 1996 from $65,000,000 at the end of Fiscal 1995.
The Company's borrowings, both short and long term, increased approximately
$136,000,000 during the first nine months of Fiscal 1996. This significant
increase in borrowings was used primarily to fund the working capital needs of
the Company. Borrowings during the third quarter of Fiscal 1996 was affected
by the payment of $20,000,000 to discharge the judgment in favor of Serv-Tech,
Inc. See Results of Operations. With the increase in working capital
requirements, the Company is considering options to convert a portion of its
uncommitted credit arrangements to committed credit facilities.
In the event that any acquisition of additional operations, growth in existing
operations, changes in inventory levels, accounts receivable or other working
capital items create a need for working capital or capital expenditures in
excess of existing committed lines of credit, the Company may seek to convert
additional uncommitted borrowing arrangements to committed credit facilities
or to issue additional equity securities. Management believes that the
Company's current credit facilities including the options under consideration,
are adequate to meet its foreseeable cash requirements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note B to the Consolidated Condensed Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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
October 31, 1996.
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: December 12, 1996 By: /s/ Robert L. Hargrave
Robert L. Hargrave
Chief Executive Officer
Chief Financial Officer and Chief
Accounting Officer
Exhibit Number and Description
27 Financial data schedule
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<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.
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1996
<CASH> 7,977
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<RECEIVABLES> 205,049
<ALLOWANCES> (2,412)
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<CURRENT-ASSETS> 968,671
<PP&E> 256,973
<DEPRECIATION> (134,051)
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<CURRENT-LIABILITIES> 334,232
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<COMMON> 163,718
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<SALES> 797,100
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<CGS> 677,788
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<OTHER-EXPENSES> 109,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,625
<INCOME-PRETAX> 9,438
<INCOME-TAX> 3,144
<INCOME-CONTINUING> 6,215
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