-----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, EYiVdtVFVoD8DKYejFGgAgxgyhM0vwTEu48pNKPJPu+eAVKZUA45VM1lm3baJyPA qJkO19jR6Fgx/VZztoDZsQ== 0000094328-96-000019.txt : 19961216 0000094328-96-000019.hdr.sgml : 19961216 ACCESSION NUMBER: 0000094328-96-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19961213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART & STEVENSON SERVICES INC CENTRAL INDEX KEY: 0000094328 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 741051605 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11443 FILM NUMBER: 96680263 BUSINESS ADDRESS: STREET 1: 2707 N LOOP W CITY: HOUSTON STATE: TX ZIP: 77008 BUSINESS PHONE: 7138687700 MAIL ADDRESS: STREET 1: P O BOX 1637 CITY: HOUSTON STATE: TX ZIP: 77251-1637 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission file number 0-8493 STEWART & STEVENSON SERVICES, INC. (Exact name of registrant as specified in its charter) Texas 74-1051605 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2707 North Loop West, Houston, Texas 77008 (Address of principal executive offices) (Zip Code) (713) 868-7700 (Registrant's telephone number, including area code) not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, Without Par Value 33,064,088 Shares (Class) (Outstanding at October 31, 1996) PART I. FINANCIAL INFORMATION Item 1. Financial Statements. The following information required by Rule 10-01 of Regulation S-X is provided herein for Stewart & Stevenson Services, Inc. and Subsidiaries (the "Company"): Consolidated Condensed Statement of Financial Position -- October 31, 1996 and January 31, 1996. Consolidated Condensed Statement of Earnings -- Nine Months and Three Months Ended October 31, 1996 and 1995. Consolidated Condensed Statement of Cash Flows -- Nine Months Ended October 31, 1996 and 1995. Notes to Consolidated Condensed Financial Statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION (Dollars in thousands) October 31 January 31 1996 1996 ________________ ________________ (Unaudited) ASSETS CURRENT ASSETS Cash and equivalent $ 7,977 $ 6,325 Accounts and notes receivable, net 202,637 196,548 Recoverable costs and accrued profits not yet billed 295,213 317,855 Inventories: Engineered Power Systems 365,230 269,119 Distribution 153,697 145,179 Excess of current cost over LIFO values (56,930) (53,580) ________________ ________________ 461,997 360,718 Other 847 393 ________________ ________________ TOTAL CURRENT ASSETS 968,671 881,839 PROPERTY, PLANT AND EQUIPMENT 256,973 243,491 Allowances for depreciation and amortization (134,051) (116,436) ________________ ________________ 122,922 127,055 OTHER ASSETS 35,784 31,689 ________________ ________________ $1,127,377 $1,040,583 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 116,000 $ 65,000 Accounts payable 106,833 134,562 Billings on uncompleted contracts in excess of incurred costs 6,047 14,417 Current income taxes 57,422 68,650 Other current liabilities 47,930 47,451 ________________ ________________ TOTAL CURRENT LIABILITIES 334,232 330,080 COMMITMENTS AND CONTINGENCIES (SEE NOTE B) LONG-TERM DEBT 295,717 210,800 DEFERRED INCOME TAXES 6,243 6,794 ACCRUED POSTRETIREMENT BENEFITS 15,534 15,454 DEFERRED COMPENSATION 5,477 5,540 SHAREHOLDERS' EQUITY Common Stock, without par value, 100,000,000 shares authorized; 33,075,908 and 33,061,908 shares issued at October 31, 1996 and January 31, 1996, respectively, including 11,820 shares held in treasury 163,718 163,409 Retained earnings 306,489 308,539 ________________ ________________ 470,207 471,948 Less cost of treasury stock (33) (33) ________________ ________________ TOTAL SHAREHOLDERS' EQUITY 470,174 471,915 ________________ ________________ $1,127,377 $1,040,583 ================ ================ See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (In thousands, except per share data) Nine Months Ended Three Months Ended October 31 October 31 _________________________________ _________________________________ 1996 1995 1996 1995 _______________ _______________ _______________ _______________ (Unaudited) (Unaudited) Sales $ 797,100 $ 932,641 $ 336,834 $ 323,779 Cost of sales 677,788 786,193 294,136 275,822 _______________ _______________ _______________ _______________ Gross profit 119,312 146,448 42,698 47,957 Selling and administrative expenses 75,069 67,624 25,611 23,445 Interest expense 17,625 9,642 6,847 3,542 Settlement of litigation 20,000 0 0 0 Other income, net (2,820) (2,518) (856) (1,399) _______________ _______________ _______________ _______________ 109,874 74,748 31,602 25,588 _______________ _______________ _______________ _______________ Earnings before income taxes 9,438 71,700 11,096 22,369 Income taxes 3,144 24,021 3,793 7,458 _______________ _______________ _______________ _______________ Earnings of consolidated companies 6,294 47,679 7,303 14,911 Equity in net earnings (loss) of unconsolidated affiliates (79) 263 (114) 89 _______________ _______________ _______________ _______________ Net earnings $ 6,215 $ 47,942 $ 7,189 $ 15,000 =============== =============== =============== =============== Weighted average number of shares of Common Stock outstanding 33,062 33,030 33,064 33,045 =============== =============== =============== =============== Net earnings (loss) per share $ .19 $ 1.45 $ .22 $ .45 =============== =============== =============== =============== Cash dividends per share $ .25 $ .23 $ .085 $ .08 =============== =============== =============== =============== See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollars in thousands) Nine Months Ended October 31 _______________________________________ 1996 1995 ________________ ________________ (Unaudited) Operating Activities Net earnings $ 6,215 $ 47,942 Adjustments to reconcile net earnings to net cash used in operating activities: Accrued postretirement benefits 80 0 Depreciation and amortization 20,188 18,222 Deferred income taxes, net (551) (863) Change in operating assets and liabilities: Accounts and notes receivable, net ( 6,089) ( 5,174) Recoverable costs and accrued profits not yet billed 22,642 (75,563) Inventories (101,279) (31,885) Accounts payable (27,729) (19,937) Billings on uncompleted contracts in excess of incurred costs (8,370) (1,003) Current income taxes (11,228) 21,995 Other current liabilities 461 (1,092) Other--principally long-term assets and liabilities (4,876) (3,123) ________________ ________________ Net Cash Used In Operating Activities (110,536) (50,481) Investing Activities Expenditures for property, plant and equipment (17,181) (16,003) Disposal of property, plant and equipment 1,390 942 ________________ ________________ Net Cash Used In Investing Activities (15,791) (15,061) Financing Activities Additions to long-term borrowings 160,018 71 Payments on long-term borrowings (75,083) (67) Net borrowings and payments on short-term notes payable 51,000 73,000 Dividends paid (8,265) (7,600) Exercise of stock options 309 1,259 ________________ ________________ Net Cash Provided By Financing Activities 127,979 66,663 ________________ ________________ Increase in cash and equivalents 1,652 1,121 Cash and equivalents, February 1 6,325 3,987 ________________ ________________ Cash and equivalents, October 31 $ 7,977 $ 5,108 ================ ================ Supplemental disclosure of cash flow information: Net cash paid during the period for: Interest payments $ 13,139 $ 8,918 Income tax payments $ 13,945 $ 6,881 See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note A--Basis of Presentation and Significant Accounting Policies The accompanying consolidated condensed financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The results of operations for the nine months ended October 31, 1996 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 1997. The accounting policies followed by the Company in preparing interim consolidated financial statements are similar to those described in the "Notes to Consolidated Financial Statements" in the Company's January 31, 1996 Form 10-K. The Company's fiscal year begins on February 1 of the year indicated and ends on January 31 of the following year. For example, "Fiscal 1996" commenced on February 1, 1996 and ends on January 31, 1997. Net earnings (loss) per share of Common Stock are computed by dividing net earnings (loss) by the weighted average number of shares outstanding. Common Stock equivalents (outstanding options to purchase shares of Common Stock) are excluded from the computations as they are insignificant. The weighted average number of shares outstanding for the nine months ended October 31, 1996 includes 14,000 shares issued pursuant to exercise of stock options. Note B--Commitments and Contingencies On May 3, 1995, an indictment was returned by a federal Grand Jury in Houston, Texas, accusing the Company and four employees, including the Company's President, of one count of major fraud against the United States, four counts of false statements and one count of conspiracy to commit major fraud, make false statements and interfere with the administration of a foreign military sale. All of the counts arise from a 1987 subcontract to supply diesel generator sets for installation at long-range radar sites in Saudi Arabia (the "Peace Shield"). The indictment alleges that a former employee of the general contractor for the Peace Shield program, who later became a consultant to the Company, conspired with the Company and the other defendants to award the subcontract to the Company. The indictment also alleges that the government was defrauded out of approximately $5 million in connection with cost savings from a change order under the Peace Shield contract and that the Company made false statements relating to cost estimates in connection with such change order. The Company and each individual have denied all charges under the indictment and the case is pending in the United States District Court, Southern District of Texas, Houston Division. The Company is not able to make a reasonable estimate of the fines or penalties that could be imposed under the Federal Sentencing Guidelines in the event of a conviction under the indictment. Such fines and penalties could be substantial and adversely affect the Company's financial position and results of operations. If the Company or any of the individuals are convicted of any charges under the indictment, the Company could also be suspended or debarred from entering into new contracts or subcontracts with agencies of the U.S. Government or receiving the benefit of federal assistance payments for the duration of such suspension or debarment. Any such suspension could prevent the Company from receiving a modification to the Family of Medium Tactical Vehicle ("FMTV") contract that would fund additional vehicles or extend the delivery schedule of funded vehicles unless the Secretary of the Army finds a compelling need to enter into such modification. The Company would also be unable to sell equipment and services to customers that depend on loans or financial commitments from the Export Import Bank ("EXIM Bank"), Overseas Private Investment Corporation ("OPIC") and similar government agencies during a suspension or debarment. The Engineered Power Systems segment frequently sells equipment to customers that rely on financial commitments from EXIM Bank and/or OPIC. Any such suspension or debarment could have a material adverse impact on the Company's financial condition and results of operations. Also in connection with the Peace Shield contract, the Company has been advised that the former consultant of the Company referred to above filed a suit in the United States District Court, Southern District of Texas, Houston Division, for himself and the United States of America alleging that the Company supplied false information in violation of the False Claims Act (the "Act"), engaged in common law fraud and misapplied costs. Under the provisions of the Act, the suit has not been served upon the Company pending an investigation of the case by the U.S. Department of Justice and a determination as to whether the Department of Justice will intervene and pursue the matter on behalf of the United States. The suit alleges treble damages of $21 million plus unspecified penalties. Proceedings in this case have been stayed pending resolution of the criminal matter referred to above. The Company cannot predict the outcome of this action or the likelihood that substantial damages will result. However, the Company intends to vigorously defend this case if it is served upon the Company. On May 16, 1995, C. Daniel Chill filed a purported class action suit in the United States District Court, Southern District of Texas, Houston Division, against the Company and three of its officers and directors on behalf of himself and all persons that purchased shares of Common Stock between May 2, 1994 and May 3, 1995. An amended complaint was filed on June 7, 1995. The suit alleged that the Company violated various sections of and rules under the Securities Exchange Act of 1934 and common law by disseminating material false and misleading information, failing to disclose material information and failing to correct earlier statements that were no longer true, all relating to the Peace Shield investigation and indictment. On September 27, 1996, a final judgment settling this litigation on terms that were not material to the Company was approved by the court. The Company reserved all costs incurred in connection with the settlement of this case in the second quarter of Fiscal 1996. The Company is a defendant in a number of other lawsuits relating to contractual, product liability, personal injury and warranty matters and otherwise of the type normally incident to the Company's business. Management is of the opinion that such lawsuits will not result in any material liability to the Company. Except as set forth above, the Company has not established any reserves or accruals for any potential liability that may be subsequently found in any of the foregoing cases. Note C--Long-Term Debt On May 30, 1996 the Company completed a $135,000,000 private placement of long- term debt. The notes are unsecured and were issued pursuant to an agreement containing a covenant which imposes a maximum debt to total capitalization requirement. The notes will mature in three, five, seven and ten year increments with semi-annual interest payments at a weighted average coupon rate of 7.01%, and have a weighted average life of 5 1/2 years. The Company elected to reduce the $200,000,000 credit facility with commercial banks to $150,000,000 in connection with the private placement. Item #2 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains forward-looking statements which are based on assumptions such as timing, volume and pricing of customers' orders. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those outlined in the forward-looking statements, including the risk of cancellation or adjustment of specific orders, termination of significant government programs, decrease in demand in the markets served, or lower-than-anticipated penetration of markets served. This discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto, and with the Company's audited financial statements and notes thereto for the fiscal year ended January 31, 1996. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of sales represented by certain items reflected in the Company's Consolidated Condensed Statement of Earnings.
Nine Months Ended Three Months Ended October 31 October 31 __________________________________ __________________________________ 1996 1995 1996 1995 ________________ _______________ _______________ _______________ Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 85.0 84.3 87.3 85.2 ________________ _______________ _______________ _______________ Gross profit 15.0 15.7 12.7 14.8 Selling and administrative expenses 9.4 7.3 7.6 7.2 Interest expense 2.2 1.0 2.0 1.1 Settlement of litigation 2.5 0 0 0 Other income, net (.3) (.3) (.2) (.4) ________________ _______________ _______________ _______________ 13.8 8.0 9.4 7.9 ________________ _______________ _______________ _______________ Earnings (loss) before income taxes 1.2 7.7 3.3 6.9 Income taxes .4 2.6 1.1 2.3 ________________ _______________ _______________ _______________ Earnings (loss) of consolidated companies .8 5.1 2.2 4.6 Equity in net earnings of unconsolidated affiliates .0 .0 .0 .0 ________________ _______________ _______________ _______________ Net earnings (loss) .8% 5.1% 2.2% 4.6% ================ =============== =============== ===============
Sales for the first nine months of the year ending January 31, 1997 ("Fiscal 1996") decreased 15% to $797,100,000 compared to sales of $932,641,000 for the same period of the year ended January 31, 1996 ("Fiscal 1995"). The Distribution segment's Fiscal 1996 sales increased $55,278,000 (18%) in the first nine months and $13,753,000 (12%) in the third quarter compared to the comparable periods of Fiscal 1995. A strengthening oil and gas market served by the Company's Distribution territory contributed to these sales improvement, particularly among the Company's Detroit Diesel, EMD and Waukesha product lines. The Tactical Vehicle Systems (TVS) segment sales decreased $64,310,000 (39%) for the first nine months of Fiscal 1996 compared to the same period in Fiscal 1995. The decrease in TVS segment sales reflects the decrease in truck production under the "Family of Medium Tactical Vehicles" (FMTV) contract during the first six months of Fiscal 1996 due to the scheduled retrofit program of previously produced vehicles. See "Government Contract Status" below. The TVS segment sales increased $6,825,000 (10%) for the third quarter compared to the same period in Fiscal 1995, reflecting the Company's resumption of truck production during the current year's third quarter. The Engineered Power Systems (EPS) segment sales were the primary contributor to the Company's sales decline, decreasing $125,703,000 (27%) for the first nine months of Fiscal 1996 compared to the same period in Fiscal 1995. The sales decrease in the EPS segment is attributed to the gas turbine product line which produced $261,244,000 in sales during the first nine months of Fiscal 1996 compared to $393,936,000 for the same period in Fiscal 1995. Turbine-driven equipment sales decreased $156,902,000 (54%) compared to the first nine months of Fiscal 1995. This decrease was partially offset by the gas turbine product support group (consisting of the servicing of customers' equipment and the long-term contracting for the operation and maintenance of the customers' power plants) which contributed increased sales of $24,210,000 (23%) in the first nine months of Fiscal 1996 compared to the same period in Fiscal 1995. During the third quarter of Fiscal 1996 the EPS segment sales decreased $9,248,000 (7%) compared to the same period in Fiscal 1995 as discussed above. The gross profit margin of 15.0% for the first nine months of Fiscal 1996 was comparable to the 15.7% gross profit margin for the same period in Fiscal 1995. Gross profit margins for the third quarter of Fiscal 1996 were 12.7% compared to 14.8% for the third quarter of Fiscal 1995. This decrease in gross profit margin reflects the decrease in turbine-driven equipment sales as well as decrease in the gross profit margin on these sales. Selling and administrative expenses for the first nine months of Fiscal 1996 increased as a percentage of sales to 9.4% compared to 7.3% for the same period in Fiscal 1995, due to both the decrease in sales and the increase in incurred expenses. Selling and administrative expenses increased 11% during the current year which included a onetime charge of approximately $900,000 related to settling a lawsuit and substantial legal expenses related to the "Peace Shield" litigation. Exclusive of such legal expenses, selling and administrative expense grew about 8.2%, primarily in those business lines having sales growth. Interest expense for the first nine months of Fiscal 1996 increased to $17,625,000, up from $9,642,000 for the same period in Fiscal 1995. Interest expense for the third quarter increased to $6,847,000 up from $3,542,000 for the same period in Fiscal 1995. The Company began increasing debt during the fourth quarter of Fiscal 1995 to finance an increase by the EPS segment in inventory and an increase in recoverable costs and accrued profits not yet billed. On July 25, 1996, a jury in Houston, Texas returned a $43,000,000 verdict against the Company in a case filed by Serv-Tech, Inc. for breach of a secrecy agreement. The Company's liability in connection with this matter was limited pursuant to a pretrial agreement between the Company and Serv-Tech. The Company recognized a pre-tax charge against earnings of $20,000,000 ($13,000,000 or $.39 per share after taxes) relating to this case in the second quarter of Fiscal 1996. The judgment based on this verdict was paid by the Company in September 1996. Net earnings of $6,215,000 ($.19 per share) were recorded for the nine months ended October 31, 1996 as compared to earnings of $47,942,000 ($1.45 per share) for the nine months ended October 31, 1995. Net earnings for the nine months, excluding the litigation charge, would have been $19,215,000 or $.58 per share. GOVERNMENT CONTRACT STATUS The FMTV contract is a firm fixed-price multi-year contract whereby the price paid to the Company is not subject to adjustment to reflect the Company's actual costs, except costs incurred as a result of actions or inactions of the government. The Company has completed approximately 3,800 of approximately 11,000 trucks. Revenues and profits realized on the FMTV contract are based on the Company's estimates of total contract sales value and costs at completion. Stewart & Stevenson has incurred significant cost overruns and delivery schedule delays on the FMTV contract which the Company believes are primarily due to the government's decision to delay the testing of trucks and other government directed changes to the contract. The Company has and will continue to submit a series of Requests for Equitable Adjustments or claims, under the FMTV contract, seeking increases in the FMTV contract price for those additional costs that relate to government caused delays and changes. Amounts in excess of agreed upon contract price for government caused delays, disruptions, unpriced change orders and government caused additional contract costs are recognized in contract value when the Company believes it is probable that the claim for such amounts will result in additional contract revenue and the amount can be reasonably estimated. At October 31, 1996, the Company's FMTV contract accounting position reflects the expected recovery of substantial amounts in excess of the contract price for government caused delays, disruptions, unpriced change orders and other government caused additional contract costs. These claims are in varying stages of negotiations. Although management believes that the FMTV contract provides a legal basis for the claims and that its estimates are based on reasonable assumptions and on a reasonable analysis of the contract costs, the ultimate profitability of the FMTV contract will depend not only on the accuracy of the Company's cost projections but also on the outcome of these claims and other contractual issues. 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. If the Company is unable to recover a substantial portion of the additional costs, previously recognized earnings may be overstated and the Company may suffer a material adverse effect on its operations during the accounting period in which such FMTV contract issues are resolved. Furthermore, future earnings may be recognized at reduced rates. The funding of the FMTV contract is subject to the inherent uncertainties of congressional appropriations. As is typical of multi-year defense contracts, the FMTV contract must be funded annually by the Department of the Army and may be terminated at any time for the convenience of the government. The Company has received full funding for the production of approximately 8,538 vehicles through May 1997. Approximately 2,620 vehicles scheduled for production after that date have not been funded due to reductions in the U.S. Army's budget for acquisitions. The Company completed negotiations with the U.S. Army to modify the existing FMTV contract on October 11, 1996 providing for the production of 7,364 vehicles over a three year period ending December 1998. The Company has requested Government Fiscal Year 1997 funding and expects that funding to be provided upon completion of a contract modification formalizing the above negotiations. Government Fiscal Year 1998 funding will not be available until October 1, 1997. If the FMTV contract is terminated other than for default, the FMTV contract provides for termination charges that will reimburse the Company for allowable costs, but not necessarily all costs. EFFECT OF CERTAIN LITIGATION On May 3, 1995, the Company and four employees, including the Company's President, were indicted by a federal Grand Jury on six counts arising out of a 1987 subcontract to supply diesel generator sets for installation in Saudi Arabia. On May 12, 1995, the U.S. Air Force suspended the Company from contracting with any agency of the U.S. Government and from receiving the benefit of federal assistance programs. This suspension was temporarily terminated on November 8, 1995, pending the resolution of the charges covered by the indictment, pursuant to an Interim Administrative Agreement between the Company and the U.S. Air Force. The Interim Administrative Agreement does not have any effect on the indictment. The Interim Administrative Agreement requires the Company to maintain various internal procedures and policies intended to assure the U.S. Government that the Company is a responsible contractor. In the event that the Company or any of the indicted employees are convicted of the charges contained in the indictment, the U.S. Air Force may re-evaluate whether the Company should be suspended or debarred based on all of the facts and circumstances then known. An acquittal of all parties of the charges does not terminate the Interim Administrative Agreement and any failure by the Company to perform its obligations thereunder may also be grounds for suspension or debarment. If the Company is suspended or debarred, either because of a conviction pursuant to the indictment or as a result of a breach of the Interim Administrative Agreement, it would be ineligible to enter into new contracts or subcontracts with agencies of the U.S. Government or receive the benefit of federal assistance payments for the duration of such suspension or debarment. Any such suspension could prevent the Company from receiving a modification to the FMTV contract to fund additional vehicles or extend the delivery schedule of funded vehicles unless the Secretary of the Army finds a compelling need to enter into such modification. The Company would also be unable to sell equipment and services to customers that depend on loans or financial commitments from the Export Import Bank ("EXIM Bank"), Overseas Private Investment Corporation ("OPIC") and similar government agencies during a suspension or debarment. The Engineered Power Systems segment frequently sells equipment to customers that rely on financial commitments from EXIM Bank and/or OPIC. Any such suspension or debarment could have a material adverse impact on the Company's financial condition and results of operations. UNFILLED ORDERS The Company's unfilled orders consist of written purchase orders, letters of intent, and oral commitments. These unfilled orders are generally subject to cancellation or modification due to customer relationships or other conditions. Purchase options are not included in unfilled orders until exercised. Unfilled orders at October 31, 1996 and at the close of Fiscal 1995 were as follows:
_________________________________________________________________________________________________ October 31 January 31 1996 1996 _________________________________________________________________________________________________ (Dollars in millions) Engineered Power Systems Equipment $ 310.8 $ 208.9 Operations and Maintenance 344.7 321.8 ______________ ______________ $ 655.5 $ 530.7 Distribution 77.8 50.9 Tactical Vehicle Systems 919.0 862.7 ______________ ______________ Total $ 1,652.3 $ 1,444.3 ============== ==============
Although no assurance can be given, the Company expects sales of the Engineered Power Systems segment to continue to be weighted in favor of turbine-driven equipment based on the number of unfilled orders for these units, the number of proposals that are presently outstanding and the current worldwide need for additional electrical generating capacity. Unfilled orders of the Tactical Vehicle Systems segment consists principally of the contracts awarded in October 1991, by the United States Department of the Army, to manufacture medium tactical vehicles, and options under the FMTV contract that have been exercised by the U.S. Army to purchase additional vehicles for the National Guard. CAPITAL EXPENDITURES AND COMMITMENTS Capital spending for property, plant and equipment of $17,181,000 for the first nine months of Fiscal 1996 was comparable to $16,003,000 for the same period in Fiscal 1995. These amounts are consistent with the historical capital expenditure levels of the Company. LIQUIDITY AND SOURCES OF CAPITAL On May 30, 1996, the Company completed a private placement of $135,000,000 debt securities with an average maturity of 5 1/2 years. The notes are unsecured and were issued pursuant to an agreement containing a covenant which imposes a debt to total capitalization requirement. The notes will mature in three, five, seven and ten years increments with semi-annual interest payments at a weighted average life and coupon rate of 5 1/2 years and 7.01%, respectively. The proceeds from the sale of the notes were used to reduce other outstanding indebtedness of the Company in the amount of $129,000,000 and for general corporate purposes. Long-term borrowings at October 31, 1996 increased from the end of Fiscal 1995. Upon completion of the $135,000,000 private placement discussed above, the Company elected to reduce the fully utilized $200,000,000 credit facility with commercial banks to $150,000,000 which was fully utilized at October 31, 1996. The Company has additional banking relationships which provide uncommitted borrowing arrangements. These short-term borrowings increased to $116,000,000 at October 31, 1996 from $65,000,000 at the end of Fiscal 1995. The Company's borrowings, both short and long term, increased approximately $136,000,000 during the first nine months of Fiscal 1996. This significant increase in borrowings was used primarily to fund the working capital needs of the Company. Borrowings during the third quarter of Fiscal 1996 was affected by the payment of $20,000,000 to discharge the judgment in favor of Serv-Tech, Inc. See Results of Operations. With the increase in working capital requirements, the Company is considering options to convert a portion of its uncommitted credit arrangements to committed credit facilities. In the event that any acquisition of additional operations, growth in existing operations, changes in inventory levels, accounts receivable or other working capital items create a need for working capital or capital expenditures in excess of existing committed lines of credit, the Company may seek to convert additional uncommitted borrowing arrangements to committed credit facilities or to issue additional equity securities. Management believes that the Company's current credit facilities including the options under consideration, are adequate to meet its foreseeable cash requirements. PART II. OTHER INFORMATION Item 1. Legal Proceedings. See Note B to the Consolidated Condensed Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as a part of this report pursuant to Item 601 of Regulation S-K. 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the three months ended October 31, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STEWART & STEVENSON SERVICES, INC. Date: December 12, 1996 By: /s/ Robert L. Hargrave Robert L. Hargrave Chief Executive Officer Chief Financial Officer and Chief Accounting Officer Exhibit Number and Description 27 Financial data schedule EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-31-1997 OCT-31-1996 7,977 0 205,049 (2,412) 757,210 968,671 256,973 (134,051) 1,127,377 334,232 295,717 0 0 163,718 306,456 1,127,377 797,100 797,100 677,788 677,788 109,874 0 17,625 9,438 3,144 6,215 0 0 0 6,215 0.19 0.19
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