Attached files
file | filename |
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EX-32.2 - CERTIFICATION - Stewart & Stevenson LLC | exh32-2.htm |
EX-32.1 - CERTIFICATION - Stewart & Stevenson LLC | exh32-1.htm |
EX-31.1 - CERTIFICATION - Stewart & Stevenson LLC | exh31-1.htm |
EX-31.2 - CERTIFICATION - Stewart & Stevenson LLC | exh31-2.htm |
United
States Securities and Exchange Commission
Washington,
D.C. 20549
FORM
10-Q
þ
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
quarterly period ended October 31, 2009
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 001-33836
Stewart
& Stevenson LLC
(Exact
name of registrant as specified in its charter)
Delaware
|
20-3974034
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
1000
Louisiana St., Suite 5900, Houston, TX
|
77002
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(713)
751-2700
(Registrant’s
telephone number including area code)
None
(Former
name, former address, and former fiscal year if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or if 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 þ * No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or if such shorter period that the
registrant was required to submit and post such files).
Yes þ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one):
Large
accelerated ¨ Accelerated
filer ¨ Non-accelerated
filer þ Smaller
reporting company filer ¨
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2) Yes ¨ No þ
There is
no market for the registrant’s equity. As of December 11, 2009, there
were 100,005,000 common units outstanding.
* The
registrant is currently not required to file reports, including this report, by
Section 13 or 15(d) of the Securities Exchange Act of 1934 but is voluntarily
filing this report with the Securities and Exchange Commission.
1
STEWART
& STEVENSON LLC AND SUBSIDIARIES
Part
I.
|
Financial
Information
|
Page
|
|||
Item
1.
|
Financial
Statements
|
||||
3
|
|||||
4
|
|||||
5
|
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6
|
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Item
2.
|
17
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Item
3.
|
24
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||||
Item
4.
|
25
|
||||
Part
II.
|
Other
Information
|
||||
Item
1.
|
25
|
||||
Item
1A.
|
25
|
||||
Item
2.
|
26
|
||||
Item
3.
|
26
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Item
4.
|
26
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Item
5.
|
26
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Item
6.
|
26
|
PART
I.
|
FINANCIAL
INFORMATION
|
Item
1. Financial
Statements
Stewart
& Stevenson LLC and Subsidiaries
|
|||||||
As
of
|
|||||||
(In
thousands, except units)
|
October
31, 2009
|
January
31, 2009
|
|||||
(Unaudited)
|
|||||||
Assets
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$ | 2,857 | $ | 2,006 | |||
Restricted
cash
|
3,000 | 3,000 | |||||
Accounts
receivable, net
|
120,975 | 148,330 | |||||
Recoverable
costs and accrued profits not yet billed
|
16,741 | 54,975 | |||||
Inventories,
net
|
279,780 | 293,207 | |||||
Other
current assets
|
9,241 | 5,650 | |||||
Total
current assets
|
432,594 | 507,168 | |||||
Property,
plant and equipment, net
|
83,281 | 93,170 | |||||
Goodwill
and intangibles, net
|
46,289 | 44,622 | |||||
Deferred
financing costs and other assets
|
8,258 | 9,002 | |||||
Total
assets
|
$ | 570,422 | $ | 653,962 | |||
Liabilities
and shareholders' equity
|
|||||||
Current
liabilities:
|
|||||||
Bank
notes payable
|
$ | 8,198 | $ | 4,921 | |||
Current
portion of long-term debt
|
103 | 212 | |||||
Accounts
payable
|
52,627 | 87,383 | |||||
Accrued
payrolls and incentives
|
7,514 | 10,854 | |||||
Billings
in excess of incurred costs
|
26,485 | 27,960 | |||||
Customer
deposits
|
8,723 | 20,547 | |||||
Other
current liabilities
|
49,725 | 41,717 | |||||
Total
current liabilities
|
153,375 | 193,594 | |||||
Long-term
debt, net of current portion
|
248,723 | 280,237 | |||||
Other
long-term liabilities
|
563 | 187 | |||||
Total
liabilities
|
402,661 | 474,018 | |||||
Commitments
and contingencies
|
|||||||
Shareholders'
equity:
|
|||||||
Common
units, 100,005,000 units issued and outstanding
|
74,113 | 74,113 | |||||
Accumulated
other comprehensive income (loss)
|
3,849 | (3,762 | ) | ||||
Retained
earnings
|
89,799 | 109,593 | |||||
Total
shareholders' equity
|
167,761 | 179,944 | |||||
Total
liabilities and shareholders' equity
|
$ | 570,422 | $ | 653,962 | |||
See
accompanying Notes to Condensed Consolidated Financial
Statements
|
Stewart
& Stevenson LLC and Subsidiaries
|
|||||||||||||
(Unaudited)
|
|||||||||||||
For
the Three Months Ended
|
For
the Nine Months Ended
|
||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
||||||||||
(In
thousands, except per unit data)
|
|||||||||||||
Sales
|
$ | 167,263 | $ | 307,739 | $ | 530,596 | $ | 960,206 | |||||
Cost
of sales
|
143,591 | 250,130 | 442,072 | 783,099 | |||||||||
Gross
profit
|
23,672 | 57,609 | 88,524 | 177,107 | |||||||||
Selling
and administrative expenses
|
25,691 | 34,839 | 88,367 | 105,523 | |||||||||
Other
expense (income), net
|
208 | 489 | (1,394 | ) | 1,886 | ||||||||
Operating
(loss) profit
|
(2,227 | ) | 22,281 | 1,551 | 69,698 | ||||||||
Interest
expense, net
|
5,568 | 6,249 | 16,293 | 18,802 | |||||||||
(Loss)
earnings before income taxes
|
(7,795 | ) | 16,032 | (14,742 | ) | 50,896 | |||||||
Income
tax expense (benefit)
|
393 | 234 | (516 | ) | 1,466 | ||||||||
Net
(loss) earnings
|
$ | (8,188 | ) | $ | 15,798 | $ | (14,226 | ) | $ | 49,430 | |||
Weighted
average units outstanding:
|
|||||||||||||
Basic
|
100,005 | 100,005 | 100,005 | 100,005 | |||||||||
Diluted
|
100,005 | 100,005 | 100,005 | 100,005 | |||||||||
Net
(loss) earnings per common unit:
|
|||||||||||||
Basic
|
$ | (0.08 | ) | $ | 0.16 | $ | (0.14 | ) | $ | 0.49 | |||
Diluted
|
$ | (0.08 | ) | $ | 0.16 | $ | (0.14 | ) | $ | 0.49 | |||
See
accompanying Notes to Condensed Consolidated Financial
Statements
|
Stewart
& Stevenson LLC and Subsidiaries
|
|||||||
(Unaudited)
|
|||||||
For
the Nine Months Ended
|
|||||||
(In
thousands)
|
October
31, 2009
|
November
1, 2008
|
|||||
Operating
activities
|
|||||||
Net
(loss) earnings
|
$ | (14,226 | ) | $ | 49,430 | ||
Adjustments
to reconcile net (loss) earnings to net cash
|
|||||||
provided
by operating activities:
|
|||||||
Amortization
of deferred financing costs
|
1,509 | 1,477 | |||||
Other
non-cash items
|
249 | - | |||||
Depreciation
and amortization
|
14,257 | 13,380 | |||||
Change
in operating assets and liabilities:
|
|||||||
Accounts
receivable, net
|
28,394 | (24,668 | ) | ||||
Recoverable
costs and accrued profits not yet billed
|
39,853 | (40,126 | ) | ||||
Inventories
|
17,268 | 4,617 | |||||
Accounts
payable
|
(35,766 | ) | 21,481 | ||||
Accrued
payrolls and incentives
|
(3,598 | ) | (1,617 | ) | |||
Billings
in exess of incurred costs
|
(1,508 | ) | (2,058 | ) | |||
Customer
deposits
|
(11,994 | ) | 383 | ||||
Other
current assets and liabilities
|
5,681 | 4,191 | |||||
Other,
net
|
(2,040 | ) | (1,479 | ) | |||
Net
cash provided by operating activities
|
38,079 | 25,011 | |||||
Investing
activities
|
|||||||
Capital
expenditures
|
(2,659 | ) | (6,737 | ) | |||
Additions
to rental equipment
|
(729 | ) | (15,759 | ) | |||
Disposal
of property, plant and equipment, net
|
413 | 7 | |||||
Net
cash used in investing activities
|
(2,975 | ) | (22,489 | ) | |||
Financing
activities
|
|||||||
Change
in short-term notes payable
|
2,471 | 2,909 | |||||
Deferred
financing costs
|
(375 | ) | (375 | ) | |||
Changes
in long-term revolving loans
|
(31,518 | ) | 13,089 | ||||
Distributions
to shareholders for tax obligations
|
(5,568 | ) | (28,599 | ) | |||
Net
cash used in financing activities
|
(34,990 | ) | (12,976 | ) | |||
Effect
of exchange rate on cash
|
737 | 252 | |||||
Increase
(decrease) in cash and cash equivalents
|
851 | (10,202 | ) | ||||
Cash
and cash equivalents, beginning of fiscal period
|
2,006 | 12,382 | |||||
Cash
and cash equivalents, end of fiscal period
|
$ | 2,857 | $ | 2,180 | |||
Cash
paid for:
|
|||||||
Interest
|
$ | 11,306 | $ | 13,458 | |||
Income
taxes
|
$ | 2,769 | $ | 3,264 | |||
See
accompanying Notes to Condensed Consolidated Financial
Statements
|
Stewart & Stevenson LLC |
Notes to Condensed Consolidated Financial Statements |
(Unaudited) |
Note 1. Company Overview
Stewart &
Stevenson LLC, headquartered in Houston, Texas, was formed in November 2005 for
the purpose of acquiring from Stewart & Stevenson Services, Inc.
(“SSSI”) and its affiliates on January 23, 2006 substantially all of their
equipment, aftermarket parts and service and rental businesses that primarily
served the oil and gas industry as well as the perpetual rights to the
Stewart & Stevenson name and logo for use worldwide (the “SSSI
Acquisition”). Unless otherwise indicated or the context otherwise
requires, the terms “Stewart & Stevenson,” the “Company,” “we,” “our” and
“us” refer to Stewart & Stevenson LLC and its
subsidiaries.
We are a
leading designer, manufacturer and marketer of specialized equipment and provide
aftermarket parts and service to the oil and gas and other industries. Our
diversified product lines include equipment for well stimulation, well servicing
and workover rigs, drilling rigs, coiled tubing, cementing, nitrogen pumping,
power generation and electrical systems as well as engines, transmissions and
material handling equipment. We have a substantial installed base of equipment,
which provides us with significant opportunities for recurring, higher-margin
aftermarket parts and service revenues, and we also provide rental equipment to
our customers.
Note
2. Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with Rule 10-01 of Regulation S-X for
interim financial statements and do not include all information and footnotes
required by United States (“U.S.”) generally accepted accounting principles
(“GAAP”) for complete financial statements. However, the information
furnished herein reflects all normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented. The results of operations for the three
and nine months ended October 31, 2009 are not necessarily indicative of the
results that will be realized for the fiscal year ending January 31, 2010. These
condensed consolidated financial statements should be read in conjunction with
our Annual Report on Form 10-K and the notes thereto for the year ended January
31, 2009.
Use of Estimates and
Assumptions: The preparation of financial statements in conformity with
U.S. GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the 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 may
differ from these estimates.
Fiscal Year: Our fiscal year
begins on February 1 of the year stated and ends on January 31 of the following
year. For example, our “Fiscal 2009” commenced on February 1, 2009
and will end on January 31, 2010. We report results on the fiscal
quarter method with each quarter comprising approximately 13 weeks. The third
quarter of Fiscal 2009 commenced on August 2, 2009 and ended on October 31,
2009.
Consolidation: The
consolidated financial statements include the accounts of Stewart &
Stevenson LLC and all enterprises in which we have a controlling
interest. All intercompany accounts and transactions have been
eliminated. We do not have any variable-interest entities.
Reclassifications: Certain
reclassifications have been made in the prior year consolidated financial
statements to conform to the current period presentation. During the second
quarter of 2009, the Company reclassified accrued contract costs from accounts
payable and inventories, net to other current liabilities.
Recent
Accounting Pronouncements
Business
Combinations: In December 2007, the Financial Accounting
Standards Board (“FASB”) issued revised and clarified authoritative guidance on
how acquirers recognize and measure the consideration transferred, identifiable
assets acquired, liabilities assumed, non-controlling interests and goodwill
acquired in a business combination. The required disclosures surrounding the
nature and financial effects of business combinations have also been
expanded. The new guidance was effective prospectively for fiscal years
beginning after December 15, 2008. The Company adopted the revised guidance
on February 1, 2009 and it is expected to impact certain aspects of our
accounting for any future acquisitions or other business combinations which may
be consummated, including the accounting for acquisition costs and determination
of fair values assigned to certain purchased assets and
liabilities.
Disclosures about Derivative
Instruments and Hedging Activities: In March 2008, the FASB
issued new and expanded authoritative guidance that requires qualitative
disclosures about a company’s objectives and strategies with respect to its use
of derivative instruments, quantitative disclosures about the fair value, gains
and losses of its derivative contracts and details of credit-risk-related
contingent features in hedged positions. This guidance requires disclosure of
how and why a company uses and accounts for derivative instruments and their
related hedged items and their effects on its financial position, financial
performance and cash flows. The new guidance was effective prospectively for
fiscal years beginning on or after November 15, 2008. The Company adopted the
new guidance on February 1, 2009 and it did not have a material impact on the
notes and disclosures to our consolidated financial statements.
Determination of the Useful Life of
Intangible Assets: In April 2008, the FASB provided new
authoritative guidance that revised the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. The goal of this guidance is to
improve the consistency between the useful life of a recognized intangible asset
and the period of expected cash flows used to measure the fair value of the
asset. This new guidance was effective for fiscal years beginning
after December 15, 2008. The Company adopted the new guidance on
February 1, 2009 and it may impact certain aspects of our accounting for
intangible assets and the determination of useful lives assigned to them in any
future acquisitions or other business combinations.
Subsequent
Events: In May 2009, the FASB established standards
related to accounting for and disclosure of events occurring after the balance
sheet date and prior to issuance of the financial statements. This standard sets
the period during which management must evaluate events for inclusion via
recognition and/or disclosure in the financial statements. The
standard also defines events as either recognized or non-recognized and requires
disclosure of the date through which events were evaluated. We have adopted the
provisions of this new standard, which became effective for interim and annual
reporting periods ending after June 15, 2009. Subsequent events have
been evaluated through the date the third quarter financial statements were
issued on December 15, 2009 and have been either recognized and/or disclosed,
when necessary, in our current period financial statements.
Note
3. Comprehensive Income
Total
comprehensive income was as follows:
For
the Three Months Ended
|
For
the Nine Months Ended
|
||||||||||||
(In
thousands)
|
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||
Net
(loss) earnings
|
$ | (8,188 | ) | $ | 15,798 | $ | (14,226 | ) | $ | 49,430 | |||
Currency
translation (loss) gain
|
(2 | ) | (11,076 | ) | 7,612 | (11,342 | ) | ||||||
Comprehensive
(loss) gain
|
$ | (8,190 | ) | $ | 4,722 | $ | (6,614 | ) | $ | 38,088 |
The local
currency is the functional currency for our South American and Canadian
subsidiaries and, as such, assets and liabilities are translated into U.S.
dollars at the period end exchange rates. Income and expense items
are translated at the average exchange rates during the
period. Translation adjustments resulting from changes in exchange
rates are reported in other comprehensive income. As of October 31,
2009 and November 1, 2008, the entire accumulated and other comprehensive (loss)
gain consisted of currency translation adjustments.
Note
4. Segment Data
Our
reportable operating segments are based on the types of products and services
offered and are aligned with our internal management
structure. Inter-segment and intra-segment revenues and costs are
eliminated, and the operating profit represents the earnings before interest and
income taxes.
Our
reportable segments include:
Equipment – This segment
designs, manufactures, constructs and markets equipment for well stimulation,
drilling and well servicing rigs, coiled tubing, cementing, nitrogen pumping,
power generation and electrical systems, serving the oil and gas
industry. This segment also sells engines, transmissions and material
handling equipment for well servicing, workover, drilling, pumping and other
applications for a wide range of other industries.
Aftermarket Parts and Service –
This segment provides aftermarket parts and service for
products we manufacture and products manufactured by others, to
customers in the oil and gas industry as well as customers in the power
generation, marine, mining, construction, commercial vehicle and material
handling industries.
Rental – This segment
provides equipment on a short-term rental basis, including generators, material
handling equipment and air compressors, to a wide range of
end-markets.
Corporate – This segment
includes administrative overhead normally not associated with the specific
activities within the operating segments. Such expenses include
legal, finance and accounting, internal audit, human resources, information
technology and other similar corporate office costs.
Certain
general and administrative costs which are incurred to support all operating
segments are allocated to the segment operating results presented. Operating
results by segment are as follows:
For
the Three Months Ended
|
For
the Nine Months Ended
|
||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
||||||||||
(In
thousands)
|
|||||||||||||
Sales
|
|||||||||||||
Equipment
|
$ | 96,551 | $ | 188,945 | $ | 303,883 | $ | 630,624 | |||||
Aftermarket
parts and service
|
65,873 | 99,620 | 211,489 | 295,654 | |||||||||
Rental
|
4,839 | 19,174 | 15,224 | 33,928 | |||||||||
Total
sales
|
$ | 167,263 | $ | 307,739 | $ | 530,596 | $ | 960,206 | |||||
Operating
profit (loss)
|
|||||||||||||
Equipment
|
$ | 3,725 | $ | 15,168 | $ | 14,291 | $ | 55,607 | |||||
Aftermarket
parts and service
|
2,198 | 12,283 | 14,351 | 33,759 | |||||||||
Rental
|
417 | 5,369 | 1,573 | 8,121 | |||||||||
Corporate
|
(8,567 | ) | (10,539 | ) | (28,664 | ) | (27,789 | ) | |||||
Total
operating (loss) profit
|
$ | (2,227 | ) | $ | 22,281 | $ | 1,551 | $ | 69,698 | ||||
Operating
profit (loss) percentage
|
|||||||||||||
Equipment
|
3.9 | % | 8.0 | % | 4.7 | % | 8.8 | % | |||||
Aftermarket
parts and service
|
3.3 | 12.3 | 6.8 | 11.4 | |||||||||
Rental
|
8.6 | 28.0 | 10.3 | 23.9 | |||||||||
Consolidated
|
(1.3 | ) % | 7.2 | % | 0.3 | % | 7.3 | % |
Note 5. Long-Term
Debt
As
of
|
|||||||
October
31, 2009
|
January
31, 2009
|
||||||
(In
thousands)
|
|||||||
Unsecured
senior notes
|
$ | 150,000 | $ | 150,000 | |||
Revolving
credit facility
|
98,668 | 130,219 | |||||
Other
debt
|
8,356 | 5,151 | |||||
Total
|
257,024 | 285,370 | |||||
Less: current
portion of other debt
|
(8,301 | ) | (5,133 | ) | |||
Long-term
debt, net of current portion
|
$ | 248,723 | $ | 280,237 |
Revolving Credit Facility: In
February 2007, we amended our senior credit facility, increased the revolving
facility to $250.0 million and added a $25.0 million sub-facility to be used by
our Canadian subsidiary. The amended $250.0 million revolving credit
facility, which matures in February 2012, is an asset-based revolving credit
facility which is secured by substantially all accounts receivable, inventory
and property, plant and equipment and provides for borrowings at LIBOR plus a
margin ranging from 1.25% to 2.00% per annum, based on our leverage ratios, as
specified in the credit agreement. As of October 31, 2009, borrowings
under the facility bear interest at a weighted average interest rate of
2.45%. A commitment fee of 0.30% to 0.375% per annum is payable on
all unused portions of the revolving credit facility based on our leverage
ratios. Interest payments are due monthly, or as LIBOR contracts
expire. The revolving credit facility also has a $30.0 million
sub-facility which may be used for letters of credit. The credit agreement
limits available borrowings to certain percentages of our assets. As of October
31, 2009, there were $20.4 million of letters of credit
outstanding. Based on the outstanding borrowings, letters of credit
issued and the terms of the asset-based revolving credit facility, our available
borrowing capacity was approximately $60.0 million at October 31,
2009.
Unsecured Senior Notes:
During the second quarter of Fiscal 2006, we issued $150.0 million of
unsecured senior notes, bearing interest at 10% per annum and maturing in July
2014.
The
revolving credit facility and the senior notes contain financial and operating
covenants with which we must comply during the terms of the
agreements. These covenants include the maintenance of certain
financial ratios, restrictions related to the incurrence of certain indebtedness
and investments, and prohibition of the creation of certain liens. We were
in compliance with all covenants as of October 31, 2009. The
financial covenant for the revolving credit facility requires that we maintain a
fixed charge coverage ratio, as defined in the agreement, of at least 1.1 to
1.0; however, this covenant does not take effect until our available borrowing
capacity is $30.0 million or less. The financial covenant for the
senior notes indenture requires that, were we to incur additional indebtedness
(subject to various exceptions set forth in the indenture), after giving effect
to the incurrence of such additional indebtedness, we have a consolidated
coverage ratio, as defined in the indenture, of at least 2.5 to
1.0.
We
incurred $3.3 million of capitalized legal and financing charges associated with
establishing the original $250.0 million senior credit facility, which are being
amortized over the five year term of the facility. As a result of the
amendment reducing the facility to $125.0 million in June 2006, we recorded a
$1.5 million non-cash charge during the second quarter of Fiscal 2006 as
interest expense. We also incurred $5.1 million of capitalized legal
and financing charges associated with the issuance of the $150.0 million of
senior notes during the second quarter of Fiscal 2006. These costs
are being amortized over the eight year term of the notes. During the
first quarter of Fiscal 2007, we incurred $2.2 million of capitalized legal and
financing costs associated with the February 2007 amendment to the senior credit
facility. As of October 31, 2009, $6.1 million of unamortized costs are
included in the balance sheet.
The
estimated fair value of our senior notes is based on quoted market prices (Level
1). At October 31, 2009, our senior notes with a carrying value of $150.0
million had a fair value of $138.0 million.
Other debt: Other debt
includes certain secured loans from our South American operations, a floor plan
financing agreement and other equipment loans. The restricted cash on
our balance sheet relates to collateral securing certain of this
debt.
Guarantor
entities: The senior notes were co-issued by Stewart &
Stevenson LLC and Stewart & Stevenson Funding Corp. and are guaranteed by
all of our subsidiaries except one domestic subsidiary, one subsidiary in Canada
and two subsidiaries in South America. Stewart & Stevenson LLC and all
of its subsidiaries except one domestic subsidiary, one subsidiary in Canada and
two subsidiaries in South America are co-borrowers on the $250.0 million
revolving credit facility.
The
following condensed consolidating financial statements present separately the
financial position, results of operations and cash flows of the
co-issuers/guarantors (“Guarantor Entities”), and all non-guarantor subsidiaries
of the Company (“Non-Guarantor Entities”) based on the equity method of
accounting.
Condensed
Consolidating Balance Sheets
|
|||||||||||||
As
of October 31, 2009
|
|||||||||||||
(Unaudited)
|
|||||||||||||
Guarantor
Entities
|
Non-Guarantor
Entities
|
Eliminations
|
Consolidated
Totals
|
||||||||||
(In
thousands)
|
|||||||||||||
Current
assets
|
$ | 381,052 | $ | 51,542 | $ | - | $ | 432,594 | |||||
Property,
plant and equipment
|
78,645 | 4,636 | - | 83,281 | |||||||||
Other
assets
|
46,864 | 33,594 | (25,911 | ) | 54,547 | ||||||||
Total
assets
|
$ | 506,561 | $ | 89,772 | $ | (25,911 | ) | $ | 570,422 | ||||
Current
liabilities
|
$ | 133,395 | $ | 19,980 | $ | - | $ | 153,375 | |||||
Intercompany
(receivables) payables
|
(43,661 | ) | 43,661 | - | - | ||||||||
Long-term
liabilities
|
249,066 | 220 | - | 249,286 | |||||||||
Shareholders'
equity
|
167,761 | 25,911 | (25,911 | ) | 167,761 | ||||||||
Total
liabilities and shareholders' equity
|
$ | 506,561 | $ | 89,772 | $ | (25,911 | ) | $ | 570,422 | ||||
As
of January 31, 2009
|
|||||||||||||
Guarantor
Entities
|
Non-Guarantor
Entities
|
Eliminations
|
Consolidated
Totals
|
||||||||||
Current
assets
|
$ | 434,068 | $ | 73,100 | $ | - | $ | 507,168 | |||||
Property,
plant and equipment
|
89,472 | 3,698 | - | 93,170 | |||||||||
Other
assets
|
48,254 | 31,311 | (25,941 | ) | 53,624 | ||||||||
Total
assets
|
$ | 571,794 | $ | 108,109 | $ | (25,941 | ) | $ | 653,962 | ||||
Current
liabilities
|
$ | 169,940 | $ | 23,654 | $ | - | $ | 193,594 | |||||
Intercompany
(receivables) payables
|
(58,310 | ) | 58,310 | - | - | ||||||||
Long-term
liabilities
|
280,220 | 204 | - | 280,424 | |||||||||
Shareholders'
equity
|
179,944 | 25,941 | (25,941 | ) | 179,944 | ||||||||
Total
liabilities and shareholders' equity
|
$ | 571,794 | $ | 108,109 | $ | (25,941 | ) | $ | 653,962 |
Condensed
Consolidating Statements of Operations
|
|||||||||||||
(Unaudited)
|
|||||||||||||
For
the Three Months Ended October 31, 2009
|
|||||||||||||
(In
thousands)
|
Guarantor
Entities
|
Non-Guarantor
Entities
|
Eliminations
|
Consolidated
Totals
|
|||||||||
Sales
|
$ | 150,681 | $ | 16,582 | $ | - | $ | 167,263 | |||||
Cost
of sales
|
126,074 | 17,517 | - | 143,591 | |||||||||
Gross
profit (loss)
|
24,607 | (935 | ) | - | 23,672 | ||||||||
Selling
and administrative expenses
|
21,494 | 4,197 | - | 25,691 | |||||||||
Equity
in loss of subsidiaries
|
4,394 | - | (4,394 | ) | - | ||||||||
Other
expense, net
|
32 | 176 | - | 208 | |||||||||
Operating
loss
|
(1,313 | ) | (5,308 | ) | 4,394 | (2,227 | ) | ||||||
Interest
expense, net
|
4,801 | 767 | - | 5,568 | |||||||||
Loss
before income taxes
|
(6,114 | ) | (6,075 | ) | 4,394 | (7,795 | ) | ||||||
Income
tax expense (benefit)
|
2,074 | (1,681 | ) | - | 393 | ||||||||
Net
loss
|
$ | (8,188 | ) | $ | (4,394 | ) | $ | 4,394 | $ | (8,188 | ) | ||
For
the Three Months Ended November 1, 2008
|
|||||||||||||
Guarantor
Entities
|
Non-Guarantor
Entities
|
Eliminations
|
Consolidated
Totals
|
||||||||||
Sales
|
$ | 282,562 | $ | 25,177 | $ | - | $ | 307,739 | |||||
Cost
of sales
|
227,753 | 22,377 | - | 250,130 | |||||||||
Gross
profit
|
54,809 | 2,800 | - | 57,609 | |||||||||
Selling
and administrative expenses
|
30,749 | 4,090 | - | 34,839 | |||||||||
Equity
in loss of subsidiaries
|
1,504 | - | (1,504 | ) | - | ||||||||
Other
expense (income), net
|
697 | (208 | ) | - | 489 | ||||||||
Operating
profit (loss)
|
21,859 | (1,082 | ) | 1,504 | 22,281 | ||||||||
Interest
expense, net
|
5,522 | 727 | - | 6,249 | |||||||||
Earnings
(loss) before income taxes
|
16,337 | (1,809 | ) | 1,504 | 16,032 | ||||||||
Income
tax expense (benefit)
|
539 | (305 | ) | - | 234 | ||||||||
Net
earnings (loss)
|
$ | 15,798 | $ | (1,504 | ) | $ | 1,504 | $ | 15,798 |
Condensed
Consolidating Statements of Operations
|
|||||||||||||
(Unaudited)
|
|||||||||||||
For
the Nine Months Ended October 31, 2009
|
|||||||||||||
(In
thousands)
|
Guarantor
Entities
|
Non-Guarantor
Entities
|
Eliminations
|
Consolidated
Totals
|
|||||||||
Sales
|
$ | 470,276 | $ | 60,320 | $ | - | $ | 530,596 | |||||
Cost
of sales
|
386,766 | 55,306 | - | 442,072 | |||||||||
Gross
profit
|
83,510 | 5,014 | - | 88,524 | |||||||||
Selling
and administrative expenses
|
76,841 | 11,526 | - | 88,367 | |||||||||
Equity
in loss of subsidiaries
|
7,641 | - | (7,641 | ) | - | ||||||||
Other
(income) expense, net
|
(2,770 | ) | 1,376 | - | (1,394 | ) | |||||||
Operating
profit (loss)
|
1,798 | (7,888 | ) | 7,641 | 1,551 | ||||||||
Interest
expense, net
|
14,165 | 2,128 | - | 16,293 | |||||||||
Loss
before income taxes
|
(12,367 | ) | (10,016 | ) | 7,641 | (14,742 | ) | ||||||
Income
tax expense (benefit)
|
1,859 | (2,375 | ) | - | (516 | ) | |||||||
Net
loss
|
$ | (14,226 | ) | $ | (7,641 | ) | $ | 7,641 | $ | (14,226 | ) | ||
For
the Nine Months Ended November 1, 2008
|
|||||||||||||
Guarantor
Entities
|
Non-Guarantor
Entities
|
Eliminations
|
Consolidated
Totals
|
||||||||||
Sales
|
$ | 853,792 | $ | 106,414 | $ | - | $ | 960,206 | |||||
Cost
of sales
|
694,268 | 88,831 | - | 783,099 | |||||||||
Gross
profit
|
159,524 | 17,583 | - | 177,107 | |||||||||
Selling
and administrative expenses
|
90,941 | 14,582 | - | 105,523 | |||||||||
Equity
in earnings of subsidiaries
|
(337 | ) | - | 337 | - | ||||||||
Other
expense, net
|
1,453 | 433 | - | 1,886 | |||||||||
Operating
profit
|
67,467 | 2,568 | (337 | ) | 69,698 | ||||||||
Interest
expense, net
|
16,601 | 2,201 | - | 18,802 | |||||||||
Earnings
before income taxes
|
50,866 | 367 | (337 | ) | 50,896 | ||||||||
Income
tax expense
|
1,436 | 30 | - | 1,466 | |||||||||
Net
earnings
|
$ | 49,430 | $ | 337 | $ | (337 | ) | $ | 49,430 |
Condensed
Consolidating Statements of Cash Flows
|
|||||||||||||
(Unaudited)
|
|||||||||||||
For
the Nine Months Ended October 31, 2009
|
|||||||||||||
(In
thousands)
|
Guarantor
Entities
|
Non-Guarantor
Entities
|
Eliminations
|
Consolidated
Totals
|
|||||||||
Net
cash provided by (used in):
|
|||||||||||||
Operating
activities
|
|||||||||||||
Net
loss
|
$ | (14,226 | ) | $ | (7,641 | ) | $ | 7,641 | $ | (14,226 | ) | ||
Equity
in loss of subsidiaries
|
7,641 | - | (7,641 | ) | - | ||||||||
Other
adjustments
|
30,068 | 22,237 | - | 52,305 | |||||||||
Operating
activities
|
23,483 | 14,596 | - | 38,079 | |||||||||
Investing
activities
|
412 | (3,387 | ) | - | (2,975 | ) | |||||||
Financing
activities
|
(23,701 | ) | (11,289 | ) | - | (34,990 | ) | ||||||
Effect
of exchange rate on cash
|
- | 737 | - | 737 | |||||||||
Net
increase in cash
|
194 | 657 | - | 851 | |||||||||
Cash
at the beginning of the period
|
26 | 1,980 | - | 2,006 | |||||||||
Cash
at the end of the period
|
$ | 220 | $ | 2,637 | $ | - | $ | 2,857 | |||||
For
the Nine Months Ended November 1, 2008
|
|||||||||||||
Guarantor
Entities
|
Non-Guarantor
Entities
|
Eliminations
|
Consolidated
Totals
|
||||||||||
Net
cash provided by (used in):
|
|||||||||||||
Operating
activities
|
|||||||||||||
Net
income
|
$ | 49,430 | $ | 337 | $ | (337 | ) | $ | 49,430 | ||||
Equity
in earnings of subsidiaries
|
(337 | ) | - | 337 | - | ||||||||
Other
adjustments
|
(10,720 | ) | (13,699 | ) | - | (24,419 | ) | ||||||
Operating
activities
|
38,373 | (13,362 | ) | - | 25,011 | ||||||||
Investing
activities
|
(20,641 | ) | (1,848 | ) | - | (22,489 | ) | ||||||
Financing
activities
|
(23,642 | ) | 10,666 | - | (12,976 | ) | |||||||
Effect
of exchange rate on cash
|
- | 252 | - | 252 | |||||||||
Net
decrease in cash
|
(5,910 | ) | (4,292 | ) | - | (10,202 | ) | ||||||
Cash
at the beginning of the period
|
5,957 | 6,425 | - | 12,382 | |||||||||
Cash
at the end of the period
|
$ | 47 | $ | 2,133 | $ | - | $ | 2,180 |
Note
6. Significant Balance Sheet Accounts
Allowance for Doubtful
Accounts: Activity in the allowance for doubtful accounts was
as follows:
For
the Three Months Ended
|
For
the Nine Months Ended
|
||||||||||||
(In
thousands)
|
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||
Allowance
for doubtful accounts at beginning of period
|
$ | 4,512 | $ | 3,554 | $ | 3,599 | $ | 3,140 | |||||
Additions
to reserves
|
1,088 | 111 | 2,354 | 564 | |||||||||
Writeoffs
against allowance for doubtful accounts
|
(291 | ) | (455 | ) | (729 | ) | (768 | ) | |||||
Collections
of previously reserved items
|
45 | 28 | 130 | 302 | |||||||||
Allowance
for doubtful accounts at end of period
|
$ | 5,354 | $ | 3,238 | $ | 5,354 | $ | 3,238 |
Inventories: Summarized
below are the components of inventories:
As
of
|
|||||||
(In
thousands)
|
October
31, 2009
|
January
31, 2009
|
|||||
Inventory
purchased under distributor agreements
|
$ | 110,167 | $ | 124,844 | |||
Raw
materials, spare parts and finished goods
|
126,972 | 111,848 | |||||
Work
in process
|
42,641 | 56,515 | |||||
Total
inventories, net
|
$ | 279,780 | $ | 293,207 |
Raw
materials, spare parts and finished goods include OEM equipment and components
used in the equipment segment. The inventory balances above are
stated net of inventory valuation allowances totaling $17.5 million and $13.0
million as of October 31, 2009 and January 31, 2009, respectively.
Property, Plant and
Equipment: Components of property, plant and equipment, net,
were as follows:
As
of
|
|||||||
(In
thousands)
|
October
31, 2009
|
January
31, 2009
|
|||||
Machinery
and equipment
|
$ | 27,970 | $ | 25,841 | |||
Buildings
and leasehold improvements
|
27,018 | 27,082 | |||||
Rental
equipment
|
62,160 | 63,947 | |||||
Computer
hardware and software
|
4,426 | 3,043 | |||||
Accumulated
depreciation
|
(46,038 | ) | (35,420 | ) | |||
Net
depreciable assets
|
75,536 | 84,493 | |||||
Construction
in progress
|
686 | 1,629 | |||||
Land
|
7,059 | 7,048 | |||||
Property,
plant and equipment, net
|
$ | 83,281 | $ | 93,170 |
Intangible Assets and Goodwill:
Amounts allocated to intangible assets are amortized on a straight-line
basis over their estimated useful lives. Intangible asset values
include the following:
As
of October 31, 2009
|
||||||||||||||
(In
thousands)
|
Estimated
Useful Life
|
Gross
Carrying Value
|
Accumulated
Amortization
|
Currency
Translation
|
Net
Carrying Value
|
|||||||||
Non-current
amortizable intangible assets:
|
||||||||||||||
Engineering
drawings
|
2.5-10
Yrs.
|
$ | 6,346 | $ | (4,928 | ) | $ | 189 | $ | 1,607 | ||||
Distribution
contracts
|
27
Yrs.
|
3,384 | (468 | ) | - | 2,916 | ||||||||
Customer
relationships
|
6-11
Yrs.
|
7,409 | (2,352 | ) | 338 | 5,395 | ||||||||
Patents
|
4
Yrs.
|
209 | (166 | ) | - | 43 | ||||||||
Non-compete
covenant
|
5
Yrs.
|
1,420 | (795 | ) | 71 | 696 | ||||||||
Total
|
18,768 | (8,709 | ) | 598 | 10,657 | |||||||||
Indefinite-lived
intangible assets:
|
||||||||||||||
Trademarks
|
-
|
9,150 | - | 158 | 9,308 | |||||||||
Total
|
$ | 27,918 | $ | (8,709 | ) | $ | 756 | $ | 19,965 |
As
of January 31, 2009
|
||||||||||||||
(In
thousands)
|
Estimated
Useful Life
|
Gross
Carrying Value
|
Accumulated
Amortization
|
Currency
Translation
|
Net
|
|||||||||
Non-current
amortizable intangible assets:
|
||||||||||||||
Engineering
drawings
|
2.5-10
Yrs.
|
$ | 6,346 | $ | (3,824 | ) | $ | 157 | $ | 2,679 | ||||
Distribution
contracts
|
27
Yrs.
|
3,384 | (373 | ) | - | 3,011 | ||||||||
Customer
relationships
|
6-11
Yrs.
|
7,409 | (1,587 | ) | (140 | ) | 5,682 | |||||||
Patents
|
4
Yrs.
|
209 | (135 | ) | - | 74 | ||||||||
Non-compete
covenant
|
5
Yrs.
|
1,420 | (580 | ) | 2 | 842 | ||||||||
Total
|
18,768 | (6,499 | ) | 19 | 12,288 | |||||||||
Indefinite-lived
intangible assets:
|
||||||||||||||
Trademarks
|
-
|
9,130 | - | (125 | ) | 9,005 | ||||||||
Total
|
$ | 27,898 | $ | (6,499 | ) | $ | (106 | ) | $ | 21,293 |
The
following table presents goodwill (relating entirely to our equipment segment)
as of the dates indicated, as well as changes in the account during the period
shown:
(In
thousands)
|
Amount
|
||
Carrying
amount as of January 31, 2009
|
$ | 23,329 | |
Currency
translation
|
2,995 | ||
Carrying
amount as of October 31, 2009
|
$ | 26,324 |
During
the second quarter, we determined that reduced orders had lowered our cash flow
expectations for a reporting unit within our equipment segment and concluded
that an indicator of impairment existed. We performed an interim impairment
test, which indicated that an impairment did not exist. Our interim
goodwill and indefinite-lived intangibles impairment test involved a comparison
of the fair value of the reporting unit with the carrying value. The fair value
was determined using discounted cash flows and other market-related valuation
models, including earnings multiples and comparable asset market values. Certain
estimates and judgments are required in the application of these fair value
models. The discounted cash flow analysis consists of estimating the future cash
flows that are directly associated with the reporting unit. These cash flows, in
addition to the earnings multiples and comparable asset market values, are
inherently subjective and require significant estimates based upon historical
experience and future expectations, such as budgets and industry
projections. We believe the decline in activity in this reporting
unit is temporary in nature and our estimates assume an improvement in orders in
the near term. A sustained period of depressed demand could result in
a significant decline in the fair value of the reporting unit, and impairments
may be necessary in future periods.
Warranties: We generally
provide product and service warranties for periods of six to 18 months. Based on
historical experience and contract terms, we provide for the estimated cost of
product and service warranties at the time of sale or, in some cases, when
specific warranty problems are identified. Accrued warranty costs are adjusted
periodically to reflect actual experience. Certain warranty and other related
claims involve matters of dispute that ultimately may be resolved by
negotiation, arbitration or litigation. Occasionally, a material warranty issue
can arise that is beyond our historical experience. We provide for any such
warranty issues as they become known and estimable.
A summary
of warranty activity was as follows:
For
the Three Months Ended
|
For
the Nine Months Ended
|
||||||||||||
(In
thousands)
|
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||
Accrued
warranty costs at beginning of period
|
$ | 4,631 | $ | 5,687 | $ | 4,990 | $ | 5,982 | |||||
Payments
for warranty obligations
|
(1,220 | ) | (1,519 | ) | (4,781 | ) | (4,734 | ) | |||||
Warranty
accrual for current period sales
|
615 | 1,475 | 3,817 | 4,395 | |||||||||
Accrued
warranty costs at end of period
|
$ | 4,026 | $ | 5,643 | $ | 4,026 | $ | 5,643 |
Derivative financial instruments:
We entered into a short-term foreign currency exchange rate derivative
instrument in January 2009 to manage our exposure to fluctuations in foreign
currency exchange rates for certain contracts of our Canadian subsidiary that
were not denominated in its functional currency. The estimated fair values
of a derivative fluctuate over time and should be viewed in relation to the
underlying transaction and the overall management of our exposure to
fluctuations in the underlying risks. Hedge accounting for our foreign currency
derivative was not pursued. The derivative instrument was settled on
May 22, 2009 and resulted in a realized gain of $1.4 million which was recorded
in other expense (income), net within our consolidated statements of
operations.
Note
7. Equity
The
Company has 100,005,000 common units issued and outstanding, which consist of
both Common Units and Common B Units. Additionally, the Company has
Common A Units, none of which are issued or outstanding. These three
classes of Units have the same economic rights. The voting and
transfer rights of the three classes differ in that the Common Units are
entitled to one vote per Common Unit and upon transfer shall remain designated
as Common Units. The Common A Units are entitled to ten votes per Common A Unit
and upon transfer will be designated as Common Units. The Common B
Units are entitled to ten votes per Common B Unit and upon transfer may be
designated by the transferor as Common B Units, Common A Units or Common
Units. As of October 31, 2009, the number of Common Units and Common
B Units issued and outstanding was 48,255,000 and 51,750,000, respectively, and
as of January 31, 2009 the number of Common Units and Common B Units issued and
outstanding was 36,255,000 and 63,750,000, respectively.
Stewart
& Stevenson LLC is a limited liability company, therefore, U.S. federal and
certain state taxes are paid by the holders of our common units. As a
limited liability company, the common unit holders’ liability is limited to the
capital invested in the Company.
Share-Based
Compensation: On September 5, 2007, our board of directors adopted
the 2007 Incentive Compensation Plan (“Incentive Plan”). The Incentive Plan
received the required approval of a majority of our unit holders and became
effective on September 27, 2007. In connection with the adoption and
approval of the Incentive Plan, the compensation committee of the board, which
has the responsibility to administer the Incentive Plan, made certain grants of
restricted shares to our non-executive directors and certain members of our
senior executive management. The grants to our five non-executive directors
total 300,000 restricted shares vesting in five (5) 60,000 share tranches,
with each such tranche vesting upon board service for a complete fiscal year. In
addition, approximately 54,000 restricted shares granted to former directors
were earned as part of their service to the Company with the balance of these
grants being forfeited at the end of their service to the Company. The grants to
senior executive management total 110,000 restricted shares vesting in five (5)
22,000 share tranches, with each tranche vesting upon employment for a complete
fiscal year. The executive grants are subject to the achievement of
net pre-tax income growth in the relevant fiscal year that exceeds the median
net pre-tax income growth of a peer group of companies consisting of
Schlumberger, Ltd., National Oilwell Varco, Inc., Weatherford International
Ltd., Cameron International Corp. and BJ Services Company and are subject to
acceleration in the case of an executive’s death or disability. As this
performance condition was not met for Fiscal 2008, the Fiscal 2008 tranche of
22,000 restricted shares was forfeited. All grants are subject to
(i) the completion of an initial public equity offering, and
(ii) accelerated vesting upon a change-in-control of the Company. No
expense has been recognized for these grants because the contingent condition
has not occurred and, as of October 31, 2009, diluted earnings per share
excluded the approximately 442,000 contingent unvested restricted
shares.
Note
8. Income Taxes
We expect
our effective tax rate to be a benefit of approximately 15.0% for Fiscal 2009,
which excludes our distributions to our unit holders. As a limited
liability company, income is reported for federal and state income tax purposes
(except for the Texas Margins tax and foreign taxes reported at the entity
level) by our unit holders. During the three and nine months ended October 31,
2009, we recognized tax expense of $2.0 million and $1.8 million, respectively,
of Texas Margins tax and $1.6 million and $2.3 million, respectively, of
income tax benefit associated with foreign jurisdictions. During the three and
nine months ended November 1, 2008, we recognized $0.5 million and $1.2
million, respectively, of Texas Margins tax and ($0.2) million and $0.2
million, respectively, of income tax associated with foreign jurisdictions. The
difference between the effective tax rate expected for Fiscal 2009 and for the
period ended October 31, 2009 is due to temporary differences to reverse in the
fourth quarter and losses in a foreign subsidiary.
Generally,
we make quarterly distributions to our unit holders to fund their tax
obligations. During the periods ended October 31, 2009 and November 1, 2008, we
made tax distributions of $5.6 million and $28.6 million,
respectively, to our unit holders.
Note
9. Litigation and Contingencies
In July 2009,
we settled an arbitration action brought against one of our suppliers and
us. Our second quarter of Fiscal 2009 results of operations, after
insurance proceeds and receipt of certain inventory, were negatively impacted by
approximately $2.6 million, which is recorded in selling and administrative
expenses. The settlement resolved the arbitration action and resulted in
dismissal and release of all claims alleged.
The State of
Texas has notified us that it will be conducting a sales and use tax audit for
the fiscal years 2006 through 2008 set to begin in Fiscal
2009. During the second quarter of Fiscal 2009, management completed
a preliminary analysis and recorded a charge of $3.4 million to selling and
administrative expenses and other current liabilities. This amount
represents management’s best estimate of probable loss, though such loss could
be higher or lower and remains subject to the audit by the State of Texas. We
are in discussions with our customers and will attempt to recoup such sales tax
where possible and will record such recoveries, if any, upon
receipt.
We are also a
defendant in a number of lawsuits relating to matters normally incident to our
business. No individual case, or group of cases presenting
substantially similar issues of law or fact, is expected to have a material
effect on the manner in which we conduct our business or on our consolidated
results of operations, financial position or liquidity. We maintain
certain insurance policies that provide coverage for product liability and
personal injury cases. We have established reserves that we believe
to be adequate based on current evaluations and our experience in these types of
claim situations. Nevertheless, an unexpected outcome or adverse
development in any such case could have a material adverse impact on our
consolidated results of operations in the period in which it
occurs.
Special
Note Regarding Forward-Looking Statements
This
Quarterly Report includes statements that are, or may be deemed to be,
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements can be
identified by the use of forward-looking terminology, including the terms
“believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,”
“will” or “should” or, in each case, their negative or other variations or
comparable terminology. These forward-looking statements include all
matters that are not historical facts and are not limited to the outlook for our
future business and financial performance. They appear in a number of
places throughout this report and include statements regarding our intentions,
beliefs or current expectations concerning, among
other things, our results of operations, financial condition, liquidity,
prospects, growth, strategies and the industry in which we
operate. By their nature, forward-looking statements involve risks
and uncertainties because they relate to events and depend on circumstances that
may or may not occur in the future and some of which are beyond our
control.
We believe that these risks and uncertainties include:
·
|
periodic
economic and industry downturns affecting the oil and gas
industry;
|
·
|
competitive
pressures in the industries we
serve;
|
·
|
factors
affecting our international sales and
operations;
|
·
|
the
potential loss of a key OEM
supplier;
|
·
|
the
occurrence of events not covered by
insurance;
|
·
|
our
ability to attract and retain qualified
employees;
|
·
|
our
failure to accurately estimate costs associated with products produced
under fixed-price contracts;
|
·
|
our
susceptibility to adverse weather conditions affecting the Gulf
Coast;
|
·
|
unforeseen
difficulties relating to
acquisitions;
|
·
|
the
impact of governmental laws and regulations, including environmental laws
and regulations;
|
·
|
our
failure to maintain key licenses;
|
·
|
our
ability to protect our intellectual
property;
|
·
|
our
level of indebtedness; and
|
·
|
the
other factors described under “Risk Factors” in our Annual Report on Form
10-K for the fiscal year ended January 31, 2009, which is accessible on
the Securities and Exchange Commission’s website at
www.sec.gov.
|
These factors
should not be construed as exhaustive and should be read with the other
cautionary statements in this Quarterly Report.
We caution
you that forward-looking statements are not guarantees of future performance and
that our actual results of operations, financial condition and liquidity, and
developments in the industry in which we operate, may differ materially from
those made in or suggested by the forward-looking statements contained in this
Quarterly Report. In addition, even if our results of operations,
financial condition, liquidity and growth, and developments in the industry in
which we operate are consistent with the forward-looking statements contained in
this Quarterly Report, those results or developments may not be indicative of
results or developments in subsequent periods.
Any
forward-looking statements which we make in this Quarterly Report speak only as
of the date of such statement, and, except as required under the federal
securities laws and the rules and regulations of the SEC, we undertake no
obligation to update publicly any forward-looking statements in this Quarterly
Report, after the date of this Quarterly Report, whether as a result of new
information, future events or otherwise. Comparisons of results for
current and any prior periods are not intended to express any future trends or
indications of future performance, unless expressed as such, and should only be
viewed as historical data.
Comparison
of Results of Operations—Three Months Ended October 31, 2009 and November 1,
2008
Sales - For
the three months ended October 31, 2009 our sales were $167.3 million, a
decrease of 45.6% compared to sales of $307.7 million for the comparable period
of Fiscal 2008. This decrease in sales was primarily attributable to
low customer confidence as a result of the weak U.S. and global economy, the
tight credit markets and unstable gas and oil prices, which impacted all
segments. A breakdown of sales for the periods is as
follows:
For
the Three Months Ended
|
Three
Month Change
|
||||||||||||||
October
31, 2009
|
November
1, 2008
|
$ | % | ||||||||||||
(In
thousands)
|
|||||||||||||||
Sales
|
|||||||||||||||
Equipment
|
$ | 96,551 | $ | 188,945 | $ | (92,394 | ) | -48.9 | % | ||||||
Aftermarket
parts and service
|
65,873 | 99,620 | (33,747 | ) | -33.9 | % | |||||||||
Rental
|
4,839 | 19,174 | (14,335 | ) | -74.8 | % | |||||||||
Total
sales
|
$ | 167,263 | $ | 307,739 | $ | (140,476 | ) | -45.6 | % | ||||||
Operating
profit (loss)
|
|||||||||||||||
Equipment
|
$ | 3,725 | $ | 15,168 | $ | (11,443 | ) | -75.4 | % | ||||||
Aftermarket
parts and service
|
2,198 | 12,283 | (10,085 | ) | -82.1 | % | |||||||||
Rental
|
417 | 5,369 | (4,952 | ) | -92.2 | % | |||||||||
Corporate
|
(8,567 | ) | (10,539 | ) | 1,972 | -18.7 | % | ||||||||
Total
operating (loss) profit
|
$ | (2,227 | ) | $ | 22,281 | $ | (24,508 | ) | -110.0 | % | |||||
Operating
profit (loss) percentage
|
|||||||||||||||
Equipment
|
3.9 | % | 8.0 | % |
|
||||||||||
Aftermarket
parts and service
|
3.3 | 12.3 | |||||||||||||
Rental
|
8.6 | 28.0 | |||||||||||||
Consolidated
|
(1.3 | ) | % | 7.2 | % |
|
Sales of
equipment fell by 48.9%, or $92.4 million, during the three months ended October
31, 2009 compared to the same period in Fiscal 2008. The decrease in sales was
primarily attributable to lower sales volumes in all product lines except power
generation and coiled tubing, with well stimulation, rigs and seismic sales
representing the largest percentage of decline.
Aftermarket
parts and service sales fell by $33.7 million to $65.9 million in the three
months ended October 31, 2009 compared to $99.6 million in the comparable period
of Fiscal 2008. The decrease in parts sales was $20.7 million and in
service revenues was $13.0 million.
Rental sales
fell by 74.8%, or $14.3 million, in the three months ended October 31, 2009
compared to the same period of Fiscal 2008. In the three months ended
November 1, 2008, approximately $11.2 million of revenues related to Hurricanes
Ike and Gustav and were not repeated for the same period in Fiscal
2009.
Gross profit –
Our gross profit was $23.7 million for the three months ended October 31,
2009 compared to $57.6 million for the same period in Fiscal 2008, reflecting a
decrease in gross profit margin from 18.7% to 14.2%. Our gross profit
margin decreased due to lower sales volumes, product mix and pricing pressures.
The equipment segment gross profit margin decreased from 16.6% to 14.3% due to
changes in sales mix and higher unabsorbed manufacturing costs. Gross profit
margin in the aftermarket parts and service segment decreased from 19.3% to
13.1% due to changes in sales mix and higher unabsorbed costs. The rental
segment gross profit margin declined from 36.2% to 24.7% as the result of lower
sales and its relation to the large amount of fixed cost associated with the
rental fleet.
Selling
and administrative expenses – Selling and administrative expenses
decreased by $9.1 million to $25.7 million for the three months ended October
31, 2009. Selling and administrative expenses as a percentage of
sales were 15.4% and 11.3% for the three months ended October 31, 2009 and
November 1, 2008, respectively, mainly as a result of lower sales
volumes.
Other income/expense,
net – Other expense decreased by $0.3 million to $0.2 million for the
three months ended October 31, 2009, mainly as the result of foreign currency
transaction gains associated with our Canadian subsidiary.
Operating
profit/(loss) – Our operating loss of $2.2 million, or (1.3%) of sales,
during the three months ended October 31, 2009, compared to operating profit of
$22.3 million, or 7.2% of sales, in the same period of Fiscal 2008, primarily as
the result of lower sales volumes.
Interest expense, net
- Interest expense for the three months ended October 31, 2009 decreased
by $0.7 million over the same period in Fiscal 2008 mainly as a result of lower
interest rates and outstanding borrowings on our revolving credit
facility.
Segment
Results Comparison – Three Months Ended October 31, 2009 and November 1,
2008
Equipment –
Operating profit generated by the equipment segment decreased to $3.7
million, or 3.9% of sales, for the three months ended October 31, 2009, from
$15.2 million, or 8.0% of sales, for the same period in Fiscal 2008, primarily
due to lower sales volumes across all product lines, except power generation and
coiled tubing. The $11.4 million decrease in operating profit was attributable
to a decrease of $15.3 million in sales volume partially offset by an increase
in gross margin rate of $3.9 million.
Our equipment
order backlog as of October 31, 2009 was $130.2 million, as compared to $393.7
million on November 1, 2008, a decrease of 66.9%. We expect to
recognize approximately half of this equipment order backlog as revenue during
the remainder of Fiscal 2009.
Aftermarket Parts and
Service – Operating profit generated by the aftermarket parts and service
segment decreased to $2.2 million in the three months ended October 31, 2009,
from $12.3 million in the same period of Fiscal 2008, representing a decrease in
operating profit percentage from 12.3% to 3.3%. The decrease in
operating profit was primarily attributable to decreases in sales volume of $6.5
million and in gross margin rate of $3.6 million.
Rental – Operating profit generated
by the rental segment decreased to $0.4 million in the three months ended
October 31, 2009, from $5.4 million of operating profit generated in the same
period of Fiscal 2008. Operating profit percentage decreased to 8.6%
for the three months ended October 31, 2009 from 28.0% for the same period in
Fiscal 2008, mainly as a result of lower sales volumes and the impacts of
Hurricanes Ike and Gustav in the prior period.
Corporate -
Corporate and administrative expenses decreased to $8.6 million in the three
months ended October 31, 2009, compared to $10.5 million in the same period of
2008, and increased as a percentage of sales from 3.4% to 5.1% as a result of
lower sales volumes.
Comparison
of Results of Operations—Nine Months Ended October 31, 2009 and November 1,
2008
Sales - For
the nine months ended October 31, 2009, our sales were $530.6 million, a
decrease of $429.6 million, or 44.7%, compared to Fiscal 2008 sales of $960.2
million for the same period. This decrease in sales was primarily
attributable to low customer confidence as a result of the weak U.S. and global
economy, the tight credit markets and unstable gas and oil prices, which
impacted all segments. A breakdown of sales for the periods is as
follows:
For
the Nine Months Ended
|
Nine
Month Change
|
||||||||||||||
October
31, 2009
|
November
1, 2008
|
$ | % | ||||||||||||
(In
thousands)
|
|||||||||||||||
Sales
|
|||||||||||||||
Equipment
|
$ | 303,883 | $ | 630,624 | $ | (326,741 | ) | -51.8 | % | ||||||
Aftermarket
parts and service
|
211,489 | 295,654 | (84,165 | ) | -28.5 | % | |||||||||
Rental
|
15,224 | 33,928 | (18,704 | ) | -55.1 | % | |||||||||
Total
sales
|
$ | 530,596 | $ | 960,206 | $ | (429,610 | ) | -44.7 | % | ||||||
Operating
profit (loss)
|
|||||||||||||||
Equipment
|
$ | 14,291 | $ | 55,607 | $ | (41,316 | ) | -74.3 | % | ||||||
Aftermarket
parts and service
|
14,351 | 33,759 | (19,408 | ) | -57.5 | % | |||||||||
Rental
|
1,573 | 8,121 | (6,548 | ) | -80.6 | % | |||||||||
Corporate
|
(28,664 | ) | (27,789 | (875 | ) | 3.1 | % | ||||||||
Total
operating profit
|
$ | 1,551 | $ | 69,698 | $ | (68,147 | ) | -97.8 | % | ||||||
Operating
profit percentage
|
|||||||||||||||
Equipment
|
4.7 | % | 8.8 |
%
|
|||||||||||
Aftermarket
parts and service
|
6.8 | 11.4 | |||||||||||||
Rental
|
10.3 | 23.9 | |||||||||||||
Consolidated
|
0.3 | % | 7.3 |
%
|
Sales of
equipment fell by 51.8%, or $326.7 million, during the nine months ended October
31, 2009 compared to the same period in Fiscal 2008. The decrease in sales was
primarily attributable to lower sales volumes in all product lines except power
generation and coiled tubing, with well stimulation, rigs, seismic and engines
representing the largest percentage of decline.
Aftermarket
parts and service sales fell by $84.2 million to $211.5 million in the nine
months ended October 31, 2009 compared to $295.7 million in the comparable
period of Fiscal 2008. The decrease in aftermarket parts and service
sales was attributable to decreased parts sales of $54.7 million and decreased
service sales of $29.5 million.
Rental sales
fell by 55.1%, or $18.7 million, in the nine months ended October 31, 2009
compared to the same period of Fiscal 2008. In the nine months ended
November 1, 2008, approximately $11.2 million of revenues related to Hurricanes
Ike and Gustav and were not repeated for the same period in Fiscal
2009.
Gross profit –
Our gross profit was $88.5 million for the nine months ended October 31,
2009 compared to $177.1 million for the same period in Fiscal 2008, reflecting a
decrease in gross profit margin from 18.4% to 16.7%. Our gross profit
margin decreased by 1.7 points due to lower sales volumes, partially offset by
cost containment measures, including headcount reductions, wage and salary cuts,
indirect expense control and lower facility related expenses, undertaken by
management in response to the lower sales volumes and general softness of the
global economy. The equipment segment gross profit margin decreased from 17.5%
to 16.6%. The aftermarket parts and service segment gross profit margin
decreased from 18.7% to 16.2%. The rental segment gross profit margin declined
from 34.4% to 24.7% as the result of lower sales and its relation to the large
amount of fixed cost associated with the rental fleet.
Selling and
administrative expenses – Selling and administrative expenses decreased
by $17.2 million to $88.4 million for the nine months ended October 31,
2009. This decrease was offset by $7.9 million of charges recorded
during Fiscal 2009, related to the accrual of a probable sales tax liability
($3.4 million), settlement and defense
of a claim ($3.5 million), the closure of a facility ($0.9 million) and employee
severance ($0.1 million). Selling and administrative expenses as a
percentage of sales increased to 16.7% from 11.0% for the nine months ended
October 31, 2009, mainly as a result of lower sales volumes and the charges
referenced above.
Other income/expense,
net – Other income increased by $3.3 million to income of $1.4 million
for the nine months ended October 31, 2009, mainly as the result of foreign
currency transaction gains associated with our Canadian subsidiary and realized
gains associated with our foreign currency derivative instrument.
Operating profit
– Our operating profit decreased to $1.6 million, or 0.3% of sales,
during the nine months ended October 31, 2009, from $69.7 million, or 7.3% of
sales, in the same period of Fiscal 2008, primarily as the result of lower sales
volumes and the $7.9 million of charges referenced above.
Interest expense, net
- Interest expense for the nine months ended October 31, 2009 decreased
by $2.5 million over the same period in Fiscal 2008 mainly as a result of lower
interest rates and outstanding borrowings on our revolving credit facility and
income earned on a past due receivable balance.
Segment
Results Comparison – Nine Months Ended October 31, 2009 and November 1,
2008
Equipment –
Operating profit generated by the equipment segment decreased to $14.3
million, or 4.7% of sales, for the nine months ended October 31, 2009 from $55.6
million, or 8.8% of sales, for the same period in Fiscal 2008, primarily due to
lower sales volumes. The $41.3 million decrease in operating profit was
attributable to a decrease of $57.1 million in sales volume partially offset by
an increase in gross margin rate of $15.8 million.
Our equipment
order backlog as of October 31, 2009 was $130.2 million, as compared to $393.7
million on November 1, 2008, a decrease of 66.9%. We expect to
recognize approximately half of this equipment order backlog as revenue during
the remainder of Fiscal 2009.
Aftermarket Parts and
Service – Operating profit generated by the aftermarket parts and service
segment decreased to $14.4 million in the nine months ended October 31, 2009
from $33.8 million in the same period of Fiscal 2008, representing a decrease in
operating profit percentage from 11.4% to 6.8%. The decrease in
operating profit of $19.4 million was attributable to decreases in sales volume
of $15.7 million and gross margin rate of $3.7 million.
Rental – Operating profit generated
by the rental segment decreased to $1.6 million in the nine months ended October
31, 2009, from $8.1 million of operating profit generated in the same period of
Fiscal 2008. Operating profit percentage decreased to 10.3% for the
nine months ended October 31, 2009 from 23.9% for the same period in Fiscal
2008, mainly as a result of lower sales volumes and the impacts of Hurricanes
Ike and Gustav in the prior period.
Corporate -
Corporate and administrative expenses increased $0.9 million to $28.7 million in
the nine months ended October 31, 2009. This increase included $6.9
million of charges recorded in the current period related to the accrual of a
probable sales tax liability ($3.4 million) and settlement and defense of a
claim ($3.5 million). Corporate and administrative expenses increased
as a percentage of sales from 2.9% to 5.4% as a result of these charges and
lower sales volumes.
Liquidity
and Capital Resources
Our principal
source of liquidity is cash generated by operations. We also have a
$250 million asset-based revolving credit facility which we draw upon when
necessary to satisfy our working capital needs and generally pay down with
available cash. Our liquidity needs are primarily driven by changes in working
capital associated with execution of large manufacturing projects. While many of
our contracts include advance customer deposits and progress billings, some
international contracts provide for substantial portions of funding under
confirmed letters of credit upon delivery of the products. For the remainder of
Fiscal 2009, our working capital may decrease as certain large contracts are
completed.
During the
nine months ended October 31, 2009, net cash provided by operating activities
was $38.1 million compared to net cash provided by operating activities of
$25.0 million during the nine months ended November 1, 2008. The cash provided
by operating activities during the nine months ended October 31, 2009 consisted
of depreciation and amortization and other non-cash items of $16.0 million
and changes in operating assets and liabilities of $36.3 million, partially
offset by losses of $14.2 million. Changes in operating assets and liabilities
were the result of decreases in accounts receivable, inventories and recoverable
costs and accrued profits not yet billed, and increases in other, which in
aggregate totaled $89.2 million and which were offset by decreases in
accounts payable, accrued payrolls, customer deposits and billings in excess of
incurred costs, which in aggregate totaled $52.9 million.
During the
nine months ended November 1, 2008, we generated net cash from operating
activities of $25.0 million. The cash generated by operating activities
consisted of $49.4 million cash generated by net earnings and depreciation and
amortization of $14.9 million, partially offset by changes in operating assets
and liabilities of $39.3 million. Changes in operating assets and liabilities
were the result of decreases in inventories and increases in accounts payable,
customer deposits and other, which in aggregate totaled $29.2 million and which
were offset by increases in accounts receivable and recoverable costs and
accrued profits not yet billed and decreases in accrued payrolls and billings in
excess of incurred costs which in aggregate totaled $68.5 million.
Net cash used
in investing activities was $3.0 million during the nine months ended
October 31, 2009. This included $2.7 million of capital expenditures and
$0.7 million related to additions to our rental fleet, partially offset by
disposals of property, plant and equipment of $0.4 million. Net cash used in
investing activities was $22.5 million during the nine months ended
November 1, 2008, primarily for capital expenditures of $6.7 million and $15.8
million related to additions to our rental fleet.
Net cash used
in financing activities was $35.0 million during the nine months ended
October 31, 2009. This included $31.5 million in net payments to our
revolving credit facility, tax distributions to holders of common units of $5.6
million and deferred financing costs of $0.4 million, partially offset by an
increase in notes payable of $2.5 million. Net cash used in financing
activities was $13.0 million during the nine months ended November 1, 2008.
This included tax distributions to holders of common units of $28.6 million and
deferred financing costs of $0.4 million, partially offset by a $2.9 million
increase in notes payable and $13.1 million in net borrowings on our revolving
credit facility.
As of October
31, 2009, our cash and cash equivalent balance was $2.9 million, reflecting
timing of cash receipts, disbursements and borrowings under our revolving credit
facility.
Current
Resources
We have
an asset-based revolving credit facility in the amount of $250.0 million
with a $25.0 million sub-facility to be used by our Canadian subsidiary.
The $250.0 million revolving credit facility, which matures in
February 2012, is secured by substantially all accounts receivable,
inventory and property, plant and equipment and provides for borrowings at
LIBOR, plus a margin ranging from 1.25% to 2.00% per annum, based on our
leverage ratios, as specified in the credit agreement. Based on the outstanding
borrowings, letters of credit issued and the terms of the asset-based revolving
credit facility, our available borrowing capacity was approximately $60.0
million at October 31, 2009.
As of October
31, 2009, borrowings under our revolving credit facility and our senior notes
were as follows:
(In
thousands)
|
||
Unsecured
senior notes
|
$ |
150,000
|
Revolving
credit facility
|
98,668
|
|
Total
|
$ |
248,668
|
The revolving
credit facility and the senior notes contain financial and operating covenants
with which we must comply during the terms of the agreements. These
covenants include the maintenance of certain financial ratios, restrictions
related to the incurrence of certain indebtedness and investments, and
prohibition of the creation of certain liens. We were in compliance
with all covenants as of October 31, 2009. The financial covenant for
therevolving credit facility requires that we maintain a fixed charge coverage
ratio, as defined in the agreement, of at least 1.1 to 1.0; however, this
covenant does not take effect until our available borrowing capacity is $30.0
million or less. The financial covenant for the senior notes
indenture requires that, were we to incur additional indebtedness (subject to
various exceptions set forth in the indenture), after giving effect to the
incurrence of such additional indebtedness, we have a consolidated coverage
ratio, as defined in the indenture, of at least 2.5 to 1.0.
We have
funded, and expect to continue to fund, operations through cash flows generated
by operating activities and borrowings under our revolving credit facility. We
also expect that ongoing requirements for debt service and capital expenditures
will be funded from these sources.
Our future
liquidity requirements will be for working capital, capital expenditures, debt
service and general corporate purposes. Our working capital may
continue to decrease in the near term based on our current backlog and, thus, we
would expect to use a portion of this cash flow to pay down our revolving credit
facility. Our borrowing capacity under the revolving credit facility
is impacted by, among other factors, the amount of working capital and
qualifying assets therein. While we expect to reduce outstanding
borrowings under our revolving credit facility as working capital is converted
to cash, it is possible that our borrowing capacity could decline in future
periods. Based on our current level of operations, we believe that cash flow
from operations and available cash, together with available borrowings under our
revolving credit facility, will be adequate to meet our short-term and long-term
liquidity needs. However, our ability to meet our working capital and
debt service requirements is subject to future economic conditions and to
financial, business and other factors, many of which are beyond our control. If
we are not able to meet such requirements, we may be required to seek additional
sources of capital.
We currently
believe that we will make approximately $4.0 million of capital expenditures in
total during Fiscal 2009.
Recent
Accounting Pronouncements
For a
discussion of recently adopted and not yet adopted accounting standards, see
Note 2 in “— Notes to Condensed Consolidated Financial Statements.”
Foreign
Exchange Risk
Our
international subsidiaries in Colombia and Venezuela transact most of their
business in their respective local currencies, while our Canadian subsidiary
conducts its business in both Canadian and U.S. dollars. While local currency
transactions arising from our Canadian operations represented approximately 4.4%
of our revenues during the nine months ended October 31, 2009, our results of
operations were not significantly impacted by changes in currency exchange
rates. We entered into a foreign currency exchange rate derivative instrument in
January 2009 to manage our exposure to fluctuations in foreign currency exchange
rates for certain contracts of our Canadian subsidiary that were not denominated
in its functional currency. The derivative was settled in May 2009
resulting in a realized gain of $1.4 million. Transactions denominated in local
currencies generated by our Colombian and Venezuelan subsidiaries comprised
approximately 5.7% of our revenue, resulting in insignificant impacts to our
results of operations from fluctuation of these foreign currencies against the
U.S. dollar.
Interest
Rate Risk
We use
variable-rate debt under our revolving credit facility to finance certain of our
operations and capital expenditures. Assuming the entire $250.0
million revolving credit facility was drawn, each quarter point change in
interest rates would result in a $0.6 million change in annual interest
expense.
Item
4. Controls and Procedures
Effectiveness
of Disclosure Controls and Procedures
We maintain a
set of disclosure controls and procedures designed to ensure that information we
are required to disclose in reports that we file or submit with the SEC is
recorded, processed, summarized and reported within the time periods specified
by the SEC. An evaluation was carried out under the supervision and with the
participation of the Company’s management, including the Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the CEO and CFO have concluded that the
Company’s disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by us in reports we file
with the SEC is recorded, processed, summarized and reported within the time
periods required by the SEC, and is accumulated and communicated to management
including our CEO and CFO, as appropriate, to allow timely decisions regarding
disclosure.
Changes
in Internal Control over Financial Reporting
Management,
together with our CEO and CFO, evaluated the changes in our internal control
over financial reporting during the quarter ended October 31, 2009. We
determined that there were no changes in our internal control over financial
reporting during the quarter ended October 31, 2009, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
In July 2009,
we settled an arbitration action brought against one of our suppliers and us.
Our second quarter of Fiscal 2009 results of operations, after insurance
proceeds and receipt of certain inventory, were negatively impacted by
approximately $2.6 million, which is recorded in selling and administrative
expenses. The settlement resolved the arbitration action and resulted in
dismissal and release of all claims alleged.
The State of
Texas has notified us that it will be conducting a sales and use tax audit for
the fiscal years 2006 through 2008 set to begin in Fiscal
2009. During the second quarter of Fiscal 2009, management completed
a preliminary analysis and recorded a charge of $3.4 million to selling and
administrative expenses and other current liabilities. This amount
represents management’s best estimate of probable loss, though such loss could
be higher or lower and remains subject to the audit by the State of Texas. We
are in discussions with our customers and will attempt to recoup such sales tax
where possible and will record such amounts, if any, upon receipt.
We are also a
defendant in a number of lawsuits relating to matters normally incident to our
business. No individual case, or group of cases presenting
substantially similar issues of law or fact, is expected to have a material
effect on the manner in which we conduct our business or on our consolidated
results of operations, financial position or liquidity. We maintain
certain insurance policies that provide coverage for product liability and
personal injury cases. We have established reserves that we believe
to be adequate based on current evaluations and our experience in these types of
claim situations. Nevertheless, an unexpected outcome or adverse
development in any such case could have a material adverse impact on our
consolidated results of operations in the period in which it
occurs.
Item
1A. Risk Factors
For a
discussion of our potential risks and uncertainties relating to our business and
an investment in our senior notes, see the factors described under “Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31,
2009, which is accessible on the Securities and Exchange Commission’s website at
www.sec.gov. There have been no material changes to the risk factors
disclosed in the Form 10-K.
Not
applicable.
Item
3. Defaults Upon Senior Securities
Not
applicable.
Not
applicable.
Item
5. Other Information
Not
applicable.
Item
6. Exhibits
31.1
|
Rule 13a-14(a)/15d-14(a)
certification of the Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2
|
Rule 13a-14(a)/15d-14(a)
certification of the Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1
|
Section 1350
certification of the Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2
|
Section 1350
certification of the Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
The
Company has duly caused this Quarterly Report to be signed on its behalf by the
undersigned thereto duly authorized.
STEWART
& STEVENSON LLC
|
|||
By: /S/
ROBERT L. HARGRAVE
|
|||
Robert
L. Hargrave
|
|||
Chief
Executive Officer
|
|||
By:
/S/ JEFFERY
W. MERECKA
|
|||
Jeffery
W. Merecka
|
|||
Vice
President, Chief Financial Officer
|
|||
and
Secretary
|
December
15, 2009
27