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, 1997
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 33,193,868 Shares
(Class) (Outstanding at October 31, 1997)
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, 1997
and January 31, 1997.
Consolidated Condensed Statement of Earnings -- Nine Months and Three
Months Ended October 31, 1997 and 1996.
Consolidated Condensed Statement of Cash Flows -- Nine Months Ended October
31, 1997 and 1996.
Notes to Consolidated Condensed Financial Statements.
<TABLE>
<CAPTION>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
<S> <C> <C>
October 31 January 31
1997 1997
---------- ----------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and equivalent $ 17,984 $ 9,132
Accounts and notes receivable, net 170,886 160,407
Recoverable costs and accrued profits
not yet billed 159,115 156,375
Inventories:
Engineered Power Systems 76,122 54,185
Distribution 157,719 149,238
Excess of current cost over LIFO values (41,110) (39,218)
----------- -----------
192,731 164,205
Net assets of discontinued operations (Note C) 465,598 461,971
----------- -----------
TOTAL CURRENT ASSETS 1,006,314 952,090
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 231,240 210,500
Allowances for depreciation and
amortization (130,198) (118,922)
----------- -----------
101,042 91,578
INVESTMENTS AND OTHER ASSETS 41,961 34,211
----------- -----------
$1,149,317 $1,077,879
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 49,000 $ 28,000
Accounts payable 79,789 122,116
Current income taxes 71,621 65,881
Other current liabilities 48,945 37,156
----------- -----------
TOTAL CURRENT LIABILITIES 249,355 253,153
COMMITMENTS AND CONTINGENCIES (NOTE B)
LONG-TERM DEBT 381,963 319,700
DEFERRED INCOME TAXES 4,721 5,127
ACCRUED POSTRETIREMENT BENEFITS 15,178 15,091
DEFERRED COMPENSATION 5,583 5,573
SHAREHOLDERS' EQUITY
Common Stock, without par value, 100,000,000
shares authorized; 33,205,688 and 33,132,280
shares issued at October 31, 1997 and January 31,
1997, respectively, including 11,820
shares held in treasury 166,454 164,959
Retained earnings 326,096 314,309
----------- -----------
492,550 479,268
Less cost of treasury stock (33) (33)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 492,517 479,235
----------- -----------
$1,149,317 $1,077,879
=========== ===========
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
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 780,737 $ 540,236 $ 298,998 $ 231,632
Cost of sales 689,029 469,983 265,305 206,201
---------- ---------- ---------- ----------
Gross profit 91,708 70,253 33,693 25,431
Selling and administrative
expenses 53,836 49,050 18,546 16,730
Interest expense 10,545 6,056 3,399 3,288
Settlement of litigation 10,000 20,000 10,000 0
Other income, net (8,213) (2,156) (6,023) (629)
---------- ---------- ---------- ----------
66,168 72,950 25,922 19,389
---------- ---------- ---------- ----------
Earnings (loss) from continuing
operations before income taxes 25,540 (2,697) 7,771 6,042
Income tax provision (benefit) 10,150 (1,179) 4,063 2,174
---------- ---------- ---------- ----------
Earnings (loss) from continuing
operations of consolidated
companies 15,390 (1,518) 3,708 3,868
Equity in net loss of
unconsolidated affiliates (206) (163) (184) (126)
---------- ---------- ---------- ----------
Net earnings (loss) from
continuing operations $ 15,184 $ (1,681) $ 3,524 $ 3,742
Net earnings (loss) from
discontinued operations net of
tax of $1,920, $4,323, ($1,198),
and $1,619 (Note C) 5,068 7,896 (1,382) 3,447
---------- ---------- ---------- ----------
Net earnings $ 20,252 $ 6,215 $ 2,142 $ 7,189
========== ========== ========== ==========
Weighted average number of shares of
Common Stock outstanding 33,181 33,062 33,194 33,064
========== ========== ========== ==========
Net earnings (loss) per share
Continuing operations $ .46 $ (.05) $ .11 $ .11
Discontinued operations .15 .24 (.04) .11
---------- ---------- ---------- ----------
Net earnings per share $ .61 $ .19 $ .07 $ .22
========== ========== ========== ==========
Cash dividends per share $ .255 $ .25 $ .085 $ .085
========== ========== ========== ==========
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
------------------
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Operating Activities
Net earnings (loss) from continuing operations $ 15,184 $ (1,681)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Accrued postretirement benefits 87 80
Depreciation and amortization 17,416 17,305
Deferred income taxes, net (1,528) (551)
Gain on sale of dealership (4,317) 0
Change in operating assets and liabilities
net of the effect of acquisition,
divestiture and discontinued operations:
Accounts and notes receivable, net (4,757) (69,811)
Recoverable costs and accrued profits not
yet billed (2,741) 22,642
Inventories (51,514) (17,097)
Accounts payable (38,701) (2,732)
Current income taxes 5,802 (11,228)
Accrued litigation settlement 9,206 0
Other current liabilities 841 6,961
Other--principally long-term assets and
liabilities (3,195) (2,601)
----------- -----------
Net Cash Used by Continuing Operations (58,217) (58,713)
Net Cash Provided by (Used in) Discontinued
Operations 5,457 (52,376)
----------- -----------
Net Cash Used In Operating Activities (52,760) (111,089)
----------- -----------
Investing Activities
Expenditures for property, plant and equipment (24,794) (16,208)
Proceeds from sale of dealership 22,773 0
Acquisition of business (5,029) 0
Disposal of property, plant and equipment 3,279 970
----------- -----------
Net Cash Used In Investing Activities (3,771) (15,238)
----------- -----------
Financing Activities
Additions to long-term borrowings 78,885 160,018
Payments on long-term borrowings (27,532) (75,083)
Net borrowings and payments on short-term
notes payable 21,000 51,000
Dividends paid (8,465) (8,265)
Exercise of stock options 1,495 309
----------- -----------
Net Cash Provided By Financing Activities 65,383 127,979
----------- -----------
Increase in cash and equivalents 8,852 1,652
Cash and equivalents, February 1 9,132 6,325
----------- -----------
Cash and equivalents, October 31 $ 17,984 $ 7,977
=========== ===========
Supplemental disclosure of cash flow information:
Net cash paid during the period for:
Interest payments $ 18,475 $ 13,139
Income tax payments $ 9,816 $ 13,945
Non-Cash Activities:
Transfer of inventory to fixed assets -
Discontinued operations $ (8,727) $ 0
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 footnote disclosures
required by generally accepted accounting principles for complete financial
statements. However, in the opinion of management, the information
furnished reflects all normal recurring adjustments which are necessary for
a fair presentation of the results of the interim periods. The results of
operations for the nine months ended October 31, 1997 are not necessarily
indicative of the results that will be realized for the fiscal year ending
January 31, 1998.
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,
1997 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 1997"
commenced on February 1, 1997 and ends on January 31, 1998.
Net earnings per share of Common Stock are computed by dividing net
earnings 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,
1997 includes 70,000 shares issued pursuant to exercise of stock options.
The Company's consolidated financial statements for Fiscal 1996 contain
certain reclassifications to conform with the presentation used in Fiscal
1997.
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.
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.
The Company has commenced and is pursuing settlement discussions that would
resolve all pending litigation arising from the Peace Shield contract.
Under the proposed terms of a plea arrangement, the Company would be
convicted of one count of making a false statement in connection with
certain cost certifications under the Peace Shield contract. During the
third quarter, the Company recognized a $10 million pre-tax charge relating
to fines, penalties, restitution and other costs that have been incurred,
or would be incurred, as a result of the settlement of the pending
litigation.
If the Company or any of the individuals are convicted of any charges under
the indictment, whether after trial or as a result of a plea arrangement,
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 future modifications to the Family of Medium Tactical
Vehicle ("FMTV") contract 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.
The Company is a party to an arbitration proceeding before the American
Arbitration Association in Houston, Texas in which Engineering Design
Group, Inc. ("EDG") has asserted approximately $17 million in claims
against the Company, and the Company has asserted approximately $18 million
in claims against EDG relating to a turnkey contract for the construction
and installation of a power plant in Argentina by EDG. The Company is not
able to make a reasonable estimate of the possible outcome of this matter.
It is vigorously defending the claims that have been asserted against it
and is pursuing the claims it has made against EDG. If EDG is successful
on its claims against the Company and the damages are not offset in whole
or in part by the Company's claims against EDG, the Company's results of
operations for the reporting period in which these claims are resolved,
could be adversely affected.
The Company is also a party to an arbitration proceeding before the
American Arbitration Association in San Francisco, California in which
Noell, Inc. ("Noell") has asserted approximately $6 million in damages
arising from the sale of turbine-driven equipment for installation in power
plants located in Ceres, California and Lodi, California. The Company
believes that it has meritorious defenses to the claims asserted by Noell
and is vigorously defending this matter but cannot predict the outcome.
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. The Company has not established any
reserves or accruals for any potential liability that may be subsequently
found in any of the foregoing cases, except as indicated above.
Note C--Discontinued Operations
On September 22, 1997 the Company and the General Electric Company
announced the signing of a definitive agreement pursuant to which General
Electric Company will buy the Company's Gas Turbine Division for $600
million, subject to adjustments. The Gas Turbine Division designs,
engineers, manufactures and markets engine-driven equipment (including
associated spare parts) utilizing combustion turbine engines supplied by
independent manufacturers. It also packages equipment and associated
systems for the generation of electricity or mechanical drive applications
incorporating combustion turbine engines, provides spare parts for, and
services and overhauls combustion turbine powered equipment, provides
operation and maintenance service for power generation and petroleum
production facilities, except such services for reciprocating engines,
markets technical and support services for combustion turbine-driven
equipment, and provides project consulting and development services that
complement its combustion turbine-driven product lines.
The results of the Gas Turbine Division have been classified as
discontinued operations in the accompanying financial statements. Net
assets of the discontinued operations at October 31, 1997, consists
primarily of inventories and receivables. Included in net earnings from
discontinued operations for the nine months ended October 31, 1997 is a
post-measurement date loss of $356,000, which includes $1,243,000 of
allocated interest. Interest expense of $9,948,000 was allocated during the
premeasurement period of Fiscal 1997 to the discontinued operation based on
the ratio of net assets to be discontinued to the sum of total net assets
of the consolidated entity. The Company anticipates a gain on the sale,
however, it cannot be reasonably estimated at this time.
Summarized operating results of discontinued operations are as follows:
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended Three Months Ended
October 31 October 31
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 295,415 $ 256,864 $ 101,833 $ 105,202
Gross profit 43,015 49,059 8,735 17,267
Provision (benefit) for
income taxes 1,920 4,323 (1,198) 1,619
Net earnings (loss) from
discontinued operations
net of tax 5,068 7,896 (1,382) 3,447
</TABLE>
Note D -- Divestiture
On October 6, 1997 the Company sold its construction equipment dealership
for $30.2 million. The construction equipment dealership operated in the
gulf coast territory of Texas and primarily distributed, and provided
services for, products manufactured by John Deere Construction Equipment
Company and other companies engaged in the business of manufacturing earth
moving equipment, forestry equipment, skidsteer equipment, and utility
equipment. An estimated gain of $4.3 million was recognized on the sale,
however this gain is subject to adjustments.
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, the outcome of pending
and future litigation and governmental proceedings, increasing
product/service competition, 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, 1997.
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
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.3 87.0 88.7 89.0
------ ------ ------ ------
Gross profit 11.7 13.0 11.3 11.0
Selling and administrative
expenses 6.9 9.1 6.2 7.2
Interest expense 1.3 1.1 1.1 1.4
Settlement of litigation 1.3 3.7 3.4 .0
Other income, net (1.1) (.4) (2.0) (.2)
------ ------ ------ ------
8.4 13.5 8.7 8.4
------ ------ ------ ------
Earnings (loss) from
continuing operations
before income taxes 3.3 (.5) 2.6 2.6
Income taxe provision (benefit) 1.3 (.2) 1.4 .9
------ ------ ------ ------
Earnings (loss) from
continuing operations of
consolidated companies 2.0% (.3)% 1.2% 1.7%
Equity in net loss of
unconsolidated affiliates (.0) (.0) (.0) (.1)
------ ------ ------ ------
Net earnings (loss) from
continuing operations 2.0% (.3)% 1.2% 1.6%
Earnings (loss) from
discontinued operations net
of tax .6 1.5 (.5) 1.5
------ ------ ------ ------
Net earnings 2.6% 1.2% .7% 3.1%
====== ====== ====== ======
</TABLE>
Sales from continuing operations for the first nine months of the year
ending January 31, 1998 ("Fiscal 1997") increased 45% to $780,737,000
compared to sales of $540,236,000 for the same period of the year ended
January 31, 1997 ("Fiscal 1996"). Sales for the third quarter increased
$67,366,000 (29%) compared to same period Fiscal 1996.
The Distribution segment's Fiscal 1997 sales increased $67,099,000 (19%) in
the first nine months and $34,235,000 (28%) in the third quarter of Fiscal
1997 compared to the same periods in Fiscal 1996. A strengthening oil and
gas market served by the Company's Distribution territory contributed to
this improvement. Also contributing to this improvement was the Company's
acquisition of Sierra Detroit Diesel Allison, Inc. ("Sierra") during April
of 1997. Sales attributable to Sierra in the first nine months and in the
third quarter of Fiscal 1997 were $20,763,000 and $9,202,000, respectively.
The Tactical Vehicle Systems (TVS) segment sales increased $145,212,000
(147%) for the first nine months and $23,430,000 (30%) in the third quarter
of Fiscal 1997 compared to the same periods in Fiscal 1996. The increase
in TVS segment sales reflects the increase in truck production under the
"Family of Medium Tactical Vehicles" (FMTV) contract during the first nine
months of Fiscal 1997 compared to the same period in Fiscal 1996. This
increase also reflects the minimal production during the first nine months
of Fiscal 1996, which resulted from the scheduled retrofit program of
previously produced vehicles. See "Government Contract Status" below.
The Engineered Power Systems (EPS) segment sales portion from continuing
operations increased $28 million (36%) in the first nine months and $10
million (33%) in the third quarter of Fiscal 1997 compared to the same
periods in Fiscal 1996. This increase in both the quarter and the nine
months is primarily the result of increased sales of oil field service
equipment.
The gross profit margin from continuing operations of 11.7% for the first
nine months of Fiscal 1997 decreased compared to the 13.0% gross profit
margin for the same period in Fiscal 1996. This decrease primarily reflects
a change in the segment mix of sales. The gross profit margin for the
third quarter of Fiscal 1997 was 11.3% compared to 11.0% for the third
quarter of Fiscal 1996.
Selling and administrative expenses from continuing operations for the
first nine months of Fiscal 1997 decreased as a percentage of sales to 6.9%
compared to 9.1% for the same period in Fiscal 1996. Selling and
administrative expense increased 9.8% during the first nine months of
Fiscal 1997 as compared to Fiscal 1996, but at a much slower rate than the
increase in revenue, bringing SG&A closer into line with historical range.
Interest expense from continuing operations for the first nine months of
Fiscal 1997 increased to $10,545,000, up from $6,056,000 for the same
period in Fiscal 1996. The increase in interest expense over the
comparable period of the prior year was the result of increases in both
borrowings and interest rates. The average interest rate increase reflects
primarily the conversion of a large block of debt from floating rates to
higher fixed rates, during the second quarter of Fiscal 1996. During the
first nine months of Fiscal 1997, long-term debt increased $62 million
due to (i)increased working capital requirements caused by a reduction in
trade payables and (ii) the acquisition of Sierra.
Other income from continuing operations increased to $8,213,000 in the
first nine months of Fiscal 1997 compared to $2,156,000 for the same period
in Fiscal 1996 primarily due to increased interest income, gains recognized
on the sale of the construction equipment dealership of approximately
$4,317,000 and the sale of corporate real estate.
Net earnings from continuing operations of $15,184,000 ($.46 per share)
were recorded for the nine months ended October 31, 1997 as compared to a
net loss of $1,681,000 ($.05 per share) for the nine months ended October
31, 1996, which included pretax litigation charges to earnings during the
third quarter of Fiscal 1997 ($10,000,000) and the second quarter of Fiscal
1996 ($20,000,000). Comparative net earnings and earnings per share for
the first nine months of Fiscal 1997 and Fiscal 1996 prior to the
litigation charges were $22,763,000 ($.69 per share) and $11,319,000 ($.34
per share), respectively. Earnings from discontinued operations of
$5,068,000 ($.15 per share) were recorded for the nine months ended October
31, 1997 as compared to net earnings $7,896,000 ($.24 per share) for the
comparable period in Fiscal 1996.
Net earnings from continuing operations of $3,524,000 ($.11 per share)
were recorded for the third quarter of Fiscal 1997 compared to a net
earnings of $3,742,000 ($.11 per share) for the comparable period in Fiscal
1996. Comparative net earnings for the third quarter of Fiscal 1997 prior to
the litigation charge were $11,103,000 ($.33 per share). A loss of $1,382,000
($.04 per share) from discontinued operations was recorded in the third quarter
of Fiscal 1997 as compared to earnings of $3,447,000 ($.11 per share) in the
comparable period of Fiscal 1996. (See Note C.)
GOVERNMENT CONTRACT STATUS
As of October 31, 1997, the Company has produced approximately 6,859 of the
11,404 vehicles covered by the original FMTV contract plus options and
additional requirements to date. The FMTV contract is a firm fixed-price
multi-year contract and 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.
Revenues and profits realized on the FMTV contract in each accounting
period are based on the Company's estimates of total contract sales value
and costs at completion. The Company 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 (REAs) 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, 1997, 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 REAs
are in varying stages of negotiation. Although management believes that the
contract provides a legal basis for the REAs and its estimates are based on
reasonable assumptions and on a reasonable analysis of contract costs, due
to uncertainties inherent in the estimation and REAs negotiations process,
no assurances can be given that its estimates will be accurate, and
variances between such estimates and actual results could be material. In
the event that the Company is unable to recover a substantial portion of
the additional costs, or other estimates or assumptions on which the
estimated cost to complete is based are inaccurate, the Company may suffer
a material adverse effect on its earnings during the accounting period in
which such contract issues are resolved.
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 contracts 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
all 11,404 vehicles covered by the FMTV contract at the end of the third
quarter.
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. The Company has commenced and is pursuing
negotiations with the Department of Justice to resolve all charges under
the indictment. Under the terms of a proposed plea arrangement, the Company
would be convicted of making a false statement. The Company is not able to
determine what effect, if any, that such conviction would have on the
Administrative Agreement or whether such conviction will result in a
suspension or debarment of the Company.
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 also prevent the
Company from receiving future modifications to the FMTV contract 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 future financial condition and results of operations.
CERTAIN INVENTORY VALUES
The Engineered Power Systems segment's inventory at October 31, 1997
includes approximately $19,100,000 of costs on a certain U.S. Government
contract in excess of contractual authorization. On September 25, 1997,
the Armed Services Board of Contract Appeals (ASBCA) awarded the Company
excess costs of $5,326,494 plus interest and profit. The Company has filed
a motion for reconsideration. Management's position, supported by outside
counsel which specializes in government procurement law, is that the
Company will recover an amount in excess of the inventory carrying value.
In the event that the ASBCA does not revise its award, the Company will
seek review of those findings by the Court of Appeals for the Federal
Circuit.
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, 1997 and at the close of
Fiscal 1996 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
October 31 January 31
1997 1997
- -------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Engineered Power Systems
Discontinued Operations $ 607.7 $ 574.6
Continuing Operations 55.0 46.1
---------- ----------
$ 662.7 $ 620.7
Distribution 92.5 92.2
Tactical Vehicle Systems 638.1 817.3
---------- ----------
Total $ 1,393.3 $ 1,530.2
========== ==========
</TABLE>
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.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital spending for property, plant and equipment was $24,794,000 for the
first nine months of Fiscal 1997 compared to $16,208,000 for the same
period in Fiscal 1996. This increase was due in part to the construction of
new facilities.
LIQUIDITY AND SOURCES OF CAPITAL
Long-term borrowings at October 31, 1997 increased from the end of Fiscal
1996. The Company has $250,000,000 in committed credit facilities, of
which $225,000,000 is utilized at October 31, 1997, compared to
$225,000,000 committed with utilization of $175,000,000 at the end of
Fiscal 1996. The Company has additional banking relationships which provide
uncommitted borrowing arrangements. These short-term borrowings increased
to $49,000,000 at October 31, 1997 from $28,000,000 at the end of Fiscal
1996. In addition, the acquisition of Sierra Detroit Diesel Allison, Inc.
increased long-term debt by $9 million. With the pending sale of the
Company's Gas Turbine Division (See Note C), management believes that the
Company's current credit facilities are adequate to meet its foreseeable
cash requirements.
On August 25, 1997, the banks' commitments under the Company's revolving
credit notes increased from $225,000,000 to $250,000,000. All other terms,
including maturity and pricing, under the revolving credit facility remain
the same as previously reported in the Company's annual report on Form 10-
K.
The Company previously announced that a portion of the proceeds from the
sale of the Gas Turbine Division would be used to retire up to $300 million
in bank debt and to repurchase up to $120 million of the Company's Common
Stock.
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 4. Submission of Matters to a Vote of Security Holders.
None
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.
See Exhibit Index.
(b) The following report on Form 8-K was filed during the three months
ended October 31, 1997.
Form 8-K Reporting Date - October 3, 1997
Items reported - Item 5. Other Events (GE Transaction Agreement)
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 15, 1997 By: /s/ Robert L. Hargrave
Robert L. Hargrave
Chief Executive Officer
Chief Financial Officer and Chief
Accounting Officer
EXHIBIT INDEX
Exhibit Number and Description
*3.1 Third Restated Articles of Incorporation of Stewart &
Stevenson Services, Inc., effective as of September 13,
1995 (Exhibit 3(a) to 10/95 10-Q).
*3.2 Fourth Restated Bylaws of Stewart & Stevenson Services,
Inc., effective as of September 13, 1995 (Exhibit 3(b) to
10/95 10-Q).
*4.1 Note Purchase Agreement effective May 30, 1996, between
Stewart & Stevenson Services, Inc. and the Purchasers
named therein (Exhibit 4 to 7/96 10-Q).
*4.2 Rights Agreement effective March 13, 1995, between Stewart
& Stevenson Services, Inc. and The Bank of New York
(Exhibit 1 to Form 8-A Registration Statement under the
Commission File No. 001-11443).
*10.1 Lease Agreement effective April 15, 1997, between Miles
McInnes and Faye Manning Tosch, as Lessors, and the
Company, as Lessee (Exhibit 10.1 to 1/97 10-K).
*10.2 Distributor Sales and Service Agreement effective January
1, 1996, between the Company and Detroit Diesel
Corporation (Exhibit 10.2 to 1/96 10-K).
*10.3 Contract Number DAAE07-92-R001 dated October 11, 1991
between Stewart & Stevenson Services, Inc. and the United
States Department of Defense, U.S. Army Tank-Automotive
Command, as modified (Exhibit 28.1 to Form S-3
Registration Statement under the Commission File No. 33-
44149).
*10.4 Contract Number DAAE07-92-R002 dated October 15, 1991
between Stewart & Stevenson Services, Inc. and the United
States Department of Defense, U.S. Army Tank-Automotive
Command, as modified (Exhibit 28.2 to Form S-3
Registration Statement under the Commission File No. 33-
44149).
*10.5 Stewart & Stevenson Services, Inc. Deferred Compensation
Plan dated as of December 31, 1979 (Exhibit 10.8 to 1/94
10-K).
*10.6 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock
Option Plan (as amended and restated effective as of June
10, 1997)(Exhibit B to 5/9/97 Proxy Statement).
*10.7 Stewart & Stevenson Services, Inc. Supplemental Executive
Retirement Plan (Exhibit 10.11 to 1/94 10-K).
*10.8 Stewart & Stevenson Services, Inc. 1996 Director Stock
Plan (Exhibit A to 5/9/97 Proxy Statement).
*23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants (Exhibit 23.1 to 1/97 10-K).
27.1 Financial Data Schedule.
__________
*Incorporated by reference.
<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>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 17,984
<SECURITIES> 0
<RECEIVABLES> 173,157
<ALLOWANCES> (2,271)
<INVENTORY> 192,731
<CURRENT-ASSETS> 1,006,314
<PP&E> 231,240
<DEPRECIATION> (130,198)
<TOTAL-ASSETS> 1,149,317
<CURRENT-LIABILITIES> 249,355
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<COMMON> 166,454
0
0
<OTHER-SE> 326,096
<TOTAL-LIABILITY-AND-EQUITY> 1,149,317
<SALES> 780,737
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