SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 3, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO _________
COMMISSION FILE NUMBER 0-8493
STEWART & STEVENSON SERVICES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1051605
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2707 NORTH LOOP WEST, HOUSTON, TEXAS 77008
(Address of principal executive offices) (Zip Code)
(713) 868-7700
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, WITHOUT PAR VALUE 28,490,849 SHARES
(Class) (Outstanding at September 4, 2002)
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following information required by Rule 10-01 of Regulation S-X is provided
herein for Stewart & Stevenson Services, Inc. (the "Company"):
Consolidated Condensed Statements of Financial Position - August 3, 2002 and
January 31, 2002.
Consolidated Condensed Statements of Earnings - Three and Six Months Ended
August 3, 2002 and July 28, 2001.
Consolidated Condensed Statements of Cash Flows - Three and Six Months Ended
August 3, 2002 and July 28, 2001.
Consolidated Condensed Statements of Comprehensive Income - Three and Six Months
Ended August 3, 2002 and July 28, 2001.
Notes to Consolidated Condensed Financial Statements.
2
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
AUGUST 3, 2002 JANUARY 31, 2002
-------------- ----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 99,341 $ 81,438
Accounts and notes receivable, net 143,228 163,841
Recoverable costs and accrued profits not yet billed 4,768 --
Inventories 242,878 226,059
Excess of current cost over LIFO values (43,387) (42,132)
Other current assets 22,271 33,503
Total assets of discontinued operations 34,943 42,869
-------------- ----------------
TOTAL CURRENT ASSETS 504,042 505,578
-------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET 129,030 124,004
DEFERRED INCOME TAX ASSET 5,392 3,237
INVESTMENTS AND OTHER ASSETS 12,933 16,236
-------------- ----------------
TOTAL ASSETS $ 651,397 $ 649,055
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,081 $ 3,114
Accounts payable 48,291 69,514
Accrued payrolls and incentives 15,081 19,379
Current portion of long-term debt 30,250 250
Billings in excess of incurred costs 67,987 39,874
Other current liabilities 31,044 22,622
Total liabilities of discontinued operations 11,877 10,204
-------------- ----------------
TOTAL CURRENT LIABILITIES 206,611 164,957
COMMITMENTS AND CONTINGENCIES
LONG-TERM DEBT 26,600 56,600
ACCRUED POSTRETIREMENT BENEFITS AND PENSION 34,299 32,281
OTHER LONG-TERM LIABILITIES 4,425 3,984
-------------- ----------------
TOTAL LIABILITIES 271,935 257,822
-------------- ----------------
SHAREHOLDERS' EQUITY
Common stock, without par value, 100,000,000 shares authorized;
28,489,224 and 28,444,281 shares issued and outstanding at
August 3, 2002 and January 31, 2002, respectively 54,812 54,176
Accumulated other comprehensive loss (9,932) (8,744)
Retained earnings 334,582 345,801
-------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 379,462 391,233
-------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 651,397 $ 649,055
============== ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
AUGUST 3, 2002 JULY 28, 2001 AUGUST 3, 2002 JULY 28, 2001
-------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
Sales $ 278,843 $ 372,999 $ 576,434 $ 693,156
Cost of sales 237,743 318,904 491,691 592,892
--------- --------- --------- ---------
Gross profit 41,100 54,095 84,743 100,264
Recovery of costs incurred, net -- -- -- (20,800)
Selling and administrative expenses 34,401 34,379 69,534 67,835
Interest expense 815 1,496 1,920 3,316
Interest and investment income (373) (897) (711) (2,111)
Other income, net (492) (269) (513) (292)
----------- --------- --------- ---------
34,351 34,709 70,230 47,948
Earnings from continuing operations before income taxes 6,749 19,386 14,513 52,316
Income tax expense 2,194 7,073 4,930 19,376
----------- --------- --------- ---------
NET EARNINGS FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 4,555 12,313 9,583 32,940
Earnings (loss) from discontinued operations, net of
taxes of $(3,285), $209, $(2,610), and $468 (5,451) 701 (6,680) 407
Loss from disposal of discontinued operations,
net of tax of $(2,705) (5,551) -- (5,551) --
Cumulative effect of change in accounting, net of
taxes of $(1,798) -- -- (3,682) --
----------- --------- --------- ---------
NET EARNINGS (LOSS) $ (6,447) $ 13,014 $ (6,330) $ 33,347
=========== ========= ========= =========
Weighted average shares outstanding:
Basic 28,483 28,327 28,469 28,206
Diluted 28,754 29,146 28,761 28,927
Earnings (loss) per share:
Basic
Continuing operations before cumulative effect $ 0.16 $ 0.43 $ 0.34 $ 1.17
Discontinued operations (0.39) 0.02 (0.43) 0.01
Cumulative effect of change in accounting -- -- (0.13) --
----------- --------- --------- ---------
NET EARNINGS (LOSS) PER SHARE $ (0.23) $ 0.46 $ (0.22) $ 1.18
=========== ========= ========= =========
Diluted
Continuing operations before cumulative effect $ 0.16 $ 0.42 $ 0.33 $ 1.14
Discontinued operations (0.38) 0.02 (0.43) 0.01
Cumulative effect of change in accounting -- -- (0.13) --
----------- --------- --------- ---------
NET EARNINGS (LOSS) PER SHARE $ (0.22) $ 0.45 $ (0.22) $ 1.15
=========== ========= ========= =========
Cash dividends per share $ 0.085 $ 0.085 $ 0.170 $ 0.170
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
AUGUST 3, 2002 JULY 28, 2001 AUGUST 3, 2002 JULY 28, 2001
-------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net earnings from continuing operations $ 4,555 $ 12,313 $ 5,901 $ 32,940
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,572 4,697 10,424 9,466
Change in operating assets and liabilities net of the effect
of acquisition, divestiture and discontinued operations:
Accounts and notes receivable, net 23,411 16,266 20,613 (32,734)
Recoverable costs and accrued profits not yet billed (3,787) 9,247 (4,768) 11,829
Inventories, net (10,085) (7,792) (15,565) (13,246)
Other current and noncurrent assets (3,169) 1,021 12,383 720
Accounts payable 3,225 (5,792) (21,224) (12,854)
Accrued payrolls and incentives (3,517) 5,032 (4,298) (1,324)
Billings in excess of incurred costs 23,209 12,852 28,113 22,097
Other current liabilities 1,028 (15,789) 8,421 6,251
Accrued postretirement benefits & pension 1,226 645 2,017 1,820
Other long-term liabilities (665) 1,052 (748) 788
--------- --------- --------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS 41,003 33,752 41,269 25,753
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 112 5,424 (2,631) 9,032
--------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 41,115 39,176 38,638 34,785
--------- --------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (6,806) (9,522) (16,802) (20,163)
Proceeds from sale of business assets -- -- -- 2,323
Disposal of property, plant and equipment, net 807 438 1,351 1,285
--------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (5,999) (9,084) (15,451) (16,555)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Payments on long-term borrowings -- (20,080) -- (20,131)
Net short-term borrowings (payments) (985) (1,254) (1,033) (2,142)
Dividends paid (2,419) (2,391) (4,887) (4,776)
Exercise of stock options 312 5,591 636 6,062
--------- --------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (3,092) (18,134) (5,284) (20,987)
--------- --------- --------- ---------
Increase (Decrease) in cash and equivalents 32,024 11,958 17,903 (2,757)
Cash and equivalents, beginning of period 67,317 95,459 81,438 110,174
--------- --------- --------- ---------
Cash and equivalents, end of period $ 99,341 $ 107,417 $ 99,341 $ 107,417
========= ========= ========= =========
Cash Paid For:
Interest $ 2,185 $ 3,578 $ 2,534 $ 4,101
Taxes (excluding refunds) 2,991 17,989 3,463 18,377
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
AUGUST 3, 2002 JULY 28, 2001 AUGUST 3, 2002 JULY 28, 2001
-------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
Net earnings (loss) $ (6,447) $ 13,014 $ (6,330) $ 33,347
Unrealized gain on forward contracts, net of tax 397 -- 284 --
Currency translation loss (1,239) (22) (1,472) (86)
-------------- ------------- -------------- -------------
Comprehensive income (loss) $ (7,289) $ 12,992 $ (7,518) $ 33,261
============== ============= ============== =============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
6
STEWART & STEVENSON SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated condensed financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X for interim financial statements
required to be filed with the Securities and Exchange Commission and do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. However, the information furnished
herein reflects all normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods. The results of operations for the three and six months ended August 3,
2002 are not necessarily indicative of the results that will be realized for the
fiscal year ending January 31, 2003.
The Company's fiscal year begins on February 1 of the year stated and ends on
January 31 of the following year. For example, the Company's fiscal year 2002
(hereinafter referred to as "Fiscal 2002") commenced on February 1, 2002 and
ends on January 31, 2003. In addition, other years are referred to in the same
manner. The Company reports results on the fiscal quarter method with each
quarter comprising approximately 13 weeks. The second quarter of Fiscal 2002
began on May 5, 2002 and ended on August 3, 2002.
The accounting policies followed by the Company in preparing interim
consolidated financial statements are similar to those described in the "Notes
to Consolidated Financial Statements" in the Company's January 31, 2002 Form
10-K. An actual valuation of inventory under the last-in-first-out ("LIFO")
method can be made only at the end of each year based on the inventory levels
and costs at that time. Accordingly, interim LIFO calculations are based on
management's estimates of expected year-end inventory levels and costs. Interim
results are subject to the final year-end LIFO inventory valuation.
The accompanying consolidated condensed financial statements for Fiscal 2001 and
related notes contain certain reclassifications to conform with the presentation
used in Fiscal 2002.
7
NOTE B - SEGMENT INFORMATION
Financial information relating to industry segments with a reconciliation to
earnings from continuing operations before income taxes is as follows (IN
THOUSANDS EXCEPT PERCENTAGES):
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------------------
AUGUST 3, 2002 JULY 28, 2001 AUGUST 3, 2002 JULY 28, 2001
-------------- ------------- -------------- -------------
SALES (Unaudited) (Unaudited)
-----
Tactical Vehicle Systems $ 105,404 $ 108,771 $ 220,865 $ 217,265
Power Products 129,658 153,084 279,186 288,555
Distributed Energy Solutions 17,832 62,683 29,615 93,732
Petroleum Equipment 8,792 24,073 15,310 45,107
Airline Products 17,157 22,878 31,458 46,987
Other Business Activities -- 1,510 -- 1,510
-------------- ------------- -------------- -------------
Total $ 278,843 $ 372,999 $ 576,434 $ 693,156
============== ============= ============== =============
OPERATING PROFIT (LOSS)
Tactical Vehicle Systems $ 15,554 $ 16,231 $ 30,459 $ 54,474
Power Products 480 3,403 4,130 4,790
Distributed Energy Solutions (2,063) 4,906 (4,271) 4,949
Petroleum Equipment (1,533) 1,592 (2,105) 3,078
Airline Products (1,572) (2,597) (4,702) (6,976)
Other Business Activities (57) (3) (213) (41)
-------------- ------------- -------------- -------------
Total 10,809 23,532 23,298 60,274
NON-OPERATING INCOME (EXPENSE)
Corporate expenses, net (3,618) (3,547) (7,576) (6,753)
Interest income 373 897 711 2,111
Interest expense (815) (1,496) (1,920) (3,316)
-------------- ------------- -------------- -------------
Earnings from continuing operations
before income taxes $ 6,749 $ 19,386 $ 14,513 $ 52,316
============== ============= ============== =============
OPERATING PROFIT (LOSS) PERCENTAGE
Tactical Vehicle Systems 14.8% 14.9% 13.8% 25.1%
Power Products 0.4 2.2 1.5 1.7
Distributed Energy Solutions (11.6) 7.8 (14.4) 5.3
Petroleum Equipment (17.4) 6.6 (13.7) 6.8
Airline Products (9.2) (11.4) (14.9) (14.8)
Other Business Activities 0.0 (0.2) 0.0 (2.7)
Total 3.9 6.3 4.0 8.7
8
NOTE C - ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations entered
into after June 30, 2001 and SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. SFAS No. 142
requires that the balance sheet valuation of goodwill and other intangible
assets be evaluated for impairment at least annually. Further, it requires that
amortization of goodwill cease beginning with the Company's Fiscal 2002.
Transition charges recognized upon implementation of SFAS No. 142 have been
accounted for as a cumulative effect of a change in accounting principle. In the
first quarter of Fiscal 2002, the Company recognized a pre-tax impairment charge
associated primarily with the Airline Products segment of $5.5 million to
goodwill ($3.7 million after tax) and ceased amortization on the $7.5 million of
remaining unamortized goodwill. The Company's goodwill amortization for Fiscal
2001 was $0.7 million.
The Company has adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions relating to the disposal of a segment of a business of
Accounting Principles Board Opinion No. 30. The Company adopted SFAS No. 144 in
the fourth quarter of Fiscal 2001, which resulted in the reclassification of
certain operations as discontinued. Other than such reclassification, there was
no material impact to the Company resulting from adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that an entity
recognize costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred and not at the date of an entity's commitment to
an exit plan. This Statement is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company is currently evaluating the
impact of adoption on its results of operations.
NOTE D - 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 $1.7 million as of
August 3, 2002.
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.
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.
The Company is a defendant in a suit brought by Diamond Offshore on May 30,
2002, arising out of claims relating to marine riser manufactured by the
Company and purchased by Diamond Offshore for use on its Ocean Baroness
semi-submersible drilling rig, Cause No. 2002-27831; DIAMOND OFFSHORE
INTERNATIONAL CORPORATION, DIAMOND OFFSHORE COMPANY, AND DIAMOND OFFSHORE
COMPANY D/B/A DIAMOND OFFSHORE DRILLING CO. V. STEWART & STEVENSON SERVICES,
INC.; In the District Court of Harris County, Texas 125th Judicial District
Court ("Baroness Litigation"). The suit seeks to recover damages in an
unspecified amount allegedly incurred as a result of a parting of the marine
riser during deep water drilling operations. The Company 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, though
the Company believes it is adequately reserved as of the balance sheet date
9
On or about September 13, 2001, Diamond Offshore placed a purchase order with
the Company for another marine riser, for use on the Ocean Rover
semi-submersible drilling rig. The Company was fulfilling this order, when, on
August 19, 2002, Diamond amended its petition in the Baroness Litigation to seek
a declaration that Diamond has no further contractual obligations to the Company
under the Ocean Rover riser purchase order. On August 21, 2002, before being
served with Diamond Offshore's amended petition in the Baroness Litigation, the
Company filed a lawsuit against Diamond Offshore, Cause No. 2002-42419; STEWART
& STEVENSON SERVICES, INC. V. DIAMOND OFFSHORE COMPANY, AND DIAMOND OFFSHORE
COMPANY D/B/A DIAMOND OFFSHORE DRILLING CO.; In the District Court of Harris
County Texas, 151st Judicial District Court ("Rover Litigation"), seeking to
recover damages, including attorneys' fees. On August 30, 2002, the 151st
Judicial District Court, SUA SPONTE, transferred the Rover Litigation to the
125th Judicial Court where the Baroness Litigation is pending.
From time to time, the Company is subject to various environmental
remediation requirements at certain of its facilities. The Company believes
that the exposure associated with such requirements will not have a material
adverse impact on the Company's financial position or liquidity.
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 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 may
have a material adverse impact on the results of operations in the period it
occurs.
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 $1.3 million as of August 19, 2002.
The Company leases certain property and equipment from third parties under
operating lease arrangements of varying terms whose annual rentals are less than
1% of consolidated sales.
NOTE E - GOVERNMENT CONTRACTING
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
August 3, 2002, funding in the amount of approximately $1.5 billion for the FMTV
contract had been authorized and appropriated by the U.S. Congress, $450 million
of which is allocated to future production under the existing contract. 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 multi-year 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.
10
NOTE F - DISCONTINUED OPERATIONS
During the fourth quarter of Fiscal 2001, the Company 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. The net
operational loss from these activities in the second quarter of Fiscal 2002 was
$7.7 million ($5.2 million, net of income taxes) and the net profit in the
second quarter of Fiscal 2001 was $0.8 million ($0.5 million, net of income
taxes). For the first half of Fiscal 2002 net operational loss from these
operations was $8.7 million ($5.9 million, net of income taxes), while the net
profit for the first half of Fiscal 2001 was $0.7 million ($0.5 million, net of
income taxes). The second quarter loss resulted from this business operating at
below breakeven levels, as well as provisions made for warranty and other
issues. In addition, the Company recognized a loss from disposal of discontinued
operations, net of tax, of $8.3 million ($5.6 million, net of income taxes) in
the second quarter of Fiscal 2002, resulting from the anticipated sale of these
operations, as further discussed below under the heading, "Subsequent Events."
Loss from discontinued operations, net also includes the gas compression
equipment sales operations previously reported as Other Business Activities. The
Company is currently exiting this business and is preparing to close and offer
for sale its facility used in the packaging of such equipment. Sales for this
business during the second quarter of Fiscal 2002 and Fiscal 2001 were $5.0
million and $3.3 million, respectively and $6.7 million and $9.8 million for the
first half of Fiscal 2002 and Fiscal 2001, respectively. Net earnings for this
business during the second quarter of Fiscal 2002 and Fiscal 2001 were breakeven
and $0.2 million ($0.1 million, net of income taxes), respectively, and for the
first half of Fiscal 2002 and 2001 were breakeven and $0.6 million ($0.4
million, net of income taxes), respectively.
In addition, the loss from discontinued operations includes the Company's
wheelchair lift business, which is being offered for sale and which was
previously reported as part of the Power Products segment. Sales for this
business were $1.2 million in the second quarter of the current year and $1.3
for the second quarter of Fiscal 2001. For the first half, sales were $1.6
million in the current year and $2.4 million in the prior year. Net earnings for
this business during the second quarter of Fiscal 2002 and Fiscal 2001 were
breakeven and $0.2 million ($0.1 million, net of income taxes), respectively and
breakeven and $0.3 million ($0.2 million, net of income taxes) for the first
half of Fiscal 2002 and Fiscal 2001, respectively.
The corporate expenses previously allocated to each of these discontinued
businesses are now absorbed by the remaining continuing operations, resulting in
a restatement of operating profit by segment versus that which was originally
reported in prior periods.
Also included in discontinued was a provision for a financial guarantee related
to the discontinued gas turbine business of $0.5 million ($0.3 million, net of
income taxes) and $1.1 million ($0.7, net of income taxes) for the three and six
months ended August 3, 2002, respectively, net of the impact of income taxes, as
further discussed below, under the heading, "Subsequent Events."
In total, net of taxes, discontinued operations accounted for a loss of $11.0
million, or $0.38 per diluted share, in the second quarter of Fiscal 2002 versus
a profit of $0.7 million, or $.02 per diluted share, in the second quarter of
Fiscal 2001. For the first half, net of taxes, discontinued operations accounted
for a loss of $12.2 million in the current year and a profit of $0.4 million in
the prior year.
11
NOTE G - RECONCILIATION OF BASIC TO DILUTED SHARES OUTSTANDING
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," the following table is a reconciliation of the numerators
and denominators used in the calculation of basic and diluted earnings per share
as presented on the Consolidated Condensed Statements of Earnings.
---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------------------------------------------------------------------------------------------
AUGUST 3, 2002 JULY 28, 2001 AUGUST 3, 2002 JULY 28, 2001
-------------- ------------- -------------- -------------
Numerator:
Net earnings available to common shareholders
From continuing operations before
cumulative effect of change in accounting $ 4,555 $ 12,313 $ 9,583 $ 32,940
From discontinued operations (11,002) 701 (12,231) 407
From cumulative effect of change
in accounting -- -- (3,682) --
-------------- ------------- -------------- -------------
Net earnings $ (6,447) $ 13,014 $ (6,330) $ 33,347
============== ============= ============== =============
Denominator:
Denominator for basic earnings per share -
Weighted-average shares outstanding 28,483 28,327 28,469 28,206
Effect of dilutive securities:
Employee and director stock options 271 819 292 721
-------------- ------------- -------------- -------------
Denominator for diluted earnings per share -
Adjusted weighted-average shares outstanding 28,754 29,146 28,761 28,927
============== ============= ============== =============
Basic earnings (loss) per share
From continuing operations before cumulative effect $ 0.16 $ 0.43 $ 0.34 1.17
From discontinued operations (0.39) 0.02 (0.43) 0.01
From cumulative effect of change in accounting -- -- (0.13) --
-------------- ------------- -------------- -------------
Net earnings $ (0.23) $ 0.46 $ (0.22) $ 1.18
============== ============= ============== =============
Diluted earnings (loss) per share
From continuing operations before cumulative effect $ 0.16 $ 0.42 $ 0.33 $ 1.14
From discontinued operations (0.38) 0.02 (0.43) 0.01
From cumulative effect of change in accounting -- -- (0.13) --
-------------- ------------- -------------- -------------
Net earnings $ (0.22) $ 0.45 $ (0.22) $ 1.15
============== ============= ============== =============
Number of anti-dilutive stock options outstanding 1,396 235 1,361 235
NOTE H - RECOVERY OF COSTS INCURRED
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. The settlement was netted against $1.2 million in related
expenses and is included in the Fiscal 2001 first half results. The net amount
of $20.8 million is presented on the Company's Consolidated Condensed Statements
of Earnings in the caption entitled, "Recovery of costs incurred, net."
NOTE I - SUBSEQUENT EVENTS
On August 15, 2002 the Company announced that it had paid $6.1 million to a
financial institution in connection with an obligation under a guarantee related
to certain gas turbine equipment in Argentina. The equipment was exported to
Argentina by the Company's discontinued gas turbine operation in 1996. The
payment was precipitated by the Argentine financial crisis and the Company was
required to fund the obligation by the terms of the agreement with the financial
institution. The gas turbine equipment provides electrical power to the town of
Rio Grande in Argentina. The Company recorded this payment as an asset and is
currently evaluating its rights under an export insurance credit policy procured
in connection with the transaction and its rights with the Argentine end user of
the equipment. A pre-tax expense of $0.6 million and $0.5 million were recorded
in the first and second quarters of Fiscal 2002,
12
respectively. The Company believes it is adequately reserved for the risk
associated with this transaction as of the end of the second quarter of Fiscal
2002.
On August 28, 2002, the Company signed an agreement to sell the previously
discontinued blowout preventer, valve, elastomer, and drilling riser business
for $14.75 million to Cooper Cameron Corporation. When the transaction
consummated on September 13, 2002, the Company sold certain assets and
retained certain contracts and related assets as well as the receivables and
certain liabilities of the business, including warranty responsibility for
products sold before closing as well as warranty responsibility for retained
contracts to be completed. In some cases, the Company has agreements with
customers on commitments to support its products. In connection with the
sale, the Company wrote down the assets by $5.6 million, net of tax.
Also on August 28, 2002, the Company announced an organizational restructuring
of its Power Products segment, the intent of which is to reduce operational
costs. The Company expects to recognize expense associated with this
restructuring in the third quarter of Fiscal 2002. While a final analysis of
this organizational restructuring is pending, the Company is unable to estimate
the associated costs.
NOTE J - BORROWING ARRANGEMENTS
The Company's sources of cash liquidity include cash and equivalents, cash from
operations, amounts available under credit facilities, and other external
sources of funds. The Company believes that these sources are sufficient to fund
the current requirements of working capital, capital expenditures, dividends,
and other financial commitments. At August 3, 2002 the Company had no borrowings
outstanding under an unsecured revolving debt facility that could provide up to
approximately $143 million, net of $7 million outstanding under a $25 million
letter of credit sub facility, subject to the Company's obtaining an amendment
as discussed below. This revolving facility matures during Fiscal 2004. In
addition, the Company has $55 million in senior notes outstanding, $30 million
of which is due in May of 2003.
The Company's unsecured long-term notes, which include the revolving credit
facility and senior notes, were issued pursuant to agreements containing
covenants that restrict indebtedness, guarantees, rentals, and other items.
Additional covenants in the revolving credit facility require the Company to
maintain a minimum tangible net worth and interest coverage. The Company is not
in violation of any covenants related to its senior notes or the minimum
tangible net worth requirement of its revolving credit facility. However, it was
in violation of the minimum interest coverage ratio requirement of the revolving
credit facility (under which it has no borrowings) as of the balance sheet date.
As a result, the Company has obtained a waiver from its lenders relating to the
minimum interest coverage ratio covenant. The waiver is in effect for the
second quarter of Fiscal 2002. The Company must be in compliance with the
original covenant at the end of the third quarter, which it expects to do.
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 equivalents and committed lines
of credit, the Company may seek to borrow under other long-term financing
instruments or seek additional equity capital.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the attached condensed
consolidated financial statements and notes thereto, and with the Company's Form
10-K and notes thereto for the fiscal year ended January 31, 2002. The following
discussion contains forward-looking statements. In connection therewith, please
see the cautionary statements contained therein and the heading labeled "Factors
That May Affect Future Results" below, which identify important factors that
could cause actual results to differ materially from those in the
forward-looking statements.
The Company's fiscal year begins on February 1 of the year stated and ends on
January 31 of the following year. For example, the Company's fiscal year 2002
(hereinafter referred to as "Fiscal 2002") commenced on February 1, 2002 and
ends on January 31, 2003. Other years are referred to in the same manner. The
Company reports results on the fiscal quarter method with each quarter
comprising approximately 13 weeks. The second quarter of Fiscal 2002 commenced
on May 5, 2002 and ended on August 3, 2002, while the second quarter of Fiscal
2001 commenced on April 29, 2001 and ended on July 28, 2001.
RESULTS OF OPERATIONS
Sales for the second quarter of Fiscal 2002 were $278.8 million compared to
sales of $373.0 million in the same period a year ago. Of the $94 million
decrease, $45 million was in the Distributed Energy Solutions segment and was
due to certain large turnkey power generation projects that were completed in
the prior year which were not repeated in the current quarter. Other segments of
the Company also contributed to the decrease in sales, as further discussed
below in "Segment Data." The Company's gross profit percentage improved slightly
to 14.7% in the current quarter from 14.5% in the second quarter of Fiscal 2001.
Recovery of costs incurred, net represents a recovery pursuant to a certified
claim with the U.S. Government for costs incurred by the Company resulting from
production delays in the first multi-year Family of Medium Tactical Vehicles
("FMTV") contract in the Tactical Vehicle Systems segment. A settlement of $22.0
million was reached during the first quarter of Fiscal 2001, which was reduced
by $1.2 million in related expenses for legal and professional services. No such
recovery was received in the first half of Fiscal 2002.
Selling and administrative expenses for the second quarter of Fiscal 2002 were
$34.4 million, or 12.3% of sales, versus $34.4 million, or 9.2% of sales in the
comparable quarter of Fiscal 2001. Spending in the current quarter was impacted
by higher costs associated with bid preparation and other projects at TVS,
higher insurance costs, and ongoing costs incurred in implementing the JD
Edwards software in the remaining Power Products locations. Offsetting this
higher spending was an improvement in efficiency and a reduction in headcount.
Interest expense is $0.8 million lower in the second quarter of the current year
versus the second quarter of the prior year, as $20.0 million of long-term debt
was paid off in the second quarter of Fiscal 2001. In addition, $0.3 million of
interest related to the self-construction of certain major capital projects was
capitalized in the current year. The reduction of interest income in the current
quarter as compared to the second quarter of the prior year results from lower
average invested cash at lower effective interest rates.
Net earnings from continuing operations before cumulative effect of change in
accounting in the second quarter of Fiscal 2002 were $4.6 million or $0.16 per
diluted share, compared to $12.3 million, or $0.42 per diluted share, in the
prior year second quarter. This decrease in net income was principally a result
of decreased sales volume in all segments of the Company's business, as further
discussed below.
DISCONTINUED OPERATIONS
During the fourth quarter of Fiscal 2001, the Company 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. The net
operational loss from these activities in the second quarter of Fiscal 2002 was
$5.2 million and the net profit in the second quarter of Fiscal 2001 was $0.5
million. For the first half of Fiscal 2002 net operational loss from these
operations was $5.9 million, while the net profit for the first half of Fiscal
2001 was $0.5 million. The second quarter loss resulted from this business
operating at below breakeven levels, as well as provisions made for warranty and
other issues. In addition, the Company recognized a loss from disposal of
discontinued operations, net of tax, of $5.6 million in the second quarter of
Fiscal 2002, resulting from the anticipated sale of these operations, as further
discussed below under the headings, "Subsequent Events" and "Legal Proceedings."
Loss from discontinued operations, net also includes the gas compression
equipment sales operations previously reported as Other Business Activities. The
Company is currently exiting this business and is preparing to close and offer
for sale its facility used in the packaging of such equipment. Sales for this
business during the second quarter of Fiscal 2002 and Fiscal 2001 were $5.0
million and $3.3 million, respectively and $6.7 million and $9.8 million for the
first half of Fiscal 2002 and Fiscal 2001, respectively. Net earnings
14
for this business during the second quarter of Fiscal 2002 and Fiscal 2001 were
breakeven and 0.1 million, respectively, and for the first half of Fiscal 2002
and 2001 were breakeven and $0.4 million, respectively.
In addition, the loss from discontinued operations includes the Company's
wheelchair lift business, which is being offered for sale and which was
previously reported as part of the Power Products segment. Sales for this
business were $1.2 million in the second quarter of the current year and $1.3
for the second quarter of Fiscal 2001. For the first half, sales were $1.6
million in the current year and $2.4 million in the prior year. Net earnings for
this business during the second quarter of Fiscal 2002 and Fiscal 2001 were
breakeven and $0.1 million, respectively and breakeven and $0.2 million for the
first half of Fiscal 2002 and Fiscal 2001, respectively.
The corporate expenses previously allocated to each of these discontinued
businesses are now absorbed by the remaining continuing operations, resulting in
a restatement of operating profit by segment versus that which was originally
reported in prior periods.
Also included in discontinued operations was a provision for a financial
guarantee related to the discontinued gas turbine business of $0.3 million and
$0.7 for the three and six months ended August 3, 2002, respectively, net of the
impact of income taxes, as further discussed below, under the heading,
"Subsequent Events."
In total, net of taxes, discontinued operations accounted for a loss of $11.0
million, or $0.38 per diluted share, in the second quarter of Fiscal 2002 versus
a profit of $0.7 million, or $.02 per diluted share, in the second quarter of
Fiscal 2001. For the first half, net of taxes, discontinued operations accounted
for a loss of $12.2 million in the current year and a profit of $0.4 million in
the prior year.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
Effective February 1, 2002, the Company adopted two statements promulgated by
the Financial Accounting Standards Board, Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for business combinations and SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. SFAS No. 142 requires that the balance sheet valuation of goodwill and
other intangible assets be evaluated for impairment at least annually. Further,
it requires that amortization of goodwill cease. Any transition charges
recognized upon implementation of SFAS No. 142 have been accounted for as a
cumulative effect of a change in accounting principle and recorded net of tax.
In the first quarter of Fiscal 2002, the Company recognized a pre-tax impairment
charge of $5.5 million ($3.7 million after tax) to goodwill primarily related to
the Airline Products segment and ceased amortization on the $7.5 million of
remaining unamortized goodwill. The Company's goodwill amortization for Fiscal
2001 was $0.9 million.
SEGMENT DATA
The Company's management analyzes financial results in five business segments
based on distinct product and customer types: Power Products, Distributed Energy
Solutions, Tactical Vehicle Systems, Petroleum Equipment, and Airline Products.
Other businesses not otherwise classified are shown as Other Business
Activities. Such segments are described below along with analyses of their
respective results of operations.
The Tactical Vehicle Systems segment, which manufactures tactical vehicles for
the U.S. Army and others, recorded sales of $105.4 million in the second quarter
of Fiscal 2002 compared to $108.8 million in the same period a year ago and were
in line with expectations that were set at the first quarter earnings release.
For the first half, sales were $220.9 million versus $217.3 million for the
first half of Fiscal 2001. Operating profit for the quarter totaled $15.6
million, compared with $16.2 million in the second quarter of Fiscal 2001 and
$30.5 million and $54.5 million for the first half of Fiscal 2002 and Fiscal
2001, respectively. The first half of Fiscal 2001 included a $20.8 million net
recovery of costs incurred, which led to the large decrease in operating profit
year over year. Operating margins of 14.8% for the current quarter were
relatively unchanged compared to the prior quarter of 2001 but were improved
from the 12.9% margins in the first quarter of this year. Increased spending on
bid preparation and other projects has been substantially offset by productivity
improvements and reduced spending realized in other aspects of the business. The
Company anticipates the maintenance of operating margins in the current range
for the second half of the year with the potential for a slight increase in
sales.
In the fourth quarter of Fiscal 2001, the U.S. Army exercised an option to award
a fifth program year to the current production 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. As of
August 3, 2002, funding in the amount of approximately $1.5 billion for the FMTV
contract had been authorized and appropriated by the U.S. Congress, $450 million
of which is allocated to future production under the existing contract.
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 completed a contract under the first phase of
the competitive bid process
15
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.
Production by the successful bidder for the new multi-year contract is
anticipated to begin in October of FY2004. If this expectation proves to be
correct and if the U.S. Army chooses not to incur a production break for the
FMTV, there may be an opportunity for an additional one-year extension to the
Company's current multi-year contract for the FMTV. This extension would provide
for continued deliveries of the FMTV through September 2004.
During the second quarter of Fiscal 2002, the Tactical Vehicle Systems segment
submitted a bid to the United Kingdom's Ministry of Defence ("UK MoD") pursuant
to a request for proposals for their multi-year requirement for over 8,000
trucks. The Company is responding to this opportunity with a United
Kingdom-based consortium of entities that all have extensive experience meeting
the demanding requirements of the Ministry of Defence. The Company cannot
reliably predict when the UK MoD will make its decision as to the final award
for the production contract or whether the Company will receive the award, but
the decision is expected to be made in the first quarter of Fiscal 2003. The
Company cannot reliably predict the outcome of the contract unless and until the
contract is awarded to the Company. Production on this contract, should it be
awarded to the Company, is expected to begin after Fiscal 2003.
The Power Products segment, which markets and services a wide range of
industrial equipment, recorded sales in the second quarter of Fiscal 2002 of
$129.7 million, compared to $153.1 million in the second quarter of Fiscal 2001.
Sales for the first half of the current year were $279.2 million versus $288.6
million in Fiscal 2001. The sales decrease was the result of lower equipment
sales across all areas and most product lines and markets within which this
segment operates. The decrease has been particularly apparent in the oil and gas
and power generation markets. In the second quarter of Fiscal 2002, operating
profit was $0.5 million versus $3.4 million in the second quarter of Fiscal
2001. For the first half of Fiscal 2002, operating profit was $4.1 million
versus $4.8 million in the first half of Fiscal 2001. Although this business is
continuing to reduce costs, the lower volume of sales was the primary factor
contributing to the lower operating profit for the quarter. Recently announced
strategic leadership changes, as described beneath the heading, "Subsequent
Events" below, should allow for increased focus on growth, as well as on
operational and cost improvements.
As mentioned above, beneath the heading, "Discontinued Operations," the Company
has reclassified for reporting purposes its wheelchair lift business, which was
previously reported as a part of the Power Products segment. During the third
quarter of Fiscal 2001, the Company sold its John Deere distributorship in
Casper, Wyoming, and recognized $3.1 million and $5.5 million of sales in the
second quarter and first half of Fiscal 2001, respectively. The Power Products
segment's quarter-over-quarter and year-over-year comparative results are
unfavorably impacted by this sale. There remain future opportunities in this
segment. As environmental restrictions on new Class 8 trucks potentially become
more onerous, new trucks may be produced with inferior fuel economy, causing
operators to operate older equipment longer, thereby increasing the age of the
industry-wide fleet. Such an aging could increase the demand for this segment's
service and parts. However, sales in the second half of the year are anticipated
to continue at or below the levels experienced in the first half of the year as
recoveries in these markets are not expected in the near term.
The Distributed Energy Solutions segment was established in the fourth quarter
of Fiscal 2001 and represents activities associated with the higher-horsepower
reciprocating power generation equipment business. Second quarter sales were
$17.8 million as compared to sales of $62.7 million in the same period of Fiscal
2001. First half sales were $29.6 million as compared to $93.7 million in the
same period of Fiscal 2001. Prior year sales included certain large turnkey
power generation projects that were completed during Fiscal 2001 for which no
similar contracts were completed in the current quarter. Second quarter
operating loss totaled $2.1 million compared to an operating profit of $4.9
million in the comparable period of last year. For the first half of Fiscal
2002, the operating loss was $4.3 million compared to an operating profit of
$4.9 million for the first half of Fiscal 2001. The contracts in this segment
tend to be large in volume and sporadic as to timing, which causes large swings
in the sales level of this segment. The Company is beginning to realize some
cost reductions that should result in somewhat higher margin rates on the sales
made in the second half of the year, although it may still be operating this
segment at below breakeven sales. Despite this, there has been an increased
volume of quote activity, but there can be no assurance that this will convert
to additional backlog in the near future.
The Petroleum Equipment segment manufactures equipment for the oil and gas
exploration, production, and well stimulation industries. Sales in this segment
were $8.8 million for the second quarter of Fiscal 2002 versus $24.1 million
reported for the same period last year. For the first six months of Fiscal 2002,
sales were $15.3 million, as compared to sales of $45.1 million for the same
period of Fiscal 2001. The decrease in sales for this segment was primarily
attributable to the generally lower levels of business in prior periods that
resulted in delays in receiving new equipment orders. The order rate has
recently increased, primarily in the international markets, as reflected in the
backlog at the end of the second quarter of $45.0 million. The lower sales
volume and lower manufacturing productivity were the primary contributors to the
operating loss for the second quarter which totaled $1.5 million compared to an
operating profit of $1.6 million in the previous year and a loss of $2.1 million
for the first half of the current year versus an operating profit of $3.1
million in the prior year. Execution of some of the larger orders in the backlog
is underway, which
16
should be reflected in higher revenues for this segment in the second half of
the year as compared to the first half.
The Airline Products segment, which manufactures airline ground support
products, mobile railcar movers, and snow blowers, recorded sales of $17.2
million in the second quarter of Fiscal 2002, compared with $22.9 million in the
same quarter last year. Sales for the first six months of Fiscal 2002 and 2001
were $31.5 million and $47.0 million, respectively. The airline industry
continues to experience weak demand and low fares and the industry has announced
cutbacks in flights, and reduction of capital expenditures as well as cost
cutting initiatives. It is not clear when a recovery can be expected, and the
lower level of industry-wide capital spending has resulted in continued revenue
levels below breakeven for this business. A similar level of sales is expected
to continue for the second half of the year. Operating loss for the second
quarter of Fiscal 2002 was $1.6 million, which compares to an operating loss of
$2.6 million in the same quarter last year. Operating loss for the first half of
Fiscal 2002 was $4.7 million and $7.0 million for the same period of the prior
year. Costs were in line with expectations and higher margins are being realized
on the sales made during the quarter. The improvements are a result of the
restructuring efforts that were completed during 2001.
Other business activities not identified in a specific segment previously
included predominantly the gas compression equipment packaging business. The
Company is currently exiting this business and is preparing to close and offer
for sale its facility used in the packaging of gas compression equipment. As a
result, this activity has been reclassified for reporting purposes as a
discontinued business. See "Discontinued Operations" above.
UNFILLED ORDERS
The Company's unfilled orders consist of written purchase orders, letters of
intent, and oral commitments. These unfilled orders are generally subject to
cancellation or modification due to customer relationships or other conditions.
Purchase options are not included in unfilled orders until exercised. Unfilled
orders as of August 3, 2002 and May 4, 2002 were as follows:
------------------------
AUGUST 3, MAY 4,
2002 2002
------------------------
(In millions)
Tactical Vehicle Systems $496.9 $582.7
Power Products 56.9 49.1
Distributed Energy Solutions 33.8 52.3
Petroleum Equipment 45.0 20.2
Airline Products 3.8 7.6
------ ------
$636.4 $711.9
====== ======
Total unfilled orders decreased $75.5 million during the quarter. The Tactical
Vehicle Systems segment ("TVS") backlog includes the fifth option year exercised
by the U.S. Government, but continued to decline as the Company completed
scheduled work on the second multi-year contract for the FMTV. Backlog for the
portion of the Company's business excluding TVS increased modestly by $10.3
million, as shown above.
Over the coming months, the Company expects the backlog in its Tactical Vehicle
Systems segment to continue to decrease as existing contractual orders are
filled.
LIQUIDITY AND CAPITAL RESOURCES
The balance in cash and cash equivalents at the end of the quarter was $99.3
million, $17.9 million more than at the end of Fiscal 2001. During the first
half of Fiscal 2002, cash of $41.3 million was provided by continuing
operations, while $2.6 million was used by discontinued operations. The earning
of cash related primarily to the collection of certain receivables and the
timing of government funding of production of the FMTV. Partially offsetting
such increases in cash was a decrease in accounts payable as a result of the
timing of payments. Investing activities consumed $15.5 million during the first
half, principally for expenditures related to the continued construction of a
fabrication facility at its Tactical Vehicle Systems segment and certain
investments in long-term rental equipment. Financing activities used $5.3
million, principally for the payment of dividends.
The Company's sources of cash liquidity include cash and equivalents, cash from
operations, amounts available under credit facilities, and other external
sources of funds. The Company believes that these sources are sufficient to fund
the current requirements of working capital, capital expenditures, dividends,
and other financial commitments. At August 3, 2002 the Company had no borrowings
outstanding under an unsecured revolving debt facility that could provide up to
approximately $143 million, net of $7 million outstanding under a $25 million
letter of credit sub facility, subject to the Company's obtaining an amendment
as discussed below. This revolving facility matures during Fiscal 2004. In
addition, the Company has $55 million in senior notes outstanding, $30 million
of which is due in May of 2003.
17
The Company's unsecured long-term notes, which include the revolving credit
facility and senior notes, were issued pursuant to agreements containing
covenants that restrict indebtedness, guarantees, rentals, and other items.
Additional covenants in the revolving credit facility require the Company to
maintain a minimum tangible net worth and interest coverage. The Company is
not in violation of any covenants related to its senior notes or the minimum
tangible net worth requirement of its revolving credit facility. However, it
was in violation of the minimum interest coverage ratio requirement of the
revolving credit facility (under which it has no borrowings) as of the
balance sheet date. As a result, the Company has obtained a waiver from its
lenders relating to the minimum interest coverage ratio covenant. The waiver
is in effect for the second quarter of Fiscal 2002. The Company must be in
compliance with the original covenant at the end of the third quarter, which
it expects to do.
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 equivalents and committed lines
of credit, the Company may seek to borrow under other long-term financing
instruments or seek additional equity capital.
SUBSEQUENT EVENTS
On August 15, 2002 the Company announced that it had paid $6.1 million to a
financial institution in connection with an obligation under a guarantee related
to certain gas turbine equipment in Argentina. The equipment was exported to
Argentina by the Company's discontinued gas turbine operation in 1996. The
payment was precipitated by the Argentine financial crisis and the Company was
required to fund the obligation by the terms of the agreement with the financial
institution. The gas turbine equipment provides electrical power to the town of
Rio Grande in Argentina. The Company recorded this payment as an asset and is
currently evaluating its rights under an export insurance credit policy procured
in connection with the transaction and its rights with the Argentine end user of
the equipment. A pre-tax expense of $0.6 million and $0.5 million were recorded
in the first and second quarters of Fiscal 2002, respectively. The Company
believes it is adequately reserved for the risk associated with this transaction
as of the end of the second quarter of Fiscal 2002.
On August 28, 2002, the Company signed an agreement to sell the previously
discontinued blowout preventer, valve, elastomer, and drilling riser business
for $14.75 million to Cooper Cameron Corporation. When the transaction
consummated on September 13, 2002, the Company sold certain assets and
retained certain contracts and related assets as well as the receivables and
certain liabilities of the business, including warranty responsibility for
products sold before closing as well as warranty responsibility for retained
contracts to be completed. In some cases, the Company has agreements with
customers on commitments to support its products. Associated with this
anticipated sale, the Company wrote down the assets of the businesses to
expected sales value by $5.6 million, net of tax.
Also on August 28, 2002, the Company announced an organizational restructuring
of its Power Products segment, the intent of which is to reduce operational
costs. The Company expects to recognize expense associated with this
restructuring in the third quarter of Fiscal 2002. While a final analysis of
this organizational restructuring is pending, the Company is unable to estimate
the associated costs.
FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD-LOOKING STATEMENTS
This filing contains forward-looking statements that are based on management's
current expectations, estimates, and projections. These statements are not
guarantees of future performance and involve a number of risks, uncertainties,
and assumptions and are made pursuant to the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995. Many factors, including those
discussed more fully elsewhere in this release and in the Company's filings with
the Securities and Exchange Commission, particularly its latest annual report on
Form 10-K, as well as others, could cause results to differ materially from
those stated. Specific important factors that could cause actual results,
performance, or achievements to differ materially from such forward-looking
statements include risk of competition, risks relating to technology, risks of
general economic conditions, risks of oil and gas industry economic conditions,
risks of airline industry economic conditions, risks as to terrorist attacks on
the U.S. and their impact on the U.S. economy, risks relating to personnel,
risks of dependence on government, inherent risks of government contracts, risks
of claims and litigation, risks of product defects, risks as to foreign sales
and global trade matters, risks as to cost controls, risks as to information
technology, risks as to acquisitions, risks as to currency fluctuations, risks
as to environmental and safety matters, risks as to distributorships, and credit
risks, all as more specifically outlined in the Company's latest annual report
on Form 10-K. In addition, such forward-looking statements could be affected by
general industry and market conditions and growth rates, general domestic and
international conditions including interest rates, inflation and currency
exchange rates and other future factors. Actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements.
In addition, the following factors should be considered:
18
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. In 2001 and the first
half of 2002, there was a marked period of economic slowdown and 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.
RISKS OF DEPENDENCE ON GOVERNMENT AND FAILURE TO OBTAIN NEW GOVERNMENT
CONTRACTS. 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 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 August 3, 2002, funding in the
amount of approximately $1.5 billion for the FMTV contract had been
authorized and appropriated by the U.S. Congress, $450 million of which is
allocated to future production under the existing contract. 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.
RISK AS TO LICENSES. Our Power Products and Petroleum Equipment segments are
dependent upon and subject to certain state motor vehicle licensing
requirements. Generally, such licenses are renewed annually. While these
licenses have been renewed on a regular basis in the past, there can be no
assurance that any particular license will be renewed in the future. The
termination of, or failure to renew, key licenses could have a material adverse
impact on our operations. We have assumed in our forward-looking statements that
our principal licenses will not be terminated and/or will be renewed as they
come up for renewal.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During 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.
The Company is a defendant in a suit brought by Diamond Offshore on May 30,
2002, arising out of claims relating to marine riser manufactured by the
Company and purchased by Diamond Offshore for use on its Ocean Baroness
semi-submersible drilling rig, Cause No. 2002-27831; DIAMOND OFFSHORE
INTERNATIONAL CORPORATION, DIAMOND OFFSHORE COMPANY, AND DIAMOND OFFSHORE
COMPANY D/B/A DIAMOND OFFSHORE DRILLING CO. V. STEWART & STEVENSON SERVICES,
INC.; In the District Court of Harris County, Texas 125th Judicial District
Court ("Baroness Litigation"). The suit seeks to recover damages in an
unspecified amount allegedly incurred as a result of a parting of the marine
riser during deep water drilling operations. The Company is vigorously
defending the suit.
On or about September 13, 2001, Diamond Offshore placed a purchase order with
the Company for another marine riser, for use on the Ocean Rover
semi-submersible drilling rig. The Company was fulfilling this order, when, on
August 19, 2002, Diamond amended its petition in the Baroness Litigation to seek
a declaration that Diamond has no further contractual obligations to the Company
under the Ocean Rover riser purchase order. On August 21, 2002, before being
served with Diamond Offshore's amended petition in the Baroness Litigation, the
Company filed a lawsuit against Diamond Offshore, Cause No. 2002-42419; STEWART
& STEVENSON SERVICES, INC. V. DIAMOND OFFSHORE COMPANY, AND DIAMOND OFFSHORE
COMPANY D/B/A DIAMOND OFFSHORE DRILLING CO.; In the District Court of Harris
County Texas, 151st Judicial District Court ("Rover Litigation"), seeking to
recover damages, including attorneys' fees. On August 30, 2002, the 151st
Judicial District Court, SUA SPONTE, transferred the Rover Litigation to the
125th Judicial Court where the Baroness Litigation is pending.
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, involve a claim for damages which
are material to the Company's financial statements or are 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.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Form 8-K Report Date - May 8, 2002 (Fiscal 2002 First Quarter Earnings Release
And Conference Call Schedule)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - June 4, 2002 (Fiscal First Quarter Results)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - June 13, 2002 (Dividend Announcement)
Items Reported - Item 5. Other Events
Item 7. Exhibits
21
SIGNATURES
Pursuant to the requirements 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 16th day of September 2002.
STEWART & STEVENSON SERVICES, INC.
By: /s/ Michael L. Grimes
----------------------------------
Michael L. Grimes
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ John B. Simmons
----------------------------------
John B. Simmons
Vice President and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
22
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
None
23
CERTIFICATION PURSUANT TO THE JUNE 27, 2002 ORDER OF THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO SECTION 21(a)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FILE NO. 4-460)
STATEMENT UNDER OATH OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL OFFICER REGARDING FACTS AND CIRCUMSTANCES
RELATING TO EXCHANGE ACT FILINGS
I, Michael L. Grimes, state and attest that:
1. To the best of my knowledge, based upon a review of the covered
reports of Stewart & Stevenson Services, Inc., and, except as
corrected or supplemented in a subsequent covered report:
o no covered report contained an untrue statement of a material
fact as of the end of the period covered by such report (or in
the case of a report on Form 8-K or definitive proxy materials,
as of the date on which it was filed); and
o no covered report omitted to state a material fact necessary to
make the statements in the covered report, in light of the
circumstances under which they were made, not misleading as of
the end of the period covered by such report (or in the case of a
report on Form 8-K or definitive proxy materials, as of the date
on which it was filed).
2. I have reviewed the contents of this statement with the Company's
audit committee.
3. In this statement under oath, each of the following, if filed on or
before the date of this statement, is a "covered report":
o Annual Report on Form 10-K for the year ended January 31, 2002 of
Stewart & Stevenson Services, Inc. filed with the Commission;
o all reports on Form 10-Q, all reports on Form 8-K and all
definitive proxy materials of Stewart & Stevenson Services, Inc.
filed with the Commission subsequent to the filing of the Form
10-K identified above; and
o any amendments to any of the foregoing.
Name: Subscribed and sworn to before me this
13th day of September, 2002
/s/ Michael L. Grimes /s/ Rita Schaulat
----------------------------------- ---------------------------------------
Michael L. Grimes Notary Public State of Texas
Principal Executive Officer
My Commission Expires:
Date: September 13, 2002
------------------------------ November 20, 2005
---------------------------------------
24
CERTIFICATION PURSUANT TO THE JUNE 27, 2002 ORDER OF THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO SECTION 21(a)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FILE NO. 4-460)
STATEMENT UNDER OATH OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL OFFICER REGARDING FACTS AND CIRCUMSTANCES
RELATING TO EXCHANGE ACT FILINGS
I, John B. Simmons, state and attest that:
1. To the best of my knowledge, based upon a review of the covered
reports of Stewart & Stevenson Services, Inc., and, except as
corrected or supplemented in a subsequent covered report:
o no covered report contained an untrue statement of a material
fact as of the end of the period covered by such report (or in
the case of a report on Form 8-K or definitive proxy materials,
as of the date on which it was filed); and
o no covered report omitted to state a material fact necessary to
make the statements in the covered report, in light of the
circumstances under which they were made, not misleading as of
the end of the period covered by such report (or in the case of a
report on Form 8-K or definitive proxy materials, as of the date
on which it was filed).
2. I have reviewed the contents of this statement with the Company's
audit committee.
3. In this statement under oath, each of the following, if filed on or
before the date of this statement, is a "covered report":
o Annual Report on Form 10-K for the year ended January 31, 2002 of
Stewart & Stevenson Services, Inc. filed with the Commission;
o all reports on Form 10-Q, all reports on Form 8-K and all
definitive proxy materials of Stewart & Stevenson Services, Inc.
filed with the Commission subsequent to the filing of the Form
10-K identified above; and
o any amendments to any of the foregoing.
Name: Subscribed and sworn to before me this
13th day of September, 2002
/s/ John B. Simmons /s/ Rita Schaulat
----------------------------------- ---------------------------------------
John B. Simmons Notary Public State of Texas
Principal Financial Officer
My Commission Expires:
Date: September 13, 2002
------------------------------ November 20, 2005
---------------------------------------
25
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 AND THE
RULES AND REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION
PURSUANT THERETO
I, Michael L. Grimes, certify in connection with the quarterly report on Form
10-Q of Stewart & Stevenson Services, Inc. (the "Company") to which this
certification is attached that
1. I have reviewed this quarterly report of the Company on Form 10-Q;
2. based on my knowledge, this quarterly report on does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report.
/s/ Michael L. Grimes
---------------------------------------
Name: Michael L. Grimes
Title: Principal Executive Officer
26
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 AND THE
RULES AND REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION
PURSUANT THERETO
I, John B. Simmons, certify in connection with the quarterly report on Form
10-Q of Stewart & Stevenson Services, Inc. (the "Company") to which this
certification is attached that
1. I have reviewed this quarterly report of the Company on Form 10-Q;
2. based on my knowledge, this quarterly report on Form 10-Q does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report.
/s/ John B. Simmons
---------------------------------------
Name: John B. Simmons
Title: Principal Financial Officer
27
INFORMATIONAL ADDENDUM TO REPORT ON FORM 10-Q
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
NOT FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934
Solely for the purpose of Section 906 of the Sarbanes-Oxley Act of 2002, and
solely to the extent this certification may be applicable to this Report on Form
10-Q, the undersigned hereby certify that this report on Form 10-Q of Stewart &
Stevenson Services, Inc. fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and that information contained
in this report on Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of Stewart & Stevenson Services,
Inc.
/s/ Michael L. Grimes
---------------------------------------
Name: Michael L. Grimes
Title: Chief Executive Officer
/s/ John B. Simmons
---------------------------------------
Name: John B. Simmons
Title: Chief Financial Officer
28