-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PYzrRQKzCSZj1dHKGzDeqW7OMorIx0mzlkI49ve0B3o3Z6MughN5MF0BeirYMsZP JOuCOlyX+1uSXMjJrTP/WQ== 0000094328-97-000025.txt : 19971216 0000094328-97-000025.hdr.sgml : 19971216 ACCESSION NUMBER: 0000094328-97-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19971215 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART & STEVENSON SERVICES INC CENTRAL INDEX KEY: 0000094328 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 741051605 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11443 FILM NUMBER: 97738258 BUSINESS ADDRESS: STREET 1: 2707 N LOOP W CITY: HOUSTON STATE: TX ZIP: 77008 BUSINESS PHONE: 7138687700 MAIL ADDRESS: STREET 1: P O BOX 1637 CITY: HOUSTON STATE: TX ZIP: 77251-1637 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 1997 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 33,193,868 Shares (Class) (Outstanding at October 31, 1997) PART I. FINANCIAL INFORMATION Item 1. Financial Statements. The following information required by Rule 10-01 of Regulation S-X is provided herein for Stewart & Stevenson Services, Inc. and Subsidiaries (the "Company"): Consolidated Condensed Statement of Financial Position -- October 31, 1997 and January 31, 1997. Consolidated Condensed Statement of Earnings -- Nine Months and Three Months Ended October 31, 1997 and 1996. Consolidated Condensed Statement of Cash Flows -- Nine Months Ended October 31, 1997 and 1996. Notes to Consolidated Condensed Financial Statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION (Dollars in thousands) October 31 January 31 1997 1997 ---------- ---------- ASSETS (Unaudited) CURRENT ASSETS Cash and equivalent $ 17,984 $ 9,132 Accounts and notes receivable, net 170,886 160,407 Recoverable costs and accrued profits not yet billed 159,115 156,375 Inventories: Engineered Power Systems 76,122 54,185 Distribution 157,719 149,238 Excess of current cost over LIFO values (41,110) (39,218) ----------- ----------- 192,731 164,205 Net assets of discontinued operations (Note C) 465,598 461,971 ----------- ----------- TOTAL CURRENT ASSETS 1,006,314 952,090 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT 231,240 210,500 Allowances for depreciation and amortization (130,198) (118,922) ----------- ----------- 101,042 91,578 INVESTMENTS AND OTHER ASSETS 41,961 34,211 ----------- ----------- $1,149,317 $1,077,879 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 49,000 $ 28,000 Accounts payable 79,789 122,116 Current income taxes 71,621 65,881 Other current liabilities 48,945 37,156 ----------- ----------- TOTAL CURRENT LIABILITIES 249,355 253,153 COMMITMENTS AND CONTINGENCIES (NOTE B) LONG-TERM DEBT 381,963 319,700 DEFERRED INCOME TAXES 4,721 5,127 ACCRUED POSTRETIREMENT BENEFITS 15,178 15,091 DEFERRED COMPENSATION 5,583 5,573 SHAREHOLDERS' EQUITY Common Stock, without par value, 100,000,000 shares authorized; 33,205,688 and 33,132,280 shares issued at October 31, 1997 and January 31, 1997, respectively, including 11,820 shares held in treasury 166,454 164,959 Retained earnings 326,096 314,309 ----------- ----------- 492,550 479,268 Less cost of treasury stock (33) (33) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 492,517 479,235 ----------- ----------- $1,149,317 $1,077,879 =========== =========== See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (In thousands, except per share data) Nine Months Ended Three Months Ended October 31 October 31 ------------------ ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (Unaudited) (Unaudited) Sales $ 780,737 $ 540,236 $ 298,998 $ 231,632 Cost of sales 689,029 469,983 265,305 206,201 ---------- ---------- ---------- ---------- Gross profit 91,708 70,253 33,693 25,431 Selling and administrative expenses 53,836 49,050 18,546 16,730 Interest expense 10,545 6,056 3,399 3,288 Settlement of litigation 10,000 20,000 10,000 0 Other income, net (8,213) (2,156) (6,023) (629) ---------- ---------- ---------- ---------- 66,168 72,950 25,922 19,389 ---------- ---------- ---------- ---------- Earnings (loss) from continuing operations before income taxes 25,540 (2,697) 7,771 6,042 Income tax provision (benefit) 10,150 (1,179) 4,063 2,174 ---------- ---------- ---------- ---------- Earnings (loss) from continuing operations of consolidated companies 15,390 (1,518) 3,708 3,868 Equity in net loss of unconsolidated affiliates (206) (163) (184) (126) ---------- ---------- ---------- ---------- Net earnings (loss) from continuing operations $ 15,184 $ (1,681) $ 3,524 $ 3,742 Net earnings (loss) from discontinued operations net of tax of $1,920, $4,323, ($1,198), and $1,619 (Note C) 5,068 7,896 (1,382) 3,447 ---------- ---------- ---------- ---------- Net earnings $ 20,252 $ 6,215 $ 2,142 $ 7,189 ========== ========== ========== ========== Weighted average number of shares of Common Stock outstanding 33,181 33,062 33,194 33,064 ========== ========== ========== ========== Net earnings (loss) per share Continuing operations $ .46 $ (.05) $ .11 $ .11 Discontinued operations .15 .24 (.04) .11 ---------- ---------- ---------- ---------- Net earnings per share $ .61 $ .19 $ .07 $ .22 ========== ========== ========== ========== Cash dividends per share $ .255 $ .25 $ .085 $ .085 ========== ========== ========== ========== See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollars in thousands) Nine Months Ended October 31 ------------------ 1997 1996 ---- ---- (Unaudited) Operating Activities Net earnings (loss) from continuing operations $ 15,184 $ (1,681) Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Accrued postretirement benefits 87 80 Depreciation and amortization 17,416 17,305 Deferred income taxes, net (1,528) (551) Gain on sale of dealership (4,317) 0 Change in operating assets and liabilities net of the effect of acquisition, divestiture and discontinued operations: Accounts and notes receivable, net (4,757) (69,811) Recoverable costs and accrued profits not yet billed (2,741) 22,642 Inventories (51,514) (17,097) Accounts payable (38,701) (2,732) Current income taxes 5,802 (11,228) Accrued litigation settlement 9,206 0 Other current liabilities 841 6,961 Other--principally long-term assets and liabilities (3,195) (2,601) ----------- ----------- Net Cash Used by Continuing Operations (58,217) (58,713) Net Cash Provided by (Used in) Discontinued Operations 5,457 (52,376) ----------- ----------- Net Cash Used In Operating Activities (52,760) (111,089) ----------- ----------- Investing Activities Expenditures for property, plant and equipment (24,794) (16,208) Proceeds from sale of dealership 22,773 0 Acquisition of business (5,029) 0 Disposal of property, plant and equipment 3,279 970 ----------- ----------- Net Cash Used In Investing Activities (3,771) (15,238) ----------- ----------- Financing Activities Additions to long-term borrowings 78,885 160,018 Payments on long-term borrowings (27,532) (75,083) Net borrowings and payments on short-term notes payable 21,000 51,000 Dividends paid (8,465) (8,265) Exercise of stock options 1,495 309 ----------- ----------- Net Cash Provided By Financing Activities 65,383 127,979 ----------- ----------- Increase in cash and equivalents 8,852 1,652 Cash and equivalents, February 1 9,132 6,325 ----------- ----------- Cash and equivalents, October 31 $ 17,984 $ 7,977 =========== =========== Supplemental disclosure of cash flow information: Net cash paid during the period for: Interest payments $ 18,475 $ 13,139 Income tax payments $ 9,816 $ 13,945 Non-Cash Activities: Transfer of inventory to fixed assets - Discontinued operations $ (8,727) $ 0 See accompanying notes to consolidated condensed financial statements.
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 footnote disclosures required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, the information furnished reflects all normal recurring adjustments which are necessary for a fair presentation of the results of the interim periods. The results of operations for the nine months ended October 31, 1997 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 1998. 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, 1997 Form 10-K. The Company's fiscal year begins on February 1 of the year indicated and ends on January 31, of the following year. For example, "Fiscal 1997" commenced on February 1, 1997 and ends on January 31, 1998. Net earnings per share of Common Stock are computed by dividing net earnings by the weighted average number of shares outstanding. Common Stock equivalents (outstanding options to purchase shares of Common Stock) are excluded from the computations as they are insignificant. The weighted average number of shares outstanding for the nine months ended October 31, 1997 includes 70,000 shares issued pursuant to exercise of stock options. The Company's consolidated financial statements for Fiscal 1996 contain certain reclassifications to conform with the presentation used in Fiscal 1997. Note B--Commitments and Contingencies On May 3, 1995, an indictment was returned by a federal Grand Jury in Houston, Texas, accusing the Company and four employees, including the Company's President, of one count of major fraud against the United States, four counts of false statements and one count of conspiracy to commit major fraud, make false statements and interfere with the administration of a foreign military sale. All of the counts arise from a 1987 subcontract to supply diesel generator sets for installation at long-range radar sites in Saudi Arabia (the "Peace Shield"). The indictment alleges that a former employee of the general contractor for the Peace Shield program, who later became a consultant to the Company, conspired with the Company and the other defendants to award the subcontract to the Company. The indictment also alleges that the government was defrauded out of approximately $5 million in connection with cost savings from a change order under the Peace Shield contract and that the Company made false statements relating to cost estimates in connection with such change order. The Company and each individual have denied all charges under the indictment and the case is pending in the United States District Court, Southern District of Texas, Houston Division. The Company is not able to make a reasonable estimate of the fines or penalties that could be imposed under the Federal Sentencing Guidelines in the event of a conviction under the indictment. Such fines and penalties could be substantial and adversely affect the Company's financial position and results of operations. Also in connection with the Peace Shield contract, the Company has been advised that the former consultant of the Company referred to above filed a suit in the United States District Court, Southern District of Texas, Houston Division, for himself and the United States of America alleging that the Company supplied false information in violation of the False Claims Act (the "Act"), engaged in common law fraud and misapplied costs. Under the provisions of the Act, the suit has not been served upon the Company pending an investigation of the case by the U.S. Department of Justice and a determination as to whether the Department of Justice will intervene and pursue the matter on behalf of the United States. The suit alleges treble damages of $21 million plus unspecified penalties. Proceedings in this case have been stayed pending resolution of the criminal matter referred to above. The Company cannot predict the outcome of this action or the likelihood that substantial damages will result. The Company has commenced and is pursuing settlement discussions that would resolve all pending litigation arising from the Peace Shield contract. Under the proposed terms of a plea arrangement, the Company would be convicted of one count of making a false statement in connection with certain cost certifications under the Peace Shield contract. During the third quarter, the Company recognized a $10 million pre-tax charge relating to fines, penalties, restitution and other costs that have been incurred, or would be incurred, as a result of the settlement of the pending litigation. If the Company or any of the individuals are convicted of any charges under the indictment, whether after trial or as a result of a plea arrangement, the Company could also be suspended or debarred from entering into new contracts or subcontracts with agencies of the U.S. Government or receiving the benefit of federal assistance payments for the duration of such suspension or debarment. Any such suspension could prevent the Company from receiving future modifications to the Family of Medium Tactical Vehicle ("FMTV") contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Company would also be unable to sell equipment and services to customers that depend on loans or financial commitments from the Export Import Bank ("EXIM Bank"), Overseas Private Investment Corporation ("OPIC") and similar government agencies during a suspension or debarment. The Engineered Power Systems segment frequently sells equipment to customers that rely on financial commitments from EXIM Bank and/or OPIC. Any such suspension or debarment could have a material adverse impact on the Company's financial condition and results of operations. The Company is a party to an arbitration proceeding before the American Arbitration Association in Houston, Texas in which Engineering Design Group, Inc. ("EDG") has asserted approximately $17 million in claims against the Company, and the Company has asserted approximately $18 million in claims against EDG relating to a turnkey contract for the construction and installation of a power plant in Argentina by EDG. The Company is not able to make a reasonable estimate of the possible outcome of this matter. It is vigorously defending the claims that have been asserted against it and is pursuing the claims it has made against EDG. If EDG is successful on its claims against the Company and the damages are not offset in whole or in part by the Company's claims against EDG, the Company's results of operations for the reporting period in which these claims are resolved, could be adversely affected. The Company is also a party to an arbitration proceeding before the American Arbitration Association in San Francisco, California in which Noell, Inc. ("Noell") has asserted approximately $6 million in damages arising from the sale of turbine-driven equipment for installation in power plants located in Ceres, California and Lodi, California. The Company believes that it has meritorious defenses to the claims asserted by Noell and is vigorously defending this matter but cannot predict the outcome. The Company is a defendant in a number of other lawsuits relating to contractual, product liability, personal injury and warranty matters and otherwise of the type normally incident to the Company's business. Management is of the opinion that such lawsuits will not result in any material liability to the Company. The Company has not established any reserves or accruals for any potential liability that may be subsequently found in any of the foregoing cases, except as indicated above. Note C--Discontinued Operations On September 22, 1997 the Company and the General Electric Company announced the signing of a definitive agreement pursuant to which General Electric Company will buy the Company's Gas Turbine Division for $600 million, subject to adjustments. The Gas Turbine Division designs, engineers, manufactures and markets engine-driven equipment (including associated spare parts) utilizing combustion turbine engines supplied by independent manufacturers. It also packages equipment and associated systems for the generation of electricity or mechanical drive applications incorporating combustion turbine engines, provides spare parts for, and services and overhauls combustion turbine powered equipment, provides operation and maintenance service for power generation and petroleum production facilities, except such services for reciprocating engines, markets technical and support services for combustion turbine-driven equipment, and provides project consulting and development services that complement its combustion turbine-driven product lines. The results of the Gas Turbine Division have been classified as discontinued operations in the accompanying financial statements. Net assets of the discontinued operations at October 31, 1997, consists primarily of inventories and receivables. Included in net earnings from discontinued operations for the nine months ended October 31, 1997 is a post-measurement date loss of $356,000, which includes $1,243,000 of allocated interest. Interest expense of $9,948,000 was allocated during the premeasurement period of Fiscal 1997 to the discontinued operation based on the ratio of net assets to be discontinued to the sum of total net assets of the consolidated entity. The Company anticipates a gain on the sale, however, it cannot be reasonably estimated at this time. Summarized operating results of discontinued operations are as follows:
(In thousands) Nine Months Ended Three Months Ended October 31 October 31 ------------------ ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (Unaudited) (Unaudited) Sales $ 295,415 $ 256,864 $ 101,833 $ 105,202 Gross profit 43,015 49,059 8,735 17,267 Provision (benefit) for income taxes 1,920 4,323 (1,198) 1,619 Net earnings (loss) from discontinued operations net of tax 5,068 7,896 (1,382) 3,447
Note D -- Divestiture On October 6, 1997 the Company sold its construction equipment dealership for $30.2 million. The construction equipment dealership operated in the gulf coast territory of Texas and primarily distributed, and provided services for, products manufactured by John Deere Construction Equipment Company and other companies engaged in the business of manufacturing earth moving equipment, forestry equipment, skidsteer equipment, and utility equipment. An estimated gain of $4.3 million was recognized on the sale, however this gain is subject to adjustments. Item #2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains forward-looking statements which are based on assumptions such as timing, volume and pricing of customers' orders. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those outlined in the forward-looking statements, including the risk of cancellation or adjustment of specific orders, termination of significant government programs, decrease in demand in the markets served, the outcome of pending and future litigation and governmental proceedings, increasing product/service competition, or lower-than-anticipated penetration of markets served. This discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto, and with the Company's audited financial statements and notes thereto for the fiscal year ended January 31, 1997. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of sales represented by certain items reflected in the Company's Consolidated Condensed Statement of Earnings.
Nine Months Ended Three Months Ended October 31 October 31 ------------------ ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 88.3 87.0 88.7 89.0 ------ ------ ------ ------ Gross profit 11.7 13.0 11.3 11.0 Selling and administrative expenses 6.9 9.1 6.2 7.2 Interest expense 1.3 1.1 1.1 1.4 Settlement of litigation 1.3 3.7 3.4 .0 Other income, net (1.1) (.4) (2.0) (.2) ------ ------ ------ ------ 8.4 13.5 8.7 8.4 ------ ------ ------ ------ Earnings (loss) from continuing operations before income taxes 3.3 (.5) 2.6 2.6 Income taxe provision (benefit) 1.3 (.2) 1.4 .9 ------ ------ ------ ------ Earnings (loss) from continuing operations of consolidated companies 2.0% (.3)% 1.2% 1.7% Equity in net loss of unconsolidated affiliates (.0) (.0) (.0) (.1) ------ ------ ------ ------ Net earnings (loss) from continuing operations 2.0% (.3)% 1.2% 1.6% Earnings (loss) from discontinued operations net of tax .6 1.5 (.5) 1.5 ------ ------ ------ ------ Net earnings 2.6% 1.2% .7% 3.1% ====== ====== ====== ======
Sales from continuing operations for the first nine months of the year ending January 31, 1998 ("Fiscal 1997") increased 45% to $780,737,000 compared to sales of $540,236,000 for the same period of the year ended January 31, 1997 ("Fiscal 1996"). Sales for the third quarter increased $67,366,000 (29%) compared to same period Fiscal 1996. The Distribution segment's Fiscal 1997 sales increased $67,099,000 (19%) in the first nine months and $34,235,000 (28%) in the third quarter of Fiscal 1997 compared to the same periods in Fiscal 1996. A strengthening oil and gas market served by the Company's Distribution territory contributed to this improvement. Also contributing to this improvement was the Company's acquisition of Sierra Detroit Diesel Allison, Inc. ("Sierra") during April of 1997. Sales attributable to Sierra in the first nine months and in the third quarter of Fiscal 1997 were $20,763,000 and $9,202,000, respectively. The Tactical Vehicle Systems (TVS) segment sales increased $145,212,000 (147%) for the first nine months and $23,430,000 (30%) in the third quarter of Fiscal 1997 compared to the same periods in Fiscal 1996. The increase in TVS segment sales reflects the increase in truck production under the "Family of Medium Tactical Vehicles" (FMTV) contract during the first nine months of Fiscal 1997 compared to the same period in Fiscal 1996. This increase also reflects the minimal production during the first nine months of Fiscal 1996, which resulted from the scheduled retrofit program of previously produced vehicles. See "Government Contract Status" below. The Engineered Power Systems (EPS) segment sales portion from continuing operations increased $28 million (36%) in the first nine months and $10 million (33%) in the third quarter of Fiscal 1997 compared to the same periods in Fiscal 1996. This increase in both the quarter and the nine months is primarily the result of increased sales of oil field service equipment. The gross profit margin from continuing operations of 11.7% for the first nine months of Fiscal 1997 decreased compared to the 13.0% gross profit margin for the same period in Fiscal 1996. This decrease primarily reflects a change in the segment mix of sales. The gross profit margin for the third quarter of Fiscal 1997 was 11.3% compared to 11.0% for the third quarter of Fiscal 1996. Selling and administrative expenses from continuing operations for the first nine months of Fiscal 1997 decreased as a percentage of sales to 6.9% compared to 9.1% for the same period in Fiscal 1996. Selling and administrative expense increased 9.8% during the first nine months of Fiscal 1997 as compared to Fiscal 1996, but at a much slower rate than the increase in revenue, bringing SG&A closer into line with historical range. Interest expense from continuing operations for the first nine months of Fiscal 1997 increased to $10,545,000, up from $6,056,000 for the same period in Fiscal 1996. The increase in interest expense over the comparable period of the prior year was the result of increases in both borrowings and interest rates. The average interest rate increase reflects primarily the conversion of a large block of debt from floating rates to higher fixed rates, during the second quarter of Fiscal 1996. During the first nine months of Fiscal 1997, long-term debt increased $62 million due to (i)increased working capital requirements caused by a reduction in trade payables and (ii) the acquisition of Sierra. Other income from continuing operations increased to $8,213,000 in the first nine months of Fiscal 1997 compared to $2,156,000 for the same period in Fiscal 1996 primarily due to increased interest income, gains recognized on the sale of the construction equipment dealership of approximately $4,317,000 and the sale of corporate real estate. Net earnings from continuing operations of $15,184,000 ($.46 per share) were recorded for the nine months ended October 31, 1997 as compared to a net loss of $1,681,000 ($.05 per share) for the nine months ended October 31, 1996, which included pretax litigation charges to earnings during the third quarter of Fiscal 1997 ($10,000,000) and the second quarter of Fiscal 1996 ($20,000,000). Comparative net earnings and earnings per share for the first nine months of Fiscal 1997 and Fiscal 1996 prior to the litigation charges were $22,763,000 ($.69 per share) and $11,319,000 ($.34 per share), respectively. Earnings from discontinued operations of $5,068,000 ($.15 per share) were recorded for the nine months ended October 31, 1997 as compared to net earnings $7,896,000 ($.24 per share) for the comparable period in Fiscal 1996. Net earnings from continuing operations of $3,524,000 ($.11 per share) were recorded for the third quarter of Fiscal 1997 compared to a net earnings of $3,742,000 ($.11 per share) for the comparable period in Fiscal 1996. Comparative net earnings for the third quarter of Fiscal 1997 prior to the litigation charge were $11,103,000 ($.33 per share). A loss of $1,382,000 ($.04 per share) from discontinued operations was recorded in the third quarter of Fiscal 1997 as compared to earnings of $3,447,000 ($.11 per share) in the comparable period of Fiscal 1996. (See Note C.) GOVERNMENT CONTRACT STATUS As of October 31, 1997, the Company has produced approximately 6,859 of the 11,404 vehicles covered by the original FMTV contract plus options and additional requirements to date. The FMTV contract is a firm fixed-price multi-year contract and the price paid to the Company is not subject to adjustment to reflect the Company's actual costs, except costs incurred as a result of actions or inactions of the government. Revenues and profits realized on the FMTV contract in each accounting period are based on the Company's estimates of total contract sales value and costs at completion. The Company has incurred significant cost overruns and delivery schedule delays on the FMTV contract which the Company believes are primarily due to the government's decision to delay the testing of trucks and other government directed changes to the contract. The Company has and will continue to submit a series of Requests for Equitable Adjustments (REAs) under the FMTV contract seeking increases in the FMTV contract price for those additional costs that relate to government caused delays and changes. Amounts in excess of agreed upon contract price for government caused delays, disruptions, unpriced change orders and government caused additional contract costs are recognized in contract value when the Company believes it is probable that the claim for such amounts will result in additional contract revenue and the amount can be reasonably estimated. At October 31, 1997, the Company's FMTV contract accounting position reflects the expected recovery of substantial amounts in excess of the contract price for government caused delays, disruptions, unpriced change orders and other government caused additional contract costs. These REAs are in varying stages of negotiation. Although management believes that the contract provides a legal basis for the REAs and its estimates are based on reasonable assumptions and on a reasonable analysis of contract costs, due to uncertainties inherent in the estimation and REAs negotiations process, no assurances can be given that its estimates will be accurate, and variances between such estimates and actual results could be material. In the event that the Company is unable to recover a substantial portion of the additional costs, or other estimates or assumptions on which the estimated cost to complete is based are inaccurate, the Company may suffer a material adverse effect on its earnings during the accounting period in which such contract issues are resolved. The funding of the FMTV contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the FMTV contracts must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. The Company has received full funding for the production of all 11,404 vehicles covered by the FMTV contract at the end of the third quarter. EFFECT OF CERTAIN LITIGATION On May 3, 1995, the Company and four employees, including the Company's President, were indicted by a federal Grand Jury on six counts arising out of a 1987 subcontract to supply diesel generator sets for installation in Saudi Arabia. On May 12, 1995, the U.S. Air Force suspended the Company from contracting with any agency of the U.S. Government and from receiving the benefit of federal assistance programs. This suspension was temporarily terminated on November 8, 1995, pending the resolution of the charges covered by the indictment, pursuant to an Interim Administrative Agreement between the Company and the U.S. Air Force. The Interim Administrative Agreement does not have any effect on the indictment. The Interim Administrative Agreement requires the Company to maintain various internal procedures and policies intended to assure the U.S. Government that the Company is a responsible contractor. In the event that the Company or any of the indicted employees are convicted of the charges contained in the indictment, the U.S. Air Force may re-evaluate whether the Company should be suspended or debarred based on all of the facts and circumstances then known. An acquittal of all parties of the charges does not terminate the Interim Administrative Agreement and any failure by the Company to perform its obligations thereunder may also be grounds for suspension or debarment. The Company has commenced and is pursuing negotiations with the Department of Justice to resolve all charges under the indictment. Under the terms of a proposed plea arrangement, the Company would be convicted of making a false statement. The Company is not able to determine what effect, if any, that such conviction would have on the Administrative Agreement or whether such conviction will result in a suspension or debarment of the Company. If the Company is suspended or debarred, either because of a conviction pursuant to the indictment or as a result of a breach of the Interim Administrative Agreement, it would be ineligible to enter into new contracts or subcontracts with agencies of the U.S. Government or receive the benefit of federal assistance payments for the duration of such suspension or debarment. 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 Company would also be unable to sell equipment and services to customers that depend on loans or financial commitments from the Export Import Bank ("EXIM Bank"), Overseas Private Investment Corporation ("OPIC") and similar government agencies during a suspension or debarment. The Engineered Power Systems segment frequently sells equipment to customers that rely on financial commitments from EXIM Bank and/or OPIC. Any such suspension or debarment could have a material adverse impact on the Company's future financial condition and results of operations. CERTAIN INVENTORY VALUES The Engineered Power Systems segment's inventory at October 31, 1997 includes approximately $19,100,000 of costs on a certain U.S. Government contract in excess of contractual authorization. On September 25, 1997, the Armed Services Board of Contract Appeals (ASBCA) awarded the Company excess costs of $5,326,494 plus interest and profit. The Company has filed a motion for reconsideration. Management's position, supported by outside counsel which specializes in government procurement law, is that the Company will recover an amount in excess of the inventory carrying value. In the event that the ASBCA does not revise its award, the Company will seek review of those findings by the Court of Appeals for the Federal Circuit. UNFILLED ORDERS The Company's unfilled orders consist of written purchase orders, letters of intent, and oral commitments. These unfilled orders are generally subject to cancellation or modification due to customer relationships or other conditions. Purchase options are not included in unfilled orders until exercised. Unfilled orders at October 31, 1997 and at the close of Fiscal 1996 were as follows:
- ------------------------------------------------------------------------------------------------- October 31 January 31 1997 1997 - ------------------------------------------------------------------------------------------------- (Dollars in millions) Engineered Power Systems Discontinued Operations $ 607.7 $ 574.6 Continuing Operations 55.0 46.1 ---------- ---------- $ 662.7 $ 620.7 Distribution 92.5 92.2 Tactical Vehicle Systems 638.1 817.3 ---------- ---------- Total $ 1,393.3 $ 1,530.2 ========== ==========
Unfilled orders of the Tactical Vehicle Systems segment consists principally of the contracts awarded in October 1991, by the United States Department of the Army, to manufacture medium tactical vehicles, and options under the FMTV contract that have been exercised by the U.S. Army to purchase additional vehicles. CAPITAL EXPENDITURES AND COMMITMENTS Capital spending for property, plant and equipment was $24,794,000 for the first nine months of Fiscal 1997 compared to $16,208,000 for the same period in Fiscal 1996. This increase was due in part to the construction of new facilities. LIQUIDITY AND SOURCES OF CAPITAL Long-term borrowings at October 31, 1997 increased from the end of Fiscal 1996. The Company has $250,000,000 in committed credit facilities, of which $225,000,000 is utilized at October 31, 1997, compared to $225,000,000 committed with utilization of $175,000,000 at the end of Fiscal 1996. The Company has additional banking relationships which provide uncommitted borrowing arrangements. These short-term borrowings increased to $49,000,000 at October 31, 1997 from $28,000,000 at the end of Fiscal 1996. In addition, the acquisition of Sierra Detroit Diesel Allison, Inc. increased long-term debt by $9 million. With the pending sale of the Company's Gas Turbine Division (See Note C), management believes that the Company's current credit facilities are adequate to meet its foreseeable cash requirements. On August 25, 1997, the banks' commitments under the Company's revolving credit notes increased from $225,000,000 to $250,000,000. All other terms, including maturity and pricing, under the revolving credit facility remain the same as previously reported in the Company's annual report on Form 10- K. The Company previously announced that a portion of the proceeds from the sale of the Gas Turbine Division would be used to retire up to $300 million in bank debt and to repurchase up to $120 million of the Company's Common Stock. PART II. OTHER INFORMATION Item 1. Legal Proceedings. See Note B to the Consolidated Condensed Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 4. Submission of Matters to a Vote of Security Holders. None Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as a part of this report pursuant to Item 601 of Regulation S-K. See Exhibit Index. (b) The following report on Form 8-K was filed during the three months ended October 31, 1997. Form 8-K Reporting Date - October 3, 1997 Items reported - Item 5. Other Events (GE Transaction Agreement) 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. STEWART & STEVENSON SERVICES, INC. Date: December 15, 1997 By: /s/ Robert L. Hargrave Robert L. Hargrave Chief Executive Officer Chief Financial Officer and Chief Accounting Officer EXHIBIT INDEX Exhibit Number and Description *3.1 Third Restated Articles of Incorporation of Stewart & Stevenson Services, Inc., effective as of September 13, 1995 (Exhibit 3(a) to 10/95 10-Q). *3.2 Fourth Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of September 13, 1995 (Exhibit 3(b) to 10/95 10-Q). *4.1 Note Purchase Agreement effective May 30, 1996, between Stewart & Stevenson Services, Inc. and the Purchasers named therein (Exhibit 4 to 7/96 10-Q). *4.2 Rights Agreement effective March 13, 1995, between Stewart & Stevenson Services, Inc. and The Bank of New York (Exhibit 1 to Form 8-A Registration Statement under the Commission File No. 001-11443). *10.1 Lease Agreement effective April 15, 1997, between Miles McInnes and Faye Manning Tosch, as Lessors, and the Company, as Lessee (Exhibit 10.1 to 1/97 10-K). *10.2 Distributor Sales and Service Agreement effective January 1, 1996, between the Company and Detroit Diesel Corporation (Exhibit 10.2 to 1/96 10-K). *10.3 Contract Number DAAE07-92-R001 dated October 11, 1991 between Stewart & Stevenson Services, Inc. and the United States Department of Defense, U.S. Army Tank-Automotive Command, as modified (Exhibit 28.1 to Form S-3 Registration Statement under the Commission File No. 33- 44149). *10.4 Contract Number DAAE07-92-R002 dated October 15, 1991 between Stewart & Stevenson Services, Inc. and the United States Department of Defense, U.S. Army Tank-Automotive Command, as modified (Exhibit 28.2 to Form S-3 Registration Statement under the Commission File No. 33- 44149). *10.5 Stewart & Stevenson Services, Inc. Deferred Compensation Plan dated as of December 31, 1979 (Exhibit 10.8 to 1/94 10-K). *10.6 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (as amended and restated effective as of June 10, 1997)(Exhibit B to 5/9/97 Proxy Statement). *10.7 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement Plan (Exhibit 10.11 to 1/94 10-K). *10.8 Stewart & Stevenson Services, Inc. 1996 Director Stock Plan (Exhibit A to 5/9/97 Proxy Statement). *23.1 Consent of Arthur Andersen LLP, Independent Public Accountants (Exhibit 23.1 to 1/97 10-K). 27.1 Financial Data Schedule. __________ *Incorporated by reference. EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-31-1998 OCT-31-1997 17,984 0 173,157 (2,271) 192,731 1,006,314 231,240 (130,198) 1,149,317 249,355 381,963 166,454 0 0 326,096 1,149,317 780,737 780,737 689,029 689,029 66,168 0 10,545 25,540 10,150 15,390 5,068 0 0 20,252 .61 .61
-----END PRIVACY-ENHANCED MESSAGE-----