-----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, SbEiKgQHpJfSAv5j6mbTiOtbtMeeEhGcVOyXAXTdBbQ84+Bv0sBjyvuwnA0os0wC /y7R1YneD1Jm/Tvb1bRoMA== 0001047469-02-007146.txt : 20021216 0001047469-02-007146.hdr.sgml : 20021216 20021216172435 ACCESSION NUMBER: 0001047469-02-007146 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20021102 FILED AS OF DATE: 20021216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART & STEVENSON SERVICES INC CENTRAL INDEX KEY: 0000094328 STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510] IRS NUMBER: 741051605 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11443 FILM NUMBER: 02859218 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 a2096239z10-q.txt 10-Q 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 NOVEMBER 2, 2002 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 28,490,849 SHARES (Class) (Outstanding at December 3, 2002) 1 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. (the "Company"): Consolidated Condensed Statements of Financial Position - November 2, 2002 and January 31, 2002. Consolidated Condensed Statements of Earnings - Three and Nine Months Ended November 2, 2002 and October 27, 2001. Consolidated Condensed Statements of Cash Flows - Three and Nine Months Ended November 2, 2002 and October 27, 2001. Consolidated Condensed Statements of Comprehensive Income - Three and Nine Months Ended November 2, 2002 and October 27, 2001. Notes to Consolidated Condensed Financial Statements. 2 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION (IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 2, 2002 JANUARY 31, 2002 ---------------- ---------------- (Unaudited) (Audited) ASSETS CURRENT ASSETS Cash and equivalents $ 118,427 $ 81,438 Accounts and notes receivable, net 146,063 166,123 Recoverable costs and accrued profits not yet billed 12,208 - Inventories 243,145 230,300 Excess of current cost over LIFO values (43,688) (42,132) Other current assets 19,723 33,503 Total assets of discontinued operations 15,164 40,693 ---------------- ---------------- TOTAL CURRENT ASSETS 511,042 509,925 ---------------- ---------------- PROPERTY, PLANT AND EQUIPMENT, NET 129,263 119,657 DEFERRED INCOME TAX ASSET 3,312 3,237 INVESTMENTS AND OTHER ASSETS 12,581 16,237 ---------------- ---------------- TOTAL ASSETS $ 656,198 $ 649,056 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 1,633 $ 3,114 Accounts payable 39,556 71,270 Accrued payrolls and incentives 21,307 19,402 Current portion of long-term debt 30,250 250 Billings in excess of incurred costs 78,877 39,874 Other current liabilities 34,924 22,971 Total liabilities of discontinued operations 4,973 8,078 ---------------- ---------------- TOTAL CURRENT LIABILITIES 211,520 164,959 LONG-TERM DEBT 26,350 56,600 ACCRUED POSTRETIREMENT BENEFITS AND PENSION 35,703 32,281 OTHER LONG-TERM LIABILITIES 3,781 3,982 ---------------- ---------------- TOTAL LIABILITIES 277,354 257,822 ---------------- ---------------- SHAREHOLDERS' EQUITY Common stock, without par value, 100,000,000 shares authorized; 28,491,245 and 28,444,281 shares issued and outstanding at November 2, 2002 and January 31, 2002, respectively 54,819 54,177 Accumulated other comprehensive loss (11,906) (8,744) Retained earnings 335,931 345,801 ---------------- ---------------- TOTAL SHAREHOLDERS' EQUITY 378,844 391,234 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 656,198 $ 649,056 ================ ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 3 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------------- ----------------------------------- NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001 ---------------- ---------------- ---------------- ---------------- (Unaudited) (Unaudited) Sales $ 296,582 $ 317,344 $ 881,287 $ 1,022,755 Cost of sales 253,585 278,854 752,661 882,853 ---------------- ---------------- ---------------- ---------------- Gross profit 42,997 38,490 128,626 139,902 Recovery of costs incurred, net - (18,200) - (39,000) Selling and administrative expenses 34,549 38,603 105,036 106,487 Interest expense 1,161 1,316 3,131 4,704 Interest and investment income (485) (706) (1,197) (2,817) Other income, net (31) (438) (545) (731) ---------------- ---------------- ---------------- ---------------- 35,194 20,575 106,425 68,643 Earnings from continuing operations before income taxes 7,803 17,915 22,201 71,259 Income tax expense 2,814 6,261 7,709 26,011 ---------------- ---------------- ---------------- ---------------- NET EARNINGS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 4,989 11,654 14,492 45,248 Earnings (loss) from discontinued operations, net of taxes of $(583), $35, $(3,831), and $(80) (1,223) 40 (7,826) (146) Loss from disposal of discontinued operations, net of taxes of $(2,705) - - (5,551) - Cumulative effect of change in accounting, net of taxes of $(1,798) - - (3,682) - ---------------- ---------------- ---------------- ---------------- NET EARNINGS (LOSS) $ 3,766 $ 11,694 $ (2,567) $ 45,102 ================ ================ ================ ================ Weighted average shares outstanding: Basic 28,490 28,441 28,475 28,285 Diluted 28,585 29,002 28,701 28,951 Earnings (loss) per share: Basic Continuing operations before cumulative effect $ 0.18 $ 0.41 $ 0.51 $ 1.60 Discontinued operations (0.04) - (0.47) (0.01) Cumulative effect of change in accounting - - (0.13) - ---------------- ---------------- ---------------- ---------------- NET EARNINGS (LOSS) PER SHARE $ 0.13 $ 0.41 $ (0.09) $ 1.59 ================ ================ ================ ================ Diluted Continuing operations before cumulative effect $ 0.17 $ 0.40 $ 0.50 $ 1.56 Discontinued operations (0.04) - (0.47) (0.01) Cumulative effect of change in accounting - - (0.13) - ---------------- ---------------- ---------------- ---------------- NET EARNINGS (LOSS) PER SHARE $ 0.13 $ 0.40 $ (0.09) $ 1.56 ================ ================ ================ ================ Cash dividends per share $ 0.085 $ 0.085 $ 0.255 $ 0.255
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 4 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------------- ----------------------------------- NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001 ---------------- ---------------- ---------------- ---------------- (Unaudited) (Unaudited) OPERATING ACTIVITIES Net earnings from continuing operations $ 4,989 $ 11,654 $ 10,810 $ 45,248 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 5,605 3,673 15,936 13,366 Change in operating assets and liabilities net of the effect of acquisition, divestiture and discontinued operations: Accounts and notes receivable, net (1,319) (20,577) 20,060 (52,902) Recoverable costs and accrued profits not yet billed (7,440) - (12,208) 11,829 Inventories, net 1,408 (17,611) (11,289) (29,216) Other current and noncurrent assets 4,981 (3,701) 17,359 (3,024) Accounts payable (8,699) 18,292 (31,714) 4,992 Accrued payrolls and incentives 6,134 (1,074) 1,905 (2,410) Billings in excess of incurred costs 10,890 1,830 39,003 23,927 Other current liabilities 3,412 310 11,952 6,872 Accrued postretirement benefits & pension 1,674 (2,839) 3,692 (1,098) Other long-term liabilities (2,884) (281) (3,632) 507 ---------------- ---------------- ---------------- ---------------- NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS 18,751 (10,324) 61,874 18,091 NET CASH PROVIDED BY DISCONTINUED OPERATIONS 8,288 1,317 3,803 7,956 ---------------- ---------------- ---------------- ---------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 27,039 (9,007) 65,677 26,047 ---------------- ---------------- ---------------- ---------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (5,942) (13,226) (22,744) (33,511) Proceeds from sale of business assets - - - 2,323 Disposal of property, plant and equipment, net 1,100 1,707 2,452 2,845 ---------------- ---------------- ---------------- ---------------- NET CASH USED IN INVESTING ACTIVITIES (4,842) (11,519) (20,292) (28,343) ---------------- ---------------- ---------------- ---------------- FINANCING ACTIVITIES Payments on long-term borrowings (250) (287) (250) (20,418) Payments on short-term notes payable, net (448) (2,319) (1,481) (4,461) Dividends paid (2,422) (2,417) (7,309) (7,193) Exercise of stock options 9 691 644 6,753 ---------------- ---------------- ---------------- ---------------- NET CASH USED IN FINANCING ACTIVITIES (3,111) (4,332) (8,396) (25,319) ---------------- ---------------- ---------------- ---------------- Increase (Decrease) in cash and equivalents 19,086 (24,858) 36,989 (27,615) Cash and equivalents, beginning of period 99,341 107,417 81,438 110,174 ---------------- ---------------- ---------------- ---------------- Cash and equivalents, end of period $ 118,427 $ 82,559 $ 118,427 $ 82,559 ================ ================ ================ ================ Cash Paid For: Interest $ 172 $ 755 $ 2,706 $ 4,856 Taxes (excluding refunds) 1,083 5,883 3,617 24,260
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 5 STEWART & STEVENSON SERVICES, INC. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------------- ----------------------------------- (Unaudited) (Unaudited) NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001 ---------------- ---------------- ---------------- ---------------- Net earnings (loss) $ 3,766 $ 11,694 $ (2,567) $ 45,102 Unrealized gain on forward contracts, net of tax 52 - 336 - Currency translation loss (2,025) (148) (3,498) (234) ---------------- ---------------- ---------------- ---------------- Comprehensive income (loss) $ 1,793 $ 11,546 $ (5,729) $ 44,868 ================ ================ ================ ================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 6 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 herein 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 nine months ended November 2, 2002 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 2003. The Company's fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, the Company's fiscal year 2002 (hereinafter referred to as "Fiscal 2002") commenced on February 1, 2002 and ends on January 31, 2003. In addition, other fiscal years are referred to in the same manner. The Company reports results on the fiscal quarter method with each quarter comprising approximately 13 weeks. The third quarter of Fiscal 2002 began on August 4, 2002 and ended on November 2, 2002. 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, 2002 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 fiscal 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 accompanying consolidated condensed financial statements for Fiscal 2001 and related notes contain certain reclassifications to conform with the presentation used in Fiscal 2002. 7 NOTE B - SEGMENT INFORMATION Financial information relating to industry segments with a reconciliation to earnings from continuing operations before income taxes is as follows (IN THOUSANDS EXCEPT PERCENTAGES):
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------------- ----------------------------------- NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001 ---------------- ---------------- ---------------- ---------------- (Unaudited) (Unaudited) SALES Tactical Vehicle Systems $ 113,715 $ 103,771 $ 334,581 $ 321,036 Power Products 129,597 148,860 410,389 439,899 Distributed Energy Solutions 18,285 15,020 47,899 108,752 Petroleum Equipment 18,405 25,121 33,715 70,228 Airline Products 16,580 17,664 48,038 64,651 Other Business Activities - 6,908 6,665 18,189 ---------------- ---------------- ---------------- ---------------- Total $ 296,582 $ 317,344 $ 881,287 $ 1,022,755 ================ ================ ================ ================ OPERATING PROFIT (LOSS) Tactical Vehicle Systems $ 18,442 $ 32,972 $ 48,931 $ 87,483 Power Products (4,200) 3,277 180 8,597 Distributed Energy Solutions 635 (5,159) (3,618) (194) Petroleum Equipment 351 (1,077) (1,748) 2,123 Airline Products (2,685) (7,838) (7,371) (14,784) Other Business Activities (669) 1,063 (556) 3,498 ---------------- ---------------- ---------------- ---------------- Total 11,874 23,238 35,818 86,723 NON-OPERATING INCOME (EXPENSE) Corporate expenses, net (2,910) (4,007) (10,486) (10,760) Interest expense (1,161) (1,316) (3,131) (4,704) ---------------- ---------------- ---------------- ---------------- Earnings from continuing operations before income taxes $ 7,803 $ 17,915 $ 22,201 $ 71,259 ================ ================ ================ ================ OPERATING PROFIT (LOSS) PERCENTAGE Tactical Vehicle Systems 16.2% 31.8% 14.6% 27.3% Power Products (3.2)% 2.2% 0.0% 2.0% Distributed Energy Solutions 3.5% (34.3)% (7.6)% (0.2)% Petroleum Equipment 1.9% (4.3)% (5.2)% 3.0% Airline Products (16.2)% (44.4)% (15.3)% (22.9)% Other Business Activities 0.0% 15.4% (8.3)% 19.2% Total 4.0% 7.3% 4.1% 8.5%
8 NOTE C - ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations entered into after June 30, 2001 and SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 requires that the balance sheet valuation of goodwill and other intangible assets be evaluated for impairment at least annually. Further, it requires that amortization of goodwill cease beginning with the Company's Fiscal 2002. Transition charges recognized upon implementation of SFAS No. 142 have been accounted for as a cumulative effect of a change in accounting principle. In the first quarter of Fiscal 2002, the Company recognized a pre-tax impairment charge associated primarily with the Airline Products segment of $5.5 million to goodwill ($3.7 million after tax, or $0.13 per share) and ceased amortization on the $7.5 million of remaining unamortized goodwill. The Company's goodwill amortization for Fiscal 2001 was $0.7 million. The Company has adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30. The Company adopted SFAS No. 144 in the fourth quarter of Fiscal 2001, which resulted in the reclassification of certain operations as discontinued. Other than such reclassification, there was no material impact to the Company resulting from adoption. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that an entity recognize costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and not at the date of an entity's commitment to an exit plan. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently evaluating the impact of adoption on its results of operations. NOTE D - 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. As of November 2, 2002, performance type letters of credit totaled approximately $4.0 million and other letters of credit totaled $4.0 million. 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. 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 a defendant in a suit brought under the QUI TAM provision of the False Claims Act, United States of America, ex rel. Werner Stebner v. Stewart & Stevenson Services, Inc. and McLaughlin Body Co., Civil Action No. H-96-3363, in the United States District Court for the Southern District of Texas, Houston Division. The suit seeks penalties and damages in an unspecified amount. The suit alleges that the Company made false statements and certifications in connection with claims for payment for Family of Medium Tactical Vehicles delivered to the U.S. Army starting in 1995, and the suit alleges that the vehicles were substandard because of corrosion problems. The suit was filed under seal in 1996, and following an investigation by the Justice Department, the United States declined to intervene in the suit, which was unsealed on August 29, 2000. The case is set for trial December 1, 2003. The Company believes the claims in the suit are without merit and is vigorously defending the suit. The Company is a defendant in a suit brought by Diamond Offshore on May 30, 2002, arising out of claims relating to a marine riser manufactured by the Company and purchased by Diamond Offshore for use on its Ocean Baroness semi-submersible drilling rig, Cause No. 2002-27831; DIAMOND OFFSHORE INTERNATIONAL CORPORATION, DIAMOND OFFSHORE COMPANY, AND DIAMOND OFFSHORE COMPANY D/B/A DIAMOND OFFSHORE DRILLING CO. v. STEWART & STEVENSON SERVICES, INC.; in the District Court of Harris County, Texas 125th Judicial District Court (the "Baroness Litigation"). The suit was filed following a parting of the marine riser during deep water drilling operations and seeks to recover damages in an unspecified amount. 9 In a separate transaction on or about September 13, 2001, Diamond Offshore placed a purchase order with the Company for a marine riser for use on its Ocean Rover semi-submersible drilling rig. The Company was fulfilling this order, when, on August 19, 2002, Diamond amended its petition in the Baroness Litigation to seek a declaration that Diamond has no further contractual obligations to the Company under the Ocean Rover riser purchase order. On August 21, 2002, before being served with Diamond Offshore's amended petition in the Baroness Litigation, the Company filed a separate lawsuit against Diamond Offshore seeking to recover damages, including attorneys' fees (the "Rover Litigation"). On August 30, 2002, the Court transferred the Rover Litigation to the 125th Judicial Court where the Baroness Litigation is pending. The two cases have been consolidated into one lawsuit in the 125th Judicial Court. The Company is vigorously prosecuting its claims against Diamond Offshore and defending the claims asserted against it by Diamond Offshore in this lawsuit. The Company's primary general liability insurer has denied that it owes the Company a defense or indemnity for any of Diamond Offshore's claims in the Baroness Litigation. The Company disagrees, and has filed suit to determine this issue, in Cause No. 200259100; STEWART & STEVENSON SERVICES, INC. v. ACE AMERICAN INSURANCE COMPANY; in the District Court, Harris County, Texas, 281st Judicial District Court. It is presently impossible to determine the ultimate outcome of these matters or whether the resolution will have a material adverse effect on the Company's financial statements, though the Company believes it is adequately reserved as of the balance sheet date. In 2001, the Company received from the United States Environmental Protection Agency ("EPA") a Request for Information under Section 104(e) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, for information pertaining to the R&H Oil Company Site in San Antonio, Texas (the "Site"). Information provided to the Company by the EPA indicates that the Company may have sent waste oils to the Site for recycling in the late 1980s, and that such waste oils may potentially account for between one and two percent of the volume of total wastes received by the oil recycler at the Site. Since the Company expects to receive a claim for cleanup and other costs for this site, it has established additional reserves in the third quarter, which it believes to be adequate at this time. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established, changes in these and other factors may result in actual costs exceeding the current environmental reserves. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. From time to time, the Company is subject to various environmental remediation requirements at certain of its facilities. The Company believes that the exposure associated with such requirements will not have a material adverse impact on the Company's financial position or liquidity. 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, is expected to have a material effect on the manner in which the Company conducts its business. Although the Company maintains certain insurance policies and has established reserves that it believes to be adequate in each case, an unforeseen outcome in such cases may 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 debt guarantees. The amount of such guarantees has been reduced to approximately $0.5 million as of November 2, 2002. The Company leases certain property and equipment from third parties under operating lease arrangements of varying terms whose annual rentals are less than 1% of consolidated sales. NOTE E - GOVERNMENT CONTRACTING The U.S. government is one of the Company's key customers. As such, decreased government spending or termination of significant government programs could adversely affect the Company's business. The Company's Tactical Vehicle Systems segment depends largely on U.S. government expenditures. In recent years, government contracts in such segment have accounted for substantially all of its annual revenues and operating income. The Company is currently in production year four of its second multi-year contract with the U.S. Department of the Army ("U.S. Army") for production of the Family of Medium Tactical Vehicles ("FMTV"). The U.S. Army exercised options to award a fifth and sixth program year to the current contract. The fifth program year began in October 2002 and the sixth is expected to be completed during September 2004. The funding of the FMTV contract is subject to the inherent uncertainties of Congressional appropriations. As is typical of multi-year defense contracts that may be canceled or adjusted by the government, the FMTV contract must be funded annually by the U.S. Department of the Army and may be terminated at any time for the convenience of the government. As of November 2, 2002, funding in the amount of approximately $1.5 billion for the FMTV contract had been authorized and appropriated by the U.S. Congress, $354 million of which is allocated to future production under the existing contract. A second option year that extends production through September 2004 was funded by the U.S. Congress and awarded by the U.S. Army, subsequent to the end of the fiscal quarter. This second option year will add approximately $396 million 10 to the backlog of the Tactical Vehicle Systems segment, which was not included in the backlog reported as of the end of the quarter. If the FMTV contract is terminated, other than for the Company's default (in which event there could be serious adverse consequences and claims against the Company), it provides for termination charges that will reimburse the Company for certain allowable costs but not necessarily for all costs. Under the FMTV contracts, billings on uncompleted contracts (which are permitted under performance based payment schedules) in excess of incurred costs and accrued profits, which relate to direct costs of manufacturing, engineering, and allocable overhead, are classified as current liabilities (approximately $70 million as of the balance sheet date) and reflect firm obligations to the U.S. Army to perform the contracts and ship vehicles. The Company's cash position at any time reflects the benefits of current liabilities arising from such arrangements since the Company receives cash from the U.S. Army in excess of its incurred costs and accrued profits. As the Company's current contract with the U.S. Army for production of the FMTV is nearing completion, it will be necessary for the Company to secure additional contracts to have continued success in this segment. The Company has completed a contract for the first phase of the competitive bid process for the next multi-year contract for production of the FMTV and submitted its proposal for the final award on November 18, 2002. The U.S. Army is expected to make its decision as to the final award during the first quarter of Fiscal 2003. Production by the successful bidder for the new multi-year contract is anticipated to begin in October of 2004. The U.S. Army will determine the award by a competitive bid process, and there can be no assurance that the Company will be successful in such regard or that a competitor will not be more successful than the Company in this or coming bids and awards for tactical vehicles. If the Company does receive the next multi-year FMTV award, it believes that profit margins would likely be lower than historical levels for the existing FMTV contract. Further, as the next multi-year contract award is for fewer trucks to be produced per fiscal year, revenue is forecasted to be lower relating to this contract unless the U.S. Army exercises options for additional production. Continued success in this segment is dependent on securing additional contracts, such as the next multi-year contract award for the FMTV, after completion of the current contract, while maintaining acceptable operating margins. Major contracts for military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extend over prolonged periods of time. The Company's ultimate profitability on such contracts will depend on the eventual outcome of an equitable settlement of contractual issues with the U.S. government. Due to uncertainties inherent in the estimation and claim negotiation process, no assurances can be given that management's estimates will be accurate, and variances between such estimates and actual results could be material. NOTE F - DISCONTINUED OPERATIONS During the fourth quarter of Fiscal 2001, the Company announced its intention to sell the Petroleum Equipment segment's blowout preventer and controls, valve, and drilling riser business, and as a result, these activities were reclassified for reporting purposes for all periods shown as discontinued operations. The net operating loss from these activities in the third quarter of Fiscal 2002 was $1.8 million ($1.2 million, net of income taxes) and the net profit in the third quarter of Fiscal 2001 was $0.1 million ($.05 million, net of income taxes). For the first three quarters of Fiscal 2002, the net operating loss from these operations was $10.5 million ($7.1 million, net of income taxes), while the net profit for the first three quarters of Fiscal 2001 was $0.8 million ($0.5 million, net of income taxes). The third quarter loss resulted from this business operating at below breakeven levels, as the work completed was primarily related to certain retained contracts. In addition, the Company recognized a loss from disposal of discontinued operations of $8.3 million ($5.6 million, net of income taxes) in the second quarter of Fiscal 2002, resulting from the sale of these operations to Cooper Cameron Corporation for $14.8 million. When the transaction consummated on September 13, 2002 the Company sold certain assets and retained certain contracts and related assets as well as the receivables and certain liabilities of the business including, warranty responsibility for products sold before closing as well as warranty responsibility for retained contracts to be completed. In some cases, the Company has agreements with customers on commitments to support its products. The corporate expenses previously allocated to the Petroleum Equipment segment's discontinued businesses are now absorbed by the remaining continuing operations, resulting in a restatement of operating profit by segment versus that which was originally reported in prior periods. Also included in discontinued operations was a provision for a financial guarantee of $1.1 million ($0.7, net of income taxes) for the nine months ended November 2, 2002. The pre-tax charge of $1.1 million was recorded in the first and second quarters of Fiscal 2002 in the amounts of $0.6 and $0.5 million, respectively. The provision was related to a $6.1 million payment the Company made to a financial institution in connection to an obligation under the financial guaranty for certain gas turbine equipment in Argentina during the third quarter of Fiscal 2002. The equipment was exported to Argentina by the Company's discontinued gas turbine operation in 1996. The payment was precipitated by the Argentine financial crisis, and the Company was required to fund the obligation by the terms of the agreement with the financial institution. The gas turbine equipment provides power to the town of Rio Grande, Argentina. The payment was recorded as an asset on the Company's books. The Company has rights under an export insurance credit policy procured in connection with the transaction and its rights with the Argentine end user of the equipment. The $1.1 million dollar reserve recorded in 11 connection with the $6.1 million asset is believed to be adequate. In total, net of taxes, discontinued operations accounted for a loss of $1.2 million, or $0.04 per diluted share, in the third quarter of Fiscal 2002 versus break even in the third quarter of Fiscal 2001. For the nine months ended November 2, 2002, net of taxes, discontinued operations accounted for a loss of $13.4 million or $0.47 per diluted share versus a net loss of $0.1 million or $0.01 per diluted share for the nine months ended October 27, 2001. The Company's wheelchair lift business, which was previously reported as discontinued operations, has been reclassified into continuing operations as part of the Company's Power Products segment. A suitable agreement could not be reached, and the business is no longer offered for sale. In addition, the gas compression equipment sales operations, which were reported as discontinued operations in the second quarter of Fiscal 2002, have been reclassified into continuing operations, and are included in Other Business Activities. NOTE G - RECONCILIATION OF BASIC TO DILUTED SHARES OUTSTANDING In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," the following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per share as presented on the Consolidated Condensed Statements of Earnings.
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) THREE MONTHS ENDED NINE MONTHS ENDED ---------------- ---------------- ---------------- ---------------- NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001 ---------------- ---------------- ---------------- ---------------- Numerator: Net earnings (loss) available to common shareholders From continuing operations before $ 4,989 $ 11,654 $ 14,492 $ 45,248 cumulative effect of change in accounting From discontinued operations (1,223) 40 (13,377) (146) From cumulative effect of change in accounting - - (3,682) - ---------------- ---------------- ---------------- ---------------- Net earnings $ 3,766 $ 11,694 $ (2,567) $ 45,102 ================ ================ ================ ================ Denominator: Denominator for basic earnings per share - Weighted-average shares outstanding 28,490 28,441 28,475 28,285 Effect of dilutive securities: Employee and director stock options 95 561 226 666 ---------------- ---------------- ---------------- ---------------- Denominator for diluted earnings per share - Adjusted weighted-average shares outstanding 28,585 29,002 28,701 28,951 ================ ================ ================ ================ Basic earnings (loss) per share From continuing operations before cumulative effect $ 0.18 $ 0.41 $ 0.51 $ 1.60 From discontinued operations (0.04) 0.00 (0.47) (0.01) From cumulative effect of change in accounting - - (0.13) - ---------------- ---------------- ---------------- ---------------- Net earnings $ 0.13 $ 0.41 $ (0.09) $ 1.59 ================ ================ ================ ================ Diluted earnings (loss) per share From continuing operations before cumulative effect $ 0.17 $ 0.40 $ 0.50 $ 1.56 From discontinued operations (0.04) 0.00 (0.47) (0.01) From cumulative effect of change in accounting - - (0.13) - ---------------- ---------------- ---------------- ---------------- Net earnings $ 0.13 $ 0.40 $ (0.09) $ 1.56 ================ ================ ================ ================ Number of anti-dilutive stock options outstanding 1,383 326 1,327 256
NOTE H - RECOVERY OF COSTS INCURRED The Company recorded settlements from the U.S. Army, net of related expenses, of $20.8 million and $18.2 million in the first and third quarters of Fiscal 2001, respectively. These amounts are presented on the Company's Consolidated Condensed Statements of Earnings in the caption entitled, "Recovery of costs incurred, net." 12 The $18.2 million recorded in the third quarter of Fiscal 2001 resulted from a claim the Company filed with the U.S. Government in Fiscal 2000 seeking recovery of costs incurred by the Company resulting from retrofitting all vehicles produced under the first multi-year FMTV contract for changes in drive train components. All costs associated with the retrofitting were expensed by the Company. The U.S. Army and the Company agreed to attempt resolution through voluntary participation in the Alternate Disputes Resolution process managed by the Armed Services Board of Contract Appeals. This process concluded with the agreement that the Company would receive $18.5 million in settlement of its claims, which was netted against associated costs of $0.3 million. The $20.8 million recorded in the first quarter of Fiscal 2001 resulted from a claim the Company filed with the U.S. Government in Fiscal 1998 seeking recovery of costs incurred resulting from delays from the original production plan in the first multi-year FMTV contract. The U.S. Army and the Company participated in a voluntary dispute resolution process resulting in a $22.0 million settlement. The settlement was netted against $1.2 million in related expenses. NOTE I - COMPONENTS OF PROPERTY, PLANT AND EQUIPMENT Summarized below are the components of Property, Plant & Equipment, net:
(IN THOUSANDS) November 2, 2002 January 31, 2002 ---------------- ---------------- Machinery and equipment $ 126,781 $ 113,697 Buildings and leasehold improvements 93,990 80,530 Revenue earning assets 19,343 19,348 Computer hardware and software 40,156 31,635 Accumulated depreciation and amortization (171,711) (158,407) ---------------- ---------------- 108,559 86,803 Construction in progress 6,423 19,111 Land 14,281 13,743 ---------------- ---------------- Property, plant & equipment, net $ 129,263 $ 119,657 ---------------- ----------------
The company placed a new fabrication facility into service in Sealy, Texas during Fiscal 2002. The fabrication facility accounted for increases of $9.8 million and $3.1 million in Machinery and equipment and Buildings and leasehold improvements, respectively. The Company also capitalized $5.1 million for a new service facility in Dallas, Texas and $8.7 million for software development in Fiscal 2002. Construction in progress as of November 2, 2002 was primarily related to additional spending for Machinery and equipment for the fabrication shop in Sealy, Texas and Machinery and equipment for several locations in the Power Products and Airline Products segments. NOTE J - PENSION PLANS The assets of the Company's defined benefit pension plans, are, to a substantial degree, invested in the capital markets and managed by a professional third party under the review of the Company's pension plan committee. The actual rate of of return on plan assets during fiscal 2002 has been lower than expected long-term rate of return used in the Company's pension calculations. Consequently, to comply with accounting rules, the Company expects to record an increase to its pension liability during the fourth quarter of Fiscal 2002, with an offsetting charge to stockholders equity (through other comprehensive income). The amount of such charge cannot be reasonably determined at this time. The Company anticipates that the decline in the value of pension plan assets will result in increased pension costs in future periods. If capital market performance in future periods continues to be lower than the long-term rate of return assumed in the Company's pension calculations, the amount of such increases could be material. During the first nine months of Fiscal 2002, the Company contributed $1.3 million to the pension plans. It does not expect to make any additional contributions during the last quarter of Fiscal 2002. 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, 2002. The following discussion contains forward-looking statements. 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. The Company's fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, the Company's fiscal year 2002 (hereinafter referred to as "Fiscal 2002") commenced on February 1, 2002 and ends on January 31, 2003. Other years are referred to in the same manner. The Company reports results on the fiscal quarter method with each quarter comprising approximately 13 weeks. The third quarter of Fiscal 2002 commenced on August 4, 2002 and ended on November 2, 2002, while the third quarter of Fiscal 2001 commenced on July 29, 2001 and ended on October 27, 2001. 13 RESULTS OF OPERATIONS Sales for the third quarter of Fiscal 2002 were $296.6 million compared to sales of $317.3 million in the same period a year ago. The decrease of $20.7 million in sales resulted primarily from lower sales of $19.3 million in the Power Products segment, as further described below in "Segment Data." Gross profit of $43.0 million, or 14.5%, was realized on the revenue recorded compared to $38.5 million, or 12.1%, in the third quarter of the prior year. The improvement in gross margin of 2.4 percentage points was driven principally by improved margins in the Tactical Vehicle Systems segment resulting from an improved mix in truck shipments, as well as from productivity improvements and cost reductions in that segment. Recovery of costs incurred, net represents a recovery pursuant to a certified claim with the U.S. government for costs incurred by the Company resulting from production delays in the first multi-year Family of Medium Tactical Vehicles ("FMTV") contract in the Tactical Vehicle Systems segment. A settlement of $22.0 million was reached during the first quarter of Fiscal 2001, and a settlement of $18.5 million was reached during the third quarter of Fiscal 2001. Each settlement was reduced by $1.2 million and $0.3 million, respectively, for expenses related to legal and professional fees and other costs. No such recovery was received in the first nine months of Fiscal 2002. Selling and administrative expenses for the third quarter of Fiscal 2002 were $34.5 million, or 11.6% of sales, versus $38.6 million, or 12.2% of sales in the comparable quarter of Fiscal 2001. Spending in the prior year included approximately $4.0 million for restructuring in the Airline Products segment, as compared to $1.2 million in the Power Products segment in the current quarter. Interest income for the quarter was $0.5 million as compared to $0.7 million in the same quarter of the prior year. Although the Company's level of invested cash increased versus the prior year, the lower average rate of return on invested cash resulted in the decrease. Net earnings from continuing operations before cumulative effect of change in accounting in the third quarter of Fiscal 2002 were $5.0 million or $0.17 per diluted share. Excluding the $0.03 per diluted share impact of the $1.2 million in pretax costs associated with the Power Products organization change, earnings from continuing operations were $0.20 per diluted share. DISCONTINUED OPERATIONS During the fourth quarter of Fiscal 2001, the Company announced its intention to sell the Petroleum Equipment segment's blowout preventer and controls, valve, and drilling riser business, and as a result, these activities were reclassified for reporting purposes for all periods shown as discontinued operations. The net operating loss from these activities in the third quarter of Fiscal 2002 was $1.8 million ($1.2 million, net of income taxes) and the net profit in the third quarter of Fiscal 2001 was $0.1 million ($.05 million, net of income taxes). For the first three quarters of Fiscal 2002, the net operational loss from these operations was $10.5 million ($7.1 million, net of income taxes), while the net profit for the first three quarters of Fiscal 2001 was $0.8 million ($0.5 million, net of income taxes). The third quarter loss resulted from this business was attributable to expenses related to the sale of this business, as well as the completion of certain retained contracts. In addition, the Company recognized a loss from disposal of discontinued operations of $8.3 million ($5.6 million, net of income taxes) in the second quarter of Fiscal 2002, resulting from the sale of these operations to Cooper Cameron Corporation for $14.8 million. When the transaction consummated on September 13, 2002 the Company sold certain assets and retained certain contracts and related assets as well as the receivables and certain liabilities of the business including, warranty responsibility for products sold before closing as well as warranty responsibility for retained contracts to be completed. In some cases, the Company has agreements with customers on commitments to support its products. The corporate expenses previously allocated to this discontinued business are now absorbed by the remaining continuing operations, resulting in a reclassification of operating profit by segment versus that which was originally reported in prior periods. The Company's wheelchair lift business, which was previously reported as discontinued operations, has been reclassified into continuing operations as part of the Company's Power Products segment. A suitable agreement could not be reached, and the business is no longer offered for sale. In addition, the gas compression equipment sales operations, which were reported as discontinued operations in the second quarter of Fiscal 2002, have been reclassified into continuing operations, and are included in Other Business Activities. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING Effective February 1, 2002, the Company adopted two statements promulgated by the Financial Accounting Standards Board, Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for business combinations and SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 requires that the balance sheet valuation of goodwill and other intangible assets be evaluated for impairment at least annually. Further, it requires that amortization of goodwill cease. Any transition charges recognized upon implementation of SFAS No. 142 have been accounted for as a cumulative 14 effect of a change in accounting principle and recorded net of tax. In the first quarter of Fiscal 2002, the Company recognized a pre-tax impairment charge of $5.5 million ($3.7 million after tax) to goodwill primarily related to the Airline Products segment and ceased amortization on the $7.5 million of remaining unamortized goodwill. The Company's goodwill amortization for Fiscal 2001 was $0.7 million. SEGMENT DATA The Company's management analyzes financial results in five business segments based on distinct product and customer types: Tactical Vehicle Systems, Power Products, Distributed Energy Solutions, Petroleum Equipment, and Airline Products. Other businesses not otherwise classified are shown as Other Business Activities. Such segments are described below along with analyses of their respective results of operations. The Tactical Vehicle Systems segment, which manufactures tactical vehicles for the U.S. Army and others, recorded sales of $113.7 million in the third quarter of Fiscal 2002 compared to $103.8 million in the same period a year ago. The third quarter sales were higher on slightly higher truck shipments in the quarter, but were favorably impacted by a higher mix of lower priced option trucks in the current period as compared to the third quarter of last year. Also contributing to the higher level of sales was a higher service revenue component related to engineering, retrofit, and field services. Operating profit for the quarter was $18.4 million, compared with $33.0 million in the third quarter of the prior year. The prior year quarter included a pre-tax gain associated with a net settlement from the U.S. Army for $18.2 million. After taking this settlement into account, operating margins improved from 14.2% to 16.2% as a result of the favorable mix of non-option priced trucks as well as productivity improvements and lower spending realized in the current period. In the fourth quarter of Fiscal 2001, the U.S. Army exercised an option to award a fifth program year to the current production contract, which added $374 million to the backlog for this segment. Deliveries under this award began in October 2002 and are expected to be completed during September 2003. As of November 2, 2002, funding in the amount of approximately $1.5 billion for the FMTV contract had been authorized and appropriated by the U.S. Congress, $354 million of which is allocated to future production under the existing contract. After the end of this third quarter of Fiscal 2002, the U.S. Army awarded and the U.S. Congress funded a second option year that extends production through September 2004. This option year added approximately $396 million to the backlog of the Tactical Vehicle Systems segment, which is not included in the backlog reported as of the end of the quarter. As the current contract with the U.S. Army for production of the FMTV is nearing completion, the Company continues its preparation for the next multi-year contract award. On November 18, 2002, the Company submitted its competitive proposal to continue manufacture of the FMTV for the U.S. Army for another five years. The Company expects that the final decision will be made as to the winner of this contract during the first quarter of Fiscal 2003. Production by the successful bidder for the new multi-year contract is anticipated to begin in October of 2004. If the Company receives the next multi-year FMTV award, it believes that its margins would likely be lower than historical levels for the existing FMTV contract. Further, as the next multi-year contract award is for fewer trucks to be produced per fiscal year, revenue is forecasted to be lower relating to this contract, unless the U.S. Army exercises options for additional production. Continued success in this segment is dependent on securing additional contracts, such as the next multi-year contract award for the FMTV, after completion of the current contract, while maintaining acceptable operating margins. During the second quarter of Fiscal 2002, the Tactical Vehicle Systems segment submitted a bid to the United Kingdom's Ministry of Defence ("UK MoD") pursuant to a request for proposals for their multi-year requirement for over 8,000 trucks. The Company is responding to this opportunity with a United Kingdom-based consortium of entities that all have extensive experience meeting the demanding requirements of the UK MoD. Subsequently, the UK MOD has issued a request for amended submittals, which are now due in January 2003. The Company cannot reliably predict when the UK MoD will make its decision as to the final award for the production contract or whether the Company will receive the award, but the decision is expected to be made in the second quarter of Fiscal 2003. The Company cannot reliably predict the impact of the contract unless and until the contract is awarded to the Company. Production on this contract, should it be awarded to the Company, is expected to begin after Fiscal 2003. The Power Products segment, which markets and services a wide range of industrial equipment, recorded sales in the third quarter of Fiscal 2002 of $129.6 million, compared to $148.9 million in the third quarter of Fiscal 2001. Sales were $410.4 million during the first nine months of Fiscal 2002, compared to $439.9 million recognized in the first nine months of the prior year. The decrease in sales was reflected in all components of revenue, including equipment, parts, service, and rentals, and was reflected across most of the geography in which the Company operates. The weakness in the first half of the year in many of the key markets the Company serves continued in the third quarter, and the Company does not expect to see a significant recovery during the remainder of this fiscal year. While there are intermittent signs of a strengthening economy, the lack of a steady stream of sales volume in parts and service 15 indicates a relatively flat oil and gas marketplace in the U.S. until late 2003. The Company's over-the-highway customers are now facing higher insurance costs and other operating expenses related to more stringent environmental regulations, which has decreased the amount of funding available for the Company's parts and service products. For the third quarter of Fiscal 2002, the Power Products segment recognized an operating loss of $4.2 million, compared to operating profit of $3.3 million in the prior year third quarter. For the first nine months of Fiscal 2002 and 2001, this segment's operating profit was $0.2 million and $8.6 million, respectively. Lower margin rates realized on sales for the quarter and higher operating expenses associated with implementation of information management systems, bad debt, and warranty obligations contributed to the net operating loss for the period and the reduced operating profit for the nine months. In addition, the Company recognized $1.2 million of costs in the third quarter of the current year associated with the recently announced organization changes in this segment. The Company's action plan to improve the financial performance of the Power Products segment includes (i) further process improvement arising out of the new organization structure that was announced in the second quarter, (ii) continued productivity improvements from backroom consolidation efforts, (iii) further leverage of a segment-wide approach to supply chain management, and (iv) completion of the information management system. Subsequent to the close of the third quarter, the Company completed the purchase of additional Hyster distributorship in New Mexico and West Texas for approximately $3 million, which are expected to add $5 million in annual revenue. The Distributed Energy Solutions segment was established in the fourth quarter of Fiscal 2001 and represents activities associated with the higher-horsepower reciprocating power generation equipment business. Third quarter sales were $18.3 million as compared to sales of $15.0 million in the same period of Fiscal 2001, an increase of 22%. The higher sales volume was due to completion and shipment of certain international projects and continued work on the CVN-77 contract for standby power on the next nuclear power aircraft carrier for the U.S. Navy. This higher sales level, combined with cost reductions, resulted in the segment posting an operating profit of $0.7 million for the quarter versus a $5.2 million loss in the same quarter of the previous year. Backlog decreased $9.6 million during the third quarter of Fiscal 2002 to $24.2 million. However, subsequent to the end of the quarter, contracts were awarded with a value of $12.4 million. Sales in the first nine months of Fiscal 2002 were $47.9 million as compared to $108.8 million in the same period of Fiscal 2001, and operating loss for the first nine months of Fiscal 2002 was $3.6 million compared to an operating loss of $0.2 million for the first nine months of Fiscal 2001. The decrease is primarily attributable to certain large turnkey power generation projects that were completed during the first nine months of Fiscal 2001 for which comparable projects did not exist in the first nine months of Fiscal 2002. Continued performance above breakeven levels is dependent on winning additional contracts in the near term. The Petroleum Equipment segment manufactures equipment for the oil and gas exploration, production, and well stimulation industries. Sales in this segment were $18.4 million for the third quarter of Fiscal 2002 versus $25.1 million reported for the same period last year. For the first nine months of Fiscal 2002, sales were $33.7 million, as compared to sales of $70.2 million for the same period of Fiscal 2001. The decrease in sales for this segment was primarily attributable to the generally lower levels of business in prior periods that resulted in delays in receiving new equipment orders. The order backlog remained relatively unchanged versus the second quarter of this year at $44.3 million. Increasing order activity is occurring, primarily in international markets. This segment posted an operating profit for the third quarter of $0.4 million versus an operating loss of $1.1 million in the previous year. For the first nine months of Fiscal 2002, operating loss was $1.7 million versus operating profit of $2.1 million in the prior year. Based on current backlog, the Company expects that revenue in this segment will increase in the fourth quarter. The Airline Products segment, which manufactures airline ground support products, mobile railcar movers, and snow blowers, recorded sales of $16.6 million in the third quarter of Fiscal 2002, compared with $17.7 million in the same quarter last year. Sales for the first nine months of Fiscal 2002 and 2001 were $48.0 million and $64.7 million, respectively. The level of equipment sales continues to be lower than the prior year due to the impact of the decline in the airline industry in the domestic market, resulting in lower levels of spending. Operating loss for the third quarter of Fiscal 2002 was $2.7 million, which compares to an operating loss of $7.8 million in the same quarter last year. The prior year quarter results included $4.0 million in non-recurring expenses related to restructuring of this segment. This segment continues to operate at sales levels below breakeven profitability. The low levels of capital spending in the airline industry are expected to continue in the near term and are reflected in the backlog of $4.2 million at the end of the third quarter. Such an environment has significantly shortened customer order cycles and requires this segment to build equipment for anticipated orders, slightly increasing working capital requirements. Any improvement in this business would come from the development of international, regional airline, package carrier, and governmental markets. The Company is evaluating potential acquisition candidates, as the businesses that serve these markets must consolidate in light of current conditions. Other business activities not identified in a specific segment include predominantly the gas compression equipment packaging business. The Company has exited this business and has closed the facility. UNFILLED ORDERS 16 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 November 2, 2002 and October 27, 2001 were as follows:
November 2, October 27, 2002 2001 ----------- ----------- (In millions) Tactical Vehicle Systems $ 388.9 $ 404.7 Power Products 50.3 79.9 Distributed Energy Solutions 24.2 53.7 Petroleum Equipment 44.3 27.4 Airline Products 4.2 8.4 ----------- ----------- $ 511.9 $ 574.1 =========== ===========
Total unfilled orders decreased by $62.2 million during the quarter. The Tactical Vehicle Systems segment ("TVS") backlog includes the fifth option year exercised by the U.S. Government, but continued to decline as the Company completed scheduled work on the second multi-year contract for the FMTV. In the fourth quarter, the Company expects to show an increase in the backlog in TVS, as an additional option year, with approximately $396 million of revenue, has been added by the Department of Defense. Subsequent to that increase, the Company expects the backlog in TVS to decrease as existing contractual orders are filled. LIQUIDITY AND CAPITAL RESOURCES The balance in cash and cash equivalents at the end of the quarter was $118.4 million, $37.0 million higher than at the end of Fiscal 2001. During the first nine months of Fiscal 2002, cash of $61.9 million was provided by continuing operations compared to $18.1 million in the prior year, while $3.8 million was provided by discontinued operations compared to $8.0 million in the prior year. The increased earning of cash during Fiscal 2002 related primarily to the collection of certain receivables and the timing of government performance payments related to the funding of production of the FMTV. Under the FMTV contracts, billings on uncompleted contracts (which are permitted under performance based payment schedules) in excess of incurred costs and accrued profits, which relate to direct costs of manufacturing, engineering, and allocable overhead, are classified as current liabilities (approximately $70 million as of the balance sheet date) and reflect firm obligations to the U.S. Army to perform the contracts and ship vehicles. The Company's cash position at any time reflects the benefits of current liabilities arising from such arrangements since the Company receives cash from the U.S. Army in excess of its incurred costs and accrued profits. Partially offsetting such increases in cash was a decrease in accounts payable as a result of the timing of payments. Investing activities consumed $20.3 million during the first nine months of Fiscal 2002 compared to $28.3 million in the first nine months of Fiscal 2001, principally for expenditures related to the now-complete construction of a fabrication facility at its Tactical Vehicle Systems segment and certain investments in long-term rental equipment. Financing activities used $8.4 million during Fiscal 2002, principally for the payment of dividends. Financing activities used $25.3 million in Fiscal 2001, primarily for the repayment of indebtedness and the payment of dividends. The Company's sources of cash liquidity include 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. As of November 2, 2002 the Company had no borrowings outstanding under its $150 million, unsecured revolving debt facility. Under the terms of this debt facility, the Company had available to it $77 million, net of $8 million outstanding under a $25 million letter of credit sub facility. This revolving debt facility matures during Fiscal 2004. In addition, the Company has $55 million in senior notes outstanding, $30 million of which is due in May of 2003. The Company's unsecured long-term notes, which include the revolving credit notes and senior notes, were issued pursuant to agreements containing covenants that restrict indebtedness, guarantees, rentals, and other items. Additional covenants in the revolving credit notes require the Company to maintain a minimum tangible net worth and interest coverage ratio. The Company is not in violation of any such covenants. 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. 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 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 equivalents and committed lines of credit, the Company may seek to borrow under other long-term 17 financing instruments or seek additional equity capital. FACTORS THAT MAY AFFECT FUTURE RESULTS FORWARD-LOOKING STATEMENTS This filing contains forward-looking statements that are based on management's current expectations, estimates, and projections. These statements are not guarantees of future performance and involve a number of risks, uncertainties, and assumptions and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Many factors, including those discussed more fully elsewhere in this release and in the Company's filings with the Securities and Exchange Commission, particularly its latest annual report on Form 10-K and quarterly reports on Form 10-Q, as well as others, could cause results to differ materially from those stated. Specific important factors that could cause actual results, performance, or achievements to differ materially from such forward-looking statements include risk of competition, risks relating to technology, risks of general economic conditions, risks of oil and gas industry economic conditions, risks of airline industry economic conditions, risks as to terrorist attacks on the U.S. and their impact on the U.S. economy, risks relating to personnel, risks of dependence on government, inherent risks of government contracts, risks of claims and litigation, risks of product defects, risks as to foreign sales and global trade matters, risks as to cost controls, risks as to information technology, risks as to acquisitions, risks as to currency fluctuations, risks as to environmental and safety matters, risks as to distributorships, risks as to licenses, and credit risks, all as more specifically outlined in the Company's latest annual report on Form 10-K. In addition, such forward-looking statements could be affected by general industry and market conditions and growth rates, general domestic and international conditions including interest rates, inflation and currency exchange rates and other future factors. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. In addition, the following factor should be considered: RISKS OF DEPENDENCE ON GOVERNMENT AND FAILURE TO OBTAIN NEW GOVERNMENT CONTRACTS. Because the U.S. government is one of our key customers, decreased government spending or termination of significant government programs could adversely affect our business. Our Tactical Vehicle Systems segment depends largely on U.S. government expenditures. In recent years, government contracts in such segment have accounted for substantial percentages of our annual revenues and operating income. We are currently in production year four of our second multi-year contract with the U.S. Department of the Army ("U.S. Army") for production of the Family of Medium Tactical Vehicles ("FMTV"). The U.S. Army exercised an option to award a fifth program year to the current contract, which begins in October 2002 and is expected to be completed by September 2003. The U.S. Army holds an additional option to award a sixth program year that, if exercised by the U.S. Army, could extend production of the FMTV through September 2004. The funding of the new FMTV contract is subject to the inherent uncertainties of Congressional appropriations. As is typical of multi-year defense contracts that may be canceled or adjusted by the government, the FMTV contract must be funded annually by the U.S. Department of the Army and may be terminated at any time for the convenience of the government. As of November 2, 2002, funding in the amount of approximately $1.5 billion for the FMTV contract had been authorized and appropriated by the U.S. Congress, $354 million of which is allocated to future production under the existing contract. If the FMTV contract is terminated, other than for our default (in which event there could be serious adverse consequences and claims against us, including repayment of amounts (classified as current liabilities on our balance sheet) billed and received from the U.S. Army in excess of costs incurred and profits accrued and other monetary exposures), the contract includes a provision under which we will be reimbursed for certain allowable costs but not necessarily for all costs. As our current contract with the U.S. Army for production of the FMTV is nearing completion, it will be necessary for us to secure additional contracts for us to have continued success in this segment. We have been awarded a contract under the first phase of the competitive bid process for the next multi-year contract for production of the FMTV and are currently competing for the final award. The U.S. Army is scheduled to make its decision as to the final award of the next multi-year contract during our first quarter of Fiscal 2003. The U.S. Army will determine the award by a competitive bid process, and there can be no assurance that we will be successful in such regard or that our competitor will not be more successful than we will be in this or coming bids and awards for tactical vehicles. If we do receive the award, we believe that margins will likely be lower than historical levels on the existing FMTV contract. Further, as the next multi-year contract award is for fewer trucks to be produced per fiscal year, revenue is forecasted to be lower relating to this contract unless the U.S. Army exercises options for additional production. Moreover, there can be no assurance as to whether future governmental spending will adequately support our business in this area, and substantial decreases in government spending, the loss of the U.S. government as a customer or the cancellation of key significant government programs could materially and adversely affect our operations. Even if government spending in general continues at current levels, we are not assured that we can compete effectively as to the receipt of specific government orders and contract awards or as to the timing thereof. In our forward-looking statements, we have assumed that we will continue to have satisfactory benefits from our government contracting business. 18 ITEM 4. CONTROLS AND PROCEDURES a) Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's periodic reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company has evaluated the effectiveness of its disclosure controls and procedures within the 90 days prior to the filing of this report with the supervision and the participation of the Company's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. b) Change in Internal Controls There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of the most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. During 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 a defendant in a suit brought under the QUI TAM provision of the False Claims Act, United States of America, ex rel. Werner Stebner v. Stewart & Stevenson Services, Inc. and McLaughlin Body Co., Civil Action No. H-96-3363, in the United States District Court for the Southern District of Texas, Houston Division. The suit seeks penalties and damages in an unspecified amount. The suit alleges that the Company made false statements and certifications in connection with claims for payment for Family of Medium Tactical Vehicles delivered to the U.S. Army starting in 1995, and the suit alleges that the vehicles were substandard because of corrosion problems. The suit was filed under seal in 1996, and following an investigation by the Justice Department, the United States declined to intervene in the suit, which was unsealed on August 29, 2000. The case is set for trial December 1, 2003. The Company believes the claims in the suit are without merit and is vigorously defending the suit. The Company is a defendant in a suit brought by Diamond Offshore on May 30, 2002, arising out of claims relating to a marine riser manufactured by the Company and purchased by Diamond Offshore for use on its Ocean Baroness semi-submersible drilling rig, Cause No. 2002-27831; DIAMOND OFFSHORE INTERNATIONAL CORPORATION, DIAMOND OFFSHORE COMPANY, AND DIAMOND OFFSHORE COMPANY D/B/A DIAMOND OFFSHORE DRILLING CO. v. STEWART & STEVENSON SERVICES, INC.; in the District Court of Harris County, Texas 125th Judicial District Court (the "Baroness Litigation"). The suit was filed following a parting of the marine riser during deep water drilling operations and seeks to recover damages in an unspecified amount. In a separate transaction on or about September 13, 2001, Diamond Offshore placed a purchase order with the Company for a marine riser for use on its Ocean Rover semi-submersible drilling rig. The Company was fulfilling this order, when, on August 19, 2002, Diamond amended its petition in the Baroness Litigation to seek a declaration that Diamond has no further contractual obligations to the Company under the Ocean Rover riser purchase order. On August 21, 2002, before being served with Diamond Offshore's amended petition in the Baroness Litigation, the Company filed a separate lawsuit against Diamond Offshore seeking to recover damages, including attorneys' fees (the "Rover Litigation"). On August 30, 2002, the Court transferred the Rover Litigation to the 125th Judicial Court where the Baroness Litigation is pending. The two cases have been consolidated into one lawsuit in the 125th Judicial Court. The Company is vigorously prosecuting its claims against Diamond Offshore and defending the claims asserted against it by Diamond Offshore in this lawsuit. The Company's primary general liability insurer has denied that it owes the Company a defense or indemnity for any of Diamond Offshore's claims in the Baroness Litigation. The Company disagrees, and has filed suit to determine this issue, in Cause No. 200259100; STEWART & STEVENSON SERVICES, INC. v. ACE AMERICAN INSURANCE COMPANY; in the District Court, Harris County, Texas, 281st Judicial District Court. It is presently impossible to determine the ultimate outcome of these matters or whether the resolution will have a material adverse effect on the Company's financial statements, though the Company believes it is adequately reserved as of the balance sheet date. In 2001, the Company received from the United States Environmental Protection Agency ("EPA") a Request for Information under Section 104(e) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, for information pertaining to the R&H Oil Company Site in San Antonio, Texas (the "Site"). Information provided to the Company by the EPA indicates that the Company may have sent waste oils to the Site for recycling in the late 1980s, and that such waste oils may potentially account for between one and two percent of the volume of total wastes received by the oil recycler at the Site. Since the Company expects to receive a claim for cleanup and other costs related to this site, it has established additional reserves in the third quarter, which it believes to be adequate at this time. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established, changes in these and other factors may result in actual costs exceeding the current environmental reserves. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. 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 20 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. 21 Item 4. Submission of Matters to a Vote of Security Holders On June 11, 2002 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.
For Withheld Against Abstained ---------- --------- --------- --------- ELECTION OF DIRECTORS Khleber V. Attwell 22,708,420 3,269,785 ---------- --------- C. Jim Stewart III 24,771,184 1,207,021 ---------- --------- Darvin M. Winick, PhD 23,036,942 2,941,263 ---------- --------- Howard Wolf 21,798,161 4,180,044 ---------- --------- APPROVAL OF AMENDED AND RESTATED 1996 DIRECTOR STOCK PLAN 21,602,857 3,884,843 490,505 ---------- --------- --------- APPROVAL OF ERNST & YOUNG INDEPENDENT PUBLIC ACCOUNTANTS OF THE COMPANY 24,644,621 1,318,504 15,080 ---------- --------- ---------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Exhibit 3.1 - Sixth Restated Bylaws of Stewart & Stevenson Services, Inc. Effective April 11, 2001, as Amended Through December 10, 2002 Form 8-K Report Date - August 5, 2002 (Stewart & Stevenson Announces Strategic Leadership Changes In Power Products Division) Items Reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - August 19, 2002 (Stewart & Stevenson Honors Discontinued Argentine Obligation) Items Reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - August 22, 2002 (Stewart & Stevenson Fiscal 2002 Second Quarter Earnings Release And Conference Call Schedule) Items Reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - August 29, 2002 (Stewart & Stevenson Services Reports Fiscal 2002 Second Quarter Results And Sale Of Discontinued Business) Items Reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - September 12, 2002 (Stewart & Stevenson Services, Inc. Consolidated Condensed Statements Of Earnings (Reclassification Of Discontinued Operations) And Segment Information) Items Reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - September 16, 2002 (Stewart & Stevenson Announces Closing Of Sale Of Discontinued Business) Items Reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - September 17, 2002 (Stewart & Stevenson Announces Dividend) Items Reported - Item 5. Other Events Item 7. Exhibits Form 8-K Report Date - October 4, 2002 (Stewart & Stevenson Services To Move To New York Stock Exchange) Items Reported - Item 5. Other Events Item 7. Exhibits 22 Form 8-K Report Date - October 8, 2002 (Stewart & Stevenson Presentation To Investors) Items Reported - Item 7. Exhibits Item 9. Regulation FD Disclosure Form 8-K Report Date - October 18, 2002 (Stewart & Stevenson Services Begins Trading On The New York Stock Exchange) Items Reported - Item 5. Other Events Item 7. Exhibits 23 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 16th day of December 2002. STEWART & STEVENSON SERVICES, INC. By: /s/ Michael L. Grimes ---------------------- Michael L. Grimes President and Chief Executive Officer (Principal Executive Officer) By: /s/ John B. Simmons ------------------- John B. Simmons Vice President and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 24 EXHIBIT INDEX EXHIBIT NUMBER AND DESCRIPTION 3.1 Sixth Restated Bylaws of Stewart & Stevenson Services, Inc. Effective April 11, 2001, as Amended Through December 10, 2002 25 26 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Michael L. Grimes, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Stewart & Stevenson Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 16, 2002 /s/ Michael L. Grimes ---------------------- Michael L. Grimes President and Chief Executive Officer (Principal Executive Officer) 27 CHIEF FINANCIAL OFFICER CERTIFICATION I, John B. Simmons, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Stewart & Stevenson Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 16, 2002 /s/ John B. Simmons ------------------------------ John B. Simmons Vice President and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 28 INFORMATIONAL ADDENDUM TO REPORT ON FORM 10-Q PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 NOT FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934 Solely for the purpose of Section 906 of the Sarbanes-Oxley Act of 2002, and solely to the extent this certification may be applicable to this Report on Form 10-Q, the undersigned hereby certify that this report on Form 10-Q of Stewart & Stevenson Services, Inc. fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Stewart & Stevenson Services, Inc. /s/ Michael L. Grimes ------------------------------ Name: Michael L. Grimes Title: President and Chief Executive Officer /s/ John B. Simmons ------------------------------ Name: John B. Simmons Title: Vice President and Chief Financial Officer 29 EX-3.1 3 a2096239zex-3_1.txt EXHIBIT 3.1 EXHIBIT 3.1 SIXTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. EFFECTIVE APRIL 11, 2000 ARTICLE I OFFICES SECTION 1.1. OFFICES. The principal business office of the Corporation shall be at Houston, Texas or at such other location within the State of Texas as the Board of Directors may, from time to time, establish by resolution. The Corporation may have such other business offices within or without the State of Texas as the Board of Directors may from time to time establish or the business of the Corporation may require. ARTICLE II CAPITAL STOCK SECTION 2.1. CERTIFICATES REPRESENTING SHARES. Certificates representing shares of stock of the Corporation shall be consecutively numbered and in such form or forms as comply with the requirements of law and the Restated Articles of Incorporation and as the Board of Directors shall approve. Such certificates shall be signed by the President or a Vice President, and the Secretary or an Assistant Secretary of the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the President or Vice President and the Secretary or Assistant Secretary may be facsimiles, engraved or printed, if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. In case any officer or officers who have signed or whose facsimile signature or signatures have been placed upon such certificate shall have ceased to be such officer or officers before such certificate is issued, it may be adopted and issued by the Corporation with the same effect as if he or they had not ceased to be such officer or officers as of the date of its issuance, and the issuance and delivery thereof by the Corporation shall constitute adoption thereof by the Corporation. SECTION 2.2. STOCK CERTIFICATE REGISTER AND SHAREHOLDERS OF RECORD. The Secretary of the Corporation shall keep at the registered office of the Corporation, or cause a duly appointed transfer agent or registrar to keep at its principal office, a share register showing the names of the shareholders and their addresses, the number of shares held by each, the number and date of issue of all certificates representing shares of the Corporation, the number and date of cancellation of every certificate surrendered for cancellation and whether such certificates originated from original issue or transfer. Such information may be kept in any medium capable of reproducing the information in clearly legible form and shall be the official list of shareholders of record of the Corporation for all purposes. The Corporation shall be entitled to treat the holder of record of any shares of the Corporation as the owner thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or any rights deriving from such shares on the part of any other person, including (but without limitation) a purchaser, assignee, or transferee, unless and until such other person becomes the holder of record of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such other person. SECTION 2.3. TRANSFER OF STOCK. The shares represented by any share certificates of the Corporation are transferable only on the stock certificate register of the Corporation by the holder of record thereof in person or by a duly authorized attorney or legal representative upon surrender of the certificate for such shares properly endorsed or assigned. SECTION 2.4. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one or more transfer agents or registrars of the shares, or both, and may require all share certificates to bear the signature of a transfer agent or registrar or both. SECTION 2.5. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate for shares of stock in the place of any certificate theretofore issued and alleged to have been lost, stolen or destroyed, but the Board of Directors may require the owner of such lost, stolen or destroyed certificate, or his legal representative, to furnish an affidavit as to such loss, theft, or destruction and to give a bond in such form and substance, and with such surety or sureties, with fixed or open penalty, as it may direct, to indemnify the Corporation, and the transfer agents and registrars, if any, against any claim that may be made on account of the alleged loss, theft or destruction of such certificate. Any such new certificate shall be plainly marked "Duplicate" on its face. ARTICLE III THE SHAREHOLDERS SECTION 3.1. ANNUAL MEETINGS. An annual meeting of the shareholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, within or without the State of Texas, as may be designated by the Board of Directors or officer calling the meeting at 10:00 in the morning of the second Tuesday in June, or on such other date and time as the Board of Directors or officer calling such meeting shall fix and set forth in the notice of the meeting. At the annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the annual meeting. To be properly brought before the annual meeting of shareholders, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section 3.1, who shall be entitled to vote 2 at such meeting and who complies with the notice procedures set forth in this Section 3.1. For business to be properly brought before an annual meeting by a shareholder, the shareholder, in addition to any other applicable requirements, must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of shareholders of the Corporation. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of voting stock of the Corporation which are beneficially owned by the shareholder, (d) a representation that the shareholder intends to appear in person or by proxy at the meeting to bring the proposed business before the annual meeting, and (e) a description of any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 3.1. The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 3.1, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 3.1, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 3.1. SECTION 3.2. SPECIAL MEETINGS. Except as otherwise provided by law or by the Restated Articles of Incorporation, special meetings of the shareholders may be called by the Chairman of the Board, the President, the Board of Directors, or the holders of not less than one-tenth of all the shares having voting power at such meeting, and shall be held at the principal office of the Corporation, at such time as is stated in the notice calling such meeting, or at such other place as the person or body calling such meeting may determine and state in such notice. SECTION 3.3. NOTICE OF MEETINGS - WAIVER. Written, electronic or printed notice, stating the place, day and hour of any meeting and, in case of a special shareholders' meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than fifty (50) days before the date of the meeting by or at the direction of the Chairman of the Board, the President, or the officer, body or person calling the meeting, to each shareholder of record entitled to vote at such meeting. Notice shall be delivered personally, by mail or, subject to receipt by the Corporation of written authorization, electronic transmission. If delivered personally, such notice shall be deemed delivered when actually received by the shareholder. If delivered by mail, such 3 notice shall be deemed delivered when deposited in the United Sates mail addressed to the shareholder at his address as it appears on the stock certificate register of the Corporation, with postage thereon prepaid. If delivered by electronic transmission, such notice shall be deemed delivered when the notice or the location from which the notice can be retrieved or otherwise viewed is sent to the electronic mail address specified by each shareholder that authorized electronic transmission. Such further or earlier notice shall be given as may be required by law. Waiver by a shareholder of notice in writing of a shareholders' meeting, signed by him, whether before or after the time stated therein, shall be equivalent to the giving of such notice. No notice shall be necessary for any adjourned meeting. SECTION 3.4. CLOSING OF STOCK CERTIFICATE REGISTER AND FIXING RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock certificate register shall be closed for a stated period but not to exceed, in any case, fifty (50) days. If the stock certificate register shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such registers shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock certificate register, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than fifty (50) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock certificate register is not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made, as provided in this Section, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of the stock certificate register and the stated period of closing has expired. SECTION 3.5. VOTING LIST. The officer or agent having charge of the stock certificate register for shares of the Corporation shall make, at least ten (10) days before such meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during the usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. Failure to comply with this Section shall not effect the validity of any action taken at such meeting. 4 SECTION 3.6. QUORUM AND OFFICERS. Except as otherwise provided by law, by the Restated Articles of Incorporation or by these Bylaws, the holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders, but the shareholders present at any meeting, although less than a quorum, may from time to time adjourn the meeting to some other day and hour, without notice other than announcement at the meeting. The vote of the holders of a majority of the shares entitled to vote and thus represented at a meeting at which a quorum is present shall be the act of the shareholders' meeting, unless the vote of a greater number is required by law, the Restated Articles of Incorporation or these Bylaws. The Chairman of the Board, or in his absence, the President, shall preside at and the Secretary, or in his absence, any Assistant Secretary shall keep the records of each meeting of shareholders, and in the absence of all such officers, their respective duties shall be performed by persons appointed by the meeting. SECTION 3.7. PROXIES. A shareholder may vote either in person or by proxy executed in writing by the shareholder, or by his duly authorized attorney-in-fact. Proxies shall be dated but need not be sealed, witnessed or acknowledged. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless provided expressly therein to be irrevocable, and unless otherwise made irrevocable by law. Proxies shall be filed with the Secretary of the Corporation before or at the time of the meeting. SECTION 3.8. BALLOTING. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. At each meeting inspectors of election may be appointed by the presiding officer of the meeting, and at any meeting for the election of directors, inspectors shall be so appointed on the demand of any shareholder present or represented by proxy and entitled to vote at the election of directors. No director or candidate for the office of directors shall be appointed as such inspector. SECTION 3.9. VOTING RIGHTS; VOTING FOR DIRECTORS. Each outstanding share of common stock shall be entitled to one (1) vote upon each matter submitted to a vote at a meeting of shareholders. No shareholder shall have the right to cumulate his votes for the election of directors, but each share shall be entitled to one vote in the election of each director. SECTION 3.10 NOMINATIONS FOR ELECTION AS A DIRECTOR. Only persons who are nominated in accordance with the procedures set forth in these Bylaws and qualify for nomination pursuant to Section 4.1 shall be eligible for election by shareholders as, and to serve as, directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or a duly constituted committee thereof or (b) by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section 3.10, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 3.10. Such nominations, other than those made by or at the direction of the 5 Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at the annual meeting of the shareholders of the Corporation, not less than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of shareholders of the Corporation, and (ii) with respect to an election to be held at a special meeting of shareholders of the Corporation for the election of directors not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed to shareholders of the Corporation as provided in Section 3.3 or public disclosure of the date of the special meeting was made, whichever first occurs. Such shareholder's notice to the Secretary shall set forth (x) as to each person whom the shareholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serve as a director if elected), and (y) as to the shareholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such shareholder and (ii) the class and number of shares of voting stock of the Corporation which are beneficially owned by such shareholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. In the event that a person is validly designated as a nominee to the Board of Directors in accordance with the procedures set forth in this Section 3.10 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee. Other than directors chosen pursuant to the provisions of Section 4.3, no person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.10. The presiding officer of the meeting of shareholders shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 3.10, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 3.10. ARTICLE IV THE BOARD OF DIRECTORS SECTION 4.1. NUMBER AND QUALIFICATIONS. The business and affairs of the Corporation shall be managed and controlled by the Board of Directors, and subject to any restrictions imposed by law, by the Restated Articles of Incorporation, or by these 6 Bylaws, the Board of Directors may exercise all the powers of the Corporation. The Board of Directors shall consist of eleven (11) members. The number thereof may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors need not be residents of Texas and need not be shareholders. Directors shall retire as of the date of the annual meeting of shareholders first occurring following the Director's 73rd birthday; provided, that any Director who was originally elected on or before June 19, 1981 shall not be required to retire until the date of the annual meeting of shareholders first occurring following such Director's 75th birthday. No person shall be qualified for election or re-election as a director of the Corporation if he is an incumbent director and has attended fewer than fifty (50%) percent of the meetings of the Board of Directors held during any fiscal year commencing after January 31, 1981, which such incumbent was entitled to attend as a director. SECTION 4.2. CLASSIFICATION AND TERM. The Board of Directors shall be divided into three classes, each class consisting as nearly as possible of one-third (1/3) of the number of directors that make up the full Board of Directors. At each annual meeting of shareholders, the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to hold office until the third succeeding annual meeting of shareholders. SECTION 4.3. VACANCIES. Any vacancy on the Board of Directors may be filled by the vote of a majority of the remaining directors though less than a quorum of the Board of Directors; provided, that the Board of Directors may not fill more than two (2) vacancies caused by an increase in the number of directors during any period between two (2) successive annual meetings of shareholders. A director elected to fill a vacancy shall hold office for the unexpired portion of his predecessor's term if such vacancy was created by the death, resignation, disqualification or removal of a director or until the next annual meeting of shareholders if such vacancy was created by an increase in the size of the Board of Directors. SECTION 4.4. PLACE OF MEETING. Meetings of the Board of Directors may be held either within or without the State of Texas, at whatsoever place is specified by the officer or director calling the meeting. In the absence of other designation, the meeting shall be held at the principal business office of the Corporation. SECTION 4.5. REGULAR MEETINGS. The Board of Directors shall hold no fewer than four (4) regular meetings in each fiscal year. One such regular meeting (the "Annual Meeting of Directors") shall be held immediately following the annual meeting of shareholders, at the place of such shareholder meeting, and the other regular meetings shall be held at such times and places as the Board of Directors shall establish by resolution at the regular meeting following the annual meeting of shareholders. No notice of any kind of such regular meetings shall be necessary to either old or new members of the Board of Directors. 7 SECTION 4.6. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held at any time by call of the Chairman of the Board, the President (if a director) or by a majority of the directors. The Secretary or officer performing his duties shall give notice of special meetings to each director at his usual business or residence address by mailing such notice at least five (5) days or one hundred twenty (120) hours before the meeting or by personally delivering or, subject to receipt of written authorization, electronically transmitting the same at least one (1) day or twenty-four (24) hours before the meeting. No notice shall be necessary for any adjourned meeting. A waiver of notice of any special meeting, in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Such notice or waiver thereof need not specify the business to be transacted at, or the purpose of, such meeting. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express and announced purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. SECTION 4.7. QUORUM. Seven directors shall constitute a quorum for the transaction of business. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the Board of Directors unless a larger number is required by applicable law, the Restated Articles of Incorporation or these Bylaws, but any one or more directors, although less than a quorum, may adjourn the meeting to some other day or hour. SECTION 4.8. CHAIRMAN OF THE BOARD. At each Annual Meeting of Directors, the Board of Directors shall elect from its membership a Chairman of the Board who shall serve in such capacity until the next Annual Meeting of Directors or until his death, resignation, disqualification or removal if sooner. The Chairman of the Board shall preside at all meetings of the Board of Directors and at all meetings of the shareholders of the Company. SECTION 4.9. PROCEDURE AT MEETINGS. The Chairman of the Board shall preside at meetings of the Board of Directors. In his absence at any meeting, the President (if a director) shall preside, and in the absence of both the Chairman of the Board and the President, a member of the Board of Directors selected by the members present shall preside. The Secretary of the Corporation shall act as secretary at all meetings of the Board, or in his absence the presiding officer of the meeting may designate any person to act as secretary. At meetings of the Board of Directors, business shall be transacted in such order as from time to time the Board of Directors may determine. SECTION 4.10. PRESUMPTION OF ASSENT. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the 8 Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 4.11. COMPENSATION. Directors as such shall not receive any stated salary for their service, but by resolution of the Board of Directors (a) an annual directors fee and (b) a fixed sum and expenses for attendance, if any, may be allowed to each director who is not an officer or employee of the Corporation for attendance at each regular or special meeting of the Board of Directors or of any Committee thereof; but nothing herein shall preclude any director from serving the Corporation in any other capacity or receiving compensation therefor. SECTION 4.12. STANDING COMMITTEES. The Board of Directors by resolution adopted by a majority of the number of directors fixed by the Bylaws shall designate from their number an Executive Committee and an Audit Committee. The Executive Committee shall consist of five (5) persons. Each member shall serve until the next annual meeting of shareholders or until such director's retirement, removal, disqualification, or death. The Executive Committee shall meet upon the call of the chairman of such committee or any two (2) members thereof and shall have and may exercise all of the authority of the Board of Directors in the business and affairs of the Corporation except (a) the power to authorize or approve the sale or other transfer of any real property now owned or hereafter acquired by the Corporation; (b) the power to vote, direct the vote or grant proxies relating to any stock owned by the Corporation; (c) the power to authorize or approve purchases or commitments for goods or services with an aggregate market value in any single transaction or group of related transactions exceeding $5,000,000 except for goods and services purchased in the ordinary course of business for inventory or pursuant to capital expenditure budgets approved by the Board of Directors; (d) the power to authorize or approve the incurrence or guaranty of indebtedness with an original principal amount in excess of $1,000,000 and a maturity of longer than one (1) year; (e) the power to make loans, guaranties, investments, or other commitments outside the ordinary course of business in excess of $5,000,000 at any time outstanding to any one person or group of persons; and (f) where action of the Board of Directors is specified by the Texas Business Corporation Act or by other applicable law. The Audit Committee shall consist of four (4) persons, all of whom shall be independent of management and free of any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment as a committee member. Each member shall serve until the next annual meeting of shareholders or until such director's retirement, removal, disqualification, or death. The Audit Committee shall meet no fewer than two (2) times in each fiscal year of the Corporation upon the call of the chairman of such committee or any two (2) members thereof and shall have and may exercise such responsibilities, authority and power as the Board of Directors specifies. The designation of Standing Committees and delegation of authority thereto shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. 9 SECTION 4.13. OTHER COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors, by resolution adopted by a majority of the number of directors fixed by the Bylaws, may designate from their number such compensation, nominating and other committees as they shall, from time to time, deem necessary and proper. Such committees shall be composed of not less than three members and shall have and exercise such of the Board of Directors' authority as shall by resolution, be delegated to it. The designation of such other committees and the delegation of authority thereto shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. SECTION 4.14. MEETINGS AND REPORTS OF THE COMMITTEES. The Committees shall meet from time to time as set forth in the Bylaws and on call of the Chairman or any two or more members thereof. Notice of each such meeting, stating the place, day and hour thereof, shall be served personally on each member of such Committee, or shall be mailed, delivered, telephoned or, subject to receipt of written authorization, electronically transmitted to his address on the books of the Corporation, at least twenty-four (24) hours before the meeting. No such notice need state the business proposed to be transacted at the meeting. No notice of the time or place of any meeting of such Committee need be given to any member thereof who attends in person or who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. No notice need be given of an adjourned meeting of any Committee. Meetings of the Committees may be held at such place or places, either within or outside of the State of Texas, as such Committee shall determine, or as may be specified or fixed in the respective notices or waivers thereof. Each Committee may fix its own rules of procedure. They shall keep record of their proceedings and shall report these proceedings to the Board of Directors at the regular meetings thereof held next after they have been taken. SECTION 4.15. ADVISORY DIRECTORS. The Board of Directors, by resolution adopted by a majority of the number of directors fixed by the Bylaws, may appoint from those persons who have previously served as a director of the Corporation, such advisory directors as the Board of Directors may, from time to time, determine to be desirable. Such advisory directors shall be ex-officio members of the Board of Directors, shall hold office from the date elected until the next following annual meeting of the Board of Directors unless sooner removed in the manner provided for the removal of Directors, shall be entitled to receive notice of and to attend all meetings of the Board of Directors and shall be reimbursed for all out-of-pocket expenses incurred to attend meetings of the Board of Directors. Advisory directors shall not be a member of any committee of the Board of Directors, vote on any matter brought before the Board of Directors for action or be counted for the purposes of determining whether a quorum exists. Failure to notify the advisory directors of any meeting shall not render any meeting or any action taken at such meeting void. 10 ARTICLE V OFFICERS SECTION 5.1. NUMBER. The officers of the Corporation shall consist of the President, Secretary, Treasurer and Controller; and, in addition, such Vice Presidents, other officers and assistant officers and agents as may be deemed necessary and elected or appointed by the Board of Directors. The Board of Directors may by resolution designate any officer as the Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, or other title. Any two or more offices may be held by the same person. SECTION 5.2. ELECTION; TERM; QUALIFICATION. Officers shall be chosen by the Board of Directors at the Annual Meeting of the Directors and may be chosen at any other meeting of the Board of Directors. Each officer shall hold office until the next following Annual Meeting of Directors, or until his death, resignation, retirement or removal. SECTION 5.3. REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors at its pleasure, but such removal shall be without prejudice to other contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create any contract rights. SECTION 5.4. RETIREMENT. No person may serve as an officer of the Corporation after the last day of the fiscal year in which such officer celebrates his sixty-fifth birthday or such later date as is necessary to comply with applicable laws. SECTION 5.5. VACANCIES. Any vacancy in any office for any cause may be filled by the Board of Directors at any meeting. SECTION 5.6. DUTIES. The officers of the Corporation shall have such powers and duties, except as modified by the Board of Directors, as generally pertain to their offices, respectively, as well as such powers and duties as from time to time shall be conferred by the Board of Directors and by these Bylaws. SECTION 5.7. THE PRESIDENT. The President shall, subject to the control of the Board of Directors, have general supervision and control over all of the business, assets and affairs of the Corporation. All other officers shall report as directed by the President. In the absence of the Chairman of the Board, the President shall perform all of the duties of the Chairman of the Board, and when so acting shall have all of the powers of, and be subject to all restrictions upon, the Chairman of the Board. SECTION 5.8. SECRETARY. The Secretary shall: (a) keep the minutes of all meetings of the shareholders, of the Board of Directors, and of all committees of the Board of Directors, in one or more books provided for that purpose and shall distribute a copy of all such minutes to the members of the Board of Directors immediately on receipt thereof, (b) see that all notices are duly given in accordance with the provisions of these 11 Bylaws or as required by law, (c) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all documents the execution of which on behalf of the Corporation under its seal is duly authorized, (d) have general charge of the stock certificate register, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, of the Corporation, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the office of the Corporation during business hours, and (e) in general perform all duties and exercise all powers incident to the office of the Secretary and such other duties and powers as the Board of Directors or the President from time to time may assign to or confer on him. SECTION 5.9. TREASURER. The Treasurer shall be legal custodian of all monies, notes, securities, and other valuables which may from time to time come into the possession of the Corporation and shall perform such other duties as the Bylaws may require or the Board of Directors may prescribe. The Treasurer shall have the power and authority to incur or guaranty indebtedness on behalf of the Corporation without the prior approval of the Board of Directors provided that the original principal amount thereof is less than $1,000,000 and the original maturity is less than one year. SECTION 5.10. CONTROLLER. The Controller shall keep complete and accurate books and records of account showing accurately at all times the financial condition of the Corporation. He shall furnish at meetings of the Board of Directors, or whenever requested, a statement of the financial condition of the Corporation, and shall perform such other duties as the Bylaws may require or the Board of Directors may prescribe. SECTION 5.11. THE VICE PRESIDENTS. The Board of Directors may from time to time elect such Vice Presidents as the Board of Directors deems appropriate and assign thereto such general or specific powers, authority and responsibility as the Board of Directors deems appropriate. The Board of Directors may specify the order in which the Vice Presidents may act in the absence of the President. Any action taken by a Vice President in the performance of the duties of President shall be conclusive evidence of the absence of the President. The Vice Presidents shall perform such other duties as may, from time to time, be assigned to them by the Board of Directors or the President. A Vice President may also sign with the Secretary or an Assistant Secretary certificates of stock of the Corporation. SECTION 5.12. ASSISTANT OFFICERS. Any Assistant Secretary, Assistant Treasurer or Assistant Controller appointed by the Board of Directors shall have power to perform, and shall perform, all duties incumbent upon the Secretary, the Treasurer or the Controller of the Corporation, respectively, subject to the general direction of such officers, and shall perform such other duties as the Bylaws may require or the Board of Directors may prescribe. SECTION 5.13. SALARIES. The salaries or other compensation of the officers shall be fixed from time to time by the Board of Directors. No officer shall be prevented from 12 receiving such salary or other compensation by reason of the fact that he is also a director of the Corporation. SECTION 5.14. BONDS OF OFFICERS. The Board of Directors may secure the fidelity of any or all of such officers by bond or otherwise, in such terms and with such surety or sureties, conditions, penalties or securities as shall be required by the Board of Directors. SECTION 5.15. DELEGATION. The Board of Directors may delegate temporarily the powers and duties of any officer of the Corporation, in case of his absence or for any other reason, to any other officer, and may authorize the delegation by any officer of the Corporation of any of his powers and duties to any agent or employee subject to the general supervision of such officer. ARTICLE VI MISCELLANEOUS SECTION 6.1. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents, of the Corporation to enter into any contract or execute and deliver any instrument in the name of or on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the Board of Directors or by these Bylaws, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement, or to pledge its credit or to render it liable pecuniarily for any purpose or to any amount. SECTION 6.2. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officers or employees of the Corporation as shall from time to time be authorized pursuant to these Bylaws or by resolution of the Board of Directors. SECTION 6.3. DEPOSITORIES. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board of Directors may from time to time designate, upon such terms and conditions as shall be fixed by the Board of Directors. The Board of Directors may from time to time authorize the opening and keeping with any such depository as it may designate of general and special bank accounts, and may make such special rules and regulations with respect thereto, not inconsistent with the provisions of these Bylaws, as it may deem expedient. SECTION 6.4. ENDORSEMENT OF STOCK CERTIFICATES. Subject to the specific directions of the Board of Directors, any share or shares of stock issued by any corporation and owned by the Corporation (including reacquired shares of the Corporation) may, for sale or transfer, be endorsed in the name of the Corporation by the President or any Vice President, and attested or witnessed by the Secretary or any Assistant Secretary either with or without affixing the corporate seal. 13 SECTION 6.5. VOTING OF SHARES OWNED BY THE CORPORATION. Subject to the direction of the Board of Directors, the President, the Secretary and the Treasurer, or any of them, shall have the power and authority on behalf of the Corporation to attend and to vote and to grant proxies to be used at any meeting of shareholders of any corporation in which the Corporation may hold stock. The Board of Directors may confer like powers upon any other person or persons. SECTION 6.6. CORPORATE SEAL. The corporate seal shall be in the form of a five pointed star surrounded by the words "Stewart & Stevenson Services, Inc.," and such seal, or a facsimile thereof, may be impressed on, affixed to, or in any manner reproduced upon, instruments of any nature required to be executed by officers of the Corporation. SECTION 6.7. FISCAL YEAR. The fiscal year of the Corporation shall begin on February 1 and end on January 31 of the next following year, or on such other dates as the Board of Directors at any time shall determine. SECTION 6.8. RESIGNATIONS. Any director or officer may resign at any time. Such resignations shall be made in writing and shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the Chairman of the Board, President or Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. SECTION 6.9. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Corporation shall indemnify any person against any judgment, penalty, fine, settlement and reasonable expenses incurred by him in connection with any threatened, pending or completed action, suit or proceeding in which such person is or is threatened to be made a party because he is or was serving as an officer or director of the Corporation or at the request of the Corporation as an officer, director, partner, venturer, proprietor, trustee, employee, agent or other functionary of another entity and (i) such person is wholly successful in the defense thereof, or (ii) it is determined in the manner required by law that such person conducted himself in good faith, reasonably believed that his conduct was in the best interest of the Corporation and had no reasonable cause to believe that his conduct was unlawful; provided, however, that no person shall be indemnified if such indemnity is prohibited by applicable law. Any such indemnification shall be reported in writing to the shareholders of the Corporation on or before the notice or waiver of notice of the next shareholders' meeting and in any event within twelve (12) months of the indemnification. The right of indemnification under this Section 6.9 shall be in addition to any other rights to which such persons may be entitled and is intended to provide the broadest benefits permitted by law. SECTION 6.10. LOANS TO AND GUARANTIES FOR OFFICERS AND DIRECTORS. The Corporation shall not lend money to or guaranty the indebtedness of any of its officers or directors unless such loan or guaranty is approved by the number of directors equal to a majority of the full Board of Directors none of whom are then or will become as a result of 14 such action indebted to the Corporation and on the express finding by such directors that such loan or guaranty is reasonably expected to directly or indirectly benefit the Corporation. ARTICLE VII AMENDMENTS SECTION 7.1. AMENDMENTS. The Board of Directors, by the affirmative vote of seven directors may alter, amend or repeal these Bylaws or adopt new Bylaws. The shareholders by affirmative vote of two-thirds (2/3) of the issued and outstanding shares entitled to vote may alter, amend or repeal these Bylaws or adopt new Bylaws, without notice at any regular meeting, or if notice of the proposed amendment be contained in the notice of any special meeting. 15 FIRST AMENDMENT TO THE SIXTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. Effective as of April 28, 2000, Section 4.1 and 4.7 of the Bylaws of Stewart & Stevenson Services, Inc. was amended to read as follows: SECTION 4.1. NUMBER AND QUALIFICATIONS. The business and affairs of the Corporation shall be managed and controlled by the Board of Directors, and subject to any restrictions imposed by law, by the Restated Articles of Incorporation, or by these Bylaws, the Board of Directors may exercise all the powers of the Corporation. The Board of Directors shall consist of twelve (12) members. The number thereof may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors need not be residents of Texas and need not be shareholders. Directors shall retire as of the date of the annual meeting of shareholders first occurring following the Director's 73rd birthday; provided, that any Director who was originally elected on or before June 19, 1981 shall not be required to retire until the date of the annual meeting of shareholders first occurring following such Director's 75th birthday. No person shall be qualified for election or re-election as a director of the Corporation if he is an incumbent director and has attended fewer than fifty (50%) percent of the meetings of the Board of Directors held during any fiscal year commencing after January 31, 1981, which such incumbent was entitled to attend as a director. SECTION 4.7. QUORUM. Eight directors shall constitute a quorum for the transaction of business. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the Board of Directors unless a larger number is required by applicable law, the Restated Articles of Incorporation or these Bylaws, but any one or more directors, although less than a quorum, may adjourn the meeting to some other day or hour. 16 SECOND AMENDMENT TO THE SIXTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. Effective as of June 13, 2000, the first sentence in the third paragraph of Section 4.12 Standing Committees of the Sixth Restated Bylaws of the Company was amended to read as follows: "The Audit Committee shall consist of five (5) persons, all of whom shall be independent of management and free of any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment as a committee member." 17 THIRD AMENDMENT TO THE SIXTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. Effective as of September 12, 2000, Section 4.1 of the Sixth Restated Bylaws of the Company is amended to read as follows in its entirety: SECTION 4.1. NUMBER AND QUALIFICATIONS. The business and affairs of the Corporation shall be managed and controlled by the Board of Directors, and subject to any restrictions imposed by law, by the Restated Articles of Incorporation, or by these Bylaws, the Board of Directors may exercise all the powers of the Corporation. The Board of Directors shall consist of thirteen (13) members, PROVIDED, HOWEVER, that such number shall be automatically reduced to twelve (12) upon the retirement, resignation, death or removal of a director on or after September 12, 2000. The number thereof may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors need not be residents of Texas and need not be shareholders. Directors shall retire as of the date of the annual meeting of shareholders first occurring following the Director's 73rd birthday; PROVIDED, that any Director who was originally elected on or before June 19, 1981 shall not be required to retire until the date of the annual meeting of shareholders first occurring following such Director's 75th birthday. No person shall be qualified for election or re-election as a director of the Corporation if he is an incumbent director and has attended fewer than fifty percent (50%) of the meetings of the Board of Directors held during any fiscal year commencing after January 31, 1981, which such incumbent was entitled to attend as a director. 18 FOURTH AMENDMENT TO THE SIXTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. Effective as of December 11, 2000, Section 5.4 Retirement of the Sixth Restated Bylaws of the Company is deleted. 19 FIFTH AMENDMENT TO THE SIXTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. Effective June 12, 2001, Section 4.1 Number and Qualifications, Section 4.7 Quorum and the first sentence in the third paragraph of Section 4.12 Standing Committees of the Sixth Restated Bylaws of the Company are amended to read as follows in their entirety: SECTION 4.1. NUMBER AND QUALIFICATIONS. The business and affairs of the Corporation shall be managed and controlled by the Board of Directors, and subject to any restrictions imposed by law, by the Restated Articles of Incorporation, or by these Bylaws, the Board of Directors may exercise all the powers of the Corporation. The Board of Directors shall consist of ten (10) members. The number thereof may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors need not be residents of Texas and need not be shareholders. Directors shall retire as of the date of the annual meeting of shareholders first occurring following the Director's 73rd birthday. No person shall be qualified for election or re-election as a director of the Corporation if he is an incumbent director and has attended fewer than fifty (50%) percent of the meetings of the Board of Directors held during any fiscal year. SECTION 4.7. QUORUM. Six directors shall constitute a quorum for the transaction of business. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the Board of Directors unless a larger number is required by applicable law, the Restated Articles of Incorporation or these Bylaws, but any one or more directors, although less than a quorum, may adjourn the meeting to some other day or hour. First sentence in the third paragraph of SECTION 4.12 STANDING COMMITTES: The Audit Committee shall consist of not less than three (3) directors who are qualified and independent of management and free of any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment as a committee member. 20 SIXTH AMENDMENT TO THE SIXTH RESTATED BYLAWS OF STEWART & STEVENSON SERVICES, INC. RESOLVED, that SECTION 4.1 NUMBER AND QUALIFICATIONS of the Sixth Restated Bylaws of the Company be amended to read in its entirety as follows: "SECTION 4.1. NUMBER AND QUALIFICATIONS. The business and affairs of the Corporation shall be managed and controlled by the Board of Directors, and subject to any restrictions imposed by law, by the Restated Articles of Incorporation, or by these Bylaws, the Board of Directors may exercise all the powers of the Corporation. The Board of Directors shall consist of ten (10) members. The number thereof may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors need not be residents of Texas and need not be shareholders. Directors who have attained the age of 73 years at the time their term expires shall resign on the expiration of their term. No person shall be qualified for election or re-election as a director of the Corporation if he is an incumbent director and has attended fewer than fifty (50%) percent of the meetings of the Board of Directors held during any fiscal year." 21 -----END PRIVACY-ENHANCED MESSAGE-----