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, 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 27,992,203 Shares
(Class) (Outstanding at August 25, 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 Statements of Financial Position --
July 31, 1999 and January 31, 1999.
Consolidated Condensed Statements of Earnings -- Six
Months and Three Months Ended July 31, 1999 and 1998.
Consolidated Condensed Statements of Cash Flows -- Six
Months and Three Months Ended July 31, 1999 and 1998.
Notes to Consolidated Condensed Financial Statements.
<TABLE>
<CAPTION>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In thousands)
July 31, 1999 January 31, 1999
------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,181 $ 12,959
Accounts and notes receivable, net 185,095 164,547
Recoverable costs and accrued profits
not yet billed 34,847 99,097
Income tax receivable 34,664 48,596
Inventories:
Power Products 175,047 182,894
Petroleum Equipment 25,547 40,560
Other Business Activities 53,615 40,222
Excess of current cost over LIFO values (48,718) (48,474)
--------- ---------
205,491 215,202
--------- ---------
TOTAL CURRENT ASSETS 462,278 540,401
PROPERTY, PLANT AND EQUIPMENT 277,687 271,658
Allowances for depreciation and
amortization (151,036) (142,913)
--------- ---------
126,651 128,745
DEFERRED INCOME TAX ASSETS 8,098 7,904
INVESTMENTS AND OTHER ASSETS 33,927 28,727
--------- ---------
$630,954 $705,777
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 25,546 $ 17,468
Accounts payable 56,975 83,127
Accrued payrolls and incentives 13,818 17,123
Current income taxes 2,931 2,931
Current portion of long-term debt 23,902 69,488
Other current liabilities 91,819 95,349
--------- ---------
TOTAL CURRENT LIABILITIES 214,991 285,486
--------- ---------
COMMITMENTS AND CONTINGENCIES
LONG-TERM DEBT 78,749 83,530
DEFERRED INCOME TAXES 66 43
ACCRUED POSTRETIREMENT BENEFITS 13,735 13,019
DEFERRED COMPENSATION 2,782 3,336
SHAREHOLDERS' EQUITY
Common Stock, without par value, 100,000,000
shares authorized; 27,992,203 and 27,984,035
shares issued at July 31, 1999 and January 47,722 47,819
31, 1999, respectively
Retained earnings 272,909 272,544
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 320,631 320,363
--------- ---------
$630,954 $705,777
========= =========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In thousands, except per share data)
------------------------- ------------------------
Six Months Ended Three Months Ended
July 31, July 31,
------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $389,551 $628,549 $200,640 $323,539
Cost of sales 328,410 565,775 169,360 291,799
--------- --------- --------- ---------
Gross profit 61,141 62,774 31,280 31,740
Selling and administrative expenses 50,265 38,695 24,774 19,964
Interest expense 6,710 5,956 3,259 2,806
Other income, net (3,439) (10,230) (1,244) (4,208)
--------- --------- --------- ---------
53,536 34,421 26,789 18,562
--------- --------- --------- ---------
Earnings before income taxes 7,605 28,353 4,491 13,178
Income tax provision 2,816 10,295 1,663 4,814
--------- --------- --------- ---------
Earnings of consolidated companies 4,789 18,058 2,828 8,364
Equity in net earnings (loss) of
unconsolidated affiliates 334 (456) 175 73
--------- --------- --------- ---------
Net earnings $ 5,123 $ 17,602 $ 3,003 $ 8,437
========= ========= ========= =========
Weighted average shares
outstanding:
Basic 27,986 30,046 27,989 28,178
Diluted 28,010 30,137 28,086 28,178
Earnings per share:
Basic $.18 $.59 $.11 $.30
Diluted .18 .59 .11 .30
Cash dividends per share $.17 $.17 $.085 $.085
==== ==== ==== ====
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
------------------------ ------------------------
Six Months Ended Three Months Ended
July 31, July 31,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Operating Activities
<S> <C> <C> <C> <C>
Net earnings $ 5,123 $ 17,602 $ 3,003 $ 8,437
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Accrued postretirement benefits 716 (190) 207 (195)
Depreciation and amortization 10,826 9,963 5,623 5,770
Deferred income taxes, net (171) (2,899) (134) -
Change in operating assets and
liabilities, net of the effect of
acquisition:
Accounts and notes receivable, net (20,548) 42,347 (7,066) 55,814
Recoverable costs and accrued
profits not yet billed 64,250 (6,713) 34,241 (10,546)
Inventories 9,711 (14,433) 16,525 (16,156)
Accounts payable (29,457) (14,378) 15,796 1,570
Current income taxes, net 13,932 (30,739) 12,938 (39,632)
Other current liabilities (3,530) (24,761) (2,701) (23,854)
Other-principally long-term
assets and liabilities (5,851) 4,536 (5,032) 6,535
-------- -------- -------- --------
Net Cash Provided By (Used In)
Operating Activities 45,001 (19,665) 73,400 (12,257)
Investing Activities
Collection of receivable from sale of
Gas Turbine Operations - 600,000 - -
Expenditures for property, plant and
equipment (16,685) (15,633) (8,864) (7,526)
Acquisition of businesses - (18,750) - (9,300)
Disposal of property, plant and
equipment, net 7,953 665 6,286 259
-------- -------- --------- ---------
Net Cash (Used In) Provided By (8,732) 566,282 (2,578) (16,567)
Investing Activities
Financing Activities
Additions to long-term borrowings 16,234 - - -
Payments on long-term borrowings (66,601) (226,124) (66,268) (607)
Net short-term borrowings (payments) 8,078 (34,178) (1,646) 329
Dividends paid (4,758) (5,001) (2,379) (2,318)
Repurchase of common stock - (120,000) - (62,940)
Exercise of stock options - 589 - (26)
-------- -------- -------- --------
Net Cash Used In Financing Activities (47,047) (384,714) (70,293) (65,562)
-------- -------- -------- --------
(Decrease) increase in cash and cash
equivalents (10,778) 161,903 529 (94,386)
Cash and cash equivalents, beginning of
period 12,959 18,987 1,652 275,276
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 2,181 $180,890 $ 2,181 $180,890
======== ======== ======== ========
Supplemental disclosure of cash flow
information:
Net cash paid during the period for:
Interest payments $ 7,162 $ 4,922 $ 6,176 $ 4,664
Income tax payments 733 $ 44,877 314 44,789
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, 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 condensed 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 Statement of
Financial Accounting Standards ("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.
The accompanying consolidated condensed 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 Family of Military Tactical
Vehicles ("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.
Most of the production under the original FMTV contract
was completed as of January 31, 1999. Revenues and
profits realized on the original FMTV contracts 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 original FMTV contracts 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 contracts. In addition, the Company has been directed
by the U.S. Army to undertake certain changes to the drive
train of all vehicles produced under the first FMTV
contract. The Company has and will continue to submit a
series of Requests for Equitable Adjustments or claims
under the original FMTV contract, seeking increases in the
FMTV contract price for those additional costs that relate
to government caused changes and delays amounts in excess
of agreed upon contract price. It is not possible to
estimate the amount, if any, that the Company will recover
under such Requests for Equitable Adjustments or claims.
The Company has expensed the costs associated with $48
million in claims relating to program delays and changes,
and has fully reserved $40 million related to drive train
changes. Any future recovery of these amounts will be
treated as income in the period in which the matter is
resolved.
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 July 31, 1999) of a power generation plant in
Argentina. Included in "Other accrued liabilities" at July
31, 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 ($15.4 million had been provided as of
July 31, 1999). 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 customers' 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, 1999 is $6 million, excluding
the $42.6 million discussed above.
Note C: Earnings per share (unaudited)
Reconciliation of the numerators and denominators of the
basic and diluted EPS computation is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
--------------------- --------------------
Six Months Ended Three Months Ended
July 31, July 31,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Net earnings $ 5,123 $17,602 $ 3,003 $ 8,437
Weighted Average Shares Outstanding 27,986 30,046 27,989 28,178
------- ------- --------- ---------
Basic Earnings Per Share $.18 $.59 $.11 $.30
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
------------------- -------------------
Six Months Ended Three Months Ended
July 31, July 31,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Diluted Earnings Per Share
Net earnings $ 5,123 $17,602 $ 3,003 $ 8,437
Weighted Average Shares Outstanding 27,986 30,046 27,989 28,178
Shares Issuable from Assumed
Conversion of Common Stock 24 91 97 -
------- ------- ------- -------
Weighted Average Shares Outstanding,
as adjusted 28,010 30,137 28,086 28,178
------- ------- ------ -------
Diluted Earnings Per Share $.18 $.59 $.11 $.30
==== ==== ==== ====
</TABLE>
Note D: Segment information (unaudited)
Financial information relating to industry segment is as
follows (in thousands):
<TABLE>
<CAPTION>
Sales Operating Profit (Loss)
----- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Six months ended July 31,
Power Products $266,197 $273,829 $ 10,791 $ 20,073
Tactical Vehicle Systems 12,033 263,848 3,143 5,777
Petroleum Equipment 52,112 51,122 3,649 4,485
Other Business Activities 59,209 39,750 (361) 1,444
-------- -------- -------- --------
Total $389,551 $628,549 $ 17,222 $ 31,779
======== ======== ======== ========
Three months ended July 31,
Power Products $144,909 $137,661 $ 7,701 $ 10,168
Tactical Vehicle Systems 5,818 139,188 2,037 3,058
Petroleum Equipment 23,648 27,530 1,691 2,382
Other Business Activities 26,265 19,160 (1,197) (52)
-------- -------- --------- --------
Total $200,640 $323,539 $ 10,232 $ 15,556
======== ======== ======== ========
</TABLE>
There have been no material changes in total assets by industry segment since
January 31, 1999.
A reconciliation of operating profit to earnings before income taxes is as
follows (in thousands):
<TABLE>
<CAPTION>
---------------------- -------------------
Six Months Ended Three Months Ended
July 31, July 31,
---------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating profit $17,222 $31,779 $10,232 $15,556
Corporate expenses, net (2,936) (4,535) (2,484) (2,414)
Non-operating interest income 29 7,065 2 2,842
Interest expense (6,710) (5,956) (3,259) (2,806)
-------- ------- ------- -------
Earnings before income taxes $ 7,605 $28,353 $ 4,491 $13,178
======= ======= ======= =======
</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 consolidated condensed 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 herein and
therein, which identify important factors that could cause
actual results to differ materially from those in the
forward-looking statements.
RESULTS OF OPERATIONS
Sales for the three months ended July 31, 1999 ("Second
Quarter"), totaled $200.6 million compared to sales of
$188.9 million for the three months ended May 1, 1999
("First Quarter") and $323.5 million for the same period
in 1998. Net earnings from operations for the Second
Quarter totaled $3.0 million or $0.11 per basic and
diluted share compared to net earnings of $2.1 million or
$.08 per basic and diluted share for the First Quarter and
$8.4 million or $0.30 per basic and diluted share a year
ago.
The Power Products segment, which is responsible for
marketing and aftermarket support of a wide range of
industrial equipment, recorded Second Quarter sales of
$144.9 million compared to $121.3 million in the First
Quarter and $137.7 million for the same period in 1998.
Operating profit for the Power Products segment totaled
$7.7 million for the Second Quarter compared to $3.1
million in the First Quarter and $10.2 million a year ago.
Depressed oil prices last year and earlier this year
continue to have an adverse impact on equipment parts and
service sales in selected geographic markets. However,
the Power Products segment experienced improved earnings
at four West Coast branches and from the IPSC Co.
acquisition, as well as benefits from remedial actions
taken earlier this year at other locations.
The Petroleum Equipment segment manufactures equipment for
oil and gas exploration, production, and well stimulation
industries. Sales for this segment totaled $23.6 million
for the Second Quarter compared to $28.5 million in the
First Quarter and $27.5 million last year. Operating
profit for Petroleum Equipment totaled $1.7 million for
the Second Quarter compared to $2.0 million in the First
Quarter and $2.4 million last year. The decrease in
profits resulted from increased sales on lower margin
marine riser products, offset by a decrease in higher-
margin equipment sales, which remained depressed
particularly in the U.S. market.
The Tactical Vehicle Systems segment, which manufactures
tactical vehicles for the U.S. Army and others, recorded
sales of $5.8 million for the Second Quarter compared to
$6.2 million in the First Quarter and $139.2 million a
year ago. Production on the original contract was
completed as of January 31, 1999, and production on the
follow-on contract is anticipated to start in the third
quarter of Fiscal 1999. Operating profit for the Second
Quarter of 1999 amounted to $2.0 million, compared to $1.1
million in the First Quarter and $3.1 million a year ago,
and was largely comprised of reductions to estimated costs
to complete the original truck contract.
Other business activities not identified in a specific
segment include airline ground support equipment and the
fabrication and leasing of gas compression equipment.
Sales totaled $26.3 million for the Second Quarter,
compared to $19.2 million for the same period last year.
Most of the $7.1 million increase occurred in airline
ground support equipment, associated with the acquisition
of Tug Manufacturing Corporation ("Tug") in December 1998.
A Second Quarter operating loss of $1.2 million versus
$0.1 million loss a year ago resulted primarily from
expenses related to airline ground support product develop-
ment and start up of the gas compression business,
partially offset by higher sales and margins associated
with the Tug acquisition.
Interest income earned on proceeds from the sale of Gas
Turbine Operations to General Electric Company for the
second quarter and first six months of 1998 totaled $2.8
million and $7.0 million, respectively.
Net cash provided by operating activities for the Second
Quarter totaled $73.4 million, largely resulting from
a comprehensive asset reduction initiative. Total debt
decreased $67.9 million during the Second Quarter.
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 as of July 31,
1999 and January 31, 1999 were as follows (in millions):
<TABLE>
<CAPTION>
------------- ----------------
July 31, 1999 January 31, 1999
------------- ----------------
<S> <C> <C>
Tactical Vehicle Systems $986.1 $991.7
Power Products 79.3 69.9
Petroleum Equipment 18.8 38.6
All Other 41.2 17.9
-------- --------
$1,125.4 $1,118.1
======== =========
</TABLE>
Unfilled orders of the Tactical Vehicle Systems segment at
July 31, 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 was
$8.9 million for the Second Quarter, an increase from $7.5
million for the same period in Fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity include cash and cash
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 the six months ended July 31, 1999 current
liabilities decreased by $70.5 million. The repayment of
$60 million of senior debt and a $26.2 million decline in
"Accounts payable" were the key contributors to this
decrease. Total debt decreased by $42.3 million during
the six months ending July 31, 1999. The Company has
provided $22.6 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, net of a $25 million letter of
credit facility, of which $110 million was available at
July 31, 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; the assessment of
unanticipated taxes by foreign or domestic governmental
authorities 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,
including claims for additional taxes, 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. Furthermore, during the course of the contract,
the Company may be required to make certain payments which
it believes are recoverable under the contract from the
U.S. Government or its vendors. To the extent that such
amounts are not actually recovered, results under the
contract could be materially adversely affected.
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 July 31, 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 September 6, 1999, and most related testings
are expected to be completed by November 30, 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.
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 4. Submission of Matters to a Vote of Security
Holders.
The Annual Meeting of Shareholders of the Company was held
on June 8, 1999. 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.
<TABLE>
<CAPTION>
Election of Directors
Against or
For Withheld
--- ----------
<S> <C> <C>
Khleber V. Attwell 23,188,602 404,236
Brian H. Rowe 22,304,071 1,288,767
Darvin M. Winick 23,224,275 368,563
Howard Wolf 23,221,575 371,263
For Against Abstained
--- ------- ---------
Ratification of Accountants 23,346,391 223,675 22,772
For Against Abstained
--- ------- ---------
Shareholder Proposal to Declassify the Board 7,592,273 12,020,262 148,372
For Against Abstained
--- ------- ---------
Shareholder Proposal to Maximize the Value of
the Company through Public Auction 1,146,689 18,435,940 178,278
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
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 30th day of August, 1999.
STEWART & STEVENSON SERVICES, INC.
By: /s/ Michael L. Grimes
Michael L. Grimes
President and Chief Executive Officer
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. </LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 2,181
<SECURITIES> 0
<RECEIVABLES> 189,319
<ALLOWANCES> (4,224)
<INVENTORY> 205,491
<CURRENT-ASSETS> 462,278
<PP&E> 277,687
<DEPRECIATION> (151,036)
<TOTAL-ASSETS> 630,954
<CURRENT-LIABILITIES> 214,991
<BONDS> 78,749
<COMMON> 47,722
0
0
<OTHER-SE> 272,909
<TOTAL-LIABILITY-AND-EQUITY> 630,954
<SALES> 389,551
<TOTAL-REVENUES> 389,551
<CGS> 328,410
<TOTAL-COSTS> 328,410
<OTHER-EXPENSES> 53,536
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,710
<INCOME-PRETAX> 7,605
<INCOME-TAX> 2,816
<INCOME-CONTINUING> 4,789
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,123
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
</TABLE>
