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UNITED STATES
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, 1997
("Fiscal 1996") 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: None
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. [ ]
Aggregate market value of voting securities held by nonaffiliates as of
February 28, 1997:
$738,624,314
Number of shares outstanding of each of the issuer's classes of common stock, as
of February 28, 1997:
Common Stock, Without Par Value 33,120,460 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K
- -------- -----------------
Proxy Statement for the 1997 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, services 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 are manufactured by General
Electric Corporation. The Company's engineered power systems and operations and
maintenance services are marketed worldwide, particularly in developing
countries where there has been growth in demand for electrical power. Stewart &
Stevenson also participates in the development of molten carbonate fuel cells
and hybrid photo-voltaic/recip systems.
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 the Southern and Western United 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 is also offering the FMTV for sale 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 1996" commenced on
February 1, 1996 and ended on January 31, 1997. Identifiable assets at the close
of Fiscal 1996, 1995 and 1994 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 Item 8 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
40.2%, 50.9% and 56.5%, respectively, of consolidated sales during Fiscal 1996,
1995 and 1994.
Gas Turbine Driven Equipment. The Company packages gas turbine products based on
turbine engines purchased from General Electric Corporation ("GE"), European Gas
Turbines ("EGT") and the Garrett Corporation ("Garrett"). The table below lists
the simple cycle 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 . . . . . . . . . . . . . . 40.30 Mw
GE LM2500+. . . . . . . . . . . . . . 27.60 Mw
GE LM2500 STIG. . . . . . . . . . . . 26.50 Mw
GE LM2500 . . . . . . . . . . . . . . 22.20 Mw
GE LM1600 . . . . . . . . . . . . . . 13.40 Mw
EGT TEMPEST . . . . . . . . . . . . . 7.49 Mw
EGT TORNADO . . . . . . . . . . . . . 6.25 Mw
EGT TYPHOON . . . . . . . . . . . . . 4.91 Mw
Gas turbine generator sets have a lower capital cost, higher efficiency and
shorter lead times and are more environmentally acceptable than many 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 42 Mw size incorporate GE gas turbine engines and are marketed
primarily to independent power producers for prime power and cogeneration
applications and to electrical utilities for base load capacity or additional
capacity during peak demand periods. Generators in the 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 EGT gas turbine engines. The table below
lists the output of each model of gas turbine engine offered by the Company for
mechanical drive applications.
Output in
Engine Model Shaft Horsepower
GE LM6000. . . . . . . . . . . . . . 55,545 Shp
GE LM2500+ . . . . . . . . . . . . . 37,000 Shp
GE LM2500. . . . . . . . . . . . . . 31,235 Shp
GE LM1600+ . . . . . . . . . . . . . 18,745 Shp
EGT TORNADO. . . . . . . . . . . . . 8,900 Shp
EGT TYPHOON. . . . . . . . . . . . . 6,500 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 offers the turnkey design, procurement and construction of
power generation and compression facilities that incorporate turbine-driven
generators, turbine-driven compressors and other equipment packaged by the
Company. The balance of the equipment required for a complete facility and the
installation and construction services are subcontracted by the Company and
performed under the Company's supervision.
Stewart & Stevenson believes that the international market provides significant
sale and lease opportunities for the Company's gas turbine products and
construction services. 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 are derived from packaging gas
turbine engines manufactured by GE and EGT. The Company believes that its
relationship with GE and EGT is good and will continue. Any interruption of
these relationships, however, would adversely affect the Company.
Sales of gas turbine products accounted for approximately 16.7%, 30.5% and
40.1%, respectively, of consolidated sales in Fiscal 1996, 1995 and 1994.
Gas Turbine Product Support Services. 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, processing and
transportation 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.
Operation and maintenance services are provided on a worldwide basis.
In addition, Stewart & Stevenson offers parts and repair services for
turbine-driven equipment and is authorized to perform complete overhaul services
on certain GE and EGT gas turbine engines. Another turbine product manufactured
by the Company is an exhaust flow enhancement device that is manufactured under
license from Norlock Technologies, Inc. This new product improves power output
and fuel efficiency and reduces exhaust gas turbulence.
Sales of Gas Turbine Product Support Services accounted for approximately 14.2%,
12.6% and 7.6%, respectively, of consolidated sales in Fiscal 1996, 1995 and
1994.
Other Power Systems. Stewart & Stevenson is a leading manufacturer of coil
tubing units, well stimulation equipment and other diesel equipment for the
oilfield service industries. 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 blowout preventors and
high pressure valves for the drilling and workover industry.
Stewart & Stevenson also 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 approximately 9.2%, 7.8%
and 8.8%, respectively, of consolidated sales in Fiscal 1996, 1995 and 1994.
DISTRIBUTION SEGMENT
Distribution Operations. 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
expiration date thereof.
Expiration
Manufacturer Products Territories Date
Detroit Diesel Corporation Heavy Duty High Speed Texas, Colorado, New 1998
("Detroit Diesel") Diesel Engines Mexico, Wyoming, Nebraska,
Louisiana, Mississippi,
Alabama and Venezuela
Electro-Motive Division of Heavy Duty Medium Speed Texas, Colorado, New 1998
General Motors Corporation Diesel Engines Mexico, Nebraska,
("EMD") Oklahoma, Arkansas,
Louisiana, Tennessee,
Mississippi, Alabama,
Mexico, Central America
and most of South America
Allison Transmission On- and Off-Highway Texas, Colorado, New 1997
Division of General Motors Automatic Transmissions, Mexico, Wyoming, Nebraska,
Corporation ("Allison") Power Shift Transmissions Louisiana, Mississippi,
and Torque Converters Alabama and Venezuela
Hyster Company Material Handling Equipment Texas *
John Deere Industrial Construction, Utility and Southeast Texas and Wyoming *
Equipment Company Forestry Equipment
Thermo King Corporation Transport Refrigeration Southeast Texas and 1999
Equipment Southern Louisiana
Waukesha Engine Division of Natural Gas Industrial Colorado, Montana, North 1997
Dresser Industries, Inc. Engines Dakota, Oklahoma, Wyoming,
New Mexico, Utah, Oregon,
Hawaii, Kansas, Arizona,
California, Washington and
Nevada
KHD - Deutz Corporation Diesel Engines Colorado, Wyoming, 1997
Arizona, New Mexico,
Washington and Alaska
- ------------------------
*No expiration date. Agreements may be terminated by written notice of
termination.
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.
The Company's principal distribution agreements are subject to early termination
by the suppliers for a variety of causes, including a change in control or a
change in the principal management of the Company. Although no assurance can be
given that such distribution agreements will be renewed beyond their expiration
dates, they have been renewed regularly.
Manufacturing Operations. The Distribution segment also manufactures and sells
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 companies with whom the
Distribution segment has a distributor or packaging agreement. 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 standby power
sources for emergency use and as prime power sources to supply electricity at
remote locations.
In addition to reciprocating engine-driven power systems, the Distribution
segment manufactures and sells snow removal equipment and wheel chair lifts.
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 42.8%, 33.7%
and 30.4%, respectively, of consolidated sales during Fiscal 1996, 1995 and
1994. The Distribution segment's marketing units regularly sell certain products
manufactured by 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 for the production of 2 1/2-ton and 5-ton trucks, spare
parts and logistical support. 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
airdrop 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 Company also sells the FMTV to other government contractors as a platform
for installation of weapons systems and other equipment which is then resold to
the Armed Forces. Stewart & Stevenson believes that there will be opportunities
to sell additional vehicles to the U.S. Army, 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 the capacity to produce
vehicles for those additional sales.
Operations of the Tactical Vehicle Systems segment accounted for approximately
16.9%, 15.3%, and 13.0%, respectively, of consolidated sales in Fiscal 1996,
1995 and 1994.
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, and 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 the sale of its products.
Manufacturers of gas turbine generator sets in the 20-42 Mw size include General
Electric Corporation, Ruston Gas Turbines Ltd., Seimens, Westinghouse and ABB
Energy Services, Inc., a subsidiary of Asea Brown Boveri. Competition in the
market for the other products manufactured, and services provided, 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.
The Tactical Vehicle Systems segment competes with domestic companies for
incremental sales to the U.S. Armed Forces. Both domestic and foreign suppliers
compete for the sale of vehicles to foreign governments. The Company's foreign
competitors include Daimler-Benz, Steyr, and other vehicle manufacturers that
have greater international recognition as vehicle manufacturers.
INTERNATIONAL OPERATIONS
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 profit margin on export sales
is not materially different from that on domestic sales of the same or similar
products with the same or similar delivery requirements.
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.
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 Fiscal 1996 and Fiscal 1995 were as
follows:
Estimated percentage
to be recognized in Fiscal Fiscal
Fiscal 1997 1996 1995
----------- ---- ----
(Dollars in millions)
Engineered Power Systems
Equipment 70% $324.0 $208.9
Operations and Maintenance 27% 296.7 321.8
----------------- ------------------
620.7 530.7
Distribution 100% 92.2 50.9
Tactical Vehicle Systems 51% 817.3 862.7
----------------- ------------------
Total 53% $1,530.2 $1,444.3
================= ==================
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 based on the number of unfilled orders for these units, the number of
proposals that are presently outstanding and the current worldwide need for
additional electrical generating and gas compression 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, and options under the FMTV
contract that have been exercised by the U.S. Army to purchase additional
vehicles.
EMPLOYEES
At March 1, 1997, the Company employed approximately 4,879 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 executive
offices, the national sales offices for the Engineered Power Systems segment and
administrative offices for the Distribution segment, occupies about 133,000
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 919,000 square feet and leases
approximately 41,000 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, and Anchorage,
Alaska each totaling 5,000 square feet and maintains a sales office in
Alexandria, Virginia and Fort Lauderdale, Florida. The Company also owns gas
turbine parts, service, operations and maintenance facilities in Syracuse, New
York (15,000 square feet) and Bakersfield, California (14,000 square feet) and a
high pressure valve manufacturing facility in Jennings, Louisiana (89,000 square
feet).
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 523,000 square feet of owned space and
357,000 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. The Tactical Vehicle Systems segment
also leases 171,000 square feet of warehousing facilities in Houston, 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 is a defendant in a federal criminal matter and certain related
civil litigation arising from a 1987 subcontract to supply diesel generators to
the Kingdom of Saudi Arabia. See Note 5 to the Consolidated Financial Statements
which is incorporated herein by reference.
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 760 shareholders of record as of February 28, 1997. The
following table sets forth the high and low sales prices relating to the
Company's Common Stock and the dividends declared by the Company in each
quarterly period within the last two fiscal years.
Fiscal Fiscal
1996 1995
--------------------------------------------- ---------------------------------------------
High Low Dividend High Low Dividend
First Quarter $29 3/4 $23 1/4 $0.080 $40 1/2 $28 3/4 $0.07
Second Quarter 30 1/2 19 3/4 0.085 41 1/4 32 3/4 0.08
Third Quarter 23 3/4 19 5/8 0.085 38 3/4 21 1/2 0.08
Fourth Quarter 29 1/4 21 0.085 26 1/2 21 7/8 0.08
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
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------- ---------------- ----------------- -------------- ------------- ------------
(Dollars in thousands, except per share data) Fiscal Fiscal Fiscal Fiscal Fiscal
1996 1995 1994 1993 1992
- --------------------------------------------------- ---------------- ----------------- -------------- ------------- ------------
Financial Data:
Sales $1,187,161 $1,233,981 $1,138,336 $981,892 $812,526
Earnings before income taxes
and accounting change (a) 25,575 91,908 102,852 85,301 64,376
Earnings before accounting change (a) 16,851 61,803 67,558 56,780 43,958
Net earnings (a) 16,851 61,803 67,558 56,780 34,658
Total assets 1,145,285 1,040,583 875,616 692,624 573,348
Short-Term Debt (including current portion
of Long-Term Debt) 29,100 66,100 43,344 7,219 3,252
Long-Term Debt 319,700 210,800 116,900 68,000 44,451
Per Share Data:
Earnings before accounting change (a) .51 1.87 2.05 1.73 1.35
Net earnings (a) .51 1.87 2.05 1.73 1.06
Cash dividends declared 0.335 0.31 0.27 0.23 0.19
- ---------------------------------------------------------------------------------------------------------------------------
(a) The Company adopted Statement of Financial Accounting Standard No. 106
effective February 1, 1992, 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.
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 TABLES
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
Consolidated Sales Growth Rate
- ---------------------------------------- -------------------------------------------------- ---------------------------------
Fiscal Fiscal Fiscal Fiscal
1996 1995 1994 1995-1996 1994-1995
- ---------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Sales 100.0% 100.0% 100.0% (3.8)% 8.4%
Cost of sales 86.0 84.4 84.0 (2.0) 8.9
---------------- ---------------- ----------------
Gross profit 14.0 15.6 16.0 (13.7) 5.8
Selling and administrative expenses 8.5 7.5 6.6 9.6 22.0
Interest expense 2.0 1.1 .6 73.7 102.2
Settlement of litigation 1.7 0 0 N/A N/A
Other income, net (.3) (.4) (.2) (20.0) 85.0
---------------- ---------------- ----------------
11.9 8.2 7.0 39.6 26.9
Earnings before income taxes 2.1 7.4 9.0 (72.2) (10.6)
Income taxes .7 2.5 3.0 (72.2) (11.2)
---------------- ---------------- ----------------
Earnings of consolidated
companies 1.4 4.9 6.0 (72.2) (10.4)
Equity in net earnings (losses)of
unconsolidated affiliates 0 .1 (.1) (136.4) 172.4
---------------- ---------------- ----------------
Net Earnings 1.4% 5.0% 5.9% (72.7) (8.5)
================ ================ ================
The following tables present both the contribution to sales and operational
profit from each of the Company's business segments, as well as the growth rate
year to year achieved by these segments.
Business Segment Highlights
-------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------------------
Sales Growth Rate
------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal
1996 1995 1994 1995-1996 1994-1995
-------------------------------------------------------------------------------------------------
Engineered Power Systems $476,680 40% $627,702 51% $642,804 57% -24% -2%
Distribution 508,305 43 416,229 34 346,564 30 +22 +20
Tactical Vehicle Systems 200,916 17 189,009 15 147,920 13 +6 +28
Corporate Services 1,260 - 1,041 - 1,048 - +21 -1
========================================================================
$1,187,161 100% $1,233,981 100% $1,138,336 100% -4 +8
========================================================================
Operating Profit Growth Rate
------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal
1996 1995 1994 1995-1996 1994-1995
- -----------------------------------------------------------------------------------------------------------------------------
Engineered Power Systems $33,538 43% $73,449 65% $82,395 71% -54% -11%
Distribution 33,143 42 30,130 27 24,015 21 +10 +25
Tactical Vehicle Systems 10,823 14 9,703 8 8,782 8 +12 +10
Corporate Services 528 1 292 - 376 - +81 -22
===================================================================
$78,032 100% $113,574 100% $115,568 100% -31 -2
===================================================================
Operating Profit as a Percentage of Sales
------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1996 1995 1994
- ----------------------------- ------------------------ ----------------------- -----------------------
Engineered Power Systems 7.0% 11.7% 12.8%
Distribution 6.5 7.2 6.9
Tactical Vehicle Systems 5.4 5.1 5.9
Corporate Services 41.9 28.1 35.9
Consolidated 6.6 9.2 10.2
RESULTS OF OPERATIONS
Fiscal 1996 vs. Fiscal 1995
Sales for Fiscal 1996 decreased 4% to $1.187 billion compared to sales of $1.234
billion for Fiscal 1995. The Company's international sales decreased 20% to $305
million in Fiscal 1996 as compared to $382 million in Fiscal 1995, representing
26% and 30% of consolidated sales for Fiscal 1996 and 1995, respectively.
The Distribution segment was the primary growth contributor to the Company's
sales with an increase in sales of $92 million (22%) in Fiscal 1996 compared to
Fiscal 1995. A strengthening oil and gas market served by the Company's
Distribution territory contributed to these sales improvements, particularly
among the Company's Detroit Diesel, EMD and Waukesha product lines.
The Tactical Vehicle Systems (TVS) segment sales increased $12 million (6%)
during Fiscal 1996 as compared to Fiscal 1995. The increase in TVS sales
reflects the increase in truck production under the "Family of Medium Tactical
Vehicles" (FMTV) contract to 1,764 trucks in Fiscal 1996 as compared to 1,560
trucks in Fiscal 1995.
The Engineered Power Systems (EPS) segment sales were the primary contributor to
the Company's sales decline, decreasing $151 million (24%) in Fiscal 1996 as
compared to Fiscal 1995. During Fiscal 1996, the EPS segment saw a continuation
of the very weak domestic market for its gas turbine electrical power generation
equipment, as well as a very competitive international market place. Incoming
domestic orders, which declined significantly in Fiscal 1995, were non existent
in Fiscal 1996. The international market activity, although encouraging, did not
produce a level of new orders adequate to offset the lost revenue and profits
from the domestic market. This decrease was partially offset by the gas turbine
product support group (consisting of the servicing of customer's equipment and
the long-term contracting for the operation and maintenance of the customer's
power plants) which increased sales $16 million (10%) in Fiscal 1996 as compared
to Fiscal 1995. Airline and petroleum equipment experienced increased sales of
$12 million (40%) and $6 million (11%), respectively, in Fiscal 1996 as compared
to Fiscal 1995.
Operating profit decreased approximately 31% during Fiscal 1996 to $78 million
as compared to $114 million in Fiscal 1995. The decrease in gross profit margin
reflects both the decrease in turbine-driven equipment sales as well as decrease
in the gross profit margin on these gas turbine-driven equipment sales.
Fiscal 1995 vs. Fiscal 1994
Sales for Fiscal 1995 increased 8% to $1.234 billion compared to sales of $1.138
billion for Fiscal 1994. The Company's international sales increased 27% to $382
million in Fiscal 1995 as compared to $301 million in Fiscal 1994, representing
30% and 26% of consolidated sales for Fiscal 1995 and 1994, respectively.
The Distribution segment was the primary contributor to the Company's sales
growth with an increase in sales of $70 million (20%) in Fiscal 1995 compared to
Fiscal 1994. This increase is primarily attributable to the acquisition of
substantially all of the assets of Power Application & Mfg., Co. ("PAMCO"), a
Waukesha distributor for the Western United States, during the fourth quarter of
Fiscal 1994. The distribution of product lines acquired from PAMCO contributed
sales of $49 million in Fiscal 1995 compared to $5 million in Fiscal 1994.
Excluding sales relating to the PAMCO acquisition, the Distribution segment's
sales increased 7% in Fiscal 1995 over Fiscal 1994 reflecting the continued
economic growth in the territories serviced by the Company.
The Tactical Vehicle Systems segment sales increased $41 million (28%) during
Fiscal 1995 as compared to Fiscal 1994. The increase in TVS sales reflects the
increase in truck production under the FMTV contract to 1,560 trucks in Fiscal
1995 as compared to 1,130 trucks in Fiscal 1994. Although sales increased for
the current fiscal year, the increase was less than anticipated. Sales for the
year were adversely affected by the deployment of certain U.S. Army personnel to
Haiti in Fiscal 1994 which delayed the completion of testing and certification
of the FMTV program for high volume production until the fourth quarter of
Fiscal 1995.
The Engineered Power Systems segment of the Company experienced a 2% decrease in
sales in Fiscal 1995. This decline in EPS sales was primarily within the Gas
Turbine equipment product lines which experienced sharply reduced domestic
activity, reflecting the U.S. utility market's response to deregulation
proposals, and delays in contract awards in the international markets. Gas
Turbine product support sales, consisting of the servicing of customers'
equipment and the long-term contracting for operation and maintenance of power
plants, continued to grow with Fiscal 1995 sales increasing more than 10% above
Fiscal 1994.
Operating profit decreased by approximately 2% during Fiscal 1995 to $114
million as compared to $116 million in Fiscal 1994. Both the Distribution and
the Tactical Vehicle Systems segments' operating profits increased at a rate
comparable to the growth in sales volumes. The Engineered Power Systems
segment's operating profit of 11.7% in Fiscal 1995 declined from 12.8% in Fiscal
1994. This decline is primarily related to lower profits realized on the sale of
certain compression equipment during Fiscal 1995, and to increased market
competitiveness.
Net Period Expenses
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Percentage Change
Fiscal Fiscal Fiscal Fiscal
1996 1995 1994 1995-1996 1994-1995
- --------------------------------------------------- ------------- ------------- ------------- ------------------------------
Selling and administrative expenses $100,624 $91,814 $75,249 +10% +22%
Interest expense 24,113 13,884 6,865 +74 +102
Settlement of litigation 20,000 N/A N/A
0 0
Other income, net (3,742) (4,676) (2,528) -20 +85
============= ============= =============
$140,995 $101,022 $79,586 +40 +27
============= ============= =============
============= ============= =============
Net period expenses as a percentage of sales 11.9% 8.2% 7.0%
============= ============= =============
Net period expenses increased significantly during Fiscal 1996, both in amount
and in relation to sales, when compared to Fiscal 1995. Selling and
administrative expenses increased primarily in those business lines having sales
growth, in addition a one-time charge of approximately $900 thousand related to
settling a lawsuit and substantial legal expenses related to the "Peace Shield"
litigation are also included. Interest expense grew significantly in both Fiscal
1996 and 1995 reflecting the increased borrowings required to fund the Company's
operations; primarily gas turbine inventories relating to international
contracts that do not contain substantial progress payments and inventories of
vehicles under the FMTV. The decrease in other income during Fiscal 1996 is
primarily attributable to both decreased interest income and decreased gains on
the disposal of real estate.
On July 25, 1996, a jury in Houston, Texas returned a $43 million verdict
against the Company in a case filed by Serv-Tech, Inc. for breach of a secrecy
agreement. The Company's liability in connection with this matter was limited
pursuant to a pretrial agreement between the Company and Serv-Tech. The Company
recognized a pre-tax charge against earnings of $20 million ($13 million or $.39
per share after taxes) relating to this case in the second quarter of Fiscal
1996. The judgment based on this verdict was paid by the Company in September
1996.
Net Earnings
- -------------------------------------------------------------------------------------------- ----------------------------------
(Dollars in thousands) Percentage Change
Fiscal Fiscal Fiscal Fiscal
1996 1995 1994 1995-1996 1994-1995
- ---------------------------------------------------- ------------ ------------- ------------- --------------------------------
Amount $16,851 $61,803 $67,558 -73% -9%
Percentage of sales 1.4% 5.0% 5.9%
============ ============= =============
Fiscal 1996's net earnings decline from Fiscal 1995 primarily reflects the
decrease in operational profits and the increase in net period expense. Income
tax expense, relative to operational profits, was comparable for Fiscal 1996,
1995 and 1994.
FINANCIAL CONDITION
Working Capital
- ---------------------------------------------------------------------------------------------------------------------------
Percentage Change
Fiscal Fiscal Fiscal
(Dollars in thousands) 1996 1995 1995 - 1996
- ---------------------------------------------------------------------------------------------------------------------------
Current Assets $974,128 $881,446 +11%
Current Liabilities 320,559 330,080 -3%
============== ==============
Working Capital 653,569 551,366 +19%
============== ==============
Current Ratio 3.04:1 2.67:1
============== ==============
Current assets increased $93 million from Fiscal 1995. This increase was
primarily in accounts and notes receivable, which increased $41 million (+21%)
and inventories which increased $40 million (+11%). The increase in accounts
receivable reflects the significant increase (29%) in consolidated revenue
during the fourth quarter of Fiscal 1996 compared to the same period a year ago.
The growth in inventories, at a rate faster than annual revenue growth, can be
attributed to the Engineered Power Systems' procurement and manufacturing
activities in anticipation of increased demand.
Current liabilities decreased $10 million from Fiscal 1995, with decreases
primarily in notes payable of $37 million (-57%) and billings on uncompleted
contracts in excess of incurred costs of $5 million (-35%), offset by an
increase in accounts payable of $31 million (+23%).
The reduction in notes payable reflects the Company strategy of replacing a
portion of notes payable with long-term debt. The decrease in billings on
uncompleted contracts in excess of incurred costs was caused by the customer
payment terms on uncompleted contracts which were more favorable to the customer
at the end of Fiscal 1996 than at the end of Fiscal 1995.
INVESTMENTS
The Company's capital expenditures for plant, rental machines and other property
were $25 million for Fiscal 1996, an increase of $2 million from Fiscal 1995.
The increase reflects the Company's continuing investment in business units
capable of rapid growth.
Depreciation and amortization totaled $26 million for Fiscal 1996, an increase
of $2 million from Fiscal 1995. Additionally, the Company disposed of
approximately $3 million of property during Fiscal 1996 versus disposals of $4
million during Fiscal 1995.
Investments and other assets were $48 million at the end of Fiscal 1996, an
increase of $16 million from the end of Fiscal 1995. This increase is primarily
comprised of an investment in an independent power producer operating in
Argentina, as well as an increase in the non-current portion of notes
receivable.
Company's Capital
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Fiscal 1996 Fiscal 1995
Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $319,700 39% $210,800 30%
Other Long-Term Liabilities 25,791 3 27,788 4
Shareholders' Equity 479,235 58 471,915 66
=======================================================
$824,726 100% $710,503 100%
=======================================================
Long-term debt increased $109 million during Fiscal 1996, reflecting the
Company's strategy to reduce its dependence on short-term notes payable and to
take advantage of relatively attractive long-term interest rates. Shareholders'
equity increased $7 million during Fiscal 1996 primarily as a result of earnings
retained after dividends.
LIQUIDITY
The Company's sources of liquidity include cash and equivalents, cash from
operations, amounts available under credit facilities and other external sources
of funds. The Company believes that these sources are sufficient to fund the
current requirements of working capital, capital expenditures, dividends and
other financial commitments.
The following table summarizes the Company's cash flows from operating,
investing and financing activities as prescribed by Generally Accepted
Accounting Principles (GAAP), and reflected in the Consolidated Statement of
Cash Flows.
Summarized Statement of Cash Flows
- --------------------------------------------------------------------------------------- ------------- ------------- -------------
(Dollars in thousands) Fiscal Fiscal Fiscal
1996 1995 1994
- --------------------------------------------------------------------------------------- ------------- ------------- -------------
Net Cash Provided By (Used In):
Operating Activities $(29,278) $(86,142) $(52,606)
Investing Activities (30,284) (19,600) (29,007)
Financing Activities 62,369 108,080 77,812
============= ============= =============
$2,807 $2,338 $(3,801)
============= ============= =============
Cash Used In Operating Activities
- ------------------------------------ --------------------------------------------------- ----------- ------------- --------------
(Dollars in thousands) Fiscal Fiscal Fiscal
1996 1995 1994
- ------------------------------------ --------------------------------------------------- ----------- ------------- --------------
Net Earnings $16,851 $61,803 $67,558
Depreciation and amortization 26,263 24,732 23,954
Deferred income taxes, net (1,667) (1,244) 2,170
------------- ------------- -------------
Funds from operations 41,447 85,291 93,682
Change in net operating assets and liabilities (70,725) (171,433) (146,288)
------------- ------------- -------------
Net cash (used in) operating activities $(29,278) $(86,142) $(52,606)
============= ============= =============
Funds from operations decreased 51% during Fiscal 1996 versus a 9% decrease
during Fiscal 1995, reflecting primarily the relative change in earnings each
year. Working capital to support the operations of the Company fluctuates
significantly depending on the progress payment streams of contracts in process.
The Tactical Vehicle Systems segment is primarily funded by progress payments
under government regulations which require that contractors retain a significant
amount of the contract costs until government acceptance of the product. 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.
Cash Used In Investing Activities
- --------------------------------------------------------------------------------------- ------------- ------------- ------------
(Dollars in thousands) Fiscal Fiscal Fiscal
1996 1995 1994
- --------------------------------------------------------------------------------------- ------------- ------------- ------------
Expenditures for property, plant and equipment $(25,038) $(23,487) $(33,379)
Investment (See Note 14) (8,000) 0 0
Disposal of property, plant and equipment 2,754 3,887 4,372
------------- ------------- ------------
Net cash (used) in investing activities $(30,284) $(19,600) $(29,007)
============= ============= ============
Net cash used in investing activities increased 55% during Fiscal 1996 versus a
32% decrease during Fiscal 1995. During Fiscal 1996, the Company made an
investment in an independent power producer. Proceeds from asset sales decreased
29% in Fiscal 1996 as compared to an 11% decrease in Fiscal 1995. On April 12,
1997, the Company acquired ownership of Sierra Detroit Diesel Allison, Inc. from
Outer Drive Holdings, Inc. The acquisition will broaden the Company's
distribution territory for certain products.
Cash Provided From Financing Activities
- --------------------------------------------------------------------------------------- ------------- ------------- ------------
(Dollars in thousands) Fiscal Fiscal Fiscal
1996 1995 1994
- --------------------------------------------------------------------------------------- ------------- ------------- ------------
Additions to long-term debt $360,000 $200,071 $ 85,000
Payments on long-term debt (251,100) (106,100) (36,975)
Net borrowings and payments on short-term notes payable (37,000) 23,000 37,000
Dividends paid (11,081) (10,243) (8,904)
Exercise of stock options 1,550 1,352 1,691
------------- ------------- ------------
Net cash provided by financing activities $62,369 $108,080 $77,812
============= ============= ============
Net cash provided from financing activities decreased 42% for Fiscal 1996
compared to a 39% increase for Fiscal 1995. During Fiscal 1996 the Company
increased long-term debt $360.0 million while retiring $251.1 million in
long-term debt. In addition to the increased long-term debt, financing cash
inflows included the exercise of stock options totaling $1.55 million.
Payment of cash dividends on common stock totaled $11.081 million.
On May 30, 1996, the Company completed a private placement of $135 million
senior notes with an average maturity of 5 1/2 years. The notes are unsecured
and were issued pursuant to an agreement containing a covenant which imposes a
debt to total capitalization requirement. The notes will mature in three, five,
seven and ten year increments with semi-annual interest payments at a weighted
average life and coupon rate of 5 1/2 years and 7.01%, respectively. The
proceeds from the sale of the notes were used to reduce other short-term
outstanding indebtedness of the Company and for general corporate purposes. In
the event that any acquisition of additional operations, growth in existing
operations, changes in inventory levels, accounts receivable or other working
capital items 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 amount of cash dividends increased 8% and 15% during Fiscal 1996 and 1995,
respectively. Cash dividends represented 66%, 17% and 13% of net earnings before
accounting change for Fiscal 1996, 1995 and 1994, respectively. 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.
The Company uses both funds from operations, along with borrowings, to pay
dividends.
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This standard provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This standard is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. The adoption of this standard is not expected
to impact the Company's consolidated results of operations, financial position
or cash flow.
TACTICAL VEHICLE SYSTEMS' CONTRACT STATUS
Under the terms of the FMTV contract, approximately 2,936 vehicles produced
before December 1995 were required to be retrofitted with any modifications
required by test results or specification changes ordered by the U.S.
government. This retrofit program was commenced during the fourth quarter of
Fiscal 1995 and was substantially completed in the second quarter of Fiscal
1996. Full rate production of the FMTV commenced after the retrofit program was
substantially completed and, as of January 31, 1997, the Company has completed
approximately 4,750 of the 11,197 vehicles covered by the original contract plus
options and additional requirements to date. During Fiscal 1996, the Company
entered into a contract modification that extended the FMTV delivery schedule
through December 1998 and reduced the annual product requirements. The total
number of vehicles covered by the FMTV contract did not change.
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 FMTV contract is a firm fixed-price multi-year contract whereby the price
paid to the Company is not subject to adjustment to reflect the Company's actual
costs, except costs incurred as a result of actions or inactions of the
government. Stewart & Stevenson has incurred significant cost overruns and
delivery schedule delays on the FMTV contract which the Company believes are
primarily due to the government's decision to delay the testing of trucks and
other government directed changes to the contract. The Company has and will
continue to submit a series of Requests for Equitable Adjustments (REAs), under
the FMTV contract, seeking increases in the FMTV contract price for those
additional costs that relate to government caused delays and changes.
Revenues and profits realized on the FMTV contract are based on the Company's
estimates of total contract sales value and costs at completion. Amounts in
excess of agreed upon contract price for government caused delays, disruptions,
unpriced change orders and government caused additional contract costs are
recognized in contract value when the Company believes it is probable that the
claim for such amounts will result in additional contract revenue and the amount
can be reasonably estimated. At January 31, 1997, the Company's FMTV contract
accounting position reflects the expected recovery of substantial amounts in
excess of the contract price for government caused delays, disruptions, unpriced
change orders and other government caused additional contract costs. These
claims are in varying stages of negotiation. Although management believes that
the contract provides a legal basis for the claims and its estimates are based
on reasonable assumptions and on a reasonable analysis of contract costs, due to
uncertainties inherent in the estimation and claims negotiations process, no
assurances can be given that its estimates will be accurate, and variances
between such estimates and actual results could be material. In the event that
the Company is unable to recover a substantial portion of the additional costs,
the Company may suffer a material adverse effect on its earnings during the
accounting period in which such contract issues are resolved.
The funding of the contract is subject to the inherent uncertainties of
congressional appropriations. 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. The Company has
received full funding for the production of approximately 10,155 vehicles
through August 1997. It is anticipated that the remaining 1,042 vehicles will be
funded after October 1997 when the 1998 Government fiscal year funding is
approved. If the FMTV contract is terminated other than for default, the FMTV
contract provides for termination charges that will reimburse the Company for
allowable costs, but not necessarily all costs.
EFFECT OF CERTAIN LITIGATION
On May 3, 1995, the Company and four employees, including the Company's
President, were indicted by a federal Grand Jury on six counts arising out of a
1987 subcontract to supply diesel generator sets for installation in Saudi
Arabia. See Note 5: Commitments and Contingencies to the Consolidated Financial
Statements. On May 12, 1995, the U.S. Air Force suspended the Company from
contracting with any agency of the U.S. Government and from receiving the
benefit of federal assistance programs. This suspension was temporarily
terminated on November 8, 1995, pending the resolution of the charges covered by
the indictment, pursuant to an Interim Administrative Agreement between the
Company and the U.S. Air Force. The Interim Administrative Agreement does not
have any effect on the indictment.
The Interim Administrative Agreement requires the Company to maintain various
internal procedures and policies intended to assure the U.S. Government that the
Company is a responsible contractor. In the event that the Company or any of the
indicted employees are convicted of the charges contained in the indictment, the
U.S. Air Force may re-evaluate whether the Company should be suspended or
debarred based on all of the facts and circumstances then known. An acquittal of
all parties of the charges does not terminate the Interim Administrative
Agreement and any failure by the Company to perform its obligations thereunder
may also be grounds for suspension or debarment.
If the Company is suspended or debarred, either because of a conviction pursuant
to the indictment or as a result of a breach of the Interim Administrative
Agreement, it would be ineligible to enter into new contracts or subcontracts
with agencies of the U.S. Government or receive the benefit of federal
assistance payments for the duration of such suspension or debarment. Any such
suspension could also prevent the Company from receiving future modifications to
the FMTV contract unless the Secretary of the Army finds a compelling need to
enter into such modification. The Company would also be unable to sell equipment
and services to customers that depend on loans or financial commitments from the
Export Import Bank ("EXIM Bank"), Overseas Private Investment Corporation
("OPIC") and similar government agencies during a suspension or debarment. The
Engineered Power Systems segment frequently sells equipment to customers that
rely on financial commitments from EXIM Bank and/or OPIC. Any such suspension or
debarment could have a material adverse impact on the Company's future financial
condition and results of operations.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this annual report contains forward-looking
statements that are based on current expectations, estimates, and projections
about the markets and industries in which the Company operates, management's
beliefs and assumptions made by management. These forward-looking statements are
made pursuant to the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995. These statements are not guarantees of future performance
and involve certain risks, uncertainties and assumptions ("future factors")
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Future factors include increasing price and product/service
competition by foreign and domestic competitors; rapid technological
developments and changes; the ability to continue to introduce competitive new
products and services on a timely, cost effective basis; the mix of
products/services; the achievement of lower costs and expenses; reliance on
large customers; technological, implementation and cost/financial risks in use
of large, multi-year contracts; the cyclical nature of the markets served; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing, financial instruments and financial
resources in the amount, at the times and on the terms required to support the
Company's business; and the risk of cancellation or adjustments of specific
orders and termination of significant government programs. These are
representative of the future factors that could affect the outcome of
forward-looking statements. In addition, such statements could be affected by
general industry and market conditions and growth rates, general domestic and
international conditions including interest rates, rates of inflation and
currency exchange rate fluctuations and other future factors.
Item 8. Financial Statements and Supplementary 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, 1997
and 1996, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended January
31, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 20, 1997
===========================================================================
===========================================================================
Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands) Fiscal Fiscal
1996 1995
- -----------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and equivalents $9,132 $6,325
Accounts and notes receivable, net 237,062 196,548
Recoverable costs and accrued profits not yet billed 326,952 317,855
Inventories 400,982 360,718
---------------------- -------------------
Total Current Assets 974,128 881,446
Property, Plant and Equipment, net 123,433 127,055
Investments and Other Assets 47,724 32,082
====================== ===================
$1,145,285 $1,040,583
====================== ===================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $28,000 $65,000
Accounts payable 165,999 134,562
Accrued payrolls and incentives 22,008 22,450
Billings on uncompleted contracts in excess of incurred 9,354 14,417
costs
Current income taxes 65,881 68,650
Other accrued liabilities 29,317 25,001
---------------------- -------------------
Total Current Liabilities 320,559 330,080
Commitments and Contingencies (See Note 5)
Long-Term Debt 319,700 210,800
Deferred Income Taxes 5,127 6,794
Accrued Postretirement Benefits 15,091 15,454
Deferred Compensation 5,573 5,540
Shareholders' Equity
Common Stock, without par value, 100,000,000 shares authorized at January
31, 1997 and January 31, 1996, respectively; 33,132,280 and 33,061,908
shares issued at January 31, 1997 and 1996, respectively,
including 11,820 shares held in treasury 164,959 163,409
Retained earnings 314,309 308,539
---------------------- -------------------
479,268 471,948
Less cost of treasury stock (33) (33)
---------------------- -------------------
Total Shareholders' Equity 479,235 471,915
-------------------
======================
$1,145,285 $1,040,583
====================== ===================
The accompanying notes are an integral part of the consolidated financial
statements
Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) Fiscal Fiscal Fiscal
1996 1995 1994
------------------------------------------------------------------------------------------------------------------------
Sales $1,187,161 $1,233,981 $1,138,336
Cost of sales 1,020,591 1,041,051 955,898
-------------- -------------- --------------
Gross profit 166,570 192,930 182,438
-------------- -------------- --------------
Selling and administrative expenses 100,624 91,814 75,249
Interest expense 24,113 13,884 6,865
Settlement of litigation (See Note 2) 20,000 0 0
Other income, net (3,742) (4,676) (2,528)
-------------- -------------- --------------
140,995 101,022 79,586
-------------- -------------- --------------
Earnings before income taxes 25,575 91,908 102,852
Income taxes 8,520 30,665 34,520
-------------- -------------- --------------
Earnings of consolidated companies 17,055 61,243 68,332
Equity in net earnings (losses) of unconsolidated affiliates (204) 560 (774)
============== ============== ==============
Net earnings $16,851 $61,803 $67,558
============== ============== ==============
Weighted average number of shares of Common Stock outstanding 33,068 33,035 32,973
============== ============== ==============
Net earnings per share $.51 $1.87 $2.05
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements
Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Common Retained Treasury
Stock Earnings Total
Stock
- ----------------------------------------------------------------------------------------------------------------------------------
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
Net earnings 61,803 61,803
Cash dividends (10,243) (10,243)
Exercise of stock options 1,352
1,352
------------- ------------- ------------- ----------
Balance at end of Fiscal 1995 163,409 308,539 (33) 471,915
Net earnings 16,851 16,851
Cash dividends (11,081) (11,081)
Exercise of stock options 1,550 1,550
============= ============= ============= ==========
Balance at end of Fiscal 1996 $164,959 $314,309 $(33) $479,235
============= ============= ============= ==========
The accompanying notes are an integral part of the consolidated financial
statements
Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Fiscal Fiscal Fiscal
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net earnings $16,851 $61,803 $67,558
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Accrued postretirement benefits (363) 202 224
Depreciation and amortization 26,263 24,732 23,954
Deferred income taxes, net (1,667) 2,170
(1,244)
Change in operating assets and liabilities:
Accounts and notes receivable, net (40,514) (9,734) (39,522)
Recoverable costs and accrued profits not yet billed (9,097) (90,388) (111,599)
Inventories (40,264) (64,851) (26,262)
Accounts payable 31,437 (29,912) 32,694
Billings on uncompleted contracts in excess
of incurred costs (5,063) 3,133 (19,804)
Current income taxes (2,769) 26,410 14,309
Other current liabilities 3,874 (3,776) 6,644
Other--principally long-term assets and liabilities (7,966) (2,517) (2,972)
------------- ------------- -----------
Net Cash Used in Operating Activities (29,278) (86,142) (52,606)
Investing Activities
Expenditures for property, plant and equipment (25,038) (23,487) (33,379)
Investment (See Note 14) (8,000) 0 0
Disposal of property, plant and equipment 2,754 3,887 4,372
------------- ------------- -----------
Net Cash Used in Investing Activities (30,284) (19,600) (29,007)
Financing Activities
Additions to long-term debt 360,000 200,071 85,000
Payments on long-term debt (251,100) (106,100) (36,975)
Net borrowings and payments on short-term notes payable (37,000) 23,000 37,000
Dividends paid (11,081) (10,243) (8,904)
Exercise of stock options 1,550 1,352 1,691
------------- ------------- -----------
Net Cash Provided by Financing Activities 62,369 108,080 77,812
------------- ------------- -----------
Increase (decrease) in cash and equivalents 2,807 2,338 (3,801)
Cash and equivalents, beginning of fiscal year 6,325 3,987 7,788
------------- ------------- -----------
Cash and equivalents, end of fiscal year $9,132 $6,325 $3,987
============= ============= ===========
The accompanying notes are an integral part of the 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 1996"
commenced on February 1, 1996 and ended on January 31, 1997.
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.
Stock-Based Compensation: The Company will continue to apply the existing
accounting rules contained in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. Pro
forma disclosure of the compensation expense determined under the fair-value
provision of Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" has been provided. (See Note 10)
Cash Equivalents: Interest-bearing deposits and other investments with
original maturities of three months or less are considered cash equivalents.
Inventories: Inventories are generally 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.
Capitalized Interest: Interest costs associated with certain constructed assets
are capitalized during the construction period. Capitalized interest in 1996 was
$725 and was netted against interest expense in the consolidated statement of
earnings. There was no capitalized interest in 1995 and 1994. Interest
capitalized on assets constructed for customers will be included in cost of
sales. Interest capitalized on assets developed for the Company's use will be
amortized over the depreciable life of the related assets.
Contract Revenues and Costs: Revenues relating to contracts or contract changes
that have not been completely priced, negotiated, documented, or funded are not
recognized unless realization is considered probable. Generally, revenue is
recognized when a product is shipped or accepted by the customer, except for
certain Engineered Power Systems' products, 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 when recovery of such amounts are
probable, 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 as incurred and
replacements and betterments are capitalized.
Foreign Exchange Contracts: The Company occasionally enters into forward
exchange contracts only as a hedge against certain economic exposures and not
for speculative or trading purposes. 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 limits exposure
to foreign currency fluctuations in its operations and maintenance contracts
through provisions that generally require customer payments in U.S. dollars or
other currency either corresponding to the currency in which the costs are
incurred or otherwise having the customer assume currency rate risk.
Other Off-Balance Sheet Risks: The Company has entered into certain
contracts whereby it has guaranteed the repayment of a customer's debt to third
party lenders. (See Note 5)
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 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 because they are insignificant and
adjustments could be material to the Company's results of operations.
Use of Estimates and Assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications: The accompanying consolidated financial statements for
Fiscal 1995 and 1994 contain certain reclassifications to conform with the
presentation used in Fiscal 1996.
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 and processing 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 products and services 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 1996, 1995 and 1994 were $304,508, $382,452 and $301,885
respectively. Export sales to any single geographic region in Fiscal 1996, 1995
and 1994 were not material to consolidated sales.
During Fiscal 1996, a jury in Houston, Texas returned a $43,000 verdict against
the Company in a case filed by Serv-Tech, Inc. for breach of a secrecy
agreement. The Company's liability in connection with this matter was limited
pursuant to a pretrial agreement between the Company and Serv-Tech. The Company
recognized a pre-tax charge against earnings of $20,000 ($13,000 or $.39 per
share after taxes) relating to this case in the second quarter of Fiscal 1996.
The judgment based on this verdict was paid by the Company in September 1996.
Financial information relating to industry segments is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Identifiable Capital
Sales Profit Assets Expenditures Depreciation
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal 1996
Engineered Power Systems $476,680 $33,538 $651,768 $9,877 $6,925
Distribution 508,305 33,143 290,011 13,119 7,699
Tactical Vehicle Systems 200,916 10,823 185,211 1,422 10,746
Corporate Services 1,260 528 18,295 620 536
=============== ============== ================ =============== ============
Total $1,187,161 $78,032 $1,145,285 $25,038 $25,906
=============== ============== ================ =============== ============
Fiscal 1995
Engineered Power Systems $627,702 $73,449 $601,690 $9,495 $6,230
Distribution 416,229 30,130 240,390 10,780 6,900
Tactical Vehicle Systems 189,009 9,703 175,174 2,111 10,349
Corporate Services 1,041 292 23,329 1,101 926
=============== ============== =============== ============== =============
Total $1,233,981 $113,574 $1,040,583 $23,487 $24,405
=============== ============== ================ =============== ============
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
=============== ============== ================ =============== ============
A reconciliation of Operating profit to Earnings before income taxes is as
follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Operating profit $ 78,032 $113,574 $115,568
Corporate expenses, net (8,344) (7,782) (5,851)
Interest expense (24,113) (13,884) (6,865)
Settlement of litigation (20,000) 0 0
---------------- ---------------- --------------
Earnings before income taxes $25,575 $91,908 $102,852
================ ================ ==============
Note 3: Contracts in Process
Amounts included in the financial statements which relate to recoverable costs
and accrued profits not yet billed on contracts in
process are classified as current assets, billings on uncompleted contracts in
excess of incurred cost and accrued profits are classified as current
liabilities. Summarized below are the components of the amounts:
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $1,008,332 $913,108
Accrued profits 30,140 83,824
--------------- --------------
$1,038,472 996,932
Less: Customer progress payments (720,874) (693,494)
--------------- --------------
$317,598 $303,438
=============== ==============
Included in the statements of financial position:
Recoverable costs and accrued profits not yet billed $326,952 $317,855
Billings on uncompleted contracts in excess of incurred costs (9,354) (14,417)
=============== ==============
$317,598 $303,438
=============== ==============
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 $33,943 and $26,640 at January 31, 1997 and
1996, respectively. The Company's total general and administrative expenses
incurred amounted to $116,553, $103,999 and $86,292 in Fiscal 1996, 1995 and
1994, 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 1995
1996
- ----------------------------------------------------------------------------------------------------------------------------------
Engineered Power Systems $308,027 $273,200
Customer deposits (1,081) (4,081)
--------------- --------------
Total Engineered Power Systems 306,946 269,119
Distribution 149,238 145,179
Excess of current cost over LIFO values (55,202) (53,580)
=============== ==============
Total Inventories $400,982 $360,718
=============== ==============
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, 1997 and 1996
includes approximately $19,139 and $19,022, 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. During Fiscal 1995, the Company recognized $3,500 of
additional costs under such contract based upon preliminary settlement
discussions. 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 1996, certain inventories were reduced. The reductions resulted in
liquidation of LIFO inventory quantities carried at lower costs prevailing in
prior fiscal years as compared with the cost of Fiscal 1996 purchases, the
effect of which increased pre-tax earnings in Fiscal 1996 by approximately
$4,047.
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 $40,889 at the close of Fiscal 1996.
On May 3, 1995, an indictment was returned by a federal Grand Jury in Houston,
Texas, accusing the Company and four employees, including the Company's
President, of one count of major fraud against the United States, four counts of
false statements and one count of conspiracy to commit major fraud, make false
statements and interfere with the administration of a foreign military sale. All
of the counts arise from a 1987 subcontract to supply diesel generator sets for
installation at long-range radar sites in Saudi Arabia (the "Peace Shield"). The
indictment alleges that a former employee of the general contractor for the
Peace Shield program, who later became a consultant to the Company, conspired
with the Company and the other defendants to award the subcontract to the
Company. The indictment also alleges that the government was defrauded out of
approximately $5 million in connection with cost savings from a change order
under the Peace Shield contract and that the Company made false statements
relating to cost estimates in connection with such change order. The Company and
each individual have denied all charges under the indictment and the case is
pending in the United States District Court, Southern District of Texas, Houston
Division. The Company is not able to make a reasonable estimate of the fines or
penalties that could be imposed under the Federal Sentencing Guidelines in the
event of a conviction under the indictment. Such fines and penalties could be
substantial and adversely affect the Company's future financial position and
results of operations. If the Company or any of the individuals are convicted of
any charges under the indictment, the Company could also be suspended or
debarred from entering into new contracts or subcontracts with agencies of the
U.S. Government or receiving the benefit of federal assistance payments for the
duration of such suspension or debarment. Any such suspension could prevent the
Company from receiving future modifications to the Family of Medium Tactical
Vehicle ("FMTV") contract unless the Secretary of the Army finds a compelling
need to enter into such modification. The Company would also be unable to sell
equipment and services to customers that depend on loans or financial
commitments from the Export Import Bank ("EXIM Bank"), Overseas Private
Investment Corporation ("OPIC") and similar government agencies during a
suspension or debarment. The Engineered Power Systems segment frequently sells
equipment to customers that rely on financial commitments from EXIM Bank and/or
OPIC. Any such suspension or debarment could have a material adverse impact on
the Company's financial condition and results of operations.
Also in connection with the Peace Shield contract, the Company has been advised
that a former consultant of the Company filed a suit in the United States
District Court, Southern District of Texas, Houston Division, 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. 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.
Proceedings in this case have been stayed pending resolution of the criminal
matter referred to above. The Company cannot predict the outcome of this action
or the likelihood that substantial damages will result. However, the Company
intends to vigorously defend this case if it is served upon 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 a negative outcome in any such lawsuits will not have a
material effect on the Company's financial position, results of operations and
cash flows. The Company has not established any reserves or accruals for any
potential liability that may be subsequently found in any of the foregoing
cases.
The Company has provided certain guarantees in support of its customer's
financing of purchases from the Company in the form of both residual value
guarantees and debt guarantees. At the end of Fiscal 1996 the maximum exposure
of the Company had in this regard was $48 million which will decrease annually.
At the end of Fiscal 1995 the Company's exposure was nominal.
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: Government Contracts
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.
Revenues and profits realized on the FMTV contract are based on the Company's
estimates of total contract sales value and costs at completion. Stewart &
Stevenson has incurred significant cost overruns and delivery schedule delays on
the FMTV contract which the Company believes are primarily due to the
government's decision to delay the testing of trucks and other government
directed changes to the contract. The Company has and will continue to submit a
series of Requests for Equitable Adjustments or claims, under the FMTV contract,
seeking increases in the FMTV contract price for those additional costs that
relate to government caused delays and changes. Amounts in excess of agreed upon
contract price for government caused delays, disruptions, unpriced change orders
and government caused additional contract costs are recognized in contract value
when the Company believes it is probable that the claim for such amounts will
result in additional contract revenue and the amount can be reasonably
estimated.
The Company's FMTV contract accounting position reflects the expected recovery
of substantial amounts in excess of the contract price for government caused
delays, disruptions, unpriced change orders and other government caused
additional contract costs. These claims are in varying stages of negotiations.
Although management believes that the FMTV contract provides a legal basis for
the claims and that its estimates are based on reasonable assumptions and on a
reasonable analysis of the contract costs, the ultimate profitability of the
FMTV contract will depend not only on the accuracy of the Company's cost
projections but also on the outcome of these claims and other contractual
issues. Due to uncertainties inherent in the estimation and claim negotiation
process, no assurances can be given that management's estimates will be
accurate, and variances between such estimates and actual results could be
material. If the Company is unable to recover a substantial portion of the
additional costs, previously recognized earnings may be overstated and the
Company may suffer a material adverse effect on its operations during the
accounting period in which such FMTV contract issues are resolved and future
earnings may be recognized at reduced rates.
The funding of the FMTV contract is subject to the inherent uncertainties of
congressional appropriations. As is typical of multi-year defense contracts, the
FMTV contract must be funded annually by the Department of the Army and may be
terminated at any time for the convenience of the government. The Company has
received full funding for the production of approximately 10,155 vehicles
through August 1997. Approximately 1,042 vehicles scheduled for production after
that date have not been funded due to reductions in the U.S. Army's budget for
acquisitions. Government Fiscal Year 1998 funding will not be available until
after October 1, 1997. If the FMTV contract is terminated other than for
default, the FMTV contract provides for termination charges that will reimburse
the Company for allowable costs, but not necessarily all costs.
Note 7: 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, 1997 and 1996, the amounts outstanding under
these arrangements were $28,000 and $65,000, respectively, with a weighted
average interest rate of 6.11% and 5.95%, respectively.
Long-Term Debt, which is generally unsecured, consists of the following:
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Notes payable to insurance company:
-10.20%, principal due $1,000 annually to 1998 $2,000 $3,000
Debt of consolidated limited partnership:
-note payable to a bank, principal due monthly to 1998 (see note below) 8,800 8,900
Revolving credit notes payable to banks (see note below) 175,000 200,000
Senior Notes
6.72% principal due 1999 60,000 0
7.03% principal due 2001 20,000 0
7.29% principal due 2003 30,000 0
7.38% principal due 2006 25,000 0
---------------- ---------------
320,800 211,900
Less current portion (1,100) (1,100)
---------------- ---------------
Long-Term Debt $319,700 $210,800
================ ===============
The Company has commitments of $225,000 from banks under revolving credit notes
(subject to reduction at the Company's election) which mature on December 31,
2001. Under the terms of the revolving credit facility, the commitment fee on
the daily average unused balance is based on the Company's debt to
capitalization ratio with a maximum of 20 basis points per annum. Borrowings
outstanding under the revolving credit notes bear interest at various options,
the maximum rate being the prime rate.
On May 30, 1996, the Company completed a private placement of $135,000 senior
notes. The notes are unsecured and were issued pursuant to an agreement
containing a covenant which imposes a debt to total capitalization requirement.
The notes will mature in three, five, seven and ten year increments with
semi-annual interest payments. The proceeds from the sale of the notes were used
to reduce other outstanding indebtedness of the Company and for general
corporate purposes.
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 1996, approximately $104,001
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 1996, 1995 and
1994 was $22,975, $13,261 and $6,679, respectively. The amounts of long-term
debt which will become due during Fiscal 1997 through 2000, are approximately:
1997--$1,100; 1998--$9,700; 1999--$60,000; 2000--$0; 2001--$195,000 and
beyond--$55,000.
Note 8: 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. 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
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Service costs - benefits attributed to service during the period $457 $527 $418
Interest cost on accumulated postretirement medical benefit
obligation 528 620 678
Amortization of prior service costs (874) (718) (718)
-------------- -------------- ---------------
Net postretirement medical benefit costs $111 $429 $378
============== ============== ===============
The status of the plan is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
January 31, January 31, January 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued Postretirement Benefits:
Retirees $3,692 $4,642 $4,454
Employees eligible to retire 1,696 2,073 1,978
Employees not eligible to retire 1,799 2,020 1,500
-------------- -------------- -------------
7,187 8,735 7,932
Unrecognized prior service cost 4,074 4,701 5,328
Unrecognized net gain 3,830 2,018 1,992
-------------- -------------- -------------
$15,091 $15,454 $15,252
============== ============== =============
The actuarial assumptions used are as follows:
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Discount Rate 7.50% 7.25%
Health Care Cost Trend 8.40% - 9.50% (a) 8.50% - 10.00% (b)
(a) Gradually declining to 5.00% by 2005
(b) Gradually declining to 5.00% by 2004
Changing the health care cost trend rates by one percentage point would change
the accumulated postretirement medical benefit obligation at January 31, 1997 by
approximately $1,082 and the postretirement medical benefit costs for Fiscal
1996 by approximately $185.
Note 9: 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
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $48,193 in 1996 and $45,809 in 1995 $52,478 $48,720
============ =============
Projected benefit obligation for service rendered to date $(66,129) $(59,767)
Plan assets at fair value for Fiscal 1996 and 1995;
primarily publicly traded stocks and bonds,
including 70,956 shares of the Company's Common
Stock at the end of both Fiscal 1996 and 1995 68,196 62,136
------------- ------------
Plan assets in excess of projected benefit obligations 2,067 2,369
Unrecognized net loss from past experience different from that assumed 3,297 5,467
------------- -----------
Prepaid pension cost included in Investments and Other Assets $5,364 $7,836
============ ============
Net pension (income)/expense includes the following components:
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Service cost -- benefits earned during the year $3,674 $2,187 $1,815
Interest cost on projected benefit obligation 4,360 3,800 3,541
Actual return on plan assets (8,197) (2,782) (5,494)
Amortization of unrecognized net gain - (738) (406)
Net amortization and deferrals 2,635 (2,494) 200
----------- ------------- ------------
Net periodic pension (income) expense $2,472 $(27) $(344)
=========== ============= ============
The actuarial assumptions used are as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1996 1995
--------------------------------------------------------------------------------------------------------------------------------
Discount Rate 7.50% 7.25%
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 expected return on plan assets is determined based on the expected long-term
rate of return on plan assets and the market-related value of plan assets. The
market-related value of plan assets for Fiscal 1996 and Fiscal 1995 was
determined using the calculated value and for Fiscal 1994 using the fair value.
There was no material impact to operating results as a result of the change.
Effective June 1997, the Company will terminate its unfunded defined benefit
retirement plan for non-employee directors which had provided for payments upon
retirement, death, or disability. Retirement expense for this plan in Fiscal
1996, 1995 and 1994, respectively, was $59, $141 and $68.
The Company has an unfunded supplemental retirement plan for certain corporate
officers. Retirement expense for the plan in Fiscal 1996, 1995 and 1994 was
$406, $459 and $216, respectively. Prior service cost not yet recognized in
periodic pension cost was $1,547, $1,676, and $1,804 at January 31, 1997, 1996
and 1995, respectively.
The Company has 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 $981, $788 and $399 in Fiscal 1996, 1995
and 1994, respectively.
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 on specified dates.
Note 10: Common Stock
Shareholder Rights Plan: In 1995, the Company adopted a shareholders rights
plan. The rights may be exercised by their holders to purchase one-third (1/3)
of a share at $30.00 for each share owned by a shareholder upon the acquisition,
or announcement of intended acquisition, of 15% or more of the Company's stock
by a person or group. The rights are subject to antidilution adjustments and
will expire on March 20, 2005, unless the plan is further extended or the rights
are earlier redeemed.
Stock Option Plans: The Stewart & Stevenson Services, Inc. 1988 Nonstatutory
Stock Option Plan, the Stewart & Stevenson Services, Inc. 1993 Nonofficer Stock
Option Plan, the 1994 Director Stock Option Plan and the 1996 Director Stock
Plan authorize the grant of options to purchase an aggregate of up to 1,800,000,
984,950, 150,000 and 150,000 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 757,150 to 984,950 shares as of February 1, 1997.
Pursuant to an amendment adopted in Fiscal 1996, no future grants of options may
be made pursuant to the 1994 Director Stock Option Plan.
A summary of the status of the Company's stock option plans during Fiscal years 1994, 1995 and 1996 is presented in the tables
below:
- -----------------------------------------------------------------------------------------------------------------------------------
Option Price
Shares under Range
Option Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of Fiscal 1993 478,100 $13.125 - $32.625
Granted 180,050 $50.25
Exercised (60,750) $13.125 - $32.625
Canceled (12,225) $18.75 - $50.25
--------------
Outstanding at end of Fiscal 1994 585,175 $18.75 - $50.25
Granted 386,300 $33.75 and $35.125
Exercised (52,750) $18.75 - $32.625
Canceled (20,650) $32.625 - $50.25
--------------
Outstanding at end of Fiscal 1995 898,075 $18.75 - $50.25
Granted 343,800 $24.25 and $24.375
Exercised (71,500) $18.75
Canceled (35,375) $24.25 - $50.25
--------------
Outstanding at end of Fiscal 1996 1,135,000 $18.75 - $50.25
==============
Options available for future grants at the end of Fiscal 1996
608,050
==============
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 414,917 299,421
Weighted average exercise price of options exercisable $ 33.58 $ 27.67
Weighted average fair value of options granted $ 9.59 $ 15.01
------------------------- ------------------------ ------------------------ -- ------------------------ ------------------------
Weighted Average Remaining Contractual
Exercise Price Exercise Price Options Outstanding Options Exercisable Life (Years)
------------------------- ------------------------ ------------------------ -- ------------------------ ------------------------
$18.75 $18.75 82,000 82,000 Less than 1
$24.25 - $35.125 $30.32 889,200 250,025 6 - 10
$50.25 $50.25 163,800 82,892 8
======================== ========================
1,135,000 414,917
======================== ========================
The Company accounts for these plans under APB Opinion No. 25 under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
----------------------------------------------------------------------------------- ---------------------- ----------------------
Fiscal Fiscal
1996 1995
----------------------------------------------------------------------------------- ---------------------- ----------------------
Net earnings As Reported $16,851 $61,803
Pro Forma $15,498 $60,961
Net earnings per share As Reported $.51 $1.87
Pro Forma $.47 $1.85
Because the Statement 123 method of accounting is not required to be applied to
options granted prior to February 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in Fiscal 1996 and 1995:
----------------------------------------------------------------------------------- ---------------------- ----------------------
Fiscal Fiscal
1996 1995
----------------------------------------------------------------------------------- ---------------------- ----------------------
1988 Nonstatutory Stock Option Plan and 1993
Nonoffficer Stock Option Plan
Risk free interest rates 6.13% 7.00%
Expected dividend yields 1.30% .80%
Expected volatility 34.42% 33.01%
Expected life (years) 6 6
1994 Director Stock Option Plan
Risk free interest rates 6.79% 6.19%
Expected dividend yields 1.30% .80%
Expected volatility 35.24% 32.56%
Expected life (years) 6 6
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Note 11: Income Taxes
The components of the income tax provision and the income tax payments are as
follows:
- ---------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Current $3,887 $20,430 $2,194
Deferred 4,633 10,235 32,326
------------- ------------- -------------
Income tax provision $8,520 $30,665 $34,520
============= ============= =============
Income tax payments (excluding refunds) $15,320 $13,337 $17,422
============= ============= =============
A reconciliation between the provision for income taxes and income taxes
computed by applying the statutory U.S. Federal income tax rate of 35% in Fiscal
1996, 1995 and 1994 is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Provision at statutory rates $ 8,952 $32,190 $35,998
Other (432) (1,525) (1,478)
------------- ------------- --------------
$ 8,520 $30,665 $34,520
============= ============= ==============
The deferred tax liability is determined under the liability method based on the
difference between the financial statement and tax basis 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 tax effects of the significant temporary differences which comprise the
deferred tax liability at the end of Fiscal 1996 and 1995 are as follows:
---------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1996 1995
---------------------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets
Postretirement benefit obligation $ 5,282 $ 5,407
Accrued expenses and other reserves 5,257 9,282
Other 33
33
------------- -------------
Gross deferred tax assets 10,572 14,722
------------- -------------
Deferred Tax Liabilities
Property, plant and equipment 3,253 4,259
Pension accounting 1,114 2,233
Contract accounting 32,880 36,730
Prepaid expenses and deferred charges 50,918 44,485
Other
9,927 9,902
------------- -------------
Gross deferred tax liabilities 98,092 97,609
------------- -------------
Net deferred tax liability $87,520 $82,887
============= =============
Current portion of deferred tax liability $82,393 $76,093
Non-current portion of deferred tax liability 5,127
6,794
------------- -------------
Net deferred tax liability $ 87,520 $ 82,887
============= =============
Note 12: Supplemental Financial Data
Accounts and Notes Receivables, net consist of the following:
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Accounts receivable $234,843 $193,406
Notes receivable 24,614 18,121
Allowance for doubtful accounts (1,513)
(1,409)
Less non-current portion of notes receivable (20,882) (13,570)
-------------- -------------
$237,062 $196,548
============== =============
No single group or customer represents greater than 10% of total accounts
receivable in Fiscal 1996. The U.S. Government accounted for approximately 7.3%
and 16.3% of accounts receivable at January 31, 1997 and 1996, respectively. Due
to the large number of entities and diversity of the Company's customer base,
concentration of credit risk with respect to trade receivables is limited. At
the end of Fiscal 1996 accounts receivable and notes receivable included
immaterial amounts due from certain investees of the Company.
Components of property, plant and equipment, net are as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Machinery and equipment $135,612 $126,306
Buildings and leasehold improvements 93,469 91,298
Revenue earning assets 16,174 12,917
Accumulated depreciation and amortization (138,759) (116,436)
-------------- -------------
106,496 114,085
Construction-in-progress 2,373 6
Land 14,564 12,964
-------------- -------------
$123,433 $127,055
============== =============
Note 13: Consolidated Quarterly Data (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
Sales $390,061 $336,834 $240,726 $219,540
Gross profit 47,258 42,698 38,511 38,103
Net earnings (loss) 10,636 7,189 (7,687) 6,713
Net earnings (loss) per share .32 .22 (.23) .20
Fiscal 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
Sales $301,340 $323,779 $319,840 $289,022
Gross profit 46,482 47,957 49,949 48,542
Net earnings 13,861 15,000 16,927 16,015
Net earnings per share .42 .45 .51 .49
Note 14: Acquisitions
On April 12, 1997, the Company acquired ownership of Sierra Detroit Diesel
Allison, Inc. from Outer Drive Holdings, Inc. The acquisition will broaden
the Company's distribution territory for certain products.
From time to time, the Company enters into investment arrangements that are
related to its Engineered Power Systems segment. During Fiscal 1996, the Company
made an approximate $8 million investment in an independent power producer.
Note 15: Vulnerability Due To Certain Concentrations
A majority of the Engineered Power Systems Segment sales is derived from
packaging, operating and servicing gas turbine engines manufactured by General
Electric Company ("GE") and European Gas Turbines ("EGT"). The Company has no
reason to believe that its relationship with GE and EGT will not continue for
the foreseeable future. Any interruption of these relationships, however, would
adversely affect the Company.
The Company's principal distribution agreements are subject to termination by
the suppliers for a variety of causes. Although no assurance can be given that
such distribution agreements will be renewed beyond their expiration dates, they
have been renewed regularly.
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, 1997 and
1996.
Consolidated Statements of Earnings--Years ended January 31, 1997, 1996
and 1995.
Consolidated Statements of Shareholders' Equity--Years ended January
31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows--Years ended January 31, 1997,
1996 and 1995.
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
and 4.2 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 23,
1997, 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 Third Restated Articles of Incorporation of Stewart &
Stevenson Services, Inc., effective as of September 13, 1995
(incorporated by reference to Exhibit 3(a) of the Form 10-Q of
Stewart & Stevenson for the quarterly period ended October 31,
1995 under the Commission File No.
001-11443).
3.2 Fourth Restated Bylaws of Stewart & Stevenson Services, Inc.,
effective as of September 13, 1995 (incorporated by reference
to Exhibit 3(b) of the Form 10-Q of Stewart & Stevenson for
the quarterly period ended October 31, 1995 under the
Commission File No. 001-11443).
*4.1 Revolving Credit Agreement effective December 20, 1996,
between Stewart & Stevenson Services, Inc. and Texas Commerce
Bank National Association and Bank of America Illinois and
NationsBank of Texas, N.A. and ABM AMRO Bank N.V., Houston
Agency and The Bank of New York and PNC Bank National
Association and First National Bank of Commerce.
4.2 Note Purchase Agreement effective May 30, 1996, between
Stewart & Stevenson Services, Inc. and the Purchasers named
therein (incorporated by reference to Exhibit 4 of the Form
10-Q of Stewart & Stevenson for the quarterly period ended
July 31, 1996 under the Commission File No.
0-8493).
4.3 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 15, 1997, between Miles
McInnes and Faye Manning Tosch, as Lessors, and the Company,
as Lessee.
10.2 Distributor Sales and Service Agreement effective January 1,
1996, between the Company and Detroit Diesel Corporation
(incorporated by reference to Exhibit 10.2 of the Form 10-K of
Stewart & Stevenson for the fiscal year ended January 31, 1996
under Commission File No.
0-8493).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Stewart & Stevenson Services, Inc. 1994 Director Stock Option
Plan (incorporated by reference to Exhibit 4.1 of the Form S-8
Registration Statement of Stewart & Stevenson under the
Commission File No. 33-58685).
*21.1 List of Subsidiaries.
*23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
*27.1 Financial Data Schedule.
----------
* Filed with this report.
(b) No reports on Form 8-K were filed during the three months ended January 31,
1997.
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 8th day of April,
1997.
STEWART & STEVENSON SERVICES, INC.
By /s/ Robert L. Hargrave
Robert L. Hargrave
Chief Executive Officer
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 8th day of April, 1997.
/s/ Robert L. Hargrave
Robert L. Hargrave Bob H. O'Neal
Director, Principal Executive Officer, Director
Principal 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
Exhibit Number and Description
4.1 Revolving Credit Agreement.
10.1 Lease Agreement.
21.1 List of subsidiaries.
23.1 Consent of Arthur Andersen LLP,
Independent Public Accountants.
27.1 Financial Data Schedule.