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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 31, 1995 ("Fiscal 1994") 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)
Registrant's telephone number, including area code: (713) 868-7700
Securities registered pursuant to Section 12(b) of the Act:
Name of Each
Title of each class Exchange on Which Registered
___________________ ____________________________
Rights to Purchase Shares of Common NASDAQ Stock Market
Stock, without par value
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
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 by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant.
$923,162,460
(As of February 28, 1995)
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 32,997,815 Shares
(Class) (Outstanding at February 28, 1995)
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K
________ _________________
Proxy Statement for the 1995 Annual Meeting of Shareholders Part III
PART I
Item 1. Business.
Stewart & Stevenson Services, Inc. (together with its wholly-owned
subsidiaries, the "Company" or "Stewart & Stevenson") was founded in Houston,
Texas in 1902 and was incorporated under the laws of the State of Texas in
1947. Since its beginning, the Company has been primarily engaged in custom
fabrication enterprises. Stewart & Stevenson consists of three business
segments: the Engineered Power Systems segment, the Distribution segment and
the Tactical Vehicle Systems segment.
The Engineered Power Systems segment designs, engineers and markets engine-
driven equipment principally utilizing diesel or gas turbine engines supplied
by independent manufacturers. In addition, this segment offers operation and
maintenance contracts for large gas turbine projects and petroleum production
facilities. The Company's products include gas turbine generator sets for
primary electrical power and diesel generator sets for primary, emergency or
stand-by electrical power sources. Stewart & Stevenson is a leading packager
of aeroderivative gas turbine engines for electrical power generation. A
majority of the gas turbine engines used by the Company is manufactured by
General Electric Corporation ("GE"), and GE has selected the Company as the
exclusive packager in the United States and Canada for the LM6000. The
Company's engineered power systems and operations and maintenance services are
marketed worldwide. The Company believes that the international market offers
significant opportunities because of the potential growth in demand for
electric power, particularly in developing nations.
The Distribution segment markets industrial equipment and related parts
manufactured by others and provides in-shop and on-site repair services for
such products. This segment began operations in 1938 and currently markets
Detroit Diesel engines, General Motors Electro-Motive diesel engines, Allison
automatic transmissions, Waukesha natural gas engines, Deutz diesel engines,
Hyster material handling equipment, Thermo King transport refrigeration units
and John Deere construction, utility and forestry equipment. The Distribution
segment markets primarily in Texas and other Western and Southern states, as
well as in Mexico, Venezuela and Central America.
The Tactical Vehicle Systems segment has received contracts with the United
States Department of Defense to manufacture the U.S. Army's next generation of
medium tactical vehicles (the "Family of Medium Tactical Vehicles" or "FMTV").
The FMTV contracts call for the production of approximately 11,000 newly-
designed 2 1/2-ton and 5-ton trucks in several configurations, including troop
carriers, wreckers, cargo trucks, vans and dump trucks. All variants of the
FMTV incorporate a high level of common parts. Manufacturing of the FMTV is
being performed by the Company's Tactical Vehicle Systems segment at a facility
located near Houston, Texas. The Company believes that it will be able to sell
additional trucks to other branches of the U.S. Armed Forces and to the armed
forces of foreign countries.
The Company's fiscal year begins on February 1 of the year stated and ends on
January 31 of the following year. For example, "Fiscal 1994" commenced on
February 1, 1994 and ended on January 31, 1995. Identifiable assets at the
close of Fiscal 1994, 1993 and 1992 and net sales, operating profit and export
sales for such fiscal years for the Company's business segments and sales to
customers which exceed 10% of consolidated sales are presented under "Industry
Segment Data" in the notes to the consolidated financial statements in Part II.
ENGINEERED POWER SYSTEMS SEGMENT
Stewart & Stevenson designs, engineers and markets engine-driven equipment of
various descriptions utilizing diesel or gas turbine engines manufactured by
independent suppliers and provides operation and maintenance services for power
generation and petroleum facilities. As a custom packager of engine-driven
equipment, the Company designs its products to meet the specific needs of its
customers in a variety of applications. Both equipment and services are sold
under the "Stewart & Stevenson" name throughout the world.
Operations of the Engineered Power Systems segment accounted for approximately
56.5%, 61.4% and 62.6%, respectively, of consolidated sales during Fiscal 1994,
1993 and 1992.
Gas Turbine Power Systems. The Company packages gas turbine products based on
turbine engines purchased from General Electric Corporation ("GE"), Allison
Engine Company ("Allison") and the Garrett Corporation ("Garrett"). The table
below lists the capacity of generator sets based on each model of gas turbine
engine regularly packaged by the Company.
Generator Set
Capacity
Engine Model in Megawatts
____________ ____________
GE LM6000 . . . . . . . 40.3 Mw
GE LM5000 STIG . . . . 51.6 Mw
GE LM5000 . . . . . . . 34.4 Mw
GE LM2500+ . . . . . . 27.6 Mw
GE LM2500 STIG . . . . 26.5 Mw
GE LM2500 . . . . . . . 22.2 Mw
GE LM1600 . . . . . . . 13.4 Mw
ALLISON 501K . . . . . 3.7 Mw
GARRETT IM831 . . . . . 0.5 Mw
Gas turbine generator sets have a lower capital cost, higher efficiency,
shorter lead times and are more environmentally acceptable than alternative
technologies. In addition, gas turbine generator sets may be used for the
simultaneous production of electrical power and useful thermal energy
("cogeneration"). The gas turbine generator sets packaged by the Company in
the 20 Mw to 52 Mw size incorporate GE gas turbine engines and are marketed
primarily to independent power producers for prime power and cogeneration
applications and to public utilities for base load capacity or additional
capacity during peak demand periods. Generators in the 0.5 Mw to 20 Mw range
are marketed to hospitals, hotels, office complexes and industrial facilities,
both for prime power and cogeneration applications. Stewart & Stevenson's
package design and full-load testing prior to shipment permit the complete
installation and start-up of the Company's gas turbine generators in as little
as 30 days after shipment and decrease both the time and expense required to
build a complete electrical generation facility.
The Company assembles turbine-driven mechanical drive packages, including gas
compressor sets powered by GE and Allison gas turbine engines and vessel
propulsion systems incorporating Allison gas turbine engines. The table below
lists the output of each model of gas turbine engine offered by the Company for
mechanical drive applications.
Engine Model Output
____________ ______
GE LM6000 . . . . . . . 55,545 Shp
GE LM2500+ . . . . . . 37,000 Shp
GE LM2500 . . . . . . . 31,235 Shp
GE LM1600 . . . . . . . 18,745 Shp
ALLISON 501K . . . . . 5,510 Shp
Like the Company's turbine-driven generator sets, gas compression packages are
designed to be easily and quickly installed at the customer's location and can
be full-load tested at the Company's facility before shipment. Gas compressor
sets are marketed to gas production and pipeline operators for both offshore
and onshore installation.
Stewart & Stevenson enters into operation and maintenance contracts under which
the Company provides all labor, supervision and expertise necessary to operate,
maintain and repair power generation, gas compression and petroleum production
and processing facilities. Operation and maintenance contracts may have a term
of up to 10 years and provide for a fixed fee out of which the Company must pay
all costs incurred under the contract or for the payment of a fixed fee plus
reimbursement of the costs incurred by the Company. The Company has provided
operation and maintenance services for power generation facilities since 1986.
During Fiscal 1994, the Company acquired substantially all of the operating and
maintenance assets of Creole International, Inc. and its subsidiaries. The
Creole companies were primarily engaged in the operation and maintenance of
petroleum production, processing and transportation facilities. Operation and
maintenance services are provided on a world-wide basis.
During January 1995, the Company and General Electric Capital Corporation ("GE
Capital") announced an agreement in principle to jointly offer turbine-driven
equipment for lease. Partnerships owned by GE Capital and the Company will
contract with the Company for the complete installation of a power generation
or gas compression facility and for operation and maintenance services during
the term of the lease. The complete system, including operation and
maintenance services, will be leased to an independent power producer, public
utility, gas producer or transporter or industrial user for an all-inclusive
lease payment.
In addition to complete turbine-driven packages and operation and maintenance
services, Stewart & Stevenson offers parts and repair services for turbine-
driven equipment and is authorized to perform complete overhaul services on GE
and Allison gas turbine engines. Other turbine products manufactured by the
Company include an exhaust flow enhancement device, manufactured under license
from Norlock Technologies, Inc. This new product improves power output and
fuel efficiency and reduces exhaust gas turbulence.
Stewart & Stevenson believes that the international market provides significant
sale and lease opportunities for the Company's gas turbine products. The
market for electrical power in developing countries is growing, and the
Company's gas turbine generator sets are well suited for the requirements of
developing countries; providing quick delivery, low initial capital costs and
ease of installation in areas without significant existing electrical power
infrastructure.
A majority of the Company's gas turbine sales is derived from packaging gas
turbine engines manufactured by GE. The Company is the exclusive packager of
all LM6000 generator sets sold by GE in the United States and Canada and has
been an authorized packager of GE gas turbine engines since 1979. The Company
has no reason to believe that its relationship with GE will not continue for
the foreseeable future. Any interruption of this relationship, however, would
adversely affect the Company.
Sales of gas turbine products and services accounted for approximately 47.6%,
49.2% and 50.5%, respectively, of consolidated sales in Fiscal 1994, 1993 and
1992.
Other Power Systems. The majority of other power systems packaged by Stewart &
Stevenson are generator sets and mechanical drive packages using reciprocating
engines fueled with diesel, natural gas, or both. Generator sets range in size
from 20 kw to 12,700 kw and are based on engines supplied by Detroit Diesel
Corporation ("Detroit Diesel"), General Motors Corporation ("General Motors")
or other independent manufacturers. The Company undertakes the selection of
the appropriate engine and generator based on the intended application and
fabricates the completed package according to a design developed specifically
to fit the needs of the customer. Reciprocating engine driven generator sets
are marketed by the Company as both stand-by power sources for emergency use
and as prime power sources to supply electricity at remote locations.
Mechanical drive packages include pump packages for irrigation and compressor
packages for pipelines.
Stewart & Stevenson is also a leading manufacturer of well stimulation
equipment and other diesel equipment for the oilfield service industries.
Despite the depressed domestic drilling markets, the Company has continued to
manufacture these products, primarily for sale in the international market.
Most of the Company's well stimulation equipment is manufactured according to
the Company's proprietary designs and incorporates advanced microprocessor-
based systems to automatically control the pressures, density and other
characteristics of the high pressure fluids used to fracture oil-bearing
formations. Other oilfield equipment includes coil-tubing equipment, blowout
preventors and high pressure valves for the drilling and workover industry.
Stewart & Stevenson manufactures a complete line of aircraft ground support
equipment, including gate tractors, air-start units, ground power equipment and
air conditioning systems.
Sales of other power systems and services accounted for 8.8%, 12.5% and 12.2%,
respectively, of consolidated sales in Fiscal 1994, 1993 and 1992.
DISTRIBUTION SEGMENT
Stewart & Stevenson markets various industrial equipment, components,
replacement parts, accessories and other material supplied by independent
manufacturers and provides in-shop and on-site repair services for diesel-
driven equipment. The following table contains the name of each manufacturer
with whom the Company presently maintains a distribution contract, a
description of the products and territories covered thereby and the original
distribution contract date relating to each product line.
Original
Contract
Manufacturer Products Territories Date
____________ ________ ___________ ______
Detroit Diesel Corporation Heavy Duty High Speed Texas, Colorado, New 1938
Diesel Engines Mexico, Wyoming, Nebraska,
Louisiana, Mississippi and
Alabama; Venezuela
Electro-Motive Division Heavy Duty Medium Speed Texas, Colorado, New 1988
of General Motors Corporation Diesel Engines Mexico, Nebraska, Oklahoma,
Arkansas, Louisiana, Tennessee,
Mississippi and Alabama; Mexico;
Central America; most of South
America
Cooper Industries, Inc. Large-bore Natural Gas, Varies depending on engine 1991
Dual Fuel and Diesel size, fuel and application
Engines
Allison Transmission On- and Off-Highway Texas, Colorado, New 1962
Division of General Automatic Transmissions, Mexico, Wyoming, Nebraska,
Motors Corporation Power Shift Transmissions Louisiana, Mississippi and
and Torque Converters Alabama; Venezuela
Hyster Company Material Handling Texas 1960
Equipment
John Deere Industrial Construction, Utility Southeast Texas and 1987
Equipment Company and Forestry Equipment Wyoming
Thermo King Corporation Transport Refrigeration Southeast Texas and 1970
Equipment Southern Louisiana
Waukesha Engine Natural Gas Industrial Colorado, Montana, 1995
Division of Dresser Engines North Dakota, Oklahoma,
Industries, Inc. Wyoming, New Mexico,
Utah, Oregon, Hawaii,
Kansas, Arizona, California,
Washington and Nevada
Deutz Corporation Diesel Engines Colorado, Wyoming, 1995
Arizona, New Mexico,
Washington and Alaska
Distribution agreements generally require the Company to purchase and stock the
products and repair parts covered thereby for resale to end users, original
equipment manufacturers or independent dealers within the franchise area of
distribution. Such agreements also require the Company to provide after-sale
service within its designated territory and may contain provisions prohibiting
the sale of competitive products within the franchise territory. Distribution
operations are conducted at branch facilities located in major cities within
the Company's franchised area of distribution. New products are marketed
primarily under the trademarks and the trade names of the original
manufacturer. During Fiscal 1994, the Company acquired substantially all of
the assets of Power Application & Mfg. Co. ("PAMCO"), a Waukesha distributor
for the western United States.
The Company's principal distribution agreements are subject to termination by
the suppliers for a variety of causes, including a change in control or a
change in the principal management of the Company. The Company's distribution
agreements with Detroit Diesel expire in 1995. Although no assurance can be
given that such distribution agreements will be renewed beyond their expiration
dates, they have been renewed regularly.
The Distribution segment also manufactures and sells snow removal equipment,
wheel chair lifts and rail car movers. Some products manufactured by the
Distribution segment are based upon proprietary designs owned by the Company
and others are based upon designs owned by others and licensed to the Company.
Operations of the Distribution segment accounted for approximately 30.4%, 31.8%
and 33.1%, respectively, of consolidated sales during Fiscal 1994, 1993 and
1992. The Distribution segment's marketing units regularly sell certain
products manufactured by units of the Engineered Power Systems segment and also
sell to military and airline users. In both cases, such sales are included in
the Distribution segment.
TACTICAL VEHICLE SYSTEMS SEGMENT
In October 1991, the United States Department of Defense selected Stewart &
Stevenson to manufacture the next generation of medium tactical vehicles (the
"Family of Medium Tactical Vehicles" or "FMTV") for the U.S. Army and awarded
the Company contracts, valued at $1.2 billion, for the production of 2 1/2-ton
and 5-ton trucks, spare parts and logistical support. As is typical of multi-
year defense contracts, the FMTV contracts must be funded annually by the
Department of the Army and may be terminated at any time for the convenience of
the government. In the event that vehicle or spare parts deliveries are
canceled or terminated for the convenience of the government, the FMTV
contracts provide for termination charges that will substantially reimburse the
Company for all unamortized non-recurring costs.
The Family of Medium Tactical Vehicles is the U.S. Army's next generation of
basic transportation vehicle for personnel and materials. As such, the FMTV is
produced in several variants to carry troops and cargo, including cargo beds,
vans, troop carriers, wreckers, dump trucks and tractors. In addition, several
of the vehicles are specially configured for airborne operation. Although more
than ten configurations of the FMTV are being produced, a high degree of common
components is incorporated in the Stewart & Stevenson design.
The vehicles manufactured by the Company are based on a design acquired from
Steyr-Daimler-Puch, A.G., an established Austrian-based manufacturer of
military and commercial vehicles. It was adapted to the requirements of the
U.S. Army by Stewart & Stevenson and incorporates a diesel engine manufactured
by Caterpillar, Inc., an automatic transmission and transfer case manufactured
by Allison and drive axles manufactured by Rockwell Corporation. Although the
FMTV is the Company's first high volume production vehicle, the Company has
previously packaged various equipment for the U.S. Armed Forces using diesel
and gas turbine engines.
Stewart & Stevenson believes that there will be opportunities to sell
additional vehicles to other branches of the U.S. Armed Forces and to the armed
forces of foreign countries. The FMTV contracts allow for such sales, and the
Company's facility has capacity to produce vehicles for those additional sales.
The Company has already begun marketing efforts with potential customers other
than the U.S. Army.
Operations of the Tactical Vehicle Systems segment accounted for approximately
13.0%, 6.7% and 4.2%, respectively, of consolidated sales during Fiscal 1994,
1993 and 1992.
COMPETITION
The Company encounters strong competition in all segments of its business.
Competition involves pricing, quality, availability, the range of products and
services and other factors. Some of the Company's competitors have greater
financial resources than Stewart & Stevenson. The Company believes that its
reputation for quality engineering and after-sales service, as well as single-
source responsibility, are important to its market position.
The Engineered Power Systems segment competes with various entities, including
certain suppliers of major components, for sale of its products. Manufacturers
of gas turbine generator sets in the 20-52 Mw size include General Electric
Corporation, Ruston Gas Turbines Ltd., ABB Energy Services, Inc., a subsidiary
of Asea Brown Boveri, Seimens and Westinghouse. Competition in the market for
the other products manufactured by the Engineered Power Systems segment is
highly diversified with no single competitor participating in all of the
markets of the Company. The Distribution segment competes with distributors
for other manufacturers in the sale of original equipment, with the
manufacturers and distributors of non-original equipment parts for the sale of
spare parts and with independent repair shops for in-shop and on-site repair
services.
INTERNATIONAL OPERATIONS
The profit margin on export sales is typically not materially different from
that on domestic sales of the same or similar products with the same or similar
delivery requirements. International sales are subject to the risks of
international political and economic changes, such as changes in foreign
governmental policies, currency exchange rates and inflation. Generally, the
Company accepts payments only in United States Dollars and makes most sales to
customers outside the United States against letters of credit drawn on
established international banks, thereby limiting the Company's exposure to the
effects of exchange rate fluctuations and customer credit risks. In the
limited circumstances in which the Company has entered into contracts in
foreign currencies, it has hedged its exposure to fluctuations in such
currencies.
The performance of operation and maintenance contracts in some countries could
be disrupted by political unrest, terrorist activity or government action. The
Company believes that any such disruption would be temporary. No business
segment of the Company is dependent on foreign operations.
UNFILLED ORDERS
Stewart & Stevenson's unfilled orders consist of written purchase orders,
letters of intent and oral commitments. These unfilled orders are generally
subject to cancellation or modification due to customer relationships or other
conditions. Purchase options are not included in unfilled orders until
exercised. Unfilled orders at the close of Fiscals 1994 and 1993 were as
follows:
Estimated percentage
to be recognized in Fiscal Fiscal
Fiscal 1995 1994 1993
___________________ ______ ______
(Dollars in millions)
Engineered Power Systems
Equipment 69.2% $ 416.0 $ 491.5
Operations and Maintenance 18.3% 311.6 269.7
_________ _________
727.6 761.2
Distribution 100.0% 40.0 32.6
Tactical Vehicle Systems 13.3% 1,017.8 1,119.5
_________ _________
Total 29.2% $1,785.4 $1,913.3
========= =========
Although no assurance can be given, the Company expects sales of the Engineered
Power Systems segment to continue to be weighted in favor of turbine-driven
equipment because of the large number of unfilled orders for these units, the
number of proposals that are presently outstanding and the current worldwide
need for additional electrical generating capacity.
Unfilled orders of the Tactical Vehicle Systems segment consists principally of
the contracts awarded in October 1991, by the United States Department of the
Army, to manufacture medium tactical vehicles.
EMPLOYEES
At the end of Fiscal 1994, the Company employed approximately 4,300 persons.
The Company considers its employee relations to be satisfactory.
Item 2. Properties.
The Company maintains its corporate and executive offices at 2707 North Loop
West, Houston, Texas. The corporate office, which includes the national sales
offices for the Engineered Power Systems segment and administrative offices for
the Distribution segment, occupies about 78,000 square feet of space leased
from a limited partnership in which the Company owns an 80% limited partnership
interest.
Stewart & Stevenson's Engineered Power Systems segment is headquartered in
Houston, where the Company owns approximately 966,000 square feet and leases
approximately 48,000 square feet of space at seven locations devoted to
manufacturing, warehousing and administration. The Company leases gas turbine
operations and maintenance facilities in Long Beach, California totaling 5,000
square feet and maintains a sales office in Alexandria, Virginia and Fort
Lauderdale, Florida. The Company owns gas turbine parts, service, operations
and maintenance facilities in Syracuse, New York, Bakersfield, California and
Shreveport, Louisiana and a high pressure valve manufacturing facility in
Jennings, Louisiana totaling 15,000, 14,000, 40,000 and 89,000 square feet,
respectively.
Activities of the Distribution segment are coordinated from Houston, where the
Company owns 293,000 square feet of space at three locations devoted to
equipment and parts sales and service. To service its distribution territory
(See "Item 1. Business -- Distribution Segment"), Stewart & Stevenson maintains
Company-operated facilities occupying 546,000 square feet of owned space and
398,000 square feet of leased space in 25 cities in Texas, Louisiana, Colorado,
New Mexico, Wyoming, Utah, North Dakota, Kansas, Washington and California.
The Tactical Vehicle Systems segment is located in a 500,000 square foot
Company-owned facility near Houston, Texas and leases 88,000 square feet of
warehousing facilities in Houston and Lubbock, Texas.
The Company considers all property owned or leased by it to be well maintained,
adequately insured and suitable for its purposes.
Item 3. Legal Proceedings.
The Company has been advised that on January 5, 1993, John G. Runion, a former
consultant of the Company, filed a civil suit for himself and the United States
of America in the U. S. District Court, Southern District of Texas. The suit
alleges that the Company supplied false information in violation of the False
Claims Act (the "Act"), engaged in common law fraud and misapplied costs
incurred in connection with a change order under a 1987 government subcontract.
Under the provisions of the Act, the suit has not been served upon the Company
pending an investigation of the case by the U. S. Department of Justice and a
determination as to whether the Department of Justice will intervene and pursue
the matter on behalf of the United States. The suit alleges treble damages of
$21 million plus unspecified penalties. The Company is aware that the Defense
Criminal Investigation Service and the United States Air Force Office of
Special Investigation are conducting an investigation into whether the Company
violated any criminal statute in connection with the same facts. The Company
has denied any wrongdoing in connection with the pricing of the change order
and believes that both the criminal investigation and the civil case will be
resolved without any material effect on the financial position, net worth or
results of operations of the Company.
The Company is a defendant in a number of other lawsuits relating to
contractual, product liability, personal injury and warranty matters and
otherwise of the type normally incident to the Company's business. All such
cases involve primarily a claim for damages and no individual case or group of
cases presenting substantially the same legal or factual issues involve amounts
in excess of ten percent (10%) of the current assets of the Company or is
expected to result in any material liability.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock is traded on the NASDAQ Stock Market under the
symbol: SSSS. There were 864 shareholders of record as of February 28, 1995.
The following table sets forth the high and low sales prices relating to the
Company's Common Stock and the dividends paid by the Company in each quarterly
period within the last two fiscal years.
Fiscal Fiscal
1994 1993
______________________________ ______________________________
High Low Dividend High Low Dividend
_____ ____ ________ _____ ____ ________
First Quarter 53 3/4 41 1/4 0.06 38 1/2 28 0.05
Second Quarter 45 3/4 38 1/4 0.07 46 3/4 35 3/4 0.06
Third Quarter 40 3/4 33 3/4 0.07 51 3/4 42 1/2 0.06
Fourth Quarter 38 3/4 28 0.07 53 3/4 44 1/4 0.06
Item 6. Selected Financial Data.
The Selected Financial Data set forth below should be read in conjunction with
the accompanying Consolidated Financial Statements and notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Stewart & Stevenson Services, Inc.
CONSOLIDATED FINANCIAL REVIEW
_________________________________________________________________________________________________________________
(In thousands, except per share data) Fiscal Fiscal Fiscal Fiscal Fiscal
1994 1993 1992 1991 1990
_________________________________________________________________________________________________________________
Financial Data:
Sales $1,138,336 $981,892 $812,526 $686,363 $645,766
Earnings before income
taxes and accounting change 102,852 85,301 64,376 52,259 43,152
Earnings before accounting change 67,558 56,780 43,958 35,703 29,384
Net earnings 67,558 56,780 34,658 35,703 29,384
Total assets 875,616 692,624 573,348 477,858 394,118
Short-Term Debt (including
current portion of Long-Term Debt) 43,344 7,219 3,252 4,582 58,616
Long-Term Debt 116,900 68,000 44,451 27,939 37,982
Per Share Data :
Earnings before accounting change 2.05 1.73 1.35 1.18 0.99
Net earnings 2.05 1.73 1.06 1.18 0.99
Cash dividends declared 0.27 0.23 0.19 0.15 0.11
The Company adopted Statement of Financial Accounting Standard No. 106
effective February 1, 1992, resulting in a cumulative charge to 1992
earnings of $9,300, or $0.29 per share, after a deferred tax benefit of
$4,790 (see Note 7 in the notes to the consolidated financial statements).
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis, as well as the accompanying consolidated
financial statements and related footnotes, will aid in understanding the
Company's results of operations as well as its financial position, cash flows,
indebtedness and other key financial information.
SUMMARY
The following table sets forth for the periods indicated (i) percentages which
certain items reflected in the Company's Consolidated Statements of Earnings
bear to consolidated sales of the Company and (ii) the percentage increase
(decrease) of such items as compared to the indicated prior period:
Relationship to Percentage
Consolidated Sales Increase (Decrease)
__________________________________________________________________________________________________________
Fiscal Fiscal Fiscal Fiscal
1994 1993 1992 1993-1994 1992-1993
==========================================================================================================
Sales 100.0% 100.0% 100.0% 15.9% 20.8%
Cost of sales 84.0 84.1 84.4 15.7 20.4
_________________________________
Gross profit 16.0 15.9 15.6 17.0 23.2
Selling and administrative expenses 6.6 7.0 7.5 10.1 11.7
Interest expense .6 .3 .5 107.2 (10.2)
Other income, net (.2) (.1) (.3) 161.4 (62.6)
_________________________________
7.0 7.2 7.7 12.6 13.5
_________________________________
Earnings before income taxes
and accounting change 9.0 8.7 7.9 20.6 32.5
Income taxes 3.0 2.9 2.5 23.3 35.9
__________________________________
Earnings of consolidated
companies before accounting change 6.0 5.8 5.4 19.3 30.9
Equity in net earnings (loss) of
unconsolidated affiliates (.1) .0 .0 N/A N/A
__________________________________
Earnings before accounting change 5.9% 5.8% 5.4% 19.0 29.2
==================================
RESULTS OF OPERATIONS
Business Segment Highlights
_____________________________________________________________________________________________________________________________
(Dollars in thousands)
Sales Growth Rate
_____________________________________________________________________________________
Fiscal Fiscal Fiscal Fiscal
1994 1993 1992 1993-1994 1992-1993
_____________________________________________________________________________________________________________________________
Engineered Power Systems $ 642,804 57% $602,853 61% $508,898 63% +7% +18%
Distribution 346,564 30 311,983 32 269,045 33 +11 +16
Tactical Vehicle Systems 147,920 13 65,894 7 34,112 4 +124 +93
Corporate Services 1,048 - 1,162 - 471 - -10 +147
___________________________________________________________
$1,138,336 100% $981,892 100% $812,526 100% +16 +21
===========================================================
Operating Profit Growth Rate
_____________________________________________________________________________________
Fiscal Fiscal Fiscal Fiscal
1994 1993 1992 1993-1994 1992-1993
_____________________________________________________________________________________________________________________________
Engineered Power Systems $ 82,395 71% $70,292 75% $59,578 81% +17% +18%
Distribution 24,015 21 20,309 22 12,478 17 +18 +63
Tactical Vehicle Systems 8,782 8 2,886 3 1,602 2 +204 +80
Corporate Services 376 - 552 - 195 - -32 +183
___________________________________________________________
$115,568 100% $94,039 100% $73,853 100% +23 +27
===========================================================
Operating Profit as a Percentage of Sales
___________________________________________________________
Fiscal Fiscal Fiscal
1994 1993 1992
__________________________________________________________________________________________________
Engineered Power Systems 12.8% 11.7% 11.7%
Distribution 6.9 6.5 4.6
Tactical Vehicle Systems 5.9 4.4 4.7
Corporate Services 35.9 47.5 41.4
Consolidated 10.2 9.6 9.1
Fiscal 1994 vs. Fiscal 1993
Sales increased to $1,138 million for Fiscal 1994 from $982 million for Fiscal
1993. This increase represents the setting of a new sales record for the
seventh consecutive year. In total, sales increased by 16% with each of the
Company's segments recording new sales records. The Company's international
sales increased 28% to over $301 million.
The Tactical Vehicle Systems segment showed the largest sales growth during
Fiscal 1994, increasing sales by 124%. This sales growth, although
significant, was less than was anticipated. Sales growth was restrained by the
government's decision to delay both the testing of trucks and the approval for
purchasing of key components, which effectively precluded the Company from
achieving its planned production quantities. The Company has reached an
agreement with the U. S. Army to restart Initial Operational Test and
Evaluation of the FMTV truck program in April, 1995. The agreement also
provides additional contract funding for direct support by the Company in
connection with the restarted tests. Other provisions of the agreement permit
the Company to file for compensation of the costs created by the suspension of
testing in Fiscal 1994. The Company expects U. S. Government testing to be
completed in June, 1995, which will enable the Company to increase from the
current low level production to full rate production in the fourth quarter of
Fiscal 1995.
The Company's Distribution segment's sales increased by 11% in Fiscal 1994.
This increase reflects the continuation of both the growth of the economies of
the territories serviced by the Company and the market's reception of the
products which the Company sells. The Company continued to expand the
territories in which it operates and the products it represents through the
acquisition, during the fourth quarter of Fiscal 1994, of substantially all of
the assets of PAMCO, a Waukesha distributor for the western United States.
The Engineered Power Systems segment of the Company experienced continued
growth with Fiscal 1994 sales increasing 7%. The gas turbine product lines
provided the majority of the sales growth. Gas turbine product support sales
growth continued to exceed expectations and contributed significantly to this
increase. Gas turbine product support consists of the servicing of customers'
equipment and the long-term contracting for the operation and maintenance of
the customers' power plants. Gas turbine equipment sales increased, but at a
slower rate than the prior year, reflecting the U. S. utility market's
uncertain response to deregulation trends. Excluding the discontinued bus
product line, the diesel products group showed a slight increase in sales,
primarily in products sold to the airline market. During the third quarter of
Fiscal 1994, the Company completed its previously announced acquisition of
substantially all of the assets of Creole International, Inc., a provider of
operating and maintenance services for turbine and reciprocating engine driven
equipment.
Operating profit grew by approximately 23% during Fiscal 1994 to $116 million.
Each of the Company's segment's operating profits increased both in absolute
amounts and as a percentage of sales. The Tactical Vehicle Systems segment's
growth reflects both an increase in production levels and an improvement in the
anticipated profitability of the FMTV program. The Engineered Power Systems
segment had an improved revenue mix resulting primarily from the rapid growth
rate of its gas turbine product support sales which generally realize a higher
operating profit. The Distribution segment benefitted from improved operating
efficiencies and a revenue blend of higher value added products.
Fiscal 1993 vs. Fiscal 1992
Sales increased to $982 million for Fiscal 1993 from $813 million for Fiscal
1992, primarily due to sales volume increases in the Engineered Power Systems
segment. The Engineered Power Systems' gas turbine product lines were the
primary source of its growth, with the highest rate of growth experienced in
the gas turbine product support group. The Distribution segment's increased
sales reflect both the general improvement in the U. S. economy and in the
market penetration of the products distributed. The Tactical Vehicle Systems
segment sales, which increased 93% in relation to Fiscal 1992, reflect the
commencement of low volume truck production during Fiscal 1993. The Company's
export sales declined slightly in Fiscal 1993, representing 24% of consolidated
sales in Fiscal 1993 as compared to 32% in Fiscal 1992.
Operating profit increased significantly during Fiscal 1993, with the overall
rate of growth exceeding the growth in sales. The Distribution segment's
operating profit grew at a rate substantially greater than its sales volume
growth, reflecting primarily operating efficiencies achieved through better
utilization of existing plants. Both the Engineered Power Systems and the
Tactical Vehicle Systems segments' operating profits increased at a rate
comparable to sales volume growth.
Net Period Expense
___________________________________________________________________________________________________________
(Dollars in thousands) Percentage Change
Fiscal Fiscal Fiscal Fiscal
1994 1993 1992 1993-1994 1992-1993
___________________________________________________________________________________________________________
Selling and administrative expenses $75,249 $68,331 $61,168 +10% +12%
Interest expense 6,865 3,313 3,689 +107 -10
Other income, net (2,528) (967) (2,586) +161 -63
________________________________
$79,586 $70,677 $62,271 +13 +13
================================
Net period expense as a percentage of sales 7.0% 7.2% 7.7%
================================
Net period expense continued to grow at a much slower rate than sales.
Operating efficiencies as a result of spreading certain fixed administrative
costs over increased sales has facilitated the control of selling and
administrative expenses. Interest expense increased significantly during
Fiscal 1994, resulting from increases in interest rates and in the level of
borrowing required to finance operations.
Earnings Before Accounting Change
___________________________________________________________________________________________________________
(Dollars in thousands) Percentage Change
Fiscal Fiscal Fiscal Fiscal
1994 1993 1992 1993-1994 1992-1993
___________________________________________________________________________________________________________
Amount $67,558 $56,780 $43,958 +19% +29%
Percentage of sales 5.9% 5.8% 5.4%
===============================================================================
Earnings before the accounting change continued to increase in both amount and
as a percentage of sales in Fiscal 1994 and 1993. These increases reflect the
growth in operating profits each period.
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), "Employer's Accounting for
Postemployment Benefits", in November 1992. SFAS 112 requires that the
liability for certain postemployment benefits be recognized over the employees'
service lives when certain conditions are met. The Company adopted SFAS 112 in
Fiscal 1994. The adoption of SFAS 112 did not have a material impact on the
Company's financial statements.
The Fiscal 1992 change in accounting represents the Company's adoption of
Statement of Financial Accounting Standards No. 106 ("SFAS 106"), "Employers'
Accounting for Postretirement Benefits other than Pensions" (see Note 7 in the
notes to consolidated financial statements). This standard requires that the
cost of retiree medical and other non-pension benefits be recognized on the
accrual method of accounting instead of expensing those costs when paid, as had
been the generally accepted practice. The Company elected to expense
previously unrecognized prior service costs immediately. This resulted in a
cumulative charge to Fiscal 1992 earnings of $9.3 million, or $0.29 per share,
after a deferred tax benefit of $4.8 million.
During Fiscal 1992, the Company also adopted the Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes",
effective February 1, 1992. SFAS 109 changed the criteria for recognition and
measurement of deferred tax assets and reduces the complexity of accounting for
income taxes established by Statement of Financial Accounting Standards No. 96
("SFAS 96"), "Accounting for Income Taxes". Since the Company previously
followed SFAS 96, adoption of SFAS 109 did not have a material impact on the
Company's financial statements.
FINANCIAL CONDITION
Company's Capital
____________________________________________________________________________________________
(Dollars in thousands) Fiscal 1994 Fiscal 1993
Amount Percentage Amount Percentage
____________________________________________________________________________________________
Long-Term Debt $116,900 21% $ 68,000 15%
Other Long-Term Liabilities 28,559 5 24,780 5
Shareholders' Equity 419,003 74 358,658 80
______________________________________________
$564,462 100% $451,438 100%
==============================================
The Company's capital consisted principally of shareholders' equity at the end
of Fiscal 1994 and 1993. Shareholders' equity increased $60,345 during Fiscal
1994 and $52,990 during Fiscal 1993 primarily as a result of earnings retained
after dividends.
The Company had $42 million and $5 million in short-term borrowings at the end
of Fiscal 1994 and 1993, respectively. Total debt increased during Fiscal 1994
and 1993 principally due to the timing of customer progress payments for
contracts in process in Fiscal 1994 and 1993 and the previously discussed
acquisitions made in Fiscal 1994. See related Note 6 in the notes to the
consolidated financial statements.
The Company may expand its Distribution and Engineered Power Systems segments
by selective acquisition of additional distribution territories and product
lines. In the event that such activities or growth in existing operations
create a need for working capital or capital expenditures in excess of existing
committed lines of credit, the Company may seek to convert uncommitted
borrowing arrangements to committed credit facilities, to borrow under other
long-term financing sources or to issue additional equity securities. The
Company has an agreement in principle to sell to GE Capital warrants for the
Company's Common Stock in connection with certain transactions as described in
Note 9 of the consolidated financial statements. The Company's current credit
facilities appear adequate to meet its foreseeable cash requirements.
LIQUIDITY
Cash Provided From Operations
_________________________________________________________________________________________
(Dollars in thousands) Fiscal Fiscal Fiscal
1994 1993 1992
__________________________________________________________________________________________
Earnings before accounting change $ 67,558 $ 56,780 $43,958
Depreciation and amortization 23,954 21,175 12,305
Deferred income taxes 2,170 413 (2,935)
____________________________________
Funds from operations 93,682 78,368 53,328
Change in net operating assets and liabilities (146,288) (86,395) 23,068
____________________________________
Net cash provided by (used in) operating activities $ (52,606) $ (8,027) $76,396
====================================
Funds from operations increased 20% during Fiscal 1994 versus a 47% increase
during 1993, reflecting primarily the growth in earnings each year. The
Company's investment in net operating assets and liabilities increased by an
amount greater than that provided from operations during Fiscal 1994 and 1993.
The significant components of net operating assets and liabilities grew at
rates comparable with sales growth, excluding recoverable costs and accrued
profits not yet billed. Significant growth in recoverable costs and accrued
profits not yet billed occurred in both the Tactical Vehicle Systems segment
and the Engineered Power Systems segment. The Tactical Vehicle Systems segment
is primarily funded progress payments under government regulations which
require that contractors retain a significant amount of the contract costs
until government acceptance of the product. The production delays for the FMTV
contract increased costs and delayed deliveries resulting in a build up in the
unliquidated contract costs in excess of what was planned. The Engineered
Power Systems segment's gas turbine product line's mix of international
contracts, which generally provide for lower customer contract funding
requirements, experienced significant growth resulting in the increased
recoverable costs and accrued profits not yet billed. Working capital to
support the operations of the Company fluctuates significantly depending on the
aforementioned progress payment streams of the contracts in process. The
Company regularly bids on commercial and government contracts, which if awarded
to the Company, could significantly affect both working capital and capital
expenditures needs.
The Company's liquidity was comparable at the end of both Fiscal 1994 and 1993
using several measures of liquidity and leverage. The Company's current ratio
(current assets divided by current liabilities) remained somewhat constant at
2.3:1 and 2.2:1 at the end of Fiscal 1994 and Fiscal 1993, respectively. The
long-term debt to equity ratio (long-term debt including the current portion
divided by total shareholders' equity) was 28% at the end of Fiscal 1994 and
20% at the end of Fiscal 1993. The Company's interest coverage (earnings
before income taxes and interest expense divided by interest expense) decreased
to 16.0 times interest for Fiscal 1994 versus 26.7 times interest for Fiscal
1993, as a result of increasing interest rates and total debt outstanding.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital Expenditures By Industry Segment
___________________________________________________________________________________________________________
(Dollars in thousands) Percentage Change
Fiscal Fiscal Fiscal Fiscal
1994 1993 1992 1993-1994 1992-1993
___________________________________________________________________________________________________________
Engineered Power Systems $12,082 $14,502 $18,646 -17% -22%
Distribution 17,651 9,302 5,582 +90 +67
Tactical Vehicle Systems 2,929 6,061 36,852 -52 -84
Corporate Services 717 781 13,985 -8 -94
________________________________
$33,379 $30,646 $75,065 +9 -59
================================
Capital expenditures returned to historical levels in Fiscal 1994 and 1993
after having increased significantly during Fiscal 1992. The Distribution
segment's increase during Fiscal 1994 includes the capital assets acquired in
the acquisition of PAMCO. The capital expenditures program at the Tactical
Vehicle Systems segment and the program to upgrade the Engineered Power Systems
segment's facilities were both substantially completed during Fiscal 1993. The
Corporate Services capital expenditures in Fiscal 1992 consisted primarily of
the consolidation of a limited partnership, in which the Company became a
majority limited partner. This limited partnership owns the building where the
Company's corporate office is located.
Cash Dividends
___________________________________________________________________________________________________________
(In thousands, except per share data) Growth Rate
Fiscal Fiscal Fiscal Fiscal
1994 1993 1992 1993-1994 1992-1993
___________________________________________________________________________________________________________
Amount of Cash Dividends $8,904 $7,563 $6,193 +18% +22%
Annual Rate of Cash Dividends per Share $ 0.27 $ 0.23 $ 0.19 +17 +21
The amount of cash dividends increased 18% and 22% during Fiscal 1994 and 1993,
respectively. Cash dividends represented 13%, 13% and 14% of earnings before
accounting change for Fiscal 1994, 1993 and 1992, respectively. Even though
substantial dividends were paid, the Company retained sufficient earnings to
invest in new plant and equipment for a wide variety of capital expenditure
projects, particularly those which increase productivity, and to provide
adequate financial resources for internal and external growth opportunities.
The Board of Directors of the Company intends to consider the payment of
dividends on a quarterly basis, commensurate with the Company's earnings and
financial needs.
GOVERNMENT CONTRACTING
The Company's government contract operations are subject to U.S. Government
investigations of business practices and cost classifications from which legal
or administrative proceedings can result. Based on government procurement
regulations, under certain circumstances a contractor can be fined, as well as
suspended or barred from government contracts. On November 5, 1993, the
Company was advised that a former consultant had filed a suit on his own behalf
and on behalf of the United States of America alleging that the Company
supplied false information, engaged in fraud and misapplied costs in connection
with a change order under a 1987 government subcontract. The suit claims
treble damages of $21 million and unspecified penalties. Management of the
Company has denied any wrongdoing and believes the case will be resolved with
no material adverse effect on the Company's business, its financial condition
or its operating results.
Major contracts for military systems are performed over extended periods of
time and are subject to changes in scope of work and delivery schedules.
Pricing negotiations on changes and settlement of claims often extend over
prolonged periods of time. The Company's ultimate profitability on such
contracts will depend not only upon the accuracy of the Company's cost
projections, but also the eventual outcome of an equitable settlement of
contractual issues with the U.S. Government.
The contract to produce 2 1/2-ton and 5-ton trucks for the U. S. Army is
subject to congressional approval of necessary funding for future program
years. As of January 31, 1995, funding for purchases for Program Year Five had
not been received. If such funding is not approved or is limited or delayed,
the number of trucks produced in each fiscal year may be reduced or contract
performance may be delayed.
Item 8. Financial Statements and Supplemental Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Stewart & Stevenson Services, Inc.
We have audited the accompanying consolidated statements of financial position
of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 1995
and 1994, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended January
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stewart & Stevenson Services,
Inc. and subsidiaries as of January 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 7 and Note 10 to the consolidated financial statements, in
Fiscal 1992 the Company changed its method of accounting for postretirement
medical benefit costs to conform with Statement of Financial Accounting
Standards No. 106 and its method of accounting for income taxes to conform
with Statement of Financial Accounting Standards No. 109. As discussed in Note
8 to the consolidated financial statements, effective February 1, 1994, the
Company changed its method of accounting for postemployment benefits to conform
with Statement of Financial Accounting Standard No. 112.
ARTHUR ANDERSEN LLP
Houston, Texas
March 13, 1995
Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
______________________________________________________________________________________________
(Dollars in thousands) Fiscal Fiscal
1994 1993
______________________________________________________________________________________________
Assets
Current Assets
Cash and equivalents $ 3,987 $ 7,788
Accounts and notes receivable, net 186,814 147,292
Recoverable costs and accrued profits not yet billed 227,467 115,868
Inventories 295,867 269,605
Other 364 224
_________ _________
Total Current Assets 714,499 540,777
Property, Plant and Equipment, net 131,860 126,473
Other assets 29,257 25,374
_________ _________
$875,616 $692,624
========= =========
Liabilities and Shareholders' Equity
Current Liabilities
Notes Payable $ 42,000 $ 5,000
Accounts Payable 164,474 131,780
Accrued payrolls and incentives 21,611 18,629
Billings on uncompleted contracts in excess of incurred costs 11,284 31,088
Current income taxes 42,240 27,931
Current portion of long-term debt 1,344 2,219
Other accured liabilities 28,201 24,539
_________ _________
Total Current Liabilities 311,154 241,186
Long-Term Debt 116,900 68,000
Deferred Income Taxes 8,038 5,868
Accrued Postretirement Benefits 15,252 15,028
Deferred Compensation 5,269 3,884
Shareholders' Equity
Common Stock, without par value, 50,000,000
shares authorized; 33,009,635 and 32,948,885
shares issued at January 31, 1995 and 1994,
respectively, including 11,820 shares held in treasury 162,057 160,366
Retained earnings 256,979 198,325
_________ _________
419,036 358,691
Less cost of treasury stock (33) (33)
_________ _________
Total Shareholders' Equity 419,003 358,658
_________ _________
$875,616 $692,624
========= =========
See notes to consolidated financial statements
Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
___________________________________________________________________________________________________________
(In thousands, except per share data) Fiscal Fiscal Fiscal
1994 1993 1992
___________________________________________________________________________________________________________
Sales $1,138,336 $981,892 $812,526
Cost of sales 955,898 825,914 685,879
___________ _________ _________
Gross profit 182,438 155,978 126,647
Selling and administrative expenses 75,249 68,331 61,168
Interest expense 6,865 3,313 3,689
Other income, net (2,528) (967) (2,586)
___________ _________ _________
79,586 70,677 62,271
___________ _________ _________
Earnings before income taxes and accounting change 102,852 85,301 64,376
Income taxes 34,520 27,999 20,597
___________ _________ _________
Earnings of consolidated companies before accounting change 68,332 57,302 43,779
Equity in net earnings (loss) of unconsolidated affiliates (774) (522) 179
___________ _________ _________
Earnings before accounting change 67,558 56,780 43,958
Cumulative effect of accounting change -0- -0- (9,300)
___________ _________ _________
Net earnings $ 67,558 $ 56,780 $ 34,658
=========== ========= =========
Weighted average number of shares of Common Stock outstanding 32,973 32,861 32,560
=========== ========= =========
Earnings per share before accounting change $ 2.05 $ 1.73 $ 1.35
Cumulative effect of accounting change, per share -0- -0- (.29)
___________ _________ _________
Net earnings per share $ 2.05 $ 1.73 $ 1.06
=========== ========= =========
See notes to consolidated financial statements
Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
___________________________________________________________________________________________________________
(Dollars in thousands) Common Retained Treasury
Stock Earnings Stock Total
___________________________________________________________________________________________________________
Balance at end of Fiscal 1991 $151,704 $120,805 $ (33) $272,476
Net earnings 34,658 34,658
Stock dividends 162 (162) -0-
Cash dividends (6,193) (6,193)
Exercise of stock options 4,727 4,727
_________ _________ _________ _________
Balance at end of Fiscal 1992 156,593 149,108 (33) 305,668
Net earnings 56,780 56,780
Cash dividends (7,563) (7,563)
Exercise of stock options 3,773 3,773
_________ _________ _________ _________
Balance at end of Fiscal 1993 160,366 198,325 (33) 358,658
Net earnings 67,558 67,558
Cash dividends (8,904) (8,904)
Exercise of stock options 1,691 1,691
_________ _________ _________ _________
Balance at end of Fiscal 1994 $162,057 $256,979 $ (33) $419,003
========= ========= ========= =========
See notes to consolidated financial statements
Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
___________________________________________________________________________________________________________
(Dollars in thousands) Fiscal Fiscal Fiscal
1994 1993 1992
___________________________________________________________________________________________________________
Operating Activities
Net earnings $ 67,558 $ 56,780 $ 34,658
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Accrued postretirement benefits 224 (91) 15,119
Depreciation and amortization 23,954 21,175 12,305
Deferred income taxes, net 2,170 413 (2,935)
Change in operating assets and liabilities:
Accounts and notes receivable (39,522) (4,126) (22,136)
Recoverable costs and accrued profits not yet billed (111,599) (59,175) (5,664)
Inventories (26,262) (57,099) 21,050
Accounts payable 32,694 3,010 30,283
Billings on uncompleted contracts in excess
of incurred costs (19,804) 14,104 (8,680)
Current income taxes 14,309 14,081 2,083
Other current liabilities 6,644 7,126 10,831
Other--principally long-term assets and liabilities (2,972) (4,225) (10,518)
__________ __________ __________
Net Cash Provided by (Used in) Operating Activities (52,606) (8,027) 76,396
Investing Activities
Expenditures for property, plant and equipment (33,379) (30,646) (75,065)
Disposal of property, plant and equipment 4,372 796 377
__________ __________ __________
Net Cash Used in Investing Activities (29,007) (29,850) (74,688)
Financing Activities
Additions to long-term borrowings 85,000 192,918 190,000
Payments on long-term borrowings (36,975) (170,402) (174,818)
Net borrowings and payments on short-term notes payable 37,000 5,000 -0-
Dividends paid (8,904) (7,563) (6,193)
Exercise of stock options 1,691 3,773 4,727
__________ __________ __________
Net Cash Provided by Financing Activities 77,812 23,726 13,716
__________ __________ __________
Increase (decrease) in cash and equivalents (3,801) (14,151) 15,424
Cash and equivalents, beginning of fiscal year 7,788 21,939 6,515
__________ __________ __________
Cash and equivalents, end of fiscal year $ 3,987 $ 7,788 $ 21,939
========== ========== ==========
See notes to consolidated financial statements
Stewart & Stevenson Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 1: Summary of Principal Accounting Policies
Fiscal Year: The Company's fiscal year begins on February 1 of the year stated
and ends on January 31 of the following year. For example, "Fiscal 1994"
commenced on February 1, 1994 and ended on January 31, 1995.
Consolidation: The consolidated financial statements include the accounts of
Stewart & Stevenson Services, Inc. and all of its majority-owned subsidiaries.
Investments in other partially-owned companies and joint ventures in which
ownership ranges from 20 to 50 percent are generally accounted for using the
equity method. All significant intercompany accounts and transactions have
been eliminated.
Accounting Change: Effective February 1, 1992, the Company adopted Statement
of Financial Accounting Standards No. 106, "Employers' Accounting For
Postretirement Benefits Other Than Pensions" ("SFAS 106")(see Note 7), and No.
109, "Accounting For Income Taxes" ("SFAS 109")(see Note 10). During the
fourth quarter of Fiscal 1994, the Company adopted, effective February 1, 1994,
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS 112")(see Note 8).
Cash Equivalents: Interest-bearing deposits and other investments with
original maturities of three months or less are considered cash equivalents.
Inventories: Inventories are stated at the lower of cost (using LIFO) or
market (determined on the basis of estimated realizable values), less related
customer deposits. Inventory costs include material, labor and overhead. The
carrying values of these assets approximate their fair values.
Contract Revenues and Costs: Revenue is recognized when a product is shipped
or accepted by the customer, except for large gas turbine contracts, where
revenue is recognized using the percentage-of-completion method. The revenues
of the Tactical Vehicle Systems segment are generally recognized under the
units-of-production method, whereby sales and estimated average cost of the
units to be produced under the Family of Medium Tactical Vehicle ("FMTV")
contract are recognized as units are substantially completed. Profits expected
to be realized on contracts are based on the Company's estimates of total sales
value and costs at completion. Changes in estimates for sales, costs, and
profits are recognized in the period which they are determinable using the
cumulative catch-up method of accounting. In certain cases the estimated sales
values include amounts expected to be realized from contract adjustments or
claims subject to negotiations or legal proceedings. Any anticipated losses on
contracts are charged in full to operations in the period in which they are
determinable.
Depreciable Property: The Company depreciates property, plant and equipment
over their estimated useful lives, using accelerated and straight-line methods.
Expenditures for property, plant and equipment are capitalized and carried at
cost. When items are retired or otherwise disposed of, income is charged or
credited for the difference between net book value and proceeds realized
thereon. Ordinary maintenance and repairs are charged to expense and
replacements and betterments are capitalized.
Off-Balance Sheet Risk: The Company enters into forward exchange contracts to
hedge certain foreign currency transactions for periods consistent with the
terms of the underlying transactions. The Company does not engage in
speculation, nor does the Company typically hedge nontransaction-related
balance sheet exposure. While the forward contracts affect the Company's
results of operations, they do so only in connection with the underlying
transactions. As a result, they do not subject the Company to risk from
exchange rate movements, because gains and losses on these contracts offset
losses and gains on the transactions being hedged. The Company's other off-
balance sheet risks are not material.
Fair Value of Financial Instruments: The Company's financial instruments
consist primarily of cash and equivalents, trade receivables, trade payables
and debt instruments. The book values of cash and cash equivalents, trade
receivables and trade payables are considered to be representative of their
respective fair values. Generally, the Company's notes receivable and payable
have interest rates which are tied to current market rates. The Company
estimates that the book value of its financial instruments approximates market
values.
Warranty Costs: Expected warranty and performance guarantee costs are accrued
as revenue is recorded, based on historical experience and contract terms.
Net Earnings Per Share: Net earnings per share of Common Stock are computed by
dividing net earnings by the weighted average number of shares outstanding.
Common Stock equivalents (outstanding options to purchase shares of Common
Stock) are excluded from the computations as they are insignificant.
Reclassifications: The accompanying consolidated financial statements for
Fiscal 1993 and 1992 contain certain reclassifications to conform with the
presentation used in Fiscal 1994.
Note 2: Industry Segment Data
The Engineered Power Systems segment includes the designing, packaging,
manufacturing and marketing of diesel and gas turbine engine-driven equipment
and the operations and maintenance of large gas turbine projects and petroleum
production facilities. The Distribution segment includes the marketing of
diesel engines, automatic transmissions, material handling equipment, transport
refrigeration units and construction equipment and the provision of related
parts and service. The Tactical Vehicle Systems segment includes the
designing, manufacturing and marketing of tactical vehicles, primarily 2 1/2-
ton and 5-ton trucks under contract with the United States Army.
The high degree of integration of the Company's operations necessitates the use
of a substantial number of allocations and apportionments in the determination
of business segment information. Sales are shown net of intersegment
eliminations.
Corporate assets consist primarily of cash and equivalents and the assets of a
limited partnership.
The Company markets its engineered power systems throughout the world and is
not dependent upon any single geographic region or single customer. Other than
the U. S. Government, no single group or customer represents greater than 10%
of consolidated sales. Export sales, including sales to domestic customers for
export, for Fiscal 1994, 1993 and 1992 were $301,885, $237,807 and $256,269,
respectively. Export sales to any single geographic region in Fiscal 1994 were
not material to consolidated sales. Export sales in Fiscal 1993 included
$113,597 destined for Asia and in Fiscal 1992 included $87,271 destined for
South America.
Financial information relating to industry segments is as follows:
_______________________________________________________________________________________________________________
Operating Identifiable Capital
Sales Profit Assets Expenditures Depreciation
_______________________________________________________________________________________________________________
Fiscal 1994
Engineered Power Systems $ 642,804 $ 82,395 $478,354 $12,082 $ 6,759
Distribution 346,564 24,015 222,462 17,651 6,113
Tactical Vehicle Systems 147,920 8,782 152,772 2,929 9,943
Corporate Services 1,048 376 22,028 717 805
___________ _________ _________ ________ ________
Total $1,138,336 $115,568 $875,616 $33,379 $23,620
=========== ========= ========= ======== ========
Fiscal 1993
Engineered Power Systems $ 602,853 $ 70,292 $396,712 $14,502 $ 5,330
Distribution 311,983 20,309 157,696 9,302 5,075
Tactical Vehicle Systems 65,894 2,886 113,917 6,061 9,405
Corporate Services 1,162 552 24,299 781 926
___________ _________ _________ ________ ________
Total $ 981,892 $ 94,039 $692,624 $30,646 $20,736
=========== ========= ========= ======== ========
Fiscal 1992
Engineered Power Systems $ 508,898 $ 59,578 $311,075 $18,646 $ 3,267
Distribution 269,045 12,478 138,359 5,582 5,041
Tactical Vehicle Systems 34,112 1,602 86,351 36,852 3,303
Corporate Services 471 195 37,563 13,985 468
___________ _________ _________ ________ ________
Total $ 812,526 $ 73,853 $573,348 $75,065 $12,079
=========== ========= ========= ======== ========
A reconciliation of Operating profit to Earnings before income taxes and
accounting change is as follows:
_____________________________________________________________________________________________________________
Fiscal Fiscal Fiscal
1994 1993 1992
_____________________________________________________________________________________________________________
Operating profit $115,568 $94,039 $73,853
Corporate expenses (5,851) (5,425) (5,819)
Interest expense (6,865) (3,313) (3,658)
_________ ________ ________
Earnings before income taxes and accounting change $102,852 $85,301 $64,376
========= ======== ========
Note 3: Recoverable Costs and Accrued Profits Not Yet Billed
Amounts included in the financial statements which relate to recoverable costs
and accrued profits not yet billed on contracts in process are as follows:
_________________________________________________________________________________________________
Fiscal Fiscal
1994 1993
_________________________________________________________________________________________________
Costs incurred on uncompleted contracts $ 581,151 $ 355,184
Accrued profits 47,627 33,300
__________ __________
628,778 388,484
Less: Customer progress payments (412,595) (303,704)
__________ __________
$ 216,183 $ 84,780
========== ==========
Included in the statements of financial position:
Recoverable costs and accrued profits not yet billed $ 227,467 $ 115,868
Billings on uncompleted contracts in excess of incurred costs (11,284) (31,088)
__________ __________
$ 216,183 $ 84,780
========== ==========
Recoverable costs and accrued profits related to the Tactical Vehicle Systems
segment include direct costs of manufacturing and engineering and allocable
overhead costs. Generally, overhead costs include general and administrative
expenses allowable in accordance with the United States Government contract
cost principles and are charged to cost of sales at the time revenue is
recognized. General and administrative costs remaining in recoverable costs
and accrued profits not yet billed amounted to $22,582 and $17,852 at January
31, 1995 and 1994, respectively. The Company's total general and
administrative expense incurred amounted to $86,292, $79,290 and $70,075 in
Fiscal 1994, 1993 and 1992, respectively.
The United States Government has a security interest in unbilled amounts
associated with contracts that provide for progress payments.
In accordance with industry practice, recoverable costs and accrued profits not
yet billed include amounts relating to programs and contracts with long
production cycles, a portion of which is not expected to be realized within one
year.
Note 4: Inventories
Summarized below are the components of inventories:
_______________________________________________________________________________________
Fiscal Fiscal
1994 1993
_______________________________________________________________________________________
Engineered Power Systems $229,898 $218,358
Customer deposits (5,169) (1,178)
_________ _________
Total Engineered Power Systems 224,729 217,180
Distribution 121,273 98,885
Excess of current cost over LIFO values (50,135) (46,460)
_________ _________
Total Inventories $295,867 $269,605
========= =========
The Company's inventory classifications correspond to its industry segments.
As a custom packager of power systems to customer specifications, the
Engineered Power Systems segment's inventory consists primarily of work-in-
process which includes purchased and manufactured components in various stages
of assembly. The Engineered Power Systems segment's inventory at January 31,
1995 and 1994 includes approximately $14,789 and $14,271, respectively, of
costs on a certain U. S. Government contract in excess of contractual
authorization which will be billable upon either contractual amendment or
approval of claims increasing contract funding. Management's position,
supported by outside legal counsel which specializes in government procurement
law, is that the Company will recover a substantial portion of the amount
claimed, which significantly exceeds the inventory carrying value. The
Distribution segment's inventory consists primarily of industrial equipment,
equipment under modification and parts held in the Company's distribution
network for resale.
During Fiscal 1994 and 1992, certain inventories were reduced. These
reductions resulted in liquidations of LIFO inventory quantities carried at
lower costs prevailing in prior fiscal years as compared with the cost of
Fiscal 1994 and 1992 purchases, the effect of which increased pre-tax earnings
in Fiscal 1994 and 1992 by approximately $1,741 and $204, respectively.
Note 5: Commitments and Contingencies
As a custom packager of power systems, the Company issues bid and performance
guarantees in the form of performance bonds or standby letters of credit.
Performance type letters of credit totaled $44,415 at the close of Fiscal 1994.
Major contracts for military systems are performed over extended periods of
time and are subject to changes in scope of work and delivery schedules.
Pricing negotiations on changes and settlement of claims often extend over
prolonged periods of time. The Company's ultimate profitability on such
contracts will depend not only upon the accuracy of the Company's cost
projections, but also the eventual outcome of an equitable settlement of
contractual issues with the U. S. Government.
The Company has been advised that on January 5, 1993, a former consultant of
the Company filed a civil suit for himself and the United States of America
alleging that the Company supplied false information in violation of the False
Claims Act (the "Act"), engaged in common law fraud and misapplied costs
incurred in connection with a change order under a 1987 government subcontract.
Under the provisions of the Act, the suit has not been served upon the Company
pending an investigation of the case by the U. S. Department of Justice and a
determination as to whether the Department of Justice will intervene and pursue
the matter on behalf of the United States. The suit alleges treble damages of
$21 million plus unspecified penalties. The Company is aware that the Defense
Criminal Investigation Service and the United States Air Force Office of
Special Investigation are conducting an investigation into whether the Company
violated any criminal statute in connection with the same facts. The Company
has denied any wrongdoing in connection with the pricing of the change order
and believes that both the criminal investigation and the civil case will be
resolved without any material effect on the financial position, net worth or
results of operations of the Company.
The Company is a defendant in a number of other lawsuits relating to
contractual, product liability, personal injury and warranty matters and
otherwise of the type normally incident to the Company's business. Management
is of the opinion that such lawsuits will not result in any material liability
to the Company.
The Company leases certain property and equipment under lease arrangements of
varying terms. Annual rentals under terms of noncancelable leases are less
than 1% of consolidated sales.
Note 6: Debt Arrangements
The Company has informal borrowing arrangements with banks which may be
withdrawn at the banks' option. Borrowings under these credit arrangements are
unsecured, are due within 90 days and bear interest at varying bid and
negotiated rates. On January 31, 1995 and 1994, the amounts outstanding under
these arrangements were $42,000 and $5,000, respectively, with a weighted
average interest rate of 6.30% and 3.39%, respectively.
Long-Term Debt, which is generally unsecured, consists of the following:
__________________________________________________________________________________________________________
Fiscal Fiscal
1994 1993
__________________________________________________________________________________________________________
Notes payable to insurance companies:
-10.20%, principal due $1,000 annually to 1998 $ 4,000 $ 5,000
-Installment note, 10.20%, principal retired in 1994 -0- 451
Debt of consolidated limited partnership:
-note payable to a bank, principal due monthly to 1998 (see note below) 9,000 9,000
Revolving credit notes payable to banks (see note below) 105,000 55,000
Other 244 768
_________ ________
118,244 70,219
Less current portion (1,344) (2,219)
_________ ________
Long-Term Debt $116,900 $68,000
========= ========
The Company has commitments of $105,000 from banks under revolving credit notes
(subject to reduction at the Company's election) which mature on December 31,
1997. A commitment fee at the rate of 15 basis points per annum is paid on the
daily average unused balance during the revolving period. Borrowings
outstanding under the revolving credit notes bear interest at various options,
the maximum rate being the prime rate. In Fiscal 1992, the Company entered
into an interest rate swap agreement, which expires in Fiscal 1995, that
presently converts $10,000 of floating rate debt into fixed rate debt with an
interest rate of 4.28%. The net interest paid or received is included in
interest expense.
The Company's unsecured long-term debt was issued pursuant to agreements
containing covenants which impose working capital requirements on the Company
and designated subsidiaries and restrict indebtedness, guarantees, rentals,
dividends and other items. At the close of Fiscal 1994, approximately $124,678
of retained earnings were available for payment of dividends under the most
restrictive covenant.
As a result of the acquisition of a majority interest in a partnership in which
the Company is a limited partner, the Company's Consolidated Statements of
Financial Position include the debt of this partnership, which owns the
building where the Company's corporate office is located. Such debt is solely
the obligation of the partnership and is secured by the office building and
garage. Interest is payable in monthly installments at various rates, the
maximum rate being 9%.
Interest paid on both long-term and short-term debt during Fiscal 1994, 1993
and 1992 was $6,679, $3,425 and $3,707, respectively. The amounts of long-term
debt which will become due during Fiscal 1995 through 1998, are approximately:
1995--$1,344; 1996--$1,100; 1997--$106,100 and 1998--$9,700.
Note 7: Postretirement Medical Plan
The Company has a postretirement medical plan which covers most of its
employees and provides for the payment of medical costs of eligible employees
and dependents upon retirement. Effective February 1, 1992, the Company
adopted SFAS 106 and changed its method of accounting for such costs to the
accrual basis of accounting instead of expensing these costs when paid as had
been the generally accepted method. The Company elected to record the
previously unrecognized prior service cost of such benefits on the immediate
recognition basis resulting in a cumulative charge to Fiscal 1992 earnings of
$9,300, or $0.29 per share, after a deferred tax benefit of $4,790. The plan
is currently not funded. The Company expects to continue financing
postretirement medical costs as covered claims are incurred.
Postretirement medical benefit costs includes the following components:
______________________________________________________________________________________________________
Fiscal Fiscal Fiscal
1994 1993 1992
______________________________________________________________________________________________________
Service costs - benefits attributed to service during the period $ 418 $ 377 $ 466
Interest cost on accumulated postretirement medical benefit
obligation 678 768 1,105
Amortization of prior service costs (718) (618) -0-
______ ______ _______
Net postretirement medical benefit costs $ 378 $ 527 $1,571
====== ====== =======
The status of the plan is as follows:
______________________________________________________________________________________________
January 31, January 31,
1995 1994
______________________________________________________________________________________________
Accrued Postretirement Benefits:
Retirees $ 4,454 $ 6,201
Employees eligible to retire 1,978 2,561
Employees not eligible to retire 1,500 1,419
________ ________
7,932 10,181
Unrecognized prior service cost 5,328 5,954
Unrecognized net gain (loss) 1,992 (1,107)
________ ________
$15,252 $15,028
======== ========
Postretirement medical benefit amounts were determined by applying health care
costs trend rates of 9.5 to 11.5 percent for Fiscal 1994 and 10.5 to 13.0
percent for Fiscal 1993, gradually decreasing to 5.5 percent by 2012 to gross
eligible medical claims, and using a discount rate of 8.75 percent for Fiscal
1994 and 7.75 percent for Fiscal 1993. Changing the health care cost trend
rates by one percentage point would change the accumulated postretirement
medical benefit obligation at January 31, 1995 by approximately $766 and
the postretirement medical benefit costs for Fiscal 1994 by approximately $126.
The Company made plan modifications during the fourth quarter of Fiscal 1992.
The plan was amended for employees that retire on or after February 1, 1993, to
modify the attribution period and the cost sharing provisions of the plan.
Note 8: Employee Pension and Other Benefit Plans
The Company has a noncontributory defined benefit pension plan covering
substantially all of its full-time employees. The pension benefits are based
on years of service, limited to 45 years, and the employee's highest
consecutive five-year average compensation out of the last ten years of
employment. The Company funds pension costs in conformity with the funding
requirements of applicable government regulations.
The following table sets forth the plan's funded status and amounts recognized
in the Company's statements of financial position:
___________________________________________________________________________________________________________
Fiscal Fiscal
1994 1993
___________________________________________________________________________________________________________
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $34,096 in 1994 and $33,051 in 1993 $ 36,028 $ 34,714
========= =========
Projected benefit obligation for service rendered to date $(43,764) $(44,421)
Plan assets at fair value, primarily publicly traded stocks and bonds,
including 70,956 and 120,956 shares of the Company's Common Stock
at the end of Fiscal 1994 and 1993, respectively 60,686 56,099
_________ _________
Plan assets in excess of projected benefit obligations 16,922 11,678
Unrecognized net gain from past experience different from that assumed (9,114) (4,020)
Unrecognized net asset at February 1, 1985 amortized over the
average remaining service period -0- (194)
_________ _________
Prepaid pension cost included in Other Assets $ 7,808 $ 7,464
========= =========
Net pension credit includes the following components:
_________________________________________________________________________________________________________________________
Fiscal Fiscal Fiscal
1994 1993 1992
_________________________________________________________________________________________________________________________
Service cost -- benefits earned during the year $ 1,815 $ 2,012 $ 1,735
Interest cost on projected benefit obligation 3,541 3,108 3,126
Actual return on plan assets (5,494) (4,883) (4,550)
Amortization of unrecognized net gain (406) (493) (810)
Net amortization and deferrals 200 (540) (847)
________ ________ ________
Net periodic pension credit $ (344) $ (796) $(1,346)
======== ======== ========
The assumptions used are as follows:
_________________________________________________________________________________________________________________________
Fiscal Fiscal
1994 1993
_________________________________________________________________________________________________________________________
Discount Rate 8.75% 7.75%
Long-term rate of return on assets 9.50% 9.50%
Rate of increase in future compensation 4.50 - 5.00% 4.50 - 5.00%
The Company has an unfunded defined benefit retirement plan for non-employee
directors which provides for payments upon retirement, death, or disability.
Retirement expense for this plan in Fiscal 1994, 1993 and 1992, respectively,
was $68, $164 and $71.
During Fiscal 1993, the Company adopted an unfunded supplemental retirement
plan for certain corporate officers. Retirement expense for the plan in Fiscal
1994 and 1993 was $216 and $290, respectively. Prior service cost not yet
recognized in periodic pension cost was $1,804 and $1,208 at January 31, 1995
and 1994, respectively.
In January 1994, the Company adopted an employee savings plan, which qualifies
under Section 401(k) of the Internal Revenue Code. Under the plan,
participating employees may contribute up to 15% of their pre-tax salary, but
not more than statutory limits. The Company contributes twenty five cents for
each dollar contributed by a participant, subject to certain limitations. The
Company's matching contribution to the savings plan was $399 and $13 in Fiscal
1994 and 1993, respectively.
Effective February 1, 1994, the Company adopted SFAS 112. The statement
requires the accrual of the estimated costs of benefits provided by the
employer to former or inactive employees after employment but prior to
retirement. Adoption of SFAS 112 did not have a material impact upon the
consolidated financial position or results of operations.
Under a nonqualified deferred compensation plan for certain employees, a
portion of eligible employees' discretionary income can be deferred at the
election of the employee. These deferred funds accrue interest payable to the
employee at the prime rate in effect at the end of the fiscal year.
Note 9: Common Stock
Proposed issuance of common stock warrants: On January 10, 1995, the Company
announced that an agreement in principle had been reached with GE Capital
Corporation ("GE Capital"), a wholly owned subsidiary of General Electric
Company, to offer for lease power plants and gas compression stations
manufactured by the Company. Under the agreement, the Company will contribute
10% of the equity requirements for each lease transaction and GE Capital has
agreed to purchase warrants for the Company's Common Stock to fund the
Company's equity participation. Completion of this transaction is subject to
due diligence, further negotiations and approval of a definitive agreement by
the board of directors of both companies.
Shareholder Rights Plan: On March 9, 1995, the Company announced that its Board
of Directors adopted a shareholder rights plan. The Company adopted the plan
to protect shareholders against unsolicited attempts to acquire control of the
Company that do not offer what the Company believes to be an adequate price to
all shareholders. The rights will be issued to shareholders of record on March
20, 1995 and will expire on March 20, 2005.
The plan provides for the issuance of one right for each outstanding share of
the Company's Common Stock. The rights will become exercisable only if a
person or group acquires 15% or more of the Company's outstanding voting stock
or announces a tender or exchange offer that would result in ownership of 15%
or more of the Company's stock. Each right will entitle the holder to buy one-
third of a share of Common Stock at an exercise price of $30 per right, subject
to antidilution adjustments. The Company's Board of Directors may, at its
option, redeem all rights for $.01 per right at any time prior to the
acquisition of 15% or more of the Company's stock by a person or group. If a
person or group acquires 15% or more of the Company's outstanding voting stock,
each right will entitle holders, other than the acquiring party, to purchase
shares of the Company's Common Stock having a market value of twice the
exercise price of the right.
The plan also includes an exchange option. If a person or group acquires 15%
or more, but less than 50%, of the outstanding voting stock, the Board of
Directors may at its option exchange the rights in whole or in part for shares
of the Company's stock for each two shares of Common Stock for which a right is
then exercisable. This exchange would not apply to shares held by the person
or group holding 15% or more of the Company's voting stock.
If, after the rights have become exercisable, the Company merges or otherwise
combines with another entity, or sells 50% or more of its assets or earning
power, each right then outstanding will entitle its holder to purchase for $30,
subject to antidilution adjustments, a number of the acquiring party's common
shares having a market value of twice that amount.
Stock Options: The Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock
Option Plan and the Stewart & Stevenson Services, Inc. 1993 Nonofficer Stock
Option Plan authorize the grant of options to purchase an aggregate of up to
1,800,000 and 415,000 shares of Common Stock, respectively, at not less than
fair market value at the date of grant. The options have a term not exceeding
ten years and vest over periods not exceeding four years. Under the terms of
the 1993 Nonofficer Stock Option Plan, the number of options available for
grant increased from 415,000 to 514,550 shares as of February 1, 1995.
Stock option activity under the plan is as follows:
___________________________________________________________________________________________________
Shares Option Price
under Range
Option Per Share
___________________________________________________________________________________________________
Outstanding at end of Fiscal 1991 747,400 $4.75 - $18.75
Granted 58,800 $27.75
Exercised (335,000) $4.75 - $18.75
_________
Outstanding at end of Fiscal 1992 471,200 $4.75 - $27.75
Granted 178,000 $32.625
Exercised (171,100) $4.75 - $27.75
_________
Outstanding at end of Fiscal 1993 478,100 $13.125 - $32.625
Granted 180,050 $50.25
Exercised (60,750) $13.125 - $32.625
Cancelled (12,225) $18.75 - $50.25
_________
Outstanding at end of Fiscal 1994 585,175 $18.75 - $50.25
=========
Options exercisable at end of Fiscal 1994 170,150 $18.75 - $50.25
=========
Options available for future grants at the end of Fiscal 1994 639,975
=========
Note 10: Income Taxes
Effective February 1, 1992, the Company adopted the method of accounting for
income taxes promulgated by SFAS 109. The Company had previously accounted for
income taxes under the method promulgated by Statement of Financial Accounting
Standards No. 96 ("SFAS 96"). Under both SFAS 109 and SFAS 96, the deferred
tax liability is determined under the liability method based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted statutory tax rates and deferred tax expense is the
result of changes in the net liability for deferred taxes. The principal types
of differences between assets and liabilities for financial statement and tax
return purposes are accumulated depreciation, pension accounting, contract
accounting, and nondeductible accruals. Adoption of SFAS 109 did not have a
material effect on Fiscal 1992 earnings before the accounting change for SFAS
106.
The components of the income tax provision and the income tax payments are as
follows:
__________________________________________________________________________________________
Fiscal Fiscal Fiscal
1994 1993 1992
__________________________________________________________________________________________
Current $ 2,194 $10,454 $17,917
Deferred 32,326 17,545 2,680
________ ________ ________
Income tax provision $34,520 $27,999 $20,597
======== ======== ========
Income tax payments (excluding refunds) $17,422 $11,965 $13,667
======== ======== ========
A reconciliation between the provision for income taxes and income taxes
computed by applying the statutory U. S. Federal income tax rates of 35% in
both Fiscal 1994 and 1993 and 34% in Fiscal 1992 is as follows:
_________________________________________________________________________________________
Fiscal Fiscal Fiscal
1994 1993 1992
__________________________________________________________________________________________
Provision at statutory rates $35,998 $29,856 $21,888
Other (1,478) (1,857) (1,291)
________ ________ ________
$34,520 $27,999 $20,597
======== ======== ========
The tax effects of the significant temporary differences which comprise
the deferred tax liability at the end of Fiscal 1994 and 1993 are as follows:
_____________________________________________________________________________
Fiscal Fiscal
1994 1993
_____________________________________________________________________________
Deferred Tax Assets
Postretirement benefit obligation $ 5,338 $ 5,260
Accrued expenses and other reserves 11,072 11,426
Other 54 1,316
________ ________
Gross deferred tax assets 16,464 18,002
Deferred Tax Liabilities
Property, plant and equipment 4,602 4,027
Pension accounting 2,449 2,412
Contract accounting 34,817 27,533
Prepaid expenses and deferred charges 37,563 16,997
Other 9,685 7,359
________ ________
Gross deferred tax liabilities 89,116 58,328
________ ________
Net deferred tax liability $72,652 $40,326
======== ========
Current portion of deferred tax liability $64,614 $34,458
Non-current portion of deferred tax liability 8,038 5,868
________ ________
Net deferred tax liability $72,652 $40,326
======== ========
Note 11: Supplemental Financial Data
Receivables consist of the following:
______________________________________________________________________________
Fiscal Fiscal
1994 1993
______________________________________________________________________________
Accounts receivable $186,024 $145,433
Notes receivable 2,458 3,576
Allowance for doubtful accounts (1,668) (1,717)
_________ _________
$186,814 $147,292
========= =========
At January 31, 1995, the Company does not have significant credit risk
concentrations. No single group or customer, other than the U. S. Government,
represents greater than 10% of total accounts receivable. The U. S. Government
accounted for approximately 12.7% and 10.2% of accounts receivable at January
31, 1995 and 1994, respectively.
Components of property, plant and equipment are as follows:
______________________________________________________________________________
Fiscal Fiscal
1994 1993
______________________________________________________________________________
Machinery and equipment $114,592 $107,405
Buildings and leasehold improvements 89,178 76,533
Revenue earning assets 10,556 10,154
Accumulated depreciation and amortization (98,355) (82,188)
_________ _________
115,971 111,904
Construction-in-progress 1,585 2,050
Land 14,304 12,519
_________ _________
$131,860 $126,473
========= =========
Note 12: Consolidated Quarterly Data (unaudited)
____________________________________________________________________________________________________
Fiscal 1994
____________________________________________________________________________________________________
Fourth Third Second First
Quarter Quarter Quarter Quarter
____________________________________________________________________________________________________
Sales $287,815 $304,248 $287,118 $259,155
Gross profit 50,501 47,176 44,215 40,546
Net earnings 18,438 17,603 16,488 15,029
Net earnings per share .56 .53 .50 .46
Fiscal 1993
____________________________________________________________________________________________________
Fourth Third Second First
Quarter Quarter Quarter Quarter
____________________________________________________________________________________________________
Sales $244,662 $259,141 $257,936 $220,153
Gross profit 43,399 40,867 38,024 33,688
Net earnings 16,831 14,068 13,789 12,092
Net earnings per share .51 .43 .42 .37
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
In accordance with General Instruction G(3) to Form 10-K, Items 10 through 13
have been omitted since the Company will file with the Commission a definitive
proxy statement complying with Regulation 14A involving the election of
directors not later than 120 days after the close of its fiscal year. Such
information is incorporated herein by reference.
CROSS REFERENCE
Form 10-K Item Caption in Definitive
Number and Caption Proxy Statement
___________________ _____________________
Item 10. Directors and Executive
Officers of the Registrant . . . . Election of Directors;
Executive Officers;
Compliance with
Securities Laws
Item 11. Executive Compensation . . . . . . Election of Directors;
Performance of Stewart
& Stevenson Common Stock;
Report of the
Compensation and
Management Development
Committee; Executive
Compensation
Item 12. Security Ownership of
Certain Beneficial Owners
and Management . . . . . . . . . . Voting Securities and
Ownership Thereof by
Certain Beneficial Owners
and Management
Item 13. Certain Relationships
and Related Transactions . . . . . Transactions with
Management and Certain
Business Relationships
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)1. The following financial statements for Stewart & Stevenson Services, Inc.
are filed as a part of this report:
Consolidated Statements of Financial Position--January 31, 1995 and 1994.
Consolidated Statements of Earnings--Years ended January 31, 1995, 1994
and 1993.
Consolidated Statements of Shareholders' Equity--Years ended January 31,
1995, 1994 and 1993.
Consolidated Statements of Cash Flows--Years ended January 31, 1995, 1994
and 1993.
Notes to Consolidated Financial Statements.
2. Schedules are omitted because of the absence of conditions under which
they are required or because the information is included in the
financial statements or notes thereto.
3. The Company has several instruments which define the rights of holders
of long-term debt. Except for the instruments listed as exhibits 4.1,
4.2 and 4.3 below, the total amount of securities authorized under any
individual instrument with respect to long-term debt does not exceed 10%
of the total assets of the Company and its subsidiaries on a
consolidated basis. The Company agrees to furnish upon request by the
Securities and Exchange Commission any instruments not filed herewith
relating to its long-term debt.
The Company will furnish to any shareholder of record as of April 25,
1995, a copy of any exhibit to this annual report upon receipt of a
written request addressed to Mr. Lawrence E. Wilson, Vice President and
Secretary, P. O. Box 1637, Houston, Texas 77251-1637 and the payment of
$.20 per page with a minimum charge of $5.00 for reasonable expenses
prior to furnishing such exhibits.
The following exhibits are part of this report pursuant to item 601 of
regulation S-K.
3.1 Second Restated Articles of Incorporation of Stewart & Stevenson
Services, Inc., effective as of April 20, 1992 (incorporated by
reference to Exhibit 3.1 of the Form 10-K of Stewart & Stevenson
for the fiscal year ended January 31, 1994 under the Commission
File No. 0-8493).
3.2 Third Restated Bylaws of Stewart & Stevenson Services, Inc.,
effective as of December 8, 1992 (incorporated by reference to
Exhibit 3.2 of the Form 10-K of Stewart & Stevenson for the fiscal
year ended January 31, 1994 under the Commission File No. 0-8493).
*4.1 Loan Agreement effective September 3, 1993, between Stewart &
Stevenson Services, Inc. and Texas Commerce Bank National
Association and ABN AMRO Bank, N.V., Houston Agency and The Bank
of New York, a New York Banking Corporation and NationsBank of
Texas, National Association.
*4.2 Agreement and First Amendment to Loan Agreement effective July 31,
1994, between Stewart & Stevenson Services, Inc. and Texas
Commerce Bank National Association and ABN AMRO Bank, N.V.,
Houston Agency and The Bank of New York, a New York Banking
Corporation and NationsBank of Texas, National Association.
*4.3 Agreement and Second Amendment to Loan Agreement effective
December 23, 1994, between Stewart & Stevenson Services, Inc. and
Texas Commerce Bank National Association and ABN AMRO Bank, N.V.,
Houston Agency and The Bank of New York, a New York Banking
Corporation and NationsBank of Texas, National Association and
Bank of America Illinois, an Illinois Banking Association and PNC
Bank, National Association, a National Banking Association.
4.4 Rights Agreement effective March 13, 1995, between Stewart &
Stevenson Services, Inc. and The Bank of New York (incorporated by
reference to Exhibit 1 of the Form 8-A Registration Statement of
Stewart & Stevenson under the Commission File No. 001-11443).
10.1 Lease Agreement effective April 1, 1990, between Joe Manning, Jr.
and C. E. Ames, as Lessors, and the Company, as Lessee
(incorporated by reference to Exhibit 10.1 of the Form 10-K of
Stewart & Stevenson for the fiscal year ended January 31, 1994
under the Commission File No. 0-8493).
10.2 Lease Agreement effective January 1, 1991, between Joe Manning,
Jr., as Lessor, and the Company, as Lessee (incorporated by
reference to Exhibit 10.2 of the Form 10-K of Stewart & Stevenson
for the fiscal year ended January 31, 1994 under the Commission
File No. 0-8493).
10.3 Lease Agreement effective January 1, 1988, between Miles McInnes
and Faye Manning Tosch, as Lessors, and the Company, as Lessee
(incorporated by reference to Exhibit 10.3 of the Form 10-K of
Stewart & Stevenson for the fiscal year ended January 31, 1994
under the Commission File No. 0-8493).
10.4 Lease Agreement effective March 1, 1986, between Joe Manning, Jr.
and Joe Manning, IV, as Lessors, and the Company, as Lessee
(incorporated by reference to Exhibit 10.4 of the Form 10-K of
Stewart & Stevenson for the fiscal year ended January 31, 1994
under the Commission File No. 0-8493).
10.5 Distributor Sales and Service Agreement effective January 1, 1993,
between the Company and Detroit Diesel Corporation (incorporated by
reference to Exhibit 10.1 of the Form 10-K of Stewart & Stevenson
for the fiscal year ended January 31, 1993 under the Commission
File No. 0-8493).
10.6 Contract Number DAAE07-92-R001 dated October 11, 1991 between
Stewart & Stevenson Services, Inc. and the United States Department
of Defense, U. S. Army Tank-Automotive Command, as modified
(incorporated by reference to Exhibit 28.1 of the Form S-3
Registration Statement of Stewart & Stevenson under the Commission
File No. 33-44149).
10.7 Contract Number DAAE07-92-R002 dated October 15, 1991 between
Stewart & Stevenson Services, Inc. and the United States Department
of Defense, U. S. Army Tank-Automotive Command, as modified
(incorporated by reference to Exhibit 28.2 of the Form S-3
Registration Statement of Stewart & Stevenson under the Commission
File No. 33-44149).
10.8 Stewart & Stevenson Services, Inc. Deferred Compensation Plan dated
as of December 31, 1979 (incorporated by reference to Exhibit 10.8
of the Form 10-K of Stewart & Stevenson for the fiscal year ended
January 31, 1994 under the Commission File No. 0-8493).
10.9 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option
Plan (incorporated by reference to Exhibit 10.9 of the Form 10-K of
Stewart & Stevenson for the fiscal year ended January 31, 1994
under the Commission File No. 0-8493).
10.10 Amendment No. 1 to Stewart & Stevenson Services, Inc. 1988
Nonstatutory Stock Option Plan, dated September 11, 1990
(incorporated by reference to Exhibit 10.10 of the Form 10-K of
Stewart & Stevenson for the fiscal year ended January 31, 1994
under the Commission File No. 0-8493).
10.11 Stewart & Stevenson Services, Inc. Supplemental Executive
Retirement Plan (incorporated by reference to Exhibit 10.11 of the
Form 10-K of Stewart & Stevenson for the fiscal year ended January
31, 1994 under the Commission File No. 0-8493).
*21.1 List of Subsidiaries.
*23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
*27.1 Financial Data Schedules.
__________
* Filed with this report.
(b) Reports on Form 8-K.--No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 11th day of April,
1995.
STEWART & STEVENSON SERVICES, INC.
By /s/ Bob H. O'Neal
Bob H. O'Neal
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 11th day of April, 1995.
/s/ Bob H. O'Neal /s/ Robert L. Hargrave
Bob H. O'Neal Robert L. Hargrave
Director and Principal Director, Principal
Executive Officer Financial Officer and
Principal Accounting Officer
/s/ C. Jim Stewart II /s/ J. Carsey Manning
C. Jim Stewart II J. Carsey Manning
Director Director
/s/ Donald E. Stevenson /s/ Robert H. Parsley
Donald E. Stevenson Robert H. Parsley
Director Director
/s/ Jack W. Lander, Jr. /s/ Jack T. Currie
Jack W. Lander, Jr. Jack T. Currie
Director Director
/s/ Robert S. Sullivan /s/ Richard R. Stewart
Robert S. Sullivan Richard R. Stewart
Director Director
/s/ Orson C Clay /s/ Brian H. Rowe
Orson C Clay Brian H. Rowe
Director Director
EXHIBIT INDEX
Filed with Incorporated by Reference
Exhibit Number and Description this report Form Date File No. Exhibit
___________________________________ ____________ _____ _____ _______ ________
3.1 Second Restated Articles of Incorporation,
effective as of April 20, 1992. 10-K 1/31/94 0-8493 3.1
3.2 Third Restated Bylaws, effective as of
December 8, 1992. 10-K 1/31/94 0-8493 3.2
4.1 Loan Agreement effective September 3, 1993,
between Stewart & Stevenson Services, Inc.
and Texas Commerce Bank National Association
and ABN AMRO Bank, N.V., Houston Agency and
The Bank of New York, a New York Banking
Corporation and NationsBank of Texas,
National Association. *
4.2 Agreement and First Amendment to Loan Agreement
effective July 31, 1994, between Stewart & Stevenson
Services, Inc. and Texas Commerce Bank National
Association and ABN AMRO Bank, N.V., Houston
Agency and The Bank of New York, a New York
Banking Corporation and NationsBank of Texas,
National Association. *
4.3 Agreement and Second Amendment to Loan
Agreement effective December 23, 1994,
between Stewart & Stevenson Services,
Inc. and Texas Commerce Bank National
Association and ABN AMRO Bank, N.V., Houston
Agency and The Bank of New York, a New York
Banking Corporation and NationsBank of
Texas, National Association and Bank of
America Illinois, an Illinois Banking
Association and PNC Bank, a National
Banking Association. *
4.4 Rights Agreement effective March 13, 1995,
between Stewart & Stevenson Services, Inc.
and The Bank of New York. 8-A 3/15/95 001-11443 1
10.1 Lease Agreement effective April 1, 1990,
between Joe Manning, Jr. and C. E. Ames,
as Lessors, and the Company, as Lessee. 10-K 1/31/94 0-8493 10.1
10.2 Lease Agreement effective January 1, 1991,
between Joe Manning, Jr., as Lessor, and
the Company, as Lessee. 10-K 1/31/94 0-8493 10.2
10.3 Lease Agreement effective January 1, 1988,
between Miles McInnes and Faye Manning Tosch,
as Lessors, and the Company, as Lessee. 10-K 1/31/94 0-8493 10.3
10.4 Lease Agreement effective March 1, 1986, between
Joe Manning, Jr. and Joe Manning, IV, as Lessors,
and the Company, as Lessee. 10-K 1/31/94 0-8493 10.4
10.5 Distributor Sales and Service Agreement effective
January 1, 1993, between the Company and Detroit
Diesel Corporation. 10-K 1/31/93 0-8493 10.1
10.6 Contract Number DAAE07-92-R001 dated October 11,
1991 between Stewart & Stevenson Services, Inc.
and the United States Department of Defense,
U. S. Army Tank - Automotive Command, as modified. S-3 12/28/91 33-44149 28.1
10.7 Contract Number DAAE07-92-R002 dated October 15,
1991 between Stewart & Stevenson Services, Inc.
and the United States Department of Defense, U. S.
Army Tank - Automotive Command, as modified. S-3 12/28/91 33-44149 28.2
10.8 Stewart & Stevenson Services, Inc. Deferred
Compensation Plan dated as of December 31, 1979. 10-K 1/31/94 0-8493 10.8
10.9 Stewart & Stevenson Services, Inc. 1988 Nonstatutory
Stock Option Plan. 10-K 1/31/94 0-8493 10.9
10.10 Amendment No. 1 to Stewart & Stevenson Services, Inc.
1988 Nonstatutory Stock Option Plan, dated September
11, 1990. 10-K 1/31/94 0-8493 10.10
10.11 Stewart & Stevenson Services, Inc. Supplemental
Executive Retirement Plan. 10-K 1/31/94 0-8493 10.11
21.1 List of subsidiaries. *
23.1 Consent of Arthur Andersen LLP,
Independent Public Accountants. *
27.1 Financial Data Schedules. *