SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 4, 2002
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 28,447,196 SHARES
(Class) (Outstanding at May 31, 2002)
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. (the "Company"):
Consolidated Condensed Statements of Financial Position - May 4, 2002 and
January 31, 2002.
Consolidated Condensed Statements of Earnings - Fiscal Quarters Ended May 4,
2002 and April 28, 2001.
Consolidated Condensed Statements of Cash Flows - Fiscal Quarters Ended May 4,
2002 and April 28, 2001.
Consolidated Condensed Statements of Comprehensive Income -Fiscal Quarters Ended
May 4, 2002 and April 28, 2001.
Notes to Consolidated Condensed Financial Statements.
2
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
MAY 04, 2002 JANUARY 31, 2002
-------------- ----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 67,318 $ 81,438
Accounts and notes receivable, net 168,471 166,123
Recoverable costs and accrued profits not yet billed 981 --
Inventories 237,149 230,300
Excess of current cost over LIFO values (43,828) (42,132)
Other current assets 20,330 33,503
Total assets of discontinued operations 43,584 40,693
--------- ---------
TOTAL CURRENT ASSETS 494,005 509,925
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET 124,256 119,657
DEFERRED INCOME TAX ASSET 4,740 3,237
INVESTMENTS AND OTHER ASSETS 12,359 16,236
--------- ---------
TOTAL ASSETS $ 635,360 $ 649,055
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 3,066 $ 3,114
Accounts payable 45,645 71,270
Accrued payrolls and incentives 18,593 19,402
Current portion of long-term debt 250 250
Billings in excess of incurred costs 44,778 39,874
Other current liabilities 30,395 22,971
Total liabilities of discontinued operations 9,855 8,078
--------- ---------
TOTAL CURRENT LIABILITIES 152,582 164,959
COMMITMENTS AND CONTINGENCIES
LONG-TERM DEBT 56,600 56,600
ACCRUED POSTRETIREMENT BENEFITS AND PENSION 33,185 32,281
OTHER LONG-TERM LIABILITIES 4,133 3,984
--------- ---------
TOTAL LIABILITIES 246,500 257,824
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, without par value, 100,000,000 shares
authorized; 28,471,281 and 28,444,281 shares issued and
outstanding at May 4, 2002 and January 31, 2002, respectively 54,500 54,176
Accumulated other comprehensive loss (9,090) (8,746)
Retained earnings 343,450 345,801
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 388,860 391,231
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 635,360 $ 649,055
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
---------------------------------------
MAY 04, 2002 APRIL 28, 2001
-------------- ----------------
(Unaudited)
Sales $ 299,670 $ 327,817
Cost of sales 255,918 281,124
--------- ---------
Gross profit 43,752 46,693
Recovery of costs incurred, net -- (20,800)
Selling and administrative expenses 35,424 33,378
Interest expense 1,132 1,860
Interest and investment income (338) (1,214)
Other income, net (21) (24)
--------- ---------
36,197 13,200
Earnings from continuing operations before income taxes 7,555 33,493
Income tax expense 2,659 12,444
--------- ---------
Net earnings from continuing operations
before cumulative effect of change in accounting 4,896 21,049
Loss from discontinued operations, net of
taxes of $(599) and $(398) (1,097) (716)
Cumulative effect of change in accounting, net of
taxes of $(1,798) (3,682) --
--------- ---------
Net earnings $ 117 $ 20,333
========= =========
Weighted average shares outstanding:
Basic 28,454 28,085
Diluted 28,767 28,704
Earnings per share:
Basic
Continuing operations before cumulative effect $ 0.17 $ 0.75
Loss from discontinued operations, net (0.04) (0.03)
Cumulative effect of change in accounting, net (0.13) --
--------- ---------
NET EARNINGS PER SHARE $ 0.00 $ 0.72
========= =========
Diluted
Continuing operations before cumulative effect 0.17 0.73
Loss from discontinued operations, net (0.04) (0.02)
Cumulative effect of change in accounting, net (0.13) --
--------- ---------
NET EARNINGS PER SHARE $ 0.00 $ 0.71
========= =========
Cash dividends per share $ 0.085 $ 0.085
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
----------------------------------
MAY 04, 2002 APRIL 28, 2001
-------------- ----------------
(Unaudited)
OPERATING ACTIVITIES
Net earnings from continuing operations $ 1,214 $ 21,049
Adjustments to reconcile net earnings from continuing operations to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,852 5,005
Change in operating assets and liabilities net of the effect
of discontinued operations:
Accounts and notes receivable, net (2,348) (48,988)
Recoverable costs and accrued profits not yet billed (981) 954
Inventories, net (5,153) (3,311)
Other current and noncurrent assets 15,546 (301)
Accounts payable (25,625) (7,607)
Accrued payrolls and incentives (809) 795
Billings in excess of incurred costs 4,904 9,245
Other current liabilities 7,424 14,901
Accrued postretirement benefits & pension 905 1,096
Other long-term liabilities (196) (113)
--------- ---------
NET CASH USED IN CONTINUING OPERATIONS (267) (7,275)
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (2,211) 3,089
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (2,478) (4,186)
--------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (9,995) (10,845)
Proceeds from sale of business assets -- 2,323
Disposal of property, plant and equipment, net 545 847
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (9,450) (7,675)
--------- ---------
FINANCING ACTIVITIES
Payments on long-term borrowings -- (51)
Change in short-term notes payable (48) (888)
Dividends paid (2,468) (2,385)
Exercise of stock options 324 470
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (2,192) (2,854)
--------- ---------
Decrease in cash and equivalents (14,120) (14,715)
Cash and equivalents, beginning of period 81,438 110,174
--------- ---------
Cash and equivalents, end of period $ 67,318 $ 95,459
========= =========
Cash Paid For:
Interest $ 350 $ 522
Taxes (excluding refunds) 472 388
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED
---------------------------------------
(Unaudited)
MAY 04, 2002 APRIL 28, 2001
-------------- ----------------
Net earnings $ 117 $ 20,333
Unrealized loss on forward contracts, net of tax (113) --
Currency translation loss (233) (64)
-------- --------
Comprehensive income (loss) $ (229) $ 20,269
======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
6
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
herein 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 months ended May 4, 2002 are
not necessarily indicative of the results that will be realized for the fiscal
year ending January 31, 2003.
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 2002
(hereinafter referred to as "Fiscal 2002") commenced on February 1, 2002 and
ends on January 31, 2003. In addition, other years are referred to in the same
manner. The Company reports results on the fiscal quarter method with each
quarter comprising approximately 13 weeks. The first quarter of Fiscal 2002
began on February 1, 2002 and ended on May 4, 2002.
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, 2002 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 Fiscal 2001 and
related notes contain certain reclassifications to conform with the presentation
used in Fiscal 2002.
7
NOTE B - SEGMENT INFORMATION
Financial information relating to industry segments with a reconciliation to
earnings from continuing operations before income taxes is as follows (IN
THOUSANDS EXCEPT PERCENTAGES):
STEWART & STEVENSON SERVICES, INC.
SEGMENT INFORMATION
(In thousands)
THREE MONTHS ENDED
--------------------------------------
MAY 04, 2002 APRIL 28, 2001
-------------- ----------------
SALES (Unaudited)
Power Products $ 149,961 $ 136,623
Distributed Energy Solutions 11,783 31,049
Tactical Vehicle Systems 115,461 108,494
Petroleum Equipment 6,518 21,034
Airline Products 14,301 24,109
Other Business Activities 1,646 6,508
--------- ---------
Total $ 299,670 $ 327,817
========= =========
OPERATING PROFIT (LOSS)
Power Products $ 3,655 $ 1,632
Distributed Energy Solutions (2,201) 52
Tactical Vehicle Systems 14,916 38,259
Petroleum Equipment (507) 1,547
Airline Products (3,124) (4,368)
Other Business Activities (432) 223
--------- ---------
Total 12,307 37,345
--------- ---------
NON-OPERATING INCOME (EXPENSE)
Corporate expenses, net (3,958) (3,206)
Interest income 338 1,214
Interest expense (1,132) (1,860)
--------- ---------
Earnings from continuing operations
before income taxes $ 7,555 $ 33,493
========= =========
OPERATING PROFIT (LOSS) PERCENTAGE
Power Products 2.4 % 1.2 %
Distributed Energy Solutions ( 18.7 ) 0.2
Tactical Vehicle Systems 12.9 35.3
Petroleum Equipment ( 7.8 ) 7.4
Airline Products ( 21.8 ) ( 18.1 )
Other Business Activities ( 26.2 ) 3.4
4.1 11.4
8
NOTE C - ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations entered
into after June 30, 2001 and SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. SFAS No. 142
requires that the balance sheet valuation of goodwill and other intangible
assets be evaluated for impairment at least annually. Further, it requires that
amortization of goodwill cease beginning with the Company's Fiscal 2002.
Transition charges recognized upon implementation of SFAS No. 142 have been
accounted for as a cumulative effect of a change in accounting principle. In the
first quarter of Fiscal 2002, the company recognized a pre-tax impairment charge
associated primarily with the Airline Products segment of $5.5 million to
goodwill ($3.7 million after tax) and ceased amortization on the $7.5 million of
remaining unamortized goodwill. The Company's goodwill amortization for Fiscal
2001 was $0.7 million.
The Company has adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions relating to the disposal of a segment of a business of
Accounting Principles Board Opinion No. 30. The Company adopted SFAS No. 144 in
the fourth quarter of Fiscal 2001 which resulted in the reclassification of
certain operations as discontinued. Other than such reclassification, there was
no material impact to the Company resulting from adoption.
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 $3.2 million as of May
4, 2002.
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.
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.
The Company is a defendant in a suit brought under the QUI TAM provision of the
False Claims Act, United States of America, ex rel. Werner Stebner v. Stewart &
Stevenson Services, Inc. and McLaughlin Body Co., Civil Action No. H-96-3363, in
the United States District Court for the Southern District of Texas, Houston
Division. The suit seeks penalties and damages in an unspecified amount. The
suit alleges that the Company made false statements and certifications in
connection with claims for payment for Family of Medium Tactical Vehicles
delivered to the U.S. Army starting in 1995, and the suit alleges that the
vehicles were substandard because of corrosion problems. The suit was filed
under seal in 1996, and following an investigation by the Justice Department,
the United States declined to intervene in the suit, which was unsealed on
August 29, 2000. The case is set for trial December 1, 2003. The Company
believes the claims in the suit are without merit and is vigorously defending
the suit. 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, are expected to have a material
effect on the manner in which the Company conducts its business. Although the
Company maintains certain insurance policies and has established reserves that
it believes to be adequate in each case, an unforeseen outcome in such cases
should not 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 debt guarantees. The
amount of such guarantees is approximately $4.6 million as of May 4, 2002.
9
The Company leases certain property and equipment under operating lease
arrangements of varying terms whose annual rentals are less than 1% of
consolidated sales.
NOTE E - GOVERNMENT CONTRACTING
The U.S. government is one of the Company's key customers. As such, decreased
government spending or termination of significant government programs could
adversely affect its business. The Company's Tactical Vehicle Systems segment
depends largely on U.S. government expenditures. In recent years, government
contracts in such segment have accounted for substantial percentages of its
annual revenues and operating income. The Company is currently in production
year four of its second multi-year contract with the U.S. Department of the Army
("U.S. Army") for production of the Family of Medium Tactical Vehicles ("FMTV").
The U.S. Army exercised an option to award a fifth program year to the current
contract, which begins in October 2002 and is expected to be completed by
September 2003. The U.S. Army holds an additional option to award a sixth
program year that, if exercised by the U.S. Army, could extend production of the
FMTV through September 2004. The funding of the FMTV contract is subject to the
inherent uncertainties of Congressional appropriations. As is typical of
multi-year defense contracts that may be canceled or adjusted by the government,
the FMTV contract must be funded annually by the U.S. Department of the Army and
may be terminated at any time for the convenience of the government. As of May
4, 2002, funding in the amount of approximately $1.5 billion for the new FMTV
contract had been authorized and appropriated by the U.S. Congress, $539 million
of which is allocated to future production under the existing contract. If the
FMTV contract is terminated, other than for the Company's default (in which
event there could be serious adverse consequences and claims against the
Company), it provides for termination charges that will reimburse the Company
for certain allowable costs but not necessarily for all costs.
As the Company's current contract with the U.S. Army for production of the FMTV
is nearing completion, it will be necessary for the Company to secure additional
contracts to have continued success in this segment. The Company has been
awarded a contract for the first phase of the competitive bid process for the
next multi-year contract for production of the FMTV and is currently competing
for the final award. The U.S. Army is scheduled to make its decision as to the
final award of the next multiyear contract during the first quarter of Fiscal
2003. The U.S. Army will determine the award by a competitive bid process, and
there can be no assurance that the Company will be successful in such regard or
that its competitor will not be more successful than it will be in this or
coming bids and awards for tactical vehicles. Even if the Company does receive
the award, there can be no assurance that operating margins will be at the same
level as the existing FMTV contract.
Major contracts for military systems are performed over extended periods of time
and are subject to changes in scope of work and delivery schedules. Pricing
negotiations on changes and settlement of claims often extend over prolonged
periods of time. The Company's ultimate profitability on such contracts will
depend 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. Continued success in this segment is dependent on
securing additional contracts after completion of the current contract for
production of the FMTV at acceptable operating margins.
10
NOTE F - DISCONTINUED OPERATIONS
During the fourth quarter of Fiscal 2001, the company announced its intention to
sell the Petroleum Equipment segment's blowout preventer and controls, valve,
and drilling riser businesses. Results of operations have been restated herein
to classify net earnings, assets, and liabilities of these businesses as
discontinued operations. The net loss from discontinued operations for the first
quarter of Fiscal 2002 was $1.1 million. Included in the loss was a $0.7 million
net loss from the discontinued Petroleum Equipment segment and $0.4 million net
loss from a provision for a financial guarantee related to the discontinued gas
turbine business. The $0.7 million net loss from discontinued operations in the
first quarter of Fiscal 2001 included a net loss of $0.1 million from the
discontinued Petroleum Equipment segment and a net loss of $0.6 million for a
reserve of certain taxes associated with previously disposed gas turbine
operations. Discontinued Petroleum Equipment segment sales for the first quarter
were $9.2 million and $13.7 million for Fiscal 2002 and 2001, respectively. The
corporate allocations previously allocated to the discontinued Petroleum
Equipment segment are now absorbed by the remaining continuing operations,
resulting in restatement of operating profit by segment versus that which was
originally reported in 2001.
The Company is currently unable to reliably predict the timing of any final sale
of the discontinued operations formerly associated with its Petroleum Equipment
segment.
Significant categories of assets and liabilities from discontinued operations
are included in the table below:
---------------------------------------------------------------------------------------
(IN THOUSANDS) MAY 4, 2002 JANUARY 31, 2002
---------------------------------------------------------------------------------------
(Unaudited)
Receivables, net $ 8,473 $ 11,123
Inventory, net 21,458 18,040
Property, plant and equipment, net 11,618 12,019
Other assets 2,035 (489)
-------- --------
Total assets 43,584 40,693
-------- --------
Accounts payable 7,571 5,097
Other liabilities 2,284 2,981
-------- --------
Total liabilities 9,855 8,078
-------- --------
Net assets $ 33,729 $ 32,615
======== ========
11
NOTE G - RECONCILIATION OF BASIC TO DILUTED SHARES OUTSTANDING
In accordance with SFAS No. 128, "Earnings Per Share," the following table is a
reconciliation of the numerators and denominators used in the calculation of
basic and diluted earnings per share as presented on the Consolidated Condensed
Statements of Earnings.
---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------------------
MAY 4, 2002 APRIL 28, 2001
------------- ---------------
Numerator:
Net earnings available to common shareholders
From continuing operations before
cumulative effect $ 4,896 $ 21,049
From discontinued operations (1,097) (716)
From cumulative effect of change
in accounting (3,682) --
---------- --------
Net earnings $ 117 $ 20,333
========== ========
Denominator:
Denominator for basic earnings per share -
Weighted-average shares outstanding 28,454 28,085
Effect of dilutive securities:
Employee and director stock options 313 619
---------- --------
Denominator for diluted earnings per share -
Adjusted weighted-average shares outstanding 28,767 28,704
========== ========
Basic earnings (loss) per share
From continuing operations before cumulative effect $ 0.17 $ 0.75
From discontinued operations (0.04) (0.03)
From cumulative effect of change in accounting (0.13) --
---------- --------
Net earnings $ 0.00 $ 0.72
========== ========
Diluted earnings (loss) per share
From continuing operations before cumulative effect $ 0.17 $ 0.73
From discontinued operations (0.04) (0.02)
From cumulative effect of change in accounting (0.13) --
---------- --------
Net earnings $ 0.00 $ 0.71
========== ========
Number of anti-dilutive stock options outstanding 1,375 690
NOTE H - RECOVERY OF COSTS INCURRED
In Fiscal 1998, the company filed a claim with the U.S. Government seeking
recovery of costs incurred resulting from delays from the original production
plan in the first multi-year FMTV contract. The U.S. Army and the Company
participated in a voluntary dispute resolution process resulting in a $22.0
million settlement. The settlement was netted against $1.2 million in related
expenses and is included in the Fiscal 2001 first quarter results. The net
amount of $20.8 million is presented on the Company's Consolidated Condensed
Statements of Earnings in the caption entitled, "Recovery of costs incurred,
net."
12
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, 2002. 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.
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 2002
(hereinafter referred to as "Fiscal 2002") commenced on February 1, 2002 and
ends on January 31, 2003. In addition, other years are referred to in the same
manner. The Company reports results on the fiscal quarter method with each
quarter comprising approximately 13 weeks. The first quarter of Fiscal 2002
commenced on February 1, 2002 and ended on May 4, 2002.
RESULTS OF OPERATIONS
Sales for the first quarter of Fiscal 2002 were $299.7 million compared to sales
of $327.8 million in the same period a year ago. This decrease was a result of
lower volume in the Company's Distributed Energy Solutions, Airline Products,
and Petroleum Equipment segments, further discussed below in "Segment Data." The
Company's gross profit percentage improved slightly to 14.6% in the current
quarter from 14.2% in the first quarter of Fiscal 2001, partially as a result of
actions taken in the Airline Products segment during 2001 to reduce its cost
structure.
Recovery of costs incurred, net represents a recovery pursuant to a certified
claim with the U.S. Government for costs incurred by the Company resulting from
production delays in the first multi-year Family of Medium Tactical Vehicles
("FMTV") contract in the Tactical Vehicle Systems segment. A settlement of $22.0
million was reached during the first quarter of Fiscal 2001, which was reduced
by $1.2 million in related expenses for legal and professional services.
Selling and administrative expenses for the first quarter of Fiscal 2002 were
$35.4 million, or 11.8% of sales, versus $33.4 million, or 10.2% of sales in
the comparable quarter of Fiscal 2001. The increase of $2.0 million was
principally due to higher general office spending and higher costs associated
with the Company's management information systems that have been implemented.
Interest expense is $0.7 million lower in the first quarter of the current year
versus the first quarter of the prior year, as $20.0 million of long-term debt
was paid off in the second quarter of Fiscal 2001. Interest income was also
reduced by $0.9 million as lower effective interest rates were earned on lower
average cash balances.
Net earnings in the first quarter of Fiscal 2002 were $0.1 million or $0.00 per
diluted share, compared to $20.3 million, or $0.71 per diluted share, in the
prior year first quarter. This decrease in net income was principally a result
of the settlement with the U. S. Government recognized in the prior year, as
discussed above.
DISCONTINUED OPERATIONS
During the fourth quarter of Fiscal 2001, the Company announced its intention to
sell the Petroleum Equipment segment's blowout preventer and controls, valve,
and drilling riser business, and as a result, these activities were reclassified
for reporting purposes for all periods shown as discontinued operations. Net
losses from these activities for the first quarter of Fiscal 2002 and the first
quarter of Fiscal 2001 were $0.7 million and $0.1 million, respectively. Also
included in discontinued operations in the current quarter was a provision for a
financial guarantee related to the discontinued gas turbine business. In
addition, $0.6 million of expense was included in discontinued operations in the
first quarter of Fiscal 2001 related to a reserve for taxes associated with
previously discontinued gas turbine operations.
Discontinued Petroleum Equipment segment sales for the first quarter were $9.2
million and $13.7 million for Fiscal 2002 and 2001, respectively. The corporate
allocations previously allocated to the discontinued Petroleum Equipment segment
are now absorbed by the remaining continuing operations, resulting in a
restatement of operating profit by segment versus that which was originally
reported in 2001.
In total, discontinued operations accounted for a loss of $1.1 million, or $0.04
per diluted share, in the first quarter of Fiscal 2002 and
13
$0.7 million, or $0.02 per diluted share, in the first quarter of Fiscal 2001.
The Company is currently unable to reliably predict the timing of any final sale
of the discontinued operations formerly associated with its Petroleum Equipment
segment. However, there is the potential for making a final decision on the sale
of these businesses sometime during the second or early third quarter.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
Effective February 1, 2002, the Company adopted two statements promulgated by
the Financial Accounting Standards Board, Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for business combinations and SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. SFAS No. 142 requires that the balance sheet valuation of goodwill and
other intangible assets be evaluated for impairment at least annually. Further,
it requires that amortization of goodwill cease. Any transition charges
recognized upon implementation of SFAS No. 142 have been accounted for as a
cumulative effect of a change in accounting principle and recorded net of tax.
In the first quarter of Fiscal 2002, the company recognized a pre-tax impairment
charge of $5.5 million to goodwill primarily related to the Airline Products
segment ($3.7 million after tax) and ceased amortization on the $7.5 million of
remaining unamortized goodwill. The Company's goodwill amortization for Fiscal
2001 was $0.9 million.
SEGMENT DATA
The Company's management analyzes financial results in six business segments
based on distinct product and customer types: Power Products, Distributed Energy
Solutions, Tactical Vehicle Systems, Petroleum Equipment, Airline Products, and
Other Business Activities. Such segments are described below along with analyses
of their respective results of operations.
The Power Products segment, which markets and services a wide range of
industrial equipment, recorded sales in the first quarter of Fiscal 2002 of
$150.0 million, compared to $136.6 million in the first quarter of Fiscal
2001. The increase in revenue resulted from a higher level of service and
parts sales related to aftermarket activities. Within the service component
of the business, there was an increased level of warranty work for the
Company's supply partners which are typically at lower margin rates and a
higher component of compensation expense, both of which put downward pressure
on the service margins achieved for the quarter. Despite this, an improvement
in the mix of other products sold led to an operating profit of $3.7 million
in the current quarter versus $1.6 million in the prior year first quarter.
While the Company continues its focus on cost and asset management in this
segment and anticipates improved margin performance, it is not currently
experiencing order patterns which indicate a near-term increase in sales
volume.
The Distributed Energy Solutions segment was established in the fourth quarter
of Fiscal 2001 and represents activities associated with the reciprocating power
generation equipment business. Sales for this segment were $11.8 million in the
current year first quarter versus $31.0 million in the same period of the prior
year. The decrease of $19.2 million is principally related to sales of large
turnkey power generation contracts that were completed in Fiscal 2001 and not
replaced in the first quarter of Fiscal 2002. This reduction in volume led to an
operating loss in the current quarter of $2.2 million compared to breakeven in
the first quarter of Fiscal 2001. The orders filled by the Distributed Energy
Solutions segment tend to be large in volume and sporadic as to timing, which
causes large swings in the sales level for this segment. The order backlog for
this segment has increased $12.0 million during the quarter to $52.3 million.
The Company believes that the growth in backlog is an indicator that this
segment will realize a higher level of sales in the second quarter of Fiscal
2002 than in the first quarter.
The Tactical Vehicle Systems segment, which manufactures tactical vehicles
for the U.S. Army and others, recorded sales of $115.5 million in the first
quarter of Fiscal 2002 compared to $108.5 million in the same period a year
ago. Operating profit for the quarter totaled $14.9 million, compared with
$17.5 million in the first quarter of Fiscal 2001, excluding the one-time
benefit in Fiscal 2001 of a $20.8 million claim settlement with the U. S.
Government. After removing the impact of this prior-year item, operating
margins for the current quarter were somewhat lower than the prior year due
to lower equipment margins resulting from increased costs associated with the
Company's efforts to win a third multi-year contract of the FMTV and other
projects and a change in the mix of products sold. The Company expects the
mix of products sold will remain relatively constant in the second quarter.
During the second quarter of Fiscal 2002, the Company expects sales in this
segment to be slightly lower while continued expenditures on activities
associated with the effort to win a third multi-year contract of the FMTV and
other contracts will exert downward pressure on margins.
The U.S. Army exercised an option to award a fifth program year to the current
contract, which added $374 million to the backlog for this segment in the fourth
quarter of Fiscal 2001. Deliveries under this award should begin in October 2002
and are expected to be completed by September 2003.
14
As the current contract with the U.S. Army for production of the FMTV is nearing
completion, the Company continues its preparation for the next multi-year
contract award. The Company has been awarded a contract under the first phase of
the competitive bid process and is currently competing for the final award. The
Company cannot reliably predict when the U.S. Army will make its decision as to
the final award for the new production contract or whether the Company will
receive the award, but the decision is scheduled to be made during the Company's
first quarter of Fiscal 2003 and the Company believes its proposal will be
competitive. Even if the Company receives the award, there can be no assurance
that operating margins will be at the same level as the existing FMTV contract.
Continued success in this segment is dependent on securing additional contracts
after completion of the current contract for production of the FMTV at
acceptable operating margins.
Production by the successful bidder for the new multi-year contract is
anticipated to begin in October of FY2004. If this expectation proves to be
correct and if the U.S. Army chooses not to incur a production break for the
FMTV, there may be an opportunity for an additional one-year extension to the
Company's current multi-year contract for the FMTV. This extension would provide
for continued deliveries of the FMTV through September 2004.
The Petroleum Equipment segment manufactures equipment for the oil and gas
exploration, production, and well stimulation industries. Sales in this segment
were $6.5 million for the first quarter of Fiscal 2002 versus the $21.0 million
reported for the same period last year. The decrease in sales for this segment
was primarily attributable to the generally lower business levels in the oil and
gas markets and the completion of several large equipment orders for well
stimulation equipment in the prior year. This lower volume was the primary
contributor to the operating loss for the first quarter of this year which was
$0.5 million compared to an operating profit of $1.5 million in the same period
of the prior year. During the quarter, the backlog for this segment increased to
$20.2 million versus $17.8 million at the end of Fiscal 2001. Sales for the
second quarter of Fiscal 2002 are expected to be somewhat higher than the first
quarter, but still lower than the prior year.
The Airline Products segment, which manufactures airline ground support
products, mobile railcar movers, and snow blowers, recorded sales of $14.3
million in the first quarter of Fiscal 2002, compared with $24.1 million in
the same quarter last year. The airline industry has been adversely impacted
by the events of September 11, and this segment is currently operating at
below breakeven levels. Operating losses for the first quarter of Fiscal 2002
and Fiscal 2001 were $3.1 million and $4.4 million, respectively. Actions
taken in prior quarters to reduce the breakeven level for this segment are
being realized as costs were in line with expectations and the Company
believes it is positioned to take advantage of any market recovery. The
Company anticipates an improvement in the financial results of this segment
during the remainder of Fiscal 2002. Sales for the second quarter of Fiscal
2002 are expected to be slightly higher than those recognized in the first
quarter.
Other business activities not identified in a specific segment include
predominantly the sales of gas compression equipment and wheelchair lifts. Sales
in the first quarter of Fiscal 2002 were $1.6 million, versus $6.5 million for
the comparable period last year. First quarter operating loss was $0.4 million
compared to a $0.2 million operating profit in last year's first quarter.
UNFILLED ORDERS
The Company's unfilled orders consist of written purchase orders, letters of
intent, and oral commitments. These unfilled orders are generally subject to
cancellation or modification due to customer relationships or other conditions.
Purchase options are not included in unfilled orders until exercised. Unfilled
orders as of May 4, 2002 and January 31, 2002 were as follows:
15
-------------------------------
May 4, January 31,
2002 2002
-------------------------------
( In millions)
Power Products $ 49.1 $ 51.4
Distributed Energy Solutions 52.3 40.3
Tactical Vehicle Systems 582.7 686.0
Petroleum Equipment
- Continuing 20.2 17.8
- Discontinued 11.2 14.0
Airline Products 7.6 6.9
All Other 6.8 4.3
-------------------------------
$ 729.9 $ 820.7
===============================
Total unfilled orders decreased $90.8 million during the quarter. The Tactical
Vehicle Systems segment ("TVS") backlog includes the fifth option year exercised
by the U.S. Government, but continued to decline as the Company completed work
on the second multi-year contract for the FMTV. Backlog for the portion of the
Company's business excluding TVS increased modestly by $12.5 million,
principally as a result of a $12.0 million increase in the backlog in the
Distributed Energy Solutions segment.
Over the coming months, the Company expects the backlog in its Tactical Vehicle
Systems segment to continue to decrease as existing contractual orders are
filled.
LIQUIDITY AND CAPITAL RESOURCES
The balance in cash and cash equivalents at the end of the quarter was $67.3
million, $14.1 million less than at the end of Fiscal 2001. During the first
quarter of Fiscal 2002, cash of $2.5 million was consumed by operations, $2.2
million of which was used by discontinued operations. The use of cash resulted
primarily from a lower balance of accounts payable as a result of the timing of
payments to vendors at the end of Fiscal 2001 and the timing of purchases of
certain inventory prior to the end of Fiscal 2001. Partially offsetting this
impact was a receipt of a tax refund from the U. S. Government during the first
quarter. Investing activities consumed $9.5 million during the first quarter,
principally for expenditures related to the continued construction on a
fabrication facility at its Tactical Vehicle Systems segment and certain
investments in long-term rental equipment. Financing activities used $2.2
million, principally for the payment of dividends.
The Company's sources of cash liquidity include cash and equivalents, cash from
operations, amounts available under credit facilities, and other external
sources of funds. The Company believes that these sources are sufficient to fund
the current requirements of working capital, capital expenditures, dividends,
and other financial commitments. At May 4, 2002 the Company had no borrowings
outstanding under an unsecured revolving debt facility that could provide up to
approximately $144 million, net of $6 million outstanding under a $25 million
letter of credit sub facility. This revolving facility matures during Fiscal
2004. In addition, the Company has $55 million in senior notes outstanding.
The Company's unsecured long-term notes, which include the revolving credit
notes and senior notes, were issued pursuant to agreements containing covenants
that restrict indebtedness, guarantees, rentals, and other items. Additional
covenants in the revolving credit notes require the Company to maintain a
minimum tangible net worth and interest coverage. The Company is not in
violation of any such covenants. 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.
The Company has additional banking relationships, which provide uncommitted
borrowing arrangements. In the event that any acquisition of additional
operations, growth in existing operations, settlements of 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 equivalents and committed lines
of credit, the Company may seek to borrow under other long-term financing
instruments or seek additional equity capital.
16
FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD-LOOKING STATEMENTS
This filing contains forward-looking statements that are based on management's
current expectations, estimates, and projections. These statements 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 results to differ materially from
those stated. Specific important factors that could cause actual results,
performance, or achievements to differ materially from such forward-looking
statements include risk of competition, risks relating to technology, risks of
general economic conditions, risks of oil and gas industry economic conditions,
risks of airline industry economic conditions, risks as to terrorist attacks on
the U.S. and their impact on the U.S. economy, risks relating to personnel,
risks of dependence on government, inherent risks of government contracts, risks
of claims and litigation, risks of product defects, risks as to foreign sales
and global trade matters, risks as to cost controls, risks as to information
technology, risks as to acquisitions, risks as to currency fluctuations, risks
as to environmental and safety matters, risks as to distributorships, and credit
risks, all as more specifically outlined in the Company's latest annual report
on Form 10-K. 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.
17
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 a defendant in a suit brought under the QUI TAM provision of the
False Claims Act, United States of America, ex rel. Werner Stebner v. Stewart &
Stevenson Services, Inc. and McLaughlin Body Co., Civil Action No. H-96-3363, in
the United States District Court for the Southern District of Texas, Houston
Division. The suit seeks penalties and damages in an unspecified amount. The
suit alleges that the Company made false statements and certifications in
connection with claims for payment for Family of Medium Tactical Vehicles
delivered to the U.S. Army starting in 1995, and the suit alleges that the
vehicles were substandard because of corrosion problems. The suit was filed
under seal in 1996, and following an investigation by the Justice Department,
the United States declined to intervene in the suit, which was unsealed on
August 29, 2000. The case is set for trial December 1, 2003. The Company
believes the claims in the suit are without merit and is vigorously defending
the suit.
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.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Form 8-K Report Date - February 20, 2002 (Preliminary Fourth Quarter And Year End Results)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - March 22, 2002 (Fiscal Fourth Quarter Earnings Release And Conference Call Schedule)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - March 27, 2002 (Fiscal Year End And Fourth Quarter Results)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - March 29, 2002 (Segment Information)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - April 10, 2002 (Presentation To Investors)
Items Reported - Item 7. Exhibits
Item 9. Regulation FD Disclosure Form 8-K Report Date - April 10, 2002 (Presentation To Investors)
Form 8-K Report Date - April 23, 2002 (Dividend Announcement)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - April 26, 2002 (Change In Registrant's Certifying Accountant)
Items Reported - Item 4. Change In Registrant's Certifying Accountant
Item 7. Exhibits
19
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 13th day of June 2002.
STEWART & STEVENSON SERVICES, INC.
By: /S/ MICHAEL L. GRIMES
Michael L. Grimes
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ JOHN B. SIMMONS
John B. Simmons
Vice President and Chief Financial Officer
(Principal Financial Officer and Chief
Accounting Officer)
20
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
None
21