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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, 1998
("Fiscal 1997") 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 March 3, 1998:
$678,403,239
Number of shares outstanding of each of the issuer's classes of common stock, as
of March 3, 1998:
Common Stock, Without Par Value 31,188,188 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K
- -------- -----------------
Proxy Statement for the 1998 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 the custom
fabrication of engine driven products. Stewart & Stevenson consists of three
business segments: the Power Products segment (formerly known as the
Distribution segment), the Tactical Vehicle Systems segment and the Engineered
Power Systems segment. Effective as of January 31, 1998, the Company sold the
net assets of its Gas Turbine Operations Division to the General Electric
Company ("GE") for $600 million, subject to adjustment and the assumption by GE
of certain liabilities. The business of the Gas Turbine Operations Division was
conducted within the Engineered Power Systems segment of the Company. Operating
results of the Gas Turbine Operations Division have been segregated from
continuing operations and reported as a separate line item on the Consolidated
Statement of Earnings. The Company has restated its prior financial statements
to present the operating results of the Gas Turbine Operations Division as a
discontinued operation. The assets and liabilities of such operations at January
31, 1997 have been reflected as a net current asset based substantially on
the original classification of such assets and liabilities.
The Power Products segment was renamed (formerly known as the Distribution
segment) because a significant portion of its sales involves value added engine
driven equipment. The Power Products 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 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 Power Products
segment markets primarily in the Southern and Western United States, as well as
in Mexico, Venezuela, Colombia 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. During Fiscal 1997, the Company began negotiations
with the U.S. Army for new contracts to produce additional FMTV's under a
multi-unit contract on a sole source basis. These negotiations are expected to
be completed during Fiscal 1998, and, if the contract is awarded to the Company,
it is anticipated that production will begin in Fiscal 1999.
The composition of businesses in the Engineered Power Systems segment
changed significantly in Fiscal 1997. The Company sold the net assets of its Gas
Turbine Operations Division which designed, engineered, serviced and marketed
engine-driven equipment utilizing gas turbine engines supplied by independent
manufacturers. The Gas Turbine Operations Division was a leading packager of
aeroderivative gas turbine engines for electrical power generation. The Gas
Turbine Operations Division also offered operation and maintenance contracts for
large gas turbine projects and petroleum production facilities. Following the
sale of the Gas Turbine Operations Division, the Engineered Power Systems
segment consists primarily of manufacturing airline ground support equipment
(including tow tractors, air start units, electrical ground power units, and air
conditioning units) and oil field well servicing equipment (including fracturing
equipment, slurry/chemical blenders, chemical additive systems, acidizing
equipment, nitrogen purging systems, cementing equipment, coiled tubing units
and capital drilling equipment such as blowout preventers, riser systems,
blowout preventer controls, gate valves, chokes and check valves, manifolds and
surface test trees). In addition, the Company manufactures gas compression
equipment using reciprocating engines and recently entered the business of
leasing and servicing gas compression equipment in Wyoming and the surrounding
Rocky Mountain area.
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 1997" commenced on
February 1, 1997 and ended on January 31, 1998. Identifiable assets at the close
of Fiscal 1997, 1996 and 1995 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 Note 3.
POWER PRODUCTS SEGMENT
Power Products Segment. Stewart & Stevenson markets industrial equipment,
components, replacement parts, accessories and other materials 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
significant 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, Northern 1998
("Detroit Diesel") Diesel Engines California, New Mexico,
Wyoming, Nebraska,
Louisiana, Mississippi,
Alabama, Venezuela and
Colombia
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 , Northern 1998
Division of General Motors Automatic Transmissions, California, New Mexico,
Corporation ("Allison") Power Shift Transmissions Wyoming, Nebraska,
and Torque Converters Louisiana, Mississippi,
Alabama, Venezuela and
Colombia
Hyster Company Material Handling Equipment Texas *
John Deere Industrial Construction, Utility 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, Northern 2000
Dresser Industries, Inc. Engines California, Montana, North
Dakota, Oklahoma, Wyoming,
New Mexico, Utah, Oregon,
Hawaii, Kansas, Arizona,
California, Washington,
Nevada and Colombia
KHD - Deutz Corporation Diesel Engines Colorado, Wyoming, *
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. The Power
Products segment 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 Power Products 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 Power
Products 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 Power Products
segment manufactures and sells snow removal equipment and wheel chair lifts.
Some products manufactured by the Power Products 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 Power Products segment accounted for approximately 53%, 62%
and 59%, respectively, of consolidated sales during Fiscal 1997, 1996 and 1995.
The Power Products 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 Power Products
segment.
TACTICAL VEHICLE SYSTEMS SEGMENT
In October 1991, the United States Department of Defense selected Stewart &
Stevenson to manufacture the next generation of FMTV trucks 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
36%, 24% and 27%, respectively, of consolidated sales in Fiscal 1997, 1996 and
1995. The United States Government is the predominant customer of the Tactical
Vehicle Systems segment, accounting for practically all of the sales of this
segment in Fiscal 1997, 1996 and 1995. The loss of this customer would have a
material adverse effect on the Company's consolidated future financial condition
and results of operation. For additional information on the Tactical Vehicle
Systems segment, see Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations - Tactical Vehicle Systems' Contract Status.
ENGINEERED POWER SYSTEMS SEGMENT
Stewart & Stevenson is a leading manufacturer of coil tubing units, well
stimulation equipment and other 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, riser systems
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.
During Fiscal 1997, Stewart & Stevenson's Gas Turbine Operations Division
designed, engineered and marketed engine-driven equipment utilizing
aeroderivative gas turbine engines manufactured by independent suppliers and
provided operation and maintenance services. As previously mentioned,
the Company sold its Gas Turbine Operations Division to the General Electric
Company. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Discontinued Operations.
Operations of the Engineered Power Systems segment related to continuing
operations accounted for approximately 11%, 14% and 14%, respectively, of
consolidated sales during Fiscal 1997, 1996 and 1995. As a custom packager
of engine-driven equipment, the Company designed its products to meet the
specific needs of its customers in a variety of applications. Both equipment and
services were sold under the "Stewart & Stevenson" name throughout the world.
Effective as of March 30, 1998, the Company completed the acquisition of the
assets of Compression Specialties, Inc. for approximately $9.45 million. The
Company plans to use this acquisition as a strategic entrance into the business
of leasing and servicing gas compression equipment in the state of Wyoming and
the surrounding Rocky Mountain area.
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 Power Products 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.
The Engineered Power Systems segment is highly diversified with no single
competitor participating in all of the markets of the Company.
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.
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 relating to continuing operations at the close of
Fiscal 1997 and Fiscal 1996 were as follows:
Estimated percentage to be
recognized in Fiscal Fiscal
Fiscal 1998 1997 1996
(Dollars in millions)
Power Products 100% $69.6 $92.2
Tactical Vehicle Systems 95% 487.0 817.3
Engineered Power Systems 100% 57.5 46.1
============ ============
$ 614.1 $ 955.6
============ ============
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 and services.
EMPLOYEES
At March 1, 1998, the Company employed approximately 3,665 persons. The Company
considers its employee relations to be satisfactory.
Item 2. Properties.
The Company maintains its corporate executive and administrative offices (which
occupy about 64,000 square feet of space leased from a limited partnership in
which the Company owns an 80% limited partnership interest) at 2707 North Loop
West, Houston, Texas.
Activities of the Power Products segment are coordinated from Houston, where the
Company owns 320,000 square feet of space at three locations and leases 31,000
square feet in one location devoted to equipment and parts sales and service. To
service its distribution territory (See "Item 1. Business -- Power Products
Segment"), Stewart & Stevenson maintains Company-operated facilities occupying
570,000 square feet of owned space and 344,000 square feet of leased space in 26
cities in Texas, Louisiana, Colorado, New Mexico, Wyoming, Utah, North Dakota,
Kansas, Washington, Georgia 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 147,000 square feet of warehousing facilities in Houston, Texas.
Stewart & Stevenson's Engineered Power Systems segment is headquartered in
Houston, where the Company owns approximately 575,000 square feet and leases
approximately 41,000 square feet of space devoted to manufacturing, warehousing
and administration. The Company also owns a high pressure valve manufacturing
facility in Jennings, Louisiana (89,000 square feet). The Company also has
facilities in Aberdeen, Scotland and Abu Dhabi.
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.
See Note 6 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 722 shareholders of record as of March 3, 1998. 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
1997 1996
--------------------------------------------- ---------------------------------------------
High Low Dividend High Low Dividend
First Quarter $27 1/2 19 3/8 0.085 $29 3/4 $23 1/4 $0.080
Second Quarter 28 3/8 23 3/8 0.085 30 1/2 19 3/4 0.085
Third Quarter 29 1/4 21 0.085 23 3/4 19 5/8 0.085
Fourth Quarter 26 3/16 20 7/8 0.085 29 1/4 21 0.085
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." The Company has restated its prior financial statements to present
the operating results of the Gas Turbine Operating Division as a discontinued
operation.
Stewart & Stevenson Services, Inc.
CONSOLIDATED FINANCIAL REVIEW
- --------------------------------------------------- -------------- --------------- --------------- --------------- ---------------
(Dollars in thousands, except per share data) Fiscal Fiscal Fiscal Fiscal Fiscal
1997 1996 1995 1994 1993
- --------------------------------------------------- -------------- --------------- --------------- --------------- ---------------
Financial Data:
Sales $1,115,034 $ 825,187 $ 702,324 $ 596,003 $ 496,475
Earnings (loss) from continuing operations
before income taxes (22,190) 6,651 32,892 27,323 17,546
Net earnings (loss) from continuing operations(1) (14,505) 4,768 20,698 16,215 9,464
Net earnings from discontinued operations 5,424 12,083 41,105 51,343 47,316
Gain on discontinued operations 61,344 - - - -
Net Earnings 52,263 16,851 61,803 67,588 56,780
Total assets 1,252,647 1,079,159 948,626 786,520 590,295
Short-Term Debt (including current portion
of Long-Term Debt) 261,000 29,100 66,100 43,344 7,219
Long-Term Debt 147,166 319,700 210,800 116,900 68,000
Per Share Data:
Earnings (loss) from continuing operations $ (0.44) $0.14 $0.63 $0.49 $0.29
Earnings from discontinued operations 0.16 0.37 1.24 1.56 1.44
Gain on discontinued operations 1.85 - - - -
Net earnings per share - Basic and Diluted $1.57 $.51 $1.87 $2.05 $1.73
Cash dividends declared 0.34 0.335 0.31 0.27 0.23
(1) The net earnings (loss) from continuing operations for Fiscal 1997 and
Fiscal 1996 includes special items, net of tax, of $39,086 and $12,600,
respectively. Refer to Item 7 for detail analysis.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
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) the percentages
which certain items reflected in the Company's 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
1997 1996 1995 1996-1997 1995-1996
- --------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Sales 100.0% 100.0% 100.0% 35.1% 17.5%
Cost of sales 92.6 87.6 86.5 42.9 19.0
---------------- ---------------- ----------------
Gross profit 7.4 12.4 13.5 (19.2) 8.1
Selling and administrative expenses 6.8 8.1 8.2 12.6 16.7
Interest expense 1.4 1.5 1.0 23.8 69.9
1.5
Settlement of litigation and special charge 2.1 2.4 - 16.8 N/A
Gain on sale of the Houston John Deere
franchise (.4) - - N/A N/A
Other income, net (.5) (.4) (.4) 36.3 28.3
---------------- ---------------- ----------------
9.4 11.6 8.8 9.5 54.7
---------------- ---------------- ----------------
Earnings (loss) from continuing
operations before income taxes (2.0) .8 4.7
Income tax expense (benefit) (.7) .2 1.8
---------------- ---------------- ----------------
Earnings (loss) from continuing
operations
of consolidated companies (1.3) .6 2.9
Equity in net earnings of
unconsolidated affiliates - - .1
---------------- ---------------- ----------------
Net earnings (loss) from
continuing operations (1.3)% .6% 3.0%
================ ================ ================
N/A: Not applicable or meaningful
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
1997 1996 1995 1996-1997 1995-1996
-----------------------------------------------------------------------------------------------------
Power Products $580,490 52% $508,305 62% $416,229 59% 14% 22%
Tactical Vehicle Systems 396,734 36 200,916 24 189,009 27 97 6
Engineered Power Systems 124,194 11 114,706 14 96,045 14 8 19
Other 13,616 1 1,260 - 1,041 - N/A 21
------------------------------------------------------------------------
$1,115,034 100% $825,187 100% $702,324 100% 35 17
========================================================================
Operating Profit Growth Rate
------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal
1997 1996 1995 1996-1997 1995-1996
- ----------------------------------------------------------------------------------------------------------------------------
Power Products $36,031 147% $21,504 45% $23,590 49% 68% (9)%
Tactical Vehicle Systems (9,990) (41) 10,823 23 9,703 20 N/A 12
Engineered Power Systems (879) (3) 14,615 31 14,433 30 N/A 1
Other (685) (3) 528 1 292 1 N/A 81
========================================================================
$24,477 100% $47,470 100% $48,018 100% (48) (1)
========================================================================
Operating Profit as a Percentage of Sales
------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
- ----------------------------- ------------------------ ----------------------- -----------------------
Power Products 6.2% 4.2% 5.7%
Tactical Vehicle Systems (2.5) 5.4 5.1
Engineered Power Systems (.7) 12.7 15.0
Other (5.0) 41.9 28.1
Consolidated 2.2 5.8 6.8
DISCONTINUED OPERATIONS
Effective as of January 31, 1998, the Company completed the sale of the net
assets of its Gas Turbine Operations Division to the General Electric Company
("GE") for $600 million, subject to adjustment, and the assumption by GE of
certain liabilities. The Company intends to use these funds to retire $260
million of debt, to repurchase up to $120 million of its outstanding stock and
for other general corporate purposes.
The Gas Turbine Operations Division was involved in the designing, engineering,
manufacturing and marketing of engine-driven equipment (including associated
spare parts) utilizing combustion turbine engines supplied by independent
manufactures such as GE. It also packaged equipment and associated systems for
the generation of electricity or mechanical drive applications incorporating
combustion turbine engines, provided spare parts for, and serviced and
overhauled, combustion turbine powered equipment, provided operating and
maintenance service for power generation and petroleum production facilities
(except such services for reciprocating engines), marketed technical and support
services for combustion turbine-driven equipment, and provided project
consulting and development services that complemented its combustion
turbine-driven product lines.
SPECIAL ITEMS
Special items are infrequent transactions that may affect comparability between
years. The special items included in the Fiscal 1997 and 1996 results are
detailed below. In Fiscal 1997, $41.2 million of the special items are included
in cost of sales. The Company does not expect any of these special items to have
an impact on future operating results. For further information, see "Results of
Operations" below.
Pretax Charge (Benefit)
- -------------------------------------------------------------- ---------------- --- ----------------
(Dollars in thousands) Fiscal Fiscal
1997 1996
- -------------------------------------------------------------- ---------------- --- ----------------
Tactical Vehicle Systems
Change in estimate $26,703 $ -
Power Products
Write down of inventories and other various assets 3,468 -
Gain on sale of the Houston John Deere franchise (4,369) -
---------------- ----------------
(901) -
Engineered Power Systems
Write down of inventories and other various assets 6,743 -
Change in estimate 2,317 -
---------------- ----------------
9,060 -
Other
Settlement of litigation and special charge 23,352 20,000
Impaired operating assets 2,000 -
---------------- ----------------
25,352 20,000
Pretax charge 60,214 20,000
Tax Benefit (21,128)
(7,400)
----------------- -----------------
Special Items - net of tax $39,086 $12,600
================ ================
RESULTS OF OPERATIONS
Fiscal 1997 vs. Fiscal 1996
Sales for Fiscal 1997 increased 35% to $1,115 million compared to sales of $825
million for Fiscal 1996. The Company's international sales decreased 21% to $66
million in Fiscal 1997 as compared to $83 million in Fiscal 1996, representing
6% and 10% of consolidated sales for Fiscal 1997 and 1996, respectively.
The Company's Power Products segment's sales increased 14% to $580 million,
which included Sierra Detroit Diesel, acquired April 12, 1997, whose revenues
totaled approximately 5% of the segment's sales. The growth in sales reflects
the continued healthy economic environment of the regions and markets served by
the Company. In addition, the acquisition of Sierra Detroit Diesel Allison Inc.
increased sales by approximately $30 million and increased the Company's
distribution territory for certain products, including Detroit Diesel and
Allison products, to include northern California. The Power Products segment
recognized an increase in operating profit of 68% to $36 million including a net
profit of $1 million from a combination of both a special gain and charge. Refer
to "Special Items" for detailed analysis. Excluding these special items,
operating profit would have been $35 million for Fiscal 1997 representing a 63%
increase over Fiscal 1996.
The Company's Tactical Vehicle Systems segment had sales of $397 million, a 97%
increase from the prior year. This increase reflects the achievement of a high
rate of truck production during Fiscal 1997. The Tactical Vehicle System segment
recorded an operating loss for Fiscal 1997 of $10 million, which included the
impact of a change in the estimated profit at completion of its principle
contract with the U.S. Army. The cumulative impact of this change was a fourth
quarter charge to cost of sales of $27 million. For additional information,
see "Tactical Vehicle Systems' Contract Status."
Following the sale of the Gas Turbine Operations, the Engineered Power
Systems segment consists of petroleum, airline and gas compression products.
The Engineered Power Systems segment sales from continuing operations totaled
$124 million, an 8% increase over Fiscal 1996. The Petroleum product line sales
increased significantly, as its new riser product was well received by the
market, however, this increase was greatly offset by a similar decrease in
sales of Airline Equipment, reflecting a significant drop in orders from Asia.
The operating loss from Engineered Power Systems of $1 million included special
charges totaling $9 million, which included both market adjustments to Airline
and other inventories and changes in estimated cost of sales for certain
contracts. Excluding these special charges, operational profit would have been
$8 million, a 44% decrease in operating profits from the prior year. This
significant decrease is attributable both to the Airline Product short fall in
revenues and increased product costs related to certain products and services.
The Other segment of the Company had sales of $12 million which included
approximately $13 million associated with owning and operating independent power
plants, including Carson Cogeneration which was acquired in September, 1997, and
represented 67% of this segment's 1997 sales. Other operations recorded a $1
million loss for Fiscal 1997, including a special charge of $2 million, related
to the impairment of certain operating assets. Excluding this special charge,
operating profits would have been $1 million.
Fiscal 1996 vs. Fiscal 1995
Sales for Fiscal 1996 increased 17% to $825 million compared to sales of $702
million for Fiscal 1995. The Company's international sales increased 55% to $83
million in Fiscal 1996 as compared to $54 million in Fiscal 1995, representing
10% and 8% of consolidated sales for Fiscal 1996 and 1995, respectively.
The Power Products segment was the primary growth contributor to the Company's
sales with an increase in sales of $92 million, or 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, or 6%,
during Fiscal 1996 as compared to Fiscal 1995. The increase in TVS sales
reflects the increase in truck production under the 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 contributed to the Company's
sales growth, increasing $9 million, or 8%, in Fiscal 1996 as compared to Fiscal
1995. Airline and Petroleum Equipment experienced increased sales of $12
million, or 40%, and $6 million, or 11%, respectively, in Fiscal 1996 as
compared to Fiscal 1995.
Net Period Expenses
- ----------------------------------------------------- ----------------------------------------- -----------------------------------
(Dollars in thousands) Percentage Change
Fiscal Fiscal Fiscal Fiscal
1997 1996 1995 1996-1997 1995-1996
- ----------------------------------------------------- ------------- ------------- ------------- -----------------------------------
Selling and administrative expenses $75,619 67,163 $57,546 13% 17%
Interest expense 15,440 12,474 7,344 24 70
Settlement of litigation and special charge 23,352 20,000 - 17 N/A
Gain on sale of the Houston John Deere franchise (4,369) - - N/A N/A
Other income, net (4,867) (3,571) (2,784) 36 28
------------- ------------- -------------
$105,175 $96,066 $62,106 9 55
============= ============= =============
============= ============= =============
Net period expenses as a percentage of sales 9.4% 11.6% 8.8%
============= ============= =============
N/A: Not applicable or meaningful.
Net period expenses increased 9% in Fiscal 1997 from Fiscal 1996, which was
substantially less than the 35% increase in sales. Selling and administrative
expense growth was modest reflecting the better utilization of existing
infrastructure. Interest expense (net of the amount charged to discontinued
operations) grew by 24% in Fiscal 1997 as additional borrowings were obtained to
fund the growth in continuing operations' working capital needs. Special charges
in Fiscal 1997 totaled over $23 million including $10 million in expenses
relating to the Company's resolution of the charge, under the "Peace Shield"
indictment, whereby the Company pled guilty to one count of making a false
statement to the United States Air Force, see "Effect of Certain Litigation"
below. Special charges in Fiscal 1997 also included $13 million associated with
settling a claim by the Company, for excessive costs incurred on a U.S.
Government contract, at less than the carrying value.
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 for 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.
On October 6, 1997, the Company sold its construction equipment franchise for
approximately $30 million and recognized a gain on the sale in the approximate
amount of $4 million. The construction equipment franchise operated in the gulf
coast territory of Texas and primarily distributed, and provided services for,
products manufactured by John Deere Construction Equipment Company and other
companies engaged in the business of manufacturing earth moving equipment,
forestry equipment, skidsteer equipment and utility equipment.
Net Earnings (Loss) from Continuing Operations
- -------------------------------------------------------------------------------------------- ----------------------------------
(Dollars in thousands) Percentage Change
Fiscal Fiscal Fiscal Fiscal
1997 1996 1995 1996-1997 1995-1996
- -------------------------------------------------- -------------- ------------- ------------- --------------------------------
Net earnings (loss) $(14,505) $4,768 $20,698 N/A (77)%
Percentage of sales (1.3)% 0.6% 3.0%
============== ============= =============
N/A: Not applicable or meaningful.
The continuing operations loss was $15 million during Fiscal 1997 versus profit
of $5 million in Fiscal 1996 and $21 million in Fiscal 1995. Both Fiscal 1997
and Fiscal 1996 had special charges which significantly impacted performance.
Excluding the $60 million in special charges in Fiscal 1997 ($39 million after
tax) and $20 million in special charges in Fiscal 1996 ($13 million after tax),
this net profit of continuing operations for Fiscal 1997, 1996 and 1995 would
have been $25 million, $18 million and $21 million, respectively.
FINANCIAL CONDITION
Working Capital
- ---------------------------------------------------------------------------------------------------------------------------
Percentage Change
Fiscal Fiscal Fiscal
(Dollars in thousands) 1997 1996 1996 - 1997
- ---------------------------------------------------------------------------------------------------------------------------
Current Assets $1,109,805 $942,382 18%
Current Liabilities 562,102 254,433 121%
-------------- -------------
Working Capital $ 547,703 $687,949 (20)%
============== =============
Current Ratio
1.97:1 3.70:1
============== ==============
Current assets increased $167 million from Fiscal 1996, due to the receivable of
$600 million from the sale of the assets of Gas Turbine Operations, partially
offset by the decrease in net assets of $452 million from discontinued
operations.
Current liabilities increased $308 million from Fiscal 1996, primarily due to
$225 million of long-term debt becoming current as the Company retired the
outstanding revolving credit facility on February 3, 1998 using proceeds from
the sale of the Gas Turbine Operations. There was also an increase in other
accrued liabilities, primarily related to the sale of the Gas Turbine
Operations.
INVESTMENTS
The Company's capital expenditures for plant, rental machines and other property
were $32 million for Fiscal 1997, an increase of $11 million from Fiscal 1996.
The increase reflects the Company's continuing investment in business units
capable of rapid growth.
Depreciation and amortization totaled $22 million for Fiscal 1997, a slight
increase from Fiscal 1996. Additionally, the Company disposed of approximately
$4 million of property during Fiscal 1997 versus disposals of $2 million during
Fiscal 1996.
Investments and other assets were $45 million at the end of Fiscal 1997, a
slight decrease from the end of Fiscal 1996.
Company's Capital
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Fiscal 1997 Fiscal 1996
Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt $147,166 21% $319,700 39%
Other Long-Term Liabilities 21,672 3 25,791 3
Shareholders' Equity 521,707 76 479,235 58
=======================================================
$690,545 100% $824,726 100%
=======================================================
Shareholders' equity increased $42 million during Fiscal 1997 primarily due to
the gain on the sale of the Gas Turbine Operations retained after dividends.
Long-term debt was reduced during Fiscal 1997 reflecting the classification, as
current maturities of long-term debt, those amounts which the Company intended
to retire within one year.
Stewart & Stevenson has announced its intention to use up to $120 million
of the estimated cash from the sale of the Gas Turbine Operations Division to
repurchase shares of its common stock. As of April 15, 1998, the Company had
completed the purchase and retirement of 1,650,000 shares of its common stock
under an equity forward contract for approximately $41 million. The Company
intends to continue making purchases of its common stock in the open market. As
of January 31, 1998, the repurchase by the Company of its common stock did not
have a material impact of the calculation of earnings per share for Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
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. During Fiscal 1997, the Company completed a number
of transactions intended to strengthen its long-term financial position and
enhance earnings. In the third quarter of 1997, the Company completed the sale
of its construction equipment division for $30 million, realizing a net gain of
$4 million. In the fourth quarter of 1997, the Company completed the sale of its
Gas Turbine Operations Division for $600 million, realizing a net gain of $61
million. Also in the fourth quarter of 1997, the Company instituted a program to
repurchase up to $120 million of its outstanding common stock. On February 3,
1998, Stewart & Stevenson repaid $225 million of unsecured indebtedness under
its revolving credit facility.
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
1997 1996 1995
- --------------------------------------------------------------------------------------- ------------- ------------- -------------
Net cash provided by (used in):
Operating activities $(11,916) $(32,600) $(91,666)
Investing activities (14,236) (26,966) (14,086)
Financing activities 36,033 62,369 108,080
============= ============= =============
$9,881 $2,803 $2,328
============= ============= =============
Net Cash Used In Operating Activities
- ------------------------------------ --------------------------------------------------- ----------- ------------- -------------
(Dollars in thousands) Fiscal Fiscal Fiscal
1997 1996 1995
- ------------------------------------ --------------------------------------------------- ----------- ------------- -------------
Net earnings (loss) from continuing operations $(14,505) $4,768 $20,698
Depreciation and amortization 22,447 22,376 20,557
Accrued postretirement benefits (1,835) (363) 202
Deferred income taxes, net (3,350) (1,667) (1,244)
Gain on sale of John Deere franchise (4,369) - -
------------- ------------- -------------
Funds from (used in) continuing operations (1,612) 25,114 40,213
Change in net operating assets and liabilities 70,639 27,653 (131,737)
Funds from discontinued operations (80,943) (85,367) (142)
------------- ------------- -------------
Net cash used in operating activities $(11,916) $(32,600) $(91,666)
============= ============= =============
Funds from continuing operations decreased 106% during Fiscal 1997 versus a 60%
decrease during Fiscal 1996, 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. Other current liabilities increased during Fiscal 1997, which is
primarily attributable to certain liabilities associated with the sale of the
Gas Turbine Operations. 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 expenditure needs.
Net Cash Used In Investing Activities
- --------------------------------------------------------------------------------------- ------------- ------------- ------------
(Dollars in thousands) Fiscal Fiscal Fiscal
1997 1996 1995
- --------------------------------------------------------------------------------------- ------------- ------------- ------------
Expenditures for property, plant and equipment $(31,778) $(21,303) $(16,041)
Proceeds from sale of the Houston John Deere franchise 22,773 - -
Acquisition of business (8,729) - -
Investment (See Note 15) - (8,000) -
Disposal of property, plant and equipment 3,498 2,337 1,955
------------- ------------- ------------
Net cash used in investing activities $(14,236) $(26,966) $(14,086)
============= ============= ============
Net cash used in investing activities decreased 47% during Fiscal 1997 versus a
91% increase during Fiscal 1996. During Fiscal 1996, the Company made an
investment in an Argentine independent power producer. During 1997, the Company
transferred a gas turbine valued at approximately $5 million from its
discontinued operations inventory to property, plant and equipment of the
Company's other operations, to support its retained interest and obligations
associated with that investment. 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. On September 12, 1997, the Company also acquired Carson Cogeneration
LLP, an independent power producer in California. On October 6, 1997, the
Company sold its Houston John Deere franchise.
Net Cash Provided By Financing Activities
- --------------------------------------------------------------------------------------- ------------- ------------- ------------
(Dollars in thousands) Fiscal Fiscal Fiscal
1997 1996 1995
- --------------------------------------------------------------------------------------- ------------- ------------- ------------
Additions to long-term debt $76,153 $360,000 $200,071
Payments on long-term debt (37,329) (251,100) (106,100)
Net borrowings and payments on short-term notes payable 7,000 (37,000) 23,000
Dividends paid (11,286) (11,081) (10,243)
Exercise of stock options 1,495 1,550 1,352
------------- ------------- ------------
Net cash provided by financing activities $36,033 $62,369 $108,080
============= ============= ============
Net cash provided from financing activities decreased 42% for Fiscal 1997 and
Fiscal 1996. During Fiscal 1997 the Company increased long-term debt $76 million
while retiring $37 million. In addition to the increased long-term debt,
financing cash inflows included the exercise of stock options totaling $2
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. 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 or to borrow under other long-term financing
sources.
Payment of cash dividends on common stock totaled $11.3 million and $11.1
million during Fiscal 1997 and 1996, respectively, increasing 2% and 8% during
these years. Cash dividends represented 22%, 66% and 17% of net earnings for
Fiscal 1997, 1996 and 1995, 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.
YEAR 2000 COMPLIANCE
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Company's financial position, results of operations or
cash flows in future periods. However, if the Company, its customers or vendors
are unable to resolve such processing issues in a timely manner, it could result
in a material financial risk. Accordingly, the Company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", which become effective for years beginning after December
31, 1997. SFAS No. 130 requires disclosure of comprehensive income, which
consists of all changes in equity from non-shareholder sources. SFAS No. 131
requires that segment reporting for public reporting purposes be conformed to
the segment reporting used by management for internal purposes. The adoption of
these statements will not impact the Company's consolidated financial position,
results of operations or cash flows, but will be limited to the form and content
of the Company's disclosures. Since most of the information required under these
statements is currently disclosed, it is not expected that their adoption will
materially change the Company's current disclosures.
TACTICAL VEHICLE SYSTEMS' CONTRACT STATUS
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, 1998, 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.
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, 1998, the Company has completed
approximately 7,937 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.
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. As of January 31,
1998, the Company has received full funding for the current contract. 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.
During Fiscal 1997, the Company revised its estimate of the total cost to
complete and profit on the existing FMTV contract. This review resulted in a
write off of approximately $27 million in profits previously recognized under
the FMTV contract and a reduction in the operating profit percentage on the
Tactical Vehicle Systems segment to 2.1%. During Fiscal 1997, the Company began
negotiations with the U.S. Army to produce additional FMTV's under a new
multi-unit contract on a sole source basis. These negotiations are expected to
be completed during Fiscal 1998, and, if the contract is awarded to the Company,
it is anticipated that production will begin in Fiscal 1999, subject to the
multi-year funding requirements described above.
EFFECT OF CERTAIN LITIGATION
During Fiscal 1997, the Company entered a Plea Agreement and a Settlement
Agreement resolving all litigation relating to the 1987 contract to supply
diesel generator sets for installation in the Kingdom of Saudi Arabia (the
"Peace Shield Litigation"). The Company paid a $2 million criminal fine, a $2
million civil penalty, and $3 million in restitution to the U.S. Air Force. A
$10 million provision for fines, penalties, restitution and certain unrecognized
legal fees in connection with the Peace Shield Litigation was made in the third
quarter of Fiscal 1997. After the end of Fiscal 1997, the Company entered an
Administrative Agreement with the United States Air Force that extends the
application of the interim Administrative Agreement signed on November 8, 1995
and imposes certain requirements on the Company intended to assure the U.S. Air
Force that the Company is a responsible government contractor. A default by the
Company of the requirements under the Administrative Agreement could result in
the suspension or debarment of the Company from receiving any new contracts or
subcontracts with agencies of the U.S. Government or the benefit of federal
assistance payments. Any such suspension could also prevent the Company from
receiving future modifications to the FMTV contract unless the Secretary of the
Army finds a compelling need to enter into such modification. The 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. 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 contain forward-looking
statements that are based on current expectations, estimates, and projections
about the markets and industries in which the Company operates, management's
beliefs and assumptions made by management. These forward-looking statements are
made pursuant to the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995. These statements are not guarantees of future performance
and involve certain risks, uncertainties and assumptions ("future factors")
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Future factors include adjustments to the sale price of the
Gas Turbine Operations Division; risks associated with newly acquired
businesses; increasing price and product/service competition by foreign and
domestic competitors; rapid technological developments and changes; the ability
to continue to introduce competitive new products and services on a timely, cost
effective basis; the mix of products/services; the achievement of lower costs
and expenses; reliance on large customers; technological, implementation and
cost/financial risks in use of large, multi-year contracts; the cyclical nature
of the markets served; the outcome of pending and future litigation and
governmental proceedings and continued availability of financing, financial
instruments and financial resources in the amount, at the times and on the terms
required to support the Company's business; 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, 1998
and 1997, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended January
31, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 13, 1998
Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data) Fiscal Fiscal
1997 1996
- -----------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and equivalents $18,987 $9,106
Accounts and notes receivable, net 185,033 160,407
Recoverable costs and accrued profits not yet billed 138,208 156,375
Inventories 167,577 164,205
Receivable from sale of assets of Gas Turbine Operations 600,000 -
Net assets of discontinued operations (See Note 2) - 452,289
---------------------- -------------------
Total Current Assets 1,109,805 942,382
Property, Plant and Equipment, net 97,744 91,578
Investments and Other Assets 45,098 45,199
====================== ===================
$1,252,647 $1,079,159
====================== ===================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $35,000 $28,000
Accounts payable 92,728 122,116
Accrued payrolls and incentives 18,693 15,376
Current income taxes 88,862 65,881
Current portion of long-term debt 226,000 1,100
Other accrued liabilities 100,819 21,960
---------------------- -------------------
Total Current Liabilities 562,102 254,433
Commitments and Contingencies (See Note 6)
Long-Term Debt 147,166 319,700
Deferred Income Taxes 2,899 5,127
Accrued Postretirement Benefits 13,256 15,091
Deferred Compensation 5,517 5,573
Shareholders' Equity
Common Stock, without par value, 100,000,000 shares authorized at January
31, 1998 and January 31, 1997, respectively; 33,205,688 and 33,132,280
shares issued at January 31, 1998 and 1997, respectively,
including 11,820 shares held in treasury 166,454 164,959
Retained earnings 355,286 314,309
---------------------- -------------------
521,740 479,268
Less cost of treasury stock (33) (33)
---------------------- -------------------
Total Shareholders' Equity 521,707 479,235
====================== ===================
$1,252,647 $1,079,159
====================== ===================
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
1997 1996 1995
------------------------------------------------------------------------------------------------------------------------
Sales $1,115,034 $ 825,187 $ 702,324
Cost of sales 1,032,049 722,470 607,326
--------------- --------------- ---------------
Gross profit 82,985 102,717 94,998
--------------- --------------- ---------------
Selling and administrative expenses 75,619 67,163 57,546
Interest expense 15,440 12,474 7,344
Special charge - Quiet Program 13,352 - -
Settlement of litigation (See Note 3) 10,000 20,000 -
Gain on sale of the John Deere franchise (4,369) - -
Other income, net (4,867) (3,571) (2,784)
--------------- --------------- ---------------
105,175 96,066 62,106
--------------- --------------- ---------------
Earnings (loss) from continuing operations before income taxes (22,190) 6,651 32,892
Income tax expense (benefit) (8,075) 1,776 12,754
--------------- --------------- ---------------
Earnings (loss) from continuing operations of consolidated companies (14,115) 4,875 20,138
Equity in net earnings (loss) of unconsolidated affiliates (390) (107) 560
--------------- --------------- ---------------
Net earnings (loss) from continuing operations (14,505) 4,768 20,698
Net earnings from discontinued operations net of tax of
$1,920, $6,744 and $17,911 (See Note 2) 5,424 12,083 41,105
Gain on disposal of discontinued operations, net of tax of $35,297
(See Note 2) 61,344 - -
--------------- --------------- ---------------
Net earnings $52,263 $16,851 $61,803
=============== =============== ===============
Weighted average number of shares of Common Stock outstanding -
Basic 33,184 33,068 33,035
Diluted 33,250 33,090 33,101
Net earnings (loss) per share: Basic and Diluted
Continuing operations $ (.44) $.14 $.63
Discontinued operations .16 .37 1.24
Gain on disposal 1.85 - -
=============== =============== ===============
Net earnings per share $1.57 $.51 $1.87
=============== =============== ===============
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 Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
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
Net earnings - 52,263 - 52,263
Cash dividends - (11,286) - (11,286)
Exercise of stock options 1,495 - - 1,495
============= ============= ============= ===========
Balance at end of Fiscal 1997 $166,454 $355,286 $(33) $521,707
============= ============= ============= ===========
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
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net earnings (loss) from continuing operations $(14,505) $4,768 $20,698
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Accrued postretirement benefits (1,835) (363) 202
Depreciation and amortization 22,447 22,376 20,557
Deferred income taxes, net (3,350) (1,667) (1,244)
Gain on sale of the John Deere franchise (4,369) - -
Change in operating assets and liabilities net of the effect of acquisition,
divestiture and discontinued operations:
Accounts and notes receivable, net (13,699) (37,495) (5,745)
Recoverable costs and accrued profits not yet billed 18,167 (30,335) (34,050)
Inventories (17,596) 53,203 (82,514)
Accounts payable (32,700) 49,196 (29,706)
Current income taxes 23,043 (2,769) 26,410
Other current liabilities 79,947 6,885 (3,710)
Other--principally long-term assets and liabilities 13,477 (11,032) (2,422)
------------- ------------- ------------
Net Cash Provided by (Used in) Continuing Operations 69,027 52,767 (91,524)
Net Cash Used in Discontinued Operations (80,943) (85,367) (142)
------------- ------------- ------------
Net Cash Used in Operating Activities (11,916) (32,600) (91,666)
Investing Activities
Expenditures for property, plant and equipment (31,778) (21,303) (16,041)
Proceeds from sale of John Deere franchise (See Note 15) 22,773 - -
Acquisition of business (See Note 15) (8,729) - -
Investment - (8,000) -
Disposal of property, plant and equipment 3,498 2,337 1,955
------------- ------------- -------------
Net Cash Used in Investing Activities (14,236) (26,966) (14,086)
Financing Activities
Additions to long-term debt 76,153 360,000 200,071
Payments on long-term debt (37,329) (251,100) (106,100)
Net borrowings and payments on short-term notes payable 7,000 (37,000) 23,000
Dividends paid (11,286) (11,081) (10,243)
Exercise of stock options 1,495 1,550 1,352
------------- ------------- -------------
Net Cash Provided by Financing Activities 36,033 62,369 108,080
------------- ------------- -------------
Increase in cash and equivalents 9,881 2,803 2,328
Cash and equivalents, beginning of fiscal year 9,106 6,303 3,975
============= ============= =============
Cash and equivalents, end of fiscal year $18,987 $9,106 $6,303
============= ============= =============
Non-Cash Activities:
Transfer of inventory to fixed assets - Continuing operations $(4,712) $ - $ -
- Discontinued operations $(4,015) $ - $ -
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 1997"
commenced on February 1, 1997 and ended on January 31, 1998.
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 (SFAS) No. 123,
"Accounting for Stock-Based Compensation" has been provided. (See Note 11)
Cash Equivalents: Interest-bearing deposits and other investments with original
maturities of three months or less are considered cash equivalents. Included in
this balance at January 31, 1998 is approximately $3.1 million, which is subject
to the terms of a fiscal agency agreement related to an operating lease of a
cogeneration facility acquired in September 1997.
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 inventories are not in excess of their fair values.
Capitalized Interest: Interest costs associated with certain constructed assets
are capitalized during the construction period. There was no capitalized
interest in 1997, 1996 or 1995. Interest capitalized on assets developed for the
Company's use are 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.
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 6)
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 fair market value of the
senior notes is $139.3 million at January 31, 1998, which are recorded at a book
value of $135.0 million. The Company estimates that the book value of all other
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: In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128 Earnings per Share ("SFAS 128"),
which specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS"). It replaces the presentation of primary and fully
diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is
based upon the weighted average number of common shares outstanding during the
period. Diluted EPS reflects the potential dilution that would occur if all
securities or other contracts to issue common stock were exercised or converted
into common stock. During Fiscal 1997, 1996 and 1995, there were 66,000, 22,000
and 66,000 stock options, respectively, were deemed to be dilutive. The Company
has adopted SFAS 128 as of January 31, 1998, as is required by FASB.
Accordingly, all periods presented have been restated as basic and diluted EPS.
There is no material difference between SFAS 128 presentation of EPS and the EPS
presented in prior reporting periods.
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 prior
Fiscal years contain certain reclassifications to conform with the presentation
used in Fiscal 1997. The consolidated financial statements have been restated to
reflect the Company's Gas Turbine Operations as a discontinued
operation.
Note 2: Discontinued Operations
Effective as of January 31, 1998, the Company completed the sale of the net
assets of the Gas Turbine Operations Division to the General Electric Company
for $600.0 million plus assumed liabilities, subject to adjustment. The Gas
Turbine Operations Division manufactures and services gas turbine driven
equipment including associated spare parts, provides contract operation and
maintenance services for power generation and petrochemical processing
facilities, and engages in the development and turnkey contraction of power
generation projects. The results of the Gas Turbine Operations Division have
been classified as discontinued operations in the accompanying financial
statements. The amounts classified as "Net assets of discontinued operations" in
the Fiscal 1996 consolidated balance sheet consist primarily of inventories and
receivables. Net earnings from discontinued operations for the eight months
ended September 30, 1997 (the pre-measurement period) includes interest expense
of approximately $9.9 million, which was allocated based on the ratio of net
assets to be discontinued to the sum of the total net assets of the consolidated
entity. The gain on disposal of discontinued operations includes interest
expense of approximately $3.9 million, allocated using the same method.
Summarized operating results of discontinued operations are as follows:
Twelve Months Ended
January 31
--------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
(Unaudited)
Sales $404,172 $361,974 $531,657
Gross profit 35,643 63,852 97,932
Income tax expense 37,217 6,744 17,911
Net earnings from discontinued
operations net of tax 5,424 12,083 41,105
Gain on disposal of discontinued operations,
net of tax 61,344 - -
Note 3: Industry Segment Data
The Power Products 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 Engineered Power Systems segment
primarily consists of the manufacturing of airline ground support equipment and
oil field well servicing equipment.
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, consisting primarily of cash and equivalents and investments,
are included in "Other Operations".
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 1997, 1996 and 1995 were $65.7 million, $83.2 million and
$53.8 million, respectively. Export sales to any single geographic region in
Fiscal 1997, 1996 and 1995 were not material to consolidated sales.
During Fiscal 1997 the Company incurred a $10.0 million litigation charge in
association with a 1987 contract to supply diesel generator sets for
installation at long range radar sites in Saudi Arabia (See Note 6: Commitments
and Contingencies). Also, during Fiscal 1997 the Company recorded a special
charge of $13.4 million relative to the settlement of a claim and a
special gain of $4.4 million related to the sale of the Company's John Deere
franchise in Houston, Texas (See Note 15).
During Fiscal 1996, a jury in Houston, Texas returned a $43.0 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 $20.0 million 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 1997
Power Products (1) $580,490 $36,031 $327,030 $17,915 $9,698
Tactical Vehicle Systems 396,734 (9,990) 179,090 1,510 8,313
Engineered Power Systems 124,194 (879) 107,294 6,999 2,734
Other 13,616 (685) 39,233 5,354 908
Discontinued Operations - - 600,000 - -
--------------- -------------- ---------------- --------------- ---------------
Total $1,115,034 $24,477 $1,252,647 $31,778 $21,653
=============== ============== ================ =============== ===============
Fiscal 1996
Power Products $508,305 $21,504 $290,011 $13,119 $7,699
Tactical Vehicle Systems 200,916 10,823 185,211 1,422 10,746
Engineered Power Systems 114,706 14,615 133,353 6,142 3,045
Other 1,260 528 18,295 620 536
Discontinued Operations - - 452,289 - -
--------------- -------------- ---------------- --------------- ---------------
Total $825,187 $47,470 $1,079,159 $21,303 $22,026
=============== ============== ================ =============== ===============
Fiscal 1995
Power Products $416,229 $23,590 $240,390 $10,780 $6,900
Tactical Vehicle Systems 189,009 9,703 175,174 2,111 10,349
Engineered Power Systems 96,045 14,433 154,893 2,049 2,023
Other 1,041 292 23,329 1,101 958
Discontinued Operations - - 354,840 - -
--------------- -------------- ---------------- --------------- ---------------
Total $702,324 $48,018 $948,626 $16,041 $20,230
=============== ============== ================ =============== ===============
(1) Operating profit of Power Products for Fiscal 1997 includes the $4,369 gain
on the sale of the Houston John Deere franchise.
A reconciliation of Operating Profit to Earnings (Loss) from Continuing
Operations before Income Taxes is as follows:
---------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
Operating profit $ 24,477 $47,470 $48,018
Corporate expenses, net (7,875) (8,345) (7,782)
Interest expense (15,440) (12,474) (7,344)
Settlement of litigation and special charge (23,352) (20,000) -
-------------- ---------------- -------------
Earnings (loss) from continuing operations before income taxes $(22,190) $6,651 $32,892
============== ================ ==============
Note 4: 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
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $1,137,220 $800,923
Accrued profits 19,440 31,571
--------------- ---------------
$1,156,660 $832,494
Less: Customer progress payments (1,018,892) (676,119)
--------------- ---------------
$137,768 $156,375
=============== ===============
Included in the statements of financial position:
Recoverable costs and accrued profits not yet billed $138,208 $156,375
Billings on uncompleted contracts in excess of incurred costs (440) -
=============== ===============
$137,768 $156,375
=============== ===============
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 $13,992 and $25,420 at January 31, 1998 and
1997, respectively. The Company's total general and administrative expenses
incurred amounted to $88,235, $83,092 and $69,730 in Fiscal 1997, 1996 and 1995,
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 5: Inventories
Summarized below are the components of inventories:
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Engineered Power Systems $47,017 $55,338
Customer deposits (466) (1,081)
--------------- ---------------
Total Engineered Power Systems 46,551 54,257
Power Products 166,918 149,166
Excess of current cost over LIFO values (45,892) (39,218)
--------------- ---------------
Total Inventories $167,577 $164,205
=============== ===============
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 includes
approximately $19.1 million of costs on a certain U.S. Government contract in
excess of contractual authorization for which the Company ultimately received
approximately $5.8 million, resulting in a Fiscal 1997 fourth quarter charge of
approximately $13.4 million. The Power Products 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. After adjusting for the
sale of the Gas Turbine Operations Division, 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
$1,446. In Fiscal 1997, the effect of the liquidation of LIFO inventory was
immaterial.
Note 6: Commitments and Contingencies
As a custom packager of power systems, the Company issues bid and performance
guarantees in the form of performance bonds or standby letters of credit.
Performance type letters of credit totaled approximately $29.3 million at the
close of Fiscal 1997. Additionally, the Company has outstanding, at January 31,
1998, letters of credit totaling approximately $7.1 million related to potential
future liabilities of a wholly owned cogeneration plant.
During Fiscal 1997, the Company entered a Plea Agreement and a Settlement
Agreement resolving all litigation relating to the 1987 contract to supply
diesel generator sets for installation in the Kingdom of Saudi Arabia (the
"Peace Shield Litigation"). This litigation was pending in the United States
District Court, Houston Division. The Company paid a $2.0 million criminal fine,
a $2.0 million civil penalty, and $3.0 million in restitution to the U.S. Air
Force. A $10.0 million provision for fines, penalties, restitution and certain
unrecognized legal fees in connection with the Peace Shield Litigation was made
in the third quarter of Fiscal 1997. After the end of Fiscal 1997, the Company
entered an Administrative Agreement with the U.S. Air Force that imposes certain
requirements on the Company intended to assure the U.S. Air Force that the
Company is a responsible government contractor. A default by the Company of the
requirements under the Administrative Agreement could result in the suspension
or debarment of the Company from receiving new contracts or subcontracts with
agencies of the U.S. Government or the benefit of federal assistance payments.
Any such suspension could prevent the Company from receiving future
modifications to the Family of Medium Tactical Vehicles ("FMTV") contract unless
the Secretary of the Army finds a compelling need to enter into such
modification. The 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. Any such suspension or
debarment could have a material adverse impact on the Company's financial
condition and results of operations.
The Company is a party to an arbitration proceeding before the American
Arbitration Association in Houston, Texas in which Engineering Design Group,
Inc. ("EDG") has asserted approximately $17 million in claims against the
Company, and the Company has asserted approximately $18 million in offsets,
back-charges and claims against EDG relating to a turnkey contract for the
construction and installation of a turbine power plant in Argentina by EDG. The
Company is not able to make a reasonable estimate of the possible outcome of
this matter. It is vigorously defending the claims that have been asserted
against it and is pursuing the claims it has made against EDG. If EDG is
successful on its claims against the Company and the damages are not offset in
whole or in part by the Company's claims against EDG, the Company's results of
operations for the reporting period in which these claims are resolved, could be
materially adversely affected.
The Company is also a party to an arbitration proceeding before the American
Arbitration Association in San Francisco, California in which Noell, Inc.
("Noell") has asserted approximately $6 million in damages arising from the sale
of turbine-driven equipment for installation in power plants located in Ceres,
California and Lodi, California. The liability, if any, relating to these claims
was assumed by GE as part of the Gas Turbine Operations Division.
The Company is a defendant in a number of other lawsuits relating to
contractual, product liability, personal injury and warranty matters and
otherwise of the type normally incident to the Company's business. Management is
of the opinion that such lawsuits will not result in any material liability to
the Company. The Company has not established any reserves or accruals for any
potential liability that may be subsequently found in any of the foregoing
cases, except as indicated above.
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. The maximum exposure of the Company related to
guarantees at January 31, 1998 is $160 million.
In conjunction with the acquisition of a cogeneration facility, the Company
acquired an operating lease whose payments will become due during Fiscal years
1998 through 2002. These payments are approximately: 1998 and 1999 - $5,850;
2000 - $6,192; 2001 and 2002 - $6,534; and beyond - $48,295. The Company has
recorded a liability at January 31, 1998 of approximately $2,468 based on a
straight line expense recognition of the required lease step rental payments.
The Company leases certain additional property and equipment under lease
arrangements of varying terms whose annual rentals are less than 1% of
consolidated sales.
Note 7: 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 FMTV contract. 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 8: 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, 1998 and 1997, the amounts outstanding under
these arrangements were $35,000 and $28,000, respectively, with a weighted
average interest rate of 6.11% for both periods. The amounts outstanding at
January 31, 1998 were paid on February 2, 1998 from the proceeds of the sale of
discontinued operations (See Note 2.)
Long-Term Debt, which is generally unsecured, consists of the following:
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Notes payable to insurance company:
-10.20%, principal due $1,000 annually to 1998 $1,000 $2,000
Debt of consolidated limited partnership:
-note payable to a bank, principal due monthly to 1998 (see note below) 8,700 8,800
Revolving credit notes payable to banks (see note below) 225,000 175,000
Senior Notes
6.72% principal due 1999 60,000 60,000
7.03% principal due 2001 20,000 20,000
7.29% principal due 2003 30,000 30,000
7.38% principal due 2006 25,000 25,000
Other 3,466 -
---------------- ---------------
373,166 320,800
Less current portion (see note below) (226,000) (1,100)
================ ===============
Long-Term Debt $147,166 $319,700
================ ===============
The Company has commitments of $250,000 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 February 3, 1998, the Company retired
$225,000 outstanding under the revolving credit notes from the proceeds of the
sale of the discontinued operations (See note 2). Simultaneously, the Company
reduced the banks' commitments to $150,000.
The Company's unsecured long-term debt, which includes the revolving credit
notes and senior notes, was issued pursuant to agreements containing covenants
that impose working capital requirements and debt to total capitalization
requirements on the Company and designated subsidiaries. These agreements also
include covenants that restrict indebtedness, guarantees, rentals and other
items.
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%.
The amounts of long-term debt which will become due during Fiscal 1998 through
2002, are approximately: 1998--$226,000; 1999--$68,700; 2000--$0; 2001--$20,000;
2002--$743 and beyond--$57,723.
Note 9: 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
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Service costs - benefits attributed to service during the period $422 $457 $527
Interest cost on accumulated postretirement medical benefit
obligation 500 528 620
Amortization of prior service costs (708) (874) (718)
============== ============== ===============
Net postretirement medical benefit costs $214 $111 $429
============== ============== ===============
Net postretirement medical benefit costs
Continuing operations $214 $81 $371
Discontinued operations - 30 58
-------------- -------------- ---------------
$214 $111 $429
============== ============== ===============
The status of the plan is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
January 31, January 31, January 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued Postretirement Benefits:
Retirees $3,819 $3,692 $4,642
Employees eligible to retire 1,505 1,696 2,073
Employees not eligible to retire 1,734 1,799 2,020
-------------- -------------- -------------
7,058 7,187 8,735
Unrecognized prior service cost 2,655 4,074 4,701
Unrecognized net gain 3,543 3,830 2,018
-------------- -------------- -------------
$13,256 $15,091 $15,454
============== ============== =============
The actuarial assumptions used are as follows:
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Discount Rate 7.25% 7.50%
Health Care Cost Trend 7.98% - 8.94% (a) 8.40% - 9.50% (b)
(a) Gradually declining to 5.00% by 2004
(b) Gradually declining to 5.00% by 2005
Changing the health care cost trend rates by one percentage point would change
the accumulated postretirement medical benefit obligation at January 31, 1998 by
approximately $1,170 and the postretirement medical benefit costs for Fiscal
1997 by approximately $186. The sale of the Gas Turbine Operations resulted in a
curtailment gain of $824 as of January 31, 1998. The Company has retained all
liabilities and obligations of its Gas Turbine Operations' plan participants up
to the date of the sale.
Note 10: 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
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $57,586 in 1997 and $48,193 in 1996 $60,853 $52,478
============= =============
Projected benefit obligation for service rendered to date $(69,610) $(66,129)
Plan assets at fair value for Fiscal 1997 and 1996;
primarily publicly traded stocks and bonds,
including 70,956 shares of the Company's Common
Stock at the end of both Fiscal 1997 and 1996 76,323 68,196
------------- --------------
Plan assets in excess of projected benefit obligations 6,713 2,067
Unrecognized net (loss) gain from past experience different from that assumed (1,312) 3,297
------------- -------------
Prepaid pension cost included in Investments and Other Assets $5,401 $5,364
============= =============
Net pension (income)/expense includes the following components:
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost -- benefits earned during the year $3,861 $3,674 $2,187
Interest cost on projected benefit obligation 4,734 4,360 3,800
Actual return on plan assets (10,445) (8,197) (2,782)
Amortization of unrecognized net gain - - (738)
Net amortization and deferrals 4,535 2,635 (2,494)
------------- ------------- -------------
Net periodic pension (income) expense $2,685 $2,472 $(27)
Net periodic pension (income) expense
Continuing operations $1,684 $1,483 $(303)
Discontinued operations 1,001 989 276
------------ ----------- ------------
$2,685 $2,472 $(27)
============ =========== ============
The actuarial assumptions used are as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Discount Rate 7.25% 7.50%
Long-term rate of return on assets 9.50% 9.50%
Rate of increase in future compensation 4.75% 4.50% - 5.00%
The expected return on plan assets is determined based on the expected long-term
rate of return and the market-related value of plan assets. The market-related
value of plan assets for Fiscal 1997, Fiscal 1996, and Fiscal 1995 was
determined using the calculated value.
The sale of the Gas Turbine Operations resulted in a curtailment as defined by
SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits". The impact of the
curtailment was a net gain of $2,722, which includes a decrease in the projected
benefit obligation of $2,931 as of January 31, 1998. The Company has retained
all liabilities and obligations of the Gas Turbine Operations' plan participants
up to the date of sale.
Effective June 1997, the Company terminated 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
1997, 1996 and 1995, respectively, was $47, $59 and $141.
The Company has an unfunded supplemental retirement plan for certain corporate
officers. Retirement expense for the plan in Fiscal 1997, 1996 and 1995 was
$486, $406 and $459, respectively. Prior service cost not yet recognized in
periodic pension cost was $1,418, $1,547, and $1,676, at January 31, 1998, 1997
and 1996, 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 for continuing operations was $817, $670 and
$507 in Fiscal 1997, 1996 and 1995, 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 11: Common Stock
Stock Repurchase Program: On October 31, 1997 the Company's Board of Directors
authorized the repurchase of up to $120 million in its common stock. In December
1997, the Company entered into an equity forward contract to acquire up to
1,650,000 shares at a determinable price. Subsequent to January 31, 1998, the
Company completed the repurchase of 1,650,000 shares for $40.5 million under
this contract. This contract did not have a material impact on the calculation
of earnings per share for Fiscal 1997.
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 3,300,000,
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
amended terms of the 1988 Nonstatutory Stock Option Plan, the number of options
available for grant increased from 1,800,000 to 3,300,000 shares as of June 10,
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 1995, 1996 and 1997 is presented in the tables below:
- -----------------------------------------------------------------------------------------------------------------------------------
Option Price
Shares under Range
Option Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
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
Granted 375,900 $20.00 - $28.125
Exercised (70,000) $18.75
Canceled (73,175) $18.75 - $50.25
-----------
Outstanding at end of Fiscal 1997 1,367,725 $20.00 - $50.25
Options available for future grants at the end of Fiscal 1997 2,035,625
===========
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 552,050 414,917
Weighted average exercise price of options exercisable $ 35.61 $ 33.58
Weighted average fair value of options granted $ 12.23 $ 9.59
------------------------- ------------------------ ------------------------ -- ------------------------ ------------------------
Weighted Average Remaining Contractual
Exercise Price Exercise Price Options Outstanding Options Exercisable Life (Years)
------------------------- ------------------------ ------------------------ -- ------------------------ ------------------------
$20.00 - $35.125 $31.66 1,211,125 434,600 5 - 10
$50.25 $50.25 156,600 117,450 7
======================== ========================
1,367,725 552,050
======================== ========================
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
1997 1996
----------------------------------------------------------------------------------- ---------------------- ----------------------
Net earnings As Reported $52,263 $16,851
Pro Forma $49,869 $15,498
Net earnings per share As Reported $1.57 $.51
Pro Forma $1.50 $.47
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 1997 and 1996:
----------------------------------------------------------------------------------- ---------------------- ----------------------
Fiscal Fiscal
1997 1996
----------------------------------------------------------------------------------- ---------------------- ----------------------
1988 Nonstatutory Stock Option Plan and 1993
Nonofficer Stock Option Plan
Risk free interest rates 6.61% 6.13%
Expected dividend yields 0.34% 1.30%
Expected volatility 39.21% 34.42%
Expected life (years) 10 6
1994 Director Stock Option Plan
Risk free interest rates 6.79% 6.79%
Expected dividend yields 1.30% 1.30%
Expected volatility 35.24% 35.24%
Expected life (years) 6 6
1996 Director Stock Option Plan
Risk free interest rates 6.93% N/A
Expected dividend yields 0.50% N/A
Expected volatility 39.28% N/A
Expected life (years) 10 N/A
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
options, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Note 12: Income Taxes
The components of the income tax provision and the income tax payments are as
follows:
---------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
Current $4,990 $(6,083) $2,337
Deferred (13,065) 7,859 10,417
------------- ------------- -------------
Income tax provision $(8,075) $1,776 $12,754
============= ============= =============
Income tax payments (excluding refunds) $15,378 $15,320 $13,337
============= ============= =============
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
1997, 1996 and 1995 is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Provision at statutory rates $(7,767) $ 2,328 $11,512
Other (308) (552) 1,242
------------- ------------- --------------
$(8,075) $ 1,776 $12,754
============= ============= ==============
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 1997 and 1996 are as follows:
---------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1997 1996
---------------------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets
Postretirement benefit obligation $ 4,640 $ 5,282
Accrued expenses and other reserves 3,113 5,257
Other 33 33
------------- -------------
Gross deferred tax assets 7,786 10,572
------------- -------------
Deferred Tax Liabilities
Property, plant and equipment 2,544 3,253
Pension accounting 1,273 1,114
Contract accounting 6,334 32,880
Prepaid expenses and deferred charges 96,938 50,918
Other 11,842 9,927
------------- -------------
Gross deferred tax liabilities 118,931 98,092
------------- -------------
Net deferred tax liability $111,145 $87,520
============= =============
Current portion of deferred tax liability $108,246 $82,393
Non-current portion of deferred tax liability 2,899 5,127
------------- -------------
Net deferred tax liability $111,145 $ 87,520
============= =============
Note 13: Supplemental Financial Data
Accounts and notes receivables, net consist of the following:
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Accounts receivable $180,388 $157,073
Notes receivable 26,119 16,695
Allowance for doubtful accounts (2,236) (1,086)
Less non-current portion of notes receivable (19,238) (12,275)
-------------- -------------
$185,033 $160,407
============== =============
The U.S. Government accounted for approximately 22.5% and 10.9% of accounts
receivable, exclusive of the receivable due from GE, at January 31, 1998 and
1997, 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 1997, 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
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Machinery and equipment $111,931 $106,990
Buildings and leasehold improvements 80,511 74,315
Revenue earning assets 17,118 14,075
Accumulated depreciation and amortization (129,408) (118,922)
-------------- -------------
80,152 76,458
Construction-in-progress 3,607 2,373
Land 13,985 12,747
-------------- -------------
$97,744 $91,578
============== =============
Note 14: Consolidated Quarterly Data (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $334,297 $298,998 $248,778 $232,961
Gross profit (8,723) 33,693 30,238 27,777
Net earnings (loss) - Continuing (29,689) 3,524 6,390 5,270
Net earnings (loss) - Discontinued 356 (1,382) 1,838 4,612
Gain on disposal of discontinued operations, net of tax 61,344 - - -
Net earnings (loss) per share: Basic and Diluted
Continuing operations (.90) .11 .19 .16
Discontinued operations .01 (.04) .06 .14
Gain on disposal 1.85 - - -
---------- ----------- ----------- ---------
Net earnings per share $ .96 .07 .25 30
========== =========== =========== ============
Fiscal 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $284,951 $231,632 $159,982 $148,622
Gross profit 32,465 25,430 24,120 20,702
Net earnings (loss) - Continuing 6,253 4,182 (7,474) 1,807
Net earnings (loss) - Discontinued 4,383 3,007 (213) 4,906
Net earnings (loss) per share: - Basic and Diluted
Continuing operations .19 .13 (.23) .05
Discontinued operations .13 .09 - .15
---------- ---------- ---------- -----------
Net earnings (loss) per share $ .32 $ .22 $(.23) $ .20
========== =========== =========== ============
Note 15: Acquisitions and Divestiture
On April 12, 1997, the Company acquired Sierra Detroit Diesel Allison, Inc., a
Detroit Diesel distributor whose franchise covers northern California. The
purchase price totaled approximately $5.0 million. The assets and operations of
the franchise prior to the acquisition are not material to the Company's
consolidated assets or earnings.
On September 12, 1997, the Company acquired ownership of Carson Cogeneration,
LLP, a California independent power producer. The purchase price totaled
approximately $3.7 million. The assets and operating results of the plant prior
to the acquisition are not material to the Company's consolidated assets or
earnings.
On October 6, 1997, the Company sold its construction equipment franchise for
$30.2 million. The construction equipment franchise operated in the gulf coast
territory of Texas and primarily distributed, and provided services for,
products manufactured by John Deere Construction Equipment Company and other
companies engaged in the business of manufacturing earth moving equipment,
forestry equipment, skidsteer equipment, and utility equipment. An estimated
gain of $4.4 million was recognized on the sale.
On March 30, 1998, the Company acquired the assets of Compression Specialties,
Inc., a compression equipment distributor in the business of leasing and
servicing compression equipment in the State of Wyoming and the surrounding
Rocky Mountain area. The purchase price totaled approximately $9.45 million. The
assets and operations of this business prior to the acquisition would not have
been material to the Company's consolidated assets or earnings.
Note 16: Vulnerability Due To Certain Concentrations
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. The Company's Tactical Vehicle Systems segment's
products are generally sold to the U.S. Government. (See Note 7:
Government Contracts).
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 Election of Directors; Executive
Officers of the Registrant........ Officers; Section 16(a)
Beneficial Ownership Reporting
Compliance
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 Voting Securities and Ownership
Certain Beneficial Owners Thereof by Certain Beneficial
and Management................. Owners and Management
Item 13. Certain Relationships Transactions with Management
and Related Transactions....... 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, 1998 and 1997.
Consolidated Statements of Earnings--Years ended January 31, 1998, 1997 and
1996.
Consolidated Statements of Shareholders' Equity--Years ended January
31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows--Years ended January 31, 1998,
1997 and 1996.
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 22, 1998, 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.
*2.1 Transaction Agreement dated September 21, 1997 between General
Electric Company and Stewart & Stevenson Services, Inc. (Exhibit 2.1 to 9/97
8-K).
*3.1 Third Restated Articles of Incorporation of Stewart & Stevenson
Services, Inc., effective as of September 13, 1995 (Exhibit 3(a) to 10/95 10-Q).
3.2 Fifth Restated Bylaws of Stewart & Stevenson Services, Inc., effective
as of April 14, 1998.
*4.1 Note Purchase Agreement effective May 30, 1996, between Stewart &
Stevenson Services, Inc. and the Purchasers named therein (Exhibit 4 to 7/96
10-Q).
*4.2 Rights Agreement effective March 13, 1995, between Stewart & Stevenson
Services, Inc. and The Bank of New York (Exhibit 1 to Form 8-A Registration
Statement 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 (Exhibit 10.1 to 1/97
10-Q).
*10.2 Distributor Sales and Service Agreement effective January 1, 1996,
between the Company and Detroit Diesel Corporation (Exhibit 10.2 to 1/96 10-K).
*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 (Exhibit 28.1 of the Form S-3
Registration Statement 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 (Exhibit 28.2 of the Form S-3
Registration Statement under the Commission File No. 33-44149).
*10.5 Stewart & Stevenson Services, Inc. Deferred Compensation Plan dated
as of December 31, 1979 (Exhibit 10.8 to 1/94 10-K).
*10.6 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option
Plan (as amended and restated effective as of June 10, 1997) (Exhibit B to
5/9/97 Proxy Statement).
*10.7 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement
Plan (Exhibit 10.11 to 1/94 10-K).
*10.8 Stewart & Stevenson Services, Inc. 1996 Director Stock Option Plan
(Exhibit A to 5/9/97 Proxy Statement).
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
27.1 Financial Data Schedule.
----------
* Incorporated by reference.
(b) Form 8-K Report Date - February 16, 1998 (GE Transaction completed)
Items reported - Item 2. Disposition of Assets
Item 7. Financial Statements
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 30th day of April,
1998.
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 30th day of April, 1998.
/s/ Robert L. Hargrave /s/ Orson C Clay
- ----------------------------------------- ---------------------------------
Robert L. Hargrave Orson C Clay
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.
- ----------------------------------------- ---------------------------------
Jack W. Lander, Jr. Jack T. Currie
Director Director
/s/ Robert S. Sullivan /s/ Brian H. Rowe
- ----------------------------------------- ---------------------------------
Robert S. Sullivan Brian H. Rowe
Director Director
EXHIBIT INDEX
Exhibit Number and Description
3.2 Fifth Restated Bylaws.
21.1 List of subsidiaries.
23.1 Consent of Arthur Andersen LLP,
Independent Public Accountants.
27.1 Financial Data Schedule.