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 July 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 July 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 -- July 31, 1997
and January 31, 1997.
Consolidated Condensed Statement of Earnings -- Six Months and Three
Months Ended July 31, 1997 and 1996.
Consolidated Condensed Statement of Cash Flows -- Six Months Ended July
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>
July 31 January 31
1997 1997
------- ----------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and equivalent $ 13,581 $ 9,132
Accounts and notes receivable, net 243,308 237,062
Recoverable costs and accrued profits
not yet billed 310,480 326,952
Inventories:
Engineered Power Systems 301,944 306,946
Distribution 177,051 149,238
Excess of current cost over LIFO values (56,953) (55,202)
----------- -----------
422,042 400,982
----------- -----------
TOTAL CURRENT ASSETS 989,411 974,128
PROPERTY, PLANT AND EQUIPMENT 288,867 262,192
Allowances for depreciation and
amortization (152,206) (138,759)
----------- -----------
136,661 123,433
INVESTMENTS AND OTHER ASSETS 50,508 47,724
----------- -----------
$1,176,580 $1,145,285
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 38,000 $ 28,000
Accounts payable 108,713 165,999
Billings on uncompleted contracts in
excess of incurred costs 7,727 9,354
Current income taxes 70,395 65,881
Other current liabilities 54,690 51,325
----------- -----------
TOTAL CURRENT LIABILITIES 279,525 320,559
COMMITMENTS AND CONTINGENCIES (SEE NOTE B)
LONG-TERM DEBT 378,997 319,700
DEFERRED INCOME TAXES 4,136 5,127
ACCRUED POSTRETIREMENT BENEFITS 15,149 15,091
DEFERRED COMPENSATION 5,576 5,573
SHAREHOLDERS' EQUITY
Common Stock, without par value, 100,000,000
shares authorized; 33,205,688 and 33,132,280 shares
issued at July 31, 1997 and January 31,
1997, respectively, including 11,820
shares held in treasury 166,454 164,959
Retained earnings 326,776 314,309
----------- -----------
493,230 479,268
Less cost of treasury stock (33) (33)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 493,197 479,235
----------- -----------
$1,176,580 $1,145,285
=========== ===========
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)
Six Months Ended Three Months Ended
July 31 July 31
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 675,321 $ 460,266 $ 345,908 $ 240,726
Cost of sales 583,026 383,652 299,380 202,215
---------- ---------- ---------- ----------
Gross profit 92,295 76,614 46,528 38,511
Selling and administrative
expenses 54,698 49,458 28,959 25,126
Interest expense 14,429 10,778 7,507 6,033
Settlement of litigation 0 20,000 0 20,000
Other income, net (4,451) (1,964) (2,693) (965)
---------- ---------- ---------- ----------
64,676 78,272 33,773 50,194
---------- ---------- ---------- ----------
Earnings (loss) before income
taxes 27,619 (1,658) 12,755 (11,683)
Income taxes 9,205 (649) 4,252 (3,928)
---------- ---------- ---------- ----------
Earnings (loss) of consolidated
companies 18,414 (1,009) 8,503 (7,755)
Equity in net earnings (loss)
of unconsolidated affiliates (304) 35 (275) 68
---------- ---------- ---------- ----------
Net earnings (loss) $ 18,110 $ (974) $ 8,228 $ (7,687)
========== ========== ========== ==========
Weighted average number of shares of
Common Stock outstanding 33,174 33,060 33,193 33,064
========== ========== ========== ==========
Net earnings (loss) per share $ .55 $ (.03) $ .25 $ (.23)
========== ========== ========== ==========
Cash dividends per share $ .17 $ .165 $ .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)
Six Months Ended
July 31
----------------
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Operating Activities
Net earnings (loss) $ 18,110 $ (974)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Accrued postretirement benefits 58 56
Depreciation and amortization 13,552 12,830
Deferred income taxes, net (2,113) (512)
Change in operating assets and liabilities
net of the effect of acquisition:
Accounts and notes receivable, net (312) (17,481)
Recoverable costs and accrued profits not
yet billed 16,472 (8,693)
Inventories (22,606) (39,912)
Accounts payable (58,080) (36,256)
Billings on uncompleted contracts in excess
of incurred costs (1,627) (7,829)
Accrued litigation settlement 0 20,000
Current income taxes 4,514 (14,252)
Other current liabilities 1,616 (2,346)
Other--principally long-term assets and
liabilities (1,144) (6,741)
----------- -----------
Net Cash Used In Operating Activities (31,560) (102,110)
Investing Activities
Expenditures for property, plant and equipment (15,352) (9,860)
Acquisition of business (5,029) 0
Disposal of property, plant and equipment 2,144 1,243
----------- -----------
Net Cash Used In Investing Activities (18,237) (8,617)
Financing Activities
Additions to long-term borrowings 75,832 160,000
Payments on long-term borrowings (27,445) (75,050)
Net borrowings and payments on short-term
notes payable 10,000 31,000
Dividends paid (5,636) (5,455)
Exercise of stock options 1,495 309
----------- -----------
Net Cash Provided By Financing Activities 54,246 110,804
Increase in cash and equivalents 4,449 77
Cash and equivalents, February 1 9,132 6,325
----------- -----------
Cash and equivalents, July 31 $ 13,581 $ 6,402
=========== ===========
Supplemental disclosure of cash flow information:
Net cash paid during the period for:
Interest payments $ 13,091 $ 9,124
Income tax payments $ 8,665 $ 14,046
Non-Cash Activities:
Transfer of inventory to fixed assets (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 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 months ended July 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 six months ended July 31, 1997
includes 70,000 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
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.
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.
The Company has commenced and is pursuing settlement negotiations with the
Department of Justice to resolve all litigation arising from the Peace
Shield contract. The Company is not able to predict whether such
negotiations will be successful at this time or whether such settlement
would result in the suspension or debarment of the Company for any period.
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
and 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
but cannot predict the outcome and is vigorously defending this matter.
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.
Note C--Subsequent Events
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.
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>
Six Months Ended Three Months Ended
July 31 July 31
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.3 83.4 86.5 84.0
------ ------ ------ ------
Gross profit 13.7 16.6 13.5 16.0
Selling and administrative
expenses 8.1 10.7 8.4 10.4
Interest expense 2.1 2.3 2.2 2.5
Settlement of litigation 0 4.3 0 8.3
Other income, net (.6) (.4) (.8) (.4)
------ ------ ------ ------
9.6 16.9 9.8 20.8
------ ------ ------ ------
Earnings (loss) before income
taxes 4.1 (.3) 3.7 (4.8)
Income taxes 1.4 (.1) 1.2 (1.6)
------ ------ ------ ------
Earnings (loss) of
consolidated companies 2.7 (.2)% 2.5 (3.2)%
Equity in net earnings (loss)of
unconsolidated
affiliates .0 .0 (.1) .0
------ ------ ------ ------
Net earnings (loss) 2.7% (.2)% 2.4% (3.2)%
====== ====== ====== ======
</TABLE>
Sales for the first six months of the year ending January 31, 1998 ("Fiscal
1997") increased 47% to $675,321,000 compared to sales of $460,266,000 for
the same period of the year ended January 31, 1997 ("Fiscal 1996"). Sales for
the second quarter increased $105,182,000 (44%) compared to same period Fiscal
1996.
The Distribution segment's Fiscal 1997 sales increased $32,863,000 (14%) in
the first six months and $23,714,000 (19%) in the second quarter of Fiscal
1997 compared to the comparable periods of 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 six months
and in the second quarter of Fiscal 1997 were $11,561,000 and $9,672,000,
respectively.
The Tactical Vehicle Systems (TVS) segment sales increased $121,783,000
(615%) for the first six months and $58,065,000 (996%) in the second
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 six months of Fiscal 1997 compared to the same period in Fiscal 1996.
This increase also reflects the minimal production during the first six
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 increased $60 million
(30%) in the first six months and $24 million (21%) in the second quarter
of Fiscal 1997 compared to the same periods in Fiscal 1996. Turbine-driven
equipment sales increased $33 million (48%)in the first six months and $26
million (75%) in the second quarter of Fiscal 1997 compared to the
comparable periods of Fiscal 1996. Gas turbine product support group
(consisting of the servicing of customers' equipment and the long-term
contracting for the operation and maintenance of customers' power plants)
sales increased $17 million during the first six months and $6 million in
the second quarter of Fiscal 1997 compared to the same periods in Fiscal
1996. Engineered Power Systems diesel driven products sales increased $13
million in the first six months and $5 million in the second quarter of
Fiscal 1997 compared to the same periods in Fiscal 1996.
The gross profit margin of 13.7% for the first six months of Fiscal 1997
decreased compared to the 16.6% gross profit margin for the same period in
Fiscal 1996. The gross profit margin for the second quarter of Fiscal 1997
was 13.5% compared to 16.0% for the second quarter of Fiscal 1996. This
decrease primarily reflects a change in the segment mix of sales and lower
margins in the turbine-driven equipment product line. The gas turbine-
driven equipment margin was negatively impacted by introduction costs
associated with certain new products and a very competitive market for
mature product lines.
Selling and administrative expenses for the first six months of Fiscal 1997
decreased as a percentage of sales to 8.1% compared to 10.7% for the same
period in Fiscal 1996. Selling and administrative expense increased (11%)
during the first six months of Fiscal 1997, but at a much slower rate than
the increase in revenue, bringing SG&A closer into line with historical
range.
Interest expense for the first six months of Fiscal 1997 increased to
$14,429,000, up from $10,778,000 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 six months of Fiscal 1997, long-term debt
increased $59 million due to (i)increased working capital requirements caused by
a reduction in trade payables and (ii) the acquisition of Sierra.
Other income increased to $4,451,000 in the first six months of Fiscal 1997
compared to $1,964,000 for the same period in Fiscal 1996 primarily due to
increased interest income.
Net earnings of $18,110,000 ($.55 per share) were recorded for the six
months ended July 31, 1997 as compared to loss of $974,000 ($.03 per share)
for the six months ended July 31, 1996, which included a $20,000,000 pretax
litigation charge to earnings during the second quarter of Fiscal 1996.
Comparative net earnings and earnings per share for the first six months of
1996 prior to the litigation charge, were $12,026,000 and $.36 per share,
respectively. Using these comparative numbers, first-half net earnings
increased 51% year-to-date.
Net earnings of $8,228,000 ($.25 per share) were recorded for the second
quarter of Fiscal 1997 compared to a loss of $7,687,000 ($.23 per share)
for the comparable period in Fiscal 1996. Comparative net earnings and
earnings per share for the second quarter of 1996 prior to the litigation
charge were $5,313,000 and $.16 per share, respectively.
GOVERNMENT CONTRACT STATUS
As of July 31, 1997, the Company has produced approximately 5,942 of the
11,197 vehicles covered by the original contract plus options and
additional requirements to date. 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.
Revenues and profits realized on the FMTV contract 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 July 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,
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 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
approximately 10,155 vehicles through August 1998. It is anticipated that
the remaining 1,042 vehicles will be funded after October 1997 when the
1998 Government fiscal year funding is approved. 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. The Company has commenced and is pursuing
negotiations with the Department of Justice to resolve all charges under
the indictment. The Company is not able to determine what effect, if any,
that such discussions will have on the Administrative Agreement or whether
such discussions 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.
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, 1997 and at the close of
Fiscal 1996 were as follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
July 31 January 31
1997 1997
- -------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Engineered Power Systems
Equipment $ 380.5 $ 324.0
Operations and Maintenance 294.7 296.7
---------- ----------
$ 675.2 $ 620.7
Distribution 97.3 92.2
Tactical Vehicle Systems 799.3 817.3
---------- ----------
Total $ 1,571.8 $ 1,530.2
========== ==========
</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.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital spending for property, plant and equipment was $15,352,000 for the
first six months of Fiscal 1997 compared to $9,860,000 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 July 31, 1997 increased from the end of Fiscal
1996. The Company has $225,000,000 in committed credit facilities which
were utilized at July 31, 1997 compared to utilization of $175,000,000 at
the end of Fiscal 1996. Subsequent to July 31, 1997, the Company obtained
an increase in committed credit facilities to $250,000,000. The Company has
additional banking relationships which provide uncommitted borrowing
arrangements. These short-term borrowings increased to $38,000,000 at July
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.
In the event that any acquisition of additional operations, growth in
existing operations, changes in inventory levels, new capital investments,
accounts receivable or other working capital items create a permanent 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 and available options for external sources of
funds 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 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on June 10,
1997. 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
AGAINST OR
FOR WITHHELD
--- ----------
C. Jim Stewart, II 29,324,893 424,303
Jack W. Lander, Jr. 29,319,896 429,300
Bob H. O'Neal 23,799,083 5,950,113
Jack T. Currie 29,320,791 428,405
Approval of 1996 Director Stock Plan
AGAINST OR
FOR WITHHELD ABSTAINED
--- ---------- ---------
28,528,789 861,814* 303,024
Approval of 1988 Nonstatutory Stock Option Plan (as amended
and restated effective as of June 10,1997)
AGAINST OR
FOR WITHHELD ABSTAINED
--- ---------- ---------
28,314,230 1,059,818* 319,579
Ratification of Accountants
AGAINST OR
FOR WITHHELD ABSTAINED
--- ---------- ---------
29,614,291 63,416 71,489
*Broker Non-votes 55,569
Item 5. Other Information.
During the second quarter of Fiscal 1997, the Company announced the
pending sale of its construction equipment dealership. The construction
equipment dealership operates in the gulf coast area and primarily
distributes and services 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.
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) No reports on Form 8-K were filed during the three months ended
July 31, 1997.
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: September 12, 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.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
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