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 29, 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 (Zip Code)
offices)
(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 28,036,041 SHARES
(Class) (Outstanding at September 11, 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 - July 29, 2000 and
January 31, 2000.
Consolidated Condensed Statements of Earnings - Three and Six Months Ended July
29, 2000 and July 31, 1999.
Consolidated Condensed Statements of Cash Flows - Three and Six Months Ended
July 29, 2000 and July 31, 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>
JULY 29, 2000 JANUARY 31, 2000
-------------------- --------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents ......................................................... $ 61,901 $ 11,715
Accounts and notes receivable, net ........................................... 217,979 242,625
Recoverable costs and accrued profits
not yet billed ............................................................ 12,887 8,151
Income tax receivable ........................................................ 14,823 26,255
Deferred tax asset ........................................................... 10,469 9,076
Inventories:
Power Products ............................................................ 138,035 150,844
Petroleum Equipment ....................................................... 26,096 30,151
Airline Products .......................................................... 28,636 26,029
Other Business Activities ................................................. 8,696 33,762
Excess of current cost over LIFO values ................................... (49,746) (49,839)
-------------------- --------------------
151,717 190,947
-------------------- --------------------
TOTAL CURRENT ASSETS ...................................................... 469,776 488,769
PROPERTY, PLANT AND EQUIPMENT ................................................... 280,585 290,355
Allowances for depreciation and
amortization ............................................................. (168,431) (160,821)
-------------------- --------------------
112,154 129,534
DEFERRED INCOME TAX ASSETS ...................................................... 128 166
INVESTMENTS AND OTHER ASSETS .................................................... 23,097 23,881
-------------------- --------------------
$ 605,155 $ 642,350
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ................................................................ $ 14,545 $ 25,269
Accounts payable ............................................................. 52,331 90,163
Accrued payrolls and incentives .............................................. 14,369 18,701
Income tax ................................................................... 3,345 3,257
Current portion of long-term debt ............................................ 29,014 8,955
Other current liabilities .................................................... 72,221 65,903
-------------------- --------------------
TOTAL CURRENT LIABILITIES ................................................. 185,825 212,248
COMMITMENTS AND CONTINGENCIES (SEE NOTE C)
LONG-TERM DEBT .................................................................. 58,043 78,281
DEFERRED INCOME TAX ............................................................. 166 958
ACCRUED POSTRETIREMENT BENEFITS ................................................. 13,366 12,748
DEFERRED COMPENSATION ........................................................... 2,154 2,436
OTHER LONG-TERM LIABILITIES ..................................................... -- 600
SHAREHOLDERS' EQUITY
Common Stock, without par value, 100,000,000
shares authorized; 28,026,044 and 27,992,203, shares issued
at July 29, 2000 and January 31, 2000, respectively ........................... 47,727 47,722
Retained earnings ............................................................ 297,874 287,357
-------------------- --------------------
TOTAL SHAREHOLDERS' EQUITY ................................................ 345,601 335,079
-------------------- --------------------
$ 605,155 $ 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>
SIX MONTHS ENDED THREE MONTHS ENDED
----------------------------------- -----------------------------------
JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999
--------------- --------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales .............................................. $ 524,272 $ 389,551 $ 265,065 $ 200,640
Cost of sales ...................................... 441,367 328,410 228,050 169,360
--------------- --------------- --------------- ---------------
Gross profit ....................................... 82,905 61,141 37,015 31,280
Selling and administrative expenses ................ 65,132 50,265 29,041 24,774
Interest expense ................................... 4,356 6,710 2,047 3,259
Other income, net .................................. (10,874) (3,439) (6,440) (1,244)
--------------- --------------- --------------- ---------------
58,614 53,536 24,648 26,789
--------------- --------------- --------------- ---------------
Earnings before income taxes ....................... 24,291 7,605 12,367 4,491
Income tax provision ............................... 9,014 2,816 4,588 1,663
--------------- --------------- --------------- ---------------
Earnings of consolidated companies ................. 15,277 4,789 7,779 2,828
Equity in net earnings of unconsolidated
affiliates ......................................... -- 334 -- 175
--------------- --------------- --------------- ---------------
Net earnings ....................................... $ 15,277 $ 5,123 $ 7,779 $ 3,003
=============== =============== =============== ===============
Weighted average number of shares of common stock
Basic ........................................... 28,005 27,986 28,013 27,989
Diluted ......................................... 28,175 28,010 28,299 28,086
Net earnings per share:
Basic .............................................. $ .55 $ .18 $ .28 $ .11
Diluted ............................................ .54 .18 .27 .11
Cash dividends per share ........................... .17 .17 .085 .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>
SIX MONTHS ENDED THREE MONTHS ENDED
----------------------------------- -----------------------------------
JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999
--------------- --------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings ...................................... $ 15,277 $ 5,123 $ 7,779 $ 3,003
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Accrued postretirement benefits ............... 618 716 370 207
Depreciation and amortization ................. 11,025 10,826 5,493 5,623
Deferred income taxes, net .................... (754) (171) (790) (134)
Gain on sale of business assets ............... (5,649) -- (5,649) --
Change in operating assets and liabilities
net of the effect of acquisition:
Accounts and notes receivable, net ......... 36,946 (20,548) (8,018) (7,066)
Recoverable costs and accrued profits not
yet billed .............................. (4,736) 64,250 1,247 34,241
Inventories ................................ 15,958 9,711 28,272 16,525
Accounts payable ........................... (37,832) (26,152) (27,803) 15,796
Accrued payrolls and incentive ............. (4,332) (3,305) 89
Current income taxes, net .................. 10,127 13,932 5,836 12,938
Other current liabilities .................. 7,219 (3,530) 10,058 (2,701)
Other--principally long-term assets
and liabilities .......................... (4,374) (5,851) (2,905) (5,032)
--------------- --------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 39,493 45,001 13,979 73,400
--------------- --------------- --------------- ---------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment .... (20,558) (16,685) (10,279) (8,864)
Proceeds from sale of business assets ............. 44,622 -- 44,622 --
Disposal of property, plant and equipment, net .... 2,288 7,953 2,165 6,286
--------------- --------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES ...................................... 26,352 (8,732) 36,508 (2,578)
--------------- --------------- --------------- ---------------
FINANCING ACTIVITIES
Additions to long-term borrowings ................. 20,047 16,234 -- --
Payments on long-term borrowings .................. (20,221) (66,601) (414) (66,268)
Net short-term borrowings (payments) .............. (10,724) 8,078 (1,234) (1,646)
Dividends paid .................................... (4,761) (4,758) (2,382) (2,379)
--------------- --------------- --------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES ............. (15,659) (47,047) (4,030) (70,293)
--------------- --------------- --------------- ---------------
Increase (decrease) in cash and equivalents .......... 50,186 (10,778) 46,457 529
Cash and equivalents, beginning of period ............ 11,715 12,959 15,444 1,652
--------------- --------------- --------------- ---------------
Cash and equivalents, end of period .................. $ 61,901 $ 2,181 $ 61,901 $ 2,181
=============== =============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest ........................................ $ 4,742 $ 7,162 $ 3,608 $ 6,176
Income tax ...................................... 7,203 733 6,611 314
</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 six months ended July 29,
2000 are not necessarily indicative of the results that will be realized for the
fiscal year ending January 31, 2001.
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 Company's fiscal year begins on February 1 of the year stated and ends on
January 31 of the following year. For example, "Fiscal 2000" commenced on
February 1, 2000 and ends on January 31, 2001. 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 accompanying consolidated financial statements for Fiscal 1999 contain
certain reclassifications to conform with the presentation used in Fiscal 2000.
NOTE B--SEGMENT INFORMATION
Financial information relating to industry segments is as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
------------------------------------ ------------------------------------
JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales
Power Products ............................... $ 281,231 $ 266,197 $ 154,140 $ 144,909
Tactical Vehicle Systems ..................... 134,325 12,033 55,652 5,818
Airline Products ............................. 56,523 45,837 28,252 23,585
Petroleum Equipment .......................... 33,058 52,112 18,131 23,648
Other Business Activities .................... 19,135 13,372 8,890 2,680
--------------- --------------- --------------- ---------------
Total ...................................... $ 524,272 $ 389,551 $ 265,065 $ 200,640
=============== =============== =============== ===============
Operating Profit
Power Products ............................... $ 2,417 $ 10,791 $ 3,233 7,701
Tactical Vehicle Systems ..................... 28,957 3,143 14,321 2,037
Airline Products ............................. (4,337) (761) (4,341) (765)
Petroleum Equipment .......................... (269) 3,649 404 1,691
Other Business Activities .................... 2,632 400 3,266 (432)
--------------- --------------- --------------- ---------------
Total ...................................... $ 29,400 $ 17,222 $ 16,883 $ 10,232
=============== =============== =============== ===============
Operating Margin
Power Products ............................... 0.9% 4.1% 2.1% 5.3%
Tactical Vehicle Systems ..................... 21.6 26.1 25.7 35.0
Airline Products ............................. (7.7) (1.7) (15.4) (3.2)
Petroleum Equipment .......................... (0.8) 7.0 2.2 7.2
Other Business Activities .................... 13.8 3.0 36.7 (16.1)
</TABLE>
6
<PAGE>
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.) 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):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
----------------------------------- -----------------------------------
JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operating profit ................................... $ 29,400 $ 17,222 $ 16,883 $ 10,232
Corporate expenses, net ............................ (5,345) (2,936) (2,869) (2,484)
Non-operating interest income ...................... 4,592 29 400 2
Interest expense ................................... (4,356) (6,710) (2,047) (3,259)
--------------- --------------- --------------- ---------------
Earnings before income taxes ....................... $ 24,291 $ 7,605 $ 12,367 $ 4,491
=============== =============== =============== ===============
</TABLE>
NOTE C--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 $4.1 million at July
29, 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. 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. 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.
7
<PAGE>
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 July 29, 2000 is $6.2 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>
SIX MONTHS ENDED THREE MONTHS ENDED
--------------------------------- ------------------------------------
JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales ................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................................ 84.2 84.3 86.0 84.4
--------------- --------------- --------------- ---------------
Gross profit ......................................... 15.8 15.7 14.0 15.6
Selling and administrative expenses .................. 12.4 12.9 10.9 12.3
Interest expense ..................................... 0.8 1.7 0.8 1.6
Other income, net .................................... (2.0) (0.9) (2.4) (0.6)
--------------- --------------- --------------- ---------------
11.2 13.7 9.3 13.4
--------------- --------------- --------------- ---------------
Earnings before income taxes ......................... 4.6 2.0 4.7 2.2
Income tax provision ................................. 1.7 0.7 1.7 0.8
--------------- --------------- --------------- ---------------
Earnings of consolidated companies ................... 2.9 1.2 2.9 1.4
Equity in net earnings of unconsolidated affiliates .. -- 0.1 -- 0.1
--------------- --------------- --------------- ---------------
2.9
2.9% 1.3% 2.9% 1.5%
=============== =============== =============== ===============
</TABLE>
OVERVIEW
Sales for the second quarter ended July 29, 2000 grew 32 percent to $265.1
million compared to sales of $200.6 million for the second quarter of Fiscal
1999. Net earnings for the second quarter of Fiscal 2000 increased 159 percent
to $7.8 million, or $0.27 per diluted share compared to net earnings of $3.0
million, or $0.11 per share, in the second quarter of Fiscal 1999.
Sales for the first six months of Fiscal 2000 grew 35 percent to $524.3 million
versus $389.6 million for the first six months of Fiscal 1999. First half net
earnings tripled to $15.3 million, or $0.54 per diluted share, compared to $5.1
million, or $0.18 per share, in last year's first half.
In the second quarter of Fiscal 2000, the Company achieved its sixth 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.
8
<PAGE>
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, which is responsible for marketing and aftermarket
support of a wide range of industrial equipment, recorded second quarter sales
of $154.1 million, compared to $127.1 million in the first quarter and $144.9
million for the second quarter of Fiscal 1999. Operating profit for the Power
Products segment totaled $3.2 million for the quarter compared to a $0.8 million
loss in the first quarter and a $7.7 million profit a year ago. Second quarter
results were adversely impacted by $2.1 million lower than expected profit
margins on orders in the newly established power generation business and a $2.5
million increase in reserves primarily for inventories. The first quarter
included special charges totaling $6.4 million, principally in connection with a
potentially uncollectible account and note receivable.
The Tactical Vehicle Systems segment, which manufactures and services
transportation systems for the U.S. Army and others, recorded sales of $55.7
million, compared to $78.7 million in the first quarter of Fiscal 2000 and $5.8
million for the second quarter of Fiscal 1999. Operating profit for the second
quarter of Fiscal 2000 amounted to $14.3 million, compared to $14.6 million in
the first quarter and $2.0 million a year ago, and included a $3.1 million
recovery from a canceled Australian contract and a $1.0 million favorable impact
of lower than expected overhead costs and additional billing recoveries. The
U.S. Army's most recent delivery schedule shifted some truck deliveries from the
second quarter to the fourth quarter of Fiscal 2000 which are not expected to
have a material impact on the Fiscal 2000 operating results. Truck shipments
during the first two quarters of Fiscal 2000 were 402 and 260 units,
respectively, and the Company expects to ship 339 and 535 units during each of
the last two quarters of this year.
The Airline Products segment, which manufactures airline ground support products
and mobile railcar movers under the S&S Tug, Rail King and other names, recorded
sales of $28.3 million in the second quarter, equal to the first quarter sales
and 20 percent above last year's second quarter results of $23.6 million. The
$4.3 million operating loss for the quarter included $4.3 million in inventory
write downs, principally associated with a decision to make changes in the
existing product portfolio. These actions are being taken by the new S&S Tug
management leadership team, which was assembled earlier this year, after
completing an assessment of current and future product planning requirements.
This segment reported breakeven results in the first quarter of Fiscal 2000 and
a $0.8 million loss for the second quarter of Fiscal 1999.
The Petroleum Equipment segment manufactures and services equipment for oil and
gas exploration, production, and well stimulation industries. Sales for this
segment totaled $18.1 million for the second quarter, compared to $14.9 million
in the first quarter and $23.6 million for the second Fiscal quarter of 1999.
Operating profit for Petroleum Equipment totaled $0.4 million, compared to a
$0.7 million loss in the first quarter and a $1.7 million profit a year ago. The
order backlog for petroleum equipment, which is $55.6 million as of the end of
the second quarter, has increased substantially during the first half and is
expected to drive future earnings improvement in this segment.
The Company's Other Business Activities segment includes predominantly gas
compression equipment sales or leases. Sales in the second quarter totaled $8.9
million, compared to $10.2 million in the first quarter and $2.7 million for the
second quarter of Fiscal 1999. Operating profit for the second quarter totaled
$3.3 million and included a $5.6 million gain on sale of the Company's gas
compressor leasing business. (See "Sale of Gas Compressor Leasing Business"
below.) Operating losses for the first quarter of Fiscal 2000 and second quarter
of Fiscal 1999 were $0.6 million and $0.4 million, respectively.
CORPORATE RESULTS
For the three months ended July 29, 2000 gross profit margin was 14.0% versus
15.6% for the comparable period of Fiscal 1999. Margins decreased during the
quarter principally as a result of various special charges detailed above.
Other Corporate expense, net increased by approximately $2.4 million during the
first six months of Fiscal 2000 versus the first six months of Fiscal 1999,
principally as a result of the Company's ongoing implementation of an enterprise
resource planning ("ERP") software package. Such additional expense relates to
consulting expense associated with this implementation. The Company expects such
costs to continue into the third quarter and to decrease during the fourth and
subsequent quarters.
Non-operating interest income increased significantly during the first half of
Fiscal 2000 versus the first half of Fiscal 1999. In the first quarter of Fiscal
2000, the Company recorded approximately $4 million in interest income in
connection with tax refunds from the Internal Revenue Service for the years
ended January 31, 1990 through January 31, 1993. The Company does not expect to
recognize additional such income in future quarters.
9
<PAGE>
Interest expense decreased by $1.2 million and $2.4 million for the three and
six months ended July 29, 2000 versus the corresponding periods of Fiscal 1999.
Such reduction of expense resulted from 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
compression equipment for sale and will continue to service such equipment. To
date, the Company has received payment of $44.6 million and an additional $12.9
million will be due and payable on or before April 10, 2001. Such amount is
included on its Consolidated Condensed Statements of Financial Position as of
July 29, 2000 as a component of accounts and notes receivable, net. The Company
realized a gain of $5.6 million on this sale, which is included in other income,
net on the Company's Consolidated Condensed Statements of Earnings. 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 second quarters of Fiscal 2000 and 1999 were as
follows:
JULY 29, 2000 JULY 31, 1999
--------------- ---------------
(DOLLARS IN MILLIONS)
Tactical Vehicle Systems ............... $ 795.7 $ 986.1
Power Products ......................... 116.7 79.3
Airline ................................ 21.1 20.8
Petroleum Equipment .................... 55.6 18.8
All Other .............................. 10.1 20.4
--------------- ---------------
$ 999.2 $ 1,125.4
=============== ===============
Unfilled orders of the Tactical Vehicle Systems segment at July 29, 2000
consisted principally of the follow-on contract awarded in October 1998 by the
United States Army Tank-Automotive and Armanent Command ("TACOM") to manufacture
medium tactical vehicles.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital spending for property, plant and equipment of $20.6 million for the six
months ended July 29, 2000 included $7.8 million in revenue earning assets, and
increased from $16.7 million for the same period in Fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $46.5 million during the second quarter to
$61.9 million. During the second quarter of Fiscal 2000, net cash provided by
operating activities of $14.0 million and cash provided by investing activities
of $36.5 million were partially offset by cash used in financing activities of
$4.0 million. Significant activities affecting cash and cash equivalents during
the quarter included the receipt of $44.6 million for the sale of certain assets
(see "Sale of Gas Compressor Leasing Business" above) and capital expenditures
of $10.3 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 Fiscal 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 $101 million was available at July 29, 2000,
due to certain limitations as a result of modifications made effective January
31, 1999. This Revolving Debt Facility matures on December 20, 2001. The Company
has additional banking relationships that provide uncommitted borrowing
arrangements.
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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.
The Company's sources of cash liquidity included 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 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 other 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
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 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.
During Fiscal 1998, the Company was awarded a new multi-year contract that 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 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 29, 2000, funding in the amount of $365 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.
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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 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 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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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 13, 2000 the Company's Annual Meeting of Shareholders was held. 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.
AGAINST
Election of Directors FOR OR WITHHELD ABSTAINED
--- ----------- ---------
C. Jim Stewart II 23,705,533 298,782
Michael L. Grimes 23,708,397 295,918
Monroe M. Luther 23,691,536 312,779
Charles R. Ofner 23,691,636 312,679
Ratification of Accountants 23,943,513 53,465 7,337
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.2 Sixth Restated Bylaws of Stewart & Stevenson Services, Inc.,
effective April 11, 2000
(b) Form 8-K Report Date - May 2, 2000 (Announcement of Two New Directors)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - May 18, 2000 (Company to Complete Driveline
Upgrade at Fort Bragg Ahead of Schedule)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - May 24, 2000 (First Quarter 2000 Results)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - June 7, 2000 (Plan to Sell Natural Gas Compressor
Leasing Business to Hanover Compressor Company Announced)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - June 13, 2000 (FMTV A1 Successfully Completes
First Article Testing)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - June 14, 2000 (Dividend Announcement)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - July 17, 2000 (Sale of Natural Gas Compressor
Leasing Business to Hanover Compressor Company Complete)
Item reported - Item 5. Other Events
Form 8-K Report Date - July 18, 2000 (Company Receives $11.8 Million
Product Contract Modification)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - July 25, 2000 (Receipt by Fort Carson of New FMTV
A1 Models)
Items reported - Item 5. Other Events
Item 7. Exhibits
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SIGNATURES
Pursuant to the requiremen of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigne thereunto duly authorizedts on the 12th day of September, 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)
15
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EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
3.2 Sixth Restated Bylaws of Stewart & Stevenson Services, Inc., effective
April 11, 2000.
16
