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, 1998
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 27,984,035 Shares
(Class) (Outstanding at September 1, 1998)
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, 1998
and January 31, 1998.
Consolidated Condensed Statement of Earnings -- Six Months and Three
Months Ended July 31, 1998 and 1997.
Consolidated Condensed Statement of Cash Flows -- Six Months Ended
July 31, 1998 and 1997.
Notes to Consolidated Condensed Financial Statements.
<TABLE>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL
POSITION
(Dollars in thousands)
<CAPTION>
July 31 January 31
1998 1998
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 180,890 $ 18,987
Accounts and notes receivable, net 143,481 185,033
Receivable from sale of Gas Turbine Operations -- 600,000
Recoverable costs and accrued profits
not yet billed 144,921 138,208
Inventories:
Engineered Power Systems 60,879 46,551
Power Products 168,979 166,918
Excess of current cost over LIFO values (46,842) (45,892)
----------- -----------
(46,531) (45,892)
----------- -----------
183,016 167,577
----------- -----------
TOTAL CURRENT ASSETS 652,308 1,109,805
PROPERTY, PLANT AND EQUIPMENT 257,270 227,152
Allowances for depreciation and
amortization (137,572) (129,408)
----------- -----------
119,698 97,744
INVESTMENTS AND OTHER ASSETS 39,264 45,098
----------- -----------
$811,270 $1,252,647
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 822 $ 35,000
Accounts payable 78,350 92,728
Current income taxes 58,123 88,862
Current portion of long-term debt 60,046 226,000
Other current liabilities 94,751 119,512
----------- -----------
TOTAL CURRENT LIABILITIES 292,092 562,102
----------- -----------
COMMITMENTS AND CONTINGENCIES (SEE NOTE B)
LONG-TERM DEBT 86,996 147,166
DEFERRED INCOME TAXES -- 2,899
ACCRUED POSTRETIREMENT BENEFITS 13,066 13,256
DEFERRED COMPENSATION 4,186 5,517
SHAREHOLDERS' EQUITY
Common Stock, without par value, 100,000,000
shares authorized; 27,984,035 and 33,205,688
shares issued at July 31, 1998 and January
31, 1998, respectively, including 0 and
11,820 shares held in treasury 47,043 166,454
Retained earnings 367,887 355,286
----------- -----------
414,930 521,740
Less cost of treasury stock -- (33)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 414,930 521,707
----------- -----------
$811,270 $1,252,647
=========== ===========
See accompanying notes to consolidated condensed
financial statements.
</TABLE>
<TABLE>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(In thousands, except per share data)
Six Months Ended Three Months Ended
July 31 July 31
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 628,549 $ 481,739 $ 323,539 $ 248,778
Cost of sales 565,775 423,724 291,799 218,540
--------- --------- --------- ----------
Gross profit 62,774 58,015 31,740 30,238
Selling and administrative
expenses 38,695 35,290 19,964 18,376
Interest expense 5,956 7,146 2,806 3,684
Other income, net (10,230) (2,190) (4,208) (1,570)
--------- --------- --------- ----------
34,421 40,246 18,562 20,490
--------- --------- --------- ----------
Earnings from continuing
operations before income
taxes 28,353 17,769 13,178 9,748
Income taxes 10,295 6,087 4,814 3,331
--------- --------- --------- ----------
Earnings from continuing
operations of consolidated
companies 18,058 11,682 8,364 6,417
Equity in net earnings
(loss) of unconsolidated
affiliates (456) (22) 73 (27)
--------- --------- --------- ----------
Net earnings from
continuing operations 17,602 11,660 8,437 6,390
--------- --------- --------- ----------
Net earnings from
discontinued operations net of tax of
$3,118, and $920 -- 6,450 -- 1,838
--------- --------- --------- ---------
Net earnings 17,602 18,110 8,437 8,228
========= ========= ========= =========
Weighted average number of
shares of Common Stock
outstanding -
Basic 30,046 33,174 28,178 33,193
Diluted 30,137 33,249 28,178 33,295
Net earnings per share:
Basic and Diluted
Continuing operations $ .59 $ .35 $ .30 $ .19
Discontinued operations -- .20 -- .06
--------- --------- --------- ----------
$ .59 $ .55 $ .30 $ .25
========= ========= ========= =========
Cash dividends per share $ .17 $ .17 $ .085 $ .085
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Six Months Ended
July 31
------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Operating Activities
Net earnings from continuing operations $ 17,602 $ 11,660
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Accrued postretirement benefits (190) 58
Depreciation and amortization 9,963 9,072
Deferred income taxes, net (2,899) (2,113)
Change in operating assets and liabilities
net of the effect of acquisition:
Accounts and notes receivable, net 42,347 21,808
Recoverable costs and accrued profits not
yet billed (6,713) (16,811)
Inventories (14,433) (31,942)
Accounts payable (14,378) (49,714)
Current income taxes (30,739) 4,514
Other current liabilities (24,761) 926
Other--principally long-term assets and
liabilities 4,536 715
--------- ---------
Net Cash Used In Continuing Operations (19,665) (51,827)
Net Cash Provided By Discontinued Operations -- 11,775
--------- ---------
Net Cash Used In Operating Activities (19,665) (40,052)
Investing Activities
Collection of receivable from sale of
Gas Turbine Operations 600,000 --
Expenditures for property, plant and equipment (15,633) (6,708)
Acquisition of businesses (18,750) (5,029)
Disposal of property, plant and equipment, net 665 1,992
--------- ---------
Net Cash Provided By (Used In) Investing
Activities 566,282 (9,745)
Financing Activities
Additions to long-term borrowings -- 75,832
Payments on long-term borrowings (226,124) (27,445)
Net borrowings and payments on short-term
notes payable (34,178) 10,000
Dividends paid (5,001) (5,636)
Repurchase of common stock (120,000) --
Exercise of stock options 589 1,495
--------- --------
Net Cash Provided By (Used In) Financing
Activities (384,714) 54,246
--------- --------
Increase in cash and equivalents 161,903 4,449
Cash and equivalents, February 1 18,987 9,132
--------- ---------
Cash and equivalents, July 31 $ 180,890 $ 13,581
========= =========
Supplemental disclosure of cash flow information:
Net cash paid during the period for:
Interest payments $ 4,922 $ 13,091
Income tax payments $ 44,877 $ 8,665
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, 1998 are not
necessarily indicative of the results that will be realized for the
fiscal year ending January 31, 1999.
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, 1998 Form 10-K.
The Company's fiscal year begins on February 1 of the year stated and
ends on January 31 of the following year. For example, "Fiscal 1998"
commenced on February 1, 1998 and ends on January 31, 1999.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS 128 Earnings Per Share ("SFAS 128"), which specifies the
computation, presentation, and disclosure requirements for earnings per
share ("EPS"). It replaces the presentation of primary and fully
diluted EPS with basic and diluted EPS. Basic EPS excludes all
dilution. It is based upon the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential
dilution that would occur if all securities or other contracts to issue
common stock were exercised or converted into common stock. During the
second quarter of Fiscal 1998 and 1997, 0 and 102,000 unexercised stock
options, respectively, were deemed to be dilutive. For the six months
ended July 31, 1998 and 1997, 92,000 and 75,000 unexercised stock
options, respectively, were deemed to be dilutive. The Company adopted
SFAS 128 as of January 31, 1998. Accordingly, all periods presented have
been restated to disclose basic and diluted EPS. There is no material
difference between SFAS 128 presentation of EPS and the EPS presented in
prior reporting periods. The weighted average number of shares
outstanding for the six months ended July 31, 1998 includes 17,000
shares issued pursuant to the exercise of stock options and 38,287 restricted
shares issued in exchange for shares of a subsidiary of the Company .
In addition, the Company repurchased 5,265,120 shares of its outstanding
Common Stock during the six months ended July 31, 1998, which has been
considered in the computation of the weighted average number of shares
outstanding. These 5,265,120 shares, as well as the 11,820 shares held as
treasury stock, were cancelled during the six months ended July 31, 1998.
The accompanying consolidated financial statements for Fiscal 1997
contain certain reclassifications to conform with the presentation used
in Fiscal 1998. The consolidated financial statements have been
restated to reflect the Company's Gas Turbine Operations as a
discontinued operation.
Note B--Commitments and Contingencies
The Company and Engineering Design Group, Inc. ("EDG") were parties to
an arbitration before the American Arbitration Association in Houston,
Texas. On May 12, 1998, the arbitrators awarded EDG the sum of
$12,433,000 relating to unpaid amounts under a subcontract to construct
a power plant in Argentina. The award was fully reserved as of January
31, 1998 and did not affect the Company's financial position or results
of operations as of July 31, 1998.
The Company is a party to an arbitration proceeding before the American
Arbitration Association in San Francisco, California in which Noell,
Inc. has asserted claims of 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 liability,
if any, relating to these claims was assumed by GE as part of the sale
of the Gas Turbine Operations Division.
The Company is involved in a number of other lawsuits and disputes
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 and disputes
are either fully reserved or will not result in any material liability
to the Company.
The Company has provided certain guarantees in support of its customer's
financing of purchases from the Company in the form of both residual
value guarantees and debt guarantees. The maximum exposure of the
Company related to guarantees at July 31, 1998 is $65.9 million.
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
adjustment to the sales price of the Gas Turbine Operations Division,
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, risk associated
with newly acquired businesses, 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 Form 10-K and notes thereto for the fiscal year ended
January 31, 1998.
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
July 31
------------------
1998 1997
---- ----
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 90.0 88.0
------ ------
Gross profit 10.0 12.0
Selling and administrative expenses 6.2 7.3
Interest expense 0.9 1.5
Other income, net (1.6) (.5)
----- -----
5.5 8.3
----- -----
Earnings from continuing operations
before income taxes 4.5 3.7
Income taxes 1.6 1.3
------ ------
Earnings from continuing operations
of consolidated companies 2.9 2.4
Equity in net earnings of unconsolidated
affiliates (0.1) --
------ ------
Net earnings from continuing operations 2.8% 2.4%
====== ======
</TABLE>
Sales for the second quarter of the year ending January 31, 1999
("Fiscal 1998") increased 30% to $324 million compared to sales of $249
million for the same period of the year ended January 31, 1998 ("Fiscal
1997"). Sales for the six months ended July 31, 1998 increased 30% to
$629 million, compared to sales of $482 million for the same period of
Fiscal 1997.
The Power Products segment's sales decreased $9 million (6%) in the
second quarter of Fiscal 1998 compared to the same period in Fiscal
1997, but increased $7 million (2%) for the six months ended
July 31, 1998 over the same period of Fiscal 1997. The quarter
and six month periods ended July 31, 1997 include $9.6 million and
$18.9 million, respectively, of sales from the Company's John Deere dealership,
which was sold during the third quarter of Fiscal 1997. Increased sales
in the Power Product's segment for the six months ended July 31, 1998 were
broad based, with most locations contributing to the favorable results.
The Power Products segment experienced strong sales growth in its core
businesses in the second quarter of Fiscal 1998, and management expects this
trend to continue in the near future.
The Tactical Vehicle Systems (TVS) segment sales increased $75 million
(118%) for the second quarter of Fiscal 1998 compared to the same period
in Fiscal 1997. TVS segment sales for the six months ended July 31,
1998 increased $122 million (86%) over the same period in Fiscal 1997.
The sales increase was primarily due to higher production of trucks
under the Family of Medium Tactical Vehicles ("FMTV") contract. See
"Government Contract Status" for discussion of the second multi-year
contract.
The Engineered Power Systems (EPS) segment sales increased to $41
million in the second quarter of Fiscal 1998 compared to $38 million in
the same period in Fiscal 1997. EPS segment sales for the six months
ended July 31, 1998 increased $7 million (11%) over the same period in
Fiscal 1997. Sales increased 48% and 42% for the Petroleum Equipment
Division for the quarter and six months ended July 31, 1998,
respectively, reflecting the strong demand for new equipment by the
oilfield drilling and services industries. In particular, demand
increased in the overseas markets and in the market for marine riser
systems. These increases were partially offset by a 41% and 30% decline
in sales by the Aircraft Ground Support Division for the quarter and
year to date period ended July 31, 1998, respectively. The Aircraft
Ground Support Division continues to be adversely affected by the Asian
financial crisis.
The gross profit margin of 9.8% for the second quarter of Fiscal 1998
decreased compared to the 12.2% gross profit margin for the same period
in Fiscal 1997. The gross profit margin of 10.0% for the six months
ended July 31, 1998 decreased compared to the 12.0% gross profit margin
for the same period of Fiscal 1997. These decreases are due to a greater
percentage of sales represented by the TVS segment, which carry a lower
gross margin than the other segments.
Selling and administrative expenses increased 8.6% in the second quarter
of Fiscal 1998, primarily as a result of post closing activity related
to the sale of the Company's Gas Turbine Operations. Selling and
administrative expenses increased 9.6% for the six months ended July 31,
1998 over the same period of Fiscal 1997. Selling and administrative
expenses for the second quarter of Fiscal 1998 decreased as a percentage
of sales to 6.2% compared to 7.4% for the same period in Fiscal 1997 due
to greater sales volume. Selling and administrative expenses for the six
months ended July 31, 1998 decreased as a percentage of sales to 6.2%
compared to 7.3% for the same period in Fiscal 1997 due to greater sales
volumes.
As a result of the sale of the Gas Turbine Operations, the Company has
been able to reduce its debt and has experienced a significant increase
in cash and cash equivalents. Interest expense for the second quarter
of Fiscal 1998 decreased to $2.8 million, down from $3.7 million for the
same period in Fiscal 1997, due primarily to the repayment of $261
million in floating rate debt from the proceeds of the sale of the
Company's Gas Turbine Operations. Interest expense decreased 16.7% for
the six months ended July 31, 1998, as compared to the same period of
Fiscal 1997.
Other income increased to $4.2 million in the second quarter of Fiscal
1998 compared to $1.6 million for the same period in Fiscal 1997
primarily due to increased interest income from short-term investment of
the proceeds from the sale of the Company's Gas Turbine Operations.
Other income increased to $10.2 million for the six months ended July
31, 1998, as compared to $2.2 million for the same period of Fiscal
1997.
As of June 2, 1998, the Company completed a $120,000,000 stock
repurchase program. In total, the Company repurchased and retired
5,265,120 shares of the Company's Common Stock, thereby reducing its
total outstanding shares by 16%. Net earnings from continuing
operations of $8.4 million ($.30 per share) were recorded for the three
months ended July 31, 1998 as compared to net earnings from continuing
operations of $6.4 million ($.19 per share) for the three months ended
July 31, 1997. Net earnings from continuing operations of $17.6 million
($.59 per share) were recorded for the six months ended July 31, 1998,
as compared to net earnings from continuing operations of $11.7 million
($.35 per share) for the same period of Fiscal 1997. This increase is
due to increased gross profit and other income and the reduction in the
weighted average number of shares outstanding.
GOVERNMENT CONTRACT STATUS
The FMTV contract is a firm fixed-price multi-year contract. 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.
As of July 31, 1998, the Company has completed approximately 10,193 of
the 11,197 vehicles covered by the original contract plus options and
additional requirements to date. 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 (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.
The Company is negotiating a contract with the United States Army that
would provide for continued production of the FMTV through 2002, with a one
year option that would extend the contract through 2003. Award of the
second FMTV contract has been delayed pending the completion of tests
relating to drive-train improvements made by the Company to correct reported
failures in drive-train components. The Company expects to sign this
agreement in the third quarter of Fiscal 1998 and estimates that, if all
options were exercised, it will have a total value of $1.36 billion with
gross profit margins in excess of the current contract.
At July 31, 1998, 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.
Although management believes that the contract provides a legal basis
for the claims and its estimates are based on reasonable assumptions and
on a reasonable analysis of contract costs, due to uncertainties
inherent in the estimation and claims negotiations process, no
assurances can be given that its estimates will be accurate, and
variances between such estimates and actual results could be material.
The Company's FMTV contract accounting position also reflects the expected
recovery of all costs relating to the drive-train improvements made by the
Company. 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 contracts are 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 government has approved full funding for the initial 5
year program. If the FMTV contracts are terminated other than for
default, they provide for termination charges that will reimburse the
Company for allowable costs, but not necessarily all costs.
EFFECT OF ADMINISTRATIVE AGREEMENT
The Company is subject to an Administrative Agreement with the U.S. Air
Force that imposes certain requirements on the Company intended to
assure the U.S. Air Force that the Company is a responsible government
contractor. A default by the Company of the requirements under the
Administrative Agreement could result in the suspension or debarment of
the Company from receiving new government contracts or modifications to
existing government contracts unless the contracting agency finds a
compelling need to enter into such agreement. 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. 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 July 31, 1998 and
at the close of Fiscal 1997 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
July 31 January 31
1998 1998
- ----------------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Power Products $ 76.8 $ 69.6
Tactical Vehicle Systems 199.9 487.0
Engineered Power Systems 86.8 57.5
------- --------
$363.5 $614.1
======= ======
</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 of $15.6 million for
the six months ended July 31, 1998 increased as compared to $6.7 million
for the same period in Fiscal 1997. Excluding approximately $7.3 million
of expenditures for a new facility and machinery for the Petroleum
Equipment Division, these amounts are consistent with the historical
capital expenditure levels of the Company.
LIQUIDITY AND SOURCES OF CAPITAL
Proceeds from the sale of Gas Turbine Operations were used to retire
$261 million of notes payable and the current portion of long-term debt
during the quarter ended April 30, 1998. The Company has $150 million in
committed credit facilities, all of which are available for the
Company's use at July 31, 1998. The Company has additional banking
relationships which provide uncommitted borrowing arrangements.
In the event that any acquisition of additional operations, growth in
existing operations, settlement of other lawsuits and disputes, 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 cash and equivalents and
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 cash and equivalents and current credit facilities and
available options for external sources of funds are adequate to meet its
foreseeable cash requirements.
YEAR 2000 COMPLIANCE
The Company is currently working to resolve the potential impact of the
year 2000 on its informational systems, operational systems, and
products. The Company is at the close of its assessment phase, and has
begun remediation efforts on those systems and products requiring
modification to eliminate any data processing conflict created by the
impending millennium. The Company believes that its compliance program
will reach a favorable conclusion on or before December 31, 1998.
Based on its assessment, the Company has budgeted $2,000,000 for
remediation efforts. The majority of these costs are attributable to
the purchase of new personal computer systems. The Company has not
identified any mission critical system whose timely remediation poses a
material risk to the Company. The Company's contingency plans for any
non-compliant systems will be developed for each particular system if,
and as, they are identified.
ACQUISITIONS
On June 1, 1998, the Company acquired substantially all of the assets of
H & H Rubber, Inc., a manufacturer of rubber replacement parts for the
oilfield industry, located in Houston, Texas. The purchase price
totaled approximately $4.0 million. The assets and operations of this
business prior to the acquisition would not have been material to the
Company's consolidated assets or earnings.
In other acquisitions, the Company purchased (i) substantially all of
the assets of Action Air, Inc., an air compression equipment company
serving San Antonio and South Texas, (ii) the Deutz engine
distributorship for the states of Texas, Oklahoma and Kansas from Harley
Equipment Corporation, and (iii) all of the outstanding stock and the
real estate of IPSC Co., Inc., the Deutz engine distributor in the
states of Arkansas, Mississippi and Louisiana, all for an aggregate
purchase price of approximately $5.3 million. The assets and operations
of these businesses prior to their acquisition would not have been
material to the Company's consolidated assets or earnings.
The Company intends to continue looking for acquisition opportunities in
its core businesses and for synergistic opportunities in niche
businesses.
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.
3.1 Third Restated Articles of Incorporation
of Stewart & Stevenson Services, Inc.,
effective as of September 13, 1995
(incorporated by reference to Exhibit 3(a)
of the Form 10-Q of Stewart & Stevenson
for the quarterly period ended October 31,
1995 under the Commission File No. 001-
11443).
3.2 Fifth Restated Bylaws of Stewart &
Stevenson Services, Inc., effective as of
April 14, 1998 (incorporated by reference
to Exhibit 3.2 of the Form 10-K of Stewart
& Stevenson for the Fiscal year ended
January 31, 1998 under the Commission File
No. 0-8493).
4.1 Note Purchase Agreement effective May 30,
1996, between Stewart & Stevenson
Services, Inc. and the Purchasers named
therein (incorporated by reference to
Exhibit 4 of the Form 10-Q of Stewart &
Stevenson for the quarterly period ended
July 31, 1997 under the Commission File
No. 0-8493).
4.2 Rights Agreement effective March 13, 1995,
between Stewart & Stevenson Services, Inc.
and The Bank of New York (incorporated by
reference to Exhibit 1 of the Form 8-A
Registration Statement of Stewart &
Stevenson 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 (incorporated by reference to
Exhibit 10.1 of the Form 10-K of Stewart &
Stevenson for the Fiscal year ended
January 31, 1997 under Commission File No.
0-8493).
10.2 Distributor Sales and Service Agreement
effective January 1, 1996, between the
Company and Detroit Diesel Corporation
(incorporated by reference to Exhibit 10.2
of the Form 10-K of Stewart & Stevenson
for the Fiscal year ended January 31, 1996
under Commission File No. 0-8493).
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
(incorporated by reference to Exhibit 28.1
of the Form S-3 Registration Statement of
Stewart & Stevenson 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
(incorporated by reference to Exhibit 28.2
of the Form S-3 Registration Statement of
Stewart & Stevenson under the Commission
File No. 33-44149).
10.5 Stewart & Stevenson Services, Inc.
Deferred Compensation Plan dated as of
December 31, 1979 (incorporated by
reference to Exhibit 10.8 of the Form 10-K
of Stewart & Stevenson for the Fiscal year
ended January 31, 1994 under the
Commission File No. 0-8493).
10.6 Stewart & Stevenson Services, Inc. 1988
Nonstatutory Stock Option Plan (as amended
and restated effective as of June 10,
1997) (incorporated by reference to
Exhibit B of the Proxy Statement of
Stewart & Stevenson filed with the
Commission on May 9, 1997).
10.7 Stewart & Stevenson Services, Inc.
Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit
10.11 of the Form 10-K of Stewart &
Stevenson for the Fiscal year ended
January 31, 1994 under the Commission File
No. 0-8493).
10.8 Stewart & Stevenson Services, Inc. 1996
Director Stock Plan (incorporated by
reference to Exhibit A of the Proxy
Statement of Stewart & Stevenson filed
with the Commission on May 9, 1997).
23.1 Consent of Arthur Andersen LLP,
Independent Public Accountants
(incorporated by reference to Exhibit 23.1
of the Form 10-K of Stewart & Stevenson
for the Fiscal year ended January 31, 1998
under Commission File No. 0-8493).
*27.1 Financial Data Schedule.
__________
*Filed with this report.
(b) Form 8-K Report Date
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 14, 1998 By: /s/ Robert L. Hargrave
Robert L. Hargrave
President and Chief Executive Officer
(as authorized officer)
Date: September 14, 1998 By: /s/ Patrick G. O'Rourke
Patrick G. O'Rourke
Controller (as chief accounting officer)
EXHIBIT INDEX
Exhibit Number and Description
3.1 Third Restated Articles of
Incorporation of Stewart &
Stevenson Services, Inc.
3.2 Fifth Restated Bylaws of Stewart
& Stevenson Services, Inc.
4.1 Note Purchase Agreement.
4.2 Rights Agreement.
10.1 Lease Agreement.
10.2 Distributor Sales and Services
Agreement.
10.3 Contract Number DAAE07-92-R001.
10.4 Contract Number DAAE07-92-R002.
10.5 Stewart & Stevenson Services,
Inc. Deferred Compensation Plan.
10.6 Stewart & Stevenson Services,
Inc. 1988 Nonstatutory Stock
Option Plan (as amended and
restated effective as of June 10,
1997).
10.7 Stewart & Stevenson Services,
Inc. Supplemental Executive
Retirement Plan.
10.8 Stewart & Stevenson Services,
Inc. 1996 Director Stock Plan.
23.1 Consent of Arthur Andersen LLP,
Independent Public Accountants.
27.1 Financial data schedule.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
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