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 May 1, 1999
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 May 10, 1999)
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 - May
1, 1999 and January 31, 1999.
Consolidated Condensed Statement of Earnings -- Fiscal
Quarter Ended May 1, 1999 and Three Months Ended April 30,
1998.
Consolidated Condensed Statement of Cash Flows -- Fiscal
Quarter Ended May 1, 1999 and Three Months Ended April 30,
1998.
Notes to Consolidated Condensed Financial Statements.
<TABLE>
<CAPTION>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
May 1, 1999 January 31, 1999
----------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 1,652 $ 12,959
Accounts and notes receivable, net 178,029 164,547
Recoverable costs and accrued profits
not yet billed 69,088 99,097
Income tax receivable 48,002 48,596
Inventories:
Power Products 189,119 182,894
Petroleum Equipment 35,586 40,560
Other Business Activities 45,881 40,222
Excess of current cost over LIFO values (48,570) (48,474)
-------- --------
222,016 215,202
-------- --------
TOTAL CURRENT ASSETS 518,787 540,401
PROPERTY, PLANT AND EQUIPMENT 275,950 271,658
Allowances for depreciation and
amortization (146,792) (142,913)
-------- --------
129,158 128,745
DEFERRED INCOME TAX ASSETS 7,949 7,904
INVESTMENTS AND OTHER ASSETS 29,518 28,727
-------- --------
$685,412 $705,777
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 27,192 $ 17,468
Accounts payable 45,718 83,127
Accrued payrolls and incentives 9,279 17,123
Current income taxes 3,331 2,931
Current portion of long-term debt 70,220 69,488
Other current liabilities 94,520 95,349
-------- --------
TOTAL CURRENT LIABILITIES 250,260 285,486
-------- --------
COMMITMENTS AND CONTINGENCIES (SEE NOTE B)
LONG-TERM DEBT 98,699 83,530
DEFERRED INCOME TAXES 51 43
ACCRUED POSTRETIREMENT BENEFITS 13,528 13,019
DEFERRED COMPENSATION 2,866 3,336
SHAREHOLDERS' EQUITY
Common Stock, without par value, 100,000,000
shares authorized; 27,984,035, shares issued
at May 1, 1999 and January 31, 1999 47,723 47,819
Retained earnings 272,285 272,544
-------- --------
TOTAL SHAREHOLDERS' EQUITY 320,008 320,363
-------- --------
$685,412 $705,777
======== ========
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)
Fiscal Quarter Three Months
Ended Ended
May 1, 1999 April 30, 1998
------------ --------------
(Unaudited)
<S> <C> <C>
Sales $188,911 $305,010
Cost of sales 159,050 273,976
-------- --------
Gross profit 29,861 31,034
Selling and administrative expenses 25,491 18,731
Interest expense 3,451 3,150
Other income, net (2,195) (6,022)
-------- --------
26,747 15,859
-------- --------
Earnings before income taxes 3,114 15,175
Income tax provision 1,153 5,481
-------- --------
Earnings of consolidated companies 1,961 9,694
Equity in net earnings (loss) of
unconsolidated affiliates 159 (529)
-------- --------
Net earnings $2,120 $9,165
======== ========
Weighted average number of shares of Common
Stock outstanding -
Basic 27,984 31,976
Diluted 27,984 32,035
Net earnings per share: Basic and Diluted $.08 $.29
======== ========
Cash dividends per share $.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)
Fiscal Quarter Three Months
Ended Ended
May 1,1999 April 30, 1998
------------ --------------
(Unaudited)
<S> <C> <C>
Operating Activities
Net earnings $ 2,120 $ 9,165
Adjustments to reconcile net earnings to
net cash provided by (used in) operating
activities:
Accrued postretirement benefits 509 5
Depreciation and amortization 5,203 4,193
Deferred income taxes, net (37) (2,899)
Change in operating assets and liabilities
net of the effect of acquisition:
Accounts and notes receivable, net (13,482) (13,467)
Recoverable costs and accrued profits
not yet billed 30,009 3,833
Inventories (6,814) 1,723
Accounts payable (37,409) (9,357)
Accrued payrolls and incentives (7,844) (6,591)
Current income taxes 994 8,893
Other current liabilities (829) (907)
Other-principally long-term assets
and liabilities (819) (1,999)
-------- --------
Net Cash Used In Operating Activities (28,399) (7,408)
Investing Activities
Collection of receivable from sale of
Gas Turbine Operations -- 600,000
Expenditures for property, plant and (7,821) (8,107)
equipment Acquisition of businesses -- (9,450)
Disposal of property, plant and
net equipment, net 1,667 406
-------- --------
Net Cash Provided By (Used In) Investing
Activities (6,154) 582,849
Financing Activities
Additions to long-term borrowings 16,234 483
Payments on long-term borrowings (333) (226,000)
Net short-term borrowings (payments) 9,724 (34,507)
Dividends paid (2,379) (2,683)
Repurchase of common stock -- (57,060)
Exercise of stock options -- 615
-------- --------
Net Cash Provided By (Used In) Financing
Activities 23,246 (319,152)
-------- --------
Increase (decrease) in cash and equivalents (11,307) 256,289
Cash and equivalents, February 1 12,959 18,987
-------- --------
Cash and equivalents, end of period $ 1,652 $275,276
======== ========
Supplemental disclosure of cash flow
information:
Net cash paid during the period for:
Interest payments $986 $258
Income tax payments $419 $88
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 quarter ended May 1, 1999 are not necessarily
indicative of the results that will be realized for the
fiscal year ending January 31, 2000.
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, 1999 Form 10-K. An
actual valuation of inventory under the LIFO method can be
made only at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO
calculations are based on management's estimates of expected
year-end inventory levels and costs. Interim results are
subject to the final year-end LIFO inventory valuation.
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 1999" commenced on February 1, 1999 and
ends on January 31, 2000. Beginning in Fiscal 1999, the
Company began reporting results on the Fiscal Quarter
method. Each of the first three fiscal quarters are exactly
13 weeks long, with the fourth fiscal quarter covering the
remaining part of the fiscal year. The Company believes the
fiscal quarters are comparable to the calendar quarters
reported during Fiscal 1998, therefore, prior periods have
not been restated.
As of January 31, 1998 the Company adopted, SFAS No. 128
Earnings per Share, 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.
There were no stock options during Fiscal 1998, or the first
quarter of Fiscal 1999, which were deemed to be dilutive.
The accompanying consolidated financial statements for
Fiscal 1998 contain certain reclassifications to conform
with the presentation used in Fiscal 1999.
Note B--Commitments and Contingencies
The Company's government contract operations are subject to
U.S. Government investigations of business practices and
cost classifications from which legal or administrative
proceedings can result. Based on government procurement
regulations, under certain circumstances a contractor can be
fined, as well as suspended or barred from government
contracting. 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, Overseas
Private Investment Corporation, and similar government
agencies or otherwise receive the benefits of federal
assistance programs during a suspension or debarment.
The Company is a party to an Administrative Agreement with
the United States 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. Under this agreement, the Company has
established and maintains an effective program to ensure
compliance with applicable laws and the Administrative
Agreement. The program provides employees with education
and guidance regarding compliance and ethical issues,
operates a means to report questionable practices on a
confidential basis, and files periodic reports with the U.S.
Air Force regarding the Company's business practices. A
default by the Company of the requirements under the
Administrative Agreement could result in the suspension or
debarment of the Company from receiving any new contracts or
subcontracts with agencies of the U.S. Government or the
benefit of federal assistance payments. 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 Administrative Agreement expires pursuant
to its term on March 19, 2001, but the Company intends to
maintain compliance programs on a continuing basis.
During Fiscal 1998, the U.S. Customs Service detained a
medium tactical vehicle that was being shipped by the
Company for display in a European trade show. The Company
has been advised that the U.S. Customs Service and the
Department of Justice are investigating potential violations
by the Company of laws relating to the export of controlled
military vehicles, weapons mounting systems, and firearms.
Such investigation could result in the filing of criminal,
civil, or administrative sanctions against the Company
and/or individual employees and could result in a suspension
or debarment of the Company from receiving new contracts or
subcontracts with agencies of the U.S. Government or the
benefit of federal assistance payments.
The Company is also a defendant in a number of lawsuits
relating to contractual, product liability, personal injury
and warranty matters normally incident to the Company's
business. No individual case, or group of cases presenting
substantially similar issues of law or fact, involve a claim
for damages in excess of $5 million or are expected to have
a material effect on the manner in which the Company
conducts its business. Although management has established
reserves that it believes to be adequate in each case, an
unforeseen outcome in such cases could have a material
adverse impact on the results of operations in the period it
occurs.
The Company has guaranteed the project financing ($42.6
million at May 1, 1999) of a power generation plant in
Argentina. Included in "Other accrued liabilities" at May
1, 1999 is a reserve of $22.6 million for the anticipated
loss related to such guarantee. This estimated loss is
predicated on projections of future events and realization
value of the underlying collateral. The Company has amended
the guarantee agreement with the project lender and has
agreed to provide standby letters of credit (LOC's) in
varying amounts between May 31, 1999 and June 30, 2000
totaling the entire outstanding balance of the project
financing. Such LOC's may be drawn and applied in payment
of the $42.6 million upon the earlier of an event of default
or December 31, 2000.
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 May 1, 1999 is $7 million, excluding the $42.6
million discussed above.
Note C: Segment information
Financial information relating to industry segment is as
follows:
<TABLE>
<CAPTION>
Operating
Sales Profit
----- ------
<S> <C> <C>
Three months ended May 1, 1999
Power Products $121,288 $ 3,090
Tactical Vehicle Systems 6,215 1,106
Petroleum Equipment 28,464 1,958
Other Business Activities 32,944 836
-------- --------
Total $188,911 $ 6,990
======== ========
Three months ended April 30, 1998
Power Products $136,169 $ 9,905
Tactical Vehicle Systems 124,660 2,719
Petroleum Equipment 23,592 2,103
Other Business Activities 20,589 1,496
-------- --------
$305,010 $ 16,223
Total ======== ========
</TABLE>
There have been no material changes in total assets by
industry segment since January 31, 1999.
A reconciliation of operating profit to earnings (loss) from
continuing operations before income taxes is as follows:
<TABLE>
<CAPTION>
Three Months Ending
-------------------
May 1, 1999 April 30, 1998
----------- ---------------
<S> <C> <C>
Operating profit $ 6,990 $16,223
Corporate expenses, net (756) (2,690)
Non-operating interest income 331 4,792
Interest expense (3,451) (3,150)
------- -------
Earnings before income taxes $ 3,114 $15,175
======= =======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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, 1999. The
following discussion contains forward-looking statements
which are based on assumptions such as timing, volume and
pricing of customers' orders. In connection therewith,
please see the cautionary statements contained therein,
which identify important factors that could cause actual
results to differ materially from those in the forward-
looking statements.
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>
Fiscal Quarter Three Months
Ended Ended
May 1,1999 April 30, 1998
---------- --------------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 84.2 89.8
------ ------
Gross profit 15.8 10.2
Selling and administrative expenses 13.5 6.2
Interest expense 1.8 1.0
Other income, net (1.1) (2.0)
------ ------
14.2 5.2
------ ------
Earnings before income taxes 1.6 5.0
Income tax provision .6 1.8
------ ------
Earnings of consolidated companies 1.0 3.2
Equity in net earnings of
unconsolidated affiliates 0.1 (.2)
------ ------
1.1% 3.0%
====== ======
</TABLE>
Sales for the first fiscal quarter of Fiscal 1999 decreased
38% to $189 million compared to sales of $305 million for
the three months ended April 30, 1998.
The Power Products segment sales decreased $15 million (11%)
in the first fiscal quarter of 1999 compared to the three
months ended April 30, 1998. This segment continues to be
adversely impacted by lower equipment, parts and services
sales in the petroleum sensitive branches resulting from
depressed oil prices.
The Tactical Vehicle Systems segment (TVS) sales decreased
$118 million (94%) for the first fiscal quarter of 1999
compared to the three months ended April 30, 1998. Most of
the production associated with the original contracts was
completed as of January 31, 1999, and production on the
follow-on contract is scheduled to begin in the third
quarter of 1999.
The Petroleum Equipment segment sales increased $5 million
(21%) in the first fiscal quarter of 1999 compared to the
three months ended April 30, 1998. Increased sales and
lower margins on marine riser products and a decrease in
higher margin equipment sales, which remained depressed
particularly in the U.S. market, contributed to lower
profits.
Other business activities not identified in a specific
segment include airline ground support equipment and the
fabrication and leasing of gas compression equipment. Sales
for the quarter totaled $33 million, with most of the $12
million increase from last year occurring in the airline
ground support equipment business. This increase results
from the recent acquisition of Tug Manufacturing
Corporation. First quarter 1999 operating profits totaled
$.8 million versus $1.5 million a year ago. Airline profits
were adversely impacted by new product development costs and
gas compression continues in a start-up mode.
The gross profit margin rate of 15.8% for the first fiscal
quarter of 1999 was higher than the 10.2% gross profit
margin rate for the three months ended April 30, 1998,
largely due to high volume, low margin TVS sales during the
first quarter of 1998. Excluding TVS, gross profit margin
rates were 16.0% in 1999 and 16.1% in 1998.
The increase in selling and administrative expenses from $19
million for three months ended April 30, 1998 to $25 million
for the first fiscal quarter of 1999 resulted from business
acquisitions and startups in Fiscal 1998.
Interest expense increased 10% for the first fiscal quarter
of 1999 as compared to the three months ended April 30,
1998, primarily as a result of increased levels of short
term borrowings. Other income decreased to $2.2 million in
the first fiscal quarter of 1999 compared to $6.0 million
for the three months ended April 30, 1998. Other income for
the three months ended April 30, 1998 included interest
income from the short-term investment of proceeds from the
sale of the Company's Gas Turbine Operations.
Net income from operations of $2.1 million ($.08 per share)
was recorded for the fiscal period ended May 1, 1999 as
compared to net earnings of $9.2 million ($.29 per share)
for the three months ended April 30, 1998.
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 May 1, 1999 and
at the close of Fiscal 1998 were as follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
May 1, 1999 January 31, 1999
- --------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Tactical Vehicle Systems $ 990.8 $ 991.7
Power Products 70.4 69.9
Petroleum Equipment 24.9 38.6
All Other 37.3 17.9
-------- --------
$1,123.4 $1,118.1
======== ========
</TABLE>
Unfilled orders of the Tactical Vehicle Systems segment at
May 1, 1999 consisted principally of the four year follow-on
contract awarded in October 1998 by the United States
Department of the Army to manufacture medium tactical
vehicles.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital spending for property, plant and equipment of $7.8
million for the period ended May 1, 1999 included $5.4
million in revenue earning assets, and decreased from $8.1
million for the same period in Fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity included cash and
equivalents, cash from operations, amounts available under
credit facilities and other external sources of funds. The
Company believes that these sources are sufficient to fund
the current requirements of working capital, capital
expenditures, dividends and other financial commitments.
During Fiscal 1999 the Company anticipates a reduction in
current liabilities, due to the scheduled repayment of $60
million of senior debt, and the performance under a
government directed change to previously produced FMTV
trucks projected to cost approximately $40 million. The
Company has provided $23 million, as a current liability,
for its probable partial performance under a guarantee,
although no demand for performance has been received. (See
Note B -- Commitments and Contingencies and Note 7 to the
consolidated financial statements for Fiscal 1998 included
in Form 10-K.) The Company has in place an unsecured
revolving credit facility that could provide up to
approximately $150 million, of which $135 million was
available at May 1, 1999, but subject to certain limitations
as a result of modifications made effective January 31,
1999. (See Note 9 to the consolidated financial statements
for Fiscal 1998 included in Form 10-K). This revolving
facility matures during Fiscal 2001.
The Company has additional banking relationships which
provide uncommitted borrowing arrangements. In the event
that any acquisition of additional operations, growth in
existing operations, settlements of other lawsuits or
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 the existing cash and cash
equivalents and committed lines of credit, the Company may
seek to borrow under other long-term financing sources or
curtail certain activities.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward-Looking Statements
This Management's Discussion and Analysis of Financial
Condition and Results of Operations and other sections of
this quarterly report contain forward-looking statements
that are based on current expectations, estimates, and
projections about the markets and industries in which the
Company operates, management's beliefs, and assumptions made
by management. These forward-looking statements are made
pursuant to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. These statements
are not guarantees of future performance and involve certain
risks, uncertainties and assumptions ("future factors")
which are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expressed or
forecasted in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-
looking statements, whether as a result of new information,
future events or otherwise. Future factors include risks
associated with newly acquired businesses; increasing price
and product/service competition by foreign and domestic
competitors; rapid technological developments and changes;
the ability to continue to introduce competitive new
products and services on a timely, cost effective basis; the
mix of products/services; the achievement of lower costs and
expenses; reliance on large customers; technological,
implementation and cost/financial risks in use of large,
multi-year contracts; the cyclical nature of the markets
served; the outcome of pending and future litigation and
governmental proceedings and continued availability of
financing, financial instruments and financial resources in
the amount, at the times and on the terms required to
support the Company's business; and the risk of cancellation
or adjustments of specific orders and termination of
significant government programs. These are representative
of the future factors that could affect the outcome of
forward-looking statements. In addition, such statements
could be affected by general industry and market conditions
and growth rates, general domestic and international
conditions including interest rates, rates of inflation and
currency exchange rate fluctuations and other future
factors.
Government Contracting Factors
Major contracts for military systems are performed over
extended periods of time and are subject to changes in scope
of work and delivery schedules. Pricing negotiations on
changes and settlement of claims often extend over prolonged
periods of time. The Company's ultimate profitability on
such contracts will depend not only upon the accuracy of the
Company's cost projections, but also the eventual outcome of
an equitable settlement of contractual issues with the U.S.
Government. Due to uncertainties inherent in the estimation
and claim negotiation process, no assurances can be given
that management's estimates will be accurate, and variances
between such estimates and actual results could be material.
During Fiscal 1998, the Company was awarded a new multi-year
contract that will extend production of the FMTV into 2002
(or 2003 if the government exercises its option to purchase
additional vehicles). The funding of the new FMTV contract
is subject to the inherent uncertainties of congressional
appropriations. As is typical of multi-year defense
contracts, the FMTV contract must be funded annually by the
Department of the Army and may be terminated at any time for
the convenience of the government. As of May 1, 1999,
funding in the amount of $315 million for the new FMTV
contract had been authorized and appropriated by the U.S.
Congress. If the new FMTV contract is terminated other than
for default, the FMTV contracts provide for termination
charges that will reimburse the Company for allowable costs,
but not necessarily all costs.
The Company's government contract operations are subject to
U.S. Government investigations of business practices and
cost classifications from which legal or administrative
proceedings can result. Based on government procurement
regulations, under certain circumstances a contractor can be
fined, as well as suspended or barred from government
contracting. 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, Overseas
Private Investment Corporation, and similar government
agencies or otherwise receive the benefits of federal
assistance payments during a suspension or debarment.
The Company is a party to an Administrative Agreement with
the United States 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. Under this agreement, the Company has
established and maintains an effective program to ensure
compliance with applicable laws and the Administrative
Agreement. The program provides employees with education
and guidance regarding compliance and ethical issues,
operates a means to report questionable practices on a
confidential basis, and files periodic reports with the U.S.
Air Force regarding the Company's business practices. A
default by the Company of the requirements under the
Administrative Agreement could result in the suspension or
debarment of the Company from receiving any new contracts or
subcontracts with agencies of the U.S. Government or the
benefit of federal assistance payments. 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 Administrative Agreement expires pursuant
to its term on March 19, 2001, but the Company intends to
maintain compliance programs on a continuing basis.
Year 2000 Compliance
In the past, many computer software programs were written
using two digits rather than four to define the applicable
year. As a result, date-sensitive computer software may
recognize a date using "00" as the year 1900 rather than the
year 2000. If this situation occurs, the potential exists
for computer system failures or miscalculations by computer
programs, which could disrupt operations. This is generally
referred to as the Year 2000 issue.
The Company has established a team to address the potential
impacts of the year 2000 on each of its critical business
functions. The team has concluded its assessment of the
Company's critical date-sensitive technology, including its
information systems, computer equipment and other systems
used in its various operations, and is now in the process of
making the required modifications to or replacing these
systems to be year 2000 compliant. The modification costs
are expected to be approximately $2 million. The majority
of these costs are attributable to the purchase of new
computer equipment. The required modifications and most
related testings are expected to be completed by July 31,
1999, and most related testings are expected to be completed
by August 31, 1999. The Company's contingency plan for any
non-compliant systems will be developed for each particular
system if, and as, they are identified. Systems modification
costs are being expensed as incurred. Costs associated with
new equipment are being capitalized and will be amortized over
the life of the product.
In addition to addressing the Company's internal systems,
the team has identified key vendors that could be impacted
by year 2000 issues, and communication has been made. The
Company has evaluated the responses to this correspondence
and has not identified any critical vendor systems whose
timely remediation poses a material threat to the Company.
The most likely worst case scenario would involve the
interruption of supply of key materials necessary to timely
complete production under outstanding contract commitments.
In order to reduce this risk, the Company is developing a
final contingency plan which may include having materials
from sole-source suppliers that are necessary to fulfill
outstanding contract commitments on hand prior to December
31, 1999.
While the Company believes that its program is sufficient to
identify the critical issues and associated costs necessary
to address possible year 2000 problems in a timely manner,
there can be no assurance that the program or underlying
steps implemented, will be successful in resolving all such
issues prior to the year 2000. If the steps taken by the
Company (or critical third parties) are not made in a timely
manner, or are not successful in identifying and remedying
all significant year 2000 issues, business interruptions or
delays could occur. Based on the information the Company has
gathered to date and its expectation of its ability to
remedy problems encountered, the Company believes that it
will not experience significant business interruptions that
would have a material adverse impact on its results of
operations or financial condition.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During Fiscal 1998, the U.S. Customs Service detained a
medium tactical vehicle that was being shipped by the
Company for display in a European trade show. The Company
has been advised that the U.S. Customs Service and the
Department of Justice are investigating potential violations
by the Company of laws relating to the export of controlled
military vehicles, weapons mounting systems, and firearms.
Such investigation could result in the filing of criminal,
civil, or administrative sanctions against the Company
and/or individual employees and could result in a suspension
or debarment of the Company from receiving new contracts or
subcontracts with agencies of the U.S. Government or the
benefit of federal assistance payments.
The Company is also a defendant in a number of lawsuits
relating to contractual, product liability, personal injury,
and warranty matters normally incident to the Company's
business. No individual case, or group of cases presenting
substantially similar issues of law or fact, involve a claim
for damages in excess of $5 million or are expected to have
a material effect on the manner in which the Company
conducts its business. Although management has established
reserves that it believes to be adequate in each case, an
unforeseen outcome in such cases could have a material
adverse impact on the results of operations in the period it
occurs.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
(c) A report on Form 8-K was filed with the Commission on April 1, 1999,
reporting the results for the Company's fourth quarter and fiscal
year 1998.
A report on Form 8-K was filed with the Commission on April 20, 1999,
reporting the Company's dividend and announcing its new chief executive
officer.
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 on the 15th day of June, 1999.
STEWART & STEVENSON SERVICES, INC.
By: /s/ John H. Doster
John H. Doster
Senior Vice President and Chief Financial Officer
(as principal financial officer and authorized officer)
By: /s/ Patrick G. O'Rourke
Patrick G. O'Rourke
Controller and Chief Accounting Officer
(as chief accounting officer)
EXHIBIT INDEX
Exhibit Number and Description
27.1 Financial data schedule.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
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