-----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, QA1nbWOv/qwFYmCcXnNj7mN7ro0NVpzI9cynvpnuD91X8xw/NPks7NK2512XMKh+ s6NuiuCp20Vba/N1YvTUzQ== 0000094328-98-000020.txt : 19980915 0000094328-98-000020.hdr.sgml : 19980915 ACCESSION NUMBER: 0000094328-98-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980914 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: 98709152 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 July 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission file number 0-8493 STEWART & STEVENSON SERVICES, INC. (Exact name of registrant as specified in its charter) Texas 74-1051605 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2707 North Loop West, Houston, Texas 77008 (Address of principal executive offices) (Zip Code) (713) 868-7700 (Registrant's telephone number, including area code) not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, Without Par Value 27,984,035 Shares (Class) (Outstanding at September 1, 1998) 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 -- July 31, 1998 and January 31, 1998. Consolidated Condensed Statement of Earnings -- Six Months and Three Months Ended July 31, 1998 and 1997. Consolidated Condensed Statement of Cash Flows -- Six Months Ended July 31, 1998 and 1997. Notes to Consolidated Condensed Financial Statements. STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION (Dollars in thousands)
July 31 January 31 1998 1998 ---------- ---------- (Unaudited) ASSETS CURRENT ASSETS Cash and equivalents $ 180,890 $ 18,987 Accounts and notes receivable, net 143,481 185,033 Receivable from sale of Gas Turbine Operations -- 600,000 Recoverable costs and accrued profits not yet billed 144,921 138,208 Inventories: Engineered Power Systems 60,879 46,551 Power Products 168,979 166,918 Excess of current cost over LIFO values (46,842) (45,892) ----------- ----------- (46,531) (45,892) ----------- ----------- 183,016 167,577 ----------- ----------- TOTAL CURRENT ASSETS 652,308 1,109,805 PROPERTY, PLANT AND EQUIPMENT 257,270 227,152 Allowances for depreciation and amortization (137,572) (129,408) ----------- ----------- 119,698 97,744 INVESTMENTS AND OTHER ASSETS 39,264 45,098 ----------- ----------- $811,270 $1,252,647 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 822 $ 35,000 Accounts payable 78,350 92,728 Current income taxes 58,123 88,862 Current portion of long-term debt 60,046 226,000 Other current liabilities 94,751 119,512 ----------- ----------- TOTAL CURRENT LIABILITIES 292,092 562,102 ----------- ----------- COMMITMENTS AND CONTINGENCIES (SEE NOTE B) LONG-TERM DEBT 86,996 147,166 DEFERRED INCOME TAXES -- 2,899 ACCRUED POSTRETIREMENT BENEFITS 13,066 13,256 DEFERRED COMPENSATION 4,186 5,517 SHAREHOLDERS' EQUITY Common Stock, without par value, 100,000,000 shares authorized; 27,984,035 and 33,205,688 shares issued at July 31, 1998 and January 31, 1998, respectively, including 0 and 11,820 shares held in treasury 47,043 166,454 Retained earnings 367,887 355,286 ----------- ----------- 414,930 521,740 Less cost of treasury stock -- (33) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 414,930 521,707 ----------- ----------- $811,270 $1,252,647 =========== =========== See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (In thousands, except per share data) Six Months Ended Three Months Ended July 31 July 31 ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- (Unaudited) (Unaudited) Sales $ 628,549 $ 481,739 $ 323,539 $ 248,778 Cost of sales 565,775 423,724 291,799 218,540 --------- --------- --------- ---------- Gross profit 62,774 58,015 31,740 30,238 Selling and administrative expenses 38,695 35,290 19,964 18,376 Interest expense 5,956 7,146 2,806 3,684 Other income, net (10,230) (2,190) (4,208) (1,570) --------- --------- --------- ---------- 34,421 40,246 18,562 20,490 --------- --------- --------- ---------- Earnings from continuing operations before income taxes 28,353 17,769 13,178 9,748 Income taxes 10,295 6,087 4,814 3,331 --------- --------- --------- ---------- Earnings from continuing operations of consolidated companies 18,058 11,682 8,364 6,417 Equity in net earnings (loss) of unconsolidated affiliates (456) (22) 73 (27) --------- --------- --------- ---------- Net earnings from continuing operations 17,602 11,660 8,437 6,390 --------- --------- --------- ---------- Net earnings from discontinued operations net of tax of $3,118, and $920 -- 6,450 -- 1,838 --------- --------- --------- --------- Net earnings 17,602 18,110 8,437 8,228 ========= ========= ========= ========= Weighted average number of shares of Common Stock outstanding - Basic 30,046 33,174 28,178 33,193 Diluted 30,137 33,249 28,178 33,295 Net earnings per share: Basic and Diluted Continuing operations $ .59 $ .35 $ .30 $ .19 Discontinued operations -- .20 -- .06 --------- --------- --------- ---------- $ .59 $ .55 $ .30 $ .25 ========= ========= ========= ========= Cash dividends per share $ .17 $ .17 $ .085 $ .085 ========= ========= ========= ========= See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollars in thousands)
Six Months Ended July 31 ------------------ 1998 1997 ---- ---- (Unaudited) Operating Activities Net earnings from continuing operations $ 17,602 $ 11,660 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Accrued postretirement benefits (190) 58 Depreciation and amortization 9,963 9,072 Deferred income taxes, net (2,899) (2,113) Change in operating assets and liabilities net of the effect of acquisition: Accounts and notes receivable, net 42,347 21,808 Recoverable costs and accrued profits not yet billed (6,713) (16,811) Inventories (14,433) (31,942) Accounts payable (14,378) (49,714) Current income taxes (30,739) 4,514 Other current liabilities (24,761) 926 Other--principally long-term assets and liabilities 4,536 715 --------- --------- Net Cash Used In Continuing Operations (19,665) (51,827) Net Cash Provided By Discontinued Operations -- 11,775 --------- --------- Net Cash Used In Operating Activities (19,665) (40,052) Investing Activities Collection of receivable from sale of Gas Turbine Operations 600,000 -- Expenditures for property, plant and equipment (15,633) (6,708) Acquisition of businesses (18,750) (5,029) Disposal of property, plant and equipment, net 665 1,992 --------- --------- Net Cash Provided By (Used In) Investing Activities 566,282 (9,745) Financing Activities Additions to long-term borrowings -- 75,832 Payments on long-term borrowings (226,124) (27,445) Net borrowings and payments on short-term notes payable (34,178) 10,000 Dividends paid (5,001) (5,636) Repurchase of common stock (120,000) -- Exercise of stock options 589 1,495 --------- -------- Net Cash Provided By (Used In) Financing Activities (384,714) 54,246 --------- -------- Increase in cash and equivalents 161,903 4,449 Cash and equivalents, February 1 18,987 9,132 --------- --------- Cash and equivalents, July 31 $ 180,890 $ 13,581 ========= ========= Supplemental disclosure of cash flow information: Net cash paid during the period for: Interest payments $ 4,922 $ 13,091 Income tax payments $ 44,877 $ 8,665 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 footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The results of operations for the six months ended July 31, 1998 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 1999. 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, 1998 Form 10-K. The Company's fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, "Fiscal 1998" commenced on February 1, 1998 and ends on January 31, 1999. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 128 Earnings Per Share ("SFAS 128"), which specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS"). It replaces the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if all securities or other contracts to issue common stock were exercised or converted into common stock. During the second quarter of Fiscal 1998 and 1997, 0 and 102,000 unexercised stock options, respectively, were deemed to be dilutive. For the six months ended July 31, 1998 and 1997, 92,000 and 75,000 unexercised stock options, respectively, were deemed to be dilutive. The Company adopted SFAS 128 as of January 31, 1998. Accordingly, all periods presented have been restated to disclose basic and diluted EPS. There is no material difference between SFAS 128 presentation of EPS and the EPS presented in prior reporting periods. The weighted average number of shares outstanding for the six months ended July 31, 1998 includes 17,000 shares issued pursuant to the exercise of stock options and 38,287 restricted shares issued in exchange for shares of a subsidiary of the Company . In addition, the Company repurchased 5,265,120 shares of its outstanding Common Stock during the six months ended July 31, 1998, which has been considered in the computation of the weighted average number of shares outstanding. These 5,265,120 shares, as well as the 11,820 shares held as treasury stock, were cancelled during the six months ended July 31, 1998. The accompanying consolidated financial statements for Fiscal 1997 contain certain reclassifications to conform with the presentation used in Fiscal 1998. The consolidated financial statements have been restated to reflect the Company's Gas Turbine Operations as a discontinued operation. Note B--Commitments and Contingencies The Company and Engineering Design Group, Inc. ("EDG") were parties to an arbitration before the American Arbitration Association in Houston, Texas. On May 12, 1998, the arbitrators awarded EDG the sum of $12,433,000 relating to unpaid amounts under a subcontract to construct a power plant in Argentina. The award was fully reserved as of January 31, 1998 and did not affect the Company's financial position or results of operations as of July 31, 1998. The Company is a party to an arbitration proceeding before the American Arbitration Association in San Francisco, California in which Noell, Inc. has asserted claims of 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 liability, if any, relating to these claims was assumed by GE as part of the sale of the Gas Turbine Operations Division. The Company is involved in a number of other lawsuits and disputes 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 and disputes are either fully reserved or will not result in any material liability to the Company. The Company has provided certain guarantees in support of its customer's financing of purchases from the Company in the form of both residual value guarantees and debt guarantees. The maximum exposure of the Company related to guarantees at July 31, 1998 is $65.9 million. 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 adjustment to the sales price of the Gas Turbine Operations Division, 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, risk associated with newly acquired businesses, 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 Form 10-K and notes thereto for the fiscal year ended January 31, 1998. 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.
Six Months Ended July 31 ------------------ 1998 1997 ---- ---- Sales 100.0% 100.0% Cost of sales 90.0 88.0 ------ ------ Gross profit 10.0 12.0 Selling and administrative expenses 6.2 7.3 Interest expense 0.9 1.5 Other income, net (1.6) (.5) ----- ----- 5.5 8.3 ----- ----- Earnings from continuing operations before income taxes 4.5 3.7 Income taxes 1.6 1.3 ------ ------ Earnings from continuing operations of consolidated companies 2.9 2.4 Equity in net earnings of unconsolidated affiliates (0.1) -- ------ ------ Net earnings from continuing operations 2.8% 2.4% ====== ======
Sales for the second quarter of the year ending January 31, 1999 ("Fiscal 1998") increased 30% to $324 million compared to sales of $249 million for the same period of the year ended January 31, 1998 ("Fiscal 1997"). Sales for the six months ended July 31, 1998 increased 30% to $629 million, compared to sales of $482 million for the same period of Fiscal 1997. The Power Products segment's sales decreased $9 million (6%) in the second quarter of Fiscal 1998 compared to the same period in Fiscal 1997, but increased $7 million (2%) for the six months ended July 31, 1998 over the same period of Fiscal 1997. The quarter and six month periods ended July 31, 1997 include $9.6 million and $18.9 million, respectively, of sales from the Company's John Deere dealership, which was sold during the third quarter of Fiscal 1997. Increased sales in the Power Product's segment for the six months ended July 31, 1998 were broad based, with most locations contributing to the favorable results. The Power Products segment experienced strong sales growth in its core businesses in the second quarter of Fiscal 1998, and management expects this trend to continue in the near future. The Tactical Vehicle Systems (TVS) segment sales increased $75 million (118%) for the second quarter of Fiscal 1998 compared to the same period in Fiscal 1997. TVS segment sales for the six months ended July 31, 1998 increased $122 million (86%) over the same period in Fiscal 1997. The sales increase was primarily due to higher production of trucks under the Family of Medium Tactical Vehicles ("FMTV") contract. See "Government Contract Status" for discussion of the second multi-year contract. The Engineered Power Systems (EPS) segment sales increased to $41 million in the second quarter of Fiscal 1998 compared to $38 million in the same period in Fiscal 1997. EPS segment sales for the six months ended July 31, 1998 increased $7 million (11%) over the same period in Fiscal 1997. Sales increased 48% and 42% for the Petroleum Equipment Division for the quarter and six months ended July 31, 1998, respectively, reflecting the strong demand for new equipment by the oilfield drilling and services industries. In particular, demand increased in the overseas markets and in the market for marine riser systems. These increases were partially offset by a 41% and 30% decline in sales by the Aircraft Ground Support Division for the quarter and year to date period ended July 31, 1998, respectively. The Aircraft Ground Support Division continues to be adversely affected by the Asian financial crisis. The gross profit margin of 9.8% for the second quarter of Fiscal 1998 decreased compared to the 12.2% gross profit margin for the same period in Fiscal 1997. The gross profit margin of 10.0% for the six months ended July 31, 1998 decreased compared to the 12.0% gross profit margin for the same period of Fiscal 1997. These decreases are due to a greater percentage of sales represented by the TVS segment, which carry a lower gross margin than the other segments. Selling and administrative expenses increased 8.6% in the second quarter of Fiscal 1998, primarily as a result of post closing activity related to the sale of the Company's Gas Turbine Operations. Selling and administrative expenses increased 9.6% for the six months ended July 31, 1998 over the same period of Fiscal 1997. Selling and administrative expenses for the second quarter of Fiscal 1998 decreased as a percentage of sales to 6.2% compared to 7.4% for the same period in Fiscal 1997 due to greater sales volume. Selling and administrative expenses for the six months ended July 31, 1998 decreased as a percentage of sales to 6.2% compared to 7.3% for the same period in Fiscal 1997 due to greater sales volumes. As a result of the sale of the Gas Turbine Operations, the Company has been able to reduce its debt and has experienced a significant increase in cash and cash equivalents. Interest expense for the second quarter of Fiscal 1998 decreased to $2.8 million, down from $3.7 million for the same period in Fiscal 1997, due primarily to the repayment of $261 million in floating rate debt from the proceeds of the sale of the Company's Gas Turbine Operations. Interest expense decreased 16.7% for the six months ended July 31, 1998, as compared to the same period of Fiscal 1997. Other income increased to $4.2 million in the second quarter of Fiscal 1998 compared to $1.6 million for the same period in Fiscal 1997 primarily due to increased interest income from short-term investment of the proceeds from the sale of the Company's Gas Turbine Operations. Other income increased to $10.2 million for the six months ended July 31, 1998, as compared to $2.2 million for the same period of Fiscal 1997. As of June 2, 1998, the Company completed a $120,000,000 stock repurchase program. In total, the Company repurchased and retired 5,265,120 shares of the Company's Common Stock, thereby reducing its total outstanding shares by 16%. Net earnings from continuing operations of $8.4 million ($.30 per share) were recorded for the three months ended July 31, 1998 as compared to net earnings from continuing operations of $6.4 million ($.19 per share) for the three months ended July 31, 1997. Net earnings from continuing operations of $17.6 million ($.59 per share) were recorded for the six months ended July 31, 1998, as compared to net earnings from continuing operations of $11.7 million ($.35 per share) for the same period of Fiscal 1997. This increase is due to increased gross profit and other income and the reduction in the weighted average number of shares outstanding. GOVERNMENT CONTRACT STATUS The FMTV contract is a firm fixed-price multi-year contract. 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. As of July 31, 1998, the Company has completed approximately 10,193 of the 11,197 vehicles covered by the original contract plus options and additional requirements to date. Revenues and profits realized on the FMTV contract are based on the Company's estimates of total contract sales value and costs at completion. Stewart & Stevenson has incurred significant cost overruns and delivery schedule delays on the 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. The Company is negotiating a contract with the United States Army that would provide for continued production of the FMTV through 2002, with a one year option that would extend the contract through 2003. Award of the second FMTV contract has been delayed pending the completion of tests relating to drive-train improvements made by the Company to correct reported failures in drive-train components. The Company expects to sign this agreement in the third quarter of Fiscal 1998 and estimates that, if all options were exercised, it will have a total value of $1.36 billion with gross profit margins in excess of the current contract. At July 31, 1998, 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. Although management believes that the contract provides a legal basis for the claims and its estimates are based on reasonable assumptions and on a reasonable analysis of contract costs, due to uncertainties inherent in the estimation and claims negotiations process, no assurances can be given that its estimates will be accurate, and variances between such estimates and actual results could be material. The Company's FMTV contract accounting position also reflects the expected recovery of all costs relating to the drive-train improvements made by the Company. In the event that the Company is unable to recover a substantial portion of the additional costs, 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 contracts are 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 government has approved full funding for the initial 5 year program. If the FMTV contracts are terminated other than for default, they provide for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. EFFECT OF ADMINISTRATIVE AGREEMENT The Company is subject to an Administrative Agreement with the U.S. Air Force that imposes certain requirements on the Company intended to assure the U.S. Air Force that the Company is a responsible government contractor. A default by the Company of the requirements under the Administrative Agreement could result in the suspension or debarment of the Company from receiving new government contracts or modifications to existing government contracts unless the contracting agency finds a compelling need to enter into such agreement. 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. Any such suspension or debarment could have a material adverse impact on the Company's financial condition and results of operations. 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 July 31, 1998 and at the close of Fiscal 1997 were as follows:
- ---------------------------------------------------------------- July 31 January 31 1998 1998 - ---------------------------------------------------------------- (Dollars in millions) Power Products $ 76.8 $ 69.6 Tactical Vehicle Systems 199.9 487.0 Engineered Power Systems 86.8 57.5 ------- -------- $363.5 $614.1 ======= ======
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 of $15.6 million for the six months ended July 31, 1998 increased as compared to $6.7 million for the same period in Fiscal 1997. Excluding approximately $7.3 million of expenditures for a new facility and machinery for the Petroleum Equipment Division, these amounts are consistent with the historical capital expenditure levels of the Company. LIQUIDITY AND SOURCES OF CAPITAL Proceeds from the sale of Gas Turbine Operations were used to retire $261 million of notes payable and the current portion of long-term debt during the quarter ended April 30, 1998. The Company has $150 million in committed credit facilities, all of which are available for the Company's use at July 31, 1998. The Company has additional banking relationships which provide uncommitted borrowing arrangements. In the event that any acquisition of additional operations, growth in existing operations, settlement of other lawsuits and disputes, changes in inventory levels, new capital investments, accounts receivable or other working capital items create a permanent need for working capital or capital expenditures in excess of existing cash and equivalents and committed lines of credit, the Company may seek to convert additional uncommitted borrowing arrangements to committed credit facilities or to issue additional equity securities. Management believes that the Company's cash and equivalents and current credit facilities and available options for external sources of funds are adequate to meet its foreseeable cash requirements. YEAR 2000 COMPLIANCE The Company is currently working to resolve the potential impact of the year 2000 on its informational systems, operational systems, and products. The Company is at the close of its assessment phase, and has begun remediation efforts on those systems and products requiring modification to eliminate any data processing conflict created by the impending millennium. The Company believes that its compliance program will reach a favorable conclusion on or before December 31, 1998. Based on its assessment, the Company has budgeted $2,000,000 for remediation efforts. The majority of these costs are attributable to the purchase of new personal computer systems. The Company has not identified any mission critical system whose timely remediation poses a material risk to the Company. The Company's contingency plans for any non-compliant systems will be developed for each particular system if, and as, they are identified. ACQUISITIONS On June 1, 1998, the Company acquired substantially all of the assets of H & H Rubber, Inc., a manufacturer of rubber replacement parts for the oilfield industry, located in Houston, Texas. The purchase price totaled approximately $4.0 million. The assets and operations of this business prior to the acquisition would not have been material to the Company's consolidated assets or earnings. In other acquisitions, the Company purchased (i) substantially all of the assets of Action Air, Inc., an air compression equipment company serving San Antonio and South Texas, (ii) the Deutz engine distributorship for the states of Texas, Oklahoma and Kansas from Harley Equipment Corporation, and (iii) all of the outstanding stock and the real estate of IPSC Co., Inc., the Deutz engine distributor in the states of Arkansas, Mississippi and Louisiana, all for an aggregate purchase price of approximately $5.3 million. The assets and operations of these businesses prior to their acquisition would not have been material to the Company's consolidated assets or earnings. The Company intends to continue looking for acquisition opportunities in its core businesses and for synergistic opportunities in niche businesses. 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 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. 3.1 Third Restated Articles of Incorporation of Stewart & Stevenson Services, Inc., effective as of September 13, 1995 (incorporated by reference to Exhibit 3(a) of the Form 10-Q of Stewart & Stevenson for the quarterly period ended October 31, 1995 under the Commission File No. 001- 11443). 3.2 Fifth Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of April 14, 1998 (incorporated by reference to Exhibit 3.2 of the Form 10-K of Stewart & Stevenson for the Fiscal year ended January 31, 1998 under the Commission File No. 0-8493). 4.1 Note Purchase Agreement effective May 30, 1996, between Stewart & Stevenson Services, Inc. and the Purchasers named therein (incorporated by reference to Exhibit 4 of the Form 10-Q of Stewart & Stevenson for the quarterly period ended July 31, 1997 under the Commission File No. 0-8493). 4.2 Rights Agreement effective March 13, 1995, between Stewart & Stevenson Services, Inc. and The Bank of New York (incorporated by reference to Exhibit 1 of the Form 8-A Registration Statement of Stewart & Stevenson 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 (incorporated by reference to Exhibit 10.1 of the Form 10-K of Stewart & Stevenson for the Fiscal year ended January 31, 1997 under Commission File No. 0-8493). 10.2 Distributor Sales and Service Agreement effective January 1, 1996, between the Company and Detroit Diesel Corporation (incorporated by reference to Exhibit 10.2 of the Form 10-K of Stewart & Stevenson for the Fiscal year ended January 31, 1996 under Commission File No. 0-8493). 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 (incorporated by reference to Exhibit 28.1 of the Form S-3 Registration Statement of Stewart & Stevenson 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 (incorporated by reference to Exhibit 28.2 of the Form S-3 Registration Statement of Stewart & Stevenson under the Commission File No. 33-44149). 10.5 Stewart & Stevenson Services, Inc. Deferred Compensation Plan dated as of December 31, 1979 (incorporated by reference to Exhibit 10.8 of the Form 10-K of Stewart & Stevenson for the Fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.6 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (as amended and restated effective as of June 10, 1997) (incorporated by reference to Exhibit B of the Proxy Statement of Stewart & Stevenson filed with the Commission on May 9, 1997). 10.7 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.11 of the Form 10-K of Stewart & Stevenson for the Fiscal year ended January 31, 1994 under the Commission File No. 0-8493). 10.8 Stewart & Stevenson Services, Inc. 1996 Director Stock Plan (incorporated by reference to Exhibit A of the Proxy Statement of Stewart & Stevenson filed with the Commission on May 9, 1997). 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants (incorporated by reference to Exhibit 23.1 of the Form 10-K of Stewart & Stevenson for the Fiscal year ended January 31, 1998 under Commission File No. 0-8493). *27.1 Financial Data Schedule. __________ *Filed with this report. (b) Form 8-K Report Date 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: September 14, 1998 By: /s/ Robert L. Hargrave Robert L. Hargrave President and Chief Executive Officer (as authorized officer) Date: September 14, 1998 By: /s/ Patrick G. O'Rourke Patrick G. O'Rourke Controller (as chief accounting officer) EXHIBIT INDEX Exhibit Number and Description 3.1 Third Restated Articles of Incorporation of Stewart & Stevenson Services, Inc. 3.2 Fifth Restated Bylaws of Stewart & Stevenson Services, Inc. 4.1 Note Purchase Agreement. 4.2 Rights Agreement. 10.1 Lease Agreement. 10.2 Distributor Sales and Services Agreement. 10.3 Contract Number DAAE07-92-R001. 10.4 Contract Number DAAE07-92-R002. 10.5 Stewart & Stevenson Services, Inc. Deferred Compensation Plan. 10.6 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (as amended and restated effective as of June 10, 1997). 10.7 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement Plan. 10.8 Stewart & Stevenson Services, Inc. 1996 Director Stock Plan. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 27.1 Financial data schedule. 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 6-MOS JAN-31-1998 JUL-31-1998 180,890 0 146,623 (3,412) 183,016 652,308 257,270 (137,572) 811,270 292,092 147,042 47,043 0 0 367,887 811,270 628,549 628,549 565,775 565,775 34,421 0 5,956 28,353 10,295 18,058 0 0 0 17,602 .59 .59
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