10-Q 1 0001.txt 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 29, 2000 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 (Zip Code) offices) (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 28,036,041 SHARES (Class) (Outstanding at September 11, 2000) 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 29, 2000 and January 31, 2000. Consolidated Condensed Statements of Earnings - Three and Six Months Ended July 29, 2000 and July 31, 1999. Consolidated Condensed Statements of Cash Flows - Three and Six Months Ended July 29, 2000 and July 31, 1999. Notes to Consolidated Condensed Financial Statements. 2 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (IN THOUSANDS, EXCEPT SHARE DATA)
JULY 29, 2000 JANUARY 31, 2000 -------------------- -------------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and equivalents ......................................................... $ 61,901 $ 11,715 Accounts and notes receivable, net ........................................... 217,979 242,625 Recoverable costs and accrued profits not yet billed ............................................................ 12,887 8,151 Income tax receivable ........................................................ 14,823 26,255 Deferred tax asset ........................................................... 10,469 9,076 Inventories: Power Products ............................................................ 138,035 150,844 Petroleum Equipment ....................................................... 26,096 30,151 Airline Products .......................................................... 28,636 26,029 Other Business Activities ................................................. 8,696 33,762 Excess of current cost over LIFO values ................................... (49,746) (49,839) -------------------- -------------------- 151,717 190,947 -------------------- -------------------- TOTAL CURRENT ASSETS ...................................................... 469,776 488,769 PROPERTY, PLANT AND EQUIPMENT ................................................... 280,585 290,355 Allowances for depreciation and amortization ............................................................. (168,431) (160,821) -------------------- -------------------- 112,154 129,534 DEFERRED INCOME TAX ASSETS ...................................................... 128 166 INVESTMENTS AND OTHER ASSETS .................................................... 23,097 23,881 -------------------- -------------------- $ 605,155 $ 642,350 ==================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable ................................................................ $ 14,545 $ 25,269 Accounts payable ............................................................. 52,331 90,163 Accrued payrolls and incentives .............................................. 14,369 18,701 Income tax ................................................................... 3,345 3,257 Current portion of long-term debt ............................................ 29,014 8,955 Other current liabilities .................................................... 72,221 65,903 -------------------- -------------------- TOTAL CURRENT LIABILITIES ................................................. 185,825 212,248 COMMITMENTS AND CONTINGENCIES (SEE NOTE C) LONG-TERM DEBT .................................................................. 58,043 78,281 DEFERRED INCOME TAX ............................................................. 166 958 ACCRUED POSTRETIREMENT BENEFITS ................................................. 13,366 12,748 DEFERRED COMPENSATION ........................................................... 2,154 2,436 OTHER LONG-TERM LIABILITIES ..................................................... -- 600 SHAREHOLDERS' EQUITY Common Stock, without par value, 100,000,000 shares authorized; 28,026,044 and 27,992,203, shares issued at July 29, 2000 and January 31, 2000, respectively ........................... 47,727 47,722 Retained earnings ............................................................ 297,874 287,357 -------------------- -------------------- TOTAL SHAREHOLDERS' EQUITY ................................................ 345,601 335,079 -------------------- -------------------- $ 605,155 $ 642,350 ==================== ====================
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 3 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED THREE MONTHS ENDED ----------------------------------- ----------------------------------- JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999 --------------- --------------- --------------- --------------- (UNAUDITED) (UNAUDITED) Sales .............................................. $ 524,272 $ 389,551 $ 265,065 $ 200,640 Cost of sales ...................................... 441,367 328,410 228,050 169,360 --------------- --------------- --------------- --------------- Gross profit ....................................... 82,905 61,141 37,015 31,280 Selling and administrative expenses ................ 65,132 50,265 29,041 24,774 Interest expense ................................... 4,356 6,710 2,047 3,259 Other income, net .................................. (10,874) (3,439) (6,440) (1,244) --------------- --------------- --------------- --------------- 58,614 53,536 24,648 26,789 --------------- --------------- --------------- --------------- Earnings before income taxes ....................... 24,291 7,605 12,367 4,491 Income tax provision ............................... 9,014 2,816 4,588 1,663 --------------- --------------- --------------- --------------- Earnings of consolidated companies ................. 15,277 4,789 7,779 2,828 Equity in net earnings of unconsolidated affiliates ......................................... -- 334 -- 175 --------------- --------------- --------------- --------------- Net earnings ....................................... $ 15,277 $ 5,123 $ 7,779 $ 3,003 =============== =============== =============== =============== Weighted average number of shares of common stock Basic ........................................... 28,005 27,986 28,013 27,989 Diluted ......................................... 28,175 28,010 28,299 28,086 Net earnings per share: Basic .............................................. $ .55 $ .18 $ .28 $ .11 Diluted ............................................ .54 .18 .27 .11 Cash dividends per share ........................... .17 .17 .085 .085
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 4 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED THREE MONTHS ENDED ----------------------------------- ----------------------------------- JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999 --------------- --------------- --------------- --------------- (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Net earnings ...................................... $ 15,277 $ 5,123 $ 7,779 $ 3,003 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Accrued postretirement benefits ............... 618 716 370 207 Depreciation and amortization ................. 11,025 10,826 5,493 5,623 Deferred income taxes, net .................... (754) (171) (790) (134) Gain on sale of business assets ............... (5,649) -- (5,649) -- Change in operating assets and liabilities net of the effect of acquisition: Accounts and notes receivable, net ......... 36,946 (20,548) (8,018) (7,066) Recoverable costs and accrued profits not yet billed .............................. (4,736) 64,250 1,247 34,241 Inventories ................................ 15,958 9,711 28,272 16,525 Accounts payable ........................... (37,832) (26,152) (27,803) 15,796 Accrued payrolls and incentive ............. (4,332) (3,305) 89 Current income taxes, net .................. 10,127 13,932 5,836 12,938 Other current liabilities .................. 7,219 (3,530) 10,058 (2,701) Other--principally long-term assets and liabilities .......................... (4,374) (5,851) (2,905) (5,032) --------------- --------------- --------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 39,493 45,001 13,979 73,400 --------------- --------------- --------------- --------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment .... (20,558) (16,685) (10,279) (8,864) Proceeds from sale of business assets ............. 44,622 -- 44,622 -- Disposal of property, plant and equipment, net .... 2,288 7,953 2,165 6,286 --------------- --------------- --------------- --------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ...................................... 26,352 (8,732) 36,508 (2,578) --------------- --------------- --------------- --------------- FINANCING ACTIVITIES Additions to long-term borrowings ................. 20,047 16,234 -- -- Payments on long-term borrowings .................. (20,221) (66,601) (414) (66,268) Net short-term borrowings (payments) .............. (10,724) 8,078 (1,234) (1,646) Dividends paid .................................... (4,761) (4,758) (2,382) (2,379) --------------- --------------- --------------- --------------- NET CASH USED IN FINANCING ACTIVITIES ............. (15,659) (47,047) (4,030) (70,293) --------------- --------------- --------------- --------------- Increase (decrease) in cash and equivalents .......... 50,186 (10,778) 46,457 529 Cash and equivalents, beginning of period ............ 11,715 12,959 15,444 1,652 --------------- --------------- --------------- --------------- Cash and equivalents, end of period .................. $ 61,901 $ 2,181 $ 61,901 $ 2,181 =============== =============== =============== =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net cash paid during the period for: Interest ........................................ $ 4,742 $ 7,162 $ 3,608 $ 6,176 Income tax ...................................... 7,203 733 6,611 314
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 5 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 three and six months ended July 29, 2000 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 2001. 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, 2000 Form 10-K. An actual valuation of inventory under the last-in-first-out ("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 2000" commenced on February 1, 2000 and ends on January 31, 2001. The Company reports results on the Fiscal Quarter method; each of the first three fiscal quarters are 13 weeks long, with the fourth fiscal quarter covering the remaining part of the fiscal year. The accompanying consolidated financial statements for Fiscal 1999 contain certain reclassifications to conform with the presentation used in Fiscal 2000. NOTE B--SEGMENT INFORMATION Financial information relating to industry segments is as follows (in thousands):
SIX MONTHS ENDED THREE MONTHS ENDED ------------------------------------ ------------------------------------ JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999 --------------- --------------- --------------- --------------- Sales Power Products ............................... $ 281,231 $ 266,197 $ 154,140 $ 144,909 Tactical Vehicle Systems ..................... 134,325 12,033 55,652 5,818 Airline Products ............................. 56,523 45,837 28,252 23,585 Petroleum Equipment .......................... 33,058 52,112 18,131 23,648 Other Business Activities .................... 19,135 13,372 8,890 2,680 --------------- --------------- --------------- --------------- Total ...................................... $ 524,272 $ 389,551 $ 265,065 $ 200,640 =============== =============== =============== =============== Operating Profit Power Products ............................... $ 2,417 $ 10,791 $ 3,233 7,701 Tactical Vehicle Systems ..................... 28,957 3,143 14,321 2,037 Airline Products ............................. (4,337) (761) (4,341) (765) Petroleum Equipment .......................... (269) 3,649 404 1,691 Other Business Activities .................... 2,632 400 3,266 (432) --------------- --------------- --------------- --------------- Total ...................................... $ 29,400 $ 17,222 $ 16,883 $ 10,232 =============== =============== =============== =============== Operating Margin Power Products ............................... 0.9% 4.1% 2.1% 5.3% Tactical Vehicle Systems ..................... 21.6 26.1 25.7 35.0 Airline Products ............................. (7.7) (1.7) (15.4) (3.2) Petroleum Equipment .......................... (0.8) 7.0 2.2 7.2 Other Business Activities .................... 13.8 3.0 36.7 (16.1)
6 Total assets of the Company's Other Business Activities segment decreased by approximately $36.4 million during the second quarter of Fiscal 2000 as a result of the sale of certain of the Company's assets associated with its gas compressor leasing business. (See "Sale of Gas Compressor Leasing Business" below in Item 2.) There have been no other material changes in total assets by industry segment since January 31, 2000. A reconciliation of operating profit to earnings before income taxes is as follows (in thousands):
SIX MONTHS ENDED THREE MONTHS ENDED ----------------------------------- ----------------------------------- JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999 --------------- --------------- --------------- --------------- Operating profit ................................... $ 29,400 $ 17,222 $ 16,883 $ 10,232 Corporate expenses, net ............................ (5,345) (2,936) (2,869) (2,484) Non-operating interest income ...................... 4,592 29 400 2 Interest expense ................................... (4,356) (6,710) (2,047) (3,259) --------------- --------------- --------------- --------------- Earnings before income taxes ....................... $ 24,291 $ 7,605 $ 12,367 $ 4,491 =============== =============== =============== ===============
NOTE C--COMMITMENTS AND CONTINGENCIES As a custom packager of power systems, the Company issues bid and performance guarantees in the form of performance bonds or standby letters of credit. Performance type letters of credit totaled approximately $4.1 million at July 29, 2000. The Company's government contract operations are subject to U.S. Government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or debarred from government contracting. In that event, the Company would also be unable to sell equipment or services to customers that depend on loans or financial commitments from the Export Import Bank, Overseas Private Investment Corporation, and similar government agencies during a suspension or debarment. The Company entered into an Administrative Agreement with the United States Air Force that imposes certain requirements on the Company intended to assure the U.S. Air Force that the Company is a responsible government contractor. Under this agreement, the Company has established and maintains a program to ensure compliance with applicable laws and the Administrative Agreement. The program provides employees with education and guidance regarding compliance and ethical issues, operates a means to report questionable practices on a confidential basis, and files periodic reports with the U.S. Air Force regarding the Company's business practices. A default by the Company of the requirements under the Administrative Agreement could result in the suspension or debarment of the Company from receiving any new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. Any such suspension could also prevent the Company from receiving future modifications to the Family of Medium 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. It is presently impossible to determine the actual costs that may be incurred to resolve this matter or whether the resolution will have a material adverse effect on the Company's results of operations. 7 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 which are material to the Company's financial statements or are expected to have a material effect on the manner in which the Company conducts its business. Although management has established reserves that it believes to be adequate in each case, an unforeseen outcome in such cases could have a material adverse impact on the results of operations in the period it occurs. The Company has provided certain guarantees in support of its customers' financing of purchases from the Company in the form of both residual value guarantees and debt guarantees. The maximum exposure of the Company related to guarantees at July 29, 2000 is $6.2 million. The Company leases certain additional property and equipment under lease arrangements of varying terms whose annual rentals are less than 1% of consolidated sales. 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, 2000. 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 and the heading labeled "Factors That May Affect Future Results" below, 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 Statements of Earnings.
SIX MONTHS ENDED THREE MONTHS ENDED --------------------------------- ------------------------------------ JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999 --------------- --------------- --------------- --------------- Sales ................................................ 100.0% 100.0% 100.0% 100.0% Cost of sales ........................................ 84.2 84.3 86.0 84.4 --------------- --------------- --------------- --------------- Gross profit ......................................... 15.8 15.7 14.0 15.6 Selling and administrative expenses .................. 12.4 12.9 10.9 12.3 Interest expense ..................................... 0.8 1.7 0.8 1.6 Other income, net .................................... (2.0) (0.9) (2.4) (0.6) --------------- --------------- --------------- --------------- 11.2 13.7 9.3 13.4 --------------- --------------- --------------- --------------- Earnings before income taxes ......................... 4.6 2.0 4.7 2.2 Income tax provision ................................. 1.7 0.7 1.7 0.8 --------------- --------------- --------------- --------------- Earnings of consolidated companies ................... 2.9 1.2 2.9 1.4 Equity in net earnings of unconsolidated affiliates .. -- 0.1 -- 0.1 --------------- --------------- --------------- --------------- 2.9 2.9% 1.3% 2.9% 1.5% =============== =============== =============== ===============
OVERVIEW Sales for the second quarter ended July 29, 2000 grew 32 percent to $265.1 million compared to sales of $200.6 million for the second quarter of Fiscal 1999. Net earnings for the second quarter of Fiscal 2000 increased 159 percent to $7.8 million, or $0.27 per diluted share compared to net earnings of $3.0 million, or $0.11 per share, in the second quarter of Fiscal 1999. Sales for the first six months of Fiscal 2000 grew 35 percent to $524.3 million versus $389.6 million for the first six months of Fiscal 1999. First half net earnings tripled to $15.3 million, or $0.54 per diluted share, compared to $5.1 million, or $0.18 per share, in last year's first half. In the second quarter of Fiscal 2000, the Company achieved its sixth consecutive quarter of improved earnings. The Company continues to focus on five key initiatives to: (1) strengthen business leadership, (2) improve cash flow management, (3) enhance supply chain productivity, (4) revitalize business growth, and (5) implement a new enterprise-wide information system. 8 SEGMENT DATA The Company's management analyzes financial results principally in five business segments based on distinct product and customer types: Power Products, Tactical Vehicle Systems, Airline Products, Petroleum Equipment and Other Business Activities. Such segments are described below along with analyses of their respective results of operations. The Power Products segment, which is responsible for marketing and aftermarket support of a wide range of industrial equipment, recorded second quarter sales of $154.1 million, compared to $127.1 million in the first quarter and $144.9 million for the second quarter of Fiscal 1999. Operating profit for the Power Products segment totaled $3.2 million for the quarter compared to a $0.8 million loss in the first quarter and a $7.7 million profit a year ago. Second quarter results were adversely impacted by $2.1 million lower than expected profit margins on orders in the newly established power generation business and a $2.5 million increase in reserves primarily for inventories. The first quarter included special charges totaling $6.4 million, principally in connection with a potentially uncollectible account and note receivable. The Tactical Vehicle Systems segment, which manufactures and services transportation systems for the U.S. Army and others, recorded sales of $55.7 million, compared to $78.7 million in the first quarter of Fiscal 2000 and $5.8 million for the second quarter of Fiscal 1999. Operating profit for the second quarter of Fiscal 2000 amounted to $14.3 million, compared to $14.6 million in the first quarter and $2.0 million a year ago, and included a $3.1 million recovery from a canceled Australian contract and a $1.0 million favorable impact of lower than expected overhead costs and additional billing recoveries. The U.S. Army's most recent delivery schedule shifted some truck deliveries from the second quarter to the fourth quarter of Fiscal 2000 which are not expected to have a material impact on the Fiscal 2000 operating results. Truck shipments during the first two quarters of Fiscal 2000 were 402 and 260 units, respectively, and the Company expects to ship 339 and 535 units during each of the last two quarters of this year. The Airline Products segment, which manufactures airline ground support products and mobile railcar movers under the S&S Tug, Rail King and other names, recorded sales of $28.3 million in the second quarter, equal to the first quarter sales and 20 percent above last year's second quarter results of $23.6 million. The $4.3 million operating loss for the quarter included $4.3 million in inventory write downs, principally associated with a decision to make changes in the existing product portfolio. These actions are being taken by the new S&S Tug management leadership team, which was assembled earlier this year, after completing an assessment of current and future product planning requirements. This segment reported breakeven results in the first quarter of Fiscal 2000 and a $0.8 million loss for the second quarter of Fiscal 1999. The Petroleum Equipment segment manufactures and services equipment for oil and gas exploration, production, and well stimulation industries. Sales for this segment totaled $18.1 million for the second quarter, compared to $14.9 million in the first quarter and $23.6 million for the second Fiscal quarter of 1999. Operating profit for Petroleum Equipment totaled $0.4 million, compared to a $0.7 million loss in the first quarter and a $1.7 million profit a year ago. The order backlog for petroleum equipment, which is $55.6 million as of the end of the second quarter, has increased substantially during the first half and is expected to drive future earnings improvement in this segment. The Company's Other Business Activities segment includes predominantly gas compression equipment sales or leases. Sales in the second quarter totaled $8.9 million, compared to $10.2 million in the first quarter and $2.7 million for the second quarter of Fiscal 1999. Operating profit for the second quarter totaled $3.3 million and included a $5.6 million gain on sale of the Company's gas compressor leasing business. (See "Sale of Gas Compressor Leasing Business" below.) Operating losses for the first quarter of Fiscal 2000 and second quarter of Fiscal 1999 were $0.6 million and $0.4 million, respectively. CORPORATE RESULTS For the three months ended July 29, 2000 gross profit margin was 14.0% versus 15.6% for the comparable period of Fiscal 1999. Margins decreased during the quarter principally as a result of various special charges detailed above. Other Corporate expense, net increased by approximately $2.4 million during the first six months of Fiscal 2000 versus the first six months of Fiscal 1999, principally as a result of the Company's ongoing implementation of an enterprise resource planning ("ERP") software package. Such additional expense relates to consulting expense associated with this implementation. The Company expects such costs to continue into the third quarter and to decrease during the fourth and subsequent quarters. Non-operating interest income increased significantly during the first half of Fiscal 2000 versus the first half of Fiscal 1999. In the first quarter of Fiscal 2000, the Company recorded approximately $4 million in interest income in connection with tax refunds from the Internal Revenue Service for the years ended January 31, 1990 through January 31, 1993. The Company does not expect to recognize additional such income in future quarters. 9 Interest expense decreased by $1.2 million and $2.4 million for the three and six months ended July 29, 2000 versus the corresponding periods of Fiscal 1999. Such reduction of expense resulted from various asset management initiatives. SALE OF GAS COMPRESSOR LEASING BUSINESS Effective July 1, 2000 the Company completed the sale of its gas compressor leasing business for $57.5 million. The Company will continue to package gas compression equipment for sale and will continue to service such equipment. To date, the Company has received payment of $44.6 million and an additional $12.9 million will be due and payable on or before April 10, 2001. Such amount is included on its Consolidated Condensed Statements of Financial Position as of July 29, 2000 as a component of accounts and notes receivable, net. The Company realized a gain of $5.6 million on this sale, which is included in other income, net on the Company's Consolidated Condensed Statements of Earnings. All such items are associated with its Other Business Activities segment. 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 the end of the second quarters of Fiscal 2000 and 1999 were as follows: JULY 29, 2000 JULY 31, 1999 --------------- --------------- (DOLLARS IN MILLIONS) Tactical Vehicle Systems ............... $ 795.7 $ 986.1 Power Products ......................... 116.7 79.3 Airline ................................ 21.1 20.8 Petroleum Equipment .................... 55.6 18.8 All Other .............................. 10.1 20.4 --------------- --------------- $ 999.2 $ 1,125.4 =============== =============== Unfilled orders of the Tactical Vehicle Systems segment at July 29, 2000 consisted principally of the follow-on contract awarded in October 1998 by the United States Army Tank-Automotive and Armanent Command ("TACOM") to manufacture medium tactical vehicles. CAPITAL EXPENDITURES AND COMMITMENTS Capital spending for property, plant and equipment of $20.6 million for the six months ended July 29, 2000 included $7.8 million in revenue earning assets, and increased from $16.7 million for the same period in Fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased $46.5 million during the second quarter to $61.9 million. During the second quarter of Fiscal 2000, net cash provided by operating activities of $14.0 million and cash provided by investing activities of $36.5 million were partially offset by cash used in financing activities of $4.0 million. Significant activities affecting cash and cash equivalents during the quarter included the receipt of $44.6 million for the sale of certain assets (see "Sale of Gas Compressor Leasing Business" above) and capital expenditures of $10.3 million. The Company has outstanding $75 million of privately placed unsecured long-term senior notes (the "Private Placement") at varying rates of interest. Various traunches of the Private Placement mature on May 30 of 2001, 2003 and 2006. Interest is due semiannually on May 30 and November 30 of each year. During the second quarter of Fiscal 2000, the Company reclassified the amount due on May 30, 2001, or $20 million, from Long-term debt to Current portion of long-term debt on its Consolidated Condensed Statements of Financial Position. The Company has in place an unsecured Revolving Debt Facility that could provide up to approximately $150 million, including a $25 million letter of credit sub facility, of which approximately $101 million was available at July 29, 2000, due to certain limitations as a result of modifications made effective January 31, 1999. This Revolving Debt Facility matures on December 20, 2001. The Company has additional banking relationships that provide uncommitted borrowing arrangements. 10 The Company's unsecured long-term notes, which include the Revolving Debt Facility notes and senior notes, were issued pursuant to agreements containing covenants that restrict indebtedness, guarantees, rentals and other items. Additional covenants in the Revolving Debt Facility require the Company to maintain a minimum tangible net worth and interest coverage. Since these requirements are calculated from earnings and cash flow, dividends could be restricted indirectly. Dividends at the current level are not restricted as of the date of this report, because the Company is currently in compliance with all other such covenants. The Company's sources of cash liquidity included cash and cash equivalents, cash from operations, amounts available under credit facilities and other external sources of funds. The Company believes that these sources are sufficient to fund the current requirements of working capital, capital expenditures, dividends, current maturities of debt and other financial commitments. From time to time, as business needs warrant, the Company borrows funds under its Revolving Debt Facility. To date the company has borrowed and repaid approximately $20 million under this facility. In the event that any acquisition of additional operations, growth in existing operations, settlements of other lawsuits or disputes, changes in inventory levels, accounts receivable, tax payments or other working capital items create a permanent need for working capital or capital expenditures in excess of the existing cash and cash equivalents and committed lines of credit, the Company may seek to borrow from other long-term financing sources or to 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 on the eventual outcome of an equitable settlement of contractual issues with the U.S. Government. Due to uncertainties inherent in the estimation and claim negotiation process, no assurances can be given that management's estimates will be accurate, and variances between such estimates and actual results could be material. During Fiscal 1998, the Company was awarded a new multi-year contract that will extend production of the Family of Medium Tactical Vehicles ("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 29, 2000, funding in the amount of $365 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. 11 The Company's government contract operations are subject to U.S. Government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or debarred from government contracting. In this event, the Company would also be unable to sell equipment or services to customers that depend on loans or financial commitments from the Export Import Bank, Overseas Private Investment Corporation, and similar government agencies, or otherwise receive the benefits of federal assistance payments during a suspension or debarment. The Company entered an Administrative Agreement with the United States Air Force that imposes certain requirements on the Company intended to assure the U.S. Air Force that the Company is a responsible government contractor. Under this agreement, the Company has established and maintains an effective program to ensure compliance with applicable laws and the Administrative Agreement. The program provides employees with education and guidance regarding compliance and ethical issues, operates a means to report questionable practices on a confidential basis, and files periodic reports with the U.S. Air Force regarding the Company's business practices. A default by the Company of the requirements under the Administrative Agreement could result in the suspension or debarment of the Company from receiving any new contracts or subcontracts with agencies of the U.S. Government or the benefit of federal assistance payments. Any such suspension could also prevent the Company from receiving future modifications to the FMTV contract unless the Secretary of the Army finds a compelling need to enter into such modification. The Administrative Agreement expires pursuant to its term on March 19, 2001, but the Company intends to maintain compliance programs on a continuing basis. 12 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 which are material to the Company's financial statements 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. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 13, 2000 the Company's Annual Meeting of Shareholders was held. 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. AGAINST Election of Directors FOR OR WITHHELD ABSTAINED --- ----------- --------- C. Jim Stewart II 23,705,533 298,782 Michael L. Grimes 23,708,397 295,918 Monroe M. Luther 23,691,536 312,779 Charles R. Ofner 23,691,636 312,679 Ratification of Accountants 23,943,513 53,465 7,337 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 3.2 Sixth Restated Bylaws of Stewart & Stevenson Services, Inc., effective April 11, 2000 (b) Form 8-K Report Date - May 2, 2000 (Announcement of Two New Directors) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - May 18, 2000 (Company to Complete Driveline Upgrade at Fort Bragg Ahead of Schedule) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - May 24, 2000 (First Quarter 2000 Results) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - June 7, 2000 (Plan to Sell Natural Gas Compressor Leasing Business to Hanover Compressor Company Announced) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - June 13, 2000 (FMTV A1 Successfully Completes First Article Testing) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - June 14, 2000 (Dividend Announcement) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - July 17, 2000 (Sale of Natural Gas Compressor Leasing Business to Hanover Compressor Company Complete) Item reported - Item 5. Other Events Form 8-K Report Date - July 18, 2000 (Company Receives $11.8 Million Product Contract Modification) Items reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - July 25, 2000 (Receipt by Fort Carson of New FMTV A1 Models) Items reported - Item 5. Other Events Item 7. Exhibits 14 SIGNATURES Pursuant to the requiremen of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigne thereunto duly authorizedts on the 12th day of September, 2000. STEWART & STEVENSON SERVICES, INC. By: /s/ MICHAEL L. GRIMES Michael L. Grimes President and Chief Executive Officer (principal executive officer) By: /s/ JOHN H. DOSTER John H. Doster Senior Vice President and Chief Financial Officer (principal financial officer) By: /s/ PATRICK G. O'ROURKE Patrick G. O'Rourke Controller and Chief Accounting Officer (chief accounting officer) 15 EXHIBIT INDEX EXHIBIT NUMBER AND DESCRIPTION 3.2 Sixth Restated Bylaws of Stewart & Stevenson Services, Inc., effective April 11, 2000. 16