SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 27, 2001
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 28,444,281 SHARES
(Class) (Outstanding at November 30, 2001)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following information required by Rule 10-01 of Regulation S-X is provided
herein for Stewart & Stevenson Services, Inc. and Subsidiaries (the "Company"):
Consolidated Condensed Statements of Financial Position - October 27, 2001 and
January 31, 2001.
Consolidated Condensed Statements of Earnings - Nine and Three Months Ended
October 27, 2001 and October 28, 2000.
Consolidated Condensed Statements of Cash Flows - Nine and Three Months Ended
October 27, 2001 and October 28, 2000.
Consolidated Condensed Statements of Comprehensive Income - Nine and Three
Months Ended October 27, 2001 and October 28, 2000.
Notes to Consolidated Condensed Financial Statements.
2
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
OCTOBER 27, 2001 JANUARY 31, 2001
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 82,732 $ 109,955
Accounts and notes receivable, net 224,886 172,441
Recoverable costs and accrued profits not yet billed 2,596 22,415
Inventories 257,182 231,716
Excess of current cost over LIFO values (50,495) (51,309)
Other current assets 16,817 16,539
------------ ------------
TOTAL CURRENT ASSETS 533,718 501,757
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 122,058 114,765
INVESTMENTS AND OTHER ASSETS 22,018 22,340
------------ ------------
$ 677,794 $ 638,862
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 8,150 $ 12,611
Accounts payable 70,039 66,437
Accrued payrolls and incentives 18,731 21,395
Current portion of long-term debt 437 20,437
Billings in excess of costs 54,565 30,638
Other current liabilities 40,013 36,685
------------ ------------
TOTAL CURRENT LIABILITIES 191,935 188,203
COMMITMENTS AND CONTINGENCIES
LONG-TERM DEBT 57,123 66,568
ACCRUED POSTRETIREMENT BENEFITS & PENSION 17,781 18,879
OTHER LONG-TERM LIABILITIES 8,407 4,628
------------ ------------
TOTAL LIABILITIES 275,246 278,278
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock, without par value, 100,000,000 shares
authorized; 28,444,281 and 28,067,566 shares issued at
October 27, 2001 and January 31, 2001, respectively 52,688 48,325
Currency translation adjustment (1,163) (929)
Retained earnings 351,023 313,188
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 402,548 360,584
------------ ------------
$ 677,794 $ 638,862
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED
----------------------------------- ------------------------------------
OCTOBER 27, 2001 OCTOBER 28, 2000 OCTOBER 27, 2001 OCTOBER 28, 2000
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
Sales $ 1,061,572 $ 814,333 $ 329,662 $ 286,242
Cost of sales 914,853 677,185 289,445 236,297
------------ ------------ ------------ ------------
Gross profit 146,719 137,148 40,217 49,945
Recovery of costs incurred, net (39,000) - (18,200) -
Selling and administrative expenses 112,165 97,818 40,154 34,037
Interest expense 5,212 6,739 1,454 2,383
Interest and investment income (2,830) (6,230) (718) (1,638)
Other (income) expense, net (730) 1,051 (444) 1,684
------------ ------------ ------------ ------------
74,817 99,378 22,246 36,466
------------ ------------ ------------ ------------
Earnings before income taxes 71,902 37,770 17,971 13,479
Income tax expense 26,246 13,903 6,290 4,889
------------ ------------ ------------ ------------
Net earnings from continuing operations 45,656 23,867 11,681 8,590
Loss on disposal of discontinued operations, net
of tax of $372 (628) - - -
------------ ------------ ------------ ------------
Net earnings $ 45,028 $ 23,867 $ 11,681 $ 8,590
============ ============ ============ ============
Weighted average shares outstanding:
Basic 28,285 28,018 28,441 28,041
Diluted 28,951 28,277 29,002 28,478
Earnings per share:
Basic
Continuing operations $ 1.61 $ 0.85 $ 0.41 $ 0.31
Loss on disposal of discontinued operations (0.02) - - -
------------ ------------ ------------ ------------
NET EARNINGS PER SHARE $ 1.59 $ 0.85 $ 0.41 $ 0.31
============ ============ ============ ============
Diluted
Continuing operations $ 1.58 $ 0.84 $ 0.40 $ 0.30
Loss on disposal of discontinued operations (0.02) - - -
------------ ------------ ------------ ------------
NET EARNINGS PER SHARE $ 1.56 $ 0.84 $ 0.40 $ 0.30
============ ============ ============ ============
Cash dividends per share $ 0.255 $ 0.255 $ 0.085 $ 0.085
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
--------------------------------- ---------------------------------
NINE MONTHS ENDED THREE MONTHS ENDED
--------------------------------- ---------------------------------
OCTOBER 27, 2001 OCTOBER 28, 2000 OCTOBER 27, 2001 OCTOBER 28, 2000
---------------- ---------------- ---------------- ----------------
(Unaudited)
OPERATING ACTIVITIES
Net earnings from continuing operations $ 45,656 $ 23,867 $ 11,681 $ 8,590
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 14,867 16,135 5,342 5,110
Gain on sale of business assets - (5,649) - -
Change in operating assets and liabilities net of the effect
of acquisition, divestiture and discontinued operations:
Accounts and notes receivable, net (54,985) 86,284 (25,373) 49,338
Recoverable costs and accrued profits not yet billed 19,819 (12,756) (538) (8,020)
Inventories, net (26,280) (21,511) (12,153) (37,469)
Other current and noncurrent assets (1,113) 2,720 (1,767) (3,826)
Accounts payable 3,602 (28,839) 16,966 8,993
Accrued payrolls and incentive (2,613) (5,492) (983) (1,160)
Billings in excess of costs 23,927 30,444 1,830 19,368
Other current liabilities 6,895 (8,248) 1,478 (3,879)
Accrued postretirement benefits & pension (1,098) 801 (2,839) 183
Other long-term liabilities 161 6,364 (1,529) 7,399
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 28,838 84,120 (7,885) 44,627
---------------- ---------------- ---------------- ----------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (36,112) (26,255) (13,739) (5,697)
Proceeds from sale of business assets 2,323 52,622 - 8,000
Disposal of property, plant and equipment, net 3,165 2,212 954 (76)
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (30,624) 28,579 (12,785) 2,227
---------------- ---------------- ---------------- ----------------
FINANCING ACTIVITIES
Additions to long-term borrowings - 20,417 - 370
Payments on long-term borrowings (20,536) (20,522) (317) (296)
Payments on short-term notes payable (4,461) (12,172) (2,319) (1,448)
Dividends paid (7,193) (7,138) (2,417) (2,377)
Exercise of stock options 6,753 58 691 53
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (25,437) (19,357) (4,362) (3,698)
---------------- ---------------- ---------------- ----------------
Increase (Decrease) in cash and cash equivalents (27,223) 93,342 (25,032) 43,156
Cash and cash equivalents, beginning of period 109,955 11,715 107,764 61,901
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, end of period $ 82,732 $ 105,057 $ 82,732 $ 105,057
================ ================ ================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest $ 4,856 $ 5,171 $ 755 $ 429
Income tax 24,260 16,810 5,883 9,607
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
(Unaudited) (Unaudited)
OCTOBER 27, 2001 OCTOBER 28, 2000 OCTOBER 27, 2001 OCTOBER 28, 2000
---------------- ---------------- ---------------- ----------------
Net earnings $ 45,028 $ 23,867 $ 11,681 $ 8,590
Currency translation loss (234) (299) (148) (120)
---------------- ---------------- ---------------- ----------------
Comprehensive income $ 44,794 $ 23,568 $ 11,533 $ 8,470
================ ================ ================ ================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
6
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
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 October
27, 2001 are not necessarily indicative of the results that will be realized for
the fiscal year ending January 31, 2002.
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 2001
(hereinafter referred to as "2001") commenced on February 1, 2001 and ends on
January 31, 2002. In addition, 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 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, 2001 Form
10-K. An actual valuation of inventory under the last-in-first-out ("LIFO")
method can be made only at the end of each year based on the inventory levels
and costs at that time. Accordingly, interim LIFO calculations are based on
management's estimates of expected year-end inventory levels and costs. Interim
results are subject to the final year-end LIFO inventory valuation.
The accompanying consolidated condensed financial statements for 2000 and
related notes contain certain reclassifications to conform with the presentation
used in 2001.
NOTE B--SEGMENT INFORMATION
Financial information relating to industry segments is as follows (in thousands
except percentages):
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------------ ------------------------------------
OCTOBER 27, 2001 OCTOBER 28, 2000 OCTOBER 27, 2001 OCTOBER 28, 2000
---------------- ---------------- ---------------- ----------------
(Unaudited)
SALES
Power Products $ 548,652 $441,386 $163,881 $158,691
Tactical Vehicle Systems 321,036 203,346 103,771 69,021
Petroleum Equipment 109,045 60,606 37,439 26,345
Airline Products 64,651 83,409 17,663 26,824
Other Business Activities 18,188 25,586 6,908 5,361
---------------- ---------------- ---------------- ----------------
Total $1,061,572 $814,333 $329,662 $286,242
================ ================ ================ ================
OPERATING PROFIT (LOSS)
Power Products $ 9,069 $ 8,820 $ (1,535) $ 6,104
Tactical Vehicle Systems 87,892 38,980 33,186 10,023
Petroleum Equipment 2,103 1,224 (1,492) 1,493
Airline Products (14,708) (4,802) (7,799) (465)
Other Business Activities 687 2,446 354 113
---------------- ---------------- ---------------- ----------------
Total 85,043 46,668 22,714 17,268
================ ================ ================ ================
OPERATING PROFIT (LOSS) PERCENTAGE
Power Products 1.7% 2.0% -0.9% 3.8%
Tactical Vehicle Systems 27.4 19.2 32.0 14.5
Petroleum Equipment 1.9 2.0 (4.0) 5.7
Airline Products (22.7) (5.8) (44.2) (1.7)
Other Business Activities 3.8 9.6 5.1 2.1
Total 8.0 5.7 6.9 6.0
7
A reconciliation of operating profit to earnings before income taxes is as
follows (in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
(Unaudited) (Unaudited)
OCTOBER 27,2001 OCTOBER 28,2000 OCTOBER 27,2001 OCTOBER 28,2000
--------------- --------------- --------------- ---------------
Operating profit $ 85,043 $46,668 $22,714 $17,268
Corporate expenses, net (10,759) (8,389) (4,007) (3,044)
Non-operating interest and investment income 2,830 6,230 718 1,638
Interest expense (5,212) (6,739) (1,454) (2,383)
--------------- --------------- --------------- ---------------
Earnings before income taxes $ 71,902 $37,770 $17,971 $13,479
=============== =============== =============== ===============
NOTE C--ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting For Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts and hedging activities. Effective February 1, 2001,
the Company adopted SFAS No. 133. Such adoption did not have a material effect
on the Company's results of operations or financial position.
In September 2000, the Emerging Issues Task Force ("EITF") released abstract No.
00-10, "Accounting for Shipping and Handling Fees and Costs," which was adopted
by the Company effective January 31, 2001. EITF No. 00-10 requires that shipping
and handling costs billed to customers be recorded as sales. Accordingly, the
Company has restated its quarterly sales and cost of sales for 2000. Such
restatement had no impact on gross profit or net earnings.
In June 2001, the FASB issued 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 year 2002.
Any transition charges recognized upon implementation of SFAS No. 142 will be
accounted for as a cumulative effect of a change in accounting principle. The
Company has approximately $6 million of unamortized goodwill as of October 27,
2001, and expects to recognize approximately $0.5 million of amortization
expense associated therewith during Fiscal 2001. The Company is currently
evaluating the possible impact of the adoption of these standards on its
financial statements.
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for the Company beginning
February 2002. SFAS No. 144 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. We do not anticipate that the
adoption of SFAS No. 144 will have a material impact on our financial position.
The FASB issued SFAS No. 143, "Accounting For Asset Retirement Obligations," in
2001, covering the accounting for legal obligations associated with retirement
of long-lived assets. SFAS No. 143 must be adopted by the Company effective
February 1, 2003. The Company does not expect the adoption of SFAS No. 143 to
have a material effect on its financial statements.
NOTE D--COMMITMENTS AND CONTINGENCIES
The Company issues bid and performance guarantees in the form of performance
bonds or standby letters of credit. Performance type letters of credit totaled
$5 million at October 27, 2001.
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.
8
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. It is presently impossible to determine the actual
costs that may be incurred to resolve this matter or whether the resolution will
have a material adverse effect on the Company's results of operations.
The Company is also a defendant in a number of lawsuits relating to contractual,
product liability, personal injury, and warranty matters normally incident to
the Company's business. No individual case, or group of cases presenting
substantially similar issues of law or fact, involve a claim for damages which
are material to the Company's financial statements or are expected to have a
material effect on the manner in which the Company conducts its business.
Although management has established reserves that it believes to be adequate in
each case, an unforeseen outcome in such cases could have a material adverse
impact on the results of operations in the period it occurs.
The Company has provided certain guarantees in support of its foreign operations
and of its customers' financing of purchases from the Company in the form of
both residual value and debt guarantees. The maximum exposure of the Company
related to guarantees at October 27, 2001 is $3.5 million.
The Company leases certain additional property and equipment under lease
arrangements of varying terms whose annual rentals are less than 1% of
consolidated sales.
NOTE E--RECONCILIATION OF BASIC TO DILUTED SHARES OUTSTANDING
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------------- -------------------------------------
OCTOBER 27, 2001 OCTOBER 28, 2000 OCTOBER 27, 2001 OCTOBER 28, 2000
---------------- ---------------- ---------------- ----------------
Numerator:
Income available to common shareholders
From continuing operations $45,656 $23,867 $11,681 $ 8,590
Net earnings 45,028 23,867 11,681 8,590
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 28,285 28,018 28,441 28,041
Effect of dilutive securities:
Employee and director stock options 666 259 561 437
Denominator for diluted earnings per share -
Adjusted weighted-average shares 28,951 28,277 29,002 28,478
Basic earnings per share
From continuing operations $ 1.61 $ 0.85 $ 0.41 $ 0.31
Net earnings 1.59 0.85 0.41 0.31
Diluted earnings per share
From continuing operations 1.58 0.84 0.40 0.30
Net earnings 1.56 0.84 0.40 0.30
Number of anti-dilutive stock options outstanding 256 865 326 865
NOTE F--SIGNIFICANT ITEMS
In Fiscal 2000, the Company filed a certified claim with the U.S. Government
seeking recovery of costs incurred by the Company resulting from retrofitting
all vehicles produced under the first FMTV contract for changes in drive train
components. All costs
9
associated with the retrofitting were expensed by the Company as incurred. The
U.S. Army and the Company agreed to attempt resolution through voluntary
participation in the Alternative Disputes Resolution process managed by the
Armed Services Board of Contract Appeals. This process took place in August
2001 and concluded with the agreement that the Company would receive $18.5
million in settlement of its claim. The Company has recorded the recovery, net
of associated costs and related receivable in its third fiscal quarter. The
U.S. Government has agreed to use its best efforts to effect payment by
December 31, 2001. If payment is not made by December 31, 2001, the settlement
shall be converted to a consent decree with interest accruing from January 1,
2002 until paid.
10
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, 2001. The following
discussion contains forward-looking statements, which are based on assumptions
such as timing, volume, and pricing of customers' orders. In connection
therewith, please see the cautionary statements contained therein and the
heading labeled "Factors That May Affect Future Results" below, which identify
important factors that could cause actual results to differ materially from
those in the forward-looking statements.
The Company's fiscal year begins on February 1 of the year stated and ends on
January 31 of the following year and the Company reports its results on a fiscal
quarter basis, with each quarter being approximately 13 weeks long. For example,
"Fiscal third quarter 2001" commenced on July 29, 2001 and ends on October 27,
2001.
RESULTS OF OPERATIONS
Sales for Fiscal third quarter 2001 grew 15.2% to $329.7 million compared to
sales of $286.2 million in the same period a year ago. Gross profit percentage
for the same period was 12.2%, lower than the 14.8% recorded during Fiscal
second quarter 2001 and the 17.4% recorded in last year's third quarter.
Sales for the first nine months of Fiscal 2001 grew 30.4% to $1,061.6 million
versus $814.3 million for the first nine months of Fiscal 2000. Gross profit
percentage for the same period was 13.8%, lower than the 16.8% recorded for the
first nine months of Fiscal 2000. This year's first nine months includes
nonrecurring items that impacted cost of goods sold by $5.1 million and which
impacted gross profit by 0.5 percentage points. These adjustments pertained to
accounts receivable, inventory realization, and higher warranty costs. Other
factors impacting the gross margin comparison with last year include lower
margins in the Airline segment resulting from the events of September 11, higher
than anticipated costs for certain contracts in the Petroleum segment, lower
margins in the Tactical Vehicle Systems segment due to sales mix, and costing
and inventory valuation issues that resulted in lower margins in the Power
Products segment.
Recovery of costs incurred, net represents a settlement of $18.5 million reached
on August 15, 2001 with the U.S. Government, through the Alternative Disputes
Resolution process, pertaining to changes in drive train components on vehicles
produced and delivered on the first contract. Payment of the settlement is
expected by December 31 of this year. However, in the event funds are not
available, the settlement also provides for interest at the contract disputes
act rate from January 1, 2002 until payment is made.
Selling and administrative expenses were $40.2 million, or 12.2% of sales for
Fiscal third quarter 2001 compared to $34.0 million or 11.9% of sales in Fiscal
third quarter 2000. Selling and administrative expenses for the first nine
months of Fiscal 2001 were $112.2 million, or 10.6% of sales compared to $97.8
million, or 12.0% for the same period in the prior year. The first nine months
of Fiscal 2001 included $1.5 million pertaining to legal expenses and provisions
for a doubtful receivable, $2.3 million pertaining to a systems automation
project, $1.1 million for relocation of power generation manufacturing
operations, $4.6 million associated with restructuring and other one time costs.
The first nine months of Fiscal 2000 included a $7.0 million provision for a
doubtful receivable.
Interest and investment income of $0.7 million for the Fiscal third quarter 2001
was lower versus the $1.6 million recorded for Fiscal third quarter 2000 due to
lower average cash and investment balances, compounded by lower effective
interest rates. Interest and investment income decreased $3.4 million during the
first nine months of Fiscal 2001 to $2.8 million compared to $6.2 million in the
previous year. Included in the previous year's results was $4.0 million in
interest income in connection with tax refunds from the Internal Revenue
Service. Interest expense decreased $1.5 million principally due to lower
average borrowings.
Net earnings in Fiscal third quarter 2001 were $11.7 million or $0.40 per
diluted share versus $8.6 million or $0.30 per diluted share in last year's
third quarter. Net earnings from continuing operations for the first nine months
increased by 91.2% to $45.7 million or $1.58 per share compared to $23.9 million
or $0.84 per diluted share in the same period for Fiscal 2000. Net loss from
discontinued operations in the first nine months of Fiscal 2001 was $0.6 million
or $0.02 per share. Total net earnings for the first nine months of Fiscal 2001
were $45.0 million or $1.56 per diluted share compared with $23.9 million or
$0.84 per diluted share for the comparable period of Fiscal 2000.
SEGMENT DATA
The Company's management analyzes financial results in five business segments
based on distinct product and customer types: Power
11
Products, Tactical Vehicle Systems, Petroleum Equipment, Airline Products, and
Other Business Activities. Such segments are described below along with
analyses of their respective results of operations.
The Power Products segment, which is responsible for marketing and aftermarket
support of a wide range of industrial equipment, recorded Fiscal third quarter
sales of $163.9 million, as compared to sales of $158.7 million in the same
period of Fiscal 2000. The segment reported an operating loss of $1.5 million in
the fiscal third quarter versus a $6.1 million operating profit in the
comparable period of last year. The $7.6 million unfavorable variance included
$3.4 million in nonrecurring expenses associated with a systems automation
project and relocation of power generation manufacturing operations and a $2.6
million charge related to costing and inventory valuation issues. Parts sales in
the Fiscal third quarter were down slightly from the second quarter and last
year while service sales in the Fiscal third quarter were up over the second
quarter and last year. Results in the Power Generation portion of this segment
were below expectations due to higher than anticipated costs on sales levels
below those required to break even. However, the low market share position in
this segment provides a new management team the opportunity for growth.
The Tactical Vehicle Systems segment, which manufactures tactical vehicles for
the U.S. Army and others, recorded sales of $103.8 million in the Fiscal third
quarter compared to $69.0 million a year ago. Operating profit for the quarter
totaled $33.2 million, compared with $10.0 million in the Fiscal third quarter
of 2000. Fiscal 2001 third quarter results included an $18.2 million settlement
with the U.S. Army, net of $0.3 million in expenses related to the settlement
process. Payment of the settlement is anticipated during the Fiscal fourth
quarter of 2001. Shipments for the third quarter were 551 trucks and 198
trailers compared to 546 trucks and 210 trailers in the second quarter. Sales
for trucks in the fourth quarter are anticipated to be up while trailer
shipments are expected to be down. Overall sales in TVS are expected to remain
relatively flat in the fourth quarter while margin rates should return to those
experienced in the second quarter of 2001.
The Petroleum Equipment segment manufactures equipment for the oil and gas
exploration, production, and well stimulation industries. Sales in this segment
totaled $37.4 million for the Fiscal third quarter, 42 percent higher than the
$26.3 million reported in the same period last year. Operating results were
adversely impacted by higher than forecasted costs for certain contracts
completed during the quarter and higher system costs in the current quarter
compared with a year ago. As a result, the operating loss for the Fiscal third
quarter was $1.5 million versus a $1.5 million operating profit for the same
period of the previous year. The order backlog at the end of the Fiscal third
quarter 2001 totaled $44.3 million, compared with $63.0 million at the end of
the second Fiscal quarter. Volume is anticipated to be down with margin rates
improving from the third quarter, as costs are brought into line by a new
leadership team driving change and more profitable contracts convert to sales.
The Airline Products segment, which manufactures airline ground support products
and mobile railcar movers, recorded sales of $17.7 million in the Fiscal third
quarter, compared with $26.8 million in the same quarter last year. Sales were
adversely impacted by the events of September 11, which resulted in
cancellations of existing orders and delays in receiving new orders from the
commercial airlines. Operating loss for the fiscal third quarter was $7.8
million versus a $0.5 million loss in the previous year. Included in the results
for the current quarter were $4.0 million in non-recurring expenses related to
restructuring and rationalization of facilities in Denver, Colorado; Houston,
Texas; and the Atlanta, Georgia area. This segment is anticipating one more
quarter of manufacturing and organizational transition as it prepares to achieve
a breakeven run rate with a significantly reduced volume. There has been more
than a 35% reduction in staffing during the year and other costs are under
review. The focus continues to be on introducing new electric products and
regional airline products as well as looking at the military and material
handling markets for additional opportunity.
Other business activities not identified in a specific segment include
predominantly gas compression equipment sales. Fiscal third quarter sales were
$6.9 million, versus $5.4 million for the comparable period last year. Third
quarter operating profit was $0.4 million compared to a $0.1 million operating
profit in last year's third quarter.
UNFILLED ORDERS
The Company's unfilled orders consist of written purchase orders, letters of
intent, and oral commitments. These unfilled orders are generally subject to
cancellation or modification due to customer relationships or other conditions.
Purchase options are not included in unfilled orders until exercised. Unfilled
orders as of October 27, 2001 and as of October 28, 2000 were as follows:
12
-------------------------------
October 27, October 28,
2001 2000
-------------------------------
(In millions)
Tactical Vehicle Systems $ 404.7 $ 742.8
Power Products 133.6 119.2
Petroleum Equipment 44.3 65.6
Airline Products 8.4 19.5
All Other 5.3 16.5
-------------------------------
$ 596.3 $ 963.6
===============================
Total unfilled orders decreased $133.6 million during the quarter. The TVS
backlog continued to decline since the Company does not report the contract
modification that adds option year agreements in its backlog. Such option year
additions are added to the backlog as Congressional funding is in place. Backlog
for the portion of the Company's business excluding TVS declined $45.2 million,
including an $18.7 million reduction in Petroleum Equipment segment and $12.5
million in Power Products segment. These decreases resulted from the downward
pressure in pricing in the oil and gas sector of the economy, as well as the
recent slowdown of the general economy. In the oil & gas markets, short cycle
orders are down in both Petroleum and Power Products as demand has been impacted
by lower energy prices. In the near term, the market opportunity for orders
could be down as much as 10%. The backlog in the Airline Products segment
declined more than 50%, as certain customers reassessed their capital
requirements in the wake of significant recent current events.
Over the coming months, the Company expects the backlog in its Tactical Vehicle
Systems segment to continue to decrease as existing contractual orders are
filled.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal third quarter 2001, cash of $7.9 million was consumed by
operations. This decrease resulted from higher receivables associated with
the timing of collections on certain major projects. During the same period,
the Company invested $13.7 million in property, plant and equipment for the
purchase and implementation of its new enterprise information system, the
construction of a new service facility in Dallas, Texas, and other projects.
Payments of cash dividends on common stock totaled $2.4 million during the
quarter and cash and equivalents were $82.7 million at October 27, 2001, a
decrease of $25.0 million versus the prior quarter. Borrowings at the end of
the Fiscal third quarter were $65.7 million, a decrease of $33.9 million
versus the beginning of the Fiscal year. The decrease in debt was principally
due to a scheduled repayment of $20.0 million and $8.9 million mortgage
noncash note reduction in connection with the sale of the remaining
partnership interest in the corporate headquarters building.
The Company's sources of cash liquidity included cash and equivalents, cash from
operations, amounts available under credit facilities, and other external
sources of funds. The Company believes that these sources are sufficient to fund
the current requirements of working capital, capital expenditures, dividends,
and other financial commitments. At October 27, 2001 the Company had no
borrowings outstanding under an unsecured revolving debt facility that could
provide up to approximately $144 million, net of $6 million outstanding under a
$25 million letter of credit sub facility. This revolving facility matures
during Fiscal 2004. In addition, the Company has $55 million in senior notes
outstanding.
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. 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 financing
instruments or seek additional equity capital.
13
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, 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 relating to personnel, risks of dependence on
government, inherent risks of government contracts, risks of claims and
litigation, risks as to global trade matters, risks as to cost controls, risks
as to acquisitions, risks as to currency fluctuations, risks as to environmental
and safety matters, and risks as to distributorships, 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.
14
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 also a defendant in a number of lawsuits relating to contractual,
product liability, personal injury, and warranty matters normally incident to
the Company's business. No individual case, or group of cases presenting
substantially similar issues of law or fact, involve a claim for damages which
are material to the Company's financial statements or are expected to have a
material effect on the manner in which the Company conducts its business.
Although management has established reserves that it believes to be adequate in
each case, an unforeseen outcome in such cases could have a material adverse
impact on the results of operations in the period it occurs.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Form 8-K Report Date - August 23, 2001 (Second Quarter Fiscal 2001
Financial Results)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - August 28, 2001 (Presentation to Investors)
Items reported - Item 7. Exhibits
Item 9. Regulation FD Disclosure
Form 8-K Report Date - September 18, 2001 (Announces Third Quarter
Dividend)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - October 23, 2001 (Fiscal Third Quarter Outlook)
Items reported - Item 5. Other Events
Item 7. Exhibits
16
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 10th day of December 2001.
STEWART & STEVENSON SERVICES, INC.
By: /s/ Michael L. Grimes
---------------------
Michael L. Grimes
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ John H. Doster
------------------
John H. Doster
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ John B. Simmons
-------------------
John B. Simmons
Controller and Chief Accounting Officer
(Chief Accounting Officer)
17
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
None
18