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 NOVEMBER 2, 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 December 3, 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 - November 2, 2002 and
January 31, 2002.
Consolidated Condensed Statements of Earnings - Three and Nine Months Ended
November 2, 2002 and October 27, 2001.
Consolidated Condensed Statements of Cash Flows - Three and Nine Months Ended
November 2, 2002 and October 27, 2001.
Consolidated Condensed Statements of Comprehensive Income - Three and Nine
Months Ended November 2, 2002 and October 27, 2001.
Notes to Consolidated Condensed Financial Statements.
2
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 2, 2002 JANUARY 31, 2002
---------------- ----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 118,427 $ 81,438
Accounts and notes receivable, net 146,063 166,123
Recoverable costs and accrued profits not yet billed 12,208 -
Inventories 243,145 230,300
Excess of current cost over LIFO values (43,688) (42,132)
Other current assets 19,723 33,503
Total assets of discontinued operations 15,164 40,693
---------------- ----------------
TOTAL CURRENT ASSETS 511,042 509,925
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET 129,263 119,657
DEFERRED INCOME TAX ASSET 3,312 3,237
INVESTMENTS AND OTHER ASSETS 12,581 16,237
---------------- ----------------
TOTAL ASSETS $ 656,198 $ 649,056
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 1,633 $ 3,114
Accounts payable 39,556 71,270
Accrued payrolls and incentives 21,307 19,402
Current portion of long-term debt 30,250 250
Billings in excess of incurred costs 78,877 39,874
Other current liabilities 34,924 22,971
Total liabilities of discontinued operations 4,973 8,078
---------------- ----------------
TOTAL CURRENT LIABILITIES 211,520 164,959
LONG-TERM DEBT 26,350 56,600
ACCRUED POSTRETIREMENT BENEFITS AND PENSION 35,703 32,281
OTHER LONG-TERM LIABILITIES 3,781 3,982
---------------- ----------------
TOTAL LIABILITIES 277,354 257,822
---------------- ----------------
SHAREHOLDERS' EQUITY
Common stock, without par value, 100,000,000 shares
authorized; 28,491,245 and 28,444,281 shares issued and
outstanding at November 2, 2002 and January 31, 2002, respectively 54,819 54,177
Accumulated other comprehensive loss (11,906) (8,744)
Retained earnings 335,931 345,801
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 378,844 391,234
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 656,198 $ 649,056
================ ================
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 NINE MONTHS ENDED
----------------------------------- -----------------------------------
NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
Sales $ 296,582 $ 317,344 $ 881,287 $ 1,022,755
Cost of sales 253,585 278,854 752,661 882,853
---------------- ---------------- ---------------- ----------------
Gross profit 42,997 38,490 128,626 139,902
Recovery of costs incurred, net - (18,200) - (39,000)
Selling and administrative expenses 34,549 38,603 105,036 106,487
Interest expense 1,161 1,316 3,131 4,704
Interest and investment income (485) (706) (1,197) (2,817)
Other income, net (31) (438) (545) (731)
---------------- ---------------- ---------------- ----------------
35,194 20,575 106,425 68,643
Earnings from continuing operations
before income taxes 7,803 17,915 22,201 71,259
Income tax expense 2,814 6,261 7,709 26,011
---------------- ---------------- ---------------- ----------------
NET EARNINGS FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 4,989 11,654 14,492 45,248
Earnings (loss) from discontinued operations, net of
taxes of $(583), $35, $(3,831), and $(80) (1,223) 40 (7,826) (146)
Loss from disposal of discontinued operations,
net of taxes of $(2,705) - - (5,551) -
Cumulative effect of change in accounting, net of
taxes of $(1,798) - - (3,682) -
---------------- ---------------- ---------------- ----------------
NET EARNINGS (LOSS) $ 3,766 $ 11,694 $ (2,567) $ 45,102
================ ================ ================ ================
Weighted average shares outstanding:
Basic 28,490 28,441 28,475 28,285
Diluted 28,585 29,002 28,701 28,951
Earnings (loss) per share:
Basic
Continuing operations before cumulative effect $ 0.18 $ 0.41 $ 0.51 $ 1.60
Discontinued operations (0.04) - (0.47) (0.01)
Cumulative effect of change in accounting - - (0.13) -
---------------- ---------------- ---------------- ----------------
NET EARNINGS (LOSS) PER SHARE $ 0.13 $ 0.41 $ (0.09) $ 1.59
================ ================ ================ ================
Diluted
Continuing operations before cumulative effect $ 0.17 $ 0.40 $ 0.50 $ 1.56
Discontinued operations (0.04) - (0.47) (0.01)
Cumulative effect of change in accounting - - (0.13) -
---------------- ---------------- ---------------- ----------------
NET EARNINGS (LOSS) PER SHARE $ 0.13 $ 0.40 $ (0.09) $ 1.56
================ ================ ================ ================
Cash dividends per share $ 0.085 $ 0.085 $ 0.255 $ 0.255
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- -----------------------------------
NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net earnings from continuing operations $ 4,989 $ 11,654 $ 10,810 $ 45,248
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 5,605 3,673 15,936 13,366
Change in operating assets and liabilities net
of the effect of acquisition, divestiture and
discontinued operations:
Accounts and notes receivable, net (1,319) (20,577) 20,060 (52,902)
Recoverable costs and accrued profits not
yet billed (7,440) - (12,208) 11,829
Inventories, net 1,408 (17,611) (11,289) (29,216)
Other current and noncurrent assets 4,981 (3,701) 17,359 (3,024)
Accounts payable (8,699) 18,292 (31,714) 4,992
Accrued payrolls and incentives 6,134 (1,074) 1,905 (2,410)
Billings in excess of incurred costs 10,890 1,830 39,003 23,927
Other current liabilities 3,412 310 11,952 6,872
Accrued postretirement benefits & pension 1,674 (2,839) 3,692 (1,098)
Other long-term liabilities (2,884) (281) (3,632) 507
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS 18,751 (10,324) 61,874 18,091
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 8,288 1,317 3,803 7,956
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 27,039 (9,007) 65,677 26,047
---------------- ---------------- ---------------- ----------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (5,942) (13,226) (22,744) (33,511)
Proceeds from sale of business assets - - - 2,323
Disposal of property, plant and equipment, net 1,100 1,707 2,452 2,845
---------------- ---------------- ---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (4,842) (11,519) (20,292) (28,343)
---------------- ---------------- ---------------- ----------------
FINANCING ACTIVITIES
Payments on long-term borrowings (250) (287) (250) (20,418)
Payments on short-term notes payable, net (448) (2,319) (1,481) (4,461)
Dividends paid (2,422) (2,417) (7,309) (7,193)
Exercise of stock options 9 691 644 6,753
---------------- ---------------- ---------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES (3,111) (4,332) (8,396) (25,319)
---------------- ---------------- ---------------- ----------------
Increase (Decrease) in cash and equivalents 19,086 (24,858) 36,989 (27,615)
Cash and equivalents, beginning of period 99,341 107,417 81,438 110,174
---------------- ---------------- ---------------- ----------------
Cash and equivalents, end of period $ 118,427 $ 82,559 $ 118,427 $ 82,559
================ ================ ================ ================
Cash Paid For:
Interest $ 172 $ 755 $ 2,706 $ 4,856
Taxes (excluding refunds) 1,083 5,883 3,617 24,260
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- -----------------------------------
(Unaudited) (Unaudited)
NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001
---------------- ---------------- ---------------- ----------------
Net earnings (loss) $ 3,766 $ 11,694 $ (2,567) $ 45,102
Unrealized gain on forward contracts, net of tax 52 - 336 -
Currency translation loss (2,025) (148) (3,498) (234)
---------------- ---------------- ---------------- ----------------
Comprehensive income (loss) $ 1,793 $ 11,546 $ (5,729) $ 44,868
================ ================ ================ ================
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 nine months ended
November 2, 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 fiscal 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 third quarter of Fiscal 2002
began on August 4, 2002 and ended on November 2, 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 fiscal 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 NINE MONTHS ENDED
----------------------------------- -----------------------------------
NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
SALES
Tactical Vehicle Systems $ 113,715 $ 103,771 $ 334,581 $ 321,036
Power Products 129,597 148,860 410,389 439,899
Distributed Energy Solutions 18,285 15,020 47,899 108,752
Petroleum Equipment 18,405 25,121 33,715 70,228
Airline Products 16,580 17,664 48,038 64,651
Other Business Activities - 6,908 6,665 18,189
---------------- ---------------- ---------------- ----------------
Total $ 296,582 $ 317,344 $ 881,287 $ 1,022,755
================ ================ ================ ================
OPERATING PROFIT (LOSS)
Tactical Vehicle Systems $ 18,442 $ 32,972 $ 48,931 $ 87,483
Power Products (4,200) 3,277 180 8,597
Distributed Energy Solutions 635 (5,159) (3,618) (194)
Petroleum Equipment 351 (1,077) (1,748) 2,123
Airline Products (2,685) (7,838) (7,371) (14,784)
Other Business Activities (669) 1,063 (556) 3,498
---------------- ---------------- ---------------- ----------------
Total 11,874 23,238 35,818 86,723
NON-OPERATING INCOME (EXPENSE)
Corporate expenses, net (2,910) (4,007) (10,486) (10,760)
Interest expense (1,161) (1,316) (3,131) (4,704)
---------------- ---------------- ---------------- ----------------
Earnings from continuing operations
before income taxes $ 7,803 $ 17,915 $ 22,201 $ 71,259
================ ================ ================ ================
OPERATING PROFIT (LOSS) PERCENTAGE
Tactical Vehicle Systems 16.2% 31.8% 14.6% 27.3%
Power Products (3.2)% 2.2% 0.0% 2.0%
Distributed Energy Solutions 3.5% (34.3)% (7.6)% (0.2)%
Petroleum Equipment 1.9% (4.3)% (5.2)% 3.0%
Airline Products (16.2)% (44.4)% (15.3)% (22.9)%
Other Business Activities 0.0% 15.4% (8.3)% 19.2%
Total 4.0% 7.3% 4.1% 8.5%
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, or $0.13 per share) 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. As of
November 2, 2002, performance type letters of credit totaled approximately $4.0
million and other letters of credit totaled $4.0 million.
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 a 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 (the "Baroness Litigation"). The suit was filed following a parting of the
marine riser during deep water drilling operations and seeks to recover damages
in an unspecified amount.
9
In a separate transaction on or about September 13, 2001, Diamond Offshore
placed a purchase order with the Company for a marine riser for use on its 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 separate lawsuit against Diamond
Offshore seeking to recover damages, including attorneys' fees (the "Rover
Litigation"). On August 30, 2002, the Court transferred the Rover Litigation to
the 125th Judicial Court where the Baroness Litigation is pending. The two cases
have been consolidated into one lawsuit in the 125th Judicial Court. The Company
is vigorously prosecuting its claims against Diamond Offshore and defending the
claims asserted against it by Diamond Offshore in this lawsuit.
The Company's primary general liability insurer has denied that it owes the
Company a defense or indemnity for any of Diamond Offshore's claims in the
Baroness Litigation. The Company disagrees, and has filed suit to determine this
issue, in Cause No. 200259100; STEWART & STEVENSON SERVICES, INC. v. ACE
AMERICAN INSURANCE COMPANY; in the District Court, Harris County, Texas, 281st
Judicial District Court.
It is presently impossible to determine the ultimate outcome of these matters or
whether the resolution will have a material adverse effect on the Company's
financial statements, though the Company believes it is adequately reserved as
of the balance sheet date.
In 2001, the Company received from the United States Environmental Protection
Agency ("EPA") a Request for Information under Section 104(e) of the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, for information pertaining to the R&H Oil Company Site in San Antonio,
Texas (the "Site"). Information provided to the Company by the EPA indicates
that the Company may have sent waste oils to the Site for recycling in the
late 1980s, and that such waste oils may potentially account for between one
and two percent of the volume of total wastes received by the oil recycler at
the Site. Since the Company expects to receive a claim for cleanup and other
costs for this site, it has established additional reserves in the third
quarter, which it believes to be adequate at this time. As additional facts
are developed and definitive remediation plans and necessary regulatory
approvals for implementation of remediation are established, changes in these
and other factors may result in actual costs exceeding the current
environmental reserves. While uncertainties are inherent in the final outcome
of these environmental matters, and it is presently impossible to determine
the actual costs that ultimately may be incurred, management currently
believes that the resolution of such uncertainties should not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.
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 has been reduced to approximately $0.5 million as of
November 2, 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 the Company's 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 substantially all 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 options to award a fifth and sixth program year to the
current contract. The fifth program year began in October 2002 and the sixth is
expected to be completed during 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 November 2, 2002, funding in the amount of approximately $1.5
billion for the FMTV contract had been authorized and appropriated by the U.S.
Congress, $354 million of which is allocated to future production under the
existing contract. A second option year that extends production through
September 2004 was funded by the U.S. Congress and awarded by the U.S. Army,
subsequent to the end of the fiscal quarter. This second option year will add
approximately $396 million
10
to the backlog of the Tactical Vehicle Systems segment, which was not included
in the backlog reported as of the end of the quarter. 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. Under the FMTV contracts, billings on
uncompleted contracts (which are permitted under performance based payment
schedules) in excess of incurred costs and accrued profits, which relate to
direct costs of manufacturing, engineering, and allocable overhead, are
classified as current liabilities (approximately $70 million as of the balance
sheet date) and reflect firm obligations to the U.S. Army to perform the
contracts and ship vehicles. The Company's cash position at any time reflects
the benefits of current liabilities arising from such arrangements since the
Company receives cash from the U.S. Army in excess of its incurred costs and
accrued profits.
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 completed a contract for the first phase of the competitive bid process
for the next multi-year contract for production of the FMTV and submitted its
proposal for the final award on November 18, 2002. The U.S. Army is expected
to make its decision as to the final award during the first quarter of Fiscal
2003. Production by the successful bidder for the new multi-year contract is
anticipated to begin in October of 2004. 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 a competitor will not be
more successful than the Company in this or coming bids and awards for
tactical vehicles.
If the Company does receive the next multi-year FMTV award, it believes that
profit margins would likely be lower than historical levels for the existing
FMTV contract. Further, as the next multi-year contract award is for fewer
trucks to be produced per fiscal year, revenue is forecasted to be lower
relating to this contract unless the U.S. Army exercises options for additional
production.
Continued success in this segment is dependent on securing additional contracts,
such as the next multi-year contract award for the FMTV, after completion of the
current contract, while maintaining acceptable operating margins.
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.
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
operating loss from these activities in the third quarter of Fiscal 2002 was
$1.8 million ($1.2 million, net of income taxes) and the net profit in the third
quarter of Fiscal 2001 was $0.1 million ($.05 million, net of income taxes). For
the first three quarters of Fiscal 2002, the net operating loss from these
operations was $10.5 million ($7.1 million, net of income taxes), while the net
profit for the first three quarters of Fiscal 2001 was $0.8 million ($0.5
million, net of income taxes). The third quarter loss resulted from this
business operating at below breakeven levels, as the work completed was
primarily related to certain retained contracts. In addition, the Company
recognized a loss from disposal of discontinued operations of $8.3 million ($5.6
million, net of income taxes) in the second quarter of Fiscal 2002, resulting
from the sale of these operations to Cooper Cameron Corporation for $14.8
million. 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.
The corporate expenses previously allocated to the Petroleum Equipment segment's
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 of $1.1 million ($0.7, net of income taxes) for the nine months ended
November 2, 2002. The pre-tax charge of $1.1 million was recorded in the first
and second quarters of Fiscal 2002 in the amounts of $0.6 and $0.5 million,
respectively. The provision was related to a $6.1 million payment the Company
made to a financial institution in connection to an obligation under the
financial guaranty for certain gas turbine equipment in Argentina during the
third quarter of Fiscal 2002. 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 power to the town of Rio Grande,
Argentina. The payment was recorded as an asset on the Company's books. The
Company has rights under an export insurance credit policy procured in
connection with the transaction and its rights with the Argentine end user of
the equipment. The $1.1 million dollar reserve recorded in
11
connection with the $6.1 million asset is believed to be adequate.
In total, net of taxes, discontinued operations accounted for a loss of $1.2
million, or $0.04 per diluted share, in the third quarter of Fiscal 2002 versus
break even in the third quarter of Fiscal 2001. For the nine months ended
November 2, 2002, net of taxes, discontinued operations accounted for a loss of
$13.4 million or $0.47 per diluted share versus a net loss of $0.1 million or
$0.01 per diluted share for the nine months ended October 27, 2001.
The Company's wheelchair lift business, which was previously reported as
discontinued operations, has been reclassified into continuing operations as
part of the Company's Power Products segment. A suitable agreement could not be
reached, and the business is no longer offered for sale. In addition, the gas
compression equipment sales operations, which were reported as discontinued
operations in the second quarter of Fiscal 2002, have been reclassified into
continuing operations, and are included in Other Business Activities.
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 NINE MONTHS ENDED
---------------- ---------------- ---------------- ----------------
NOVEMBER 2, 2002 OCTOBER 27, 2001 NOVEMBER 2, 2002 OCTOBER 27, 2001
---------------- ---------------- ---------------- ----------------
Numerator:
Net earnings (loss) available to common
shareholders
From continuing operations before $ 4,989 $ 11,654 $ 14,492 $ 45,248
cumulative effect of change in accounting
From discontinued operations (1,223) 40 (13,377) (146)
From cumulative effect of change
in accounting - - (3,682) -
---------------- ---------------- ---------------- ----------------
Net earnings $ 3,766 $ 11,694 $ (2,567) $ 45,102
================ ================ ================ ================
Denominator:
Denominator for basic earnings per share -
Weighted-average shares outstanding 28,490 28,441 28,475 28,285
Effect of dilutive securities:
Employee and director stock options 95 561 226 666
---------------- ---------------- ---------------- ----------------
Denominator for diluted earnings per share -
Adjusted weighted-average shares outstanding 28,585 29,002 28,701 28,951
================ ================ ================ ================
Basic earnings (loss) per share
From continuing operations before cumulative
effect $ 0.18 $ 0.41 $ 0.51 $ 1.60
From discontinued operations (0.04) 0.00 (0.47) (0.01)
From cumulative effect of change in accounting - - (0.13) -
---------------- ---------------- ---------------- ----------------
Net earnings $ 0.13 $ 0.41 $ (0.09) $ 1.59
================ ================ ================ ================
Diluted earnings (loss) per share
From continuing operations before
cumulative effect $ 0.17 $ 0.40 $ 0.50 $ 1.56
From discontinued operations (0.04) 0.00 (0.47) (0.01)
From cumulative effect of change in accounting - - (0.13) -
---------------- ---------------- ---------------- ----------------
Net earnings $ 0.13 $ 0.40 $ (0.09) $ 1.56
================ ================ ================ ================
Number of anti-dilutive stock options outstanding 1,383 326 1,327 256
NOTE H - RECOVERY OF COSTS INCURRED
The Company recorded settlements from the U.S. Army, net of related expenses, of
$20.8 million and $18.2 million in the first and third quarters of Fiscal 2001,
respectively. These amounts are presented on the Company's Consolidated
Condensed Statements of Earnings in the caption entitled, "Recovery of costs
incurred, net."
12
The $18.2 million recorded in the third quarter of Fiscal 2001 resulted from a
claim the Company filed with the U.S. Government in Fiscal 2000 seeking recovery
of costs incurred by the Company resulting from retrofitting all vehicles
produced under the first multi-year FMTV contract for changes in drive train
components. All costs associated with the retrofitting were expensed by the
Company. The U.S. Army and the Company agreed to attempt resolution through
voluntary participation in the Alternate Disputes Resolution process managed by
the Armed Services Board of Contract Appeals. This process concluded with the
agreement that the Company would receive $18.5 million in settlement of its
claims, which was netted against associated costs of $0.3 million.
The $20.8 million recorded in the first quarter of Fiscal 2001 resulted from a
claim the Company filed with the U.S. Government in Fiscal 1998 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.
NOTE I - COMPONENTS OF PROPERTY, PLANT AND EQUIPMENT
Summarized below are the components of Property, Plant & Equipment, net:
(IN THOUSANDS) November 2, 2002 January 31, 2002
---------------- ----------------
Machinery and equipment $ 126,781 $ 113,697
Buildings and leasehold improvements 93,990 80,530
Revenue earning assets 19,343 19,348
Computer hardware and software 40,156 31,635
Accumulated depreciation and amortization (171,711) (158,407)
---------------- ----------------
108,559 86,803
Construction in progress 6,423 19,111
Land 14,281 13,743
---------------- ----------------
Property, plant & equipment, net $ 129,263 $ 119,657
---------------- ----------------
The company placed a new fabrication facility into service in Sealy, Texas
during Fiscal 2002. The fabrication facility accounted for increases of $9.8
million and $3.1 million in Machinery and equipment and Buildings and leasehold
improvements, respectively. The Company also capitalized $5.1 million for a new
service facility in Dallas, Texas and $8.7 million for software development in
Fiscal 2002. Construction in progress as of November 2, 2002 was primarily
related to additional spending for Machinery and equipment for the fabrication
shop in Sealy, Texas and Machinery and equipment for several locations in the
Power Products and Airline Products segments.
NOTE J - PENSION PLANS
The assets of the Company's defined benefit pension plans, are, to a substantial
degree, invested in the capital markets and managed by a professional third
party under the review of the Company's pension plan committee. The actual
rate of of return on plan assets during fiscal 2002 has been lower than
expected long-term rate of return used in the Company's pension calculations.
Consequently, to comply with accounting rules, the Company expects to record
an increase to its pension liability during the fourth quarter of Fiscal
2002, with an offsetting charge to stockholders equity (through other
comprehensive income). The amount of such charge cannot be reasonably
determined at this time. The Company anticipates that the decline in the
value of pension plan assets will result in increased pension costs in future
periods. If capital market performance in future periods continues to be
lower than the long-term rate of return assumed in the Company's pension
calculations, the amount of such increases could be material. During the
first nine months of Fiscal 2002, the Company contributed $1.3 million to the
pension plans. It does not expect to make any additional contributions during
the last quarter of Fiscal 2002.
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 third quarter of Fiscal 2002 commenced on
August 4, 2002 and ended on November 2, 2002, while the third quarter of Fiscal
2001 commenced on July 29, 2001 and ended on October 27, 2001.
13
RESULTS OF OPERATIONS
Sales for the third quarter of Fiscal 2002 were $296.6 million compared to sales
of $317.3 million in the same period a year ago. The decrease of $20.7 million
in sales resulted primarily from lower sales of $19.3 million in the Power
Products segment, as further described below in "Segment Data." Gross profit of
$43.0 million, or 14.5%, was realized on the revenue recorded compared to $38.5
million, or 12.1%, in the third quarter of the prior year. The improvement in
gross margin of 2.4 percentage points was driven principally by improved margins
in the Tactical Vehicle Systems segment resulting from an improved mix in truck
shipments, as well as from productivity improvements and cost reductions in that
segment.
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, and a settlement of
$18.5 million was reached during the third quarter of Fiscal 2001. Each
settlement was reduced by $1.2 million and $0.3 million, respectively, for
expenses related to legal and professional fees and other costs. No such
recovery was received in the first nine months of Fiscal 2002.
Selling and administrative expenses for the third quarter of Fiscal 2002 were
$34.5 million, or 11.6% of sales, versus $38.6 million, or 12.2% of sales in the
comparable quarter of Fiscal 2001. Spending in the prior year included
approximately $4.0 million for restructuring in the Airline Products segment,
as compared to $1.2 million in the Power Products segment in the current
quarter.
Interest income for the quarter was $0.5 million as compared to $0.7 million in
the same quarter of the prior year. Although the Company's level of invested
cash increased versus the prior year, the lower average rate of return on
invested cash resulted in the decrease.
Net earnings from continuing operations before cumulative effect of change in
accounting in the third quarter of Fiscal 2002 were $5.0 million or $0.17 per
diluted share. Excluding the $0.03 per diluted share impact of the $1.2 million
in pretax costs associated with the Power Products organization change, earnings
from continuing operations were $0.20 per diluted share.
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
operating loss from these activities in the third quarter of Fiscal 2002 was
$1.8 million ($1.2 million, net of income taxes) and the net profit in the third
quarter of Fiscal 2001 was $0.1 million ($.05 million, net of income taxes). For
the first three quarters of Fiscal 2002, the net operational loss from these
operations was $10.5 million ($7.1 million, net of income taxes), while the net
profit for the first three quarters of Fiscal 2001 was $0.8 million ($0.5
million, net of income taxes). The third quarter loss resulted from this
business was attributable to expenses related to the sale of this business, as
well as the completion of certain retained contracts. In addition, the Company
recognized a loss from disposal of discontinued operations of $8.3 million ($5.6
million, net of income taxes) in the second quarter of Fiscal 2002, resulting
from the sale of these operations to Cooper Cameron Corporation for $14.8
million. 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.
The corporate expenses previously allocated to this discontinued business are
now absorbed by the remaining continuing operations, resulting in a
reclassification of operating profit by segment versus that which was originally
reported in prior periods.
The Company's wheelchair lift business, which was previously reported as
discontinued operations, has been reclassified into continuing operations as
part of the Company's Power Products segment. A suitable agreement could not be
reached, and the business is no longer offered for sale. In addition, the gas
compression equipment sales operations, which were reported as discontinued
operations in the second quarter of Fiscal 2002, have been reclassified into
continuing operations, and are included in Other Business Activities.
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
14
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 $0.7 million.
SEGMENT DATA
The Company's management analyzes financial results in five business segments
based on distinct product and customer types: Tactical Vehicle Systems, Power
Products, Distributed Energy Solutions, 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 $113.7 million in the third
quarter of Fiscal 2002 compared to $103.8 million in the same period a year
ago. The third quarter sales were higher on slightly higher truck shipments
in the quarter, but were favorably impacted by a higher mix of lower priced
option trucks in the current period as compared to the third quarter of last
year. Also contributing to the higher level of sales was a higher service
revenue component related to engineering, retrofit, and field services.
Operating profit for the quarter was $18.4 million, compared with $33.0
million in the third quarter of the prior year. The prior year quarter
included a pre-tax gain associated with a net settlement from the U.S. Army
for $18.2 million. After taking this settlement into account, operating
margins improved from 14.2% to 16.2% as a result of the favorable mix of
non-option priced trucks as well as productivity improvements and lower
spending realized in the current period.
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 began in
October 2002 and are expected to be completed during September 2003. As of
November 2, 2002, funding in the amount of approximately $1.5 billion for the
FMTV contract had been authorized and appropriated by the U.S. Congress, $354
million of which is allocated to future production under the existing contract.
After the end of this third quarter of Fiscal 2002, the U.S. Army awarded and
the U.S. Congress funded a second option year that extends production through
September 2004. This option year added approximately $396 million to the
backlog of the Tactical Vehicle Systems segment, which is not included in the
backlog reported as of the end of the quarter.
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. On November 18, 2002, the Company submitted its competitive
proposal to continue manufacture of the FMTV for the U.S. Army for another five
years. The Company expects that the final decision will be made as to the winner
of this contract during the first quarter of Fiscal 2003. Production by the
successful bidder for the new multi-year contract is anticipated to begin in
October of 2004.
If the Company receives the next multi-year FMTV award, it believes that its
margins would likely be lower than historical levels for the existing FMTV
contract. Further, as the next multi-year contract award is for fewer trucks to
be produced per fiscal year, revenue is forecasted to be lower relating to this
contract, unless the U.S. Army exercises options for additional production.
Continued success in this segment is dependent on securing additional contracts,
such as the next multi-year contract award for the FMTV, after completion of the
current contract, while maintaining acceptable operating margins.
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 UK MoD. Subsequently, the UK MOD has issued a
request for amended submittals, which are now due in January 2003. 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 second quarter of Fiscal 2003.
The Company cannot reliably predict the impact 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 third quarter of Fiscal 2002 of
$129.6 million, compared to $148.9 million in the third quarter of Fiscal 2001.
Sales were $410.4 million during the first nine months of Fiscal 2002, compared
to $439.9 million recognized in the first nine months of the prior year. The
decrease in sales was reflected in all components of revenue, including
equipment, parts, service, and rentals, and was reflected across most of the
geography in which the Company operates. The weakness in the first half of the
year in many of the key markets the Company serves continued in the third
quarter, and the Company does not expect to see a significant recovery during
the remainder of this fiscal year. While there are intermittent signs of a
strengthening economy, the lack of a steady stream of sales volume in parts and
service
15
indicates a relatively flat oil and gas marketplace in the U.S. until late 2003.
The Company's over-the-highway customers are now facing higher insurance costs
and other operating expenses related to more stringent environmental
regulations, which has decreased the amount of funding available for the
Company's parts and service products.
For the third quarter of Fiscal 2002, the Power Products segment recognized an
operating loss of $4.2 million, compared to operating profit of $3.3 million in
the prior year third quarter. For the first nine months of Fiscal 2002 and 2001,
this segment's operating profit was $0.2 million and $8.6 million, respectively.
Lower margin rates realized on sales for the quarter and higher operating
expenses associated with implementation of information management systems, bad
debt, and warranty obligations contributed to the net operating loss for the
period and the reduced operating profit for the nine months. In addition, the
Company recognized $1.2 million of costs in the third quarter of the current
year associated with the recently announced organization changes in this
segment.
The Company's action plan to improve the financial performance of the Power
Products segment includes (i) further process improvement arising out of the new
organization structure that was announced in the second quarter, (ii) continued
productivity improvements from backroom consolidation efforts, (iii) further
leverage of a segment-wide approach to supply chain management, and (iv)
completion of the information management system.
Subsequent to the close of the third quarter, the Company completed the purchase
of additional Hyster distributorship in New Mexico and West Texas for
approximately $3 million, which are expected to add $5 million in annual
revenue.
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. Third quarter sales were
$18.3 million as compared to sales of $15.0 million in the same period of Fiscal
2001, an increase of 22%. The higher sales volume was due to completion and
shipment of certain international projects and continued work on the CVN-77
contract for standby power on the next nuclear power aircraft carrier for the
U.S. Navy. This higher sales level, combined with cost reductions, resulted in
the segment posting an operating profit of $0.7 million for the quarter versus a
$5.2 million loss in the same quarter of the previous year. Backlog decreased
$9.6 million during the third quarter of Fiscal 2002 to $24.2 million. However,
subsequent to the end of the quarter, contracts were awarded with a value of
$12.4 million. Sales in the first nine months of Fiscal 2002 were $47.9 million
as compared to $108.8 million in the same period of Fiscal 2001, and operating
loss for the first nine months of Fiscal 2002 was $3.6 million compared to an
operating loss of $0.2 million for the first nine months of Fiscal 2001. The
decrease is primarily attributable to certain large turnkey power generation
projects that were completed during the first nine months of Fiscal 2001 for
which comparable projects did not exist in the first nine months of Fiscal 2002.
Continued performance above breakeven levels is dependent on winning additional
contracts in the near term.
The Petroleum Equipment segment manufactures equipment for the oil and gas
exploration, production, and well stimulation industries. Sales in this
segment were $18.4 million for the third quarter of Fiscal 2002 versus $25.1
million reported for the same period last year. For the first nine months of
Fiscal 2002, sales were $33.7 million, as compared to sales of $70.2 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
backlog remained relatively unchanged versus the second quarter of this year
at $44.3 million. Increasing order activity is occurring, primarily in
international markets. This segment posted an operating profit for the third
quarter of $0.4 million versus an operating loss of $1.1 million in the
previous year. For the first nine months of Fiscal 2002, operating loss was
$1.7 million versus operating profit of $2.1 million in the prior year. Based
on current backlog, the Company expects that revenue in this segment will
increase in the fourth quarter.
The Airline Products segment, which manufactures airline ground support
products, mobile railcar movers, and snow blowers, recorded sales of $16.6
million in the third quarter of Fiscal 2002, compared with $17.7 million in
the same quarter last year. Sales for the first nine months of Fiscal 2002
and 2001 were $48.0 million and $64.7 million, respectively. The level of
equipment sales continues to be lower than the prior year due to the impact
of the decline in the airline industry in the domestic market, resulting in
lower levels of spending. Operating loss for the third quarter of Fiscal 2002
was $2.7 million, which compares to an operating loss of $7.8 million in the
same quarter last year. The prior year quarter results included $4.0 million
in non-recurring expenses related to restructuring of this segment. This
segment continues to operate at sales levels below breakeven profitability.
The low levels of capital spending in the airline industry are expected to
continue in the near term and are reflected in the backlog of $4.2 million at
the end of the third quarter. Such an environment has significantly shortened
customer order cycles and requires this segment to build equipment for
anticipated orders, slightly increasing working capital requirements. Any
improvement in this business would come from the development of
international, regional airline, package carrier, and governmental markets.
The Company is evaluating potential acquisition candidates, as the businesses
that serve these markets must consolidate in light of current conditions.
Other business activities not identified in a specific segment include
predominantly the gas compression equipment packaging business. The Company has
exited this business and has closed the facility.
UNFILLED ORDERS
16
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 November 2, 2002 and October 27, 2001 were as follows:
November 2, October 27,
2002 2001
----------- -----------
(In millions)
Tactical Vehicle Systems $ 388.9 $ 404.7
Power Products 50.3 79.9
Distributed Energy Solutions 24.2 53.7
Petroleum Equipment 44.3 27.4
Airline Products 4.2 8.4
----------- -----------
$ 511.9 $ 574.1
=========== ===========
Total unfilled orders decreased by $62.2 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.
In the fourth quarter, the Company expects to show an increase in the backlog
in TVS, as an additional option year, with approximately $396 million of
revenue, has been added by the Department of Defense. Subsequent to that
increase, the Company expects the backlog in TVS 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 $118.4
million, $37.0 million higher than at the end of Fiscal 2001. During the first
nine months of Fiscal 2002, cash of $61.9 million was provided by continuing
operations compared to $18.1 million in the prior year, while $3.8 million was
provided by discontinued operations compared to $8.0 million in the prior year.
The increased earning of cash during Fiscal 2002 related primarily to the
collection of certain receivables and the timing of government performance
payments related to the funding of production of the FMTV. Under the FMTV
contracts, billings on uncompleted contracts (which are permitted under
performance based payment schedules) in excess of incurred costs and accrued
profits, which relate to direct costs of manufacturing, engineering, and
allocable overhead, are classified as current liabilities (approximately $70
million as of the balance sheet date) and reflect firm obligations to the U.S.
Army to perform the contracts and ship vehicles. The Company's cash position at
any time reflects the benefits of current liabilities arising from such
arrangements since the Company receives cash from the U.S. Army in excess of its
incurred costs and accrued profits. Partially offsetting such increases in cash
was a decrease in accounts payable as a result of the timing of payments.
Investing activities consumed $20.3 million during the first nine months of
Fiscal 2002 compared to $28.3 million in the first nine months of Fiscal 2001,
principally for expenditures related to the now-complete construction of a
fabrication facility at its Tactical Vehicle Systems segment and certain
investments in long-term rental equipment. Financing activities used $8.4
million during Fiscal 2002, principally for the payment of dividends. Financing
activities used $25.3 million in Fiscal 2001, primarily for the repayment of
indebtedness and 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. As of November 2, 2002 the Company had no
borrowings outstanding under its $150 million, unsecured revolving debt
facility. Under the terms of this debt facility, the Company had available to it
$77 million, net of $8 million outstanding under a $25 million letter of credit
sub facility. This revolving debt 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
notes and senior notes, were issued pursuant to agreements containing covenants
that restrict indebtedness, guarantees, rentals, and other items. Additional
covenants in the revolving credit notes require the Company to maintain a
minimum tangible net worth and interest coverage ratio. The Company is not in
violation of any such covenants. 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 this report.
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
17
financing instruments or seek additional equity capital.
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 and quarterly reports on Form 10-Q, 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, risks as to licenses, 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 factor should be considered:
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 November 2,
2002, funding in the amount of approximately $1.5 billion for the FMTV contract
had been authorized and appropriated by the U.S. Congress, $354 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, including repayment of
amounts (classified as current liabilities on our balance sheet) billed and
received from the U.S. Army in excess of costs incurred and profits accrued and
other monetary exposures), 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. If we do receive the award, we believe that margins will likely be
lower than historical levels on the existing FMTV contract. Further, as the next
multi-year contract award is for fewer trucks to be produced per fiscal year,
revenue is forecasted to be lower relating to this contract unless the U.S. Army
exercises options for additional production. 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.
18
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Company's periodic reports is recorded, processed, summarized, and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is
accumulated and communicated to the Company's management, including
its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
The Company has evaluated the effectiveness of its disclosure controls
and procedures within the 90 days prior to the filing of this report
with the supervision and the participation of the Company's Chief
Executive Officer and Chief Financial Officer. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures
are effective.
b) Change in Internal Controls
There have been no significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of the most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
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 a 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 (the "Baroness Litigation"). The suit was filed following a parting of the
marine riser during deep water drilling operations and seeks to recover damages
in an unspecified amount.
In a separate transaction on or about September 13, 2001, Diamond Offshore
placed a purchase order with the Company for a marine riser for use on its 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 separate lawsuit against Diamond
Offshore seeking to recover damages, including attorneys' fees (the "Rover
Litigation"). On August 30, 2002, the Court transferred the Rover Litigation to
the 125th Judicial Court where the Baroness Litigation is pending. The two cases
have been consolidated into one lawsuit in the 125th Judicial Court. The Company
is vigorously prosecuting its claims against Diamond Offshore and defending the
claims asserted against it by Diamond Offshore in this lawsuit.
The Company's primary general liability insurer has denied that it owes the
Company a defense or indemnity for any of Diamond Offshore's claims in the
Baroness Litigation. The Company disagrees, and has filed suit to determine this
issue, in Cause No. 200259100; STEWART & STEVENSON SERVICES, INC. v. ACE
AMERICAN INSURANCE COMPANY; in the District Court, Harris County, Texas, 281st
Judicial District Court.
It is presently impossible to determine the ultimate outcome of these matters or
whether the resolution will have a material adverse effect on the Company's
financial statements, though the Company believes it is adequately reserved as
of the balance sheet date.
In 2001, the Company received from the United States Environmental Protection
Agency ("EPA") a Request for Information under Section 104(e) of the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, for information pertaining to the R&H Oil Company Site in San Antonio,
Texas (the "Site"). Information provided to the Company by the EPA indicates
that the Company may have sent waste oils to the Site for recycling in the
late 1980s, and that such waste oils may potentially account for between one
and two percent of the volume of total wastes received by the oil recycler at
the Site. Since the Company expects to receive a claim for cleanup and other
costs related to this site, it has established additional reserves in the
third quarter, which it believes to be adequate at this time. As additional
facts are developed and definitive remediation plans and necessary regulatory
approvals for implementation of remediation are established, changes in these
and other factors may result in actual costs exceeding the current
environmental reserves. While uncertainties are inherent in the final outcome
of these environmental matters, and it is presently impossible to determine
the actual costs that ultimately may be incurred, management currently
believes that the resolution of such uncertainties should not have a material
adverse effect on the Company's consolidated financial position, results of
operations, 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, involve a claim for damages which
are material to the Company's financial statements or are expected to have a
material
20
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.
21
Item 4. Submission of Matters to a Vote of Security Holders
On June 11, 2002 the Company's Annual Meeting of Shareholders was held. Set
forth below is a brief description of each matter acted upon at the meeting and
the number of votes cast for, against or withheld and abstaining, or not voting
as to each matter.
For Withheld Against Abstained
---------- --------- --------- ---------
ELECTION OF DIRECTORS
Khleber V. Attwell 22,708,420 3,269,785
---------- ---------
C. Jim Stewart III 24,771,184 1,207,021
---------- ---------
Darvin M. Winick, PhD 23,036,942 2,941,263
---------- ---------
Howard Wolf 21,798,161 4,180,044
---------- ---------
APPROVAL OF AMENDED AND
RESTATED 1996 DIRECTOR STOCK
PLAN 21,602,857 3,884,843 490,505
---------- --------- ---------
APPROVAL OF ERNST & YOUNG
INDEPENDENT PUBLIC ACCOUNTANTS
OF THE COMPANY 24,644,621 1,318,504 15,080
---------- --------- ---------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 3.1 - Sixth Restated Bylaws of Stewart & Stevenson Services, Inc.
Effective April 11, 2001, as Amended Through December 10, 2002
Form 8-K Report Date - August 5, 2002 (Stewart & Stevenson Announces Strategic
Leadership Changes In Power Products Division)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - August 19, 2002 (Stewart & Stevenson Honors Discontinued
Argentine Obligation)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - August 22, 2002 (Stewart & Stevenson Fiscal 2002 Second
Quarter Earnings Release And Conference Call Schedule)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - August 29, 2002 (Stewart & Stevenson Services Reports
Fiscal 2002 Second Quarter Results And Sale Of Discontinued Business)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - September 12, 2002 (Stewart & Stevenson Services, Inc.
Consolidated Condensed Statements Of Earnings (Reclassification Of Discontinued
Operations) And Segment Information)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - September 16, 2002 (Stewart & Stevenson Announces Closing
Of Sale Of Discontinued Business)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - September 17, 2002 (Stewart & Stevenson Announces
Dividend)
Items Reported - Item 5. Other Events
Item 7. Exhibits
Form 8-K Report Date - October 4, 2002 (Stewart & Stevenson Services To Move To
New York Stock Exchange)
Items Reported - Item 5. Other Events
Item 7. Exhibits
22
Form 8-K Report Date - October 8, 2002 (Stewart & Stevenson Presentation To
Investors)
Items Reported - Item 7. Exhibits
Item 9. Regulation FD Disclosure
Form 8-K Report Date - October 18, 2002 (Stewart & Stevenson Services Begins
Trading On The New York Stock Exchange)
Items Reported - Item 5. Other Events
Item 7. Exhibits
23
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 December 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)
24
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
3.1 Sixth Restated Bylaws of Stewart & Stevenson Services, Inc.
Effective April 11, 2001, as Amended Through December 10, 2002
25
26
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Michael L. Grimes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stewart &
Stevenson Services, Inc.;
2. Based on my knowledge, this quarterly report 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 registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: December 16, 2002
/s/ Michael L. Grimes
----------------------
Michael L. Grimes
President and Chief Executive Officer
(Principal Executive Officer)
27
CHIEF FINANCIAL OFFICER CERTIFICATION
I, John B. Simmons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stewart &
Stevenson Services, Inc.;
2. Based on my knowledge, this quarterly report 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 registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: December 16, 2002
/s/ John B. Simmons
------------------------------
John B. Simmons
Vice President and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
28
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: President and Chief
Executive Officer
/s/ John B. Simmons
------------------------------
Name: John B. Simmons
Title: Vice President and
Chief Financial Officer
29