Attached files
file | filename |
---|---|
EX-31.2 - EX-31.2 - Stewart & Stevenson LLC | a11-13183_1ex31d2.htm |
EX-31.1 - EX-31.1 - Stewart & Stevenson LLC | a11-13183_1ex31d1.htm |
EX-32.1 - EX-32.1 - Stewart & Stevenson LLC | a11-13183_1ex32d1.htm |
EX-32.2 - EX-32.2 - Stewart & Stevenson LLC | a11-13183_1ex32d2.htm |
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
x |
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended April 30, 2011
or
o |
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
(Registrants 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 x * No o
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 o No o
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 o |
|
Accelerated filer o |
|
|
|
Non-accelerated filer x |
|
Smaller reporting company o |
(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 o No x
There is no market for the registrants equity. As of May 31, 2011, there were 56,025,210 common units outstanding.
* The registrant is currently not required to file reports, including this report, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 but is voluntarily filing this report with the Securities and Exchange Commission.
STEWART & STEVENSON LLC AND SUBSIDIARIES
Stewart & Stevenson LLC and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
As of |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
January 31, 2011 |
| ||
|
|
(Unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
14,166 |
|
$ |
9,168 |
|
Restricted cash |
|
5,000 |
|
5,000 |
| ||
Accounts receivable, net |
|
107,881 |
|
85,236 |
| ||
Recoverable costs and accrued profits not yet billed |
|
37,789 |
|
78,934 |
| ||
Inventories, net |
|
327,559 |
|
285,909 |
| ||
Other current assets |
|
7,734 |
|
7,186 |
| ||
Total current assets |
|
500,129 |
|
471,433 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment, net |
|
80,864 |
|
75,077 |
| ||
Goodwill and intangibles, net |
|
22,311 |
|
16,064 |
| ||
Deferred financing costs and other assets |
|
4,637 |
|
5,029 |
| ||
Total assets |
|
$ |
607,941 |
|
$ |
567,603 |
|
|
|
|
|
|
| ||
Liabilities and shareholders equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Bank notes payable |
|
$ |
6,021 |
|
$ |
7,401 |
|
Current portion of long-term debt |
|
25,115 |
|
40 |
| ||
Accounts payable |
|
91,217 |
|
81,198 |
| ||
Accrued payrolls and incentives |
|
16,688 |
|
15,913 |
| ||
Billings in excess of incurred costs |
|
6,992 |
|
4,285 |
| ||
Customer deposits |
|
98,726 |
|
80,346 |
| ||
Other current liabilities |
|
49,717 |
|
43,979 |
| ||
Total current liabilities |
|
294,476 |
|
233,162 |
| ||
|
|
|
|
|
| ||
Long-term debt, net of current portion |
|
150,000 |
|
185,181 |
| ||
Other long-term liabilities |
|
223 |
|
226 |
| ||
Total liabilities |
|
444,699 |
|
418,569 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
Shareholders equity: |
|
|
|
|
| ||
Common units, 56,025,210 units issued and outstanding |
|
74,113 |
|
74,113 |
| ||
Accumulated other comprehensive income |
|
6,516 |
|
5,092 |
| ||
Retained earnings |
|
82,613 |
|
69,829 |
| ||
Total shareholders equity |
|
163,242 |
|
149,034 |
| ||
Total liabilities and shareholders equity |
|
$ |
607,941 |
|
$ |
567,603 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
Stewart & Stevenson LLC and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
For the Three Months Ended |
| ||||
(Dollars and units in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
| ||
|
|
|
|
|
| ||
Sales |
|
$ |
271,367 |
|
$ |
161,936 |
|
Cost of sales |
|
220,829 |
|
136,257 |
| ||
Gross profit |
|
50,538 |
|
25,679 |
| ||
|
|
|
|
|
| ||
Selling and administrative expenses |
|
31,327 |
|
24,875 |
| ||
Other expense, net |
|
400 |
|
46 |
| ||
Operating profit |
|
18,811 |
|
758 |
| ||
|
|
|
|
|
| ||
Interest expense, net |
|
4,854 |
|
4,973 |
| ||
Earings (loss) before income taxes |
|
13,957 |
|
(4,215 |
) | ||
|
|
|
|
|
| ||
Income tax expense |
|
110 |
|
484 |
| ||
Net earnings (loss) |
|
$ |
13,847 |
|
$ |
(4,699 |
) |
|
|
|
|
|
| ||
Weighted average units outstanding: |
|
|
|
|
| ||
Basic |
|
56,025 |
|
56,025 |
| ||
Diluted |
|
56,025 |
|
56,025 |
| ||
|
|
|
|
|
| ||
Net earnings (loss) per common unit |
|
|
|
|
| ||
Basic |
|
$ |
0.25 |
|
$ |
(0.08 |
) |
Diluted |
|
$ |
0.25 |
|
$ |
(0.08 |
) |
See accompanying Notes to Condensed Consolidated Financial Statements
Stewart & Stevenson LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
For the Three Months Ended |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
| ||
Operating activities |
|
|
|
|
| ||
Net earnings (loss) |
|
$ |
13,847 |
|
$ |
(4,699 |
) |
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |
|
|
|
|
| ||
Amortization of deferred financing costs |
|
409 |
|
441 |
| ||
Depreciation and amortization |
|
4,121 |
|
4,179 |
| ||
Non-cash foreign exchange gains |
|
(5 |
) |
|
| ||
Change in operating assets and liabilities net of the effect of acquisitions: |
|
|
|
|
| ||
Accounts receivable, net |
|
(16,753 |
) |
9,647 |
| ||
Recoverable costs and accrued profits not yet billed |
|
41,215 |
|
1,524 |
| ||
Inventories, net |
|
(29,108 |
) |
(28,563 |
) | ||
Accounts payable |
|
7,370 |
|
11,159 |
| ||
Accrued payrolls and incentives |
|
248 |
|
(782 |
) | ||
Billings in excess of incurred costs |
|
2,580 |
|
380 |
| ||
Customer deposits |
|
18,024 |
|
14,656 |
| ||
Other current assets and liabilities |
|
2,334 |
|
(3,164 |
) | ||
Other, net |
|
1,401 |
|
(349 |
) | ||
Net cash provided by operating activities |
|
45,683 |
|
4,429 |
| ||
|
|
|
|
|
| ||
Investing activities |
|
|
|
|
| ||
Capital expenditures |
|
(1,308 |
) |
(407 |
) | ||
Additions to rental equipment |
|
(3,058 |
) |
(3,585 |
) | ||
Acquisitions, net of cash acquired |
|
(23,402 |
) |
|
| ||
Proceeds from the sale of property, plant and equipment, net |
|
|
|
18 |
| ||
Net cash used in investing activities |
|
(27,768 |
) |
(3,974 |
) | ||
|
|
|
|
|
| ||
Financing activities |
|
|
|
|
| ||
Change in short-term notes payable |
|
(1,824 |
) |
885 |
| ||
Changes in revolving loans |
|
(10,116 |
) |
180 |
| ||
Distributions to shareholders for tax obligations |
|
(1,063 |
) |
(241 |
) | ||
Net cash (used in) provided by financing activities |
|
(13,003 |
) |
824 |
| ||
|
|
|
|
|
| ||
Effect of exchange rate on cash |
|
86 |
|
19 |
| ||
|
|
|
|
|
| ||
Increase in cash and cash equivalents |
|
4,998 |
|
1,298 |
| ||
Cash and cash equivalents, beginning of fiscal period |
|
9,168 |
|
3,321 |
| ||
Cash and cash equivalents, end of fiscal period |
|
$ |
14,166 |
|
$ |
4,619 |
|
|
|
|
|
|
| ||
Cash paid for: |
|
|
|
|
| ||
Interest |
|
$ |
578 |
|
$ |
826 |
|
Income taxes |
|
$ |
275 |
|
$ |
162 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Company Overview
Stewart & Stevenson LLC, headquartered in Houston, Texas, was formed for the purpose of acquiring from Stewart & Stevenson Services, Inc. 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. 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 provider of specialized equipment and aftermarket parts and service for the oil and gas and other industries that we have served for over 100 years. Our wide range of products covers hydraulic fracturing, well stimulation, workover, intervention and drilling operations. These products include pumping, acidizing, coiled tubing, cementing and nitrogen units, drilling rigs and workover rigs, power generation systems and electrical support and distribution systems, as well as engines, transmissions and material handling equipment. We have a substantial installed base of products, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues from customers in the oil and gas, power generation and various other industries. In addition, we provide rental equipment to our customers, including generator sets, air compressors, rail car movers and material handling equipment.
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 months ended April 30, 2011 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 2012. 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, 2011.
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. We evaluate our estimates on an ongoing basis, based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. 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 2011 began on February 1, 2011 and will end on January 31, 2012. We report results on the fiscal quarter method with each quarter comprising approximately 13 weeks. The first quarter of Fiscal 2011 began on February 1, 2011 and ended on April 30, 2011.
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. Our prior reports filed with the SEC through the third quarter of Fiscal 2010 presented four segments: equipment, aftermarket parts and service, rental and corporate. In our Fiscal 2010 Annual Report on Form 10-K, we revised our segments to the following three segments: manufacturing, distribution and corporate and shared services. Information relating to the first quarter of Fiscal 2010 included in the unaudited condensed consolidated financial statements herein and elsewhere in this Quarterly Report have been recast to reflect our new segment presentation. See Note 4 Segment Data.
New Accounting Pronouncement: On February 1, 2011, we adopted an update to existing guidance on revenue recognition for arrangements with multiple deliverables. This update allows companies to allocate consideration for qualified separate deliverables using estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable. Additional disclosures are required that discuss the nature of multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required. The adoption of this update did not have a material impact on our consolidated financial statements.
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
Note 3. Comprehensive Income
Total comprehensive income (loss) was as follows:
|
|
For the Three Months Ended |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
| ||
|
|
|
|
|
| ||
Net earnings (loss) |
|
$ |
13,847 |
|
$ |
(4,699 |
) |
Currency translation gain |
|
1,424 |
|
2,439 |
| ||
Comprehensive income (loss) |
|
$ |
15,271 |
|
$ |
(2,260 |
) |
Translation adjustments resulting from changes in exchange rates are reported in other comprehensive income. As of April 30, 2011 and May 1, 2010, the entire accumulated other comprehensive income (loss) balance consisted of currency translation adjustments. Foreign currency transaction exchange losses are recorded in other expense, net in the consolidated statements of operations and were ($0.4) million and ($0.1) million during the periods ended April 30, 2011 and May 1, 2010, respectively.
Note 4. Segment Data
Our reportable segments are as follows:
Manufacturing
We design, manufacture and market equipment for U.S. and international oilfield service providers and drilling and workover contractors, as well as national oil companies that require integrated and customized product solutions. We manufacture equipment specifically for hydraulic fracturing, well stimulation, well workover, intervention and drilling operations. Our manufactured products include integrated solutions, which incorporate a variety of components into a single system, for a wide range of oilfield services and support applications. In addition, we provide parts and service to customers primarily in the oil and gas industry.
Distribution
We provide stand-alone products and aftermarket parts and service for products manufactured by us, our six key OEMs and other manufacturers. In addition, we provide rental equipment including generator sets, air compressors, rail car movers and material handling equipment to our customers. Our aftermarket parts and service operations, which provide us with a recurring, higher-margin source of revenue, serve customers engaged in the oil and gas, power generation, marine, mining, construction, commercial vehicle and material handling industries, as well as other industries.
Corporate and shared services
Our corporate and shared services segment includes administrative overhead normally not associated with specific activities within the operating segments. These expenses include legal, finance and accounting, internal audit, human resources, information technology, marketing, supply chain and similar corporate office costs.
Intra-segment revenues and costs are eliminated, and operating profit (loss) represents earnings (loss) before interest and income taxes. Operating results by segment were as follows:
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
|
|
For the Three Months Ended |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
| ||
|
|
|
|
|
| ||
Sales |
|
|
|
|
| ||
Manufacturing |
|
$ |
112,495 |
|
$ |
58,298 |
|
Distribution |
|
158,872 |
|
103,638 |
| ||
Total sales |
|
$ |
271,367 |
|
$ |
161,936 |
|
|
|
|
|
|
| ||
Operating profit (loss) |
|
|
|
|
| ||
Manufacturing |
|
$ |
19,756 |
|
$ |
5,488 |
|
Distribution |
|
10,259 |
|
3,579 |
| ||
Corporate and shared services |
|
(11,204 |
) |
(8,309 |
) | ||
Total operating profit |
|
$ |
18,811 |
|
$ |
758 |
|
|
|
|
|
|
| ||
Operating profit percentage |
|
|
|
|
| ||
Manufacturing |
|
17.6 |
% |
9.4 |
% | ||
Distribution |
|
6.5 |
% |
3.5 |
% | ||
Consolidated |
|
6.9 |
% |
0.5 |
% |
Note 5. Long-Term Debt
|
|
As of |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
January 31, 2011 |
| ||
|
|
|
|
|
| ||
Other debt |
|
$ |
6,055 |
|
$ |
7,441 |
|
Revolving credit facility |
|
25,081 |
|
35,181 |
| ||
Unsecured senior notes |
|
150,000 |
|
150,000 |
| ||
Total |
|
181,136 |
|
192,622 |
| ||
Less: current portion of debt |
|
(31,136 |
) |
(7,441 |
) | ||
Long-term debt, net of current portion |
|
$ |
150,000 |
|
$ |
185,181 |
|
Other debt: Other debt includes certain secured loans within our South American operations, a floor plan financing agreement and certain equipment loans. The restricted cash on our balance sheet relates to collateral securing a portion of this debt.
Revolving Credit Facility: The revolving credit facility is a $250.0 million asset-based facility, which matures in February 2012, and 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. The revolving credit facility has a $25.0 million sub-facility to be used by our Canadian subsidiary. As of April 30, 2011, borrowings under the facility bear interest at a weighted average interest rate of LIBOR plus 1.5%, or 1.73%. A commitment fee of 0.30% to 0.375% per annum, based on our leverage ratios, is payable on all unused portions of the revolving credit facility. 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 April 30, 2011, there were $19.0 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 $158.0 million at April 30, 2011.
Our revolving credit facility matures in February 2012 and, therefore, the outstanding borrowings have been reclassified to current portion of long-term debt in our consolidated balance sheet as of April 30, 2011. We are in the process of negotiating a long-term extension of our revolving credit facility and, while we expect to be able to complete this extension, there is no assurance that we will be able to do so, or, if we are able to extend our revolving credit facility, whether it will be on substantially similar terms and conditions as are currently in effect.
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
Unsecured Senior Notes: The $150.0 million of unsecured senior notes bear interest at 10% per annum and mature 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 April 30, 2011. 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 and capitalized legal and financing costs associated with establishing the revolving credit facility and the issuance of the unsecured senior notes. These deferred financing costs are being amortized over the terms of the credit facility and senior notes of five years and eight years, respectively, as a component of interest expense, net in the consolidated statements of operations. As of April 30, 2011, $3.5 million of unamortized deferred financing costs were included in the balance sheet.
The estimated fair value of our senior notes is based on unadjusted quoted market prices from an active market (Level 1 inputs). At April 30, 2011, our senior notes with a carrying value of $150.0 million had a fair value of $153.7 million.
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 and two subsidiaries in South America are co-borrowers on the $250.0 million revolving credit facility.
The following condensed consolidated 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.
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
Condensed Consolidating Balance Sheets
|
|
As of April 30, 2011 |
| ||||||||||
|
|
(Unaudited) |
| ||||||||||
(Dollars in thousands) |
|
Guarantor |
|
Non-Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Current assets |
|
$ |
427,635 |
|
$ |
72,494 |
|
$ |
|
|
$ |
500,129 |
|
Property, plant and equipment, net |
|
73,206 |
|
7,658 |
|
|
|
80,864 |
| ||||
Other assets |
|
2,492 |
|
11,303 |
|
13,153 |
|
26,948 |
| ||||
Total assets |
|
$ |
503,333 |
|
$ |
91,455 |
|
$ |
13,153 |
|
$ |
607,941 |
|
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities |
|
$ |
261,728 |
|
$ |
32,748 |
|
$ |
|
|
$ |
294,476 |
|
Intercompany payables (receivables) |
|
(71,773 |
) |
71,773 |
|
|
|
|
| ||||
Long-term liabilities |
|
150,136 |
|
87 |
|
|
|
150,223 |
| ||||
Shareholders equity |
|
163,242 |
|
(13,153 |
) |
13,153 |
|
163,242 |
| ||||
Total liabilities and shareholders equity |
|
$ |
503,333 |
|
$ |
91,455 |
|
$ |
13,153 |
|
$ |
607,941 |
|
|
|
As of January 31, 2011 |
| ||||||||||
|
|
Guarantor |
|
Non-Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Current assets |
|
$ |
414,311 |
|
$ |
57,122 |
|
$ |
|
|
$ |
471,433 |
|
Property, plant and equipment, net |
|
72,246 |
|
2,831 |
|
|
|
75,077 |
| ||||
Other assets |
|
881 |
|
4,827 |
|
15,385 |
|
21,093 |
| ||||
Total assets |
|
$ |
487,438 |
|
$ |
64,780 |
|
$ |
15,385 |
|
$ |
567,603 |
|
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities |
|
$ |
200,693 |
|
$ |
32,469 |
|
$ |
|
|
$ |
233,162 |
|
Intercompany payables (receivables) |
|
(47,606 |
) |
47,606 |
|
|
|
|
| ||||
Long-term liabilities |
|
185,317 |
|
90 |
|
|
|
185,407 |
| ||||
Shareholders equity |
|
149,034 |
|
(15,385 |
) |
15,385 |
|
149,034 |
| ||||
Total liabilities and shareholders equity |
|
$ |
487,438 |
|
$ |
64,780 |
|
$ |
15,385 |
|
$ |
567,603 |
|
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
Condensed Consolidating Statements of Operations
(Unaudited)
|
|
For the Three Months Ended April 30, 2011 |
| ||||||||||
(Dollars in thousands) |
|
Guarantor |
|
Non-Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Sales |
|
$ |
240,171 |
|
$ |
31,196 |
|
$ |
|
|
$ |
271,367 |
|
Cost of sales |
|
195,428 |
|
25,401 |
|
|
|
220,829 |
| ||||
Gross profit |
|
44,743 |
|
5,795 |
|
|
|
50,538 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling and administrative expenses |
|
27,279 |
|
4,048 |
|
|
|
31,327 |
| ||||
Equity in earnings of subsidiaries |
|
(808 |
) |
|
|
808 |
|
|
| ||||
Other (income) expense, net |
|
(52 |
) |
452 |
|
|
|
400 |
| ||||
Operating profit |
|
18,324 |
|
1,295 |
|
(808 |
) |
18,811 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest expense, net |
|
4,115 |
|
739 |
|
|
|
4,854 |
| ||||
Earnings before income taxes |
|
14,209 |
|
556 |
|
(808 |
) |
13,957 |
| ||||
Income tax expense (benefit) |
|
362 |
|
(252 |
) |
|
|
110 |
| ||||
Net earnings |
|
$ |
13,847 |
|
$ |
808 |
|
$ |
(808 |
) |
$ |
13,847 |
|
|
|
For the Three Months Ended May 1, 2010 |
| ||||||||||
|
|
Guarantor |
|
Non-Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
Sales |
|
$ |
144,061 |
|
$ |
17,875 |
|
$ |
|
|
$ |
161,936 |
|
Cost of sales |
|
120,684 |
|
15,573 |
|
|
|
136,257 |
| ||||
Gross profit |
|
23,377 |
|
2,302 |
|
|
|
25,679 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling and administrative expenses |
|
21,809 |
|
3,066 |
|
|
|
24,875 |
| ||||
Equity in loss of subsidiaries |
|
2,097 |
|
|
|
(2,097 |
) |
|
| ||||
Other (income) expense, net |
|
(381 |
) |
427 |
|
|
|
46 |
| ||||
Operating (loss) profit |
|
(148 |
) |
(1,191 |
) |
2,097 |
|
758 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest expense, net |
|
4,254 |
|
719 |
|
|
|
4,973 |
| ||||
Loss before income taxes |
|
(4,402 |
) |
(1,910 |
) |
2,097 |
|
(4,215 |
) | ||||
Income tax expense |
|
297 |
|
187 |
|
|
|
484 |
| ||||
Net loss |
|
$ |
(4,699 |
) |
$ |
(2,097 |
) |
$ |
2,097 |
|
$ |
(4,699 |
) |
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
Condensed Consolidating Statements of Cash Flows
(Unaudited)
|
|
For the Three Months Ended April 30, 2011 |
| ||||||||||
(Dollars in thousands) |
|
Guarantor |
|
Non-Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
| ||||
Operating activities |
|
|
|
|
|
|
|
|
| ||||
Net earnings |
|
$ |
13,847 |
|
$ |
808 |
|
(808 |
) |
$ |
13,847 |
| |
Equity in earnings of subsidiaries |
|
(808 |
) |
|
|
808 |
|
|
| ||||
Other adjustments |
|
32,189 |
|
(353 |
) |
|
|
31,836 |
| ||||
Operating activities |
|
45,228 |
|
455 |
|
|
|
45,683 |
| ||||
Investing activities |
|
(27,740 |
) |
(28 |
) |
|
|
(27,768 |
) | ||||
Financing activities |
|
(11,243 |
) |
(1,760 |
) |
|
|
(13,003 |
) | ||||
Effect of exchange rate on cash |
|
|
|
86 |
|
|
|
86 |
| ||||
Net increase (decrease) in cash |
|
6,245 |
|
(1,247 |
) |
|
|
4,998 |
| ||||
Cash at the beginning of the period |
|
2,273 |
|
6,895 |
|
|
|
9,168 |
| ||||
Cash at the end of the period |
|
$ |
8,518 |
|
$ |
5,648 |
|
$ |
|
|
$ |
14,166 |
|
|
|
For the Three Months Ended May 1, 2010 |
| ||||||||||
|
|
Guarantor |
|
Non-Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
| ||||
Operating activities |
|
|
|
|
|
|
|
|
| ||||
Net loss |
|
$ |
(4,699 |
) |
$ |
(2,097 |
) |
2,097 |
|
$ |
(4,699 |
) | |
Equity in loss of subsidiaries |
|
2,097 |
|
|
|
(2,097 |
) |
|
| ||||
Other adjustments |
|
8,461 |
|
667 |
|
|
|
9,128 |
| ||||
Operating activities |
|
5,859 |
|
(1,430 |
) |
|
|
4,429 |
| ||||
Investing activities |
|
(3,946 |
) |
(28 |
) |
|
|
(3,974 |
) | ||||
Financing activities |
|
(2,049 |
) |
2,873 |
|
|
|
824 |
| ||||
Effect of exchange rate on cash |
|
|
|
19 |
|
|
|
19 |
| ||||
Net (decrease) increase in cash |
|
(136 |
) |
1,434 |
|
|
|
1,298 |
| ||||
Cash at the beginning of the period |
|
248 |
|
3,073 |
|
|
|
3,321 |
| ||||
Cash at the end of the period |
|
$ |
112 |
|
$ |
4,507 |
|
$ |
|
|
$ |
4,619 |
|
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 |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
| ||
Allowance for doubtful accounts at beginning of period |
|
$ |
2,707 |
|
$ |
4,919 |
|
Additions to reserves |
|
220 |
|
553 |
| ||
Writeoffs against allowance for doubtful accounts |
|
(393 |
) |
(317 |
) | ||
Collections of previously reserved items |
|
10 |
|
35 |
| ||
Allowance for doubtful accounts at end of period |
|
$ |
2,544 |
|
$ |
5,190 |
|
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
Inventories, net: Summarized below are the components of inventories:
|
|
As of |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
January 31, 2011 |
| ||
|
|
|
|
|
| ||
Inventory purchased under distributor agreements |
|
$ |
121,795 |
|
$ |
107,872 |
|
Raw materials and spare parts |
|
84,628 |
|
79,231 |
| ||
Work in process |
|
121,136 |
|
97,501 |
| ||
Finished goods |
|
|
|
1,305 |
| ||
Total inventories, net |
|
$ |
327,559 |
|
$ |
285,909 |
|
Raw materials and spare parts include OEM equipment and components used in the manufacturing segment. Included in work in process are eight drilling rigs that are substantially complete and ready for customer orders. Finished goods include manufactured equipment that is essentially complete. The inventory balances above are net of inventory reserve adjustments totaling $32.2 million and $30.4 million as of April 30, 2011 and January 31, 2011, respectively.
Property, Plant and Equipment, net: Components of property, plant and equipment, net, were as follows:
|
|
As of |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
January 31, 2011 |
| ||
|
|
|
|
|
| ||
Machinery and equipment |
|
$ |
31,852 |
|
$ |
29,852 |
|
Buildings and leasehold improvements |
|
31,116 |
|
27,918 |
| ||
Rental equipment |
|
66,786 |
|
67,067 |
| ||
Computer hardware and software |
|
4,830 |
|
4,701 |
| ||
Accumulated depreciation |
|
(65,910 |
) |
(62,220 |
) | ||
Net depreciable assets |
|
$ |
68,674 |
|
$ |
67,318 |
|
Construction in progress |
|
4,021 |
|
696 |
| ||
Land |
|
8,169 |
|
7,063 |
| ||
Property, plant and equipment, net |
|
$ |
80,864 |
|
$ |
75,077 |
|
Depreciation expense was $3.6 million and $3.8 million during the three months ended April 30, 2011 and May 1, 2010, respectively.
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
Intangible Assets and Goodwill: Amounts allocated to intangible assets are amortized in a manner over which the expected benefits of those assets are realized pursuant to their estimated useful lives. Intangible asset values include the following:
|
|
|
|
As of April 30, 2011 |
|
|
| |||||||||||
(Dollars in thousands) |
|
Estimated |
|
Gross |
|
Acquisition |
|
Accumulated |
|
Currency |
|
Net |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-current amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Engineering drawings |
|
2.5-10 Years |
|
$ |
6,346 |
|
$ |
|
|
$ |
(5,276 |
) |
$ |
189 |
|
$ |
1,259 |
|
Distribution contracts |
|
7-27 Years |
|
3,384 |
|
1,928 |
|
(707 |
) |
|
|
4,605 |
| |||||
Customer relationships |
|
5-11 Years |
|
7,409 |
|
3,927 |
|
(3,380 |
) |
842 |
|
8,798 |
| |||||
Patents |
|
4 Years |
|
209 |
|
|
|
(209 |
) |
|
|
|
| |||||
Non-compete covenant |
|
5 Years |
|
1,420 |
|
|
|
(1,262 |
) |
118 |
|
276 |
| |||||
Total |
|
|
|
$ |
18,768 |
|
$ |
5,855 |
|
$ |
(10,834 |
) |
$ |
1,149 |
|
$ |
14,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Trademarks and tradename |
|
|
|
6,316 |
|
500 |
|
|
|
422 |
|
7,238 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
|
|
$ |
25,084 |
|
$ |
6,355 |
|
$ |
(10,834 |
) |
$ |
1,571 |
|
$ |
22,176 |
|
Based upon our preliminary purchase price allocation, we acquired approximately $6.4 million of intangible assets and $0.1 million of goodwill in a recent acquisition. These preliminary amounts are recorded in goodwill and intangibles, net in our consolidated balance sheet. In addition, the preliminary purchase price allocation reflects a $1.2 million construction contract liability in connection with the acquired backlog in this acquisition and this amount is recorded in other current liabilities in our consolidated balance sheet. All these amounts are preliminary and remain subject to change as the determination of fair value for the assets acquired and liabilities assumed remains in process. See Note 11 EMDSI Acquisition.
|
|
|
|
As of January 31, 2011 |
| |||||||||||||
(Dollars in thousands) |
|
Estimated |
|
Gross |
|
Accumulated |
|
Impairment |
|
Currency |
|
Net |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-current amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Engineering drawings |
|
2.5-10 Years |
|
$ |
6,346 |
|
$ |
(5,211 |
) |
$ |
|
|
$ |
189 |
|
$ |
1,324 |
|
Distribution contracts |
|
27 Years |
|
3,384 |
|
(624 |
) |
|
|
|
|
2,760 |
| |||||
Customer relationships |
|
6-11 Years |
|
7,409 |
|
(3,097 |
) |
|
|
635 |
|
4,947 |
| |||||
Patents |
|
4 Years |
|
209 |
|
(209 |
) |
|
|
|
|
|
| |||||
Non-compete covenant |
|
5 Years |
|
1,420 |
|
(1,182 |
) |
|
|
105 |
|
343 |
| |||||
Total |
|
|
|
$ |
18,768 |
|
$ |
(10,323 |
) |
$ |
|
|
$ |
929 |
|
$ |
9,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Trademarks |
|
|
|
9,150 |
|
|
|
(2,834 |
) |
374 |
|
6,690 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
|
|
$ |
27,918 |
|
$ |
(10,323 |
) |
$ |
(2,834 |
) |
$ |
1,303 |
|
$ |
16,064 |
|
Amortization expense was $0.5 million and $0.4 million during the three months ended April 30, 2011 and May 1, 2010, respectively.
During the fourth quarter of Fiscal 2010, we performed our annual impairment test for goodwill and indefinite-lived intangible assets and determined that the carrying amount for our Crown reporting unit exceeded its estimated fair value. As a result of the second step of the impairment analysis, we determined that the Crown reporting units indefinite-lived intangible assets were partially impaired and its goodwill was determined to have no residual value.
Warranty Costs: Generally, the only warranty provided to our customers for products we sell that were originally manufactured by others, including our key OEMs, is the warranty provided by those original manufacturers. We warrant products manufactured, and services provided, by us for periods of three to 18 months. Based on historical experience and contract terms, we accrue the estimated cost of our product and service warranties at the time of sale or, in some cases, when specific warranty exposures are identified and quantifiable. Accrued warranty costs are adjusted periodically to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. Occasionally, a material warranty issue can arise that is beyond our historical experience. We accrue for any such warranty issues as they become known and estimable.
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
A summary of activity for accrued warranty costs, recorded in other current liabilities on the consolidated balance sheets for the periods ended April 30, 2011 and May 1, 2010, was as follows:
|
|
For the Three Months Ended |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
| ||
|
|
|
|
|
| ||
Accrued warranty costs at beginning of period |
|
$ |
9,110 |
|
$ |
4,398 |
|
Payments for warranty obligations |
|
(1,317 |
) |
(706 |
) | ||
Warranty accrual |
|
1,063 |
|
269 |
| ||
Accrued warranty costs at end of period |
|
$ |
8,856 |
|
$ |
3,961 |
|
Other current liabilities: Included in other current liabilities are $10.9 million and $12.2 million of accrued job costs as of April 30, 2011 and January 31, 2011, respectively. No other item comprises more than 5% of total current liabilities.
Note 7. Equity
We have 56,025,210 common units issued and outstanding, which consist of both Common Units and Common B Units. Additionally, we have 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 April 30, 2011 and January 31, 2011, the number of Common Units and Common B Units issued and outstanding was 27,033,613 and 28,991,597, 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 four non-executive directors totaled 134,454 restricted shares vesting in five (5) 26,891 share tranches, with each such tranche vesting upon board service for a complete fiscal year. In addition, approximately 62,745 of the restricted shares granted to three former directors were earned as part of their service to us with the balance of their grants being forfeited. The executive grants total 33,613 restricted shares vesting in five (5) 6,723 share tranches, with each tranche vesting upon employment for a complete fiscal year. In addition, approximately 11,204 of the restricted shares granted to a former executive were earned before his resignation from the Company with the balance being forfeited. 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. and Cameron International Corp. and are subject to acceleration in the case of an executives death or disability. This performance condition was met for Fiscal 2010 and 6,723 shares vested; however, this performance condition was not met for Fiscal 2009 or Fiscal 2008 and those tranches were 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 April 30, 2011, diluted earnings per share excluded the approximately 228,571 contingent unvested restricted shares. A total of 221,849 restricted shares will vest upon completion of an initial public offering, and we will record a non-cash compensation expense in connection therewith in an amount equal to the grant-date fair value of such vested shares, estimated to be approximately $5.0 million,
Note 8. Income Taxes
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 months ended April 30, 2011 and May 1, 2010, we recognized tax expense of $0.4 million and $0.3 million, respectively, of Texas Margins tax. During the three months ended April 30, 2011 and May 1, 2010, we recognized a tax benefit of $0.3 million and tax expense of $0.2 million, respectively, associated with foreign jurisdictions.
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
Generally, we make quarterly distributions to our unit holders to fund their tax obligations. During the three months ended April 30, 2011 and May 1, 2010, we made tax distributions of $1.1 million and $0.2 million, respectively, to our unit holders.
Note 9. Related Party Transactions
During the fourth quarter of Fiscal 2009, we received a $37.5 million order from an affiliate of the Companys shareholder. Revenue recognition from this transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. Cash payments received and amounts invoiced pursuant to this transaction are recorded as a customer deposit in the consolidated balance sheet and amounted to $37.5 million and $31.2 million as of April 30, 2011 and January 31, 2011, respectively. Included in inventories, net are $29.7 million and $29.5 million of costs related to this transaction, respectively, as of these same dates. No amounts have been recorded in the consolidated statements of operations for this transaction to date.
Note 10. Litigation and Contingencies
During Fiscal 2009, the State of Texas began conducting a sales and use tax audit for Fiscal 2006, 2007 and 2008. Recently, the audit period has been expanded to include Fiscal 2009. In the second quarter of Fiscal 2009, we completed a preliminary analysis and recorded our then best estimate of probable loss as a charge to selling and administrative expenses and other current liabilities in our consolidated financial statements. As the audit process and periods have evolved, we have continued to evaluate this analysis and have recorded adjustments to the accrual reflecting our best estimate of probable loss. The audit remains in process and, accordingly, our ultimate loss could be greater, or less, than the amounts we have recorded.
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. These insurance policies are subject to a self-insured retention for which we are responsible, which is generally $500,000 for newer cases and $1.0 million for cases initiated before Fiscal 2009. 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.
Note 11. EMDSI Acquisition
On March 23, 2011, we acquired 100% of the stock of EMDSI-Hunt Power, L.L.C. (EMDSI) in an all cash transaction from ITOCHU Corporation of Japan for total consideration of approximately $25.7 million, subject to final closing adjustments. The acquisition was funded from available cash and through borrowings under our revolving credit facility. EMDSI, which is based in Harvey, Louisiana, specializes in the marketing and distribution of medium speed diesel engines for marine propulsion, drilling and power generation applications and is a provider of aftermarket parts and service.
The following summarizes our preliminary assessment of the fair values of the assets acquired and liabilities assumed at the acquisition date. The assets acquired and liabilities assumed remain subject to final closing adjustments, and our ongoing evaluation thereof, which could impact the amount of net tangible assets acquired and, thus, increase or decrease the total consideration transferred. The excess of the consideration transferred over the preliminary assessment of fair value amounts to $0.1 million and is recorded as goodwill. Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. We are in the process of reviewing third-party valuations for the inventories, property, plant and equipment, contract backlog, intangible assets and goodwill acquired. Accordingly, the amounts below, which reflect our preliminary assessment of fair value as of the acquisition date, remain subject to change.
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
(Dollars in thousands) |
|
Fair Values |
| |
Assets acquired: |
|
|
| |
Cash |
|
$ |
2,345 |
|
Accounts receivable |
|
5,009 |
| |
Inventories |
|
11,016 |
| |
Property, plant and equipment |
|
5,019 |
| |
Other assets |
|
177 |
| |
Intangible assets |
|
6,355 |
| |
Goodwill |
|
135 |
| |
|
|
|
| |
Liabilities assumed: |
|
|
| |
Accounts payable |
|
2,087 |
| |
Notes payable |
|
112 |
| |
Accrued liabilities |
|
922 |
| |
Construction contract liability |
|
1,188 |
| |
Net assets acquired/Consideration transferred |
|
$ |
25,747 |
|
The unaudited pro forma condensed combined statement of operations for the three months ended April 30, 2011 and May 1, 2010 gives effect to the March 23, 2011 consummation of the EMDSI Acquisition as if the transaction occurred on February 1, 2011 and 2010, respectively. The unaudited pro forma information is presented for illustration purposes only and is not necessarily indicative of the results of operations which would actually have been reported had the combination been in effect during these periods, or for which we might expect to report in the future.
Stewart & Stevenson LLC and Subsidiaries
Pro Forma Results including EMDSI
|
|
Three Months Ended |
| ||||
(Dollars in thousands, except per unit data) |
|
April 30, 2011 |
|
May 1, 2010 |
| ||
|
|
(unaudited) |
|
(unaudited) |
| ||
Sales |
|
$ |
278,374 |
|
$ |
166,228 |
|
|
|
|
|
|
| ||
Net earnings (loss) |
|
$ |
13,471 |
|
$ |
(6,834 |
) |
|
|
|
|
|
| ||
Weighted average units outstanding: |
|
|
|
|
| ||
Basic |
|
56,025 |
|
56,025 |
| ||
Diluted |
|
56,025 |
|
56,025 |
| ||
|
|
|
|
|
| ||
Earnings (loss) per common unit: |
|
|
|
|
| ||
Basic |
|
$ |
0.24 |
|
$ |
(0.12 |
) |
Diluted |
|
$ |
0.24 |
|
$ |
(0.12 |
) |
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements Continued
(Unaudited)
Note 12. Subsequent Events
Reverse Stock Split: As of May 31, 2011, we effected a reverse common unit split in the ratio of 1:1.785. All common units and per common unit calculations have been recast to include the impact of this reverse common unit split.
Stock Compensation: On May 31, 2011, upon the recommendation of our chairman, our compensation committee approved a grant, vesting immediately, of 154,062 shares to our Chief Executive Officer. We will record a non-cash compensation expense in connection therewith in an amount equal to the grant date fair value of such vested shares, estimated to be approximately $2.3 million. Also on May 31, 2011, upon the recommendation of our chairman, our compensation committee approved a grant to our Chief Executive Officer of 448,179 options to purchase common shares at a strike price of $15, vesting in four (4) equal tranches upon the attainment of performance measures in respect of each of our next four (4) fiscal years established by the compensation committee and approved by our board of directors. We estimate that the grant date fair value of this award to be approximately $2.7 million and expect to recognize a portion of this non-cash compensation expense in each of our next four (4) fiscal years, beginning with the second quarter of Fiscal 2011, unless and to the extent it becomes unlikely that any such tranche of options will ultimately not vest.
On May 31, 2011, upon the recommendation of our chairman, our compensation committee approved, subject to the completion of an initial public offering of our stock, a grant of 33,613 restricted shares to each of our three recently appointed non-executive directors, which vest in five (5) 6,723 share tranches with the first tranche vesting on May 31, 2011 and each of the next four tranches vesting upon board service for a complete fiscal year (with respect to Fiscal 2011 service through January 31, 2012 being deemed a complete fiscal year). The estimated grant date fair value of this award is $1.5 million. Subject to the completion of an initial public offering of our stock, we will record a non-cash compensation expense in an amount equal to the grant date fair value of vested shares, with ratable expense recognized for completed fiscal periods thereafter.
Also on May 31, 2011, upon the recommendation of our chairman, our compensation committee approved, subject to the completion of an initial public offering of our stock, a special, one-time grant to our employees of (i) 100,000 shares to our Vice Chairman and Chief Financial Officer, and (ii) approximately 550,000 shares in the aggregate to all current employees who were employed by the Company on June 1, 2010. Upon the completion of an initial public offering of our stock, we will record a non-cash compensation expense in an amount equal to the grant date fair value of such vested shares, estimated to be approximately $9.8 million.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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 that we serve;
· factors affecting our international sales and operations;
· the potential loss of a key OEM supplier;
· our failure to accurately estimate costs associated with products produced under fixed-price contracts;
· our ability to translate backlog into revenue and profit;
· the effect of regulation of hydraulic fracturing on the demand for our products;
· the impact of governmental laws and regulations, including environmental laws and regulations;
· the hazards to which our employees and customers are exposed during the conduct of our business;
· the occurrence of events not covered by insurance;
· our susceptibility to adverse weather conditions affecting the Gulf Coast;
· unforeseen difficulties relating to acquisitions;
· our ability to attract and retain qualified employees;
· our failure to maintain key licenses;
· our ability to protect our intellectual property;
· our level of indebtedness and restrictions on our activities imposed by our debt instruments;
· our principal stockholder could exercise control of our affairs through his beneficial ownership of a majority of our common equity, including all of our Class B common stock; and
· the other factors described under Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011, which is accessible on the Securities and Exchange Commissions 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.
Overview
We are a leading designer, manufacturer and provider of specialized equipment and aftermarket parts and service for the oil and gas industry and other industries that we have served for over 100 years.
Our wide range of products covers hydraulic fracturing, well stimulation, workover, intervention and drilling operations. These products include pumping, acidizing, coiled tubing, cementing and nitrogen units; drilling rigs and workover rigs; power generation systems; and electrical support and distribution systems, as well as engines, transmissions and material handling equipment. We have a substantial installed base of products, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues from customers in the oil and gas, power generation and various other industries. In addition, we provide rental equipment to our customers, including generator sets, air compressors, rail car movers and material handling equipment.
Business drivers and measures
Revenue factors
Oil and gas industry capital expenditures. Sales of our equipment are significantly driven by the capital spending programs of our customers. Growing worldwide demand for energy has resulted in significantly increased capital expenditures by oil and gas producers in recent years. We believe that we are well positioned for the rapid growth in the development of unconventional oil and gas resources, particularly in North America, which require utilization of technologically advanced well stimulation equipment of the nature that we provide. Although commodity price fluctuations may impact the level of oil and gas exploration activity in the long term, we believe the capital spending programs of our customers at this time continue to be strong. A decrease in the capital spending programs of our customers would adversely impact our equipment sales and, to a lesser extent, our aftermarket parts and service and rental sales. Approximately 77.8% and 75.5% of our revenues in the three months ended April 30, 2011 and May1, 2010, respectively, came from customers in the oil and gas industry.
Non-oil and gas industries. We believe that many of the non-oil and gas industries we serve, particularly the commercial vehicle and material handling industries, provide us with opportunities to continue to grow our business.
Aftermarket parts and service demand. In addition, we provide aftermarket parts and service and rent equipment to customers in the oil and gas, power generation, marine, mining, construction, commercial vehicle and material handling industries. These sales generated approximately 32.2% and 41.8% of our revenues during the three months ended April 30, 2011 and May1, 2010, respectively. We provide aftermarket parts and service for equipment manufactured by approximately 100 manufacturers, including products manufactured by us and our key OEMs, and our aftermarket business provides us with a recurring revenue stream. Our rental revenue includes generators, compressors and material handling equipment.
Backlog. Among the metrics we track to monitor demand in our business is equipment order backlog. We define backlog as unfilled equipment orders that consist of written purchase orders or signed contracts accompanied, if required by our credit policies, by credit support (typically down payments or letters of credit). As of April 30, 2011, our equipment order backlog was $412.2 million, compared to $259.9 million as of May 1, 2010.
Backlog of $412.2 million as of April 30, 2011 includes a $37.5 million related party transaction reflecting an order in Fiscal 2009 from an affiliate. Revenue recognition from this transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. A deposit in the amount of $37.5 million is recorded as a customer deposit in our consolidated balance sheet. Included in inventories, net is $29.7 million in costs related to this contract, and no amounts have been recorded in the consolidated statements of operations through April 30, 2011.
Seasonality. Our revenues are not significantly affected by seasonality.
Operational factors
Ensuring timely supply of components. While we believe that the opportunities to grow our business are significant, there are also challenges and uncertainties we face in executing our business plans. In the current environment of strong demand for products and services of the type we provide, our ability to procure certain components on a timely basis to meet the delivery needs of our customers is a concern. A substantial portion of the products we sell includes components provided by our six key OEMs, and on occasion we need to rely upon alternative sources of supply for those components because of the current levels of high demand for the components we require. Our ability to satisfy the delivery requirements of a customer on a timely basis is critical to our success.
Labor market constraints. Although we have the benefit of a highly trained and experienced workforce, we believe that attracting and retaining high quality and experienced personnel is a significant challenge in the current competitive environment, particularly in oil- and gas-related activities. Accordingly, we place particular emphasis on career development programs that seek to improve the retention of employees, including senior and middle management.
Presentation of historical financial information
Our fiscal year begins on February 1 of the stated year and ends on January 31 of the following year. For example, Fiscal 2011 began on February 1, 2011 and will end on January 31, 2012. We report results on the fiscal quarter method, with each quarter comprising approximately 13 weeks. The first quarter of Fiscal 2011 began on February 1, 2011 and ended on April 30, 2011.
Operation as an LLC
We have conducted our operations through Stewart & Stevenson LLC, a limited liability company, and, as a result, U.S. federal and certain state income taxes were paid by the holders of our equity interests. Therefore, no U.S. federal income tax expense is recorded in our statement of operations. The amounts shown under income taxes in our audited consolidated financial statements reflect income tax expense associated with foreign jurisdictions and certain state taxes.
New Accounting Pronouncement
On February 1, 2011, we adopted an update to existing guidance on revenue recognition for arrangements with multiple deliverables. This update allows companies to allocate consideration for qualified separate deliverables using estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable. Additional disclosures are required that discuss the nature of multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required. The adoption of this update did not have a material impact on our consolidated financial statements.
Segment presentation
We recently revised our segment presentation to present the following reportable segments:
· Manufacturing, which includes the design, manufacture and marketing of equipment for oilfield service providers, drilling and workover contractors, U.S. and international oilfield service companies, and national oil companies. We provide parts and service to customers primarily in the oil and gas industry.
· Distribution, which includes the distribution of stand-alone products and the provision of aftermarket parts and service for products manufactured by us, our key OEMs and other manufacturers, as well as the renting of equipment, including generator sets, rail car movers and material handling equipment.
· Corporate and shared services, which includes administrative overhead normally not associated with specific activities within our operating segments.
For more information on our segments, see Segment data.
Comparison of Results of OperationsThree Months Ended April 30, 2011 and May 1, 2010
Sales - For the three months ended April 30, 2011, our sales were $271.4 million, an increase of $109.5 million, or 67.6%, compared to the same period of Fiscal 2010 sales of $161.9 million. The increase in sales impacted both operating segments and was primarily attributable to an overall increase in equipment sales from the oil and gas industry, primarily for our well stimulation equipment. Parts and service sales increased in both segments. Prime mover, power generation and transmissions sales were primarily responsible for the increase in equipment sales in the distribution segment. Sales for Fiscal 2011 include the impact of the EMDSI Acquisition, reported in our distribution segment, from March 23, 2011 through April 30, 2011 and amounted to approximately $1.5 million.
A breakdown of sales for the periods is as follows:
|
|
For the Three Months Ended |
|
Change |
| |||||||
(Dollars in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
|
$ |
|
% |
| |||
|
|
|
|
|
|
|
|
|
| |||
Manufacturing segment |
|
|
|
|
|
|
|
|
| |||
Equipment |
|
$ |
106,008 |
|
$ |
53,561 |
|
$ |
52,447 |
|
97.9 |
% |
Parts and service |
|
6,487 |
|
4,737 |
|
1,750 |
|
36.9 |
% | |||
Total manufacturing sales |
|
$ |
112,495 |
|
$ |
58,298 |
|
$ |
54,197 |
|
93.0 |
% |
|
|
|
|
|
|
|
|
|
| |||
Distribution segment |
|
|
|
|
|
|
|
|
| |||
Equipment |
|
$ |
71,939 |
|
$ |
36,061 |
|
$ |
35,878 |
|
99.5 |
% |
Parts and service |
|
80,739 |
|
63,044 |
|
17,695 |
|
28.1 |
% | |||
Rentals |
|
6,194 |
|
4,533 |
|
1,661 |
|
36.6 |
% | |||
Total distribution sales |
|
$ |
158,872 |
|
$ |
103,638 |
|
$ |
55,234 |
|
53.3 |
% |
|
|
|
|
|
|
|
|
|
| |||
Total sales |
|
$ |
271,367 |
|
$ |
161,936 |
|
$ |
109,431 |
|
67.6 |
% |
|
|
|
|
|
|
|
|
|
| |||
Operating profit (loss) |
|
|
|
|
|
|
|
|
| |||
Manufacturing |
|
$ |
19,756 |
|
$ |
5,488 |
|
14,268 |
|
260.0 |
% | |
Distribution |
|
10,259 |
|
3,579 |
|
6,680 |
|
186.6 |
% | |||
Corporate and shared services |
|
(11,204 |
) |
(8,309 |
) |
(2,895 |
) |
(34.8 |
)% | |||
Total operating profit |
|
$ |
18,811 |
|
$ |
758 |
|
$ |
18,053 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Operating profit percentage |
|
|
|
|
|
|
|
|
| |||
Manufacturing |
|
17.6 |
% |
9.4 |
% |
|
|
|
| |||
Distribution |
|
6.5 |
% |
3.5 |
% |
|
|
|
| |||
Consolidated |
|
6.9 |
% |
0.5 |
% |
|
|
|
|
Manufacturing sales increased by 93.0%, or $54.2 million, for the three months ended April 30, 2011 compared to the same period in Fiscal 2010, of which $52.4 million was related to equipment sales and $1.8 million was related to an increase in parts and service sales. The increase in equipment sales was primarily attributable to higher sales volumes for well stimulation equipment and seismic products, which was partially offset by lower sales volumes of power generation equipment (associated with deepwater drilling rig build cycles) as follows:
|
|
For the Three Months Ended |
|
Change |
| |||||||
(Dollars in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
|
$ |
|
% |
| |||
|
|
|
|
|
|
|
|
|
| |||
Manufacturing equipment sales |
|
|
|
|
|
|
|
|
| |||
Well stimulation |
|
$ |
92,047 |
|
$ |
27,341 |
|
$ |
64,706 |
|
236.7 |
% |
Rigs |
|
5,399 |
|
6,299 |
|
(900 |
) |
(14.3 |
)% | |||
Seismic products |
|
4,188 |
|
40 |
|
4,148 |
|
|
| |||
Power generation |
|
2,425 |
|
16,649 |
|
(14,224 |
) |
(85.4 |
)% | |||
Electric products |
|
1,947 |
|
2,504 |
|
(557 |
) |
(22.2 |
)% | |||
Other |
|
2 |
|
728 |
|
(726 |
) |
(99.7 |
)% | |||
Total equipment sales |
|
$ |
106,008 |
|
$ |
53,561 |
|
$ |
52,447 |
|
97.9 |
% |
Distribution sales increased by $55.2 million to $158.9 million for the three months ended April 30, 2011, compared to $103.6 million during the same period of Fiscal 2010. The increase in distribution sales was due to increased equipment sales of $35.9 million, parts and service of $17.7 million and rentals of $1.6 million. The increase in prime movers, transmissions and engines was primarily due to higher sales volumes for oilfield equipment. Power generation equipment sales increased in large part due to sales for back-up power to data centers. Equipment sales increased due to the following changes in our distribution products:
|
|
For the Three Months Ended |
|
Change |
| |||||||
(Dollars in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
|
$ |
|
% |
| |||
|
|
|
|
|
|
|
|
|
| |||
Distribution equipment sales |
|
|
|
|
|
|
|
|
| |||
Prime movers |
|
$ |
18,295 |
|
$ |
5,973 |
|
$ |
12,322 |
|
206.3 |
% |
Power generation |
|
14,796 |
|
6,193 |
|
8,603 |
|
138.9 |
% | |||
Transmissions |
|
14,237 |
|
7,850 |
|
6,387 |
|
81.4 |
% | |||
Engines |
|
9,630 |
|
6,363 |
|
3,267 |
|
51.3 |
% | |||
Material handling |
|
8,817 |
|
5,874 |
|
2,943 |
|
50.1 |
% | |||
Rail car movers |
|
4,117 |
|
2,023 |
|
2,094 |
|
103.5 |
% | |||
Other |
|
2,047 |
|
1,785 |
|
262 |
|
14.7 |
% | |||
Total equipment sales |
|
$ |
71,939 |
|
$ |
36,061 |
|
$ |
35,878 |
|
99.5 |
% |
Gross profit Our gross profit was $50.5 million for the three months ended April 30, 2011 compared to $25.7 million for the same period in Fiscal 2010, reflecting an increase in gross profit margin from 15.9% to 18.6%. Our gross profit margin increased by 2.7 percentage points due to higher sales volumes and product mix. The manufacturing segment gross profit margin increased from 16.4% to 22.3%, an increase of 5.9 percentage points. This increase was due in large part to higher sales volumes and product mix, with a significant portion of this increase attributable to well stimulation equipment. The distribution segment gross profit margin increased from 15.5% to 16.0%, an increase of 0.5 percentage points.
Selling and administrative expenses Selling and administrative expenses increased by $6.5 million to $31.3 million for the three months ended April 30, 2011, primarily as a result of increases in salaries and wages due to the restoration of previous pay cuts in August 2010, a company-wide pay increase effective at the start of Fiscal 2011 of approximately 4.0%, increased headcount and a one-time bonus to our new Chief Executive Officer, all of which amounted to approximately $4.2 million. The remaining increase is not attributable to any single area, but is reflective of the overall increase in our business activity. As a percentage of sales, selling and administrative expenses decreased to 11.5% from 15.4% for the three months ended April 30, 2011, as compared to the same period in Fiscal 2010.
Other expense, net Other expense increased by $0.4 million to $0.4 million for the three months ended April 30, 2011 compared to the same period in Fiscal 2010 primarily as the result of foreign currency transaction losses related to our foreign subsidiaries.
Operating profit (loss) Our operating profit increased to $18.8 million, or 6.9% of sales, during the three months ended April 30, 2011 from $0.8 million, or 0.5% of sales, in the same period of Fiscal 2010, primarily as the result of higher sales volumes and gross profit margins.
Interest expense, net Interest expense, net for the three months ended April 30, 2011 decreased by $0.1 million over the same period in Fiscal 2010 mainly as a result of lower borrowings outstanding on and interest rates for our revolving credit facility.
Segment data
Our prior reports filed with the SEC through the third quarter of Fiscal 2010 presented four segments: equipment, aftermarket parts and service, rental and corporate. In our Fiscal 2010 Annual Report on Form 10-K, we revised our segments to the following three segments: manufacturing, distribution and corporate and shared services. Information relating to the first quarter of Fiscal 2010 included herein and in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report have been recast to reflect our new segment presentation.
Our reportable segments are as follows:
Manufacturing
We design, manufacture and market equipment for U.S. and international oilfield service providers and drilling and workover contractors, as well as national oil companies that require integrated and customized product solutions. We manufacture equipment specifically for hydraulic fracturing, well stimulation, well workover, intervention and drilling operations. Our manufactured products
include integrated solutions, which incorporate a variety of components into a single system, for a wide range of oilfield services and support applications. In addition, we provide parts and service to customers primarily in the oil and gas industry.
Distribution
We provide stand-alone products and aftermarket parts and service for products manufactured by us, our six key OEMs and other manufacturers. In addition, we provide rental equipment including generator sets, air compressors, rail car movers and material handling equipment to our customers. Our aftermarket parts and service operations, which provide us with a recurring, higher-margin source of revenue, serve customers engaged in the oil and gas, power generation, marine, mining, construction, commercial vehicle and material handling industries, as well as other industries.
Corporate and shared services
Our corporate and shared services segment includes administrative overhead normally not associated with specific activities within the operating segments. These expenses include legal, finance and accounting, internal audit, human resources, information technology, marketing, supply chain and similar corporate office costs.
Intra-segment revenues and costs are eliminated, and operating profit (loss) represents earnings (loss) before interest and income taxes.
Segment Results Comparison Three Months Ended April 30, 2011 and May 1, 2010
Manufacturing
Operating profit generated by our manufacturing segment increased to $19.8 million, or 17.6% of sales, for the three months ended April 30, 2011, from $5.5 million, or 9.4% of sales, for the same period of Fiscal 2010. The $14.3 million increase in operating profit was attributable to increases of $12.1 million in sales volume and $3.4 million in increases due to higher average gross profit margins, and a decrease of $0.2 million in other expense. These improvements were partially offset by an increase in selling and administrative expenses of $1.4 million, which primarily related to higher salaries and wages due to the restoration of previous pay cuts in August 2010, a company-wide pay increase effective at the start of Fiscal 2011 of approximately 4.0%, increased headcount and new product development expenses.
Our manufacturing backlog as of April 30, 2011 was $278.6 million, as compared to $205.0 million as of May 1, 2010, an increase of 35.9%. Backlog of $278.6 million as of April 30, 2011 includes a $37.5 million related party transaction, reflecting an order in Fiscal 2009 from an affiliate. Revenue recognition from this transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. Cash payments received pursuant to this transaction are recorded as customer deposits in the condensed consolidated balance sheet and amounted to $37.5 million as of April 30, 2011. Included in inventories, net is $29.7 million of costs related to this transaction, and no amounts have been recorded in the condensed consolidated statements of operations for this transaction to date.
Distribution
Operating profit generated by the distribution segment increased to $10.3 million during the three months ended April 30, 2011 from $3.6 million during the same period in Fiscal 2010, representing an increase in operating profit percentage from 3.5% to 6.5%. The $6.7 million increase in operating profit was attributable to increases of $8.8 million in sales volume and $0.5 million in average gross profit margins, partially offset by increases of $2.4 million in selling and administrative expenses and $0.2 million in other expense. The increase in selling and administrative expenses was due to higher salaries and wages due to the restoration of previous pay cuts in August 2010, a company-wide pay increase effective at the start of Fiscal 2011 of approximately 4.0%, increased headcount and depreciation.
Our distribution backlog as of April 30, 2011 was $133.6 million, as compared to $54.9 million on May 1, 2010, an increase of 145.0%.
Corporate and shared services
Corporate and shared services expenses increased to $11.2 million during the three months ended April 30, 2011 compared to $8.3 million during the same period of Fiscal 2010, primarily as a result of higher salaries and wages due to the restoration of previous pay cuts in August 2010, a company-wide pay increase effective at the start of Fiscal 2011 of approximately 4.0%, increased headcount and a one-time bonus to our new CEO during the three months ended April 30, 2011. Due to higher sales volumes, corporate and shared services expenses decreased from 5.1% to 4.1% as a percentage of sales.
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.
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 borrowing capacity under the revolving credit facility is impacted by, among other factors, the amount of working capital and qualifying assets therein. 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 liquidity needs for the next twelve months. 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.
Cash flows
|
|
For the Three Months Ended |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
May 1, 2010 |
| ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
|
$ |
45,683 |
|
$ |
4,429 |
|
Net cash used in investing activities |
|
(27,768 |
) |
(3,974 |
) | ||
Net cash (used in) provided by financing activities |
|
(13,003 |
) |
824 |
| ||
As of April 30, 2011, our cash and cash equivalent balance was $14.2 million. The level of cash and cash equivalents is impacted by the timing of cash receipts, disbursements and borrowings and payments under our revolving credit facility.
Net cash flow provided by operating activities for the three months ended April 30, 2011 increased by $41.3 million compared to the same period in Fiscal 2010. This increase in the Fiscal 2011 period was largely attributable to greater earnings and the completion of long-term contracts that were billed and collected, plus increases in customer deposits. These sources of increased cash flow in large part funded the build-up in inventory during the three months ended April 30, 2011, which reflects the overall increase in business activity for our company.
Net cash used in investing activities increased by $23.8 million for the three months ended April 30, 2011 compared to the same period in Fiscal 2010. This increase was due to the acquisition on March 23, 2011 of EMDSI. See Note 11 EMDSI Acquisition. Capital expenditures and additions to rental equipment remained relatively consistent between both periods.
Net cash used in financing activities increased by $13.8 million for the three months ended April 30, 2011 compared to the same period in Fiscal 2010, and primarily relate to higher payments in Fiscal 2011 under our revolving credit facility due to increased cash flow from operating activities, plus increased payments for our short-term notes payable. Net earnings for Fiscal 2011 resulted in increased distributions to our unit holders for tax obligations.
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 $158.0 million at April 30, 2011.
Our revolving credit facility matures in February 2012 and, therefore, the outstanding borrowings have been reclassified to current portion of long-term debt in our consolidated balance sheet as of April 30, 2011. We are in the process of negotiating a long-term extension of our revolving credit facility and, while we expect to be able to complete this extension, there is no assurance that we will be able to do so, or, if we are able to extend our revolving credit facility, whether it will be on substantially similar terms and conditions as are currently in effect.
Borrowings under our revolving credit facility and our senior notes were as follows:
|
|
As of |
| ||||
(Dollars in thousands) |
|
April 30, 2011 |
|
January 31, 2011 |
| ||
|
|
|
|
|
| ||
Revolving credit facility |
|
$ |
25,081 |
|
$ |
35,181 |
|
Unsecured senior notes |
|
150,000 |
|
150,000 |
| ||
Total |
|
$ |
175,081 |
|
$ |
185,181 |
|
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 April 30, 2011. 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 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 borrowing capacity under the revolving credit facility is impacted by, among other factors, the amount of working capital and qualifying assets therein. 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 liquidity needs for the next twelve months. 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 our total estimated capital expenditures for Fiscal 2011 will be approximately $36.0 million, with up to $25.0 million of this amount to be used for additions to our rental fleet.
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
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. Revenues generated by our Canadian, Colombian and Venezuelan subsidiaries comprised 6.3%, 3.4% and 0.2%, respectively, of our total revenue during the three months ended April 30, 2011. Our results of operations were not significantly impacted by changes in currency exchange rates.
A 10% depreciation of the Canadian dollar with respect to the U.S. dollar would have caused our Canadian subsidiarys assets and sales as of and for the fiscal quarter ended April 30, 2011 to decrease in U.S. dollar terms by approximately $2.8 million and $1.6 million, respectively. A 10% depreciation of the Colombian peso with respect to the U.S. dollar would have caused our Colombian subsidiarys assets and sales as of and for the fiscal quarter ended April 30, 2011 to decrease in U.S. dollar terms by approximately $2.1 million and $0.8 million, respectively.
On January 10, 2010, the Venezuelan government devalued its currency from 2.15 Bolivars per U.S. dollar to 4.30 Bolivars per U.S. dollar (the official rate) and the Venezuelan economy has since been designated as hyperinflationary. We have historically utilized the official rate for our Venezuelan operations. Beginning February 1, 2010, we utilized the U.S. dollar as the functional
currency for our Venezuelan subsidiary and remeasured its financial statements into U.S. dollars at the official rate. Accordingly, using hyperinflationary accounting, we recognized the related losses or gains from such remeasurement of its balance sheet in the consolidated statements of its operations.
At January 31, 2011, we evaluated the rate at which we remeasure our Venezuelan subsidiary and concluded that based on the continued slow-down of its economy and resultant constraints presently impacting the banking environment and associated limitations therein, that the SITME rate of 5.30 Bolivars per U.S. dollar was a more appropriate remeasurement rate. The result of this change in remeasurement rate did not have a material impact to our financial statements. During the first quarter of Fiscal 2011 and Fiscal 2010, the SITME rate and official rate did not fluctuate significantly. As a result, the effect of remeasuring our Venezuelan subsidiary was insignificant.
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.
Effects of inflation
We do not believe that inflation has had a material adverse effect on our financial condition or results of operations in recent years. However, to the extent that the cost of components and other supplies that we purchase rise and we are unable to pass those price increases on to our customers, our financial condition and results of operations would be adversely affected. In instances in which we enter into contracts, such as for the manufacture of certain equipment that requires lead time between the placing of the order and delivery, the majority of those contracts are at a fixed price. Any increase in component and other supply costs over the term of these contracts would reduce our profit margin on those products.
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 with or submit to 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 Companys 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 Companys 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, including our CEO and CFO, evaluated the changes in our internal control over financial reporting during the quarter ended April 30, 2011. We determined that there were no changes in our internal control over financial reporting during the quarter ended April 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During Fiscal 2009, the State of Texas began conducting a sales and use tax audit for Fiscal 2006, 2007 and 2008. Recently, the audit period has been expanded to include Fiscal 2009. In the second quarter of Fiscal 2009, we completed a preliminary analysis and recorded our then best estimate of probable loss as a charge to selling and administrative expenses and other current liabilities in our consolidated financial statements. As the audit process and periods have evolved, we have continued to evaluate this analysis and have recorded adjustments to the accrual reflecting our best estimate of probable loss. The audit remains in process and, accordingly, our ultimate loss could be greater, or less, than the amounts we have recorded.
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. These insurance policies are subject to a self-insured retention for which we are responsible, which is generally $500,000 for newer cases and $1.0 million for cases initiated before Fiscal 2009. 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.
For a discussion of 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, 2011, which is accessible on the Securities and Exchange Commissions website at www.sec.gov. There have been no material changes to the risk factors disclosed in the Fiscal 2010 Form 10-K.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Not applicable.
10.1 |
|
Second Supplemental Indenture, dated as of March 23, 2011, among Stewart & Stevenson LLC, EMDSI-Hunt Power, L.L.C. and Wells Fargo Bank National Association, to Indenture dated as of July 6, 2006 (Filed as Exhibit 10.1(b) to the Registrants Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed on May 2, 2011 (File No. 001-33836) and incorporated herein by reference.) |
10.2 |
|
Employment Agreement, dated February 2, 2011, between Stewart & Stevenson LLC and Stephen Fulgham (Filed as Exhibit 10.8 to the Registrants Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed on May 2, 2011 (File No. 001-33836) and incorporated herein by reference.) |
|
|
|
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/ STEVE FULGHAM |
|
|
Steve Fulgham |
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
By: |
/S/ JOHN B. SIMMONS |
|
|
John B. Simmons |
|
|
Chief Financial Officer |
|
|
|
|
|
|
June 1, 2011 |
|
|