SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 2000
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 28,051,916 SHARES
(Class) (Outstanding at December 1, 2000)
<PAGE>
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 - October 28, 2000 and
January 31, 2000.
Consolidated Condensed Statements of Earnings - Nine Months and Three Months
Ended October 28, 2000 and October 30, 1999.
Consolidated Condensed Statements of Cash Flows - Nine and Three Months Ended
October 28, 2000 and October 30, 1999.
Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 28, 2000 JANUARY 31, 2000
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents ..................................... $ 105,057 $ 11,715
Accounts and notes receivable, net ....................... 160,641 242,625
Recoverable costs and accrued profits
not yet billed ........................................ 20,907 8,151
Income tax receivable .................................... 18,053 26,255
Deferred tax asset ....................................... 11,067 9,076
Inventories:
Power Products ........................................ 167,250 150,844
Petroleum Equipment ................................... 40,857 30,151
Airline Products ...................................... 31,585 26,029
Other Business Activities ............................. -- 33,762
Excess of current cost over LIFO values ............... (50,506) (49,839)
--------- ---------
189,186 190,947
--------- ---------
TOTAL CURRENT ASSETS .................................. 504,911 488,769
PROPERTY, PLANT AND EQUIPMENT ............................... 284,115 290,355
Allowances for depreciation and
amortization ......................................... (171,298) (160,821)
--------- ---------
112,817 129,534
DEFERRED INCOME TAX ASSETS .................................. 370 166
INVESTMENTS AND OTHER ASSETS ................................ 22,724 23,881
--------- ---------
$ 640,822 $ 642,350
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ............................................ $ 13,097 $ 25,269
Accounts payable ......................................... 61,324 90,163
Accrued payrolls and incentives .......................... 13,209 18,701
Income tax ............................................... 3,459 3,257
Current portion of long-term debt ........................ 29,384 8,955
Other current liabilities ................................ 91,865 65,455
--------- ---------
TOTAL CURRENT LIABILITIES ............................. 212,338 211,800
COMMITMENTS AND CONTINGENCIES (SEE NOTE D)
LONG-TERM DEBT .............................................. 57,747 78,281
DEFERRED INCOME TAX ......................................... 182 958
ACCRUED POSTRETIREMENT BENEFITS ............................. 13,549 12,748
DEFERRED COMPENSATION ....................................... 2,160 2,436
OTHER LONG-TERM LIABILITIES ................................. 2,980 1,048
--------- ---------
TOTAL LIABILITIES ..................................... 288,956 307,271
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock, without par value, 100,000,000
shares authorized; 28,059,416 and 27,992,203, shares issued
at October 28, 2000 and January 31, 2000, respectively .... 47,780 47,722
Retained earnings ........................................ 304,086 287,357
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................ 351,866 335,079
--------- ---------
$ 640,822 $ 642,350
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales ............................................. $ 808,499 $ 624,267 $ 284,227 $ 234,716
Cost of sales ..................................... 677,808 527,505 236,441 199,095
--------- --------- --------- ---------
Gross profit ...................................... 130,691 96,762 47,786 35,621
Selling and administrative expenses ............... 91,361 76,431 31,878 26,166
Interest expense .................................. 6,739 8,812 2,383 2,102
Interest and investment income .................... (6,230) (854) (1,638) (185)
Other income, net ................................. 1,051 (2,924) 1,684 (154)
--------- --------- --------- ---------
92,921 81,465 34,307 27,929
--------- --------- --------- ---------
Earnings before income taxes ...................... 37,770 15,297 13,479 7,692
Income tax provision .............................. 13,903 5,673 4,889 2,857
--------- --------- --------- ---------
Earnings of consolidated companies ................ 23,867 9,624 8,590 4,835
Gain on sale of investment, net of tax ............ -- 2,746 -- 2,746
Equity in net earnings of unconsolidated affiliates -- 142 -- (192)
--------- --------- --------- ---------
Net earnings ...................................... $ 23,867 $ 12,512 $ 8,590 $ 7,389
========= ========= ========= =========
Weighted average number of shares of common stock
Basic .......................................... 28,018 27,988 28,041 27,992
Diluted ........................................ 28,277 28,036 28,478 28,082
Net earnings per share:
Basic ............................................. $ 0.85 $ 0.45 $ 0.31 $ 0.26
Diluted ........................................... 0.84 0.45 0.30 0.26
Cash dividends per share .......................... $ 0.255 $ 0.255 $ 0.085 $ 0.085
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net earnings .......................................................... $ 23,867 $ 12,512 $ 8,590 $ 7,389
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Accrued postretirement benefits ................................... 801 775 183 59
Depreciation and amortization ..................................... 16,135 15,895 5,110 5,069
Deferred income taxes, net ........................................ (980) (225) (226) (54)
Gain on sale of business assets ................................... (5,649) -- -- --
Change in operating assets and liabilities
net of the effect of acquisition:
Accounts and notes receivable, net ............................. 86,284 (33,494) 49,338 (12,946)
Recoverable costs and accrued profits not yet billed ........... (12,756) 90,689 (8,020) 26,439
Inventories .................................................... (21,511) 23,900 (37,469) 14,189
Accounts payable ............................................... (28,839) (10,383) 8,993 15,769
Accrued payrolls and incentive ................................. (5,492) (5,065) (1,160) (1,760)
Current income taxes, net ...................................... 6,413 15,998 (3,714) 2,066
Other current liabilities ...................................... 26,862 (9,204) 19,643 (5,674)
Other--principally long-term assets and liabilities ............ (1,015) (8,479) 3,359 (2,628)
--------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................. 84,120 92,919 44,627 47,918
--------- --------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment ........................ (26,255) (24,690) (5,697) (8,005)
Proceeds from sale of business assets ................................. 52,622 -- 8,000 --
Disposal of property, plant and equipment, net ........................ 2,212 14,054 (76) 6,101
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................... 28,579 (10,636) 2,227 (1,904)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Additions to long-term borrowings ..................................... 20,417 16,234 370 --
Payments on long-term borrowings ...................................... (20,522) (81,896) (296) (15,295)
Net payments on short-term borrowings ................................. (12,172) (2,507) (1,448) (10,585)
Dividends paid ........................................................ (7,138) (7,138) (2,377) (2,380)
Exercise of stock options ............................................. 58 -- 53 --
--------- --------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES ................................. (19,357) (75,307) (3,698) (28,260)
--------- --------- --------- ---------
Increase in cash and equivalents ......................................... 93,342 6,976 43,156 17,754
Cash and equivalents, beginning of period ................................ 11,715 12,959 61,901 2,181
--------- --------- --------- ---------
Cash and equivalents, end of period ...................................... $ 105,057 $ 19,935 $ 105,057 $ 19,935
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest ............................................................ $ 5,171 $ 7,775 $ 429 $ 613
Income tax .......................................................... 16,810 2,609 9,607 1,876
Non-cash investing activities:
Issuance of notes receivable in sale of investment .................. -- 4,224 -- 4,224
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
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 three and nine months ended October
28, 2000 are not necessarily indicative of the results that will be realized for
the fiscal year ending January 31, 2001.
The Company's fiscal year begins on February 1 of the year stated and ends on
January 31 of the following year. For example, the Company's fiscal year 2000
(hereinafter referred to as "2000") commenced on February 1, 2000 and ends on
January 31, 2001. In addition, other years are referred to in a similar manner.
The Company reports results on the fiscal quarter method; each of the first
three fiscal quarters are 13 weeks long, with the fourth fiscal quarter covering
the remaining part of the fiscal year.
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, 2000 Form
10-K. An actual valuation of inventory under the last-in-first-out ("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 accompanying consolidated condensed financial statements for 1999 and
related notes contain certain reclassifications to conform with the presentation
used in 2000.
NOTE B--SEGMENT INFORMATION
Financial information relating to industry segments is as follows (in thousands
except percentages):
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------ ------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales
Power Products .......... $ 443,751 $ 396,578 $ 162,520 $ 130,381
Tactical Vehicle Systems 203,346 63,588 69,021 51,555
Petroleum Equipment ..... 58,575 64,899 25,517 12,787
Airline Products ........ 83,308 74,863 26,785 29,026
Other Business Activities 19,519 24,339 384 10,967
--------- --------- --------- ---------
Total ................. $ 808,499 $ 624,267 $ 284,227 $ 234,716
========= ========= ========= =========
Operating Profit (Loss)
Power Products .......... $ 8,747 $ 15,660 $ 6,330 $ 4,869
Tactical Vehicle Systems 38,980 13,248 10,023 10,105
Petroleum Equipment ..... 1,224 2,222 1,493 (1,427)
Airline Products ........ (4,802) (547) (465) 214
Other Business Activities 2,519 (1,076) (113) (1,476)
--------- --------- --------- ---------
Total ................. $ 46,668 $ 29,507 $ 17,268 $ 12,285
========= ========= ========= =========
Operating Margin
Power Products .......... 2.0% 3.9% 3.9% 3.7%
Tactical Vehicle Systems 19.2 20.8 14.5 19.6
Petroleum Equipment ..... 2.1 3.4 5.9 (11.2)
Airline Products ........ (5.8) (0.7) (1.7) 0.7
Other Business Activities 12.9 (4.4) N/M (13.5)
</TABLE>
N/M - Not Meaningful
Total assets of the Company's Other Business Activities segment decreased by
approximately $36.4 million during the second quarter of Fiscal 2000 as a result
of the sale of certain of the Company's assets associated with its gas
compressor leasing business. (See "Sale of Gas Compressor Leasing Business"
below in Item 2.) At the beginning of the third quarter, approximately $20
million of the remaining
6
<PAGE>
assets and associated operating results of its Other Business Activities segment
were reclassified into the Company's Power Products segment. Such
reclassification occurred as a result of a change in the nature of certain of
Other Business Activities segment's operations. There have been no other
material changes in total assets by industry segment since January 31, 2000.
A reconciliation of operating profit to earnings before income taxes is as
follows (in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
---------------------- ----------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
-------- -------- -------- --------
Operating profit ............ $ 46,668 $ 29,507 $ 17,268 $ 12,285
Corporate expenses, net ..... (8,389) (5,427) (3,044) (2,491)
Non-operating interest income 6,230 29 1,638 --
Interest expense ............ (6,739) (8,812) (2,383) (2,102)
-------- -------- -------- --------
Earnings before income taxes $ 37,770 $ 15,297 $ 13,479 $ 7,692
======== ======== ======== ========
NOTE C--ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts and hedging activities. Adoption of SFAS No. 133 was
required on or before February 1, 2000. However, in June 1999, the FASB issued
SFAS No. 137 which delayed the required implementation of SFAS No. 133 to no
later than February 1, 2001. The Company is currently evaluating the
implementation effects of SFAS No. 133 but does not expect that implementation
will have a material impact on the Company's results of operations or financial
position.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulleting ("SAB") No. 101, "Revenue Recognition." The bulletin is not
intended to change existing authoritative literature, but instead provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. Subsequent to the release of SAB No. 101, SAB No. 101A and
SAB No. 101B were issued. These bulletins extended the effective date of SAB No.
101, allowing filers additional time to comply. Now, companies must comply with
SAB No. 101 beginning with the fourth quarter of 2000. The Company does not
believe the adoption of SAB No. 101 will have a material impact on the Company's
financial results.
NOTE D--COMMITMENTS AND CONTINGENCIES
As a custom packager of power systems, the Company issues bid and performance
guarantees in the form of performance bonds or standby letters of credit.
Performance type letters of credit totaled approximately $4.7 million at October
28, 2000.
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 debarred from government contracting. In that event, the Company
would also be unable to sell equipment or services to customers that depend on
loans or financial commitments from the Export Import Bank, Overseas Private
Investment Corporation, and similar government agencies during a suspension or
debarment.
The Company entered into 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 a 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 Medium Tactical Vehicles ("FMTV") contract unless the Secretary of
the Army finds a compelling need to enter into such modification.
7
<PAGE>
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 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. It is presently impossible to determine the actual
costs that may be incurred to resolve this matter or whether the resolution will
have a material adverse effect on the Company's results of operations.
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 which
are material to the Company's financial statements 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 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 October 28, 2000 is $4.6 million.
The Company leases certain additional property and equipment under lease
arrangements of varying terms whose annual rentals are less than 1% of
consolidated sales.
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, 2000. 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 and the
heading labeled "Factors That May Affect Future Results" below, 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
Statements of Earnings.
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
----------------------- -----------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales ............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................................... 83.8 84.5 83.2 84.8
---------- ---------- ---------- ----------
Gross profit ...................................... 16.2 15.5 16.8 15.2
Selling and administrative expenses ............... 11.3 12.2 11.2 11.1
Interest expense .................................. 0.8 1.4 0.8 0.9
Interest and investment income .................... (0.8) (0.1) (0.5) (0.1)
Other income, net ................................. 0.1 (0.5) 0.5 (0.1)
---------- ---------- ---------- ----------
11.5 13.0 12.1 11.9
---------- ---------- ---------- ----------
Earnings before income taxes ...................... 4.7 2.5 4.7 3.3
Income tax provision .............................. 1.7 0.9 1.7 1.2
---------- ---------- ---------- ----------
Earnings of consolidated companies ................ 3.0 1.5 3.0 2.1
Gain on sale of investments, net of tax ........... -- 0.4 -- 1.2
Equity in net earnings of unconsolidated affiliates -- -- -- (0.1)
---------- ---------- ---------- ----------
Net earnings ...................................... 3.0% 2.0% 3.0% 3.1%
========== ========== ========== ==========
</TABLE>
8
<PAGE>
OVERVIEW
Sales for the third quarter ended October 28, 2000 grew 21 percent to $284.2
million compared to sales of $234.7 million for the third quarter of 1999. Net
earnings for the third quarter of 2000 increased 16 percent to $8.6 million, or
$0.30 per diluted share compared to net earnings of $7.4 million, or $0.26 per
share, in the third quarter of 1999.
Sales for the first nine months of 2000 grew 30 percent to $808.5 million versus
$624.3 million for the first nine months of 1999. Net earnings for the first
three quarters increased by 91 percent to $23.9 million, or $0.84 per diluted
share, compared to $12.5 million, or $0.45 per share, in last year's first three
quarters. Excluding a one-time gain on a sale of an investment which occurred in
the third quarter of 1999, net earnings increased by 144 percent.
In the third quarter of 2000, the Company achieved its seventh consecutive
quarter of improved earnings. The Company continues to focus on five key
initiatives to: (1) strengthen business leadership, (2) improve cash flow
management, (3) enhance supply chain productivity, (4) revitalize business
growth, and (5) implement a new enterprise-wide information system.
SEGMENT DATA
The Company's management analyzes financial results principally in five business
segments based on distinct product and customer types: Power Products, Tactical
Vehicle Systems, Airline Products, Petroleum Equipment, and Other Business
Activities. Such segments are described below along with analyses of their
respective results of operations.
The Power Products segment recorded third quarter sales of $162.5 million
compared to $130.4 million for the third quarter of 1999. Operating profit for
the Power Products segment totaled $6.3 million, or 3.9% of sales, the best
operating profit margin percentage since the second quarter of 1999. At the
beginning of the third quarter of 2000, the Company changed the nature of one of
its operating facilities and reassigned it from the Other Business Activities
segment to the Power Products segment, which resulted in a modest increase in
sales and a $1.4 million reduction in operating profit. Third quarter 2000
results reflected improved parts and service revenues in all five regions versus
the same period in 1999. For the third quarter of 1999, the Company realized
operating profit of $4.9 million, or 3.7% of sales.
The Tactical Vehicle Systems segment recorded sales of $69.0 million for the
three months ended October 28, 2000, compared to $51.6 million for the like
period of 1999. Operating profit for the third quarter of 2000 amounted to $10.0
million, compared to $10.1 million a year ago. Operating profit for the third
quarter of 2000 included $2.0 million in non-recurring charges, which were
principally comprised of provisions for corrosion warranty costs and certain
billing adjustments. The Company shipped 339 trucks in the third quarter of 2000
and 232 trucks in the third quarter of 1999. Based on US Army forecasts and
other data, the Company expects to ship 533 trucks during the fourth quarter of
2000 and 1,534 trucks for the year. In 2001, the Company expects to ship
approximately 2,200 trucks and approximately 700 trailers. Such volume is
expected to result in sales of approximately $300 million in 2000 and $400
million in 2001.
The Company's Petroleum Equipment segment recorded sales of $25.5 million during
the third quarter of 2000, compared to $18.1 million in the second quarter of
2000 and $12.8 million in the third quarter of 1999. Operating profit for
Petroleum Equipment was $1.5 million for the third quarter of 2000, or 5.9
percent of sales, compared to a $0.4 million profit in the second quarter of
2000, and a $1.4 million loss in the third quarter of 1999. This improvement in
operating profit is a result of the cyclical rebound of the petroleum industry.
The Company expects further improvements in operating profit for the fourth
quarter of 2000. In addition to improved sales, order backlogs for this segment
grew to $65.6 million at quarter end, up $10.0 million over the backlog reported
at the end of the second quarter of 2000.
The Airline Products segment recorded sales of $26.8 million in the third
quarter, compared to last year's third quarter results of $29.0 million. The
$0.5 million operating loss for the quarter included new product development
expenditures as well as the recognition of a charge for sales volume rebates. A
profit of $0.2 million was recorded in last year's third quarter. The new S&S
Tug management leadership team, which was assembled earlier this year, continues
to take actions to position this business for future profitable growth.
Other business activities not identified in a specific segment include
predominantly gas compression equipment sales or leases. Sales in the third
quarter totaled $0.4 million, compared to $11.0 million in the third quarter of
1999. Operating losses of $0.1 million and $1.5 million were reported in the
third quarter of this year and last year, respectively. As previously reported,
the gas compression leasing business was sold during the second quarter of 2000,
which led to the reduced sales and operating losses. In addition, as described
above, the Company changed the nature of one of its operating facilities and
reassigned it from Other Business Activities to the Power Products segment.
9
<PAGE>
CORPORATE RESULTS
For the three months ended October 28, 2000 gross profit margin was 16.8 percent
versus 15.2 percent for the comparable period of 1999. Margins increased during
the quarter largely as a result of the cyclical improvement reflected in the
results of the Company's Petroleum Equipment segment. However, such improvement
was partially offset by charges recognized in the third quarter of 2000 in the
Tactical Vehicle Systems segment and the Airline Products segment, as described
above.
Net corporate expenses for the quarter totaled $3.0 million versus $2.5 million
for the comparable period of 1999. The increase was largely attributable to
expenditures on a new, enterprise-wide information system. The Company has
dedicated a team of employees to lead the implementation and is currently
utilizing the software for its core and certain of its ancillary financial
systems. The first manufacturing management implementation has also been
completed and over the coming months the Company will implement the
manufacturing management software at other of its locations. To date, the
Company has made positive progress on this initiative and believes it will
continue to improve the quality of information through the utilization of this
technology.
During the third quarter the Company generated $1.6 million in interest income,
an increase of $1.6 million over the third quarter of 1999, as a result of
increased average cash balances in 2000. Interest expense for the first three
quarters was $6.7 million or $2.1 million below last year's comparable period,
resulting from lower average debt and various asset management initiatives.
SALE OF GAS COMPRESSOR LEASING BUSINESS
Effective July 1, 2000 the Company completed the sale of its gas compressor
leasing business for $57.5 million. The Company will continue to package gas
compressor equipment for sale and will continue to service such equipment. To
date, the Company has received payment of $52.6 million and an additional $4.9
million will be due and payable on or before April 10, 2001. Such amount is
included on the Company's Consolidated Condensed Statements of Financial
Position as of October 28, 2000 as a component of Accounts and notes receivable,
net. The Company realized a gain of $5.6 million on this sale during the second
quarter of 2000, which is included in Other income, net on the Company's
Consolidated Condensed Statements of Earnings for the nine months ended October
28, 2000. All such items are associated with its Other Business Activities
segment.
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 the end of the third and second quarters of 2000 and third quarter
of 1999 were as follows:
OCTOBER 28, 2000 JULY 29, 2000 OCTOBER 30, 1999
---------------- ---------------- ----------------
(Dollars in millions)
Tactical Vehicle Systems $ 742.8 $ 795.7 $ 960.3
Power Products ......... 119.2 116.7 60.8
Petroleum Equipment .... 65.6 55.6 17.3
Airline Products ....... 21.3 21.1 19.4
All Other .............. 16.5 10.1 18.8
----------- ----------- -----------
$ 965.4 $ 999.2 $ 1,076.6
=========== =========== ===========
Total backlog decreased $33.8 million during the quarter as a result of
additional fulfillment of the multi-year follow-on Tactical Vehicle Systems
contract awarded in October 1998 by the United States Army Tank-Automotive and
Armament Command ("TACOM") to manufacture medium tactical vehicles. This
decrease was partially offset by an option exercised by TACOM for an additional
103 vehicles and various enhancements to vehicles already produced. Such
decrease in unfilled orders for this segment was also partially offset by a
modest increase in both the Power Products and Airline Products segments. The
Company has also experienced continued growth in orders for the Petroleum
Equipment segment's products.
Over the coming months, the Company expects the backlog in its Tactical Vehicle
Systems segment to decrease as existing contractual orders are filled. See
"Government Contracting Factors" for additional information regarding Tactical
Vehicle Systems contracts.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital spending for property, plant and equipment of $26.3 million for the nine
months ended October 28, 2000 included $8.3 million in
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revenue earning assets, and increased from $24.7 million for the same period in
1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities was $44.6 million during the third
quarter of 2000, largely due to collections of outstanding balances due from the
U.S. Government, as well as performance-based collections from the U.S.
Government. During the first nine months of 2000 the Company generated over $84
million in cash flow from operations, slightly less than the comparable nine
months of 1999. Cash and equivalents were $105.1 million at October 28, 2000, an
increase of over $43 million versus the prior quarter. Borrowings at the end of
the quarter amounted to slightly over $100 million, resulting in a net cash over
borrowings position of $4.8 million.
The Company has outstanding $75 million of privately placed unsecured long-term
senior notes (the "Private Placement") at varying rates of interest. Various
traunches of the Private Placement mature on May 30 of 2001, 2003, and 2006.
Interest is due semiannually on May 30 and November 30 of each year. During the
second quarter of 2000, the Company reclassified the amount due on May 30, 2001,
or $20 million, from Long-term debt to Current portion of long-term debt on its
Consolidated Condensed Statements of Financial Position.
The Company has in place an unsecured Revolving Debt Facility that could provide
up to approximately $150 million, including a $25 million letter of credit sub
facility, of which approximately $112 million was available under the terms of
the debt facility at October 28, 2000. This Revolving Debt Facility matures on
December 20, 2001, but the Company has plans in place to refinance this facility
prior to the end of 2000. The Company has additional banking relationships that
provide uncommitted borrowing arrangements.
The Company's unsecured long-term notes, which include the Revolving Debt
Facility notes and senior notes, were issued pursuant to agreements containing
covenants that restrict indebtedness, guarantees, rentals, and other items.
Additional covenants in the Revolving Debt Facility require the Company to
maintain a minimum tangible net worth and interest coverage. Since these
requirements are calculated from earnings and cash flow, dividends could be
restricted indirectly. Dividends at the current level are not restricted as of
the date of this report, because the Company is currently in compliance with all
other such covenants. Further, the Company expects to remain in compliance for
the foreseeable future.
The Company's sources of cash 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,
current maturities of debt, and other financial commitments. From time to time,
as business needs warrant, the Company borrows funds under its Revolving Debt
Facility. To date during 2000 the Company has borrowed and repaid approximately
$20 million under this facility.
In the event that any acquisition of additional operations, growth in existing
operations, settlements of lawsuits or disputes, changes in inventory levels,
accounts receivable, tax payments, 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 from other long-term financing sources or to curtail certain
activities.
FACTORS THAT MAY AFFECT FUTURE RESULTS
CAUTIONARY 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 management's current expectations, estimates, and
projections. Any such statements set forth herein or otherwise made in writing
or orally by the Company with regard to its goals or expectations for revenues,
its projected or estimated earnings, its results of operations, or other aspects
of its business are not guarantees of future performance and involve a number of
risks, uncertainties, and assumptions and are made pursuant to the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of 1995. Many
factors, including those discussed more fully elsewhere in this release and in
the Company's filings with the Securities and Exchange Commission, particularly
its latest annual report on Form 10-K, as well as others, could cause actual
results to differ materially from those stated. These factors include, but are
not limited to: risks associated with newly acquired businesses or other
business combinations; changes in the costs or availability of the Company's raw
materials or other factors of production; changes in pricing or product or
service offerings by the Company's foreign and domestic competitors; changes in
demand for the Company's products and services; technological developments and
changes; the Company's or others' ability to continue to introduce competitive
new products and services on a timely, cost effective basis; the mix of products
and services sold or marketed by the Company; the achievement of reduced costs
and expenses; the gain or loss of significant customers; technological,
implementation, and cost or financial risks in use of large, multi-year
contracts; the cyclical nature of markets served by the Company; the outcome of
pending and future litigation, governmental proceedings, or other actions
against the Company; the continued availability of financing, financial
instruments
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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 or
imposition of eminent domain by foreign or domestic governmental authorities;
the risk of cancellation or adjustment of specific orders and termination of
significant government programs; disruptions in production and/or increased
costs due to labor disputes and enactment of adverse state, federal or foreign
legislation or changes in government policy or regulation. In addition, such
forward-looking statements could be affected by general industry and market
conditions and growth rates, general domestic and international conditions
including interest rates, inflation and currency exchange rates and other future
factors. Actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements.
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 on 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.
The Company's existing multi-year contract with the U.S. Army will extend
production of the Family of Medium Tactical Vehicles ("FMTV") into 2002 (or 2003
if the government exercises its option to purchase additional vehicles). The
funding of the FMTV contract is subject to the inherent uncertainties of
congressional appropriations. As is typical of multi-year defense contracts, the
FMTV 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 October 28,
2000, funding in the amount of $365 million for the FMTV contract had been
authorized and appropriated by the U.S. Congress. If the FMTV contract is
terminated other than for default, the FMTV contract provides for termination
charges that will reimburse the Company for allowable costs, but not necessarily
all costs.
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 debarred from government contracting. In this event, the Company
would also be unable to sell equipment or 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 entered 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During 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 which
are material to the Company's financial statements 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.2 Sixth Restated Bylaws of Stewart & Stevenson Services, Inc.,
effective September 12, 2000
27.1 Financial Data Schedule
(b) Form 8-K Report Date - August 24, 2000 (Second Quarter Results)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - August 31, 2000 (Receipt for $23.6 Million in
Oilfield Equipment)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - September 13, 2000 (Dividend Announcement)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - September 20, 2000 (Max Lukens Joins as New
Director)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - September 28, 2000 (Receipt of US Army Contracts
for $25 Million)
Items reported - Item 5. Other Events
Item 7. Exhibits
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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 8th day of December 2000.
STEWART & STEVENSON SERVICES, INC.
By: /s/ MICHAEL L. GRIMES
Michael L. Grimes
President and Chief Executive Officer
(principal executive officer)
By: /s/ JOHN H. DOSTER
John H. Doster
Senior Vice President and Chief Financial Officer
(principal financial officer)
By: /s/ PATRICK G. O'ROURKE
Patrick G. O'Rourke
Controller and Chief Accounting Officer
(chief accounting officer)
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EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
3.2 Sixth Restated Bylaws of Stewart & Stevenson Services, Inc., effective
September 12, 2000
27.1 Financial data schedule
16
