SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 31, 2002 ("Fiscal 2001") or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission file number 0-8493
STEWART & STEVENSON SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 74-1051605
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2707 North Loop West, Houston, Texas 77008
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 868-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
AGGREGATE MARKET VALUE OF VOTING SECURITIES HELD
BY NONAFFILIATES AS OF MARCH 31, 2002:
$550,544,381
Number of shares outstanding of each of the issuer's classes of common stock, as
of March 31, 2002:
COMMON STOCK, WITHOUT PAR VALUE 28,451,906 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K
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Proxy Statement for the 2002 Part III
Annual Meeting of Shareholders
ITEM 1. BUSINESS
Stewart & Stevenson Services, Inc. (together with its wholly-owned subsidiaries,
the "Company" or "Stewart & Stevenson") was founded in Houston, Texas in 1902
and was incorporated under the laws of the State of Texas in 1947. Since its
beginning, the Company has been primarily engaged in the custom fabrication of
engine driven products. Stewart & Stevenson consists of five major business
segments: the Power Products segment, the Distributed Energy Solutions segment,
the Tactical Vehicle Systems segment, the Petroleum Equipment segment, and the
Airline Products segment.
The Company's fiscal year begins on February 1 of the year stated and ends on
January 31 of the following year. For example, "Fiscal 2001" commenced on
February 1, 2001 and ended on January 31, 2002. Identifiable assets at the close
of Fiscal 2001, 2000, and 1999, net sales and operating profit for such fiscal
years for the Company's business segments, export sales, and sales to customers
representing 10% or more of consolidated sales are presented in the Notes to
Consolidated Financial Statements contained herein.
POWER PRODUCTS SEGMENT
Effective with the fourth quarter of Fiscal 2001, the Power Products segment was
modified to exclude custom generator set packaging, turnkey power plant
installation, and sales of power generation solutions in domestic and certain
international markets. These activities will be reported as a new segment called
Distributed Energy Solutions - see below. The Power Products segment sells and
rents various industrial equipment; sells components, replacement parts,
accessories, and other materials supplied by independent manufacturers; and
provides in-shop and on-site repair services for industrial transportation
equipment.
Some of the equipment sold or rented by the Power Products segment is acquired
by the Company from independent manufacturers pursuant to distribution
agreements. The following table contains the name of certain manufacturers with
whom the Company presently maintains a significant distribution contract, a
description of the products and territories covered, and the expiration date
thereof.
EXPIRATION
MANUFACTURER PRODUCTS TERRITORIES DATE
--------------- ----------- ------------ ----------
Detroit Diesel Corporation, a Heavy Duty High Speed Texas, Colorado, Northern California, 2003
Daimler Chrysler Company** Diesel Engines New Mexico, Wyoming, Nebraska, Louisiana,
Mississippi, Alabama, Venezuela, and Colombia
Electro-Motive Division of General Heavy Duty Medium Speed Texas, Colorado, New Mexico, Oklahoma, 2004
Motors Corporation** Diesel Engines Arkansas, Louisiana, Tennessee, Mississippi,
Alabama, Mexico, Central America, and
parts of South America
Allison Transmission Division of On- and Off-Highway Automatic Texas, Colorado, Northern California, 2004
General Motors Corporation Transmissions, Power Shift New Mexico, Wyoming, Nebraska, Louisiana,
Transmissions and Torque Converters Mississippi, Alabama, Venezuela, and Colombia
Hyster Company Material Handling Equipment Texas *
Thermo King Corporation Transport Refrigeration Equipment Southeast and South Texas, Southern 2002
Louisiana, and Northern California
Waukesha Engine Division of Natural Gas Industrial Engines Colorado, Wyoming, New Mexico, Utah, Oregon, 2003
Dresser Industries, Inc.** Hawaii, Kansas, Arizona, California,
Washington, Nevada, Colombia, and Alaska
Kohler Company Spectrum Generator Sets Colorado, Southern Louisiana, New Mexico, *
Texas, Wyoming, and Northern California
Deutz AG** Diesel Engines Colorado, Wyoming, Arizona, New Mexico, *
Washington, Alaska, Texas, Oklahoma, Kansas,
Arkansas, Louisiana, Mississippi, and
Western Tennessee
Mercury Marine and MerCruiser, Diesel and Gas Engines Texas, Louisiana, Mississippi, Arkansas, 2003
Divisions of Brunswick Corporation Missouri, Oklahoma, Kansas, New Mexico, Iowa,
Florida, Georgia, Tennessee, Alabama, Kentucky,
North Carolina, South Carolina, Alaska,
Washington, Oregon, Idaho, Montana, Wyoming,
North Dakota, South Dakota, and Nebraska
* No expiration date. Agreements may be terminated by
written notice of termination by either party under
certain conditions.
** Applicable to both the Power Products segment and
the Distributed Energy Solutions segment.
2
Distribution agreements generally require the Company to purchase and stock
products for resale to end users, original equipment manufacturers, and/or
independent dealers within the franchised area of distribution. Such agreements
may contain provisions restricting sales of products outside of the franchised
territory and prohibiting the sale of competitive products within the franchised
territory. The Company's major distribution agreements also require the Company
to stock repair parts, components, and accessories for resale to end users,
either directly by the Company or through a dealer network; and to provide
aftermarket service support for distributed products within the franchised
territory. The Company also offers in-shop and on-site repair services for
related equipment manufactured by companies with whom it does not have a
distribution agreement.
The Power Products segment also sells generator sets, pump packages, marine
propulsion systems, and other engine driven equipment. Generator sets fabricated
by the Company range in size from 25 kw to 1,000 kw. In addition, the Power
Products segment markets generator sets ranging in size from 1,000 kw to 5,700
kw. Pump packages, marine propulsion systems, and other engine-driven packaged
equipment fabricated by the Company range in size from 35 hp to 7,000 hp. Most
generator sets and other engine-driven packaged equipment are based upon diesel,
dual fuel, or natural gas fueled engines supplied by independent manufacturers
with whom the Company has a distribution or packaging agreement. Such agreements
do not usually restrict the sale of packaged equipment to a franchised
territory, and the products fabricated by the Company are sold on a world-wide
basis.
Power Products segment operations are conducted at branch facilities located
within the Company's franchised areas of operations. New products manufactured
by suppliers and repair parts, components, and accessories are marketed under
the trademarks and trade names of the original manufacturer. Products fabricated
by the Company and aftermarket service are marketed under the "Stewart &
Stevenson" name and other trademarks, trade names, and service marks owned by
the Company.
The Company's principal distribution agreements are subject to early termination
by the suppliers for a variety of causes, including a change in control or a
change in the principal management of the Company. Although no assurance can be
given that such distribution agreements will be renewed beyond their expiration
dates, they have been renewed regularly in the past. Any interruption in the
supply of materials from the original manufacturers, or a termination of a
distributor agreement, could have a material effect on the results of operations
of the Power Products segment.
The Power Products segment competes with other manufacturers and their
distributors in the sale of original equipment, with the manufacturers and
distributors of non-original equipment parts for the sale of spare parts, and
with independent repair shops for in-shop and on-site repair services. No single
competitor competes against the Company's Power Products segment in all of its
businesses, but certain competitors may have a leading position in different
product areas. Major competitors in the sale of packaged diesel and gas-fired
reciprocating engine equipment include Caterpillar, Inc. and its distributors,
and Cummins, Inc. and its distributors.
Operations of the Power Products segment accounted for approximately 44%, 51%,
and 63% of consolidated sales during Fiscal 2001, 2000, and 1999, respectively.
DISTRIBUTED ENERGY SOLUTIONS SEGMENT
The Distributed Energy Solutions Segment was reported separately effective with
the fourth quarter of Fiscal 2001 and includes the Company's activities
associated with the reciprocating diesel and natural gas engine generator set
packaging, turnkey power plant installation operations and maintenance services,
and sales of power generation solutions in domestic and certain international
markets. This segment was created to provide a clearer view of the Company's
power generation activities and to allow improved focus on market opportunities.
Some of the equipment sold by the Distributed Energy Solutions segment is
acquired by the Company from independent manufacturers pursuant to the
distribution agreements referenced in the Power Products segment. Some of the
listed agreements are common to both the Distributed Energy Solutions and Power
Products segments, and the table included in the Power Products segment above
details those agreements that are common to both segments. The Distributed
Energy Solutions segment also has two agreements that are unique to that
segment; an agreement with Mitsubishi Heavy Corp. for natural gas industrial
engines for the United States and the Dominican Republic, and a Power Energy
Partner agreement with Waukesha Engine that allows this segment to sell as an
original equipment manufacturer. These agreements are terminable upon certain
notifications.
The Distributed Energy Solutions segment sells custom generator sets fabricated
by the Company that range in size from 550 kw to 5,700 kw. Most generator sets
and other engine-driven packaged equipment are based upon diesel, dual fuel, or
natural gas fueled engines supplied by independent manufacturers with whom the
Company has a distribution or OEM packaging agreement. Such agreements do not
usually restrict the sale of packaged equipment to a franchised territory, and
the products fabricated by the Company are sold on a world-wide basis. Other
services offered by the Distributed Energy Solutions segment include turnkey
installation services, operation and maintenance contracts, professional
services agreements, green field development, building modifications, equipment
upgrades and retrofits, and emission control systems and environmental
compliance testing.
3
The Distributed Energy Solutions segment operations are conducted at fabricating
facilities located in Houston, Texas and Sacramento, California. New products
manufactured by suppliers and repair parts, components, and accessories are
marketed under the trademarks and trade names of the original manufacturer.
Products fabricated by the Company and aftermarket service are marketed under
the "Stewart & Stevenson" name and other trademarks, trade names, and service
marks owned by the Company. The Distributed Energy Solutions segment also
utilizes the Power Products segment branch facilities and personnel to perform
aftermarket service and support for product offerings.
The Company's principal distribution agreements are subject to early termination
by the suppliers for a variety of causes, including a change in control or a
change in the principal management of the Company. Although no assurance can be
given that such distribution agreements will be renewed beyond their expiration
dates, they have been renewed regularly in the past. Any interruption in the
supply of materials from the original manufacturers, or a termination of a
distributor agreement, could have a material effect on the results of operations
of the Distributed Energy Solutions segment.
The Distributed Energy Solutions segment competes with other manufacturers and
their distributors in the custom packaging of generator sets, with manufacturers
and distributors of non-original equipment parts for the sale of spare parts,
and with independent repair shops for in-shop and on-site repair services. No
single competitor competes against the Company's Distributed Energy Solutions
segment in all of its businesses, but certain competitors may have a leading
position in different product areas. Major competitors in the custom packaging
of generator sets, turnkey power plant installation, and power generation
solutions include Caterpillar, Inc. and Wartsila NSD.
Operations of the Distributed Energy Solutions segment accounted for
approximately 9%, 4%, and 0% of consolidated sales during Fiscal 2001, 2000, and
1999, respectively.
TACTICAL VEHICLE SYSTEMS SEGMENT
The Tactical Vehicle Systems segment assembles and provides sustaining design
engineering and service and support for the Family of Medium Tactical Vehicles
("FMTV") under contracts with the U.S. Army. The initial FMTV contract was
awarded in 1991 and called for the production of approximately 11,200 2-1/2-ton
and 5-ton trucks in several configurations, including troop carriers, wreckers,
cargo trucks, vans, and dump trucks. Production pursuant to the original FMTV
contract was completed as of January 31, 1999.
During October 1998, the Company received a second multi-year contract from the
U.S. Army that now provides for continued production of the FMTV through
September 2003 including currently exercised option years. The U.S. Army has an
option for one additional year that could extend the contracts through September
2004. The second FMTV contract incorporates an environmentally improved engine,
an improved diagnostics system, anti-lock brakes, and other improvements.
Production under the second contract, including all available option years would
be approximately 10,200 trucks and 2,100 trailers and have a total contract
value of $1.74 billion. On occasion, the Company may be required to fund certain
expenditures related to the FMTV contracts in advance of government funding.
The Company also sells the FMTV to other government contractors as a platform
for installation of other equipment which is then resold to the Armed Forces.
The Company also has sold vehicles to other branches of the U.S. Armed Forces
and believes there will be opportunities to sell additional vehicles to the U.S.
Army, other branches of the U.S. Armed Forces, and the armed forces of foreign
countries. The FMTV contracts allow for such sales, and the Company's facility
has the capacity to produce vehicles for additional sales.
The United States Government is the primary customer of the Tactical Vehicle
Systems segment, accounting for practically all of the sales of this segment.
The FMTV contracts are subject to termination at the election of this customer
and provide for termination charges that would reimburse the Company for
allowable costs, but not necessarily all costs. The loss of this customer could
have a material adverse effect on the Company's future financial condition and
results of operations.
The FMTV incorporates engines, transmissions, axles, and a number of other
components specified by the U.S. Army and available only from the source
selected by them. Interruption of the supply of any of these components could
have a material adverse affect on the results of operations of the Tactical
Vehicles Systems segment. The Company believes that any delays arising from the
unavailability of source-specified components would be fully compensated under
the FMTV contracts.
The Tactical Vehicle Systems segment is competing against Oshkosh Truck
Corporation for the third multi-year contract for the FMTV. The Company cannot
reliably predict when the U.S. Army will make its decision as to the final award
for the new production contract or whether the Company will receive the award,
but the decision is scheduled to be made during the Company's first quarter of
Fiscal 2003 and the Company believes its proposal will be competitive. Both
domestic and foreign suppliers compete for the sale of vehicles to foreign
governments. The Company's foreign competitors include DaimlerChrysler, Tatra,
and other companies that may have greater international recognition as vehicle
manufacturers than the Company.
4
Operations of the Tactical Vehicle Systems segment accounted for approximately
32%, 27%, and 18% of consolidated sales in Fiscal 2001, 2000, and 1999,
respectively.
PETROLEUM EQUIPMENT SEGMENT
The Company recently announced its intention to sell the Petroleum Equipment
segment's blowout preventer and controls, valve, and drilling riser businesses,
and as a result these activities are being reclassified for reporting purposes
as discontinued operations. See Discontinued Operations in Part II for further
discussion. The ongoing Petroleum Equipment segment, as now configured,
manufactures equipment primarily for the well stimulation industries. Its
products include coil tubing systems and acidizing and fracturing systems. Many
of its products are manufactured according to proprietary designs and are
covered by appropriate process and apparatus patents. Other products may be
manufactured according to the designs or specifications of its customers.
The Petroleum Equipment segment purchases many of the components incorporated
into its products from independent suppliers. Some of these components are
manufactured according to designs and specifications owned by the Company and
protected from disclosure by confidentiality arrangements. Other components are
standard commercial or oilfield products and may be acquired under the
distribution or packaging agreements as discussed under "Power Products Segment"
above. The Petroleum Equipment segment is not dependent on a single supplier for
any critical component.
The Petroleum Equipment segment competes primarily with other manufacturers of
similar equipment. Products are differentiated by protected technology, and no
manufacturer has a leading position in any product line. Major competitors
include Caterpillar, Inc. and Halliburton Corporation in fracturing and
acidizing equipment and Varco International, Inc. in coil tubing systems.
The Petroleum Equipment segment's products are sold world-wide under the
"Stewart & Stevenson" trade name. Demand for oilfield equipment is substantially
dependent on the price trends for oil and gas.
Operations of the Petroleum Equipment segment represented 7%, 5%, and 3% of
consolidated sales during Fiscal 2001, 2000, and 1999, respectively.
AIRLINE PRODUCTS SEGMENT
The Airline Products segment manufactures internal combustion and electric
airline ground support equipment that includes aircraft tow tractors, gate
pushback tractors, baggage tow tractors, beltloaders, air start units, and air
conditioning units. This segment also manufactures mobile railcar movers, sold
under the Rail King(R) trademark and snow blowers, sold under the Snow King(TM)
trademark. Some of its products are manufactured according to proprietary
designs that are covered by appropriate process and apparatus patents. Other
products may be manufactured according to the designs or specifications of its
customers.
During the second half of Fiscal 2001, the Airline Products segment consolidated
its ground support business into operations located in Marietta, Georgia, and
its mobile railcar mover and snow blower businesses into one operation located
in Houston, Texas. The Company believes the consolidation of these operations
and facilities, coupled with more than a 35% reduction in employment levels
during Fiscal 2001 should allow this segment to be profitable at a lower level
of sales.
The Airline Products segment purchases many of the components incorporated into
its products from independent suppliers. The Company believes this segment is
not dependent on a single supplier for any critical component and it sells the
majority of its products to the airline industry, which has a global customer
base. Airline products are sold under the "S&S Tug" and "Stewart & Stevenson
Tug" trade names and demand for its products is dependent on the profitability
of the airline industry. The events of September 11 have impacted the airline
industry as a whole, and recovery of the market is not expected until late
Fiscal 2002 at the earliest. See further discussion at Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations. The
Airline Products segment markets domestically and internationally in the
commercial, military, and industrial segments.
The Airline Products segment competes primarily with other manufacturers of
similar equipment. Major domestic competitors include FMC Technologies, Inc. in
pushback tow tractors, Trilectron Industries Inc. in air conditioners and air
starts, NMC-Wollard in belt loaders and cargo tractors, and Tiger Tractor
Corporation, Toyota, and Harlan Corporation in baggage tractors. International
competitors include Schopf-Douglas in aircraft tow tractors and Charlott in
electric baggage tractor/belt loaders.
Operations of the Airline Products segment represented 6%, 10%, and 12% of
consolidated sales during Fiscal 2001, 2000, and 1999, respectively.
5
OTHER BUSINESS ACTIVITIES
The Company is engaged in other business activities that are not included in any
of its five business segments. Other businesses include fabrication of gas
compression equipment and wheelchair lifts for buses.
Operations of the Other Business Activities segment represented 2%, 2%, and 4%
of consolidated sales during Fiscal 2001, 2000, and 1999, respectively.
COMPETITION
The Company encounters strong competition in all segments of its business.
Competition involves pricing, quality, availability, range of products and
services, and other factors. Some of the Company's competitors have greater
financial resources than Stewart & Stevenson and manufacture some of the major
components that the Company must buy from independent suppliers. The Company
believes that its reputation for quality engineering and after-sales service,
with single-source responsibility, are important to its market position.
INTERNATIONAL OPERATIONS
International operations are subject to the risks of international political and
economic changes, such as changes in foreign governmental policies, currency
exchange rates, and inflation. The Company maintains operations in foreign
jurisdictions, including Colombia and Venezuela, some of which may be considered
politically or economically volatile. Where appropriate, on a transaction by
transaction basis, the Company purchases insurance policies to mitigate
political risks.
International sales are also subject to changes in exchange rates, government
policies, and inflation. Generally, the Company accepts payments denominated in
United States Dollars and makes sales to customers outside the United States
against letters of credit drawn on established international banks, thereby
limiting the Company's exposure to the effects of exchange rate fluctuations and
customer credit risks.
UNFILLED ORDERS
The Company's unfilled orders consist of written purchase orders and letters of
intent. These unfilled orders are generally subject to cancellation or
modification due to customer relationships or other conditions. Purchase options
are not included in unfilled orders until exercised.
Unfilled orders relating to continuing operations at the close of Fiscal 2001
and Fiscal 2000 were as follows:
Estimated percentage to
be recognized Unfilled orders at January 31,
Fiscal 2002 (In millions)
-------------------------------
2002 2001
-------- -------
Power Products 89% $ 51.4 $ 59.4
Distributed Energy Solutions 100% 40.3 78.4
Tactical Vehicle Systems 64% 686.0 658.2
Petroleum Equipment 100% 31.8 55.3
Airline Products 100% 6.9 16.2
All Other 100% 4.3 11.3
-------- -------
$ 820.7 $ 878.8
======== =======
Unfilled orders of the Tactical Vehicle Systems segment at January 31, 2002 and
2001, consisted principally of contracts awarded in October 1998 by the United
States Army Tank - Automotive and Armament Command (TACOM) to manufacture medium
tactical vehicles and trailers.
The U.S. Army exercised an option to award a fifth program year to the current
contract, which begins in October 2002 and is expected to be completed by
September 2003. The U.S. Army holds an additional option to award a sixth
program year that, if exercised by the U.S. Army, could extend production of the
FMTV through September 2004. The sixth program year is not included in unfilled
orders, as the U.S. Government has not yet exercised such option.
6
EMPLOYEES
At January 31, 2002, the Company employed approximately 4,100 persons. The
Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES.
The Company maintains its corporate executive and administrative offices at 2707
North Loop West, Houston, Texas, which occupy about 65,000 square feet of leased
space.
Activities of the Power Products segment are coordinated from Houston, Texas,
where the Company owns 320,000 square feet of space at three locations and
leases 31,200 square feet in one location devoted to equipment and parts sales
and service. To service its distribution territory (See "Power Products Segment"
in Item 1 above), Stewart & Stevenson maintains Company operated facilities
occupying 668,000 square feet of owned space and 698,000 square feet of leased
space in 35 cities in Texas, Louisiana, Colorado, New Mexico, Wyoming, Utah,
Kansas, Washington, Georgia, California, Mississippi, Arizona, Arkansas, and
Florida. The Company leases 56,000 square feet in three locations in Venezuela,
approximately 58,000 square feet in four locations in Colombia, and 3,200 square
feet in Argentina.
The Distributed Energy Solutions segment is located in a portion of a 388,000
square foot company owned facility located in Houston, Texas. The Airline
Products segment also assembles railcar movers and snow blowing equipment in
this facility.
The Tactical Vehicle Systems segment is located in a 535,000 square foot Company
owned facility near Houston, Texas. The Tactical Vehicle Systems segment also
leases 105,000 square feet of warehousing facilities in Houston, Texas, 19,000
square feet in Sealy, Texas, and 35,400 square feet in Fayetteville, North
Carolina, and approximately 7,600 square feet within three facilities located in
Alexandria, Virginia, Fayetteville, North Carolina, and Troy, Michigan.
The Petroleum Equipment segment is headquartered in Houston, Texas, where the
Company owns approximately 323,000 square feet devoted to manufacturing,
warehousing, and administration. The Company also leases facilities in Scotland
(18,000 square feet) and Abu Dhabi, U.A.E. (12,000 square feet).
The Airline Products segment is headquartered in Marietta, Georgia, where the
company leases a 149,000 square foot facility. Airline products are also
manufactured and assembled in a 87,000 square foot facility in Kennesaw,
Georgia. The Company also leases a 19,000 square foot warehouse in Kennesaw,
Georgia.
The Company also leases an additional 66,600 square feet of office, warehouse,
and shop space to support its marketing department, corporate records, and
transportation department.
The Company owns five locations containing approximately 237,500 square feet
which are currently being leased to a third party or being marketed for sale.
The Company considers all property owned or leased by it to be well maintained,
adequately insured, and suitable for its purposes.
ITEM 3. LEGAL PROCEEDINGS.
During Fiscal 1998, the U.S. Customs Service detained a medium tactical vehicle
that was being shipped by the Company for display in a European trade show. The
Company has been advised that the U.S. Customs Service and the Department of
Justice are investigating potential violations by the Company of laws relating
to the export of controlled military vehicles, weapons mounting systems, and
firearms. Such investigation could result in the filing of criminal, civil, or
administrative sanctions against the Company and/or individual employees, and
could result in a suspension or debarment of the Company from receiving new
contracts or subcontracts with agencies of the U.S. Government or the benefit of
federal assistance payments.
The Company is a defendant in a suit brought under the QUI TAM provision of the
False Claims Act, United States of America, ex rel. Werner Stebner v. Stewart &
Stevenson Services, Inc. and McLaughlin Body Co., Civil Action No. H-96-3363, in
the United States District Court for the Southern District of Texas, Houston
Division. The suit seeks penalties and damages in an unspecified amount. The
suit alleges that the Company made false statements and certifications in
connection with claims for payment for Family of Medium Tactical Vehicles
delivered to the U.S. Army starting in 1995, and the suit alleges that the
vehicles were substandard because of corrosion problems. The suit was filed
under seal in 1996, and following an investigation by the Justice Department,
the United States declined to intervene in the suit, which was unsealed on
August 29, 2000. The case is set for trial December 1, 2003. The Company
believes the claims in the suit are without merit and is vigorously defending
the suit.
7
The Company is also a defendant in a number of lawsuits relating to contractual,
product liability, personal injury, and warranty matters normally incident to
the Company's 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 the Company conducts its business. Although
management has established reserves that it believes to be adequate in each
case, an unforeseen outcome in such cases could have a material adverse impact
on the results of operations in the period it occurs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the NASDAQ Stock Market under the
symbol: SSSS. There were 608 shareholders of record as of February 28, 2002. The
following table sets forth the high and low sales prices relating to the
Company's common stock and the dividends declared by the Company in each
quarterly period within the last two fiscal years.
Fiscal 2001 Fiscal 2000
------------------------------------------ ------------------------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
--------- --------- ---------- --------- --------- ----------
First Quarter $ 27.13 $ 19.56 $ 0.085 $ 12.31 $ 8.75 $ 0.085
Second Quarter 35.55 22.20 0.085 15.44 11.56 0.085
Third Quarter 32.30 14.78 0.085 22.50 14.92 0.085
Fourth Quarter 19.94 14.35 0.085 27.19 19.50 0.085
On December 11, 2001, the Board of Directors approved a dividend of $0.085 per
share for shareholders of record on January 31, 2002, payable on February 15,
2002. The Board of Directors of the Company intends to consider the payment of
dividends on a quarterly basis, commensurate with the Company's earnings and
financial needs.
9
ITEM 6. SELECTED FINANCIAL DATA.
The Selected Financial Data set forth below should be read in conjunction with
the accompanying consolidated financial statements and notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED FINANCIAL REVIEW
---------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA:
Sales $ 1,329,510 $ 1,111,050 $ 861,264 $ 1,150,939 $ 1,082,427
Cost of sales 1,150,792 939,592 738,498 1,136,097 1,007,794
----------- ----------- ----------- ----------- -----------
Gross profit 178,718 171,458 122,766 14,842 74,633
Recovery of costs incurred, net (39,000) -- -- -- --
Period expenses 147,270 115,842 102,425 84,209 101,688
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing operations
before income taxes 70,448 55,616 20,341 (69,367) (27,055)
Gain on sale of investment, net of tax -- -- 2,746 -- --
Net earnings (loss) from continuing
operations 45,344 35,157 15,942 (43,955) (17,718)
Net earnings (loss) from discontinued operations,
net of tax (2,493) (368) 1,509 4,950 8,637
Gain (loss) on disposal of discontinued
operations, net of tax (628) 565 6,879 (33,979) 61,344
Net earnings (loss) 42,223 35,354 24,330 (72,984) 52,263
Total assets 649,055 638,862 646,012 705,777 1,252,647
Short-term debt (including current portion
of long-term debt) 3,364 33,048 34,006 86,824 261,000
Long-term debt 56,600 66,327 77,881 82,864 147,166
PER SHARE DATA:
Earnings (loss) per share:
Basic
Continuing operations $ 1.60 $ 1.25 $ 0.57 $ (1.52) $ (0.52)
Discontinued operations (0.09) (0.01) 0.05 0.17 0.25
Gain (loss) on disposal of discontinued
operations (0.02) 0.02 0.25 (1.17) 1.85
----------- ----------- ----------- ----------- -----------
$ 1.49 $ 1.26 $ 0.87 $ (2.51) $ 1.57
=========== =========== =========== =========== ===========
Diluted
Continuing operations $ 1.57 $ 1.24 $ 0.57 $ (1.52) $ (0.52)
Discontinued operations (0.09) (0.01) 0.05 0.17 0.25
Gain (loss) on disposal of discontinued
operations (0.02) 0.02 0.25 (1.17) 1.84
----------- ----------- ----------- ----------- -----------
$ 1.46 $ 1.25 $ 0.87 $ (2.51) $ 1.57
=========== =========== =========== =========== ===========
Weighted average shares outstanding:
Basic 28,325 28,026 27,989 29,006 33,184
Diluted 28,865 28,373 28,042 29,006 33,250
Cash dividends declared per share $ 0.34 $ 0.34 $ 0.34 $ 0.34 $ 0.34
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis, as well as the accompanying consolidated
financial statements and related footnotes, will aid in understanding the
Company's results of operations as well as its financial position, cash flows,
indebtedness, and other key financial information. The following discussion may
contain forward-looking statements. In connection therewith, please see the
Cautionary Statements contained herein, which identify important factors that
could cause actual results to differ materially from those predicted or implied
in the forward-looking statements.
BUSINESS SEGMENT HIGHLIGHTS
--------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PERCENTAGES)
--------------------------------------------------------------------------------
Sales
----------------------------------------
Fiscal Fiscal Fiscal
2001 2000 1999
----------------------------------------
Power Products $ 587,034 $ 566,078 $ 540,740
Distributed Energy Solutions 115,728 46,385 --
Tactical Vehicle Systems 432,288 304,143 150,884
Petroleum Equipment 90,547 58,092 26,864
Airline Products 80,649 110,250 104,915
Other Business Activities 23,264 26,102 37,861
---------- ---------- ----------
Total Segment Sales $1,329,510 $1,111,050 $ 861,264
========== ========== ==========
Operating Profit (Loss)
----------------------------------------
Fiscal Fiscal Fiscal
2001 2000 1999
----------------------------------------
Power Products $ 10,278 $ 16,395 $ 15,164
Distributed Energy Solutions (12,449) (3,839) --
Tactical Vehicle Systems 103,493 54,258 30,195
Petroleum Equipment 1,648 4,062 (1,588)
Airline Products (18,395) (6,643) (3,712)
Other Business Activities 1,180 3,478 (1,712)
--------- --------- ---------
Total Operating Profit (Loss) 85,755 67,711 38,347
Corporate expenses, net (13,322) (11,980) (10,047)
Non-operating interest income 3,415 7,993 1,083
Interest expense (5,400) (8,108) (9,042)
--------- --------- ---------
Earnings (loss) from continuing
operations before taxes $ 70,448 $ 55,616 $ 20,341
========= ========= =========
Operating Profit (Loss) as a Percentage of Sales
----------------------------------------
Fiscal Fiscal Fiscal
2001 2000 1999
----------------------------------------
Power Products 1.8% 2.8% 2.8 %
Distributed Energy Solutions (10.8) (8.3) --
Tactical Vehicle Systems 23.9 17.8 20.0
Petroleum Equipment 1.8 7.0 (5.9)
Airline Products (22.8) (6.0) (3.5)
Other Business Activities 5.1 13.3 (4.5)
Consolidated 6.5 6.1 4.5
11
RESULTS OF OPERATIONS
GENERAL
During Fiscal 2001, the Company continued to focus on five key management
initiatives aimed at improving the balance sheet, increasing profit margins, and
growing the business.
With respect to the leadership initiative, many new team members joined the
Company during Fiscal 2001, including the Senior Vice President and General
Counsel, Senior Vice President Power Products, President Tactical Vehicle
Systems, Vice President Petroleum Equipment, President S&S Tug, and over thirty
mid and upper level managers.
Working capital improvement initiatives contributed to the generation of $50.3
million in cash provided by operating activities during Fiscal 2001. In
addition, cash and equivalents less total debt at January 31, 2002 totaled a
positive $21.5 million, an improvement of $10.7 million from the $10.8 million
at January 31, 2001.
In the supply chain initiative, the principal focus has been shifted from a
corporate driven activity to an effort led by each of the business segments. A
corporate-wide purchasing database has been established for the purposes of
sharing information across the Company. Additionally, a corporate-wide
engineering council was created to help improve product structuring and
configuration management.
The information management systems project is under new leadership and the scope
has been expanded to include substantial improvements in basic business
processes, including project management, configuration control, bill of
materials management, and inventory and production control. An effort is also
under way to improve inquiry-to-order and order-to-remittance processes as well
as the final integration of the JD Edwards software into the manufacturing and
service business.
Progress was made on growth initiatives despite a tough market environment. The
Distributed Energy Solutions segment reported a $69 million (150%) revenue
increase during Fiscal 2001. The Power Products segment reported a 19% increase
in service sales, relocated into a new facility in Dallas, Texas, and opened up
new branches in El Paso, Texas, Stockton, California, and Valencia, Venezuela.
Tactical Vehicle Systems acquired Extended Reach Logistics, Inc., an e-commerce
business that provides military units and commercial companies with a web-based
portal for ordering repair parts or component repair services. The Airline
Products segment is preparing to introduce an expanded line of electric-powered
products as well as new products currently being offered for the regional jet
market. The Petroleum Equipment segment recently introduced coil tubing
equipment to the underground construction industry for laying fiber optic cable
and other utility services.
FISCAL 2001 VS. FISCAL 2000
Fiscal 2001 sales totaled $1,330 million compared to $1,111 million in Fiscal
2000. Net earnings from continuing operations for the year grew 29% to $45
million, or $1.57 per diluted share, compared with $35 million, or $1.24 per
diluted share, in the prior year. Including discontinued operations, total
year net earnings for Fiscal 2001 and 2000 were $42 million, or $1.46 per
diluted share, and $35 million, or $1.25 per diluted share, respectively.
POWER PRODUCTS
Effective with the fourth quarter of Fiscal 2001, the Power Products segment was
modified to exclude certain activities pertaining to power generation, which are
being reported in a new segment called Distributed Energy Solutions. The
currently reported Power Products segment sells and rents various industrial
equipment; sells components, replacement parts, accessories, and other materials
supplied by independent manufacturers; and provides in-shop and on-site repair
services for industrial equipment.
Sales for the Power Products segment in Fiscal 2001 were $587 million, 4% higher
than Fiscal 2000 sales of $566 million, largely due to higher service sales. The
Company has increased the number of service technicians in this segment and
continues to focus on the service aspect of this business. While equipment sales
increased modestly year-over-year, the trend was downward during the fourth
quarter, reflecting weakness in selected markets such as oil and gas, material
handling, and small power generation equipment. This market softness was
reflected in the equipment order backlog, which decreased $8 million during the
year. Parts sales remained steady but were impacted by the continuing retirement
of the two cycle engine in the marine market. In particular, the continuing
retirement of the two cycle engine in the marine market has caused the Company's
supply partners to lose share to competitors as the newer four cycle engines are
introduced to the market, which could negatively impact sales in future periods.
Operating profit for Fiscal 2001 was $10 million compared with $16 million for
the comparable period of Fiscal 2000. A $3.1 million improvement from higher
volume was more than offset by $5.1 million higher expense related to
information systems improvements, $2.0 million of expense related to
collectibility of certain accounts receivable, $0.7 million in inventory
valuation adjustments (net of a lower LIFO reserve which decreased cost of sales
by $6.3 million), and $1.4 million higher costs due to inflation and other
factors.
12
Overall, margin rates on equipment were down while margin rates on parts and
service sales remained consistent with prior periods. The Company is continuing
the installation of information technology tools to help reduce transaction
costs and improve margin rates.
It is expected that the overall market for this segment will be flat to slightly
down in Fiscal 2002. Actions being taken to improve profitability in this
segment include redesign of business processes to improve accountability and
reduce costs, the introduction of new leaders to the business, and improved
management information systems. Management continues to monitor the Class 8
truck after-market activity, the domestic oil and gas markets, and the overall
condition of the economy, all of which influence the activity level for this
segment.
DISTRIBUTED ENERGY SOLUTIONS
As noted above, the Distributed Energy Solutions segment was reported separately
effective with the fourth quarter of Fiscal 2001 to provide a clearer view of
the Company's power generation activities and to allow more focus on market
opportunities.
Sales for the Distributed Energy Solutions segment in Fiscal 2001 were $116
million compared to $46 million in the prior year. The increase in sales was
primarily due to two large turnkey power generation projects in California that
were completed in the first half of Fiscal 2001. An operating loss of $12
million was recorded in Fiscal 2001 compared to a $4 million operating loss in
the comparable period of Fiscal 2000. The $6.7 million impact of higher gross
margins due to increased volume was more than offset by cost structure increases
in Houston ($6.9 million) and Sacramento ($3.3 million), $2.8 million LIFO
provisions associated with an inventory ramp up, $1.4 million in warranty
expenses, and $0.9 million for restructuring and other costs.
The Company anticipates a weaker market in Fiscal 2002 compared with Fiscal 2001
as a result of decreased customer demand and excess power generation capacity
and equipment in selected markets. The Company plans to increase focus on
natural gas co-generation.
Actions being taken to improve profitability in this segment include an
organization realignment to better focus on market opportunities as well as
monitor costs, the introduction of new leaders to the business, and the
implementation of new business processes and cost tracking systems. This segment
has a low market share in the markets it serves which should allow for
opportunity to grow even in a weakened economy. However, the contracts that are
won in this segment tend to be large in volume and unpredictable as to timing
which may cause large quarterly swings in the financial results for this segment
going forward.
TACTICAL VEHICLE SYSTEMS
The Tactical Vehicle Systems segment, which manufactures tactical vehicles for
the U. S. Army and others, recorded sales for Fiscal 2001 of $432 million versus
$304 million a year ago. Total operating profit for Fiscal 2001 was $103
million, which compared favorably with $54 million a year ago. Included in the
current year's operating profit is $39 million in settlement of claims, net of
expenses of $1.5 million, with the U.S. Army, as further described below.
In Fiscal 1998, the Company filed a certified claim with the U.S. government
seeking recovery of costs incurred by the Company resulting from a delay of over
eight months from the original production plan in the first multi-year FMTV
contract. The U.S. Army and the Company reached resolution in April 2001 through
the alternative dispute resolution process managed by the Armed Services Board
of Contract Appeals, and the Company received payment of $22 million in July
2001.
The U.S. Army directed the Company to make certain changes in drive train
components of all vehicles produced under the first FMTV contract. The Company
commenced the installation of the directed changes during Fiscal 1999 and
completed the changes during Fiscal 2000. The financial responsibility for the
cost of the drive train change has been resolved through an alternate dispute
resolution proceeding and the U.S. Army paid $18.5 million to the Company in
December 2001.
The FMTV incorporates engines, transmissions, axles, and a number of other
components specified by the U.S. Army and available only from the source
selected by them. Interruption of the supply of any of these components could
have a material adverse affect on the results of operations of the Tactical
Vehicles Systems segment. The Company believes that any delays arising from the
unavailability of source-specified components would be fully compensated under
the FMTV contracts.
The increase in sales in Fiscal 2001 was due to an increase in the volume of
products sold during the year. In Fiscal 2001, 2,229 trucks and 692 trailers
were shipped compared to 1,534 trucks and no trailers for the comparable period
of Fiscal 2000.
The U.S. Army exercised an option to award a fifth program year to the current
contract, which added $374 million to the backlog for this segment. Deliveries
under this award should begin in October 2002 and are expected to be completed
by September 2003. Shipments for Fiscal 2002 are anticipated to be approximately
2,351 trucks and 518 trailers, a portion of which are included in option year
production at somewhat lower pricing levels. The lower pricing in the option
year along with bid costs associated with the competitive rebuy should be offset
by cost reduction efforts.
13
As the current contract with the U.S. Army for production of the FMTV is nearing
completion, the Company continues its preparation for the next multi-year
contract award. The Company has been awarded a contract under the first phase of
the competitive bid process and is currently competing for the final award. The
Company cannot reliably predict when the U.S. Army will make its decision as to
the final award for the new production contract or whether the Company will
receive the award, but the decision is scheduled to be made during the Company's
first quarter of Fiscal 2003 and the Company believes its proposal will be
competitive. Even if the Company receives the award, there can be no assurance
that operating margins will be at the same level as the existing FMTV contract.
Continued success in this segment is dependent on securing additional contracts
after completion of the current contract for production of the FMTV at
acceptable operating margins.
PETROLEUM EQUIPMENT
The Company recently announced its intention to sell the Petroleum Equipment
segment's blowout preventer and controls, valve, and drilling riser business,
and as a result, these activities were reclassified for reporting purposes as
discontinued operations and are not included in the results of this segment. See
Discontinued Operations for further discussion. The currently reported Petroleum
Equipment segment manufactures equipment primarily for the well stimulation
industries.
Sales for the Petroleum Equipment segment totaled $91 million for Fiscal 2001
compared to $58 million last year. The segment reported a $1.6 million operating
profit in Fiscal 2001 compared to a $4.1 million operating profit for Fiscal
2000. The $3.0 million benefit from increased volume was more than offset by
$2.9 million increased operating expense to support the increased volume, $1.0
million in higher information systems expense, a $1.0 million increase in
product warranty costs, and $0.5 million restructuring costs.
During the last half of Fiscal 2001, oil and gas prices dropped significantly
resulting in reduced capital spending in the oil and gas markets which has
impacted the general business level for this segment. The downward pressure in
this market has resulted in a 53% decrease in backlog at the end of Fiscal 2001
as compared to the end of Fiscal 2000. Management will continue to monitor the
changes in the oil and gas market and respond to opportunities as they arise. A
new business leadership team was installed during the fourth quarter of Fiscal
2001 and efforts are underway to improve basic business processes, reduce costs,
and improve margins.
AIRLINE PRODUCTS
The Airline Products segment manufactures airline ground support products,
mobile railcar movers, and snow blowers. Sales for Fiscal 2001 were $81 million
versus $110 million in Fiscal 2000. The operating loss for Fiscal 2001 was $18
million compared to an operating loss of $7 million for the same period in
Fiscal 2000. The increase in operating loss was attributable to lower volume
($4.5 million), restructuring costs ($4.7 million) associated with facility and
organization consolidations, higher operating costs ($4.5 million) associated
with facility costs, ramp up of the snow blower business transferred to Houston,
Texas, higher insurance and bad debt expense, and other costs. These costs were
partially offset by lower LIFO reserves which decreased cost of sales by $2.0
million.
Sales volume in this segment was impacted by fallout from the September 11
terrorist attack, which resulted in domestic flight schedule reduction
approximating 20% and significant cash flow pressures for the airline industry.
As a result, the order backlog decreased by $9.3 million (57%) during the fiscal
year. This segment's customers in the passenger airline industry are still
cautious as they assess their equipment requirements in the coming year. While
airlines have begun to restore flight schedules, it is unlikely that normal
levels of airline ground support equipment purchases will be restored until
Fiscal 2003.
Consolidation of production facilities, coupled with significant staff
reductions associated with organization realignments should reduce the breakeven
point for this segment. In addition, a new leadership team was installed in
January 2002.
OTHER BUSINESS
Other business activities not identified in a specific segment include
predominantly sales of gas compression equipment and wheel chair lifts. Fiscal
2001 sales were $23 million versus $26 million in Fiscal 2000. Operating profit
for the year totaled $1 million versus $3 million last year which included a $6
million gain on sale of the gas compression equipment leasing business.
FISCAL 2000 VS. FISCAL 1999
Sales for Fiscal 2000 totaled $1,111 million compared to $861 million in Fiscal
1999. Net earnings from continuing operations for the year totaled $35 million,
or $1.24 per diluted share, compared with $16 million, or $0.57 per share, in
the prior year. Including discontinued operations, total year net earnings for
Fiscal 2000 and 1999 were $35 million, or $1.25 per diluted share, and $24
million, or $0.87 per share, respectively.
During Fiscal 2000, the Company made significant progress in five important
management initiatives. The result of this progress has been to improve its
balance sheet, to increase its profit margins, and to grow organically (or
internally) its businesses. With regards to
14
the improvement of the balance sheet, during Fiscal 2000 the Company increased
its cash and cash equivalents by $98 million, reduced its total debt by $13
million, and improved its current ratio to 2.74%. While the Company has made
significant progress in reducing its inventory and accounts receivable levels,
it continues to focus on further reductions. Increased profit margins are
ultimately reflected in net earnings from continuing operations, which, as
mentioned above, were significantly improved versus Fiscal 1999. Sales for the
year increased 29% versus Fiscal 1999.
The Power Products segment, which is responsible for marketing and aftermarket
support of a wide range of industrial equipment, recorded Fiscal 2000 sales of
$566 million, 5% higher than Fiscal 1999 sales of $541 million. Operating profit
for Fiscal 2000 was $16 million compared with $15 million last year. Operations
in Fiscal 2000 were adversely impacted by special charges of $9 million,
principally in connection with an uncollectible account and note receivable, and
inventory reserves. Order backlog for this segment decreased $18 million during
the year. The Power Products segment relies on a number of markets for top line
growth. The Power Products segment also participates in the oil and gas market
through the sale of equipment, parts, and service for the propulsion and power
of marine support vessels, and through the application of off-highway internal
combustion engines, along with service and parts support for land-based
applications. While these markets strengthened during the year, the Power
Products segment continues to monitor the land-based Class 8 on-highway
transportation markets for signs of weakness which could occur as a result of a
softening of the overall economy. Latin American sales were strong in Fiscal
2000. However, there remains an element of volatility as these markets continue
to mature and grow.
The Power Products segment realized increasing sales in each successive quarter
of Fiscal 2000. While the segment was able to enjoy modest price increases on
some of its products and services, the increased sales in Fiscal 2000 were
primarily attributable to increased volumes. Parts, equipment, and service sales
and profitability all showed a positive trend throughout the year. During Fiscal
2000, the Company added approximately 200 service technicians to promote organic
growth. Power Products segment management continues to focus on business process
improvement and reducing administrative expenses in an effort to improve its
operating profit, and to further reduce its working capital.
The Distributed Energy Solutions segment reported sales of $46 million and an
operating loss of $4 million in Fiscal 2000. This segment was not in existence
in Fiscal 1999 and the results of any activities of a similar nature are
included in the results of the Power Products segment. The operating loss in
Fiscal 2000 was due to higher operating costs associated with startup of this
segment compared to sales at a volume below that required to achieve break even
in this segment.
The Tactical Vehicle Systems segment, which manufactures tactical vehicles for
the U.S. Army and others, recorded sales for Fiscal 2000 of $304 million versus
$151 million a year ago. Total year operating profit for Fiscal 2000 was $54
million, which compared favorably with $30 million a year ago.
The Tactical Vehicle Systems segment experienced significantly improved results
for Fiscal 2000 versus Fiscal 1999, as sales almost doubled. The increase in
sales was primarily the result of an increase in the volume of products sold.
The segment shipped approximately 1,500 trucks during Fiscal 2000.
The Petroleum Equipment segment manufactures equipment for oil and gas
exploration, production, and well stimulation industries. Sales in this segment
totaled $58 million for Fiscal 2000 compared to $27 million last year. The
segment reported a $4 million operating profit in Fiscal 2000 and a $2 million
operating loss in Fiscal 1999. The order backlog at the end of Fiscal 2000
totaled $55 million, well above the $17 million at 1999 fiscal year-end.
While the Petroleum Equipment segment was able to enjoy modest price increases
on some of its products and services, the increased operating profit in Fiscal
2000 were primarily attributable to increased volumes. During the first half of
the year, while the markets for its products were comparatively soft, the
Company was not able to fully utilize its infrastructure and absorbed its fixed
costs over a relatively low volume of sales. Later in the year, as demand
rapidly increased, the segment incurred a substantial amount of overtime
expense, as the tight labor markets did not allow the Company to increase
staffing to optimal levels.
The Airline Products segment manufactures airline ground support products,
mobile railcar movers, and snow blowers. Sales for Fiscal 2000 were $110 million
versus $105 million the previous year. Operating losses were reported for both
years: $7 million in Fiscal 2000 and $4 million in Fiscal 1999 and results for
Fiscal 2000 included $4.3 million in inventory write downs. The continuing
disappointing performance in Airline Products results principally from
production and inventory process issues, and to a lesser extent, softness in
demand from airline customers. The Company's management has made the restoration
of profitability to this segment a high priority. Furthermore, a shift in the
industry to electric propulsion products and the growth of regional airlines
that require smaller foot print products could provide the Company with an
opportunity to better serve those markets. However, the airline industry
continues to experience increased fuel expenses and reduced travel spending by
its customers due to a general softening of the U.S. economy. These factors
could result in lower industry profits, which could impact the available
business for the Company's ground support products.
15
Other business activities not identified in a specific segment include
predominantly gas compression equipment sales. Fiscal 2000 sales were $26
million versus $38 million in Fiscal 1999. Operating profit for the year totaled
$3 million and included a $6 million gain on sale of the gas compression
equipment leasing business. An operating loss of $2 million was reported in
Fiscal 1999.
RECOVERY OF COSTS INCURRED, NET
--------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
--------------------------------------------------------------------------------
Recovery of costs incurred, net $(39,000) $ -- $ --
In Fiscal 1998, the Company filed a certified claim with the U.S. government
seeking recovery of costs incurred by the Company resulting from a delay of over
eight months from the original production plan in the first multi-year FMTV
contract. The U.S. Army and the Company reached resolution in April 2001 through
the alternative dispute resolution process managed by the Armed Services Board
of Contract Appeals, and the Company received payment of $22 million in July
2001.
The U.S. Army directed the Company to make certain changes in drive train
components of all vehicles produced under the first FMTV contract. The Company
commenced the installation of the directed changes during Fiscal 1999 and
completed the changes during Fiscal 2000. The financial responsibility for the
cost of the drive train change has been resolved through an alternate dispute
resolution proceeding and the U.S. Army paid $18 million to the Company in
December 2001.
Expenses of $1.5 million related to the recoveries were offset against the
payments received from the U.S. Army.
PERIOD EXPENSES
--------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
--------------------------------------------------------------------------------
Selling and administrative
expenses 148,757 120,482 100,680
Interest expense 5,400 8,108 9,042
Other income, net (6,887) (12,748) (7,297)
--------- --------- ---------
Net period expenses
$ 147,270 $ 115,842 $ 102,425
========= ========= =========
Net period expenses as a
percentage of sales 11.1% 10.4% 11.9%
16
NET PERIOD EXPENSES
Period expenses for Fiscal 2001 totaled $147 million, or 11.1% of sales compared
with $116 million, or 10.4% of sales in Fiscal 2000 and $102 million, or 11.9%
of sales in Fiscal 1999.
Selling and administrative expenses for Fiscal year 2001, 2000, and 1999 totaled
$149 million, $120 million, and $101 million, respectively. The $28 million
increase during Fiscal 2001 included an $8.0 million increase in management
information systems expenses, $6.1 million in restructuring expenses, $4.6
million in timing differences of various one-time balance sheet adjustments
($2.9 million of credits in Fiscal 2000 versus a $1.7 million expense in Fiscal
2001), and $9.6 million in higher costs due to inflation and increased business
activity. The $20 million increase for 1999 to 2000 includes a $7 million
writeoff of an uncollectible receivable as well as increased salary and benefits
expense.
Interest expense declined during Fiscal 2001 due to debt reductions and
capitalization of $0.6 million of interest on major capital projects.
Other income included interest income of $3.4 million and a $1.7 million
insurance recovery of damages from insurance carriers related to prior year
claims in the fourth quarter in Fiscal 2001. Other income, net, for Fiscal 2000
included a $5.6 million gain on sale of the gas compression business.
DISCONTINUED OPERATIONS
NET EARNINGS (LOSS)
-------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
-------------------------------------------------------------------------------------------------------------------
Net earnings (loss) from discontinued operations $(2,493) $ (368) $ 1,509
Gain (loss) on disposal of discontinued operations, (628) 565 6,879
net of tax
------- ------- -------
Net earnings (loss) $(3,121) $ 197 $ 8,388
======= ======= =======
As previously noted, the Company recently announced its intention to sell the
Petroleum Equipment segment's blowout preventer and controls, valve, and
drilling riser business, and as a result, these activities were reclassified for
reporting purposes for all periods shown as discontinued operations. Net losses
for these discontinued operations for Fiscal 2001 and 2000 were $2.5 million and
$0.4 million, respectively while net earnings in Fiscal 1999 were $1.5 million.
Included in the net loss for Fiscal 2001 were higher costs associated with
certain contracts, higher operating expenses related to facility leases in the
United Kingdom, and cost associated with inventory valuation.
During the fourth quarter of Fiscal 1999, the Company disposed of an
investment and certain obligations relating to a power generation facility in
Argentina associated with the previously discontinued gas turbine operations
resulting in a $0.6 million and $7 million, net of tax gain in Fiscal 2000
and 1999, respectively. Accordingly, the gain has been reflected as a gain on
disposal of discontinued operations.
17
FINANCIAL CONDITION
WORKING CAPITAL
----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) January 31, 2002 January 31, 2001
----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 81,438 $110,174
Accounts and notes receivable, net 166,123 156,787
Recoverable costs and accrued profits not yet billed -- 11,829
Inventories 188,168 162,407
Income tax receivable 13,262 5,586
Deferred income tax asset 16,488 10,428
Other current assets 3,753 1,348
Total assets of discontinued operations 40,693 57,130
-------- --------
Total Current Assets 509,925 515,689
-------- --------
Current Liabilities
Notes payable 3,114 12,611
Accounts payable 71,270 60,354
Accrued payrolls and incentives 19,402 20,024
Income tax liabilities 1,394 1,962
Current portion of long-term debt 250 20,437
Billings in excess of cost 39,874 30,638
Other current liabilities 21,577 33,870
Total liabilities of discontinued operations 8,078 8,548
-------- --------
Total Current Liabilities 164,959 188,444
-------- --------
Working Capital $344,966 $327,245
======== ========
Current Ratio 3.09 2.74
During Fiscal 2001, current assets decreased by $6 million or 1%. Cash and cash
equivalents decreased $29 million due to $50 million in cash from operations
generated during Fiscal 2001 offset by $45 million in usage on investing
activities and $34 million in usage on financing activities. See Liquidity and
Capital Resources section below for further discussion. Accounts and notes
receivable increased $9 million due to timing of receipts from the U.S.
government, retention on certain turnkey projects, and other timing of
collections. Recoverable costs and profits not yet billed decreased as
significant contracts in the Petroleum Equipment segment, accounted for on the
percentage of completion method, were completed and billed. Inventories
increased $26 million, principally in the Distributed Energy Solutions segment.
Income tax assets increased due to estimated tax payments made prior to
realization of lower than expected earnings in the Fiscal Fourth Quarter 2001.
Assets of discontinued operations decreased primarily due to lower accounts
receivable and inventory balances.
Current liabilities decreased by $24 million during Fiscal 2001 principally due
to a $30 million reduction of notes payable and the current portion of long term
debt and $12 million lower other current liabilities due to payment against
various reserves established in prior periods for warranty, royalty, and other
liabilities. These decreases were offset by $11 million higher accounts payable
and $9 million in billings in excess of cost due to timing of receipts from the
U.S. Government.
The net change in current assets and current liabilities resulted in the current
ratio improving to 3.09 as of the end of Fiscal 2001 compared to 2.74 at the end
of Fiscal 2000.
18
LONG LIVED ASSETS
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) January 31, 2002 January 31, 2001
----------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net (excluding revenue $100,309 $ 84,886
earning assets)
Revenue earning assets, net 19,348 18,334
Deferred income tax asset 3,237 840
Investments and other assets 16,236 19,113
-------- --------
$139,130 $123,173
======== ========
Long-lived assets increased by $16 million during Fiscal 2001, principally as a
result of expenditures for property, plant and equipment. These expenditures
included a new facility in Dallas, Texas in the Power Products segment and a new
fabrication facility in the Tactical Vehicle Systems segment.
CAPITAL STRUCTURE
------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) January 31, 2002 January 31, 2001
Amount Percentage Amount Percentage
------------------------------------------------------------------------------------------------------------------------------
Long-term debt (excluding current portion) $ 56,600 11.7% $ 66,327 14.7%
Other long-term liabilities excluding long-term debt 36,265 7.5 23,507 5.2
Shareholders' equity 391,231 80.8 360,584 80.1
-------- ----- -------- -----
$484,096 100.0% $450,418 100.0%
======== ===== ======== =====
The Company's capital structure consists primarily of Shareholders' equity and
Long-term debt. The capital structure increased by $34 million during Fiscal
2001, primarily due to net earnings of $42 million, partially offset by
dividends of $10 million and a reduction of long-term debt. Other long-term
liabilities increased $13 million due to higher accrued postretirement benefits
and pension liability as a result of lower investment returns and certain
discount rate assumptions used in the calculation of the liability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash liquidity included cash and cash equivalents, cash
from operations, amounts available under credit facilities, and other external
sources of funds. The Company believes that these sources are sufficient to fund
the current requirements of working capital, capital expenditures, dividends,
and other financial commitments. The Company has in place an unsecured revolving
debt facility that could provide up to approximately $144 million, net of $6
million outstanding under a $25 million letter of credit sub facility, all of
which was available for the Company's use at the end of Fiscal 2001. This
revolving facility matures during Fiscal 2004. In addition, the Company has $55
million in senior notes outstanding. The senior notes are unsecured and were
issued pursuant to an agreement containing a covenant which imposes a debt to
total capitalization requirement. For additional information, see Note 9 to the
Financial Statements, "Debt Arrangements."
The Company has additional banking relationships which provide uncommitted
borrowing arrangements. In the event that any acquisition of additional
operations, growth in existing operations, settlements of lawsuits or disputes,
changes in inventory levels, accounts receivable, tax payments, or other working
capital items create a permanent need for working capital or capital
expenditures in excess of the existing cash and cash equivalents and committed
lines of credit, the Company may seek to borrow under other long-term financing
instruments or seek additional equity capital.
19
The following table summarizes the Company's cash flows from operating,
investing, and financing activities as reflected in the Consolidated Statements
of Cash Flows.
SUMMARIZED CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
-------------------------------------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 50,313 $ 97,025 $ 89,493
Investing activities (44,787) 22,868 (23,152)
Financing activities (34,262) (21,430) (67,415)
-------- -------- --------
$(28,736) $ 98,463 $ (1,074)
======== ======== ========
20
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Net earnings from continuing operations $ 45,344 $ 35,157 $ 15,942
Depreciation and amortization 22,275 20,790 21,834
Gain on sale of business assets (528) (5,649) (5,804)
Deferred taxes (4,058) (3,160) (34)
Change in operating assets and liabilities, net (25,567) 60,916 45,404
--------- --------- ---------
Net cash provided by continuing operations 37,466 108,054 77,342
Net cash provided by (used in) discontinued operations 12,847 (11,029) 12,151
--------- --------- ---------
Net cash provided by operating activities $ 50,313 $ 97,025 $ 89,493
========= ========= =========
Net cash provided by continuing operations in Fiscal 2001 was $37 million. Net
earnings from continuing operations provided $45 million of net cash before
adding back $22 million in depreciation. The $26 million usage from the change
in operating assets and liabilities, net, was largely due to a $25 million
increase in inventories primarily in the Distributed Energy Solutions segment.
Net cash provided by continuing operations in Fiscal 2000 totaled $108 million.
Net earnings from continuing operations provided $35 million of net cash before
adding back $21 million in depreciation. Decreases in accounts and notes
receivable net of changes in recoverable costs not yet billed of $76 million
provided the primary additional source of cash from operations.
Net cash provided by continuing operations in Fiscal 1999 totaled $77 million
and included a $45 million change in net operating assets and liabilities
resulting primarily from the completion of the original FMTV contract and the
liquidation of inventories. Net cash provided by discontinued operations in
Fiscal 1999 was primarily related to certain discontinued operations of the
Petroleum Equipment segment.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Expenditures for property, plant and equipment $(53,207) $(35,021) $(39,379)
Acquisition of businesses (1,225) -- (5,832)
Proceeds from sale of business assets 5,737 55,221 8,303
Disposal of property, plant and equipment 3,908 2,668 13,756
-------- -------- --------
Net cash provided by (used in) investing activities $(44,787) $ 22,868 $(23,152)
======== ======== ========
During Fiscal 2001, 2000, and 1999, the Company invested significant amounts of
cash in property, plant, and equipment to expand its existing business. Included
in Fiscal 2001 are expenditures for a new fabrication facility in the Tactical
Vehicle Systems segment, equipment and leasehold improvements related to a new
facility in Georgia for the Airline Products segment, and expenditures related
to a new facility in Dallas for the Power Products segment. Also included in
Fiscal 2001, 2000, and 1999 were $2.1 million, $5.2 million, and $3.0 million,
respectively for expenditures related to the Company's new enterprise resource
planning software and capitalizable implementation cost.
During Fiscal 2001, the Company received $5.7 million in cash associated with
the sale of its John Deere franchise and the final payment related to the sale
of its gas compression business in the prior year, both in the Power Products
segment. During Fiscal 2000, the Company received $55 million in cash associated
with the divestiture of its gas compression equipment leasing business.
Proceeds from sale of business assets in Fiscal 1999 totaled $8 million and
consisted of sale of investments in (1) GFI Control Systems, Inc., a
21
gaseous fuel injection joint venture located in Ontario, Canada ($4 million);
(2) Syracuse Orange Partners, L.P., a cogeneration facility located in Syracuse,
New York ($3 million); and (3) a facility in North Dakota ($1 million).
In Fiscal 2001, the Company's Tactical Vehicle segment acquired Extended Reach
Logistics, Inc., an e-commerce business for $1.2 million in cash plus additional
potential performance payments. Acquisitions of businesses in Fiscal 1999
consisted of the purchase of Thermo King of Northern California for
approximately $6 million.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
--------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Additions to long-term borrowings $ -- $ 29,238 $ 16,500
Payments on long-term borrowings (21,005) (29,233) (82,093)
Net short-term borrowings (payments) (9,498) (12,517) 7,792
Dividends paid (9,610) (9,521) (9,517)
Proceeds from exercise of stock options 5,851 603 (97)
-------- -------- --------
Net cash used in financing activities $(34,262) $(21,430) $(67,415)
======== ======== ========
During Fiscal 2001, the Company paid down $21 million of long-term borrowings of
which $20 million related to senior notes from a private placement in prior
fiscal periods. In Fiscal 2001, $9 million of short-term debt was also paid down
all of which was related to a financing arrangement for equipment inventory.
Payment of cash dividends on common stock totaled approximately $9.6 million
during Fiscal 2001, 2000, and 1999. There have been no changes in the dividends
per share during these years. The Company uses funds from operations, along with
borrowings, as necessary, to pay dividends. Proceeds from exercise of stock
options at Fiscal 2001 increased due to generally higher stock prices which
resulted in a level of greater stock option exercise.
During Fiscal 2001, the Company sold its interest in a partnership in which
the Company was a limited partner. This partnership was no longer
consolidated as of the end of Fiscal 2001. As of January 31, 2001, the
Company's long-term debt included approximately $9 million of non-recourse
debt associated with this partner.
22
CRITICAL ACCOUNTING POLICIES
The Company believes the following accounting policies represent those which
have the most impact on the significant judgments and estimates used in the
preparation of its consolidated financial statements.
Generally, revenue is recognized when contract terms are met, collectibility is
reasonably assured and a product is shipped or accepted by the customer, except
for certain equipment contracts, where revenue is recognized using the
percentage-of-completion method as required by Generally Accepted Accounting
Principles. The revenues of the Tactical Vehicle Systems segment are generally
recognized under the units-of-production method, whereby sales and cost of the
units produced under the Family of Medium Tactical Vehicle ("FMTV") contracts
are recognized as units are accepted by the U.S. Government. Cost of sales for
units accepted are based on actual unit cost. . Changes in estimates for
revenues, costs, and profits are recognized in the period in which they are
reasonably determinable using the cumulative catch-up method of accounting
applied on an annual basis. In certain cases, the estimated revenue values
include amounts expected to be realized from contract adjustments when recovery
of such amounts is probable. Any anticipated losses on contracts are charged in
full to operations in the period in which they are reasonably determinable.
From time to time, the Company assesses the valuation of its long-lived assets
for impairment. In so doing, it utilizes operating plans, budgets, and forecasts
and recognizes impairments when expected future cash flows associated with these
assets is less than book value.
The Company extends credit and credit enhancements to customers and other
parties in the normal course of business and management regularly reviews
outstanding receivables, and provides for estimated losses through an allowance
for doubtful accounts. Management makes judgments regarding the parties' ability
to make required payments, economic events, and other factors.
Inventories are generally stated at the lower of cost (using LIFO) or market
(determined on the basis of estimated realizable values), less related customer
deposits. Work in process costs include material, labor, and overhead. The
aggregate carrying values of these inventories are not in excess of their fair
values.
The Company maintains insurance coverage for various aspects of its business and
operations and retains a portion of losses that occur through the use of
deductibles and retentions under self-insurance programs. Management regularly
reviews estimates of reported and unreported claims and makes judgments as the
level of losses to provide for through insurance reserves. As claims develop and
additional information becomes available, adjustments to loss reserves may be
required.
Deferred tax assets and liabilities are recognized for differences between the
book basis and tax basis of the net assets of the Company. In providing for
deferred taxes, management considers current tax regulations, estimates of
future taxable income, and available tax planning strategies.
As revenue is recorded, expected warranty and performance guarantee costs are
accrued, based on both historical experience and contract terms. Should actual
product failure rates or repair costs differ from the Company's current
estimates, revisions to the estimated warranty liability would be required.
The Company accounts for its defined benefit pension plans in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers'
Accounting for Pensions" which requires that amounts recognized in the financial
statements be determined on an actuarial basis. A significant element in
determining the Company's pension income or expense in accordance with SFAS No.
87 is the expected return on plan assets and the discount rate for calculating
future liability. The assumed long-term rate of return on assets is applied to a
calculated value of plan assets which results in an estimated return on plan
assets that is included in current year pension income or expense.
ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." Both statements are
effective for the Company's Fiscal 2002, which begins on February 1, 2002. Under
these new rules, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests.
Other identifiable intangible assets will continue to be amortized over their
useful lives.
The Company expects that it will apply the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of Fiscal 2002.
During Fiscal 2001, the Company amortized approximately $0.7 million of
goodwill. Such amortization expense will cease beginning with the first quarter
of the Company's Fiscal 2002.
The Company expects to complete its impairment testing on remaining goodwill
during the first quarter of Fiscal 2002 and expects to recognize an impairment
of approximately $4 to $5 million as a result of this testing, subject to
continuing analysis. This charge will
23
be recorded as a cumulative effect of a change in accounting principle and is
primarily related to the goodwill associated with the Airline Products segment.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 is intended to establish one
accounting model for long-lived assets to be disposed of by sale and to address
significant implementation issues of SFAS No. 121. The Company has adopted SFAS
144. Accordingly, the Company reported discontinued operations in connection
with the announced intended sale of certain businesses associated with the
Petroleum Equipment segment.
In September 2000, the Emerging Issues Task Force ("EITF") released abstract No.
00-10, "Accounting for Shipping and Handling Fees and Costs." EITF No. 00-10
requires that shipping and handling costs billed to customers be recorded as
sales. Accordingly, the Company has restated its quarterly and annual sales and
cost of sales for Fiscal 2001 and 2000 and annual sales and cost of sales for
1999, 1998, and 1997 versus that which was originally reported.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting For Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts and
hedging activities. Effective February 1, 2001, the Company adopted SFAS No.
133. The adoption of SFAS No. 133 did not have a material effect on the
Company's results of operations or financial position.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." This bulletin
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The bulletin is not intended to change existing
authoritative literature. The Company is in compliance with all such
authoritative literature described in SAB No. 101.
FACTORS THAT MAY AFFECT FUTURE RESULTS
CAUTIONARY STATEMENTS
Certain of the statements contained in this document, including those made under
the captions "Business," "Legal Proceedings," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Other than
statements of historical fact included herein, all statements herein, including
in particular, but not limited to, statements regarding potential future
products and markets, our future financial position or results of operations,
business strategy, other plans, and objectives for future operations, relating
to trends, expressing our belief, referring to expectations, referring to
backlogs as to future product deliveries, relating to long-term contracts in
progress or using the verbs "should," "could," "may," and verbs of similar
import and prospective focus, are forward-looking statements. We can give no
assurance that any forward-looking statement of ours will prove to have been
correct and such statements are not guarantees of future performance. They
involve certain risks, uncertainties, and assumptions that are difficult to
predict, and actual outcomes and results may differ materially from what is
expressed or forecasted or implied in such forward-looking statements. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Specific important factors that could cause actual results, performance, or
achievements to differ materially from our forward-looking statements, and that
otherwise may affect our operations, are identified below. All written and oral
forward-looking statements attributable to us or to persons acting on our behalf
are expressly qualified in their entirety by such factors.
o RISK OF COMPETITION. Our foreign and domestic competitors may use their
resources and product and service offerings to increase competition, both
in prices and products and services offered, and thereby reduce our
market shares and/or sales and profitability. Some of our existing and
potential competitors have substantially greater marketing, financial,
and technical resources than we have, and these resources may be used in
effective competition with us. We have assumed in our forward-looking
statements that we will continue to be a reasonably effective competitor
in our markets.
o RISKS RELATING TO TECHNOLOGY. Our business will suffer if we are unable
to keep up with rapid technological change and product development. Our
success will depend on our ability to anticipate changes in technology
and industry requirements and to respond to technological developments on
a timely basis, either internally or through strategic alliances. We will
likely be constantly threatened by current competitors or new market
entrants who may develop new technologies or products or establish new
standards that could render our products less marketable or obsolete.
Thus, we can offer no assurances that we will be successful in developing
and marketing, on a timely and cost effective basis, products or product
enhancements that respond to our competition, to technological
developments, to changing industry standards, and to market place
acceptability. We have assumed in our forward-looking statements that we
can reasonably keep pace with our competitors in technology changes and
product development.
24
o RISKS OF GENERAL ECONOMIC CONDITIONS. Our commercial operations are
cyclical and dependent for success on the general economic well-being of
the United States and certain other world markets. A general economic
downturn could adversely affect demand for our products and services.
Although the economy of the United States experienced one of its longest
periods of growth in recent years, the continued strength of the United
States economy cannot be assured. Notwithstanding that period of growth,
in 2001 there was a marked period of economic slowdown. Even though some
recent data is encouraging about the U.S. economy, there are still some
signs that we are in a period of a world economic slowdown. If the United
States or world economies fail to recover or decline, the demand for, and
price of, our products and services could be adversely affected, thus
adversely affecting our revenues and income. Further, other general
market conditions such as increased inflation and higher interest rates
could also adversely impact our revenues and results of operations. In
our forward-looking statements we have assumed that a worldwide recession
or material downturn in the United States economy, to the extent they may
exist at present, will not continue or worsen and that we are not
entering a new and significant down-cycle in our markets or a period of
significantly increasing inflation and interest rates.
o RISKS OF OIL AND GAS INDUSTRY ECONOMIC CONDITIONS. Our Petroleum
Equipment segment, as well as certain aspects of our Power Products and
Distributed Energy Solutions segments, are closely tied to the oil and
gas industry in general and, in particular, to capital expenditures by
oil and gas companies and companies providing services and manufactured
products to the oil and gas industry. Capital expenditures by oil and gas
companies have tended in the past to follow trends in the price of oil
and natural gas, which have fluctuated widely in recent years and which
were somewhat depressed (particularly for natural gas) in Fiscal 2001. A
sustained period of substantially reduced capital expenditures by oil and
gas companies and oil and gas service and manufacturing companies, as we
have experienced in the most recent year and also in some other recent
years, will likely lead to a drop in demand for products and services in
our Petroleum Equipment segment as well as in our Distributed Energy
Solutions and Power Products segments, which also provide products and
services used in connection with the exploration for and production of
oil and gas. Any such drop will have an adverse effect on our results of
operations and cash flow during the affected period, as it did during
Fiscal 2001. There are some recent modest signs of recovery in the oil
and gas industry, and we have assumed in our forward-looking statements
that economic conditions in such industry will stabilize at least at
present levels or improve and that capital expenditures in the industry
will not continue to be unduly restrained in future periods.
o RISKS OF AIRLINE INDUSTRY ECONOMIC CONDITIONS. Our Airline Products
segment is highly dependent upon the economic well-being of the airline
industry and was adversely affected in 2001 by serious difficulties in
that industry, including difficulties arising following the terrorist
attacks on the U.S. in September, 2001. Capital and other general
expenditures by airline companies are the principal source for demand for
the products of our Airline Products segment. Should there be a sustained
period of substantially reduced capital expenditures by airline companies
and other companies that cater to the airline industry, the demand for
our products in our Airline Products segment will drop and there will
likely be an adverse effect on our results of operations and cash flow
during the affected period, as there was in 2001. In our forward-looking
statements we continue to be cautious as to the recovery of economic
conditions in the airline and related industries and do not anticipate
quick and/or complete recovery.
o RISKS AS TO TERRORIST ATTACKS ON THE U.S. AND THEIR IMPACT ON THE U.S.
Economy. While we are not yet able to evaluate fully the ongoing impacts
of the recent terrorist attacks on the U.S. (which appear to have
coincided with or contributed to a general downturn in the U.S. economy),
or the threat of further such incidents, such circumstances may continue
to adversely affect our business in ways that we cannot yet identify.
However, both the past attacks and threats of future ones may adversely
affect the demand for our products and services generally in addition to
their specific impact on our segments that serve the oil and gas and
airline industries. Our forward-looking statements at present assume no
further material impacts of such circumstances on the U.S. or further
deterioration on our affected business.
o RISKS RELATING TO PERSONNEL. Labor shortages and our inability to recruit
and retain key employees and workers could limit our operations and
increase our labor costs and, in turn, adversely affect our results of
operations. Our manufacturing and service operations are substantially
dependent upon our ability to recruit and retain key managers and
qualified machinists, mechanics, factory workers, and other laborers.
While there are some signs that the U.S. and world economies are
strengthening and labor markets improving, there continued to be a strong
labor market in the U.S. in general even during the slower periods of
2001. A strong labor market can adversely impact us by limiting our
manufacturing capacity or resulting in significantly increased wages and
other benefits to attract additional key employees and workers. We have
assumed in our forward-looking statements that we will continue to be
able to recruit and retain necessary personnel at overall costs that are
comparable with our ability to produce revenues.
o RISKS OF DEPENDENCE ON GOVERNMENT. Because the U.S. government is one of
our key customers, decreased government spending or termination of
significant government programs could adversely affect our business. Our
Tactical Vehicle Systems segment depends largely on U.S. Government
expenditures. In recent years, government contracts in such segment have
accounted for substantial percentages of our annual revenues and
operating income. We are currently in production year four of our second
multi-year contract with the U.S. Department of the Army ("U.S. Army")
for production of the Family of Medium Tactical Vehicles ("FMTV"). The
U.S. Army exercised an option to award a fifth program year to the
current contract, which begins in October 2002 and is expected to be
completed by September 2003. The U.S. Army holds an additional option to
award a sixth program year that, if exercised by the U.S. Army, could
extend production of the FMTV through September 2004. The funding of the
new FMTV contract is subject to the inherent uncertainties of
Congressional appropriations. As is typical of multi-year defense
contracts that may be canceled or adjusted by the government, the FMTV
25
contract must be funded annually by the U.S. Department of the Army and
may be terminated at any time for the convenience of the government. As
of January 31, 2002, funding in the amount of approximately $1.5 billion
for the FMTV contract had been authorized and appropriated by the U.S.
Congress. If the FMTV contract is terminated, other than for our default
(in which event there could be serious adverse consequences and claims
against us), the contract includes a provision under which we will be
reimbursed for certain allowable costs but not necessarily for all costs.
As our current contract with the U.S. Army for production of the FMTV is
nearing completion, it will be necessary for us to secure additional
contracts for us to have continued success in this segment. We have been
awarded a contract under the first phase of the competitive bid process
for the next multi-year contract for production of the FMTV and are
currently competing for the final award. The U.S. Army is scheduled to
make its decision as to the final award of the next multi-year contract
during our first quarter of Fiscal 2003. The U.S. Army will determine the
award by a competitive bid process, and there can be no assurance that we
will be successful in such regard or that our competitor will not be more
successful than we will be in this or coming bids and awards for tactical
vehicles. Even if we do receive the award, there can be no assurance that
operating margins will be at the same level as the existing FMTV
contract. Moreover, there can be no assurance as to whether future
governmental spending will adequately support our business in this area,
and substantial decreases in government spending, the loss of the U.S.
government as a customer or the cancellation of key significant
government programs could materially and adversely affect our operations.
Even if government spending in general continues at current levels, we
are not assured that we can compete effectively as to the receipt of
specific government orders and contract awards or as to the timing
thereof. In our forward-looking statements, we have assumed that we will
continue to have satisfactory benefits from our government contracting
business.
o INHERENT RISKS OF GOVERNMENT CONTRACTS. Government contracts present us
with numerous special risks that are inherent in their nature and that
could adversely affect our operations. Government contracts are often
relatively large in our business. Major contracts for military systems
are performed over extended periods of time and are subject to changes in
scope of work and delivery schedules. Pricing negotiations on changes and
settlement of claims often extend over prolonged periods of time. Whether
we are able to obtain ultimate profitability on military contracts that
we may receive often depends on the eventual outcome of an equitable
settlement of contractual issues with the U.S. Government, and, due to
uncertainties inherent in the estimation and claim negotiation process,
no assurances can be given that our estimates of ultimate profitability
will be accurate. Moreover, estimates as to percentage-of-completion
accounting on large government contracts can prove to have been
incorrect. Variances between actual results and such estimates could be
material. Furthermore, there are inherent risks in projecting actual
costs on multi-year government contracts because of unforeseen factors,
including price and wage inflation and supply shortages. Our government
contracting operations are subject to U.S. Government investigations of
business practices and cost classifications and legal and administrative
proceedings can flow from our practices. Under certain circumstances a
contractor can be fined as well as suspended or debarred from government
contracting. Suspension or debarment could prevent us from selling
equipment or services to customers that depend on loans or financial
commitments from other U.S. Government agencies such as the Export Import
Bank and the Overseas Private Investment Corporation. In such events we
might otherwise not be able to receive the benefits of federal assistance
payments during a suspension or debarment. In our forward-looking
statements, we have assumed our reasonable management of risks inherent
in our government contracting business.
o RISKS OF CLAIMS AND LITIGATION. Unexpected outcomes of pending litigation
and governmental proceedings and future unexpected litigation and legal
disputes could have a material adverse impact on our operations. If we
experience materially adverse and unexpected outcomes or other unexpected
results in our existing litigation and government proceedings, which in
turn have a material adverse effect on our results of operations, the
accuracy of our forward-looking statements would be affected. Similarly,
if we experience in the future new, unexpected litigation or adverse
results from new, unexpected litigation, there could also be a material
adverse effect on our results, again affecting the accuracy of our
forward-looking statements. Our forward-looking statements assume that
there will be no such unexpected outcomes or results that we have not
already adequately provided for.
o RISKS OF PRODUCT DEFECTS. Our customers often require demanding
specifications for product performance and reliability. Because many of
our products are complex and often use state-of-the-art components,
processes, and techniques, undetected errors and design flaws may occur.
Product defects result in higher product service and warranty and
replacement costs and may cause damage to our customer relationships and
industry reputation, all of which may negatively impact our results of
operations. We have assumed in our forward-looking statements that we
will not in the future incur material difficulties with respect to
product defects and warranty claims.
o RISKS AS TO FOREIGN SALES AND GLOBAL TRADE MATTERS. Foreign sales are
subject to special risks inherent in doing business outside of the U.S.,
including the risk of war, terrorist activities, civil disturbances,
embargoes, and government activities, all of which may disrupt markets.
Foreign sales are also generally subject to the risk of compliance with
additional laws, including tariff regulations and import and export
restrictions. Sales in certain foreign countries require prior U.S.
Government approval in the form of an export license. We cannot assure
you that we will not experience difficulties in connection with future
foreign sales. Moreover, changes in global trade policies in our markets
could impact our operations in these markets. Recent events concerning
the adoption by the U.S. of certain tariffs on foreign imported steel and
other products could cause other countries to retaliate and other
disruptions in global trade policies. We have assumed in connection with
our forward-looking statements that there will be no material changes in
global trading policies, such as embargoes, new and large tariffs, or
other tax assessments and the like or other new and material restrictions
on trade, that apply in particular to our businesses.
26
o RISKS AS TO COST CONTROLS. As a manufacturing and service company
operating within "tight" margins and with substantial facilities and
inventories and a large workforce, our operations have been, and can be,
adversely affected by our inability to control costs and to accurately
estimate and plan our costs on an exacting basis. As a manufacturing and
service company it is particularly important for us to estimate and
control our costs and expenses, and we continuously endeavor to implement
cost identification, estimation, and savings measures in our operations.
Our forward-looking statements assume that we will be able to contain our
costs and expense increases at reasonable levels consistent with expected
revenues.
o RISKS AS TO INFORMATION TECHNOLOGY. We have recently added, at
substantial costs, new information processing systems designed to assist
us in cost controls, reporting, and other operations areas. We anticipate
the need to make additional expenditures to increase the efficiency and
usefulness of such systems and have not yet enjoyed the full benefits of
implementation of such systems. Accordingly, we are at risk as to further
costs and implementation problems on our relatively new information
technology systems that could adversely affect our results of operations.
We have assumed in our forward-looking statements that we will control
the costs of such systems in line with our expectations for such systems
and that we will successfully implement them.
o RISKS AS TO ACQUISITIONS. Our success is dependent upon the integration
of newly acquired businesses with our existing businesses. Our
forward-looking statements assume the successful integration of acquired
businesses and their future contribution to our operations even though
integration of acquisitions requires constant effort, including attention
to personnel and cost issues, and there can be no assurance as to the
ultimate success of our integration efforts.
o RISKS AS TO CURRENCY FLUCTUATIONS. A material change in currency exchange
rates in our markets could affect our future results as well as affect
the carrying values of certain of our assets. World currencies have been
subject to much volatility in recent years. The U.S. dollar has been
strong against most currencies over the past year. Our forward-looking
statements assume no material impact from future changes in currency
exchange rates.
o RISKS AS TO ENVIRONMENTAL AND SAFETY MATTERS. Our operations and
products, and the use thereof, are regulated under a number of federal,
state, local, and foreign environmental laws and regulations, which
govern, among other things, the discharge of hazardous materials into the
air and water as well as the handling, storage, and disposal of hazardous
materials. Compliance with these environmental laws is a major
consideration in the manufacturing of our products and in their servicing
and distribution, as we use and generate hazardous substances and wastes
in our manufacturing operations, and we may be subject to material
financial liability for any investigation and clean-up of such hazardous
materials. In addition, many of our current and former properties are or
have been used for industrial purposes. Accordingly, we also may be
subject to financial liabilities relating to the investigation and
remediation of hazardous materials resulting from the action of previous
owners or operators of industrial facilities on those sites. Liability in
many instances may be imposed on us regardless of the legality of the
original actions relating to hazardous or toxic substances or whether or
not we knew of, or were responsible for, the presence of those
substances. We are also subject to various federal, state, local, and
foreign laws and regulations relating to safety and health conditions in
our manufacturing facilities and with respect to our products and the use
thereof and our service operations. Those laws and regulations may also
subject us to material financial penalties or liabilities for any
noncompliance, as well as potential business disruption if any of our
facilities or a portion of any facility is required to be temporarily
closed as a result of any violation of those laws and regulations. Any
financial liability or business disruption from environmental or health
and safety issues could have a material adverse effect on our financial
condition and results of operations. Our forward-looking statements
assume no material adverse impact from environmental and safety issues.
o RISKS AS TO DISTRIBUTORSHIPS. Our Power Products and Distributed Energy
Solutions segments are, in particular, dependent upon a number of
distribution agreements with third-party manufacturers. All of our
distribution agreements either have expiration dates or are terminable
upon certain notifications. Even those with expiration dates are also
terminable based on other factors, including changes in our control or in
our principal management. While our principal distribution agreements
have been renewed on a regular basis in the past, there can be no
assurance that any particular distribution agreement will be renewed in
the future or that, on the whole, our principal distribution agreements
will continue to be renewed. The termination of, or a failure to renew,
key distribution agreements could have a material adverse impact on our
operations. We have assumed in our forward-looking statements that our
principal distribution agreements will not be terminated and/or will be
renewed as they come up for renewal.
o CREDIT RISKS. We believe that our allowance for bad debts at January 31,
2002, is adequate in light of known circumstances. However, we cannot
give assurance that additional amounts of uncollectible receivables and
bad debt write-offs will not have a material adverse effect on our future
results of operations. Many of our customers have suffered from lower
revenues and experienced liquidity challenges resulting from the economic
difficulties throughout our industry and the industries we have served in
recent periods. We have in the past incurred write-offs in our accounts
receivable due to customer credit problems. We have also found it
necessary to extend trade credit and credit enhancements to long-term
customers and others from time to time where some risks of nonpayment or
late payment exist. Substantial unanticipated credit issues can adversely
affect our results of operations. We have assumed in our forward-looking
statements that our current reserves and allowances will be sufficient to
avoid future material impacts on our results of operations.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Stewart & Stevenson's market risk results from volatility in interest rates and
foreign currency exchange rates. This risk is monitored and managed.
Stewart & Stevenson's exposure to interest rate risk relates primarily to its
debt portfolio. To limit interest rate risk on borrowings, the Company targets a
portfolio within certain parameters for fixed and floating rate loans taking
into consideration the interest rate environment and the Company's forecasted
cash flow. This policy limits exposure to rising interest rates and allows the
Company to benefit during periods of falling interest rates. The Company's
interest rate exposure is generally limited to its short-term uncommitted bank
credit facilities and its unsecured revolving credit notes. See "Liquidity and
Capital Resources" in Item 7 above.
The table below provides information about the Company's market sensitive
financial instruments and constitutes a forward-looking statement.
PRINCIPAL AMOUNT BY EXPECTED MATURITY
(IN THOUSANDS, EXCEPT INTEREST RATE DATA)
Fiscal Years Ending January 31,
---------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter
---------------------------------------------------------------------------------------
Fixed Rate
Long-term Debt $ -- $30,000 $ -- $ -- $25,000 $ --
Average Interest Rate -- 7.29% -- -- 7.38% --
Floating Rate
Long-term Debt $ 250 $ 250 $ 250 $ 250 $ 250 $ 600
---------------------------------------------------------------------------------------
Total $ 250 $30,250 $ 250 $ 250 $25,250 $ 600
=======================================================================================
The Company's earnings and cash flows are subject to fluctuations due to changes
in foreign currency exchange rates. Generally, the Company's contracts provide
for payment in U.S. Dollars and the Company does not maintain significant
foreign currency cash balances. Foreign subsidiaries have in-country working
capital loans, which limit the exposure to foreign currency exchange rate
fluctuations. Certain suppliers bill in foreign currencies. The Company may
enter into forward contracts to hedge these specific commitments and anticipated
transactions but not for speculative or trading purposes. The following table
lists the foreign currency forward contracts outstanding at the close of Fiscal
2001. These contracts settle periodically through September 2002.
CONTRACT AMOUNT BY EXPECTED MATURITY
(IN THOUSANDS, EXCEPT EXHANGE RATE DATA)
Fiscal Year Ending
January 31, 2002
-------------------
Foreign contracts to Purchase Foreign Currencies for U.S. Dollars
Euro $ 1,193
Average Contractual Exchange Rate 0.9047
German Mark $ 602
Average Contractual Exchange Rate 2.1440
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Stewart & Stevenson Services, Inc.
We have audited the accompanying consolidated statements of financial position
of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 2002
and 2001, and the related consolidated statements of earnings, shareholders'
equity, comprehensive income, and cash flows for each of the three years in the
period ended January 31, 2002. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stewart & Stevenson Services,
Inc. and subsidiaries as of January 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2002, in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
March 27, 2002
Houston, Texas
29
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
-------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) Fiscal Fiscal
2001 2000
-------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 81,438 $ 110,174
Accounts and notes receivable, net 166,123 156,787
Recoverable costs and accrued profits not yet billed -- 11,829
Inventories 230,300 210,712
Excess of current cost over LIFO values (42,132) (48,305)
Income tax receivable 13,262 5,586
Deferred income tax asset 16,488 10,428
Other current assets 3,753 1,348
Total assets of discontinued operations 40,693 57,130
--------- ---------
Total Current Assets 509,925 515,689
Property, Plant and Equipment, net 119,657 103,220
Deferred Income Tax Asset 3,237 840
Investments and Other Assets 16,236 19,113
--------- ---------
Total Assets $ 649,055 $ 638,862
========= =========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 3,114 $ 12,611
Accounts payable 71,270 60,354
Accrued payrolls and incentives 19,402 20,024
Income tax payable 1,394 1,962
Current portion of long-term debt 250 20,437
Billings in excess of incurred costs 39,874 30,638
Other current liabilities 21,577 33,870
Total liabilities of discontinued operations 8,078 8,548
--------- ---------
Total Current Liabilities 164,959 188,444
Commitments and Contingencies (See Note 7)
Long-Term Debt 56,600 66,327
Accrued Postretirement Benefits and Pension 32,281 18,879
Other Long-Term Liabilities 3,984 4,628
--------- ---------
Total Liabilities 257,824 278,278
--------- ---------
Shareholders' Equity
Common Stock, without par value, 100,000,000
shares authorized; 28,444,281 and 28,067,566
shares issued at January 31, 2002 and 2001, respectively 54,176 48,325
Accumulated Other Comprehensive Loss (8,746) (929)
Retained Earnings 345,801 313,188
--------- ---------
Total Shareholders' Equity 391,231 360,584
--------- ---------
Total Liabilities & Shareholders' Equity $ 649,055 $ 638,862
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
30
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
-------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) Fiscal 2001 Fiscal 2000 Fiscal 1999
-------------------------------------------------------------------------------------------------------------------------------
Sales $ 1,329,510 $ 1,111,050 $ 861,264
Cost of sales 1,150,792 939,592 738,498
----------- ----------- -----------
Gross profit 178,718 171,458 122,766
----------- ----------- -----------
Recovery of costs incurred, net (See Footnote 3) (39,000) -- --
Selling and administrative expenses 148,757 120,482 100,680
Interest expense 5,400 8,108 9,042
Interest and investment income (3,415) (7,993) (1,083)
Other (income) expense, net (3,472) (4,755) (6,214)
----------- ----------- -----------
108,270 115,842 102,425
----------- ----------- -----------
Earnings from continuing operations before income taxes 70,448 55,616 20,341
Income tax expense 25,104 20,459 7,287
----------- ----------- -----------
Net earnings from continuing operations of consolidated companies 45,344 35,157 13,054
Equity in net earnings of unconsolidated affiliates -- -- 142
Gain on sale of investment, net of tax of $847 -- -- 2,746
----------- ----------- -----------
Net earnings from continuing operations 45,344 35,157 15,942
Earnings (loss) from discontinued operations, net
of taxes of $(1,166), $(105), and $1,355 (2,493) (368) 1,509
Gain (loss) on disposal of discontinued operations, net of taxes
of $(372), $331, and $4,112 (628) 565 6,879
----------- ----------- -----------
Net earnings $ 42,223 $ 35,354 $ 24,330
=========== =========== ===========
Weighted average shares outstanding
Basic 28,325 28,026 27,989
Diluted 28,865 28,373 28,042
Earnings (loss) per share:
Basic
Continuing operations $ 1.60 $ 1.25 $ 0.57
Earnings (loss) from discontinued operations, net (0.09) (0.01) 0.05
Gain (loss) on disposal of discontinued operations, net (0.02) 0.02 0.25
----------- ----------- -----------
Net earnings per share $ 1.49 $ 1.26 $ 0.87
=========== =========== ===========
Diluted
Continuing operations $ 1.57 $ 1.24 $ 0.57
Earnings (loss) from discontinued operations, net (0.09) (0.01) 0.05
Gain (loss) on disposal of discontinued operations, net (0.02) 0.02 0.25
----------- ----------- -----------
Net earnings per share $ 1.46 $ 1.25 $ 0.87
=========== =========== ===========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
31
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Accumulated
Other
Shares Common Retained Comprehensive
Outstanding Stock Earnings Loss Total
-----------------------------------------------------------------------------------------------------------------------------
Balance at end of Fiscal 1998 27,984 $ 47,819 $ 272,544 $ (5) $ 320,358
Net earnings -- -- 24,330 -- 24,330
Cash dividends -- -- (9,517) -- (9,517)
Other comprehensive loss -- -- -- (626) (626)
Repurchase and cancellation of shares 8 (97) -- -- (97)
--------- --------- --------- --------- ---------
Balance at end of Fiscal 1999 27,992 $ 47,722 $ 287,357 $ (631) $ 334,448
Net earnings -- -- 35,354 -- 35,354
Cash dividends -- -- (9,523) -- (9,523)
Other comprehensive loss -- -- -- (298) (298)
Exercise of stock options 76 603 -- -- 603
--------- --------- --------- --------- ---------
Balance at end of Fiscal 2000 28,068 $ 48,325 $ 313,188 $ (929) $ 360,584
Net earnings -- -- 42,223 -- 42,223
Cash dividends -- -- (9,610) -- (9,610)
Other comprehensive loss -- -- -- (7,817) (7,817)
Exercise of stock options 376 5,851 -- -- 5,851
--------- --------- --------- --------- ---------
Balance at end of Fiscal 2001 28,444 $ 54,176 $ 345,801 $ (8,746) $ 391,231
========= ========= ========= ========= =========
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
--------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Net earnings $ 42,223 $ 35,354 $ 24,330
Change in additional minimum pension
liability, net of tax of $(4,251) (7,679) -- --
Unrealized loss on forward contracts, net of
tax of $(149) (271) -- --
Currency translation gain (loss) 133 (298) (626)
-------- -------- --------
Comprehensive income $ 34,406 $ 35,056 $ 23,704
======== ======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
32
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net earnings from continuing operations $ 45,344 $ 35,157 $ 15,942
Adjustments to reconcile net earnings from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 22,275 20,790 21,834
Gain on sale of business assets (528) (5,649) (5,804)
Deferred taxes (4,058) (3,160) (34)
Change in operating assets and liabilities net of the effect of acquisition,
acquisition, divestiture, and discontinued operations:
Accounts and notes receivable, net (11,876) 79,274 (76,599)
Recoverable costs and accrued profits not yet billed 11,829 (3,678) 90,946
Inventories (25,233) (13,787) 8,909
Other current and noncurrent assets (12,759) 21,082 18,033
Accounts payable 10,916 (25,380) 10,709
Accrued payrolls and incentives (622) 2,610 1,238
Billings in excess of incurred costs 9,236 30,638 (224)
Other current liabilities (10,492) (32,233) (13,040)
Accrued postretirement benefits & pension 5,452 3,249 2,611
Other long-term liabilities (2,018) (859) 2,821
--------- --------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS 37,466 108,054 77,342
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 12,847 (11,029) 12,151
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,313 97,025 89,493
--------- --------- ---------
Investing Activities
Expenditures for property, plant and equipment (53,207) (35,021) (39,379)
Acquisition of business (See Note 15) (1,225) -- (5,832)
Proceeds from sale of business assets (See Note 15) 5,737 55,221 8,303
Disposal of property, plant and equipment 3,908 2,668 13,756
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (44,787) 22,868 (23,152)
--------- --------- ---------
Financing Activities
Additions to long-term borrowings -- 29,238 16,500
Payments on long-term borrowings (21,005) (29,233) (82,093)
Change in short-term notes payable (9,498) (12,517) 7,792
Dividends paid (9,610) (9,521) (9,517)
Exercise of stock options 5,851 603 (97)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (34,262) (21,430) (67,415)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (28,736) 98,463 (1,074)
Cash and cash equivalents, beginning of fiscal year 110,174 11,711 12,785
--------- --------- ---------
Cash and cash equivalents, end of fiscal year $ 81,438 $ 110,174 $ 11,711
========= ========= =========
CASH PAID FOR:
Interest $ 8,267 $ 8,157 $ 10,915
Taxes (excluding refunds) 33,246 17,323 3,494
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
33
STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
FISCAL YEAR: The Company's fiscal year begins on February 1 of the year stated
and ends on January 31 of the following year. For example, "Fiscal 2001"
commenced on February 1, 2001 and ended on January 31, 2002. The Company reports
results on the Fiscal Quarter method with each quarter comprising approximately
13 weeks.
USE OF ESTIMATES AND ASSUMPTIONS: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results may differ. Significant estimates
have been made by management with respect to (1) future obligations associated
with warranties and guarantees, (2) the outcome of ongoing governmental
investigations and outstanding litigation, (3) losses related to uncollectible
receivables, (4) inventory carrying values, (5) actuarial assumptions related to
pensions, and (6) revenues recognized and costs incurred on long-term contracts.
CONSOLIDATION: The consolidated financial statements include the accounts of
Stewart & Stevenson Services, Inc. and all enterprises in which the company has
a controlling interest. Investments in other partially-owned enterprises in
which ownership ranges from more than 20 percent to 50 percent or less are
generally accounted for using the equity method. All intercompany accounts and
transactions have been eliminated.
STOCK-BASED COMPENSATION: The Company applies Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Pro forma disclosure of the compensation expense determined
under the fair-value provision of Statement of Financial Accounting Standard
("SFAS") No. 123, "Accounting for Stock-Based Compensation," has been provided.
(See Note 11: Common Stock.)
CASH EQUIVALENTS: Interest-bearing deposits and other investments with original
maturities of three months or less are considered cash equivalents.
INVENTORIES: Inventories are generally stated at the lower of cost (using LIFO)
or market (determined on the basis of estimated realizable values), less related
customer deposits. Work in process costs include material, labor, and overhead.
The carrying values of these inventories are not in excess of their fair values.
CONTRACT REVENUES AND COSTS: Generally, revenue is recognized when a product is
shipped or accepted by the customer and title has passed, except for certain
equipment products, where revenue is recognized using the
percentage-of-completion method. The revenues of the Tactical Vehicle Systems
segment are generally recognized under the units-of-production method, whereby
sales and cost of the units produced under the Family of Medium Tactical Vehicle
("FMTV") contracts are recognized as units are accepted by the U.S. Government.
Cost of sales for units accepted are based on actual unit cost. Changes in
estimates for revenues, costs, and profits are recognized in the period in which
they are determinable using the cumulative catch-up method of accounting applied
on an annual basis. In certain cases, the estimated revenue values include
amounts expected to be realized from contract adjustments when recovery of such
amounts are probable. Any anticipated losses on contracts are charged in full to
operations in the period in which they are determinable.
DEPRECIABLE PROPERTY: The Company depreciates property, plant and equipment over
their estimated useful lives, using both accelerated and straight-line methods.
Expenditures for property, plant and equipment are capitalized and carried at
cost. All long-lived assets are periodically reviewed to determine whether a
change in circumstances indicates that the carrying amount of the asset may not
be recoverable. When items are retired or otherwise disposed of, income is
charged or credited for the difference between net book value and proceeds
realized thereon. Ordinary maintenance and repairs are charged to expense as
incurred, and replacements and betterments are capitalized. The range of
estimated service lives used to calculate financial reporting depreciation for
principal items of property, plant and equipment are as follows:
Machinery and equipment 2 - 7 years
Computer hardware and software 3 - 5 years
Building and leasehold improvements 10 - 25 years
Revenue earning assets 2 - 8 years
INTANGIBLE ASSETS: Intangible assets primarily relate to the price paid for
acquired businesses in excess of appraised net asset value and has been
amortized on a straight-line basis over the estimated life of fifteen years. As
of the end of Fiscal 2001, 2000, and 1999, the Company's Other assets included
$12.5 million, $9.7 million, and $8.8 million of unamortized goodwill and $3.9
million, $3.8 million, and $5.7 million of unamortized other intangible assets.
34
During 2001, the FASB issued SFAS No. 142,"Goodwill and Other Intangible
Assets," which discontinues goodwill amortization over its estimated useful
life. The valuation of goodwill will be assessed at least annually. See "Recent
Accounting Pronouncements" below.
INTERNAL-USE SOFTWARE COSTS: Internal and external costs incurred to develop
internal-use computer software are capitalized. The cost of business process
reengineering activities and training are expensed as incurred.
FOREIGN EXCHANGE CONTRACTS: The Company occasionally enters into foreign
currency forward exchange contracts only as a hedge against certain economic
exposures and not for speculative or trading purposes. While the forward
contracts affect the Company's results of operations, they do so only in
connection with the underlying transactions. All derivative instruments are
recognized as assets or liabilities in the balance sheet and are measured at
fair value at the end of each period. Changes in the market value of open hedge
positions represent unrealized gains or losses and are recorded to other
comprehensive income. To the extent that changes in market values are initially
recorded in other comprehensive income, such changes reverse out and are
recorded in net income when the underlying transaction occurs. At the close of
Fiscal 2001, the Company had approximately $2 million in forward contracts to
purchase foreign currencies, the fair value of which was a loss of approximately
$400,000. These contracts settle periodically through September 2002. The
counterparties to these contracts are major financial institutions, therefore
the Company believes the risk of default is minimal. Effective February 1, 2001,
the Company adopted SFAS No. 133. This adoption did not have a material effect
on the Company's results of operations or financial position.
TRANSLATION OF FOREIGN CURRENCY: The local currency is the functional currency
for most of the Company's international subsidiaries and, as such, assets and
liabilities are translated into U.S. dollars at year-end exchange rates. Income
and expense items are translated at average exchange rates during the year.
Translation adjustments resulting from changes in exchange rates are reported in
other comprehensive income.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's financial instruments consist
primarily of cash equivalents, trade receivables, trade payables, and debt
instruments. The recorded values of cash equivalents, trade receivables, and
trade payables are considered to be representative of their respective fair
values. Generally, the Company's notes receivable and payable have interest
rates which are tied to current market rates. The senior notes are recorded at a
book value of $55 million, the fair market value of which was $57 million as of
January 31, 2002. The Company estimates that the recorded value of all other of
its financial instruments approximates market values.
WARRANTY COSTS: As revenue is recorded, expected warranty and performance
guarantee costs are accrued, based on both historical experience and contract
terms. Should actual product failure rates or repair costs differ from the
Company's current estimates, revisions to the estimated warranty liability would
be required.
PENSIONS: The Company accounts for its defined benefit pension plans in
accordance with SFAS No. 87, Employers' Accounting for Pensions which requires
that amounts recognized in the financial statements be determined on an
actuarial basis. A significant element in determining the Company's pension
income or expense in accordance with SFAS No. 87 is the expected return on plan
assets and the discount rate for calculating future liability. The assumed
long-term rate of return on assets is applied to a calculated value of plan
assets which results in an estimated return on plan assets that is included in
current year pension income or expense. Adjustments to the minimum pension
liability are recorded in other comprehensive income and amortized over the
remaining average service life of the Company's workforce.
EARNINGS PER SHARE: Basic EPS excludes all dilution and is based upon the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that would occur if all securities or other
contracts to issue common stock were exercised or converted into common stock.
RECLASSIFICATIONS: The accompanying consolidated financial statements for prior
fiscal years contain certain reclassifications to conform with the presentation
used in Fiscal 2001.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." Both statements are effective for the
Company's Fiscal 2002 which begins on February 1, 2002. Under these new rules,
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests. Other identifiable
intangible assets will continue to be amortized over their useful lives.
The Company expects that it will apply the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of Fiscal 2002.
During Fiscal 2001, the Company amortized approximately $0.7 million of
goodwill. Such amortization will cease beginning with the first quarter of the
Company's Fiscal 2002.
35
The Company expects to complete its impairment testing on remaining goodwill
during the first quarter of Fiscal 2002 and expects to recognize approximately
an impairment of $4 to $5 million as a result of this testing, subject to
continuing analysis. This charge will be recorded as a cumulative effect of a
change in accounting principle principally related to the goodwill in Airline
Products.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 144 also supercedes the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 is intended to establish one
accounting model for long-lived assets to be disposed of by sale and to address
significant implementation issues of SFAS No. 121. The Company has adopted SFAS
No. 144 and as a result has reclassified certain operations as discontinued. See
Note 2 below.
In September 2000, the Emerging Issues Task Force ("EITF") released abstract No.
00-10, "Accounting for Shipping and Handling Fees and Costs." EITF No. 00-10
requires that shipping and handling costs billed to customers be recorded as
sales. Accordingly, the Company has restated its quarterly and annual sales and
cost of sales for Fiscal 2001 and 2000 and annual sales and cost of sales for
1999, 1998, and 1997 versus that which was originally reported.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting For Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts and hedging
activities. Effective February 1, 2001, the Company adopted SFAS No. 133. The
adoption of SFAS No. 133 did not have a material effect on the Company's results
of operations or financial position.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." This bulletin
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The bulletin is not intended to change existing
authoritative literature. The Company is in compliance with all such
authoritative literature described in SAB No. 101.
36
NOTE 2: DISCONTINUED OPERATIONS
During the fourth quarter of Fiscal 2001, the Company announced its decision to
sell the Petroleum Equipment segment's blowout preventer and controls, valve,
and drilling riser businesses. Results of operations have been restated herein
to classify the net earnings, assets, and liabilities of these businesses as
discontinued operations. Net earnings (loss) of discontinued operations were
$(2.5) million, $(0.4) million, and $1.5 million during Fiscal 2001, 2000, and
1999, respectively. Sales from these operations were $45.6 million, $42.2
million, and $57.4 million for Fiscal 2001, 2000, and 1999, respectively. The
corporate expenses previously allocated to these discontinued operations are now
absorbed by the remaining continuing operations, resulting in a restatement of
operating profit by segment.
Significant categories of assets and liabilities from discontinued operations
are included in the table below:
----------------------------------
(IN THOUSANDS) Fiscal Fiscal
2001 2000
-----------------------------------------------------------------------------------
Receivables, net $ 11,123 $ 15,654
Inventory, net 18,040 28,586
Property, plant and equipment, net 12,019 11,545
Other assets (489) 1,345
-------- --------
Total assets 40,693 57,130
-------- --------
Accounts payable 5,097 6,083
Other liabilities 2,981 2,465
-------- --------
Total liabilities 8,078 8,548
-------- --------
Net assets $ 32,615 $ 48,582
======== ========
In addition, during the first quarter of Fiscal 2001, the Company recognized an
adjustment to a reserve for certain taxes associated with previously disposed
businesses, resulting in an after-tax loss of $0.6 million also included in
earnings from discontinued operations.
During the fourth quarter of Fiscal 1999, the Company disposed of an investment
and certain obligations relating to a power generation facility in Argentina
associated with the previously discontinued gas turbine operations resulting in
a $7 million gain, net of tax . Accordingly, the gain has been reflected as a
gain on disposal of discontinued operations.
NOTE 3: RECOVERY OF COSTS INCURRED, NET
In Fiscal 1998, the Company filed a claim with the U.S. Government seeking
recovery of costs incurred resulting from delays from the original production
plan in the first multi-year FMTV contract. The U.S. Army and the Company
participated in a voluntary dispute resolution process resulting in a $22.0
million settlement which is included in the first quarter Fiscal 2001 results.
In Fiscal 2000, the Company filed a certified claim with the U.S. Government
seeking recovery of costs incurred by the Company resulting from retrofitting
all vehicles produced under the first FMTV contract for changes in drive train
components. All costs associated with the retrofitting were expensed by the
Company as incurred. The U.S. Army and the Company reached resolution through
voluntary participation in the Alternative Disputes Resolution process managed
by the Armed Services Board of Contract Appeals resulting in an $18.5 million
settlement recorded in the third quarter of Fiscal 2001.
During Fiscal 2001, the Company incurred $1.5 million in related expenses
associated with the above recoveries. The full amount of these claims was
received during Fiscal 2001.
37
NOTE 4: SEGMENT DATA
The Power Products segment sells and rents various industrial equipment; sells
components, replacement parts, accessories, and other materials supplied by
independent manufacturers; and provides in-shop and on-site repair services for
industrial equipment. The Distributed Energy Solutions Segment was reported
separately effective with the fourth quarter of Fiscal 2001 and includes the
Company's activities associated with the reciprocating diesel and natural gas
engine generator set packaging, turnkey power plant installation operations and
maintenance services, and sales of power generation solutions in domestic and
certain international markets. The Tactical Vehicle Systems segment assembles
and provides sustaining design engineering and service and support for the
Family of Medium Tactical Vehicles under contracts with the U.S. Army. The
Petroleum Equipment segment manufactures equipment primarily for the well
stimulation industries. Its products include coil tubing systems, and acidizing
and fracturing systems. The Airline Products segment manufactures internal
combustion and electric airline ground support equipment that includes aircraft
tow tractors, gate pushback tractors, baggage tow tractors, beltloaders, air
start units, and air conditioning units. This segment also manufactures mobile
railcar movers, sold under the Rail King(R) trademark and snow blowers, sold
under the Snow King(TM) trademark.
The Company recently announced its intention to sell the Petroleum Equipment
segment's blowout preventer and controls, valve, and drilling riser business,
and as a result these activities have been reclassified for reporting purposes
as discontinued operations. See Note 2: Discontinued Operations for further
discussion. The corporate expenses previously allocated to these discontinued
operations are now absorbed by the remaining continuing operations, resulting in
a restatement of operating profit by segment.
The high degree of integration of the Company's operations necessitates the use
of a substantial number of allocations and apportionments in the determination
of business segment information. Sales are shown net of intercompany,
intersegment, and intrasegment eliminations.
The Company markets its products and services throughout the world and is not
dependent upon any single geographic region. The U.S. Government has accounted
for $425.3 million, $303.7 million, and $149.0 million of sales in Fiscal 2001,
2000, and 1999, respectively. No other single group or customer represents more
than 10% of consolidated sales in any of the last three fiscal years. Export
sales from continuing operations, including sales to domestic customers for
export, for Fiscal 2001, 2000, and 1999 were $173.2 million, $83.0 million, and
$48.3 million, respectively.
During Fiscal 2001, the Company expensed certain items related to restructuring.
Specifically, the Company consolidated its Airline Products manufacturing
facilities in Marietta, Georgia, combining operations from both Kennesaw,
Georgia and Houston, Texas. Also, the Company relocated the manufacture of snow
blowers from Colorado to Houston, Texas. In conjunction with these
restructurings, the Company recognized expense of $1.1 million in Distributed
Energy Solutions, $4.7 million in Airline Products, during Fiscal 2001, and $0.5
million in Petroleum Equipment. As of the end of Fiscal 2001, the Company
retained $0.3 million of accruals associated with these restructurings and has
spent $5.9 million during Fiscal 2001 which includes employee severance, asset
relocation costs, and facility optimization costs. The Company reduced
approximately 100 positions as a result.
38
Financial information relating to industry segments is as follows excluding
those operations which have been discontinued. See Note 2.
------------------------------------------------------------------------------------------------------------------------------------
Operating Identifiable Capital Depreciation and
(IN THOUSANDS) Sales Profit (Loss) Assets Expenditures Amortization
------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2001
Power Products $ 587,034 $ 10,278 $ 405,629 $ 35,009 $ 15,536
Distributed Energy Solutions 115,728 (12,449) 55,587 822 1,364
Tactical Vehicle Systems 432,288 103,493 50,112 14,019 3,429
Petroleum Equipment 90,547 1,648 18,930 257 541
Airline Products 80,649 (18,395) 45,976 3,052 953
Other Business Activities 23,264 1,180 32,128 48 452
---------- ---------- ---------- ---------- ----------
Total $1,329,510 $ 85,755 $ 608,362 $ 53,207 $ 22,275
========== ========== ========== ========== ==========
Fiscal 2000
Power Products $ 566,078 $ 16,395 $ 419,608 $ 21,508 $ 13,288
Distributed Energy Solutions 46,385 (3,839) 27,067 1,002 910
Tactical Vehicle Systems 304,143 54,258 24,274 5,439 3,732
Petroleum Equipment 58,092 4,062 27,160 198 1,279
Airline Products 110,250 (6,643) 47,840 455 905
Other Business Activities 26,102 3,478 35,783 6,419 676
---------- ---------- ---------- ---------- ----------
Total $1,111,050 $ 67,711 $ 581,732 $ 35,021 $ 20,790
========== ========== ========== ========== ==========
Fiscal 1999
Power Products $ 540,740 $ 15,164 $ 310,733 $ 17,323 $ 13,641
Distributed Energy Solutions -- -- -- -- --
Tactical Vehicle Systems 150,884 30,195 79,639 4,747 2,879
Petroleum Equipment 26,864 (1,588) 20,673 309 1,827
Airline Products 104,915 (3,712) 53,631 1,459 640
Other Business Activities 37,861 (1,712) 135,706 15,541 2,847
---------- ---------- ---------- ---------- ----------
Total $ 861,264 $ 38,347 $ 600,382 $ 39,379 $ 21,834
========== ========== ========== ========== ==========
Operating income in Fiscal 2001 includes $39.0 million in the Tactical Vehicle
Systems segment from settlements of claims with the U.S. Government. See Note 3.
A reconciliation of operating profit to earnings from continuing operations
before income taxes is as follows:
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Operating profit $ 85,755 $ 67,711 $ 38,347
Corporate expenses, net (13,322) (11,980) (10,047)
Non-operating interest income 3,415 7,993 1,083
Interest expense (5,400) (8,108) (9,042)
-------- -------- --------
Earnings from continuing operations before income taxes $ 70,448 $ 55,616 $ 20,341
======== ======== ========
39
NOTE 5: CONTRACTS IN PROCESS
Amounts included in the financial statements which relate to recoverable costs
and accrued profits not yet billed on contracts in process are classified as
current assets. Billings on uncompleted contracts in excess of incurred cost and
accrued profits are classified as current liabilities. Summarized below are the
components of the amounts:
----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal
2001 2000
----------------------------------------------------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $ -- $ 13,470
Accrued profits -- 565
-------- --------
14,035
Less: Customer progress payments -- (2,206)
-------- --------
Recoverable costs and accrued profits not yet billed (recorded as current assets) $ -- $ 11,829
======== ========
Costs incurred on uncompleted contracts $ 31,463 $ 53,522
Less: Customer progress payments (71,337) (84,160)
-------- --------
Billings in excess of incurred costs (recorded as current liabilities) $(39,874) $(30,638)
======== ========
As of the end of Fiscal 2001, the Company's continuing operations did not
include any contracts in process that included billings in excess of incurred
cost.
Billings in excess of incurred costs related to the Tactical Vehicle Systems
segment include direct costs of manufacturing and engineering and allocable
overhead costs. Generally, overhead costs include selling and administrative
expenses in accordance with generally accepted accounting principles and are
charged to cost of sales at the time revenue is recognized.
The United States Government has a security interest in unbilled amounts
associated with contracts that provide for performance based payments.
NOTE 6: INVENTORIES
Summarized below are the components of inventories by segment excluding
discontinued operations, net of customer deposits:
------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal
2001 2000
------------------------------------------------------------------------------------------------------
Power Products $ 138,210 $ 151,095
Distributed Energy Solutions 48,817 19,410
Petroleum Equipment 6,689 5,804
Airline Products 28,036 29,007
Tactical Vehicle Systems 5,933 3,861
Other Business Activities 2,615 1,535
--------- ---------
230,300 210,712
Excess of current cost over LIFO values (42,132) (48,305)
--------- ---------
Total Inventories $ 188,168 $ 162,407
========= =========
40
The Company's inventory classifications correspond to its reportable segments.
The Power Products segment's inventory consists primarily of industrial
equipment, equipment under modification, and parts held in the Company's
distribution network for resale. As a custom packager of power systems to
customer specifications, the Distributed Energy Solutions, Petroleum Equipment,
Airline Products, Tactical Vehicle Systems, and Other Business Activities
segments' inventory consists of both work-in-process, which includes purchased
and manufactured components in various stages of assembly, and on-hand parts and
equipment to support service and future sales. LIFO income (expense), classified
as cost of sales on the consolidated statements of earnings, was allocated by
segment as follows:
-------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal
2001 2000
-------------------------------------------------------------------------------------------------------
Power Products $ 6,275 $ (854)
Distributed Energy Solutions (2,764) (45)
Petroleum Equipment 586 346
Airline Products 1,975 (50)
Tactical Vehicle Systems -- --
Other Business Activities 101 (17)
------- -------
$ 6,173 $ (620)
======= =======
NOTE 7: COMMITMENTS AND CONTINGENCIES
As a custom packager of power systems, the Company issues bid and performance
guarantees in the form of performance bonds or standby letters of credit.
Performance type letters of credit totaled approximately $3.1 million at the
close of Fiscal 2001.
The Company's government contract operations are subject to U.S. Government
investigations of business practices and cost classifications from which legal
or administrative proceedings can result. Based on government procurement
regulations, under certain circumstances a contractor can be fined, as well as
suspended or debarred from government contracting. In that event, the Company
would also be unable to sell equipment or services to customers that depend on
loans or financial commitments from the Export Import Bank, Overseas Private
Investment Corporation, and similar government agencies during a suspension or
debarment.
During Fiscal 1998, the U.S. Customs Service detained a medium tactical vehicle
that was being shipped by the Company for display in a European trade show. The
Company has been advised that the U.S. Customs Service and the Department of
Justice are investigating potential violations by the Company of laws relating
to the export of controlled military vehicles, weapons mounting systems, and
firearms. Such investigation could result in the filing of criminal, civil, or
administrative sanctions against the Company and/or individual employees and
could result in a suspension or debarment of the Company from receiving new
contracts or subcontracts with agencies of the U.S. Government or the benefit of
federal assistance payments. It is presently impossible to determine the actual
costs that may be incurred to resolve this matter or whether the resolution will
have a material adverse effect on the Company's results of operations.
The Company is a defendant in a suit brought under the QUI TAM provision of the
False Claims Act, United States of America, ex rel. Werner Stebner v. Stewart &
Stevenson Services, Inc. and McLaughlin Body Co., Civil Action No. H-96-3363, in
the United States District Court for the Southern District of Texas, Houston
Division. The suit seeks penalties and damages in an unspecified amount. The
suit alleges that the Company made false statements and certifications in
connection with claims for payment for Family of Medium Tactical Vehicles
delivered to the U.S. Army starting in 1995, and the suit alleges that the
vehicles were substandard because of corrosion problems. The suit was filed
under seal in 1996, and following an investigation by the Justice Department,
the United States declined to intervene in the suit, which was unsealed on
August 29, 2000. The case is set for trial December 1, 2003. The Company
believes the claims in the suit are without merit and is vigorously defending
the suit. It is presently impossible to determine the actual costs that may be
incurred to resolve this matter or whether the resolution will have a material
adverse effect on the Company's results of operations.
The Company is also a defendant in a number of lawsuits relating to contractual,
product liability, personal injury, and warranty matters normally incident to
the Company's business. No individual case, or group of cases presenting
substantially similar issues of law or fact, are expected to have a material
effect on the manner in which the Company conducts its business. Although the
Company maintains certain insurance policies and has established reserves that
it believes to be adequate in each case, an unforeseen outcome in such cases
should not have a material adverse impact on the results of operations in the
period it occurs.
41
The Company has provided certain guarantees in support of its customers'
financing of purchases from the Company in the form of debt guarantees. The
amount of such guarantees is approximately $4.4 million as of January 31, 2002.
The Company leases certain property and equipment under operating lease
arrangements of varying terms whose annual rentals are less than 1% of
consolidated sales.
NOTE 8: GOVERNMENT CONTRACTS
The U.S. government is one of the Company's key customers. As such, decreased
government spending or termination of significant government programs could
adversely affect its business. The Company's Tactical Vehicle Systems segment
depends largely on U.S. government expenditures. In recent years, government
contracts in such segment have accounted for substantial percentages of its
annual revenues and operating income. The Company is currently in production
year four of its second multi-year contract with the U.S. Department of the Army
("U.S. Army") for production of the Family of Medium Tactical Vehicles ("FMTV").
The U.S. Army exercised an option to award a fifth program year to the current
contract, which begins in October 2002 and is expected to be completed by
September 2003. The U.S. Army holds an additional option to award a sixth
program year that, if exercised by the U.S. Army, could extend production of the
FMTV through September 2004. The funding of the FMTV contract is subject to the
inherent uncertainties of Congressional appropriations. As is typical of
multi-year defense contracts that may be canceled or adjusted by the government,
the FMTV contract must be funded annually by the U.S. Department of the Army and
may be terminated at any time for the convenience of the government. As of
January 31, 2002, funding in the amount of approximately $1.5 billion for the
new FMTV contract had been authorized and appropriated by the U.S. Congress. If
the FMTV contract is terminated, other than for the Company's default (in which
event there could be serious adverse consequences and claims against the
Company), it provides for termination charges that will reimburse the Company
for certain allowable costs but not necessarily for all costs.
As the Company's current contract with the U.S. Army for production of the FMTV
is nearing completion, it will be necessary for the Company to secure additional
contracts to have continued success in this segment. The Company has been
awarded a contract for the first phase of the competitive bid process for the
next multi-year contract for production of the FMTV and is currently competing
for the final award. The U.S. Army is scheduled to make its decision as to the
final award of the next multiyear contract during the first quarter of Fiscal
2003. The U.S. Army will determine the award by a competitive bid process, and
there can be no assurance that the Company will be successful in such regard or
that its competitor will not be more successful than it will be in this or
coming bids and awards for tactical vehicles. Even if the Company does receive
the award, there can be no assurance that operating margins will be at the same
level as the existing FMTV contract.
Major contracts for military systems are performed over extended periods of time
and are subject to changes in scope of work and delivery schedules. Pricing
negotiations on changes and settlement of claims often extend over prolonged
periods of time. The Company's ultimate profitability on such contracts will
depend on the eventual outcome of an equitable settlement of contractual issues
with the U.S. Government. Due to uncertainties inherent in the estimation and
claim negotiation process, no assurances can be given that management's
estimates will be accurate, and variances between such estimates and actual
results could be material. Continued success in this segment is dependent on
securing additional contracts after completion of the current contract for
production of the FMTV at acceptable operating margins.
NOTE 9: DEBT ARRANGEMENTS
The Company has informal borrowing arrangements with banks which may be
withdrawn at the banks' option. Borrowings under these credit arrangements are
unsecured, are due within 90 days, and bear interest at varying bid and
negotiated rates. No borrowings were outstanding under these arrangements at
January 31, 2002 or 2001.
In addition, the Company's international subsidiaries had foreign currency bank
loans totaling $3.1 million at January 31, 2002. Notes payable consist of
renewable, secured loans for the purpose of financing the Company's South
American operations. These loans are denominated in local currency (Colombian
Pesos and Venezuelan Bolivars) and are secured by letters of credit issued by
the Company and principally bear market-based variable rates of interest which
were approximately 13.4% as of January 31, 2002. The Company uses foreign
denominated debt to offset the impact of foreign currency exchange rates on its
operations.
42
Long-term debt, which is generally unsecured, consists of the following:
-----------------------------------------------------------------------------------------------------
(IN THOUSANDS) FISCAL Fiscal
2001 2000
-----------------------------------------------------------------------------------------------------
Debt of consolidated limited partnership:
-Note payable to a bank, principal due 2006 $ -- $ 8,935
Senior Notes:
7.03% principal due 2001 -- 20,000
7.29% principal due 2003 30,000 30,000
7.38% principal due 2006 25,000 25,000
Other 1,850 2,829
-------- --------
56,850 86,764
Less current portion (250) (20,437)
-------- --------
Long-Term Debt $ 56,600 $ 66,327
======== ========
During Fiscal 2001, the Company replaced its revolving credit facility with a
new unsecured revolving credit facility which matures on February 20, 2004. No
borrowings were outstanding under the new or previous facility at January 31,
2002 or 2001 nor at any point during Fiscal 2001. Under the new revolving credit
facility, the Company has commitments of $150 million from banks, subject to
increase to $200 million or reduction at the Company's election. The revolving
credit facility has a $25 million sub facility which may be used for letters of
credit. Approximately $6 million in letters of credit were outstanding at
January 31, 2002 leaving $144 million available for the Company's use. A
commitment fee ranging from 20 to 50 basis points is paid on the daily average
unused balance based on the Company's leverage ratio. Borrowings outstanding
will bear interest at several options, including LIBOR plus 75 to 175 basis
points based on the Company's leverage ratio, the prime rate, or a competitive
bid among the banks. Based on the first option (LIBOR plus 75 to 175 basis
points based on the Company's leverage ratio), the borrowing rate would have
been approximately 2.6% as of January 31, 2002.
The Company's unsecured long-term notes, which include the revolving credit
notes and senior notes, were issued pursuant to agreements containing covenants
that restrict indebtedness, guarantees, sales of assets, rentals, and other
items. Additional covenants in the revolving credit notes require the Company to
maintain a minimum tangible net worth and interest coverage. Since these
requirements are calculated from earnings and cash flow, dividends could be
restricted indirectly. Dividends at the current level are not restricted as of
the date of the financial statements.
In December 1998, the Company entered into an agreement under which it financed
approximately $7 million of gas compression equipment. In June 1999, the Company
entered into an agreement under which it sold and leased back, under an
operating lease structure, $6.2 million of gas compression equipment. In October
1999, under the same arrangement, the Company sold and leased back an additional
$4.5 million of gas compression equipment. The Company has subleased the gas
compression equipment that is subject to this leaseback arrangement to the
purchaser of the gas compression equipment leasing business. See Note 15:
Acquisitions and Divestitures for additional information.
During Fiscal 2001, the Company sold its interest in a partnership in which the
Company was a limited partner. This partnership was no longer consolidated as of
the end of Fiscal 2001. As of January 31, 2001, the Company's long-term debt
included approximately $9 million of non-recourse debt associated therewith.
The amounts of long-term debt which will become due during the next five years
are as follows (in thousands):
2002 $ 250
2003 30,250
2004 250
2005 250
2006 25,250
Thereafter 600
-----------
$ 56,850
===========
43
NOTE 10: EMPLOYEE PENSION AND OTHER BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all of its full-time employees. The pension benefits are based on
years of service, limited to 45 years, and the employee's highest consecutive
five-year average compensation out of the last 10 years of employment. The
Company funds pension costs in conformity with the funding requirements of
applicable government regulations.
In addition, the Company has a postretirement medical plan which covers most of
its employees and provides for the payment of medical costs of eligible
employees and dependents upon retirement. The plan is currently not funded. The
Company expects to continue paying postretirement medical costs as covered
claims are incurred.
The following table includes pension benefits information for the
noncontributory defined benefit pension plan discussed above as well as the
unfunded supplemental retirement plan and the unfunded defined benefit
retirement plan for non-employee directors.
----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) PENSION BENEFITS OTHER POST EMPLOYMENT BENEFITS
---------------- ------------------------------
2001 2000 2001 2000
---- ---- ---- ----
---------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 98,469 $ 85,802 $ 12,278 $ 9,920
Service cost 4,494 4,039 821 647
Interest cost 7,271 6,686 905 755
Amendments 1,933 -- -- --
Participant contributions -- -- 228 221
Benefits paid (3,977) (3,730) (922) (798)
Actuarial loss 7,503 5,672 3,523 1,533
--------- --------- --------- ---------
Benefit obligation at end of year $ 115,693 $ 98,469 $ 16,833 $ 12,278
========= ========= ========= =========
Change in plan assets
Fair value of plan assets at beginning of year $ 79,887 $ 76,476 $ -- $ --
Actual return on plan assets (5,507) 7,659 -- --
Employer contributions 5,717 361 694 577
Participant contributions -- -- 228 221
Benefits paid (3,977) (3,730) (922) (798)
Administrative expenses -- (879) -- --
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 76,120 $ 79,887 $ -- --
========= ========= ========= =========
Reconciliation of funded status
Funded status $ (39,573) $ (18,582) $ (16,833) $ (12,278)
Unrecognized actuarial (gain) or loss 32,233 11,782 3,298 (225)
Unrecognized prior service cost 2,735 1,102 (215) (678)
--------- --------- --------- ---------
Net amount recognized at year-end $ (4,605) $ (5,698) $ (13,750) $ (13,181)
========= ========= ========= =========
Amounts recognized in the statement
of financial position
Prepaid benefit cost $ -- $ -- $ -- $ --
Accrued benefit liability (18,531) (6,578) (13,750) (13,184)
Intangible assets 1,996 808 -- --
Accumulated other comprehensive income 11,930 72 -- --
--------- --------- --------- ---------
Net amount recognized at year-end $ (4,605) $ (5,698) $ (13,750) $ (13,184)
========= ========= ========= =========
44
------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) PENSION BENEFITS OTHER POST EMPLOYMENT BENEFITS
---------------- ------------------------------
2001 2000 2001 2000
---- ---- ---- ----
----------------------------------------------------------------------
Additional year-end information for pension
plans with accumulated benefit
obligations in excess of plan assets
Projected benefit obligation $115,693 $ 4,346 $ -- $ --
Accumulated benefit obligation 94,651 3,957 -- --
Fair value of plan assets 76,120 -- -- --
PENSION BENEFITS OTHER POST EMPLOYMENT BENEFITS
--------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- -------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 4,494 $ 4,039 $ 3,856 $ 821 $ 647 $ 385
Interest cost 7,271 6,686 5,906 905 755 546
Expected return on plan assets (7,445) (7,204) (6,876) -- -- --
Amortization of prior service cost 299 311 311 (381) (381) (483)
Recognized actuarial (gain) loss 4 4 288 -- (71) (220)
------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 4,623 $ 3,836 $ 3,485 $ 1,345 $ 950 $ 228
======= ======= ======= ======= ======= =======
FISCAL 2001 FISCAL 2000 FISCAL 1999
-------------- -------------- --------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 7.00% 7.50% 7.75%
Expected long-term rate of return on plan assets 9.00% 9.00% 9.50%
Rate of compensation increase 5.10% 5.10% 5.10%
The assets of the Company's pension plans, like numerous other companies' plans,
are, to a substantial degree, invested in the capital markets and managed by a
third party under the review of the Company's pension plan committee. Given the
performance of the stock market during Fiscal 2001, the Company was required to
reflect an additional minimum pension liability of $11.9 million in its Fiscal
2001 financial statements as a result of a decline in the value of the assets
held by the Company's pension plans. Minimum pension liability adjustments are
non-cash adjustments that are reflected as an increase in pension liability and
an offsetting charge to stockholders' equity (net of income tax) through
comprehensive income (rather than net income). The Company also anticipates that
the decline in the value of the pension plans' assets will result in higher
future pension costs. However, absent a decision by the Company to increase its
contributions to the pension plans as a result of the Fiscal 2001 asset
performance, such asset performance is not expected to have a material impact on
the Company's near-term liquidity as pension funding requirements generally
allow for such impacts to be spread over multiple years. Increases in
post-Fiscal 2002 pension funding requirements could occur, however, if capital
market performance in future periods does not more closely approximate the
long-term rate of return assumed by the Company, and the amount of such
increases could be material.
ASSUMED HEALTH CARE COST TREND
For measurement purposes, an annual rate of increase of approximately 5.9% in
the per capita cost of covered health care benefits was assumed for Fiscal 2002.
The rate is assumed to gradually moderate to 5% through 2004 and remain at that
level thereafter. Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plan. A one percentage-point change
in assumed health care cost trend rates would have the following effects:
---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) ONE PERCENTAGE- ONE PERCENTAGE-
POINT INCREASE POINT DECREASE
---------------------------------------------------------------------------------------------------------------------
Effect on total service and interest cost components for Fiscal 2001 $ 272 $ (281)
Effect on Fiscal 2001 postretirement benefit obligation 1,758 (1,783)
The Company has an unfunded supplemental retirement plan for certain corporate
officers. Retirement expense for the plan in Fiscal 2001, 2000, and 1999 was
$649,000, $442,000, and $524,000, respectively. Prior service cost not yet
recognized in periodic pension cost was approximately $1.0 million each at
January 31, 2001, 2000, and 1999.
45
The Company has an employee savings plan, which qualifies under Section 401(k)
of the Internal Revenue Code. Under the plan, participating employees may
contribute up to 20% of their pre-tax salary subject to statutory limits. The
Company contributes a matching payment equal to each dollar contributed by
employees up to 1% of their eligible annual compensation and twenty-five cents
for each dollar contributed on the next 5% of their eligible annual
compensation, subject to certain limitations. The Company's matching
contribution to the savings plan for continuing operations was $2.8 million,
$2.2 million, and $2.3 million in Fiscal 2001, 2000, and 1999, respectively.
Under an unfunded nonqualified deferred compensation plan for certain employees,
a portion of eligible employees' discretionary income can be deferred at the
election of the employee. These deferred funds accrue interest payable to the
employee at the prime rate in effect on specified dates.
In Fiscal 2001, the Company implemented a new elective salary deferral plan and
ceased accepting contributions to the previous nonqualified deferred
compensation plan described above. The new plan is also nonqualified and allows
certain employees to defer a portion of their compensation, resulting in
potential tax benefits to the employee. These deferred funds accrete value
through deemed investments in equity or other instruments and are then
distributed to the employee at time of separation from the Company or may be
distributed under an optional pre-retirement interim distribution.
NOTE 11: COMMON STOCK
SHAREHOLDER RIGHTS PLAN: The Company has a shareholder rights plan which allows
holders to purchase one-third (1/3) of a share at $30.00 for each share owned by
a shareholder upon the acquisition, or announcement of intended acquisition, of
15% or more of the Company's stock by a person or group. The rights are subject
to antidilution adjustments and will expire on March 20, 2005, unless the plan
is further extended or the rights are earlier redeemed.
STOCK ISSUANCE: During Fiscal 2001 and 2000, the Company also issued under the
1996 Director Stock Plan 3,094 and 8,540 shares, respectively, to certain
directors of the Company for services rendered.
STOCK OPTION PLANS: The Stewart & Stevenson Services, Inc. 1988 Nonstatutory
Stock Option Plan, the Stewart & Stevenson Services, Inc. 1993 Nonofficer Stock
Option Plan, and the 1994 Director Stock Option Plan, authorize the grant of
options to purchase an aggregate of up to 3,300,000, 984,950, and 150,000,
shares of Common Stock, respectively, at a price not less than fair market value
at the date of grant. The 1996 Director Stock Plan authorizes the grant of
options to nonemployee directors at a price not less than fair market value at
the date of grant, pursuant to which 150,000 shares of common stock have been
registered. The options have terms not to exceed ten years and vest over periods
not to exceed four years. Under the amended terms of the 1988 Nonstatutory Stock
Option Plan, the number of options available for grant increased from 1,800,000
to 3,300,000 shares as of June 10, 1997. Pursuant to an amendment adopted in
Fiscal 1996, no future grants of options may be made pursuant to the 1994
Director Stock Option Plan.
CASH DIVIDENDS DECLARED: Cash dividends of $0.085 per share were declared in
each quarter of Fiscal 2001, 2000, and 1999.
46
A summary of the status of the Company's stock option plans during Fiscal 2001,
2000, and 1999 is presented in the tables below:
-----------------------------------------------------------------------------------------------------------------------------
Option Price
Shares under Option Range Per Share
-----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of Fiscal 1998 1,529,475 $ 20.00 - $ 50.25
Granted 445,750 $ 8.91 - $ 13.00
Canceled (419,575) $ 10.50 - $ 50.25
---------------
Outstanding at end of Fiscal 1999 1,555,650 $ 8.91 - $ 50.25
Granted 666,000 $ 9.56 - $ 24.25
Exercised (67,600) $ 10.50 - $ 24.38
Canceled (286,075) $ 9.56 - $ 50.25
---------------
Outstanding at end of Fiscal 2000 1,867,975 $ 8.91 - $ 50.25
Granted 384,000 $ 16.05 - $ 34.94
Exercised (376,725) $ 8.91 - $ 32.63
Canceled (357,575) $ 9.56 - $ 50.25
---------------
Outstanding at end of Fiscal 2001 1,517,675 $ 8.91 - $ 50.25
===============
Options available for future grants at the end of Fiscal 2001 2,134,075
===============
47
---------------------------------------------------------------------------------------------------------------------------
Fiscal 2001 Fiscal 2000 Fiscal 1999
---------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 608,514 796,927 756,863
Weighted average exercise price of options exercisable $ 22.83 $ 38.79 $ 30.63
Weighted average fair value of options granted $ 10.57 $ 4.22 $ 2.64
----------------------------------------------------------------------------------------------------------------------------
Weighted Average Average Remaining
Exercise Price Exercise Price Options Outstanding Options Exercisable Contractual Life (Years)
----------------------------------------------------------------------------------------------------------------------------
$8.91 - $9.56 $9.32 520,500 125,875 7.8
$10.50 - $20.00 $15.76 282,100 154,626 6.3
$20.25 - $28.13 $24.61 529,175 164,113 4.0
$32.63 - $50.25 $38.09 185,900 163,900 2.5
---------------------- ------------------
1,517,675 608,514
====================== ==================
The Company accounts for these plans under APB Opinion No. 25 under which no
compensation cost is recorded at time of grant as all options have been granted
at or above market value. Had compensation cost for these plans been determined
based on their fair market value, the Company's net income and earnings per
share would have been reduced to the following pro forma amounts:
------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) Fiscal 2001 Fiscal 2000 Fiscal 1999
------------------------------------------------------------------------------------------------------------------------
Net earnings As Reported $ 42,223 $ 35,354 $ 24,330
Pro Forma 40,474 33,765 22,684
Net earnings per share
Basic As Reported $ 1.49 $ 1.26 $ 0.87
Pro Forma 1.43 1.20 0.81
Diluted As Reported $ 1.46 $ 1.25 $ 0.87
Pro Forma 1.40 1.19 0.81
Because fair market value accounting is not required to be applied to options
granted prior to February 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in Fiscal 2001, 2000, and 1999:
----------------------------------------------------------------------------------------------------------------------------
Fiscal 2001 Fiscal 2000 Fiscal 1999
----------------------------------------------------------------------------------------------------------------------------
1988 Nonstatutory Stock Option Plan and 1993 Nonofficer Stock Option Plan
Risk free interest rates 4.94% 6.55% 5.76%
Expected dividend yields 1.66% 3.48% 4.07%
Expected volatility 41.13% 39.79% 38.36%
Expected life (years) 10 10 10
1996 Director Stock Plan
Risk free interest rates 5.38% 6.39% 6.29%
Expected dividend yields 1.00% 2.25% 2.90%
Expected volatility 41.21% 40.15% 38.35%
Expected life (years) 10 10 10
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions
48
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
A reconciliation of basic earnings (loss) per share to diluted earnings (loss)
per share is below:
-----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Fiscal Fiscal Fiscal
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Numerator:
Earnings (Loss) available to common stockholders
From continuing operations $ 45,344 $ 35,157 $ 15,942
From discontinued operations (2,493) (368) 1,509
From disposal of discontinued operations (628) 565 6,879
---------- ---------- ----------
Net earnings $ 42,223 $ 35,354 $ 24,330
========== ========== ==========
Denominator:
Denominator for basic earnings per share-
Weighted average shares 28,325 28,026 27,989
Effect of dilutive securities:
Employee and director stock options 540 347 53
Denominator for diluted earnings per share-
Adjusted weighted average shares 28,865 28,373 28,042
Basic earnings (loss) per share
From continuing operations $ 1.60 $ 1.25 $ 0.57
From discontinued operations (0.09) (0.01) 0.05
From disposal of discontinued operations (0.02) 0.02 0.25
---------- ---------- ----------
Net earnings $ 1.49 1.26 $ 0.87
========== ========== ==========
Diluted earnings (loss) per share
From continuing operations $ 1.57 $ 1.24 $ 0.57
From discontinued operations (0.09) (0.01) 0.05
From disposal of discontinued operations (0.02) 0.02 0.25
---------- ---------- ----------
Net earnings $ 1.46 $ 1.25 $ 0.87
========== ========== ==========
Number of anti-dilutive stock options outstanding 186 660 1,171
NOTE 12: INCOME TAXES
The components of the income tax provision (benefit) from continuing operations
and the income tax payments are as follows:
------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Current $ 29,162 $ 23,619 $ 7,321
Deferred (4,058) (3,160) (34)
-------- -------- --------
Income tax provision $ 25,104 $ 20,459 $ 7,287
======== ======== ========
Income tax payments (excluding refunds) $ 33,246 $ 17,323 $ 3,494
======== ======== ========
49
----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
----------------------------------------------------------------------------------------------------------------------
Current $ 2,322 $ (3,525) $ (3,868)
Deferred (3,860) 3,751 10,182
-------- -------- --------
Income tax provision $ (1,538) $ 226 $ 6,314
======== ======== ========
A reconciliation between the income tax provision and income taxes computed by
applying the statutory U.S. Federal income tax rate of 35% in Fiscal 2001, 2000,
and 1999 is as follows:
------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FISCAL Fiscal Fiscal
2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Provision at statutory rates $24,657 $19,466 $ 7,121
Other 447 993 166
------- ------- -------
Income tax provision $25,104 $20,459 $ 7,287
======= ======= =======
The deferred tax liability from continuing operations is determined under the
liability method based on the difference between the financial statement and tax
basis of assets and liabilities as measured by the enacted statutory tax rates,
and deferred tax expense is the result of changes in the net liability for
deferred taxes.
The tax effects of the significant temporary differences which comprise the
deferred tax asset at the end of Fiscal 2001 and 2000 are as follows:
-------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal 2001 Fiscal 2000
-------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets
Postretirement benefit obligation $ 4,839 $ 4,579
Accrued expenses and other reserves 16,093 14,829
Property, plant and equipment -- 2,218
Pension accounting 5,863 1,945
Contract accounting 1,931 --
Other 2,025 1,216
Valuation allowance (326) (263)
-------- --------
Gross deferred tax assets 30,425 24,524
-------- --------
Deferred Tax Liabilities
Property, plant and equipment 405 --
Contract accounting -- 6,286
Prepaid expenses and deferred charges 7,431 3,829
Other 2,864 3,141
-------- --------
Gross deferred tax liabilities 10,700 13,256
-------- --------
Net deferred tax asset $ 19,725 $ 11,268
======== ========
Current portion of deferred tax asset $ 16,488 $ 10,428
Non-current portion of deferred tax asset 3,237 840
-------- --------
Net deferred tax asset $ 19,725 $ 11,268
======== ========
The Company believes it is more likely than not that the net deferred income tax
asset as of January 31, 2002 in the amount of $19.7 million will be realized,
based primarily upon sufficient taxable income available in carryback years as
permitted by the tax law.
50
NOTE 13: SUPPLEMENTAL FINANCIAL DATA
Accounts and notes receivables, net consist of the following:
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal
2001 2000
----------------------------------------------------------------------------------------------------------------
Accounts receivable $ 167,645 $ 157,318
Notes receivable, current and non-current 2,477 5,830
Allowance for doubtful accounts (3,903) (4,093)
Less non-current portion of notes receivable (96) (2,268)
--------- ---------
Accounts and notes receivable, net $ 166,123 $ 156,787
========= =========
The U.S. Government accounted for approximately 8.7% and 2.9% of accounts
receivable, at January 31, 2002 and 2001, respectively. Due to the large number
of entities and diversity of the Company's customer base, concentration of
credit risk with respect to trade receivables is limited. The Company recorded
approximately $4.1 million in bad debt expense and charged approximately $4.3
million against its allowance for doubtful accounts during Fiscal 2001.
Components of Property, plant and equipment, net are as follows:
-------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FISCAL Fiscal
2001 2000
-------------------------------------------------------------------------------------------------------------------
Machinery and equipment $ 113,697 $ 105,526
Buildings and leasehold improvements 80,530 89,361
Revenue earning assets 19,348 18,334
Computer hardware and software 31,635 25,512
Accumulated depreciation and amortization (158,407) (156,533)
--------- ---------
86,803 82,200
Construction in progress 19,111 6,646
Land 13,743 14,374
--------- ---------
Property, plant, and equipment, net $ 119,657 $ 103,220
========= =========
Included in Construction in progress at the end of Fiscal 2001 was approximately
$8 million related to a fabrication facility being constructed in Sealy, Texas,
$7 million related to software development, and $3 million related to the
construction of a new service facility in Dallas, Texas. The Company capitalized
$0.6 of interest related to the self-construction of both a new service facility
in Dallas, Texas and a new fabrication facility in Sealy, Texas.
Components of Other current liabilities are as follows:
------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FISCAL Fiscal
2001 2000
------------------------------------------------------------------------------------------------------------------
Warranty costs $ 9,375 $14,462
Accrued taxes 3,464 3,395
Reserves for employee benefits 3,099 2,377
Dividends payable 2,375 2,375
Accrued interest payable 787 1,626
Other 2,477 9,635
------- -------
Other current liabilities $21,577 $33,870
======= =======
51
segment. Other decreased $7 million primarily due to the deconsolidation of a
limited partnership that owned an office building in which the Company is no
longer a limited partner.
NOTE 14: CONSOLIDATED QUARTERLY DATA (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------------
FISCAL 2001
-------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------------------------------------------------------------------------------------
Sales $ 306,755 $ 317,344 $ 377,594 $ 327,817
Gross profit 38,817 38,490 54,719 46,693
Net earnings from continuing operations $ 97 $ 11,653 $ 12,545 $ 21,049
Earnings (loss) from discontinued operations, net (2,902) 28 468 (87)
Loss on disposal of discontinued operations, net -- -- -- (628)
--------- --------- ----------- -----------
Net earnings (loss) $ (2,805) $ 11,681 $ 13,013 $ 20,334
========= ========= =========== ===========
Net earnings (loss) per share:
Basic
Continuing operations $ -- $ 0.41 $ 0.44 $ 0.75
Discontinued operations, net (0.10) -- 0.02 --
Loss on disposal of discontinued operations, net -- -- -- (0.02)
--------- --------- ----------- -----------
Net earnings (loss) per share $ (0.10) $ 0.41 $ 0.46 $ 0.73
========= ========= =========== ===========
Diluted
Continuing operations $ -- $ 0.40 $ 0.43 $ 0.73
Discontinued operations, net (0.10) -- 0.02 --
Loss on disposal of discontinued operations, net -- -- -- (0.02)
--------- --------- ----------- -----------
Net earnings (loss) per share $ (0.10) $ 0.40 $ 0.45 $ 0.71
========= ========= =========== ===========
52
-------------------------------------------------------------------------------------------------------------------------------
Fiscal 2000
-------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) Fourth Third Second First
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------------------------------
Sales $ 325,337 $ 272,506 $ 258,010 $ 255,197
Gross profit 47,109 43,946 35,485 44,918
Net earnings from continuing operations $ 10,476 $ 7,700 $ 8,590 $ 8,391
Earnings (loss) from discontinued operations, net 446 890 (811) (893)
Gain on disposal of discontinued operations, net 565 -- -- --
----------- ----------- ----------- -----------
Net earnings $ 11,487 $ 8,590 $ 7,779 $ 7,498
=========== =========== =========== ===========
Net earnings (loss) per share:
Basic
Continuing operations $ 0.37 $ 0.27 $ 0.31 $ 0.30
Discontinued operations, net 0.02 0.03 (0.03) (0.03)
Gain on disposal of discontinued operations, net 0.02 -- -- --
----------- ----------- ----------- -----------
Net earnings per share $ 0.41 $ 0.30 $ 0.28 $ 0.27
=========== =========== =========== ===========
Diluted
Continuing operations $ 0.37 $ 0.27 $ 0.30 $ 0.30
Discontinued operations, net 0.02 0.03 (0.03) (0.03)
Gain on disposal of discontinued operations, net 0.02 -- -- --
----------- ----------- ----------- -----------
Net earnings per share $ 0.41 $ 0.30 $ 0.27 $ 0.27
=========== =========== =========== ===========
Quarterly earnings per share is not necessarily additive to the annual
calculation of earnings per share, as each quarter's calculation is based on
that quarter's weighted average shares outstanding.
NOTE 15: ACQUISITIONS AND DIVESTITURES
In Fiscal 2001, the Company's Tactical Vehicle Systems segment acquired Extended
Reach Logistics, Inc., an e-commerce business, for $1.2 million in cash plus
additional potential performance payments to be paid in future years.
During Fiscal 2001, the Company recognized a gain of $0.5 million associated
with the sale of its John Deere distributorship located Casper, Wyoming and
received $3.4 million in cash consideration.
Effective July 1, 2000, the Company completed the sale of its gas compressor
leasing business for $57.5 million. The Company is continuing to package gas
compressor equipment for sale and will continue to service such equipment. The
Company realized a gain of $5.6 million on this sale during Fiscal 2000. During
Fiscal 2001 and Fiscal 2000, the Company received $2.3 million and $55.2 million
from this sale, respectively.
Proceeds from sale of business assets in Fiscal 1999 totaled $8 million and
consisted of sale of investments in (1) GFI Control Systems, Inc., a
gaseous fuel injection joint venture located in Ontario, Canada ($4 million);
(2) Syracuse Orange Partners, L.P., a cogeneration facility located in Syracuse,
New York ($3 million); and (3) a facility in North Dakota ($1 million).
NOTE 16: VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's principal distribution agreements are subject to termination by
the suppliers for a variety of causes. Although no assurance can be given that
such distribution agreements will be renewed beyond their expiration dates, they
have been renewed regularly. Any interruption in the supply of materials from
the original manufacturers or a termination of a distributor agreement could
have a material adverse effect on the results of operations of the Power
Products and Distributed Energy Solutions segments.
Additionally, the Family of Medium Tactical Vehicles incorporates components
specified by the U.S. Army which are produced by specified sources. Interruption
of the supply of any of these components could have a material adverse effect on
the results of the Tactical Vehicle Systems segment.
The U.S. Government is the predominant customer of the Tactical Vehicle Systems
segment, accounting for practically all of the sales of this segment. The loss
of this customer would have a material adverse effect on the Company's
consolidated financial condition and results of operations.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
54
PART III
In accordance with General Instruction G(3) to Form 10-K, Items 10 through 13
have been omitted since the Company will file with the Commission a definitive
proxy statement complying with Regulation 14A involving the election of
directors not later than 120 days after the close of its fiscal year. Such
information is incorporated herein by reference.
CROSS REFERENCE
FORM 10-K ITEM CAPTION IN DEFINITIVE
NUMBER AND CAPTION PROXY STATEMENT
Item 10. Directors and Executive Election of Directors; Executive Officers;
Officers of the Registrant......................... Section.16(a) Beneficial Ownership
Reporting Compliance
Item 11. Executive Compensation............................ Election of Directors; Performance of
Stewart & Stevenson Common Stock;
Report of the Compensation and
Management Development Committee;
Executive Compensation
Item 12. Security Ownership of Voting Securities and Ownership
Certain Beneficial Owners Thereof by Certain Beneficial
and Management..................................... Owners and Management
Item 13. Certain Relationships Transactions with Management and Certain
and Related Transactions........................... Business Relationships
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. The following financial statements for Stewart & Stevenson Services,
Inc. are filed as a part of this report:
Consolidated Statements of Financial Position--January 31, 2002 and
2001.
Consolidated Statements of Earnings--Years ended January 31, 2002,
2001, and 2000.
Consolidated Statements of Shareholders' Equity--Years ended January
31, 2002, 2001, and 2000.
Consolidated Statements of Comprehensive Income - Years ended January
31, 2002, 2001, and 2000.
Consolidated Statements of Cash Flows--Years ended January 31, 2002,
2001, and 2000.
Notes to Consolidated Financial Statements.
2. Schedules are omitted because of the absence of conditions under which
they are required or because the information is included in the
financial statements or notes thereto.
3. The Company has several instruments which define the rights of holders
of long-term debt. Except for the instruments listed as exhibits 4.1
and 4.2 below, the total amount of securities authorized under any
individual instrument with respect to long-term debt does not exceed
10% of the total assets of the Company and its subsidiaries on a
consolidated basis. The Company agrees to furnish upon request by the
Securities and Exchange Commission any instruments not filed herewith
relating to its long-term debt.
The Company will furnish to any shareholder of record as of April 25,
2001, a copy of any exhibit to this annual report upon receipt of a
written request addressed to Carl B. King, P. O. Box 1637, Houston,
Texas 77008-1637 and the payment of $.20 per page with a minimum charge
of $5.00 for reasonable expenses prior to furnishing such exhibits.
The following exhibits are part of this report pursuant to item 601 of
regulation S-K.
*3.1 Third Restated Articles of Incorporation of Stewart & Stevenson
Services, Inc., effective as of September 13, 1995 (Exhibit 3(a) to
10/95 10-Q).
*3.2 Sixth Restated Bylaws of Stewart & Stevenson Services, Inc., effective
as of April 14, 1998, as amended through June 12, 2001 (Exhibit 3.2 to
7/01 10-Q).
*4.1 Credit Agreement effective February 20, 2001, between Stewart &
Stevenson Services, Inc. and The Chase Manhattan Bank, as
Administrative Agent, and the other Banks named therein (Exhibit 4.1 to
1/31/01 10-K).
*4.2 Note Purchase Agreement effective May 30, 1996, between Stewart &
Stevenson Services, Inc. and the Purchasers named therein (Exhibit 4 to
7/96 10-Q).
*4.3 Rights Agreement effective March 13, 1995, between Stewart & Stevenson
Services, Inc. and The Bank of New York (Exhibit 1 to Form 8-A
Registration Statement under the Commission File No. 001-11443).
*10.1 Lease Agreement effective April 15, 1997, between Miles McInnes and
Faye Manning Tosch, as Lessors, and the Company, as Lessee (Exhibit
10.1 to 1/97 10-Q).
*10.2 Distributor Sales and Service Agreement effective January 1, 1996,
between the Company and Detroit Diesel Corporation (Exhibit 10.2 to
1/96 10-K).
*10.3 Stewart & Stevenson Elective Deferral Plan dated as of June 1, 2001
(Exhibit 4.1 of Form S-8 Registration Statement under Commission File
No. 333-62438).
*10.4 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan
(as amended and restated effective as of June 10, 1997) (Exhibit B to
5/9/97 Proxy Statement).
*10.5 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement
Plan (Exhibit 10.11 to 1/94 10-K).
56
*10.6 Stewart & Stevenson Services, Inc. 1996 Director Stock Plan (Exhibit A
to 5/9/97 Proxy Statement).
*10.7 Contract Number DAAE07-98-C-M005 dated October 14, 1998 between Stewart
& Stevenson Services, Inc. and the United States Department of Defense,
U.S. Army Tank-Automotive and Armaments Command (Exhibit 10.9 to 10/98
10-Q).
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
99.1 Confirmation of Audit Quality
----------
Form 8-K Report Date - November 21, 2001 (Third Quarter Conference Call Schedule)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - November 28, 2001 (Third Quarter Results)
Items reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - December 12, 2001 (Company's Dividend)
Items reported - Item 5. Other Events
Item 7. Exhibits
* Incorporated by reference.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 8th day of April,
2002.
STEWART & STEVENSON SERVICES, INC.
By /s/ MICHAEL L. GRIMES
----------------------------
Michael L. Grimes
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 8th day of April, 2002.
/s/ Michael L. Grimes /s/ Khleber V. Attwell
--------------------------------------- --------------------------------
Michael L. Grimes Khleber V. Attwell
President and Chief Executive Officer Director
(Principal Executive Officer)
/s/ John H. Doster /s/ C. Jim Stewart III
--------------------------------------- --------------------------------
John H. Doster C. Jim Stewart III
Senior Vice President and Chief Director
Financial Officer
(Principal Financial Officer)
/s/ John B. Simmons /s/ Darvin M. Winick
--------------------------------------- --------------------------------
John B. Simmons Darvin M. Winick
Controller and Chief Accounting Officer Director
(Principal Accounting Officer)
/s/ Robert S. Sullivan /s/ Howard Wolf
--------------------------------------- --------------------------------
Robert S. Sullivan Howard Wolf
Director Director
/s/ Donald E. Stevenson /s/ Charles R. Ofner
--------------------------------------- --------------------------------
Donald E. Stevenson Charles R. Ofner
Director Director
/s/ Max L. Lukens /s/ Monroe M. Luther
--------------------------------------- --------------------------------
Max L. Lukens Monroe M. Luther
Director Director
58
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
-----------------------------------------
21.1 List of subsidiaries
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
99.1 Confirmation of Audit Quality
59