-----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, J8JsMpqtxnVqY0WBdEwzcwdLXg+wiVnG1QPj2TNE5AlMRAkkrHszTMTAUuGtAhN3 nus0wxKPmxCw+piGYdCxvQ== 0000094328-99-000013.txt : 19990616 0000094328-99-000013.hdr.sgml : 19990616 ACCESSION NUMBER: 0000094328-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990501 FILED AS OF DATE: 19990615 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART & STEVENSON SERVICES INC CENTRAL INDEX KEY: 0000094328 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 741051605 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11443 FILM NUMBER: 99646749 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 May 1, 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) (713) 868-7700 (Registrant's telephone number, including area code) not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, Without Par Value 27,984,035 Shares (Class) (Outstanding at May 10, 1999) 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 - May 1, 1999 and January 31, 1999. Consolidated Condensed Statement of Earnings -- Fiscal Quarter Ended May 1, 1999 and Three Months Ended April 30, 1998. Consolidated Condensed Statement of Cash Flows -- Fiscal Quarter Ended May 1, 1999 and Three Months Ended April 30, 1998. Notes to Consolidated Condensed Financial Statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION (Dollars in thousands) May 1, 1999 January 31, 1999 ----------- ------------------ (Unaudited) ASSETS CURRENT ASSETS Cash and equivalents $ 1,652 $ 12,959 Accounts and notes receivable, net 178,029 164,547 Recoverable costs and accrued profits not yet billed 69,088 99,097 Income tax receivable 48,002 48,596 Inventories: Power Products 189,119 182,894 Petroleum Equipment 35,586 40,560 Other Business Activities 45,881 40,222 Excess of current cost over LIFO values (48,570) (48,474) -------- -------- 222,016 215,202 -------- -------- TOTAL CURRENT ASSETS 518,787 540,401 PROPERTY, PLANT AND EQUIPMENT 275,950 271,658 Allowances for depreciation and amortization (146,792) (142,913) -------- -------- 129,158 128,745 DEFERRED INCOME TAX ASSETS 7,949 7,904 INVESTMENTS AND OTHER ASSETS 29,518 28,727 -------- -------- $685,412 $705,777 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 27,192 $ 17,468 Accounts payable 45,718 83,127 Accrued payrolls and incentives 9,279 17,123 Current income taxes 3,331 2,931 Current portion of long-term debt 70,220 69,488 Other current liabilities 94,520 95,349 -------- -------- TOTAL CURRENT LIABILITIES 250,260 285,486 -------- -------- COMMITMENTS AND CONTINGENCIES (SEE NOTE B) LONG-TERM DEBT 98,699 83,530 DEFERRED INCOME TAXES 51 43 ACCRUED POSTRETIREMENT BENEFITS 13,528 13,019 DEFERRED COMPENSATION 2,866 3,336 SHAREHOLDERS' EQUITY Common Stock, without par value, 100,000,000 shares authorized; 27,984,035, shares issued at May 1, 1999 and January 31, 1999 47,723 47,819 Retained earnings 272,285 272,544 -------- -------- TOTAL SHAREHOLDERS' EQUITY 320,008 320,363 -------- -------- $685,412 $705,777 ======== ======== See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (In thousands, except per share data) Fiscal Quarter Three Months Ended Ended May 1, 1999 April 30, 1998 ------------ -------------- (Unaudited) Sales $188,911 $305,010 Cost of sales 159,050 273,976 -------- -------- Gross profit 29,861 31,034 Selling and administrative expenses 25,491 18,731 Interest expense 3,451 3,150 Other income, net (2,195) (6,022) -------- -------- 26,747 15,859 -------- -------- Earnings before income taxes 3,114 15,175 Income tax provision 1,153 5,481 -------- -------- Earnings of consolidated companies 1,961 9,694 Equity in net earnings (loss) of unconsolidated affiliates 159 (529) -------- -------- Net earnings $2,120 $9,165 ======== ======== Weighted average number of shares of Common Stock outstanding - Basic 27,984 31,976 Diluted 27,984 32,035 Net earnings per share: Basic and Diluted $.08 $.29 ======== ======== Cash dividends per share $.085 $.085 ======== ======== See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollars in thousands) Fiscal Quarter Three Months Ended Ended May 1,1999 April 30, 1998 ------------ -------------- (Unaudited) Operating Activities Net earnings $ 2,120 $ 9,165 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Accrued postretirement benefits 509 5 Depreciation and amortization 5,203 4,193 Deferred income taxes, net (37) (2,899) Change in operating assets and liabilities net of the effect of acquisition: Accounts and notes receivable, net (13,482) (13,467) Recoverable costs and accrued profits not yet billed 30,009 3,833 Inventories (6,814) 1,723 Accounts payable (37,409) (9,357) Accrued payrolls and incentives (7,844) (6,591) Current income taxes 994 8,893 Other current liabilities (829) (907) Other-principally long-term assets and liabilities (819) (1,999) -------- -------- Net Cash Used In Operating Activities (28,399) (7,408) Investing Activities Collection of receivable from sale of Gas Turbine Operations -- 600,000 Expenditures for property, plant and (7,821) (8,107) equipment Acquisition of businesses -- (9,450) Disposal of property, plant and net equipment, net 1,667 406 -------- -------- Net Cash Provided By (Used In) Investing Activities (6,154) 582,849 Financing Activities Additions to long-term borrowings 16,234 483 Payments on long-term borrowings (333) (226,000) Net short-term borrowings (payments) 9,724 (34,507) Dividends paid (2,379) (2,683) Repurchase of common stock -- (57,060) Exercise of stock options -- 615 -------- -------- Net Cash Provided By (Used In) Financing Activities 23,246 (319,152) -------- -------- Increase (decrease) in cash and equivalents (11,307) 256,289 Cash and equivalents, February 1 12,959 18,987 -------- -------- Cash and equivalents, end of period $ 1,652 $275,276 ======== ======== Supplemental disclosure of cash flow information: Net cash paid during the period for: Interest payments $986 $258 Income tax payments $419 $88 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 quarter ended May 1, 1999 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 2000. 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, 1999 Form 10-K. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs. Interim results are subject to the final year-end LIFO inventory valuation. The 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 ends on January 31, 2000. Beginning in Fiscal 1999, the Company began reporting results on the Fiscal Quarter method. Each of the first three fiscal quarters are exactly 13 weeks long, with the fourth fiscal quarter covering the remaining part of the fiscal year. The Company believes the fiscal quarters are comparable to the calendar quarters reported during Fiscal 1998, therefore, prior periods have not been restated. 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. There were no stock options during Fiscal 1998, or the first quarter of Fiscal 1999, which were deemed to be dilutive. The accompanying consolidated financial statements for Fiscal 1998 contain certain reclassifications to conform with the presentation used in Fiscal 1999. Note B--Commitments and Contingencies 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 barred from government contracting. 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, Overseas Private Investment Corporation, and similar government agencies or otherwise receive the benefits of federal assistance programs during a suspension or debarment. The Company is a party to 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. 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 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 guaranteed the project financing ($42.6 million at May 1, 1999) of a power generation plant in Argentina. Included in "Other accrued liabilities" at May 1, 1999 is a reserve of $22.6 million for the anticipated loss related to such guarantee. This estimated loss is predicated on projections of future events and realization value of the underlying collateral. The Company has amended the guarantee agreement with the project lender and has agreed to provide standby letters of credit (LOC's) in varying amounts between May 31, 1999 and June 30, 2000 totaling the entire outstanding balance of the project financing. Such LOC's may be drawn and applied in payment of the $42.6 million upon the earlier of an event of default or December 31, 2000. The Company has provided certain guarantees in support of its customer's financing of purchases from the Company in the form of both residual value guarantees and debt guarantees. The maximum exposure of the Company related to guarantees at May 1, 1999 is $7 million, excluding the $42.6 million discussed above. Note C: Segment information Financial information relating to industry segment is as follows:
Operating Sales Profit ----- ------ Three months ended May 1, 1999 Power Products $121,288 $ 3,090 Tactical Vehicle Systems 6,215 1,106 Petroleum Equipment 28,464 1,958 Other Business Activities 32,944 836 -------- -------- Total $188,911 $ 6,990 ======== ======== Three months ended April 30, 1998 Power Products $136,169 $ 9,905 Tactical Vehicle Systems 124,660 2,719 Petroleum Equipment 23,592 2,103 Other Business Activities 20,589 1,496 -------- -------- $305,010 $ 16,223 Total ======== ========
There have been no material changes in total assets by industry segment since January 31, 1999. A reconciliation of operating profit to earnings (loss) from continuing operations before income taxes is as follows:
Three Months Ending ------------------- May 1, 1999 April 30, 1998 ----------- --------------- Operating profit $ 6,990 $16,223 Corporate expenses, net (756) (2,690) Non-operating interest income 331 4,792 Interest expense (3,451) (3,150) ------- ------- Earnings before income taxes $ 3,114 $15,175 ======= =======
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto, and with the Company's Form 10-K and notes thereto for the fiscal year ended January 31, 1999. The following discussion contains forward-looking statements which are based on assumptions such as timing, volume and pricing of customers' orders. In connection therewith, please see the cautionary statements contained therein, which identify important factors that could cause actual results to differ materially from those in the forward- looking statements. 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.
Fiscal Quarter Three Months Ended Ended May 1,1999 April 30, 1998 ---------- -------------- Sales 100.0% 100.0% Cost of sales 84.2 89.8 ------ ------ Gross profit 15.8 10.2 Selling and administrative expenses 13.5 6.2 Interest expense 1.8 1.0 Other income, net (1.1) (2.0) ------ ------ 14.2 5.2 ------ ------ Earnings before income taxes 1.6 5.0 Income tax provision .6 1.8 ------ ------ Earnings of consolidated companies 1.0 3.2 Equity in net earnings of unconsolidated affiliates 0.1 (.2) ------ ------ 1.1% 3.0% ====== ======
Sales for the first fiscal quarter of Fiscal 1999 decreased 38% to $189 million compared to sales of $305 million for the three months ended April 30, 1998. The Power Products segment sales decreased $15 million (11%) in the first fiscal quarter of 1999 compared to the three months ended April 30, 1998. This segment continues to be adversely impacted by lower equipment, parts and services sales in the petroleum sensitive branches resulting from depressed oil prices. The Tactical Vehicle Systems segment (TVS) sales decreased $118 million (94%) for the first fiscal quarter of 1999 compared to the three months ended April 30, 1998. Most of the production associated with the original contracts was completed as of January 31, 1999, and production on the follow-on contract is scheduled to begin in the third quarter of 1999. The Petroleum Equipment segment sales increased $5 million (21%) in the first fiscal quarter of 1999 compared to the three months ended April 30, 1998. Increased sales and lower margins on marine riser products and a decrease in higher margin equipment sales, which remained depressed particularly in the U.S. market, contributed to lower profits. Other business activities not identified in a specific segment include airline ground support equipment and the fabrication and leasing of gas compression equipment. Sales for the quarter totaled $33 million, with most of the $12 million increase from last year occurring in the airline ground support equipment business. This increase results from the recent acquisition of Tug Manufacturing Corporation. First quarter 1999 operating profits totaled $.8 million versus $1.5 million a year ago. Airline profits were adversely impacted by new product development costs and gas compression continues in a start-up mode. The gross profit margin rate of 15.8% for the first fiscal quarter of 1999 was higher than the 10.2% gross profit margin rate for the three months ended April 30, 1998, largely due to high volume, low margin TVS sales during the first quarter of 1998. Excluding TVS, gross profit margin rates were 16.0% in 1999 and 16.1% in 1998. The increase in selling and administrative expenses from $19 million for three months ended April 30, 1998 to $25 million for the first fiscal quarter of 1999 resulted from business acquisitions and startups in Fiscal 1998. Interest expense increased 10% for the first fiscal quarter of 1999 as compared to the three months ended April 30, 1998, primarily as a result of increased levels of short term borrowings. Other income decreased to $2.2 million in the first fiscal quarter of 1999 compared to $6.0 million for the three months ended April 30, 1998. Other income for the three months ended April 30, 1998 included interest income from the short-term investment of proceeds from the sale of the Company's Gas Turbine Operations. Net income from operations of $2.1 million ($.08 per share) was recorded for the fiscal period ended May 1, 1999 as compared to net earnings of $9.2 million ($.29 per share) for the three months ended April 30, 1998. 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 May 1, 1999 and at the close of Fiscal 1998 were as follow:
- -------------------------------------------------------------------------- May 1, 1999 January 31, 1999 - -------------------------------------------------------------------------- (Dollars in millions) Tactical Vehicle Systems $ 990.8 $ 991.7 Power Products 70.4 69.9 Petroleum Equipment 24.9 38.6 All Other 37.3 17.9 -------- -------- $1,123.4 $1,118.1 ======== ========
Unfilled orders of the Tactical Vehicle Systems segment at May 1, 1999 consisted principally of the four year follow-on contract awarded in October 1998 by the United States Department of the Army to manufacture medium tactical vehicles. CAPITAL EXPENDITURES AND COMMITMENTS Capital spending for property, plant and equipment of $7.8 million for the period ended May 1, 1999 included $5.4 million in revenue earning assets, and decreased from $8.1 million for the same period in Fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity included cash and equivalents, cash from operations, amounts available under credit facilities and other external sources of funds. The Company believes that these sources are sufficient to fund the current requirements of working capital, capital expenditures, dividends and other financial commitments. During Fiscal 1999 the Company anticipates a reduction in current liabilities, due to the scheduled repayment of $60 million of senior debt, and the performance under a government directed change to previously produced FMTV trucks projected to cost approximately $40 million. The Company has provided $23 million, as a current liability, for its probable partial performance under a guarantee, although no demand for performance has been received. (See Note B -- Commitments and Contingencies and Note 7 to the consolidated financial statements for Fiscal 1998 included in Form 10-K.) The Company has in place an unsecured revolving credit facility that could provide up to approximately $150 million, of which $135 million was available at May 1, 1999, but subject to certain limitations as a result of modifications made effective January 31, 1999. (See Note 9 to the consolidated financial statements for Fiscal 1998 included in Form 10-K). 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, new capital investments, accounts receivable 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 curtail certain activities. 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 quarterly 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; 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. 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 often extend over prolonged periods of time. The Company's ultimate profitability on such contracts will depend not only upon the accuracy of the Company's cost projections, but also 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 May 1, 1999, funding in the amount of $315 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 barred from government contracting. 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, Overseas Private Investment Corporation, and similar government agencies or otherwise receive the benefits of federal assistance payments during a suspension or debarment. The Company is a party to 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 has established a team to address the potential impacts of the year 2000 on each of its critical business functions. The team has concluded its assessment of the Company's critical date-sensitive technology, including its information systems, computer equipment and other systems used in its various operations, and is now in the process of making the required modifications to or replacing these systems to be year 2000 compliant. The modification costs are expected to be approximately $2 million. The majority of these costs are attributable to the purchase of new computer equipment. The required modifications and most related testings are expected to be completed by July 31, 1999, and most related testings are expected to be completed by August 31, 1999. The Company's contingency plan for any non-compliant systems will be developed for each particular system if, and as, they are identified. Systems modification costs are being expensed as incurred. Costs associated with new equipment are being capitalized and will be amortized over the life of the product. In addition to addressing the Company's internal systems, the team has identified key vendors that could be impacted by year 2000 issues, and communication has been made. The Company has evaluated the responses to this correspondence and has not identified any critical vendor systems whose timely remediation poses a material threat to the Company. The most likely worst case scenario would involve the interruption of supply of key materials necessary to timely complete production under outstanding contract commitments. In order to reduce this risk, the Company is developing a final contingency plan which may include having materials from sole-source suppliers that are necessary to fulfill outstanding contract commitments on hand prior to December 31, 1999. While the Company believes that its program is sufficient to identify the critical issues and associated costs necessary to address possible year 2000 problems in a timely manner, there can be no assurance that the program or underlying steps implemented, will be successful in resolving all such issues prior to the year 2000. If the steps taken by the Company (or critical third parties) are not made in a timely manner, or are not successful in identifying and remedying all significant year 2000 issues, business interruptions or delays could occur. Based on the information the Company has gathered to date and its expectation of its ability to remedy problems encountered, the Company believes that it will not experience significant business interruptions that would have a material adverse impact on its results of operations or financial condition. PART II. OTHER INFORMATION Item 1. 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 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. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 27.1 Financial Data Schedule (b) Reports on Form 8-K: (c) A report on Form 8-K was filed with the Commission on April 1, 1999, reporting the results for the Company's fourth quarter and fiscal year 1998. A report on Form 8-K was filed with the Commission on April 20, 1999, reporting the Company's dividend and announcing its new chief executive officer. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 15th day of June, 1999. STEWART & STEVENSON SERVICES, INC. By: /s/ John H. Doster John H. Doster Senior Vice President and Chief Financial Officer (as principal financial officer and authorized officer) By: /s/ Patrick G. O'Rourke Patrick G. O'Rourke Controller and Chief Accounting Officer (as chief accounting officer) EXHIBIT INDEX Exhibit Number and Description 27.1 Financial data schedule. EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-31-1999 May-01-1999 1,652 0 181,972 (3,943) 222,016 518,787 275,950 (146,792) 685,412 250,260 193,219 47,723 0 0 272,285 685,412 188,911 188,911 159,050 159,050 26,747 0 3,451 3,114 1,153 1,961 0 0 0 2,120 .08 .08
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