-----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, DY42WxGM0fMiXvGLGtkSiFNEgT1wyQz1+LbLE5KYF7UX67Z7a8xWZdRX3eMz5oDU 4LUuPLfz83WiDDx9xaAhyQ== 0000094328-99-000016.txt : 19990901 0000094328-99-000016.hdr.sgml : 19990901 ACCESSION NUMBER: 0000094328-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990831 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: 99703277 BUSINESS ADDRESS: STREET 1: 2707 N LOOP W CITY: HOUSTON STATE: TX ZIP: 77008 BUSINESS PHONE: 7138687700 MAIL ADDRESS: STREET 1: P O BOX 1637 CITY: HOUSTON STATE: TX ZIP: 77251-1637 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 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 27,992,203 Shares (Class) (Outstanding at August 25, 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 Statements of Financial Position -- July 31, 1999 and January 31, 1999. Consolidated Condensed Statements of Earnings -- Six Months and Three Months Ended July 31, 1999 and 1998. Consolidated Condensed Statements of Cash Flows -- Six Months and Three Months Ended July 31, 1999 and 1998. Notes to Consolidated Condensed Financial Statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (In thousands) July 31, 1999 January 31, 1999 ------------- ---------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,181 $ 12,959 Accounts and notes receivable, net 185,095 164,547 Recoverable costs and accrued profits not yet billed 34,847 99,097 Income tax receivable 34,664 48,596 Inventories: Power Products 175,047 182,894 Petroleum Equipment 25,547 40,560 Other Business Activities 53,615 40,222 Excess of current cost over LIFO values (48,718) (48,474) --------- --------- 205,491 215,202 --------- --------- TOTAL CURRENT ASSETS 462,278 540,401 PROPERTY, PLANT AND EQUIPMENT 277,687 271,658 Allowances for depreciation and amortization (151,036) (142,913) --------- --------- 126,651 128,745 DEFERRED INCOME TAX ASSETS 8,098 7,904 INVESTMENTS AND OTHER ASSETS 33,927 28,727 --------- --------- $630,954 $705,777 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 25,546 $ 17,468 Accounts payable 56,975 83,127 Accrued payrolls and incentives 13,818 17,123 Current income taxes 2,931 2,931 Current portion of long-term debt 23,902 69,488 Other current liabilities 91,819 95,349 --------- --------- TOTAL CURRENT LIABILITIES 214,991 285,486 --------- --------- COMMITMENTS AND CONTINGENCIES LONG-TERM DEBT 78,749 83,530 DEFERRED INCOME TAXES 66 43 ACCRUED POSTRETIREMENT BENEFITS 13,735 13,019 DEFERRED COMPENSATION 2,782 3,336 SHAREHOLDERS' EQUITY Common Stock, without par value, 100,000,000 shares authorized; 27,992,203 and 27,984,035 shares issued at July 31, 1999 and January 47,722 47,819 31, 1999, respectively Retained earnings 272,909 272,544 --------- --------- TOTAL SHAREHOLDERS' EQUITY 320,631 320,363 --------- --------- $630,954 $705,777 ========= ========= See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (In thousands, except per share data) ------------------------- ------------------------ Six Months Ended Three Months Ended July 31, July 31, ------------------------- ------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (Unaudited) (Unaudited) Sales $389,551 $628,549 $200,640 $323,539 Cost of sales 328,410 565,775 169,360 291,799 --------- --------- --------- --------- Gross profit 61,141 62,774 31,280 31,740 Selling and administrative expenses 50,265 38,695 24,774 19,964 Interest expense 6,710 5,956 3,259 2,806 Other income, net (3,439) (10,230) (1,244) (4,208) --------- --------- --------- --------- 53,536 34,421 26,789 18,562 --------- --------- --------- --------- Earnings before income taxes 7,605 28,353 4,491 13,178 Income tax provision 2,816 10,295 1,663 4,814 --------- --------- --------- --------- Earnings of consolidated companies 4,789 18,058 2,828 8,364 Equity in net earnings (loss) of unconsolidated affiliates 334 (456) 175 73 --------- --------- --------- --------- Net earnings $ 5,123 $ 17,602 $ 3,003 $ 8,437 ========= ========= ========= ========= Weighted average shares outstanding: Basic 27,986 30,046 27,989 28,178 Diluted 28,010 30,137 28,086 28,178 Earnings per share: Basic $.18 $.59 $.11 $.30 Diluted .18 .59 .11 .30 Cash dividends per share $.17 $.17 $.085 $.085 ==== ==== ==== ==== See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) ------------------------ ------------------------ Six Months Ended Three Months Ended July 31, July 31, ------------------------ ------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (Unaudited) (Unaudited) Operating Activities Net earnings $ 5,123 $ 17,602 $ 3,003 $ 8,437 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Accrued postretirement benefits 716 (190) 207 (195) Depreciation and amortization 10,826 9,963 5,623 5,770 Deferred income taxes, net (171) (2,899) (134) - Change in operating assets and liabilities, net of the effect of acquisition: Accounts and notes receivable, net (20,548) 42,347 (7,066) 55,814 Recoverable costs and accrued profits not yet billed 64,250 (6,713) 34,241 (10,546) Inventories 9,711 (14,433) 16,525 (16,156) Accounts payable (29,457) (14,378) 15,796 1,570 Current income taxes, net 13,932 (30,739) 12,938 (39,632) Other current liabilities (3,530) (24,761) (2,701) (23,854) Other-principally long-term assets and liabilities (5,851) 4,536 (5,032) 6,535 -------- -------- -------- -------- Net Cash Provided By (Used In) Operating Activities 45,001 (19,665) 73,400 (12,257) Investing Activities Collection of receivable from sale of Gas Turbine Operations - 600,000 - - Expenditures for property, plant and equipment (16,685) (15,633) (8,864) (7,526) Acquisition of businesses - (18,750) - (9,300) Disposal of property, plant and equipment, net 7,953 665 6,286 259 -------- -------- --------- --------- Net Cash (Used In) Provided By (8,732) 566,282 (2,578) (16,567) Investing Activities Financing Activities Additions to long-term borrowings 16,234 - - - Payments on long-term borrowings (66,601) (226,124) (66,268) (607) Net short-term borrowings (payments) 8,078 (34,178) (1,646) 329 Dividends paid (4,758) (5,001) (2,379) (2,318) Repurchase of common stock - (120,000) - (62,940) Exercise of stock options - 589 - (26) -------- -------- -------- -------- Net Cash Used In Financing Activities (47,047) (384,714) (70,293) (65,562) -------- -------- -------- -------- (Decrease) increase in cash and cash equivalents (10,778) 161,903 529 (94,386) Cash and cash equivalents, beginning of period 12,959 18,987 1,652 275,276 -------- -------- -------- -------- Cash and cash equivalents, end of period $ 2,181 $180,890 $ 2,181 $180,890 ======== ======== ======== ======== Supplemental disclosure of cash flow information: Net cash paid during the period for: Interest payments $ 7,162 $ 4,922 $ 6,176 $ 4,664 Income tax payments 733 $ 44,877 314 44,789 See accompanying notes to consolidated condensed financial statements.
STEWART & STEVENSON SERVICES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note A--Basis of Presentation and Significant Accounting Policies The accompanying consolidated condensed financial statements have been prepared in accordance with Rule 10- 01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The results of operations for the six months ended July 31, 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 condensed 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 Statement of Financial Accounting Standards ("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. The accompanying consolidated condensed 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 Family of Military Tactical Vehicles ("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. Most of the production under the original FMTV contract 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. In addition, the Company has been directed by the U.S. Army to undertake certain changes to the drive train of all vehicles produced under the first FMTV contract. The Company has and will continue to submit a series of Requests for Equitable Adjustments or claims under the original FMTV contract, seeking increases in the FMTV contract price for those additional costs that relate to government caused changes and delays amounts in excess of agreed upon contract price. 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 in which the matter is resolved. 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 July 31, 1999) of a power generation plant in Argentina. Included in "Other accrued liabilities" at July 31, 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 ($15.4 million had been provided as of July 31, 1999). 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 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 July 31, 1999 is $6 million, excluding the $42.6 million discussed above. Note C: Earnings per share (unaudited) Reconciliation of the numerators and denominators of the basic and diluted EPS computation is as follows (in thousands, except per share data):
--------------------- -------------------- Six Months Ended Three Months Ended July 31, July 31, --------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Basic Earnings Per Share Net earnings $ 5,123 $17,602 $ 3,003 $ 8,437 Weighted Average Shares Outstanding 27,986 30,046 27,989 28,178 ------- ------- --------- --------- Basic Earnings Per Share $.18 $.59 $.11 $.30 ==== ==== ==== ====
------------------- ------------------- Six Months Ended Three Months Ended July 31, July 31, ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Diluted Earnings Per Share Net earnings $ 5,123 $17,602 $ 3,003 $ 8,437 Weighted Average Shares Outstanding 27,986 30,046 27,989 28,178 Shares Issuable from Assumed Conversion of Common Stock 24 91 97 - ------- ------- ------- ------- Weighted Average Shares Outstanding, as adjusted 28,010 30,137 28,086 28,178 ------- ------- ------ ------- Diluted Earnings Per Share $.18 $.59 $.11 $.30 ==== ==== ==== ====
Note D: Segment information (unaudited) Financial information relating to industry segment is as follows (in thousands):
Sales Operating Profit (Loss) ----- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Six months ended July 31, Power Products $266,197 $273,829 $ 10,791 $ 20,073 Tactical Vehicle Systems 12,033 263,848 3,143 5,777 Petroleum Equipment 52,112 51,122 3,649 4,485 Other Business Activities 59,209 39,750 (361) 1,444 -------- -------- -------- -------- Total $389,551 $628,549 $ 17,222 $ 31,779 ======== ======== ======== ======== Three months ended July 31, Power Products $144,909 $137,661 $ 7,701 $ 10,168 Tactical Vehicle Systems 5,818 139,188 2,037 3,058 Petroleum Equipment 23,648 27,530 1,691 2,382 Other Business Activities 26,265 19,160 (1,197) (52) -------- -------- --------- -------- Total $200,640 $323,539 $ 10,232 $ 15,556 ======== ======== ======== ========
There have been no material changes in total assets by industry segment since January 31, 1999. A reconciliation of operating profit to earnings before income taxes is as follows (in thousands):
---------------------- ------------------- Six Months Ended Three Months Ended July 31, July 31, ---------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Operating profit $17,222 $31,779 $10,232 $15,556 Corporate expenses, net (2,936) (4,535) (2,484) (2,414) Non-operating interest income 29 7,065 2 2,842 Interest expense (6,710) (5,956) (3,259) (2,806) -------- ------- ------- ------- Earnings before income taxes $ 7,605 $28,353 $ 4,491 $13,178 ======= ======= ======= =======
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with the attached consolidated condensed 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 herein and therein, which identify important factors that could cause actual results to differ materially from those in the forward-looking statements. RESULTS OF OPERATIONS Sales for the three months ended July 31, 1999 ("Second Quarter"), totaled $200.6 million compared to sales of $188.9 million for the three months ended May 1, 1999 ("First Quarter") and $323.5 million for the same period in 1998. Net earnings from operations for the Second Quarter totaled $3.0 million or $0.11 per basic and diluted share compared to net earnings of $2.1 million or $.08 per basic and diluted share for the First Quarter and $8.4 million or $0.30 per basic and diluted share a year ago. The Power Products segment, which is responsible for marketing and aftermarket support of a wide range of industrial equipment, recorded Second Quarter sales of $144.9 million compared to $121.3 million in the First Quarter and $137.7 million for the same period in 1998. Operating profit for the Power Products segment totaled $7.7 million for the Second Quarter compared to $3.1 million in the First Quarter and $10.2 million a year ago. Depressed oil prices last year and earlier this year continue to have an adverse impact on equipment parts and service sales in selected geographic markets. However, the Power Products segment experienced improved earnings at four West Coast branches and from the IPSC Co. acquisition, as well as benefits from remedial actions taken earlier this year at other locations. The Petroleum Equipment segment manufactures equipment for oil and gas exploration, production, and well stimulation industries. Sales for this segment totaled $23.6 million for the Second Quarter compared to $28.5 million in the First Quarter and $27.5 million last year. Operating profit for Petroleum Equipment totaled $1.7 million for the Second Quarter compared to $2.0 million in the First Quarter and $2.4 million last year. The decrease in profits resulted from increased sales on lower margin marine riser products, offset by a decrease in higher- margin equipment sales, which remained depressed particularly in the U.S. market. The Tactical Vehicle Systems segment, which manufactures tactical vehicles for the U.S. Army and others, recorded sales of $5.8 million for the Second Quarter compared to $6.2 million in the First Quarter and $139.2 million a year ago. Production on the original contract was completed as of January 31, 1999, and production on the follow-on contract is anticipated to start in the third quarter of Fiscal 1999. Operating profit for the Second Quarter of 1999 amounted to $2.0 million, compared to $1.1 million in the First Quarter and $3.1 million a year ago, and was largely comprised of reductions to estimated costs to complete the original truck contract. Other business activities not identified in a specific segment include airline ground support equipment and the fabrication and leasing of gas compression equipment. Sales totaled $26.3 million for the Second Quarter, compared to $19.2 million for the same period last year. Most of the $7.1 million increase occurred in airline ground support equipment, associated with the acquisition of Tug Manufacturing Corporation ("Tug") in December 1998. A Second Quarter operating loss of $1.2 million versus $0.1 million loss a year ago resulted primarily from expenses related to airline ground support product develop- ment and start up of the gas compression business, partially offset by higher sales and margins associated with the Tug acquisition. Interest income earned on proceeds from the sale of Gas Turbine Operations to General Electric Company for the second quarter and first six months of 1998 totaled $2.8 million and $7.0 million, respectively. Net cash provided by operating activities for the Second Quarter totaled $73.4 million, largely resulting from a comprehensive asset reduction initiative. Total debt decreased $67.9 million during the Second Quarter. 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 as of July 31, 1999 and January 31, 1999 were as follows (in millions):
------------- ---------------- July 31, 1999 January 31, 1999 ------------- ---------------- Tactical Vehicle Systems $986.1 $991.7 Power Products 79.3 69.9 Petroleum Equipment 18.8 38.6 All Other 41.2 17.9 -------- -------- $1,125.4 $1,118.1 ======== =========
Unfilled orders of the Tactical Vehicle Systems segment at July 31, 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 was $8.9 million for the Second Quarter, an increase from $7.5 million for the same period in Fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity include 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. During the six months ended July 31, 1999 current liabilities decreased by $70.5 million. The repayment of $60 million of senior debt and a $26.2 million decline in "Accounts payable" were the key contributors to this decrease. Total debt decreased by $42.3 million during the six months ending July 31, 1999. The Company has provided $22.6 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, net of a $25 million letter of credit facility, of which $110 million was available at July 31, 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; 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. 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 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. Furthermore, during the course of the contract, the Company may be required to make certain payments which it believes are recoverable under the contract from the U.S. Government or its vendors. To the extent that such amounts are not actually recovered, results under the contract could be materially adversely affected. 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 July 31, 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 September 6, 1999, and most related testings are expected to be completed by November 30, 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. 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 4. Submission of Matters to a Vote of Security Holders. The Annual Meeting of Shareholders of the Company was held on June 8, 1999. Set forth below is a brief description of each matter acted upon at the meeting and the number of votes cast for, against or withheld and abstaining or not voting as to each matter.
Election of Directors Against or For Withheld --- ---------- Khleber V. Attwell 23,188,602 404,236 Brian H. Rowe 22,304,071 1,288,767 Darvin M. Winick 23,224,275 368,563 Howard Wolf 23,221,575 371,263 For Against Abstained --- ------- --------- Ratification of Accountants 23,346,391 223,675 22,772 For Against Abstained --- ------- --------- Shareholder Proposal to Declassify the Board 7,592,273 12,020,262 148,372 For Against Abstained --- ------- --------- Shareholder Proposal to Maximize the Value of the Company through Public Auction 1,146,689 18,435,940 178,278
Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 27.1 Financial Data Schedule (b) Reports on Form 8-K: 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 30th day of August, 1999. STEWART & STEVENSON SERVICES, INC. By: /s/ Michael L. Grimes Michael L. Grimes President and Chief Executive Officer 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 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JAN-31-1999 JUL-31-1999 2,181 0 189,319 (4,224) 205,491 462,278 277,687 (151,036) 630,954 214,991 78,749 47,722 0 0 272,909 630,954 389,551 389,551 328,410 328,410 53,536 0 6,710 7,605 2,816 4,789 0 0 0 5,123 0.18 0.18
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