-----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, CwZDhtVjVZ3oeVHKlkFHFtpxGy8Ijyd3iB8xGGlGGElG7ptnWkLeOiBwWN+vM2vu 73iQ8PwHrMWnagYMIeNUag== 0000094328-00-000010.txt : 20000502 0000094328-00-000010.hdr.sgml : 20000502 ACCESSION NUMBER: 0000094328-00-000010 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000501 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-K405 SEC ACT: SEC FILE NUMBER: 001-11443 FILM NUMBER: 615224 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-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 31, 2000 ("Fiscal 1999") 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 868-7700 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, WITHOUT PAR VALUE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] AGGREGATE MARKET VALUE OF VOTING SECURITIES HELD BY NONAFFILIATES AS OF MARCH 10, 2000: $224,074,904 NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF MARCH 10, 2000: COMMON STOCK, WITHOUT PAR VALUE 27,992,203 SHARES DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT PART OF FORM 10-K - ------- ----------------- Proxy Statement for the 2000 Annual Meeting of Shareholders Part III PART I ITEM 1. BUSINESS Stewart & Stevenson Services, Inc. (together with its wholly-owned subsidiaries, the "Company" or "Stewart & Stevenson") was founded in Houston, Texas in 1902 and was incorporated under the laws of the State of Texas in 1947. Since its beginning, the Company has been primarily engaged in the custom fabrication of engine driven products. Stewart & Stevenson consists of four major business segments: the Power Products segment, the Tactical Vehicle Systems segment, the Petroleum Equipment segment, and the Airline Products segment. Effective as of January 31, 1998, the Company sold the net assets of its Gas Turbine Operations Division ("GTO") to the General Electric Company. Accordingly, the operating results of GTO have been segregated from continuing operations and reported as a separate line item on the Consolidated Statement of Earnings. The Company has restated its prior financial statements to present the operating results of GTO as a discontinued operation and reorganized the remaining businesses into the current business segments. 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 1999" commenced on February 1, 1999 and ended on January 31, 2000. Identifiable assets at the close of Fiscal 1999, 1998, and 1997, net sales and operating profit for such fiscal years for the Company's business segments, export sales, and sales to customers representing 10% or more of consolidated sales are presented in "Note 4: Segment Data". POWER PRODUCTS SEGMENT The Power Products segment sells and rents various industrial equipment; sells components, replacement parts, accessories and other materials supplied by independent manufacturers; and provides in-shop and on-site repair services for industrial equipment. Some of the equipment sold or rented by the Power Products segment is acquired by the Company from independent manufacturers pursuant to distribution agreements. The following table contains the name of each significant manufacturer with whom the Company presently maintains a distribution contract, a description of the products and territories covered, and the expiration date thereof.
EXPIRATION MANUFACTURER PRODUCTS TERRITORIES DATE Detroit Diesel Corporation Heavy Duty High Speed Texas, Colorado, Northern California, New Mexico, 2001 ("Detroit Diesel") Diesel Engines Wyoming, Nebraska, Louisiana, Mississippi, Alabama, Venezuela and Colombia Electro-Motive Division of Heavy Duty Medium Speed Texas, Colorado, New Mexico, Nebraska, Oklahoma, 2004 General Motors Corporation Diesel Engines Arkansas, Louisiana, Tennessee, Mississippi, Kansas, ("EMD") Alabama, Mexico, Central America, and most of South America Allison Transmission Division of On- and Off-Highway Texas, Colorado, Northern California, New Mexico, 2001 General Motors Corporation Automatic Transmissions, Wyoming, Nebraska, Louisiana, Mississippi, Alabama, ("Allison") Power Shift Transmissions Venezuela, and Columbia and Torque Converters Hyster Company Material Handling Texas * Equipment John Deere Industrial Equipment Company Construction, Utility Wyoming * and Forestry Equipment Thermo King Corporation Transport Refrigeration Southeast and South Texas, Southern Louisiana, and 2002 Equipment Northern California Waukesha Engine Division Natural Gas Industrial Colorado, Northern California, Montana, Oklahoma, 2001 of Dresser Industries, Inc. Engines Wyoming, New Mexico, Utah, Oregon, Hawaii, Kansas, Arizona, California, Washington, Nevada, Colombia, and China Kohler Company Spectrum Generator Sets Colorado, Southern Louisiana, New Mexico, Texas, * and Wyoming KHD - Deutz Corporation Diesel Engines Colorado, Wyoming, Arizona, New Mexico, Washington, * Alaska, Texas, Oklahoma, Kansas, Arkansas, Louisiana, Mississippi, and Western Tennessee
*No expiration date. Agreements may be terminated by written notice of termination Distribution agreements generally require the Company to purchase and stock products for resale to end users, original equipment manufacturers, or independent dealers within the franchised area of distribution. Such agreements may contain provisions restricting sales of products outside of the franchised territory and prohibiting the sale of competitive products within the franchised territory. The Power Products segment also sells custom generator sets, pump packages, marine propulsion systems, and other engine-driven equipment. Generator sets fabricated by the Company range in size from 25 kw to 12,700 kw. Pump packages, marine propulsion systems and other engine-driven packaged equipment fabricated by the Company range in size from 35 hp to 7,000 hp. Most generator sets and other engine-driven packaged equipment are based upon diesel, dual fuel, or natural gas fueled engines supplied by independent manufacturers with whom the Company has a distribution or packaging agreement. Such agreements do not usually restrict the sale of packaged equipment to a franchised territory, and the products fabricated by the Company are sold on a world-wide basis. The Company's major distribution agreements also require the Company to stock repair parts, components, and accessories for resale to end users, either directly by the Company or through a dealer network; and to provide after-market service support for distributed products within the franchised territory. The Company also offers in-shop and on-site repair services for related equipment manufactured by companies with whom it does not have a distribution agreement. Power Product segment operations are conducted at branch facilities located in major cities within the Company's franchised area of operations. New products manufactured by suppliers, repair parts, components, and accessories are marketed under the trademarks and trade names of the original manufacturer. Products fabricated by the Company and after-market service are marketed under the "Stewart & Stevenson" name and other trademarks, trade names, and service marks owned by the Company. The Company's principal distribution agreements are subject to early termination by the suppliers for a variety of causes, including a change in control or a change in the principal management of the Company. Although no assurance can be given that such distribution agreements will be renewed beyond their expiration dates, they have been renewed regularly. Any interruption in the supply of materials from the original manufacturers, or a termination of a distributor agreement, could have a material effect on the results of operations of the Power Products segment. Operations of the Power Products segment accounted for approximately 59%, 46% and 50%, respectively, of consolidated sales during Fiscal 1999, 1998 and 1997. TACTICAL VEHICLE SYSTEMS SEGMENT The Tactical Vehicle Systems segment assembles the Family of Medium Tactical Vehicles ("FMTV") under contracts with the U. S. Army. The initial FMTV contract was awarded in 1991 and called for the production of approximately 11,200 2 1/2-ton and 5-ton trucks in several configurations, including troop carriers, wreckers, cargo trucks, vans and dump trucks. Most of the production pursuant to the original FMTV contract was completed as of January 31, 1999. During October 1998, the Company received a second set of multi-year contracts from the U.S. Army that provide for continued production of the FMTV through Fiscal 2002, with a one year option held by the U.S. Army that could extend the contracts through Fiscal 2003. The second FMTV contracts incorporate an environmentally compliant engine, improved diagnostics system, anti-lock brakes and other improvements. Production of approximately 7,800 trucks and 1,500 trailers under the second contract began in the third quarter of Fiscal 1999. If all options are exercised, the second set of contracts will have a total value of $1.36 billion. On occasion, the Company may be required to fund certain expenditures related to the FMTV contracts in advance of government funding. The U.S. Army has directed the Company to make certain changes in drive train components of all vehicles produced under the first FMTV contracts. The Company commenced the installation of the directed changes during Fiscal 1999 and, subject to availability of vehicles, expects to complete the changes during the second quarter of Fiscal 2000. The financial responsibility for the cost of the drive train change, as well as claims filed by the Company for the costs of government caused delays and other government-directed changes under the first FMTV contract, has not been resolved. The Company also sells the FMTV to other government contractors as a platform for installation of other equipment which is then resold to the Armed Forces. Stewart & Stevenson believes that there will be opportunities to sell additional vehicles to the U.S. Army, other branches of the U.S. Armed Forces, and the armed forces of foreign countries. The FMTV contracts allow for such sales, and the Company's facility has the capacity to produce vehicles for those additional sales. The United States Government is the predominant customer of the Tactical Vehicle Systems segment, accounting for practically all of the sales of this segment. The FMTV contracts are subject to termination at the election of this customer. The loss of this customer would have a material adverse effect on the Company's consolidated future financial condition and results of operations. The FMTV incorporates engines, transmissions, axles, and a number of other components specified by the U.S. Army and available only from the source selected by them. Interruption of the supply of any of these components could have a material adverse affect on the results of operations of the Tactical Vehicles Systems segment. The Company believes that any delays arising from the unavailability of source-specified components would be fully compensated under the FMTV contracts. Operations of the Tactical Vehicle Systems segment accounted for approximately 17%, 38%, and 36%, respectively, of consolidated sales in Fiscal 1999, 1998, and 1997. PETROLEUM EQUIPMENT SEGMENT The Petroleum Equipment segment manufactures equipment for the oil and gas exploration, production, and well stimulation industries. Its products include marine riser systems, blow-out preventers and controls, high pressure valves, coil tubing systems, acidizing and fracturing systems, and compression molded rubber products. Many of its products are manufactured according to proprietary designs and are covered by appropriate process and apparatus patents. Other products may be manufactured according to the designs or specifications of its customers. The Petroleum Equipment segment purchases many of the components incorporated into its products from independent suppliers. Some of these components are manufactured according to designs and specifications owned by the Company and protected from disclosure by confidentiality arrangements. Other components are standard commercial or oilfield products and may be acquired under the distribution or packaging agreements as discussed under "Power Products Segment" above. The Company believes that the Petroleum Equipment segment is not dependent on a single supplier for any critical component. The Company sells oilfield equipment under the "Stewart & Stevenson" trade name and compression molded rubber products under the "Stewart & Stevenson Elastomer Products" trade name. The Petroleum Equipment segment's products are sold world-wide. Demand for oilfield equipment is substantially dependent on the price trends for crude oil. Operations of the Petroleum Equipment segment represented 9%, 10%, and 7%, respectively, of consolidated sales during Fiscal 1999, 1998, and 1997. AIRLINE PRODUCTS SEGMENT The Airline Products segment manufactures airline ground support equipment that includes aircraft tow tractors, gate pushback tractors, baggage tow tractors, beltloaders, air start units, air conditioning units and container loaders. This segment also manufactures mobile railcar movers. Many of its products are manufactured according to proprietary designs that are covered by appropriate process and aparatus patents. Other products may be manufactured according to the designs or specifications of its customers. Sales in the Airline Products segment grew dramatically in Fiscal 1999 as a direct result of the Company's acquisition of the assets and liabilities of Tug Manufacturing Corporation (Tug) in December 1998, as well as increased sales of previously existing products. The acquisition of Tug expanded the Company's product offerings in the airline ground support equipment business. The Airline Products segment purchases many of the components incorporated into its products from independent suppliers. The Company believes that this segment is not dependent on a single supplier for any critical component and sells the majority of its products to the airline industry, which has a global customer base. Airline products are sold under the "Stewart & Stevenson Tug" trade name. Mobile rail car movers are sold under the "Rail King" trademark. Demand for its products is dependant on the profitability of the airline industry. Operations of the Airline Products segment represented 12%, 3% and 3%, respectively, of consolidated sales in Fiscal 1999, 1998 and 1997. OTHER BUSINESS ACTIVITIES The Company is engaged in other business activities that are not included in any of its four major business segments. Other businesses include fabrication of gas compression equipment and operating gas compression equipment under maintenance or lease agreements. COMPETITION The Company encounters strong competition in all segments of its business. Competition involves pricing, quality, availability, range of products and services, and other factors. Some of the Company's competitors have greater financial resources than Stewart & Stevenson and manufacture some of the major components that the Company must buy from independent suppliers. The Company believes that its reputation for quality engineering and after-sales service, with single-source responsibility, are important to its market position. The Power Products segment competes with other manufacturers and their distributors in the sale of original equipment, with the manufacturers and distributors of non-original equipment parts for the sale of spare parts, and with independent repair shops for in-shop and on-site repair services. No single competitor competes against the Company's Power Products segment in all of its businesses, but certain competitors may have a dominant position in different product areas. Major competitors in the sale of packaged diesel and gas-fired reciprocating equipment include Caterpillar, Inc. and its distributors, and Waukesha Diesel Group and its distributors. The Tactical Vehicle Systems segment competes with domestic companies for incremental sales to the U.S. Armed Forces. Oshkosh and AM General have received government funding to qualify as a potential second source for the FMTV and may compete for incremental sales to the U.S. Army. Both domestic and foreign suppliers compete for the sale of vehicles to foreign governments. The Company's foreign competitors include Daimler-Benz, Steyr, and other companies that have greater international recognition as vehicle manufacturers. The Petroleum Equipment segment competes primarily with other manufacturers of similar equipment. Products are differentiated by protected technology, and no manufacturer has a dominant position in any product line. Major competitors include Cooper Cameron Corporation in blow-out preventers and valves, ABB Vetco, Inc. in riser systems, Caterpillar, Inc. and Halliburton Corporation in fracturing and acidizing equipment, and Tuboscope Corporation in coil tubing systems. The Airline Products segment competes primarily with other manufacturers of similar equipment. Major domestic competitors include FMC in pushback tow tractors and container loaders, Trilectron in air conditioners and air starts, NMC/Wollard in belt loaders and cargo tractors, and Tiger and Harlan in baggage tractors. International competitors include Schopf/Douglas in aircraft tow tractors, Charlott in electric baggage tractor/belt loaders, and Goldholfer in tow barless aircraft tow tractors. INTERNATIONAL OPERATIONS International operations are subject to the risks of international political and economic changes, such as changes in foreign governmental policies, currency exchange rates, and inflation. The Company maintains operations in various foreign jurisdictions, some of which may be considered politically or economically volatile. Where appropriate to avoid risk of loss of a material asset, the Company purchases insurance against political risks. International sales are also subject to changes in exchange rates, government policies, and inflation. Generally, the Company accepts payments only in United States Dollars and makes most sales to customers outside the United States against letters of credit drawn on established international banks, thereby limiting the Company's exposure to the effects of exchange rate fluctuations and customer credit risks. 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 relating to continuing operations at the close of Fiscal 1999 and Fiscal 1998 were as follows: Estimated percentage to be recognized in Unfilled orders at Fiscal 2000 1/31/00 1/31/99 ------------ -------- -------- (In millions) Tactical Vehicle Systems 31% $914.5 $ 991.7 Power Products 100 77.6 69.9 Airline Products 96 29.7 12.7 Petroleum Equipment 100 17.2 38.6 All Other 100 24.0 5.2 --------------- ---------------- $1,063.0 $1,118.1 ================ ================ Unfilled orders of the Tactical Vehicle Systems segment at January 31, 2000, consisted principally of the follow-on contract awarded in October 1998 by the United States Army Tank - Automotive and Armament Command (TACOM) to manufacture medium tactical vehicles. EMPLOYEES At January 31, 2000, the Company employed approximately 4,000 persons. The Company considers its employee relations to be satisfactory. ITEM 2. PROPERTIES. The Company maintains its corporate executive and administrative offices at 2707 North Loop West, Houston, Texas, which occupy about 65,000 square feet of space leased from a limited partnership in which the Company owns an 80% interest. Activities of the Power Products segment are coordinated from Houston, where the Company owns 320,000 square feet of space at three locations and leases 44,900 square feet in two locations devoted to equipment and parts sales and service. To service its distribution territory (See "Item 1. Business -- Power Products Segment"), Stewart & Stevenson maintains Company-operated facilities occupying 680,000 square feet of owned space and 659,000 square feet of leased space in 29 cities in Texas, Louisiana, Colorado, New Mexico, Wyoming, Utah, Kansas, Washington, Georgia, California, Mississippi, Arizona and Arkansas. The Company leases 38,000 square feet in Maracaibo, Venzuela and approximately 58,000 square feet in four separate locations in Columbia. The Tactical Vehicle Systems segment is located in a 500,000 square foot Company-owned facility near Houston, Texas. The Tactical Vehicle Systems segment also leases 105,000 square feet of warehousing facilities in Houston, Texas and leases 24,000 square feet in Sealy, Texas. The Petroleum Equipment segment is headquartered in Houston, where the Company owns approximately 300,000 square feet and leases an additional 12,000 square feet devoted to manufacturing, warehousing and administration. The Company also owns a high pressure valve manufacturing facility in Jennings, Louisiana (89,000 square feet) and has facilities in Scotland (18,000 square feet) and Abu Dhabi, U.A.E. (12,000 square feet). The Airline Products segment is headquartered in Kennesaw, Georgia where the company owns an 89,000 square foot facility. In addition, airline products and railcar movers are manufactured and assembled in a company owned facility in Houston, Texas. This 407,000 square foot facility is a shared central manufacturing location which also supports power generation and gas and air compression products. The Company also leases an additional 59,300 square feet of office, warehouse and shop space to support its marketing department, corporate records, and transportation department. The Company considers all property owned or leased by it to be well maintained, adequately insured and suitable for its purposes. ITEM 3. LEGAL PROCEEDINGS. During Fiscal 1998, the U.S. Customs Service detained a medium tactical vehicle that was being shipped by the Company for display in a European trade show. The Company has been advised that the U.S. Customs Service and the Department of Justice are investigating potential violations by the Company of laws relating to the export of controlled military vehicles, weapons mounting systems, and firearms. Such investigation could result in the filing of criminal, civil, or administrative sanctions against the Company and/or individual employees and could result in a suspension or debarment of the Company from receiving new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. The Company is also a defendant in a number of lawsuits relating to contractual, product liability, personal injury, and warranty matters normally incident to the Company's business. No individual case, or group of cases presenting substantially similar issues of law or fact, involve a claim for damages in excess of $5,000,000 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the NASDAQ Stock Market under the symbol: SSSS. There were 727 shareholders of record as of March 10, 2000. The following table sets forth the high and low sales prices relating to the Company's Common Stock and the dividends declared by the Company in each quarterly period within the last two fiscal years.
FISCAL Fiscal 1999 1998 -------------------------------------------------------- ----------------------------------------- High Low Dividend High Low Dividend ---- ---- ------- ---- ---- -------- First Quarter $ 10 1/2 $ 7 $0.085 26 3/16 $22 1/4 $0.085 Second Quarter 15 1/4 10 13/16 0.085 22 1/8 17 1/4 0.085 Third Quarter 14 3/16 11 1/4 0.085 17 1/4 9 3/4 0.085 Fourth Quarter 13 13/16 10 1/2 0.085 14 1/4 8 7/16 0.085
On December 14, 1999, the Board of Directors approved a dividend of $0.085 per share for shareholders of record on January 31, 2000, payable on February 11, 2000. The Board of Directors of the Company intends to consider the payment of dividends on a quarterly basis, commensurate with the Company's earnings and financial needs. ITEM 6. SELECTED FINANCIAL DATA. The Selected Financial Data set forth below should be read in conjunction with the accompanying Consolidated Financial Statements and notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company has restated its prior financial statements to present the operating results of the GTO as a discontinued operation. STEWART & STEVENSON SERVICES, INC. CONSOLIDATED FINANCIAL REVIEW
- ---------------------------------------------- ---------- ----------- ------------ ------------ ---------- FISCAL Fiscal Fiscal Fiscal Fiscal (IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995 - --------------------------------------------- ---------- ----------- ------------ ------------ ---------- Financial Data: Sales $ 911,702 $ 1,206,772 $ 1,115,034 $ 825,187 $ 702,324 Cost of sales 776,864 1,178,088 1,032,049 722,470 607,326 ---------- ----------- ------------ ------------ ---------- Gross profit 134,838 28,684 82,985 102,717 94,998 Period Expenses 111,633 90,395 105,175 96,066 62,106 Earnings (loss) from continuing operations before income taxes 23,205 (61,711) (22,190) 6,651 32,892 Gain on sale of investment, net of tax 2,746 - - - - Net earnings (loss) from continuing operations (1) 17,451 (39,005) (14,505) 4,768 20,698 Net earnings from discontinued operations - - 5,424 12,083 41,105 Gain (loss) on disposal of discontinued operations 6,879 (33,979) 61,344 - - Net earnings (loss) 24,330 (72,984) 52,263 16,851 61,803 Total assets 642,350 705,777 1,252,647 1,079,159 948,626 Short-Term Debt (including current portion of Long-Term Debt) 34,224 86,956 261,000 29,100 66,100 Long-Term Debt 78,281 83,530 147,166 319,700 210,800 Per Share Data: Earnings (loss) per share: Basic and Diluted Continuing operations $ 0.62 $ (1.34) $ (0.44) $ 0.14 $ 0.63 Discontinued operations - - 0.16 0.37 1.24 Gain (loss) on disposal of discontinued operations 0.25 (1.17) 1.85 - - $ 0.87 $ (2.51) $ 1.57 $ 0 .51 $ 1.87 Weighted average shares outstanding: Basic 27,989 29,006 33,184 33,068 33,035 Diluted 28,042 29,006 33,250 33,090 33,101 Cash dividends declared $ 0.34 $ 0.34 $ 0.34 $ 0.335 $ 0.31
(1) The net earnings (loss) from continuing operations for Fiscal 1999, 1998, 1997, and 1996 includes special items, (income) expense, net of tax, of $(3,948), $50,632, $29,696 and $13,000, respectively. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis, as well as the accompanying Consolidated Financial Statements and related footnotes, will aid in understanding the Company's results of operations as well as its financial position, cash flows, indebtedness and other key financial information. The following discussion may contain forward-looking statements. In connection therewith, please see the cautionary statements contained herein, which identify important factors that could cause actual results to differ materially from those in the forward-looking statements. Business Segment Highlights - ------------------------------------------------------------------------------ (IN THOUSANDS) - ------------------------------------------------------------------------------ The following tables present the contribution to sales and operating profit from each of the Company's business segments. Business segment data for prior years have been restated to reflect the Company's current business segments that comprise earnings (loss) from continuing operations before taxes. Sales ---------------------------------------------- FISCAL Fiscal Fiscal 1999 1998 1997 ---------------------------------------------- Power Products $ 536,236 $ 555,507 $ 558,393 Tactical Vehicle Systems 150,884 455,399 396,734 Petroleum Equipment 82,085 115,800 83,096 Airline Products 104,785 32,603 35,975 Other Business Activities 37,712 47,463 40,836 --------------------------------------------- Total Segment Sales $ 911,702 $1,206,772 $1,115,034 ============================================= Operating Profit (Loss) ---------------------------------------------- FISCAL Fiscal Fiscal 1999 1998 1997 ---------------------------------------------- Power Products $ 15,244 $ 23,638 $ 34,120 Tactical Vehicle Systems 30,217 (77,717) (10,005) Petroleum Equipment 2,099 10,245 5,695 Airline Products (3,697) (630) (3,409) Other Business Activities (652) (4,476) (1,924) ----------------------------------------------- Total Operating Profit (Loss) 43,211 (48,940) 24,477 Corporate expenses, net (10,044) (11,452) (9,816) Non-operating interest income 29 10,925 1,941 Interest expense (9,991) (12,244) (15,440) Litigation and special charges - - (23,352) ----------------------------------------------- Earnings (loss) from continuing operations before taxes $ 23,205 $ (61,711) $ (22,190) ===================================================== Operating Profit (Loss) as a Percentage of Sales ---------------------------------------------- FISCAL Fiscal Fiscal 1999 1998 1997 ---------------------------------------------- Power Products 2.8% 4.3% 6.1% Tactical Vehicle Systems 20.0 (17.1) (2.5) Petroleum Equipment 2.6 8.8 6.9 Airline Products (3.5) (1.9) (9.5) Other Business Activities (1.7) (9.4) (4.7) Consolidated 4.7 (4.1) 2.2 SPECIAL ITEMS Special items are unusual or infrequent events or transactions that may affect comparability of the results of continuing operations between years. The special items included in the Fiscal 1999, 1998, and 1997 results are shown below:
SPECIAL ITEMS - -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FISCAL Fiscal Fiscal 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Tactical Vehicle Systems Estimated costs associated with a government directive $ - $40,000 $ - Charge related to a series of claims - 36,849 $ - Change in estimated profit at completion - 9,700 6,703 Power Products Gain on sale of construction equipment franchise - - (4,369) Other Business Activities Gain on sale of investments (5,443) - - Interest income on proceeds from sale of gas turbine business - (8,654) - Special Charges - - 23,352 ---------------- ----------------- -------------- Pretax (benefit) charge (5,443) 77,895 45,686 Tax (expense) benefit (35% tax rate assumed) (1) (1,495) 27,263 15,990 ---------------- ----------------- -------------- Special items, net of tax $ (3,948) $ 50,632 $ 29,696 ================ ================= ==============
(1) For Fiscal 1999, the actual tax for the gain on the sale of the investments was used. RESULTS OF OPERATIONS Fiscal 1999 vs. Fiscal 1998 Sales for Fiscal 1999 totaled $912 million, a decrease of 24% from Fiscal 1998 sales of $1,207 million. Net earnings from continuing operations for Fiscal 1999 totaled $17 million or $0.62 per share as compared to a net loss from continuing operations of $39 million or $1.34 per share for Fiscal 1998. Results for Fiscal 1999 included a $3 million after-tax gain on the sale of the Company's fifty percent interest in an unconsolidated affiliate and a $1 million after-tax gain on the sale of an investment. Excluding these special items, net earnings from continuing operations for Fiscal 1999 totaled $14 million or $0.50 per share. Results for Fiscal 1998 included $51 million after taxes in special charges pertaining to (1) a government directive to make certain changes to drive train components of the FMTV ($26 million), (2) claims for additional costs arising out of government caused delays and changes in the FMTV program ($24 million), (3) charges for cost overruns and superceded material in the FMTV program ($6 million) and (4) partially offsetting interest income on proceeds from sale of the gas turbine business ($5 million). Excluding these special items, net earnings from continuing operations for Fiscal 1998 totaled $12 million or $0.40 per share. The Company reported an operating profit of $43 million in Fiscal 1999 compared with an operating loss of $49 million in Fiscal 1998. The Power Products segment recorded sales of $536 million in Fiscal 1999, 3% lower than Fiscal 1998 sales of $556 million. Operating profit for Fiscal 1999 was $15 million, compared with $24 million in Fiscal 1998. The segment absorbed $1 million of charges in Fiscal 1999 in connection with corporate initiatives to improve business performance and $2 million in inventory charges. Performance in the Power Products segment continues to vary by market. Equipment and parts sales were adversely impacted by softness in oil and gas markets. The Tactical Vehicle Systems segment recorded sales of $151 million in Fiscal 1999 versus $455 million a year ago, primarily as a result of an anticipated production hiatus between contracts. Deliveries on the initial contract were completed in January 1999, and production start-up on the new contract began during the third quarter of Fiscal 1999. An operating profit of $30 million was recorded in Fiscal 1999 as compared to an operating loss of $78 million for the prior year that included $87 million in special charges. Improved operating margins resulted from an effective cost reduction program and a higher initial sales price per truck sold to compensate for costs incurred during the production shut-down. Sales for the Petroleum Equipment segment totaled $82 million for Fiscal 1999, a decrease of 29% from $116 million recorded in the prior year. The segment reported an operating profit of $2 million for Fiscal 1999 as compared to an operating profit of $10 million in the prior year. The decrease in sales and operating profit resulted from a depleted order backlog in the depressed oil and gas markets. The Airline Products segment achieved sales of $105 million in Fiscal 1999, an increase of 221% over Fiscal 1998 sales of $33 million, reflecting both the full-year impact of the acquisition of the airline products business from Tug Manufacturing Corporation and improved sales of previously existing products. An operating loss of $4 million was recorded for Fiscal 1999, as compared to an operating loss of $1 million in the prior year. The operating loss for Fiscal 1999 included charges of $5 million for new product development and inventory write-offs. All other business activities not defined as a specific segment include gas compression equipment and related services and other miscellaneous sales. Sales for these activities totaled $38 million for Fiscal 1999, as compared to Fiscal 1998 sales of $47 million. Operating losses of $1 million and $4 million were recorded for Fiscal 1999 and 1998, respectively, largely due to the establishment of inventory reserves and under-recovered costs associated with restructuring of pooled manufacturing facilities. FISCAL 1998 VS. FISCAL 1997 Sales for Fiscal 1998 totaled $1,207 million, an increase of 8% over Fiscal 1997 sales of $1,115 million. Net losses from continuing operations for Fiscal 1998 totaled $39 million or $1.34 per share as compared to net losses from continuing operations of $14 million or $0.44 per share for Fiscal 1997. Results for Fiscal 1998 included $51 million after taxes in special charges pertaining to (1) a government directive to make certain changes to drive train components of the FMTV ($26 million), (2) claims for additional costs arising out of government caused delays and changes in the FMTV program ($24 million), (3) charges for cost overruns and superceded material in the FMTV program ($6 million) and (4) partially offsetting interest income on proceeds from sale of the gas turbine business ($5 million). Fiscal year 1997 results from continuing operations included special charges totaling $30 million comprised of (1) higher costs to complete the initial FMTV contracts ($17 million), (2) settlement of a government claim ($9 million), (3) resolution of litigation arising from a 1987 contract to supply diesel generator sets ($7 million), and (4) gain on sale of the Company's John Deere franchise in Houston, Texas ($3 million). Excluding these special items, net earnings from continuing operations for Fiscal 1998 and 1997 totaled $12 million or $0.40 per share and $16 million or $0.48 per share, respectively. The Company reported a $49 million operating loss for Fiscal 1998 compared with a $24 million operating profit for Fiscal 1997. The Power Products segment recorded sales of $556 million during Fiscal 1998, virtually flat when compared with Fiscal 1997 sales of $558 million. Sales were affected by several factors. In particular, sales were higher as a result of recent business acquisitions, but such increase was offset by (1) lower equipment, parts, and services sales in branches supplying the petroleum industry (due primarily to depressed oil and gas prices) and (2) the sale of the Company's construction equipment business in Fiscal 1997. Operating profits in the Power Products segment for Fiscal 1998 totaled $24 million compared with $34 million for the prior year. Operating profits decreased as a result of weakness in the petroleum industry, increased reserves for exposures in accounts receivable and inventory from the decline in the financial condition of the petroleum industry, and increased costs arising out of recent business acquisitions. The Tactical Vehicle Systems segment recorded sales of $455 million in Fiscal 1998, an increase of $59 million (15%) over Fiscal 1997. An operating loss of $78 million was recorded for Fiscal 1998 and included: (1) a $40 million charge for estimated costs associated with a government directive to make certain changes in the drive train components of the FMTV; (2) a $37 million charge related to a series of claims for additional costs arising from government caused delays and changes; and (3) a $10 million charge to cost of sales relating to cost overruns and superseded materials on the original contract. The Tactical Vehicle Systems segment reported an operating loss of $10 million in Fiscal 1997. The Petroleum Equipment segment achieved sales and operating profits of $116 million and $10 million, respectively, for Fiscal 1998, which compared favorably with Fiscal 1997 sales of $83 million and profits of $6 million. This segment reported sustained quarter-to-quarter improvement during Fiscal 1998, largely on the strength of new product introductions such as marine riser systems. The Airline Products segment sales totaled $33 million for Fiscal 1998, a 9% decrease from sales of $36 million recorded for Fiscal 1997. Airline Products sales were impacted by the weak Asian market, with an offsetting increase from the acquisition of Tug Manufacturing Corporation in late December 1998. Operating losses for Fiscal 1998 and 1997 totaled $1 million and $3 million, respectively, and included product development costs in Fiscal 1998 and asset write-offs and product warranty charges in Fiscal 1997. Sales for other business activities totaled $47 million for Fiscal 1998, compared to $41 million for Fiscal 1997. Lower gas compression revenues were more than offset by higher miscellaneous sales. Both years were impacted by under-recovered costs associated with the restructuring of pooled manufacturing facilities. In addition, Fiscal 1998 included startup costs in the gas compression leasing and services business.
PERIOD EXPENSES NET PERIOD EXPENSES - ----------------------------------------------------- --------------------------- ---------------------- --------------------------- FISCAL Fiscal Fiscal (IN THOUSANDS) 1999 1998 1997 - ----------------------------------------------------- --------------------------- ---------------------- --------------------------- Selling and administrative expenses $ 109,038 $ 90,857 $ 75,619 Interest expense 9,991 12,244 15,440 Special charges - - 23,352 Gain on sale of construction equipment franchise - - (4,369) Other income, net (7,396) (12,706) (4,867) --------------------------- ---------------------- --------------------------- $ 111,633 $ 90,395 $ 105,175 =========================== ====================== =========================== Net period expenses as a percentage of sales 12.2% 7.5% 9.4%
Period expenses for Fiscal 1999 totaled $112 million or 12.2% of sales compared with $90 million or 7.5% of sales in Fiscal 1998 and $105 million or 9.4% of sales in Fiscal 1997. Increases in selling and administrative expenses during the last two years were largely due to business acquisitions and process and technology improvement initiatives. Interest expense decreased $2 million in Fiscal 1999 due to improved cash flow performance. The $3 million decrease in interest expense in 1998 resulted from a reduction in borrowings accomplished with funds received from sale of the GTO. Special charges in Fiscal 1997 totaled $23 million including $10 million in expenses arising from the Company's resolution of litigation relating to a 1987 contract to supply diesel generator sets, and $13 million associated with settling a claim by the Company for excessive costs incurred on a U.S. Government contract. On October 6, 1997, the Company sold its construction equipment franchise for $30 million and recognized a gain on the sale of $4 million. The construction equipment franchise 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. Other income, net, for Fiscal 1999 included a $1.9 million recovery of value added taxes and harbor taxes, and a $1.8 million gain on the sale of an investment. Other income, net, for Fiscal 1998 included approximately $9 million in interest income earned on proceeds from sale of GTO. CONTINUING/DISCONTINUED OPERATIONS NET EARNINGS (LOSS)
- ---------------------------------------------------------------------- ------------------------------------------------------- FISCAL Fiscal Fiscal (IN THOUSANDS) 1999 1998 1997 - ---------------------------------------------------------------------- ------------------------------------------------------- Continuing operations $ 17,451 $ (39,005) $ (14,505) Discontinued operations - - 5,424 Gain on disposal of discontinued operations 6,879 (33,979) 61,344 ----------------- --------------- ----------------- Net earnings (loss) $ 24,330 $(72,984) $ 52,263 ================ ================ ================
The net earnings from continuing operations for Fiscal 1999 was $17 million versus a loss of $39 million in Fiscal 1998 and a loss of $15 million in Fiscal 1997. All three years had special items which significantly impacted performance. See "Special Items." Excluding special items, net of tax, of $4 million income in Fiscal 1999, $51 million expense in Fiscal 1998, and $30 million expense in Fiscal 1997, net earnings from continuing operations for Fiscal 1999, 1998, and 1997 would have been $14 million, $12 million, and $15 million, respectively. The net loss from discontinued operations in Fiscal 1998 totaled $34.0 million and represented the equivalent of $1.17 per share. The Company recorded an after-tax charge, net of accruals, of $20 million relating to certain contractual purchase price adjustments associated with the sale of GTO to the General Electric Company ("GE") and $14 million for a probable liability associated with a debt guarantee related to the Company's investment in a power generation facility in Argentina. During the fourth quarter of Fiscal 1999, the Company disposed of the investment and related obligations, resulting in a $7 million gain net of tax. The guarantee arose as part of the Company's Gas Turbine Operations; accordingly, the gain has been reflected in results from discontinued operations. During Fiscal 1997, the Company completed the sale of the net assets of GTO to GE for $600 million, with subsequent downward adjustments of $84 million in Fiscal 1998. The Company used these funds to retire $260 million of debt, repurchase $120 million of its outstanding stock, and acquire four businesses at a cost of approximately $34 million. The total net earnings for Fiscal 1999 was $24 million or $0.87 per share versus a loss of $73 million or $2.51 per share in Fiscal 1998 and earnings of $52 million or $1.57 per share in 1997.
FINANCIAL CONDITION WORKING CAPITAL - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) January 31, 2000 January 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents $ 11,715 $ 12,959 Accounts and notes receivable, net 242,625 164,547 Recoverable costs and accrued profits not yet billed 8,151 99,097 Income tax receivable 26,255 38,027 Deferred tax asset 9,076 10,569 Inventories 190,947 215,202 ---------------------------------------------------- Total Current Assets $ 488,769 540,401 Current Liabilities Notes payable $ 25,269 $ 17,468 Accounts payable 90,163 83,127 Accrued payrolls and incentives 18,701 17,123 Income tax payable 3,257 2,931 Current portion of long-term debt 8,955 69,488 Other accrued liabilities 65,903 95,349 ---------------------------------------------------- Total Current Liabilities $ 212,248 $ 285,486 ---------------------------------------------------- Working Capital $ 276,521 $ 254,915 ================================================== Current Ratio 2.30:1 1.89:1
Current assets decreased from $540 million to $489 million, a reduction of $51 million or 9%. Accounts and notes receivable increased $78 million, and included $61 million in amounts billed to the U.S. government which were collected in February 2000 and $8 million in notes receivable associated with marine sales. Recoverable costs declined $91 million or 92%, primarily reflecting the liquidation of the original FMTV contract. Inventories decreased by $24 million or 11%, reflecting the benefit of an inventory reduction program, partially offset by inventory buildup associated with entering the gas compression business and the acquisition of a transition supply of discontinued 2-cycle diesel engines. Current liabilities were reduced $73 million at the end of Fiscal 1999 compared to Fiscal 1998 by the payment of $61 million in notes payable, a $29 million reduction in other accrued liabilities associated with expenditures to perform under a government directive, and the elimination of the Ave Fenix guarantee obligation retained in connection with the sale of GTO, and partially offsetting increases in accounts and notes payable. The Company's current ratio improved from 1.89 at the end of Fiscal 1998 to 2.30 at the end of Fiscal 1999.
LONG LIVED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) JANUARY 31, 2000 JANUARY 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Property, plant and equipment, net $ 99,844 $ 101,029 Revenue earning assets, net 29,690 27,716 Deferred income tax asset 166 7,904 Investments and other assets 23,881 28,727 ---------------------------------------------------- $ 153,581 $ 165,376 ====================================================
Long lived assets decreased by $12 million in Fiscal 1999. Property, plant and equipment includes acquisition costs, net of depreciation, for property, plant and equipment. Revenue earning assets, net, represents the undepreciated value of equipment used in gas compression, material handling, power generation and the air compression rental businesses. At the end of Fiscal 1998, the Company recorded deferred tax assets representing the future tax benefits of certain accrued long-term reserves, which were recovered in Fiscal 1999. The decline in investments and other assets during Fiscal 1999 was principally the result of a reduction in the long-term portion of notes receivable and the sale of certain investments.
CAPITAL STRUCTURE - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) JANUARY 31, 2000 JANUARY 31, 1999 Amount Percentage Amount Percentage - ----------------------------------------------------------------------------------------------------------- ------------------------ Long-Term Debt $ 78,281 18.2% $ 83,530 19.9% Other Long-Term Liabilities 16,742 3.9 16,398 3.9 Shareholders' Equity 335,079 77.9 320,363 76.2 -------------------------------- --------------------------------------- $ 430,102 100.0% $ 420,291 100.0% ================================ =======================================
The Company's capital structure consists primarily of shareholders' equity and long-term debt. The capital structure increased by $10 million during Fiscal 1999, primarily due to net earnings of $24 million (less dividends of $10 million), and a reduction of long-term debt. During Fiscal 1998, the Company repurchased 5,265,120 shares of its common stock which resulted in a reduction of shareholders' equity of $120 million. The Company's capital was further reduced in Fiscal 1998 by both the Company's net loss of $73 million and the reduction of current maturities of long-term debt totaling $69 million. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of cash liquidity included cash and cash equivalents, cash from operations, amounts available under credit facilities, and other external sources of funds. The Company believes that these sources are sufficient to fund the current requirements of working capital, capital expenditures, dividends, and other financial commitments. The Company has in place an unsecured revolving debt facility that could provide up to approximately $150 million, net of a $25 million letter of credit facility, of which approximately $62 million was available at January 31, 2000, due to certain limitations as a result of modifications made effective January 31, 1999. Based on current earnings projections, the Company expects full access to the $150 million facility during the last half of Fiscal 2000. For additional information, see "Note 9: Debt Arrangements." This revolving facility matures during Fiscal 2001. 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 other lawsuits or disputes, changes in inventory levels, accounts receivable, tax payments or other working capital items create a permanent need for working capital or capital expenditures in excess of the existing cash and cash equivalents and committed lines of credit, the Company may seek to borrow under other long-term financing sources or to curtail certain activities. The following table summarizes the Company's cash flows from operating, investing and financing activities as reflected in the Consolidated Statement of Cash Flows.
SUMMARIZED STATEMENT OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------------------------------- FISCAL Fiscal Fiscal (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by: Operating activities $ 88,274 $ 428,075 $ (11,916) Investing activities (22,020) (65,249) (14,236) Financing activities (67,498) (368,854) 36,033 ----------------------------------------------------------------------- $ (1,244) $ (6,028) $ 9,881 =======================================================================
Net Cash Provided By (Used In) Operating Activities - ----------------------------------------------------------------------------------------------------------------------------------- FISCAL Fiscal Fiscal (IN THOUSANDS) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) from continuing operations $ 17,451 $ (39,005) $ (14,505) Accrued postretirement benefits (271) (237) (1,835) Depreciation and amortization 22,298 19,636 22,447 Deferred income taxes, net (2,310) (10,760) (3,350) (Gain) loss on sale of business assets (5,804) 53 (4,369) Change in operating assets and liabilities, net 60,197 (57,612) 70,639 ----------------------------------------------------------------------- Net cash provided by (used in) continuing operations 91,561 (87,925) 69,027 Net cash (used in) provided by discontinued operations (3,287) 516,000 (80,943) ----------------------------------------------------------------------- Net cash provided by (used in) operating activities $ 88,274 $ 428,075 $ (11,916) =======================================================================
Net cash provided by continuing operations in Fiscal 1999 totaled $92 million and included a $60 million change in net operating assets and liabilities resulting primarily from the liquidation of the original FMTV contract and lower inventories. During Fiscal 1998 the Company's continuing operations consumed $88 million of funds, primarily caused by net losses from continuing operations, and a change in net operating assets and liabilities largely resulting from certain tax events, including the payment of income taxes associated with the sale of GTO and the accrual of certain reserves which under tax regulations were not deductible during Fiscal 1998. The cash consumed by discontinued operations in Fiscal 1997 reflects the net results of the GTO activities, whereas in Fiscal 1998 cash provided by discontinued operations represents the net collection of the proceeds from the sale of the GTO business. Usage in Fiscal 1999 was related to disposition of an investment and related obligations pertaining to a power generation plant in Argentina.
Net Cash Used In Investing Activities - ------------------------------------------------------------------------------------------------------------------------------------ FISCAL Fiscal Fiscal (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Expenditures for property, plant and equipment $ (38,573) $ (39,565) $ (31,778) Proceeds from sale of business assets 8,303 4,597 22,773 Acquisition of businesses (5,832) (33,659) (8,729) Disposal of property, plant and equipment 14,082 3,378 3,498 ---------------------------------------------------------------------- Net cash used in investing activities $ (22,020) $ (65,249) $ (14,236) ======================================================================
During Fiscal 1999, 1998, and 1997, the Company invested significant amounts into property, plant and equipment to expand its existing businesses. Fiscal 1999 expenditures included approximately $20.4 million in revenue earning assets and $18.2 million in normal plant and equipment. In addition, the Company sold approximately $16 million of revenue earning assets in Fiscal 1999 to third parties. Fiscal 1998 included expenditures of $13.1 million related to the acquisition and buildup of the Company's gas compression rental fleet. Proceeds from sale of business assets in Fiscal 1999 totaled $8 million and consisted of sale of investments in (1) GFI Control Systems, Inc., a gaseous fuel injection joint venture located in Ontario, Canada ($4 million); and (2) Syracuse Orange Partners, L.P., a cogeneration facility located in Syracuse, New York ($3 million); and (3) a facility in North Dakota ($1 million). Acquisitions of businesses in Fiscal 1999 consisted of the purchase of Thermo King of Northern California for approximately $6 million. Business acquisitions in Fiscal 1998 included the assets of Compression Specialties, Inc., a Wyoming based gas compression leasing and service company ($9 million), the stock of IPSC Co., Inc., the Deutz engine distributor for Louisiana, Mississippi, Arkansas, and Western Tennessee, ($4.2 million), the Deutz distributorship franchise for Texas, Oklahoma, and Kansas from Harley Equipment Company, H & H Rubber, Inc., a manufacturer of specialty rubber products, for ($4 million), and Tug Manufacturing Corporation, an airline ground support equipment manufacturer, for approximately $13 million in cash and $3 million in additional purchase price to be paid ratably over three years. During October 1998, the Company sold the net assets of Carson Cogeneration LLP (discussed below). During Fiscal 1997, the Company transferred a gas turbine valued at approximately $5 million from its discontinued operations inventory to the property, plant and equipment of the Company's other operations, to support its interests and obligations associated with a retained investment in a power plant in Argentina. In April 1997, the Company acquired ownership of Sierra Detroit Diesel Allison, Inc., a Detroit Diesel and Allison Transmission distributor for Northern California. In September 1997, the Company also acquired Carson Cogeneration LLP, an independent power producer in California. In October 1997, the Company sold its Houston construction equipment distributorship.
Net Cash (Used In) Provided By Financing Activities - ------------------------------------------------------------------------------------------------------------------------------------ FISCAL Fiscal Fiscal (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Additions to long-term borrowings $ 16,234 $ 25,000 $ 76,153 Payments on long-term borrowings (82,016) (242,780) (37,329) Net short-term borrowings (payments) 7,801 (22,714) 7,000 Dividends paid (9,517) (9,758) (11,286) Repurchase of common stock - (120,000) - Proceeds from exercise of stock options - 1,398 1,495 --------------------------------------------------------------------- Net cash (used in) provided by financing activities $ (67,498) $ (368,854) $ 36,033 =====================================================================
Effective as of January 31, 1999, the Company obtained certain modifications to its unsecured revolving line of credit, which among other things, adjusted its interest rate options and modified certain covenants dealing with debt levels, interest coverage, investments, and levels of retained earnings. Under this amendment, the most commonly used interest rate option increased by approximately 150 basis points. In addition to the revolving credit facility, the Company has $75 million in senior notes outstanding. The senior notes are unsecured and were issued pursuant to an agreement containing a covenant which imposes a debt to total capitalization requirement. Payment of cash dividends on common stock totaled $9.5 million and $9.8 million during Fiscal 1999 and 1998, respectively. There has been no change in the dividends per share during these years, and the decline in total dividends results from the Company's repurchase of 5,265,120 shares of its outstanding stock. Cash dividends represented 55%, 82% and 75% of net earnings from continuing operations before special items for Fiscal 1999, 1998 and 1997, respectively. The Company uses funds from operations, along with borrowings, to pay dividends. ACCOUNTING DEVELOPMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In February 1998, SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POST EMPLOYMENT BENEFITS was issued. In June, 1998, FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which was subsequently amended by FAS No. 137. In December, 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SFAS No. 130 requires disclosure of comprehensive income, which consists of all changes in equity from non-shareholder sources. SFAS No. 131 requires that segment reporting for public reporting purposes be conformed to the segment reporting used by management for internal purposes. SFAS No. 132 standardizes the disclosure requirements of Statements No. 87 and No. 106. The adoption of these statements did not impact the Company's consolidated financial position, results of operations or cash flows, but is limited to the form and content of the Company's disclosures. Since most of the information required under these statements is currently disclosed, their adoption does not materially change the Company's current disclosures. SFAS No. 133 establishes new accounting and disclosure standards for derivative instruments. SAB No. 101 provides detailed guidance on the recognition of revenue. However, the Company believes the future adoption of these statements will not have a material impact on its results of operations or financial position. FACTORS THAT MAY AFFECT FUTURE RESULTS FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this annual report contain forward-looking statements that are based on current expectations, estimates, and projections about the markets and industries in which the Company operates, management's beliefs, and assumptions made by management. These forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("future factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Future factors include risks associated with newly acquired businesses; increasing price and product/service competition by foreign and domestic competitors; rapid technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost effective basis; the mix of products/services; the achievement of lower costs and expenses; reliance on large customers; technological, implementation and cost/financial risks in use of large, multi-year contracts; the cyclical nature of the markets served; the outcome of pending and future litigation and governmental proceedings and continued availability of financing, financial instruments and financial resources in the amount, at the times and on the terms required to support the Company's business; the assessment of unanticipated taxes by foreign or domestic governmental authorities; and the risk of cancellation or adjustments of specific orders and termination of significant government programs. These are representative of the future factors that could affect the outcome of forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic and international conditions including interest rates, rates of inflation and currency exchange rate fluctuations and other future factors. BUSINESS OUTLOOK During Fiscal 1999 and 1998, both the Power Products segment and the Petroleum Equipment segment were adversely affected by depressed prices for oil and gas. The Company reacted by adopting programs to reduce costs associated with these business segments. These programs included disposition of several unprofitable branches, implementation of turnaround plans for under-performing branches, and better integration of recently acquired operations into the business segments. In addition, the Company took action to reduce working capital requirements by increasing inventory turnover and accelerating collection of accounts receivable. Performance measurements systems have been restructured to focus on these areas. The Company expects that these efforts will result in improved operating margins and return on assets in both segments. The recent increase in oil and gas prices is expected to provide opportunities for improved sales in Fiscal 2000. During Fiscal 1998, the U.S. Army directed the Company to make certain changes in the drive train components of all vehicles produced under the first FMTV contracts. The Company made a decision to refit all fielded vehicles and to fund the $40 million estimated cost to perform that work. The Company commenced the installation of the directed changes during Fiscal 1999 and, subject to availability of vehicles, expects to complete the changes during the second quarter of Fiscal 2000. The Company will submit Requests for Equitable Adjustments or claims under the FMTV contracts seeking compensation for the additional costs relating to this directive. In addition, the Company filed a certified claim with the U.S. Army for $48 million seeking recovery of additional costs incurred under the initial FMTV contracts as a result of other changes and delays caused or directed by the government. The U.S. Army denied the Company's claim, and the parties have agreed in principal to engage in non-binding arbitration. Management believes that the FMTV contracts provide a legal basis for the claims. However, due to the inherent uncertainties in the claims resolution process, the Company has expensed the cost relating to these matters. Since the costs associated with these claims have been expensed, any future recovery of these amounts will be treated as income in the period which these matters are resolved. In the first half of Fiscal 1999, the Company was in a production hiatus between the original FMTV contracts and the new FMTV contracts. During this period, the Company made several changes to the management and production processes intended to improve the performance of the Tactical Vehicle Systems segment. These changes included the reduction of both direct and indirect personnel, improvements in materials management, and reductions in cash flow cycle times. The Company was paid a higher sales price per truck on some trucks sold in Fiscal 1999 to compensate the Company for costs incurred during the production shut-down. Additionally, the Company commenced the installation of the directed changes to the drive train components during Fiscal 1999. The Company expects that the changes discussed above will have a positive impact on operating margins, cash flow, and return on assets in the Tactical Vehicles Systems segment. The acquisition of Tug Manufacturing Corporation in late 1998, coupled with increased sales of previously existing products resulted in a tripling of sales volume in Fiscal 1999 compared with Fiscal 1998. In addition, Fiscal 1999 operations were impacted by $5 million in charges for new product development expenditures. These actions, coupled with organizational restructuring, new product introductions, and increasing service revenues should position the business for profitable growth in the future. GOVERNMENT CONTRACTING FACTORS Major contracts for military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims, including claims for additional taxes, often extend over prolonged periods of time. The Company's ultimate profitability on such contracts will depend on the eventual outcome of an equitable settlement of contractual issues with the U.S. Government. Due to uncertainties inherent in the estimation and claim negotiation process, no assurances can be given that management's estimates will be accurate, and variances between such estimates and actual results could be material. During Fiscal 1998, the Company was awarded a new multi-year contract that will extend production of the FMTV into 2002 (or 2003 if the government exercises its option to purchase additional vehicles). The funding of the new FMTV contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the FMTV contract must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. As of January 31, 2000, funding in the amount of $342 million for the new FMTV contract had been authorized and appropriated by the U.S. Congress. If the new FMTV contract is terminated other than for default, the FMTV contracts provide for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. The Company's government contract operations are subject to U.S. Government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or debarred from government contracting. In this event, the Company would also be unable to sell equipment or services to customers that depend on loans or financial commitments from the Export Import Bank, Overseas Private Investment Corporation, and similar government agencies, or otherwise receive the benefits of federal assistance payments during a suspension or debarment. The Company entered an Administrative Agreement with the United States Air Force that imposes certain requirements on the Company intended to assure the U.S. Air Force that the Company is a responsible government contractor. Under this agreement, the Company has established and maintains an effective program to ensure compliance with applicable laws and the Administrative Agreement. The program provides employees with education and guidance regarding compliance and ethical issues, operates a means to report questionable practices on a confidential basis, and files periodic reports with the U.S. Air Force regarding the Company's business practices. A default by the Company of the requirements under the Administrative Agreement could result in the suspension or debarment of the Company from receiving any new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. Any such suspension could also prevent the Company from receiving future modifications to the FMTV contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Administrative Agreement expires pursuant to its term on March 19, 2001, but the Company intends to maintain compliance programs on a continuing basis. YEAR 2000 COMPLIANCE In the past, many computer software programs were written using two digits rather than four to define the applicable year. As a result, date-sensitive computer software may recognize a date using "00" as the year 1900 rather than the year 2000. If this situation occurs, the potential exists for computer system failures or miscalculations by computer programs, which could disrupt operations. This is generally referred to as the Year 2000 issue. The Company did not experience any year 2000 problems that, in the Company's opinion, materially and adversely affected its consolidated financial condition. The Company established a team to address the potential impacts of the year 2000 on each of its critical business functions. The team assessed the Company's critical date-sensitive technology, including its information systems, computer equipment and other systems used in its various operations, and the Company completed the process of modifying or replacing those systems to be year 2000 compliant. The final modification costs were approximately $2 million. The majority of those costs were attributable to the purchase of new computer equipment. Systems modification costs were expensed as incurred and costs associated with new equipment were capitalized and will be amortized over the life of the product. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Stewart & Stevenson's market risk results from volatility in interest rates and foreign currency exchange rates. This risk is monitored and managed. Stewart & Stevenson's exposure to interest rate risk relates primarily to its debt portfolio. To limit interest rate risk on borrowings, the Company targets a portfolio within certain parameters for fixed and floating rate loans taking into consideration the interest rate environment and the Company's forecasted cash flow. This policy limits exposure to rising interest rates and allows the Company to benefit during periods of falling interest rates. The Company's interest rate exposure is generally limited to its short-term uncommitted bank credit facilities and its unsecured revolving credit notes. See "Liquidity and Capital Resources." The table below provides information about the Company's market sensitive financial instruments and constitutes a forward-looking statement.
PRINCIPAL AMOUNT BY EXPECTED MATURITY (IN THOUSANDS) Fiscal Year Ending January 31, ---------------------------------------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 Thereafter ---------------------------------------------------------------------------------------------------------------- Fixed Rate Long-term Debt $ 8,705 $ 20,215 $ 254 $ 30,235 $ - $ 25,000 Average Interest Rate 9.06% 7.13% 16.90% 7.36% 7.38% Floating Rate Long-term Debt $ 250 $ 250 $ 727 $ 250 $ 250 $ 1,100
The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Generally, the Company's contracts provide for payment in U.S. Dollars and the Company does not maintain significant foreign currency cash balances. Foreign subsidiaries have in-country working capital loans, which limit the exposure to foreign currency exchange rate fluctuations. Certain suppliers, suppliers for the FMTV contract, bill in foreign currency. The Company may enter into forward contracts to hedge these specific commitments and anticipated transactions but not for speculative or trading purposes. The following table lists the foreign currency forward contracts outstanding at the close of Fiscal 1999.
Contract Amount by Expected Maturity (IN THOUSANDS) Fiscal Years Ending January 31 ------------------------- 2000 2001 ---- ---- Foreign contracts to Purchase Foreign Currencies for U.S. Dollars German Mark $ 1,397 $ 473 Average Contractual Exchange Rate 1.8817 1.8615 Austrian Schilling $ 3,131 $ 1,349 Average Contractual Exchange Rate 13.321 13.089
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ---------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors and Shareholders Stewart & Stevenson Services, Inc. We have audited the accompanying consolidated statements of financial position of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 2000 and 1999, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended January 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2000 are in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Houston, Texas March 22, 2000
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - ------------------------------------------------------------------------------------------------------------------------------------ FISCAL Fiscal (IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Current Assets Cash and cash equivalents $ 11,715 $ 12,959 Accounts and notes receivable, net 242,625 164,547 Recoverable costs and accrued profits not yet billed 8,151 99,097 Income tax receivable 26,255 38,027 Deferred tax asset 9,076 10,569 Inventories 190,947 215,202 ---------------------------------------------- Total Current Assets 488,769 540,401 Property, Plant and Equipment, net 129,534 128,745 Deferred Income Tax Asset 166 7,904 Investments and Other Assets 23,881 28,727 ---------------------------------------------- $ 642,350 $ 705,777 ============================================== Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 25,269 $ 17,468 Accounts payable 90,163 83,127 Accrued payrolls and incentives 18,701 17,123 Income tax 3,257 2,931 Current portion of long-term debt 8,955 69,488 Other accrued liabilities 65,903 95,349 ---------------------------------------------- Total Current Liabilities 212,248 285,486 Commitments and Contingencies (See Note 7) Long-Term Debt 78,281 83,530 Deferred Income Tax 958 43 Accrued Postretirement Benefits 12,748 13,019 Deferred Compensation 2,436 3,336 Other Long-Term Liabilities 600 - Shareholders' Equity Common Stock, without par value, 100,000,000 shares authorized at January 31, 2000 and 1999; 27,992,203 and 27,984,035 shares issued at January 31, 2000 and 1999, respectively 47,722 47,819 Retained earnings 287,357 272,544 ---------------------------------------------- Total Shareholders' Equity 335,079 320,363 ---------------------------------------------- $ 642,350 $ 705,777 ==============================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL 1999 Fiscal 1998 Fiscal 1997 ----------------------------------------------------------------------------------------------------------------------------------- Sales $ 911,702 $ 1,206,772 $ 1,115,034 Cost of sales 776,864 1,178,088 1,032,049 ---------------------------------------------------- Gross profit 134,838 28,684 82,985 ---------------------------------------------------- Selling and administrative expenses 109,038 90,857 75,619 Interest expense 9,991 12,244 15,440 Special charges, net - - 18,983 Other income, net (7,396) (12,706) (4,867) ---------------------------------------------------- 111,633 90,395 105,175 ---------------------------------------------------- Earnings (loss) from continuing operations before income taxes 23,205 (61,711) (22,190) Income tax expense (benefit) 8,642 (22,804) (8,075) ---------------------------------------------------- Earnings (loss) from continuing operations of consolidated companies 14,563 (38,907) (14,115) Equity in net earnings (loss) of unconsolidated affiliates 142 (98) (390) Gain on sale of investment, net of tax of $847 2,746 - - ---------------------------------------------------- Net earnings (loss) from continuing operations 17,451 (39,005) (14,505) Net earnings from discontinued operations, net of tax of $1,920 (See Note 2) - - 5,424 Gain (loss) on disposal of discontinued operations, net of tax of $4,112, $(21,985), and $35,297 (See Note 2) 6,879 (33,979) 61,344 ---------------------------------------------------- Net earnings (loss) $ 24,330 $ (72,984) $ 52,263 ==================================================== Weighted average shares outstanding Basic 27,989 29,006 33,184 Diluted 28,042 29,006 33,250 Earnings (loss) per share: Basic and Diluted Continuing operations $ 0.62 $ (1.34) $ (0.44) Discontinued operations - - 0.16 Gain (loss) on disposal of discontinued operations 0.25 (1.17) 1.85 ---------------------------------------------------- Net earnings (loss) per share $ 0.87 $ (2.51) $ 1.57 ====================================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Common Retained Treasury (IN THOUSANDS) Stock Earnings Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of Fiscal 1996 $ 164,959 $ 314,309 $ (33) $ 479,235 Net earnings - 52,263 - 52,263 Cash dividends - (11,286) - (11,286) Exercise of stock options 1,495 - - 1,495 --------------------------------------------------------------------------- Balance at end of Fiscal 1997 166,454 355,286 (33) 521,707 Net loss - (72,984) - (72,984) Cash dividends - (9,758) - (9,758) Issuance of common stock and exercise of stock options 1,398 - - 1,398 Repurchase and cancellation of shares (120,033) - 33 (120,000) --------------------------------------------------------------------------- Balance at end of Fiscal 1998 47,819 272,544 - 320,363 Net earnings - 24,330 - 24,330 Cash dividends - (9,517) - (9,517) Repurchase and cancellation of shares (97) - - (97) --------------------------------------------------------------------------- Balance at end of Fiscal 1999 $ 47,722 $ 287,357 $ - $ 335,079 ===========================================================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------------------------------- FISCAL Fiscal Fiscal (IN THOUSANDS) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings (loss) from continuing operations $ 17,451 $(39,005) $ (14,505) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Accrued postretirement benefits (271) (237) (1,835) Depreciation and amortization 22,298 19,636 22,447 Deferred income taxes, net (2,310) (10,760) (3,350) (Gain) loss on sale of business assets (5,804) 53 (4,369) Change in operating assets and liabilities net of the effect of acquisition, divestiture and discontinued operations: Accounts and notes receivable, net (76,192) 31,318 (13,699) Recoverable costs and accrued profits not yet billed 90,946 39,111 18,167 Inventories 24,839 (35,711) (17,596) Accounts payable 8,077 (14,465) (32,700) Current income taxes, net 20,442 (122,815) 23,043 Other current liabilities (13,805) 33,421 79,947 Other--principally long-term assets and liabilities 5,890 11,529 13,477 --------------- --------------- -------------- NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS 91,561 (87,925) 69,027 NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (3,287) 516,000 (80,943) --------------- --------------- --------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 88,274 428,075 (11,916) Investing Activities Expenditures for property, plant and equipment (38,573) (39,565) (31,778) Proceeds from sale of business assets (See Note 15) 8,303 4,597 22,773 Acquisition of businesses (See Note 15) (5,832) (33,659) (8,729) Disposal of property, plant and equipment 14,082 3,378 3,498 --------------- -------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (22,020) (65,249) (14,236) FINANCING ACTIVITIES Additions to long-term borrowings 16,234 25,000 76,153 Payments on long-term borrowings (82,016) (242,780) (37,329) Net short-term borrowings (payments) 7,801 (22,714) 7,000 Dividends paid (9,517) (9,758) (11,286) Repurchase of common stock - (120,000) - Exercise of stock options - 1,398 1,495 -------------- -------------- ------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (67,498) (368,854) 36,033 -------------- --------------- -------------- Increase (decrease) in cash and cash equivalents (1,244) (6,028) 9,881 Cash and cash equivalents, beginning of fiscal year 12,959 18,987 9,106 --------------- --------------- ------------- Cash and cash equivalents, end of fiscal year $ 11,715 $ 12,959 $ 18,987 =============== =============== ============ Non-Cash Activities: Transfer of inventory to fixed assets - Continuing operations $ - $ - $ 4,712 Transfer of inventory to fixed assets - Discontinued operations $ - $ - $ 4,015 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF PRINCIPAL ACCOUNTING POLICIES FISCAL YEAR: 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 1999" commenced on February 1, 1999 and ended on January 31, 2000. CONSOLIDATION: The consolidated financial statements include the accounts of Stewart & Stevenson Services, Inc. and all enterprises in which the company has a controlling interest. Investments in other partially-owned enterprises in which ownership ranges from more than 20 percent to 50 percent or less are generally accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated. STOCK-BASED COMPENSATION: The Company applies Accounting Principles Board Opinion (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations. Pro forma disclosure of the compensation expense determined under the fair-value provision of Statement of Financial Accounting Standard (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION has been provided. (See Note 11: Common Stock.) CASH EQUIVALENTS: Interest-bearing deposits and other investments with original maturities of three months or less are considered cash equivalents. INVENTORIES: Inventories are generally stated at the lower of cost (using LIFO) or market (determined on the basis of estimated realizable values), less related customer deposits. Inventory costs include material, labor and overhead. The carrying values of these inventories are not in excess of their fair values. CONTRACT REVENUES AND COSTS: Generally, revenue is recognized when a product is shipped or accepted by the customer, except for certain equipment products, where revenue is recognized using the percentage-of-completion method. The revenues of the Tactical Vehicle Systems segment are generally recognized under the units-of-production method, whereby sales and cost of the units produced under the Family of Medium Tactical Vehicle ("FMTV") contracts are recognized as units are substantially completed. Profits realized on contracts are based on the Company's estimates of revenue value and costs. Changes in estimates for revenues, costs, and profits are recognized in the period which they are determinable using the cumulative catch-up method of accounting. In certain cases, the estimated revenue values include amounts expected to be realized from contract adjustments when recovery of such amounts are probable. Any anticipated losses on contracts are charged in full to operations in the period in which they are determinable. DEPRECIABLE PROPERTY: The Company depreciates property, plant and equipment over their estimated useful lives, using both accelerated and straight-line methods. Expenditures for property, plant and equipment are capitalized and carried at cost. All long-lived assets are periodically reviewed to determine whether a change in circumstances indicates that the carrying amount of the asset may not be recoverable. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized. INTERNAL-USE SOFTWARE COSTS: Internal and external costs incurred to develop internal-use computer software are capitalized, except for certain costs such as training. The cost of business process reengineering activities and training are expensed as incurred. FOREIGN EXCHANGE CONTRACTS: The Company occasionally enters into forward exchange contracts only as a hedge against certain economic exposures and not for speculative or trading purposes. While the forward contracts affect the Company's results of operations, they do so only in connection with the underlying transactions. As a result, they do not subject the Company to risk from exchange rate movements, because gains and losses on these contracts offset losses and gains on the transactions being hedged. At the close of Fiscal 1999, the Company had $6.4 million in forward contracts to purchase foreign currencies. The counterparties to these contracts are major financial institutions, therefore the Company believes the risk of default is minimal. OTHER OFF-BALANCE SHEET RISKS: The Company has entered into certain contracts whereby it has guaranteed the repayment of a customer's debt to third party lenders. (See Note 7: Commitments and Contingencies.) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's financial instruments consist primarily of cash equivalents, trade receivables, trade payables and debt instruments. The recorded values of cash equivalents, trade receivables and trade payables are considered to be representative of their respective fair values. Generally, the Company's notes receivable and payable have interest rates which are tied to current market rates. The fair market value of the senior notes is $72.7 million at January 31, 2000, which are recorded at a book value of $75 million. The Company estimates that the recorded value of all other of its financial instruments approximates market values. WARRANTY COSTS: Expected warranty and performance guarantee costs are accrued as revenue is recorded, based on both historical experience and contract terms. EARNINGS PER SHARE: As of January 31, 1998 the Company adopted, SFAS No. 128 EARNINGS PER SHARE, 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 Fiscal 1999 and 1997, 53,000 and 66,000 stock options, respectively, were deemed to be dilutive. There were no stock options during Fiscal 1998 which were deemed to be dilutive. USE OF ESTIMATES AND ASSUMPTIONS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates have been made by management with respect to (1) future obligations associated with a government directive to change the FMTV truck configuration, (2) future obligations associated with guarantees, (3) the outcome of ongoing governmental investigations and outstanding litigation, (4) losses related to uncollectible receivables, and (5) inventory carrying values. Actual results could differ from those estimates making it reasonably possible that a change in these estimates could occur in the near term. RECLASSIFICATIONS: The accompanying consolidated financial statements for prior fiscal years contain certain reclassifications to conform with the presentation used in Fiscal 1999. The consolidated financial statements have been restated to reflect the Company's Gas Turbine Operations as a discontinued operation. NEW ACCOUNTING PRONOUNCEMENTS: In April, 1998 Statement of Position ("SOP") No. 98-5 REPORTING ON COSTS OF START UP ACTIVITIES was issued by the American Institute of Certified Public Accountants. The statement requires costs of start-up activities and organizational costs to be expensed as incurred. Initial application of the statement did not have a material cumulative effect on results of operations and financial position. In June 1997, SFAS No. 130, REPORTING COMPREHENSIVE INCOME was issued. SFAS No. 130 requires the presentation of comprehensive income in an entity's financial statements. Comprehensive income represents all changes in equity of an entity during the reporting period, including net income and charges directly to equity which are excluded from net income. This statement does not have any impact as the Company currently does not enter into transactions which result in material charges (or credits) directly to equity (such as additional minimum pension liability charges, currency translation adjustments or unrealized gains and losses on available-for-sale securities, etc.). Effective January 31, 1999, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement establishes new standards for segment reporting which are based on the way management organizes segments within a company for making operating decisions and assessing performance. In connection with the sale of the Gas Turbine Operations (GTO) and in response to these new standards, the Company reorganized its business segments. The Company's financial reporting segments consist of Power Products, Tactical Vehicle Systems, Petroleum Equipment, Airline Products and Other Business Activities. (See Note 4: Segment Data.) In June 1998, SFAS No. 132 - EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POST EMPLOYMENT BENEFITS was issued. This statement standardizes the disclosure requirements of SFAS No. 87 and No. 106, and the Company adopted the provisions of this statement for Fiscal 1998. (See Note 10: Employee Pension and Other Benefit Plans). In June 1998, FASB issued SFAS No. 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts and hedging activities. Adoption of SFAS No. 133 was initially required on or before February 1, 2000. However, in June, 1999, the FASB issued SFAS No. 137 which delayed the required implementation date of SFAS No. 133 to no later than February 1, 2001. The Company believes that the future adoption of SFAS No. 133 will not have a material effect on its results of operations or financial position. In December, 1999 the Securities and Exchange Commission staff released Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION. This bulletin provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The bulletin is not intended to change existing authoritative literature. However, in instances in which the guidance requires a change from one acceptable method of recognizing revenue to another method, this change would be effective for the Company's quarter ended July 31, 2000. The Company is currently evaluating the impact that this bulletin will have on the Company. NOTE 2: DISCONTINUED OPERATIONS During Fiscal 1997, the Company completed the sale of the net assets of GTO to General Electric Company ("GE") for $600 million, with a subsequent downward adjustment of $84 million in Fiscal 1998. GTO manufactured and serviced gas turbine driven equipment and associated spare parts, provided contract operation and maintenance services for power generation and petrochemical processing facilities, and engaged in the development and turnkey construction of power generation projects. The results of the GTO have been classified as discontinued operations in the accompanying financial statements. Net earnings from discontinued operations for the eight months ended September 30, 1997 (the pre-measurement period) includes interest expense of approximately $10 million, which was allocated based on the ratio of net assets to be discontinued to the sum of the total net assets of the consolidated entity. The gain on disposal of discontinued operations includes interest expense of approximately $4 million, allocated using the same method. In the third quarter of Fiscal 1998, the Company reached an agreement with GE regarding certain contractual adjustments to the purchase price and other matters related to the sale of GTO. The agreement required the Company to pay GE $84 million, resulting in an after tax charge, net of accruals, of $20 million to net loss from discontinued operations. In the fourth quarter of Fiscal 1998, it became probable that the Company would be required to perform under a debt guarantee related to the Company's investment in a power generation facility in Argentina. Accordingly, the Company recorded the probable liability of $14 million, net of tax. During the fourth quarter of Fiscal 1999, the Company disposed of this investment and related obligations resulting in a $7 million, net of tax gain. The guarantee arose as part of the Company's Gas Turbine Operations, accordingly, the gain has been reflected as a gain on disposal of discontinued operations. Summarized operating results of discontinued operations are as follows:
- ----------------------------------------------------------------------------------------------- (IN THOUSANDS) FISCAL 1999 Fiscal 1998 Fiscal 1997 - ----------------------------------------------------------------------------------------------- (Unaudited) Sales - - $404,172 Gross profit - - 35,643 Income tax expense - - 1,920 Net earnings from discontinued operations, net of tax - - 5,424 Gain (loss) on disposal of discontinued operations, net of tax $ 6,879 $(33,979) 61,344
NOTE 3: SPECIAL ITEMS AND EVENTS Included in Fiscal 1998 net earnings (loss) from continuing operations are the effects of three significant nonrecurring events including (1) a $36.8 million charge related to a series of claims under the FMTV program, (2) a $40 million charge for estimated costs associated with a government directive to make certain changes in the drive train components of the FMTV, (3) a $10 million charge for cost overruns and superseded materials on the original FMTV contracts and (4) $9 million of interest income earned on the proceeds from the sale of the GTO. On December 17, 1998, following an extensive period of negotiations with the U.S. Army seeking to amicably resolve certain requests for equitable adjustments for additional costs incurred by the Company due to delays and changes caused by the government during the initial truck contract, the Company filed a certified claim with the U.S. Army seeking recovery of the additional costs. Management believes that the FMTV contract provides a legal basis for the claim. However, due to the inherent uncertainties in the claims resolution process, the Company has fully reserved all recoveries relating to the claim. The Company will continue to pursue recovery of all amounts claimed. Any compensation received from the U.S. Army related to this matter will be recorded in the period in which the additional compensation is awarded. In the fourth quarter of Fiscal 1998, the Company made a decision to refit all fielded vehicles and fund the $40 million estimated cost to perform that work. The Company will submit a claim under the original FMTV contract, seeking compensation for those additional costs related to the directive. Any additional compensation received from the U.S. Army related to this matter will be recorded in the period in which the additional compensation is awarded. During Fiscal 1997 the Company incurred a $10 million charge relating to the resolution of litigation arising from a 1987 contract to supply diesel generator sets for installation at long range radar sites in Saudi Arabia. Also during Fiscal 1997 the Company recorded a special charge of $13.4 million relative to the settlement of a government claim and special gain of $4.4 million related to the sale of the Company's John Deere franchise in Houston, Texas. (See Note 15: Acquisitions and Divestitures.) NOTE 4: SEGMENT DATA The Power Products segment includes the marketing of diesel engines, automatic transmissions, material handling equipment, transport refrigeration units, and construction equipment and related parts and service. The Tactical Vehicle Systems segment includes the designing, manufacturing and marketing of tactical vehicles, primarily 2 1/2-ton and 5-ton trucks under contract with the United States Army. The Petroleum Equipment segment includes the design, manufacturing, and marketing of specialty equipment for the oilfield service market. The Airline Products segment includes the design, manufacturing and marketing of airline ground support equipment and railcar movers. Other business activities not included in a business segment for reporting purposes principally include fabrication of gas compression equipment and operating gas compression equipment under maintenance or lease agreements and financial services. Corporate assets, consisting primarily of cash and cash equivalents and investments, are included in "Other Business Activities". The high degree of integration of the Company's operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations. The Company markets its products and services throughout the world and is not dependent upon any single geographic region or single customer. Other than the U.S. Government, no single group or customer represents greater than 10% of consolidated sales in any of the last three fiscal years. Export sales, including sales to domestic customers for export, for Fiscal 1999, 1998 and 1997 were $93.5 million, $84.7 million, and $65.7 million, respectively. Export sales to any single geographic region in Fiscal 1999, 1998 and 1997 were not material to consolidated sales.
Financial information relating to industry segments is as follows: - --------------------------------------------------------------------------------------------------------------------------------- Operating Profit Identifiable Capital Depreciation (IN THOUSANDS) Sales (Loss) Assets Expenditures and Amortization - --------------------------------------------------------------------------------------------------------------------------------- FISCAL 1999 Power Products $ 536,236 $ 15,244 $ 323,501 $ 16,166 $ 13,641 Tactical Vehicle Systems 150,884 30,217 75,977 4,747 2,879 Petroleum Equipment 82,085 2,099 66,303 660 2,291 Airline Products 104,785 (3,697) 53,631 1,459 640 Other Business Activities 37,712 (652) 122,938 15,541 2,847 --------------- --------------- --------------- --------------- --------------- Total $ 911,702 $ 43,211 $ 642,350 $ 38,573 $ 22,298 =============== =============== =============== =============== =============== FISCAL 1998 Power Products $ 555,507 $ 23,638 $ 334,234 $ 17,409 $ 11,396 Tactical Vehicle Systems 455,399 (77,717) 113,721 1,434 3,120 Petroleum Equipment 115,800 10,245 96,874 4,771 2,634 Airline Products 32,603 (630) 25,479 114 37 Other Business Activities 47,463 (4,476) 135,469 15,837 2,449 --------------- --------------- --------------- --------------- --------------- Total $1,206,772 $ (48,940) $ 705,777 $ 39,565 $ 19,636 =============== =============== =============== =============== =============== FISCAL 1997 Power Products (1) $ 558,393 $ 34,120 $ 307,232 $ 17,308 $ 9,887 Tactical Vehicle Systems 396,734 (10,005) 179,260 1,509 8,312 Petroleum Equipment 83,096 5,695 60,214 7,358 1,428 Airline Products 35,975 (3,409) 18,925 - - Other Business Activities 40,836 (1,924) 87,016 5,603 2,820 Discontinued Operations - - 600,000 - - --------------- --------------- --------------- --------------- --------------- Total $1,115,034 $ 24,477 $1,252,647 $ 31,778 $ 22,447 =============== =============== =============== =============== ===============
(1) Operating profit of Power Products for Fiscal 1997 includes the $4,369 gain on the sale of a construction equipment franchise. A reconciliation of operating profit (loss) to earnings (loss) from continuing operations before income taxes is as follows:
- --------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FISCAL Fiscal Fiscal 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Operating profit (loss) $ 43,211 $ (48,940) $ 24,477 Corporate expenses, net (10,044) (11,452) (9,816) Non-operating interest income 29 10,925 1,941 Interest expense (9,991) (12,244) (15,440) Settlement of litigation and special charge - - (23,352) ------------ ------------ ----------- Earnings (loss) from continuing operations before income taxes $ 23,205 $ (61,711) $ (22,190) ============ ============ ============
NOTE 5: CONTRACTS IN PROCESS Amounts included in the financial statements which relate to recoverable costs and accrued profits not yet billed on contracts in process are classified as current assets. Billings on uncompleted contracts in excess of incurred cost and accrued profits are classified as current liabilities. Summarized below are the components of the amounts:
- ---------------------------------------------------------------------------------------------------------------------------------- FISCAL Fiscal (IN THOUSANDS) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Costs incurred on uncompleted contracts $ 83,059 $ 1,467,957 Accrued profits 2,290 8,655 ------------------- --------------- 85,349 1,476,612 Less: Customer progress payments (77,198) (1,377,739) -------------------- --------------- $ 8,151 $ 98,873 ==================== ============== Included in the statements of financial position: Recoverable costs and accrued profits not yet billed $ 8,807 $ 99,097 Billings on uncompleted contracts in excess of incurred costs and accrued profits (656) (224) -------------------- -------------- $ 8,151 $ 98,873 ==================== ==============
Recoverable costs and accrued profits related to the Tactical Vehicle Systems segment include direct costs of manufacturing and engineering and allocable overhead costs. Generally, overhead costs include general and administrative expenses in accordance with generally accepted accounting principles and are charged to cost of sales at the time revenue is recognized. Capitalized general and administrative costs remaining in recoverable costs and accrued profits not yet billed amounted to $4.1 million and $14.0 million at January 31, 2000 and 1999, respectively. The Company's total general and administrative expenses incurred, including amounts capitalized and charged to cost of sales under the FMTV contract, totaled $89.3 million, $105.9 million, and $88.2 million in Fiscal 1999, 1998 and 1997, respectively. The United States Government has a security interest in unbilled amounts associated with contracts that provide for performance based payments. In accordance with industry practice, recoverable costs and accrued profits not yet billed include amounts relating to programs and contracts with long production cycles, a portion of which is not expected to be realized within one year. NOTE 6: INVENTORIES Summarized below are the components of inventories, net of customer deposits: - ------------------------------------------------------------------------------- FISCAL Fiscal (IN THOUSANDS) 1999 1998 - ---------------------------------------------------------------------------- Power Products $ 150,844 $ 182,894 Petroleum Equipment 30,151 40,560 Airline Products 26,029 10,079 Other Business Activities 33,762 30,143 Excess of current cost over LIFO values (49,839) (48,474) -------------- -------------- Total Inventories $ 190,947 $ 215,202 ============== ============== The Company's inventory classifications correspond to its reportable segments. The Power Products segment's inventory consists primarily of industrial equipment, equipment under modification and parts held in the Company's distribution network for resale. As a custom packager of power systems to customer specifications, the Petroleum Equipment, Airline Products, and Other Business Activities segments' inventory consists primarily of work-in-process which includes purchased and manufactured components in various stages of assembly. NOTE 7: 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 $6.9 million at the close of Fiscal 1999. Also outstanding at the end of Fiscal 1999 was a $1.5 million letter of credit issued to support a foreign currency loan of an unconsolidated affiliate. The Company's government contract operations are subject to U.S. Government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or debarred from government contracting. In that event, the Company would also be unable to sell equipment or services to customers that depend on loans or financial commitments from the Export Import Bank, Overseas Private Investment Corporation, and similar government agencies during a suspension or debarment. The Company entered an Administrative Agreement with the United States Air Force that imposes certain requirements on the Company intended to assure the U.S. Air Force that the Company is a responsible government contractor. Under this agreement, the Company has established and maintains a program to ensure compliance with applicable laws and the Administrative Agreement. The program provides employees with education and guidance regarding compliance and ethical issues, operates a means to report questionable practices on a confidential basis, and files periodic reports with the U.S. Air Force regarding the Company's business practices. A default by the Company of the requirements under the Administrative Agreement could result in the suspension or debarment of the Company from receiving any new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. Any such suspension could also prevent the Company from receiving future modifications to the FMTV contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Administrative Agreement expires pursuant to its term on March 19, 2001, but the Company intends to maintain compliance programs on a continuing basis. During Fiscal 1998, the U.S. Customs Service detained a medium tactical vehicle that was being shipped by the Company for display in a European trade show. The Company has been advised that the U.S. Customs Service and the Department of Justice are investigating potential violations by the Company of laws relating to the export of controlled military vehicles, weapons mounting systems, and firearms. Such investigation could result in the filing of criminal, civil, or administrative sanctions against the Company and/or individual employees and could result in a suspension or debarment of the Company from receiving new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. It is presently impossible to determine the actual costs that may be incurred to resolve this matter or whether the resolution will have a material adverse effect on the Company's results of operations. 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 in excess of $5 million or are expected to have a material effect on the manner in which the Company conducts its business. Although management has established reserves that it believes to be adequate in each case, an unforeseen outcome in such cases could have a material adverse impact on the results of operations in the period it occurs. The Company has provided certain guarantees in support of its customers' financing of purchases from the Company in the form of both residual value guarantees and debt guarantees. The maximum exposure of the Company related to guarantees at January 31, 2000 is $6.8 million. The Company leases certain additional property and equipment under lease arrangements of varying terms whose annual rentals are less than 1% of consolidated sales. NOTE 8: GOVERNMENT CONTRACTS 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. Most of the production under the original FMTV contracts was completed as of January 31, 1999. Revenues and profits realized on the original FMTV contracts 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 original FMTV contracts 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 contracts. The Company filed a certified claim with the U.S. Army for $48 million seeking recovery of the additional costs incurred related to those government directed charges to the contract. In addition, the Company has been directed by the U.S. Army to make certain changes in the drive train components of all vehicles produced under the first FMTV contracts. The Company expects to complete the changes during the second quarter of Fiscal 2000. The Company will submit Requests for Equitable Adjustments or claims under the original FMTV contracts, seeking compensation for the additional costs that relate to government caused changes and delays amounts in excess of agreed upon contract price, and costs associated with the drive train upgrade. The U.S. Army denied the Company's claim, and the parties have agreed in principal to engage in non-binding arbitration or Management believes that the FMTV contracts provide a legal basis for the claims. It is not possible to estimate the amount, if any, that the Company will recover under such Requests for Equitable Adjustments or claims. The Company has expensed the costs associated with $48 million in claims relating to program delays and changes and has fully reserved $40 million related to drive train changes. Any future recovery of these amounts will be treated as income in the period which the matters are resolved. During Fiscal 1998, the Company was awarded a second set of multi-year contracts from the U.S. Army that provides for continued production of the FMTV through Fiscal 2002 with a one year option held by the U.S. Army that could extend the new contract through Fiscal 2003. The funding of the new FMTV contracts are subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the new 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. As of January 31, 2000, funding in the amount of $342 million for the new FMTV contracts had been authorized and appropriated by the U.S. Congress. If the new FMTV contracts are terminated other than for default, the FMTV contracts provides for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. NOTE 9: DEBT ARRANGEMENTS The Company has informal borrowing arrangements with banks which may be withdrawn at the banks' option. Borrowings under these credit arrangements are unsecured, are due within 90 days, and bear interest at varying bid and negotiated rates. On January 31, 2000 and 1999, the amounts outstanding under these arrangements were $12 million and $16 million, respectively, with a weighted average interest rate of 6.23% and 5.48% respectively. In addition, the Company's international subsidiaries had foreign currency bank loans totaling $1.3 million at January 31, 2000. The Company has entered into an agreement to acquire up to $17 million of diesel engines. This agreement allows for vendor supported financing with payments due upon certain events, not to exceed three years. The interest rate charged for 1999 was approximately 2.0%. The interest rate to be charged for 2000 and 2001 are 4.0% and 6.0%, respectively. At the end of Fiscal 1999, $12 million was outstanding under this facility. The Company has also entered into a facility to finance computer hardware and software totaling up to approximately $7 million. As of January 31, 2000, the amount outstanding under this facility was approximately $1 million. Long-Term Debt, which is generally unsecured, consists of the following:
- ----------------------------------------------------------------------------------------------------------------------------------- FISCAL Fiscal (IN THOUSANDS) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Debt of consolidated limited partnership: -note payable to a bank, principal due 2000 $ 8,491 $ 8,582 Senior Notes 6.72% principal due 1999 - 60,000 7.03% principal due 2001 20,000 20,000 7.29% principal due 2003 30,000 30,000 7.38% principal due 2006 25,000 25,000 Other 3,745 9,436 ------------------ ----------------- 87,236 153,018 Less current portion (See Note Below) (8,955) (69,488) ----------------- ----------------- Long-Term Debt $ 78,281 $ 83,530 ================= =================
At January 31, 2000, the Company had commitments of $150 million, limited by certain financial calculations, from banks under unsecured revolving credit notes which mature on December 20, 2001. There are no amounts outstanding under this credit facility at January 31, 2000 and 1999. Effective January 31, 1999, the Company obtained certain modifications to its revolving line of credit which, among other things, adjusted its interest rate options and modified certain covenants dealing with debt levels, interest coverage, investments and required tangible net worth. Under these modifications, the Company pays interest and a commitment fee at various options. The maximum interest rate is the prime rate and the commitment fee is 25 basis points per annum on the daily average unused balance. Pursuant to the amended covenants under the revolving credit facility, approximately $62 million would have been available for the Company's use as of January 31, 2000. Based on current earnings projections, the Company expects full access to the $150 million facility during the second half of Fiscal 2000. 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. 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. In December 1998, the Company entered into an agreement under which the Company has financed approximately $7 million of gas compression equipment. In June 1999, the Company entered into an agreement under which the Company sold and leased back, under an operating lease structure, $6.2 million of gas compression equipment. In October 1999, under the same arrangement, the Company sold and leased back an additional $4.5 million of gas compression equipment. As a result of the ownership of a majority interest in a partnership in which the Company is a limited partner, the Company's Consolidated Statements of Financial Position include the debt of this partnership, which owns the building where the Company's corporate office is located. Such debt is solely the obligation of the partnership, without recourse to the Company, and is secured by the office building and parking garage. Interest is payable in monthly installments at various rates, the maximum rate being 9%. The amounts of long-term debt which will become due during the next five years are as follows (in thousands): 2000 $ 8,955 2001 20,465 2002 981 2003 30,485 2004 250 Thereafter 26,100 ------------------- $ 87,236 =================== NOTE 10: EMPLOYEE PENSION AND OTHER BENEFIT PLANS The Company has a noncontributory defined benefit pension plan covering substantially all of its full-time employees. The pension benefits are based on years of service, limited to 45 years, and the employee's highest consecutive five-year average compensation out of the last 10 years of employment. The Company funds pension costs in conformity with the funding requirements of applicable government regulations. In addition, the Company has a postretirement medical plan which covers most of its employees and provides for the payment of medical costs of eligible employees and dependents upon retirement. The plan is currently not funded. The Company expects to continue paying postretirement medical costs as covered claims are incurred. The following table includes pension benefits information for the noncontributory defined benefit pension plan discussed above as well as the unfunded supplemental retirement plan and the unfunded defined benefit retirement plan for non-employee directors.
- ---------------------------------------------------------------------------------------------------------------------------- Pension Benefits Other Post Employment Benefits ----------------------- ------------------------------- (IN THOUSANDS) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 84,946 $ 74,468 $ 7,976 $ 7,058 Service cost 3,856 3,175 385 421 Interest cost 5,906 5,385 546 500 Amendments - - 713 - Participant contributions - - 196 180 Curtailment (gain) or loss - - - - Benefits paid (3,845) (5,970) (717) (632) Actuarial (gain) loss (5,061) 7,888 821 449 --------------- --------------- --------------- --------------- Benefit obligation at end of year $ 85,802 $ 84,946 $ 9,920 $ 7,976 =============== =============== =============== =============== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 76,722 $ 76,323 $ - $ - Actual return on plan assets 4,372 7,145 - - Employer contributions 267 205 521 452 Participant contributions - - 196 180 Benefits paid (3,845) (5,970) (717) (632) Administrative expenses (1,040) (981) - - --------------- --------------- --------------- --------------- Fair value of plan assets at end of year $ 76,476 $ 76,722 $ - $ - ================= ================ ================== ============= RECONCILIATION OF FUNDED STATUS Funded status $ (9,326) $ (8,224) $(9,920) $ (7,976) Unrecognized actuarial (gain) or loss 5,690 7,495 (1,829) (2,870) Unrecognized prior service cost 1,412 1,723 (999) (2,173) --------------- --------------- --------------- --------------- Net amount recognized at year-end $ (2,224) $ 994 $(12,748) $ (13,019) =============== =============== =============== =============== AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION Prepaid benefit cost $ 736 $ 3,666 $ - $ - Accrued benefit liability (3,758) (3,820) - - Intangible assets 752 1,110 - - Accumulated other comprehensive income 46 38 - - ----------------- --------------- ------------- -------------- Net amount recognized at year-end $ (2,224) $ 994 - - =============== =============== =============== =============== Other comprehensive income attributable to change in additional minimum liability $ 8 $ 18 $ - $ - obligation ADDITIONAL YEAR-END INFORMATION FOR PLANS WITH BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS: Benefit obligation $ 85,802 $ 84,946 $ 9,920 $ 7,976 Fair value of plan assets 76,476 76,722 - -
- -------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Pension Benefits Other Post Employment Benefits ---------------- ------------------------------ 1999 1998 1999 1998 ---- ------ ---- ----- - -------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL YEAR-END INFORMATION FOR PENSION PLANS WITH ACCUMULATED BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS. Projected benefit obligation $ 4,458 $ 5,419 $ - $ - Accumulated benefit obligation 3,758 3,820 - - COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 3,856 $ 3,175 $ 385 $ 421 Interest cost 5,906 5,385 546 500 Expected return on plan assets (6,876) (6,616) - - Amortization of prior service cost 311 311 (483) (483) Recognized actuarial (gain) loss 288 48 (220) (225) ----------- ----------- ----------- ---------- Net periodic benefit cost $ 3,485 $ 2,303 $ 228 $ 213 ============ ========== ========== =========== WEIGHTED-AVERAGE ASSUMPTIONS Discount rate 7.75% 6.75% 7.75% 6.75% Expected long-term rate of return on plan assets 9.50% 9.50% N/A N/A Rate of compensation increase 5.10% 4.75% N/A N/A
ASSUMED HEALTH CARE COST TREND For measurement purposes, an annual rate of increase of approximately 7.25% in the per capita cost of covered health care benefits was assumed for Fiscal 1999. The rate is assumed to gradually moderate to 5% through 2004 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
- -------------------------------------------------------------------------------------------------- --------------------------- ONE-PERCENTAGE- ONE-PERCENTAGE- (IN THOUSANDS) POINT INCREASE POINT DECREASE - -------------------------------------------------------------------------------------------------- --------------------------- Effect on total service and interest cost components for Fiscal 1999 $ 217 $ (208) Effect on fiscal 1999 postretirement benefit obligation 1,287 (1,218)
The sale of GTO resulted in a curtailment as defined by SFAS No. 88, EMPLOYER'S ACCOUNTING FOR SETTLEMENTS AND CURTAILMENTS OF DEFINED BENEFIT PENSION PLANS AND FOR TERMINATION BENEFITS. The impact of the curtailment was a net gain of $2.7 million which includes a decrease in the projected benefit obligation of $2.9 million as of January 31, 1998. The Company has retained all liabilities and obligations of the GTO plan participants up to the date of sale. Effective June 1997, the Company terminated its unfunded defined benefit retirement plan for non-employee directors which had provided for payments upon retirement, death, or disability. Retirement expense for this plan in Fiscal 1999, 1998 and 1997, respectively, was $31 thousand, $33 thousand, and $47 thousand. The Company has an unfunded supplemental retirement plan for certain corporate officers. Retirement expense for the plan in Fiscal 1999, 1998 and 1997 was $524 thousand, $535 thousand and $486 thousand, respectively. Prior service cost not yet recognized in periodic pension cost was $1.2 million, $1.3 million and $1.4 million, at January 31, 2000, 1999, and 1998, respectively. The Company has an employee savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating employees may contribute up to 15% of their pre-tax salary, but not more than statutory limits. The Company contributes twenty-five cents for each dollar contributed by a participant, subject to certain limitations. The matching percentages were changed as of January 1, 1999 and now provide a matching payment equal to each dollar contributed by employees up to 1% of their annual income and twenty-five cents for each dollar contributed in excess of 1%, subject to certain limitations. The Company's matching contribution to the savings plan for continuing operations was $2.3 million, $986 thousand and $817 thousand in Fiscal 1999, 1998 and 1997, respectively. Under a nonqualified deferred compensation plan for certain employees, a portion of eligible employees' discretionary income can be deferred at the election of the employee. These deferred funds accrue interest payable to the employee at the prime rate in effect on specified dates. NOTE 11: COMMON STOCK SHAREHOLDER RIGHTS PLAN: The Company has a shareholders rights plan. The rights may be exercised by their holders to purchase one-third (1/3) of a share at $30.00 for each share owned by a shareholder upon the acquisition, or announcement of intended acquisition, of 15% or more of the Company's stock by a person or group. The rights are subject to antidilution adjustments and will expire on March 20, 2005, unless the plan is further extended or the rights are earlier redeemed. STOCK ISSUANCE: During Fiscal 1999 and 1998, the Company also issued under the 1996 Director Stock Plan 8,168 and 4,504 shares, respectively, to certain directors of the Company for services rendered. During Fiscal 1998, the Company issued 33,783 shares of common stock to acquire an additional interest in its Venezuela affiliate from a minority shareholder. STOCK REPURCHASE: During Fiscal 1998, the Company repurchased and cancelled 5,265,120 shares of its outstanding stock for $120 million. STOCK OPTION PLANS: The Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan, the Stewart & Stevenson Services, Inc. 1993 Nonofficer Stock Option Plan, the 1994 Director Stock Option Plan and the 1996 Director Stock Plan authorize the grant of options to purchase an aggregate of up to 3,300,000, 984,950, 150,000 and 150,000 shares of Common Stock, respectively, at not less than fair market value at the date of grant. The options have a term not exceeding ten years and vest over periods not exceeding four years. Under the amended terms of the 1988 Nonstatutory Stock Option Plan, the number of options available for grant increased from 1,800,000 to 3,300,000 shares as of June 10, 1997. Pursuant to an amendment adopted in Fiscal 1996, no future grants of options may be made pursuant to the 1994 Director Stock Option Plan. A summary of the status of the Company's stock option plans during Fiscal 1999, 1998 and 1997 is presented in the tables below:
- ----------------------------------------------------------------------------------------------------------------------------- Option Price Shares under Range (IN THOUSANDS, EXCEPT PER SHARE DATA) Option Per Share - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at end of Fiscal 1996 1,135,000 $18.75 - $50.25 Granted 375,900 $20.00 - $28.125 Exercised (70,000) $18.75 Canceled (73,175) $18.75 - $50.25 ------------------- Outstanding at end of Fiscal 1997 1,367,725 $20.00 - $50.25 Granted 277,500 $21.3125 - $24.375 Exercised (17,000) $20.00 Canceled (85,250) $20.00 - $50.25 ------------------- Outstanding at end of Fiscal 1998 1,542,975 $20.00 - $50.25 Granted 445,750 $8.91 - $13.00 Canceled (406,675) $10.50 - $50.25 ------------------- Outstanding at end of Fiscal 1999 1,582,050 $8.91 - $50.25 =================== Options available for future grants at the end of Fiscal 1999 2,210,700 -------------------
During Fiscal 1997 the Company sold GTO. Those GTO employees holding stock options were granted a one year period, from the date of sale, in which to exercise vested options at the time of the sale. Effective February 2, 1999, 354,025 options held by employees of the Company's discontinued GTO were canceled. - ------------------------------------------------------------------------------- FISCAL 1999 Fiscal 1998 - ------------------------------------------------------------------------------- Options exercisable at end of year 756,863 775,100 Weighted average exercise price of options exercisable $30.63 $33.14 Weighted average fair value of options granted $2.64 $11.71
- --------------------------------------------------------------------------------------------------------------- Weighted Average Options Options Remaining Contractual Exercise Price Exercise Price Outstanding Exercisable Life (Years) - --------------------------------------------------------------------------------------------------------------- $8.91 - $13.00 $10.56 445,250 0 10 $20.00 - 28.125 $23.21 763,550 383,613 3 - 9 $32.625 - 35.125 $34.34 281,350 281,350 4 - 6 $50.25 $50.25 91,900 91,900 5 -------------- ----------- 1,582,050 756,863 ================= ============
The Company accounts for these plans under APB Opinion No. 25 under which no compensation cost has been recognized as all options have been granted at or above market value. Had compensation cost for these plans been determined based on their fair market value, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
- ----------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL 1999 Fiscal 1998 - ------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) As Reported $24,330 $(72,984) Pro Forma 22,684 (74,724) Net earnings (loss) per share As Reported $0.87 $ (2.51) Pro Forma $0.81 $ (2.58)
Because fair market value accounting is not required to be applied to options granted prior to February 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in Fiscal 1999 and 1998:
- -------------------------------------------------------------------------------------------------------------------------------- FISCAL 1999 Fiscal 1998 - -------------------------------------------------------------------------------------------------------------------------------- 1988 Nonstatutory Stock Option Plan and 1993 Nonofficer Stock Option Plan Risk free interest rates 5.76% 5.93% Expected dividend yields 4.07% 1.39% Expected volatility 38.36% 35.48% Expected life (years) 10 10 1994 Director Stock Option Plan Risk free interest rates - 6.79% Expected dividend yields - 1.30% Expected volatility - 35.24% Expected life (years) - 6 1996 Director Stock Plan Risk free interest rates 6.29% 5.93% Expected dividend yields 2.90% 1.60% Expected volatility 38.35% 35.71% Expected life (years) 10 10
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. NOTE 12: INCOME TAXES The components of the income tax provision (benefit) and the income tax payments are as follows:
----------------------------------------------------------------------------------------------------------------------------- FISCAL Fiscal Fiscal (IN THOUSANDS) 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------------------- Current $ 9,458 $ 84,335 $ 4,990 Deferred (816) (107,139) (13,065) ------------------ ------------------ ------------------ Income tax provision (benefit) $ 8,642 $ (22,804) $ (8,075) ================== ================== ================== Income tax payments (excluding refunds) $ 3,494 $ 100,153 $ 15,378 ================== ================== ==================
A reconciliation between the income tax provision (benefit) and income taxes computed by applying the statutory U.S. Federal income tax rate of 35% in Fiscal 1999, 1998 and 1997 is as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- FISCAL Fiscal Fiscal (IN THOUSANDS) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Provision (benefit) at statutory rates $ 8,122 $ (21,599) $ (7,767) Other 520 (1,205) (308) ----------------- ------------------ ------------------ $ 8,642 $ (22,804) $ (8,075) ================== ================== ==================
The deferred tax liability is determined under the liability method based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted statutory tax rates, and deferred tax expense is the result of changes in the net liability for deferred taxes. The tax effects of the significant temporary differences which comprise the deferred tax liability at the end of Fiscal 1999 and 1998 are as follows:
---------------------------------------------------------------------------------------------------- (IN THOUSANDS) FISCAL 1999 Fiscal 1998 ---------------------------------------------------------------------------------------------------- Deferred Tax Assets Postretirement benefit obligation $ 4,475 $ 4,830 Accrued expenses and other reserves 25,506 39,520 Property, plant and equipment - 937 Pension accounting 673 - Other 642 3,354 -------------------- ------------------- Gross deferred tax assets 31,296 48,641 -------------------- ------------------- Deferred Tax Liabilities Property, plant and equipment 140 - Pension accounting - 422 Contract accounting 13,271 20,737 Prepaid expenses and deferred charges 4,393 5,649 Other 5,208 3,403 -------------------- ------------------- Gross deferred tax liabilities 23,012 30,211 -------------------- ------------------- Net deferred tax (asset) liability $ (8,284) $ (18,430) ==================== ================== Current portion of deferred tax (asset) liability $ (9,076) $ (10,569) Non-current portion of deferred tax (asset) liability 792 (7,861) -------------------- ---------------- Net deferred tax (asset) liability $ (8,284) $ (18,430) ==================== ================= The Company believes it is more likely than not that the net deferred income tax asset as of January 31, 2000 in the amount of $8.3 million will be realized, based primarily upon sufficient taxable income available in carryback years as permitted by the tax law. NOTE 13: SUPPLEMENTAL FINANCIAL DATA Accounts and notes receivables, net consist of the following: - --------------------------------------------------------------------------------------------------------------------------------- FISCAL Fiscal (IN THOUSANDS) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Accounts receivable $ 237,353 $ 162,219 Notes receivable 10,233 13,509 Allowance for doubtful accounts (2,803) (3,999) Less non-current portion of notes receivable (2,158) (7,182) -------------- --------------- $ 242,625 $ 164,547 ============= =============== The U.S. Government accounted for approximately 34.6% and 15.7% of accounts receivable, at January 31, 2000 and 1999, respectively. Due to the large number of entities and diversity of the Company's customer base, concentration of credit risk with respect to trade receivables is limited. Components of property, plant and equipment, net are as follows: - ----------------------------------------------------------------------------- FISCAL Fiscal (IN THOUSANDS) 1999 1998 - ----------------------------------------------------------------------------- Machinery and equipment $ 137,934 $ 127,947 Buildings and leasehold improvements 94,916 93,868 Revenue earning assets 38,782 34,383 Accumulated depreciation and amortization (160,821) (142,913) ------------- ------------ 110,811 113,285 Construction-in-progress 3,350 105 Land 15,373 15,355 ------------- ------------ $ 129,534 $ 128,745 ============= ============
Other accrued liabilities consist of the following: - ----------------------------------------------------------------------------------------------------------------------------------- FISCAL Fiscal (IN THOUSANDS) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Estimated cost to perform under a government directive $ 16,299 $ 40,000 Estimated obligation to perform under a debt guarantee - 22,600 Warranty Costs 10,365 8,346 Other 39,239 24,403 ------------- ------------- $ 65,903 $ 95,349
NOTE 14: CONSOLIDATED QUARTERLY DATA (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ FISCAL 1999 - ------------------------------------------------------------------------------------------------------------------------------------ FOURTH THIRD SECOND FIRST (IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------------------------------------------------------------------------------------ Sales $287,435 $234,716 $200,640 $188,911 Gross profit 38,076 35,621 31,280 29,861 Net earnings from continuing operations 4,939 7,389 3,003 2,120 Gain on disposal of discontinued operations, net 6,879 - - - Net earnings per share: Basic and Diluted Continuing operations $ 0.17 $ 0.26 $ 0.11 $ 0.08 Gain on disposal of discontinued operations 0.25 - - - --------------------------------------------------------------------- Net earnings per share $ 0.42 $ 0.26 $ 0.11 $ 0.08 =====================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ Fiscal 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Fourth Third Second First (IN THOUSANDS, EXCEPT PER SHARE DATA) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Sales $257,102 $321,121 $323,539 $305,010 Gross profit (loss) (45,932) 11,842 31,740 31,034 Net earnings (loss) from continuing operations (49,690) (6,917) 8,437 9,165 Loss on disposal of discontinued operations, net (13,979) (20,000) - - Net earnings (loss) per share: Basic and Diluted Continuing operations $ (1.77) $ (0.25) $ 0.30 $ 0.29 Loss on disposal of discontinued operations (0.50) (0.71) - - --------------------------------------------------------------------- Net earnings (loss) per share $ (2.27) $ (0.96) $ 0.30 $ 0.29 =====================================================================
NOTE 15: ACQUISITIONS AND DIVESTITURES On April 12, 1997, the Company acquired Sierra Detroit Diesel Allison, Inc., a Detroit Diesel distributor whose franchise covers northern California. The purchase price totaled approximately $5.0 million. On September 12, 1997, the Company acquired ownership of Carson Cogeneration, LLP, a California independent power producer. The purchase price totaled approximately $3.7 million. The assets and operating results of the plant prior to the acquisition are not material to the Company's consolidated assets or earnings. In October 1998, the Company sold the assets of Carson Cogeneration, LLP for approximately $4.6 million realizing an approximate loss of $53,000. On October 6, 1997, the Company sold its construction equipment franchise in Houston, Texas for $30.2 million. The construction equipment franchise 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. A gain of $4.4 million was recognized on the sale. On March 30, 1998, the Company acquired the assets of Compression Specialties, Inc., a compression equipment distributor in the business of leasing and servicing compression equipment in the State of Wyoming and the surrounding Rocky Mountain area. The purchase price totaled approximately $9.5 million. The Company acquired H & H Rubber on June 1, 1998 for approximately $4 million. Based in Houston, Texas, H & H Rubber manufactures molded rubber products utilized in the production of petroleum equipment and sells after market products. On June 30, 1998 the Company acquired IPSC Co., Inc. based in Stuttgart, Arkansas for approximately $4.2 million. IPSC Co., Inc. is the exclusive Deutz engine distributor for Louisiana, Mississippi, Arkansas and Western Tennessee. IPSC Co., Inc. also manufactures its own line of pumping equipment and generator sets for agriculture, industrial and marine markets utilizing the Deutz engines. It complements the existing engine distributorships owned by the Power Products segment. On December 21, 1998 the Company acquired the assets and certain liabilities of Tug Manufacturing Corporation, a manufacturer of airline ground support equipment. The purchase price totaled approximately $13 million and an adjustment of $3 million to be paid ratably over three years. The Company has made other immaterial acquisitions during fiscal year 1998 which were included mainly in the Petroleum Equipment segment with a combined purchase price of approximately $2.9 million. On June 28, 1999, the Company sold its Waukesha engine business in Williston, North Dakota for approximately $1 million. This franchise operated in the north central United States and primarily distributed and provided services for products manufactured by Waukesha. In October 1999, the Company sold its interest in GFI Control Systems, Inc., a gaseous fuel injection joint venture located in Ontario, Canada for approximately $4 million. The Company also sold a cogeneration facility located in Syracuse, New York in December 1999 and recognized a gain of approximately $1.8 million. On December 4, 1999 the Company acquired certain assets and liabilities of Thermo King of Northern California. The purchase price totaled approximately $6.2 million. This acquisition complements the existing franchise agreements owned by the Power Products segment. The results of all businesses acquired in fiscal years 1999, 1998 and 1997 have been included in the consolidated financial statements from the date of acquisition. The assets and any operations of the businesses acquired are not material to the Company's consolidated assets or earnings. In allocating purchase price, the assets acquired and liabilities assumed have been initially assigned and recorded based upon preliminary estimates of fair value and may be reviewed as additional information becomes available. As a result, the financial information in the Company's consolidated financial statements is subject to adjustment prospectively as subsequent revisions in estimates of fair value, if any, are necessary. NOTE 16: VULNERABILITY DUE TO CERTAIN CONCENTRATIONS SOURCES OF SUPPLY: The Company's principal distribution agreements are subject to termination by the suppliers for a variety of causes. Although no assurance can be given that such distribution agreements will be renewed beyond their expiration dates, they have been renewed regularly. Any interruption in the supply of materials from the original manufacturers or a termination of a distributor agreement could have a material adverse effect on the results of operations of the Power Products segment. Additionally, the FMTV incorporates components specified by the U.S. Army which are produced by specified sources. Interruption of the supply of any of these components could have a material adverse effect on the results of the Tactical Vehicle Systems segment. CUSTOMERS: The U.S. Government is the predominant customer of the Tactical Vehicle Systems segment, accounting for practically all of the sales of this segment. The loss of this customer would have a material adverse effect on the Company's consolidated financial condition and results of operations. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III In accordance with General Instruction G(3) to Form 10-K, Items 10 through 13 have been omitted since the Company will file with the Commission a definitive proxy statement complying with Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year. Such information is incorporated herein by reference. CROSS REFERENCE Form 10-K Item Caption in Definitive Number and Caption Proxy Statement - ------------------ --------------------- Item 10. Directors and Executive Officers of the Registrant.......... Election of Directors; Executive Officers; Section 16(a) Beneficial Ownership Reporting Compliance Item 11. Executive Compensation.............. Election of Directors; Performance of Stewart & Stevenson Common Stock; Report of the Compensation and Management Development Committee; Executive Compensation Item 12. Security Owenrship of Certain Beneficial Owners and Management...................... Voting Securities and Ownership Thereof by Certain Beneficial Owners and Management Item 13. Certain Relationships Transactions with Management and and Related Transactions........... Business Relationships PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. The following financial statements for Stewart & Stevenson Services, Inc. are filed as a part of this report: Consolidated Statements of Financial Position--January 31, 2000 and 1999. Consolidated Statements of Earnings--Years ended January 31, 2000, 1999 and 1998. Consolidated Statements of Shareholders' Equity--Years ended January 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows--Years ended January 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements. 2. Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto. 3. The Company has several instruments which define the rights of holders of long-term debt. Except for the instruments listed as exhibits 4.1 and 4.2 below, the total amount of securities authorized under any individual instrument with respect to long-term debt does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish upon request by the Securities and Exchange Commission any instruments not filed herewith relating to its long-term debt. The Company will furnish to any shareholder of record as of April 21, 1999, a copy of any exhibit to this annual report upon receipt of a written request addressed to Mr. Lawrence E. Wilson, Vice President and Secretary, P. O. Box 1637, Houston, Texas 77251-1637 and the payment of $.20 per page with a minimum charge of $5.00 for reasonable expenses prior to furnishing such exhibits. The following exhibits are 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 (Exhibit 3(a) to 10/95 10-Q). *3.2 Fifth Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of April 14, 1998, as amended through April 13, 1999 (Exhibit 3.2 to 1/99 10-K). *4.1 Revolving Credit Agreement effective December 20, 1996, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association, as Agent, and the other Banks named therein (Exhibit 4.1 to 1/97 10-K). *4.2 Amendment to Loan Agreement effective August 25, 1997, between Stewart & Stevenson Services, Inc. and Texas Commerce Bank National Association, as Agent, and the other Banks named therein (Exhibit 4.2 to 1/99 10-K). *4.3 Agreement and Second Amendment to Loan Agreement effective January 31, 1998, between Stewart & Stevenson Services, Inc. and Chase Bank of Texas, National Association, as Agent, and the other Banks named therein (Exhibit 4.3 to 1/99 10-K). *4.4 Agreement and Third Amendment to Loan Agreement effective May 13, 1998, between Stewart & Stevenson Services, Inc. and Chase Bank of Texas, National Association, as Agent, and the other Banks named therein (Exhibit 4.4 to 1/99 10-K). *4.5 Agreement and Fourth Amendment to Loan Agreement effective October 31, 1998, between Stewart & Stevenson Services, Inc. and Chase Bank of Texas, National Association, as Agent, and the other Banks named therein (Exhibit 4.5 to 1/99 10-K). *4.6 Agreement and Fifth Amendment to Loan Agreement effective April 23, 1999, between Stewart & Stevenson Services, Inc. and Chase Bank of Texas, National Association, as Agent, and the other Banks named therein (Exhibit 4.6 to 1/99 10-K). *4.7 Note Purchase Agreement effective May 30, 1996, between Stewart & Stevenson Services, Inc. and the Purchasers named therein (Exhibit 4 to 7/96 10-Q). *4.8 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-Q). *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 of the 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 of the 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). *10.9 Contract Number DAAE07-98-C-M005 dated October 14, 1998 between Stewart & Stevenson Services, Inc. and the United States Department of Defense, U.S. Army Tank-Automotive and Armaments Command (Exhibit 10.9 to 10/98 10-Q). 21.1 List of Subsidiaries. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 27.1 Financial Data Schedule. * Incorporated by reference. (b) Form 8-K Report Date - November 30, 1999 (Third Quarter 1999 Results) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - December 2, 1999 (U.S. Army FMTV Production for Third Program Year) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - December 8, 1999 (Acquisition of Thermo King Dealership) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - December 15, 1999 (Dividend Announcement) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - January 20, 2000 (FMTV Service Contract) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - January 26, 2000 (FMTV Driveline Upgrade Program) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - January 31, 2000 (Generator Contract) Items reported - Item 5. Other Events Item 7. Exhibits SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 27th day of April, 2000. STEWART & STEVENSON SERVICES, INC. By/s/ Michael L. Grimes - ------------------------------------------- Michael L. Grimes President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 27th day of April, 2000. /s/ Michael L. Grimes /s/ Robert S. Sullivan - ---------------------------------- ----------------------------------- Michael L. Grimes Robert S. Sullivan President and Chief Executive Officer Director (Principal Executive Officer) /s/ John H. Doster /s/ Brian H. Rowe - ---------------------------------- ------------------------------------ John H. Doster Brian H. Rowe Senior Vice President and Director Chief Financial Officer (Principal Financial Officer) /s/ Patrick G. O'Rourke - ---------------------------------- ------------------------------------ Patrick G. O'Rourke William R. Lummis Controller and Chief Accounting Officer Director (Controller) /s/ C. Jim Stewart II /s/ Khleber V. Attwell - ---------------------------------- ------------------------------------ C. Jim Stewart II Khleber V. Attwell Director Director /s/ Donald E. Stevenson /s/ Darvin M. Winick - ---------------------------------- ------------------------------------ Donald E. Stevenson Darvin M. Winick Director Director /s/ J. Carsey Manning /s/ Howard Wolf - ----------------------------------- ------------------------------------ J. Carsey Manning Howard Wolf Director Director EXHIBIT INDEX Exhibit Number and Description - ------------------------------------------- 21.1 List of subsidiaries. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 27.1 Financial Data Schedule. EX-21.1 2 EXHIBIT 21.1 SUBSIDIARIES OF STEWART & STEVENSON SERVICES, INC. The following list sets forth the name of each subsidiary of the Company, which is also the name under which such subsidiary does business: Jurisdiction of Incorporation or Organization ---------------- AFE Acquisition, LLC Delaware C. Jim Stewart & Stevenson, Inc. Delaware CPS International, Inc. Panama Creole Stewart & Stevenson, Inc. Delaware IPSC Co., Inc. Arkansas PAMCO Services International, Inc. Delaware Sierra Detroit Diesel Allison, Inc. Nevada Stewart & Stevenson Capital Corporation Texas Stewart & Stevenson Development Services, Inc. Delaware Stewart & Stevenson International, Inc. Delaware Stewart & Stevenson International Sales, Inc. Barbados Stewart & Stevenson Operations, Inc. Delaware Stewart & Stevenson Overseas, Inc. Texas Stewart & Stevenson Petroleum Services, Inc. Delaware Stewart & Stevenson Power, Inc. Delaware Stewart & Stevenson Project Services, Inc. Delaware Stewart & Stevenson Realty Corporation Texas Stewart & Stevenson Technical Services, Inc. Delaware Stewart & Stevenson Transportation, Inc. Texas Stewart & Stevenson Tactical Vehicle Systems, LP Delaware Stewart & Stevenson Tug, LLC Delaware Stewart & Stevenson TVS, Inc. Delaware Stewart & Stevenson (U.K.) Limited Scotland Stewart & Stevenson Vehicle Services, Inc. Delaware TVS Holdings, Inc. Delaware EX-23.1 3 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in Registration Statement No. 33-21515 on Form S-8 dated April 28, 1988, Registration Statement No. 33-22463 on Form S-8 dated June 13, 1988, Registration Statement No. 33-65404 on Form S-8 dated July 1, 1993, Registration Statement No. 33-52881 on Form S-8 dated March 30, 1994, Registration Statement No. 33-52903 on Form S-8 dated March 30, 1994, Registration Statement No. 33-54389 on Form S-4 dated June 30, 1994, Registration Statement No. 33-58679 on Form S-8 dated April 18, 1995, Registration Statement No. 33-58685 on Form S-8 dated April 18, 1995, Registration Statement No. 333-02817 on Form S-8 dated April 25, 1996, Registration Statement No. 333-15271 on Form S-8 dated October 31, 1996, Registration Statement No. 333-26089 on Form S-8 dated April 29, 1997, Registration Statement No. 333-35617 dated September 15, 1997, Registration Statement No. 333-51567 on Form S-8 dated May 1, 1998 and Registration Statement No. 333-77799 on Form S-8 dated May 5, 1999 of our report dated March 22, 2000 included in Stewart & Stevenson Services, Inc.'s Form 10-K for the fiscal year ended January 31, 2000. /s/ Arthur Andersen LLP Houston, Texas April 28, 20000 EX-27.1 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-K AND IS QUALIFIED IN ITS ENTIRIETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS JAN-31-2000 JAN-31-2000 11,715 0 245,428 (2,803) 190,947 488,769 290,355 (160,821) 642,350 212,248 78,281 0 0 47,722 287,357 642,350 911,702 911,702 776,864 776,864 109,038 0 9,991 23,205 8,642 14,563 0 0 0 24330 0.62 0.62
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